Financial Mess Heats Up

The financial mess that our country is in is heating up… big time. Hold on folks, it’s really going to be a rough ride:

WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?

Or all of the above?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.

As Paul Krugman says in his column: “O.K., here it comes: The unthinkable is about to become the inevitable.”

But the big bailout is coming. The only question is how well it will be managed.

As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.

According to late reports on Sunday, JPMorgan Chase will buy Bear for a pittance. That’s an O.K. resolution for this case — but not a model for the much bigger bailout to come. Looking ahead, we probably need something similar to the Resolution Trust Corporation, which took over bankrupt savings and loan institutions and sold off their assets to reimburse taxpayers. And we need it quickly: things are falling apart as you read this.

As regular readers here know I have been bemoaning the state of the economy for a very long time here on The Dem Daily. Having just returned from a couple of days out of town on business, I can only say this news and the news that the Feds have cut the discount rate is not encouraging. Tighten up your belts and plan to tighten up your budgets too. We need a leader in the White House that understands fiscal responsibility.

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4 Responses to Financial Mess Heats Up

  1. bjerryberg says:

    To paraphrase Carville–it is the system stupid. There are quadrillions (!) of
    dollars of worthless financial instruments on the books out there–which is its
    nature not something that be bailed out successfully. Krugman is right to
    sound the alarm but tragically mistaken if he thinks it is just a matter good
    ‘crisis mangement.’ The system is dead. Put it into Chapter 11.
    We need a new system a la FDR’s Bretton Woods.

    It is this systemic financial collapse and the fact that leaders do not want to
    believe it is happening–that make the behind the scenes machinations
    promoting a ‘Bloomberg option’ so dangerous–despite its pooh-poohing
    by conventional wisdom addicts.

    Sen Clinton needs to go in an FDR direction not a fiscal conservative mode.

  2. alrudder says:

    The sad irony of all of this is that the person who, in the last 8 years, has done the most to regulate the markets and save capitalism from itself was: Eliot Spitzer.

  3. Pingback: Ugly. REALLY Ugly. « The Krile Files

  4. In the Bear Stearns instance, a stock that sold above $30 on Friday was worth only $2 before the market opened again on Monday morning. It is this which Krugman is labeling as at least a partially reasonable outcome.

    In the instance of Countrywide, the fall came in slow motion, and at least some of the perpetrators were able to lay their risk off on latecomers. On the other hand, many of the folks still in the stock when B of A brought the price down to $6 and change were “bottom fishers” (Wilbur Ross picked up the remains of Option one from H & R Block today), and also would not qualify as innocent bystanders.