The power of bureaucracy

Unfortunately, as I predicted in my last posting, lawmakers in Washington DC preferred to allow the markets to nosedive and the Russell 3000 to lose over US$1 trillion in value than to sign a US$700 billion check for Secretary of Treasury Henry Paulson. Talk about money out of the pockets of taxpayers.
As I said before, there is no force more powerful than a bureaucrat trying to cover his ass. However, I would like to take this opportunity to discuss briefly the drivers for this decision at the House of Representatives in a day when five banks had failed around the world - in case they needed any more reason to pass the package.
A friend of mine summarized the issue talking to me a few weeks ago. His words: "The ultimate goal of every politician is to be re-elected." In fact, it is as simple as that. On Capitol Hill they are not worried about the country's interest unless that means securing another term for them. The same applies, naturally, to the executive branch, though there, especially in a second term, the dynamics are a bit different.
Once you understand that, it is clear why politicians chose to let the market go down the drain instead of signing a (slightly) controversial rescue package. They are afraid of the consequences. And, just five weeks before a historic presidential election, all actions are blown out of proportion.
No lawmaker wants to risk being thrusted into the spotlight as the one who made the wrong decision - though any of them would love to be the one that made the right decision. And since none of them really knows what the right decision is, they are afraid. Scared that the public will be enraged and not reelect them.
I don't mean to be biased here, but Barack Obama put it best in a quote today: "It is not a time for politicians to concern themselves with the next election. It is a time for all of us to concern ourselves with the future of the country we love. This is a time for action."
McCain completed: "There is no time for inaction."
I think I know what I can do. I will right now start writing my representative - and all the other ones whose emails I can get - to make them know that if I lose my job and this country goes bankrupt because they were afraid of signing that check for Paulson, they are the ones who will lose their jobs. I will not reelect them.
Photo: House republican Whip Roy Blunt, caught by the lenses of Chris Kleponis From Reuters.

It's the end of the world as we know it

Some friends have been asking me how come I have not been writing in the blog in the past two weeks. My answer: I have just been awestruck these days! Also, I have been thinking that I did not want to write an "I told you so" post, since I published an entry on us being on the verge of 1929 back in July, when stocks of Fannie Mae and Freddie Mac first signaled what was about to happen.
However, yesterday's events prompted me to return to this forum. I am referring to the Washington Mutual debacle. Within 10 days account holders pulled out almost US$17billion from the institution, forcing the feds to take it over and sell the remaining deposits to JPMorgan for US$1.9 billion - small change for the bank. It was the biggest commercial bank failure in US history.
That single event really puts us on the same footing as we were in 1929. Let me explain, not without an anecdote as is my style. The first stages of the stock market crash in 1929 and ensuing economic depression had many similarities to our current crisis. However, as a friend insisted in pointing trying to make a distinction between the two crises, in 1929 the crash also entailed a run to the banks which, naturally, shook the whole financial system.
Washington Mutual's fall from grace marks that exact turning point. To be sure, in an internet age you do not see lines outside the bank anymore, with people running to pull out their deposits. They do it from their laptops, at home. But it still is a run to the banks. And anybody who studied a little bit of economic theory and understands the meaning of M1 and M2 knows what that means. It can be summarized in one word: fuck. Excuse my language.
So, where do we stand, people have been asking me. We are one month away from the election, so nobody wants to take the blame for a wrong decision. Nothing can be more powerful and destructive than bureaucrats trying to cover their asses - sorry for my language again, but extreme times require extreme wording.
So chances are, the rescue package will be caught up in Congress filibusters. Meanwhile, the whole thing is going down. And it is not only investment banks anymore. The problem is no longer saving Bear Stearns, Lehman Brothers, Merill Lynch, Morgan Stanley and Goldman Sachs. What is at stake now are the commercial banks, those in which people like you and me have their deposits.
And that brings me to my anecdote. This week I heard a friend telling me that her professor in the university had said the safest banks to have an account in was Chase, as it is part of JPMorgan. That scared me.
It means two things, both very worrisome. One, is that people are trying to safeguard their money. As most people outside the financial world, they tend to misunderstand things and think that the bank crisis means their deposits are at risk - which is only true for deposits bigger than US$ 100,000, as up to that limit they are insured by the FDIC. As an example of how people misunderstand stuff, somebody else told me JPMorgan was trying to sell itself this week. The person was thinking about Morgan Stanley.
The other is that Main Street has become aware of the crisis. It is common knowledge among investors that whenever the clerk at the pharmacy starts talking about an investment it means you should have already left it for it is a bubble.
That also works the other way around. Meaning, by the time Main Street starts worrying about a crisis it has become out of hand.
I am sorry for making it so long, but I just want to make a final remark. Even more amazing has been the US government's response. They have basically instituted socialist measures, nationalizing huge private corporations. It should not come as a surprise, though, as Robert Kurz had already predicted that. Here I quote from Imperialism of Crisis:
"Every time that a phase of valorisation (in capitalism) is exhausted, the political institutions, afferent concepts and ideologies become also obsolete."
In that article Kurz was not foreseeing our current events, but the quote applies.
My only comfort is that Ben Bernanke's post-doctorate was on the 1929 crisis. So, he is probably the single most prepared person in the world to deal with what we are going through.
Last, but not least, I'd like to share some quotes a smart economist in Chile gathered about the 1929 crisis.

"We will not have any more crashes in our time."
John M. Keynes, October 1927.

"No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."
President of the United States, Calvin Coolidge, on December 4, 1928, in his last message to the nation before handing over command to his successor Herbert Hoover, 10 months before the crash in the New York Stock Exchange and the Great Depression of 1929-33.

"I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
Andrew W. Mellon, United States Secretary of the Treasury, December 31, 1929, when the Great Depression had just begun, which would end only in World War II.

"Gentlemen, you have come sixty days too late. The depression is over."
Herbert Hoover, President of the United States in June of 1930, in response to the petitions for the creation of a public employment program to stimulate a reactivation of the economy.