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US Economy

Here is a comparison of the final bill.

E.R. Campbell said:
But printing more money takes us back to another very unpleasant experience, the 1970s, doesn't it?

I absolutely agree but that is what is happening and it seems to be accelerating with the U.S.'s current policymakers and by extension to the G-7 central bankers.  We are all in this together although Canada maybe better positioned than most with debt load under control and falling, a nation of savers, and a country of resources.  The U.S. is probably in a much more vulnerable position now than the 1970's with little to no savings, equity tied up in illiquid assets that are falling in value, stock market in decline, energy prices rising, a large part of their manufacturing now outsourced to developing countries, and vulnerable to interest rate increases due to all their high debt loads.  Its worrying times if you are caught unprepared.

"Dollar Death Ray #1"
by Ned W. Schmidt, CFA, CEBS
Schmidt Management Company
September 26, 2008


Our graph this week is of the Dollar Death Ray, which is aimed directly at the value of the U.S. dollar. This plot is an extension of that which was introduced in last week's Gold Thoughts. In the graph is plotted the year-to-year change in Federal Reserve bank credit. In simplest terms, it is the rate of expansion of the asset side of Federal Reserve's balance sheet. Latest data was released Thursday, 25 September. In this case, it has been adjusted for a circular transaction created by Treasury supplemental financing of the Federal Reserve which was recently done. Federal Reserve bank credit, or U.S. base money, has now been expanded at a record level. Rarely, if ever, has a major central bank intentionally inflated its balance sheet in such an inflationary manner.

(see link for graph)

What the graph tells us is that the Federal Reserve has increased base money by about 20% from a year ago. This has been accomplished by the massive, more than $200 billion, financing of dubious assets held by U.S. banking system. Plan to bailout Wall Street will only exacerbate this development. While it does not translate directly into money supply growth, it gives a good picture of likely future trend.

If you turn it upside down, you get a picture of the future value of the U.S. dollar. A central bank cannot abandon all restraint in financing an economy without the currency losing value. As it is presented, the graph give a “forecast” for the price of $Gold. The bailout of Wall Street is being done with total disregard of the secondary and tertiary consequences. If you own paper assets instead of Gold, be prepared for the value of your wealth to deteriorate.

Here in a picture of that graph:


Just imagine turning it upside down to see the future value of the $(US)!
Just listening to ABC news. In addition to the 700 billion plan there was an additional 25 billion approved for the three big automakers. They had been asking for 50 billion. In the spring budget 25 billion was approved under the energy budget, but the government just approved the other 25 billion they wanted....no guarantees whatsoever.

Apparently there was 15 billion given to the airlines after Sept 11.....gee that was done quietly.

There are strings of course.

Under provisions of the new legislation, not only US carmakers are eligible for the guarantees but also suppliers and foreign automakers with plants in the United States that are more than 20 years old -- Nissan and Honda's US operations qualify.
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from yesterday’s Financial Times is what I think is a pretty fair and fairly ‘conservative’ reaction to the ‘bailout’:

Backing Paulson’s bank bail-out

Published: September 28 2008 20:07 | Last updated: September 28 2008 20:07

The good news is that, after much brinkmanship, agreement has arrived on the outlines of a bail-out plan for the troubled US financial system. The bad news remains the need for such a rescue. Self-evidently, big lessons have to be learnt from the scale of the calamity.

It is easy to sympathise with Republicans who oppose bail-outs on principle and Democrats who object to the generous treatment of those whose folly and greed created the current financial mess. But seizure of the credit system is now on the cards. That is not a danger a sane person should run.

This scheme is indeed imperfect, but it is also the only one on offer. A sufficiently large number of members of Congress, from both sides, seem to have recognised this grim reality. They have not given Hank Paulson, US Treasury secretary, the $700bn blank cheque he demanded so importunately. But he has got most of what he wanted.

According to the outline, more oversight will be exercised over the administration than Mr Paulson desired. The money is also to come in tranches, not all at once. The bill requires the government to use its role as owner of distressed mortgage-backed securities to slow the rate of home foreclosures. It also allows the government to take equity stakes in companies seeking assistance. Furthermore, the notion of providing insurance against losses on “toxic” mortgage-backed securities, favoured by Republican members of Congress, is included.

This then is a mishmash, inevitably so when an unpopular bill had to be put together in a hurry, so close to an election. But will the panic in money markets last week at least be alleviated by the scheme? The answer has to be: nobody knows; but it may not be, at least with the sums on offer.

It would almost certainly be cheaper and more effective for the government tofollow Warren Buffett’s lead in his remarkable deal with Goldman Sachs. Purchase of preference shares, on such terms, would recapitalise banks more effectively than Mr Paulson’s desire to buy tainted assets at above-market prices. It would also be more intrusive. But institutions needing a rescue should expect intrusion. It is a pity there was not much more intrusion in the run-up to the crisis.

Make no mistake: the need for the scheme is a disaster. But failing to produce any rescue would risk an even bigger one. This is not even the best plan, but it is the one on offer. It must be tried and modified if necessary. But regulation of this industry also needs to be reformed from top to bottom. Anything less would be the biggest scandal of all.

Copyright The Financial Times Limited 2008[/url]

The first of several steps is accomplished. According to recent reports the US House of Representatives voted 220-198 to move the bill forward towards a final vote.
E.R. Campbell said:
Well, according to this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, the bailout package is crafted, for better or for worse:


To see if it is working at its real goal: stopping the panic amongst too easily frightened ‘investors,’ watch the LIBOR numbers.

LIBOR = London Interbank Offered Rate; it is the rate of interest at which banks borrow funds from each other in the London interbank market. LIBOR is the primary benchmark for global short term interest rates. It is the basis for contracts on many of the world’s major futures and options exchanges and most Over the Counter and lending transactions.

The pain is spreading according to this article which is reproduced under the Fair Dealing provisions(§29) of the Copyright Act from today’s Globe and Mail:

Global money markets still frozen



September 29, 2008 at 8:59 AM EDT

LONDON — Global money markets remained frozen Monday, under severe stress as the government rescue of three European financial institutions overshadowed U.S. congressional agreement over a $700-billion (U.S.) financial stabilization plan.

London interbank offered rates for three-month euro funds and the premium for borrowing euros over anticipated official policy rates rose to their highest ever since the currency was launched almost a decade ago.

Against a backdrop of governments being forced to rescue Belgium's Fortis, Britain's Bradford & Bingley and Iceland's Glitnir, the European Central Bank and Bank of England joined Asian monetary authorities in pumping funds into their banking systems.

Dollar and sterling three-month Libor rates and spreads rose Monday too, while the broad deterioration in financial market sentiment pushed global equities sharply lower.

The latest wave of U.S. banking consolidation came Monday, when Federal authorities said Citigroup will acquire Wachovia Corp's banking operations. Shares in Wachovia had sunk as much as 60 per cent in early electronic trading Monday.

Central bank operations have partially succeeded in capping ultra short-dated money market rates closer to central bank targets. But the cost of borrowing beyond overnight, if term lending is being conducted at all, remains prohibitive.

“Financial institutions do not want to lend to each other amid doubts over counterparty risk,” said BNP Paribas strategists.

“There are increasing signs that the banks prefer to hoard cash, preventing liquidity from being recycled in the broader market. Overall, financial markets remain under more stress than at any time since the start of the crisis in August 2007.”

The three-month euro Libor rate hit its highest ever at 5.22250 per cen. The premium for borrowing those funds over anticipated central bank policy rates as measured by Overnight Index Swaps, the Libor/OIS spread, also hit a record, around 113 basis points.

Reflecting banks' bent to park cash in the safest haven possible rather than do business with each other, the European Central Bank said banks deposited a record €28.059-billion with the central bank Friday.

Interbank dollar funding remained scarce too as markets reacted cautiously to the news the U.S. Congress will this week vote on an amended version of the $700-billion stabilization plan put forward by Treasury Secretary Henry Paulson.

Dollars for ‘tomorrow/next day' delivery, straddling the crucial quarter end for accounting purposes, were indicated as high as 5.75 per cent.

Three-month dollar Libor jumped more than 12 basis points to 3.88250 per cen, and the Libor/OIS spread widened to around 220 basis points.

The closely-watched TED spread, or the difference between market-based dollar deposit rates and three-month U.S. government borrowing rates, was last quoted at the upper end of a wide range of around 280 to 440 basis points in London trade Monday.

That spread had ballooned to almost 500 basis points earlier this month, the widest in over a quarter of a century.

“It is important to note that the current levels of money market cash rates are rather symbolic and are not backed by real flows,” said Unicredit strategists in a note Monday.

And here, also reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site, is some reaction from some experts:

Holding the applause
David Berman,

David Berman has been writing about business and investing since 1995. He began his career at Canadian Business magazine, where he wrote full-length features on a range of topics, from goose slaughterers to broadcasters. Later, he moved to MoneySense magazine, where his emphasis turned to investing. More recently, he worked at the Financial Post as an investing writer and daily columnist. He has a bachelor of arts degree from the University of Toronto and studied journalism at Ryerson University.

Today at 10:16 AM EDT

The market's reaction to the U.S. bailout plan is hardly upbeat. The S&P 500 and the S&P/TSX composite index were both down 3.6 per cent in early trading on Monday – reflecting concerns that the plan isn't going to stabilize the world's financial system or unfreeze credit. Here are a few thoughts on the plan from three of the finest online voices, which should shed some light on why there is little applauding right now.

Nouriel Roubini, professor of economics, Stern School of Business at New York University: “The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.”

Barry Ritholtz, The Big Picture: “What the Fed, Treasury and SEC seems to fail to understand is that you CANNOT get a return to normalcy after a bubble – not until prices are allowed to fall to levels that bring in aggressive buyers. That is true for stocks, houses, and even financial institutions. The plan as it is currently constructed fails to recognize that Housing prices still remain elevated, more foreclosures are likely, and that another 10-20 per cent downside in real estate is quite likely.”

Paul Kedrosky, Infectious Greed: “If you're not already angry, feel free to get angry. Recognize, however, that while Wall Street was the credit drug dealer/developer, far too many among us were willing buyers of the pharmaceutical called easy money. I wish I felt confident that those days are gone forever, and the U.S. has turned a corner, but I don't.”

I suppose we can say that enthusiasm is restrained.
As of 1400 1415 Hrs (Eastern) the vote is failing has failed in the House of Representatives: 207 (Yea) vs 226 (Nay). Republicans are 2:1 against their president's plan - amended though it was by Nancy and her boys.

President George W Bush cannot command the loyalty of his own party, even when he runs about, à la Chicken Little, squawking about a falling sky.

At 1410: the stock indices are: TSX –870 and Dow30 -565. Those are HUGE expressions of lack of confidence in the US economy.

Is the sky falling? No. Is the US economy in trouble? Yes. Is Canada’s economy in trouble? Not as much as Canadian investors fear. Is the US political system working? Yes. Is it working well? No. Are things going to get better? Yes – eventually. Are things going to get worse? Yes – lots and soon.

Edited to insert situation at 1415 Hrs.
The dominos are continueing to fall

Citigroup buys Wachovia bank assets for $2.2B
As part of all-stock deal, Citi will acquire deposits, loans from nation's fourth largest bank. Citi also to raise $10B in stock sale, cuts dividend.
Last Updated: September 29, 2008: 1:53 PM ET
Article Link

NEW YORK (CNNMoney.com) -- Citigroup will acquire the banking operations of Wachovia for $2.2 billion in an all-stock deal announced Monday, following much speculation over the weekend about the fate of the nation's fourth-largest bank.

To help finance the transaction, Citigroup said it would raise $10 billion through a sale of common stock and announced it would slash its quarterly dividend yet again, cutting it in half to 16 cents a share to preserve capital.

As part of the deal, Citigroup will acquire Wachovia's massive deposit network, giving it more than $600 billion in deposits in the U.S., about a 9.8% market share, and broadening its presence in such key regions as the Southeast and the West.

At the same time, Citi will assume about $53 billion in the Wachovia's debt and take hold of the same loan portfolio that ultimately sank Wachovia in the end.

Of the more than $300 billion in loans it absorbs, Citigroup said it would cover up to $42 billion of losses on those loans, while the Federal Deposit Insurance Corporation will be on the hook for anything beyond that.

In exchange, the FDIC will get preferred stocks and warrants worth about $12 billion.

Banking regulators stressed that consumers who bank with Wachovia would not experience any interruption in service and that their deposits remained protected.

"Today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits," said FDIC Chairman Sheila Bair.

The FDIC noted that Wachovia did not
More on link
I hope there is a Plan B...

How about no bailout at all and let the market clear in a rapid fashion? Since incompetent congressional legislation (dating back to the late 1990's) caused the disaster, then I would suggest we don't let the Congress get involved again.
From a Fox News commentary:  http://foxforum.blogs.foxnews.com/2008/09/29/jpinkerton_0929/

I kinda like this:

September 29th, 2008 3:42 PM Eastern

No to the Bailout: We Can’t Let Bankers Try to Blackmail America

“You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

Today I turn over my space to Andrew Jackson, the seventh president of the United States, who said these fiery words to a delegation of bankers in 1832:

“Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

The issue back then was the Bank of the United States, a federally chartered institution—sort of a predecessor to the Federal Reserve—that Jackson, ever the populist, strongly opposed. Today, most people agree that a national bank is necessary, but as today’s vote demonstrates, there is no national consensus on transferring wealth from the middle to the top. Good! Let’s hope that principle holds true for a while longer.
Well, I tried to talk to the financial guy today, but he couldn't be located. He was later discovered curled up under his desk in the fetal position.........

I think that there is yet to be further fall out from the American markets, hopefully due to different regulations it won't affect us as badly here in Canada. Though I rather doubt this will be the case, as our economies are so intertwined.
I am philosophically inclined to the Jacksonian view to which muskrat89 referred: let the stupid and venal pay the price.

It will feel good, for a couple of billion small investors and it will be good for the global financial system if a few hundred bankers and CEOs are bankrupted – maybe even tossed in jail. There is no great harm in a few thousand of the over-paid thirtysomething traders being put on the street. Equally, those middle class Americans who, stupidly and greedily, used their home mortgages as under-secured ATMs deserve the pain they are about to feel, don’t they?

Of course I will feel a wee, tiny bit of regret about the job losses amongst the ordinary workers in the banks and financial services businesses and for the shoe salesmen and dry cleaning shop owners and the like, the folks who served all those now unemployed Wall Streeters and who, therefore, also have to start looking for new jobs.

Amongst those paying the price will be those ‘stupid’ enough to have signed up for the American Dream and who are now about to be homeless – those who bought houses they ought to have known they could not afford, just because some smart, well dressed lady in a mortgage broker’s office told them it was OK - not just OK, but certain to bring them the security of home ownership. Of course the workers in the home building industries – those who did nothing at all wrong – are also going to pay: there are almost no new homes being built. They are looking for new jobs – jobs that are harder and harder to find because there are too many people chasing too few jobs.

When fewer and fewer people have jobs they stop buying new cars, too. That means that people get laid off in Detroit and Oshawa and Osaka, too.

The market works; it is working, right now. It will, efficiently and effectively, rebalance itself. But the market is not famous for its social conscience or its kindness. When it corrects itself it requires that we all pay – perhaps with just some paper losses, perhaps with our jobs and savings.

Philosophically I’m inclined to let the market do its work in its own way. But I can afford that view. I’m retired – I have no job to lose; I have no mortgage; I have a sufficient pension; I don’t need to take any money out of my investment accounts right now, so my ‘losses’ are notional.

Not everyone can afford to be so philosophical. Those were the people President Bush and Hank Paulson were trying to help but those were the same people who said “No!” to bailing out Wall Street. Well, now they will reap what they sowed.

I got hit by the recession in the early nineties....when all these young 20-30 somethings were competeting  for the same jobs I was, I suddenly found ability and job loyalty don't always get you what you want. So in the space of 5 years, I renewed my electronics certification, became certified as a computer technician, then went on and became a computer programmer. If it had not been for the recession I wouldn't have put the effort out to change away from mechanical systems, but I was determined to not be put in that position again.

There were a lot of people exactly like me, doing exactly the same process.....they bettered themselves, increased their marketability, and busted their tails to get there. The cream (heh) rises to the top (or at least a little way up)

The coming recession in the US will have the same effect, except it will be massive and nowhere near as smooth.....
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is an article explaining the grassroots opposition to the bailout:

Wall Street bailout trips over grassroots


From Tuesday's Globe and Mail
September 29, 2008 at 9:44 PM EDT

Josh Ashley has never been involved in politics but last week he became so enraged at the prospect of the government spending that much money on a rescue package for Wall Street, he put together a local protest movement. His small group began sending e-mails to their Congressman, Jeff Miller, and organized a rally in front of his office last Friday.

Three days later, Mr. Ashley could barely contain his joy when he heard that the U.S. Congress had voted against a $700-billion (U.S.) bailout of Wall Street.

“I'm incredibly happy,” Mr. Ashley, 23, said from his office in Fort Walton Beach, Fla., where he works as an electrical engineer.

“We did everything we could to let our representative know that if he voted for it he would basically be fired.” Mr. Ashley's almost accidental transformation into political activist made him an unlikely ally is a mixed bag of protesters that ranged from conservative groups against big government to low-income families who want mortgage relief. Combined, they became powerful enough to turn the tide against the high-pressure vote.

Even some long-time lobbyists were stunned by the effectiveness of the grass-roots opposition to the bailout. “It was just incredibly heavy,” said Pete Sepp, of the National Taxpayers Union, or NTU, referring to the phone calls and e-mails that poured into congressional offices in recent days.

Mr. Sepp said he has never seen such a fast and furious public reaction to a piece of legislation in his 20 years on Capitol Hill. “This opposition effort built upon itself in the space of a few days, which is pretty incredible.”

Mr. Miller, who voted against the bailout, said he has never seen such public outrage against a piece of legislation in his seven years in Congress. His office received more than 1,000 telephone calls in the past few days urging him to reject the legislation. Some of his colleagues were getting as many as 2,000 e-mails and calls a day, many reading simply: “NO BAILOUT.”

“These were not your typical calls that were generated by special interest groups,” Mr. Miller, a Republican, said from his Washington office shortly after yesterday's vote. “This was Main Street America saying ‘No.' ”

Treasury Secretary Henry Paulson and Federal Reserve Board chairman Ben Bernanke badly misread the public and made things worse with their comments, Mr. Miller said.

“That's part of the problem. I don't think that the top banking regulator in the United States of America needs to be running around like Chicken Little saying the sky is falling. Yes, there is a problem, but there is a way to work through this issue without a massive government intervention at the federal level,” he said.

Mr. Paulson and congressional leaders said after the vote – which was 228 to 205 – that they will try to introduce new legislation. But Mr. Miller said he doubted a new bill will pass. “I think in order to get this bill passed the requirement of taxpayer money is going to have to be minimized to a greater extent,” he said. “If they think [public outrage] was loud in the last couple of days, it will be 10 times that over the coming weeks.”

Mr. Sepp, whose organization opposed the legislation, said it usually takes several weeks to generate any public reaction to a government proposal. Not this time. By Sunday NTU officials were hearing that so many calls were coming into congressional offices, the switchboard became overloaded.

Some others blamed President George Bush and senior administration officials for not properly explaining the bailout. “The plan wasn't well marketed, in part because it was put together quickly,” said Mark Zandi, senior economist at research firm Moody's Economy.com. “What people know about the plan is that its going to cost $700-billion, and the population firmly believes that's going to line the pockets of the people who caused this. The sad thing is, that's just the furthest thing from the truth.”

Mr. Zandi said he still expects a revised version of the bill to pass, but if that doesn't happen, “Worst-case scenario is they don't do anything, and the stock market continues to slide, the money markets remain in a deep freeze and layoffs will begin imminently, within the next three weeks, and we'll have a very severe recession. Unemployment could rise into the double digits.”

It wasn't just conservative groups leading local efforts against the bailout. Darlene Battle, who works with low income families in Wilmington, Del., brought a busload of people to Washington last week to oppose the bill. Many of them were about to lose their homes through foreclosure. “All weekend, we've been getting people to call Congress,” said Ms. Battle who runs the local chapter of the Association of Community Organizations. “We organize low and moderate income families. It's those middle class income families that are going to suffer.”

Ms. Battle said she was happy the legislation was defeated and she hopes it will force politicians to re-think their approach and address the underlying problems in the housing market. Referring to Wall Street financial institutions, she added: “We don't want them to get a free pass.”

With files from Lori McLeod

It isn’t ‘just’ ordinary Americans who oppose the bailout. Some pretty smart economists also think that the only effective way – and the most efficient way – to solve the crisis is to let the market sort itself out in its own (often cruel) way.