Economic oddities and collapses?

Kev H

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I don't have the time to expound on this much before real life consumes me, but recent news has me wondering wtf is going on. I did not see any threads up about this in the front few pages, so I wanted to ask those who are more informed to comment on the new happenings, like the Govt bailing out Bear Stearns, and Bush's cautioning not to "oversteer" (ie, overcorrect the economy).


Representative links for reference:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aY2RvFA.yO_Q&refer=worldwide

http://biz.yahoo.com/ap/080315/bush.html?.v=2


I have a ton of questions that unfortunately I don't have time to phrase, but I am hoping to get some insights/discussions rolling. One economist gave the analogy that letting one house burn down (because of their poor choices and failed risks) is dangerous because it can lead to the entire neighborhood burning down. We've always had issues with our credit industries (a typical side-effect of that type of beast?), but why is this case so widespread and persistent? Is it as simple as the combo with the fuel prices? Why does Bush seem to say something opposite to what his Fed Governors are doing?
 
Shrugs. This sort of thing goes back to at least the Tulip Bulb Bubble. It's what happens when reality starts to exert itself over delusion.

In our case there have been two major delusions.

The first is that the value of money is a real thing. It isn't. It's an abstract that we all agree on because it simplifies commerce. When we are aware of this we don't screw around with it as much. We know that money isn't the same as reality and we pay more attention to reality than to money.

But recently we think money is real and anyway that creates money is good. So we've been speculating, lending and borrowing which makes us feel rich. However since much of that activity has done little to create real wealth there is a wide gap, in my opinion, between money and real wealth.

The other delusion is a somewhat limited one but exists in a very important place, at the upper levels of of our economic elite. They believe they are capitalists. In actuality they are just employees.

Capitalism is a damned risky business. There are a lot of things that can go wrong. And since a real capitalist, that is one who puts their own capital, into their business they can lose a lot when the business fails. This often, but not always, makes a capitalist careful. They know if they fuck up they're in trouble.

The executive employees think that they are safe from this fact. So they indulge in activity that undermines the business and society, although it's good for this year's balance sheet. They then pay themselves as if they were successful capitalists in the belief that all capitalists are wealthy. Which they aren't.

So our current problems are just reality reasserting itself after many years of delusional behaviour.

We'll get through this. We've been through it many times before. It's not going to be a lot of fun for a few years though.
 
I've kinda got this image in my mind. President Bush as a doctor outside a patient's room, explaining to friends and relatives in the waiting room that their loved one was in a bit in trouble, but everything is going to be fine, really. The doctors have some tricks up their sleeve. And he explains that the patient will be given this transfusion, and that medicine, and will be right as rain in no time.

But one of the relatives manages to peek into the room. There he sees all these ER surgeons frantically applying bandages, shouting "Oh, Shit! We're losing him!" and the heart monitor flat-lining. Which is to say, all these bandages being applied to the economy are just that. Bandages that are too little, too late, and Bush is saying these things in an attempt to keep the patient's relatives from panicking and making things worse.

Putting it another way, he's doing and saying them to keep the villagers from marching on Washington with torches.
 

I feel sorry for the accountants, analysts and those attempting to make sense of today's financial statements (hell, I feel sorry for myself- and I'm trained and experienced at this stuff!) The move over the last couple of decades from carrying securities at cost to carrying them at market value was well-intentioned and, in many respects, it is perfectly sensible. I find it a little amusing that there are now some voices protesting. The contrarian part of me can't help but wonder if the pendulum has swung too far in the opposite direction and wonders whether a gap has opened between "intrinsic values" and market values in certain areas. In some respects, the catatonic seizure that has occurred bears resemblance to the self-reinforcing effects on market values that portfolio insurance had on the entire stock market in 1987.

Like it or not, mark-to-market accounting can be traced as far back as the late '60s when the accountants were finally forced to deal with the abuse of leasing by corporations seeking to minimize the appearance of on-balance sheet liabilities. There is a long and not very pretty history of obfuscation and minimization of liabilities by corporation managers. Over the last forty years, corporate contractual obligations (be they leases, post-retirement benefits, hedging instruments, or purchase commitments) have gradually (and deservedly) found their way onto balance sheets at the behest of regulators, accountants and analysts.

On the asset side of balance sheets, even prior to mark-to-market accounting, corporations disclosed market values in order to comply with the old accounting rules that mandated "lower of cost or market." Of course, back in those days, market values were for the most part easily determinable because banks and corporations did not traffic in absurdly complex derivative investments (e.g., MBSs, CDSs, CDOs, interest rate swaps, swaptions, commodity futures, etc.) or one-off contractual obligations (e.g., power supply agreements, tolling agreements, commodity supply contracts, interest rate swaps, etc.) The demand for mark-to-market accounting came about after the S&L fiasco because lazy, hurried, hassled and untrained readers of financial statements were fooled by balance sheets carrying loans, regulatory assets and investment portfolios at cost. Politicos, the public, and regulators were bamboozled by 4% mortgage loan portfolios carried at cost; they were bamboozled by inflated carrying values for goodwill; they were bamboozled by post-retirement liabilities that never made any appearance on balance sheets whatsoever and they were bamboozled by the completely bent analysts of the sell-side.

Warren Buffett and many other true long term value investors have made a very good living over the years exploiting differences between "intrinsic values" and market values. Similarly, informed and seasoned investors have always been well aware of the potential for differences between market values and assets carried at cost. Ephemeral quotational values may or may not bear any relation whatsoever to "intrinsic value." Active and highly liquid public markets can and do occasionally become deranged. Quotations in thinly or rarely traded markets are potentially inaccurate. The potential for the abuse of "mark-to-made up" prices in one-off contracts where participants are heavily influenced by the rocket-fueled inherent conflict of interest of bonuses, stock-option related compensation or other perverse incentives is obvious and well-documented.


 
Arrgh, Trysail, I am going to have to print out your answer and study it, before I can understand it.

In this subject, I have the utmost respect for you-- but I just don't comprehend the jargon!:(
 
Arrgh, Trysail, I am going to have to print out your answer and study it, before I can understand it.

In this subject, I have the utmost respect for you-- but I just don't comprehend the jargon!:(

Stella, I'm sorry about the lingo..., and (regretfully) I'd advise you not to waste your time studying because this stuff has become essentially incomprehensible to even the smartest folk. I'm reasonably intelligent, experienced and trained- yet, in honesty, I'll tell you that I could spend the next ten years poring over JPMorgan Chase's (or Morgan Stanley's or Goldman's or Merrill's) financial statements and I wouldn't be any better informed when I finished than I was when I started.

I've witnessed the transformation of the investment field over the last thirty-odd years from a place dominated by people with (at least) a modicum of integrity to a place that is almost entirely infested by used car salespeople, hucksters and quick buck artists. It's now nothing but salespeople-- and that's a shame.

There's only one place that isn't in the business of extracting as much money as they possibly can from their clients: Vanguard, Vanguard, Vanguard, Vanguard.


 
Arrgh, Trysail, I am going to have to print out your answer and study it, before I can understand it.

In this subject, I have the utmost respect for you-- but I just don't comprehend the jargon!:(
That's the whole point. Mastery of jargon indicates mastery of the subject.

You're supposed to just throw up your hands and surrender.
 
That's the whole point. Mastery of jargon indicates mastery of the subject.

You're supposed to just throw up your hands and surrender.

Mastery of jargon is anything but mastery of the subject (knowledge of anatomy doesn't qualify you to do surgery).

Bloomberg ( http://www.bloomberg.com ) has a nice glossary ( http://www.bloomberg.com/invest/glossary/bfglosa.htm ) of financial lingo. Jargon means nothing- if you don't understand something, don't do it. Like so many professions, training in investing (which, necessarily, includes accounting, economics, manufacturing, logistics, statistical methods, marketing and strategic policy) is an absolute requirement. Unlike many fields, long experience (almost always gained the hard way) and perspective is indispensable. Character and integrity are critical elements, as well. The truth of the matter is that the only way one can gauge another's judgment, competence and trustworthiness is through long and intense (meaning almost daily) observation.

It's very easy to say, "buy low." In practice it's astoundingly difficult-- to do it successfully requires knowledge, courage of conviction and intellectual integrity. The world of investing is not a good place for co-dependents. There's a reason that- as a broad generality- institutions aren't superior investors. Wall Street (i.e., the "sell-side") is, of course, in the "moving business" while intelligent investors are (and should be) in the "storage business."

The average person has no chance of accurately evaluating another's competence or integrity without the kind of observation I note above.

That's a large part of the reason I steer most people toward Vanguard (need I say this behavior is not greatly appreciated by other investment organizations?)


 
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That's the whole point. Mastery of jargon indicates mastery of the subject.
Well, no, but I've never met a master of a subject who wasn't also a master of the jargon. Jargons develop for a very good reason-- so that points and problems specific to the field can be addressed precisely. :)

Try, I wasn't being sarcastic. :rose:
 

This is a well-written article and opinion that focuses on an accounting topic that is a bit arcane for the layman but is currently the subject of a great deal of attention:

Don't Blame Mark-to-Market for Banks' Problems
by Jonathan Weil

http://www.bloomberg.com/apps/news?pid=20601039&sid=aJFrPa3rqhHw&refer=home#


I confess that I'm not much of a fan of Barney Frank. The bone I have to pick with him is that his knowledge of economics and finance is not, by any stretch of the imagination, his strong suit. For at least a decade, he's been browbeating and hectoring the banks to be more aggressive mortgage lenders. Well, they went out and did what he told 'em to do-- that hasn't turned out all that well. Anybody who's ever been a banker will tell you, "Any idiot can lend money. The hard part is getting it back." People outside the banking field don't understand that and they don't understand that banks are not in the business of providing equity. Banks are (and have always been) leveraged. If more than roughly three of every one hundred $1.00 loans goes sour, it'll generally bust a bank.

Rep. Frank (to my dismay and astonishment) is Chairman of the House Banking and Finance Committee. Those familiar with the dire financial straits that the United States has gotten itself into through wild overspending and irresponsible entitlements will not be surprised that I view Rep. Frank as one of the people responsible. I honestly don't think the fellow is capable of reconciling his own checkbook let alone that of the country.


 
Those familiar with the dire financial straits that the United States has gotten itself into through wild overspending and irresponsible entitlements will not be surprised that I view Rep. Frank as one of the people responsible.

You don't think deregulation and corporate welfare have anything to do with it? Or corporations writing the regulations they will be forced to comply with? I've heard arguments claiming that the mortgage fiasco could have been avoided if regulations had been written to prevent scam artitsts from selling loans to people who obviously couldn't afford them.

I see a two pronged attack by the conservatives, which is now coming back to bite them; Starve the Beast, and Feed the other Beast. They cut taxes so they'll be forced to cut governemt (which also cuts into the budgets of those who would regulate) and then they write legislation favoring corporations at the expense of the general public.

Give capitalism a chance to run rampant (the highly praised 'free market') and watch it all fall down like a house of cards. You really can't expect greed to provide an environment conducive to a healthy society, which is why governments like ours came into being in the first place.

Don't get me wrong, I still love my country, it's the people running it I can't stand.
 
!!

You really can't expect greed to provide an environment conducive to a healthy society, which is why governments like ours came into being in the first place.

.

Why not ? Self interest is the only successful driver of any economy since your ancestors traded flints.

Governments dont fix economic problems - They create them

Finally, did America's founders expect the government to run the economy. No they had more sense.
 
STELLA

Youre on point!

The whole thing is a house of jargon. And jargon is as pliable as Silly Putty. The resulting confusion allows frauds and swindlers to skate around the law and standards of practice.
 
Why not ? Self interest is the only successful driver of any economy since your ancestors traded flints.

Governments dont fix economic problems - They create them

Finally, did America's founders expect the government to run the economy. No they had more sense.
They didn't expect government to run the economy. But they had no problem setting regulations that would protect the public.

And I'll disagree with your thesis about self interest. Self interest alone is not the most useful social impulse. To quote Heinlein, "Roman mothers used to tell their sons, 'Come back with your shield or on it. Later this custom declined. So did Rome.'
 
They didn't expect government to run the economy. But they had no problem setting regulations that would protect the public.

And I'll disagree with your thesis about self interest. Self interest alone is not the most useful social impulse. To quote Heinlein, "Roman mothers used to tell their sons, 'Come back with your shield or on it. Later this custom declined. So did Rome.'

What regulation did you have in mind in the first quoted sentence

I never said it was . I said self interest was the most successful driver of economic effort. I make no comment about any moral dimension.

I am unsure as to the value of bodies either on or off shields as a useful social impulse .
 
To quote Heinlein, "Roman mothers used to tell their sons, 'Come back with your shield or on it. Later this custom declined. So did Rome.'

If that was Heinlein, he got it wrong. The origin was Sparta.

 
You don't think deregulation and corporate welfare have anything to do with it? Or corporations writing the regulations they will be forced to comply with? I've heard arguments claiming that the mortgage fiasco could have been avoided if regulations had been written to prevent scam artitsts from selling loans to people who obviously couldn't afford them...

Give capitalism a chance to run rampant (the highly praised 'free market') and watch it all fall down like a house of cards. You really can't expect greed to provide an environment conducive to a healthy society, which is why governments like ours came into being in the first place.

Don't get me wrong, I still love my country, it's the people running it I can't stand.

A) We live amidst a nation full of salesman and peddlars. Just because some pitchman tells you to buy such-and-such automobile, do you? Miracle diet pills are hawked on the boob tube all day long. You (and everybody else) have the freedom to choose whether to buy the $400 sneakers from the carnival barker.

B) John Hancock was rich because he was a smuggler; a goodly portion of his revolutionary motivation was pecuniary. American revolutionaries had a myriad of rationales, removal of taxation was prominent for many of them.

C) Business cycles are, and have always been, part of market economies. They arise from periodic over-optimism and are naturally corrected.


 
The subtext of much of what is written in threads like this is, "I don't like capitalism, it doesn't work, it should be replaced with something else." Nowhere in this "critique" is an explanation offered for what force generated a several-orders-of-magitude increase in wealth and living standards over the past 200 years in countries where capitalism has been allowed to operate (since it "doesn't work"), nor is there any hint of what might "replace" it.

Yes there are certain preconditions for capitalism, primarily the rule of law, but frequently in these discussions the preconditions are conflated with the thing itself. Yet the "rule of law" never produced a single widget, convertable or laptap. We are also reminded that man is not motivated primarily by material self interest (duh), and then implicit attempts are made to intimate that self interest really has little to do with that monumental advance in living standards, again with no real attempt to offer an alternative explanation.
 
*yawn*

It seems that the people holding the paper on the people holding the paper to some people who signed their name on some risky paper got nervous.
 
BTW, here is a thougtful proposal to solve the subprime/credit problem without resorting to bailouts, creating other forms of moral hazard, or putting taxpayers on the hook to benefit improvident speculators:

How to Stop the Mortgage Crisis
By MARTIN FELDSTEIN
WSJ, March 7, 2008

The potential collapse of house prices, accompanied by widespread mortgage defaults, is a major threat to the American economy. A voluntary loan-substitution program could reduce the number of defaults and dampen the decline in house prices -- without violating contracts, bailing out lenders or borrowers, or increasing government spending.

The unprecedented combination of rapid house-price increases, high loan-to-value (LTV) ratios, and securitized mortgages has made the current housing-related risk greater than anything we have seen since the 1930s. House prices exploded between 2000 and 2006, rising some 60% more than the level of rents. The inevitable decline since mid-2006 has reduced prices by 10%. Experts forecast an additional 15% to 20% decline to correct the excessive rise. The real danger is that prices could fall substantially further if there are widespread defaults and foreclosures.

Irresponsible lending created new mortgages with LTV ratios of nearly 100%. By the end of 2006, the fall in prices caused 7% of mortgages to have LTV ratios above 100%. A further 20% of mortgages had LTV ratios over 80% and will shift to negative equity as prices decline.

Most mortgages are no longer held by originating lenders, but are securitized and sold to investors world-wide. More significant, mortgages are used to create complex, asset-backed securities that are central to current credit-market problems. Investors no longer own specific mortgages, but only have rights to certain conditional payment streams. So generally, it is no longer possible to prevent foreclosures by negotiations between borrowers and lenders.

The 1.8 million mortgages now in default have created substantial personal hardship. The 10% decline in house prices has cut household wealth by more than $2 trillion, reducing consumer spending and increasing the risk of a deep recession. Defaults also damage the capital of lending institutions, causing further declines in credit and economic activity.

Rising unemployment during a downturn will force more homeowners to default, driving house prices lower. Since mortgages are generally "no recourse" loans, when there is a default the mortgage lender can only collect the value of the property. The lender does not have the right to seize other property (a car, a boat, money in the bank) or to put a lien on future wages. Thus, a homeowner with a mortgage that exceeds the value of his house has a strong incentive to default, even if he can afford to make the monthly payments.

Optimists note that homeowners with negative equity have generally been reluctant to default in past years. That was sensible when house prices were rising. But with house prices falling, defaulting on the mortgage is the rational thing to do.

Limiting the number of such defaults, and preventing the overshooting of price declines, requires a public policy to reduce the number of homeowners who will slide into negative equity. Since house prices still have further to fall, this can only be done by a reduction in the value of mortgages.

None of the current mortgage-reduction proposals are satisfactory. Although bankers sometimes have the incentive to reduce mortgage-loan balances voluntarily in order to avoid a foreclosure, this is usually not possible because the syndication of mortgage loans means that there is generally not a single lender who can agree to the mortgage writedown.

Proposals to force creditors to accept write-downs of interest or principal violate their contractual rights, reducing the future availability of mortgage credit and raising the relative interest rate on future mortgages. Reviving the depression-era Home Owners' Loan Corporation would have the government use taxpayer money to pay off existing loans and become the largest mortgage lender in the country. This would require an enormous federal bureaucracy of appraisers and loan agents.

If the government is to reduce significantly the number of future defaults, something fundamentally different is needed. Although there is no perfect plan, a program of federal mortgage-paydown loans to individuals, secured by future income rather than by a formal mortgage, could reduce the number of mortgages with high LTV ratios and cut future defaults.
Here's one way that such a program might work:

The federal government would lend each participant 20% of that individual's current mortgage, with a 15-year payback period and an adjustable interest rate based on what the government pays on two-year Treasury debt (now just 1.6%). The loan proceeds would immediately reduce the borrower's primary mortgage, cutting interest and principal payments by 20%. Participation in the program would be voluntary and participants could prepay the government loan at any time.

The legislation creating these loans would stipulate that the interest payments would be, like mortgage interest, tax deductible. Individuals who accept the government loan would be precluded from increasing the value of their existing mortgage debt. The legislation would also provide that the government must be repaid before any creditor other than the mortgage lenders.

Although individuals who accept the loan would not be lowering their total debt, they would pay less in total interest. In exchange for that reduction in interest, they would decrease the amount of the debt that they can escape by defaulting on their mortgage. The debt to the government would still have to be paid, even if they default on their mortgage.

Participation will therefore not be attractive to those whose mortgages that already exceed the value of their homes. But for the vast majority of other homeowners, the loan-substitution program would provide an attractive opportunity.

Although home owners may recognize that the national average level of house prices has further to fall, they do not know what will happen to the price of their own home. They will participate if they prefer the certainty of an immediate and permanent reduction in their interest cost to the possible option of defaulting later if the price of their own home falls substantially.

The loan-substitution program would decrease the number of homeowners who would come to have negative equity as house prices decline. That reduces the number of homeowners who will have an incentive to default, thereby limiting the risk of a downward spiral of house prices.

Since individuals now have the right to prepay any part of their mortgage debt, the 20% reduction in the mortgage balance would not violate mortgage creditors' rights. Creditors should welcome the mortgage paydowns, because they make the remaining mortgage debt more secure. The 20% repayments to creditors would also create a major source of funds that should stimulate all forms of lending.
The simplest way to administer the new loans would be for the current mortgage servicer to collect on behalf of the government and remit those funds to Washington. There would be no need for a new government bureaucracy, for new appraisals, or for negotiations in bankruptcy. The program could be up and running within months after the legislation is passed.

The government would fund these loans by issuing new two-year debt and rolling over the debt until the loans are fully repaid, thus eliminating any net cost to the government. The government loans would not add to the budget deficit or to the net debt of the nation. Gross government debt would rise by the amount of the new government lending, but this would be balanced by the asset value of those loans.

The current possibility of widespread defaults is a cloud over all mortgage-backed securities, and over credit markets generally. The uncertainty about the future value of such asset-backed loans has been a primary reason credit markets have become dysfunctional. And without a flow of credit, the economy cannot expand.

To lower the risk of a downward spiral of house prices and to revive the frozen credit markets, the government must move quickly to reduce the potential number of mortgage defaults. A loan substitution program may be the best way to achieve that.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
 
Did some quick math. I understand his reasoning to lower interest paid out. The thing is, the typical lendee is looking at the monthly outlay. Using a PV of $100,000 at 7% with 25 years left on the mortgage yields a P&I payment of $687.81. Exchanging that for two loans, loan one PV $80,000 with above terms and loan two having a PV of $20,000 at 1.6% with 15 year term has a combined payment of $675.30.

For the lendee, the difference in monthly outlay is insignificant. For the lendor, they have less risk, have recovered 20% of the principle but also have less income on the remaining capital outlay.

I don't see anyone really gaining much with this scenario.
 
I don't see anyone really gaining much with this scenario.

Not to mention the little problem that would occur should there be a fly-up of interest rates:
"a 15-year payback period and an adjustable interest rate based on what the government pays on two-year Treasury debt..."

The fundamental problem is this: the mortgage business is, at bottom, an unnatural creation of the politicians. Because there is no natural pool of capital with an appetite for long-term (which, because of prepayment options have no determinable maturity), fixed-rate loans large enough to supply the demand, the politicians mandated Fannie and Freddie to be the bagholders (ultimately meaning, of course, Mr. and Mrs. Taxpayer).

As is always the case when politicians attempt to force square pegs into round holes, the result is a mess. All they have ever succeeded in doing was creating an artificial game of "hot potato" or "musical chairs." The size of the natural pool of capital that has the ability and desire to hold 15 or 30 year fixed-rate mortgages (which, by law, can usually be prepaid with little or no penalty) isn't large enough to satisfy the politicos. Nobody knows what the maturity on those mortgages is. Would you invest in something without knowing when it matures? I know I damn well wouldn't.

The political solution: pass laws repealing natural forces. It works..., for a little while but is ultimately doomed to fail.

 
I have a ton of questions that unfortunately I don't have time to phrase, but I am hoping to get some insights/discussions rolling. One economist gave the analogy that letting one house burn down (because of their poor choices and failed risks) is dangerous because it can lead to the entire neighborhood burning down. We've always had issues with our credit industries (a typical side-effect of that type of beast?), but why is this case so widespread and persistent?

The main problem the creditors (banks and other financial firms) are having is counterparty risk: you and I have hundreds, if not thousands, of trades going on between us and I'm beginning to lose my faith that you'll still be solvent in a couple of months.

The driver of counterparty risk isn't that complicated: every financial company has a pile of paper somewhere in its accounts that it knows is in putrid, never-gonna-collect shape. Once they get a feel (not a count - that's usually a reasoned estimate at best) for the size of this shitpile, they start looking around and asking themselves questions like: who's pile is probably worse than mine? If most of your bad paper was generated in market X, and you know company Y to have been the biggest and most aggressive player in market X, you know who you don't want as a counterparty.

That's effectively what happened to Bear: other players realised how vulnerable they were to current market conditions and basically stopped accepting their trades (never mind lending them money - they wouldn't even sell things to them that had to be settled on day of delivery.) When that happens, you're cooked: there is no possible recovery. Somebody bigger, whose funding is not under suspicion buys you out for pennies, or you go to the wall. In this case, the Fed decided that underwriting JPM's investment in Bear was the better course of action, as knowing that Big Brother's wallet would be used to prop up the desperate would reduce the overall amount of counterparty risk in the market.


Why does Bush seem to say something opposite to what his Fed Governors are doing?

Here's the Fed's assessment of Bush's economic acumen. In the post-Bear-deal debriefings, Fed officials stressed repeatedly that neither Bush nor his economic advisors had been involved in any way in either the structure or process of the transaction. They took specific pains to ensure everyone knew this deal had been designed by the professionals with zero input from the White House. Draw your own conclusion about how high they rate the executive branch's grasp of current problems...
 
Here's the Fed's assessment of Bush's economic acumen. In the post-Bear-deal debriefings, Fed officials stressed repeatedly that neither Bush nor his economic advisors had been involved in any way in either the structure or process of the transaction. They took specific pains to ensure everyone knew this deal had been designed by the professionals with zero input from the White House. Draw your own conclusion about how high they rate the executive branch's grasp of current problems...

It's interesting to compare the US resolution of the Bear problem with the farcical management of the Northern Rock crisis by the UK Government. The UK chancellor, Alistair Darling refused to allow the vitally necessary secret quick deal(to "sell" Northern Rock); he let things go public . Result, a run on the bank and its nationalisation became inevitable. The lesson would seem to be that the Central Bank must in addition to its interest setting responsibilities also have regulatory control and particularly the capacity to suspend normal rules in an emergency.
 
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