Debt Ceiling and Default

Quote from JSHINV:

It's a mess. Regardless what happens with the debt ceiling - the crisis with the banks isn't over.
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I agree. I'm one of the biggest small government types on this board, but even I would say that if we have decided that some banks were too big to fail, then WTF are they even bigger now?

One cannot pass laws and regulations to keep banks (or anyone else for that matter) from taking on so much risk that bad things happen. The system needs to be set up such that the people who take too much risk get it in the shorts when it blows up. Plans need to be in place for failures of "too big to fail" banks.

And moral hazard is averted if banks are no longer TBTF postbailout.

But splitting up TBTF means deflating the housing bubble, the markets and the economy. Which means losing elections, and above all else, we cannot have that!
 
Quote from JSHINV:

I agree for the most part. The banks primarily caused financial crisis - that includes Fannie and Freddie - mortgage lenders (of course millions who lied on their loan applications went along - with encouragement). The Fed and Treasury wouldn't and still won't, do anything without passing it by GS and the banks. We bailed out the banks - the big ones - many under 10.0 billion were closed and the large banks got their assets with nearly a complete guarantee of losses in loss sharing agreements where the big banks shared 5 percent of the losses and the government's share was was 95 percent of the loss. So now the same people that ran the big banks at the time of the melt down are still running the show. Private unregulated banking is stupid - a bank is a bank.

I am sure Freddie and Fannie are not fully disclosing their losses. Of course that is why the FED bought a bunch of Fannie's bonds, to hide the credit losses; but this is only one issue. A lot of the mortgages out their either securitized as CMOs or CDOs, portfolioed in financial institutions or held by any number of investors are ARMs. So when interest rates go up the mortgage payments go up. Nine percent "reported unemployment" and other economic pressures; a lot of those homeowners won't be able to afford it.

They should have let those large banks fail, have set up a liquidity system outside of the control of the so called "too big to fail" banks. Instead the Fed and Treasury ran to Goldman Sachs and the others and said "What should we do?" Well Goldman Sachs and the others told them what to do and they did it.

The FED has the power of appearance and the power to print money. They don't control long term rates the bond market does. Sooner or later this will be demonstrated clearly. Also, its out of bullets and lost a lot of its real power. When Volker was in - he had power and he used it. No FED chairman could act like Volker did now - different era back then.

It's a mess. Regardless what happens with the debt ceiling - the crisis with the banks isn't over.
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The shift from a creditor nation in Volcker's day, to the current status of US as world's largest debtor nation is the primary difference. Volcker acted to massively raise rates, because there was ample room to take that risk, and in the process brought gold under control. Today, there is zero room with rates already at rock-bottom with a gargantuan debt growing exponentially from the maniacs running the gov't. However, Bernanke is too eager to print and there is too much free money for gov't hacks and sycophants to game the system. It is systemic with rampant corruption. The time has come to clean house, but there is not enough fortuitude and integrity left, so the march to Rome continues unabated.
 
Quote from TGregg:

I agree. I'm one of the biggest small government types on this board, but even I would say that if we have decided that some banks were too big to fail, then WTF are they even bigger now?

One cannot pass laws and regulations to keep banks (or anyone else for that matter) from taking on so much risk that bad things happen. The system needs to be set up such that the people who take too much risk get it in the shorts when it blows up. Plans need to be in place for failures of "too big to fail" banks.

And moral hazard is averted if banks are no longer TBTF postbailout.

But splitting up TBTF means deflating the housing bubble, the markets and the economy. Which means losing elections, and above all else, we cannot have that!
More...

I think there are a few changes that could be made to lessen the systemic risk of TBTF firms, w/o bailing them out...

1) Require banks, and non-bank financials to hold more capital so firms can't leverage to the point where a %3 drop in their assets wipes them out. This tends to create a self-reinforcing downward spiral as firms sell assets to protect their capital, which pushes down prices and puts more pressure on their capital.

2) Make sure all standardized OTC derivatives are traded on a centralized exchange, with transparent clearing and margin/collateral rules/procedures. Maybe then firms like AIG wouldn't have sold billions of risky CDS for almost nothing.

3) Don't let banks get emergency funding from the fed, they should have to go to the inter-bank market. Make it known there will be no more bailouts of any type.

4) Firms need to stop using modern, statistical risk-measures like VAR. They overstate risk when the world is safe, and understate it when it is not. It creates a false sense of security.
 
Quote from TGregg:

The system needs to be set up such that the people who take too much risk get it in the shorts when it blows up. Plans need to be in place for failures of "too big to fail" banks.
More...

There is. But "they" didn't want the big banks to go through bankruptcy procedures like everyone else. There were financially-sound smaller and mid-size banks that could have taken up the slack and run things better--and they wouldn't lever up to the hilt and take the same kind of risks.

But now we have even fewer TBTF banks who are convinced they'll be bailed out again if they mess up...
 
Quote from MKTrader:

There is. But "they" didn't want the big banks to go through bankruptcy procedures like everyone else. There were financially-sound smaller and mid-size banks that could have taken up the slack and run things better--and they wouldn't lever up to the hilt and take the same kind of risks.

But now we have even fewer TBTF banks who are convinced they'll be bailed out again if they mess up...
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+1. Free markets are self-policing. Bankruptcy is the best regulator. Taxpayer-funded rescues only create moral hazard. And the subsequent patchwork of Government overseers are paid off by the industry groups they're charged to regulate. Which explains why TBTF still exists. Congress was bought off.
 
Quote from achilles28:

... Free markets are self-policing. ...
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In modern times, i.e., 20th century on, the evidence suggests that when they are allowed to self-police the result is not good. That idea, that free markets would self-correct excesses, was Greenspan's modus operandi and guiding light, and it did not end well. But to be fair, there were not truly free markets at that time, as capitalists, who by nature oppose free markets, were firmly in control.

The government has abandoned its proper function of protecting free markets in a capitalist economy, and is now the bedfellow with the very capitalists they must hold in check if there is to be free competition and free markets.

On the other hand, it is probably not correct to say that free markets will not self-correct excesses, and leave it at that. They undoubtedly will. But when? Twenty years, a hundred years? To the extent that markets are truly free the correction will come sooner rather than later. In the meantime there is an intermediate stage of increasing chaos until the correction finally arrives full tilt.
 
Quote from piezoe:

In modern times, i.e., 20th century on, the evidence suggests that when they are allowed to self-police the result is not good. That idea, that free markets would self-correct excesses, was Greenspan's modus operandi and guiding light, and it did not end well. But to be fair, there were not truly free markets at that time, as capitalists, who by nature oppose free markets, were firmly in control.

The government has abandoned its proper function of protecting free markets in a capitalist economy, and is now the bedfellow with the very capitalists they must hold in check if there is to be free competition and free markets.

On the other hand, it is probably not correct to say that free markets will not self-correct excesses, and leave it at that. They undoubtedly will. But when? Twenty years, a hundred years? To the extent that markets are truly free the correction will come sooner rather than later. In the meantime there is an intermediate stage of increasing chaos until the correction finally arrives full tilt.
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Total bunk about Greenspan. He wouldn't have even taken the job of Fed head and manipulated interest rates if he believed "self-correcting" was the way to go. The fact that he was once a Randian is immaterial. He was a pure establishment economist by the time he took that job.

How about the depression of 1921-1922? No stimulus, no FDR, the early Fed didn't get invovled. The gov't did basically nothing but tighten its belt and self-correcting worked beautifully. The same was true of every domestic depression before that (back when they correctly called them "depressions").

The Asian and Russian crises of 1997-1998 were largely left to self-correction and turned out much better than our TBTF, stimulate, regulate, new 2000+ page bills that don't address the real issues, etc.
 
Quote from MKTrader:

Total bunk about Greenspan. He wouldn't have even taken the job of Fed head and manipulated interest rates if he believed "self-correcting" was the way to go. The fact that he was once a Randian is immaterial. He was a pure establishment economist by the time he took that job.

How about the depression of 1921-1922? No stimulus, no FDR, the early Fed didn't get invovled. The gov't did basically nothing but tighten its belt and self-correcting worked beautifully. The same was true of every domestic depression before that (back when they correctly called them "depressions").

The Asian and Russian crises of 1997-1998 were largely left to self-correction and turned out much better than our TBTF, stimulate, regulate, new 2000+ page bills that don't address the real issues, etc.
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How could it be a depression if it lasted a year. This is different it is not based on liquidity it is insolvency and demographic.
 
Either way, the US is fucked. The House has the right Idea, with their bill however, the American People are not strong enough for the Freshman Republican Plan. Therefore, the Leaches, the scum sucking liberal citizens, free loaders et all, will force the Obama plan, as the media is already pushing the GANG OF 6 Propaganda hard..

S&P released another warning for a reason, the US WILL BE DOWN GRADED REGARDLESS IMHO. The Old School REPS and SCUM BAG LIBERALS are one in the SAME. They will not Cap, balance and cut.

Get ready for massive layoffs coming at the end of this quarter. Not in direct correlation with the AUGs dead line but to the fact that TAXES will be raised, Tax incentives will be done away with and the "PRODUCERS" will lay off.

Lay off announcements have already started.

We are going into the second phase of the DEPRESSION, or GREAT RECESSION. WALL STREET does not represent the "ECONOMY". WALL STREET is a joke and the volume is super thin.

Revolution is on the horizon.
 
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