Pulling out all the stops: These go to eleven.

(9 am. – promoted by ek hornbeck)

Plan A

When it was discovered that certain investment bankers had shot themselves in the chest using a shotgun of exotic financial products, and that these same bankers were parabiotically connected to the entire financial system of the Earth, i.e., their blood-funnels were permanently attached to the face of humanity, massive cash infusions were said to be necessary to prevent the expiration of all due to the carelessness of a few.   We were all going to die, so it was said, even though the medical report remains unavailable to this day, and the patient is said to have been stabilized and resting comfortably in ICU.

Plan B?

The folks over at The Automatic Earth have long been asking what is Plan B for achieving hemostasis with respect to the sucking, self-inflicted chest wound that is Wall Street, in case the cash-infusions fail.

What if the economy keeps contracting after the first batch of trillions has vanished?

I’d say 2010 should be the year to formulate a Plan B. It couldn’t hurt to discuss something more grounded than pure belief systems. Economic growth might just be not the best consiglieri in this particular case. And I don’t understand the reluctance to talk about a Plan B to begin with. We’re talking about enormous risks to the welfare of millions of people, and about policies that have never even been tried before.

70 years ago it took a world war to get out of the crisis. And the president’s finance meisters today don’t even want to talk about what happens when they got it wrong? What’s up with that?

Earlier this month David Rosenberg wrote in Why 2010 Looks So Dicey:

The defining characteristic of this asset and credit collapse has been the implosion of the largest balance sheet in the world: the U.S. household sector. Even with the equities rally and the tenuous recovery in housing in 2009, the reality remains that household net worth has contracted nearly 20% over the past year and a half. That’s an epic $12 trillion of lost net worth, a degree of trauma never seen before.  

As households assess the damage, the impact of this shocking loss of wealth on spending patterns is likely to be enormous. Frugality is more than just the new fashion; attitudes towards discretionary spending, home ownership, and credit have undergone a secular shift toward prudence and conservatism.

Economic growth could be a long long time coming. Are you sure you want to wager all you have on that one color?

If consumption makes up 70% of our economy, and household spreadsheets are battered, and no job gains are expected anytime soon, and housing has yet to find a bottom, and health care reform surely cannot prevent the leading cause of bankruptcies before it’s implemented, never mind after…then betting on near-term growth to pay off our massively increasing debts does not seem like a solid bet.

Don’t we need a Plan B?  Wouldn’t it at least be prudent to surgically remove the blood-funnel from our faces before the guys in ICU start hemorrhaging again?

Plan B: Re-implement Plan A

As is typical of Orwellian legislative language, e.g., The “Patriot” Act, The Wall Street Reform and Consumer Protection Act sounds like legislation designed to reform Wall Street and protect consumers.

Barney Frank introduced H. R. 4173 purportedly “To provide for financial regulatory reform, to protect consumers and investors, to enhance Federal understanding of insurance issues, to regulate the over-the-counter derivatives markets, and for other purposes.”

Whatever this bill does to protect consumers, it not only explicitly fails to remove the blood-funnel from our faces, it doubles the siphon volume, and adds a pre-emptive perfusion pump:

For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system.

Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

Here’s the language:

FINANCIAL CRISIS MANAGEMENT

(1) IN GENERAL.

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, upon the written determination, pursuant to section 1109 of the Financial Stability Improvement Act of 2009, of the Financial Stability Oversight Council, that a liquidity event exists that could destabilize the financial system …. and with the written consent of the Secretary of the Treasury (after certification by the President that an emergency exists), may authorize any Federal reserve bank, ….

Upon making any determination under this paragraph, with the consent of the Secretary of the Treasury, the Financial Stability Oversight Council shall promptly submit a notice of such determination to the Congress. The amounts made available under this subsection shall not exceed $4,000,000,000,000.

And there will be no Congressional discussion of Plan B lasting longer than 10 hours.

Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours.

Worse yet, it is the worst kind of faith-based healing imaginable.  The threshold for kicking into another pre-emptive bailout will be based on “determinations” that depend on the belief systems of a member of the Board of Governors of the Federal Reserve and the Treasury Secretary, Tim Geithner, that the probability of another $4 trillion in taxpayer money going straight down the toilet is only 1%.

CLARIFICATION OF ‘SECURED TO THE SATISFACTION OF THE FEDERAL RESERVE BANK’.

No member of the Board of Governors of the Federal Reserve System shall vote to authorize any action permitted under paragraph (1) and the Secretary of the Treasury shall not provide the written consent required by paragraph (1) unless that member believes and the Secretary of the Treasury believes:

”(A) that there is at least a 99 percent likelihood that all funds disbursed or put at risk by such action will be repaid to the Federal Reserve System; and ”(B) that there is at least a 99 percent likelihood that all interest due on any funds disbursed will also be paid to the Federal Reserve System.

Weren’t we given assurances last time?

Now, listen to Dr. Tim Quackenstein Geithner’s confidence-inspiring testimonial to faith-based healing:

Pulling out all the stops

Nigel Tufnel: What we do is, if we need that extra push over the cliff, you know what we do?

Marty DiBergi: Put it up to eleven.

Nigel Tufnel: Eleven. Exactly. One louder.

Marty DiBergi: Why don’t you just make ten louder and make ten be the top number and make that a little louder?

Nigel Tufnel: [pause] These go to eleven.

But as Ilargi points out, didn’t Larry Summers recently pretty much rule out going one louder (much less 20 louder):

Is it possible that Obama and Geithner weren’t paying attention when their own chief economic adviser, Larry Summers, said in New York, October 8, that:

“We will not, as a country, as the economy recovers, be in a position to issue federal debt on anything like the scale that was appropriate to issue federal debt during a profound economic downturn.”

Sure looks like they missed that one. Then again, they may be able to issue the debt, as long as they are willing to use your money to pay interest rates on the debt that will satisfy the bond markets. Lend out money to market makers at 0.25%, and borrow what you need for yourself at 5-6%. That looks like one lousy deal to me. Unless you’re a banker.

Not to worry though.  There won’t be another crisis.  A pre-emptive, ballistic, faith-based healing process with little to no consideration of Plan B (which is Plan A on steroids) will be totally unnecessary, so why did we even include it in the Wall Street “reform” bill?