Wow, the Mother of All Bailouts Failed to Pass the House (Further Update: Carnage Assessments)

I’m actually quite surprised. The stock market in a panic. I wonder whether Paulson and Bernanke have a Plan B. Jamie Galbraith outlined a good interim idea (needs tweaking but has merit) in the Washington Post last week. Hope someone paid attention.

From Bloomberg:

U.S. stocks plunged and the Standard & Poor’s 500 Index tumbled the most since 1987 after the House of Representatives voted down a $700 billion plan to rescue the financial system.

Sovereign Bancorp Inc. tumbled 66 percent and National City Corp. slid 52 percent, leading financial shares in the S&P 500 to an 11 percent slide. The MSCI World Index of 23 developed markets sank 6 percent, the most since its creation in 1970

“It’s pretty much a nightmare,” said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. “This is the worst we’ve seen it since the credit mess started. Until we know exactly why they didn’t pass it, we’re going to be selling off for a while.”

The S&P 500 sank as much as 87.02 points, or 7.2 percent, to 1,125.99. The Dow Jones Industrial Average slid 631.13, or 5.6 percent, to 10,512 at 2:09 p.m. The Nasdaq Composite Index declined 148.4, or 6.8 percent, to 2,034.94.

The S&P 500 extended last week’s 3.4 percent retreat after the House voted 205 to 228 against the measure to authorize the biggest government intervention in the markets since the Great Depression. The crisis that began with bad home loans to subprime borrowers is threatening to push the economy into a recession as consumers lose confidence and banks cut back on lending.

Some quick carnage recaps:

Financial shares now diving Ed Harrison

VIX Spikes – But It’s Been Worse Bill Luby, Seeking Alpha

Will add to the list. Looking for credit market sightings.

Update 3:00 PM: With being a member of the poor unwashed, I get my data feeds on delay. Yen up to 104, Brent crude is $93 and change, and this article Bloomberg on other reactions:

The Standard & Poor’s 500 Index fell as much as 7.2 percent, the most since Oct. 26, 1987, as 490 companies declined. The MSCI World Index of 23 developed markets sank 5.9 percent, the steepest decline in the measure’s 38-year history. Trading on Brazil’s Bovespa was halted after the main stock index plummeted 10 percent. The euro and the pound sank and bonds rose as governments raced to prop up banks infected by growing U.S. mortgage losses. Crude futures tumbled more than $11 a barrel.

“This was sold as the last straw, the thing that was going to fix everything and it looked like it was going to pass,” said Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. “There’s disappointment that we have this continued stress in the financial sector.”

The MSCI World Index of 25 developed markets lost 73.86 points to 1,176.51, giving it the steepest intraday percentage retreat since its creation in 1970. The MSCI All-Country World Index of 48 nations lost up to 6 percent, the most in its 21-year history. The S&P 500 retreated 74.93 points to 1,138.08 at 2:29 p.m. in New York, and earlier touched a four-year low of 1,125.99. Europe’s Dow Jones Stoxx 600 Index sank 5.5 percent to 251.43, the lowest since January 2005. The MSCI Asia Pacific Index fell 2.1 percent.

The problem is that the focus is on the equity markets are doing, which is highly visible, when the most important reaction is what bank funding rates and credit default swap spreads are doing. Any inputs there appreciated.

Update 3:10 PM: Here is the take from Clusterstock: “Market To Feds: Your Bailout Wouldn’t Have Worked Anyway“:

What’s happened in the past hour?

The House blocked the Bailout Bill (a big surprise)
The market plunged 400 points from where it had been trading
The market then recovered, and is now down only about 200 points from where it was trading prior to the House announcement.
This suggests that the current Bailout itself was worth only about 200 DOW points in the market’s eyes.

And it’s not just the DOW: The credit markets haven’t moved much, either.

This morning, when it seemed the bailout would sail through Congress, the TED Spread spiked up from Friday’s already elevated levels (the opposite of what it would have done if banks had viewed the Bailout as a fix). And now that the Bailout has been voted down, the TED Spread is up only modestly from its levels an hour or so ago. In other words, the market yawned.

Of course, maybe we’re just going to have a delayed reaction. There are 85 minutes left in the trading day. Still time for an honest-to-God crash.

Update 3:45 PM: Good thing Clusterstock left that little caveat….the panic has increased…or perhaps more accurately, the recognition of how bad this credit crisis is is finally beginning to penetrate the denial.

Update 3:55 PM : Yen holding at earlier levels, some recovery in the delayed Dow I get (down 600 vs. 700 earlier), oil not falling further but gold continues to spike.

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  1. Anonymous

    Bernanke is printing.

    Markets are recovering.

    See it wasn’t so bad after all.

    The People Have Spoken!

  2. Anonymous

    “Until we know exactly why they didn’t pass it …”

    Because we don’t want to give you a treat at our expense. Is that too hard for you to understand?

  3. Yves Smith

    I am never happy to see markets tank, but the sad truth is that all this bill would have done is give psychological relief for a short time at tremendous cost, and blocked implementing better measures. Let’s hope someone comes up with a good interim plan and uses the time wisely to come up with a decent bill.

  4. Anonymous

    It is a bloodbath out there – the current ticker doesn't tell the whole story S&P 500 hit 1116.

    1 month T bill hit a low of 0.06%.

    How scary is that?

    2 weeks ago the T bill went for 1.5%.

    As far as the markets recovering S&P is down 6% that doesn't look like a recovery to me.

  5. FR

    The point is that it can get much worse on the markets if the bill doesn't get passed. The S&P is falling 75 points, and I think it's pricing a positive revote on Wedensday. 2-year notes yield is down 42 basis points with spread product widening out big time – total flight to quality.

    It looks like the Fed and Treasury are coming up with rescue plans for banks and doing what they can to stabilize the situation, while the congress – driven by animal-election instincts – makes it worse.

    The congressmen know perfectly well that it needs to go through, but none of them want THEIR name under it, as it is so unpopular with the public. The public is obviously unable to judge, whether it's indeed the right solution and whether it will work, as the complexity is quite high. The public however, sees it as a "bailout of wall st" and wants revenge for all these guys that made millions in the last couple of years too easily. Revenge is a bad feeling. I hope main st and the congress come to their minds…

  6. Dean

    There are two Plan Bs.

    1. The first is to re-introduce the bill ASAP with passage this time.

    2. The alternate Plan B is for Ben to lower Fed rate.

  7. Mara

    What I didn’t have answered on the “revised” bill was whether or not it still had the clause where it’s not up for legal or congressional review and Paulson basically becomes a financial dictator.
    Also, the higgly-piggly overpayment of bad assets without enough corresponding correction on the banks’ side means that the same dumb things will happen again, only bigger.
    As far as the markets being down, I know it’s bad for the schmuck with the 401(k), but given the P/E ratios of these companies, they are overpriced.
    As Yves posted earlier (from Roubini) this ‘solution’ is a bad one and probably more harmful than doing nothing until we have a real solution. Unfortunately we are in a position where the bankers have a gun to the head of the market and are saying “Give us the ransom money, or the economy gets it”.

  8. FR

    Maybe this is part of the plan. Scare the heck out of everyone, and then obtain a positive (market) reaction to a yes-vote on Wednesday. All of a sudden everyone will see it as a savior and start believing that it was necessary and indispensable…

  9. eh

    Wow. I guess we live in interesting financial times.

    It remains to be seen how much of an influence the stock market hissy fit will have. The confidence of “investors” — are there any of them left? — has to be pretty badly shaken at the moment. I mean not long ago people on TV were talking about a 2nd half recovery in housing. I wonder if mutual fund redemptions will also be big news soon.

  10. Sammy

    “Until we know exactly why they didn’t pass it, we’re going to be selling off for a while…”

    Because calls from citizens to their representatives have been running 300-to-1 against this measure, and because the election is 5 weeks away, and because the representatives want to keep their jobs.

    Does that help explain it, numb-nuts?

  11. Dean

    BTW, back to Yves’ point on Galbraith. Marc Faber suggested something very similar; I believe he said increasing the FDIC limit for the current $100,000 to $10 Million. It is conceivable that, if implemented, a great deal of private capital will then to the market’s rescue.

    It seems to me that the situation is similar to the energy crisis. As in energy, the solution might rest in broadly deversified set of alternatives, some public and some private (hopefully more private than public).

  12. Been there

    I’m with Yves. This bill was nowhere close to being a viable long term solution. It was at best a band aid, whose effects would have worn off very quickly just like the last stimulus package.

    My hope is that the market stabilizes soon, even if it that means closing below 10000. Hopefully, nerves will be calmed a bit once it stabilizes, providing proof that the sky won’t fall in 24 hours if a rescue package isn’t passed immediately.

    Then- start from scratch, take the appropriate amount of time and effort and come up with a real rescue plan that makes sense- One that has the appropriate strategy, level of oversight, incentives, and especially one whereby the taxpayers’ interests are truly protected by a specific system of checks and balances that are well thought out. In addition, take the time to correct deficiencies (swaps, Etc) and pursue those who caused this mess. Gotta make sure the bad guys get brought to justice.

    My guess is that this will involve a brand new leadership team since the current leadership (on both sides of the aisle) has completely lost the trust of their constituents.

    ps- thanks for keeping us informed- keep up the great work!

  13. Dean

    Let’s try again:

    BTW, back to Yves’ point on Galbraith. Marc Faber suggested something very similar; I believe he suggested increasing the FDIC limit from the current $100,000 to $10 Million. It is conceivable that, if such is implemented, a great deal of private capital will then flow to the market’s rescue.

    It seems to me that the situation is similar to the energy crisis. As in energy, the solution might rest in a broadly deversified set of alternatives, some public and some private (hopefully more private than public).

    Think how we are approaching the energy issue. Diversify sources: solar,wind, nuclear, offshore, bio-fuels, other. A similar approach might very well be the solution here instead of MOAB.

  14. doc holiday


    Borrowed from the web:

    nyway, if you’re scratching your head about how the bailout legislation, which was conceived over the weekend, ends up numbered H.R. 3997 when they’re already well into the 7000s with House bills already (they’re numbered in order of their introduction), the answer is that they’re going back to a trick we’ve seen them use before — taking an old bill that has passed one House but not both, and hollowing it out and replacing that text with the new stuff.

    So H.R. 3997, an old tax bill that passed the House, bounced back and forth a few times after being amended, but was never passed in the same form by both houses, which means it’s still available as a legislative vehicle. That means that technically, what’s under consideration in the House today is an amendment to the Senate amendment to the House amendment to the Senate amendment to H.R. 3997.


    Why? Because pretending that the bailout package is just a new amendment (in the nature of a substitute) for what now stands as the old body of H.R. 3997 means they can get expedited consideration on the House floor, plus be protected from a Republican motion to recommit [send back to committee, essentially killing the bill].
    In addition to doing this to speed the bill through with fewer chances to kill it, I think they’re also doing this to obfuscate their votes. It’s a lot easier to look up online who voted for “HR 3997” than it is to look up “who voted for an amendment to the senate amendment to the house amendment to the senate amendment to HR 3997.”

    Every Congressman already has a vote on the record for the original version of HR 3997, which was originally “The Defenders of Freedom Tax Relief Act of 2007.” It’s purpose was “to provide tax relief and protections for military personnel.” Of course now it’s being amended to be something completely different and will have a completely separate vote for the amendment. This will make it much more difficult for the average citizen to sort through all of this and determine whether their congressman voted for the bill last year as originally intended to provide tax relief to members of the military, or voted this year to pass the bailout.

  15. HoosierDaddy

    When the FDIC trust fund in danger of going into deficit, it seems like raising FDIC protection limits wholesale might be on about as wise as congress raising the conforming loan limit for the GSEs not long before having to bail them out.

    Also, I thought the FDIC insurance fee is calculated on insured deposits. Wouldn’t raising the limit increase how much the cash strapped banks have to shell out now?

    Also would this incentivise people to pull out of money and bond funds at a really bad time.

    I think we’ve had enough unintended consequences already. Let’s think before we act for once.

  16. Anonymous

    Karen Tulmulty of TIME MAGAZINE on the republican spin that Pelosi’s “partisan” speech is the reason the bill failed:
    “Oh, please. So the House Republicans say that they were willing to let the credit markets slide into the abyss because Nancy Pelosi hurt their feelings?”
    Also, aren’t we all glad John McCain suspended his campaign last week to handle this crisis?

  17. Anonymous

    They are giving that excuse about Pelosi, so they can have a reason to change vote from “No” to “Yes” when Pelosi makes it up to them (or they get some payoff).

    I have a funny feeling about this, not a good one …

  18. Anonymous

    September 29, 2008

    In the context of “Take It Where You Can Get it”:

    Finally, after years of not listening, the House of Representatives” has voted according to
    the wishes of the voting public, right, or wrong, as the “wishes” may be.

    To this I say, Hurrahs, Kudos, Right Ons, and Hallelujahs.

    May a trend be starting…

    Earl L. Crockett
    Santa Cruz, CA

  19. SlimCarlos

    As long as opponents of the bill understand that the current impasse is causing permament scar tissue in productive sectors of the real economy.

    Sure, it was a shitty bill. There are no good options. Roubini wants to unwind the bubble, which is sorta like unwinding You can’t do it. And if you try, you will drive the economy into a little ball of charred carbon.

    “The lights are going out all over [America]. We shall not see them lit again in our lifetime”

  20. Anonymous

    Solution to fax to congress for next bill:
    1) Force all off-balance sheet “assets” back onto the balance sheet, and force the valuation models and identification of individual assets out of Level 3 and into 10Qs and 10Ks. Do it now.
    2) Force all OTC derivatives onto a regulated exchange similar to that used by listed options in the equity markets. This permanently defuses the derivatives time bomb. Give market participants 90 days; any that are not listed in 90 days are declared void; let the participants sue each other if they can’t prove capital adequacy.
    3) Force leverage by all institutions to no more than 12:1. The SEC intentionally dropped broker/dealer leverage limits in 2004; prior to that date 12:1 was the limit. Every firm that has failed had double or more the leverage of that former 12:1 limit. Enact this with a six month time limit and require 1/6th of the excess taken down monthly.

    send regulators in to every financial in the country to determine solvency. If they’re insolvent, they get a quick WaMu-like job: write equity to zero, reorg the subordinated debt into new equity and open them back up on monday as a solvent entity.

  21. FR

    Been there: I think you and the public and some congressmen miss a point. It's not about stocks in this crises – it's about credit. Credit is key to the functioning of financial institutions and corporations, and currently its availability is very low and price extremely high.

    Most people follow the S&P and DJIA, but certain indicators in the fixed-income world are much more important. The ted-spread to give one example. It blew out to 3.5% from a historical average of 0.2-0.3%. It means that the FED can lower interest rates as much as it wants, but the highest-rated corps will pay 3.88%, which is 3-month libor. Citigroup senior 2-year notes yield over 9%, where govies yield 1.65%. That's the key problem right now. And don't kid yourself – stocks will not stabilize anywhere near the current level if something is not done to unlock credit markets. What we will get though, is a surge in defaults as companies fail to find financing. That's why there is no time left to think of solutions. Good luck!

  22. Allin

    Plan C: Crush the shorts

    All short positions on any stock must be closed by next Friday.

    Short selling on any stock remains illegal forever.

    Rally for America!

  23. Anonymous

    Yes, I also noted how that brilliant Clusterstock analysis stopped looking brilliant about 5 minutes after it was posted. Only down 200? Whoops. 700. Down 97 on S&P. 15 more points on S&P We are now back at mid-2004 levels. Of course, still another 25 minutes. Could have a giant rally based on . . . um … I'll get back to you

  24. doc holiday

    Great work here Yves, I really trust you and dis-trust BIG corporate media. You are doing a great service for America by keeping up the good fight — and I know I've heard you say, you make less than minimum wage!

    See: The Age of Paine
    Thomas Paine was one of the first journalists to use media as a weapon againstthe entrenched power structure. He should be resurrected as the moral father of the Internet. Jon Katz explains why.

    If any father has been forsaken by his children, it is Thomas Paine. Statues of the man should greet incoming journalism students; his words should be chiseled above newsroom doors and taped to laptops, guiding the communications media through their many travails, controversies, and challenges. Yet Paine, a fuzzy historical figure of the 1700s, is remembered mostly for one or two sparkling patriotic quotes – "These are the times that try men's souls" – and little else. Thomas Paine, professional revolutionary, was one of the first to use media as a powerful weapon against an entrenched array of monarchies, feudal lords, dictators, and repressive social structures. He invented contemporary political journalism, creating almost by himself a mass reading-public aware for the first time of its right to encounter controversial opinions and to participate in politics.

    >>> Thank you, thank you Yves!

    If you want me to fade away and stop posting shit like this, say the word and I'm gone…

  25. Anonymous

    The people has spoken!
    And the people is taking their money out of the evil banks!
    Hooray! We is all busted!

  26. Yves Smith

    Gang, I have to remind you:

    1. This bill was NOT going to do much of anything for the crunch in the money markets, despite all the hand-waiving to the contrary. The tacit admission came in the Treasury conference call last night, when they said they planned to do NOTHING with the new authority for two weeks, that they PLANNED to let more firms fail.

    2. This was an effort to keep paper at above market prices. That is the only way it would benefit banks as structured. That is, pardon my being crude, pissing in the wind. What every banking crisis shows, including Japan, where they used other means to avoid taking losses (because they had a higher savings rate, they could defer the inevitable longer) is that eventually you have to take the losses and recapitalize the banking system. And their example further shows that if you dork around, you can get caught in a deflationary hole.

    3. The stock market reaction is noise, as unpleasant as it is (IMHO, the stock markets have kidded themselves about the severity of this crisis and have been in serious denial; today reality is setting in) is noise and the credit market reaction, which is what counts, is muddied by massive liquidity injections. But I have to tell you, if $300 billion more in the TAF doesn’t unstick the money markets, no way would this bill have.

  27. Anonymous


    A lot of opponents are pleased that the plan has been voted down, “as now we can take the time to come up with a better plan”.

    Well, to those people I say, take all the time you like to come up with your “better” plan. But you should be forced to account for the dead weight losses that you cause, while you take this time. Time is not free, nor is it cheap in this case.

    I would also ask all those who argue in favour of alternatives eg recapitalization of banks via common issuances, via preferred, sub-debt,…why you think house republicans will be any more inclined to support your plan?

    There is simply a segment of the population that does not know better or does not care about the economic well-being of their families or other families. Whether for reasons for morality (what is caused by “debt” cannot be saved by “debt”) or schedenfreude or ignorance or indifference,…The house republicans are the voice for this segment…somehow they have to be bribed or cajoled or coerced into going along…otherwise, in the words of one of America’s greatest leaders, “this suckers going down…”.

  28. Abbott_Of_Iona

    doc holiday said…

    I was about to hail a great victory for Representative Democracy.

    If you are right we may all have to Hiel Paulson

  29. Been there

    Thanks for your insight. I agree the Dow is not the end all /beat all barometer.

    I follow this blog regularly, so I’m quite aware credit (excess leverage) is the main underlying cause. In fact, in my un-expert opinion, while it might have been the subprime explosion caused by low quality underwriting as the trigger for the current crisis, right now, it’s the tremendous level of uncertainty in the current environment that is truly exacerbating the problem. This uncertainty is a direct result of the exponential growth of CDS contracts issued over the past few years, without regulatory oversight.

    But I disagree with you in that there was (and is still) time to craft a more precise response to this crisis, unlike what we’ve been told. Also, my belief is that the unusual interest rate spreads that you describe are symptoms of the current crisis- not its underlying cause.

  30. Yves Smith

    Anon of 3:51 PM,

    I agree 100% that the logic behind much (not all, some were mad at being railroaded and the skimpiness of the bill) of the Republican oppostoin to the bill bodes ill for doing this right. I don’t know if constituents delivered intelligent opposition, or if they had, if it would have had any long-term impact.

    The message was pretty distressing, a lot of “no socialism, let the markets sort it out” at the worst was the executive pay BS. If you feed at the public trough, you should not be entitled to outsized pay.

  31. Anonymous

    Unreported, as far as I know, is the protesting crowds on Wall Street this morning against the bailout.

    If the debt outstanding is more than GDP then the SOW’s true value is way below 10,000.

  32. FR


    Just two quick points and I’m off tonight.

    1) The extreme spreads are both a symptom and a cause of the crises. It’s a symptom because as people get more scared (ie money market funds, credit funds, hf’s, banks) they buy less credit and go into govies. But it’s also the cause of the crises. When spreads were low and access to credit easy (until the summer of ’07), everyone could refinance, find a source of financing, banks and corps could borrow at great rates and so could homeowners. It is this tightening of lending standards and less credit availability that defines this crises and is its cause and symptom (yes, at the same time).

    2) Paulson’s plan would address the extreme short term funding situation. If you are citigroup and have access to Fed money at 2%, why do you not lend to other high-rated banks for 3 months at 3.5% and make 1.5% in spread? It’s free lunch! Well, it’s because you’re already very long credit. You have too much credit exposure to the entire credit spectrum, including risky names, and considering the size of your equity, you simply can’t take any more credit risk – even if it’s BoA with its AA-rating. If you could offload some of that risky paper that eats-up your risk-budget (ie subprime debt), you would obviously play the game and lend 3-month and 6-month money on the interbank market, as it’s such an easy gain!

  33. Dean

    IMHO, The Pepublicans just lost the election. There is no way that they can come out of this smelling like a rose. By “this”, I mean both the problem itself created under their watch and today’s maneuvering due to some last minute found morality.

  34. Anonymous

    How the HELL do any of you know what would have happened if the bill had passed??? So you contacted your representatives and told them not to vote for the bill, what do we have now???? Why don’t you people just COOL IT and let our elected officials do what they KNOW is best for all??? Anyone can sit and yap, yap on a computer all day. For me I’ve just lost my son’s inheritance and I am furious!!!

  35. tuz


    You are spot on.

    There has been a miss pricing of risk for 20 years…

    But what I can’t figure out, is how will the Fed will tighten the spreads. I don’t believe it can.

    How will banks go forward with the spreads so wide?

    How can business go forward with the current spreads?

  36. Cash Mundy

    The Blood, the Blood…
    [Whew Dawgies, what a stampede! Ol Cash sure took care of some bidness today. Off to the gun shop and the feed’n’seed to invest it in durable goods and commodities…]
    The Horror…

    [And as for Mr Anonymous who gambled his son’s inheritance and lost it: if you were dumb enough to still be long after last week, you should stick to Savings Bonds in future. You sure wasted your time reading Naked Capitalism, and should demand a full refund. And a bailout.]

  37. Dean

    BTW, I agree with many of comments and Yves’ astute analysis that the failed bill was far from an ideal solution.

    Regardless, there not one chance in a million that we are going to get something better instead. This bill, as well as the political choreography, is way past the point of return. A similar bill will pass and Wall Street will experience turmoil for a while.

    Folks, we are past the point of ideal solutions here. This is all about a very narrow band of limited choices with a common denominator. Nothing really worth talking about.

  38. FR

    tuz, that’s the point. The leveraged world we live in, is not prepared for a sudden shock in the cost of money, which we’re witnessing. If spreads stay where they are it’s 1930’s all over again – and maybe worse – as we have a massive wave of defaults and bank failures. The government can not bail everyone out.

    The only solution is to get the spreads to tighten, by getting the banks to lend, and subsequently getting investors back into credit. In order to kick start this process Paulson wants to free banks up a little bit and take the biggest burden off them.

    The economy is circular these days. Before we thought that the fundamentals (growth, unemplyment, inflation) influence security prices. Now we realize, that security prices also influence the economy.

    I’m reasonably confident that it will get passed and should work to some degree (not quite sure whether it’s 40% or 90%), but today was a heck of a day!

  39. SlimCarlos

    >> 1. This bill was NOT going to do much of anything for the crunch in the money markets, despite all the hand-waiving to the contrary.

    I don't know about the money markets, but the bond markets clearly took the proposal as a sign the monetary authorities aimed to reflate the problems away. This is the only solution (even if none dare mention it by name) and now, at least for the moment, it appears to be off the table.

    >> The tacit admission came in the Treasury conference call last night, when they said they planned to do NOTHING with the new authority for two weeks, that they PLANNED to let more firms fail.

    *When* they planned to throw money at the problem is less important than that they *would* throw money at the problem.

    >> 2. This was an effort to keep paper at above market prices.

    This was an effort to throw money at the problem. On another thread, someone suggested the gov't spend a trillion on infrastructure. I agree – a better use of funds, but the idea is the same. Devaluation is the only ticket out of this mess.

    >> 3. The stock market reaction is noise, as unpleasant as it is (IMHO, the stock markets have kidded themselves about the severity of this crisis and have been in serious denial; today reality is setting in) is noise and the credit market reaction, which is what counts, is muddied by massive liquidity injections.

    Huh? First off, this is a market of stocks, not a stock market. And some stocks are trading at absurdly low valuations. America needs more oil, for example, but as of now there is no money available to initiate and/or expand production. The market has seized up. This has nothing to do with the economics of the proposition, which are quite compelling. Rather, this has everything to do with the distortions caused by the markets seizing up in an entirely indiscriminate way.

    This is not a high school science project. Real people will lose their jobs. Real companies will go down the tube. Real and lasting damage is being done.

    All while bank analysts fiddle….

  40. Anonymous

    The dow was down from the very beginning this morning on thoughts that the bailout was not going to be enough. When word came down, the dow was already down almost 500 points…

    Sorry for your son’s inheritance loss. Many people’s parents can’t retire now.

  41. forbes

    “Why don’t you people just COOL IT and let our elected officials do what they KNOW is best for all???”

    Because they’ve such a GREAT job over the past 40 years with the economy..really stellar work they’ve done.

  42. Anonymous

    RETIRE!!!! I already retired and listened to a financial advisor who told me to put my money in the stock market. Now I’m 62, working at Home Depot and hoped to leave something for my son when I die. Guess that won’t happen.

  43. Anonymous

    “I’m actually quite surprised.” — Yves Smith

    Don’t be so modest, Yves. You’re a freaking heroine.

    Untrammeled by modesty, I envisioned the role I would have played in the House today.

    JUAN: “Permission to speak for five minutes.”

    SPEAKER: “Granted.”

    Rising from my desk, I strip off my white shirt, revealing an oiled upper torso that shines under the lights. A collective gasp goes up at the gross violation of decorum. But before objection can be raised, I continue.

    JUAN: “The Secretary of the Treasury would have us believe, that you can petition the market with prayer.”

    I pause for a full ten seconds, to pin-drop silence.

    JUAN: (twisting his lips malevolently) “Petition the market … with PRAYER.”

    Another pregnant pause.

    JUAN: (spewing spittle with every syllable) “PETITION THE MARKET … with PRAY-UH!”

    Rearing back, I place my coiled fists on my black leather trousers, and suck in a gigantic blast of air, winding up for a devastating ‘cri de couer’ finale.


    Ten seconds of stunned silence. Then my homies — the lefty-democrat and righto-republican backbenchers — erupt: overturning desks, slinging chairs, landing punches into turkey-wattle paunches, as a hail of water bottles pelts us from the observation deck.

    When an overwrought freshman demolishes Barney Frank’s lower jaw with a broken-off chair leg, I exclaim, “Man, I’ve had as much grassroots democracy as I can stand.”

    Beating a hasty retreat into the Rotunda, I whip out my phone and ring my broker.

    “Joe? Buy me more gold, more gunpowder, and more whisky. PRONTO!”

    “Can you cover the settlements?”

    “Add it to my tab, Joe. I’m a MEMBER OF CONGRESS. I’ve got UNLIMITED LIQUIDITY!! AH HA HA HA! AH HA HA HA huhhhhhhh ack ack!”

    As I erupt in a bong-induced coughing fit, I hear Joe ‘s reedy New York voice through the phone: “FILLED!”

    — Juan Falcone

  44. Richard Kline

    And hast thou slain the Clusterfuck? OH FRABIOUS DAY! KALOO,KALLAIAIAY!!! You can fool some third of the people all of the time, but you can only buy 205 fools for this one. No oligarchy here,yet; we’re still a democracy.

    I just got up, and haven’t had time to wade through it all. But I’ll say this: Don’t crrryy for the equity markets. These have been stone delusional since long, and are hugely over-valued for where they should be in this economic cycle. We cannot, and hence should not, try to defend delusional, speculative, credit-pumped-up quoted values, only protect ourselves as we can from the consequences of coming down. It wouldn’t surprise me if we go down a third by the bottom, indeed overshoot, but that may not hit until 2010. But the markets coming down are actually A Good Thing, because we can’t move on until they get off the pot (which does NOT, as they have now foound, contain gold).

    I found Galbraith’s plan, or rather sketch, the best of all I’ve read. Yes, it needs tweaks. Yes, there are features in other plans which could well be added. But his plan actually makes functional sense, and would be a compact one to implement. Let’s get _on_ with this thing.

    . . . And don’t forget to watch the sunset tonight, wherever you are, and recall that, no, the world did not end. What has been lost are but illusions—

  45. Anonymous

    What about interrupting the MBS-decline/margin-call/can’t get interbank loan cycle by insuring the loans used to buy the MBSes (and other “toxic” securities)? This should restore banks’ confidence by setting a loss floor on all the loans used to purchases the toxics. And it should do so at a much lower up-front cost, since the insurance is only against defaults.

    BTW, this is not the same as insuring the toxics themselves.

  46. Richard Kline

    So FR: : . . . "[A] plan needs to pass." Yes—but not THIS plan. In _this_ plan, the Hogs eat the public's face, and bill us for the surgery.

    You want a plan to pull your nuts out of the fire? Why don't you get behind a fair and effective one then? We have wasted fifteen months building up to the bullrush to hogtie the public and jam them into the pig trough. So time to ditch the discredited Paulson & Co., and craft a real plan for nationalization and recapitalization, ex-stakeholders who have lost their bets, shorts, and chokehold on the public till.

  47. Anonymous

    Basically, what we’re seeing is Wall Street grabbed by the lapels and shaken. No one saw anything wrong when Wall Street was fueled by smoke and mirrors. Well, the smoke is clearing, and the mirrors are gone. The days of easy money are coming to a close, so adjust.

  48. Juan de la O

    fr, the financial bubble which began building in the earlier 1980s has also been both symptom and cause.

    ‘Symptom’ of falling avg rate of profit of production capital with somewhat lagged turn to increased financial/speculative activities in an attempt to offset. That is, decline in nonfinancial can induce rise and further institutionalization of the financial, which is just what we see in a 2004 Dumenil and Levy paper ” The Real and Financial Components of Profitability (USA 1948-2000)”.

    Causality is acquired as a credit fueled moreless self-fullfilling dynamic which casts an architecture of faux prosperity over that which is in retrogression. The false comes to dominate, always demanding more even as these demands drive its own fragility and death.

    Symptom and cause of decline but taken as its contrary until…

  49. Alan von Altendorf

    Today was the first day in a decade that I felt hope and pride in the American People, in the wisdom of our Founding Fathers and the House of Representatives. Well done. Especially Yves and Mish, who courageously spearheaded this outburst of courage.

    The right thing is so rare, I’m made quiet and humble by it. Thank you.

    The right thing is also simple, if there is more to be done, which seems obvious. Fund the FDIC.

    Alan von Altendorf

  50. Richard Kline

    So FR: ” . . . {I]t’s all about credit.” Ye-es-sss; but. It’s not that there isn’t money in the system to lend. But a) we don’t know who the next Lehman’s is so banks don’t want to lend to each other, and b) the banks have no incentive to lend if they believe that they will be bailed-out at irrationally favorable numbers. Buying bogus assets from gutted Hogs will not bring down credit spreads or promote lending: they are under no obligation to lend to the public, even and bad numbers. All the Paulson Proposal would accomplish is a three-week punt. The country needs better than that, but, yah know, real solutions will involve a little . . . pain. For all of us, yes, and Americans have been promised that it will only be stupid wogs who get any pain out of our decisions. But it ain’t so.

    Want to unfreeze credit, then? a) Name and close insolvent financials [a great big mess, but we won’t move on until we do]. b) Make clear to the banks that they Santa ain’t comin’ with a sack o’ the green, so they can clean up and start lending or get out of the way. c) Charter several hundred billion worth of lending institutions with some of that loot that was going to be given away with the mission to lend to sound businesses. This can’t be done quickly, but the turnaround time is on the order of six months.

  51. Moopheus

    “Until we know exactly why they didn’t pass it, we’re going to be selling off for a while.”

    This is indeed a marvelous quote. I think I will try to find this guy’s email address and send him links to those videos of Reps. DeFazio and Kaptur telling them exactly why.

  52. Anonymous

    I see you don’t have Jim Sinclair’s MindSet listed, although not a blog it should get a honorable mention.

    He was one of the outspoken few who saw this all coming years ago and it is all archived onsite with his prediction of a possible outcome. May I suggest you do a personal interview with him?

    BTW, the Democrats hold the majority in the House and still couldn’t pass the bailout.

  53. John Law

    Paulson shall Just resign after coming out with a 3 pages plan that will make him above the LAW. This is not communists. This is Dictatorship on Wall Street. Where is the meltdown they warn? Asia markets are fine. Dow Future is even in green today. We cannot bailout wall street gamblers. Vote againt those that vote favour for the bailout.

    USA can get a better plan. Build the future such as roads,Railways,new nuclear plants. This can create jobs not toxic debts on wall street.The properties supply and demand out of whack. If this $700 billion bailout is pass, the taxpayers going to pay for it long term.

  54. Richard Kline

    So Juan de la O, I agree with you assessment completely. A failing real economy encouraged over-speculation in the FIRE economy, but it was faux ‘growth’ and vapor profit. What we really see is that the phony numbers of the last ten years masked the absence of _real_ profits in the US economy. It is clear the our legislators simply do NOT get this. But the invention of more zeros behind the character in the debt column of our country cannot obviate reality, only make its final arrival that much more painfully impactive.

  55. Richard Kline

    So Juan de la O, I agree with you assessment completely. A failing real economy encouraged over-speculation in the FIRE economy, but it was faux ‘growth’ and vapor profit. What we really see is that the phony numbers of the last ten years masked the absence of _real_ profits in the US economy. It is clear the our legislators simply do NOT get this. But the invention of more zeros behind the character in the debt column of our country cannot obviate reality, only make its final arrival that much more painfully impactive.

  56. Flow5

    It would seem that somewhere, somehow, if total net debt (not just Federal Debt) keeps rising faster than production (Real-GDP), the burden of interest charges at some point now indefinite and unknown, but nevertheless real, will become too great to carry.

  57. Flow5

    Any deficit, by definition, creates a demand for loan-funds. The larger the deficit, the higher interest rates will be, or the less they will fall.

    Any given deficit should be evaluated in terms of: (1) the size of the deficit in the context of the size of future deficits, and the accumulated debt relative to the means and costs of financing the whole: (2) how the deficit is financed: (a) from savings or (b) commercial bank credit, i.e., newly created money; and (3) the purpose for which the deficits are incurred.

    Prorating the federal deficits over the entire spectrum of federal expenditures, it can be said that virtually all of the current deficits are attributable to defense spending, military and civil service pensions, interest on the debt, and welfare and unemployment benefits. Social security for now is not include in the above list since only a very small proportion of social security benefits are financed from non-social security taxes.

    From an economic standpoint, only interest is “untouchable”.

    If current projections of Federal Deficits materialize in this, and the next few years, interest rates (both long and short-term) will be driven up sharply by the increased demand for loan funds.

    I.e., any recovery in the economy will present a “Catch 22” situation. An upturn in the economy will add increased private demand for loan funds to the insatiable demands of the Federal Government. The consequent rise in interest rates will effectively abort any recovery.

    Raising taxes to accomplish a reduction in the deficit would be counter-productive. Most of this debt is short-term. Combine this with the factor with the constant roll-over of some of the long-term debt and it becomes obvious that the burden of higher interest rates will be compounded.

    The burden becomes a function of the major portion of the debt, not just the current deficits. The burden, in fact, becomes exponential. In other words, if the trend is not stopped, the debt inevitably has to be repudiated.

  58. Flow5

    Those who are wont to minimize the ill effects of the deficit are prone to compare the size of the deficit with nominal GDP, as if the volume of nominal GDP were independent of the size of the deficit.

    Unprecedentedly large deficits “absorb” a disproportionately large share of nominal GDP.

    Present deficits are unprecedented no matter how measured, and the past gives us no reliable guide to the future effects of deficit financing, beneficial or otherwise.

    To appraise the effect of the federal budget deficit on interest rates, it is necessary to compare the deficit, not to GDP, but to the volume of CURRENT SAVINGS made available to the credit markets. The current deficit is absorbing about 24% of gross savings.

    The more alarming aspect of the deficits is not the effect on interest rates but the effect of high interest rates on the level of taxable income and the volume of taxes required to serve a cumulative debt now exceeding $9.7 trillion.

    Both high interest rates and high taxes induce stagflation, thus eroding the tax base and increasing the volume of futures deficits

  59. Flow5

    It should be recalled that the charges on debt are related to a cumulative figure; and since the multiplier effects of debt expansion on income, the ingredient from which the charges must inevitably be paid, is a non-cumulative figure, it would seem that the time will inevitably arrive when further debt expansion is no longer a practical or possible expedient, either to provide full employment or to keep debt charges with tolerable limits.

  60. Flow5

    The significant economic purposes for which a debt was contracted, or the manner in which it was financed, is of inestimatable value in evaluating it’s impact.

    For example if the debt was acquired to finance the acquisition of a (new-security), the proceeds of which are used to finance plant and equipment expansion, rather than the purchase of an (existing-security) to finance the construction of a new house, rather than to finance the purchase of an existing one (as will Paulson’s planned $700 bill bailout)
    to finance (inventory-expansion), rather than refinance (existing-inventories).

    The former types of investment are designated as “real” as contrasted to the latter, which constitute “financial” investment (existing homes).

    Financial investment provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy. Compared to real investment,it is rather inconsequential as a contributor to employment and production.

    Only debt growing out of real investment or consumption makes an actual direct demand for labor and materials.

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