Bush and Fed Run End Around Congress

Bloomberg:

The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed’s emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The Fed’s expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone. Read on…

I’m not an expert on the economy or Wall St., but this sure looks like an end-around by the Bush administration to give away hundreds of billions of dollars without the approval of Congress.

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. I.U. has no affiliation whatsoever with the originator of this article nor is I.U endorsed or sponsored by the originator.)


The Nazis, Fascists and Communists were political parties before they became enemies of liberty and mass murderers.

After The Money is Gone

By PAUL KRUGMAN

On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it’s the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn’t count on it.

In past financial crises — the stock market crash of 1987, the aftermath of Russia’s default in 1998 — the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn’t working.

Why not? Because the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency.

Let me explain the difference with a hypothetical example.

Suppose that there’s a nasty rumor about the First Bank of Pottersville: people say that the bank made a huge loan to the president’s brother-in-law, who squandered the money on a failed business venture.

Even if the rumor is false, it can break the bank. If everyone, believing that the bank is about to go bust, demands their money out at the same time, the bank would have to raise cash by selling off assets at fire-sale prices — and it may indeed go bust even though it didn’t really make that bum loan.

And because loss of confidence can be a self-fulfilling prophecy, even depositors who don’t believe the rumor would join in the bank run, trying to get their money out while they can.

But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity — the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.

Matters are very different, however, if the rumor is true: the bank really did make a big bad loan. Then the problem isn’t how to restore confidence; it’s how to deal with the fact that the bank is really, truly insolvent, that is, busted.

My story about a basically sound bank beset by a crisis of confidence, which can be rescued with a temporary loan from the Fed, is more or less what happened to the financial system as a whole in 1998. Russia’s default led to the collapse of the giant hedge fund Long Term Capital Management, and for a few weeks there was panic in the markets.

But when all was said and done, not that much money had been lost; a temporary expansion of credit by the Fed gave everyone time to regain their nerve, and the crisis soon passed.

In August, the Fed tried again to do what it did in 1998, and at first it seemed to work. But then the crisis of confidence came back, worse than ever. And the reason is that this time the financial system — both banks and, probably even more important, nonbank financial institutions — made a lot of loans that are likely to go very, very bad.

It’s easy to get lost in the details of subprime mortgages, resets, collateralized debt obligations, and so on. But there are two important facts that may give you a sense of just how big the problem is.

First, we had an enormous housing bubble in the middle of this decade. To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels.

Second, there was a tremendous amount of borrowing into the bubble, as new home buyers purchased houses with little or no money down, and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash.

As home prices come back down to earth, many of these borrowers will find themselves with negative equity — owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.

And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What’s going on in the markets isn’t an irrational panic. It’s a wholly rational panic, because there’s a lot of bad debt out there, and you don’t know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won’t start functioning normally until investors are reasonably sure that they know where the bodies — I mean, the bad debts — are buried. And that probably won’t happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. I.U. has no affiliation whatsoever with the originator of this article nor is I.U endorsed or sponsored by the originator.)


The Nazis, Fascists and Communists were political parties before they became enemies of liberty and mass murderers.

The Fed Plans To Kick The Recession Can Down The Road

The phrase “moving the goalposts” has been applied most heavily in public discourse of late to the Bush regime’s “strategery” regarding the Iraq war. Through the “surge” and constant reiteration that things are getting better in Iraq, Bush hopes to delay a full-scale drawdown just long enough for him to leave office, thus saddling his successor (likely a Democrat) with two choices–maintain troop levels in Iraq and be crucified by the anti-war movement, or bring troops home and be accused of “cutting and running” by the conservative base.

This kind of crass political calculus isn’t limited to the Iraq quagmire, though–you can see it in the news today that the Federal Reserve is telegraphing a cut in interest rates at its next meeting:

For the first time in more than four years, the Federal Reserve appears ready to lower interest rates to prevent a housing meltdown and a painful credit crunch from driving the economy into a recession.

A rate cut would affect millions of borrowers, with the intention of getting them to spend and invest more, which would revitalize the economy…Fed action would mean that borrowers who can obtain credit would see rates drop on a variety of loans. It would become less expensive for people to finance certain credit card debt and for homeowners to take out popular home equity lines of credit, which often are used to pay for education, home improvements or medical bills. Also, it should help some homeowners whose adjustable-rate mortgages reset in the fall.

The uncritical cheerleading by AP economics “reporter” Jeannine Aversa is genuine. It’s deliberately designed to plant the idea in the reader’s mind that this is good, that this is what the Fed should do, and in fact, will do. But the reality is that even a cut in interest rates will only delay an economic slowdown and eventual recession, not stop it. The underlying economic conditions which led to the housing boom and subsequent slump–too-low interest rates, unscrupulous lenders looking to make a buck, and ignorant borrowers trying to buy things they can’t afford–will still be in place, and a cut in rates will only spur more of the irresponsible behavior which triggered the housing boom/crash in the first place.

But this, I suspect, is part of the plan as well. Current Fed chair Ben Bernanke was a longtime Bush economic adviser before taking the job, and doesn’t want to be remembered as the man who captained the ship as it sank any more than Bush does. By supporting a rate cut, Bernanke and the current Fed board may want to spur a last-minute flurry of conspicuous consumption, buying, and borrowing that should propel the economy through the last few quarters of Bush’s reign, and then saddle his successor (again, likely a Democrat) with an even more unpopular set of choices–raise taxes to pump new revenue into the government, end the Bush corporate taxes and lose support from industry and big business, and find a way to weather the anger of voters who will only see that the economy sucks and there’s a Democrat in office.

This sort of thinking certainly has precedent, though–consider former Fed chair Alan Greenspan’s blaming Bush and the Republicans for the failing economy in his new memoir:

Mr. Greenspan, who calls himself a “lifelong libertarian Republican,” writes that he advised the White House to veto some bills to curb “out-of-control” spending while the Republicans controlled Congress. He says President Bush’s failure to do so “was a major mistake.” Republicans in Congress, he writes, “swapped principle for power. They ended up with neither. They deserved to lose.”

Many economists say the Fed, by cutting short-term interest rates to 1% in mid-2003 and keeping them there for a year, helped foster a housing bubble that is now bursting. In his book, which was largely written before much of the recent turmoil in credit markets, Mr. Greenspan defends the policy. “We wanted to shut down the possibility of corrosive deflation,” he writes. “We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address….It was a decision done right.”

You catch that? Greenspan admits that he is responsible for fostering the corrosive housing bubble that has led to millions of Americans facing foreclosure and the collapse of banks and lenders across the globe…but it wasn’t his fault. No, it was the fault of Bush and the Republicans for acting like Democrats and increasing spending.

People like this truly have no shame, and yet they are aware at some level of how much of the burden they must bear for the catastrophic mistakes they’ve made, so they do everything they can to distort history and repaint the world into what they would have wanted. If Greenspan–and Bush–had truly been concerned about their legacies, they could have done a great many things differently, not least being never going to war with Iraq or turning our economy into a hollow shell fueled by credit consumption, overleveraged borrowing, and dubious “specuvesting” to begin with.

UPDATE: Hale “Bonddad” Stewart substantiates my theory with some sobering analysis of the economic crisis facing the next President. What better way to ensure that the losing party can retake the government in 2010-2012 than by leaving them such a massive poison pill in 2008?

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. I.U. has no affiliation whatsoever with the originator of this article nor is I.U endorsed or sponsored by the originator.)


The Nazis, Fascists and Communists were political parties before they became enemies of liberty and mass murderers.