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Three Considerations on the 'Too Big To Fail' Issue

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Nofsdad

Joined: 06 Jul 2003
Posts: 6742
Location: Central CA

Posted: Thu Jul 17, 2008 5:30 pm Post subject: Three Considerations on the 'Too Big To Fail' Issue

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When William Poole warned in 2003 that Fannie Mae and Freddie Mac lacked the capital to weather a financial storm, his advice went unheeded. Five years later, the outspoken former president of the Federal Reserve Bank of St. Louis is far too polite to say “I told you so,” but he does have a message for the Fed: Wait too long to tackle inflation, and you’ll face an even worse recession in the years to come.

Which is exactly why SOME of us... even in our tiny little insignificant ways with our tiny little insignificant voices... are trying to create some grass roots awareness of what's being done to our economy and our society, even in the face of the remaining 18-20% of the population who, for their own reasons and agendas, still attempt to blow off our concerns as either untrue or unimportant.

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Foreign Policy: What’s your diagnosis of what happened to Fannie Mae and Freddie Mac?

William Poole: First of all, they had too little capital to withstand adverse circumstances. And the adverse circumstances were the severe downturn in housing, the decline in house prices, and the rising default rate on mortgages. I don’t know of anyone who early enough was saying that there would be a major national decline in house prices, so I can’t hold them to that standard, but I can hold them to a standard of holding adequate capital to be able to withstand unforeseen circumstances. That’s what capital is for.

Gee... not a single solitary mention of the energy prices upon which the 20 percenters, whose primary goal right now seems to be to punish the public into approving the opening up of millions more acres to drilling and exploitation when they're already simply sitting on ten million acres or so they've failed or refused to develop... want to base every ill befalling the US economy... notwithstanding the fact that the housing bubble was created and had run its inevitable course prior to this latest round of energy "crises" coming to full fruition. Dumbasses.

Also, I don't know what he means by "early enough" but I remember there were people, right here on Retailworker, accurately predicting that the real estate bubble... just like every other "bubble" before it... was going to implode and that the effects on the general public were NOT going to be pretty.

That did not require rocket science or any equivalent thereof, just a small measure of common flipping sense. We didn't know all the technical ins and outs of course, but we had sense enough to know that you can't allow harmful parasites (Wall Street) to insert malignantly toxic pathogens into the blood stream and not expect the patient to get sick. It's just a flipping given.

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FP: Now, there has obviously been some turmoil in the banking sector. ... Analysts are wondering where the line is in terms of what banks are considered “too big to fail.” Where would you draw that line?

WP: I like the way that Greenspan used to put it and probably still does put it, that no firm should be too big to fail. Some might be too big to liquidate quickly and may require some support until they can be wound down, but there should be no firm too big to fail. We don’t know yet what the nature of the bailout of Fannie and Freddie is going to be, but I believe the plan would be to pay off at par all of the regular obligations. They are being turned into full faith and credit obligations of the United States government.

Some turmoil in the banking sector... now that's funny right there, I don't care who ya are. That's as far as the "vision" goes? Mr. Green

But the 20 percenters claim that to allow them to fail will bring the entire country to it's knees and then roll up like an armadillo spotting a coyote and try to look like rocks without once offering any empirical evidence to support the claim.

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FP: NYU economist Nouriel Roubini, who has been sounding the alarm for quite a while, told Bloomberg News that we’re seeing the worst U.S. financial crisis since the Great Depression.

WP: I think that’s right, but let’s go back and revisit the Great Depression for a moment. ... There was a total and complete collapse of the banking system, and the economy that had functioned on credit and deposits was suddenly left to function on hand-to-hand currency. We aren’t anywhere close to that and we won’t get close to that because of ample Federal Reserve resources and also intellectual understanding that would not permit that to happen.

So we'll avert an actual depression this time because the FED has ample resources? And pray tell, what do those resources consist of? Federal guarantees backed up with taxpayer's money? I would hazard a guess that old Joe Sixpack who lives out here in the real world where the rest of us live and has to try to make do paycheck to paycheck isn't going to be ab;e to tell much difference.

But taking Mr. Roubini's primary premise...

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NYU economist Nouriel Roubini, who has been sounding the alarm for quite a while, told Bloomberg News that we’re seeing the worst U.S. financial crisis since the Great Depression.

... how bad does it have to get before the 20 percenters stop calling it a "temporary downturn that will right itself if we do nothing" at best, and a "minor recession" (if you can get one of them to even SAY the dreaded "R" word at all) at worst. How long before they have to wake up and realize that inflation is no longer something to be prevented but something to be FIXED? In other words, it's here for most of us and it's biting hard.

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FP: How bad will it get, then?

WP: We are going to have failures of large numbers of firms, financial firms in particular..., failures of smaller commercial banks ... that were the most heavily involved in real estate are the ones at the greatest risk.

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FP: Meanwhile, consumer prices are rising at their fastest rate in 17 years. Does that mean the Fed is running out of tools to keep growth going?

WP: All the financial turmoil that we’ve just been talking about—the tightening of credit...—that’s putting downward pressure on the economy, and the big increase in fuel prices is also putting downward pressure on real activity. ... There is a growing amount of unemployment in those sectors, and the Federal Reserve is trying to support economic activity by holding the federal funds rate ... at its current level. If the downturn in employment becomes much more severe, the Fed might even cut rates.

In the meantime... while they play the never ending game of hide the soap in regard to who/what's to blame for all this and speculate and cogitate about what MIGHT need to be done... those whom these massive increases in consumer prices affect the MOST and who are already suffering greatly the effects of all of these past practices... those whom the big shot economists on ALL sides of the question(s) seem to conveniently leave out of all their equations and algorithms... just continue to sink deeper into the damned morass.

The Rest Of The Story_By Mark Thoma, Seeking Alpha

Nofsdad

Joined: 06 Jul 2003
Posts: 6742
Location: Central CA

Posted: Fri Jul 18, 2008 4:17 pm Post subject:

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Hats off Shelby and Bunning. The latter is threatening to filibuster Paulson's proposed bailout of Fannie Mae and Freddie Mac. See Paulson Crosses Rubicon Lands In 5th Dimension for Paulson's absurd proposal asking Congress for "authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence."

That's pretty damned absurd alright. Telling the taxpayer he has to pony up billions of bucks to bolster confidence in a company. Uh huh... I'm gonna have a WORLD of confidence in a company that I have to "rescue" because it stands to lose a trillion or so due to it's own mismanagement and shortsightedness AND that of the FED itself.

If I actually had anything to say about how the government reacts to this crap, a sprig of mistletoe pinned to my back pocket would say most of it.

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Bunning sure has the Fed nailed with this statement: "Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed."

I can buy that... especially when you look around and see the carnage caused by the manner in which they're wielded the powers they already have.

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Bloomberg picked up the story in Lawmakers Balk at Paulson's Fannie, Freddie Plan. Here are some interesting quotes.

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Senate Banking Committee Chairman Christopher Dodd: "I'm uneasy about giving this blanket authority without having any kind of checks."

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Shelby: "I've never known Congress" to give "an open-ended blank check for somebody to fill in."

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Shelby again: "When you're dealing with the taxpayer's money I don't think ambiguity has a place...We are potentially layering taxpayer resources on top of massive systemic risk."

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Republican Senator Jim Bunning of Kentucky: "The taxpayers have reacted and the market has reacted to your plan by driving down Fannie Mae shares 26% today, right now...Freddie Mac's are down 29% at this moment, just in case you are interested in how the markets are reacting to your wonderful plan."

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"Bernanke told lawmakers it's 'important' for Fannie Mae and Freddie Mac bonds and stocks to rise...Paulson said the two companies are 'essential' because they represent the only "functioning" part of the home loan market."

Check that out. Bernanke said it's important for the stock market to rise (specifically Fannie Mae). How many mandates does the Fed have now?

Fed Mandates

* Price Stability
* Economic Growth
* Full Employment
* Rising Stock Market

So far you have to give Bernanke an "F" for all accounts.

Well, unless you're one of the chosen few who stand to make money from the mess... or at least think you are.

More Here: Saying No To The Fannie Bailout