Neither popular nor economist support for wild guess bailout


The People vs. the Banksters

By MIKE WHITNEY

The financial system is blowing up. Don't listen to the experts; just
look at the numbers. Last week, according to Reuters, "U.S. banks
borrowed a record amount from the Federal Reserve nearly $188 billion a
day on average, showing the central bank went to extremes to keep the
banking system afloat amid the biggest financial crisis since the Great
Depression." The Fed opened the various "auction facilities" to create
the appearance that insolvent banks were thriving businesses, but they
are not. They're dead; their liabilities exceed their assets. Now the
Fed is desperate because the hundreds of billions of dollars of
mortgage-backed securities (MBS) in the banks vaults have bankrupted
the entire system and the Fed's balance sheet is ballooning by the day.
The market for MBS will not bounce back in the foreseeable future and
the banks are unable to roll-over their short term debt.

The Federal Reserve itself is in danger. So, it's on to Plan B; which
is to dump all the toxic sludge on the taxpayers before they realize
that the whole system is cratering. It's called the Paulson Plan, a
$700 billion outrage which has already been disparaged by every
economist of merit in the country.

  From Reuters: "Borrowings by primary dealers via the Primary Dealer
Credit Facility, and through another facility created on Sunday for
Goldman Sachs, Morgan Stanley, and Merrill Lynch, and their
London-based subsidiaries, totaled $105.66 billion as of Wednesday, the
Fed said."

See what I mean; they're all broke. The Fed's rotating loans are just a
way to perpetuate the myth that the banks aren't flat-lining already.
Bernanke has tied strings to the various body parts and jerks them
every so often to make it look like they're alive. But the Wall Street
model is broken and the bailout is pointless.

Last week, there was a digital run on the banks that most people never
even heard about; a "real time" crash. An article in the New York Post
by Michael Gray gave a blow by blow description of how  events
unfolded. Here's a clip from Gray's "Almost Armageddon":

     "The market was 500 trades away from Armageddon on Thursday...Had
the Treasury and Fed not quickly stepped into the fray that morning
with a quick $105 billion injection of liquidity, the Dow could have
collapsed to the 8,300-level - a 22 percent decline! - while the clang
of the opening bell was still echoing around the cavernous exchange
floor. According to traders, who spoke on the condition of anonymity,
money market funds were inundated with $500 billion in sell orders
prior to the opening. The total money-market capitalization was roughly
$4 trillion that morning.

     “The panicked selling was directly linked to the seizing up of the
credit markets - including a $52 billion constriction in commercial
paper - and the rumors of additional money market funds ‘breaking the
buck,' or dropping below $1 net asset value.

     “The Fed's dramatic $105 billion liquidity injection on Thursday
(pre-market) was just enough to keep key institutional accounts from
following through on the sell orders and starting a stampede of cash
that could have brought large tracts of the US economy to a halt."

Commercial paper is the lubricant that keeps the financial markets
functioning. When confidence vanishes, investors withdraw their money,
normal business operations become impossible, and the markets collapse.
End of story. So, rather than restore the public's confidence by strong
leadership and behavior designed to reassure investors; President Bush
decided to give a major prime-time speech stating that if Paulson's
emergency bailout package was not passed immediately, the nation's
economy would vaporize into the ether.

Last week, the commercial paper market, (much of which is backed by
mortgage-backed securities) shrunk by $61 billion to $1.702 trillion,
the lowest level since early 2006. So, Paulson's bailout will
effectively underwrite CP as well as the whole alphabet soup of
mortgage-backed derivatives for which there is currently no market. The
US taxpayer is not only getting into the plummeting real estate market,
he is also backstopping the entire financial system including
defaulting car loan securities, waning student loan securities,
flailing home equity loan securities and faltering credit card
securities. The whole mountainous pile of horsecrap-debt is about to be
stacked on the back of the maxed-out taxpayer and the ever-shriveling
greenback.

How did Treasury Secretary Paulson figure out that recapitalizing the
banking system would cost $700 billion? Or did he just estimate the
amount of money that could be loaded on the back of the Treasury's
flatbed truck when it sputters off to shower his buddies at Goldman
Sachs with freshly minted greenbacks? The point is, that Paulson's
calculations were not assisted by any economists at all, and they
cannot be trusted. It is a purely arbitrary, "back of the envelope"
type figuring. According to Bloomberg: Swiss investor Marc Faber, known
for a long track record of good calls, believes the damage may come to
$5 trillion:

     "Marc Faber, managing director of Marc Faber Ltd. in Hong Kong,
said the U.S. government's rescue package for the financial system may
require as much as $5 trillion, seven times the amount Treasury
Secretary Henry Paulson has requested....

     ``The $700 billion is really nothing,'' Faber said in a television
interview. ``The Treasury is just giving out this figure when the end
figure may be $5 trillion.''

Most people who follow these matters would trust Faber's assessment way
over Paulson's. In his latest blog entry, economist Nouriel Roubini
said that "no professional economist was consulted by Congress or
invited to present his/her views at the Congressional hearings on the
Treasury rescue plan."  Roubini added:

     "The Treasury plan is a disgrace: a bailout of reckless bankers,
lenders and investors that provides little direct debt relief to
borrowers and financially stressed households and that will come at a
very high cost to the US taxpayer. And the plan does nothing to resolve
the severe stress in money markets and interbank markets that are now
close to a systemic meltdown."

Roubini is right on all counts. So far, more than a 190 prominent
economists have urged Congress not to pass the $700 bailout bill. There
is growing consensus that the so-called "rescue package" does not
address the central economic issues and has the potential to make a bad
situation even worse.
The Bankers' Coup

Financial industry rep. Paulson is the ringleader in a bankers' coup
the results of which will decide America's economic and political
future for years to come. The coup leaders have drained tens of
billions of dollars of liquidity from the already-strained banking
system to trigger a freeze in interbank lending and hasten a stock
market crash. This, they believe, will force Congress to pass Paulson's
  $770 billion bailout package without further congressional resistance.
It's blackmail.

As yet, no one knows whether the coup-backers will succeed and further
consolidate their political power via a massive economic shock to the
system, but their plan continues to move jauntily forward while the
economy follows its slide to disaster.

The bailout has galvanized grassroots movements which have flooded
congressional FAXs and phone lines. Callers are overwhelmingly opposed
to any bailout for banks that are buckling under their own toxic
mortgage-backed assets. One analyst said that the calls to Congress are
50 per cent "No" and 50 percent "Hell, No". There is virtually no
popular support for the bill.

  From Bloomberg News: "Erik Brynjolfsson, of the Massachusetts Institute
of Technology's Sloan School, said his main objection ‘is the
breathtaking amount of unchecked discretion it gives to the Secretary
of the Treasury. It is unprecedented in a modern democracy.'

  “‘I suspect that part of what we're seeing in the freezing up of
lending markets is strategic behavior on the part of big financial
players who stand to benefit from the bailout,' said David K. Levine,
an economist at Washington University in St. Louis, who studies
liquidity constraints and game theory.'” (Mish's Global Economic Trend
Analysis)

Brynjolfsson's suspicions are well-founded. "Market Ticker's" Karl
Denninger confirms that the Fed has been draining the banking system of
liquidity in order to blackmail Congress into passing the new
legislation. Here's Denninger:

     "The Effective Fed Funds rate has been trading 50 basis points or
more below the 2% target for five straight days now, and for the last
two days, it has traded 75 basis points under.  The IRX is demanding an
immediate rate cut.  The Slosh has been intentionally drained by over
$125 billion in the last week and lowering the water in the swamp
exposed one dead body - Washington Mutual - which was immediately
raided on a no-notice basis by JP Morgan.  Not even WaMu's CEO knew
about the raid until it was done....The Fed claims to be an
‘independent central bank.' They are nothing of the kind; they are now
acting as an arsonist.  The Fed and Treasury have claimed this is a
‘liquidity crisis'; it is not.  It is an insolvency crisis that The
Fed, Treasury and the other regulatory organs of our government have
intentionally allowed to occur."

Grassroots resistance, spearheaded by Internet bloggers (like Mish,
Roubini and Denninger) are demonstrating that they can mobilize tens of
thousands of "peasants with pitchforks" and be a factor in political
decision making. It also helps to have elected officials, like Senator
Richard Shelby, who stand firm on principle and don't faint at the
first whiff of grapeshot (like his weak-kneed Democratic counterparts)
Shelby has shouldered the full-weight of executive pressure which has
descended on him like a Appalachian rockslide. As a result, there's
still a slight chance that the bill will have to be shelved and the
industry reps will have to go back to Square One.

The country's economic predicament is steadily deteriorating. Orders
for manufactured durable goods were off 4.5 percent last month while
inventories continued to rise. Unemployment is soaring and the housing
crash continues to accelerate. Credit Suisse now expects 10.3 million
foreclosures (total) in the next few years. Numbers like that are not
accidental, but part of a larger scheme to use monetary policy as a way
to shift wealth from one class to another while degrading the nation's
overall economic well-being. More alarming, the country's primary
creditors are now staging a rebellion that is likely to cut off the
flow of capital to US markets sending the dollar plummeting and
triggering a deflationary credit collapse. This is from Reuters:

     "Chinese regulators have asked domestic banks to stop lending to
U.S. financial institutions in the interbank money markets to prevent
possible losses during the financial crisis, the South China Morning
Post reported Thursday. The China Banking Regulatory Commission's ban
on interbank lending of all currencies applied to U.S. banks, but not
to lenders from other countries, the report added."

Bloomberg News reports that Dallas Federal Reserve Bank President
Richard Fisher has broken with tradition and lambasted the proposed
bailout saying that it "would plunge the U.S. government deeper into a
fiscal abyss."

  From Bloomberg: "The plan by Treasury Secretary Henry Paulson to buy
troubled assets from financial institutions would put 'one more straw
on the back of the frightfully encumbered camel that is the federal
government ledger,' Fisher said today in the text of a speech in New
York. 'We are deeply submerged in a vast fiscal chasm.'...The seizures
and convulsions we have experienced in the debt and equity markets have
been the consequences of a sustained orgy of excess and reckless
behavior, not a too-tight monetary policy," Fisher said to the New York
University Money Marketeers Club." (Bloomberg)

Surely, the cure for hyperbolic "credit excesses and reckless behavior"
cannot be "more of the same." In fact, Paulson's bailout does not even
address the core issues which have been obscured by demagoguery and
threats. The worthless assets must be written-down, insolvent banks
must be allowed to go bust, and the crooks and criminals who engineered
this financial blitz on the nation's coffers must be held to account.

The carnage from Greenspan's low interest rate, "easy money" binge is
now visible everywhere. Inflated home and stock values are crashing as
the gas continues to escape from the massive equity bubble. The FDIC
will have to be recapitalized--perhaps, $500 billion--to account for
the anticipated loss of deposits from failing banks caught in the
cross-hairs of asset-deflation and steadily contracting credit.
Recession is coming, but economic collapse can still be avoided if
Paulson's misguided plan is abandoned and corrective action is taken to
put the country on solid financial footing. Market Ticker lays out
framework for a workable solution to the crisis, but they must be acted
on swiftly to rebuild confidence that major systemic changes are
underway:

     1--Force all off-balance sheet "assets" back onto the balance
sheet, and force the valuation models and identification of individual
assets out of Level 3 and into 10Qs and 10Ks.  Do it now. : (In other
words, no more Enron-type accounting mumbo-jumbo and no more allowing
the banks assign their own "values" to dodgy assets)

     2--Force all OTC derivatives onto a regulated exchange similar to
that used by listed options in the equity markets.  This permanently
defuses the derivatives time bomb.  Give market participants 90 days;
any that are not listed in 90 days are declared void; let the
participants sue each other if they can't prove capital adequacy. (If
trading derivatives contracts can damage the "regulated" system, than
that trading must take place under strict government regulations)

     3--Force leverage by all institutions to no more than 12:1.  The
SEC intentionally dropped broker/dealer leverage limits in 2004; prior
to that date 12:1 was the limit.  Every firm that has failed had double
or more the leverage of that former 12:1 limit.  Enact this with a six
month time limit and require 1/6th of the excess taken down monthly.
(Ed: The collapse in the "structured finance" model is mainly due to
too much leverage. For example, Fannie Mae and Freddie Mac had $80 of
debt for every $1 dollar of capital reserves when they were taken into
government conservatorship.)

If there's going to be a bailout, let's get it right. Paulson's $700
billion bill does nothing to fix the deep structural problems in the
financial markets; it merely pushes the day of reckoning a little
further into the future while shifting the burden of payment for toxic
assets onto the taxpayer.

Mike Whitney lives in Washington state. He can be reached at
fergiewhitney@msn.com