What's over, grasshopper?
The financial crisis, of course. Secretary of the Treasury Paulson - wearing an appropriately somber expression - announced a bailout of some $700 billion on Friday; the stock market went nuts with relief. We're saved!
You mean that the Administration's plan has already been enacted into law and it worked?
Well, no. But I'm sure it will.
Spot is glad to hear it. But there are economists other than yourself who aren't quite so sanguine.
Yeah? Like who?
Well, Paul Krugman for one. In a post on his blog, Thinking the bailout through, Krugman says:
But the more I think about [the Temporary Asset Relief Plan], the more skeptical I get about the extent to which it’s a solution. Problems:
(a) Although the problem starts with mortgage-backed securities, the range of assets whose prices are being driven down by deleveraging is much broader than MBS. So this only cuts off, at most, part of the vicious circle.
(b) Anyway, the vicious circle aspect is only part of the larger problem, and arguably not the most important part. Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.
Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.
Spotty, can you explain what that means?
I'll try, grasshopper.
Let's say you bought a turtle for a dollar, the going rate for turtles at the time. Sometime thereafter, due to a glut on the turtle market, the price of turtles falls to fifty cents. Too bad, but it's the same turtle.
But now let's say that you need to raise some cash. So you approach your bank for a loan. The banker asks if you have any collateral; you say you have a turtle for which you paid a dollar. But the banker says it is only worth fifty cents and will loan you only maybe thirty-five cents, not the seventy cents or more you were hoping to borrow.
As a result of the collapse of the turtle market, you no longer have the capital to raise the cash - the liquidity - that you need. What to do?
Under the Temporary Asset Relief Plan, you could go to Henry Paulsen and see if you could get a dollar, or certainly a lot more than fifty cents, for the turtle. For every penny you got over the fifty cents, the public treasury would be bailing you out of your bad decision making in the turtle market.
We're starting to see why Wall Street likes this plan, Spotty!
Wall Street may like it, but William Greider at The Nation, does not:
Financial-market wise guys, who had been seized with fear, are suddenly drunk with hope. They are rallying explosively because they think they have successfully stampeded Washington into accepting the Wall Street Journal solution to the crisis: dump it all on the taxpayers. That is the meaning of the massive bailout Treasury Secretary Henry Paulson has shopped around Congress. It would relieve the major banks and investment firms of their mountainous rotten assets and make the public swallow their losses - many hundreds of billions, maybe much more. What's not to like if you are a financial titan threatened with extinction?
Greider calls it an "historic swindle."
Uncle Sam swims with the sharks
Spot now turns to Kevin Phillips, the author of several books, including his last one Bad Money: Reckless Finance, Failed Politics, and Global Crisis of American Capitalism. Phillips was interviewed by Bill Moyers last Friday night, and you can see a video of the interview and a transcript here. Phillips had a number of interesting things to say.
Here's Phillips on what he calls "bad capitalism":
BILL MOYERS: Give me a quick definition of "bad money."
KEVIN PHILLIPS: Well, "bad money" has a triple connotation. The first is "bad money" in the sense of bad capitalism drives out good capitalism.
BILL MOYERS: That's sort of a historical-
KEVIN PHILLIPS: That's right. We've had-
BILL MOYERS: I don't understand why it is. But-
KEVIN PHILLIPS: Well, because you have to compete with sleaze. Get a little more sleaze in your own operations. And you look at all these lies, these deceptions, these frauds that have been going on. But, I mean, there aren't too many people that would say back two or three years ago that the way to prosper more was to do less of the cheating. You had to do what the others were doing. And that's the way these things — it was true in the Twenties. It's been true in plenty of other bubbles. You have to do it. So just the question of what's been bubbling here and the hugeness of the problem hasn't been revealed to people.
This is one of the best responses to the free market ideologues like King Banaian, Captain Fishsticks, and Davey Strom that Spot has seen. Unfettered free markets will always run to ruin. Always. You must also remember, boys and girls, Kevin Phillips used to be a Republican.
Phillips thinks we are in the early innings of the current crisis:
. . . But I do have the feeling that this is going to be a big one, that I hate to use the term "innings." But let's say I don't think we're too far into the ballgame. I think we have more of a ballgame to go than we've had. So, yes, I think it's going to be a real problem.
Here are the "seven sharks" that Uncle Sam currently swims with:
Well, just to give you an example of how many [problems] there are, Alan Greenspan has finally decided to admit, you know, this may be one of those once-a-century biggies. Well, what makes it fascinating is that I sometimes use the description "seven sharks." There are seven sharks in the tank with the economy.
And the first is financialization because we're so dependent on this industry that's sort of half lost its marbles. The second is that you have this huge buildup of debt, absolutely unprecedented anywhere in the world. The third is you've now got home prices collapsing. The fourth is you've got global commodity inflation building up.
The fifth is you've got flawed and deceptive government economics statistics. The sixth is that you've got what they call peak oil where the world is, to some extent, running out of oil. So it's not just commodity inflation, it's a shortage of oil. And then the last thing is the collapsing dollar. Now, whenever you get this sort of package in one decade, you got a big one. And when Greenspan says it's a once a century, I think it's another variation but on a par with the Thirties.
This is the same economy that John McCain believes has strong fundamentals.
Maybe we aren't so saved after all, huh Spot?
Maybe not, grasshopper.