Cardiac Arrest

by hilzoy

Nouriel Roubini is more than usually terrifying today:

"It is now clear that the US financial system -- and now even the system of financing of the corporate sector -- is now in cardiac arrest and at a risk of a systemic financial meltdown. I don't use these words lightly but at this point we have reached the final 12th step of my February paper on "The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster" (...)

So we are now facing:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely."

I can only hope he's wrong.

Comments

[DaveinHackensack]

There some who argue that this 'cardiac arrest' is largely confined to Wall Street. See, for example, "Is the Credit Crisis hurting the Real Economy"?

[ThatLeftTurnInABQ]

hilzoy,

I'm really not quite sure what to make of this.

On the one hand Roubini has a very impressive track record thus far on calling out systemic risks and making predictions which have borne fruit, so anything coming from rgemonitor is worth paying attention to.

On the other hand he has attacted a great deal of favorable attention by saying things which at the time were perceived to be well outside the mainstream (but which were proved by events to be prescient), so much so that mainstream opinion has shifted very much in Roubini's direction - the mountain has come to the prophet rather than the other way around, so to speak.

But this makes me wonder if Roubini is not happy with being inside the Overton Window, and is now making even more dramatic predictions in order to get back on the outside again.

It is worth noting that Yves Smith had another intersting post today pointing out that there are several auctions scheduled in October for settling CDS and participants may be hoarding cash in preparation for these events. So it is possible that this is a temporary event lasting a couple of weeks, if we can hang on that long without any additional systemic ruptures.

[now_what]

I can only hope he's wrong.

Well, he has predicted 137 of the last 2 recessions. With a track record like that...

I'm a bitter pessimist by nature but people are totally panicking now. We pessimists have seen this crisis coming for years. The time to panic is long past, the damage is done. This is the time to be greedy. Go look for a cheap stock to buy.

[ThatLeftTurnInABQ]

oops, I forgot the link:
Another reason for cash hoarding

There some who argue that this 'cardiac arrest' is largely confined to Wall Street

I think the point to watch out for is whether non-financial firms are able to roll over their short term debt or whether they are being frozen out along with the Wall St. firms. I've read conflicting stories about this over the last week - earlier in the week stories about Microsoft and other non-financials getting good rates for their CP were common, but now there seem to be a glut of stories about the market for CP freezing up for everybody. I can't tell if this is due to a sudden shift in conditions or is due to a shift in what stories the press is choosing to give emphasis to.

[Gary Farber]

Has ObWi considered going public?

[Don the libertarian Democrat]

"First, this is the worst housing recession in US history and there is no sign it will bottom
out any time soon. At this point it is clear that US home prices will fall between 20% and
30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of
household wealth."

I'm not sure how it's wiped out. Surely some people will remain in their houses and will someday reap the benefit of selling their houses for more than they bought them. As well, some of these housing markets will someday recover. Finally, when the Price-Rent Ration declines enough, although we still seem to be on the high side, it will start making sense again for people to purchase rather than rent, although the mortgage market will have something to say about that. My only point is that someone more knowledgeable than me should go over some of the assumptions in this article.

[efgoldman]

A couple of points in favor of pessimism:

Massachusetts can't get routine refinancing, borrows half as much at 3 times the interest rate:
http://www.bankinvestmentconsultant.com/asset/article/711441/massachusetts-pinched.html?pg=

California may have to try to borrow from Uncle Sam for routine refinancing:
http://www.nytimes.com/2008/10/04/us/04calif.html?bl&ex=1223265600&en=80352c05b6d4b135&ei=5087%0A

Maine couldn't get routine road bonds sold:
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/03/AR2008100303486.html?hpid=topnews

the national news broadcasts have been full of human-interest stories about small businesses which can't get routine borrowing done, and have to cut production and lay off workers *even though their businesses have been otherwise making it.*

I can't speak to Roubini's predictive powers, and I'm certainly no economist (nor do I play one on TV) but right now, at least, we are in a VERY bad place. 1930's? Can't say, I wasn't born yet; I've read history, and listened to my parents, grandparents, aunts and uncles.

Thank goodness I have a decent conventional mortgage and a good job at a very good company. But it could all fall apart very quickly. I'm 63, which means if I lose my job I likely will never find another - not a real job. It also means, if I hadn't already decided to work to age 70, I'd probably be forced to decide now - there's no way my 401k is going to recover in two years.

Be afraid. Be very afraid.

[hilzoy]

TLT: I share your question about Roubini. As best an outsider and non-expert can tell, he's very smart, and very good. But reading him always reminds me of the kind of questions I sometimes had to answer when I was working at the battered women's shelter, and had to decide whether someone was crazy, over the phone. (If so, I couldn't admit her: we didn't have the training to deal with that, and the usual result of admitting someone who was really psychotic was that all the other women would get terrified and leave.)

The problem was: how do you tell a normal person in circumstances that would make anyone sound crazy from someone who genuinely is crazy? It was of course totally understandable for e.g. a woman whose husband had just tried to kill her to be in pretty bad psychological shape; how to distinguish, over the phone, that utterly normal bad shape from real craziness? It was tough.

Likewise with Roubini: it makes you sound alarmist when, as Tenet would say, your hair is on fire. But that can be exactly the right, sane, sober response to have, under certain circumstances. And trying to tease that apart from anything else is tough.

[joel hanes]

I'm not sure how [ between $4 trillion and $6 trillion of
household wealth is ] wiped out.

Because housing prices aren't going to recover in many of the most inflated markets. Ever. They could only "recover" if incomes increased to match the bubble price, which now seems nigh-impossible -- hence the crash.

Median household incomes would have had to double or triple to over the last twenty years to have kept up with the notional price of housing in the hottest markets. Instead, incomes went sideways, as all the wealth from the economy's productivity increase went to the top tenth of a percent of households.

In a recession, incomes aren't going to go up soon. Since incomes aren't going to go up, housing prices will regress to levels affordable at existing incomes, and will stay there until there _is_ a substantial and broad-based rise in incomes.

This is why it's important to be able to adjust loan principals downward.

[ken]

Nouriel Roubini is more than usually terrifying today
--------------

Actually, and it was bound to come to this, Roubini is more than usually out of touch today.

First: the insured deposits have been increase to 250,000 from 100,000. This should head off the silent run on uninsured deposits he is afraid of.

Second: Nonbank mortgage lenders come and go with any boom and bust cycly so no big deal. We lose three hundred now, we'll gain 600 the next go round. It happens every time.

Bear is now part of JPM and JPM has UST gaurantees up to 39 billion, so it is ok.

Merrill is now part of BAC and BAC has one of the largest insured deposit base for funding in the world. So it is ok.

Goldman has put together a deal for funding with Bershire Hathaway, so it is ok.

Lehman is in bancrupcy and creditors burned. This will not be forgotten. Perhaps one of Paulsons few mistakes so far.

Most Money Market fund deposits are now gauranteed by the UST, so they are ok.

Refinancing remains a problem for private equity firms and will no doubt cause quite a few good companies to be sold at fire sale prices causing great loss to private investors. But they are not a very large part of the overall economy, so not a big problem.

Hedge funds will lose billions in investor deposits which will no doubt find a home in USTs for a while just when needed most by UST for funding the TARP. So this is actually a good thing.

Three: He's correct about the problem with corporations not being able to get loans. I read where bank capital has soared to the point there is something like 80 some billion is excess capital in US commercial banks. They are just not lending.

I believe that the Paulson plan when put into operation will help shake some of the lending lose once again.

It didn't help that we were approaching the end of the quarter when the crisis hit and the Paulson plan was being debated. This caused banks to build their balance sheets for quarter end reporting and take a wait and see attitude about the TARP. If it passed it would mean taking one course of action but if it failed it meant taking a completely different course of action.

Roubini has been calling for the sky to fall for such a long time that he just may not be able to see that concrete actions are being taken to mitigate or head off the problems.

We are still in danger but it need not be as presented in as one sided a negative manner as Roubini does.

[Don the libertarian Democrat]

About housing prices, you're assuming that all of the increase was a bubble effect, which has now been lost. I don't. Some of the price increases in the Bay Area, for example, have to do with demographics and desirability of location for reasons of, say, commuting. I don't think that, as of now, anyone knows how much of the price increases will hold up. But I understand your point, and appreciate it. Tell me if I'm still misunderstanding you.

[Don the libertarian Democrat]

"We know that if the regulation is left in place, housing will bubble again — California and Hawaii housing has bubbled and crashed three times since the 1970s. We also know, from research by Harvard economist Edward Glaeser, that each successive bubble makes housing more unaffordable than ever before — and thus leaves the economy more vulnerable to the inevitable deflation. This is because when prices decline, they only fall about a third of their increase, relative to “normal” housing, before bottoming out."

http://www.cato-at-liberty.org/2008/09/22/blame-urban-planning/#more-4515

I also assume that regulation might get worse.

[ThatLeftTurnInABQ]

My only point is that someone more knowledgeable than me should go over some of the assumptions in this article.

I won't claim to be better informed, but here are some links to one of the more readable (IMHO) housing/econ blogs I've found which may help in evaluating those claims:

Speculation regarding future housing price/rent ratios

Regional variations in the housing price bubble

Looming problems in Commercial Real Estate (CRE)

At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion

I think the dollar loss estimate here comes from the roughly 20 trillion dollar value of US housing multiplied by the estimated draw down in value as a percentage of peak prices. Several assumptions are packaged into this estimate, which hopefully will prove to be wrong:

1 - That price declines will average 25-30 for the nation in aggregate (which would probably require 50% or larger declines in some markets).

2 - That we must count losses sustained on paper by homeowners who own their homes outright (or owe small amounts only) and not just lost value suffered by people with high debt / equity ratios.

of household wealth.

Here is a third assumption: the losses due to the decline in home values are at the present time losses on paper (which will be converted into real losses as soon as the person or institution in question has to sell the house or mortgage back security they hold) for two groups: people who had non-trivial amounts of equity in their homes, and lenders who provided the funds to purchase those now over-valued homes and who will be short the income stream they expected to receive if the homeowners default on their mortgages. The latter losses have passed to banks and other investors via securitization of those mortgage pools.

These latter losses will be converted into a loss of "household wealth" (a loss of wealth on the part of the people who live in these homes rather than just whoever is left holding the bag on the mortgage backed securities tied to those homes) if those homeowners are forced to pay their mortgage debt in full (rather than defaulting) and prices do not rise back to "bubble levels" for a generation or more.

This is because these unfortunate homeowners will have effectively overpaid for an asset in this scenario, and will have lost wealth by the amount they overpaid.

The other scenario is that all of us collectively may lose that amount of household wealth via reduced purchasing power if these debts are driven down to their pre-bubble baseline via inflation - basically defaulting on our debt via currency devaluation.

IMHO, YMMV, etc.

About housing prices, you're assuming that all of the increase was a bubble effect, which has now been lost. I don't. Some of the price increases in the Bay Area, for example, have to do with demographics and desirability of location for reasons of, say, commuting.

I just caught this on preview. This idea has been discussed and partially debunked on the caclulatedrisk blog I linked to above. The problem is that this is exactly what the people who are stuck holding the tulips when the music stops always say.

I think if you are talking about an area where price/income ratios are above their historic trendlines, then it doesn't look good, regardless of commutes or how desirable the area may seem.

[ThatLeftTurnInABQ]

Oops, typo above:

Speculation regarding future housing price/rent ratios

That should read price/income ratios.

[felix culpa]

I’m confluent with now_what here.
In my late adolescence I was assured The times they are a-changin’ and I’ve been expecting some kind of justice that long, as many of us have.

The purloined tell, though, just begs for some little clueless kid watching the parade to speak up.
The fact that the ransom note was delivered by Wall Street’s Official Viceroy, well, that’s just what it is; the tell is the utter outrageousness of the demand, the carte-blanche-behind-a-curtain covering a closed door to a den of, well, thieves for sure, but: What the Hell are they up to? Have the captains of finance decided that a bit of terrorism would shake the unripe fruit of democracy into their laps? Or maybe since they’re so awesomely avaricious they’re actually all in the pocket of, well, sorry, this is where I lose the thread, so to call it.
But what strikes me blind is these guys; it’s not that no one knew or they lacked inside knowledge or that if it were following a script a couple of loose beans would get spilled or that they’re smart and informed enough to have worked out two dozen contingency plans; but THIS is a PLAN?

The point actually being that everything on the Finance and political stages feels scripted (by Ionesco or Beckett), a courtly back-and-forth miming of surprise, and solemn invocations; while everything reported taking place in the machinery of commerce speaks of asphyxiation.

The point in fact really actually being, um, how really real in fact is whatever we’re in for?
The pursuit of the answer is a heroic one, but most of us will be busy enough puzzling a path to sustenance, what with one thing and another.

Excelsior! (Hey, buddy...)

[Don the libertarian Democrat]

Thank You.

[J. Michael Neal]

Goldman has put together a deal for funding with Bershire Hathaway, so it is ok.

No. You are completely misreading what happened. Goldman got funding from Berkshire Hathaway because it was desperate. Take a look of the terms Berkshire got; Buffet couldn't have done better holding a gun to Goldman's head. You can't even say that, since Buffet thinks Goldman is in good enough shape to invest in, we should all be confident in it. He is protected six ways from Sunday, and makes out just fine if Goldman goes belly up. There is nothing about this deal that should be used as evidence that Goldman is "fine".

[ken]

J. Michael Neal, Sure Berkshire got a good deal, but since the public market for new preferred shares was killed when Paulson denied the dividend payments for FRE and FNM a private deal was the only option.

Bershire's 5B investment made it possible for GS to raise another 5B by selling common stock in an oversubscribed issue.

Plus GS conversion to a commercial bank gives them the chance to gain long term funding with cheap insured deposits.

Besides, GS has not posted any quarterly losses since the crisis began. They needed the money, sure, and they got it from a guy who only invests money in companies he believes in.

All and all I think GS will be ok.

[felix culpa]

Don; you’re ever so welcome, but please, don’t thank me. (Unless I mistake your intended precedent; otherwise feel free.)
It was them guys as did whatever the Hell it was they did, handbaskets and all; which {whatever etc.) we’ll only begin to grasp in vague outline around, say, Christmas.

It’s a Wonderful Life, hey?

[ThatLeftTurnInABQ]

OK, this is too good not to share:

Strategery Capital Management LLC

"The hedge fund of the people."

h/t to Nemo of calculatedrisk comments fame.

[OCSteve]

I’m really not sure how much of this is media driven right now.

This is more information than I would normally share, but in the event it makes someone feel even a little bit better…

We intentionally set a low limit on our credit card. Last week, we wanted to make a large purchase when the card was already maxed out. I called the bank and got a $1000 bump in the 5 minutes I was on the phone.

I’m looking to buy real estate right now. I’ve never actually called the top or the bottom of a market. But I have to think that there is a bottom coming soon. So I’m looking at foreclosed properties. CD rates suck right now. If banks need cash so bad, why is it that 3.6% is the best rate I can get? Might as well put that cash into a down payment. I’ve been shopping a mortgage for the last few weeks. I’m pre-approved – 30 year fixed at under 7%. Under 6.5% if I want to pay points. And there was no hesitation at all with the lenders I talked to.

Now, we have a great credit rating. I have no doubt that other folks with a bad rating are having trouble with credit.

I’m scared spit less reading this stuff. But so far, I’m not seeing the effect out here in the meatworld. I’m going to do my part to help the economy by buying a house real soon.

Take that for what it’s worth. (Which is nothing at all really, being anecdotal and posted on the intertubes…)

[bedtimeforbonzo]

Bill Maher put the $840 billion bailout package into perspective last night.

Maher said the banks are using our money -- taxpayer money -- to bail them out, so they can turn around and lend us money. At interest.

Wall Street will make money again. It's those of us in the middle class that I'm not sure about.

[bedtimeforbonzo]

OCSteve: "I called the bank and got a $1000 bump in the 5 minutes I was on the phone."

I knew I was maxed out when faced with a similar situation a few months ago -- for the first time in my life -- the credit card rep on the other end of the line came back with a resounding, "No."

[wonkie]

OCSteve, my ex-uncle in law became a multimillionaire because he had the resources to by property during the early years of the Depression and he was young enough to just sit around and wait years and years for the property to become valuable again. He bought land, not housees.

I'm not in that position, but if I was a couple decades younger, then buying proerty probvably would be the very smart thing to do.

I probably jumped into CD's too soon(I had the same thought--why is interest so low when credit is supposed to be tight?). but that money is my retirement. I will need it very badly in about five years. I got out of the stock market about sixmonths ago out of fear and I'm glad now. I just don't have the know how to play with that money.

[redwood]

my criticism is with Roubini's writing. First of all, I find it tiresome to read the Forbes informed counter statistics. It would take hours to properly line even one up against Roubini's and shake out the truth.

But what is it about so many Economists that instead of just telling us how the stat hits the ground they must rely on some silly metaphor to make their points?

and hilzoy, while I think it is good of you to volunteer at battered women's shelters, I don't think that metaphor beats a personal story of how the credit crunch impacts you or someone you know.

without one, to extend your metaphor, you really don't have anyone telephoning shelter.

the nytimes econ reporters have been doing a great job on informing us about the meaning of the financial crisis.

that's the way to talk about economics: make it real or leave it at an esoteric discussion about stats.

[ThatLeftTurnInABQ]

OCSteve,

Best wishes and good luck with your new home. I hope you enjoy it for many years regardless of how it performs as an investment, and if you've "called the bottom" in your local market then so much the better.

redwood,

I don't agree with this statement 100%

the nytimes econ reporters have been doing a great job on informing us about the meaning of the financial crisis.

There have been some very good articles in the NYT, but they have also been very late in waking up to notice aspects of this recession which have been obvious for some time. For example the story regarding solvency and liquidity problems state and local govt.'s are suffering due to declining tax revenue and the failure of the muni bond market - a story which was recently featured in the TImes - that story is approximately a year old now, and has been an acute problem since the spring of this year. It is only now receiving prominent attention in the mainstream press including the NYT.

Is it really a "great job informing" when they are running 6-12 months behind events? And when the events in question were actively being reported and commented on and having their larger significance pointed out by others, how much excuse do the NYT reporters and editors have for missing the story?

I think there is great value in retrospective and forensic reporting, but it would also be nice to read about what matters this month, umm, this month or next month, rather than say next April or next August. There are a number of things which distinguish great reporting from merely good reporting, and IMHO this is one of them.

[EL]

Neither Roubini nor any other economist has a good grip on where we may be headed. Short run predictions about jobs and housing values are relatively easy to make because the present tends are clear. Krugman has stated on several occasions why we can only guess about where the economy will spin because we have entered a realm of barely understood forces interacting in barely understood ways. Any analysis must take into account so many intertwined, interacting, unstable forces that no one, I repeat no one, can foresee with any clarity where it will head over the next 12-18 months. Numerous conflicting outcomes will be predicted with great conviction and support from past events. Chaos theory has settled into each of our lives. When events have unfolded, we will all witness Leszek Kolakowski's Law of the Infinite Cornucopia. Whatever happens a set of facts and causes will be constructed to explain it. And that constructed explanation will make the wise men wise.

[bedtimeforbonzo]

My problem with the reporting on the current economic crisis -- and the lack of leadership from the White House and Congress on it -- is the lack of a long view.

If my co-workers are any indication, the average person may think we have turned some sort of corner since the bailout bill just started.

I think a lot of people are expecting immediate returns and will be in for a bitter disappointment.

[ThatLeftTurnInABQ]

I think a lot of people are expecting immediate returns

Either the reporting has been defective or people aren't paying attention if they think this, IMHO. My expectation for the results of the bailout bill are that at best we get a result no worse than what we have now - the point of the bill is to prevent a far worse systemic crash of the credit markets along the lines of 1930-1933. I don't think it will do much to stimulate the manufacturing, agricultural or non-financial service economy.

So I expect it will do nothing to improve our situation with respect to job losses, declining personal spending, or consumers over-extended on their credit cards, auto loans and other non-mortgage debt, nor will it do anything to mitigate the decline of Commercial Real Estate due to overbuilding.

That last one (CRE) is a good example of one of those stories you will read about in the NYT sometime next year. It has been getting attention on the econ blogs for at least 6 months now (e.g., Architectural firm billings are a leading indicator), so by about March or so the MSM will be ready to start paying attention to it.

[mikkel]

Yes Goldman is in great shape, that's why they would have died if AIG had gone under.

Also Hilzoy:
The problems that Roubini is afraid of were exacerbated by the bailout bill. The TED spread increasing even after its passage shows that the "hope" plan didn't seem to work.

That bill made no sense at all. It didn't address long term problems and perhaps made short term problems worse.

NakedCapitalism, the Big Picture, Roubini, etc. have all talked about alternative ideas that have a better shot at actually stopping a depression.

[mikkel]

Also I wouldn't discount Roubini's predictions based on the raising of FDIC limits.

First of all, he's talking about major accounts far in excess of $250,000 and more importantly, foreign investment and bank interactions.

Secondly, without better oversight, increased FDIC limits have a good chance of making things far worse. This is because they will all start doing what Wamu and Countrywide did, which is start offering insane yields (CD rates at 5%+) and then betting the farm....because at this point they might as well! Some of Countrywide and Wamu's worst decisions where made far after it was clear that they were doomed.

So perversely (especially coupled with the SEC nudging companies to "reassess" their mark to market values) that might lead to less confidence in the banking system.

I personally have no problem with that because I think that protecting deposits overrides almost all other concerns, but it does point to a greater chance of more deflation.

[John Thullen]

"people expecting immediate returns"

Two to three years ago, when mortgage resets and housing starts began their merry catastrophe, the talking heads on CNBC, particularly Bob Pisani on the floor of the New York Stock Exchange, began the mantra of "we could see the bottom soon" in the housing market.

The housing market? It's a long-term asset whose price fluctuations display the turning radius of the Titanic.

Americans are fundamentally stupid (think good thoughts and everything will be all Kudlowy) about this stuff, but we do have the wit to go out and hire even stupider people to man the controls of business, Government and the media

[hilzoy]

mikkel: I think the question to ask is not: did the TED spread (or whichever indicator you like) go up or down after the bailout was passed?, but: is it higher or lower than it would have been without the bailout bill?

I'm not saying this to defend (or attack) the bill; just to get the relevant comparison clear. Suppose whatever you think is the relevant indicator was at 100 before the bailout, and went up (good) to 105 immediately after, but would have gone up to 500 had the bill not been passed: then the bill is a disaster. Conversely, if it goes to 90 after the bill is passed, but would have gone to -300 without it, then the bailout bill did a lot of good.

[bedtimeforbonzo]

LeftTurn: "Either the reporting has been defective or people aren't paying attention if they think this, IMHO."

Most people aren't blogging on this stuff. They are hearing radio headlines or skimming the newspapers with the expectation that $700 billion is enough to fix most any problem.

And then the next level of folks are like me -- informed but have trouble balancing a checkbook -- who, as Thullen noted, hear a lot of happy talk on CNBC and confuse that with reality.

[bedtimeforbonzo]

By the way, John, I like that adjective: "Kudlowy."

In Kudlow's world, Eisenhower is still president, hockey moms drive Buick Roadmaster station wagons, the corner hardware store of the pre-Walmart days still exists, every Main Street has a Woolworth's, Gunsmoke is still the No. 1 show on TV, the internet doesn't exist, Betty Grable is the pinup girl of choice, and everyone still reads the "Saturday Evening Post."

[mikkel]

Your point is taken Hilzoy but the "question to ask" is still based on where you think we're going based on an understanding of the root causes.

Based on the still severe overvaluation of housing and historic debt loads in general, I think a very strong argument can be made that all (or at least many) of the major banks are effectively insolvent over the long term. This view is shared by nearly all the of the people I've read that have seen this coming.

So the question you have to ask is on different time horizons. Maybe the bill prevented short term catastrophe, but it doesn't seem to have actually made things any better.

And if things aren't getting any better, then there is a stronger argument to be made that no matter what we do we still have a LOT further to go.

So if the $700 billion now didn't decrease the likelihood of long term failure and when that failure happens we have $700 billion less to navigate the situation then that is arguably worse than not passing the bill even if it means things collapse sooner.

Of course the counterargument is if we collapse now we are guaranteed to be miserable (and don't be mistaken, the plans offered by Roubini etc would let there be a collapse but just try to stop it from getting out of control) while if we do "something" we might not.

This is why it's so easy to keep throwing away money trying to stop something, so there is no blame for sitting and doing nothing.

But this is why I think that ultimately plans need to be decided on their logical merit. I have to confess that I was surprised and slightly disheartened that you seemed to approach the bailout bill so emotionally with a call to do something and focused on complete a****** that don't care about others, rather than having a lot more links to people like Roubini that obviously care a great deal about trying to help.

Even Krugman (who I think has too much faith in the government to do something in many cases) pointed out that there was no logical foundation for how the bill would help at all (and the link I posted showed there is logical foundation for it being worse).

The recapitalization plan proposed by Roubini and others would in effect trigger widescale deflation but then try to contain it from getting into Great Depression territory and at least has a lot of logical merit. That is something to "try" even though I'm afraid that the proponents are too optimistic about it helping a ton.

Congress should be focused less on trying to fix urgent crises and more on laying the groundwork for large scale reform and setting up social programs that would activate if the worst fears come to pass. That'd be a lot better use of $700 billion.

[Nell]

mikkel: Some of Countrywide and Wamu's worst decisions [were] made far after it was clear that they were doomed.

This is something that struck me in news accounts, and was reinforced by comments made by Alan Blinder, a Princeton economist, in a panel this past spring not long after the Bear Stearns collapse/takeover. He said that in every bubble, the worst behavior comes right at the end. It made me wonder exactly where we are in the cycle...

Blinder is a former Fed figure and considered one of the more Serious People among those predicting trouble from the housing bubble/subprime mortgage/derivative house of cards since a long time back (i.e., 2000 or so). But he was almost as ignored as Roubini by the people actually in a position to do something.

Also, in another classic "Saturday story" (an old newspaper tradition of hiding unpleasantly truthful reporting in the least-read edition of the week), the New York Times details how tens of those $700 billions will go to the usual Wall Street suspects as fees, as they make the decisions about what securities Strategery LLC will buy and at what price.

re ThatLeftTurn's pointer to the Calculated Risk post on the upcoming credit default swap auctions: I took a slightly different message from it, which is that those auctions could function as the unwelcome price discovery that really brings the house of cards down. The Fannie Mae and Freddie Mac auctions, the huge ones, are less than two weeks before the election.

Breathing deeply... Now I really am going out into the sunshine.

[bedtimeforbonzo]

Why is everyone still saying "700 billion" when the pork pushed it up to $840 billion?

[bedtimeforbonzo]

"tens of those $700 billions will go to the usual Wall Street suspects as fees"

Wouldn't be right if Wall Street didn't line its own pockets with our tax dollars.

Why do I think we will wind up regretting the passage of this bill?

[mikkel]

"Why is everyone still saying "700 billion" when the pork pushed it up to $840 billion?"

I read that that was actually in a different bill that had wide consensus and they just combined them for "procedural" issues.

So on the plus side they didn't take advantage of the emergency to do stuff they wouldn't.

On the down side they were going to waste that money anyway.

[mikkel]

Nell I'm not *sure* that those auctions will be price discovery on the underlying assets as much as price discovery on the bonds of the companies.

In the case of Fannie/Freddie it should be at par because it's backed by the government, so everything is OK (well hopefully).

In the case of Lehman they went into bankruptcy so it's about how much can be recouped from that (and the act of selling the underlying assets will surely be "forced" so not affect similar assets for other companies).

For Wamu, I dunno how that works at all.

If my understanding is correct it shouldn't make things worse than they already are from an asset value perspective, except for the insurers that take big losses and might be forced to sell other assets to rebuild their capital...which could destroy the entire financial system, so let's pray that their aren't huge losses for any insurers.

Again that's another much better use of $700 billion because it's a "one and done" settlement where there is an acute event that might bring everything down not related to the longer term problems.

[Fledermaus]

I'm doing my part in the run on the bank. I switched my minscule curing and savings to a credit union this week

[Ugh]

The rescue plan is going to pour $700 billion down a hole. You watch. The banks et. al. will sell the U.S. treasury the most toxic of the toxic securities, and the Treasury will be lucky to get 10 cents on the dollar back in the end. That might shore up the banks for a while, but if there really was something like a $20 trillion market (or more) in these securities, a less than 5% shore up ain't much.

From what I've heard, people on Wall Street seem to think that the market has overreacted, that all these securities are undervalued, and that they'll eventually come back (though not to their previous highs). But they've been saying that for 9 months (or longer) now, and it's only gotten worse.

So, as I said in another thread, the most this bailout does is push the depression off into an Obama presidency, so he can take the fall.

[gwangung]

So, as I said in another thread, the most this bailout does is push the depression off into an Obama presidency, so he can take the fall.

Would have happened, no matter what, so it's not that big of an occurrence.

[Gary Farber]

ken: "I believe that the Paulson plan when put into operation will help shake some of the lending lose once again."

So, ken, how are those congratulations to, and praise of, Nancy Pelosi, coming along? Still working to get enough superlatives into your draft?

[bedtimeforbonzo]

If it was Cardiac Arrest last Friday, what is it now?

When does this end?

[bedtimeforbonzo]

More good news.

And.

Three cheers for the Bush economy.

Isn't the "ownership society" grand?

I mentioned in a private conversation with Liberal Japonicus that I hope Hilzoy, Eric and Publius post more economic threads now that the bailout bill is "yesterday's news."

For my money (or lack of it), the economy dwarfs every other issue at the moment, with no close second.

We may not be on the verge of a Depression, but this is certainly the most challenging and threatening economic downturn in my lifetime.

[Gary Farber]

"I mentioned in a private conversation with Liberal Japonicus that I hope Hilzoy, Eric and Publius post more economic threads now that the bailout bill is 'yesterday's news.'"

You're better off reading economists' blogs for that sort of thing.

[bedtimeforbonzo]

Well, Gary, I thought the commentary here was sharp during the bailout debate. More of the same would be welcomed.

[ThatLeftTurnInABQ]

btfb,

It's good to see you commenting. I hope that things are going as well for you as can reasonably be hoped for under the present circumstances.

Well, Gary, I thought the commentary here was sharp during the bailout debate. More of the same would be welcomed.

I second that. Economics is inherently political (and thus belongs on a politics oriented blog) - it used to be called "Political Economy". Of course that was a long time ago, and since then it has turned into a jargon laden field where one can use PhD level mathematics to create such a tangled web of abstractions that some people pretend it isn't the livelihoods of real people that are at stake but instead just a bunch of numbers.

Time to take back that territory, IMHO. Let's put the Political back in Political Economy.

[Gary Farber]

"Let's put the Political back in Political Economy."

Because Brad deLong doesn't do that?

[liberal japonicus]

I've been taking a crash course (ha ha) in trying to figure out about economics, and though reading the various economics blogs, the explanations that I find here are much better pitched to guys like me. Also, it's really easy for me to get lost in the weeds when I try to drop in the comments of the econ blogs. I realize that this says a lot more about me than about anyone else, but I strongly second btfb request, even if it were open threads about econ.

[bedtimeforbonzo]

lj,

I think the current crisis is showing that not even the experts know as much about the economy as they think they do.

Also, I've been surprised at how amateurish McCain and Obama have been discussing the bailout and the relating mess -- although Obama was a lot sharper in the second debate.

Good to see he boned up.

McCain seems helpless on economic matters, just tossing out stuff and seeing what sticks.

P.S. Does anyone really think Warren Buffett, at this stage in his life, would accept the post as Treasury Secretary?

[gwangung]

P.S. Does anyone really think Warren Buffett, at this stage in his life, would accept the post as Treasury Secretary?

Way too much sense for that.

But I suspect he'd take plenty of calls from the next White House.

[Gary Farber]

"P.S. Does anyone really think Warren Buffett, at this stage in his life, would accept the post as Treasury Secretary?"

Sure. It's not like he needs to get any richer, and it's very prestigious, and lots of people who aren't libertarians like to serve their country.

It's not as Robert Rubin, or Lloyd Bentsen, or Clarence Douglas Dillon, or Andrew William Mellon needed the job, either.

[bedtimeforbonzo]

I guess this is what panic looks like.

On CNBC last night, a fellow from the CATO institute made the point that government needs to shut up -- I'm typing that as President Bush is scheduled to address the country -- and let the markets do their thing.

Mr. CATO noted that the Dow was above 11,000 before Paulson got his mitts on things. Now look.

That, of course, is one argument.

On the other hand, I've been reading a lot of stuff that suggests the government was far too late and fell far too short in addressing what became the Great Depression.

What little I know for sure is this: We are in a leadership vacuum. Who really cares what President Bush says? Does anyone really listen to him anymore? John McCain is a joke. And Barack Obama is getting caught up to speed on matters economic pretty fast.

I search for good commentary on the economic crisis every day. This piece qualifies.