Political Corruption, the Bush-Pelosi Bailout, and the Soros Plan
by tdaxp ~ October 2nd, 2008
The big-government ‘regulation’ of the mortgage market is a major cause of our current financial crisis. Problems which were known about nearly two-hundred years ago came back again. Bought-off Senators, such as Chris Dodd and Barack Obama, took the ideological easy route of pushing loans on people who could not pay them off, at the risk of a financial crisis such as we are now having.
The first President of the modern Democratic Party, Andrew Jackson, summarized the corrupt Bank of the United States as follows:
By the early 1830s, President Andrew Jackson had come to thoroughly dislike the Second Bank of the United States because of its fraud and corruption. Jackson then had an investigation done on the Bank which he said established “beyond question that this great and powerful institution had been actively engaged in attempting to influence the elections of the public officers by means of its money.” Although its charter was bound to run out in 1836, Jackson wanted to “kill” the Second Bank of the United States even earlier. Jackson is considered primarily responsible for its demise, seeing it as an instrument of political corruption and a threat to American liberties.[5] The head of the Second Bank during Jackson’s presidency was Nicholas Biddle who decided to seek an extension of the bank’s charter four years early, in 1832. Henry Clay helped to steer the bill through Congress. But Jackson vetoed the bill in July.
Now, because in part of Obama’s and Dodd’s actions, we are in the worst financial crisis since the Great Depression.
There are two major approaches being discussed: first, give even more wealth and influence those incompetent investment banks which helped create this mess, or partially nationalize the banks.
Both approaches are ugly, but given the choice between rewarding the stockholders who helped create this mess, or punish them, I say punish.
I’ll take the Soros Plan over the Bush-Pelosi Bailout.
[1] http://www.tdaxp.com/archive/2 008/06/19/the-foreign-polic...
October 2nd, 2008 at 5:47 pm
News from the front…
Cross border runs on US financial institutions has begun.
It’s a matter of time, my friends.
October 3rd, 2008 at 2:58 am
Dan: I really like the Soros plan [1]. Also, It doesn’t set off any of my nationalization alarms.
Fed X: That sounds more like a wish then a prediction. We are not at that point yet.
[1] http://purpleslog.wordpress.com/2008/10/02/on-the-bailout-part-7-the-george-soros-plan-hint-i-like-it/
October 3rd, 2008 at 5:48 am
Yesterday I saw with my own eyes a prominent trading desk completely frozen. The commercial paper market is totally closed down. Libor was bid only - not a single offer. There are plenty of solvent commercial entities that can no longer pay their short term accumulated debt, all happened overnight. Fed will have to lend directly to corporate sector now.
All uninsured deposits are being re-routed. This is what led to the run on Wachovia over the weekend, it has picked up steam. It is happening to every commercial bank. It is a quiet run, but it is a big one and is cross border
All hedge funds are experiencing redemption calls and many are having an outright run on them. The bigger the fund, the more likely they are experiencing liquidation pressure.
State governments are not even safe. They can’t access their revolvers for pre-tax receipt spending. Again, Fed will need to lend directly to them.
We are at the end game of total systemic meltdown. No more chicken being played. This is real.
October 3rd, 2008 at 5:57 am
After Ireland unilaterally announced unlimited governmental deposit insurance, I believe cross-border flows are happening in Europe, as well.
As we decide how to reinject liquidity, one basic question is: should the worst institutions — those that caused this mess — be rewarded or punished? What would be better for our free-market system, if we assume that spending around a trillion to fix their mess is a given?
The Bush-Pelosi plan does its best to reward those who made stupid bets (risky while they were ahead).
The Soros Plan captures the gain in wealth for the taxpayer.
Soros is popular on the left, and is plan is naturally more popular on the right. If the House defeats the Bush-Pelosi plan, it will be urgent to get Soros’ ideas into legislation as quickly as we can.
October 3rd, 2008 at 6:50 am
You are absolutely right. It is all so silent too. Not like the good ol’ days when footsteps could be heard at the teller’s window. All electronic now and a lot of people don’t even know it’s happening until it is too late.
I don’t think a trillion dollars is going to fix it. But assuming so, I would rather see the institutions that are already too sick to remain solvent go ahead and go into bankruptcy while the healthier institutions receive taxpayer support. Reward success (or at least, conservative financial investing) and punish failure (or at least, excessive speculation).
The House will pass the bailout as it stands now. They have generated enough political cover. It will be massively re-tooled after the election, and may end up looking like something Soros would endorse.
If we cannot unfreeze commercial paper within a few days, none of this will matter though. That is now Paulson’s biggest problem.
October 3rd, 2008 at 8:44 am
[...] Update: There is a related discussion at TDAXP. [...]
October 3rd, 2008 at 9:03 am
I think the act that Soros is popular on the left should give the dems cover to go with his idea. His is a good plan.
The Treasury/Congress plan is crap.
They are essentially trying to blackmail citizens and congressional opponents: “If you don’t support are bad plan, horrible things will happen, so you must accept the pork and bad incentives for the good of the country”.
This is misconduct by these leaders. American citizens should be outraged. There are better ways to accomplish the goal . Congress is ignoring them though and porking up.
The FDIC change could could be made separately and quickly. I just read that the FDIC hasn’t bothered to actually collect any insurance premiums for several years. Heads should roll at the FDIC.
A separate quick bill to insure at 100% business transaction bank account could also be made. This would not be controversial.
These are not controversial and could be made immediately.
October 3rd, 2008 at 9:22 am
Early summer, Lone Star bought a roughly $10B MBS portfolio for $0.63/dollar.
Late summer, Lone Star bought some of Merrill’s MBS for $0.22/dollar.
If you’re a vulture, like me, why would you put any money in when relatively speaking, an entire asset class has fallen by 40% in two months?
If the Feds don’t come in and put a floor on MBS, which is really all Paulson is going to have time to do before it’s someone else’s turn, then capital will continue to stay on the sidelines. Capital is much more patient than you might think.
Paulson is simply going to start accumulating MBS, at what price… no one knows. We bet it will be around $0.40/dollar.
Once the bill passes, the asset class (for the first time in a long time) will start to trade up, not a lot of course… someone has to pay the premium to go in and do the due diligence to figure out what is what. We looked at some MBS portfolios awhile back (trust me, they’ve been shopping this crap for the better part of 12 mo.) and it was impossible to get a handle on it. Thousands of loans were originated, never filed, so not perfected, so absolutely worthless, etc.
If you’re a secured transaction attorney with a good local knowledge of debt-collection laws in FL, TX, CA, or the NE, you can charge whatever you want an hour, they’ll pay it.
Anyway, after the floor is set, LIBOR will start to pull back. That’ll be enough to keep corporate citizens out of hock. Then we can create a real plan that has long lasting impact… hopefully for the good.
October 3rd, 2008 at 9:29 am
Btw, you have to remember how tightly coupled the financial markets are. You can’t just say, “oh, we’ll handle this little problem over here, and that little one over there, etc.” None of this is in isolation. Paulson, for all his faults, understands that. So he needs a big f-ing wallet that he can take to the table. Huge. He isn’t going to have time to spend it all. But he will be giving the patient some much needed CPR.
I think it’ll stablize for 60 days. Volatility will still be king, but not as badly. There will be a wait and see approach. Then the next POTUS gets to have the migraine of a hundred years untying all the knots in the financial nervous system.
October 3rd, 2008 at 10:21 am
This is a complicated issue dealing with lots of money and a lot of specifics in an area that most people know very little about (although many of us know a lot more now than we did just a few weeks ago).
That being the case, I think that it is appropriate to apply the sort of Occam’s Razor approach that Glen Reynolds, the Instapundit applies to anthropogenic global warming, i.e. “I’ll believe that it is a crisis when the people who say that it is a crisis start acting like it is a crisis.” For global warming, one way of acting like it is a crisis would be if rich environmentalists were to make the sacrifice of flying first class commercial instead of on private jets.
If our political class thought that we were really facing a financial crisis that would soon cause massive damage to the economies of the United States and the world, they would not have to be bribed into passing a bill that would stave off, or at least mitigate that disaster, with all manner of pork earmarks. Also, they would refrain from playing political gotcha until the bill had been passed and signed into law.
Since our political class is not behaving that way, and they have access to better information than I do, I must assume that either they don’t think it is a crisis or that do not care about the wellbeing of the United States. Of course, they might just be too stupid to understand the dire warnings that their staff are giving them but joking aside, it usually requires some minimum level of competence and intelligence to get elected to Congress as well as some level of concern that triggering a new Great Depression would be bad for reelection prospects.
October 3rd, 2008 at 10:45 am
FedX,
I completely disagree with your suggestion.
I could care less if the market prices of MBS are falling. They should be falling, Right now, there is no way to reasonable value these securities. Smart capital shouldn’t be buying the MBS.
There is no reason that the US Taxpayer should be left handling the bag on these by buying them up at what is mostly too high of a price (PV of future expect aggregate sell prices)
Here’s the thing, the Taxpayers don’t need to buy the MBS. To address positively the problem at hand [1].
The real problem is bank liquidity for making short loans.
This can be handled by schemes around:
1) Having the Feds make loans to the banks secured by the banks assets [2]
2) Letting back back fail and letting the rest re-capitalize though some combination pf private and USGOV investment like the Soros plan [3]
Things like increasing FDIC deposit coverage amounts (for individuals and business transaction accounts) helps too.
The investors and owners who took on risk and came up short should fail. It sucks to be them. There is no reason to make the US Taxpayers suck it instead.
–
[1]
http://purpleslog.wordpress.com/2008/09/30/on-the-bailout-part-1/
[2]
http://purpleslog.wordpress.com/2008/09/30/on-the-bailout-part-4-what-i-think-should-be-done-short-term/
[3]
http://purpleslog.wordpress.com/2008/10/02/on-the-bailout-part-7-the-george-soros-plan-hint-i-like-it/
October 3rd, 2008 at 10:45 am
I think the political class doesn’t understand the problem. They are very insulated.
October 3rd, 2008 at 10:46 am
Mark in Texas:
“If our political class thought that we were really facing a financial crisis that would soon cause massive damage to the economies of the United States and the world, they would not have to be bribed into passing a bill that would stave off, or at least mitigate that disaster, with all manner of pork earmarks. Also, they would refrain from playing political gotcha until the bill had been passed and signed into law.”
Brilliant!
October 3rd, 2008 at 10:51 am
[...] I hope TDAXP is okay with me hijacking a comment from his site. Here is the comment: If our political class thought that we were really facing a financial crisis that would soon cause [...]
October 3rd, 2008 at 11:44 am
purpleslog, actually, if you look at the default rate, MBS are trading well below their probable true value. The Lone Star quotes were there to show how much of a discount, but that discount is far more than the default rate… which means a market for lemons.
Putting a floor on the MBS doesn’t do anything to stave off the solvency crisis.
Don’t get me wrong, I’m not saying this is the best plan. Or even a good plan. It is rotten corporatist bs. I am all for bankruptcy process. I think good litigation in that area will reveal securitization’s non-remoteness. Which will bring the house of cards down eventually. But that will take time. If Catepillar can’t pay their employees, they can’t have them. That is real now.
But the target for round one is about right.
Having said that, without addressing solvency crisis in American middle class, it won’t matter long term. It will unfreeze credit markets though… and if you fail to do that, you can’t address the solvency crisis anyway so it doesn’t matter.
Again, this is a tight, rigid system. Any treatment looks bad from this perspective.
There is a difference between the current liquidity problem and the actual cause of the meltdown. That is the difference I don’t think you are seeing clearly.
October 3rd, 2008 at 12:08 pm
Federalist X
You may well be correct that our political class does not understand the problem. That does not fill me with confidence in any solution that they are likely to come up with.
I believe that if a) our elected representatives understood the problem b) the problem is as serious as many people are claiming it is c) our elected representatives want good things for the United States (rather than the destruction of the corrupt current racist, sexist, homophobic, imperialist, etc. regime by smashing the putrid corpse of capitalism so that a new socialist utopia can be built in the ashes…) they would pass a clean bill that does nothing but address the issue.
In dealing with important complicated issues involving issues that require years of arcane study and experience to fully understand, it is best if there is some trustworthy individual who knows the subject and can be asked for advice. Unfortunately, in this case everybody who knows what is going on has an agenda and a lot of reason to say things that might not be true.
We do know that if no government action is taken, eventually the market will sort this all out. What is undetermined at this point is just how much avoidable pain and collateral damage will occur before that sorting is complete. My guess is quite a bit of pain is going to be unavoidable in any case. But I’m just a prole who gets his information from the internet.
October 4th, 2008 at 10:45 am
This is a great discussion. I think anyone who stumbles across it will be much more informed about the problems in the financial sector than they otherwise be. The special perspective that Fed X brings to the discussion — as well as the thoughts and questions generated by Purpleslog and Mark in Texas — are invaluable.
The damage done by the political class’s manipulation of the mortgage market for political ends (on the left, the rewarding of constituents, and on the right, the idea that mortgages make people more responsible citizens); combined with the foolish banks and foolish lenders, is severe. The short-term financial crisis, and the longer-term real estate bubbles, would be serious problems even if they occurred in isolation to each other. Unfortunately, they are closely interconnected.
There is no reason to think our political class will perform in anything more than an unintelligent and mediocre manner.
October 22nd, 2008 at 6:58 pm
Joe a poor sinner writes:
.
Americans to stupid, to scared, to weak, to enforce the Laws to stop
Financial Disaster.
CEOs Fed Congress make statements they conspired took bribes and unjustly
enrich them self. Corruption believe the few American that will demand
Justice can be over looked or payed off. To many violation to count. Here
Are 2. From CEOs Fed and Congress own mouth
. 1] ” Many parties are to blame” Law Dictionary; A conspiracy exist when
the parties use legal means to accomplish an illegal result
2] “The Bail Out is Bribery” Encyclopedia; Any item of value to
influence the actions of an official in discharge of a public or legal duty
Solution ; Unjust Enrichment
Knowledge is immaterial under the law of unjust enrichment
Wed, 4 Jan 2006 17:23:00 -0500
Re: Unjustly enriched executive
“Former HealthSouth Corp. chief executive officer Richard Scrushy has been
ordered by a judge to repay his former company more than $47.8 million in
bonuses, according to published reports. … Judge Allwin E. Horn III of
Jefferson County Circuit Court in Birmingham, who made the ruling as part of
a summary judgment in a shareholder lawsuit, determined that Scrushy is not
entitled to the payments whether or not he participated in the fraud or knew
about the scheme.”
Prosecution evidence
Fed lowers Interest to prop Fannie and Freddie
2001 to mid 2003 the Federal Reserve lowered its interest rates 13 times,
from 6.25 to 1.00% overnight rate averaged 0.68% June 2004,
the Federal Reserve System target interest rate continued to do so 17
straight times
In March 2006, the Federal Reserve ceased to make public M3, arguably the
most reliable means of measuring the money supply.
Fed declared that the costs of collecting this data outweighed the benefits
Here’s the kicker
The Fed needed to increase rates not lower them
Quote”. overnight overdrafts (more than three occurrences in any 12-month
period), the overnight overdraft rate increases by one percentage point for
each additional occurrence.”
American Demand Law Enforcement and Remove ,the Corrupt CEOs, Fed,
Congress
.Recover $500+B, Honor and make corruption look stupid.
American have no choice but to take the Law in there own Hands or the
corrupt have take control of America
Rem; Congress did not fail they scammed,
Rem; Congress had many red flags about the credit problem
Use the war to decoy American focus
Congress , Falsely accused, made statements of treason and stopped much
funding to protect our Military.
Congress disrespected the position they held to the point of treason.
The rule ; one is judged on how they have judged then they need to go to
prison for life and hell for eternity.
Rem; Corrupt CEOs, Fed and Congress believe they are above the law and
Americans to stupid, to scared, to weak to enforce the law..
article by Poor Sinner