Music Video : Arlo Guthrie is (Still) Changing His Name to Chrysler

I'm Changing My Name to Chrysler
Performed by Arlo Guthrie. Lyrics by Tom Paxton.

"Corporate welfare-the enormous and myriad subsidies, bailouts, giveaways, tax loopholes, debt revocations, loan guarantees, discounted insurance and other benefits conferred by government on business-is a function of political corruption. Corporate welfare programs siphon funds from appropriate public investments, subsidize companies ripping minerals from federal lands, enable pharmaceutical companies to gouge consumers, perpetuate anti-competitive oligopolistic markets, injure our national security, and weaken our democracy." - Ralph Nader in "Cutting Corporate Welfare."

Thanks to Roger Baker / The Rag Blog

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Jim Hightower : 'Too Big to Fail' Is Too Big, Period.

Too big to fail. Photo by Jennifer Szymaszek / AP / Noise Between Stations.

The 'too big' claim forms the rationale for the diversion of regular people's money into rich people's pockets.

By Jim Hightower / April 4, 2009.

As skiers and backcountry hikers know, a whiteout is a blizzard that's so intense that those caught in it can't even see the blizzard.

That's how I think of the Wall Street bailout now swirling around us. So many trillions of our tax dollars are being blown at the financial giants that we're blinded by the density of it, unable to see where we are or know what direction we're headed.

However, one way to get your bearings in this bailout blizzard is to focus on the central point that both the bailors (Washington) and the bailees (Wall Street) keep pounding as an irrefutable truth that everyone simply has to accept -- namely, the institutions being rescued are too big to fail.

Even sheep know to flee when coyotes howl in unison -- and we commoners need to confront the absurdity of this "too big" claim, which forms the rationale for the entire diversion of regular people's money into rich people's pockets.

Wachovia, Merrill Lynch, Citigroup, Bank of America, AIG -- omigosh, cried the Powers That Be, these behemoths are linked to every other behemoth, so if we don't stuff them with tax dollars ... well, we have no choice, because they're just too big for the government to let fail.

Point No. 1: They have failed. They are kaput. It costs more to buy a snickerdoodle than to buy a share of Citigroup stock. AIG is 80 percent owned by you and me, the taxpayers. These once-haughty outfits are insolvent -- wards of the state.

Point No. 2: If they're too big, why should we sustain them? Let's be clear about something the establishment doesn't want you and me to understand -- these giants did not get so big and interconnected because of natural market forces and free-enterprise efficiencies. They amassed power the old-fashioned way: They got the government to give it to them. In the past 20 years or so, they lobbied furiously to get Washington to rig the rules so they could latterly bloat ... and float out of control.

A new report by Wallstreetwatch.org reveals that from 1998 to 2008, the finance industry made $1.7 billion in contributions to Washington politicians (55 percent to Repubs, 45 percent to Dems), spent $3.4 billion on lobbyists (3,000 of them on the industry payroll in 2007 alone) and won a dozen key deregulatory victories that led directly to today's financial meltdown.

Inherent in the industry's push for unbridled expansion was the unstated goal of guaranteeing that they would get taxpayer bailouts if things went badly. So many investors, businesses, employees and others would be hooked into these multitentacled blobs that government would be compelled to rescue the banks from their own excesses.

Knowing that they could privatize all of the profits from quick-buck schemes and socialize the losses, bankers were unleashed to do their damnedest. Which they did.

What to do now? Federal Reserve Chairman Ben Bernanke is calling on Congress to create a "super regulator" to control the irrational risks that the too-big boys take. Immodestly, Bernanke suggests that the Fed be this overseer. He is backed up by Timothy Geithner, President Barack Obama's treasury secretary and point man on rescuing the giants. He has just outlined a new regulatory regime that he suggests we entrust to the Fed.

Bad idea all around. First, the Fed already has far-reaching watchdog authority that it refused to use as today's crisis built up. We heard no bark and got no bite because, while the Fed has enormous public authority to regulate America's money supply, interest rates and banks, it is governed by -- guess who? -- bankers, and it operates essentially as a private banking cartel.

Second, and most important, too big to fail is too big to regulate. And too big to regulate means they are too big to tolerate. Period.

The answer is to split their investment, banking and insurance functions into separate companies and reinvigorate America's antitrust laws to restore competition in each of the three sectors of finance.

As Newsweek columnist Michael Hirsh put it in an online column in February, "We can't have a free-market economy dominated by institutions so huge that they don't have to play by free-market rules."

Copyright 2009, Creators Syndicate Inc.

[Texan Jim Hightower is a national radio commentator, writer, public speaker and author of the new book, Swim Against the Current: Even a Dead Fish Can Go With the Flow (Wiley, March 2008). He publishes the monthly Hightower Lowdown, co-edited by Phillip Frazer.]

Source / AlterNet

Thanks to David Hamilton / The Rag Blog

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Why Did A.I.G. Pay Goldman Sachs $12.9 Billion?

Hong Kong AIG building. Photo: Chow Meisy.
The Gift That Keeps on Giving
March 16, 2009

After four bailouts totaling some $170 billion, the American International Group has finally answered some of the questions about where the money went. Unfortunately, the answers have only succeeded in raising many more questions.

On Saturday, Americans learned that A.I.G. planned to pay $165 million in bonuses to executives and employees in the very division that caused the problems that led to the federal bailouts. Taxpayers have every right to be outraged, and President Obama was right to acknowledge that outrage on Monday, when he vowed to try to stop the payments.

Mr. Obama’s tough talk, however, contrasted with comments made by his top economic adviser, Lawrence Summers, and by the Treasury Department. They had already expressed dismay but said that legally they could do nothing to stop the bonuses, which, in fact, had already mostly been paid on Friday.

It is frustrating enough for Americans to try to figure out which part of that mixed message reflects the administration’s true position. But the bigger issue is that the bonuses are something of a distraction. Seen by themselves, the payments are huge, but they are less than one-tenth of 1 percent of the money already committed to the A.I.G. bailout.

Which brings us to the second disclosure of recent days. It was common knowledge that most of the A.I.G. bailout money had been funneled to the company’s trading partners — banks and other financial firms that would have lost big if A.I.G. were allowed to fail. On Sunday, after much prodding by Congress and the public, A.I.G. finally released the partners’ identities, along with amounts paid thus far to make them whole.

The largest single recipient was Goldman Sachs ($12.9 billion). The amount — hardly chump change even by Wall Street standards — appears to contradict earlier assertions by Goldman that its exposure to risk from A.I.G. was “not material” and that its positions were offset by collateral or hedges. If so, why didn’t the hedges pay up instead of the American taxpayers?

Other recipients include 20 European banks that received a total of $58.8 billion and Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion) and Citigroup ($2.3 billion).

Altogether, the disclosures account for $107.8 billion in A.I.G. bailout money. Which leaves us wondering about the rest of the money. Another $30 billion was added to the A.I.G. bailout pot this month and must be accounted for as soon as it is spent. That leaves some $32 billion unaccounted for. Where did it go?

Taxpayers also need to be told the precise nature of the banks’ dealings with A.I.G. Appearing on “60 Minutes” on Sunday, Ben Bernanke, the Federal Reserve chairman, described A.I.G. as a company “that made all kinds of unconscionable bets.” Well, on the other side of those bets are the banks that received the bailout money. It is possible that one side of a bet is acting unconscionably and that another side is acting in good faith. But it’s also possible that both sides are trying to play an unseemly game to their own advantage.

Congress must investigate, and the new disclosures give them enough to get started. Untangling all the entanglements is not only essential to understanding how the system became so badly broken, but also to restoring faith in the government that it is up to the task of fixing it.

Source / New York Times

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Loving's Take on the Wall Street Bailouts

Cartoon by Charlie Loving / The Rag Blog

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The Sunday Funnies: 52 Pickup

Cartoon by Charlie Loving / The Rag Blog

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The Wall Street Bailout Is "Borderline Criminal"

Treasury Secretary Henry Paulson and Friends announcing terms of the bailout.
In Praise of a Rocky Transition
By Naomi Klein / November 13, 2008

The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bailout is not merely incompetent. It is borderline criminal.

In a moment of high panic in late September, the US Treasury unilaterally pushed through a radical change in how bank mergers are taxed--a change long sought by the industry. Despite the fact that this move will deprive the government of as much as $140 billion in tax revenue, lawmakers found out only after the fact. According to the Washington Post, more than a dozen tax attorneys agree that "Treasury had no authority to issue the [tax change] notice."

Of equally dubious legality are the equity deals Treasury has negotiated with many of the country's banks. According to Congressman Barney Frank, one of the architects of the legislation that enables the deals, "Any use of these funds for any purpose other than lending--for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc.--is a violation of the act." Yet this is exactly how the funds are being used.

Then there is the nearly $2 trillion the Federal Reserve has handed out in emergency loans. Incredibly, the Fed will not reveal which corporations have received these loans or what it has accepted as collateral. Bloomberg News believes that this secrecy violates the law and has filed a federal suit demanding full disclosure.

Despite all of this potential lawlessness, the Democrats are either openly defending the administration or refusing to intervene. "There is only one president at a time," we hear from Barack Obama. That's true. But every sweetheart deal the lame-duck Bush administration makes threatens to hobble Obama's ability to make good on his promise of change. To cite just one example, that $140 billion in missing tax revenue is almost the same sum as Obama's renewable energy program. Obama owes it to the people who elected him to call this what it is: an attempt to undermine the electoral process by stealth.

Yes, there is only one president at a time, but that president needed the support of powerful Democrats, including Obama, to get the bailout passed. Now that it is clear that the Bush administration is violating the terms to which both parties agreed, the Democrats have not just the right but a grave responsibility to intervene forcefully.

I suspect that the real reason the Democrats are so far failing to act has less to do with presidential protocol than with fear: fear that the stock market, which has the temperament of an overindulged 2-year-old, will throw one of its world-shaking tantrums. Disclosing the truth about who is receiving federal loans, we are told, could cause the cranky market to bet against those banks. Question the legality of equity deals and the same thing will happen. Challenge the $140 billion tax giveaway and mergers could fall through. "None of us wants to be blamed for ruining these mergers and creating a new Great Depression," explained one unnamed Congressional aide.

More than that, the Democrats, including Obama, appear to believe that the need to soothe the market should govern all key economic decisions in the transition period. Which is why, just days after a euphoric victory for "change," the mantra abruptly shifted to "smooth transition" and "continuity."

Take Obama's pick for chief of staff. Despite the Republican braying about his partisanship, Rahm Emanuel, the House Democrat who received the most donations from the financial sector, sends an unmistakably reassuring message to Wall Street. When asked on This Week With George Stephanopoulos whether Obama would be moving quickly to increase taxes on the wealthy, as promised, Emanuel pointedly did not answer the question.

This same market-coddling logic should, we are told, guide Obama's selection of treasury secretary. Fox News's Stuart Varney explained that Larry Summers, who held the post under Clinton, and former Fed chair Paul Volcker would both "give great confidence to the market." We learned from MSNBC's Joe Scarborough that Summers is the man "the Street would like the most."

Let's be clear about why. "The Street" would cheer a Summers appointment for exactly the same reason the rest of us should fear it: because traders will assume that Summers, champion of financial deregulation under Clinton, will offer a transition from Henry Paulson so smooth we will barely know it happened. Someone like FDIC chair Sheila Bair, on the other hand, would spark fear on the Street--for all the right reasons.

One thing we know for certain is that the market will react violently to any signal that there is a new sheriff in town who will impose serious regulation, invest in people and cut off the free money for corporations. In short, the markets can be relied on to vote in precisely the opposite way that Americans have just voted. (A recent USA Today/Gallup poll found that 60 percent of Americans strongly favor "stricter regulations on financial institutions," while just 21 percent support aid to financial companies.)

There is no way to reconcile the public's vote for change with the market's foot-stomping for more of the same. Any and all moves to change course will be met with short-term market shocks. The good news is that once it is clear that the new rules will be applied across the board and with fairness, the market will stabilize and adjust. Furthermore, the timing for this turbulence has never been better. Over the past three months, we've been shocked so frequently that market stability would come as more of a surprise. That gives Obama a window to disregard the calls for a seamless transition and do the hard stuff first. Few will be able to blame him for a crisis that clearly predates him, or fault him for honoring the clearly expressed wishes of the electorate. The longer he waits, however, the more memories fade.

When transferring power from a functional, trustworthy regime, everyone favors a smooth transition. When exiting an era marked by criminality and bankrupt ideology, a little rockiness at the start would be a very good sign.

Naomi Klein is an award-winning journalist and syndicated columnist and the author of the international and New York Times bestseller The Shock Doctrine: The Rise of Disaster Capitalism (September 2007); an earlier international best-seller, No Logo: Taking Aim at the Brand Bullies; and the collection Fences and Windows: Dispatches from the Front Lines of the Globalization Debate (2002).

Source / The Nation

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Larry Ray : Post-Election Kibbles 'n Bits

'A presidential campaign produces a mother lode of ideas. One learns to keep a pad and pen handy.'
By Larry Ray / The Rag Blog / November 11, 2008

Every reporter or writer has story ideas and scrawled words left in their notebooks after extended major news events. The daily news focus is ever changing. Wars, global warming, killer hurricanes, and of course, politicians and political campaigns. A presidential campaign produces a mother lode of ideas. One learns to keep a pad and pen handy. It is not possible to use each idea you jot down as a central theme for an article. But it always seems a shame to let them just fade away because the hot theme du jour has changed from wayward politicians caught flagrante delicto, to deadly earthquakes in California.

So, here are some of my recent sketchy notes plumped out into mini-articles. We are in a recession, so best to use everything in the pantry.

America's veterinarians are reportedly getting an income boost since the campaign is over. Sarah Palin cost them untold dollars in potential exam and treatment fees because, as one Vet observed, "Damn, that woman has a voice that would worm a dog at thirty yards!" And sure enough, soon as her nasal twang quit filling America's living rooms, dogs again started dragging their butts across those same living room floors about a week after she packed up her designer duds and returned to Alaska. The dogs are reportedly lots happier having the vet worm them than the moose mom.

Continuing the pet theme . . . Billions of American taxpayer's dollars have been shelled out to "rescue" huge Wall Street firms because of lax Federal oversight allowing greedy management to royally screw up. But there is no such thing as a Chagrined CEO. Soon as the cash was deposited in their depleted tills what did do they do? Go into the conference rooms of their posh high rise office digs and start planning how to get a grip and tighten things up? Oh, no. The almost-on-the-rocks mortgage and insurance moguls booked thousand dollar a night rooms at distant posh resorts and flew the whole management staffs there from Wall Street . . . first class. Poolside penitence. Between spa treatments, lobster niblets and lots of Dom Perignon they discussed how to best spend all the new money we just gave them. A TV news investigative team followed and caught them red-handed. That night America saw the AIG hotshots poolside, sipping drinks with little umbrellas in them. Outrage! Fire them all! (this call for their heads lasted for two, maybe three days)

Then, only a few weeks later, the Fed gives them another 80 billion or so of bailout money to keep their doors open, and guess what the top AIG managers did? A bit of conference room contrition? Not on your life. They kept the doors open at AIG so they could dash out of them again and fly off first class to yet another poolside executive "workshop." Again they were caught by waiting cameras. We see them on the nightly news stonily walking away from a reporter's microphone as they are asked why they are pissing away all our money.

This should be called the "Bad Dog" syndrome. These hedge fund hotshots are basically peeing on America's rug, over and over just like the family's pedigreed pooch, who despite threats and attempts to change his behavior, continues to pee the carpet. The pooch just won't learn, but at least he displays a slinking, hang dog indication that he knows it is wrong. Ever see a hang-dog sub-prime hotshot? When they talk about having a leg up on everyone else, we now know what that really means.

Finally, I was playing with the idea of the nation's self-service gas stations all of a sudden feeling the pinch of the recession with gasoline dropping from four bucks to less than two bucks. Regular gas at the Exxon station near my house has always been lots higher than the big discount station across the street from it. Now they're having a gas-war with just pennies difference in their prices. Today the discounter had regular for $1.95 and Exxon had it for $1.97. Lots of readers are too young to remember, but when Exxon was Esso, all the stations had a gimmick to get you to buy gas at their pumps. You stayed in the car while an attendant came out, asked you how much and what grade of gas he could put in your tank. Then he checked the oil and cleaned the windshield while the gas was pumping. If you got a fill up, you got a free dinner plate or coffee cup. The idea was to get you to return and eventually get a service for six of dinnerware. Wonder if Exxon and Chevron will be forced to actually compete for business in the coming couple years of recession? There would be no trouble filling the station attendant jobs. But I wonder if folks will have any use for the dinner plates?

[Retired journalist Larry Ray is a Texas native and former Austin news anchor. He also posts at The iHandbill.]

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Is This Another Backroom BushCo Bailout?

Chrysler headquarters
Why the GM/Cerberus/Chrysler Bailout is bad for taxpayers and doomed to fail without the benefits of a Chapter 11 filing for both Chrysler and GM
By Robert Farago / November 6, 2008

[The following analysis was sent to TTAC by a New York City bankruptcy lawyer who wishes to remain anonymous. It's twice as long as our usual editorial, but I think you'll find it's well worth your time. Thanks to you-know-who-you-are.] Cerberus Capital, a highly secretive NYC-based vulture investment fund, wants the U.S. government and taxpayers to bailout its failed investment in Chrysler and its failing investment in GMAC. Its partner in this raid on the US Treasury is General Motors, a woefully insolvent automobile manufacturer whose CEO is paid $40k each day. Here’s why a bailout for GM and/or Chrysler is a bad idea.

Background

Cerberus Capital uses hedge funds as the vehicles in which to invest in various companies. Apparently, the hedge fund known as Cerberus Series 4 is the owner of an 80 percent interest in Chrysler and a related fund owns or controls a 51 percent interest in GMAC. Not surprisingly for a company known for its secrecy, Cerberus has not disclosed which entities actually own the interests in Chrysler and GMAC, has not disclosed what fees Cerberus has taken or accrued from its investments, and has not disclosed what severance payments would have to be made if GM actually acquired Chrysler. For example, would Chrysler CEO Bob Nardelli get another big payday if he’s cut loose in a merger? The interrelationships among GMAC, Chrysler Financial, Cerberus and other entities are also a well-kept secret.

Secrecy, Secrecy, Secrecy

Why is everything so secret? What happened to the idea of open government? A few questions come to mind:

1. Exactly what is the Cerberus/GM proposal to borrow $10b from the US Treasury in order to fund a merger, the terms of which are also secret? Is it in writing? Where is a copy? What were the proposed terms that were rejected by the current US Treasury? Is another proposal in the works? How is the $10b going to be repaid by two insolvent auto manufacturers?

2. Which lobbyists represented GM and Cerberus in getting their loan application before the US Treasury? How much were the lobbyists paid? With whom did GM/Cerberus meet? Where are the notes of any meeting or other communications about the loan proposal?

3. What do we know about the financial condition of the proposed borrowers? Where is Chrysler’s current balance sheet and income statement? Surely Chrysler is insolvent on an equitable basis, and probably insolvent on a balance sheet basis. Why is basic financial information not available for public inspection and comment?

4. Where are the financial statements for the Cerberus Series Four hedge fund? US taxpayers are being asked to bailout the failed auto related investments by Cerberus Series Four, while the profitable investments in the same fund are not being shared with taxpayers.

GM is woefully insolvent and should file Chapter 11

5. As of June 30, 2008, GM had total assets of $136b and total liabilities of $191b, a $55b deficiency. Thus, GM is insolvent. How can GM ever repay a $10b bailout, or any bailout for that matter? As of June 30, 2008, its current liabilities were $70b, dwarfing its current assets of $55b. Moreover, we do not know what deals GM has made to stretch/defer repayment of its account payables.

6. Is Chrysler in any better shape than GM? Probably not, but without a current balance sheet the definitive answer is a secret.

7. Assuming Chrysler is insolvent (liabilities exceed assets), then the equity interest of Cerberus and Daimler (the 20 percent equity owner) are worthless and these entities are not even entitled to a seat at the merger negotiating table. The real economic owners of Chrysler are its creditors and employees, who are also in the dark about the proposed US treasury bailout.

Who really benefits from a GM/Cerberus/Chrysler merger?

8. The US taxpayers can’t benefit since there is no repayment plan. Not surprisingly, Cerberus and its hedge fund are back door beneficiaries, because the 51 percent Cerberus ownership interest in GMAC will increase in value if GM and GMAC survive. Chrysler is a lost cause, but with the value of the Cerberus investment in GMAC also plummeting, Cerberus is trying to prop-up GMAC by helping GM survive. Is Cerberus pledging its equity interest in GMAC to the US Treasury as security for a government loan to GM? Why not? Is GM pledging its 49 percent equity interest in GMAC to secure repayment of any loan by the US Treasury? More secrets kept from the public.

9. The self-dealing by Cerberus extends to wanting to cherry-pick the Chrysler assets and keep the auto financing arm for itself. What is the value of the Chrysler auto financing business, and why should Cerberus benefit?

10. GMAC had negative net income of $3b for the first 6 months of 2008. GM’s ownership interest in GMAC was impaired by at least $2.7b during the same six month period, meaning that Cerberus Series Four hedge fund had suffered a similar loss in value in its investment in GMAC. Why should taxpayers bailout the millionaire investors in the Cerberus hedge funds?

More secrecy and lack of disclosure

11. Does GM plan to make any payments to GMAC, payments that directly benefit Cerberus? As vehicle residual values decrease, GM is obligated to make payments to GMAC under “residual support and risk sharing” agreements. On August 6, 2008, GM paid GMAC/Cerberus $646m, money which could have been used by GM to fund its ongoing operations and its obligations to employees.

12. Should any taxpayer money be used to fund payments to GMAC/Cerberus, whether that money is used directly or indirectly? How much, if anything is Cerberus investing in new money to prop up its investment in GMAC? If it is not investing in Chrysler or GMAC we can reasonably conclude that its analysis shows that the investment is a bad one. What’s bad for Cerberus is bad for the US Treasury.

Although it appears that the Cerberus Series Four has money available to make follow-on investments, it makes no sense to throw good money after bad if you can lobby the US Treasury to make the bad investment for you. A related question is whether the Cerberus equity interests in GMAC are going to be used as collateral for the loans that will be used (albeit indirectly) to bailout GMAC. Why should equity bear none of the risk but get all of the benefit?

More non-disclosure

13. What is Cerberus ResCap Financing LLC and who has seen its financial statements or the agreements relating to the $3.5b secured loan facility? How is this secured loan impacted by the bailout of Cerberus/GM/Chrysler?

Deepening insolvency is likely

14. GM’s current insolvency and continuing losses will trigger additional liabilities, and make it doubtful that GM will be able to make payments promised to employees and former employees or perform its labor agreements. GM’s worsening financial condition also deepens its losses from its derivative contracts. How would a GM/Cerberus Chrysler merger affect these liabilities? Will any government loans be used to reduce the $30b of GM accounts payable, or, in the event of a merger, to pay down Chrysler accounts payable in some still unknown amount? Sadly, we don’t even know what Cerberus proposed as the use of funds and we have no idea how Cerberus will benefit since we have no financial information on Chrysler or Cerberus.

15. As GM and Chrysler idle plants and facilities, more employees are laid off the employee related liabilities of GM/Chrysler will increase by hundreds of millions. Since GM and Chrysler are insolvent, who will pay these increased costs? Can any of these costs be avoided in a Chapter 11 case of Chrysler or GM?

16. Should taxpayer money be used, directly or indirectly, to pay GM and Chrysler obligations that are coming due while these entities are unable to pay from their own assets. Surely not, but what is being proposed, and who will benefit if GM debt is redeemed at par by vulture investors that bought the debt at pennies on the dollar? A related question: will any Cerberus entities benefit from government funded redemptions of auto maker debt? Is it possible that Cerberus is trading in credit default swaps and actually benefiting from the difficulties of Chrysler, GM and GMAC? Yet more items of non-disclosure on a long list of secret items.

Conclusion

17. GM, GMAC and Chrysler are not credit worthy and are unable to borrow money on any basis, secured or unsecured.

What’s Good for GM/Chrysler is a Chapter 11 Filing

18. GM needs to be restructured, which means it must change the terms of its legal obligations to suppliers, bondholders and employees. The only vehicle to accomplish the needed changes is Chapter 11, which lets GM reject unfavorable contracts, renegotiate its debt obligations, defer interest and principal payments and gives it time to fix its business. Without a chapter 11 filing a government infusion of $10b cash will be gone in six months when GM uses the money in 2009 to pay bondholders and employees billions of dollars, payments which do nothing to help GM survive.

19. Chrysler, the stepchild of a distressed debt vulture fund, is also a prime candidate for Chapter 11. But Chrysler should be liquidated, not reorganized. A liquidating Chapter 11 case, expressly permitted by the Bankruptcy Code, can be used to keep Chrysler operating while its divisions are sold. With adequate Chapter 11 funding line workers can keep their jobs and benefits, and non-essential executives can be fired at minimal cost to the Chapter 11 debtor, known as the debtor-in-possession. Trade creditors will continue to ship to Chrysler because their post-petition claims will have a priority in payment. Chapter 11 also lets the Bankruptcy Judge appoint an examiner to conduct an investigation into the financial affairs of Chrysler and its equity owners, and to sue to recover any improper payments. Chapter 11 will also make it clear to Daimler and Cerberus that their investment is worthless and they will not be able to use their position of control to improperly benefit.

20. Cerberus should acknowledge the financial reality and either file a Chapter 11 case for Chrysler or have a federal receiver appointed so that the value of the Chrysler assets can be maximized in an orderly sale procedure. The US government should fund the Chapter 11 case and keep Chrysler operating by giving Chrysler a debtor-in-possession loan having seniority over all other liabilities of Chrysler, thereby assuring taxpayers that the money will be repaid out of the proceeds of asset sales. The US could also give a senior secured loan to GM to help GM acquire assets from Chrysler, but this would require the cooperation of bondholders, cooperation not likely to be forthcoming. On the other hand, if GM is in Chapter 11 then the government could refinance the GM operations without fear that taxpayer money would be diverted to pay existing creditors.

Source / The Truth About Cars

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The Bailout Monster : Feed Me!

Just wait until next month, sucker.
By Roger Baker / The Rag Blog / October 22, 2008

See 'Fed to Provide Up to $540 Billion to Aid Money Funds' by Craig Torres and Christopher Condon, Below.

Dividing $540 billion by the US population of 300 million equals $1800 per capita for just this one bailout aimed to stop a run on money market funds. While you weren't looking, your long term tax burden just got that much higher. But it is worth it to prevent "Great Depression II," right? Just wait until next month, sucker.

The lenders to the capitalists (the investment bankers and hedge funds) are now drowning in an ocean of the bad debt and failing securitized derivatives they issued. The more fair weather credit deals that got done, the more profits that were made by everyone while the bubble economy was booming.

Paulson and Bernanke will swear to god that this latest money market bailout will be enough to stop a widening panic that might otherwise bring down the whole US economy, so we naturally agree. The federal reserve and treasury team can never run out of enough money to use to try to revive capitalism.

Note that we are really talking about generating and injecting enough strategic bailout dollars to overcome investor fear. But how many dollars might be required is not economics; its about psychology. Nobody can say whether it might not take a big enough dose of dollar liquidity to cause hyperinflation as the side effect of trying to restore investor confidence. The feds risk crippling the economy by adding either too much money or not enough, with stagflation a likely element leading to the final outcome.

Everyone familiar with finance knows that the banks don't hold nearly enough ready cash or callable reserves to actually pay back all their lenders. Thus keeping lenders happy depends on using psychology to keep everyone from trying to take their money out and discovering it just isn't there. All the bank may really is a bunch of increasingly bad long term loans that were based on a booming economy that likewise
isn't there anymore.

Therefore, if everyone really did try to draw out their money all at once, they might have to wait a long time and even then might only get back fifty cents on the dollar. Deflationary psychology tends to feed on itself (look at Japan), much like the optimism of booms. Whatever the correct numbers on eventual payout, the feds will have to try to use financial manipulations that generally reduce and dilute the value of dollars to try to hide what is sooner or later going to be bad news.

Why bad news rather than even slow recovery? It takes ever more oil to keep expanding our oil-addictive global economy, but now oil is peaking. This fact alone is enough to ensure that a large part of current global investments will never earn the profits to pay back their loans.

Fed to Provide Up to $540 Billion to Aid Money Funds
By Craig Torres and Christopher Condon / October 21, 2008

The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.

"Short-term debt markets have been under considerable strain in recent weeks" as it got tougher for funds to meet withdrawal requests, the Fed said today in a statement in Washington. A Fed official said that about $500 billion has flowed since August out of prime money-market funds, which with other money-market mutual funds control $3.45 trillion.

The initiative is the third government effort to aid the funds, which usually provide a key source of financing for banks and companies. The exodus of investors, sparked by losses following the bankruptcy of Lehman Brothers Holdings Inc., contributed to the freezing of credit that threatens to tip the economy into a prolonged recession.

"The problem was much worse than we thought," Jim Bianco, president of Chicago-based Bianco Research LLC, said in a Bloomberg Television interview. Policy makers are trying to prevent 'Great Depression II' by stemming the financial industry's contraction, he said.

JPMorgan Chase & Co. will run five special units that will buy up to $600 billion of certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. The Fed will provide up to $540 billion, with the remaining $60 billion coming from commercial paper issued by the five units to the money-market funds selling their assets, central bank officials told reporters on a conference call.

'Lot of Pressure'

"This will take a lot of pressure off the Fed and the Treasury," David Glocke, head of taxable money market funds for Valley Forge, Pennsylvania-based Vanguard Group Inc. Glocke said he'll be more willing to shift money he's invested in U.S. Treasuries back into financial-sector commercial paper covered by the plan.

U.S. money-market mutual funds held more than 63 percent of outstanding unsecured commercial paper and 39 percent of asset- backed commercial paper at the beginning of September, according to Alex Roever, a New York-based analyst at JPMorgan.

Commercial paper, which typically matures in 270 days or less, is used by companies to finance payroll, rent and other daily expenses.

The new program is called the Money Market Investor Funding Facility, and officials said it's intended as a backstop for money-market mutual funds to use as needed to meet redemptions.

Liquidity Buffer

Today's action shows that two programs set up last month by the Fed and U.S. Treasury to help money-market funds haven't stabilized the industry. A Fed official told reporters today that the funds don't have much of a liquidity buffer remaining.

Last month, the Fed agreed to give loans to banks so they can buy asset-backed commercial paper from money funds. There was $122.8 billion of such loans outstanding as of Oct. 15. The Treasury separately used a $50 billion emergency pool to offer money funds guarantees against losses.

The central bank's announcement today "is a big event," BlackRock Inc. Chief Executive Officer Laurence Fink said during an earnings conference call with analysts and investors. "It is the first thawing."

BlackRock and JPMorgan were members of the consortium of money managers that put together the plan and presented it to the Fed, people briefed on the matter said.

Money-market funds have been hurt by their inability to sell back at par the commercial paper they bought from banks and other issuers, Fed officials said.

The new program "should improve the liquidity position of money market investors," the Fed said in its statement.

Special Units

Each of the five special units will buy assets from up to 10 separate bank and financial company issuers. The program may be expanded to include purchases from other money-market investors.

The special-purpose vehicles will finance 10 percent of their purchases by selling asset-backed commercial paper. That paper won't be eligible for the Fed program that extends credit to banks to buy such assets, a central-bank official said.

The New York Fed will lend the remaining 90 percent to the facilities on an overnight basis at the discount rate, which stands at 1.75 percent.

Each special-purpose vehicle will only purchase debt with the top short-term ratings of A-1, F1 and P-1 given by Standard & Poor's, Fitch Ratings and Moody's Investors Service respectively.

The Fed said the facility will be in place until April 30 unless extended by the Board of Governors. Fed officials said they will announce a start date by the end of the week.

In addition to the three programs to aid money funds, the Fed next week will start an unlimited program to purchase commercial paper directly from issuers, after companies had to pay more to borrow or were cut off from that market.

Turmoil Worsened

Turmoil worsened among money-market funds after the bankruptcy of Lehman Brothers on Sept. 15, and the breakdown of the oldest money-market fund the following day.

The $62.5 billion Reserve Primary Fund announced Sept. 16 that losses on debt issued by Lehman had reduced its net assets to 97 cents a share, making it the first money fund in 14 years to break the buck, the term for falling below the $1 a share that investors pay.

Institutional investors have since pulled $341 billion from funds that can invest in corporate debt, or 28 percent of assets in those funds.

The Treasury responded to the initial run three days after the Reserve fund faltered by introducing the guarantee program. While that calmed investors, fund managers didn't resume buying commercial paper because it can't be sold quickly without realizing a loss.

"There have been very few or no bids at all" in the secondary market, Debbie Cunningham, head of taxable money funds for Pittsburgh-based Federated Investors Inc. Federated had $231.1 billion in money-market funds at the end of August.

"This is another important piece in the puzzle," Cunningham said. "It will be very helpful in bringing more normal market tendencies back for investors."

Source / Bloomberg

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Knee-Jerk Bailout Policy as Financial Cure-All? Here's a Moderate Alternative.

Lower the hammer on knee-jerk policies.
'The following economic essay is an intelligent alternative to the current economic crisis response under Paulson and Bernanke.'
By Roger Baker / The Rag Blog / October 13, 2008

Would the following moderate but sensible approach, offered as an alternative to Federal policy actually work to slowly restore the US economy, as we have known it, back to health?

Even a smart approach to US economic management is unlikely to succeed because it is blind to peak oil/energy constraints. An imbalance between inflexible oil supply and an inflexible but increasing demand for same is a sure prescription for cost-push inflation in the food and energy sector, which simultaneously tends to depress other consumer spending, even if no new money is added to the system. Oil shortages thus naturally tend to lead to stagflation. For the moment oil prices have crashed, but as world oil demand recovers while oil supply contracts, we are soon back to an even worse oil cost crisis.

But at least the following economic essay is an intelligent alternative to the current economic crisis response under Paulson and Bernanke. The point being made by the "Stalinist" reference is that the feds are as rude and crude as Stalin in applying a knee-jerk bailout policy as a financial cure-all.

Federal policy had initially involved bailouts of those stuck with vast derivatives obligations, via buying their bad paper debts. But now a banking or liquidity panic has spread internationally. The dynamics of fear cannot be measured in the numbers of dollars that Bernanke needs to add to the system to cause the fear to subside. If Bernanke's helicopters start dumping cash on a large scale, it is as likely as not to reduce public confidence in the soundness of the system.

This injection of credit and cash and liquidity is bound to contribute to the other variety of inflation: demand-pull inflation. Bailouts that make good on bad paper, on the required scale, will put vast amounts of new dollars into circulation. These bailout dollars soon diffuse everywhere, causing a more generalized type of inflation.

With these two kinds of inflation are added together, naturally they tend to make the value of the dollar fall in value relative to other currencies. So OPEC will tend to raise the price of oil, which will further depress the US economy because of acute US addiction. That impact will require further bailouts, etc.

While the following prescription does fall well short of the nationalization of US banks and the treasury under public control, it offers a picture of what might be done by a government considerably wiser in its attempts to save the existing system than any that we are likely to have in the near future:

"...Regulating the level of economic activity and counteracting recession should fall under fiscal policies. The government has better means, agencies and fiscal instruments to fight economic recession than central bank monetary policy. The recent world crisis has shown that governments have to address shortages in food, energy, infrastructure, and social programs. Each government can draw a comprehensive stabilization program with properly designed fiscal and sectoral policies without compromising monetary stability..."

Monetary Stalinism in Washington
By Hossein Askari and Noureddine Krichene / October 11, 2008

Amongst the worst tragedies of Soviet collectivization was the Ukraine famine of 1932-33, which took six million lives as Joseph Stalin practiced forced appropriation of crops and imposed very low prices for agricultural products in favor of industrialization. Interference with the pricing mechanism and Stalinism in the form of very low prices for agricultural products also caused famines in India in 1965 and in China in 1969, with a human death toll well into the millions.

Monetary policy as practiced by the US Federal Reserve for the past decade is but a form of financial Stalinism, forcing ridiculously low or negative real interest rates, with catastrophic results that are now plaguing the world. Fed policy has disabled the price mechanism in capital markets and set off uncontrolled credit expansion at the expense of capital productivity and creditworthiness, pushing housing, food, and energy prices to prohibitive levels, and triggering food and energy riots in vulnerable countries. It has undermined the dollar and made the US highly dependent on foreign financing.

The dramatic consequences of Fed policy are unfolding before our very eyes. The financial crisis that broke out in August 2007 has recently taken a turn for the worse. After claiming international and well-established banks and investment banks, it has now reduced the financial savings of ordinary Americans (in retirement accounts) by over 30%.

The fiscal bill for past, ongoing and future bailouts by Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson will be staggering; the US fiscal deficit will be blown up to unthinkable proportions, public debt will be pushed to unprecedented levels, and most public resources will be destined to absorb financial losses at the expense of social and economic programs.

Last, but not least, the long-term inflationary consequences may turn out to be even more dramatic. All these consequences are real and were in part predictable.

So far Bernanke and Paulson have failed miserably in stemming the financial crisis and have brought the US economy to a standstill, in part because Bernanke does not have a feel for the free-market mechanism and in part because he is not a prudent central banker.

It would appear that Bernanke has read a great deal about the Great Depression of 1929-1933 and perhaps very little, or nothing, about the German hyperinflation of 1920-1923. His view is that the Fed was liquidationist of banking institutions during 1929-33. In his view, if the Fed had injected sufficient liquidity during 1929-1932, it would have precluded thousands of bank failures. Therefore, Bernanke is determined not to let that mistake happen again. Consequently, his response to the financial crisis has been a blind and aggressive monetary policy in form of negative interest rates, massive liquidity injection, and massive bailouts.

Bernanke is like the medical doctor who is familiar with one drug, and who prescribes it to every patient he sees at full dose without diagnosis of what ails the patient or thinking what will happen if he takes the wrong medication.

Thinking that the US economy was in a deep recession in 2007, one similar to the Great Depression, he precipitously unleashed monetary policy. His rushed actions have destabilized the financial system, sent commodity prices skyrocketing, and crippled economic growth. The US economy in 2007 had no resemblance to either the institutional setting of the Great Depression or to the immense role and expansionary stance of fiscal policy. Namely, today, there are institutions that can prevent bank runs, such as the Federal Deposit Insurance Corporation, and the federal and state governments (both relatively far bigger than 1929) are running large deficits that should preclude a deep recession, especially if they adopt appropriate policies.

Hence, his inflationary approach was ill-designed and will be very costly in bank failures, high inflation and rising unemployment.

The Fed chairman is by far the most important personality on the US economic and financial landscape. In fact, both Wall Street and Main Street read his statements more carefully than reading the words of a president or the laws of the land. His words and actions are the most influential in the financial and economic world. Being in large part an independent institution, the Fed, largely under Bernanke's predecessor Alan Greenspan, grasped absolute power over economic policymaking and decided to abandon its regulatory power, enabling the development of financial anarchy under the guise of financial engineering and innovations.

Such myopic faith in the free market has turned the US financial markets into a casino. The US president has negligible influence on economic policymaking and has become merely a symbolic figure. By subscribing fully to Bernanke and Paulson policies, the two presidential contenders have renounced their future economic role. The US Congress has become a rubber stamp of Fed policies. It applauded Greenspan�s policies and it now supports Bernanke-Paulson knee-jerk and costly bailouts. The US public is not so much interested in the presidential debates as in how Bernanke and Paulson policies will affect their jobs, retirement savings, tax liabilities and the very livelihoods of their children.

Wrong course will continue

Once the Fed follows a policy path, it hardly changes course, which means the Fed will perpetuate its cheap monetary policy indefinitely. After institutionalizing negative real interest, the Fed wants to institutionalize high housing prices and rents, and a depreciated dollar. While US banks are in the process of strengthening their balance sheets and opting for safe banking, the Fed is forcing them to extend credit regardless of risk and profitability, and to finance with short time resources long-term loans.

Recent desperate actions by the Fed consist of bypassing the banking system and extending directly low-cost loans to borrowers regardless of risk and nationalizing the banking system. The Fed sees no limit for issuing trillions of dollars by electronically crediting borrowers.

The Fed has arguably created the most uncertain and unstable economic environment in US history. No one would have predicted that the value of shares would tumble by nearly 5,000 points, or approaching a decline of 40%, in the past three months. There is no basis for making sound financial or economic forecasts. No rational entrepreneur can undertake investment plans under such uncertainties. Foreign investors are scared of inflation and a depreciating dollar and are rushing to gold and safer currencies. It is at best a wait and see attitude.

Central bankers are this week convening for their semi-annual meeting in Washington DC, only to find that the world is no better than it was six months ago. Certainly, they will not surrender their excessive powers and most likely will not accept blame for their imprudent monetary policies that have led to the worst financial crisis in the post-war period.

Interest rate setting by central banks has long been repudiated by monetary economists; it creates distortion between the market and natural interest rates, and triggers a self-cumulative inflationary process. As a form of price control, it creates considerable inefficiencies and misallocation of resources into non-productive uses. With a view to unlocking credit markets, it is an utmost priority both in the US and Europe to free interest rates. Such a step will enable banks to mitigate credit risk, improve their earnings, and for productive borrowers to have access to borrowing. It will dispel inflation fear and pave the way for financial consolidation and recovery. If they reject this step, central banks will only aggravate the current crisis.

Central banks' misguided role

The role of central banks has never been to regulate the economy or promote full employment. It is a simple truth that an economy needs safe money, which serves as a medium of exchange and store of value. The central banks should be principally in charge of managing liquidity and regulating the banking system.

These are the most important functions of a central bank. If properly done, they will contribute to a stable macroeconomic framework conducive to economic growth and employment. Given their total neglect of bank regulation in the past two decades, central banks have a long way to go in updating the regulatory framework, streamline financial products, and mitigating sources of risks and speculation.

Regulating the level of economic activity and counteracting recession should fall under fiscal policies. The government has better means, agencies and fiscal instruments to fight economic recession than central bank monetary policy. The recent world crisis has shown that governments have to address shortages in food, energy, infrastructure, and social programs. Each government can draw a comprehensive stabilization program with properly designed fiscal and sectoral policies without compromising monetary stability.

A 10-year spending program on infrastructure, including education and alternative energy development, would be appropriate today, especially in the United States. At the same time, federal credit should be urgently extended to state and local governments until financial order is restored. However, excessive reliance on credit or ex-nihilo money creation is wrong and hazardous.

Central banks should not interfere with the price mechanism; in this respect, institutionalizing long-term housing price controls would be detrimental to the economy. Central banks have to put in place monetary programming consisting of safe limits on credit and money aggregates. Monetary economists never claim that fixed rules for credit and money supply are free of instability. However, if instability were to occur, it can be addressed by fine-tuning.

The US economic ship could capsize in the coming days and weeks. There is urgency for action before chaos spreads farther a field. The same central banks that have announced a coordinated rate cut should admit that this measure is not the proper solution. It will be damaging to financial institutions and will exacerbate world inflation and economic recession.

Instead, they should announce a coordinated decision for freeing up interest rates. They have to allow banks to undertake orderly and long-term recapitalization, relying in the first instance on shareholders or other private holders of capital and only on a case-by-case basis on federal injections of capital with preferred share ownership for the public. And they must adopt urgent regulatory reform, accompanied by strict supervision and enforcement.

Finally, Bernanke and Paulson must jettison their policy of one bailout at a time. with the intention of addressing other issues later, and adopt a comprehensive plan to address all issues now, including support for state and local governments.

Unfortunately, it would appear that the notion that monetary policy is the panacea for addressing all economic problems has gained total currency among central bankers and politicians.

[Hossein Askari is professor of international business and international affairs at George Washington University. Noureddine Krichene is an economist at the International Monetary Fund and a former advisor, Islamic Development Bank, Jeddah.]

Copyright 2008 Asia Times Online (Holdings) Ltd.

Source / Asia Times

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Visualize Industrial Collapse Dept.

Propping up Capitalism...
'A hundred billion in federal guarantees here, a trillion there, it all adds up.'
By Roger Baker / The Rag Blog / October 7, 2008

Don't focus on the Dow too much. More important is probably how Bernanke is reacting, how panicky, whom he is bailing out, etc.

Here are two snips that tell the tale. There is a global financial crash going on as the first snip shows, and the US credit and money market has locked up. In response, the Paulson Bernanke team pledges to buy up any and all bad paper in certain categories like the collateral backing interbank loans, now US taxpayer guaranteed. A hundred billion in federal guarantees here, a trillion there, it all adds up. And all that fresh new money generated from bad paper will land somewhere sooner or later, and start looking for stuff to buy like fuel and food that may not be there. And you know where that leads. But it has to be done.

Using taxpayer money to prop up capitalism is no easy task. When it has to be done by means of the guaranteed tax obligations of a citizen population already deep in debt, the task is doubly challenging. It obviously is going to take some highly creative bookkeeping, for which job only a very few who occupy top positions in the Bush Administration are properly qualified.

When the White House brought out its $700 billion rescue plan two weeks ago, its sheer size was meant to soothe the global financial system, restoring trust and confidence. Three days after the plan was approved, it looks like a pebble tossed into a churning sea...

Source / New York Times / Oct. 7, 2008

And:

The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened
to cut off a key source of funding for corporations.

The Treasury will make a deposit with the Fed's New York district bank to help set up the special purpose vehicle. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks. The Fed Board invoked emergency powers to set up the unit, the central bank said in a statement released in Washington.

Today's action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption.

The Fed didn't say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase...

Source / Bloomberg / Oct. 7, 2008

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Stopping a Financial Crisis : How Sweden Did It

Sweden's Bo Lundgren sought an 'upside' for the taxpayer.
'Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks.'
By Carter Douherty

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s deputy minister of finance at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.

A few American commentators have proposed that the United States government extract equity from banks as a price for their rescue. But it does not seem to be under serious consideration yet in the Bush administration or Congress.

The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

Putting taxpayers on the hook without anything in return could be a mistake, said Urban Backstrom, a senior Swedish finance ministry official at the time. “The public will not support a plan if you leave the former shareholders with anything,” he said.

The Swedish crisis had strikingly similar origins to the American one, and its neighbors, Norway and Finland, were hobbled to the point of needing a government bailout to escape the morass as well.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks, which did not worry enough about whether the value of their collateral might evaporate in tougher times.

Property prices imploded. The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden’s currency, the krona, caused overnight interest rates to spike at one point to 500 percent. The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures and ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt decided it was time to clear the decks.

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt’s conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation’s 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years.

Then came the imperative to bleed shareholders first. Mr. Lundgren recalls a conversation with Peter Wallenberg, at the time chairman of SEB, Sweden’s largest bank. Mr. Wallenberg, the scion of the country’s most famous family and steward of large chunks of its economy, heard that there would be no sacred cows.

The Wallenbergs turned around and arranged a recapitalization on their own, obviating the need for a bailout. SEB turned a profit the following year, 1993.

“For every krona we put into the bank, we wanted the same influence,” Mr. Lundgren said. “That ensured that we did not have to go into certain banks at all.”

By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.

More money may yet come into official coffers. The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

The politics of Sweden’s crisis management were similarly tough-minded, though much quieter.

Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country. The center-left opposition, while wary that the government might yet let the banks off the hook, made its points about penalizing shareholders privately.

“The only thing that held back an avalanche was the hope that the system was holding,” said Leif Pagrotzky, a senior member of the opposition at the time. “In public we stuck together 100 percent, but we fought behind the scenes.”

Source / New York Times / Posted Sept. 22, 2008

Thanks to Jim Retherford / The Rag Blog

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Post-Bailout : Why the Stock Market Still Plunged

Unemployment, tempera on paper by Ben Shahn, 1938. © Private Collection/Christie’s Images / The Bridgeman Art Library.
It's the economy, stupid....
By Steve Russell / The Rag Blog / October 4, 2008

Why, I was asked off line, did the market dive after the bailout passed?

First, the bailout was not about the Dow Jones/S&P/NASDAQ but about the LIBOR (London Interbank Offered Rate).

However, the straight answer is that the smart money had already priced in the bailout as a lead pipe cinch after the Senate moved things a few notches to the right to capture House Repugs. I would have thought moving to the right would cost votes on the left but that turned out not to be the case as every chamber of commerce in the country was in a blind sweat panic over new collateral requirements and drying up lines of credit. You don't think a car dealer owns those new cars on his lot, do you?

Anyway, after the big dive the market came back to an equilibrium slightly lower than it was before the far left and the far right joined hands and jumped off the cliff.

The Friday dive was about more dire economic news, principally the unemployment numbers. Those numbers and the LIBOR are directly related, so here's hoping we can at least slow down the bleeding when the "toxic assets" become sort of liquid again.

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Greed and Disaster Politics (Burp.)

'This is a gun to our head by our own people. The Republicans and Democrats are both doing this.'
By Dennis Thompson / The Rag Blog / October 3, 2008

I called my congressman's office to weigh in on the "debate". I asked the lady taking the calls how she was holding up and she said she was above ground. I asked her if that was in relation to being alive or in a bunker?

In an op-ed piece I saw this morning, the best advice that could be recommended for a position to take in this mess was in cash and fetal. What is terror then? As the piece said, I don't think in my lifetime I have felt this defenseless as a country and on a personal level. Not JFK assassination, not 9/11. This is a gun to our head by our own people. The Republicans and Democrats are both doing this. B. Frank et al are up to their eyeballs in the deregulation and engorgement of Freddie & Fannie scenario. Bush and family have always worked directly or indirectly for the investment bankers (Brown Harriman), what's new. Do we really believe this just happened, somehow walking out of the dark to surprise us. If we don't wake up now, the mountains may be where you end up, maybe as a sophist but more likely as a partisan.

This whole thing comes out of the playbook of the disaster politics scenario that Friedman liked. Screw them up bad enough and change things while they are on the ropes. Move in after a natural disaster or create an economic one, doesn't matter. We have seen this before. Can we have a little war on this terror? And if you are worrying which side Obama is on look at this.

Greed and Disaster Politics, this trail leads directly to Cheney's bunker: Naomi Klein on Mutant Egg Plant.

Good literary blog by the way.

If democracy still works, it better start working now.

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Roger Baker : Industrial Collapse? Bring it On!

Collapse the Light into Earth by ~EvidencE~
'The best outcome is probably for humans to hit the wall soon and hard.'
By Roger Baker / The Rag Blog / October 2, 2008

Is industrial collapse the BEST way out of our current economic mess?

Arguably yes and here is why. But does it even matter? Perhaps not. Capitalism, in its global form and as we now know it, is likely finished in any case, so the choice is likely to be an illusion. But the best outcome is probably for humans to hit the wall soon and hard.

The Economic Context

Capitalism as an economic system depends on an endless expansion of material goods production at a rate that allows lenders to earn interest on money saved and invested. The only way to get potential lenders to lend rather than spending their money immediately is to reward them with a real rate of return on their savings. This is done by promising lenders that they will be rewarded with the ability to buy more material goods in the future. A reward must be offered to lenders for not buying and stockpiling bars of gold, barrels of oil, or any other desirable goods or services now as opposed to putting their money in banks or investing it in stocks or bonds or whatever else can earn them a real rate of interest as a reward for offering their savings up for investment by others.

Keynesian economics tries to maintain a mild inflation rate of a percent or two in order to encourage people to save their money in banks and other alternatives that offer a return above the rate of inflation. This is necessary to keep people from simply putting their money under a mattress. If the rate of inflation is one percent and they can earn three percent in a bank, they will bank their spare funds and will, in theory, be able to come out ahead and buy two percent more in the amount of physical goods or services than they had originally put in.

That is how those managing the economic system (like the Federal Reserve representing the banks) try to set things up. It is meant to encourage people to behave predictably and to keep them saving and investing. Under conditions in which in which it is possible to keep the material world always expanding and yielding a production of desirable goods at or above the rate of interest on money saved, this system remains viable and stable. This assumes that the financial system has been well-managed, and that there are no external limiting factors.

Enter Peak Oil

We now live in a world economy that is rapidly approaching the limiting factor of fossil fuel energy sources. The specific limiting factor that is most relevant is a looming shortage of liquid fuel based on petroleum as the total world oil production peaks and declines.

The peaking of world oil production strongly affects the investment equation that underlies the global capitalist economy and rewards investments and savings. The global economy is based on a cheap-oil-related infrastructure for its expansion of the production of real goods. Capitalism requires cheap energy to deliver the exponential expansion of material goods through investments that can pay real interest rates on loans. But this expectation is probably more than the expansion an oil-addicted global production system can really deliver. It changes the system's economic potential by making it impossible to earn a real rate of return on the money saved by lenders, who in the case of the United States have increasingly been foreign lenders.

The underlying problem is that nobody can think of a way to keep expanding the material production of a global economy that is experiencing a shrinking supply of liquid fuels. These oil-based fuels move almost all goods in our global economy. This economy is based everywhere on the cheap transport of people, goods, and the capital goods needed to expand global production, whether it be by ship, by rail, by road, or by air. When the ability to move almost all goods declines, the expansion of the ability of capitalist investments to exploit nature for human uses must also decline.

Economic Response to an Oil Shock

The global and also the US economy may be roughly divided into two sectors: necessary spending versus spending that is unnecessary or can be postponed. The necessary spending sector corresponds to spending on vital goods such as food, shelter, the fuel needed to heat or cool a home, and the fuel needed to commute to work. Spending of this kind in the United States cannot be reduced very much or very fast without a long and painful restructuring of the economy to reduce suburban sprawl trends, etc.

If such necessary expenditures rise in cost, spending will be transferred to this sector at the expense of the second sector. We may term the latter the discretionary spending sector. This is a sector of the economy devoted to jewelry, fancy cars, iPods, trips to the movies, vacations, eating out, etc. But it must also include voluntary savings, which are vital for the functioning and expansion of global capitalism.

The discretionary spending sector is a big enough part of the total US and global economy that there are job losses and severe disruptions throughout the total economy if the discretionary spending sector contracts. If foreigners will not lend money and if US consumers are also strapped for cash, then the whole system is soon in trouble.

If there is only enough oil to keep the vital spending sector of the economy functioning, even as it gradually and painfully tries to adjust itself, then no possible kind of economic manipulation, whether by the federal reserve or the US treasury or even the most creative economist can prevent an even steeper contraction of the discretionary spending sector as consumer spending shifts over to the vital spending sector. If we are ever to shift to wind and solar energy, this implies that somebody has money enough left over after paying for food and gasoline and house payments to lend to the companies that expand their output of wind turbines and solar panels.

Thus oil production, whether it is stagnating on a level production plateau or actually contracting as population increases, forces a deep restructuring of the global economy. This raises prices in the vital goods sector and forces a restructuring of the vital spending sector of the economy, which is now additionally called upon to feed those thrown out of work by a contraction throughout the discretionary spending sector. This is basically why we are now in a state of slow economic collapse. Those parts of the economy that cannot be restructured to accommodate permanently higher food and fuel prices must shrink. The discretionary sector of the economy shrinks in terms of total spending (although not necessarily in all cases) as the vital necessity sector restructures itself to require less fossil fuel energy input. In doing so it often has to become more labor intensive.

Further Implications

The foregoing is a description of the general trends forced on the global economy by the end of cheap oil, but it still ignores important details in how US and global capitalism, increasingly organized as a global corporate empire, is likely to respond.

Global oil supply and demand are both relatively inflexible. That means that when oil demand rises faster than its world supply (there is essentially one world oil market with all humans bidding for a shrinking supply of what is left), even a slight imbalance tends to cause a sharp price rise. If oil demand falls, then oil price will fall rapidly too.

In much the same way, if a ship in the ocean runs short of potable water available for sale to the passengers, they are likely to try to bid a very high price for whatever water remains. A graph of the water consumed by the ship's passengers may reflect a slow decline in water consumption as some passengers die of thirst. But this graph of water consumption would not reveal a sharp increase in the water price as the remaining passengers attempt to buy whatever water remains for sale. If they run short of money, then the price will fall even as they remain thirsty.

The same economic dynamic applies to worldwide bidding for what remains of the global oil supply and explains why the price has fallen modestly due to conservation and demand destruction even as production remains flat. As the dollar is devalued further, people will bid up the price of fuel, and food made from fuel, as much as they are able at the expense of savings and discretionary spending.

The Credit Crisis

The current US economic crisis, sometimes termed a credit meltdown, is actually due to a combination of several factors. First banking deregulation has led to the extreme over-leveraging of debt and credit, based on the Greenspan bubble expectation that the economy can and will continue to grow "normally" (that is exponentially) forever into the future. Billions have been lent to expand the production of Chinese toys and Christmas ornaments and similar discretionary sector goods. These debts, and indeed the smooth functioning of the entire global economy, have been insured by the massive issuing of derivatives such as credit default swaps (default insurance), paper created by the investment banks and AIG on a scale in which their total dollar value dwarfs the annual global economy.

The credit market and the highly profitable derivative market were allowed to expand, primarily after the deregulation of investment banks by Phil Gramm under President Bill Clinton. This paper was issued to the degree that seemed prudent by those who stood greatly to benefit by an enormous expansion, including not only the investment banks, but also their clients, the hedge funds.

It was imagined until about a year ago, that if the US or global economy ever threatened to contract, that a Wall Street or global bank run could be calmed by stimulating the global and national lenders with temporary injections of liquidity, through government lending and bailouts, and in accord with the principles of traditional Keynesian economic theory. Whereas total US bank reserves now equal only about three percent of what has been lent, and whereas the usual guidelines are to keep about eight per cent in reserve to calm the markets it was imagined that the Federal Reserve could come to the rescue and calm investors until the crisis subsides. Failing such assistance, the US and probably the entire global lending system is now grotesquely over-leveraged and subject to collapse as investors seek to withdraw their loaned funds on a large scale.

Reaching for the Right Levers

For the Federal Reserve and the Treasury Department, the crisis continues.

Without the broad bailout plan they invented and lobbied hard for, the two agencies are once again forced to careen from one desperate path to another, and to dig deep into their toolkits to rescue the global financial system. Even before the House stunned the world on Monday by rejecting the Bush administration's bailout bill, the Fed was already resorting to the oldest action in its book: printing money.

With money markets around the world seizing in fear, the Fed on Monday announced that it would provide an extra $150 billion through an emergency lending program for banks, and an additional $330 billion through so-called swap lines with foreign central banks to help money markets from Europe to Asia.

It was an extraordinary display of financial power, and it reflected acute new anxiety at the Fed and central banks around the world that the crisis of confidence in American financial markets had metastasized to money markets everywhere...

Reaching for the Right Levers in an Anxious Situation by Edmund L. Andrews and Mark Landler / New York Times / September 29, 2008.

The People vs. the Banksters

The financial system is blowing up. Don't listen to the experts; just look at the numbers. Last week, according to Reuters, "U.S. banks borrowed a record amount from the Federal Reserve nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression." The Fed opened the various "auction facilities" to create the appearance that insolvent banks were thriving businesses, but they are not. They're dead; their liabilities exceed their assets. Now the Fed is desperate because the hundreds of billions of dollars of mortgage-backed securities (MBS) in the banks vaults have bankrupted the entire system and the Fed's balance sheet is ballooning by the day. The market for MBS will not bounce back in the foreseeable future and the banks are unable to roll-over their short term debt.

...If there's going to be a bailout, let's get it right. Paulson's $700 billion bill does nothing to fix the deep structural problems in the financial markets; it merely pushes the day of reckoning a little further into the future while shifting the burden of payment for toxic assets onto the taxpayer.

The People vs. the Banksters by Mike Whitney / counterpunch / September 27, 2008.

Inflationary consequences

...Now that the market is finally adjusting the price bubble downward and a lot of firms that were incredibly profitable on the way up are falling like leaves in autumn in a bear market. The Fed is merely trying to inject money to keep the prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep price of worthless assets high is to lower the value of money. And that appears to be the Fed's unspoken strategy...

Inflation is effectively a hidden form of governmental taxation that substitutes for the more honest approach of openly raising taxes. A global or national bank run can be calmed by, in effect, printing money to fill the liquidity gap. This is the gap between the material reward promised on money deposited, which the investment system has promised as a reward for saving, versus what the system can actually deliver to lenders in terms of real goods that can be purchased with the money withdrawn. Over the short run, printing bailout money charged to taxpayers can bridge the gap between the liquidity problems and appear to make them seem to go away.

Thus the Federal Reserve is injecting large amounts of bailout money into the economy in order to stop a widening global bank run and financial panic. But this added money will soon diffuse throughout the general economy and start bidding for real commodities. That means inflation as the bailout money starts chasing vital necessity goods tied to oil and energy, or other commodities, or the traditional physical means of preserving wealth, gold.

The reaction by the Federal Reserve has been more or less predictable, traditional, and automatic. If a credit crisis threatens a bank run, the solution is for the US government to print up enough money to make the immediate crisis go away long enough so that the economic downturn ends, the system can recover, and business confidence restored. This is a stopgap measure, much like stalling creditors while looking for a job. It has tended to work in the past, keeping the high tech and housing bubbles expanding during the last decade. But there is only so long that the US economic bubble can be kept expanding by lowering interest rates or using bank bailouts.

During normal times, it tends to work, and the government can make up its own rules to keep things expanding. To use an analogy, not only is it harder to keep a party going past a certain point no matter how much free liquor is on hand, but the situation is made more complicated by the fact that the liquor supply is running short. The attempt to stimulate the system and keep the investment bubble expanding will not work under conditions in which the real economy can never recover because the material world on which it is based can no longer expand and recover over time because a contraction of its economic base is dictated of declining oil-based fuel production.

Stagflation

In the real world this combination of a credit crisis and peak oil strongly implies stagflation; the serious stagflation we saw in the 1970's during our first big energy crisis was not a random event due merely to bad luck. Stagflation is characterized by a simultaneous economic contraction in the discretionary spending sector of the economy, along with cost-push inflation caused by competitive bidding for a limited supply of goods in the vital necessity sector of the economy. During a time of stagflation, people transfer spending in favor of bare necessities like housing, food, and the fuel needed for vital transportation. The only good news is that base housing prices are falling, but this comes only after many people have been locked into ballooning housing loans. Something has got to give in terms of consumer spending, and the main option is to sharply reduce spending in the discretionary sector of the economy.

No amount of additional money printed by the government can successfully stimulate a renewed expansion of the discretionary sector of the economy if the added money is mostly used to bid for a limited supply of fuel, and food costs heavily based on fuel. The current economic crisis will unfold as some inflationary variety of economic collapse shaped by political reality. The rate of decline and the severity of such an oil-price triggered crisis is made more abrupt and severe than the gradual decline in oil production itself by its interaction with the credit crisis.

The end result, no matter how the details play out, will be predictably contrary to the continued expansion of the capitalist economic system. The end result is unavoidable but will have a strong tendency toward inflation or hyperinflation in the stages that precede the final economic collapse, in accord with the historical experience elsewhere.

Infinite expansion in a finite world

"Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." -- Kenneth Boulding, economist.

The situation we face now, on a global scale, is the predictable economic consequence of a deeply dysfunctional economic organization; a system predicated on infinite exponential expansion, struggling to pay the compound interest rates expected by those who have lent their savings to a global capitalist economy:

The global economy is deeply structured in such a way as to be resistant to abrupt change by its national political institutions. The economy and the Wall Street financial institutions are likewise structured in such a way as to always guarantee a real return on long term investments. Something has got to give; a deep and universal economic shock is necessary to reflect the required change on the required time scale. This means the end of exponential economic growth for a long time, assuming the capitalist economic system can ever recover in anything like its current form. Human survival probably now implies reverting to the simpler ways of the past.

If the ultimate limit to continuing economic growth were not liquid fossil fuel, it would be potable water, or arable land, or global warming, or pandemics or some combination of such limiting factors. Given the current world population of six billion people, the current level of human technology, and the powerful ability of that technology to disrupt nature, important limiting factors would soon be reached in any case.

The necessary result must involve a deep restructuring of the entire global economy to reflect the new material reality of declining world energy production. And it must somehow reduce human population growth and reduce the current human population bubble and its unsustainability.

Why should such a painful outcome be encouraged as soon as possible? Few humans can or will change their behavior in response to intellectual arguments or warnings or predictions until they are forced to do so by external factors. If the current reality seems to succeed for those who benefit most, even though they may live in luxury within gated communities, it is human nature for them to attempt to resist change and to try to assure that things continue along the same path as long as possible. But now the global economy system is obliged to change, and to accommodate the new material reality of much reduced energy availability. The faster the accommodation to the limits of nature the better, or else the end result will undoubtedly be worse for humans everywhere.

Faster restructuring now, though it amounts to an industrial collapse, means that we will hit the wall of material reality dictated by the limits of the natural world soon and hard. To hit the wall now, however painful, is preferable to hitting it later, with an increased risk of war and famine if the crisis could somehow be postponed. We probably have little choice in any case.

The Rag Blog

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