Home > Economic policy > The smartest guy in the room?

The smartest guy in the room?

September 24th, 2008

One thing that really puzzles me about the great bailout plan is the almost universal acceptance that Paulson should be the one to run it, at least until the next Administration. More generally, I’m surprised by the kid-glove treatment he’s been getting in public discussion, even from people highly critical of the plan.

Let’s stipulate that he’s a smart guy. He wouldn’t have risen to the top in Wall Street if he wasn’t. And, of course, if having smart guys running the show was sufficient to ensure good outcomes, Wall Street wouldn’t be in its current mess.

Looking back at the record, plenty of people have observed that, at least in his public statements, Paulson repeatedly underestimated the severity of the crisis. And there’s nothing in the ad hoc shifts between cash infusions, bailouts and bankruptcies to suggest that he has much more of an understanding of what’s going on than anyone else. As Paul Krugman has said, he’s making it up as he goes along, just like the rest of us.

But the bailout plan is something else. The possibility of a meltdown like this has been talked about, increasingly seriously, for the last couple of years. Yet Paulson responds with a three page document saying “I need $700 billion, no questions asked”. Wasn’t there a contingency plan? Or worse still, was this the contingency plan?

Either way, Paulson should be sacked forthwith.

Categories: Economic policy Tags:
  1. Spiros
    September 24th, 2008 at 23:06 | #1

    “Either way, Paulson should be sacked forthwith.”

    That might spook the markets a bit, don’t you think? They are jittery enough as it is.

    There’s going to be a new president elected in 6 weeks. Paulson’s career in government is as good as over in any case.

    Paulson is advised by the US treasury. But it is not like the Australian Treaury or the British Treasury. It is not full of the best and the brightest minds. They are in Wall Street and Silicon Valley where they can make in a few days what US civil servants make in a year. The US Treasury is staffed by mediocre people who would be right at home in say an Australian state departmwnt of industry. It’s too much to expect that the US Treasury would be able to think of a way out of the worst financial crisis in 75 years.

  2. observa
    September 24th, 2008 at 23:08 | #2

    Personally, I’d be more worried about those New South Welshmen calling in the central bankers-

    “Former Reserve Bank governors Bernie Fraser and Ian Macfarlane have been called in to help the NSW government deal with the global economic downturn.

    Premier Nathan Rees said both men would report directly to cabinet and would be given full access to Treasury briefings until the current economic conditions stabilised.

    “NSW is not immune from the global economic downturn. We need to do everything in our power to ensure we are well placed to ride out the storm,” Mr Rees said.

    “In these uncertain times, forewarned is forearmed.

    “Mr Fraser and Mr Macfarlane are two of the finest economic minds in this country.”

    Both men will examine the impact of the global economic downturn on the state’s economic growth, employment and investment as well as also examine ways to encourage business investment in NSW.

    Mr Fraser served as the governor of the Reserve Bank from 1989 until 1996, when he was replaced by Mr Macfarlane, who held the position until 2006.”

    Why is it I get the distinct feeling those fast lane Sydneysiders are about to get their wings clipped severely. Serve those Eastern carpet-baggers right for nicking all our water and mocking we prudent, churchy types. Got some more bad news for them. We’ve got lots of urainiumyumyum now, among other precious dirt and you have to stop burning all that yukky black stuff now cos Ross and Kevvy say so. Now we’re building a desal plant that runs on cowfarts or similar, so we don’t need you and your central bankers anymore. Nyar! Nyar!

  3. Interdictor
    September 24th, 2008 at 23:16 | #3

    Maybe Congress is smarter than Paulson?

  4. SJ
    September 24th, 2008 at 23:28 | #4

    It’s Bush and his Republican backers over-reaching again. Bush has been relatively quiet for the past few weeks, but in the last couple of days he’s been mouthing off again.

    That means that they think things have already been stabilised, so it’s time for a bit more theft.

    The Democrats are way too corrupt to put up any real opposition, so it’ll go ahead and damn the consequences.

    The US has seemed determined to turn itself into a third world backwater for quite some time now. The sooner it happens, the better for the rest of us.

  5. tin tin
    September 24th, 2008 at 23:47 | #5

    Sack Paulson? Absolutely! But don’t stop there. Sack Bernanke and the entire Federal Reserve board too. The current crisis could not have occurred without an excess of credit. Who set the price of credit? It wasn’t the market. It was the Fed.

  6. Bingo Bango Boingo
    September 24th, 2008 at 23:47 | #6

    jquggin, so even though both Paulson and ‘the rest of us’ are making it up as we go along, we should choose one of ‘the rest of us’ to replace Paulson, so that one of ‘the rest of us’ can make it up as we go along, just like Paulson is already doing (according to you). What’s the point again?

    BBB

  7. observa
    September 24th, 2008 at 23:54 | #7

    No point at all BBB which is why everyone will be happy to leave it all to Paulson. Who else wants the resonsibility now for chrissakes?

  8. tin tin
    September 24th, 2008 at 23:56 | #8

    Paulson isn’t the only government official who was slow to see the severity of the current crisis. Here’s what Bernanke had to say in May last year
    “the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.�

    Could he have been more wrong? I doubt it.

    http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm

  9. observa
    September 25th, 2008 at 00:03 | #9

    Yes things are really happening for Edward Gibbon Wakefield’s freemen again(well now we’ve paid off the last State Bank credit debacle)-

    ‘A NEW poll which shows Premier Mike Rann is in deep trouble with voters is “encouraging”, Opposition Leader Martin Hamilton-Smith says.

    The Liberals Leader said today’s Newspoll published in The Australian newspaper, which showed the ALP’s primary vote has been overtaken by that of the state Liberals, indicated people “see an alternative”.’

    And for those who pooh poohed the ‘rust bucket’ state, we’re doing our bit for global warming-

    ‘BHP BILLITON, the world’s largest mining company, is positioning itself to supply China with uranium for “decades” as the country ramps up its nuclear plant program in a carbon conscious world.

    Chief executive Marius Kloppers said nuclear energy would play a “bigger role” in China going forward and the country was “gearing up” for a bigger build program as it developed its nuclear program.

    “That will take a couple of years, but clearly we are positioning the company to, from our side, participate in that over decades, not just a couple of years,” Mr Kloppers said in a DVD sent to shareholders.

    BHP Billiton holds the largest known uranium deposit at its Olympic Dam mine in South Australia, which is about 560 kilometres north of Adelaide.

    “If the world is serious about cutting carbon emissions, then you cannot have a debate without the nuclear piece in that debate, because it is the most efficient way to cut carbon emissions,” chairman Don Argus added.

    The company supplies uranium to utility customers in the United Kingdom, France, Sweden, Finland, Belgium, Japan, South Korea, Taiwan, Canada and the United States.’

    Hmmm.. might even be a nuclear power station on the drawing board in time for the next election to really wipe the boards and then we could ‘succede’ along with the Sandgropers, from those horrid Labor ‘coal-bucket’ states. They can try and scrape by on more carbon credit and those central bankers by the looks of things. Might even invite the Israelis over for a chat about a decent wall for our new republic.

  10. observa
    September 25th, 2008 at 00:59 | #10

    Turning to those deadly serious international perturbations, it is important to have serious ‘reservations’ about the Paulson plan whilst deferring to Paulson naturally. That way if it works but with obvious consequences you can say well it was the only option in a crisis whereas if it doesn’t it was obviously all Paulson’s fault and he can join Adolf, Guy Fawkes, Saddam, Howard, etc.

    The usual suspects are petitioning of course-
    http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

    And don’t you just love the gist of it-

    ‘As economists, we want to express to Congress our great concern .. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action..

    yada, yada, yada, yada, etc

    For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider….’

    Yeah right, thanks for your input guys

  11. Donald Oats
    September 25th, 2008 at 01:12 | #11

    Why is $700 Billion USD required, rather than say $150 Billion? That is the question just asked by congress.

    Bernanke’s answer should have been that $700 Billion USD is what is required to bail out his mate’s institutions, so that he can call in the favour post election, and continue gainful employment in the discipline that he knows best.

    Too cynical :-)

    More seriously, shouldn’t they let the firesale of distressed assets go through so that the assets can be put to productive use by those willing to risk it? It would be ugly that’s for sure, but this alternative that Bernanke and Paulson have sketched out (as I type this) seems destined to perpetuate the behaviours that led to the mess in the first place. That will just mean that another trillion or so of national debt is created, only to be thrown into the black hole.

    Besides, where in the plan do they consider how to help out the community banks, the state banks, etc? Too large to fail or too small to bail, that seems to be the dichotomy set by Bernanke and Paulson.

  12. sean
    September 25th, 2008 at 06:05 | #12

    I think this is a good explaination of the issue.

    This is how is worked, FM @ FM to placate Washington started taking in dodgy loans, then selling them on to Wall street (cds ect)

    Sovereign wealth funds with plenty of cash, sent more and more cash to wall street in the belief that these were government backed loans underpinning the investments.

    This combination IS the black swan.

    And who did not regulate the 2 F@M,s was that Wall Street or Washington? And which side of the divide tried to do something about it?

    So you have Wall st making megabucks, Paying mega taxes to Washington, delivering cheap mortgages to Voters, and (they thought) delivering a great investment opportunity to Asia, Russia and Mid East. (have anybody noticed what has been going on in Russia lately?)

    And underpinned my some alchemy maths from Princeton ect, again not spotted by Washington or the worlds great and good.

    All roads lead to Washington Folks. Of course they are going to send the cash, its their Pish up.

  13. MH
    September 25th, 2008 at 06:55 | #13

    Krugman also drew his readers attention to a nifty little section of the proposed bill submitted by Paulson that provided for no oversight or judicial review by any body of the act or its application which provides the powers and the authority for the largess to Wall St. The audacity and disregard of this administration to due process, rule of law and democratic oversight is incredible. Vidal was right, the Republic is dead, the whole process is now corrupted beyond the point of no return. The current elections will be perverted and Obama is a dead man walking.

  14. NR
    September 25th, 2008 at 07:28 | #14

    sean, care to explain what you have noticed happening in Russia lately? More specifically from your travels and first hand experiences.

    Not from your ‘informative’ FOX News.

  15. Donald Oats
    September 25th, 2008 at 08:04 | #15

    A blogger (“Wilt”) elsewhere drew attention to this article – http://www.dailykos.com/storyonly/2008/9/21/9322/74248 – in which the various repeals of existing acts, or parts thereof, set the US on the path it followed with gusto. Rather puts the history behind the current debacle in stark relief.

    Regards,

    Don.

  16. jquiggin
    September 25th, 2008 at 09:25 | #16

    BBB & Observa, perhaps if you’d read the para immediately after the one you quoted, you’d get the point. But after eight years of Bush, an inability to see the obvious is an essential precondition for remaining on the political right.

  17. Bingo Bango Boingo
    September 25th, 2008 at 10:54 | #17

    OK, fair enough jquiggin. So let’s flesh this out. You’ve at least conceded – as I thought you ought to – that a replacement wouldn’t have been warranted prior to the $700 billion bailout proposal; the latest events are ‘something else’ in relation to which the ‘rest of us’ would not be making this up as we go along, whereas beforehand we were all in the same boat.

    So if we’re going to sack Paulson on the basis of incompetence, we at least need a credible alternative package from one of ‘the rest of us’ by which to judge his latest action. I mean, if you can’t say: ‘he should be doing this’, etc, how can you say ‘what he is doing is stupid’? So what would a competent person have done instead of propose this latest package? Serious question. I have seen some alternatives elsewhere, but you’re the one who’s proposing his dismissal, so it’s incumbent upon you to back that up with some meat, I think.

    And this is wrong, isn’t it: “Yet Paulson responds with a three page document saying “I need $700 billion, no questions askedâ€?. The bill authorises the investment of up to $700 billion in a particular kind of asset only. The spending options are limited. I have no idea whether it’s a good idea – perhaps it’s not – but we should at least be describing it properly.

    As for Bush and remaining on the political right, I can’t let a foreign government dictate my political preferences. I think I’ve mentioned elsewhere that I’m broadly opposed to the Republican ‘big-government conservatism’ programme (the worst of both worlds). I suppose it’s kind of like when foreign left-wing governments kill people and then professors remain on the political left and the ALP and Greens still gets votes in Oz elections. Weird, huh?

    BBB

  18. September 25th, 2008 at 11:19 | #18

    Before Homer gets here – observa – so BHP Billiton is going like the Kloppers?

  19. observa
    September 25th, 2008 at 11:19 | #19

    Nobody comes out of this like Ceasar’s wife John. Fundamentally central bankers across the globe had a monopoly on fiat money creation and that didn’t mean creating Monopoly money. As sean points out the ponzi scheme suited ‘everyone’ at the time, although blind freddy could see it couldn’t last. It was the baby boomer structural demographic that fooled many into believing it could after such a prolonged run. It is the length and breadth of it that is the problem now and we can’t blame Paulson for wanting total power and an indemnity from liability, if he’s to be the ultimate whipping boy, as is likely.

    It’s no good talking about orderly bankruptcy and deleveraging now under the circumstances. That’s a bit like orderly insurance and emergency services. Fine if a burst water main floods a street full of punters, but useless with a Katrina bearing down on a New Orleans and the height of the levees suddenly appears to be less than desirable. That’s essentially Paulson’s big worry now.

    Deliberately targetting inflation at 2-3% has caused this crisis and we all need to understand that going forward. We all need redeemable currency to promote transparent real savings and investment and taxation. There are too many elites with a vested interest in the other nonsense as we’ve all seen by their past activity. That’s the real crisis staring us all in the face now. We can have incorruptible money but we’ll need to keep as much of it as possible to ourselves to avoid all the carpet-baggers that want to siphon it off for themselves and their mates. They come in different guises but their spin and angle is timeless, albeit a lot more sophisticated nowadays.

  20. David
    September 25th, 2008 at 11:19 | #20

    > … an inability to see the obvious is an essential precondition for remaining on the political right.

    Harsh but fair, Prof Q.

  21. sean
    September 25th, 2008 at 11:31 | #21

    Nr, tx for the advice, was in st.petersberg in the mid summer…24 hour dalight and the venice of the north,grt, if you get the chance?

    btw, I dont take the post modernist position of blocking out arguments because they dont fit the paradigm.

    tip, follow the cash super cycle, oh yes keep politicos and their stupid inventions out of the market place plz. And look up “illusion of control” while you are @ it.

    Ill let you get on with your self reinforceing theories,

  22. September 25th, 2008 at 11:41 | #22

    this talk about what to do now is mis-directed. the immediate future should be spent hanging the first hundred pollies we can catch inside the beltway.

    only then will we get a good answer to: “what should be done?” it will probably be “liquidate another thousand, and ask again.”

  23. observa
    September 25th, 2008 at 11:54 | #23

    Well it’s official-

    ‘US President George W. Bush has said the “entire economy is in danger,” in a rare television address to the public on the economic crisis.
    “We are in the midst of a serious financial crisis,” he said from the White House a day before hosting unprecedented crisis talks.

    “There’s been a widepsread loss of confidence,” he said.

    Major sectors of the financial system were at risk of shutting down, Mr Bush said.

    He warned the market was “not functioning properly,” and more banks could fail, threatening to send the US economy into recession.

    “We must not let this happen,” Mr Bush said.

    Democratic Presidential candidate Barack Obama and his Republican counterpart John McCain will join Mr Bush in economic crisis talks at the White House tomorrow, a spokesperson said.’

    Definitely time to call a meeting of concerned taxeaters by the looks of things.

  24. Bingo Bango Boingo
    September 25th, 2008 at 12:03 | #24

    Too right, observa.

    To paraphrase an obscure Scotsman: bureaucrats and politicians seldom meet together but when they do it ends in a conspiracy against the public. So a powerful executive branch and its bureaucrats yelling ‘crisis’! and apparently about to screw things up? Colour me deeply unsurprised.

    BBB

  25. pablo
    September 25th, 2008 at 13:35 | #25

    I’m intrigued by the Paulson-Bernanke relationship, my guess being that the latter lends a lot of gravitas to what appears Treasury’s outrageous ($700b no strings) demand. I doubt Paulson would get off the grid without the FR’s wholesale support. Has Paulson, and of course, Bernanke played a bit of political poker by requesting twice…three times the amount they, one or both feel is their bottom line?

  26. Hal9000
    September 25th, 2008 at 14:21 | #26

    There seems to be much discussion about whether or not Paulson should be sacked for incompetence. Surely the main issue is that, as a holder of Goldman Sachs stocks and options estimated to be worth $700 million at last month’s prices, he should be sacked for his appalling conflict of interests in this matter: the blank cheque he’s asking the US congress to sign will directly benefit himself.

  27. sean
    September 25th, 2008 at 15:10 | #27

    Super Credit Cycle Productions (Beijing) in association with Elephant in the Room Productions (Singapore) Proudly Presents
    Credit Quake for Dummies
    American Edition

    (Progressive people are advised to consult a social scientist before and after reading, details of support groups are available on request.)

    In short,
    BIG GOVERNMENT (allowed and encouraged its ) Quangos to sell faulty goods (Mortgage Bonds) to BIG BUSINESS

    Unabridged,
    BIG GOVERNMENT (that’s US Federal government inc all branches , President, Congress etc. which share power in the US system)
    Allowed and encouraged (policy aim of boosting home ownership in lower income groups particularly ethnic groups thus lowering the criteria for these groups to obtain loans)

    Quangos (these are state sponsored and “regulated” companies that in effect supply wholesale mortgages) THESE LOANS WHERE AND ARE UNDERWRITTEN BY THE US GOVERNMENT

    MORTGAGE BONDS (these mortgages where bundled up in order to reduce risk with better standards mortgages, and sold as bonds, the model they used was developed by noble prize winning economists using Maths to claim that the future could be accounted for) THESE ARE THE FAULTY GOODS.

    BIG BUSINESS (bought these, turned them into other products such as derivatives, raised more money to buy more as the US government was underwriting them at source, which brought more and more money into the market place, bringing more cheap loans to people and big profits for them, which resulted in big salaries and bonuses and BIG taxes for BIG GOVERNMENT, after all these are apparently AAA investments.)

    Big Business was also using the same kind of computer models that claimed to reduce risk and spot hazards, which it tuned out was based on the last few years which is not much good with a claimed one in a hundred year event, a bit like driving only using your rear view mirror, and you know how easy that is, especially for Nobel prize winning economists?)

    So who’s to blame? I think that is easy unless you are a economist.

    But look on the bright side, even with a half trillion bailout, the US Government owes for less than its European Cousins.

    COMING SOON, at A BIG GOVERNMENT near you, CARBON CREDIT SHOCK. (and you will be at the end)
    From award winning Straight Jacket Productions, and multi-award winning economist Sir Nicholas Stern, using the very same super computers and super mathematical models, CARBON CREDITS, start saving now its going to be an even bigger big government production, rest assured.

    Note, Investments can go down as well as up, Your life, and future Home, Happiness, and Health depend on YOU understanding what the government is doing in your name.

  28. Ian Gould
    September 25th, 2008 at 15:37 | #28

    “(policy aim of boosting home ownership in lower income groups particularly ethnic groups thus lowering the criteria for these groups to obtain loans)”

    The vast majority of the loans currently in default had nothing to do with the Community Reinvestment Act but let’s not let facts get in the way of the all-important task of blaming the pinkos and the darkies.

  29. Jill Rush
    September 25th, 2008 at 16:57 | #29

    Even without knowing the details of the proposal a three page document for $700 Billion is staggering. Whilst politicians like the one page brief and this one is three times as long, the lack of detail on a document which must be basically, “trust that I have thought this through and got it right” is staggering. It wouldn’t even be long enough to show where the money would go, and that it also asks for no checks and balances is why it is in trouble.

    The three pages should have been the executive summary for a document which outlines where the economy has been, where it is now and where the economy should travel and how it would operate in practice.

    For those experienced in this field it does show a level of incompetence which would result in a sacking in the real world. I don’t know who would be better to do the job as asked by several contributors – but then that is not my job. There are bound to be any number of people in authority who know individuals who are not only smart but ethical and who could come in as a consultant to establish an acceptable plan with tight time frames.

    There is no point in adopting a stupid plan because action is required. After all the theory is that the market should be allowed to find its own level.

  30. Katz
    September 25th, 2008 at 17:45 | #30

    Only George W. Bush can sack Paulson for incompetence.

    *pause to allow the tragi-comic aspects of this statement to manifest themselves*

    That is all.

  31. TerjeP (say tay-a)
    September 25th, 2008 at 17:54 | #31

    The comment by tin tin reminded me of this classic video starring a Glenn Hubbard look alike:-

    Perhaps they should give Ben Bernankes job to Glenn Hubbard. ;-)

    http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

  32. smiley
    September 25th, 2008 at 18:54 | #32

    And tin tin’s comment at #5 remind me of this comment made by Barack Obama in the last week or so. Here’s the You Tube link.

  33. Jonno
    September 25th, 2008 at 19:50 | #33

    I’m no economist but I’ve been reading Nouriel Roubini http://www.rgemonitor.com/blog/roubini/ for the last few months and his predictions are coming true and he has a plan. Can’t do much worse than the present mob.

  34. Ikonoclast
    September 25th, 2008 at 20:07 | #34

    SJ said early on in this thread that “The US has seemed determined to turn itself into a third world backwater for quite some time now. The sooner it happens, the better for the rest of us.”

    I agree with the first sentence but disagree with the second. Some decline of American power will be beneficial for the world IF (a big if) the Americans can take such a decline gracefully. I doubt they can. From this point on, their real military power is clearly badly out of balance with their real economic power. That is a very dangerous imbalance for the world.

    In any case, I would not like to see US power decline to the point that it could not counterbalance Russia or China (taken singly not together). A multipolar world (with respect to superpowers) has more chance or remaining safe and stable than a unipolar or bipolar world.

  35. smiley
    September 25th, 2008 at 21:18 | #35

    “I have the South in front of me, and I have the bankers behind me. And for my country I fear the bankers more.”
    Abraham Lincoln

  36. Socrates
    September 25th, 2008 at 21:58 | #36

    I agree with Hal at 26; the conflict of interest alone between Paulson and Goldman Sachs is more than enough reason to sack him. He is obviously not going to come up with a deal that hurts his friends, even if they are guilty of who kows what.

    Also, after all the months this has been developing over, a three page explanation is indeed an insult to congress’ intelligence. If the situation is really that bad, then the at risk parties should be willing to give a full explanation. Transparency should be a minimum requirement for any bailout.

  37. Esme
    September 25th, 2008 at 23:14 | #37

    Dear John,

    I wondered if you could send me your e-mail address. I am writing from a British-based political website and wish to send you some information I think you might be interested in.

    Many thanks,

    Esme Knight

  38. scott
    September 26th, 2008 at 02:36 | #38

    I bounced from Chomsky to this summary of the problem, and potential way out of it, written ten years ago by John Eatwell and Lance Taylor.

    It seems to have a lot depth, but I have done very little economics reading.

    A World Financial Authority
    It is proposed that a World Financial Authority (WFA) be established. This organization would be complementary to the WTO. A central task of the WFA is the development of policies to manage systemic risk. The objectives of the WFA should include the requirement to pursue policies to maintain high rates of growth and employment.

    It would be the task of the WFA both to develop rules which would ensure the adoption of best regulatory practice and effective risk management procedures, and to oversee the development of a credible guarantor and lender of last resort function. It will therefore need to build on the achievements of IOSCO to develop a framework for international financial regulation (including risk management procedures) and to ensure, via the powers ceded to it, that those rules are implemented.

    Now that sounds like a good way to spend $700 billion. Hey, while we’re here, why don’t we think about how we cooperate on protecting our planet for future generations.

    I wonder what secretary Paulson would think of such an idea.

  39. scott
    September 26th, 2008 at 02:41 | #39

    Oops, I botched the href, which equals http://www.fes.de/ipg/ipg3_99/arteatwell.html

  40. September 26th, 2008 at 07:30 | #40

    scott, i’m sorry fella, but the world doesn’t run on planning and fairness. your mother should have told you. it runs on ego and power, when stalin asked how many divisions had the pope, it should have tipped you off.

  41. TerjeP (say tay-a)
    September 26th, 2008 at 07:41 | #41

    Scott – perhaps you missed it the last time we tried that. Look up IMF in the history books. What a evil monster that became.

  42. Stuart
    September 26th, 2008 at 09:08 | #42

    Sack Paulson!
    You seem to be somwhat at odds with one M. Turnbull, PM-in-waiting and one-time Goldman Sachs employee, who was recently exhorting us thank god that Hank Paulson is in-charge of the situation.

  43. observa
    September 26th, 2008 at 09:23 | #43

    Well Terje, scott is still deciding whether he’d vote for Paulson as president of his new august WFA or not. He may want a bit more time to study Paulson’s CV before definitely making up his mind on that.

    Ultimately the world’s issuers and overseeers of fiat money are about to be judged by the gold price(perhaps black gold prices too) It’s imperative we abandon progressive income tax to remove the temptation for the usual suspects to deliberately target inflation and corrupt claims on production over time. If Archbishops of York can’t get their head around that simple idea immediately, then perhaps they should at least advocate indexation and the taxation of real returns for starters, if they don’t like certain outcomes. Still if we can’t trust in God Archbishop, there’s always the familiar ways of the Devil-
    http://www.atimes.com/atimes/Global_Economy/JI26Dj02.html

  44. smiths
    September 26th, 2008 at 10:36 | #44

    there seems to be some confusion,

    if i may clarify,

    goldman sachs is central to the US ‘state’,
    as is lockheed martin, carlyle etc etc
    therefore Paulson has no conflict of interest whatsoever,

    the greatest conflict of interest is for the most rhetorical players in the ‘democratic pantomime’

    it is they who claim most to represent something that they dont

  45. scott
    September 26th, 2008 at 12:30 | #45

    Terje,

    Actually, if you read the Eatwell and Taylor article I linked to you’ll note that the WFA they propose is being suggested to enhance the IMF and the post Bretton Woods system in general.

    The WFA should also be given the responsibility of ensuring transparency and accountability on the part of international financial institutions such as the IMF and the World Bank. There is at present no systematic evaluation of the activities of the Bretton Woods institutions, and this lacuna may well have contributed to the damaging criticism that the IMF in particular is imposing an essentially political program in the guise of technical conditionality. Martin Feldstein, for example, has argued that the IMF “should not use the opportunity to impose other economic changes that, however helpful they may be, are not necessary to deal with the balance of payments problem and are the proper responsibility of the country’s own political system”. Making the Bretton Woods institutions accountable to the WFA would introduce a “safety valve” of evaluation and accountability that would make the IMF more effective.

    Finally, the WFA should provide the necessary regulatory framework within which the IMF can develop as an effective lender of last resort. In many countries the WFA would simply certify that domestic regulatory procedures are effective. In those countries in which financial regulation is unsatisfactory, (i can pick one!) and which would therefore not have access to the IMF in a financial crisis, the WFA would assist with regulatory reform.

    Perhaps the problem is that the IMF has essentially been run as US institution to date. IMO, that doesn’t mean we just discard the concept of building truly international institutions for the future. On the contrary, doesn’t it indicate the need for exactly such a cooperative global approach – say, Bretton Woods chapter 2.

    Al loomis, as for ego and power, well the counter argument for I guess is evolution and survival. Or perhaps we should just resign to being stuck in modern history forever.

    As for Paulson, well I tend to agree with most of the comments here. I merely raised his name in my post above to highlight the absurdity of his situation.

  46. O6
    September 26th, 2008 at 12:45 | #46

    Actually, if you look at Mr Paulson’s CV, you’ll find that he was head of Goldman Sucks, whereas Mr Turnbull’s CV you’ll find he was only head of Goldman Sucks down here. You’d hardly expect him to be against his old boss, would you?

  47. Ian Gould
    September 26th, 2008 at 12:49 | #47

    The New York times has an interesting article on the Swedish financial crisis of the early 1990′s:

    “Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

    But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

    The tumultuous events of the last few weeks have produced a lot of tight-lipped nods in Stockholm. Mr. Lundgren even made the rounds in New York in early September, explaining what the country did in the early 1990s.”

    http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?_r=3&sq=sweden%20financial%20crisis&st=cse&adxnnl=1&oref=slogin&scp=1&adxnnlx=1222358906-YKaI4E7YoVckxUIxtTbEfA&oref=slogin&oref=slogin

    Unfortunately, the article succumbs to the common error of assuming that the US bail-out will amount to simply handing-out cash without any return to the US taxpayer.

    The bail-outs of recent days haven’t worked that way and there is no reason to assume that the future ones will.

    Demanding to know now before the institutions to be bailed out have even been identified exactly what costs will be imposed on them is like demanding that the fireman gives you a blueprint for your new house before he can fight the fire.

  48. Ian Gould
    September 26th, 2008 at 13:16 | #48

    Oh look another one of those bail-outs where government socialises the losses and the managers and shareholders clean up:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=av8gIaGIF6EY&refer=home

    “JPMorgan Chase & Co., the third- biggest U.S. bank by assets, agreed to pay $1.9 billion for the deposits of Washington Mutual Inc. after the thrift was seized by regulators in the biggest bank failure in U.S. history.”

    “WaMu has fallen 95 percent in 12 months on losses tied to subprime lending and lost $6.3 billion in the past three quarters.”

  49. smiths
    September 26th, 2008 at 13:37 | #49

    america will have two banks,

    australia will have four, ha ha, for how long?

    i reckon we’ll have two within a year

  50. gandhi
    September 26th, 2008 at 14:34 | #50

    45 comments before anyone mentions the word “accountability”. Just sayin’…

    I mean, like that would “scare the markets” right???

    It’s such a quaint old concept these days. But how do you have regulation without it?

  51. observa
    September 26th, 2008 at 14:38 | #51

    Big fish eating small fish eh Ian and all those previous tax losses to boot most likely? More problems for the taxeaters down the track no doubt.(ah income/company tax, aint it grand folks?) Morgan want to be careful all that blood in the water doesn’t attract SWF sharks ultimately, although they may be in bed with sharks already I suspect. And to think WaMu were offered $4/share by Morgan back in March. So long sardines!

  52. Ernestine Gross
    September 26th, 2008 at 14:41 | #52

    Other contenders:

    “Self-regulation, laissez-faire and “the market is always right” were finished, Mr Sarkozy said….

    “Mr Sarkozy said German chancellor Angela Merkel supported his proposal to convene a summit of heads of state and government of the main countries concerned, by the end of this year. “I am convinced we must refound the world financial and monetary system, as was done at Bretton Woods after the second World War.”

    http://www.irishtimes.com/newspaper/world/2008/0926/1222374595726.html

  53. observa
    September 26th, 2008 at 14:56 | #53

    As for accountability ghandi, there’ll be plenty of time for that. Basically we’re it and we’re all freaking doomed to borrow a line.

    Interesting that the Repubs are not happy and McCain is accused of being the spoiler. McCain has a habit of doing the unexpected, so what’s he up to eh-

    ‘US Republicans stymied a late-night session of talks designed to resurrect an enormous economic bailout package but new negotiations will be held tomorrow, a top Democrat said.
    Barney Frank, chairman of the House of Representatives financial services committee, said a House Republican introduced an alternative plan on a single sheet of paper — which he brandished at an impromptu press conference.

    Reflecting the unease of many Republicans at the government’s $US700 billion ($840 billion) intrusion into private enterprise, the new plan called for an independent entity to dispose of bad assets, and a cut in capital gains tax.

    Congressman Frank said the top Republican on his committee, Spencer Bachus, was his party’s sole representative at the late-night talks attended by Treasury Secretary Henry Paulson.

    At first, according to a bemused-sounding Congressman Frank, Senator Bachus said he was “not empowered to negotiate” for his party and left the room. He then reappeared later with the sheet of paper, and then quit the room again.

    Congressman Frank said the discussions would reconvene early Friday (overnight AEST) without Mr Paulson, following a day of drama when a deal appeared to be nearing only to prove elusive after an emergency session of talks at the White House.

    Democrats accused Republican presidential hopeful John McCain of sabotaging an agreement in a bid to wrest back the initiative against Democratic rival Barack Obama.

    Senator McCain insisted Democrats had been premature in talking up prospects for a deal given the high level of Republican discontent at the plan, especially in the House of Representatives.’

  54. observa
    September 26th, 2008 at 15:03 | #54

    “Self-regulation, laissez-faire and “the market is always right� were finished, Mr Sarkozy said….

    Well he would say that being among the usual suspects watching their fiat money gravy train going down the plughole now wouldn’t he Ernestine?

  55. observa
    September 26th, 2008 at 15:07 | #55

    Let them eat their Monopoly money.

  56. Albert Ross
    September 26th, 2008 at 16:13 | #56

    Aren’t the Seppos going to have “fold their tents, like the Arabs, and as silently steal away” in Afghanistan and I-rack real soon now?

  57. Ubiquity
    September 26th, 2008 at 19:26 | #57

    The banks burnt themselves with the fractional lending policies implicitly guaranteed by our governments.

    Now those “poker faced” pollies at the fed, treasuries and sec look us in the face and tell us that they need to the boost the money supply again!

    So the assumption of course by the experts is that more money is the agent of economic growth when really its just a medium of exchange and cannot create wealth. In fact monetary expansion destroys real wealth. A metaphorical example, you spend twelve months growing Oranges and have a 1000 boxes. You know the market price is say $24 a box. Suddenly new opposition springs up and magically with wave of a wand creates from nothing a 1000 more boxes, so realistically the price of a box of oranges is probably $12. So wealth is reduced.

    So I ask myself do the men at the top of the money tree really understand this example (simplistic as it might be). It would be safe to assume they do. OK so have they forgotten to apply this simple logic to ther plans to save the US from a impending depression. I think not.

    Maybe their egos are so big that they must save face. They can’t do what the rest of us do when we’re insolvent, go bankrupt.

    Here lies the answer I think, these people are not acting in the best interest of the people but are saving face and meanwhile they blame, bankers, brokers , shortsellers and whomever else they can to take the attention of their follies.

    Irresponsible policies of money supply creation, the idea that more fiat money creates growth is an illusion they sell the people at the expense of their egos and lining their pockets with money.

    So regulation by big government has failed and the individual investors will walk with their money and doing so will not only finally tear them down from their big ivory towers and unfortunatley also leave the majority of US citizens much poorer for along while.

    Was that a bit doomsdayish ?

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