While some of you may have been lining up to see Governor Palin, there were a couple of excellent interviews on the Sunday news shows (Meet The Press and Face The Nation) this morning with Henry Paulson, as well as Barney Frank and Senator Richard Shelby. The legislators are the respective chairmen of the House and Senate Banking and Finance Committees. Never was there a more clearcut example of the difference between someone who knew what he was talking about and elected people with a political agenda.

Paulson explained the immediate need for a large amount of bailout money to be provided to the Fed with very few strings and conditions. He explained that the need was immediate in order to stabilize the debt markets and avoid serious damage to the U.S. and world economy. He admitted that the request was distasteful, but better than the result if nothing was done. He said that the bailout funds were needed immediuately and there was no time to debate various limitations and amendments that members of Congress might like to see added. Shelby, at least, was fairly senatorial and thoughtful about his responsibility in satisfying this request. Barney Frank acted like a jerk, I thought. He wanted to tack stuff onto the bill like a $100 billion economic stimulus package and some limitations on executive compensation. Pretty clearly, Frank is going to hold Paulson's request hostage in order to get the extraneous things he wants tacked onto the bill. Talk about not being able to separate the fly**** from the pepper. Remember, it is Frank's committee that is supposed to provide oversight to U.S. banks and financial institutions.

To be fair, Frank's committee has no jurisdiction over the investment banks that failed--they are unregulated businesses.The same is true of Freddie and Fannie--the Congress itself has the responsibilty to regulate those two firms, which they refused to do with much intramural arguing and posturing for many years with the results we now all sadly know.

On Face The Nation, Bob Schieffer was the first journalist that I've heard address the issue of how we're going to pay for this huge bill. In the context of the presidential candidates who are running around and telling the voters who's going to cut taxes by how much, Schieffer asked Paulson whether in fact it would be necessary to raise taxes in order to pay for this huge expenditure. (By the way, I was wrong in my earlier post on another thread when I said that this bailout represents the same cost as one year of the Iraq War. I was really wrong. This bailout represents more than the cost of the entire Iraq War from it's beginnings in 2002.)

Paulson answered Schieffer's question like a person who had only a few months left before he'd be going out of office. First he said that the money would be used to buy up non-performing blocks of bad loans from banks which could later be traded and/or re-sold, with any proceeds coming back to the Treasury. He avoided any estimate of how much might come back to the Treasury, if anything at all. He distinguished between this plan and other government spending bills, like the earlier bailout of Bear Stearns, which was simply an expenditure of taxpayer funds to shore up a failing investment bank. But he did artfully dodge the question, admitting that the bailout plan would have a dramatic effect on the federal deficit and would effect the ability of our government to borrow money which would have to be dealt with by Congress in order to maintain the financial stability and fund the operation of the U.S. government.

Also, you may not gave picked up on the fact that the only two remaining investment banks, Goldman Sachs and Morgan Stanley were given the status of full-fledged commercial banks today. What this does is permit both firms to perform as commercial banks, but it also brings them under the regulatory authority of the Federal Reserve. Until now they have been unregulated and not subject to any regulation. While the referenced Wall Street Journal article doesn't say it, I'd be willing to bet that this is a classification that neither firm asked for or wanted. My guess is that both firms are threatened by their exposure to bad loans, but probably not mortally threatened as was Lehman, Merrill Lynch and Bear Stearns before them. I'd guess that they approached the Fed for some financial assistance and were told that they'd get it from the bailout plan, but only if they agreed to become subject to government regulation. I think this is really a good thing because it brings the last two major financial firms that could enter into businesses and transactions taking as much risk as they wanted to under the regulatory thumb of the Fed. The people that the bankers will be required to deal with from the Fed will certainly not be as smart as they are, will act in a deliberate manner, and will cause the bankers all kinds of frustrations while limiting risks they might otherwise want to take. This is a good thing in my opinion.

I think this move involving the only to remaining independent investment banks effectively brings the business of investment banking to an end along with the creation and trading of exotic financial instruments, unfettered risk-taking and the the payment of offensive amounts of money to everyone from partners down to junior investment bankers just out of college. The new classification of the two firms as well as Lehman, Merrill Lynch and Bear Stearns before them creates some very stringent capital requirements that will require the diversion of money which had been paid to partners and employees to the balance sheets of the firms as amounts capital required based on the riskyness of the businesses they want to be in. If any of the firms are not profitable enough to divert funds to satisfy regulatory capital requirements, they will simply have to dramatically cut back practicing the businesses deemed so risky as to require such capital retention. Here's the brief article...http://online.wsj.com/article/SB1222...ml?mod=testMod

Everyone interviewed today admitted that the proposed bailout is a stopgap measure and may not be enough. They also admitted that it may stem the unsettled capital markets, but that the underlying situation will almost certainly cause a year or two of zero or maybe negative U.S. economic growth. It was explained that as this effect wends its way thru our economy, it will almost certainly result in unexpected declines in corporate earnings and a deepening of the current recession and already serious correction to the equity markets. Sounds like a good time to be in really high quality fixed income securities and cash. The problem will be, of course, that the entire market will try to head in that direction and drive the price of high grade fixed income securities thru the roof, making it too late to effect such a reallocation.

In the meantime, our Presidential candidates are running around criticizing each other's character and telling the public how much they're going to cut taxes. Once the election is over, folks, get ready for reality. Don't accuse the winner of lying--they were both just selectively manipulating their opponent's words for the purpose of getting elected.

What a system!

Great post, Kahuna! I think so many people are focused on the election and not keeping up on the financial high wire act going on right now. Barney Frank is a hugh icon, IMHO, of exactly what is wrong with our government.My guess is, with the immensity of the financial crisis, we will be 2-3 full years of zero growth and we still aren't out of the immediate "financial woods". Paulson has his work cut out for him and as you said, Kahuna, "what a system"!!!!

Thanks for the post, Kahuna. As much as we may hate the bailout, the consequences of not bailing out these firms would be to dire to imagine. We are in for some scary financial times.
I keep hearing rumblings about military involvement in Iran and Russia. If you think our economy is in a tailspin now, add in the cost of military involvement in those two countries. I feel a deep sense of foreboding.

I think you're right, Sam. IMHO, Russia and Iran see the blood in the financial streets here and it's no small coincidence those vultures are circling the carcass.

Unfortunately, the current bailout legislation is quickly becoming a tool for additional billions in pet projects. Schumer(sp?) & Co in the Senate and scores of House members will attempt to add on their favorite welfare bills that could not and would not pass on their own.

They always add so much junk into these bills that the average person does not know what was voted on in the end. I vote they get body parts removed when they do this.

Originally Posted by Muncle

Unfortunately, the current bailout legislation is quickly becoming a tool for additional billions in pet projects. Schumer(sp?) & Co in the Senate and scores of House members will attempt to add on their favorite welfare bills that could not and would not pass on their own.

One of the big downsides of the financial crisis our leaders have gotten us into over the last decade or so (other than the effect on our own retirement portfolios) is the fact that as a nation we can't afford to enter into any more military engagements.

There is little doubt about that and the rest of the world knows it. We can't afford either the treasure or the lives it would take to initiate further military operations. As the result our ability to influence world affairs has been badly eroded. The only circumstance that I can imagine where we would initiate military operations would be if there was an attack on our homeland. Even then, we'd have to be very certain who it was that was doing the attacking before we'd send our military out to gain retribution.

Our political and business leaders can and should be blamed for getting us in this fix. WE should be blamed for a longstanding inattentiveness, letting them do this to us. I hope there's enough of a lesson here that in the next 60 or so days before the election we really concentrate on listening to and demanding a debate on the issues and not the endless and inane back-and-forth personal criticisms using parsed words and meaningless historical events and relationships.

Instead of participating in that chatter ourselves, can't we begin to demand the truth and some thoughtful debate, not just an exchange of campaign messages that the candidates' handlers think the electorate wants to hear? Continuing this presidential campaign at the same low level as it's been going is exactly what I mean by our INATTENTIVENESS!

That was my exact point, Kahuna. We are now extremely vulnerable as a nation and don't think our detractors haven't noticed. We as a nation are UNATTENTIVE! How do we engage people in real financial and political facts?
This financial mess was predicted over two years ago and no one paid attention. Impossible mortgage resets and massive overleveraging made it obvious that the situation was extremely unhealthy, financially. I pleaded with Mr. Peachie to get out of stocks at that time because of the info I had gleaned regarding the unsavory condition of the markets. He acquiesced in April '07 and we bailed, our broker was ticked. The situation is so tenuous now, that may not be enough for retirement funds. Dig deep people, the information is there but we need to do the homework.

Originally Posted by Villages Kahuna

Instead of participating in that chatter ourselves, can't we begin to demand the truth and some thoughtful debate, not just an exchange of campaign messages that the candidates' handlers think the electorate wants to hear? Continuing this presidential campaign at the same low level as it's been going is exactly what I mean by our INATTENTIVENESS!

So just let me know when you are all ready to march in the streets.

And if you don't think that Villagers marching would get a serious amount of media coverage, think again.

This is our problem now. We need to make it their problem. And no matter how comfortable our personal lives may have become, what are our children and grandchildren facing?

Should I be telling my granddaughter to look at colleges in Canada? She is pretty fluent in French already.

And if you think I am kidding about the marching, think again.

If I were down there now, we would be making signs.

Boomer

Originally Posted by Villages Kahuna

...

The only circumstance that I can imagine where we would initiate military operations would be if there was an attack on our homeland. Even then, we'd have to be very certain who it was that was doing the attacking before we'd send our military out to gain retribution.

...

I respectfully agree, but wonder if we share the same definition of attack on our homeland.

On any given day some part of the US is under attack. It can by blatantly obvious (e.g., Pearl Harbor, 9/11) or may be much more subtle (e.g., cyber-attacks against critical infrastructure or government systems). It can be an operation-in-plan but not fully executed.

The fact that CNN doesn't issue a news flash about it doesn't mean it's not happening, and very dedicated people defend us 24/7 on these fronts, and this defense needs to be exceptionally proactive rather than reactive, or the quantum of harm caused to US can get way out of hand. As technology has increased, so have the ways we have become more vulnerable and susceptible to attacks never considered or understood a decade or two ago. I expect the federal government to be on guard and responsive - proactively and reactively if too late to prevent.

Unfortunately, the Presidential election gets all the hype. I agree the level of inattentiveness is dumbfounding, especially regarding the House candidates who (during non-Presidential election years) run oftentimes unopposed, or no more than 20% of the electorate bothers to make the journey to the Polls.

I wonder how many people even know who their Representative in the US Congress is, on what committees the congressperson sits, what the person's voting records IN THE COMMITTEES is, have ever bothered to witness in person or via C-SPAN any of the committee meetings just to see whether the congressperson shows up at all or does anything while present?

The issues should not be somethings that hare just dusted off at Presidential election time and sound-bit to death, but actually followed. Anything less is really a measure of national apathy and "just let someone else worry about it - I'm too busy."

Maybe this will be the election that will get folks rattled enough to pay attention to Congress - who controls the money, the laws actually made, the committees who are supposed to fulfill an oversight role, and do something other than pat each other on the back.

I'll get the poster board and markers, Boomer.

But the sad fact is, many will opt not to deeply investigate our government, the lobbyist involvment and financial systems so the political rhetoric will continue as the people are lulled into "just "going along".

And another thing. . .re. that last post of mine about marching in the streets: Do not dismiss me as some old hippie. Not the case at all. (Sure looked like it could have been fun sometimes though.) During those days I was busy with my baby and also going to college. Oh, and Mr. Boomer was a Green Beret. Not exactly a hippie I guess.

What am I now?

I am one hacked off retired grandmother. But I still know how to make a little noise. I sure wish I were there in TV right now. All those retired people. Retired people as hacked off as I am no doubt.

Ohhhh, how I wish I were there. I know some of you would help me make those signs. And somebody would decide the place to meet. And somebody would call the newspapers and the television stations. And. . .

You know, I guess I had better shut up. Somebody may come to take me away. Oh well, nobody ever listens to me anyway. I know Alan Greenspan never did. Oh how I hollered at that man. I sure wish he had stuck with the saxophone. Genius is not all it's cracked up to be, is it.

Boomer

Peachie,

I just knew you would help.

Oh and all that stuff in my last post about not being dismissed as an old hippie. Well, I want to add that I really like old hippies and count a few of them among my friends. They own small businesses or do computer stuff now though. But I bet I could get them to help, too.

Oh well, I can dream I guess. And I had better let this thread get back to its serious and interesting discussion which I am actually reading as I wander in and out of the kitchen this morning.

As Thomas Paine said long ago, "These are the times that try men's souls."

. . .and women's souls, too, huh.

Boomer

AIG might end up saying "Thanks, but NO THANKS" to that government bailout.
I will LMAO if that happens....and I think they might be able to pull it off.

I might laugh but I wouldn't buy AIG stock. Isn't Ed Liddy the new, ah..hem, (cleaning this up...) "guru" there?