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Monday, October 13, 2008

As Her Majesty's Government in the U.K. moves to take control of the Royal Bank of Scotland, officials in Washington are pondering similar actions that would allow the U.S. Government to take ownership stakes in major banks. This is all part of a process called "recapitalization" which, in layman's terms, means pouring cash into lending institutions so that they can resume the business of lending. The hope is that this will alleviate the problem created by the collapse in the U.S. housing market. But, as Robert J. Samuelson points out, there is more to the story than just a lot of bad mortgages on the books of so many financial institutions.

What we've discovered is that the real problem is bigger. Large parts of the financial system are too thinly capitalized and too dependent on unreliable short-term debt. Leverage ratios often reached 30 to 1 for investment banks and hedge funds (that is, $30 of debt for every $1 of capital). The presumption was that the MBA types had learned how to "manage risk." That false conceit backfired. Low capital didn't adequately protect against losses. Confidence and trust evaporated, because no one knew which institutions held suspect securities, how much the losses were and who was ultimately safe.

Deleveraging -- a shift from excessive debt toward more capital -- is inevitable and desirable in the long run. The trouble is that, in the short run, it could destabilize the economy if it proceeds too rapidly.


Read the whole thing.

CNBC's Charles Gasparino has another concern in this piece in The New York Post, that the market is already factoring in an Obama Administration that will raise taxes. There is already evidence for that supposition in the latest word coming from the Democratic leadership in Congress.

Meanwhile, the latest RealClearPolitics Electoral Map shows Obama over the top as Virginia is now in the Leaning Obama category. McCain's campaign is in trouble, with Conservative columnist Bill Kristol calling on him to fire his campaign. According to this story, McCain hopes to "reset" his campaign with a new speech. I think it is too late. Why? Since the Republican Party is perceived as the party of Wall Street, and the excesses of Wall Street have led us to a financial crisis which imperils the jobs, livelihoods and life savings of all Americans, and since the American people cannot directly vote to fire the people on Wall Street who caused the mess, they are left with only one option...fire the Republicans.

This, of course, will have consequences. A Liberal Democrat in the Oval Office, combined with Liberal Democrats running both the House and the Senate will mean all sorts of changes. More government spending, more taxes (although at first they will try to limit those tax increases to "the rich") and, according to Michael Barone, less free speech.

The good news? The wheel keeps turning. As we have seen before, the party holding total power will overreach, causing a backlash by voters (which is one of the reasons why the party holding the White House almost always loses seats in the off-year election). Power in Washington will go back into balance eventually, but the damage that will be done is, of course, unknowable at this time.

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