let me explain what I think is happening in credit markets

http://gregmankiw.blogspot.com/

and this... If I were a member of Congress... An economics professor I know who teaches at a leading business school (who prefers anonymity, as he is still untenured) sends me a critique of our profession and a plea: Dear Greg, This is a strange email, but these are strange times. I saw that your name was absent from the Shimer/Kashyap/etc initiated "letter" to the speaker and senate pro tempore. I don't know if that is reflective of your view about the appropriate course of action or not. But as a person with a very large microphone at your disposal I wanted to share the following, which is informed by my experience in the private sector prior to graduate school. Let me preface this by saying that my personal view is that Ben Bernanke and Hank Paulson are very, very smart people who have better information than anyone who signed that letter, and that questioning their view to the point where it is used by senators to justify inaction is reckless at best--and ideologically driven white-anting at worst. But I digress. A LOT of payrolls get paid at the end of the month. The next for many companies is September 30. Three different people with hugely relevant knowledge said to me today words to the effect of: "Why don't your economist buddies want [insert fortune 100 company/companies here] to be able to pay their employees on Tuesday. If Washington doesn't do something now, they won't be able to". That just scared the hell out of me. I can go into more details if you like, but all of them involve the four horsemen of the apocalypse. As I say, I don't know what your view is. And if it is that the problems with the "bailout" exceed the benefits then I obviously respect that. But I am terrified about the consequences of inaction--and our profession seems to be advocating just that. If you do favor action then please avail yourself of your microphone. If not, free disposal! Best, [name withheld] What is my opinion about all this? I am of two minds about the complex situation we find ourselves in. On the one hand, I share many of the concerns of the letter signers and other critics of the Treasury plan. On the other hand, I know Ben Bernanke well. Ben is at least as smart as any of the economists who signed that letter or are complaining on blogs and editorial pages about the proposed policy. Moreover, Ben is far better informed than the critics. The Fed staff includes some of the best policy economists around. In his capacity as Fed chair, Ben understands the situation, as well as the pros, cons, and feasibility of the alternative policy options, better than any professor sitting alone in his office possibly could. If I were a member of Congress, I would sit down with Ben, privately, to get his candid view. If he thinks this is the right thing to do, I would put my qualms aside and follow his advice.

But I digress. A LOT of payrolls get paid at the end of the month. The next for many companies is September 30. Three different people with hugely relevant knowledge said to me today words to the effect of: "Why don't your economist buddies want [insert fortune 100 company/companies here] to be able to pay their employees on Tuesday. If Washington doesn't do something now, they won't be able to". That just scared the hell out of me. I can go into more details if you like, but all of them involve the four horsemen of the apocalypse.

As I say, I don't know what your view is. And if it is that the problems with the "bailout" exceed the benefits then I obviously respect that.

But I am terrified about the consequences of inaction--and our profession seems to be advocating just that. If you do favor action then please avail yourself of your microphone. If not, free disposal!

IF the above is true the magnitude of the problem is way bigger than just the banks and financial institutions. If these blue chip companies have no cash at all, and need to borrow payroll each pay period to meet their obligations, they need to go under. These CEOs all have been taking home 10's and 100's of millions of dollars a year and cant even budget for payroll without borrowing it?

Seizing the taxpayer's money to the tune of 700 billion so that the same taxpayer can get paid on Tuesday is not the solution. That is saying I will pay you if I can take the money form you to do so.

This snippet from the NYT sums up why it is that the Republicans are blocking this deal.

After years of acceding to the White House on a variety of initiatives despite deep misgivings, House Republicans found the administration's latest proposal to be too much to swallow.

Just as they were trying to reassert themselves as a party of fiscal restraint, President Bush, on his way out the White House door, was asking them to sign off of on a $700 billion bailout built on taxpayer dollars, with very few questions allowed.

"You were being asked to choose between financial meltdown on the one hand and taxpayer bankruptcy and the road to socialism on the other and you were told do it in 24 hours," Representative Jeb Hensarling of Texas, head of the conservative group, said. "It was just never going to happen."

http://www.nytimes.c...7repubs.html?hp

In May/June 2007 I posted here that we were witnessing a generational top in the stock market. Some 15 months after that post of mine we have the President of the United States go on TV and say the US financial system is on the verge of collapse.

I saw that 15 months ago -- hence the comment about a generational top that I made at that point. So now the President agrees with my assesment of what the charts have been telegraphing for years. Charts work if you know how to read them.

And Fed Gov Fisher is not happy about Ben's actions either - he may in retrospect be regarded as smarter than Ben - he just wasnt on the right side when Ben came to town - excerpts from yesterday's speech:

"Since the beginning of the year, I have been worried about the efficacy of reducing the fed funds rate given the problems of liquidity and capital constraints afflicting the financial system. As I see it, the seizures and convulsions we have experienced in the debt and equity markets have been the consequences of a sustained orgy of excess and reckless behavior, not a too-tight monetary policy.

There is no nice way to say this, so I will be blunt: Our credit markets had contracted a hideous STD—a securitization transmitted disease—for which lowering the funds rate to negative real levels seemed to me to be not only an ineffective treatment, but a palliative and maybe even a stimulus that would only encourage further mischief.

I was and I remain skeptical that lowering the fed funds rate is the most effective antidote for such a pathology, given that, in my book, rates held too low, too long during the previous Fed regime were an accomplice to that reckless behavior. A fed funds rate of around 3 1/2 percent—that was the level at which I began to stray from “the pen”—did not appear to me to be the principal problem, particularly with commodities prices soaring and incipient inflation coming to our shores from demand-pull pressures and rising labor costs in the countries that we use to source the inputs needed to run our manufacturing base and stock the shelves of our retail stores

The Federal Reserve created three new facilities: the TAF, or term auction facility; the TSLF, or term securities lending facility; and the PDCF, or primary dealers credit facility. We used these improvised devices to intravenously inject liquidity in amounts and on terms that were unprecedented.


So now a proposal has been made to isolate and quarantine the principal source of this debacle, the toxic mortgage and mortgage-related bacteria, by placing it under a TARP, or “Troubled Asset Relief Program.” All parties have recognized that this proposal entails risk, not least of which is that every lobby will seek to sweep other festering sores—from credit card receivables to auto loans—under the TARP. The president of the United States summed up the sense of urgency last night in no uncertain terms.

Even before tackling the task of cementing capital adequacy, we need to bear in mind that the TARP places one more straw on the back of the frightfully encumbered camel that is the federal government ledger. Other off-balance-sheet liabilities were already in place before Washington took on additional burdens from the reorganization of Fannie Mae and Freddie Mac and whatever we realize—which may, after all is said and done, be a positive return—from the liquidation of collateralized loans made through the Fed to Bear Stearns and AIG, and now the Treasury’s discharging of “x” dollars of mortgage-related securities for which there is presently no palpable market.

We are deeply submerged in a vast fiscal chasm. Which begs the question: Is it possible, now that so many distinguished senators and congressmen are proclaiming their concerns for the price tag of the Treasury proposal and are ardently defending the interests of the taxpayer, that one of the outcomes of this debate will be that Congress, which alone has the power to tax and spend, will finally face up to the task of squaring the nation’s books?"

http://dallasfed.org...08/fs080925.cfm

in other words, hope and pray for a miracle.

and an excellent rebuttal to the faulty logic presented is right on your blog from Mr. Shimer at U Chi - hmm, maybe he has tenure for a reason.

watch package 1, 2, 3, ......28 get passed one by one. and every time it will be the last one! 2009 will be fugly!

"... On the other hand, I know Ben Bernanke well. Ben is at least as smart as any of the economists who signed that letter or are complaining on blogs and editorial pages about the proposed policy. Moreover, Ben is far better informed than the critics. The Fed staff includes some of the best policy economists around. In his capacity as Fed chair, Ben understands the situation, as well as the pros, cons, and feasibility of the alternative policy options, better than any professor sitting alone in his office possibly could.

If I were a member of Congress, I would sit down with Ben, privately, to get his candid view. If he thinks this is the right thing to do, I would put my qualms aside and follow his advice.

I'm much more concerned about his misguided "money pump can solve any problem" philosophy than how "smart" he is...

The issue is not one of intelligence, but decision-making bias. Whose interests are being advanced in the form of these bailouts ? Certainly not the U.S. taxpayers. There are many other feasible options that are being deliberately ignored by these policy-makers, for their own agenda.

"Intelligence" Versus "Philosophy".... An encyclopedic mind Vs. core principles... PhD Vs U of Hard Knocks... I will take the latter in all 3 cases. A shining example is president Reagan...

The issue is not one of intelligence, but decision-making bias.

Whose interests are being advanced in the form of these bailouts ? Certainly not the U.S. taxpayers.

There are many other feasible options that are being deliberately ignored by these policy-makers, for their own agenda.

Paulson's banking ties taint Wall Street bailout plan