Friday, October 31, 2008

Industrial Heartland Comments on Editorial re Bailing Out GM & Ford

Friday, October 31, 2008
readers' comments
More Money for DetroitBack to Article »
Pumping billions more taxpayer dollars into Detroit’s automakers makes sense even though the companies may go bust.
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EDITORS' SELECTIONS (what's this?)
October 31, 2008 7:10 am
And then what? The airlines? The big box stores? Sears? United Artists? Where does it stop?Detroit has known for four decades that we needed gas-efficient vehicles, and it snubbed its nose at that and produced SUVs, then marketed them so aggressively that folks were practically forced at gun point to buy them when looking for a new car. It moaned and whined that Japan was taking more and more market share, even as it did everything it could to ignore the obvious truth standing in front of it.And now we're supposed to bail them out as well, with money we dont have? I'm sorry, but this is getting absurd. Who's paying for all of this, guys? And how long is it supposed to go on before we force these clowns to accept responsibility for their screwups?They made this mess. Let them figure out how to solve it. If it means closing down, well, nothing lasts forever. Good riddance; let the people who know how to build these things right take charge until we can get it back together.
— Sean Martin, Mebane, NC
Recommended by 22 Readers
EDITORS' SELECTIONS (what's this?)
October 31, 2008 7:11 am
Forcing the senior management of Ford and GM to step down is a mistake. It was the government decision to pretend SUV were truck and should count the same in mileage standards. People wanted SUV's and the car companies made what people wanted and were in fact willing to pay top dollar for. That's not the car companies fault. It's also not the car companies fault that the government allowed the commodities markets to be turned into casino's with the price of oil bid up to ridiculous levels. Neither is it the car companies fault that the government mismanaged the financial markets to the point that credit is nonexistent. Giving over a hundred billion to AIG and nothing to car companies that actually make something and employ millions directly and indirectly would be foolish beyond belief.
— Mark, New Jersey
Recommended by 7 Readers
EDITORS' SELECTIONS (what's this?)
October 31, 2008 9:44 am
Meanwhile, Cherry, a Chinese car manufacturer, is looking into replacing London's taxi fleet with inexpensive electric vehicles.What's that sound I hear? Must be the boat we missed...
— Thomas, Singapore
Recommended by 5 Readers
EDITORS' SELECTIONS (what's this?)
October 31, 2008 9:47 am
What seems to be missing in the discussion about bailing out American Automakers is the plight of the dealer body. With the exception of AutoNation, Sonic and United that are publicly traded, the vast majority of dealers are small businesses that fuel local economies. The relationship between dealers and manufacturers has grown increasingly unbalanced in recent years as dealers have sacrificed more and more of the profitability of the business to Detroit.Additionally, had our federal government held Detroit's feet to the fire and enforced CAFE (Corporate Annual Fuel Economy) Standards, GM, Ford and Chrysler would have been "forced" to design and build the sort of vehicles that make Honda and Toyota so successful. Ironically, they have been telling Congress for decades that CAFE could not be achieved without bankrupting them. Seems the opposite may have been true and their "vision" myopic.They built trucks because the Per Vehicle Profit was much greater than with less expensive cars. A very short term mentality that seems more in line with Wall Street than Main Street.Now, dealers around the country own inventories that are not energy efficient. To cap things off, GMAC now requires a 700 Beacon score should you want to finance a GM through them. Less than 10% of most dealer's customers qualify.Now, GMAC is telling their dealer body that they are also getting out of the floor planning business. Yes, that's right. After the manufacturer sells a dealer a car they finance the sale and the dealer pays interest on every car on the lot (including the rebate!) until it is sold to consumers. Now, GMAC is out of money and wants out of the business. Immediately.So, these dealers are being force to find new lenders for millions of dollars inventory in an economy where banks are tapped out or simply not lending. All in all, this means that the domestics are now at a price disadvantage that means they will continue to lose market share to the imports.So, shoring up the manufacturers is one side of the equation. But if you ignore the dealers, it will have a devastating impact on local economies as thousands of dealers face extinction. With their demise goes thousands and thousands of jobs across the country. Not just the folks working there, but the vendors who have been in business with the dealers for all these years.
— Kathy Wiley, Dade City, FL
Recommended by 5 Readers
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Rescrambling the "AIG"

Market Overview
Market Stats
Mutual Funds

CNNMoney.comAIG pays off $85 billion loan with Fed fundsThursday October 30, 7:07 pm ET By Tami Luhby, senior writer
American International Group is paying down its pricey $85 billion loan from Uncle Sam with cheaper funding from Uncle Sam.
The struggling insurance giant now is allowed to issue up to $20.9 billion of short-term debt, known as commercial paper, under a new Federal Reserve Bank of New York program, according to a federal filing posted Thursday. The Commercial Paper Funding Facility, which began this week, is designed to provide short-term financing to companies suffering from the credit crunch.

But the interest rate AIG pays under the commercial paper program is less than 4%, while the $85 billion federal loan it received in September carries a rate of nearly 11.7%. The rates fluctuate daily.
"It appears we're giving away more money," said Bill Bergman, senior equity analyst at Morningstar. "The Fed terms are getting less, not more tight."
AIG also has access to a $37.8 billion lending facility from the Fed arranged in early October after its securities lending division ran into trouble.
Borrowings under the original two lending programs fell to $83.5 billion, down from $90.3 billion the week before, the Fed said Thursday. AIG reduced its obligations under the original bridge loan to $65.5 billion, down from $72 billion a week earlier, the company said.
The federal government granted AIG the bridge loan to prevent the company's collapse the day after Lehman Brothers declared bankruptcy on Sept. 15.
AIG plans to sell of most of its divisions to pay back the debt. Asset sales should be announced by year's end, Chief Executive Edward Liddy told last week.

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Unscrambling the "AIG"

The bottomless nature of the bailout:


Published: October 29, 2008
The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.
Donn Vickrey, a forensic analyst, is skeptical of A.I.G.’s past reports. “You don’t just suddenly lose $120 billion overnight,” he said.

“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.
Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.
But losses on that scale do not show up in the company’s financial filings. Instead, A.I.G. replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.
Mr. Vickrey and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.
Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.
The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry A. Waxman, Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.
These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.
Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.
Continuing Risk
Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.
“When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”
A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.
A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.
No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.
Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring A.I.G. together with all its derivatives counterparties and put a moratorium on the collateral calls. “We did that with ACA,” she said, referring to ACA Capital Holdings, a bond insurance company that filed for bankruptcy in 2007.
Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.
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Bailing Out Detroit -- Yes!

Living in Ohio, I realize the value of this plan. Steel companies in the midwest would benefit too.

More Money for Detroit
if (;

Published: October 31, 2008
Here is a measure of just how grim the economic outlook is: It seems to make sense to pump billions more taxpayer dollars into Detroit’s automakers even though down the road they could quite possibly go bust anyway.
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The specific request by General Motors and Cerberus Capital Management, the private equity firm that controls Chrysler, is preposterous: billions to help pay for a merger of dubious value. Neither automaker has been able to produce cars that consumers want to buy. Both are losing money hand over fist. Gluing them together would not change this dynamic. Still, there are two plausible arguments to support a general government bailout of Detroit’s lumbering car companies.
First, it is not unreasonable to believe that they might survive as self-sustaining companies if government money can get them over the credit crunch and deep recession that is expected in 2009.
In 2010, they are expected to offload responsibility for their retirees’ health care onto a new fund. It would cost them some $40 billion but would get the problem off their books and stop the hemorrhaging of money. They have negotiated new contracts with the auto workers’ union that eliminate retiree health care and allow for lower wages for new hires. They are slashing the production of gas-guzzlers. Some analysts believe they finally have a promising lineup of fuel-efficient cars.
The second argument may be the more powerful: even if Detroit’s car companies do not manage to survive in the longer term, it may still be worthwhile to keep them from going bankrupt next year. The economy and the job market will have their hands full dealing with the fallout from the near-collapse of the financial system.
Detroit’s three automakers employ hundreds of thousands of workers and support several million jobs in related industries like auto-part manufacturing and car sales. Major job losses in the auto sector would not only cause enormous economic and social distress around the country but would be extremely costly to the government. In particular, the government’s pension guarantee corporation would have to pick up some of the tab for hundreds of thousands of retirees.
The auto workers suggest that the companies could use another $25 billion in low-cost loans to pay into the retiree health care fund (they already got $25 billion in subsidized loans to retool their plants to make fuel-efficient cars). Detroit might need more just to make up for the markets’ collapse that has cut its access to credit.
But if the government is going to hand out billions to Detroit’s Sorry Three, there need to be serious conditions. For starters, Cerberus has to open up Chrysler’s books and the rest of its finances to government inspection to make sure taxpayer money isn’t just funneled elsewhere in the opaque private equity firm. Ford and General Motors don’t pay dividends these days. We don’t know if Chrysler does. They should all be barred from paying dividends until they repay any taxpayer money they get.
The money should also come with limits on executive pay and golden parachutes. The top executives of the car companies should be required to step down; taxpayer money should not be used to underwrite proven managerial incompetence.
We realize that helping Detroit involves big risks. After bailing out the financial system, it will encourage other companies to seek sustenance at Washington’s trough. Washington will have to learn to say no. But at this juncture, Detroit is too big to allow it to fail. And who knows? It may learn to survive.

Sign of the Times

So Sissy dropped me off at the Woodlawn Springfield Pike Obama Headquarters, so I could check things out and then walk home for my daily exercise.

After doing a half-hour of telephoning, I asked for an Obama yard sign, and was given one to take home.

On a whim I decided to hold it above my head as I walked home through Woodlawn. I was a walking Obama sign.

What a reaction!

* Someone from the Payday Loan office rushed out to ask what the early-voting hours were at the downtown Board of Elections; (Capping payday loans at 28% is a referendum item on the Ohio ballot, by the way.)

* A lot of cars honked as though the Reds had just won the World Series;

* One woman at a stoplight zipped down her passenger window and said "I like your sign!" "I voted early."

Thursday, October 30, 2008

Private Equity

Ted forstmann was interviewed on Charlie Rose last night. He says that private equity, which cannot borrow, will be the real winners.

Notes From an Op-Ed Piece

Don't get mad, get even.

Thursday, October 30, 2008

October 29, 2008, 10:00 pm — Updated: 2:42 am -->
Hang ‘em High
MISSOULA, Mont. — Under the Big Sky on election’s eve, the cold gold cottonwood leaves catching the late October light, Lolo Peak holding its first dusting of snow, the season feels ritualistically right.
But a free-floating edginess clings to the air, a sense of possibility over the prospect of a new president, and righteous anger that things are going to be very bad for a long time.
I can’t shake this line from Jon Tester, the freshman senator from Montana. Since the $700 billion bailout was first introduced, his office has been flooded with calls and letters — uniformly unforgiving toward the Masters of the Universe who destroyed the American economy. Tester said people “want to see the executives that drove Wall Street into the ground in orange suits picking up cans along the side of the road.”
It’s a comforting image, in a comeuppance sort of way. Imagine all those hedge fund managers and soft-skinned bonus brats stooped over litter through the long night of a Montana winter.
For now, the villains have been identified, though they have yet to be paraded through the village square. Polls show banks and Wall Street are blamed for the most staggering blow to the economy since the onset of the Great Depression. By two-to-one margins, people blame Republicans over Democrats. But they also blame their neighbors — you and me — for taking on too much debt.
If Americans are walking without a skip in their step, and maybe with a pitchfork in one hand, you can’t fault them. Gallup found that one in five people say their finances have already been hurt “a great deal.” On Tuesday, consumer confidence fell to the lowest level since the Conference Board started tracking popular sentiment 41 years ago. A bare 11 percent say the country is headed in the right direction.
We are not a nation of whiners, despite what Phil Gramm has said. (And he’s a prime candidate for road crew.) But where does this jet stream of anxiety go after the election?
During the Great Depression, it found its violent outlets. In Iowa, farmers stormed a courtroom in mid-session, demanding that a judge not sign any more foreclosure notices. The judge was dragged from the courthouse and taken to a nearby hanging tree. His life was spared only when the mob’s cooler heads (an oxymoron?) prevailed.
In Congress, at the time, taxes were raised on the wealthy, with a whiff of genuine class warfare in the air and cries of “Soak the rich!”
And the wise men of finance offered few nuggets of hope, only a clunker or two of infinite despair during an age the poet W.H. Auden called “the low, dishonest decade.” The economist John Maynard Keynes was asked if there was ever a worse time.
“It was called the Dark Ages,” he said. “And it lasted 400 years.”
Our battery-life of pessimism is not that long, and never will be. As dark as the End of Days-Bush Era has become, most of us see some sunshine in the forecast. The Pew Research Center Poll this week found that 64 percent still believe in this sentence: “As Americans we can always find ways to solve our problems and get what we want.”
But there will be blood, from Main Street to the mall. You see it every hour: businesses closing, folding, cutting back, projects delayed and canceled, young entrepreneurs putting their dreams back in the attic, people walking away from houses with nothing but bad memories.
And yet, Wall Street has not answered for its misdeeds, its reckless gambles, having set aside nearly $20 billion to pay in bonuses for 2008. You’ve just destroyed the economy — here’s your reward! Even the bankrupt Lehman Brothers managed to sock away $2.5 billion in future bonuses before filing for Chapter 11, according to Bloomberg.
We want shelter from the storm and a pound of flesh. But how much time will a new president have? A year? A hundred days? A month? The expectations cycle, like our culture, moves at the speed of a text message.
Franklin Roosevelt, the high standard for changes by a new president, got out of the gate like Seabiscuit on a sugar-cube high. In his first week in office, he was urged to nationalize the banks, as Bush has done in large measure. Instead, Roosevelt closed the banks for most of a week, and when they opened again, he assured all Americans, they were safe — now backed, for the first time, by the faith and credit of the United States.
It’s debatable whether he saved capitalism, as many historians have said. But Will Rogers certainly got it right: “If Roosevelt burned down the Capital, we should cheer and say, ‘Well, we at least got a fire started, anyhow.’”
Somebody has to start a fire. That’s what Americans will be looking for after next Tuesday. And quick. Otherwise, expect people to begin fitting executives in fluorescent orange vests for penance work on the side of the road — or worse.
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1. October 30, 2008 1:39 am Link
I hate to denigrate an entire industry, but there’s something wrong with basic accounting these days. Wall Street fat cats were able to sock away billions for their own bonuses prior to filling for bankruptcy because we have made up, out of whole cloth, rules for accounting that defy the laws of nature, math, and physics. Let’s start at the beginning: the use of the word “characterize” to describe a transaction. One does not “characterize” a financial transaction; it is what it is, regardless of what one calls it.
It shouldn’t take a special degree to balance the books. You sell something, and it costs something, and it happened on a certain date, and those are the facts. It is simple tautology to make up rules and definitions and then believe that these rules and definitions control the system.— Opsimath44
2. October 30, 2008 2:11 am Link
It is not the cottonwoods that turn yellow in Missoula. There is a row of sugar maples that stretches up the avenue to the college. They are lovely, my favorite memory from when I went to college there.Missoula is a foggy town in the fall, due to an air inversion that gets caught in the narrow canyons there. Some days you can see the Big Sky, some days it is possible to get lost in the fog just a block or two from your house, and you can spend hours trying to get back home.Your description is lovely, too, just applies more to other Montana towns.Edginess? My son lost half of his savings, and my daughter’s teacher reports her son is coming home from Wall Street. One of the 200,000 laid off this year, he was given no severance pay, so he is coming home to stay with her while he applies for jobs.A local resort has laid off everybody because their funding came from Lehman Brothers.My husband’s guitar group is all planning to vote for Obama… they’ve all lost their retirement funds.The economy of Montana doesn’t correlate with the national events very well. We were last in per capita income, but now our income is second to the last.The wealthy began to move here in droves this last few years, but this year the summer folk did not come. The streets were suspiciously empty of $100,000 sports cars.I think the damage to the economy occurred a year ago, but they kept silent.I think it was exactly like Nero fiddling while Rome burned. Yes, they need to be held accountable, because they knew it was coming, as long as a year ago.As for Montanans, they wrote the book on “broke.” and much of what happens elsewhere just seems like more of the same here.All these years of watching Bush spend 50 billion a month in Iraq, I kept thinking, what it would be like if we got even one month of that money spent in Montana.To tell you the truth, the relief being felt at the gas pump here has been good for a few laughs. The good that can come from poverty stricken money guys, bereft of their playdough, is going to be a light at the end of a long, dark tunnel, believe it or not.Deb— Deb
3. October 30, 2008 2:31 am Link
Karl Marx is laughing in his grave; again. What dupes we have all been, and the saddest thing seems to be that somewhere just short of half the voting population of America wants their ignorance and folly to continue. Even if; and I hope so sincerely; Barack Obama is elected to lead, and the world breathes a huge sigh of relief; the fact remains that an enormous number of people still believe the republican party message. Lies, innuendo and so little regard for the ordinary American it is hard to comprehend. Dupes. What can the world make of us when even after the supposed liberation of the sixties we still fall for such nonsense? What can it say about our education system when we produce crowds of people at political rallies who cry for the death of a candidate, and that candidate does not really disavow such behavior? We have a lot of work to do. May next Tuesday signal a real dawn in our country, and not just the usual blip in interest and commitment.— Bob Sterry
4. October 30, 2008 3:12 am Link
Lehman pencils in $2.5 billion for bonuses and then files Chapter 11. How do they get away with it? Well, they’re rich, so it’s okay to be crooked.
Another NYTimes columnist writes, thanks to his unauthorized listening in (sound familiar?) of a conference call, discovers that JPMorgan took $50 billion in bailout money, but will be using it for acquisitions rather than extending credit.
And to learn that the contracts — government contracts using our money! — for the accounting firms administering the bailout have been redacted so no one may know what they’re being paid.
So far this is working out very well for the American people, NOT! If someone can explain to me how this so-called bailout is not The Greatest Heist in the History of Mankind, I’d love to hear it. Indeed, I’m all ears.— tiowally
5. October 30, 2008 3:22 am Link
The first time that unregulated capitalism drove the US economy into a ditch, in 1929, FDR managed, with the help of heavy state spending on the military during WWll, to put the US economy back on the road.
This time, I believe that the ditch is much deeper, and far more drastic means may be required to get the economy out of the ditch this time. Key financial functions, such as banking and insurance, may have to be nationalized.
Perhaps if an enterprise or institution is too big to fail, or too important to the economy to fail, then it should not be privately held. After all, somewhere there must always be accountability.— Jack the Canuck
6. October 30, 2008 3:27 am Link
The concept that the financial crisis has been caused by individuals taking on too much debt seems to burke the fact that debt is far from universal. About a quarter of all credit card holders pay their balances down to zero at the end of every month. Mortgages in default comprise 1%-2% of mortgages–and many homes are owned outright, and have no mortgage.
Compare this with the rot at the top–the percentage of financial institutions in trouble.— Anne W.
7. October 30, 2008 4:05 am Link
I don’t get it. There are folks on Wall Street getting a BONUS for helping eviscerate our economy? I now have to work harder, longer, to stay where I am and someone on Wall Street is being rewarded for it? The way I see it…this was one screwup after another. If I screwed up at my job with consequences like this as a result . . . I would be looking for another job - and I am pretty sure I would not get a bonus out of it.
I’m either in the wrong line of work
or the right one.— Deon
8. October 30, 2008 5:02 am Link
I’m one of those people this has hurt. I’m just another worker ant who used to have a retirement nest egg. It’s gone. We didn’t spend wildly. We saved our money, invested as prudently as we could. We didn’t get the house. We always drove ten (or more) year old cars. We worked hard.
For what?
AH— Anna Harding
9. October 30, 2008 5:16 am Link
The $20 billion in socked away bonuses by bankrupt Wall Street firms–especially the $2.5 billion hidden by Lehman Brothers–is especially galling. How do they have the temerity to get away with that?
In the movie “Trading Places” Eddie Murphy’s character said that the way you hurt the rich is to take away their money. I think the time has come to do exactly that, and seize these huge bonus stockpiles.
It’s time that we–the taxpayers and the feds–had all their slick corporate tax and securities lawyers working for us, to try and take that money away from them. We should draft the attorneys into some form of selective service if we must! It’s time to add considerably more muscle to the regulatory agency forces, like sending out ten thousand more modern day Elliot Ness style accountants to go after these modern day bootleggers.
There are going to be a lot more unemployed, talented professionals looking for work in the months ahead; why not employ them to try to recover this money? Maybe they could even earn their money like bounty hunters do, or personal injury attorneys, by promising them a share of the take.
The bankers and Wall Street fat cats have destroyed the promise of a better future for us for at least another two years, possibly longer. Why should they be allowed to keep that largesse? Tax it, confiscate it, expropriate it by any means necessary. Give it back to the taxpayers or spend it on public works and infrastructure, but don’t let them keep it.— Donald Johnson
10. October 30, 2008 5:22 am Link
Unlikely that the guilty will receive their due.— P Miller
11. October 30, 2008 5:28 am Link
I don’t believe it was malfeasance or fraud that led to financial meltdown, rather a combination of greed, recklesness and incomprehension of the complex financial schemes invented to feed that greed. The masters of the universe do not belong in jail but people do expect that the money they accumulated inthe last decade be taken back in some way and put to constructive use. High taxes on unwarranted bonuses seems a good way to accomplish that.— serban
12. October 30, 2008 5:31 am Link
“expect people to begin fitting executives in fluorescent orange vests for penance work on the side of the road — or worse”
I vote for worse.— kamachanda
13. October 30, 2008 5:40 am Link
Great article, thank you.
Millions of people all over the world will suffer more and more because of the greed of the financial world. The Bush Administration as well as the US Congress has to take responsibility for this crisis as they have been asleep at the wheel for too long. The cosy relationship between Wall Street and the Treasury must end, namely, a former executive of an investment bank taking over the US Treasury. Stringent laws must be in place to prevent this.
The incoming Administration has to take immediate action to investigate and prosecute the white collar criminals . All the bonuses must be returned to the tax payers. This crisis is adding trillions to the US deficit, the bills to be paid by future generations. The US is yet to learn from the Savings and Loan losses or the Milliken debacle of the recent past. Any political system that allows obscene greed is a blot on our beautiful planet.— JAZZ
14. October 30, 2008 5:58 am Link
Is it impossible legally, and otherwise, to get back the 2.5 billion USD put away as bonuses from the tricksters in Lehman Bros.
Who will actually be receiving this money, now that Lehman Bros is not there.— ashok sen
15. October 30, 2008 6:00 am Link
We, the American people, elected the public officials who deregulated to the point of ruin. We, the American people, have to accept the blame. It looks like Montana is voting for more of the same in 2008.— Linda 42
16. October 30, 2008 6:28 am Link
What has us REALLY angry is that those same executives and high rollers who caused the conflagration are being rewarded with OUR dollars by an administration that hasn’t done anything right so far! How could Congress just acquiesce to Bush’s bailout without an investigation into how much was needed, who was going to get it and what would be done with so much money? How do you trust crooks to take $700 billion and not have it stick to their fingers? In the meantime, no one in government seems to be worried about making the victims of the scheme whole: those people whose credit is gone and whose retirement accounts have lost at least 30% of their value.
Don’t tell me I have to wait until the market comes surging back. It is folly to further enrich the rich and pay no attention to the middle class, who only suffer from the actions of crooks and cronies of the administration.— stheil
17. October 30, 2008 6:39 am Link
WE don’t have as much roadside trash on Michigan. As they said with Richard Nixon “I want him to say I”m Sorry on license plates a million times.”— Roger Marz
18. October 30, 2008 6:42 am Link
Nobody’s going to start a fire until after the new president takes office in late January…an eternity from now. And then we will see what we will see. It is ample time, however, for Bush to cause considerable harm and more future problemsfor an incoming president. That’s the fire I expect to see. My advise: Hunker down and brace yourself for a very bad timein November,December and January. Bush and his croniesaren’t going to go quietly.— Barry Moyer
19. October 30, 2008 6:48 am Link
Nothing would please me more than to see them in those orange jumpsuits picking up trash in Michigan, the place I live and which they helped ruin. But it will never happen. Instead, ordinary people like me — teachers, firefighters, and mechanics — will send ourselves and our children into debt to pay for their hubris and greed. It is sickening and inexcusable. If there is a mob, I just might attend.— adrienne
20. October 30, 2008 7:07 am Link
You left out treason and war crimes.— par4
21. October 30, 2008 7:07 am Link
Blah,blah,blah. A little posturing by the politicians,a few photos of a senate hearing and then the filthy rich go about their business .It’s the job of the middle class and the poor to be fodder.The rich are indeed different than you and me.— martin
22. October 30, 2008 7:09 am Link
It is amazing that the operators in Wall Street and financial districts all over the States were allowed to pocket huge bonuses just before the institution itself declared bankruptcy.Elsewhere in the world this is called fraud of the worst kind and thievery of the middle class families funds.What a pity, the only superpower in the world today has no means to guillotine the rogues on the fiancial scene.— s.divakaran
23. October 30, 2008 7:09 am Link
AIG is already spent 123 billion and seeking more.
America wants to explanation , Greenspan’s thought ; “I found a flaw in the system” is so insufficient for this cataclysm.
We do not want only regulation, we want justice who robbed us.— hadarmen
24. October 30, 2008 7:21 am Link
Populist rubbish and dishonest, to boot: you acknowledge that gullible and/or unscrupulous borrowers share culpability, but single out banks and bankers for retribution.And what about mortgage originators, mortgage brokers, accommodating property appraisers and, most of all, the rating agencies — Moodys and S&P — who were the enablers of this crisis?Wall Street is an easy target (ask Guliani, Sptizer and Cuomo); the people who really made it all possible are, so far, flying happily below the radar.— DB Smith
25. October 30, 2008 7:23 am Link
We wish.
The people most responsible for this, in which I include the entire Bush administration, as well as the Moguls of Wall Street, Big Pharma, and the National Association of Manufacturers, among others, have colluded for the past eight years to free themselves from all regulations, even reasonable and prudent ones.
So, the Moguls of Wall Street, having bilked the country and the investers to the tune of God alone knows how much money, and having captured huge rewards while the market was going up (as might ahve been appropriate) now continue to do so as things go bust, instead of going bust with us.
The manufacturers of America have their collective hands out for “bail outs” which aren’t rescues from anything except their incompetence.
Big Pharma and its associates have their collective hands in our pockets and are busily bankrupting every day Americans.
At least, George and Co failed to privatize Social Security, but the “let’s not negotiate drug costs” drug benefits are so expensive we can’t afford them and even WITH them, one out of eight Americans can’t afford their cancer drugs, and by some estimates more than one out of ten have no health insurance at all.
The GOP has its collective hand out thinking somehow it can continue to dupe Main Street into financing its folly, meanwhile keeping the GOP in power so it can continue to gut the Constitution while picking our pockets clean.
Think again, past Masters of the Universe: your shell game has been exposed and your time in control is now over. Unfortunately for those of us who will have to clean up this moral, fiscal, economic, and government mess, there don’t appear to be any laws which actually will put you in the orange jail jump suits you deserve, and I’m sure that even as I type, goons in the Bush White House are busily drafting presidential pardons for themselves that will guarantee that none of them ever have to face their day in court.
Well, the rest of us will have the last laugh. It will be one long time before any of the current crew will be able to show its face in public anywhere except on Fox News, and a lot longer than that before you’ll be back in power.
Don’t let the door hit you on the way back to whatever rock you plan on hiding behind.— Judy G from Fairfax VA
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Previous Post:The Party of Yesterday
About Timothy Egan
Timothy Egan worked for 18 years as a writer for The New York Times, first as the Pacific Northwest correspondent, then as a national enterprise reporter. In 2006, Mr. Egan won the National Book Award for his history of people who lived through the Dust Bowl, The Worst Hard Time. In 2001, he won the Pulitzer Prize as part of a team of reporters who wrote the series How Race Is Lived in America. Mr. Egan is the author of five books, including "The Good Rain: Across Time and Terrain in the Pacific Northwest," and "Lasso the Wind, Away to the New West." He lives in Seattle.
Mr. Egan's Previous Articles for The New York Times
Op-Ed Podcast (1/23/08)
A conversation with the newest Op-Extra columnists Timothy Egan and Olivia Judson. Hosted by David Shipley, deputy editorial page editor and Op-Ed editor.
Outposts, by Timothy Egan
The Wild Side, by Olivia Judson
Listen to the Op-Cast (mp3)

Archive Select Month October 2008 September 2008 August 2008 July 2008 June 2008 May 2008 April 2008 March 2008 February 2008 January 2008
Recent Posts
October 29(33 comments)
Hang ‘em High
After the election, any sense of a new beginning will have to include a reckoning on Wall Street.
October 25(0 comments)
The Party of Yesterday
Republicans have been insinuating for years that some of the brightest, most productive communities in the United States are fake American.
October 23(1 comment)

October 16(335 comments)
The Deal, Sealed?
McCain plays the Ayers card again, and it feels like it’s time for him to fold.
October 08(182 comments)
My Own Private Focus Group
Colorado Springs, a center of evangelical political power, is looking to the future in some very surprising ways.
From the Opinion Blogs
Why Is Everyone Whining About Taxes?
From Flickr user Global Jet. The Economist published its annual graph showing total taxes as a percent of G.D.P. for a large number of rich countries. Not surprisingly, there's little year-to-year change -- and the U.S. is near the bottom. We are a low-tax country; our average tax rate, counting all taxes, hovers above 30
Paul Krugman
Still returning The Return
No blog posts until I finish the final touches on The Return of Depression Economics and the Crisis of 2008, probably tomorrow.

Wednesday, October 29, 2008

How to Avoid Becoming a Failure Statistic

I clicked on this article thinking it was by Mike Brown of the Bengals telling us how to be a great entrepreneur.

How to Avoid Becoming a Failure Statistic

Published: October 28, 2008
Times are tough. And while there is no definitive checklist governing what entrepreneurs should guard against, there do seem to be some commonalities.
Paul B. Brown’s Columns »
Several are well known, like the risks of being undercapitalized, having poor financial controls, hiring badly and refusing to delegate. But other problems may have escaped your attention.
POGO WAS RIGHT “Businesses perish in untimely ways, many of which are largely out of an entrepreneur’s control: There’s too much competition. The public is no longer interested in your product or service,” writes Geoff Williams in Entrepreneur. Or you could be a victim of bad luck, he says.
“But sometimes, the painful reality is that a business falls apart for one reason: You.” he writes. “In the end, when any company is suffering, there is a question every entrepreneur must ask when he or she looks in the mirror: Am I killing my own business?”
FOCUS, FOCUS AND FOCUS Underscoring the point that your biggest enemy could be you, Karyn Greenstreet, who describes herself as a self-employment expert and small-business coach, writes, “Dunn and Bradstreet recently did a study and determined that “90 percent of small businesses that fail do so because of a lack of skills and knowledge on the part of the owner.”
She suggests a tip that could keep you in business longer.
Entrepreneurs, she points out, frequently get excited about a new idea but they are either unable to figure out if it is a true opportunity, as opposed to a momentary blip in the marketplace. And even it is something worth considering, they don’t know how they should go about trying to capitalize on it.
What to do?
“Test every new idea against your business plan and mission statement before deciding whether to undertake it or not, and then ask yourself, Do I have the time and skill to implement this?”

KNOWLEDGE IS POWER Given the competitive landscape, a small-business owner needs to “understand his or her market as well as he or she understands their best friend, their spouse, or the back of their hand,” argues Shane Messer, chief executive of the Incubator Group, a private equity firm in Nashville. “So much so that they can predict movements and purchasing habits with uncanny accuracy.”
“I cannot stress this enough,” he adds. “The absolutely, positively, most important skill that you can develop, without exception, is the ability to learn your market so well that you can predict what will make people react, buy and feel satisfied. Without it, you will undoubtedly fail.”
THE OTHER GUY says learning about your market extends to understanding what the competition is doing.
“Consumer loyalty doesn’t just happen; you have to earn it. If you don’t take care of your customers, your competition will. Watch your competition as closely as you do your own employees.”
LAST CALL Invariably, entrepreneurs are given all kinds of suggestions. And while most of it is probably meant to be helpful,, a small business resource site, has identified 10 of the “silliest bits of advice to ignore” when you are running a small business.
These are among our favorites:
¶“All you need to do is think success.” As the article points out, you can think all the positive thoughts you want, but nothing good is going to happen until you make it happen.
¶“There’s no reason why you can’t be as successful as So and So.” Sure there is. So and So could be smarter, have more capital, a better marketing plan, superior people, better skills.” You get the idea.
¶“You can always return to what you were doing before,” if things don’t work out. That may well be true, but as the article points out, “Never allow yourself an easy way out — because at the first sign of trouble, you’ll take it. Think winning, not retreating.”

Funny But Valuable Piece on Water

Begin forwarded message:
From: "Hayes, William D." <>
Date: October 29, 2008 9:21:36 AM EDT
Subject: Emailing: International Environment Reporter

Hi Everyone- I have been meaning to advocate the collection of rainwater to friends for some time, and seeing this today motivated me. Roseann and I have two rainwater collection barrels and routinely collect 75 gallons of rainwater during a normal rain. We use this for replenishing the fish pond and for watering plants and trees. Rainwater barrels are relatively inexpensive and pay for themselves by reducing your water costs. More importantly, water from your spigot is treated water which requires energy to treat and transport. Collecting rainwater is great because you are using gravity to collect it, and the weight of the water in the barrel provides adequate pressure for most garden uses. One of our barrels is a recycled whiskey barrel (I often find roseann drinking from it) and the other is 100% recycled plastic. They are available through lots of different sources. In any event, I thought I would encourage all of you to consider it. Rainwater collection should be inherent in any new building activity you are involved in. I think it will be second nature I the future. thanks- Bill
From the law offices of Vorys, Sater, Seymour and Pease LLP.

See Spot Run

Some justification -- although not exact -- backing my prediction that Duke Energy's prices this winter will be lower than last.

Flynn's Oil Exeter

heating oil for northeast


no offer of seasonal rate for full season.

Worth Following This Article and its Sources

All on Greenspan's "awakening:"

Cramer Last Night

6:07 AM 10/29/2008

Summary (after listening to the entire program):

It's a "short squeeze" market. That's all. But Cramer is obviously elated and is recommending some stocks.

Now...Cramer last night. Yesterday's "tell" that foretold the huge increase late in the day. By watching Apple Computer.
It opened up 3 points. Litmus test stocks. Best fundamentals, best balance sheet.
Best fundamentals. Fabulous unchecked growth.
Blew numbers away. $1.26/share.
Now only 15 pts off its 52 mo low. Should be 200/sh.
7 million iphones in this past qtr alone.
Marvelous qtr.
A generational company. Only brand they will buy.

$24.5 billion in cash. 30% of share price is cash.

Apple is the key. As long as it is stuck in the mud, so is every other tech stock.

Tuesday, October 28, 2008

New Yorker

I found this hilarious from the October 27th issue of the New Yorker:

Shouts & Murmurs
by David Sedaris October 27, 2008
I don’t know that it was always this way, but, for as long as I can remember, just as we move into the final weeks of the Presidential campaign the focus shifts to the undecided voters. “Who are they?” the news anchors ask. “And how might they determine the outcome of this election?”
Then you’ll see this man or woman— someone, I always think, who looks very happy to be on TV. “Well, Charlie,” they say, “I’ve gone back and forth on the issues and whatnot, but I just can’t seem to make up my mind!” Some insist that there’s very little difference between candidate A and candidate B. Others claim that they’re with A on defense and health care but are leaning toward B when it comes to the economy.
I look at these people and can’t quite believe that they exist. Are they professional actors? I wonder. Or are they simply laymen who want a lot of attention?
To put them in perspective, I think of being on an airplane. The flight attendant comes down the aisle with her food cart and, eventually, parks it beside my seat. “Can I interest you in the chicken?” she asks. “Or would you prefer the platter of shit with bits of broken glass in it?”
To be undecided in this election is to pause for a moment and then ask how the chicken is cooked.
I mean, really, what’s to be confused about?
When doubting that anyone could not know whom they’re voting for, I inevitably think back to November, 1968. Hubert Humphrey was running against Richard Nixon, and when my mother couldn’t choose between them she had me do it for her. It was crazy. One minute I was eating potato chips in front of the TV, and the next I was at the fire station, waiting with people whose kids I went to school with. When it was our turn, we were led by a woman wearing a sash to one of a half-dozen booths, the curtain of which closed after we entered.
“Go ahead,” my mother said. “Flick a switch, any switch.”
I looked at the panel in front of me.
“Start on the judges or whatever and we’ll be here all day, so just pick a President and make it fast. We’ve wasted enough time already.”
“Which one do you think is best?” I asked.
“I don’t have an opinion,” she told me. “That’s why I’m letting you do it. Come on, now, vote.”
I put my finger on Hubert Humphrey and then on Richard Nixon, neither of whom meant anything to me. What I most liked about democracy, at least so far, was the booth—its quiet civility, its atmosphere of importance. “Hmm,” I said, wondering how long we could stay before someone came and kicked us out.
Ideally, my mother would have waited outside, but, as she said, there was no way an unescorted eleven-year-old would be allowed to vote, or even hang out, seeing as the lines were long and the polls were open for only one day. “Will you please hurry it up?” she hissed.

"Wouldn’t it be nice to have something like this in our living room?” I asked. “Maybe we could use the same curtains we have on the windows.”
“All right, that’s it.” My mother reached for Humphrey but I beat her to it, and cast our vote for Richard Nixon, who had the same last name as a man at our church. I assumed that the two were related, and only discovered afterward that I was wrong. Richard Nixon had always been Nixon, while the man at my church had shortened his name from something funnier but considerably less poster-friendly—Nickapopapopolis, maybe.
“Oh, well,” I said.
We drove back home, and when asked by my father whom she had voted for, my mother said that it was none of his business.
“What do you mean, ‘none of my business’?” he said. “I told you to vote Republican.”
“Well, maybe I did and maybe I didn’t.”
“You’re not telling me you voted for Humphrey.” He said this as if she had marched through the streets with a pan on her head.
“No,” she said. “I’m not telling you that. I’m not telling you anything. It’s private—all right? My political opinions are none of your concern.”
“What political opinions?” he said. “I’m the one who took you down to register. You didn’t even know there was an election until I told you.”
“Well, thanks for telling me.”
She turned to open a can of mushroom soup. This would be poured over pork chops and noodles and served as our dinner, casserole style. Once we’d taken our seats at the table, my parents would stop fighting directly, and continue their argument through my sisters and me. Lisa might tell a story about her day at school and, if my father said it was interesting, my mother would laugh.
“What’s so funny?” he’d say.
“Nothing. It’s just that, well, I suppose everyone has a different standard. That’s all.”
When told by my father that I was holding my fork wrong, my mother would say that I was holding it right, or right in “certain circles.”
“Undecided” continues

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Op-Ed Columnist
A Choice and an Echo
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Published: October 27, 2008
It seems to have taken forever (the seasons have changed, and changed and changed again), but this long presidential campaign is finally coming to an end. In January, with snow blanketing the trail in Iowa and New Hampshire, I wrote of the Barack Obama phenomenon: “Shake hands with tomorrow. It’s here.”
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I didn’t mean that Senator Obama would win the election. He still seemed like a long shot to me. But it was clear that the message, style and strategy of his campaign pointed to a new direction for American politics, and that a new generation of voters — younger, smarter, more diverse, more open-minded — was anxious to follow his lead.
I remember talking with a voter named Debra Gable, who had driven from central Vermont to attend an Obama rally in Derry, N.H. “I dislike politics,” she told me, “because we focus on our differences even though we have so many more commonalities. That’s what I think I’m hearing from Obama, so I want to see how he is in person.”
Ms. Gable had not made up her mind, and the other candidate she was seriously considering — in a Republican field that was still wide open — was John McCain.
This election is hardly over, despite the impulse of the pundits to write the McCain campaign’s obituary. But Senator McCain has diminished his chances of winning the presidency in many ways, the most important of which was his failure to grasp the most significant new trend in American politics.
With the country facing enormous problems (even before the meltdown of the credit and financial markets in recent months), the voters wanted more substance from their candidates. They wanted a greater sense of maturity and a more civil approach to campaigning. They were tired of the politics of personal destruction and the playbook that counseled “attack, attack, attack.”
Senator Obama was perfectly suited to this new approach. He told the crowd that trekked through the cold and snow to hear his victory speech at the Iowa caucuses:
“You said the time has come to move beyond the bitterness and pettiness and anger that’s consumed Washington. To end the political strategy that’s been all about division, and instead make it about addition. To build a coalition for change that stretches through red states and blue states.”
John McCain didn’t get it. He seemed as baffled by the new politics as an Al Jolson aficionado trying to make sense of the Beatles.
He answered the desire for a higher tone in politics with ads that likened Senator Obama to Britney Spears and Paris Hilton and with attacks that questioned Mr. Obama’s patriotism, blamed him for high gasoline prices and all-but-accused him of being a socialist.
Mr. Obama, said Mr. McCain, would convert the Internal Revenue Service into “a giant welfare agency.”
Get it?
Whether this is admirable or honorable is not the question here. In the current political and economic atmosphere, it seems very much like a roadmap to defeat.
The heyday of Lee Atwater and Karl Rove is over. Yet Senator McCain handed the reins of his campaign to Rove’s worshipful acolytes. With the nation in a high state of anxiety over the conflagration in the credit and financial markets, Senator McCain traveled the country ranting Rovelike about Bill Ayers, trying to instill a bogus belief that the onetime ’60s radical and Senator Obama were good buddies and perhaps involved in some nefarious doings together. Senator Obama was about 8 years old when Mr. Ayers was engaged in his nefarious doings.
It was the classic fear card that the Republicans have played to such brilliant effect for years. But times have changed. (Lately Senator McCain has been obsessively invoking the name of “Joe the Plumber” at his campaign appearances, as if that might be the phrase that finally sways the electorate in a way that the Bill Ayers mantra did not.)
Senator Hillary Clinton helped define the new political atmosphere with her own historic run for the White House. Senator McCain, demonstrating again his tone-deafness to the new reality, tried to capitalize on Mrs. Clinton’s remarkable achievement by cynically selecting Sarah Palin, the anti-Hillary, as his running mate.
Mr. McCain must never have noticed that the public turned overwhelmingly against the Bush administration because of its repeatedly demonstrated incompetence. Now here is Senator McCain, in the midst of a national crisis, with a running mate who is demonstrably incompetent to serve the nation as its president.
Ms. Palin is a walking affront to the many Republican women (not to mention women in general) who are, in fact, qualified to hold the highest office in the land.
John McCain could have traveled a higher road. He chose not to. He bet instead on one last gasping triumph of the politics of the past.

I Have Been Told This Article is Good

This is well worth reading. I have marked it up to about 1/2 way, and then gone off to have breakfast.

Headlined on 10/18/08:FINANCIAL MELTDOWN: The Greatest Transfer of Wealth in History
by Ellen Brown

6votesBuzz up!

On October 15, the Presidential candidates had their last debate before the election. They talked of the baleful state of the economy and the stock market; but omitted from the discussion was what actually caused the credit freeze, and whether the banks should be nationalized as Treasury Secretary Hank Paulson is now proceeding to do. The omission was probably excusable, since the financial landscape has been changing so fast that it is hard to keep up. A year ago, the Dow Jones Industrial Average broke through 14,000 to make a new all-time high. Anyone predicting then that a year later the Dow would drop nearly by half and the Treasury would move to nationalize the banks would have been regarded with amused disbelief. But that is where we are today.1
Congress hastily voted to approve Treasury Secretary Hank Paulson’s $700 billion bank bailout plan on October 3, 2008, after a tumultuous week in which the Dow fell dangerously near the critical 10,000 level. The market, however, was not assuaged. The Dow proceeded to break through not only 10,000 but then 9,000 and 8,000, closing at 8,451 on Friday, October 10. The week was called the worst in U.S. stock market history.
On Monday, October 13, the market staged a comeback the likes of which had not been seen since 1933, rising a full 11% in one day. This happened after the government announced a plan to buy equity interests in key banks, partially nationalizing them; and the Federal Reserve led a push to flood the global financial system with dollars.
The reversal was dramatic but short-lived. On October 15, the day of the Presidential debate, the Dow dropped 733 points, crash landing at 8,578. The reversal is looking more like a massive pump and dump scheme – artificially inflating the market so insiders can get out – than a true economic rescue. The real problem is not in the much-discussed subprime market but is in the credit market, which has dried up. The banking scheme itself has failed. As was learned by painful experience during the Great Depression, the economy cannot be rescued by simply propping up failed banks. The banking system itself needs to be overhauled.
A Litany of Failed Rescue Plans
Credit has dried up because many banks cannot meet the 8% capital requirement that limits their ability to lend. A bank’s capital – the money it gets from the sale of stock or from profits – can be fanned into more than 10 times its value in loans; but this leverage also works the other way. While $80 in capital can produce $1,000 in loans, an $80 loss from default wipes out $80 in capital, reducing the sum that can be lent by $1,000. Since the banks have been experiencing widespread loan defaults, their capital base has shrunk proportionately.
The bank bailout plan announced on October 3 involved using taxpayer money to buy up mortgage-related securities from troubled banks. This was supposed to reduce the need for new capital by reducing the amount of risky assets on the banks’ books. But the banks’ risky assets include derivatives – speculative bets on market changes – and derivative exposure for U.S. banks is now estimated at a breathtaking $180 trillion.2 The sum represents an impossible-to-fill black hole that is three times the gross domestic product of all the countries in the world combined. As one critic said of Paulson’s roundabout bailout plan, "this seems designed to help Hank’s friends offload trash, more than to clear a market blockage."3
By Thursday, October 9, Paulson himself evidently had doubts about his ability to sell the plan. He wasn’t abandoning his old cronies, but he soft-pedaled that plan in favor of another option buried in the voluminous rescue package – using a portion of the $700 billion to buy stock in the banks directly. Plan B represented a controversial move toward nationalization, but it was an improvement over Plan A, which would have reduced capital requirements only by the value of the bad debts shifted onto the government’s books. In Plan B, the money would be spent on bank stock, increasing the banks’ capital base, which could then be leveraged into ten times that sum in loans. The plan was an improvement but the market was evidently not convinced, since the Dow proceeded to drop another thousand points from Thursday’s opening to Friday’s close.
One problem with Plan B was that it did not really mean nationalization (public ownership and control of the participating banks). Rather, it came closer to what has been called "crony capitalism" or "corporate welfare." The bank stock being bought would be non-voting preferred stock, meaning the government would have no say in how the bank was run. The Treasury would just be feeding the bank money to do with as it would. Management could continue to collect enormous salaries while investing in wildly speculative ventures with the taxpayers’ money. The banks could not be forced to use the money to make much-needed loans but could just use it to clean up their derivative-infested balance sheets. In the end, the banks were still liable to go bankrupt, wiping out the taxpayers’ investment altogether. Even if $700 billion were fanned into $7 trillion, the sum would not come close to removing the $180 trillion in derivative liabilities from the banks’ books. Shifting those liabilities onto the public purse would just empty the purse without filling the derivative black hole.
Plan C, the plan du jour, does impose some limits on management compensation. But the more significant feature of this week’s plan is the Fed’s new "Commercial Paper Funding Facility," which is slated to be operational on October 27, 2008. The facility would open the Fed’s lending window for short-term commercial paper, the money corporations need to fund their day-to-day business operations. On October 14, the Federal Reserve Bank of New York justified this extraordinary expansion of its lending powers by stating:
"The CPFF is authorized under Section 13(3) of the Federal Reserve Act, which permits the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations that are unable to obtain adequate credit accommodations. . . .
"The U.S. Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the New York Fed in support of this facility."4
That means the government and the Fed are now committing even more public money and taking on even more public risk. The taxpayers are already tapped out, so the Treasury’s "special deposit" will no doubt come from U.S. bonds, meaning more debt on which the taxpayers have to pay interest. The federal debt could wind up running so high that the government loses its own triple-A rating. The U.S. could be reduced to Third World status, with "austerity measures" being imposed as a condition for further loans, and hyperinflation running the dollar into oblivion. Rather than solving the problem, these "rescue" plans seem destined to make it worse.
The Collapse of a 300 Year Ponzi Scheme
All the king’s men cannot put the private banking system together again, for the simple reason that it is a Ponzi scheme that has reached its mathematical limits. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on "fractional reserve" lending, which allows banks to create "credit" (or "debt") with accounting entries. Banks are now allowed to lend from 10 to 30 times their "reserves," essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.5 The problem is that banks create only the principal and not the interest necessary to pay back their loans. Since bank lending is essentially the only source of new money in the system, someone somewhere must continually be taking out new loans just to create enough "money" (or "credit") to service the old loans composing the money supply. This spiraling interest problem and the need to find new debtors has gone on for over 300 years -- ever since the founding of the Bank of England in 1694 – until the whole world has now become mired in debt to the bankers’ private money monopoly. As British financial analyst Chris Cook observes:
"Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth’s resources."6
The parasite has finally run out of its food source. But the crisis is not in the economy itself, which is fundamentally sound – or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money. Fortunately, we don’t need the credit of private banks. A sovereign government can create its own.
The New Deal Revisited
Today’s credit crisis is very similar to that facing Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s plan failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and to invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.
The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the private banks with which it was competing, the RFC had to have the money in hand before lending it. The RFC was funded by issuing government bonds (I.O.U.s or debt) and relending the proceeds. The result was to put the taxpayers further into debt. This problem could be avoided, however, by updating the RFC model. A system of public banks might be set up that had the power to create credit themselves, just as private banks do now. A public bank operating on the private bank model could fan $700 billion in capital reserves into $7 trillion in public credit that was derivative-free, liability-free, and readily available to fund all those things we think we don’t have the money for now, including the loans necessary to meet payrolls, fund mortgages, and underwrite public infrastructure.
Credit as a Public Utility
"Credit" can and should be a national utility, a public service provided by the government to the people it serves. Many people are opposed to getting the government involved in the banking system, but the fact is that the government is already involved. A modern-day RFC would actually mean less government involvement and a more efficient use of the already-earmarked $700 billion than policymakers are talking about now. The government would not need to interfere with the private banking system, which could carry on as before. The Treasury would not need to bail out the banks, which could be left to those same free market forces that have served them so well up to now. If banks went bankrupt, they could be put into FDIC receivership and nationalized. The government would then own a string of banks, which could be used to service the depository and credit needs of the community. There would be no need to change the personnel or procedures of these newly-nationalized banks. They could engage in "fractional reserve" lending just as they do now. The only difference would be that the interest on loans would return to the government, helping to defray the tax burden on the populace; and the banks would start out with a clean set of books, so their $700 billion in startup capital could be fanned into $7 trillion in new loans. This was the sort of banking scheme used in Benjamin Franklin’s colony of Pennsylvania, where it worked brilliantly well. The spiraling-interest problem was avoided by printing some extra money and spending it into the economy for public purposes. During the decades the provincial bank operated, the Pennsylvania colonists paid no taxes, there was no government debt, and inflation did not result.7
Like the Pennsylvania bank, a modern-day federal banking system would not actually need "reserves" at all. It is the sovereign right of a government to issue the currency of the realm. What backs our money today is simply "the full faith and credit of the United States," something the United States should be able to issue directly without having to draw on "reserves" of its own credit. But if Congress is not prepared to go that far, a more efficient use of the earmarked $700 billion than bailing out failing banks would be to designate the funds as the "reserves" for a newly-reconstituted RFC.
Rather than creating a separate public banking corporation called the RFC, the nation’s financial apparatus could be streamlined by simply nationalizing the privately-owned Federal Reserve; but again, Congress may not be prepared to go that far. Since there is already successful precedent for establishing an RFC in times like these, that model could serve as a non-controversial starting point for a new public credit facility. The G-7 nations’ financial planners, who met in Washington D.C. this past weekend, appear intent on supporting the banking system with enough government-debt-backed "liquidity" to produce what Jim Rogers calls "an inflationary holocaust." As the U.S. private banking system self-destructs, we need to ensure that a public credit system is in place and ready to serve the people’s needs in its stead. Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her eleven books include the bestselling Nature’s Pharmacy, co-authored with Dr. Lynne Walker, and Forbidden Medicine. Her websites are a