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What is Democratic Capitalism?

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Saab

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The agony of international capitalism

http://newstodaynet.com/newsindex.php?id=10702 & section=13 .

Lehman Brothers, with a hoary history of 158 years in investment banking, is bankrupt.
Merrill Lynch, another Wall Street favourite with 94 years of charmed existence, has been gobbled up by Bank of America after being on the verge of collapse.

. And the world’s largest insurer, American International Group (AIG) has been downgraded by credit rating agencies and is racing against time to find a multi billion dollar infusion to stay afloat. A few weeks back, Bear Stearns, and investment bank biggie, folded meekly.

Fannie Mae and Freddie Mac was just about salvaged by Federal grant. After the crisis of the two days, the American authorities have had to intervene again. The Federal Reserve has agreed to inject $ 70 billion into financial markets amid turmoil.

The New York Fed, acting on behalf of the Washington-based Federal Reserve central bank, agreed to a series of so-called repurchase agreements to ensure market liquidity.

It provided cash to banks pledged against US agency and mortgage-backed securities, in operations amounting to $ 50 billion and 20 billion.The move steps up actions by the Fed begun last year when credit flows started seizing up as banks began reporting multibillion dollar losses and writedowns tied to the housing market’s woes.

It may not be recession in America; it could be much worse. Already composers of financial threnodies are talking of this sub-prime crisis being worse than the 1929 Depression. As one observer has said, the dollar figures may not be as large as in the stock market crash of 1929, which devastated the global economy.

However, the complex transactions have created unprecedented levels of uncertainty in the marketplace. As well, technology has placed increased pressure on how organisations *respond, offering them less time to co-ordinate considered rescue plans.

It is too early, and in a sense ludicrous to try and plot a graph for how things will pan out in the coming days. But it is more than clear that the bankers and Wall Street pundits had an inflated sense of their own infallibility. Many of these Smart Alec management school types were perhaps dazzled by their own previous success.

In their hyped up world of winning, no risk was not worth taking. Ergo, investment banks allowed hefty mortgages (loans in Indian lingo) to get into the hands of unqualified homebuyers. Apparently, nobody worried about monitoring the quality of the loans, and whether the repayments was possible at all.

It is a cautionary tale worth telling the desi financial whiz kids who are not above making the same mistakes that have brought crashing down the Wall Street wizards. In this seamless flat world, India is not above catching cold when America sneezes.

Apart from this market reality, the thing to take note of is the fact that Indian financial apparatus would do well to not mindlessly imitate the Western systems. Indian society is bedrocked on the concepts of handy thrift and intelligent providence. The Western concepts, in a sense, evaluates the present based on the prognosis for the future.

While Indian markets, though not highly evolved, defines the present based on the past.
There may not be a golden rule in this. But the latter concept has stood India in good stead so far. To totally fling out of the window in an eager glee to embrace the ideals of West will lead to unmitigated disaster.

The regular crisis in these so-called modern markets are warnings that India could ill-afford to ignore.
 
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The great recession

http://www.expressbuzz.com/edition/...mgLywPI=&SectionName=XQcp6iFoWTvPHj2dDBzTNA==
17 Sep 2008 01:46:00 AM IST

The recession in the United States is proving to be far wider and deeper than was anticipated a year ago in August 2007,when the phrase “sub-prime crisis” (referring to the crisis in the market for housing loans) came into vogue. The contagion has spread rapidly from the property mortgage market to the entire financial system in the world’s most powerful economy, sending shivers through the entire globe.

Last week the American government had to bail out Freddie Mac and Fannie Mae, the two firms that accounted for roughly half the bad loans in the housing market. Now the virus has paralysed the 158-year-old Lehman Brothers.

The financial services bigwig stated on Monday that it would be filing for bankruptcy. Bank of America has said it would be bailing out Merrill Lynch with a US$ 50 billion buyout to create the world’s largest brokerage firm at a time when the latter was threatening to go the Lehman Brothers way. Adding to the torrent of bad news on Black Monday, the American International Group (AIG), one of the world’s biggest players in insurance and financial services, has sought a $ 40 billion bridge loan from the US Federal Reserve as it faces a sharp downgrade from rating agencies.

Many saw the writing on the wall. But their fears were brushed aside as the prognostications of pessimists. It was argued that the richest country in the world should not be borrowing large amounts of money from the rest of the world, especially developing countries, at ridiculously low rates of interest.

It was pointed out that flows of hot money that had no relation with actual transactions in goods and services could not be sustained. These bubbles had to burst some day. That day has come.

The tragedy is that the US recession is going to impact lives not just in America but all over the world – in India too, a few thousand employees could get axed. There is yet another paradox.

The US has been the bastion of free enterprise capitalism. It has always argued in favour of market-friendly economic policies and against big government. Today some of the biggest names from Wall Street have gone to the Fed begging bowl in hand. The legacy of George W Bush will be remembered many years after he leaves the White House. And his successor will surely face an uphill task in reviving an economy that has gone into a tailspin comparable to the Great Depression of the 1930s.
 

KRS

Well-known member
Folks,

Now that bombs are exploding in India and there are news about certain financial institutions failing in US, all sorts of statements are being made that are totally incorrect and can not be supported by logic.

First and foremost, democracy and capitalism need not go hand in hand to be successful by themselves. Most of the scandinavian countries are democratic but quite a bit socialistic. They are quite affluent and manage their societies with an efficient functioning of a democratic government. They can do so, because their populations are entirely mono ethnic and are not diverse. So, they all can afford with their societies' consensus to adopt many socialistic programs. Big countries like the USA, and some European countries who are Capitalistic to varying degrees have to necessarily have both democracy and capitalism to thrive because of the diversity of their societies where consensus on the ways to implement various social programs are lacking.

So, for modern times where a benevolent King and autocracy are both anachronistic and passe, because no enlightened self governing society will allow it, there are only democracy and enlightened capitalism as systems to be adopted to flourish. Look around the world. Only countries which are backward in terms of not thriving in this 21st century world are the ones who are neither democratic nor capitalistic. By the way, capitalism in any diverse society usually leads to democracy eventually with affluence.

Capitalism is brutally efficient. It will punish incompetence and inefficiency mercilessly. If you look at the companies in the capitalistic market that died off recently, you will recognize that it is the market force at work. Economics is not static in the modern world - new innovations come, new ideas manifest and new ways to serve the needs of the population arrive. There is no other mechanism invented by man to suit to this reality.

Recession like the 30's? The person who wrote this above does not know the difference between the top and the bottom! What a nonsense! During the 30's more than 50% of US households defaulted on their mortgages. The 'mortgage' crisis of today has less than 7% defaulting, and the usual economic cycle always keeps it around 2%. I wish the persons who are posting above understand the financial fundamentals before they post such unfounded, illogical postings.

Capitalism is the ultimate meritocracy syatem. Some claim that it is not humanistic. But that's where a function of the government comes in. I think a private enterprise has to follow only two basic rules: Create wealth and follow the laws created by the government. A government that ventures in to a private company's enterprise to control it, will only kill it.

This is why both democracy based on true secularism and capitalism that is blind to religion, sex, age of any person within it is the proper answer to any country today with the complexities of today's economy, technology and life.

Regards,
KRS
 
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Saab

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Dear Friends,

I will continue to post news items of the ongoing developments world over on this subject and views put out by eminent journalists, economists and political philosophers so as to increase the awareness of our readers of this blog. I encourage all of you to share your thoughts as well as of those of others whom you consider as important and relevant for our discussion.

Regards,
Saab
 
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Fed rescues AIG for USD 85 billion

Wed, 17 Sep, 2008,12:21 PM​
. Fearing worldwide impact of collapse of American Insurance Group (AIG), the United States government has agreed to a USD 85 billion bailout that gives it control of the troubled insurance giant operating in 130 countries.

The US Federal Reserve decided to bail out AIG hours after it decided to keep the benchmark bank rate unchanged at two per cent, despite hopes expressed by many financial experts that it would be slashed.
The federal government reversed its decision against intervention late Tuesday after it became clear that AIG was unable to get bank loan and would have to file for bankruptcy protection within hours, leading to major consequences and danger to the financial system.

Only last week, the government had declined to support investment banker Lehman Brothers Holdings leading to it filing bankruptcy protection, but analysts say AIG was too big to be allowed to fail.

What frightened Fed and Treasury officials, the New York Times said, was not simply the prospect of another giant corporate bankruptcy, but AIG's role as an enormous provider of financial insurance to investors who bought complex debt securities.

That effectively required AIG to cover losses suffered by buyers in the event of securities defaulted. It meant AIG was potentially on the hook for billions of dollars worth of risky securities that were once considered safe.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson briefed lawmakers in Washington for about an hour on the rescue plan.

The lawmakers were said to have generally supported the plan though reports said some were not completely satisfied.

Analysts said issue whether tax payers should bail out financial institutions would be long debated but then it was clear that without government intervention, AIG would have to have filed for bankruptcy protection.

The financial markets, awaiting the fate of AIG, were relieved by the announcement of bailout but analysts said they would watch for some more time to see how they behave.

On Monday, AIG had sought to raise USD 40 billion in bridge loan to overcome its current difficulties. But the government had shown no interest in bailing it out.

An attempt to raise money from JP Morgan Chase and Goldman Sachs failed after the two institutions said that they could not raise the cash, leaving it with only two options - either feds intervene or AIG file for bankruptcy.

"The complexity of AIG's business, and the fact that it does business with thousands of companies around the globe, make its survival critical at a time when there is stress throughout the financial system worldwide," said the New York Times.
 
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Sensex back in negative zone

Wed, 17 Sep, 2008,11:52 AM
. The stock markets fell sharply after a promising start, with the benchmark Sensex plunging by over 180 points at 1100 hrs today due to profit-taking by speculators at higher levels.

The Bombay Stock Exchange benchmark Sensex, which moved up by 102 points in early trade, was quoted at 13,338.16 at 1100 hrs, down by 180.64 points or 1.34 per cent.

. The Sensex opened strong at 13,620.74, more than 100 points over yesterday's close, but soon slipped in the red.

Similarly, the 50-share Nifty of the National Stock Exchange dropped by 51.90 points, or 1.29 per cent to 4,023.00 at 1100 hrs, after rising to 4,116.70 points in early trade.

Marketmen said investors pressed heavy sales in bank stocks after the Reserve Bank yesterday hiked interest rate on FCNR (B) and NR(E)RA deposits and expanded the liquidity adjustment facility scheme.

India's largest private sector lender ICICI Bank was down by 3.68 per cent. The country's largest lender State Bank of India fell by 2.93 per cent.

The mid-cap and small-cap stocks, however, attracted some buying interest from retail investors.

Meanwhile, Asian stocks recovered and crude oil prices rallied smartly during morning trading after the Federal Reserve reportedly announced a bail out for the ailing American International Group (AIG).

Meanwhile, Foreign Institutional Investors (FIIs) have pulled out nearly USD 370 million from equity in the last two days.
 
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`Merrill buyout good for India'

Tue, 16 Sep, 2008,10:55 AM​
. Bank of America today said that its 50-billion dollar acquisition of Merrill Lynch would provide it with significant growth opportunities in India.

In an investor presentation webcast to discuss the deal, Bank of America Chairman and CEO Ken Lewis and Merrill Lynch chief John Thian said Merrill Lynch has been focusing on growth in India.

. The deal would result in "significant growth opportunities" in wealth management and investments businesses in India.

Merrill Lynch has been the market leader in the country with full local capabilities and there has been a significant expansion since increasing stake in DSP Merrill Lynch, the Indian entity, to 90 per cent, they said.

While Merrill Lynch has a notable presence in India, particularly in mutual fund and investment banking segments, BofA has also invested in the country as an emerging market.

Bank of America has five branches in India -- Mumbai, Delhi, Kolkata, Chennai and Bangalore.

Bank of America has said its Indian banking operations have consistently delivering superior returns year after year.

Its revenue in its Indian operations rose 30 per cent to Rs 861.7 crore and profit after tax rose 56 per cent to Rs 305.2 crore for the year ended March 31, 2008.

In October 2007, Bank of America made a capital injection of Rs 328.2 crore into its India operations, boosting the bank's capital base and strengthening its capital adequacy ratio.

It also owns a subsidiary in India called Bank of America Securities India Pvt Ltd, which is engaged in underwriting, dealing and trading of corporate fixed income securities and related capital market activities.

 
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Asian growth to ease to 7.5 per cent

http://newstodaynet.com/newsindex.php?id=10697 & section=8

Tue, 16 Sep, 2008,01:17 PM​
. ADB Growth across developing Asia will slow to 7.5 per cent this year from 9 per cent in 2007 in the face of rising inflation, turbulent financial markets and weakening world demand, the Asian Development Bank said Tuesday.

. Inflation is expected to climb to 7.8 per cent this year from 4.3 per cent last year, the Manila-based lender saidin a report, further squeezing a region where food and fuelcosts account for nearly 60 per cent of household spending.

Next year could see inflation ebb to 6 per cent. Downturns in the US and Europe, buyers of vast amountsof Asian-made goods, will only aggravate the situation.Already, there are signs that demand for exports is waning.

"Uncoupling is a myth," ADB chief economist Ifzal Alisaid, referring to the idea that Asian economies are increasingly less dependent on the US and Europe to drive their growth.

The region still depends on industrial countries to fuel its growth. If the global slowdown extends beyond 2009, the repercussions for the region could be severe," he said.

The forecast comes amid turmoil in financial markets, with Asian stocks plunging today on news about the bankruptcy filing of US investment bank Lehman Brothers and that Bank of American is buying Merrill Lynch.

The Chinese economy, which expanded 10.4 per cent in the first half of the year, is likely to see its growth rate moderate somewhat to 10 per cent for the year due to softening demand for its exports and tighter fiscal measures, the ADB said.

The country will post 9.5 per cent growth for 2009 as its trade surplus and investment shrink.On Monday, the Chinese central bank said it was cutting interest rates for the first time in more than six years to stimulate growth.
 
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Rupee value plunges; biggest fall in a decade

16 Sep 2008, 1908 hrs IST,REUTERS
MUMBAI: The rupee posted its biggest fall in a decade on Tuesday, hit by risk aversion and banks arbitraging a weaker offshore rate, although suspected central bank intervention stopped the slide just short of 47 per dollar.

The partially convertible rupee ended at 46.89/90 per dollar, off a trough of 46.99 which was its lowest since July 24, 2006.

The rupee fell 1.8 percent from its close of 46.05/06 on Monday, its biggest fall since May 14, 1998, according to Reuters daya, when the currency fell 2 percent after sanctions were imposed on India for its nuclear testing. One-month offshore non-deliverable forward contracts were quoting at 47.15/25, weaker than the onshore rate, indicating a bearish near-term outlook for the rupee.

That also created an arbitrage opportunity, where the dollar is bought against the rupee in the onshore market and sold in the offshore NDF market to exploit the price differential. "There are no (dollar) sellers in the market apart from the central bank. There is lot of oil, equity and NDF-related dollar demand, and even importers are covering near-term imports," said Madhusudan Somani, associate director of financial markets at Yes Bank.

"The rupee may test 47.20-25 levels in the near term," he added. Dealers said the central bank was seen selling dollars to halt the rupee's sharp decline, but sales were offset by demand for the US currency. At its low on Tuesday, the rupee was down 6.5 percent in September and more than 16 percent in 2008. Dealers estimated the central bank had sold $1.5-$2 billion to put a floor under the rupee on Tuesday.

Indian shares pulled out from a nosedive to end almost level on Tuesday after they had opened down 3.5 percent. Capital outflows from the local shares so far in 2008 total a net $8.4 billion, including $1 billion in September, a sharp turnaround from a record net inflows of $17.4 billion in 2007.

Traders said broad strength in the dollar versus other currencies overseas was also hurting sentiment on the rupee. The dollar steadied near 4-month lows versus the yen on Tuesday, but held gains against high yielders as investors took refuge in safe-haven assets following the collapse of Lehman Brothers.
 
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Bank fears, AIG fallout drive Wall St sell-off


REUTERS
18 Sep 2008 01:17:00 AM IST

NEW YORK/LONDON: Shares of Wall Street firms Morgan Stanley and Goldman Sachs plummeted on Wednesday and Britain's biggest mortgage lender looked set to be sold in the latest signs of extreme distress in the financial industry.Tuesday's surprise $85 billion rescue of insurer American International Group by the U.S. Federal Reserve did little to calm investors' nerves, and U.S. stocks dropped as much as 3.6 percent.The Fed move capped a week of bailouts, a bankruptcy on Wall Street, and central banks around the world flooding the financial system with money to prevent it from seizing up.The result: a seismic shift in the financial industry, with some of Wall Street's biggest names disappearing overnight."The fear is who is next," said John O'Brien, senior vice president at MKM Partners LLC in Cleveland. "It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear."Shares of Morgan Stanley and larger rival Goldman fell as much as 43 percent and 27 percent, respectively, even after both reported better-than-expected quarterly earnings on Tuesday."I'm assuming that Goldman Sachs and Morgan Stanley are lining up dancing partners. They don't want to be ... this week's victim," said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.The cost of protecting the investment banks' debt spiked, reflecting investor fears that their debt issues are no safer than junk bonds. Both are currently rated investment grade."The credit crunch and credit contraction is intensifying," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. "The action in Morgan Stanley in light of what was better-than-expected numbers last night is disconcerting."Goldman spokesman Lucas van Praag said, "We think the markets will positively differentiate those financial institutions that have global, diversified business models and that outperformed through this crisis."Morgan Stanley spokeswoman Jeanmarie McFadden declined comment.

PROPPING UP THE SYSTEM

In the latest sign of regulatory anxiety, the U.S. Securities and Exchange Commission tightened enforcement of rules against abusive short-selling, or investor bets on declining share prices."Seems like the SEC is a day late on the rule ... Morgan Stanley is clearly in the short sellers' sights," said Andrew Brenner, senior vice president at MF Global in New York.Other distress signals had popped up earlier: The cost of borrowing overnight dollars spiked above 10 percent, indicating a deep lack of trust spooking the inter-bank lending market in Europe.And Bank of Ireland became the latest bank to cut its dividend, causing a sell-off in Irish banking shares.British bank Lloyds TSB was in advanced talks to buy domestic rival HBOS Plc to create a 28 billion pound ($50 billion) mortgage giant.The talks underscore how quickly authorities around the world are ditching long-held beliefs about free markets and competition as they seek to counter the credit crunch.Lloyds, for example, was previously blocked from buying a smaller mortgage bank.Then there was the shock British government decision in February take over troubled bank Northern Rock -- the first major nationalization in Britain since the 1970s.U.S. authorities also have moved to prop up the financial system.The AIG rescue comes just over a week after the bailout of mortgage finance companies Fannie Mae and Freddie Mac, and six months after the Fed brokered the sale of failed investment bank Bear Stearns to JPMorgan Chase.AIG's bailout brings to about $900 billion the total of U.S. rescue efforts to stabilize the financial system and housing market. Authorities may get much of that money back -- if asset prices don't slide further.The week has already seen two legendary firms bite the dust: Lehman Brothers Holdings Inc filed for bankruptcy, and Merrill Lynch & Co threw itself into the arms of Bank of America Corp.British bank Barclays Plc gave Wall Street a small boost on Tuesday by agreeing to buy Lehman's Manhattan headquarters and investment bank for $1.75 billion and taking aboard 10,000 staff.

YARD SALE AT AIG

AIG's newly appointed chief, former Allstate Corp CEO Edward Liddy, was poised to hold a big yard sale to pay off the Fed loan. There are plenty of interested bidders, AIG's main regulator told business television channel CNBC.AIG, which has businesses ranging from life insurance to airplane leasing in 130 countries, has a big incentive to raise cash: It is currently paying more than 11.4 percent interest on the $85 billion loan.Japan's cash-rich insurers and Australia's top player, QBE Insurance, are seen as potential buyers."Its a no-brainer," said CLSA analyst Yuin Lim in Hong Kong. "If you have a non-growing mature market, excessive capital, you have a big war chest there."AIG faced a cash crunch after $18 billion of losses over three quarters, largely because of complex securities that are tied to mortgages, and which plunged in value as the U.S. housing crisis deepened. The rescue kept AIG from surpassing Lehman as the largest corporate failure ever.If it was meant to prevent a deepening of the credit crisis or sooth investors, it didn't work."The system will remain unstable and fragile," the chief executive of top bond fund Pimco, Mohamed El-Erian, told Reuters. "Further action will be required that targets both, and I stress both, institutions and the system as a whole. Otherwise, and as has been repeatedly the case in this crisis, seemingly bold policy actions will turn out to be too little, too late."
 
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The Great Depression of 2008?

Reuters 20 Sep 2008 07:54:00 AM IST

Reuters
20 Sep 2008 07:54:00 AM IST

NEW YORK: There's something about hundreds of billions of dollars vanishing overnight that begs a comparison to the 1929 market crash and the Great Depression.

Almost -- but not yet.

The United States has seen the destruction of some of its biggest names in finance, thousands of lost jobs and threats to the stability of the world banking system. All in one week.

The losses are staggering, more than $1 trillion in taxpayer dollars pledged by the U.S. government to mop up bad mortgage debt and prop up the financial system. The final tab could be far greater.

To put it in perspective for Wall Street and the world outside, news outlets have latched onto the 1929 crash and the subsequent Great Depression as their historical benchmarks.

Michelle Caruso-Cabrera, a reporter at business news cable network CNBC, told viewers it was "one of the most historic weeks in financial and American history.

"Hold on a minute, market veterans and scholars say. It's serious, because it has been preceded by a 13-month credit crisis that has gotten worse despite government efforts to solve it. But it has yet to reach the cataclysmic scale of the Depression.

"I've lived through plenty of debacles. Each time you go through it, it seems like the worst since 1929," said Theodore Weisberg, a New York Stock Exchange member for some 40 years.

"The nomenclature of the word 'crisis' has cheapened," said Roy Smith, a professor at New York University's Stern School of Business and former partner at Goldman Sachs.

No one disputes that it is a profound crisis, but Depression-level may be overdoing it, said Allan Sloan, Washington Post and Fortune magazine columnist.

"I don't think so, considering that the Great Depression had thousands of banks failing and people losing their life savings, 25 percent unemployment and social unrest and tent cities of the poor," Sloan said.

BLACK MONDAY, TUESDAY, THURSDAY


Financial earthquakes that have prompted fearful murmurings of the bad old days include the Asian financial crisis in the late 1990s and the dot-com bust early in this decade that wiped trillions of dollars of paper wealth off the Nasdaq market.

Then there was October 1987, when stock markets around the world crashed. History books are spotted with numerous references to Black Mondays, Tuesdays and Thursdays.

It is clear that the current financial meltdown that killed Lehman Brothers, sold off Merrill Lynch and forced the U.S. government to take over insurance provider American International Group could radically change nearly a century's worth of financial policy.

Each faltered on debt and other interrelated, complex financial instruments that ensured a more rapid collapse than Wall Street and regulators could handle.

That is a key similarity to the crash 79 years ago, said Maury Klein, professor emeritus at the University of Rhode Island and author of "Rainbow's End: The Crash of 1929."

"What's similar in each case is you have a situation where you're starting to play in ever-larger stakes with things that you don't understand," he said.

But today's overall U.S. economic picture is quite different.

"With just 6 percent unemployment, we are having a debate as to whether we are even in a recession," said Richard Sylla, professor of the history of financial institutions and markets at New York University.

WHERE WILL IT STOP?


Prominent economic columnist Robert Samuelson wrote a piece in the Washington Post in July titled "A Depression? Hardly." He said he would write the same column now, but "with less conviction.

"That is because there is no telling where the erosion will stop. The bad-bet loans made on homeowners during the recent U.S. housing boom and shady trades could burrow deeper into the financial nervous system than anyone anticipated.

This can hurt regular people too. It may destroy their investments, further degrade home values and cost them their jobs. It may be hard, but not as hard as eating a loaf of bread as their sole daily meal before sleeping under the stars.

"The only question is whether the crisis is so deep that you can't get at it at all," said Columbia University professor and Council on Foreign Relations Senior Fellow Jagdish Bhagwati. "We have instruments like the Federal Reserve coming in. Only the United States could do it in such a big way.

"The fear at the back of everyone's mind is that the turmoil could spill into the real economy -- "the factories where they actually make things and retail establishments and transportation providers," said Robert Bruner, dean of the University of Virginia's Darden School of Business.

Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson are determined to avoid the mistakes of 1929, said Brad DeLong, economics professor at the University of California, Berkeley.

"They want to make their own, new mistakes."

(Additional reporting by Bob Margolis)
 
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Saab

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U.S. launches all-out attack on credit crisis


Reuters
20 Sep 2008 07:51:00 AM IST

WASHINGTON: The United States surged into action on Friday to launch an all-out attack against the worst financial crisis since the Great Depression, readying a plan to tap hundreds of billions of dollars in taxpayer funds to buy up toxic mortgage-related debt.

Capping a week that has reshaped Wall Street, U.S. Treasury Secretary Henry Paulson urged Congress to quickly agree on a program for huge purchases of bad debts held by banks and other financial institutions. Lawmakers promised fast action.

Losses on these debts have choked the financial system, forced lenders into bankruptcy and led the economy to what U.S. President George W. Bush called a "pivotal" moment.

"America's economy is facing unprecedented challenges, and we are responding with unprecedented action," Bush told reporters in the White House Rose Garden.

After having taken a series of other emergency steps that failed to erect a firewall against the spreading credit turmoil, U.S. authorities turned their attention to the underlying problem -- the rising tide of bad mortgage debt.

Paulson offered few details on Treasury's evolving plan but said he would work through the weekend and next week with Congress to get a program put in place. Congressional aides said they expected to see more details within 24 hours.

Rep. Steny Hoyer, the Democratic leader in the House of Representatives, said the chamber would likely take up a bill to implement the plan early next week. House Speaker Nancy Pelosi said lawmakers would stay in town past their hoped-for adjournment next Friday if needed to pass it.

"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Paulson said at a news conference. "We're talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem."

U.S. stocks, which chalked up their best day in six years on Thursday as talk of the more aggressive approach spread, soared again on Friday. The blue chip Dow Jones industrial average closed up 368 points, or about 3.4 percent.

The news also caused waves in the U.S. presidential campaign. Republican hopeful Sen. John McCain knocked the Treasury for taking a haphazard approach to the crisis, while rival Democrat, Sen. Barack Obama, supported the latest moves.

$1 TRILLION

Paulson and Federal Reserve Chairman Ben Bernanke have already put close to $1 trillion of taxpayer money on the line to try to keep credit flowing, and the new effort could double that amount.

At a meeting with congressional leaders on Thursday night, Paulson and Bernanke made the case for aggressive action to get ahead of events that could devastate an already weak economy.

"When I heard his description of what might happen to our economy if we failed to act, I gulped," Democratic Sen. Charles Schumer of New York said, referring to Bernanke's appraisal.

A congressional aide on a telephone conference call between the Fed, Treasury and lawmakers on Friday said that Bernanke had warned them "If Congress doesn't act soon, there will be an economic meltdown."

Fed spokeswoman Michelle Smith declined to comment directly on the accuracy of the chairman's reported remark, but confirmed that he painted "a dark scenario".

At his news conference on Friday, Paulson said the latest plan was the best hope of ultimately protecting the public purse and avoiding a grave recession.

"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," he said.

A Treasury official said that hedge funds and non-U.S. financial institutions would not be allowed to offload their troubled assets onto American taxpayers under the plan.

The White House said it was too soon to say how the plan would impact the nation's debt, and said it was possible many of the funds could be recovered as markets stabilize and currently bad assets are sold off.

Paulson told lawmakers on the conference call that the government would get most of the money back in the long run, meaning some level of a loss, the congressional aide said.

Other congressional aides also said that Treasury would make a proposal to Congress within 24 hours to hire asset managers to implement the purchases, and would seek maximum flexibility on the types of assets that could be bought.

One of those aides said the proposal may call for locating the program initially within the Treasury and then possibly migrating it later into an independent entity, as long as that could be done without slowing the market rescue process.

Another congressional aide said the issue of whether the government should receive warrants in companies that are offloading assets is being discussed.

It was still unclear who might be in charge of the program and how much taxpayer money it will likely cost.

Sen. Richard Shelby of Alabama, the top Republican on the U.S. Senate Banking Committee, said on ABC's "Good Morning America" the asset-purchase plan could cost anywhere from $500 billion to $1 trillion.

The plan is reminiscent of the Resolution Trust Corp, a government agency set up to help the nation out of the savings and loan crisis in the 1980s. The RTC, however, took whole institutions under its wing whereas the new fund under discussion would remove bad assets from the balance sheets of financial institutions to help revitalize them.

One financial source briefed on other calls made by the Treasury to Washington lobby groups said that the Treasury feels it has the authority to take on these assets directly, and therefore won't need to set up a so-called RTC2.

EMERGENCY ACTIONS


The major effort marked the latest dramatic government bid to prevent credit markets from freezing up over huge losses on subprime and other mortgage debt.

These have forced U.S. investment bank Lehman Brothers Holdings Inc into bankruptcy, Merrill Lynch into a hasty marriage with Bank of America, the Fed to bail out troubled insurer American International Group, and the government to seize control of mortgage finance giants Fannie Mae and Freddie Mac.

"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," Paulson said.

The Treasury also said on Friday that it would siphon up to $50 billion from a fund established in the 1930s to conduct foreign exchange market intervention to backstop the rattled U.S. money market mutual fund industry.

This long-safe corner of financial markets, home to some $3.5 trillion of deposits, has increasingly appeared at risk of falling victim to the year-old credit crunch. Money market fund assets dropped by a record $169.03 billion in the week ended Sept. 17 as jittery investors pulled money out.

The Treasury said it would back money market funds whose asset values fall below $1 a share. Separately, the Fed said it would lend money to banks to finance purchases of certain assets from money market funds.

"They are absolutely petrified of ... a run on financial assets," said Boris Schlossberg at GFT Forex in New York.

A panic in money markets set in on Tuesday, when the Reserve Primary Fund, a fund whose assets had tumbled 65 percent in recent weeks, fell below $1 a share in net asset value because of losses on debt issued by Lehman Brothers.

The Treasury also said it would step up a program announced this month to directly buy mortgage-backed securities in the market, and said Fannie Mae and Freddie Mac would also increase their buying -- a further effort to get credit flowing.

(Additional reporting by Emily Kaiser, Patrick Rucker and Donna Smith in Washington, Lucia Mutikani in New York, Jeff Mason in Green Bay, Wisconsin)
 

KRS

Well-known member
Folks,

In a non presidential year, AIG would not have been saved. It would have been allowed to go by the wayside like the Lehman Brothers.

By the way, the originator of this thread has promised views from various 'eminent economists and others' to buttress his original thesis that capitalism and democracy do not measure up to their 'tom-tomed' status. I am still waiting for such articles. So far we have editorials from two non economic sources of news - one of them is a blog - and rest are all news!

Let me make sure that the readers understand what is going on:

1. Starting from Clinton administration and continuing in to Bush administration, Fannie Mae & Freddie Mac, who are backed by the US Government as quasi govenmental entities (in terms of guarantees), have become political organizations, in the sense that they backed the mortgages given out by private concerns.

2. This meant that they have 'pressured' the private lenders who would lend to the borderline credit worthy clients to be approved, based on their backing.

3. Unfortunately, the investment banks saw these mortgage loans as valid financial instruments and marketed them to various investment entities as 'financial instruments'.

4. While this is perfectly acceptable (because of the risk/reward concept of capitalism) for investments, the buried risk was not always transparent and the Bush administration, which believed in Capitalism, got confused betwenn the Government's responsibility to regulate greed and the concept of not interfering in a firm's business.

5. So, when 7% of defaults occurred in the housing market, because the house prices stopped increasing in certain important parts of the country, it had a domino effect.

6. This is obviously in the domain of private business - people who knew they could not afford certain houses went ahead and applied for the mortgages, based on their belief that their house prices would go up for a while and the banks who lent them the money even though they were NINJA loans 'No Income, No Job, No Assets' did so, because there was no regulation!

7. Hence the mess. In a normal Capitalistic climate, all the banks in the current predicament would have been allowed to suffer the consequences, and more importantly those folks who were greedy to get the houses beyond their means would have been allowed to bear the consequences of their foolish decisions. But because of the impending elections, the socialist concept of propping up these banks and the folks has come about.

8. Goes to show you that socialism is alive and well even in a capitalistic society!

Regards,
KRS
 
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Saab

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What the Bush administration is doing to bail out the Wall Street in not an election sop. Here is a write up that says that the Bush admin had painted itself into a corner and doing this unprecedented bail out in a desperate attempt to save the country from going bankrupt.

This has nothing to do with the November election.

Is this an attempt to save the malaise or is this a leap of faith?

The information dissemination and the resultant discourse will continue.

Saab

September 21, 2008
$700 Billion Is Sought for Wall Street in Vast Bailout

ByDAVID M. HERSZENHORN
WASHINGTON — The Bush administration on Saturday formally proposed a vast bailout of financial institutions in the United States, requesting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from the private firms.

The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.

"This is a big package, because it was a big problem," President Bush said Saturday at a White House news conference, after meeting with PresidentÁlvaro Uribeof Colombia. "I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we're going to get a lot of the money back."

After a week of stomach-flipping turmoil in the financial system, and with officials still on edge about how global markets will respond, the delivery of the administration' s plan set the stage for a four-day brawl in Congress. Democratic leaders have pledged to approve a bill but say it must also include tangible help for ordinary Americans in the form of an economic stimulus package.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill and were expected to work through the weekend. Congressional leaders are hoping to recess at the end of the week for the fall elections, after approving the bailout and a budget measure to keep the government running.

With Congressional Republicans warning that the bailout could be slowed by efforts to tack on additional provisions, Democratic leaders said they would insist on a requirement that the administration use its new role, as the owner of large amounts of mortgage debt, to help hundreds of thousands of troubled borrowers at risk of losing their homes to foreclosure.

"It's clear that the administration has requested that Congress authorize, in very short order, sweeping and unprecedented powers for the Treasury secretary," the House speaker,Nancy Pelosiof California, said in a statement. "Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes."

Ms. Pelosi said Democrats would also insist on "enacting an economic recovery package that creates jobs and returns growth to our economy."

Even as talks got under way, there were signs of how very much in flux the plan remained. The administration suggested that it might adjust its proposal, initially restricted to purchasing assets from financial institutions based in the United States, to enable foreign firms with United States affiliates to make use of it as well.
The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers was first put forward by the administration late last week after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon's total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giantAmerican International Groupand a plan to spend up to $200 billion to shore up the mortgage finance giantsFannie MaeandFreddie Mac.

At his news conference, Mr. Bush also sought to portray the plan as helping every American. "The government," he said, "needed to send a clear signal that we understood the instability could ripple throughout and affect the working people and the average family, and we weren't going to let that happen."

(contd.)
 
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contd..

A program to help troubled borrowers refinance mortgages — along with an $800 billion increase in the national debt limit — was approved in July. But financing for it depended largely on fees paid by Fannie Mae and Freddie Mac, which have been placed into a government conservatorship.
RepresentativeBarney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said in an interview that his staff had already begun working with the Senate banking committee to draft additions to the administration' s proposal.

Mr. Frank said Democrats were particularly intent on limiting the huge pay packages for corporate executives whose firms seek aid under the new plan, raising the prospect of a contentious battle with the White House.
"There are going to be federal tax dollars buying up some of the bad paper," Mr. Frank said. "They should accept some compensation guidelines, particularly to get rid of the perverse incentives where it's 'heads I win, tails I break even.' "

Mr. Frank said Democrats were also thinking about tightening the language on the debt limit to make clear that the additional borrowing authority could be used only for the bailout plan. And he said they might seek to revive a proposal that would give bankruptcy judges the authority to modify the terms of primary mortgages, a proposal strongly opposed by the financial industry.

SenatorCharles E. Schumer, Democrat of New York, who attended emergency meetings with the Treasury secretary,Henry M. Paulson Jr., and theFederal Reservechairman,Ben S. Bernanke, on Capitol Hill last week, described the proposal as a good start but said it did little for regular Americans.

"This is a good foundation of a plan that can stabilize markets quickly," Mr. Schumer said in a statement. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."

Ms. Pelosi's statement made clear that she would push for an economic stimulus initiative either as part of the bailout legislation or, more likely, as part of the budget resolution Congress must adopt before adjourning for the fall elections. Such a plan could include an increase in unemployment benefits and spending on infrastructure projects to help create jobs.

Some Congressional Republicans warned Democrats not to overreach.

"The administration has put forward a plan to help the American people, and it is now incumbent on Congress to work together to solve this crisis," said RepresentativeJohn A. Boehnerof Ohio, the Republican leader.

Mr. Boehner added, "Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors and small businesses deserve."

Aides to SenatorBarack Obamaof Illinois, the Democratic presidential nominee, said he was reviewing the proposal. In Florida, Mr. Obama told voters he would press for a broader economic stimulus.

"We have to make sure that whatever plan our government comes up with works not just for Wall Street, but for Main Street," Mr. Obama said. "We have to make sure it helps folks cope with rising prices, and sparks job creation, and helps homeowners stay in their homes."

(contd.)
 
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contd..

SenatorJohn McCainof Arizona, the Republican nominee, issued a statement saying he, too, was reviewing the plan.
"This financial crisis," Mr. McCain said, "requires leadership and action in order to restore a sound foundation to financial markets, get our economy on its feet, and eliminate this burden on hardworking middle-class Americans."

If adopted, the bailout plan would sharply raise the stakes for the new administration on the appointment of a new Treasury secretary.

The administration' s plan would allow the Treasury to hire staff members and engage outside firms to help manage its purchases. And officials said that the administration envisioned enlisting several outside firms to help run the effort to buy up mortgage-related assets.

Officials said that details were still being worked out but that one idea was for the Treasury to hold reverse auctions, in which the government would offer to buy certain classes of distressed assets at a particular price and firms would then decide if they were willing to sell at that price, or could bid the price lower.

Mindful of a potential political fight, Mr. Paulson and Mr. Bernanke held a series of conference calls with members of Congress on Friday to begin convincing them that action was needed not just to help Wall Street but everyday Americans as well.

Republicans typically supportive of the administration said they were in favor of approving the plan as swiftly as possible.

SenatorMitch McConnellof Kentucky, the Republican leader, said in a statement, "This proposal is, and should be kept, simple and clear." The majority leader, SenatorHarry Reid, Democrat of Nevada, said that the bailout was needed but that Mr. Bush owed the public a fuller explanation.
Some lawmakers were more critical or even adamantly opposed to the plan. "The free market for all intents and purposes is dead in America," SenatorJim Bunning, Republican of Kentucky, declared on Friday.

It is far from clear how much distressed debt the government will end up purchasing, though it seemed likely that the $700 billion figure was large enough to send a reassuring message to the jittery markets. There are estimates that firms are carrying $1 trillion or more in bad mortgage-related assets.

The ultimate price tag of the bailout is virtually impossible to know, in part because of the possibility that taxpayers could profit from the effort, especially if the market stabilizes and real estate prices rise.
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$700 billion (b for a biscuit) vast bailout for Wall Street. How about the joy of work?


By Dr.Kalyanaraman
This is just at tip of the iceberg, this biscuit thrown at the financial dogs to bailout financial institutions in the USA. Mortgage-related assets are only part of the reason for the broken financial system of this monster called the US economy.

I had mentioned about catechism of money (money becoming a commodity) and the major broker of this commodity is the marketplace of America. After all, evern petro-dollars have to find a sanctuary only in this marketplace (how clever could Kissinger get in the wake of OPEC cartel flexing its muscles to control production of fossil fuels!)

The roots for the oncoming collapse of the system lies in treating money like a commodity. This situation is comparable to the times when Karl Marx noted that labor was becoming a commodity (catechism of labor) which resulted in ‘communism’ or ’socialism’ becoming buzz-words in organizing the state machineries to cope with national identities. Now that money has been made into a commodity with all types of instruments (puts, options, derivatives, forward trading, exchange rate manipulations, central bank interventions as ace manipulators, IMF-type pundit fiscal (principally budget deficit management) prescriptions for the illiterate economies, for example, those of the third-world countries, mutual funds, participatory notes and the list goes on). There are also private actors typified by Soros who operate in the trading of this commodity in its variety of packaged forms.

The old-fashioned prescriptions for creating wealth (as in Adam Smith’s Wealth of Nations) have been put upside down, on their heads and merely having money in swiss bank accounts or safe-haven territories such as Isle of Man, Cayman Islands or even Mauritius to name a few sanctuaries of the financial system guarded by the might of the military to keep these small territories and islands as secure places to keep paper transactions.
An old-fashioned prescription, for instance is a definition of wealth as something which produces opportunities for employment. If land is wealth, cultivating it produces employment and so on.

This definition of wealth has been changed. Wealth is something which produced opportunities for producing money. If mortage loan is an asset for a financial institution, money is produced through financial charges and a suite of interest rate package (variable, fixed and many variations of such rates cited for money). Money itself become the only salvation. Wealth is irrelevant and at most, incidental, such as producing a building to live in. If the real worth of this building is use of wood logged from 100 trees, the ‘wealth’ in the mortage-type definition is multiplied a hundred fold into an army of financial advisors and investment advisors playing games with ‘money’ as a commodity and with nobel-prize- winning economic pundits producing econometric models to prove how the irrational exuberance gets crazy yet yields money which is the only be-all and end-all of all wealth-creating activities. Employment? What employment? Keeping the able-bodies citizens gainly employed giving opportunities for realizing their full potential are cliches used during election meetings at election time and do not constitute the driving force for wealth-creating decisions.

Okay, $700 b may help keep up the charade of Freddie Mac or Fannie Mae as market-driven institutions which can stand on their own without treasury bail-out. Today, AIG may be given a loan of $80b and tomorrow, they may also need a treasury bail-out of insurance-based- assets.
The jolly good times of treasury-wall street pow-wow will continue as the market indices girate, leaving the poor farmer in a remote Indian village to contemplate suicide as rina mochan - deliverance from this debt-trap.
To get out of the debt-trap, Uncle Sam needs more than a peanut $700 b package for financial institutions dealing with mortgage-related- assets. Uncle Sam may need a crash program to build houses for free, just as Pres. Eisenhower inaugurated the grand scheme of national highways to employ the returning soldiers from the second-world- war theatre. Now, switch them into building workers. That may help.

Does India have lessons to learn? First get rid of false heroes like Substitute Manmohan or PC and give work for people so that they can create wealth-producing assets, the old-fashioned way.

Money is NOT the measure of man. The joy of work is.

dhanyavaadah.
Kalyanaraman

http://janamejayan.wordpress.com/
 

KRS

Well-known member
Folks,

I did not say this is an election 'sop'. This is done mainly to prevent the short term collapse of the Wall Street lest it seeps in to middle Class 401K and mutual fund investments, especially because this is the election time. If there is no infusion, there will be a short term recession based on panic and then the fingers will start pointing. Republicans will stand accused for not implementing enough controls through regulation on the Mortgage Industry and the firms that invented the by product investment vehicles and the Democrats will be accused for allowing Freddie Mac and Fannie Mae to misuse their quasi government status, by opening up the loans to everyone despite the credit risks. Both parties do not want this now.

In a fourteen trillion GDP economy, while any failure of the three quarter trillion will bite, but only for a short while. Many economists actually argue against the bailout, so that system punishes the wide eyed and risky investors.

The previous post, describing Dr.S. Kalyanaraman's views is very interesting. I always thaought the way we keep account of the creation of wealth is through money and its worth. So, in theory, in a capitalist world, money is 'invested' in endeavors where the returns are the highest. Of course the mortgage based derivatives carry higher risks, but because of the actions of Fannie Mae and Freddie Mac, such derivatives carried more inherent risks than original risk profile. This is why even the solid investment compay like Lehman Bros. got in to trouble. A healthy dose of regulation and a demand for transparency would have partly averted the magnitude of today's problem.

Money is not the problem. Capitalism that uses money to flow towards various risk profile investments is not the problem. The problem is the government, which abdicates it's role to safeguard the interests of the general public, leaving greed to manipulate the markets.

Regards,
KRS


What the Bush administration is doing to bail out the Wall Street in not an election sop. Here is a write up that says that the Bush admin had painted itself into a corner and doing this unprecedented bail out in a desperate attempt to save the country from going bankrupt.

This has nothing to do with the November election.

Is this an attempt to save the malaise or is this a leap of faith?

The information dissemination and the resultant discourse will continue.

Saab

September 21, 2008
$700 Billion Is Sought for Wall Street in Vast Bailout

ByDAVID M. HERSZENHORN
WASHINGTON — The Bush administration on Saturday formally proposed a vast bailout of financial institutions in the United States, requesting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from the private firms.

The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.

"This is a big package, because it was a big problem," President Bush said Saturday at a White House news conference, after meeting with PresidentÁlvaro Uribeof Colombia. "I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we're going to get a lot of the money back."

After a week of stomach-flipping turmoil in the financial system, and with officials still on edge about how global markets will respond, the delivery of the administration' s plan set the stage for a four-day brawl in Congress. Democratic leaders have pledged to approve a bill but say it must also include tangible help for ordinary Americans in the form of an economic stimulus package.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill and were expected to work through the weekend. Congressional leaders are hoping to recess at the end of the week for the fall elections, after approving the bailout and a budget measure to keep the government running.

With Congressional Republicans warning that the bailout could be slowed by efforts to tack on additional provisions, Democratic leaders said they would insist on a requirement that the administration use its new role, as the owner of large amounts of mortgage debt, to help hundreds of thousands of troubled borrowers at risk of losing their homes to foreclosure.

"It's clear that the administration has requested that Congress authorize, in very short order, sweeping and unprecedented powers for the Treasury secretary," the House speaker,Nancy Pelosiof California, said in a statement. "Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes."

Ms. Pelosi said Democrats would also insist on "enacting an economic recovery package that creates jobs and returns growth to our economy."

Even as talks got under way, there were signs of how very much in flux the plan remained. The administration suggested that it might adjust its proposal, initially restricted to purchasing assets from financial institutions based in the United States, to enable foreign firms with United States affiliates to make use of it as well.
The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers was first put forward by the administration late last week after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon's total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giantAmerican International Groupand a plan to spend up to $200 billion to shore up the mortgage finance giantsFannie MaeandFreddie Mac.

At his news conference, Mr. Bush also sought to portray the plan as helping every American. "The government," he said, "needed to send a clear signal that we understood the instability could ripple throughout and affect the working people and the average family, and we weren't going to let that happen."

(contd.)
 
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Sensing the enormity of the problem at hand, there are even veiled suggestions to turn it into a socialist economy by government take over. Such demand could become vocal as the crisis deepens!

Paulson Bailout Plan a Historic Swindle



By William Greider
September 19, 2008

[FONT=verdana, helvetica, sans-serif]Financial-market wise guys, who had been seized with fear, are suddenly drunk with hope. They are rallying explosively because they think they have successfully stampeded Washington into accepting the Wall Street Journal solution to the crisis: dump it all on the taxpayers. That is the meaning of the massive bailout Treasury Secretary Henry Paulson has shopped around Congress. It would relieve the major banks and investment firms of their mountainous rotten assets and make the public swallow their losses -- many hundreds of billions, maybe much more. What's not to like if you are a financial titan threatened with extinction? [/FONT]

[FONT=verdana, helvetica, sans-serif]If Wall Street gets away with this, it will represent an historic swindle of the American public -- all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called "responsible opinion." If this deal succeeds, I predict it will become a transforming event in American politics -- exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice. [/FONT]

[FONT=verdana, helvetica, sans-serif]Christopher Whalen of Institutional Risk Analytics, a brave conservative critic, put it plainly: "The joyous reception from Congressional Democrats to Paulson's latest massive bailout proposal smells an awful lot like yet another corporatist lovefest between Washington's one-party government and the Sell Side investment banks." [/FONT]

[FONT=verdana, helvetica, sans-serif]A kindred critic, Josh Rosner of Graham Fisher in New York, defined the sponsors of this stampede to action: "Let us be clear, it is not citizen groups, private investors, equity investors or institutional investors broadly who are calling for this government purchase fund. It is almost exclusively being lobbied for by precisely those institutions that believed they were 'smarter than the rest of us,' institutions who need to get those assets off their balance sheet at an inflated value lest they be at risk of large losses or worse." [/FONT]

[FONT=verdana, helvetica, sans-serif]Let me be clear. The scandal is not that government is acting. The scandal is that government is not acting forcefully enough -- using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Stop the music, so to speak, instead of allowing individual financiers and traders to take opportunistic moves to save themselves at the expense of the system. The step-by-step rescues that the Federal Reserve and Treasury have executed to date have failed utterly to reverse the flight of investors and banks worldwide from lending or buying in doubtful times. There is no obvious reason to assume this bailout proposal will change their minds, though it will certainly feel good to the financial houses that get to dump their bad paper on the government. [/FONT]

[FONT=verdana, helvetica, sans-serif]A serious intervention in which Washington takes charge would, first, require a new central authority to supervise the financial institutions and compel them to support the government's actions to stabilize the system. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own -- cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed. [/FONT]

[FONT=verdana, helvetica, sans-serif]Only with these conditions, and some others, should the federal government be willing to take ownership – temporarily -- of the rotten financial assets that are dragging down funds, banks and brokerages. Paulson and the Federal Reserve are trying to replay the bailout approach used in the 1980s for the savings and loan crisis, but this situation is utterly different. The failed S&Ls held real assets -- property, houses, shopping centers -- that could be readily resold by the Resolution Trust Corporation at bargain prices. This crisis involves ethereal financial instruments of unknowable value -- not just the notorious mortgage securities but various derivative contracts and other esoteric deals that may be virtually worthless. [/FONT]

[FONT=verdana, helvetica, sans-serif]Despite what the pols in Washington think, the RTC bailout was also a Wall Street scandal. Many of the financial firms that had financed the S&L industry's reckless lending got to buy back the same properties for pennies from the RTC -- profiting on the upside, then again on the downside. Guess who picked up the tab? I suspect Wall Street is envisioning a similar bonanza -- the chance to harvest new profit from their own fraud and criminal irresponsibility. [/FONT]

[FONT=verdana, helvetica, sans-serif]If government acts responsibly, it will impose some other conditions on any broad rescue for the bankers. First, take due bills from any financial firms that get to hand off their spoiled assets, that is, a hard contract that repays government from any future profits once the crisis is over. Second, when the politicians get around to reforming financial regulations and dismantling the gimmicks and "too big to fail" institutions, Wall Street firms must be prohibited from exercising their usual manipulations of the political system. Call off their lobbyists, bar them from the bribery disguised as campaign contributions. Any contact or conversations between the assisted bankers and financial houses with government agencies or elected politicians must be promptly reported to the public, just as regulated industries are required to do when they call on government regulars. [/FONT]

[FONT=verdana, helvetica, sans-serif]More important, if the taxpayers are compelled to refinance the villains in this drama, then Americans at large are entitled to equivalent treatment in their crisis. That means the suspension of home foreclosures and personal bankruptcies for debt-soaked families during the duration of this crisis. The debtors will not escape injury and loss -- their situation is too dire -- but they deserve equal protection from government, the chance to work out things gradually over some years on reasonable terms. [/FONT]

[FONT=verdana, helvetica, sans-serif]The government, meanwhile, may have to create another emergency agency, something like the New Deal, that lends directly to the real economy -- businesses, solvent banks, buyers and sellers in consumer markets. We don't know how much damage has been done to economic growth or how long the cold spell will last, but I don't trust the bankers in the meantime to provide investment capital and credit. If necessary, Washington has to fill that role, too. [/FONT]

[FONT=verdana, helvetica, sans-serif]Finally, the crisis is global, obviously, and requires concerted global action. Robert A. Johnson, a veteran of global finance now working with the Campaign for America's Future, suggests that our global trading partners may recognize the need for self-interested cooperation and can negotiate temporary -- maybe permanent -- reforms to balance the trading system and keep it functioning, while leading nations work to put the global financial system back in business. [/FONT]

[FONT=verdana, helvetica, sans-serif]The agenda is staggering. The United States is ill equipped to deal with it smartly, not to mention wisely. We have a brain-dead lame duck in the White House. The two presidential candidates are trapped by events, trying to say something relevant without getting blamed for the disaster. The people should make themselves heard in Washington, even if only to share their outrage.[/FONT]


About William Greider
National affairs correspondent William Greider has been a political journalist for more than thirty-five years. A former Rolling Stone and Washington Post editor, he is the author of the national bestsellers One World, Ready or Not, Secrets of the Temple, Who Will Tell The People, The Soul of Capitalism (Simon & Schuster) and--due out in February from Rodale--Come Home, America. more...
 
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Cash-for-trash or paradox of deleveraging



$700bn rescue plan is ‘cash for trash’
By Paul Krugman
Some sceptics are calling Henry Paulson’s $700 billion rescue plan for the US financial system “cash for trash.” Others are calling the proposed legislation the Authorisation for Use of Financial Force, after the Authorisation for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.
Some are saying that we should simply trust Mr Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:
1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse.

This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, the last step in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

[URL="http://deccan.com/Columnists/Columnists.asp?#$700bn"]http://deccan. com/Columnists/ Columnists. asp?#$700bn rescue plan is ‘cash for trash’
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Cash-for-trash or paradox of deleveraging


$700bn rescue plan is ‘cash for trash’

By Paul Krugman

Some sceptics are calling Henry Paulson’s $700 billion rescue plan for the US financial system “cash for trash.” Others are calling the proposed legislation the Authorisation for Use of Financial Force, after the Authorisation for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:
1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse.

This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, the last step in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

http://deccan. com/Columnists/ Columnists. asp?#$700bn rescue plan is ‘cash for trash’
 
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Stocks Fall as Rescue Plan Is Negotiated

By DAVID M. HERSZENHORN

This article was reported byDavid M. Herszenhorn,Stephen LabatonandMark Landler, and written by Mr. Herszenhorn.

WASHINGTON — Senate and House Democratic leaders said on Monday that they had reached an agreement on their conditions for approving a $700 billion rescue plan for the financial system, including more oversight of the program and a requirement that the government do more to help troubled borrowers refinance their mortgages.

But even as Congressional Democrats and the administration began to narrow their differences, Democrats are bracing for a battle over efforts to limit the pay of executives whose firms seek help and over whether to grant bankruptcy judges authority to modify the mortgages of borrowers in danger of foreclosure.

Investors were skeptical. Concerns that the bailout plan may not move smoothly through Congress contributed to the anxiety in the markets that pushed the Dow Jones industrial average down more than 372 points and pushed crude oil up more than $16 a barrel.
President Bush on Monday morning urged legislators to resist the temptation to add provisions that, he said, "would undermine the effectiveness of the plan." Still, Treasury officials indicated a willingness to negotiate.

Within hours, Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said he had reached a general agreement with the Treasury Department over mortgage aid and Congressional oversight.

But Mr. Bush may find that members of his own party are among the holdouts. Some conservative Republicans criticized the plan, raising the stakes for Treasury Secretary Henry M. Paulson Jr., who has been trying to persuade lawmakers and an increasingly frustrated American public that the rescue package was needed.

Newt Gingrich, the former House speaker, said he expected Republican lawmakers to oppose the plan in increasing numbers. "I think this is going to be a much bigger fight than he expected," Mr. Gingrich said, referring to President Bush, who called again for swift action on Monday morning. "I think this bill is a long way from done," Mr. Gingrich added.
Republican leaders who support the administration' s plan warned Democrats on Monday to exercise restraint and not slow the bailout package, even as they prepared for an aggressive internal campaign to rally Republican support.

"When there's a fire in your kitchen threatening to burn down your home, you don't want someone stopping the firefighters on the way and demanding they hand out smoke detectors first or lecturing you about the hazards of keeping paint in the basement," Senator Mitch McConnell of Kentucky, the Republican leader, said in a speech on the Senate floor. "You want them to put out the fire before it burns down your home and everything you've saved for your whole life."

Mr. McConnell added: "The same is true of our current economic situation. We know that there is a serious threat to our economy, and we know that we must take action to try and head off a serious blow to Main Street."

The Senate Democrats' proposals includes two bold provisions. One would grant the Treasury "contingent shares" of stock in any financial institution that wants to sell bad debt to the government; the other would grant bankruptcy judges the authority to modify the terms of primary mortgages, a step aimed at helping homeowners at risk of foreclosure.
The bankruptcy provision is staunchly opposed by the banking, lending and securities industries and by many Republicans in Congress, but Democrats insist that it is one of the few mechanisms to provide direct assistance to homeowners caught in the foreclosure crisis.

(contd.)
http://www.nytimes.com/2008/09/23/business/23paulson.html?pagewanted=2&hp
 
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contd..

The contingent shares would give taxpayers an equity stake in companies seeking help through the rescue program, potentially allowing the government not only to recoup however much of the $700 billion it spends on bad debt, but also to profit should the financial firms prosper in years ahead. The legislation would require the value of the contingent shares to equal the value of the assets purchased by the government.

The 44-page Senate proposal, pulled together by Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, would require the Treasury to run the rescue plan through a new "Office of Financial Stability" to be headed by an assistant treasury secretary. It would also establish an "Emergency Oversight Board" to monitor the bailout effort, made up of the Fed Chairman; the chairman of the Federal Deposit Insurance Corporation; the chairman of the Securities and Exchange Commission; and two non-government employees with "financial expertise" in the public and private sectors, one each appointed by the majority and minority leadership in Congress.

In addition, the Senate proposal would require monthly reports to Congress, rather than the biannual reports that would be required under the Bush administration' s proposal.
Amid continuing concerns over the deep global ramifications of the crisis, the finance ministers and central bank governors of the Group of Seven major industrial nations said on Monday that they were maintaining "heightened close cooperation. " In a joint statement, they pledged to take "whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system."

The ministers and governors welcomed the "extraordinary" actions proposed by American officials to take illiquid assets off bank balance sheets, Reuters reported. But the statement made no other mention of any specific steps to be taken by the group's member nations.
The Bush administration' s proposal could prove to be the largest government bailout of private industry in the nation's history. It calls for nearly unfettered powers for the Treasury secretary in managing the bailout.

Though the jittery state of the financial markets put pressure on officials and legislators to move quickly, some lawmakers said they did not want to be rushed into approving extraordinary new powers for the Treasury secretary and the government without full consideration of the consequences.

Both presidential nominees, who face the prospect of inheriting an enormous program, said there had to be more oversight of the Treasury Department than the Bush administration had proposed.

Financial companies were already lobbying to broaden the plan. And the Bush administration did indeed widen the scope by allowing the government to buy out assets other than mortgage-related securities as well as making foreign companies eligible for government assistance.

Banks and traders also braced themselves for another tumultuous week in the markets. But early signs indicate that investors in Asia were reacting positively to the developments in Washington. Meanwhile, top Democrats and Republicans on Capitol Hill said on Sunday that they would act swiftly on the administration' s request, but not without setting their own conditions.

"We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome," House SpeakerNancy Pelosi said.

Top administration officials and senior lawmakers said that the markets could be devastated if Congress and the administration failed to reach agreement on the plan.
Mr. Paulson said he hoped that the government would recoup much of the cost of buying distressed mortgage-related assets. But he did not rule out that the initial cost of the bailout could rise beyond $700 billion, the limit set in the terse proposal sent by the Treasury to Congress on Saturday.

"That doesn't mean we'll go all the way there, or it doesn't mean it will stop there and we won't ask for more," Mr. Paulson said Sunday on the CBS program, "Face the Nation." "What we need is something that is big enough to get the job done. We'll ask for what we think is a right amount to give us plenty of flexibility. "

David Stout, Carl Hulse and Brian Knowlton contributed reporting.

http://www.nytimes. com/2008/ 09/23/business/ 23paulson. html?pagewanted= 2&hp
 
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Washington must heed fiscal alarm bell

By David Walker


Last updated: September 22 2008 18:57



What do AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch have in common? Some thought that these companies were too big to fail. They were wrong: all of these companies have either filed for bankruptcy, been “bailed out” by the government, or, owing to the sub-prime crisis, have been acquired. Over the weekend, the US government went one step further, with its proposals for an estimated $700bn (€493bn, £391bn) bail-out to ease the credit crisis.

The US government truly is too big to fail. However, there are disturbing parallels between the factors that led to the sub-prime crisis and the deteriorating financial condition and fiscal foundation of our federal government. These similarities ought to ring an alarm bell for Congress and the presidential candidates. The question is, will they hear it and wake up?
The first parallel relates to the dangerous disconnect between the parties who benefit from various imprudent practices and those who bear the related risk and ultimately pay the price. In the housing crisis, some originators of unwise mortgages have not paid a price for their actions. In the case of our federal government, politicians have increased spending, expanded government entitlement programmes, and agreed tax cuts without considering their long-term costs.

Second, a lack of transparency facilitated the crisis. Banks and other financial institutions created off-the-books entities so that regulators would find it hard to track the risks to their health. The US federal budget does not reflect the government’s huge off-balance sheet and unfunded promises, commitments and contingencies that stood at over $40,000bn at September 30, 2007.

Another similarity has been the role of credit rating agencies, which blithely rated securitised mortgage packages without looking at the weaknesses of underlying mortgages. In similar fashion, purchasers of American debt issued by Fannie Mae and Freddie Mac assumed that it was guaranteed by the US government. The resulting expectation gap among foreign investors resulted in their demand that the government make explicit what until then had been only an implicit guarantee. The result is that the US taxpayer now stands behind more than $5,000bn in mortgages. It is too soon to say what the ultimate cost will be to taxpayers.

Finally, while there were private sector and executive branch failures, Congress also bears responsibility. It writes the laws and is charged with oversight of these formerly quasi-governmental entities and regulatory agencies. The sad but simple truth is that our country has strayed a long way from the principles and values that made this nation great. Washington has grown increasingly out of touch and out of control. Personal responsibility and stewardship for our collective future are largely absent in too many government areas. This must change.

Are there lessons from the sub-prime crisis? The answer is yes. The recent actions had to be taken because the government failed to establish an effective regulatory structure in connection with mortgages, derivatives and other securities. Greed was rampant. Fannie Mae and Freddie Mac strayed from their original mission, becoming too focused on profit and personal gain rather than their public purpose. Lax oversight was facilitated by powerful Wall Street lobbies and the lobbying of Fannie Mae and Freddie Mac.

Beyond the turmoil for banks and homeowners, however, there is a super-sub-prime crisis brewing in Washington. Our fiscal policies have created a disconnect between today’s citizens and future taxpayers. Today’s taxpayers benefit from high government spending and low taxes, while future generations are expected to pay the bill. Our real challenge is where we are headed on our do-nothing fiscal path.

Washington has charged everything to the nation’s credit card – engaging in tax cuts and spending increases without paying for them. Washington’s imprudent, unethical and even immoral behaviour is facilitated by a lack of transparency. For example, as of September 30, 2007 the federal government was in a $53,000bn dollar fiscal hole, equal to $455,000 per household and $175,000 per person. This burden is rising every year by $6,600-$9,900 per American. Medicare represents $34,000bn of this deficit and the related Medicare trust fund is set to run dry within 10 years. The Social Security programme is projected to have negative cash flow within about 10 years.

What needs to be done? First, we need leadership from the presidential candidates and members of Congress. We need to re-impose tough budget controls, constrain federal spending, decide which Bush tax cuts will stay, and engage in comprehensive reform of our entitlement, healthcare and tax systems. A bipartisan commission that would make recommendations for an up-or-down vote by Congress would be a positive step to making this a reality.

While the US government is too big to fail, continuing on our current path will have adverse implications for our economy and international standing. The sooner Washington acts, the better. Our country, children and grandchildren deserve no less. In the interim, the government needs to decide how to account for its radical actions in the financial statements for the year to September 30. The Treasury has a responsibility to disclose and account for these costs adequately and the Government Accountability Office has a duty to insist the Treasury does so.

The writer is president and chief executive of the Peter G Peterson Foundation and former Comptroller General of the United States
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