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U.S. Deficit, Debt Grows As Financial Crisis Heats Up

The financial crisis is burning one big fat hole in Uncle Sam’s wallet. From Bloomberg’s Matthew Benjamin today:

The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger…

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley’s chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

The Bloomberg reporter also brought up the issue of our national debt. Benjamin wrote:

Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government’s debt limit to more than $11.3 trillion from $10.6 trillion.

Well, at least you can’t fault Congress for not planning ahead. Further exacerbating the problem with our nation’s finances, the Associated Press is reporting tonight:

Treasury Secretary Henry Paulson said Friday that the Bush administration will move ahead with a plan to buy stock in financial institutions.

Mr. Paulson said the program to purchase stock in financial institutions will be open to a broad array of institutions.

Ahead of the curve, Benjamin noted even before tonight’s announcement:

Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.

Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary — and will likely turn out to increase the measure’s cost…

The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.

In an attempt to illustrate just how out of control the debt is becoming, the Wall Street Journal’s Phil Izzo wrote in the “Real Time Economics Blog” yesterday:

The national debt clock, the unofficial tracker of the federal deficit maintained by the Durst Organization in New York, has reached its limits. Last month, as the national debt exceeded $10 trillion for the first time, the clock ran out of digits to record the number.

The dollar sign in the clock had to be deleted and replaced with a one to record the massive number. The clock’s owners say a new model — with space for two extra digits — will be in place early next year.

Now the debt clock will be able to reach the quadrillions. Hopefully, that’s not a level that will be breached any time soon.

Wow. I didn’t even know there was such a word as “quadrillions.”

I’ve given you a decision to make
Things to lose, things to take
Just as she’s about ready to cut it up
She says
Wait a minute honey I’m gonna add it up

-Violent Femmes, “Add It Up” (1982)

Sources:

“Cost of U.S. Crisis Action Grows, Along With Debt (Update1)”
Matthew Benjamin
Bloomberg, October 10, 2008

”U.S. Plans Bank Stakes”
Associated Press, October 10, 2008

“Sign of the Times: National Debt Clock Runs Out of Digits”
Phil Izzo
Wall Street Journal (Real Time Economics Blog), October 9, 2008

Did Secretary Paulson Mislead President Bush On The Bailout?

Along with Fed Chairman Ben Bernanke, U.S. Treasury Secretary Henry Paulson has quickly become a household name in recent days. As one of President Bush’s top economic advisers, Paulson has helped spearhead the movement to rescue Wall Street and the financial system on behalf of Main Street and the U.S. economy. His efforts to date have resulted in the $700 billion bailout legislation that was signed into law by President Bush over the weekend. The bailout authorizes the Treasury Department to buy bad mortgages and other troubled securities associated with them from banks and other financial institutions. It is hoped that these purchases will allow credit to flow more freely throughout the financial system.

Earlier today, Dean Baker, an economist and co-director of the Washington, D.C.- based Center for Economic and Policy Research, questioned whether or not Secretary Paulson presented all the available options to the White House. He wrote in the Huffington Post:

According to the Washington Post, after the initial defeat of the bailout package in the House last Monday, Treasury Secretary Henry Paulson went to see President Bush in the White House. The Post reports that President Bush asked Paulson about “Plan B.” According to the Washington Post, Paulson told Bush “there is no Plan B.”

Of course this was not true. Paulson could have easily designed a bailout plan that was centered on the direct infusion of capital in the banking system, as was suggested by George Soros in a Financial Time column later in the week. Virtually every economist who has written on the bailout argued that a direct infusion of capital is a far more effective approach to dealing with the financial crisis than the approach outlined by Paulson.

Clearly Paulson had not invested a great deal of time in crafting the initial proposal he submitted to Congress since it was just three pages and few of the details of the plan had yet been decided. This means that Paulson easily could have switched gears and developed a plan along the lines advocated by economists.

Baker, who has been warning of an economic crisis for years now, added:

If the Post accurately described the meeting between Paulson and Bush (there is no source given for this account), then Secretary Paulson badly misled President Bush on the most important economic decision of his presidency.

Do you think it’s possible Hank Paulson may have had an ulterior motive when he allegedly told President Bush there was no other option available?

“If there is anything that a public servant hates to do it’s something for the public”

-Kin Hubbard (American humorist/writer. 1868-1930)

Source:

“Post Claims Paulson Misled Bush on Bailout”
Dean Baker
Huffington Post, October 6, 2008

SNL Skit On The U.S. Financial Crisis, Bailout

I don’t watch too much “Saturday Night Live” anymore, as my nostalgic tendencies make me yearn for the comedic genius of the writers and “Not Ready For Prime-Time Players” from the late seventies. However, I did manage to catch the following SNL skit from this past weekend, which pokes fun at those behind the financial crisis we now find ourselves in.

Too funny, but for how long?

Note: As of Monday night, the skit has disappeared from the NBC video page. Glitch? Or something more sinister, perhaps…

As of Tuesday morning, it looks like NBC did indeed pull the SNL Bailout skit from their website. From Ed Lasky over at the “American Thinker” blog this morning:

NBC has pulled the video of the Saturday Night Live skit satirizing the role of George Soros and the Sandlers in the collapse of Wachovia Bank off the internet and is deleting comments on its message boards asking about it. This skit reflected information first brought to light by me on AT’s pages.

Once again the media covers up information that proves harmful to Democrats. Were the party in question the GOP, there would be a major row right now over this suppression.

Update: a bootleg copy (apparently) lives on YouTube (for the moment) watch it while you can:

Oh well. Looks like the Nazi Broadcasting Corporation pulled the plug on the YouTube video a couple of minutes after I posted the Tuesday morning update.

Can’t start the morning without my daily fix of fascism you know…

As of Friday night, this is the explanation according to Brian Stelter of the New York Times on October 9:

NBC has taken the unusual step of editing the online version of a “Saturday Night Live” skit. In a sketch about the government’s financial bailout package that was broadcast Saturday night, two characters identified as Herbert and Marion Sandler were labeled with on-screen words that read, “People who should be shot.” Those two characters represented real-life business managers who had sold their savings-and-loan company (and its mortgage-backed securities) to Wachovia.

NBC removed the skit from its Web site, nbc.com, on Tuesday; the video reappeared on Wednesday with the label removed. Explaining the change, NBC said in a statement, “Upon review, we caught certain elements in the sketch that didn’t meet our standards.

Which leads me to ask, so whose attorney(s) crafted the above language?

The obscure we see eventually. The completely obvious, it seems, takes longer.

-Edward R. Murrow (American journalist. 1908-1965)

The Week Of Financial Crisis

Now that it’s Monday morning, when I look back at the financial chaos that took place last week, one term in particular comes to mind…

“Hell in a handbasket”

And Dr. Prieur du Plessis, the chairman and principal holder of South African-based Plexus Asset Management, best summed up the week of financial crisis in Market Oracle (UK) yesterday when he wrote:

Whew – what a wild week! Global stock markets and commodities tumbled, whereas government bonds and the US dollar surged amid mounting fears that the ongoing turmoil in financial markets was foreshadowing a hard landing for the US and Europe.

The first-ever trillion-dollar loss (as measured by the Dow Jones Willshire 5000 Index) on Wall Street came on Monday in the wake of the US House of Representatives failing to gather enough votes to pass the $700 billion bank rescue package. Globally, more than $1.7 trillion got wiped off the MSCI World Index.

Considering the entire history of the Dow Jones Industrial Average since 1896, Monday’s decline of 777 points ranked as the largest points decline in history (see post “Fear Grips Global Markets”). However, and let’s be thankful for small mercies, the percentage decrease of 6.98% was still significantly less than 1987’s 22.61% decline.

Although the Senate’s passing of the bailout plan on Wednesday brought temporary relief, the reversal on Friday of the House’s earlier decision brought more volatility. In classic “buy on the rumor, sell on the news” fashion, the Dow Jones Industrial Index rallied by 3.0% leading up to the vote, but then sold off by a massive 486 points (4.5%) to end 1.5% down on the day and 7.3% lower on the week.

Already, this week is off to a bang-up start. As I type this, the Dow is off over 400 points this morning, while in Europe, the pan-European Dow Jones Stoxx 600 index posted its biggest one-day percentage loss ever on Monday (according to preliminary data). The index fell 7.6% to 241.57, surpassing the 6.21% fall recorded back on September 11, 2001.

Source:

“Fear Grips Stock Markets as Economies Tip Into Recession”
Prieur du Plessis
Market Oracle (UK), October 5, 2008

Quotes For The Week

A hat-trick of quotations for you…

The rejection of the package is good because it shows that some people in the U.S. are still sane. A bailout will not buy the U.S. a way out. The government is less powerful than markets in fixing this mess.

-Marc Faber, in a September 30 phone interview with Bloomberg

Sometimes I think we need to put out an ad: “No, we don’t have any more jobs than you do.”

-Jodi Royal-Goodwin, the redevelopment agency director for Reno, Nevada, in response to an influx of homeless people coming to the city looking for jobs

Altogether, we have had eight years of no gains in real median wages, flat stock market returns, and minimal net new jobs. Despite what you have heard, after adjusting for debt spending, population growth and realistic adjustments to the GDP deflator, there have only been 3 or 4 quarters of GDP growth since 2005. If you adjust for military, government and minimum wage positions – i.e. jobs funded by tax payers and jobs that don’t pay anything - there have been absolutely no net new jobs. Bush’s largest gains have been with inflation, oil and food prices, debt, trade deficits, bankruptcies, foreclosures, and healthcare costs. If an assembly of the world’s leading economic strategists were to design the most destructive economic disaster possible, they could not match the results of Bush’s tenure. Even the most loyal Bush supporters will admit he has been an absolute disaster – that is if they’re being honest.

-Mike Stathis, Managing Principal of Apex Venture Advisors and author of America’s Financial Apocalypse, in a Market Orackle (UK) piece from September 14

Gold Stars, Or The Gallows, For Congress?

So what do you think, Boom2Bust readers?

Did Congress do the right thing in passing the bailout legislation the second time around?

Let’s hear your opinions on this matter!

Ron Paul: Welcome To The Next Great Depression

Congressman Ron Paul warned his colleagues in the U.S. House of Representatives before they approved the bailout legislation:

By doing more mischief, by not allowing markets to adjust, debt to be liquidated, you’re going to guarantee a Depression…

YouTube Video Link

Even With Bailout, Talk Of Additional Intervention

Well, it’s official. The U.S. government bailout of Wall Street and the financial system is now law. From the Wall Street Journal’s Greg Hitt and Deborah Solomon today:

President George W. Bush signed into law an unprecedented $700 billion plan to rescue the U.S. financial system, one of the largest-ever government interventions in the nation’s economy — and almost certainly not the last.

The Treasury Department is expected to move quickly to start buying distressed assets from struggling financial institutions, although any impact might not be felt for some weeks. Many details — such as who will administer the program and how — are still to be worked out.

Even with the massive bailout, there is already talk of additional government intervention. Hitt and Solomon wrote:

It will likely be followed by other moves. The Federal Reserve could cut interest rates and take further steps to ensure there are enough funds coursing through the financial system. Congress has already beefed up jobless benefits and is expected next year to push for new stimulus efforts, such as spending on infrastructure.

Looking to next year, Democratic lawmakers are planning to revamp financial-system regulations, with hedge funds, private-equity funds and investment banks all likely to come in for tighter scrutiny. House Speaker Nancy Pelosi (D, Calif.) portrayed the legislation as “only the beginning” of the legislative response to the faltering economy…

“We will be back next year to do some serious surgery,” said House Financial Services Chairman Barney Frank (D., Mass.). Mr. Frank wants legislation to rewrite housing finance — including the roles of mortgage giants Fannie Mae and Freddie Mac – and overhaul regulation of financial services.

More intervention? Can’t wait…

Call me skeptical, but Congress has a habit of rendering things F.U.B.A.R. Speaker Pelosi may
want to pay heed to something one of her predecessors said many years ago:

One of the greatest delusions in the world is the hope that the evils in this world are to be cured by legislation.

-Thomas Reed, Speaker of the House of Representatives (1886)

Sources:

“Historic Bailout Passes As Economy Slips Further”
Greg Hitt, Deborah Solomon
Wall Street Journal, October 3, 2008

Second Bailout Proposal More Criminal Than First

If you thought the first bailout plan was a piece of garbage, the second one is one hell of a stinker.

Besides using American taxpayer money to pay for the handiwork of those greedy bastards that live among us, this new bill also takes care of executives’ golden parachutes, increases the deficit, and aids and abets Wall Street in cooking the books. Way to go Congress. The Founding Fathers are rolling in their graves. Even faster now.

From MarketWatch’s Greg Robb and Robert Schroeder last night:

The Senate approved a revised $700 billion U.S. plan to stabilize the financial industry and kick-start credit on Wednesday night, just two days after the House defied President Bush and leaders of both political parties to reject the original package.

By a vote of 74-25, senators authorized the Treasury secretary to buy bad assets from companies’ books, allowed the Federal Deposit Insurance Corp. to raise its deposit-insurance cap to $250,000 from $100,000, extended several tax breaks and required government agencies to modify troubled mortgages…

House Majority Leader Steny Hoyer said the House leadership will likely bring the bill to the floor on Friday.

I wouldn’t expect anything less. As most of us know, money talks on Capitol Hill. And Wall Street banks are anxious to receive their share of the plunder.

A lot of anger has been directed at executive compensation packages. Predictably, that issue won’t be addressed in the new bill. Robb and Schroeder noted:

Executive pay would also be limited in some cases under the bill, as would “golden parachutes” for some corporate chiefs.

Note the multiple use of “some.” The looting goes on.

Greg Hitt Sarah Lueck of the Wall Street Journal pointed out other problems with the “new and improved” bailout plan, such as deficit growth and accounting rule modifications. They wrote last night:

The 10-year, $150.5 billion package of tax proposals includes a measure to ease the bite of the alternative minimum tax, as well as research-and-development tax credits coveted by high-tech companies and drug makers. Its addition is designed to secure the support of Republicans, who were overwhelmingly opposed in the House. But it could irk conservative House Democrats because the measure will add to the deficit.

Add to the deficit? Bring it on, I’m sure the discredited followers of John Maynard Keynes are saying at this very moment.

The Journal reporters added:

The compromise bill represented a marriage of the rescue proposal with a host of measures designed to win the support of reluctant lawmakers. Additions include an increase in bank deposit insurance limits, a suggested change to accounting rules, and a $150.5 billion package of unrelated personal and corporate tax cuts.

And just what is this “suggested change” to accounting rules? Hitt and Lueck explained:

The bill also reaffirms the Securities and Exchange Commission’s authority to suspend so-called mark-to-market accounting, an issue that gained surprising traction among lawmakers looking for less costly alternatives to the Bush plan. The practice, adopted in the aftermath of the savings-and-loan collapse in the 1980s, pegs the value of assets to their current market price, rather than the price paid for them.

Banks have complained the strict application of mark-to-market rules have forced them to write down billions worth of mortgage-related securities for which there are no buyers, intensifying the squeeze in the credit markets.

Um, yeah, there’s a good reason why mark-to-market accounting was implemented after that other famous episode of financial greed in America. Joanna Ossinger of FOX Business wrote yesterday:

Mark-to-market, which is part of fair-value accounting, simply means that companies assigning values to assets they hold must value them at current market levels. If something is trading right around $10, it’s given a value of $10, regardless of whether it was bought for $2 or $20.

That sounds logical, right? The problem, though, and the reason M2M is getting so many opponents, is that the credit markets are in such a bind now that a lot of securities aren’t selling at all. So, technically, you might have a “market” of $0 for a security.

In effect, change the rules, assign fictitious values to securities, announce less write-downs… and pencil in some dates to look at property in The Hamptons and the latest Maserati to roll of the line in Italy.

I don’t know about you, but the suspension of mark-to-market accounting sure sounds like cooking the books to me. With the help of the U.S. government, no less.

We hang the petty thieves and appoint the great ones to public office.

-Aesop

Sources:

“Senate approves $700 billion financial rescue plan”
Greg Robb, Robert Schroeder
MarketWatch, October 2, 2008

“Senate Vote Gives Bailout Plan New Life”
Greg Hitt, Sarah Lueck
Wall Street Journal, October 2, 2008

“In Defense of Mark-to-Market Accounting”
Joanna Ossinger
FOX Business, October 1, 2008

Wall Street Bailout Protest

What you didn’t see in the mainstream news last week…

Wall Street Bailout Protest
September 25, 2008
YouTube Video Link

$700 Billion Bailout Figure Pulled Out Of Thin Air

Yep. You heard it right. The $700 billion price tag for the failed U.S. government bailout of Wall Street and the financial system was conjured up. Where’s the evidence? Forbes’ Brian Wingfield and Josh Zumbrun wrote on September 23:

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

And you wonder why Americans are suspicious of government…

Steve Miller Band, “Abracadabra” (1982)
YouTube Video Link

Source:

“Bad News For The Bailout”
Brian Wingfield, Josh Zumbrun
Forbes, September 23, 2008

The Picture That’s Worth A Thousand Words

Or $1.1 trillion in U.S. stock market losses today…

U.S. Bailout Plan For Dummies

Obviously, there’s a lot of info on the proposed U.S. government bailout of the financial system circulating around cyberspace this Monday morning. Filtering out the noise, I tried to get at the nuts-and-bolts of what is being proposed in this post.

For those of you who prefer a short, multimedia-based breakdown of the bailout proposal, John Bussey of the Wall Street Journal talks about what’s at stake in a 3-minute MarketWatch video:

MarketWatch Video Link

For an in-depth, print-based explanation of the $700 billion scheme, this morning the Journal’s Deborah Solomon picked apart the proposed legislation and talked about its components:

The Troubled Asset Relief Fund:

The bill authorizes $700 billion for the fund in installments. Treasury will first get $250 billion, with an additional $100 billion immediately accessible. Congress would have the option of blocking the final installment of $350 billion by issuing a joint resolution within 15 days of any requests.

How it works:

Treasury plans to hire asset managers to determine how to buy bad loans and other ailing assets from financial institutions. Many of the details, including pricing and purchase procedures, will be worked out between those managers and Treasury. The legislation requires Treasury to set guidelines within 45 days for pricing methods and setting the value of troubled assets, as well as mechanisms for purchasing assets, procedures for selecting asset managers and criteria for identifying troubled assets to buy.

The legislation requires Treasury to purchase assets at the lowest price, and allows the government to buy through auction or direct from institutions.

Treasury expects to start buying the simplest assets first — mortgage-backed securities, for example — followed by more complex securities. Treasury likely will publish a list of the assets it is seeking to purchase. Banks and other institutions are expected to submit bids in a competition to sell bad loans and securities.

Executive compensation:

The legislation places restrictions on executive compensation for certain companies that sell assets to Treasury. If Treasury buys assets from a company directly — something it would do if a firm were failing — then no “golden parachute” exit payments could be made during the period when Treasury has an ownership stake in the firm. Companies that sell assets to Treasury through an auction process will be subject to some limits. Firms that sell more than $300 million of assets to Treasury won’t be allowed to make any new golden-parachute payments to top executives. A tax-deduction limit on compensation above $500,000 also will apply.

Equity stakes:

The legislation requires Treasury to receive warrants in companies that participate in the program. If a company sells its assets through an auction, Treasury will get a nominal amount of nonvoting warrants. If Treasury buys assets directly, it could get a majority equity stake.

Oversight:

The Troubled Asset Relief Fund will be overseen by a bipartisan congressional commission that will receive reports from Treasury every 30 days. The program will also be overseen by a board comprising the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission, the Housing and Urban Development Department and the Federal Housing Finance Agency.

The office of accountability will have an inspector-general office within Treasury.

Treasury will have to submit a written report to Congress no later than April 30 on the overall financial regulatory system and “its effectiveness at overseeing the participants in the financial markets, including the over-the-counter swaps market and government-sponsored enterprises” and recommend improvements.

Protecting taxpayers:

If after five years the government has a net loss, the president will be required to submit a legislative proposal to seek reimbursement from the financial institutions that participated.

Help for homeowners:

Treasury will buy mortgage-backed securities, mortgages and other assets secured by residential real estate. The legislation requires Treasury to use its position as the investor in those loans and securities to “encourage the servicers of the underlying mortgages” to help minimize foreclosures.

It also calls for Treasury to “identify opportunities” to acquire “classes of troubled assets” that will improve the ability of Treasury to help modify and restructure loans. The idea is that Treasury would be more patient with homeowners who have fallen behind on their payments than commercial lenders.

Insurance:

The bill would require Treasury to establish, alongside the asset-purchase plan, a program to insure mortgage-backed securities. Financial institutions that want to participate would essentially pay the government a fee and, in return, the government would insure their assets against any future losses.

Accounting:

The legislation would require the Securities and Exchange Commission to study so-called mark-to-market accounting standards, which require that firms reflect the market value of assets on their books. Such accounting has culminated in many financial institutions writing down big losses as the value of certain assets has fallen in price. The SEC would have to study the accounting rule’s effect on balance sheets and report to Congress within 90 days of its findings.

The bailout legislation (in .pdf format) can be accessed here.

Sources:

MarketWatch Video
MarketWatch, September 28, 2008

“Shape of Massive Bailout Bill Starts to Develop Definition”
Deborah Solomon
Wall Street Journal, September 29, 2008

Quotes For The Week

This week, the QFTW (plural!) have to do with the looming government bailout of Wall Street and the financial system:

It’s astonishing, devastating, and very harmful for America and American citizens. It means we’re in for the worst recession since World War II, as well as higher long-term interest rates, higher inflation, higher taxes, a weaker dollar and substantially lower stock prices.

-Jim Rogers, legendary investor and CEO of Rogers Holdings, in the September 22, 2008, issue of the New York Sun

CBS News found 21 former staffers from the Senate Banking, Housing and Urban Affairs and House Financial Services Committees are now lobbyists for financial firms. Their job? To lobby those in Congress who will shape the financial bailout. The former staffers now represent hedge funds, private equity firms, investment banks and the failed mortgage giants Fannie Mae and Freddie Mac.

-CBS News, September 26 2008

The bottom line is the Democrats want to give this money to the banks because most of it’s going to go to the large New York city banks, and those folks are generous supporters of the National Democratic Party, senators and congressmen running for re-election, and Barack Obama.

-Peter Morici, University of Maryland business professor and multiple-time winner of MarketWatch’s “Forecaster of the Month” award, September 28, 2008

You have the former Chairman of Goldman Sachs asking for 700 billion dollars, and in his initial request, asking for it in such an un-American way that I think he should have resigned. I think Paulson has terminally misunderstood the nature of the American system. Not just no review, no judicial review, no congressional accountability. Give me 700 billion dollars, 700 BILLION dollars! I’ll be glad to spend it for you. That’s a centralization of power that is totally un-American.

-Newt Gingrich, former Speaker of the House on ABC’s “This Week with George Stephanopoulos” roundtable, September 28, 2008