Republican Economic Plan Wreaks Havoc

Barely more than a week ago, the U. S. government stepped in and more or less nationalized Fannie Mae and Freddie Mac. Today, two huge brokerage houses cease to exist and the Dow drops 504 points. Yet despite this economic melt down, John McSenile thinks "the economy is basically sound." What planet does McSenile live on? In this area of the country - which is somewhat insulated from wild economic shifts due to the huge payroll of the U. S. Military signs are everywhere that the economy is sinking. Especially, in any industries relating to construction or residential real estate although the ripple effect extends far beyond those industries. Here are highlights from The Economist concerning the fragile economy:

*

EVEN by the standards of the worst financial crisis for at least a generation, the events of Sunday September 14th and the day before were extraordinary. The weekend began with hopes that a deal could be struck, with or without government backing, to save Lehman Brothers, America’s fourth-largest investment bank. Early Monday morning Lehman filed for Chapter 11 bankruptcy protection. It has more than $613 billion of debt.

*

Other vulnerable financial giants scrambled to sell themselves or raise enough capital to stave off a similar fate. Merrill Lynch, the third-biggest investment bank, sold itself to Bank of America. . . The situation remains fluid, and investors stampeded towards the relative safety of American Treasury bonds. Stockmarkets tumbled around the world.

*

With these developments the crisis is entering a new and extremely dangerous phase. If Lehman's assets are dumped in a liquidation, prices of like assets on other firms' books will also have to be marked down, eroding their capital bases. The government's refusal to help with a bail-out of Lehman will strip many firms of the benefit of being thought too big to fail, raising their borrowing costs.

*

Wall Street has company in its misery. Washington Mutual, a big thrift, is fighting for survival under a new boss. Even more worryingly, so is AIG, America’s largest insurer, thanks to a reckless foray into CDSs of mortgage-linked collateralised-debt obligations.

*

Even if markets can be stabilised this week, the pain is far from over—and could yet spread. Worldwide credit-related losses by financial institutions now top $500 billion, of which only $350 billion of equity has been replenished. This $150 billion gap, leveraged 14.5 times (the average gearing for the industry), translates to a $2 trillion reduction in liquidity. Hence the severe shortage of credit and predictions of worse to come. . . . . As spectacular as this weekend was, more drama is on the way.

In Frantic Day, Wall Street Banks Teeter

The Chimperator and the GOP created the no rules and no oversight atmosphere that created the current economic melt down which, just a week after the nationalization of Fannie Mae and Freddie Mac, has now claimed two of the largest financial firms on Wall Street: Merrill Lynch and Lehman Brothers. Between the two firms, the fate of some 85,000 jobs are now up in the air. Inasmuch as the McSenile/Palin ticket is in essence offering voters more of the same policies and mindset that created the current economic disaster, why would anyone sane and rational support that ticket? Oops! I forgot, the Christianist base of the GOP is not sane or rational. It is simply mind boggling that anyone with any sense isn't running sceaming away from the GOP ticket. Here are highlights from tomorrow's New York Times looking at the fall of these two former financial giants:

*

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer, people briefed on the deals said.

*

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of tens of billions of dollars in losses because of bad mortgage finance and real estate investments.

*

They culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to avoid a downward spiral in the markets stemming from a crisis of confidence. “My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I‘ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

*

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed. What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.

*

Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firm, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation or how big the financial backstop would be.