Stabilities of a New Kind:
- Worst decade ever for stocks
- Geithner Plan is more of same

Ed Note:  First posted Feb 7.  Bumped up to follow up (see comments below) and for some tunes.

There’s a warning sign on the road ahead …

1. This report by Floyd Norris that the S&P 500 has just completed its worst ten years ever brings to mind this observation by Walter Benjamin from 1928 and the dissolving Weimar Republic.

Stable conditions need by no means be
pleasant conditions …

Click on pics to enlarge

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2.  The much ballyhooed bank plan, rumored to be announced this coming Monday at noon, is now (friday evening) being leaked to the press and looks a disorganized mess, the product more than anything of an inability to agree on big moves.

Headed by Geithner, who has been there all along, this looks nothing like Change We Need.

Indeed, it seems the bulk of the second half of the TARP $700 billion will be — like the first — given to the banks with few strings. Will not be using the cash to buy the wounded assets or banks holding them; rather, will be “encouraging” private sector investors to do so.

I.e., Geithner has run thru the same cycle that Paulson did, bumping into the same obstacles, and backing down.  The banks have said get lost, and the new administration seems to lack the will to enforce whatever other ideas may lay between the president’s or Geithner’s ears.

Brings (again) to mind Walter Benjamin:

“Again and again it has been shown that society’s attachment to its familiar and long since forfeited life is so rigid as to nullify the genuinely human application of intellect and forethought — even in dire peril.”

It’s astounding how poorly prepared the new prez seems to have been on inauguration day, given the Change anthem of his campaign.

There’s colors on the street
Red, white and blue
People shuffling their feet
People sleeping in their shoes
But there’s a warning sign on the road ahead
There’s a lot of people saying we’d be better off dead

The stock market had rallied this week on the hope of a decisive bank plan. I would now look for a turnaround, back down to test the lows of November. Those soft areas have been tested before, and such things tend to weaken with each probe. Perhaps, finally discouraged re Change, this time they will give way.

If so, look out below: Dow 4000. Keep on rockin’ in the Free World.

There must be some way out of here …

Mark-to-Market on block?

Ed Note:  Been whining and yammering here about mark-to-market accounting since August 2007.  

For the best succinct discussion on the topic in these here parts see this section and that section in a profile of Bill Seidman the Zombie Slayer.

The current below was first posted Feb 9, 2009, day before Young Tim Geithner gathered his loins like a wrestler and went before cameras to pee his pants.  See comments below to follow thru time since — in purticlar takin’ notice of Ben Bernanke’s signal-laden comments of March 10.

1.  Vince Farrel, something of a grizzled eminence on Wall Street, suggests today that part of Geithner’s plan (the announcement of which has been delayed til tomorrow) will be to repeal the Financial Accounting Standards Board regulation (passed in late 2007 if memory serves) that requires institutions to “mark” their wounded structured-finance bonds on their books at (non existent) market values.

Institutions would then mark the assets in accord with “models” (spreasheet predictors) based on actual performance and guesstimates of the future — the old fashioned way.

2.  This would be HALF of what I’ve been whining/screaming for since August 2007.

The other half would be to have the feds — not each individual institution — do the modelling and setting the marks for the distressed segments of the s-f universe.

This “price control” regime would bring transparency and level-playing field fairness to the world.  Doubts about what banks hold would vanish.  Most banks would enjoy write-ups (reversing some of the gargantuan paper losses taken in the past 20 months).   Banks would retain the essential risk of the asset, but would no longer be punished for the absence of a market.

Market Fundamentalists would cry havoc.  But they were raised on Age of Reagan television, and it’s time to tell them to shut up.  Markets break.  Markets are often irrational and fail to work properly.  The market is not a fundamental cultural value.

Vinnie’s lips to Geithner’s ears.

November Case-Schiller housing price index

The November numbers were out last week.  Floyd Norris of the Times sorts them this way (re cumulative decline from the peak of the Case-Schiller index in 2007 or 2008 for 20 metro areas):

Gentle Decliners
Dallas, -6 percent
Charlotte, -8 percent
Denver, -9 percent

No Disaster Yet
Portland, -13 percent
Cleveland, -13 percent
New York, -13 percent
Seattle, -14 percent
Atlanta, -15 percent
Boston, -15 percent
Chicago, -16 percent

Worth Worrying
Minneapolis, -22 percent
Washington, -28 percent

Foreclosure Specials
Tampa, -32 percent
Detroit, -34 percent
Los Angeles, -36 percent
San Diego, -38 percent
San Francisco, -38 percent
Miami, -40 percent
Las Vegas, -41 percent
Phoenix, -43 percent

All roads leading to
Price Controls

1. The WS Jrnl reports that the big banks that received TARP money in the early fall went on to reduce lending in the last quarter of 2008. This seems to disappoint and surprise most commentators.

The big banks will continue to suck up and then hoard every drop of credit offered by the fed/gov’t, because they’re afraid that their paper insolvency leaves them vulnerable to the kind of confidence crisis that killed Bear and Lehman and Wachovia.

They are insolvent in the sense that their assets have declined so dramatically as to leave liabilities overweight. The assets have declined largely due to a confidence problem about the methodologies used to create and forecast performance of structured finance instruments like mortgage bonds and CDOs.

The most responsible thing the gov’t can do to cure the insolvency crisis is replace current accounting with a price control regime that would allow the banks to mark their wounded assets in accord with performance instead of (non existent) market value.

2. Obama and the Congress seem focused on the big stimulus package, as if this were 1933 — when the big banks were healthy and the government was a global creditor.

And when they do get around to the banking system, they talk about how to spend the remaining $350 bln TARP money. Going nowhere.

The stimulus bill should be passed. But it should be number two on Obama’s list, and in any case is the Congress’s baby. Team Obama should be focusing and acting on the banking system, where the institutions of the Executive are the point men.

Left to wonder what’s going on between the president’s ears, the financial media are awash in talk of the Second Wave of major bank failures and renewed calls for revoking mark-to-market accounting and/or going back to the original TARP idea of buying the wounded mortgage bonds and the like from the banks.

Or even nationalizing the banks (which in a sense isn’t saying much, given that Citigroup has already received over $40 billion in cash and $300 billion in guarantees — and could be bought in toto today for about $20 billion):

Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?

Bill Seidman is the wise old banker who piloted the Resolution Trust Corporation that bought up failed Savings & Loans 20 years ago and turned a profit for the government. Last week on the tube he said that neither nationalization nor reversion to the original TARP idea won’t work because recent experience shows that the wounded MBS etc cannot be accurately priced.

But further comments showed that what he meant is NOT that a “hold-to-maturity price” (Bernanke’s term) is unfathomable, but, rather, that in October the banks and the feds couldn’t agree on a sale price.

That is:

– Treasury didn’t want to pay best guess hold-to-maturity because that would be assuming all risk and paying all/most value to the miscreant banks.

– And the banks weren’t willing to take anything in the neighborhood of (non-existent) market value.

In other words: The problem is not that a performance-based price cannot be decently estimated. It’s that the principals don’t want to transact at those prices.

THUS a fortiori: Instead of buying the wounded assets, the feds should prescribe controlled prices for them (segmented demographically across the wounded sectors of the structured finance universe).

These controlled prices would be based on short-term trailing performance (how much interest actually being paid and how much principal actually being lost) and best guesses on housing price and foreclosures for coming six months or so. Prices would then be adjusted quarter by quarter.

The banks would get immediate write-ups to something near best guess hold-to-maturity price, while retaining risk going forward.

The feds would have to do a ton of spreadsheeting and regulating, but would not have to lay out the several trillions more that Paul Volcker spoke of this week while introducing Tim Geithner.

The market for mortgage bonds and related has been broken for 18 months, and the markets for credit card bonds are not much better. Broken markets do not always fix themselves. These are not.

Price controls WERE in the toolbox during the postwar era (Eisenhower, Kennedy, Nixon) — until the owner-operator class realized in the 80s that globalization was the ticket and got laissez-faire religion.

People who spent their formative years watching Age of Reagan television have driven the global economy into the ground. It’s time to bench them, and open the toolbox.

Inaugural throat clearing

The festivities were joyous and interesting to behold. But life in the Scientific Civilization is no party.

The inaugural address was drafted by a 27-year old and its first scripted sentence — “Forty-four Americans have now taken the presidential oath” — was false.

(There have been 44 distinct administrations but 22 and 24 were presided over by the same American, Grover Cleveland. )

It’s odd, then — superstitiously disturbing in a small way — that the first sentence of this eloquent president, a man concerned like Jimmy Carter with speaking truth to the public, by adopting its conceit and then employing “American,” seems almost to have gone out of its way to misspeak. Spilled wine at a wedding toast …

Moments before uttering his first falsehood, the president smiled as Chief Justice Roberts stumbled in his own attempt to show the world that he’s the very smartest boy in the class.  (Roberts chose to recite rather than read the presidential oath, then flubbed it by first passing over and then misplacing the word “faithfully.”)

Obama — who as a senator voted against Roberts’ nomination — was sharp and smooth to pause when Roberts uttered his error. 

But it seems the president may not have said precisely the 35-word oath prescribed by the main body of the Constitution.  If so, most constitutional wonks seem to think it doesn’t matter given the 20th amendment.  But are right-wing headcases blogging this morning about the new president’s legitimacy?

Cheney in the wheelchair seemed Dr Strangelove, especially as he yanked on a black leather glove while rolling down a ramp exiting the White House.  Mein Fuhrer I can valk …

Obama’s talk thru the first half of the speech about responsiblity and sacrifice reinforces worries that the new administration will do little to undo the ill economic effects of Reaganism.

Indeed, it seems (from several reports out of the inner circle aired on the tube Monday and yesterday) that Social Security and Medicaire will be targeted.  Rather startling. To think that a long-anticipated reduction of working-class supports might be attempted by the most powerful Democratic constellation in DC since Reagan, as the GOP smiles from the sidelines.

I continue to get MyObama emails asking for donations without a word as to what purpose the money might be put.  If it turns out that the Congress dominated by Democrats will obstruct Obama’s sacrificial notions, perhaps we will see him go the way of Teddy Roosevelt, who in 1912 left the GOP (under which he had served as Vice President and then President) to form the Bull Moose Party, a short-lived and unsuccessful affair.

A two-party system makes sense in this respect:  it concentrates as much power as may be available for the two basic components of any society:  the Haves and the Have-Nots.  If the class struggle is one of the “childish things” (from Paul’s first letter to the Corinthians) that the president’s tweenage writer intended to target yesterday, he and I will probably be disappointed (for different reasons).

OVER THERE

The international half of the speech was hopeful.  Several great things were said in simple language.  This morning Obama is suspending prosecution activity at Guantanamo.  One way or another it seems it will be shut down.  If he drags his feet there, however, it will be an early indication of reverting to mean.

The incumbent chairman of the Pentagon, Admiral Mike Mullen, chatted for the tube at the CinC’s Inaugural Ball last night.  He seems a nice fellow and quite deferential to the new CinC, but it remains clear that both McCain and Obama last spring were apprised of and accepted the coming aggressive policy in Pakghanistan.

Mullen’s deference, then, may be deceptive; the policy is a child of the post-Rumsfeld National Security Apparat, seated it seems more in the Pentagon than CIA (although maybe I’m the more deceived).

TIM GEITHNER and WHAT’s TO BE DONE

Also today, wounded Treasury nominee Timothy Geithner is facing his Congressional betters.  His opening statement contained nothing of substance as to how to best spend the remaining $350 TARP cash, nor anything confessional or apologetic about the various missteps, including his own, that led to the current debacle.

But he spoke of a new Obama plan for the banks — and, while introducing Geithner, fomer Fed chairman Paul Volcker told the people’s reps that the rescue would cost several trillion more.

Despite his recent past and ancillary political problems, perhaps Geithner is the best candidate willing to take on the job.  I’m not against him so much as against the idea that he (or any one) is essential for the Treasury post.  It requires neither an artist nor a magician.  Implying that it does continues to obscure what’s wrong.

Recall that an explicit aim — ask Jude Wanniski and Jack Kemp — of Reaganomics was to paralyze the federal government with debt, when it was clear that the Congress would never consent to dismantle the New Deal and take us back to the Gilded Age.  Reagan told the world in his own first inaugural that government is the problem; Wanniski, Kemp, David Stockman & co. then sold a way to take it out of commission.

The current debacle is achieving this aim, however and with however much malice aforethought it may have come about.  Bush-Cheneyism has already more than tripled the national debt left behind by Reagan and Bush pere (who themselves tripled it), and Volcker, as noted, today growled about trillions more while introducing President Obama’s chosen point man.

Also recall the fears of some right-wingers about the globalizing North American Union movement, which, re economics, would dump the dollar and replace it with a new currency spanning Mexico, the US and Canada.  The current debacle may be taking us down that road, in that the one thing all financial pundits seem to agree on is that our $11 trillion and counting national debt means the dollar is toast against Asian currencies.  Long-term and perhaps mid-term (2-5 yrs).

(Against the Euro and the Pound …?   There it’s a race to the bottom, but I guess when dust settles the dollar will suffer the worse. )

Keeping the toasted dollar would work against globalization in many ways. It would reduce the flow of cheap goods from Asia into the US and stimulate the return of domestic american manufacturing.

SMILE

It may turn out that the best lasting effects of Obama’s presidency will be cultural:  Gangsta hipsters and Identity Politics out of style.  And, most importantly and astoundingly, this residing sense that the Civil War is over and that American society has taken a huge irreversible step in the direction of its ideals.  Things to smile about as we go under.

A Fortiori: Price Controls and
the lingering odor of Reagan

FINANCE

1.  Oppenheimer analyst Meredith Whitney, now celebrated for calling Citigroup a spade in 2007, displeased people early this new year by predicting over $40 billion in further writedowns by the big banks in the first half.

2.  A week later:

(a) Bank of America, which TV had delcared this past fall a survivor (along with Wells Fargo and JPMorgan Chase), disappoinrts by touching up Treasury and the Fed for another $120 billion (20 in cash and 100 in guarantees) in order to close its fire-sale buyout of Merrill Lynch.  Merrill, recall, went under for being loaded with mortgage bonds; and BoA is blaming December writedowns on those assets for the newly discovered black hole.

(b)  Citigroup announces a plan to give the appearance of dismembering itself, into a Good and Bad bank.  The Bad will contain the marketless structured finance assets at which the feds have already thrown approximately $350 billion in cash and guarantees.  (A measure of how much good has been thrown at the Bad: all of Citi’s common stock could have been bought this past Friday for about $23 billion.)

3.  This same week, foreclosure data for December indicate the trend is still accelerating.

Thus a fortiori:  The need now for PRICE CONTROLS on the wounded segments of the structured finance universe.

(Bernanke, during his first round of TARP salesmanship in October, spoke of a “hold-to-maturity price” for Trouble Assets the program might buy.  That notion would be the basis of a price control regime — ie, valuation based on current and best-guess future PERFORMANCE rather than (non-existent) market value. )

POLITICS

I’m happier with the choice of Larry Summers to head the White House economic team than I was when his name was first floated at Treasury.   He seems in a mood to ream people in high places.  Good.

As for Geithner …  He was part of the problem at the NY Fed.  I don’t understand why Obama thinks he’s golden.  Esp in light of his problems paying taxes.  To tell the public (as this does) that anyone is crucial to New England here is to encourage a kind of superstitious obscurantism about finance.

It seems, rather, that the balls-to-the-wall defense of Geithner has mostly to do with the felt need at Team Obama to ride into DC on a steamroller. Acknowledging that the choice of Geithner was a mistake would blunt big mo.

The choice of FINRA’s Mary Schapiro for SEC is similarly tainted (another top regulator of the current mess) and uninspiring.  I guess they needed a woman and were running out of slots.  Eliot Spitzer was the obvious Change candidate here.

Geithner didn’t pay $34,000 in taxes in two recent years. Spitzer transacted with prostitutes. The defense of Geithner sends an odd message.

The Lincoln train from Philadelphia this weekend, the Lincoln bible coming Tuesday, all seem a bit much — and inapt, in that as Lincoln arrived in the city it was clear near and far that it meant civil war.

(Lincoln was for Unity in the odd sense of being able and willing (after the Free Soil compromise broke) to divide the nation and imperil the state as never since or before over the issue of slavery — which he discussed during his campaign and presidency by talking about Preserving the Union.   I admire him for all of this, and merely wish to point out that he was not about Unity.)

The theme of Obama’s inaugural address is said (on the Sunday talk shows) to be Personal Responsibility and a Call to Sacrifice.  This (again) sounds like Reaganite marketing materials.

Our woes were not caused by irresponsible working class Americans. Most Americans have been sacrificing time and quality of life since the advent of Reagan.

Why then will we be getting this lecture?   Is it (inapt) Cosbyism, aimed at malingering black american males?  If so, it’s way too personal.  Or will it prove to have been a roundabout way to target the rich (with targeted sacrifice)?  Or, most likely, a way to begin watering the rhetoric of the campaign down into middle-of-the-road policy that will do little to address the economic warfare practiced by the owner class upon the working class since the advent of Reagan?

The black woman chosen to read a poem at Obama’s inaugural is telling the tube that Whitman was a poet of “diversity.”   No he wasn’t.  He was the precise opposite — the most potent expressor of universality and American melting-pot newness we have ever had.  But since one in a thousand TV viewers have ever read more than a wisp of Whitman …

Reaganism and the Identity Politics it provoked both need burying.  It remains a question if that’s what Obama’s about.  Indications so far are boxing the compass.

The Dollar: China Syndrome

Here’s a good if convoluted chat about the current macro picture as the various economic powers twist in the breeze and try to protect themselves.

China in late October increased by several orders of magnitude its verbal attacks on the dollar. But in the wake of the G20 meeting it seems to have softened its own currency (by buying dollars) in an attempt to prop up its domestic industrial enterprises (which are suffering for lack of consumers in, to begin, the U.S.).

The dollar has been going up  for a month or so, generally speaking.  A good deal of this is flight from minor currencies (like Argentina’s, alas) based on fear that the local banks will collapse.

This component of the dollar’s recent surge won’t last.  Best guess is that soon enough the dollar will continue its plummet, and that long-term the chinese currency will rise.

The current dollar boost, then, might be imagined as the point in the sinking of the Titantic where the bow suddenly goes under the waves and the stern ascends to bring the ship nearly vertical — until it shaps amidships — upon which the stern falls like a brick into the sea.

And, as the dollar turns and sinks, the cost of oil (denominated in dollars) will go back up.

A debased dollar is good for people who make things with dollars and sell them in other currencies.  And for debtors, in general (assuming they can make their payments).  Otherwise it’s rather bad.

NYROB High Five:
Cheney, Soros, Olmert

Recent MUST READS in the NY Review of Books:

On Cheney.

On the financial crisis — by George Soros.

And the full interview that Prime Minister Ehud Olmert gave before resigning — in which he renounces militarism as a possible basis of Israeli security.

American automakers to be
born again as Green
“gov’t-sponsored entities”?

The President Elect met with his econoteam and then answered press questions for the first time today.

Meanwhile the people running GM and Ford told the world that time is running out.

Brusque types are saying “Let them go.” Down the drain.

But the employment consequences nationwide would be catastrophic, and it’s clear that Hammerin’ Hank Paulson, after fucking the globe royally with Lehman, is on the case.  A Treasury spokesman indicated that some of the TARP $700 billion might get thrown over the automakers to keep them dry awhile.

The full resolution may be nationalization (perhaps through the equity-kicker provisions of the TARP) — leaving something like Airbus in Europe:  a unified quasi-nationalized auto company.

Such an enterprise could be effectively directed by the incoming Donkey regime to the ends often indicated across the campaign years: a native auto industry fully dedicated to green cars.

Similar initiatives were crushed by the Reaganites immediately upon assumption of power in 1981, as they shut down Jimmy Carter’s Energy Department in support of the Oil Mafia status quo ante.

It illumines American democracy to look back across that expanse of time — lost time — and to think that it may take the triple whammy of high oil prices, a ruined financial system and bankrupted Ford and GM to finally pry loose the Oil Mafia’s grip on Washington.

(It’s often left unsaid that the core of the OM’s political power these many decades has been the Pentagon — which cannot run its tanks and aircraft on natural gas or the sun or the wind or nuclear power.)

The first Earth Day was in 1968.  Everything in the way of knowledge needed to act on our energy problems was known in the wake of the oil crunches of the 70s. Instead we got Reagan.  This time … We shall see.

Santa Claus (?) he comink: Fed
doing another trillion or bust (?) to $3 tees before New Year’s Day

A recent review of Fed actions to date recalled that roughly a year ago the Fed’s (self manufactured) assets were roughly $900 billion — and, as a result of its rescue attempts since, they’ve gone to $1.8 trillion — about $1.3 of which is wounded bonds and similar that the Fed has taken off the hands of wounded financial instituitons.

Today, one of the supposedly hawkish members of the Fed board — ie, an Inflation Fighter typically damning the torpedoes — said in public that it’s likely the Fed’s balance sheet will rise to THREE trillion.  ?!?

Before the year is out.

?!?!?

Perhaps in reaction, the dollar (rebounding lately against the euro, sterling) tanked today, and gold (and oil, of course) shot up.

The picture is reminiscent not only of what the Fed tried to do between 1929 and 1932 (discussed here a number of times across the past year) — but also, atmospherically at least, of the Weimar Republic’s death-by-inflation throes.  People in the streets with wheelbarrows of evanescent cash, trying to spend it before it becomes completely worthless  …

What happens when countries go bankrupt?
I’m not saying, even, what the Fed is doing is wrong (although there are plenty of people doing so — saying in effect that the Fed is fighting the LAST great depression instead of today’s — fighting a Liquidity Crisis in the banking system when in fact the problem is a Debt-Insolvency Crisis).

Me — I don’t know.  It’s just noteworthy and shocking to watch this stuff happen and fly.

Here is a Gold Bug, Lance Lewis, at Minyanville.com, discussing today’s Fed speak:

$3 Trillion Fed Balloon?

This morning, the Fed’s supposed inflation hawk, Dallas Fed President Fisher, said the “Fed’s balance sheet may expand to $3 trillion by year’s end.”

That means the Fed would have to take its balance sheet up over $1 trillion in just 7 weeks from the current $1.97 trillion (which had already doubled over the past 6 weeks from under $1 trillion). The next question is how would they do this?

Thus far, the Fed has not been actively monetizing government debt in the open market by creating cash out of thin air and buying treasury bonds. Instead, the Treasury has been playing a game whereby it has issued debt and then placed it on deposit with the Fed for the Fed to use as it pleases. This is still inflationary but not quite as inflation as if the Fed was in reality physically running the printing presses.

Now, the Treasury isn’t going to be issuing another trillion dollars of debt over the next 7 weeks to place with the Fed, so how is it going to pull this off? Could it be that Fisher is hinting that the Fed will soon be monetizing treasury debt?

I’ve been wondering how the bond market was going to be able to handle the record amounts of treasury debt that are about to wash over it like a tidal wave. Perhaps this is how? The Fed is simply going to buy it all.

Perhaps that’s why gold is up $36 and the dollar has experienced its biggest percentage drop ever against the euro today?

The Fed’s actions to date

Here is a great look at the latest Fed balance sheet.  It summarizes everything the Fed has done since August 2007 in response to the credit crisis.

When the Fed began to widen its windows and criteria for lending to financial institutions last year, it had roughly $900 billion in assets — ie, notional credits that it manufactures in cyberspace and then uses to buy Treasury bonds from the US gov’t or, now increasingly, wounded bonds of all sorts from wounded institutions.  And the Fed said it was willing to use a quarter of its balance sheet to rescue the latter.

Fast forward a year.  The balance sheet has doubled, to more than 1.8 trillion — roughly $1.3 of which is wrapped up in rescues.

Thus, the commentator linked above observes:

The Fed’s first $100 billion didn’t do it. The Fed’s first $1 trillion didn’t do it. Having the Treasury take over the $5 trillion in debts and guarantees of Fannie and Freddie didn’t do it. The Treasury’s $3/4 trillion rescue/bailout package didn’t do it. And another quarter trillion will?

This (again) echoes the early 30s — when the banks took and took and took everything the Fed had to give, until, in late 1932, the people who own and operate the Fed cried Uncle and the Great Depression settled in, to endure until the stimulus of the world war.

Greenspan, global recesssion —
1932 arriving on schedule

Alan Greenspan’s broad confession before Congress yesterday brings to mind the parade in 1932 through those once hallowed halls of big brains from Wall Street and the Fed, all confessing their ideas were bankrupt and that they’d nothing left to suggest.

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.

Do you feel that your ideology pushed you to make decisions that you wish you had not made?

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

On a day that brought more bad news about rising home foreclosures and slumping employment, Mr. Greenspan refused to accept blame for the crisis but acknowledged that his belief in deregulation had been shaken.

“This modern risk-management paradigm held sway for decades,” he said. “The whole intellectual edifice, however, collapsed in the summer of last year.”

As if in reaction, Asian and European stock markets went off the cliff overnight — Tokyo’s Nikkei 225 Index down 9.6%, Hong Kong’s Hang Seng down 8.0%, the Financial Times 100 down 5.0% — and the US markets are now following.

Sheer panic and forced selling (by margin callers) aside, the more slightly more concrete cause seems to be data and earnings reports indicating that the credit crisis that began 15 months ago has surely pushed the industrialized world into recession.

By the time FDR took office in March 1933, every bank in the United States was closed.

In general, however, the banking system then was much stronger than it is now.  The crisis of the early 30s was largely a liquidity crisis created by bad austerity policy enacted post 1929 crash, which artificial austerity crushed the general economy.  The crisis of today is an insolvency crisis created by a mountain of bad debt, crushing the finance sector first.

Opportunities and strategies for recovery, then, are likely to be different than they seemed to the bewildered owner-operators 76 years ago.  Last week a bunch of Friedmanesque Chicago-School economists warned that today’s Fed and Treasury were fighting the last Great Depression (as if the crisis were merely a lack of liquidity in the credit system).

Into all this strides Barack Obama (it seems).

His entry brings to mind the early years of Bush-Cheney, when Secretary of State Colin Powell was repeatedly sent on foreign missions, including to East 42nd street in New York, to explain (as if it were possible) and take flack for the collateral damage of their radical policies.

Will the Obama movement and all its hopes for a new age get crushed by the economic misery that will characterize his four years?  Or will the misery be so widespread that it serves to found and root that new age?

Oww, Dow sinks 700

The Market giveth and it taketh away.

The powers that be seem indeed out of bullets.

Guess they’ll have to do it the old-fashioned way …

Zow, Dow rockets 936 points

Biggest ever raw point rocket.  Fifth all time largest percentage gain.

Causes:  Extremely oversold condition.  European bank rescues over the weekend.  Pending US bank rescue (out after the bell:  Treasury will take $250 billion equity stakes in banks).  And fear among the big shorts of another Plunge Protection Team assault (intervention, manipulation) of the sort that swung the Dow 900 points to the upside Friday afternoon.

Ho hum.

Short Ban lifted —
No “terrorism” after all?
Joltin’ Jersey Jim Cramer re
How to break a stock

1. Thursday of the week of Worldwide Wreckage — and the SEC lifts its ban on short-selling financial stocks.

The Dow 30 close down another 679 points at 8,625.

2.  Recall that two weeks ago Todd Harrison at Minyanville.com reported that a good Washington source said that the feds had identified a concerted shorting campaign out of London and Dubai that began on September 11 and which they considered financial “terrorism.”  Rather than simple Creatively Destructive greed.

But apparently that worry no longer troubles the SEC.

3.Here’s Joltin’ Jim Cramer re how the big short sellers destroy targeted stocks.

Fed loans AIG another $38 bils:
Business as usual

The Fed press release about AIG’s latest injection reads deceptively for anyone who doesn’t understand swaps and repurchase agreements.

Here then is an elaborate homespun explication.

And the text:

The Federal Reserve Board has authorized the Federal Reserve Bank of New York to borrow securities from certain regulated U.S. insurance subsidiaries of the American International Group (AIG), under section 13(3) of the Federal Reserve Act.

Under this program, the New York Fed will borrow up to $37.8 billion in investment-grade, fixed-income securities from AIG in return for cash collateral. These securities were previously lent by AIG’s insurance company subsidiaries to third parties.

As expected, drawdowns to date under the existing $85 billion New York Fed loan facility have been used, in part, to settle transactions with counterparties returning these third-party securities to AIG. This new program will allow AIG to replenish liquidity used in settling those transactions, while providing enhanced credit protection to the New York Fed and U.S. taxpayers in the form of a security interest in these securities.

Central banks do big rate cut /
Throw the Fed bums out?

1.  The central banks of the US, Canada, the European Union, Great Britain, Switzerland and Sweden, all cut the interbank rates they control by half a percentage this morning.

The US stock markets gyrated wildly, with the Dow 30 winding up down 191 points.

Bernanke last month told Congress that a year ago he had warned Paulson that something dramatic (like the Paulson Plan) might eventually have to be done.

The time to act was indeed a year ago.  Nothing but a lot of time and pain will cure what now ails the global system.

2.  The US has had something like five central banks (empowered to issue the currency and lend it to the government) thru its history.   Jefferson and his school were against the idea, the Federalists led by Alexander Hamilton were for.

Some people are convinced the federal government cannot recover its fiscal health unless it takes back the power to issue currency, as was last done under President Andrew Jackson.  It was 77 years until, in 1913, a private central bank was again established on the eve of the world wars.

Here’s a feature length doc about the history of central banks in Europe and the US, made by people hoping to dethrone the Fed.

Iceland nationalizes collapsing
banks, asks Russia for help

Pretty frightening.

And rather than London they go to Moscow, for a $5 bil loan.

After the Rescue:
“Worldwide Wreckage”

Ed Note:  See comments below for day by day, blow by blow summaries of what turned out to be the worst week in the history of the Dow 30.

Monday Morning.

After Europe’s traumatic weekend (see comments here), European stock markets fell roughly 7% Monday.

And with an hour ’til closing time, the Murdoch (formerly Dow) 30 is down another 700 points (6.8%), to roughly 9,600, breaking the psych barrier at 10,000 for the first time since 2004.

Along the way a new all-time point drop was notched — 806 — breaking the record set way back uh, let’s see … Last week.

.

Broad & Wall Street, 1929

The central banks and treasuries have shot most of their bullets.  No one has yet taken heart.   Credit markets are broken worldwide.  Nothing else now matters.

It is truly The Great (debt) Unwind that some people have been predicting for fifteen years — ever since the advent of Excel and email jolted high-tech Structured Finance to life in the money centers.

Traders this afternoon are sniffing “capitulation,” and supposing tomorrow we may have a bounce.  Perhaps even coordinated rate cuts by every central bank from Tokyo to Washington.

But people with slightly longer-term views are saying Dow 8,000 might prove to be a floor.

It’s been a wild ride, since …

August 23, 2007:

MY OWN TWO CENTS, based on awareness of how vast the universe of structured finance securities is, and of how confidence in the methodologies used to rate and evaluate them has been shaken, and on watching the mortgage business get dismantled daily, is that the worst is far from over.

Recession, asset deflation (houses mostly), prolonged credit contraction. The Dustbowl returneth … But what do I know.

The sign at the Cyclone says “HOLD ONTO YOUR WIGS AND CAR KEYS.”

August 3, 2007:

The mortgage-bond failures demonstrate that the rating agency methodologies used to evaluate and rate high-tech “structured finance” bonds are seriously flawed.

This wethinks is why the private bond markets across all sectors (well beyond mortgage bonds) have seized up. The rating methodology failure means no one in the world really knows what their high-tech bonds are worth.

A radical thought, then: Perhaps the authorities might institute 90 days of price controls on the teeming mystery bonds to quell the panic …

How long do these (ahem) dislocations tend to last?

A good review at Naked Capitalism gauging how bad and how long financial disasters tend to be.  In a nutshell:

The episodes of credit crunches and housing busts are often long and deep.

For example, a credit crunch episode typically lasts two and a half years and is associated with nearly a 20 percent decline in real credit. A housing bust tends to last even longer: four and a half years with a 30 percent fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities has dropped to half.