Ben Bernanke: Socialist

From Bloomberg:

Bear Stearns Cos. shares plummeted a record 53 percent after the New York Federal Reserve and JPMorgan Chase & Co. stepped in to rescue the fifth-largest U.S. securities firm with emergency funding.

After denying earlier this week that access to capital was at risk, Bear Stearns said today that its cash position had ``significantly deteriorated'' in the past 24 hours. The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today.

The regulator stepped in to prevent the collapse of the second-biggest underwriter of U.S. mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week. JPMorgan, which has suffered fewer losses than rivals during the credit crisis, may end up owning all or part of Bear Stearns, analysts speculated.

``I don't think they can afford to let Bear go,'' said Charles Geisst, the author of ``100 Years on Wall Street,'' referring to the New York Fed bailout. ``At this particular moment in time, it would be a devastating blow to the markets.''

Bear Stearns acted in response to ``market rumors'' of a liquidity crisis, Chief Executive Officer Alan Schwartz said in a separate statement. He said earlier this week that the company's ``liquidity cushion'' was sufficient to weather the credit-market contraction. Traders have been reluctant to engage in long-term transactions with Bear Stearns as the counterparty, the Wall Street Journal reported yesterday.

1.) Earlier this week, Bear Stearns denied there were any problems.  We know how reliable those statements were.  Can we now please assume that any representative of a financial company who says things are fine is lying?  It really would make life a great deal easier.

2.) Yesterday, S&P announced that the big banks were near the end of their writedowns.  They also said the US can win a land war in Asia.

3.) Bear did this to themselves.  They got involved in the mortgage backed market of their own free will.  They obviously made some incredibly stupid choices and decisions.  They should be allowed to fail, plain and simple.  

The only way to prevent this mess from happening again is to let some of the big banks fail.  Then in the future when someone says, "let's stop performing due diligence on borrowers" someone can respond with, "Bear Stearns tried that and they went belly up."  Now in 10 years, someone will say, "Let's stop performing due diligence" someone will respond with "that's a great idea.  After the borrowers default, the Federal Reserve will bail us out."

The next time a Republican complains about socialized medicine, tell them the Federal Reserve is currently practicing socialism with Americans banking system.

•  Thanks - I need to send you the latest

  dollar v. crude chart - great fodder for another shot at the Fed

  by tjlord on Fri Mar 14, 2008 at 11:21:28 AM PDT

  •  Don't forget the Bush Job Approval Chart

    It mirrors both... down down DOWN

    by kubla000 on Fri Mar 14, 2008 at 12:49:06 PM PDT

    •  bushies always bail out their buddies

      The entire US treasury, and trillions more that is "borrowed" is all in play for the bushite scum, their goal is to transfer as much of it as possible to their cronies- and just 312 days left to loot!

      What's a bushite scum to do?  Why loot twice as fast, there is still a little credit left in the USA, they will now try to get all of that!

      1-20-09, that's the day we start cleaning up the bush mess, unless of course HRC gets her buddy McBush installed in the WH.

      by MD patriot on Fri Mar 14, 2008 at 01:34:31 PM PDT

      •  fuck Pelosi! This is the exact reason we needed

        to impeach. It would, at the very least, occupy the time Bush is using now to loot whatever is left of the treasury. Wall Street is crying wolf and Bush just pours more money on the fire.

        by Josh Prophet on Fri Mar 14, 2008 at 02:14:30 PM PDT

        •  Pilosi's worried about a clean table, but W

          is sacking the bank vaults for his cronies.  What sort of action are our leaders willing to take to stop the rampant piracy that's stealing us all blind?  What does it take for them to acknowledge we are under financial and economic siege?

          Whoa...too rich or big 'to be allowed fail' in what is supposed to be a 'free market'? See, there's a major clue. So it's 'a level playing field' for the market when the field angle is reset to allow as much available cash, even hundreds of billions, trillions even, are borrowed from our futures and personal wealth, to be funneled into crony hands as massive present value gains.

          This is beyond corporate welfare, it's more than crony welfare, it's reverse transfer, i.e. theft, piracy and plunder of the treasuries of multiple nations and 99% of the people, by the top 1%.

          It would appear when our 'biggest fans of the free market' Republicans were given free reign to enter our treasuries, and they brought their leaf blowers and supervacs along to make sure the to clean out the rest of our 99% class.  Reverse Robin Hood ethics hard at work.  This 1% seems to have adopted the pirate's ethic of "Take all ye can, and give nothin' back!" and they're over 3/4's done with 300 days to go.

          My modest stack of $USD dollar bills barely buys 1/4th of gold and oil it did at the time W was elected.  Think about this...it takes only 1/4 as much gold to equal the value of our homes as it did 8 years ago, for those among us who still have them.

          Instead of our pension stocks and housing values also going up 4X, these seem to be teetering or already sliding at alarming rates.  Who benefits from that kind of leverage?  Jobs, salaries and benefits are noticably thinner now than 8 years ago. Where is W's deep concern and actions to restore the tremendous value stolen from the 99% of citizens?

          The top 1% apparently have taken greater percentages of control of real assets and have magnified their net worth by factors, while 99% of us have seen it taken away, they're up 300%, we're holding 25% of what we had.  

          This is far worse than a home invasion or burglery, and yet we just tolerate it, numb, unbelieving, hoping for things to change.

          It's hard to ignore the signs of depression written on the bank vault walls, along the streets in the tracts of housing for which no buyers can be found, and whatever savings you had in IRA or pension accounts, etc. being worth 1/4th of what it was 8 years ago.  We've by the hundreds of millions been nearly cleaned out.  And there's a few thousand uber-rich trying very hard to avoid being detected as the ones whose vaults are 300% fuller now.  

          Is it possible Ms. Pilosi is one of that priviledged top %1 who prefers that we not notice?  Wait, wait, wait...we've got a blue-light special $600 check coming, again borrowed from our futures, but is it enough to keep the masses placated?  What if the masses start to do the math?

          by antirove on Fri Mar 14, 2008 at 03:30:09 PM PDT

          •  Sorry his cronies are loosing it all

            That's why he's trying to get us to buy crap to inject money back in, so they can get more loans from the European banks.

            Perhaps he shouldn't of pissed of Europe so much.

            ; P  I've been looking into the heads of these companies you should do the same.

            by Shhs on Fri Mar 14, 2008 at 03:39:53 PM PDT

        •  President Cheney?

          Ewww.

          by tomjones on Fri Mar 14, 2008 at 04:45:36 PM PDT

          •  Impeach Cheney First n/t

            by offgrid on Fri Mar 14, 2008 at 08:20:11 PM PDT

        •  Nothing would be different if Obama or Clinton

          were President now.  The same thing would have happened with Bear Sterns.  A violent failure of the institution would do more harm than good, which is why the Fed and JP Morgan stepped in to make sure they could at least liquidate the company in an orderly fashion.  It would be nice if we had people who actually presented a balanced case on economics/finance around here, instead of just playing to the popular notions of the people on DKos.  

          by Asak on Fri Mar 14, 2008 at 05:37:07 PM PDT

          •  Not true, because they would have...

            been President since 2004. Clinton for instance would have been studying and listening and would have concluded that the real estate market was out of control years ago. And then he would have done a little proactive stuff. Bush doesn't do proactive, he only does preemptive!

            by phild1976 on Fri Mar 14, 2008 at 05:54:24 PM PDT

          •  If they want to liquidate it in an orderly fashion

            They can go into Chapter 7.

            Since they're not even in Chapter 11 yet, this is a premature Get Out of Hazard Free card.

            OK, go on.  Present a balanced case for how low the dollar needs to fall before the Fed stops buying bad debt.  Or, put another way, how high does oil have to go by the end of the year?  $150 a barrel?  $200?  $300?  $500?  At what point does the Fed underwriting start to do "more harm than good"?

            The President is not my master. He is Chief among my servants.

            by DemCurious on Fri Mar 14, 2008 at 07:29:13 PM PDT

      •  avoiding market panic is good

         Yeah, on the one hand its a bailout, but on the other hand do we want a market panic? I would say a more stately progression to unwinding the leverage would be best.

         The guilty won't be punished in this, just the unlucky when the demands for a scapegoat or two reach crescendo level. We're too short sighted and we've proven that by letting the situation develop in the first place.

        by Stranded Wind on Fri Mar 14, 2008 at 02:18:50 PM PDT

        •  Uh, yes, we do want a market panic

          We want - we need the market to fear the consequences of taking stupid risks.  How is that hard to understand?

          The President is not my master. He is Chief among my servants.

          by DemCurious on Fri Mar 14, 2008 at 07:21:12 PM PDT

          •  dumb idea, sorry

             A panic causes harm above and beyond the unwinding needed. I'd rather slide down a 20' rocky slope than fall 20' and land on a pile of rocks. One hurts a lot, the other could very well be fatal.

            by Stranded Wind on Fri Mar 14, 2008 at 09:50:42 PM PDT

      •  Bankers vs Homeowners

        They should be allowed to fail, plain and simple.

        When the homeowner fails, he loses his house and ends up on the street.  

        When the banker fails, he ends up with billions of dollars handed to him by our government curtesy of the taxes paid by the now homeless taxpayer.

        The citizen is destroyed.  Big business is rescued.

        Do we need further proof that our government represents big business rather than the people???

        Is their any responsibility for destroying our economy?  Shouldn't some of these responsible go to jail???

        by Jagger on Fri Mar 14, 2008 at 04:35:05 PM PDT

        •  Is that right?

          Why didn't you invest all your money in Bear Sterns then, since it's so obvious they end up with billions.  I suppose the 47% loss you suffered today wouldn't really be a loss.  I guess if you end up with 10 cents on the dollar for your investment you'd feel that was a great success, right?  

          by Asak on Fri Mar 14, 2008 at 05:38:50 PM PDT

          •  You raise some good points that obviously

            merit further discussion.  My question: In theory, Bernanke doesn't answer to Bush - so how closely are his actions attributable to Bush?  And, bad as Bush is, it makes no sense to charge him with failures that he's not responsible for.  So, what aspects of this crisis is he really responsible for?  I assume one aspect is a decrease in regulation of the banking industry - rather significant, in fact.  Is Bush responsible for the housing bubble?  Or was that Greenspan?  Did Bush cause Greenspan's actions?  Collusion?  Or acting independently?  Another point, though, is how are the execs at Bear Sterns making out - they may have lost a lot today, but in the grand scheme of things they're probably doing way better than any poor stockholder or person whose pension was invested in it.  It seems these guys who hate government regulation and taxes are all too willing to get a bailout when they need it.  They're probably still better off than 99.5% of the rest of us.

            by RW on Fri Mar 14, 2008 at 06:26:49 PM PDT

          •  "Investment"?

            I'm not sure you even know what that means.  You seem to be talking about day trading.

            The President is not my master. He is Chief among my servants.

            by DemCurious on Fri Mar 14, 2008 at 07:34:28 PM PDT

    •  How come pollster.com quit updating Bush approval

      I noticed they never updated it with arc's 19% approval.

      by Dave from Oregon on Fri Mar 14, 2008 at 04:29:26 PM PDT

    •  Not low enough yet.

      Need another 20 points down.

      by Creosote on Fri Mar 14, 2008 at 04:46:01 PM PDT

  •  As much as

    I can appreciate your sentiment regarding the hypocrisy of the Republican position, I wish you would stop assisting the right-wing in dragging the word "socialist" through the mud as though it is something bad.

    Some of the world's greatest governments - the ones who have done the most to eradicate poverty and improve the quality of life of their citizens - have been democratic socialists and members of Socialist International. This includes the governments of the UK and Spain.

    The statement "The next time a Republican complains about socialized medicine, tell them the Federal Reserve is currently practicing socialism with Americans banking system." implies not that "socialized medicine" is an attempt at dirtying the word socialized, but that the republicans are just as guilty of the evil of "Socialism" as we are. It's not an evil... it should be the core of the party's economic platform.

    by Ian Hines on Fri Mar 14, 2008 at 08:40:16 PM PDT

•  great post but our governmnet has

  been practicing socialism for the corporations for many many years. Too bad our candidates don't talk about this.

  by Tanya on Fri Mar 14, 2008 at 11:23:20 AM PDT

  •  Socialism for the rich, capitalism for the poor

    Always has been

    Always will be

    by Volvo Liberal on Fri Mar 14, 2008 at 11:36:19 AM PDT

    •  i am still hoping it won't

      always be. Please leave me at least this little fantasy of mine :)

      by Tanya on Fri Mar 14, 2008 at 11:44:16 AM PDT

      •  So what are WE going to do about it? (n/t)

        Starve the corporate beast, buy local!

        by EthrDemon on Fri Mar 14, 2008 at 01:00:03 PM PDT

        •  Hack out a little breathing room, your sig

          Is just the place to start. We need to start with our neighbors, our blocks, and our jobs. We need to work together with whoever is right around us to strengthen our local communities. The reason all this works so well for the rich is that they've got everyone afraid to talk to their neighbors. We lead lives of isolation, confusion.

          We see ads for giant Financial services companies on TV, why are they there? Just to threaten the TV networks with yanking the ad revenue if they speak out on behalf of the poor guy, the working mom, the senior citizen living in a refrigerator box.

          There is always only one place to start, and that is wherever you happen to be.

          by dnamj on Fri Mar 14, 2008 at 01:13:19 PM PDT

        •  What can be done?

          It's really very simple - you have to change expectations of what financial behavior is acceptable or not. First, we need to impose a one fifth of one percent (or more) tax on each and every financial transaction. That will begin to squeeze out speculation. The size of the financial markets now, this would provide over $1 trillion in revenues in the U.S. alone (yes, the trading in financial markets IS that large - some 60 times bigger than GDP). Of course, that tax take will shrink rapidly as financial trading collapses.

          Second, you re-impose the 70% to 90% tax rates on top income brackets we had in the 194os to 1970s (until Reagan came in). The aim of this is not to raise revenue, or to achieve income equality, but to remove incentives for asset-stripping industrial enterprises. It takes years to build an industrial facility and get it producing, so you must force finance to be patient. You must destroy the expectation that 20% or 30% returns a year are achievable, and force capital to be patient. In other words, force and end to financial capitalism and a return to industrial capitalism.

          Third, you junk GATT, NAFTA and the "free trade" agreements of the past 30 years, and begin multi-lateral negotiations aimed at actual national development of LDCs. Towns and villages in Africa and South America that don't have sewage and water systems will get them. Countries that have only transport systems designed to facilitate the export of raw materials or the products of cheap labor, will get actual national transportation systems. Much of the production of China and India can be shifted from producing for export to the U.S., to producing what's needed for these national development programs. And in the U.S., there will be an export boom of construction equipment, road-building equipment, and other industries.

          However, will all this actually be done? Of course not. Because the real, underlying problem is political. Right now, both the Obama and Clinton campaigns are "owned" by Wall Street, the oilarchy, and the oligarchy. My own feeling is that this will be altered in the streets in the next two or three years. After that, we can drop the 82nd Airborne on the Cayman Islands and the Isle of Man and seize all those secret bank accounts and start jailing most of the present U.S. establishment. We will probably also have to engage in a nuclear confrontation with Britain, because that is the host of the City of London, which is actually a larger financial center than New York City. Perhaps some covert sinking of one or two British submarines will get the point across. Maybe an cruise missile "accident" in Switzerland?

          Personally, I don't think this is likely to happen. Rather than confronting the international financial oligarchy, we are more likely to be steered into resource wars against India and China.

          But it IS our choice. Are we WILLING to confront these ugly truths? Will we go along as the war drums begin to beat against India and China five or ten years from now? Or is the use of the U.S. military and covert capabilities against the world's rich that unthinkable? What do YOU think?

          by NBBooks on Fri Mar 14, 2008 at 01:55:49 PM PDT

          •  WOW

            I don't know what to say.  Like you say, not likely to happen.  I don't know how many 3rd rails you have exposed, but it isn't just a mass transit one.

            I'm not sure whether to recommend or hide your post.  I'll probably have to read it again and maybe hope someone else will chime in with a more intelligent response.

            by dangoch on Fri Mar 14, 2008 at 02:09:00 PM PDT

            •  Not Hideworthy, LOL!

              Recommend it.  He's just a radical.  We don't recognize them within our Party anymore, but, yes, definitely a radical.

              I was once a radical.  When I was poor.

              by Bluesee on Fri Mar 14, 2008 at 02:16:39 PM PDT

              •  "I was once a radical. When I was poor."

                This ought to be the slogan for the corporatized version of the Democratic party.

                by chrississippi on Fri Mar 14, 2008 at 02:30:54 PM PDT

                •  One Man's Snark...

                  Lamentable but true.

                  The best way to pacify a radical is probably to give him or her a good job.  It really explains a lot about the way Conservatives think; they think they are too busy to worry about these niggling concerns like equality, justice, and brother/sisterhood!

                  And if these poor people would just get off their duffs, why, they would stop worrying too, because they would be too busy making money like the rest of us!

                  This is why I can't be bothered with a sneak attack on GB; I'm too busy to draw up plans.

                  I am kidding!

                  by Bluesee on Fri Mar 14, 2008 at 04:21:36 PM PDT

              •  Radical?

                The first proposal for the 0.2% Tax sounds like the Tobin Tax ... and Tobin is hardly a radical.

                The rest -- 90% tax rates and junking/reworking GATT/NAFTA -- are eminently achievable without violent revolution.

                You could implement most of what NBBooks says -- I'm not sure if they are radical or just necessary reforms.

                by Bronxist on Fri Mar 14, 2008 at 05:30:44 PM PDT

                •  Yep, it's Tobin

                  that's where I get the idea - and all the supporting documentation.

                  As for tax rates and tax brackets - here is a great historical perspective - it used to be 91%
                  Top US Marginal Income Tax Rates, 1913--2003

                  by NBBooks on Fri Mar 14, 2008 at 05:54:38 PM PDT

                •  Gulf of Tobin?

                  We will probably also have to engage in a nuclear confrontation with Britain, because that is the host of the City of London, which is actually a larger financial center than New York City. Perhaps some covert sinking of one or two British submarines will get the point across. Maybe an cruise missile "accident" in Switzerland?

                  That's the radical part to me.  But you're right, any re-structuring of the tax and revenue process could be and should be considered; that wasn't the radical part.

                  by Bluesee on Fri Mar 14, 2008 at 06:37:22 PM PDT

          •  don't forget the food and energy squeeze

            Other factors exacerbating the situation you brilliantly laid out above will be growing energy shortages, and problems with food supply ranging from drastically increased costs of long-distance distribution systems to effects of climate change to fishery collapses.
            It might just get ugly enough to spill onto the streets, but since that didn't happen during the Depression, I doubt it will happen this time. Perhaps the sense that FDR's gov't was trying its best to help people was a calming factor, I dunno.

            Yep; China, here we come.

            by kamarvt on Fri Mar 14, 2008 at 02:16:30 PM PDT

            •  Even though

              FDR's heart may have been in the right place, the only reason we got the New Deal changes we did, was that the elite were expecting riots in the street and worse: They were terrified of a full blown communist revolution. And it could have happened then. If they'd pushed a little harder squeezed a little more...

              It would have been a horrible failure, of course, but the threat of it gave us a much more equal and just society for decades.
              The reaction was years of propaganda to smear the idea of communism and socialism, with which the USSR and China cooperated by actually being horrible authoritarian disasters.
              

              by thejeff on Fri Mar 14, 2008 at 04:28:20 PM PDT

            •  I was wondering how long before China...

              got thrown under the bus. They are foreigners, after all. And we are Americans, so our interests go first.

              This is the aspect of America that I despise the most. The willingness with which so many Americans rolled over when the call to war sounded -- with unease, yes, but rolled over all the same --- so many Dems voted for it, thinking to play it safe with the popular mood -- thinking not of the bewildered people on the other end of our bombs and bullets, but only of our own, narrow interests, and the babble that passes for national dialogue...

              I will vote for whoever raises the standard of principle and reason above all. This is the moral judgment that Hilary failed and Obama exercised over the Iraq war. If we continue to fail in this, we shall no longer be the America from which people around the world take inspiration, hope, and strength. We will become just another ruling clique who put power and privilege before principle.

              Mismanaging our own economy, our own politics and politicians, should not make an enemy of the vast majority of Chinese people who are just trying to raise a family on a living wage, just as Americans are. Their government is less theirs by choice than ours is. They have no say -- we do -- AND THE VAST MAJORITY OF US DON'T VOTE. We do not participate! (Of course DailyKos and blogs like it are a part of the solution, not the problem. Bless you Kossacks. But I am on a roll...)

              It is American myopia and naval gazing which to this day defines "Vietnam" as an American historical experience, not a country. It is exasperating in the extreme. Most Asians don't think much about it. As an American it drives me bonkers.

              I will cry a pox on all our houses if we go to war with China the way we went to war with Iraq. That fucking contemptible, indefensible, propagandistic war that has left hundreds of thousands if not millions dead and displaced, LIVES AND COMMUNITIES destroyed. We are so completely on the wrong side of history on this. Eyes on the prize -- the election of Obama and the promise of change is not a false hope. It is our only hope.

              by beijingbetty on Fri Mar 14, 2008 at 07:10:12 PM PDT

          •  Re

            It's really very simple - you have to change expectations of what financial behavior is acceptable or not. First, we need to impose a one fifth of one percent (or more) tax on each and every financial transaction. That will begin to squeeze out speculation.

            Yeah, ok, watch the utter collapse of the US economy and financial markets. Enjoy. No trading means assets aren't liquid anymore. "Speculation" is not a bad thing, speculators help set correct market prices for issues.

            by Sparhawk on Fri Mar 14, 2008 at 02:30:10 PM PDT

            •  0.2% charge will collapse the markets?

              I doubt it.

              by billlaurelMD on Fri Mar 14, 2008 at 03:42:46 PM PDT

            •  Growth of debt versus real economy thermodynamics

              In a post on European Tribune this past week, The roots of the subprime crisis, Eric Zencey explains some of the fundamentals of ecological economics.    

              When you understand the thermodynamic roots of economic life, and when you understand how our financial system flouts thermodynamic law, you can see that regular crises like these are a structural requirement of our system.

                 Current econmic wisdom treats phenomena like inflation, bankruptcy, and the failure of bond issuers to meet their obligations as economic pathologies: wouldn't it be nice to see an end to these things?  Maybe with good management we can cruise along without them.

                 But inflation, bankruptcy, and the failure of bond issuers to meet their obligations are all forms of debt repudiation, and our system has a built-in requirement for some form of debt repudiation, because it lets debt (which is a claim on future real wealth) grow faster than real wealth.  

                 Debt grows through the charging of interest.  In the neoclassical economic paradigm, charging interest is normal, but bankruptcy, bond failures, and inflation are not.  Paradox, huh?

                 SNIP

                 Debt is a claim on future wealth--a claim on real wealth, actual things, not just "monetary wealth."   Frederick Soddy was the first to distinguish between these; he was a Nobel Laureate in Chemistry who wrote a series of books in the 1920s arguing that economic theory ignored physical reality--the reality described by the laws of thermodynamics.  As he put it:        

              "Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot away with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well known mathematical laws of simple and compound interest."

                 Daly, following Soddy, explains what happens when society pits a mere convention (our practice of letting interest compound infinitely) against the physical reality of finite planet ruled by the laws of thermodynamics. Debt, he says, can theoretically grow  forever, but real physical wealth cannot, "because its physical dimension is subject to the destructive forces of entropy....Since wealth cannot continually grow as fast as debt, the one-to-one relation between the two will at some point in time be broken- i.e. there must be some repudiation or cancellation of debt. The positive feedback of compound interest must be offset by counter acting forces of debt repudiation, such as inflation, bankruptcy, or confiscatory taxation"  -- all of which are seen as pathological phenomena in economic systems.  

                 So:  a system that lets debt grow faster than real wealth grows is a system that needs periodic bouts of debt repudiation:  bankruptcy, inflation, failed bonds, or other financial events in which claims on real wealth are wiped out.

              by NBBooks on Fri Mar 14, 2008 at 03:43:46 PM PDT

              •  sorry - debt CAN be at a higher rate than wealth

                Debt is borrowing, not just money but even resources. Discounting the future is an inherent, rational, human trait (Beer in the hand is worth two in the fridge...)

                Societal discount rates are usually lower than commercial. Debt rates themselves vary, and, ultimately, are a function of the overall project (put together with equity as per the Capital Asset Pricing Model (CAPM).  Like you/he wrote, wealth growth is important. But they are NOT the same.

                Let's say you have an idea. Something that is worth a net earning of $10/year. You need to borrow $100 as start-up costs. Under an infinite term loan, if your interest rate is 10%, then you just are able to pay off the interest. If you earn more than $10/year, or have lower interest rate, then you can accumulate some wealth (you can even earn enough to gradually pay off the principal). You then have an easy case of debt grown > wealth growth. It need not be that way, but they don't need to be the same.

                Things like bankruptcies, etc. all just make the debt riskier. The higher the risk, the higher the discount rate (i.e., market rate, interest rate, etc.)

                In equilibrium, Debt + Equity = Net Value (approximately).

                I don't think we have the case of accumulated debt growing faster than accumulated value.  There are issues of Green domestic product, etc.  

                Lazy G.

                by lazy guru on Fri Mar 14, 2008 at 04:41:12 PM PDT

            •  info on a tax on forex

              From Destabilizing Speculation and the Case for an International Currency Transactions Tax, by Thomas Palley, May 2001:

              The idea of an international currency transactions tax was first advanced by Nobel laureate in economics James Tobin (1978), who proposed a small tax--these days the suggestion is 0.1 percent--on all foreign exchange (FX) dealings. The intention was to reduce disruptive speculation in FX markets by raising the cost of engaging in such activities.

              The Tobin tax builds on an earlier proposal made by John Maynard Keynes (1936) in his magisterial book The General Theory of Employment, Interest, and Money. In The General Theory Keynes proposed the imposition of a small transactions tax on all stock exchange dealings to diminish instability in domestic stock markets. His proposal was motivated by the disastrous consequences of the stock market crash of 1929, combined with the observation that speculation tended to be more prevalent on Wall Street than on Throgmorton Street (the London stock exchange), in part due to the absence of a tax in the New York market.

              SNIP

              More recently, following the U.S. stock market crash of 1987, the idea of using transactions taxes to curb speculation received support from Joseph Stiglitz (1989), the former chairman of the U.S. Council of Economic Advisers and former chief economist of the World Bank. It also received support from Lawrence Summers (Summers and Summers 1989), the recent U.S. Treasury secretary. The bottom line is that the Tobin tax has a highly respectable intellectual heritage. Though this background does not make the Tobin tax necessarily right, it does dispel the notion that it is an outlandish idea.

              by NBBooks on Fri Mar 14, 2008 at 03:58:50 PM PDT

    •  dominoes

      will someone explain an alternative that could have been taken

      allow bear sterns to fail?

      which will allow countrywide/bank of america to fail

      which will allow washington mutual fail

      which will allow banks to be overrun by savings holders

      which will allow....    

      by blklikeme on Fri Mar 14, 2008 at 12:12:59 PM PDT

      •  Well if we don't let them fail

        is it okay if the general public bails them out without getting a percentage of the companies in return?

        by Jim P on Fri Mar 14, 2008 at 12:33:56 PM PDT

        •  You want ownership

          ...in a bank that is failing!?

          by Foodle on Fri Mar 14, 2008 at 12:38:34 PM PDT

          •  Nope

            I was thinking about this earlier.  In exchange for the bailout, BSC and every other "too big to fail" bank has to explicitly lobby Congress to pass a tax on their income, say 55% (something very punitive).  This money is then treated as receipts from FICA tax.  If they expect us to bail them out, then they need to help pay for the social safety net.  We pay for their safety net, they can pay for ours.

            by kyoders on Fri Mar 14, 2008 at 12:43:44 PM PDT

            •  I'm not economist

              ...but this doesn't sound half bad to me

              by bbrown8370 on Fri Mar 14, 2008 at 12:47:30 PM PDT

              •  Possibly the fact that

                you are not an economist and this not sounding half bad to you are, somehow, related?

                by Justanothernyer on Fri Mar 14, 2008 at 01:08:22 PM PDT

                •  Too True

                  It's Dumbass economists who always spout bullshit about the "new economy" like the dot-com era. That's why common sense sounds good to those who haven't drunk the econ. 101 kool-aid.

                  by dnamj on Fri Mar 14, 2008 at 01:15:54 PM PDT

                  •  as an ex-economist

                    I take offense :)

                    It is corporate/brokerage economists and republican hack economists and some democratic hack economists that spout it

                    The real ones don't do that but no one listens to them. That is why I gave it up.

                    by Just This on Fri Mar 14, 2008 at 01:21:24 PM PDT

                    •  many parallels...

                      In arts and sciences as well. The intellectual advancement is usually secondary to short-term monetary gain. Symptom or Cause, who knows? There's only room for so many Paul Krugmans.

                      What did you do after that?

                      by dnamj on Fri Mar 14, 2008 at 01:30:37 PM PDT

                      •  I went into health care

                        nobody listens to me there either.

                        Krugman is a hack by the way.

                        Economics is diagnostic, when it becomes policy, opinion and bias always takes hold. It explains the behavior but doesn't give any good advice on what to do to change the behavior.

                        I apply the same principals in therapeutic relationships. I show people their weak spots physically, emotionally, behaviorally and explain to them what I view as an efficient well functioning human system. Then offer some possibilities on how to be more efficient, but it is entirely their doing if they want to change.

                        As I said, very few people listen to me in this regard either. Where is the pill, where is the surgery. How do I fix the disease instead of healing the system.

                        Same goes for the markets, they are diseased and there is no fixing it, only changing them. There is a difference.  

                        by Just This on Fri Mar 14, 2008 at 01:39:07 PM PDT

                        •  Allowing the banks to fail

                          would cause a run on the banks - this would hurt the lower and middle classes a hell of a lot harder that the rich.  

                          Think about it.  

                          The middle class and the poor put what little money they have into savings accounts.  The savings accounts would be wiped out (except for $10,000 protected by FDIC).

                          The upper class and the super rich are generally diversified.  A bank collapse would hurt them, but not wipe them out.

                          The heads of the banks that fail and the executives would all jump ship with golden parachutes, and meanwhile the broader economy would plummet into a depression.

                          Saving the banks is necessary.

                          by minimei on Fri Mar 14, 2008 at 01:58:40 PM PDT

                          •  It is $100,000 that is insured by the FDIC

                            by penguinsong on Fri Mar 14, 2008 at 02:07:17 PM PDT

                          •  Whatever happened to a free market?

                            Isn't the argument that we should allow the markets regulate themselves going to come into play here?

                            I agree wholeheartedly with bonddad.  If we really want the market to reach equilibrium instead of skewing toward all the fatcats, then we have to allow some failures.

                            I am far less worried about runs on the banks and a domino effect.  Bear Stearns may be big, but it is not that powerful.

                            by ccyd on Fri Mar 14, 2008 at 02:32:01 PM PDT

                          •  two thoughts:

                            1. First, John Kenneth Galbraith quote:  

                            "Capitalism without market failure is simply socialism for the rich."

                            2. Second, Bear Sterns is an "investment bank", not a "bank" bank  (which is why they had to get JP Morgan to take their worthless portfolio "to the window" for them - that is, get the government to "lend" them money on worthless collateral.  

                            (If the collateral is as worthless as it's widely assumed to be, JP Morgan has NO liability here - the taxpayer is just screwed. )

                            3. Bear Stearns doesn't have a lot of small account holders - just stockholders.

                            4.  So what is happening here is that Rethuglican government, which ADAMANTLY REFUSES TO EVEN DISCUSS setting up a government fund to help homeowners keep their home - throw 'em out in the street, screw it, who cares - is committing 200 billion dollars to protect the shareholders of Bear Sterns.

                            Why should homeowners lose their houses, their savings, their credit scores - while the government steps in to make sure that the shareholders of Bear Sterns don't lose THEIR shirts?  

                            by mldostert on Fri Mar 14, 2008 at 03:14:42 PM PDT

                            •  large majority of shareholders are "institutional

                              meaning, more than likely a huge percentage of Bear Stearns is owned by less than 100 large trading entities with several  thousand small shareholders.

                              by TexasTwister on Fri Mar 14, 2008 at 04:12:42 PM PDT

                            •  Well, the good news in this is

                              that the banks/investors don't really want a zillion houses.  So after everyone's credit scores get ruined because of this, they're still going to need to sell those houses back to people because the investors aren't going to want them (investing in housing isn't like investing in a company that actually does or makes something to earn a profit).  So the banks are going to have to sell the houses back to people with "bad" credit at reduced prices.

                              It will sort itself out, and hopefully in a manner that means that I can afford a house in Seattle.  That house didn't really increase $250k in worth during the last three years, so stfu and sell it to me for 300k instead of 550k.

                              by bbrown8370 on Fri Mar 14, 2008 at 10:47:19 PM PDT

                          •  FDIC covers $100,000

                            That's fine for us small fry. Fuck the rich. It will help them chill out and become human.

                            Parachute the executives to federal prison.

                            The banks aren't worth jack shit.

                            We need to save the productive economy, not the financial fluff that serves no apparent purpose. Protect the infrastructure that delivers real goods and services that people need, and let the banks go to hell. We can provide all the credit that real productive ventures need through a national bank run by and for the people.

                            by unclejohn on Fri Mar 14, 2008 at 04:11:53 PM PDT

                            •  How long does it take to get $100,000?

                              I mean a lot of poor people are going to be SOL if their bank shuts down and they can't pay their mortgage until the FDIC sends them a check a few months down the road.

                              How quickly do you get your money back if your bank dies?  (Genuine question, not retorical.)

                              by Retyef on Fri Mar 14, 2008 at 06:24:01 PM PDT

                              •  Responses 17 and 18

                                here should answer your question

                                by unclejohn on Sat Mar 15, 2008 at 08:53:30 AM PDT

                          •  It WOULD hurt the rich

                            because the rich invest in banks.  Their money isn't sitting in an FDIC insured account at the bank, it's a literal piece of the bank - stock.  If the bank goes under the stock becomes worthless.

                            by bbrown8370 on Fri Mar 14, 2008 at 10:39:42 PM PDT

                    •  Exactly, as an economist colleague, I've listened

                      to my in-laws (financial markets) prattle on for quarter-century about all the great conservative free market presidents from Reagan to his protege Bush and all the deregulation benefits to the world. This was all pedictable from Reagan tax cuts through Bush tax cuts through deregulation of the restrictions between banks and brokerages. Simply left to its own device, capitalism always fails.

                      by Arctor on Fri Mar 14, 2008 at 02:21:01 PM PDT

                      •  It is unfettered capitalism

                        which is subject to severe upswings (greed is good) and downturns(the depression of the 30's).  Which is why regulation by the Federal Reserve was instituted by FDR to manage those swings in both directions, cuz the positive one inevitably leads to a corresponding correction on the downside. Unfortunately, it is Mr and Mrs. Average Joe Blow who get the damage on the downside and generally nothing on the upside.

                        Was at my local Target today.  There were only 2 clerks checking out (there are at least 15 checkout stations) and there was general complaining up and down the rather long 2 lines.  After a bit a manager comes up to my line and tells the person in front of me to go to Customer Service to get checked out.  I followed her.  The customer service person was very competent and efficient.  She was telling us that because business was so bad they were working with minimal staff.  In her case, she said that she commuted 63 miles one way daily from her home because she had 22 years employment with Target (not locally:Target has been here less than 5 years)and that her husband had told her when gas gets to $4.00 a gallong she had to quit, because then they would be losing money instead of making any.

                        Times they are getting tough out here.  But, then there was Mr. Decider speaking on the economy today using that petulant, chiding, and berating tone he uses a lot of late:  all about how globalism is right and how he as President has to make  the right decision even when facing a political headwind and how he doesn't pay attention to focus groups. Yada, yada, yada.  People actually clapped;I couldn't believe it.

                        While I don't have a visceral hate for the "current occupant", I have about reached the point when he speaks I have to turn the TV off.  I will no longer tolerate having him, of all people, berate me, a citizen. Most especially on the topic of the economy.
                         And, while causes of downturns such as this are extremely complicated and not the result of the actions of a single person, you can bet your little blue bottoms that the preciptious and sudden nature of this one is rooted entirely in his expensive war, coupled with tax cuts, failure to address in any substantive way our dependence on oil, and all out general short term economic thinking.  He has caused damage to the dollar from which it will take years to recover, if it ever does.

                        by dww44 on Fri Mar 14, 2008 at 08:19:41 PM PDT

                    •  you got Friedman-ed out?

                      n/t

                      by billlaurelMD on Fri Mar 14, 2008 at 03:45:03 PM PDT

            •  great idea but it doesn't work

              having a company means arranging "profits" in a way that it doesn't get taxed.  We need to hold individuals responsable, corporation feel nothing. for example the high salaries of the officers should be subject to penalties to pay back the citizens.

              by mollyd on Fri Mar 14, 2008 at 12:48:49 PM PDT

              •  I forgot

                The tax would be based on their federal taxable income, or their shareholder income statement, whichever is higher.  No loss carryover, nothing.  If they want to please their shareholders and screw us, then they can pay taxes on what they tell the shareholders.

                by kyoders on Fri Mar 14, 2008 at 01:08:03 PM PDT

          •  Yes, as a matter of fact I do.

            They are failing now, but they will fail bigger in the future. and besides that, what's the worst that could happen, the cost is already sunk.

            by dnamj on Fri Mar 14, 2008 at 01:14:29 PM PDT

          •  Asset strip them and

            return the value to the people.

            by unclejohn on Fri Mar 14, 2008 at 04:05:40 PM PDT

            •  Which people?

              Bear Stearns is in trouble precisely because its assets are not as valuable as their investors believed them to be.  Let the word get out that the Feds may strip them of their assets, and their $30/share price would drop them into the realm of penny stocks.  At that point, it would cost more to calculate and divide the assets than the assets are worth.

              Let's not follow the banks' perverse wisdom in destroying assets (in their case, houses) in the attempt to collect on them.  

              by Yamaneko2 on Fri Mar 14, 2008 at 04:27:23 PM PDT

              •  If the share prices collapse, like you

                say, it will probably be a more accurate evaluation of Bear Stearns.

                The real economy needs a reliable flow of credit to fulfill its obligation to produce and distribute. It becomes clearer everyday that the current system is incapable of providing that credit. We will probably need to set up a national bank that can provide the loans that the real economy needs and just let the fictitious banks and their fictitious capital die off.

                I'm not advocating that we destroy the real value, the houses. That would be foolish. However, there is no need to hold real value hostage to fictitious capital.

                by unclejohn on Sat Mar 15, 2008 at 08:47:31 AM PDT

          •  I Want New Regulations!

            Lots of them goddamn it!  Harsh regulations imposed immediately!  No more speculative financial engineering bubbles in my lifetime or my children's lifetime!

            It's my money bailing them out.  It's my life savings which I actually had to earn with blood and sweat over the course of the last twenty years circling the drain becoming worthless.

            Do you hear me Barney Frank?  If you bail them out, I expect you to keep this from happening again.  I also expect you to put measures in place so this bailout never becomes an opportunity to get rich quick.  We the people, the taxpayers, own their asses.

             

            by JohnnySacks on Fri Mar 14, 2008 at 08:07:18 PM PDT

        •  If I have to pay...so should they.

          If we are going to bailing out this fat cat banks, and it is looking as if Bear Stearn is the first, then we need to have prerequisites for the deal.

          1. Immediately withhold all bonuses and shareholder dividends and transfer them into a special fund to repay the tax payer.

          2.  Liquidate the mortgage back securities division and any other arm that may cause the concern to collapse.

          3. Restructure the ownership of the firm that would put at least 1/3rd of total shares in a government-owned special investment fund.

          4. A special retroactive capital gains tax on all institutional shareholders which would go into the fund mentioned in 1.

          5. Establish a regulatory body to supervise the secondary mortgage market, perhaps a division of the Securities and Exchange Commission.

          6.  If we bail out the entire industry, then a new tax rate for individuals earning $1 million or more in income, including passive income.

          by Johnny Venom on Fri Mar 14, 2008 at 01:42:12 PM PDT

          •  Shareholders should get zero

            If a bank bailout is necessary, the condition needs to be bankruptcy for the bank and a big fat zero for all its shareholders. Then we can start talking about what needs to be done to pick up the pieces.

            by Sparhawk on Fri Mar 14, 2008 at 02:25:20 PM PDT

            •  Shareholders should be mortgaged for pushing

              management to pursue the risky directions. When the bank heads back into the black, then their mortgaged shares can start to be redeemed.  We, the taxpayers would be the ones who have to be repaid.

              Right now, these so called 'shares' are 'positive value' tickets that either have value or not.  

              Share holders never incur a negative value to truly punish the bad behavior.  When it's going near zero, the investor class can walk away or greatly benefit by betting on the failure via hedge funds.  

              But we, the taxpayers, have to cover the negative hole they leave behind, covering it with our tax dollars.  This change, to allow shares to have negative value for which investors are held responsible, would make all those crazy hedge funds be more accountable as well.  They cannot just benefit from puts while driving share value to zero, and liquidating corporate assets and the worker's pension funds, they would have to take on full responsibility for all the negative value they create as well.  You break it, and you are owned by all those whose value you sucked out or destroyed.

              by antirove on Fri Mar 14, 2008 at 03:45:05 PM PDT

              •  Not sure that's legal

                If such a thing were possible, you'd see truly massive structural changes in the stock market, and maybe not good changes.

                by Sparhawk on Fri Mar 14, 2008 at 04:42:32 PM PDT

                •  The whole world economy would collapse

                  if we followed that plan.  

                  Bondad should try to educate people around here, because their ignorance is dangerous.  Instead he just plays to their incorrect beliefs.  Really disappointing.  

                  by Asak on Fri Mar 14, 2008 at 05:40:51 PM PDT

                  •  And that's not happening now?

                    by antirove on Fri Mar 14, 2008 at 07:53:46 PM PDT

            •  I'm not sure allowing it to go to zero is helpful

              If they know the government will allow a market traded business concern to go to zero, the wealthy will simply hedge with put options.  But what about the regular shareholder who has that company in their 401k?  Also, there are pension funds who may have bylaws that do not allow it to engage in options or single-stock futures trading, so they will take a hit as well.