Anyone deeply interested in the nuts and bolts of the financial crisis, including a pretty lucid explanation of the ways in which we have gotten ourselves into one helluva jam, would be well-advised to read the always entertaining Matt Taiibi's takedown of the Wall Street bailouts in Rolling Stone, the URL for which is: http://www.rollingstone.com/politics/story/26793903/the_big_takeover.
It's utterly hilarious to the extent that it's not absolutely infuriating. Matt does what the dilettantes of the Brainfart Brigade at the New York Times never do, get on the phone and talk to people who can describe in detail how mortgage-backed securities were devised; how they were sold; why they were created; and how they were insured by AIG at the Casino Division of the (formerly) world's largest insurance compnay And then, after this indispensable research, Taiibi actually thinks through how the system works and why it has come to the awful pass it has.
I recall that narrow escape we managed a few decades ago when we discovered that CFCs in the atmosphere were destroying ozone. We reversed that folly just in time to avoid utter catastrophe. What made it all the more chilling was the subsequent revelation that had the makers of refrigerants decided to use bromine (in molecules termed halons) instead of chlorine, discovering the source of ozone depletion at the point we did would have been too late. The greater ozone destroying capacity of bromine would have made attempts to ameliorate the situation futile. And the difference in choice between the two elements had to do with a slight marginal advantage in cost in using chlorine instead of bromine; the fate of the planet hung on this trivial choice.
It seems to me that the United States has probably come to something like such a pass with the current financial crisis. It's a one-time fix that we may be allowed to implement with the world held in a state of co-dependent pretending along with us as we hallucinate the necessary money to fix the system. I appreciate the comment of my highly intelligent fellow alum and Erstwhile bandmate of a few days ago about the Treasury/Fed's plan to create money out of thin air by (a) running the printing presses to create currency to (b) purchasing our own T-bills, which I have likened before to an ability to cure a bounced check by depositing a check from the same overdrawn account into the account and claiming "solvency." The United States is "borrowing" money, in other words, from itself, akin to reaching the roof three feet away by lifting the ladder on which you're standing with your own two hands.
We're the only country in the world, for the time being, who might be allowed to get away with this conjurer's trick, simply because we run the printing press for the world's reserve currency. And now China and Russia are making noises about changing that, which is very, very dangerous and scary, and probably the reason that Nouriel Roubini thinks that gold may go to $2,000 an ounce by this summer.
Chief Wizard of the Brainfart Brigade, Paul Krugman, thinks the whole problem with the banks can be cured by nationalization. Krugman has never much liked Obama, and takes potshots at him whenever he can. Krugman, in his once-over-lightly research way, cites the Swedish example as the way to go. Of course, Sweden has a population of about 9 million, or about the size of the metropolitan area of New York. By an order of magnitude, its problems in the 1990's are not comparable to what's going on with B of A, Citigroup, AIG, Wells Fargo and the rest of them. Nationalization, in effect, is what the FDIC does when it takes over an insolvent bank. Krugman is proposing that the U.S. take on banks with deposits literally thousands of times larger than the biggest bank failure the FDIC has ever handled in order to "clean up their balance sheets." After all, it's what they did in Stockholm; should work here too.
The addiction to conspiracy theories of all branches of the media at this point, mainstream press (while it lasts) and all the hip blogs, leads everyone writing about this situation to assume, automatically and a priori, that the only reason Ben Bernanke and Tim Geithner favor of an outsider's approach to clearing the balance sheets is because they're in bed with the big Wall Street banks. I doubt this. Nouriel Roubini (a guy who does not share the conspiracy compulsion of these others, probably because he does a little homework) notes that probably $1.8 trillion in toxic assets infects the books of the big banks. That's what I like about Nouriel; he uses actual, comprehensible numbers, instead of the qualitative junk Krugman uses habitually. So the question becomes, do you actually have to take ownership of the banks in order to get rid of these debits on the books, or is there a way to leverage federal money to clear the debt? That's what Geithner is trying to do.
Interesting that the Dow jumped 500 points when Geithner and Bernanke announced their plan. Almost as if there are people in finance who don't take all their cues from the Op-Ed pages of the New York Times.
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