Batten Down the Hatches!
Written on Tuesday, September 30th, 2008 at 5:48 am | by DJBThe U.S. Congress has rejected the Paulson bailout plan 228-205 The Dow has dropped 777 points. Predictions about what happens next are taking on an increasingly dire tone. ‘Gloom and doom’ doesn’t even come close. This is really scary. Will we get bank runs? Martial Law? Blogging is a fine luxury. But we may even have to give it up.
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VERY VERY scary raised to the nth Power.
scary indeed.
is this just a psy war game ????
Congress will try to do it again within the week,after the senate’s move.
If nothing happens,all we can do is watch and wait.
As I watch the news I hear them saying,that it is not yet like 1987, if that was like a heart attack,this is just panreatic cancer.
How reassuring.
Not cancer. Wrong analogy. It’s more like…the Core is uncovered in a 700 billion megaton nuclear reactor. When it melts down and hits the water table, even the Guys in Pajamas will wake up in Afghanistan.
I think the losers in this instance will be mainly those who have an unshakable habit of living by the results of other people’s thinking (courtesy insight from Steve Jobs).
Tough luck na lang. Weather-weather lang yan. The only solution is to hunker down and weather the storm.
The “core” principles of big business should be rethought. progress through innovation not salesmanship and marketing. Efficiency not hype. Less psychology and more real down-to-earth accounting.
Karl Marx did get some things right about Capitalism.
This is not psywar. these are the middle and low income famiies in action sending e-mails of outrage to their representatives. November is also election of the reps.
now the socialists/liberals are gleefully reaping the poison fruit of their foolish ideology. spending money they didn’t have to satisfy their bleeding hearts, forcing the government to put undeserving people in homes they couldn’t afford, and now asking the taxpayers to pick up the tab, are just some of the root causes of this debacle. but the greatest danger is that this dire situation could help elect the wrong candidate for president, not for his personal merit, but on account of this “crisis” regardless of who really is to blame. scary indeed.
whether there is bailout or not, the losers will be the US taxpayers. And the winners are the CEOs of the financial institutions who have golden parachutes which they are going to receive regardless whether their companies are liquid or not.
The Stock Market is a sideshow compared to the potential freezing up of the Credit markets which the bailout was supposed to head off.
You are incorrigible CVJ! This wasn’t Capitalism that failed, but the socialistic guarantees–posing as deregulation–for the large Wall Street firms that went nuts with leverage. They talked capitalism but practiced Big Govt Socialism. The bailout is really more of the same.
So what if the Paulson package did not pass Congress…
The major parties in this mess have already come under Federal oversight and shelter so the Fed can refinance the banking sector and the bailout is really redundant.
This package was together with the AIG bailout and Lehman trashing was about saving Goldman Sachs and Morgan Stanley. It is called crony capitalism and not socialism for the rich…
They simply throw away this plan and simply increase the reserves of the FDIC and set up a company to take over mortgages and foreclosed homes and renegotiate prices. Restructuring is painful process where all concerned take a hit.
You know they call it the bankruptcy process as outlined in the U.S. constitution.
Why should the Philippines have anything to worry about when the banking system is still in its primitive stage. Very little linkages and Lucio tan has more capital than the BSP…
What a joke!!!!!
DJB, let’s get our sequence of events right. The attempted bailout was a response to the financial crisis that resulted in the collapse of multiple Financial Institutions like Bear Stearns, Lehman, AIG, Wachovia, Fortis, Merryl Lynch etc etc. The collapse was a result of a chain reaction of bad housing loans which were repackaged into financial instruments (i.e. derivatives) and resold. This were made possible by Financial Deregulation as well as the opaque manner in which Credit Rating Agencies assigned its ratings (e.g. ‘AAA’ for subprime loans).
End result is the loss of confidence in the financial system and the unwillingess of banks to lend to each other. The bailout was then supposed to absorb the underlying bad debts (at taxpayer’s expense) so that these institutions can regain confidence and resume lending. Bottomline, the purpose of the bailout is to get Capitalism’s confidence game going again.
cvj,
I’ve no problem with your sequence of events. But was that “free market capitalism”?–when the normal mechanism of risk, reward and punishment is aborted by condoning leverage of 150 to 1 (as in the case of AIG and Lehmann and others?). I think it’s more like crony capitalism.
Saw the whole disaster unfold at 2AM Manila time.
Let the Tans, Tys and Sys scramble to shield theire exposures.
What should scare you and me is what would happen to our SSS and GSIS pension funds. Winston Garcia has become scarce lately!
Likely the US Congress will pass some kind of legislation, which however will ignite a fulminant global inflation, especially for currencies so closely tied to the dollar and because of our reliance on OFW remittances. But panic and bank runs would be a global disaster. Looking deeper into it, I don’t think there is any choice but to do some kind of “socialist” bailout by the US govt. Or as Pelosi called it a “buy-in” by the US taxpayer into all these firms in order to save the whole system. We need help from economists thought to help us sort this out. I know I’m out of MY league on this issue.
DJB (at 10:51 am), you have to go back further than that to get to the cause of the Financial Crisis. What led to the buildup of debt that the Bankers are asking the government to absorb? That would be the buying and selling of derivatives which was supposed to take advantage of the financial markets to minimize risk but instead ended spreading and magnifying risk. That buying and selling of derivatives falls squarely under the workings of Capitalism. It is that part that failed.
cvj,
If you mean the failure of Adam Smith-capitalism then I agree. But from what I’ve been reading in various blogs (like The Big Picture of Ritholz) the fundamental reason those derivatives became so toxic was the removal of leverage caps and capitalization requirements when the Stegall (?) Act was repealed. This allowed derivatives and credit default swap instruments to get outrageous 150-to-1 ratios that were outlawed back in the Great Depression. But like I said we need some professional economists input here. I wonder where Roehlano Briones is when you need him. We need to get a guy like that into FV, I think. Need to bone up on a subject I am not at all expert in. Things are grim Stateside. Was just talking to my brother out in California…the department stores and car dealerships are deserted!
DJB (at 12:24 pm), then we’re once again in [violent] agreement, at least we seem to be on the same page. IMHO, the go-to guy here would be hvrds who has been prophesying something like this since last year. So far he has made the right calls compared to the Investment Banker types over at Manolo’s blog, although i fundamentally disagree with his implied recommendation to go back to the Gold Standard.
We need help from economists thought to help us sort this out.
Pfsh. Just what we need. They got us here in the first place.
Speaking of prophesy. I found this on the internets. Ron Paul’s speech from 2003.
Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.
Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out.
Jeg, if it were limited to Fannie & Freddie, then the US government takeover of these institutions would have ended the issue. As it is, it is not Fannie and Freddie that are asking for the bailout but the private banks. As i mentioned above, what magnified the effects of the housing bubble is the buying and selling of derivatives between Private Financial Institutions. You can’t blame that on the government. No wait, actually, you can blame the US government for deregulating the market in the first place (reference DJB’s account above of the repeal of Glass Seagall in 1998).
As far as housing is concerned, here in Singapore, the government via its ‘Housing Development Board’ (HDB) has made it its business to ‘interfere’ in the Housing Market for the past 40 years. The result is that more than 80% of Singaporeans have their own homes, courtesy of the government, minus the hassle of a mortgage crisis.
I just can’t see ‘deregulation’, cvj. Maybe we’re talking of degrees of regulation, but what the US does is akin to, as DJB said, crony capitalism, still regulated. But I see where youre coming from. The Filipinos are huge state fans and nobody moves here because the government is supposed to take care of everything. Might as well use that and keep our fingers crossed. We could get lucky. Our middle class has abdicated anyway, so what choice do we have?
I happen to agree with hvrds on putting something behind the money we print instead of IOUs.
prescription is yes to bailout but jail all ceos and VPs.
What is happening in the US financial market is no argument against Capitalism or for Socialism. Indeed the best arguments for Capitalism and against socialism have already been made. By Russia and China! (HVRDS notwithstanding).
Yes, derivatives were supposed to even things out with fluctuating prices. It was like putting a bet against Ateneo though you are Atenean. If Ateneo loses, at least you’ve got money to assuage your sorrows. But the way financial institutions ended up doing derivatives (I remember reading a critical article way back in the mid 90s) was more like parlay betting.
Re GSIS. I really think GSIS is in trouble. This must be the reason why GMA went to the States.
Jeg, the deregulation part has to do with allowing an unregulated trade in derivatives (like credit default swaps) among financial institutions and unregulated ratings by private agencies such Standard & Poor and Moody’s which turned the whole process into a giant pyramid scam.
DJB, again i think sequencing matters. I think China would be a good argument for Socialism-first (Mao to take care of inequality by getting rid of the Oligarchs) followed by Capitalism (Deng-style reforms to develop the market albeit with guidance by the State). Russia in the 90’s would be a good argument for keeping away the IMF (as described by economist Joseph Stiglitz in his book ‘Globalization and Its Discontents).
Unregulated Capitalism tends to give rise to inequality (as represented by the Oligarchs) who outlive their usefulness and have to be periodically swept away by Socialism. Then the cycle starts again. You can see the same phenomenon in China where inequality has worsened. The Philippines, for its part, has not even begun the process of spring cleaning itself of Oligarchs so we are still in Stage 0.
First,
I agree with the Cat, that the constituents pressured their reps on the votes to reject the bailout.
as for the philippines not to worry because of our primitive banking system and that lucio than has more money than the bsp.( J_AG and HVRDS sounded the same on that one)
That is true,but I still think we should not take the comforting and calming statements of our leaders that we are very safe.
GSIS could be one,why is winston garcia, quiet and why won’t he tell us where on earth he invested the pension fund(was that $1 billion()he said the fund managers were European,but was that enough?).
Remember our so called primitive banking system got rid of their bad loans (also real estate related) and cleaned up their balance sheets through this special purpose vehicles.
Metro bank came clean and said some of those asset managers were subsidiaries of Lehman.
What about the other banks, how did they cleanse their balance sheet of bad loans?
I have a question,what is the composition of our 36 Billion dollar reserves, I know there is gold,sdrs,ofw money,foreign investments,etc but how on earth it arrived to that amount.was it from numerous currency swaps? or plain overstatement of our reserves?
Sec. Paulson was largely a part of it, he knew the sky was falling. Just a year before he became secretary in 2006, he, as Goldman Sachs CEO securitized $68 billion in residential mortgages and $23 billion in “other assets” primarily related to cdos.
Last March, McCain (probably coached by his economic adviser Phil Gramm) spoke of MORE deregulation to ease the impending crisis.
Then in May, again this year, Bush announced he will veto a $15B bill to aid victims of foreclosures and another legislation that aims to provide $300B to struggling homeowners because it would “open taxpayers to too much risk”.
Today?
Per our BSP and GMA’s press releases, our country is insulated from escalating financial crisis battering the US economy and now spreading in EU countries.
I will raise some hypothetical questions. Our country has latest combined public and private foreign debt of US$58 Billion. first, if our lenders got a hit from US financial crisis and thus experiencing liquidity problems, they decided to call the Philippine debts and demand outright payment through offsetting of our deposits abroad, what would happen to the Philipine economy? If local private banks also demand the outright payment by the government and local debtors of their debts in the event they encounter liquidity problem, can our government be able to pay considering that its also in deficit? Our BSP should take a look at the debt papers if there are terms and conditions to that effect.
Second, our BSP announced that its latest foreign exchange reserves is US$39 Billion plus the monthly remittances of OFWs, exports and foreign investments less the imports and debt repayments. It appears that BSP foreign exchange reserves is not enough in a worst case scenario I mentioned above. What would happen?
I hope no one calls me nagmamarunong, to those who will; wala na akong magagawa. just giving jacks’s hypothetical scenario a shot.
First our interest payments are still automatically appropriated as far as our budget is concerned,unless our legislators change it.
House bill 1721 attempts to ammend marcos and aquino’s presidential decree and executive order, which calls for automatic appropriation of interest and principal payments.
The chances of us having our budget reaching almost $ 60 billion and purely dedicated to paying debts,is very remote. It will never happen.
never pa tayo nagka 2.4 trillion peso budget,to add other items you need at least 300 billion?
san kukuha ng pambayad,uutangin mo ulit sa IMF-WB????
If that happens I will support the idea of our country defaulting on our debts .
and as what happened in the states that the constituents pressured their congressmen to reject the bailout.
We can also pressure our congressmen not to decide on that ,the moment they hint on doing so(paying debts one time big time).
Just look at the public school teachers charging to congress for a pay hike, and those pro RH bill also charging congress kahit wala naman nagyari kundi photo-op.
I think our representaives are giving in to the involvement of their constituents little by little. I hope that will be the case in all issues.