An interesting narrative surrounding the financial crisis that hasn’t gotten much attention is this: Is the near fiscal collapse of the United States the fulfillment of Osama bin Laden’s original plans for the downfall of the United States, laid out in his 1996 Fatwa?
“Since the United States is experiencing a crisis of monumental proportions, Osama must genuinely feel that his prophecy has become a reality. More than a decade ago, he set out to vanquish America and its villainous puppets in the Arabian Gulf - nothing more, nothing less. Back then this must have appeared like folly, because the U.S. was at the zenith of its power and Osama and his people were considered nothing more than a fanatical gang of murderers.
“Today we are witnessing the rapid decline of the United States, a trend which some consider to be irreversible. Osama has victory in his sights. Whether that’s true or not shouldn’t be debated here. This is about recognizing that this is the view of Osama bin Laden. This is about catching a glimpse of the world of ideas espoused by these fanatics.”
We have been here before, and we can learn from the past.
On March 4, 1933, Franklin D. Roosevelt took the oath of office and told Americans, “(T)he only thing we have to fear is fear itself…nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance…
“Values have shrunken to fantastic levels, taxes have risen, our ability to pay has fallen, government of all kinds is faced by serious curtailment of income, the means of exchange are frozen in the currents of trade, the withered leaves of industrial enterprise lie on every side…the savings of many years in thousands of families are gone.”
But FDR came to the White House ready to take action, and he did. When the next president moves into the White House in January, it may be too late to start.
I had just finished watching “Jon Stewart’s round-up video of Fox News election coverage since the debate” in Joe Windish’s “Palin report Due Today,” when our lame duck president came on the networks to make another non-news, non-encouraging and “non-sensical” address on the mess he has gotten our country in. (By the way, the Dow tanked another 80 points or so while Bush was talking—it has now “stabilized” at around 8,300).
When Bush felt that he had done enough additional damage and went back into his mansion without answering a reporter’s question, I decided to check out Fox News. And, lo and behold, after the “great” Cavuto lamented for a few minutes, Fox went right back to an “Acorn” report, immediately followed by a report and video of an angry man at a McCain rally yesterday begging McCain to “take it to Obama.” The other networks were still trying to make sense of the president’s address and of the economic crisis we are in.
You betcha, Fox is fair and balanced, and really cares about the real issues facing Americans.
Contrary to the now-popular wisdom about the end of American financial dominance, Jorge Castro of Argentina’s Clarin newspaper argues that the crisis merely demonstrates the inherent strength of the United States and its primacy within the global economy.
After agreeing with those that believe John McCain is running out of options this election cycle, Castro writes in part:
“The U.S. economy is, like its currency, the reserve and the most technologically advanced platform in the world. More than in normal times, this crises is revealing of the essential nature of this phenomenon. U.S. productivity is as important to the structure of global power as the law of gravity is to physics.”
“In contrast to ‘Mr. Hot’ McCain, Obama doesn’t proceed according to the slogan, ‘Forward, no matter what!’ … Obama simply seems more sober and rational. When panic abounds, this is what’s needed.”
Credit is based on a cycling of cash. Banks lend and sell the loan. Sallie Mae buys it, bundles it and sells it to investment banks. They rate them, package them and sell them to investors. Investors trade them at the monthly auctions - - SCCREECH – wait the auctions are gone.
“Hold one now, Mr. Columnist Guy. Are you telling me that I can sell my fake Gucci on eBay to someone in Russia but sophisticated investors have nowhere to sell billions of dollars in professionally rated securities to others who might want them?”
Yep, that is the problem.
“Well what idiot would buy stuff he or she can’t sell or even use?”
Precisely.
When the natural flow of anything is clogged, either the system stops or, as in this case, it backs up and spills icky stuff all over the place. The solution is so simple - restart the ARS auctions. At these auctions, the securities will be purchased and sold. As always, some will not sell. The government can purchase those that don’t sell just as the investment bankers once did and offer them for sale the next month. The clog will be cleared and the cash will flow again. Values will go up. Banks will loan money. Fannie Mae will not be broke. Investment banks will not be broke AND it will NOT cost $700,000,000,000.
How it Used to Work
Decades ago, shares of stock could only be purchased in large blocks, effectively excluding ordinary people from entering the markets. Mutual funds and even money markets were a thing of the future. People deposited their money in savings accounts at a bank or savings and loan. This money was then insured by the FDIC. The institution loaned that cash to customers to buy homes and start businesses. This was a local process and quite limited.
As higher return on investment options for smaller investors grew, people began to place a lower percentage of their wealth in bank savings accounts. Since this cash was the primary source of lending, the government had to create a mechanism to allow banks to turn loans into cash they could lend again.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac were born. Their mutations over the years were designed to continue to facilitate liquidity as financial behavior changed. Anyone can buy stock in today’s world. There are many creative and effective vehicles, with varying levels of risk and return, into which people of all levels of wealth can invest. As a result, savings accounts no longer effectively support lending. Lending is now driven by liquidity.
Liquidity is created and lending is facilitated in the following process:
1. A bank makes a loan.
2. The loan is purchased by Fannie Mae for cash.
3. Fannie Mae needs cash to buy more loans, so it has to sell the ones that it has purchased. It bundles these loans into securities rated by Standard and Poor’s and others (ARS) and sells them to investment bankers.
4. Investment bankers need cash to buy more ARS, so they sell them to investors.
5. Up until a few years ago, investors then traded these assets in monthly auctions. These auctions supported the value of the ARS by keeping them liquid.
This cycle kept cash moving through the system so that loans could be made to you at the front end.
What is Broken?
When you clog up the pipes the whole system backs up, and this is precisely what has occurred. The auctions for these ARS dried up due to stupid Federal Reserve policies (see my prior blog).
These auctions allow investors in ARS to buy and sell them. Liquidity is a critical part of value. According to Carl Jenkins, an expert in securities valuations with UHY Advisors in Boston, MA, the inability to sell an asset can reduce its value by as much as 30%. These are fairly tight margin investments and the only way they make sense to an investor is if they can be sold easily. When the ARS auctions failed, investors not only stopped buying ARS but also demanded their money back and got it from investment banks.
If investment banks cannot sell their ARS to investors, they have no incentive to purchase them from Fannie Mae. If Fannie Mae cannot sell its bundled mortgages and bank loans to investment bankers, it has no cash left to purchase mortgages and bank loans from banks who make them. If Fannie Mae cannot purchase the loans, the banks cannot make them because they have no cash to lend. If the banks cannot make loans, the economy screeches to a horrible stop.
And that is what has happened. Start the auctions. Unclog the system. Let the money flow again and all will be well with the world. By the way, if the government starts the auctions and gets the cash flowing, private players will take the auctions back and the government can get out of that as well.
There is little question that the presidential race will tighten as Election Day approaches. It always does. But absent an apocalyptic event, Barack Obama will cruise across the finish line ahead of John McCain in the most important election since Franklin Roosevelt beat Herbert Hoover in the depths of the Great Depression.
I do not make that cross-generational comparison lightly because in 1932 things were sucky in a way that none of us — excepting a precious few long-lived grandmothers and great uncles — are able to recall.
And while I do not have the chops to predict whether we are on the verge of another depression, it is clear that no one in a position of responsibility — whether they work on Wall Street, in Washington, the City of London or Tokyo — has a clue as to how the global economic conflagration of the vanities can be extinguished since throwing trillions of dollars, euros and yen into the flames in the form of rescue packages has had little effect in restoring confidence in what obviously is a badly-broken economic system.
This brings me to the second presidential debate and the sit-up-in-bed realization (because I happened to be lying down at the time) that even if McCain had the chops and even if Obama had a resume longer than a page and change, the cold fact of the matter is that they have been battling for the privilege of sitting in the cockpit of an airplane that has become aerodynamically unstable, to paraphrase an astute antipodean blogger.
* * * * *
The title of this post is cribbed from “When the Hunter Gets Captured By the Game,” a song that Smokey Robinson wrote for the Marvelettes back when Barack Obama still had training wheels on his bicycle.
“Hunter” seems to be about love, but like many great songs its lyrics have a timeless universality that fit events years in the future that would seem to have nothing to do with it’s surface theme — a romancer who chases someone for the thrill of the hunt only to find that they have become the prey.
That is a pretty close approximation to what has happened to Obama, who is trying to stay on a bicycle of another kind as he pedals toward November 4 and Inauguration Day.
While the financial crisis has unfolded and the U.S. election had pummeled ahead, North Korea has broken the seals on some of its nuclear enrichment facilities and six-party talks have broken down.
“Pyongyang accused Washington of not fulfilling its commitment to remove North Korea from the list of terrorist-supporting states. There’s a lot to be said about the quality of this list: either you support terrorism or not; and if this can be negotiated, what kind of list is that? But that’s a separate issue about the style of U.S. foreign policy. The U.S. explains its hesitance by pointing out North Korea’s refusal to adhere to the agreed-upon verification of its nuclear sites (which of course, Pyongyang has rejected). ”
“South Korean satellites recorded some strange smoke over a firing range near the village of Gilju in Hamgyong Province. It’s the same place where, on October 9, 2006 North Korea detonated something that apparently allowed it to call itself a nuclear power. … Some people who have seen the satellite images say it could be a smokescreen to conceal from satellites preparations for a new nuclear test. Of course, the same effect could be obtained by a bucketful of burning rags that someone wanted to get rid of. And while North Koreans burned rags and laughed, Washington thought to itself: Is this good news on the eve of the elections - the detonation of a North Korean nuclear bomb right after Condoleezza Rice’s assurances that everything is fine? … Now everything depends on whether the North Korean authorities want to make a gift to American Republicans on the eve of the voting (in the form of a resumption of the disarmament process), or choose to wait until the new administration enters the White House.”
‘THE RETURN OF FAITH’
[Het Parool, The Netherlands]
With finger-pointing over the global financial crisis rapidly spreading, William Waack of Brazil’s O Globo warns that developing countries are in no way shielded from the effects - and that blaming others won’t do a thing to help Brazil or the world emerge from the hole they are in.
“‘Contagion’ suggests that it might be possible to prevent the “disease,” as long as the potential victim remains isolated from the source of infection (in this case, the American economy). That’s pure nonsense, and it’s dangerous, because it overshadows what must be done and delays the adoption of protective measures. … We can dispense with the notion of ‘decoupling.’”
“The more advanced and competitive a national economic system is, the more it will be affected by the crisis. Therefore, it’s Brazil the exporter and innovator which is connected with the global economy that will face the worst consequences. And it is that modern country - industry, agro-business, services and competitive exporters of mineral commodities - that have ensured our prosperity so far. … Schadenfreude, a German word that has been adopted by the Anglo-Saxon press, means to take pleasure in the misfortune of others. The New York Times this Thursday pointed out the fact that many Latin American leaders, among them Chávez [Venezuela], Morales[Bolivia], Correa [Ecuador], Kirchner [Argentina] and Lula [Brazil], allowed themselves be get carried away with schadenfreude in regard to the crisis in the United States. And now, they’re getting carried away with fear. ”
In the porkathon to pass the bailout bill, Congress balked at two measures–to extend jobless benefits for the unemployed and allow bankruptcy judges to reduce penniless homeowners’ mortgages.
So much for Main Street, where signs of a 1930s Depression are cropping up everywhere:
*New figures show 760,000 lost jobs this year. Of the 9.5 million Americans out of work, two million have been for more than six months. Nearly 6.1 million people are working part-time because worsening business conditions have led to fewer hours and less pay.
*With bank-account insurance increased from $100,000 to $250,000, the potential liability of the Federal Deposit Insurance Corporation for failing banks is now estimated to be $1.1 trillion. The FDIC’s fund currently has about $45 billion, a five-year low.
This afternoon I looked through some of my old blogs relating to the Bush administration. I knew as soon as I did it that it was a big, fat, depressing mistake. Below is my blog from Nov. 8, 2006, the day after the midterm elections. What it foresaw was rosy, compared to where the nation stands on Oct. 5, 2008. We’re not behind 150-14. We’re behind a trillion to nothing. Here’s the blog.
“The Tuesday elections have proven to be a repudiation of George W. Bush and his administration. Democratic and independent candidates carried the day, and Republicans no longer possess a conservative majority in Congress.
“Either way, the nation was going to lose. We’ve lost already, and it’s only the first days after Election Day. Bush has a team that knows how to get around Congress, if it has to. If the Bush team doesn’t have a Republican Congress to “work with,” then the team will work without Congress. Loss of a Republican congressional majority has been a repudiation, but only a vocal one. Bush, Cheney, Rove and Gonzales will continue on their same path, maybe with more machete work to do on balances of power put in place in 1789, but continuing all the same.
“It is this inevitability that is so depressing. It’s like the nation is behind, 100-0, at the beginning of the fourth quarter, there’s no mercy rule, and nobody can leave until the fat lady sings. If the Congress had remained Republican-controlled after the elections, who knows what the final score might have been? Now that Republicans have lost control – I don’t say, “Democrats have gained control,” because it’s not that black-and-white (or red-and-blue) – but now that Republicans have lost control, the final score, when Bush is finally carried off the field in 2008, may be 150-14.
“Surely a non-Republican Congress can scratch out a couple of scores in two years, but most of the drives won’t get inside the 40-yard line, against an opponent that knows how to use the rules so well.
“But who cares? What good are 14 points in the last quarter of a game that was over at the half? In the Congressional locker room, what will the coach say? ‘Folks, you did your best.’ Well, rah rah rah. The stories in the morning papers, when the gun finally sounds in 2008, will be about which nation is bloodied the worst, Iraq or America.
“And all we can do is sit in the stands and watch. Can’t leave, can’t get away, can’t go home and fix a martini and turn on the TV and try to forget. Wait til next year? Sheesh. Who wants to watch 2007 in America?
“I have nothing against Republicans, or Republican or conservative philosophy and ideology, or honest Republican elected representatives, or evangelical Christians gay or straight, and I am not energized by the prospects of a party that counts John Kerry among its leaders. I am just an American, sitting in the stands, rooting for a country that is behind 100-0 with a full quarter left to go. Remember Andy Griffith’s funny monologue, ‘What it was, was football’? A well-oiled fellow next to Andy in the stands slaps him on the shoulder and says, ‘Buddy, have a drink,’ only Andy says, ‘drank.’ To you, my seatmates in this stadium from hell, I slap you on the shoulder and say, ‘Buddy, have a drank. Have several.’ “
One thing has changed, this afternoon, from that November day two years ago. I am energized by the prospects of a party that has made Barack Obama its candidate for president. I think he has the makings of a patient leader and, equally important, a coach who knows the value of values, and who teaches that principles are principal. God knows we face a rebuilding program.
October 4th, 2008 By JOE GANDELMAN, Editor-In-Chief
PETA, the headline-grabbing, news-savvy animal rights group that some serious animal rights advocates can’t stand, has pitchforked itself into the headlines again.
The target this time: Ben and Jerry’s Ice Cream. The demand: Get rid of cows’ milk in ice cream.
This piece by Pajamas Media’s Michelle Catalano (a great conservative blogging powerhouse who left the political blogging scene a few years ago) she tells you what ingredient the always-provocative PETA suggests replace cow’s milk.
With much of the developed world pointing fingers at American greed and free enterprise as the central culprit of the current financial crisis, Thomas Fricke, Chief Economics Editor at the Financial Times Deutschland, has another explanation.
“German politicians badmouth bank managers or (indebted) Americans, demanding that with their private assets, they be held liable … Certainly, there are horrible people who always want to obtain more money. The only question is whether this is the problem at hand. And whether it explains why the world of finance regularly confronts increasingly dangerous crises. … The problem may be less about greed, and more about the fact that bankers and investors today are severely overwhelmed. This is instead, a system-wide problem.”
“It was perhaps not such a great idea to introduce financial innovations, the function of which even professional hedge fund managers declare themselves puzzled and even mystified … the financial world would do well to shift down a few gears and adjust its business practices to the limited capacity of human beings to adapt.”
Throughout time immigrants have driven the growth and prosperity of this country. The concept of illegal immigrants is a relatively recent one. The idea that we should keep out those who don’t look like us, however, is an age-old effort. Whether we like it or not, immigrants are critical to the future of the US economy. There is a simple way to solve this problem. Make them join a union.
Who comes to the US? Immigrants are people with the guts to leave their families, cultures and traditions to venture into a new land in search of a way to improve themselves. They are tough, clever and self-sufficient.
Most people fear the risks and stay home, no matter the desperation of their native situation. Immigrants bear these great burdens and still send most of their often meager wages home. Immigrants are truly special people. This has always been what defines Americans. This applies to Mexican immigrants as completely it has to all other nationalities.
A Bit of History: As always, we should learn from our past or suffer the same errors. Immigration laws are a recent concept. The Immigration and Nationality Act of 1952 was the first broad immigration law. Still immigrants were generally welcomed and helped by Americans to adjust to and become part of society.
Laws of Exclusion: Prior to 1952, “immigration laws” were designed solely to exclude certain ethnic groups. The Naturalization Act of 1790 excluded blacks except as slaves. After that there were acts specifically excluding Chinese, Japanese, Asian Indians, Filipinos, and others. Isn’t our current policy strikingly similar? http://www.umass.edu/complit/aclanet/USMigrat.html We became a melting pot despite our white ancestors’ best efforts.
The Baby Boom: In 1965 we first began to prefer immigrants with skills. The Baby-boomers were coming of age. Births rose dramatically from 1945 to 1957. After that rates fell. The Baby-boom generation officially extends to 1964. A graph of births per year can be found here.
There was a glut of new 20-something workers entering the marketplace to fill the less-skilled positions at the bottom of the growing corporate pyramid. Unskilled immigrant workers, therefore, would further overfill an overflowing population.
1990 was the tipping point.
The youngest Baby boomers turned 26 and wanted to move out of the lowest-level jobs. The problem, there were simply not enough young workers to replace them. Businesses found they could not fill the unskilled workers with Americans. They had two choices:
1. Hire immigrants, or
2. Outsource to other countries.
Based on the needs and resources of their business, they did both.
As time passed, the situation worsened. There was pressure to outsource as China found a great new way to drive its economy. There was pressure for Mexicans to come to the United States to fill the jobs left vacant. For years we ignored them as we always had.
Immigrants are Critical to Our Economy.
When a corporation outsources jobs overseas, it no longer needs the supervisors or managers above that group of workers and those jobs are lost as well.
When a corporation hires immigrants, all of the supervisory and management jobs are retained in the US to oversee those workers.
9/11
Then the Bush Administration slammed the door using 9/11 as the excuse. By some accounts there are around 10 million “illegal” aliens in the United States. They have been here for years helping to fill the critical jobs at the bottom of the corporate pyramid.
Mexican immigrants could not go back home, as they had for years, for fear they would not be able to return to the US. The vast majority, like all Americans, had good steady jobs and paid their taxes and even contributed to Social Security and Medicare without hope of benefiting from them.
The Solution is Simple
You cannot remove ten million people, even if you could find them. We cripple US businesses struggling already to compete by denying them Mexican workers.
Pure amnesty is simply politically impossible. A fence is just silly.
Undocumented Workers Must Join a Union
If we provided that any illegal alien could secure all necessary working papers to become “legal” so long as they join a recognized American union and remain in good standing, we would solve all of the problems associated with Mexican workers.
Then employers have no excuse. If they need more low-skilled workers, they need only turn to the unions. Any illegal alien who chooses not to join a union, will not be able to find work.
Unions will help workers adjust to our culture, language and work ethic. They will help them secure training and better wages, make sure they are not competing with Americans, and help ensure they have health and other insurance.
American workers, whether in guilds, trades or unions, have always been there to help immigrants adapt. They will do it again.
Congress is facing a Butch-and-Sundance moment today in the debate over hurtling into the unknown as relentless mercenary forces close in.
The Senate has thrown them some goodies to slow down the stampede but essentially left the $700 billion cost unchanged–in fact, adding $150 billion in reduced taxes to the ransom.
In the House showdown, it will still be an odd coalition of liberals and conservatives controlling the swing votes. “The bailout legislation that the Senate is sending back to the House,” says Texas Republican Joe Barton, “is a fraternal twin to the one I voted against on Monday.”
Virginia Democrat Bobby Scott insists there are “a lot of things we can do at virtually no cost to the taxpayer” rather than “a $700 billion purchase of worthless assets,” citing mark-to-market accounting to expand lending capacity, net worth certificates to give banks confidence in lending money to other banks and a counterpart of the Home Ownership Loan Corporation of the Great Depression, “which, when the dust settled, we protected all the mortgages, prevented foreclosures, and ended up making a profit.”
If Congress were not in panic mode, members could consider still other approaches such as Paul Krugman’s plan “centered on purchases of preferred stock and takeovers of failing firms–basically, a plan clearly focused on recapitalizing the financial sector, with nationalization where necessary.”
But with the hot breath of voters only a month away, House members will be deciding less on the merits of the rescue bill than calculation of the odds of their own chances at the polls.
On further thought, for taxpayers this may not be like Butch and Sundance, who somehow managed to survive their free fall, but more like Thelma and Louise.
October 3rd, 2008 By JOE GANDELMAN, Editor-In-Chief
The second attempt at a bailout is expected to come to a vote in the House of Representatives today. In this post, written before the Senate passed the newer version, Walter Brasch looks at why the bailout failed. Journalism professor and author Brasch is an award-winning syndicated newspaper columnist and radio commentator, and president of the Pennsylvania Press Club. Guest Voice posts do not necessarily represent the opinion of TMV or its writers.
Stampeded by Fear, Scammed by Lies: Why the Bailout Failed
by Walter Brasch
The Republican leaders of the House of Representatives grabbed a half dozen bags of sincerity, looked directly into every TV camera they could find, and lied.
The House had just defeated, 228-?205, a bipartisan $700 billion bailout bill. But it was the Democrats who were the subject of vicious rhetoric.
Speaker of the House Nancy Pelosi (D-Calif.) “poisoned our conference,” screeched Rep. John Boehner (R-Ohio), the Republican minority leader. He said the House would have voted for the bill “had it not been for the partisan speech the Speaker gave on the floor of the House.” Rep. Roy Blunt (R-Mo.) specifically said that Pelosi’s speech changed the minds of about a dozen Republicans who voted against the bill. Rep. Eric Cantor (R-Va.), waving a copy of Pelosi’s speech, screamed out, “Here is the reason I believe why this vote failed!” The speech, he said, “frankly struck the tone of partisanship that frankly was inappropriate in this discussion.” Douglas Holtz-Eakin, a senior advisor to Sen. John McCain, was equally blunt and equally wrong. The bailout failed, he said, because “Barack Obama and the Democrats put politics ahead of country.”
But it wasn’t the Democrats who brought about the bill’s defeat.
The Democrats voted 140?95 for the bill; the Republicans voted 133?65 against the bill. Sens. Barack Obama and John McCain reluctantly supported the bill. Nevertheless, the viciously partisan Republican leadership, eager to paint anything Democratic as vicious partisanship, couldn’t even get a majority of their own members to agree to the bailout, one that now had added protections for the taxpayer.
What infuriated the Republican leaders was Pelosi’s accurate portrayal of the Bush-Cheney Administration’s economic policies as “built on recklessness, on an anything-goes mentality, with no regulation, no supervision and no disciple in the system.” While driving America into the deepest deficit in its history, the Administration had usurped its own campaign lies that breathlessly panted the fear that the enemies of American consumers are “tax-and-spend liberals,” as if it was one word.
October 2nd, 2008 By SWARAAJ CHAUHAN, International Columnist
Even with the global financial crisis looming large on the horizon, and its consequent crippling effects becoming clearer, the US media’s/blogs’ continued obsession with “what Obama/McCain/Palin/Biden said”, and then “what Obama/McCain/Palin/Biden replied” would appear myopic and tragic.
The media/blogs have seemingly abdicated their traditional responsibility of explaining/warning about major/critical issues.
In this theatre of the absurd, Playboy magazine is “offering a new way to lose your shirt on Wall Street.
“The adult entertainment magazine, long famous for its photo spreads of nude women and lessons in living the urbane life of the well-heeled bachelor, is launching a search for models to pose for its upcoming feature, ‘Women of Wall Street’.”More here…
October 2nd, 2008 By SWARAAJ CHAUHAN, International Columnist
I agree with the The Economist that in this global crisis the governments must work together. But no one talks of the world’s ordinary people who have to bear the additional burden in the wake of this and other crisis, which in the first place can be attributed to the callousness and greed of the governments/leaders and financial institutions themselves (especially the bankers).
First the world leaders blow up trillions of dollars on unending “wars”, and then fail in their duty to monitor/regulate the questionable strategies of the financial and corporate world (especially when the governments themselves have to bail them out with taxpayers’ money). What a ‘free’ and ‘democratic’ world we live in!!!
The Economist notes: “After the (rescue) plan’s thrashing by the House of Representatives on September 29th, spurred on by voters’ loathing of ‘casino capitalism’, investors panicked. Yet as The Economist went to press, they were optimistic that, after winning the Senate’s approval on October 1st, the plan would pass.
“Even if it does, that should not be a cause for optimism. Look beyond the stock markets, especially at the seized-up money markets, and there is little to see except bank failures, emergency rescues and high anxiety in the credit markets. These forces are drawing the financial system closer to disaster and the rich world to the edge of a nasty recession (see article). The bail-out package should mitigate the problems, but it will not avert them.
“The crisis is spreading in two directions—across the Atlantic to Europe, and out of the financial markets into the real economy. Governments have been dealing with it disaster by disaster. They have struggled to gain control not just because of the speed of contagion but also because policymakers, and the public they serve, have failed fully to grasp the breadth and depth of the crisis.” More here…
Meanwhile Russian prime minister Vladimir Putin has accused the United States of “irresponsibility” as he criticised its primary role in the economic and financial turmoil that has undermined the foundations of global capitalism across the world. More here…
And French president Sarkozy tries to rally united European response to the crisis.More here…
Wachovia bank has frozen the accounts of nearly 1,000 colleges, leaving institutions unable to access billions of dollars they depend on for salaries, campus construction, and debt payments.
The freeze, which affects most institutions that invest their endowment income and other assets through Commonfund, has some colleges worried that they won’t be able to make payroll this period, said Verne O. Sedlacek, president and chief executive of Commonfund, which manages investments for nonprofit institutions. Many colleges use the organization’s short-term investment fund for operating expenses, “almost as a checking account,” he said.
As of last Friday, the Common Fund for Short Term Investments managed approximately $9.3-billion in assets for 900 colleges and roughly 100 private schools.
Wachovia, which agreed to sell its banking operations to Citigroup this week, announced on Monday that it was resigning as trustee of the fund and would allow plan participants to withdraw only 10 percent of their assets—the value of the securities that had reached maturity. That percentage grew to 26 percent on Tuesday as additional securities reached maturity, and is expected to reach 57 percent by the end of this year and 74 percent by the end of 2009.
