"Day of Reckoning"

WASHINGTON (AP) — Top Republican senators said Sunday they will oppose a Democratic plan to bail out Detroit automakers, calling the U.S. industry a “dinosaur” whose “day of reckoning” is coming. Their opposition raises serious doubts about whether the plan will pass in this week’s postelection session...

Senators Richard Shelby of Alabama and Jon Kyl of Arizona said it would be a mistake to use any of the Wall Street rescue money to prop up the automakers. They said an auto bailout would only postpone the industry’s demise.

“Companies fail every day and others take their place. I think this is a road we should not go down,” said Mr. Shelby, the senior Republican on the Senate Banking, Housing and Urban Affairs Committee.

Gee, any guesses why these clowns lost Ohio, Indiana, and the entire industrial Midwest?

...We are talking about literally millions of jobs here, when you consider auto parts and the other related industries that'd be devastated by a GM or Chrysler collapse. But Republicans don't care. Tax breaks for the superrich are NO-PROBLEM for these guys, but over their dead body should working people get any help at all. Unbelievable.

They really are accountable to no one and nothing except their wealthy backers and their insane market-fundamentalist ideology. The thought that these people were ever in power makes me ill.

Robert Reich on the economic crisis

As usual, Robert Reich is both cogent and absolutely right. You should read it all, but (emphasis mine):

First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay... This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.

The real problem is on the demand side of the economy.

Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs....

So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?

The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy-- people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled -- government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.

The answer to the second question is mostly "infrastructure" -- repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation... Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future... Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.

I get a warm, happy feeling from the idea that this man is advising the president-elect -- even if he has Rubin and Summers and co. to contend with.

(Also, this should be a reminder that all Democrats who support a balanced budget amendment should be slapped. I'm looking at you, Bill Richardson. Deficit spending is an important economic stimulus.)

The FAILout Continues

Surprise!

The misery worsened on Wall Street Tuesday, with stocks piling on the losses late in the session and bringing the two-day decline in the Dow Jones industrials to more than 875 points amid escalating worries about credit markets and financial sector. The Dow lost more than 500 points and all the major indexes slid more than 5 percent.

Steps by the Federal Reserve to reinvigorate the dormant credit markets ultimately weren't enough to calm nervous investors. News about financial companies only added to their despondent mood.

"The calls I'm getting -- every money manager I deal with, and every client I talk to -- are just very emotional. This is a very, very emotional time, and most of them are taking steps to shore up their defenses, reducing exposure to stocks just to defend their portfolios," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors.

I know I risk sounding like a Government by Dow person with these posts. But -- didn't they push the "bailout" through so quickly because they thought it would immediately restore confidence in the system? Have these people been right about anything yet?

FAILout, Pt. II

SO -- I've been out of touch the past few days. I left Friday to spend the weekend in sun-streaked Somerset, Mass. with the girlfriend's family, watching pro sports and eating delicious homemade meatloaf¹. Vaguely I heard, through the meatloaf haze, that Congress had reversed itself on the "bailout" for reasons I still haven't quite wrapped my head around. I gather they involved "sweeteners."² Anyway, I completely missed the Vote that Cured Wall Street and Saved America, so I guess I was less surprised than some of my contemporaries when I wandered out of Stat 100 this morning and saw:

NEW YORK (AP) -- Wall Street is plunging, with the Dow Jones industrials down more than 500 points amid growing fears that the credit crisis is spreading around the world.

Investors are realizing that the Bush administration's $700 billion rescue plan won't work quickly to unfreeze credit markets, and many banks are still having difficulty gaining access to cash. European governments also took steps over the weekend to limit the damage from the growing global financial crisis...

...World markets suffered massive losses Monday, striking four-year lows, as panic-stricken investors doubted whether a Wall Street bailout package would stem the global financial crisis.

London, Frankfurt and Paris all tumbled more than six percent approaching the half-way mark while a 15-percent dive in Moscow forced a halt to Russian trading...

...Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.

During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.

The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.

Good job everybody! Time for a well-deserved vacation!

I have been telling my friends for a while -- and I'm increasingly convinced myself -- that the "bailout" is wrongheaded NOT JUST because it's a humongous transfer of wealth from the public to the financial elite, but also because it misses the core of the economic problem. The "bailout" is all well and good if the banks and other institutions are jammed up because of liquidity, i.e. their assets are tied up in this bad paper that nobody wants, and if the gov't takes it all then cash can flow again. But what if the problem is not liquidity but solvency, i.e. they've been operating on imaginary money and fancy bookwork this whole time, and a lot of these institutions just fundamentally have more liabilities than assets? In that case, the "bailout" does absolutely nothing to assure anyone that the system can meet its obligations. Increasingly it seems like that's the case -- in which case, we're in much deeper trouble than Paulson, Bernanke, Bush, Congress, or anybody in power seems willing to recognize.

Here is the article that got me thinking about the solvency/liquidity issue. Also, Nouriel Roubini -- who's been completely right about this entire thing since 2006 -- has been making this argument, as have some others, for quite a while.

Next weekend I'm leaving again, this time for Canadian Thanksgiving. If past experience is any indication, Congress or the Fed will do something SUPER-AWESOME over the weekend which will undoubtedly fix the problem, at taxpayer expense (again). And on Tuesday when I return, I'm just going to assume Wall Street will have burst into flames, or something. Just how much closer to systemic collapse can we get before everything tips over -- or at very least, until somebody important recognizes the problem?

1. RECIPE TIP: next time you make meatloaf, put some FRENCH'S brand french-fried onions on top. Mmm, crispy goodness!

2. Congress' "sweeteners" couldn't possibly be as SWEET as FRENCH'S brand french-fried onions! Add that onion crunch to your salad, soup or stir-fry today!

FAILout

In case you haven't heard, this morning the House rejected the bailout, by a vote of 205-228. I'll echo Chris Bowers' glee that this extremely bipartisan vote happened to cut against the elite consensus, bringing together the left and the far right, the exact opposite of what centrist Broderite "bipartisanship" always demands; and while David Sirota is characteristically overexcited in calling it a "populist revolt," it certainly is exciting to see a bill like this deep-sixed by grassroots popular pressure. (No thanks to centrist Blue Dogs like Jim Marshall of Georgia, locked in a tight reelection race right now, who reportedly told the caucus that he'd "give up [his] seat" to support the bailout. FAIL!)

That's the good news: we have a Congress which for once is responsive to the public. But--

--BUT--

--but, now we're left with a financial system that's continuing to implode. And Treasury's taken its shot, so the ball is clearly in Congress' court to come up with a sensible plan. And anything which will actually help the situation (suggestions? anyone? ...Bueller?) is likely to look even more like socialism, so good luck convincing those cranky Republican wingnuts to back, for instance, bank nationalization.

("Wingnut" is the word, incidentally. Good for them for stopping the bailout; but these are people who instead proposed, in total seriousness, that the government shouldn't buy these assets but rather insure them. Think that through for a minute and you'll realize how BUGSHIT INSANE it is. That's how deep their market fundamentalism runs.)

Then, if Congress winds up half-assing it or doing nothing -- which of course never ever happens -- watch for wily Republicans in 2010 to pin the full-blown depression right on Nancy Pelosi's nose. And they'll have a point. So Democrats have a responsibility to put together a plan, and quickly -- during election season -- with a Republican president and a panicked public -- for an unbelievably complex institutional problem which may in fact have no solution at all. Have I said FAIL enough times to get my message across yet?

Actual news in the newspaper for once

No Sunday Screening tonight because I'm in a serious mood. Instead, go read this front-page NYT article about AIG, its questionable ties to Goldman Sachs, and its enormous, mind-blowing irresponsibility. WALL STREET FUCK YEAH!

Say goodnight, Washington Mutual

By far the largest bank failure in U.S. history.

What's interesting about this, to me anyway, is that the feds (from the way I read the article) are basically handing WaMu on a platter to JP Morgan Chase, because FDIC doesn't want to shell out for everybody's deposits. Now -- is FDIC just being conservative? Or are they worried there'll be even bigger failures to come, and they don't want to bust the piggy bank for this one?

EITHER WAY -- how many more banks are going to give out?

...Also, to answer Consumerist's question from April: yes, they were that short on capital reserves, apparently.

The Paulson "bailout" and right-wing ideology

I'd been debating writing about the financial crisis and the Paulson Plan, these last couple days, because while I have strong opinions about it (executive summary: "BLEARRRGH") I don't have anything to add to the debate that Krugman and Dean Baker and Barry Ritholtz haven't already said.

But then I saw this, via MyDD, and holy crap (emphasis mine):

U.S. Sen. Norm Coleman said the massive government bailout of failing financial institutions is not only necessary but could make money for the federal government.

“The government could make 10 or 20 times what it pays on this, possibly,” Coleman said during a campaign stop at Christy’s Cafe in North Mankato Saturday morning.

Let's leave aside for now the point that Coleman is insanely wrong on the facts and clearly doesn't know what he's talking about. (In brief: it's basically unimaginable that the gov't will make ANY money on these assets, considering that to achieve his goals Paulson will have to buy them at ludicrously inflated prices, and these things are basically worthless to begin with. [Calculated
Risk explains this well.] Even breaking even is an optimistic estimate; Coleman's comes from La-La Land.) Let's look instead at what this line of thinking says about the conservative mind.

Liberals and those further left, like yours truly, have seen a silver lining to this crisis in that it seems to conclusively discredit free-market-ism. "Aha!," the argument goes, "as soon as Wall Street's in trouble all these so-called capitalists go crying to the government for help. Hypocrites!" This is true as far it goes, and it's great fun for us skeptics (my favorite comment is still Atrios' pithy note "Capitalism! Fuck yeah!"), but it's not the whole picture. Other, more restrained observers see the bailout as a panicked flight to pragmatism, in which crisis demands that Paulson and Bernanke set their ideologies aside and try anything that might work. (This argument naturally reaches back to 9/11, another case of seemingly-pragmatic government rapid response that turned out to be way more ideological than we thought. But that's for another post.) This also makes sense to us; but neither of these frameworks, I think, would resonate with the conservative mind.

Pretend you're Norm Coleman -- a roughly average conservative legislator, no intellectual but bright enough that you at least understand the GOP talking points. You love markets, and you think that private enterprise almost always knows better than the government. So when you see this situation, you assume that something fluky has happened, and there's an imbalance in the markets. Well, that's not a crisis -- that's an investment opportunity! Just like a business, the government should buy low and sell high; pick up these assets at fire-sale prices, get the market rolling again, and you'll get returns of 1000-2000% once everything is back to normal. What better use of public money could there possibly be?

That's the logic -- it is still, even now, market fundamentalism. So when Chris Dodd comes to your office and says the government should get contingent shares in these companies it's buying junk assets from, you'd just blink at him; why put that burden on them when they're already doing us a favor? Plus it sounds like creeping socialism, and that scares you. Then when David Sirota's outside your window with a megaphone, shouting about a massive transfer of public money into private hands -- i.e. taking from the many and giving to the few -- you'd just get confused and blink even more, because isn't investing in a healthy economy the best thing we can do with the people's money? After all, it'll trickle back down to everybody again!

It's old-fashioned, unvarnished, trickle-down economics. Right-wing lunacy from beginning to end. They still believe this stuff, even in the face of market meltdown; the conservative capacity for rationalization is unmatched. And though they're not vocal about it these days, this ideology is exactly what motivates Republicans in Congress. I know this because it's the only way you can possibly justify Paulson's plan as vs. Dodd's (which, in addition to contingent shares, also adds independent oversight, executive pay caps, profit-sharing to the HOPE program, and court-administered homeowner mortgage restructuring, all eminently practical things which make conservative ideologues nervous); you just have to be a wingnut, and then it makes sense.

So we shouldn't delude ourselves into thinking the Paulson plan is "pragmatic" or acceptable in any way, and we should pray that Dodd and Barney Frank are smart in their negotiations -- or else, the Democratic Congress will wind up passing by far the biggest piece of right-wing corporate welfare in American history. That would make me sad.

And meanwhile we should work on getting these nutcases out of our government; defeating Norm Coleman would be a good start. You can contribute to the Franken campaign here.

You know things are getting weird when Bill O'Reilly makes sense

If you watch one political video this year:

I love this clip, because it's a perfect embodiment of the Republican coalition imploding.

O'Reilly, in his clumsy right-wing way, is trying to tap into the overwhelming public anger at big business and a government that lets it run amok (he does so by blaming a "lack of leadership," which is not quite right, but it's a start). That's what O'Reilly does; he's a rabble-rouser. And watch as Cavuto, who is ostensibly on the same team, gets not just upset but righteously indignant at the suggestion that oil companies aren't playing nice -- and, amazingly, inveighs against the New Deal in the process. Hilarity results. Clearly, both of these people are crazy, but it's two different kinds of crazy that can't stay on the same planet for much longer. (Watch for the glorious moment where O'Reilly calls Cavuto a "pinhead" and Cavuto responds by saying "I'm not going to buy your next book." I'm amazed these people can communicate at all.)

For almost 30 years, Republicans have constituted themselves around the Reagan coalition: a shotgun marriage between wealthy urban/suburban capitalists and religious/alienated lower-income whites. It was never a good fit, and lately they've had more and more interal flareups (see: the immigration issue, which clove them neatly in half), but right now there's a potential death blow lurking. This economic crisis is tearing the GOP's two driving impulses -- millionaire free-market-ism and popular xenophobia -- apart from each other. And if the crisis gets more serious, and base Republicans begin to see the financial elite not as their allies but as their enemies (which, by the way, is exactly what they are), watch for some serious carnage.

And the Obama campaign has the perfect opportunity to maximize it, scoop up as many disaffected struggling Republicans as possible, and potentially redefine the partisan coalitions for decades to come. God, I love election season!

(Both videos via Al Giordano.)

Shorter Wall Street:

"AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAHHHHHHHH!"

...I especially love this tastefully understated bit from the abovelinked NYT article. Emphasis mine:

Over the weekend, the Federal Reserve Bank of New York called together the leaders of most major financial firms in an effort to get them to act collectively to stem any possible panic, but could not force a deal.

In a way, that was similar to what happened a little more than a century ago, when the financier J.P. Morgan called the heads of all the trust companies in New York to a meeting in his library, and demanded that they agree to put up money to stop the bank run at another trust company.

The bankers did not want to do so, in part because they would need that money if the panic spread. Morgan locked the door, and kept the presidents in the library until morning, when they finally gave in. No such coercion exists this year.

No kidding.

...Also: all the suit-wearing Harvard douches who'd planned long and fruitful careers at Lehman Bros can kiss my soon-to-be-delivering-pizza-for-minimum-wage ass. That's right.

Deregulation solves everything. Deregulation is magic. Deregulation is your father

Nathan Newman's little article about the failure of deregulation and the current financial crisis made me have an equally little thought -- remember after one of the more recent Wall Street shocks, I think it was the Bear Stearns collapse, when McCain went on TV and gave a big speech where he said the answer to our problems was more transparency and a simpler tax code?

My thought: Boy, that was stupid.

And baby makes five

I recall writing a blogpost five weeks ago called Next Stop: Bank Failures. Well, I'm not one to toot my own horn, but... Toot! Toot!

The federal government took control of Pasadena-based IndyMac Bank on Friday in what regulators called the second-largest bank failure in U.S. history.

Citing a massive run on deposits, regulators shut its main branch three hours early, leaving customers stunned and upset. One woman leaned on the locked doors, pleading with an employee inside: "Please, please, I want to take out a portion." All she could do was read a two-page notice taped to the door.

IndyMac -- whose slogan, wonderfully, was "You Can Count On Us" -- is the fifth U.S. bank this year to bite the dust. Something tells me it's not going to be the last.

(Note: FDIC insures every account up to $100,000, so most non-business and non-rich IndyMac account holders have nothing to worry about save some logistical hassles. Over that number, it's an open question. The government will sell off IndyMac's assets for whatever they can get, and go from there...)