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Posts Tagged ‘financial crisis’

Justin Fox over at Time offers up a comparison between the failures of Wall Street and Detroit:

“Imagine there was this industry–Industry A–that had been flying high for years. It benefited from major regulatory shifts, and changes in the tax code. Its employees were the highest paid of any industry. Then it landed in a crisis entirely of its own making. It had been manufacturing defective products and selling them around the world. Buying them all back would have bankrupted the industry, so it asked Congress for help. Industry A got $700 billion, to be administered by a Treasury Secretary who was the former CEO of one of the industry’s leading firms. He soon began handing out the money at generous terms, with very few restrictions.”

versus…

“Imagine there was this other industry–Industry B–that had been struggling for a while. Some of its problems were of its own making, but government policies played a significant role in its decline. Its employees, while still paid better than their peers in similar industries, had given up perks and pay, and their ranks had been decimated. Then Industry B landed in a crisis that was mostly the making of Industry A. It asked Congress for $25 billion to tide it over. Members of Congress criticized its leaders sharply, and told them not to come back until they had a detailed plan for how they would spend the money and how they would pay it back.”

Much of the political class, Fox included, supports bailout funding for some or all sectors of the first group – the financial industry.  Republicans and Democrats alike are finding billions, with no strings attached.  The auto bailout, however, has been pilloried with execs taunted for their use of private jets while Congress drops all manner of conditions on them.  Why?

Fox argues that banks are critical to all sectors of the economy, as well as explaining that banks are suceptible to panics so that a bad one failing can cause good ones to fail as well.  He also suggests a public perception problem:

“Most Americans simply no longer identify with the domestic auto industry (or with the states of Michigan and Ohio). To the Southerners who now make up the core constituency of the Republican Party, it’s a bunch of coddled, unionized workers trying to get handouts that the South’s auto industry (Toyota, Hyundai, Nissan, Mercedes, BMW …) doesn’t need. To the coastal urbanites and suburbanites who now make up the core constituency of the Democratic Party, it’s an industry that makes crappy big cars and fights against higher fuel efficiency standards. And to the business press it’s the worst thing of all: a trio of companies that are neither exciting nor financially successful.”

Bailout opponents, particularly union-bashing Republicans, have pitched outright lies about the industry.  Auto workers don’t make $70 an hour, but who will defend them?  The business press hates unions, the Democrats aren’t particularly committed to Detroit’s business model, and the clout of various Michigan politicians is fading fast.

In contrast, the financial industry provides its own “impartial” experts.  Whether on Bush or Obama’s team, all the Very Serious People with the Very Serious Solutions are the same ones who tanked these institutions in the first place.  Robert Rubin?  Citigroup.  Henry Paulson?  Goldman Sachs.  Laura Tyson?  Morgan Stanley.  William Daley?  JP Morgan Chase.  This is not a condemnation of Obama, nor Bush for that matter.  It’s simply the way that finance is handled as a combined political and economic issue.  The same people who drive the car into the ditch are presented as the only ones capable of driving it out; the theory being that, well, at least we’re sure they know how to drive.  Enabling this, the press has presented the financial crisis in the passive voice.  Dean Baker explains:

“Let’s imagine that the economy in Venezuela gets really bad in the next few years. Will the Post write about how Hugo Chavez had to cope with enormous economic turmoil?

That’s unlikely. The Post would most likely be running articles that tell readers how Chavez’s policies led to an economic disaster.

But, a different standard is applied to our economic chieftains who pursue policies that the Post endorses. The first part of a two-part profile of Treasury Secretary Henry Paulson’s actions in the crisis is headlined “A Conversion in ‘This Storm.'” The headline implies that the economic crisis is something that came out of the blue as opposed to being an entirely predictable result of the economic policies pursued by Paulson and his predecessors.

The point is extremely simple. There was a huge housing bubble that should have been visible to any competent economic analyst. The bubble was fueled by an enormous chain of highly leveraged finance. (As head of Goldman Sachs, Mr. Paulson personally made hundreds of millions of dollars from this bubble.)

It was entirely predictable that the housing bubble would burst and that its collapse would have a huge impact on the financial system and the economy as a whole. There is zero excuse for Paulson being caught by surprise by a “storm” that he helped create. The Post should not be in the business of covering up for Paulson’s massive failure.”

The narrative on the auto industry is that it failed because of poor choices by management and labor.  The narrative on the financial industries, however, is that it just sorta happened.  No one would dream of asking the CEO of GM (let alone the head of the UAW) to design the plan for a Detroit bailout, and yet that’s exactly what the entire political class does when they anoint the various de-regulators and speculators as managers of trillions more taxpayer dollars.

There isn’t an easy solution for either crisis.  I would, at least, suggest that we listen a bit more to people like James Galbraith, Paul Krugman and Nourial Roubini and a little less to Rubin and his acolytes even as they pander to the new orthodoxy.  Then again, it’s probably too much to ask that politically influential people be judged on performance.  Trix and accountability are for kids.

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From the Washington Post’s Tom Toles:

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The Washington, DC Metro system is the only public transit system in America without a dedicated funding source.  Consequently, Metro goes ’round hat-in-hand trying to find contributions from the DC, Maryland, Virginia, and federal governments.  This please sir may I have another? approach has left the system short approximately $1 billion per year needed for the next decade to ensure upkeep and upgrades to the buses, trains, and rails.  The Senate recently ponied up $1.5 billion, and small fare hikes and increased ridership may add a bit to the pot.  (Though the latter obviously increases wear and tear as well)

So today, the Washington Post reports more bad news:

“Metro and 30 other transit agencies across the country may have to pay billions of dollars to large banks as years-old financing deals unravel, potentially hurting service for millions of bus and train riders, transit officials said yesterday.”

Huh? What happened?

“The problems are an unexpected consequence of the credit crisis, triggered indirectly by the collapse of American International Group, the insurance giant that U.S. taxpayers recently rescued from bankruptcy, officials said.

AIG had guaranteed deals between transit agencies and banks under which the banks made upfront payments that the agencies agreed to repay over time. But AIG’s financial problems have invalidated the company’s guarantees, putting the deals in technical default and allowing the banks to ask for all their money at once. “

In other words, the failure of AIG means that the banks can call in their loans whenever they damn well please; as in, tomorrow.  The Washington Metro Area Transit Authority (WMATA) could owe up to $400 million; one Belgian bank has already demanded payment of $43 million by next week.  They’re going begging to Treasury ASAP, but with other cities including Boston and Atlanta similarly desperate, there may not be much to go around.

The full, depressing situation is here.  Above all, the story reveals the dangerousness of the incredible interconnectivity of our modern economic system.

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  • Former leader of the lunatic-right Austrian Freedom Party Jorg Haider died in a car accident on October 11.  Today, the new party leader confirmed in a radio interview that he and Haider had been lovers.  Sadly, Bruno could not be reached for comment.
  • It’s not a put-on, it’s not faux-populism, it’s not political, self-conscious anti-intellectualism.  Nope.  Sarah Palin is just a straight-up idiot.
  • The financial crisis is the result of a number of complex processes.  However, this instant message exchange among Standard and Poors analysts (revealed in testimony to the House Oversight Committee,) goes a long way towards explaining how we got here:

Rahul Dilip Shah: btw: that deal is ridiculous

Shannon Mooney: I know right … model def does not capture half of the risk

Rahul Dilip Shah: we should not be rating it

Shannon Mooney: we rate every deal

Shannon Mooney: it could be structured by cows and we would rate it

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With Wall Street wavering and populists left and right decrying corporate greed, we may be losing sight of the real victims in the current financial crisis:  The Irish Republican Army.

As per the British and Irish press, the IRA may have lost a substantial amount of money in the banking collapse.  Sources say that the IRA’s financial bosses had moved large amounts of money through front companies into a number of financial institutions that have suffered in the sub-prime crisis.  We’re talking about as much as USD $250 million.  According to sources:

“…one senior IRA finance figure made four apparently frantic visits to New York as the markets began showing signs of impending disaster and then collapsed.”

Whatever the relationship between the IRA and its political wing, Sinn Fein was also already in a bad way.  Despite having traditionally been quite well-funded, (the money laundering will do that,) Sinn Fein is suffering its own financial problems.  According to the Belfast Telegraph:

“…since mid-2007 it has been hit by a series of resignations, mainly of full-time workers and councillors. According to one source one of the current sources of disillusionment among the remaining 50 or so councillors in the Republic has been the withdrawal of “political operating expenses” to top up their council salaries and expenses which rarely exceed €30,000 a year.”

Do them all a solid and drop a buck or two for a pint at your local IRA bar.

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Earlier today, Elizabeth Bumiller of the evil New York Times reported:

“Senator John McCain said Wednesday that he would temporarily suspend his presidential campaign on Thursday to return to Washington to deal with the financial crisis and the $700 billion bailout package now before Congress.”

Mavericky stuff there, lookin’ all post-partisan. But wait, there’s more!

“Mr. McCain said he told Senator Barack Obama that he was asking the Commission on Presidential Debates to postpone the debate scheduled for Friday night.”

These debates are long-planned, long-prepared events. The financial crisis is here today, it’ll be here tomorrow, and if we’re lucky for the rest of our lives. McCain called this a matter of “patriotism;” by now we should know not to trust any Republican wearing a flag. Postponing the debate over the weekend is a shallow ploy to appear statesmanlike while diverting attention away from a floundering campaign. A McCain campaign source noted:

– McCain called Obama before he made the statement and told him he was going to suspend his campaign and move back to DC until the economic crisis has been figured out.
– McCain wants to create “a political free zone” until a deal is reached between now and Monday.

Given the campaign’s inability to manage Palin properly, their decreasingly coherant blame-the-media strategy, and their recent Wall Street problem…

(Pew Poll, September 23)

(Pew Poll, September 23)

…it wasn’t surprising to hear them calling for an urgent political moratorium. NBC’s Kelly O’Donnell quotes the McCainiacs’ hysteria:

“[McCain advisors] deny that there is a political calculation in this and say without action the country could slide into a Depression by Monday and added “we’ll see 12 percent unemployment” if action is not completed.”

Our economy has apparently sunk so low that a 90 minute Presidential debate on Friday night could double the unemployment rate. Ben Smith over at Politico questions the urgency, noting: “The only thing that’s changed in the past 48 hours is the public polling.”

And Obama? “No dice:”

“The debate is on,” a senior Obama campaign official told ABC News.

Assuming the debate remains on, (and I’d put my $1 on it,) McCain will at least suspend his ads. What this has to do with anything is beyond me. Senator McCain isn’t writing the ads himself, nor spending any personal time planning them instead of dealing with financial policy. This too-cute-by-half gambit reaffirms McCain’s motive: A temporary stop to the campaign bleeding, rather than an actual solution to the financial crisis.

Obama could pull his ads as well, if he wants to match McCain charade for facade. (*I’m aware it don’t rhyme.) Alternately, Obama could release a statement explaining that the campaigns themselves are absolutely central to America’s financial future, while hammering on a “failure of conservatism” narrative. Friday’s debate is on foreign policy, so let’s expand it beyond war-gaming. Let’s have a talk about free trade. Let’s have a talk about the interconnectivity of international markets. Let’s have a talk about blowing American taxpayer money to save foreign banks.

Bring. It. On.

Update: The reviews are in and they’re horrible:

First poll results are trickling out.  The very good Survey-USA asked:

“The first debate between John McCain and Barack Obama is scheduled to take place in two days. Should the debate be held as scheduled? Should the debate be held, but the format changed to focus on the economy? Or, should the debate be postponed?”

And the results:

Held as scheduled:  50%

Held with focus on economy:  36%

Postponed:  10%

Not sure:  4%

Nor are Americans buying the campaign suspension gimmick.  Question:

“Is the right response to the turmoil on Wall Street to suspend the campaigns for president? To continue the campaigns as though there is no crisis? Or, to re-focus the campaigns with a unique emphasis on the turmoil on Wall Street?”

Answers:

Suspend campaigns:  14%

Continue campaign:  31%

Re-focus the campaign:  48%

Not sure:  7%

My unscientific guess is that the wording may have pushed some people both towards the “re-focus” answer and away from the “continue” response; the former because it sounds nice (“unique emphasis”) and the latter because it sounds dismissive and naive (“as though there is no crisis.”)  Consistant, though, is the fact that less than one in eight Americans are buying McCain’s used car.

(S-USA polled 1,000 people, margin of error 3.2%.  Crosstabs here.)

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Tuesday tidbits

Kos catches this winner in the 2008 Republican Party convention platform:

“We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself.”

GOP is splintering.  Guess only some Republicans are socialists above $100 billion.

And this letter to the New York Times:

To the Editor:

Dear Mr. Bernanke and Mr. Paulson:

My student loans are too big and it is hurting the economy. Can I have a bailout, please? I need $92,000.

Thanks.

Nathan Kottke
St. Paul, Minnesota

And, via Marginal Revolution, the critical intel:

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