Thank you for posting these articles.

Rather than reading the meaning of the stock market's daily motion, people who think there is no problem should be reading stuff like this.

My hospital was preparing to send out bids for a bond issue in the neighborhood of $40 million for a large expansion/renovation. I seriously doubt it will happen anytime soon, if we have to pay an exhorbitant amount in interest. This will ripple through this small town and have a significant impact on the local economy.

Reading these sorts of examples makes the problem concrete -- and real -- as nothing I've seen in the Times, the Post, the LATimes, or any of my other regular reads has so far done. (Or have I just been reading the wrong parts of all those places?)

As others have pointed out across different blogs and commenting spots, poor rhetorical choices helped shape yesterday's fail-to-pass. So few attempts have been made to explain the situation in anything but economic jargon -- and the bail-out was mostly predicated upon "Trust us, we know what we're doing."

Bush et al. so seriously underestimated the wide frustration, confusion, and lack of trust.

Thanks, Hilzoy, as always, for the work you do.

There is a big problem. But it's not clear that a bailout based on the Paulsen/Administration proposal, even amended to (slightly) cover over the incredible transfer of power to an appointed hack, is an answer.

Perhaps Congress could pass a bill extending Federal Reserve or FDIC powers to cover direct municipal lending at Reserve rates in case of emergency.

Think of it as an FDIC type backing for municipal borrowing.

That extra cost of borrowing needs to be presented to the public, to counter "populist" arguments that the bailout is bad. But why do many apparently reasonable, good-faith progressives (e.g. Michael Moore, if you consider him such) oppose the bailout on balance? Are they that bound by symbolism?

What lampwick said. I don't think most people realize how serious a problem cashflow management has become, or what a cash-only economy really looks like.

The worst thing is that this is a vicious cycle, with multiple negative feedback loops.

It's not a good sign that it has already started.

Those who say we have until January, or that we need to go slowly, are simple deluding themselves.

We don't have much time.

oh, duh, too late, not reading carefully enough, why is there not a "please can I delete my too much at the end of the day commenting" option?

sigh.

Heading into a recession is the worst time to cut back on projects like these, which provide people with good jobs, and can work to keep the economy going.

Absolutely. But with the decline in real estate values, the tax base became contaminated with unrealistic expectations for future revenue. That is now going to contract, whether the banks get bailed out or not. This is where the Feds need to step in and spend lots of money, to cushion the loss of tax revenues.

The Federal Government can run a deficit, but most states cannot. So just at the time when people need these jobs the most, they end up having to cut back. It makes problems with the economy worse, when keeping these projects going would help to make it better.

Again, absolutely correct, but this is fiscal policy. People keep suggesting the banks will start lending for this stuff again if they get bailed out, and they won't. They'll be busy hoarding their cash to keep their balance sheets in the black, even if we move a bunch of crap off their books.

Credit, no matter what you do, is going to contract; it has to because there was way way way too much of it floating around. The banks found excessive lending profitable because of the derivatives; once the derivatives markets and the upmarket economy died, that kind of lending was no longer possible, because it was only barely profitable in the first place. (Roughly speaking, the various bookkeeping tricks allowed the banks to cash out future profits immediately, which meant that, when someday arrived, the banks had already cashed out what would've been their now-current profits, and they started being forced to book their previously deferred losses. When they wash out all the losses, and can start acquiring new profits, and the market is safe, and the economy is no longer contracting, then they'll start lending again.)

max
['That's going to be awhile.']

Neil B., as today's stock results show, there is a difference between a liquidity problem (claimed) and a solvency problem (real, which means folks won't lend to each other except under the most onerous terms).

Perhaps if the bailout addressed the real issue (solvency) instead of just pumping money into a failed system in a kick-it-down-the-road approach, the economists who saw this coming (Roubini, Krugman, Baker) would be more for the bailout.

The fact that only the bankers are should give you pause for thought. Until we know what things are worth (not solved by buying toxic debts), this current crisis will just keep moving along in slo-mo. A bailout that solves problems would be good. The one on the table doesn't, it just costs a lot and lets us keep pretending that the markets are fundamentally not hosed.

So, why is the solution to prop up this obviously failed business model? All of these issues could be handled with direct grants or loans to the states from the Federal government. Instead, the plan is to run it through the banking system so they can grant themselves 10% of the bailout in bonuses before letting the rest move on.

Since June? July? NYT has had an occasional article about money/credit problems that small municipalities have been experiencing due to lenders' reluctance to lend. This is *not* a problem which has appeared overnight; it's just that nobody has paid much attention to it before, because, hey! who gives a flying duck about Piddlington, when Bear Stearns needs rescuing?

As far as I could see, there was no guarantee (in the bill which failed yesterday), that the situation would have changed any; that the big banks wouldn't just pocket the cash -- so generously supplied by us -- and *still* leave the small-town mayors bare ass to the ice, worrying about their towns disintegrating.

All on Paulson's say so, too. Because, while there was some oversight written into the revised bill, there was no enforcement mechanism to beef it up. I'm sick and tired of the Bush's administration practically thumbing its nose at us -- yeah, everyone knows we cheat, lie and steal.... So, what you gonna *do* about it? Paulson's bill (even with "improvements") was just like that. We'd have *known*, that (and when) we were being screwed, but still helpless to counteract it.

If we're gonna buy Paulson's Pup in a Poke, at least let's make sure its favourite leg-lifting spot isn't on our carpet; let's build in some -- *enforceable* -- protections against it.

If the Paulson plan was a scam, like Iraq, I don't think Bush, Paulson, and Bernanke would be coming out in public looking half-dead and terrified.

Well, I'm not going to defend the boy who cried wolf. But there is a wolf.

People keep suggesting the banks will start lending for this stuff again if they get bailed out, and they won't. They'll be busy hoarding their cash to keep their balance sheets in the black, even if we move a bunch of crap off their books. -- max, @23:28

So, Max has expressed precisely (and concisely), what I was striving to say. Blame it on English being my second language :)

But, seriously... Big-time financial institutions have different priorities than we do; bailing them out -- without any questions and without any obligations -- is not going to solve the problems in Piddlington...

"People keep suggesting the banks will start lending for this stuff again if they get bailed out, and they won't. They'll be busy hoarding their cash to keep their balance sheets in the black, even if we move a bunch of crap off their books."

No. They'll loan more conservatively - i.e. to municipalities building roads rather than waitresses buying McMansions - but they'll lend; it's what banks do.

Oh, and then there's this little tidbit on the issue of "cui bono?". Not decisive, but certainly indicative:
http://thinkprogress.org/2008/09/30/banks-contributions-bailout/

Those who argue “let them fail� don’t seem to grasp credit is being cut of for everyone. Businesses generally don’t keep their money in a safe; they keep it in bank accounts backed by commercial paper. If there is no market for this paper (even if it is triple A solid stuff) the banks are forced to freeze the account as they cannot generate the money to honor withdrawals. The result is businesses can not make payroll, resulting in job furloughs. This is already happening on a limited scale, and it doesn’t take much imagination to see the “kick in the teeth “it will give the economy if it is allowed to spread.

My wife is CFO at a small university, and today she had the pleasure of sitting through a conference call where a bank explained why they could only allow withdrawals of 10%. This is a serious inconvenience for her school, but her situation paled compared to the representatives of smaller schools who asked: “How are we going to make payroll?�

They'll loan more conservatively - i.e. to municipalities building roads rather than waitresses buying McMansions [...] -- lampwick, @23:53

"Waitresses buying McMansions"???? Like, for, maybe, 8th domicile, a la McCain?

Your wick needs trimming; your lamp is guttering, dear.

"Waitresses buying McMansions"

That's how we got into this crisis: banks making ridiculous loans whereby a couple making 40K a year would get an ARM with no down payment on a 500K house.

Really! It happened! Perhaps as many as a million times! That's part of the reason why we're in this mess.

An aquaintance of mine here in NZ drew a distinction between a financial crisis and an economic crisis, saying that what is happening is the former. While he is a wealthy, retired successful oil company executive who I admire (and raises really good beef), I disagreed with him. Except I couldn't explain why. This post explains it. If you cannot get money to pay people to work, they don't work and don't get paid. Voila, an economic crisis.

Here's the thing.

These examples need to be broadcast far and wide.

THIS is what the "credit" crisis is all about, but Americans are so used to using the stock market as the measure of the "investment economy" that this kind of thing has never been considered.

OK. Now we get "it."

Next stop: the majority of Democrats voted to fix this crisis, the majority of Republicrats voted against helping.

"It's the infrastructure, stupid."

We're all Argentinians now.

I wonder, seriously, what will happen if we have a one month "time out." The election is effectively one month away. If we have to postpone municipal bonds, small business loans, new mortgages, etc. for one (1) month, will everything really collapse?

Second, I do think we need to realize that lots of banks are hoarding money, afraid to loan it out.

So, let's REQUIRE that banks NOT cut lines of credit to people who have never missed a payment. FORCE them to keep money in the economy if they want to keep FDIC insurance for their deposits.

Where, oh where, is the "responsibility" of local and regional banks? Why are capitalists so chicken?

Any solution has to target the banks; if you fix the banks you get the leverage on the fix. If your solution is all safety net, then you don't get the leverage and you end up spending 10-20x more to achieve the same result.

There are other approaches, like Roubini's. And I personally have no idea how to weigh their merits. But this is a potentially a fast crisis, and we also need to take advantage of the leverage of time, of getting ahead of the problem. If Roubini's solution is twice as efficient, but takes ten times longer to implement, we may well end up spending more money on it despite the efficiency.

I need someone to tell me why we need to buy bad paper from the big investment banks in order to free up the cash reserves of the local banks.

Cannot the Fed continue to be the supplier of cash to depository banks for them to lend for car loans small business loans, and (yes) even mortgages that they KEEP rather than securitize?

Thanks max.

And thanks political animal for describing the 'crisis' in understandable terms.

Dear 'Pit': There are no investment banks left now. The Fed is like just another bank with some extra powers; large but certainly not large enough to do everything itself.

This guy is REALLY bright. He was on with Charlie Rose (PBS). I think what he says makes a lot of sense. It is a different approach to a "bailout" that helps mainstreet as well as Wall Street. Here ya go. I think people could go for this version...

By Ilaina JonesNEW YORK (Reuters) - Mortimer Zuckerman, owner of the New York Daily News and U.S. News and World Report, and chairman of Boston Properties Inc BXP.N, one of the largest owners of first-class U.S. office buildings, on Monday said he does not endorse the proposed $700 billion bailout plan, but believes Congress must take action."I think everybody realized something has to be done," Zuckerman told Reuters, speaking after the U.S. House of Representatives rejected the bailout plan.But Zuckerman, who does not endorse the plan, said its not the right move."I think this was the wrong approach," he said. "I believe everybody should take a step back. I think basically they should invest in perpetual preferred (shares), and shareholders will accept the losses. They made money on the way up; they should have to accept the losses."Preferred shares are paid off before common shares and are less risky.Zuckerman said the federal plan should follow the same design the government took in its takeover of mortgage giants Freddie Mac and Fannie Mae, and that of billionaire-investor Warrant Buffett, when he invested $5 billion in Goldman Sachs. Both approaches allow the investor to be paid off first and have an opportunity for a profitable return."What I think Warren Buffett did with Goldman Sachs, and what the federal government did with Fannie and Freddie is the way to go," he said.Soon after Congress failed to pass the proposed legislation designed to help prop up the financial sector and ease credit markets, the Dow Jones Industrial Average tanked, closing down almost 778 points in the largest point decline in its history.(Editing by Bernard Orr)

© Thomson Reuters 2008 All rights reserved

and yet we spend 10 Billion a month in Iraq. Witness the downgrading of a superpower.

Former Political Aninal, Kevin Drum, has a quick explanation for why taking the bad paper off the books of the banks is likely to be a good idea.

Lampwick has it right, events are moving fast and we don't have much time. That is why Paulson, Bernanke, and Congressional leaders are burning the midnight oil on this. Honestly, Hilzoy's post and the comments of fafner1 should scare the bejeezus out of every one. The bailout plan on its own may not be enough, but doing nothing or waiting until January to take action looks like certain disaster.

Sorry, but this is just insane. A lot of these projects should be stopped.

Gas over $4/gallon did not wake up our ruling class. They're still planning to spend trillions on a car-road culture that is ending.

Another reader mentioned a hospital expansion. The age of the hospitals is over. In all probability the expansion the reader referenced is a wasteful duplication of existing unneeded facilities (I spent my life in the business).

In the 20s the railroads spent billions on new stations and coaling facilities etc etc. That didn't stop the Great Depression because times were changing and people were using cars and airplanes.

As for the idea that ordinary people will be hurting if bonds don't sell, Get. A. Clue. Ordinary people were already hurting because cities were funding "infrastructure" improvements for developers who kicked tenants out on the streets.

Spending more on bad ideas is a bad idea.

What gets me mad about this is that we've made such a mess of the federal debt that at a time when we need deficit spending I'm afraid to accept it. Keynesian economics states that it's acceptable to spend to deficit in bad economic times, but the other side of the coin is to pay off that debt during good economic times. Yet Americans seem to childishly think taxes are always bad, and politicians (particularly Republicans) love to pander to that sentiment. Back in the 90's, we finally had a surplus, and Republicans said we should immediately cut taxes to give back the money. No, we don't have the money- we still owe it to other people. I've run up a lot of debt on my credit cards, but I know I need to pay it off now that I've got a good-paying job. I don't think I can just spend all the money I make and ignore the debt I have.

Anyway, the point is that I'm willing to accept that we need some deficit spending temporarily, but I'm afraid it won't be temporary. At some point, we need to pay off the massive, bipartisan debt we've aquired over the decades, or what we've got now will look like a boom. I think Obama, since he treats voters like adults, might actually be able to convince people of the necessity of taking responsibility for living outside our means, but I'm not too optimistic in the short-term (especially considering the middle-class tax cut he's hitched his star to). I'm waiting for the $1,000 loaf of bread that's on the way.

More misery for the poor:

Economic woes leave food banks struggling to feed more

Coachella Valley contains Palms Springs and other desert communities. If you can donate anything to help build up the food banks here is the information:

Coachella Valley Rescue Mission Box 10660, Indio, CA 92292-2564, or call 760-347-3512.
FIND Food Bank 68-615 Perez Road, Suite 14 B, Cathedral City, CA 92235, or call 760-328-3663.
Hidden Harvest 85-711 Peter Rabbit Lane, Box 266, Coachella, CA 92236, or call 760-398-8183.

Oh Wow, Maine, where I now live, makes the national news twice in a week.
First a hurricane and now financial disaster.

Maybe if states and the federal government followed responsible budgeting they wouldn't be in such a bind.
Collect taxes, budget for the amount of money they have collected, and when they have spent all your money, stop spending.

Otherwise.
1) They waste increasing amounts of your collected money on interest. That is nonproductive spending, and thus inflationary and passes debts into the next budget, effectively lowering the amount of money collected.

2) They could avoid becoming dependant on loans and federal gimmies.
The great benefit is that they would always be ahead of the curve, and could adjust the next budget to the current financial reality.

The failure, and thus the threat of total financial collapse, of the current financial approach in American is that virtually every corporate body, businesses and governments, function by borrowing, not by earning.

Most governmental entities owe more than they earn. Most businesses own less than they owe.
Without an unending line of credit they are actually, continually bankrupt.
So when the economy slumps or banks withhold credit or greatly increase interest, (since they also work in the red) debtors go belly up.

Good riddance?
No.
Because business and governmental entities lay off employees, and all have to raise prices or taxes, thus feeding inflation and starting a whole new negative financial cycle, Depression.

The voters scream help and the government responds by putting the nation deeper into the death spiral we are already in.

More blame-smearing "Community Organizers" (Barack) and the CRA for the collapse.