Thursday, September 25, 2008

Warren Buffett: Crisis is 'Economic Pearl Harbor'

If Mr.Capitalism says it then it must be really bad.

Billionaire investor Warren Buffett called the $700 billion U.S. bailout plan "absolutely necessary" to help pull the financial system out of an "economic Pearl Harbor."

Speaking on CNBC television on Wednesday, the 78-year-old Buffett also called on Congress to leave no doubt by Friday that a bailout would be adopted, or risk throwing markets and the economy into further turmoil.

"We were very, very close to a system that was totally dysfunctional, and would have not only gummed up the financial markets but gummed up the economy in a way that would take us years and years to repair," Buffett said, referring to recent events.

[...]Buffett's insurance and investment company, announced a $5 billion investment in Goldman Tuesday.

"I'm not buying a cross-section of banking institutions," Buffett said. "I certainly have confidence in Goldman, and you could say it's a vote of confidence in Congress to do the right thing."

As lenders try to reduce balance sheet risk, Buffett said the government should buy some of the assets they unload, but not at inflated prices.

"There is no one that can leverage up like the United States government," Buffett said. "If they do it right, and I think they will do it reasonably right ... they'll make a lot of money."

It looks pretty bleak. But the solution lies with listening to people like Buffett. He should be at the White House in those meetings on the government "rescue plan."
One Congressman questioned whether the bailout is necessary, since Mr Buffett's purchase suggested confidence was returning. But Mr Bernanke said: "Mr Buffett said on TV this morning that he thought Congress would act, and if Congress didn't act we would go over a precipice." It seemed increasingly likely yesterday that the Treasury would accept legislation to limit executive pay as a quid pro quo. Democrats were also pushing for the government to take equity stakes in companies that receive assistance, and some suggested the $700bn should only be released in increments.

Financial markets remained on tenterhooks. Investors bought short-term US government bonds as a safe haven, fearing a credit market meltdown if legislation is not passed. In Hong Kong, thousands of savers mobbed the offices of the Bank of East Asia amid text message rumours that it was about to go under. The bank vehemently denied the rumours.

"The market could not have taken another week like what was developing last week," Mr Buffett told CNBC. "Last week will look like Nirvana if they don't do something. I think they will. I understand they're very mad about what's happened in the past, but this isn't the time to vent your spleen about that." He predicted that the taxpayer would make a profit on its investments in toxic mortgage debt. "If I had $700bn on the government's terms to buy distressed assets, I would," he said. "Unfortunately, I'm tapped out."

The value of trillions of dollars of mortgage-related derivatives has collapsed since the housing market turned down, and their ultimate value rests on where house prices settle and how widespread foreclosures become. The latest data on the sale of existing homes, out yesterday, showed 10.7 per cent fewer transactions in August than a year ago, at an average price down 9.5 per cent.

In his testimony to the Joint Economic Committee of Congress yesterday, Mr Bernanke painted his bleakest outlook yet for the US economy, and he warned it would get even worse if the bailout is not successful.

"Ongoing developments in financial markets are directly affecting the broader economy through several channels," he said. "When worried lenders tighten credit, then spending, production and job creation slow. Real economic activity in the second quarter appears to have been surprisingly resilient, but, more recently, economic activity appears to have decelerated broadly." He said that the market turmoil was causing problems overseas that would hold back exports – which has been the most robust plank of economic growth and kept the US out of recession since the credit crisis broke.

Bush is perfectly correct on the root cause of the problem. But he doesn't mention is that his administration's policies accelerated the conditions that led to the bubble bursting.
First, how did our economy reach this point? Well, most economists agree that the problems we're witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business.

This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.

Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.

Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford.

As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.

See, in today's mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.

Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses.

Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.

Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

McCain, Palin are Ridiculed by David Letterman

McCain bailed out on David Letterman. The famous talk show host was not amused.

The Republican presidential candidate said he was halting his campaign activities Wednesday, citing the need to deal with the nation's financial crisis, and called Letterman to drop out of the show's late-night lineup. On the air Wednesday night, Letterman assailed McCain's rationale and, with prickly humor, questioned whether the nominee — now trailing in some polls — was in trouble.

"This doesn't smell right," Letterman said. "This is not the way a tested hero behaves. Somebody's putting something in his Metamucil."

And there was more:
During his chat with Olbermann, Letterman used the in-house CBS cameras and monitors to show McCain being readied for his interview with Couric on the set of the CBS Evening News.

“He doesn’t seem to be racing to the airport, does he?” Letterman said referring to McCain's call earlier in the day when he told Letterman he was canceling because "the economy is cratering" and he has to rush back to Washington to work on a Wall Street bailout plan.

“Hey John, I got a question! You need a ride to the airport?” Letterman yelled at the TV monitor as the in-house camera showed McCain talking to Couric.

The audience howled in delight at the merciless edge of Letterman's anti-McCain barbs. The comedian also repeatedly asked why McCain didn't send Palin in his place -- suggesting the GOP handlers were afraid that she couldn't handle it.

But its been a comedy of errors for the Republican ticket for weeks. How can anyone argue these people are fit to run the executive branch of the government (includes video).
It was a bad day at CBS for Republican candidates John McCain and Sarah Palin. It started with CBS News anchorwoman Katie Couric and ended with late night host David Letterman, and between the two, it looks like some serious damage might have been done to the GOP ticket.

In a particularly wild day on the campaign trail, TV news was at the center of events -- mostly in the person of Couric. Beyond getting two exclusive interviews with John McCain and Sarah Palin, the veteran newswoman served viewers extremely well in her superb handling of the Republican candidates.

The headlines: Palin told Couric she thinks "America may find itself on" the road to "another Great Depression."

Then in a separate interview, when Couric repeated Palin's answer to McCain, he had to try and do damage control saying: "I, I don't know if, if, if it's exactly the depression..."

[...]Here's Couric pressing McCain on Palin's talk of American being on the road to another Great Depression:

Couric: “But isn't much of this, Senator McCain about consumer confidence?”

McCain: “Sure.”

Couric: “And using rhetoric like the Great Depression, is that the kind of language Americans need to hear right now?”

McCain: “Well, listen, I've heard language from respected people who are staring at the abyss. I've, I've heard all kinds of, of things from people. I don't think we need to scare people. …”

And here's Couric pressing Palin on a claim that McCain is the right man to "reform government" and Wall Street.

Couric: “But he's been in Congress for 26 years. He's been chairman of the powerful Commerce Committee. And he has almost always sided with less regulation -- not more.”

Palin: “He's also known as a maverick though. Taking shots from his own party, and certainly taking shots from the other party. …”

Couric: “I'm just going to ask one more time, not to belabor the point -- specific example in his 26 years of pushing for more regulation.”

Palin: “I'll try to find you some, and I'll bring them to you.”

It is becoming increasingly clear that Palin is unfit to be running for VP.
Republican vice presidential candidate Sarah Palin said Wednesday that the United States could be headed for another Great Depression if Congress doesn't act on the financial crisis.

Palin made the comment in an interview with "CBS Evening News" anchor Katie Couric while visiting New York to meet foreign leaders for the first time in her political career. As Palin sought to establish her credentials in world affairs, first lady Laura Bush said Palin lacked sufficient foreign policy experience but was "a quick study."

Recent surveys have shown that Palin's popularity, while still strong, has begun to fade.

Earlier this month, an Associated Press-Yahoo News poll showed more people viewing Palin favorably than unfavorably, 47 percent to 28 percent. But an ABC News-Washington Post poll released Wednesday showed that in a two-week period, the number seeing Palin positively dropped 6 percentage points while 10 points more see her unfavorably. On Monday, a CNN-Opinion Research Corp. poll said her favorable rating dropped 4 points and her unfavorable rating rose 8 points over two weeks.

This from the Huffington Post:
John McCain has tried to convince Americans that his sense of stability and leadership is the only choice for Americans. Instead, John McCain has shown so little stability that he makes a Slinky seem sturdy.

One week ago, John McCain claimed (again) that the fundamentals of the economy are strong. Just one week later, he now says the economy is in such dire straights that he's suspending his campaign.

Mere days ago, after claiming for months how inexperienced Barack Obama was, John McCain tried to claim that Sen. Obama was so experienced that the economic crisis was somehow his fault. And then mere days after that, on Bad Wednesday, he offered that Mr. Obama should join him in resolving the crisis he'd supposedly caused.

Wednesday was, indeed, a bad day for John McCain. While trying to show his great stability and leadership qualities, he told the American public that he was unable to chew gum and walk at the same time. That he was unable to have his scheduled debate with Barack Obama because he'd be having meetings in Washington.

Sen. Obama figured out how to handle both.

A NYTimes blog wonders:
“Do you get the impression a McCain presidency would be a bit exhausting?” writes Mickey Kaus, the Slate blogger. “No convention today! … OK, it’s on! … The economy’s sound… No, wait, it’s going to fall apart unless I go to Washington tomorrow! … We need a commission! … We need to fire somebody! … Get me Andrew Cuomo! … I want ten more debates! … But let’s postpone the one we’ve scheduled!”

They quote a pro-Republican magazine (American Spectator) that is similarly annoyed with the McCain-Palin soap opera:
She clearly stumbled twice — when asked how McCain has fought to reform Wall Street and about Rick Davis’s ties to Freddie Mac. Her answer that not supporting a bailout could mean a Great Depression was off message and irresponsible. For the rest of the interview, it was just lots of tired cliches, and random jargon that made it seem as if she was reading off of mental index cards. I know a lot of conservatives like Sarah Palin and always rush to her defense. But it’s absolutely not meant as an insult to say that she simply is not ready to be a heartbeat away from the presidency.

Here is proof that the debate pullout was a cynical ploy by McCain:
Early on a day when national polls showed Barack Obama pulling away from McCain, the Democrat called him and privately suggested that the two issue a joint statement in an effort to keep presidential campaign politics from becoming an impediment to bailout package deliberations. The offer echoed a similar one Obama had made that resulted in the candidates appearing at Ground Zero earlier in the month on the anniversary of the 9/11 attacks.

McCain huddled with his advisers. He finally accepted several hours later, but only after he rejected Obama’s call for the bailout package to include oversight provisions, cap executive salaries and help foreclosed homeowners. His campaign then announced then that, in so many words, it was pulling the rug out from under the entire purpose of the joint statement and injected a huge shot of campaign politics into the deliberations. McCain was suspending campaigning, was rushing back to Washington and would skip the first presidential debate tomorrow night.

As the day went on and McCain preened before the cameras not in Washington but in New York City, with timeouts for Katie Couric and Lady Lynn de Rothschild but not David Letterman, one of the candidate’s leading surrogates added a further wrinkle: That the first presidential debate should supplant the only debate between Joe Biden and Sarah Palin.

It is not known if Palin is suspending campaigning since she wasn’t doing any of substance in the first place.