TARP and Fed facilities unravel

November 13, 2008

johnkemp3–John Kemp is a Reuters columnist.  The opinions expressed are his own–

LONDON (Reuters) – Experience shows financial crises escalate very rapidly, and need a swift and decisive response from policymakers to break the cycle of panic. Time to reflect, craft thoughtful policies and consider long-term consequences is a luxury policymakers generally don’t have.

But the problem with bold ad hoc responses is they often have unintended consequences. Individual policy actions may prove inconsistent with one another, fail to achieve objectives, and store up larger problems for the longer term.

Developments over the last week suggest the U.S rescue program has fallen into just this trap and is now rapidly unraveling.

The twin pillars of the rescue program are the multiplicity of liquidity and lending programs being offered by the Federal Reserve and the Treasury’s Troubled Asset Relief Program (TARP).

Both programs are now in deep trouble. In fact the various rescue packages risk becoming a textbook example of how poorly designed programs can fail to achieve their objectives.

LIQUIDITY EVERYWHERE BUT MAIN STREET

The Fed has grown its balance sheet from $884 billion to $2.055 trillion in the space of two months and extended almost $1 trillion in additional support to the banking system through the various emergency lending programs enacted or expanded over the last year.

But precious little of this additional liquidity is finding its way through to households and corporate borrowers. In fact, most of it is now sloshing around the banking system like so much excess ballast.

Banks have increased their reserve holdings on deposit with the Fed from $8 billion to $494 billion. This is $488 billion more than the Fed estimates they would ordinarily need to hold for payment clearing and prudential purposes.

Increased reserve holdings have absorbed perhaps half of the liquidity placed into the banking system from the Fed. Much of the rest has almost certainly been invested into the mountain of Treasury bills the U.S Treasury has been issuing. Only a very small proportion is left for re-lending to the real economy.

It is much safer for the banks to lend surplus funds to the Fed and the Treasury than lend to one another let alone to households and corporations. There is no credit risk. Nor is there any liquidity risk because reserve balances can be accessed on demand, and the Treasury bills have short maturities and can be readily re-discounted.

The Fed has made these perverse incentives worse by agreeing to start paying interest on excess reserves. Previously, the lack of interest payments gave banks an incentive to minimize reserve balances. But now reserves pay interest the net cost is low.

Even low returns on Fed balances start to look attractive when adjusted for the high levels of credit and liquidity risk in extending longer-term credits to other banks and real-sector borrowers.

SURPLUS MONEY, NOT ENOUGH CREDIT

Policymakers have ignored the distinction between money and credit (or to use monetarist terminology between narrow money and broad money). The Fed can create unlimited (narrow) money by adding reserves to the banking system. But it cannot create credit (broad money, or lending from the banking system and other financial institutions to one another and to end customers).

This is precisely the problem the Bank of Japan faced throughout the late 1990s and into the present decade. The bank reduced interest rates close to zero, and even resorted to “quantitativeeasing”.

The result was a huge increase in narrow money but little or no growth in the broader money aggregates as the banks preferred to keep the increased liquidity in their vaults rather than boost lending to customers.

The problem is that credit extensions depend on healthy banks being willing and able to lend, and healthy borrowers willing to borrow and able to repay. Once the economy is trapped into a more than usually serious recession, sound and prudently managed institutions have no incentive to take on more leverage to expand their operations, while lending to weaker institutions that need the money presents an unacceptably high credit and liquidity risk.

Yesterday’s inter-agency statement from the Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (http://www.federalreserve.gov/newsevents/press/bcreg/20081112a.htm) notes sternly “the agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers”. But the stern injunction to start lending again is probably futile.

Until collateral values (especially residential and commercial property) stabilize and there is greater certainty about the economic outlook, there is no incentive for creditworthy institutions to borrow, or banks to lend. But without lending, the contraction will deepen.

THE $700 BILLION TARP SLUSH FUND

TARP is beset by even bigger problems. Recall the $700 billion fund was originally created to provide a buyer of last resort for mortgage-backed securities and other assets that had become illiquid and were allegedly trading only at firesale values, if at all, that did not reflect their fundamental underlying worth. TARP was supposed to aid price discovery and deal with a crisis of liquidity.

But the TARP provided the Treasury secretary with almost unlimited authority over how to use the money, subject only to an oversight board composed mostly of executive branch officials and powers for Congress to invoke the “nuclear option” and disapprove further funding beyond an initial $350 billion.

The fund has quickly mutated. The Treasury used $125 billion for capital injections into nine large national banks, some of whom claimed they did not want or need it. Another $125 billion is being made available for capital injections smaller regional and community banks. Some $40 billion is now being used to support AIG. The Treasury now has just $60 billion of TARP authority before it must risk returning to Congress.

PROGRAM CREEP

Yesterday, the Treasury admitted it now has no plans to begin buying troubled assets, gutting the program’s original purpose completely.

Congress came under intense pressure to approve TARP with the promise that asset purchases could begin within a matter of days of the president signing the bill. Legislators show increasing signs of restiveness that TARP has transmuted into a giant $700 discretionary fund outside the regular appropriation process.

There is frustration that TARP funds are being used to bolster balance sheets (and thereby take off pressure to cut dividends and bonuses), and perhaps pursue consolidation, while there is no new credit flow to households and corporations.

Meanwhile an ever-lengthening list of industries are bidding for TARP bailouts. The Treasury has already extended the program to insurers. American Express and other institutions have turned themselves into commercial banks to access all the federal support on offer.

The auto industry is pressing its own claims to be “systemically important” for a share of the bailout funds. Congress and the administration are now arguing over where to draw the line. TARP is not big enough to bail out all these industries.

But the fundamental problem is that neither Fed liquidity nor TARP deals with the root of the problem – the rising tide of defaults in the residential mortgage market, and the continued fall in home prices and collateral values.

There is a popular misconception that the renewed extension of credit will revive the real economy. But that is putting the cart before the horse. Credit will start flowing again only when banks and potential borrowers can see some sign that the economy, cash flows and collateral is stabilizing.

As several senior Fed officials have indicated, monetary policy has done all it can. Only fiscal policy, combined with the systematic rescheduling of loans and write-down of debt principal, can achieve stabilization in the real economy and the housing market.

53 comments

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What can one say? Deck chairs, Titanic….

The rescue packages were not meant to resolve problems but to address perception and behaviour. Because some ninny who watches a lot of television feels that people are rushing to the banks taking all of their savings out. We know that is what happens because I’ve seen this television show. It usually appears around Christmas time. I kind of wonder about the level of nominal thinking that seems pervasive in executive America and which psychology course they were taking together to come up with these wonderful enlightened ideas. So it seems people are not necessarily cashing out because of fear. Believe it or not, some people invest in order to make money – so they can take OUT more money. It’s true. People put money in so they can take money out. Are they in a panic? No, actually, they have been planning to do this for decades. But all of these suits who took basic psychology think it’s some kind of puzzling mental psychosis. Homer Simpson isn’t just operating nuclear power plants, apparently.

Posted by Don | Report as abusive

If you read between teh lines, the only people that have money are the banks. it is time to put a stop to this nonsense. join a protest on 11/22 for ending the federal reserve system. goto endthefed.uswe need sound money and a free market, not gov’t manipulaiton. why would anyone believe they could run this economy? they can’t even run the television conversion rebate.

Posted by Mike | Report as abusive

In fact it’s not clear what the bailout package was intended to do. The Administration spent months in blissful denial (‘strong fundamentals’ and all that) then upon slowly noticing the symptoms of the sickness — not the causes — cobbled something together in a panic. The current effort is akin to handing out tissues in a pneumonia ward and wondering why none of the patients is getting better.

We need a time out. Treasury needs to stop treating only the symptoms of this burst asset bubble. Systemic risk to the financial system is no longer imminent. Mission accomplished. Up to now, Sheila Bair at FDIC has been a voice of reason and consistently has advocated steps to slow housing foreclosures, the root of the problem.

Posted by Toney Brooks | Report as abusive

Since when has big government ever successfully fixed a problem (they caused, Clinton administration) by throwing more money at it? Are U.S. citizens so numb between the ears they actually thought it would work? How could it, when they give themselves unlimited control? Any time you give more money to someone who can’t handle their money, will only do the same. Did we forget the real definition of insanity? And while we’re at it, what about the bad behavior of so many American citizens, when it comes to the almighty dollar?

Posted by scott | Report as abusive

O.K. Fine Article… But what about those pesky Credit Default swaps… What becomes of them.? are they not DEBT.this is a wonderful example of Absolute power corrupting absolutely. Banks do not even Register the Consumer anymore in their lexicon of business. we consumers are mere flys buzzing around the room they would love to SWAT given the chance. Believe Me, Banks would rather you “go Away and Shut Up” than to deal with you… They are just Like Potter in “It’s a Wonderful Life” cranky Old Farts wishing the consumer didn’t exist.I wonder how far 700 Billion would have gone if it was given equally to every Tax Payer recognized by the IRS.My Calculater doesn’t have that many “O”‘s Had Paulson Given the Money to the People that Pay the Taxes then maybe this mess could have been avoided. But now the Banks will just “Play” with their new found wealth.Save your Money, the bread lines are forming…

Posted by Wilson | Report as abusive

Underneath the bank’s boar of directors, under its top managment and operating platform leaders is the credit policy department. These are the red headed step children of the banking industry. Typically staffed by quant that lack interpersonal skills to generate revenues or maintain customer relationships. Now, they rule the roost and are savoring the light, as dim as it might be. No one can fault these people if no credit risks are taken. Revenue growth? Sounds very free market and would likely be viewed as “risky” by the financial press. That’s not good for stock price…perhaps the suggestion to extend credit by the Fed should be accompanied by a shot to Eugene’s ribs with a loud…”do your job. Can’t be any worse than your former boss who lost billions.”

It shouldn’t have been rocket science. But it was. Before you can devise a solution, you have to know what the real problem is. Not what you think it might be, but what it actually is. Be that as it may, it seemed to me, the economist neophyte to top em all, that these bailouts were crazy from the get go. Because, first of all, who should benefit from the triage and how to you make sure that happens? Second of all, where is all this money to come from? What are the accounting controls? My third worry is manifesting, and that is the bandwagon effect. The feds are giving away money? OMG, all of a sudden, everybody is a lottery winner. Everybody has their hands out. Nobody is bothering to carry their own weight. Why should they? There’s always these bailouts. FREE MONEY. Who wouldn’t want it? But systemically, what is really the problem? Has anybody identified the problem? What really caused this? I mean subprime lending did not cause the auto industry to tank, did it? I don’t know. I’m confused.It seems to me that there is an economic virus that is spreading that needs to be isolated and contained. Throwing money at it is not the solution. But I am not an economist and so I don’t exactly know what the solution is. But I would start by saying no to any more bailouts. I would put a moratorium on that. The idea can be revisited. But for now, no bailouts. Yes, a band aid is needed to contain the hemorrhaging. Although, maybe if you let it be, it will stop bleeding on its own. I don’t know. Maybe the doctors should leave the patient alone and see what happens. Let the market players play. For example with the mortgage industry: The banks lent all these mortgages and borrowers borrowed the money, right? Let them resolve it. Force the banks into a position where working out these mortgages is a matter of survival for the banks and their over paid CEOs. How? I don’t know. I am not an economist. But that should be easy to figure out? As far as this auto czar business? Don’t do it. If some big giants go under, new giants will pop up – eventually….omg. forget everything I just said. This is frightening.By Marion TD Lewis, Esq., New Yorkwww.marionlewisesq.com

Too bad the fed didn’t listen to all the protests of middle America fighting this b/s program from the beginning. Actually, I’m sure they were listening, but didn’t care. Anyway, if Paulson did give out $700 billion to the 380 million people in the country, we all would have been walking around about 2 grand richer. Thanks, Hank, instead of an extra $2000 in my wallet, I get to read about you guys screwing everything up more than it already was!!

Posted by Mun E. Bags | Report as abusive

Someone should give Mr. Kemp an advisory role in the Treasury Department, as his observations are brilliant.It’s really simple, and basic. Any rescue, or bailout program must contain the triggering mechanisms to implement and activate the desired results, or they can be expected to fail. If they do fail, the confidence in the markets will worsen upon evidence that the government is unable to resolve the problem. That’s where we are right now. The next issue is this: General Motors, is literally killing us with its debt burden. While it is necessary to bailout GM, it is also necessary to force GM to merge its massive retirement funds with the retirement funds managed & administered by the individual states.GM has neither the capacity, nor the expertise to manage the retirement funds together with the automobile manufacturing business, and it is a MAJOR distraction. GM, has to be forced to decide whether it wants to improve its financial structure, or expire in bankruptcy.If the government supervises that scenario properly, the entire county will rejoice, and confidence in the markets will be restored – world-wide. TSM

Posted by TROi S. McNEILL | Report as abusive

There is one other important observation. GM’s economic impact is so vast that there is an excellent probability that it will try to bully the government. When it does, we must be prepared to walk away from the table, and let GM “go shopping” for a bailout from some other source. This is crucial. TSM.

Posted by TROi S. McNEILL | Report as abusive

The root of the problem are the foreclosures. Until the investment houses and lenders are forced to restructure those loans, this is not going to be fixed. Why are they being rewarded with my tax dollars? And why wasn’t Paulson’s massive conflict of interest an issue?

Posted by Lesley Watts | Report as abusive

The inability of the treasury to control (perhaps dictate) how the TARP money provided to banks is used is troubling. A naive thought is to force banks to originate a certain percentage of the TARP funds as home loans at a fixed percentage rate. For instance, if $250B were made directly available to back home loans at a fixed rate of 4.5%, the avalanche of refinances and new mortgages would certainly do more to bolster the economy than having banks reinvest the money in treasuries, yes?

Posted by Angus | Report as abusive

The TARP, proposed by hide-bound Republicans, morphed in Congress as the meaning of “assets” broadened. Few economists shed tears for the “gutted” original purpose. Paulsen, Kemp, and others agree that Federal monetary efforts perhaps have run their course for now. Only renewed threat of banking collapse (TED spread above 4 again?), however, could justify this column’s headline.I second Toney Brooks’ comments (Nov. 13th, 7:44 pm GMT), with the caveat that bubbly house prices must fall further, and many more people will lose their homes. Let’s do what we can while not wasting resources in delaying the inevitable.

Posted by Tom Burton | Report as abusive

You mean that purchasing bad debt with monopoly money didn’t work?The terms “broad” and “narrow” money actually means wealth and fiat/counterfeit money. This country is broke and had no actual wealth to pay for this bailout, so the Federal Reserve just printed money, or borrowed it from outside the states. Monetary inflation debases the dollar, which now is worth pennies on the, well, dollar.End the Federal Reserve, they’re the root problem of the government’s economic failure.

Posted by Lyon | Report as abusive

The underlying problem of the fiscal crises has many parts, but among them is the lack of oversight and regulation of securitization. But Paulson is on record as saying that dramatic efforts to increase the levels of securitization are necessary to stimulate lending.Paulson’s position is 100% wrong. Outstanding securities need to be accurately valued and properly regulated going forward. Dramatically improved regulation to ensure that securities remain small, simple, and auditable is necessary. This takes time, and indeed, banking leaders and treasuries around the world haven’t any time to spare. What is shameful is that Paulson hasn’t realized that when one finds oneself in a hole, one must stop digging. Accelerating the creation of hastily-reassembled securities for his friends to buy at bargain prices is the most ill-advised policy I’ve ever heard.I propose a simpler plan:1) Cap all future credit at 20% interest rate for all lending vehicles, including credit cards. If a lending institution feels that the borrower is too risky to extend a lower rate, then the lending institution should not be allowed to offer such low-value subprime loans.2) All lenders should be required to hold the loan for a minimum of 25% of the life of the loan (7.5 years for a standard 30-year mortgage). This would be sufficient time to properly value the loan and, if securitization is done, the underlying value would be easily audited.3) Regulation should mandate the accounting and transparency of complex securities.4) Credit-default swaps must be outlawed.5) no publicly held corporation or private enterprise should be bailed out with taxpayer money unless put to a public referendum. Indeed some would vote to bail out companies with guaranteed loans, however, this is the entire purpose of the stock market, NOT the federal government. Those who support private institutions should risk their own investment, not yours and mine.Only when a firm financial foundation is re-laid will the crisis end. Sadly, Paulson continues to dig a deeper hole for everyone.

Posted by Michael | Report as abusive

At the risk of seeming repetitive, this problem was never going to be solved by the current administration. Their anything goes, corporatist ideology is what created the problem. These people need to be brought to justice, not given trillions of dollars to further feed their corporate masters. Allowing this to go forward is completely dysfunctional and is compounding the problem. Let the trials begin!! Unfortunately, it will have to wait until January 20th.

Posted by Jonathan Cole | Report as abusive

I am a hedge fund manager. What is the Federal Reserve?

Posted by John Blodbrett | Report as abusive

So if it has cost 5 trillion dollars thats 1.2 trillion a month. It is an amazing figure and we can pass more laws to pretend that we dont have to have an equitable system. However that is DEBT that can be used for a reconstruction. I would propose that 5 trillion would bring relief for years in crisis. So if the effect of this dash to the past costs 1.2 trillion a month the question should not be how do we save the banks. Rather we should ask how do we stop spending 1.2 trillion a month and what would a plan based on that idea require.

Posted by Da' Don | Report as abusive

I don’t understand why I see such a consistent thread of wisdom in blogs like this, but last week saw hundreds of millions of Americans go vote for a candidate who fully supported this bailout. What are you all doing out there? If you can clearly see the complete, bumbling incompetence of this government, why would you vote to continue it?

Posted by Russ in PA | Report as abusive

Lyon said:”The terms “broad” and “narrow” money actually means wealth and fiat/counterfeit money. This country is broke and had no actual wealth to pay for this bailout, so the Federal Reserve just printed money, or borrowed it from outside the states. Monetary inflation debases the dollar, which now is worth pennies on the, well, dollar.End the Federal Reserve, they’re the root problem of the government’s economic failure”AMEN! Right now this country does NOT NOT NOT need more credit. The endless spiral of more debt (usury at its best) to generate interest to service prior debt is unworkable and it is unraveling. To inject more credit into the system is ultimately fanning the flames. We need to pay off our debt, however painful that may be and live more reasonably. End the Federal Reserve. There are plenty of geniuses out there who can come up with a more balanced monetary system. Woodrow Wilson himself, after implementing the Fed, later said “I have ruined my country”. Yes, you did.

Posted by ScottHW | Report as abusive

It’s a real pity… Most, if not all of these banks and financial institutions should all fail. Let them go bankrupt, serves them right. I see no reason why they should be helped. Of course it’ll be a domino effect and effect everyone around the whole world. This isn’t a monopoly game although it looks and feels like one. US is no longer #1, never has been. Wonder what would happen if the Fed called it quits and declares bankruptcy. We might all be better off…

Posted by ken | Report as abusive

I’m a U.S. citizen living on “Main Street” who is in the process of re-financing my home with a local credit union. If there isn’t any money to lend, how can I be consolidating 3 accounts into a home loan?

Posted by Lochness | Report as abusive

The TARP funds are being used as a trickle down, and they aren’t trickling, any more than other economic policy of this administration. Paradoxically, a better use of the funds might be to buy up the securities created by the credit card industry. That may, in fact, be where the problem began, not in mortgage lending. The mortgage foreclosure issue appears to be regional. The problems of many of those borrowers began in two places – credit card interest – and in the cost of transportation to work- i.e. gas and SUV payments. Unstick that stuff and things will start to flow. Drop credit card interest and bank deposits or buying will increase. The difference between 24% and 10% is huge in a household budget.

Posted by Brad Riendeau | Report as abusive

Sometimes I have to wonder the people who continuously support this bailout are really THAT stupid to keep continuing with it, when it is failing. Or that they are purposefully trying to ruin is to gain control. Which is it? Tomorrow, the stocks will go down, by Monday, they will go back up. The obvious fluctuation the market should PROVE that these bailouts do not work. I’m tired of this, so help me, I will go out and protest these, even if I’m by myself!

Posted by NW | Report as abusive

We’re talking about enough money to have refunded all of the personal income taxes paid in the last three-seven (still trying to calculate this) years by persons earning 200K or less, or, pay all interest on all mortgages for five years.Instead we have the broadest scale of thievery by the the most blatant crew of villians ever to command the center stage in this country.Why are we protecting institutions, . . . balance sheets. Nationalize everyone’s bank account for banks that go under. Those that live by the sword should die by it.

The article concludes that, “… Only fiscal policy, combined with the systematic rescheduling of loans and write-down of debt principal, can achieve stabilization in the real economy and the housing market.”This is wrong. Housing will stabilize only when the average person can afford the average house. The current market value of your house is only what another person can (or will) pay for it. If I can afford to stay in my current home only because Uncle Sam gives me a 2% mortgage for 40 years, my ability (or desire) to move out of the house and purchase another is limited at best.The stabilization of home values has nothing to do with the volume of foreclosures … it has solely to do with people’s ability and willingness to pay top dollar for your home.

Posted by Bill | Report as abusive

Russ in PA reflects the real danger associated with this whole financial crisis. The end of the US Govt as we have known it for over 200 years. I hope it doesn’t come to that.

Posted by Dave | Report as abusive

It’s obvious these guys, Paulson and Bernanke, didn’t know the severity of the problems. Everything from the beginning was piecemeal.How ironic Paulson dropped his original TARP plan. What if Congress went along with it? Is Paulson Bush’s “you’re doing a great job Brownnie”?Disasters all.

Posted by mikee | Report as abusive

TARP is simply a continuation of the Ponzi scheme that created the crisis. “Cheap” money created the problem , and the same folk who failed to see the approaching credit meltdown , are now trying to solve the crisis with “free” money.Here’s a solution : why not simply streamline the process and allow banks to print their own fiat … the resultant will be the same; a dollar collapse and hyper-inflation.

Posted by Andre' | Report as abusive

It would appear that we are uncovering more than a broken mortgage lending model in this crisis. The pileup of reserves within the Fed system, and the failure to distribute to the tier 2 commercial paper market seems to be showing that the era of cheap and easy credit created a completely broken business model whereby retained earnings became a thing of the past.The folly of LBO’s via junk bond issuance is self evident, but what about leveraged business creation made possible by the ability to borrow against every foreseeable expense category. Naturally too many ventures will be created. Successful new businesses have cash flow tied up in debt service and rollover, and anything left over seems to get dedicated to distribution through dividends or executive compensation. Where applicable, management toward stock price manipulation becomes a great temptation, and retaining earnings toward the goal of plant expansion or modernization (much less rainy day needs)takes a back seat.Equity building became a forgotten model.The easy credit era allowed us to borrow from the future to create short term prosperity. The ability to continue that practice has obviously come to an end with the realization that risk has to be managed. Lining up at the Fed window at this point should carry some stigma.

Posted by Gary Leeper | Report as abusive

There is an issue that nobody seems to be worried about.The crisis has its origins in bad lending by financial institutions. A solution must involve a huge recovery process whereby these bad loans are managed back into good order over time. This will require the services of a vast army of good old fashioned lending bankers.In my opinion the changed dynamic in lending markets over the past 20 years has seen a steady erosion of old fashioned lending skills in the broad global financial sector. If I am right then there are simply not enough lending bankers left to clean up the mess, let alone ensure that the task of good lending is done properly in future.

Posted by anton kleinschmidt / south africa | Report as abusive

I am a hedge fund manager. What is a facility?

Posted by John Blodbrett | Report as abusive

Where are all the geniuses America produced in its renowned Business Schools over decades? Why they could not stop the US economy going that bad? May be America needs a down-to-earth Economist like Dr. Yunus (Noble prize winner) of Bangladesh who although educated in America, has shown the world that collateral free loan is feasible even with the poorest people.

Posted by M.N.Meah | Report as abusive

100%commodity money standart, 100%bank reserves, End the Fed !100%commodity money standart, 100%bank reserves, End the Fed !100%commodity money standart, 100%bank reserves, End the Fed !it will be painful, but sound monetary system must be established to stop this debt Ponzi scheme

Good article.Risky lending practices are the root cause of this credit crisis. It was fostered by excessive incentives to executives to go for broke, and not thinking about the long term beyond their personal bank account. Can’t say I blame them. When they are giving out cash, grab a pitchfork.Now we have an inflated housing market. It needs to come down by anywhere from 20 to 50 percent depending on the state you are in. (I wonder how people in Iowa feel about bailing out a southern Californian?). If I had a $ 400K mortgage and a house worth $ 300K, I would walk away in a heartbeat. Maybe someone needs to issue TI calculators to homeowners? The problem is that the previous congress passed personal bankruptcy laws that make a person declaring bankruptcy an indentured servant. Personal bankruptcy was a check on extravagant lending that kept things in balance.Someone now needs to pay for their bad bets, and the sooner the write downs occur, the quicker this mess will be sorted out. It looks like big business wants it to be the taxpayer.I am planning on going on welfare soon. That way I will be in the same category as investment bankers, insurance companies, and soon to be auto companies.

Posted by Dennis in PA | Report as abusive

My God, what a fascinating time to be alive to watch this mess unravel. No, I am not a masochist, nor am I a sadist, but we are living thru history right now, with a capital H if you will.The world will eventually come out of this mess, just as it has come out of all of the others that the human race has managed to create. Look on the positive side, however. There are historians and scholars yet unborn who will earn their PhD’s and spend their entire adult lives analyzing and writing about this time we live in.Look at this whole mess as a jobs creation program for scholars of the 22nd Century.And smile.

Posted by Howard S | Report as abusive

To pick up on the question raised by M N Meah and my earlier post.About 20 years ago we started seeing a change in the way that banks managed credit. The old staid lending banker was viewed as a bit of an anachronism whilst the marketing types started gaining favour. Bankers who were steeped in the traditions of good lending warned the new breed of “graduate school bankers” that they were playing with fire and that the aggressive marketing of lending products without good risk management was a very bad idea. Lending bankers all over the world were dismissed (in some cases literally) as ill informed Cassandra’s.I will use the acronym MBA in a very generic way to define business school graduates. Over the past 20 years the MBAs have triumphed over QBE in a manner that was defined by hubris. The highly educated but experience deficient MBAs swept into the market and had little difficulty in brushing aside their less educated QBE colleagues. Unfortunately the MBAs won the battle, but they lost the war and we are all paying the price.

Posted by anton kleinschmidt / cape town | Report as abusive

The principle that individuals and business’ will govern their affairs in a self regulating “capitalistic free market system” is historical ficton and idealogic bunk.Economies are doomed to repeat the mistakes of history. “Never happen again” has happened with such regularity it is predictable!!!!! Ten years after the last global economic collapse, the world was embroiled in global hostilities. But, WWI, WW2 were “never again” historic events with economic roots.

Posted by agauagau | Report as abusive

I think this debate is ignoring the most basic underlying cause of our economic crisis – the mindset of the people. There is a great discord amongst the generations at play here, whether we’re talking about the Boomers who are in control and have basically set up the way we do business, the Gen Xers who are caught in the middle, aloof and selfish, and the up and coming Millennials who want to be catered to and want everything they want and more, yesterday without having to lift a finger to get it.So long as the 3 separate and distinct mindsets remain separate and distinct, this economic flatulence will continue, and nothing will get resolved.Sure, blame it on the lenders who gave the loans to people who weren’t qualified. But what about the pressure to make those loans out of “fairness?” Go ahead, tell me lenders don’t make loans based on a sense of fairness, but then explain why businesses are catering to this generation of workers by doing things like sending acceptance letters to their parents, allowing parents to tour the workplace and sign off on little Johnny or Janey’s job, and are fielding calls from parents because little Johhnny or Janey got a bad review? Like it or not, the workplace has to learn to deal with the new generation, and I think that’s where things are failing.Lenders have fallen into the trap of redoing standards because there is a demand to do so. It’s the tail end of the selfish GenX generation and the beginning of the entitled Millenial generation who have forced this change. Getting something for nothing is the theme of the generation. And that’s exactly what the lending institutions gave them – credit where credit was not due.And now we are paying for it.

Posted by Wendy | Report as abusive

As the jobless rate continues to skyrocket, it should be the role of the government to secure jobs in fields that are or will be lucrative. The U.S. auto industry is a perennial failure, refusing to bail them out will force them to restructure. The markets should be left to sort themselves out, throwing money at the banks has given them the opportunity to weather the storm. Impeach Pelosi.

Posted by Stephen | Report as abusive

Let’s see.An Administration whose mismanagement caused this mess, gets a $700B blank check from Congress and gives the money to the bankers whose mismanagement and greed caused this mess, who then use this money to get richer.Meanwhile Joe the Plumber loses his job and home.No wonder Das Kapital has become popular again.No one is in charge who is competent and willing to fix things.We are doomed.

Posted by John Bannick | Report as abusive

To me there is a common thread here. The criminals who perpetrated the greatest larceny in the history of the world have us believing this is simply a problem of financial transparency, regulatory policy, and the behavior of consumers.The fact of the matter is that we have been betrayed by the leadership for the benefit of their corporate backers. We really need to wake up here and impeach and remove these people, because they clearly intend to keep on doing the same actions (relieving us of our wealth and the wealth of generations yet unborn) by straight out corrupt practices. Why are we still giving these people the benefit of the doubt?It is almost comical how the public keeps falling for the lies that drag the world deeper into the quicksand. We need to wake up, realize that we’ve been had, bring the perpetrators to book and try to get back on some kind of stable footing. Right now we are on the express train to a major Depression and no one is putting on the brakes.Just the opposite. The forces of greed are lining up to try to get their share of the booty. It’s the new age of piracy, except the pirates are in charge!!

Posted by Jonathan Cole | Report as abusive

Please, the bailout was to give the bankers a new way to line there pockets while we on main street struggle to even feed ourselves. Its disgusting, Our country has been robbed of any kind of lively hood by bernake paulson and the international bankers of the fed reserve. Its time to end the fed and get this country back on its feet.END THE FED

Posted by jesse | Report as abusive

When thew Big Three go bankrupt what will be left of U.S manufacturing? New housing is at a virtual standstill. Producing tangible goods is the way societies build wealth. Our society has built an economy based on debt to buy homes, autos and investment”products”. At some pint in time all markets become saturated and demand levels off. For a decade or more GDP growth has been based on profits from the financial sector and services.The challenge is to develop new products( other than just homes, autos and wireless devices) that consumers will buy. Bringing affordable solar panels, hydrogen cell generators, bio-fuels and low current electrical products to the market successfully will solve many of our problems. However, creating demand for such products, in this economic climate, has proven to be impossible.It is clear to me that the previous commentators get it but those in political and economic power do not. High wages paid to defense workers, along with price and wage controls during World War II, created excess income for U.S. workers. Many products were rationed. The American peoples response was to save and buy U.S. bonds which provided more revenue for the war than taxes or Wall Street did. This is what brought the U.S. out of the Great Depression.Free market capitalism, up to this point,has been unable to deliver to this society the things it so desperately needs. We must find a way to lift ourselves(and the world) up, like this nation did for itself in the 1940s, without going to war.

It is not that those in political and economic power don’t get it. They’ve got it and things are going great, for them.check out Michel Chossudovsky or Peter Scot Dale.

Posted by Will | Report as abusive

Let’s see…Greenspan –> flooding the world with play money –> creating enormous asset bubbles –> economic fundamental out of the window –> game of musical chairs stops –> ???As a private institution, the Federal Reserve has the monopoly on money creation. The question is where is accountability and checks and balances?

Posted by need answers | Report as abusive

How does an economy continue to grow and expand when the key drivers of the economy, the middle class consumer, has experienced real wage stagnation for over 10 years? By spending money which they have not earned – debt. Debt they are not qualify to obtain, but do so through reduced / eliminated borrowing requirements. That debt was backed by housing prices which were / are artificially inflated due to artificial demand (home loans to those who are not qualified or able to pay drives up demand). This works for a while, but at some point the consumer runs out of money and credit then:- default on home loans- Home prices fall- spending stops- economic contraction.Even if lending is freed up, there will be no qualified borrowers.Bottom line – the economy will not turn around until1. housing prices come in line with average income (median income = $48,000/yr affordable house price is 3.5 times median income = $168,000. Current median single family home price = $235,000. We have a ways to go). Once housing prices come into line the economic contraction will stop.2. If we then want economic growth, we need to create jobs which will increase real wages over time. If folks earn more money they will save and spend more money.Unfortunately we have sent a significant number of these jobs overseas. The engineers and bookeepers and factory workers who used to spend and save a good income are now making half of what they used to make. Hard to grow the economy with that happening.

Posted by Jeff | Report as abusive

I totally agree that low or even zero interest rates in the US will not help the situation as we go into 2009 companies will fail at a faster rate and unemployment will rise to alarming heights, we should be in no doubt that this will be worse than the great depression, what will make this worse if the likes of General Motors are bailed out and not allowed to fail we cannot keep bailing out these companies the demand is not there for the supply and demand will not get back to levels seen pre 2007 because credit will not be available the rules of the game have now changed think of your parents or grandparents if you could not afford it you could not have it people had to go with out, now the party is over this is what it going like be in no doubt this is going to be extremely painful.

Posted by COLIN JAMES OBE | Report as abusive

As an alternative to auto industry bailout it might be better to offer a percentage of low interest financial backing or investment to companies buying bankruptcy automotive assets to produce cars and trucks in this country.This could achieve two main goals:1. It would retain the domestic capability.2. It offer those with better ideas and less stuck in an old “automotive company culture” a chance to change the industry.I believe maintaining a significant domestic automotive capability is essential to national defense. Without such capabilities we would have been hard pressed to win WW II.

Posted by M. Craig Kernan | Report as abusive

I think that we have to tackle the crisis at its roots, which is the price of housing. The lower the price goes, the more people enter into a position of negative equity in their house. The only way to prevent further falls in the price of housing would be to stem the flow of foreclosures and the subsequent sale of the houses a distressed prices, which affects the price of every house in the area.Instead of giving the money directly to the banks bailout money should be used to buy back the mortgages that are in distress. It would be unfair to bail out only those individuals who are unable to pay their mortgage. This would penalize those we bought a house they could afford. However, it would not be unreasonable to negotiate a rental agreement with the current occupants of the house that reflected their ability to pay. For those who are not simply speculators this would allow them to stay in their current house, but they would not build up equity as their more prudent neighbors will be doing.Details remain to be worked out, such as the pricing formula and in the terms of the rental agreement. If the scheme is restricted to those currently living in the house the impact on the rental market should be manageable. Some way of preventing, or reducing the amount of “key money” from being exchanged would have to be found.Is the supply of rental accommodation also in surplus?

Posted by Jim Kirby | Report as abusive

Lynn Tilton (CEO of Patriarch Partners) was on CNBC Squawk Box on Friday…relevant insights to this discussion…Fixing the Financial Crisis: The truth of the situation can be ignored no longer (http://www.cnbc.com/id/15840232?video=9 60926779.)This is the same woman who predicted the financial crisis on Bloomberg TV back in 2006 (http://www.blinkx.com/video/lynn-tilton -on-bloomberg/87JL8lMSQmrDI4ALaa5zdQ) so perhaps she’s worth listening to now.She proposes direct lending to businesses through a new “Provisional Federal Bank (http://www.patriarchpartners.com/Lynn_T ilton_WashPost_NYT.pdf)”…Liquidity must be made available not solely to big banks where Treasury-injected capital has been amassed to fill the cavity left by gambling losses, but rather expressly to deserving American companies and their people who will reignite our sputtering economy. A provisional Federal Bank must be initiated to foster enterprise and to provide job opportunities for every American.”

Posted by TruthSeeker | Report as abusive