Ashes In The Maelstrom

The IMF purports to be optimistic after the U.S. and U.K. acted to nationalize banks through direct capital injections. True, Paulson did not intend this even a week ago. But rather than excoriate him for improvising we applaud the flexibility. The question many might ask is why would a direct capitalization overcome fear of lending contra say Fed rate cuts and the open discount window.

Time outpaces ideology or statutes. We were skeptical Paulson could stand up and run auctions in ‘weeks’. We worked with the FCC and industry setting up and implementing the first ever spectrum auctions in the early 1990s and those that followed. Even skipping Reed Hundt and Blair Levin’s Gore-esque GOSPLAN regulatory mania for a down and dirty bare bones gig in 2008, those spectrum auctions each had a defined homogenous res (a specific band of frequencies) compared to current unknowable facility’s toxicity, etc. Even a reverse auction to function must have *some* kind of uniform or at least common baseline, however attenuated. That is simple auction theory 101.


Some comparable statistics of other economic declines are sobering and possibly reassuring:

The average downturn after recent banking crises in rich countries lasted four years as banks retrenched and debt-laden households and firms were forced to save more. This time firms are in relatively good shape, but households, particularly in Britain and America, have piled up unprecedented debts. And because the asset and credit bubbles formed in many countries simultaneously, the hangover this time may well be worse.

But history teaches an important lesson: that big banking crises are ultimately solved by throwing in large dollops of public money, and that early and decisive government action, whether to recapitalise banks or take on troubled debts, can minimise the cost to the taxpayer and the damage to the economy. For example, Sweden quickly took over its failed banks after a property bust in the early 1990s and recovered relatively fast. By contrast, Japan took a decade to recover from a financial bust that ultimately cost its taxpayers a sum equivalent to 24% of GDP.

All in all, America’s government has put some 7% of GDP on the line, a vast amount of money but well below the 16% of GDP that the average systemic banking crisis (if there is such a thing) ultimately costs the public purse. Just how America’s proposed Troubled Asset Relief Programme (TARP) will work is still unclear. The Treasury plans to buy huge amounts of distressed debt using a reverse auction process, where banks offer to sell at a price and the government buys from the lowest price upwards. The complexities of thousands of different mortgage-backed assets will make this hard. If direct bank recapitalisation is still needed, the Treasury can do that too. The main point is that America is prepared to act, and act decisively.

All of which leads to the real issue: What Comes After. As The Economist notes “If foreigners ever flee the dollar, America will face the twin nightmares that haunt emerging countries in a financial collapse: simultaneous banking and currency crises. America’s debts, unlike those in many emerging economies, are denominated in its own currency, but a collapse of the dollar would still be a catastrophe.”

The American ability to inflate our way out of our own stupidity is a short term Sword of Damocles over the IMF meeting this weekend in Washington and among the EU leadership. We agreed with Spengler before in an earlier post — Asian and European alternative capital architectures are not yet in place. It is, however, just a matter of time.

The Warlord destroyed the ‘American’ brand across the board. Centuries of brand equity squandered in front of a connected global audience. It will not be coming back by chanting ‘Yes we can’. Footsteps away with the whisper ‘Never again’ will dictate events.

In two debates both the Boy King and McCain avoided answering how this crisis constrained their options. Perhaps it is good politics to deny that the United States is a bankrupt hegemon. Even so, neither of them shows the necessary leadership to prepare the American people for the real hardship to come: life as a debtor nation in a post U.S. global financial system.


  1. Comment says

    Btw – we have no idea how to asses Krugman’s academic work – But we are glad he won the Nobel prize for the simple reason of enjoying the mental freakout show among right wing pundits and bloggers. We may even go over Steyn again (we haven’t read him since the Black trial) or Reynolds or Malkin or that guy with the white hair who wrote a book about Romeney but whose names escapes now.

  2. Comment says

    This neocon firing squad is hilarious as Kristol basically attacks his old position from a week ago and Hiatt fantasizes about some fictional McCain of days ol’ that “respected” the “centrist” Obama

    The oriental fabric of the pundit class is frayed. So
    they are all tearing it apart and banging on gongs.

    As Paulson follows Gordon Browns seizing the commanding heights – they wait and think and wonder what to do.

  3. Comment says

    Jeff Immelt: (on the phone) – Chris, I’m gonna be in town today. Can we get together for a small chat?

    Tweety: HA! A small chat! Howard Fineman told me abour a lunch at Sig-NAH-tures that was supposed to be a small chat. HA!

    Jeff Immelt: (puzzled) – Yeah. Whatever. Anyway, Chris you may have bothered one of our more valuable properties at the GE top properties party the other night. Apparently, Youtube has footage of you …

    Tweety: HA! Are you talking about Erin Burnette-sy?

    Jeff Immelt: Glad you heard. Look, Chris, we can contain this if you apologize immediately and seem sincere.

    Tweety: HA! Why should I apologize? I let her “win.” HA! I rolled over – not on top! HAHAHAHAHA!

    Jeff Immelt: Uh – hmmm. Chris, that’s not.

    Tweety: Jack Welch said I didn’t do anything wrong. Hey, so you remember when Paul Newman was boxing in “Someone Up There Loves Me?”

    Jeff Immelt: I don’t see what your point is ..

    Tweety: Jeez. No one complained when young Jack Kennedy did worse in the classic 1960 campaign. Why am I being picked on now by the henny-peckers?

  4. DrLeoStrauss says

    Tweety: Hi Erin, wow you are even more amaaaazing in person than on a television monitor ! I mean wow!

    Erin Burnett: uh, hello Chris, it’s great to see you. . .

    Tweety: Will you just lean forward for a second, come on, just lean closer — they taught you that at Williams, come on!

    Erin Burnett: Chris, please, this is a company party.

    Tweety: (dropping to floor, rolling on back sticking arms and legs in air)

    Erin Burnett: CHRIS !

    Tweety: woof ! woof !

  5. says

    Reed Hundt and Blair Levin’s Gore-esque GOSPLAN regulatory mania

    Spare me. “Gore-esque GOSPLAN”? bwaaahahaaahaa.

  6. Anon says

    Actually Obama should pretend to take Huckabee seriously – or farm the job out to Biden and demand DHS and DOJ interview Huckabee and get Huckabee to turn over the name of someone he knows who may be aware of such plots.

  7. Comment says

    We bet Paulson originally considered nationalizing via equity stakes, but they were afraid of the “socialism” label – But they got called that anyway – so that’s why they are less sheepish about using that semi-hidden provision of the bill.

    Massive spending on infrastructure will happen – Especially things like Boone’s windmills up the center of the US. Those have rolyalties.

  8. Comment says

    Not only is it politically impossible for Obama or McCain to tell the full truth – it is inconceivable and possibly dangerous.

    There are whole hosts of issues beside the economy that can only be discussed with fictional premise.

    Afganistan – politically speaking – does not really exist – It is merely a rehtorical device to be invoked for comparitive illustration.

    We saw the smug Ted Kopple on tv the other night bragging about his friendship with Colin Powell.

    Kopple shook his head in grandfatherly amusement at the mere idea of withdrawing from Iraq. “As if,” Kopple mused.

    Kopple has it opposite – he seemed to suggest Obama would have to do what McCain would do. In reality, both Obama and McCain will have to leave earlier than expected,

    The Republicans will have to hope the bloodbath following withdrawl can be pinned on Obama. But irony of irony will prevail – no one will care enough. Besides – the “base” will be divided in their hatred of Iraqi ingrates vs. backstabbing Democrats.

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