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Acronyms to watch for: Roubini supports Hillary's HOLC, not RTC/RFC solutions to financial crisis


[I'm leaving this sticky because I think it's still the litmus test, and because of the impassioned comment thread. --lambert]

Here's a litmus test for whatever Congress comes up with as they huddle with the finance boiz over the weekend: HOLC good, RTC/RFC bad.

I may not understand this class warfare finance stuff, but I can sure quote people who do! Nouriel Roubini:

The most important policy action ... is rather the realization that a generalized debt and solvency problem required a solution that leads to significant debt reduction.

Let me explain in detail how we now need bold policy action to resolve this most severe financial and economic crisis…

Households in the US have too much debt (subprime, near prime, prime mortgages, home equity loans, credit cards, auto loans and student loans) while their assets (values of their homes and stocks) are plunging leading to a sharp fall in their net worth. And households are getting buried under this mountain of mounting debt and rising debt servicing burdens. Thus, a fraction of the household sector – as well as a fraction of the financial sector and a fraction of the corporate sector and of the local government sector – is insolvent and needs debt relief.

When a country (say Russia, Ecuador or Argentina) has too much debt and is insolvent it defaults and gets debt reduction and is then able to resume fast growth; when a firm is distressed with excessive debt it goes into bankruptcy court and gets debt relief that allows it to resume investment, production and growth; when a household is financially distressed it also needs debt relief to be able to have more discretionary income to spend. So any unsustainable debt problem requires debt reduction. The lack of debt relief to the distressed households is the reason why this financial crisis is becoming more severe and the economic recession - with a sharp fall now in real consumption spending – now worsening. The fiscal actions taken so far (income relief to households via tax rebates) and bailouts of distressed financial institutions (Bear Stearns creditors’ bailout, Fannie and Freddie and AIG) do not resolve the fundamental debt problem for two reasons. First, you cannot grow yourself out of a debt problem: when debt to disposable income is too high increasing the denominator with tax rebates is ineffective and only temporary; i.e. you need to reduce the nominator (the debt). Second, rescuing distressed institutions without reducing the debt problem of the borrowers does not resolve the fundamental insolvency of the debtor that limits its ability to consume and spend and thus drags the economy into a more severe economic contraction.

So of the five possible uses of fiscal policy – income relief to households (the 2008 tax rebate), rescue/bailout of financial institutions (Bears Stearns, Fannie and Freddie, AIG), purchase of assets of failed institutions (an RTC-like institution), recapitalization of undercapitalized financial institutions (an RFC-like institution), government purchase of distressed mortgages to provide debt relief to households (an HOLC-like institution) – the last option is the most important and effective to resolve this severe financial and economic crisis. During the Great Depression the Home Owners’ Loan Corporation was create to buy mortgages from bank at a discount price, reduce further the face value of such mortgages and refinance distressed homeowners into new mortgages with lower face value and lower fixed rate mortgage rates. This massive program allowed millions of households to avoid losing their homes and ending up in foreclosure. The HOLC bought mortgages for two year and managed such assets for 18 year at a relatively low fiscal cost (as the assets were bought at a discount and reducing the face value of the mortgages allowed home owners to avoid defaulting on the refinanced mortgages). A new HOLC will be the macro equivalent of creating a large “bad bank” where the bad assets of financial institutions are taken off their balance sheets and restructured/reduced; thus it will be the macro equivalent of the “bad bank” that Lehman tried to create for its bad assets.

Creating a new HOLC mechanism is likely to be more effective than creating a new RTC (whose purpose was to buy and dispose over a number of years of the assets of already failed S&Ls): we need to provide debt reduction to households well before hundreds of banks failed as working out the bad assets only after banks have failed is costly.

Bottom line: Households first, then the banks (which, in the end, turns out to be better for the banks, too).

And HOLC, while Obama is still waiting for word from his finance guys to scroll up on his teleprompter, is the solution Hillary has already advocated:

A new government entity like the HOLC with a focus on attacking the source of the problem can serve the purpose of clearing a lot of those toxic mortgage securities from the market. We know there will not be any semblance of a normal or orderly marketplace until we have found a way to resolve these mortgage securities that are metastasizing in the bottom of our markets. By taking this paper out of the market and quarantining it in this new entity we will be able to give the market breathing room to recover.

Last spring when I called for a modern version of the HOLC, that’s the Depression-era entity that bought up old mortgages and issued new, more affordable ones in their stead, most people did not pay much attention. But I think it’s important to note that by the time the HOLC closed its books, that agency had turned a small profit and helped over a million people keep their homes. And this was 70 years ago. Our population has grown dramatically. So, obviously, if we did it right, we would be able to save a lot of homes. And I think if it is administered correctly it could be actually a net expenditure or even winner for the federal government.

Read the whole thing. It's great. It's what we should be doing.

Bottom line: Wall Street's treating Obama as if he were President right now (and that probably makes sense, though Constitutionally, I hate it). If Obama does not come out with a HOLC solution, and Harry, Nancy and the rest of 'em go for an RTC/RFC solution, we are even more totally fucked than we already are. For HOLC, we'll have to wait 'til 2012, because the other proposals just won't work.

NOTE Let's remember, too, that Hillary also, as a Senator from New York, also states as an explicit goal maintaining Manhattan as a financial center -- which is hard to do when the markets collapse. So, HOLC is not only good for the people, it saves the bankers' bacon as well. This is a classic fix for a runaway capitalist system in the FDR-mode, and shows the systems thinking that was a hallmark of the Hillary campaign (after it righted itself in February).

UPDATE As Glenn points out, and Barney Frank before him, the Paulson plan amounts to a financial dictatorship:

UPDATE: Here is the current draft for the latest plan. It's elegantly simple. The three key provisions: (1) The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets (so he can just transfer that amount to any corporations in exchange for their worthless or severely crippled "assets") [Sec. 6]; (2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme [Sec. 10]; and (3) best of all: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency" [Sec. 8].

Put another way, this authorizes Hank Paulson to transfer $700 billion of taxpayer money to private industry in his sole discretion, and nobody has the right or ability to review or challenge any decision he makes.

Really, it's just like Iraq, isn't it? And in Iraq, I've always thought it would have been simpler, cheaper, more humane, and far more effective simply to load C47s up with pallets of cash, and then airdrop them all over Iraq. Ditto here. Why are we giving infestment bankers the money, when they'll just send it offshore anyhow? Save people's homes, and they'll spend it right here.

UPDATE Krugman's dubious. As well he should be.

UPPDATE Atrios too. As well he should be. As a commenter there asks, shock doctrine, anyone?

UPDATE Krugman again: No deal.

UPDATE As Susie points out, Lord Eschaton is back at the top of his game. He asks a very good question:

It's unrealistic to imagine that I'd be able to really get enough honest information to have an informed opinion, but I spent some time thinking about what question all the Very Serious People should, at a minimum, want answered before the start cheering on pony plans. This is what I came up with:

What changed between Monday and Friday? What new information did you have at the end of the week that you did not have at the beginning of the week which caused you to go from $0 to $1 trillion?

And, no, tumbling stock prices or babble about "deteriorating credit conditions" don't count. Bernanke, Paulson, the SEC, the FDIC should have had access to a set of facts independent of day to day market turmoil. What actually changed over the week? If it was new information, what was it? If it was newly discovered information, why didn't you know it before?

Ponies? Will there be ponies?

No votes yet


Submitted by jawbone on

watch/listen to everything, but I haven't seen anything about it except on the blogs I read. (Are the Obama Nation blogs covering her proposal?)

Seems like the MCM can only look at X many options, and those need to come from Very Serious Maladministration People, the candidates, of selected R&D pols, mostly in leadership positions. I heard Dodd, Shelby, the two prez candidates, some Maladmin people--Clinton??

Oh, there was some video on local NYC TV about Clinton cancelling an appearance at a pro-Israel rally after Palin was also invited. No policy news on the reasons, however, since everyone knows the accepted policy.

*MCM--Mainstream Corporate Media (now, more that ever, the C part is so important to how the news is presented to the public)

leah's picture
Submitted by leah on

Happily, Roubini is someone who is being quoted and listened to.

Unhappily, the emergency nature of this and the closeness of the election is going to put pressure on everyone to find a quick answer, and remember, some members of congress are facing an election in early November.

Also a problem, the Republicans are unlikely to even want an independent agency of any kind, and some Democrats are talking about a new agency, but instead of mentioning the HOLC, they are using the example of the RTC. That doesn't necessarily mean that they mean that example to set the example of how such an agency would function; I don't know whether they do or don't. Some may be referencing RTC because most people remember that example.

But I completely agree with Lambert's and Roubini's analysis - and not doing that will be an even further disaster - it will lead to a severe, or a severer recession than whatever we are now facing.

So let me make a proposal.

This is so big that the liberal blogisphere needs to work together to get these ideas out in the open, and repeated and repeated. We need a populist vocabulary to do so - talking points the voters will understand - ones that make clear that there are two ways to do this - relieve the rich of their burdens using our tax money, and that means, for instance, our social security money, or to reduce liability through-out the economy, to understand that the troubles of the finance sector are undermining the fundamental health of the economy, which means not only recession, but a possible return, at the same time, of inflation - stagflation anyone - and that it will be possible to use this man-made economic disaster to give relief to the people who created and hand the bill to the rest of us, but that it is just as possible to provide debt relief through-out the economy, i.e., to the rest of us, the vast middle and working class.

But there is also a way not to do that.

Let me suggest that someone from Corrente who still has an account at Daily Kos do a diary there, inviting Kossocks to join a movement to get this message out - to other bloggers - and to solicit ideas on how we can start a movement that will take some action that will be noticed. Dito at Firedoglake. Anyone know Ian Welsh's email? He's there now, and he's terrific on the economy. And let's just email bloggers we know. Digby writes a column for Campaign For America's Future. Center For American Progress has been on this and has good policy position papers. Let's get MOVE-ON in on this.

And some of this should be aimed at the congress, at Hillary, to take leadership within the Senate, and most of all, at the Obama campaign. And maybe even at Bill Clinton - calls and letters to is office asking him to make a statement - or to use his influence with Obama. Clinton, remember, is close to guys like Robert Rubin, but I think Bill also understand the economics and would agree with Roubini.

How about whoever started that page at Obama's website about whatever. Let's solicit support from his grassroots. We need to let that campaign know we are watching what he does and we know enough not to be fooled.

I can tell you this much about the Obama campaign; he has set up in his remarks the issue - who gets relief - only the big guys, no good - main street has to get it too. He's been vague about what that means - and his campaign is going to be loath to commit, but he may have to in the Senate - this is one he can't get out of voting on. There are overwhelming reasons that it will ruin him if he goes for the RTC model.

Now here's another task for the blogisphere. It doesn't matter what it's called - the point is restructuring mortgages of actual homeowners, not just restructuring securatized debt - i.e., bundles of mortgages. So we need to keep track of what is being talked about and not let anyone get away with creating and new entity without defining it in the liberal progressive New Deal way.

My understanding is that what the Bush administration wants is to let the Bush Treasury handle the entire thing - and I think we know what they will do. And the hell of it is - that is what is best for everyone in congress, because they won't have to take a stand. We can't let that happen.

I have an account at Daily Kos, if anyone can help me get something up there.

Why don't we try and get P.B 2.0 started by getting the entire liberal blogisphere to get organized on the most important issue of our time - one that has the potential, at its worst, to crush the possibilities for liberal progressive reform for another decade or two, if the economic fundamentals of the this country are undermined in the same way our standing around the world has been. Let's help the forces of progressivism that are clearly emerging to act boldly, by acting boldly ourselves.

On the local level - local blogs around the country could be inviting homeowners to sign petitions and talk about their own predicament, whether its trying to fend of foreclosure, or watching the value of their houses fall below the money they still owe on their mortgage - and get that to Congress.

I'm completely serious about these proposals. This is all going to happen very fast. We don't have a lot of time.

Submitted by lambert on


I think an account at obama's site is the best idea

The equivalent idea for FISA got a lot of attention, and no doubt this would, too. Anyone want to do that today? Readers? Leah?

I can't, since I have to go paint caulk and paint some windows before it gets too cold. It would be an easy post to write, too -- copy this post, invert the snark into a plea for unity, and blogwhore, blogwhore, blogwhore.

Kos and the rest of 'em, IMNSHO, like so much else this year, "if it were going to happen, it would have already happened." In other words, they're totally focused on being Tier Two for the Obama campaign, and have no bandwidth to do this, although the Agonist and OpenLeft are possibilities.

However, I do have the slogan: Homes before banks!

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

tnjen's picture
Submitted by tnjen on

It's absolutely key that we control what gets out and put it in a real lingua franca. The blogs are great but if you really want to disseminate a message to main street we need to also target local message boards with our pitch.

PB 2.0 - Supplement the wonk!

Submitted by jawbone on

new soul of the Democratic Party wears pinstripes," as Kevin Phillips put it last night in saying he doesn't see the Dems trying FDR-type changes.

The Clintons may have been the last Big Dems who saw a way to form strong coalitions between the poor, working and lower middle classes, and the meritocracy. The NuDems seem to be, as has been noted during the prez primary, moving toward ignoring certain parts of the old Dem coalition.

But, since the meritocracy depends on a vibrant economy for many of its members to be in the meritocracy (by definition, having a good education and then getting paid well for work of some sort is how one gets into the meritocracy), that "class" may be losing some of its membership.

It's a hard rain a gonna fall....

(Had more in this post, but lost in a quick google search--that's going to be fixed in the new site, right? Right???)

inna's picture
Submitted by inna on

and thanks a lot for posting the whole thing, Lambert - it looks like one has to be a registered, paid user in order to have an access to full articles on Roubini's site.

btw, i'm pretty certain that Obama is going to go with HOLC, in fact i'm surprised he hasn't announced it yet.

Submitted by lambert on

Jeebus, does anybody think I paid? There are other service you can pay for, but plenty of great content is free. Go register now!

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

gyrfalcon's picture
Submitted by gyrfalcon on

FWIW, and I don't trust him, but he's chairman of the Senate Banking Committee, so maybe backup pressure on him might be worthwhile.

Look, this can't just be about what they call "illiquid debt" -- basically, a lot of bad mortgages or a lot of bad securitized debt that's out there. It also has to be about the cause of the problem.

Let me emphasize this again. And that is, Michael, you've heard me talk about it for two years. And again, the secretary of the Treasury and the chairman, Bernanke, said it, as well. At the root cause of this is the housing foreclosure crisis. Still is today. So we can't just talk about what we do about the effects of this on Wall Street. We also need to talk about its cause.

And at this very hour, 9,000 to 10,000 people every day in the country are losing their homes. So part of this plan has to also affect people out there who are in danger of losing their residences, as well as their jobs, their retirement accounts, the 401(k)s. If it's just about Wall Street, then we've got a problem. I'm hopeful it will not be, and my intention is, over the weekend, to at least try and include some of these other pieces so that we can truly come together this week and get the job done.

TreeHugger's picture
Submitted by TreeHugger on

gave a 10 min talk (interview)to Maria WhatsHerName on CNBC video 2 nights ago. He actually said Hillary's plan was the best but he did not describe it. The only "media" coverage of this interview was a storm of criticism over his tepid support of the Democratic ticket and for supporting Hillary's economic plan. Give a listen...he makes pauses while he is searching for the right words to use but no um's for a solid 10 minutes.

An important difference of today's proposed bailout from the Resolution Trust Corporation model, as Joe Noccera in today's NYT points out, is that we are not talking about buying the friggin' MORTGAGES, which have real quantifiable value...we are talking about buying the derivitized derivatives these snakes sold each other...that is, junk of the nth degree that nobody knows how to value! That's why there is such a mess in the first place.

Paul Krugman said at the end of a 6 minute interview this am that he doesn't know if the proposed bailout will work or not. (Sorry, too many clicks ago to remember where I listened to it.)

Submitted by lambert on

I'd be interested to hear it.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

leah's picture
Submitted by leah on almost equally to blame for the present cock-up. Didn't you hear him on Bob Rubin? Both Clintons have strong pin-stripped alliances. That is why many genuine progressives have a low opinion of them. I think those progressives are only seeing part of the picture.

But a post like yours is part of the problem. It's all hopeless - there's nothing we can do. There had been all kinds of grassroots protest and activity before Roosevelt took over in 32.

I notice that you didn't deal with my comment that in expressing his support for this new bailout, Obama has committed himself to the notion that it has to be a bailout of main street as well as Wall Street. Yes, it is entirely possible, even likely, perhaps, that under pressure, the Democrats might cave and pretend that what they agree to meets those qualifications. But the people who sit around doing nothing will have nothing to complain about.

Thanks, Valhalla, I saw Dodd's Hardball interview; he looked genuinely mad, and I think he meant what he said. Could some of us spare the time to contact his office by phone, and/or email to say thanks, and keep at it - and even mention an HOLC option; right now what the Bush administration has is a promissory note for a blank check for Hank Paulson, and as Atrios is pointing out, the consensus for that is being manufactured like crazy.

The one place where the liberal blogisphere is fairly united is on economic policy. We ought to be able to use that consensus to DO something.

Inna, I'm interested in your comment, assuming your weren't being ironic. Could you elaborate?

Submitted by lambert on

since IMNSHO that's a key factor in who's under the bus and who isn't. But this can be party invariant...

I think the key aspect is that the HOLC plan has been proven to work and by the time it wound down, actually made a profit. Even from the Stevensonian goo-goo perspective it's a winner.

And the Paulsen alternative is, in my mind, essentially fees for the boys who got us into this mess. Again, from the Stevensonian goo-goo perspective, that's a loser.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

Valhalla's picture
Submitted by Valhalla on

I think you meant someone else than me? I haven't commented on this thread (although I've been reading it closely!).

gyrfalcon's picture
Submitted by gyrfalcon on

to have been mistaken for Valhalla. I posted the Dodd thing, but it doesn't matter.

Submitted by lambert on

1. "Homes before banks" (turns out to be better for banks, too!)

2. "Financial dictatorship" (what the Rs are proposing, and what the Ds will sign off on, if we're not careful)

3. "Infestment bankers" (haw)

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

gyrfalcon's picture
Submitted by gyrfalcon on

Seriously. I'm not sure what you're getting at. If we're talking about "democracy" in terms of voting and will o' the people and all that, how do we vote on a bank bail-out plan? Our elected representatives are about to do that, but that's not enough?

I think you're trying to get at broader issues here, but the term "dictatorship" isn't doing that for me.

Submitted by lambert on

... giving $800 billion to one man to dispense as he sees fit with no accountability is not democratic.

And if they get away with this, it's hard to see how the guys who just looted $800 billion from the Treasury aren't running the show.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

gyrfalcon's picture
Submitted by gyrfalcon on

Seriously. What's the alternative? Who should be voting on these auction purchases one by one, and how long should they be allowed to deliberate?

No kidding. What on earth are you talking about? I freely admit that I'm ignorant enough about this stuff that I may be totally missing something that's obvious to you. If so, would you please explain it to me?

Did you read Drum's post today ( and the Wall Street Journal tick-tock he links to as background (

Do you understand that the entire U.S. financial system is on the verge of imminent collapse-- not in a matter of weeks or months but days and maybe hours come Monday?

Do you understand what the $880 billion is for? Do you understand about the auctions? Do you understand that credit has essentially shut down and that no business in this country can function without it? If you doubt the seriousness of the situation that's developed just in the last couple of days, please read the stuff in the links.

Maybe you know all this and are just using shorthand that's going totally over my head?

What's your alternative to dealing with the immediate, urgent, emergency situation we have right now other than throwing the money at the smartest guy in the room and telling him to do what he needs to do?

And yes, I totally, totally agree that this mess developed in the first place because of greed and cowardice and fucked ideas of social Darwinism and insane selfish "I've got mine, Jack" attitudes about regulation.

But here we are, and it has to be patched up now, immediately, or we're all going down the rathole, and as BIO rightly says, no amount of backyard gardening is going to protect us.

Submitted by lambert on

and I'm not sure I believe any of the players. I'm with Krugman: No deal.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

gyrfalcon's picture
Submitted by gyrfalcon on

Try reading up on what's been going on financially in the last week? It's totally impossible to evaluate this on the basis of politics and ideology alone.

Submitted by lambert on

and posting regularly -- and looking seriously at what well respected economists like Krugman and Roubini have to say. But thanks for your suggestion. Especially the idea that the administration isn't acting politically or ideologically. That's a humdinger.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

gyrfalcon's picture
Submitted by gyrfalcon on

As far as I can tell, Lambert, you've been reading up on opinion, not facts on the ground.

And once again, I'm impressed by the refusal of some folks here to actually read what was said and instead insert their own constructions.

Where, Oh, Lambert, did I say the adminstration wasn't acting politically or ideologically? I did say I thought Paulson personally was pretty demonstrably a straight-ahead guy on this particular crisis, given the way his proposal matches the facts of the meltdown as I understand them.

And as far as I can tell, the rest of the Bush administration is just getting the hell away from the whole mess and letting Paulson have a free hand because they're scared shitless and don't want any part of the consequences if he's wrong, or even if he's right. That alone should tell you something.

And I gotta say, this whole thing is a damn depressing demonstration of aspirations to PB 2.0, which as I always imagined it, was intended to be based on facts and not haka.

Submitted by lambert on

So far as I can tell, gyrfalcon, you've linked to exactly one article, from AP, which was nothing but opinion -- unless you wish to treat Paulson's statements as factual?

And it's not clear to me, in the hall of mirrors that is modern finance, how facts are to be distinguished from opinion.

This is an open platform. I suggest that your best course of action is not to complain that others do not live up to your expectations but to "be the change you seek" by posting the kind of post that you would prefer to see. You will learn something, educate others, and make yourself and the blog look good. Or you can choose not to invest the time. Your call.


UPDATE Actually, more than one. I lost the WSJ tick tock in the threads. Nevertheless, even the tick tock is being driven by fear, and that's being driven by.... What? We can't know.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

gyrfalcon's picture
Submitted by gyrfalcon on

Here are a couple of the things I've posted, some of them repeatedly, to no apparent effect:

I have no memory of an AP opinion piece, but if you say I posted one, I won't argue.

I've said over and over and over again that my understanding of this stuff is limited and may be entirely wrong and *begged* for factual corrections, and instead have gotten responses that amount to little more than All Bush Admin Bad, End Of Story.

I have attempted repeatedly to outline what I understand to be the objective facts of what's been happening in the financial system, and gotten zero counterargument or correction on my understanding of the facts.

I'm a lifelong pretty dim bulb on financial/economic issues and a lot of people here are obviously a hell of a lot smarter than I am and almost certainly much more capable of understanding this stuff. I continue to await enlightenment on where my understanding has been faulty.

I've raised substantive questions on Krugman's post and the idea that HOLC is a reasonable substitute for Paulson's plan to deal with the immediate crisis and that the money market "bail-out" has to do with the freezing up of capital and gotten nothing more than the occasional flip dismissal in response. I'd be delighted to find out I've gone astray because I DON'T LIKE CAPITALISTS AT ALL and resent like hell the fact that I'm in their power and have to rely on even a relatively benign one like Paulson to save my neck.

I've done all I can do here to introduce a substantive discussion of the realities of the situation, and if nobody wants to deal with it, I give up.

And my God, if you can seriously say there's no difference between fact and opinion in talking about the financial system, I have literally no words for you at all.

There is a point at which healthy skepticism becomes malignant cynicism.

From the WSJ piece linked above:

n three days, the Fed had pumped hundreds of billions of additional cash into the financial system. But instead of calming markets and helping to suppress interest rates, short-term interest rates had gone haywire. Most strikingly to some Fed staff, its own federal-funds rate, an interbank lending rate managed directly by the central bank, repeatedly shot up in the morning as banks sat on cash. The financial system was behaving like a patient losing blood pressure.
Bracing for Redemptions

Fed staff discovered that one reason the federal-funds rate was behaving so abnormally was because money-market funds were building up cash in preparation for redemptions, leaving hoards of cash at their banks that the banks wouldn't invest.

U.S. depositary institutions on average held excess reserves of $90 billion each day this week, estimates Lou Crandall, chief economist at Wrightson ICAP. This is cash the banks hold on the sidelines that does not earn any interest. That compares with an average of $2 billion, he says, noting he estimates banks held $190 billion in excess cash on Thursday, as they feared they'd have to meet many obligations at the same time.

Through Wednesday, money-market fund investors -- including institutional investors such as corporate treasurers, pension funds and sovereign wealth funds -- pulled out a record $144.5 billion, according to AMG Data Services. The industry had $7.1 billion in redemptions the week before.

Without these funds' participation, the $1.7 trillion commercial-paper market, which finances automakers' lending arms or banks credit-card units, faced higher costs. The commercial-paper market shrank by $52.1 billion in the week ended Wednesday, according to data from the Federal Reserve, the largest weekly decline since December.

Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," says Paul Schott Stevens, president of the Investment Company Institute mutual-fund trade group.

Submitted by lambert on

0. "All Bush Admin Bad, End Of Story." Really? I guess if you don't see a repeated pattern of behavior where a crisis (manufactured certainly in the case of WMD) is followed by a demand for unaccountable authority and then followed by a massive fail (in public terms) and an orgy of looting, then there's not a lot I can do for you. I'm arguing we're looking at a modus operandi here; you characterize that as "Bush Admin Bad." Fine.

1. FWIW, the number Krugman follows is the TED spread, which, so far as I understand it, measures the risk of lending to banks; i.e., if "opinion" on Wall Street is that banks are going belly up, the TED spread increases.

2. Yes, the situation is awful. But--

3. Nothing in what I read in your comment above shows me why giving Paulson unfettered authority over $800 billion is good policy, and that's the point at issue in this thread.

4. On fact and opinion in financial systems, read Soros. In a complex feed-forward system, even opinions, based as they are on models of future events, affect prices in the here and now, becoming facts. Sorry you have "no words"; what can I say?

Shock doctrine, pure and simple. Give me $800 billion or I shoot this market.

UPDATE On financial dictatorship, see here. Why would anybody invest in a market not governed by the rule of law? That $800 billion may help for a few months, but in the long run, it's deadly to us.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

Submitted by lambert on

We are truly doomed. It's not going to work. HOLC would work. That is the alternative you were asking for.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

tnjen's picture
Submitted by tnjen on

...on being democrats, haven't they? The only reason I can see for this is if we truly are going to completely collapse on Monday without it. If that's true, we're just slowing the fall with this plan. After that, we're going to have to do it all over again later and it may end up being even worse (if such a thing is possible).

PB 2.0 - Supplement the wonk!

gyrfalcon's picture
Submitted by gyrfalcon on

the crisis we have at hand, right now, that requires immediate emergency measures. Did I say right now? It needs to be *right now*, not even sometime next week. Right now.

(banging head on desk)

Submitted by lambert on

This is meant to make you bang your head on the desk.

So, if Paulson wants to be emperor, the answer to "And we get?" should be HOLC.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

Swift Loris's picture
Submitted by Swift Loris on

that it isn't an emergency, that Paulson et al. are lying about the urgency of forestalling a major collapse? If so, how do you know?

Submitted by lambert on

Authorization to Use Financial Force == Authorization to Use Military Force.

With this administration, the burden of proof is on you to prove trustworthiness, not on me to show untrustworthiness.

Whoever's trying to force Paulson's hand -- assuming this isn't just another Village scammer looting the Treasury -- needs to be told "No" by Congress and the American people. If the abcess is going to burst, then, let it be now, because it's only going to get worse after Paulson pisses away $800 billion and there's nothing to show for it. The price, as I said, should be HOLC.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

gyrfalcon's picture
Submitted by gyrfalcon on

Don't be silly.

I buy totally that the "Shock Doctrine" may well have been set up as a trap long ago, but *that doesn't change* the realities of the situation at hand.

C'mon, Lambert. If you're willing to have the whole structure collapse and the economy grind to a halt and the widespread suffering that would result in order to prove a point, please say so.

I wouldn't agree, maybe because I'm too old, but it's a legitimate position to take if you genuinely think a more just system would be certain to rise from the ashes.

If Congressional Dems can pry HOLC or the like out of the GOP without argument as the price, I'm all for it. But I'm NOT willing to gamble the livelihoods of however many Americans -- and my own -- on a game of chicken.

Submitted by lambert on

... a single man with $800 billion to spend and no accountability but an emperor?

You're already in a game of chicken -- and what Krugman and Roubini are telling you is that you're going to lose anyhow, because the $800 billion will help some bankers, but will not help you.

Nice petitio elenchi on "willing to have the whole structure collapse," though. Somehow, I don't think Krugman wants that to happen...

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

tnjen's picture
Submitted by tnjen on

...for the current proposal then they can (if they chose) utilize them for an HOLC. Yes, we need something now but what we don't need is a blank check that only serves to slow the inevitable and compound the overall cost.

PB 2.0 - Supplement the wonk!

Submitted by jawbone on

yellow machine!

OK, actual comment: Bernhard at Moon of Alabama is aghast at the proposal put forth by Paulson. He points out using this authorization will raise the national debt to dizzying heights.

Paulson also wants to lift the US national debt ceiling to $11,315,000,000,000.00. (When Bush took office, the U.S. federal debt was some $5.6 trillion and on a downtrend.) The U.S. GDP is roughly 13.5 trillion so the US government debt at that ceiling will be some 83% of US GDP. In international ranking that puts the U.S. debt to GDP ratio somewhere between Cote d'Ivoire and Sri Lanka. Still exclude[d] from that calculation are several trillions of liabilities of Fannie & Freddie and AIG the U.S. government recently took over.

Japan is of course still worse off with a debt to GDP ratio of nearly 200%. But most of Japan's debt is held at home as Japan is a nation of savers and has a positive currency account. It exports more than it imports. Over the last years the U.S. has imported a lot more than it exported and needs some $500 billion per year from foreigners to finance that habit. The U.S. national saving rate is somewhere near zero. It therefore needs foreigners to lend the money of any deficit.

Now Paulson wants $700 billion in emergency finance from where?

Who in this world can and will lend $700 billion for an emergency plan when the total lending to the U.S. in one year is only about $500 billion?

Did Paulson talk with China, Russia and the Saudis about this?

With this new debt and debt to GDP ratio the U.S. does no longer deserve an AAA rating. That will have to be cut down two or three notches.

Any future lenders will therefore ask for higher interest rates. Will they have additional conditions on top of those?

OMG--When the Bushies demand speed, and Congress, whether D or R controlled, goes along with that, we end of with terrible and sometimes terrifying legislation. OMG, OMG.. Why the hell weren't the Dems holding hearings on this kind of stuff? Why so unprepared? Hoping BushCo would manage to kick the can down the road until after the election? Well, reality bites. Hard.

China wasn't permitted to purchase Unical (correct name?). I don't think they will take that kind of treatment, now that they own US almost lock, stock, and barrel. Well, Russia owns us as well; as do many ME oil despots. Oh, my.

But this proposal simply cannot stand--Who among the Dems has the standing and balls to handle this kind of BushCo stare down?

Can we have Hillary as our nominee, please? If only Obama would decide he needs to spend more time with his family--and gaining exerience and expertise--and just goes back to the Senate.

I don't see either McCain or Obama as capable of handling this kind of mess. We are so fucked.

hobson's picture
Submitted by hobson on

It is my understanding that one reason foreigners will finance this plan is that they are also into this mortgage garbage. They will be allowed to trade the garbage for US treasuries putting taxpayers on a further hook.

amberglow's picture
Submitted by amberglow on

"Any member of Congress who looks at the plan to give Hank unchecked power to transfer $700 billion from the Treasury to his friends' companies and has any reaction other than "You've got to be f*cking kidding me" does not deserve to hold office."

Submitted by Paul_Lukasiak on

increased taxes on capital gains, and higher taxes on upper income people -- and possibly a "temporary" 'wealth tax'.

Basically, the people who have the most to gain from this bailout are those who would suffer the most because of capital gains losses if the market collapses. And we need to have a mechanism to pay for these bailouts.

Oh, and one thing that REALLY pisses me off is the idea of the Fed guaranteeing Money Market Funds. The reason I don't invest in money markets, despite their higher return, is because they aren't insured by the FDIC. So, now that the funds are in trouble, we are going to remove the risk involved in putting your money into those funds? RE-FUCKING-DICULOUS!

gyrfalcon's picture
Submitted by gyrfalcon on

With respect, Paul, I think you don't understand the reason for this. According to the WSJ article linked above, the money market funds have dropped so far and have been hit so hard by people wanting to withdraw their money in panic that they've started hoarding money (so have the banks and the investment firms and every other financial institution in this country) so they can pay off the withdrawals.

That means there's NO MONEY circulating in the financial system as of a couple days ago.

No kidding, this is not a matter of saving the financial fannies of fat cats, or the gazillions of thin cats, ordinary folks with a bit of retirement savings in those funds who are no less deserving of a little protection than the folks with the bad mortgages we're all crying over.

That those investments will be partially protected is, yes, a side effect. But that's not why it has to be done.

Submitted by Paul_Lukasiak on

...and what the money market funds should do is declare bankruptcy, making it impossible to withdraw funds until this whole thing shakes out.

Its NOT guaranteed....and if there is a need for liquidity, the Fed can provide it.

Submitted by jawbone on

I thought your suggestions were terrific, then went to do RL stuff. Taking a break right now.

I took the Phillip's criticism of Bill Clinton's administration and Rubin's actions into account. I do believe Bill thought he could forge a coalition of Old Dems and the new meritocracy, some of whom were the new monied class. He also was fighting the perception, long fostered by Reagan and Bush I, that Dems are bad for business, anti-business. He worked hard to try to create conditions which would permit everyone to do better. He felt it could be win-win. And there was job growth and actual income increases for groups which hadn't seen that in many years (Hello, St. Ronnie!). Unfortunately, the MCM wanted to have beer with that dry drunk instead of the steady, experienced wonk.

And, yes, I am pessimistic about this mess. BushCo manages to make mincemeat out of Dems when they come to Congress with an emergency measure that must be legislated RIGHT NOW! We've had terrible results from such laws, and I fear we will have more bad, bad results.

Plus, I don't have great faith in Obama--what will he actually do? What are his basic principles? OK, you know the drill.

And back to trying to make order out of disorder (plus find tarps to cover all the junk I won't get back into the basement by nightfall...).

TreeHugger's picture
Submitted by TreeHugger on

Hey Lambert, sorry for the delayed response: I've been outside for a couple of hours mating a new frontporch light fixture to an ancient junction box that defied being fit with any of the so-called universal brackets. Finally ended up drilling into the siding to attach a mounting bracket and guessed right on which of the ancient paint encrusted wires was black and the whole shebang now works. What I like is that it is a compact fluorescent that automatically comes on at dusk & off at dawn. First time I've seen a low cost fluorescent version of this...$40 at the OTHER home improvement warehouse place.

But I digress. I googled video+billclinton+maria+nbc to get the url for the video I mentioned earlier:

Now, can someone briefly explain how to copy/paste an address that is in my browser (IE) search window? I keep having to write these down and type them in. Big Thank You.

amberglow's picture
Submitted by amberglow on

click so the cursor is in the address bar on top where the website's address is.

then highlight the whole address, and do COPY.

then go to the comment box here and hit PASTE.

Submitted by lambert on


Here’s the thing: historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

The last blank check we handed the Bush administration was the AUMF. How's that working out?

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

gyrfalcon's picture
Submitted by gyrfalcon on

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

Far be it from me to disagree with Krugman, but this doesn't make sense to me. Maybe he wrote it before the details became public?

The rationale, as I understand it, is not to "convince creditors of troubled institutions that everything's OK," as he says, but to enable creditors or investors or whoever deals wiht them to *have some idea what the heck they are actually worth.* Right now, nobody knows what anybody who deals in this stuff is worth because these goddamn "securitized" craploads no longer have any established value. They might be worth a lot, they might be worth nothing at all.

It's to establish a degree of certainty not in the health of the institutions but in the ability to evaluate the health of those institutions, good or bad, by removing the unvaluable crap from the system and seeing what's left.

The whole point is that there IS NO market price for this crap. It can't be valued even approximately anymore. It's not worthless, but there's no way to establish how much above worthless it is.

The auction Treasury is proposing will establish at least some kind of objective value-- how much is it worth it to these financial institutions to lose in order to get this crap off their books?

The institutions with the really sucky weirdo "securitized" assets are going to have to pay the price for it because, as I understand it, the gummint will only pay them an auction price, which will be way, way below what they paid for them in the first place.

THe idea, as I understand it, is to get the stinking garbage out of the system entirely, and then the financial institutions can sink or swim on whatever else is left of their balance sheets. The ones that haven't got much of anything left are going to go down. The rest have the hope of struggling back into business on a more honest basis.

Submitted by lambert on

Here it is (and yes, it was available to Krugman when he posted, it was out at Calculated Risk last night).

I'm all for transparency and auctions and marking to market, but from my reading of the text of the law, none of that is mandated at all.

[ ] Very tepidly voting for Obama [ ] ?????. [ ] Any mullah-sucking billionaire-teabagging torture-loving pus-encrusted spawn of Cthulhu, bless his (R) heart.

Swift Loris's picture
Submitted by Swift Loris on

It sure isn't spelled out in the text of the leaked draft of the act. Far as I can tell, it doesn't say anything about how what the gummint pays for the garbage will be determined.