by Damozel | The whole system? The entire economy? Surely not. Economist Paul Krugman says "Yikes." Literally---that's what he says.
Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next. (NYT)
According to him, there is a real possibility "that 2008 could be 1931 revisited." (NYT) I knew things were dire. I didn't realize that we were that close to the brink.
In Business Week, David Henry explains:
Wall Street expected to spend today trying to contain the damage from a bankruptcy filing by Lehman Brothers (LEH) after the fourth-largest investment bank failed to find a buyer for its broken balance sheet over the weekend.
And that's not all. There's the distressed sale of Merrill Lynch (MER) to Bank of America (BAC) for approximately $44 billion, and a radical restructuring plan for American International Group (AIG), the insurance giant which became a major player in mortgage-related securities and derivatives.(BW)
The rescues being organized by Ben Bernanke, "savior of the world," might not take. And Paulson has surprised Krugman by holding firm on his position that there is to be no rescue for Lehman.
Henry Paulson, the Treasury secretary, was adamant that he wouldn’t sweeten the deal by putting more public funds on the line. Many people thought he was bluffing. I was all ready to start today’s column, “When life hands you Lehman, make Lehman aid.” But there was no aid, and apparently no deal. Mr. Paulson seems to be betting that the financial system...can handle the shock of a Lehman failure. We’ll find out soon whether he was brave or foolish. (NYT)
Alan Greenspan says we're in a once in a century crisis. I'm assuming he's counting the 20th Century as well. He says it is "more than likely to spark a recession," which in itself didn't upset me too much, since I've been assuming for awhile we're already in one. (Breitbart) He says we have a "less than 50 percent chance" of escaping a recession. Right.
But he definitely isn't seeing any silver linings.
Asked whether the crisis, which has seen the US government step in to bail out mortgage giants Freddie Mac and Fannie Mae, was the worst of his career, Greenspan replied "Oh, by far."
"There's no question that this is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go," Greenspan said
"And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. "That will induce a series of events around the globe which will stabilize the system."(Breitbart)
Um, okay. Greenspan definitely doesn't think all the institutions facing collapse can or should be rescued. (Breitbart)
David Henry explains the rationale for the benefit of the laity:
Bailouts, while saving financial institutions and easing short-term danger, are widely seen as encouraging managers and investors to take bigger and bigger risks out of confidence that their losses will be covered.
Regulators may have also felt other forces pushing them away from saving Lehman. Building in the wings have been threats of big trouble at other major institutions. Shares of Merrill and AIG tumbled last week, along with Lehman's stock, following the government's takeover of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). Shares of savings bank Washington Mutual (WM) also fell sharply. In other words, things could get plenty costly for the government even though it's not subsidizing a Lehman buyer. (BW)
And Greenspan most definitely doesn't approve of fellow Republican John McCain's tax plan.
[O]n Saturday the Associated Press reported remarks by Greenspan that clearly indicate he doesn’t think John McCain is the one to steer America and the world through that collapse.
“Unless we cut spending, no,” the former Federal Reserve chairman said Friday when asked about McCain’s proposed tax cuts, pegged in some estimates at $3.3 trillion.
“I’m not in favor of financing tax cuts with borrowed money,” Greenspan said during an interview with Bloomberg Television. “I always have tied tax cuts to spending.”
That McCain’s “Bush-Plus” budget planning, which would make Bush’s tax cuts permanent while introducing extra cuts benefiting mostly the very rich and corporations and would aim to offset those cuts by cutting earmark spending, comes up woefully short was pointed out by Democratic Senator Claire McCaskill (D-Mo.):
McCaskill said eliminating congressional earmark spending — estimated at $17 billion annually — cannot offset McCain’s proposed tax cuts.
“That’s a huge amount of money, but it’s not even a drop in the bucket to pay for $3.5 trillion in tax cuts,” she said. “So, every time he throws up earmarks and he’s asked how he’s going to pay for it, he knows he’s being disingenuous, he knows he’s not being forthcoming.”
It’sa position that McCain’s own chief economic advisor also holds - as divulged in a forthcoming book. Douglas Holtz-Eakin believes that “you’re going to have to raise taxes whether you’re a Republican, a Democrat or a Martian” but the McCain campaign campaign isn’t taking his advice and he isn’t speaking out in public about that because ““It’s the brand and you don’t dilute the brand.” (C&L)
Anyway, the Fed is on the case.
There really is no end on the scope of the catastrophes that Bush and his band of merry marauders seem to have wished on this nation. As Krugman points out, we should have had a regulatory system to prevent these problems years ago. Or if not years ago, then months.
Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock? When Bear went under, many people talked about the need for a mechanism for “orderly liquidation” of failing investment banks. Well, that was six months ago. Where’s the mechanism?
And so here we are, with Mr. Paulson apparently feeling that playing Russian roulette with the U.S. financial system was his best option. Yikes (NYT).
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