Was U.S Financial System Days Away from a Total Meltdown?

News, commentary

It was a bit of an annoyance last night - pulling into the gas station, inserting my credit card into the machine at the pump, selecting the grade of gasoline, putting the pump into the neck of the tank, pulling up the level to start the flow of petrol -- and nothing. A message on the pump "transaction canceled."

So I tried again -- same pattern, same result. Three or four times. Knowing that my credit is good, I drove home with my 1/3 of a tank of gas, figuring I'd fill 'er up in the morning.

Then, as today's headlines describing the steps the federal government was taking to step in to try to rescue, in a big way, the U.S. financial system - with perhaps a trillion dollars - 1,000 billion dollars of taxpayer money, a little bell went off in the back of my head. The financial / credit market situation had gotten to be so bad that credit companies were starting to turn off the spigot. We had barely avoided (it appears) a total meltdown of the U.S. financial system.

[A]s the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi (see photo.)

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning ... the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

***

Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.

“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”

As he spoke, Mr. Schumer swooped his hand, to make the gesture of a plummeting bird. “You know we’d be lucky ...” he said as his voice trailed off. “Well, I’ll leave it at that.”

(New York Times, September 19, 2008: Congressional Leaders Stunned by Warnings.)

What will the executive branch agencies do immediately to attempt to prevent this imminent free-fall? Well, the U.S. Treasury Department will guarantee money-market funds, evidently up to $50 billion dollars each. The Fed will be buying up bad debt, mortgage agency notes, to clean up the balance sheets of many of America's leading financial institutions. The Security and Exchange Commission (SEC) has temporarily banned short sales of stock (betting that the stock will fall in value) in 799 financial companies was temporarily banned by the SEC. (For details on any of these stories, see the detailed coverage in the New York Times.)

Congressional Democrats and Republicans seemed ready to work together to forestall disaster, having the government enter into Socialist-type policies to prevent the devastating consequences of minimally regulated capitalism from falling across American society (and the world economic system.)

Democrats are likely to seek government assistance not just for the nation's financial elites (whose failure would more than trickle down on everyone from the upper-middle class and below), but to directly help those who have been harmed by the recklessness of the minimally regulated financial markets -- such as by extending the length of time one may receive unemployment benefits, funding infrastructure projects to protect our nation's underbelly while putting people back to work (here in California, unemployment, which were 5.5% a year ago, and 7.4% just last month, has just risen to 7.7%), and the like.

Most of Congress appears ready to put aside partisanship to craft and bring to the floor of Congress by the end of next week a full rescue plan. Meetings to date have been described as "collaberative."

Lawmakers in both parties described the meeting in Ms. Pelosi’s office on Thursday night with Mr. Paulson and Mr. Bernanke as collaborative, and that they were prepared to put politics aside to address the needs of the American people. ***

(Democrats) continued to examine ways to make clear that the government was stepping up not just to help the major financial firms but also to protect the interests of American taxpayers and families by safeguarding their pensions and college savings, and by preventing any further drying up of consumer credit.

In addition to potential stimulus measures, which could include an extension of unemployment benefits and spending on public infrastructure projects, Democrats said they intended to consider measures to help stem home foreclosures and stabilize real estate values.

Among the potential steps Congress can take include approving legislation to allow bankruptcy judges to modify the terms of primary mortgages — authority that the bankruptcy laws do not currently allow and that the banking industry has strenuously opposed.

But the Democrats said it was too soon to discuss such details, and that they were awaiting a draft of the proposal from the Treasury Department.

“We have got to deal with the foreclosure issue,” Mr. Dodd said. “You have got to stop that hemorrhaging..If you don’t, the problem doesn’t go away. Ben Bernanke has said it over and over again. Hank Paulson recognizes it. This problem began with bad lending practices. Those are his words, not mine, and so this plan must address that or I’ll be back here in front of a bank of microphones at some point explaining the next failure.” ***

While George Bush and the executive branch, joined by most Congressional leadership of both parties say this action is critical to the well-being of our nation, some speak out against such intervention on philosophical grounds. Republican presidential candidate and Senator John McCain criticized the federal bailouts:

Republican Sen. John McCain said today that the Federal Reserve in the future must stop bailing out failed financial institutions and get back to its "core business of responsibly managing our money supply and inflation."

McCain did not explicitly say whether he favored a meltdown of the U.S. economic system so the nation could move closer to adherence to an absolute market economy - a position supported by many of McCain's more right-wing libertarian supporters.

Meanwhile, Democratic candidate Senator Barack Obama canceled plans to roll out his own financial recovery plan in favor of working with all involved without partisanship:

Democratic nominee Sen. Barack Obama today voiced support for giving the Treasury and Federal Reserve broad powers to stabilize financial markets. Citing the gravity of the tumult on Wall Street, Obama scratched his plan to outline an emergency recovery proposal of his own today.

"It is critical at this point that the markets and the public have confidence that their work will be unimpeded by partisan wrangling, and that leaders in both parties work in concert to solve the problem at hand," Obama said....
Los Angeles Times, September 19, 2008, emphasis added.

I await my next trip to the pumps to see, on a small scale, how the credit markets have reacted to these moves by the federal government.

Addendum - September 20, 2008, 11:35 a.m. PST: I've revised the headline revised from a declaration to a question. I am reminded that I must remain alert to thepossible "gaming" of the system by those who brought us "yellow cake" and WMD in Iraq. See further discussion of the "zombie-like" response to the Administration's declarations of imminent collapse at this Daily Kos post. Dave's posts at D-Day - here and here are also a worthwhile read, as usual. -Rev. Al

(Photo: Paulson, Bernanke, Cox, meet with Congressional leaders in conference room of the Speaker, Nancy Pelosi. Believed to be a gov't photo.)