Right now there is a simple problem. There are three market participants in the short term credit market. The Fed, the equities buyers, the banks. These are relatively much, in order, the government's preferred demand target, the demand for money, and the demand for interest. Right now they have radically different ideas of what the prices are. The Fed has interest rates at 1.5%, though this is an emergency cut from the 2% they had before. The equities market thinks that interest should be about .5%. That's why the hot money from the equities market has flooded treasuries, and what the cost of short term money is. The banks think that overnight rates should be somewhere between 3% and 6%.

That's why the credit markets are seizing up, there is no way to get the market to clear if the people who want money see the basic risk premium as low and it is time for a steep yield curve and expansion, the people who are the proxy for controlling demand think it is time for a shallow yield curve and moderation between growth and inflation, and the people charging for money think that the inflation and risk premiums are high. One doesn't need to invoke non-existent "counter-party risk." In fact, the LIBOR curve says the reverse: if it were counterparty risk, then long term libor rates would be much higher. But they aren't. If it is risky to loan today, then why is it less risky to loan for a year? It isn't. Banks aren't lending because rates are not attractive.

So who is right? Well, all of them, and that is the short term problem.

The Republicans have been spewing the idea that welfare queen mortgages caused the collapse. David Goldstien and Kevin G Hill drive a stake through this one. It is direct racism, and anyone who speaks it is knowingly pimping racism. This includes noted Darwin Denier, Ben Stein. His father was, at least, a serious economist. Stein is simply a racist hack.

Key talking points from the debunking article:

Federal Reserve Board data show that:

_ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

_ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

_ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The explosion in subprime was an explosion in a credit bubble, and a direct policy, backed by Greenspan and Bush, to expand home ownership rapidly, combined with a complete lack of enforcement of even existing regulations.

Next up, Ms. O'Leary's cow did not cause the Chicago Fire, and the moon is not made of green cheese.

there will be no tax cut.

The only thing that will be done is to shift from income taxes, to consumption taxes. From income taxes to consumption taxes. From income taxes, to consumption taxes.

This has been a public fucking service announcement.

On the side bar we have T. Bone Pickens plan to create the next resource bubble, switch over to natural gas vehicles, and get out of the relatively staid and regulated electricity business, and make it so that NG has the potential to be oil when the next crunch hit. Why merely triple your money when you can dectuple or more?

That's the problem here, owners of current capital are more than willing to "solve" the problem by misapplying current capital to the situation. Double win, they keep their capital, and get a whole bunch more money.

It is capital as rent. That's really what we are talking about. The old capital maybe, in fact is, inferior to the task at hand, but it, and its owners, are here. That's why rent is an economic advantage in time or space. The capital is here, and so has an advantage over capital that is not here. The solution to rent problems is to cram down current capital, not create incentives for it. The same is true in the banking sector: we are seeing banks being bailed out to keep the current people in charge, with their relationships and position, which represent an economic rent.

This weekend the powers that be are going to make the 1925 decision: that is make paper move in a circle and hope to recapture enough real activity through taxes and prices, and the stagnation tax, to stay in power. Japanification on a global scale - did anyone catch how the Japanese are willing to give their advice on how they propped up their banks? What the Japanese did for their economy, they are willing to help the rest of us do.

Sean Paul asks about whether this is the ultimate crisis or not. The answer is whether we learn from it. I say no. When I see suburbanites setting up braisers and selling squirrel skewers, then I will know we've learned. Until then I think we are going to get the response of printing paper, and then having elites get together and figure out how to slice away another slab of middle class expectations.

In their minds, this is a paper crisis. In their minds the same people who were in charge before, will be in charge now, only with non-voting government shares on the books. The people like Instablunder who pimped this slide, will still be well paid and on the inside.

“the worse it goes, the more you must treat it as a puppet show”

Winston Churchill on the subject of elections.

It is easy, when value has been sliced off in fat slabs from the stock market to treat one's portfolio with neglect. People who log on every day during rising times to witness the ascent of their assets, hide in the corner in the depths. This is the worst possible way to look at it. When one's choices are working out, that is when it is time to leave them alone. Set one's sell targets, and let the market take care of the rest, revisiting quarterly and balancing assets. It is when the wave peaks, or troughs, that hard decisions need to be made.

We are there. The land bubble, and the credit bubble built on it, could not last, because in the end, the money to pay for houses had to come from someplace. That someplace was hoped to be cheap oil from Iraq. It did not happen that way. Once Iraq's oil was lost to the US, something which was clear from about 2004 onward, the housing bubble and credit bubble, were inevitable casualties.

Thus, we are facing a new economic era, one which means different decisions. Nothing is worse than letting fear avoid facing the facts.

Last night the Nikkei fell by 9.38%, not points, percent. The fall of 952 points means that the Tokyo stock market is now a few bad days away from it's low of 2003, which was 8424. Panic selling gripped other asian markets. Shortly there after wards, central banks issued a coordinated rate cut. The Federal reserve sliced it's rate from 2.00% to 1.50% - and other banks followed suit.

I have a post on Daily Kos but will be writing in more detail here later on in an essay entitled "That which couldn't go on, hasn't."

Ben Stein, noted Darwin denier continues to be Yahoo financial's featured columnist. This morning he is pushing racism. Their coverage is biased hard right to begin with, and Stein is merely the most obvious panderer to the racist right.

Why is Yahoo run by racists? This company should be allowed to die, because it is nakedly and obviously bigoted in the material it promotes.

Like this doofus who uses concussion grenades in a glass house, knows nothing about markets. The Dow Industrials slid 348 points even as the bail-out was assured of passage and no one commented. Instead the global financial markets are now pricing in the depth of the US recession. Where, as the downturns of late 2007 and 2008 could be called "a failed recession," in that it was a downturn sharp enough to cause a contraction of the economy, without ending inflation pressures, the present recession has begun in earnest. The question is merely where the line is drawn.

The Break the glass plan is being greeted with jeers by actual investors, even as virtually every political elite perjures himself to pass it.

Insanity and opacity got us into this mess, and they are going to get us deeper. We are riding this bucket all the way down.

One of the objectives of this crisis is for the "Mark to Market" rules to be replaced by Mark to Shitpile rules, where banks and others can use their own "internal estimates" of what an asset is worth. The reason for this is that many of the derivative bets were, just that, bets. The instrument has no future payments attached to it, but instead, the company that sold the Credit Default Swap or other derivative took a one time payment, and then essentially bet that there would never be a default. The "value" of the derivative is, no more and no less, the chance that the person writing it will never have to pay.

It's time to get real about this. The solution is not to suspend mark to market, but to provide an alternative market mechanism to mark to, one that is not in the hands of the people who created the instruments. If it can be marked to market, it should be. However, if there is no market, then we can create one.

Obama-Paulson adds tax provisions in naked effort to buy votes.

SEIU endorses. Donna Edwards one of the supporters.

I will look at the bill when I have the text.

"As I said, raze the Republican Party to the ground. Plough it under. Scatter salt in the furrows so it can never grow back.
We need another, very different opposition party to face the Democrats. We need it now."

Bail out reactions.

In general, when a bank is bailed out, while deposits up to 100,000 are insured, all depositors are bailed out. This is mostly an empty gesture, in that deposits over the insured limit receive a claim, and that money is generally paid. While not having access to one's deposits is not good, the 250,000 limit increase effects only a few people, and it should be done any way. By making it part of this bail out, it is, in effect, extortion, targeted mainly at the most conservative and vulnerable individuals. "Give us our bail out, or your money gets it!"

Also, IRA deposits are already covered up to 250,000 dollars. It's in the FDIC's depositors bill of rights.

What happens to my money that is over the FDIC's insurance limits?

Let's say you alone have one deposit account at a bank with a balance of $105,000, including interest earned. If your bank fails, you'll immediately be paid $100,000 covered by FDIC insurance and you'll receive a "claim" against the closed bank for the remaining $5,000 that is not FDIC-insured. The amount you recover on your uninsured deposits will depend on how much the FDIC recovers by selling the bank's assets. While that process can take several years, most payments to uninsured depositors are made within a year or two of the bank failure. In some cases, the FDIC is able to make an advance payment to uninsured depositors.

FDIC consumer news page.

McBama are offering McSame to vie for who can best continue the legacy of the Worst. President. Ever. There really isn't a dime's worth of difference today.

If you were against the bill yesterday, you should be against the bill today, it is a mostly meaningless gesture, and insult to injury, it is something that should have been done anyway. James K. Galbraith has proposed removing the cap entirely.

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.

Or why the bail out is a bust.

I've never been prouder of the blogosphere than in the last week. The opposition to an ill-considered bailout has spread from every direction. From people insiders and outsiders, from in the popular press and in their own journals, to who knew that this was a free three martini lunch . Negotiations have not made it better. We are told, for the third time, that a deal is close, it is done, and yet, the vote slipped from today, to tomorrow. The platitudes have poured forth, but the mean nothing.

There is still time to kill this bill. There is still time to do what is right. Opposition is across the political spectrum, this is not a matter of left or right, but of inside against outside. Many people have seen their political heros bow and crumble before the onslaught of insiderdom, while others have emerged from the most unlikely of places. This bill is bad policy, bad politics and bad economics.

It is predicated on a lie, a lie that this one picture exposes. This is not a crisis of confidence, but a failure of management. The way to fix this crisis is not by trying to bribe the banks to keep lending, but to understand why they are not lending overnight. What does this picture mean? I will explain, but a bit of background first.

The Toxic Wasteketeers: Trust Us, We've been wrong about everything so far!

The backers of the bail out have come out with why we need to give them a blank check for economic dictatorship: it's a good bet on the markets.

No really, that's their best pitch. Their argument is this: Credit has seized up, and it is time to use the government's ability to act as borrower of last resort to buy up instruments now listed as "toxic waste" by Wall Street. Prof Brad DeLong just wrote in weak support of the plan. His estimate of how many jobs this could preserve over two years? 5 million.

Unfortunately for this argument, his math is fuzzy and way off. And maybe that's why earlier this year DeLong was one of those people saying that this was not a recession, that we needed only a minimum of stimulus. Up to a few weeks ago he thought that the whole period might escape being truly an unequivocal recession. In other words, if DeLong's back-of-the-envelope math were good, we wouldn't be having this conversation.

Economists against the bail out.

And for good measure a long summary of how we got here.

Barney Frank says it is a done deal.

Markets in Asia are generally up 1%, with some exceptions. If there is a catastrophic failure of the financial system out there, it doesn't seem to be awake yet.

Krugman calls this a bad deal. Good to hear.

Ian Welsh has a very sensible mortgage bail out proposal. Essentially it is a cram down of the mortgages that are troubled. However, it is still the beginning of the problem, the problem is a contraction of the money supply leading into a recession. The key numbers are the no longer published M3, which represents the broadest claim on future resources, and the broadest range of liquidity, and MZM, or Money to Zero Maturity, which is the immediately available currency at par value, basically M2 with CDs and money market funds removed. These numbers tell a very simple story. MZM says that we have just passed through a recession, because MZM tends to spike up during or near recessions. It has flattened out now. M3 shows a rapid run up, and then a rapid fall. This is the source of the rapid intensification of the crisis.

What happened was this: the Fed did a first round of bail outs early, and then stood pat. This was a bad idea, everyone who was paying attention knew that more bail out was needed, but the massive hit of liquidity without restriction poured into resources, the poster child of which was oil, and the federal undirected stimulus bill, made sure that the economy revved up for one last round of inflationary growth. This is why the economy improved a bit during July, because of an almost Carteresque willingness to ignore inflation.

The key question is this: the American tax payers just bought the banking system. We are going to pay, with interest, upwards of three trillion dollars for it. A relative bargain actually. The question is what we are going to do with it now that we own it. Paul Krugman's crush, Ben Bernanke, stood stone faced next to Bush and Paulson as more good money was poured down after bad. Why is it that even liberals have been behind the curve through this crisis?

Ian has started things off by giving us a sensible foreclosure in place plan. Now it is time to follow things up with a plan for a better country. Liberals have pined for a new deal moment, well, it has arrived.

Highest close, Standard and Poor's 500: 1565.15 10/9/07
Highest close, Previous cycle: 1527.46 3/24/00
Total gain, percent, peak to peak, not counting dividends: 2.046% in seven years. Who says you shouldn't try and time the market?

Percentage fall from 2000 peak in GDP deflator terms: 38.16%
In Euros, adjusted for GDP deflator: 57.68% That is to say, if you invested a 1000 Euros in 2000 in the S&P at the peak, it would have the buying power in the US economy as a whole of 423.29 Euros.

John Kay in the Financial Times makes an astute observation, and couples it with a stark prediction:

Fannie Mae and Freddie Mac were probably the world’s most heavily supervised financial institutions, subject to a specialist agency, the Office of Federal Housing Enterprise Oversight. The office employed 236 people at the time of its last annual report. OFHEO did not fail because it was understaffed or not well informed about Fannie Mae’s activities, but because it lacked authority. The entire staff earned less in aggregate than Franklin Raines, the aggressive chief executive who masterminded Fannie’s expansion.

Like Martin Wolf, I yearn for a world in which regulators would moderate the inherent instability of the financial system. But my yearning is tempered by modest expectations of what regulation can achieve. Martin’s realism, which I share, acknowledges that public expectations are much higher and politicians will claim to respond to these expectations. But the politicians will fail. The next financial crisis will be different in origin and the rules that will be introduced to close the doors of today’s empty stables will prove irrelevant.

This is why our present crisis is a constitutional crisis. It is not a crisis of finance as such, but a crisis of the governing mandate. Governments take over companies all of the time. Many governments have run important parts of the infrastructure. The US government runs a bank, The Federal Reserve. In fact, one of the first acts of the new government under the Constitution of 1787 was to charter The Bank of the United States.

The problem now is not that governments lack power, or that regulations have been lacking; it is that the mandate of the United States Government has been to keep the land casino open at all costs. The pieces that are falling are the direct result of this mandate of "socialism for suburbanism." What we are seeing now is a response very similar to Hoover's days in office, or Abraham Lincoln's disastrous first year in office, where there was a willingness to do anything except the things that would actually end the political and economic crisis.

Central banks around the world began intervening over the last 24 hours to protect a fragile global financial system. Chain reactions of debt-swaps meant that contagion was not localized, but spread through secondary and derivative debt markets, as instruments held through Lehman Brothers vanished in a puff of paperwork. Major Asian stock indexes tumbled, headlined by a 600 point drop in the Nikkei to 11609.72. Major European indexes have already tumbled as well, the DAX dropped to 5915, almost 150 points. However, the levels in Europe are still well above their 2002 lows, particularly when adjusted for currency.

Individuals great and small became caught up in the panic selling: Goldman Sachs shares plunged in pre-market trading as they announced a 70% drop. Ordinary share holders were wiped out, and scrambled to fill the voids in their finances.

But in all of the commentary about crash risk, about moral hazard, a fundamental point has been missed: this did not have to happen, but is, instead, the direct result of deliberate decisions made by known actors. This is the ultimate result of the crisis of legitimacy that began with Bush v Gore. What is the price of a stolen election? We now know that it runs into the trillions of dollars.

A Festival of Failure, A Carnival of Corruption

One can forgive John McCain's speech writers for producing the worst nominating speech in decades - perhaps since candidates began going to national conventions to accept the nomination of their party. They are saddled with the worst candidate in decades, and with the reality that reality is catching up with them. Gustav disrupted oil production, and the RNC. A year ago John McCain looked dead until fatalities subsided in Iraq, and he looks even more dead now.

John McCain looks dead, because the policy ideas, the political apparatus, and the ideology he comes from are thoroughly discredited by all but his remaining supporters in the Village-American ethnic group which adored him so much.

There they go again. The attack dogs drooling over every small piece of personal history in an attempt to drive someone from the stage. In this case it was attack dogs from the blogosphere's Democratic side, and the target, Sarah Palin, is an extremist harpy who is, in fact, unqualified to be on the national stage. However, by focusing on details of her family and personal life, they played into her hands. This is because by making the question as to whether Sarah Palin, the mother and family member is qualified to be on the national stage, they made it so that her speech simply had to be about her ability to read a speech well. The reactions from the Guardian UK: "Sarah Palin storms convention with prime-time speech" and New York Times: "Palin Assails Critics and Electrifies Party", coupled with the glowingly flattering pictures, underline the depth of the Cannaesque blunder of the attack dogs.

Rather than defining her as a frenetic extremist who is a bundle of contradictions: a supposed free-marketeer whose state's residents get large checks from the government, a clean government campaigner who wins elections based on bringing home government pork, a Christianist extremist who is bent on reducing rights while claiming to be part of the Leave-us-alone coalition, they allowed her to defend her family. Suddenly she was not an empty suited attack dog, but a mother defending her family and her way of life, not a politician defending why she should impose that way of life on others, and have others subsidize her choices.

And in doing so they undermined Obama's own post-partisan narrative, since personal attacks are precisely what ordinary Americans define as "partisan politics."