Jonathan Weil of Bloomberg has an eye-opening column about the need to inject capital into the system, rather than just buy up dud assets, as the bailout plan has proposed. What’s especially enlightening is he presents the $700 billion figure in a context I haven’t seen:
For that much money, at yesterday’s prices, the government could buy 23 of the 24 banks in the KBW Bank Index, including Bank of America Corp. and Wells Fargo & Co. And it still would have money left to buy a stake in JPMorgan Chase & Co., the largest company in the index.
Weil says the European takeover of Fortis this weekend, which gave taxpayers a nearly 50% stake in the company, is how the bailout should work:That’s how a government intervention is supposed to work. The company gets fresh capital, which has the added benefit of not being fake. The buyers get equity. Legacy shareholders get slammed with dilution. And if the company recovers, the government can sell shares to the public later, maybe even at a profit.
And he makes another sound proposal:As for the illiquid assets still on banks’ balance sheets, the best way to find out what they’re worth is to start disclosing every conceivable piece of data about them, right down to the daily cash flows they produce. A big reason subprime mortgage-related securities aren’t selling is that outsiders can’t see what’s underlying them on a timely basis.
Martin Wolf of the FT—one of the smartest commentators around, says Congress is risking another Great Depression by rejecting a bailout, however deeply flawed it is.
We are watching the disintegration of the financial system. Finance is the web of intermediation binding economic agents to one another, across both space and time. Without it, no modern economy can survive. Yet that is now threatened, with the ongoing collapse in trust and flight to safety. We can indeed run this experiment. But why should we?
Speaking of Great Depressions, David Leonhardt of the NYT provides some economic history, which I don’t think we can get enough of right now.
the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.
At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.
In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.
Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.
It’s funny but pathetic to see the think-tank folks on the right flail around trying to blame government somehow—anyhow!mdash;for the failures of their free-market ideology. Here’s a column in the Washington Times that blames Fannie and Freddie, who I’ll be the first to say were not upright entities, for the collapse.
It is universally understood that the present financial meltdown began with the problems of two enormous government-sponsored enterprises (GSEs) — Fannie Mae and Freddie Mac.
Universally, huh? Here’s Justin Fox at Time with a relevant chart and other info:
And on the left, Thomas Frank in today’s Journal writes about this very campaign and blisters the conservative talking points:
When some free-market scheme blows up, one needs only find an institution of government in close proximity to the wreckage and commence accusing
There is no doubt that Fannie and Freddie enabled the subprime neurosis, but for certain conservatives they are virtually the only malefactors worth noting. The dirge goes like this: Fannie and Freddie were buying up subprime mortgages, and they were doing it for (liberal) political reasons. Mortgage originators thus had no choice but to hand out mortgages like candy. Had market forces been in charge, loans would, no doubt, have been administered with a rigor and sternness to make John Calvin blanch.
I asked Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on the Savings and Loan debacle of the 1980s, what he thought of the latest blame offensive. He pointed out that, for all their failings, Fannie and Freddie didn’t originate any of the bad loans — that disastrous piece of work was done by purely private, largely unregulated companies, which did it for the usual bubble-logic reason: to make a quick buck.
Most of the mistakes for which we are paying now, Mr. Black told me, were actually made “by four entities that under conservative economic theory should have exercised effective market discipline — the appraisers, the originators of the mortgages, the rating agencies, and the investment banking firms that packaged the subprime mortgage-backed securities.” Instead of “disciplining” the markets, these private actors “served as the four horsemen of the financial apocalypse, aiding the accounting fraud and inflating the housing bubble.” It is they, Mr. Black says, who “turned a crisis into a catastrophe.”
Read the whole thing.
The Washington Post takes a look at the fall of New York and the potential rise of Shanghai or other cities in its place.
With U.S. investment houses tumbling into bankruptcy, consolidating operations or transforming themselves into more closely regulated commercial banks, Wall Street’s reputation as the prime address to raise capital, seek investment advice or trade securities is no longer rock-solid.