Defaulting banks - where will it stop?

[Peter Lemkin]

So FUBAR is postponed whilst They bury their snouts ever more deeply in the honey pot, greedily chowing on the traces left at the bottom of the jar...

That's the ticket.....stall for time and meanwhile get more lucre from the suckers on 'Main St.' The average banker/financier should be able to get another multi-million dollar home and airplane or boat out of this bailout. They have the minds (and ethics) of con-men (which they are). A few at the top may have a geopolitical plan for the neocon agenda, but for most, it is just another few months of gravy train and a stalling for time during which they are confident they or others of their class will come up with yet another way to fool the average Joe and Jane out of their money....after all it has worked like a dream for them from the Middle Ages [and before] until today...In fact, the system they use has been refined over time, made less transparent, and better at sucking the life out of society into their pockets.... The changes under the recent administrations and in Europe and the World in recent years has been one of wild deregulation and virtual reality financial 'products' a la Enron. Its the Enronization of the Planet - hooray! (By the way, if you've not yet seen the film 'The Smartest Guys In The Room' about Enron, do so now - The past is prologue!!!!)

As for the rising anger in America, yes, it is rising and some may just turn to civil unrest. Given all the guns in America, I'd imagine someone who has just lost all to those making ten-twelve figure salaries will sooner or later take it out on one of them - if not a group meeting of them. Move over Islamofascists, Homeland Security will soon be rooting-out Financoterrorists. Those Haliburton prisoncamps run by Blackwater were carefully mandated to be completed and up-to-speed by the election. These people are NOT stupid - just evil!

Amazingly no on in the MSM nor 'political class' verbalized the idea of spending the $850,000,000,000
to bail-out the average person. The average person in America, however, had that thought and the anger is growing....it may even wake some of the somnolent masses up!.....

[David Guyatt]

I well remember the bank heist of the mid-1980's. I watched the real estate flips all around me as the local speculators went crazy, and I made out OK just drafting deeds and wrap-around deeds of trust out of my little office. There was a lot of fraud fueled just by high interest rates, which kept "values" going ever higher. It was a gamble on when the price would begin to fall, and who would be left holding the asset on which more was owed than could be recouped by sale. A lot of those, like poor Neil Bush (his Momma said he never did anything wrong!), raked in cash for holding the door open for their friends who were doing insider deals with no intention of repaying.

I got out of that end of real estate in time to spend the next three years foreclosing on family farms--probably the most distasteful three years of my career. Then I went to Houston just in time to work with a group of attorneys investigating an incident of alleged political bribery during that time and was present at an interview of a couple of fraudsters who were mentioned in Pete Brewton's book. While they were laughing about the title, Mafia, CIA and George Bush, one of them asked the other which entity he worked for--the Mafia or the CIA? The other just shook his head, and replied that Brewton just did not understand how it all works. I wish I had known enough at the time to ask them to explain it to me, but I was too afraid to hear the answer.

That's interesting Linda. I wonder what they meant eh. I remember Brewton discussed in his book the Mafia technique of taking over a business, leveraging it with enormous loans, asset stripping it and then scarpering off with the loot leaving the banks with a shell for their collateral. They would usually focus on successful and thriving businesses because those always qualified for the highest loans.

In regard to my foregoing post, it is usual that any predictions I make turn out to be the very kiss of death of what I suggest, rather than being a barometer of accuracy, so FUBAR as Jan says, may well be happening.

However, I am certain that the ultimate bill to be paid will be a far bigger than the $700 billion...

But beware of my predictions is the moral of this post.

[David Guyatt]

Oh dear. Now Germany has announced it will 100% guarantee all deposits in German banks -- to stop money flooding into Ireland. So much for the pretense that Europe sails together. Now all European banks will be rushing to follow suit and 100% guaranteeing deposits in their domestic banks. How can they not?

What interesting times we live in.

[David Guyatt]

Okay, I spoke too soon.

Today it is all doom and gloom and my spies in the banking industry aren't happy bunnies. TARP was heavily discounted (this should not be construed to mean it was ignored but rather the financial impact was factored by the market into pricing) even before it was signed into law. Ireland's 100% guarantee of bank deposits has been duplicated by Greece, Denmark and Germany. The Chancellor, Alistair Darling, is now thought to be ready to announce the UK will follow suit.

A soft nationalization of the banking industry is being talked about, with the governments expected to take shareholding stakes in banks rather than continuing to endlessly bail them out, as a means of protecting taxpayers who are to be bled to pay for all this.

Japan is following in the wake of the US an Europe. It's banking industry is going belly-up. In the last 7 days Origami Bank has folded, Sumo Bank has gone belly up and Bonsai Bank announced plans to cut some of its branches. Yesterday, it was announced that Karaoke Bank is up for sale and will likely go for a song, while today shares in Kamikaze Bank were suspended after they nose-dived. Furthermore, 500 staff at Karate Bank got the chop and analysts report that there is something fishy going on at Sushi Bank where it is feared that staff may get a raw deal.

AND above all, even banking insiders now consider that far tougher regulation of the banking and financial industries is now inevitable. Never thought I'd hear that in a month of Sundays...

Add to that dire message that fact that all the market indicators now point to a massive slowdown in the global economy causing fear that a massive depression similar to the 1930's is just around the corner.

.

[Peter Lemkin]

An hour with Naomi Klein on the Financial Demise....
Naomi Klein: Wall St. Crisis Should Be for Neoliberalism What Fall of Berlin Wall Was for Communism
http://www.democracynow.org/2008/10/6/naomi_klein

Democratic Congress member Dennis Kucinich was one of the leading congressional opponents of the Wall Street bailout. In an interview with the website Truthdig, Kucinich called the bill “the largest single act of class warfare in the modern history of this country.” He continued, “The Democrats have unfortunately become so enamored and beholden to Wall Street that we are not functioning to defend the economic interest of the broad base of the American people. This is an outrage. This was democracy’s Black Friday.” - Oh, why couldn't we have him running for President....I know...I know...!~

2/3 of Klein's talk is transcribed:
AMY GOODMAN: The credit crunch is spreading to financial markets around the world. Nearly 160,000 jobs were lost here in the United States in September. That’s not including losses directly resulting from the financial meltdown. Wall Street might be breathing a little easier since Congress passed the more-than-$700-billion bailout plan Friday, but there are no signs of an easy or quick recovery.


Today we take a look back at the economic philosophy that championed the kind of deregulation that led to this crisis. We spend the hour with investigative journalist and author Naomi Klein, bestselling author of The Shock Doctrine: The Rise of Disaster Capitalism.


Naomi Klein spoke at the University of Chicago last week, invited by a group of faculty opposed to the creation of an economic research center called the Milton Friedman Institute. It has a $200 million endowment and is named after the University’s most famous economist, the leader of the neoliberal Chicago School of Economics.

NAOMI KLEIN: When Milton Friedman turned ninety, the Bush White House held a birthday party for him to honor him, to honor his legacy, in 2002, and everyone made speeches, including George Bush, but there was a really good speech that was given by Donald Rumsfeld. I have it on my website. My favorite quote in that speech from Rumsfeld is this: he said, “Milton is the embodiment of the truth that ideas have consequences.”

So, what I want to argue here is that, among other things, the economic chaos that we’re seeing right now on Wall Street and on Main Street and in Washington stems from many factors, of course, but among them are the ideas of Milton Friedman and many of his colleagues and students from this school. Ideas have consequences.

More than that, what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology. It cannot simply be written off as corruption or greed, because what we have been living, since Reagan, is a policy of liberating the forces of greed to discard the idea of the government as regulator, of protecting citizens and consumers from the detrimental impact of greed, ideas that, of course, gained great currency after the market crash of 1929, but that really what we have been living is a liberation movement, indeed the most successful liberation movement of our time, which is the movement by capital to liberate itself from all constraints on its accumulation.

So, as we say that this ideology is failing, I beg to differ. I actually believe it has been enormously successful, enormously successful, just not on the terms that we learn about in University of Chicago textbooks, that I don’t think the project actually has been the development of the world and the elimination of poverty. I think this has been a class war waged by the rich against the poor, and I think that they won. And I think the poor are fighting back. This should be an indictment of an ideology. Ideas have consequences.

Now, people are enormously loyal to Milton Friedman, for a variety of reasons and from a variety of sectors. You know, in my cynical moments, I say Milton Friedman had a knack for thinking profitable thoughts. He did. His thoughts were enormously profitable. And he was rewarded. His work was rewarded. I don’t mean personally greedy. I mean that his work was supported at the university, at think tanks, in the production of a ten-part documentary series called Freedom to Choose, sponsored by FedEx and Pepsi; that the corporate world has been good to Milton Friedman, because his ideas were good for them.

But he also was clearly a tremendously inspiring teacher, and he had a gift, like all great teachers do, to help his students fall in love with the material. But he also had a gift that many ideologues have, many staunch ideologues have—and I would even use the word “fundamentalists” have—which is the ability to help people fall in love with a perfect imagined system, a system that seems perfect, utopian, in the classroom, in the basement workshop, when all the numbers work out. And he was, of course, a brilliant mathematician, which made that all the more seductive, which made those models all the more seductive, this perfect, elegant, all-encompassing system, the dream of the perfect utopian market.

Now, one of the things that comes up again and again in the writings of University of Chicago economists of the Friedman tradition, people like Arnold Harberger, is this appeal to nature, to a state of nature, this idea that economics is not a political science or not a social science, but a hard science on par with physics and chemistry. So, as we look at the University of Chicago tradition, it isn’t just about a set of political and economic goals, like privatization, deregulation, free trade, cuts to government spending; it’s a transformation of the field of economics from being a hybrid science that was in dialogue with politics, with psychology, and turning it into a hard science that you could not argue with, which is why you would never talk to a journalist, right? Because that’s, you know, the messy, imperfect real world. It is beneath those who are appealing to the laws of nature.

Now, these ideas in the 1950s and ’60s at this school were largely in the realm of theory. They were academic ideas, and it was easy to fall in love with them, because they hadn’t actually been tested in the real world, where mixed economies were the rule.

Now, I admit to being a journalist. I admit to being an investigative journalist, a researcher, and I’m not here to argue theory. I’m here to discuss what happens in the messy real world when Milton Friedman’s ideas are put into practice, what happens to freedom, what happens to democracy, what happens to the size of government, what happens to the social structure, what happens to the relationship between politicians and big corporate players, because I think we do see patterns.

Now, the Friedmanites in this room will object to my methodology, I assure you, and I look forward to that. They will tell you, when I speak of Chile under Pinochet, Russia under Yeltsin and the Chicago Boys, China under Deng Xiaoping, or America under George W. Bush, or Iraq under Paul Bremer, that these were all distortions of Milton Friedman’s theories, that none of these actually count, when you talk about the repression and the surveillance and the expanding size of government and the intervention in the system, which is really much more like crony capitalism or corporatism than the elegant, perfectly balanced free market that came to life in those basement workshops. We’ll hear that Milton Friedman hated government interventions, that he stood up for human rights, that he was against all wars. And some of these claims, though not all of them, will be true.

But here’s the thing. Ideas have consequences. And when you leave the safety of academia and start actually issuing policy prescriptions, which was Milton Friedman’s other life—he wasn’t just an academic. He was a popular writer. He met with world leaders around the world—China, Chile, everywhere, the United States. His memoirs are a “who’s who.” So, when you leave that safety and you start issuing policy prescriptions, when you start advising heads of state, you no longer have the luxury of only being judged on how you think your ideas will affect the world. You begin having to contend with how they actually affect the world, even when that reality contradicts all of your utopian theories. So, to quote Friedman’s great intellectual nemesis, John Kenneth Galbraith, “Milton Friedman’s misfortune is that his policies have been tried.”


AMY GOODMAN: Naomi Klein, author of the bestselling book The Shock Doctrine: The Rise of Disaster Capitalism. We’ll come back to her speech at the University of Chicago in a minute.

[break]

AMY GOODMAN: We return to Naomi Klein, bestselling author of The Shock Doctrine, talking at the University of Chicago on Wednesday about the current economic crisis and the legacy of Milton Friedman.

NAOMI KLEIN: This process of measuring an elegant perfect, beautiful, inspiring ideology against a messy reality is a painful process, and it’s a process that anyone who has tried to free themselves from the confines of fundamentalist thinking, from ideological constraints, has faced. My grandparents, for instance, were pretty hardcore Marxists. In the ’30s and ’40s, they believed fervently in the dream of egalitarianism that the Soviet Union represented. They had their illusions shattered by the reality of gulags, of extreme repression, hypocrisy, Stalin’s pact with Hitler.

I bring this up, because the left has been held accountable for the crimes committed in the name of its extreme ideologies, and I believe that it’s actually been a very healthy process for the left, one that isn’t over, that is continuing. But I think that the process of having to examine the unacceptable compromises that were made in the name of hard ideology, that they are paying off in the way the left today is being reborn and re-imagined.

You know, the most left-wing place on the planet at the moment is, interestingly enough, the first place where Chicago School ideology made that leap from the textbook into the real world, and that’s Latin America. And that happened for a very specific reason, as you know. This—in the 1950s, there was great concern at the State Department about the fact that Latin America, then as now, as it seems to do, was moving to the left. There was concern about what they called the “pink economists,” the rise of developmentalism, import substitution, and, of course, socialism. And, of course, this was a concern because it greatly affected American and European interests, because the crux of the argument of import substitution was that countries like Chile and Argentina, Guatemala, should stop exporting their raw natural resources to the north and then importing expensive processed goods to the south, that it didn’t make economic sense, that they should use the same tools of protectionism, of state supports, that built the economies of Europe and North America. That was that crazy radical idea, and it was unacceptable.

So, this plan was cooked up—it was between the head of USAID’s Chile office and the head of the University of Chicago’s Economics Department—to try to change the debate in Latin America, starting in Chile, because that’s where developmentalism had gained its deepest roots. And the idea was to bring a group of Chilean students to the University of Chicago to study under a group of economists who were considered so extreme that they were on the margins of the discussion in the United States, which, of course, at the time, in the 1950s, was fully in the grips of Keynesianism. But the idea was that there would be—this would be a battle to the—a counterbalance to the emergence of left-wing ideas in Latin America, that they would go home and counterbalance the pink economists.

And so, the Chicago Boys were born. And it was considered a success, and the Ford Foundation got in on the funding. And hundreds and hundreds of Latin American students, on full scholarships, came to the University of Chicago in the 1950s and ’60s to study here to try to engage in what Juan Gabriel Valdes, Chile’s foreign minister after the dictatorship finally ended, described as a project of deliberate ideological transfer, taking these extreme-right ideas, that were seen as marginal even in the United States, and transplanting them to Latin America. That was his phrase—that is his phrase.

But today, we see that these ideas are reemerging in Latin America. They were suppressed with force, overthrown with military coups, and then Chile and Argentina, Uruguay and Brazil all became, to varying degrees, laboratories for the ideas that were taught in the classrooms of the University of Chicago. But now, because there was never a democratic consent for this, the ideas are reemerging.

But one of the things that’s interesting about the new left in Latin America is that democracy is at the very center. And, you know, the first thing that Rafael Correa did when he was elected president of Ecuador, for instance—well, the first thing he did was give an interview. They said, “What can we expect of your economic program?” He said, “Well, let’s put it this way: I’m no fan of Milton Friedman’s.” And then he called a constituent assembly. He created an incredibly open political process to rewrite the country’s constitution. And that’s what happened in Bolivia, and that’s what’s happened in many Latin American countries, because democracy is being put at the center of these projects, because there has been a learning process of looking at the mistakes that the left has made in the past, the ends-justify-the-means mistakes.

So, I think all ideologies should be held accountable for the crimes committed in their names. I think it makes us better. Now, of course, there are still those on the far left who will insist that all of those crimes were just an aberration—Mao, Stalin, Pol Pot; reality is annoying—and they retreat into their sacred texts. We all know who I’m talking about.

But lately, particularly just in the past few months, I have noticed something similar happening on the far libertarian right, at places like the Cato Institute and the Reason Foundation. It’s a kind of a panic, and it comes from the fact that the Bush administration adapted—adopted so much of their rhetoric, the fusing of free markets and free people, the championing of so many of their pet policies. But, of course, Bush is the worst thing that has ever happened to believers in this ideology, because while parroting the talking points of Friedmanism, he has overseen an explosion of crony capitalism, that they treat governing as a conveyor belt or an ATM machine, where private corporations make withdrawals of the government in the form of no-bid contracts and then pay back government in the form of campaign contributions. And we’re seeing this more and more. The Bush administration is a nightmare for these guys—the explosion of the debt and now, of course, these massive bailouts.

So, what we see from the ideologues of the far right—by far right, I mean the far economic right—frantically distancing themselves and retreating to their sacred texts: The Road to Serfdom, Capitalism and Freedom, Free to Choose. So that’s why I’ve taken to calling them right-wing Trotskyists, because they have this—and mostly because it annoys them, but also because they have the same sort of frozen-in-time quality. You know, it’s not, you know, 1917, but it’s definitely 1982. Now, the left-wing Trots don’t have very much money, as you know. They make their money selling newspapers outside of events like this. The right-wing Trots have a lot of money. They build think tanks in Washington, D.C., and they want to build a $200 million Milton Friedman Institute at the University of Chicago.

Now, this brings up an interesting point. It’s an interesting point about the think tanks, in general, which has to do with the fact that it does seem to take so much corporate welfare to keep these ideas alive, which would seem to be a contradiction of the core principle of free market ideology—I mean, and particularly now, in the context of the Milton Friedman Institute. I mean, I could see it in the ’90s, but now, is the world really clamoring for this? Is there really a demand that you are supplying here? Really?

I think this points to a larger issue, and this comes up—has come up for me again and again in talking about this ideology, this ideological campaign. You know, is it—is it really fueled by true belief, and—or is it just fueled by greed? Because it’s not—the thoughts are so very profitable. So they are distinctive in that way, distinctive from other ideologies. And, of course, you know, certainly we know that religion has been a great economic partner in imperialism. I mean, this isn’t an entirely new phenomenon. But this is a question that comes up a lot. And I think it’s very difficult to answer, and it’s clear, certainly at this school, that much of it is fueled by belief, by true belief, by falling in love with those elegant systems.

But I think we also need to look particularly at this moment, who this ideology benefits directly economically, keeping it alive in this moment, and how, even in this moment, when everybody is saying, you know, this is the end of market fundamentalism, because we’re seeing this betrayal of the basic tenets of the non-interventionist government by the Bush administration—you know, I believe this is a myth and that the ideology has just gone dormant, because it’s ceased to be useful. But it will come roaring back, and I’ll talk a little bit more about that.

But, you know, I was interested that yesterday the Heritage Foundation, which has always been a staunch Friedmanite think tank, that they came out in favor of the bailout. They came out in favor of the bailout; they said it was vital. And what’s interesting about that is, of course, the bailout is creating a crisis in the economic—in the public sphere. It’s taking a private crisis, a crisis on Wall Street, which of course isn’t restricted to Wall Street, and it will affect everyone, but it is moving it, moving those bad debts, onto the public books.

And now the Bush administration has already left the next administration, whoever it is, with an economic crisis on their hands, but with this proposed transfer, they’re dramatically increasing that crisis. So, we can count, I would argue, on the Heritage Foundation refinding their faith, refinding their faith when it becomes necessary and useful to once again argue that the way to revive the American economy is to cut taxes, cut regulation, to stimulate the economy—and, by the way, we can’t afford Social Security; we’re going to have to privatize it, because we’ve got this terrible debt and deficit on our hands. So, the ideology is far from dead, and what we are, I think, seeing with this proposed monument to Friedmanism is really a way of entrenching it and making sure that it is always available to come back, to come roaring back.

So, I said I would talk a little bit about Friedmanism and the links to the current crisis. And, you know, it’s pretty direct. Milton Friedman is pretty much accepted as the godfather of deregulation. And this was—this ideology was the rationale for turning the financial sector into the casino that we see today. You know, Milton Friedman was clear about this. He believed that “history took a wrong turn,” and that’s a quote; it’s a quote from a letter he wrote to Augusto Pinochet. He said, “History took a wrong turn in your country, as well as mine.” And he was referring to the responses to the Great Depression. In Chile, it was the rise of import substitution and developmentalism. But in the United States, he was of course referring to the New Deal.

And I think that the Chicago School of Economics is properly understood as a counterrevolution against the New Deal, against regulations like Glass-Steagall, that was put in place in 1934 after having seen people lose their life savings to the market crash, and it was a firewall, a very simple, sensible law that said if you want to be an investment bank, if you want to gamble, gamble with your investors’ money, but the government isn’t going to help you because it’s your own risk. You can fail. And if you want to be a commercial bank, then we will help you. We will offer insurance to make sure that those savings are safe, but you have to restrict the risks that you take. You cannot gamble. You cannot be an investment bank. And a firewall was put up between investment banks and consumer banks.

And now we look at the way in which this crisis is supposedly being solved, and what we see, actually, is a wave of mergers in the banking sector, a wave of mergers with the banks getting bigger and bigger until ultimately—you know, the Financial Times was predicting today that eventually the United States will have three big banks, just like Japan does. That’s where it’s heading. And, of course, all of those banks will be too big to fail. So they all have this implicit guarantee; it’s not just Fannie and Freddie. It’s any function that is too important to fail has this implicit guarantee.

Phil Gramm is the person, you know, on the legislative side who did the most to create the legislative context for what we’re seeing right now in the financial sector. You know, I think everyone knows that Phil Gramm, most famously, recently is the one who said that America was in a mental recession and a bunch of whiners and all of that. And so, he’s not officially an adviser to McCain, but there is talk that if he were to win the elections, he would be Treasury Secretary. You know, I point—I bring him up because Phil Gramm was a Milton Friedman fanatic. I think you know this. In 1999, the same year that he led the charge to strike down Glass-Steagall, he also—Phil Gramm—pressed Congress to get the Medal of Honor for Friedman. When he ran in the—when he made his 1996 presidential run, McCain was the co-chair of his campaign. Phil Gramm was asked, “If you had to rely on a single person as your foremost economic policy adviser, who would it be?” And he replied, “Dr. Milton Friedman.” So we see the connections between deregulation and Friedmanism.

I also think there’s something else at play in the kind of politicians that are attracted to this particular ideology. You know, Reagan was the first really to embrace it, and Nixon was the great disappointment to Friedman. I’m sure you all know that. You know, he writes in his memoir that when Nixon was elected, he was euphoric. I mean, he couldn’t imagine an American president more closely aligned ideologically than Richard Nixon. But Richard Nixon insisted on governing, and he wanted to win elections, and he imposed wage and price controls. And Milton Friedman sort of had a bit of a temper tantrum and declared him the most socialist president in modern American history. But, you know, it was—so it was really Reagan who campaigned, you know, with his copy of Capitalism and Freedom on the campaign trail, who was the first person to really put Friedmanism into practice.

And I raise this because, you know, one of the things that we hear about McCain is that he doesn’t really know about economics, and so I think that makes us inclined not to take his economic ideas seriously, not to think he would be a really serious economic force. I think just the opposite. And I think if you look at his campaign platform, you see just the opposite. He wants to privatize Social Security. He is saying that in the first 100 days they’ll look at every single government program, and they will either reform it or shut it down if it is not serving taxpayers. I mean, they are talking about a sort of hundred-day economic shock therapy period. And I think it’s the fact that he doesn’t know about economics, and that Sarah Palin, I suspect, knows a little less, that actually makes them so dangerous.

And I don’t—you know, I don’t think it is—not to be too flippant—I’m sure that I’ve, you know, offended everyone, so I may as well just say bad things about Ronald Reagan—but I do think that, you know, that it isn’t a coincidence that, you know, a movie star president champions these ideas, or a body-builder governor, you know, who says, “Dr. Friedman changed my life”—I don’t know if you’ve seen Arnold Schwarzenegger’s introductions to Freedom to Choose, but they’re good. You should. YouTube them. But the appeal of these ideas, I think, to politicians who are actually in over their head on economics—and, by the way, this goes for military dictators, too, like Pinochet—who get control over a country and are totally clueless about how to run an economy, is that it lets them off the hook completely. It says government is the problem, not the solution. Leave it to the market. Laissez-faire. Don’t do anything. Just undo. Get out of the way. Leave it to us.


AMY GOODMAN: Naomi Klein is author of The Shock Doctrine: The Rise of Disaster Capitalism, speaking at the University of Chicago against the naming of the economics institute there after its most famous economist, Milton Friedman. We’ll come back to the conclusion of her address in a minute.

[break]

[Jan Klimkowski]

For a technical analysis of why FUBAR is imminent, Ticker Forum's Karl Denninger is - as usual - most astute. He's also welcome relief from the drivel MSM continues to feed us:

http://market-ticker.denninger.net/

I repeat: It is time for Congress to lock up the children in their playpen and allow the adults to have a discussion with them regarding solutions to the economic problems we face.

If CONgress fails to do so, you will see The DOW at 5,000 and the S&P 500 at 500 within the next 12-24 months.

Guaranteed.

This morning Bernanke's Fed "decided" to essentially enter the realm of unsecured lending through the creation of a "SPV" (a "SIV", or as I and others have called it, a "SIeVe") that will buy 3-month commercial paper.

While they claim that these borrowings are "secured", the fact remains that in essence they are not, protests to the contrary notwithstanding.

Read that new alphabet soup description carefully, and pay special attention to the rating requirements. It is narrowly targeted - perhaps so narrowly as to permit a very small number of firms to roll their commercial paper.

Academia, including most particularly Bernanke, posits that one must "increase liquidity" into a seizure in the markets such as we have now, lest we have a Depression.

The failure of this so-called economic "theory" is that it fails to recognize the root cause of the problem and therefore misses the forest for the trees. It is akin to trying to put out a forest fire by peeing on it and has precisely the same end result.

In point of fact we are now running out of names for Bernanke's "liquidity facilities"; TAF/PDCF/TSLF/TARP/ABCPMMMF and now this new SPV (does it have a name yet?)

The truth is that this crisis occurred under Greenspan and Bernanke's watch precisely because these two "gentlemen", along with our Treasury Secretary Paulson and other government officials, presided over the granting of credit to people who could not pay it back.

The false premise these folks all proceed from is that credit is equivalent to money.

It is not.

Credit spends like money but it is not money. It is in fact debt and comes with the millstone of interest, which must be repaid along with the principal.

The commercial paper market for non-financial, non-asset-backed entities has not frozen. Nor will it. Those firms have not abused the market and thus have nothing to fear.

It is in fact those firms that have abused this market that have problems, just as occurred with municipalities with "auction-rate" securities.

Borrowing short-term (to lower the coupon required) for long-term requirements is fundamentally unsound. When you do so you place the very life of the entity that does so at risk.

If I am an aircraft manufacturer and require two years to build an airplane, to borrow for less than a two year term in order to fund completion of that airplane for delivery to the customer is idiotic. Yes, doing so means I pay less in interest, but it also means that at any time if the market perceives my firm to be "unsafe" I risk instantaneous bankruptcy of the enterprise.

This is just one more example of how "levering up" has gotten so out of hand, and why we are in this mess in the first place. This particular form of idiocy is not limited to one firm - in fact, it is common across huge parts of the S&P 500 and even many smaller firms, along with state and local governments. It was and is intellectually bankrupt and those who engaged in this behavior should be run out of town on a rail.

"More liquidity" will not solve the problem no matter the form. This has now been proven correct through more than a year's "grand experiment" by Bernanke and friends.

The credit markets, along with consumers and banks, are literally choking on all the liquidity being shoved down their throats. It has done exactly nothing to address the problem and won't because:

* Banks and other financial institutions have been repeatedly proven liars in terms of their financial strength and balance sheets. Pick a financial institution and you will find that almost without exception they have claimed "exposure" to bad debt that is a tiny fraction of what is later shown to be accurate. Nobody can fairly evaluate a firm's financial strength so long as this continues; ergo, nobody can have a reasonable degree of trust to lend to such an institution. In addition even settled black-letter law in some regards has been shown to be wantonly (and perhaps feloniously) ignored; Lehman, as an example, is alleged to have transferred segregated customer funds and securities to a Cayman Islands subsidiary shortly before it went under, effectively locking up funds and securities that are supposed to be safe from a bankruptcy proceeding.
* Consumers are tapped out. The House-cum-ATM machine is empty and cannot be refilled. Consumers will retrench severely, even though they have had to be dragged kicking and screaming into that mode. Nearly 18 months ago I detected the trend in the consumer credit data. This recession cannot resolve until the over-leveraged state of the consumer is rectified. That requires that the bad debt be defaulted and thus cleared. Consumers are more than 2/3rds of the economy.
* It is not possible to reflate the credit bubble. We must deal with the reality that the bad debt in the economy - no matter who holds it - must be defaulted.
* There is no "liquidity trap" into which to fall; we are already in the hole as there is no more capacity to borrow; we have exceeded the maximum safe amount of lending that can be accommodated in the economy. When one is in a hole, the first rule is to stop digging.

Remember, we were told repeatedly that Bernanke's Fed and Treasury's actions would prevent a recession. We were told that the TAF would free up bank lending. We were told that the TSLF and PDCF would prevent more blowups in investment banks after Bear Stearns yet Lehman blew up and the two remaining IBs (after the essentially-forced merger of Merrill) were forced to reorganize as commercial banks to prevent their own implosion.

None of these claims and predictions has proven out.

As this crisis has deepened instead of forcing the liars into the open and shining the bright light of truth upon them, along with arresting and prosecuting the fraudsters, we have instead seen yet more obfuscation and falsehood both explicitly condoned and even perpetrated by the government.

Bernanke's thesis has been proven incorrect.

It is time for Americans to demand that the children, Ivory Tower Savants and those with clear conflicts of interest who are trying to game Congress and regulators to strip hundreds of billions of taxpayer dollars for their own enrichment be locked in their playpen beyond both sight and hearing while adults are admitted to the sacred halls of Congress.

[Jan Klimkowski]

OMG.

Paulson just said that which must not be said: that banks will fail. Because to say so has always been considered likely to provoke massive bank runs....

One thing we must recognize – even with the new Treasury authorities, some financial institutions will fail. The EESA doesn't exist to save every financial institution for its own sake.

Therefore, a second prong in our strategy is designed to mitigate financial market disruption when a bank fails. In addition to insuring deposits up to the new, temporary level of $250,000, the FDIC has the ability to use its insurance fund and its substantial lines of credit with the Treasury to address systemic financial risk that may be posed by a bank failure.

http://www.ustreas.gov/press/releases/hp1189.htm

[Jan Klimkowski]

Ticker Forum's Karl Denninger, a natural Republican and self-made man, is now seriously considering Apocalypse Amerika:

There is chatter circulating, apparently, that "global equity markets will be closed after the emergency G7 meeting this weekend." That ought to induce confidence - just ask the Russians or Indonesians, both of whom have tried this and it has resulted in an instantaneous crash when they reopened (the Indonesian market was just closed AGAIN this evening, after literally imploding - down by more than 10% - within an hour of starting to trade.)

This is no longer a US problem, but the United States continues to refuse to lead. We continue to "trust" the idiot savants Bernanke and Paulson, both of whom have sung the same song since this crisis began more than a year ago, have been wrong 100% of the time, and yet have found an ear in Congress repeatedly willing to listen to and follow their insanity.

By allowing this action and indeed following the advice of these two each and every one of the 535 members of that body has taken unto themselves the responsibility for the calamity that now faces American investors and the public, as our economic system literally "folds back" and consumes itself. Americans will not be able to retire and have no economic security, and now are losing their jobs in increasing numbers. This will continue.

For more than a year I have tried to get the attention of Congress with petitions, phone calls and faxes. I have been ignored, as have others who have been consistently right in our expectations and beliefs, including "Mish" Shedlock, Nouriel Roubini, Charles Hugh Smith and others. Over 200 degreed economists urged that the "Bailout Bill" not be passed as submitted, including two Nobel Lauretes; all were ignored.

The people of this nation have sat on their hands and watched American Idol, now turning into the NFL, while lapping up the slop from Paulson, Bernanke and Bush about how the "economy is fundamentally strong", instead of showing up in Washington DC to protest or flooding the fax and phone lines demanding that Congress act to reign in the fraudsters.

Let me know how "fundamentally strong" the economy is when you're walking the unemployment line and waiting for your turn at the soup kitchen for something to eat.

Entitlements? Forget 'em. They're gone. Social Security? Medicare? Done. Not today, but in the not-distant future. China, having gotten its money from the $700 billion "bailout", will ditch our Treasuries and refuse to buy more, as they will no more need to sterilize export dollars as our economy collapses. We in turn will be left to twist.

We deserve it, because we could have (but didn't) stand up to their demands that we cover a private dispute instead of handing over $700 billion we don't have. When (not if) the foreign flow of funds inward disappears due to the lack of need for these nations to recycle dollars, we will suddenly find that we have a nearly $800 billion a year hole in our federal budget - a hole that can only be filled by chopping Social Security, Medicare and the Military. Congratulations Congress (and America in general); you didn't really think you'd get away with that, did you?

George W. Bush will go down in history as the President who held the office while we drove our nation's financial system off the cliff, laughing all the while about flipping houses. And despite his protests to the contrary, the history books will record that it was his administration that removed the 12:1 leverage limits, sued New York to prevent them from clamping down on predatory lending, and willfully stuck its head in the sand while Bear Stearns prepared to blow up, never mind ignoring the problem after Bear detonated in February.

Henry Paulson will go down in history as the Treasury Secretary who sold out our nation to the Chinese and London Bankers, then fled the country with $500 million he "earned" creating and selling the very credit instruments that later blew up and sunk the nation.

The members of the House Financial Services Committee, the Senate Banking Committee and the Joint Economic Committee will each have special places reserved in the history books for refusing to deal with Ben Bernanke's raw power grab after Bear Stearns, an act that will ultimately be judged to be the single most important element of the crisis, as it forever put the market in a mood to expect "rule changes" at any time, precipitously damaging trust and liquidity.

The "no short" rule will ultimately be cited as the reason that the market crashed, being that there were no shorts to cover and thus hundreds of stocks, on that fateful day, went "no bid" and had their prices collapse to zero - all at once.

Oil will collapse in price to $20/bbl. Unfortunately nobody will have any money to buy gasoline, or a car, so it won't matter. As in The Depression millions of automobiles will be scrapped after being abandoned by their owners for lack of insurance and registration fee money. Cheap scooters will become the dominant form of transportation for those with jobs, as they will be all most people can afford.

As credit collapses distribution of food and other essentials will break down. Unable to access credit, trucking companies will be unable to get goods to market. The current distribution system for food requires travel of over 500 miles from production to consumption; this is untenable in a market where stable credit is unavailable. Food distribution will be severely impacted and in some areas may break down below critical levels.

Unemployment will reach 25% within two years. Median income will fall by 30% nationally. Foreclosures will reach 20 million homes. The government will step in with HOLC-style remediation but it won't matter - the unemployed won't be able to pay irrespective of the price.

House prices will fall to well under $100,000 nationally on a median basis but with lending all but non-existent you'll need 50% down. A few people will make out like bandits near the bottom, being able to buy up homes for $10,000 each in blocks of 10 at a time - for cash. 60% of America will be renters; nearly half of all homeowners will ultimately lose their homes to foreclosure.

Civil unrest will break out in major cities when incomes fall but the cost of food and essential services fail to come down materially, leaving millions of Americans hungry, broke and homeless. Unlike in the 1930s America will not quietly stand in soup lines - instead they will riot, loot and burn. The National Guard will be called up but will find it impossible to exert meaningful control without shutting down all commerce in the affected areas. The decision will be made to cordon off the cities and deny entry to anyone who does not live in that specific neighborhood, essentially shutting down commercial activity. GDP will fall by 30%.

The S&P 500 will fall to 150 and flatline, a 90% loss. CNBC and Bloomberg will cease broadcasting. Volume will fall to 10% of former levels.

Bleak outlook?

Yep.

Quite possible?

Yep.

Can it be stopped?

Yes, but not for much longer.

The markets are perilously close to a tipping point where they will collapse, after which all of the above will come to pass, and Congressional action (or inaction) will be irrelevant.

Congress will then have to face the people, as will President Bush and his Cabinet, and may God have mercy on our Republican form of government, because history shows that when government mismanages things to this degree and refuses to respond to the will of the people, a "messiah" generally appears with a "solution" - but there will be "compromises."

Like your freedom.

To fix the problem trust must be restored. To restore trust you must stop the lying, expose the liars, prosecute and jail them all, and stop changing the rules in the middle of the game.

This must happen now. Today. Immediately. Not tomorrow, not next week, not after a series of hearings.

Right now.

Market participants must be able to know that when they engage in a transaction it will be transparent, handled fairly, and their rights will be protected.

Our politicians must stop demanding the impossible - that home prices "levitate." House prices cannot be maintained at more than 3x incomes - it simply can't be done. We must encourage home prices to contract to sustainable, affordable levels quickly and efficiently.

Mortgages must return to 30 year fixed notes, 20% down, no more than 36% DTI. No government-linked paper in any GSE may issue outside these guidelines. We must reliquify the mortgage market, and this is the only way to do it - by writing only sustainable mortgages.

Strong consumer protection laws must be written that bar negative balance auto and home loans. The practice of "rolling over" an old car loan into a new one, producing an instant 20% or more deficiency against the vehicles value, must end.

Usury laws must be re-imposed, limiting credit card and other consumer loan interest to no more than a reasonable spread over funding costs. Yes, this will limit credit to less-worthy borrowers. So be it. Unbridled credit got us here, and we must prevent it from happening again.

The excess, unsustainable debt in the system must be defaulted. Whether held by corporations or individuals, it must be purged from the system. Those firms and individuals that are bankrupt must be so declared and their assets liquidated, so they can start over and the market can clear.

People will say that what I ask is unreasonable, unable to be achieved, or "needs study."

You're free to study all you want, but if these actions are not taken immediately, right now, today, the above forecast will come to fruition.

You are seeing the global credit markets unravel in front of your eyes, and it is happening precisely because the fraud, avarice and outright theft has gone unpunished and left in place to siphon off wealth from the average American for more than 20 years, and our President, in that environment, went on national television and threatened the world with a global Depression unless his Treasury Secretary got a $700 billion blank check.

The markets, correctly perceiving there was a problem, did exactly what they did when this same gambit was run during the Fannie and Freddie debacle - they called the bluff.

The check is now on the table and we have but two choices - either pay it or suffer the consequences.

http://market-ticker.denninger.net/

[Peter Lemkin]

Too Big To Bail Out - Tarpley predicted much of this...
http://www.911blogger.com/node/10634
http://www.kpfa.org/archives/index.php?arch=22000

[David Guyatt]

On the BBC News this morning, it was reported that some UK banks may decline to take the governments bailout money, as the terms involved in doing so are too harsh for them to swallow.

What the government insist upon is that in exchange for providing liquidity in order to grease the wheels of interbank lending, the government will get an equity stake in each bank using the facility. They would also force executives salaries and bonuses down.

These miserable, greedy bastards don't want that. They just want the government to hand over taxpayers cash but otherwise to leave them alone.

If this turns out to be true it can only be regarded as blackmail.

Apparently, this attitude is doing the rounds in the US as well:

http://www.guardian.co.uk/business/2008/...et.bailout

Now Wall Street may shun $700bn bail-out
James Doran, New York
The Observer, Sunday October 5 2008

Fears are mounting that many Wall Street banks and financial firms will refuse to participate in the US government's $700bn bail-out package, leaving global markets and world economies in a perilous state for months to come.

'There is a growing feeling that banks ... might instead decide to tough it out,' said Thomas Caldwell, chairman and CEO of Caldwell Financial, a $1bn-plus fund manager.

For the past two weeks all eyes in the market have been focused on US Congress and its attempts to pass Treasury Secretary Henry Paulson's bail-out package - a bill to allow the US government to buy up to $700bn of toxic mortgage-related assets from American banks, which would in theory free the credit markets and set the gears of global commerce spinning once more.

Last Monday, after the bill was thrown out by the House of Representatives, more than $1 trillion was wiped off the value of US stocks as the market was gripped by panic. The bill was passed on Friday afternoon, however, after the inclusion of $149bn of tax breaks and strict rules for participating banks.

But Wall Street analysts, believe the addition of so many terms to the bill might deter potential participants.

One of the least attractive elements is a section designed to curb executive pay at banks that participate in the bail-out package. These include limiting stock-related pay and banning 'golden parachutes' for executives.

'I think this hodge-podge of regulations and rules will be enough to put many [chief executives] off participating,' Caldwell said.

Sources close to Goldman Sachs and Merrill Lynch indicated the banks might choose not to participate in the bail-out as there is a growing view on Wall Street that the market may be bottoming out.

Analysts also believe that the mere presence of the government as buyer of last resort will be enough to get credit markets moving again, and that a large number of banks would not need to take part for the legislation to succeed.

Wall Street ended its worst week in seven years with another tumble on Friday. The Dow Jones Industrial Average closed down more than 157 points on Friday at 10,325.38.