America's Blown it, Bring in a Global System

My take on the situation:

America's political dysfunction and its economic crisis intersected catastrophically yesterday in the House of Representatives which failed to pass a bailout for Wall Street's mess.
At issue was politics but mostly President Bush's lack of credibility. As commander in chief he exaggerated the threats in Iraq in order to launch a needless trillion-dollar invasion. Now, as America's CEO, nobody's listening to his description of the situation as "dire" and "dangerous" as he pulls the fire alarm over Wall Street's mess.

To many, it's a case of fool us once, shame on you. Fool us twice, Bush, shame on us.

A deal must be struck in Washington but in the vacuum the world's central bankers are doing their thing which is why markets recovered somewhat today. But there is blood in the trenches already, for instance:

-- Advertising is drying up for media companies. The financial sector, auto sector and consumer goods sectors are following the real estate sector in terms of no-shows in newspaper columns and eventually television commercials (less reactive since they are often annual contracts).

-- An estimate by an auto trade organization said that the number of car dealerships in Southern California will plummet to 1,500 from 5,000 in a matter of months.

-- One $10-million financing involving improvements for a chain of retail outlets cannot find any investors or banks because "the cost of capital" is unknown at this point. As the entrepreneur said: "Who knows what the return on investment will be when we don't know what interest rate we will be charged or whether it will be variable or locked in? It's impossible to do financings now."

-- Several condo projects in Toronto have had their banks pull out, at early stages, because of uncertainty.

-- The world's biggest leveraged buyout involving $35 billion, of telecoms giant BCE in Montreal, was to be financed by Citibank and that's unlikely. Other deals will be put on hold, iced or canceled.

-- A flood of money into U.S. T-bills has driven down the "spread" to less than 1% which is the first step toward hiding money under mattresses. Some are people and businesses unwilling to put money into bank deposits due to the anticipation of hundreds more failures unless an action plan reverses the situation.

-- First mortgage rates are up dramatically if buyers want to lock in for a period of time which will further drive down real estate values, the root cause of much of this catastrophe.

Most frightening was Jim Cramer of CNBC's "Mad Money" on Monday who parked his usual mania and described the failure to rescue as bringing about "the nuclear winter of the financial system" and possibly "20% to 30% unemployment."

The world is very nervous because America's political rigamordis means that 25% of the global GDP cannot be repaired or even managed. More huge commercial banking bailouts are rumored. There's an estimated $42 trillion in toxic derivatives to be written down worldwide, about the size of the annual global GDP.

Until something happens in Washington here's what will happen:
 More ad hoc rescues and shotgun marriages around the world to save financial institutions from going bust. Governments will extend bank deposit insurance up significantly, even as high as $2 million to prevent runs and mass withdrawals, both of which make borrowing more difficult if not impossible.
 Central banks are trying to liquefy the system.
 If this doesn't work central banks will use moral suasion to get commercial banks to lend to one another.
 Central banks can also chop rates in concert to try and stop the deflationary death spiral.

If Washington does nothing hold on to your hats and your gold stocks.

Comments

[Hdaryl01]

Two weeks ago both Bush and McCain echoed each other by stating "the fundamentals of the economy are strong and sound." We are experiencing a collosal, epidemic and uniform failure of a "de-regulated" market, and a completely abysmal lack of understanding and recognition by those who should be in the know. No one recognized that the $144 Billion credit derivative swap market in 1998 had balooned to $62 Trillion in 2008? And that this could be a problem-derivatives on derivatives on derivatives. We didn't get here without universal participation by the "financial services industry", and an utter failure of external or industry regulation and oversight. All was well while the music was playing. Unfortunately, the music has stopped, and several are without seats.....

What I find interesting, and not covered or considered in the US media which presents the crisis from our insular perspective and worldview, is the effect this debacle is having on the rest of the world. Hugo Chavez is now seen as not only a hero, but a visionary-I told you so...China is calling for a worldwide regulatory framework. The US has been shown to be a paper tiger, without clothes.

Folks, our crisis, whoever's individual or collective fault it may be, has massively impacted fragile capitalist democracies the world over. I think we should be prepared for the eventuality that we may not have a choice, and we may not be driving the bus at the end of this deal.

[Diane Francis - Huffpost Blogger]

good point about the rest of the world. we're terrified here in Canada because we're joined at the hip. That's why the system has to have a global SEC, global Fed, global laws

[lejman]

maybe bush will act like fdr and get us out of this economic mess by getting us into a war....oh, he's already done that....twice. i'm told some day i'll think he was one of the great presidents in our history.

[aslinged]

No, a deal must not be struck on the matter. Is the political system wrecked? Mostly, yes. Is there a crisis in the economy? Mostly, but a bailout only delays the inevitable. Another option is to see the situation as an opportunity to educate people on the very real need for very real money---not just more printing.

How do you expect infinite growth to continue in a finite world? Perhaps we need a readjustment. Darn tootin' we need a readjustment, we need a readjustment to the gold standard. Politicians don't want it because you take away their power to spend, Wall Street doesn't want it because it makes them honest.

If we start facing the reality of things: energy crisis, runaway spending, despots running our govt. then maybe we can change them. To sit here and continue to angst over the minute details of a totally flawed segment of potential outcomes relegates you to the small picture.

Google: Austrian School. Google: The Constitution of The United States

Use your platform for something besides inside baseball and revamps of the pundit's spewm.

[Rule Of Law]

Quoting Kramer--not smart. He's a shill and most here know it. You consider threats of Nuclear Winter and Depression era unemployment to be sugar coating it? His job is to get people excited, just like it is the MSM's job to make us think that the election is close. You don't get viewers or sell papers with solid, if boring reporting.

Folks more expert than I in finance and economics have already suggested here on HuffPo that the "bailout" should be focused on the Middle Class, where the money would be put right back into the economy and do the country some real good. Paying off the swine who are bankrupting us is the same as extortion. And, as you noted, this crisis runs into the multiple trillions of dollars (even though they exist only as some electronic entry in some banks books and there is and never was any real money involved in this scam--Thank you Fractional Banking System!) and cannot be resolved with $700 Billion or ten times that amount!

[Diane Francis - Huffpost Blogger]

Cramer not Kramer but you're right sometimes he's like the Seinfeld character

[Rule Of Law]

As for a Global System--What do you think we have right now? These banks are so interowned and cross run they make the Japanese Kiretsu system look like a straight line. All the Central Banks and international Investment Corps. like Goldman and Morgan are in on this robbery, they will be the first ones paid--that's why Paulson and Bush wanted no restrictions or oversight.

If anything we need to disband the FED, go back to minting and owning our currency without the added interest the FED charges us to use our own money, and then base it on something other than debt. A global banking system of Any kind just begs to be manipulated even more than the uneasy family relationships that exist now between the FED, Bank Of England, and other member owners of our so called privately owned "reserve."

If we put any money in, we should created a Federal Corporation that will own these companies in the name of the People. Enact Constitutional protections against this sort of Monopoly, and then break them up into their tiny constituent parts when we sell them off to recoup our investment.

[lushx77]

Why must a bailout happen? Why give failing banks good money? Why not create new jobs with that 700 billion like the new deal? Perhaps you should take a second look at this before you panic and cry about the sky falling.

[Henry]

Diane,
It seems that just a short time ago we were swimming in liquidity. What could have happened to all this liquidity, did it just disappear? Putting money into Treasuries is no where near putting money into mattresses. If you purchase Treasuries the liquidity you use to purchase the security transfers from your "transaction" account to the sellers transaction account. Net effect on liquidity -0-.
So we have this capital, this insolvency problem. And then we have this liquidity problem. The more Kramer can scare you out of stocks, the greater the wall street skammers will make on the upswing when John MCain rides into town to resolve the issue.
My credit union offers 6.125% no fees, 30 year fixed rate. Not a bad rate. Why would I, however, purchase a home in these days when I know the bottom will not hit until nxt spring?? Now.... you begin to see the nuance and complexity of this issue. The bottom needs to be attained