The Band-Aid Has Landed!

With high drama the drama queens in Congress finally passed a $700 billion bailout plan – as if it mattered other than because people said that failure to pass the bill mattered. Passage of the bill is relatively meaningless for the global economic crunch. But failure to pass the bill would be taken as a sign that Congress wasn’t taking the crisis seriously enough. So we have a $700 billion public relations stunt. Now the Whatever Plan needs to be implemented – of course by the people who got us into this mess in the first place. Meanwhile, the world moves onward and downward.

Some interesting links below:

What Comes After Paulson? – The American Prospect – Robert Kuttner – 6 October 08

It is now increasingly clear that the Paulson approach will not solve the financial crisis. The damage that has been done to America’s financial system will not cured by having the Treasury purchase dubious bonds, even $700 billion worth. It extends to a basic collapse in credit markets, a run on the stocks of banks with a melting away of bank capital. The crisis has now extended to European banks, and is rapidly becoming a worldwide calamity.

The crisis also destroys the basic business models that have proliferated in the past decade — of having financial intermediaries invent ever more obscure securities that allow ever greater levels of pyramiding. It is the unwinding of this larger model that is causing the deeper collapse, and not merely a lack on confidence in certain exotic bonds backed by mortgages of depressed value. Hedge funds will be next, causing wider losses.

more at What Comes After Paulson

The financial crisis may hasten European integration but slow global banking – Vox – Avinash Persaud – 6 October 08

The liabilities of the biggest US bank equal half the US tax revenues; the ratios in Europe are bigger. Deutsche Bank’s liabilities are one and a half times Germany’s annual tax revenue; Barclays’ are twice Britain’s. This crisis will either leave European financial integration in tatters or quicken the development of European fiscal capacity. European integration is a historical process that routinely stumbles upon crises that threaten to destroy it, only to find that it has been deepened by the crisis.

One of the interesting and perhaps sad lessons of last weekend’s mini-summit of European leaders in Paris is that Europe’s predicament has been made worse by allowing financial integration to run ahead of fiscal integration.

more at The financial crisis may hasten European integration but slow global banking

Fed Considering More Extreme Measures, Further Expansion of Its Role – Naked Capitalism – Yves Smith – 06 October 08

As the Fed’s interventions have failed to halt the progress of the credit crisis, the central bank has taken even bigger measures, only to see them provide at best temporary relief.

As we have indicated, the Fed’s moves appear to have hit the point of being counterproductive. Why should banks deal with each other when they can obtain funding form their friendly monetary authority? And as Richard Bookstaber warned in his book A Demon of Our Own Design, in tightly-coupled systems like our financial system, efforts to reduce risk typically make matters worse. The system’s very processes need to be changed for risks to be contained. But the banking regulators appear not to have considered this line of thought.

more at Fed Considering More Extreme Measures, Further Expansion of Its Role

Oh yeah, that other bailout! – Bubble Meter – 03 October 08

In case everyone forgot, Congress already enacted one bailout months ago:

Amidst all the chaos surrounding the $700 billion Wall Street bailout plan, the federal government’s other housing rescue program quietly opened for business Wednesday.

But will any mortgage servicers come knocking?

more at Oh yeah, that other bailout

Another Reason for Cash Hoarding: Big Credit Default Swaps Market Test Imminent – Naked Capitalism – Yves Smith – 02 October 08

Most observers have taken as a given that the increased disinclination of banks to lend to each other is counterparty risk, that is, the fear the money they lend out won’t come back, or at least on the initially promised timetable (bankruptcy proceedings take time and usually lead to losses by unsecured creditors). Some wags have said that financial firms are unwilling to provide loans to each other because they know how bad their own books are, and won’t want to be exposed to anyone in that shape.

more at Another Reason for Cash Hoarding: Big Credit Default Swaps Market Test Imminent

Rogoff: Significant Reasons to Doubt Wisdom of Bail-Out -Economist’s View: Mark Thoma – Kenneth Rogoff – 02 October 08

Kenneth Rogoff thinks that the bailout plan “might end up doing more for profits and bonuses in the financial sector than for the rest of the economy”: Significant reasons to doubt wisdom of bail-out, by Kenneth Rogoff, Project Syndicate: With minds concentrated by fears of another 1930s-style Great Depression, America’s politicians have adopted, virtually overnight, a $700bn bail-out plan…

The final deal is an elaborate piece of financial and political engineering whose ultimate effect is almost impossible to predict. There are good reasons, however, to be skeptical…

The plan’s central conceit is that government ingenuity can disentangle the trillion-dollar “subprime” mortgage loan market, even though Wall Street’s own rocket scientists have utterly failed to do so. To boot, we are told that the government is so clever it might even make money… Perhaps, but … a lot of very smart people in the financial industry thought the same thing until quite recently. …

more at Rogoff: Significant Reasons to Doubt Wisdom of Bail-Out
Stiglitz: Bailout Blues – Economist’s View: Mark Thoma – Joseph Stiglitz – 02 October 08

Joseph Stiglitz hopes we can tread water until a new administration takes over:

Bailout Blues, by Joseph E. Stiglitz, Project Syndicate: It doesn’t take a genius to figure out that the United States’ financial system – indeed, global finance – is in a mess. …

As global markets plummet, … Congress … may rescue Wall Street, but what about the economy? What about taxpayers, already beleaguered by unprecedented deficits, and with bills still to pay for decaying infrastructure and two wars? In such circumstances, can any bailout plan work? …

[T]he rescue plan that was just defeated … remained critically flawed. First, it relied – once again – on trickle-down economics: somehow, throwing enough money at Wall Street would trickle down to Main Street, helping ordinary workers and homeowners. Trickle-down economics almost never works…

Moreover, the plan assumed that the fundamental problem was one of confidence. That is no doubt part of the problem; but the underlying problem is that financial markets made some very bad loans.

more at Stiglitz: Bailout Blues