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Like Generals, Bureaucrats Always Fight the Last War

Today, the herd is saying that we need strict regulation to ensure that the kind of financial crisis we've endured over the past year will not happen again. Words are cheap. But if it is so easy to avoid crises, why didn't the thousands of new pages of regulation written after earlier crises steer us clear of this one? In fact, the story of this storm in the global markets is the story of how government intervention to solve previous crises laid the foundation for the new one.

Have we learned anything?

10,000

From the Wall St. Journal:

The Dow Jones Industrial Average hit the 10,000 mark Wednesday afternoon, reaching the psychologically important level for the first time in more than a year, as strong earnings reports from Intel and JPMorgan boosted sentiment.

The closely watched market measure last traded above 10,000 on Oct 7, 2008, and hasn't closed above that level since Oct 3, 2008.

Its return to that level represents a big milestone in the stock market's huge climb back up over the past seven months from its March lows. As of Tuesday's close, the Dow was up about 51% from the 12-year closing low of 6547.05 it hit on March 9.[LINK]

Silicon Israel

How market capitalism saved the Jewish state - - highly recommended reading - - it demonstrates key points about building economic health related to the proper use of brain power and willingness to relinquish socialist ideology:

...what I learned in Jerusalem was that Israel was not only a site for research and outsourcing and the occasional conceptual coup, but the emerging world leader, outside the United States, in launching new companies and technologies. This tiny embattled country, smaller than most American states, is outperforming European and Asian Goliaths ten to 100 times larger. In a watershed moment for the country, Israel in 2007 passed Canada as the home of the most foreign companies on the technology-heavy NASDAQ index; it is now launching far more high-tech companies per year than any country in Europe.

George Gilder is the founding director of Gilder Technology Associates, a venture capital fund, and a contributing editor of Forbes. His books have sold more than 2 million copies worldwide. The newest is The Israel Test.

Jewish immigration from Soviet Russia, along with good economic policy ushered in by Netanyahu in the 1990s, helped create Israel's success. 

 Read the whole thing.

And on a related note:

Israeli Scientists Generate Electricity from Road Traffic - Shira Horesh (Globes)
    Israeli scientists have achieved a breakthrough in alternative energy by generating electricity from road traffic, using technology developed by Innowwattech Ltd.
    In a test along a ten-meter stretch of road, generators for "parasitic energy harvesting" were installed beneath the asphalt layer.
    Dr. Lucy Edery-Azulay said: "The technology is based on piezoelectric materials, which convert mechanical energy generated from a vehicle's weight into electricity. Drivers feel no change in the road. Regular vehicle traffic can generate 2,000 watts per hour. The electricity is accumulated in batteries placed along the side of the road."

Economic Acid Reflux

...the only way to make seriously money in this market is to get in on a government handout. If you have a big balance sheet, and if the Treasury selects you as a money manager for one of its programs, and if the regulators treat you nicely, you will make money in the financial business. But woe betide anyone who gets out of the good graces of the administration.

Come 2010, from whom are Republicans going to raise funds? There aren’t any entrepreneurs out there. They are lying face up on the beaches with swollen bellies and vacant eyes. There aren’t any independent financial institutions. There’s only a long line of prospective monopolists looking for a handout from the federal government. And the worse the economy gets, the longer the line gets. That’s the way banana republics work.

                                              - David Goldman (Spengler)

Whoa

Criticism of Obama's economic policy in liberally-biased Time Magazine?  

 

See: Obama's Stimulus Plan: Failing by Its Own Measure

I, Toaster

A project designed to lament the ills of Capitalism only ends up highlighting the benefits:

This week, a new exhibit called "The Toaster Project" opens at the Royal College of Art in London, England. On his website, artist Thomas Thwaites explains the gist: "I'm trying to build a toaster, from scratch—beginning by mining the raw materials and ending with a product that Argos sells for only £3.99." So Thwaites has been traveling around the world to acquire iron, nickel, copper, and oil from which he planned to make refined petroleum for the appliance's plastic moldings.

The basic theme of Thwaites' Toaster Project....was first conceived back in 1958 in the brilliant essay "I, Pencil," written by Leonard Read, founder of the libertarian think tank Foundation for Economic Education.

...Thwaites' frustrations at making a toaster from scratch don't illustrate the "helplessness" capitalism has created in consumers, it illustrates the way free markets have liberated us. Instead of the day-to-day struggle to stay nourished or to collect wood to fuel the fire that cooks our food so it's safe to eat, developed economies have food that is plentiful, safe, and mostly delicious. That has freed us from substistence struggles to pursue other intersests, such as culture and the arts—even, inevitably, art projects that mock and denigrate the very economic processes that made art possible in the first place.

Read the whole thing.

Economic Reality

It is not a new concept.  Fiscal conservatives have been saying it for years. The conclusion could not be more black and white - if you raise taxes on the wealthy, you create poverty rather than success. Proof can be seen just by taking a look at the states where taxes are highest vs those where they are lowest.  Not sure why Democrats see the data yet continue to believe the opposite: 

With states facing nearly $100 billion in combined budget deficits this year, we're seeing more governors than ever proposing the Barack Obama solution to balancing the budget: Soak the rich. Lawmakers in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon want to raise income tax rates on the top 1% or 2% or 5% of their citizens. New Illinois Gov. Patrick Quinn wants a 50% increase in the income tax rate on the wealthy because this is the "fair" way to close his state's gaping deficit.

Mr. Quinn and other tax-raising governors have been emboldened by recent studies by left-wing groups like the Center for Budget and Policy Priorities that suggest that "tax increases, particularly tax increases on higher-income families, may be the best available option." A recent letter to New York Gov. David Paterson signed by 100 economists advises the Empire State to "raise tax rates for high income families right away."

Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

Read the whole thing.

Ezehu Chacham?

With regard to the AIG bonus controversy, an understandably irritated Brit writes:

Once again, team Obama’s insularity and lack of curiosity about the external world come back to punish him. If he had taken the time to ask, Gordon Brown could have advised him about exactly this question, because here in Britain the single biggest political issue for the last two months has been pay and bonuses for the staff of nationalised banks. But of course Obama is such a transcendent genius that he has nothing to learn from anybody on any subject whatever.[Link]

It caused me to think of this blog's tagline, which in English means:

Who is wise?  He who learns from everyone. - Ben Zoma

Inauguration Tickets and the Failure of Central Planning

An extremely interesting look at what can happen when government mixes with market forces:

The lessons learned from the unseemly distribution of Obama's inaugural tickets should give him pause regarding his first acts as president. His record-sized stimulus bill ignores the corrupting propensity Congress has to distribute favors to constituents out of the taxpayer's purse. In addition, it rests on the dubious assumption that government can better decide where resources should be devoted.

[Link]

Re: The US Economy

"When you're in the expert business, after a while you realize there are no experts," says Richard Sylla, New York University's Henry Kaufman Professor of The History of Financial Institutions and Markets.

The important thing to know, it seems, is how little we know.

Read the whole thing.

The Dow Jones Limbo Dance

How low will it go? Mark Steyn provides a wide range of estimates.

Fasten Your Seatbelts...

More economic bumps ahead:

Stock index futures slid on Monday, putting Wall Street on track to extend a global rout as embattled insurer American International Group's (AIG.N) report of a $61.7 billion quarterly loss suggested the financial crisis is worsening.

The diminishing appetite for risk slammed stock markets around the world, with European benchmark indexes down 4 percent or more, while futures suggested Wall Street may open down at least 2 percent.

The Dow would likely open below 7,000, a level that the blue-chip index last fell through, on an intraday basis, in late October 1997.

...AIG, the recipient of $150 billion in taxpayer aid last year, will get access to an additional $30 billion under the government's revised plan announced on Monday.

Its fourth-quarter loss was the biggest in U.S. corporate history.

[Link]

"Decremental," the new buzzword:

Every era on Wall Street has its buzzwords, terms that capture a prevailing mood or business theme. In today's era of economic decline, that term is "decremental."

It is showing up these days in analysts' research reports for companies ranging from Caterpillar and Baker Hughes, to Genuine Parts and Emerson Electric. In a recent report on Watts Water Technologies, J.P. Morgan Chase analyst Stephen Tusa noted that his 2009 estimates for the maker of water-control products reflects "a roughly 20% decremental margin in North America and Europe."

"I don't even know if it's a real word, because it's always underlined in red in my Word documents," Mr. Tusa says. "I've been writing [research reports] since 2004, and this is my first time using it. I think it might be a made-up word. But it fits, and it's in almost every report these days."

Decremental is a real word; it's a negative increment, or the linguistic inverse of incremental. And it has long been part of Wall Street's financial lexicon.

But the use of decremental to describe today's declines in corporate profitability has become so prevalent that in the first eight weeks of this year it has appeared in 531 research reports, according to Thomson One Analytics. That almost equals the number of mentions in all of 2008 -- and is nearly double the number in 2007.

The word ultimately translates into shrinking earnings power, which is a big factor in stock-market declines that have driven share prices to their lowest level in more than a decade.

[Link]

Is the world is in a state of denial?

Obama Declares War on Wall Street....

....at Main Street's peril. Not good.  Not good at all.

Um, Excuse Me, President Obama?

Got any spare "change?" Or at least a little hope....?

Stocks dropped to the lowest closing marks in more than eleven years as investors strapped in for a possible worsening of the 14-month-old recession.

The DOW - 1970 to Present

A picture that has launched a million theories.

Time to Tarp the TARP

Kudlow: "...like the grounds crew at a baseball stadium on a rainy evening, we need to roll out the tarpaulin in order to preserve the field."

Wall Street: Optimist vs Pessimist

WSJ's Dennis Berman and Evan Newmark discuss how corporate America will survive these tough economic times. Restructuring could be the key.

Berman plays the negativist, coming up with very good reasons for his pessimism. Newmark counters by saying that one day in the near future, people are going to turn around and realize that the world is not coming to an end and investment $$ will begin flooding back into the market.  He ends by exhorting Berman to believe in America. Interesting back and forth:

I believe in America, but am having a hard time believing in American leadership. We are going to have to find the wherewithal to prevail despite our leaders rather than because of them.

Crud

Gee, that was quick.

Futures fall as euphoria fades.

Investment Outlook

Brilliant analogy, whether he belongs to Mensa or not.

79 Years Ago Today

I don't want to freak anyone out, but this article surely did send some shivers down my spine when I read it earlier today.  From the Washington Post, here are some excerpts from a retrospective piece about October 29, 1929.  Emphasized are gloom and doom parallels to what is going on in our economy today.  How accurate is it and how much attention should be paid?  Is there some hidden agenda in it somewhere? I don't have a clue.  If anything, it makes me more certain than ever(and I was already pretty darned certain) of who to vote for for president:

The bread lines didn't form overnight. The banks didn't buckle all at once. And no one, despite urban legend, is known to have jumped out of a window in sorrow over financial ruin.

Instead, the worst would come later, sometimes months and even years after Oct. 29, 1929, "Black Tuesday." On that date -- 79 years ago today -- few people could conceive that an economic apocalypse was gathering, even as the ominous news soaked in. But the ripples would soon begin.

In 24 hours of trading, starting Oct. 28 and continuing into the next day, some 25 percent of the value of America's biggest companies vanished on the New York Stock Exchange. Coming on the heels of big losses a few days earlier, the reversal was stunning. Just six weeks before, stocks had reached their all-time high.

Still, it was possible at first to view the Crash of '29 as an isolated event. Most people hadn't shared in the rising prosperity after World War I, so most didn't lose money in the Crash. Only about 2 percent of households owned stocks, says historian David E. Kyvig, compared with about 50 percent who have direct or indirect investments in the market today.

A consumer culture was growing -- about 80 percent of households had a radio by the late 1920s -- but the middle class was still small. Soon, they would know. Slowly, in irregular waves, people across the country began to feel that things were different.

In New York, the Crash claimed its first victims within hours. The day after, smaller brokerages in the city folded, driven under by "margin" loans to clients who were wiped out. The undertow drew in a number of smaller banks, which in turn had lent money to the brokerages and to stock market players.

The first bread line appeared in New York in February 1930, according to historian William K. Klingaman. When the images of men lining up for a handout appeared in newspapers and newsreels, they shocked the rest of the nation, which until then had largely been spared. These men -- able-bodied, well-dressed -- didn't fit the stereotype of the destitute, he says.

...By the middle of 1930, though, the malaise had spread beyond Manhattan. Nine months after the Crash, the national unemployment rate had tripled, claiming more than 10 percent of the nation's 48 million workers. By the time Franklin Roosevelt was inaugurated in March 1933, the figure had risen to more than 25 percent.

Americans of that era still remember their first encounter with the Depression: The day the family switched from electric lighting to cheaper kerosene lanterns. The day that beans were on the dinner table instead of beef. The day that extended family members moved in. The day a relative arrived home, ashamed to report that he'd lost his job.

Neil Schaffner, the proprietor of an acting troupe that barnstormed small towns in Iowa during the 1920s and '30s, told Terkel about how his business seemed to freeze up all at once in early July 1930. "We had heard talk of hard times being back East," Schaffner says. "We couldn't see it. . . . All of a sudden, the plug was pulled out of the bathtub. I have a wife, a baby and a mother-in-law. All I've got to sell is my ability as an entertainer. But it appeared nobody had any money to buy. The audience had become benumbed."

Soup kitchens popped up within months, but didn't become "ubiquitous" in many cities until 1932, says Kyvig, author of "Daily Life in the United States, 1920-1940." The demand was so overwhelming by then, he says, that church and private charities turned to increasingly strapped local governments to keep their programs going.

Kyvig, a professor at Northern Illinois University, says he stuns his students when he tells them what happened in Detroit, a particularly hard-hit city. Overwhelmed by demands from the needy, the city shut down its zoo in 1932 and slaughtered its animals to provide food.

*******

The parallels between October 1929 and today are striking.

Although the contemporary economy is far larger and more complex than it was eight decades ago, consumers were deeply in debt then, too. The gap between rich and poor had widened, thanks in part to tax cuts for the wealthy. Amid it all, the stock market -- lightly regulated -- grew into a speculative bubble, driven to unsupportable highs by investors who used borrowed money to purchase shares.

...It was still possible to see sunshine after Black Tuesday. The day after the Crash, the Washington Post carried a front-page story citing "98 leading businessmen" who insisted that the engine of American capitalism was still revving. "Our October sales are the largest on record," crowed R. E. Wood, president of Sears, Roebuck and Co., in the article. "While the shaking of public confidence may impair buying power somewhat in the next few months, I see no grounds for any real depression in business."

A few weeks later, the Economist magazine tut-tutted the doomsayers. "On the whole, the experts are agreed that there must be some setback, but there is not yet sufficient evidence to prove that it will be long or that it need go to the length of producing a general industrial depression," the magazine wrote. "If we are justified in assuming that the setback in American industry will only be temporary, we may look forward to steady development in 1930."

...After the Crash, the Dow Jones Industrial Average began to climb again. By mid-April of 1930, the average was within a few percentage points of the pre-Crash levels of early October. But then the index began to march downward again; by the time it bottomed out in July 1932, stocks had fallen an average of 89 percent from their peak.

It would take an entire generation, almost 25 years, for the market to recover fully.

Read the whole thing and please vote for John McCain, the candidate who won't raise taxes.

Poised For Yet Another Market Bloodbath...?

Stock markets were in freefall around the world, and the futures market looks dreadful:

Stock index futures tumbled so sharply on Friday that they had to be frozen at several points as global markets tumbled on signs the global economy is in the throes of recession.

Stock markets were in freefall around the world as panicked investors moved to liquidate risky positions. Japan's Nikkei index ended down 9.6 percent and European shares lost 8 percent.

By 8:00 a.m. in New York December Dow Jones futures were down 6.3 percent, Standard & Poor's 500 futures were off 6.6 percent and Nasdaq 100 futures were down 6.8 percent.

All three contracts lost the maximum amount permissible before the start of futures trading in the United States.

Both the New York Stock Exchange and Nasdaq said trading would open as normal at 9:30 a.m. EDT.

"The markets are basically following grim news that's coming out of the global economy ... It's basically feeding on itself," said Peter Cardillo, chief market economist at Avalon Partners in New York, adding "... right now the markets are in the process of discounting a global recession and how severe it's going to be."

According to Reuters data, December S&P futures hit a low of 855.20, while Dow Jones futures touched a low of 8,224 -- the lowest levels at which both contracts could trade in a session. The Nasdaq fell to 1,168.50.

Jeremy Hughes, a spokesman for the Chicago Mercantile Exchange in London, said both contracts were "limit down."

"The limit is calculated at roughly 5 percent down. At that point it can't go any further down but it is still accessible and can go up again," he said.

"When the U.S. futures open in Chicago (at 9.30 a.m. EDT), the contract becomes available again, so (it could go) further down another 5 percent down, so 10 percent in total," he added.

Financial shares were poised to see deep losses, with bank shares tumbling 6.1 percent before the bell, but selling looked likely to be indiscriminate across all sectors as investors move to raise cash. [link]

Watching CNBC

Larry Kudlow says the dropping of gas prices is the best stimulus package of all.

I Do Not Envy Paulson et al

The political pressure they are under is horrendous and each and every answer, each and every remedy sucks:

Less than two weeks into it, the $700 billion Troubled Asset Relief Program (TARP) is stuck between a rock and a hard place. Next week, several hundred billion dollars of credit default swap (default insurance) payments on Lehman's debt default are due. No one quite knows who owes what and if they're good for it. Hence the urgency in Henry Paulson and Ben Bernanke's plan to inject $250 billion directly into bank balance sheets, which seems a necessary evil to get capital to the right place and help weaker banks save face. The credit markets agree -- so far.

Wall Street and banks live by short-term loans. But as a loan shark might say, right now, nobody wants to lend to nobody. The rate that banks charge each other, the London Interbank Offered Rate (Libor), has been trading so high above three-month Treasury-bill rates (on Monday it was 4.75% vs. 0.11%) that no one is lending. This so-called TED spread -- the difference between what banks pay and what the Treasury pays to borrow for three months -- signals the health of credit markets and has rarely been over 1% since the 1987 crash. The Treasury is clearly focused on this metric and needs to get it down to historic spreads. First it has to change the current mentality of "who wants to lend to the next Lehman or Wachovia?"

The original TARP plan was to buy all the bad loans, mortgage-backed securities and collateralized debt obligations (CDOs) currently weighing down bank balance sheets. That is still the right (and profitable) thing to do. History shows that well-capitalized banks eventually do lend since hoarding doesn't make money.

But here's the current dilemma: If Treasury pays more than market price for these distressed securities, it would look like a taxpayer gift to Wall Street. That's politically unfeasible. So Treasury has to pay the current distressed prices. (Despite this week's stock-market bounce, prices are still dropping on toxic CDOs.) But if Treasury pays current, fire-sale prices, it would lead to major write-downs at banks. Since most of these securities are collateral for other loans, and regulators force banks to have minimum capital requirements and cash on hand, any write-down in value immediately means new capital needs to be raised.

And then who would throw good money after bad? Sovereign wealth funds have already been burned. Dubai invested in Citigroup less than a year ago via preferred shares that convert into Citi stock at $32 to $37 per share. Citi is now around $18.

...

So here we are with no interbank loans and no equity financing. Treasury would bankrupt banks if TARP buys securities at market prices, forcing them to do the impossible task of raising capital in an ugly environment.

The direct capital injection is a way to get unstuck. In effect, first Treasury injects money into bank's balance sheets, then buys the toxic loans at market prices. Even if there are write downs, banks will have enough capital to live. What about healthy banks like J.P. Morgan, Bank of America and perhaps Goldman, which don't need capital? They get it too. The Treasury is forcing every top bank to take the government investment. Why? Because if they didn't, the ones that do take the capital would look weak and loans to them would remain dry.

Is this the right thing to do? Probably not. Despite some limits on compensation, bad management stays in charge. Government investment in financial institutions will raise a gazillion temptations and conflicts of interest. Politicians won't be able to help themselves and will inevitably meddle. Just look at the pork loaded into the TARP bill. But it's the only thing to do at this stage.

Ugly. 

+936 Points

Wow:

Stocks snapped a brutal losing streak in resounding fashion as the Dow Jones Industrial Average enjoyed its biggest one-day point gain ever following new moves by governments to shore up the global financial system.

The Dow leapt 936.42 points, or 11.1%, to 9387.61. The rally ended an eight-day slide in which the blue-chip measure plummeted almost 2,400 points and endured the worst full-week performance in its 112-year history.

Twenty-nine of 30 Dow components posted gains, with General Electric the only exception, sliding 2.3%. General Motors, which is reportedly in talks to merge with Chrysler, was among the big winners, soaring 33.1% . Alcoa and Chevron rose more than 20% each, while Microsoft rose 18.6% and American Express gained 17.9%.[Link]

Economic Forecast

Weekend meetings between government leaders have had a very positive effect in Europe, and it is looking likely that this will spillover to us when our market re-opens.  At least one potentially predictive indicator, the Dow Jones Stoxx 600, was up:

European Stocks Vault Higher On Coordinated Government Moves

After losing more than 20% last week, European stocks vaulted higher Monday as investors warmed to a more coordinated fight from leading governments to tackle the credit crunch.

A stock trader smiled at the exchange in Frankfurt Monday as Germany's DAX Index soared in early trade.

By midday, the Dow Jones Stoxx 600 rose 6.1% to 217.72. The index slumped 22% last week, its largest weekly point and percentage decline in its history. The U.K. FTSE 100 was up 5.1% at 4133.40, the French CAC 40 rose 6.7% to 3388.82 and the German DAX 30 gained 6.8% to 4854.11.

"Central banks and governments are getting more aggressive and ever more proactive in targeting the banks and money markets," said strategists at Goldman Sachs in London. "Many of the recent steps taken are, we feel, very constructive and should contribute to a market rally," they added.

European investors had several key weekend developments to digest Monday morning. International Monetary Fund Managing Director Dominique Strauss-Kahn said Sunday that leading economies now have coordinated, detailed and comprehensive plans to resolve the severe credit crisis. "I am confident," he said.

In Washington, the Group of Seven agreed to a common framework, calling for recapitalizing banks with public and private funds, insuring depositors and unfreezing credit markets. Euro-zone nations, meeting in Paris, said they would guarantee loans between banks through 2009 and allow governments to buy stock in distressed financial companies.

"When the euro zone was facing possibly its greatest test to date, the political leaders stepped up to the plate and delivered," said Erik Nielsen, chief European economist at Goldman Sachs.[link]

Israel's Economy, By the Way...

David Hazony writes:

It might be encouraging to anti-Semitic conspiracy theorists (and some of my commenters may even criticize me for this reason) to note that as the world spins into a financial cataclysm, Israel has been sitting in a surprising calm. Who knows how long this can last, but for the time being, Israelis are not panicking. Yes, the stock market’s been volatile–though not nearly as much as those of the major economies. But nobody’s talking about bailouts, about failing credit, about housing. Banks are not failing. When Israel’s central bank cut rates on Tuesday, Israeli stocks did what they were supposed to do: They bounced back up. Since the beginning of October, the Dow is down nearly 20 percent. Israel’s equivalent, the TA 25, is down only about 5 percent.

There are a few reasons for all this. First of all, Israel’s banks have apparently behaved a lot more responsibly than some of those in the U.S.

Read the rest.

Daled Amos notes that Arab markets are not sharing Israel's calm and quotes from the Jerusalem Post:

Stock markets across the Arab world experienced unprecedently sharp losses when trading began following the Id al-Fitr holiday earlier this week. The seven stock markets in the oil rich Gulf states shed around $150 billion of their capitalization in the course of the week.

Wall Street Roller Coaster

MARKET ALERT
from The Wall Street Journal.


Oct. 10, 2008

The Dow Jones Industrial Average ended down by 127 points after swinging in a range of more than 1,000 points for the first time in its history, bringing one of the most turbulent weeks in financial history to a fittingly volatile conclusion. A surge in financial stocks helped to drive a late-day turnaround in the market after the Dow plunged below the 8000 mark for the first time in five years in morning trade. Bank of America jumped 6%, Citigroup gained 9% and J.P. Morgan Chase rose 14%. The S&P 500's financial sector ended higher by 9.2%.

For more information, see: http://online.wsj.com/article/SB122363315976122397.html?mod=djemalertMARKET

Time to Face Facts: We Are Governed by Idiots and Children Humans

Today's Market Plunge - Updated X2

The bailout should have been done swiftly, firmly and authoritatively.   The way it was carried out made it appear at if no one knew what they were doing.  Idiotic blowhard politicians messed things up. The falling market is based at least partly upon fear as a result  - - but certainly also because of the increase in the unemployment rate and the tanking of world markets. 

Update:

Looking pretty ugly:

Financial markets took a bleak view of the future Monday, seeing contagion in a credit crisis that threatens to cascade through economies globally despite government efforts to provide relief. The Dow Jones industrials skidded around 600 points and fell below 10,000 for the first time in four years, while the credit markets remained under strain.

Investors around the world have come to the sobering realization that the Bush administration's $700 billion rescue plan won't work quickly to unfreeze the credit markets. Global banks, hobbled by wrong-way bets on mortgage securities, remain starved for cash as credit has dried up.

That has sent stocks spiraling downward in the U.S., Europe and Asia, and driven investors to sink money into the relative safety of U.S. government debt. Fears about a global recession also caused oil to drop below $90 a barrel.

"The fact is people are scared and the only thing they're doing is selling," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "Investors are cleaning out portfolios and getting rid of everything because nothing seems to be working."

The selling was so extreme that only 98 stocks rose on the NYSE -- and 3,114 dropped. That's a telling sign considering the stock market is considered a leading economic indicator, with investors tending to buy and sell based on where they believe the economy will be in six to nine months.

Monday's steep decline on Wall Street indicates that investors are becoming more convinced that the country is leading a prolonged economic crisis that is spreading to other nations. Over the weekend, governments across Europe rushed to prop up failing banks, while the governments of Germany, Ireland and Greece also said they would guarantee bank deposits. [link]

As of 2:40 PM EST the DOW is down 715 points.

Update#2:

A 400 point rebound as of 3:55pm, maybe based on expectations that the Fed will lower interest rates:

Lower Fed Rates Expected — Imminently?

The question surrounding the Federal Reserve’s next change in the federal-funds target is not if, but when. Expectations for rate-cutting from the slide-rule committee have steadily risen as the banking crisis has unfolded and stocks have taken a major hit.

Rather than wait until Oct. 29, many economists believe the Fed will take action — perhaps in concert with a group of central banks — prior to that day, and perhaps as early as later in the week. [link]

The Bailout of U & I

This is no bailout of an industry, it's a transfusion of capital needed to allow an industry to comply with legislation that just doesn't make sense. And while the politicians posture and pontificate, bluster and blame, banks are failing and irreparable harm is being done to John Q's nest egg--- yours and mine! [Link]

A Pathetic Sign of the Times

A woman has purchased a home on Ebay for $1.75:

With a winning bid of just $1.75, a Chicago woman has won an auction for an abandoned home in Saginaw. Joanne Smith, 30, recently was the top bidder for the home during an auction on eBay, The Saginaw News reported. Her bid was one of eight for the home.

"I am going to try and sell it," she told the newspaper. "I don't have any plans to move to Saginaw."

...There's a notice on the door of the home saying a foreclosure hearing is pending, the newspaper said. She must pay about $850 in back taxes and yard cleanup costs. [link]

Fixing the Economy

Those that think "doing nothing" is an option are wrong:

...it's not a "bailout for Wall Street," as popularly repeated. Average Americans have yet to feel the full force of what a credit crisis means. Once they do, they won't like it a bit. A credit crisis doesn't just mean banks stop lending to one another, or call in loans from Wall Street "fat cats." It means you might not get the credit you need to pay for a car, a home or a child's education.

It means many medium to large companies will not be able to go into the money market to finance their daily operations. Those that can't will be forced to pull back on expansion, slash investments across the board, reduce their purchases, maybe shut down marginal businesses and lay off workers.

All this could cascade into a deep economic downturn that will last years. The victims, however, won't be gazillionaires on Wall Street. It'll be you. Link

see also:  It's about DAMAGE CONTROL.

I Think (hope) They Are Going to Pass a Rescue Plan

But if they don't what will transpire could make Monday's losses look like a picnic, according to Charles Krauthammer:

KRAUTHAMMER: ...You look at the market today, which rebounded hugely, and you can say either it's because the doomsday scenario was wrong, and the markets in Europe nonetheless went up and the sun came up in the east in New York, and people thought it was OK if you don't have a package.

Or you can argue that the reason it went up is because everybody on Wall Street assumed after hearing the president and Democrats and Republicans and Mitch McConnell and others say we will have a package. It will be changed in some way, but we will have a package. Everyone on Wall Street believes we will have a package.

I believe the second theory is right and the first is completely wrong.

HUME: But the futures were up last night before anybody said any of this.

KRAUTHAMMER: The problem is that—the thing that Jim Angle had talked about, which is the spread on the lending, the seizing of the credit markets, even if the stock market holds up a day or two or three, if no one is lending and no one will lend at six and seven percent overnight, nobody will lend, no one is going to have any money and the economy is going to be in a crushing collapse.

Everybody understands that. The reason that Bernanke and Paulson are running around with their hair on fire is because they're looking at the overnight lending numbers, and those are real. That's what's going to happen.

That's why I think the markets reacted, assuming there is going to be a package. If there isn't a package, I think there will be a collapse that will make yesterday look like a picnic.

Via The Corner

Just Because the Stock Market Went Up Today...

...it doesn't mean we are out of the woods yet. I have seen bloggers gloating, wondering where the big meltdown is, declaring Republicans who voted against the bailout to have done the right thing.

It still remains to be seen. The stock market rose based upon the conviction that a bailout plan is still in the works, and bargain basement prices were a lure to speculators. Plus, the bounce effect: "Even a dead cat bounces if you drop it far enough."

Wall Street snapped back Tuesday after its biggest sell-off in years amid growing expectations that lawmakers will salvage a $700 billion rescue plan for the financial sector. But the seized-up credit markets where businesses turn to raise money showed no sign of relief.

One day after the biggest point drop in its history, the Dow Jones industrial average rose 485 points, or more than 4.5 percent -- the latest in a string of extraordinarily volatile days in the stock market. It was third-biggest point gain in the Dow's history and the biggest percentage climb in the Dow in six years.

The recovery in stocks wasn't unexpected as carnage on Wall Street often attracts bargain hunters, though questions remain about how investors will proceed. Without a bailout plan in place to absorb soured mortgage debt and other bad loans from battered banks, investors are left wondering what might restore confidence in lending. [link]

Lack of credit liquidity continues to be a real threat:

Credit Market: Even Scarier than Stocks

Think stocks are volatile? The dislocations in the credit markets are even more serious, and they pose a greater threat to the economy

With the financial system bailout plan derailed by the House of Representatives on Sept. 29, the resulting plunge in equities made headlines around the world. But while the stocks gyrate, it's important to keep one thing in mind: The big problem for financial markets is still the credit crunch. So as bad as equities have looked—and during the big Sept. 29 sell-off, they looked pretty bad—the true indicators investors should be watching are obscure measures such as credit default swaps, TED spreads, and commercial paper volume (all explained below).

These names may sound wonky and insider-y, but they are nonetheless vital to understanding just how difficult, costly, and fearful the credit markets have become. They're the reason the stock market, in general an indicator of investor sentiment, plunged on Sept. 29 after the bailout failed. Without the plan, the markets recognized that the credit markets, the lifeblood of American business, will get worse before they get better. "The market understands the lack of liquidity that exists and the repercussions it will have on companies big and small," says American Capital CEO Malon Wilkis.

Start with credit default swaps (CDS), which act as insurance on bonds and other debt. They've gotten a bad name amid the troubles at American International Group (AIG), which was a big factor in the CDS market, but they're very good at one thing: measuring fear in the credit markets. And swap spreads, as measured by the CDX, an index of the most commonly traded CDS, rose to 163.7 at the end of last week according to CreditSights, levels unseen in five years and a sign that the credit markets are afraid. Very afraid.

Hunker-Down Mode

So scared, in fact, that investors are scooping up Treasuries, driving prices up, and yields down to 0% when adjusted for inflation. In other words, investors are willing to make nothing on their money as long as it's safe.

"Everyone's in a hunker-down mode," said Joseph Patterson, president of fixed income manager Patterson Capital Management. "They're trying to preserve capital."

What does this mean for everyone else? For starters, as Treasury rates fall, the rate at which banks lend to each other, known as the London Interbank Offered Rate, or LIBOR, has gone up. The three-month LIBOR, a short term rate, opened on Sept. 29 at 3.88%, the highest level since January. Three-month Treasury bills traded at the passbook savings-like rate of 0.66%. The difference between the two, known as the TED spread, is the highest it has been in five years. Essentially banks are paying more to borrow and are turning around raising rates for their customers.

If, that is, the banks are making loans at all...

"...The failure of Lehman cratered the commercial paper market," says risk analyst Chris Whalen of Institutional Risk Analytics. "All short-term lines of credit have been pulled."

Municipalities, too, are having trouble raising money. Cities are usually considered good bets to pay off their debt, but right now even they're having trouble. New York recently had to pay an interest rate of 9% on a $75 million short-term debt issue—up from 1.25% at the beginning of September. Other cities, including Denver, have faced similar situations.

The freeze-up of lending has serious implications for the broader economy. Credit is the lubricant for the U.S. economic engine. If loans don't get made, businesses don't expand, orders don't get placed, workers don't get hired. A garden-variety economic slowdown can turn into a deep recession. [Read the whole thing]

I. Don't. Think. Politicians. Have. A. Clue.  Or the ones who voted against the bailout, anyway. 

More on the credit markets:

If you only watch the stock market, where the Dow was recently up more than 250 points, you might get the mistaken impression all is well with the world on the Tuesday after the latest Black Monday.

But, as has often been the case during this crisis, credit markets are singing a different tune. Overnight dollar Libor rates more than doubled to 6.875%, as banks hoarded cash for the quarter end amid signs the financial crisis was spreading. It’s more than a little ironic that while investors are buying banks’ stocks — shares were up sharply across the sector — banks themselves were unwilling to buy each others’ shortest term debt. Banks are so desperate for funds that they paid 11% for $30 billion in overnight funds from the European Central Bank, up from 3% just Monday.

Lena Komileva, economist at broker Tullet Prebon, notes the premium for overnight liquidity is “out of control,” making it hard for central banks to instill confidence in the future.

In short, credit is frozen...[link]

But, ideological purity uber alles. Onboard a sinking Titanic and the government offers you a lifeline?  Don't you dare take it.  Go down with that ship, mister.

The problem is, those who voted against the bailout don't really believe the ship is going down. 

I suppose it could be possible, despite all signs to the contrary, that it MIGHT not be.

But how much risk are you willing to take?

What Are Republicans Thinking?

Beware the Law of Unintended Consequences:

The Republicans who opposed the bill...can hardly hope that a more conservative version is going to garner enough Democrat votes to pass.  So, to give them the benefit of the doubt (because who, on the right, hopes for another Great Depression?), they must be figuring that doing nothing will turn out OK.  That's where I think they've taken a big, risky gamble with this country's economic future.  Given market and economic realities -- like the 770 point drop today -- it's not likely that the economy's going to pick right up on its own.

Perhaps they hope that Congress is going to pass a loony left bill and get thrown out on the heels of it.  Well, maybe so, but it's always risky to assume that if things get really, really bad, people will understand the glories of free market conservatism.  More often, they great frightened and demand more government protection, and the concept of capitalism takes it on the chin . . . just what Moore and his gang of leftists are hoping for. 

In the meantime, scads of seniors lose their life's savings.  And as those on both sides who opposed the bill take all the time they want to "get it right," the damage continues unabated.  That's not a scenario that helps Republicans, the markets, or free market capitalism.

Beware the unintended consequences.

Link

FWIW

My husband is a securities attorney who works with financial institutions.  He's voted Republican since 1980. 

His email to me upon hearing that the bailout didn't pass was very brief:

F---ing Republicans.

National Review's Kathryn Lopez cites a bank president:

I can only offer the perspective of someone who manages money for a living, rather than someone who follows politics closely.

The failure of the House to pass the bill – combined with the resulting bickering – will likely lead to a substantial market sell-off.  We’re seeing part of that occur right now, but we may well see much worse over the coming days as the inevitable sell-off hits overseas markets, followed up by another collapse at home as forced selling really kicks in and many institutional investors are required to liquidate their leveraged positions.  While it would be nice if all this was confined to a few select Wall Street bad apples, the reality is ordinary people will be hurt very badly as their investments deteriorate and the economic environment turns even more negative.  Unemployment will likely spike sharply from here, and the lack of available credit will impair many small businesses that rely on credit lines to finance their operations. 

How any of this could possibly be construed as a positive for either McCain or the Republican Party is beyond me (and I say this as a life-long Republican)?  In fact, it would seem much more likely to me that the House Republicans just handed the election to Obama on a silver platter.  Blaming the vote on Pelosi’s antagonistic remarks seems especially dumb, and I expect to see Barney Frank-type comments all over the MSM tonight and throughout the week.    

No doubt this was a lousy bill – everyone agrees on that.  But the consequences of not passing it, or something like it, are going to be far reaching.  Clinging to the “small government” mantra as things collapse around us will probably not resonate well with most voters in November. [link]

I almost think this is Republican revenge against McCain.There are some who dislike him so much from his past habit of rubbing them the wrong way, they'd do anything to see him lose. I think they will get their wish now.

Bleak Outlook

Larry Kudlow wonders if it's the end of the US finance system as we know it and says, "Tough day. One of the worst I can remember."

As this scenario goes, the House Democrats need 218 votes, and they have to pick up a number of black and Hispanic House members who jumped ship because the Wall Street provisions, in their view, were too benign. So things like the bankruptcy judges setting mortgage terms and rates, the ACORN slush-fund spending, the union proxy for corporate boards, stricter limits on executive compensation, and much larger equity ownership of selling banks through warrants will all find itself back in the new bill. Of course, this scenario will lose more Republican votes. But insiders tell me President Bush will take Secretary Paulson’s advice and sign that kind of legislation.

Personally, if this scenario plays out, I would probably withdraw my support for the rescue mission and switch to plan B, which would center on the FDIC and its bank-recapitalization powers. The bank-ownership issue, in particular, could lead to heavy nationalization of America’s financial system with a three-house Democratic sweep in November.

Link

Dow Sinks on Midday News that the Bailout Vote is Uncertain

Just ugly:

WASHINGTON -- U.S. lawmakers took the final steps towards to the most dramatic federal intervention in the financial markets since the Great Depression on Monday, taking to the floor of the House of Representatives to give impassioned pleas for and against a $700 billion Wall Street rescue plan.

The bill appeared short of the necessary support, however, and the Dow Jones Industrial Average dropped more than 700 points as "no" votes mounted. The Dow later recovered part of those losses, trading down around 380 points to 10760. As of around 1:52 p.m., nays stood at 227 and yeas stood at 206.

Link

Truly Disturbing

Shocking Video Unearthed Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis:

When Should the Government Step in?

Was allowing Lehman to fail a mistake? 

Two weeks ago, Wall Street titans and the government's most powerful economic stewards made a fateful choice: Rather than propping up another failing financial institution, they let 158-year-old Lehman Brothers Holdings Inc. collapse.

Now, the consequences of that decision look more dire than almost anyone imagined.

Lehman's bankruptcy filing in the early hours of Monday, Sept. 15, sparked a chain reaction that sent credit markets into disarray. It accelerated the downward spiral of giant U.S. insurer American International Group Inc. and precipitated losses for everyone from Norwegian pensioners to investors in the Reserve Primary Fund, a U.S. money-market mutual fund that was supposed to be as safe as cash. Within days, the chaos enveloped even Wall Street pillars Goldman Sachs Group Inc. and Morgan Stanley. Alarmed U.S. officials rushed to unveil a more systemic solution to the crisis, leading to Sunday's agreement with congressional leaders on a $700 billion financial-markets bailout plan.

The genesis and aftermath of Lehman's downfall illustrate the difficult position policy makers are in as they grapple with a deepening financial crisis. They don't want to be seen as too willing to step in and save financial institutions that got into trouble by taking big risks. But in an age where markets, banks and investors are linked through a web of complex and opaque financial relationships, the pain of letting a large institution go has proved almost overwhelming.

In hindsight, some critics say the systemic crisis that has emerged since the Lehman collapse could have been avoided if the government had stepped in. Before Lehman, federal officials had dealt with a series of financial brushfires in a way designed to keep troubled institutions such as Fannie Mae, Freddie Mac and Bear Stearns Cos. in business. Judging them as too big to fail, officials committed billions of taxpayer dollars to prop them up. Not so Lehman.

"I don't understand why they didn't understand that the markets would be completely spooked by this failure," says Richard Portes, professor of economics at London Business School and president of the Centre for Economic Policy Research. Rather than showing the government's resolve, he says, letting Lehman fail only exacerbated the central problem that has afflicted markets since the financial crisis began more than a year ago: Nobody knows which financial firms will be able to make good on their debts.

Link

Bailing Out the Sinking Ship

Thinking out loud...

Of course, I have little, if any, idea what I am talking about - the frightening thing is, I don't think those who are supposed to know have much of a clue either.

At any rate, they seem to have come up with a bailout plan that everyone is willing to sign off on.   Though I continue to object to the politicized way it was done, I am softening - a bit - in my criticism of the Republican objection to the plan.  I understand that they were reluctant to hand over such a sizeable chunk of funds without proper deliberation or oversight. 

However, I wonder - have the objections and extra time and hashing out done much other than to add legalese to the bailout document and take it from the initial 3 pages to 100 plus? 

And I also wonder, will the manner in which the Republicans objected to the bill interfere with its efficacy?  Lack of trust in the financial system initiates actions that make things worse - runs on banks, refusal of banks to loan money to one another, stock sell offs, people tightening their belts and decreasing spending out of fear, etc.  Belief in the $700 billion bailout could have gone a long way to assuaging peoples' fear.  But by the time the Republicans ended their objections, popular approval for the bailout had taken a huge dive in the polls.  I don't know exactly how big a part their objections played in creating this.

Did the changes Republicans insist on really ensure adequate oversight anyway? Despite all sorts of dire objections, they did sign the bill in the end. [Coming back a day later to say - I thought they were going to sign off on it, but I was wrong - they did not] This signifies that they knew something had to be done. Wouldn't it have been better to have found a way to be more supportive of the bill and in so doing help to calm the economic waters, even as they criticized it? 

What I am hoping now is that the bill actually even works. 

DP* Make Me Sick

There is so much slime oozing out of the current financial crisis, it's very difficult to know what's what.  Many fingers being pointed in many directions and most are pointing correctly because in one way or another, everyone is to blame.  Especially the politicians  - both left and right.

Right now, I am really not liking the Republican/conservative position much.  To me it looks as though they are putting ideology and pigheadedness before common sense and practicality. A huge part of the economic problems we face right now is fear and lack of trust in the marketplace.  The Republicans/conservatives are not helping by refusing to agree with the bailout plan.  It is a plan being put forth by a REPUBLICAN president.  They do not trust THEIR OWN leader. How is anyone supposed to be able to trust anyone again if Republicans don't stand behind Bush?

Everyone (everyone who falls under the label of "sane," that is) is afraid and wants this thing straightened out - including Democrats/liberals.  Add the liquidity to the system, bailout the banks so they can start lending again, and worry about everything else later. Both sides are politicizing this thing to death at the country's expense. I can't say which is worse, the shamefulness of it or the stupidity.

Gail's primordial axiom, or in other words, the idea which underlies my political philosophy: Never, ever, place at risk the goose that lays the golden eggs (aka the US economy) in favor of ideology or power.  Without the goose, both are completely worthless.

Nothing means anything without the American ability to crank out money.  It feeds everything, and is what allows us to feel good about and is what supports all of our ideals of freedom, liberty, equality and the American dream. 

Dumbass politicians*.

Yet Even More Music to Await the Bailout By

The Dance of the Hours - preening politician edition:

Stock futures this morning:

U.S. Stock Futures Slide as Lawmakers Undercut Rescue Plan

Sept. 26 (Bloomberg) -- U.S. stock-index futures slumped after negotiations on the government's $700 billion financial rescue plan stalled and Washington Mutual Inc. was seized in the largest bank failure in the nation's history.

Bank of America Corp., Morgan Stanley and Merrill Lynch & Co. fell more than 2 percent in Germany as a group of House Republicans said they wouldn't support the bailout plan based on the approach outlined by Treasury Secretary Henry Paulson. WaMu plunged 79 percent after the thrift was seized and JPMorgan Chase & Co. acquired the company's branch network for $1.9 billion to become the biggest U.S. bank by deposits.

Futures indicated the Standard & Poor's 500 Index will extend its weekly decline of 3.7 percent. The benchmark for American equities had climbed for the first time in four days yesterday as speculation grew that Congress would reach agreement on the bank bailout plan.

``The market knows that there is a huge amount at stake,'' said Peter Lucas, who helps oversee $2.2 billion as global investment strategist at Jersey, Channel Islands-based Ashburton Ltd. ``If the bailout isn't forthcoming and they don't like the look of the plan, all sorts of economic scenarios come into play.'' [Link]

Also see: 6 varieties of meltdowns.

Good Speech

Well done by President Bush. 

Yes, $700 Billion is a tremendous amount of money, but it is simply the maximum potential exposure tax payers will have, not a measure of actual money lost.  That's because there will be physical houses and property underlying the defaulted loans the government will be purchasing from cash-starved lending institutions. Just because they are worth little now doesn't mean they won't go up in value later when the economy rebounds. The money will be made back, or mostly made back. The goverment can afford to hold onto them until this occurs.

In my opinion, they should get on with it without further delay and refrain from pandering to those who place ideology before practicality and common sense, and those who subordinate the good of the country to their own ambitions.

Yet More Music to Await the Bailout By

To read while you listen and wait:

McCain announced a suspension of his campaign and postponement of Friday's presidential debate:

Republican presidential candidate John McCain announced Wednesday that he is suspending his campaign to return to Washington and focus on the "historic" crisis facing the U.S. economy.

The Arizona senator called on his Democratic rival, Barack Obama, to do the same...

He also urged organizers of Friday's presidential debate at the University of Mississippi to postpone the event...

Immediately after the announcement, White House press secretary Dana Perino released this statement: "We welcome Sen. McCain's announcement. We are making progress in negotiations on the financial markets rescue legislation, but we have not finished it yet. Bipartisan support from Sens. McCain and Obama would be helpful in driving to a conclusion."

McCain's campaign also said that he had canceled his scheduled appearance on "The Late Show with David Letterman" for Wednesday night. [Link]

Obama wants the debate to go on:

The AP reports that Barack Obama is “inclined to move ahead” with Friday’s debate as scheduled, and not grant John McCain’s wish to delay it while he goes to work on the bailout crisis in the Senate.[Link]

K-Lo reports:

A possible stand-in for McCain if he decides he's too busy to debate:  Sarah Palin. [Link]

[Editorial comment from Rubicon3: Oh please, oh please, oh please, oh please...]

Housing is grim:

Prices of U.S. existing homes suffered a record drop in August and the rate of sales tumbled, offering little sign of improvement in the source of the financial crisis in the United States.[Link]

Politicians concentrate on what really matters:

Lawmakers worry that failing to back the bailout could hurt them... [Link]

And the Dow ends the day at a very portentious number:

-29.00

Music to Await a Bailout By

To read while you listen:

Bernanke says act quickly:

Federal Reserve Chairman Ben Bernanke on Wednesday urged lawmakers to act quickly on the "grave threats" facing the U.S. financial system, warning that inaction could propel the economy into a deeper downturn. [Link]

David Freddoso says it may not work:

“They’re all going to say this is a problem with deregulation,” he said. “But that is false. If we’re going to go forward with this bailout and allow that narrative to stand, we’ll never be able to get the government out of this.”

What’s worse, as Senate Banking Committee ranking member Richard Shelby (R., Ala.) observed yesterday, “We could very well spend $700 billion and not resolve the crisis.”[Link]

The FBI is investigating:

Federal investigators have opened preliminary probes into the financial troubles of four high-profile companies that are at the center of the current financial turmoil that the Bush administration says requires an unprecedented proposed taxpayer-funded bailout to clean up.

The Federal Bureau of Investigation's preliminary inquiries are focusing on whether fraud helped cause some of the troubles at Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc. and American International Group Inc., according to senior law-enforcement officials. [Link]

Buffet's gambling:

Goldman Sachs Group Inc. said it will get a $5 billion investment from billionaire Warren Buffett's company, marking one of the biggest expressions of confidence in the financial system since the credit crisis intensified early this month. [Link]

Senator Richard Shelby thinks we are turning French:

"I think we're going down the road of France now," Mr. Shelby told one television interviewer Tuesday, before quickly adding, "in all due respect for my French friends." [Link]

Rubicon3 investing tip: Manufacturers of Valium, Xanax and Ativan are hot right now:

Financial markets were tense Wednesday, with stocks fluctuating following investor Warren Buffett's decision to invest $5 billion in Goldman Sachs Group Inc. The credit markets showed added strain as investors await news about the government's plan to rescue banks from crippling debt.[Link]

Wall Street Journal Bailout Poll

Question: "What do you think of the Treasury's bailout plan?"

Response choice: On the right track vs on the wrong track.

3500 have voted so far. 

It's running 3:1 against the plan.

Looks like people are willing to risk another 1,000 point drop in the stock market.

Link

Just Put Out the Damned Fire Already

“When there’s a fire in your kitchen threatening to burn down your home, you don’t want someone stopping the firefighters on the way and demanding they hand out smoke detectors first or lecturing you about the hazards of keeping paint in the basement,” Senator Mitch McConnell of Kentucky, the Republican leader, said in a speech on the Senate floor. “You want them to put out the fire before it burns down your home and everything you’ve saved for your whole life.”

Mr. McConnell added: “The same is true of our current economic situation. We know that there is a serious threat to our economy, and we know that we must take action to try and head off a serious blow to Main Street.” [Link]

Too much talking and political posturing, not enough action. 

Read it and Weep

How the Democrats Created the Financial Crisis: Kevin Hassett

The whole thing could and should have been averted. 

Shaking my head in disgust. 

It's Not Over Yet; There's Still the...

Fussing & fixing:

The U.S. economy might be moving from the acute stage of the credit contagion to a chronic one.

Even with hundreds of billions of dollars from Washington to keep them solvent, banks facing the prospect of more loan losses may still curb new lending. Debt-laden consumers look set to rein in spending further as job cuts take their toll. And profit-pinched companies are turning cautious on investing and hiring as the rest of the world slows.

The plan the Bush administration and Congress are racing to enact is designed to alleviate the crisis in the markets rather than stimulate a sluggish economy. ``The fact that we have stepped back from the edge of the cliff doesn't mean everything is wonderful,'' says Michael Atkin, head of sovereign research at Putnam Investments in Boston. ``We shouldn't forget that the economy is not in great shape.''

That puts pressure on Federal Reserve Chairman Ben S. Bernanke and his colleagues to follow up their extraordinary interventions in the markets with more traditional medicine in the form of lower interest rates.

``The Fed still has more rate cuts to do,'' says John Makin, a principal at Caxton Associates LLC hedge fund in New York and a fellow at the American Enterprise Institute in Washington.

Link

Fighting:

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

Link

Finagling:

Congressional Democrats began to set their own terms on Sunday for a plan to rescue the nation’s financial institutions, including greater legislative oversight of the Treasury Department, more direct assistance for homeowners and limits on the pay of top executives whose firms seek help.

Link

Flogging:

Before D.C. Gets Our Money, It Owes Us Some Answers    [Newt Gingrich]

Watching Washington rush to throw taxpayer money at Wall Street has been sobering and a little frightening.

We are being told Treasury Secretary Henry Paulson has a plan which will shift $700 billion in obligations from private companies to the taxpayer.

We are being warned that this $700 billion bailout is the only answer to a crisis.

We are being reassured that we can trust Secretary Paulson "because he knows what he is doing".

Congress had better ask a lot of questions before it shifts this much burden to the taxpayer and shifts this much power to a Washington bureaucracy.

Link

Fumfering:

Here is what some newspapers had to say about the Bush administration's move to ask Congress for $700 billion to buy up troubled mortgage-related assets from U.S. financial institutions:

_ The Philadelphia Inquirer:

"The unprecedented taxpayer bailout of Wall Street and the banking industry is as necessary as it is infuriating. Spawned by greed and reckless lending, the worst financial crisis in decades has left policymakers without any good options for fixing the mess."

_ The Los Angeles Times:

"The main question for politicians isn't whether to act — the comments Friday by congressional leaders and top administration officials made it clear that Washington will undertake something extraordinary — but what to extract from the companies that are helped and how to prevent the problems from recurring."

_ Fort Worth (Texas) Star-Telegram:

"It's crucial that trust and confidence be restored in the markets of the world's largest and most-powerful economy."

_ The News Tribune of Tacoma, Wash.:

"Hard-core free marketeers are grumping, but federal officials have little choice but to pay the price for past failures to regulate."

_ The Anniston (Ala.) Star:

"Simply put, something had to be done. The path chosen seems as sound as any available."

_ Rochester (N.Y.) Democrat and Chronicle:

"The taxpayer once again is digging deep to rescue private companies that played fast and loose with America's financial security. It has to be done ... (b)ut from this must come reform — and consequences for those who pushed us to the brink."

Link

Fretting:

Treasury Secretary Henry Paulson's plan to end the rout in U.S. financial markets may derail the dollar's three-month rally as investors weigh the costs of the rescue.

The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates.

``As we get to the other side of this, the dollar will get crushed,'' said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion.

Link

And falling futures:

U.S. stock futures slipped Monday as traders sought out more details on a government plan to buy troubled mortgage assets and as Goldman Sachs and Morgan Stanley bid farewell to the independent brokerage model.

About three hours before the start of trading, Dow industrial futures fell 79 points to 11280. S&P 500 futures fell nine points to 1237.00 and Nasdaq 100 futures slipped 7.5 to 1732.00.

However...

Changes in futures don't always accurately predict early market moves after the opening bell.

Link