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November 24, 2008 6:47 AM   Subscribe

Anatomy of a Meltdown - Ben Bernanke and the financial crisis (in one page)
posted by Gyan (61 comments total) 11 users marked this as a favorite
 
Paulson agreed. A bailout ran counter to the Bush Administration’s free-market principles and to his own belief that reckless behavior should not be rewarded, but he had worked on Wall Street for thirty-two years, most recently as the C.E.O. of Goldman Sachs, and had never seen a financial crisis of this magnitude. He had come to respect Bernanke’s judgment, and he shared his conviction that, in an emergency, pragmatism trumps ideology.
Translation: Bailouts are against the free market, except when I stand to lose a shitload of cash and end up looking like an idiot. Then it's pragmatic.
posted by PenDevil at 7:06 AM on November 24, 2008 [13 favorites]


I'm interested in the credit ratings part. Am I incorrect in my understanding that the mis-representation of the ratings of these bundles is a critical part of the problem? Would the mortgage collapse maelstrom have been minimized if this issue did not exist? Eliminated entirely?

This article is useless without an address to send my teeth ... for the Federal Reserve.
posted by adipocere at 7:17 AM on November 24, 2008 [5 favorites]


I'm all for the bailout because I know that when *I* need money, the bank or government will send me $240,000. It's pragmatic, not ideological.
posted by DU at 7:19 AM on November 24, 2008 [1 favorite]


Well, DU, Georgie boy sent me 300 bucks a few years back. That was a hell of a weekend.
posted by spicynuts at 7:23 AM on November 24, 2008 [2 favorites]


Looking back on this period, Bernanke told me, “I and others were mistaken early on in saying that the subprime crisis would be contained. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.”
Who started this idea that there's a "casual" relationship between housing and the financial system? It's the single largest investment most people will ever make, eating up 1/3rd of your annual income, and all of it flows through the financial system. If housing hits the wall, you can be damn sure that the financial system is going to feel it.
posted by PenDevil at 7:27 AM on November 24, 2008 [1 favorite]


All industry wide bailouts can be averted by pushing along startups or smaller companies.

Indeed this policy would have worked more easily for the banks than for the current automotive manufacturer crisis. You'd just take small banks tell them they must become big banks, increase their fed borrowing power, defer the costs of hiring new employees, and send NSA analysts to help them evaluate loans & such.
posted by jeffburdges at 7:27 AM on November 24, 2008


"in an emergency, pragmatism trumps ideology."

..the rest of the time, ideology beats pragmatism. That sentence sums up the past 20 years or so. The Baby Boomer dreamers.
posted by stbalbach at 7:34 AM on November 24, 2008 [9 favorites]


PenDevil, it's causal, not casual.
posted by snofoam at 7:34 AM on November 24, 2008 [1 favorite]


In October, 2002, a few months after joining the Fed, he gave a speech to the National Association for Business Economics, in which he said, “First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them.” In other words, it is difficult to distinguish a rise in asset prices that is justified by a strong economy from one based merely on speculation, and raising rates in order to puncture a bubble can bring on a recession.
This is what kills me about this guy. He thinks no one could have detected the housing bubble — never mind that everyone did except for realtors (no I will not capitalize that you pompous fucks), Fed governors, and Casey Serin. He thinks raising rates would have been foolish even if they could have. (When exactly, one wonders, does he believe in raising rates?) Forget taking away the punchbowl — this is the guy who wanders around the ruins of the party at seven in the morning trying to find somebody to keep drinking with when everyone else is stumbling home or passed out on the couch covered in vomit.
posted by enn at 7:37 AM on November 24, 2008 [9 favorites]


In the September 2004 issue of Harpers, Lewis H. Lapham wrote an excellent article about the rise of the Republican machine. One section is a very succinct description of the attitude of Washington, no matter who is in power:
In the glut of paper I could find no unifying or fundamental principle except a certain belief that money was good for rich people and bad for poor people. It was the only point on which all the authorities agreed, and no matter where the words were coming from (a report on federal housing, an essay on the payment of Social Security, articles on the sorrow of the slums or the wonder of the U.S. Navy) the authors invariably found the same abiding lesson in the tale—money ennobles rich people, making them strong as well as wise; money corrupts poor people, making them stupid as well as weak.
posted by Bitter soylent at 7:52 AM on November 24, 2008 [33 favorites]


Bernanke and Gertler argued that the Fed should ignore bubbles and stick to its traditional policy of controlling inflation. If a bubble inflated and burst of its own accord, they said, the Fed could always bring down rates to alleviate damage to the broader economy. To support their case, they presented a series of computer simulations, which appeared to show that a policy of targeting inflation stabilized the economy more effectively than one that targeted bubbles. The presentation got a mixed reception. Henry Kaufman, a well-known Wall Street economist, said that it would be irresponsible for the Fed to ignore rampant speculation. Rudi Dornbusch, an M.I.T. professor (who has since died), pointed out that Bernanke and Gertler had overlooked the possibility that credit could dry up after a bubble burst, and that such a development could have serious effects on the economy. But Greenspan was more supportive. “He didn’t say anything during the session,” Gertler recalled. “But after it was over he walked by and said, as quietly as he could, ‘You know, I agree with you.’ That had us in seventh heaven.”
i think this is the key paragraph. he essentially got to be fed chair by telling greenspan what he wanted to hear.

we are a nation governed by suck-ups, syncophants, and courtiers.
posted by geos at 7:54 AM on November 24, 2008 [2 favorites]


how about this deal -- I'll support citibank's bailout if they forget about my credit card bill.
posted by empath at 8:01 AM on November 24, 2008 [9 favorites]


in an emergency, pragmatism trumps ideology.

I keep hearing this and I simply do not understand what it means. Or: I do not understand what mental structures must be in place for this concept to be sensible to someone.

Surely, if a pragmatic course of action conflicts with your ideology, it becomes your responsibility to reexamine your ideology. Not to simply shelve it temporarily, under the assumption that you can just dust it off later and move on about your day. Ideology isn't an occasional proposition. You have it or you don't. If "Thou shalt not kill" is your ideology, and you truly believe you must kill somebody (say in self-defense), then you don't get to just turn off the commandment and then turn it back on. You have complicated your ideology. It is now "thou shalt not kill except under certain circumstances." And "thou shalt not bail out except under certain circumstances" just serves to prove that "thou shalt not bail out" was a flawed, dumb ideology, and now we need to take a look at what those circumstances are and why they exist.
posted by penduluum at 8:03 AM on November 24, 2008 [22 favorites]


adipocere is right on target, in the search for specific human criminal culpability, the ratings agencies are at the head of the list.
posted by sfts2 at 8:07 AM on November 24, 2008


This Bernanke of which you speak is both hero and villain. Aha! Aha! (excellent article)
posted by dances_with_sneetches at 8:17 AM on November 24, 2008


reexamine your ideology

I really don't think that's an option for these guys. They would turn to dust and blow away.
posted by diogenes at 8:20 AM on November 24, 2008 [1 favorite]


Let's keep pumping money into the wallets of failed businessmen and forget about the fact that people aren't buying cars because they're getting laid off.

I lost my respect for economics when I realized that unlike physics or biology, which can fix things in the future, economics is simply a self-descriptive, self-propagating system. Economics professors are cool because description is necessary for teaching, but the people who actually make policy based on economic models are fail. Never heard anyone able to justify why the economy exists, why it should exist like this, and why the government/business owners are so lax about layoffs in a consumer-driven economy.

Let's not forget the fact that corporations are not people; corporations do not have quality of life. Favoring the support of an imaginary construct over people who are getting kicked out of their houses is mind boggling.

/rant
posted by burnfirewalls at 8:30 AM on November 24, 2008 [3 favorites]


"The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.”

Bernanke has studied the Great Depression extensively... I guess he missed the part about the massive housing boom of the 1920s followed by the massive housing bust.

"The October 1929 crash came during a period of declining real estate values in America (which peaked in 1925) near the beginning of a chain of events that led to the Great Depression."
posted by Fuzzy Monster at 8:33 AM on November 24, 2008 [1 favorite]


...in an emergency, pragmatism trumps ideology.
And therein lies the epic fail of modern American economics. It's all ideological theory with absolutely no way to test the theory without releasing it into the wild and hoping it doesn't eat people alive. Economics is not a science. It's a fucking guessing game backed by dogma that shores-up your group's particular level of self-interest.
posted by Thorzdad at 8:43 AM on November 24, 2008 [3 favorites]


We're all assuming that Bernanke studied the Great Depression to understand how to prevent another one. Maybe he studied it to understand how to create another one! He was appointed by Bush...
posted by diogenes at 8:43 AM on November 24, 2008 [2 favorites]


I lost my respect for economics when I realized that unlike physics or biology, which can fix things in the future, economics is simply a self-descriptive, self-propagating system.

To be fair, economics is much more of a moving target than most other fields. Scientists have had hundreds of years to do experiments about the structure of the atom, but how long have economists had to study CDOs and CDSs? And there is no way to do real controlled experiments in macroeconomics, so all they have to go by is history and theory.
posted by burnmp3s at 8:52 AM on November 24, 2008 [1 favorite]


My theory is that saw the housing bubble and realized it was going to eventually burst and create a mess. If they raised rates years ago to slow down the market, they'd be blamed for the economic meltdown that followed. If they left it alone, the bubble (and the resulting mess) would be bigger, but at least they wouldn't be blamed for it. Well, that and the fact that it's better to dump the economy when your boy bush is leaving the white house instead of starting a second term.

That and the fact the cdo/cds markets made the mess exponentially worse than it needed to be.
posted by ShadowCrash at 8:52 AM on November 24, 2008


Bernanke has studied the Great Depression extensively... I guess he missed the part about the massive housing boom of the 1920s followed by the massive housing bust.
In an article Bernanke published in 1983, he showed how the Fed’s failure in the early thirties to prevent banks from collapsing contributed to the depth and severity of the Great Depression—a finding that supported a theory first proposed in 1963 by the economists Milton Friedman and Anna Schwartz. In November, 2002, shortly after joining the Fed, Bernanke appeared at a conference to mark Friedman’s ninetieth birthday, and apologized for the Fed’s Depression-era policies. “I would like to say to Milton and Anna: regarding the Great Depression, you’re right; we did it,” he said. “We’re very sorry. But, thanks to you, we won’t do it again.”
yup, that's why we need to back-up (to) $300 billion in bad citibank loans. that's Friedman's free market for you. the arrogance, the hypocrisy, the greed... won't someone do a citibank post so i can get my hammer and sickle out.
posted by geos at 8:59 AM on November 24, 2008 [2 favorites]


What I find most depressing about the whole mess is that this is not the result of some clueless fuckups finding themselve in over their heads and just punting. This is the result of some very smart people thinking real hard and coming up with their very best plan to save the day. I am not sanguine about the future.
posted by RussHy at 9:02 AM on November 24, 2008


Obama's working with Congress to get a $500 billion infrastructure stimulus package on his desk on January 20.
posted by EarBucket at 9:05 AM on November 24, 2008


The good news is that once housing prices crash, I might be able to afford a house.

The bad news is that once the entire economy crashes, no-one will be able to afford a house.
posted by you just lost the game at 9:36 AM on November 24, 2008 [1 favorite]


Yes, there's something fundamentally unsound about a solution to a problem that hands more resources to the very people who screwed the pooch in the first place. Give the money to consumers and let the fuck-ups compete for it.
posted by Mental Wimp at 9:52 AM on November 24, 2008 [1 favorite]


In Soviet Russia banks bail out YOU!

Not so funny now America?
posted by mazola at 10:02 AM on November 24, 2008 [1 favorite]


Part of me thinks that economists are really good at explaining what should happen, but largely useless at predicting what will happen. Then they say, oh, it's because people didn't do what they were supposed to. Like a weatherman telling people not to bring an umbrella when it's raining because it isn't supposed to be raining.

I also think that many economists say totally ridiculous things because they willfully disregard anything that isn't part of their economic theories. That way they can say a cheap tomato from 3,000 miles away is better than a locally farmed heirloom tomato because they ignore the way the tomatoes taste and their relative nutritional value. This would be like a physicist designing a rocket that can shoot an astronaut into space but the capsule is 3,000 degrees when taking off and then saying, yeah, but that's the biology part, I'm only doing the physics to get the mass into space.

I also think many of them are just scumbags who want to justify the rape and pillaging of our earth and regular folks for the benefit of a wealthy few, and do so with complicated, but irrelevant mathematics and bogus pseudo-scientific theories in order to provide some plausible deniability about what these assholes are really doing. I seem to be thinking this more and more lately.
posted by snofoam at 10:08 AM on November 24, 2008 [4 favorites]


I also think many of them are just scumbags who want to justify the rape and pillaging of our earth and regular folks for the benefit of a wealthy few

A Dr Gaffney at UC Riverside wrote a book on that. . .
posted by troy at 10:21 AM on November 24, 2008 [1 favorite]


Anyone who believes the United States doesn't bail out companies or entire industries isn't familiar with economic history. When it suits America we bail out - it's as simple as that, free market ideology be damned.

Just a few off the top of my head - where possible I've included dollar figures if a quick google would reveal the sums (chronological order)
  • Amtrak, 1971
  • Lockheed, 1971, $1.4 billion
  • United States National Savings Bank (the failure of /Franklin National Bank), $7.7 billion
  • Conrail, 1975
  • New York City 1975, $2.3 billion
  • Chrysler, 1979, $1.5 billion
  • Continental Illinois National Bank and Trust, 1984 (no money involved but The Fed ran this bank for 10 years)
  • Savings & Loan, 1989, $294 billion
  • Airline Industry, Airline Industry, 2001, $19 billion
  • Fannie Mae / Freddie Mac, 2008, $200 billion
  • AIG, 2008, $150 billion
So lots of big intervention at, at times, not so large intervention. And, of course, some argue that US Defense spending represents the mother of all government interventions, indirectly funding R&D that someday (hopefully) will have civilian potential; that's a huge debate just on it's own merits.

But of course FDR really introduced the idea of government rescues with his Fair Deal, an incredibly wide ranging program of previously unheard of support including (alphabetical order) No mistake about it; the New Deal changed the social nature of America permanently (and for the better I believe); before this bailouts DIDN'T HAPPEN, at least on this scale.

We have had lots of asset bubbles and economic collapses in The United States and before FDR changed the nations mindset (to expect intervention at some point) people lost their jobs, homes, families and died during depressions. 1929 wasn't the first - we've had lots of them in America. If anything the social network that FDR inculcated has helped to mitigate the pain and damage of these events. But bubbles keep happening.

Regardless, the United States has a long and rich history of intervention when it suits. One thing I've always been curious about though. When in Business School I saw studies about US and European career histories.

In America firms are faster to hire and quicker to fire.

In Europe, firms are slower to hire and reluctant to fire.

Now the explanation is labour laws; it's just tougher to fire someone in Europe so we don't hire as fast. Of course it's the opposite in America, so you'd think that if you measured, across someone's career, how many days they'd worked vs been unemployed America would be the clear winner.

Nope, roughly a tie. It will take you longer to find a job in Europe but you'll have it for a longer period of time than in America.

So what I was curious about (and this isn't my area of research at all), if we compared US and EU meddling (for want of a better word), would we find more in Europe, more in America or roughly the same?

I'd bet it shakes out roughly equal, across the board.

In Europe you've got a lot more day to day government presence and involvement in a business, while in America we only see government when needed; i.e. when the Cavalry arrives.

But, as history shows us, they get called a lot.
posted by Mutant at 10:36 AM on November 24, 2008 [38 favorites]


A Meltdown? Oh no, not quite yet.

The stock market crash is just the warm up for the real meltdown: a bond market crash.

Eventually the government will have to pay the bill for all these bailouts, interventions, new obligations (oh hai FDIC, yes please raise insurance limit to $250K and insure my money market fund and circuit city gift card while you're at it) and stimulii.

Fed Pledges Exceed $7.4 Trillion:



That bill is paid one of 3 ways:

1 - Cut Spending

2 - Raise Taxes

3 - Borrow

1 and 2 are non-starters in a recession cum depression. That leaves #3.

3 is accomplished by selling treasury debt.

Supposedly there is ~2.7 Trillion in treasury debt outstanding. Total.

I've seen estimates that the Treasury will need to auction ~3 trillion in F.Y. 2009 (Oct. '08 to Oct. '09) in order to fund all the bailouts made SO FAR.

Supply and demand - what happens to demand when you double supply?

Get ready for much higher interest rates, and much lower prices for the treasuries that are currently held, aka, A Bond Crash.
posted by de void at 10:38 AM on November 24, 2008 [4 favorites]


Oops, should have been a link in the above post for the 7.4 trillion story:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDqw8_eMzrhU&refer=home
posted by de void at 10:39 AM on November 24, 2008


1929 wasn't the first - we've had lots of them in America.

This graph via the St Louis Fed illustrates the frangibility of the economy from the late 19th century to the 1930s. . .
posted by troy at 10:58 AM on November 24, 2008


The Fed Is Out of Ammunition

posted by ornate insect at 10:59 AM on November 24, 2008 [1 favorite]


Does anybody else with a subscription to The New Yorker find it annoying that these articles are released online before the print issue arrives? Is this just happening for me? I always skip these links cos I wanna read it in print, but it would be nice to read it in print & then come here & see the comments. Ah well.
posted by jcruelty at 11:09 AM on November 24, 2008 [1 favorite]


In Europe you've got a lot more day to day government presence and involvement in a business, while in America we only see government when needed; i.e. when the Cavalry arrives.

...which is why there is hardly any lobbying of the federal government by business in the U.S. since there is so little involvement. Also, you have to compare apples to oranges since there is signifcant "state" regulation of business in the U.S. which doesn't compare readily to what happens in Europe (especially since much of it isn't likely very transparent.)

i won't argue about the statistics of bailouts in the U.S. but the federal government is still acting as if this is a crisis of confidence rather than solvency. the reason the risk premium for citi is going up may be "fear itself" or maybe, just maybe, it's because they really are exposed to housing deflation and the recession.
posted by geos at 11:13 AM on November 24, 2008


Boy, I want to hammer again on the axe I've been grinding - that is, that while everyone is giving lip service to getting the credit markets moving again, mortgage rates are going up rather than down (at least here on the east coast of the USA). Sure, we bought into all these banks because their failure would be catastrophic, but catastrophic to whom? To the borrower, and the larger credit markets? Or just to bankers and stockholders? If, to defend against deflation, the Fed prints a google of new dollars, interest rates are going to go way up, and noone's going to want to take any kind of loan in that environment.

It seems like the Fed is one step too far removed to actually effect the outcome of loan-making decisions. Since we own all these banks now, or presumably have some control over them, we ought to mandate that rate cuts are passed from the Fed to the borrower rather than pocketed as profit by the banks.
posted by newdaddy at 11:24 AM on November 24, 2008


burnmp3s: To be fair, economics is much more of a moving target than most other fields. Scientists have had hundreds of years to do experiments about the structure of the atom, but how long have economists had to study CDOs and CDSs? And there is no way to do real controlled experiments in macroeconomics, so all they have to go by is history and theory.

True, burnmp3s. Economics is terrifically complex and that's no reason to shy away from an area of inquiry - indeed, if it were simple to understand there wouldn't be a need for the inquiry. On the other hand, economists stymie and befuddle other economists by creating new raw material to be studied via policy - physicists only stymie and befuddle other physicists by coming up with new observations, they don't create new forms of matter. Economists can stop making/curtail new forms of investment - a Bose-Einstein condensate is going to be possible whether or not a bunch of scientists have a meeting about it.

Let's say, for the sake of argument, that there are economists who could use the current system of government/finance not for good or evil, but for awesome - the selection process by which they get into the position to shape policy is essentially to appeal to the aesthetics of a hiring committee that may not know dollars from doughnuts. The economics community might understand the situation, but that doesn't meant that the right economists are going to get selected to shape policy. Sycophancy trumps peer-review.
posted by burnfirewalls at 11:36 AM on November 24, 2008 [2 favorites]


I'm no economist, but my joe-six-pack reflex reaction is that I like the sound of "infrastructure economic stimulus" a lot more than anything with the word "bailout" in it.

Because, you know, it sounds like at the end of the former we might actually get something useful: new/better infrastructure. But I'm pretty sure after a bailout all you have is the same unreliable boat as before, only now it's all wet and stinky and water-damaged, too.
posted by rokusan at 1:37 PM on November 24, 2008 [3 favorites]


An infrastructure stimulus has a couple of advantages besides leaving us with bridges and roads to show for it once the money's been spent, too. It creates actual jobs; you have to hire people to pour the cement. And once the project's over, you stop spending money, which makes it more attractive to fiscal conservatives than a new entitlement program.

(Or should, anyway. Republicans may be tempted to oppose it just to stick their thumb in Obama's eye, but that would be unwise. For the first six months or so at least, he's going to be enjoying a honeymoon period with the public and the press, and standing in the way of a program to turn the economy around would be massively unpopular, especially since they'd have to vote against it on strict party lines to successfully filibuster.)
posted by EarBucket at 1:44 PM on November 24, 2008


Too Terrifying, Didn't Read.
posted by Devils Rancher at 2:00 PM on November 24, 2008 [1 favorite]


I'm amazed at how little I understand of how society is built. But I'm also amazed to see such quasi-religious feeling influencing important affairs of state. The belief in free markets has all the hallmarks of a religious mania. It is as if naked observation of economic variables convinced them all that "it's alive", and they failed to notice that not only is it alive, but it is us! The indicators speak of real lives and real people, and not of an alien life form. Yet that is how they treat this magical free market. Perhaps the real silver lining will be to marginalize that particular attitude towards the collective.
posted by fcummins at 2:03 PM on November 24, 2008


1 and 2 are non-starters in a recession cum depression.
You could always tax just the rich.
posted by bonaldi at 2:09 PM on November 24, 2008 [1 favorite]


Seems to me the root 'problem' of economics as a practical activity, is the fungibility of money. If different parts of an economy could be sectioned off from one another, such that food, housing, and education could proceed without regard for rise and fall in mineral extraction, manufacturing, computer sales, and so on--ie, a 'firewall' between necessity and luxury--then we would have far fewer problems.

In other words, that you buy bread and pay rent with the same dollars, out of the same wallet, with which you attempt to make yourself rich and/or happy, puts you at risk. Your activities in turn put others at risk. Personally I would prefer not to give a damn about Casey Serin (poor pathetic posterboy that he was) and his like - by all means, feel free to mess about with real estate and see if you can make yourself rich. The problem is that it leads to messing about with me and you. Selfish dickwads (or alternatively, pro-active and ambitious investors, it all depends on what side of the mirror one stands on) buy real estate to flip; whoop-di-doo, who cares. Real estate prices go up; damn, have to pay a bit more for a house, but on the other hand, they will lend me more. Rent goes up; oh crap, I'm going to have to move an hour out of the city, and spend more money and time on transport, just because Casey wanted to make money. Money being fungible, the speculator's self-enrichment-directed activities affect our survival-directed activities.

At that point, I'm justified in taking a hostile view of their activities. Economics is not zero-sum. People can always, and hopefully will always, find new ways to add new money-making methods to the economy. But as time goes by, a lot of those money-making methods (and real estate is the best and most eminent example) get popular, approach zero-sum, and even dip into negative-sum.

I suspect there's a good case to be made for that to be a test point for regulation: when economic activity starts becoming zero-sum on an economy-wide level, it's time to regulate it, so as to prevent damage, and also to point the self-enrichers at the positive-sum activities. Everyone should be a self-enricher; that we're not, is a core reason why free-marketism is a bad thing, because free-marketism requires everyone to be a self-enricher to work properly, and screws over those who aren't.
posted by aeschenkarnos at 2:58 PM on November 24, 2008


If different parts of an economy could be sectioned off from one another,

then money would no longer be a "universal means of exchange", rendering it difficult to use. Imagine your credit card bill at the end of the month!

In other words, that you buy bread and pay rent with the same dollars, out of the same wallet, with which you attempt to make yourself rich and/or happy, puts you at risk.

Only in countries where you can fall off the bottom and starve to death, like the US. In social democracies, you can only fall as far as "the dole".

Here's something I wrote a few days ago with another proposal:

The Economic Amendment to the Bill of Rights.

A well-regulated economic system being essential to the health of the body politic, the right of the people to engage in equitable economic activities shall not be abridged.

Note the word "equitable". It means "rip-offs are not protected".

Note the words "well-regulated".

A well-regulated economic system needs to be:

Responsible: at each point there is an individual or a group of individuals (a corporation) who is actually legally, even criminally, responsible for each financial statement made.

Open: anything not conveying a strong competitive market advantage needs to be open. All risk factors need to be open whether or not they convery a market advantage.

Disinterested: the financial advisors need to be disinterested from the things they are selling. You can't push items you are holding. Bring back Glass-Steagall; enforce Chinese walls/firewalls. All potential conflicts of interest must be disclosed (see "Open")

An economic system that is not run under these principles is just a license to steal from the state; that it allows what is happening today, where a comparatively small number of rich thieves have looted the Treasury for trillions.
posted by lupus_yonderboy at 3:37 PM on November 24, 2008 [1 favorite]


by all means, feel free to mess about with real estate and see if you can make yourself rich. The problem is that it leads to messing about with me and you

The mechanism for firewalling the Casey Serins of the world from the productive economy was first proposed 200+ years ago by Thomas Paine, developed further in the late 19th century by various reformers (including Winston Churchill), then promptly purged from popular knowledge by the post-Great War prosperity and then the following Red Scare.

Land value is entirely taxable surplus. From my reading few economic schools will disagree that it is the "least worst" tax.

Note that many major economic downturns -- 1929, 1989 in Japan, the 1990-1991 recession -- had their roots in land speculation.

This is only natural because, in the absence of a land value tax, in times of relative prosperity the landlord collects & keeps unearned income -- economic rent -- hand over fist.

With a LVT regime the landlord would collect but not keep this economic rent due to land values.
posted by troy at 3:50 PM on November 24, 2008 [2 favorites]


All industry wide bailouts can be averted by pushing along startups or smaller companies.

Not in these circumstances. Financing to start such companies is non-existent. There is no company poised to take on the assets and debt of the automakers. You are talking about putting millions of people out of work. Building those small businesses to the point where they would even come close to replacing the jobs and lost revenue takes a very long time, even in a good economy.
posted by krinklyfig at 4:55 PM on November 24, 2008 [1 favorite]


A well-regulated economic system being essential to the health of the body politic, the right of the people to engage in equitable economic activities shall not be abridged.

How does this play out in the USSC?

Note the word "equitable". It means "rip-offs are not protected".

One of the things that needs to be repeated is that the bailouts are designed to deal with systemic risk. At this point moral hazard is (should not be) an issue. We could let it fail, but that road is going to be far, far worse.
posted by krinklyfig at 5:00 PM on November 24, 2008


Should have read, "moral hazard is not an issue."
posted by krinklyfig at 5:01 PM on November 24, 2008


As much as we can blame Washington for screwing up, then bailing out... I have to wonder whether this was really avoidable.

To me, the basic fact of the last decade or two seems to be that there's been a flood of new businesses, a flood of new products, a flood of product diversification... It's not just a Wonder Bread world anymore. Instead, you get a bazillion forms of breads, and bagels, and pitas, all with their own inefficient support teams, manufacturers, marketing departments, etc.

It's like we have so much efficiency, we can afford to trade a lot of that away for greater diversity... even as millions still go without. Why? Because... they don't contribute to the economy in any meaningful way and simply don't matter in the great scheme of things. We can afford to eat efficiencies through diversification or simply for sheer waste -- Hummers, super-sized meals, all-you-can-eat -- but taking care of the most needy is simply not profitable, and undercuts capitalism.

And you see this same kind of product diversification everywhere else you look... and yet, where are all the new consumers to buy all this stuff?! So, with that much competition, prices must be kept as low as possible... manufacturing must be offshored... cheap, fast, and as efficient as possible. Retailed at Walmart, in bulk!

But at a certain point, people don't need and can't justify even more... especially when it's fundamentally bad for them and for the world. Despite all the underlying efficiencies and low costs, consumption slumps. Traditional investments slump, as all the low-hanging money-to-be-made dries up. Bubble economies sprout up.

So, when people complain about how we've been failed as far as real estate speculation funded by risky loans, I have to think... if not real estate, then what else would it have been? To me, real estate speculation seems like the last resort before oil, copper... with the possible exception of guns and underground bunkers.

All the bubbles were moving towards the lowest common denominator anyways, weren't they?!

The fact is, real estate is horribly inflated over the past 30 years or so, despite obvious increased efficiencies in construction. And yet, ask any homeowner out there in the Silicon Valley area where I live, and they'll tell you that *their* house shouldn't go down in value in the current economy, and that demand will *always* be strong here. Many of these people who back in 2003 were busy flipping a house on the side and who didn't get stuck when home prices started falling sharply last year are now the same people buying up foreclosures around here, at a rate that practically keeps up with supply... and they think this speculation is a good idea, because "it can never happen here..."

So, while I would like to blame the federal government for saving our banks and auto industry, there's still so much consumer stupidity and greed out there that it's really hard for me to care about bailouts. Because I trust these consumers to behave in a greedy, short-sighted manner that causes the bubbles which hurt ordinary Americans.

The fact is, a *LOT* of Americans still quite rightly deserve a heapin' helpin' of economic pain. Unfortunately, those feeling the pain in this recession are usually the wrong Americans.
posted by markkraft at 5:51 PM on November 24, 2008 [4 favorites]


Many of these people who back in 2003 were busy flipping a house on the side and who didn't get stuck when home prices started falling sharply last year are now the same people buying up foreclosures around here, at a rate that practically keeps up with supply... and they think this speculation is a good idea, because "it can never happen here..."

I was watching one of those lottery shows which feature the winners and their lives, and one guy took most of his $3 million and poured it into creating a house flipping business as a "wise investment," as he didn't want to be one of those guys who blows it all (the taping was done in the summer of 2007). I'm afraid to look up his business, as I'm afraid his so-called wise investment is going to look pretty unwise right about now. Of course, he probably wouldn't have done much better putting it into the stock market, which is what most financial advisors would have told him to do last year.
posted by krinklyfig at 5:59 PM on November 24, 2008


Supposedly there is ~2.7 Trillion in treasury debt outstanding. Total.

I've seen estimates that the Treasury will need to auction ~3 trillion in F.Y. 2009 (Oct. '08 to Oct. '09) in order to fund all the bailouts made SO FAR.

Supply and demand - what happens to demand when you double supply?

Get ready for much higher interest rates, and much lower prices for the treasuries that are currently held, aka, A Bond Crash.

It all depends. Keep in mind that treasury auctions are a way to get money without the fed having to print it. The fed can print as much money as it wants and buy treasuries but that would encourage rampant inflation.

As silly and greedy we think Bernanke is the guy does realise that we're not going anywhere until we get lower long term interest rates. There's not going to be a bond crash because, if Bernanke gets hit way, the Fed and Treasury are going to force long term interest rates down using ~0% short term T-bills to stash cash in the fed's account which will then be used to purchase long bonds and drive the long term mortgage rates down by force.

This in turn should stimulate the housing market and drive a consumer spending recovery while helping those who need the most help.
posted by Talez at 9:12 PM on November 24, 2008


You know, after reading the article, I've come to the conclusion that strange simulations lyin' in cluster-farms distributin' bailouts is no basis for a system of finance.
YES, a successful Monty Python reference. Finally.
posted by the cydonian at 10:20 PM on November 24, 2008


Surely, if a pragmatic course of action conflicts with your ideology, it becomes your responsibility to reexamine your ideology. Not to simply shelve it temporarily, under the assumption that you can just dust it off later and move on about your day. Ideology isn't an occasional proposition. You have it or you don't. If "Thou shalt not kill" is your ideology, and you truly believe you must kill somebody (say in self-defense), then you don't get to just turn off the commandment and then turn it back on. You have complicated your ideology. It is now "thou shalt not kill except under certain circumstances." And "thou shalt not bail out except under certain circumstances" just serves to prove that "thou shalt not bail out" was a flawed, dumb ideology, and now we need to take a look at what those circumstances are and why they exist.

This is just like a pro-lifer "killing a baby" when she is the one to get pregnant and then going right back on the picket line the next day, screaming all the louder to cover up her own shame.

See Bush lecturing the economic summit on free markets less than 60 days after his administration gets on its knees begging for a bailout from Congress.

No wonder no one will shake hands with this pathetic s.o.b.

(yes, I saw the "retraction", and no, I'm not buying it.)
posted by marsha56 at 10:44 PM on November 24, 2008 [1 favorite]


No mistake about it; the New Deal changed the social nature of America permanently (and for the better I believe); before this bailouts DIDN'T HAPPEN, at least on this scale.

Speaking of the scale of this bailout mania, I notice today that Jim Bianco, as quoted at The Big Picture, has estimated that the inflation-adjusted potential costs of recent bailout action is "more than all of these big-budget government expenditures -- combined:"
  • Marshall Plan
  • Louisiana Purchase
  • Apollo program
  • S&L Crisis
  • Korean War
  • The New Deal
  • Invasion of Iraq
  • Vietnam War
  • NASA
Even if you use a more optimistic estimate of the costs that will be realized, and even if you adjust by size of GDP instead of inflation, it's still going to come out to quite a lot more than his estimate (or another) of the New Deal. So, before 2008 bailouts didn't happen on this scale.
posted by sfenders at 5:14 AM on November 25, 2008 [1 favorite]


Which of course, attempts to obfuscate the difference between 'spending' and 'investment' and the relative return of something like the Vietnam War and the Louisiana Purchase. This kind of breathless 'analysis' doesn't further the course of discussion on these topics. I'd bet the profits over time of these bailouts dwarf those expenditures as well.
posted by sfts2 at 5:34 AM on November 25, 2008


I'd bet the profits over time of these bailouts dwarf those expenditures as well.

One would hope so, yes. Although at least one commentator claims to think he can calculate that the US got a pretty good deal on Louisiana. It is why I prefer to focus on comparison to the New Deal.
posted by sfenders at 6:02 AM on November 25, 2008


I'd bet the profits over time of these bailouts dwarf those expenditures as well.

I've been wrestling with that post at the Big Picture all day. The numbers are staggering. Do we have reason to be optimistic that the money will be payed back? Over what time frame? And isn't there a huge opportunity cost in the meantime?

To pick one example, what about AIG? Won't it take them forever to pay back that kind of money if they just make conservative investments? Is it really likely that they return to being a wildly profitable company?

I hope we get an FPP on this topic.
posted by diogenes at 9:32 AM on November 25, 2008


As much as we can blame Washington for screwing up, then bailing out... I have to wonder whether this was really avoidable.

Perhaps if The Office of the Comptroller of the Currency (OCC) hadn't preempted every single state's Predatory Lending Laws, things might've turned out a little differently.

"In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules."

--from here: Predatory Lenders' Partner in Crime: How the Bush Administration Stopped the States From Stepping In to Help Consumers.
posted by Fuzzy Monster at 2:15 PM on November 25, 2008


fcummins: I'm also amazed to see such quasi-religious feeling influencing important affairs of state. The belief in free markets has all the hallmarks of a religious mania.

This has most likely been linked from Metafilter before, but since you mentioned it: The Market as God, from a 1999 issue of The Atlantic. Excerpt:
The lexicon of The Wall Street Journal and the business sections of Time and Newsweek turned out to bear a striking resemblance to Genesis, the Epistle to the Romans, and Saint Augustine's City of God. Behind descriptions of market reforms, monetary policy, and the convolutions of the Dow, I gradually made out the pieces of a grand narrative about the inner meaning of human history, why things had gone wrong, and how to put them right. Theologians call these myths of origin, legends of the fall, and doctrines of sin and redemption. But here they were again, and in only thin disguise: chronicles about the creation of wealth, the seductive temptations of statism, captivity to faceless economic cycles, and, ultimately, salvation through the advent of free markets, with a small dose of ascetic belt tightening along the way, especially for the East Asian economies.
posted by youarenothere at 5:38 PM on November 25, 2008


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