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The wish for economics to be science doesn't it make so -- to look back and wonder how so many professionals could have missed the emerging pattern is to admit that faith in economics is not fully rational. From every crisis a scorned
prophet emerges, but of course we want something like scientific consensus rather than prophets. Roubini had no better information than other other
economists in academia and on the Street. Oddly, his theme was conservative: older lending and leverage standards were better, innovation conceals unknown dangers, etc. But his forecasts were no more worthy of credence than the opinions of, say, Mr. Greenspan or Mr. Bernanke. We'd like to do better in the future, certainly, but based on what?


I realize your deeply analytical and academic approach to economic affairs, but to assert that the current administration did not try to avert this crisis is simply false. I would refer you to the link below, and encourage you not to rely solely on the New York Times for your news.


redmund sum

Dr Becker has a much more cogent explanation on why the "warning signs" were "ignored." Note that it is not sufficient to be able to predict what "is bound to happen," which is in itself very, very difficult in a complex system, to be really useful, the prediction has to have a time element: when? Or what the triggering events would be. If a person is sufficiently confident of his predictions, he obviously would put money where his mouth is, and be richly rewarded.

Remember: "In the long run, we are all dead." Question is: When?

So, I say it is pointless to ask why we did not heed the warning calls when there were all sorts of calls (of boom and doom) being made every day by every self-proclaimed expert. How many investigations can anyone do? And which ones? Besides, there is a lot of money to be made while the ride still looks good. The real question is: can you afford the risk and when should you get out?

I am with Dr. Becker. I don't see this turmoil, as painful as it is, as indicative of the failure of the free market. I am not being facetious or heartless, as a lot of people, even those on the sidelines, lost a lot of money. But I am struck by a very insightful saying by Dr. Thomas Sowell: "Failure is an important part of the success of the capitalistic system." In the free market system, companies that are seriously mismanaged in one way or another will fail, and these failures make room for the ones that are well managed. There are those who will tell you that massive business failures are an indictment of the capitalistic system. Nothing can be further from the truth. If you are overly agonized by business failures, you should learn to get over it. For it is the way the free market works. Yes, it is very imperfect and sometimes downright ugly, but - guess what - it is better than anything else men have tried!

I am definitely guilty of being "heavily invested" in the free market ideology.

D. Murphy

A factor: Anyone in past years who warned of the dangers of subprime loans to the poor and/or to minorities would have been instantly labeled a redlining racist. This made political interventions highly unlikely at the time when they were most needed.


A lender objecting to minorities getting loans is racist. Point Blank.


"We'd like to do better in the future, certainly, but based on what?


The basis of all Science.


Improving signal strength by filtering out noise -- or discovering signal within what was previously thought to be "noise" -- is always the goal of scientific progress.

What cannot be discounted here is the influence of ideology on the analysis. Roubini was dismissively labeled a "permabear" by many financial analysts and economists. If the economic/financial community cannot discern value due to ideological assumptions, then its members are as "scientific" as Copernicus's religious inquisitors. Cynics would say it is not an issue of "cannot" but one of WILL NOT due to vested interests in status quo/political outcomes.

In other fields of science, a researcher/theorist who has a financial stake in the outcome of the research is said to have a Conflict of Interest.

Here, for all of the brilliant technical analysis which will always be beyond my abilities, the core issue to me is why economics focuses so little on a quantitative analysis of Standard of Living and psychological well-being. And, in my opinion, it does not do to say I have answered my own question by bringing in psychology. Clearly, psychology on the individual and societal level is essential to meaningful economic analysis.

As long as economics is unable to unify with psychology, in my opinion its value as a discipline is severely limited. It is merely an observational study always looking to the past for "predictive patterns" without the diagnostic tools to be very useful in looking ahead to an unfolding future.

For example, no one has ever seen the degree of volatility in the stock markets we have right now. No one has ever seen a one-day 900-point "bear market rally" upward swing in the Dow (itself a very problematic indicator, but I digress).

It is interesting that the Paulson/Bernanke array of tools is referred to in the language of war as "bullets" or "arrows" or "bazookas" or "squirt guns" as opposed to medical terminology. Is it because the truth of the matter is that the state of economics vis a vis other disciplines is such that all they have to treat economic ailments are leeches and carbolic smoke balls?



Amen. Or perhaps to avoid appearances of using religious terms in favor of a more academic and scientific salutation, ataboy!

Brian Davis

Ah yes, the timeless carbolic smoke ball. And we also saw the tale of the hairy hand. And the riddle of the Peerless. Where did the LAW disappear to in all this wreckage? That's a deadly serious (and now colossally-expensive) question. Having represented and counseled a large number of state-regulated insurance organizations over the years, I can certify that failure is the rare exception to consistently solid company performance. No, the stocks don't tend to be day trades and your claim may not be worth what you thought, but the money will be there if it is. Fast-buck artists usually get rooted out pretty quickly, if not by the insurance commissioner then by their competition or the state's prosecutor.


the uk 's bailout is much better than the us. in hk where i live , it also had a new policy - 100% guarantee of the savings. i think it is a good policy as now we must recover the confidence of the consuners.


Expect a very good Economy in 7 months!
Falling home values, rising unemployment, declining confidence among consumers and businesses and, lately, a swooning stock market…all these will change in another 7 months.
This is the prediction by a team of Scholars in Astrology. According to them, the world, especially the USA will have a better economy within 7 months. Signals of better changes will be visible by December 21 2008, and good results will be seen from that date. However, individuals should have a systematic planning to overcome this crisis period.
I addition to other advices already given I strongly recommend to plan your finances professionally. Books like, Act Now…Tomorrow may be too late by James Walker, Published by www.JTSbooks.com, Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis by Mark Zandi, published by www.Amazon.com, The Dollar Crisis : Causes, Consquences, Curesby Richard Duncan published by Barnes&Noble are MUST READS.


@ Brian Davis: Love the hairy hand. :)

You nailed it. If the credit default swap market had been properly regulated as insurance commitments with appropriate capitalization requirements, we wouldn't be in this mess.

Without regulation, the law has no traction. Amazing how that works. Good luck trying to get the deregulation ideologues to come clean without trying to shift blame to all of that horrible "minority" lending.


It was well foreseen in The Black Swan, Conquer the Crash, and probably other nonsanctified publications. Perhaps establishment types aren't capable of playing Cassandra?
As to "failure of regulation" fans, bad loans in a collapsing bubble can't be hidden, insolvency has a quality all its own.

James T. Struck

1. With regard to Krugman being awarded the Nobel Prize in Economics; I wanted to say that his argument about trade impacting different regions depicted on the Nobel Prize site on Monday (drawing of trade flows between regions) reminded me of a "Beyong Krugman-the Role of War In International Trade" topic that I had been discussing. Areas like Illinois received about $164 million dollars in taxes from the Boeing corporation in 2007 involved in producing weapons and missiles.(10-K Boeing Corporation) Property holdings of Boeing are larger in about 12 other areas although Boeing has headquarters here. From their 10-K, it is not clear if US State taxes includes property taxes to these 11 or 12 other states. Some of that revenue pays down Illinois' debt and pays salaries of state of Illinois employees. Those employees in turn could or might go to places like the museums, grocery stores, zoos,restaurants, Swedish American Museum, Three Crowns, any place or any where and Swedish Covenant Hospital and get coloring books, food and health care. Over the short term,involvement in war provides some revenue for an area. Over the long term,continuous use of missiles damages the economy of the regions being bombed and redirects resources from health or food to missiles and weapons. It should be said that the concern that the state taxes this corporation involved in war has lead to loss of rights for my mother and I, as Judge Posner knows, as filings were filed in front of him in terms of retaliation for discussion in state courts for the topic of the state and County taxing the Boeing corporation involved in war. I raised the question, even with the ICC, that retaliation for discussion of a state being involved in war could be a violation of article 8 of the Rome Statute and sections of the Geneva Convention Protocol 4 on the Rights of civilians. "Beyond Krugman-The Role of War in International Trade" is a worthwhile topic to think about with regard to our financial problems. Ask yourself if resources have been redirected from other aspects of life into a war economy?

2. What exactly happened to call this a financial crisis? We saw no significant increase in unemployment except for about a 1% increase, we saw increased foreclosures and we saw severe stock market dips. Those types of things are regular economic happenings. Stock markets drop all the time, mortgages are foreclosed on all the time. Unemployment rates fluctuate all the time. I have this suspicion that Greenspan, Clinton, Bush Senior, and Reagan faced these very same issues and did not call them financial crises. In fact, Clinton's relationships with people drew attention away from economic problems in possibly a healthy way. If $700 billion is being used to buyout banks by banks receiving funds, how do we help a financial crisis by making bank takeovers easier by bailed out banks?
3. If we imagined today, "All America's debt is written off" what would happen? You owning a bond would not be repaid. You owning a treasury note or treasury bill would not be repaid. Other than that kind of problem, what other effects would government imagining that its debt is gone have? Some sources say we have had this debt since the Revolutionary War and not since Vietnam as some other sources say.

James T. Struck

An additional note is that I was retaliated against by some Cook County employees for discussing issues such as the County and state taxing Boeing involved in the war, the right of elderly or disabled to avoid smokers and not get cancer, the right to get mail, the right to get caregiving bills reimbursed, the right not to be enslaved for having a diagnosis, inacapacity, mental illness, the right to know chemicals put into someone, Olmstead v. LC and executive order rights to go home, state rights to visit, phone, know where family is, right to dispute an eviction, right not to be evicted when pipes break in the cold or you are given cold water or want to be alone on an elevator, concerns about being pushed from buildings or threatened with lock up for concerns such as short term exposure causing cancer or 500,000 people dying each year in nursing homes some related to smokers or second hand smoke. My discussion of war crimes was that Boeing is the corporation that provided many of the missiles used against Iraq, Afghanistan, and the airplanes hijacked in 9/11. 7,000 people died in Iraq in the first week of the war related to bombing; many of the missiles were Boeing provided. 3,000 people died in the early part of bombing of Afghanistan related to bombing. Boeing's airplanes delivered the Hiroshima and Nagasaki bombs. Their airplanes and missiles were involved in the Korean war and Vietnam war as well. One point is that the County and state taxed a corporation involved in war and retaliated by taking away housing, phone restriction, not reimbursing bills, taking mail and visitation restriction. Another point is that the government could just as easily be said to be "unable to care for themselves" because the government is receiving income from harmful issues such as alcohol, tobacco and missiles. I was relying on my reading of the Geneva Convention protocol 4 I think article 161 and parts of the Rome Statute article 8. Litigation is part of economic problems I believe. If in cases such as Russ v. Watts, having a son means the parent of the father has no rights to associate with son, then there are economic effects of legal decisions. What is the point of marriage or childbirth if you might loose your right to associate with your parents?


I recently happened upon this blog; here's an excerpt from an article I've been sharing with my principles of macro students. The article was published in March of 2006:

“When the downturn in house prices occurs, many homeowners will have mortgages that exceed the value of their homes, a situation that is virtually certain to send default rates soaring. This will put lenders that hold large amounts of mortgage debt at risk, and possibly jeopardize the solvency of Fannie Mae and Freddie Mac, since they guarantee much of this debt. If these mortgage giants faced collapse, a government bailout (similar to the S&L bailout), involving hundreds of billions of dollars, would be virtually inevitable.” Baker, Dean (2006) "The Menace of an Unchecked Housing Bubble," The Economists' Voice: Vol. 3 : Iss. 4, Article 1.

I wanted to point out that Roubini wasn't the only one to foresee this mess. Perhaps the failure to act in this situation is similar to our failure to act on warnings about global warming. We often don’t believe that the worst-case scenario will happen. That is, as demonstrated by a number of risk researchers, humans systematically underestimate the probability of high-risk, high-cost events.

Chris Graves

Well, anyone familiar with Friedrich Hayek's theory of the business cycle could have predicted this scenario(see his *Prices and Production* 1931, *Monetary Theory and the Trade Cycle* 1933, and *Pure Theory of Capital* 1941--see this article for a summary of the overinvestment theory:


The continual injection of credit into the economic system without the savings to support investments over time was bound to lead to this sort of credit crisis. For example, Peter Schiff, an investment counselor working from Hayek's theory predicted this crash in 2006.

Why did not others predict the crash? Nouriel Roubini appeared on Charlie Rose Tuesday night and was asked this question. Roubini replied that among other reasons was a lack of independent thought. Thomas Kuhn showed how this problem occurs in the scientific community. Certainly, if one falls outside of the dominant paradigm, people just do not listen, at best. At worst, those in the dominant paradigm suppress the criticisms of the dominant paradigm and alternative visions. Consider how the University of Chicago Economics Department would not allow Hayek to serve as a visiting professor in their department in 1950. He had to take a position at the Committee on Social Thought instead. While that move was not quite suppressing Hayek's views, Knight and others did not want to lend credence to the Austrian approach to economics. New York University's Business School took an even more disdainful approach to their association with Ludwig von Mises. The social psychological and sociological literature on "Group Think" would be relevant in studying the suppression of independent thought.

Finally, there is something to inflationary economic booms that seems to cloud people's thinking and leads them to irresponsible behavior. Inflation and its attendant boom feeds a frenetic pace of life that induces people to engage in self-destructive and anti-social behavior. It is like an illicit drug that hypes people up even as they realize at some level that they should not be doing the things they are doing. Tom Wolfe describes my hometown of Atlanta, Georgia, very insightfully as a boomtown in his novel, *A Man in Full.* I found Atlanta to be so boorish, I left town in disgust. As Professor Becker argues, no one knows when the bubble will pop, so they keep pushing to get all that they can right now. I would carry that insight a bit further by arguing that the headiness of the ride up distorts people's equilibrium. Growth that is too rapid for too long will produce this kind of immoral, dumb mindset that gave rise to the crash. Inflation is very much like an addictive drug. It produces a euphoria that cannot be sustained over time. During the high, it distorts people's judgement and corrupts their behavior. Feeding into this euphoria was the implicit understanding of a cushion that would break the fall if it ever came--in the form of a bailout. Moral hazard from previous bailouts raised its head again as it will in the future.

James T. Struck

I think a component of the depression was the Dust Bowl and the loss of soil in the great plains.

I wonder if bailouts are needed. If a product is really overvalued, why not allow bankruptcies to go forward. Mortgate lenders go into receiverships with old asset holders still holding onto assets held in bankruptcy trusts. Judge Posner deals with bankruptcies every week, month or day. Do not people who owned these banks still hold onto some assets in bankruptcy? Bankruptcy does not mean the lenders lose everything; there is just a receivership in some cases. Why increase debt when bankruptcy stands as an option?

Whether or not Joe Plumber gets a fine is an interesting almost diversionary issue. A president can have an executive order about health insurance, but a senator can propose that as well. A president can veto or let pass such a bill. I found this to be a somewhat diversionary discussion. Whether or not somewhat relates to a weathermen I found to be interesting; people need to relate to eachother irregardless of their pasts. McCain's critique became I reason I liked Obama; able to relate to people of differing backgrounds.

I still feel, as I have said on SSRN and other places, that the first place finisher finishes first and second place finisher second according to article 2 and amendent 12 of the US Constitution. These two McCain and Obama will be top 2 finishers probably. The money spent to support their candidacies could help many families in financial trouble or persons in financial trouble. I think Obama and McCain would be better off getting some rest and giving their donations to persons in financial stress.

T V Selvakumaran

(Continued on Thursday, October 16, 2008)

Q13. You had mentioned in your answer to Q9 that "as far as the Federal Reserve Bank is concerned, the most important and pressing need, at present, is for its Chairman, Professor Benjamin Bernanke to give a well-thought public speech that demonstrates that he understands the problems he is encountering in the markets." The Federal Reserve Chairman has indeed been giving public speeches on the current financial crisis during the last few days. On October 7, he spoke at the conference of the National Association of Business Economists (NABE). Yesterday (October 15), Professor Bernanke spoke at the Economic Club of New York and held a Q & A session after that. Does Professor Bernanke's speeches provide some assurance about his expertise in being able to deal with this financial crisis?

A. Yes, I have transcribed Professor Bernanke's speech and his Q & A session held yesterday at the Economic Club in New York. I have carefully considered his remarks in his opening address and his answers in the Q & A session. I have to say, with great reluctance and some sadness, that Professor Bernanke does not possess sufficient understanding of the current crisis in the financial markets. This is all the more worrisome because Professor Bernanke seems to have earnestly consulted his academic colleagues throughout this crisis. One good aspect about Professor Bernanke's stewardship of the Federal Reserve is that right from the beginning of his term, he has functioned within a rational and logical policy framework which had been derived from current academic scholarship of the Great Depression. Let me explain the broad outlines of his policy framework here. For more details, the reader should refer to the transcripts of yesterday's speech given by Professor Bernanke (a copy of the transcripts is attached to this mail):

To quote Professor Bernanke (from yesterday's speech), "The crisis we face in the financial markets has many novel aspects largely arising from the complexity and sophistication of today's financial institutions and instruments, a remarkable degree of global financial integration that allows financial shocks to be transmitted around the world at the speed of light". Professor Bernanke also made some comments about the positive geo-political reality that enables the Federal Reserve to work in close coordination with the central banks of Japan, England and Europe, in contrast to the protectionist economic policies of the industrial countries during the Great Depression. But for these novel aspects, it would seem, from listening to Professor Bernanke's speech and his Q & A, that the current crisis situation can be handled with tools and techniques developed from past experiences, particularly the Great Depression. Lastly, expressing a firm "we will not stand down", as the Chairman did yesterday would, I suppose, contribute towards managing the expectations of market participants about the future.

The first lesson of the Great Depression is that the government authorities (the Federal Reserve, the Treasury, the Congress and the President) should act early and act quickly because waiting too long could mean that many financial institutions are already insolvent. The next lesson is that the central bank should provide liquidity in the financial system by keeping interest rates down and by extending large amounts of credit to the banks by way of short-term lending. Beyond this liquidity provision, the Federal Reserve, the Treasury and the FDIC should take precautions to prevent the collapse of a large number of banks through bank-runs, as happened during the Great Depression. Moreover, the systemic risk should be monitored continuously and any large financial institution whose failure is too risky for the whole financial system should be directly assisted in avoiding bankruptcy. At some point in this crisis-prevention program, the central bank would find itself out of resources, i.e., monetary policy alone would not be sufficient to prevent the escalation of the crisis. At that point or well before that, Congress and the Administration should step in with fiscal assistance. The intellectual basis for this role for government's intervention has been long established by the great British economist John Maynard Keynes during the Great Depression. Government intervention could take the form of deficit financing, higher taxation and (partial) nationalization. While all this assistance is going on, the central bank should use its mathematical models for gauging inflationary expectations to make sure that inflation does not get out of control. It may be noted in passing that this inflationary-expectations-modelling, a body of knowledge that has evolved from the collective contributions of monetary theory, behavioral psychology and econometrics, is one of the great achievements of 20th century economic theory.

This then is the broad outline of the policy framework that the Federal Reserve has been following during the tenure of Professor Bernanke as its Chairman. The practical implication of this policy framework is that the Federal Reserve provides broad intellectual support to the Treasury's actions in this crisis. In particular, the government take-over of Fannie Mae and Freddie Mac in early September and the 700 billion dollar Troubled Assets Relief Program (TARP) passed in the US Congress in early October are given theoretical justification under the Keynesian prescription for government intervention. So far, so good. Now, regarding the future, the Keynesian tradition would advocate regulating the financial markets to prevent excessive risk-taking, and injecting equity into financial firms to prevent insolvency. The moneratist tradition would insist, I suppose, on a role for the Federal Reserve in providing liquidity and the thawing of the credit freeze. The libertarian tradition would provide assurance to the finance firms that the government's involvement is only for their own benefit. Unfortunately, this policy framework does not take into account some crucial aspects of today's economic reality. Hence, I am forced to express doubts about Professor Bernanke's understanding of the current financial situation. With all due respects, I have to give Professor Bernanke a mild thumbs-down.

Q14. In what ways are the current economic situation different from the Great Depression?

A. To my knowledge, academic literature in economics does not take into account that the Great Depression fell between the two World Wars of the 20th century. As a result, the lessons of the Great Depression for today are usually specified as abstract policy prescriptions without taking into account the particular details of the political and economic reality that existed at that time. The single major difference between the American economy during the Great Depression and the contemporary one is the massive accumulation of capital, a phenomenon which I have explained in detail in my answer to Q1 above. Before World War I, the most advanced industrial nations with well-developed pension systems and universal health care were in Europe. World War I wiped out the accumulated capital of these countries. America was beginning to experience the first blushes of affluence during the Jazz age of the 20s, just before the onset of the Great Depression. Thus there were no sizable accumulations of capital anywhere in the world. In contrast, the pension funds and mutual funds that hold the lifetime savings of today's workers all over the world amount to anywhere between 20 trillion to 50 trillion dollars. One should compare this figure with the fact that the annual GDP of the United States is of the order of 14 trillion dollars.

The second major difference is geo-political reality, which Professor Bernanke alluded to in his speech. During the Great Depression, countries were pursuing protectionist economic policies and severe restrictions on the flow of capital across the world. In contrast, global flow of capital, goods, labour are growing rapidly today. Moreover, nations are increasingly adopting democracy as the form of government. This has resulted in a much friendlier, co-operative geo-political environment at the global level. The third major difference is the advent of technology. The use of computers has ensured that communication is more quantitative, reliable and accurate. In this way, the flow of information which is crucial for economic decision making has vastly improved.

Q15. Why are the lessons drawn from the Great Depression inadequate for dealing with the current financial crisis?

A. One can easily see that when one takes the massive accumulations of capital today into account, then the most helpful policy prescriptions for dealing with the current crisis would try mostly to enable the private sector, which holds these vast quantities of capital, to function freely. The possibility that capital does not flow freely but is clogged up temporarily calls for an active policy of providing liquidity. But other than that direct government intervention to adjust the capital structure of the finance firms is evidently quite destructive. In short, the cures that Milton Freedman prescribed for avoiding the Great Depression, namely, ample liquidity and minimal government, seem to make the best policy for the current financial crisis. Keynesian policy recommendations might come useful, if and when the economy actually experiences a contraction in output. Moreover, it appears that the credit freeze that has come under intense focus among the economists of late was, in fact, caused by the loss of confidence in the credit markets due to the government's arbitrary intervention in the functioning of the markets, going back at least to the take-over of Fannie Mae and Freddie Mac in early September. One should also note that the term 'credit freeze' is quite misleading. There does not appear to be an actual unavailability of credit on Main Street. Credit freeze seems to refer to the high rates of interest that banks charge for lending to themselves, far in excess of the yield in the Treasury securities, and the high rates of mortgage loans. But, again, the reason for this could be that government is the 800-pound gorilla that is causing a lot of uncertainty in the credit markets by its arbitrary meddling in the functioning of the private sector. Also, inflation could be creeping up, and banks may be unwilling to lend at real interest rates that are negative, unlike the willingness of the Federal Reserve to keep cutting its interest rates. Lastly, the fact that private banks could be charging interest rates much higher than the Fed might help to attract money from the hedge funds and mutual funds which are looking for safer investments than stocks and mortgage securities. Thus it is not entirely a bad thing since it enables the free flow of credit.


TV, Responses to questions 13, 14, 15:

Have you heard that the International Banking and Financial Community will soon be holding meetings on the "state of and condition of" the industry at present. The end result of, which will probably be, modifications of and general revamp of the Industry on the whole. In essence, dragging the Industry into the 21'st Century kicking and screaming. A much different response than that taken during the Great Depression.

Perhps this is what the Federal Reserve Chairman alluded to when he said, "WE will NOT stand down"!


Neilehat: Yes, a Bretton Woods II certainly seems to be in the offing.

TV: To paraphrase your observations about Chairman Bernanke, the quip making the rounds is that he is "fighting the last war." As a scholar of the Great Depression, the question is whether he has sufficient insights into 21st-century finance, as neilehat mentions above.

The differences from 1929-1932 are legion: there was no E.U. and no Euro, no consensus sufficient to result in the concerted effort by ECB and Fed Reserve to coordinate rate cuts and "capital injections" in major banks. I believe that even Japan is now coming around.

TV: I don't know anyone else who holds the view you hold that government action is creating the uncertainty in credit markets. The consensus is that it is (a) Insolvency (the real 800-pound gorilla here, not "Liquidity") and (b) Off balance sheet accounting practices by major financial institutions resulting in tremendous uncertainty about which bank(s) will be next to go belly-up.

The consensus is that there will be more major banks that fail in the coming months. Most see that as a necessary weeding-out process to purge the system and restore confidence in inter-bank lending.

However, I think it is clear that the "Bretton Woods II" will result in:

1. Stricter worldwide capitalization requirements by financial institutions across their lines of business, in part to compensate for repeal of Glass-Steagal in the U.S.;

2. Strict worldwide limits on off balance sheet accounting as part of a move toward greater transparency. Hopefully this will include a tightening of European accounting standards that SEC Chairman Cox was advocating the U.S. adopt (in place of GAAP) as late as early September 2008.

These changes will put limits on the upside ability of banks to use leverage to achieve profits. What the impact will be on the global economy under the resulting paradigm shift I have no idea.

I was delighted to see in the WSJ that Shelia Bair, the Chair of the FDIC (one of the few federal financial oversight agencies with any credibility right now) is advocating for systemic mortgage reformation as a sine qua non of effectively repairing the economy. Right on!

Brian Davis

Bair supported the taxpayer bailout of Wall St that passed Congress. The option (Treasury's) to make direct investments in financial firms and holding companies was in the bill. She might as well live with the priorities set by Paulson (and Bernanke). My gut says they've thrown this Hail Mary because the banks and what's left of the brokers are in much worse shape than the govt wants us to know. Direct Treasury investment (for preferred stock) puts capital of the most liquid variety into the institutions and will surely buy some at least forbearance from the FDIC. Pres. Bush today said the objective is to stimulate loans, loans, loans and jobs, jobs, jobs - trickle down. It's too soon to try to measure whether the $$$, so applied, will do that. Indeed, the average U.S. 30 year fixed home mortgage interest rate immediately jumped to 6.85%. People with cash are now being induced to buy the debt paper of Treasury-infused banks with implicit taxpayer guarantee (a la Fannie & Freddie) rather than spend or invest elsewhere in the economy. I do understand where Bair was coming from (and what FDIC has undertaken with the Indy Mac workouts), but if market interest rates continue to rise anyway, what good will those workouts be? Remember, interest rises = value of principal declines. The govt can't set a floor under real estate values. The market will have to grope at it.


I wish I had the time to read the bill and find what other goodies are buried in there.

I think Bair is proposing a payment cap on workout mortgages of 38% of monthly income. Bernanke is rumored to also be in favor. Not sure what the dynamic is between he and Paulson, but Paulson is gone in a few weeks.

Inflation or Deflation seems to be the $64,000 question right now. Have you seen the Adjusted Reserves/Adjusted Monetary Base figures just released? Holy crap.

I don't think anybody's got a sense of what to do with their cash. Thus the crazy market volatility.

How is the Fed going to suck all this emergency liquidity back up when the crisis is over? What's that going to look like in 18-24 months? 12% mortgages? Bales of cash in the wood stove?

Nobody who's been paying attention should be surprised at the housing starts figures today.

Brian: back to your Rule of Law question the other day. What do you think of Paulson's strong-arming of the bank CEOs? Gotta love a guy who will do whatever it takes: get on his knees before Nancy Pelosi or do the Al Capone scene with the baseball bat from "The Untouchables" with the bank CEOs.

Brian Davis

Dan, I'm not somebody a banker would approach for support. What's in the bailout act itself on exec comp and separation pay is largely fig-leafery. Depending on how the races run for the House and Senate, sure, we could see stuff filed early next year to cap exec comp not only for bankers and Wall Streeters but throughout the economy. Viscerally, it's sickening that, say, a judge has to work for the dollars (respectable but nominal in comparison) a legislature appropriates while deal guys and sycophants in private industry walk away with multi-millions for hosing the their employees, their customers, the investing public, and the IRS. But I don't claim to have a better answer than the next person for how much compensation is enough. Boards of directors and shareholders are supposed to do the leveling but too many conflicts of interest get in the way.


many people said it's greed effect. When atmosphere like this, is alarm still heard?

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