Murphy and Thornton Take on Paulson and Bernanke; Scott Horton Referees
This was a really fun interview (mp3). Scott always sets up elaborate scenarios or objections. With Mark on the phone, I could be a super geek knowing that he would keep it real.
The Buzz on the Street: Are WaMu Deposits Safe? What About WaMu Stock?
The latest chatter concerns Washington Mutual. Will it sink too? Do its clients need to get out?
To WaMu depositors, I would say: Your money (up to $100,000 per account) is insured by FDIC. So in theory it is just as safe (or vulnerable) as everything else that is insured by the feds–and that pile of assets just grew a lot in the past two weeks.
To WaMu shareholders, I would say: Be very afraid. Things are very fluid, and the government can engineer a self-fulfilling prophecy if it wants to acquire 79.9% of your shares on the cheap.
Either way, the future does not look good for dollar-denominated assets. If you are a regular Joe, I would definitely advise reducing your checking account balances and instead loading up on “junk” silver. And you wouldn’t be doing it as an investment, but rather transferring one form of money into another, more traditional form.
"Henry Paulson, American Oligarch"
Robert Wenzel makes the case in a classic post. An excerpt:
We are in the midst of one of the greatest power and money grabs in the history of the world. I am stunned by the Russian style oligarch aggressiveness and boldness of the moves made this weekend, led by Paulson.
In a bold strike, he asks for $700 billion in “bailout money” and hopes the panic environment will push his proposal through with scant review by Congress. The proposal contains this remarkable clause:
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency…”
Then, in a Sunday night press release, 9:30 PM ET, the Federal Reserve announced that it has approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies. Goldman is, of course, where Paulson served as CEO before he joined the Treasury. (On Goldman’s insider pedigree, see my column: Does Goldman Sachs Run the World?)
…
Talk about scooping up bank stocks on the cheap, when fear is everywhere. That is exactly what the Goldman approval from the Fed to become a bank holding company is all about! And, we might add, all of Goldmans competitors were wiped out by a series of rumors. Dick Fuld CEO of the latest victim, Lehman Brothers, thought that Goldman was behind the rumors…
Paulson Handcuffs Obama By Empowering Goldman Sachs
The very popular economics blog Marginal Revolution has a very rare mathematical property: The mean insightfulness of the comments left at MR is significantly larger than the median insightfulness of the actual blog posts. Discuss.
Anyway, today my jaw literally dropped in awe at the following comment made by “a person”:
It is becoming increasingly clear to me that President Bush is again choosing the shock doctrine, as he did in pushing for the Iraq War, to subvert the democratic process. His wish is to tie up the financial freedom of an Obama presidency. There needs to be a more uniform response (screaming, yelling, etc.) from intelligent people in America that we will not be bullied again in the same way into another terrible plan.
(In retrospect, it doesn’t look as impressive now that I’ve put in up on a pedestal and shined a spotlight on it. But trust me, for that to be just some guy’s comment on a blog post…whoa.)
What’s very interesting about this is the amount of power that has been transferred to the private sector. At first this is counterintuitive–haven’t the feds been grabbing more power from the private sector?
Yes: In general the federal government has grown at the expense of the financial sector. However, a very few firms–chiefly Goldman Sachs–now wield much more power than they did 13 months ago.
I heard a guy say on CNBC that it was crucial to save Goldman Sachs because it is a symbol of capitalism around the world. So that means no matter what, the Goldman shareholders know that they can’t possibly go bankrupt or even get bought out, especially by a foreign buyer. They are untouchable now. Unrelated trivia quiz: For which Wall Street investment bank was Henry Paulson the CEO, before he assumed his current job of CBA (Chief Bailout Architect) for the Treasury? (BTW, that link also indicates that Paulson’s predecessor at Goldman Sachs was Jon Corzine, who is now Governor of New Jersey. Wow that job of being CEO at Goldman must give you some really good people skills or something.)
If Obama should win, the few remaining “independent” players on Wall Street can literally stage a crisis if they want. The politicians won’t know the difference, and even if they did, enough of them could be induced to defend the legitimacy of the crisis and demand that President Obama “stop ignoring the experts and start showing leadership by supporting the Republican Financial Patriotism Act.”
Look at how easily the panic on Wall Street pushed oil companies and hurricanes off the radar. They could easily do the same if McCain wins and then a scandal threatens him. “You need a few days to regroup? No problem, Mr. President. We’ll stop lending to Goldman.”
Did the Market Call Paulson’s Bluff?
As of 10:40 AM Monday morning, the S&P 500 is down almost 1.5%. Notice how the short-term euphoria from the government’s progressively bigger interventions is more and more fleeting, as the months roll by?
Investors are apparently starting to realize that Paulson and Bernanke are bluffing. They can’t undo the housing bust. All they can do is rearrange a few trillion dollars, but that’s a negative sum game, once the incentive effects are taken into account.
In macroeconomics it took a while but finally they learned that if the central bank keeps price inflation down, then the short-term growth from an unanticipated injection of new money is pretty high. But if the central bank keeps injecting more and more funny money into the system, then after a while the public adapts and these injections become necessary just to maintain the status quo.
It seems we are nearing that point with Paulson’s power grabs. He basically took over the nation’s credit markets last week, and it bought him two business days’ of relief.
Murphy on Scott Horton Radio Show
We will be discussing the financial mess and (presumably) the relation to an interventionist foreign policy on Monday, from about 12:15 – 1:00 pm EST. You can listen live here, or I’ll provide a link later on when it is archived.
The Government Is Not Promoting Financial Stability
My article today on LRC. A juicy excerpt:
Just stop and reflect on what the government has done, even in the last few weeks. It has literally seized (the press’ word, not mine) companies tied to trillions of dollars in assets. Furthermore, these seizures were truly a “hostile takeover.” For example, the common shareholders of Fannie and Freddie were quite simply robbed. The government came in and assured injections of capital to keep the firms afloat. In exchange, it acquired “senior preferred equity” shares, placing it higher on the totem pole vis-à-vis the original preferred equity shareholders, in the case of losses. However, if the real estate market turns around and the share prices of Fannie and Freddie start rising, then the government will exercise its warrants giving it ownership of 79.9% of the common stock. (Note how people are speculating that the government might make money on the deal.) Before, shareholders of Fannie and Freddie knew they were probably going to lose everything, but there was still a sliver of hope. Now there is no hope.
And yet, there is no rhyme or reason to the government’s decisions. Lehman Brothers was allowed to fail. In essence, you’ve got a massive beast stalking the financial markets. This creature has many trillions of dollars ultimately at its disposal, and oh yes, I should add: It is not afraid to send armed men to your house if you should ever really cross it. In this environment, is it any wonder that the credit markets are “frozen”? When the SWAT team bursts into your kitchen window, you freeze up, right? Why should things be so different on Wall Street?
Latest Bailout Tally: $1.8 Trillion; Ron Paul Talks Good Sense
This helpful CNBC article tallies up all the government promises to date regarding the crippled financial markets. It’s a shocking $1.8 trillion so far. Below is a very good interview Ron Paul gives to Wolf Blitzer on this mess. (HT2LRC)
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