Monday, September 29, 2008

More economics stuff.

As of the nanosecond I am typing this, a vote on the "bailout" (which isn't, really, technically, a bailout) has been scheduled. I believe it is some sort of hybrid between the plan put forth by Sec. Paulson (as modified by the Democrats) and the counterproposal by the Republicans.

If this is substantially so (and it may well not be) then it seems it would be a good -- not great -- compromise. Larry Kudlow, who'd be my Sec. of the Treasury and under whose thinking cap groweth no moss, weighs in on why this would be a good deal (assuming what will pass is, essentially, what he is discussing) or, as he calls it a "win-win-win-win" and it richly merits your attention. Kudlow has a knack for reducing the complex down to layperson-friendly terms.

No, by my lights this deal isn't perfect. For example, that mark-to-market accounting rule was not struck down, instead the deal "...mandates a study on the impact of mark-to-market accounting standards." Which is like saying that when you see someone being attacked by a swarm of hornets, you immediately demand someone conduct a study on the impact of hornet stings. But it seems to meet the main goal, that of stopping the financial hemorrhage.

Again, I have no idea how close to this is the plan which will actually end up passing.

That said, I realize the plan -- in my opinion incorrectly billed as a bailout; because a bailout means essentially "here, Wall Street, take a gazillion dollars and clean up the mess you made," and that is hugely wrong on several important counts -- is wildly unpopular. Congress reports calls running +/- 25:1 against it, in fact. But most people really have absolutely no idea:

a) how financial markets work,
b) how what happens on Wall St. deeply impacts what happens on Main St. (which is why a lot of people get all mad at oil companies, instead of oil speculators, for rising fuel prices) and
c) the scope of the abyss down which we are staring.

This is not to say there's nothing left to do and the plan (assuming...blahblahblah, etc.) will prove a miraculous cure-all. The problem, and it is a colossal problem, is that nobody wants to lend their money (and we're talking a zillion tons of it) to anyone. The issue (for now) is not solvency, but liquidity. It's not "does the car have any gas?" but "does the car have any oil pumping through it?" What would you rather have, a car that runs out of gas at highway speeds, or one that runs out of oil all of a sudden at the same speeds? (Hint: Find some videos on YouTube of race cars with catastrophic oil pump failures. Yeah..."wow" is right.)
That is what we are facing, and it would be just as cataclysmic for an economy as it would for a minivan.

Lack of liquidity, however, has a nasty habit of turning into insolvency REALLY fast. Washington Mutual can't get the everyday cash it needs to handle daily operations and just like that [finger snap] it's seized by the gummint, broken up, and its assets sold off for pennies. Oh, those bondholders and shareholders of Washington Mutual are now holding worthless paper. This puts pressure on other banks (like, say Wachovia Bank, the 6th largest in the USA) because their cost on insuring their debt just shot through the roof just as they need cash on hand. Ta-da! Wachovia (wisely!) is now leaping into the arms of whomever is still there, kind of like a drunk guy looking at some aesthetically-challenged girls at closing time.

Furthermore, other banks don't want to lend to each other because they don't want to wind up like the saps who lent money to Washington Mutual and wound up losing all they invested. Worse, some of those bondholders and shareholders happen to be other banks in Europe and Asia (where they are still fighting the previous battle of inflation and have not yet figured out that systemic problems demand systemic solutions) and that's causing some of THOSE to start wobbling worryingly on their axis.

This is all an unpleasant shock for people who assume this is just a USA thing; the financial markets are so interwoven -- and have been for so many decades -- that it is impossible to be isolated from the problems. Just ask Russia, which on top of everything is finding out that annoying the world with that whole Georgia-invasion thing is not the way to get people to fling capital at you.

In sum, if the situation on financial markets isn't addressed soon, we're facing, at very best, a really deep recession and at worst...you don't want to know. Let's just say your crazy relatives who moved to a compound up in the mountains would be feeling pretty damned smug.

However, this needn't get worse. The fundamental underpinnings of the US economy are still (for now) okay. Personal income grew 0.5% (the projection was for only 0.2%) and 2nd Quarter GDP was 2.8% (up from a piddling 0.9% in the 1st Quarter).

In sum, if you want a cheat-sheet for seeing how things are going, just look to see how well banks are lending each other money in the "overnights," the more they are lending each other, the closer we are to the end of this mess.

So that's what's going on so far.

-J.

P.S. Sorry to not have comments on this entry, either.

Posted by Joke at 7:18 AM

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