its the economy, stupid!

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The much quieter banking panic

The Financial Times is (rightly) worried:

Banks are not to be trusted. This is not just the view of the public and policymakers, but that of the banks themselves.

And indeed, the most notable thing over the past year has been the general mistrust amongst banks, and their reluctance to lend to one another. This graph shows a direct indicator of the level of defiance between banks.

Banks are hoarding all the cash they can (avoiding new deals, not renewing facilities that come to an end and would in normal times be extended, and now even trying to find legal - if not necessarily very proper - ways to sneak out of existing commitments), both because they need it for their own basic needs, and because they simply don't trust the risk represented by other banks.

And given that at any time a bank makes a loan to a customer (at least for big corporate deals), it borrows the same amount of money on the markets, the fact that the interbank market, ie where that borrowing part takes place, is frozen can makes it difficult for banks to continue with the lending.MORE

JPMorgan to Buy WaMu Operations

CNBC reports: FDIC to Seize WaMu and Sell Deposits to JPMorgan

The Federal Deposit Insurance Corp will seize Washington Mutual and sell its deposits to JPMorgan Chase for an undisclosed sum, CNBC has learned. The deal is expected to be announced during a Thursday night conference call at 9:15 p.m. ET.

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Over $800 Billion already spent bailing out Wall Street

Federal Reserve Bailouts: at least $600 Billion so far

In late December 2007 the Federal Reserve had around $800 Billion in treasuries. By June they had less than $350 Billion in Treasuries because they had swapped out the remainder for toxic securities from Wall Street banks through an alphabet-soup of auction facilities.
The Federal Reserve just recently expanded these programs.

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Fannie Mae and Freddie Mac bailout: $200 Billion so far
How can we forget about the largest f*ck up in America's mortgage industry history.

Treasury Secretary Henry M. Paulson Jr. has pledged to invest as much as $200 billion to keep the firms solvent.

This will, of course, be off-budget. So the $200 Billion will not show up in the deficit numbers, and thus doesn't really exist in the political world. Only in the financial world.
If the real estate industry continues to melt down then $200 Billion will be the least of our worries (and expenses in this bailout).

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Why the rest of the world isn’t helping with the bailout

You may have noticed the rather frigid response to requests that the rest of the world help with the bailout. European leaders coldly said no, so did Chinese, so did, well, pretty much everyone. And China instructed its banks to not lend to American banks.

You might be wondering why. Let's start with the history: basically the US spent the last seven and a half years borrowing money from the rest of the world and spent it on tax cuts for your rich, a war that most of the world didn't agree with (that's Iraq) and on consumption. The money inflow was extreme, at one point in 2005 some surveys were showing it as being more than the total interest on all the money in the world (ie. all the legal money, plus drug money). Everyone warned the US, including the IMF, but the US just went on its merry way with a war no one wanted and fiscal policies clearly aimed at making its rich even richer and impoverishing its middle class.

Since, however, it was buying Chinese goods and since that meant that China was industrializing by giving the US money in exchange for manufacturing jobs, the Chinese were willing to keep the subsidies going. To a lesser extent, so were the Japanese and Koreans. And while most everyone else wasn't that thrilled, the idea of the US having an economic collapse and taking the rest of the world down with them didn't seem too hot (although Stirling was arguing at the time that the Europeans should pull the plug anyway, because the costs were larger than they appeared, and well, if they didn't, what's happening now would happen.)

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So, anyway, long story short, the rest of the world doesn't feel much if any sympathy for the US about all this. You borrowed the money, you promised to pay it back, and now it looks like the stuff you gave everyone in exchange for all that money is mostly garbage, worth cents on the dollar. Your IOUs, in other words, are no good. Everyone knows they're getting stiffed, they're just trying to figure out how much they're getting stiffed for. Even if you're holding greenbacks, everyone knows that the currency is going to crash even further and also get eaten up by inflation.

That's why when the bailout came around it included a provisions for bailing out foreign banks holding toxic American waste that Americans sold so they could keep having their splendid little war, giving money to the rich, and running up a housing bubble while consuming cheap and lousy Chinese consumer goods. Those countries were, well, pissed. Now, in truth, I don't think they have a lot of cause to be pissed, they had to know that they were going to get stiffed - you really shouldn't lend money to people you know can't pay it back, even if they do promise that they'll crash the world economy if you don't. But even if you expect you aren't getting paid back, when the day comes that you've got to write off hundreds of billions of dollars, you're still not pleased. I'm sure ordinary Americans can understand that, given that they're being asked to eat that loss for Wall Street.MORE