Some Clear Thinking on the Financial Mess from Norris and Krugman

I read both of these columns in last Friday’s edition of the New York Times.  It’s the end of a historic year for the U.S. economy.  We may look back in a few years and say that 2008 was the beginning of the end for supply-side economics (trickle down) and a nearly wholly unregulated financial services system.  2008 will hopefully become known as the time when ordinary people got concerned enough about the price they were paying for the excesses of banks which traded stocks, brokerages which sold insurance and insurance companies which did both.  2008 was a year when ordinary folks began to understand mortgage backed securities and credit default swaps – and what the failure of those derivatives meant for their local widget makers’ line of credit.

If you don’t read anything else today, read these two columns:

• Op-Ed, Floyd Norris: A year of financial contradictions and chaos - New York Times
• Op-Ed, Paul Krugman: The Madoff Economy – The New York Times

Read more

Uhhh, Where Does This Money Come From?

I just finished reading this story.  It outlines actions taken today by the U.S. Federal Reserve and was headlined, “Fed throws fresh lifeline to stressed households.”

In a nutshell, here’s what the Fed did today:

1. Announced it will buy $100 billion in debt now owned by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
2. Said it will buy up to $500 billion in mortgage securites from Fannie, Freddie and Ginnie Mae.
3. Began a $200 billion program to support consumer finance including things like auto and education loans.

This sounds like another $700 billion bailout, only it’s $800 billion.  I also didn’t read that anyone voted on this or that there is any oversight.  I obviously need to have a better understanding of just how much the Fed can do, but this is sort of scary.  Isn’t the Fed the public’s bank – the bank for banks?  Aren’t respectable banks supposed to have standards?

We’ve got many problems in this country and one of them is that we’ve become a debtor society.  We’re addicted to credit.  Many people spend beyond their means and now the Fed is going to own a big chunk of this debt.  What are the potential unintended consequences of this much money on the line?

Better yet, when do the financial wizards who dreamed up collateralized debt obligations and mortgage backed securities – which led to the credit default swaps – start to pay?

Dow 7000?

Back on October 6, I predicted – well sort of predicted by writing a headline on some market news aggregation – Dow 8,000.  Based on the economic and financial industry news of that day just 2 1/2 months ago (seems longer) the Dow dropping to 8,000 and staying in that vicinity for some period of time seemed reasonable.

At the time we had been through Fannie and Freddie, Lehman was failing, more banks were failing and the federal government and media began explaining things like credit default swaps to America.  Things looked bad, but some were still touting the “fundamentals” of the U.S. economy and the publicly traded companies on our major stock exchanges shouldn’t pay too high a price (with dropping share values) for the excesses of the financial services industry.  Also at that time, I was reading Kevin Phillps’ book, Bad Money.  If you want a better understanding than the average bear – or bull – of the current U.S. financial system Bad Money is a must read.  At any rate, under the influence of that book, it was just obvious that as stocks dropped sharply that day there were probably many more shoes to drop, hence the market wasn’t at the bottom yet.

Now I’ll revise my estimate.  On top of the crisis in the financial system and all that it entails, from failing banks to a still too tight credit market there are many more economic indicators pointing to the final quarter of 2008 just being the beginning of a difficult economic downturn.  Here are a few things that immediately come to mind: Read more

Full Text: President Bush Statement on Economy September 18, 2008

THE PRESIDENT: The American people are concerned about the situation in our financial markets and our economy, and I share their concerns.

I’ve canceled my travel today to stay in Washington, where I will continue to closely monitor the situation in our financial markets and consult with my economic advisors. I spoke to Secretary Paulson this morning, and I will meet with him later on today.

In recent weeks, the federal government has taken extraordinary measures to address the challenges confronting our financial markets. We’ve taken control of Fannie Mae and Freddie Mac — the home finance agencies — to help promote market stability and to ensure they can continue to play a role in helping our housing market recover. This week, the Federal Reserve acted to prevent the disorderly failure of the insurance company AIG — a development that could have caused a severe disruption in our financial markets and threatened other sectors of the economy. Yesterday, the Security and Exchange Commission took action to strengthen investor protections and step up its enforcement actions against illegal market manipulation. Last night, the Federal Reserve, in coordination with central banks around the world, took a substantial step to provide additional liquidity to the U.S. financial system.

These actions are necessary, and they’re important. And the markets are adjusting to them. Our financial markets continue to deal with serious challenges. As our recent actions demonstrate, my administration is focused on meeting these challenges. The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence.

Thank you.

END 10:17 A.M. EDT

(Source: White House Press Office)

Sunday p.m. – Woodward’s new book, Fannie, Freddie, Prez Campaign, Pakistan

Bob Woodward’s New Book – WaPo Series Kicks Off

• Doubt, Distrust, Delay – Washington Post
• Spying on Iraqi Leader – Worth the Risk? – Washington Post

Watch CBS Videos Online

National & World News

• Palin’s politics and family mix - Washington Post
• U.S. unveils takeover of two mortgage giants – New York Times
• A tangled web with many masters – New York Times
• What the takeover means for your mortgage – Washington Post
• Bhutto’s widower elected Pakistani president – Washington Post
• Talibanistan – New York Times Magazine
• The vanishing Republican voter – New York Times Magazine
• Rival tickets are redrawing battlegrounds – New York Times
• Coming to grips with Russia’s new nerve – New York Times
• Hurricane Ike kills 59 on Hispaniola, headed for Cuba – Chicago Tribune

Paulson pulls the trigger on Fannie & Freddie

Taxpayers left on the hook for how much?

Noon Sunday

• Paulson lays out plan for Fan-Fred – Wall Street Journal
• Treasury engineers takeover – Bloomberg
• GSE takeover – Reuters
• Bernanke endorses move – Reuters
• U.S. unveils takeover of Fannie, Freddie – New York Times

Updated – News Coverage: Fannie Mae and Freddie Mac

U.S. Federal Government Takeover Imminent

Taxpayers Will Now Own the Billions of Dollars of Mistakes of Others

For an explanation of what are Fannie Mae and Freddie Mac see this post.

• Rescue Cost: The Big Unknown – CNN

News

• 8 p.m. Saturday: Government plan to hit shareholders – Reuters
• 6 p.m. Saturday: Bloomberg story updates with Barney Frank – Bloomberg

“This is no bailout, particularly for the shareholders,” Frank said. The federal government “will be senior to all shareholders, preferred and common.”

Holders of the companies’ corporate debt and preferred shares are “very unlikely to come out of this at all happy,” and the chief executive officers will be forced out, Frank said. Paulson met with Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron yesterday to tell them of the decision to put the companies into conservatorship, and remove the executives from their jobs, according to two people briefed on the discussions. – Bloomberg, Quotes from U.S. Rep. Barney Frank

• 6 p.m. Saturday: Loan Giant Overstated Size of Its Capital Base – New York Times
• Paulson readies the bazooka - CNN/Fortune
• U.S. to take control of Fannie, Freddie: Reports – Reuters
• U.S. rescue seen at hand for two mortgage giants – New York Times
• Questions, and hope, on plans for mortgage giants – New York Times
• Paulson Plans to take control of Fannie, Freddie – Bloomberg
• U.S. nears rescue plan for Fannie, Freddie – Washington Post
• U.S. nears deal on Fan-Fred – Wall Street Journal
• Obama says Fannie, Freddie too large to let fail – Bloomberg

P.M. Update – Iraq, Wall Street biggies try to explain meltdown, McCain, Whole Foods sinks, USAF tankers, Freddie Mac, Coffee

$79 billion surplus in Iraqi coffers – Are you pumpin’ me?!

• As Iraq surplus rises, little goes into rebuilding – New York Times
• Iraqi army willing, but not ready to fight – New York Times
• Sorting out coffee’s contradictions – New York Times
• McCain at nuclear plant highlights issue – New York Times
• Bin Laden’s former driver found guilty – New York Times
• Freddie posts loss, cuts dividend – Bloomberg
• Whole Foods plunges – Business Week
• Bidding starts anew for $35 B tanker deal – International Herald Tribune
• Wall Street Report tries to dissect financial meltdown – New York Times

Monday a.m. – Obama, McCain, Foreclosures, Fannie/Freddie, Oil prices

I called it last night …

• Oil rises on tropical storm, other news – Bloomberg

Look here.

• Obama arrives in Basra - New York Times
• Obama lands in Iraq amid troop pullout talk - The Times
• Minor parties a November wild card – Columbus Dispatch
• Some help on way for foreclosure crisis – Columbus Dispatch
• Editorial: To the Rescue – Columbus Dispatch
• Editorial: Taxpayer financed cars for members of Congress – Columbus Dispatch

If they were to make the switch to more economical cars, they could do what Ohio’s state government did and declare the Ford Focus the default car choice.

• Ohio’s unemployment fund on edge of crisis - Cleveland Plain Dealer
• After 2000 McCain learned to work the levers of power – New York Times
• Mideast faces choice between crops, water - New York Times
• Black, female, accomplished, attacked – Washington Post

Thursday Night – Obamoney, Economy, the business of the New York Times, OPEC

• Barack Obama raised $52 million in June – New York Times
• Alan Kohler: Beware a run on the U.S. – Business Spectator (Australia)
• Merrill posts another loss – Wall Street Journal
• Single family building dips to lowest number in 17 years – Forbes
• Thomas Lifson: The rapid decline of the New York Times – PJM (via Real Clear Politics)
• Nicole Gelinas: America – too big to fail? … Probably – City Journal
• Where is OPEC’s oil? – Fortune

When I look at the graphic, part of the caption nags me – particularly the part about how OPEC produced less oil last year and is “cutting back” at a time of growing demand. The problem here is that as far as I know, there is very little transparency among OPEC member nations concerning their actual proven reserves. When one describes the situation as OPEC “cutting back” that implies a conscious decision by producers to take fewer barrels to market. What I wonder, is if it isn’t a cutting back situation, but a reality built on truly more scarce supply.

Monday Evening – More Fannie, More Freddie; Afghan War; Useless Drilling; Mountain Lion

• Fannie, Freddie and You – New York Times

Clear- headed column by Paul Krugman points out that Fannie and Freddie operate under federal regulations that forbid them from buying subprime loans. So, how did we get to this point, Krugman writes in part:

Part of the answer is the sheer scale of the housing bubble, and the size of the price declines taking place now that the bubble has burst. In Los Angeles, Miami and other places, anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point, even if he or she originally put 20 percent down. The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines.

Also, Fannie and Freddie, while tightly regulated in terms of their lending, haven’t been required to put up enough capital — that is, money raised by selling stock rather than borrowing. This means that even a small decline in the value of their assets can leave them underwater, owing more than they own.

• Barack Obama: My Plan for Iraq – New York Times
• Bush lifts executive ban on offshore drilling – Washington Post

Any oil production from new offshore drilling will come online and the oil into the market in about 10 years. This is a cynical, political ploy. The combined estimated production of U.S. offshore drilling and drilling in ANWR would barely dent our dependence on foreign oil or add enough oil to general supplies to make more than a minor dent in consumer prices. It’s past time to realize that we’re on the downward slope of the oil economy. Politicians who support this sort of drilling are either bought and paid for by the petroleum industry or offering false hope in order to get votes or create the appearance they are doing something.

• Militants breached U.S. base – BBC
• Tracker hunts Palo Alto mountain lion after attack – San Francisco Chronicle

Monday Afternoon – Obama and New Yorker, Mortgage Lenders

• Eric Zorn: Will New Yorker Smear McCain too? – Chicago Tribune
• Obama: New Yorker Cover ‘Tasteless’ – Associated Press

I can’t even believe this made it through the editorial mill at the New Yorker.  Recent polling has shown that there are tons of people who people who believe the B.S. that the magazine is satirizing.  Add to that the fact that these issues – terrorism, Islam, patriotism – are super wedge issues.  This cover isn’t funny, it’s not satire, it’s not fair. 

• Cloud hangs over U.S. mortgage lenders – Reuters

Monday News … Fannie & Freddie, Obamas and New Yorker, Boccieri, Keno

• Fannie Plan a `Disaster’ to Rogers; Goldman Says Sell (Update3) – Bloomberg
• Bernanke says plan will help consumers – Wall Street Journal
• New Yorker cover under fire – Boston Globe

• Uncertain fuel and materials cost and government contracts – Columbus Dispatch
• Keno starts in Ohio August 4 – Columbus Dispatch
• Cost of government in Northern Ohio – Cleveland Plain Dealer
• Spending study shows need for reform – Clevleland Plain Dealer
• Editorial: Bank regulators finally issue new rules to curtail shady lending – Cleveland Plain Dealer
• Boccieri, 16th Congressional District race getting national attention – Canton Repository
• Mortgage Giants Falter – Christian Science Monitor

Fannie Mae – Freddie Mac: Meet Federal Daddy-Mac

• Treasury Takes Steps to Bolster Fannie & Freddie – Washington Post
• Treasury Acts to Save Mortgage Giants – New York Times
• Treasury, Fed Affirm Backing for Troubled Mortgage Giants – Wall Street Journal

Fannie and Freddie and Main Street …

Reading the previous post and the following from the Saturday NYT may make you smarter or just wonder where the regulators (including Congress) are in all this.  It would have been nice to catch this mess a little closer on the front end.  The money which will be spent by the federal government on this mess coupled with that spent in the Iraq War could have been put to a more constructive use.

• How Fallout Could Affect Main Street – New York Times

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