``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

[Jam]

Re: "were literally maybe days away from a complete meltdown of our financial system"

Next comes financial chaos where even the appearance of control is lost. The sheer speed and randomness of events will catch many by surprise, like a financial tornado.

After the financial tornado passes we will all stare in wonder at the strangeness of the scene, the red Lamborghini stuck upside down 40 feet off the ground in a last remaining branches of a leafless oak tree, at the man smiling who is glad to have survived unscathed in his underwear in the bathtub that was as all that remained of his home. Lives will be frozen in economic time, careers ended, ancient relationships cut off by economic irrelevance.

Next year, slowly we will stagger out of the economic wreckage and start to rebuild. But things will never be as they were, for our old reality was fantasy anyway, built on false beliefs. We have no more chance of recreating it than we have in the morning after waking from a lovely dream to fall asleep again back into it while the alarms are ringing.

Wow! This is poetry...

[we_are_toast]

Re: "were literally maybe days away from a complete meltdown of our financial system"

Wow! This is poetry...

Yeah, Edgar Allen Poe comes to mind. :eek:

[zoog]

Re: "were literally maybe days away from a complete meltdown of our financial system"

Which came first, the egg of incompetent crisis prevention or the chicken of incompetent crisis response?

They are preparing Congress for the next phase. They may also hope they might pull out of it, and know they don't have a chance without a blank check from Congress. But at some level they must know they have little chance anyway. Too many things have broken at the same time. This is why Bernanke has been out of sight. Paulson is a crisis-hardened executive, Bernanke an academic. He never learned how to manage and hide his fear. Fear is more contagious than a virus. He is kept out of the public eye.

America's enemies smell weakness. Open season on America has begun.

Next comes financial chaos where even the appearance of control is lost. The sheer speed and randomness of events will catch many by surprise, like a financial tornado.

After the financial tornado passes we will all stare in wonder at the strangeness of the scene, the red Lamborghini stuck upside down 40 feet off the ground in a last remaining branches of a leafless oak tree, at the man smiling who is glad to have survived unscathed in his underwear in the bathtub that was as all that remained of his home. Lives will be frozen in economic time, careers ended, ancient relationships cut off by economic irrelevance.

Next year, slowly we will stagger out of the economic wreckage and start to rebuild. But things will never be as they were, for our old reality was fantasy anyway, built on false beliefs. We have no more chance of recreating it than we have in the morning after waking from a lovely dream to fall asleep again back into it while the alarms are ringing.

I think that is the most disconcerting post I have ever seen you write.

[icm63]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

CRASH PHASES

1) ALL is WELL.

2) Minor sell off - [MBIA/ABK scare]

3) ALL is well - After a minor govt fix. Little public awarness.

4) Medium sell off - [Bear Sterns]

5) ALL is well - After a medium govt fix, informed public awareness.

6) Major sell off, though not crash - [ABI,FNM,FRE,LEH]

7) ALL is well - After a mother of all govt fixes, Public very aware.

8) CRASH - Both public and institutions running for the hills ! May even be started by the public (so called dumb money).

9) ALL is well - CNBC ! (ha)

AFTER step 7 the public is very aware and can initiate a crash. All the worlds media covered the events of last week, every one knows that risk is high at the moment !

[EJ]

Re: "were literally maybe days away from a complete meltdown of our financial system"

I think that is the most disconcerting post I have ever seen you write.

It's the context. I haven't changed my tune. I wrote this to AO readers in 2005:

What I want to make sure I get across here, in case it's not obvious, is that I'm fairly certain that an unseemly economic turn of events is more likely to happen than not, probably in the next three years, and it's going to happen here, in the U.S. To us. To you and me. While it's likely to be worse than most of us are prepared for—that is, it will not be your average recession—it will not be the end of the world either, although there may be times when things look that way. It will certainly be the end of living high off the hog on other people's savings, and it will represent a transformation that we must go through to get to a different place.

Whether you experience the new place as better or not is going to depend on where you started and what's important to you. While periods of economic readjustment are never painless, it's important to keep in mind that the challenges we face as individuals represent nothing worse than those that 90% of the world's citizens cope with every day with grace, dignity, and humor. No one owes us a high standard of living, and most of the world gets by without one. Our main challenge will be to accept and deal with our problems effectively in the short term. It will require strong, honest leadership. In the long term, we can count on the United States' and its people's extraordinary ability to adapt to change and come out ahead.

Inflation is Dead! Long Live Inflation!

Readers have had a good three years to prepare.

[Jim Nickerson]

Re: "were literally maybe days away from a complete meltdown of our financial system"

It's the context. I haven't changed my tune. I wrote this to AO readers in 2005:

What I want to make sure I get across here, in case it's not obvious, is that I'm fairly certain that an unseemly economic turn of events is more likely to happen than not, probably in the next three years, and it's going to happen here, in the U.S. To us. To you and me. While it's likely to be worse than most of us are prepared for—that is, it will not be your average recession—it will not be the end of the world either, although there may be times when things look that way. It will certainly be the end of living high off the hog on other people's savings, and it will represent a transformation that we must go through to get to a different place.

Whether you experience the new place as better or not is going to depend on where you started and what's important to you. While periods of economic readjustment are never painless, it's important to keep in mind that the challenges we face as individuals represent nothing worse than those that 90% of the world's citizens cope with every day with grace, dignity, and humor. No one owes us a high standard of living, and most of the world gets by without one. Our main challenge will be to accept and deal with our problems effectively in the short term. It will require strong, honest leadership. In the long term, we can count on the United States' and its people's extraordinary ability to adapt to change and come out ahead.

Inflation is Dead! Long Live Inflation!

Readers have had a good three years to prepare.

I guess the following is rather much what you had in mind, EJ, as far as preparing for an "unseemly economic turn of events."

Treasury Seeks Authority to Buy $700 Billion Assets (Update1)

By Alison Fitzgerald and John Brinsley




Sept. 20 (Bloomberg) -- The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from U.S. financial companies in what would be an unprecedented government intrusion into the markets.

The plan, designed by Treasury Secretary Henry Paulson, is aimed at averting a credit freeze that would bring the financial system and economic growth to a standstill. The bill would bar courts from reviewing actions taken under its authority.

``It sounds like Paulson is asking to be a financial dictator, for a limited period of time,'' said historian John Steele Gordon, author of ``Hamilton's Blessing,'' a chronicle of the national debt. ``This is a much-needed declaration of power for the Treasury secretary. We can't wait until the next administration in January.''

As congressional aides and officials scrutinized the proposal, the Treasury late today clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage-related assets and, after consultation with the Federal Reserve chairman, ``other assets, as deemed necessary to effectively stabilize financial markets,'' the Treasury said in a statement.

The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program.

Bigger Than Pentagon

The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment.

A failure by the government to support the U.S. financial system could lead to ``a depression,'' Senator Charles Schumer told reporters in New York. ``To do nothing is to risk the kind of economic downturn this country hasn't seen in 60 years.''

The Treasury is seeking authority to step in as buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy, following government takeovers of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.

``Democrats will work with the administration to ensure that our response to events in the financial markets is swift,'' House Speaker Nancy Pelosi said in a statement.

Fast Track

The majority party will seek to reduce mortgage foreclosures and create ``fast-track authority'' for an overhaul of financial regulation, Pelosi said. Democrats will ensure ``the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms.''

The proposal will include curbs on executive pay for the companies whose assets the government will be buying, Steve Adamske, a spokesman for Representative Barney Frank, said today in an interview.

Democrats also will include a plan to stem foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration, the Federal Deposit Insurance Corp., and Freddie Mac and Fannie Mae, Adamske said. Frank, a Democrat from Massachusetts, is chairman of the House Financial Services Committee.
``The consequences of inaction could be catastrophic,'' Senate Majority Leader Harry Reid said in a statement.

`Serious Issues'

``While the Bush proposal raises some serious issues, we need to resolve them quickly,'' he said. ``I am confident that, working together, we will.''
House minority leader John Boehner, an Ohio Republican, said today he is reviewing the proposal but didn't say whether he was inclined to support it.

``The American people are furious that we're in this situation, and so am I,'' Boehner said in a statement. ``We need to do everything possible to protect the taxpayers from the consequences of a broken Washington.''
Congress, which may pass legislation as soon as Friday, needs to ``make sure there are protections built in for taxpayers,'' said Schumer, a New York Democrat on the banking committee. Lawmakers should ensure ``taxpayers who gave the money will be put ahead of the stockholders, bondholders and others.''

Paulson is seeking an expansion of federal influence over markets that hasn't been seen since the Great Depression, said Charles Geisst, author of ``100 Years of Wall Street'' and a finance professor at Manhattan College in New York.

Hoover Era

Geisst likened the plan to the Reconstruction Finance Corp., which was chartered by Herbert Hoover in 1932 with the goal of boosting economic activity by lending money after credit markets seized up.
President George W. Bush said he called leaders in both houses of Congress and ``found a common understanding of how severe the problem is and how necessary it is to get something done quickly.''

``This is going to be a big package because it's a big problem,'' Bush said following a meeting with Colombian President Alvaro Uribe at the White House. ``We need to get this done quickly, and the cleaner the better.''
Democratic presidential nominee Barack Obama said in a radio address that he ``fully supports'' Paulson and Fed Chairman Ben S. Bernanke's efforts to stabilize the financial system. The plan, however, should benefit both main street and Wall Street, he said.

Republican Presidential nominee John McCain ``looks forward'' to reviewing the proposal while focusing at least in part on ``minimizing the burden on the taxpayer,'' said Jill Hazelbaker, communications director for the McCain campaign.

Ban Legal Challenges

The ban on legal challenges of actions by Treasury is ``distasteful, it's unfortunate and it's bad precedent, but this is an emergency and you have to act,'' said Jerry Markham, a law professor at Florida State University and author of ``A Financial History of the United States.''
``What you don't want happen is to have lawsuits that will slow things down and cause problems,'' he said.

The proposal would raise the nation's debt ceiling to $11.315 trillion from $10.615 trillion and require the Treasury secretary to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that.

Paulson would gain discretion to act as he ``deems necessary'' to hire people, enter into contracts and issue regulations related to a revival of U.S. mortgage finance, according to a three-page proposal. The Treasury would ``take into consideration'' protecting taxpayers and promoting market stability.

Hiring Authority

The Treasury plans to hire managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, a person briefed on the proposal said yesterday. The document specifies that Treasury may buy only assets from U.S.-based financial institutions issued or originated on or before Sept. 17.

The House will pass legislation to implement the plan by the end of next week, and the Senate will act soon after, Frank said yesterday in an interview on Bloomberg Television's ``Political Capital with Al Hunt.''
Bush today said he's unconcerned that the price tag on the package may seem high.

``I'm sure there are some of my friends out there that are saying, I thought this guy was a market guy, what happened to him,'' the president said. ``My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.''
The Bush administration seeks ``dictatorial power unreviewable by the third branch of government, the courts, to try to resolve the crisis,'' said Frank Razzano, a former assistant chief trial attorney at the Securities and Exchange Commission now at Pepper Hamilton LLP in Washington. ``We are taking a huge leap of faith.''

To contact the reporter on this story: Alison Fitzgerald in Washingtont ; John Brinsley in Washington at jbrinsley@bloomberg.net

It's quite unfortunate that the US is not more like China, because if we were we should enjoy seeing a lot of people in high places getting hung.

Unfortunately most of these bastards will retire on government pensions.

Edit: To me Paulson looks quite happy, rather than what should be morose.

[The Outback Oracle]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

She'll be right jim!
We'll just get this little financial problem under the carpet and we can all get back to living beyond our means and getting the rest of the world to keep sending us money because we are wonderful people and have "resilient" (USA) or "insulated" (AUS) economies.
I'll bet all these clowns in your Congress think they are innocent of the cause of the problems as well! That bloody idiot Paulson is the brains of a rescue...God help us all!
The 'blame it ALL on Wall St' is really starting to get on my goat.

[icm63]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Do people here really think that the lows of last week are it. Thats foolish.

Watch the rally over the next two weeks, if volume fades then the smart money are using it to exit at better prices because they under estimated the situation.

Dont you think GS and MS need higher prices to get a better deal on their mergers. This is the last market massive manipulation [funny, just pre elections], this is the RICH MANs bailout.

This market will NOT push through levels around 1350 to 1400 on SP500.

Why, $550 trillion of derivatives says so !

[Guest]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Do people here really think that the lows of last week are it. Thats foolish.

Yes and by the same token by no means are we done with oil declines, and the precious metals declines have been and would then contnue being leveraged to further oil declines. I'm thinking those "loading up" on silver particularly here, may not have given enough deliberation to where we currently are in this trajectory. According to the commenter below, oil can easily drop from here to $75, and if it does silver goes careening to $8 or even $6 as it's been leveraging the moves in oil spectacularly on the way down. I''m keeping my eye grimly on next April / May for a possible cessation of this bear in commodities if only due to it's then exceeding the average historical time for such a move. Author below goes on to note that this correction, which is only partly completed, follows one of the top six commodity bull markets, in the past 200 years. Larger the bull, larger the correction. We are not done yet.

" If we have just gone through one of the biggest commodity bull markets since the 1790's, and we follow the trajectory of what occurred at the previous tops around 1812, 1864, 1920, 1948 and 1980, the commodity sector is at an extremely exposed juncture. Drops coming off blowoff tops at the end of bull runs which were in excess of 500% when sampled across 200 years, averaged 48 percent, and took about 5 months to play out. If we go through a drop of that size the price of crude can easily decline well below $80. That would match the bottom price in the steep correction in August of 2007. That means the market would retrace the whole rise from August of 2007 up to the top on July 11th of this year. There is a lot of evidence that this would play out in a six month period after this summer's top. The velocity of the decline would be twice that of this last blowoff leg in the oil price's rise. "

[Thailandnotes]

Re: "were literally maybe days away from a complete meltdown of our financial system"

Readers have had a good three years to prepare.

Can we have a couple more weeks?

[icm63]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

..."Which came first, the egg of incompetent crisis prevention or the chicken of incompetent crisis response? "...

That $700 BN should go to cover unsecured depositors at all banks/brokers/insurance to $250k per account. That is 2.8 bn accounts in total covered.

Then say "if you go bust, you go bust" to all the banks out there !

MS GS C go bust fine, then out of the ashes the new strong banks rise !

That's my easy fix, a 5 year old could do this !

[lakedaemonian]

Re: "were literally maybe days away from a complete meltdown of our financial system"

Edit: To me Paulson looks quite happy, rather than what should be morose.

As they say a picture is worth a thousand words...or up to a trillion in this case....I'm confident that considerable effort would have gone into ensuring only smiley/happy/confident/positive photos displaying the appropriate positive body language would be released for distribution.

[LargoWinch]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Yes and by the same token by no means are we done with oil declines, and the precious metals declines have been and would then contnue being leveraged to further oil declines. I'm thinking those "loading up" on silver particularly here, may not have given enough deliberation to where we currently are in this trajectory. According to the commenter below, oil can easily drop from here to $75...

Luke, c'mon, printing $7Trillion ($700B x 10 to get the real figure: see Irak pre-war vs actual budget) into the economy is hugely inflationary.

I foresee stocks and real estate to be supported somewhat by this effort (instead of falling) while commodities and other tangible assets to increase sharply in the coming months (especially PMs).

[marvenger]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

high finance is adding subtracting multiplying and dividing numbers with lots of zeros in them. Some 5 year olds can do this. It's all politics, not financial skill.

[GRG55]

Re: ``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Luke, c'mon, printing $7Trillion ($700B x 10 to get the real figure: see Irak pre-war vs actual budget) into the economy is hugely inflationary.

I foresee stocks and real estate to be supported somewhat by this effort (instead of falling) while commodities and other tangible assets to increase sharply in the coming months (especially PMs).

Who says they have to be printed?

Once upon a time, I recall one of EJ's posts pointing out that all the US $ needed to create the next Poom/Bubble have already been printed and are largely in the hands of offshore entities. The repatriation of all those $ was the point.

Could it be that Paulson's Super SIV is the mechanism, or at least the catalyst for that?