When Governments Can’t Print Money!

By – SWAMINATHAN S ANKLESARIA AIYAR, The Economic Times

The inability of countries to print their way out of debt is something markets have reckoned with only recently

We are used to the notion that companies can go bust for want of cash but not governments, since the latter can print money without limit. This may cause high inflation or even hyperinflation (as in Russia under Yeltsin or Germany in the 1920s). But as long as governments can print currency, they can spend and borrow without limit. Right?

Wrong. The panic in financial and stock markets across the globe last week reflected the growing realisation that neither the US nor major European governments can print money without limit to finance government bond issues, and so could default. The US Constitution says both houses of Congress must approve any increase in the government’s borrowing limit (or debt ceiling). If either house says no, the government cannot issue more bonds, and cannot ask the Fed to print money to buy forbidden bonds.

The Trouble with Paulson’s Bailout

The Treasury Secretary’s $700 billion initial plan fails to give financial firms the incentive to reform and risks rewarding those who made the biggest mistakes

by Peter Coy

Is this really the best way to spend $700 billion? Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are pressing Congress to enact without delay their hugely expensive plan to vacuum up devalued mortgage-backed securities and other toxic assets. If the plan isn’t passed, Bernanke warned the Senate on Sept. 23, “the economy will just not be able to recover in a normal, healthy way.”

But there’s growing concern that the plan offers a small bang for big bucks. Hard-won experience in the U.S. dating as far back as The Great Depression—and in other countries as diverse as Japan, South Korea, and Mexico—shows that the kind of approach that Paulson and Bernanke are pushing could fail to get the U.S. economy moving again. That is a scary prospect. Because if all $700 billion buys is a bunch of weak financial institutions that have enough money to survive but not thrive, there will be a wave of anger from the taxpaying public that will make today’s mounting restiveness seem mild.

Goldman, Morgan Stanley to become regulated banks

By Krishna Guha in Washington
Published: September 22 2008 03:04 | Last updated: September 22 2008 07:34

Goldman Sachs and Morgan Stanley, the last surviving big investment banks on Wall Street, have become regulated banks.

In a statement issued at 9.30pm Sunday, the Federal Reserve said it had approved their applications to become bank holding companies, subject to regulation by the Fed.

During the transition period, the Fed will make loans to both entities and to the broker-dealer subsidiary of Merrill Lynch against collateral acceptable for posting either by a bank or a securities firm.

The Fed will also lend to Goldman, Morgan and Merrill’s London-based broker dealer subsidiaries directly.
The Fed approval is subject to a five-day waiting period for potential antitrust issues.

Bailout Timeline

Economists see financial bailout as necessary

By MARTIN CRUTSINGER, AP Economics Writer

The economy could suffer a massive hangover from the government’s efforts to rescue the financial system in the form of a soaring debt burden. But the alternatives look infinitely worse.

The $700 billion the administration is seeking from Congress as the upper bounds of what it will need to take a mountain of bad loans off the books of financial firms is certainly an eye-popping figure.

To get the funds to buy up the bad mortgage loans that have threatened to bring the financial system to its knees, the government will have to borrow. And that borrowing will come at a time when the federal budget deficit is already soaring.

The deficit for this budget year, which ends on Sept. 30, is expected to rise to $407 billion, a figure that is more than double the $161.5 billion imbalance for 2007, reflecting what the economic slowdown and this year’s $168 billion economic stimulus program are already doing to the government’s books.

The Bush administration is estimating that the deficit for the budget year that begins Oct. 1, which will cover the new president’s first year in office, will hit $482 billion, a record in dollar terms.

Bush team, Congress negotiate $700B bailout

By JULIE HIRSCHFELD DAVIS and DEB RIECHMANN, Associated Press Writers

The Bush administration asked Congress on Saturday for the power to buy $700 billion in toxic assets clogging the financial system and threatening the economy as negotiations began on the largest bailout since the Great Depression.

The rescue plan would give Washington broad authority to purchase bad mortgage-related assets from U.S. financial institutions for the next two years. It does not specify which institutions qualify or what, if anything, the government would get in return for the unprecedented infusion.

Democrats are pressing to require that the plan help more strapped borrowers stay in their homes and to condition the bailout on new limits on executive compensation.

Congressional aides and administration officials are working through the weekend to fill in the details of the proposal. The White House hoped for a deal with Congress by the time markets opened Monday; top lawmakers say they would push to enact the plan as early as the coming week.

Economic officials: Bailout an economic necessity

By ANDREW TAYLOR, Associated Press Writer
Sat Sep 20, 2:45 PM ET
Ben Bernanke didn’t sugarcoat the situation. He couldn’t.

Financial market conditions had degenerated to a full panic, credit is frozen, money market funds are losing money. Even strong institutions such as Wall Street’s remaining investment banks were under extraordinary pressure, the Federal Reserve chairman told House Republicans in a briefing Friday.

Leave things unchecked, he said, and face deep and extended recession, according to notes taken by a House GOP aide at the session.

At one remarkable meeting in the Capitol on Thursday night and in a series of conference calls the next day, Bernanke and Treasury Secretary Henry Paulson laid out nothing less than a nightmare scenario if Congress failed to pass a plan to use breathtaking amounts of taxpayer money to bail out the financial markets.

Fear is a great motivator — and it helps explain lawmakers’ quick bipartisan embrace of the massive federal intervention in the markets.

After AIG rescue, Fed may find more at its door

Wed Sep 17, 2008 1:24am EDT
By Emily Kaiser – Analysis

WASHINGTON (Reuters) – In one $85 billion (47 billion pound) fell swoop, the U.S. Federal Reserve may have wiped out what credibility it won resisting Lehman Brothers’ rescue plea and opened its door to countless other companies to come calling for cash.

By providing a massive loan to American International Group on Tuesday, just two days after refusing to use public funds to save Lehman Brothers from bankruptcy, the central bank also invited tough questions on how exactly it determined whether a company was too big to fail.

Between the $29 billion the Fed pledged to swing the Bear Stearns sale to JPMorgan in March, $100 billion apiece to rescue mortgage finance firms Fannie Mae and Freddie Mac, up to $300 billion for the Federal Housing Authority, Tuesday’s $85 billion loan to insurer AIG and various other rescue deals and loans, taxpayers are potentially on the hook for more than $900 billion.

U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up

Emergency Loan Effectively Gives Government Control of Insurer;
Historic Move Would Cap 10 Days That Reshaped U.S. Finance
By MATTHEW KARNITSCHNIG, DEBORAH SOLOMON, LIAM PLEVEN and JON E. HILSENRATH

The U.S. government seized control of American International Group Inc. — one of the world’s biggest insurers — in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.
The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.

US move triggers CDS default

By Aline van Duyn in New York
Published: September 8 2008 19:21 | Last updated: September 8 2008 19:21

One of the largest defaults in the history of the $62,000bn credit derivatives market has been triggered by the US government’s seizure of Fannie Mae and Freddie Mac, raising questions about how dealers will unwind billions of dollars worth of contracts.

Although the $1,600bn of debt issued by the troubled mortgage groups is regarded as safe after the US government’s move to take control of the companies, their move into “conservatorship” counts as the equivalent of a bankruptcy in the credit derivatives market.
This triggers a default on credit default swaps – instruments that provide a form of insurance on fixed-income assets. Dealers in the market are now working to settle these contracts.
The exact amount of CDS on Fannie Mae and Freddie Mac are not known, reflecting the private nature of the market, but they are part of widely traded indices and the amounts are likely to be significant. Analysts at Lehman Brothers said: “There is likely to be a considerable amount of notional protection outstanding.”