I too was confused by Krugman. Yet the 'Pawn Broker for Wall Street' comment is at the center.

Wall Street will keep up the political pressure until something like the 1980's S&L Bailout is done. It wants the Federal Government to end up owning thier bad loans. This will eventually happen, perhaps the best thing to do is dust off the plans for the Office of Thift Supervision. The eventuality of this is why the Krugman article seems so contorted.

I am amazed how quickly the S&L crisis, and the current subprime bubble materialized. It seems only 3-4 years of a rush by banks to signup dubious loans, results in a decade or more of assets to be worked off.

Really it's good article thanks for sharing

Not trying to be obnoxious or snarky . . . You must have something in mind when you say "we know how to keep the financial system operating even as banks go into bankruptcy and receivership." What is it? Seems as if it would be an utter disaster not just a collection of disruptions.

Well Dean, as you have pointed out in other contexts, their is a political logic to it. Politicians respond to loud voters and campaign contributors, and both are screaming for help to subsidize housing prices and shift losses from them to all taxpayers (one could say to "socialize" the loss). Justice and economic merit have little to do with it.

While I'd love to see the hedgefund set have to eat their yachts as much as the next guy.

But we're not talking about them.

Apparently, according to the whispers, we're talking about just about every single bank in the country.

We're talking about most of the pension funds.

And, according to the whispers, we're talking about $100 Trillion Dollars. (Not a typo.)

But what do I know. I'm just hearing the whispers repeated back and forth in the echo chamber that is the internet.

Given the amount of housing wealth about to go bye-bye ($8 Trillion wouldn't be surprising), given the amount of leverage commonly used in hedge funds (10x), and given the top end leverage that's used (ref: Carlyle Group was 32x), the $100 Trillion number may actually be right.

Doesn't a lot of this depend upon how we bail out the banks?

If they are extended loans so they can liquidate in an orderly fashion and later pay back the loans, won't that save the taxpayers money- given that it prevents us from buying their bad loans. Isn't this what happened with LTCM?

I have no sympathy for the jet set but nor am I out to get them- except to make them pay their fair share of taxes.

i want to follow up on mark's comment, with which i agree.

we've never had this much leverage in the system, and we've never had this much junk in the system, so dean, i'm really curious: what makes you think that we "know" what to do? could you outline what we "know?"

I still fail to understand this TAF arrangement. The Fed is loaning out this money in exchange for mortgaged backed securities as collateral. If the borrower institution defaults they are left with a bag of warm spit. Why not require some real assets as collateral? Are these banks technically insolvent? Could someone explain this... Dean?

Right on the money there. I am tired of these bubble runners- the only way to stop it is to stop the bailouts.

Dean, thanks for telling it like it is, with brilliant insight and accurate predictions. I read your stuff back in 2005 and it helped persuade me to sell my house and rent, plus sell two investment properties in bubble-central Florida. You have been one of the few voices of reason, and you have my sincerest gratitude. More people should have been receptive to you message, but they were blinded by greed and mass bubble psychology.

Dean,

I read Krugman's article a bit differently. He seems to be acknowledging that the Fed lacks the ability to come to the rescue. He also seems to be suggest that he wishes the Fed had the ability to clear up this mess. We all realize that cleaning up this mess is not within the ability (and some would argue not within the competency) of the Fed.

Also, we may even agree that a Fed, acting prudently, had the the ability to prevent the housing bubble from rising to such a tremendous threat to our economy and well-being. But lets face it, since 1980 we have swallowed the so-called conservative line that government just can't get it right and we have elected a number of men to office who have not been content to belittle the role of government but have even been intent on actively preventing government from taking an appropriate role in regulating commerce in the public interest.

Lets hope we can redtify this soon.

I really like the way Dean is thinking about accountability for these rich and frequently less-than-competent types who manage to damage the national economy with their antics.

Dean,

I know a little about bank closure and receivership. Congress mandates the FDIC to take over failed institutions with the LEAST amount of cost. Of course, cost is a tricky thing as cost for how long. Resolution Trust Corp was set up to do the job in the '80s so looking for new mgmt team to run failed banks was not and is STILL not part of the given authority.

I doubt very much that Congress will even consider changing the law let alone able to pass any bill. Too many average people are ignorant while the powerful always have access and can influence.

I hope you have a chance to read this and give your point. I know this is thread #12.

It seems to me that the 800 lb. gorilla that no one is talking about is energy. We know that the usual suspects have, through a combination of greed and willful blindness, torpedoed the economy and sent us into a recession, or worse. But we’ve never experienced a situation where a serious economic downturn runs headlong into an endless energy crunch.

You may have noticed that Bush asked the Saudis to increase their oil output, and that their answer was an emphatic “No.” It looks like our oil supply has peaked, and we can expect a short supply plateau followed by a long production decline. Given the increased energy demands that we’re seeing from China and India, and knowing how those demands will impact global energy prices if we can’t increase current production levels, it’s hard to imagine any kind of a soft economic landing - regardless of what Congress and the Administration do to address the fallout from the sub-prime mess.

In other words, what happens to America if gas and diesel fuel are at $8/ gallon in two or three years?

The bourgeois rule in a bourgeois democracy. You can be sure that they don't give a damn about their wage-slaves below decks when there's this big of a hole in the main sail.

Time to fire the Fed. Install a public central bank and create credit money … money that can be created without debt …

Why the hell should we pay interest on our own money …

The privately owned and operated Federal Reserve has proven that it can’t be trusted to operate in the public’s interest.

How about a market solution?

Bail out banks with public money, in return for higher tax rates for 20 years. The higher tax rates would be a way for banks to acknowledge their public debt. Banks declining the bailout would not pay the tax surcharge.

Another version (I'm sure we can come up with dozens) would be to provide a bailout, on the condition that executive pay be limited to 250 times the average income of employees.

The problem seems to be the willingness to accept public rescue without acknowledging any public obligation.

Yes, but when the economy tanks, the wage slaves are going to be the ones who get hurt, not the rich guys with their millions in the Caymans. The waitresses are not only not going to have health insurance, they're also not going to have jobs and homes and fuel, but I guess you have to break a few eggs to make a revolutionary omelet, no?

J Bean:

Yes, so lets just give billions more to the rich managers and hope their continued mismanagement keeps the economy afloat. Maybe they will leave bigger tips with their gardeners and waitresses, and $5000 hookers.

OT, but the time seems to be right for this gem from Brecht:

THOSE WHO TAKE THE MEAT FROM THE TABLE
Teach contentment.
Those for whom the contribution is destined
Demand sacrifice.
Those who eat their fill speak to the hungry
Of wonderful times to come.
Those who lead the country into the abyss
Call ruling too difficult
For ordinary men.

Someone else posted comments using the name "Mark" that I have used in the past to post comments to this BLOG. I will post comments using a name other than "Mark" in the future.

I've got a weird idea: how about if the Treasury offers to buy up all those CDOs and whatnot at five cents on the dollar, take it or leave it.

Then give the Treasury lots of latitude to renegotiate loans on, say, the first $500,000 of principal per homeowner, with the object of keeping first mortgage loan balances below house valuations.

Anonymous:

No, I don't think that we want to give more money to the fat cats. However, if the government allows uncontrolled economic meltdown, you have to acknowledge that the "wage slaves" will be hurt far worse than Richie Rich. And then the "wage slaves" are going to go out and vote "against their economic interests" for God's Own Party candidates.

goooooooooooooood