Politics

It looks very much as if the US Treasury is going to adopt the European model in the next stage of the bank bailout. Late tonight the New York Times had this story:U.S. May Take Ownership Stake in Banks

The real novelty here is that the government is prepared to take ownership shares of a US bank in return for injecting capital into that bank. The objective is roughly the same as the previously announced program to buy assets except the focus is now on providing capital rather than liquidity.

The capital issue is this: banks who have lousy assets are having to ‘right down’ the value of those assets. Each right down means a corresponding loss on the banks income statement and consequently a reduction of capital on its balance sheet. That’s the capital part of the problem.

The liquidity issue is this: once banks are nervous of the capital losses other banks may be suffering they hold back from lending to each other. So the market for inter-bank lending freezes up in fear. As a result a bank that need funds to pay off depositors or to make loans cannot rely on one of the major sources of cash. So it stops lending too in order to preserve what cash it has.

And so on.

Buying lousy assets relieves a bank of a potential capital loss and re-assures its trading partners that the bank is ‘safe’ to lend to. The idea is that such a move would unfreeze the interbank lending market.

In contrast this evening’s announcement suggests that the Treasury Department thinks that making direct investments in banks which would bolster capital and cover potential losses will have a quicker and cleaner impact: banks with sound capital ratios will more easily find other banks willing to lend to it.

Of course this is distinctly ‘un-American’! Government investment in the private sector has been taboo here for ever. The current crisis is apparently sufficient to override that taboo.

Is this ‘nationalization’?

No. The government is not taking majority ownership … or at least it doesn’t seem that way … so the US won’t actually own the banks. Instead it will take back ‘preferred’ stock with no voting rights. Although I cannot imagine any deals being done without strings attached. The political environment is so heavily charged that it would not be possible to invest taxpayer money without at least some effort to placate the popular anger at things like executive pay.

The details are yet to come.

But we are definitely in a different era.

This article in today’s New York Times: Europe Tested by Financial Crisis highlights just how bad the situation is now getting. The rot that was the American mortgage market has now spread like a cancer to Europe.

European banks were eager to hold American assets because of the size, liquidity, and reputed safety of the American economy. Too many bought American mortgage backed securities.

Plus the European housing markets are suffering a similar price deflation to that we are living trough here. The worst hit is the UK where the government has already nationalized a couple of banks and has had to increase the limits on deposit insurance.

The European Community has been shown to be disorganized again: many of the worst hit countries have all introduced different deposit insurance plans. This after a soothing meeting of the national leaders over the weekend!

Given the amount of interchange between the various financial systems in Europe the lack of a coordinated approach is mind boggling, but not unusual. I predict that one outcome of this mess will be a much more tightly coupled set of financial regulations for Europe and more power invested in the European Central Bank.

Meanwhile here in America: the stock prices have plunged on the European news, and on fears that the bailout passed last Friday will not have an immediate impact.

The timing of all this could not be worse: the American political system is practically frozen in place for a few months due to the current election and the need for a subsequent ‘transition’ team. So for all intents and purposes we will not have a firm leadership until February. That’s not good!!

The banking system is a hopeless mess. The markets failed us totally. The only functioning part of the system are the commercial banks, and they are getting swamped by bad assets just like the now defunct investment banks.

The bright note?

Anyone with cash will make a killing by buying up the debris and holding onto it while a recovery gets underway. Now is the time fortunes can be made. But who has cash in this country? After all it is the most indebted nation in history. .

Good job Bushie!!

What a week!

Today the House of Representatives passed the infamous bailout bill. This time last week they had failed in the same task, so the switch was not just notable, it was monumental.

I have a feeling of having watched history these past few weeks. Never did I think that the collapse of free-market ideology would be so rapid and so complete. The Reagan era is definitively over. Here is Andrew Leonard’s piece in Salon:
How the World Works

The bailout as it now exists is nowhere near complete. That is I think we will still be seeing bank failures for a while to come. The bill is tortured mix of vague promises and speculation: there is precious little detail about how the Treasury is going to use the funds it now has available to it. Nor is there much detail about the way in which oversight will be maintained. This leads me to believe that there many legislators who think this will be taken up again after the election and a new, more thought through bill will be voted on to replace this one. For one thing we need to cut out all the awful pork barrel provisions that were added to persuade various Senators to go along with the bill.

But for all its warts getting the bill passed was a triumph.

I would have preferred a more straightforward approach to the bailout … I wanted simple nationalization of failing banks … but at least a start has been made.

And the ringing in my ears is the death knell of Reaganism. That’s the real triumph here. It is entirely appropriate that Reaganism died at the hands of a Republican administration. One that had taken the lore of the market to absurd and ultimately dangerous lengths. The reckless abandonment of government oversight has had all sorts of effects over the last few years, from tainted food imports, poisoned toys, the appalling response to Katrina, and now the melt down of one of the Republicans stoutest citadels: Wall Street. The collapse of the Soviet Union is the most recent analog for what we have just lived through.

The Republican Party is now out of ideas. We need a new right wing party to emerge from its rump. One with a less ideologically pure position, and one committed to a more pragmatic right of center set of principles. That will take time. The purge of the far right is only now beginning. Obama has to win the presidential election with sufficient margin to convince the Republicans to go away and start over. That’s the effect Reagan had on the Democrats three decades ago. Maybe it will be another three decades before we can trust a Republican platform again.

Meanwhile we can revel in the fresh air that the lifting of the oppressive free-market monopoly allows into our intellectual climate.

It is astonishing that a large core group of Republicans in the House of Representatives could hold the country to ransom. But today they did. Their cause? The hallowed altar of ‘free markets’. They whined that Nancy Pelosi had ‘upset’ them with a partisan, but entirely accurate, assessment of the Bush regime’s record. That record is appalling. That record is a reflection of basic post Reagan Republican beliefs. Pelosi was telling the truth. The New York Times editorial says it the way it is:Editorial – What?¢?‚¬?„¢s Worse Than a Flawed Bailout? – Editorial – NYTimes.com

This is the point at which we need to take a deep breath and acknowledge the truth: so-called ‘free-market’ ideology has failed. This is an indictment of all the political and academic efforts of the right wingers for almost three decades.

Reagan came to power claiming that ‘the government is the problem’. Yet here we are post Katrina and post financial melt down with a clear and painful history: deregulation and unfettered market economies are very unpleasant places for the large majority. They are places where life is, to use Thomas Hobbes famous phrase from the 17th century “nasty, brutish, and short”. We need government. And we need competent government.

If there are two defining characteristics of the recent past, in particular the years of the Bush regime, they are that incompetence [think Katrina and Iraq post invasion] and deregulation [think Wall Street melt down] are intolerable for a fully effective and functioning democracy.

So the central core value of the right wingers has been proven wrong. Horribly wrong. As an exercise in social experimentation it has caused misery beyond even its critics imagination.

Yet here here are the Republicans throwing a hissy fit that Pelosi should notice and actually say so out loud.

Sorry.

That’s pathetic. There is nothing wrong with calling a duck a duck. The Republican ideology of the last thirty years is responsible for what is now playing out in our economy. We should learn from their mistake and move on.

If they cannot learn so be it.

They will have plenty of time as the minority party they deserve to be. They should get used to it. Meanwhile the rest of us have to find a new way of conducting our affairs.

Let the post Reagan era begin. The sooner the better!

Here’s Paul Krugman’s take on today’s Republican inspired disaster: OK, we are a banana republic – Paul Krugman – Op-Ed Columnist – New York Times Blog

He’s absolutely right. The bill put forward today was a Bush Administration plan. It was likely from the beginning that a lot of Democrats would not go for it since it did not include enough to protect homeowners. My own opinion [see my post below] is that the bill was sufficient as a start. I assumed that new and better legislation would be presented after the election. So the Bush plan was what we had.

And the Republicans scuppered it. Even after McCain had said publicly he had brokered the deal.

Now both they and he look like partisan fools. What else is there that we can think?

The Republican right wing rose in revolt against both Bush and their party leadership because they still think that ‘private money’ can solve the problem. that would be, presumably, the private money that’s being lost today as a result of the collapse of the stock market.

These folks are idiots locked in some Reaganesque time warp. And then they have the gall to get all huffy because Pelosi says the obvious: this mess is a direct result of Republican deregulation. Specifically it is the result of the deliberate efforts of the then Senator Gramm who in 1999 wrote legislation to eliminate regulation on derivatives. that would be the same Mr. Gramm who is now advising McCain on economic matters. Whoops!!

So Pelosi calls them on their responsibility; they get bent out of shape for being shown up and vote against Bush’s legislation.

Get that straight: the Republicans shoot at Bush [a Republican] in order to spite Pelosi.

Krugman is right: that stuff only happens in a banana republic.

Meanwhile the rest of us with retirement funds etc tied up in stocks and bonds saw about $1.1 trillion of value wiped lout by this Republican spat.

Ugh!