Paulson: Treasury will do what it can while we wait for Congress

posted at 5:36 pm on September 29, 2008 by Allahpundit

Try to wrap your mind around the fact that both sides of Congress acknowledge that this is a dire crisis and that something must be done — and yet the next vote won’t come until Thursday at the earliest. That’s a “sure loser,” for reasons InstaGlenn astutely articulates. To quote Michael Scherer, “This is no longer just a credit crisis. It is a credibility crisis.”

And what happens when they do reconvene? Like McArdle says, it’s not that they need 12 more votes. It’s that they need 12 more votes for a (momentarily) unpopular bill from House members facing reelection in competitive districts. How do you get those? By letting the market tank until your constituents beg for relief, I guess.

Exit quotation from Barnett: “We’re in uncharted territory here, and I don’t want to tacitly posit an economic competence that I lack. However, the many people I’ve spoken with who do understand economics and our financial system are gravely concerned – all of them. The only place you can find people who aren’t gravely concerned are on Capitol Hill and in the media, the two places in our society where people are paid to offer opinions on things they know nothing about. Suffice to say that if our banking and financial system doesn’t recover its footing, the overwhelming consensus is that we’re headed for very rough times.”

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Y-not on September 29, 2008 at 6:10 PM

As I said previously, Jewish soldiers would be working on this holiday during a war. This crisis is about as urgent, since the livelihoods of many millions of people could be devastated.
As Jesus told the Jewish religion experts of his day, if your donkey or sheep fell into a pit on a holy day, you’d retrieve it, right?

jgapinoy on September 29, 2008 at 7:19 PM

Pelosi is a disaster. Here’s a short summary on the situation:

Here’s a cynical take from commenter Bart:

Pelosi was not acting out of stupidity, but out of malice to obtain partisan electoral advantage.

The woman knows how to count votes. She has kept several bills from coming to votes over the past Congress because she knew she was short on votes and would lose.

The woman knows how to follow polls. Obama was losing to McCain until this mess emerged a little over a week ago. Now Obama has a 5 point lead.

One has to be willfully blind not to see that Pelosi was attempting to dump on Bush and pick a fight with the GOP to ensure that this rescue plan lost and the partisanly advantageous crisis continues.

Everything you are watching is for the sole purpose of electing Barry. And once he’s POTUS, guess who will be running the show? It won’t be BO because he’s incapable. It will be Nanny, Harry, Soros, Lewis, et al.

There won’t be any economic stimulus package that involves developing US energy resources and jobs for Americans. Nanny and her pals have invested elsewhere. All they care about is raising taxes and expanding government.

Cody1991 on September 29, 2008 at 7:21 PM

phronesis,

I’ve been following your analyses for the past few days. Most excellent, and thank you. Considering your comment on fractional-reserve lending, how does that relate to a fiat monetary system based not only on government, but on derivative incomes, futures, and currency markets, as well? We haven’t had hard (metal) reserves in this country to back our economy since, when, 1931? Maybe earlier, I’m a touch hazy here. In any case, we’ve floated the dollar for at least forty years. Prior to that, if you consider the issue of the Fed Res notes in 1963

If I’m off-base, go ahead and hit me upside the head. I’m just trying to get my hands around some concepts here.

Also, pertaining to the comment terrye at 5:45P that payroll checks might be facing some jeopardy: Steinbeck wrote that no group of people were more than three meals from revolution. In today’s U.S., it might be that they’re only two paychecks away. I don’t really want to believe that payrolls would fail because of market disruptions, however, I’d like to entertain any thoughts in this regard.

creekspecter on September 29, 2008 at 7:21 PM

phronesis on September 29, 2008 at 6:48 PM

thanks for the link… its quite interesting that the last few years, the “nonreal” money from the system has skyrocketed (ie, increased at a higher rate than either M0 or M1 money).

You are correct, I had no idea banks were creating money out of thin air… seems quite interesting with the Constitutional Prohibition against that very practice.

Seems like if it worked correctly, it would end up as a zero sum game as real dollars were used to pay back the loans which created these “bank dollars”… but, if further loans are used to pay back those loans, the amount of unreal dollars (ie, not real government backed dollars) would inflate, as loans are used to pay back loans… in a giant pyramid scheme…

Is the collapse of this pyrmaid scheme what we are seeing? Because the reserve dollars used to create these loans in the first place have to be there…

Romeo13 on September 29, 2008 at 7:22 PM

Everything you are watching is for the sole purpose of electing Barry. And once he’s POTUS, guess who will be running the show? It won’t be BO because he’s incapable. It will be Nanny, Harry, Soros, Lewis, et al.

There won’t be any economic stimulus package that involves developing US energy resources and jobs for Americans. Nanny and her pals have invested elsewhere. All they care about is raising taxes and expanding government.

Cody1991 on September 29, 2008 at 7:21 PM

I agree with you. It’s one reason I view the current “crisis” with a jaundiced eye. It appears to me that Paulson and Cox (Bush administration people) were either asleep at the switch or idiots to begin with to allow us to get to this point. I just have no faith that they are the right people to lead us out of it.

I also despise the fact that Paulson is much closer with Pelosi, Reid, Dodd, and Frank than he is with members of his own administration’s party. And he has embraced leftist remedies in favor of conservative ones.

funky chicken on September 29, 2008 at 7:33 PM

creekspecter on September 29, 2008 at 7:21 PM

Romeo13 on September 29, 2008 at 7:22 PM

You both have good points. That’s why I’m so afraid right now. The mess of other financial instruments using leverage (some of which are fairly recent inventions) are kind of like other forms of money. Instutions and instruments which use margin/leverage are also creating money in a way. They are now deleveraging, draining the market of liquidity, and thus feeding the deflationary spiral. Unlike some others here, I don’t think these instruments are neccessarily garbage. Their values are contingent on changing economic fundementals. But just because it isn’t necesarily a house of cards doesn’t mean it can’t fall like one. Deleveraging lowers asset prices which begets more deleveraging, all of which feeds the contraction in money along with the bank failures.

phronesis on September 29, 2008 at 8:11 PM

phrenesis,

So, your basically saying that the markets are spiraling down right now, with value based on perceived value of all of the instruments involved. I would agree, looking at how these instruments have come into being, that they aren’t garbage at all, but instead, (again) a perception of value against what has been promised. Where’s that one domino that stops the fall? There must be a point where deleveraging reaches a critical value, true?

Deflation, I can understand. Those of us who went through the 70′s into the 80′s should know that lesson. But, with this analysis, we aren’t looking at just a deflationary trend, or are we? From where I look, it seems to be more reactionary (in financial terms) to the point of recessive, if not depressive. I think the markets can recover, given time. Will enough time be provided for the man in the street, and not limited to here in the U.S, but overseas as well, to realize that this problem is perhaps solvable? I guess what I’m asking is, is there enough confidence in the non-U.S. markets to weather this, or are we staring down the barrel of 1919 again?

creekspecter on September 29, 2008 at 8:25 PM

Oops… phronesis… apologies

creekspecter on September 29, 2008 at 8:29 PM

I’m sure his incentive to do his best to get through without the bailout is quite high. Gee! Golly! If he can just eek his way through without the bailout, he can come out looking like a thief, liar or fool… maybe even all three.

Fire him NOW.

CC

CapedConservative on September 29, 2008 at 8:46 PM

Going from the 70′s to the 80′s was NOT deflation.
It was DISINFLATION.

The two are not the same.

Disinflation is when the rate of inflation gets smaller, but inflation keeps going up.

Deflation is when prices spiral downward.

The two have very, very different effects.

Reserach the difference.

Shirotayama on September 29, 2008 at 8:48 PM

creekspecter on September 29, 2008 at 8:25 PM

Here’s the rub and the reason I think government intervention is the only hope of stopping this spiral (which may not work but at least offers a decent degree of hope). Asset prices are dependent on credit (since this creates buyers for the assets) and now credit is dependent on assets prices (since it is the depreciation of assets on the balance sheets of firms that provide credit which is dragging them down). There no force toward equilibrium here, only forces pushing things downward. I don’t see how the market reaches a bottom on its own, at least not any time soon. I don’t see how we escape absent government intervention to inflate at least some asset prices. Maybe another bill or a 25bps fed funds rate would do the trick. I don’t see other investors returning to the market absent these things.
At some point it will be too late for the government intervention to work. I’m not sure we are at that point yet. If another bill passes soon, maybe it will work. Otherwise I think we face a deep depression, possibly as severe as the Great Depression. We are starting a higher level of wealth than we were in 1929, so things shouldn’t be as bad in terms of abject poverty, but I wouldn’t want to own stocks or other financial assets or be looking for a job. We will have life savings wiped out, pension funds without hope of funding their obligations, bankrupt state and local governments, etc.

phronesis on September 29, 2008 at 8:58 PM

phronesis on September 29, 2008 at 8:58 PM

I’m going finger-deaf yelling this… It is about credit default swaps PERIOD.

Read these….

Excellent explanation of the credit default swap bailout.

http://www.financialsense.com/fsu/editorials/amerman/2008/0910.html

Bailout of AIG was directly caused by Credit Default Swaps:

http://www.npr.org/templates/story/story.php?storyId=94700734

FANNIE/FREDDIE bailout caused $1 Trillion of Credit Default Swaps to trigger…

http://www.marketwatch.com/news/story/gse-bailout-triggers-over-1-trillion/story.aspx?guid=%7B0BD9AF95-0034-4309-85FE-03A8B7B77B32%7D&dist=hplatest

Proof that settling debt at or close to par is a bailout of credit default swaps:

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080909/REG/809099979

Closing the barn door after the horses are out:

http://www.usatoday.com/money/industries/banking/2008-09-23-cox-credit-default-swaps_N.htm

See the light…

CC

CapedConservative on September 29, 2008 at 9:03 PM

phronesis on September 29, 2008 at 8:58 PM

Seems this thing won’t let me post multiple links so I will post them one after another… and education on what the real problem is… credit default swaps.

First:

Excellent explanation of the credit default swap bailout.

http://www.financialsense.com/fsu/editorials/amerman/2008/0910.html

CC

CapedConservative on September 29, 2008 at 9:07 PM

Next:

Bailout of AIG was directly caused by Credit Default Swaps:

http://www.npr.org/templates/story/story.php?storyId=94700734

CapedConservative on September 29, 2008 at 9:08 PM

Next…

FANNIE/FREDDIE bailout caused $1 Trillion of Credit Default Swaps to trigger…

http://www.marketwatch.com/news/story/gse-bailout-triggers-over-1-trillion/story.aspx?guid=%7B0BD9AF95-0034-4309-85FE-03A8B7B77B32%7D&dist=hplatest

CapedConservative on September 29, 2008 at 9:08 PM

again..

Proof that settling debt at or close to par is a bailout of credit default swaps:

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080909/REG/809099979

CapedConservative on September 29, 2008 at 9:08 PM

last.

Closing the barn door after the horses are out:

http://www.usatoday.com/money/industries/banking/2008-09-23-cox-credit-default-swaps_N.htm

CapedConservative on September 29, 2008 at 9:09 PM

Read the above until you understand them and the light will come on.

CC

CapedConservative on September 29, 2008 at 9:10 PM

CapedConservative on September 29, 2008 at 9:10 PM

Yeah, CDS are a big part of the mess. Also artificial money of sorts. They are now being regulated. Still doesn’t mean we should accept depression.

phronesis on September 29, 2008 at 9:27 PM

Shirotayama – thank you, and I have noted the differences. Chalk that up to buying into historical hyperbole, or misrepresentation, if you will. There are a distinct difference, and, from the benefit of historical perspective, I can see where I erred. Once more, thanks.

phronesis – astute, as always, though not a comforting answer. In 1929, Hoover agreed (though with reluctance) to help out business by increasing government spending, with the hope that what happened, prosperity-wise, would “trickle down” (sound familiar?) to the “have-nots.” We all know what happened after that.

I’m not here to pass judgment on Hoover’s economic policies, or Roosevelt’s. The parallels are becoming too eerie for comfort, though. Roosevelt continued (after a fashion) Hoover’s interventionist policies. It was a hard row to hoe in the 1930′s, however. It wasn’t until 1935 that effects started to be seen from the New Deal.

I’m hoping, phorensis, that government intervention will have a more positive effect than it did in 1929. Still, the markets were simpler then, without the intertwined derivative markets we have now. That’s where my questions, and my worries, lie. The failure of the U.S. markets in 1929 took down the world markets. Are we any different now? Please assure me that we are.

Shirotayama, please, jump in and give your perspective, if you’d like. I’ve found both you and phorensis to be very valuable when it comes to market analysis.

creekspecter on September 29, 2008 at 9:31 PM

creekspecter on September 29, 2008 at 9:31 PM

I’m not in favor of Keynesian stimulus of aggregate demand (which was Roosvelt’s big thing). I see the Paulson planas more monetarist in nature, using a fiscal lever to affect a monetary stimulus, which is quite necessary to avoid depression.

phronesis on September 29, 2008 at 9:36 PM

The government has no money of its own. It gets money from taxpayers, or creates it out of thin air. How can taking money from some people to give to others help the people it’s taken from (apart from being immoral)? How can creating more fiat money — an act that is in large part responsible for the current situation — help solve the current situation?

Instead, reduce the capital gains tax — to zero. Repeal the CRA. Suspend the mark to market rule. Slowly reduce, not increase, the mortgages Fannie and Freddie buy and phase them out of existence, let home prices fall to whatever levels the market will bear, etc., etc.

In other words, to solve the problem, undo the things that caused it in the first place.

No painless solution is possible in the face of decades of interference in the markets. But there are practical and fair ones. The current proposal is neither.

Beyond that, it’s rational — in the face of historical experience — to put more trust in the ingenuity of private citizens acting according to their evaluations of their own self-interest, than to trust elected officials whose only proper function is to protect against fraud — and failed to do so time and time again.

JDPerren on September 29, 2008 at 9:36 PM

I’m not in favor of Keynesian stimulus of aggregate demand (which was Roosvelt’s big thing). I see the Paulson planas plan as more monetarist in nature, using a fiscal lever to affect a monetary stimulus, which is quite necessary to avoid depression.

phronesis on September 29, 2008 at 9:36 PM

phronesis on September 29, 2008 at 9:36 PM

Yeah, CDS are a big part of the mess. Also artificial money of sorts. They are now being regulated. Still doesn’t mean we should accept depression.

phronesis on September 29, 2008 at 9:27 PM

But.. I heard a great idea from Ben Stein Saturday. He said the government should just pass a law making them illegal in this country and declare them null and void. Everyone would be off the hook and the “credit” problem would be over. There is currently only about $250 billion of sub-prime mortgage debt in default. That isn’t the problem… it’s the CDSs leveraged off that debt that is.

CC

CapedConservative on September 29, 2008 at 10:09 PM

Dear Creekspectre,

I only logged in when I saw a misstatement that I knew needed correcting.

Apologies to you, but I’m done with much blogging. The sheer level of total denial that, sometimes, extraordinary circumstances DEMAND the temporary and willing suspension of a purist’s conservative dogma, and the direct personal attacks I got late last week, shook me to my core.

I firmly believe that in order to effectively deal with HARD DATA staring one in the face — data which tells us that if we follow that dogma and patently reject helping the financial system, and intentionally allow it to fail for the sake of “not bailing out the greedy and the incompetent with our tax dollars” when one also hears that it can totally freeze up, and crash, our overall economy — I began to question just how conservative I really was.

I’ve been a committed conservative since 1980 when President Reagan was elected. I was midway through college at the time.

Last week’s attacks here shook me to my core and frankly…I don’t consider myself a conservative or even a republican anymore. It certainly doesn’t mean I’ve become a liberal or a democrat of any stripe. I likely will still vote for McCain/Palin.

But given the denial of fact I saw last week here on the blog, and given the sheer incompetence in leadership I saw on Capitol Hill on BOTH sides recently…I’d be hard-pressed to define WHAT my political identity is anymore, other than never wanting to see the kind of Great Depression my father lived through, and heard about regularly as I was growing up.

Cold, analytical logic suggests that if one only has two very undesirable options available before one runs out of time to prevent dire calamity, and those options are:

A) Take utterly distasteful, undesirable action to rescue the overall situation for a possible, but not guaranteed recovery

vs.

B) Do nothing based on political philosophy and dogma, distrust of the decision-makers for their greed, incompetence, and hidden agendas, but be GUARANTEED of dire calamity, harm, and damage

Then in my mind, I’d go with option A 1000% of the time.

Both the liberals and the conservatives are wrong about not wanting wall street fat cats to benefit at the expense of the taxpayer: There’s NO WALL STREET LEFT TO BENEFIT. Those firms…the BIGGEST of them, anyway…have all either collapsed, been bought up at fire sale prices, or have converted themselves into national banks.

Saving MAIN STREET was the driver behind the Paulson plan.
Main Street screamed at its elected representatives to reject a plan they didn’t fully understand but feared.

And the natural result happened when elected officials are scared of their constituents voting them out of their jobs.

Unless by some miracle another solution is found, I fear it is too late.

Now Main Street will feel the pain. I just hope all those people who attacked me last week get to keep their jobs, their homes, their cars, their savings.

And that’s about all I have left to say. I don’t feel like debating here anymore. If people refuse to accept how bad a real economic depression can be, because conservative dogma trumps memories passed down from one to three generations ago aboutt how bad the first great depression was, it’s pointless for me to argue. All I can do now is simply try and prepare my own situation for what may well be coming, as best I can.

Creekspectre, I’ve enjoyed my dialogue with you and with Terrye recently a lot.

But now it’s time for me to focus on other things.
Best,
S.

Shirotayama on September 30, 2008 at 6:38 AM

Hurry! Hurry! Hurry! Into the pen. Clang! Hey, what happened?

argos on September 30, 2008 at 8:08 AM

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