A Shot of Adrenaline

What now? It’s very simple, we need a shot of adrenaline to get lending going, until there is time to deal with the larger crisis at hand. The bill that should be crafted should be designed to get us through to January, and to give us time to work on a more comprehensive and fairer redesign, not bail out, of the banking system.

The principles are simple and have already been ennunciated:

1. Give the FDIC an injection of cash to buy out banks that are too insolvent to lend. “Too sick to lend is too sick to live.” You would be amazed at how many will start lending in preference to working for their Unle Sam.

2. Sell short term bonds and give these to the Fed to extend lines of credit at the average of FF and Libor. This will make use of the arbitrage play that Paulson saw of dirt cheap short term money in the flight to quality. About 150 billion in addition to the Fed’s already eased credit will do.

3. Back the bonds long term with “fat cat taxes” and insurance fees on a wider array of financial entities.

4. Signal that the policy of allowing banks to be bought up cheaply is over.

That’s what needs to happen, a shot of adrenaline to get us through to January.

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Stirling Newberry


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  • Paulson badly wants a blank check to bailout his buddies instead of a reasonable solution or he would be proposing one. (I don’t hear Jamie Dimon complaining as he picks up body after body for pennies on the dollar.)

    The House said no to him and his cronies. Now the markets are pouting, hoping to force Congress to reverse direction. Meanwhile, messages to Congress are running 1000:1 against a bailout.

    Will the administration capitulate and ask for something that makes sense instead of continuing the bluff? I doubt it.

    Will Obama rally the Dems, or McCain the GOP, behind a proposal that makes sense? After all, one of them is going to get stuck with it. I doubt either of them will do anything really constructive, however.

    If the Senate passes the bailout bill on Wednesday, it will be sent back to the House to try again. By then the markets will be haywire and the House will have had time to reconsidered. Will the flurry of protest continue against this to prevent the House from reversing itself if the Senate passes its bill? Hopefully so.

    BTW, Mish is counseling contacting Congress everyday for the next three days to keep the pressure on against this ridiculous piece of legislation. He’s also asking folks to go to CNBC and CNN and vote in the informal poll.

    What is at stake here is not only the economic future of the US for some time. It is also the myth of the free markets. Economists know that the free market is not “the solution to all problems” it is represented to be, because in the process of its inexorable working, it leads to severe crises like this when normal corrections are forestalled through CB intervention, leading to misallocation of capital, mispricing risk, and sectarian bubbles.

    This is not only a US problem. The UK and European banking systems are getting slammed, too, as we speak.

    Now the world is getting to see this for themselves, and those who were buying into the myth of the free market on the basis of the American “miracle” are rethinking this doctrine as they see “the free market” leading to enormous government (taxpayer) bailouts after massive government intervention and then outright manipulation fails.

    This is a lesson the world needs to learn before further consolidation at the top leads to even greater disaster when “to big to fail” turns into “to big to bail.” It’s a necessary lesson as we enter the era of globalization to prevent uncritical adoption of a new world order based on a Western neoliberal model that is doomed to fail owing to its flawed assumptions.

  • is the doctrine of “the free market” inherently defective or it only fails if it’s run by crooks?

    “While not a Playboy reader, she invites a male acquaintance in for a quiet discussion of Chagall, Nietzsche, jazz, sex.” – not a Hugh Hefner quote

  • The traditional model of a free market is based on unrealistic assumptions, for example that, most of the people are well-informed about their choices, and that the cost of switching between things is negligible.

    I think that this is more of an indictment of central banking and fiat currency control. The fundamental problem that led to this is that it’s politically favorable to have low interest rates so that there is ‘growth’ in the market, even if that causes long term problems. The economy is basically going through loose-money withdrawal.

  • we interpreted “free market” to mean “unregulated market?” I would think it likely that the unscrupulous and the dishonest might tend to gain power over time as they persuaded their less enterprising colleagues to participate in opaque, profitable schemes. Confidence men should flourish until schemes crumbled.

  • The doctrine of the “free market,” really economic neoliberalism, e.g., as enunciated by the Chicago School of (Socio)-Economics, is essentially flawed in that it is not essentially an economic prescription as claimed, but a socio-economic one with a political agenda. As such, it is based on mispresentations of fundamental economic principles and their consequences for society.

    The “free market,” aka economic neoliberalism, is represented as a solution to all problems socially, politically and economically because of its supposed “economic,” i.e., “scientific” basis.

    However, it is largely a normative theory, which when tested, leads to consequences other than the social utopia that its champions claim, that is, as benefiting “everyone” but the lazy and willfully indigent.

  • Any semi-permanent solution is going to have to start at the bottom, not the top. Job creation, incentives to save, renegotiation of mortgage terms, etc.

    If the consumer has money to spend, the inhabitants of the top will follow along. No bank wants lots of deposits and no loans.

    Exactly, how we get there is anyone’s guess. But I suspect it doesn’t involve buying up Goldman-Sachs’ worthless paper.

    Another lesson we should learn from this is that large conglomerates and holding companies serve to concentrate risk, not to spread it out. We need legislation that discourages the formation of large banks and investment firms.

    The last reminds me of Google’s server farms. At one time, they consisted largely of commodity PCs networked together. If one or ten went down, no problem; there were enough other systems to keep things going without a blip. I think Google is just as distributed in its computing today, but uses made-for-purpose servers.

    Small really is beautiful.

  • this is just the beginning of the unwind. Down the line, we are going to see a lot of other corrections across the board that some economists are estimating to be in the neighborhood of 5 trillion instead of 700 billion. That’s one reason that throwing 700 billion to Wall Street to rescue it from the toxic waste it created is insane, when that is not going to be the real fix that is promised.

  • A Question: With an additional $330 Billion in Currency Swaps today, and another $300 Billion available via the “Trash for Cash” Term Auction Facility, have Paulson & Bernanke effectively “outflanked” the Legislature?

  • Wall Street insiders were assured beforehand in a conference call that the “compromise” measures put in the bill were meaningless and represented effectively little change from the original financial emperor version that Paulson dumped on America.


    This is beginning to remind me more and more, not of the WMD reign of terror, but of the California energy crisis, where Californians were robbed of, what was it?, a hundred billion dollars. This is a dirty bill being pushed by dirty people, both Democrat and Republican.

    Ian Welsh at FDL, who’s been doing a great job on this shakedown of America, describes the energy crisis aspect of the situation and how it can be manipulated, assuming it hasn’t to this point.


    Glenn Greenwald at Salon.com describes the stealth process that has become standard for both Democrats and Republicans that keeps the public out of the loop on the laws that have great and devastating effects on their lives and futures. This, in contrast to the personal touch insider info delivered directly to Wall Street people.


    “Banana republic” is a meme spreading from a recent Paul Krugman post, but America has been far from a real representative democracy for years now, if not decades.

    Oh, and you too, Stirling have come to the fore just when needed. Good work.

  • Fed Pumps Further $630 Billion Into Financial System (Update3)

    This almost unlimited financial dictatorial power possessed by the Treasury Secretary and especially the Fed chief was described at Balkinization even before Bush decided to take the matter to congress.

    My guess is that Bush and the Republicans felt they should get the Democrats in on the fleecing of the public so they don’t take the political hit alone. I can’t find a link to the discussion at Balkinization since they don’t seem to have their older posts available through archive index links. At this point the political aspect might well have been enough to provide political cover since more Democrats voted for the fleecing than did Republicans.

  • Thank you, Stirling, for the way you correctly predicted, against the overwhelming consensus, that the vote was gonna fail. Bravo!
    Thoughtful, global, timely indeed.

  • but I called all my representatives and senators and asked them to vote against it.

    I saw Dennis Kucinich on democracy now and he did a great job talking down the bill.

    Moreover, I’ve read that 90% of americans, or more, were against it. When I was moving to minnesota, i heard people in the heartland hoping that one day wall street would crash back done to their earth.

    In my opinion, America has a lot of healing to do.

  • excerpt:
    “This bill meets fear with fear, and compounds greed with greed. It leaves in place those who created the crisis, profited from profligacy, and have hoped to forge the chains of slavery to debt around our necks. Their hope, as is the hope of every generation of aristocrats, is to force the living to be slaves to the dead. Never have so few, stolen so much, from so many, for so little return.”

    please read the entire article, if like me you were looking for more from Stirling. Thanks to you both!

    1700: “Abolish slavery!”
    1800: Woman’s Suffrage!”
    2000:”World Peace!”

  • Call to Stop Paulson’s Plunder
    (1) Call your Representatives and Senators at 800-473-6711 or 202-224-3121 and say No Bailout!
    (2) Email them too and tell your friends:


    After a week of high-drama negotiations, Congress and Hank Paulson issued Bailout version 1.1, which is just the original Paulson pig with a lot of lipstick.
    Republicans say the deal will be profitable for taxpayers, but they are lying – just as they did about the invasion of Iraq producing lower gas prices. It’s a lie because Paulson has full power to pay too much for the securities and he will because his real goal is a bailout of bank executives and shareholders with our money – a massive ($2,333 per person!) transfer of wealth from the poor and middle class to the rich.
    Democrats say they got oversight, accountability, and limits on executive compensation but each of these provisions is so full of Republican-written loopholes that they are meaningless – just like all other restrictions imposed on the Bush Administration, from Iraq to wiretapping. And that’s before Bush simply negates any restrictions he doesn’t like with one of his unconstitutional (and hence impeachable) signing statements.
    So our answer remains ABSOLUTELY NOT.
    The House will vote on Monday and the Senate will vote on Wednesday.
    So call your Senators and Representative right now to say “No $700 Billion Bailout for Wall Street” – dial the Capitol switchboard at 800-473-6711 or 202-224-3121 or dial direct using the instant phone lookup on the right side of http://usalone.com
    And if you have not e mailed your Senators and Representative , please do it now:
    Find more information and comment here:

    1700: “Abolish slavery!”
    1800: Woman’s Suffrage!”
    2000:”World Peace!”

  • with Republican Presidential and some Congressional leadership backing , but bank to bank credit swaps thaw nonetheless, it seems to me a victory for McCain is more likely.

    If Obama does win, the Republicans will reinstate party loyalty tests on every economic proposal initiated by a Democratic president.

    “The mythical John McCain is an affable, straight-talking, moderately conservative war hero who is an expert on foreign policy” – Bob Herbert

  • it seems to me a victory for McCain is more likely

    “Country-first” McCain is being perceived now as having unwittingly torpedoed this bill for personal ambition.

  • He was against it before he was for it.

    And got nothing for his vote.

    And is “eratic.”

    The problem with McCain is that he is a corrupt political hack. If he had been a maverick, he’d have gone all against the Paulson proposal, taken the credit for it going down if it went down, been the hero of populism if if didn’t, and would be in this election.

    Now? He’s made the mistake of giving the public a choice of two wall street elitist Democrats, and the public is deciding to pick the real thing. The whole re-emergence of racism from the Republicans is their last firebreak against Obama.

    We should see state polls shifting, and we are seeing senate races shifting.

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