This will be a Weekend at Bernie’s for the global banking system. If a ‘Banking Holiday’ is declared for next week, well then it will be a ‘Very Long Week at Bernie’s’.
Nothing has come of all the efforts of Paulson and every Central Bank in the world to ‘restore confidence in the banking system’ (somehow get insolvent banks that don’t trust one another to loan one another money). Never mind the high flying world of global finance, derivatives, hedges, debt swaps, and the alphabet soup of debt instruments of the shadow banking system. It is a stark matter, now, of the bank on every corner — worldwide — shuttering its windows.
In plain words, the absolutely core function of banking — to provide a steady flow of fungible money to local enterprise — remains dead, worldwide, and this lack will kill companies, currencies, and nations, as surely as a dead pump in a human chest kills that person.
Money is a medium of exchange — be it cowrie shells or fiat paper — that lets human commerce rise above the bartering of chickens and bushels of corn. If people can’t get cowrie shells, greenbacks, rubles or pounds to run their shop or do their own shopping, they will promptly invent their own currency, and stop using yours for any purpose other than insulating the outhouse.
Nationalizing banks, and forcing them through the motions of issuing taxpayer funds for local commerce, jobs, payrolls, shopping, bus fares — is the last stopgap measure before letting your currency fail. It’s the motion that makes money — money.
If money doesn’t move, it isn’t money.
If money isn’t, neither is government.
If the one becomes pointless, so does the other.
Well!~ Halloween is early this year.
Zombie bankers everywhere . . . but where are the brains?!? Where are the brains???

Posted by: Antifa | Oct 10 2008 21:24 utc | 3

the absolutely core function of banking — to provide a steady flow of fungible money to local enterprise
Here lies one of the key flaws of our current economic system.
Banks are there for people to put their money and keep it safely. A secondary function is to lend money – for a small fee.
The flow of money is a key in economy, probably. But the flow of money shouldn’t happen because of or thanks to the banks, but should come from the day-to-day trade between people and businesses, basically between sellers and buyers of goods and services. Banks should have a very limited role in this – mostly to be the deposit of earned money that will later be used to pay wages, goods and services, and to an extent, as lender of limited amounts of money to business that might occasionally need it. Allowing a bigger role to banks, or allowing a system where lending of money and debts play an important role, is asking for trouble, and will lead to major catastrophe, soon or later.

Posted by: CluelessJoe | Oct 10 2008 22:53 utc | 5

commander paulson of goldmann sachs feeding the banks for free
ô, down, down, down
bring out the tumbrils

Posted by: remembereringgiap | Oct 10 2008 23:10 utc | 7

There is a worldwide, cascading fall of institutions, with governments around the world pledging taxpayers funds as guarantors of liquidity. I’m not sure where in that picture is it in the best interests of players to stop deceiving. The threat is that trust is gone, everyone still wants theirs and will take whatever more they can get, as always. Function could end up restored much later than necessary, with giant, artificial ‘debts’ held by publics around the world having acted as guarantors for the super-rich. Nice that Paulson wants to get the public 50% back on its money buying stock, not just buying turds; but business will not like public ownership, and they will not want it to become a habit. Failure makes virtue, you have to work in good faith to survive and thrive when you’re down. This taxpayer funded soft landing will just keep greed falling from fool heights for a long(er) time. The upside? Public record of benefits of public ownership. Maybe we’ll come back to it for upcoming bigger crises..

Posted by: aumana | Oct 11 2008 2:17 utc | 9

They are now likely agree to proceed with the ‘Swedish solution’, i.e. to recapitalize the banks in exchange for stakes in these.
It is about time that they proceeded with that solution. As I have said, that is the only sensible solution. But the longer they wait, the less effective the solution will be. The Swedish solution works IF implemented properly. As I see it, the following is essential for the solution to work:
1. Total and absolute transperancy on the part of the banks. They MUST tell the treasury exactly what their losses are. I would even put the CEOs under oath and take statements from them on the exact amount of losses that they have. If they lied, then use the statements against them and drag them to jail.
2. The Treasury/Congress must create independent agencies to manage the acquired preffered stocks. The agencies should not be involved in the day to day functioning of the banks. Their main concern is to triage the banks and maintain the value of the shares in the long run.
3. All deposits MUST be FDIC insured no matter the amount. That is essential to prevent runs on the banks.
4. There should be a provision that this is temporary and that the govt held shares will be sold back to the private sector once the value of the shares has equaled the amount spent by the taxpayers on the bailout.
Two advantages that Sweden had that the US does not have:
1. The Swedish political elites were united in their efforts to bailout the banks. In the US this does not seem to exist.
2. Sweden has a community oriented political culture and the US has a very individualist political culture. IMO, the Swedish culture allowed the political elites to unite behind the bank bailout. The US does not have such an advantage. If Obama becomes president and continues the bailout program he will be attacked for being “socialist, communist, etc..”

Posted by: ndahi | Oct 11 2008 5:42 utc | 11

This is why we are going to go hungry

“There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.”

Posted by: vbo | Oct 11 2008 6:18 utc | 13

vbo,
the situation you describe in #12 reminds me of that awful Russian winterof 1991/92, when the USSR collapsed. People were sending humanitarian aid packets, but the problem was not one of supply, it was that the distribution system had broken down.
But now we see what happens when the government fails to regulate the flow of capital to serve the greater good: it gets sucked into suburban tract mansions that nobody can afford any more, while schools and roads are neglected and even basic systems like food delivery languish.

Posted by: ralphieboy | Oct 11 2008 8:29 utc | 15

Doug Noland: Hoping There’s Hope

This is the first all-encompassing global dislocation of contemporary finance, impacting virtually all economies, markets and asset classes. The media is now all over the “Wall Street” and “banking” crisis. I am of the view, however, that the collapse of the hedge fund industry has moved to the forefront – that it is now at the epicenter of global market upheaval.
…
There is no doubt that markets are in the midst of an unprecedented liquidation of positions across virtually all asset classes and a vicious unwind of a multitude of investment and trading strategies. The Massive Pool of Global Speculative Finance is being drained.
…
It has been history’s most spectacular speculative Bubble and, especially over the past few years, it became very much global in nature and infiltrated virtually all asset classes. This Bubble is in a full-fledged collapse – entailing unprecedented liquidations – and it’s taking global markets down with it.
The situation is dire, as is now commonly recognized. The media is in a tizzy, and Wall Street makes for an easy and generally deserving villain. I fear the rapidly mounting anger.
…
Perhaps things will stabilize once the hedge fund liquidations run their course.
…
I also hold out Hope that the Trillions of reserves held by global central bankers will provide some buffer to stem financial system collapse. In particular, I am Hoping that China, India, Russia, Brazil and the Middle East have today sufficient reserves to somehow avoid a ‘90s style financial and economic meltdown. I am Hoping that demand from China, India, Asia and Latin America will help offset inevitable economic downturns in the U.S. and Britain and, hopefully to a lesser extent, Europe. I am hoping that the collapse in energy and commodities prices is more a reflection of acute financial market dislocation rather than a harbinger of synchronized global economic upheaval. I am hoping there is more substance to the dollar’s rally than simply an unwind of bearish dollar bets. And I am hoping that with large capital infusions our deeply impaired banking system will retain the capacity to finance a much less robust but at least functioning U.S. economy. I really Hope everything is not as dire as it appears.

Well, there is always hope. But hope is not a plan …

Posted by: b | Oct 11 2008 12:37 utc | 17

francis fukuyam – the albert speer of the u s empire

Posted by: remembereringgiap | Oct 11 2008 17:51 utc | 19

Berlusconi said, I read, ‘they’ will declare a long bank holiday. (Swiss paper, article not on the internet. Google doesn’t turn up anything solid in a few clicks.)
That scoundrel has a big mouth – italian, heh!, pardon me – and often leaks all kinds of info, only reported in the local type press. However, he likes to pretend he is an insider, so who knows.
The crystal ball is very cloudy, horribly splintered. Rubbing or peering don’t help.
There are problematic situations where throwing cash helps and may work. This ain’t one of them.
Inter-bank lending can’t proceed without a clean up – the guarantees offered are not believed (so far.)
In a systemic failure, all the little nodes (here, banks) go POP, pop! one after the other as positive feedback loops kick in. Saving oneself and one’s friends (à la Paulson) cannot work, sub-parts of the system cannot be isolated and closed off; nor can tinkering with one rule of the system in the hope of stalling it or affecting its fundamental nature (banning shorts in some time frame); guaranteeing some of the outputs (depositor’s accounts) is hopeless as well.
The stock market crash is a secondary phenomenon or problem, a result, of lack of trust in the system as a whole.
If I may, social safety nets contribute to halting, possibly changing, solving, (in the sense of reaching some new consencus and MO) the situation.

Posted by: Tangerine | Oct 11 2008 18:06 utc | 21

And was Paulson’s announcement that Treasury will be taking equity positions in banks somehow linked to the outcome of the Lehman settlement? Is he about to bail out one or more of the Big Three, the most reckless of the reckless?
Simple answer to a simple question:
Yes.

Posted by: b | Oct 11 2008 18:35 utc | 23

@22
my crystal ball (and some reading at the economic populist and a few other spots) suggests morgan stanley.

Posted by: sharon | Oct 12 2008 0:04 utc | 25

Declare All Credit Default Swaps Null And Void.
It is unconstitutional to ex post facto abrogate a valid contract.

Posted by: DaveC | Oct 12 2008 2:51 utc | 27

@Allen/Vancouver and therein lies the problem really. CDO’s are fairly amorphous indefinable entities, so how do you outlaw them? Any legislation on an issue as important as this must be precise and when one considers the sort of sleazy scum whose behaviour is to be regulated you can see that the tiniest loophole will be exploited for advantage by the greediest most amoral of these low lifes.
I’m not speaking against the idea in principle just that effectively implementing it may not be possible. Lets face it we should be able to emulate the god botherers of old with a simple law like “Thou shall not steal” yet we all know that five minutes after that law was passed some silver tongued advocate for the elites would be petitioning the courts to “define stealing”.
The more tightly a law is defined the more scope for abuse by expensive mouthpieces, but the looser it is defined the more injustices likely to occur.
I’m sure you and b and all the others have a really good notion of what you mean by ‘declaring all Credit Default Swaps null and void’, but knowing that and actually writing down a workable definition of what that means are two quite separate things.

Posted by: Debs is dead | Oct 12 2008 6:06 utc | 29

b, the US supreme court has no jurisdiction over CDS agreements. Once again, most CDS trading is conducted in the UK.
“effectively implementing it may not be possible.”
completely true
“They are poker bets between individuals, and we, the people, have no responsibilty to honor them en masse.”
no one is asking you to.

Posted by: hedgehog | Oct 12 2008 7:35 utc | 31

another thing… you would hav to ban a lot more than CDSes to really BAN CDSes. A CDS can be synthesized using bond options or bond forwards. an out of the money put spread on a bond issue prices its risk of default in much same way as a CDS.
would you also ban bond insurance?? PMI?
“some lawyers will take care of that” “Judges would take care of the rest”
Judges and lawyers aren,t trained in finance or exotic derivatives. sneaky loophole-finding financiers are.
http://www.bankofengland.co.uk/publications/fsr/2001/fsr10art3.pdf
note cashflow diagram with bermudan domicile.

Posted by: hedgehog | Oct 12 2008 8:04 utc | 33

it`s obvious thqt the credit crisis has its root in too low interest rates, lax lending standards and inflated real estate values crashing to earth. cdses have nothing to do with it. as said already most cdses aren`t remotely in the money.
you would have to rewrite a lot of laws … basel ii is one reason cdses are so widely used by european banks

Posted by: hedgehog | Oct 12 2008 8:09 utc | 35

another thing… you would have to ban a lot more than CDSes to really BAN CDSes is pretty much what I thought.
B you were correct with your analysis of the attempt to stop short selling. Putting aside whether it is just or even desirable to allow long trades but not shorts, the point you made about there being many ways to short trade that cannot be legislated out of existence must also hold true for credit default swaps.
Yes it would be possible sort of for a while but if one wanted to create a system that couldn’t be worked around within a week by smart lawyers (thereby giving the elites an unfair advantage over everyone else) bank regulation would have to go back to a system which narrowly defined what a bank could do rather than the present system which is meant to allow banks to operate pro-actively and flexibly and which only tries to define a quite short list of what a bank may not do. Everything else is permitted.
Now I’m no fan of deregulation and could easily argue that restricting financial institutions such as banks who after all are playing with all our money, to a narrow list of permitted operations is no bad thing. But that is what I think. Nearly every pol on any side of the debate has been subjected to intense brainwashing over the last couple of decades, brainwashing that would make the odds of them agreeing to exert the sort of state control over banks that would be needed to make CDS’s null and void, so remote as to be impossible.
Just because we can see that there has been a fundamental shift in the way the world works, that once impregnable power bases are now weak, withered and dying, doesn’t mean that those whose entire working lives have been in the thick of those systems see the same thing or even if they do, are capable of changing their methodology over-night.
This BBC article is a case in point.
it is the reason I came in here because it is such a classic. It seems that Gordon Brown’s response to the bliar’s hand to forelock approach to amerikan exceptionalism, is to crank up english exceptionalism to the level not seen since the last days of the Raj.

“No country – not even the biggest – can make it just on their own at a time like this.”
He added that the “calm, determined British spirit” would mean that although the crisis began in America, “Britain will lead the way in pulling through”.

The irony is of course that Brown has no intention of england leading anything. This is just smokescreen for what he is really up to. Something intimated by the BBC when they write:

Mr Brown is to hold talks with French President Nicolas Sarkozy before the eurozone members’ meeting. . . .
. . . Because the UK has not adopted the euro, Mr Brown had not been due to take part in the later meeting of eurozone leaders, but a Downing Street spokesman said the French president had invited him to attend part of it.

As per usual england is playing the role of amerika’s toady and snitch. Just like when the bliar pulled england out of the euro. That is a decision that the english will live to regret as the power of the $US weakens. In the meantime england is doing the usual, playing combination bum-boy and snitch.
Bush and his amerikan pals must be terrified that this is the moment when the euro decides to go it alone, so Brown will turn up with the list of threats (cause the carrots must be in short supply right now), along with attempting to ascertain exactly what it is Europe may be planning. England doing it’s usual of pissing inside and outside the euro tent simultaneously may succeed in undermining any revolt from europe. Sarkozy may be onside anyhow. He must be eager to get back up shrub’s rear passage since his fumbling on the Georgian matter cost him his favoured position up there.
Maybe not, perhaps Sarkozy isn’t as complete a recruit as they thought.
In that case one wonders if Brown realises that a special relationship with a washed-up has-been, isn’t so special after all.

Posted by: Debs is dead | Oct 12 2008 11:45 utc | 37

this is the link for #38.

Posted by: plushtown | Oct 12 2008 13:41 utc | 39

b #40, unfortunately, wigwam’s diary is no longer linked to from firedoglake’s front page.(Was at 9:41 am) Might be evidence is a good idea.

Posted by: plushtown | Oct 12 2008 15:10 utc | 41

Youtube: U.s. National Debt Grows To Large For National Debt Clock

Posted by: Uncle $cam | Oct 14 2008 8:48 utc | 43