The Wall St. Model is Broken … and Won’t Soon be Fixed!!
By Larry Doyle on November 12, 2008 at 12:15 PM in American Consumers, Banking Institutions, Current Affairs, Economy, Housing & Housing Crisis, Mortgage Crisis
(bumped up from two evenings ago by Marge Gunderson, because it has to be read, or I’ll have to bring you in for questioning. And you won’t be able to answer one question in the — gee, look at all that info LD gave you folks! This is sink-or-swim time — that body? that’s the ECONOMY! — and information like this is a LIFE PRESERVER! Which my dad called a Mae West. And, gee, that Mr. Johnson made a statement about this too. Look, he wrote it in bold below. We all saw some real bunglers commit kidnapping, robbery, extortion and murder, didn’t we.
It’s time we forewarn ourselves so we can stop ‘em dead in their tracks — and we can toss their greedy schemes in the wood chipper before they mess us up again! Me? I’m tryin’ to figure out who murdered the LAW [and those safety nets that kept average Americans safe].)
[Note from Larry Johnson--Folks, this is a very important piece and deserves your time and attention. It is long and it is challenging but LD, who knows the Wall Street world from the inside, is giving you the Willy Wonka tour of the Money Factory. Please check it out.]
Despite billions and now trillions of dollars in capital injections and equity investments made by our government, private equity, and sovereign wealth funds, our economic turmoil is a long way from being over. I do find it interesting that despite numerous Wall St. titans having indicated to us at different points over the last year that we were in the 7th inning of this fiasco, that now a recurring theme is that we should not expect any real economic recovery until 2010. Actually maybe we were in the 7th inning but it was the 7th inning of the first game of a 4 game set.
Well, if we want to figure out where and when we are moving forward, I think it would be beneficial to know from where and when we came.
For those over 50 years of age, perhaps you remember when mortgage money dried up. Perhaps you also recall the days of putting down 20% before you even thought of buying a home. In any event, the growth of the secondary mortgage market in the mid 1980s was a result of some very sharp financial minds on Wall St. who engineered a product called a Collateralized Mortgage Obligation (CMO).
CMOS and their cousins that grew from that model were and are not necessarily bad structures. However, much like prescription drugs. if and when they are abused. they can be deadly.
CMOs used the stream of cash flows from a standard fixed rate mortgage to create specific bonds which met the investment desires of a wide array of investors, including money market funds, bank portfolios, insurance companies, money managers, and pension funds. Prior to the development of the CMO, mortgages were an investment that typically only met the needs of bank portfolios.
As the CMO market grew, two developments occurred. First and foremost, Wall St. firms (which were making on average 1 point on each deal … on an average deal size of 300 million, the Wall St. underwriter made $3 million dollars … not too shabby) had an appetite for more and more mortgage collateral to do more and more deals.
In the mid-1980s, most CMO deals were done with private homebuilders such as Pulte Homes, Centex, Ryland et al. The second development was more substantial. If Wall St. could use mortgage collateral to execute CMOs, why couldn’t they use other forms of loans/assets to create similar sorts of structured products. Thus in the late 1980s the Asset Backed Securities market was launched using credit card loans, auto loans, computer leases, equipment leases, and the like. Again, all Wall St. was doing was using the stream of cash flows from these well underwritten loans to create securities that met the guidelines and needs of a wide array of investors. Again prior to the developments of these markets, the banks underwrote these loans at rates and terms that met their own portfolio needs (REMEMBER THIS POINT!!).
In the late ’80s Freddie Mac and Fannie Mae got a whiff of the profitability of these CMO deals and used their significant lobbying power to get legislation passed that made it advantageous from a tax standpoint for CMOs to be launched through them. While some Wall St. firms were reluctant to support Freddie and Fannie in this process, given F/F ’s position in the business they won out. (REMEMBER THIS POINT!!)
As the CMO and ABS engines grew ever stronger throughout the early to mid 90s, Wall St. needed to find more and more collateral to continue to feed this profit monster. Some Wall St. firms either purchased or made strategic alliances with originators (Lehman Bros bought Aurora Mortgage in Aurora, Colorado … Bear Stearns owned EMC Mortgage in Texas … Merrill Lynch purchased First Franklin, a sub-prime originator, from National City Bank) while some originators formed their own broker dealers to retain the profits of distributing these products (Countrywide Mortgage formed Countrywide Securities, JPM Chase grew its own investment banking presence in the late ’90s as did Bank of America)
In the midst of this growth, Wall St. continued to use this CMO model not only across other consumer asset classes but then branched out and used it with corporate loans as well. Thus Wall St. structured CLOs (collateralized loan obligations using the same financial engineering).
While there were hiccups with different deals for the most part the machine ran smoothly. The machine, though, was built on the premise of strict underwriting of the underlying loans and a robust ratings process.
However, at the turn of the century there were two critically important developments that occurred to truly escalate the disastrous situation we have currently. A number of individuals from Wall St. realized that they could form their own firms (hedge funds) which allowed them a greater share of the profits from this structured financial engineering with less internal or external oversight. (REMEMBER THIS POINT!!)
A large number of qualified analysts from the rating agencies left those firms to come to Wall St. to participate in the profit machine. This shift of talent both to hedge funds and from ratings agencies dramatically exacerbated and accelerated the financial meltdown of the last two years. (***given the amount of money in these hedge funds as well as the amount “earned” by the hedge fund managers it should be no surprise that they became very influential in currying political favor … especially with Barack this go round!!)
At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans … no income no asset check). WOW!!! What were we thinking?? Well Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”
Hedge funds factored into the fray in two ways. They partnered with their friends on Wall St. in managing CBOs and CLOs and they purchased the cheapest bonds in the deals or so they thought. Rating agencies either were not smart enough to know what they were rating or were blinded by their own stream of profits given the growing volume of deals. They were negligent or complicit or both. Honestly there was nobody who truly was looking out for the investors, who it was assumed should look out for themselves. Where was the SEC when you really needed them??!! This was all hunky dory as long as the economy was humming and delinquencies and defaults by consumers, homeowners, and corporations were well behaved.
In 2005 or thereabouts Wall St. had such a voracious appetite for volume of collateral product that they pressed the envelope even further and came up with “synthetic” structures. These structures purely used a pool of known collateral (be it sub-prime mortgages, home equity loans, corporate loans, et al) as a reference pool for the stream of cash flows in the deal. Wow!!
Without the need for actual collateral Wall St. really rocked. (REMEMBER THIS POINT)
Under the “originate to distribute” model Wall St. hired reams of financial quants and engineers to structure deals. Wall St. grew their distribution efforts globally to sell these products far and wide.
Life was good!! … or so they thought.
Wall St. actually started to think they were as smart as everybody told them. Wall St. thought that their own models were so robust because they had the smartest minds build them. Wall St. thought that they had become so effective at “distributing” risk that they were blind to the fact of just how much risk they “created”. Then the music stopped. The Fed needed to increase rates to slow the pace of inflation that was emanating from global economic growth especially in Asia. Mortgage rates reset at higher levels. Freddie and Fannie started to show signs of distress. Wall St. pressed so hard that they “killed the goose that had laid the golden eggs”.
Against that backdrop, through the 3rd quarter in 2008, check out the volume of underwritings in these respective sectors vs 3rd quarter 2007.
| Deals using mortgage collateral … … | down 95%!!!!!!!! |
| Deals using commercial mortgage collateral … … | down 89%!!!!!!!! |
| Deals using consumer assets … … | down 75%!!!!!!!! |
The mortgage and asset backed markets (including commercial mortgages) are twice the size of the overall U.S. government bond market and app half the size of the U.S. equity markets. The mortgage market doubled in size from the end of 2003 until the end of 2007!!!
Investors now fully appreciate that with the economy slowing and seemingly picking up speed that delinquencies and defaults will continue to ratchet higher. The embedded losses are only exacerbated by the massive leveraging that occurred via the use of “synthetic” cash flows. No, the media has no appreciation for this and will not share it with the public.
Where are the other shoes that have yet to drop??
Please refer back to the “synthetic” structure that I discussed. These synthetic structures grew exponentially with the growth of a product called the “credit default swap” or CDS. This product, in theory, is outstanding because it acts to protect investors against defaults on the underlying referenced corporation or entity (such as sub-prime mortgages). That said, instead of helping to distribute risk the CDS market has effectively “created” risk because it has grown to the point where it now is 10 times the size of the overall corporate bond market that it is supposed to be tracking.
Yes, the tail is very much wagging the dog. Hedge funds dominate the trading activity with close to 60% of the overall trading volume. Hedge funds have gotten good press so far for not having had many “blow ups”!!
Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt that they have positions that are grossly mismarked and that they have many positions that are totally illiquid. For many investors in these funds these are truly “roach motels”. Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.
Read more how “Hedge Funds on Hot Seat.”
In the S&L crisis of the late ’80s the overall cost was estimated to be $100bln+ with the government taking over and liquidating failed institutions. Now given the tremendous systemic risk that links Wall. St investment banks to hedge funds to insurance companies, to sovereign wealth funds to commercial banks to municipalities the losses are untold.
To think that a stimulus package of even $300bln along with the $700bln commitment that has already been made is going to “fix” our economy is foolhardy. We will definitely get “bear market” rallies in the stock market and politicians and market timers who will tell you that all is well but don’t get fooled by “that man behind the curtain”. The losses in the banking system alone are upwards of $1 trillion. From there let’s move into insurance companies, hedge funds et al. Paulson, Sheila Baer, Bernanke and others know that any money that goes into the system is purely going to help the banks recapitalize themselves in the face of these losses.
When Barney Frank, Nancy Pelosi, and Barack Obama complain that they need to make sure that credit lines open and remain open, they are not addressing the fact that the banks have an overwhelming amount of non-performing assets already and that those assets are likely going to grow in the face of an unemployment rate headed up by 2% to 4%!!
Please read this article in Monday’s WSJ highlighting how Uncle Sam is reworking the terms of the rescue package for AIG. This article highlights the systemic risk (Goldman Sachs is widely speculated to have the greatest counterparty risk exposure to AIG) and the very fluid nature of the deteriorating situation. Guess what? As taxpayers we have the bulk of the risk as we own 80% of AIG and will very likely lose a lot of money on this deal. That said, the near term losses would very likely be even greater if AIG were not propped up by the government. It is not a given that our longer term losses and negative impact on GDP won’t exceed the perils of immediate losses. We have a high stakes game of craps on our hands.
“Government, AIG Near Pact to Scrap Original Terms of Deal” … oh what fun!!
I have little doubt that we will also in large measure “nationalize” the auto industry. Read here how the “Auto Makers Force Bailout Issue” …
IMO, there are only a few moves that Obama, Summers, Geithner, Volcker, Buffet or Rubin can do to change this situation for the better. Those moves include:
- lowering the tax rate on capital gains (I’m not so sure that Barack wants to do that)
- categorically state that tax rates will not change (not sure he will do that either)
- spending freeze!! (also not sure he wants to do this either).
Even with those moves, it may only shorten the length of our very deep recession but will not negate it.
Honestly, I have to believe that Barack is kicking himself thinking that his entire program to create social change may very well be at the mercy of these economic constraints. IMO, if he and/or the Democratic leadership aggressively push the tax/spend agenda, the markets will punish them in very short order.
With the unemployment rate headed higher, to at least 8% if not 9% or 10%+, I firmly believe that people will use any money from the government to simply pay off existing debt. That is the rational move at this point. Our U.S. personal savings rate is 1%!!! In China the personal savings rate is 40%!! The party’s over, the lights have come back on, and somebody has to pay the bill. Yep, that’s right and regrettably that bill is on the U.S. taxpayer. Screwed again.
The government has already massively increased it’s own debt and will “crowd out ” lending into other sectors.
If we go back to the first point I asked you to remember, with the “originate to distribute” model broken and not soon if ever to return, banks will now only underwrite those loans (consumer or corporate) that they feel comfortable putting into their own portfolio at terms and rates that are amenable to both sides. That is why I think rates for these loans will be higher and volumes will be lower. Batten down the hatches.
Paulson knew of the consequences of this scenario earlier this year. He hoped the banks could sell assets, he says as much in this piece … “Paulson, Bernanke Strained for Consensus In Bailout.”
As Maryann Hurley a Vice-President of D.A. Davidson recently said, “When the banks shed their balance sheets of a lot of these unwanted and poorly performing assets.” they may start to lend again. Hurley added that consumers need to fix their balance sheets as well after years of going into debt. The lack of a rigorous underwriting process is coming home to roost.
She adds, “I’m guessing it’s not going to be before 2010 at best and it’s most likely 2011 before the economy really starts to turn around.”
7th inning of game 1 of a 4 game set …
LD
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Maybe the corrupt people involved in Freddie and Fannie can hand back over some cash. Like that 90 Million OVomit’s best friend Franklin Raines took. These people make me sick.
Obama was an “International Student” aka a “Foreign Exchange Student” at Columbia in NYC in the 1980s (and Occidental College in California before that)….he applied and registered as a Kenyan citizen.
Obama also traveled to Pakistan as a college student at a time when it was illegal for US citizens to visit Pakistan.
He travled to Pakistan on his Kenyan Passport.
Under Kenyan law, people are allowed to hold dual citizenship until age 21 (toward the end of college).
Obama did hold Kenyan citizenship until age 21 and admits it on his web site, though he hides the admission on a “fight the smears” page.
The FACT of his Kenyan citizenship is not a smear.
But is surely something he does not want people to know about. I think that most people would be surprised to learn of his Kenyan Citizenship into the 1980s and that the next President of the United States of America applied to and attended two elite US colleges as a “foreign exchange student.”
All legal, all true, but truly surprising to many people, whether they support him or not.
do you have a link or source for his registration at Occidental. I’ve thought that is why his records were sealed. Any source appreciated!
More pure douchebaggery from Obama – Solis-Doyle for the cabinet.
Sad but true.
http://thepage.time.com/2008/11/10/report-obama-team-wants-solis-doyle-for-white-house-post/?xid=rss-page
Wow…just…wow…I’m sorry, I had at least hoped that OVomit would pick some interesting people to surround himself with. Emanuel? Kerry? Solis-Doyle? YAWN. Where’s that big ole Hope and Change?
UG! Lets start keeping score on how many Chicago combine favors are paid in the new coin of the relm, “Baraks” which is trading poorly against the Euro.
Gee, they’re all worried about the effect their big, powerful jobs will have on their children! Like they haven’t been working for this their whole lives and didn’t sell out Hillary Clinton to get it.
Well, it’s payback time for Obama. Gotta throw the hispanics a bone–Solis-Doyle.
She should fit right in – she was probably already working for them when she worked Hillary’s campaign.
Exactly what I have thought all along OhioMary.
The election is over.
Now is the time to attack the issues.
Energy.
Ask the loaded questions.
For example, why hasn’t the following been reversed?
In 1977, President Jimmy Carter dealt the U.S. nuclear industry one of its greatest setbacks by issuing Presidential Directive 8 (PD-8), [21] which forbids reprocessing (recycling) nuclear fuel in the United States. “Closing the fuel cycle,” the term used to describe the recycling of spent nuclear fuel, allows used fuel to be recycled and used again. Regrettably, PD-8 has effectively been U.S. policy ever since. As a result, nuclear fuel is run through U.S. reactors only once, wasting a valuable resource and producing unnecessary amounts of high-level nuclear waste.
Recycling spent nuclear fuel would help the U.S. and the world to reduce the volume of high-level nuclear waste and recover vast amounts of energy that remain in “spent” nuclear fuel even after it has gone through a reactor. Currently, only about 5 percent of the energy is used per volume of fuel. The U.S. does not recycle nuclear fuel, but France, Great Britain, China, and Russia are safely using recycling technology.
Obama has already stated that he supports safe nuclear energy, and in his mind there is no such creature.
I agree with you that this directive should be changed, I also believe that more nuclear plants need to be built. Much of the fear about nuclear energy is based on misinformation. Before anyone says that I would feel differently if I lived near one of the plants, I do live near one. I also understand the concept of half life and all the other terminology that is thrown around to scare the uninformed.
Greta Van Susteren
I need help! Okay, this is so OT but I hope someone on here can give me some info. For some reason I am unable to get incoming emails. I can send but I cannot recieve. I had six people send me emails and I have not gotten one. I sent the same people six emails and they got every one. Does email services go down? If anyone has hotmail could you check yours?
I’m having trouble opening PDF files..they just vanish..poof..won’t download..The web highway must be jammed
Oh God please tell me this isn’t the Obots screwing with out computers…Ughhh…..
blog.puma.org is taken over by the bots. It takes you to a site address that says snap picture and then goes to the site but all the while you are still on the site…something like snap a picture..if you go there…watch the URL when the page opens…
It snaps a picture of your destop and I don’t know what else..Anyway they have a new server and it’s puma.org without the word blog.
Have you tried sending yourself an email from the same hotmail account as well as from another outside account? If there is a problem on receiving you should get a bounce. If they are not bouncing, then wait, the problem should clear itself up. I’ve had my freebie accounts lag like that on occasion, then all of a sudden the messages appear.
Do they ever consider they’re being hacked?
I mean, did it occur to them that “office of president elect” looked really silly to people outside the bubble?
I heard they had a problem with the internet cheese delivery today. Hope that was not a problem for you.
can you send yourself one?
send one to a contact if possible sen it with a return “read” recipt. Just a few suggestions…
Is your email box full? Full mail boxes will stop receiving new mail.
Glad to hear from you, soldier. I’ve missed you this week.
Yeah because they knew the gravy train from writing bad loans could not last more than a few years and their BIG MONEY would dry up.
The fear of nuclear energy by American’s can be directly traced to two things which occurred in 1979, Three Mile Island and the movie “The China Syndrome” starring Jack Lemmon, Jane Fonda, Michael Douglas, and Wilford Brimley.
Isn’t it amazing how people can be affected by the media, the movies and movie stars?
Uhhh, Chernobal (sp) is what comes to mind when I think of nuclear energy, not to mention Hanford here in Washington.
Hanford….that place Obama never heard of….
Yup.
Love the contaminated Hanford ground water that is making it’s way the Columbia river basin aquifer.
I just watched a PBS special on the ‘29 market crash.
Deju vu all over again. The same sins of greed and corruption–a group of speculators pooling money to artificially raise stock prices, selling suddenly when the price was right, leaving small investors bankrupt. Eventually, even the bigger stockholders were ensnared as market prices dipped to nothing.
The head of the J.P. Morgan Bank (if memory serves)attempted to head off impending doom by pouring in money. It worked for only a few weeks before the inevitable crash.
Underlying cause: the market was allowed to function without rules or oversight. Average Americans were
lured into stocks by the hope of easy money. The
old something-for-nothing syndrome–all smoke and
mirrors. Easy credit, soaring stock prices,
a recipe for disaster when the credit dried up.
A crash course in the economics of irresponible
brinkmanship. Stock trading was a big game to the big players.
Where is FDR when we need him?
The real problem was similar to today: overuse of credit to mask falling wages. I’ve studied macro and micro economics, and after reading many studies about the crash, the one that nails it, imo, is Eccles. It’s a simple and short explanation. Read Wikipedia and scroll down to:
Inequality of Wealth and Income
http://en.wikipedia.org/wiki/Great_depression
Most of us Baby Boomers grew up hearing from our parents and grandparents about life during the Great Depression. I think that’s why I always had an aversion to getting deeply into debt and not having any money.
Didn’t the “big cheeses” who created this economic mess ever study the causes of the Crash of ‘29? Maybe they thought they were smarter and more savvy.
My question is… Where is all that mortgage, stock market, etc. money? It didn’t vanish into thin air…
It was distributed among the 6.5 billion people on the planet. Where do you think china got all its money from.
LD – Thank you. Excellent post. It clarified so many points for me.
Golden – I think this is going to be worse than the 29 crash!
I attended a sustainability conference yesterday and couldn’t help shaking my head as everyone was talking of all the opportunities to buy and sell green. No one seems to be dealing and talking about the big picture yet. We are all compartmentalizing and managing “key” issues when we need to take a whole view approach. I’ve been kind of thinking of the financial meltdown in these terms.
The govt and wall street have been building condos on top of lit stacks of dynamite that were wedged into a major fault line because they like a little risk and the land had fantastic views.
In order to prevent the inevitable, they spiced and lengthened the fuses and continued to merrily build away because everyone wanted those amazing views.
Suddenly, they realized they got careless in their haste to build and forgot to keep up with the fuses which were now burning out of control underground beneath the condos.
To make matter worse, during a fuse shortage at the height of the building boom, specs were changed to allow water proof, fast burning fuses to be substituted for flame retardant fuses.
Now everyone is frantically trying to put out the fuses and save the condos, but they don’t have alot of confidence and fewer options.
Unfortunately, with politicians focused on pointing fingers while trying to look in control, no one is talking about fault line and what it means in all of this. Because as bad as the explosion is going to be, its resulting earthquake that will do us in.
For me, the lit fuse is that we are a consumption based society that is deeply, personally and governmentally in debt. The fault line is we also in a world environmental crisis that will require us to produce and consume less. We need to do a 180 now.
Well Karl Rove kept telling us he wanted to bring back the Gilded Age. He told Americans everything that the Bush administration was going to do but no one listened. People were too busy fawning over Bush.
The real crisis is going to be upon us when the sovereign wealth funds stop lending the U.S. money. This will happen in mid-2009 as they realize that there is no payback coming. The Chinese are investing $586 billion into their own economy in a jobs program in order to stave off the coming domestic insurrection in tandem with the global financial collapse . they will shortly no longer have any significant funds available to underwrite our largesse. With oil prices in near free-fall the Saudis and other gulf nations will also lack the funds to help us as the Europeans will also have their hand out looking for money. At the current and projected levels of U.S. budget and trade deficit spending along with the “bailouts’ now too numerous to count and the promised $850 billion in increased spending for entitlements by the incoming Obama administration we are looking at close to $3 TRILLION DOLLLARS A YEAR IN DEFICIT SPENDING! With no-one to fund this totally irresponsible economic disaster in waiting the last resort for the Obama administration is to expropriate all 401k and pension fund wealth in order to “save” it. these funds with a current estimated value of between $11 & $14 trillion dollars will evaporate in 3-4 years. and nothing will be left except the printing presses at the Treasury dept. The massive printing of soon to be worthless $100 dollar bills will lead to massive inflation with an accompanied devaluation of real bricks and mortar assets. these assets will be sold off wholesale to foreign nationals just to pay the interest on our now un-payable debt obligations. all of this “bailout” business is only temporarily delaying the inevitable. and only make the problem worse in the long run. We can look to a halving of our living standard in a few short years and a coming welfare state unless major painful choices are made now. a federal spending freeze on all but essential services, A national debt modification plan on all debt obligations- credit cards, Mortgages, and certain corporate debt with a 5% cap on interest with principal payments suspended for a period of 5 years in order to stabilize the situation. A comprehensive national energy plan with a complete rebuilding of our national electric grid in order to accommodate wind farms and nuclear power plants and to reduce wasted energy with decentralization of energy production a priority.And as for the automotive industry they should be reorganized by stripping the pension and health plans from their books (to govt control and distribution) and a restructuring of their basic auto platforms with a 50% alternative fuel per unit output within 3 years . an accompanied investment in clean coal power plants and converting our oil heat home systems to electric heat. This will free up close to 5 million barrels a day of oil for other uses thereby greatly reducing our need for oil and shrinking our trade deficit . With this investment in our electric grid ,wind turbine manufacturing and installations.nuclear power plants and converting home heating into electric heat in the northeast and mid-west will create millions of jobs that cannot be exported. Just a start but decisive action must be taken immediately.
Excellent solutions.
It won’t happen, so I think we’re in deep doodoo.
Yea I have been preaching this to my friends as well. But they think that there is no way the US Gov could ever fail.
Thanks for this LD. You’ve been the bearer of a lot of bad news here on NQ but I admit I share your bleak outlook. None of us have ever experienced the economic straits we’re headed for. People are already losing jobs, homes, nest eggs and buying power. And it will get much worse. Losses will ripple throughout most sectors and there will be a domino effect of failure upon failure. I think recovery by 2010 is optimistic. As well, the nature of recovery may very well fall short of expectations.
I’m sick about AIG. I’m sick about the auto industry. And I worry about a consumer credit bailout. Where will it end?
A main reason I voted for McCain was that I believed he’d cut government spending and that he had the will to prevent tax increases in this very dire time for our economy. I have no such faith in Obama, especially with Reid and Pelosi at his side — they think they have a mandate to expand government in various ways. We can only wait and see what happens.
God help us.
LD, Hell of good article. Thanks
Does anyone know how much voodoo debt exist in these hedgefunds in total?
Do hedgefunds bear any resemblence to national boundries or are they a wholly seperate global objects? If the latter how would one “regulate” it?
What role will the intergration of headfunds and MiddleEast forms of banking as was floated by the tresury and the Fed, play in the future?
The losses in the banking system alone are upwards of $1 trillion
I have counted 5 trillion dollars in vaporized “assets” in the last two years.
You are being kind.
“spending freeze!!” this is what McCain advanced and was ridiculed for suggesting it.
Teakwoodkite:
There is $63,000,000,000,000.00 in Credit Default Swaps, with no assets backing them up.
The entire Sub Prime mess was ONLY $2,000,000,000,000.00.
The entire Credit Mess was ONLY $26,000,000,000,000.00.
AIG was called “to big to fail” in Sept. 08
What is AIG now??? “TO To big to fail??? BULLSHIT!
Taxpayers and the Federal Government have NO obligation to bail out AIG!!! OR Fanny & Freddy!
AIG knowingly understated its risk and losses back in Sept/Oct.
Thats a “DEAL BREAKER”!
It’s time for taxpayers to INSIST that the FED walk away from AIG and this whole BAILOUT mess right now.
The U.S. Government IS NOT TO BIG TO FAIL!!!
The US is about to loose it’s AAA rating which will make it almost impossible to sell it’s Bonds in the international market.
In short:
The FED is driving the US to a “Third World Economy” from which it will not recover.
UNLESS—- A TAXPAYER REVOULT STOPS THEM—NOW— As in RIGHT NOW!!!!
Thanks William, that 63 trillion is a pile of o’.
I heard this am if I under stood Paulson, at one point he said that the feds are still going to support “secutitized mortagaes”.
ie, they want to keep digging. UG!
I don’t believe that lowering the tax rate on capital gains and the other 2 measures will improve the economic situation because those solutions are top down and will do nothing to correct the real problem: the US consumer. Without the US consumer being able to purchase, nothing will move. It’s like an engine without oil — frozen. The US consumer is up to his eyeballs in debt. It’s the consumer that has a liquidity problem. Yes, the financial institutions have a liquidity problem too, but that’s easy to fix, as we see the government pump money into them. Even if the banks have cash, the hoards of the unemployed are not going to get any loans. Those with credit cards into the thousands are not be willing to up their credit when they know their jobs may be in jeopardy. So what to do?
Here is my solution:
1. Force the banks to lower the credit card interest rate to no more than 12 percent per year, even if it’s only for 2 years. The banks won’t like it, but the consumer needs breathing room.
2. Lower (a significant decrease) the income tax rate for the middle class ($100K and lower) and issue new tax tables so that employers decrease the withholding. The consumer will get the equivalent of a pay increase every month. This is better than a one time lump sum stimulus.
3. Help states expand their public works with special grants and loans to be paid down the road (pun intended).
It’s too late to attack the problem by fixing the financial institutions.
I’ve got no problem with high credit card interest rates. What I’ve got a problem with is that credit card companies can legally adjust rates upward on existing balances. This is a set-up for the next big financial disaster.
Yes, you have to watch them every minute. One of the cards for a company I oversee just suddenly, and with no reason, jumped their rate from under 10% to 21%. I’ll pay them off completely with lower interest funds but this isn’t the first time I’ve seen this in this past year.
And, no, there is no point asking them why they did it. Truth is the first casualty here. Check your interest rate every month, gang.
If you dont lower cap gains, or in fact raise it, why would anyone invest? Without investment where does business get money to expand? Without expanding healthy private sector businesses, where does the economy as a whole gain wealth? Where do people work when companies are in “stay afloat” mode?
Just because your wallet doesnt personally see taxes like cap gains, payroll, workers comp does not mean they do not impact you. These are costs businesses incur that are paid by hiring fewer workers and investing less.
Businesses generate wealth.
The government prints money.
The difference is not trivial.
Expansionist government wont be a solution to a happy, healthy US economy.
We will become a big sad mean Canada, scratching our heads wondering what happened.
Well, the worst is that small investors, i.e., people, won’t be able to move.
We’ll be, as has been the case for the last several years, the ones left holding the stock bag of loser companies.
We’ll have to wait until it falls to the point that we can afford the tax.
This is, then, going to make most of us smarter in the future.
Just avoid that type of investment entirely.
Sadly I disagree. Nothing seems to make the general public smarter over time.
Thank you — I’m going to copy this and read it over several times. I’ve placed on the backburner my interest in economics — and it’s time to relearn the basics.
Ironically the ones who always suffer in a recession/depression are the poor — & the working class poor.
You’re doing a great job of explaining what is nearly impossible to explain.
The movie Wall Street comes to mind — Greed is good – or so a lot of people believe.
CHRIS MATTHEWS MAKES A HUGE BLUNDER:
CHRIS: “Is this person unaware of basic grade-school information, like, Africa is a country of 57-or-so countries, it is not a country, it’s a continent? South Africa is a country, not a region.”
http://newsbusters.org/blogs/mark-finkelstein/2008/11/10/chris-matthews-calls-africa-country
What a Fool!
Not a “huge blunder,” my friend. This is what normal humans call a “slip of the tongue.”
So where are people putting their money to stay out of the fray? Metals?
Gold is artificially low now, possibly to give the bigger malefactors time to convert their GringoBuck$ into bullion.
The 50 ounces I bought back in 1981, adjusted for inflation, has hardly kept up with the S&P 500 or the DJIA.
Plus: HOW does one Make CHange for gold? Fill your gas tank and take the difference in… help me here.. food coupons? Toilet tissue? Scrip?
art and collectables..
I’ve heard/read that banks are hoarding. Clearly consumers are too (in bank accounts now—under mattress soon?).
mattresses
Doesn’t work in an inflationary economy
Inflation, another invisible tax.
>>> Hurley added that consumers need to fix their balance sheets as well after years of going into debt. The lack of a rigorous underwriting process is coming home to roost.
Now, THERE’S and Understatement!
Thanks for the article. I am just wondering if there’s not a up side to all of this. I see the long term interest rate going up due to huge federal and states debt. I think this may attract some foreign investor eventually. It help strengthen the dollar and may prevent us from another Japan style mess of the 90s. The US market is still a safer bet than EU.
Another thing is that due to the debt held by other countries, they will be more cooperative in any need of the US if they don’t want to go down with us.
Also, that China is still in position to boost their economy by spending close to 700 billion dollars and reduce their capital gain tax at the same time may help the global economy, they are expecting to surpass German this year to be the third largest economy in the world.
I think it’s going to be ugly, especially with Obama’s foolish view of economic issue. But I am hopeful that things maybe looking better in 2010, there is still 2 years before the current tax cut expire.
“Hope” is never a part of any Plan.
Thank you for the article explaining this. For the person wanting to come up to speed quickly regarding the history of this, get a copy of “Financial Shock” by Mark Zandi. It is a quick read.
Could I suggest part of the problem is the greed in the consummer market. I agree with all the points that LU made, however it will not stop untill the consummer starts to spend withing their means and start saving.
Also we need to preserve the market place concept of failure to teach the lessons. Lu is right in that these bail outs will only moderate the shock, but will not change the outcome.
Automotive is the next big fiasco. In this case GM is making the moves it needs to do; possibly to late. Some how they need to rewrite the union contract that pays you for a year after you get laid off. One might argue why buy a auto from a company that is hampered by a labor contract of that magnitude.
Please keep the articles comming
Excellent article & explains the situation in layman terms.
I just heard Donald Trump on Fox & Friends say the the banks are using the bailout money to buy other banks instead of lending the money out. Even the Donald is having trouble getting loans. He also said that they are headed for one big bank.
I think this bailout stuff is just throwing money at a bad situation & not fixing the real problems. It will only delay the pain that is coming, imo. Personally, I cut up credit cards 2yrs ago, only pay cash for want I need, amazing what you can do without when you don’t have a credit card as a safetly net.
Alot of good info up thread, noquarter rocks, the best articles, writers & bloggers.
Do you have a take on why the Obama administration is now saying they will not give banks money to buy bad mortgage assets to stabilize the housing market? Paulsen told us that’s what the bailout was for. ANd now NObama wants to bailout the auto industry. Do the American people get shares in those companies if our money is used to buy out their debt?
Enquiring minds want to know.
My understanding is the money is being used to buy stock rather than crap mortgage assets. I was pissed my money was going to be used to buy crap paper that no one was going to be able to untangle. Other countries are using the money to buy stock… they also added many conditions to participate in the program such as: no dividends to shareholder, citizen representation on the Co. Boards etc, limits on compensation. The US has no conditions which is why AIG is still having parties, there are no limits on compensation and banks are using my money to buy up other banks.
You aren’t just bailing out the auto industry (apparently, just this week, our govt has decided manufacturing jobs are important) you are now bailing out the credit card industry…. your neighbor with a garage full of crap they were never in a position to afford? thanks you.
I saw the estimate on the cost of US auto industry shut down. Seemed high. But that is all inclusive. How about showing the cost to ONLY the US of the industry using a bankruptcy option and re-writing it’s debt and getting out from under crap contracts it can’t afford? Why isn’t there an analysis of the impact on JUST the US? Cars aren’t really made in the US, they are assembled in the US. I wouldn’t be surprised if the biggest lobby right now are foreign govts. Outsource US parts manufacturing to other countries….these other countries must be pressuring the US govt to use my money to bail their auto industry @sses out.
ok well I don’t do baseball but I gather this is bad news for all of us?
why is this NOT surprising to me (that’s rhetorical) lol
I guess I have indeed been luckier than many. I rent so have no mortgage worries. I have no credit cards so I’m not worried about that. I am permanently disabled so my meds are cheap (I do worry about where they come from).
My Mom is retired with a small pension and my daughter is in the bartending business and it seems (according to her) people are drinking MORE not less!! Oooo and gas is now down to $2.13 a gallon!!
All this gloom and doom the dems keep talking about is just not what they are WHINING about (to me).
lucky i guess
Thank you LD.
This is the most important thing I get from that, which as it is usual with me, not even related.
We should now begin to purchase only products made in the U.S.A. and if none of the sought out products are made here then make a determination to sacrifice and not purchase them. Not even grapes. Its kind of difficult and it should not be a cold shock approach but in general terms a growing approach. Lets begin to do without if it is not substantially build here.
I agree completely. I have been trying to buy US as much as possible(actually I have done so for many years.) There are many sites on line that sell Made in US only. I will do without before i buy Made in China, and I make my feelings known to shopkeepers all the time.
Extremely hard but something we can and have to learn.
In less rarified air, the Wall Street mess is what is referred to as a Ponzi Scheme, better known as a Pyramid Scheme, and it gets you a few years in the pokey. What nobody wants to do is bell the cat and admit that Wall Street has been running a gigantic pyramid scheme. The first and most essential thing to do is to allow all the fake value that has been created to evaporate to a conservative level of leverage. Let all the fake money disappear. The bailout was a complete error. A short-term fix that will allow the disease in the body to spread. What we have is financial cancer and nothing short of hard-core financial chemo and surgery will stop it.
Good article, LD, and I agree that the plan going forward simply doesn’t make sense to me in terms of true economic regrowth for a long time.
You point out that John’s economic plan was actually the best approach. Alas, I don’t see how Obama could reverse his positions now.
Great piece of analysis … just wait until the credit cards defaults start going up … more of these synthetic assets will start collapsing.
Obama needs to focus on strengthening the real economy before the financial markets can regain strength. If the assets behind all this tomfoolery continue to be bad, the financial markets can’t heal.
In trying to understand the financial crisis as somebody totally ignorant and previously uninterested in financial affairs, my goal is to pin the blame on someone. Unfortunately, it looks like another 9/11 routine, where nobody is blamed for a horrendous disaster.
This article seems to be describing the mechanics of the pyramid scheme in the mortgage and/or credit industry. This aspect of the financial world seems to be separate from the derivatives market which many articles are identifying as a major source of trouble worldwide.
So, at this point, if I am looking to blame someone, I would blame the laissez-faire philosophy of Alan Greenspan and friends for the pyramid scheme. The problems with the derivatives market can probably be blamed on Greenspan also…except that there were warnings.
WHY WASN’T ANYBODY HEEDING THESE WARNINGS? WHY DIDN’T CONGRESS REFORM FREDDIE MAE AND FREDDIE MAC WHEN MCCAIN AND OTHER REPUBLICANS WARNED THEM?
The except below is from Washington Post, October 15th.
“A decade ago, long before the financial calamity now sweeping the world, the federal government’s economic brain trust heard a clarion warning and declared in unison: You’re wrong.
The meeting of the President’s Working Group on Financial Markets on an April day in 1998 brought together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr. — all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power.
Their adversary, although also a member of the Working Group, did not belong to their club. Brooksley E. Born, the 57-year-old head of the Commodity Futures Trading Commission, had earned a reputation as a steely, formidable litigator at a high-powered Washington law firm. She had grown used to being the only woman in a room full of men. She didn’t like to be pushed around.”
Thank you LD.. Excellent post.
I kind of think of it in these terms.
The govt and wall street have been building condos on top of lit stacks of dynamite that were wedged into a major fault line because they had fantastic views.
In order to prevent the inevitiable, they spiced and lengthened the fuses and continued to merrily built away. Until suddenly they realized they got careless and forgot to keep up with the fuses which were now burning out of control under the condos. To make matter worse, the fuses that they thought were fire retardent, are actually water proof, fast buning fuses.
Sorry – this was accidentally posted mid write up.
Great article, LD. And thank you, Larry, for insisting we read it!
It is a bit mind-numbing, all this detail to concepts that are rather abstract to most of us, but we definitely benefit from the education presented here.
I agree with the pyramid scheme analogy, and I wonder if it isn’t so much an analogy as the real deal. McCain talked about reform and people going to jail for their fiscal malfeasance, enriching themselves at the public trough, taking windfall profits and golden parachutes when they bail out. I think there should be an investigation and prosecutions, along with confiscations of ill-gotten wealth, or at least VERY heavy fines. Let the bastards who got us into this mess pay for their crimes in hard cash, then maybe we taxpayers won’t have to foot so much of the bill.
The Thomas Becket Effect
Because of one of Thomas’s (Obama’s) father’s (Grandfather Stanley) friends, Richer de L’Aigle (Frank Davis), Thomas learned to ride a horse, hunt, behave like a gentleman, and engage in popular sports such as jousting. Beginning when he was 10, Becket received an excellent education in civil and canon law at Merton Priory in England (the esteemed Punahou Academy), and then overseas at Paris, Bologna, and Auxerre. (Obama’s Columbia-Harvard-Chicago road was paved by very wealthy and powerful people).
Due to his zeal and efficiency he was recommended to King Henry II when the important office of Lord Chancellor was vacant. As Chancellor, Becket enforced the king’s traditional medieval land tax that was exacted from all landowners, including churches and bishoprics. This created both a hardship and a resentment of Becket among the English Churchmen. (Rezko’s tenant buildings had no heat). To further implicate Becket as a secular man, he became an accomplished and extravagant courtier and a cheerful companion to the king’s pleasures. (Here Larry, have another snort!) Thomas was devoted to Henry’s interests with such a firm and yet diplomatic thoroughness that scarcely anyone doubted his allegiance to (George Soros’ bosses) English (financial) royalty.
However, Becket, when saddled with the responsibility of the Archbishop of Canterbury, rose to the demands placed on him and rejected his past controllers. This is what his minions claim is going to happen. I actually HOPE so!
But, King Henry had his knights assassinate Thomas. And, if Obama rises above his background, his handlers, his financial backers, his puppet-masters, he will most likely be martyred because he would still be of some use to them that way. They’ll unleash some Manchurian candidate (that they’ve made watch Taxi 500 times) that’s stashed away some where for just such an occasion. It will be someone that the media will label as a n*&^%r hate’n KKK type so that it will all look believable. The resulting unmanageable chaos would still be to their advantage. (See Burn! -Italian title: Queimada- is a 1969 film starring Marlon Brando)
Then, the only remaining question will be: will he be canonized?
The other day in discussing election with a friend, I mentioned that after 0bama’s election I no longer feel safe.
Friend’s reply:
Given the way things are run in Washington, probably the only one who shouldn’t feel safe is 0bama. My friend added: “I actually voted for McCain in order to protect 0bama.”
I truly hope your scenario does not occur.
The best (worst?) I’m expecting is Jimmah Cahtah redux.
If the “big boys” can jump out with a golden parachute, courtesy of the U.S. government, of course the Wall Street model is broken.
This latest Auto Industry Bailout is one of the hugest slaps in the face for us, the TAXPAYING CITIZNES!
And Senator Reid’s comments that he is “determined to help the auto industry” is just another attempt at a giveaway on our backs.
I mean, I know Dirty Harry has been around for enough years that he should remember ALL THE GIVEAWAY AND HELPING HANDS of our TAXPAYING DOLLARS to the PRIVATE Auto Industry. He can’t be drinking THAT much.
Shoot, we can’t forget the millions Al Gore got Bill Clinton to give them (at least it was for a noble cause) to help creat new technology for more efficient vehicles. BUT, even then, they took the 50 million dollars and cancelled making the Electric Car and put all new technology on the shelf when Bush got elected and BROOUGH US GAS GUZZLERS AND THE HUMMER with our tax dollars.
Then they continuously went down his with their brain dead actions and kept asking for MORE help.
Recently Congress helped them again, because GEE, the Health Care was costing them so much to run, WE HAD TO HELP THEM OUT.
WAKE UP YOU STUPID DEMOCRATS THAT APPARENTLY HAVE NO CLUE IN ECONOMICS!!!
And you all keep giving away our dollars with out fixing any the problems and put no restrictions on them to help stop their destructing ways. LOOK AT AIG
The auto industry is on life support. If we give them our money, that will only extend their time on life support. TURN OF THE MACHINE AND SEE IF THEY CAN PULL THEMSELVES OUT OF DANGER or let them go to that Car Heaven in the sky.
And PLEASE CALL EACH AND EVERY SENATOR AND CONGRESS person to tell them, NO MORE MONEY FOR THE AUTO INDUSTRY!
A hand toll free number to the US Capitol
1-877-331-1223
Thank you.
I read every word of this article. I did not fully understand all of it, but I definitely understand that we are in an economic crisis and we have, once again, government leniency and corporations to blame. Not PAY THE BILL, that’s up to us, but they are culpable in this from start to finish. Too, people took out loans they simply could not afford. They are to blame, as well.
I read that Starbucks profits fell off 97%. That is an astounding number. They say it is part of their restructuring and that they will rebound. Maybe. But I remember when I stopped buying Starbucks. It was about 18 months ago. There seemed to be a shift in the economy that I could not quite put my finger on – could only sense – and I decided to be far more frugal with my coins. Too, does anyone remember for most of 2008 how credit card offers arrived every single day – in multiples – in your mailbox? Besides the one card that I use (and pay off every month), those have stopped. It was almost like a frenzy to get people to spend – even if it was on credit.
The orgy is over.
Suspend capital gains tax for two years and let the money flow.
People are too dumb or too lazy to understand why this would help.
They are crying out for bizarre tax rebate schemes and an increase in Federal spending.
Where exactly do they think the money comes from?
Maybe Obama can just print some more cash! That would fix everything!
Weimar Germany anyone?
No the US is merging with the UK..
Too much easy money; that’s the bottom line. I watched “The Money Masters” about three years ago, well worth watching. http://video.google.com/videoplay?docid=-515319560256183936
The documentary stated that money was too easy to come by right now and because of this we we’re headed for a crash. They we’re off by a couple of years but they we’re so right. This video is worth watching. It talks about capitalism and the history of banking system, the depression and where we are headed now. The documentary also covers globalization and how it effects money.
Obama not eligible, US Constitution, Tenth Amendment, Bill of Rights, US Supreme Court
http://citizenwells.wordpress.com/2008/11/12/obama-not-eligible-us-constitution-tenth-amendment-bill-of-rights-us-supreme-court-federal-judges-state-judges-state-election-officials-electoral-college-electors-philip-j-berg-lawsuit-leo-c/
As I see it then, bar a successful action before Jan 20th., once sworn in any citizen that feels she/he has been harmed by Obama pertaining to any action by Obama, can bring a grievance to a court and allege that his harm is the product of Obama not being a natural born citizen. He will want to prove that only people that are natural born citizens are able to have the state of mind required to possess the attitude of acting in the best interest of the country.
By the way, then Obama would have to compensate each citizen’s loss or losses because of actions taken by him as he lacks the Constitutional requirement of ‘natural born’ that prevents him from having our best interest in mind at all times.
So essentially if he takes the oath of office without the qualifications provided by the Constitution then he himself places himself in liability to each and every citizen of the country. Having placed himself in liability he would either need to buy insurance – like professional liability insurance – in this case for the profession of President – in case he harms and damages the citizens of our country.
Lets see, I think Lloyd of London can sell him a policy for that. Yearly premium 20 trillion dollars.
LARK
I have read –”Whoever votes for Obama, if he is not a legit American citizen to even run for the US presidency, is guilty of aiding and abetting”.
>>> For those over 50 years of age, perhaps you remember when mortgage money dried up.
I have a vivid memory of making the mortgage payments on four spec houses every month in 1974-1975 while living and doing business in a plush retirement town in Florida when The Fed turned off the tap. Took jobs closing in carports and adding patios to keep my crews together rather than taking Bankruptcy and going fishing for a year or two with money in the bank, maybe drawing my Unemployment.
Finally, after 1981-1982, I said, “F**k that s**t.” I got a Unionized job with the government…laughed my ass off in 1987, 1991-2, 2000. Picked up lots of bargains “on the cheap” from the Less Prudent who were over their heads.
There’s a reason my LDS neighbors have 6 months’ worth of groceries in their garage…
Obama’s health plan.
<<>>
The same amount McCain offered, except McCain’s plan would work and actually solve the health insurance problem for every single person in the country including illegals. But like everything Obama,
Oops.
The quote that was deleted by an inadvertent code.
I could have gotten my health care paid for a whole year under Mac’s plan just by having a tax break.
Now we get socialist health care that is supposedly free…..but it’s NOT! Taxpayers will pay MORE taxes..and the stimulus check goes to people who do not need it.
Great read LD! I would really appreciate your opinion of this:
Sen. Hillary Rodham Clinton wrote a letter to President Bush and Senate leaders, calling for a stimulus package to help the economy.
In the letter, she calls for “extending unemployment insurance benefits, providing assistance to financially strapped cities and states to prevent cuts to critical services, and investments in infrastructure and alternative energy projects that could quickly provide hundreds of thousands of new jobs while laying the foundation for future economic expansion.”
November 11, 2008
The Honorable George W. Bush
The White House
Washington, D.C. 20500
Dear Mr. President:
Our economy has lost more than one million jobs this year alone. The scope and scale of the economic challenges facing the American people are vast. Businesses, large and small, are struggling to secure financing to survive. Families cannot find affordable mortgages and consumer loans. The housing crisis, which has already wiped out hundreds of billions of dollars in home equity and even more in investment losses, grows deeper every day, with another wave of foreclosures looming.
The State of New York is the epicenter of this crisis. New York projects that more than 160,000 New Yorkers will lose their jobs as a result of the economic downturn. A recent analysis estimates that New York City will lose almost 30,000 construction jobs by 2010, in addition to the tens of thousands of jobs already lost to turmoil on Wall Street.
We are in a recession which demands decisive action. I believe that in order to stimulate this economy, we need to get people working, earning, and building – not just spending. We have borrowed hundreds of billions that have gone to banks and financial institutions and borrowed tens of billions more to energize the economy, yet the economic downturn has continued and the financial turmoil has worsened. What is clear is that any action we take – especially as we borrow more money to do so – must pay off in the near and long term. That is what America does best: we can address this crisis while preparing for our future.
However, we do have immediate needs that cannot wait between now and when the next Congress and the next President takes office. And although your Administration has voiced skepticism about the need for a stimulus bill, I believe that the current conditions call for a coordinated response now.
The most recent jobs report, indicating another 240,000 jobs lost last month and the worst unemployment rate in 14 years, shows that steps need to be taken to shore up the safety net as millions of Americans continue the search for work. Expanding Unemployment Insurance and the Supplemental Nutrition Assistance Program (SNAP) would not only provide relief to those hit hardest by our economic downturn, it would also spur economic activity as this money is immediately spent. New York alone has hundreds of thousands of people who will face the unemployment line and the loss of their food assistance during this economic downturn.
In the midst of one of the greatest fiscal crises to hit our states, an increase in the Medicaid FMAP rate would help prevent further and deeper cuts to health care and other essential services like education, child care and public safety. Rising demand for health insurance coverage through Medicaid due to increasing job loss is straining state budgets, and the federal government should act to help ease this growing burden on our states.
It is also increasingly clear that we need to take steps now that not only mitigate the fallout, but also begin putting the nation on the path towards recovery. That is why I believe the stimulus we pursue should focus on rebuilding our infrastructure and building a new, clean energy economy. Stimulus should focus on putting people back to work by investing in infrastructure and green jobs. That is how we can restore our prosperity today and ensure it in the future.
So I am proposing, among other steps, that we speed investments in infrastructure, including $410 million in New York roads, bridges, and transit systems, as well as training for new jobs in the clean energy economy, or “green collar jobs.” A federal investment in our infrastructure serves the dual purpose of modernizing our country’s deteriorating roads, bridges, and transit systems while stimulating the economy. Investing in these projects will create tens of thousands of good paying jobs. More than 40 highway, transit and rail projects are “shovel-ready” in New York alone.
I am also proposing an investment in training programs to prepare a new green workforce for the clean energy jobs of the future. I believe we can create at least five million green collar jobs – and we can speed the creation of those jobs while also training displaced workers to fill them in the very short term.
The next wave of foreclosures looms, and we should address it immediately. It is critical that we modify unworkable mortgages into clear and stable terms if we are to prevent the bottom of the housing market from falling even further. I have proposed HOME, the Home Owners Mortgage Enterprise, based on the successful program enacted during the New Deal which not only saved one million homes but also turned a profit for the Treasury. We should continue focusing on initiatives large and bold enough to meet the scale of the challenges presented by the faltering housing market.
The road to recovery will be difficult. But it is imperative that we take these urgent and important steps to kick-start the economy and hasten a return to prosperity that is shared and strengthens the middle class. I ask that you work with congressional leaders in developing a
comprehensive stimulus package that the Congress can pass next week to reach your desk immediately thereafter.
Sincerely,
Hillary Rodham Clinton
cc: Majority Leader Harry Reid
Senator Robert C. Byrd
Senator Daniel Inouye
We are posting this soon.
*nodding in agreement*
Hillary is right.
Invest in something other than dinasaur industries which can no longer compete.
Create jobs. Fast.
Our economy is based on borrowing and credit, is what she alludes to. We do not have an economy based on money earned and saved…the inevitable is a depression. But Washington cronies are so filthy rich that they think there is no danger since they are doing well and their pockets are jingling from bamaboozling the citizens of USA.
Mac would have listened to this proposal in a heartbeat but Hillary went and got her supporters to vote for a crook. Once a crook, always a crook.
I heard on one of those financial networks that if the automakers went bankrupt that would nullify all of the union contracts that are now in effect. While I don’t begrudge anyone a good income, I do feel that the autoworkers will, of necessity, have to give up a lot of what they have been used to. They can’t expect the government to bail them out while they enjoy better-than-average wages and bennies. I’m afraid that those days are over.
Of course, we do have one ace in the hole — that would be our very own personal Messiah. Lucky for us that he will now be able to wiggle his ears and make everything right again. Or he can click his heels and go back to Kansas where he originated….or maybe he could ask Bill Hillary what to do…..or….
I think is Hillary Bill rather than Bill Hillary. That way you give the woman a 51 percent chance or sometimes better if she chooses to say something without Bill’s approval.
Exactly. That goes all the way back to the early christian church when Paul the apostle said ” I do not permit a woman to teach or to have authority over a man, but to be in silence”–1st Tim. 2:12. And this jerk by the name of Obama and his Shiria law is even worse. Just what I have been saying about women who hate on women because they think that is what men approve of.
I stand corrected — Hillary and Bill it is!
many union people are overpaid. our big GM plant went on strike becausse the company asked that they help pay part of their medical insurance premiums. how many employers don’t ask you to do that? Alot of this economic mess is due to people wanting something for nothing. Wall St, CEO’s, people who don’t want to work, people who work but want to live beyond their means. It’s GREED.
currently, GM is paying out pension to 300,000 retirees. $3,500-$5,000 is added to the price of each car they produce to cover pensions of both for current and ex employees’ health care and pension. The model is broken. IBM back in 1997 decided to do away with the pension model, they had a major class action suit against them. They settled out of court and that was the end of their pension nightmare model. While I feel for the auto workers, you can’t have your cake and eat it too. Companies are going to be dragged down and will move their plants offshore if they haven’t already. The unions need to rethink this before they send hard working people down a deep hole.
Frankly, both companies needed a product worth buying.
Then they could have handled it.
This crud about American innovation?
Excuse me?
We need science/engineering brainpower.
We are very behind.
Business models are worthless and stop working because University and College models for granting degrees are also worthless and not working. I have discussed that in previous threads. But who cares, no?
Thank you LD for an excellent article.
It is really hard to watch your country deteriorate so quickly. I wonder how the veterans and the families of those that made the ultimate sacrafice for this country feel as they watch this unfolding tragedy.
Lee Iacocco has a book that asks a great question: Where have all the leaders gone?
I can tell you it isn’t easy to watch this guy with all the communist associates take the reins as CIC. How would you feel if you had/have fought or are fighting to defend this nation (or any nation) only to have it handed over to a bastard who will not even recognize the flag you swore an oath of allegiance too? I would think most veterans do not think too highly of the man from Kenya. I don’t.
Thanks for the well-written article LD. It helps me to make sense out of what is going on in the current financial mess.
Thank you again.
thank you for the post.
I agree, NO GOVERNMENT SPENDING EXCEPT NECESSITIES. People are going to have to start fending for themselves, people have become a bunch of spoiled, selfish brats.
I found out in May I am losing my Accounting job at Wells Fargo. This is a national thing so thousands will be losing their jobs. We are hanging on by a thread-no set date, sometime next Spring. I am padding my bank accounts and will be prepared to weather the storm. If Obama and Democrats do decide their 401k scheme, I am yanking out all of my money and stuffing it under my mattress.
Thank you for posting this informative article. But as we read this, the government is now expanding its bailout to the auto industry. There simply doesn’t seem to be any consequences to companies that are managed poorly and whose executives make bad decisions.
One of my nephews works for GM and they are absolutely unable to lay him off because of a union contract. He really has nothing to do and is sometimes given menial tasks such as making copies etc. whenever possible, but he and others generally just sit around all day and collect their paychecks.
I also saw this depicted on a TV show segment some time ago (sorry, can’t recall which show). I’m sure there are other weird things going on the the Auto industry that makes them so overbloated and noncompetitive.
I will say though that Michigan has been in dire straits for several years now and I really feel for that State (where I was born). But even when my husband worked for GM several years ago, he saw the error of their ways and warned that they would eventually get severely burned.
This is what Bill Clinton is so criticized about. He opened the doors to competition to break this stranglehold that unions had on the economy. Global competition has driven American carmakers out of business, with good reason. We don’t want their products.
Bailing them out, in my opinion, is not the answer and is Obama’s first wrong move.
Let it fail.
Now, I’m in my 50’s. I really don’t have a horse in this race.
By the time the ridiculous bill comes due, I’ll be dead, frankly.
But this path?
It’s clearly stupid.
Thank you for this incredible article.
My theory of capitalism, free trade, and the let’em fail position:
I believe that no matter what the area, let’s use food and the machine tool industry for the sake of discussion, you allow capitalism to work.
However, the minute our capability in a given area drops below that needed to defend ourselves then I believe in regulation.
I believe in establishing a floor below which we will not allow a given capability to fall due to national security.
An in house machine tool capability (auto industry) is essential to our long term national security.
(Are not the F22 wiring harnesses being assembled in Mexico to avoid paying Fort Worth wages?)
So the question is not: how screwed up are American auto makers, it is, do we want a domestic machine tool industry?
You know, free trade in the minds of Milton Friedman / Phil Graham is really economic anarchy.
We don’t allow anarchy in government, why should we in economics?
The middle of the road is always best.
AKA, balance!
Anyway, I read this yesterday and it was cute..
Now we have been bamboozled again but this time from Pelosi and her cronies. The bailout money that was supposed to be for buying up banks bad assets so they could be able to have money to loan…is not going to do that now……so how are the banks going to operate? They have no liquidity and no money to loan..pisses me off..we have been tricked as they are saying the bailout money will go to non lending institutions…I told you it would go right back into these thugs pockets. I’m not bizarre. This whole government is bizarre.
Barky’s cabinet contains all the crooked thugs who got us into this economical mess…just great! The fox is guarding the hen house..
Yes the fox is gaurding the hen house and Obama wants to take away the farmers gun just in case he notices something is wrong!
I read the whole thing, but the article seems to miss the main point that creating money out of nothing is the real culprit. When you get a loan, the bank simply types in a number in your bank account. They don’t actually get it from anywhere. It was bad enough when banks decided the money supply, but once credit cards companies and third party lending institutions got into it, you saw an influx of “fake” cash. And the more of something you have, the less it’s worth. The devaluation of the dollar should have been the first indication.
But loans are used to pay older loans. It’s like paying one credit card with another credit card. That’s how you pay the interest. As long as new loans keep being handed out, everything is great. But without real assets, this system was bound for failure. When loans go into default, older loans don’t get paid off. This causes a domino effect. This is why economies can’t handle downturns.
Really, why are downturns so drastic? Loans rule the day and more loans are the only way to pay off the interest on older loans. When loans stop, everything falls apart.
I didnt know whether to laugh, scream, or curse at Paulsen on the Tv today when he said “manufacturing is very important to this country” REALLY……..???
you never would have known it by the way he and his republican friends certainly aided by the democrats, and the US Chamber of Commerce (which is not a govt agency at all) have been shipping the manufacturing jobs and companies out of this country.
And all of a sudden he/they realize manufacturing (when it comes to GM) is very important to this country. After 30 years of moving all manufacturing out of this country.
I agree with those upthread.
BUY AMERICAN.
and my next thought is how our pockets and pocketbooks are being picked – robbed – taking our money and giving it away to the rich, to Wall Street, to the corporations, and the multinantionals without our agreement, to save them from bankruptcy while screwing again the citizens they sold those subpprime mortgages to, and allowing American citizens to not only go into bankruptcy but by the millions being thrown out on the street as the banks foreclose on unpayable ballon mortgages.
We the taxpayer will be paying these debts for the next 50 to 100 years and more, because they are govt debts accruing interest – that the citizen taxpayer is supposed to pay off – forever. If someone took your credit card without your permission and maxed it out – what would you do? Same difference. Theft.
UNLESS WE CHOOSE NOT TO PAY TAXES FOR THE US GOVT TO FURTHER BOOST THEIR BIGGEST CONTRIBUTORS ON WALL STREET.
Yep. No jobs, no taxes for the coffers to be further thrown away, let it all fall….get rid of the Federal Reserve (which also is not a govt agency but a conglomerate of private bankers called Wall Street) – hello Morgan (the first to be bailed out with our money without asking us) and Chase Rockefeller – The Rockefeller’s need our bailout money?
Pluck em all.
Bush Jr put the final pieces together for his father’s New World Order…One Global Government….doesnt seem to have worked too well…his father’s and David Rockefeller’s and Kissinger’s ideas – The Trilateral Group, The Bilderburgers…the hubris !
They have brought the entire world economy down. In a way it’s good because it illustrates their one world government, run by the bankers and multinationals of the world who they proclaimed were far better equipped to run the world than the peasants by voting, doesnt work.
I do think what is coming next is something similar to what FDR did.
Fiat money will be declared null and void – and all gold will be confiscated – the country(and all countries)will go back on the gold standard backing up the paper money. Then they’ll declare a new money, similar to the Euro for Europe, backed up by the people’s gold melted down into gold bars. Bush tried to push the Amero…(he also tried to push that Social Security funds should be invested in the stock market- LOL) I wouldn’t be surprised if the new money isn’t being printed up already.
If any one has gold it might be a good idea to bury it – one other thing – back in the 30’s when people had to turn in all their gold – they were not given in paper dollars what the gold was worth.
Why do Americans passively sit on their asses and allow this to happen?
the last time they refused to pay unreasonable taxes was the start of the American Revolution.
It’s time.
I agree, a lower cap gains rate would atleast open the door for more revenue to flow into the Treasury, but Buffett & Obama want things to be “fair”, so we can forget that. Guarantee a stable tax rate? Our government wouldn’t know how to do that even in good times, plus it’s customary to raise taxes during war & we’re in 2 of ‘em. Spending freeze? With millions of boomers retiring en mass how would that even be possible? I’m in dismay over the folks who think union bustin’ is an answer, no collective bargaining for labor but wide open wild west hedging for the billionaire’s clubs is acceptable? Sure, just keep allowing these rapacious capitalists to zip around the markets crashing & burning stocks, ruining companies (even the ones with good fundamentals) & lives, that’ll work. I say find a way to take them down now! Completely outlaw naked short selling, bring back the uptick rule & a some perp walks could do wonders to put the brakes on & maybe slow the slide. I can’t believe everything these freaks have done is legal. No more fast tracking of anything. How naive am I?
If I have to undergo a hard credit check to deposit/open a CD & allow them to photo copy my ID then I think total transparency for the bank holding companies is in order. Legislation now: everything on the books, criminalize the hiding of off book “assets” of all publicly traded companies.
Why don’t our congress men and women, go 1 year without pay (lord knows they are all wealthy and can afford it), contribute that to the economy. Give average americans money to pay their bills instead of giving millions to big corporations.
Why don’t our congress men and women, go 1 year without pay (lord knows they are all wealthy and can afford it), contribute that to the economy. Give average americans money to pay their bills instead of giving millions to big corporations.
They also need to stop receiving pay for life regardless of how many terms they serve. That is ridiculous and no other job does that so why do these fools get away with it? Because we allow them to by not questioning them.