Friday, September 26, 2008


Whether an agreement is reached this weekend, or Friday after next, how much can it matter? Just so we're clear: either way, we're screwed. Let's at least get a movie, if not dinner first: Call your employees in Congress now (well, as soon as you finish reading this) and tell them to haul the heads of Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Merrill Lynch, Washington Mutual, Greenspan (yes, Greenspan), -- ALL OF THEM -- and ask them WTF? A bailout of some sort or another is apparently in order and it's going to be extremely painful for most of us, and excruciating for many for years to come; the very least we're due is an explanation of what happened, and why it was believed that it wouldn't happen, given the fantastical salaries, staggering bonuses and golden parachutes, that have characterized Wall Street.

As soon as the first hour of today's Diane Rehm show becomes available, listen to it. A panel of journalists, including financial journalist Jim McTague from Barrons, dissect The Calamity from all angles. I presume it was Jim McTague who finally offered the most understandable (to me) explanation of why a bailout of some type is in order. He explained essentially that something called the Federal Credit Spread, (?) the difference between the frequency with which the Federal Reserve Bank will lend to banks, and the frequency with which banks lend to each other, is currently 15 times more divergent than they have ever been! This would mean short term credit that businesses rely on to meet payroll, keep suppliers paid and inventory in stock, etc., would dry the flip up! Checks start bouncing (like the guy I heard about who now has two car loans because the check BOUNCED that the car dealer wrote to pay off the loan for the car the guy used as a trade-in for his new purchase); folks get laid off at faster rate (note the thousands we hear about weekly)and businesses and banks fail; (did you hear about the biggest bank failure in American history?!)

My knowledge of economics and finance may be on par with John McCain's, so you know, do your Due Googling. This 2004 Federal Reserve publication which would ordinarily set me to snoozing, had some interesting tidbits like

"... plots the behavior of various U.S. credit spreads and clearly shows that credit spreads tend to widen in recessions and to shrink in expansions. The figure also illustrates an episode where the spread changed in response to an event that was not immediately related to the business cycle, specifically, the Russian default in 1998. This event triggered a huge move in spreads, as markets seized up in a liquidity crisis, even though the U.S. corporate bond market did not see a significant jump in defaults..."

"..Put it this way - what Wachovia paid $670,000 for yesterday costs nearly $3 million today."

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