Posted on 09/26/2008 8:29:29 PM PDT by SeekAndFind
“It's a terrible idea. It's undemocratic. It's bad economic policy, and it's bad social policy. And it has a very little chance of solving the problem in a meaningful way.” -- Allan Meltzer, Carnegie-Mellon University
Beware of politicians or business leaders who say, “I’m a firm believer in the free market, but…”
“But” thinkers have come out of the woodwork during this financial crisis: Conservative economist Bruce Bartlett proposes tax increases…..Patrick Byrne, the new CEO of the Milton and Rose Friedman Foundation who calls himself a “classical liberal,” demands that Congress impose a transactions tax on every stock market transaction to stem speculation. (This so-called “Tobin Tax,” named after Yale economist James Tobin, would reduce liquidity and make buying and selling stock more difficult.)
Then, of course, there’s Secretary Hank Paulson himself. A former CEO of Goldman Sachs, he professes to be a strong free-marketeer. "But we must act or face disaster," he warns. Then he proposes the largest power grab in history. Have you seen Section 8 of the bailout plan? It states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
If this stands, it is giving incredible and unprecedented dictatorial power to the Secretary of the Treasury.
Fortunately, there are a few sane voices out there. I was delighted to see that Allan Meltzer, a famous monetary expert from Carnegie-Mellon, lambasted the $700 billion bailout in a PBS interview yesterday.
Meltzer is writing a multi-volume history of the Federal Reserve. He drew upon his extensive background as a monetary historian to criticize Secretary Paulson’s handling of the credit crisis. “I've listened to governments tell me for 40 years that there was a crisis and the world was going to fall apart if we didn't do this or that,” he said. “But there have been a few cases where they weren't able to do that. One was the commercial paper crisis in 1970. There have been several others. The world did not fall apart.
Consider:
* Last week, we had Lehman Brothers went into bankruptcy. Within three days, most of the assets were sold.”
* AIG had three offers to buy the company before the government took over and offered a better deal.
* Merrill Lynch was sold to Bank of America when it ran into trouble.
* Last night it was announced that JP Morgan bought Washington Mutual’s deposits.
Meltzer concludes, “We need to get the government's hand out of this, and let's see whether we can't get a market solution.”
Given that monetarists often favor intervention during a crisis, it's great to see Meltzer taking a strong laissez faire stance.
Where's J. P. Morgan When We Need Him?
I too am a historian of finance, and one of my favorite stories is the Panic of 1907. It has some similarity to the current situation, because in 1907 there were some runs on the banks and the credit markets froze up. J. P. Morgan, the quasi central banker, invited all the major bankers in New York to his library, locked the doors, and said he wouldn't let anyone out until they had raised the funds to end the credit crunch. It worked.
Secretary Paulson and chairman Bernanke should do the same and not depend on Congress. They should invite all the major bankers to a meeting in New York, and raise capital to solve the liquidity crunch. They might invite Warren Buffett and Alan Greenspan to help out. Meltzer suggests the Treasury might help in lending funds if necessary: “If they're going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think -- that's an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them.” But it should not nationalize banks and mortgage companies, and get involved in the commercial banking business.
History is holding its breath. In the next couple of days, we will witness one of the greatest tests of American will, whether we will stand for economic freedom or doom ourselves to a new form of tyranny.
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Mr. Skousen is a financial economist, author and university professor. He has been the editor of the financial advice newsletter, Forecasts & Strategies, for 26 years. Two of his books highlight Milton Friedman's career: "The Making of Modern Economics" and "Vienna and Chicago, Friends or Foes?." Check out his latest book, "EconoPower: How a New Generation of Economists is Transforming the World." He is the producer of FreedomFest, the world's largest gathering of free minds, in Las Vegas every July.
I am willing to bet that Wamu can’t.
I hate to say it, but I am not optimistic.
F*** the bailout.
“Conservative economist Bruce Bartlett proposes tax increases”
WTF? Even socialists know that tax increases slow economic growth.
“I too am a historian of finance, and one of my favorite stories is the Panic of 1907. It has some similarity to the current situation, because in 1907 there were some runs on the banks and the credit markets froze up. J. P. Morgan, the quasi central banker, invited all the major bankers in New York to his library, locked the doors, and said he wouldn’t let anyone out until they had raised the funds to end the credit crunch. It worked.”
This is extrememly important, and should be popularized in the historical consciousness. J.P. Morgan thought that all business needed when recession loomed was more money. What he probably didn’t understand that too much money is the problem in the first place, for easy credit incentivizes wasteful investment.
I guess he got tired of talking all his buddies into opening the faucets, for by 1913, America had a real central bank, the Federal Reserve System, which could pump money into the economy whenever it wanted. The result? More recessions than we’ve known what to do with ever since. Inflating the currency is not a solution to a “credit crunches.” Why? The only reason credit is so tight now, as then, is that it was far too loose in the immediate past. Only saving can cure a credit crunch. Save now!
Then in 1910. The Federal reserve was structured and enacted in 1913.
We are at that moment again.
The Paulson plan is not an unreviewable dicatorial power grab, that is and always has been a baseless fearmongering smear, and beneath the seriousness of this crisis.
Buying securities is a more arms-length transaction than extending loans. Being a creditor among other creditors would be closer to nationalization. Who'd be senior in a default, for instance? We all know who.
The private resolutions series leaves out the little fact that each one caused the next is an accelerating cascade, which only slowed on the bailout plan itself, and massive Fed intervention.
Also, every single one of those moves had to be coordinated by the Fed. Without Fed prodding and Fed financing, this entire thing would have comprehensively crashed and burned months ago.
The Fed *is* the successor of JP Morgan, and it is doing his job.
If the Fed were a for profit institution, it would be arbitraging the huge spread between corporates and treasuries, in banks it decided to keep from failing.
The money market run rate hit $160 billion per day before the Paulson proposal and money fund guaranteed halted it. Without massive Fed intervention, that would have destroyed the entire commercial paper market, and dropped the money supply by a third. The Fed had to and did intervene.
The Washington Mutual failure was such a great big success because a $25 billion hit was put on the bondholders, and JP Morgan was able to raise $10 billion in stock to cover the remainder, on the strength of those bondholders having been stood against the wall. Only that gave the part JP Morgan bought, actual value.
But that loss to bondholders instantly sent every bond of beseiged banks into free-fall. Wachovia debt was offered today at 130% - with no buyers. Its longer term paper as low as 30 cents on the dollar. Crushed stock prices have closed the equity market for new capital for these banks. The Washington Mutual failure closed the bond market as well.
Washington Mutual itself was a zombie that financed at $16 billion depositor run only by running up borrowings from the Home Loan Banks. It had no non-public capital sources.
Banks need to raise hundreds of billions by year end just to roll over existing bonds, without it recapitalizing them at all. They aren't going to do so at 130% rates and survive.
It isn't just Wachovia. National City today, 60% yield. Morgan Stanley, despite a large recent capital infusion from Asia for stock, 40% yield. Bank bonds are simply now traded as junk for any institution with default risk, as being essentially uncovered, because the depositors are senior and the FDIC has shown the bondholders will get nothing, if it is necessary to protect the FDIC.
There are only two ways out of this mess, and private markets healing themselves is not one of them. Either the Treasury buys the toxic paper, or the Fed monetizes corporate debts of financial companies. Or half the paper in the commercial paper market, if it doesn't want to play favorites. In both cases for new high powered cash, ballooning the money supply to saturate people's risk aversion and liquidity demands.
Otherwise the Treasury still gets the bill, via the FDIC. And half the banking system disappears. Which will mean violent deflation and further economic losses, public and private.
It is simply not possible to allocate the remaining loss to the existing banks. They will go down.
>> F*** the bailout.
Fund the bailout???
No way!!!
;-)
They didn’t get taken over by JPM, they got taken over by the gov’t then sold to JPM. They failed.
>> The Paulson plan is not an unreviewable dicatorial power grab, that is and always has been a baseless fearmongering smear, and beneath the seriousness of this crisis.
You’re a liar. Here is the actual text of the draft proposal.
“Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
Calling it an unreviewable dictatorial power grab is perfectly correct. Not a smear at all.
>> But that loss to bondholders instantly sent every bond of beseiged banks into free-fall.
So what? What you term “beseiged” — a euphemism for “banks that got greedy and f_____ up” — deserve to go into free fall.
Solid banks are fine.
BAC was up a couple bucks today. JPM was in good enough shape to buy WaMu (another of your buttboy banks).
Well run banks will do great. Crap banks run by greedy fools will die. I don’t see the problem.
My point was that WAMU can’t be solved without gov’t help. They failed so they weren’t able to solve the problems on their own.
>> that is mere legal boilerplate
That’s your opinion. I disagree. I think Paulson doesn’t want to be bothered with justification as his pals game the system to unload their toxic crap on the taxpayer at top dollar. Prove I’m wrong.
>> Oversight is with *congress*, where it belongs
And they’re performing the role! Congress (particularly the Republican part) is exercising its oversight. You should be happy they’re killing the idiotic piece of shit. Smarter people than you (along with 70% of the electorate) are calling “bullshit” on this crappy turkey and killing it. Since you’re a big believer in Congressional oversight you should be overjoyed.
If stockholders in poorly run banks lose money, fine, they should, no problem. They already have to the tune of several trillion, in case nobody noticed. But the bond market shutting down for banks is a different story. The money supply will be cut in half.
Net mortgage issuance in the second quarter was $80 billion, according to the recently released Z.1 flow of funds data from the Fed. That is down 93% from the boom rates, and an order of magnitude under normal. Want to see what rates on mortgages are with record defaults when the banks have to pay 40% to borrow, themselves? What to see what houses are worth without mortgages?
It is just nuts.
Morgan Stanley was one of the best run operations, not a basket case like Wa Mu. But it doesn't matter, if the rates on its bonds are driven high enough, it fails.
The system is only designed to work if the Fed does its job. Ideologues want the Fed to not do its job in the name of killing weak banks. If the Fed didn't exist, banks would make one as a defense for themselves. But you have concocted a preferred policy mix of a Fed in existence but forced to do nothing out of your populist hatred, that cannot function, and ends only in first smash, and second socialism.
Again, it is just nuts. You are trying to wish into existence an unreality, instead of looking at what is actually happening. It is every bit as reckless and irresponsible as the left pretending war is optional and we can just pretend it away.
The patient is lying on the table having a heart attack, and you are impugning the attending physician's motives and demanding he remove the heart and burn it as the cause of the problem, while objecting to needles as painful. It is just nuts that rational men have to beg you to let them save your sorry backside.
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