September 24, 2008

My Fellow Americans: The Speech President Bush Should Give

As government officials flounder trying to explain why the most important fiscal maneuver in U.S. history is so necessary, I offer a potential Presidential speech.  With footnotes.


Good evening.

I come to you as a President at the end of his term, who suddenly must deal with the largest issue of his Presidency.  I have already had the difficult responsibility of leading this nation during other historic crises, and I am aware that the country is quite divided on my legacy and performance.  It will be up to history to give the final verdict.

But the current crisis before us now is too large, too immediate, and too catastrophic to be trivialized with partisanship, blame, or scapegoating.  If all goes well, there will be time for that later.   Senators Obama and McCain have agreed to temporarily suspend their campaign to work within Congress, and they are to be commended for that; but, indeed, they had no choice.  If quick, decisive and herculean action is not taken in the next few days, then the country they seek to lead will cease to exist as they know it.


A summary of the events are these:

Financial institutions over the course of decades took on greater and greater leverage in order to maximize their profits.(1)   

Simultaneously, every day Americans, in pursuit of the American dream, worked and saved money to buy a house.  In recent times-- the past two years-- housing prices had risen so dramatically that many could not afford the house of their dreams-- except for the availability of credit, of low rate mortgages.  Some of these mortgages required no money down, an offer too tempting for many trying to put down roots for their families.

As is inevitable, cycles end; and housing prices began to fall.  For many, the price of the house fell below their mortgaged amount-- they owed the bank more than the house was worth.  In effect, not only could they not afford to live there anymore, but it made some economic sense simply to let the bank foreclose.

Critically, for most Americans who work day to day and live off of their incomes, who have little savings and perhaps even considerable debt, their entire financial wealth is in the value of their homes.  Why this should be the case in a nation as prosperous as our own is another matter that will need to be addressed.  But it cannot be now; there is no time.

And the two worlds collided.  Mortgage defaults meant that financial institutions that relied on those mortgages no longer could count on that money; but worse, they had leveraged and invested that money at 10 times, 20 times.(8)  If they lost a dollar, they really lost 20.  On paper, with the mortgages essentially valueless, these institutions were bankrupt.

And the spiral continues. 

  • Lacking even the money to cover their own leverage, they are unable to make new loans, or the loans will come with prohibitively high interest rates.
  • So mortgage rates go up, not down; and there will be more defaults.  And housing prices fall further, worsening the cycle.
  • As property values fall, so too do the property taxes which pay for the schools which educate the community's children. 
  • No car loans, no school loans.  No personal loans.
  • No loans to help with medical bills, the chief cause of bankruptcy in this country/
  • Small business will be unable to get short or long term loans-- to get mortgages, to pay their leases, to make down payments-- to pay their employees.
  • Unemployment rises; economists believe the rate could go as high as 25%.(3)
  • More people will default on their credit cards-- how would they be able to pay them?  And credit limits would contract dramatically, if not completely vanish.  On the one hand people lose their jobs, and on the other hand there is no credit available to tie them over.
  • Pensions, 401(k)s, own shares of these financial companies.  There are millions of retirees right now, at this moment, who are worrying how they will make it now that their 401(k)s have been cut in half.  If we do not provide a bailout plan for these financial institutions now, we will be bailing out millions of retirees later. 

Without immediate action, lenders will be too suspicious that borrowers will default; and citizens will be suspicious that their banks, their mutual funds, their 401(k)s, will not be solvent.  The credit markets will freeze; banks will fail.  Months ago, IndyMac, a small bank, failed.  If a larger, well known bank fails-- Wachovia, Washington Mutual, or any number of others-- the public may indeed panic about their own savings.  There will be a run on the banks.  This is not hyperbole, and I say it again: there will be a run on the banks.

To be clear: this is also a national security threat.  We-- both the government and private institutions-- send aid and do business all over the world.  All of this is threatened.  The crisis has spilled over to many of our European allies, who only months ago worried about possible inflation as their economies grew robustly.  But no more.  Meanwhile, Iran has announced the end of America, and other countries lie in wait, hoping to pick at the American carcass, at firesale prices.


Perhaps some of you can't believe the crisis is that bad, and are of the opinion that, as with every other crisis this nation has ever faced, we will come out ok, even on top.  You believe this because you believe in America. 

It's a safe bet, but I remind you that we have overcome these past crises not by waiting, not by debate, but by commitment, action.  We have been fortunate that in most cases, the burden has been borne by some who accepted the responsibility, and has not been generalized to everyone; indeed, that is one of the strengths of this nation.

Indeed, Secretary Paulson, Chairman Bernanke, and countless others assured me and the American people that the financial system was sound, that it would recover on its own.  Perhaps more aggressive action a year ago could have prevented this.  They were wrong, in retrospect.  I was wrong.

But this may not be the case now.  I have come to you now because I believe that you, the American people need to, and are strong enough to, hear the facts.   And it is imperative that all Americans-- including those in the government-- understand that the stakes are real, and are not just high, but ultimate.  There is no time to debate blame, history, or social policy.  All personal or partisan motives must be set aside. 

But we have a plan, a good one, not without drawbacks.  But it can be implemented immediately and fine tuned over time.  And it is the only plan available to us.

Secretary Paulson has shown considerable leadership on this issue, and it is this country's good fortune to have a former Wall Streeter working now for our side.  He understands the complexities of the problem, and has carfted a plan which will likely succeed.

The specifics of the plan are these:

The bailout plan will cost $700 billion dollars, but three things must be understood. 

  • First, the money will not be spent all at once.  It will take months, perhaps years to spend it, a little at a time, as needed.  While $700 billion will be budgeted for this crisis, not all of it may actually be spent. (4)
  • Second, the money will be used to buy assets, such as mortgages, that no one else wants to buy now.  These assets still have considerable value-- just not today, not this week.(2)  It is reasonable to assume that at least 70%, if not much more of this money will be recovered as real estate stabilizes.  This will be done with warrants, a key requirement of the Democrats,  which will assure that the government gets paid first, before the banks.  Consequently, the burden to taxpayers may be very small, if indeed there is any.    It is entirely likely that the government could realize a profit over the years, though this is not the purpose of the bailout, The U.S.  Government is not a hedge fund-- it has more important work to do.
  • Third, $700 billion is not just the price of the assets, but the price of confidence.  A lesser amount would not convince the American financial system that there is plenty of credit available should they need it-- for an emergency, to conduct business.  To know that they can take a calculated risk and begin lending again.  Indeed, with the restoration of confidence, with the flowing of the credit markets, troubled financial institutions may-- will likely-- try to raise their own capital to fix their own balance sheet.


Americans want to know how this will be prevented from happening again; indeed, many worry that a government bailout poses moral hazard, only gives license to overleverage again.  This will not happen, and part of the long term solution is an entire overhaul of financial regulations, compelling increased transparency and limits on leverage.  Congress is highly motivated in this regard as well.

Why would we want to bail out the very bankers and executives who caused this in the first place?    In some instances they were complicit in a Ponzi scheme; in some cases they were outright fraudulent.  These people will be held accountable, but that is not today.

Punishing the arsonists can only happen after putting out the fire.

It is entirely understandable that Americans want the CEOs responsible for overleveraging, for lack of transparency, and for poor judgment to be punished.  Indeed, many of them have been, in the only ways that matter to them.  They have lost their jobs, and they have been publicly shamed.   The FBI is also investigating certain institutions for improper actions.

Some, like Ron Paul, see this plan bailing out the very institutions which, by the hand of the free market, should fail. Unfortunately, the problem is much larger than just a few institutions-- nearly all institutions will be affected by this.  We are not saving the CEO of AIG; we are saving your money, which is in AIG.(6) 

Why should you be punished because of the mistakes, or even misdeeds, of others?  Should you lose your home, your savings, because some on Wall Street had poor judgment?

The time for blame is later.
Because as I am both the leader and the representative of the people, I will support the overwhelming desire of the American public and not allow CEOs a golden parachute in the government bailout.  It is morally outrageous to allow them to be paid more money for leaving  than the entire company is now worth.

But our anger has to be temporarily held.  There will be time for that later-- there is none for it now.

Many worry that such a plan will lead inevitably to inflation.  We are undergoing one of the largest deflationary periods in our nation's history.  Money is evaporating from the system; credit is disappearing.  People are losing their homes, their personal savings.  Businesses are not growing.  This plan is replacing the money that has disappeared (5), (7) and, over time, should prevent further deflation while simultaneously checking inflation.  The lung has collapsed almost to nothing; the plan is to inflate it enough so that the patient can breathe.

Others scoff at the appearance of socialism, that we are nationalizing the financial institutions.  This could not be more wrong; nationalization is what will occur if we do not implement this plan immediately.

I call on Congress to approve this plan.  In the past months, there has been much talk about which institutions are too big to fail.  In truth, there is only one: the united States of America.  And we must do anything necessary to save it. 

This is what is at stake.

My fellow Americans, good night, and God bless us all.   


1. For every dollar they had in reserve, they would lend out or invest $5.  For this leverage they would earn rates of return on the order of 10%; this meant, however, that their actual return on the $1 they actually possessed was quite low; put another way, the only way they could get 10% return on their $1 was to borrow four more to invest.

Every other financial institution, hedge fund and brokerage had to be leveraged in greater and greater amounts, just to keep up.  Now, leverage ratios are on the order of ten to twenty times.

2. An analogy might be to owning a Picasso, previously bought for one million dollars.  One could try to sell it tonight on Ebay, but in the current climate perhaps no one bids-- so the price never goes above $10.  Is the Picasso really worth $10?  The bailout plan is to buy the Picasso at $30, and wait.

3.  9/25/08: jobless claims at 493000, the highest level since 9/11.  Continuing claims-- 3.542 million-- is the highest since 10/03.

4. Neither does it significantly increase the deficit.  As the money will be financing these failing institutions, the budget will show only the interest costs, and any actual losses, if any. 

5.  Money reinjected into the banking system, by new rules as well as fear, will not be able to leverage it out at 20x as before.  e.g. Goldman Sachs, under its new "bank" status, can only leverage 10x, as opposed to the 30x in the past.  This is clearly deflationary.

6.  Since the governments acquisition of 80% of AIG for $80B, AIG's stock price has doubled.  And the terms of the bailout were quite steep for AIG: 2% "gross commitment fee" ($1.7B upfront) and 8.5% interest.  This is quite an incentive to raise capital some other way.

7. In July 2007 there was $2.2T in commercial paper; that number is now $1.7T.  $500B has disappeared.

8. In 2004 the SEC loosened the leverage restrictions for certain institutions from 12x to up to 40x.  Not coincidentally, all of those institutions either are now gone, or in a dramatically different form.


1/16/09 Update:  I was wrong. First, the obvious: the TARP passed, and nothing much has changed.  Credit spreads aren't as wide, treasuries look like a bubble, but hardly the effect $400B was supposed to have.  But the thing that I was most wrong about-- in retrospect, how could I not have assumed this was going to happen-- was that the money wasn't used as it was supposed to be used.  Rather than the govt. giving the banks money to lend out, the banks kept it.  BAC bought some bank in China, etc.  And then BAC implodes further.  Yet everyone who works at BAC got paid... a conspiracy theorist might say this is enterprise corruption.  Maybe it shouldn't just be conspiracy theorists.


Oh, I think, as long as you... (Below threshold)

September 25, 2008 4:33 AM | Posted by Dave: | Reply

Oh, I think, as long as you'd like us to gambol in the Aegean stables of unregulated commerce, I'd throw out a few more footnotes. Apologies in advance for their contrary nature.

Mueller testified to Congress that there were 24 ongoing financial investigations. The FBI is trying to determine "whether company officials systematically misled investors about the financial strength of their institutions." The companies being investigated include Lehman Brothers, and AIG. Meanwhile Freddie Mac and Frannie Mae are up for investigation as well.

And Paulsen is going to hand out a $700 billion blank check? From his proposal, verbatim: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Why this explicit provision? Oh, I forgot. To nobly save the United States of America. Any oversight, of course, would condemn us all to witness it's final death throes.

The Paulsen Plan: Absolutist. Black and white thinking. All or nothing. Yes, a fine, fear-fueled plan. "We must do ANYTHING to save ourselves." ANYTHING.

Good thing a large number of democrats, republicans, economists and businessmen, including those outside the public trough, are engaged in crafting a more comprehensive plan. Good thing. Fear, fatalism, paternalism and publicly funded capitalism make for a poor outcome.

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You are a very interesting ... (Below threshold)

September 25, 2008 8:02 AM | Posted by xon: | Reply

You are a very interesting and admirable psychiatrist. You should stick with that.

This is the Reichstag fire. These same people caused this problem, and now they are saying, "Trust us! We'll fix this!" and you are out on the boulevard, waving the flag as the troops march toward the Chancellery.

Why would people do this? Ultimately, it's because we are all complicit. Mortgage brokers might have scammed hundreds of thousands of buyers into sub-prime mortgages, but almost none of those buyers were really concerned about knowing that. CDOs and SIVs have always been sleazy, but people really didn't care as long as the 401(k) was making 10% (or more).

Ultimately, narcissism (as you provocatively and profoundly describe it, and I love your work on this topic) is asserting itself within, well, most of us. Right now we, as a culture, are right at that point where we have been living inside our own heads for a very, very long time. Reality is intruding. The question is: just how much are we going to privilege our own delusions compared to the humanity of our fellow citizens? How many will become expendable?

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"Others scoff at the appear... (Below threshold)

September 25, 2008 10:56 AM | Posted by CM Collins: | Reply

"Others scoff at the appearance of socialism, that we are nationalizing the financial institutions. This could not be more wrong; nationalization is what will occur if we do not implement this plan immediately."

This is one of the dumbest paragraphs I've ever read. If the government buys the debt, it's socialism along fascist lines: a takeover, nationalization if you will. If, on the other hand, the companies go bankrupt, and presumably seek protection by filing for bankruptcy, then debtors and creditors hash it out in bankruptcy court per pre-established rules. It does not necessarily follow, in fact it would pretty much go against all precedent, that the government would step into the several bankruptcy proceedings to buy the failed companies and move to take them out of bankruptcy.

The similarities to what Bush et alia said prior to invading Iraq in 2003 are stunning.

Please explain.

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"Whenever a Great Bipartisa... (Below threshold)

September 25, 2008 10:57 AM | Posted by Matthew: | Reply

"Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

I am afraid that policymakers today have not learned the lesson that prices must adjust to economic reality. The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay.

Additionally, the government's actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.

Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.

The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.

It is time this process is put to an end.”

-- Ron Paul

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I agree based on my limited... (Below threshold)

September 25, 2008 5:06 PM | Posted by Steve: | Reply

I agree based on my limited understanding of the matter that some government intervention is in order to prevent possibly much more serious results.

However, you have to be suspicious that this plan starts now, with the Treasury Secretary's "former" company. I do need more information on the matter I admit, but I know enough to figure out that Goldman Sachs stock will rise as a result of Paulson's plan, in stark contrast to the managed liquidations of several other very significantly large banks, most notably Bear Stearns, one of Sachs' big competitors.

Maybe it's just a big unfortunate coincidence, but if so it's a pretty damn suspicious one, and you'd have to be a bit silly to ignore it.

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I am also skeptical. For on... (Below threshold)

September 25, 2008 9:29 PM | Posted by ME: | Reply

I am also skeptical. For one thing, who says there's going to be a run on the banks? People's deposits are insured. The savings banks can't be leveraged the way that investment banks can. Whatever this turns out to be, it's not 1929 all over again.

I think you would do well to apply your thoughts on media framing re teen sexuality to this matter. The media want us to think there's a crisis: why?

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Washington Mutual just e... (Below threshold)

September 25, 2008 10:55 PM | Posted, in reply to ME's comment, by Alone: | Reply

Washington Mutual just evaporated. This is it, we're at the end.

Look, the issue is partly ideological, partly reality. Everyone seems hung up on the ideology, so I'll address that here.

House Republicans. pretending to be conservatives, are balking at the plan. Too big, and of course, government is too involved in the private sector.

Wake up, Republicans. You think this is government intervention? You think they're nationalizing the financial system? If they do not do this, the crash will come. And then: you will have massive social security overhaul-- read: nationalization-- because 401(k)s are gone.

When the loans for medical expenses evaporate; when jobs ans therefore health benefits are lost, then you will see massive nationalization of healthcare. France will be envious.

When the student loans evaporate, the government will subsidize education.

They will have to do these things, because otherwise there will be a revolution. If you think the government is bending over backwards for a bunch of Wall Streeters who have no weapons, what will they do when the riots come?

I am well on record as being an advocate for personal responsibility, against government intervention, and fiscal responsibility. The blog speaks for itself on these matters. But I am telling you now if this plan is not passed, then Republicans are basically handing the nation over to socialism.

I'll say it again: this plan does not nationalize anything, it temporarily prevents default. But if this plan does not happen, nationalization on a massive scale will happen. So massive, even House Democrats don't want it. These House-- not Senate, but House-- Republicans are myopic and selfish, they want to be able to run in one or two years, get on the AM radio and say they opposed government intervention. Idiots. Selfish, greedy idiots.

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“America is more communist ... (Below threshold)

September 26, 2008 7:25 AM | Posted, in reply to Alone's comment, by CM Collins: | Reply

“America is more communist than China is right now,” Rogers told CNBC Europe’s “Squawk Box Europe” September 8. “You can at least have a free market in housing and a lot of other things in China. And you can see that this is welfare for the rich. This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters." 9/8/2008,; see also Mr. Rogers' qualifications: Yours?

Meanwhile, I can think of at least three things this plan nationalize's: (1) given the predictable inflation, a portion of my savings account; (2) given the most probable increase or at least maintenance of high (relative to history and to growing economies) tax rates, a (continuing) portion of my income; and (3) given the further centralization of political authority to the federal, heck the unreviewable Exchequer's Star Chamber that seems to be on the offing, a continuing and increasing portion of my delegable political power. This plan seems the antonym of subsidiarity. As such, it's fair to say it's a nationalization, a type of socialism, a type of fascism.

Your last paragraph features all the moral logic of the oft heard BS from the likes of Planned Parenthood supporters: if we don't give them condoms and abortion, they will just have sex anyway and get pregnant and ruin their lives and ours. To reel out the analogy, such a stance ignores not merely a morally superior alternative over an inferior, but goes so far as to advocate immorality in favor of morality. This advocacy is based on a false premise that an uncertain to occur unpleasant event will occur; a false dilemma. Further it also perniciously ignores the issue of which stance is more or less likely to effect a moral and beneficial course of behavior (or course change as the case may be). It simply assumes away the issue. If "Alone" is The Last Psychiatrist, then I'm surprised. Basically the threat here is akin to telling me that if I don't give my 14-year-old niece condoms then it's my fault if she gets knocked up. I'd rather we just have the depression; I'd rather just kill the jackleg.

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I would contrast your three... (Below threshold)

September 26, 2008 7:50 AM | Posted by xon: | Reply

I would contrast your three paragraphs above:

"Wake up, Republicans. You think this is government intervention? You think they're nationalizing the financial system? If they do not do this, the crash will come. And then: you will have massive social security overhaul-- read: nationalization-- because 401(k)s are gone.

When the loans for medical expenses evaporate; when jobs ans therefore health benefits are lost, then you will see massive nationalization of healthcare. France will be envious.

When the student loans evaporate, the government will subsidize education."

with the situation in almost every Scandinavian country. Of course they have their challenges, 'if men were angels" and all that, but this parade of horribles is apologistic for the scumbags who are laughing at their hundreds of millions in their Dubanese banks.

You're right, though, it is ideology. It's the clash of ideologies between those who chose to prey on their fellow human, and those who don't want to be prey. (The twist on this is that there are perhaps a majority of the prey that would like to be predators if given the chance.) This is ALREADY primal.

The bailout is going to do precisely the same thing that the government interventions in the 1930's did: exacerbate and prolong the suffering.

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The bailout by taxpayers fo... (Below threshold)

September 26, 2008 11:42 PM | Posted by Jack Coupal: | Reply

The bailout by taxpayers for a multitude of mistakes made by both Congresscritters and investment bankers is the height of official/private stupidity.

President Bush and the Congresscritters also said that the amnesty for illegal aliens bill in the U.S. Congress (aka, the Comprehensive Immigration Reform Act) was our last best hope to solve our problem with illegal immigration to the US. That also was URGENT and had to be passed yesterday. The US public said: Thanks for your brilliance, but NO.

So, the usual suspects in Washington and Wall Street now roll out the same strategy, this time for the bailout.

Aware of the game, the US public is again saying: NO

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This is perhaps similar in ... (Below threshold)

September 27, 2008 4:23 AM | Posted by Alexandru: | Reply

This is perhaps similar in gravity to the great inflationary crisis Germany experienced in the 20's, although different in nature.

My point is however, that there is still great support for anti-inflation measures from all over the German populace, precisely because of the suffering such gross mismanagement was let to take an effect on everyone.

No tribunal, no analyst, no newspaper, nobody can substitute for that. The aid plan will fail to create that sense that high leverage is *really* bad. From that perspective if the financial stabilisation plan will succeed, it would also fail on a larger dimension.

The analogy with the arsonist having to be punished after the fire is a wrong one. What's happening now in the US is not a fire, because fire is understood by all people. Financial mismanagement and lack of regulation is not understood by most Americans... and never will be unless some of them get to live on the streets for a while because of it.

Look at it like this: the stabilisation plan is aimed explicitely at preventing fear in the overall population. If that fear never materialises, then, at the next elections presidents will be chosen again on whether or not they think gay marriage is ok, and not on real issues, such as their intention to improve regulation and oversight in the financial sector. The common American will keep his belief that he can focus exclusively on his job and front lawn and not invest a dime or second in his economic or political education (so that he doesn't cast an ignoramus' vote).

Obviously few if any people share my point of view, because suffering and loss of wealth and fear are not popular. And they shouldn't be. But every once in a while these are the only teachers people can learn REALITY from, the only ones they'd listen to.

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Your point about fear ne... (Below threshold)

September 27, 2008 9:22 AM | Posted, in reply to Alexandru's comment, by Alone: | Reply

Your point about fear needing to materialize is a good one; but it can't be in the form of a market/credit crash. The fear is required to get people to change a)their own behavior (e.g. no huge mortgages, etc) and b) others' behavior-- but that will be done through regulation.

You may want to ask why fear is needed at all-- why do people overextend themselves financially-- overleverage, take on debt? I'd say it isn't simply greed, but the system conditions unrealistic expectations: the Wall Streeter thinks he has to make 20% a year because the other guy is, even though he isn't either; everyone needs a Blackberry or a newer house...

As to your finial point, I'll even reword it: why do Americans spend four years never once thinking about gay marriage or abortion, but then suddenly choose their President almost entirely on those issues?

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A slight update to this ... (Below threshold)

January 16, 2009 9:40 AM | Posted by Alone: | Reply

A slight update to this post, and I'm using the comments here as a bump: I was wrong.

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Two reasons you were wrong:... (Below threshold)

August 2, 2013 6:09 PM | Posted by George: | Reply

Two reasons you were wrong: (1) Banks don't lend out reserves. (2)They don't extend credit unless there is demand for credit from creditworthy borrowers.

Do a search on "endogenous money."

I hope the porn book is going well.

Vote up Vote down Report this comment Score: 0 (0 votes cast) retrospect, ... (Below threshold)

May 21, 2015 12:31 PM | Posted by Oedepism: | Reply retrospect, how could I not have assumed this was going to happen...

Because you were cynical. Then you were shocked and then badly frightened. Then, a solution was offered by the problem and you became hopeful just to feel at ease again. Ultimately, you got screwed and now you get to be cynical again. You admirably did exactly what you were expected to do. None the wiser.

Congratulations, Alone; you're human, and for that you have my condolences.

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