>> ^vex:

That last bit that she mentions really pisses me off. You should not be able to consolidate a local businesses BBB rating into headquarters' rating. If one store is consistently getting 'F's, it's time to fire management, not magically erase wrongdoings via 'consolidation'.
Reminds me of the time the financial sector consolidated toxic assets into triple A securities. That wasn't misleading at all and really worked out well for the economy.


Better Business Bureau is a joke. All you need for a good rating is to respond to a complaint. That's all. Even "We'll give them 10% off installation next time they buy $1500+ of computer accessories." counts as an A++ rating.

That last bit that she mentions really pisses me off. You should not be able to consolidate a local businesses BBB rating into headquarters' rating. If one store is consistently getting 'F's, it's time to fire management, not magically erase wrongdoings via 'consolidation'.

Reminds me of the time the financial sector consolidated toxic assets into triple A securities. That wasn't misleading at all and really worked out well for the economy.

1. I saw an interview with Bernanke a month or so ago....he was asked this EXACT question. His response - they just log onto a computer, and create new money...digitally create new fungible cash, without actually having ANYTHING physically backing it. It exists in the digital world only. That is then given out to banks, and kept track of. The paper to cover the banks comes later...when they need it (ie....when people are withdrawing).

Transactions are all done digitally in big business, so there is less and less need to print paper, or hold gold to back the funds created....because noone checks it.

The money is literally created out of thin air...and only exists in their networks.

The idea is that the debt created is a promise from the loanee for future productivity...that will in turn create assets that are worth the interest to pay the bank back, and then some on top for a tidy profit.

This all comes unstuck when people A) Realise what the banks are doing, and demand their money (a run on the bank...) or B) The debts dont get repaid because the productivity is not creating enough of a return to service the interest.

Both these scenarios create toxic assets, and you end up with an economy with more visible debt that their is money....and bam, the whole system dies in a heap.

2. Absolutely nothing. Its way too entrenched. You can run for president on a campaign of destroying this institution, but have fun trying to educate enough people about it to back you on your crusade.



...Slavery never died, it was just abstracted by money. Its new name is debt.

@BansheeX I think anyone who promotes the idea of a return to a gold standard has to realize that deflation is just as bad, if not worse than inflation.

What we're seeing right now in the economy is the effect of mere disinflation (i.e. a drop in the rate of inflation), and the result is lots of unemployment, and very low investment in actual economic activity because it's far too attractive to hoard cash (or more accurately financial assets so safe they're as good as cash).

Part of how you break out of that cycle is to create an expectation of inflation, and you have no hope of that under a gold standard, because you can't increase the money supply. In fact, you're guaranteed to see a steady rate of deflation whenever your population grows, or your economy tries to expand and that will put a drag on growth.

I don't think there's much of a case to be made that the Fed is unconstitutional (and what case there is rests on the word "coin" carrying a lot more weight than the phrase "regulate the value thereof" which follows it). Even if some SCOTUS ruled it unconstitutional, you'd see an amendment to the Constitution passed before you can say the phrase "the Senator from Goldman Sachs". Like Cenk said, our government is nothing but quick and efficient when it comes to serving the interests of the rich and powerful.

Which ultimately is what I think Cenk said that carries the most weight -- the problem isn't that the Fed exists and has the power to do things like this, it's that the actions it takes are quick and decisive when banks and investors are in trouble, but regular people not so much.

In this case, the Fed bought a lot of toxic assets at face value. I like this a lot more than Congress authorizing treasury to do the same thing, because unlike Treasury and Congress, the Fed can just print the money rather than borrow it. We don't have to pay interest on those dollars to anyone, and we don't need to collect them back with taxes, either. We might see inflation, but right now inflation would be good for the economy.

What the Fed could have done instead is print up money and give it to people to pay off their mortgages. In effect it could still do this by just writing off the toxic assets it holds, and not foreclosing on the mortgages it has on its balance sheet. It may still do this, and I suspect it will have to for some percentage of them. I also expect right-wing people to bitch about "moral hazard" and lazy parasites mooching off the producers in society if/when it happens.

Ultimately, the only downside to any of what the Fed is doing is that it might lead to inflation. But so far nothing it's done has created even the slightest increase in the year-over-year inflation rate, which is already well below the 2% target. Furthermore, all market indicators are predicting inflation of essentially 0% as far out as 7 years, even though the scale of the Fed's actions are public knowledge.

What McCain says in clip #1:

We were all misled. We were all misled. I mean, he said that they were going after the toxic assets. The toxic asset—his word—was the housing market. He testified to that. I mean, we were all misled. So what did he do then? They started pumping money into the financial institutions. … They turned around and switched from trying to address the housing market to bailing out the financial institutions on Wall Street.

To summarize, he says that TARP was to address the housing market, but later was about helping financial institutions.

What McCain says in clip #2 (from the 2nd Presidential debate):

This rescue package means that we will stabilize markets, we will shore up these institutions. But it’s not enough. That’s why we’re going to have to go out into the housing market and we’re going to have to buy up these bad loans and we’re going to have to stabilize home values.

To summarize, in sentence one he says TARP is to stabilize the markets, and will shore up these (financial) institutions. In sentence two, he says that's not enough. In sentence three he says, in future tense, that we will need to have a new initiative to help people out with mortgages because the current one won't.

If 2010 McCain isn't lying his ass off, then he's an utter moron who never understood what TARP was about, despite it being a hot topic in the election. There was no attempt by the Bushies or Paulson to say that this would help homeowners with their mortgages. What they said was that this was to help keep credit to business owners flowing so that people wouldn't lose their jobs.

Oh, and to catch people up with present times, the Republicans unanimously opposed legislation that would do what McCain says he thought TARP would do (and what he said he wanted to do during that 2008 debate), which of course means McCain himself voted against doing what he claims he voted for in 2008.

Per Mr. Greyson's words. That Citigroup gains 100% of profit if toxic assets sell well, but us US citizens get 90% debt, if those assets fail. Where can I get a deal like THAT for my student loans? Or my House? Or my car? Or me?!?!?!?!?

And then there's this email I received from the Campaign for Liberty tonight, an email I expect because I signed up for it.


December 10, 2008

Dear fellow Patriot,

Just as we promised, Congressional leaders weren't content with their $700 billion bailout this past fall and are ready to pass another one -- this time for the American automotive industry.

Visit our activist Liberty Blog at http://www.campaignforliberty.com to learn how you can help fight this round of government theft and wealth redistribution, or just keep reading.

In the agreement just formulated earlier today by Congressional Democrats and the White House, our government has pledged to wrest another $23 billion away from taxpayers to subsidize the inefficiency and reward the poor management and performance of -- count them -- one, two, three giant corporations.

But that's not all.

More intervention like this means greater government oversight and regulation -- and more inflation as the government prints and spends even more dollars.

As one economic thinker once reflected, a subsidy may be a form of establishment, but it's really a means of capture.

Even if the bailout passes the house, we have a chance to muster some opposition in the Senate.

Using the contact information provided on our website, tell your Senator to support the Ensign filibuster. While you’re at it, thank Senator Ensign for standing up to Big Labor and Big Business.

Auto Bailout Looming

It looks like the White House and Congressional Democrat leadership have reached a deal on the auto bailout, although there aren't very many details at this point.

Plans for a "car czar" seem to still be included as part of the deal. So, not only will your money be spent for the bailout, it will be used to pay a new government appointee, staff his office, and take care of the other requirements that come along with that job. (It also gives them one more person to shift the blame to when the problems continue.)

All of this is being done again, of course, out of "necessity," we are told. Just like buying up all the toxic assets was a "necessity" until the Treasury got the money and decided to spend it on everything but. This is what happens when the majority of Congress is not guided by any philosophy other than the one that says that government can cure all of our ills with just a little more money (or billions more).

A vote could come at any time, with signs pointing toward later today.

To keep reading for up-to-date news on the bailout, sample letters, and your
representatives' contact information, visit C4L’s blog at http://www.campaignforliberty.com and take action right away.

If you haven't already done so, please bookmark our website www.campaignforliberty.com for real-time news updates and discussion regarding our shared freedoms and liberty.

For liberty,


John Tate
President
Campaign For Liberty

Roubini has some very good ideas on how to do this right, and not be a scam:

HOME (Home Owners’ Mortgage Enterprise): A 10 Step Plan to Resolve the Financial Crisis
Nouriel Roubini | Sep 24, 2008

Even if the Treasury TARP plan is implemented fairly and efficiently the US will not avoid a severe U-shaped18-month recession and a severe financial and banking crisis: the recession train has already left the station in Q1 and the financial/banking crisis will be severe regardless of what the Treasury and the Fed do from now on. What a proper rescue plan can do is to avoid having the US experience a multi-year L-shaped recession and extreme financial crisis like the one that led to a decade long stagnation in Japan in the 1990s after the bursting of their real estate and equity bubbles.

I have also argued that, in order to resolve this financial crisis it is not enough to take the bad/toxic assets off the balance sheet of the financial institutions (a new RTC); it is also necessary and fundamental to reduce the debt overhang of millions of insolvent households via a significant debt reduction on their mortgages (an HOLC program like the one that was implement during the Great Depression); and also recapitalize undercapitalized banks with public capital in the form of preferred shares (as the RFC did with 4000 banks during the Great Depression). An RTC scheme without an HOLC and RFC component would not resolve two fundamental problems: millions of households are insolvent and unable to service their mortgages; the financial system is vastly undercapitalized and needs capital to avoid an ugly credit crunch and to foster new credit creation that is needed for future growth.

That is why I proposed the creation of a HOME (Home Owners’ Mortgage Enterprise) that would be a combination of an RTC, a HOLC and a RFC. Let me flesh out this proposal and its key elements and compare it to the Treasury TARP proposal that in its current form has many flaws.

There are 10 steps in this HOME proposal to resolve this most severe financial crisis. Here they are:

First, like in the Treasury TARP plan you need to buy illiquid/toxic assets and take them off the balance sheet of banks and financial institutions to reliquify them and allow new credit creation. The biggest problem here – as the debate between Bernanke and senators yesterday is one of the proper valuation and the proper price at which the government should buy these assets (the RTC did not have this problem as it was working out assets of failed S&Ls): if the government buys the asset at at price that is too high (too small of discount relative to face value) the fiscal cost will be huge and you massively subsidize reckless bankers and their shareholders. If you buy at a discount that is too high you minimize the fiscal cost in the short run but many banks could go bust and the eventual fiscal cost of bailing out the depositors of failed banks could be large. You can debate endlessly whether such assets should be bought at current market price or at prices closer to hold to maturity values (as Bernanke suggested). Given that these assets are impaired pricing the long run value of them is mission impossible. Thus, there is only one solution to this fundamental uncertainty: avoid the government overpaying by having the government having some of the positive benefits of an upside gain in case the banks’ values recover after the bailout. I.e. you need for the government to have some equity in the banks whose assets are purchased by the government. This leads to step 2 of the proposal.

Second, in exchange for the purchase of illiquid asset (at whatever price it is agreed) the government gets preferred shares in the financial institutions that senior to existing common and preferred shares and that are convertible into common shares to allow government to participate into any future upside.

Third, even if the government gets preferred shares as in step 2, the banks will need more capital if they are undercapitalized and they have not fully reserved/provisioned for the losses coming from writing down the asset being sold to the government. So you will need to inject further actual public capital in the form of preferred shares in the financial institutions ( this is what the RFC did during the Great Depression).

Fourth, given the risk to the government deriving from the public injection of capital in the financial system the existing shareholders of the banks need to take a first-tier loss to minimize the risks for the government share. How to do that? First, you need to suspend dividend payments on common share and possibly even existing preferred shared; you also need to force to partially match the public capital injection with new Tier 1 capital.

Fifth, public and private recapitalization of financial institutions unfairly benefits unsecured creditors (all creditors but insured depositors) of such institutions. So, you also need to convert some of this unsecured debt (the sub debt and other debt unsecured debt) into equity (a debt for equity swap). Such swap further reduce the leverage of the financial system (leading to a lower debt to equity ratio for financial institutions).

Sixth, after this crisis is resolved the banking and financial system may need lower capital than before this crisis so as to avoid new asset and credit bubbles; and if you recapitalize some banks that will be able to lend more (still with lower leverage ratios) you still need to let other insolvent banks and financial institutions to go bust and disappear. Only healthier institution should survive. So you need to a systematic triage between banks that are distressed, undercapitalized and illiquid but solvent once the private and public recapitalization occurs from those that are fundamentally insolvent and that need to be shut down. You need to destroy the bad apples to let the good ones or the sick but curable ones survive and thrive.

Seventh, as in the case of the RTC the assets of the banks that are bankrupt and are allowed to fail go to the HOME for workout (debt restructuring/reduction).

Eighth, you need an HOLC-like program for debt reduction of the household sector. Households in the US have too much debt (subprime, near prime, prime mortgages, home equity loans, credit cards, auto loans and student loans) while their assets (values of their homes and stocks) are plunging leading to a sharp fall in their net worth. And households are getting buried under this mountain of mounting debt and rising debt servicing burdens. Thus, a fraction of the household sector – as well as a fraction of the financial sector and a fraction of the corporate sector and of the local government sector – is insolvent and needs debt relief. When a country (say Russia, Ecuador or Argentina) has too much debt and is insolvent it defaults and gets debt reduction and is then able to resume fast growth; when a firm is distressed with excessive debt it goes into bankruptcy court and gets debt relief that allows it to resume investment, production and growth; when a household is financially distressed it also needs debt relief to be able to have more discretionary income to spend. So any unsustainable debt problem requires debt reduction. The lack of debt relief to the distressed households is the reason why this financial crisis is becoming more severe and the economic recession - with a sharp fall now in real consumption spending – now worsening. The fiscal actions taken so far (income relief to households via tax rebates) and bailouts of distressed financial institutions (Bear Stearns creditors’ bailout, Fannie and Freddie and AIG) do not resolve the fundamental debt problem for two reasons. First, you cannot grow yourself out of a debt problem: when debt to disposable income is too high increasing the denominator with tax rebates is ineffective and only temporary; i.e. you need to reduce the nominator (the debt). Second, rescuing distressed institutions without reducing the debt problem of the borrowers does not resolve the fundamental insolvency of the debtor that limits its ability to consume and spend and thus drags the economy into a more severe economic contraction. So of the five possible uses of fiscal policy – income relief to households (the 2008 tax rebate), rescue/bailout of financial institutions (Bears Stearns, Fannie and Freddie, AIG), purchase of assets of failed institutions (an RTC-like institution), recapitalization of undercapitalized financial institutions (an RFC-like institution), government purchase of distressed mortgages to provide debt relief to households (an HOLC-like institution) – the last option is the most important and effective to resolve this severe financial and economic crisis. During the Great Depression the Home Owners’ Loan Corporation was create to buy mortgages from bank at a discount price, reduce further the face value of such mortgages and refinance distressed homeowners into new mortgages with lower face value and lower fixed rate mortgage rates. This massive program allowed millions of households to avoid losing their homes and ending up in foreclosure. The HOLC bought mortgages for two year and managed such assets for 18 years at a relatively low fiscal cost (as the assets were bought at a discount and reducing the face value of the mortgages allowed home owners to avoid defaulting on the refinanced mortgages). A new HOLC will be the macro equivalent of creating a large “bad bank” where the bad assets of financial institutions are taken off their balance sheets and restructured/reduced.

Ninth, we need to avoid a situation where the recapitalization of the banks and the resolution of this financial crisis leads to another credit and asset bubble. Many things need to be done to avoid this risk but a rapid change of the Basel II capital adequacy ratios to reduce their the pro-cyclicality would be essential.

Tenth, start implementing rapidly a reform of the system of regulation and supervision of financial institutions in a world of financial globalization. With the collapse of most of the shadow banking system most of these shadow banks are now being folded in the traditional banks and will be regulated like banks. Indeed all institutions of large size and that are systemically important (commercial banks, investment banks, non-bank mortgage lenders, hedge funds, private equity funds, etc.) should be supervised and regulated in a similar way. To make the financial system more stable over time and avoid severe financial crises like the current one will require that both banks and former shadow banks be regulated and supervised better than they have been in the last decade. After all traditional banks have performed as poorly – and some more poorly – and have lost more money than shadow banks during this severe financial crisis. So both the poor regulation and supervision of banks (as regulators were asleep at the wheel while the laissez fair ideology and voodoo-cult of self-regulation and market discipline and internal risk management became dominant) and the lack of sensible regulation of shadow banks lies behind the current financial disaster. Thus, folding shadow banks back into the traditional banking system will make the overall financial system more stable only if the proper reform of the regulation and supervision of financial institutions in a world of financial globalization will be undertaken. This important matter is the subject of the chapter (titled “Financial Crises, Financial Stability, and Reform: Supervision and Regulation of the Financial System in a World of Financial Globalization”) that I have written for the recently published World Economic Forum’s Financial Development Report.

This chapter analyzes in detail the episodes of financial crisis in emerging market economies and advanced economy; discusses the causes and consequences of such crisis; measures the economic and fiscal costs of such crises; discusses the debate on whether monetary and credit policy should target asset prices and asset bubbles; studies the weaknesses of financial regulation and supervision in advanced economies financial systems that led to the recent crises; and finally considers eleven separate key issues in the reform of the regulation and supervision of financial institutions in a world of financial globalization that are necessary to prevent future crisis and make them less virulent. These eleven issues that are key in reforming financial regulation and supervision are: the distorted compensation system of bankers/traders and the related agency problems between financial institutions shareholders and their managers; the flaws of the originate and distribute securitization model; regulatory arbitrage and the instability of the shadow banking system given its reliance on short term liquid financing, high leverage and long term illiquid lending; the weaknesses of self-regulation and market discipline and the need of greater rules-based regulation; pro-cyclical capital requirements and other issues with the Basel II capital requirements; the distorted incentives of credit rating agencies; asset valuation and fair value accounting in a world where assets can be highly illiquid and hard to price; the lack of transparency in financial markets; the inadequate regulatory regime; the lack of international coordination of regulatory policies; and the issue of who will regulate the regulators, i.e. how to avoid the regulatory capture by the financial industry of the regulators and supervisors of financial institutions.

So now that the shadow banking system is being folded in the formal banking system it is high time to rethink how both banks and the former non-bank financial institutions should be properly regulated and supervised.

http://www.rgemonitor.com/roubini-monitor/253739/home_home_owners_mortgage_enterprise_a_10_step_plan_to_resolve_the_financial_crisis