Magic numbers: retirement/investment coffers

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I mean my gawd Municpal debt? Go stand by a friggin' toll road and see the transponder lanes SEAMLESSLY suck in hundreds of thosands a day with no effort. Those bonds are not going to go into default unless people stop driving. Not going to happen unless there is no where to drive to -- it would take a whole heulluva lot to idle the country

Related to this... I was under the impression that municipal bonds very rarely went into default (as you imply), but that they rarely got AAA credit ratings. This created a business opportunity for insurers - some of whom then delved into subprime mortgages and have run in to trouble as a result. But if the bonds very rarely default (ISTR <0.1% being mentioned), why didn't the bonds get top ratings?

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> The "socialization of bad debt" is a horrible idea. Aside from the philosophical damage, the warping of government priorities (as ddt eludes to), and difficulty of actually finding any set of human beings that can fathom this mess, there is the problem of "fixing the locomotive while the tracks are being torn up" -- I still am not convinced that "bad mortgages" are the root cause here.

Precisely why my signature is what it is...
In America, the only respectable form of socialism is socialism for the rich.

SOooo it's OK to socialize gambling (let's call it what it is folks) but it's big and scary when we want to do something similar to medicine??



Edited 1 time(s). Last edit at 09/19/2008 08:55AM by rino.

>why didn't the bonds get top ratings?

Because they didn't pay the right kickback? Or maybe because it wasn't a cow.

When cows kickback, Chicago burns.

The ratings agencies have a bias in the formula by which munis are evaluated that is a bit arcane. Unlike the FICO score that a consumer gets, and improves by paying loans back on time, the ratings on munis are pretty much locked to the size of the town and the scale of each new issue relative to the ratio of the debt that it has. The result of these two factors is that smaller the town the worse its bond rating AND towns that issue issue a lot of debt will always have low ratings. If towns complain the rating agencies tell em to insure the the bonds if the they want a better rating. Of course this results in fees that somewhat offset the lower interest that the town must pay, but rarely will a town do this frequently enough to "catch on" and even if they do the vast majority towns in such in circumstances either are going undergo rapid changes of elected officials or are so corrupt that they do not care that this costs them...

So, now it's official. The taxpayers are going to pay for the gambling addiction of Wall Street.

http://www.ft.com/cms/s/0/89593e26-8685-11dd-959e-0000779fd18c,dwp_uuid=11f94e6e-7e94-11dd-b1af-000077b07658.html

I have yet to see one peep about terms and conditions under which this is going to be allowed and while this is the biggest stop gap measure to date, the real cause of the problem (the sea of debt in which the average US citizen seems to be drowning) has yet to be tackled as well.

Could this lead to a double whammy later on? The American taxpayer is now on the hook for anything between 500 billion and 1.2 trillion dollars. And the markets are struggling because people started defaulting on their loans. 20+ years of taxcut politics has made the climate to sell tax increases a bit harsh to say the least, but at some point the money has to come from somewhere. Or is the fed planning to print the money and hope nobody will notice it?

what really depresses me is the opportunity cost -- with this much added debt, the ability to fund single-payer health care is even farther away. of course, with this amount for the bailout, we could all be getting state-sponsored massages weekly on top of great health care... .

ddt

>we could all be getting state-sponsored massages weekly

Ones with happy endings too, and a complimentary bag of blow.

The US economy is now addicted to cheap debt.

If it was the hidden plan of the GOP to starve the beast from within, you could say they've been mightly successful; this will haunt the generations to come.



Edited 1 time(s). Last edit at 09/20/2008 02:00AM by tliet.

Very astute tliet -- I am in basic agreement on that theory.
For decades it has been their cause to dismantle The Great Society.
Unable to succeed in a frontal attack they used a sink the ship technique that doesn't seem exactly Sun Tzu strategic in its outcome.

I have to stay that Tony & tliet are giving the lawmakers / party insiders way too much credit if they think that any of them of the foresight to "plan for" the additional guarantee of this sort of debt load effecting the governments insatiable appetite. There were enough abuses by 'red state' politicians that many of them were tossed in elections two years ago. The lack of CHANGE has left voters still mighty gd upset. The final chapter on voter dissatisfation has yet to be written.

If ddt thinks that the "opportunity cost" of backstopping mortgages is high, then what might have been the 'opportunity costs' of the whole friggin' consumer, commercial, and governmental lending mechanisms running into a brick wall? And let's not forget that the way our government runs: if "political will" is there ANYTHING can be accomplished. Hell look at what happened to banking POST RTC. Despite the fact that the ownership {full liabilities & assets} of hundreds of failed S&Ls was scooped into the RTC and then slowed sold off the final accounting on the RTC was not all that costly, no communities suffered from "inaccessibility" of S&Ls (in fact one could honestly argue that the LARGE mindless mortgage lenders swept into the void created by the vacuuming up the S&Ls and detached as they were from "conditions on the ground", too rapidly promoted loans to people who could not handle them, in places where housing investment was unwise...) nor was there any "slow down" in other government borrowing. Thus if the political will is such that "investment" in healthcare reform is a good thing the magnitude of the existing should have little impact.

Though I disagree with the PHILOSOPHY of the assumption of the bad debt my simple analysis is that this very likely will have a net positive effect on the ability of the economy to grow. When the economy grows the cost of ALL lending decreases AND the ability of the government to take on debt (as a ratio of GDP, which is pretty much all that matters...) INCREASES.

Honestly.

I hate to admit it, as the philosophy is SO WRONG, but history shows that whenever the government makes it "safer" for the private sector to increase its "generic risk" the rewards to the overall economy are rather substantial. You can go back to WW II and look at the "militarization' of so many industries in the US and the Allied Nations -- people kept the factories humming, wages were decent. The government 'financed' alot of investment in production / industrial expansion. Ditto for other "conflicts". You can be philosophically opposed to the power of the "military industrial complex" but it is hard to deny that such investment does, in fact, grow the economy. Some of the companies so nurtured do go on to dominate in non-military areas. SImilarly whenever the government has made it less risky for ANY sector of the economy that sector SOARS. Take a look, as disgusting as the carnage has been, at the level of safety that has been put into the mid-east oil supply situation. ExxonMobile has record profits. The market "tale" is that investment in a petro-based "oil from under the sands of Iraq/Iran/Saudi Arbia is a GOOD BET. And, as I have shown in the past, despite the dramatic rise at the pump, the ability of people to dial down other areas of spending has not, to this point, led to out of control inflationary pressure. As much as it pains some, the data does show that the overall US economy, to this point in 2008, has doggedly continued to expand. If the current administration had a spokesman like John Cameron Swazy it would be apropos...

Why govts bail out banks...

Interesting reading...

At present, however, the banks are reluctant to lend to each other, preferring to hang on to any cash they have. So the central banks have stepped in and are lending to any bank that's short.

But these loans are being made at the cash rate, they run for only a few days or weeks and they're made against the security of bonds or other assets.

Note that, were the central bank not making these loans, the shortage of exchange settlement funds would be so great as to push the official interest rate much higher than (in our case) the 7 per cent the Reserve desires it to be.

In other words, the Reserve is doing only an extreme version of what it does every day: manipulating the balance of demand and supply of exchange settlement funds so as to hold the cash rate where it wants it to be.

As the money market calms down, the Reserve will reel the extra liquidity back in - just as it's done several times before in the past year of the subprime crisis.

That means no free ride for the banks and no effect on inflation. Taxpayers' money is being used in ways that benefit taxpayers.



Edited 1 time(s). Last edit at 09/20/2008 04:33PM by Tony Leggett.

Very nice article Tony, thanks for linking. I guess cooler heads down under, let's hope get a more balanced telling here too. The "election bias" pretty well stains all coverage in the USA...

I am quite worried about the details of how the US Government is going to buying up the "bad debt". If this us largely a "accounting rule change" that flushes the loses away as foregone tax credits it will have a VASTLY deferent effect than if HUNDREDS OF billions of actual spendable dollars go into the coffers of the firms that issues this crap. The compensation rules of firms pretty much never hinge upon tax losses but spendable cash tends to 'get spent'...

No idea what the US congress critters are thinking if they want to fight over "larding" this thing. While their are arguments to be had over MANY details of the thing (limit purchases, extend aid to foreign owned firms, craft a mechanism to set fair prices, etc) there is just no rational argument to tie disparate ideas about incentive checks, caps on executive compensation, and who knows what else into a piece of legislation that raises the "debt ceiling" to over $11 trillion dollars... Any effort to make this process seem "partisan' will splatter a lot of ill will and turn-off a highly energized electorate.

You know, this guy thinks it is a pretty lousy idea what they in Washington come up with.

I wonder if it has something to do with this: Congressional Leaders Stunned by Warning
WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

It reminds me of the blitzkrieg that happened after 9/11, the Patriot act, shock doctrine anyone?

People are getting worried already: Sept. 21 (Bloomberg) -- The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.



Edited 1 time(s). Last edit at 09/21/2008 10:50AM by tliet.

Hmmm... I though banning short-selling would be terrible for the market...

Well, if an almost 9% rise over two days is terrible, I say lets ban a few more things...

The rise worries me. It should be a long slog back, not a meteoric flight. The old adages, "If it's too god to be true, it probably is" and "TANSTAAFL" may not be precisely scientific, but they're good gut-check gauges. Something's off-kilter, there's an angle the big investment houses have figured out but the Administration and the Fed hasn't, and it will probably cause another implosion later in the week.

Short Selling is gambling and manipulative of the markets, and naked short selling needs to be done away with altogether. That said, it does sniff out fundamental weakness in companies and industries. The big boys are =all= out of the game, with Morgan Stanley and Goldman Sachs now no longer investment banks... but expect a lot of what the english term "silly buggers" played with the market with a steep crash at the end of it with these new anti-shorting rules for some companies but not for others.

Or a steep crash at the beginning, as investment firms realize that the golden parachute isn't so golden. A misapprehension of the situation by the market is also possible, and stewing on it over the weekend may bring back some sensible apprehensions.

Either way, those who were screaming "Buy, buy, buy!" Friday afternoon will certainly be sorry they did.

So that's what Andrew Sullivan looks like...

That said, it does sniff out fundamental weakness in companies and industries.

And more people wanting to sell than wanting to buy doesn't do the same thing?

At the very least I would like all institutional investors to have to disclose their positions, be it long or short, on all the stocks they have.

The run up cannot last, at this moment the sentiment will be 'cash is king' and nobody has it. Yes, the tax payer, 30 years from now. After paying for this massacre.

The more I understand of this 'new deal' for Wall Street, the scarier it seems to become.

Klein hits the nail on its head; while you're nationalising Wall Street, also nationalise Exxon to pay for all this. Why is only the bad crap turned onto the people?

Here's hoping the US Congress is not completely castrated and flushes this bill immediately through the toilet, but is also aware enough not to pass a slightly watered down version of it. If this one passes, the Bush 'administration' will see their work completed. I really don't get it tho? Do they (or their corporate meisters) really think it's nice to live in a country that will slowly turn into a war zone with no infrastructure to speak of?