Let’s just say for the sake of argument that oil was indeed a renewable resource—I sincerely doubt that oil is renewable on the time scales orientated towards the needs of the energy-hungry modern economy. Even with the drop in price and the drop in world demand caused by the global recession, the world still will demand more than 90 million barrels per day sometime early in the next decade. I don’t know of any giant oil gushers deep within the Earth that are producing oil on that scale…..

Best,
Nick

It looks as if these developments are really part of the longer-term trend whereby the world economy re-balances itself more firmly around the longer-term prospects for growth and sustained wealth creation in the Far East. Russia and China have already grown much closer since the establishment of the SCO, and Russian exports of oil to China in return for loans to Russian energy companies will further cement their economic dependency on each other—-Russia for credit, China for energy. With US bogged down in Afghanistan and Iraq and with the US still desperate to maintain its dominance in the resource-rich areas of Eurasia from the Persian Gulf to the Caspian Sea, these developments are quite negative for the future of US power in this critically important region. I still think of the book Dr. Zbigniew Brzezinski wrote in 1998 entitled The Grand Chessboard—in it, he argued that whichever global power controlled the resource-rich regions of Central Asia essentially would set themselves up for dominance in the 21st century world. The pieces on the chessboard are shifting rapidly—and a stung and wounded Russia is definitely moving into the arms of the Chinese desperate to extend credit in return for vital energy resources.

Best,
Nick

Finally the issue I want to see discussed is out in the open.

His perspective was interesting and much more detailed than mine. He should be jocking with Twofish rather than me. But the equally interesting thing was the 25 comments that followed his article. The followup discussion centered on bondholders, an issue I have neglected.

Seems I can’t just concern myself the kinds of contracts that the Depository Trust & Clearing Corporation claimed to successfully resolve in their new release dated October 30, 2008. I don’t have any opinion about bondholders. My inclination is to say no to them as well as the kinds of contracts handled by DTCC.

I have carried this discussion with Twofish as far as I can carry it. I remain convinced that the Federal Government must reverse course. Proping up Zombie banks is a temporary expedient. It will not solve the problem. The Lehman experience should be the template to examine. How the Lehman template should be modified is above my pay grade, as Obama famously said.

I recommed to anyone interested in this question (which should be all U.S. citizens) that you read up on this matter, beginning with the Whalen post of Feb. 19, 2008, with the commentaries and the DTCC news release of Oct. 30, 2008 and the timeline of official actions provided by St. Louis Fed. Reserve Bank.

I remain unpersuaded, however. I spent a bit of time this morning on the website for the Federal Reserve Bank of St. Louis, reading their Timeline of Events. It summarizes all the important actions of governmental agencies each day that it happened for 2007, 2008, 2009.

The tie-in between the Federal Government and the mega banks that used to be private is amazing. Drip, drip, drip – more federal money dropped on the people that created the problem. This website also has a very short summary of the three interrelated causes of the financial crisis that focuses on description rather than making a political point.

More to come.

I do not think that it good for democracy if the major decisions are made behind closed doors. Even if good decisions end up being made the public ends up being rather suspicious of who and how those decisions are made.

The discussion with ReformerRay is the type of discussion that does tend to happen behind closed doors. (We’d like to do that, no that won’t work, well what if we do this, well maybe let’s try that.) The reason these discussions aren’t open is that bad things tend to happen when powerful people think out loud.

I’m sure Geither has thought about the possibility of shutting down a megabank, and I’m also sure that there is a group of dozens of people in Treasury that have prepared or are in the process of preparing a whole series of memos on how to shut down a megabank and what the consequences are. Even if they don’t do it, they need to have a plan in place, and they also need a plan so that they can think through exactly how.

However, if Geither thinks out loud in front of camera, he could end up destroying the system. Since I’m very low on the totem pole, I can think out loud, and I think I have a good idea of what is going through his mind, and so does anyone else that works in finance.

The other thing is for transparency is that people really don’t see what bankers and government bureaucrats do, so people assume they do nothing except take money. A lot of the day of your banker or bureaucrat involves having these sorts of discussions to figure out exactly how to get something done, and going through the check list of everything that needs to get done involves lots and lots of people.

It will also likely happen on Friday evening or Sunday evening NYC time.

In a cubicle, doing my job…..

Anyway hindsight is 20-20. Paulson’s proposal was a good idea in October, and at the time I was hoping that it would work. It was worth a try, but things have changed since then. The big thing that has changed is all of those bad employment numbers that started coming out in November.

ReformerRay: Where was he when Paulson followed the advice of Paul Krugman? Direct infusion of money into the banking system did not work either.

Work for what? The infusion in November kept the commercial paper market from falling apart. You are looking for a single magic bullet that solves all of the problems, and things just don’t work that way.

Trying things that don’t work is not a bad thing. I’m not a fortune teller and neither is Paulson or Geither.

ReformerRay: Any private firm, whether a bank or an insurance company, that has taken on obligations that they cannot fulfill should be disolved and their assets distributed among claimants.

It almost never works that way. Even in Chapter 7 liquidations, the bankrupt entity is not “dissolved.” A bankrupt company is still a company. Also in many (and probably most) bankruptcies, the creditors don’t want the entity liquidated since they end up losing more money that way.

ReformerRay: The only financial firms that will fail if AIG or Citigroup goes under are those firms that participated in buying and selling these toxic assets that brought on the current recession – depression.

Which is basically everyone in the world either directly or indirectly.

ReformerRay: It cannot be the case that the overnight liabilities exceed the ability of the Tresury and the Federal Reserve Board to handle the matter.

Yes it can be….

ReformerRay: Ben came up with enough money to keep the short term overnight markets going at the scale of all banks. If he can handle all banks, there is no reason he cannot handle one bank.

He came up with $50 billion “good faith money” from a slush fund to back money market and commercial paper markets that are in the trillions. It works just like FDIC, which has $50 billion but backs deposits that are in the trillions.

When people are in panic mode and in a bank run, you can stop it by walking up to the teller window and waving lots of money. Once people calm down and see they aren’t going to lose all their money immediately, they calm down.

The thing about FDIC and Treasuries backing of commercial paper is that it isn’t nearly enough money to shut down a megabank. Everyone knows it, so that’s why people are pretty confident that a megabank just will not be shut down. Nationalized maybe. Shut down. No.

ReformerRay: My main point to Twofish is that the Federal govenment should NOT be in the business of covering all the deposits listed on the balance sheet of a mega bank. He cannot see the possibility that some of the deposits on the books of banks must be disavowed

Really difficult to do, and probably too late.

Once you’ve guaranteed some of the deposits, then you get sucked in and you end up having to guarantee more and more of the deposits until you end up guaranteeing everything. The Federal government *already* has ended up guaranteeing all checking accounts, all savings accounts, all money market accounts, all mortgages, and backstopping commercial paper.

ReformerRay: The bankruptcy of Lehman Brothers shows what I want to happen to ATG and Citigroup.

1) Not all of Lehman Brothers went bankrupt. Lehman’s North American operations stayed solvent and was purchased by Barclay’s.

2) Lehman is still in business, and they are hiring in fact. It will be another two years before they can permanently shut down their doors.

3) Lehman was small in comparison to Citigroup or AIG. It had about $250 billion in assets. Citigroup and AIG are both $1 trillion+ companies. Lehman’s mistake was that it was not “too big to fail.”

4) Nothing Lehman Brothers had was federally insured.

5) The day after LB collapsed, you had hedge funds and depositors showing up the door of all of the major banks demanding their cash, and if the Fed had done nothing, the whole system would have crashed then and there.

ReformerRay: So the toxic assets on their books were not transfer to another bank or any other entity.

Actually they were. It’s more accurate if you think of these things not as “toxic assets” but rather as “horse manure.” If you have tons of what you thought were gold bricks but turned to be “horse manure”, you are trouble if you borrowed money against it.

However, once you go bankrupt, there will be lots of farmers willing to pay you for your horse manure since it is worth something to them, and right now what the people working at Lehman are doing is going through all of their tons of horse manure, and finding buyers.

ReformerRay: They were resolved by the Depository Trust Clearing Company. All the Credit Defaut Swaps to which they were a party were resolved by the exchange of 5.2 billion dollars among the parties.

That’s not what happened…..

The trouble with this is that one of the parties turned out to be AIG, and they didn’t have the money to cover the CDS’s which they had written. At which point the Fed had to step in.

ReformerRay: The private sector settled this among themselves.

No they didn’t. The Fed had to pump in money through AIG. If they Fed hadn’t bought AIG, the whole thing would have collapsed, since AIG has the counterparty for a lot of the CDS. And then it turned out that money market funds had exposure to Lehman, and then the Fed had to cover those too.

The really scary thing is that the weekend before all of this happened, no one knew that AIG had so much so much exposure to Lehman. This is why Geither is being so slow to do anything. He wants to make sure that he knows who owes what to whom before doing anything.