Fortune Magazine – Nicholas Varchaver and Katie Benner report: As Congress wrestles with another bailout bill to try to contain the
financial contagion, there’s a potential killer bug out there whose
next movement can’t be predicted: the Credit Default Swap.

In
just over a decade these privately traded derivatives contracts have
ballooned from nothing into a $54.6 trillion market. CDS are the
fastest-growing major type of financial derivatives. More important,
they’ve played a critical role in the unfolding financial crisis.
First, by ostensibly providing “insurance” on risky mortgage bonds,
they encouraged and enabled reckless behavior during the housing bubble.

“If
CDS had been taken out of play, companies would’ve said, ‘I can’t get
this [risk] off my books,’” says Michael Greenberger, a University of
Maryland law professor and former director of trading and markets at
the Commodity Futures Trading Commission. “If they couldn’t keep
passing the risk down the line, those guys would’ve been stopped in
their tracks. The ultimate assurance for issuing all this stuff was,
‘It’s insured.’”

Second, terror at the potential for a financial
Ebola virus radiating out from a failing institution and infecting
dozens or hundreds of other companies - all linked to one another by
CDS and other instruments - was a major reason that regulators stepped
in to bail out Bear Stearns and buy out AIG (AIG, Fortune 500), whose calamitous descent itself was triggered by losses on its CDS contracts (see “Hank’s Last Stand“).

And the fear of a CDS catastrophe still haunts the markets. For
starters, nobody knows how federal intervention might ripple through
this chain of contracts. And meanwhile, as we’ll see, two fundamental
aspects of the CDS market - that it is unregulated, and that almost
nothing is disclosed publicly - may be about to change. That adds even
more uncertainty to the equation

“The big problem is that here
are all these public companies - banks and corporations - and no one
really knows what exposure they’ve got from the CDS contracts,” says
Frank Partnoy, a law professor at the University of San Diego and
former Morgan Stanley derivatives salesman who has been writing about
the dangers of CDS and their ilk for a decade. “The really scary part
is that we don’t have a clue.” Chris Wolf, a co-manager of Cogo Wolf, a
hedge fund of funds, compares them to one of the great mysteries of
astrophysics: “This has become essentially the dark matter of the
financial universe.” …

ONE REASON THE MARKET TOOK OFF is that you don’t have to own
a bond to buy a CDS on it - anyone can place a bet on whether a bond
will fail. Indeed the majority of CDS now consists of bets on other
people’s debt. That’s why it’s possible for the market to be so big:
The $54.6 trillion in CDS contracts completely dwarfs total corporate
debt, which the Securities Industry and Financial Markets Association
puts at $6.2 trillion, and the $10 trillion it counts in all forms of
asset-backed debt.

“It’s sort of like I think you’re a bad driver
and you’re going to crash your car,” says Greenberger, formerly of the
CFTC. “So I go to an insurance company and get collision insurance on
your car because I think it’ll crash and I’ll collect on it.” That’s
precisely what the biggest winners in the subprime debacle did. Hedge
fund star John Paulson of Paulson & Co., for example, made $15
billion in 2007, largely by using CDS to bet that other investors’
subprime mortgage bonds would default.

So what started out as a
vehicle for hedging ended up giving investors a cheap, easy way to
wager on almost any event in the credit markets. In effect, credit
default swaps became the world’s largest casino. As Christopher Whalen,
a managing director of Institutional Risk Analytics, observes, “To be
generous, you could call it an unregulated, uncapitalized insurance
market. But really, you would call it a gaming contract.” …

There is at least one key difference between casino gambling and CDS
trading: Gambling has strict government regulation. The federal
government has long shied away from any oversight of CDS. The CFTC
floated the idea of taking an oversight role in the late ’90s, only to
find itself opposed by Federal Reserve chairman Alan Greenspan and
others. Then, in 2000, Congress, with the support of Greenspan and
Treasury Secretary Lawrence Summers, passed a bill prohibiting all
federal and most state regulation of CDS and other derivatives. In a
press release at the time, co-sponsor Senator Phil Gramm - most
recently in the news when he stepped down as John McCain’s campaign
co-chair this summer after calling people who talk about a recession
“whiners” - crowed that the new law “protects financial institutions
from over-regulation … and it guarantees that the United States will
maintain its global dominance of financial markets.” (The authors of
the legislation were so bent on warding off regulation that they had
the bill specify that it would “supersede and preempt the application
of any state or local law that prohibits gaming …”) Not everyone was
as sanguine as Gramm. In 2003 Warren Buffett famously called
derivatives “financial weapons of mass destruction.”

THERE’S ANOTHER BIG
difference between trading CDS and casino gambling. When you put $10 on
black 22, you’re pretty sure the casino will pay off if you win. The
CDS market offers no such assurance. One reason the market grew so
quickly was that hedge funds poured in, sensing easy money. And not
just big, well-established hedge funds but a lot of upstarts. So in
some cases, giant financial institutions were counting on collecting
money from institutions only slightly more solvent than your average
minimart. The danger, of course, is that if a hedge fund suddenly has
to pay off on a lot of CDS, it will simply go out of business. “People
have been insuring risks that they can’t insure,” says Peter Schiff,
the president of Euro Pacific Capital and author of Crash Proof,
which predicted doom for Fannie and Freddie, among other things. “Let’s
say you’re writing fire insurance policies, and every time you get the
[premium], you spend it. You just assume that no houses are going to
burn down. And all of a sudden there’s a huge fire and they all burn
down. What do you do? You just close up shop.” (09/30/08)
more…

Timothy Wilken, MD writes: Recall my earlier definitions of synergic wealth:

SYNERGIC WEALTH —def—>
Life itself and that which promotes human well being generally — that
which satisfies human needs of self and other — that which promotes
mutual survival and makes life meaningful for self and other. This then
includes all Property and all Synergic Trust.

SYNERGIC WEALTH is then 1) LIFE itself including the LIFE TRUST 2) HUMAN ACTION—Mental and Physical—Thinking, Action, and Behavior—Primary Property 3) HUMAN LEVERAGE—Mental
and Physical—Intellectual Property in the forms of Theories,
Discoveries, and Technology Designs—Primary Property, and Physical
Property such as Tools, Technology Artifacts, and Products—Secondary
Property, 4) the TIME-BINDING TRUST, and 5) the EARTH TRUST.

plunder is
not Synergic Wealth. As stolen Property or exploited Trust it has been
removed from the Synergic Wealth pool to serve the criminals’ needs.

If and when stolen Property is rescued by synergic justice,
then it is returned to its rightful owners, or if that is not possible
it is placed in the protective custody of the appropriate Trustees. If
and when exploited Trust is rescued by synergic justice, it is returned
to the Protective custody of the appropriate Trustees.

Korzybski’s Indexing: Now that we have carefully defined Wealth, we can utilize a derivative of Korzybski’s Indexing^TT to identify what form of wealth we are talking about.

Property^P is designated with superscript P.

Life Trust^LT is designated with a superscript LT.

Earth Trust^ET is designated with a superscript ET.

Time-binding Trust^TT is designated with a superscript TT.

And plunder_p is designated with a subscript p.

Some examples would be: my computer^P, the American eagle^LT,the Earth^ET, Einstein’s Theory of Relativity^TT, and the thief was arrested in possession of several cellular phones_p.

Synergic Trustees: Recall, I said earlier that all humans are synergic trustees.

We are Earth Trustees for the land and natural resources we
are granted use of for our personal needs. We must conserve and protect
those Earth resources that we are entrusted with. This is an obligation
to humanity as community and to the Earth Trust.

We are of course the Life Trustees of our own bodies. We
should take good care of ourselves. Take care with our health and
nutrition. As parents we are the Life Trustees for our children until
they are adults. We must not harm ourselves or our children. We must
live in ways to help ourselves and our children. This is an obligation
to humanity as community and to the Life Trust.

We are also the Time-binding Trustees of all the knowledge and
skills that we personally have mastered from our study of the past. We
must strive not to hurt others with this knowledge and skill. We should
try and help others to whatever extent we are capable.

In synergic culture, all humans are granted access to the
Time-binding Trust at birth. Every human may make full use of the
knowing contained in the Time-binding Trust as long as that use does
not hurt others.

Personal or educational use of the Time-binding Trust is
encouraged without limit or restriction. Knowledge cannot be consumed.
Using the Time-binding Trust does not in any way diminish it.

Every human who gains economically from their use of the
Time-binding Trust is required to acknowledge and give credit to the
innovators and creators of the knowledge they are using.

They are further encouraged to help others to the extent they
are capable — helping is a basic synergic value. Who they choose to
help and to what extent they help is entirely voluntary — entirely
their own personal choice. And, while synergic culture encourages its
members to help others, there is no coercive obligation to do so.

Furthermore, economic gain from use of the Time-binding Trust
creates no economic obligation to the Time-binding Trust or anyone
else. (09/30/08)
more…

If we don’t get our political-economic house in order very soon, America will soon be reduced the the level of “a banana republic with nukes.”

The following is the full text of a speech given by Iranian President Ahmadinejad to the United Nations General Assembly early Wednesday morning, September 24, 2008 as translated by the Presidency of the Islamic Republic of Iran News Service. The speech is reposted here to share his perspective with my readers. You can judge the merits of his words for yourselves. …

Mahmoud
Ahmadinejad speaks: Mr. President, Excellencies, I am grateful to the Almighty for granting me another opportunity to be present in this world Assembly.

In
the last three years, I have talked to you about great hopes in the
bright future of human society, and some solutions for achieving
sustainable peace and expanding love, compassion, and cooperation.

I
have also talked about unjust systems governing the world; pressures
exerted by some powers seeking to trample the rights of other nations,
oppression imposed on the majority of the global community, especially
on the people of Iraq, Palestine, Lebanon, Africa, Latin America, and
Asia; about challenges we are faced with, such as efforts to shatter
the sanctity of families, destroy cultures, humiliate lofty values,
neglect commitments, expand the shadow of threats, as well as about the
arms race and the unfairness and inability of the systems governing
world affairs in reforming the status quo.

With the occurrence
of various new developments, the debility of existing mechanisms has
been revealed even more. However, at the same time, an encouraging
trend, which has originated in the thoughts and beliefs of peoples, has
blossomed and become stronger. Posed against the despairs caused by the
new developments, this trend has ignited the ray of hope for a
brilliant, desirable and beautiful future in the hearts of men. …

Let’s look at the situation of the world today: Iraq
was attacked under the false pretext of uncovering weapons of mass
destruction and overthrowing a dictator. The dictator is toppled and
WMDs are not uncovered. A democratic government is established by the
votes of the people but, after 6 years, the occupiers are still there.
They insist on imposing colonial agreements on the people of Iraq by
keeping them under Chapter 7 of the UN Charter. Millions of people have
been killed or displaced, and the occupiers, without a sense of shame,
are still seeking to solidify their position in the political geography
of the region and to dominate oil resources.

They have no
respect for the people of Iraq and disregard any dignity, rights or
status for them. The UN is not capable enough to solve the problems and
to remove aggression, occupation and imposition.

In Palestine,
60 years of carnage and invasion is still ongoing at the hands of some
criminal and occupying Zionists. They have forged a regime through
collecting people from various parts of the world and bringing them to
other people’s land by displacing, detaining, and killing the true
owners of that land.

With advance notice, they invade,
assassinate, and maintain food and medicine blockades, while some
hegemonic and bullying powers support them. The Security Council cannot
do anything and sometimes, under pressure from a few bullying powers,
even paves the way for supporting these Zionist murderers. It is
natural that some UN resolutions that have addressed the plight of the
Palestinian people have been relegated to the archives unnoticed

In
Afghanistan, production of narcotics has multiplied since the presence
of NATO forces. Domestic conflicts continue. Terrorism is spreading.
And innocent people are bombarded on a daily basis in streets, markets,
schools and wedding ceremonies. The people of Afghanistan are the
victims of the willingness of NATO member states to dominate the
regions surrounding India, China, and South Asia. The Security Council
cannot do anything about it because some of these NATO members also
happen to be the major decision makers in the Security Council.

In
Africa, efforts are made to re-establish the relationships of the
colonial era. By starting civil wars in large countries including
Sudan, disintegration of those countries is planned in order to serve
the interests of some corrupt powers. In case there is a national
resistance, the leaders of the resistance are put under pressure by
legal mechanisms created by the very same powers.

In Latin
America, people find their security, national interests and cultures to
be seriously endangered by the menacing shadow of alien domineering
governments, and even by the embassies of some empires.

The
lives, properties and rights of the people of Georgia and Ossetia and
Abkhazia are victims of the tendencies and provocations of NATO and
certain western powers, and the underhanded actions of the Zionists.

The
never-ending arms race and the proliferation and stockpiling of nuclear
and other weapons of mass destruction and the threats to use them, and
the establishment of missile defense systems, have made the situation
unstable. …

All these are due to the manner in which the immoral and the
powerful view the world, humankind, freedom, obeisance to God, and
justice. The thoughts and deeds of those who think they are superior to
others and consider others as second-class and inferior; who intend to
remain out of the divine circle, to be the absolute slaves of their
materialistic and selfish desires, who intend to expand their
aggressive and domineering natures, constitute the roots of today’s
problems in human societies. They are the great hindrances to
the actualization of material and spiritual prosperity and to security,
peace and brotherhood among nations. I explicitly state that the
Iranian people and the overwhelming majority of peoples and governments
are against those deeds and perspectives of the world- domineering
powers. Establishment of justice requires people who have achieved
moderation and justice inside themselves, and have restrained their
domineering attitudes and actualized their attributes of self-sacrifice
and are at the service of humanity. …

Fortuitously, opportunities are accessible. With the grace of God
Almighty, the existing pillars of the oppressive system are crumbling.
Great developments in favor of humankind as well as its true and real
rights are on the way. A golden and brilliant future is awaiting
mankind. A global community filled with justice, friendship,
brotherhood and welfare is at hand, as I have elaborated.

A
community which will tread the path of beauty and love under the rule
of the righteous and perfect human being, the One promised by all
divine prophets and the One who is the true lover of humanity. A
community that will be devoid of any fear, despair and privation. Such
a community will soon be ours. The community promised by the great
divine Prophets Noah, Abraham, Moses, Jesus Christ and Mohammad (PBUH)
is about to materialize

Let us, hand in hand, expand the
thought of resistance against evil and the minority of those who are
ill-wishers. Let’s support goodness and the majority of people who are
good and the embodiment of absolute good that is the Imam of Time, The
Promised One who will come accompanied by Jesus Christ, and accordingly
design and implement the just and humanistic mechanisms for regulating
the constructive relationships between nations and governments.

Oh
great Almighty, deliver the savior of nations and put an end to the
sufferings of mankind and bring forth justice, beauty, and love.

Friends; Let’s have a proper share in the establishment of that illuminated and promised divine age. (09/30/08)
more…

Dr. Ellen Brown writes: In July, Treasury Secretary Henry Paulson said of his massive underwriting scheme for Fannie Mae and Freddie Mac, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.”  On September 7, Paulson pulled out his bazooka and fired, effectively nationalizing the mortgage giants.  Last week, Paulson pulled out the bazooka again and held it to Congress’s head.  “Seven hundred billion dollars or your credit system will collapse!”  Seven hundred billion dollars is more than the country currently pays annually for Social Security; and for what do we owe this ransom?  To bail out bankers from their own folly in speculating in a giant derivative Ponzi scheme that is now imploding.  But policymakers justify rewarding the guilty parties at the expense of the taxpayers by arguing that “we have to do it to save the banking system.”

Abraham Lincoln was faced with a similar situation when he stepped into the Presidency in 1861.  The country was suddenly in a civil war, and there was insufficient money to fund it.  The British bankers, knowing they had him over a barrel, agreed to lend him money only at 24 to 36% interest, highly usurious rates that would have bankrupted the North.  Our fearless forefather said, “Thanks but no thanks, I’ll print my own.”  Issuing the national currency is the sovereign right of governments.  A government does not need to borrow its national currency from bankers “merely pretending to have money.”  That was the phrase used by Thomas Jefferson when he realized the bankers’ “fractional reserve” lending scheme meant that they were lending the same “reserves” many times over.

The federal dollars issued by Lincoln were called U.S. Notes or Greenbacks.  They allowed the North not only to win the Civil War but to create the greatest industrial giant the world had ever seen.  Lincoln’s government launched the steel industry, created a continental railroad system, promoted a new era of farm machinery and cheap tools, established free higher education, provided government support to all branches of science, organized the Bureau of Mines, increased labor productivity by 50 to 75 percent.  The Greenback was not the only currency used to fund these achievements; but they could not have been accomplished without it, and they could not have been accomplished on money borrowed at 30% interest.

There are other historical examples.  In the 1930s, Australia and New Zealand avoided the Depression conditions suffered elsewhere by drawing on a national credit card issued by publicly-owned central banks.  The governments of the island states of Guernsey and Jersey have been issuing their own money for two centuries, creating thriving economies without carrying federal debt.

In none of these models has government-issued money created dangerous price inflation.  Price inflation results either when the supply of money goes up but the supply of goods doesn’t, or when speculators crash currencies by massive short selling, as in those cases of Latin American hyperinflation when printing-press money was used to pay off foreign debt.  When new money is used to produce new goods and services, price inflation does not result because supply and demand rise together.  Prices increased during the American Civil War, but this was attributed to the scarcity of goods common in wartime.  War produces weapons rather than consumer goods.

Today in most countries, money is created privately by banks when they make loans; but the banks create only the principal, not the interest necessary to pay the loans back.  The interest must be borrowed into existence, continually increasing the money supply, in a Ponzi scheme that has reached its mathematical limits.  The latest desperate proposal for propping up this collapsing system is to deliver $700 billion of taxpayer money to ex-Goldman Sachs CEO Henry Paulson to buy unmarketable derivative paper from the banks, shifting the loss on this dodgy paper from the banks to the taxpayers.  Seven hundred billion is just the opening figure; losses on the imploding derivatives pyramid could wind up being in the trillions.  And where will this money come from?  It will no doubt be borrowed into existence from the banking system.  We the people will be in the anomalous position of paying interest on a debt to the banks to bail out the banks!  At the very least, doesn’t it seem that the banks should be paying interest on the $700 billion to us?

Rather than propping up an unsustainable system with taxpayer money, it may be time to let the private money-making scheme collapse and replace it with something better.  Banks that have thrived in an unregulated free market should be left to work out their fates in that market.  If they go bankrupt, they can be put into receivership and reorganized in return for an equity interest in the banks, as was done recently with AIG.  The government would then own a string of banks, which could issue “the full faith and credit of the United States” directly, returning the country to productivity and prosperity just as Lincoln did. (09/29/08)
more…

Michael E. Lewitt writes: The problem with trying to legislate in the middle of a revolution is
that you aren’t sure whether you are governing the world that is being
destroyed or the one that is coming into being.

There can be little
question that the Wall Street that existed at the beginning of this
year is no longer the industry that Congress is seeking to rescue from
its own excesses. The financial world has been permanently altered by
the collapse of the debt bubble that inexorably built up over the past
three decades.

Now Congress is trying to design a rescue plan for a
world whose shape is highly contingent and unstable. Such an
undertaking requires more than two weeks of work. Conventional thinking
tells us that the government must do something to stabilize the markets
immediately, and that doing something is better than doing nothing.
Once again, conventional thinking is wrong. Congress would be much
better advised to take the extra few days or week it would take to
structure a plan that the world is going to have to live with for a
very long time.

HCM (Hegemony Capital Management) has been warning for years that all of the king’s horses
and all of the king’s men wouldn’t be able to put this mess back
together again. It is now time for America to take the pain and figure
out how to move forward. Any plan that is adopted must include a
sufficient dose of strong medicine to prevent the culture of
self-delusion and moral hazard that created the current crisis from
further perpetuating itself. The purpose of the Paulson Plan has to be
to rebuild confidence in the financial system. The manner in which the
plan was presented and debated rendered that more difficult but
hopefully not impossible. For any plan that fails to bring confidence
back to the market will not work.

The great economic historian Charles Kindleberger wrote in his seminal study of financial crises, Manias, Panics, and Crashes,
that, “[f]or historians each event is unique. Economics, however,
maintains that forces in society and nature behave in repetitive ways.
History is particular; economics is general.”

This is a
very important observation. While each financial crisis is unique in
terms of its causes and the types of assets that it engulfs, the
conditions that led to it are always driven by human irrationality and
hubris. Financial busts are preceded by financial bubbles. The current
bust was preceded by a debt bubble whose unique manifestations were
debt securitization and credit derivatives. Underlying these novel debt
structures were the human emotions of greed and fear that led to abuses
by even the most sophisticated individuals and most highly respected
institutions in the market. While these human attributes are the most
difficult to legislate, their ability to wreak havoc is clear evidence
that they must be regulated in a thoughtful way. (09/29/08)
more…

Dean Baker writes: If you have a real story, you don’t have to make up phony stories. That’s pretty straightforward.

I’ve heard lots of phony stories. Much of the country’s political and economic leadership has been running around raising the prospect of the Great Depression and a breakdown in the banking system (I actually had taken the latter seriously). These stories are absolutely not true.

There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression. There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.

At this point I cannot identify a single good reason to do the bailout.

The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can’t trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.

That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis. …

Finally, the bailout absolutely can make things worse. We are going to be in a serious recession because of the collapse of the housing bubble. We will need effective stimulus measures to boost the economy and keep the recession from getting worse.

However, the $700 billion outlay on the bailout is likely to be used as an argument against effective stimulus. We have already seen voices like the Washington Post and the Wall Street funded Peterson Foundation arguing that the government will have to make serious cutbacks because of the bailout.

While their argument is wrong, these are powerful voices in national debates. If the bailout proves to be an obstacle to effective stimulus in future months and years, then the bailout could lead to exactly the sort of prolonged economic downturn that its proponents claim it is intended to prevent.

In short, the bailout rewards some of the richest people in the country for their incompetence. It provides little obvious economic benefit and could lead to long-term harm. That looks like a pretty bad deal. (09/29/08)
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David Sirota writes: There’s news this Sunday afternoon of a congressional deal to bailout Wall Street fat cats with $700 billion of taxpayer cash.

Though the deal negotiated between congressional leaders and the White House is better than what Treasury Secretary Henry Paulson originally proposed early last week, it remains an insulting atrocity, having omitted even basic aid to homeowners, bankruptcy reforms and any modicum of future financial industry regulation.

Now, the New York Times reports that the Democratic leadership may not have the votes to pass this bailout. So without further ado, here are the top 5 reasons (in no order) why every single member of Congress - Democrat and Republican - should vote this sucker down.

1. BAILOUT’S INHERENT FISCAL INSANITY COULD MAKE PROBLEM WORSE …

2. EXPERTS ON BOTH THE LEFT AND RIGHT SAY THIS BAILOUT COULD MAKE THINGS WORSE …

3. THERE ARE CLEARLY BETTER AND SAFER ALTERNATIVES …

4. ANY INCUMBENT VOTING FOR THIS PUTS THEMSELVES AT RISK OF BEING THROWN OUT OF OFFICE …

5. CORRUPTION AND SLEAZE ARE SWIRLING AROUND THESE BAILOUTS - AND AMERICA KNOWS IT …

If this bill passes, it will be a profound referendum on the dominance of money over democracy in America. That - and that alone - would be the only thing an objective observer could take away from the whole thing.

Money will have compelled politicians to not only vote for substantively dangerous policy, but vote for that policy even at their own clear electoral peril. Such a vote will confirm that the only people these politicians believe they are responsible for representing are are the fat-cat recipients of the $700 billion - the same fat cats who underwrite their political campaigns, the same fat-cats who engineered this crisis, and want to keep profiteering off it. Any lawmaker who takes that position is selling out the country, as is any issue-based political non-profit group - liberal or conservative - that uses its resources to defend a “yes” vote rather than demand a “no” vote. This is a bill that forces taxpayers to absorb all of the pain, and Wall Street executives to reap all of the gain. It doesn’t even force the corporate executives (much less the government leaders) culpable in this free fall to step down - it lets them stay fat and happy in their corner office suites in Manhattan.

Even if they believe that something must be done right now, lawmakers should still vote no on this specific bill, and force one of the very prudent alternatives to the forefront. They shouldn’t just vote no on Paulson’s proposal - they should vote hell no. Our economy’s future depends on it. (09/29/08)
more…

Bloomberg — In addition to the $700 Billion Bailout before congress today, the Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks to $620 billion from $290 billion to make more dollars available worldwide. The Term Auction Facility, the Fed’s emergency loan program, will expand to $450 billion from $150 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The Fed’s expansion of liquidity, the biggest since credit markets seized up last year, comes as Congress prepares to vote on a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, forcing European governments to rescue four banks over the past two days alone.

“Today’s blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, “the Fed’s balance sheet is about to explode.” (09/29/08)
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Thomas Friedman writes: Many things make me weep about the current economic crisis, but none
more than this brief economic history: In the 19th century, America had
a railroad boom, bubble and bust. Some people made money; many lost
money. But even when that bubble burst, it left America with an
infrastructure of railroads that made transcontinental travel and
shipping dramatically easier and cheaper.

The
late 20th century saw an Internet boom, bubble and bust. Some people
made money; many people lost money, but that dot-com bubble left us
with an Internet highway system that helped Microsoft, I.B.M. and
Google to spearhead the I.T. revolution.

The early 21st
century saw a boom, bubble and now a bust around financial services.
But I fear all it will leave behind are a bunch of empty Florida condos
that never should have been built, used private jets that the wealthy
can no longer afford and dead derivative contracts that no one can
understand.

Worse, we borrowed the money for this bubble from
China, and now we have to pay it back — with interest and without any
lasting benefit.

Yes, this bailout is necessary. This is a
credit crisis, and credit crises involve a breakdown in confidence that
leads to no one lending to anyone. You don’t fool around with a credit
crisis. You have to overwhelm it with capital. Unfortunately, some
people who don’t deserve it will be rescued. But, more importantly,
those who had nothing to do with it will be spared devastation. You have to save the system.

But
that is not the point of this column. The point is, we don’t just need
a bailout. We need a buildup. We need to get back to making stuff,
based on real engineering not just financial engineering. We need to
get back to a world where people are able to realize the American Dream
— a house with a yard — because they have built something with their
hands, not because they got a “liar loan” from an underregulated bank
with no money down and nothing to pay for two years. The American Dream
is an aspiration, not an entitlement. (09/28/08)
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Raul Ilargi Mendoz writes: The US may reach an accord on a plan to pour what will eventually be trillions of dollars into its economy. I think all involved in the talks understand that they need to come up with something by Sunday night. I do not think, however, that it will do anything but buy more than a few more days or weeks of borrowed time, and I mean that literally. If time is money, than borrowed money, in the end, can buy you nothing but borrowed time.

The credit markets are dead and gone. The plan being negotiated in Washington is aimed at reviving them. But it will do nothing to solve the problems that have started, indeed caused, the demise of credit. In order to accomplish that, it would have to force all funny casino paper, all securities and derivatives, to be put on the table in broad daylight, valued at current market prices, and sold at those prices. If a buyer could be found at all.

The reason they are so reluctant to do that is that it would be the end-all for most banks, pension- and money market funds etc. Not a pretty sight, for sure. It would, for one thing, wipe out most of those who are around those tables today. So they’re looking for an alternative. The problem with that is that there is, as far as I can see, no alternative. All there is is lipstick.

The credit market, in the last few days, has gotten much worse and was rushed into the emergency room, as evidenced by the violent surges in Libor and TED spreads, both of which mainly signal banks’ fear to lend to each other.

An adapted Paulson plan will try to address that issue by buying up frozen assets, and the idea is that that will make banks whole again, and take away the fear. But that can’t be done with $700 billion, it can’t even by done with $7 trillion. There is far too much of that funny frozen paper in the world, it’s more like $700 trillion, and it is indeed all over the world, which compounds the problem, for all intents and purpose, to infinity and beyond. …

… the derivatives monster is about to be let loose on the planet, gaining strength with every single bank failure, like a virus feeding off weakened hosts. The UK government is about to nationalize another Northern Rock, in Bradford and Bingley, Belgian giant Fortis Bank is on life-support (its liabilities are three times the GDP of Belgium), and in the US Wachovia may have been sold as we speak.

We haven’t even started. And when the monster is done, we will have very few banks, if any at all, left. Not a lot of jobs either, for that matter. Retirement funds? You go to be kidding. By Christmas, you’ll be lucky if you recognize the town you live in. (08/28/08)
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