Monday, March 23, 2009

Everybody is afraid to have a sandwich

The Stock Market was up 7% today with the prospect that there will be an end to the banking gridlock by allowing banks to rid themselves of the mortgage based securities they have been holding. These toxic assets were the brain child of Alan Greenspan who claimed they were just an instrument to spread risk. In reality, it was like mixing some jars of bad peanut butter into every case, the risk is spread around but everybody is afraid to have a sandwich.

Obama’s solution is to bring in private investors that will be required to put up enough of their own money so that they have an incentive to do a good job unwinding the mess. They will make big profits but only if they do their job otherwise they lose money. (this isn’t a cost plus, no bid contract from the Bush Crime Family) There are big potential costs for the taxpayer but if it’s done quickly this could be minimized, at least compared with doing nothing. The big potential payoff for the economy is that this will stop the cascade of credit derivative failures and it should fix this particular problem.

The thing is that this is not the cause of the mess we’re in. This was just another of Greenspan’s bubbles designed to inflate the economy in order to hide the collapse. It’s still collapsing and picking up speed. Obama will need to roll out real reforms to fix the economy or the next crisis will be far worse. Massive job losses coupled with a push to depress wages, the out sourcing of labor that only exacerbates the crushing trade deficit; the looming collapse of the Commercial Real-estate Market followed by the certainty of huge Insurance company failures; the collapse of foreign investments made by US companies causing the collapse of the Stock Market, on and on.
The FDR style reforms that are needed to fix these things are what make the veins stand out on the heads of Fat Cat Republicans and they will not go quietly. At least not until they are pursued by a mob with torches and pitch forks. Yes we can.

Sarah B. left a well written comment that I accidentally deleted, I'm not used to the controls on this program. so here it is:
Prairie 2 For the record, Alan Greenspan did not invent derivatives and collateralized debt obligations and credit default swaps – but Greenspan is responsible for the failure to regulate them. The inventor of derivatives was L. William Siedman (aka Bill Siedman), the impish 87 year-old former director of the F.D.I.C. and later appointed by Poppy Bush to serve as the first chairman of the Resolution Trust Corporation that presided over the S&L bailout. On October 9, 2008, during a lecture at Grand Valley State University in Michigan, Siedman described the way in which he and his group invented derivatives while serving at the RTC:- Clip:"The subprime mortgage market grew in a way that is almost impossible to believe. There were almost million subprime mortgages written in a year and a half. That means somebody had to finance a couple of million homes, almost, of subprime mortgages. So, why did anybody put their money in this? Why would anybody, knowing that these, subprime means that they are not prime? Well, the genesis of that goes back to something called securitization and something called tranche credit-rated securitization. Now, that was invented by one of the people who were operating in the RTC, and mainly it was invented by me and our group."Siedman went to Alan Greenspan to discuss regulation for this new innovation:- Clip:"I remember when we invented this, Alan Greenspan said, "well, this is a great new innovation, because we are spreading the risk all over the world, which, of course, is what we did. And for which at this point the world is, to say the least, blaming the whole financial crisis we're in on us"But Greenspan, ever true to form, wasn’t having any of it and relied instead on his flawed economic philosophy -- the magic of the marketplace driven and regulated by enlightened self-interest:- Clip:"It was proposed that their regulation, or at least disclosure, be required and the industry fought it and the Federal Reserve under Alan Greenspan vehemently opposed. And they made the argument which you hear all the time, and I can remember Alan saying, "look, these are sophisticated contracts between knowledgeable buyers and knowledgeable sellers; no regulator can do as well as they'll do, so what do you need a regulator for? The market will regulate these." And he won the day. So, among the list of our friends along with me and others, Alan was clearly, I'd say, the key person responsible for the fact that we didn't even how many of those contracts there were."There are seven videos on You Tube that fully document Siedman’s lecture at Grand Valley State University on October 9, 2008: http://www.youtube.com/watch?gl=GB&hl=en-GB&v=jfFwAfgqRjg&feature=related (h/t) to Thom Hartmann for alerting and educating his listeners to Bill Siedman and the RTC as the inventors of derivatives, aided and abetted by Alan Greenspan's refusal to regulate them, and the fact that their toxic seeds were sown in the polluted swamp that was the S&L debacle! BTW, thanks for your excellent contributions to The Mike Malloy Show.Best,Sarah B.

2 comments:

Anonymous said...

KXRA sent me. Obama said it himself, I'll take a bad solution, we pay half the price and take %85 of the risk, or worse, just take the risk (cover the banks losses by sending them money). Oh at least with the new plan we get some upside. And what may that be with the forclosures getting striped by theives and wrecked by squatters. Yeah, at least with the new plan some folks with money may make some money. Back to trickle down ecomonics. How this is going to get credit flowing again, I don't know. Banks aren't lending cause we're tapped out. Kinda simple. We may be looking at 5 years of Japan. How about we do something really radical, make the credit defaults illegal. Sure, the banks will lose the rest of those assets, but the damage is already mostly done. The future default payouts will amount to a nice tidy sum of 0! Then we can concentrate on the source of the problem, the forclosures themselves. Why bail out the swaps. We're just rewarding the wall street guys who created the mess and setting the stage for history to repeat itself by not letting the people who created the mess take the fall.

Bern

Jesse Hemingway said...

Duce, I appreciate you observation skills very insightful!!

The more I watch this current economic drama and political theater play out and while living through the last 28 years it’s like the American people have been put in a wine press and are slowly having the life crushed out of us all. I wonder if the wine press operators, if they even have a real plan at all; or just some grandiose scheme of a corporate nirvana.

I believe that Paul Krugman still has his integrity and if he raises any concerns it should by recognized. Myself I see nothing good happening for the American citizens with timothy geinhner and larry summers fixing this problem; those two fixing this problem reminds me of the lost episode of the Sopranos "fixing the economy."


I have place and article by Paul Krugman titled “The Maestro Slips Out Of Tune” dated 6/6/2004 for eaders review; none of this economic disaster should have been a surprise to anyone.


The Maestro Slips Out Of Tune
By Paul Krugman
Published: Sunday, June 6, 2004
LINK:
http://www.nytimes.com/2004/06/06/magazine/the-maestro-slips-out-of-tune.html?sec=&spon=&pagewanted=4

The time has come, in my judgment, to consider a budgetary strategy that is consistent with a pre-emptive smoothing of the glide path to zero federal debt or, more realistically, to the level of federal debt that is an effective irreducible minimum.'' Translation: Go ahead and cut taxes.

With those words, delivered in Senate testimony on Jan. 25, 2001, Alan Greenspan -- revered during the 1990's as the nonpartisan architect of America's prosperity -- inserted himself decisively into politics, on the side of George W. Bush. The chairman of the Federal Reserve didn't specifically endorse Bush's plans, but his words were exactly what Bush needed. Before Greenspan's testimony, many political observers questioned whether the victor in a disputed election could get an enormous, controversial tax cut through Congress. After Greenspan spoke, much of the resistance collapsed.

Yet in retrospect we know that Greenspan's ''judgment'' -- that tax cuts were needed to prevent excessive budget surpluses -- was a misjudgment of Rumsfeldian proportions. In fact, the United States is headed for a budget deficit of more than $400 billion this year, more than half of it a result of tax cuts passed since Greenspan gave Bush his support.

Greenspan is still a figure of enormous prestige and power; he is to economic policy what J. Edgar Hoover once was to law enforcement. After 17 years as Fed chairman, Greenspan has become an icon, and it's hard to imagine America without him; indeed, last month the president nominated him for a fifth term. Yet his reputation is not what it once was. At the height of the boom, he was the monetary maestro whose advice was sought on many aspects of economic policy. Now his record as a monetary leader has been called into question, and his judgment on fiscal policy has been proved disastrously wrong. Worse, he seems to have abandoned the long tradition that places the Fed above the political fray.

The Making of a Maestro: Greenspan is, without question, a very smart man. He has also been very lucky.