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The Dow was down 800 today at one point, then rallied to close down about 125. This could be the beginnings of a bottom. That would most definitely be a good thing.

The G7 meets this weekend in DC to come up with a coordinated worldwide plan to end the financial crisis and unfreeze the dangerously locked-up credit markets. This is another good thing.

I just listened to Doug Henwood’s latest “Behind the News” podcast (on iTunes.) He’s an economist, and analyst with sufficient expertise that he frequently gets quoted in the lofty realms of Alan Abelson’s column in Barrons.

He also edits the excellent Left Business Observer and moderates the LBO-Talk listserv, a central place for lefties and socialists of all stripes to hang out and talk.

On the podcast he refutes what some on the left are saying -  let the financial system fail, then we can build a better world. He says people who say that do not understand finance or economics. There was 25% unemployment in the Great Depression. For those who say they want that he says, “that’s not socialism, that’s nihilism.”

As for the Naomi Klein’s who insist it’s all a conspiracy, he says, yes, Paulson et al did try to grab billions (and now probably won’t be able to because it will be a recapitalization and not buying junk at inflated prices) but the crisis is real. Too real.

The left can play a huge role here, and advance its causes as well. But cheering for millions to be unemployed or saying the entire thing is a monstrous hoax will only be self-defeating.

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From the Economist

A cautionary tale from the future

This newspaper story has just come to light after falling through a gap in the space-time continuum

Sept. 26, 2021

Financial authorities in America and Europe took sweeping powers yesterday to avert a financial crisis by imposing restrictions on markets. In their sights are a peculiar brand of speculators known as “long-buyers” who buy assets not to live off the income they generate but to profit from rising prices.

Apparently these evildoers so destabilized the markets that house prices soared, prompting the former Hank Paulson (now King Henry I of America) to institute capital gains taxes on home sales as a way to drive those prices back down.

Industry analysts said that some of the damage done by long-buyers might have been prevented had a now defunct practice called “short-selling” been permitted. By speculating on falling prices, short-sellers could in theory prevent bubbles from being formed. However, their scope to trade was always limited by regulations and the tactic was killed off during the crisis year of 2008. “It drove us out of business,” recalled George Soros, a former hedge-fund manager, speaking in Central Park yesterday, before adding, “Do you want some ketchup with that?”

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Thomas Dart, sheriff of Cook County, has banned evictions, saying he was outraged at banks evicting renters because the owner was in foreclosure.

“These mortgage companies … don’t care who’s in the building,” Dart said Wednesday. “They simply want their money and don’t care who gets hurt along the way.

“On top of it all, they want taxpayers to fund their investigative work for them. We’re not going to do their jobs for them anymore. We’re just not going to evict innocent tenants. It stops today.”

Predictably a bankers association was horrified by this scurrilous and unwarranted intrusion of ethics into their sick practice of tossing the blameless into the streets. The sheriff responded, bring me the proper and legal paperwork for evictions, and I’ll do it. Otherwise, no.

“When you’re blindly sending me out to houses where I’m coming across innocent tenant after innocent tenant, I can’t keep doing this and have a good conscience about it.”

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Especially when their banks were crazy over-extended in other countries? The government of Iceland has now nationalized all their major banks, their currency is dropping off a cliff, and their stock market has been closed until Monday.

Apparently their banks took a cue from US banks, and went insane on leveraged greed too - but even more excessively. Not a good idea for a tiny country.

How insane did it get there?

In the past five years, people’s average wealth has grown by 45 per cent - and the money has gone into houses and cars, financed by 100 per cent loans based on a spread of foreign currencies. Now the krona is plummeting, loans are ballooning and thousands are defaulting.

Basing the interest rates of car loans on a spread of foreign currencies is howling at the moon madness. Good for coyotes maybe, but not for financial institutions.

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“The Bush administration, which took office as social conservatives, is now leaving as conservative socialists.”

– Allan Mendelowitz

(And I don’t want any squawking in the comments from Marxists about how this isn’t real, actual, 100% Lenin-would-approve socialism. The US is going to nationalize banks. That is socialism, deal with it. Seems to me Marxists should be rejoicing about this unexpected turn of events rather than engaging in the usual theological hair-splitting and being lefter-than-thou.

This is the biggest, juciest organizing opportunity for the left in decades. That a tiny elite have been pillaging the country making billions while everyone else gets screwed is now quite obvious to everyone. Come out from the bunkers, lefties, the mainstream of America is now receptive to your message. )

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Finally

We continue to see the wreckage caused by Greenspan’s no-regulations, cheap money, extreme right-wing Ayn Rand philosophy. I remember being at a client, a precious metals dealer, during the peak of his regime, and being baffled at why the traders treated his deliberately indecipherable pronouncements with such awe. He was then, and remains, an extremist charlatan who believes greed is good and the common good should be ignored, if not spat upon. (He was an early disciple of Rand, part of her inner circle, and that was her philosophy.)

The credit markets are still dangerously frozen. One reason: Credit default swaps from Lehman and WaMu settle this month. Institutions who sold these financial instruments of mass destruction, which pretended to be insurance on what is now toxic waste, may face losses of 80-85 cents on the dollar. $400 bn of Lehman swaps unwind on Friday, so losses for some could be catastrophic (assuming they even have the money to pay, if not, then the other side on the transaction gets hurt.)

Banks are believed to be hanging on to cash both to pay for their own settlement and out of fear that their counterparties may take irreparable damage in the Lehman settlement process. There may be some relief if the financial community passes this test, but with another big settlement, WaMu, later this month, banks are still likely to remain on high alert.

TED Spread at record. Translation: The big banks don’t even trust each other for short-term loans.

Take a bow, Mr. Greenspan. Your policies led inexorably to this day.

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NY Times. December 4, 1914

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Treasury, in a tectonic shift, is now considering capitalizing banks with that $700 billion. This means rather than buying the toxic glop, they will take ownership stakes. Sweden did this a while back during their crisis. It worked - and the government eventually made a profit too.

The plan would be voluntary, but any bank that joined would then have its deposits and debt guaranteed by the US government, a huge market advantage against any bank that didn’t. Capitalizing the banks would directly inject money into the system and help unfreeze the credit markets. This could actually work.

Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: “regime change.”

This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.

Simon Johnson, former chief economist of the International Monetary Fund, has also called for recapitalizing the banks. He makes the sombre point that the consequences of Iceland’s bankruptcy will be both severe and reaching way beyond their borders. Emerging markets in general will get clobbered.

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From Blairwatch in the UK. Read the whole thing.

Capitalism is a John Cleese parrot.
Let’s give it stick and not a single carrot!
Bollocks to the dealer, the broker, the lender -
Social justice back on the agenda
Radical stylin’ going on here
Smoked Mammon sarnies and really good beer
For the poor no fear, for the rich no pity
When Attila the Stockbroker cleans up the City!

Well, capitalism survived the Great Depression, and that era included a major upsurge in hardcore communist organizing, including here in the US too. So perhaps proclamations of ’stick a fork in it’ are a teensy premature.

Ending global warming and creating a cleantech, renewable energy economy (which is what will get us out of the current crisis) will require massive amounts of money and the cooperation of huge corporations. A raggedy bunch of anarcho-socialist greenies from the Left don’t have the chops to create and install the enormous numbers of wind and wave farms, solar power arrays and geothermal plants needed to power our countries, and oh, the grids needed upgrading too.  So, let’s jail the rich who broke the law during their piggish pursuits, and get the rest on board with taking their money and creating something of use with it - like a renewable energy economy.

Besides, I don’t want to eat the rich. I doubt they taste good.

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Dave Riley made this slide show presentation of the ideas of Marx and their direct relevance to the current financial meltdown.

Ironic isn’t it? Here I am bashing together some DIY Marxist homilies to describe the Wall Street debacle and the would be whatevers are wondering that maybe there’s more to it than what’s being offered as an explanation in the local media’s finance commentaries.

That suggests to me that Marxism’s economic analysis — a rather basic element I’d think of the methodology — is suddenly of potent relevance to the here and now. How else can you explain this massive contradiction of financial collapse met with a gross and very public attempt to bail out the big end of town gratis. No strings. No receipts. Take the money (all $700 billion of it)…please!

No wonder people are both nervous and scratching their heads.

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His plan (and he’s been right and early in his predictions of what would happen)

* Guarantee all bank deposits (not just up to $250,000, not just in US)
* Triage the banking system: recapitalize survivors with equity injections, let the rest die
* Dump Bernanke and Paulson, who the public has lost confidence in
* Get ahead of the crisis instead of looking panicky and reactive
* In US, put together $300 billion fiscal spending plan (a new New Deal) to begin to replace the coming collapse in private spending

Roubini is giving free access to his entire site now for a limited time. In Feb., he made twelve predictions about what would happen. Nine have already come true. People laughed at him then. Now they pay attention to what he says.

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Turn the chart upside down to see how far and fast the Iceland krona has fallen compared to the euro. This is a direct result of the collapse of Lehman, who was the major lending facility for the third largest (and way over-extended) bank in Iceland.

TimesOnLine: Iceland has suspended trading in their banks, and the domino effect is hitting the UK.

From the comments:

Have been trying to get our money out of IceSave (Landsbanki) all day. It’s impossible. Website allows you to log on, but will not recognize any attempted transfer of funds. We get a message asking us to call the bank, but nobody is there to take the calls. This is a nightmare.

The crisis is now directly impacting small countries, not just corporations.

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Socialist Unity

If the left publicly opposes the bail out of the banking system, so that we are actually encouraging the collapse of the economy, the tens of thousands of redundancies that would entail, the poverty and homelessness, then we just prove that we are idiots who should never be listened to.

There are, I think, three main reasons why some on the the left oppose the bailouts.

1) It’s a hoax, the crisis is not real, Naomi Klein is right. It’s disaster capitalism, a mild problem exploited for political gain.

Response: After the collapse of the biggest mortgage players in the US, the biggest insurance company in the world, several major US investments banks, a major German mortgage lender, a Brit bank or two, and Iceland, only the most Black Helicopterish would say this is somehow a manufactured crisis.

2) It helps the rich only.

Response: Bank failures and credit market freeze ups affect everyone. Call me crazy, but I like going to the ATM, withdrawing $100, and having the machine give it to me.

3) A collapse would mean the end of capitalism and thus the birth of a glorious new day for socialism.

Response: This is the unfortunate subtext of why some lefties oppose the bailouts. They want the system to collapse, and are secretly cheering on this “crisis of capitalism.” That millions would suffer during such a collapse with no guarantee they would turn to socialism just shows how deluded and self-serving such lefties are. Inept too. Standing on the sidelines clucking about how Marx (or anarchist theory) predicted this would happen, instead of coming up with answers that will help those worst affected, is worse than useless.

The current crisis is a perfect organizing platform for the left. Everything they’ve been saying is right out in the open. Class. A tiny few grabbing the money. The bulk of the population getting screwed. But to organize on it, they need to leave the leftie enclaves and make themselves useful to those who are getting shafted. That’s how to build a mass movement. First, help them. Then deliver the message. Not the other way around.

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Robert Reich, former Treasury Secretary, on the financial crisis

Put simply, the Bailout of All Bailouts has been a dud, at least so far.
Several nations (Ireland, Greece, Germany) have basically guaranteed all deposits. As a result, global capital is moving their way. They’re also thereby creating a new form of socialized capitalism. At the rate they’re going, these nations will soon own and run their financial markets, and maybe a big chunk of the world’s.

If the US does not guarantee all deposits, that giant sucking sound will be billions of dollars leaving US banks. Some think this has already started.

I fault Hank Paulson, first and foremost. He never succeeded in explaining to anyone what exactly he’ll do with the bailout money.

He plans to use the money to bailout Goldman Sachs and screw everyone else. Next question. Oh, sorry, am I being snarky? Well, maybe not. Even the Wall Street Journal says “A Goldman Sachs Group alumnus in charge of the nation’s economic rescue? How unusual.”

Paulson has proven himself uniquely unable to explain anything to anyone. George W. Bush, for his part, is hopeless and hapless. Worse than a lame duck, he’s a seriously disabled parakeet, with no remaining store of public trust. Ben Bernanke seems like an able fellow but his capacity to communicate is almost as bad as his predecessor’s. Obama does understand what’s happening, and could calm global capital markets if he were already president. But he is not president as yet, nor even president-elect.

Paulson’s seeming inability to explain anything is suspect. Either he is incompetent and has no plan (doubtful) or he knows precisely what his plan is and doesn’t want to tell the public.

The leadership vacuum could not happen at a worse time. If credit markets remain frozen, we’ll soon witness a huge round of business bankruptcies. We’re in completely uncharted terrain.

That is the bottom line. Yes, the greedheads are still probably plotting how to grab billions more, but the credit markets are seized tight, and that can not continue. Expect the government to start buying commercial paper and drop the interest rate to 1% in a desperation move.

“This ain’t no party / This ain’t no disco / This ain’t no fooling around.” The world economic system is on the brink. It behooves us all to work together and somehow bring it back.

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Else how to explain that Neel Kashkari, a 35 year old protege of Paulson (former Goldman Sachs CEO), has been chosen to head the $700 billion bailout. Kashkari also used to work for Goldman, at a mere VP level and has a background in engineering. Wow, sounds like he’s just super-qualified for the job. I’m sure they looked long and hard before deciding, darn, no one in the entire country is better qualified than Kashkari.

Ethically, this stinks. The conflicts of interest are obvious. And the simple fact of the matter is that Paulson didn’t really spring into action until Goldman Sachs stock started plunging. Yes, there was and is a real crisis. But the sight of dear old Goldman cratering like all those plebian stocks was simply more than they could bear.

“Get ready to be disgusted by the coming investment bank / Goldman Sachs clusterfcuk,” I’m told…

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Here it is. The new Obama campaign video about McCain and the Keating Five, and their part in the scandal that led to the collapse of 1,000 banks - and inexorably to the present day meltdown. You can view and download it from Keating Economics.

Servers are jammed now, even YouTube. Alternate site. BitTorrent.

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Stock markets across the planet plunged last night, and as I write this, the Dow is down another 5%. Smaller markets are really getting clobbered. The Russian stock market shut down twice today after dropping 15% in just one day.

Jim Cramer just issued a sell everything alert, people who don’t even own stocks are calling me in a panic asking what the Hell is going on, and the VIX, a volatility indicator that indicates stress in the markets, is off the charts. Ordinarily, things like this, by the seemingly perverse logic of Wall Street, would indicate things are nearing a bottom. Chicken Littles filling the streets yelling the End is Near can be a sign a reversal is near. (There is a logic to this, if everyone is bearish, then lots of money is on the sidelines waiting for the green light to signal.)

But… the economy is slowing down, home prices are probably still too high, billions in mortgages got turned into toxic glop and trillions in the derivatives thereof. Plus, the immediate problem is that credit markets have locked up. This has all manner of ugly ramifications. For example, California may need to get an emergency $7 billion short-term loan from the government because it can not sell bonds like it normally does.

California and other states and local governments across the nation are facing financial ruin because they can’t issue bonds to pay for essential services including roads and schools. Most U.S. states routinely depend on short-term financing to keep operating at the start of each fiscal year, until sales tax receipts and income tax revenues begin pouring in later in the year.

One piece of good news. Bank of America settled lawsuits against their now-subsidiary Countrywide, and agreed to change the terms so 400,000 homeowners facing foreclosure will be able to stay in their houses.

My guess: We need a good screaming omigod-the-world-is-ending panic, and then normalcy will slowly begin to return to the stock and credit markets and presumably to the world economy at large. But we aren’t there yet.

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It’s quite a contrast, isn’t it? The financial world is now imploding due to an orgy of greed that built nothing and destroyed much. Meanwhile, the cleantech world is quietly and steadily creating the technologies that will lead to cheap renewable energy and an end to a dependence on oil.

What Google, Kleiner Perkins, and many others are doing is inspiring. They are actively creating a sustainable future and a zillion new jobs too. Will they make billions doing it? Yes. But they, unlike the current jackals on Wall Street, will also create things of lasting value to all.

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“There is no honor among thieves”

The Big Picture says, could be. Bloomberg and the Sunday Times agree and are running investigative stories about JP Morgan deliberately withholding funds from Lehman, forcing their collapse.

Bloomberg is a bit circumspect, while the Sunday Times pointblank says “JP Morgan ‘brought down’ Lehman Brothers”

JP Morgan has been accused by its Wall Street rivals of dealing the final hammer blow that forced Lehman Brothers into collapse in a sensational claim that threatens to spark a colossal legal battle.

The giant American bank is alleged to have frozen $17 billion (£9.6 billion) of cash and securities belonging to Lehman on the Friday night before its failure.

And did JPM Chase then transfer $138 billion of garbage to Lehman while getting a stealth infusion of $138 billion from the Fed?

It is highly likely [or a certainty on my planet] that J.P. Morgan was INSOLVENT and was ‘BAILED OUT’ last Monday, September 15, to the tune of 138 billion dollars. This would explain why the Fed and Treasury dictated that Lehman fail – to disguise or otherwise obfuscate the recapitalization of or illicit transfer of 138 billion to A MUCH SICKER, TEETERING ENTITY, J.P. Morgan Chase.”

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Hypo Real Estate, the second largest real estate lender in Germany, is circling the drain after an emergency rescue failed. They are about the size of Lehman.

The financial system cannot take another body blow of this magnitude. The authorities had better patch this one up over the weekend, or we face even more credit market panic on Monday.

Worse, this could apparently have profound effects on the Euro itself.

Could we just get through one weekend without the collapse of yet another major financial institution? Guess not…

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(Icelandic salted cod. From Flickr.)

The US financial crisis is causing an implosion in Iceland, which is forcing a cascade into the European financial system.

Serious talk of a bank holiday and food hoarding has been heard.

Head of largest oil company says oil imports may cease because of lack of US dollars.

Glitnir, a large bank in Iceland, was way overextended on now-toxic real estate. They were already in trouble when Lehman, their primary line of credit, went under. They had no back up financing and soon could not pay bills. The government was forced to take over the bank, but now no one wants to deal with any Iceland bank. And they don’t want their currency, the krona, either. It has dropped 14% since Sept. 29 against the euro.

Hey, maybe we can go back to barter - frozen or salted cod for wheat and red wine. Worked in the 1930s.

The decision by Paulson and Bernanke to let Lehman die has, in retrospect, turned out to be a serious mistake. The unintended consequences have been huge. Iceland is but one example. Financial institutions have money in the billions they can not access because of the bankruptcy proceedings plus there are enormous amounts of shadow banking system transactions (CDOs, CDSs) that Lehman was a party to that are also frozen and may never be transacted.

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“We called them ‘foreclosure loans‘ because they were doomed to fail,” said the [real estate] agent, who didn’t want to be identified because she’s still in the industry. “The lender expected the borrower to lose the house and the bank would resell it for its higher appreciated value. But the market dropped and they got caught with their pants down.”

So they made loans with no due diligence that they knew would fail? Seems to me laws could have been broken here. Criminal as well as civil investigations are called for, because fraud may have indeed occurred.

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A conservative economist says yes.

And just the other day, I talked to another prominent conservative economist who suggested a somewhat similar plan. I asked whether all these plans didn’t smell of socialism. The economist’s answer: “I think that bridge has already been crossed.”

Actual socialists have been hollering that these plans are not socialist at all, but bailouts for the wealthy. Well, maybe some of them are. But Fannie and Freddie, who own 50% of the mortgages in the US, have effectively been nationalized by the federal government, as has AIG, the biggest insurance company in the world. And that is, without question, socialist.

But the bridge has been crossed. The credit markets have seized up, as witness California saying it may need a short-term federal loan because it can’t access the credit markets. That’s where we’re at now. Their can’t be a plan because, as a British banker said recently, “No one has experience with failure on this scale. No one.”

So, rightfully or wrongfully, the government will do whatever it deem necessary to unfreeze the credit markets, as if part of it is socialist, then so be it.

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The Inland Empire area of southern California is one of the hardest hit areas for foreclosures.This TV report (which I meant to post earlier) shows some of the devastation.

One guy has a business clearing out foreclosed homes. Everything must go. The people often leave behind computers, TVs, furniture, etc. He started the business a few years ago with a handful of employees. Now he has over 70. He tried to recycle the stuff, but Salvation Army and Goodwill are so unreliable in showing up that all the stuff goes directly to landfills minus whatever the crews want that they can carry away.

Another business is spray-painting brown lawns with a biodegradable, safe-for-grass green paint so the house looks better maintained and not obviously vacant.

That businesses like this are thriving shows just how bad things are there. BTW, these are good-sized homes too, 3,000-4,000 sq. ft. Bought in the exurbs by people who drove long distances to get to work. But then gas went up and their variable-rate mortgages reset to higher interest rates as the property value plummeted…

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