Maybe We’ve Got Each Other By the Nuts…

I asked yesterday whether or not the "private investors" whom Geithner expects to pony up billions if not trillions to bail out our biggest banks were Sovereign Wealth Funds.

The WSJ and Robert Reich suggested they might be. But, Reich wondered, what incentive would other countries have to keep investing in our shitpile?

Some additional financing is thought to come from China, Japan, and the Middle East. (It seems likely that some hedge fund financing is now coming from rich Arabs.) But why exactly would Asia or the Middle East be willing to commit even more money to the United States when they’re already nervous about their US loans and investments, and when their own economies are under more and more stress?

Meanwhile, Atrios points to what might be one source of leverage we have to persuade Asia and the Middle East to ante up again.


The Fed has decided it can do whatever it wants. Just in case you didn’t know.

WASHINGTON — The White House plan to rescue the nation’s financial system, announced on Tuesday by Timothy F. Geithner, the Treasury secretary, is far bigger than anyone predicted and envisions a far greater government role in markets and banks than at any time since the 1930s.

Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money.

Yes, it can do that.


It seems the "public-private partnership" gimmick presents the world with an either/or proposition. Either "private investors" (of which foreign countries have some of the most ready cash) ante up, or the Fed will just print money and print money and print money until it comes up with the cash.

I’m beginning to see why foreign investors–and SWFs more specifically–might have an incentive to invest. 

Countries have SWFs, after all, as a way to do something with their giant surplus of dollars. The manufacturing exporters (Asia) and oil exporters (Middle East) created them as a means to invest their dollar reserves, hopefully getting a higher return on all those dollars just sitting and collecting dust. Now, as I suggested, a lot of those SWFs may be willing to invest further because it’s the only thing staving off nationalization of companies they own up to 5% of.

But even the threat to print money in huge amounts might get their attention. After all, by definition, most countries with SWFs have huge numbers of dollars. That means these countries want to make sure their pile of dollars collecting dust retains as much of its value as possible. If the Fed prints and prints and prints new dollars, those dusty dollars will be worth less and less. Geithner is suggesting he’ll devalue not just the $10 to $50 billion these SWRs have invested in our banks, but the trillion dollar stash they’re faced with.

Aside from the apparent fact that this is all a gimmick atttempt to avoid nationalizing the banks, which may well be necessary anyway, I’ve got a gut feel that threatening Asian and Middle Eastern countries with inflation and dollar devaluation isn’t going to work out as planned.

49 replies
    • Leen says:

      “by the nuts” the Fed has American taxpayers nuts nailed to the Fed floor. Hank Paulson offered the public a pack of matches and a butcher knife and said choose. Sounds like Geithner may do the same. “either/or proposition”

  1. drational says:

    Massive inflation would solve the personal mortgage crisis and credit card debt issues for those who still have jobs.
    Like Mexico did in the 70s and 80s, we just add zeroes to the bills.

    Your $100k mortgage will feel like chump change when you are paying $1000 for a Big Mac.


    • masaccio says:

      We can’t see that directly, but you can check the price of the $ vs Euro: now $1.2885 to 1. That’s down from $1.56 at the peak. Most people think the price drop was repatriation of dollars to cover losses in the financial crash after September, 2008. If people were moving heavily to other currencies, the price would go back up. So, I don’t think so.

  2. FrankProbst says:

    I still don’t understand this entire crisis. We’re told that the banks have a lot of “toxic assets” (i.e. Big Shitpile) that are “clogging” the system, so we have to give them money. Because if we don’t give them money, they won’t be able to lend money to anyone else, and a big part of the current crisis is that no one can borrow money to do anything.

    So why doesn’t the government just cut out the middleman? Why bother giving money to the banks? Why not just lend it to the people who need the loans? Some of the big banks are currently worth less the amount of TARP money they’ve already gotten, which suggests to me that this is a really stupid use of taxpayer money.

    • Leen says:

      what do you think about what Joseph Stigletz has to say about the situation

      Nationalized banks are the “only answer,” economist Stiglitz says. In an interview with Deutsche Welle, Nobel-winning economist Joseph Stiglitz talks about nationalizing banks, the outlook for developing countries, and the need for an international financial regulator.

      • bobschacht says:

        Second to nationalization is the solution James Galbraith advocated on Democracy Now! yesterday: Those banks that are, in fact, insolvent should be declared as such and turned over to the FDIC, which is pretty good at dealing with insolvent banks. That is de facto nationalization, but with an American face, isn’t it?

        Bob in HI

        • Leen says:

          I am way behing on this economic crisis. I watched all of the hearings both Wall street and the auto industry. Heard terms out of the banking industry that had my head spinning.

          for some reason I trust Stigletz.

    • jdmckay says:

      So why doesn’t the government just cut out the middleman? Why bother giving money to the banks? Why not just lend it to the people who need the loans?

      That would be one sensible place to start. Unfortunately, there has been no attempts @ sensible intercessions & corrections in what’s broken. And there’s an awful lot broken, an awful lot.

      • behindthefall says:

        Heck, at this point the money should just be GIVEN to the people who need the loans. Is there any pretense that the gigabucks being slung to the financial giants are ever coming back? Where does this idea come from that the rich get gifts and the broke get loans?

        • JThomason says:

          Surrender the leverage of debt and mechanism of socio-economic control is lost. Otherwise the equity class would be left only with psychological manipulation like a miser trying to rule his family from the grave.

    • ShotoJamf says:

      First of all, I must correct your terminology. The correct description for “Big Shitpile” is “Legacy Assets”. I don’t know about you, but that certainly makes me feel all warm and fuzzy.

      As for your suggestion that we simply cut out the middleman…well…that just makes way too much sense. Why would they ever consider doing something that simple?

    • masaccio says:

      One part of the plan is a huge increase in the money available to the Fed to lend to consumers directly. I assume that eventually these loans will be securitized and sold to investors or private banks. It will take some seasoning of the loans to see which one’s are worth something.

  3. scribe says:

    Two points:

    1. From about a minute after getting a grasp on what Bushco’s initial plan was, i.e., to cut taxes (especially the Estate tax) and spend uninterruptedly (beginning from about January 2001) and, on 9/11, have unlimited wars everywhere forever, and have no manufacturing growth and a purely service economy, I came to the conclusion that the only way out of that plan that would not result in total catastrophe would be to inflate the currency. That inflation would be along the lines of the inflation we experienced in the late 70s. It would have to be.

    When I expressed this view (politely, over lunch) to an elder colleague’s son, who at the time was the head of a department called “corporate finance” (whatever that is, /s) in a large I-bank, I got a scowl but no denial. The High Priests of Capitalism have known for years that this is was where the mess they were creating would wind up.

    In giving advice to family members about whether to buy a house or something, I reminded them that the best place to be in an inflationary episode – which, I told them, was coming – would be to be in a steady job and owing money. Because the $100 you owe today will be worth $50 or $30 tomorrow. The risk of inflation lies on the shoulders of the bank, not the borrower.

    The public revelation of Summers having cut Volcker out of the economic policy circle, seems to coincide with Geithner’s rattling the inflation sword. After all, if The Man Who Shot Liberty Valence* Killed the Inflation Dragon can’t be heard, that implies a decision to go against whatever advice he might be inclined to give.

    The threat of inflation also will push those domestic entities holding onto cash for dear life – chanting “cash is king, cash is king” – rather than putting it back into circulation, into putting it back into motion. If there’s inflation, when you hold it, you lose value.

    Not unnoticed by me anyway is the fact that, at the lower end of the socioeconomic spectrum there has been a substantial amount of inflation, driven (to my eyes anyway) by the commodity price bubbles of the past couple years. By me, the econo-brand of dried pasta is still pretty much about $1.25-$1.50 a pound, never having retreated to the $0.60-$0.89 prior to the wheat bubble last winter and spring. Coffee – still where it went to when the prices spiked a year or so ago. Tolls, parking, gas, you name it. All those daily essentials have gone up (in the face of wage stagnation or decline) and that has had the effect of a regressive tax on the lower part of the economic spectrum. For the bankers, brokers and titans, the difference between a cup of coffee at $2 and $2.25 is in the size of the tip they leave – they don’t notice it. Never did. The coming inflationary episode will be their first experience with the back side of it – and they won’t like it one bit (unlike how they felt when their home prices and values were inflated in the bubble).

    2. What to do? For Joe Sixpack, hold tight. Being a debtor is a good place to be.

    In the first place, the value you owe (as opposed to the number of things called “Dollars”) will either decline (if your wages even try to keep pace with inflation) or stay the same (if your wages do not try to keep pace). Your difficulties will come with consumables – food, energy – and replacing major items – cars, appliances.

    In the second place, this is a time when the debtor has the creditor by the balls. I got a collection call from a creditor of mine yesterday and when they started pushing I reminded them I could file bankruptcy today and blow them out entirely. That got their attention and they got really nice really fast.

    Above all, keep your heads about you – there is nothing to go crazy over.

    * Subreference: “Print the legend regardless of the reality.”

    • Alison says:

      I think that the problem for everyone is that they all invested in US$$ denominated assets. They need to prop up the $$ as much as anyone does. So Geithner is playing hardball. “Lend us your Euros or we will print so many $$ that your investments will be like dirt.”

      From my vantage point as a middle aged Canadian, it seemed obvious right from 2003 that the US was going to print enough $$ to pay its way in Iraq. Bush had no intention of paying real money or upping taxes. It was the 1970’s all over again.

      But now, the only equivalent to the Bretton Woods pact is the deep investment of so many countries in US $$. They need the US to continue to thrive.

      The question here is how much control they will demand. Geitner is pushing the debt/ equity, risk/control debate way up the food chain.

      That is very interesting. Does he have the ability to retain his own financial sovereignty under these circumstances?

  4. Bluetoe2 says:

    Marcy, thanks for the vidoe archives of OTF. I did see the show with the conservative bloggers. I’ll look at the others that I missed. The conservatives were right about 1 thing. The election in MI wasn’t even close, fortunately they were wrong about who would win.

    • emptywheel says:

      I’m proud to say that I’m “On the Record” as noting that McCain and his $100 million sugar momma would have problems connecting to laid off Michiganders–all several months before the Obama camp figured that would be true.

      We need more class warfare in politics, IMO.

      • Bluetoe2 says:

        Got that right. Would have more today if the unions hadn’t purged their socialists in the 40′ & 50’s. The unions thought they could work with the bosses and wanted to muzzle those willing to speak truth to power. They chose poorly.

  5. perris says:

    It seems the “public-private partnership” gimmick presents the world with an either/or proposition. Either “private investors” (of which foreign countries have some of the most ready cash) ante up, or the Fed will just print money and print money and print money until it comes up with the cash.

    this is what has been happening already, it’s why the bush administration stopped reporting the “m3″

    a few years ago I predicted the collapse of the economy using that knowledge however I thought it would be because the value of the dollar became worthless

    I never imagined money would simply disappear and make up for all that money that should have never been printed in the first place

    we really need to nationalize the fed, they have been printing money at will, even loaning money to our enemies with no congressional oversite

    they need to go

    • NCDem says:

      On many issues I agree with some ideas of Ron Paul. He has argued for years against the powers of the Federal Reserve and how it can/has undermined the value of the dollar without Congress and the people’s knowledge or approval.

      • perris says:

        I agree with some of ron paul’s ideas also, the “libertarian” uses some very seductive principles to get people thinking anarchy for corporations is a good thing

        ecahn made a great point the other day;

        “libertarians’ believe the dollar should vote and people should not

        democrats think people should vote and the dollar should not

    • bell says:

      nationalize the fed.. i like that.. that sounds like giving the mafia a position at the table that is openly acknowledged, as opposed to what the federal reserve has been since its inception… do you think the federal reserve would like the idea of turning their private corporation public?? it’s been so profitable screwing americans and anyone else foolish enough to hold us$ all these years.. why stop now? inflation has been the norm for quite some time as you note, with the only difference here being that they are openly acknowledging what they are doing then they ever have in the past….it is only paper and that is becoming much more clear to anyone paying attention….

      • prostratedragon says:

        The Fed’s not private. That it’s been allowed to get away with controlling its information as if it were, does not make it so.

  6. DeadLast says:

    Funny thing, the SWF have guiding principles called GAPP. After reviewing these principles, it would appear that investing in US bank debt would cause problems if they actually followed their rules, like Principle 19 and 20

    # GAPP 19. Principle
    The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.

    * GAPP 19.1 Subprinciple If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.
    * GAPP 19.2 Subprinciple The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.

    # GAPP 20. Principle
    The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.

    Basically the mere existence of these funds, operated by authoritarian or totalitarian regimes, raises fundamental questions of whether the economies of the world are going to be managed as national collectives — wherein ordinary citizens may or may not share the benefits. In other words, it is kind of like socialism without benefits. Once again, the thugs win, because they only care about profit stock prices. Everything else is an externality that can be ignored.

    I think we should suck it up, inflate ourselves into a soft landing, and then collectively and with plenty of warning and an organized workout plan, default on our bad debt obligations and re-institute a social safety net — especially for retirees whose pensions are at risk. Just like bankruptcy courts used to work.

    Hell is a place where there are no workouts, only fear.

  7. wigwam says:

    I’m not so convinced that the threat to print money is a threat at all. Since the crisis began, the Fed’s liabilities have gone from $.9T to $2T, indicating they have showered the nation’s banks with an additional $1.1T beneath MSM notice. Also, in his famous 2002 speech to the Fed, Bernanke went into great detail about how running the Fed’s printing press is the major way to halt/preempt a deflationary spiral. In fact, per the Wikipedia:

    Bernanke is particularly interested in the economic and political causes of the Great Depression, on which he has written extensively. […]

    In 2002, when the word “deflation” began appearing in the business news, Bernanke gave a speech about deflation.[19] In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation.) Bernanke’s critics have since referred to him as “Helicopter Ben” or to his “helicopter printing press.” In a footnote to his speech, Bernanke noted that “people know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.”

  8. DeadLast says:

    Another option would be to make Credit Default Swaps illegal, null & void, etc. Those are the tethers that make it impossible to unwind the mortgage mess. Let the gamblers settle their own debts to each other.

    • Synoia says:

      And prosecute tham for illegal gambling, or a conspiracy to commit fraud, under the RICO statutes.

      My preferece for prosecution, criminal negligence, would be hard to put into a conspiracy — A conspiracy to commit negligence is a bit of a oxy-moron. A bit like “I planned to be stupid”.

  9. wavpeac says:

    We have each other by the nuts?? All the more reason for women to run the world.

    Brass ovaries are much harder to grab.

  10. JThomason says:

    I guess if waving one’s hands manically as if one’s hair was on fire a la Paulson isn’t working it makes dramatic sense for Geithner pull the pin of the hand grenade he is holding and threaten to release it in the room as a last ditch offer of mutually assured destruction.

    In the end though value economics will trump the farcical posturing of arbitrage. That’s what the soft-handed theoreticians and financial network gurus feeding at the trough of surplus don’t understand.

    “Scorched earth” is not inextricably bound to the metaphor of financial games.

  11. nextstopchicago says:

    I’m not as afraid of printing money as some. The problem is being looked at too narrowly – how to coax people with money into loaning it to get it back into the market.

    That’s not the only way to get money circulating again. There are two other ways. Tax the hell out of people who have a lot of money, or inflate the money supply.

    When you inflate the money supply, the relationship between hard assets and labor doesn’t change much. But the people who have inordinate amounts of money are forced to do something with it in order to avoid seeing its value erased.

    The biggest knock against printing money is inflation. And the biggest real complaint about inflation is that it creates market confusion. That criticism is often used as a shield by investors whose real concern is deflation of their assets. But printing money has always been undertaken by governments acting either
    1) secretively and radically, to boost their own spending power without letting anyone know exactly how they’re doing it; or
    2) somewhat erratically, by governments afraid to take the wrath of investors.

    A steady application of a policy of increasing the money supply by a known but large amount would create little market confusion, but force the wealthy to get their assets into the market. You could only hold your place in the river by swimming, not by standing on the bottom.

    That should be the goal.

    Tax policy could do this as well, but unfortunately, we seem unwilling to raise the top rates by any serious amount.

  12. JThomason says:

    There is a disconnect in asking the SWFs for an infusion and then moving to protect American jobs in the context of the industrial economies of China and the oil economies of the ME. We are not in a position to solicit their help then fall into a protectionist or competitive mode necessary to create new value. Whose to say that once credit starts flowing it won’t go offshore.

  13. Hmmm says:

    I’m thinking World Mutually-Assured Economy-Crashing Club. Obviously some sorta cloak-and-dagger stuff is going on behind Geithner, and Paulson before him, and this theory appears highly consistent with all that. The 2-hour feint at a world economy crash last September might also be consistent with this, if you interpret the incident as all the foreign SWFs acting together to send the USG a message. More like a demonstration, I guess. “Aww, nice economy ya got here, Yanks… be a shame if somethin’ were to happen to it…”

    • prostratedragon says:

      The other swfs and their governments absolutely have some good counterstrategies as you say, not necessarily all in the finance realm, which is one reason I doubt we’ll see more than flash and fake in the direction of the allout inflation strategy from USG.

      I actually do agree pretty much with scribe’s outline of what the crackpot plan was, except the idea that late-70s inflation would be enough for them to make their getaway; when you’re trying to steal a large fraction of your economy’s GDP, at least, the required inflation level is probably at least toward the triple digits, if not downright hyperinflationary. And therein lies the rub.

      I think that on seeing this, they have flirted, and factions continue to flirt, with stirring up enough social unrest to open the door for them, but they’ve found that American society has impressive inertia toward stability. (Where the heck are these people from, again? Planet?)

      So I think what we’re in now is a temporary stalemate in which all but the stubbornest and truest believers are busily trying to get everything they can out of the way of the enormous boulder that’s about to come a-rollin’ through the avalanche field. Geithner’s open talk of “trillions” yesterday is a sign that the folks holding up the boulder are getting tired and need to prepare us; if nothing is nationalized or otherwise taken over by mid-year, forgetaboutit.

      • Hmmm says:

        How much per annum is needed for a meaningful sustained economic stimulus program, and what percentage of the US military budget does that represent?

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