The Oil Drum: Europe | Paulson and Bernanke ratchet up the blackmail talk

278 comments on Paulson and Bernanke ratchet up the blackmail talk

Comments can no longer be added to this story.

| Show without comments | PDF version

prairiedog on September 24, 2008 - 5:35pm

Yikes. Have seen references to this before and just started reading more about it. An article in Money magazine a few years ago described Paulson as being very interested in wildlife....especially birds and predators, and how the latter maintained their position in the top of the food chain. He also is fascinated by snakes. While I like wildlife and animals too, I'm struck by the analogies here...predators and snakes. So what are they planning...should we look forward to a world oligopoly? Also, I guess that means that any investment in the stock market is sort of like throwing your money into the wind. Great.

Comments can no longer be added to this story.

karlof1 on September 24, 2008 - 6:07pm

For those who haven't, I highly encourage reading this item by Michael Hudson:

There is a long pedigree for this kind of behavior. And it always seems to involve a partnership between kleptocratic insiders and the Treasury. Today’s twist is that the banksters have lined up complicit accomplices from the accounting industry and bond-rating companies as well. The gang’s all here.

As for investing in stocks, make sure you choose a properly regulated and transparent market, which means none in the USA. I favor Oslo because the companies I like are listed there.

One of NCANS founding members has this "better plan to save the US economy," which I hope will generate some responses:

1.) Restore the dividends for FNM and FRE preferred stock. This will immediately improve the balance sheets of small, "innocent" community banks $ 10 to $ 15 billion.

2.) Abandon the warrants the Treasury extorted from FNM and FRE. If "real" common equity is worthless, the Treasury is giving up nothing. If "real" common equity has value, then the warrants represent theft of equity from the common holders, virtually none of whom had any control over FNM and FRE managements' activities.

3.) Immediately enact a Federal direct loan program, offering a new 30 year loan at 5% interest to any owner-occupant for the full amount of money currently due secured lenders on the home, without regard to income, equity, or credit score. In addition to the current interest charged, the Federal government gets 25% of a eventual sale price in excess of the original loan amount. This makes the program attractive only to those borrowers who actually need Federal assistance to keep their homes.

This program terminates virtually all foreclosures of owner-occupied homes, which should significantly stabilize most home prices in most areas of the country. This program removes the worst loans from lenders' balance sheets, allowing them to make new, better quality loans, and should unfreeze the credit markets.

This program helps "Main Street" directly, and should benefit Wall Street indirectly, rather than current proposals which benefit Wall Street directly, and do little or nothing for "Main Street".

Comments can no longer be added to this story.

steve from Virginia on September 24, 2008 - 9:30pm

All the Fed's alphabet soup of emergency liquidity facilities innovated over the past year were structured around repurchase agreements. Toxic waste securities were used as collateral for US Treasuries and dollar credit at 85 percent of face value. But as each facility expires, it has to be rolled over and increased to keep pace with the implosion of credit in the interbank markets.

This is correct. The Fed and the Treasury have misidentified and mischaracterized the nature of this crieis from the beginning, equating it to a garden variety 'money panic/liquidity squeeze'. Under such circumstances, the injections of Fed liquidity would be 'mopped up' after the panic had subsided ... and the Fed's balance sheet cleansed. In a money panic situation, the paper taken as collateral by the Fed in an open market operation would be good, but temporarily undervalued by the panic.

This crisis is a secular revaluation of assets. The paper taken by the Fed as collateral isn't good paper mis-valued ... it really is bad paper! After a year of crisis and bear markets in all forms of paper collateral ... the Fed's balance sheet is a mess.

A giant problem with the Paulson proposal is it will bring more bad paper out of the woodwork. $700b now, $1.2t next week, $5t the end of next year ... it will never end. All the banks - both in the US and abroad - are swimming in the stuff.

I disagree with the 'Base Money' scenario since it is an inflation plan. The Fed has plenty of subsidiaries - Fannie Mae, Freddie Mac and AIG come to mind - that can be converted into 'parking spaces' - holding companies for Fed waste. The Fed can replace the waste with more Treasuries and nobody would know. Bernanke could be doing this now, the only concern would be uncertainty over him keeping his job after January.

Restore the dividends for FNM and FRE preferred stock. This will immediately improve the balance sheets of small, "innocent" community banks $ 10 to $ 15 billion.

You have illustrated the core of the current crisis in one sentence! This is the lack of yield in all investments, particularly debt. 'Simple' return is insufficient, requiring excess leverage and complex intermediation. Instead of returns to savings/investments compounded over time with manageable risk, the markets have turned to 'growth' and speculation ... and complexity and intermediation to 'hedge' the unpredictable risk. Unfortunately, the decline of yield has taken decades to manifest itself and will not be solved overnight with a bailout.

The spark for Paulson's Plea was the bankruptcy of Lehman Brothers and the resulting shockwaves felt in the money markets. The common connection between all the failures is the derivatives markets: the CDS market which is leveraging debt downward (think 'Portfolio insurance') and the interest rate/cash flow swaps market. Trading, originating and settlements in these markets should be suspended until someone who has some insights into them can straigten them out. Doing this would calm the money markets and not cost the taxpayers a dime!

Don't visit my blog!

http://stevefromvirginia.blogspot.com/

Comments can no longer be added to this story.