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September 26, 2008

When The Going Gets Rough...

...sometimes you just need a bigger clue bat:

Today (Friday, 9/26/08) will be an important day in American history. The credibility of the US dollar is at stake, which in turn depends on worldwide confidence in the US economy's future. [Note to gold bugs: see the end note.]

Almost everything I've written about at this blog for the last four years (regarding how bright the future just might be) depends on one huge but intangible asset on the balance sheet: worldwide confidence in the dollar. Accountants would liken it to an asset called "goodwill"; I roughly estimate the brand name "US dollar" to be worth around fifty to a hundred trillion dollars in present value. If we destroyed that asset, it would be like destroying the most powerful brand name in economic history.

I hope the Republican holdouts do understand that -- but some of the things I've heard about those who are blocking the rescue package are making me doubtful. If the Newt Gingrich faction "succeeds" in stopping the rescue package, they have a good chance of wiping that hundred trillion dollar asset off the balance sheet in one short weekend.

It's not called the Big Picture for nothing.

These people are really beginning to frighten me. And Lord knows, I don't scare easily.

Read his whole post. And the comments. And then read them again for good measure.

Posted by Cassandra at September 26, 2008 11:08 AM

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I'm not macro-economics qualified, but...

If the bailout is viewed internationally as poorly done, subject to the same abuse (20% of gains on sales to the usual suspects), and includes unrelated items (student loans, business loans maybe)- do we get the worst of both worlds?

The 700B price tag and the dollar still falls, for good reason?

Posted by: tomg at September 26, 2008 12:55 PM

At this point, I either want us to do nothing OR I want what the President asked for originally: take the original clean bill and vote "Yes" or "No". I could live with that if McCain and Obama both told us who their Treasury Secretary would be.

As a side issue, unless the reading I've done on CDS has fried my math circuits, the "Republican holdouts" *can't* block the bill. The Democrats control the House 235 to 199. Even if every single House Democrat voted "No", the Democrats could still pass the bill.

What the Democrats can do if the House Republicans continue to hold out is force the White House to concede more and more and more to get the bill passed. WSJ

Posted by: Elise at September 26, 2008 01:08 PM


I don't know when I have ever been more angry. They really are shameless.

There is not a single credible person of whom I'm aware who says we can do nothing. These people know that, and they are just shameless.

Posted by: Cass at September 26, 2008 01:34 PM

Tom, if you're worried about the dollar, you may care to think the message we send when our own Congress publicly telegraphs the fact that they're too jittery to make a long term capital investment in our own economy?

Because that is what our party has just done. Smart.

Really smart.

Posted by: Cass at September 26, 2008 01:43 PM

I understand that we cannot "do nothing," but I also understand that this doesn't have to be a take it or leave it proposition. There's a lot more at stack here than just $700 billion - like three times that much (Wachovia holds $121 billion in crap paper all by it's lonesome),. Whatever is decided, we are going to be feeling it for years to come. I do want just the first thing thrust upon me, unless it comes with a sailboat and two gorgeous deckhands.

Posted by: spd rdr at September 26, 2008 02:01 PM

"I do NOT want just the first thing thrust upon me, unless it comes with a sailboat and two gorgeous deckhands." (And they have to be female.)

Posted by: spd rdr at September 26, 2008 02:02 PM

Point well taken. OK, lacking in economics and logic.

Posted by: tomg at September 26, 2008 02:27 PM

I want to thank everyone who has commented. I appreciate your thoughts.

I think it would be better if I don't talk about this any more.

Posted by: Cass at September 26, 2008 02:34 PM

Whoa! Did I say three times $700 billion? Does seven times $700 billion make you want to stop for a deep breath?

Posted by: spd rdr at September 26, 2008 02:35 PM

I have that effect of women.

Posted by: spd rdr at September 26, 2008 02:40 PM


Do you have a special stapler that does that? :)

I am not alarmed as yet (even though WaMu, who holds the mortgage on my house) went under last night. But it would be better if it was done close to 'right' the first time, because we may not get a 'do-over' here.

Posted by: Don Brouhaha at September 26, 2008 02:53 PM

Well, that didn't take long, did it?

Wachovia Corp. has entered into preliminary discussions with a handful of potential suitors, including Banco Santander SA of Spain, Wells Fargo & Co. and Citigroup Inc., according to a person familiar with the situation.

The talks underscore escalating efforts by the Charlotte, N.C., bank to escape mounting loan losses and a plunging stock price. On Friday, Wachovia shares tumbled 27%, or $3.70, to $10 in New York Stock Exchange composite trading.


Posted by: spd rdr at September 26, 2008 05:48 PM

"I spend a lot of time trying to lay out the fact that we believe we're liquid," Wachovia CEO Robert Steel said earlier this month. "We believe we have the ability with our current financial position to respond to issues, and we also have some other levers to pull should we wish to enhance or improve our liquidity in the short term."

Good luck with that.

It doesn't matter when you're dealing with irrational people.

Like Congress, for instance.

Posted by: Cass at September 26, 2008 05:53 PM

Don't worry, Cass, Wachovia is liquid just as long as I keep my checking account there.

Posted by: spd rdr at September 26, 2008 05:56 PM

Oops. I said:

Even if every single House Democrat voted "No", the Democrats could still pass the bill.

Should have said:

Even if every single House Republican voted "No", the Democrats could still pass the bill.

Posted by: Elise at September 26, 2008 06:34 PM

Yeah but, there's no real difference between Republicans and Democrats, after all.

Posted by: Ymarsakar at September 26, 2008 08:59 PM

Spd's radio link gets to the point around the eleven minute mark.

This isn't a case where, if the US falters, China and the EU will pick up leadership and carry on smartly. The EU has some internal capacity, but China's economy is so deeply tied to ours that a collapse here means a collapse there. A collapse in the US-China partnership will mean disaster worldwide. "Emerging economies will suffer badly," while accurate, is not the right way to phrase it.

It is properly phrased: "This would mean war and famine across the globe."

The real consequences are out there, and that is where our eyes should be focused. Neither our navies nor our armies can stop the massacres this would unleash in places like Africa, rural India, perhaps even China. War on an order not lately seen is what is indicated here.

Posted by: Grim at September 27, 2008 06:32 AM

The old adage "When the U.S. economy sneezes, the world catches a cold" is true still. Like a deer caught in the headlights our pols stand frozen as their fight or flight response takes place right in front of our eyes.

If they spend as much time on resolving the problem as they do in hiding their involvement in it we would have a solution by now. These elitists care not a whit about the man and woman in the street until it is vote time. They are faced with doing what is expedient, which is what they are used to doing, or what is best for the country without worrying about what is best for their political career.

Can you imagine Paulson being on his knee in front of Pelosi begging? So much for being a leader and a man.

Posted by: vet66 at September 27, 2008 10:16 AM

I'm now back around to not liking the bailout plan. Really "plans" now: the original Paulson one; the modifications to that plan (I think of this as the Democrats' plan); and the House Republican plan. Of the three, the House Republican plan makes more sense to me than the other two and I prefer the original Paulson plan to the Democrats’ modified version (profit on the bailout to ACORN? really?) but I still don't think any of them address the underlying issue: mortgage default. If Zuckerman is right and real estate prices fall by another 20% and more people default then will having bought up the toxic mortgage-based assets that are currently out there really have solved anything - or even postponed anything for an appreciable length of time?

I also have to say that as ugly as it is, I like the wrangling over this. It's how all law should be made - with everybody snarling over what they see as bad ideas. I’d prefer that most of them didn’t feel the need to blame everyone else for the problem - there’s plenty of blame to go around - but our representatives *should* push back against plans they think are a bad idea. And one thing I think is excellent is that a lot of people are actually paying attention to the law being made. There’s nothing like shining a little light in some dark corners.

The down side, of course, is that if "they" are right and we absolutely have to have something in place before the markets open on Monday (which markets - US or Japan?), then all this fiddling is a bad thing. On the other hand, perhaps this wouldn't look so urgent if Bush and Paulson hadn't put us all on deadline. I wish they’d taken a less drop-dead approach, perhaps contenting themselves with making it clear this was a crisis and insisting Congress must stay in session until a bailout was passed. We would have had time for the various alternatives now being floated to bubble up without feeling like the whole world is breathing down our necks. So far the news that the US is working on a bailout seems to have calmed things down at least a little but if we miss our Monday “deadline” I don’t know if the calm will hold.

I’m finding Greg Mankiw’s blog an excellent - and calm - resource in this mess. Unfortunately, every time he puts up a new post I change my mind about whether to cheer for the Paulson plan. And his news about China not lending to US banks? Makiw call this - ahem - “worrisome”.

Posted by: Elise at September 27, 2008 12:45 PM

Don't be perturbed about changing your mind every time you hear something new about the Paulson plan. That's only a sign that your're still alive and thinking.

These are interesting times, folks. Don't be pushed by those afraid to lead. Whatever "solution" is finally arrived at, it's goin to suck for the taxpayer. Get the best deal you can, and then make sure that the stooges, cronies, and syncophants never forget your anger.

They held a tea party in Boston for a hell of a lot less.

Posted by: Damned Historian at September 27, 2008 04:34 PM

Re: Paulson getting on one knee, from what I heard, that was supposed to be a joke, vet66. People do that in a tense atmosphere to lighten things up.

Unfortunately, every time he puts up a new post I change my mind about whether to cheer for the Paulson plan. And his news about China not lending to US banks? Makiw call this - ahem - “worrisome”.


Posted by: Cass at September 27, 2008 05:32 PM

I still don't think any of them address the underlying issue: mortgage default.

If they don't get off their asses they are going to see a lot higher default rate. It's called a self fulfilling prophecy.

And then they'll call it a bad plan.

By the way, the President didn't create the deadline. The situation created the deadline. Let's just get that straight and not shoot the messenger.

Posted by: Cass at September 27, 2008 05:34 PM

On the upside, this little crisis finally motivated me to set up that USAA account like I've intended to for several years. :)

Posted by: Grim at September 27, 2008 05:55 PM

Well, I'm just giving up on my mind and the bailout plan. Now it seems like what I thought was the House Republican plan (Paulson minus ACORN, proxy, exec comp plus insurance) isn't the HR plan. The HR plan is no Paulson, all insurance which I don't think will work.

We'll have to agree to disagree on the deadline issue. The issue needed to be addressed ASAP but I don't think there was anything crucial about the one week (now stretched to nine days) Paulson specified. He could have followed Dr. Johnson's advice and allotted a fortnight to concentrate the mind.

Posted by: Elise at September 27, 2008 06:03 PM

I think we're back to me keeping my thoughts to myself.

Posted by: Cass at September 27, 2008 07:12 PM

I'd rather hear what you think, Cass, than what I think so I hope you'll reconsider. I'm going to stop commenting - I'm making myself nuts - but I will continue to read and I find your take on the financial situation very interesting. I think that's partly because you're the only blogger I'm reading who is passionate about passing the bailout - unlike everyone else who seems to be taking the attitude, "Well, okay, if I have to but I'm going to kick and scream."

Posted by: Elise at September 27, 2008 08:08 PM

An interesting paper from Cato on the CRA.


Found via "Chaos Manner", Jerry Pournelle.

Don't be afraid, and don't stop talking. This isn't the end, or even close to the end. History turns the page.

Posted by: Don Brouhaha at September 28, 2008 12:03 AM

Now that is interesting, Don.

Do I understand correctly that Bank of America and Nationsbank essentially used "megapledges" to buy themselves out from under other CRA extortions? They later merged, and today's Bank of America is one of the stronger surviving banks. Looks like paying the Danegeld may have worked out for once!

Posted by: Grim at September 28, 2008 12:16 AM

I've taken a lot of hours away from the news/internet today. Watch Texas kick Arkansas' a$$, watched Cary Grant in Father Goose & the extended version of The Lion, The Witch & The Wardrobe and some dumb mummy movie on SciFi. Sometimes I have to step away, just for my own sanity... Too much thinking about this financial crisis can be a back thing for someone who has no control over the outcome.

Posted by: Miss Ladybug at September 28, 2008 01:27 AM

Perhaps it did, and did not. Bank of American might also have compelled the problems at Merril Lynch that forced them to sell out to Bank of America. I beleive that a LOT of the big banks are playing a much deeper game that we poor plebes cannot understand at the moment.

The bottom line is that CRA is distorting the market. Some would say that is justified to overcome racial bias in lending. Others might say that it has lead to bad business practices which may have contributed to the present difficulties.

I will put on my worst case scenario hat and say what I expect to happen:
The Democratic Party has the votes in the House and the Senate to pass whatever they want, if their majorities hold together (a big if). The content of the "Bailout" or "Asset Swap" will probably determine how many votes this bill will garner. They want the cover of Republican support to innoculate them from some of the populist anger that will come from this bill. As time goes by, I will guess that a lot of politicians will wish they had supported something else.

I will also guess that there will be significant provisions to EXPAND the effects of CRA. I have read a few articles in the last few days indicating that there are quite a few small and medium sized banks that are doing just fine, because the have continued to follow good business practices. I expect language in the bill to be voted on to force ALL banks to participate in CRA to some degree, even if their area of business does not enter areas of 'minority' home ownership, etc.
As a local example, I live in a corner of one of the most prosperous counties in Ohio (Delaware County, you can look it up). There are several regional banks that only serve this county and adjacent ones that are rural, trending to suburbia. They are doing very well financially. They generally do not serve or have offices in urban Columbus, and hence are not exactly compelled to participate in CRA. This is not a mistake on their part.
So I expect that rather that repealing CRA as the CATO folks suggest, and perhaps replacing it with something that would be sounder financially, CRA will be expanded in its reach. There have already been rumors of allocation of profits by the Treasury from asset swaps being directed to ACORN in some drafts of the bill being decided on.
My last guess is that the bill to be passed will alleviate the present crisis, but in 4-5 years, the situation will be much worse than today, as there will no longer be ANY banks immune from the problems compelled by CRA, and what I expect to be expansions under the "bailout" bill to be introduced for passage. Fewer small and mid-size banks, and just a few mega-banks; that has been the trend for the past 20-some years. That may be the deeper game that the big banks are playing, in my opinion.
They are COUNTING on CRA to kill some of the competition, and to give them immense power in the financial market. And there are politicans (both parties) who are quite willing to play this game as well, based on the payoffs provided by the Big Banks.

Posted by: Don Brouhaha at September 28, 2008 11:04 AM

Are credit unions compelled to follow CRA? I would think that's a bit different, since CUs have membership criteria. I bank exclusively with a small CU meant to serve military members and their families. I think mine does offer mortgages, but I don't know if they are the actual lender in that case, or just a conduit to some mortgage company (haven't needed a mortgage since I moved back to Texas).

Posted by: Miss Ladybug at September 28, 2008 02:48 PM