Left Flank

The US Treasury Scretary, Hank Paulson, offers confidence-building explanations for TARP and recapitalization of banks to restore credit flows and letting Lehman Brothers fail. I was also reassured by his discussion of the causes for the current crisis, and his attention to global and regulatory factors. He acknowledged those, like me, who are disappointed with various agents in this fiasco, and the dangers of undermining a capitalist perspective.

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The good news is, LIBOR is down.

Karen Petrou, I mentioned LIBOR, that lending rate between ranks has dropped to its lowest level in over a month. That's a good thing, right?

KAREN SHAW PETROU, Federal Financial Analytics: That's right.

JEFFREY BROWN: Why?

KAREN SHAW PETROU: LIBOR means the rates that banks charge each other. And we can't get the money until the banks do. And we can't get it at a rate that we want or that the economy can benefit from until the banks are able to move the money at the lowest possible cost.

JEFFREY BROWN: And so now, what can they -- they lend to each other at a better cost?

KAREN SHAW PETROU: If this stays down -- the markets have been terrifically volatile. So while the news is very, very good, it's far too soon in these strange and strained market times to look too far ahead.

I'd say this is so far, so good. And the way the markets have been, that's the best we've seen in a really long time.

The bad news is, banks are taking Hank Paulson's bailout cash and hoarding it.

ANDREW ROSS SORKIN, New York Times: Well, I think that we are seeing the right steps being made. But at the end of the day, you know, they may become -- they're advertised as if they're a quick fix, a silver bullet, and they're not.

And I think that consumers and Main Street need to appreciate what we're really getting ourselves into. You know, the Treasury is giving $250 billion to the banks ostensibly to lend out, but it's not going to come to you or I anytime soon.

In fact, more often than I'd like to say, they're going to keep that money and hold onto it, in part because they are expecting to have losses, and so they need that capital.

JEFFREY BROWN: Explain that a bit, Andrew -- I'm sorry -- because you wrote today in your column that banks were actually hoarding the money, holding onto it.

ANDREW ROSS SORKIN: Well, that's exactly right. They're going to be getting this capital from the government, ostensibly, as I said, to lend it. However, they're not going to use it for that purpose, at least in the immediate term.

They're going to use it and hold onto it, in part because they're expecting losses at their own firms. And so they have capital requirements, which means they have to have a certain amount of money in the bank.

And if they know that they're going to be losing money in the future, they need to hold onto that money.

The other thing that some of them may do with that money is go out and make acquisitions and buy other banks. Now, that's not a bad thing, because it will make some of these banks stronger, but it means that you will not be getting this money into your pocket anytime soon.

It's like pouring water on sand!

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Martin Wolf puts a smile on the financial crisis, praising the corralling of nine performing and collapsing banks for a buttocks-bruising vaccination of $259 billion, after European Union and other world central banks have taken an assortment of measures, from recapitalization to expanding deposit insurance programs. Russia is another serious worry.

Amid the gloom, though, African states could see 6% GDP growth next year. And, commodity prices, including oil, continue to fall (although, again, bad for Russia).

Wolf ends with one final concern: «how American households...are going to view their future»: either spend, or save. I found this interesting because, amid the rush to reform regulations in the mortgage and financial markets, supervise this current recapitalization program, end one presidency and start another, and punt the last session of Congress into ignominy, who or what will make sure households do the right thing? And, if and after that, who will tell Americans, «Oh, now it's time for you to drastically alter the lifestyle you and your parents have adopted!» Wolf wants Americans to keep going into debt to float the global illusion of normalcy when, notably PRC and Saudi Arabia, sit on their reserves very niggardly reforming their economies and gloating as culpable western governments continue the same habits that got us here. It all seems a recipe for the same predicament, or a reset, when the global economy needs a shake-up. That's just not acceptable, after this gut-wrenching gift of tax-payer cash to a pack of criminals.

My only hope is, that capitalism remains an impersonal force that gives and destroys with indifference and impartiality.

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Slate's Erica S. Perl is on to a clever coping strategy, and one not just for children: «When times are tough, cue the stories about times that were even tougher.» How about Little House on the Prairie 2008?

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Canadians just can't buy a break from their southern neighbor. Even after all the health care tourists have crossed the border for cheap drugs, the global financial panic has now slithered into national politics. Canada's conservative prime minister, Stephen Harper, is falling victim to opposition-stoked panic that Canada's prudent financial sector might falter under the «uncaring» control of its economics-trained head of government. That's the brainchild of a very cynical political campaigner. From a jaunty 15-point poll lead, the Conservatives could now lose to a coalition of Liberals, New Democrats, Bloc Quebecois, and Greens (who also seem to be dropping in the polls?).

Not that Harper is an innocent victim of spin.

...in relative terms, Canada is doing rather better than most other rich countries. Its banks have declared some losses from dabbling in American sub-prime mortgages. But they remain in «considerably better shape than their international peers», according to Mark Carney, the governor of the Bank of Canada, the central bank. Banks continue to borrow and lend money. Late last month, Teck Cominco, a mining firm, managed to borrow $9.8 billion to take over Fording Canadian Coal.

The carnage on Wall Street has not threatened institutions, but it has rattled nerves. For most borrowers, credit has tightened. That has prompted Mr Carney to inject liquidity. On October 8th the Bank of Canada cut its benchmark interest rate by 50 basis points (to 2.5%) in a co-ordinated move with the other main central banks around the world.

The economy is still growing, albeit slowly. The growth is mainly in the resource-rich western provinces. The fall in commodity prices will certainly slow things down. The plunge in the oil price means that some of the $110 billion of projected investment in Alberta's oil sands may be postponed. But Alberta's government still ran a half-page ad in the New York Times earlier this month to try to lure American workers north. Brad Wall, Saskatchewan's premier, was in Toronto last month attempting to persuade new immigrants, who usually gravitate to the big cities, to head for his sparsely populated province. Nationally, the unemployment rate remains near a three-decade low, the federal government still has a budget surplus and over the past three months consumer confidence has risen, according to the Conference Board, a business lobby.

And yet Mr Harper's frequent assertion that «Canada is not the United States» and that the country's economy is «sound» rings hollow with voters. In part this is because the opposition, led by the Liberals, has seized upon the international financial meltdown as a game-changing event that requires government intervention in Canada. Stéphane Dion, the Liberal leader, began the campaign promoting a carbon tax, which he said would be made revenue-neutral with offsetting cuts in income tax and special payments to those hardest hit. His plan also includes incentives for business to invest in green technology. He gained little traction with this proposal, which Mr Harper has ridiculed.

Mr Dion has had more success with his improvised idea for an emergency meeting of federal and provincial leaders to come up with a government plan for the economy. He has yet to spell out much of what this might involve, apart from possibly raising the C$100,000 cap on bank deposits covered by insurance and a measure to suspend mandatory withdrawals from pension schemes to avoid having to cash in shares when prices are low.

This activism, rather than Mr Harper's standpat response, resonates with the average Canadian, says Nik Nanos, a pollster. Canadians expect their government to be more interventionist than that of the United States, and so have watched in surprise as George Bush's Republican administration has nationalised banks and put together a $700 billion Wall Street bail-out. «In the long term, [Mr Harper] may be on the right track, but in the short term, he could be portrayed as being insensitive,» says Mr Nanos.

These criticisms have been amplified because they come from all four of the opposition parties. The format of the two televised campaign debates, which have included the Green Party for the first time as well as the socialist New Democrats and the separatist Bloc Québécois, has had the effect of making Mr Harper look isolated. He dismissed the opposition platforms as «economic fantasyland… where money grows on trees, debts don't have to be paid back and taxes are good for the economy».

Although Dion has a good carbon tax proposal, I agree with The Economist, that, if Harper loses on October 14, it «...would set a dispiriting precedent that panic plays better politically than prudence.» Hopefully, that's a Canadian import the US will not accept on November 4.

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What Eric Schoenberg and Gary Marcus are arguing, that psychology is a useful guide for economic policy, but that ultimately skepticism about ideal economic presuppositions are beneficial, dovetails nicely with Nassim Taleb's black swans and Arnold Kling's caution. It's also just another way of understanding how the stock market jitters and the congressional bailout drama relate to what laypeople are experiencing.

As an explanation of the first vote US House rejecting the Paulson bailout plan, it's reassuring to hear Schoenberg to discuss the experimental economics game, concept of the ultimatum game. And then, from that point, move forward armed with more than ideological talking points to solutions.

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There's plenty of blame to go around, and I would just love to continue berating those who supported the Wall Street Welfare plan, after initially taking a bold step for all the wrong reasons, but the McCain campaign is already discrediting that attitude with its mudslinging. So, let's hope Washington's enablers store enough Christmas goodwill, to endure what I'm sure will be quite painful during next year's start of reform work.

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