Friday, September 19, 2008

Financial crisis

This is a clear Q&A style discussion of the current financial upheaval.  David Brooks comments on the kneejerk reregulation response that is becoming the new fashion.  Meanwhile today's surge on stock markets around the world apparently reflects moves by Congress and the US Treasury to buy back at deep discounts the remaining mortgage bad debt in the US economy - this plan involves buying the mortgages, not the distressed institutions. It would be the biggest bailout in US history.

Update: I repeat a news update from the NYT:

Rescue Plan Seeks $700 Billion to Buy Bad Mortgages

The Bush administration is asking Congress to let the government buy $700 billion in troubled mortgages, according to a draft of the plan. The proposal would raise the statutory limit on the national debt to $11.3 trillion from $10.6 trillion.

A quote from this report by Republican Senator Jim Bunning of Kentucky:  “The free market for all intents and purposes is dead in America. The action proposed today by the Treasury Department will take away the free market and institute socialism in America. The American taxpayer has been misled throughout this economic crisis. The government on all fronts has failed the American people miserably.”


conrad said...

It's the socialist states of America, obviously taking a lesson from Japan and China in terms of nationalizing their bank debt, except the Americans can only print cash rather than make it, which I assume makes the situation far worse.

It's also humorous that you can now only bet on stocks on the way up and not down. The stockmarket and Disneyland get one step closer.

hc said...

I don't think the US Government has acted unwisely. At limited cost it has prevented a crisis. So far shareholders and unwise investors have not been biled out - although this might be the effect of current proposals to but back mortgage debt directly.

rabee said...


What if the bailout of the financial sector doesn't work as thoroughly as hoped?

The main risk here is that we're testing the credibility of the combined efforts of the executive branch, the legislative branch, and the central bank. What happens should it become apparent that the US government(s) can't do much?

My view was that the Asian financial crisis was made worse when governments tried unsuccessfully
to shore up their currencies.

I think that we could be better off letting certain segments of the market collapse even at the expense of going into a recession. My fear is that collapses are imminent and any bailout simply puts government credibility at risk.

hc said...

I am astonished Rabee that you have switched and are now backing John McCain while I have joined your commie mates and am backing Obama's support for the Bush intervention.

The time to think abour regulating the banks more appropriately is post-November. The crisis hitting the world economy is now. the issues need to be separated.

rabee said...

I'm not sure what you've understood from my comment Harry!!!!

I would be wary of this kind of "no worries the combine fantastic powers of congress the Whitehorse
and the Fed. will rescue the financial sector." Even if Bill Clinton and his Council of Economic Advisers were at the helm.

I'm simply asking, what would happen if they are perceived to be unable to do much in this case?

There is a healthy perception that the US has the resources to prevent further deterioration in the markets. This will now be tested, something that I regard as dangerous and irresponsible.

I'd much rather at this stage that we remain under the misapprehension about the power of governments than risk the possibility of waking up one morning and realizing that no one can do a thing that is in anyway useful.

This to my mind is a dangerous experiment that we can do without. There are kinds of information that the market is better off not knowing.

Kind off reminds me of the ultra-left adventurism that drew your interest decades ago./

Spiros said...

The $700b is presumably the face value of the mortgages. But if they are actually worth a lot less than that, because they are "troubled", then the Fed won't have to pay the full $700 billion.

The people holding these things have probably already marked them right down in their books, so if the Fed offers to buy them at say 10c in the dollar, it's a deal they might well take. If the Fed is smart, they will play as hardball as possible, but not so hard as to send key players under.

And if things settle down and more than 1 in 10 of these mortgages actually get paid back, the Fed could well come out ahead.

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