What’s Hot and What’s Not as the Credit Bubble Bursts

The collapse of the credit bubble will reshape the United States’ economic landscape. Here’s a quick rundown of some of the things that are on the way up — and on the way down.

Hot	Not
Tourism. It costs less than ever for foreigners to spend a week or two visiting the United States.	World travel. If you only have U.S. dollars to spend, it will be hard to visit most countries.
Fitness. People are taking more responsibility for keeping themselves healthy, knowing that if they fail, there may be nowhere to turn.	Health care. Prices for drugs, surgery, and even diagnostic tests are rising so quickly that soon they will be mostly beyond the reach of most potential medical consumers — and beyond the scope of most health coverage.
D.I.Y. When all else fails, if you want something done, you still have the option of doing it yourself.	Financial arrangements. Loans, insurance, and retirement savings aren’t as reliable as they used to be.
India, South America, Australia, New Zealand. Areas that largely avoided the global problems of the last five years will have a chance to take on more leadership roles.	United States, Europe, China. Closer to the center of the financial troubles, people will spend a significant part of their attention adjusting to new ways of doing things.
Food, transportation. People will make the essentials of life and work a higher priority, even as prices go up.	Climate control, clothing, furniture, equipment, haircuts, television, formal education. There is already a massive slowdown in non-essentials as businesses and consumers try to make their budgets work in a low-credit world.
Retail. When it costs more to drive, consumers make fewer visits to stores — and that means fewer impulse purchases.	Online music, movies, and games. People who don’t have extra money to spend suddenly won’t mind the hit-or-miss quality of free online entertainment.

The Buenos Aires Perspective

I couldn’t visit Buenos Aires myself in time to write today’s blog entry, so I read Janelle B’s account of her recent visit there and looked over her tourist photos. Even without seeing it in person, there is no mistaking that Buenos Aires is a happening, cosmopolitan city with a rich culture and history.

Why do I care about what is going on in Buenos Aires? It’s a way of not taking the United States’ looming banking and currency crisis too seriously. Yesterday’s political meltdown in Washington does mean the U.S. economy is in big trouble. After that large-scale blunder by political leaders, there is probably no stopping the collapse of a segment of the U.S. banking system and a crisis of the U.S. dollar in the coming year, or the difficulties that will spread across the U.S. economy. But it is not the end of the world.

Buenos Aires proves that. Buenos Aires was the focal point of a banking collapse just 7 years ago. It was a difficult time, but people got through it:

It took a while, but it all worked out in the end. Although many of the details are different, the fundamental problem was identical to the situation now facing the United States. The Argentine government had no cash and the foreign currency reserves were not capable of providing sufficient liquidity.

That is from “How Argentina Survived Its Banking Collapse,” written yesterday by Guy Bennett on the streets of Buenos Aires. The United States does not have much of a history of crises in banking and currency, so U.S. readers would do well to read Guy’s entire account of the Buenos Aires experience of its crisis and its perspective on the Wall Street crisis. You’ll understand why the Wall Street crisis is not the top headline all over the world. And the thought you come away with, I hope, is that if Argentina can do it, Americans can do it too.

Politically, there is no undoing yesterday’s mistake in Washington. After a week of running around Washington in a panic saying, “We have to do something,” politicians will not easily have a change of heart and say, “Whoops! Looks like we shouldn’t have done that.” There is little hope of leadership of any kind coming from Washington as the resulting economic turmoil spreads from one sector of the economy to the next. After blowing a trillion dollars gambling on Wall Street, Washington has nothing left. Washington cannot rescue us. We will have to rescue them.

I suppose today is a good day to be angry at Washington for putting this crisis together and dumping it on us. By Monday morning, though, we have to get over it, because there is so much we need to do. The top priorities:

• Do everything you can to make sure you are healthy and able to work.
• If you have money, don’t keep it all in one bank, and don’t procrastinate on buying things you know you will need to survive.
• Make sure you are getting along with your friends and family. Get everyone’s contact information on paper. Having it in your telephone or on your computer may not be enough.
• Do simple fixes to save energy. This is especially urgent if you live in a cold climate and have to heat your home to survive.
• Develop basic skills that make you more self-sufficient, especially cooking. If you never walk anywhere, even though you could, build up your walking until you can comfortably walk at least two miles.
• Get things done. Don’t let the word “depression” make you feel depressed. Don’t let the word “hyperinflation” make you hyper either, and don’t let the prospect of a “currency collapse” make you feel like collapsing in the nearest chair. This is a time for action.

This Week in Bank Failures

Last weekend was the biggest so far in bank failures, from the Thursday night takeover of Washington Mutual followed to the report of a takeover of Wachovia and moves of a similar scale in Europe.

Billions for Banks in Europe

Fortis was the largest bank in Benelux and appeared close to collapse before the governments of Belgium, the Netherlands, and Luxembourg agreed to take a 49 percent stake in the company and restructure it. The Fortis story and similar news around Europe says that European banks have been hurt significantly by the collapse of the derivatives bubble based in the United States.

Iceland took over its third largest bank, Glitnir. The government paid 600 million euros for a 75 percent share in the bank, which had 3 billion euros in assets. Glitnir also operates a bank in Luxembourg and has offices in at least five other countries, with a significant presence in Norway.

Germany issued an emergency credit line to Hypo Real Estate Holding AG, which was hurt in part by bad loans for luxury and commercial real estate in Germany.

Then on Monday morning, the United Kingdom effectively nationalized Bradford & Bingley, a large mortgage lender that had mainly been hurt by mortgages on rental properties in Britain. Real estate values have fallen so much that many property owners are collecting too little in rent to pay their mortgage payments. The government took over the bank’s £50 billion loan portfolio and paid £18 billion on the sale of the bank’s branches and deposits to one of Europe’s largest banks, Banco Santander of Spain. Santander will pay less than £1 billion.

The 4th Largest Bank in the U.S.

Then in the United States, the Federal Deposit Insurance Corporation (FDIC) did not take over Wachovia, yet it and Citigroup came to a financial interpretation of Wachovia that allowed me to conclude that Wachovia was on the verge of collapse. Wachovia’s stock had fallen by three fourths since the beginning of the year as Wall Street lost confidence in its prospects. The FDIC provided a guarantee of Wachovia’s loan portfolio to Citigroup, which agreed to pay a purchase price of $2 billion — a token purchase price of $1 per share. Citi agreed to accept only the first $42 billion of losses on Wachovia’s $312 billion loan portfolio. Those losses could occur almost immediately, if the look of Wachovia’s recent financial statements is any indication, so the deal would likely have cost U.S. taxpayers $50–100 billion, in spite of the FDIC’s optimism about Wachovia. Regardless, the guarantees were necessary in order to avoid putting Citi’s own future in doubt.

By Friday morning, Wachovia had changed its mind, announcing that it instead would be acquired by Wells Fargo. Wells Fargo agreed to pay $15 billion in a stock swap and would complete the deal without government assistance. It is a surprising premium price for a company that recently had a market capitalization of $10 billion and whose book value excluding goodwill is surely much less than the $38 billion it reported at the end of June.

Wachovia was formed in a merger in 2001 and with subsequent acquisitions was the fourth largest bank in the United States. Predecessors of Wachovia include CoreStates, First Union, World Savings Bank, SouthTrust, and other large and small banks. Most of the predecessor banks were available because they were experiencing operating difficulties, and Wachovia stabilized them mainly by putting stronger operational systems in place. The combined Wachovia had a troubled loan portfolio of its own by 2006, and it compounded its troubles by acquiring Golden West. There was already a hint of Golden West’s real estate loan troubles, and analysts worried that the deal was too top-heavy and could lead to Wachovia’s collapse. Indeed, Wachovia’s combined loan portfolio quickly wiped out its profits, with no turnaround on the horizon.

Wachovia was also in trouble for possible collusion in identity theft. In April, it paid $144 million to settle a federal probe. It did not admit wrongdoing and might have lost its banking license if it had done so or had been convicted of even a slight involvement in the series of thefts. It fired its CEO a month later.

Wells Fargo was recently listed as the 6th largest bank in the United States, about three fourths the size of Wachovia, so is it large enough and stable enough to neutralize the troubles of Wachovia’s balance sheet? The answer appears to be no. At least on the surface, this is just another troubled, top-heavy merger in the long series of mergers that created Wachovia. An additional $75 billion loss from Wachovia’s loan portfolio would wipe out the stockholder equity of the combined company, and Wells Fargo has real estate exposure of its own and will surely take losses from its own portfolio as real estate values decline further. Because of this scenario, it seems possible that the Federal Reserve Bank could intervene, or that Wells Fargo shareholders could file suit to block the acquisition, which otherwise is expected to close around the end of the year. Citi may have something to say about it too, but that is likely to be little more than bluster to try to persuade the markets that Citi is still financially strong enough to get into this kind of argument.

The combination of Wells Fargo and Wachovia makes good sense geographically and in terms of market position, and there are other reasons to hope the combination could somehow work. The loan losses will not all hit at once, giving Wells Fargo time to raise the capital it needs. The combined bank can look for cost savings, and as both banks have relatively high cost structures, it ought to be able to cut costs in various operational areas. Still, it has to survive the economic turmoil of next year to get any of these benefits, and if things keep going the way they have been, it may have to scramble to stay above water.

The Wall Street Bailout Tog-of-War

Washington’s high-risk Wall Street bailout plan, which some supported in the mistaken hope that it might improve the financial condition of banks and stop the recent run of bank failures, was voted down in the House on Monday amid the largest demonstration of public opposition to a government initiative since the Vietnam War. As one hint at the size of the opposition, the House web site was effectively unavailable during afternoons for the entire week, as it was overwhelmed by inquiries. The Senate, which traditionally has been more sympathetic to the concerns of Wall Street, passed a souped-up version of the bill Wednesday evening. On Friday, the bill returned to the House, where it passed by a narrow margin. President Bush rushed to sign it into law.

For banks, the biggest item in the plan is a temporary increase in FDIC coverage, normally $100,000, to $250,000. The Senate added this provision in the hope that it would slow down any runs on banks that may be coming this winter. Yet the bill did not provide any additional FDIC funding, so it seems unlikely to improve depositors’ confidence in their bank deposits.

The heart of the plan a sort of collection agency in the Treasury Department. This is supposed to improve the liquidity of banks so they will start lending again, yet most of the money will not go directly to banks, but to brokerages, mutual funds, and other financial corporations. If the plan works at getting banks to lend more, the increased lending could lead banks to fail faster, unless the banks can find a way to steer around the loan losses that have piled up at alarming rates for the past two years. Even in the optimistic scenarios of banking industry insiders, it may take two years for the additional liquidity to trickle down to consumer loans.

In the end, the public lost, and Wall Street won. And I have a feeling many of the people on Wall Street will be playing “Take the Money and Run” on their car stereos as they get their bailout money out of the United States and into a more stable foreign currency as fast as they can.

Rescued by a Sinking Lifeboat?

Does a rescue count as a rescue if the lifeboat sinks?

What if the lifeboat does not sink until after Election Day?

Only the atmosphere of political gamesmanship in Washington makes this a complicated question. It should be obvious to all that a short-term “rescue” of a few financial companies does no good in the end if the rescue sinks the whole economy.

I try to imagine the thoughts that go through some of the best minds in Washington. It has to be something like this:

“If I vote no, nothing will happen, but some people might think a crisis was threatening and I didn’t respond.

“If I vote yes, the economy is toast — but that won’t be till after the election, and I’ll deal with it then.”

I have to apologize for the unflattering things I have said about Lou Dobbs in the past, because yesterday morning he had the most insightful description I’ve found of what is going on in Washington now. In an interview, he put it this way: “What we are watching are business ‘leaders’ who won’t surface and put their faces before the American public who are hysterical. Absolutely hysterical. These are not leaders of moment. They are not leaders of great character or vision.” See the whole interview:

Lou Dobbs: Hooray for those who defeated bailout

Michael Moore may be just a filmmaker, but the rescue plan he put together yesterday puts the one that came from Henry Paulson to shame. Step 1: Appoint a special prosecutor. Read the whole plan:

Here’s How to Fix the Wall Street Mess

You don’t have to agree with everything in Mike’s Rescue Plan to see that it is possible to address the problems in the economy without a giveaway program for millionaires so massive that it could sink the whole economy.

The level of cynicism in Washington thinking can be stupefying. Just watching people think that way can make you cynical too.

But wait. You do not want someone in Washington determining how cynical you should be. If you let them control you that way, then they’ve got you where you want you — watching and complaining but not doing anything that might interfere with their grip on power.

And there are simple things you can do. An expanded version of the same disastrous Wall Street bailout package that was voted down on Monday will come up again for a House vote before the week is over, so today would be a good day to telephone or email your Representative, even if you have done so before, to say, “Please vote NO on the Wall Street bailout and save the U.S. dollar.”

Something you can do that is even easier is to register and vote. There is still time to register if you are eligible to vote, and it takes only a few minutes to do. If you are already registered, you can verify that you are still registered, and that too takes just a minute or two. Voting is important because it is the one thing that tells elected representatives that they have to be on their best behavior. When less than half of the eligible voters cast a ballot, politicians figure they can do anything they want. When more than half of the voters vote, politicians sit up and take notice. That is why it is so important for lots of voters to vote on Election Day. Here is a new Hollywood movie, released yesterday, about some of the reasons why you might want to vote:

The Decline of the Political Center

When the Wall Street bailout bill went down to defeat in the House two days ago, it seemed as if almost everyone was surprised by the turn of events. What surprised me was that anyone thought the bill had a chance to pass. I was astonished that House Speaker Nancy Pelosi would bring the bill to a vote so early, not really giving anyone time to study the language of what they were voting on, and without having a legitimate floor debate in which the vast majority of House members who disliked the bill could at least vent their frustrations. I guess she thought she could ambush them. But really, Pelosi and Bush need to get out of their offices a little more and talk to some of the other people in Washington so that they’ll have a better sense of what is politically possible. Pelosi and Bush can sit down at a table with a handful of other so-called leaders and agree to agree among themselves, but if they are agreeing to go in the opposite direction from the direction the rest of the country is going in, all they accomplish is to isolate themselves from the real world.

Those were my thoughts after the carefully negotiated giveaway program Pelosi had shepherded was defeated. But I have talked to many people about this, and I understand now why people were so surprised by the way the vote came out.

The political points of view in America sometimes split out into three blocs, which people call left, center, and right. These blocs differ in their views on the basic idea of responsibility. The left leans toward an idea of social responsibility, or taking care of people. The center sees responsibility as something to be assigned, negotiated, bought and sold in the manner of a business deal. The right sees responsibility as a more private matter, belonging mainly to each individual as a matter of free will.

One of the assumptions deal-makers in Washington have made in the past is that the center bloc can never lose. The center bloc is often the smallest of the three blocs, but it has a pivotal role. Usually the center bloc can get either the left bloc or the right bloc to go along with whatever it decides. Sometimes it is half of the left bloc and half of the right bloc who vote with the center bloc. It scarcely matter how it works out as long as the votes are there. The center bloc can go ahead with its plans, confident of success, without having to bother to check what the left bloc and the right bloc are thinking.

Or so they thought. And that is why Pelosi and other Congressional leaders didn’t bother to count votes to see if their negotiated package made political sense. They were in the center. How could they lose? But lose they did, defeated by a chorus of nos from both sides.

How can the left and right blocs suddenly agree on things and vote down an initiative from the center?

It’s not really so strange when you consider that the left and right blocs both believe in principles — and, to a significant extent, the same principles. For example, left and right agree on a concept of basic fairness and a concept of order and stability. The center likes fairness and stability too, but they won’t let principles stand in the way of their method of businesslike negotiated problem-solving, or deal-making, if you will. But if the center goes too far in abandoning principles to reach a deal, the left and right can stand up together and say, “Hey, wait a minute. This deal you’re offering doesn’t have any principles in it.” And that’s what happened here.

Some observers think there is a sea change going on in politics that will increasingly leave the center out in the cold. David Sirota says it is a popular uprising in his book The Uprising: An Unauthorized Tour of the Populist Revolt Scaring Wall Street and Washington. The book came out in May and seems remarkably prescient when you set it up against the events of the last two weeks.

Yesterday, Sam of Vote Pact argued that the recent trend is toward a historic realignment in American politics. Already, far more voters agree with the positions of Ron Paul, on the right, and Ralph Nader, on the left, than agree with either John McCain or Barack Obama, in the center. Voters may not know about this, of course, because the media does not follow Paul, Nader, or other independent and third-party candidates. But I saw someone comment on Sunday, apparently assuming that the bailout would pass, that if Ralph Nader and Ron Paul agree that the bailout package is a disaster, then we are all in big trouble. The meaning of that comment is that Nader and Paul stand for principles, even as they disagree on priorities. So if Nader and Paul agree that a plan is a terrible mess, it can only be that the plan goes against the basic principles that make things work, regardless of what priorities you want to apply.

I was surprised to learn that five Presidential candidates have “agreed with a set of principles around foreign policy, privacy, the national debt and the Federal Reserve.” They could agree on these principles because they are common-sense principles that most of the voters in the country would agree with. Yet these are principles that the two center bloc candidates, Barack Obama and John McCain, are running against, inviting voters to hold their noses and vote for one of the two.

Just as it is assumed that the center always wins in Washington, McCain and Obama are running on the assumption that the closer they come to parroting a center position, the better their chances of winning. Yet principles are important too. Obama’s idealism and energy accomplish nothing if there are no principles behind them. McCain’s maverick approach, or his willingness to compromise on anything, provides no direction unless there are principles that guide him in which compromises to make. Of course, both candidates do believe in principles, but they are doing their best to hide them so that they will appear more centrist. The theory is that the one that is closest to the center will win. My prediction is that the opposite will hold true in this election: that a candidate who appears to stand for something, a candidate with a spine, will be the winner.

One reason I am sure something is changing is that I have heard from voters who have spent their entire adult lives voting in just one party, up until now. Something happened in September to make them say they are now going to start voting on issues. Combine these brand-new issues voters with the voters, angry at being effectively disenfranchised, who are ready to vote against any incumbent, and things could really change in this election. Of course, these voters are not numerous enough to turn everything upside down, at least not at this point, but they could provide the margin that decides hundreds of races across the country. A popular uprising? It might, at least, be enough of a change to persuade politicians that not standing for anything is no longer the safe way to run for office, or the safe way to vote once elected.