Capital Commerce
-
Is Hank Paulson the New Harriet Miers?
Continue reading… 0 CommentsThe head counters on Capitol Hill that I talk to keep telling me that the Paulson Plan will get passed, certainly by midweek next week. But I sense another dynamic going on, much like what we saw with the doomed 2005 nomination of Harriet Miers for the Supreme Court. With both the Miers Plan and the Paulson Plan, we saw a surprise announcement from the White House, followed by a furious negative reaction from the blogosphere that eventually spread to Congress. (Just ask Cheney how that meeting with GOP House members yesterday went. Ouch!) Of course, Miers didn't have the Treasury secretary, Federal Reserve chairman, and the global financial market watching her back. But to quote Newt Gingich, "If the bill doesn't pass by Friday, it never will," as people learn more about it. And if John McCain comes out against the bill, all bets are off. By the way, the Intrade betting market currently gives the bailout an 80 percent chance of passage. But if GOP support collapses, so will the Paulson Plan.
-
Wall Street May Be Bailing on the Bailout
Continue reading… 7 CommentsConsidering that the Paulson-Bernanke bailout plan is supposed to be helping Wall Street, some on Wall Street suddenly seem less enthusiastic. Check out what market strategist Ed Yardeni, a guy who has been pushing for the Mother of All Bailouts for months, is telling clients this morning (bold is mine):
I'm getting a queasy feeling in the pit of my stomach about the Treasury's proposed Troubled Assets Relief Program, or TARP...Frankly, I'm not convinced that TARP is even necessary...It would be an extraordinary and unprecedented intervention by the government in the economy.... Is Paulson really in charge even now? His recent hyperactivity smacks of sleep deprivation and too much Diet Pepsi.... On Friday, September 19, the Treasury promptly and appropriately responded by insuring all money market fund shares. That was enough to stem the latest calamity, in my opinion. I think introducing TARP was an overreaction to last week's crisis. Besides, TARP seems to be almost as complex as some of the complex assets that it is aiming to purchase.... I think a simpler solution would be for the SEC to immediately and temporarily suspend mark-to-market accounting rules for mortgage-backed assets. Firms could hold them to maturity (or until the market settles) without having to take crippling write-downs in the process. Ben Bernanke...said he opposes the American Bankers Association request to remove mark-to-market pricing in bank portfolios. A suspension of such accounting would hurt investor confidence, he said. Is he kidding? Hasn't he noticed that investors have lost all confidence in bank stocks already? Then again, he is an academic. He may also be suffering from sleep deprivation and too much Diet Dr. Pepper.
-
Are Paulson-Bernanke Overhyping the Danger?
Continue reading… 12 CommentsBased on the doom-and-gloom scenario that Paulson and Bernanke peddled to Congress, the bailout plan seemed worth the cost to me. (And I note that credit markets are today as bad as they have been since this crisis started.) But some Wall Street economists don't seem nearly as negative as our guys in Washington. Here is what the folks at Global Insight were saying on September 15:
The economy is very weak, the recession wolves are pounding down the door and the financial system faces new deflationary threats from the bankruptcy of Lehman Brothers. This is an emergency situation and an aggressive response from the Fed is needed. Without such a response, pressure on Congress to take further action to stem the crisis would be unstoppable.
-
Newt Gingrich: Kill the Paulson Plan. Hard.
Continue reading… 258 CommentsI just got back from a Newt Gingrich press conference where I had a nice back-and-forth dialogue with the former Speaker of the House about the Paulson Plan, which he totally hates. A few quotes and Gingrichian observations:
1) He called it a "stupid plan" that looks like it had been designed by autocrat Vladimir Putin. He also said it will be a "nightmare" to implement and full of corruption.
2) He said the Paulson Plan would be a "dead loser" on Election Day that will "break against anyone who votes for it." It will hurt even worse with the 2010 election once Americans see what a drag it is on the economy when implemented.
-
Why the Antibailout Right Is Wrong
Continue reading… 10 CommentsPlenty of economic conservatives have beaucoup problems with MOAB (the mother of all bailouts). Among the critics of the Paulson plan on the right: Michelle Malkin (a "naked power grab"), Bill Kristol ("a nightmare"), Michelle Malkin (a "disaster"), the Club for Growth ("cause more harm than good"), Michelle Malkin ("both parties...are about to screw us over"), Newt Gingrich ("slow down"), Michelle Malkin ("kill the bailout"), Rep. Mike Pence ("delay consideration"), Michelle Malkin (it's "time for ideological purity"), and Amity Shlaes ("recovery is possible without a bailout").
Also toss in about half of the folks posting over at the National Review's group blog, the Corner. And I am pretty sure Michelle Malkin has some reservations. In short, conservatives are standing athwart this trillion-dollar speeding locomotive and yelling, "Stop!" Or at least, "Slow down!" A few thoughts:
-
Bailout Prevents Great Depression 2.0
Continue reading… 175 CommentsWhat would be the dollar cost of not bailing out Wall Street? Try a number north of $30 trillion. (The awful math is detailed below.) That's why Hank Paulson and Ben Bernanke were so scared last week. And, yes, I think "scared" isn't too strong a word. You don't think they convened an emergency nighttime meeting of congressional leaders and then walked out with something close to a blank check for a trillion bucks because they thought we were headed for an outright recession, even a fairly nasty one?
Nope, I think they believed, and got Congress to believe, that the economy was on the verge of something far worse than the worst downturn in a generation. And that is why they went with the so-called nuclear option: the biggest financial bailout in history. In the words of JPMorgan Chase economist James Glassman, "Thankfully, we and our friends around the world who are watching the economic lights come on will never know where events would have led, if the clock had not stopped [last] Thursday afternoon.... Last week's events made the 1987 stock market crash look like child's play."
-
Video: Uncle Sam's Massive Bailout
Continue reading… 9 Comments -
The Colossal Bailout of 2009
Continue reading… 10 Comments"We've planned for various contingencies" is how one economic adviser to Barack Obama recently described to U.S. News—while declining to go into the messy details—how a future Obama administration would respond to a worsening of Wall Street's credit crisis.
This cautiously cryptic statement was made pre-Lehman bankruptcy and before insurer AIG went into its death spiral, forcing the Federal Reserve to extend an $85 billion loan and take an 80 percent ownership stake. Yet now the candidate may be hinting at just what the Wall Street endgame might look like. Obama was asked about an idea gaining momentum in Congress whereby Uncle Sam—aka the American taxpayer—would cowboy up and actually buy distressed debt and mortgages. (It would be sort of an updated version of the Resolution Trust Corp. from the savings and loan crisis of the 1980s.) After first begging off, Obama later seemed to indicate that it was a 2009 possibility.
-
Welcome to "Bailie Mae"
Continue reading… 1 CommentThe always insightful Arnold Kling wonders just how badly Washington will get taken in the Mother of All Bailouts:
Let's see if I get this straight. There are a whole bunch of mortgage-backed securities, the value of which is not known, because nobody knows what the default rates on the underlying mortgages are likely to be. A government agency, Bailie Mae, is going to put up, say, a billion dollars. Companies will make offers. It might go like this:
-
Analysis: Washington's Trillion Dollar Wall Street Bailout
Continue reading… 66 CommentsSo after the Mother of All Bubbles comes the Mother of All Bailouts. Main Street saves Wall Street. It now looks like Uncle Sam will create a new entity to take hundreds of billions of bad debt off the books of America's major financial companies. (Look for this to get done before Election Day, if not early next month.) "This is a gigantic step forward, the only way to fix the crisis," writes Ian Shepherdson, economist at High Frequency Economics. "Economy still a mess, but systematic risk way down."
Details are still forthcoming, but one possibility would be an $800 billion fund to purchase toxic bank assets. But whatever forms it takes, Congress will provide something close to a blank check to solve the American banking crisis. Already the Treasury Department has come up with a one-year, $50 billion guarantee of money market funds. You have questions. Here are some answers.
-
The Mother of All Bailouts
Continue reading… 1 CommentWatched Bush. Watched Paulson. I have a hard time believing that Congress is just going to write a blank check and not require something out of Wall Street beyond greater regulation down the road. Recall for a moment what Sen. Chuck Schumer wants to do. He wants an entity that would "provide capital to struggling financial institutions in exchange for an equity stake in the banks." In other words, he wants a more AIG-like solution and one more similar to fixes seen in Japan and the Nordic countries during the 1990s banking crises.
-
4 Ways to Turn a Recession Into a Depression
Continue reading… 15 CommentsHoo, boy. Wall Street, as well as America's Investor Class, ought to find the following statement reassuring. Here is Senate Majority Leader Harry Reid on the credit crisis, "No one knows what to do. We are in new territory here." Well, my first piece of advice would be to do nothing. Punish Wall Street? The market is already doing that. Crack down on super risky home loans? The market is already doing that, too.
Moving forward, however, Washington might want to crack open some history books and examine just how bad policy from Washington turned an economic downturn into the Great Depression. Here are handy tips for what not to do:
-
Big Government's Big Role in the Credit Crisis
Continue reading… 9 Comments"The private market screwed itself up, and they need the government to come help them unscrew it." So says Barney Frank, chairman of the House Financial Services Committee. Did Wall Street make mistakes? Absolutely. But so did our fellow Americans who took out loans that they shouldn't have.
And so did Uncle Sam. The more you look at the history of the housing-spawned credit crisis, the more you notice Uncle Sam popping up, Zelig-like, in every scene. Fannie Mae and Freddie Mac were government-birthed entities that decided to buy securities tied to subprime loans. And it was government officials on Capitol Hill, the recipients of millions in campaign donations from the F&F lobby, who decided not to rein in those entities. You had the government ' s Community Reinvestment Act nudging banks to make unsound loans. Government banker Alan Greenspan pushed interest rates too low for too long earlier this decade, creating an extreme financial situation that made the crazy Wall Street strategies look temporarily reasonable. And for decades, government has pushed higher homeownership as a national goal, via F&F as well as through the tax code, siphoning off resources that might have been better devoted to other economic sectors.
And now, folks like Barney Frank pretend government just showed up on the accident scene moments ago like an innocent passerby who wonders aloud, "Anyone here know what happened? Anyone?" I mean, how can we try to prevent future financial crises, or least minimize their damaging effects, if we delude ourselves on the causes of the current one?
-
The Fed and the Zero Handle
Continue reading… 2 CommentsWhen I noticed just now that the three-month treasury bill was, like, almost 0.00%—actually 0.04%—it did not compute. What that means is that people are desperate to find super-safe places to park their money. (That fear can also be seen in the $80-plus jump today in the price of gold, considered the ultimate safe haven.) There is a now a nearly 2 percentage point spread between three-month T-bills and the federal funds rate. Economist extraordinaire Mike Darda makes an interesting point: "There were similar inversions between T-bills and Fed funds during the crises/recessions of 1973-1974 and in 1980-81 just before large reductions in the Fed funds rate took place. If the Fed were to follow the T-bill yield down, the funds rate would now land at zero." Me: If a fed rate cut was what it took to fix things, I am sure Bernanke would have rather done that than launch rescues of Wall Street firms.
-
Wall Street Woes: How It Will End
Continue reading… 4 CommentsBeing a movie buff, I always look to films as a handy metaphor for whatever is going on in the world. One of my favorites right now, as it was back during the technology stock bubble of the 1990s, is The Matrix. It is a movie about two realities, one virtual, one concrete. As I wrote about the tech stock bubble back then: "Internet stocks seem to exist in some Matrix-like virtual reality where a completely different financial physics applies. In this Web wonderland, revenue growth would always accelerate, prices continually advance, and actual profits forever lurk just around the bend."
The same scenario strikes me today when it comes to current events. You have the financial economy—Wall Street—where the fundamental, inescapable realities of risk and reward were ignored, and which is now suffering a tremendous upheaval. And then you have the "real economy," where Main Street exists, which is chugging along for the most part despite the housing implosion and credit crunch.
-
Dr. Bernanke Turns Into Dr. No
Continue reading… 3 CommentsInvestors wanted a bailout of Lehman. Ben Bernanke (and Hank Paulson) said "No." Investors wanted, or at least expected, an interest rate cut. The Fed chairman said "No" again. Now, while it may seem like Bernanke has been reading too much Andrew Mellon lately—the treasury secretary who favored a financial bloodletting at the start of what became the Great Depression as a way of purging the "rot" from the system—what he is really doing is playing the cards dealt him the best way he knows how. There is zero indication that a rate cut would have done much good. As economist Mike Darda writes this afternoon:
The Fed decided to buck market expectations (which were pricing in more than an 80% probability of a 25 bps rate cut) and stood pat with short rates at 2%.... [We] believe the Fed is correct to try to deal with current credit strains with its special liquidity facilities and the discount window rather than to run short rates down from an already low 2%. The financial system is suffering at the hands of a solvency crisis, which is creating a contraction in credit and a breakdown in financial intermediation. Cutting short rates from the 2% level won't solve this problem.
Me: I just noticed the Dow is up more than 100 points. Mr. Market is calling this one right.
-
McCain's Right: The Economy is 'Fundamentally Sound'
Continue reading… 11 CommentsJohn McCain has taken a lot of grief for repeatedly saying "the fundamentals of the economy are strong," including yesterday, on Meltdown Monday. (Of course, McCain has also said the economy's "in a shambles.") So, what's the reality here?
1) Wall Street is in a recession (autos and housing, too), but the overall U.S. economy is not. The economy probably grew at close to 4 percent in the second quarter and is expanding at near 2 percent in the third quarter.
-
Washington Makes Wall Street Gloomy
Continue reading… 0 CommentsUncle Sam is making it tough for investors to be upbeat. Take a peek at this analysis from Morgan Stanley (bold is mine):
The bottom line is that we look for the F2009 budget deficit to rise to US$540 billion (3.7 percent of GDP), and in 2010 our estimate is US$450 billion (2.9 percent of GDP).... The outlook is gloomy— but hardly unprecedented. Note that our budget deficit estimates for 2009-10 are somewhat larger than those just published by the CBO. This is due to a number of factors. First, our near-term outlook for the US economy is weaker than that of the CBO. Second, the CBO's estimates do not include an extension of the AMT fix. Third, the CBO assumed only US$20 billion of outlays for the GSEs. Fourth, the CBO's estimate for FDIC outlays is lower than our own.
In the longer run, we expect tax rates for individuals to go up after 2010 regardless of who wins the election. This, together with a recovering economy and a likely flattening out of defense spending, should help to bring the budget deficit back down to US$300 billion or so by 2012. Obviously, the US still faces severe budget pressures beyond that point due to sharply escalating outlays for Medicare and Social Security, but these forces don't become too drastic until later in the decade.
-
McCain and the Gang of 10
Continue reading… 0 CommentsSome of the McCainiacs I know are worried that the GOP nominee is going to throw away the energy issue by signing on to the so-called Gang of 10 energy compromise effort. (It would seemingly allow expanded oil drilling, greatly expand biofuel programs, increase dough for nuclear fuel research, and increase taxes on oil companies.)
- My Capitol Hill sources don't think there is going to be a compromise with broad support.
- Team McCain doesn't think there is going to be a compromise with broad support.
- If a workable compromise came together, he would likely vote against it.
-
When President Obama Buys Wall Street
Continue reading… 3 CommentsBarack Obama has a lot of things he wants to do if elected president: quasi-nationalize healthcare, institute a cap-and-trade climate change plan, invest hundreds of billions in energy and infrastructure and education. What he does not want to do, I would imagine, is deal with an ongoing credit crisis on Wall Street. An adviser to the campaign told me that Obama has "contingency plans" to deal with the problem if it does not seem to be improving in 2009. (Already, he seems to be backing off his tax increases.)
Surely, one of those options may well be for the government to either take bad debt off the hands of the banks or take equity stakes in troubled financial institutions, or both. Former Treasury Secretary Larry Summer has written recently that "consideration should be given to whether the government should establish a mechanism for purchasing assets from stressed banks in return for warrants or other consideration. " And commenting on what Summers wrote, economist and blogger Brad Setser writes: "After the U.S. election, I suspect the debate will shift toward the need for such a systemic solution. If this kind of intervention proves necessary, it would need to be accompanied by a rather wholesale change to the United States' system of financial regulation."
