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While Treasury Secretary Geithner doesn't seem to be getting it, many others are. Apparently, (see update, below) Wall Street isn't getting it either!

As recently as today, U.S. Treasury Secretary Tim Geithner continues to make pronouncements of a "private-public partnership" (his vision for the follow-up proposal on TARP I, originally implemented by the Bush administration in the fourth quarter of '08) which will, effectively, expand the $350 billion, second portion of former Treasury Secretary Henry Paulson's Wall Street bailout program to $2 trillion: "Geithner Reassures G-7 on U.S. Financial Rescue Plan."

But are we already encountering problems selling our government debt to underwrite this?

In his still-vague proposals, Geithner supports pouring an additional two trillion dollars in taxpayer funds to "stabilize" our nation's financial services sector and to get the credit markets flowing, once again. This assumes our government is even able to finance that debt with the sale of T-bills and bonds, etc. And, contrary to popular belief and the reality that the U.S. may just print money without any adverse consequences, we're already quickly learning--the hard way--that there's a limited market for our nation's unbridled debt, "Treasuries Drop as Dealers Digest $67 Billion in Notes, Bonds."

We have a record-breaking schedule of federal t-bill and bond offerings slated through 2009, supposedly to finance all of this, and it appears there already may be problems with this planned schedule, and it's only February. (Basic concept: these t-bills and bonds aren't exactly flying off the shelves.) Already, we're beginning to create a significant "overhang" with regards to unsold federal T-bill offerings, set to the tune of $2.5 trillion, throughout 2009.  And, we're less than seven weeks into the year.

Primary dealers' shares of two of the U.S. securities that were sold slipped amid the steady increase in supply, Bloomberg data showed. They purchased 54.1 percent of the three-year notes, compared with an average of 81.6 percent at auctions of the security over the past three years, and 49.6 percent of the 30- year bonds, compared with an average of 68.2 percent at auctions since February 2006.

"The market continues to adjust because of the supply we got," said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 16 primary dealers that trade with the Federal Reserve and are required to bid in Treasury auctions. "There is still supply overhang from the $67 billion, and a recognition that there will be more supply in two weeks, and two weeks later, we'll get more again."

The U.S. will probably borrow $2.5 trillion during the fiscal year ending Sept. 30 as the budget deficit swells amid programs to thaw credit markets and revive the economy, according to primary dealer Goldman Sachs Group Inc. That's almost triple the $892 billion in notes and bonds the government sold in the prior 12 months.

Is a consensus developing about all of this that flies directly in the face of centrist strategy? Or, is centrist strategy, led by Geithner, taking the long way home?

A consensus appears to be building, originally from the left and now eminating from the right, to abandon Geithner's "bailout" approach and to utilize proven government infrastructure that's been in place for decades (either directly via the Federal Deposit Insurance Corporation, a/k/a the "FDIC," or something akin to creating a Resolution-Trust-Corporation-like, a/k/a "RTC," entity to dispose of failed bank assets), to temporarily takeover insolvent banks and restructure them and/or sell off their assets,  at little or no financial exposure to the public.

Progressive economic stalwart, Paul Krugman, for one, expresses tremendous concern about all of this, due to a combination of: i.) a lack of willingness on the part of the legislative branch--Democrats and Republicans alike--of our government to support Geithner's proposed efforts and ii.) the unmentioned reality that we may have problems (we may be experiencing these problems, already, in fact) raising even the next $2.5 trillion in publicly-financed debt needed to accomplish this. In short, for multiple reasons, the government simply may not be able to go back to the proverbial money tree and obtain the funds necessary to accomplish Geithner's flawed strategy (in Krugman's eyes, and those of a now-building consensus from both the left and right here in the U.S.), per Krugman's most recent commentary, "Failure to Rise," which explains his concerns in greater detail.

And, for those folks "concerned" about all those trillions of dollars in credit default swaps ("CDS") further entangling us in this mess, referencing the "too big to fail" meme, here's NY Times columnist Gretchen Morgenson's commentary on a great set of ideas to safely unravel that tangential market: "Time to Unravel the Knot of Credit-Default Swaps," as we simultaneously bring sanity back to our financial services sector, too!

At this point, it's not much of a stretch to say that there now appears to be a larger and larger group formulating a consensus aligned with this non-centrist thinking that's growing by the day, too:

"The TARP Dog and Pony Show," by Dean Baker

The basic point is extremely simple. We have a large number of bankrupt banks. We have a public interest in keeping the banks functioning, but we have zero public interest in giving taxpayer dollars to bank shareholders or to the executives that wrecked the banks they ran.

Geithner can design as complex a dog and pony show as he wants, but if his plan takes up hundreds of billions of taxpayer dollars and does not involve wiping out the shareholders and sending the bank executives packing, then he has ripped us off.

"What Went Wrong for Tim Geithner," by Robert Kuttner

Geithner's premise is that banks are not engaging in a variety of lending because they are no longer able to package loans as bonds. So Geithner, using public funds, hopes to restart the engine of loan securitization. In effect, he wants to rebuild the very model that caused the crash, relying on the most unsupervised and speculative part of the system -- hedge funds and private equity. One well-placed official told me, "It's as if his goal is to help Wall Street, not to restore a functioning banking system."

Nobody has figured out how existing toxic assets would be priced; that is one of the many details to be filled in later. But if hedge funds and private-equity companies are to profit -- with government and Federal Reserve guarantees, no less -- it has to be a less efficient and more risky and costly solution than temporary government ownership, if only because it is so much more circuitous, with so many more players who need to take a cut.

By doubling down once more, Geithner is now playing roulette with America's ultimate bank, the Federal Reserve, which stands to take on at least a trillion dollars more in risk, doubling the size of the Fed's own balance sheet. People mistakenly think that the Fed "prints money" without consequences. It does not. The Fed has a balance sheet of assets and liabilities like any other bank.

"Geithner's Plan: It's Not Transparent and It's Still a Bailout," by Robert Reich

Taken as a whole, this is hardly a model of transparency. To date, the Fed has already committed some $2.5 trillion to rescuing the financial system, yet no one outside the Fed knows exactly how or where this money went. The Fed is subject to almost no political oversight. Yet if the trillions of dollars the Fed has already committed and the trillions more it's about to commit can't be recouped, the federal debt explodes and you and I and other taxpayers are left holding the bag.

In other words, Geithner and Fed Chair Ben Bernanke continue to do pretty much what Hank Paulson and Bernanke did: They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place - namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors- except depositors - should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don't want to take these steps for fear of spooking the Street. They think it's safer to put the costs and risks on taxpayers -- especially in ways they can't see.

"What Other Financial Crises Tell Us," by Carmen Reinhart and Kenneth Rogoff

Can the U.S. avoid continuing down the deep rut of past financial crises and recessions? At this point, effective policy prescriptions -- such as coming up with realistic costs of the size of the hole in bank balance sheets -- require a sober assessment of where the economy is going.

For far too long, official estimates of the likely trajectory of U.S. growth have been absurdly rosy and always behind the curve, leading to a distinctly underpowered response, particularly in terms of forcing the necessary restructuring of the financial system. Instead, authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership, and only then recapitalizing and reprivatizing them. This is not the time for the U.S. to avoid painful but necessary restructuring by telling ourselves we are different from everyone else.

Play By the Rules, Close Failing Banks," by Reuters columnist James Saft, covering comments made by Joseph Stiglitz

As Nobel prize winning economist Joseph Stiglitz points out, the United States has an existing process to deal with failed banks.

"You have to have a certain amount of capital and if you don't have enough capital you are going to be shut down. We have a legal framework and we should use that legal framework," he said in an interview on Saturday at the World Economic Forum in Davos.

"What you need to do is carve out the narrowest thing that you need to carve out to preserve the payment mechanism. We are engaged in re-writing the rules and the question is: 'For whose benefit?'"

Both bondholders and derivative counterparties -- people who entered into a contract with a bank for payment if certain external things happened, such as the default of a third party -- look to be the big winners in preserving the existing banks.

"Can't Get There From Here," by Progressive pundit Robert Borosage, discussing Financial Times economics writer Martin Wolf's ideas:

Martin Wolf...   ...notes that the [Giethner's] plan was constrained by three assumptions: no nationalization, no losses for bondholders, no new money from the Congress.

No nationalization rules out the way the US normally deals with insolvent banks. The FDIC takes them over, replaces the management; the depositors are reassured, the shareholders take their losses to write off the bad debts. Then the FDIC restructures the bank, merges it or sells it back to private investors. It arranges an orderly and seemly burial. Without doing this with banks that are "too big to fail," the administration is left paying tribute to zombie banks that consume taxpayers' money while doing little if any productive banking.

No losses for bondholders means that taxpayers pick up the bill. With an insolvent bank, shareholders lose their investment. That's how the market works. If that isn't enough to cover the losses, then creditors take what is called "a haircut." A portion of the loan they made to the bank is written off or turned into equity (stock). But with neither the shareholders nor the creditors taking the hit, only taxpayers are left.

No new money from the Congress -- surely a political reality with the rising popular fury at bailing out millionaire bankers -- means that the plan is immensely complicated, combining guarantees from the Federal Reserve, small capital injections, inducements to lure private investors. But the whole point of the exercise is to restore confidence in the soundness of the banks. A jerry--built complicated package only makes everyone nervous that the whole contraption won't hold up.

Wolf continues to explain how Obama can get this back on track. And, that's due to Geithner's plan having "the redeeming feature" of a stress test for banks in it, which is also "....the first thing the FDIC does when it takes over a bank verging on collapse. An honest assessment allows the government to decide whether the bank is salvageable or not. "

Wolf continues to explain that 'upon discovery of the bank's insolvency,' Congress would go back to the White House and advise the President and Secretary Geithner to put the bank (that failed to pass the stress test) into temporary federal receivership.

It does not appear, however, that Geithner and the White House are going along this path.

Does 'the long way home' involve spending $2 trillion to support Wall Street?

And that's because Treasury Secretary Geithner would not be recommending two trillion dollars for this effort, unless he fully intended to move forward--as Kuttner references the matter above--taking a 'less efficient and more risky and costly [path] solution than temporary government ownership, if only because it is so much more circuitous, with so many more players who need to take a cut.'

But, as of this evening, we're beginning to see comment from the right indicating a certain level of support for (at least temporary) nationalization, too.

Late today, this appeared in The Hill: "Once radical, nationalization attracts GOP support," which proceeds to inform us of the following which occurred between right wing Senator Lindsey Graham (R-SC) and George Stephanopoulos, on Sunday's "This Week  with George Stephanopoulos:"

Graham, a confidant of former Republican presidential nominee Sen. John McCain (Ariz.), said that the problems in the economy and the financial sector are so severe that U.S. policy makers may have to start thinking about things once labeled unthinkable.

"This idea of nationalizing banks is not comfortable," said Graham, appearing downcast. "But I think we have gotten so many toxic assets spread throughout the banking and financial community throughout the world that we're going to have to do something that no one ever envisioned a year ago, no one likes."

So, in their effort to gain support for what may be, inherently, a very flawed concept, to obtain a two trillion dollar Wall Street bailout, we may continue to see the White House and the Treasury Department focusing upon some of the more emotional--but less important from a bottom line reality --matters relating to the bailout now, such as the demands for executive pay caps, and allocating a pathetic $20 or $30 billion for Detroit ($20 or $30 billion to maintain 2.3 million automotive sector jobs, versus the entire $789 billion American Recovery and Reinvestment Act of 2009, a/k/a "the Stimulus," which is being established to create 4 million jobs).

And, while folks at the just concluded G-7 conference [SEE: "Geithner Reassures G-7 on U.S. Financial Rescue Plan,"]  may be joining in the White House talking points chorus of how our future (along with 'the lives of 400,000 babies per year') depends upon supporting the bankrupt behemoths of our status quo, such as Citigroup and Bank of America (I haven't figured this one out yet, but if it's what it appears to be, then it's the spin equivalent of hitting below the belt), it would also appear that a growing consensus of liberals and Progressives, along with a few conservatives, may be thinking otherwise.  

If I were Treasury Secretary Geithner, I wouldn't count on spending that two trillion on Wall Street just yet. That's because it may be all that's left.  And, with legitimate concern that more funds will be needed to stimulate Main Street (not Wall Street) in coming months, the long way home for Mr. Geithner may have just become a little longer. Somewhere along the way, his ideas just may run out of gas.


I tried clicking through to the original story at London's Financial Times'  website, but apparently, their server is currently being overloaded by requests for this page:

Looks like Wall Street is taking its best shot to game the stress test, according to recent reports at HuffPo on a breaking Financial Times story.

No surprise there, since this confirms that Wall Street is already attempting to take the one or two teeth out of the most important aspects of Geithner's plan. (Time to speak up, IMHO. Contact your congresscritters!)

Here's the link from the HuffPo "head's-up" piece about it: "[
Wall Street to Lobby Geithner to Relax Stress Test.]"

Wall Street is to lobby the Obama administration to relax its plans for stringent reviews of banks' financial health and capital injections that could leave the government as a large shareholder in many of those institutions.

People close to the situation say financial groups were frustrated by the administration's decision not to hold detailed talks with the industry before last week's release of its $2,000bn financial rescue plan.

Hat tip to blogger ohmyheck for bringing this to our attention!

Originally posted to on Sun Feb 15, 2009 at 11:12 PM PST.

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Comment Preferences

  •  Tips: b/c we need Wall St. money for Main St. nt (171+ / 0-)
    Recommended by:
    jbou, Joe Bob, chrississippi, RedMeatDem, Mogolori, Odysseus, hester, acquittal, alisonk, JimPortlandOR, PeterHug, TocqueDeville, Knut Wicksell, Jim W, OLinda, eeff, frisco, Matilda, MarkInSanFran, bumblebums, mataliandy, RubDMC, bara, conchita, litho, mentaldebris, Xapulin, Dburn, phild1976, kanuk, bruh1, larryrant, Bronxist, ctsteve, Cedwyn, wader, Melanchthon, JimWilson, waf8868, BMarshall, jmknapp, bankbane, lcrp, sarakandel, dkmich, walkshills, side pocket, tomjones, Josiah Bartlett, iliketodrum, donailin, rapala, nailbender, cantwait08, Bluesee, radarlady, 3goldens, greycat, el dorado gal, JanetT in MD, SherwoodB, ek hornbeck, mjd in florida, PBen, ChemBob, drewfromct, Gary Norton, Lib Rule Guy, cassidy3, Wufacta, blue jersey mom, MindRayge, Pluto, USexpat Ukraine, kathny, RainyDay, drag0n, BachFan, New Deal democrat, Clytemnestra, Lefty Coaster, NBBooks, tecampbell, bubbanomics, real world chick, Sagebrush Bob, Pilgrim X, txdemfem, profh, lifexpert, CharlieHipHop, sea note, markthshark, sasher, andrewj54, bigchin, One Pissed Off Liberal, J Royce, phonegery, xaxado, dotsright, 0wn, yoduuuh do or do not, Wino, Nespolo, terabytes, jayden, manwithnoname, AznInCali, leonard145b, TomP, MKinTN, rontun, dennisk, limpidglass, puffy66, Rick Winrod, Akonitum, jamess, beltane, Quicksilver2723, The Anomaly, Gemina13, pragprogress, luckylizard, echatwa, Abe Frohman, dont think, In her own Voice, sydneyluv, revelwoodie, billmosby, SciMathGuy, Jacob Bartle, pvmuse, mkor7, John Shade, RageKage, platypus60, MKSinSA, notquitedelilah, audiored, Anarchofascist, FundaMental Transformation, paul94611, jdsnebraska, oohdoiloveyou, loper2008, TNThorpe, Areopagitica, on board 47, Man from Wasichustan, CryptoPolitico, Micheline, Publius2008, washunate, Urtica dioica gracilis, farbuska, Floande, USHomeopath, yellow dog in NJ, Colorado is the Shiznit, CornSyrupAwareness, allenjo, Old Jay, Montreal Progressive, cranquette, Wolf Of Aquarius, renfro, eppa, rk2

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Sun Feb 15, 2009 at 11:22:57 PM PST

      •  Nationalization (27+ / 0-)

        The Republicans gained traction on the "Nationalize the Banks" campaign this weekend, and I always hate to agree with them, but in this new Obama-driven paradigm, maybe a good idea is a good idea.

        I would vote today on a temporary nationalization of the banks, firing the executives in a kind of soft Bastille Day.  None of these executives should be left standing!

        This, however, is anathema to Wall Street as much as a "deflationary economy" is to all of us, and therefore DC will adopt, in all probability, a similar chicken Little stance.  In any case, I think the GOP would construct a bill of bank nationalization so thoroughly corrupt that it would simply reward other people who also didn't deserve it, and cheat and rob Americans once again.  This is simply based on my observation of their behavior.  Fool me once...

        I suppose the dilemma facing Obama and Congress is that the bank executives possibly, by knowing where all the bodies are buried, are empowered to blackmail us all.  Fire them and the economy will suffer!  Kind of like the oil companies did to Carter when he proffered his windfall tax on them because they were making obscene profits.

        •  hmmm,say more (5+ / 0-)

          which particular (figurative) kinds of buried bodies do you imagine they know about?

          Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

          by andrewj54 on Mon Feb 16, 2009 at 12:44:42 AM PST

          [ Parent ]

          •  Pure Speculation Based on Circumstantial Evidence (7+ / 0-)

            I don't know but that they must wield some sort of power.  Look at how pay cuts got mangledin the second TARP Bill.  They seem to at least have friends in high places.

            •  did you see today (12+ / 0-)

              that "officials in the Obama administration" are unhappy with the pay caps in the stimulus bill and are saying they are non-binding?

              Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

              by andrewj54 on Mon Feb 16, 2009 at 12:59:36 AM PST

              [ Parent ]

              •  No. (6+ / 0-)


                In that case, screw Soft Bastille Day, bring it on.

                •  link (2+ / 0-)
                  Recommended by:
                  Jim W, Rick Winrod

                  Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

                  by andrewj54 on Mon Feb 16, 2009 at 01:07:00 AM PST

                  [ Parent ]

                  • (2+ / 0-)

                    I continue to argue that the proper model is to admit that we blew it, admit that the "financial superstore" model of banking is broken, repudiate it and put back in place the structures that kept our financial system safe for fifty years after The Depression.

                    At the same time put the Bankruptcy Code back to where it was before "reform" under Bush.  This way consumers can use the bankruptcy code just as can corporations.  While it sucks to go bust it has the salutary effect of removing the debt from the system, and thus is a public good - whether the banks like it or not.

                    Dismantle the "23A Exemptions", force leverage back to no more than 12:1, bar banks from being anything other than depositories and lenders - that is, bar them from holding anything as an asset other than whole loans.  No securitized anything.  They're free to securitize but the banks can't hold the paper; if hedge funds and others are willing to do so, then so be it.

                    Those groups will not re-enter the market until and unless the fraud that laced these markets over the last decade is eradicated and the guilty parties are punished.  Then and only then will that capital come back - trust must be re-established, and that cannot happen until the truth is both outed and the game-playing that led to this crisis is stopped - permanently.

                    As I have repeatedly noted the issue isn't that prices are "too low" for various financial assets.  It is that there is a fundamental disagreement between the buy and sell side, with the sellers convinced that prices will "recover" (likely due to government intervention) and the buyers convinced that the market is right (or even optimistic.)

                    What's worse is that the sellers are "valuing" these "assets" at well above the market price on their books and hiding them in "Level 3", where they do not have to disclose what they're holding or how they are arriving at their valuations.

                    This sort of price-by-deception simply must cease.  It is, in fact, precisely the same game that was played by banks in Japan.  They won in the court of regulatory fiat by the government, and managed to convince the government that aiding and abetting their fictions, along with propping them up, was in the "best interest" of the Japanese economy and markets.

                    How has that worked out folks?  Japan's Nikkei was over 35,000 back before this hit them.  Now we are in a race with them on the DOW - a cut of some 75% in market value. Real estate not only collapsed but has failed to recover in price.  Consumer deflation became the rule and consumers in Japan did their damnedest to pay down debt, further damaging consumption.

                    All of this is now translating here as our government is doing the very same things that Japan's government did.

                    Ben Bernanke's theories on how he can halt a deflation as well as how monetary policy influences credit have proved false.  We now know this - it is not the conjecture of an intrepid Internet Blogger, it is now historical fact.  The monetarists were wrong, the intrepid bloggers correct.  We have both Japan's and now our own economies as examples, where the neoclassical folks both tried to run their BS and both failed.

                    We have a real problem in this nation with the truth.  We believe that government can fix all that ails us, when in fact government has never done a decent job of fixing anything.  All government has managed to do is make promises they cannot keep, while bloviating and interfering in the process of markets finding equilibrium and thus clearing.

                    There is a price for a given house, a given MBS, a CDO.  It is the price negotiated between a willing buyer and a willing seller - nothing more or less.  So long as the government continues to actively interfere in these markets and try to "prop up prices" (no matter where it is) you will see spreads widen and markets remain frozen.

                    The longer markets remain frozen due to government interference, the worse the damage to our economy, the more people will be laid off, the more businesses will fail and the lower the stock market will sink.

                    Its really that simple, and that the people in Washington DC, including both McCain and Obama, are too tone-deaf to understand the basics of how markets work, is outrageous.

                    That we as Americans allow this claptrap to continue instead of recognizing the fundamental truth of how markets work and why interfering with them in this fashion can never succeed is even more so.

                  •  administration wants to revise? (1+ / 0-)
                    Recommended by:

                    Are we still in BuchCo land here? Ah, change, when will thou come?

                    From your link:

                    At issue are requirements limiting executive bonuses. White House officials say the administration wants to revise that part of the stimulus package even after it becomes law.  Under the administration’s proposal, compensation restrictions would apply only to banks that receive "exceptional assistance" from the government. The bill passed by Congress set executive bonus limits on all banks that receive bailout money. Obama press secretary Robert Gibbs, appearing on CBS’s "Face the Nation," said the administration would seek to "strike the right balance" on the compensation question.

                    What defines and who defines "exceptional assistance"?

                    There's a long, long trail a-winding into the land of my dreams.

                    by allenjo on Mon Feb 16, 2009 at 11:15:59 AM PST

                    [ Parent ]

            •  and what exactly (1+ / 0-)
              Recommended by:
              Rick Winrod

              did the oil companies do to Carter?  The only thing I remember about the Carter administration is the hostage crisis.

              Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

              by andrewj54 on Mon Feb 16, 2009 at 01:01:11 AM PST

              [ Parent ]

        •  But they don't need a nationalization bill (23+ / 0-)

          As far as I understand the mechanism already exists under the FDIC.

          When a bank is insolvent (as the big banks are), it is taken over by the insurer.  

          •  problem is you don't know if a given bank is (8+ / 0-)

            insolvent unless you are able to put a value on their toxic assets. Nobody knows how toxic they are. Are they worth 25%, 50% or 75% of their book value?

            Gender neutral marriage. NOW.

            by Montreal Progressive on Mon Feb 16, 2009 at 06:28:46 AM PST

            [ Parent ]

            •  They are insolvent (7+ / 0-)

              if the assets can't be sold at a price that would leave them with something in hand after they paid their debts.

              •  Geithner himself said the banks are insolvent (6+ / 0-)

                and illiquid, in response to a question posed to him - I believe it was a TV pundit on Bloomberg.  Most of the celebrated economic blogs (Mish, Calculated Risk) have been making this point since September.

                If Obama allows Geithner and Summers to screw the taxpayer by refusing to nationalize, it's a one-term presidency and a huge fucking shame.  His economic team is acting like a brat.

                That said, I'm starting to believe that the "stress test" is a back door move to nationalization.  But even so, that the GOP has gained traction by philosophically allowing for nationalization, while the Democrats posture about "preserving free market principles" is pitiful.  I suspect that those GOPpers who "might consider" nationalization have been hearing an earful of populist outrage and know how to exploit it.  The DEMS, pushing bailouts, seem deaf by comparison.  

                "History is a tragedy, not a melodrama." - I.F.Stone

                by bigchin on Mon Feb 16, 2009 at 09:10:44 AM PST

                [ Parent ]

                •  A plan within a plan? (2+ / 0-)
                  Recommended by:
                  sea note, Rick Winrod

                  That said, I'm starting to believe that the "stress test" is a back door move to nationalization.  But even so, that the GOP has gained traction by philosophically allowing for nationalization

                  What if Obama is showing support for Geithner now,this week, next week, for timing's sake, but in reality is planning some kind of nationalization/ temporaryreceivership/conservatorship?

                  If Lindsey Graham comes out for "nationalization", then Obama says, "Ya, you're right, let's go that route", he can claims BIPARTISANSHIP.

                  In other words, reverse-pshychology.  Tell 'em you hate it, so they will love it (loyal opposition/obstructionist) then go ahead and say "We've changed our minds, we agree with you."
                  You still get what you want, it doesn't matter how you get it, if it's the best interest of the American taxpayer.

                  GOP-Fail again!

                  You're wrong for thinking I'm wrong, so that makes you wrong twice.

                  by ohmyheck on Mon Feb 16, 2009 at 09:41:59 AM PST

                  [ Parent ]

                •  It's so frickin' simple (4+ / 0-)

                  I think that under the law insolvent banks go under FDIC receivership.  It would solve everything if we'd just let them go bankrupt as the law says they must.  The Toxic Asset Ripoff Program™ was one of the dumbest pieces of legislation to come down the pike in a long, long time.

                •  It is time to nationalize now- not screw taxpayer (2+ / 0-)
                  Recommended by:
                  Josiah Bartlett, RageKage

                  Where is that Obama of what - a week or so ago?

                  If Obama allows Geithner and Summers to screw the taxpayer by refusing to nationalize, it's a one-term presidency and a huge fucking shame.  

                  Yes, it will be a one term presidency and a bigger shame if Obama sells us all out and continues down this path.

                  There's a long, long trail a-winding into the land of my dreams.

                  by allenjo on Mon Feb 16, 2009 at 11:21:05 AM PST

                  [ Parent ]

        •  As Obama astutely pointed out (8+ / 0-)

          The US system is one hell of a lot bigger than Sweden, and while "Nationalize" is a nice, simple expression, how (financially) you would nationalize behemoths like JP Morgan Chase, B of A, Citi, and many smaller monsters is a significant financial question.

          I agree that something resembling nationalization is necessary, since you have to have control, and then restructure these zombie banks. (Especially since the CEOs obviously do not "get it", and continue to play games.) But outright nationalization, due to the immense costs, might just crash the whole US money system.

          •  The framework (5+ / 0-)

            is there for nationalizing insolvent banks, which shouldn't be expensive at all.

            •  Maybe you're right (6+ / 0-)

              But all the banks in the savings in loan crisis taken together were probably significantly smaller than the JP Morgan Chase derivatives exposure alone. Does this not complicate the matter? If nationalization involves the US government ingesting trillions in currently garbage-level CDS and other derivatives, nationalization seems orders of magnitude more dangerous than previous comparisons.

              That said, I don't wholly understand how nationalization really would work. Can you speak to any of these issues?

              I guess my concern is applying existing frameworks that have only been applied to much smaller versions of this problem.

              •  If memory serves the S&L crisis (3+ / 0-)
                Recommended by:
                clyde, Imipolex, Rick Winrod

                cost $30 billion and the junk bonds that caused it were understandable.  Today we're faced with trillions in a new kind of junk nobody understands.  

                "Not the truth in whose possession any man is, or thinks he is, but the honest effort he has made to find out the truth, is what consitutes the worth of man."

                by Lying eyes on Mon Feb 16, 2009 at 06:36:28 AM PST

                [ Parent ]

                •  Not to scare anyone's pants off, but (4+ / 0-)

                  JPM's deviatives exposure the last time I checked was:

                  90 trillion dollars

                  Now most likely only a fraction of these are of the dangerously overvalued kind, but still. The S&L bailout was pocket change compared to this, and we're talking about just one major bank (tho they're the biggest derivatives holder in the US).

                  •  So? (5+ / 0-)

                    Let JPM and all the dumbasses that got into bed with them on those derivatives contracts go belly up.  Use the FDIC to reimburse small depositors, and move on.

                    If that won't work, we're screwed anyway so we might as well just crack open a beer and watch the damn thing burn.  Make a party of it.  

                    •  You really want to be fighting for food? (0+ / 0-)

                      and gas, and everything else your life and you family's depends on. Think it through.

                      I dislike JPM as much as anybody, but we have already seen how much damage the collapse of the much-smaller Lehman did. If JPM and its ilk goes down, so will the gas and food supply, and most jobs. The US will turn into an impoverished country overnight, without the capability that India, for example, has to grow food and get by with very little.

                •  Plenty of people understand it (1+ / 0-)
                  Recommended by:

                  They just don't want US to understand it, because then we'd tell them "where to go" when they ask for our money to cover their losses.

                  This is actually pretty simple conceptually, even if the details of each individual deal are complicated:

                  Banks made risky loans. Those loans were profitable.  The risker the loan, the greater the profit. However, since these loans were risky, some people decided it would be a great idea to spread the risk, so they created a whole new thing, made up of little pieces of lots of loans - some solid and some risky.

                  Supposedly, mixing in bits of solid loans would reduce the overall riskiness of the investment, while still allowing huge profits from the risky bits.

                  Others decided that this was not quite enough of a hedge against the risk, so they invented insurance for these new things. You could buy this insurance and if your part-risky/part-solid thing lost value, you'd be paid for your loss.

                  Here's where everything went kerfluey:

                  With no regulations, the people determining how much risk any particular loan carried, decided that it was in their best short-term financial interest to say everything was low risk. This meant more investors would be willing to invest. Lo and behold, they did! so these profitable risky loans became more and more common, and more and more of them were mixed into the stew of new "things" that people bought.

                  Then... one day, something caused some of the risky loans to actually fail. This was the sudden, dramatic increase in the interest rates on those risky loans.

                  The loans had been adjustable rate mortgages. When rates went up, without the regulations that used to require a cap on the amount a loan could increase, people were suddenly, instantly, priced out of their homes. They went bankrupt, the banks foreclosed, and the surrounding houses lost value. This triggered clauses in those homes' loans that would force interest rates to go up earlier, triggering another round of failures.

                  Think of it as triggering a mousetrap in the bottom of a fish-tank full of mousetraps and ping-pong balls.

                  This is all pretty straightforward. Unregulated interest rate hikes caused the first foreclosure dominoes to tip. Those dominoes caused investment banks to lose money. Those banks called on their insurance companies to offset their losses. This killed the largest insurer: AIG. The death of AIG caused market panic, because they were the insurer of choice for all these investment banks that had taken on huge portfolios of mixed-up risky loans.

                  As the foreclosure dominoes continue to fall, the banks' portfolios continue to lose worth.

                  They want you and me to make up for the money they are losing because they chose to take these risks.

                  First they just wanted us to funnel money straight into their coffers, but the dominoes are falling too quickly for that to help very much.

                  Now they want us to buy their empty coffers and assume all the liabilities attached to them. They want us to pay off their debts so they can maintain the lifestyle to which they've become accustomed.

                  It's kind of like making alimony payments to the investors who made bad investments, without the benefit of having fallen in love and gotten married first.

                  In real life, a TARP is a cover-up.

                  by mataliandy on Mon Feb 16, 2009 at 10:48:38 AM PST

                  [ Parent ]

              •  Well (1+ / 0-)
                Recommended by:
                Rick Winrod

                Step one is to stop foreclosures and guarantee the loans that led to them.  That is one of the fundamental causes of this crisis.  I would almost go so far as to say we might want to start un-evicting people who got thrown out because of subprime loans.  I think that probably isn't super practical, but we could look at it.  Doing this would stabilize a lot of problems out there with the weirder derivatives.  If we're going to be throwing absurd amounts of money at this problem, that money should start at the bottom, not at the top.  You can't have a strong economy without a strong base, and banking should never be that base, as we have sadly found out.

                I'd add to that the idea that the Fed should start lending directly to consumers.  I wish I could remember who pitched that first, I read it somewhere.  Why bother throwing money at banks so that they can lend to people and businesses when the Fed can just do the lending itself?

        •  I suspect a limited nationalization (8+ / 0-)

          would play better on Wall Street than many suspect.

          Here's why, and how to make it happen.

          By announcing limited but indeterminate nationalizations, the administration could play the bankers against each other.

          Right now, every wall street exec is worried its his bank that will get nationalized. Since Mr. Banker feels personally threatened, it makes sense for him to just generally oppose nationalization.

          If only a very small number of banks (bankers) were to be affected, and the administration announced that, then most bankers would not feel personally threatened. Some might even smell an advantage if their bank is in good shape, seeing that some of their competitors might go on the ropes. We could even get execs from mid-size banks pushing to nationalize Citi.

          Maybe you're thinking this is a pipe dream, but realize: Bankers are not a monolithic group. And they are quite willing to stab each other for competitive advantage. That can and should be take advantage of.

          Member, The Angry Left.

          by nosleep4u on Mon Feb 16, 2009 at 07:37:23 AM PST

          [ Parent ]

          •  Or we could draft the bankers (0+ / 0-)

            If the top executives of these banks are really necessary in order for the system to function, they should be drafted into national service.  Throughout our history we have drafted young people into military service, even though the young people had nothing to do with creating the problems they were sent to solve.  Why shouldn't the bank executives who caused this problem be drafted in a time of national need?

        •  Nationalizing the Banks is the WRONG thing to do (5+ / 0-)

          Putting them into Receivership is the right thing to do.

          Whenever I hear Republicans sound like they're promoting a "left" idea, I ask what their goal is. In this case, nationalization puts 100% of the cost of a bank's failure onto taxpayer shoulders, since we'll be the bank's owners. They want to transfer the losses to us.

          The correct thing to do is exactly the opposite: take over the bank, chop out the failed liabilities, give the bettors who made bad bets a good knee-capping, then return the bank to normal operation with new rules and new management.

          DO NOT buy into the right wing suddenly "seeing the light" - they're simply looking at a new way to vacuum more of our hard-earned dollars out of our pockets so they don't have to lose the fruits of their avarice.

          If they're talking nationalization it's only because they've reached a certain level of panic about potentially losing everything they hold dear (money, power, influence, the 16th house on the bay, the chauffeur). They don't want to face the downfall that follows necessarily from their own greedy over-reaching, so they're grudgingly willing to appear to be leaning left in order to shift their failures onto our shoulders.

          We're going to need whatever money our government can scrape together to rebuild after the collapse. We can't afford to have the last of our resources wiped out by taking ownership of bad debts that exceed all the money in the world:

          In the graph below:
          Teeny-tiny blue bar = subprime loans
          Red bar = CDOs, CDSs, and other derivatives
          Green bar = entire world's economy

          In real life, a TARP is a cover-up.

          by mataliandy on Mon Feb 16, 2009 at 10:20:32 AM PST

          [ Parent ]

    •  Excellent report and presentation (38+ / 0-)

      Thanks for the illuminating hard work.

      One comment: We're already out of gas. By my assessment, based on many sources, we're deep in the land of play money now. The only reason treasuries haven't collapsed already is because the dollar is hegemonic. But the tremor signs you report in this diary may be the beginning and then, hyperinflation.

      Not sure if central banks will allow this though. So it's all just play money. Only problem is, the interest is not play money. It's quite real.

      I'm really thinking nationalizing banks is not enough anymore. We may need to bring back the greenback. And default. Can you imagine? Global mayhem. But it would save us.

      •  forgive my ignorance but (1+ / 0-)
        Recommended by:
        Rick Winrod

        what is the greenback?

        Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

        by andrewj54 on Mon Feb 16, 2009 at 12:10:19 AM PST

        [ Parent ]

        •  U.S Currency (2+ / 0-)
          Recommended by:
          Odysseus, Rick Winrod

          Slang for the Dollar

          ------- Say it with me now, Republicans... Deregulation and greed caused all this.

          by Fast Bike on Mon Feb 16, 2009 at 06:53:40 AM PST

          [ Parent ]

        •  formerly a united states note (0+ / 0-)
          Despite the fact that in modern times the word "greenback" usually refers to any United States paper currency (all noted for their use of green ink on the reverse side of bills), the original origin of the term is from United States Demand Notes, which were a type of gold and silver redeemable note (representative money) issued very early in the American Civil war, and which had green reverses. This colorization continued with the later and more widespread United States Notes later in this war, which were not directly redeemable in specie. The still-later Federal Reserve Notes and also gold certificates and silver certificates in the United States, were printed with distinctive green reverse sides to mimic the well-known United States Note.

          I think the connotation here is that a greenback is backed up by physical gold, unlike the current federal reserve notes, which the term has devolved to.

      •  First, thanks! (23+ / 0-)

        Tocque, you're one of my favorite diarists in all of "Orange-land." (Actually, you just might be the best here, in my eyes. Coming from you, this means a lot to me!)

        And, yes, I'd tend to agree with you. But, the Japanese have just reported (today, I think...don't have the link readily accessible) a whopping 12.4% drop in their GDP! That's official Depression standards according to the National Bureau of Economic Research, at least here in the U.S.A., fwiw.

        The real problem with this new piece of horrific economic news from Japan is that these folks--along with China--are our biggest buyers of our debt.

        So, for all intents and purposes, that's one money tree in our own backyard from which the branches will be bare for years to come, for sure. China has their own issues, of course.

        That leaves us up the creek without a paddle, further exacerbating the concept that printing more money is going to lead us down a very short path to hyperinflation.

        And, The Automatic Earth has tons of great commentary on this, of course, over at:

        Again, thanks for the nice words Tocque. Truly appreciated.

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Mon Feb 16, 2009 at 12:24:51 AM PST

        [ Parent ]

        •  Japan data (12+ / 0-)
          - Japan’s economy shrank at a sharper-than-expected annual 12.7% pace in Oct-Dec quarter, the most since the 1974 oil shock, amid an unprecedented collapse in exports

          - On a quarterly basis, the economy shrank 3.3% from Q3 08. This compared with the US' 1% contraction and the euro-zone’s 1.5% decline

          - The only other time real GDP has posted a double-digit contraction in a quarter since 1955 was the Jan-Mar quarter of 1974, when GDP fell 13.1% amid the first oil crisis, according to the Economic Planning Association (via Asahi Shimbun)

          - In Q3 08, GDP shrunk a revised 1.8% yoy  

          - Sharp contraction in Q4 is likely to lead to more calls for extra stimulus

          Via RGE Monitor. (see Spotlight Issues - Japanese Economy Posts Biggest Contraction Since 1974)

        •  Japan had an epic credit bust / banking crisis (9+ / 0-)

          similiar to ours and there response was to do pretty much exactly what we have been doing so far. Hide the losses, shovel money at the banks hoping they get better and spend massive amounts relative to GDP on "stimulus" via public works projects and infrastructure.

          There result was to have thier economy go nowhere for almost 20 years....their stock market is still down by almost 80% from the peak after 20 years and now they are headed into a Depression.

          And the bush admin. and now the Obama admin. seems to be following thier playbook to a tee. I thought we were getting "change".....seems like more of the same to me.

          "I am on nobody's side because nobody is on my side" -Treebeard

          by waf8868 on Mon Feb 16, 2009 at 06:23:59 AM PST

          [ Parent ]

          •  Whereas, if they'd cut the liabilities out (0+ / 0-)

            from the very start, letting investors who made bad decisions lose their shirts, they'd probably have been in much better shape.

            The IMF policy seems to be based on shoring up short-term market confidence, at the expense of long-term market confidence and economic sustainability, and the IMF has driven most of the policy around "helping" countries "emerge" from recession/depression.

            What we need is to keep the public spending while eliminating (aka writing off) the private losses. Let the bettors lose their shirts.

            In real life, a TARP is a cover-up.

            by mataliandy on Mon Feb 16, 2009 at 11:11:30 AM PST

            [ Parent ]

      •  I'm convinced that nationalization of the money (16+ / 0-)

        center banks is in the works, but the administration is struggling with developing a plan that will accomplish its ends both economically and politically.

        One of the major challenges in placing Citi-Bank, Bank of America and/or Wells Fargo in receivership is how to effectively carve them into smaller pieces. Traditionally, the FDIC has handled bank failures by merging the failed institutions with healthier banks. However, the size of Citi, BOA and Wells Fargo is so enormous there are no single banks capable of absorbing any one of them.

        Nor, do I suspect, does the administration wish to allow such a large portion of the nation's bank deposits rest in the hands of so few banks.

        Thus, how can the deposits be disbursed, and along with them the toxic assets currently destroying the balance sheets?

        I don't get the sense at all that the administration is opposed to nationalization, and the so-called "Stress Test" is an indication of quite the opposite. However, as is his nature, Obama is going to proceed cautiously, and not until he has sufficient data to guide his policies.

        "If a free society cannot help the many who are poor, it cannot save the few who are rich." JFK - January 20, 1961

        by rontun on Mon Feb 16, 2009 at 01:19:59 AM PST

        [ Parent ]

        •  That's my sense as well (14+ / 0-)

          Based upon what both Axelrod said on MTP and Obama said to the National Journal over the weekend, the administration is NOT oppose to nationalization of the insolvent banks.  

          They are just struggling how to do it logistically and politically.  Politically they got a huge shot in the arm from Senator Graham yesterday when he came out and said that he wasn't oppose to nationalizing the banks.  Also articles such as were in the WaPo yesterday that says that we are all Swedes now does help.

          Logistically, I think that they are still working out the kinks about what they plan to do but "stress testing" the banks is both politically and logistically SMART because it may help determine what they specifically will do.

          "Because we won...we have to win." Obama - 6/6/08. WELL WE DID IT!!! 11/4/08

          by Drdemocrat on Mon Feb 16, 2009 at 04:26:58 AM PST

          [ Parent ]

          •  I fail to understand why Lindsay Graham (0+ / 0-)

            saying he is not opposed to nationalizing the banking industry is a shot in the arm?

            since when have Graham's over the top statements reflected part of the Democratic agenda?  the other thing i don't undertsnad what exactly nationalising, ie. giving them to the government to run,  the banks would achieve?  the same people would be hired to run them and since when have the Democrats advocated government takeover of the private sector?  I guess I missed that aspect of the Progressive agenda.

            I guess I must have totally mis-understooid the election. I did not understand that the game plan was to abolish capitalism and create a socialistic state.  did I back the wrong team?

            I was way off the mark obviously.  Time for me to move back to the UK, they already have this system and they are in even worse shape than America to all accounts public and private.

            i do sincerely hope that Obama and his team are not listening to the blogosphere because people seem to have gone totally berserk.  If there is anything that could make me more afraid than I already am it is the thought of the economy being in the hands of some of these wild theorists.

            •  Its an assist to nationalization (4+ / 0-)
              Recommended by:
              slinkerwink, RainyDay, evora, ohmyheck

              because it means the republican echo/scream machine might not go into full gear.

              As to why nationalization would help: it would open the banks' books.

              Right now no one (government, other banks, investors) knows what crap is on banks' books. This blocks problems from being solved, in fact it blocks problems from even being stated. And it clogs up the lending markets since there's no trust.

              Just opening the books would be a huge plus.

              Member, The Angry Left.

              by nosleep4u on Mon Feb 16, 2009 at 07:55:45 AM PST

              [ Parent ]

            •  At this point I'd choose the wild theorists (5+ / 0-)

              over the Wall Streeters whose policies have led to this crisis. Among those "wild theorists" are the highly regarded economists mentioned in the diary, and include also Nouriel Roubini, writing in the Wash Post just the other day.
              Graham's apparent comfort with nationalization (temporary receivership) means that getting bipartisan approval of this approach may not be a major stumbling block if Obama decides to move forward in this direction. The major roadblocks right now appear to be the people on his own team.

            •  Well, the wild theorists have been having (4+ / 0-)

              this nasty habit of having their theories confirmed by the empirical evidence that we've been seeing in the last 18 months.  Meanwhile the Washington Consensus types have been rendered speechless by the speed with which their theories have been rendered useless.

              And anyway- what definition of capitalism has taxpayers being forced to shovel such a huge chunk of its wealth to one sector of the economy?  Whatever happened to creative destruction and all that? Whatever happened to profits being a measure of surplus value created?  Our government crossed the Rubicon long ago in regards to the question of laissez-faire vs. having a command economy.

              Your dog likes it when you sing for her.

              by aztecraingod on Mon Feb 16, 2009 at 08:51:12 AM PST

              [ Parent ]

          •  "Texas Ratio" and other stress tests. (0+ / 0-)

            Seeking Alpha article.

            The Texas Ratio is roughly, the ratio of nonperforming to performing loans in a bank's portfolio.  Like any rule of thumb, it shouldn't be taken too far, but this is the kind of thing that tends to spotlight problems.

            Take "recent" stress into account.  In 2002, the Credit Card Charge-off Rate (money forgiven as uncollectible) peaked at about 8%.  That is not exactly "ancient history".  IMHO, every credit card issuer should be required to report to regulators and auditors how well their portfolio would perform under that kind of effect.

            The "worst stresses of the last ten years" in unemployment, performance, and many other measures should regularly be applied as a test of conservatism in management.

            -7.75 -4.67

            "Freedom's just another word for nothing left to lose."

            There are no Christians in foxholes.

            by Odysseus on Mon Feb 16, 2009 at 09:38:08 AM PST

            [ Parent ]

        •  Could looking at a pre-GLB org chart help? (2+ / 0-)
          Recommended by:
          Odysseus, pstoller78

          Citi has only been around since the very late 90s, as it's current "all financial services under one roof" model was illegal under Glass-Steagall.  Why not start by separating the day-to-day banking side from the investment houses, and the mortgage lenders, etc.?  
          If the chunks left are still too big, break them up regionally, Baby Bells-style.

          "The truth will set you free. But not until it is finished with you." - David Foster Wallace

          by John Shade on Mon Feb 16, 2009 at 07:27:48 AM PST

          [ Parent ]

        •  Sorry (1+ / 0-)
          Recommended by:

          But I just don't see Geithner's plan as a sneaky way of doing nationalization. Geithner is too tied to the banking community. He's chosen deputies from the usual suspects, Citibank, Morgan Stanley,

          He will do anything not to have to take them down. It's just not in his nature and the flop sweat performance he gave was an indication that he knows it is inadequate.

        •  Dean Baker doesn't mince words (2+ / 0-)
          Recommended by:
          Odysseus, yellow dog in NJ

          With no clear strategy, the new bank-rescue plan offers only more uncertainty.

          Fortunately, we don't have to follow the individual trades to know whether the taxpayers are being ripped off. We just need to ask some more basic questions like "How much will this thing cost?" If the answer is anywhere much more than zero -- as Geithner suggested it will be -- and we still see that bank stocks carry significant value and bank executives continue to hold on to their high-paying jobs, then we will know that we have been had.

          I don't trust Geithner, but the jury on him is out until I see the details of his plan. Judging by the drop in Bank stocks shareholders were pessimistic that his plan would be a big giveaway to the Banks, and that is a very good thing. I hope the Markets dropped is because the federal cash cow just went back into the barn.

          nor can we consume the world's resources without regard to effect. For the world has changed, and we must change with it. - Barack Obama

          by Lefty Coaster on Mon Feb 16, 2009 at 08:42:46 AM PST

          [ Parent ]

      •  Ya, we are going to have hyper inflation. (1+ / 0-)
        Recommended by:

        Time to go back to the barter system.

      •  Exactly, T-bills and notes are becoming the worst (1+ / 0-)
        Recommended by:
        yellow dog in NJ

        investment on the planet. What does the government do when it can no longer borrow money?

        Zimbabwe, here we come.

        The sleep of reason brings forth monsters. --Goya

        by MadScientist on Mon Feb 16, 2009 at 06:20:26 AM PST

        [ Parent ]

    •  great diary, bobswern. Deserves to be rec'd. (11+ / 0-)

      Good job assembling a compendium of smackdown for Obama's financial folly.  We are in for a very rough ride.

      "Well, yeah, the Constitution is worth it if you can succeed." -Nancy Pelosi, 6/29/07.

      by nailbender on Mon Feb 16, 2009 at 12:31:32 AM PST

      [ Parent ]

      •  I second that - this is a MVP diary (3+ / 0-)
        Recommended by:
        Joe Bob, nailbender, yellow dog in NJ

        Great info on the growing interest in nationalizing the banks.

        One of the best links in this diary is to the article called "Time to unravel the knot of the Credit Default Swap". This article lays out strategies to fix this problem, which is key to our financial survival.

        Mr. Raynes’s resolution is more radical: unwinding all outstanding credit-default swaps through a process he calls inversion.

        Under this plan, insurance premiums would be refunded to buyers of credit protection from the entity that wrote the initial contract. And the seller would no longer be under any obligation to pay if a default occurred.

        "If you stop the clock and reverse it, then the entire system will be able to breathe again," Mr. Raynes said. "And over time, at the same speed that you got into the mess, you get out of it."

        Mr. Raynes’s proposal is online at, and Mr. Whalen’s plan is at (the "Institutional Risk Analyst" link on the left leads to a post on the right that begins "To Stabilize Global Banks").

        I suggest everyone read this article on CDSs!!!!

    •  Excellent interview on Moyers (13+ / 0-)

      With former chief economist of the IMF and now business professor at MIT, Simon Johnson.  He is also part of this consensus.

      Great diary!

    •  The nationalization debate (1+ / 0-)
      Recommended by:
      In her own Voice

      is largely beside the point.

      It will cost trillions whether you nationalize these companies, or bail them out, or break them up and sell them off through a recievership.

      Whatever you do, you need to it quickly.  If there is one thing markets cannot stand, it is uncertainty.  

      The bitter truth of deep inequality has been disguised by an era of cheap imported goods and the anyone-can-make-it celebrity myth - Polly Toynbee

      by fladem on Mon Feb 16, 2009 at 07:23:45 AM PST

      [ Parent ]

    •  Excellent work (0+ / 0-)

      Thanks for taking the time to produce this diary.  Everyone should read it.

    •  Fantastic description! (0+ / 0-)

      You've done an excellent job describing the problem and the solution.

      I think the right wing has been using the term "nationalization" to promote the idea that the left just wants more "socialism" - in an attempt to discredit the one and only thing that will really fix the problem in our banking system.  

      Of course, not really "nationalizing" the banks, it's using the process that has been used consistently for quite some time when dealing with banks that have failed: systematic and calm unwinding via receivership.  

      Banks are put into receivership on a regular basis in the US, it just doesn't make news, because most of them aren't very large. The big difference between the current crisis and a typical bank failure is size, combined with political influence. The bankers in East Overshoe don't have a whole heck of a lot of political influence, while the bankers that run the big-name financial institutions have a ton of it. They've pushed and lobbied to be treated differently, and so far they've succeeded. Through their money and lobbyists, they have more voice than we do with our legislators, and thus have won the argument, so far. However, as fewer people have jobs they're worried about keeping, I have a feeling the public voice will become louder and more persuasive...

      In real life, a TARP is a cover-up.

      by mataliandy on Mon Feb 16, 2009 at 10:06:05 AM PST

      [ Parent ]

  •  Imagine that: (59+ / 0-)

    you hire the lead mechanic away from the dealership who drained the oil from your car and sent you down the road, he recommends draining all the gas and replacing it with new gas from a different refinery and adding fuel injector cleaner,  you still can't get the siezed-up wreck to start, all the cars backed up behind you on the express way are honking like crazy, you hear the claxon of a fire truck trying to get through the traffic jam you've caused, and behind that racket you hear the screeching brakes of an 18-wheeler about to send a chain reaction your way.

    So you turn to the former shop foreman of that same dealership who's consulting with the mechanic, and he's recommending you try putting it in reverse.

    "Well, yeah, the Constitution is worth it if you can succeed." -Nancy Pelosi, 6/29/07.

    by nailbender on Sun Feb 15, 2009 at 11:35:32 PM PST

  •  thanks for a great diary nt (7+ / 0-)

    Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

    by andrewj54 on Sun Feb 15, 2009 at 11:52:26 PM PST

  •  First Things First (9+ / 0-)

    The top priority for the US is to sell those bonds and raise that money.

    There's only one way to make that happen, and that's to raise interest rates. (Who wants to buy negative interest bonds?)

    The banks aren't lending money, anyway, so we may as well raise interest rates. If we don't, we will default on the the Treasury ponzi scheme.

  •  No n/t (0+ / 0-)

    Another installment of simple answers to simple questions.


    Mitch Gore

    January 20, 2009... the end of an error.

    by Lestatdelc on Sun Feb 15, 2009 at 11:54:53 PM PST

  •  Geitner's "plan" is nothing more than (22+ / 0-)

    a bigger version of the Japanese 1990s zombie-bank approach --- throw a lot of money at the banks holding the toxic asserts to make them look better on paper even though they still carry the assets on their balance sheets.  These toxic assets need to be worked out of the system.  Seriously, nationalization of the mega banks is the ONLY real solution left out there.  The FDIC or RTC-like agency can then do workouts for mortgages that are in default or close to default, and can remove from the market those properties that have been seized by the bank(either by giving homes to return vets and their famalies from Iraq/Afghanistan, or offering these already vacated bank foreclosed properties at discount lendinig rates to teachers, fire fighters, and other public employees as compensation in kind).  Once the toxic assets are removed from the market, both the housing market and the credit market will have found a floor from which to build from.

    •  Yep....but, if you checkout the stat's.... (7+ / 0-) in every nine homes in the U.S. is vacant!

      So, the floor for U.S. housing is actually considerably lower than we've been led to believe (I believe).

      "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

      by bobswern on Mon Feb 16, 2009 at 12:42:58 AM PST

      [ Parent ]

      •  Think you'd have to link that one (2+ / 0-)
        Recommended by:
        True Independent, pstoller78

        That sounds way too high.  Maybe in some Florida developments...

        We must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

        by Minerva on Mon Feb 16, 2009 at 04:19:20 AM PST

        [ Parent ]

      •  Way off. (1+ / 0-)
        Recommended by:
        True Independent

        Census Bureau housing survey (PDF)

        National vacancy rates in the fourth quarter 2008 were 10.1 (+ 0.4) percent for rental housing and 2.9 (+ 0.1) percent for homeowner housing, the Department of Commerce’s Census Bureau announced today. The Census Bureau said the rental vacancy rate was higher than the fourth quarter rate last year (9.6 percent), but not statistically different from the rate last quarter (9.9 percent). For homeowner vacancies, the current rate was not statistically different from the fourth quarter 2007 rate or the rate last quarter (2.8 percent each). The homeownership rate at 67.5 (+ 0.5) percent for the current quarter was lower than the rate last quarter (67.9 percent) but not statistically different from the fourth quarter 2007 rate (67.8 percent).

        -7.75 -4.67

        "Freedom's just another word for nothing left to lose."

        There are no Christians in foxholes.

        by Odysseus on Mon Feb 16, 2009 at 09:46:56 AM PST

        [ Parent ]

  •  On the same show (6+ / 0-)

    where Graham said we need to leave nationalization on the table, Schumer said we shouldn't.

    Streange bedfellows indeed.

    Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

    by andrewj54 on Sun Feb 15, 2009 at 11:56:25 PM PST

    •  Schumer is bought and paid for by Wall Street (19+ / 0-)

      Asking his opinion on what to do is like asking one of the bank execs with his pampered chair and plush rug what to do.

      •  With Republicans now tilting more toward (4+ / 0-)

        nationalization option, Schumer is being exposed as the Wall Street pimp he really is.  He'll have hoof marks on his face if he tries to be the lone defender of these crooked banks.

        •  Let's hope so. Schumer has very dirty hands. (0+ / 0-)

          my comment @ albrt from above:

          Geithner himself said the banks are insolvent and illiquid, in response to a question posed to him - I believe it was a TV pundit on Bloomberg.  Most of the celebrated economic blogs (Mish, Calculated Risk) have been making this point since September.

          If Obama allows Geithner and Summers to screw the taxpayer by refusing to nationalize, it's a one-term presidency and a huge fucking shame.  His economic team is acting like a brat.

          That said, I'm starting to believe that the "stress test" is a back door move to nationalization.  But even so, that the GOP has gained traction by philosophically allowing for nationalization, while the Democrats posture about "preserving free market principles" is pitiful.  I suspect that those GOPpers who "might consider" nationalization have been hearing an earful of populist outrage and know how to exploit it.  The DEMS, pushing bailouts, seem deaf by comparison.

          "History is a tragedy, not a melodrama." - I.F.Stone

          by bigchin on Mon Feb 16, 2009 at 09:17:56 AM PST

          [ Parent ]

          •  Right-o. the nationalization noises, however (0+ / 0-)

            sincere they may be, represent the politically savvy move by the Republicans in god knows how long.  If they keep it up, they will put Geithner and Schumer in a tough spot since democratic progressives will not want to see another dime of taxpayer money going to these toxic banks.

            •  Given that the stress test is limited to (0+ / 0-)
              banks receiving over $100 billion, I think the end result will be nationalization of the mega-banks, which I believe is what everyone has been pushing for all along.  The argument that there are thousands of banks in this country so it is tooo complicated to nationalize all of them is a red herring.  No one is arguing that every single bank in this country needs to be nationalized, rather it is the ones that serve as the true heavy weight engine to lending in this country, namely, the mega banks, that need to get fixed quick and start hummming again lending money.  Once that happens, the FDIC can take care of the remainder as it has done since its creation back in the '30s.
  •  I watched This Week today (12+ / 0-)

    And they showed the clip from the interview where Obama says why he thinks nationalization is the wrong approach.  Interestingly, they didn't play the part where he talks about our system being too complex, only the part where he talks about how we have different "cultures" towards financial institutions.  He stumbled while he was saying this "cultures" bit, and it seemed to me that he knew he was full of shit on this point, but was saying it anyway.  Too bad.

    Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

    by andrewj54 on Mon Feb 16, 2009 at 12:08:26 AM PST

  •  The Second Coming (12+ / 0-)


       Turning and turning in the widening gyre
       The falcon cannot hear the falconer;
       Things fall apart; the centre cannot hold;
       Mere anarchy is loosed upon the world,
       The blood-dimmed tide is loosed, and everywhere
       The ceremony of innocence is drowned;
       The best lack all conviction, while the worst
       Are full of passionate intensity.

       Surely some revelation is at hand;
       Surely the Second Coming is at hand.
       The Second Coming! Hardly are those words out
       When a vast image out of Spiritus Mundi
       Troubles my sight: a waste of desert sand;
       A shape with lion body and the head of a man,
       A gaze blank and pitiless as the sun,
       Is moving its slow thighs, while all about it
       Wind shadows of the indignant desert birds.
       The darkness drops again but now I know
       That twenty centuries of stony sleep
       Were vexed to nightmare by a rocking cradle,
       And what rough beast, its hour come round at last,
       Slouches towards Bethlehem to be born?

    Men with guns maturing in age will always pay a shitty wage.--Belle & Sebastian

    by andrewj54 on Mon Feb 16, 2009 at 12:50:32 AM PST

  •  I completely agree with Reich on this, (10+ / 0-)

    Geither's outline of a plan  does lack transparency because of the heavy involvement of the FED in the financing. In fact I think the Geithner outline might be dependent on this lack of transparency for it's implementation due to this outline being in reality a financial bailout rather than a financial stimulus.

    Can anyone pronounce Japan?!

    The Shape Of Things "Beware the terrible simplifiers" Jacob Burckhardt, Historian

    by notquitedelilah on Mon Feb 16, 2009 at 01:09:53 AM PST

  •  Geithner is fixing the global issue, not domestic (7+ / 0-)

    The bigger issue for the US and Geithner is the status and health of the --global-- corporate/banking system, not that of the domestic United States.

    He's all about the G7 and assuring the US be a 'good partner' in the global business/banking arena.  At the G7 this past weekend, he assured that the US would not engage in protectionism (part of which is the hiring of foreign workers to replace highly paid US workers domestically--Sen. Sanders submitted a bill or an addendum to the Stimulus bill about this issue).

    There are about 154,000,000 in the US civilian labor force
    Compared to the global workforce, this is a small number and not the focus of a global bank or corporation---they are not going to tailor their HR, pay, and operations just to satisfy an 'entitled' American work force.

    Our government, the White House, corporations and banks are thinking globally now, not domestically per se.  GM, and Bank of America are contemplating separating their businesses into two parts---a global part, and a toxic, underperforming US part.  So you can see they are moving on, and so are other corporations and banks.  


    •  The downsides of globalization (1+ / 0-)
      Recommended by:

      are being felt all over the Mediterranean, where they can't let their currencies fall (they're all on the Euro.)

      For Canadians, whose banks are solvent and whose car plants don't have to pay for US health care, it might be terrific if the US assets of MNCs were split off and allowed to sink or swim on their own.

      We imported the US crisis because we homogenized our economy with the US since NAFTA. But we don't have Iraq to pay for, our mortgages were never under water, and our firms didn't have to bankrupt themselves paying for health care.

      Our biggest problem is that we don't have any fungible assets except the tar sands. That's a big problem.

      In short, each country's crises are different, and each country's solutions will be different.

  •  Any one know more about the FED? (1+ / 0-)
    Recommended by:

    This is new (and much appreciated) information

    People mistakenly think that the Fed "prints money" without consequences. It does not. The Fed has a balance sheet of assets and liabilities like any other bank.

    I'd like to know more about the balance sheets? It would do me well in discussions with my Ron Paul addicted roommate. Food/Health Issues! Vote on Best Blog 2009!

    by CornSyrupAwareness on Mon Feb 16, 2009 at 01:29:10 AM PST

    •  Yes, but Fed's semi-autonomous. n/t (1+ / 0-)
      Recommended by:

      "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

      by bobswern on Mon Feb 16, 2009 at 02:01:45 AM PST

      [ Parent ]

    •  Some people think cash is created (8+ / 0-)

      by the government printing it.

      Paultards think cash is created by the Fed making people indebted to them and banks, which is true, in a sense, but not really an accurate picture.

      The reality is that cash is created by economic activity.  Central banks just let it flow through banks.

      Usually, the goal of central banks is to have liquidity go out SLIGHTLY faster than economic activity merits.  This allows for growth and produces slow inflation.  What we have right now is a "liquidity trap" where it doesn't matter how fast the central bank turns on the taps, no one in the economy is creating value so everything gets frozen into low yield investments.

      Incidentally, the idea of the stimulus is that the government is saying, "Hey, you banks, if you don't trust the economy enough to lend out money and want to put it all in low risk, low yield investments, how about we just borrow money from you and spend it on actual stuff?  Here's your low risk investments, Treasuries!"

      Keep in mind that the Fed (and all central banks modeled on it) is really a public/private partnership of government officials and private banks, which irks many people, particularly ideologues of either stripe.

      Yes, Santa Claus, there is a Virginia. And it went Democratic.

      by Anarchofascist on Mon Feb 16, 2009 at 02:07:34 AM PST

      [ Parent ]

      •  Geithner can do (almost) whatever he wants... (6+ / 0-) a result of this reality as far as the Fed's concerned, too. (As you obviously realize this, as well.)

        That's the sad thing, actually, about the Fed's quasi-private status. If Geithner really tries (wants to, and he does, of course), he doesn't even have to get approval from the legislative branch to put the taxpayer on the hook for another couple of trillion, as we both know.

        "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

        by bobswern on Mon Feb 16, 2009 at 02:18:57 AM PST

        [ Parent ]

        •  We are, though, actually talking (11+ / 0-)

          about numbers that bump up against the Fed Banks' total reserves.  Which is one of the main things Paulson was freaking out about in the fall.

          Also, when we're talking about putting BoA, Citi, et al into receivership, we're talking about going WAY the fuck beyond the FDIC's reserves -- and that's just to cover insured deposits.  The wealth destruction if insured deposits weren't covered would be epic.  Although no one is really talking about that -- you can't put all the big banks into traditional receivership, which is the normal mechanism by which banks are nationalized in the U.S.

          A better discussion would be conservatorship -- which would destroy equity in the banks but not depositors.  That's what they did to Freddie and Fannie and frankly, the results weren't disastrous (except to shareholders.)  I think the unwillingness to pull the trigger on that has more to do with the management nightmare than it does fear of shareholders.  I mean, even the sovereign wealth funds that people talk about a lot -- they've already seen their Citi or BoA or Wachovia investment (or whatever) go from 50 billion to 2 billion (or whatever).  If I'm an Emirati SWF, I'm much more scared of continued energy demand destruction then I am losing my last dollars invested in Citi.

          Yes, Santa Claus, there is a Virginia. And it went Democratic.

          by Anarchofascist on Mon Feb 16, 2009 at 02:34:56 AM PST

          [ Parent ]

      •  Cash and money are different things... (1+ / 0-)
        Recommended by:

        Cash is a subdivison of money and is not the problem (so his printing press argument is flatly wrong).  The traditional measures are the M1 (cash and coins) and M3 (bills, bonds and securities) money supplies.

        However, the central problem is not necessarily the level of M1/M3, but the velocity of those supplies (how fast it changes hands).  The faster the velocity, the smaller the money supply needed to support the economy (and vice versa).  Hence, all the pressure since last fall to stimulate banking by injecting liquidity (under the false assumption it would in turn increase velocity).  What they really meant to say was "we need to increase velocity so we wouldn't have to expand M3".  M1 is essentially moot (as it's cash money, and not central to ongoing bank commerce).  

        From the articles offered in the OP, the increase in Treasuries on the market is in fact a direct increase in M3 (and has serious potential for inflation, and crashing the overall market by over-supplying securities.  There is a "cascading failure" scenario within this strategy to flood the market).

        Your Ron Paul roommate doesn't understand this, as he believes the system is still a 1:1 correspondence between actual notes (hence the printing press statement) and the overall value of the economy (that's a view that hasn't been true since prior to the Great Depression).  Most "money" today exists in book entry form (as in a ledger entry in an accounting book, and is not backed up with actual notes).  Printing presses have very little to do with it, as the percentage of M1 to M3 is miniscule.

        Here is the central equation for understanding monetary policy:

        Monetary Policy

        M*V = S*P

        Money(M1/M3 supply) times Velocity(how fast it changes hands) = Sales(goods sold) times Production (goods produced)

        Intelligent monetary policy seeks to keep both sides of the equation balanced.  Greenspan ignored this, by continuing to keep velocity running full out through 2003-5, when in fact, sales were lagging far behind production.  Hence, most businesses now have a massive inventory with no underlying market, given nobody is buying (compound problem).  This is the smoking gun on our economic collapse.  Not Freddie or Fannie, or a 10% foreclosure rate, or evil minorities wanting a home for their kids.

        What policy makers to date have failed to consider is the simple fact that no amount of managling velocity or production can jumpstart monetary policy.   Only increased Sales can recover this economy.  Taxcuts, as a tool, simply encourage more production ($600 ain't shit, sorry), and with massive standing inventories (idled, unproductive capital), will be destructive (given they will increase the demand for money supply expansion, as lower revenue is available to address stimulus for sales).

        See, we allowed populist charlatans, with false laisse faire beliefs to erode sound economic policy, it may take 30 years to destroy something as sound as the United States economy, but as soon as growth goes flat or negative, this is exactly what it produces.  Government's hands are strapped right now with a 35% top tax rate (and I'd argue it's much worse when viewed from a net tax receipt basis), designed to maintain a marginal government during high economic times.  During flat or negative growth periods, you might as well put a gun to your head.  Fucking charlatans.  Anybody read the "The Ant and the Grasshopper" when they were kids?  LOL.

        Taxcuts, erosion in real wages, offshoring jobs, laisse faire regulation (or lact therof), bullshit sentiments of allowing the free market (banks, corporations et al) to decide, and on and on, with this populist NO government bullshit, needs to be put down for all time for the abject stupidity it really is.  All of this, and more, combined to erode Sales (even the taxcuts, lol).  Banana Republics rarely have healthy economies, in spite of the few land barrons making wealth in spades.

        Reagan got away with it because of the strength of our economy (which had nothing to do with anything he said or did).  Bush I&II got away with it for the same reasons.  And sorry, Clinton, too (though he did more to fight back to a neutral position than the others).  If they hadn't have gone completely off the reservation and believed their own BS, we would still be functioning (but with this timebomb of abuse waiting to explode).  

        And in a longer piece, I could bang the reasons off 1,2,3... for how we were dismantled and setup for this to happen.  Newt Gingrich should be forced to his knees and made to give every single American citizen a...  uh, nevermind that, lol.  Wrong kind of stimulus.

        Let's just say that letting Charlie Daniels become the convential wisdom was probably the stupidest fucking thing this country ever did  ("Save all your confederate money, cuz the South is gonna rise again").  Same difference.  At least he really could play a fiddle.  Even though, as an economist, Charlie can best be described as a chowderhead, lol.

        Democracy becomes a government of bullies tempered by editors. Ralph Waldo Emerson [So where have all the editors gone? rolling thunder]

        by rolling thunder on Mon Feb 16, 2009 at 09:56:47 AM PST

        [ Parent ]

    •  The Fed publishes their balance sheet (2+ / 0-)

      every week, you can see it here:

      You need to go down to item #8 to see it.

  •  Wow, a great diary, and analysis! (3+ / 0-)

    It is sad that Lindsay Graham who is on the right track here.  Things are bad, really bad, we are pretty much fucked.

  •  Did Obama say he will consider (3+ / 0-)
    Recommended by:
    slinkerwink, alba, farbuska

    good ideas if they come from Republicans? here is one from Lindsay Graham, surprise. How about reviving that bipartishanship thing?

  •  We're fed up and not going to take it anymore! (6+ / 0-)

    I fear that Obama could ruin his entire Presidency with this bull-shit.

    Forget finding the money, another bank bail-out simply will not fly politically.  There will be an overwhelming public outcry, and it will not make it through Congress.

    It is simply too outrageous.  And in a very straight-forward and simple way that everybody can understand.

  •  I'm not too smart about (9+ / 0-)

    this stuff but I read a comment (whose author I cannot recall) that made a lot of sense to me.  With all the $$ we're pouring into institutions who obviously aren't responsible when using other people's money, we could just let them fail and start whole new banks: you know, banks that do their job making money for themselves and their depositors without bankrupting the planet.  I know that's simplistic and probably impractical but when you start talking a level of financing in the trillions, it seems like that could be used to reinvent this badly warped wheel.

    I'm old enough to remember when bankers were boring, prudent people who made money a little bit at a time.  They weren't expected to turn huge profits in a short time.  They invested wisely and most of those investments paid off down the road.  The profits on individual transactions weren't large but in aggregate, they added up to a reasonable return.  There is nothing reasonable about the expectation of obscene profits in a matter of months but it seems that that has become a regular expectation.  This is a system that's designed to fail.

    -7.62, -7.28 "We told the truth. We obeyed the law. We kept the peace." - Walter Mondale

    by luckylizard on Mon Feb 16, 2009 at 02:23:39 AM PST

    •  Why we can't just buy the banks (2+ / 0-)
      Recommended by:
      PsychoSavannah, luckylizard

      With all the $$ we're pouring into institutions who obviously aren't responsible when using other people's money, we could just let them fail and start whole new banks: you know, banks that do their job making money for themselves and their depositors without bankrupting the planet.

      I heard Bernie Sanders address this exact question from Thom Hartmann on Friday, and his answer made sense to me. Bernie pointed out that it would be necessary to buy the banks' bad debt as well, making such a transaction less than feasible.

      I do like the idea of setting up a temporary, but competing Federal bank as an alternative to debt bearers if they are getting no response from traditional Big Financials. If a consumer with reasonable credit standing, for instance, can't find fair recourse for a redesigned mortgage, they might find an alternative with this Federalized institution. At an appropriate time down the line, the prudently-managed debt could be auctioned and sold, if deemed to be desirable.

      What I like about this plan is that the Fedbank competes directly with Big Finance, which will literally have to loan or die.

      STMR = Still Too Many Republicans

      by thenekkidtruth on Mon Feb 16, 2009 at 03:54:24 AM PST

      [ Parent ]

      •  I wish I could remember (2+ / 0-)
        Recommended by:
        Odysseus, thenekkidtruth

        whose comment I'm citing.  That person said to let these crappy banks fail, establish news ones, and when those are up and running well, sell them.  I don't think buying the existing banks is either smart or possible.  They did bad business - let them fail.  That's what those bankers would tell any of us if our business was in trouble...

        -7.62, -7.28 "We told the truth. We obeyed the law. We kept the peace." - Walter Mondale

        by luckylizard on Mon Feb 16, 2009 at 07:08:43 AM PST

        [ Parent ]

  •  Are such plans likely to totally and permanently (4+ / 0-)

    wipe out shareholder stakes in these failed banks, or is there still the possibility that they might one day recoup at least a portion of their stake, if some of these banks recover and become solvent and profitable again someday?

    I sheepishly ask purely for semi-selfish reasons. My close to 70 year old mother was foolishly advised to purchase preferred shares in some of these banks literally just before they started declining in mid-summer '07, as a way of translating some of her modest life savings into dividend payments, and while she's willing to hold onto them if there's a chance that they might someday get back to something approaching previous levels, she's also afraid of being completely wiped out if they're liquidated.

    I'm also guessing that more than a few people here are in similar situations, either with relatives or with their own holdings, so this isn't just for me and my mom.

    The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

    by kovie on Mon Feb 16, 2009 at 02:51:06 AM PST

    •  I know others who (1+ / 0-)
      Recommended by:

      are in your mother's situation.  Ordinary people who would be wiped out with nationalization of these banks-- people who are not wealthy, but put their retirement savings into these investments--- I have wondered if that is one reason that obama/geitner have been taking this direction.

      •  They're already largely wiped out (1+ / 0-)
        Recommended by:
        yellow dog in NJ

        So taking bank stocks to zero is a much smaller step than they have already fallen.

        •  Not true (4+ / 0-)

          My mom lost around 30-35% of her stock assets to date. If they nationalized these banks, she'll have lost 100% of them. That's still a lot of money. An assessment will have to be made of who has money invested in these companies, and instead of wiping them out, warrants should be issued for new stock in these companies once they're privatized again. No point in "saving" the economy if the only way to do it is by destroying a major portion of the assets of its most vulnerable citizens.

          The not rich shouldn't have to bail out the rich in any way, shape or form just because they got some really bad investment advice from advisors who were undoubtedly pressured to basically lie to them, who themselves were lied to by these banks. Once we've put in place plans to get these banks and the financial system back on track, a full assessment needs to be made of who did what, and ill-gotten assets will need to be seized. The Madoffs, Fulds and Lewis's and their friends should be deprived of whatever assets they essentially stole, put in jail if need be, and these should be redistributed among those hurt by them, as equitably as possible.

          The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

          by kovie on Mon Feb 16, 2009 at 05:10:47 AM PST

          [ Parent ]

          •  portfolio (0+ / 0-)

            I have no idea what your mom's portfolio looks like. But at some point she has to cut her losses and sell. The financial stocks are not coming back anytime soon. And the longer you had held them, the less likely you'll break even.

            •  If these companiies don't go under (0+ / 0-)

              and the stock aren't liquidated, she's willing to hold onto them for a few years till they rebound. But if they're likely to go under, or their stocks liquidated, obviously she needs to sell pretty soon. That's what I'm wondering, does it look like they will be allowed to go under, or their stocks liquidated? Citi's one of her holdings.

              The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

              by kovie on Mon Feb 16, 2009 at 06:54:59 AM PST

              [ Parent ]

              •  Rebound to where? (1+ / 0-)
                Recommended by:

                What's the cost basis of those shares? You break even when the share price gets back to what your cost basis is. So I'm not offering any specific advise.

                To put it in perspective about how far C has dropped, C's peak was $55.70 per share by the end of 2006. Now it's worth $3.49.  That's a tremendous loss that is not likely to recover in a very, very long time, if at all. The dividend went from $0.54 a share to $0.01.

                I have friends who still work for C, including a top manager in their headquarters. They have my sympathy, but they are surely glad that they still have a job. Their personal wealth has taken a big hit, but those at the top are still doing fine. But most analysts agree that Citigroup is not making any money and is surviving on the government dime. The risks of the share going to 0 are greater than the likelihood the share will go back to $55.

                •  It's in preferred stock (2+ / 0-)
                  Recommended by:
                  Odysseus, sarakandel

                  so the price ranges are different. She got in around July '07, just before the whole sector started declining (really bad financial advice, basically). I think that on Citi, she's at less than 50% of her cost basis. With some others, she's closer to it. Overall, it's around 65%, so she's actually doing better than some are.

                  She went for preferred mainly because they pay out better dividends and this was mainly an income source for her, which is why, if they stay solvent and continue to pay out dividends, she's willing to wait it out a few years before cashing in, even if it still isn't back to cost basis. But if it's likely to be wiped out, either due to Citi's collapse, or, more likely, as part of a final rescue plan, then she's better off taking the hit and selling out soon, so as to not lose everything.

                  She really should have sold out a bit over a month ago, when for some reason a lot of bank stocks surged for a few days to their highest price since the summer, before plunging again. But like a lot of older people who don't understand markets, when I recommended that she sell, she protested that she didn't want to lose all that money. Attempts to expain that it doesn't work this way, that she might never get back all that money, or that it might take years, fell on deaf ears. She doesn't understand the concept of risk, so it's going to be even harder to convince her to sell now that it's even lower. I'll try, but I suspect that she's going to stay in for better or worse.

                  This is precisely why private social security accounts were a TERRIBLE idea verging on evil. I have no problem with younger and/or wealthy people playing with their money. But people of modest means who are close to or at retirement age should play it safe, and anyone who exploits their financial inexperience should be jailed.

                  The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

                  by kovie on Mon Feb 16, 2009 at 08:02:51 AM PST

                  [ Parent ]

    •  Why should shareholders (1+ / 0-)
      Recommended by:
      In her own Voice

      of failed businesses get a dime?

      That is what happens when you invest in a business and it fails....the equity holders lose thier investment. And the bond holders take a big haircut as well.

      That is what should happen to investors in these banks. To bail out a small group of shareholders with public money....there is no bigger corruption than that at the gov't level.

      "I am on nobody's side because nobody is on my side" -Treebeard

      by waf8868 on Mon Feb 16, 2009 at 06:13:18 AM PST

      [ Parent ]

      •  Normally, I'd agree (1+ / 0-)
        Recommended by:
        In her own Voice

        But we're talking about a situation in which many of these investments were made in effectively insolvent companies based on fraudulent information--all of the ratings agencies were in on the con and I hope the people responsible for it get sent to jail for a very long time--by fund managers, or recommended by investment advisoers, who were in many cases also in on the con. I don't see why such good faith investors should have to take a bath for these sociopaths' crimes.

        And it's not a small group of people. It's millions of everyday people. The days when mostly only a few rich people and foundations invested in the markets are long gone.

        The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

        by kovie on Mon Feb 16, 2009 at 06:53:05 AM PST

        [ Parent ]

        •  Prosecution of fraud (0+ / 0-)

          and the making whole of bad investments are two seperate issues.

          I am all for prosecutions and if justice is to be served there are hundreds of CEO's and execs who need to have every dollar stripped from them (preferable to be put in a pool to repay investors) and sent to jail for the rest of thier lives.

          But people lose money all the time to fraud....I do not think the govt should make them whole.

          "I am on nobody's side because nobody is on my side" -Treebeard

          by waf8868 on Mon Feb 16, 2009 at 12:27:41 PM PST

          [ Parent ]

          •  FDIC? (0+ / 0-)

            The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

            by kovie on Mon Feb 16, 2009 at 03:58:31 PM PST

            [ Parent ]

            •  The FDIC (0+ / 0-)

              protects DEPOSITORS, that is people who have entrusted thier money to regulated enterprises....they do not make INVESTORS whole when they make bad bets.

              Big difference.

              "I am on nobody's side because nobody is on my side" -Treebeard

              by waf8868 on Tue Feb 17, 2009 at 04:34:08 AM PST

              [ Parent ]

              •  Shareholders didn't make "bad bets" (0+ / 0-)

                They were defrauded. How many ways do you need that explained? The concept of risk is meaningless if the system is rigged, which it was.

                The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

                by kovie on Tue Feb 17, 2009 at 06:00:56 AM PST

                [ Parent ]

                •  Then they should seek (0+ / 0-)

                  to be reimbursed by the ones who commited the crime which would be management and the auditors who blessed the financial statements over the past 10 years.

                  If they can recoup anything from these parties I think they should. Again.....that is what a shareholder is entitled sue for damages....not to get made whole by taxpayers.

                  It is not Gov't (taxpayer) responsiblity to make them whole for making a bad bet or for being a victim of fraud.

                  "I am on nobody's side because nobody is on my side" -Treebeard

                  by waf8868 on Tue Feb 17, 2009 at 05:33:42 PM PST

                  [ Parent ]

                  •  Sure it is (0+ / 0-)

                    Since it was willfully lax government regulators--and corrupt Wall St. donation-taking politicians--who knowingly looked the other way as this was happening. This was a group effort, and while certainly shareholders should sue the bankers and regulators who did this, government also owes it to them to one, conduct criminal investigations leading to, among other outcomes, clawing back some of these ill-gained profits, and two, pay back these unwitting victims some of their lost money because government itself was partly to blame for their losses. I'm just talking about justice against those responsible, and fair restitution by them, to the extent possible.

                    The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

                    by kovie on Tue Feb 17, 2009 at 09:03:47 PM PST

                    [ Parent ]

                    •  This is silly.... (0+ / 0-)

                      then one could say that ALL fraud is the fault of "willfully lax government regulators..."

                      Get ripped off on a car purchase....lax gov't regulation is partly to blame so the gov't should make you whole.

                      Buy a house that a realtor told you would never go't should have regulated that realtor more tightly...taxpayers better cut me a check.

                      Invest in a business and it't did not enforce the right regulations which would have enabled you to succeed....better tap the gov't fund to make you whole.

                      If you are defrauded you are entitled to attempt to recover what you can through the legal system, NOT be made whole by taxpayers.

                      "I am on nobody's side because nobody is on my side" -Treebeard

                      by waf8868 on Wed Feb 18, 2009 at 10:14:49 AM PST

                      [ Parent ]

                      •  Then what are criminal damages for? (0+ / 0-)

                        And engaging is all/nothing arguments is inherently silly. I wasn't talking about bad decisions, but actual fraud, especially the egregious sort that was obviously engaged in by these criminals. You don't believe it happened, and are against huge criminal fines being imposed on these fraudsters and the proceeds used to partly reimburse their victims? Nice. Is your code basically "Tough luck, sucker!"?

                        The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

                        by kovie on Wed Feb 18, 2009 at 02:44:48 PM PST

                        [ Parent ]

                        •  What are you talking about... (0+ / 0-)

                          I said several times that the shareholders are entitled to recover what they can from management and auditors through the courts and I think they should. That is what usually happens when fraud is involved in a transaction.

                          What is your problem with that again?

                          "I am on nobody's side because nobody is on my side" -Treebeard

                          by waf8868 on Thu Feb 19, 2009 at 12:54:25 PM PST

                          [ Parent ]

                          •  I misread you, apologies (0+ / 0-)

                            But this should be persued through both civil and criminal action, if warranted, with fines used to at least partly restitute shareholders.

                            The liberal soul shall be made fat. He who waters shall be watered also himself. (Proverbs 11:25)

                            by kovie on Fri Feb 20, 2009 at 05:20:14 AM PST

                            [ Parent ]

  •  TBT (0+ / 0-)

    TBT is an ETF that offers a way to short treasuries, if that's the way you think it's going.

    Note that it has bounced upward lately.

  •  Geithner didn't do himself any favors last week (3+ / 0-)

    Now while he has a fraction of the number of marbles in his mouth than Alan Greenspan ever did, we didn't much care about it when Alan was around.

    Not that Greenspan wasn't a major cause of the problem (he all but admits that he was in his latest book, as well as on the Talking Head circuit), but since the economy was doing fine (as far as we knew), we didn't care if Greenspan was speaking ancient Babylonian.

    I'm of the school which believes that the downturn was severe and permanent while Greenspan was still there, and Bushco just "forgot" to tell us. There's more than a little evidence to support that assertion, but that's another post.

    Geithner needs to break from the past in every way, including paying meticulous attention to candid, cogent and complete communication. Well Street might rightfully howl that Geithner is putting much-need screws on their thumbs - I don't care about that. They've earned it. I just don't want to hear any valid criticisms about a lack of transparency or completeness in Geithner's communications.

    And if he's not the man for the job to pull that off, it seems to me that there's always Paul Krugman.

    STMR = Still Too Many Republicans

    by thenekkidtruth on Mon Feb 16, 2009 at 04:09:41 AM PST

  •  First of all it is unclear exactly what Geithner' (4+ / 0-)

    plan is.

    Secondly the Geithner plan of "stress testing" banks (which starts this week) may be a back door way of Nationalizing the banks that are insolvent.  They may not call it "nationalizing" but another word but it will still be nationalizing.

    Thirdly, Jim Cramer who doesn't like Tim Geithner one bit really likes Geithner's plan.

    Despite what the markets said, Geithner got a lot of things right last week: His plan is big and bold, economically sound and politically viable.

    I think that people just don't know what the Geithner plan truly is even befor it is totally fleshed out.

    "Because we won...we have to win." Obama - 6/6/08. WELL WE DID IT!!! 11/4/08

    by Drdemocrat on Mon Feb 16, 2009 at 04:11:10 AM PST

  •  Thanks for that link on unwinding CDSs (3+ / 0-)

    Obviously this is a huge part of the answer and its stunning it comes up so rarely.

    We must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

    by Minerva on Mon Feb 16, 2009 at 04:18:11 AM PST

  •  I want to know why Obama said to the press and (3+ / 0-)
    Recommended by:
    PsychoSavannah, mkor7, farbuska

    others that Geithner's plan would be "spectacular" and that they should wait until he announced it.  Obama is an in-charge and in-the-know guy.  But it seems to me that he would not have chosen the term "spectacular" had he known in advance and understood even some of the obvious shortcomings of the plan.  Does this mean that there's so much shit to do that he's leaving this TARP business entirely or almost entirely to Geithner and Summers and company?  That is a huge mistake on his part if that's so.  I'm just not feeling that I'm sensing Obama at the helm here.  But what do I know.  I'm just someone whose parents just had to cancel their long distance service because they can't afford it anymore in this economic downturn where they've lost nearly half their retirement income.

  •  You would think Geithner would have done better (0+ / 0-)

    We must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

    by Minerva on Mon Feb 16, 2009 at 04:36:53 AM PST

  •  Well-crafted diary, Bobswern! (5+ / 0-)

    You captured my thoughts exactly.

    However, the problem does not end with the T-bills and financing the debt.

    There is a 2nd tsunami coming down the bank line in 2009 with the resets of Alt-A and Options ARM financing. NASE

    Additionally, during the height of the RE boom, we saw exploding Commercial Real Estate - now also facing foreclosures. link

    Just as an aside, I read elsewhere on the net (can't find the link), the FDIC is opening additional branches in GA and TX.  I hope they have one in NC.

    The goal of life is living in agreement with nature. - Zeno

    by yellow dog in NJ on Mon Feb 16, 2009 at 04:45:16 AM PST

  •  The C/W being shoveled by Wall Street and their (5+ / 0-)

    Water carriers is that an FDIC take over of a major money center bank would create an instant calamity as every citizen would rush to their bank to withdraw their money.  Nothing could be farther from the truth.
    Most folks know that their deposits (up to $250,000) are insured and this covers most citizens.  What the Wall Street folks are really concerned with is that the great Narod of American society will stand and cheer when the government finally moves to reestablish its sovereign rights and duties.
    The bottom line is that the citizens of this country already know the big secret.  As long as the water boys are in charge in government the oligarchies will be able to dictate the terms of their continued survival on the citizens coin.  This is a recipe for social disorder on a massive worldwide scale as these problems are now embedded in every country.  

  •  Thanks for the diary- especially CDSs (3+ / 0-)
    Recommended by:
    empathy, phonegery, MKSinSA

    Geithner's plan involved paying off the bettors. You gamble, you lose. No tax dollars bail out gamblers in Las Vegas. None should be used on Wall Street.

    I've been railing on these for awhile and what do we get? A diary from the site's economic expert that everything is just A-OK with them and they just need a little adjusting.

    Although I think the solution is too complex and still rewards bad behavior, I'm at least happy "Very Serious People" are starting to publicly acknowledge that the "30 Trillion Dollar Elephant" just may be the root of our problem

    That would pay for all the repairs we need to do on our economy if we got some gonads and did a claw back.

    It's a long way to go , just to get to back to when it was bad.

    by Dburn on Mon Feb 16, 2009 at 05:02:45 AM PST

    •  Who's the resident economic expert ... (1+ / 0-)
      Recommended by:

      ... and where did she say this?

      Just curious.

      •  I got your link (0+ / 0-)

        It's a good program. Just need to formalize it a little bit ya see. Somehow, I just can't imagine how we did without these for quite all those years. I think JP Morgan started marketing them in 1997. Sure we really need them. Terrific innovation.

        Look how well the regulators have worked when the right people were in charge like when TARP  started. Sure they came out. After it was formed months after it started , lo and behold the oversight committee said we overspent by at least 78 billion on the first 200 Billion or so. So what did they do? Released the second 350 Billion

        Simple really

        It's a long way to go , just to get to back to when it was bad.

        by Dburn on Mon Feb 16, 2009 at 08:39:42 PM PST

        [ Parent ]

  •  A 'financial reorganization' by a gov't corp. (0+ / 0-)

    would be more fairer to taxpayers.

    RebelCapitalist - Financial Information for the Rest of Us.

    by dennisk on Mon Feb 16, 2009 at 05:35:59 AM PST

  •  Financial services (12+ / 0-)

    Need to be treated more like utilities. The only reason to have a financial services sector is to make money available for loans to keep real business, that is entities that actually make things or deliver services, growing. Instead the financial services industry has been seen as a huge profit making center of it's own. This is ludicrous. The banks should be very tightly regulated, allowed to make enough profit to keep them solvent and growing enough to meet their tasks, but the profits should be kept reasonable, like many utility companies. Meerly shuffling paper around should not result in multi million dollar salaries and even larger bonuses and huge payouts to stockholders. That only encourages the creation of "exotic" financial instruments, whos only prupose is to enrich banks and brokers while adding little if anything to the actual work of financial services, which is to keep real business working.  

    •  that is it in a nutshell (1+ / 0-)
      Recommended by:

      Most good economists are saying as much.

      Nationalize, then reopen banks as "utilities," modeled after highly regulated companies around the world.  This would avoid the criticism that the "government can't run things," and get political backing for bank reorganization in our still anti-socialist culture.

      The government could easily and successfully run the financial system, of course, and do so with virtually no risk for the public, but old prejudices die hard in America.

  •  Wall Street influence (8+ / 0-)

    It's obvious that Summers/Geithner policies are not centrist, they are just Wall Street policies. The problem is that Wall Street funneled a lot of money during the campaign, anticipating a Republican loss. Deals were made.

    Now why is nationalization, which is just a temporary measure, not be favored by Wall Street?

    The core problem is that the shareholders would be wiped out. And for most of the Wall Street bosses, a very large portion of their compensation is tied to the value of their shares. They would be the big losers.

    Another problem is that when you nationalize you have to fire the management so new management comes in to restructure the institutions. The boards also have to be fired. Too much personal wealth is at stake (present and future) for these people just to abandon those positions.

    So Summers/Geithner plan preserves the status quo as much as possible and that only benefits the shareholders, the management and the boards. And that means the cause of the problems remain in place and the taxpayer will bear the brunt of the costs and the risks of keeping the big insolvent banks in business.

    Are there thousands of banks that need to be nationalized?

    No. Even though we are seeing the bank failures every week, the number so far has been insignificant, and the amount of money involved except for 2 big subprime lender banks, have not been great. The FDIC is following its charter in dealing with those failures.

    The big troubled banks are Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase. It has been estimated that those 4 would need over $450 billion in total to cover additional losses in their asset portfolios. Their toxic assets are not going to turn around unless the economy recovers and the real estate market starts heating up again. The likelihood of that happening over the next 2 years is almost 0. The stimulus package just approved was too little in size to begin with, and then sabotaged by the Republicans with more unnecessary tax cuts.

    •  Shareholders/bondholders (2+ / 0-)
      Recommended by:
      Odysseus, txdemfem

      Shareholders have already almost been wiped out - take a look at the stock prices. Of course one of Citi's biggest shareholders is a Saudi, Prince Alwaleed bin Talal!

      The real problem is with bondholders. Bank bondholders are not used to getting severe haircuts, and I don't think we know who the major bondholders are, but it is safe to assume that many are pension funds, as well as some foreign funds. The damage to these would be far more severe than to shareholders.

      I think the banks that fail the stress test need to be nationalized and refloated. I suspect that the current plan is a delaying tactic being used to buy time for the solution to be made more politically acceptable.

      I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

      by taonow on Mon Feb 16, 2009 at 07:10:04 AM PST

      [ Parent ]

      •  bondholders and stress test (0+ / 0-)

        I find it hard to estimate what the risk to bondholders are. You would expect a haircut, though not a complete loss, but the magnitude of which is impossible to predict. Some bondholders are hedged with CDS bought at the right time, but that's also impossible to estimate.

        The stress test is a good idea, but the real question is how it will be executed. There are serious doubts that those tests can be done realistically given the magnitude and complexity of the assets under test. The skills and the number of people required to do a thorough job is also important, and there are indications that those things are not adequate.

        It's worth a try, but we don't how good it will turn out.

    •  too big to fail (1+ / 0-)
      Recommended by:

      I forgot to mention that beyond the obvious issues of buying influence, the major financial institutions have become too big to fail. That means that no matter who is in power, their bigness is used to persuade anyone no matter what their political persuasion is, to try to "save" them. Obviously, we can't afford to have banks that are "too big to fail" anymore.

  •  We are now reaping the rotten fruit of (9+ / 0-)

    congressional and political corruption at the highest level.

    For decades powerful special interests have infiltrated the law making process and now have such an ability to influence events in their favor that the government can no longer think in terms of doing what is right for the people, but rather only what is right for any given special interest.

    And when that special interest happens to be as ethically depraved and morally bankrupt as the banking industry, then we have a government falling all over itself to try and prop up a failing, broken private interest at the expense of us all, and a government that fails to do the right thing for the people.

    Our government can't even think in terms of "nationalizing" the failing banks, because they have to think in terms of what the bankers want. Because in this particular case, the banking industry has more sway over what our government does then we do. And the banking industry just wants billions and billions of dollars to bail them out of the debt they've created. And that is what we are seeing.

    We shouldn't think just in terms of what our government should do, but as well, what is preventing our government from doing what has to be done.

    A plutocracy dressed in any other garment is still a plutocracy. What else can it be?

    IMO, the same corrupting influence can be seen in the diary "The Senator Who Killed Federal Whistleblower Rights". And many, many other instances of government protecting private interests at the expense of the people.

    I am a liberal - I question authority, ALL authority.

    by Pescadero Bill on Mon Feb 16, 2009 at 07:08:01 AM PST

  •  Geithner was a massive failure from the (0+ / 0-)

    moment Obama appointed him.  

  •  There will come a day... (3+ / 0-)

    ...when not enough folks come by to buy the daily quota of T-Bills being issued. The Fed will be forced to come in as the buyer of last resort. Then all hell breaks loose as the dollar will drop like a lead balloon. Kind of a Wile E. Coyote moment (as he goes over the cliff, then looks down). It will be Ugggullly

    I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

    by taonow on Mon Feb 16, 2009 at 07:13:44 AM PST

  •  Sometimes, I come home from work (4+ / 0-)
    Recommended by:
    TracieLynn, sockpuppet, empathy, timethief

    I get home after working all day and the kids have been at it all over the f'n place.  Their stuff is strewn about the house in manners that say they were playing, but that's not possible.  I hear that they've been unable to sit down and do anything all day.  They've been yelling and arguing.  Basically, they've been living the deregulated life all day.  It's not a surprise that when kids get their lives deregulated that there will be a lot to clean up after their freedoms have been taken full advantage of.

    This situation is reminiscent of the children.  It seems like there is a lot of cleaning up to do.  While I'm cleaning up after the kids, it's not going to look like I'm doing anything right.  If my wife came in and looked, she might wonder why the hell I'd made such a mess of the cleanup.  

    "It means I'm going to get a hot dog."

    by otto on Mon Feb 16, 2009 at 07:30:29 AM PST

  •  Geithner's bank strategy is completely (1+ / 0-)
    Recommended by:

    logical and on-track. If you listen to what is being said it was obvious that the 'stress test' is designed to weed the fields and attract private capital to fertilse the new crops.

    It still utterly confounds me how people are using the stock market rising and falling as a barometer of fiscal health or sanity. The market is a giant global casino and people re betting all ways, long and short, going up and going down.

    It is a huge comfort to me and others who feel like me that the new administration ois not allowing itself to be stampeded into hasty action.  People are behaving like lemmings and these blogs have become ridiculous.

    •  Need to get the old car to the dealer first . . . (5+ / 0-)

      Short version of what I write below: If you have a horrible old car that's starting to stall at every red light, you know you have to trade it in for a new car. But, if you're stalled on an isolated road to the dealer and AAA won't pick up, maybe you have to start by getting the car going again and trying to drive the car to the dealer, just so that you can safely trade it in.

      Obama and Geithner may think our economy is the equivalent of a horrible old car stalled on the highway, but they know they have to get the economy we have, with all of its flaws, healthy enough that we can trade it in for a better economy.

      Long version:

      First, I think this is all so complicated and new and driven partly by stuff we probably haven't even heard about that people who speak very confidently about what the right course of action is are suspect.

      If you're not really nervous about what the right course of action is, you're not paying attention.

      Second, I think huge amounts of money must be at stake here. In connection, for example, with tax rules that I don't really stand. So, it could be that that various interest groups have paid for huge hoards of concern trolls (paid concern trolls, not the well meaning amateur kind) to flood the Web with posts against this or that aspect of the relief plan, mainly so that they can kill the one part that's costing them billions of dollars.

      Third, I don't think it makes sense for Geithner to shriek in horror every time the stock market drops and then do whatever the traders want him to do. I'm (sorry) for capitalism with lots of limits and safety nets built in. I think it's great when the stock market goes up because of genuine improvements in the economy or outlook. But one reason we're in this mess is that the Fed started to cave in to Wall Street every time Wall Street cried and hollered and begged for candy. Some time, you give Wall Street candy. Sometimes, you give it an organic celery stick, no matter how much it claims it will die if you don't give it candy.

      Fourth, there might be a huge difference, in my opinion, about what we do in the short run and what we do in the long run.

      In the short run, the only goal that matters is keeping the economy going well enough that we do not end up with 50 million unemployed people in the United States, mass famines here and in Europe (and, of course, worse famines in the rest of the world), and, in general, the start of Soylent Green. To do that, Geithner does not have to create an economy that makes much sense in the long run. He has to create an economy in which the banks do not all suddenly shut their doors next week.

      The short-term problem that we know about is that banks and insurance companies bought credit default swaps hooked up to mortgage-backed securiites because almost everybody thought that properly designed pools of mortgage-backed securities were about as safe as cash, even if some of the homeowners who took out the underlying loans defaulted. In any kind of world that the banks and insurance companies thought could really exist, those investments made complete, highly profitable sense, and independent speculators made somewhat riskier bets based in the plain vanilla bets. But, suddenly, the bottom fell out, and structures that looked absurdly safe and profitable three years ago now are tens of trillions of dollars in the hole.

      So, in the short term, as in this month or in the next few months, the problem is to keep those tens of trillions of dollars in swaps losses from ending civilization as we know it, such as food and electricity, in the next few months.

      In the past few years, keep in mind, these credit default swaps built up in a scary way because Congress and other legislative bodies in the world failed to give regulators any serious authority to regulate the swaps. This, in other words, isn't necessarily a case of a flawed instrument being badly regulated; it's a case of an instrument that was not being regulated at all. To translate: Foolish children were in charge of the candy store, and they ate perfectly wholesome peanut butter cups till their intestines burst.

      My guess is that, if you get Geithner alone, he'd say that it's fine if we eventually eliminate credit default swaps and financial derivatives, or let them exist in a much more highly regulated away. (Example: on the New York Stock Exchange.)

      He's not saying that he loves the current system.

      What he is saying is that we need to restore enough stability that we can cash everyone out (translation: your parents' pension plan and your bank) in an orderly way, then go do something new in a well-planned way. Not in such a way that we're leaping blindly from this frying pan into any other frying pan that we can locate.

  •  Every Consensus Must End (6+ / 0-)

    Economist Simon Johnson was interviewed by Bill Moyers last week. It was an excellent interview about the crisis.

    Paul Krugman has just recommended to read Johnsons followup post on his own blog. Here's an excerpt:

    The consensus on banking just broke cover.  For some weeks it has been under intense pressure.  At least since the fall, serious people have been informally floating various new ideas on how to deal with the technical problems surrounding toxic assets and presumed deficient bank capital.  But since mid-January, the mainstream consensus - that we should protect existing large banks and keep them in business essentially "as is" - seems to have cracked.

    Paul Romer and Willem Buiter favor an approach that emphasizes the creation of new banks. Roger Farmer wants to go in a completely different direction.  These are just a few examples of the great (and completely constructive) new dispersion of ideas around banking - post links to your favorite new ideas in comments below.

    Advocates for the previous consensus - and the status quo - seem to be located mostly in the financial sector itself (e.g., Lloyd Blankfein).  The Administration’s view, as I discussed with Bill Moyers last week, is apparently still up for grabs.  And I understand "what next" for banks will be a central theme for debate among staffers on Capitol Hill this week.

    On the technical details, I could support any number of schemes.  My main concern is limiting taxpayer downside and making sure the taxpayer gets as much upside participation as possible.  We have a proposal on the table, but other ideas have merit and the US debate in this regard seems likely to be productive - in striking contrast with Europe, where denial is still the name of the game.

    There is only one point on which I would insist.  The banking lobby has become too powerful, in large part because big banks have balance sheets that are too big relative to the size of the economy.  If a bank has total assets of over 10% of GDP, it is obviously too big to fail.  Of course, the smart people who run these banks know this and act - politically and economically - accordingly.

    The post is here and is a must read to follow the links not included in the above quote:

  •  DOA (5+ / 0-)

    Geithner's proposal is basically still-born. No one understands it, or understands how it will work, especially since it's hinged on the idea that banks should lend themselves (and us) out of this crisis, even though their loan-to-capital ratio is fatally high and borrowers aren't in the position or mood to take on more debt. Over-indebtedness is the root cause of the crisis, and you don't get out of it with more debt. Geithner has to understand this at some level.

    Obama's argument that we shouldn't follow Sweden's example of temporarily nationalizing the banking sector because Sweden has a different 'culture' from us is one of the most ridiculous arguments I've ever heard coming out of a town that specializes in ridiculous arguments. You do what works, especially when there's very little margin for error. With equal logic, opponents of Geithner's zombification plan could argue that we shouldn't follow his course -- which is essentially a replay of Japan's failed efforts to keep banks from going under during the 90s -- because Japanese culture is so different from ours. These 'culture' arguments are a sure sign your not being told the real reason for policy choices.

    We have to get this right, both because the economy won't recover if we don't, and because we don't have the luxury to rack up trillions of dollars in government debt and liabilities pursuing a policy that won't work. The idea that we can 'always try' something else later if this doesn't work is scary, because it suggests that policy-makers don't realize the pursuit of a costly, failed policy will limit their ability to follow the right course later on. I'm scared sh*tless.

    -7.75, -7.64 "In the conservative lexicon, 'freedom' means the right to starve the death without anyone giving a shit." -- Me

    by scorponic on Mon Feb 16, 2009 at 07:51:30 AM PST

  •  Makes you wonder exactly whose land this is. (1+ / 0-)
    Recommended by:
    yellow dog in NJ

  •  Great post. There is also a macro conundrum (1+ / 0-)
    Recommended by:

    here. On a worldwide basis, money has to go somewhere. It is either invested in equities or debt, whether government or private. If funds come out of stocks and are available for debt purchases, it further depresses stock prices. Money that is invested in private debt, including repackaged mortgage securities, less money is available to purchase government debt which, at a minimum, drives up the interest rates on that debt.

    The only hope for being able to fund our increasing volume of government debt is for money to come out of equities. But to the extent it comes out of bak and other lenders it reduces their capital and consequently their ability to lend. This is why nationalization is the only answer. When nationalized the banks can lend without regard to the normal capital requirements.

  •  Rube Goldberg Economics (0+ / 0-)

    Y'know, you could just pour the friggin' beer. You deal with problems caused by banks going bankrupt, by first admitting that they are bankrupt, and dealing with that like you would with any other business.

    Reality is going to force that sooner or later. Later, you pay more on the interest, as it were.

    Until we break the corporate virtual monopoly on what we hear and see, we keep losing, don't matter what we do.

    by Jim P on Mon Feb 16, 2009 at 08:12:45 AM PST

  •  Toxic assets are worth less than 10c per dollar (6+ / 0-)

    If the Fed buys anymore of this garbage it will face bankruptcy.

    The problem with the private / public partnership in the Geithner plan is that what is being talked about is having the public insure any losses below 80c on the dollar. Meanwhile the market price for toxic assets such as were held by Lehman is less than 10c on the dollar.

    Forget a dime on the dollar. The final price for Lehman Brothers debt is 8.625 cents on the dollar.

    All of the major entities involved in the synthetic CDO (toxic asset) market will eventually be forced to admit they are insolvent and the price for their toxic assets is likely to be similar to what was fetched in the Lehman bankruptcy.  Since the size of the CDO / CDS market is upwards of $50 trillion dollars and the spread between the privately offered price and the insured price is about 75c on the dollar, the public is looking at losses in the ballpark of $35 – $40 trillion dollars.  That would be in return for nothing other than allowing the investment firms to avoid bankruptcy.

    The wider CDS and CDO markets are estimated to be worth as much as $40-50 Trillion.
    The companies involved represent some of the largest, and what were seen more than a year ago as the safest companies in the world.  Companies that were then seen as being a very remote chance of defaulting – think Freddie Mac, Fannie May, American Insurance Group, Ambac, MBIA, Countrywide Financial, Lehman Brothers, and Bear Stearns, to go with major corporates such as GM and Ford, and even international institutions such as Icelandic Banks – which have now either passed into history or which are fending off the prospect, remain parts of the portfolio for numerous synthetic CDOs.

    The way that the synthetic CDO is often structured means that when an ‘event’ – which is often the default of a number of companies from a portfolio, often more than 100 companies - occurs the sellers are looking at paying off, with the size of the payoff varying according to the number of companies which are defaulting.  As an example - and a regular one - 33% when, say, 7 companies from the list are in default, 66% when 8 companies are in default, and complete redemption when 9 companies from the list are in default.  It is this factor which is currently driving the need for companies and large investors in these securities to need large U.S. dollar volumes easily accessible.  With a significant number of these companies having been nationalized or defaulted, every additional company failing makes it more likely that investors in synthetic CDO’s are going to have to start making payments to those who sold them.  At the point at which this begins to significantly occur there could be an avalanche of redemptions...

    "Chance has put in our way a most singular and whimsical problem, and its solution is its own reward." -Sherlock Holmes

    by The Anomaly on Mon Feb 16, 2009 at 08:18:32 AM PST

  •  To answer your question: No (0+ / 0-)
  •  What it might well take... (1+ / 0-)
    Recommended by:

    From Krugman's latest, "Decade at Bernie's", in the Times yesterday:

    "If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression."

    Somehow, if things are really as bad as they seem, we'll have to get into a mode involving lots of work, some sacrifice, and morale-building on a scale equivalent to WW II. We probably can't literally go to war on the scale required, since there's on one out there big enough to justify a WW II-sized effort right now.

    But getting enough people into the kind of committed frame of mind required is the key, in my humble opinion. We're not really on track with that yet, are we?

    Moderation in most things. Except Reactors. IFR forever!

    by billmosby on Mon Feb 16, 2009 at 09:04:08 AM PST

    •  "moral equivalent of war" Wm James & Jimmy Carter (1+ / 0-)
      Recommended by:

      "We must become the change we want to see." -Gandhi

      by larryrant on Mon Feb 16, 2009 at 09:37:42 AM PST

      [ Parent ]

      •  Thanks for reminding me... (0+ / 0-)

        The Moral Equivalent of War (derisively acronymmed "MEOW" at the time) is an example of how hard it can be to put people into the proper frame of mind. It's a lot easier to think with wartime-like cohesiveness when the image of the day includes bodies and heaped, burned wreckage rather than a cardigan (sorry to be so graphic). Or a "WIN" button, if you remember the pre-Volcker efforts to "Whip Inflation Now".

        Moderation in most things. Except Reactors. IFR forever!

        by billmosby on Mon Feb 16, 2009 at 09:43:06 AM PST

        [ Parent ]

  •  I wouldn't put Tim Geithner in charge... (7+ / 0-)

    ...of collecting pizza money from a group of four people, let alone put him in charge of handing out more free money to the financial sector.

    TARP was and continues to be a sick joke. You may as well pile a trillion dollars up in the middle of a big field and set fire to the damned thing as to do what Paulson and company did (and that company, of course, includes Geithner.)

    I will absolutely NEVER understand why Obama put a Wall Street whore like Geithner in charge of the Treasury department. Of all the questionable choices Obama's made so far, this one easily beats them all (and that includes Gregg.)

    Expanding TARP is only going to burn up more money that we can't afford, on a plan that simply doesn't work. Hand a bunch of money to the financial industry so that they can sit on it and protect their own narrow set of interests while nobody's able to get credit? In what Bizarro World parallel universe does this make a lick of sense?

    The financial sector is not only sitting on shitloads of bad loan debt, they're also sitting on many, MANY trillions of dollars in credit default derivatives. Even if the banks were accepting bailout money in good faith (which all too many of them have proven they are not) Geithner couldn't begin to print up enough money for the financial industry to cover the real source of the insolvency, which is these tens of trillions of dollars in credit default derivatives.

    This shit wasn't going to work when everyone was dancing to Bush and Wall Street's tune and wallowing in full-fetal-position panic mode last fall, and it's sure as hell not going to work now. It's just going to saddle us with a couple trillion dollars more debt so that there's no conceivable way of getting the money for more sensible, rational solutions to our economic crisis.

  •  Pleezzzzzze...No More! (0+ / 0-)

    I will be short this time.

    If you notice the general public has already taken the hit in their retirment and investment funds and no amount of money pumped into the WS and Banking system has impacted those losses. They will never be recouped in our life times (unless you are currently in kindergarden).

    The only honest thing I ever heard Greenspan say was the other night in an interview when he said this is just the nature of capitalism and we would be right back here again. The interviewer asked him if it wasn't created by unbridled greed and Greenspan said of course, that it is just human nature and capitalism was still the best thing going, even when  we have meltdowns there is no excuse for government to regulate capitalism but it is government's duty to prevent it from collapsing.

    This is how the definition of capitalism has been changed by people like greed is natural and acceptable and those who lose because of it are just collateral damage.

    In other words capitalism doesn't exist to support or benefit the masses, the masses exist to support capitalism and it's captains. It's a cult.

    •  Greed is natural. Just the way we are. (0+ / 0-)

      So the real question is what to do about it. Seems to me there are two basic approaches.

      One would be to genetically engineer the greed out of humans without doing harm to the organism's ability to thrive and survive.

      The other would be to recognize reality and deal with it through measures which limit the harm any given individual can do. Limiting the harm is less likely to be accomplished by concentrating power than by keeping all those greedy bastards in competition with each other and at the same time maintaining an appropriate level of transparency and regulation. That takes hard work and eternal vigilance, and so is bound to fail from time to time. But I think it's likely to be easier to control than it would be to control a very powerful centrally-controlled system.

      Just my humble opinion, of course.

      Moderation in most things. Except Reactors. IFR forever!

      by billmosby on Mon Feb 16, 2009 at 10:10:26 AM PST

      [ Parent ]

  •  Oh, snap (3+ / 0-)
    Recommended by:
    SecondComing, sockpuppet, bobswern

    "Wall Street to Lobby Geithner to Loosen "Stress Test" " off the HuffPo, from the Financial Times.

    Makes on think that maybe the "stress test" is a back door.

    And if Wall street doesn't like it, I'm all for it!

    You're wrong for thinking I'm wrong, so that makes you wrong twice.

    by ohmyheck on Mon Feb 16, 2009 at 09:53:01 AM PST

  •  Geithner’s Plan – Like a Lead Balloon (0+ / 0-)

    Inside Look - Geithner's Financial Rescue Plan
    Bloomberg News interview - Analysis and Discussion with Chief Monitory Economist Robert Eisenbeis of Cumberland Advisors (Starting Bell)

    The problem is not lending.  We’re being led to believe that the problem surrounds mortgages.  It does not.  The problem is CDOs and credit default swaps.  What we need to do is first write down losses and restructure insolvent institutions before throwing any money at it.  Its not a matter of stress, it’s a matter of accounting.

    In an article from Financial Week, Eisenbeis proposes that one solution to the problem is to have regulators apply a law which was enacted after the savings and loan crisis.

    The law, the Federal Deposit Insurance Corporation Improvement Act, was signed into law in 1991. In an interview with Financial Week, Bob Eisenbeis, a former research director of the Federal Reserve Bank of Atlanta, said the FDICIA contains more than enough tools for regulators to help stem the current financial crisis.

    If regulators had applied FDICIA’s provisions once the solvency of major banks was first called into question, Mr. Eisenbeis said, many would already have been taken over by Uncle Sam.  That would mean that their good assets would have been separated from their bad and sold off to healthy institutions or other investors.  This, he claims, would have gone a long way toward solving the credit crisis.

    "When the Q1 numbers for the financials come out, the children’s hour in DC will end," Mr. Whalen wrote in a note posted on the blog, The Big Picture. "The markets will react and Washington will finally be forced to have an adult conversation with the global community as to how much we haircut the bondholders."

    Mr. Eisenbeis insists that such a haircut should already have been provided, as FDICIA stipulates that the federal banking agencies "facilitate early resolution of troubled insured depository institutions whenever feasible if early resolution would have the least possible long-term cost to the deposit insurance fund."  Instead, said Mr. Eisenbeis, the Treasury’s new Financial Stability Plan further delays such resolution.

    "Chance has put in our way a most singular and whimsical problem, and its solution is its own reward." -Sherlock Holmes

    by The Anomaly on Mon Feb 16, 2009 at 09:58:33 AM PST

  •  Agreed, 100 %, but focusing on Geithner is a (0+ / 0-)

    distraction that he now works for Obama and we need to be concerned as to why Obama is so reluctant to deal with this crisis in a "progressive" manner rather than appearing to be the savior of the Wall Street Oligarchy? The solution is as you say, already on the books via the FDIC mechanism and the President takes an oath "to see that the laws are faithfully executed!" NOT to reinvent the wheel and save the existing power structure.

    This bi-partisanship is a good outcome, we need the Repub conservatives on this to stop this sellout of our and our children's last hopes for the future!

  •  this goes to the heart of the debate (1+ / 0-)
    Recommended by:

    that's going on in the administration. I'm thinking Geithner was intentionally put in the spotlight so his ideas could be aired in the public square. That Geithner, the ultimate financial insider, failed to reassure either the financial markets, or either side of the aisle, tells us that the real pain has begun. I give credit to the Obama administration for having the willingness to lose face with Geithner in order to build a real conversation and consensus. When I hear Lindsay Graham endorsing nationalization of banks on national tv, I know the real fix is kicking in. It seems to me that the usefulness of the centrist era bankers in the Obama admin is first that they provide a counterpoint for progressive reformers on both sides of the aisle, and second, that they know the present system well enough to change it when they are ordered to. "The change comes from me."

  •  You don't say (0+ / 0-)

    One well-placed official told me, "It's as if his goal is to help Wall Street, not to restore a functioning banking system."

    It's as if his goal is to help Wall Street.  Well that certainly comes as a shock (eyeroll).

  •  Geithner is the worst Obama pick (0+ / 0-)

    by far--he is doing and will continue to do more damage than Gregg ever would have done in the toothless Commerce Department (not that I supported him for the job by the way).

    I can only hope that Geithner is not there for the entire 4 years.

    "People place their hand on the Bible and swear to uphold the Constitution. They don't put their hand on the Constitution and swear to uphold the Bible." --J.R.

    by michael1104 on Mon Feb 16, 2009 at 10:26:33 AM PST

  •  I Have A Damn MBA.. (0+ / 0-)

    so I have a minimal understanding of all this shit, but minimal is the operative word.

    I am living in two worlds:

    In one world, it's still 2007 and I am hoping my own world does not come crashing down on me. I and my partner are still employed, still getting paid and paying down our very high debt. Looking at what Obama is doing and thinking toward the future in a "normal" way. Thinking about our vacation this year, etc.

    In the other world, I am thinking apocalyptic. Last year BEFORE the financial system meltdown in September, my large multinational company that I make a very good living with started offshoring the area I work in (they had started offshoring other areas a year earlier). So that fact alone was enough to concern me I might lose my job.

    That same company was one of the few companies that posted record profits in 2008, including 4th quarter - in part, because of aggressive cost cutting which includes offshoring.

    Even though I have not been directly threatened with losing my job, YET, a few colleagues were recently given their walking papers as their jobs moved overseas. So I could be next.

    So ironically I work for a very successful company, even in this economy, and yet, they are successful in part because they are aggressively cutting costs by moving much of their labor costs overseas.

    So this is all scarey enough, but, given my profession in IT, if the economy were not on the precipice, I lose my job, I'm likely to find another one soon. After all, I am a certified highly experienced project manager.

    But I see all this shit in the news about the very foundation of our way of life on the verge of a catastrophic collapse, and it scares the living shit out of me.

    I try real hard to believe that people who say this is worse then right before the Great Depression are engaging in hyperbole, and yet I see shit like this and think those who downplay such talk are naive fools.

    That in fact we are on the verge of financial collapse that will cause those who lived through the Great Depression to feel sorry for us, because THEY never had it as bad as WE will.

    I AM confident of one thing, even if this is not as great or greater then the Great Depression (was is STILL to come), our standard of living is headed downward, signifcantly, and for those 40+, it will remain there for the rest of their lives. I'm 52.

  •  why is it so hard to implement sound policy? (0+ / 0-)

    I mean, I understand when the GOP runs government, it's hard to get people in there with good ideas.

    But we've know about our challenges for years. Democratic economists, of the reality-based type, have been writing about potential solutions for years. We won the House and Senate in 2006. We took the presidency in 2008. We've had historical data about longer trends that are worrisome in housing and employment and wage rates and inequality and so forth for a long, long time.

    And yet, there's this perspective in some Democratic circles of the folks who tell us don't worry, give them some breathing space, just sit tight, hurry up and wait. When the doctor's about to amputate the wrong limb, you don't wait until later to talk it over. If at all possible, you scream at him before he cuts your leg off. Especially when you've already told the doctor 100 times which leg it is, and he continues trying to chop off the other one.

    The Fed and Treasury, via actors who have been involved in the system for years, have put trillions of dollars of our money on the line in what are tantamount to ripoffs, while basic economic options like rewriting bankruptcy laws, providing a strengthened safety net, and investing in our crumbling infrastructure have been relegated to secondary priority.

    Those of us that aren't in immediate need are fortunate. We're a rich country and have time to craft good policy. We have answers that have a good chance of working. It's just so frustrating that being right seems to have so little impact on who influences our party leadership, even after successive massive votes for a different policy.

  •  The fat cat bankers are too big to fail (0+ / 0-)

    Average Joe is too small to retire in dignity. Someone has their wires crossed. Give the bondholders a haircut - shave their heads if required.

    Invest in companies whose unbridled greed risked a worldwide depression and then whine that it's not fair when your portfolio, or your firm tanks?

    Geithner is in a big squeeze in his so-called "center" when such disparate voices such as Phil Gramm and Paul Krugman are singing the same tune.

    Let. Them. Fail.

    Just can't seem to win - If I'm standing still, I'm loitering. If I'm walking; I'm a vagrant. I just want to be a vagabond, or a wandering minstrel.

    by SecondComing on Mon Feb 16, 2009 at 11:18:51 AM PST

  •  Not Only A Progressive Solution. . . (0+ / 0-)

    This is a terrific and very informative diary and comments.

    I'm not particularly liberal but I do believe in competency. Obama's appeal is in part his reliance on competency and pragmatism.  One doesn't need to be an economist to understand that the recovery can't really begin until the bank issue is addressed. It's becoming increasingly clear that the management of many of the leading banks lack the competency to turn their banks around under current market conditions.  I expect some limited nationalization of the problem banks within the next six weeks.  

    Geithner clearly has issues that go beyond his ties to wall street. His failure to pay some back taxes after the IRS audit because of statute of limitation protection exhibits the same type of greedy self-interest of much of wall street.  However, he is valuable given his insider knowlege of all that has already transpired.  Further, his wall street ties will make the solution of last resort argument an easy sell.  

  •  Make the Shareholders Pay (0+ / 0-)

    The central device that broke in our banking system was shareholder governance of banks. The deregulation was wrong, especially revoking the rules written to prevent the wildfires of the Great Depression, but that deregulation in turn relied on shareholders governing their banks in the shareholders' best interest. The bad (certain to net inevitable losses) risks taken, the catastrophic derivatives and other instruments, the loans to creditworthless borrowers, the ratings from crooked or incompetent ratings agencies/corporations, the crooked/incompetent/conflicted execs: all those problems are the responsibility of the corporate board of directors, who are elected by the shareholders.

    So yes, force crooked borrowers to pay what they agreed, either on the immediate loan or longterm with bankruptcy on their credit records, and maybe fines and jailtime. Yes, assign the flipside to crooked loan retailers who lied and otherwise cooked the books to make loans that were against the few remaining rules. Yes, fire, fine and even jail the execs who ran those crooked shops. Yes, do the same to the directors on the boards whose fiduciary irresponsibility (an actionable offense) kept those execs running their corps. There's plenty of blame to go around, and it's OK to slam both sides of the table for making the same crooked error rather than either of them pocketing the benefit without penalty.

    But there's a lot more blame to go around. And, more importantly, there's a lot more losses to assign than those other people can afford. This bailout is already costing $700B (all borrowed, so the 50% interest will be over $TRILLION). The stimulus and other spending is going to cost $TRILLIONS more (not even counting opportunity costs, compared to if we hadn't gone down this road, which is how to see it in accounting terms) until we recover. Those hard costs should not be entirely absorbed by the taxpayers (among whom bank shareholders pay among the lowest proportions), guilty only of letting the government reliant on these shareholders' self-preservation. These shareholders should be wiped out, the corporations they own containing all the net debt that this system produced. The banks were worth $TRILLIONS in stock market capitalization. Under no circumstances should we waste any effort or money regrowing those values to those shareholders.

    Put all debts left after the money is moved around into the accounts of the banks in which the stock shares are held. That includes the interest on the government bonds financing the operations. Transfer the performing assets into new bank corporations owned by the government. Once the new banks are operating stably, value them at the cost of each one's rehabilitation, and then sell the shares in the stock markets. Put the revenue from selling the government's shares back into the Treasury. Sell the shares back into private hands in a series of staggered rounds, so a better informed market can buy back the shares as the overall capital markets rebuild. Once the entire system is demonstrating stability, respect for the law, and proper respect for the shareholders' interests (for a change), the government can sell out its controlling shares at the market rates.

    What I just described is capitalism. Yes, it's administered by the state, but that's necessary to prevent these "capitalist" bankers from either selling the rope that hangs them, or from turning the rest of us into history's greatest crowd of sucker communists.

    I know Geithner understands banking and capitalism well enough to think of all this himself. But since he isn't doing that, we have to force him to. Or else we're the suckers, and those bankers have finally transcended either capitalism or communism into simple profiteers. And it will be our fault for letting them.

    "When the going gets weird, the weird turn pro." - HST

    by DocGonzo on Mon Feb 16, 2009 at 11:54:35 AM PST

  •  you can't fight two battles (0+ / 0-)
    at the same time. the inflation that occurs when we print money cannot be a concern during the worst deflationary cycle since the great depression. first, we must stop the deflation before we start worrying about inflation. print the money, get the economy going, increase tax revenues and start paying down the national debt (in that order!!)
  •  Geithner is a Wall $treet retread (0+ / 0-)

    What did Obama expect from this hack? He is just perpetuating the failures (or looting as i see it) of the Bush mis-administration. This will not be Geithner's failure. It will be Obama's failure for appointing this hackjob.

    Damn right I'm a conspiracy theorist! If you are not, then you just haven't been paying f#@king attention.

    by CitizenOfEarth on Mon Feb 16, 2009 at 12:15:19 PM PST

  •  Geithner did what Obama wanted - (0+ / 0-)

    basically, the plan WAS to have a weak "plan".  The true meat of the plan announced last week was the auditing "stress test" of all the bailout banks.  The purpose of this "test" is to find out what the true state of those banks' books is.  Doing this discovery and due diligence IS the first step in nationalization.

    Meanwhile, by having Geithner announce a "weak" plan (and calling it the Geithner Plan), Obama is allowing all the economists and talking heads do his work for him, to convince the public that nationalization is going to be the final solution.  At some point soon the public is going to WANT these banks nationalized and cleaned up just like the S&Ls were two decades ago.

    The fact that the banks are lobbying to blunt the "stress test", and the fact that the banks were whining about not being included in the "planning" last week, should tell you all you need to know.

  •  It is beyond what we can fix here. (1+ / 0-)
    Recommended by:
    FundaMental Transformation

    Read this blog -

    And see what other countries are doing or not doing
    to solve the crisis.

    The main thing is, even though we have the biggest debt and bad paper of all the countries dealing with this mess, wall street and the Fed and Treasury
    AND little ztimmy are al dragging their feet, hoping some magical power will save them from the hard choices.

    Well it won't.  And when other countries finally wise up and write off their bad paper, it will cause a crash of the banks here as well.

    The upside to all of this is, unless you are a bondholder or shareholder in the biggest 8 or 10 banks, you will be fine,  those folks will lose damn near everything they invested.

    The one reason it WILL melt down and take a lot of other banks with it, is simple.   Some countries are not willing to trash their own economy to save another country that is heavily in debt and unable to pay.

    Asking Germany to massively bail out Russia or the Ukraine, or even Ireland is asking one hell of a lot, especially when their own GDP is falling and unemployment is rising.

    Well that plus the US is pretty hosed by itself right now..  You won't see US banks looking to buy up debt in European countries any time soon.

    So the US is sitting this one out, trying to fix what wall street and GOP broke.

    Bipartisanship: Def; Republicans that give the middle finger to everyone else on a daily basis.

    by Nebraskablue on Mon Feb 16, 2009 at 12:43:05 PM PST

  •  The NEW reality... (0+ / 0-)

    NO ONE... is too big to fail.

    AIG - Failed.

    Fanny / Freddie - Failed.

    Lehman Bros - Failed.

    2 or 3 more banks every week - Fail.

    FDIC - getting more broken by the day.

    SEC- Clueless.

    Treasury Dept - Practically paralyzed by the scope of it all.

    The FED, - Out of options, and interest rates to cut.

    Little Timmy G. - Still frigging clueless!!!

    American consumers and investors? -

    Sitting on the sidleines scared to death to spend anything more than they HAVE to. And stashing massive amounts of money in SAFE places.

    Until the god awful mess of the financial system is DEALT with in a way that inspires confidence, the system will remain untrustworthy and be treated as such by the average American on main street.

    Bipartisanship: Def; Republicans that give the middle finger to everyone else on a daily basis.

    by Nebraskablue on Mon Feb 16, 2009 at 12:51:14 PM PST

  •  One thing to remember about the ... (1+ / 0-)
    Recommended by:

    ... 'private capital' that people wonder where it will come from.  The problem with enticing investment now is that everyone knows the old ride is over.  The FED system and all it ushered in has hit a wall.  BUT, there is still a lot of money in the world.  Real money, not just inflated froth - but old money.  [By old money I mean thousands of years old - not just grandpa's money.]  There is enough old money to solve this problem and there are old money investors that would be happy to be a part of America's recovery because it will mean stability for everyone, everywhere.  Thinking of thousands of years, what's a couple trillion for longevity of humanity?

    They want to come in.  And they will once a reliable structure emerges.  They would be happy to do matching funds, but not until there's a proper transformation - so they know they are funding the future and not propping up doomed-to-eventually-fail zombies. Partial nationalization and following the rule of law will do the most to encourage a rebirth at this juncture.

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