the doomsday scenarios of the left were many, but none were more detailed to
scare the rich if they come from the right like the below. this is a huge
blackmail letter indicating the depth of the crisis: give us the money or
prepare for the worse.
bold my emphasis: notice nothing about life expectancy being cut short...
Financial Times
September 29, 2008Those whom the gods would destroy, they first make madAbout
Willem BuiterProfessor of European Political Economy, London School of
Economics and Political Science; former chief economist of the EBRD, former
external member of the MPC; adviser to international organisations,
governments, central banks and private financial institutions.
The US House of Representatives has voted to reject the Emergency Economic
Stabilization Act - the $700bn Treasury-funded facility for purchasing and
managing toxic assets held by the US banking system.
Opposition to the proposal came from two different sources. A few remaining
libertarians and believers in unfettered free enterprise voted against. Even
when they recognise the risk that a calamitous collapse in economic activity
may result, they view this as a form of creative destruction that is an
integral part of a Darwinian market economy. I don’t know anything about
Gresham Barrett, a Republican congressman from South Carolina but his statement
fits the bill: "My fear is the government will be forever changing the face of
the American free market. Because I believe so strongly in the principles of
the free market and the belief in freedom, I will be opposing this bill." Those
who genuinely hold these views are mad, but honest and principled. I wish them
a good depression.
A larger body of nay-voters consists of populist rabble-rousers or, worse,
politicians who know better but follow the whims, fancies and passions of their
constituents, even when this means that before long the real economy risks
falling off a cliff. The following statement by Ted Poe, a Texan Republican
member of Congress is a nice example: "New York City fatcats expect Joe Sixpack
to buck up and pay for all of this nonsense,"… "Putting a financial gun to the
head of every American is not the answer."
The dedicated followers of constituency fashion reckon that the date of the
election is likely to be before the full impact of the financial collapse made
likely by this vote will hit their constituents’ jobs and businesses. They put
re-election before the economic health of the nation and the interests of their
constituents. Opportunism guides them rather than principle. I wish them a
rather nasty depression.
What is likely to happen next? With a bit of luck, the House will be frightened
by its own audacity and will reverse itself. If a substantively similar bill
(or a better bill that addresses not just the problem of valuing toxic assets
and getting them off the banks’ books, but also the problem of recapitalising
the US banking sector) is passed in the next day or so, the damage can remain
limited. If the markets fear that the nays have thrown their toys out of the
pram for the long term, the following scenario is quite likely:
The US stock market tanks. Bank shares collapse, as do the valuations of all
highly leveraged financial institutions. Weaker versions of this occur in
Europe, in Japan and in the emerging markets.
CDS spreads for banks explode, as will those of all highly leveraged financial
institutions. Credits spreads generally take on loan-shark proportions, even
for reputable borrowers. Again the rest of the world will experience a slightly
milder version of this.
No US bank will lend to any other US bank or any other highly leveraged
institution. The same will happen elsewhere. Remaining sources of external
finance for banks, other than the facilities created by the central banks and
the Treasuries, will dry up.
Banks and other highly leveraged institutions will try to unload assets at
fire-sale prices in illiquid markets. Even assets not viewed as toxic before
will become unsaleable at any price.
The interaction of a growing lack of funding liquidity and increasing market
illiquidity will destroy the banks’ business models.
Banks will stop providing credit to households and to non-financial
enterprises.
Banks will collapse, both through balance sheet insolvency and through
liquidity insolvency. No bank will be safe, not even the household names for
whom the crisis has thus far brought more opportunities than disasters.
Other highly leveraged financial institutions collapse on a large scale.
Households and non-financial businesses revert to financial autarky, among
wide-spread defaults and insolvencies.
Consumer demand and investment demand collapse. Unemployment shoots up.
The government suspends all trading in financial stocks until further notice.
The government nationalises all US banks and other highly leveraged financial
institutions. The shareholders get nothing up front and have to wait for an
eventual re-privatisation or liquididation to find out whether they are left
with anything at all. Holders of bank debt get a sizeable haircut ‘up front’ on
the face value of the debt and have part of the remainder converted into equity
that shares the fate of the old equity.
We have the Great Depression of the 2010s.
None of this is unavoidable, provided the US Congress grows up and adopts
forthwith something close to the Emergency Economic Stabilization Act as a
first, modest but necessary step towards re-establishing functioning
securitisation markets and restoring financial health to the banking sector.
Cutting off your nose to spite your face is not a sensible alternative.
PS My remaining financial wealth is now kept in a (small) old sock in an
undisclosed location.
PPS The conduct of both US Presidential candidates in this matter makes them
unfit for purpose.
September 29th, 2008
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