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Whose side is the Treasury on?


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2008 Oct 15, 3:09pm   42,766 views  353 comments

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Traitor!

According to this article in the NY-Times:
http://tinyurl.com/3hzwmp

In its latest questionable tactic, the Treasury is forcing banks to take billions of taxpayer dollars and lend it out - effectively trying desperately to blow some air back into the lending bubble. They know it will ultimately lead to an unsustainable debt burden on the US taxpayer, and very likely US government default but they don't care. This can't just be stupidity or greed - it is treason.

(Mish's take on this is over here: Compelling Banks To Lend)

The actions taken by the Treasury in recent days show a pattern of putting U.S. citizens/taxpayers under a huge public debt burden, and also encourage every possible way to get them into private debt. Simultaneously, avenues that would _reduce_ private debt, or reduce risk to taxpayers are being blocked, derailed or discouraged.

Why?

Why is there a systematic policy bias towards forcing the US into default? Why is the Treasury making decisions that push generations of Americans into debt-slavery and eventual destruction of US sovereign currency?

Which team is Paulson batting for?

SP

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250   snmr   2008 Oct 23, 5:35am  

There are many multi-party fans in US. The other side is always greener and so is the multi party system.
I have actually been in other countries and seen the effects of both the systems.
Both the systems suck big time. Its just that the multi party system sucks more. Ideology pushing at the expense of common goal is more powerful in multi party systems.Multi-party systems are more perfect but notoriosly slow.developed and old nations would be better candidates, not young or growing countries.

251   MST   2008 Oct 23, 6:07am  

Republics (since that's what they really are) are godawful messy, but not as messy as true democracies; those can get really guillotine awful.

Republics where the rights of the minority is enshrined in the fundamental way of doing business are very rare (like one example, maybe? Two?). In this case a relatively small group can block (mostly) things from getting done, which is what most of the Constitution is about.

In most multi-party systems, the mini-parties form coalitions to actually accomplish their goals (necessarily majority sized). How is this different from the US? You have a Center-right party that has subdivisions that are for a strong military, reduced (Hah!) spending, free-enterprise, traditional values, etc. We have a Center-left party that has elements of progessive values, union support, and redistributionist economics, etc. Think of all the talk about the various "Wings" and "Lobbies" of the parties. All are represented.

Paliamentary mini-parties' primary goals are to get their slice of the pie made bigger than someone else's. How is that different from lobbying? You've just made the lobbies into political parties. Bad idea.

252   justme   2008 Oct 23, 6:41am  

snmr:

>> I have actually been in other countries and seen the effects of both the systems.

So have I.

>>Both the systems suck big time. Its just that the multi party system sucks more

I disagree.

>>Ideology pushing at the expense of common goal is more powerful in multi party systems.

Your words are abstract, I see no evidence that this is true. On the contrary, if you have multiple parties, it is much simpler to get a majority of votes for any given law, because each party can afford to have its own ideology and a nuanced view about each law proposal. Multiple parties much more often ensure that there is a solid plurality behind any given law, or against it, for that matter. This is much more democratic, because the majority rules on a case by case basis.

>>Multi-party systems are more perfect but notoriosly slow.developed

Apart from the self-contradiction, someone will have to explain what this sentence means.

253   justme   2008 Oct 23, 6:46am  

MST:

>>In most multi-party systems, the mini-parties form coalitions to actually accomplish their goals (necessarily majority sized). How is this different from the US?

It is different because the coalition forms on a law-by-law voting basis. Coalitions are not only about capturing or controlling the executive branch, they are about passing laws on a case-by-case basis. As I said above, this fact ensures that much more often a solid majority of the people are behind each law passed.

254   MST   2008 Oct 23, 7:14am  

Justme:

1) Please give concrete examples (name a country) of these coruscating coalescences of mini-parties creating voting majorities on vote-by-vote bases.
2) Since most of these multi-party states are parlimentarian, ruling coalitions must be created or governments fall. Please give your counter-examples of Prime Ministers who have a constantly changing coalition under them, and if the PM opposes the (supposedly popularly mandated) law, how does he avoid a vote of no confidence?

Your idealization of the motives of these parties is unrealistic. There will always be quid pro quo: you vote for my boondoggle, I'll vote for yours, which knock your ideologically pure mini-parties right back into politics as usual.

"Ideologically pure" is frightening in and of itself. Ideological pure parties account for several hundred millions of their fellow citizens dead in the last 100 years. And those purists were all small minority parties -- until they killed off the opposition or terrorized them into submission.

Give me big, corrupt, raucous, obnoxious do-nothing bloviators. Save us from the Pure of Heart!

255   Peter P   2008 Oct 23, 7:15am  

There is no perfect political system. Humanity is destined to sway from one system to another as history unfolds, with or without bloodshed.

256   justme   2008 Oct 23, 8:43am  

MST:

1) if I do, will you then concede, or are you just making busywork for me? If you are willing to concede once I come up with the examples, I will go and do the work. I won't sit down with you without preconditions ;-).

2) I did not make a claim about Prime Ministers ruling continuously through multiple consecutive different coalitions. You served up that red herring all by yourself.

What must be understood is that it is perfectly possible for executive coalition member parties to vote against each other on specific laws. This does not cause the executive branch to fail. It does only if the Prime Minister explicitly states that (s)he will resign unless the law passes, and acts accordingly. Or if there is a vote of non-confidence against him. This is a great way of getting rid of dangerous people in the executive branch.

257   snmr   2008 Oct 23, 8:44am  

Multi-party systems are more perfect ( representation of democracy) but notoriosly slow. The more closer you go towards dictatorship, the faster the decision making ( for good or bad). ofcourse, i am not advocating dictatorship...just making my point. The more you go the other way, the slower but more democratic. There is a fine balance though and we can't just theorize our way out of it. The balance can be found mostly by observation rather than black and white theories. If you look at the efficiency of democratic system versus the risk they pose to democracy itself , i personally feel that two party system is much more efficient ( relatively)

258   justme   2008 Oct 23, 8:46am  

I also take exception to the word mini-parties. Parties can be big or can be small. It is not uncommon for parties to have anywhere from 5 to 35 % of the popular vote in many western democracies.

259   snmr   2008 Oct 23, 8:50am  

My conclusion is based on observation and data. you guys seem to be more knowledgeable about the inner workings though.
If you have some evidence which proves otherwise, i will be more than happy to hear that.
These things are not new and history is enough proof on which system is more efficient and which is not.

260   justme   2008 Oct 23, 8:51am  

snmr,

You are entitled to your opinion, but I have seen no evidence that multi-party democracies are slow.

Counterexample: Did not just France, Germany, Ireland, even England, and several others put together their financial rescue plans at record speed, and much faster than Washington.

Washington often described as "a gridlock". So which is it, a bipartisan gridlock or a lean mean decision machine?

261   Peter P   2008 Oct 23, 8:53am  

I propose strong regulation of governments.

In this regard, I guess we at least have a good constitutional framework.

Argentina is going to nationalize pension funds. Is this what you want? Democracy can be as dangerous as exotic derivatives if the tyranny of the majority is not well regulated.

262   justme   2008 Oct 23, 8:57am  

snmr,

our posts crossed again. I see no data. You have probably observed plenty, but as you say yourself, it is indeed very useful to have a wider knowledge about how many other western democracies function internally.

At some point, Rome was an incredibly powerful democratic republic. And I will bet that any number of romans would agree that they had the best and most efficient democratic republic possible How could it not be -- they were the rulers of the world!! They simply had to be the best, right?

But history shows what happened soon thereafter,

263   Peter P   2008 Oct 23, 8:59am  

But history shows what happened soon thereafter,

Exactly. Any system eventually fail. This has absolutely nothing to do with the merits of the system. It has everything to do with time and events.

264   justme   2008 Oct 23, 9:07am  

Peter P,

We actually agree on something today:

Strong constitutions and GOOD constitutions are of the essence. The US has a flawed constitution and election system. Many countries have better systems, We should learn.

>>Argentina is going to nationalize pension funds. Is this what you want?

Oops. Maybe I spoke too soon. There you go again baiting with some irrelevant prattle. What is your point here, exactly? That multi-party systems are more likely to nationalize than 2-party systems? Whatever the reason, it was just a red herring.

PS: Our 2-party system just "nationalized" the big banks, at least according to some people.
They also did not privatize social security, so no need to re-nationalize that, for what it's worth (sarcasm off).

265   justme   2008 Oct 23, 9:09am  

Peter P says:

>>I propose strong regulation of governments.

Then he says:

>>Any system eventually fail. This has absolutely nothing to do with the merits of the system.

Uh, logic contradiction alert, anyone?

266   Peter P   2008 Oct 23, 9:16am  

Strong constitutions and GOOD constitutions are of the essence. The US has a flawed constitution and election system. Many countries have better systems, We should learn.

Which country has a better constitution than the US? I agree we need to more adherence to the constitution.

The "progressive" era is a dark age though.

267   snmr   2008 Oct 23, 9:34am  

Does the inherent structure cause the elected members in multi party systems to be more pandering to thier constituents than focusing on something big for the country ?
India and other former british colonies have this problem so i am just curious ?
may be justme can enlighten me here.
What motivation does a mini-party have in driving and creating something useful for the nation beyond just getting re-elected ?
India has failed so many times in pushing for major "national" reforms when small parties with no national brand (so nothing to lose) have time and again put obstacles.
The more parties in key decision making, the less recognition they will eventually have and hence less motivation for the stuff thats beyond pandering to thier local masses
No wonder, europe is leaning towards socialism.
May be two or more Ceo's for a company might be good idea too ;-)

268   justme   2008 Oct 23, 10:07am  

Better constitutions and election systems: Japan, Germany, France, Denmark. Norway, Sweden, Finland, Austria, Italy, Switzerland, there is a long list.

I'll prefetch the next question:

Next up: "How come they are not as big and great and powerful as us?"

Answer: Duh, just because we are the biggest and strongest doesn't mean we are perfect, nor that we need not improve. This is a false argument.

269   justme   2008 Oct 23, 11:14am  

Hi Bap, yeah, I figured I could count on you for a thougtful argument :-).

270   PermaRenter   2008 Oct 23, 11:32am  

Henry Waxman: You were perhaps the leading proponent of deregulation of our financial markets, certainly you were the most influential voice for dergulation. You have been a staunch advocate for letting markets regulate themselves. Let me give you a few of your past statements:

In 1994, you testified at a Congressional hearing on regulation of financial derivatives. You said there was nothing involved with federal regulations that make it superior to market regulations.

In 1997, you said there was no need for government regulation of "off-exchange" transactions.

In 2002, when the collapse of Enron led to the renewd Congressional efforts to regulate derivatives, you wrote the Senate, "We do not believe a public policy case exists to justify government intervention"
And earlier this year, you wrote in the Financial Times, bank loan officers, in my experience, know far more about the risks and working of their counterparties than do bank regulators.

And my question for you is simple: Were you wrong?

Alan Greenspan: Partially. Let's separate these problems into their component parts. I took a very strong position on the issue of derivatives and the efficacy of what they were doing for the economy as a whole...

Waxman: So, you don't think you were wrong in not wanting to regulate derivatives?

Greenspan: Well, it depends which derivatives we're talking about. Credit default swaps have serious problems associated with them...

Waxman: Let me interrupt you because we do have a limited amount of time.
...

Waxman: Dr. Greenspan, Paul Krugman the Princeton Professor or Economics who just won a Nobel Prize wrote a column in 2006 as the subprime mortgage crisis started to emerge. He said, "If anyone is to blame for the current situation, it is Mr. Greenspan who poo-pooed warnings about an emerging bubble and did nothing to crack down on irresponsible lending".

He obviously believes that you deserve some of the blame for our current conditions. Do you have any personal responsibility for these financial crises.

Greenspan: Let me give you a little history, chairman. There's been a considerable amount of discussion about my views on the subprime market in the year 2000. And indeed, one of our most distinguished governors at the time, Governor Gramlich, who regrettably is deceased but who was unquestionably one of the best governors I've had to deal with, came to my office and said he was having difficulty with the problem of what turned out to be a fairly major problem in predatory lending...

Waxman: He urged you to move with the powers that you had as chairman of the Fed as both the Treasury Department and HUD suggested that you put in place regulations that would curb these emerging abuses in subprime lending, but you didn't listen to the Treasury Department or Mr. Gramlich.

Do you think that was a mistake on your part?

Greenspan: Well, I question the facts of that. He and I had a conversation. I said to him I have my doubts whether that would be successful. But to understand the process by which decisions are made at the Fed it's important to understand...

Waxman: Dr. Greenspan, I'm going to interrupt you. The question I have for you is... You had an ideology ... You had the authority to prevent the lending practices that led to the subprime mortgage crisis, you were advised to do so by many others, and now our whole economy is paying the price. Do you feel that your ideology pushed you to make decisions that you wished you had not made.

Greenspan: Well, remember what an ideology is. It's a conceptual framwork for the way people deal with reality. Everyone has one. To exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is that I found a flaw - I don't know how significant or permanent it is - but I've been very distressed by that fact. But if I may, can I just answer the previous question?

Waxman: You found a flaw in the reality...

Greenspan: I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.

Waxman: In other words you found that your view of the world, your ideology, was not right. It was not working.

Greenspan: That's precisely the reason I was shocked because I was going for forty years or more with very considerable evidence that it was working exceptionally well.

But, just let me finish if I may...

Waxman: Well, the problem is that time is already expired.

271   justme   2008 Oct 23, 11:47am  

So Greenspan had a faulty idelology. Who could have guessed?

272   kewp   2008 Oct 23, 12:24pm  

Its comforting to know that Alan Greenspan is apparently less intelligent re: financial matters than a bunch of random IT dorks running housing blogs.

273   FuzzyMath   2008 Oct 23, 12:47pm  

I don't really feel that Greenspan was to blame. If you want to argue for not having a central bank at all, then you might have a good point. But if you DO have a central bank that controls interest rates, then Greenspans model actually wasn't that ridiculous.

Note that low interest rates DID NOT cause the problem we're in. The problem was caused by fraud on many levels of our financial system. The banks thought they found a way to game the system, and they did, until they sucked all the marrow out of America. Now that the bone is dry, we're experiencing the after affects.

His biggest mistake was underestimating the animal nature of man. Which, really, we're all guilty of. Except Peter P of course.

274   kewp   2008 Oct 23, 12:59pm  

It will be interesting to see how this affects research and academia in general. There will be less endowment income to pay for the programs and less to reinvest.

The UC already froze wages for the year.

Beyond that Uni endowments are notoriously conservative. They are also absolutely enormous these days. Stanford and Princeton are basically free if you come from a needy family.

275   snmr   2008 Oct 23, 1:28pm  

FuzzyMath Wrote : I don’t really feel that Greenspan was to blame.

Its unbelievable you still believe that !!

Greenspan's fault was that he could not figure out the biggest asset bubble in history that was taking place. He was in the field for 40 years. His brain has to be pea sized to miss that.The ideology that greenspan followed was that asset bubbles matter little when it comes to fiscal policy even though the bubble is big and is hitting you on the face.

276   FuzzyMath   2008 Oct 23, 1:59pm  

Don't get me wrong snmr, his hands are not clean. He had a flaw in his model. But really, who doesn't?

I'm sure there are bigger flaws in our amateur models.

Greenspan made a mistake. The banks committed fraud. There is a very important difference there.

277   snmr   2008 Oct 23, 2:21pm  

FuzzyMath wrote : Greenspan made a mistake. The banks committed fraud. There is a very important difference there.

It would be a fraud if he did it on purpose to remotely benefit him or his pals or his wife or his relatives.

It premature to assume that he just committed a mistake and not a fraud. I would hold him guilty until proven innocent (which i generally do with all high office positions :-) )

278   snmr   2008 Oct 23, 2:33pm  

Its frustrating to see the gurus blaming the average Joe for causing the bubble by buying unaffordable houses.
You cannot blame joe because joe is personification of human nature. human nature didn't change during the bubble and will not change ever....period. Trying to change average joe is like trying to change all the millions of years of evolution. BTW, Average joe's memory fades every bubble year(TM) so good luck with financial awareness programs.

Bubble year - The time it takes for a bubble to form and pop.

279   FuzzyMath   2008 Oct 23, 3:59pm  

Joe's hands are clean. He might have made a bad financial decision, but he's also going to lose his house and most of his money.

Like he was supposed to be aware that there were millions of other Joe's who were making the same financial mistake at the same time, thereby causing a financial crisis? Give me a break.

The banks gambled, they lost. Simple story. Should have been a simple ending.

280   justme   2008 Oct 23, 4:36pm  

>>Don’t get me wrong snmr, his hands are not clean. He had a flaw in his model

Green-san had a flaw in his model? I think the problem was that he thought he did not need any model, because the free market would automagically take care of everything.

Greenspan is a joke. He is a free marketeer that nevertheless believes in regulating the interest rate. The guy is a walking (oxy)moron.

281   MST   2008 Oct 23, 11:43pm  

justme:

OK. Where to begin...
I would be truly interested in seeing an example or two of your ever-changing-coalition multiparty system that lasted more than an election cycle. (or even a year.)

I would be very interested in knowing what your criteria are for judging one governmental system "better" than another.

Europeans were able to move quickly because a great deal more power is vested in their President's/Chancellor's/PM's hands than in the US President's. You want we should give GWB that much more power? Me neither. Nor BHO. Nor JSM. Quick movement doesn't correlate to wise movement. "Democratic" passions poisoned Socrates.

"Mini-party" is not meant to be perjorative: simply a way of talking about parties that fall below the, say, 25% threshold of stated support. Most times these days, neither Republican nor Democrat self-identification rises much beyond 35% in the US.

Anybody can start a party in the US. All you need do is convince about 150,000 of your neighbors in your congressional district, and you, too, can have a seat in the House. Not even a 5% demarcation line, more like .06%. Have at it, my friend. Oh, sorry, I see: You want to automatically get handed a seat or ten because you can scrape together 4 million (abt 5% of voters) or so other like-minded folks scattered all around the country? Proportional representation, eh? And that is better why? Because that is the only way your out-of-the-mainstream views could possibly get into Congress perhaps?

282   Malcolm   2008 Oct 24, 12:12am  

Is it time for a new thread?

283   HeadSet   2008 Oct 24, 12:31am  

Note that today stock futures hit the 500 point drop limit hours before the opening bell, AND gold dipped below 700.

One theory I heard is hat the hedge funds lined up this morning to drop stocks. If so, I wonder where they put the cash? Not gold, it seems.

Strong dollar, anyone?

284   MST   2008 Oct 24, 12:44am  

Malcolm:
Yes please. This is comment number 338.

Headset:
love CNN's Commodities headlines:
The Old: Oil rises on expected OPEC cut
Just below this one...
The New: OPEC cuts production, oil sinks

you'd think they'd know about editors...

285   HeadSet   2008 Oct 24, 12:47am  

MST

LOL!

286   kewp   2008 Oct 24, 1:39am  

One theory I heard is hat the hedge funds lined up this morning to drop stocks. If so, I wonder where they put the cash? Not gold, it seems.

My theory is that there is some behind-the-scenes action going on to cripple the rest of the worlds markets in order to save ours. I'm imaging something like an orchestrated dumping of foreign equities alongside mass short-selling.

Once we squeeze liquidity out of the foreign markets, we dump it into domestic indexes. A huge stock market surge along with a strong dollar will pull whatever capital is left over into domestic equities.

Ain't capitalism grand?

287   MST   2008 Oct 24, 1:56am  

Headset, BTW:

One theory I heard is hat the hedge funds lined up this morning to drop stocks.

Take it from me (inside a Hedge Fund, but just on the IT side) it's not a simple matter to "drop stocks" or particularly any of the more exotic instruments: You also have to find Buyers. With Cash. And cashing out can have two explanations: either the managers think it's a good idea to go cash strong right then, or the investors want out, and have asked for redemptions so they can strengthen their cash positions. Also look at volume figures. Low volume + low prices still equate to cash poor, which means deflationary which means strong relative dollar. And, as well, look at fundamentals: are we actually down to decent P/E ratios for Corps. That would be deflationary, too.

288   Duke   2008 Oct 24, 2:09am  

What a scary day.
The scariest by far is that Russia is on the watch list for another bond default. You would think that their petro dollars would provide cover. sadly, the capital flight is, in fact, larger than their reservs.
As for what is happening. Why, it is the Great Deleveraging. And where is the money going? To the Bank balck-hole. If a Bank is levered at 40:1 (and many, many Euro banks were) it starts calling back its loans. Espcially if it calls into question the value of the collateral set against the loan. As the borrowers liquiidate, banks are losing as many borrowers are going under and pay less than their full amount. Banks now hve to shift more collateral to provisions for losses which shrins their reserves, and thus the cycle continues.
Where does this stop?
Typically it only stops once a governement that islarge enough to backstop the problem steps in. Since Western Europe seems to have cut Eastern Europe free and since the IMF, with a paultry $200b, is nowhere near large enough - your big backstoppers are The European Union, Japan, and the US.
Now, the EU has its own problem - really meaning more leverage than they ever let on. Japan is beging to be a player that is trying to help, but their position as a shrinking exporter is pretty tenuous.
This leaves the US. We did not enter this in a good position. Starting with $10t in debt is no way to start backstopping a global recession/depression.
Still, we are the worlds only $14t economy and we have a god chunk of wealth laying around to buy bargains. (I would love to inlcude places like Dubai, but they have not put their cash to good use, they just keep putting up 6 star hotels and creating new islands - which are pretty useless right about now).
So we are getting a flight to the US.
Also, have you seen the yen? Wow. That carry trade is as big as I thought. The world keeps blaming this problem on the US, but his credit bubble was being inflated for YEARS by the ZIRP at Japan.
Wow - this is amazing stuff.

289   Peter P   2008 Oct 24, 2:19am  

(I would love to inlcude places like Dubai, but they have not put their cash to good use, they just keep putting up 6 star hotels and creating new islands - which are pretty useless right about now).

Artificial "natural" features (e.g. islands, beaches) tend to be a sign of bubble tops.

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