Friday, March 21, 2008

Bailout Bleakness

The colossus of stupidity straddles the earth. Click on Tom Tomorrow to read pretty much all you need to know about the Iraq-war torpedo that blew one of the big holes in the U.S.S. Economy. There's more nicely-condensed detail in a London Review of Books piece I've borrowed. See also the special burden for California, calculated by Joseph Stiglitz.

Key sentences from elsewhere:

Krugman on how it's 1929:
The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills.

Dean Baker on how the bank bailout is like pretending play money is real:
The Fed . . .. announced that it would lend $200 billion to banks and other financial firms, accepting mortgage backed securities as collateral. This is effectively the same as saying that the Fed is going to lend money to banks and accept the counterfeit currency as collateral, treating it just as though it were real money.

Japan's "Mr. Yen" of the 1990s, Eisuke Sakakibara, on how the US today is like Japan on the verge of its financial collapse:
Japan's long stagnation began as non-performing asset problems in the mortgage sector. Japanese financial turmoil in the '90s started in the mortgage sector and spread to commercial banks and security firms. This is pretty much what is happening in the U.S.
Wanna give lots of public money to the richest folks on earth, most of them hostile to public funding of everything else? Hell no. As Sakakibara puts it, people "simply don't like the banks. They are the institution that lends you an umbrella when the weather's fine and won't lend it to you when it's raining."

Should we give lots of money to the financial system to keep it going? Sakakibara says yes - tons of money, right away, early and often. On the power of generosity, I agree. But we should do this only on the condition that the money aims at general assistance and social development - help for rent and later purchase for regular people losing their houses, money for the general rebuilding of a public infrastructure hollowed out by years of right-wing attacks on government from the financial folks who want a lot of help when they need it. They should be helped: only if they agree that help in general is a good thing. They should be helped only if they agree to shut the hell up, for many years, about what an incompetent burden government is, especially compared to brilliant them.

Floyd Norris tells you as much as you want to know about Bear Stearns's stock price and about the Fed's selective bailouts: Thornburg Mortgage of Santa Fe, NM, is apparently not important enough to rescue. Norris's key sentences about Thornburg's new junk it's trying to sell almost for free: hornburg’s longtime strategy was to borrow at low rates to finance mortgage securities paying higher rates. Now it will pay 12 percent to help support securities paying a much lower rate of interest.

That is the catch of leverage. If Thornburg could borrow at a low rate, it might well survive long enough for it to find out if the mortgage securities are worth more than their current market price. But if it must pay high rates, it may not last long enough to be proved right. If a company’s credit is weak, it must pay more. But paying more makes it weaker still, and justifies an even higher interest rate.

That is a story that may be repeated many times this year as highly leveraged companies deal with the combination of recession and unfriendly credit markets.

In this spectacle of fear and loathing, where do public or developmental values come in? In rejecting the effects of fear and punishment created by the Fed's half measures, and picturing the benefits of the full ones.

In the world of partial steps of the kind Eisuke Sakakibara says we should avoid, we are still forced to end Friday with this happy thought: by the time you read about adverse economic conditions in the newspaper, your money's already gone.

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