The debt fueled bubble and the recession that followed

[prasen9]

I had heard of that, but, I did not know that Bernanke was responsible for that. I thought the investment banks did that to avoid bad publicity. But, point accepted. I have not railed much against Bernanke, because, largely his post should be devoid of political considerations. I was applying general accountability, but, if you say, he has acted, then fine, he should not be asked to resign. Anyway, he does not have obvious conflicts of interest like close industry ties, at least as far as I know.

But does that then mean that the SEC whose job it was to supervise the investment banks was sleeping at the helm? Then Cox should go. Read this NYTimes article, which says:

How could Mr.Cox have been so wrong?

and later

The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

and then on to say

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake.

Mr. Competent, indeed!

It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.

Same guys needing the bailout? Yes.

This is what happens when regulatory agencies get captured by industry. There is lots more. Read the whole article. And you still insist Cox and Paulson should stay. What should I conclude if you keep insisting?

And what has Paulson done since then to regulate the industry norms and correct the mistakes?

[prasen9]

BTW, Bin Laden is also extremely competent you know, it takes a lot to plan such an attack, but, I would not make him the secretary of the Department of Homeland Security.

Honestly, I don't get this (like some of your other arguements!). What is the parallel here?

Sorry. The parallel is that both Bin Laden and Paulson were competent in their fields namely terrorism and running an investment bank. I do not know much about the latter, but, since you say he was competent and I do not have anything to prove otherwise, I accept that point. However, that does not necessarily make them competent to run government. Competency in running a company does not make someone competent in a job that has a major law enforcement component (see the treasury site). The treasury secretary also has an economic adviser component and perhaps he has done that job okay. But, I do not have any evidence that he has done his job right with respect to getting legislation passed to reign in the bad practices that have resulted in this carnage. And that is part of his job too.

Furthermore, Paulson donated heavily to the Bush campaign. So, he is clearly in the same Bush camp.

[kujo]

Bailout dish has heaping side of pork

Still, why did Senate leaders clutter up a bailout bill that has infuriated millions of Americans with tax breaks that will produce a net cost of an extra $112 billion?

The answer is simple: Because they could.

Because they know America's corporate leaders are desperate to get the financial system off life support. This was the Senate's chance to win a longstanding battle with the House over tax legislation.

"There's been a battle for years with both houses having alternative tax bills," said Rep. Charles Rangel (D-Manhattan), head of the House Ways and Means Committee.

House Republicans and conservative Democrats long ago agreed on a pay-as-you-go rule. Under that rule, all tax breaks must be matched by cuts in spending or by new revenues.

In the Senate, they love to dispense bigger portions of pork, and they rarely worry about how to pay for it. Until this week, the Senate had failed to get the House to agree to its list of tax breaks.

By tacking these breaks onto the Wall Street bailout, Senate leaders expect to peel off enough Republican House members to pass the entire package.

Wall Street gets its bailout. The refrigerator makers get their tax credit. We pay for it all - and then eat leftovers.

yes, eat the leftovers that was stored in one of those new refrigerators' which earned a $250 tax break for the manufacturer and no tax break at all for you!!

reminds me of the Simpsons episode where Lisa uses a paper clip and attaches her bill on to another popular legislation...

[prasen9]

Horrible, horrible set of earmarks. If you read what the earmarks are doing, you will puke. What a waste of money.

[PKBasu]

Yes, this is why clarity is required when dealing with a financial panic, not clutter. Letting politics intrude into the response to a financial panic only worsens the pain for the whole economy. The delay in getting this package passed has probably cost the US about a full percentage-point of real GDP growth next year. A fairly deep recession looks inevitable, and could get worse with further delays in the passage of the bill -- and the creation of the TARP (or RTC-II) and, more importantly, the implementation of its actions. With each delay, of course, another set of financial institutions goes under -- hurting an ever-widening chunk of the economy.

[puneets]

Buying up all the mortgage backed securities seems like a solution that won't affect the bottom line. What about all those homes in the market that are still vacant and have found no buyers ? As long as we don't address this issue, I don't think that this temporary fix will take us too far.

[prasen9]

Yes, this is why clarity is required when dealing with a financial panic, not clutter.

In general, yes. However, a cluttered democracy is always preferable to me than an efficient dictatorship. The person who wanted no oversight and ability to commit crimes unfettered should get part of the blame along with Congress. In trying to get dictatorial powers, Paulson fell and showed his true colors --- core belief that all oversight is a nuisance even though he talks a good talk saying something else. I would blame both him and the Congress for not getting something done. PKB, 200 eminent economists seemed to indicate that a bill should not be passed in haste. I still think the best solution would have been for Paulson to ask for a quick $50 billion --- he said that he would need that much every month. And another bill with $650 billion. Given the two together, Congress would have been more likely to pass the small one unfettered and deliberate on the large one.

[PKBasu]

You keep quoting the "200 prominent economists". Most academic economists specialize in esoteric aspects of the microeconomy that have absolutely nothing to do with financial markets or with financial panics. If there is an academic expert on financial panics, the pre-eminent one is Bernanke himself -- and I can assure you that the so-called Paulson plan had Bernanke's imprimatur and full support.

You keep talking about Paulson seeking "dictatorial powers" and "ability to commit crimes unfettered". These are somewhat outrageous claims. The moment Paulson (or anyone else running the TARP agency) buys assets at a price that is too high, he will immediately lose credibility -- and the markets will punish him severely for it. This is what happened with the Korea Asset Management Co (KAMC) in November 1997 (after its initial purchases were at 80% of face value, clearly too high), and that agency quickly needed to be re-capitalized as investors fled. Eventually it was restructured with more transparent personnel, purchased assets at an average discount of 50% of face value, and did a pretty good job of selling on those assets at a higher price over time.

Paulson was seeking powers for the agency that were very similar to what the similar agency had in Sweden or Malaysia. There is no question of him committing crimes, unfettered or not. The agency will first need to establish its credibility by ensuring that its initial asset purchases are done at a price that is seen as fair -- and the reverse auction procedure should ensure this, especially if it is transparently run. Credibility is the key, and failing to establish that will destroy its credibility (and that of any Treasury Secy trying to run it) long before he or anyone else has had the opportunity to commit crimes in the glare of global publicity.

[prasen9]

Here I provide a direct quote:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

If this was the law and the Secretary just paid his buddy $700 billion with an agreement that he gifts Paulson half of it, you could do nothing. That is the definition of dictatorial powers and if you cannot review it in any court of law or any administrative agency, it gives him the ability to commit financial crimes unfettered. Maybe I missed the word "financial" and I am happy to amend that part if that was the objection. After this clause is in a law there are no controls on him. What can the market do to him to prevent him from giving away $700 billion to his friend for junk mortgages? Nothing. Admittedly, this is the worst-case scenario, but, in legal contracts, one has to always cover themselves for the worst cases and not sign blank checks.

Of course, he knows the system and could achieve the same without directly writing a check to his friend, but, the net effect could be the same. I do not want to live in a banana republic where someone is above the law and can do whatever he pleases (even if it is limited to this money). I respect the law and think that we should uphold our democratic principles and no bill should have any limitations on suing someone if they have broken the law. If he put in more nuanced language to exempt him from some bureaucratic requirements imposed by some law that may delay sales, that would be acceptable, but, not a clause granting dictatorial powers and the ability to commit crimes unfettered with respect to this amount of money.

Global publicity and shame did not prevent Bush from torturing people, from waging an illegal war, from suspending Habeas Corpus, from shielding law-breakers like Libby in his admin. Global publicity is toothless to prevent potential financial crimes from being committed by Bush-donor Paulson. Only real laws can and we should not be running rough-shod over them.

[prasen9]

There are some macroeconomists who have signed the letter. Robert Shimer, Anil Kashyap, who I think initiated this look like macroeconomists to me. Shimer argues that the collective wisdom of these economists are not necessarily inferior than that of Bernanke and his insider information. One view maybe that Bernanke, being a Depression expert, sees a depression and exaggerates things a bit. I do not buy it that only one man knows all and the others are duds. It seems to be there is a genuine difference of opinion and when so many people of a profession are against something, I would tend to believe that all of these guys are not fools but that the prognosis and verdict is not so cut and dry. Most have argued for some intervention, so I believe that to be true, but most argued against hasty decisions and no-oversight-no-legal-review-blank-checks too and that seems sane. Especially given our history of hasty decisions resulting in the authorization of attacking Iraq and the Patriot Act overreaches.

Even if I were to assume that Paulson will be honest, for all we know, Bush could fire Paulson tomorrow and raise an internal shill to be the acting treasury secretary while the world cries and rails. We should not give anybody an escape from the law, that is what truly protects us, not people with dictatorial powers.

[Sandeep]

When I was reading the current issue of Business week I have come across an interesting point (in fact I didn't know this before), when FED said they are bailing out AIG for $85billion, it doesn't mean they have invested $85 billion in AIG but it means they have extended a credit line of $85 billions to AIG which it can use if required. This will do wonders to the confidence of investors. IMO, majority of investment banking behemoths in USA are failing because of credit crunch more than anything. Only if FED would have assured similar credit line to Lehman Brothers it would have survived the crisis (Koreans would have definitely invested in it whom Lehman brothers approached a week before filing bankruptcy).

Though it is just $700 billions that FED is asking to rescue walstreet, it is worth much more than that as they are just offering credit line. Banks and other financial institutions with toxic assets can now afford better credit with this assurance from FED.

[Sandeep]

Between, the present crisis is creating behemoths in banking sector. How big has Bank of America become after acquiring Merill Lynch , JP Morgan Chase is becoming pretty big too. Now with Wells Fargo acquiring Wachovia it might well be in the top-5 banks in USA. Barclays which is already pretty huge has acquired Lehman Brother for nothing. Once the housing sector comes back to normal, I think these banks will benefit a lot! I have a feeling Citi lost out on all these deals. Being the largest bank in USA it should have acquired atleast one of the sick companies.

[Peter]

Now that the bill has passed, Paulson is moving at warp speed. He has worked almost every weekend recently, and this one seems no exception. His testosterone level must be high just now

There is a market to prop up, and an election less than a month away. Suffice to say, free markets are dead.

PK, i have concerns about how the treasury will value these tainted assets (your last post speaks to this). Will construct and post my thoughts after i clear up my mind (maybe i'll go play the piano first ).

Also, i have greatly enjoyed both sides of the discussion here.

PK, Thanks for your informed opinions. They are invaluable, especially considering your credibility.

Prasen, i am with you on most points. Also trying to avoid the blame game. There is no accountability for 'their' past actions, but the markets are in a crisis (is that an understatement?). Your rants are getting a bit tired though.

Gautam and others: Thanks for your input from Wall Street and other vantage points.

[Peter]

On another note, what a shellacking the Asian markets have taken in the last 12 months or so. The hot money* chasing 'emerging' markets are down in the do-do.

From 52 week highs:

Shanghai, -62%
Hong Kong, -45%
Mumbai, -41%

The irony of this is that it is happening in an age of fiat currencies, with inflation roaring worldwide.

How will this play out? i found some historic precedence here (the last paragraph on this page is eerily similar).

Every asset class i can think of is down big. Is there any place to hide?

*including Jimmy Rogers - or maybe he is short these markets. Don't quite remember. Even when short selling is severely restricted in several markets around the world.

[arjun2761]

Prasen and Peter, I agree wholeheartedly with most of your sentiments. Hank Paulson and the Bush cronies are plain greedy but that is not a problem per se since the driving force of capitalism is greed (and as PKB stated very eloquently capitalism is still the best way to create wealth).

However, the main problem with this bailout as I see it is that it is just a short term fix (and not just that some greedy souls profit the most from it which they will). It may start moving credit in the economy, but the fundamental problem in the US economy has been that main street incomes have have lagged (and cannot support the borrowing, ie the credit being handed out). Simply restablishing the ability to borrow by consumers (beyond what can be afforded by your income) will only result in this same situation recurring 6 months or a year down the road.

There are only two ways out of this -- (1) US standard of living has to take a large hair cut so that US consumers live within their incomes -- and a depression will get you there sooner or the later (and this bailout is only postponing the inevitable) or (2) boost US incomes by bringing US jobs back. I have only heard Obama address this issue peripherally when he stated that he would tax companies that ship job overseas. In addition, the US trade negotiators need to get on the ball with those like China to force some sort of parity in the trade flows. The US is still by far the largest market and has the clout to bring this about if they have the political will to do so. International trade (and the theory of competitive advantage) does increase wealth overall provided the international trade patterns are not distorted as it is now.