The quasi-State of the Union speech

I hear a lot of people bemoaning the lack of specifics in President Obama's speech last night. I find myself wondering what planet these people have been living on all their lives. Speeches like this aren't about specifics. They never have been, they never would be, and more importantly, they never should be.

First of all, President Obama (and I still get a happy thrill down my spine hearing, saying, or reading or typing that phrase) doesn't know the specifics yet. He can't, because the nature of the process is that the specifics are worked out by hours, days, weeks of discussion, argumentation, and negotiation. The specifics are discovered through back-room meetings, committee hearings, and a host of other processes to which we, the public, are not privy. They're not pronounced in 50-minute speeches to joint sessions of Congress.

Thank G-d.

For one thing, can you imagine how long the speech would have been if it had contained specifics? More than 50 minutes, I'll tell you that right now.

For another thing, nobody would want to sit through it all. No, really, you wouldn't. You think you would, but you wouldn't. Not even if President Eloquence was the one expounding it. You'd be frustrated and bored in minutes, unless you're one of the tiny, tiny handful of people who really, truly gets off on policy details.

Because, you see, the details, the specifics, for every single thing the president talked about last night are going to be hairy. Not just a few more sentences beyond what he said last night, but a few thousand pages, each. Nothing less than that is going to truly describe the scope of the problems or their solutions.

So really, there's nothing he could have added to last night's speech, and kept the speech within the bounds of reasonable speech-making time, that would make you feel like you knew much more than you do today.

Obama's Delicate Dance

It's been a quiet couple of weeks for the topics I like to cover in this column; not so much because nothing's been happening, as because not a lot of it is really new. The economy continues to wrestle with the downward spiral triggered by the sub-prime mortgage mess, for example, and there's little about it that's really new relative to what I've already discussed.

The economic news at the moment is that the Big Three US automakers are back on Capitol Hill begging for a dime, and the Senate is looking at best reluctant and at worst outright recalcitrant. Democratic leadership is very much in favour of some kind of bailout, not least of which because the Democratic Party is still very much beholden to organized labor. The rank-and-file of the party, however, are much less interested, and the Republicans aren't really interested at all. In particular, Senator Shelby continues to rail against the idea and treat the CEOs of those companies as punching bags when they come to testify. Meanwhile, light sweet crude hit $43.97 the barrel this afternoon.

But that's not what I'm here to talk about right now...

***

Since 5 November, President-Designate Barack Obama has been very careful, in public pronouncements, to insist that there is only one president at a time, and it ain't him yet. This despite calls from nearly every quarter for him to weigh in on the key issues that will soon be His Problem. World leaders, for example, were disappointed he didn't attend the economic summit on 15 November, merely sending quasi-official observers to the proceedings.

As I think I've said before, from the standpoint of respect for the office of president--and safeguarding his own eventual lame-duck days--this is the right stance to take. It can't be an easy one, however, for a man as intelligent as he, who seems to have gotten involved in politics in part because of a passion to make things better (and yes, for the moment, I'm choosing to take him at face value, foolish though that may be), to find himself right on the cusp of being able to do something, and yet having to wait just a little longer.

Which explains the somewhat mixed message he's actually sending with his transition. While it's plenty usual for a president-designate or president-elect to start naming his intended nominees before he's sworn in, it's downright rare for him to start making announcements in November, even if he already knows in his own head who they're going to be. At this point, he's announced his intended nominees for State, Commerce, Treasury and Defense, as well as various key "inside the White House" advisory posts. These are all areas of extreme national importance right now, so it's understandable why he might start with these.

But by starting so early, and naming such high-profile, intelligent, active individuals to the roles, it looks a lot like a shadow government.

Shadow governments are nothing new in parliamentary nations. It's quite common for the Loyal Opposition to have a key members of its parliamentary caucus named to especially keep an eye on specific departments of government, becoming, in essence, the relevant minister's shadow.

In the US, however, we don't tend to work this way. And it's particularly odd coming from the man who keeps insisting that there's only one president at a time.


***

On the other hand, I have to say that I have few complaints with his choices so far, both for those top jobs and for others that have been mentioned.

George W. Bush has notoriously governed by favorites, with the most important qualification for any nomination being personal and ideological loyalty to him. An extreme example of this is the sad case of Harriet Miers and her inexplicable and ultimately failed nomination to the Supreme Court. Less extreme, and more ideological than personal, was the similarly inexplicable, but strangely successful nomination of John Roberts to become Chief Justice of the United States, before he'd even been successfully voted on for the Supreme Court!

The glaring exception, in turn, was General Colin Powell, who tried valiantly to serve as Bush's secretary of state, only to be continually undermined by those with closer personal and ideological ties to the president.

While much is being made of Obama's "team of rivals", what's really remarkable is that this is a team of technocrats, people who are being chosen either because of clear qualifications for the specific office, or because they're generally recognized as being intelligent enough to do the job without them. Hillary Clinton, for example, doesn't really have that much direct foreign policy experience, and has never been a diplomat; yet no-one I've seen really doubts her ability to act as Obama's chief envoy and master of foreign affairs.

Now, there's a downside to technocrats, too. Highly educated people sometimes lose sight of practical reality. They sometimes get caught up in their own cleverness. But right now, I'm sort of looking forward to the idea of a cabinet staffed entirely by people who are widely regarded as being picked because they're smart.

Gravity Continues to Assert Itself

The news, this week, has once again been bleak. Bank stocks collapsed again, led by Citi. Not very long ago, confidence in the Citi name led the bank to buy naming rights to the new Mets ballpark--Shea Stadium's replacement is Citi Field. Now, the name is mud, and most of the other big bank stocks are being dragged through it.

But to me, the more interesting, and potentially more dire news comes from the heretofore neglected realm of agriculture.

Conventional Wisdom at the moment seems to be that agriculture is going to do fine in this crisis. The price of oil (and hence, diesel for their various machinery) is down, while the price of crops is way, way up, right?

Wrong. The price of crops has crashed along with the rest of the commodities market. Right now, a bushel of winter wheat would go for about $5, but cost about $6 to grow.

This is a part of what economists talk about when they tell us that deflation is as bad, or worse, as inflation. It seems counterintuitive to think that lower prices could ever be a bad thing, and if all you ever are is a consumer, I suppose that's true.

But few of us are truly consumers, only. Many of us have jobs that produce, as well. Whether we're a "direct" producer, like a farmer putting seeds into the ground, reaping a harvest and selling it, or a more "indirect" producer, like me sitting in my office helping my company make better products, our livelihoods are ultimately tied to our ability to sell our product for more than it cost us to make it.

If the prices at which we can sell go down, something has to be done to cut the costs, as well. If you're a farmer, you don't have many options: you have to buy fuel for your machinery, you have to pay your taxes and possibly rent (many farmers lease rather than own the land they farm) or mortgage, and you almost certainly have to hire help. You could hire less help, or hire illegal help and pay them pennies, but you can't do away with the help entirely.

If you're a more industrial organization, you could try cutting costs by cutting wages and benefits, but most people react badly, even in an economic downturn when they're happy just to have work, to actually having their wages and benefits reduced rather than raised. In a unionized environment, it's often impossible, which is one reason (but not the only reason, by far) that Detroit is in the midst of catching fire and sinking into the swamp.

So instead, you cut hours, or cut jobs.

This, of course, feeds a deflationary spiral, especially when credit is also hard to come by. If people aren't buying, producers aren't selling. Ultimately, they cut the prices of what they've already made to just try to get it out of their inventory (especially if it's at all perishable, like food), but if they have to cut prices below what it cost them, they have to cut costs...

Economy and Politics: Bailing out Detroit?

With the election over and the bank bailout no longer really news, the persistent mutter in the media now is about the desperation of GM, Ford, and Cerberus (the private owners of Chrysler). It's a little hard to believe, I think, that the Big Three, who for so long were synonymous with American industry, could be this close to death, and yet, the facts are actually pretty much there for anyone to see:

• Big Three profitability, particularly for GM and Ford, has been tied for over a decade to trucks and SUVs. It's not that they weren't selling cars, mind you. They even sold a few good cars, believe it or not. It's that they weren't selling cars at a profit.
• Much like the mortgage debacle, the Big Three inflated their sales numbers, if not their actual profits, through cheap credit and easy leases. 
• Big Three labor costs are very high.This is part of the reason they can't make an ordinary car at a profit.
• When the price of gas spiked, automobile buyers quit trucks and SUVs cold turkey. US manufacturers were caught flat-footed by this, but worse, even if they hadn't, it's not really clear what they could have done about it, when they can't make a car at a profit!
• With lots full of trucks they couldn't give away, let alone sell, dealers found themselves needing to borrow to obtain vehicles that would sell, only to find they couldn't get credit.
• Making this worse, lots of trucks and SUVs were leased, not sold, in the last three years. In past years, these were easy to sell, "pre-owned", at a profit when they came back, a great deal if it works, because they got both the lease money and an eventual profitable sale. Now, instead, they've got lots full of used trucks they can't sell alongside all the new trucks they can't sell.
• Once dealers started to get credit again, customers couldn't, so even customers who wanted to buy, couldn't.

So now, Detroit is saying, "Help us!" And some people are saying, "Yes, for heaven's sake, help them! Help them now!" and others are saying, "Why should we pay to save their short-sighted asses?"

Unfortunately, the answer to that question is simple. It's the only simple answer, really, in this whole mess. We need to at least consider a government bailout, because there are roughly three million jobs associated with the Big Three. If any one of them, especially the largest, GM, were to fail, that would be monumental hit to the broader economy. 

Michigan would take the biggest hit, of course, but there are automobile and truck plants scattered throughout the country in all sorts of odd places. Senate Minority Leader Mitch McConnell (R-KY), for example, has a vested interest in seeing some sort of bail-out happen, because there's a plant in Kentucky. Here in Saint Paul, there's a Ford plant that's probably going to close in the next few years no matter what happens, but if Ford were to suddenly hit the wall, the controlled, mitigated shutdown that Ford planned would become a sudden closure that would put hundreds on the dole queue all at once.

Exacerbating this situation is a belligerent United Auto Workers leadership. Their feeling is that this crisis is entirely management's fault, and therefore their membership shouldn't have to concede a single penny or in any way suffer the consequences. They are, however, wrong. UAW intransigence is one of the reasons Detroit can't make money on a small, inexpensive, efficient car and instead had to predicate their profits entirely on gas-guzzling monstrosities. 

As brave as they're feeling right now, with GM on the ropes, they're going to feel pretty stupid if, three months from now, there is no GM, and all of their GM-based members are out on the street. They're also going to be pretty angry at President-elect Obama, who right now really does have the worst job in the world: almost-President. He can't actually do a damned thing right now, but he's under a lot of pressure to save the world. There's 70 days 'til he's actually President, and GM might well fail before that.

One argument I don't buy, by the way, is that Detroit could have avoided this by going green much earlier, like Toyota did. This is too simplistic an argument. The Prius--my personal favorite automobile, hands down, and the one I drive--is not a cheap car by any stretch of the imagination, but it also doesn't make Toyota much money. It was expensive to develop, is expensive to build, and because of issues getting enough good batteries, for a long time was in extremely short supply. I think they're currently making a profit off of them, but for a long time, they weren't.

The Prius is not why Toyota is standing, albeit a bit wobbly, while GM is battered, bruised, and crawling on broken limbs to the phone to dial 911 with its broken nose. It doesn't hurt, but it's not the reason. The reason is that Toyota's overall business model and practices ensures that they can actually make money off their cars as well as their trucks. Some of this is that they made efforts to make their entire product line, even non-hybrids, at least a little more efficient; and also have a reputation for making solid, reliable cars. People are willing to pay a little more for that, if they can, so Toyota can sell their cars for a little more than GM et al. can. Some of it is that they're not burdened with the same labor costs. 

From the outside, it appears that Toyota's management actually thought in terms of long-term sustainability, while GM, Ford and Chrysler all focused on immediate profitability. They might well have had contingency plans for the day when oil started to rise and demand for the guzzlers slackened, but they were all expecting it to be gradual. They didn't foresee or plan for a sudden spike putting the fear of G-d into the market, and they certainly didn't foresee or plan for the possibility that such a spike would coincide with a general, world-wide collapse of the financial system.

Like the bank bailout--which, by the way, will now officially not happen the way it was originally advertised; there will be no government buy-out of toxic assets, after all--I'm not really happy with the idea of throwing good money after bad companies. But I shudder to imagine what will happen if a million or more workers are tossed out into the cold at once.

Economy: A couple of less gloomy days

The week opened with sharp declines on the news that the "real" economy--meaning the cycle of production and consumption--was seriously sprained if not actually broken. The last two days, however, have been a bit cheerier for the markets. Two days ago, Asia time, the Nikkei and Heng Seng posted tremendous rallies, while yesterday saw the Nikkei's rally continue and the Heng Seng basically flat. Domestically, the Dow 30 shot up 900 points, back above the 9,000 mark, and today is floating just above yesterday's surface, almost like it's holding its breath.

Some of this is bargain hunting, of course, but some of it is also a case of "buy on rumour". The Federal Reserve Open Market Committee (which is what we often really mean when we talk about "The Fed") is meeting today to talk about interest rates. There's a strong belief they're going to cut them another quarter or half point. The Federal Funds Rate is currently at 1.5%, so you do the math.

Meanwhile, the LIBOR, the London Inter-Bank Overnight Rate that governs bank-to-bank credit, is still well above that, at 3.47%. That's down quite a bit, though. At the height of the crisis, LIBOR was over 5%. Keep in mind that, when everything is working right, LIBOR tracks the Federal Funds rate fairly closely, so the fact that there's still a 2% gap is troublesome. But the fact that it's now only a 2% gap is also reason to hope that credit markets really are thawing.

Still, this little column of mine isn't really about sunshine and roses, so of course, I have to point out some of the gloomier news. In a move that shocks almost nobody, most of the big banks receiving bailout money this week from the US Treasury are not planning to apply that money as a laxative to their constipated credit departments. Rather, they're going to use it to fund buyouts of smaller, weaker banks, thus consolidating the industry and creating more "too big to fail" institutions.

The problem is that Secretary Paulson failed to include any requirement, when he cut the checks to the banks, that it be used for lending. He just asked them really nicely. And now, the carrot having failed, he's doing nothing to apply the stick.

Now...maybe he honestly doesn't feel he has the authority to do so. Or, maybe he's such a dyed-in-the-wool free-marketeer that he just can't bring himself to really nationalize the banks by giving them orders of this sort. Maybe he thinks it's just as well that our debt-oriented economy is facing massive restructuring and a new paradigm, even if it hurts (and really, if so, I'm not sure I disagree; but then, I'm employed, right now...). Or maybe he's doing his friends favours at the taxpayer's expense--he'd hardly be the first cabinet minister in the history of government to do so.

Whatever the reason, the banks are planning to use the money to ensure their own survival, and to hell with the credit-based economy they spent the last 30 years constructing, and right now, nobody's in a position to do anything about it. The executive branch is stuffed full of Reaganites and neocons still in denial; the legislative branch is useless until January[*]; and the judicial branch really has nothing to do. It's not against the law to hoard one's treasure, nor for a corporation or individual to look out for what they believe is their own best interest.

However, it's doing nothing to improve the confidence of the economy. In addition to "big" credit pulling back, like inter-corporate credit, mortgages, and car loans, now the credit card companies are pulling back, behaving like fresh Born Agains, suddenly avid to preach tighter, more responsible credit after decades of sending credit-card pre-approvals to anyone who can prove they have a pulse. They're cutting credit limits (which automatically lowers credit scores, by the way, even if the cut has nothing to do with you, personally), raising interest rates, and in many cases just refusing to issue cards to new customers.

And all right before the American Winter Compulsory Capitalism Festival and Pine Tree Slaughtering Extravaganza.

Black Friday, the day after Thanksgiving Day in the US, is so nicknamed because it's the day many retail establishments finally make a profit on the year (and hence, are now "in the black"). Many of them spend their entire year running a loss that they expect to make up as the calendar winds down and children start praying to the Arctic toy-giving god.

This year, with money tight, jobs being shed, and credit cards pulling back, it may have a connotation more akin to the day historians attach to that day, exactly 79 years ago, when the stock markets wound up their third day of monumental collapse and set off the era we now call the Great Depression, 29 October 1929: Black Tuesday.

[*] Yes, I know they'll be convening again after the election. It's not impossible they'll get something useful done in their lame-duck session, but I wouldn't bet the farm on it.

Strange Days Indeed

It is, I think you will admit, a strange day indeed when we can look at the major US market indexes closing the day down 3-3.5% and call that a good thing; and look at the plummet in oil prices and strengthening of the dollar and call that a bad thing.

And yet, that's where we find ourselves today. Friday in Asia was a financial bloodbath, with the Nikkei (Japan) and Heng Seng (Hong Kong SAR) giving up 9.6% and 8.3% respectively before the opening of US markets. Overnight futures trading for the Dow and S&P had to be halted until the opening bells because they hit the "limit down" thresholds. Everyone expected today to be another dramatic crash in the US, as well.

In the end, despite a pessimistic start, bargain hunting, contrarian investing, and G-d knows what else kept the day's losses on the Dow 30 to 3.6%, S&P to 3.5% and NASDAQ to 3.2%.

The market continues to slide despite the thawing of the credit markets--they're not yet fluid but they've at least moved from pack-ice to slush. The problem now is that frostbite has already taken its toll. What we're seeing now, to use a somewhat graphic metaphor, is the sloughing off of flesh killed by the cold.


You see, public companies tend to only react to thinks in quarterly bursts. That's when they have to post their financials, and so that's when they tend to make big pronouncements to go along with those financials. A company that's doing well, and expects to keep on doing well, will post its massive profit and announce how it intends to build on its success. A company that's doing poorly will announce its painful loss and follow up with what it intends to do to return to profitability.


Well, there have been a lot of losses to go around, this quarter. Banks, of course, are hosed. The automobile industry, as I've described in the past, was already reeling from oil prices killing demand for their biggest sellers, and then further crushed from several directions by the credit freeze. Manufacturing in general is falling off the rails (and it wasn't really doing all that well to begin with due to over a decade of open-market, free-trade policy, which predates Bush, lest you forget and blame the shrub for everything).

Then there are the job numbers. Unemployment stands at a nationwide average of 6.1%, which is hardly dire by 1930s standards but is well above what we've gotten used to. Many of those corporate earnings announcements came coupled with announcements of layoffs, which means the only direction that number is going is up.  Even privately held Chrysler chose to join the herd and make an announcement that its cutting 25% of its salaried staff. And despite good numbers from Apple, Google and Microsoft, Big Tech is not immune: Yahoo! announced a big layoff, too.


Even in the best of times, which not even the most contrarian pundit is prepared to suggest these are, announcements like these could cost the Dow 3% or so. So in the end, the fact that we held to only a "normal" fall-off for the day, compared to what happened elsewhere, is definitely good news.


***


Meanwhile, oil is way, way down compared not only to the stratospehric highs of the summer, but the prices we'd seen for the last couple of years. Along with it  has fallen the price of gasoline--I could have paid $2.29 in Saint Paul this afternoon, for example, except that I filled up yesterday at $2.39, same station.

The dollar, in turn, is strengthening after a long decline. That should be good, right?


Wrong.


The strengthening dollar is the easier one to explain. The dollar is not getting stronger because our economy is so great, because of course, our economy is in tatters just like everyone else's. The dollar is getting stronger because other countries are faring even worse, and their currencies are reflecting it. The currency markets are basically saying that, even now, when the US has demonstrated massive national fiscal irresponsibility and helped to trigger the crisis that's got everyone in a panic, the dollar, and various dollar-denominated assets, are the best of a bad lot.


So basically, the dollar is stronger because the currency system is all interlinked instead of being based on a common, independent standard like gold or silver, and thus, it's all relative.


The price of oil crashing is a bit more of a mixed blessing than truly a bad thing, because it means that those of us who aren't feeling too panicked or too strapped for cash to drive anywhere are paying far less at the pump.

But it's not an unalloyed good thing, I assure you. Because aside from the first order reaction of, "Yay, I can fill my Prius up for less than $40!", the effects, and causes, of oil's decline are something to worry about.

First, effect. You see, many of the OPEC countries--and I'll grant you at the outset that if it weren't for the way the world economy is all interwingled, we might not care so much--many of the OPEC countries depend upon oil selling at or above a particular price in order to balance their budgets. Saudi Arabia, for example, needs oil above $55/barrel; Iran needs $90/barrel and is therefor already hurting. It's currently in the mid-60s, and despite the cut in production announced yesterday, still falling.


Now, cause. Perhaps more important (and more deserving of sympathy) than what the drop in oil prices means for the producing countries, is what it says about the consuming countries, which is that their economies are all, universally, so far down the shitter the world market is suddenly drowning in surplus oil.

From a summer spent facing the reality (and it is a reality, folks) of Peak Oil, we're now facing a winter of severe discontent in which people aren't buying much gasoline, not because it's too expensive, but because they're terrified of spending money...or no longer have any to spend!

***

Lastly, because we're so close to the election, I can't resist a bit of politics as well.

Y'all know that hoping for Mr Obama to pull off not just a victory, but a significant, unassailable victory; one that will be immune to electoral shenanigans like the one that Mr Gore suffered. I don't want a victory that hangs on the chads of few thousand provisional ballots. I want to see a mandate.

But we all have to be prepared right now for one absolutely guaranteed true thing: on 5 November, we will wake up to a financial mess as ugly as it was the day before. On 21 January 2009, when Mr Obama is, I hope, firmly ensconced in office, the world will still very likely be in turmoil. The mere fact of Obama's election and inauguration will not magically make everything better overnight. It took, depending on how you want to look at it, anywhere from 8 to 30 years for this current disaster to overtake us. Today's state of affairs is not merely the work of the monkey currently masquerading as President, but of his three predecessors, including, let's all remember, Democrat Bil Clinton, all of whom followed fiscal policies that contributed to the mess.

It will take a long time to repair the damage. While I don't want to say, "never", it's very unlikely that we'll see a spontaneous miracle happen that fixes all the problems and returns us instantaneously to prosperity.

What we can hope for, what I do hope for, is clear-headed thinking to examine and disentangle the knotty skeins of the problem, and provide confident leadership as we move forward. We need steady hands at the rudder. I believe, I hope, Mr Obama offers that, and equally to the point, I have not seen any sign that Mr McCain does.

The Week in Review

There hasn't really been all that much that's inexplicable this week. The stock markets have been wildly variable, but in a time of uncertainty and turmoil, that's to be expected. The markets are ultimately made up of people; the people are wound pretty tight; so any news, good or bad, results in a wild swing up or down as people respond with either sadness or euphoria.

 In response to one of my earlier stock-market-focused posts, my friend Ian (and I've scapegoated him on this one before) retorted that the markets are not the economy. And, as I later pointed out, he's absolutely right. The markets are merely one facet of the economy.

What makes obsessive focus on the stock markets so attractive is that we know within seconds when they change. It used to be that public market data was delayed 15-20 minutes if you weren't out on the trading floor in person, but that's no longer true. You can pull up the Wall Street Journal's web page, click on the header link to the market data chart, and watch the numbers change by the minute if you're so inclined, now, and they're up-to-date, without delay.

So it gives us a sense that we know exactly what's going on, at any given moment. We can watch the roller coaster and think we know where it's going.

But sometimes, the real economy is actually ahead of the curve. Which brings us to an interesting bit of news that slipped past most of the media this week. You see, the September retail numbers came in--that is, the comparison of same-store sales from month to month and year to year--this week. And they were awful. really, hideously awful. That part isn't a surprise.

The surprise is that they started to crash before the crisis hit. Well before. They'd actually been sliding since July. September started out awful for retail and only got worse. But because we only get those statistics two weeks after the month is over, and not on a day to day basis, it's more difficult to watch. There's no bouncing ball to follow.

In short: the "real" economy, what the candidates have been obsessively macro-ing as "Main Street"--really is pretty thoroughly screwed up, and it's not the stock market that's tanked it. Rather, both are being tanked by the same underlying cause, the credit crunch and the general loss of confidence in every aspect of the economy.

***

Meanwhile, the last of the debates was this week. I have one friend who insists that McCain won, because he stayed on the attack and kept Obama on the defensive.

I can't disagree more.

McCain stayed on the attack, and in the process looked and sounded drunk and belligerent. Note that I do not suggest he actually was either drunk or drugged, only that he did not sound, to my ears, like he was a coherent, decisive leader. He sounded like an angry old man grasping for control.

Obama, on the other hand, remained absolutely cool in the face of all of McCain's attacks. Unruffled, unflappable. He answered every challenge. Sometimes he changed the subject--every politician does this--but he never lost his cool. He never ceased to give the impression that he was already in control and therefore didn't need to grasp for anything.

If I had any lingering doubt about which one of them I want answering the big red phone, the third debate dispelled it. I want the man who stays calm and thoughtful in a crisis, not the man who feels a need to lash out to make a point.

The New, New Bailout

If you remember a couple days ago I talked about leadership, and how the Financial Crisis of 2008 desperately needed some. Well, it finally got it, from a place nobody expected...and yet, we should have.

The leader of the current movement is the Right Honourable Mr Gordon Brown, First Lord of the Treasury and Prime Minister of the United Kingdom. Mr Brown hasn't really been getting a lot of respect lately. His predecessor, Tony Blair, was a charismatic politician of the Clinton model, a showman as well as a policy wonk,. Brown, by contrast, is a dour Scots technocrat. As finance minister under Blair, the two frequently clashed over fiscal policy, and were generally seen as rivals. Brown's succession to the prime ministry was seen as something of a caretaker role, because, like John Adams, Brown seemed to be the only man who was unaware of how obnoxious and disliked he was.

And yet, we come back to what Brown's previous job was: finance minister. If anyone was going to have a handle on how to handle a financial crisis, Brown was a likely candidate. But we all got so used to thinking of him as a lame duck that it never seemed to occur to anyone that he'd be the one to lead the way.

So Mr Brown and his government came up with a plan that was much more direct, if much more socialist, than the Paulson Plan: invest directly in key banks, in exchange for equity shares; and guarantee inter-bank lending with national funds, the same way individual depositor accounts are guaranteed. Except they're talking about guarantees without limits.

The European Central Bank followed suit not long after. This is not just a case of follow-my-leader; it's a matter of survival. In a world where money can flow freely across borders, if Country A is doing something confidence-building and Countries B, C, and D don't, where are you going to send your money?

Right.

So now, the US is following suit, despite the fact that it's got to be tearing up the ideologue NeoCons in the government apart. Two weeks ago saw our leaders playing political games with a flawed, much bally-hooed $700bn bailout plan that now may never actually be implemented, because they were desperate to avoid this very gambit. But the less socialism-averse Europeans left the US with no real choice.

All told, there are four new measures being implemented in this new, new bailout:

1. Treasury will invest directly in banks, with half the investment going to the eight largest players and half going to smaller fry. In exchange, Treasury will receive non-voting stock in those companies, and a 5% dividend at first, increasing to 9% later, for its pains. In short, unless the banks actually collapse, Treasury will make money off this deal.
2. The FDIC will now guarantee bank-to-bank loans. In short, the government will now be co-signing the loans, like a parent helping a child get a car loan or a credit card. This is aimed directly at unfreezing the interbank credit market.
3. The FDIC will offer, for the next three years, unlimited insurance on non-interest-bearing accounts of the sorts used by companies for their expenses. This is aimed at preventing a run on the banks, and mirrors moves in Europe.
4. Lastly, in a pinch, the Federal Reserve itself will start buying commercial paper in an effort to unfreeze short-term lending between companies.

The President was at pains this morning to insist that these were temporary measures, that everything was being done to ensure that the free market would eventually reign supreme, once it actually, you know, functioned again.

Yesterday's market surged on just the possibility that this might happen, and today started out pretty peachy as well, not just at home, but around the world. As Tuesday wore on, however, it started to slump again. Once the initial, "Yay! They did something!" euphoria wore off, hard questions remained.

One such question was: will this actually work? Paulson has reportedly told banks that they need not just to take this deal to save America's ass (because, you know, they don't have to sell him an equity stake in their corporations if they don't want to), but to actually deploy the capital to unfreeze the credit market.

Problem is, they don't have to do that, either. The government won't be buying a large enough stake in any of the major players to actually control them, which means that once they have the money, they can do anything they want with it, including hoard it and wait for better days.

Another such question was, what about the rest of the economy? A lot of damage has already done. Consumer confidence is rattled, jobs are being shed, major industrial powerhouses have seen their stock plummet. GM and Chrysler, already struggling before this mess, are looking at merging, which would reduce the Big Three automakers to two. The commodities market has crashed hard--the sole obvious benefit of which is that the price of gasoline at the pump has come down to saner values.

Nobody's got good answers to this, yet. It will be several days before we do.

Meanwhile, once again, we come back to a crisis of leadership. Paulson comes across like an ineffective substitute teacher begging the class to behave and heaving powerless sighs as he continues to get hit with spitballs. America, which should have been leading the charge to solving this crisis, instead is trailing along behind the a lame-duck Scotsman who two weeks ago was having trouble holding on to his own party's discipline and everyone was sure was going to get trounced at the polls.

So: Memo to the So-Called Leader of the Free World. Where's the leadership, bozo?

On Credit

The word "credit" essentially means "belief".

If I extend you credit, what I'm really saying is that I'm giving you money because I believe you'll pay me back.

That belief is at the heart of the crisis right now. The media pre-occupation with the stock market indexes is not entirely wrong-headed, mind you, because as I've said before, they're the leading indicator of how the economy is reacting to whatever else is going on in the world.

But the heart of this crisis is still not truly a stock problem. It's a credit problem.

All of the bailout proposals, from the original idea of getting bad paper off the books of banks to this week's darling notion that the G7 governments should re-capitalize key banks and take ownership stakes in exchange for the money, are geared toward solving that problem, toward reinstating the belief that Bank A, borrowing from Bank B, will be good for the money.

What the markets are reacting to is partially the failure of various financial corporations and the assumption that more will fail and partially the failure of other credit-dependent industries, like housing and automotive. Companies in these industries are components of the various indexes, so as people flee those specific investments, indexes fall.

The market is also reacting to the idea that a recession, or worse, is now inevitable. Investors are "pricing in" a recession, battening down their hatches, finding relatively unrisky places for their money.

And then lastly, of course, there's the overall, purely psychological, panic-driven capitulation that's going on. Many investors are simply "giving up" on the market, spooked by the drop in the indexes. They're liquidating anything that's tied to the stock market at any price they can get, just to get out. It's that purely herd-like stampede that's really killing the markets right now.

In times when belief is in short supply, believable leaders are needed. And there's a painful lack of them right now. Bush and Paulson, for example, are widely seen as being partially culpable for getting us into the mess in the first place. There's not a lot of belief that they can get us out of it. Bush going on the air and saying, "We'll fix it. We'll take aggressive action. Trust us!" doesn't really help, because, let's face it, there has yet to be an instance of Bush taking aggressive action in any context that didn't end up being an utter bungle.

This is actually a dangerous moment. It's important to remember that most extremist movements succeed in taking power by providing that credible-seeming leadership at the moment when everyone's looking for it.

8579.19?! YIPE

When I made my earlier post today, the Dow was puttering along nicely. It was actually up a little bit.

Sometime between the time I hit "Post", had a bunch of meetings, and came back to my desk, the US indexes plummeted like...great...big...plummety things that are very heavy and make a big hole when they finish plummeting. The Dow closed at 8579.19, off 7.33% on the day, S&P followed like a lemming, giving up 7.62%, while the NASDAQ lost 5.47%.

All three walked off the cliff's edge around 2pm ET. The trigger was an announcement that Standard & Poors Ratings, a service that grades the quality of various organization's bonds, was placing GM under review, meaning there was a good chance that it would cut GM's bond rating in the coming months. This came as Ford's debt rating was also cut.

In both cases, the companies are under scrutiny because the automobile market is sucking so very badly. This, in large part, was caused in part by the spring and summer jump in oil prices, which suddenly killed off demand for trucks and SUVs all at once. Dealerships have lots full of large vehicles they can't sell, and because of the credit crunch, they can't borrow money to buy the kinds of cars that would sell, and even if they could, about half their customers couldn't get loans. So the upshot is that car sales right now suck badly and the two publicly traded US manufacturers are getting hammered for it.

Ordinarily, this would be just one blip, albeit a large one, in a typical day's news, but in the current, highly-charged and emotional climate, this was basically the starting gun for a race to liquidate holdings.

Reports are coming in that retail investors--that is, not investors in Macy's, nor Macy's itself, but people like you and me who don't trade for a living--are engaging in something of a run on the stock market. They're pulling out of stock mutual funds in droves, requiring those funds managers to sell holdings immediately to cash out the departing customers. This, of course, fuels price deflation in the stock market, which causes more investors to want out as soon as possible, setting off a spiral of doom and gloom.

Possibly--stress possibly--exacerbating the problem is that the ban on short-selling expired without renewal. I can't really explain short-selling right now, although it's on my to-do list for a later column, but suffice it to say that a lot of people blame short-sellers for a lot of the bullshit that happens in the market.

Trouble is, the earlier plunges of the last couple of weeks happened while the ban was still in effect. So that dog will only hunt so far without pretty solid evidence.

All of this, sadly, reinforces the point of my last article, which is that none of these confidence-boosting measures various governments are attempting actually appear to be working.

On Gravity, and also on the Uses of Bailout Power

First, a quick update on this week's numbers and what they seem to mean. Most major stock market indexes, not just those here in the USA but around the world, are significantly down for the week. Heng Seng, for example, started the week at 17,600 and hit a low of 15,500. It was up yesterday, but that appears to be bargain hunting.

In fact, in general, the upswings you see in the indexes this week seem to be attributable to bargain hunting. The good news there is that it means that there are people out there still willing to buy stocks. This is important, because while my old friend Ian correctly pointed out elsewhere that the stock market is not the economy, the stock market's health is always a leading indicator, in either direction, of where the economy is likely to go.

So, what we're seeing on the markets right now is a generally downward trend. It's not always precipitous drops, but gravity is definitely still in charge. There is still no broad confidence that the stock market is a good place for investment right now.

Ordinarily, in a situation like this, there'd be a flight of capital to either bonds or commodities, or both. But of course, that's not what's happening now. The bond market is still frozen up like the Northwest Passage used to be. It's not so much that nobody's buying bonds, as that people can only be enticed to buy bonds by increasingly high rates of return. Now, the definition of "high" for the bond market isn't really all that dear--low single-digits. But considering that bonds could be floated just a few weeks ago at fractional-percentage-rate interest, 3% is high. So, the various entities that float those bonds--banks, businesses, colleges, cities, states--are thinking twice about selling because they don't know that they can afford to pay!

This, of course, gets us back into the credit frostbite situation I've been nattering about since I started this column. A college wants to build a dorm, but they can't float the bonds to do so. In the near term, that means no construction jobs, which in turn means those construction workers have less cash to spend in the retail world, which depresses retail profits, which affects their stocks. Meanwhile, the college either has fewer students, or fewer of them on campus.

So that leaves us with commodities, and even those are volatile. Gold is up noticeably over the last month, but on any given day it's had some precipitous falls, usually on days the stock and bond markets also tanked. Oil, you'll have noticed at the gas pump, is down significantly, around $88/barrel right now, although that's also a factor of the dollar--get this--strengthening versus other currencies. Of course, the only reason that's possible is that so many of the other major economic players are also suffering. If Europe's economy were solid right now, oil would probably be a bit higher because the dollar would be cheaper.

So, herein lies a danger I haven't heard talked about much yet. One of the ways Treasury is going to work its magic is by printing money, creating it from scratch. No-one else in the US can do this, of course, which is what makes Treasury special. The problem, of course, is that if you create too much money, you begin to fuel inflation, which is already high. The dollar begins to weaken because, as with anything, if there's more dollars, they're worth less.

***

The big news this morning economically was the Treasury's statement that it was prepared to actually invest directly in banks--that is, give them money in exchange for ownership stakes, as opposed to giving them grants or loans or buying up their bad paper. We're not the first to consider this: Britain's already doing it.

The important thing to note here is that Treasury hasn't said that it will do this, only that, thanks to the bailout bill law, it now can, and won't take the possibility off the table. Many lawmakers (notably Charles Schumer, D-NY) favor this notion heavily. On the one hand, they think it's a better idea than just buying the bank's bad debts and then letting them run free. On the other hand, more economically-left folks aren't afraid of a little nationalization if that's what it takes.

The idea, of course, is the put the full faith and credit of the US directly into the private banking system by having the Treasury directly bolster, and take partial control of, struggling banks. However, that theory assumes a market that's thinking optimistically, that's willing and able to trust the government, or indeed, anybody, to save their asses.

That's not the market we have right now. We have a very pessimistic, PTSD market right now that's pretty much afraid of its own shadow and abjectly terrified of the least bump in the night. A move like this could instead send the message that the banks Treasury is trying to shore off are in even worse shape than they appear, leading to a panic and a run on those banks. This, in turn, would trigger a broader panic, because that's how panics work. They play on the fact that somewhere in the depths of human genetics there's a pack animal that's going to freak out because other prominent members of the pack are freaking out, rather than because they themselves actually perceive a problem.

So why is this even being considered? Desperation. Paulson, Bernanke, and others hoped that the enactment of the Bailout would calm markets and bolster confidence. Around the world, various moves by various central authorities have similarly been tailored not just to rescuing specific institutions but toward convincing the markets that it's OK to come out from behind the sofa.

Yesterday saw a coordinated central interest rate cut aimed at the same idea. An unprecedented number of national central banks, including the US Federal Reserve, the Bank of England, the European Central Bank, and the central banks of Canada and Sweden all cut their rate by 0.5%, and P.R. China's central bank quietly went along with the idea and cut theirs 0.7%.

So far, the passage of the Bailout Law failed to win confidence. The interest rate cut yesterday produced, at best, mixed results that still look more like bargain hunting than real reinvestment. In short: nothing's worked yet. Granted, they haven't given it much time, but nothing's worked, yet.

And so, we have the spectacle of some of the most powerful men in the world frantically looking for ways to change course before we hit the rocks. But nothing they've done so far has turned the ship, and it's hard to see how panic, rather than clear, cool thinking, is going to make anything any better.

Right, So...Now What

So, the bailout has been passed and signed, and suddenly the media is struggling to figure out what else to talk about. I mean, it's not so much that the economy has magically been fixed by the bailout's passage (although, more in a minute on that score), but the bailout was good theatre, and now, the show's over.

We're also not the only nation on Earth who just bailed our financial sector out. Germany, Denmark and France all moved over the weekend to find ways to rescue or shore up banks that were sliding into the pit of despair. Germany, for example, pledged billions of Euros to bail a bank called Hypo Real Estate, and announced unlimited depositor insurance, the latter matching a move by Denmark. France had to move to save Fortis. Even tiny Iceland has had to move to save a bank this last week.

Some of these moves are real bailouts, designed to fix broken banks. But some of them, and to some degree our own bailout and the politics surrounding it, are about psychology.

Market economic theories mostly rely on the notion that participants in the market are cool and collected, making rational, informed decisions about what to do with their money. As long as this remains true, markets should work.

As soon as emotion gets injected into a market, however, it begins to malfunction. You see, on the one hand, what Greenspan liked to call "irrational exuberance", like the dot-com bubble or for that matter the housing bubble; or on the other hand an irrational, excessive exodus as people get skittish about parting with their money. Emotion leads to such foolishness as believing, because you want optimistically to believe, that the housing market can only ever go up, or that the dot-com boom can go on forever despite a lack of earnings by so many of the companies involved.

Rationality, and even a cursory glance at history, tells us plainly that there's never been a market that went up that didn't eventually come down. The overall trend might continue upward--I doubt, for example that the bottom of the housing market will bring us back to house prices comparable to what they were when I moved to Minnesota in 1995. But there will always come a moment of peak, rather than an everlasting asymptotic rise.

What is remarkable about our current circumstances is how ill prepared many financial institutions, both commercial depository banks and investment banks, were to weather the day when the peak hit and the downward slide began. Large numbers of very intelligent people, all versed in the history of their chosen field, somehow convinced themselves that it couldn't happen to them.

Not everyone was fooled. There was an interview on NPR the other day--I don't remember the fellow's name, but he was a just-retired executive or board member of Washington Mutual, who felt that, now that the company had filed Chapter 11 and functionally no longer existed, his non-disclosure agreement was void and he could speak freely. He'd been telling WaMu's management for years that it was overexposed to bad mortgages and that it was going to suffer for it. Indeed, WaMu had already started to shed some of the bad loans, finally beginning to believe that he may be right.

But it was much too late, and there was much more crap on their books than they imagined. Nobody was willing to believe that the housing market could fall apart, or that it would become a self-fueling trend as foreclosure suppressed neighbourhod value and led to more foreclosure.

Of course, we're in the same sort of denial about so many potential peaks. Peak oil is one that gets talked about a lot. The possibility of reaching a tipping point in the climate, where it will change dramatically and not just gradually, is one that even many who recognize that climate change is happening prefer not to talk about much. We've already passed the peak of America's post-WWII influence over the world, although really, after nearly 60 years, perhaps we were overdue anyway.

We don't really seem to want to think about the troughs, much, either. The housing market has not yet hit bottom. Many people with perfectly ordinary mortgages are believed to be on the brink of default. If you think there's a borrowing crisis now, when sub-prime lending has turned out to be a mistake, wait 'til you see what happens when prime lending starts to fall apart.

And then, there's the really big one: how much debt can the US government rack up before people stop taking our markers? The Iraqi war is a leveraged operation, floated on bonds that are reputed to be held largely by China. I'm sure some doomsayers worry about what happens if China calls those markers in all at once, but I have a much more realistic worry, given all this bailout spending we have in mind: what happens if China stops buying our bonds? What happens when the credit freeze starts to apply to the US Government's own desire to fund its operations on credit?

I think this moment may be coming. I might be entirely wrong--I have yet to see any more educated pundit talking about it seriously--but I don't see any theoretical reason why, if individuals can't get credit on favourable terms, and corporations can't get credit on favourable terms, and cities and states can't get credit on favourable terms, there won't come a moment, very soon, when the US Treasury will find itself unable to float bonds and get money for them.

Short Take: Senate Passes Bailout 74-25

The Senate has passed the bailout bill, as amended, 74-25 with one absence (Senator Kennedy).

The revised bill contains a number of provisions pretty much designed to suckerconvince naysayers in the House to vote for it. The actual bailout provisions are almost unchanged, but the following sweeteners have been added:

• Authorize the FDIC to insure depositors for up to $250,000 per institution, rather than $100,000.
• Patch the provisions of the Alternative Minimum Tax to allow for the drift of inflation.
• Extend various tax breaks that were set to expire soon.
• Enact new tax breaks, including credits for the use of renewable energy.
• Provide virtually no new revenue or spending cuts to offset any of it.

The new bill is 4 times as voluminous in its language and basically filled with the sorts of things that never would have made it to the floor a week ago, because the committees kept wrangling over offsets and the like. Now, they're the most golden of golden carrots dangled in front of House members eager to get home and start fighting to keep their seats.

I will be shocked almost-but-not-quite-speechless if anything like the 218 former naysayers retain the courage to vote no in the face of such temptation.

Credit Frostbite: Government Spending

Because some writers talk of a "credit freeze", I in turn like to talk about "credit frostbite"--the damage done by the freeze.

Today, the New York Times has an article on how the freeze is affecting city spending.

Cities and states are good examples, you see, of a business that relies heavily on borrowing to do its day-to-day work. A road needs paving? Let's sell bonds to raise the cash. New park? Sell bonds. This sort of thing allows a government to work around its tax budget for a given year to get things done that seem to need doing. It's also a good way to finance longer-term projects. You know (or at least hope) you're going to get the tax revenue for it, but the contractors want to be paid now. So you float a bond, pay your contractors, and pay the bond off with property taxes, rather than paying for the project with taxes directly.

So far, so good. But now, there are two concurrent problems:

1. Property values are still slumping, taking property tax revenues with them. The first-order cause we all know about: the sub-prime debacle causing massive foreclosure and otherwise a sudden glut of available housing. There's now a second-order cause, however, at least in big financial-center cities like New York, which is that, as financial institutions fail and consolidate, jobs are eilminated, and commercial real-estate needs dry up. 
2. The bond market is sluggish to stopped, along with most other debt-related markets. It's virtually impossible for even a well-rated city to float a bond issue right now to raise cash.

Results? Some projects that have been in the queue for years, confidently waiting their turn, are simply not happening. The Times article, for example, cites a new emergency room project in Billings, Montana, and a highway project in Maine.  

These should have been easy targets to raise money to construct, but the bond market is hibernating.

New York City just tried to kick the bond market in the pants by offering higher rates of return on its bonds, but that option isn't necessarily open to everyone, and wasn't entirely successful--the bond issue didn't sell out. A small town may simply not feel it has the revenue to support a higher rate of return, especially with revenues slumping.

So: credit frostbite has claimed the bond market, claimed the projects that could only be funded on the bond market, and will almost certainly start claiming the jobs associated with those projects that will now not happen.

Short Take; FDIC asks to boost its per-depositor ceiling

In one of the few moves that are concretely, definitely, obviously aimed at making you and me, the average schmo on the street a little more confident that we're not going to be standing in lines for soup, the several people, including both candidates, have spent today babbling about the idea of the FDIC raising its per-depositor ceiling from $100,000 to $250,000.

Now, the word via the NyTimes is that the FDIC are themselves asking for that authority.

More later tonight or tomorrow.

First of all, let me pimp an article by my friend Chris, in which he expands a bit on the theme of liquidity: "Financial Lubricants".

One of the things being stressed this afternoon in the press, even as the markets rebound a bit, is that the money market is not rebounding at all. It's almost entirely jammed up, right now. Banks are just not lending to other banks, at least, not on favourable terms. Only the central banks of various nations (including the Federal Reserve) are being more open, but of course, all that does is put taxpayers on the hook for that borrowing.

This is part of what Paulson means when Congresscritters ask him why we should be on the hook for a $700bn credit line and he retorts that that the taxpayer is already on the hook. We are, through the Federal Reserve, lending money to banks who can't get it any other way. We're taking whatever collateral they can give us (at least, so I assume), and often, it's going to be crap, because that's all they've got. Of course, most of these banks really will pay back their notes--short term lending like this is supposed to be low-risk. But there's still likely to be some crap in there.

Meanwhile, the Senate appears poised to try to take the lead over the next day or so, rather than letting the House embarrass itself again right away. The theory presumably is that if the older, wiser heads of the Senate can get something passed, it will be easier to ram it down the House's collective throats. I'm not sure I'm buying it. I think too many of the people who said "no" really mean it, and at least some of the people who said "yes" really meant "no" and will find the courage to say so. I'm also not convinced that any attempt to even talk about the bailout won't face a filibuster.

***

So about the bailout itself. I'm still not convinced it's the right answer, but the more I understand about what Paulson was trying to do right from the start, the more I get why he and others think it's not an awful idea, anyway.

The idea, as near as I can decipher it, is to give Treasury a line of credit--a really bloody huge line of credit--with which to purchase "distressed" assets, like mortgage-backed securities whose mortgages are in the sewer. The theory, as I think I've said before, is to get them off the books of the banks, so the banks on the one hand no longer feel like they have to hoard cash to keep their balance sheets black, so they can lend again; and on the other hand no longer only have crap mortgage-backed bonds to use as collateral for being the borrowers.

Meanwhile, Treasury, which doesn't care if it holds on to a bunch of rotting meat for years, can wait paitently for the market to improve, and sell the securities as their value improves (or at least try to get more out of them) at a more leisurely pace. The bet being made is that while many of these securities are crap right now (because they're based on mortages whose underlying property values are no longer adequate, regardless of their interest terms or forecloseability), the housing market will eventually recover. 

Therefore even if some of these properties wind up foreclosed upon, there will be greater value available, later, than there would be now. The bailout bill's line of credit would wind up repaid and might even yield a profit, even if some percentage of the distressed securities really do turn out to be irredeemable turds.

***

And so now we come to the real reason why the bailout is itself an irredeemable turd and really ought to be rejected a second time: the bailout is doing exactly what the market was doing. It's betting that the housing market will eventually improve to the point where these securities are actually worth something.

Now...that's not really a completely incredible bet. Yes, the housing market is still falling and it doesn't have an obvious bottom in sight, but there does have to be a bottom, and then, it will bounce and start coming up again. There will, one day, be a demand again, and demand creates value.

It's the time-frame that makes the bet a shaky one. What if it takes five years just for the market to hit bottom. Or ten. Nobody wants it to, of course, but what if it does? And then takes another five to ten years to come back up to levels where the securities are worth a damn?

Even if it doesn't take that long, we can't assume that the value of these securities won't continue to fall after the government purchases them. One thing that's been made clear is that Treasury is not going to be able to buy them at absolute firesale prices. As much as the banks want them gone, they aren't going to accept pennies on the dollar. They're going to at least want something like the current value.

And there, at last, is the rub. We don't know their current value, not for certain. Not in aggregate. To investigate that, we would need to look not only at the securities themselves but the underlying mortgages and their terms, and then the value of the property securing that mortage, for every single one of these monsters. 

That, in the end, is why Paulson asked for so damned much money. Nobody really knows how much he's going to need to make this work, even if all the other conditions work out exactly the way he wants them to. They picked a nice big number that was lower than the deeply scary $1tn mark and figured it would probably be enough to at least get things started, even in the worst case.

There are too many unknowns, here, even now. And in the time it would take to nail them down, the credit freeze's side-effects would have begun rippling outward even further. Trickle-down economics might not work for prosperity, but there's no real question that it will work for pain. Something really does need to be done that unfreezes the money market.

But this bill ain't it.

Spreading Ripples

Of course, while America sleeps, Asia does business, and as America is starting to fumble for the coffee pot, Europe is well into its trading day.

The news is...not so good. But with one exception, which I'll note first, there are no signs of genuine panic, and even some signs of rebound.

Russia is not a country one usually associates with the words "stock market" at all, really, but it does have one. Two of its major indexes underwent major pullbacks today, requiring regulators there to actually suspend trading for a couple of hours to give people a chance to cool off and think about what they were doing.

Russia's actually had quite a bit of trouble, lately. Vladimir Putin gambled on flexing his muscles during the recent crisis in Georgia, in part because Russia seemed strong enough again to exert its own economic and political influence. The Russian economy has suffered ever since, however. Investors are nervous about putting money into Russia when it's feeling belligerent, and their banks are having some of the same "liquidity crisis" that we're having over here. Much of Russia's feeling of strength came from its status as an oil producer, but the price of oil has fallen significantly from its high of $147 in July.

Not all the market news is dire, however. The Heng Seng index out of Hong Kong posted a pretty good day, a further reflection perhaps of where China stands relative to the US and Europe in the credit mess. And the FTSE 100 index in London is also holding its own this morning. Furthermore, the futures trading market, which gambles on how the next day will go, is up for the DJIA and the S&P 500, suggesting that bargain hunting will keep the market from sliding much further today. Indeed, as I wrote this, US markets opened with a nice initial bounce, with the Dow 30 gaining 200 points back from the 777 point plummet yesterday.

***

Meanwhile, in Belgium, a bank named Dexia is requiring a massive bailout from the governments of Belgium, France and Luxembourg today. Its US operations are haemorrhaging money because of, say it with me now, the sub-prime mortgage crisis; it was trying to complete an over-leveredged buyout of a Dutch bank; and it was apparently tied in with Lehman Bros., somehow, and stood to lose $350mn from that company's collapse.

Dexia's main US operation was a bond-insurance organization called FSA. A large number of the bonds they were insuring were backed by sub-prime mortgages. With the collapse of those bonds, FSA has had to pay out quite a bit of insurance. FSA turned to its parent for help, and its Dexia provided a huge ($5bn) credit line to help FSA stay afloat without having to fire-sale its assets. But this, of course, leaves Dexia as a whole on the hook for FSA's problems.

***

Legislatively, today is likely to be a quiet day. The Congress stands in recess for Rosh ha-Shana, the Jewish New Year (for which at least one correspondent has reported seeing anti-semitic gabble on message boards at news sites). There will undoubtedly be back-room negotiations, as most of the principal players in this drama are not Jewish and have every reason not to take the day off. Tomorrow could see some committee action, but the full House of Representatives is not slated to reconvene until Thursday.

Conventional wisdom at the moment, therefore, is that there will be an attempt to pass a modified version of the bill on Thursday, assuming agreement on modifications can be reached; or else that Pelosi and Boehner are going to be breaking out the thumbscrews to try to get the handful of additional votes they need to pass the bill as-is.