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September 26, 2008

No, Seriously, This is Scary

I think this is an important sentence. Because I think it sums much of the controversy up.

You're angry. I'm angry. House Republicans are angry. We're all angry at having to put up huge amounts of cash to rescue a financial system because a lot of very rich people rolled the dice with other people's money and lost.

Now let me tell you something very simple and very important: You can try to prevent a financial meltdown or you can teach Wall Street a lesson, but you can't do both at the same time.

I think that's crucial. And I think a lot of people are postulating a third possibility -- hey, we we teach Wall Street a lesson and avert a financial meltdown!

This possibility, however, seems to require the economic equivalent of Magic Beans -- a cadre of fantastically wealthy individuals and corporations ready, willing, and able to do the exact same job (buying the toxic assets, holding them for two or three years until they appreciate in value and can be disposed of in an orderly fashion and at a profit) that many are urging the government to do.

The problem with waiting for this super-team of capitalists to step forward is 1) they haven't done so yet and 2) there's no evidence they will step forward, especially given that we are on the edge of a possible light-to-moderate depression and "two or three years of holding" such assets may stretch into 15.

So, we all seem to agree that someone with the money and patience to hold these assets and dispose of them in an orderly, non-distressed fashion should buy them and hold them for two or three years.

And therefore save the economy from a "financial Pearl Harbor."

But some insist we must wait for these private actors to come forward, and if they do not, then we should just accept the financial Pearl Harbor as the cost of true capitalism. And even though we have someone with the money and patience to do this -- the US government -- doctrine requires that one actor refuse to act.

And so we wait for our rescue by unknown legions of deep-pocketed financial superheroes.

At any rate, let me get back to this guy:

Now let me tell you something very simple and very important: You can try to prevent a financial meltdown or you can teach Wall Street a lesson, but you can't do both at the same time.

So which will it be?

You say you want straight talk -- no spin, no bull, no sugar-coating. Okay, here goes.

First, stop fixating on Wall Street executives -- there will be time to deal with them later. Even if you clawed back every dime they made over the past decade, it would come to several billions of dollars. That's a rounding error compared with the size of the financial problem we're facing here.

Second, we need to act quickly. The financial situation is now downright scary. Don't look at the stock market -- that's not where the problem is. The problem is in the credit markets, which are quickly freezing. I won't bore you with technical indicators like Libor and Treasury swap spreads, but if you talk to people who work these markets every day, as I have, they report that the money markets are in worse shape than they were last August, or even during the currency crises of 1998.

Banks and big corporations and even money-market funds are hoarding cash, refusing to lend it out for a day or a week or a month. Even the best companies are having trouble floating bonds at reasonable rates. And the shadow banking system -- the market in asset-backed securities that ultimately supplies the capital for most home loans, car loans, college loans -- is almost completely shut down.

People are so nervous, and there is so much distrust, that all it would take is one more hit to trigger the modern-day equivalent of a nationwide bank run. Financial institutions would fail, part of your savings would be wiped out, jobs would be lost and a lot of economic activity would grind to a halt. Such a debacle would cost us a lot more than $700 billion.

Etc.

How We Got Here: This is old, I know. But if you didn't bother watching it when it first came out, here's a cute little animated flash of the subprime insecurities crisis.


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posted by Ace at 02:29 AM

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