World News Blog

Obama and Democrats move on $350 bn bailout

President-elect Barack Obama and House of Representatives Financial Services Committee Chairman Barney Frank said Monday they have agreed on spending conditions for financial bailout plan.

Obama is trying to more quickly disburse TARP's second $350 billion fund.

In addition to the TARP, the Obama administration and Democrats are pushing other rescue plans including packages to help out homeowners. One effort will allow bankruptcy courts to ease terms on primary home mortages -- a move opposed by bankers.

They will also push an effort to encourage lenders to ease terms voluntarily on distressed borrowers by providing new legal protections and payments.

Reuters

Political risk high for Wall Street as TARP unfolds
Reuters - 45 minutes ago
By Kevin Drawbaugh - Analysis WASHINGTON (Reuters) - Congressional Democrats and the incoming Obama administration are uniting around strategies for saving the US financial system, but a fog of political risk still hangs over Wall Street and the banks.
Obama seeks access to half of bailout funds The Associated Press
Obama pressing Congress on remaining $350B bailout International Herald Tribune

Labels: financial bailout, financial industry, homeowners, TARP

Bank nationalization could worsen inflation

US President George W. Bush's $250 billion plan to nationalize banks will infuse money into the system and could trigger an increase in inflation.

The trend indicates that probably much more money will be needed in the future, so the money supply will continue to grow at a rapid rate as debt climbs. Interest rates will likely be kept low further putting pressure on inflation.

In the end, at least $1 trillion in additional money may be needed to prevent widespread bank failure through nationalization i.e., by shares in failing financial institutions. The law of supply and demand suggests that when money floods into the system, prices rise.

Inflation may actually ease in the short run as oil prices have dropped on fears that the slowing economy will decrease demand for petroleum. However, oil-producing countries have been hit hard and are likely to decrease production to lessen the impact on their own economies. This should stabilize oil prices.

Times Online
Bush Defends Bank Nationalization
Washington Post, United States - 3 hours ago
The government's $250 billion direct investment into banks in essence forces nine of the largest to accept what amounts to a partial nationalization. ...
US Follows Europe in Partial Bank Nationalizations Spiegel Online
Burst of optimism and a record rally Chicago Tribune
BROADER BAILOUT PLAN Hartford Courant

Labels: bank nationalization, banks, financial bailout, financial crisis, inflation

Comment: Do bailouts actually prolong downturns?

There is probably no better historical example to examine this question as the Great Depression, when the government intervened for more than a decade trying to prop up the financial system.

Although the Great Depression is generally seen as starting at the stock market crash of 1929 from at least 1929, small banks and farms had been floundering severely. However, it was not until 1931, when the government started a massive bailout program with the National Credit Corporation (NCC) that things started going downhill very quickly.

In 1932, the NCC was replaced with the Reconstruction Finance Corporation (RFC) and things continued to spiral downward reaching the lowest point during the Depression in 1933.

Yet, the RFC continued its bailout program mostly unsuccessfully until America's entry into World War II, generally seen as the point when shortly afterward the Depression ended completely. During the war, the RFC continued to operate giving out $2 billion a year. From 1932 until 1941, the RFC gave out $9.465 billion, a lot of money in those days.

When the war started, the government drafted many of the employed workers, and hired and trained large numbers of unskilled workers, at its own expense, to work in wartime factories. These policies together with rationing and a greater worker discipline helped the country work out of the lingering unemployment that still plagued the country. The stock market did not recover its pre-crash position though until 1954.

Some groups of economists, like those of the Austrian School, who believe that government intervention only prolonged the problems in the economy. Others, like the Monetarists, believe the Federal Reserve did not act quickly and strongly enough to address the crisis.

During the Depression, the Fed followed a deflationary strategy that kept interest rates high. The current Fed chief, Ben Bernanke, believes more in an low interest rate strategy, an attempt to ease credit, but in effect putting upward pressure on inflation.

Bernanke's views may account for today's cut in interest rates, another attempt by the government to bend over backward in accommodating the credit markets. However, as with the Great Depression, it is impossible to deny that easy credit is responsible for the current economic crisis.

Attempts at propping up the easy credit market, then, only reinforce the causative factors according to one school of thought.

The fact that the stock markets have not reacted positively to the torrent of government measures aimed at propping up the easy credit system probably indicates some doubt over the policy.

Labels: austrian school, bailouts, easy credit, financial bailout, financial crisis, great depression, historical lessons, interest rates, monetarist school, wall street

Comment: How deep is the economic crisis?

During a congressional hearing yesterday, the CEO of Lehman Brothers said he was surprised that the mortgage problems led to the current crisis on Wall Street.

Obviously, this guy did not become the executive officer of one of America's oldest financial firms without understanding the system, but he claims to have been caught off-guard by the credit crunch. So, it's worth noting that nobody may know quite what's going to happen until after it happens and long hard analysis takes place.

We do know that there will be mortgage resets on those risky housing loans until 2012. In fact, there will be quite a few more at-risk mortgages scheduled for resets over the next four years as compared to the subprime loans that led to the current meltdown. The future problems will be more with adjustable rate mortgages.

However, behind the mortgage problem there is still the fundamental problem of US debt. All told, the total governmental, business and consumer debt of the United States adds to about $34 trillion or four times GDP.

The most important part of this debt is that owned by foreigners, the external debt.

External Debt Worldwide

1	World	$ 51,780,000,000,000	2004 est.
2	United States	$ 12,250,000,000,000	30 June 2007
3	United Kingdom	$ 10,450,000,000,000	30 June 2007
4	Germany	$ 4,489,000,000,000	30 June 2007
5	France	$ 4,396,000,000,000	30 June 2007
6	Netherlands	$ 2,277,000,000,000	30 June 2007
7	Ireland	$ 1,841,000,000,000	30 June 2007
8	Japan	$ 1,492,000,000,000	30 June 2007
9	Switzerland	$ 1,340,000,000,000	30 June 2007
10	Belgium	$ 1,313,000,000,000	30 June 2007

Source: CIA World Factbook

From the chart above, it can be seen that the US is easily the world's largest external debtor. This means that every year a significant amount of US assets goes to other countries.

Internally, pratically everything in the economy is built up on a structure of debt. We saw the same thing with the dotcom economy, which was allowed to fail when George W. Bush came into office. There is an imaginary economy based on debt-based growth. People were basically borrowing money using previously-borrowed money as a type of collateral, or as evidence of growth or stability. While the dotcom system was allowed to meltdown, the government is desperately trying to save the broader Wall Street system.

America's debt problems arose with the idea that easy credit was good, the easier the better. Everyone borrowed with the federal government leading as an example. Savings rates tumbled also due to the impact of consumerism.

In order to feed the consumer frenzy, oil had to be imported and manufacturing jobs had to be exported, where labor costs are cheaper. Because America has failed to educate large segments of its population, professionals and skilled labor had to be imported as well. And foreign capital was needed to finance much of the "growth."

Many people are looking for the end to the current crisis in the bottoming out of the stock market, but over the long run there may be several bottoming outs. A lot depends on when the credit markets actually can't keep up with the demand on a regular basis. You can call it peak credit after a similar term for the coming peak in oil production. There will be no choice at that point but to let everything reset after a massive liquidation of debt.

Labels: economic crisis, economy, financial bailout

Wall St. stocks surge on bailout expectations

Stocks are surging on Wall St. despite bad employment numbers on hopes that the House will approve a bailout plan today. Markets are also hoping for a cut in interest rates to help jumpstart the economy.

The payroll drop also caused treasury prices to slide downward.

Wall Street Journal

Commentary: Bailout should treat the root cause, not the symptoms
CNN - 2 hours ago
Jackson voted against the bailout plan presented in the House on Monday. For a different view, read this commentary. Rep. Jesse Jackson Jr. says the bailout ...
Bailout package passed in US Senate eTaiwan News
* Focus on US House after Senate passes bailout guardian.co.uk
House Takes Up Sweetened Senate Bailout BillNPR

Live-Blogging the House’s Bailout Debate
New York Times, United States - 1 hour ago
By Catherine Rampell Today the House of Representatives is debating, and potentially voting, on the bailout package it unexpectedly rejected on Monday ...

House set for fresh bail-out vote BBC News
Bail-out bill: Congress sceptics won over ahead of House of ... Telegraph.co.uk

Video: Bush warns bailout must be passed - 29 Sep 08 AlJazeeraEnglish

Labels: financial bailout, stock market, wall street

Comment: Stock plunge pressures lawmakers on bailout

The largest point drop in American stock market history will certainly turn up on heat on Congress to pass a bailout plan for Wall Street.

Since this record effort has, in my view, been about propping up the stock market, we can expect that Wall St. fat cats and political contributors are putting maximum pressure on lawmakers. However, the folk from Main St. are pushing back hard themselves.

Record numbers of calls, faxes and emails are inundating congressional offices rebelling against $700 billion plan. Newspapers are also receiving unprecedented volumes of mail, mostly derailing the bailout proposal.

House Republicans voted strongly yesterday to dump the plan, but 95 Democrats also rejected the bailout. Conservatives complained that the proposal interfered with the free market, while the Democratic opposition tended to call for more assistance on Main St. Both sides agreed that judicial oversight was needed.

What the current proposal offers is a fix for 5 million homes currently at high-risk of default. However, there are tens of millions of mortgages still expected to occur in the coming years. Is this bailout simply a 'first installment' of a much larger plan to save Wall St.?

House leaders will reconvene Thursday after dealing a $700 billion financial market bailout a stunning defeat. The fate of the rescue package remained in doubt as Democrats and Republicans said they wanted to resurrect it. (Sept. 29)

Play Economic bailout plan: Who profits? AP via Yahoo! News - Sep 29 3:36 PM

Reuters

Asia falls on failed US bailout

Report
Sep 30, 2008

Leaders in the U.S. House of Representatives say they are reconvening Thursday instead of adjourning for the year as planned, after dealing a $700 billion financial market bailout a stunning defeat. AP's Jerry Bodlander reprots. (Sept. 29)

Play House to reconvene Thurs. after bailout defeat AP via Yahoo! News - Sep 29 4:02 PM

Local lawmakers votes on the rejected economic bailout plan were mixed; KDKA's David Highfield caught up with several Congressmen as they made their way back to the area.

Play Local Lawmakers Votes On Bailout Mixed KDKA Pittsburgh via Yahoo! News - Sep 29 8:33 PM

The House of Representatives rejected a $700 billion bailout plan by a vote of 228 to 225.

Play House rejects bailout plan Reuters via Yahoo! News - Sep 29 4:09 PM

Labels: financial bailout

Comment: Unpopular bailout may be Bush's last corporate payout

Most polls show that the administration's financial bailout plan is disliked by the vast majority of voters. Still, Congress may still pass what could be the mother of all George W. Bush's payouts to corporate America in the waning days of his admistration.

A Rasmussen poll showed that only seven percent of Americans actually support the bailout plan. Yet, lawmakers have raced to pass legislation that originally would have allowed the Treasury to spend money without any oversight. This detail apparently has been changed, but without any bump in support from the public.

Although the administration has claimed the plan will ultimately cost less than the current $700 billion price tag, some legislators have disputed the eventual costs. Senator Byron Dorgan (D-N.D.) said the final payout could amount to $1.7 trillion.

The Bush terms have been nothing less than wonderful for the corporate elite. The president cut taxes deeply for corporations and many Bush-linked businesses have fared very well after landing no-bid contracts in Iraq and Afghanistan. The administration has doubled the national debt with much of the money flowing into the military-industrial complex. We have already seen about $1 trillion spent on shoring failing financial companies including $300 billion in loans to Wall Street firms, $200 billion for Fannie Mae and Freddie Mac, and $85 billion for AIG.

Neither presidential candidate is willing to throw strong support behind the bailout in fear of angering voters with slightly more than a month before the election. Many believe that both will probably miss the Senate vote to approve the plan.

Labels: bailout plan, congress, financial bailout, george w. bush, u.s. financial companies

Comment: Bailout Smoke and Mirrors

The administration told people first that it had 24 hours to approve their $700 billion bailout package or the apocalypse would ensue.

Then it was by the end of the week to prevent absolute Armageddon. Now, supposedly lawmakers have until Sunday before Asian markets open on Monday to approve the whopper bailout or else...

Now this bailout, they claim, will calm things down and "save" the American, or even the world, financial system. But that's what they claimed when they sold earlier bailout claims for Bear and Stearns and AIG. Well, those bailouts did not appear to have much effect.

What is happening is that the same folk who got everyone into this mess are now the "experts" telling lawmakers they need to act and they need to act now! Obviously they neither know whether their plan will actually work or how soon it is needed to stop whatever gloomy consequences they are envisioning.

I have stated before that some type of plan will pass simply because the government has to at least look like it's trying to solve the situation.

So why not help those who really need help like the families struggling to pay their adjustable rate mortgages on their single dwelling homes? These families do not lose track of the number of homes they own unlike financial corporation executives, since they only own one -- the one they live in.

A grassroots relief plan has as much chance as solving the problem as any other. There are still tens of millions of mortgages that are expected to fail over the coming years regardless of any corporate bailout. These failures will drive down prices of surrounding homes in their neighborhoods creating much more of the same damage that is causing the current crisis.

These families faced with tough financial times tend to cut back on their spending and some even stash money away in shoeboxes for rainy days because they have lost trust in the system. There are so many ways that their financial decisions can impact the overall economy. Without assistance,for example, they may have to scrap plans to send their kids to college, which can have further repercussions on the workforce in the future.

Trying to mend things from the bottom up might not work either, but at least the government, in passing a sure-thing response to the crisis, is giving aid to those who really need it.

Labels: financial bailout, grassroots, main street, mortgage crisis, wall street

Comment: The Failed Bailout of the Great Depression

Some analysts have astutely commented that the recent bailouts including that of massive AIG failed to do what was expected of them. They did not calm down the markets as promised by the administration.

Will the much larger bailout plan currently in negotiations fare differently? Is it simply a matter of throwing more money at the problem?

If we look at the historical example of the Great Depression, we find that government attempts at propping up the free market do not work.

Following the panic of 1929, the federal government made numerous attempts to stem the tide of bank failures. This culminated in the formation of the RFC by the Hoover administration in 1932 and this was further supported by Roosevelt who came into power in 1933. The RFC was tasked basically with bailing out struggling large businesses and banks.

Well, obviously the strategy didn't work. The Great Depression continued for another decade until the general mobilization during World War II.

The difference between that bailout and the current one, is the Great Depression scheme occurred together with sharp deflation of prices, while the current one is happening in inflation-based environment.

A bailout could worsen inflationary problems, which was not a problem during the Great Depression when prices were sagging and hurting business people. The country will largely have to rely on foreigners to finance the debt needed for the Paulson plan.

Labels: financial bailout, great depression, history

FBI to investigate financial firms

No details but the Associated Press is saying the FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG.

This comes after Congressional hearings today on what basically amounts to a government attempt to prop up the stock market and prevent a "run on the banks."

Times Online

Stocks tumble on bailout woes
CNN - 44 minutes ago
NEW YORK (CNNMoney.com) -- Stocks slumped Tuesday, as the heated debate in Congress on the proposed $700 billion bank bailout dampened hopes that the ...
In search of an answer: Why is the Bush/Wall Street bailout so ... Los Angeles Times
Bailout extends to foreign banks, small and regional institutions Bizjournals.com
The other bailout: Main StreetChristian Science Monitor

Voice of America

Bailout plan under fire
CNNMoney.com - 2 hours ago
NEW YORK (CNNMoney.com) -- The debate over whether Washington should enact an extraordinary bailout of the nation's financial system reached a fever pitch ...
Why Congress Objects To The Bailout Plan NPR
Senate attack on bailout lacks explicit threat Reuters
Bailout plan sparks wide debate in Congress MSNBC