1. Are you confident the U.S. taxpayers' interests are being well-protected and secured by the assumption of every toxic mortgage and bad debt in the land?

2. Are you confident that housing will now leap up in price like the stock market?

3. Are you confident non-U.S. investors and central banks will buy U.S.-based mortgage-backed securities with the same abandon they did a few years ago?

4. Are you confident the new "owners" of Fannie and Freddie and AIG, i.e. your central government, will manage the firms in the best interests of the real owners, i.e. us taxpayers?

5. Are you confident that the political-influence conduit between big Wall Street donors and politicians has been severed?

6. Are you confident interest rates can stay low even as the U.S. Treasury sells a $1 trillion or more in new T-bills to fund the bailout, plus the existing $500 billion in standard deficit spending?

7. Are you confident that the ethics of Wall Street and the mortgage industry are sound, and that we can now trust these same institutions and players who ignored risk and embraced fraud and conflicts of interest for their own profit?

8. Are you confident risk will be properly priced in, despite the complete abandonment of any pretense of "moral hazard" now that the government is "backstopping" virtually all bad debt in the financial system?

9. Are you confident that all the toxic /worthless debt the government is buying/ taking on will have any value in the future, as many claim?

10. Are you confident that all the capital which is being provided by taxpayers will be allocated properly, and not mis-allocated like the trillions of capital that was lost in the easily-predicted meltdown?

11. Are you confident that politicians won't interfere in the liquidation of near-worthless assets in private capital markets?

12. Are you confident that all this taxpayer-funded "liquidity" will actually find creditworthy borrowers who will use the funds to expand real businesses?

13. Are you confident that the CEOs and investment bankers who took home billions in paychecks and bonuses during the speculative credit bubble are now chastened, despite getting to keep all their ill-gotten gains?

14. Are you confident that the trillions being promised in your name to protect stock and bondholders of insolvent banks will not be squandered, just as the first $1 trillion in bailouts and "liquidity" was squandered, to literally no effect?

15. Are you confident that banning short-selling of 799 financial companies will eliminate all the nasty horrible speculators--even though the largest speculators were the investment bankers we have just bailed out and made whole?

16. Are you confident that the U.S. consumer, even though he/she is weighed down with unprecedented amounts of debt, is now poised and anxious to borrow more money from banks?

17. Are you confident that this massive bailout has renewed foreign investors' confidence in the U.S. financial system, now that the U.S. government has taken control of the levers of that entire financial system?

18. Are you confident that banning short-selling will actually increase the value of U.S. companies even as the U.S. enters a long, deep recession?

19. Are you confident that the stock market is "forward-looking" and is rising because U.S. corporate profits are sure to soar next year despite a global recession?

20. Are you confident that the U.S. stock market is not being manipulated to persuade foreign entities and retail buyers that "it's now safe to buy and speculate in U.S. stocks, as long as you're buying on the long side"?

Special bonus question: Are you confident this bailout is legal, and that huge legal challenges stemming from systemwide fraud, conflicts of interest, etc., won't sprout like rank mushrooms and gum up the supposedly seamless works our fearless Fed and Treasury have cobbled together overnight?

I would say confidence in any of these 21 points is sadly misplaced, for the simple reason that bailing out banks and the owners of bonds and securities by assuming worthless/severely-impaired/near-worthless securities and mortgages has changed nothing in the system: a system which mispriced risk, allowed fraud to flourish and put volume and velocity of real estate and securitized debt above all else because that's what generated the huge fees for everyone in the food chain from realtors to builders to mortgage brokers to ratings agencies to investment bankers to congresspeople pocketing huge payola/donations from Fannie Mae executives.

The consumer is tapped out and cannot borrow more money; legitimate businesses are hunkering down and cancelling capital projects as the global recession becomes painfully visible to everyone but government-employed statisticians and cheerleading pundits.

So how are newly capitalized banks and lending agencies supposed to make money when the volume and velocity of money has fallen drastically? Put another way: how can you induce people to borrow more when they're already groaning under unprecedented debt burdens?

How can banks make money when consumers are losing their jobs and their ability to service the debt they already have, never mind servicing additional debt?

How can a family with an income cut in half due to job losses make a mortgage payment, even one that has been trimmed in a "reduction" or "workout"?

How can you con the people into believing "all is right with the world again" despite the obvious fact that we have bailed out the very people who engaged in the most blatant fraud and trickery, and promised them unlimited opportunity to ignore risk ("moral hazard") once the furor has died down, because they now know they can sell any garbage risky loan to the Federal agencies?

By taking on all risk, does that reduce risk or increase it? The answer is obvious: removing the risk from transactions increases the odds that risk will again be ignored in the rush to book outsized profits from transactions.

If few can borrow and even fewer are willing to borrow, then how can the financial system we just bailed out make any money? The short answer: it can't. It did so via fraud, trickery, bribes (political donations), bluffing, legerdemain and "off-balance sheet" cloaking of risk, and now that the game has been exposed the number of suckers has diminished.

As one of the articles below notes, the business model of Wall Street is broken, and bailing out those who bought the risky assets for their own gain does nothing to construct a new, ethical, sustainable model in its place.

Of the many articles published recently, these seem especially relevant to me:

Do We Actually Want To Be Conned? All Too Often: Yes (September 3, 2008)

A Good Con, and The Higher Level Con (July 1, 2008)

From U. Doran:

It's the Derivatives, Stupid! Why Fannie, Freddie and AIG Had to Be Bailed Out (Ellen Brown)

From Cheryl A:

The Unitary Federal Reserve - Crisis Choreography (London Banker)

After this week's secret and unaccountable and extra-legal moves by the US financial authorities, I will not be holding any assets in the United States. I do not understand the rules. I doubt any rules will be applied fairly to all the players. I cannot be sure who the umpire works for, or what principles the umpire thinks they should uphold. I will not play the game.*

Let's look at a timeline of some of the decisions I would class as extra-legal or Enron-esque:

Special Status and the $138 Billion Riddle? (Rob Kirby)
$138 Billion Post-Bankruptcy JP Morgan Advance to Lehman; At Least $87 B Repaid by Fed

From Craig M:

Let's Start by Finding Some People to Behead: Michael Lewis

From Jed H:

Wall Street's Unraveling (Robert J. Samuelson)

Wall Street as we know it is kaput. What's really happened is that Wall Street's business model has collapsed.

From Craig M. and C.V.:

Hitler Gets a Margin Call (comedy video)

From Zeus Y.:

Only a Roosevelt-Scale Counterrevolution Can Prevent Great Depression II (Robert Kuttner)

From Chris Sullins:

DCDC Global Strategic Trends:

"US Economic Crisis. The US position as the world’s most indebted nation makes it vulnerable to stock market collapse, currency runs and economic crisis, as well as global currency manipulation. The most likely cause of crisis would be energy market instability or volatility leading to a loss of market confidence. Also, failure to continue to support or service its debt in these circumstances would put US creditors and commodity suppliers at risk, possibly causing a global economic downturn.

Failure of Global Financial System. Economic growth may be affected by financial shocks such as economic recession, natural or human-induced disasters or failure to deal with social and environmental challenges. There will be further pressure from corruption, organized crime and increasing illicit activity which will challenge international regulation, while stressing and undermining trust and fiduciary regimes. A reduction in financial confidence may result in states reverting to regional markets and a return to outright state or regional protectionism."

Reader Commentaries (excellent and diverse) (and my responses):

Michael Goodfellow

So looks like it's official. We are going to take the Japanese approach of trying to use the government's money to stop a depression. The best we can expect is what they got -- 15 years of stagnation, with periodic deflation. Japan also doubled their national debt.

I wonder if Congress and Paulson have the nerve to offer real "market value" for these distressed assets -- like 5 cents on the dollar, take it or leave it. I also wonder if they can resist the temptation to try and reflate the housing bubble. And I really wonder where they are going to get all the money for this!

They were already projecting a $400 billion deficit, and I don't think that included "emergency" appropriations for the wars. With the bailouts they've already done, and this new facility, we may see an actual deficit (amount of treasuries sold) of a trillion dollars. I can't see how they raise that without much higher interest rates. And I can't see how they reassure the markets that we're actually good for it without serious budget cuts. There's some market for Fed default futures. Has that reacted to this?

What's your guess as to what happens?

My response:

I think you've nailed it. Only I suspect our economy is even in worse shape than the Japanese economy due to our lack of savings and the enormous derivative positions still to be unwound. The Japanese economy looked rather simple by comparison.

I am thinking the only thing worse than socialism is socialism for the wealthy/powerful. I notice no one is suggesting the investment bankers who made billions (collectively) selling the taxic risky debt be taxed or suffer any civil penalties. oops, now take the debt off our hands seems to be playing OK with the "responsible" MSM.

I think we're in the midst of a financial hurricane without precedent and no one knows how it will play out, only that it will end badly.

Michael then added:

The more I think about it, the more amazed I am that anyone in the markets think this is good news. And it's not just U.S. investors, but worldwide. They must think the U.S. government is just made of money, with no credit limit!

I was talking to a friend about this today, and he's sure that Congress can't just leave it with some simple bailout. He thinks they will inevitably start "saving" their favored industries (like autos), making the economy even more political. Supposing we avoid that though, how will this new RTC decide what to buy, and at what price?

The old RTC got assets because the S&L went bankrupt, then they sold them for whatever they could get. This new one is going to be picking and choosing things to buy. That amounts to picking winners and losers. I can see banks being bailed out, but not hedge funds or something along those lines. Politically unpopular industries will suffer.

I also wonder if companies will now offload the really toxic stuff to subsidiaries, with the aim of letting them go bankrupt and be bailed out by the feds. I can't see how they will resist the temptation, if the Fed makes it clear they are cleaning up the worst cases first.

And of course, if they do offer pennies on the dollar for these assets (as they should), then doesn't that leave the banks insolvent? Or at least so far under their minimum capital requirements that they can't loan money? There were other comments today about "recapitalizing the banking industry", by which I think they mean the banks will sell shares to the Fed. I'm not sure how that makes an insolvent company solvent unless the Fed is paying too much. Which would be another political decision, with no respect for the economics of the situation.

Perhaps they can come up with something that impresses everyone, gets passed by Congress without a lot of fiddling and add ons, and actually works without needing a ridiculous amount of money. Or perhaps it isn't impressive, Congress balks, or the bill is just too high for foreign treasury buyers. Then I assume all hell breaks loose.

The press are still covering this as "another weird event in the world of finance!", not as "hey, the economy is collapsing. Here's the latest attempt to stop it." And I do wonder if Congress, Obama and McCain realize that if they do pass an expensive bailout, they can kiss any future expenditures goodbye. ( Emphasis added: CHS) The next administration (or three) will be about budget cuts, not new programs. McCain will find he can't fund his wars, and Obama will find he can't fund healthcare. Congress will really be under pressure to stop the pork spending. No fun for anyone in politics.

My second response:

I agree completely--the free-borrowing days are ending. Nobody seems to have noticed that the drop in oil has cut the Oil Exporters' free cash flow, and China is slowing down too, meaning less free billions floating around looking for a home.

The main issue now is: OK, so the banks are "recapitalized" by Federal gifts/bailouts; now who wants or needs to borrow money as the economy slides into recession? People are paying off debt and/or defaulting, not seeking to borrow more. So exactly how will these banks be profitable? Nobody seems to be asking that key question.

The answer seems obvious: once the flow of transactions slows to a dribble, then the fees which flow from transactions also plummet. Banks are essentially limited to making commoditized loans in a shrinking economy. Regardless of the bailout, I see a lack of profitable business as crippling the survivors.

Johan E.

I've been reading your site frequently the last year, and am greatly impressed by your clarity of thought as well as exposition, which could easily have been worthy of, say Johnathan Edwards, Thoureau or even Paine. Quite the aberration in contemporary american culture, so to speak.

As I write, about 9 pm in Uppsala, it's the end of a relieving day treating us with a stock market recoil of historical proportions. Our local financial headlines are touting the great market rally, the dodged recession and the glorious salvation of our equally grand status quo. As our memories perhaps won't tell us, but archives surely will, this course of events is ghastly similar to that which my grandparents saw during the spring of 1930 - a comely market rally that brought stocks up to about 30% below the peak of '29, before commodity prices began to collapse (for reasons unknown to me), and "the snowball spiral" set in.

Since this is obviously common knowledge as I'm a theology major with miniscule experience in economics, it should warrant public caution of systemic instability if anything, rather than this blatant assurance that all is well, and so will indefinitely remain, it put your recent article to mind, regarding the thorough-reaching conceit and societal irresponsibility of the mainstream media.

In my view, a great part of this all too irrational deceit, is probably unintentional, or unavoidable. Indeed, it's fueled and exploited by the corporate profit drive; but the roots are more likely to be found in the deplorable state of contemporary public discourse, than in anything much like a conspiracy of the power élite - I don't assume the latter is your viewpoint, but felt the subject could be explored a bit further. Of course, we may also surmise that such a conspiracy is a truly long-term operation, coincidental with the increasing irrationality of the manner in which we as a society communicate, and our collective strive towards entertainment rather than enlightenment, in which case our institutions are merely, and quite innocently playing along with the rules of a very old game they are unaware of.

In any case, I believe Neil Postman was right on cue with his fears that the institutions of a society, whose main criterion on information was the entertainment value, ultimately would fail in supplying its' citizenry and policy makers with the information neccesary to commit themselves to responsible descicions, with the focus on long term stability and prosperity. It seems this is exactly what we're witnessing here, on a grand scale. The overarching meta-discourse in western society is that of televised entertainment, and all information on the market is subjected to its rule. As televised entertainment is more or less devoid of the contextualised discourse which is virtually inseparable from the written word (Yes, I even count James Joyce), this makes perfect sense of the lack of perspective in our mainstream media, for example.

Just my two cents, friend.

Grant P.

You didn't write about it Friday morning, but I assume you are thinking alot about the "mother of all bailouts" going on right now where the U.S. is planning on (probably) unlimited purchases of the stock of troubled U.S. companies. Why would they want to do this? When a company like Lehman Brothers goes bankrupt, their assets are liquidated, usually at discounted prices. Now, what entities in the global marketplace would have the capital to buy up the assets of the multitude of U.S. companies that were about to go belly-up? My answer would be the sovereign wealth funds of countries like China, Russia, Saudi Arabia, Korea, and so on. Maybe the U.S. government stepped in because they were facing the situation of the wholesale transfer of this country's assets to foreign powers.

Something to think about?

Riley T.

If any one owns any financial services stock, it looks like it is time to dump the stuff and swim for it.

Let me see, if I own Goldman stock "GS", I can't sell short or buy puts to protect my current price, is this correct?

Am I crazy?

These people can't be this stupid so they must just be crooks.

Don E.

the proposed bailout seems to abnegate the sanctity of contract law. i will no longer be expected to pay for what i buy, nor can i expect to be paid for what i sell. since this guarantee under the law is the basis of a free, equable and stable system of trade all bets are now off the table. if trade, i.e. credit, hasn't frozen before it will now. when contracts lose their force under law who will trade? i am probably overstating something here, but the main idea seems applicable to me. i think what the mkt. is presently celebrating in delirious fashion isn't a return to real business but the probability of a free lunch. it won't work. without contract law we don't have any trust, just the sugar daddy, and we know him for a fool.

jim willie had this to say yesterday, and it seems to the point:

"Hidden inside the AIG bailout funding package, surely hastily cobbled together, but carefully enough to include a totally corrupt clause, was a handy dandy clause that permits raids. The conglomerate financial firms are permitted at this point to use private individual brokerage account funds to relieve their own liquidity pressures."

if this is an accurate reading of what the gov't. put together it opens a bottomless pit.

My response:

I agree--what happens when all future risk can be shoveled off on the govt? Well, then you keep writing bad loans because there's no penalty against doing so now.

Harun I.

I had written Harun an email about the Grand Bailout/Corporate Welfare which included this line:
"How I wish they would get what they deserve, i.e. a crash that makes 1929 look like chump-change." Harun responded thusly:

Would "they" be the American people, citizens of the Liar Nation? If so this link (Paulson, Bernanke Push New Plan to Cleanse Books) serves as notice that we are about to get what we deserve in spades. With a big cynical (or maniacal) Mogambo Guru laugh, I see we are about to be robbed blind "for our own good". This type of action didn't solve anything in the 1930's and it will fail presently.

All that Bernanke thought he knew about the Great Depression has failed him and so the desperate answer is to resort to failed policies of the FDR administration. And the congress who just a day ago admitted not knowing what to do is now enthusiastic about the proposed plan.

But no one is asking, besides a few, how does this solve anything if we don't renounce the silly idea of the post-industrial service economy? Once again, without getting back to real productive output how do we create velocity of all this liquidity without blowing ever larger bubbles? They won't answer this because there is no answer and that is precisely why it will fail. Depression wasn't announced October 30, 1929, it set in over time. But since we don't like words like recession or depression how about we call the coming period the Great Correction.

Here is a quote from the above article:

"It sounds like there's going to be a giant dumpster for illiquid assets," said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. "It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative to the size of the American economy," he said.

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

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