You suppose Prozac will help with this Depression?

I'm supposed to be working right now -- and I'm going to regret this when it's 2 AM tonight and I'm trying to make up the time I'm taking here -- but after watching our financial system essentially dissolve in the span of five days...well, I have a lot to say.

If you're not terrified about the future right now, you are stupid.

Let me repeat that: If you're not contemplating how you can change your lifestyle to survive in an economy that might very well disintegrate, then you are dumber than a bag of fucking hammers.

Since I know that you guys are, in fact, quite intelligent people, I know that you're paying attention and you know that what has happened in the last week is pretty goddamn scary. But with the release of the preliminary plan for the bailout, things have taken a turn from bad to worse.

But I'm getting ahead of myself.
[Note: I'm mostly linking to blogs that summarize the source articles of information, rather than the articles themselves. Although I think you should definitely read the articles quoted for yourself, the summaries provided in the blog posts I'm linking boil it down to something much more understandable when we're talking about high-flying financial concepts that are confusing (and that it turns out, even the vaunted financial experts don't really understand themselves, which is part of what got us into this mess). These are blogs I've been reading for years and thus, I trust their insight and opinions. But as always, I encourage everyone to find out facts for themselves and develop your own opinions.]

First, the best summary of where we're at this week was posted by Atrios a few days ago:

Through this crisis, there's this underlying narrative that something can be done, that there's just a wee liquidity problem. But underlying all of this is the fact that banks made a bunch of stupid loans which aren't being repaid. A bunch of people made highly leveraged investments in securities backed by those loans. A bunch of other people sold insurance on those securities and related debt.

Lots of money is being lost and there isn't any way to fix that.

The fundamental fact is this: buying up the assets to bail out these companies and keep our economy from tanking completely, for however much we pay, isn't going to fix anything because those assets aren't worth anything. Or put more correctly, the amount of debt owed on them is due to a hyperinflated market on crack, and the assets that back those values (houses/property) are not going to suddenly regain those imaginary cracktastic values again. Not only that, buying up the assets of these failed companies is predicated on the idea that we'll be able to make the money back as people/companies pay back what they owe. But they won't. They might pay back some, but they're in the same boat the rest of us are: they hold loans on property that is worth far less than they owe on it, far outside their abililty to pay, in a credit market that's seized up, a job market that's a minefield of uncertainty, and more than 25 years of government deregulation that pushes all of the liability onto the government, raising their taxes.

This thing was a looooong time in coming. Real estate values have been overpriced for years and should've popped much sooner, given the other economic factors going on. And in fact, I was reading in 2004 and 2005 that the people whose opinions I trusted expected the bubble to pop sometime in 2005 or 2006. When that didn't happen, they all seemed kind of puzzled, and the bubble just kept growing far past what any realistic market correction should've allowed.

What they (and I, because of them) started to understand around 2006 was that the bubble was being artificially maintained by policies and rollbacks that no real economic model can predict. You know why they can't predict those conditions? Because to do so, they have to operate on an underlying assumption that the economic actors involved are deranged. Since no economic model is predicated on this idea, and the idea is inherently impossible to model, all bets were off as to when it would crash.

Not if, but when. Because sooner or later, the crash would come. The markets could be artificially inflated and defy the natural predictions of ecconomics, but eventually, economic evolution would assert itself. And just like a drug addict on a binge, it turns out the only thing that was going to stop this out-of-control car was a brick wall called Reality, that we'd have to hit rock bottom before we could hope to turn things around. Hence the ever-ramping speculative markets, the increasingly bad mortgage instruments on outright bad/no credit, etc. etc., the ridiculously out-of-touch profit expectations, the exponential explosion of credit and simultaneous negative growth of savings, the volatility of the market and the dollar, the irrational exuburance, the delusional quarterly forecasts.... We've been playing a game of musical chairs and the music was playing so fast that everyone's just racing around a single chair hoping to be the one to grab that last seat when the music finally stopped. Turns out, not only are there a whole bunch of people and only one chair, we're finding out that there was no chair.

Among other things, turns out that the SEC, which is supposed to regulate this industry (HAHAHAHAHAHAHAHA) pretty much handed the aforementioned drug addict an 8-ball and the keys to the car:
As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind.

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1. Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

As Mr. Pickard points out that "The proof is in the pudding — three of the five broker-dealers have blown up."

So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis.

You couldn't make this stuff up if you tried.
Although Matthew Gross does go on to note something that I fervently hope is true:

This point may be lost on the average voter, but it is firmly grasped by millions of the pro-business Republicans that John McCain needs to win the White House.

Add to that their disgust at the reckless and seemingly random government intervention in the markets, and you have the makings for a major backlash among a critical segment of the Republicans [business] base this November.

It's no wonder McCain's post-convention bounce this week plummeted faster than the Dow on Monday. Bush has bankrupted this country -- the Republicans have wrecked America -- and the end result for the GOP is a coalition in complete tatters and disarray.

Funny what eight years of plundering by the masters of the universe will do to a country, eh?

Indeed, if there's some good news to be had out of all of this, it's that McCain has been flailing around all week, trying to figure out what he can say that won't get his head handed to him. He has NEVER been interested in market regulation, and his entire economic advisory staff consists of true believers in the so-called unfettered market. If we're very, very lucky, we can finally consider the Republican "fiscally responsible" zombie well and truly dead.

Okay, so it's bad. And no one's happy about the government bailing out the fat cat crooks who ran their companies into the ground and are walking away with their golden parachutes intact. But judging from the market response yesterday, it seems to've calmed the freefall we saw on Wall street, and that's good news, right?

Well sure, if you're rich and you're a Republican and you're one of those fat cat crooks, it's great news! For the rest of us, not so much. And for more than the obvious reasons. For one thing, the people in charge of fixing things don't seem to really get the nature of the problem. Atrios again:

This has been the problem all along, the pretense that all problems are just liquidity problems. Until another bank goes under. Then, well, they were bad, but for everyone else it's just a liquidity problem!

Again, the problem is that lots of bad loans were made, lots of people made highly leveraged investments in those bad loans, and still more people bet on those loans by insuring them. The loans are bad. The mortgages are not going to be repaid in full. Housing prices are not going to magically shoot up 50% over the next 6 months. People gambled and lost and now the Democrats are racing to bail them all out.

I don't have enough information to really know what should be done, but I do know that the people talking about the problem are largely still misdiagnosing it. If they don't know what the problem actually is, or if they're being dishonest about it, the solution is unlikely to be a good one.

Now, it's entirely possible, as Kevin Drum lays out a pretty good case for, that in order for any bailout to work, they have to first determine the size of the problem.

The purpose of the bailout, then, isn't to recapitalize the banks, it's to put a firm value on the toxic sludge once and for all. Maybe it's a dime on the dollar, maybe it's 50 cents on the dollar. Whatever. When that's done, some banks will turn out to be insolvent, and perhaps they'll be allowed to fail. Others will turn out to be in bad shape but still solvent, and they'll continue doing business. Once that's sorted out, the commercial paper market will loosen back up since everyone will know who it's safe to loan money to and who it's not.

Which is entirely possible, and if that's the case, then Bernanke and Paulson are far more capable managers than I would've given Bush appointees credit for. But considering today's announcement about their proposed bailout plan, I think it's safe to say that once a Bush Administration toadie, always a Bush Administration toadie. As Matthew Gross puts it:
The bankers have put a loaded gun to Congress' collective head and asked for the taxpayer's wallets.

Paul Krugman does a very nice, succinct summary of the proposal which I highly, highly recommend you read. And not only does the new deal propose a $700 billion blank check from the Treasury, but "this bill also appears to constitute the greatest transfer of political power from the Congressional to the Executives Branches ... Possibly ever". The "Shock Doctrine" portion of the proposal is boiled down these three important points:
  1. The broad reading of the Secretary's power: so long as s/he claims to be acting pursuant to this statute, there is no limit nor review of their authority.
  2. It appears that entering into crony-capitalist, no-bid contracts a la Iraq and New Orleans, are part of the authority.
  3. The Secretary's power is unreviewable, not by the legislature, not by any administrative agency, and not by the Courts.
Right up to the end, the Bush Administration will stop at nothing to take any and all power. There are no words in the English language to adequately desribe how despicable and evil these people are. They are thoroughly corrupt and vile and they feed like the parasite from Alien on the body politic of the United States:

Second, whatever else is true, the events of the last week are the most momentous events of the Bush era in terms of defining what kind of country we are and how we function -- and before this week, the last eight years have been quite momentous, so that is saying a lot. Again, regardless of whether this nationalization/bailout scheme is "necessary" or makes utilitarian sense, it is a crime of the highest order -- not a "crime" in the legal sense but in a more meaningful sense.

What is more intrinsically corrupt than allowing people to engage in high-reward/no-risk capitalism -- where they reap tens of millions of dollars and more every year while their reckless gambles are paying off only to then have the Government shift their losses to the citizenry at large once their schemes collapse? We've retroactively created a win-only system where the wealthiest corporations and their shareholders are free to gamble for as long as they win and then force others who have no upside to pay for their losses. Watching Wall St. erupt with an orgy of celebration on Friday after it became clear the Government (i.e., you) would pay for their disaster was literally nauseating, as the very people who wreaked this havoc are now being rewarded.

A few further notes:

If you bank through WaMu, you've probably considered switching banks, and that probably isn't a bad idea. But if you bank through Bank of America, you should consider switching banks, too. "But wait," you say. "Didn't they just purchase Merrill Lynch? Doesn't that mean they're actually in a pretty good position, since they're able to take advantage of the market conditions and buy up a pretty major institution for a song?" Well, yes. But remember, our economy has been in the charge of lunatics for the last 8 years, and crooks for more than 20. Which is how you get decisions like this:

But Bernanke and Paulson are really going all in on this, they're letting banks play with depositor money:

"The Fed added that it was suspending a rule that normally prohibits deposit-taking banks from using deposits to help finance their investment banking subsidiaries to allow them to fund activities normally funded in the repo market on a temporary basis until January 30 2009."

This is a dangerous game, because instead of firewalling that money away from investment subsidiaries, it allows banks to gamble that with depositor money they may be able to turn it around. This was exactly the sort of thing that Glass-Steagall was designed to make impossible - banks to not be in the brokerage business, insurance companies not in banking, and so on. Glass-Steagall was partially repealed in 1980 (part of what made possible the Savings and Loan fiasco), further parts in 99 under Clinton, and now the Fed has violated the fundamental principle that banks shouldn't be gambling with depositor money. Because, be real clear, if you don't really know how much in the hole you are, or how much further you could get, lending money to the unit that's in the hole is gambling.

And in fact, when Bank of America announced its purchase of Merrill Lynch, it announced that it would be funding the purchase largely with depositor funds. Which is, again, insane, but wouldn't potentially be disastrous. If what they were purchasing weren't itself a terrible purchase. They're gambling that it'll all work out in the end, but this week we've seen how those kinds of gambles have turned out so far. So, you know, if you're the gambling type, by all means...donate that money to B of A's Vegas Fund and tell them to put your money down on black. Hopefully you'll get your money back, but I wouldn't count on it.

Well, but your money is insured by the FDIC, right? Sure, but you may not want to put too much faith in that. From the same article:

It's also putting the FDIC (the organization which insures deposits) even more on the hook, and the FDIC does not have infinite money except in the sense that the Treasury can lend it infinite money. At this point the FDIC has about 50 billion. Banks have about 4.7 trillion in insured deposits. Yes, that's a bit of a gap.

And in fact just a day later, the AP reported that the FDIC fund is dwindling:

Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators.

Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.

"We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.

Treasury Secretary Henry Paulson said Monday that the country's commercial banking system "is safe and sound" and that "the American people can be very, very confident about their accounts in our banking system." FDIC officials also have said 98 percent of U.S. banks still meet regulators' standards for adequate capital.

But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC.

The fund, which is marking its 75th anniversary this year with a "Face Your Finances" campaign, is at $45.2 billion — the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high.

FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury — something that has never been done.

Heck, after reading that, your mattress is starting to look like a much safer place to stash your money, isn't it? Well, that's probably going overboard -- and panicking about the health of your bank can create a self-fulfilling prophecy, which is what happened when the market crashed in 1929 and there were catastrophic runs on the bank. So I wouldn't want to make anyone panic and I am the LAST person you should take financial advice from.

Okay and if you were thinking T-bills...well, so was everyone else:

And the flight from bank debt to safe treasury debt is in such full flight that U.S. treasury bonds now have a negative return, the first time that's ever happened.

Oh, but it's not ALL doom and gloom. If you're a football soccer fan, you'll be excited to learn that as a part owner of AIG, you are now a sponsor of Manchester United. Of course, they're not doing so well this season, but still, how many people can say they sponsor a world-class soccer team?

Well, about 250 million Americans, I guess.

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