THE SOCIALISM OF THE NEO-CONS: After a frantic weekend full of endless phone calls (do you suppose these calls were monitored without a warrant by Uncle Sam?), a deal was cooked: J. P. Morgan would buy Bear Stearns for a measly $2 per share with borrowed money. Where did they borrow that money? Why, from Uncle Sam of course, since nobody else in the whole world stepped up to the plate to rescue the bankrupt 85-year old pillar of Wall Street, whose shares had been "worth" $30 at close of business on Friday. Very simply, the investment house could not meet margin calls and was, in fact, broke. Even the Chinese backed out of an earlier agreement to rescue the Bear, and it was frighteningly apparent to Paulson (Treasury) and Bernanke (Federal Reserve) that it would cause a worldwide meltdown of devastating proportions if Bear Stearns died messily just as the Asian markets would be opening. The Federal Reserve mounted its white horse yet again on the Sabbath Day, making it twice in one week, and in effect socialized risk while leaving any (future) profits in private hands. Congratulations to each and every American taxpayer, now on the hook for Bear Stearns, not to mention all the trillions of Treasury debt as well. And, most especially, congratulations to those American home owners on the hook for the Bear, who find themselves upside down in their own mortgage, unable to make their own escalating payments. They, of course, will not be rescued by the compassionate conservative neo-cons because they are not too big to be allowed to fail. In fact, they are just the right size to go through the meat grinder. The $600 "stimulus" largess makes not even a ripple when thrown into the pond. Moreover, the incredible raising of the so-called conforming loan limits from $417,000 to $729,950, designed to provide homeowners with affordable re-financing so as to escape from their rising stratospheric mortgage payments, can help only those few homeowners who still have good credit, haven't missed any payments, do not have a big second trust or home equity loan, and have a property which will still appraise for the amount of the loan.
"SELL THE UNITED STATES": is what the rest of the world seems to be saying: they are rushing to get rid of our money, our stocks, and our financial paper. The only thing of America they do seem to be buying is our real estate, Oh, and what infrastructure we still have that is not crumbling, but this is actually an effort to turn their rapidly depreciating dollars into some sort of tangible asset before the dollars are utterly worthless. "The U.S. dollar is melting," said Guido Mantega, Brazil's Finance Minister. The dreadful truth is that the American financing gap, i.e., the difference between what our government can expect in revenues, and the amount it is committed to pay out is, growing between $2 and $3 trillion per YEAR. Since George W. Bush became President some $20 trillion has been added to our deficit. No wonder it is harder and harder for America to command any respect---- and to sell its Treasuries to finance this deficit. There are those analysts who say the United States has at most another 4 to 5 years before we fall into complete financial ruin.
"SO WHAT?": I am amazed that on the whole the average Main Street (formerly) middle class guy, distracted by basketball's March Madness and the decline and fall of Elliott Spitzer, nevertheless still does not see how any of this Wall Street mess affects him. It's just one more smart-ass Big Guy's elitist mess-up, and, besides, his President has reassured him that "the basics of our economy are sound, it's just a rough spot," which we will get through if only the liberals would stop glooming and dooming, and think positive. The average voter has not made the connection between his desperate situation on Main Street and the Republican Party's ruthless "free" market, anti-government, no-ethics philosophy which coddles the wealthy international elite at the expense of everyone else--- and everything else, including America itself. It is past time for timid Democrats to make this connection for the citizens. It's their patriotic duty.
END NOTE: Personally, I have a feeling the Wall Street/economic disasters were not supposed to happen so soon. It's my gut suspicion that George W. Bush fully expected to dance out of the Oval Office just in advance of the tsunami, the same way he sold his oil stock just before the company went bankrupt back in Texas. It's the first time his bad boy sense of timing has betrayed him. All this was supposed to hit the fan after the next President had taken office, Dubya was back cutting brush in Crawford, and Cheney was either at an undisclosed location, or living the high life in Dubai, back at Halliburton's new headquarters. On the other hand, maybe they will patch things up, run a public relations campaign, and manipulate fear of terrorism just enough to hold it all together for one more gallop around the track.
The choice was a sale of a bankruptcy (if the auditors discovered the bank was technically insolvent, they would have issued a "going concern" letter, which would have doomed it anyway).
Then, once the choice was between certain failure or distressed sale, the Fed, correctly I think, did what it needed to complete a sale.
Also, I haven't really looked at the deal, but I don't believe the Fed is funding the deal. I believe the Fed has agreed to make $30 billion available to Bear (or, I suppose, now JPM), taking what is currently valued as worthless paper as collateral (although the paper is actually not worthless in the real world).
I don't think the Fed left them twisting in the wind because of LTCM. True, Bear acted like jerks then, but all the individual players were different.
While I still have the feeling it will eventually come to light that BSC's capital position eroded, triggering all of this, the Journal reports that this crisis was more in the nature of a classic fear-driven bank run, albeit on an investment bank.
Now since they have thrown away the oversight role they originally claimed, they are printing more play money, that is money without any backing in gold. When this happens it dilutes the money supply and every dollar is worth less which is what we call inflation.
Yes, I would like to know who will be paying the interest on the Fed's loan to J.P. Morgan. Novertheless our existing national debt will require around 400 billion a year just to pay the interest. We could run the American economy on that each year (without the war).
We are seeing just the beginning of the collapse of the banking system. The bad mortgages have ARMs which will kick in gradually over the next two years. During that time we should see a slow motion emptying out of America's banking system.
We just saw the dollar lose 25% of its value in the last few months, gas has gained by that much in price. That is a net loss of buying power of 50% for the American consumer in just a few months, after the gas price ripples through the commodities market.
Hang on. Its going to be a bumpy ride!
The Federal Reserve is a quasi public-private institution with a presidentially appointed Board of Governors. In addition, it is our central bank, just as other countries have central banks. It is not private.
For more information, see here
Furthermore, not being on a gold standard is not the cause of inflation.
Our money is part of the international currency market. The worth of the dollar is affected by the overall strength of the economy, sound economic fundamentals, and the soundness of our credit policies.
It's the budget deficit, the trade deficit, the fact that we have turned into a debtor nation in general and the credit crisis that have weakened the dollar in the international currency market and scared off international investors.
We need sound oversight of financial markets and an insistence that best practices are adopted in the banking and credit industries in general. The country also needs to pay down the national debt and get rid of the deficit.
In other words, we need sound fiscal policy and sensible regulation to prevent abuses to the system such as the subprime crisis.
None of this has anything to do with a gold standard. We do, however, mint dollar coins.
Andrew Jackson resisted this setup and his victory is recorded on his tombstone saying that he beat the banks.
The "bottom line," therefore, is actually that we ascertain the strength of our economy by how quickly and in what quantity individual consumers collectively spend, and we therefore discourage people from saving by dumping cheap money onto the market by lowering the interest rate so it's easier for you to borrow money you don't have. Unfortunately, we eventually got to the point where we let you borrow money that you'll never have, and banks are starting to fail because of it.
In the words of Nouriel Roubini, the New York University economist who's been predicting this debacle for more than a year, we've mastered the art of "socializing risk and privatizing gain."
I also really like this by E.J. Dionne:
... in the enthusiasm for deregulation that took root in the late 1970s, flowered in the Reagan era and reached its apogee in the second Bush years, we forgot the lesson that government needs to keep a careful watch on what capitalists do. Of course, some deregulation can be salutary, and the market system is, on balance, a wondrous instrument -- when it works. But the free market is just that: an instrument, not a principle.In 1996, back when he was a Republican senator from Maine, William Cohen told me: "We have been saying for so long that government is the enemy. Government is the enemy until you need a friend."
So now the bailouts begin, and Wall Street usefully might feel a bit of gratitude, perhaps by being willing to have the wealthy foot some of the bill or to acknowledge that while its denizens were getting rich, a lot of Americans were losing jobs and health insurance. I'm waiting.
The term "neoliberalism" properly draws attention that these policies are a rehash of the economic liberal theories from the 1800s.
It also makes it clear how the pro-rich policies of the neoliberals are not the same as the concept of the free-market, which is really an idealized concept that doesn't exist in reality.
It also makes it clear what is being sold. Opposing neoliberal policies sound a lot more rational in the U.S. than opposing the "free-market", which makes you sound like someone against freedom and liberty.
Sometimes just giving the proper name to things help understand it better.
"Free" markets are not the same as "free" enterprise and, while left alone, they may indeed self-regulate and on balance over the long term may have good results for most everyone, but in the short run in which we all live they can, and inevitably do, produce ridiculous distortions and pain while handsomely rewarding individual dishonesty and greed. In other words, even the best of free markets absolutely must have Rules of the Game. Money talks all right, and how often has it been used to bribe the politicians, sometimes even buying an illegal war for profit, eh?
Indeed, "Government is the enemy until you need a friend."
Other business philosophies consider long-term to be perhaps two generations, not two quarters, and their goals are so far over the horizon to Harvard Business School devotees that they are unimaginable to American planners.
That is why I say Bush, a product and acolyte of the instant gratification Harvard Business School philosophy, never seems to think more than one move ahead ("plan for post-victory occupation of Iraq? Not necessary"). He iimagines he is playing Texas Hold'em poker, or maybe clever checkers. The rest of the world is playing chess, or maybe Go (Japanese three-dimensional chess). Is Bush, and therefore America, maybe in over its head?
Before we get overhyped in the politics of this and making an an issue of "neo-cons" run wild was not Sen. Christopher Dodd involved in all of this. He was interviewed yesterday on CNBC via telephone I think and stated that he had numrous phone conversations over the weekend cocnerning Bear Stearns as would any member of the Banking or Finance Committees. I was left with the imression he was supportive of this action as well as a Fed cut today.
History does not really repeat, but it does, as they say, rhyme. The Great Depression did not occur because the government messed up a free market, we were at that time still on a gold standard, there were only 130 million people living in this country not 300 million, and so on. But I do see the same uncaring plutocrats, the same oblivious leadership, and much of the same jungle capitalism philosophy that encouraged an irresponsible pursuit of extravagant short-term profits based not on production but on crazy financial schemes---- not to mention a self-appointed elite that believed its own exalted position reflected their personal superiority, a natural aristocracy ordained by God himself.
It was from the bitter experiences of the Great Depression that we implemented regulations and the idea that the government should protect its citizens who could not go up against huge corporations, who could not protect themselves. (Something similar happened when Kings bonded with their lower class subjects against the egregious offenses of their barons) But memories fade, regulation sometimes over-reached itself, and the giant corporations (which themselves are not much like their ancestors of the 1920's and '30's, by the way) roared back inder Raegan and the Bushes and began dismantling all the protections erected during the 20th century.
There is nothing particularly sacred about the right of corporations to do exactly as they please, while trusting that it will work out for the public good "in the long run."
I imagine once a Democrat takes office next January 20, it will feel like a fog lifting.
I'm 49, so both my parents grew up in the Depression, and it was the single most formative experience of their lives (my dad was in the Navy in WWII training for the invasion of Japan when the war ended, so his wartime experience was not as profound). My mother, who was pretty well-off until my grandfather lost his dress business in the early 30s, was especially affected. she worshipped FDR.
Less so with my dad, who never had much, and so felt the sting of loss less.
If I'm prying, I apologize.