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Mon Sep 29 21:17:40 2008 Just say No Congress shuts down the bailout.
No Benjamins! Image courtesy of Dtbohrer (wiki) Well, Congress said no today. I'd like to think it was my aggressive blogging that helped stop the bill's passage. On the one hand, I think we can breathe a sigh of relief. This was a bill desperately wanted by financial institutions so they could cap their losses and dodge responsibility for their poor risk management. I still believe that the clamor of Wall Street was ringing more in the ears of Bernanke and Paulson than Main Street. This means that, if needed, that $700B can be used to help stave off a recession in other, more practical ways. On the other hand, now what? The markets didn't like the news, of course. The Dow Jones Industrial Index dropped 777 points, which, as every reporter noted, was "the largest single-day point loss in history." Interestingly, that means it wasn't the largest percentage drop. The 777 drop was 6.8%, which wasn't really close to the Black Monday (1987) drop of over 22%. Weird that they didn't mention that today's drop was less than a third as bad as Black Monday! But of course that doesn't sell newspapers. And the economic news wasn't all bad. Oil posted a large price drop, now down to a price of around $95 per barrel. Commodities holders are worried that lower demand will keep prices down. Of course, consumers of commodities are in better shape! Not that I'm getting cocky. The economy is still in for a rough ride, and there could be further negative impacts ahead. Well, what will happen now? I'm guessing that not much will happen legislatively until after Election Day. Members of Congress will be far too worried about their jobs to take a chance on a very expensive bill. The political maneuvering was excellent. President Bush proposed it, argued for it, and lost. So now he can claim a recession isn't his fault. Senators McCain and Obama did the same thing. However, we are still left holding the bag, and the government will have to step in to help keep things from collapsing. Here are my predictions: The FDIC will continue to take possession of troubled banks. I'll guess something on the order of an additional $100B, just based on what we've seen so far. The Federal Reserve will keep open its line of cheap credit to help out financial institutions that aren't complete basket cases. A few more financial institutions will collapse under their losses. The economy, and housing market, will flatten or recede for another 6 months. A 6 month recession isn't bad! I am gambling that the subprime mortgage crisis has not infected the majority of commercial banks, so the banking system as a whole will keep going. And I'm guessing that the consumer slowdown, which has already started, will continue for just a bit more. But the bottom will be reached as those firms who still have assets are able to capitalize on the situation, and risk-takers will take advantage of cheaper credit and lower prices. Comments	Related: > economics < predictions Unrelated: books energy environment geopolitics lists mathematics science

Thu Sep 25 22:35:27 2008 Open Letter Open Letter to my Representative and Senators
Open letter to my US Representative (Jim McDermott) and US Senators (Maria Cantwell and Patty Murray) Dear Senator Murray, Senator Cantwell, Representative McDermott: Please do not approve the administration's proposed $700 billion bailout plan! I know you care deeply about the health of the nation's economy, and the impact on local businesses. And I am sure we would all gladly pay now to prevent a damaging recession or depression later. However, the Administration's proposal does not guarantee the future health of the economy. At best, it may prop up some failing investment banks a little bit longer. At worst, it will reward those institutions that took inappropriate risks with their investor's money. And it will tie up funds that could be used to fight a recession or depression more effectively. Most importantly, there is no clear reason why this large sum of money should be spent or allocated now. The proposal is right to focus on subprime mortgage instruments as a key factor in the current crisis among investment banks. Those instruments will probably continue to lose value over the next year, as more mortgage holders default, and investors decline to purchase them. However, that decline is not likely to be stopped by the Administration's plan. Instead, the result will be a lot of taxpayer money spent on instruments that will continue their collapse. Also, the impact beyond overly-leveraged investment banks is not clear. Many parts of the national and world economy are more healthy, including commercial banks. It is possible that the Administration's plan will not be able to stop a wider economic downturn, and the $700 billion will simply evaporate. It is possible that no wider economic downturn will happen, and the Administration's plan only lines the pockets of poorly-managed investment banks. It is unlikely that a wider economic downturn could be stopped by purchasing a fraction of available mortgage instruments. There are measures that could be taken to improve the health of the economy! Restore the separation of investment and commercial banks. The Federal Government should not be insuring high-risk investment companies. This means restoring parts of the Glass-Steagall Act of 1933, which was repealed by the Gramm-Leach-Bliley Act of 1999. The current crisis was greatly exacerbated by the risks that investment banks took with commercial deposits. Get the deficit under control. Large budget deficits have put the dollar at risk, and made foreign creditors unwilling to loan us money. If foreign creditors lose confidence in the US Dollar, and we have not restrained our spending, the result would be either economic collapse or hyperinflation. That is much worse than a recession. But whatever you decide to do, please do not vote for the Administration's plan! It is only likely to reward those who took inappropriate risks, and will not prevent a recession if one is truly coming. Comments	Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science

Wed Sep 24 22:37:39 2008 Cure for our Ills The administration proposes a really big blank check.
Keep plugging the holes! Image courtesy of Pieter1 (wiki) Wow, a lot has happened in the past 2 months! I used this photo before, but it is still relevant: the administration continues to find ways to throw money at the problem. In Fannie and Freddie I argued against bailing out Freddie Mac and Fannie Mae. Since then, the administration has nationalized the companies, and put billions of dollars of Federal funds behind those mortgages. Then, Lehman Brothers collapsed in a spectacular and (for investors and employees) painful bankruptcy. Now President Bush is proposing a $700 billion bailout of the financial industry, by having the Federal government buy even more of the distressed mortgages. Embarrassingly, I didn't see the speech. I was working. However, I have read a few summaries and other articles about the speech. And I have of course seen the plan in the press for the past several days. The net result? Bush's speech appears to be a concession that the plan will not be approved by Congress. He seemed more interested in preserving his legacy by presenting the plan as a way to assign blame. Perhaps that is an unfair assessment. But I think he is well aware that the plan has little chance of passing. At least, I hope it has little chance of passing! My goodness, why would we sign up to spend that much money? Paulson and Bernanke are right: the piecemeal approach isn't working. But I think a better solution is to leave things alone, rather than put more Federal funds at risk. Remember, there is a real chance that even if the $700 billion plan was approved, it wouldn't work. Then we'd have a serious recession anyway, no reserves to spend our way out of it, and we'd have scared away all of the creditors we'll desperately need to borrow more money. Then we are faced with Federal bankruptcy, or hyperinflation as the Fed has to print money to get out of the disaster. Inflation is definitely the more likely scenario. And in any case, we always have the option to start buying troubled mortgages later. Perhaps the markets will panic, and the financial system will "seize up". But that might happen regardless of the $700 billion Federal infusion, or might not. And there are chances that the overall economic collapse won't be that bad. I think Paulson and Bernanke are surrounded by frightened Wall Street executives, and they are picking up that panic. But there are large parts of the economy that are still rolling, many banks still lending to businesses that are not underwater in bad mortgages. So I think we should let the honest businesses have a chance to take advantage of the lower prices and collapse of overly-aggressive competitors. The risk-takers should sweat a bit longer. Comments	Related: > economics < Unrelated: books energy environment geopolitics lists mathematics predictions science

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