We are seeing governments and central banks around the world ‘injecting’ capital into the financial system. You’ll notice that when a government and/or central bank ‘injects’ money (also referred to as a ‘bailout’) into a private corporation (Example: AIG) or bank, often the government and/or central bank receives equity in that corporation or bank in return (article below). As an example, the Federal Reserve received an 80% equity stake in AIG when it provided $85 billion in funding. Where did they get this $85 billion? It was created out of thin air and $85 billion was added to the debt of the United States government. Nice arrangement if you can get it. It also appears that $85 billion wasn’t enough – yesterday AIG needed an additional $37 billion from the Fed. Things are beginning to get really ugly.
If we, once again, strip away the rhetoric – what is really happening? Governments (United States included) and central banks (around the world) are buying majority stakes in corporations and banks. It is being done under the guise of shoring up the financial system – deceptive, but effective. While the people of the world think that governments and central banks are doing whatever they can to alleviate the financial ‘crisis’ – there is actually a long term plan at work here. Control of the financial/banking system is being consolidated rapidly under the central banking system (now including investment banks). We even see the Federal Reserve considering loaning money directly to corporations (articles began appearing yesterday) – bypassing the crippled banking system. When was the last time they did this? The Great Depression.
This is not an ‘inevitable’ result of the current crisis. If we stop listening to the lies – we begin to see what is really happening – financial control of the world continues to be consolidated into the hands of a very few, powerful people.
Yesterday, central banks around the world lowered short-term interest rates by 50 basis points. Is the current financial crisis a result of the ‘cost’ of money or is this a ‘liquidity’ problem? It’s a liquidity problem – banks aren’t lending and credit markets are frozen. Does it matter that it costs you less to borrow money if you can’t borrow money? No, it doesn’t. So, why would all of these central banks lower interest rates in this environment? I believe it’s all about appearances. By doing this, they ‘appear’ to be doing something that will positively impact stock markets. The reality is that this does nothing to help or solve the problem. The charade continues.
As I’ve said before – the underlying problem isn’t the credit markets or the banks or any of the hundreds of reasons we hear about on the news everyday. The problem is our monetary system that requires exponential growth. This will not correct itself until the monetary system changes. Where does all of this lead? Can governments bailout financial/banking firms forever? Of course not. This financial ‘crisis’ will eventually spread to governments the world over. Governments receive revenue from this ‘system’ and are already saddled with massive debt. It won’t be long before we start hearing that the entire system needs to change. How will it change? We’ll be told that we need a ‘coordinated’ financial system without national boundaries – without national currencies – eventually leading to world government controlling a coordinated world financial system.
Of course the Bible tells us all of this. We’re simply living during times when we can watch all of the details play out.
jg – October 9, 2008
_______________________________
U.S. Treasury Considers Buying Stakes in Banks
New Tack Comes Amid World-Wide Emergency Rate Cuts
By DEBORAH SOLOMON
Wall St. Journal
October 9, 2008
WASHINGTON—The Treasury Department is considering ways to inject capital directly into banks, possibly by taking equity stakes, as the financial crisis continues to worsen.
Treasury Secretary Henry Paulson, in a marked shift in rhetoric, played up Treasury's newfound authority to "to inject capital into financial institutions" in remarks Wednesday. Mr. Paulson, who won approval from Congress to buy $700 billion worth of distressed assets, had previously focused on Treasury's plan to buy mortgage-related securities from financial institutions that are having trouble getting the assets off their books.
As the financial crisis continues to escalate, Treasury has begun fleshing out ways to use its authority to make direct injections into financial institutions, according to a person familiar with the matter. Treasury is figuring out how to structure such infusions so that banks can recapitalize and begin lending.
No such moves are imminent, but the fact that the department is engaging in such discussions is an indication of how the crisis is constantly morphing. Such a move was not under consideration just a few days ago but has become more of a possibility in recent days as the stock market has plunged and the credit crunch shows no signs of easing.
Treasury wants to design something voluntary that encourages healthy institutions to participate. Treasury is discussing whether to buy preferred stock or find some other way to inject capital into the firms.
In remarks to reporters on Wednesday, Mr. Paulson said its new authority extends beyond just mortgage-related assets to "any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability."
The U.K. government this week announced a plan to take stakes in a range of domestic banks.
Coordinated Rate Cuts
On Wednesday morning, the world's central banks launched a large coordinated attack against the widening global financial crisis, lowering short-term interest rates in unison.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke testify before the House Financial Services Committee on Sept. 24.
The emergency interest-rate action, which involved the Fed, the European Central Bank, the Bank of England and others, is a sign that fears that the financial crisis could cripple the global economy are spreading rapidly.
But the rate move failed to soothe jittery investors. The Dow Jones Industrial Average closed Wednesday at 9258.10, down 189 points, or 2%. The index has fallen 14.6% so far this month. Oil fell $1.11 to $88.95 a barrel, on signs of weakening global demand. Investors continued to flock to safe-haven U.S. Treasury bills, and away from riskier debt such as junk bonds.
One of the chief threats to the global economy is that banks and other financial institutions are hoarding cash, which makes it harder for businesses and households to finance their day-to-day affairs. Lower interest rates reduce the cost of borrowing for banks, businesses and households, and potentially boost confidence. But it's far from clear whether the lower rates will make banks and other lenders, which are gripped by fears of defaults by borrowers, any more willing to lend.
The U.K. government this week announced a plan to take stakes in a range of domestic banks. As recently as a few days ago, the U.S. Treasury was not considering any capital injections. But it has become more of a possibility as the stock market has plunged and the credit crunch shows no signs of easing.
Treasury wants to design something voluntary that encourages healthy institutions to participate. It is discussing whether to buy preferred stock or find some other way to inject capital into the firms.
In remarks to reporters on Wednesday, Mr. Paulson said its new authority extends beyond just mortgage-related assets to "any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability."
On Wednesday, central banks in the U.S., the euro zone, the U.K., Canada, Sweden and Switzerland each cut short-term interest rates by a half percentage point, noting that "the recent intensification of the financial crisis has augmented the downside risks to growth." Acting on its own, the People's Bank of China also cut rates, as did Australia's central bank, a day earlier. Later, central banks in South Korean and Taiwan cut interest rates, too, and Brazil's central bank cut reserve requirements on cash and term deposits.
______________________________
Central Banks in Global Show of Force
Central banks around the world acted in concert Monday, hoping a half-percentage-point rate cut would restore confidence to battered markets, WSJ's David Wessel reports. (Oct. 8)
The global scope of the move was unprecedented, and the cuts marked the first time central banks across the Atlantic have moved in tandem on interest-rate policy since just after the Sept. 11, 2001, terrorist attacks in the U.S. The Fed has not moved rates since April, when it lowered them to 2%.
The moves likely mark just the beginning of broadened government efforts to keep the world-wide credit freeze from strangling the global economy. "For all central banks, this is not the end of the story," says Laurence Meyer, vice chairman of Macroeconomic Advisers, a forecasting firm, and a former Federal Reserve governor. "We're facing a potentially severe recession."
—Jon Hilsenrath, Joellen Perry and Sudeep Reddy contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com
Showing posts with label U.S. Treasury. Show all posts
Showing posts with label U.S. Treasury. Show all posts
Saturday, September 16, 2006
U.S. Announces Plan to Buy Stakes in Largest Banks
How was the recent $700 billion bailout sold to the American people? It’s only been about a week – have we all forgotten this? If you will remember, this bailout was sold to us as the only way for the financial system to recover. What was causing all of the problems? Toxic securities (CDO’s, etc.). Our government was going to buy these securities and take them off the books of banks/financial institutions. So, what has the Treasury done with the first blank check? They have purchased equity stakes in our largest banks – moving towards nationalizing our banking system. I find this very interesting. What does it tell us? It tells us that our leaders have lied to us so that they could get what amounts to endless funding for nationalizing our banking system – plain and simple. We see the same game plan being played out the world over. Iceland has nationalized their banking system. The U.K. has nationalized their largest banks. Europe is moving in the same direction.
I’m sure that our government will purchase toxic securities at some point. Think about what’s going to happen to our government when the economy doesn’t recover and it has all of this additional toxic debt on its balance sheet. We’re already insolvent – this isn’t going to help anything – except accelerate our government’s decline.
jg – Oct 14, 2008
____________
OCTOBER 14, 2008, 10:31 A.M. ET
U.S. Announces Plan to Buy Stakes in Largest Banks
Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort
By DEBORAH SOLOMON, DAMIAN PALETTA, JON HILSENRATH and AARON LUCCHETTI
WASHINGTON -- President George W. Bush announced Tuesday morning that the U.S. government is taking stakes in the nation's top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government's guarantee behind the basic plumbing of financial markets.
FDIC Chairperson Sheila Bair speaks at a news conference as U.S. Treasury Secretary Henry Paulson (center) and Federal Reserve Chairman Ben Bernanke (right) look on.
"The efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover,'' President Bush said.
Mr. Bush said the government will purchase equity shares in banks to help institutions unfreeze lending and spur economic growth. Funds for the purchases, which may amount to $250 billion, will come from the recently passed $700 billion bank rescue bill.
"This is an essential short-term measure to ensure the viability of America's banking system," Bush said. "And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors."
Mr. Bush also said the Federal Deposit Insurance Corp. will temporarily guarantee most new debt issued by insured banks. He said that will make it easier for banks to borrow money, which can then be lent to consumers. The FDIC also will "immediately and temporarily" expand its insurance to cover every dollar in all noninterest-bearing transaction accounts, which are widely used by small businesses to cover day-to-day operations.
Under the last step announced by Mr. Bush, the Federal Reserve will finalize a program to serve as a buyer of last resort for commercial paper, an important source of short-term financing for businesses banks.
Mr. Bernanke said the U.S. will not "stand down" until financial system and prosperity restored. Mr. Paulson, in his own remarks, said financial institutions in the new program will limit executive compensation. He said that "government owning a stake in any private U.S. company is objectionable to most Americans," but said the alternative "of leaving businesses and consumers without access to financing is totally unacceptable."
The government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.
Getting a Grip on the Financial Crisis
• Real Time Economics: The Evolution of Henry Paulson
• Economists React: A Thumbs Up From Ivory Tower
• Treasury's stock-purchase plan
• FDIC's liquidity plan
• Paulson, Bernanke, Bair joint and individual remarks
• Bush remarks Tuesday morning
• Detail of commercial paper facility
• Commercial paper FAQs
• Treasury's Executive Compensation Rules
Related Articles
• Wash Wire: Bush Embraces Multilateral Intervention
• Real Time Econ: The Evolution of Henry Paulson
• Europe's Rescue Carries Huge Price Tag
• How the U.K. Rescue Plan Became a Banking Model
• Sumner Redstone Squeezed by Loan and Stock Price
Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Mr. Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government's response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.
Formulated jointly by the Treasury, the Fed and the FDIC, these moves announced Tuesday are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.
Along with the government's involvement come certain restrictions, such as caps on executive pay. For example, firms can't write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.
Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.
A central plank of these new efforts is a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of banks, using funds approved by Congress through the recently approved $700 billion bailout plan.
Treasury will buy $25 billion in preferred stock in Bank of America -- including Merrill Lynch -- as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.
The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don't come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.
The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government's stake, a person familiar with the discussions said.
Among the other key components of the plan is the FDIC temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.
The FDIC is also temporarily offering banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.
The FDIC's central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency's power.
The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.
“These are tough times for our economies. Yet we can be confident that we can work our way through these challenges.” President Bush in a joint statement with Prime Minister Berlusconi of Italy.
The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury's main goal is to attract private capital. To make sure private investors aren't scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.
The government's new focus is raising questions about why it didn't adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn't participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.
Senior executives and advisers to some of the nation's leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.
House Democratic leaders, including Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, held a closed-door session Monday with 11 economists and other advisers. The group threw its weight behind Treasury's decision to inject capital into the banking system.
"The consensus was so strong towards direct equity injections that there was literally no dissension on the point," said one of the invited economists, Jared Bernstein of the liberal Economic Policy Institute. "The only head-scratching is why did it take us so long to get here?"
Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn't have the authority to make such a comprehensive move until Congress passed the bailout bill. The government's various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.
The government's hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won't come at their expense.
For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.
The other steps, including the FDIC's role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again. The Fed is expected to announce Tuesday that a separate plan to lend directly to companies and banks through instruments called commercial paper will start in about two weeks.
William Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury's initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.
But Treasury's new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.
"Investors need to be confident that the banks they're dealing with are unquestionably solvent, and it's in the interest of banks to assure investors that that's the case," he said. "One way banks can provide that assurance is to raise additional capital, in some combination of private and government capital."
Dean Baker, co-director of the left-of-center Center for Economic and Policy Research, argues the country may have turned a corner on the financial panic -- the fear that has kept banks and investors from making even the most prudent loans. "I think we're through the worst on that," he said. "Maybe I'll be proven wrong, but it really was at an extreme last week."
Blanket guarantees, however, might inspire banks to take unnecessary risks, warned Frederic Mishkin, a Columbia University economist who stepped down as Fed governor in August. "You don't want to give a guarantee to banks that are in trouble" that might try to gamble their way out of problems, he said. He says offering broad guarantees will require that U.S. officials more aggressively act to sort out good banks from bad banks.
One sticking point could come from Congress, which wrote into the original bailout bill requirements that Treasury tamp down executive pay. Rep. Frank said Monday he wants the government to set tough conditions for any company that receives a capital injection. If Mr. Paulson didn't enforce such rules, Mr. Frank said the Treasury secretary could be "making a big mistake."
—Michael M. Phillips, David Enrich, Daniel Fitzpatrick, Susanne Craig and Robin Sidel contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com, Damian Paletta at damian.paletta@wsj.com, Jon Hilsenrath at jon.hilsenrath@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com
I’m sure that our government will purchase toxic securities at some point. Think about what’s going to happen to our government when the economy doesn’t recover and it has all of this additional toxic debt on its balance sheet. We’re already insolvent – this isn’t going to help anything – except accelerate our government’s decline.
jg – Oct 14, 2008
____________
OCTOBER 14, 2008, 10:31 A.M. ET
U.S. Announces Plan to Buy Stakes in Largest Banks
Recipients Include Citi, Bank of America, Goldman; Government Pressures All to Accept Money as Part of Broadened Rescue Effort
By DEBORAH SOLOMON, DAMIAN PALETTA, JON HILSENRATH and AARON LUCCHETTI
WASHINGTON -- President George W. Bush announced Tuesday morning that the U.S. government is taking stakes in the nation's top financial institutions as part of a new plan to restore confidence to the battered U.S. banking system, a far-reaching effort that puts the government's guarantee behind the basic plumbing of financial markets.
FDIC Chairperson Sheila Bair speaks at a news conference as U.S. Treasury Secretary Henry Paulson (center) and Federal Reserve Chairman Ben Bernanke (right) look on.
"The efforts are designed to directly benefit the American people by stabilizing the financial system and helping the economy recover,'' President Bush said.
Mr. Bush said the government will purchase equity shares in banks to help institutions unfreeze lending and spur economic growth. Funds for the purchases, which may amount to $250 billion, will come from the recently passed $700 billion bank rescue bill.
"This is an essential short-term measure to ensure the viability of America's banking system," Bush said. "And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors."
Mr. Bush also said the Federal Deposit Insurance Corp. will temporarily guarantee most new debt issued by insured banks. He said that will make it easier for banks to borrow money, which can then be lent to consumers. The FDIC also will "immediately and temporarily" expand its insurance to cover every dollar in all noninterest-bearing transaction accounts, which are widely used by small businesses to cover day-to-day operations.
Under the last step announced by Mr. Bush, the Federal Reserve will finalize a program to serve as a buyer of last resort for commercial paper, an important source of short-term financing for businesses banks.
Mr. Bernanke said the U.S. will not "stand down" until financial system and prosperity restored. Mr. Paulson, in his own remarks, said financial institutions in the new program will limit executive compensation. He said that "government owning a stake in any private U.S. company is objectionable to most Americans," but said the alternative "of leaving businesses and consumers without access to financing is totally unacceptable."
The government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.
Getting a Grip on the Financial Crisis
• Real Time Economics: The Evolution of Henry Paulson
• Economists React: A Thumbs Up From Ivory Tower
• Treasury's stock-purchase plan
• FDIC's liquidity plan
• Paulson, Bernanke, Bair joint and individual remarks
• Bush remarks Tuesday morning
• Detail of commercial paper facility
• Commercial paper FAQs
• Treasury's Executive Compensation Rules
Related Articles
• Wash Wire: Bush Embraces Multilateral Intervention
• Real Time Econ: The Evolution of Henry Paulson
• Europe's Rescue Carries Huge Price Tag
• How the U.K. Rescue Plan Became a Banking Model
• Sumner Redstone Squeezed by Loan and Stock Price
Some of the big banks were unhappy about the government taking equity stakes, but acquiesced under pressure from Mr. Paulson in a meeting Monday. During the financial crisis, the government has steadily increased its involvement in financial markets, culminating with a move that rivals the breadth of the government's response to the Great Depression. It intertwines the banking sector with the federal government for years to come and gives taxpayers a direct stake in the future of American finance, including any possible losses.
Formulated jointly by the Treasury, the Fed and the FDIC, these moves announced Tuesday are designed to keep money flowing through the financial system, ensuring that banks continue lending to companies, consumers and each other. A freeze in these markets rippled through the economy and helped cause stocks to crater last week.
Along with the government's involvement come certain restrictions, such as caps on executive pay. For example, firms can't write new employment contracts containing golden parachutes and their ability to use certain executive salaries as a tax deduction is capped. These restrictions are relatively weak compared with what congressional Democrats had wanted when they approved this spending, a potential flash point.
Some critics also say Treasury should have formulated a comprehensive plan earlier in the crisis. Even if this move helps mend credit markets, the economy is likely to suffer in the months ahead from the aftershocks of the recent turmoil.
A central plank of these new efforts is a plan for the Treasury to take about $250 billion in equity stakes in potentially thousands of banks, using funds approved by Congress through the recently approved $700 billion bailout plan.
Treasury will buy $25 billion in preferred stock in Bank of America -- including Merrill Lynch -- as well as J.P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman and Morgan Stanley; $3 billion in Bank of New York Mellon; and about $2 billion in State Street.
The government will purchase preferred stock, an equity investment designed to avoid hurting existing shareholders and deterring new ones. Such shares typically don't come with voting rights. They will carry a 5% annual dividend that rises to 9% after five years, according to a person familiar with the matter. By investing in several big firms at once, the government hopes to avoid placing a stigma on any one firm for getting government help.
The plan will be structured to encourage firms to bring in private capital. For instance, firms returning capital to the government by 2009 may get better terms for the government's stake, a person familiar with the discussions said.
Among the other key components of the plan is the FDIC temporarily guarantee, for a fee, certain types of new debt called senior unsecured debt issued by banks and thrifts. This would apply to debt issued by June 30 with maturities up to three years. One problem plaguing credit markets has been a fear among financial institutions that it is unsafe to lend to each other even for periods of a few days. U.S. officials hope this guarantee removes that fear, which could bring down short-term lending rates, such as the London interbank offered rate, or Libor, a benchmark for consumer and business loans.
The FDIC is also temporarily offering banks unlimited deposit insurance for non-interest bearing bank accounts typically used by small businesses, through 2009. This would be voluntary for banks, and would extend the $250,000 per depositor limit lawmakers agreed on two weeks ago. To use these new powers, the FDIC is invoking a "systemic risk" clause in federal banking law that allows it to take extreme steps to prevent shocks to the economy.
The FDIC's central role in the plan is consistent with its presence during past banking crises, the Great Depression and the savings and loan crisis. Each crisis sparked a major boost in the agency's power.
The shift brings U.S. policy more in line with that of other countries. Monday, the U.K., Germany, France, Spain and Italy provided further details of measures to buy stakes in struggling banks and offer lending guarantees. The U.K., which first formulated such a plan, is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three big banks.
“These are tough times for our economies. Yet we can be confident that we can work our way through these challenges.” President Bush in a joint statement with Prime Minister Berlusconi of Italy.
The U.S. plan to inject capital into banks is expected to be open to almost all such institutions, with a focus on getting the participation of the firms most important to the financial system, according to people familiar with the matter. Treasury's main goal is to attract private capital. To make sure private investors aren't scared away, it is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants, these people said.
The government's new focus is raising questions about why it didn't adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn't participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.
Senior executives and advisers to some of the nation's leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.
House Democratic leaders, including Speaker Nancy Pelosi and House Financial Services Committee Chairman Barney Frank, held a closed-door session Monday with 11 economists and other advisers. The group threw its weight behind Treasury's decision to inject capital into the banking system.
"The consensus was so strong towards direct equity injections that there was literally no dissension on the point," said one of the invited economists, Jared Bernstein of the liberal Economic Policy Institute. "The only head-scratching is why did it take us so long to get here?"
Officials at the Treasury and Federal Reserve have been looking for a comprehensive approach to the credit crisis after a series of ad hoc interventions and say they didn't have the authority to make such a comprehensive move until Congress passed the bailout bill. The government's various moves, from saving mortgage giants Fannie Mae and Freddie Mac to letting Lehman Brothers Holdings Inc. fail, have confused investors and frozen many in place at a time when the banking system was desperate for fresh capital. That contributed to what in essence was a high-level run on Wall Street banks, with funding drying up overnight.
The government's hope is that the new plan will more thoroughly address the problems of ailing financial institutions and persuade private investors that government involvement won't come at their expense.
For troubled assets there is the Troubled Asset Relief Program, created by the $700 billion bailout bill, which gives the Treasury Department authority to acquire bad assets from banks and other financial institutions. TARP will also be used by Treasury when it puts new equity into banks.
The other steps, including the FDIC's role in guaranteeing new funds raised by banks and thrifts, are designed to address the way banks fund themselves, freeing them to start lending again. The Fed is expected to announce Tuesday that a separate plan to lend directly to companies and banks through instruments called commercial paper will start in about two weeks.
William Poole, former president of the Federal Reserve Bank of St. Louis, was a fierce critic of Treasury's initial plan to buy up distressed mortgage-backed securities. Such a scheme, he said, would lead banks to dump their worst assets on the taxpayers.
But Treasury's new tack may well do the trick, said Mr. Poole, now a senior fellow at the free-market-oriented Cato Institute.
"Investors need to be confident that the banks they're dealing with are unquestionably solvent, and it's in the interest of banks to assure investors that that's the case," he said. "One way banks can provide that assurance is to raise additional capital, in some combination of private and government capital."
Dean Baker, co-director of the left-of-center Center for Economic and Policy Research, argues the country may have turned a corner on the financial panic -- the fear that has kept banks and investors from making even the most prudent loans. "I think we're through the worst on that," he said. "Maybe I'll be proven wrong, but it really was at an extreme last week."
Blanket guarantees, however, might inspire banks to take unnecessary risks, warned Frederic Mishkin, a Columbia University economist who stepped down as Fed governor in August. "You don't want to give a guarantee to banks that are in trouble" that might try to gamble their way out of problems, he said. He says offering broad guarantees will require that U.S. officials more aggressively act to sort out good banks from bad banks.
One sticking point could come from Congress, which wrote into the original bailout bill requirements that Treasury tamp down executive pay. Rep. Frank said Monday he wants the government to set tough conditions for any company that receives a capital injection. If Mr. Paulson didn't enforce such rules, Mr. Frank said the Treasury secretary could be "making a big mistake."
—Michael M. Phillips, David Enrich, Daniel Fitzpatrick, Susanne Craig and Robin Sidel contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com, Damian Paletta at damian.paletta@wsj.com, Jon Hilsenrath at jon.hilsenrath@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com
Treasury Considers Stakes in Insurance Companies
Now we see that the Treasury is going to buy equity stakes in insurance companies with the bailout money. To date, not one ‘toxic’ security has been purchased. The treasury has been given a blank check – and instead of helping homeowners or actually buying distressed securities – they are buying stakes in all types of financial/banking companies. Why? I believe they are doing this to gain more control. The question is – what happens when things begin to get even worse?
jg
OCTOBER 24, 2008, 2:32 P.M. ET
Treasury Considers Stakes in Insurance Companies
By DEBORAH SOLOMON
WASHINGTON -- The Treasury Department is considering taking equity stakes in insurance companies, a sign of how the government's $700 billion program has become a potential piggybank for a range of troubled industries.
The availability of government cash is drawing requests from all corners, with insurance firms, automakers, state governments and transit agencies lobbying for a piece of Treasury's pie. While Treasury intended for the program to apply broadly, the growing requests could rapidly deplete the $700 billion, an amount that initially stunned many as being quite large.
Among those expected to benefit from Treasury's program are insurance firms. Most insurance companies are financially sound but have seen their long-term investments and stock prices hurt by the recent market turmoil.
Treasury wants insurance companies to participate in its program, dubbed TARP, and is considering taking equity stakes in certain firms, according to people familiar with the matter.
For now, however, only certain insurance firms would be eligible for a capital infusion. Under the terms of Treasury's program, insurers would have to have a financial institution holding company that was regulated at the federal level.
Insurers would also be able to sell its bad assets to the government under a separate element of the program.
Write to Deborah Solomon at deborah.solomon@wsj.com
jg
OCTOBER 24, 2008, 2:32 P.M. ET
Treasury Considers Stakes in Insurance Companies
By DEBORAH SOLOMON
WASHINGTON -- The Treasury Department is considering taking equity stakes in insurance companies, a sign of how the government's $700 billion program has become a potential piggybank for a range of troubled industries.
The availability of government cash is drawing requests from all corners, with insurance firms, automakers, state governments and transit agencies lobbying for a piece of Treasury's pie. While Treasury intended for the program to apply broadly, the growing requests could rapidly deplete the $700 billion, an amount that initially stunned many as being quite large.
Among those expected to benefit from Treasury's program are insurance firms. Most insurance companies are financially sound but have seen their long-term investments and stock prices hurt by the recent market turmoil.
Treasury wants insurance companies to participate in its program, dubbed TARP, and is considering taking equity stakes in certain firms, according to people familiar with the matter.
For now, however, only certain insurance firms would be eligible for a capital infusion. Under the terms of Treasury's program, insurers would have to have a financial institution holding company that was regulated at the federal level.
Insurers would also be able to sell its bad assets to the government under a separate element of the program.
Write to Deborah Solomon at deborah.solomon@wsj.com
Most Presidents Ignore the Constitution
Pay very close attention to what this article is telling us – because our government’s disregard of our constitution is getting worse – much worse. I’m sure that at some point, we’ll be told that the Constitution is completely outdated and ill-suited to deal with whatever calamity is brought upon us (we see a lot of this already). Remember – it is this ‘old fashioned’ document that has held powerful interests in check for over two hundred years. There’s a reason the Constitution adds checks and balances to our government. Too much power is a very bad thing in this evil world. The founders of our nation were wise – they were not naïve people. They knew that over time, powerful interests could try to takeover the United States of America – from within.
If you study the Illuminati – you’ll see that there are two major obstacles to their plan for world government – the American Constitution and the American middle class. Our constitution creates a Republic where everyone has inalienable rights – not good if you want to control the world. You can’t have inalienable rights granted to the world’s people if you plan to rule the world with an iron fist. Our Constitution will not allow a small group of people to control the world. This is why it’s a stumbling block to the global elite.
The question becomes – if you’re trying to create a world government and the world’s most powerful Constitution stands in the way – how do you remove this Constitution? Do you make a direct assault and begin undermining the Constitution by direct legislation or Executive power? Not in this country. Nothing would cause us to rise up in defiance like a direct assault on our freedom. No – this would not be very effective and would certainly alert everyone to your hidden plans. The best way to begin to remove the rights granted by our Constitution is to do it very deceptively. Let’s make everyone believe that it’s necessary to remove the rights and freedoms provided to the American people – in the name of security. Let’s remove these freedoms under the guise of protection. Let’s create a perceived threat (a problem) and then propose a solution that seemingly solves the problem – while removing Constitutional rights. Now you know why the events of September 11, 2001 took place. In no time at all – the Patriot Act was passed by Congress. The Military Commissions Act then followed. George W. Bush has also signed many Executive Orders (bypassing Congress) that basically creates a dictatorship in the event of another ‘national disaster’. The rights granted by our Constitution are being systematically removed. Once again I must say that it’s an ingenious plan. Evil, but ingenious.
Why is the American middle class a threat? We (a very large group of people) wield too much political and economic power. How do you knock down such a large group of people? Would a direct assault work against us? No – not a chance. Again, deception must be used to overtake such a large group of educated people. How best to do this? If you control a nation’s economy – do you not control the people to a certain extent? You might let them focus on wealth and all of the wonderful things that wealth brings – for a time. When they have become soft and easily manipulated – you then pull the rug out from under them. Take away their wealth and their security – and watch them wither. We have placed our faith – not with our Creator – but with our money. If you take away someone’s money who is focused on wealth – you leave them with nothing. Will they not do whatever you ask in an attempt to get their wealth back – whatever the cost? You are now beginning to understand the Lord’s warnings about wealth. Wealth can come and it can go – do not put your faith in money – do not let it control you. Remember, we are ultimately fighting an evil, spiritual being. He knows what drives you. He knows where your weaknesses are.
What happens if you take away the wealth of a true believer? Does the world come crashing down? No – not at all. A child of God views a trial in this world as a test. A test that, once endured, will strengthen our faith. If we are given wealth, we will use it according to the Lord’s will to advance His kingdom. If we do not have wealth, we will still do whatever we can for the Lord. We are not tossed around by the world – it holds no power over us. Take away my wealth – fine. The Lord will provide. Try to force me to adhere to unbiblical doctrine? Try to make me worship something other than the One, true God? Now you’ve got a problem. I will not – cannot – proclaim something other than the Lord’s Word. I will not – cannot – worship something, anything – other than my Creator. Will not happen – ever. Threats will not work, persecution will not work, taking away my wealth will not work – because my focus is no longer on this world. I have been promised something greater – and that is where my treasure lies.
The following is an excerpt from the Article below. It speaks to two things – 1) our government is violating the constitution with the recent bailout and 2) Raiding the U.S. Treasury is a very bad idea. If you remember – one of the very first posts on this blog related to Alexander Tyler’s study of democracy and why all democracies have eventually failed. We’re watching the theory play out before us.
“The $700 billion bailout of large banks that Congress recently enacted runs afoul of virtually all these constitutional principles. It directly benefits a few, not everyone. We already know that the favored banks that received cash from taxpayers have used it to retire their own debt. It is private welfare. It violates the principle of equal protection: Why help Bank of America and not Lehman Brothers? It permits federal ownership of assets or debt that puts the government at odds with others in the free market. It permits the government to tilt the playing field to favor its patrons (like J.P. Morgan Chase, in which it has invested taxpayer dollars) and to disfavor those who compete with its patrons (like the perfectly lawful hedge funds which will not have the taxpayers relieve their debts).
Perhaps the only public agreement that Jefferson and Hamilton had about the Constitution was that the federal Treasury would be raided and the free market would expire if the Treasury became a public trough. If it does, the voters will send to Congress those whom they expect will fleece the Treasury for them. That's why the Founders wrote such strict legislating and spending limitations into the Constitution.”
jg – October 29, 2008
________________________
OCTOBER 29, 2008
Most Presidents Ignore the Constitution
The government we have today is something the Founders could never have imagined.
By ANDREW P. NAPOLITANO
Wall St. Journal
In a radio interview in 2001, then-Illinois State Sen. Barack Obama noted -- somewhat ruefully -- that the same Supreme Court that ordered political and educational equality in the 1960s and 1970s did not bring about economic equality as well. Although Mr. Obama said he could come up with arguments for the constitutionality of such action, the plain meaning of the Constitution quite obviously prohibits it.
Mr. Obama is hardly alone in his expansive view of legitimate government. During the past month, Sen. John McCain (who, like Sen. Obama, voted in favor of the $700 billion bank bailout) has been advocating that $300 billion be spent to pay the monthly mortgage payments of those in danger of foreclosure. The federal government is legally powerless to do that, as well.
When Franklin Delano Roosevelt first proposed legislation that authorized the secretary of agriculture to engage in Soviet-style central planning -- a program so rigid that it regulated how much wheat a homeowner could grow for his own family's consumption -- he rejected arguments of unconstitutionality. He proclaimed that the Constitution was "quaint" and written in the "horse and buggy era," and predicted the public and the courts would agree with him.
Remember that FDR had taken -- and either Mr. Obama or Mr. McCain will soon take -- the oath to uphold that old-fashioned document, the one from which all presidential powers come.
Unfortunately, these presidential attitudes about the Constitution are par for the course. Beginning with John Adams, and proceeding to Abraham Lincoln, Woodrow Wilson and George W. Bush, Congress has enacted and the president has signed laws that criminalized political speech, suspended habeas corpus, compelled support for war, forbade freedom of contract, allowed the government to spy on Americans without a search warrant, and used taxpayer dollars to shore up failing private banks.
All of this legislation -- merely tips of an unconstitutional Big Government iceberg -- is so obviously in conflict with the plain words of the Constitution that one wonders how Congress gets away with it.
In virtually every generation and during virtually every presidency (Jefferson, Jackson and Cleveland are exceptions that come to mind) the popular branches of government have expanded their power. The air you breathe, the water you drink, the size of your toilet tank, the water pressure in your shower, the words you can speak under oath and in private, how your physician treats your illness, what your children study in grade school, how fast you can drive your car, and what you can drink before you drive it are all regulated by federal law. Congress has enacted over 4,000 federal crimes and written or authorized over one million pages of laws and regulations. Worse, we are expected by law to understand all of it.
The truth is that the Constitution grants Congress 17 specific (or "delegated") powers. And it commands in the Ninth and 10th Amendments that the powers not articulated and thus not delegated by the Constitution to Congress be reserved to the states and the people.
What's more, Congress can only use its delegated powers to legislate for the general welfare, meaning it cannot spend tax dollars on individuals or selected entities, but only for all of us. That is, it must spend in such a manner -- a post office, a military installation, a courthouse, for example -- that directly enhances everyone's welfare within the 17 delegated areas of congressional authority.
And Congress cannot deny the equal protection of the laws. Thus, it must treat similarly situated persons or entities in a similar manner. It cannot write laws that favor its political friends and burden its political enemies.
There is no power in the Constitution for the federal government to enter the marketplace since, when it does, it will favor itself over its competition. The Contracts Clause (the states cannot interfere with private contracts, like mortgages), the Takings Clause (no government can take away property, like real estate or shares of stock, without paying a fair market value for it and putting it to a public use), and the Due Process Clause (no government can take away a right or obligation, like collecting or paying a debt, or enforcing a contract, without a fair trial) together mandate a free market, regulated only to keep it fair and competitive.
It is clear that the Framers wrote a Constitution as a result of which contracts would be enforced, risk would be real, choices would be free and have consequences, and private property would be sacrosanct.
The $700 billion bailout of large banks that Congress recently enacted runs afoul of virtually all these constitutional principles. It directly benefits a few, not everyone. We already know that the favored banks that received cash from taxpayers have used it to retire their own debt. It is private welfare. It violates the principle of equal protection: Why help Bank of America and not Lehman Brothers? It permits federal ownership of assets or debt that puts the government at odds with others in the free market. It permits the government to tilt the playing field to favor its patrons (like J.P. Morgan Chase, in which it has invested taxpayer dollars) and to disfavor those who compete with its patrons (like the perfectly lawful hedge funds which will not have the taxpayers relieve their debts).
Perhaps the only public agreement that Jefferson and Hamilton had about the Constitution was that the federal Treasury would be raided and the free market would expire if the Treasury became a public trough. If it does, the voters will send to Congress those whom they expect will fleece the Treasury for them. That's why the Founders wrote such strict legislating and spending limitations into the Constitution.
Everyone in government takes an oath to uphold the Constitution. But few do so. Do the people we send to the federal government recognize any limits today on Congress's power to legislate? The answer is: Yes, their own perception of whatever they can get away with.
Mr. Napolitano, who served on the bench of the Superior Court of New Jersey between 1987 and 1995, is the senior judicial analyst at the Fox News Channel. His latest book is "A Nation of Sheep" (Nelson, 2007).
If you study the Illuminati – you’ll see that there are two major obstacles to their plan for world government – the American Constitution and the American middle class. Our constitution creates a Republic where everyone has inalienable rights – not good if you want to control the world. You can’t have inalienable rights granted to the world’s people if you plan to rule the world with an iron fist. Our Constitution will not allow a small group of people to control the world. This is why it’s a stumbling block to the global elite.
The question becomes – if you’re trying to create a world government and the world’s most powerful Constitution stands in the way – how do you remove this Constitution? Do you make a direct assault and begin undermining the Constitution by direct legislation or Executive power? Not in this country. Nothing would cause us to rise up in defiance like a direct assault on our freedom. No – this would not be very effective and would certainly alert everyone to your hidden plans. The best way to begin to remove the rights granted by our Constitution is to do it very deceptively. Let’s make everyone believe that it’s necessary to remove the rights and freedoms provided to the American people – in the name of security. Let’s remove these freedoms under the guise of protection. Let’s create a perceived threat (a problem) and then propose a solution that seemingly solves the problem – while removing Constitutional rights. Now you know why the events of September 11, 2001 took place. In no time at all – the Patriot Act was passed by Congress. The Military Commissions Act then followed. George W. Bush has also signed many Executive Orders (bypassing Congress) that basically creates a dictatorship in the event of another ‘national disaster’. The rights granted by our Constitution are being systematically removed. Once again I must say that it’s an ingenious plan. Evil, but ingenious.
Why is the American middle class a threat? We (a very large group of people) wield too much political and economic power. How do you knock down such a large group of people? Would a direct assault work against us? No – not a chance. Again, deception must be used to overtake such a large group of educated people. How best to do this? If you control a nation’s economy – do you not control the people to a certain extent? You might let them focus on wealth and all of the wonderful things that wealth brings – for a time. When they have become soft and easily manipulated – you then pull the rug out from under them. Take away their wealth and their security – and watch them wither. We have placed our faith – not with our Creator – but with our money. If you take away someone’s money who is focused on wealth – you leave them with nothing. Will they not do whatever you ask in an attempt to get their wealth back – whatever the cost? You are now beginning to understand the Lord’s warnings about wealth. Wealth can come and it can go – do not put your faith in money – do not let it control you. Remember, we are ultimately fighting an evil, spiritual being. He knows what drives you. He knows where your weaknesses are.
What happens if you take away the wealth of a true believer? Does the world come crashing down? No – not at all. A child of God views a trial in this world as a test. A test that, once endured, will strengthen our faith. If we are given wealth, we will use it according to the Lord’s will to advance His kingdom. If we do not have wealth, we will still do whatever we can for the Lord. We are not tossed around by the world – it holds no power over us. Take away my wealth – fine. The Lord will provide. Try to force me to adhere to unbiblical doctrine? Try to make me worship something other than the One, true God? Now you’ve got a problem. I will not – cannot – proclaim something other than the Lord’s Word. I will not – cannot – worship something, anything – other than my Creator. Will not happen – ever. Threats will not work, persecution will not work, taking away my wealth will not work – because my focus is no longer on this world. I have been promised something greater – and that is where my treasure lies.
The following is an excerpt from the Article below. It speaks to two things – 1) our government is violating the constitution with the recent bailout and 2) Raiding the U.S. Treasury is a very bad idea. If you remember – one of the very first posts on this blog related to Alexander Tyler’s study of democracy and why all democracies have eventually failed. We’re watching the theory play out before us.
“The $700 billion bailout of large banks that Congress recently enacted runs afoul of virtually all these constitutional principles. It directly benefits a few, not everyone. We already know that the favored banks that received cash from taxpayers have used it to retire their own debt. It is private welfare. It violates the principle of equal protection: Why help Bank of America and not Lehman Brothers? It permits federal ownership of assets or debt that puts the government at odds with others in the free market. It permits the government to tilt the playing field to favor its patrons (like J.P. Morgan Chase, in which it has invested taxpayer dollars) and to disfavor those who compete with its patrons (like the perfectly lawful hedge funds which will not have the taxpayers relieve their debts).
Perhaps the only public agreement that Jefferson and Hamilton had about the Constitution was that the federal Treasury would be raided and the free market would expire if the Treasury became a public trough. If it does, the voters will send to Congress those whom they expect will fleece the Treasury for them. That's why the Founders wrote such strict legislating and spending limitations into the Constitution.”
jg – October 29, 2008
________________________
OCTOBER 29, 2008
Most Presidents Ignore the Constitution
The government we have today is something the Founders could never have imagined.
By ANDREW P. NAPOLITANO
Wall St. Journal
In a radio interview in 2001, then-Illinois State Sen. Barack Obama noted -- somewhat ruefully -- that the same Supreme Court that ordered political and educational equality in the 1960s and 1970s did not bring about economic equality as well. Although Mr. Obama said he could come up with arguments for the constitutionality of such action, the plain meaning of the Constitution quite obviously prohibits it.
Mr. Obama is hardly alone in his expansive view of legitimate government. During the past month, Sen. John McCain (who, like Sen. Obama, voted in favor of the $700 billion bank bailout) has been advocating that $300 billion be spent to pay the monthly mortgage payments of those in danger of foreclosure. The federal government is legally powerless to do that, as well.
When Franklin Delano Roosevelt first proposed legislation that authorized the secretary of agriculture to engage in Soviet-style central planning -- a program so rigid that it regulated how much wheat a homeowner could grow for his own family's consumption -- he rejected arguments of unconstitutionality. He proclaimed that the Constitution was "quaint" and written in the "horse and buggy era," and predicted the public and the courts would agree with him.
Remember that FDR had taken -- and either Mr. Obama or Mr. McCain will soon take -- the oath to uphold that old-fashioned document, the one from which all presidential powers come.
Unfortunately, these presidential attitudes about the Constitution are par for the course. Beginning with John Adams, and proceeding to Abraham Lincoln, Woodrow Wilson and George W. Bush, Congress has enacted and the president has signed laws that criminalized political speech, suspended habeas corpus, compelled support for war, forbade freedom of contract, allowed the government to spy on Americans without a search warrant, and used taxpayer dollars to shore up failing private banks.
All of this legislation -- merely tips of an unconstitutional Big Government iceberg -- is so obviously in conflict with the plain words of the Constitution that one wonders how Congress gets away with it.
In virtually every generation and during virtually every presidency (Jefferson, Jackson and Cleveland are exceptions that come to mind) the popular branches of government have expanded their power. The air you breathe, the water you drink, the size of your toilet tank, the water pressure in your shower, the words you can speak under oath and in private, how your physician treats your illness, what your children study in grade school, how fast you can drive your car, and what you can drink before you drive it are all regulated by federal law. Congress has enacted over 4,000 federal crimes and written or authorized over one million pages of laws and regulations. Worse, we are expected by law to understand all of it.
The truth is that the Constitution grants Congress 17 specific (or "delegated") powers. And it commands in the Ninth and 10th Amendments that the powers not articulated and thus not delegated by the Constitution to Congress be reserved to the states and the people.
What's more, Congress can only use its delegated powers to legislate for the general welfare, meaning it cannot spend tax dollars on individuals or selected entities, but only for all of us. That is, it must spend in such a manner -- a post office, a military installation, a courthouse, for example -- that directly enhances everyone's welfare within the 17 delegated areas of congressional authority.
And Congress cannot deny the equal protection of the laws. Thus, it must treat similarly situated persons or entities in a similar manner. It cannot write laws that favor its political friends and burden its political enemies.
There is no power in the Constitution for the federal government to enter the marketplace since, when it does, it will favor itself over its competition. The Contracts Clause (the states cannot interfere with private contracts, like mortgages), the Takings Clause (no government can take away property, like real estate or shares of stock, without paying a fair market value for it and putting it to a public use), and the Due Process Clause (no government can take away a right or obligation, like collecting or paying a debt, or enforcing a contract, without a fair trial) together mandate a free market, regulated only to keep it fair and competitive.
It is clear that the Framers wrote a Constitution as a result of which contracts would be enforced, risk would be real, choices would be free and have consequences, and private property would be sacrosanct.
The $700 billion bailout of large banks that Congress recently enacted runs afoul of virtually all these constitutional principles. It directly benefits a few, not everyone. We already know that the favored banks that received cash from taxpayers have used it to retire their own debt. It is private welfare. It violates the principle of equal protection: Why help Bank of America and not Lehman Brothers? It permits federal ownership of assets or debt that puts the government at odds with others in the free market. It permits the government to tilt the playing field to favor its patrons (like J.P. Morgan Chase, in which it has invested taxpayer dollars) and to disfavor those who compete with its patrons (like the perfectly lawful hedge funds which will not have the taxpayers relieve their debts).
Perhaps the only public agreement that Jefferson and Hamilton had about the Constitution was that the federal Treasury would be raided and the free market would expire if the Treasury became a public trough. If it does, the voters will send to Congress those whom they expect will fleece the Treasury for them. That's why the Founders wrote such strict legislating and spending limitations into the Constitution.
Everyone in government takes an oath to uphold the Constitution. But few do so. Do the people we send to the federal government recognize any limits today on Congress's power to legislate? The answer is: Yes, their own perception of whatever they can get away with.
Mr. Napolitano, who served on the bench of the Superior Court of New Jersey between 1987 and 1995, is the senior judicial analyst at the Fox News Channel. His latest book is "A Nation of Sheep" (Nelson, 2007).
U.S. Treasury Seeks Unprecedented Borrowing
Dr. Martenson says it all here. If anyone thinks that this can continue indefinitely – you’re living in a fantasy.
jg – Oct 30, 2008
______________
Treasury seeks "unprecedented borrowing"
Thursday, October 30, 2008, 5:19 pm, by cmartenson
I nominate this for understatement of the year:
Ryan Says Treasury to Need `Unprecedented' Financing
``This year's financing needs will be unprecedented,'' said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitute for Treasury Secretary Henry Paulson.
"Unprecedented" hardly does this justice, we need a more superlative word. "Ginormous" comes to mind.
Perhaps the Germans have a single word that means "future destroying" we could use.
Mr Ryan continues:
Ryan said the Bush administration's July projection of a $482 billion deficit doesn't include new programs launched to attack the credit crisis. The bank rescue program, a separate mortgage-backed securities program, the Fannie-Freddie takeover and a student loan program all need funding, Ryan said. Also, the Treasury is borrowing money on behalf of the Federal Reserve and the Federal Deposit Insurance Corp., he said.
First, how come we don't have a more recent budget projection than from last July? A lot has happened since and I think the Treasury markets would enjoy a bit of guidance on how much paper they will be asked to absorb. Also, I deplore the use of budget projections that exclude items that are, uh, part of the budget.
And here's one estimate of the range of total borrowing:
``The budget deficit for fiscal year 2009 might reach $1 trillion if Congress passes another stimulus package this winter,'' said Lou Crandall, chief economist of Wrightson ICAP, in a research note. ``And that's just the beginning of the bad news -- financing needs arising from off-budget items might be nearly as large as the on-budget deficit.''
Crandall estimates 2009's total borrowing needs at $1.95 trillion. He says Treasury could raise this money with an ``aggressive but sustainable'' increase in regular borrowing, accompanied by one-time auctions as needed.
The difference, I suppose, between the $1 trillion and the $1.95 trillion number is the difference between the fiscal year (Sept 30 - Sept 30) and the calendar year. So I guess Mr Crandall expects nearly a trillion of additional borrowing in the final 3 months of 2009.
For the record, because I factor in a loss of tax revenues and additional stimulus packages, I place next year's fiscal year borrowing at between $2 trillion and $2.5 trillion.
Also, I am cheating a little by knowing that this year's deficit was nearly $1.3 trillion (the first $1 trillion plus deficit on record) even though only $455 billion of that was publicly admitted to by the Bush administration.
I have no good explanation for why the registered deficit was 179% larger than the admitted deficit. Normally the difference is in the vicinity of the excess Social Security funds that were siphoned off, or about $180 billion.
This difference is a whopping $815 billion.
My suspicion is that some of this can be found over on the Federal Reserve Balance sheet but I cannot prove that yet.
Bottom line: The US Treasury department is about to shatter every borrowing record in all of history. Why is China continuing to hold all those US dollars?
jg – Oct 30, 2008
______________
Treasury seeks "unprecedented borrowing"
Thursday, October 30, 2008, 5:19 pm, by cmartenson
I nominate this for understatement of the year:
Ryan Says Treasury to Need `Unprecedented' Financing
``This year's financing needs will be unprecedented,'' said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitute for Treasury Secretary Henry Paulson.
"Unprecedented" hardly does this justice, we need a more superlative word. "Ginormous" comes to mind.
Perhaps the Germans have a single word that means "future destroying" we could use.
Mr Ryan continues:
Ryan said the Bush administration's July projection of a $482 billion deficit doesn't include new programs launched to attack the credit crisis. The bank rescue program, a separate mortgage-backed securities program, the Fannie-Freddie takeover and a student loan program all need funding, Ryan said. Also, the Treasury is borrowing money on behalf of the Federal Reserve and the Federal Deposit Insurance Corp., he said.
First, how come we don't have a more recent budget projection than from last July? A lot has happened since and I think the Treasury markets would enjoy a bit of guidance on how much paper they will be asked to absorb. Also, I deplore the use of budget projections that exclude items that are, uh, part of the budget.
And here's one estimate of the range of total borrowing:
``The budget deficit for fiscal year 2009 might reach $1 trillion if Congress passes another stimulus package this winter,'' said Lou Crandall, chief economist of Wrightson ICAP, in a research note. ``And that's just the beginning of the bad news -- financing needs arising from off-budget items might be nearly as large as the on-budget deficit.''
Crandall estimates 2009's total borrowing needs at $1.95 trillion. He says Treasury could raise this money with an ``aggressive but sustainable'' increase in regular borrowing, accompanied by one-time auctions as needed.
The difference, I suppose, between the $1 trillion and the $1.95 trillion number is the difference between the fiscal year (Sept 30 - Sept 30) and the calendar year. So I guess Mr Crandall expects nearly a trillion of additional borrowing in the final 3 months of 2009.
For the record, because I factor in a loss of tax revenues and additional stimulus packages, I place next year's fiscal year borrowing at between $2 trillion and $2.5 trillion.
Also, I am cheating a little by knowing that this year's deficit was nearly $1.3 trillion (the first $1 trillion plus deficit on record) even though only $455 billion of that was publicly admitted to by the Bush administration.
I have no good explanation for why the registered deficit was 179% larger than the admitted deficit. Normally the difference is in the vicinity of the excess Social Security funds that were siphoned off, or about $180 billion.
This difference is a whopping $815 billion.
My suspicion is that some of this can be found over on the Federal Reserve Balance sheet but I cannot prove that yet.
Bottom line: The US Treasury department is about to shatter every borrowing record in all of history. Why is China continuing to hold all those US dollars?
Rescue Cash Lures Thousands of Banks
This quote from the article below says it all:
"There's a perception in the market that the government is actively picking winners and losers...we wanted it well-known in the market that we're on the list of survivors,"
Now that the government has gotten into the banking business – free markets are being turned upside down. No one wants to be left out – so the tentacles of government continue to spread throughout our banking system.
Everyone is running in fear – and they can’t see the danger.
jg
___________________________________
NOVEMBER 3, 2008
Rescue Cash Lures Thousands of Banks
By ELIZABETH WILLIAMSON
Wall St. Journal
WASHINGTON -- Treasury and banking regulators say as many as 1,800 publicly held institutions could apply for government investments in coming weeks, out of concern that failing to do so could make them losers in a banking sector reshaped by the Treasury's $700 billion rescue plan.
Depending upon conditions still being crafted by Treasury, thousands more private banks could apply for government capital as well, a Treasury spokeswoman said Sunday.
Only days ago, many healthy banks were saying they didn't need taxpayer money under the Troubled Asset Relief Program. These healthy banks said they worried that taking government investments could unfairly tar them as in need of a bailout. In the past week, that perception has been reversed, due in large part to efforts by Treasury, banking lobbyists and legal advisers to sell the TARP.
Henry Paulson, secretary of the Treasury Department, which has been making efforts in the past week to persuade banks to apply for capital infusions from the government as part of the financial-rescue package.
Now institutions across the U.S. worry that if they don't try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.
"There's a perception in the market that the government is actively picking winners and losers...we wanted it well-known in the market that we're on the list of survivors," said Roy Whitehead, chairman, president and CEO of Washington Federal Inc. in Seattle, one of about 20 regional banks approved by Treasury for the program last week.
In the past week, Treasury said, hundreds of publicly traded institutions have applied for the program, or signaled their intent to do so by the Nov. 14 deadline. Responding to lobbying by banking trade groups and their members, Treasury last week extended that deadline for private banks to give them a chance to apply as well.
Under the program, Treasury takes an equity stake in an institution in exchange for an investment of as much as 3% of risk-weighted assets, to a maximum of $25 billion.
Treasury spokeswoman Jennifer Zuccarelli said architects of the Treasury program anticipated the huge interest, and that the $125 billion remaining for the program after the first nine big banks committed to the funds in October will be enough.
But with new types of institutions -- last week, Treasury said insurers would be eligible -- being added almost weekly, some banks and their advisers say they aren't so sure. They are scrambling to commit to the program, worried they will be left out in the cold when the deadline passes.
"It seemed like the consensus in the industry was...go out and get this," said William Marsh, president and chief executive of Farmers National Bank of Emlenton, in Emlenton, Pa. Mr. Marsh said his bank is healthy and viable without government money, but he leans toward taking the money anyway.
Helping banks to understand and apply for the Capital Purchase Program has become a cottage industry in Washington, where firms with lobbyists and lawyers under the same roof have been adding banking clients by the dozens.
In a seafood restaurant in Washington's Georgetown neighborhood Friday, Norman Antin, a partner in Patton Boggs's banking and regulatory group, read a note on his BlackBerry. House Financial Services Chairman Barney Frank, it said, is joining other Democratic leaders in demanding government money be used for lending first, not acquisitions. Banks and their lobbyists, like those at Patton Boggs, oppose such restrictions. They are in constant contact with bank regulators and lawmakers on Capitol Hill, and send dispatches on developments in the ever-changing program to clients in real time.
Patton Boggs partner Kevin Houlihan said the firm's banking and regulatory group now spends half its time on TARP, though the firm declines to break out the revenue created by the sector. Last week, after Treasury re-emphasized that only healthy banks would qualify for the program, five bankers contacted him in a day. He encouraged them all to apply.
"It's cheap capital, cheap insurance and a bonus for the institutions that are participating," he said.
Lawyers at Skadden, Arps, Slate, Meagher & Flom, whose Washington office is located 50 yards from the Treasury, are marrying banks with private investors to improve their financial picture -- and their chances of being approved for TARP.
Some banks are still reluctant to participate in the government program. Last week, Cullen/Frost Bankers Inc. one of Texas' largest banking institutions, issued a news release explaining why it won't apply for government funds. "Cullen/Frost is well capitalized now and for the foreseeable future, with sufficient capital to grow our business and take advantage of acquisition opportunities," Cullen/Frost Chairman and CEO Dick Evans said in the statement.
Such banks are now in the minority, said Hal Reichwald, co-chair of the financial-services group at Manatt, Phelps & Phillips LLP in Los Angeles. About 100 Manatt clients, old and new, are considering TARP capital, and more are in the pipeline.
—Daniel Fitzpatrick contributed to this article.
Write to Elizabeth Williamson at elizabeth.williamson@wsj.com
"There's a perception in the market that the government is actively picking winners and losers...we wanted it well-known in the market that we're on the list of survivors,"
Now that the government has gotten into the banking business – free markets are being turned upside down. No one wants to be left out – so the tentacles of government continue to spread throughout our banking system.
Everyone is running in fear – and they can’t see the danger.
jg
___________________________________
NOVEMBER 3, 2008
Rescue Cash Lures Thousands of Banks
By ELIZABETH WILLIAMSON
Wall St. Journal
WASHINGTON -- Treasury and banking regulators say as many as 1,800 publicly held institutions could apply for government investments in coming weeks, out of concern that failing to do so could make them losers in a banking sector reshaped by the Treasury's $700 billion rescue plan.
Depending upon conditions still being crafted by Treasury, thousands more private banks could apply for government capital as well, a Treasury spokeswoman said Sunday.
Only days ago, many healthy banks were saying they didn't need taxpayer money under the Troubled Asset Relief Program. These healthy banks said they worried that taking government investments could unfairly tar them as in need of a bailout. In the past week, that perception has been reversed, due in large part to efforts by Treasury, banking lobbyists and legal advisers to sell the TARP.
Henry Paulson, secretary of the Treasury Department, which has been making efforts in the past week to persuade banks to apply for capital infusions from the government as part of the financial-rescue package.
Now institutions across the U.S. worry that if they don't try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.
"There's a perception in the market that the government is actively picking winners and losers...we wanted it well-known in the market that we're on the list of survivors," said Roy Whitehead, chairman, president and CEO of Washington Federal Inc. in Seattle, one of about 20 regional banks approved by Treasury for the program last week.
In the past week, Treasury said, hundreds of publicly traded institutions have applied for the program, or signaled their intent to do so by the Nov. 14 deadline. Responding to lobbying by banking trade groups and their members, Treasury last week extended that deadline for private banks to give them a chance to apply as well.
Under the program, Treasury takes an equity stake in an institution in exchange for an investment of as much as 3% of risk-weighted assets, to a maximum of $25 billion.
Treasury spokeswoman Jennifer Zuccarelli said architects of the Treasury program anticipated the huge interest, and that the $125 billion remaining for the program after the first nine big banks committed to the funds in October will be enough.
But with new types of institutions -- last week, Treasury said insurers would be eligible -- being added almost weekly, some banks and their advisers say they aren't so sure. They are scrambling to commit to the program, worried they will be left out in the cold when the deadline passes.
"It seemed like the consensus in the industry was...go out and get this," said William Marsh, president and chief executive of Farmers National Bank of Emlenton, in Emlenton, Pa. Mr. Marsh said his bank is healthy and viable without government money, but he leans toward taking the money anyway.
Helping banks to understand and apply for the Capital Purchase Program has become a cottage industry in Washington, where firms with lobbyists and lawyers under the same roof have been adding banking clients by the dozens.
In a seafood restaurant in Washington's Georgetown neighborhood Friday, Norman Antin, a partner in Patton Boggs's banking and regulatory group, read a note on his BlackBerry. House Financial Services Chairman Barney Frank, it said, is joining other Democratic leaders in demanding government money be used for lending first, not acquisitions. Banks and their lobbyists, like those at Patton Boggs, oppose such restrictions. They are in constant contact with bank regulators and lawmakers on Capitol Hill, and send dispatches on developments in the ever-changing program to clients in real time.
Patton Boggs partner Kevin Houlihan said the firm's banking and regulatory group now spends half its time on TARP, though the firm declines to break out the revenue created by the sector. Last week, after Treasury re-emphasized that only healthy banks would qualify for the program, five bankers contacted him in a day. He encouraged them all to apply.
"It's cheap capital, cheap insurance and a bonus for the institutions that are participating," he said.
Lawyers at Skadden, Arps, Slate, Meagher & Flom, whose Washington office is located 50 yards from the Treasury, are marrying banks with private investors to improve their financial picture -- and their chances of being approved for TARP.
Some banks are still reluctant to participate in the government program. Last week, Cullen/Frost Bankers Inc. one of Texas' largest banking institutions, issued a news release explaining why it won't apply for government funds. "Cullen/Frost is well capitalized now and for the foreseeable future, with sufficient capital to grow our business and take advantage of acquisition opportunities," Cullen/Frost Chairman and CEO Dick Evans said in the statement.
Such banks are now in the minority, said Hal Reichwald, co-chair of the financial-services group at Manatt, Phelps & Phillips LLP in Los Angeles. About 100 Manatt clients, old and new, are considering TARP capital, and more are in the pipeline.
—Daniel Fitzpatrick contributed to this article.
Write to Elizabeth Williamson at elizabeth.williamson@wsj.com
Economic Crisis Continues
A few highlights from articles in today’s Wall St. Journal. People are placing their hope with Central Banks (rate cuts, increased liquidity, etc) and governments – which I’ve said before - is not a wise move. The question becomes – how long before stock markets figure out what’s happening with the rest of the economy? You know it’s serious when experienced business executives issue quotes like this:
"the worst month in the post-World War II era"
"This is clearly a severe, severe recession."
"Never in all of the years I've been in business have I seen a worse outlook for the economy"
“never in all my years as a bookseller have I seen a retail climate as poor as the one we are in. Nothing even close."
What about the bailout? Not helping – but it is adding significant debt to the U.S.:
“The U.S. Treasury estimated it will borrow a record $550 billion in marketable debt in the October-December quarter to pay for a slew of emergency programs aimed at easing the credit crunch.”
jg – Nov 3, 2008
DETROIT--U.S. auto sales in October plunged an estimated 31% to about 850,000 vehicles, as the financial crisis and tightening credit kept buyers away from showrooms. It was the first time since February 1993 that auto makers sold fewer than 900,000 cars and light trucks in a month. When adjusted for increases in the U.S. population, October was "the worst month in the post-World War II era," Michael DiGiovanni, the top sales analyst at General Motors Corp., said in an conference call. "This is clearly a severe, severe recession."
WASHINGTON -- Amid uncertainty about the economic outlook, U.S. banks continued to tighten their standards on loans to households and businesses in the third quarter, according to a Federal Reserve survey of bank executives."Large net fractions of domestic institutions reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months," said the survey, released Monday. Additionally, banks said the uncertain economic outlook and their reduced tolerance for risk also prompted them to reduce credit limits on existing credit card accounts to both prime and nonprime borrowers.
Manufacturing activity in the U.S. slowed sharply in October, falling to the lowest level since 1982 and signaling that a recession is at hand. On the eve of Election Day, the Institute for Supply Management reported that overall activity sank to 38.9 last month from 43.5 in September. Only two industries—computer and electronic products and apparel—reported growth, while 16 industries, including furniture, plastics and petroleum products, reported contraction. It was the first ISM reading this year to herald a recession.
Circuit City Stores Inc., the second largest consumer electronics chain in the U.S., said it will immediately close and liquidate 155 stores and lay off thousands of employees as it struggles to survive an increasingly dreary holiday shopping season. Citing a deteriorating economy, tightening credit limits by its suppliers, and an updated assessment that found its inventory was worth less than it expected, Circuit City said it would close the stores in 55 U.S. markets Tuesday and immediately begin liquidation sales on Wednesday.
PARIS -- Société Générale SA Monday said net profit in the third quarter fell by 84%, as the French bank increased its provisions and continued to reduce its exposure to risky assets. France's second-largest bank said net profit fell to €183 million ($233.2 million) from €1.12 billion in the same period a year earlier. Third-quarter revenue slid 5% to €5.11 billion from €5.38 billion in the year-earlier period.
Viacom Inc.'s third-quarter net income fell 37% as the media company faced challenges in both its networks and filmed-entertainment segments. "The economic environment and ongoing uncertainty have posed new challenges for the media industry, and Viacom has not been immune to the impact of these forces," said Chief Executive Philippe Dauman.
The souring economy is aggravating the troubles of Whole Foods Market Inc., a onetime Wall Street darling now mired in a nearly three-year slump. Analysts say the upscale grocer probably will have to trim its earnings forecast for the current fiscal year and announce further cuts to capital spending or new-store plans when it reports fiscal fourth-quarter results Wednesday.
WASHINGTON -- The U.S. Treasury estimated it will borrow a record $550 billion in marketable debt in the October-December quarter to pay for a slew of emergency programs aimed at easing the credit crunch. The $550 billion estimate is $408 billion more than what Treasury projected in July 2008. The latest projection for the current quarter would leave the Treasury with an estimated end-of-December cash balance of $300 billion. That figure includes $260 billion for a new program Treasury created in September to help finance new Federal Reserve programs to address liquidity pressures in financial markets. "The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of state and local government series securities," Treasury said in a notice Monday afternoon.
For months, many mutual-fund investors could take comfort in this: They had endured worse during the tech-stock collapse. The hard lessons learned from that earlier, harrowing ride led many to believe they were better positioned for this bear market. But U.S. stock-market declines during October were so deep and wide that even tame investments were pummeled. Losses from the steep plunge that began just over a year ago now top those from 2000-2002.
Grim. There's no other word for the European Commission's outlook for the euro zone and wider European Union economy in its regular autumn survey. But the outlook may get grimmer yet for those countries with the biggest current account deficits unless the European Central Bank comes up with a series of sharp interest-rate cuts. That would probably see the euro fall even further against the dollar.
The chairman of Barnes & Noble Inc. last week told employees via an internal memo that the nation's largest bookstore retailer is "bracing for a terrible holiday season," and that he expects "the trend to continue well into 2009, and perhaps beyond." "Never in all of the years I've been in business have I seen a worse outlook for the economy," wrote Mr. Riggio. "And never in all my years as a bookseller have I seen a retail climate as poor as the one we are in. Nothing even close."
Private-equity firm KKR & Co. LP won't complete its initial public offering until 2009, once again delaying its going-public plans amid the growing financial crisis.
BRUSSELS -- The euro-zone economy is now in recession and will remain at a standstill for most of next year, the European Commission said Monday in its autumn forecast. The commission, the European Union's executive arm, said financial markets are still in a "precarious" condition, creating significant risks to its already bleak economic outlook.
"the worst month in the post-World War II era"
"This is clearly a severe, severe recession."
"Never in all of the years I've been in business have I seen a worse outlook for the economy"
“never in all my years as a bookseller have I seen a retail climate as poor as the one we are in. Nothing even close."
What about the bailout? Not helping – but it is adding significant debt to the U.S.:
“The U.S. Treasury estimated it will borrow a record $550 billion in marketable debt in the October-December quarter to pay for a slew of emergency programs aimed at easing the credit crunch.”
jg – Nov 3, 2008
DETROIT--U.S. auto sales in October plunged an estimated 31% to about 850,000 vehicles, as the financial crisis and tightening credit kept buyers away from showrooms. It was the first time since February 1993 that auto makers sold fewer than 900,000 cars and light trucks in a month. When adjusted for increases in the U.S. population, October was "the worst month in the post-World War II era," Michael DiGiovanni, the top sales analyst at General Motors Corp., said in an conference call. "This is clearly a severe, severe recession."
WASHINGTON -- Amid uncertainty about the economic outlook, U.S. banks continued to tighten their standards on loans to households and businesses in the third quarter, according to a Federal Reserve survey of bank executives."Large net fractions of domestic institutions reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months," said the survey, released Monday. Additionally, banks said the uncertain economic outlook and their reduced tolerance for risk also prompted them to reduce credit limits on existing credit card accounts to both prime and nonprime borrowers.
Manufacturing activity in the U.S. slowed sharply in October, falling to the lowest level since 1982 and signaling that a recession is at hand. On the eve of Election Day, the Institute for Supply Management reported that overall activity sank to 38.9 last month from 43.5 in September. Only two industries—computer and electronic products and apparel—reported growth, while 16 industries, including furniture, plastics and petroleum products, reported contraction. It was the first ISM reading this year to herald a recession.
Circuit City Stores Inc., the second largest consumer electronics chain in the U.S., said it will immediately close and liquidate 155 stores and lay off thousands of employees as it struggles to survive an increasingly dreary holiday shopping season. Citing a deteriorating economy, tightening credit limits by its suppliers, and an updated assessment that found its inventory was worth less than it expected, Circuit City said it would close the stores in 55 U.S. markets Tuesday and immediately begin liquidation sales on Wednesday.
PARIS -- Société Générale SA Monday said net profit in the third quarter fell by 84%, as the French bank increased its provisions and continued to reduce its exposure to risky assets. France's second-largest bank said net profit fell to €183 million ($233.2 million) from €1.12 billion in the same period a year earlier. Third-quarter revenue slid 5% to €5.11 billion from €5.38 billion in the year-earlier period.
Viacom Inc.'s third-quarter net income fell 37% as the media company faced challenges in both its networks and filmed-entertainment segments. "The economic environment and ongoing uncertainty have posed new challenges for the media industry, and Viacom has not been immune to the impact of these forces," said Chief Executive Philippe Dauman.
The souring economy is aggravating the troubles of Whole Foods Market Inc., a onetime Wall Street darling now mired in a nearly three-year slump. Analysts say the upscale grocer probably will have to trim its earnings forecast for the current fiscal year and announce further cuts to capital spending or new-store plans when it reports fiscal fourth-quarter results Wednesday.
WASHINGTON -- The U.S. Treasury estimated it will borrow a record $550 billion in marketable debt in the October-December quarter to pay for a slew of emergency programs aimed at easing the credit crunch. The $550 billion estimate is $408 billion more than what Treasury projected in July 2008. The latest projection for the current quarter would leave the Treasury with an estimated end-of-December cash balance of $300 billion. That figure includes $260 billion for a new program Treasury created in September to help finance new Federal Reserve programs to address liquidity pressures in financial markets. "The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of state and local government series securities," Treasury said in a notice Monday afternoon.
For months, many mutual-fund investors could take comfort in this: They had endured worse during the tech-stock collapse. The hard lessons learned from that earlier, harrowing ride led many to believe they were better positioned for this bear market. But U.S. stock-market declines during October were so deep and wide that even tame investments were pummeled. Losses from the steep plunge that began just over a year ago now top those from 2000-2002.
Grim. There's no other word for the European Commission's outlook for the euro zone and wider European Union economy in its regular autumn survey. But the outlook may get grimmer yet for those countries with the biggest current account deficits unless the European Central Bank comes up with a series of sharp interest-rate cuts. That would probably see the euro fall even further against the dollar.
The chairman of Barnes & Noble Inc. last week told employees via an internal memo that the nation's largest bookstore retailer is "bracing for a terrible holiday season," and that he expects "the trend to continue well into 2009, and perhaps beyond." "Never in all of the years I've been in business have I seen a worse outlook for the economy," wrote Mr. Riggio. "And never in all my years as a bookseller have I seen a retail climate as poor as the one we are in. Nothing even close."
Private-equity firm KKR & Co. LP won't complete its initial public offering until 2009, once again delaying its going-public plans amid the growing financial crisis.
BRUSSELS -- The euro-zone economy is now in recession and will remain at a standstill for most of next year, the European Commission said Monday in its autumn forecast. The commission, the European Union's executive arm, said financial markets are still in a "precarious" condition, creating significant risks to its already bleak economic outlook.
U.S. Debt Could Tie Obama's Hands
It seems people are finally waking up to reality. There is no money for the campaign promises made by our President-elect. This will become increasingly clear as tax revenues begin to drop dramatically at the same time our deficits sky-rocket. ‘Constrain’ isn’t the word I would use here. At some point – there will be no money for economic stimulus – or anything else. Things are going to ‘change’ – but not in the way most people expect.
"I don't think that anything on the stimulus end will be constrained by these deficits," said David Greenlaw, a Morgan Stanley economist.
We should stop comparing our debt to other nation's debt and start asking the right questions - why does every nation have such enormous debt? Why does it seem that everyone - nations, corporations, individuals - has to manage such massive debt loads?
jg - Nov 5, 2008
___________________
NOVEMBER 5, 2008, 4:43 P.M. ET
U.S. Debt Could Tie Obama's Hands
By JON HILSENRATH
Wall St. Journal
The U.S. government is on course for an unprecedented borrowing binge in coming months, a development that could constrain President-elect Barack Obama's economic agenda.
The Treasury Department laid out near-term borrowing plans Wednesday, saying it expects to tap financial markets for $550 billion in the final three months of 2008 and another $368 billion in the first three months of next year through issuing Treasury securities with a wide range of maturities.
Economists project that total government borrowing could pass $1.5 trillion in the fiscal year, which ends next September, in one year pushing up the government's total debt burden by more than 25%, a large and possibly jolting increase.
The sharp rise poses a potential dilemma for Mr. Obama's activist agenda. Few economists believe the Treasury will be constrained in the next year in its ability to manage its rising borrowing needs or in advancing another fiscal stimulus program. But in the long run, rising government debt could make it harder for Mr. Obama to pursue new spending and tax-cut programs aggressively.
"I don't think that anything on the stimulus end will be constrained by these deficits," said David Greenlaw, a Morgan Stanley economist. "But if you're talking about health care reform and some of these longer-term programs, there is some constraint there."
A range of factors are behind the mammoth borrowing increase. The recession has slowed individual income and corporate income tax receipts. Outlays are rising for unemployment insurance, food stamps and other programs meant to be an economic stabilizer.
Meantime, the Treasury is embarking on a $700 billion program to buy distressed assets from Wall Street and invest in financial firms and has already increased borrowing in support of Federal Reserve financial rescue efforts.
Furthermore, Congress is likely to pass a new economic stimulus plan in the weeks ahead that could run well over $150 billion.
"We're really expecting private, foreign, domestic investors and foreign government investors to increase their Treasury debt holdings by a huge proportion," said Rudy Penner, a budget expert at the Urban Institute.
In theory, such a sharp increase in new supply of Treasury bonds and notes might jolt investors, pushing up interest rates. That hasn't happened so far, in large part because investors have been reluctant to hold riskier assets.
Yields on 10-year Treasury bonds, at 3.7%, are well below levels reached in mid-2007, when they briefly moved above 5%. Yields on 1-month Treasury bills, at less than .2%, represent almost costless borrowing for the U.S. government, and have served as a green light to policy makers for a new economic stimulus plan.
"A large fiscal stimulus package of $300-$500 billion appears to be required to prevent an even deeper economic slump than the one we are now forecasting," Goldman Sachs economists said in a recent report on the fiscal outlook.
Economists break into two camps on the longer-term threat of mounting budget deficits.
One camp sees the debt as manageable compared to other countries and compared to the past. Even with $1.5 trillion of new borrowing this year, the U.S. government's publicly held debt would amount to about 49% of gross domestic product, according to Morgan Stanley.
That's much lower than Japan's government debt, which exceeds 100% of GDP. It is also below the U.S. peak of more than 100% reached after World War II. As the economy improves and the government's borrowing needs diminish, this camp holds, the deficit picture should improve.
But others warn that the current increase in borrowing is coming at the worst possible time, because the budget picture is on track to darken amid spending on Medicare, Medicaid and Social Security with the aging of the population.
"The problem is that over the next number of years, the long-run budget pressures are going to become more and more apparent," Mr. Penner says. "That is going to make it more and more difficult to reverse the deficits."
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
"I don't think that anything on the stimulus end will be constrained by these deficits," said David Greenlaw, a Morgan Stanley economist.
We should stop comparing our debt to other nation's debt and start asking the right questions - why does every nation have such enormous debt? Why does it seem that everyone - nations, corporations, individuals - has to manage such massive debt loads?
jg - Nov 5, 2008
___________________
NOVEMBER 5, 2008, 4:43 P.M. ET
U.S. Debt Could Tie Obama's Hands
By JON HILSENRATH
Wall St. Journal
The U.S. government is on course for an unprecedented borrowing binge in coming months, a development that could constrain President-elect Barack Obama's economic agenda.
The Treasury Department laid out near-term borrowing plans Wednesday, saying it expects to tap financial markets for $550 billion in the final three months of 2008 and another $368 billion in the first three months of next year through issuing Treasury securities with a wide range of maturities.
Economists project that total government borrowing could pass $1.5 trillion in the fiscal year, which ends next September, in one year pushing up the government's total debt burden by more than 25%, a large and possibly jolting increase.
The sharp rise poses a potential dilemma for Mr. Obama's activist agenda. Few economists believe the Treasury will be constrained in the next year in its ability to manage its rising borrowing needs or in advancing another fiscal stimulus program. But in the long run, rising government debt could make it harder for Mr. Obama to pursue new spending and tax-cut programs aggressively.
"I don't think that anything on the stimulus end will be constrained by these deficits," said David Greenlaw, a Morgan Stanley economist. "But if you're talking about health care reform and some of these longer-term programs, there is some constraint there."
A range of factors are behind the mammoth borrowing increase. The recession has slowed individual income and corporate income tax receipts. Outlays are rising for unemployment insurance, food stamps and other programs meant to be an economic stabilizer.
Meantime, the Treasury is embarking on a $700 billion program to buy distressed assets from Wall Street and invest in financial firms and has already increased borrowing in support of Federal Reserve financial rescue efforts.
Furthermore, Congress is likely to pass a new economic stimulus plan in the weeks ahead that could run well over $150 billion.
"We're really expecting private, foreign, domestic investors and foreign government investors to increase their Treasury debt holdings by a huge proportion," said Rudy Penner, a budget expert at the Urban Institute.
In theory, such a sharp increase in new supply of Treasury bonds and notes might jolt investors, pushing up interest rates. That hasn't happened so far, in large part because investors have been reluctant to hold riskier assets.
Yields on 10-year Treasury bonds, at 3.7%, are well below levels reached in mid-2007, when they briefly moved above 5%. Yields on 1-month Treasury bills, at less than .2%, represent almost costless borrowing for the U.S. government, and have served as a green light to policy makers for a new economic stimulus plan.
"A large fiscal stimulus package of $300-$500 billion appears to be required to prevent an even deeper economic slump than the one we are now forecasting," Goldman Sachs economists said in a recent report on the fiscal outlook.
Economists break into two camps on the longer-term threat of mounting budget deficits.
One camp sees the debt as manageable compared to other countries and compared to the past. Even with $1.5 trillion of new borrowing this year, the U.S. government's publicly held debt would amount to about 49% of gross domestic product, according to Morgan Stanley.
That's much lower than Japan's government debt, which exceeds 100% of GDP. It is also below the U.S. peak of more than 100% reached after World War II. As the economy improves and the government's borrowing needs diminish, this camp holds, the deficit picture should improve.
But others warn that the current increase in borrowing is coming at the worst possible time, because the budget picture is on track to darken amid spending on Medicare, Medicaid and Social Security with the aging of the population.
"The problem is that over the next number of years, the long-run budget pressures are going to become more and more apparent," Mr. Penner says. "That is going to make it more and more difficult to reverse the deficits."
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
What Happens if a Treasury Auction Fails?
It seems that most people do not understand how our government funds its budget deficits. Since we don’t have enough revenue (taxes) to pay for all of our expenses (Social Security, defense, Medicare, etc.), the government must borrow the extra money by selling bonds to investors. Investors buy U.S. Treasury Bonds from our government with yields of around 4% (for 10 year bonds) and our Government gets the money it needs to fund its deficits.
The government sells these bonds at auction. Investors bid for the bonds – and the government chooses the winning bidders. In recent months, we’ve seen yields drop and prices rise as more and more investors buy Treasury Bonds because they are considered some of the most risk free investments on the planet – since they are backed by the U.S. Government. Investors include individuals, institutions and foreign governments – to name a few.
With the economic problems in the U.S. – there is a growing fear that our government will someday hold a Treasury auction – and there will not be enough buyers. If you were a foreign nation (or any investor) and took a hard look at the finances of the U.S. – and could see that we are insolvent and that our economy is heading south – you can see that this is an entirely plausible scenario. The fear is that the Government will eventually go bankrupt – and unable to pay its debts. This would obviously cause us all kinds of unpleasant problems – including skyrocketing interest rates as the Government offers higher and higher yields to get the money it needs.
The dialog below is taken from a forum on Chris Martenson’s website. Chris explains what we could expect if an auction did fail.
I have a suspicion that Chris is right when he says it’s possible the Federal Reserve is the ‘buyer of last resort’ for recent auctions. This means that auctions are already failing – but the Fed is disguising this problem by buying the Treasury Bonds themselves. As Chris mentions below – this is a serious problem. Why? Because the Fed doesn’t have existing money to buy with – they create money. They would be printing money and giving it directly to the U.S. (this would be a similar process to the U.S. needing hard currency – but on a much bigger scale) – which could eventually lead to the destruction of our currency (see Zimbabwe: inflation hit 11.2 million percent in August 2008). Let me put this in perspective – a loaf of bread cost over one trillion Zimbabwe dollars in August. Anyway – you get the picture – runaway interest rates, runaway inflation – very bad things happening.
The following graph shows the assets of the Federal Reserve. The blue line is labeled ‘other assets’ – this is the asset category Chris references below. We don’t know what ‘other assets’ refers to – yet.
First this question from LemonyYellowSchwin on the subscriber forum:
Chris, I assume you still agree that there is still a risk of what amounts to an "auction failure" of US govt. bonds? If so, I'm wondering if you could sort of help us play it out in our minds:
Is this a possibility you put on the near-middle-long term horizon?
What would be the warning signs?
What would it look like?
What would be the consequences and how quickly/slowly would we see it play out?
Thank you so much!
My Response (Chris Martenson):
Great question.
This is exactly in line with the piece I am writing for the next Martenson Report.
Sooner or later (and I am starting to think 'sooner' at the rate things are hustling along) that there will be an auction failure.
The warning signs are simple enough.
The "Bid to Cover" ratio slides down in danger territory (below 2:1). This ratio measures the amount of bids that are received at auction for whatever bolus of Treasuries are being offered at that auction. At 1:1 there are exactly as many bids as there are bonds being sold, but trouble starts well before then. Remember, this is an auction where bids are placed on the bonds. So let's imagine the Treasury is offering a bunch of 10 year notes at 4%. Some eager participants might bid 3.95% (over asking price) while others may bid 4.25% (below asking price). The government will, naturally, select the best possible bids and chuck the rest. By the time we get to 1:1 on the offers it is a near certainty that the bids are going to be at worse prices than hoped. So the first warning sign is a falling bid-to-cover ratio.
Along with this, everybody is keeping a careful eye on the spread between the offered rate and the actual rate. A slipping yield means the government is not getting its desired price for the offered debt and is a sign of either reduced demand (as also reflected by a falling bid-to-cover ratio) or reduced availability of money for the amount of debt being offered (falling supply of money). So the second warning sign would be auction yields slipping higher and higher.
The final part of this act is an actual failed auction where the bid-to-cover ratio falls below 1. That is, fewer bids are received in total than there were bonds offered. An example would be $800 million in bids received for $1 billion in bonds offered. That is a failed auction.
At that moment all hell breaks loose. The government cannot afford a failed auction because it needs the money. So it will simply offer the bonds again at a higher, more attractive yield and will keep raising the yields until it attracts enough bids. The impact of an auction failure will be rapidly rising interest rates.
But once that dynamic starts the incentive is there for market participants to "wait and see" if even more attractive yields are in the offing which can start a spiral of higher and higher rates.
This is why I am so anxious to find out what is on the Federal Reserve balance sheet. I want to put to rest my uncomfortable suspicion that they've already been the "buyer of last resort" at the past few Treasury auctions.
Once a central bank begins making up for funding shortfalls by printing money directly in exchange for government bonds then you are well on the way to destroying the value of the resident currency. Think Zimbabwe and you get the idea.
Given the fact that the Fed is refusing to let anybody see exactly how and where it applied that $1.2 trillion over the past 6 weeks, and given the fact that the US government is on track to issue more new debt this quarter than all last year COMBINED, and given the fact that banks are apparently out of capital, I am wondering how it is possible that each auction has managed to go off without a hitch.
Fueling this concern of mine is that fact that the Treasury International Capital (TIC) flows have shown a steady erosion of foreign money from our shores over the past 2 months reported (July and August, so we are anxiously awaiting the September data).
IN summary, no money from overseas, impaired capital on our own shores, record government debt issuances and a Fed that is suddenly quite shy about revealing its recent purchases.
As I said, it makes me very suspicious that the Fed is directly buying those securities themselves. If true, this is explosive news and could serve to severely undermine faith in the Federal Reserve Note, a.k.a. "the dollar", and so I completely understand why that information would be hidden if it existed.
If I were doing this (meaning I was the Fed), I would want to hide my tracks to every extent possible. One way to do that would be to crush commodities as hard as possible and work with my foreign CB friends to assure the dollar looked strong. This would serve to help convince market participants that direct monetization of government debt was not being done because, if it were, the exact opposite would happen.
More later...
The government sells these bonds at auction. Investors bid for the bonds – and the government chooses the winning bidders. In recent months, we’ve seen yields drop and prices rise as more and more investors buy Treasury Bonds because they are considered some of the most risk free investments on the planet – since they are backed by the U.S. Government. Investors include individuals, institutions and foreign governments – to name a few.
With the economic problems in the U.S. – there is a growing fear that our government will someday hold a Treasury auction – and there will not be enough buyers. If you were a foreign nation (or any investor) and took a hard look at the finances of the U.S. – and could see that we are insolvent and that our economy is heading south – you can see that this is an entirely plausible scenario. The fear is that the Government will eventually go bankrupt – and unable to pay its debts. This would obviously cause us all kinds of unpleasant problems – including skyrocketing interest rates as the Government offers higher and higher yields to get the money it needs.
The dialog below is taken from a forum on Chris Martenson’s website. Chris explains what we could expect if an auction did fail.
I have a suspicion that Chris is right when he says it’s possible the Federal Reserve is the ‘buyer of last resort’ for recent auctions. This means that auctions are already failing – but the Fed is disguising this problem by buying the Treasury Bonds themselves. As Chris mentions below – this is a serious problem. Why? Because the Fed doesn’t have existing money to buy with – they create money. They would be printing money and giving it directly to the U.S. (this would be a similar process to the U.S. needing hard currency – but on a much bigger scale) – which could eventually lead to the destruction of our currency (see Zimbabwe: inflation hit 11.2 million percent in August 2008). Let me put this in perspective – a loaf of bread cost over one trillion Zimbabwe dollars in August. Anyway – you get the picture – runaway interest rates, runaway inflation – very bad things happening.
The following graph shows the assets of the Federal Reserve. The blue line is labeled ‘other assets’ – this is the asset category Chris references below. We don’t know what ‘other assets’ refers to – yet.
There are a lot of bad economic scenarios playing out right now that just about everyone thought would never happen – but they are happening. I believe this is going to be another one.
jg – Nov 12, 2008
_________________________
Recent Forum postings:
jg – Nov 12, 2008
_________________________
Recent Forum postings:
First this question from LemonyYellowSchwin on the subscriber forum:
Chris, I assume you still agree that there is still a risk of what amounts to an "auction failure" of US govt. bonds? If so, I'm wondering if you could sort of help us play it out in our minds:
Is this a possibility you put on the near-middle-long term horizon?
What would be the warning signs?
What would it look like?
What would be the consequences and how quickly/slowly would we see it play out?
Thank you so much!
My Response (Chris Martenson):
Great question.
This is exactly in line with the piece I am writing for the next Martenson Report.
Sooner or later (and I am starting to think 'sooner' at the rate things are hustling along) that there will be an auction failure.
The warning signs are simple enough.
The "Bid to Cover" ratio slides down in danger territory (below 2:1). This ratio measures the amount of bids that are received at auction for whatever bolus of Treasuries are being offered at that auction. At 1:1 there are exactly as many bids as there are bonds being sold, but trouble starts well before then. Remember, this is an auction where bids are placed on the bonds. So let's imagine the Treasury is offering a bunch of 10 year notes at 4%. Some eager participants might bid 3.95% (over asking price) while others may bid 4.25% (below asking price). The government will, naturally, select the best possible bids and chuck the rest. By the time we get to 1:1 on the offers it is a near certainty that the bids are going to be at worse prices than hoped. So the first warning sign is a falling bid-to-cover ratio.
Along with this, everybody is keeping a careful eye on the spread between the offered rate and the actual rate. A slipping yield means the government is not getting its desired price for the offered debt and is a sign of either reduced demand (as also reflected by a falling bid-to-cover ratio) or reduced availability of money for the amount of debt being offered (falling supply of money). So the second warning sign would be auction yields slipping higher and higher.
The final part of this act is an actual failed auction where the bid-to-cover ratio falls below 1. That is, fewer bids are received in total than there were bonds offered. An example would be $800 million in bids received for $1 billion in bonds offered. That is a failed auction.
At that moment all hell breaks loose. The government cannot afford a failed auction because it needs the money. So it will simply offer the bonds again at a higher, more attractive yield and will keep raising the yields until it attracts enough bids. The impact of an auction failure will be rapidly rising interest rates.
But once that dynamic starts the incentive is there for market participants to "wait and see" if even more attractive yields are in the offing which can start a spiral of higher and higher rates.
This is why I am so anxious to find out what is on the Federal Reserve balance sheet. I want to put to rest my uncomfortable suspicion that they've already been the "buyer of last resort" at the past few Treasury auctions.
Once a central bank begins making up for funding shortfalls by printing money directly in exchange for government bonds then you are well on the way to destroying the value of the resident currency. Think Zimbabwe and you get the idea.
Given the fact that the Fed is refusing to let anybody see exactly how and where it applied that $1.2 trillion over the past 6 weeks, and given the fact that the US government is on track to issue more new debt this quarter than all last year COMBINED, and given the fact that banks are apparently out of capital, I am wondering how it is possible that each auction has managed to go off without a hitch.
Fueling this concern of mine is that fact that the Treasury International Capital (TIC) flows have shown a steady erosion of foreign money from our shores over the past 2 months reported (July and August, so we are anxiously awaiting the September data).
IN summary, no money from overseas, impaired capital on our own shores, record government debt issuances and a Fed that is suddenly quite shy about revealing its recent purchases.
As I said, it makes me very suspicious that the Fed is directly buying those securities themselves. If true, this is explosive news and could serve to severely undermine faith in the Federal Reserve Note, a.k.a. "the dollar", and so I completely understand why that information would be hidden if it existed.
If I were doing this (meaning I was the Fed), I would want to hide my tracks to every extent possible. One way to do that would be to crush commodities as hard as possible and work with my foreign CB friends to assure the dollar looked strong. This would serve to help convince market participants that direct monetization of government debt was not being done because, if it were, the exact opposite would happen.
More later...
The Art of Deception: Hank Paulson Speaks
A few days ago I posted an article on Ben Bernanke’s recent comments regarding the economy and what the Federal Reserve was prepared to do to ‘help’ the situation. We looked at what Mr. Bernanke had to say and compared it to actual data. The data clearly shows that we’re not being told the truth.
Mr. Bernanke’s partner in crime – Hank Paulson – has been a willing participant in this continued deception. Mr. Paulson wrote a letter to the Editor of the NY Times yesterday. I started to write a commentary on his comments and then noticed that Chris Martenson has already dissected Paulson’s comments – in much more detail. I have attached Chris’ blog post below. Take careful note of what Paulson has said in the past – and what he is saying today.
jg – Nov 19, 2008
_____________
The art of deception: Hank Paulson speaks
Tuesday, November 18, 2008, 2:22 pm, by cmartenson
The key problems that we face are all expressions of the fact that our monetary system is based on debt, and this enforces an exceptionally short-term investing and planning horizon, along with the need for continuous exponential expansion.
Thus our primary ailment today is a failure of our money system. Practically everything else that we read about today – bank failures, foreclosures, rapidly depleting resources, etc – are merely symptoms of this failure.
We are facing a money crisis, not a banking crisis. We are not experiencing a failure of our credit markets, but a failure of our money system. The apparent inability of our policy makers to understand this crucial distinction all but assures that their attempts to “fix things” will do more harm than good.
This OpEd piece by Hank Paulson, published today by the NYT, is a monument to wasteful, off-target thinking.
“Fighting the Financial Crisis, One Challenge at a Time”By Secretary Henry M. Paulson, Jr. The New York Times November 18, 2008
We are going through a financial crisis more severe and unpredictable than any in our lifetimes. We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and the American International Group. Each of these failures would be tremendously consequential in its own right. But we faced them in succession, as our financial system seized up and severely damaged the economy.
My Comment: So far so good, but all he’s done here is describe a few symptoms. No recognition of the causes of the problems yet (let alone assigning culpability). But this is just his opening paragraph; perhaps he’ll get to the causes later.
By September, the government faced a systemwide crisis. After months of making the most of the authority we already had, we asked Congress for a comprehensive rescue package so we could stabilize our financial system and minimize further damage to our economy.
My Comment: Actually, the crisis was fully recognized by many observers several years back, but was obvious to everyone in the industry a full year earlier than September 2008, and Hank knows it. The August 17th, 2007 event (a credit dislocation and stock market swoon) was a full-blown systemic crisis that kicked off everything we are seeing today. Astute observers of financial markets know that every warning bell in the engine room went off on that day.
Hank is avoiding raising that uncomfortable fact because it puts the lie to the “emergency” bailout bill, which was rammed through Congress and which has subsequently enriched many of his closest personal associates. So he is trying to reshape history by implying that the crisis erupted in September of 2008. It did not. It had been in the offing long enough that I remain confident that Ben Bernanke was handpicked in 2002 based on his recipes for fighting this exact sort of a battle. If this isn’t true, then I have to believe that one guy in Western MA with an Internet connection was able to diagnose and predict a set of ailments that eluded professionals with access to far better information. It’s possible, but not very likely.
There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis, always keeping focused on our goal: to stabilize a financial system that is integral to the everyday lives of all Americans.
My Comment: The goal here, while laudable, is very much directed at the symptoms and offers us no insights as to whether the cause has been identified. After all, is it worth “stabilizing” a system that is inherently unstable? Do we know why it was unstable? Will providing massive funds help, or hurt? How can we know unless we know that the cause of the instability has been identified? What if the cause was “too much debt?” How will going deeper into debt help? These are all valid questions and they are left unasked and unanswered, probably because confidence in our economic system would be eroded by any such introspection.
As we assessed how best to use the remaining money for the Troubled Asset Relief Program, we carefully considered the uncertainties around the deteriorating economic situation in the United States and globally. The latest economic reports underscore the challenges we are facing. The gross domestic product for the third quarter (which ended Sept. 30, three days before the bill passed) shrank by 0.3 percent. The unemployment rate rose in October to a level not seen since the mid-1990s. Home prices in 10 major cities have fallen 18 percent over the previous year. Auto sales numbers plummeted in October and were more than a third lower than one year ago.
My Comment: Here Hank is connecting the bailout money to fixing the economy. He explicitly draws that connection and maintains it throughout the editorial. The application of TARP money, he implies, is the same as aiding the economy. But what this mechanism might be is never stated, and I’ve not yet seen any mention of it anywhere. For the millions out of work, new capital in a big bank is not helpful in the least. For an ailing company addicted to selling to overly indebted consumers, the TARP money provides no relief.
I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress. And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets.
My Comment: Um, no, Hank, sorry, this is not true. Here are some recent quotes from you:
April 20, 2007 — “I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained.”
July 26, 2007 — “I don't think it [the subprime mess] poses any threat to the overall economy.”
Perhaps “always” and “root” mean different things to Hank than to me, but when I say “I have always maintained,” I generally mean for a much longer period of time than, say, last year.
The current $250 billion capital purchase program is strong medicine for our financial institutions. More capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is essential to increasing lending, which is vital to economic recovery.
My Comment: This is technically true, but in a very, very slippery way. What Hank is leaving unsaid is that the banks are not really taking losses to anywhere near their true extent, because the Federal Reserve is buying their assets at prices far above fair market value. So you’ve got Hank shoveling taxpayer money into the capital/equity side of banks (at very unfavorable terms to the taxpayers, especially compared to European efforts), while on the other side of the balance sheet you’ve got the Fed lifting damaged assets off their books at above-market rates so that the banks can avoid an honest appraisal of their true condition. So the slippery part was for Hank to mysteriously leave out the Fed's efforts in describing the scope of the bailout help.
Worse, this paragraph displays the pro debt-growth bias that will lead to our eventual ruin as a nation. Hank is parroting a thoroughly unquestioned premise on Wall Street, which is that “stronger capitalization is essential to increasing lending, which is vital to economic recovery,” but you and I might reasonably question whether this is true. Increased lending has brought us to the highest levels of debt ever and is the precise cause of the current mess. So, clearly there is a type of lending that is not good and should be avoided at all costs. Instead we need to actively begin paying down our debts, not increasing them. But as a creature of the banking system, Hank only knows one thing: more debt.
Recently I've been asked two questions. First, Congress gave you the authority you requested, and the economy has only become worse. What went wrong? Second, if housing and mortgages are at the root of our economic difficulties, why aren't you addressing those problems?
My Comment: These straw-man questions are ducking the main issues. The continued espousing of the myth that mortgages are “at the root of” our problems either displays an appalling lack of awareness or a deliberate attempt to deceive. The root of our problems is primarily composed of excess leverage and a reckless disregard for risk by big financial institutions. It was Hank himself who oversaw the dangerous accumulation of leverage during his tenure as the captain at the helm of the flagship Wall Street firm Goldman Sachs. Reckless lending was the cause, mortgage foreclosures are the symptom. This utter failure to distinguish between cause and effect is what worries me most about our chances of pulling through all this with minimal pain.
The answer to the second question is that more access to lower-cost mortgage lending is the No. 1 thing we can do to slow the decline in the housing market and reduce the number of foreclosures. Together with our bank capital program, the moves we have made to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, will promote mortgage lending.
My Comment: Given that Hank cannot spot the cause of the disease, it is unsurprising that he’s decided to treat the symptom. Here he advocates “access to lower-cost mortgage lending” as the solution to the housing crisis, delightfully unaware that he is prescribing more of the very toxin that caused the sickness in the first place. No, we do not need more low-cost lending. Yes, we do need to wring out the excesses of the past and have house prices fall back into a lower equilibrium with incomes. With this one statement, Hank Paulson is effectively saying, “We’ve decided to treat the alcoholic with a fifth of scotch.” Perhaps it’s time to get a new doctor?
The rest of the article closes with three paragraphs of gratuitous self-congratulation for operating boldly in an uncertain market environment. There’s nothing to gain from parsing that out, so I’ll stop here.
In summary, these are the things that are not helped, but rather hurt, by the actions of the US government going deeper into debt to repair failed banks:
1. Insolvent entitlement programs. Our government is already fully insolvent with regard to the entitlement programs. Going deeper into debt at this time only exacerbates that problem, which is no longer far off into the future, but only a decade away from being a full-blown crisis of its own. Instead, a program of saving and cutting government spending needs to be implemented immediately.
2. Lack of readiness for a new energy future. We need to make trillions of dollars in investments into preparing for a very different energy future. A smart grid, electric high speed railroads, reforming our ‘exurb’ living/work arrangement, and the complete replacement of our auto fleet are all essential components of arriving at the future gracefully. To use this recent weakness in oil prices to encourage people to borrow more to buy SUVs is about the most cynical and shortsighted policy I can imagine.
3. A deficit and crumbling infrastructure. To be a first-world nation, you need an elegant and modern infrastructure. Drive from JFK to NYC with this in mind, and you will know the meaning of ‘embarrassing.’ Have you heard about any major bridges falling into rivers in any major country besides the US recently? We have vast investment needs just in rebuilding and maintaining our current infrastructure. Going into debt to bail out Wall Street does nothing to help in this regard, and very likely sabotages our future ability to borrow, should we ever decide that investing in ourselves is a priority.
4. A national failure to save. Ending our raw-consumptive spending and rebuilding savings (the only way to support true capital formation) is an absolute must if we want a future of prosperity. By showing zero willingness to do anything other than spend whatever it takes to return to a zero-saving society, the federal government is setting a bad example. Instead we should be exploring ways to cut spending where possible and redirect funds to places where some investment could yield a decent return. Green energy comes to mind.
Mr. Bernanke’s partner in crime – Hank Paulson – has been a willing participant in this continued deception. Mr. Paulson wrote a letter to the Editor of the NY Times yesterday. I started to write a commentary on his comments and then noticed that Chris Martenson has already dissected Paulson’s comments – in much more detail. I have attached Chris’ blog post below. Take careful note of what Paulson has said in the past – and what he is saying today.
jg – Nov 19, 2008
_____________
The art of deception: Hank Paulson speaks
Tuesday, November 18, 2008, 2:22 pm, by cmartenson
The key problems that we face are all expressions of the fact that our monetary system is based on debt, and this enforces an exceptionally short-term investing and planning horizon, along with the need for continuous exponential expansion.
Thus our primary ailment today is a failure of our money system. Practically everything else that we read about today – bank failures, foreclosures, rapidly depleting resources, etc – are merely symptoms of this failure.
We are facing a money crisis, not a banking crisis. We are not experiencing a failure of our credit markets, but a failure of our money system. The apparent inability of our policy makers to understand this crucial distinction all but assures that their attempts to “fix things” will do more harm than good.
This OpEd piece by Hank Paulson, published today by the NYT, is a monument to wasteful, off-target thinking.
“Fighting the Financial Crisis, One Challenge at a Time”By Secretary Henry M. Paulson, Jr. The New York Times November 18, 2008
We are going through a financial crisis more severe and unpredictable than any in our lifetimes. We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and the American International Group. Each of these failures would be tremendously consequential in its own right. But we faced them in succession, as our financial system seized up and severely damaged the economy.
My Comment: So far so good, but all he’s done here is describe a few symptoms. No recognition of the causes of the problems yet (let alone assigning culpability). But this is just his opening paragraph; perhaps he’ll get to the causes later.
By September, the government faced a systemwide crisis. After months of making the most of the authority we already had, we asked Congress for a comprehensive rescue package so we could stabilize our financial system and minimize further damage to our economy.
My Comment: Actually, the crisis was fully recognized by many observers several years back, but was obvious to everyone in the industry a full year earlier than September 2008, and Hank knows it. The August 17th, 2007 event (a credit dislocation and stock market swoon) was a full-blown systemic crisis that kicked off everything we are seeing today. Astute observers of financial markets know that every warning bell in the engine room went off on that day.
Hank is avoiding raising that uncomfortable fact because it puts the lie to the “emergency” bailout bill, which was rammed through Congress and which has subsequently enriched many of his closest personal associates. So he is trying to reshape history by implying that the crisis erupted in September of 2008. It did not. It had been in the offing long enough that I remain confident that Ben Bernanke was handpicked in 2002 based on his recipes for fighting this exact sort of a battle. If this isn’t true, then I have to believe that one guy in Western MA with an Internet connection was able to diagnose and predict a set of ailments that eluded professionals with access to far better information. It’s possible, but not very likely.
There is no playbook for responding to turmoil we have never faced. We adjusted our strategy to reflect the facts of a severe market crisis, always keeping focused on our goal: to stabilize a financial system that is integral to the everyday lives of all Americans.
My Comment: The goal here, while laudable, is very much directed at the symptoms and offers us no insights as to whether the cause has been identified. After all, is it worth “stabilizing” a system that is inherently unstable? Do we know why it was unstable? Will providing massive funds help, or hurt? How can we know unless we know that the cause of the instability has been identified? What if the cause was “too much debt?” How will going deeper into debt help? These are all valid questions and they are left unasked and unanswered, probably because confidence in our economic system would be eroded by any such introspection.
As we assessed how best to use the remaining money for the Troubled Asset Relief Program, we carefully considered the uncertainties around the deteriorating economic situation in the United States and globally. The latest economic reports underscore the challenges we are facing. The gross domestic product for the third quarter (which ended Sept. 30, three days before the bill passed) shrank by 0.3 percent. The unemployment rate rose in October to a level not seen since the mid-1990s. Home prices in 10 major cities have fallen 18 percent over the previous year. Auto sales numbers plummeted in October and were more than a third lower than one year ago.
My Comment: Here Hank is connecting the bailout money to fixing the economy. He explicitly draws that connection and maintains it throughout the editorial. The application of TARP money, he implies, is the same as aiding the economy. But what this mechanism might be is never stated, and I’ve not yet seen any mention of it anywhere. For the millions out of work, new capital in a big bank is not helpful in the least. For an ailing company addicted to selling to overly indebted consumers, the TARP money provides no relief.
I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress. And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets.
My Comment: Um, no, Hank, sorry, this is not true. Here are some recent quotes from you:
April 20, 2007 — “I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained.”
July 26, 2007 — “I don't think it [the subprime mess] poses any threat to the overall economy.”
Perhaps “always” and “root” mean different things to Hank than to me, but when I say “I have always maintained,” I generally mean for a much longer period of time than, say, last year.
The current $250 billion capital purchase program is strong medicine for our financial institutions. More capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is essential to increasing lending, which is vital to economic recovery.
My Comment: This is technically true, but in a very, very slippery way. What Hank is leaving unsaid is that the banks are not really taking losses to anywhere near their true extent, because the Federal Reserve is buying their assets at prices far above fair market value. So you’ve got Hank shoveling taxpayer money into the capital/equity side of banks (at very unfavorable terms to the taxpayers, especially compared to European efforts), while on the other side of the balance sheet you’ve got the Fed lifting damaged assets off their books at above-market rates so that the banks can avoid an honest appraisal of their true condition. So the slippery part was for Hank to mysteriously leave out the Fed's efforts in describing the scope of the bailout help.
Worse, this paragraph displays the pro debt-growth bias that will lead to our eventual ruin as a nation. Hank is parroting a thoroughly unquestioned premise on Wall Street, which is that “stronger capitalization is essential to increasing lending, which is vital to economic recovery,” but you and I might reasonably question whether this is true. Increased lending has brought us to the highest levels of debt ever and is the precise cause of the current mess. So, clearly there is a type of lending that is not good and should be avoided at all costs. Instead we need to actively begin paying down our debts, not increasing them. But as a creature of the banking system, Hank only knows one thing: more debt.
Recently I've been asked two questions. First, Congress gave you the authority you requested, and the economy has only become worse. What went wrong? Second, if housing and mortgages are at the root of our economic difficulties, why aren't you addressing those problems?
My Comment: These straw-man questions are ducking the main issues. The continued espousing of the myth that mortgages are “at the root of” our problems either displays an appalling lack of awareness or a deliberate attempt to deceive. The root of our problems is primarily composed of excess leverage and a reckless disregard for risk by big financial institutions. It was Hank himself who oversaw the dangerous accumulation of leverage during his tenure as the captain at the helm of the flagship Wall Street firm Goldman Sachs. Reckless lending was the cause, mortgage foreclosures are the symptom. This utter failure to distinguish between cause and effect is what worries me most about our chances of pulling through all this with minimal pain.
The answer to the second question is that more access to lower-cost mortgage lending is the No. 1 thing we can do to slow the decline in the housing market and reduce the number of foreclosures. Together with our bank capital program, the moves we have made to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, will promote mortgage lending.
My Comment: Given that Hank cannot spot the cause of the disease, it is unsurprising that he’s decided to treat the symptom. Here he advocates “access to lower-cost mortgage lending” as the solution to the housing crisis, delightfully unaware that he is prescribing more of the very toxin that caused the sickness in the first place. No, we do not need more low-cost lending. Yes, we do need to wring out the excesses of the past and have house prices fall back into a lower equilibrium with incomes. With this one statement, Hank Paulson is effectively saying, “We’ve decided to treat the alcoholic with a fifth of scotch.” Perhaps it’s time to get a new doctor?
The rest of the article closes with three paragraphs of gratuitous self-congratulation for operating boldly in an uncertain market environment. There’s nothing to gain from parsing that out, so I’ll stop here.
In summary, these are the things that are not helped, but rather hurt, by the actions of the US government going deeper into debt to repair failed banks:
1. Insolvent entitlement programs. Our government is already fully insolvent with regard to the entitlement programs. Going deeper into debt at this time only exacerbates that problem, which is no longer far off into the future, but only a decade away from being a full-blown crisis of its own. Instead, a program of saving and cutting government spending needs to be implemented immediately.
2. Lack of readiness for a new energy future. We need to make trillions of dollars in investments into preparing for a very different energy future. A smart grid, electric high speed railroads, reforming our ‘exurb’ living/work arrangement, and the complete replacement of our auto fleet are all essential components of arriving at the future gracefully. To use this recent weakness in oil prices to encourage people to borrow more to buy SUVs is about the most cynical and shortsighted policy I can imagine.
3. A deficit and crumbling infrastructure. To be a first-world nation, you need an elegant and modern infrastructure. Drive from JFK to NYC with this in mind, and you will know the meaning of ‘embarrassing.’ Have you heard about any major bridges falling into rivers in any major country besides the US recently? We have vast investment needs just in rebuilding and maintaining our current infrastructure. Going into debt to bail out Wall Street does nothing to help in this regard, and very likely sabotages our future ability to borrow, should we ever decide that investing in ourselves is a priority.
4. A national failure to save. Ending our raw-consumptive spending and rebuilding savings (the only way to support true capital formation) is an absolute must if we want a future of prosperity. By showing zero willingness to do anything other than spend whatever it takes to return to a zero-saving society, the federal government is setting a bad example. Instead we should be exploring ways to cut spending where possible and redirect funds to places where some investment could yield a decent return. Green energy comes to mind.
Looting America: Treasury Secretary Paulson Threatened Senators with Martial Law
This type of behavior from our leaders should no longer surprise us. We’ve watched Bush, Cheney and Bernanke use the same tactics in recent years to push their policies through Congress. We should take notice, however, of the types of threats now being thrown around. Martial law is not an idle threat. When a top official starts using this type of language – it would be wise for us to pay very close attention to what is happening. This is not some low level government employee making these threats – this is the Treasury Secretary of the United States.
There are two very big pieces of information to take away from Paulson’s statements. The first is that this financial crisis is, in fact, a crisis. This is not some mild recession that we will come out of in a few months. The financial system itself is collapsing. A Treasury Secretary would not threaten martial law if this were a minor hiccup in the system. This is a major, systemic problem – and it’s going to get worse. He’s saying that if the system collapses – there’s going to be widespread panic – and the government will need to maintain control.
The second item we should think about is this – why would the Treasury Secretary even mention martial law? Why would he even think about this? I suppose that it’s a combination of things. The obvious reason is that he’s strong-arming the legislative branch of our government to get what he wants. This isn’t the first time this administration has used these tactics. We also need to remember that the system is going to collapse at some point – and Paulson certainly knows this. Government bailouts are only delaying the inevitable while placing additional strain on our nation’s finances. From what I’ve seen, it doesn’t appear that the vast majority of our leaders in Congress understand economics and what is happening to our economy. Their lack of knowledge is being exploited by Paulson and Bernanke – so when they’re told that the U.S. Government needs to ‘bailout’ the system – they don’t have economic/monetary knowledge that would tell them this is not going to fix the problem. There will come a time in the future when our nation’s finances collapse – maybe then they will take the time to understand what is happening to us.
I believe that Paulson’s comments are foreshadowing our future. When the system collapses – we’re going to see our government’s true face.
jg – Dec 3, 2008
_____________________
Looting America: Treasury Secretary Paulson Threatened Senators with Martial Law
Tuesday, December 2, 2008, 9:04 am, by cmartenson
Some people think of Hank Paulson as our Treasury Secretary. I think of him as a 19 year veteran of Wall Street banking.
At every turn of this entire bailout he has specifically advantaged banks over taxpayers, banks over industry, banks over homeowners, and banks over the future health and prosperity of this country.
Is this surprising for a banking veteran? No, not really.
But the tactics he used certainly are. Consider this:
Sen. James Inhofe (R-Ok.) said yesterday that it was Treasury Secretary Henry Paulson who personally told Congressmen that there would be martial law in America if they did not pass the bailout of the banks as demanded by the Bush Administration.
On Oct. 2, Rep. Brad Sherman (D-Calif.) said on the House floor that "Many of us were told in private conversations that if we voted against this bill on Monday the sky would fall, the market would drop two or three thousand points the first day, another couple of thousand the second day, and a few members were even told that there would be martial law in America if we voted no."
Now, Senator Inhofe, speaking on KFAQ radio station in Tulsa, has confirmed who it was that issued this threat.
The interview host Pat Campbell asked Infhofe, "Somebody in D.C. was feeding you guys quite a story prior to the bailout, a story that if we didn't do this we were going to see something on the scale of the depression, there were people talking about martial law being instituted, civil unrest. Who was feeding you guys this stuff?"
Inhofe replied, "That's Henry Paulson. We had a conference call early on, it was on a Friday I think--a week and half before the vote on Oct. 1. So it would have been ... the 19th of September, we had a conference call. In this conference call and I guess there's no reason for me not to repeat what he said, but he said, he painted this picture you just described. He said, This is serious. This is the most serious thing that we faced."
I want you to consider that these threats of martial law were being bandied about in the final weeks before a national election. So the implied threat was that the elections themselves could have been jeopardized as a result. This is exceptionally serious. Paulson deserves to be brought up on charges of some sort.
Even leaving aside the implied election threats, such tactics were heavy-handed and unnecessary.This level of arm-twisting speaks of a certain desperation and I think the one hundred-to-one public opposition against the bailout was the impetus for raising the rhetorical stakes to such hysterical levels.
I'm just disappointed that our representatives were swayed by an administration that has proved itself over the years to be willing to use any and all methods to achieve its political aims, including lying and violating the public trust.
Speaking of which, yesterday Bush said this:
As he leaves office, Bush said he felt responsible for the economic downturn because it's occurring on his watch, but he added: "I think when the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so" before he became president.
But, of course and as always, reality is a different beast. This next bit is also from an article printed yesterday:
WASHINGTON - The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
“Expect fallout, expect foreclosures, expect horror stories,” California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:
· Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
· Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
· Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.
· Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
· Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
Those proposals all were stripped from the final rules. None required congressional approval or the president’s signature.
What we are experiencing now was not some random accident. Plenty of people, myself included, could clearly see where this was all headed. But the entrenched interests, primarily bankers and their bought and paid for representatives, did not want any limits on their obscene profits and they got everything they desired.
We can draw two conclusions:
1. Banks have way too much power over our legislative process and have abused that power. Badly.
2. If it looks like, smells like and acts like a looting operation, it is a looting operation.
Folks, there's really no kind way to put this. Not only have we been subjected to the greatest theft of our wealth ever seen, but that looting operation is continuing today.
What can be done about a banking industry that has so thoroughly violated and abused the public trust?
1. Have banks return all profits from the period in question including claw-backs on all bonuses and dividends paid.
2. Eliminate all funding and lobbying money from financial institutions. Make it a felony with automatic, mandatory jail time for any person or organization found in violation of this stricture.
3. Immediately nationalize enough banks to allow our society to carry on and let the rest go under. We can no longer afford for 40% of all corporate profits to be earned by the essentially non-productive industry that is finance.
4. Begin directly issuing non-interest bearing money from the Treasury. Why pay the Federal Reserve interest on our own money?
5. Allow competing currencies to exist in parallel with Federal Reserve Notes. If the Fed wants to ruin its balance sheet by supporting its broken network of morally and economically ruined banks, we the people should be allowed to choose whether we prefer to conduct our affairs using promise notes from the Fed or some other currency. Competition is the only known way to assure that businesses remain honest and fair. Why should the business of money be any different?
6. Return accountability to our landscape. Obama needs to immediately distance himself from the Wall Street led looting operation and do so by announcing that mistakes were made and laws were broken and that accountability will be part of his solution set. We the people need to see that laws are not just for us. If our system operates on trust (and it does) then we need to trust that the system is capable of policing itself. Right now there is zero evidence of that and its absence is rapidly eroding our social contract.
There are two very big pieces of information to take away from Paulson’s statements. The first is that this financial crisis is, in fact, a crisis. This is not some mild recession that we will come out of in a few months. The financial system itself is collapsing. A Treasury Secretary would not threaten martial law if this were a minor hiccup in the system. This is a major, systemic problem – and it’s going to get worse. He’s saying that if the system collapses – there’s going to be widespread panic – and the government will need to maintain control.
The second item we should think about is this – why would the Treasury Secretary even mention martial law? Why would he even think about this? I suppose that it’s a combination of things. The obvious reason is that he’s strong-arming the legislative branch of our government to get what he wants. This isn’t the first time this administration has used these tactics. We also need to remember that the system is going to collapse at some point – and Paulson certainly knows this. Government bailouts are only delaying the inevitable while placing additional strain on our nation’s finances. From what I’ve seen, it doesn’t appear that the vast majority of our leaders in Congress understand economics and what is happening to our economy. Their lack of knowledge is being exploited by Paulson and Bernanke – so when they’re told that the U.S. Government needs to ‘bailout’ the system – they don’t have economic/monetary knowledge that would tell them this is not going to fix the problem. There will come a time in the future when our nation’s finances collapse – maybe then they will take the time to understand what is happening to us.
I believe that Paulson’s comments are foreshadowing our future. When the system collapses – we’re going to see our government’s true face.
jg – Dec 3, 2008
_____________________
Looting America: Treasury Secretary Paulson Threatened Senators with Martial Law
Tuesday, December 2, 2008, 9:04 am, by cmartenson
Some people think of Hank Paulson as our Treasury Secretary. I think of him as a 19 year veteran of Wall Street banking.
At every turn of this entire bailout he has specifically advantaged banks over taxpayers, banks over industry, banks over homeowners, and banks over the future health and prosperity of this country.
Is this surprising for a banking veteran? No, not really.
But the tactics he used certainly are. Consider this:
Sen. James Inhofe (R-Ok.) said yesterday that it was Treasury Secretary Henry Paulson who personally told Congressmen that there would be martial law in America if they did not pass the bailout of the banks as demanded by the Bush Administration.
On Oct. 2, Rep. Brad Sherman (D-Calif.) said on the House floor that "Many of us were told in private conversations that if we voted against this bill on Monday the sky would fall, the market would drop two or three thousand points the first day, another couple of thousand the second day, and a few members were even told that there would be martial law in America if we voted no."
Now, Senator Inhofe, speaking on KFAQ radio station in Tulsa, has confirmed who it was that issued this threat.
The interview host Pat Campbell asked Infhofe, "Somebody in D.C. was feeding you guys quite a story prior to the bailout, a story that if we didn't do this we were going to see something on the scale of the depression, there were people talking about martial law being instituted, civil unrest. Who was feeding you guys this stuff?"
Inhofe replied, "That's Henry Paulson. We had a conference call early on, it was on a Friday I think--a week and half before the vote on Oct. 1. So it would have been ... the 19th of September, we had a conference call. In this conference call and I guess there's no reason for me not to repeat what he said, but he said, he painted this picture you just described. He said, This is serious. This is the most serious thing that we faced."
I want you to consider that these threats of martial law were being bandied about in the final weeks before a national election. So the implied threat was that the elections themselves could have been jeopardized as a result. This is exceptionally serious. Paulson deserves to be brought up on charges of some sort.
Even leaving aside the implied election threats, such tactics were heavy-handed and unnecessary.This level of arm-twisting speaks of a certain desperation and I think the one hundred-to-one public opposition against the bailout was the impetus for raising the rhetorical stakes to such hysterical levels.
I'm just disappointed that our representatives were swayed by an administration that has proved itself over the years to be willing to use any and all methods to achieve its political aims, including lying and violating the public trust.
Speaking of which, yesterday Bush said this:
As he leaves office, Bush said he felt responsible for the economic downturn because it's occurring on his watch, but he added: "I think when the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so" before he became president.
But, of course and as always, reality is a different beast. This next bit is also from an article printed yesterday:
WASHINGTON - The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
“Expect fallout, expect foreclosures, expect horror stories,” California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:
· Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
· Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
· Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.
· Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
· Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
Those proposals all were stripped from the final rules. None required congressional approval or the president’s signature.
What we are experiencing now was not some random accident. Plenty of people, myself included, could clearly see where this was all headed. But the entrenched interests, primarily bankers and their bought and paid for representatives, did not want any limits on their obscene profits and they got everything they desired.
We can draw two conclusions:
1. Banks have way too much power over our legislative process and have abused that power. Badly.
2. If it looks like, smells like and acts like a looting operation, it is a looting operation.
Folks, there's really no kind way to put this. Not only have we been subjected to the greatest theft of our wealth ever seen, but that looting operation is continuing today.
What can be done about a banking industry that has so thoroughly violated and abused the public trust?
1. Have banks return all profits from the period in question including claw-backs on all bonuses and dividends paid.
2. Eliminate all funding and lobbying money from financial institutions. Make it a felony with automatic, mandatory jail time for any person or organization found in violation of this stricture.
3. Immediately nationalize enough banks to allow our society to carry on and let the rest go under. We can no longer afford for 40% of all corporate profits to be earned by the essentially non-productive industry that is finance.
4. Begin directly issuing non-interest bearing money from the Treasury. Why pay the Federal Reserve interest on our own money?
5. Allow competing currencies to exist in parallel with Federal Reserve Notes. If the Fed wants to ruin its balance sheet by supporting its broken network of morally and economically ruined banks, we the people should be allowed to choose whether we prefer to conduct our affairs using promise notes from the Fed or some other currency. Competition is the only known way to assure that businesses remain honest and fair. Why should the business of money be any different?
6. Return accountability to our landscape. Obama needs to immediately distance himself from the Wall Street led looting operation and do so by announcing that mistakes were made and laws were broken and that accountability will be part of his solution set. We the people need to see that laws are not just for us. If our system operates on trust (and it does) then we need to trust that the system is capable of policing itself. Right now there is zero evidence of that and its absence is rapidly eroding our social contract.
Treasury Bills Go Negative
In my second article on our monetary system (Our Monetary System Part II – Market Volatility), I mentioned that yields on the 3 month Treasury Bill dropped to almost 0% in September as investors moved their money to safer investments. This was significant because it showed us how the world’s investors are viewing stocks, bonds, derivatives, etc – extremely volatile and unstable.
Treasury yields dropping to 0% is highly unusual – but things got even crazier today. Today – for the first time in the history of the United States – Treasury yields traded at negative interest rates. This would tell us that things are definitely getting worse – not better. Investors were buying T-bills that guaranteed a loss. Why? Chris Martenson reviews a couple of reasons below – but I believe that it’s because people in the know – are scared. We are now living in a financial environment where investors are looking for the safest investments they can find – and those investments are now paying almost nothing or negative returns. Is it still an investment if you are guaranteed to lose money?
This is what the world looks like in a debt based monetary system that is collapsing. Wealth (money) is evaporating at such a rapid pace that people are looking for ways to lose the least amount of money. Forget about trying to find positive returns – people just want to try to hold onto what they have. This is why people are clinging to cash and gold – and I believe the value of our currency will very soon begin a freefall with the Fed printing money like crazy to prop up the system. The grand game will be over when the Fed begins monetizing our debt (think Zimbabwe).
Here’s an update on our money supply growth rate. It’s not hard to see that money supply growth is slowing considerably. Unfortunately, as we’ve already discussed, high growth rates are required to keep the system functioning.
Does the DJIA stock index look familiar?
How about the S&P 500?
Nasdaq Composite?
All of our major stock indexes continue to shadow our money supply – only this time – it’s heading in the wrong direction. I’ve mentioned before – the only way to resurrect money supply growth rates is to create more debt – and as we’ve seen – banks do not want to lend and consumers are reluctant to take on more debt. The actions of the Fed may provide a brief upswing in stocks – if the money finds its way into consumer’s and investor’s hands – but it will only be a temporary fix.
Based on recent comments by the Fed and Treasury, on the surface it might appear that Fed actions (lowering interest rates and buying toxic securities) coupled with over $4 trillion in government bailouts are somehow alleviating the credit crisis. The truth is that banks are not lending, consumers are not spending and corporations continue to layoff workers and delay capital spending in an attempt to survive this ‘downturn’.
Regardless of what we’re told in the media, the following graph shows us that banks are not lending.
Why? As we’ve discussed before – loan defaults and foreclosures are rising, bank capital levels are uncomfortably low (22 U.S. banks have now failed this year) and there is a serious aversion to risk rippling throughout the entire financial system. There’s also another reason – the Fed is paying interest on reserves. If you are a bank, why risk your money in this economic environment when you can earn interest – risk free – at the Fed. This is another example of the Fed telling us that they are trying to help the situation – when their actions have the opposite effect.
If you are still playing around in the stock market – my advice is to ignore all of the recent talk about ‘finding a bottom’ and get out of this mess.
jg – Dec 9, 2008
Tuesday, December 9, 2008, 5:30 pm, by cmartenson
Separating truth from fiction, especially when listening to politicians and Fed officials talking about the positive aspects they see in our economy, is never easy.
However, separating words from actions is as easy as pie.
Today, something so unusual happened in the world of bonds, that I have to tell you about it. (All quotes below from this one article).
Treasury Bills Trade at Negative RatesDec. 9 (Bloomberg) -- Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.
At no point ever in our history, not during the worst moment of war nor at the most vicious low-point of the Great Depression, have Treasury bills yielded a negative rate of interest.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent
What could this mean?
It could mean that there's still no trust in the system. Think about what would motivate a large financial institution to accept a negative rate of interest. What could cause a CFO to decide to place their money in an instrument that is guaranteed to lose money? All I can come up with is that they are unwilling to entrust their money to any of the large banks out there that are offering positive returns on invested money because they don't trust that they'll get that money back. This means that large companies and financial institutions with deep insider connections and who know the lay of the land far better than you or I do not trust that their money is safe in any of the large banks. Think about that for a minute.
Or it could mean that the trillions of dollars that the Fed has now pushed out into the banking system have nowhere to go (or some combination of both). The only economic reason to accept a negative rate of interest is if you are convinced that prices are falling at a faster rate.
We know that more than $600 billion of the newly created Fed money has been parked straight back into the Fed where it is earning interest. As of today, the rate of interest on the money that the banks can borrow is less than the rate that the Fed is paying them. This means the Fed is offering a negative interest rate.
Thus, negative Treasury bill rates are our second example of negative interest rates that we've encountered in the past month.
To call this "unusual" is to engage in an extreme form of understatement. Unusual means "not usual". A car driving by with dolls glued all over it is unusual. A car floating by 6 feet in the air is something else entirely and on a par with negative interest rates in a debt based money system.
So consider the proposition that you are a big bank, you've been handed several hundreds of billions of dollars and you have to put it somewhere. What do you do?
The first thing you do is you take advantage of the Feds extremely generous negative interest rate money bonanza. But that will come to an end when/if the Fed lowers interest rates to 0.75% or below which will almost certainly happen on December 16th:
Futures contracts on the Chicago Board of Trade show odds of 98 percent the Fed will lower its 1 percent target rate on overnight loans between banks to 0.25 percent on Dec. 16. The probability was 38 percent a week ago.
Given that free money gravy-train is coming to an end, what does a big bank with several hundred billion burning a hole in its pocket do? Further, suppose that they can't find any qualified borrowers with a sensible use for the money. That money has to go somewhere.
So today's bond action could simply be a reflection of the ending of the Fed negative interest rate policy pushing more of that bank money out into new places.
Of course, it is a stunning stroke of good luck (tongue in cheek) that the Fed's money-spigot largess that is now spilling over into government bonds comes at precisely the right moment for a US government that will shatter all borrowing records over the coming months.
The U.S. is headed toward $1.5 trillion in debt sales as the budget deficit approaches $1 trillion in the 2009 fiscal year according to Bank of America Corp. The deficit this year was $455 billion.
Watching all of this unfold is surreal. What does it all mean? To what end? At the end of it all, what is the value of a dollar when they are being created in greater and greater quantities even as economic activity retreats?
How does government borrowing in these amounts square with the fact that this same government is already hopelessly insolvent with respect to its current promises to future retirees?
Of course there are no answers to these questions because they are being asked by too few people.
Our job is to change that.
Treasury yields dropping to 0% is highly unusual – but things got even crazier today. Today – for the first time in the history of the United States – Treasury yields traded at negative interest rates. This would tell us that things are definitely getting worse – not better. Investors were buying T-bills that guaranteed a loss. Why? Chris Martenson reviews a couple of reasons below – but I believe that it’s because people in the know – are scared. We are now living in a financial environment where investors are looking for the safest investments they can find – and those investments are now paying almost nothing or negative returns. Is it still an investment if you are guaranteed to lose money?
This is what the world looks like in a debt based monetary system that is collapsing. Wealth (money) is evaporating at such a rapid pace that people are looking for ways to lose the least amount of money. Forget about trying to find positive returns – people just want to try to hold onto what they have. This is why people are clinging to cash and gold – and I believe the value of our currency will very soon begin a freefall with the Fed printing money like crazy to prop up the system. The grand game will be over when the Fed begins monetizing our debt (think Zimbabwe).
Here’s an update on our money supply growth rate. It’s not hard to see that money supply growth is slowing considerably. Unfortunately, as we’ve already discussed, high growth rates are required to keep the system functioning.
Does the DJIA stock index look familiar?
How about the S&P 500?
Nasdaq Composite?
All of our major stock indexes continue to shadow our money supply – only this time – it’s heading in the wrong direction. I’ve mentioned before – the only way to resurrect money supply growth rates is to create more debt – and as we’ve seen – banks do not want to lend and consumers are reluctant to take on more debt. The actions of the Fed may provide a brief upswing in stocks – if the money finds its way into consumer’s and investor’s hands – but it will only be a temporary fix.
Based on recent comments by the Fed and Treasury, on the surface it might appear that Fed actions (lowering interest rates and buying toxic securities) coupled with over $4 trillion in government bailouts are somehow alleviating the credit crisis. The truth is that banks are not lending, consumers are not spending and corporations continue to layoff workers and delay capital spending in an attempt to survive this ‘downturn’.
Regardless of what we’re told in the media, the following graph shows us that banks are not lending.
Why? As we’ve discussed before – loan defaults and foreclosures are rising, bank capital levels are uncomfortably low (22 U.S. banks have now failed this year) and there is a serious aversion to risk rippling throughout the entire financial system. There’s also another reason – the Fed is paying interest on reserves. If you are a bank, why risk your money in this economic environment when you can earn interest – risk free – at the Fed. This is another example of the Fed telling us that they are trying to help the situation – when their actions have the opposite effect.
If you are still playing around in the stock market – my advice is to ignore all of the recent talk about ‘finding a bottom’ and get out of this mess.
jg – Dec 9, 2008
_____________________________________
Floating on air: Treasury bills go negative
Floating on air: Treasury bills go negative
Tuesday, December 9, 2008, 5:30 pm, by cmartenson
Separating truth from fiction, especially when listening to politicians and Fed officials talking about the positive aspects they see in our economy, is never easy.
However, separating words from actions is as easy as pie.
Today, something so unusual happened in the world of bonds, that I have to tell you about it. (All quotes below from this one article).
Treasury Bills Trade at Negative RatesDec. 9 (Bloomberg) -- Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.
At no point ever in our history, not during the worst moment of war nor at the most vicious low-point of the Great Depression, have Treasury bills yielded a negative rate of interest.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent
What could this mean?
It could mean that there's still no trust in the system. Think about what would motivate a large financial institution to accept a negative rate of interest. What could cause a CFO to decide to place their money in an instrument that is guaranteed to lose money? All I can come up with is that they are unwilling to entrust their money to any of the large banks out there that are offering positive returns on invested money because they don't trust that they'll get that money back. This means that large companies and financial institutions with deep insider connections and who know the lay of the land far better than you or I do not trust that their money is safe in any of the large banks. Think about that for a minute.
Or it could mean that the trillions of dollars that the Fed has now pushed out into the banking system have nowhere to go (or some combination of both). The only economic reason to accept a negative rate of interest is if you are convinced that prices are falling at a faster rate.
We know that more than $600 billion of the newly created Fed money has been parked straight back into the Fed where it is earning interest. As of today, the rate of interest on the money that the banks can borrow is less than the rate that the Fed is paying them. This means the Fed is offering a negative interest rate.
Thus, negative Treasury bill rates are our second example of negative interest rates that we've encountered in the past month.
To call this "unusual" is to engage in an extreme form of understatement. Unusual means "not usual". A car driving by with dolls glued all over it is unusual. A car floating by 6 feet in the air is something else entirely and on a par with negative interest rates in a debt based money system.
So consider the proposition that you are a big bank, you've been handed several hundreds of billions of dollars and you have to put it somewhere. What do you do?
The first thing you do is you take advantage of the Feds extremely generous negative interest rate money bonanza. But that will come to an end when/if the Fed lowers interest rates to 0.75% or below which will almost certainly happen on December 16th:
Futures contracts on the Chicago Board of Trade show odds of 98 percent the Fed will lower its 1 percent target rate on overnight loans between banks to 0.25 percent on Dec. 16. The probability was 38 percent a week ago.
Given that free money gravy-train is coming to an end, what does a big bank with several hundred billion burning a hole in its pocket do? Further, suppose that they can't find any qualified borrowers with a sensible use for the money. That money has to go somewhere.
So today's bond action could simply be a reflection of the ending of the Fed negative interest rate policy pushing more of that bank money out into new places.
Of course, it is a stunning stroke of good luck (tongue in cheek) that the Fed's money-spigot largess that is now spilling over into government bonds comes at precisely the right moment for a US government that will shatter all borrowing records over the coming months.
The U.S. is headed toward $1.5 trillion in debt sales as the budget deficit approaches $1 trillion in the 2009 fiscal year according to Bank of America Corp. The deficit this year was $455 billion.
Watching all of this unfold is surreal. What does it all mean? To what end? At the end of it all, what is the value of a dollar when they are being created in greater and greater quantities even as economic activity retreats?
How does government borrowing in these amounts square with the fact that this same government is already hopelessly insolvent with respect to its current promises to future retirees?
Of course there are no answers to these questions because they are being asked by too few people.
Our job is to change that.
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Amen brother.
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