"We Are Threatened by a Veritable Disaster"

I must confess to having read only a bit of economist Axel Leijonhufvud’s writings, but what I have seen, I have liked very much.

Leijonhufvud’s current post at VoxEU does a very good job of looking at the economic mess the US is in and assesses policy options. It is a remarkably straightforward piece. Most of the information cited will be familiar to many readers, but he connects them and concludes that stimulus will almost certainly be ineffective unless undertaken on a scale that would produce very serious inflation.

From VoxEU:

This recession is different. Balance sheets of consumers, firms, and banks are under strain. The private sector is bent on reducing debt and this offsets Keynesian stimulus more than standard flow calculations would suggest. Bank deleveraging is by far the most dangerous. Fiscal stimulus will not have much effect as long as the financial system is deleveraging.

This is not an ordinary recession that differs from other recent episodes simply by being somewhat more severe. It differs in kind.

Past recessions and the reallocation of employment

The end of the Cold War brought a decline in military spending and a recession which impinged most heavily on the states, like California, where the military-industrial complex was an important part of the local economy. The nationwide unemployment rate rose from 5.25% in 1989 to 7.5% in 1992. It then fell every year reaching just under 4% in 2000. The “free market” took care of the recession of the early 1990’s. Resources moved from the defence industries, trickling into other uses through innumerable channels. The federal government did not need to take a hand. Beginning in 1993, the federal deficit in fact shrank every year turning into a modest surplus in 1998. That was a very ordinary recession.

If the current situation were at all similar we would expect a recession in residential construction with unemployment among construction workers and mortgage brokers. Naturally, recent boom areas would be hard hit but we would expect resources gradually to trickle into alternative employment. Instead, we are threatened by a veritable disaster.

Balance sheet recessions

What is the difference? It resides in the state of balance sheets. The financial crisis has put much of the banking system on the edge – or beyond — of insolvency. Large segments of the business sector are saddled with much short-term debt that is difficult or impossible to roll over in the current market. After years of near zero saving, American households are heavily indebted.

The holes that have opened up in the balance sheets of the private sector are very large and still growing. A recent estimate by Jan Hatzius and Andrew Tilton of Goldman Sachs totes up capital losses of $2.1 trillion; Nouriel Roubini thinks the total is likely to be $3 trillion. About half of these losses belong to financial institutions which means that more banks are insolvent – or nearly so – than has been publicly recognised so far.

So the private sector as a whole is bent on reducing debt. Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes. The cash flows supporting the servicing of debts are dwindling. This is a destabilising process but one that works relatively slowly. The efforts by financial firms to deleverage are the more dangerous because they can trigger a rapid avalanche of defaults (Leijonhufvud 2009).

The Japanese example

Richard Koo (2003) coined the term “balance sheet recession” to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.

The Great Depression counterexample

The US Great Depression saw no consistent policy of deficit spending on adequate scale in the 1930’s. War spending not only brought the economy back to full resource utilisation but also crowded out private consumption to a degree (Barro 2009).1 The deficits run during the war meant that:

At war’s end, the federal government’s balance sheet showed a debt of a size never before seen, but also

The balance sheets of the private sector were finally back in good shape.

At the time, a majority of forecasts predicted that the economy would slip back into depression once defence expenditures were terminated and the armed forces demobilised. The forecasts were wrong. This famous postwar “forecasting debacle” demonstrated how simple income-expenditure reasoning, ignoring the state of balance sheets, can lead one completely astray.

Lessons from the two cases: Fill the financial sinkholes first

The lesson to be drawn from these two cases is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. During the years that national income fails to respond, tax receipts will be lower so that the national debt is likely to end up larger than if the banking sector’s losses had been “nationalised” at the outset.

Sweden’s successful policy mix: Don’t forget the mega devaluation

The Swedish policy following the 1992 crisis has been often referred to in recent months. Sweden acted quickly and decisively to close insolvent banks, and to quarantine their bad assets into a special fund.2 Eventually, all the assets, good and bad, ended up in the private banking sector again. The stockholders in the failed banks lost all their equity while the loss to taxpayers of the bad assets was minimal in the end. The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30% devaluation of the krona which produced a long period of strong export-led growth. Needless to say, the US is in no position to emulate this aspect of the Swedish success story.

Yves here. I wouldn’t bet on that. In fact, if I were the Fed, I’d very much want a cheaper dollar, but the conundrum is how to achieve that without causing more global instability. Back to the article:

Perils, present and future
Strong contractionary forces are at work in the US emanating both from the capital and the income accounts. Stabilisation requires major policy actions on both fronts.

First, the financial system must be recapitalised so as to remove the relentless pressure to deleverage from the banks

Second, a spending stimulus sufficient to reverse the rapidly worsening decline in incomes must be administered.

When the entire private sector is bent on shortening its balance sheet and paying down debt, the public sector’s balance sheet must move in the opposite, offsetting direction. When the entire private sector is striving to save, the government must dis-save. The political obstacles to doing these things on a sufficient scale are formidable.

If banking system losses are of the magnitude estimated by Goldman Sachs or Roubini, the banks need capital injections of at least another $200-300 billion. Even if injections equal to all their losses could be effected, the banks might still want to contract, now that they know how dangerous their leverage of yesteryear was.

US policy: A strangely contrived way out of a political impasse

The American public understands clearly that the present disaster was fashioned on Wall Street (albeit with some stimulus from Fed policy). Outright bail-outs are a “hard sell” therefore. But the American ideological taboo against “nationalisation” also stands in the way of dealing with the matter in the straightforward way that Sweden did. The present administration, like the last, would like to recapitalise the banks at least partly by attracting private capital. That can hardly be accomplished as long as the value of large chunks of the banks’ assets remains anybody’s guess. Government guarantees against (some part of) losses that may be incurred might solve this problem. But it would be a strangely contrived way out of a political impasse.

Fiscal stimulus + financial deleveraging = zero impact

Fiscal stimulus will not have much effect as long as the financial system is deleveraging. Even if that problem were to be more or less solved, the government deficit would have to offset both the decline in industry investment and the rise in household saving – a gap that is rising as the recession deepens. Here, too, the public is sceptical and prone to conclude that a program that only slows or stops the decline but fails to “jump start” the economy must have been a waste of tax payers’ money. The most effective composition of such a program is also a problem.

US states and local governments undoing the federal spending boost

Almost all American states now suffer under self-imposed constitutional balanced budget requirements and are consequently acting as powerful amplifiers of recession with respect to both income and employment. The states will have a spending propensity of one, as will a great many local governments. Income maintenance for unemployed and other low income households will also be effective.3 Tax cuts will have considerably lower spending propensities. However, the political prospects seem to portend a less than ideal program mix.

The danger of deflation, or inflation

If government programs end up not being large enough to turn the recession around, we have to look forward to a deflationary period of indeterminate length. If they do succeed, however, severe inflationary pressures may surface quite quickly.

The US ratio of federal debt to GNP is not particularly high at this time. But it does not take into account the very large off-balance liabilities of entitlement programs. Since the present crisis began, moreover, the Federal Reserve System and other federal agencies have made bail-out, loan and credit guarantee commitments totalling many trillions of dollars with uncertain eventual implications for the consolidated federal balance sheet.

If the US’s foreign creditors balk, inflation will be hard to contain

Much will depend on the willingness of the nation’s foreign creditors to continue to accumulate or at least to hold dollars at low rates of interest. Should this willingness falter, inflation will be hard to contain.

There is much to fear beyond fear itself.

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  1. Anonymous

    There’s a link at Drudge Report…

    Federal obligations exceed world GDP
    Does $65.5 trillion terrify anyone yet?

    We past the deflation/inflation road marker about ten miles ago, now approaching currency crisis ahead.

  2. mmckinl

    Anonymous said…
    There’s a link at Drudge Report…


    Should you perchance want any credibility with anybody besides wackos Drudge would not be the person to refer to.

  3. Anonymous

    In the background is the sound of a steady drumbeat of interest as it is compounding the debt.

    In their infinite wisdom not to long ago I believe the Fed relaxed the reserve requirement to zero (Maybe just the Regional banks) compounding the compounding.

  4. mmckinl

    The answer to the banking and deflation\ balance sheet problems are pretty straight forward …

    We implement a “Good Bank Plan” to sort out the banks.

    To handle the deflation/ balance sheet problems the Federal Reserve is nationalized and put into the Treasury Department where it can print money without debt. To underwrite the currency top rate income taxes go to 60%, loopholes are closed and all income is considered ordinary income. Further we add a Tobin tax and a carbon tax.

    Unfortunately this is politically impossible. The banks would shut down the country before they allowed the government our constitutional right to create money

  5. Anonymous

    mmc: The ‘Moneynetdaily’ article follows Ms. Smith post by showing the numbers referred to but not included in her article. It’s just math.

    Shoot the messenger Drudge but after he posts the link so I can read it.

  6. ndk

    I don’t find the bad balance sheet story very compelling on its own, to be honest. Attempts by both the Fed and Treasury to give ample liquidity to the private sector at extremely low rates have yielded little fruit in either investment or inflation. While existing enterprises may be impaired from prior borrowing, new enterprises should have found very ripe fields and willing lenders. It could be argued that a general sense of fear is preventing that at present, though.

    But it does nothing to explain why equilibrium real interest rates had been falling pretty consistently for a long time. Balance sheets appeared quite good before this crisis erupted, for households and corporations alike. During the time when they seemed good, corporations still invested little, reflected in low non-residential fixed investment and high share buybacks. Households saved almost nothing.

    I continue to believe this smacks of a much deeper structural issue, and that typical monetary and fiscal policy efforts could worsen that structural lack of private investment.

  7. Swedish Lex

    With commentaries like Leijonhufvud’s the debate is finally advancing towards its inevitable conclusion. So much of the ink over the past year has been spent to keep peoples’ heads firmly in the sand.

    Leijonhufvud’s comment that the Swedish bank bailout worked in part because of the simultaneous massive devaluation of the currency that gave the country’s export-driven ecnonomy a life saving boost, is crucial. Furthermore, the high global growth rate during the second half of the 90s (think Ericsson) helped to catapult Sweden out of its slump.

    Thus, the Swedish bank bailout, although cleverly deviced and well managed, was only half of the success story.

    This time, however, the crisis is virtually global and hence there is no corner of the economy, really, that can act as locomotive to be found. Fiscal stimulus or not.

    As the bitter reality that “There is much to fear beyond fear itself” begins to take hold, countries will increasingly be tempted to go down the path of protectionism that will only aggravate the downward spiral. We are already watching the beginning of this process. The WTO can only provide ex post support, hence why the political process around the G20 is so important and why the trading partners of the U.S. reacted so quickly and in such a co-ordinated fashion when the “buy American first” provisions appeared in earlier versions of the stimulus package.

    The Swedish currency has again lost significantly in value vis-à-vis the euro and the dollar. This is part of Sweden’s tacit societal understanding to let the currency lose in value to support exports. However, we can not have a race to the bottom for all currencies.

    Without a growth-locomotive in sight, we will have to re-build the economy brick by brick. First, however, we should stop the TARP-ing (i.e. throwing future generations’ good money after ours’ bad) and take the necessary steps to delever the economy in a controlled way. State control over large parts of the economy during a transition will become virtually impossible to avoid.

    A gloomy start to the week end. Sorry.


  8. Swedish Lex

    Another thought:

    Many believe, and I do agree, that the current crisis with excessive leverage in the system is the result of decades of adding layer on layer of debt. It was that global debt-driven process that in fact contributed to pulling Sweden out of its crisis in the 90s (see my previous comment).

    Thus, the excellent Reinhart & Rogoff papers that compare different countries' handling of their banking crises have to be analysed bearing that in mind. The conclusions in their papers are therefore somewhat mitigated, in my view, as regards the capacity of the economy to heal following a financial crisis.

    This crisis will not be resolved by applying more debt somewhere else in the economy or somewhere else in the world, unlike most (all?) crises analysed by Reinhart & Rogoff.

  9. Richard Kline

    This piece by Leijonhufvud is a nourishing bowl of oatmeal on our present crisis. Along with the many raisons within it, though, there are a couple o’ dead flies. Let’s pick ‘em out:

    L.: “The Japanese government . . . chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency. At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.” The conclusion from the preceding contentions here is arguably false, and surely anything but proven. (Sub)Zero rates and fiscal stimulus in Nippon did not produce any meaningful recovery; this was extensively remarked upon at the time, for years, and is widely acknowledged _not least by the Nipponese_. The ‘recovery to health’ in Nippon of the last three-four years was a) export led, via exports to the US where bubble demand was the driver, and b) lubricated by the yen carry trade which was among the few sources of bank profits over the last fifteen years there. The resultant health was far from exuberant at best, driven completely by global imbalances, and even so in no way sourced in government stimulus actions, in my view.

    L.: “This famous postwar “forecasting debacle” demonstrated how simple income-expenditure reasoning, ignoring the state of balance sheets, can lead one completely astray.” Well, yes. Kinda sorts. Also missed by those forecasts, and perhaps with more relevance to L.’s argument if contrary to his conclusion, was the massive US lending tto devastated foreign countries to support a stupendous US export boom to same. As much as anything, this is what pulled the US out of the severe recession of 47 (recession not depression). I don’t dispute his very relevant point that US businesses were healthy, profit-stuffed, and raring to go after the War Boom; that’s a major point. But it’s important to read the whole context into the analytical situation, or the wrong conclusion results. This is what happens so often in economic reasoning, ceteris paribus (all else being equal) is applied in exactly the contexts where it does not in any way apply. Good conclusions go bad a-straying that way, like babes on beach breaks some would say.

    L.: “the American ideological taboo against “nationalisation” also stands in the way of dealing with the matter in the straightforward way that Sweden did.” This contention is a complete and utter canard. I don’t blame L., for repeating it; he didn’t create it, and he’s not an American, but it is a load of stinking rubbish, there is no such taboo _amongst the population as a whole_. A solid 20-25% of the US public is deeply and utterly opposed to ‘nationalization,’ ‘public ownership,’ ‘govevnment run [X],’ and taxes. They are all in one political party now. They mostly live in rural, propertarian zones, except for the gold collar class which funds, stokes, and directs their ire from its own gated communities, all of which are far, far from said rural Red-bait Belts. This meme is propagated by the mass media, which wholly _uncoincidentally_ is owned and crank-operated by the same said gold collar wealth class. Beltway types, regardless of nominal party registration, answer primarily to the gold collar class, so they mouth this fallacious cant, except for the share of Beltway types who come from the Red-bait Belt who believe in it more than they do in JC. I suspect that you would get a solid plurality in the US for nationalization and public ownership, 40%. As the crisis grows, it will grow, too. The other 35% or so don’t much care, but will point and bark at whatever plan they think puts the most money in their own pockets. The meme that “nationalization is foreign to the American people” is a lie by those who have the most to lose; let’s stop repeating if for them, at the very least.

    L.: “The US ratio of federal debt to GNP is not particularly high at this time . . . [b]ut it does not take into account the very large off-balance liabilities . . . [M]oreover, the Federal Reserve System and other federal agencies have made bail-out, loan and credit guarantee commitments totalling many trillions of dollars with uncertain eventual implications for the consolidated federal balance sheet.” This is a very cogent statement, by Leijonhufvud. It has been stated even by very competent commentators that because the Treasury’s balance sheet is modest in relation to GDP further commitments are not excessive. This is again the kind of economic reasoning that only looks at single variables: even if these are the most important single variables, they do not describe the whole system. ‘US public obligations’ are a multi-component set. Fannie, Freddie, and other guarantees alone count as sovereign obligations in the eyes of our sovereign creditors. The guarantees behing handed out like popcorn and tickertape right now are ‘off balance sheet’ because they are not presently cashed in, but much of them will be in any reasonable scenario: these are substantive obligations. There are trillions of _private_, US denominated debt out there in the RoW. Yes, that is discounted relative to Treasuries and the like, but in figuring trade flows that comes into the calculus for others elsewhere. How to weight that is unclear, but if we default on it, yes, that will directly impact our sovereign credit position; don’t believe otherwise. We have tens of trillions in US denominated obligations floating around the global credit system. The massive issuance of more-of-same definitely impacts the operative value of existing $ instruments: even if the Treasury appears good for new issuance per se (not that it has a revenue plan or anything), it can destabilize existing $ assets. This is particularly so it it issues Treasuries (putatively more stable) while outstanding non-sovereigns are questionable of timely and complete repayment.

    I only emphasize L.’s point here that ‘US obligations’ is a multi-component state, which can be destabilized by exceptional changes in most single variables, or even by large-normal but concurrent and reinforcing changes in several variables. Economic analyses _must_ avail themselves of this kind of perspective. Talking about ‘whether the stimulus would work’ or ‘are bank guarantees enough’ or ‘exports must reach X level’ or ‘we can stay in balance up to Y Treasury debt to GDP’ are not just meaningless in the absence of this kind of perspective, they are dangerous. That is my considered view.

    The impending G20 meeting in April could be/should be, in this context, the most important geopolitical summit in a generation or more—but it won’t be. I do not believe that sufficient groundwork has been laid to get the players into the same script, let alone the same page, so it doesn’t matter if most of them sit at a common table they’ll just talk in tongues to the vexation of all. It is not clear that the EU has a strategy. China does, but does not appear to have sold it to others. Japan is drifting. No plan can succeed without _active_ US participation, since we are the largest single component, the driver of the crisis, and its epicenter. Barack O doesn’t even know what he wants to do except be nice to all; how can he or those sent by him negotiate over the kind of trip and garbage Summers-Geithner are spewing up? Can’t be done. What I’m saying is that there is not even the groundwork for a consensus, let alone a consensus, and a meeting without substantive result will be a) perceived rightly as a failure in the face of disaster, but also b) free individual actors to try to save themselves. If they flop, and I’ve yet to see a reason to expect otherwise, we are in for a Year of Hell. Hold onta yer hats, sez I.

  10. Swedish Lex

    To Richard Kline

    You wrote: “the American ideological taboo against “nationalisation” also stands in the way of dealing with the matter in the straightforward way that Sweden did.” This contention is a complete and utter canard"

    My comment: Your view seems to be that if there was a hypothetical referendum in the U.S., there could be a majority in support of nationalisation. As we know, however, a decision to nationalise would have to go through the eye of the needle that is Washington, which, in my view, significantly reduces the chances for a sane policy of nationalisation (in the general interest) when/if necessary. The symbiotic relationship between policy-makers and business in DC, which sometimes can be an advantage, at this point continues to act as a break on the development of the most appropriate policy response.

    Swedish bankers messed up the economy and were unceremoniously ejected from their functions. The Government took control (de facto or de jure depending on each case) of the financial sector quickly, massively and, often, brutally. I cannot see this happen in the U.S. as things are unfolding there at present at the level of the Obama Administration and Congress.

    You wrote: “The impending G20 meeting in April could be/should be, in this context, the most important geopolitical summit in a generation or more—but it won’t be”.

    My comment: I share your scepticism. But as I wrote on Naked Capitalism yesterday, the EU has made G20 a milestone on its internal process of devising a coherent and sufficient response to the crisis. G 20 is thus a lot more than yet another international summit. The EU leaders know that they cannot afford a PR disaster on 3 April and are trying to respond accordingly: http://www.londonsummit.gov.uk/en/media-centre/latest-news/?view=News&id=13486637

    The EU however remains sufficiently disperse and full of internal frictions and contradictions in order for these efforts fail, nevertheless.

  11. Anonymous

    Richard K: As usual, I like your cogent comments, but let's give the opposition to nationalisation its due. The keys to the anti-nationalization arguments are as I understand it:

    1) That any haircut by big bank debtholders will cause a new stage of the balance sheet crisis, rolling through other sectors – in particular, the troubled insurance (both life & P&C) sector – other banks and not to mention it pension funds/retirement savings. These problems may require additional bailouts by the US gov't, at a possibly massive cost. (Is the admnistration going to let MetLife go into receivership?)

    2) That the government will create massive state-owned banks with which smaller private-owned banks will have difficulty competing. This is exactly the predicament that the utilities sector faced in 1930s and that situation resulted in widespread long-term nationalization of an industry.

    3) That the politicians will very likely screw up the banking mechanism just as thoroughly as the current management team. But in a different way.

    I am for nationalization (with a stated exit date for the gov't) so I agree with you, but let's not paint the opposition to nationalization as only motivated by craven malice. There is genuine substance in the counterarguments.


  12. Stevie b.

    "if I were the Fed, I'd very much want a cheaper dollar, but the conundrum is how to achieve that without causing more global instability"

    Well, here goes. Thinking out of the box/left field or whatever. The Fed should make a statement saying they intended to buy gold. I for one would think "Crikey, if $s (or indeed other fiat currencies for that matter) aint good enough for the Fed, they aint good enough for me! The Fed wants to diversify out of $ so I should do the same". Assuming the gold price rose and the Fed actually nibbled a wee bit just to show willing, the $ would fall and people on the margin of hoarding cash/spending decisions may well start to dishoard & spend in mild panic at higher gold prices and in anticipation that a weaker $ would lead to higher retail prices. Meanwhile exports and import substitution would lead to higher domestic economic activity. Short-term rates would be kept low for a while just to drive the message home and for all I know they could QE the yield curve and the long bond a bit to keep it's price decline orderly. The net-net would be a falling $ (necessary & good) and a kick-start to at least some inflation (necessary & good for a bit).

  13. Anonymous

    @Richard Kline,5;24

    I’m down with that, smogashborg of historical ex-samples and only one plate, and momma may just break it in a fit of anger. I bet if you give these guys a 10 point plan and they would only do 9 just to show how cleaver they are.

    Time to jump on the Harley and hit the road, we will just have to pick the bugs out of our teeth on the way, but hay everyone loves a road trip.

    To many vested interests, I can only hope it all works out for the better in the long run.

    Skippy… appreciate your effort.

  14. Richard Kline

    So Swedish Lex and jult52, I agree with much of what you say, but the tangent of my remarks was somewhat otherwise. I took exception, and do, the the notion that ‘nationalization is rejected by Americans.’ That concept as a whole is politically skewed, and I suspect fallacious. This does not mean that nationalization is either easy, or without substantive problematic side effects, no. One can make an argument “Why not to nationalize”: This is exactly what is _not_ done by those passing on the ‘un-American’ meme, they take as a given that this is unacceptable without demonstrating this socially or arguing against it substantively. You both see the difference in that you both make arguments about how and why this is difficult to do. Speaking to which:

    I don’t believe that we would ever have a national referendum on something like nationalization, not least in that there is no procedure, organizationally or in law, for such. I do believe that nationalization is certain; what is also probable is that we will delay excessively and bungle the job as well. Americans are _pragmatic_, and the decision makers of the Federal and before that national government have time and again down the generations deployed _sweeping powers to control emergency conditions_ which often were not explicitly defined to them in law. This is in fact one of the two or three salient facts about American national governance. Land sales under the Articles of Confederation. Land purchases by the President. Lincoln’s massive Federal powers and regulations in time of war. The Federal Reserve Act. Several instances of national military draft. The numerous programs of FDR. Spy programs up the yin-yang. When push comes to shove, American government acts, and acts in sweeping fashion. Nationalization is, literally, as American as apple pie. So we will get it, but the yahoos will kick up dust first.

    Are there substantive problems with it as you say, jult52? Hell, yes. The great example is the one you raise regarding utilities in the 1930s: there is a very real risk that if the Guvmint seizes the big, busted, credit intermediaries, the still solvent regional banks are left with a piece of the pie too small to make a go of it. And much else. Well, seize the lot, if necessary. This is not the kind of think to go by halves, it has to work. But this is also why, to me, it would be good for the large chunk of the US financial system to be re-privatived. I am all in favor of a publicly owned, enduring, basic banking system. I strongly suspect that a solid majority of Americans would vote for _that_. Having the Government, directly or indirectly, run credit intermediation for an economy our size is just not on, so enough of that has to be in private hands to make a functioning though well-regulated whole. Even the Chinese came to understand that they couldn’t have a major economy without a functionally private banking system; they were smart enough to keep principle nodes under the control of the Center. The thing is this: we can’t wait. Demand is collapsing in the real economy, and we have bungled around 18 months _not_ solving the insolvency problem of the banks. Seize now, and let Paul sort it out.

    Swedish Lex, it’s good to hear that the EU’s forward thinkers are consensing on a plan. I haven’t had the sense of this, but maybe I haven’t been listening. Care to give us a point by point rundown, as you read the rumors? It would be good to know. Some adult has to shout this class to order.

    And skippy, wear yer leathers, bro. Everybody does down sooner or later; the trick is to only break your leg. And that is a concise metaphor on the function of government regulation which I think anyone could understand. This all commenting here . . .

    Everything I’ve put up today I wrote at work: it’s how I keep this place from denting my bicuspids, or otherwise tarnishing my spirit. . . . From a larger perspective, we will have to live with the consequences of the responses to this crisis for the rest of our lives. Better to do it right the first time. I like substantive ideas, and good reasoning. It doesn’t have to come from me, and not everything I opine is golden, definitely not, but if no one else will push the wheel around and I think it should I’ll chip one out of stone rather than sit on my hands; personal choice.

  15. Richard Kline

    As a further, and final, not jult52 along the lines of your concerns with ‘the day after,’ Yves’ comments in a different post regarding just how we will get US banking to function in a post-securitization environment pose major problems for a nationalized system. Reserves to loans would have to be much higher than was the case just a few years ago, Yves’ cogent point; that implies the Feds would have to come up with _significantly MORE capital_ than was in private hands before the bust to make a go of a public system. This would require some real organizational thinking, and some solid negotiation with other sovereign actors in the global financial system. The last is yet another reason why the Feds would be truly loath to nationalize: they would have to negotiate directly our finances with other countries from a position of weakness, and that is not a hand they want to play. Tough: they’re wearing the chef’s hat, so they’d better make crepes.

    Most of the problems have solid, rough and ready, functional solutions, but that requires grasping the thistle. Our ‘leaders’ are collectively hiding under the covers telling the bill collectors at the door to go away. Or sending a butler like Geithner to say the same. *hmmpphhh*

  16. Anonymous

    I think the hold-up on nationalization is less ideological and more tactical…the Treasury is still trying to figure if there is a way to have the taxpayer hoodwinked into buying/backstopping the toxic waste. Hence, Geithner’s gave his greatly anticipated and highly disappointing speech in which he said the Treasury was “exploring”.

    Either the taxpayer pays, or the common shareholders and junior debtholders pay. As another poster said, Geithner probably fears the collateral damage if common and junior debtholders are wiped out, as many of them will undoubtedly be other financial institutions such as insurance companies. Thus Geithner is trying to work out the almost absurd notion of floating taxpayer money to hedge funds, who will then pay some yet-to-be-determined price for the waste. Given that it is clearly a buyer’s market, the hedge funds will hold out for either “market” price with partial backstopping, or “myth” price with full backstopping. Everybody remembers the Lone Star deal with Merrill that effectively gave Lone Star the goods for 7 cents on the dollar. New purchasers will want AT LEAST that good of a deal. The banks, if they are to remain private, need a much better deal, and one that only the taxpayer can provide.

    So Geithner’s choice is sticking it to the taxpayer, or going with nationalization, wiping out the common and junior holders, and taking the ongoing banking entity to market at some later debt, but risking collateral damage.

    He can’t decide, Obama can’t decide, so nothing gets done. Perhaps all of the media coverage and economists’ op-eds regarding the inevitability of nationalization will prompt action.

    On another topic, China will have an interesting choice coming up. If it continues buying or holding US debt (albeit in a diminished capacity), it will mean that it continues to wish to be an export driven economy, and will continue to want to keep its currency as low as possible. On the other hand, if it decides to build its own consumer class, it makes sense that it would be willing to let the yuan appreciate, which would give it an enormous advantage in the international commodity markets vs. dollar based buyers. Their labor costs might rise, but input costs would decrease. From this a middle class might emerge. If they think the value added by being the most powerful buyer of the materials they need to run the manufacturing sector in their economy outweighs the losses they would have if the dollar tumbled, then they’ll do it.

  17. Anonymous

    All of this discussion about the politics of nationalization ignores the fact that Wall Street/Big Banks own our government and congress completely. They will not be nationalized and their insider CEOs and influence-peddler Boards of Directors will not be thrown out on their ear.
    When you understand that fact, then all government actions and the entire “smoke and mirrors” becomes clear as manipulative PR. A very deep cynicism will let you see the truth. Our entire country’s future will be sacrificed to save these monsters.

  18. Anonymous

    ok, if ‘nationalization’ is ‘un-american’, why not call it something else?

    like ‘bankruptcy’. or ‘ordered bankruptcy’. i am sure someone can come up with a good term that is technically correct and descriptive.

  19. Don

    An excellent post. I agree that:
    1) We should use a version of the Swedish Plan.
    2) The stimulus was a poor mix with too much infrastructure and not enough incentives.
    3) Social Safety Net spending is essential, including aid to states for essential services. If unemployment gets much higher and people don’t feel secure, serious social disruptions and dislocations could occur. This would be very bad news.
    4) We cannot overspend because we don’t know at what point foreign creditors will balk. ( Buiter )
    5) I am for a guaranteed income in any case, but it would certainly be useful here as a Negative Income Tax.
    6) The use of WW II for comparison is strange. What can be conspicuous consumption in a recession can be seen as treason during a world war.
    I differ in that I believe that we need to use quantitative easing to attack debt-deflation, a la Fisher. I also believe that a massive stimulus could work as Shiller believes, but we do not have the money to try it in these circumstances.

    I would also ask people to look at this post from EconomPic Data:


    Don the libertarian Democrat

  20. Anonymous

    These discussions go to the heart of the matter that there are “no good solutions” to the financial crisis. What ever action that is taken will cause pain in other sectors of the economy.

    However, all these discussions are about top down solutions, this approach is responsible for our current financial quandary. By focusing on banks, brokers, pension funds and insurance companies the discussion omits the human element. In common terms, tickle down economics.

    The idea that if we save the financial system, then everything will take care of self in the long run, overlooks the fact that it is the middleclass that is now suffering, when the merchant class rebels heads roll.

    When a cancer is found its cut out or poisoned to cure the patient. The cancer on the body politic is the financial system and those who support it current incarnation.

    How can you cure a problem, when it is the problem? The current form capitalism has given us the most unequal income distribution since…..the great depression. Production of goods is replaced by the creation of dubious financial instruments. Lee Iacocca warned us in the 80’s, at the birth of the service economy, that at some point trading pieces of paper back and forth , instead of producing tangible goods, will lead to disaster.

    Would the citizens of the US support nationalization of the banks? They would in a New York second.

    Would they support hard jail time for the Masters of the Universe and their minions in DC? As long as the do not go to Club Fed, but do hard time with petty thieves in max security prisons.

    Make the hard decisions; there will be pain regardless, but do so that it eases life’s burdens on the poor and middleclass not Wall St. Change your perspective and you might avoid a revolution that will bring down you and your ilk.

  21. Born Again Democrat

    Referring to Social Security and Medicare as “off balance sheet” obligations of the federal government is not quite accurate unless I am mistaken: Social Security is solvent for the forseeable (sp?) future, while Medicare obligations are subject to reform.

  22. Anonymous

    I think there is a serious post-war fact that we tend to sweep under the rug, or at least not make the center of our history of the post-War US. Let’s start with a part of the paper:

    “At the time, a majority of forecasts predicted that the economy would slip back into depression once defence expenditures were terminated and the armed forces demobilised. The forecasts were wrong. This famous postwar “forecasting debacle” demonstrated how simple income-expenditure reasoning, ignoring the state of balance sheets, can lead one completely astray.”

    The subsequent question is: why did the US economy flourish after WWII? (As a rejoinder of common sense, ‘why the hell would having the largest and strongest industrial base, vast access to natural resources and markets, and cleaner balance sheets put us in a situation where we wouldn’t be wealthier?’)

    The old explanation for why states wanted to expand (something that was is so important in pre-war history, but drops off the table since) was that they wanted access to more markets (for cheaper primary goods and a new market to sell their secondary or tertiary goods in).

    The subsequent explanation is relatively simple: following WWII, the United States had a vastly more powerful state than any other in the world, and a manufacturing base that was unrivaled. Further, it had open trade agreements and access to bountiful natural resources. Add in the low debt burden in the private sector, the relative consensus around the benefits of American big business, and this is the perfect virtuous circle that leads to an inflationary capital core within a banking driven empire. This political consensus is effective, as our political elite is either manned by them, or is in agreement with them (cognitive regulatory capture), and we don’t have a large rioting population.

    If we can start there, maybe we will have a better idea of how this all works. As I read in a comment by ‘hcl’ in the blog Information Processing in the post: ‘The World’s Greatest Economic Minds,’ a more accurate title for those Great Economic Minds is, “the world’s greatest (politically correct) economic minds”. Their deference to polite society will always skew the analysis.

    This is the old game of the expansion of markets and empire. Now the game has gone global, and the question is how does it re-orient itself. In the past it has been back into the nation-state shells at least in the short run, although in recent history, the successor core state would expand its operations (and operations on net would grow). There is always business/power in the expansion of production, but it seems the global nature of banking is putting together connections between states that haven’t been there before. The governance of the system after this will be interesting.

  23. George

    This is the problem with economics, it has become so ideologically driven that we fail to see the value of the intellectual tools that it provides. In addition, our view of the world has become so completely dominated by “big” companies that we completely fail to look beyond those “leaders.”

    It seems to me that there are quite a few mid level banks out there that may be strong. While the bigger banks may be insolvent, that does not necessarily mean that EVERY bank is insolvent.

    I am far from a “free market” ideologue. I recognize that it was precisely this type of belief system that got us where we are. However, “markets” are not ideological constructs, they are also observable phenomenon. The beauty of these phenomenon is that they spring up even where our supposed psychological factors seem to be an impediment. That is, despite the anthropomorphism of the market (Mr. Market will not like this…..) the “market” does not have feelings. While people may talk about “investor” sentiment. They are merely reflecting the “sentiment” that they are aware of in the current incarnation of market equilibrium. Like all such fallacies, they are incapable of seeing beyond their current world to other equilibrium states.

    That is, many statements of the “world as we know it” ending, are correct but of limited value. The “world as we know it” needs to end (it fact it has ended) and it needs to be replaced with a new sustainable equilibrium. We can try to direct it towards something reasonable and stable, or we risk having it lurch from equilibrium point to equilibrium point.

    The talk of “saving” banks is nonsense. Banks will evolve to where they can efficiently respond to the market. That is not ideological mumbo jumbo, that is just cold hard reality. The fact is that we can actually have some control over how that equilibrium state is reached through proper regulation. But we cannot “stop” the restructuring.

    All of that being said, why we need to “save” some particular manifestation of capital organization (I.e. “Citibank”) just makes no logical sense. What is so “special” about this particular organization? All the anthropormophism of “pain” is again subject to the same underlying problems highlighted above. we are simply ignoring the fact that the equilibrium point has shifted and it is important to allow that shift to happen.

    I am amazed that all of these finance” types are so quick to anthropormorphize the “market” when the “market” involves their own livelihood. However, hen they speak of changes in equilibrium for auto-workers or other “markets” they can become cold blooded rationalists and hide behind abstractions. This is similar to regulatory capture in that the financial world can control the terms of the debate both intellectually and emotionally.

  24. Canucklehead

    Nationalization is simply a red herring. Look at the SEC and the various financial market regulators who are supposed to operate on the public’s behalf. You should ask Harry Markopolis about the sanctity of a nationalized financial structure. Any efforts to effectively nationalize the US financial industry will kill the markets and mitigate it’s global influence.

    Effective Nationalization will not happen.

    Investors would hoard money then look towards friendlier markets once the markets have de-leveraged. These friendlier markets may not be US markets. A nationalized US financial industry will see corrupt dislocation when an attempt is made to re-privatize it. Rahm et al will demand their share in influencing selling decisions. The taxpayer would not be considered.

    The solution out of this mess is to stimulate the risk takers. This may well mean tax cuts. Cutting taxes when tax revenue is tanking seems to be a no-brainer. Reward the risk takers as they will lead the economy out of this mess. You can’t get blood from a stone. The stimulus package is already placing future generations in bondage. Give their parents the latitude to prepare the future for those bonded generations.

  25. Anonymous

    Yves and fellow commenters, have you considered that the PTB are not only well aware of the various 'common sense' solutions (eg default, BK, nationalization, etc) to the debt overhang conundrum as expressed here & other financial blogs, but are way ahead of us in terms of understanding the expected outcomes?

    If you stop and think about it for a moment, this is actually a more chilling scenario than merely dismissing them as clueless dunces enraptured by Kenyesian theory, power mad bureaucrats, or nefarious evil doers protecting their bankster buddies.

    Since they have access to the best super-computers, statistics/game theory PhDs, and associated Wall St geniuses, I believe they've already modeled and worked through endless different iterations that all reach the same conclusion.

    Hence, the apparently crazy, inexplicable actions we see undertaken on a daily basis by global banking chiefs and politicians to re-inflate a bubble that cannot be resuscitated. If you're down by 5 pts and one last play, does it really matter if the Hail Mary is intercepted? You're gonna lose anyway if it fails.

    I'm now operating under the assumption that the PTB aren't evil or clueless, but are providing very clear hints to anyone whose thought processes aren't being obscured by the hunt to 'get at the truth'.

    That is, we're so enamored with following & dissecting the MSM, and rebutting the PTB's daily inane pronouncements, in order to prove that WE ARE RIGHT!, that we're ignoring that, indeed, we are right…

    Think about it. It means your daily missives are essentially moot. Sure, you're right, but we're all way, way behind the curve if what I'm suggesting is correct.

    Think about it.

  26. Anonymous

    I like this guy’s article, but I hate lazy sentences like this that imply causation, “It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.” This is the same kind of thing Taleb always rails about. There is no proof that the Japanese government’s policies had any causal effect on the economy coming back to health. This is not some controlled study in the lab. Further, it is just as reasonable to conclude that Japan’s brief emergence from slowdown in this last decade was solely the result of the global credit bubble, which was so enormous that it even lifted Japan’s moribund economy from the doldrums. Please, Japan’s policies may have been great (i.e., there would have been a local depression without the stimulus and low rates) or terrible (i.e., the country may have emerged from recession much sooner without creating Zombies), but we will never know because we will never experience a world in which Japan did not follow those policies during the last two decades.

  27. Mencius Moldbug

    RK: marvelous comment.

    (Having grown up inside the Beltway, however, I am slightly confused as to the identity of your “gold-collar class.” Do you mean these people – and their parents, of course? If so, sure.)

    You and ndk are both right. We will get bank nationalization. But it will have to pretend to be something other than bank nationalization.

    Ie, it will have to suck. We need nationalization done right. We will get it done wrong.

    In reality, we already have nationalization. It is called “regulation.” This is an infringement on the owners’ right to control their own property, violating the Contracts Clause of the Constitution. Not that anyone cares, of course, or should.

    In reality, there has never been a truly private banking system in modern European or American history. Banks have always been socializing risks and privatizing profits, and surrendering power to the state in return for this gift. There is a word for this kind of bargain: corruption.

    In reality, there is no path toward fixing this situation that does not acknowledge that the sole owner of the American banking system is USG, that its assets are USG’s and so are its liabilities.

    “Regulation” without nationalization is power without responsibility – the traditional prerogative of the harlot. Uncle Sam needs to grow a pair and step up to the plate. Only he can repair the vast wreck his own incompetence has produced. He won’t, of course, but we can still agree that he should.

  28. DanyBoy

    Yves, Richard Klein et al…
    Outstanding posts, thank you. Naked Capitalism should be the cheat sheet for all gov wonks.

    Naively perhaps, the Swedish example has been proposed as a model for the US.

    Here are the caveats:

    -Sweden’s success occurred in the context of a time of global economic expansion, unlike now.
    So devaluation in that context could not miss as a successful policy.
    Devaluation in the current context, and especially for the US is perhaps the road to perdition as a race to the bottom would ensue.
    Consider this: as fast as the US can devalue, smaller nimbler countries can devalue much faster, resulting in no devaluation at all.

    -Sweden: economic weapons of mass destruction had not yet been created and did not pollute and pervade the entire economic system. Just like Resolution Trust, it simply required the will, the authority and the capital for the government to unwind simple loan contracts no matter how many there were.

    One reason we will continue to have trouble deleveraging, let alone mass repairing balance sheets, is embodied in the CDO conundrum: who owes what to whom and how much was purposely obfuscated during boom times to “spread risk” which now during bust times has a “lovely” reversal effect of “spreading risk” of defaults and capital destruction all over the economy like brown spray paint from a spray gun. Cleaning up ain’t so easy. This time around, the banks are not the ones who made the bad loans: We did. Securitization means that the Wall Street banks passed the loans on to any and all who would believe in CDO magic, a giant ponzi scheme of global proportion. What they currently hold is just the tip of an iceburg the size of the Pacific Ocean. Amongst the bag holders for the bad loans are: retirement funds, endowments, charities, asset managers, insurance companies, municipalities, states, transit companies, foreign governments and private entities, private corporations and many many more.
    So unlike Sweden in the ’90s or RTC in the US, unwinding bad debt would be analoguous to pulling up a giant tree trunk rather than a bunch of weeds: the roots go so far and deep that the entire garden will be destroyed if you try pulling them up.

    The consequences of this and all additional layers of “creative” credit derivatives that criss-cross above below and through securitized loans (CDS, CDO squared, Synthetics) is that resolution of bad loans on any scale introduces systemic risk. Yes this time the resolution is the risk.

  29. Eric L. Prentis

    Progressives don’t advocate nationalizing US banks as Leijonhufvud implies. A reasonable percentage of the 8,000 US banks are currently insolvent and before their managers do more grievous harm to the economy, large insolvent banks should fall under temporary receivership, be reorganized and then resold to private interests. FDIC interventions on small failed banks are performed very successfully, 28 FDIC trouble free interventions so far in 2009, this process should be scaled up for large failed banks. Stop taxing the poor to bailout the incompetent, rich, bonus-baby Wall Street bankers/directors/shareholders/bondholders. Severe economic pain is coming, the only questions are, “who will bear it and when”; my preference is: “those responsible and right now.” Americans, lets not suffer through a Japanese style lost economic decade.

  30. KJ

    Talking about ‘restarting’ the economy is laughable. What does that even mean?

    The economy everyone wants to return to was fueled by massive amounts of credit. Millions of 2-income American families had a third income — home equity withdrawals. Their spending spree was collateralized by the house — it wasn’t based on their wages. People could live a notch or two above their means. Now housing ‘appreciation’ has collapsed and people’s wages aren’t enough to even pay what they already owe, let alone go out and buy more.

    It’s extremely simple. ‘Income’ has fallen off a cliff. People were living high on the mountain top; now they’ve had to pack up and move to the valley. They won’t be back on the mountain top anytime soon. This isn’t just an L-shaped recession; it’s a reversion to the mean. It was a bubble. It’s burst. It’s over. People have lost their third income. A lot of people are losing their main income. And many more are taking pay cuts just to keep a job. Where will the money come from to ‘restart’ personal spending?

  31. RoseCovered Glasses

    Whether or not the average US Citizen knows it, the United States is creating the second-largest government/industrial complex in our nation’s history. It is envisioned as a cocktail of bailouts to the financial industry, the automotive industry and others who show up with their hands out and their lobbyists in tow. It is also comprised of state governors who are poised to invent yet another form of pork with federal representatives and senators at their sides while raising local taxes for the citizen back home. This speculative panacea cannot survive.


    The longest running and largest consortium of this type is the US Military Industrial Complex (MIC), funded each year at an amount many times the Wall Street and automotive bailouts combined. It is the elephant in the room in the burgeoning financial crisis, carrying the weight of wars, weapons systems and a pentagon/corporate financial relationship based on cost plus and time and material contracts since World War II:



    We are importing goods and services and borrowing money from the Chinese, the European Union, Japan, Korea, India and other developing countries at a rate unmatched in our history. Loan proceeds are being used to fight wars and bail out our bankers, carmakers and state governors.

    Our largest export today is our public debt and our credit rating is slipping.


    What shall the prospective, second-largest government/industrial complex be called, “The Department of Wishful Thinking”? It is being financed with money borrowed from entities future generations will owe as the US kicks the financing can down the road like it has for the last 60 years.

    No doubt Washington will attempt to regulate the outlay, put in auditors and control mechanisms like the Federal Acquisition Regulation and Cost Accounting Standards that evolved over the years on a reactive basis dealing with the white elephant scandals in the Military Industrial Complex. But somehow those controls have never been able to stop the mammoth waste, fraud and abuse that occur in the MIC.

    Big money attracts greedy people, not only in the MIC but also on Wall Street and in the corporate boardroom. It also buys influence and crooks in government.


    The natural order of economics is still out there. Washington’s money-and-power-influenced, artificial reality cannot survive what historically has been the rise and fall of booms and busts in the last 100 years. Economics is now on steroids through high technology, the Internet, mass communications and frauds that cross national borders like cobwebs.

    The MIC will be scaled down by collapse. The Russian MIC led to that country’s financial demise. It is now apparent that we did not outspend the Russians at weaponry and interventions. We simply had a better credit rating that is now maxed out

    The other government agencies will be re-scaled and downsized as well but not by any specific action taken by the pending or future federal establishment. The over 50 entities that make up the federal government, together with their corporate outsource services, will be shrunk dramatically because the US is broke. The feds will fight to preserve the artificial reality, but US financing and credibility on the world stage are drying up and the creditors are suffering.

    No new administration can change the above facts by riding on the taxpayer’s back with “Social Improvement”, ” Public Works” and “Creating Democracies in Other Countries” mantras. Such policies in the past have led to foreign interventions, thousands of young soldier’s deaths, bureaucratic growth in Washington and bloated corporations performing low quality service contacts.

    Annual budget deficits and the national debt are at intolerable levels.


    The US will come home from military adventures abroad because it will no longer have the money to run them and it will cease bailing out failing commercial establishments because there will be no funding for that.

    The US will re-align priorities at the state and the national level much like all the little “Joe the Plumbers” throughout the country, who are toting skinny 401K’s without jobs. They represent the present and future tax base upon which this country will run. America will not spend its way out of this dilemma because there will be no cash or credit left to spend.

    The US will demonstrate financial prudence out of necessity, align spending with available revenue, downsize the federal government and its corporate cadre, cultivate technology and the small business base and take care of its most important constituent here at home – the average tax payer.

    The US will understand the above are not political objectives but economic realities that are here and now. World economics will not allow a new, financial, government/industrial complex to emulate or replace the MIC.

  32. Anonymous

    The problem with nationalization / bankruptcy of the big banks is simple. What happens to all the positions for which the bonds and stock of these banks are pledged as collateral. If there is no problem there then let’s go ahead and wipe’m out. If there is a problem then it just contributes to the assest deflation consequent upon deleveraging.

  33. Anonymous

    The Treasury is directed to “coin and regulate” so they farm out the duties to some private bank…go figure. If the Treasury functioned as intended it could control growth with ease and greed would have to ply their trade elsewhere.

    The US already has a fort full of gold just has to announce the attachment to debt then the bleeding stops and the healing begins.

    SS insolvent the day it was born, only exists as a Ponzi scheme lumped into the General Fund with all the other schemes.

    There really is no practical solution to this mess but the PTB will figure a way to make a buck off it.

  34. dearieme

    “..the decision makers of the Federal .. government have time and again .. deployed _sweeping powers to control emergency conditions_ which often were not explicitly defined to them in law.” Quite: whenever the Powers That Be think matters important enough they simply ignore The Constitution.

  35. Max

    “Fiscal stimulus will not have much effect as long as the financial system is deleveraging”

    Why not?

    No, a fiscal stimulus won’t bring back the Greenspan bubbles, but it will most likely offset the effects of deleveraging – at least somewhat.

    We can’t do anything about deleveraging until it runs its course, but we definitely can soften the blow.

  36. Thoreau

    KPMG KPMG KPMG/Tax Shelter Tax Shelter Tax Shelter. Of course all the banks are insolvent and KPMG audits a disproportionate amount of them. You thought KPMG’s tax shelter shenanigans were disturbing, such activities were nothing compared to the 100s of Billions of fraud contained in the banks financial statements that KPMG audits. Just remember Flynn and his high priced lawyers tried to help put all the tax shelter partners in prison, what do you think Flynn is going to do to all the Audit Partners who have helped the banks engage in massive fraud by signing off on fraudulent bank financial statements? Though it is difficult to muddle through the fraudulent KPMG bank financial statements, it is not impossible and from that you can profit. Many of us made a small fortune shorting Citibank the KPMG audit client just by understanding the fraudulent nature of Citi’s financials. It is like taking candy from a baby, a favorite KPMG saying.

    As one small example for all you dopes who somehow think the system is not and has not always been rigged by liars and thieves, Citi’s 10q as of 9/31/08 shows capital of about $126 billion yet its market cap as of today is $19 Billion (though it is likely insolvent). Forget about FAS 157 there are a million ways around it, the more difficult scam to discern is the use of SIVs to offload bad assets from Citi’s balance sheet so it does not have to recognize the losses. To Citi’s credit it does disclose in footnote 15 of its 10q potential exposure of about $130 Billion for part of their SPEs. Of course such amount is in excess of its stated book capital and almost 7 times larger than its current market cap and likely massively understated.

    I know no one saw this coming; you can’t know the unknown; and all KPMG did was follow the accounting rules. Then how come a dope like me could figure it out? Further, that is what the tax partners thought before Tim Flynn, Joe Loonan and Swen Holmes tried to get them put in prison. In fact, many beginning as early as 2005 saw this problem coming like Dr. Roubini and used simple math to explain why. If KPMG is so expert at anything, why didn’t KPMG see this coming and warn all the decimated Citi investors. Personally, I am glad KPMG continued to produce the self evident fraudulent financials because me and my kind made a fortune off all the idiots who think any integrity exists within the fraudulent accounting statements or companies (such statements are reflective of).

    In fact, Dr. Roubini is suggesting formally nationalizing all the banks (which most of are already 100% owned on a fair market value basis) because the system is insolvent. It may be time to short these fraudulent companies yet again if he is right, any thoughts?


    The following tables summarize the Company's significant involvement in VIEs in millions of dollars:

    As of September 30, 2008
    Maximum exposure to loss in
    significant unconsolidated VIEs
    (continued) As of December 31, 2007(1)
    Total maximum exposure Consolidated
    VIE assets Significant
    VIE assets(2) Maximum exposure to loss in
    significant unconsolidated
    VIE assets(3)
    $ — $ 63 $ — $ —
    — 35 — —
    — 1,385 — —

    $ — $ 1,483 $ — $ —

    $ 63,462 $ — $ 72,558 $ 72,558
    1,337 — 27,021 2,154
    2,501 22,312 51,794 13,979
    2,034 1,353 21,874 4,762
    37,032 4,468 91,604 34,297
    16,560 17,003 22,570 17,843
    3,430 53 13,662 2,711
    2,124 2,790 9,593 1,643
    — 58,543 — —
    317 140 11,282 212
    1,795 12,809 10,560 1,882

    $ 130,592 $ 119,471 $ 332,518 $ 152,041

    $ 35 $ 604 $ 52 $ 45

    $ 162 $ — $ 23,756 $ 162

    $ 130,789 $ 121,558 $ 356,326 $ 152,248

    Total stockholders' equity 126,062 126,962 (1 )


  37. mmckinl

    Canucklehead said…

    The solution out of this mess is to stimulate the risk takers. This may well mean tax cuts. Cutting taxes when tax revenue is tanking seems to be a no-brainer. Reward the risk takers as they will lead the economy out of this mess. You can’t get blood from a stone.


    More tax cuts! … it is wealth disparity that got us into this mess! The wealthy garnered more and more of production and with their profits loaned to the people to in-debt themselves until the whole Ponzi Scheme collapsed off insolvency.

    We need fiscal stimulus from debt free money while underwriting it with higher taxes on the wealthy …

  38. Anonymous

    Hey all,

    If you read today’s FT (Lex column) and Barrons (cover), you’ll see proposals for addressing the financial crisis. They seem to assume the only outcomes are either stagnation like Japan or gifting the bankers with enough trillions to make them whole. They do not address — in any way shape or form — the possibility of forcing haircuts on bondholders.

    Someone should write in to the FT and Barrons recommending Martin Wolfe’s or Chris Whalen’s or Eugene Fama’s suggestion of forcing insolvent banks to reorganize by wiping out the shareholders and giving creditors stock in exchange for their debt claims. And maybe 1 step further, of separating the assets into a good bank (with liquid assets) and a bad bank (with junky assets), and giving creditors a combination of equity in the 2 banks.

    Feceivership/workout only hurts bondholders and counterparties. Those people get the deal they paid for, to the penny.

  39. Anonymous

    KJ said

    It’s extremely simple. ‘Income’ has fallen off a cliff. People were living high on the mountain top; now they’ve had to pack up and move to the valley. They won’t be back on the mountain top anytime soon. This isn’t just an L-shaped recession; it’s a reversion to the mean. It was a bubble. It’s burst. It’s over. People have lost their third income. A lot of people are losing their main income. And many more are taking pay cuts just to keep a job. Where will the money come from to ‘restart’ personal spending?

    Could not agree more. Most of the acres of analysis of this crisis seem to miss this simple point. In the past 30 years credit came to replace earnings as the main driver of the economy. In fact while borrowing went up the real value of some of the key underpinnings of the system such as wages fell in inflation adjusted terms. As the debt mountain grew it was inevitable it would outrun the capacity of the underlying economy to support it. At the end the bubble only had the momentum of the asset price inflation it had generated to support it. What we are seeing now is not a recession or even a depression but a major system failure which is not going to be solved by merely rebooting the economy with more borrowed money.

    This is not going to end until the debts have been be paid off, written down or written off, and earnings once again become the main driver to spending.

  40. Anonymous

    If the public needs a government bailout it should get a government bailout, to help it out of debt. Anyone who calls that “suboptimal” has different interests at heart.

    The public is not opposed at this time to bank nationalization. Calling that a “US tradition” is just a bow to the power of the capitalists and the banks themselves.

  41. Anonymous

    Why don’t you summarize it and review it! You just copied and pasted someone else’s work on your website. While you give them credit and provide a link, it’s not really fair use what you are doing. You are not making this your own. You’re just hoarding all of the attention to your website.

  42. Anonymous

    I may be mistaken, but stocks and bonds have always been sold as investments that may lose value. So I don't understand why insolvent banks weren't just taken over by the FDIC and sold to other banks as usual. If the bank being sold was decent, stock and bond holders would lose money, but maybe not all of it. If they lost all of it, well, too bad: that was the deal they signed up for when investing in the bank. The only ones who should not lose ANYTHING are the depositors.

    I do get the problem of bad follow-on effects if the bondholders are wiped out, especially re: insurance companies. But the insurance companies are just as bad as the banks: if an insurance company sold an anuunity based on probabilities of future events (like bonds having a certain value), then there is a small but possible chance that this deal would not work out. Guess what: it didn't work out. I'm sure the insurance companies have escape clauses in their contracts for this possibility. I don't think it's right that ordinary people believed the insurance companies when they bought into these schemes, so the insurance companies should go down too.

    To me, the biggest problem in the US is that government does not prevent corporate mergers that would lead to "systemically important" entities. We should not have ANY corporations that are so large that they can't fail. In cases where we do, the government should force them to break apart.

    Centralization has benefits of scale, but it also has many problems. IMO small should always be preferred over large to ensure resiliency when mistakes are inevitably made.

    My banking rescue plan is:

    1. Make the banks give back all the TARP money. If they can't, they go under the nuturing care of the FDIC.

    2. Any bank that wants to take over another bank has to pass an FDIC soundness test. This is to prevent large sick banks from buying small good banks with their crazy "assets".

    3. It's acknowledged that we have banks that are "too big to fail". Fine: break them up into whatever size pieces that aren't too big to fail. Do it first by state to make things easy.

    4. If the megabanks fail, let the smaller banks bid on their assets. Who cares if it takes forever? As long as the depositors know their deposits are insured, it shouldn't matter, and even if the depositors get scared and move their money to another bank, the funds are still "in the system". It doesn't contribute to a run on the whole system, just on the bank that failed.

    In my small southern Indiana town of 30,000 people we have WAY too many banks:

    – Chase (2 branches, maybe 3)
    – Your Community Bank (3 branches)
    – National City
    – Fifth-Third
    – BB&T
    – Stockyard
    – New Washington State Bank
    – Harrison County
    – First Savings
    – Mainsource
    – Regions
    – First Republic

    When I was a kid 40 years ago, our town had 1 or 2 banks, and people somehow managed. I really don't see why we need a dozen now, especially since people can now get loans and other banking services via the Internet. There is a need for LESS physical banks – not more. In my town, they are just cluttering up the landscape. It's stupid.

  43. Anonymous

    Relax, the mess is now fixed:

    Savoring his first big victory in Congress, President Barack Obama on Saturday celebrated the newly passed $787 billion economic stimulus bill as a “major milestone on our road to recovery. “

  44. Anonymous

    6:11, you’ve just revealed yourself to be a moron. Go look at the VoxEu site. They authorize reproduction as long as attribution is made. Did it occur to you that the writers there might PREFER being cited long form or in entirety?

    And who are you to be intellectual property police, anyhow?

  45. tooearly

    ” The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30% devaluation of the krona which produced a long period of strong export-led growth. Needless to say, the US is in no position to emulate this aspect of the Swedish success story.”
    You wrote: “Yves here. I wouldn’t bet on that. In fact, if I were the Fed, I’d very much want a cheaper dollar, but the conundrum is how to achieve that without causing more global instability.”
    It matters not whether the fed might want to devalue the dollar: that isn’t his point. His point is we are NOT in a position to create export led growth”

  46. artichoke

    We DO need a currency race to the bottom, competitive devaluations. We need that to reduce the real value of debts. We need inflation in every country.

    Don’t resist it, embrace it, seriously. Otherwise the debts just cannot be repaid.

    China will complain, they won’t buy Treasuries, the Fed will buy the Treasuries instead. There is no other way.

  47. groucho

    “Yves here. I wouldn’t bet on that. In fact, if I were the Fed, I’d very much want a cheaper dollar”

    Yves, maybe, but probably NOT. The FED knows which side it’s bread is buttered on and it wants it face up if it’s dropped from the counter or table.

    The current game(in the US) reminds me of the extended “rock-scissors- paper” game on the show “the big bang theory”; which adds “spock” and “lizard” which gives us 5 conflicts which have to be sorted out in the current evolving crisis.

    In the US there are at least 5 players that are at the table: the Fed, the Treasury, the Congress, the President and the People(foreign creditors are looking for a spot at the table as well)

    The Fed has a very weak hand, but has good poker skills. It has to follow the Treasury’s directives “no matter what”. In the past “strong dollar” talk was enough to give the Fed “room for maneuver”. This is no longer the case.

    Going forward, fiscal and monetary policy will have to be “in contango” with future productivity growth.(no more dollar standard “free lunch”)

    A weak dollar policy is impossible for the US unless it wishes to start WW3.

  48. Timy

    The author is clearly wrong on estimating the cost to recapitalise the US banking sector. If losses to financial institutions are in the order of $2tr, it would take more than $200-300 billion to recapitalize the banks. Every dollar of loss in its balance sheet translates into equal loss on the tangible capital of the banks (the author assumes a leverage of 10x, this is irrelevant). Hence the cost of recapitalisation of $200-300 billion is clearly wrong, otherwise, just the top 20 private equity funds and the top 5 sovereign wealth funds in the world would, without leverage, be able to buy over the whole US banking sector today.

    Second, the author mentioned that 3 sectors of the US economy are deleveraging: banks, cobsumers and firms. He mentioned only the need to recapitalise the banks, what about the consumer and the firms? Assuming that banks tomorrow are recapitalized, would consumers and firms start to borrow again as before? If not, why?

    Third, as the new administration in Washington is quickly finding out, dis-saving by the government creates a circularity – even if the US federal debt to GNP is not excessive, total US debt. including GSEs, states and municipalities, plus private sector is by conventional wisdom, excessive. Even at the current “measured” stimulus levels, the bond market is calling the FED’s bluff on buying treasuries, 10-year yield has surged 50% in less than 3 months from 2% to 3%. Clearly it is doubtful if the US government can even afford the same level of stimulus as the Japanese could.

    All in all, there is still no new insight from the author on how to proceed from here. An L-shape recession is inevitable.

  49. robert

    groucho said:

    “A weak dollar policy is impossible for the US unless it wishes to start WW3.”

    please elaborate

  50. Anonymous

    It has become fashionable lately to claim that WWII finally ended the depression for the US because the huge deficits on the government side allowed healing on the private side. What is overlooked in every such claim I’ve read is that during WWII the productive capacity of most of the world was blasted to dust, leaving the US as the only functioning mass-production economy on Earth. That MIGHT have had something to do with, don’t you think?

  51. ciccocicco

    @ Timy
    “He mentioned only the need to recapitalise the banks, what about the consumer and the firms? “

    If the banks are recapitalised by 3 Trillion because of 3 trillion losses, those losses are debts of consumers or firms that are “canceled”. So this automatically deleverages also the consumer and the firms. No need to double count.

    Also I would say that I refuse to believe the 3 Trillion number, but this is another story.

  52. Richard

    I just want to get in on nationalization.

    I spent nearly 30 years in politics in a big New York county, coming to know pretty much every elected official from Congressman on down, executive and legislative. Believe me, you don’t want these people running anything, and that’s what you’ll get, what you’ve already got, in fact in Pelosi, Frank, Dodd et.al. It’s not just that they don’t know how to fix things, it that fixing things isn’t even their top priority. That is to posture and pontificate while their hangers-on assure them of their genius and their subjects prostrate themselves before them. State control means control by these yo-yos.

    As to the possibility finding leaders among the graduates of our finest institutions of higher education. Fact is, every President after Ronald Reagan has either a graduate or undergraduate (or both) degree from an Ivy League university, including the current one. Big whoop.

  53. Anonymous


    Your argument makes no sense. Legislators don't run things, beyond their own staff and election campaigns. Your data set is irrelevant.

    What is relevant is: how does the FDIC do in winding up banks? How did the RTC do in the S&L crisis. Both get good marks.

    Bankrupt companies don't get the right to continue operating on the government dole, with no big changes in strategy. The auto industry is being treated much more harshly than the banksters. If they can be put into receivership, I see no argument for not doing the same with the big banks.

  54. Anonymous

    Anonymous of 11:30 AM

    Yves and fellow commenters, have you considered that the PTB are not only well aware of the various 'common sense' solutions (eg default, BK, nationalization, etc) to the debt overhang conundrum as expressed here & other financial blogs, but are way ahead of us in terms of understanding the expected outcomes?

    I’m now operating under the assumption that the PTB aren’t evil or clueless, but are providing very clear hints to anyone whose thought processes aren’t being obscured by the hunt to ‘get at the truth’.

    Think about it.

    Interesting take. I’m interpreting it to basically mean we get lost in the noise, while much more is going on (go figure).

    However, without a seat at the table, it is often difficult to decipher what exactly the strategy is. We can guess to what they are trying to do, but we don’t know.

    Further, I don’t know them, so I don’t know if their actions aren’t evil or clueless, just that they are rightly called masters of the universe because – right or wrong – they get to make decisions that affect billions of lives. At the end of the day, it basically means a lot of power in a few hands.

    If you can surmise what they are going for – besides expanding the grasp of a very strong central elite – I would be interested to hear it.

  55. Joe Pomykala

    Agree – “Much will depend on the willingness of the nation’s foreign creditors to continue to accumulate or at least to hold dollars at low rates of interest. Should this willingness falter, inflation will be hard to contain.”
    The US Treasury issued $1.2 trillion in debt in 2008 of which foreigners purchased $600 billion in the flight to “quality” as interest rates on treasuries reached 50 year lows. China, the biggest buyer and biggest net position in US gov. debt will not be purchasing as much with its lower exports, second biggest is OPEC, but with crude oil down 70% over last summer, they will not be purchasing the new US debt to support refinancing the old US debt (idiots – it is mostly bills) plus the new debt for teh stimulus bill. Only thing left is for US interest rates to rise to compensate lenders and the Federal Reserve to purchase it by printing money, and inflationary expectations will rise, or have been rising last few weeks. There is an asset price bubble now in treasuries. What do you think inflation will be 5 or 10 years? Not discounted in treasury prices, but markets will soon put that back in ala Fisher equation. Tic Tic Tic … ARM of US gov. on its debt – lets repeat mortgage mess X10, but instead of default, we have printing money. The bailout and stimulus will be paid for via inflation screwing holders of US treasuries, when they wake up – stageflation in US.

    Scottie – beam me up before we run out of ante-matter and the money/debt warp drive engines implode.

  56. bg

    Yves, you stepped on a bee hive with this post.

    I agree with a bunch of the posters that Nationalization is not a problem with the population. Bailing out the banks is a problem with the population. But that doesn’t seem to be stopping the politicians.

    I am an avowed libertarian, and have come to believe in nationalization of the banks. Virtually every intellegent person I know is reconsidering all of the previous ideas of government and markets, and all are easily persuaded of any action that seems correct.

    Dislike of nationalism is like the childhood fear of being naked in front of the opposite sex. But this discomfort is overwhelmed late in adolescence.

  57. groucho

    “A weak dollar policy is impossible for the US unless it wishes to start WW3.”

    please elaborate”

    robert, my thesis is pretty simple. For the US to devalue it’s currency it needs others to STOP doing likewise.

    Today’s world is vastly different than the Japanese mercantile problem. Then, talk(Plaza Accord) was all that was needed to get Japan “the mercantile” to “cut bait”.

    Getting China to move will not be so easy. Currently they have locked on to the dollar, so much for gradualism. And who can blame them? If they continue to revalue, the manufacturing jobs will leave just like they left Japan in the 80’s.
    BTW, Japanese revalue was a main driver in the development of the Asian tigers’ boom and bust. And of course that led to the dollar reserve accumulation system(BW2) that led to these latest bubbles that have now all popped.

    The driver of this whole process was the competition generated at the end of WW2. The US capitalized on it’s intact infrastructure and went back to “the business of business”. The Soviet’s decided to “keep on keepin’ on” with their war infrastructure kept intact to expand their geo-political domain.

    De Gaulle and Rueff put an end to Bretton Woods system by demanding gold(didn’t like the game of marbles). Nixon cut the dollar loose which resulted in the stagflation of the 70’s and loss of US global power.

    Killing inflation through high i-rates and knocking off private unions was the method used to regain dollar hegemony. This evolved, over time to the vendor financing models used by various players including Saudi Arabia and other ME kleptocrats as well as various Asian players up untill this current “Chinese conundrum play”(Greenspan, you should’ve read “The Dollar Crisis” by Duncan?)

    When Bernanke cut rates the dollar tanked against commodities but the Yuan depreciated against the Euro.(China’s new market, yeah!)
    Import driven inflation is the worst kind. In the past, the US(The State)could count on these dollars being recycled, so the Govt would actually BENEFIT from it’s own citizens loss. What a beautiful scheme! The US govt has financed itself to a large degree with this trade scheme.

    Where the US has faltered is in not realizing the burden of compound interest on the foreign held reserves, which will eventually grow exponential(that’s the way compounding works). For the US to be a winner in this game it has to be able to depreciate faster than the compounding effects of Treasuries(which is currently minimal, during the crisis but will explode once the banking system is restarted)

    The US govt is in quite the dilemma, so you can see why WW3 might be an option that it feels compelled to explore. For now, China has a lot of leverage over the US. But the US has only military leverage over China.

  58. artichoke

    To devalue the dollar relative to other currencies, indeed we must devalue faster than others.

    But that’s why I said we need inflation in all countries. The first thing to fix, which will fix some other issues, is to reduce the real value of debts. For that a devaluation of the currency is needed, and it’s fine if everyone devalues at once.

    That by itself would fix many problems in the banking sector, as well as devaluing the Treasuries we have been minting at amazing speed. I think that could fix all the fundamental problems!

    The US will come out of this weaker than before. It’s unavoidable and natural. But we will still be strong and catastrophe will have been averted.

    As an American I never wanted to boss around the world anyway.

  59. Anonymous

    Groucho, as a state in the classical or Weberian sense, military leverage is the best kind. You want us to pay up? Try.

  60. whitetower

    This entire discussion of “nationalization” is ludicrous. nationalization means putting rhe taxpayer on the hook for the bank’s obligations.

    Likewise, no bailout is possible — there is nobody willing to purchase enough Treasuries to create bailout funds large enough to matter. So that would leave the Fed purchasing Treasuries, meaning they would go to the printing presses and print money, resulting in catastrophic levels of inflation.

    The straightforward so0lution is to allow the insolvent banks to be put into bankruptcy/receivership — solvent banks/institutions would remain.

  61. Yves Smith


    You are ignoring the fundamental conundrum with large complex financial institutions, which we have discussed ad nauseum in other posts.

    We have a regime for winding up small and even reasonably large banks that fail. And that could just as well be called nationalization too: the bank has NO recourse, none, when the regulator walks in. John Hempton contends that both Wachovia and WaMu would have made it and did not have the characteristics of the small banks (say assets worth only 30% of liabilities) that the FDIC seizes.

    We do not have a regime for putting very large banks with crucial capital markets trading operations into bankruptcy, It would probably take years to devise and perfect (from a legal standpoint) such a regime.

    Large trading operations that go bust in a disorderly fashiion (think Lehman) leave a huge amount of destruction in their wake. Lehman’s recerviers estimate it will take ten years to figure out who is owed what. Lehman was the smallest investment bank, not a big CDS writer, not terribly international. For any of the bigger ones to go bankrupt would create more chaos.

    I think you misunderstand the nomenclature. When the FDIC takes over a bank, it DOES own it, although the FDIC seeks to dispose of assets and deposits as quickly as possible.

  62. artichoke

    Now I wonder, if the bankruptcy court cannot figure out what is owed by Lehman, why would their traders and accountants be any better?

    Is it because they fired the people who know how to use their systems?

    If it’s like that, it seems that a large percentage of the bank’s effort and payroll goes to just keeping all that stuff straight. That is consistent with my own observations.

  63. Anonymous

    Nationalizing the banks is like nationalizing a drug dealing cartel. It won’t work unless you want to be a drug dealer.

    The financial services industry has taken money – which should be limited in function to a simple medium for the convenient exchange of goods and services – and exceeded that basic function by charging usurious interest for its use. That enslaving function of charging interest for the use of money is immoral and was gained illegally by the bankster industry through the purchase of politicians who created the legislation that gave the banksters the right to deal the enslaving ‘drug’ of interest (credit). Credit is simply a replacement for the chains once worn by slaves on scamericas early plantations. The financial services industry, in the present day, now fulfills the role of overseer.

    Through aggregate corruption over generational time the banksters illegally purchased more and more legislation that allowed the financial industry to blossom and create a range of even more enslaving, more devious, and far more immoral ‘derivative’ ‘products’ that are in effect just more powerful drugs. And, because of the outright deception in their underlying base of assets, and the off the charts leverage used in structuring the newer of them, they represent, in effect, trillions of dollars of counterfeit money that have caused a complete break down of trust in the global financial system (enslavement system).

    Enter the Strauss neocons …

    In the past forty years or so, a small group of very small peckered ruling elite – the golden collar crowd – in a well orchestrated plan, have set the stage for, and implemented, an intentional and massive overdose of the credit drug right into the main vein of global commerce. Ouch! They did this to intentionally create a global financial crisis for the purpose of effecting a global financial coup. One can argue their motives, their abilities, or that there is even a conspiracy, but one can not argue that there is not a global financial crisis and that it was not created by scamerican gangster forces. There IS a global financial crisis and it WAS created by a scamerican gangster ruling elite!

    • Consolidate financial power.
    • Reduce population that pressures a now more unsustainable world.
    • Eliminate the middle class (old, expensive, high resource consuming, overseer class) globally and replace it with a law enforcement class (cheaper to maintain overseer class).
    • Tank competitive nation states and cause those states to expend energy and resources on dealing with domestic violence and have less for military spending.
    • Create a two tier ruler and ruled world where the ruled are kept in perpetual conflict with each other.
    • Etc. There are many more benefits for the ruling elite if you don’t get hung up on lost profit and realize that control is the end game.

    Some thoughts;

    • Tendering remedial plans is a waste of valuable time. These are disingenuous gangsters. You might as well shovel sxxt against the tide. Better to organize peaceful street demonstrations and election boycotts.

    • This is not plain old profit motivated vanilla greed. Psychopathic elite gangsters are at the helm.

    • We do not need a currency reset. We need a complete government reset with a new – truly democratic – electoral process. The current electoral process is a totally non responsive to the will of the people scam that should be boycotted by sending a ‘vote of no confidence in government’ letter to your supervisor of elections stating your intention to boycott and why.

    • We need to wake up and see the incremental aggregate generational corruption. It is that ever growing deception bubble that must be popped.

    Deception is the most powerful political force on the planet.

    i on the ball patriot

  64. Warrwim

    Nationalization is a loaded term to Americans as it connotes images of Castro seizing US assets in Cuba without compensation. In fact, the US has already “nationalized” the likes of Washington Mutual, IndyMac Bank and others by declaring the institutions insolvent and having the FDIC take over operations. I don’t know the details of the federal government’s equity stake in Citibank but one might venture that Citi has effectively been “nationalized”.

    We will probably have to increase the resources of the FDIC to winnow out the Zombie banks and provide some assistance or forebearance by the Fed may be necessary for certain institutional bondholders of seized banks.

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