meanwhile, back in reality (bank crisis round 2)
 

look pretty much anywhere this morning and you will see the collapse of lehman brothers, the collapse and absorption of merrill lynch, the

FT.com / In depth - Wall Street in turmoil

Wall Street's bloody Sunday

Richard Adams: The mortgage monster created by US bankers is getting its revenge | Comment is free | guardian.co.uk

there is a simple bottom line, and there is the more complex one.

the simple bottom line is that this should be the end of the neoliberal world: o sure, you can export the worst features of industrial capitalism and shift roduction facilities place to place in search of the lowest wages and most politically pulverized workforce, and so long as cheap consumer goods keep showing up in the stores, there's no problem. "markets remain rational" to the extent that capitalist ideology has never been very good at taking account of what it actually correlates to in the world and besides working people are just extensions of machines in any event.

but here we have yet another wave of crisis at the level of capital itself, one which follows directly from the assumption that markets are rational, that regulation is an impediment, that left to themselves market actors make reasonable decisions because there's something magical that happens when capital is at stake, all fog goes away and even the most idiotic person suddenly becomes a rational actor--unless they do not hold capital, in which case they are of no consequence. the deregulation of banks has resulted in crisis upon crisis, beginning with the s&l problem of the bush administration and culminating so far in the disasters of the past couple weeks. the generation of financial arcana that circulates in transnational markets which have a shadow existence and no regulation whatsoever---institutions turn profits, shareholders and happy, executives derive obscene salaries and when the shit hits the fan...

no-one is responsible, the state steps in, market fundamentalism goes out the window, these actors are "too big to allow to fail" and here we are in the brave old work of capitalist oligarchy and it's lovely friend crisis, which is one of the features capitalism is most adept at producing.

it'll be interesting to see how this gets spun, how continuity is asserted in the face of it.

in "the harder they fall" there is a conversation between the main cop and the head of the fictional equivalent of studio one about the hunt for the "bad guy" who is played, i think, by jimmy cliff. the cops want to put an apb on the radio during top of the pops. the head of studio one says---you interrupt top of the pops for that and you better catch him. you disrupt the continuity of entertainment and you create a Problem.

what do you make of this?
surprised this monday morning?
what do you think the political consequences of this will be?
if none, how is that possible?

The sky is not falling. Repeat, the sky is not falling. No need to panic or declare the end of capitalism every time the market undergoes a correction. It is my hope people will learn to exercise fiscal discipline and to live within their means. My main complaint is the government stepping in to bail out companies. Fannie and Freddie should have been left to fall on their own and not get a bailout. Corporate welfare is just as disgusting as social welfare. The market will sort itself out. The private sector has already taken measures to mitigate the impact of the bankruptcy.

And you've lived in America HOW long? :rolleyes:

The MARKET will sort itself out. Mom and Pop Homeowner, however, will be well and truly fucked without some sort of protection. I'm not interested in helping failing banks--they buttered their own bread on this one. I'm REAL interested in protecting homeowners from the failure of those banks.

o i don't think the sky is falling. i think this is a massive demonstration of the inadequacy at both the descriptive and normative levels of neoliberalism--markets do not "do" anything--agents within markets, understood as sets of constraints, do things. there is no invisible hand, there is no god at the far end of the invisible hand--there is no rationality that assures adequate or beneficial functioning. this is a self-evident feature of capitalist operations in historical terms---and the only source of information that makes any sense is the history of actually existing capitalism.

capitalism produces crisis as one of its primary features. patterns of regulation emerge to restabilize the system, redirect it, reorient it---these regulation are state-driven in the absence of meaningful political pressure that comes from elsewhere. crisis is then one of the systems principle products as system. it has been like this for much of the history of modern nation-states, much of the history of capitalism--which has never performed as neoliberal market-fundamentalism would have you think---an ideological system that presupposes a wholesale ignorance of history which issues into a wholly metaphysical view of the present.

i would think that ideology should be done now by *any* rational standard.
because this nonsense is a perfect example of what neo-liberalism really does best--generates vast income for the top tier of financial institution, treats responsibility as an externality--and in the end, leaves the public, by way of the state, holding the bag.

btw i think your equation of "social welfare" and "corporate welfare" kind of obscene. we could have it out about this, but in another thread....suffice it to say: "wtf?"

aside---it's kinda funny to see a libertarian viewpoint adopt the same relation to the reality it purports to describe as a trotskyite adopts vis-a-vis the coming proletarian revolution--o dont think so much about this version of the world--we havent *really* done what we're talking about yet. so the viewpoint--the insanity of libertarian ideology--abstracts itself from problems by positioning itself in a dreamworld.

I have to wonder if those who let the "market correct itself" are ready for what it would do to America's economy? I am with ratbastid on this...

My broker is EF Hutton, and EF Hutton says he went out of business in 1980 due to check kiting. He will gladly pay you wednesday for a hamburger today.

This is the result of unbridled real estate speculation. I only wish they had replaced the term "exotic loans" with "dumb-ass fucking the country loans".

Speculation is the root of all stupidity. Well, except for the erroneous report last Monday that UAL was declaring bankrupcty. That was an evil kind of stupid that caused a $1 (b) billion loss. Can't wait to see the lawsuits from that. If they end up with a structered settlement, maybe UAL will take that agreement to JG Wentworth and get cash immediately for 40 cents on the dollar.

RB, it's nothing of the sort. Part of capitalism, or neoliberalism as you call it, is that those who make bad decisions will fail. That's why I generally disapprove of bailouts, because they reduce moral hazard. Let me repeat that in a different way: failure of firms demonstrates the integrity of the system. You have it precisely backwards. Schumpeter would be wagging his finger at you disapprovingly.

schumpeter--another metaphysician---"creative destruction" is simultaneously an example of the teleological fallacy and an evacuation of anything like a space for responsibility---the zeitgeist enters this way, a reassuring continuity of narrative, such that the story of capitalism is unbreakable and no-one ever does anything that is not functional, not even this:


Wall Street crisis: Is this the death knell for derivatives? | Business | guardian.co.uk

the original links to warren buffet's 2002 letter....

in the end, no-one is responsible for anything, the dynamic everything. so schumpeter ends up being as crude a dialectician as stalin.


even greenspan, who oppose the freddie and fanny bailouts on the same lines as you, loquitor, is now saying that this is too big for schumpterian rationalizations.

I'm happy today. :) Maybe this will be the wakeup call we need to start regulating stuff and putting in safety nets to prevent this kind of stuff from happening.

When they get too greedy and want growth at any cost to make the numbers (and the fundamentals aren't there) this kind of stuff will occur.

Greenspan participated in creating the clusterfuck that caused overheated home prices and led to the current meltdown. Obviously he's feeling twinges of regret.

Pretty much everything that we think is wrong will end up being reflected in pricing, which is what is supposed to happen. And lots of people are going to be analyzing the correctness of their computer models.

I have a client who lost a hump of money trading derivatives a few years ago. His issue was that the small probability ended up coming true - which of course tends to happen if enough time passes; you just don't know on which trade the small probability will happen. We can argue about whether it was the model or the judgment or both, of course.

My question for you, RB, is this: if govt created the current regulatory environment and that led to the current imbroglio, what makes you so confident that the next regulatory scheme isn't going to carry the seeds of its own destruction too? See, I'm old enough to remember the S&L fiasco and the role the govt had in creating it, as well as the horrendous job it did cleaning it up. You might not like certain aspects of capitalism but you can't possibly establish that the govt will do better. In fact, Buchanan and (to some extent) Coase pretty much established that in most cases it can't.

Roachboy: What alternative system do you propose to replace capitalism? We've seen plenty of historical precedent that reinforces that despite its volatility, capitalism ultimately creates more wealth and prosperity than any other economic system.

I agree with you that economists look at things from a very heartless perspective; to give an oversimplified example, a policy which takes -9$ from the pockets of the poor/middle class and puts $10 in the pockets of the rich would be viewed as a +1$ net again and therefore economically efficient, with the theory that the winners can compensate losers never becoming more than just that--theory.

Despite these shortcomings, and maybe I'm just cynical, capitalism harnesses human greed for the greater good in a way which no other system can. People, in general, will NOT work as hard for the betterment of someone else or the society in which they live than they will for benefits that directly impact them personally. Sorry--I won't budge on this one--I believe it wholeheartedly to be true. I believe that although under capitalism many are left better off at the expense of many left worse off, we would ALL be worse off under any other system. It's hard to argue against big pharma when the drugs they sell wouldn't have been created and available to anyone at all had the incentives which motivated investment in to creating the drug in the first place been absent.

This is not the end of capitalism--if anything, Henry Paulson has proven that he is willing to let the Int'l Finance industry take its medicine, and with the Fed's safety net withdrawn, you're seeing the market work itself out ala BoA buying Merill Lynch yesterday. The true test of the system is how it operates under extreme pressure and duress, and so far I would say that considering the Dow is only down 290 pts (2.55%) as I write this, it's passing the stress-test so far.

It's not that all capitalism is bad, that's not it at all. But there needs to be checks and balances to make sure people aren't cheating to make a quick buck.

Some real estate speculating is ok, but it should be limited to buying old homes and fixing them up. Not buying new construction and selling it for tens of thousands over the base price before it is even finished using a 80/20 interest only loan with 0 down (and never having the intention of moving in).

QFT.

A bank failure will not affect those who are making their mortgage payments. The clerk at Walgreen's who decided they could afford a $600,000 house, and who is clamoring for undeserved "protection," is another story. Much like those in Galveston who refused to leave, are now clamoring for help, and who can't wait to sue FEMA.

/threadjack


Correct. The original post seems to be a call for socialism, due to the failure of capitalism. Capitalism's failure, like the rumors of Mark Twain's death, is greatly exaggerated.

I almost hate to say it, but this has been on it's way for a while. It's really sad, and I can't see an honestly good option for us right this second. All that we can do is try to prevent this in the future by ending this idea that the government interfering with the market is the debil. Fannie and Freddie were having accounting problems years back. I told my grandmother to move her investments out of them and into more stable accounts (I think she's doing her investment through something religious now, like Thrivent).
It was a bigger drop than I expected, but overall not really.
There will be rampant partisanship and ideologue-ing, which won't get us anywhere. If it's as bad as I think it will be, we won't even learn from our mistakes and it will happen again.

There's already a line forming outside Washington D.C. of industries wanting a bailout.

Someone asked a funny question either this morning or yesterday, "Why is it that the US supposedly has no money for universal health care but is more than happy to come up with a few billion to save a bank or two?"

Yeah I know, tell me about it. This is one area we could use a nationwide basic finance education mandate.


I agree, but I'm not ready to count mom and pop out just yet. They are a lot stronger than you think. But point taken, I would lean towards mom and pop protections too.
-----Added 15/9/2008 at 04 : 46 : 43-----
Yes, I would agree the current system still needs some work.

Why? I am against both. At least in it's current form.

The problem of optimizing the total wealth/benefit is a difficult non-linear problem. Individuals working only in their own self interests will likely not achieve global optimization and are likely to get stuck in a local optimization. In order to get past these local optimizations one needs an independent entity to help control the market and that is where the government comes in.

Anyone who believes that individuals acting completely alone in their own self interests serves the most good to society is naive.

Yep, agreed. This pretty much sums up my feeling.

I don't agree with limiting real estate here. The speculation will go up and eventually come down. We need to be more disciplined on our purchases. That's why I haven't bought a home in a 'hot market' yet. Because I resisted the temptation to take a out a bad loan. I will patiently wait it out and most likely buy a foreclosed property or two for a great price. Most of my friends and acquaintances are similarly disciplined.
-----Added 15/9/2008 at 04 : 53 : 47-----
Same here. I wasn't really surprised. I have been expecting this correction to happen for a while now. There will be some more coming up too. It's like a healthy purge. Glad to hear your grandma made some good financial choices, good on you for looking out for her.

Unfortunately, you may be right. This disgusts me.

Good question. Someone should put it to the powers that be.

It's pretty obvious who is lining up, and I honestly think that workers in those industries should do everything in their power to get other jobs lined up asap. I'm looking at you, Detroit.

This is where I tend to come down on the issue. It isn't about getting rid of capitalism per se. It is about regulating the wilder elements. Have a look at the sorts of policies and regulations that came about following the stock market crash of the 20s. These are the sorts of things that are required to keep balance.

The sorts of libertarian fantasies that are called for can result in greater profits for a small number of people. I favour a system that has the ability to benefit a greater number of people.

The whole country, including the government, has been living on credit. It seems nobody owns anything in the ownership society. How many people actually own their house? Their car? Hell in order to get a more expensive car then they can actually afford many people lease. So after making payments for 3-4 years they don't own jack shit. They hand it and the keys back over and lease again, if their credit checks out. Every thing's bought on credit. "NEED!" a new computer, plasma TV, latest surround sound? No cash? Fucking finance it! Much of this financing is/was tied to the value of their house on a ARM mortgage. Once the ARM rate went up and the value of the property went down the house of cards began to fall, IMHO.

I don't know the cause of the latest greatest crisis, but I think this credit situation hasn't helped any. I don't think the sky is falling, but the market sure as hell is and where it stops no one knows. Seems to me selling out now only locks in your losses. I'm sure as hell glad I'm not holding any Merrill Lynch or Lehman's and my insurance isn't through AIG.

Speaking of AIG- What's going to happens to all those folks down on the gulf who are insured with AIG if it fails?

ok so first off, what i think this will help collapse is the ideology of neo-liberalism, the dominant economic ideology in the united states of the post-reagan period, the premises of which you all know because they're repeated often enough as if they were informational elements and not ideological statements--markets, rational, state=distortion blah blah blah.

neoliberalism is an ideology within capitalism and is no more capitalism itself than those evangelical protestants who claim to *be* christianity are the entirety of christianity.

i have never believed the neo-liberalism was about anything beyond reducing political risk for the state by withdrawing it from economic sectors in response to heightened uncertainty--my assumption has been that crisis, which is more then norm in the actual history of capitalism than is the contrary, would be addressed by a rolling-back-in of the state as regulatory agent.

i figured this could happen in an incoherent manner--if handled by republicans--or a less incoherent manner, if handled by anyone else. except libertarians, who really should be nowhere near power ever.

and this is what you're seeing.

even in the benighted political context that is the united states, which seemed to be summed up for me by cnn's website today, which headlined a story about a trainwreck in los angeles and relegated a Real Problem for the entire financial order to sentences off the the side--even here i think the veneer is off neoliberalism. maybe it'll even get named---everywhere else on the planet, the dominant ideology in the united states has a name--here, it is a natural phenomenon, like the weather.

none of the banalities about capitalism as channelling avarice and short-sightedness and self-interest in a constructive direction should make any sense any longer--yet the repetition continues, like there's some little machine in your skull that just does the same things over and over until it runs down independently of anything happening in the world. this crisis is a direct *result* of the ways in which capitalism since reagan has channelled avarice and short-sightedness, and demonstrates the reality of the directions it has taken.

what i hope in the short run is that not only does this strip the veneer off neo-liberalism, but that it also forecloses any hope mc-cain/palin may have had to being elected. i don't expect any great change from obama, but he HAS to be a more rational alternative, given the mess that reality is at the moment, than more of the same idiocy from the bush period.

i think there will be significant pressure to increase the types and enforcement of regulation on banking and on the grey market in derivatives etc,. in particular. the republicans are ideologically opposed to regulation and so cannot rationally be expected to implement it in anything like a coherent manner.

so i don't see this as the end of anything in particular apart from a particularly incoherent view of capitalism and the cowboy capitalism it has spawned.

i also think that alot of regular folk are fucked as well...

RB, you still don't get that these phenomena are to be expected? and that part of what caused the problem in this case is government interference? Short-term bumps are tough but that's all they are. What do you envision as the alternative? A five-year plan? The whole point of private enterprise is that there is risk of failure. Failure is a feature of the system, not a bug: it provides object lessons and stimulates success by others.

This is nothing new, and it's only the meddling of politicians that's going to ruin stuff. Too bad there is always someone who thinks s/he knows better who wants to remake the econony as s/he thinks best. It doesn't work. Never has, never will.

Roach, I wouldn't quite make the leap that you seem to want to make from all of this - that the startling and significant implosion in the financials somehow indicates the need for a paradigm shift away from capitalism itself.

I will say that this compellingly demonstrates a couple of things: one, the foolhardiness of the ideology of complete financial deregulation. What we have had for the past decade is a system of financial institutions that were highly leveraged enough, and interconnected enough, to become vital in the sense that they were 'too big to fail'. Implicit in all of this was a government guarantee, that in a crisis, taxpayer money would be used to prevent a failure - kind of like how the FDIC guarantees deposits. And yet this banking system was not made to accept the flipside of that guarantee - some kind of regulation to control risk. As roachboy alluded, it was assumed that the private sector could manage risk well enough on its own, that capital was equivalent to rationality. This has been proven disastrously, demonstrably untrue.

A word on 'too big to fail'. I understand the impulse, echoed by some here and no doubt motivated by some sense of capitalistic justice, to simply cheer as Lehman burns and the other financials retrench. Unfortunately, the world we live in doesn't work this way. The amounts of money at stake are so enormous that the impact on Lehman's counterparties (other financial institutions with exposure to Lehman's debt), to take just one example, would reach most of the way to a trillion dollars. There is a serious risk of a cascade of bank failures to follow, as other banks' assets disappear from their balance sheets each time another bank goes belly-up, defaulting on its debts. Even without a cascade, what we would see - will see, in the coming days - is a severe contraction of credit that is going to choke the economy for some time to come. You can't invest in new economic growth without credit. So as much as we like to see the economy as in most cases self-correcting, there is a limit to what any economy can absorb without complete collapse, and I think some here are underestimating the impact of what a total collapse of the credit system would do to the US economy - and the world economy, for that matter. (Bailouts aren't a great solution - those who mention moral hazard are absolutely right. The idea is not to get here in the first place. But the phenomenal levels of risk taken by private enterprise have brought us to this juncture and left us to choose from among pretty terrible options.)

So yes, some regulatory safeguards need to be put in place, and no, it's not really all that hard to imagine what some of those might be. We cannot, as a system, be so cavalier about manipulating assets whose worth is almost impossible to value. And we cannot then trade those assets at absurd levels of leverage - I think I read that the average gearing was something like 14 to 1 - don't remember if that was the industry, or Lehman particularly.

Anyway, the second thing demonstrated by the crisis is that our economy, boosted by both a housing stock and a financial sector that were vastly overvalued, has been far weaker than we imagined. I'm afraid the financials are just the canary in the coal mine, and that we are going to see a lot of spillover into the 'real' economy, and soon. Expect things to get worse before they get better.

What "government interference"? Where? When?

We gotten a lot of abstract moralising, and that's about it.
-----Added 15/9/2008 at 07 : 14 : 05-----
There is nothing to be done.
There is nothing that can be done.
Nothing should be done.

You've completely missed his point by making this into a moral issue.

Neoliberalism is a peculiar variant of capitalism, which at the moment, is unraveling. "Free trade" has failed. The "3rd world" is not cooperating and the neoliberal world order is too weak to force it down their throats. It's become difficult to say the solution to today's problems is more deregulation and privatisation. What's left to deregulate or privatise? Don't like Putin? Talk to Jeffrey Sachs or his many enablers.

Neoliberalism is on the way out. Some new mode of regulation will replace it, and in fact, that mode of capitalist regulation is developing at this very moment. Thankfully, the passivity and negativity of neoliberal ideology (gummint = doubleplus ungood) tends to keep believers from participating effectively in debates about regulation.

Soldier on!

basically, guyy said what i was thinking of saying in response to the strange idea that neoliberalism=capitalism.
it's a function of a blinkered political and historical view of things, that equation.

The fear of most neoliberals is that the only alternative to the "free market" is communism. But there is a third way... just ask John Maynard Keynes.

Neo-Liberalism
http://graphics8.nytimes.com/images/...Norris_190.jpg

The third way
http://amykane.typepad.com/photos/un.../5374_0030.jpg

All (or most) "neoliberals" are alike, and you speak for them?

i don't see what, if any, point you're making with that, necrosis. a shared ideology is just that. a predictable response based on a shared ideology is just that. you don't need to go any further than that: logic and pattern (look at the thread so far if you doubt me). personality is irrelevant.

but i may be swayed by your disturbing avatar.

A political career? "I ran a Wall Street firm into the ground. Vote for me." I could see him screwing things up in a McCain administration in the increasingly unlikely event there is one.

Speaking of McCain, i think the worsening financial crisis is going to suck the air out of his campaign. There will be something other than lipstick and pigs and moose to talk about, and it won't be fun news. Real news in the 24/7 news cycle crowds out the Rovian nonsense, and McCain brings nothing else to the table.

I'm more curious about what effects it might have on Obama and his neo-liberal economic crew.

I wasn't able to watch this happen in real time like I wanted today. But I have been expecting this failure for the past week. I didn't expect AIG into the fold.

I'm not interested in the government bailing anyone out, including those homeowners that speculated that they could afford a home buying on a no income verification loan so that they would qualify for more money. They gambled and lost. As far as mortagees to the failing banks, I'm not worried about them their debt will be assumed by some other bank that buys out the liquidated loan. Heck, I just bought a 5 bedroom home 2,264sq ft, for $.57 on the dollar @ $84/sq. foot you can't build anything for less than $300 these days.

I'm glad that major players in industries are faltering and failing. The Big 3 automotives looking for bailouts???? C'mon that's retarded, they should have been also competing in the other market segments like small cars, minivans, and crossovers. Instead they did the "American" thing and went for the low hanging fruit and easiest options.

I'm very much ready to accept the pain of what's going on. I've been telling lots of family and friends to be read for such a shake up and be prepared for a rainy day. See there are people and companies out there who will drive the economy back up. It may be slow, but it will happen.

Sorry, let me correct myself:

as an aside, have you noticed the consistent use of "perfect storm" and other such weather-related rhetoric in the american press accounts of this? you'd almost think that ike was tailor-made for opinion-management purposes---and notice the difference in interpretations being floated by the presidential candidates: for mc-cain this is a matter of subjective deviance--excess greed---which means obviously that neoliberalism itself is not at play insofar as his constituency is concerned---while obama talks about systems of regulation---which is not a recognition of underlying problems, but nonetheless is a far more lucid take on things than what mc-cain is offering. even at the level of terminology.

we'll see what the day brings.
but isn't ideology funniest when it's transparent?

What are are ya Canadian? Tisk, tisk, tisk- always trying to twist around what you said into what you said. Damn you Canadians!

WaMu is next on the danger list.

Think they've been on the "list" for a while. The one I didn't see coming was AIG. But then my new sources are limited.

I believe that there are others, many others that are hovering and not being allowed to announce themselve because it will trigger a bigger run. I believe the Feds are trying to manage this so that it comes in small waves rather than large ones.

at the same time, it is clear that the collapse of the bush administration's political credibility across the board is making everything even more difficult than it otherwise would be. read any account--it is clear that "no-one is believing anything they're told..."

we should start seeing more indications of the near future once the american show opens in an hour or so. so far in europe and asia, there's a continuation of the momentum of yesterdays; ny exchange close and actions on the part of cental banks to limit the damage....

And as everybody knows that it is clear that the collapse of the legislative branch's political credibility across the board is making everything even more difficult than it otherwise would be. Read any account--it is clear that "no-one is believing anything they're told..."

Our only hope is Charlie Rangel, chairman of the House tax-rules committee, to steer us through these murky financial waters.

Everybody knows.

otto, darling, your new game is growing tedious.
you should play a different one before i start vaporizing your posts.
i'll not put this in yellow, but i can change that.

Why? Because you disagree? I think Otto's posts are fine. Certainly a LOT LESS offensive or taunting than the many others around here (just look at all the ridiculous pan bashing and ridiculing in his thread). Why the threat to censor? Who's modding the mods?