In case you've been out of touch lately, they are referring to the ongoing collapse of the American/world financial system wherein bankers ran amok, of which the midnight bankruptcy sale of Bear Stearns and the demise of IndyMac were early signs; followed by the government take-over of Fannie Mae and Freddie Mac; the abandonment of Lehman Brothers...
...to bankruptcy court; negotiations to merge Merrill Lynch with Bank of America; apparently desperate negotiations between Wachovia and another pillar of Wall Street; the federal government's acquisition of an 80 percent ownership of insurance giant AIG for $85 billion in an effort to save the giant; a coordinated effort by the central banks of several major developed countries to dump $242 billion into the credit markets of the U.S. and Europe to prime the pump and jump start lending again; a $100 billion recapitalization by the Treasury of the Fed's balance sheet; a federal guarantee of $50 billion to support the $4 trillion money market funds much as the FDIC guarantees your money in banks; and a new SEC ruling banning short sales of 799 various financial stocks in a classic "shoot the messenger" move typical of free marketeering Republicans. I feel I must have left out something, but that's my current list on government intervention so far.
It is probably true that we were mere hours away from total disaster plunging us into another Great(er) Depression, which would have devastated almost every American voter just in time for the elections. It is also true that short selling did not cause the stock market to fall into the crevasse. If anything, it was generally performing a perfectly legitimate market function, and, without the pressure of short sellers' purchasing shares to cover their earlier sales as stocks slide, we may reach a situation in which the market simply freezes in a "no bid" posture where there are sellers but no buyers. The promise by Paulson to insure money market funds came too late for Putnam Investments, by the way, which closed down the $12 million Putnam Prime Money Market Fund after panicky investors withdrew their funds; iMoney Net says some $89 million were withdrawn from money market funds on the 18th alone.
The question arises: why did Paulson, Bernancke, and Cox (sounds like a baseball game) pick some to save and threw others overboard? What were the magic criteria that left Lehman Brothers in the lurch but tossed a lifejacket to AIG? Paulson came to the Treasury from Goldman Sachs on Wall Street, what does he know that the rest of us don't? Why pick favorites? Truthfully, says Agora 5-Minute Forecast for 9/19, "the modern investment banking model has failed," done in by greed and taking on too much risk. The triumvirate has gone about saving their friends and acquaintances on Wall Street while proclaiming the rescue was necessary to save Main Street in just this way.
The fact is that the time to have "fixed" this mess was about two years ago, but that would have meant admitting that the entire Wall Street-Republican free market dogma was a failure. After all, they had just managed, under Reagan and the two Bushes (with help from Clinton) to accomplish draconian deregulation, dismissing firewalls and safeguards dating back to the New Deal, and they intended next to go after the lucrative privatization of Social Security, as promised to them by Bush and McCain. ( More, gimme more!).
All those high-priced Wall Street CEOs are taking their golden parachutes and departing unscathed, while the short sellers who gave us the indication something was wrong, are being punished---- as is the American tax payer who finds himself now committed to no one knows how many billions; estimates range from $1 trillion to $2 trillion, and counting. Shareholders have been wiped out---- who in the future will be willing to invest as a shareholder in anything resembling an investment bank? This presents a new kind of problem, since just about every economy in the world depends on access to ample new capital investment (remember the huge need America has to develop green industries and rebuild our infrastructure), so where is that capital coming from if not from investment banks asks Byron King, (Energy and Scarcity Investor) Foreigners as usual, you say? Sovereign Wealth Funds?
As it happens, foreign private investors are now net sellers of long-term U.S. financial assets, foreign central banks' normal purchases have "crested," and, despite past purchases of American assets, SWFs refused to touch Lehman Brothers. Unfortunately, foreign creditors have lost a lot of confidence in the U.S. (Does that mean they are "whiners?") and they do not trust American banks' balance sheets anymore; they feel duped. For that matter, how much more money can the Fed pump out, when it has repeatedly opened the window and accepted toxic paper from banks in exchange for good U.S. Treasuries? The well must soon run dry, even if the borrowers do manage to repay the "short-term" loans, or roll them over again and again. Who will be there to bail out the U.S. Treasury? The IMF? They might treat us like a banana republic. Ha.
What will be the effect on the American taxpayer of this enormous bailout, possibly amounting to $900,000 or more per family, which in a way amounts to the nationalization of banking and possibly of housing---- meet Uncle Sam, your new landlord! All this monetization of debt and, indeed, of stocks and real estate will inevitably produce incredible price inflation (Zimbabwe anyone?). Even worse, probably, is that these huge new obligations when added to the seemingly uncontrollable costs of the War on Terrorism will suck up every penny Obama and McCain, too, had planned for domestic programs. And goodbye to any more tax reductions, no matter what your ideology. This will of course please Grover Norquist, whose plans all along were to use monstrous federal debt to crowd out all those pesky entitlements or anything not related to defense or support of corporations.
While the Free Market philosophy brought us this mess, the crisis also proved that: 1) there is no such thing as a free market (the stock market and banking never, ever, were "free markets") and 2) when regulation-hating free marketeers get in trouble they, too demanded the government bail them out, leaving their profits for themselves but donating the bill for the mess to the despised little guy. We must not allow these Free Market acolytes to design the re-regulation, so whatever is passed under Bush must be revisited and redesigned under a new administration which will, I hope, replace or vastly modify the invidious "free market" dogma. Certainly, some of the big guys should go to jail for their unprincipled machinations.
On an optimistic note, we will get through this! We will have to feed, clothe, house, educate, and entertain the growing world population, deal with climate change, repair our infrastructure---- there will be plenty of things for American ingenuity to invest in, and, with the rising cost of transportation it is probable that a lot of outsourced industries will be coming home, to produce products closer to their destination market, thus re-industrializing America.
6 weeks ago I took everything I could withdraw without a penalty out of my stock market accounts and put it in a local Alexandria bank which has no exposure to the "funny" investments.
I bought a small amount of gold and silver coins in case the currency collapsed so I could buy groceries until the Treasury came up with something else.
So my prediction for the next few years is that the dollar will lose most of its value. There is no way to run away from that, but for all who are concerned, I suggest residents of Fairfax County consider issuing a local currency.
Ithaca, New York uses a local currency called Ithaca Hours which are traded for local goods and services. Ithaca, New York has used local currency in this way for many years, and some other communities have as well. There is no law against it.
Read more about Ithaca Hours here:
Just a thought from someone with a sixth sense.
The "reform" proposals offered by the Bush administration in response to the Wall Street meltdown are set up to enable the Free Market acolytes to install brutal Free Market reforms while being utterly, completely, beyond any oversight by the elected representatives of the people in Congress. Bush has aggressively proclaimed that any, I mean any, attempt to modify so much as a comma in his proposal will be regarded as a betrayal of trust to the American people, and he will not tolerate it---- he insists that his proposal be passed within the week. It is pure authoritarianism in the grand tradition of Free Market theory. If Congress caves in to his demands, it really is Goodbye democracy, Goodbye even to our republic. This must be trumpeted everywhere, we need to contact our Congressional representatives and Senators post haste. This is a Trojan horse, and, regardless of Bush's arrogance, the proposal must be modified greatly.
For that matter, how much more money can the Fed pump out, when it has repeatedly opened the window and accepted toxic paper from banks in exchange for good U.S. Treasuries? The well must soon run dry, even if the borrowers do manage to repay the "short-term" loans, or roll them over again and again. Who will be there to bail out the U.S. Treasury?
The best case scenario is rampant inflation after all that new money is printed up. The worst case is currency collapse. We are so dependent on foreign imports, and foreign oil, that this could be disastrous.