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Dominoes: Large Euro, US Banks On The Brink

At The Weekly Standard, Bill Kristol has economists he respects, neither "alarmist by nature," who are increasingly concerned as they see two massive dominoes about ready to fall.

I've received phone calls in the last hour from two economists I respect, one of them Larry Lindsey, the other in a position where he'd prefer not to be named. Both have government experience, neither is alarmist by nature, and they say this:

The huge European bank Fortis is apparently about to fail. The ripple effect on the American banking system could be disastrous, with bank runs, liquidity crises, and stock sell offs possible Monday. Wachovia may well fail next week. As Larry put it, this really will be 1933 soon if we don't move rapidly to stabilize the banking system.

And here's the bad news: the current bailout bill, whatever its merits and likelihood of passage, does nothing to address this.

He suggests "simple legislation by Monday" to provide unlimited deposit insurance as well as Federal money market guarantees to stave off panic while Congress continues to fight over a central solution.

We are witnessing a failure in government. Our Congress cannot work together to provide an immediate fix to a problem it created in the first place: forcing the American financial sector to extend mortgages to those who were high risk borrowers in order to champion to the American people that more minorities own homes than ever. That worked well under a booming economy. But when the natural cycle of economics turned downward, fear dismissed became reality unavoidable. The house of cards came tumbling down.

And even still, amid all the haggling and fighting going on in Congress over how to shore up the financial cash crisis, not a word is mentioned about changing the counter-intuitive practices forced upon mortgage lenders in the first place. In this respect, it's not unlike how Congress and the White House chose to address illegal immigration: by trying to deal with those already here first rather than initially addressing the cause: the influx of illegals that continues to flow unabated.

Make no mistake, if we wake to Black Monday this week, the responsibility lies squarely upon Congress and the electorate which has put them there, not our banks. Our banks' hands were forced by mandates from Washington, not their boardrooms.

And here we are. With a Congress so polarized that they are incapable of working together.

And let's not be confused about the situation, either. They may be worlds apart, the Democrats and Republicans. But it can hardly be said that the Republican party has become radically right. But one look at Nancy Pelosi and Harry Reid - to say nothing of their nominee for President - the Democratic party in both Houses of Congress have become radically left. Over the past two decades, the conservatism of the Republican party has held steady (at best) while the liberalism of the Democrat party has sprinted to the edge. And it has been Democratic policies during that time - directing Fanny Mae and Freddy Mac by legislative mandate - at the core of this entire financial crisis.

America does not seem nearly as polarized as its elected representation. But perhaps in less than one full week, it really won't matter but for hindsight and lessons going forward. Hard, painful, demanding lessons.


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Comments (22)

Kristol's remarks are presc... (Below threshold)

Kristol's remarks are prescient.

The solution to the current financial crisis can be nuanced and finessed, or it can be straightforward.

The straightforward response of government guaranties of money market and deposit accounts is necessary while Congress fleshes out some type of legislation.

What the Democrats were trying to sell as a "done deal" on Thursday is now seen as the biggest lie of the year.

The perceived imminent failure of a major international financial institution such as Fortis should tell all that this is a problem much bigger than Wall Street pay caps and ACORN funding. Democrats just don't get it and evidence of such is that they desperately demand Republican support even though they have votes sufficient to pass the legislation without Republican support.

I've already commented on this at length. I hate this bail out. But the US must be seen as the leader now in solving the problem. Absent that leadership we will witness a debacle of monumental scale, which, if it happens, should be laid squarely at the foot of the DNC and BHO.

Well said!... (Below threshold)

Well said!

The underlying subversion i... (Below threshold)
twolaneflash:

The underlying subversion is a Marxist conspiracy to destroy the American Republic. The Supreme Soviet could not have done better. I look into the eyes of this debacle and I see three letters: K.G.B., with collaboration from Congress and a couple of assists from Democrat presidents. Congress will surrender to the communist elements by Jewish New Year. ACORN is the new ruling party. Obama is its Premier.

forcing the American fin... (Below threshold)
wbgonne:

forcing the American financial sector to extend mortgages to those who were high risk borrowers in order to champion to the American people that more minorities own homes than ever.

Congress will surrender to the communist elements by Jewish New Year. ACORN is the new ruling party. Obama is its Premier.

And now one of them thinks he should be President. President of OUR United States! Why don't you just come out and say it: the darkies and their lackeys (Jews probably, Democrats for sure) have ruined the country. And here I thought -- like all other non-insane, non-racist Americans -- that George Bush and the Republican party, the people who've been in power the last 8 years and have allowed unbridled greed the whole time, were responsible for the carnage. But no, it was the minorities and their enablers. Who knew?
depp=true

Bit of an aside, but (heave... (Below threshold)
ExSubNuke:

Bit of an aside, but (heaven forbid) the congress dodders along, this euro bank fails (possibly due to our financial crisis), and then we really DO have a crash to rival 1929... does anyone think Clinton will be remembered fondly?

Bush tried to fix it. Congressional Republicans tried to fix it... and here we are.

Makes me REALLY worried, also, as I bank with Wachovia. Now I hear they're about to fail. Oh happy joyous day.

Should the dominos start fa... (Below threshold)
GarandFan:

Should the dominos start falling, there is also going to be a BIG fallout come Nov 4th. I wonder if those fat asses in DC have thought about this?

GarandFan,Of cours... (Below threshold)
Grace:

GarandFan,

Of course they have thought of it. It is the reason they are so desperate to make this a "bipartisan" solution. Better for the dems in congress and the senate if the blame for the bailout is spread around a bit more.

What I am most surprised about this whole mess is that reading around the blogosphere the past couple of days, I have read excellent, brief but comprehensive explanations of the root causes of the situation we are now in. I realize that hindsight is great, but it isn't all that difficult to see how the "good times" just couldn't last forever.....

I am going to say an extra few prayers for my country tonight, and for those who are working on a fix.

We have seen this same thin... (Below threshold)
tyree:

We have seen this same thing go on for over a generation in the stalemate over illegal immigration. My grandson is the only kid in his class who is not in ESL (English as a Second Language) class, and it has been 20 years since the Reagan Amnesty. Twenty years after the government tried to "fix" the problem, it is seriously worse, and they are not even trying to deal with it anymore.

Over the past two decade... (Below threshold)
Brian:

Over the past two decades, the conservatism of the Republican party has held steady (at best)

Are you kidding? Unprecedented spending, unprecedented big government, unprecedented debt, unprecedented seizure of the free market... what exactly is the "conservatism" that has "held steady"?

Brian:Recognise sa... (Below threshold)
Larry:

Brian:

Recognise sarcasm for what it is.

Brian, this is the real deal. This crisis will not be decided by ideology. Take a look at that sentence again. I have said it here many, many times; this crisis will not be solved by ideology. Ideology is how we got where we are. Ideology from the left that was doomed and ideology from the right because the right didn't understand what they were defending.

We are where we are by wrong headed ideology and if you do not understand that, you have not been paying attention. You cannot regulate mandates; all you can do is warn and wait. We have been chugging down this road to ruin and an economic train wreck by mandating that loans be provided to those unable to pay for the loans.

We have lost the War on Poverty and the Great Society because we rewarded sloth instead of labor. We have lost the War on Drugs because we lacked the will to execute drug dealers and jail users. Even our medical system is crashing because we spend nearly half of every dollar keeping people alive one, single, extra year. That or defending the outcomes of mistakes or just plain "we aren't there yet," from legal predators with emotional appeals and junk science.

Even by the use of arms, law, rules or good intentions, you cannot force economic outcomes forever, you can only attempt to guide in a certain direction and hope for the best. At the end of the day, when a significant portion of the population believes it is entitled to equality of economic outcomes because they deserve it instead of because they earned it, you have just outlined a prescription for economic disaster. And just about every society gets there sooner or later.

Look at all the hype in advertising; The Credit Card you deserve, The House You deserve, the Job You deserve, The Car You deserve, when in fact, without an earned education, hard work and a somewhat level playing field, you actually deserve nothing, not even the right to eat or the right to live. The laws of nature sooner or later trump the laws of mankind.

The greatness of the US has always been that there was a level playing field here. We had and have great natural resources and in times past one of the highest educated and hard working work forces. Now we are reaping the inevitable and untentional consequences of attempting to force outcomes when worker bees are now outnumbered by drones. We have even stopped access to our natural resources and must transfer our wealth to pay for someone else's.

We held things together for a while by importing both cheap labor and the brightest and best from all over the world. We have held things together by borrowing from our kids and grandkids and the excess capital of the rest of the world.

The train wreck is here. And all the blame shifting, power grabs and ideological hubris from the left and from the right, won't fix a damn thing because the underlying cause is not being addressed.

We are where we are because of two things.

The left attempted to force economic outcomes beyond the ability of our society to pay for it; the drones now outnumber the worker bee's ability to pay for everything. And we have basically borrowed to the point where we cannot continue to so do because we have no hope of paying it back and those with the money or raw materials we need, know it.

The right drifted off into the same economic hubris and failed to warn anyone where things were headed in such a way they would be understood. Instead, the elected conservatives from the Democrats (some) and Republicans continued to spend for their own favorite toys and the location of jobs in their districts as if we could ride this soon to be exhausted pony forever.

I doubt that most conservative lawmakers really understand what has happened and is happening. Most of them seem to spout off slogans from economic theories they don't seem to understand and don't really try to enforce, just like Liberals keep trying to legislate economic outcomes.

Return on Investment is the greatest natural law. A free education gives a great return on investment if you make it an education instead of warehousing kids. Adding value to your own or imported natural resources provides a great return on investment. Paying a workforce enough so they can buy what they produce generates a bigger pie for everyone willing to work to share.

Paying people who do not work who could, or farmers not to grow crops, or not mine or drill for resources or all the other phoney baloney deals that really mean; taking from those who produce and giving it to those who don't, leads to an economic train wreck.

Now for the bottom line. I believe because I have to believe in something; McCain's biggest lie is that he doesn't understand economics. I think he does. I also think that if he told us what is really going on in his head, he would stand no chance of making a difference. I don't know if Obama understand things or not. I don't care if he does because every step he has ever taken has pointed to legislating economic outcomes so the drones get paid not to to work and the worker bees can't support the system anymore and that doesn't work.

I've never voted for the pa... (Below threshold)

I've never voted for the party that has been whoring up the housing market. I'm still not sure that this is the crisis that it's claimed to be since I don't think they'd tell us if it was. They would simply pass the legislation, they could have all along.

Congress is controlled by democrats. The house could have passed a bill already. It would be one thing if there was a bill passed from the US House waiting for the Senate who was filibustering the issue, but such is not the case.

Let them fail. Don't throw... (Below threshold)
TCO:

Let them fail. Don't throw more good money after bad. Don't take on more liabilities by changing capital requirements. That will be incredibly expensive. The markets need to find their level. Bad paper is bad paper. The market is right. And government is smoking ganja if it thinks it knows better the value of bad paper.

BTW, community banks are FLUSH with deposits. This is a run on large, bad trading firms. Let them fall.

I'll agree with Brian on on... (Below threshold)

I'll agree with Brian on one point there in regards to government spending. Bush caved to every demand for entitlement spending that came down the pipe when he should have stood up and showed them the middle finger of both hands. It got him and us nothing. And every Democrat/Liberal that harped on him for cutting funding for every little pet project they had, who now talk out the other side of their face and harp on the increase in that spending are nothing but petty, disingenuous partisan hacks.

I'm tired of arguing how we got here. It's plain as the nose on our faces. Larry pointed it out clearly. Democrats have been playing the "guilt trip" game on Republicans for too long and Republicans have fallen for it and gone right along with it. This mindset has to go away.

Its a sad state of affairs, too, when we have indeed over funded our schools rather than underfunded them because they spend that money on social engineering rather than science and math. That has brought us high school graduates stepping out into the world with a political agenda and no idea how to balance their checkbooks. As soon as they turn eighteen they vote for the very people who put them in that position because they've been trained to.

So yeah, Bush spent his little heart out trying to placate a Congress so hostile to him they never stopped talking about impeachment. And that was wrong.

But we're not back there. We're HERE. And we need to find a way out of this God forsaken mess by learning from the mistakes. And these idiots in Congress are actually trying to find a way to perpetuate the very causes as part of the solution.

We're doomed. They're actively trying to kill us. They won't be happy until we're all standing in bread lines. How's THAT for equality?

I hope the centrist, middle... (Below threshold)
syn:

I hope the centrist, middle-of-the-road, independent, moderate voter gets a little clarity and education soon because if they are still undecided about Obama after all that has been said and done there really is no reason for America to have political parties.

If Moderates are blinded to the Collectivist in their midst then why the hell should I worry about saving their financial derrieres.

I am tired of the fence-sitters waiting to see who is the more popular; could Independent voters stand for something other than popularity for a change!

I mean, the Left under Obama are so fierce about defending their own they're willing to send goons to shut down all dissent.

What will it take for the Independent voter to get the Left's illiberal ambitions?

You are cowards and hypocri... (Below threshold)
wbgonne:

You are cowards and hypocrites. Thugs, in a word. Because you've had one (two) of your own in the White House for 8 years, you've come to think that's the way things work. But you know what, come November you're going to be in the wilderness for a long, long time. Enjoy your final month of bullying. Ta! Ta!

wbgonne: YOU are part of t... (Below threshold)

wbgonne: YOU are part of the problem. May you get everything you're hoping for - in abundance. Then "if" you grow up, because "when" seems to be out of the question, you'll understand. Enjoy your loudmouthed ignorance and denial while it lasts.

wbgone said:"You a... (Below threshold)
Larry:

wbgone said:

"You are cowards and hypocrites. Thugs, in a word. Because you've had one (two) of your own in the White House for 8 years, you've come to think that's the way things work. But you know what, come November you're going to be in the wilderness for a long, long time. Enjoy your final month of bullying. Ta! Ta!"

Excellent example of what is wrong with our education system; a total lack of critical thinking. We are thugs because we disagree with emotional rants. We are hypocrites because we dare to offer facts instead of emotional rants. Why can't all of us understand that the ability to read a speech and move people's emotions is far better than actually filling in the blanks of empty rhetoric?

Here is what the man himself said:

"I am new enough on the national political scene that I serve as a blank screen on which people of vastly different political stripes project their own views. As such, I am bound to disappoint some, if not all, of them."

So much for the Audicity of Hope. And I hope that Jay continues to allow the likes of wbgonne to hang around here; such ilk are excellent examples of exactly the kind of person Obama was talking about and who he depends on to get elected.

You can't fix stupid and you can only cure ignorance amongst those willing to take the cure.

Everytime I read that quotation from Obama, I get a tingle and it isn't up my leg, Chris Matthews.

We are thugs because we ... (Below threshold)
wbgonne:

We are thugs because we disagree with emotional rants. We are hypocrites because we dare to offer facts instead of emotional rants.

Wrong again, Boyo. You are thugs because you use censorship to stifle dissent. EXHIBIT A -- the hacking of my first comment in this thread. And you are hypocrites b/c you then have the nerve to accuse Obama of the same. Pretty simple, really. Concentrate hard now.
depp=true
notiz=*hack...*hack....*hack... :)

wbgonne - there is a whole ... (Below threshold)
Larry:

wbgonne - there is a whole thread on the subject of free speech. Find it and make your comments there. I will not respond to off subject allegations without substance on this thread.

Recognise sarcasm for wh... (Below threshold)
Brian:

Recognise sarcasm for what it is.

I do. And what it is is absent from Steve's statement about conservatism holding steady.

And every Democrat/Liber... (Below threshold)
Brian:

And every Democrat/Liberal that harped on him for cutting funding for every little pet project they had, who now talk out the other side of their face and harp on the increase in that spending are nothing but petty, disingenuous partisan hacks.

OK, but how about every Republican/Conservative that harped on the Dems for spending too much, then spent more than the Dems ever did, who now talk out the other side of their face and harp on Dems for spending? Are they also nothing but petty, disingenuous partisan hacks?

Brian:Let me just ... (Below threshold)
Larry:

Brian:

Let me just say one thing. There are plenty of political hacks on both sides of the aisle. I just watched Lindsey Graham admit that he has been part of the problem. John Kerry choose not to respond in kind. Wow what a surprise that Graham was honest and Kerry was not. After watching Nancy and her crew talk about the "Rescue" you would guess that none of them had been a source for the problem to begin with, which is pure baloney.

I have a caution for you. I see a change in Republican approach to the process of governing. It may not be effective this cycle, but eventually it will if they stick to it.




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