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Brad DeLong on the McCain Bailout Plan

McCain seems to be batting a 1000 on this financial crisis.  In the town hall “debate” of last night, he proposed buying up failed mortgages and “renegotiating” with the borrower on the value of the home as it is now.  Brad Delong gives us a rundown on why that’s such a bad idea.  In short, what McCain proposes to do is buy the bad debts from the banks that created them at face value, then become the banker to every bad debt borrower out there.

Apart from handing over billions of dollars to the irresponsible lenders, the problem with this that DeLong does not mention is that home prices are still falling.  So, the person who seems fine at the moment may be in trouble in a matter of months.  Meanwhile, it is the failing value of the homes that was the trigger for this whole mess in the first place.  The McCain plan does nothing to solve this problem and so seems to be treating the foot of a man with a broken leg.

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Local Media Oblivious to Credit Reality

Like most blogs, this blog often takes up space discussing the media, but I don’t like to think of this site as a media watchdog, particularly.  If the media is discussed, it’s often because in order to discuss the story adequately, the media’s role in it is necessary background.  I criticize local media even less because, frankly, I don’t pay attention to much of it.  Often on issues of national import, where a great opportunity lies to make those issues local, the opportunity is missed by a media culture that chooses to view Rochester as exceptional.

And if there’s one issue in particular where the local media adds no value – and in some cases, seems to have actively engaged in doing the Rochester public a disservice – it is the subprime lending crisis, which has now bloomed into the global credit crunch. This story has been out there for a year and a half, but you’d never know it by the local media coverage.

When the shit really started hitting the fan and the story became impossible not to cover about eight months or so ago, the story locally became about those people in California and elsewhere.  The D&C, in particular, ran stories claiming that because we don’t have the swings in real estate values other places had, we’d be just fine.  Rochester, we were told, was exceptional in that way.  We’re just a sleepy little town that the “Big Issues” don’t affect.  We’re not like California, heavens no!

When reports came out on how Rochester and Monroe County were being affected, the local media promptly reported that the report came out. . . .  no analysis, no deeper coverage, no exploration of the places affected by the Subprime foreclosure rate, just a report that the report happened.  No one noticed, for example, that foreclosure rates bloomed not only in the inner city (as is in keeping with the obliquely racist and classist narrative on the national level), but in the outlying suburbs as well, particularly on the east side.  It might have been illuminating to Rochestarians to know that it wasn’t just a poor people problem, it wasn’t just a brown people problem.  It might have prepared them for what’s come next if they’d known how big a problem this really was and is.

And now that the credit crisis has moved into a new and more malignant phase, freezing global credit markets and causing Wall Street to tumble, the story has moved to the Business section, where it can be once again ignored.  The direct line that could be traced from Medon, through JP Morgan Chase, through Avenida D, through – yes – California, and through Washington was never traced.  Best of all, this morning, the creme de la creme of benighted journalism steped in with the following doozie:

Markets oblivious to rate cut | democratandchronicle.com | Democrat and Chronicle

For the second consecutive day, the Federal Reserve took action in hopes of staving off a global financial collapse. And again U.S. financial markets failed to calm, extending losses for a sixth straight day while shrugging off a Fed-led, globally coordinated half-point cut in interest rates.

. . .

“The fundamental problem here is around expectations and around psychology,” said economist Kent Gardner, chief executive of the Center for Governmental Research in Rochester. “The interest rate cut will stimulate demand to some degree. They’re trying to calm the waters.”

Wow.  It’s the Markets that are oblivious, are they?

Imagine this: you go to Gentile’s Farm Market in Penfield and discover that they’ve sold out of corn.  They announce to you that, in order to sell more corn, they’ve reduced the price by half a percentage point.  You leave and wait till there’s more corn to buy.  And the next day, the D&C puts out an article proclaiming “Local Corn Consumers Oblivious to Corn Price Reduction.”

If there’s nothing to buy, the price doesn’t matter.  There’s a credit freeze sweeping the planet – banks are afraid to lend even to other banks, hence there is now or soon will be no credit for the rest of us.  It’s as simple as that.  Meanwhile, the rate cut is there to protect the *financial* markets, not Wall Street.  Normal lending and borrowing are not conducted on the Stock Market: stocks are sold on the Stock Market.  ((Sheesh, I would have thought that fucking-a obvious.))  Further, if companies are maintaining profits by holding investments – and many do – then those holdings may be now worthless and the stocks must necessarily fall in value.

But the local media has gone to such lengths to bury their collective heads – and our own – in the sand on this issue, it’s not difficult to imagine that they’re bound to be uninformed.  Local media continues to be noticeably absent on the issue, preferring instead to rebroadcast wire stories without the slightest context.  The crisis continues to be treated like just another Business Section non-issue that people don’t care about.

The D&C for it’s part has been studiously unwitted in its modicum of reporting and now, after years of supporting Republican candidates and swallowing Republican talking points, they remain true to type and adopt the same faux-Populist outrage as their Conservative political counterparts.  They now write headlines which seem to tremble with rage over the “oblivious” Wall Street.

There are no mysteries in the current crisis and no surprises.  All of this has been written on the wall for a long time, now, for those of us who cared to look.  What’s more, it’s been written on this blog, as I’ve done my best to try to report the goings on as they’ve happened.  I’m one guy with a day job and no real resources to speak of and as far as I can tell, I’m doing a vastly better job of reporting the issue than the entirety of Rochester media.  Prove me wrong, Ed.  I’m not saying I’m doing a great job – I’m not – I’m saying my half-assed job is embarrassing local media.

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Central Banks Coordinate Rate Cut

There is no precedent for such a thing as this in our history.  The Federal Reserve, the Central European Bank and the central banks of Britain, China, Canada and Switzerland have all coordinated a collective rate drop of about a half percent on their prime rates.  This means that interest rates on loans from these central banks are lower by a half a percent, and since most business begins with banks borrowing from central banks, this means rate cuts across the board for most things which are not fixed-rate loans.

What effect will this have on markets?  Well, short term, it’s meant diddly shit.  The markets in Asia and the US plateaued breifly and continued their steep decline for a fifth day straight.  MSN Market Dispatches is reporting that the Dow has lost 1400 points in that time.  Yikes.

Long term, I don’t really see where this helps, either.  Sadly, this move has to be seen at least in part as a desperation move, not a decisive move in the right direction.  That’s because the problem with the credit market is not now nor has it ever been a question of interest rates.  It’s a question of liquid assets which no longer exist.  Lowering interest rates does nothing to stop that problem.  Until there is adequate liquidity in the markets, I’m afraid the problem will persist.

The Federal Reserve’s move to begin issuing commercial paper seems, to me, a far more sound decision.  That’s because commercial paper is what gets most businesses by their day-to-day operations, like paying employees.  The down side here is that they’ve requested 99 billion dollars to do this with, but that market is about 1.7 trillion dollars worth of trade.  That means someone’s going to lose out.

Still, if the Fed can maintain the workaday operations of our nation’s job engines, then what we’re seeing is really a massive investment opportunity in the making: after all, if the stock market continues to plumet, stocks bought cheaply in the next few days will be worth a barrel of monkeys come the upswing.  Let the stock markets dive.  We need to worry about monetary policy and banking liquidity at this point.

Update: Paul Krugman chimes in with far more salient points than I: basically, the rate for CP (commercial paper) is not tied to the Fed rate anyway, so it’s not going to do much good.  Why, then does he favour the move?  Lots of comments there asking the same question.

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The Fed Buys Up Short Term Debt? What it Means, Maybe.

The Federal Reserve Bank has announced that it will be funding short term debt for businesses – commonly referred to as “commercial paper” – in order to free up capital.  What does this all mean?  Another sop for the rich?

Well, yes.  But they’re all sops to the rich, so get used to seeing that.  But the point in this case is that businesses often use short two- or three-day loans to pay their employees while they await the week’s returns on sales or whatever.  This market, like all lending markets, has begun to get a bit frozen over, and that means the potential of companies not being able to pay their employees and inevitably having to let some go.

The Fed is stepping in and – with a loan from the Treasury of some estimated 99 billion dollars – providing that short term lending vehicle to keep capital flowing to the people who are going to ultimately be the saviours of this crisis: American workers and consumers.

So, I grant that I don’t know all that much about economics.  But it seems like this is the sort of thing we want the government doing, at least temporarily.  I find it odd that companies need to use two-day loans to pay their bills, but I’m sure it’s all very technical.  And this doesn’t seem like the type of lending that’s going to lead to the government losing it’s shirt, since we’re talking about two-day loans of relatively small amounts.

But we’ll keep an eye on it.

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MSNBC Gets It Wrong. Let Wall Street Suffer.

The Bailout.  What was it for?  If you said Wall Street, that’s probably because you’re not paying attention, and neither is MSNBC, apparently.

The bailout is not for Wall Street.  It’s for banks and the financial sector which, while far from being divorced from the goings on in Wall Street firms, are not really the same thing at all.  The bailout was meant to buy up currently defaulted upon debt that is seizing up credit markets.  Banks over-invested in funds made up of mortgage debt holdings and now that the mortgage market is hemorrhaging with defaults and foreclosures, those funds are rapidly losing value and cannot be sold.  That means there’s no capital left to invest in new loans, nor are the banks willing to trust that anything can get repaid right now.  In short, seizure.

There’s absolutely nothing about the bailout which was supposed to or designed to stop Wall Street panics or fluctuations.  Nothing, nada, zilch, diddly shit.

Now, it is true that without credit, there are many businesses – particularly smallish businesses – who will be hard-pressed to pay their workers.  But what does that have to do with Wall Street?  Nothin’.

It’s true that without a fluid credit market, buying a car or a home may be impossible.  Cars are still being sold right now, however.  So, what does a potential problem a month down the line have to do with a plummet in stock values now?  Nothin’.

Hey, come to think of it, what did Hurricane Katrina have to do with gas prices getting jacked up a dollar a gallon in the hours that followed the breaking of the levees?  What did our sabre rattling with Iran have to do with constant hikes in gas prices?  What did one set of pipelines in Georgia have to do with raising prices?  Nothin’, nothin’, nothin’.

There’s nothing going on down on Wall Street that isn’t wild, uncontrolled speculation.  The banks are there to be a force for stabilization in our markets, but guess what?  They decided long ago that the most stable of all investments – mortgages – could be sold on the Stock Market as a commodity.  Hence they invested money in super funds made up of these mortgages, hence they made enormous sums of money for a while, hence homes became over-valued, over-sold, and under-secured.

So, while we are forced to bail out the banks, let’s not fool the public into believing that bailing out Wall Street was either the plan nor a necessary future goal.  Protect the banks and you protect the economy long-term.  Bail out Wall Street and you enable the addicts.

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Stop Watching the Stock Market

The Dow is down again.  The Dow is down again.

Now that we’ve established that, I think it’s time to look for more and better indicators of the economy’s status than the casino that is Wall Street.  Perhaps some cunning journalist could forge some sort of index based on employment, housing, credit, Wall Street and oh, I don’t know, pork belly futures?

Whatever is the case, looking at the day to day ups and downs of the stock market is clearly not telling us a damned thing about anything other than what a bunch of panicky rich people think about what a bunch of other panick rich people are going to do.  Does it ever strike you as odd, for example, when major Wall Street firms that control vast amounts of wealth in the form of mutual funds start talking about what “The Market” will do?  When big shots from these corporations start “hypothesizing” about what the future will look like in the next six months on cable news programs?  Have you ever screamed at the television, “you’re the fucking market, douchebag!?”

Well, I certainly have.  And while every expert economist I’ve read agrees that the bailout is a necessary evil – including those disinclined to listen to the Wall Street Giants – nothing good can come of continuing to listen to these people when they tell us how bad things are.  Where are the economics professors and researchers from government think tanks to tell us what’s really going on?

Oh, that’s right.  The government is owned by Wall Street.  Silly me.

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Well, That Ain’t Good. . .

Interesting news from Europe today.  It seems that most European nations do not quite have the robust deposit insurance that the United States government provides its citizens.  In fact, some only insure deposits up to a measly twenty thousand euros.

That was then, this is now.  Germany has announced it will be insuring all deposits of any amount.  That of course has people worried that the Germans – as the financial and banking powerhouse of the European Union – might know something the rest of us don’t.  Based on my reading of the article, it seems that the ripples of something really huge are beginning to show themselves in all quarters of the European Union.  France, Germany, Italy, the UK and Spain all seem to be bracing for a big fall.

See?  We do still have influence over world affairs.  sheesh.

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Dean Baker Sez: Calm Down

Dean Baker, writing for American Prospect, points out that Wall Street is hardly the only part of the economy that matters.  A huge drop in a single day is a scary event, but it’s not necessarily the sign of the apocalypse.

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Bailout Bill Defeated?

People in a position to watch C-Span are telling me that the bailout bill may have been defeated in the House.  Stay tuned.

CNN Money is reporting that the bill is “stalled.” The Dow has dropped like a stone, 500 points.  They’re leaving the vote open indefinitely (not a parlimentary procedure I typically support, but in this case?. . . ) to try to twist people’s arms into supporting this bill.

Christ.  The Republicans are going to send the entire country off a cliff because they can’t admit to being wrong?  Nothing like principled leadership.

2:10 ~ Yahoo! Reuters is now saying that the bill is defeated.

2:20 ~ MSNBC does the post mortem.  Funny that Republicans pick this moment to suddenly decide they don’t support everything the president does.  It looks as though plenty of Democrats voted against the bill as well.  That’s about what I expected, anyway.  But the one time I might have hoped for Republican Party unity to do some good for the country, they let me down.

So, now what?  Well, with the Dow in the toilet by 500 points, I suspect a lot of those same constituents the House members are trying to please will demand that the government do something.  If not now, then certainly when they start losing their jobs.

2:28 ~ Felix Salmon at Conde Nast weighs in on the situation.  His headline?  “Oh, Shit.”  This is not the blog of a vulgar teenage heavy metal enthusiast.  This is a respected economist.

2:54 ~ MSNBC has updated video on their website.  And don’t miss this video from last week, where a Republican commentator Ed Rollins states baldly that Republicans are playing Party over Country:

[youtube]http://www.youtube.com/watch?v=Sf4PQMs-CRk[/youtube]

Again, it needs to be said that a fair number of Democrats also rolled on this one.  But not nearly as many and the Republican leadership has really failed the American people at this point.  Moreover, by failing to pass a bill rather unsettling to their sensibilities, they’ve maybe just forced the next president’s hand in recreating the Roosavelt era Great Society reforms to undo the damage of Republican rule.

Jesus, can we just send these guys somewhere and get it over with?  They don’t just want to be part of the problem, they want to be all of it.

3:06 ~ A bit of perspective on the drop in the Dow today:

The markets turned highly volatile as it became clear the measure wouldn’t find the necessary support. The Dow regained ground then fell back again, trading down 524.88, or 4.71 percent, to 10,618.25. At its low, it was down 705.06, not far from its previous record for an intraday drop, 721.56, set during the first trading day after the Sept. 11, 2001, terror attacks. Still, in percentage terms, the decline remained well below the more than 20 percent drops seen on Black Monday of October 1987 and the Depression.

For what it’s worth.

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Republican Shrill of the Week

Keep an eye on this story, because I garantee it will be come a talking point for Republicans across the House and maybe even Shawn Hannity: a House Representative named Michael Burgess decided to throw into another tirade about the bailout deal that Speaker Nancy Pelosi has declared martial law with this new deal.  Note that he doesn’t just say she’s acting like it is martial law, but that she declared it in a “secret meeting.”  I mention all this because it’s just this type of Republican hysteria that can drag what is already a precarious situation down the shitter in no time.  Other publications are also picking up on this meme.

[youtube]http://www.youtube.com/watch?v=l7B4laX1E70[/youtube]

OK, for you Constitution enthusiasts, a quiz: who is it in the architecture of the United States government who has the power to unilaterally declare a state of martial law? ((If you answered “The Speaker of the House,” you’re a dipshit!  Congress can suspend the Writ of Habeas Corpus by a vote, but the Speaker can’t just declare martial law.  The correct answer is “The President of the United States.”))

So the bottom line is: a Republican House member with crazy ideas about bailing out the financial sector with equally unstable insurance industry money gets kicked out of – by his own words – more meetings than he can dream of decides that, since he’s not being paid attention to, it must be martial law that we’re living under.  Not a thought about his own ideas having been already proven stupid.

How typically shrill of Republicans that when noone listens to their half-assed ideas that got us into the mess we’re in, they insist that our very freedoms are at risk.

I’m not terribly happy about the bailout plan, either.  But damn, dude.  Just admit when you’re wrong.

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Protest on Wall Street

It’s gone viral.  An email sent out by one passionately enraged man has spread all over the Internet and there appears to be a gigantic protest scheduled, dumping garbage in the middle of Wall Street.  The article doesn’t say when, though. . .

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The Sunnier Side of Paul Krugman

Mind you, I can’t find fault with anything he’s saying, here.  And that’s the part I find most amazing of all.