Things have gone from epic to cosmic. Tyler Cowen was on top of it, as always, pointing to this hastily-written story in the New York Times:
The goal is to inject massive liquidity into the banking system. The government will purchase perpectual preferred shares in all the largest U.S. banking companies. The shares will notbe dilutive to current shareholders, a concern to banking chie executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings. [sic -- and my emphasis added]
Here’s the breakdown of the (ho-hum these days) $250 billion dollar package:
Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.
Arnold Kling had some fun with it:
Imagine an announcer came on TV and said, “Welcome to the 2008 Bank Telethon…
“I know what you’re wondering: How much should I give? Well, the banks need $250 billion. I know–that sounds like a lot of money to raise in just one telethon. But if each household in America gave just $2000, then we could reach our goal. So let’s get every household in America to pledge $2,000 to the banks so that they can start lending again.”
Do people get a free gift – say, an umbrella emblazened with the U.S. Treasury Department’s official seal?
And what else is happening… Oh yeah, last week the Dow Jones seemed on pace to hit $0 by the end of 2008 (check out this nasty graphic for historical context), and today it went up 12% again. So what? As Stephen Dubner pointed out, ”on 20 of the past 22 days, the U.S. stock market has gained or lost more than 3 percent,” and,
With this many extraordinary events, some otherwise major stories aren’t landing with the gravity they might deserve.
Consider, for instance, that in the same Saturday edition of The Times which reported that the Bush administration planned to “inject capital directly into the nation’s banks — in effect, partially nationalizing the industry,” it was also reported that “Chinese leaders are expected to allow peasants to buy or sell land-use rights for the first time, a step that could draw hundreds of millions of farmers more firmly into the market economy, now centered around the cities.”
And, just for good measure, Iran is trying to collect sales tax for the first time.
As half of the world marches toward nationalization, the other half seems to be marching in the opposite direction.
I don’t like that “marching” metaphor. Scares me a little. We’re still far from making the turn and I don’t fancy the dystopian imagery.
We’re just getting started with bad news from the ’real economy,’ and the bank rescue is “replete with unintended consequences galore,” as Paul Kedrosky wrote. He went on to claim that the bank rescue only addresses one of the two major fears, and,
The second fear has not gone away, however. And that is a global recession caused by an immense contraction caused, in large part, by a credit bubble collapse. Having saved the credit system we are not going to return to the days of yore, with too many banks, too much leverage, and too much consumer debt. The system will not do that again — if not never, then likely not again in our lives. As a result, consumers will become savers, to the extent they can, and the upshot is that credit market weakness, having hit the broader economy, will circle back and hit credit markets, and that will circle back to consumers again. Earnings estimates for 2008 and 2009 are too high (I will come back to that in another post), and while markets aren’t as expensive as they were, they are far from cheap. We may not have 20% more downside, but churning away in place seems the most plausible present bullish scenario.
To understand the threat of a major economic contraction, the numbers don’t tell us as much as if we look at our own lives and how we feel right now about spending our money. The economy for the past decade has been driven by people spending lots and lots of money on stuff.
It’s actually pretty easy not to spend so much money on so much stuff. When everyone figures this out, the real trouble will start.
Update: But then again, there’s still money around. There are people like me who haven’t really spent much in the past few years (except in my case I haven’t been making much to save either) and might make up some of the slack. I’m in the market for a new computer, guitar, camera, phone, wardrobe…
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