More Bad

European and Asian stocks tanked today. See the numbers here.

Here's the thing with this- the commercial paper markets, heretofore the epicenter of this problem, have actually started to move again. Investors are now staying away for quite different reasons...fear of recession?

In any event, the Dow opens in about an hour. Expect another tremendously bad day.

Greenspan Hits Iceburg, All Feared Lost

In congressional testimony today, former Chair of the Federal Reserve Alan Greenspan lit the fuse on his own legacy, and blew out the foundations. See the story in The Newspaper of Record.

Greenspan stood athwart the American financial landscape like a Titan for the better part of two decades. Markets trembled at the whims of his occasional, generally convoluted, public statements. In one sense, seeing him admit that the philosophy of deregulation that had informed his professional thinking for most of his adult life has proven deeply flawed feels tragic, the emperor revealed sans clothes.

On the other, it's impressive that he owned the failure. Many in the clips of the congressional hearings I have heard seemed eager to pile on, driving to skewer both the man and the ideology as completely as possible. That hardly seemed necessary- Greenspan was more than ready to admit that in his own eyes he had erred, and to place blame on his own policy decisions. That says a great number of positive things about Greenspan's character, even if his economic model will probably not be guiding many economies in the future.

Knowing When to Give Up

Via John Cole, this discussion between Byron York and Matt Taibbi is entirely full of win. He takes York apart. Apparently, York either doesn’t understand or is unwilling to admit that credit default swaps are at the heart of the financial crisis. I guess he should have listened to last week’s This American Life. I did, and it really helped clear things up for me.

In short: a credit default swap is a kind of insurance program that traders buy. You can bet against a company defaulting. So, let’s say I own stock in a company, and I want to protect myself from loosing all of my money if it goes bust. So, I buy a CDS and if that should happen, the people who insured me give me that money. The thing is: Phil Gramm deregulated the CDS market in 2000. Anyone could buy them, even for stocks that they didn’t own. It would be kind of like me taking out a life insurance policy on my neighbor, hoping that he dies. The CDS market was about $62 trillion dollars. That’s five times the New York Stock Exchange – and when AIG failed, all the guys who had money on AIG to fail wanted to collect – from people who didn’t have any money to give them. Hence: collapse.

End of the Beginning?

So stocks seem to have stabilized, and as the government moves to buy parts of all the largest banks in the US (whether they need it or not, to avoid giving investors a clear idea of who is in how much trouble), we have also taken to ordering those banks to lend out the money rather than hoarding it to improve their asset ratios. It's unclear where the government acquired the authority to give that order, but when Nobel Laureate Paul Krugman suggests that Gordon Brown may have saved the world with his financial planning (and Gordo could certainly benefit from something going right with his administration), things might be stabilizing. As is the usual refrain at this point, it remains unclear how credit markets will respond. Although, as this RCP story points out, the administration have done it at the cost of deeply alienating some fiscal conservatives. I don't really believe that George Bush was ever an adherent to Ayn Rand's political theories, or that he has traded in what he does believe for Marxism. I do believe that he's moved a very long way from the economic model informing his policy eight years ago.

In addition, I would refer readers to this WaPo article by Robert Skidelsky. My first project in graduate school was an evaluation of Skidelsky's biographies of John Maynard Keynes, and he has forgotten more about economic history than I will ever know. To see Dr. Skidelsky in the world of journalism is a rare treat.

Returning to Bretton Woods?

Apparently, world leaders are discussing closing the world's financial markets for the amount of time it would take them to negotiate a new Bretton Woods agreement.

Depending on who you ask, Bretton Woods was either the agreement that rebuilt the global economy after WWII (until Nixon broke it in 1973), or the agreement with which the US rigged the global economy to intrinsically favor its own interests (see: the protesters outside every G7 meeting). I suppose the two needn't be mutually exclusive. Any agreement of that scope, re-examining the fundamentals of how money and trade operate, would be enormously complex, and presumably take more than an afternoon to sort out. How long can we go without the world's financial systems?

In short, if there is any truth to this, it's a very big deal.

More to come.

The Texas Tea

So, can someone please explain why oil prices have just hit a one-year low? For one thing, I'm still paying over $3/gal for the stuff in its highly refined state, but more importantly, oil is one of those "commodities" that are supposed to be where investors flee when the paper markets tank.

Are they thinking we won't be able to afford cars soon?

more

So the madcap fun continues today, with the dow plunging 689 points. The NYT brings you all the grim details. I know in earlier posts I have suggested that the stock market reports were more distraction than main course with regard to this crisis- that was before they lost over a thousand points in one week. Were this rate of depreciation to continue, there would cease to be a stock market around mid-December, although probably people will all have pulled their money anyway if this goes on for another, say, three weeks?

It is tempting to leave this story alone for a few days. Following it over the course of a day that spans every time zone on Earth and trying to keep up with the increasingly arcane financial implications is becoming at least a part-time job. But the very speed of the thing compels attention- after the crash in 1929, it took the markets three years to bottom out. We don't have anything like that kind of time in 2008. If some sort of turnaround isn't found, the implications are becoming increasingly frightening.

And to the rescue- the Socialism pronounced so dead by Baroness Thatcher et al. The Western World, increasingly prepared to abandon any vestige of a free market at all, seems prepared to treat their economies as a matter of national security, and to pay any price, buy any asset, and insure any transaction, to restore market liquidity. W. even floated the idea of nationalizing the United States' banking system, if the British solution seems to work out. You should probably read that last sentence again.

Whatever we do, we had better do it fast. The rather odd news yesterday regarding the Russian financial bailout of the Icelandic state was, it turns out, due to a lack of reserve capital that had compelled investors to pull their investments for safer currencies. If you think about it, that could happen to an awful lot of places. Smaller economies around the world that peg their own money to reserves of dollars or euros could begin to fail - Iceland could be the canary in the coal mine. But a quasi-European canary. Who do you think is going to pony up to bail out Bangladesh? Sudan? Angola? How long would this list be if I typed the whole thing? And if you think this is mess now, wait until we have a hundred developing nations with Zimbabwean inflation losing the ability to buy food.

I heard a really interesting piece on the way home today, by Andrei Codrescu, pointing out that for $700b, we could probably have bought out every mortgage in America and installed a robust system of regionally dispersed wind power turbines. I wonder what we would have done with the $3-400b left over after everyone owned their own home powered by clean energy? Improved schools perhaps? Does it sound like communism? Yeah, a little. But when you start to think of the opportunity cost of the last two weeks...I mean, this thing is still pretty scary, as there's no end in sight, but it's also becoming so terribly sad, watching us sacrifice the resources that might have addressed so many of the dire problems of our generation on the altar of market liquidity.

* Update *

OK, upon examination of some numbers, it turns out that $700b would not even approach purchasing all of America's mortgages. I hope my larger point about opportunity cost still comes across.

Worth a thousand words

The BBC has put together this page which seeks to explain the financial crisis in graphics. The list of banks that no longer exist is pretty stunning, but the pie graphs that compare the size of the bailout packages to the annual budgets of the states that are paying for them may take the cake.

The Crisis Explained, in Brief

PW mentioned last week an episode of NPR’s This American Life that dealt with the mortgage backed securities crisis from earlier in the year. That episode was so successful, both in terms of how clearly and succinctly it explained the crisis and the number of people who listened to it that they have done another episode, laying out the reasons for and possible ways ahead from the current credit crisis.

I listened to it this afternoon during a break at work. It’s an hour well worth your time. If you are at all confused by what’s been going on, why the bailout is important and other issues of the day (and I don’t know anyone who’s not), check it out. And really, you should be listening to This American Life anyways. It’s pretty awesome. They have streaming versions of all their episodes on their website, as well as a free weekly podcast available through iTunes.

Last one out...

please turn off the lights.

NYC National Debt Clock Runs Out of Digits

Unchecked

So for anyone who spent today under a rock or at work, it seems clear that the $700b we threw into our recent bailout package has been, to use John Maynard Keynes expression, "...chicken feed to the dragons..." The global crisis unfolding itself is now simply frightening in its scope and scale, and is promoting what I believe are unprecedented steps by the world's major governments to save us all from another depression.

A brief summary of things that have gone terribly wrong today would have to include: The British government nationalizing its banking system, purchasing shares of the eight largest banks in Britain and guaranteeing inter-bank loans in The Times. A globally coordinated reduction in interest rates between American, British, Chinese, and European banks designed to boost market performance in HuffPo. Another $38.7m loan to AIG in addition to the earlier $80m+ bailout in the NYT. Russia has stepped in to prevent the financial collapse of Iceland in Newsvine. Stocks across nearly every market in Asia continued to lose value on Drudge.

The Dow has just closed, down 189.

It is impressive to see the world's leaders actually working to coordinate their response to a problem that is now, clearly, an international one, and just as clearly really not under anyone's control.

There is little to no way to know what comes next, but here is the story in which Nancy Pelosi makes the first call for Bailout Plan II.

Endgame

Fully aware of the pitfalls that await anyone who would seek to go into the future-predicting business, the aggregate effect of this morning leaves little choice:

As part of my effort to generate more reader comments, I'm calling it.

With 34 days left, the race is ending, and Barack Obama has won.

Let's review the state of affairs that compel me to this post:

1. The massive federal bailout of the financial markets has not only failed to shore up the US markets, but has done little to shore up the approaching collapse of Europe's financial centers. Desperate efforts to prop up banks in Germany and Ireland over the weekend are probably the tip of the iceberg. The financial collapse of the Western world is driving a wave of news stories comparing the US in 2008 to Great Britain in 1946, when the costs of World War II forced London to essentially cede the global stage to Washington in exchange for a massive financial aide package. This charming state of affairs: brought to you by Republican governing philosophy. The economy is like kryptonite to the Republican campaign. McCain desperately needs the financial crisis to go away- it isn't. And it isn't going to.

2. Having been hammered in two consecutive debates, McPalin are now attempting to pivot away from the economic storyline which has done so much to hurt them in the last few weeks and regain control of their campaign message. However, they seek to do this by going back to the Wright and Rezko storylines that failed to bite six months ago and that feel anti-climatic, indeed rather desperate, at this point. If this is all they have left in the arsenal, it's the equivalent of dropping back into a prevent defense. And we all know what that prevents.

3. And then we come to the announcement that McCain's health care plan, which frankly never made much sense, will be paid for by gutting Medicare and Medicaid. There are die-hard conservatives who hate those programs. There are millions and millions more elderly people who rely on them, and who see voting to protect them as a seminal political issue. In fact, I'm struggling to think of another policy decision likely to have a similarly negative effect on support for McPalin, and right in the middle of the demographic most likely to support them too...reversing the outcome of the civil war, perhaps? Surrendering Oregon and Washington state to Canada?

It is difficult to say when efforts of the magnitude of a presidential campaign reach tipping points, but this weekend has the feel of one. The points listed above seem most salient, but there are so many others I could include- the withdrawal from Michigan, the transformation of Palin into a national joke (a woman channeling her yesterday afternoon couldn't impersonate Palin without including Tina Fey), McCain's increasingly obvious physical exhaustion, the political and moral bankruptcy of the Bush administration...how many more things could this list contain?

There are still two debates left, one of them being a town-hall style discussion ostensibly favoring McCain, but unless he radically reworks the direction of his campaign between now and then, it isn't going to matter. There's plenty of room left for endgame, but barring the occurrence of a series of events so terrible they will not even be committed to print, the outcome is increasingly clear.

This week, consideration turns to what will be left of the ship of state when Obama takes the helm.

Oh yeah, one other thing that hopefully doesn't even need saying: I'm not that good at this, so you should still make a point of voting :)

Not Out of the Woods

So in another stunning victory for American politics, the House passed the "bailout" bill which was an irresponsible affront to free market capitalism at 700 billion, but became good policy with the addition of numerous absurd earmark spending amendments. The bill was then transported at something approaching light speed to Still President Bush, who signed it so rapidly that he probably didn't read it, and with that another roughly trillion dollars of debt was added to the federal budget.

One of the things which endeared Bill Clinton to me was his penchant for balanced budgets, surpluses even. Eight years of wild deficit spending are now bookended by another massive, emergency spending bill. The punditocracy have breathed a collective sigh of relief, and have returned home to see their pets, children, and significant others during daylight hours for the first time in two weeks. We've thrown a heap of money at the problem, and no doubt it is now solved.

But here's the thing- nobody, anywhere, knows if this will work. We are still improvising at a pace that doesn't allow for much reflection. Wall Street is having a hard time finding anyone to ring the bell opening the market on Monday, people not wanting to be associated with a possible ongoing disaster. But the stocks are only the surface ripples created by the monster lurking beneath the waves, the non-liquidity of the commercial paper markets. If you are one of the many still struggling to understand the madness of this debacle, I highly recommend this piece from This American Life, explaining the whole thing in a very approachable way.

Pay no attention to the screaming CNN headlines about the performance of Wall Street. Wait to see if banks resume loaning money to one another- that's the real, and only, marker of a resolution to yet another Republican-created disaster. And don't be astonished if we end up throwing another trillion at the beast two weeks from now.

Also, due to the rampant popularity of the radio piece linked above, it has become a daily podcast called Planet Money which you can get free from Itunes.

Rising Tide

The international markets opened dizzily this morning. In Russia, they were suspended after plunging. The FTSE plunged, but appears to have largely recovered, at least in part responding to a 9 billion dollar government infusion from Belgian banks. The Bank of Japan pumped 29 million USD (3 trillion yen) into its money markets. At least the price of oil is tanking. Guess all those outside investors are feeling the pinch too. Yay, deregulated markets.

But the national mood continues to darken.

David Brooks discusses the Republican revolt yesterday here, and the desert of leadership authority it suggests. Getting compared to Smoot and Hawley should give many of these lawmakers more pause than I suspect it will.

The WaPo here suggests that the problem is that Republicans, bending to the will of powerfully negative voter calling, are essentially reflecting the reality that average Americans just don't understand the complexity of the current crisis. Steven Pearlstein is probably right about that, but then how many of those voters understand the farm bill that congressfolk renew every year? The whole reason we have representative government is so that the people we send to Washington can become specialists in complicated things and make informed decisions.

Richard Cohen muses on the socio-political influence of The Great Depression here.It's an interesting piece. Perhaps the best reflection:

"The Great Depression was not just a period of wholesale unemployment and incredible poverty -- of bread lines and apple-peddlers and women selling brief intimacy for 10 cents a dance. It was also the period of Hitler and Mussolini and, in this country, of Huey Long and Father Charles Coughlin, and the belief among otherwise sane people that communism was the remedy for what ailed us. An economic crisis is like war. It's impossible to contain. It affects everything it touches."

Clearly, Fascism isn't about to leap back out of some hidden political crevice (sorry, Stephen Ambrose), but the link between financial downturn and political instability cannot be denied.

Will they start calling it the First Depression, or Great Depression I? Neither seem very catchy.

*Update*
8:42am

So a couple of hours have elapsed, and the world's markets appear to be correcting. Not at all prepared to feel out of the woods, but it does raise one interesting question- what if the fundamental assumption of most of the world's economists, specifically that without some sort of bailout the US and probably world economy implode, is wrong?

not dark yet, but it's getting there

Just when you think this whole economic collapse thing can't get any more strange. Politically, Still President Bush might as well make the remainder of his public appearances wearing a bill and oversize novelty webbed feet. The lame part will take care of itself. He's lost control of the party that voted him nearly unrestricted war powers. Surely it couldn't get much worse?

Then you look at the economic impact. Both the Dow and NASDAQ closed today lower than they were when Bush took office, meaning that 8 years of value have been wiped from the markets in the last few weeks. There is little to add to this stunning verdict other than context for this statement:

"It's a striking phenomenon," said Robert Shapiro, undersecretary of commerce during the Clinton White House years. "The reckless negligence and mismanagement of the country's financial markets by the White House, the Treasury and the Fed over the last several years has now produced a crisis that has wiped out all of the increase in the market value of America's companies from five years of record corporate profits, strong productivity gains, and reasonable growth. Bush has now run the table on presidential failure."

Read that context here.

Cracks in the Wall

It's 7:05am here, and the news suggests that the 700 billion bailout plan is not getting the job done. The US dollar suffers its largest single day drop in 7 years on CNBC. The price of oil jumped up in a single day record. The Dow lost some 370 points yesterday. See those fun stories here.

The scary part, is that while the US government debates, the bleeding continues abroad. The Royal Bank of Scotland Group and Deutchebank both lost some 3% of their value overnight, and the international recriminations have only just begun in the NYT. I'm still waiting on other media sources to pick up the European banking declines. Similar numbers are coming from Singapore and Tokyo.

So far, the MSM story of the day is about the argument about to play out between the President and congress. Let's hope that argument actually matters. Here's the first think piece in The Weekly Standard musing on the "D" word. Here's more good news from Politico: there really is no plan B. None of this is exactly good news.

I suspect markets and commodity prices will continue to swing wildly, and keep these unpleasant doubts alive.

No End in Sight?

This is the best writing I have seen thus far on what has been happening to the economy over the last year.

It uses phrases like "...worst crisis since the 30's," and "...no end in sight."

And it uses those phrases with clinical precision.

I believe this is what the ancient Chinese curse, "May you live in interesting times," refers to.

Bankrupt

I don't want to take this point too far, but if you had told someone 8 years ago when the Bush administration took office that by the end of its time there, and even as its would-be successors attempt to get elected on a platform that calls for smaller government and less regulation, it would have for all practical purposes nationalized America's leading investment banks, I for one would not have believed you.

I would have argued that nothing short of a world war, or possibly a natural disaster on a truly biblical scale, could have prompted that outcome.

And yet, with the federal buyout of AIG this morning, adding to the recently propped up Freddie and Fanny Macs, we find the US treasury calling the shots at all three.

As David Leonhardt suggests here, the staggering events of this week would in theory have heralded a far more serious economic calamity than has thus far occurred, and in that respect the federal response has been reasonably effective.

What is has not done, in the course of putting the American taxpayer on the hook for hundreds of billions of dollars, is address any of the underlying causes of slack regulation that allowed this situation to occur in the first place. So, embracing their perceived economic imperatives, the Bush administration has inadvertently transformed the US banking system into something rather closer to the Asian Tiger economies, in which governments and the banking systems have poorly defined boundaries. In both Japan and China, the system has created massive and still undisclosed liabilities that distort their national economies in only guessed-at ways.

And still, no one seems to know what this will ultimately mean here in the US. Is the flood dammed, or only only diverted to break through in some new, unforeseeable place in another week? Will this fix, as Hong Kong's leading bankers are suggesting, save the economy immediate pain only to contribute to the long term decline of the dollar (and US economy) as billions more in currency is printed to fill the balance sheets? Now that the Fed is running our major investment houses, what does it do with them? Sell them off at sweetheart prices? Continue to run them as they currently are, almost certainly entailing massive taxpayer loss? Or some new model, necessarily experimental, yet to be revealed? This is a brave new financial world, in which the American taxpayer is being asked to pay for the fairly egregious mismanagement of people whose massive salaries and bonuses largely insulate them personally from the outcomes of their decisions. It should also render utterly laughable Republican calls to continue, let alone extend, their financial model of non-regulation. After 8 years of the invisible hand, the market has bankrupted itself, and we can't live with the consequences. In another 8, we might all be buying our lunches with Euros, Renminbi, or bartering with goats.

Awaiting the Economic Fates

For those who follow such things, today is a sweet combo meal day. Huzzah!

So back to the bad news. I've been trying to make sense of the simultaneous implosion of America's major banking houses- I still have not succeeded in doing this. To a degree which seems unnatural in a western Democracy, we mortals await the verdict of our financial gods, whose ways are inscrutable in the extreme.

In case the collapses Monday were not excitement enough, Goldman Sachs and JP Morgan continue to struggle to save the monstrous AIG, whose collapse would by most accounts make the hits to Lehman Brothers look like small beer. If the NYT is to be believed, it isn't going well. Although even the Times has to admit the story might well be a leak to facilitate some hidden agenda.

The world's markets hang in the balance.

Undecided voters of America: does this economic outlook strike you as "fundamentally sound?" Can you, the nation, or the international system of credit that allows you to have a mortgage survive eight more years of this?

I really wanted to move the public debate past lipstick, but this is all getting a little too serious.