Gravity Sucks

As anybody who's ever ridden a bicycle or even stood up knows, what goes up must come down.

This is as true for the stock market as it is for anything else. Granted, it's a whole lot harder for the market to fall back to sea level, something about retained earnings and asset values underpinning stock prices, but trust me on this: it is not impossible.

Enter Paul Krugman:

...The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out — sufficiently so to be worth passing. But it’s not what you’d actually call a good plan, and it won’t end the crisis. The odds are that the next president will have to deal with some major financial emergencies.

Absolutely.

I'm not arguing that this is the mother of all financial crises. I am arguing, however, that the MOAFC stands a better chance of happening now, when the market is weakened and the solutions ineffectual, just like an opportunistic flu is more likely to incubate when the body's defenses are weakened.

The trouble with this bailout package is, it's like giving a bandage to a patient who's suffered a heart attack because he got a papercut filling in his admittance forms.

The real trouble is, well, ask a hundred pundits the cause of this problem, and you'll get a hundred different answers, all of them wrong.

Ask a hundred different economic pundits and you'll get a hundred different answers, of which 95% are incomplete.

Make no mistake about this: this crisis is pervasive and infiltrates the coziest sectors of our economy, and the world's economy. There was no single simple cause and there will not be a single answer, although the ultimate solution may end up being enormously simple. I think. I'll post more on my solution later this week.

We were worried about avian flu? This is an economic avian flu.

Curiously and coincidentally, this flu, like the avian one, has its roots in Asia. America exports debt. Period. We're good at it. We export roughly $700 billion annually (there's a reason that the bailout was pegged at that figure, and that's the reason right there).

Asian nations, flush with cash as their economies have overheated, have invested heavily in American debt, first in Treasuries bill and notes, and then when the purchase of those became unprofitable (for the same reason mortgages became attractive) in mortgage backed securities.

The gamble everyone made was that housing prices could only keep going up. Remember the title of this column?

As housing prices peaked and slid down a little, banks stopped lending money, forcing Fannie Mae and Freddie Mac to step in to keep the supply of mortgages consistent with the (overmarketed) demand.

How many Ditech.com and Countrywide commercials were there each hour just a few years ago? Five? Ten? Twenty? It's no surprise that these companies were the canary in the flu mine. They had the riskiest loans with the least capitalization, and needed to borrow the money they were lending.

And banks were only too happy to lend to them. Why? Because banks knew that the Fed and Treasury would step in when things got hairy. After all, the Fed helped arrange the bailout Long Term Capital Management. They'd have to step in where people's homes were at risk!

This is not the only cause of the current crisis and books will be written about them all, until eventually a comprehensive picture is put together, but I think this is a reasonable timeline of this crisis and how it unfolded. Call it the tree on which to hang the ornaments.

But like a Christmas tree, what goes up eventually must come down...

Buy My Shit Pile

Well, I suppose it had to happen...a website has sprung up today offering to sell your shitpile to the Federal Government just like the banks and brokerages have been able to.

Me, I posted my issue #1 of She-Hulk...I only want ten million dollars for it!

Risky Business

George Will, not a man I either admire or whose bromides and harangues I pretend to really even listen to, once said one of the smartest points about American government policy.

Unintentionally, of course. He's not that bright. He originally had been speaking of the tax code when he said that businesses tend to privatize profits but socialize losses.

In other words, a business can deduct its losses from the IRS (and by extension, the government) but will work like the dickens to retain as many earnings as possible and avoid as much tax as possible, even to the point of tax evasion.

Unfortunately, as Paul Krugman points out today, this policy is not limited to the tax code:

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

In other words, ladies and gentlemen, we've co-signed a home loan for a friend, without any access to his income, and now the bill is due, he can't afford to sell enough of his crap on eBay and the mortgage is due.

If this was the first or only bailout we had endured, that might be OK. After all, it would be an experiment, and experiments are allowed to go bad.

But this is neither the first time we've had to bailout out bad loans (Krugman correctly refers to the S&L crisis of the 80s), or even companies in deep fiscal trouble.

We've been down this road before, and will sadly travel it many times into the future unless we change the paradigm. More on that later, perhaps next week.

We are in essence buying $700 billion dollars of near-worthless paper...after all, if it had value, the banks could package and sell it...in the hopes that some miracle, mirabile dictu!, and they gain value again.

Some will, many will not. While I find it hard to believe that these so-called "adults" of the Bush administration haven't calculated a generous breakeven point for the bailout where we stand to make back our $700 billion, I can pretty much guaran-damn-tee you that point is highly, perhaps even exuberantly, overoptimistic.

I haven't run the numbers, but I'd be willing to bet Paulson's gamble will show us losing a few hudnred million, maybe we recapture $400 billion. Maybe. Not likely.

Meanwhile, these banks, the WaMus and Wachovias and Wells Fargoes, all get to line up at this big pig trough for their slop of Fed money, in the hopes that somehow, banks that managed to keep their books in order privately, like Citibank, who ended up with a saudi bailout will begin lending them good money after bad.

With no penalty to the banks who got Federal money. No management changes. No seizure of assets to offset even a small portion of the bailout. No censure of the board of directors for failing their fiduciary oversight, and all golden parachutes intact.

Meanwhile, if you owe a mortgage and you have trouble paying it off, you lose your house, even if the Fed somehow steps in and finds you a shelter, but then again, the Republicans have cut those unnecessary social services because, you know, it inflates the deficit...

George Will is correct: Our priorities are all screwed up.

Run, Bank, Run!

Many of you are familiar with bank runs only from the movie "It's A Wonderful Life," a particularly syrupy little piece of treacle your parents made you watch a billion times as a kid around Christmas:So George Bailey dips into his own pocket and rescues his bank with his honeymoon money.

Yea, that would happen. But bank runs were a significantly contributing factor to the Great Depression, which is why that scene had to be put in the movie.

Which brings us to today. Despite the attempts at reassurance by the central banks of both American and European governments that the sub-prime lending crisis is contained, there are many who are not getting the message, and rightfully so. It is NOT contained, and banks are working feverishly behind the scenes to put out this wildfire before it spreads.

The defaults on subprime mortgages and the subsequent defaults on securities that are derived from those shaky, questionable loans, will mean less liquidity for some major institutions in the world. Less liquidity, less cash, and suckers people like you and me who deposited money with these institutions stand to lose our investments.

Thus, today's story has some very ominous overtones:

LONDON (Reuters) - Fears grew on Saturday that panic among savers at British bank Northern Rock will see a run of withdrawals after reports that 1 billion pounds ($2.01 billion) had already been taken out.

The Bank of England stepped in on Friday to rescue Northern Rock, Britain's fifth-biggest mortgage provider, pledging to provide emergency funds after a global credit crunch hit the bank's ability to raise cash in money markets.

Saturday's Financial Times said customers had withdrawn 1 billion pounds on Friday, or about 4 percent of deposits.

Citing a source familiar with the situation, the paper said a quarter of that amount was withdrawn from branches and more via the Web site, despite problems accessing online accounts.

It will be impossible to even gauge the impact of this run for some days. The fact that people can electronically move their money out means they can't even easily stop the flow or limit it. Northern Rock could go bone dry on Monday, and no one would know until Wednesday.

And this is after the Bank of England has stepped in to do a George Bailey!

Bank runs have their own unique momentum, fueled by rumour and truth in a volatile mixture. The conservatives have played this paranoia for their own benefit for seven years now, and I suspect we're about to see it blowback big time on them. Just try to stop Americans from withdrawing money, and you'll realize that all those terror rumours and anti-liberal, anti-human, anti-gay, anti-immigrant ghost stories took their toll on our psyches.

This won't be the last bank run, nor will it be the worst. And this depression could be worse than anything we've ever seen.