Friday, September 26, 2008
the andromeda strain
i was struck today on reading the news that we are living something of an analog of that story.
the killer fell in the form of debt, and the lethal pathogen of deleveraging is now airborne and slaughtering the unwary. contagion is rife -- and the gory deaths of lehman brothers and now washington mutual are sure to spread the disease. why? bondholders -- heretofore held to be the saved -- were annihiliated in both deals. on lehman, read yves smith; on wamu, the financial times -- but the story is the same. there wasn't nearly enough left in the pot to cover even senior debtholders of either company. this is NOT how these companies have represented themselves in financial reporting up until now -- liquidation has revealed that they were not even nearly solvent in a crisis for which many of their assets are simply no bid.
and this does much to explain interbank lending, which is effectively dead at this time. libor quotes notwithstanding -- no one is lending anyone anything at libor. market rates have become a false price signal as liquidity has gone. the magnitude of draws upon central banks has gone far beyond anything intended, and there is effectively no way now to reduce or even threaten to reduce aid to banks without sparking catastrophe.
most importantly, contagion has now spread to the public. wamu was done in not by its asset side -- again, that's a slow motion problem -- but by its liability side. in a replay of northern rock, a depositor run of $17bn this week killed the bank. everyman is now awake to the creeping death, and more bank runs should be expected -- along with exceptional authoritarian pleas for calm.
amidst growing carnage -- much of it still invisible to everyman, hidden as it is in the unseen credit markets -- the equivalent of debilitating mechanical lasers designed for our own protection have arrived right on cue. i am no fan of the paulson plan -- listen to robert shiller or read accrued interest -- but SOMETHING must be done now if anything is ever to be done. tim duy:
The US economy is limping through the second half of the year as the impact of this summer’s stimulus checks fades. The continued weakness, I suspect, will come as a shock to the public, who have now been essentially promised that their problems will be solved with a bailout package they really don’t understand to begin with for the financial sector they view as arrogant aggregators of wealth. But any bailout will only prevent a financial meltdown that threatens to deepen the credit crunch and worsen the ongoing slowdown, not reverse the current weakness. I doubt, however, the general public sees that distinction. And they are not likely to be convinced; this Administration sacrificed its credibility long ago. Instead, the public will see billions channeled into Wall Street as the unemployment rate climbs. And climb it will.
... My hope is that a bailout is coming. But it will not change the path the economy is already on, it will only prevent activity from shifting to a new, less desirable path. I don’t quite see how the billions of dollars plowed into this program will be funneled to households. I see instead it will only cushion the process of deleveraging, and thus minimize the quantity of resources stripped from the economy. This is important and necessary, but will not provide a miracle cure for the economy’s travails....
that has not stopped misguided and ill-informed house republicans -- apparently in a final bid to destroy the republican party once and for all -- from trying to pull the plug on the compromise paulson-dodd plan. again duy:
With the bailout package currently in doubt, however, my worry is that credit markets will collapse Friday morning. Under these circumstances, the Fed would likely be forced into cutting interest rates in an intermeeting move. With Congress nipping at their heels over their handling of the crisis to date, and Republicans undermining the bailout package, monetary policymakers may simply be out of other tricks.
all this with the encouragement of senator john mccain, whose failing white house bid -- sinking under the weight of the obviously incompetent and increasingly exposed sarah palin and tarred by the popular association of republicans with wall street -- is now desperately in need of radical populist action. mccain ostentatiously "suspended" his campaign (har har) to return to washington with the specific intention of railroading the bill, it would seem. idiocy and short-run self-interest run deep in the back benches, and a desperate candidate is levering that into risking the american economy in his bid for power. politico:
Although John McCain hasn’t said whether he supports the bipartisan, bicameral compromise struck earlier in the day Thursday, one of his leading Senate surrogates – Lindsey Graham of South Carolina – said Thursday night that McCain joined House Republicans in opposing that proposal.
... According to one GOP lawmaker, some House Republicans are saying privately that they’d rather “let the markets crash” than sign on to a massive bailout.
“For the sake of the altar of the free market system, do you accept a Great Depression?” the member asked.
it's a final curse from dimwitted and quite mad free market fundamentalists, if it comes to pass, whose drive to deregulate over the last twenty-eight years has been the primary facilitation of this crisis. total collapse is far from certain, but i imagine few if any of the house republicans truly understand either what is taking place or how quickly their impetuousness could spiral out of control.
i still expect something will come from congress -- even if the president has to lock house minority leader john boehner into a wire cage in guantanamo bay to get it done.
so if we are reliving the plot of the andromeda strain, perhaps hank paulson is now desperately trying to escape the lethal force of house republicans run amok in an effort to communicate a (hopeful) cure to the outside world before contagion annihilates the world as we know it.
but in the real world we don't know the outcome of the plot. the white house is pushing buttons and making threats to get a deal done. president bush:
"There are disagreements over aspects of the rescue plan," he said, "but there is no disagreement that something substantial must be done. We are going to get a package passed."
i hope so, mr. president, but in the meantime i'll simply wish i were a newborn baby or an old drunk.