Steven Pearlstein has some thoughts on the economic mess in the Washington Post:

The top priority ought to be on setting up a new clearinghouse for those credit-default swaps that everyone’s heard about but few understand. The swaps are essentially insurance policies — in this case, insuring against the possibility that a particular loan or bond or tranche of an asset-backed security will default. But unlike real insurance companies, the hedge funds and investment banks that wrote these policies were largely unregulated and were not required to set aside any reserves in case they were required to pay up. The big fear now is that when those defaults start to roll in, as they almost surely will, the “insurer” will be broke.

The Federal Reserve is already working on launching a clearinghouse. It would offer the advantage of finally bringing credit-default swaps out from the shadows and into a regulated marketplace where they can be standardized, traded and priced in a way that everyone can see. More important, to gain access to this marketplace, buyers and sellers could be required to pay into a reinsurance fund that could be tapped in the event that one of the “insurers” can’t make good on its policies. And until the market has been around long enough for that re-insurance fund to build up a sufficient reserve, the Fed might have to finance it with a sizable loan.

The logic is simple: better to have the government bail out the CDS market, and finally bring it under government regulation, than be put in the position of having to bail out a dozen more AIGs out of a fear that their failure would also take down the CDS market.

It was a little disappointing yesterday that the major industrial countries stopped short of doing the one thing that is desperately needed, which is to free up interbank lending by guaranteeing the short-term loans made between the biggest money-center banks and bank-like institutions. Because these banks operate globally, some sort of collaborative action is necessary. The International Monetary Fund, which has been looking for something useful to do, could be authorized to finance and administer the guarantee program, using the IMF’s existing funding formula, with countries recouping their contributions through a fee imposed on participating institutions.

More encouraging is that the Treasury is moving quickly to tap the new $700 billion rescue fund to provide additional risk-capital to banks that want and need it, in exchange for preferred stock that will give taxpayers an ownership interest and a handsome quarterly dividend whenever there are profits to distribute. Britain has already announced such a program. That is also the policy preferred by most economists, who believe it’s just the thing to get banks lending again, to each other and to customers.

What to say? We agree.

Michael Barone in RCP fears a “thugocracy” that will imperil First Amendment rights:

Once upon a time, liberals prided themselves, with considerable reason, as the staunchest defenders of free speech. Union organizers in the 1930s and 1940s made the case that they should have access to employees to speak freely to them, and union leaders like George Meany and Walter Reuther were ardent defenders of the First Amendment.

Today’s liberals seem to be taking their marching orders from other quarters. Specifically, from the college and university campuses where administrators, armed with speech codes, have for years been disciplining and subjecting to sensitivity training any students who dare to utter thoughts that liberals find offensive. The campuses that used to pride themselves as zones of free expression are now the least free part of our society.

Obama supporters who found the campuses congenial and Obama himself, who has chosen to live all his adult life in university communities, seem to find it entirely natural to suppress speech that they don’t like and seem utterly oblivious to claims that this violates the letter and spirit of the First Amendment. In this campaign, we have seen the coming of the Obama thugocracy, suppressing free speech, and we may see its flourishing in the four or eight years ahead.

It seems from the minimizing of the significant ACORN voter fraud story by the MSM, and the other cover being given by the media to Senator Obama’s radical past, that perhaps Mr. Barone’s fears are not entirely unjustified.

A little problem in Philadelphia (and elsewhere in Pennsylvania too):

Justice Sandra Newman, accompanied by Dauphin County District Attorney Edward Marsico and Pennsylvania Republican State Chairman Robert Gleason, expressed her concerns at a Harrisburg press conference this morning. A thick document replete with photo copies of phony registrations and aerial shots of vacant lots used as “addresses” for “voters” was handed out to journalists…

“Between March 23rd and October 1st, various groups, including ACORN, submitted over 252,595 registrations to the Philadelphia County Election Board” with 57, 435 rejected for faulty information. “Most of these registrations were submitted by ACORN, and rejected due to fake social security numbers, incorrect dates of birth, clearly fraudulent signatures, addresses that do not exist, and duplicate registrations. In one case, a man was registered to vote more than 15 times since the Primary election.”

And another little problem in Nevada:

ACORN had planned a potluck dinner at its Las Vegas office Tuesday night to celebrate the 80,000 newly registered voters its staff had signed up in Clark County as part of its work with low-income communities nationwide. Instead, their office was raided Tuesday morning by agents of the Nevada Secretary of State and Attorney General who alleged in an application for a search warrant that ACORN had hired 59 felons through a work release program as canvassers and submitted nearly 300 apparently fraudulent voter registration cards as part of the drive.

The submitted voter cards included addresses and names that do not exist in Nevada, duplicate registrations, names culled from telephone books and names of Dallas Cowboys players…

The NYT reports on Senator Obama and ACORN, beginning with an assertion by Rick Davis of the McCain campaign:

Mr. Davis said Mr. Obama had worked as Acorn’s lawyer and conducted training events for its leaders. He also noted a payment the Obama campaign made in February to an Acorn affiliate, Citizens Services Inc…Republicans had made much of an $832,598 payment made in February by the Obama campaign to Citizens Services Inc., a consulting firm affiliated with Acorn…

While Mr. Obama did represent Acorn in a lawsuit in 1995, Acorn was on the same side as the Justice Department. The training events involved two hours of work. And the payment to the Acorn affiliate was reported in campaign filings, although they had to be revised because of an error.

Only at the very bottom of the NYT story do we finally get this little nugget:

In 1992, Mr. Obama was personally involved in voter registration efforts when he served as director of Project Vote in Chicago, helping to register 150,000 voters on the South Side…Project Vote and Acorn were not as intertwined at that time as they are today, when a significant part of Project Vote’s revenues flow to Acorn and various of its affiliates as payment for services…Mr. Obama himself linked his 1992 work to Acorn in a meeting with Acorn’s leaders in November. “Even before I was an elected official, when I ran Project Vote voter registration drives in Illinois, Acorn was smack dab in the middle of it, and we appreciate your work,” Mr. Obama said…

Sol Stern in City Journal gave us a little more background on ACORN:

Walk through just about any of the nation’s inner cities, and you’re likely to find an office of ACORN, bustling with young people working 12-hour days to “organize the poor” and bring about “social change.” The largest radical group in the country, ACORN has 120,000 dues-paying members, chapters in 700 poor neighborhoods in 50 cities, and 30 years’ experience. It boasts two radio stations, a housing corporation, a law office…

ACORN’s bedrock assumption remains the ultra-Left’s familiar anti-capitalist redistributionism. “We are the majority, forged from all the minorities,” reads the group’s “People’s Platform”…“We will continue our fight…until we have shared the wealth, until we have won our freedom”…

We’re finally beginning to understand a little bit more about the very interesting profession of “community organizing.” Question: how big a story would this ACORN/Obama business be if it were McCain and a right wing group engaged in all these shenanigans? (HT: Stanley Kurtz)

Roger Simon has reached some conclusions on the media’s collusion with the campaign of Senator Obama that are particularly well stated:

Ever since the first sound bites of the execrable Reverend Wright hit the airwaves, it has been obvious that Barack Obama is a less than candid human being. It was impossible to believe that a man who had spent twenty years in Wright’s pews did not have a pretty good idea of the minister’s vile views. You would have had to have been deaf and dumb not to. And Wright was the inspiration of Obama’s books! Yet when the candidate was confronted by the press about this, he denied knowing about Wright’s excesses and made a speech that was hailed by the media as a monument in race relations equal, some said, to Dr. King.

It was at that precise moment I knew we were living in a media-constructed lunatic asylum. That didn’t take a rocket scientist, I can assure you, only someone with a modicum of common sense. But it only got worse. When Wright predictably “acted out” and let loose with one of his racist screeds of the very type Obama pretended never to have heard, the candidate blithely pushed the minister under the bus with barely a peep from the compliant press.

About that time I learned of his putative relationship with William Ayers, the unrepentant Weatherman. I was assured by the New York Times and others that this was of no consequence, that Ayers was, in Obama’s words, just “some guy in the neighborhood.” Another lie. The more we learn of Obama’s ties to Ayers the more complex and disturbing they become. It is unlikely that we will ever know the extent of them, certainly not before the election. Most of what we do know does not come from the Times or the Washington Post of vaunted Woodward & Bernstein fame, but from Stanley Kurtz of the National Review, who has been following this story of the Ayers-Obama whitewash for months. Under orders or not, the normally voluble Mr. Ayers himself has kept his yap shut.

And now we learn of yet another strange obfuscation or omission. In 1996, Obama was apparently a member of the Chicago “New Party,” a now defunct socialist political party of some stripe or other. There’s nothing wrong with being a socialist. I called myself one for the better part of twenty years. Millions of people have and many still do. But there is something very wrong with hiding who you are or who you were from the electorate — especially if you want to be President of the United States. Yet that seems to be a habit of Mr. Obama’s, with the collusion of the press.

It might not have seemed possible for the press to be more in the tank for the Democratic ticket than they were in 2004, but it would appear to have happened.

Author Jack Cashill (who admittedly is sometimes given to fairly conspiratorial conclusions) was puzzled at the accomplished prose of Senator Obama in his first book, “Dreams from My Father.” Cashill has “reviewed the portfolios of a thousand professional writers, all of them crowded with writing samples, but only a handful of these writers would have been capable of having a written a book as stylish as Dreams.” Cashill notes that there are almost no writing samples from Senator Obama prior to his having produced his first book, and those that exist are either puerile or pedestrian. He then analyzed Senator Obama’s first book and a Bill Ayers’ memoir, and has reached the shocking conclusion that Bill Ayers ghostwrote parts of Obama’s first book. Excerpt from Cahsill’s piece in the American Thinker:

I identified two similar “nature” passages in Obama’s and Ayers’ respective memoirs, the first from Fugitive Days:

“I picture the street coming alive, awakening from the fury of winter, stirred from the chilly spring night by cold glimmers of sunlight angling through the city.”

The second from Dreams:

“Night now fell in midafternoon, especially when the snowstorms rolled in, boundless prairie storms that set the sky close to the ground, the city lights reflected against the clouds.”

These two sentences are alike in more than their poetic sense, their length and their gracefully layered structure. They tabulate nearly identically on the Flesch Reading Ease Score (FRES), something of a standard in the field. The “Fugitive Days” excerpt scores a 54 on reading ease and a 12th grade reading level. The “Dreams’” excerpt scores a 54.8 on reading ease and a 12th grade reading level. Scores can range from 0 to 121, so hitting a nearly exact score matters.

A more reliable data-driven way to prove authorship goes under the rubric “cusum analysis” or QSUM. This analysis begins with the measurement of sentence length, a significant and telling variable. To compare the two books, I selected thirty-sentence sequences from Dreams and Fugitive Days, each of which relates the author’s entry into the world of “community organizing.” “Fugitive Days” averaged 23.13 words a sentence. “Dreams” averaged 23.36 words a sentence…

Interestingly, the 30-sentence sequence that I pulled from Obama’s conventional political tract, Audacity of Hope, averages more than 29 words a sentence and clocks in with a 9th grade reading level, three levels below the earlier cited passages from “Dreams” and “Fugitive Days.” The differential in the Audacity numbers should not surprise. By the time it was published in 2006, Obama was a public figure of some wealth, one who could afford editors and ghost writers…

If there is any one paragraph in Dreams that has convinced me of Ayers’ involvement it is this one, in which Obama describes the Black Nationalist message: “A steady attack on the white race… served as the ballast that could prevent the ideas of personal and communal responsibility from tipping into an ocean of despair.” As a writer…I would never have used a metaphor as specific as “ballast” unless I knew exactly what I was talking about. Seaman Ayers most surely did.

Cashill concludes: “None of this, of course, proves Ayers’ authorship conclusively, but the evidence makes him a much more likely candidate than Obama to have written the best parts of Dreams. The Obama camp could put all such speculation to rest by producing some intermediary sign of impending greatness — a school paper, an article, a notebook, his Columbia thesis, his LSAT scores…” Question: is it possible that we know even less about Senator Obama than the little we think we do?

We noted a quote from Bill Gross in the course of our January 2008 discussion of the dangerous $45 trillion in Credit Default Sawps outstanding (more like $55-60 trillion today). He referred to something we had never heard of, Black Swan Theory, the idea that something unimaginable actually could happen:

Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever. Financial derivatives of all descriptions are involved but credit default swaps (CDS) are perhaps the most egregious offenders. While margin does flow periodically to balance both party’s accounts, the conduits that hold CDS contracts are in effect non-regulated banks, much like their hedge fund brethren, with no requirements to hold reserves against a significant “black swan” run that might break them.

One of our readers has speculated that the a cause of the continuing and unprecedented sell-offs in the market (a mere 679 points today on the Dow) is the unwinding of $400 billion in these Wild West credit contracts at bankrupt Lehman Brothers, contracts that exist in a shadow market without reserve requirements or regulations. Thus, perhaps the Treasury’s allowing Lehman Brothers to fail precipitated the “black swan run” that Bill Gross warned us about. FT:

The failure of Lehman Brothers has exposed new fault lines in the credit default swap market, with the bank’s absence putting pressure on its counterparties to buy more credit insurance just as confidence in the market is waning. “It is a cannibalistic frenzy,” says one lawyer representing some of the Lehman counterparties in disputes with the failed investment bank. “The credit default swap market has taken on a life of its own. There are huge exposures out there.”…

“Many investors had long and short CDS positions with Lehman which are terminated post Lehman’s default,” said a recent report from JPMorgan Securities. “This leaves investors suddenly long or short on credit risk. Investors need to reset these positions with other counterparties, sometimes at a loss.”…participants can’t just extinguish credit derivatives contracts with Lehman, they can only offset them. That, in turn, puts pressure on some participants to buy more credit insurance and the cost of such contracts is rising…

Theoretically, claims against Lehman should be offset by claims on Lehman’s part. But those who believe Lehman owes them money are pressing their claims, and those who owe money to Lehman “basically say come and get me”…

As we said the other day, normally the events of the last few weeks would get us thinking that the market was perhaps bottoming. But it is certainly conceivable that the current market turmoil is much more about the unimaginable amount and danger of Credit Default Swaps than it is about the mortgage market, bad as that is. If that is the case, we are in uncharted territory, and it’s anyone’s guess where the bottom might be — though it also implies that no more large institutions (in any country?) with significant exposure to the CDS market should be allowed to fail; rather, they should be merged into other, healthier financial institutions so that chaos is avoided among the various counterparties to the failed entity. “Should” is the key word in that last sentence.

We have explained that the roots of the current problem in the global banking system go back about 50 years, when funding of bank loans moved away from using a depositor’s checking account to provide the funds and morphed over time into a vast system of banks lending to each other. So when there came a crisis of confidence in interbank lending, a nearly risk-free strategy emerged for knocking off banks one after another, In effect, a Doomsday Machine was created that could devour bank after bank until few were left standing; meanwhile, the rest of us would have a Depression, or worse. So now it comes to pass that the Treasury is considering purchasing equity in banks, which we and others said last week made a lot of sense, at least in theory. NYT:

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

Meanwhile, Bloomberg reported that measure to date have not been sufficient to get banks to lend: “The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent today, the highest level since Dec. 28. The Libor-OIS spread, a measure of cash scarcity, widened to a record. The overnight rate fell to 5.09 percent, still 359 basis points more than the Fed’s 1.5 percent target rate.” We will not be surprised to see some banks take advantage of equity infusions from the Treasury. They may live to regret it a few years later, if the government decides to become intrusive in matters of corporate governance, but then again they’ll be alive to regret it.

These days in politics, it is an increasingly rare pleasure to be able to enjoy the writing of someone we disagree with much of the time. Camille Paglia has a nice piece today on Sarah Palin:

One of the most idiotic allegations batting around out there among urban media insiders is that Palin is “dumb.” Are they kidding? What level of stupidity is now par for the course in those musty circles? (The value of Ivy League degrees, like sub-prime mortgages, has certainly been plummeting. As a Yale Ph.D., I have a perfect right to my scorn.) People who can’t see how smart Palin is are trapped in their own narrow parochialism — the tedious, hackneyed forms of their upper-middle-class syntax and vocabulary.

As someone whose first seven years were spent among Italian-American immigrants (I never met an elderly person who spoke English until we moved from Endicott to rural Oxford, New York, when I was in first grade), I am very used to understanding meaning through what might seem to others to be outlandish or fractured variations on standard English. Furthermore, I have spent virtually my entire teaching career (nearly four decades) in arts colleges, where the expressiveness of highly talented students in dance, music and the visual arts takes a hundred different forms. Finally, as a lover of poetry (my last book was about that), I savor every kind of experimentation with standard English — beginning with Shakespeare, who was the greatest improviser of them all at a time when there were no grammar rules.

Many others listening to Sarah Palin at her debate went into conniptions about what they assailed as her incoherence or incompetence. But I was never in doubt about what she intended at any given moment. On the contrary, I was admiring not only her always shapely and syncopated syllables but the innate structures of her discourse — which did seem to fly by in fragments at times but are plainly ready to be filled with deeper policy knowledge, as she gains it (hopefully over the next eight years of the Obama presidencies). This is a tremendously talented politician whose moment has not yet come. That she holds views completely opposed to mine is irrelevant. Even if she disappears from the scene forever after a McCain defeat, Palin will still have made an enormous and lasting contribution to feminism.

Paglia adds some bonus facts: “When Wyoming joined the Union in 1890, it was allowed to keep women’s suffrage. As late as 1915, the state legislatures of Massachusetts, New York, Pennsylvania and New Jersey (in the supposedly more cultured Northeast) rejected women’s right to vote. But the Western states had been far more open-minded. Washington state granted women’s suffrage in 1910, California in 1911, Montana and Nevada in 1914.” Very interesting.

Mr. Ayers might not be the Democratic candidate’s pal, but he certainly is someone’s pal. City Journal reports some of his recent comments:

“the profound educational reforms under way here in Venezuela under the leadership of President Chávez. We share the belief that education is the motor-force of revolution…I look forward to seeing how you continue to overcome the failings of capitalist education as you seek to create something truly new and deeply humane…Venezuela is poised to offer the world a new model of education—a humanizing and revolutionary model whose twin missions are enlightenment and liberation…Viva Presidente Chávez! Viva la Revolucion Bolivariana! Hasta la Victoria Siempre!”

“Viva Presidente Chávez! Viva la Revolucion Bolivariana! Hasta la Victoria Siempre!” We think any fellow who talks about the “motor-force of revolution” and shouts “Hasta la Victoria Siempre!” and who hosts campaign events for a non-pal is usually just “a guy who lives in my neighborhood, who’s a professor of English in Chicago.” Certainly a candidate wouldn’t “know the history” of such a man, even if he was so very public about his views. All that time serving on boards together and so forth, they were probably just talking about the Cubs or whatever.

If banks will not lend to each other, global commerce will significantly be curtailed and domestic lending will be substantially reduced. That is the nature of the global banking system today. Arguably, it began when future Citibank CEO Walter Wriston invented the negotiable Certificate of Deposit in 1961, so that banks did not need to depend on their own depositors for lendable funds, and it has expanded into a worldwide interdependency among banks. Over the succeeding years, there have been numerous innovations, many of which, like the creation of bank holding companies, the growth of the commercial paper market, the development of the Eurodollar market, and the emergence of huge non-bank lenders, deserve their own chapters in a book. These developments have not been nefarious, and have been mostly sensible. However, they have created a global interdependency of financial institutions whose downside we are witnessing today. Economist:

the problem. It is widely assumed that central banks set the level of interest rates in their domestic markets. But the rate they announce is the one at which they will lend to the banking system. When banks borrow from anyone else (including other banks), they pay more. Every day, this rate is calculated through a poll of participating banks and published as Libor (London interbank offered rate) or Euribor (Euro interbank offered rate).

Normally, these are only a fraction of a percentage point above the official interest rates. But that has changed dramatically in recent weeks (see chart 1). Take the cost of borrowing dollars. On October 1st banks had to pay 4.15% for three-month money, more than two percentage points above the fed funds target rate…

Bank borrowing costs reached 6.88% on September 30th, more than three times the level of official American rates, while some were willing to pay a remarkable 11% to borrow dollars from the European Central Bank (ECB). Banks have become so risk-averse that they deposited a record €44 billion ($62 billion) with the ECB on September 30th even though they could have earned more than two extra percentage points by lending to other banks. It was the last day of the quarter and, for balance-sheet reasons, banks were particularly keen to have cash on hand. (Overnight rates fell back on October 1st, but one-month rates rose further, indicating that the crisis had not eased.)

In the absence of private-sector lenders to banks, central banks have become vital suppliers in the money markets. With the help of the ECB, the Bank of England and the Bank of Japan, the Federal Reserve agreed to lend a further $620 billion on September 29th…

The money markets’ difficulties began in July 2007, when two Bear Stearns hedge funds revealed the damage done to their portfolios by subprime mortgages. Since August of that year, central banks have been intervening to keep them functioning, with a series of schemes like America’s Term Auction Facility. But the collapse of Lehman Brothers, followed by the long series of rescues in Europe and America, seems to have brought the money markets close to breakdown.

Strong and coordinated measures among governments are needed to get funds flowing again or a disaster will likely happen. We have said that emergency interest rate cuts are needed and appropriate, and Barrons discusses and recommends this as well.

The genie was let out of the bottle around 50 years ago when the nature of bank funding began to be fundamentally changed. Since 1961 the interdependencies among banks and the importance of interbank funding markets has increased immeasurably. There is no going back to the earlier model of funding banks without the gravest of economic consequences. This is an issue of great importance in itself, not to mention its great costliness in our current circumstances. That no one has even thought of proposing devoting a week of one hour daily television programs to explain all this to the people paying the bills, and that the people haven’t demanded it, perhaps says a lot about our politicians, our media, our citizens, and the state of our democracy.

The WSJ has a report from a veteran of the 1929 crash or “break” who still goes to work every day investing money:

Seth Glickenhaus…first worked for a Wall Street firm in the summer of 1929, and founded his own money-management firm in 1938. He thinks battered stocks are due to rebound, but he worries they could fall again later…Mr. Glickenhaus got his training as a municipal bond trader at Salomon Brothers & Hutzler after studying economics and graduating from Harvard in 1934…Now 94 years old, Mr. Glickenhaus still serves as chief investment officer of Glickenhaus & Co., which manages $1.8 billion for wealthy individuals and a few pension funds.

“You have one conspicuous difference between this and the 1929 break…In the ‘29 break you had Hoover and Andrew Mellon contracting all the way. They believed that it wasn’t the role of the government to get involved. This time, the government is moving heaven and earth to reverse the cycle,” he said…

Calls from people seeking his guidance started coming in “a few months ago, when it first became apparent that the country was in trouble,” said Mr. Glickenhaus, who commutes to his Manhattan office from his home in suburban New Rochelle…Glickenhaus & Co.’s accounts are down this year through July, but less than the broad market. Over the past five years, its accounts have had an average annual gain of 17%, compared with 7% for the Standard & Poor’s 500, according to Morningstar Inc…He is keeping 20% of his clients’ money in cash, the highest level he remembers having…

“We’ve gotten soft in the United States, politically, economically and in every way. We’ve had so much prosperity that we can’t compete any more. Those days are gone, except in small companies. In things like autos — those days are gone,” said Mr. Glickenhaus, once a big Chrysler investor…Although Mr. Glickenhaus thinks stocks have fallen so far that a short-term rebound is likely, the economy is so weak and the financial system so damaged that a “recession or even possible depression will last for at least five years,” he warned. “Eventually, we could get to 9500 easily on the Dow Jones Industrial Average…

And indeed, Mr. Glickenhaus was proved correct in his prediction when the Dow dropped 800 points to around 9500 today before recovering in the afternoon.

As the Dow plunged 500 points and Jim Cramer warned that the stock market could fall another 20%, the ever excitable Ambrose Evans-Pritchard said: “Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days.” Telegraph:

We are fast approaching the point of no return. The only way out of this calamitous descent is “shock and awe” on a global scale, and even that may not be enough. Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation.

The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas. The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.

It could have offered “cover” to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave. Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage. The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.

Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible. Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.

In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse. Her comments echo word for word the “we’re alright Jack” attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot.

We have said that this situation is considerably more serious than many believe, that the US’s $700 billion bailout was only the beginning, and that more expensive and intrusive emergency measures such as direct purchases of commercial paper and interest rate cuts lay ahead. So far that does indeed seem to be the scenario.

On the other hand, a Real Money columnist has a slightly different view: “What we are seeing today is a very rare thing. This is what capitulation looks like. This is what happens when folks give up on the market and are so afraid that they want out at any price. You don’t see action like this other than at truly historic times, and that what this is. That doesn’t mean you rush in and buy into the teeth of this decline, but the good news is that if you have cash, you are going to have some fantastic bargains to pick from. The bad news is that there is no way to know how long this will continue before we find a low.” We’ll just have to see what happens.

As we have said, the book on how we got into this financial mess will be a politically incorrect financial thriller with many villains. This video above was produced from the GOP side, but make no mistake, Democrats will be able to put together a highlight reel of their own featuring their favorite miscreants. Regarding this YouTube clip, it would have been merely amusing to see a California Congresswoman praise foolish “100% loans” as a great innovation in this video, if such innovations were not such an important part of getting us into this global financial morass.

Rhodes Scholar and Fannie CEO Franklin Raines (sued by Fannie regulator OFHEO for $90 million of what he was paid) intones at one point that “these assets are so riskless that the capital required to hold them should be under 2%.” He might have a technical point if the securities had been explicitly guaranteed by the Federal Government, but they were not. The mortgage loans only had some unwritten moral backstop by the Feds, which, in the real world is very often no guarantee at all.

Senator McCain could hit the Congressional pressure to limit regulatory oversight very hard, but it is a risky strategy that the MSM would strongly condemn, given recent examples of MSM bias. But he may well need to engage the issue and live with the criticism. A campaign that insists on “country first” is not to be taken seriously if it avoids dissecting this crisis — a real crisis, by the way, not just some contrived affair. However, discussing the abuses of the Community Reinvestment Act and related initiatives could be beyond McCain for a host of reasons. Pity.

Frank Rich sees Senator McCain as a man in failing mental and physical health. He thus sees Governor Palin as the real GOP candidate, and he isn’t at all happy about that, noting a “steady unnerving undertone to Palin’s utterances, a consistent message of hubristic self-confidence and hyper-ambition.” His piece is entitled, “Pitbull Palin Mauls McCain.” Excerpt:

Sarah Palin’s post-Couric/Fey comeback at last week’s vice presidential debate was a turning point in the campaign. But if she “won,” as her indulgent partisans and press claque would have it, the loser was not Joe Biden. It was her running mate. With a month to go, the 2008 election is now an Obama-Palin race — about “the future,” as Palin kept saying Thursday night — and the only person who doesn’t seem to know it is Mr. Past, poor old John McCain.

To understand the meaning of Palin’s “victory,” it must be seen in the context of two ominous developments that directly preceded it. Just hours before the debate began, the McCain campaign pulled out of Michigan. That state is ground zero for the collapsed Main Street economy and for so-called Reagan Democrats, those white working-class voters who keep being told by the right that Barack Obama is a Muslim who hung with bomb-throwing radicals during his childhood in the late 1960s.

McCain surrendered Michigan despite having outspent his opponent on television advertising and despite Obama’s twin local handicaps, an unpopular Democratic governor and a felonious, now former, black Democratic Detroit mayor. If McCain can’t make it there, can he make it anywhere in the Rust Belt?

Not without an economic message. McCain’s most persistent attempt, his self-righteous crusade against earmarks, collapsed with his poll numbers. Next to a $700 billion bailout package, his incessant promise to eliminate all Washington pork — by comparison, a puny grand total of $16.5 billion in the 2008 federal budget — doesn’t bring home the bacon. Nor can McCain reconcile his I-will-veto-government-waste mantra with his support, however tardy, of the bailout bill…

It’s against this backdrop that Palin’s public pronouncements, culminating with her debate performance, have been so striking. The standard take has it that she’s either speaking utter ignorant gibberish (as to Couric) or reciting highly polished, campaign-written sound bites that she’s memorized (as at the convention and the debate). But there’s a steady unnerving undertone to Palin’s utterances, a consistent message of hubristic self-confidence and hyper-ambition. She wants to be president, she thinks she can be president, she thinks she will be president. And perhaps soon. She often sounds like someone who sees herself as half-a-heartbeat away from the presidency. Or who is seen that way by her own camp, the hard-right G.O.P. base…

This was first apparent when Palin extolled a “small town” vice president as a hero in her convention speech — and cited not one of the many Republican vice presidents who fit that bill but, bizarrely, Harry Truman, a Democrat who succeeded a president who died in office.

Mr. Rich would appear to be correct about one thing at least. Senator McCain needs a cogent and tightly focused pitch on the economy. His war against earmarks used to be interesting but pretty trivial in dollar terms. Now, with McCain’s vote for the $700 billion bailout, it has become incoherent, and McCain needs to retool his approach. (On the other hand, Sarah Palin’s debate performance on Saturday Night Live was excellent.)

A rather bizarre AP analysis piece finds a “racially tinged subtext” in Governor Palin’s attack on the Obama-Ayers relationship. See if you can locate it (video here):

By claiming that Democrat Barack Obama is “palling around with terrorists” and doesn’t see the U.S. like other Americans, vice presidential candidate Sarah Palin targeted key goals for a faltering campaign. And though she may have scored a political hit each time, her attack was unsubstantiated and carried a racially tinged subtext that John McCain himself may come to regret…Palin’s incendiary charge draws media and voter attention away from the worsening economy…

“Our opponent…is someone who sees America, it seems, as being so imperfect, imperfect enough, that he’s palling around with terrorists who would target their own country,” Palin told a group of donors in Englewood, Colo. A deliberate attempt to smear Obama, McCain’s ticket-mate echoed the line at three separate events Saturday. “This is not a man who sees America like you and I see America,” she said. “We see America as a force of good in this world. We see an America of exceptionalism.”

The AP piece carries the usual disclaimer about Obama and Ayers: “No evidence shows they were ‘pals’ or even close when they worked on community boards years ago and Ayers hosted a political event for Obama early in his career. Obama, who was a child when the Weathermen were planting bombs, has denounced Ayers’ radical views and actions.”

The AP piece of course makes no reference to the fascinating and lengthy New York Times article of September 11, 2001, in which Mr. Ayers is quoted saying, “”I don’t regret setting bombs…I feel we didn’t do enough” — and many other memorable things as well.

IBD has an entertaining list of problems in the Palin-Biden debate:

as InstaPundit’s Michael Totten instantly noted after the debate, Biden — the great, seasoned foreign policy expert who chairs the Senate Foreign Relations Committee — falsely claimed France and the U.S. “kicked Hezbollah out of Lebanon.”

Of course, the debate’s moderator, Gwen Ifill of PBS’ “Washington Week,” didn’t call Biden on the gaffe; that might not be good for sales of her upcoming book, “The Breakthrough: Politics and Race in the Age of Obama” (especially if there turns out not to be an Age of Obama).

There was also Biden’s accusation that John McCain is soft on regulation, when in fact he tried to beef up regulations on Fannie Mae and Freddie Mac — an explanation for why he got so little campaign money from Fannie and Freddie over the years — under $22,000 — as opposed to the more than $126,000 Obama received in his short time in the Senate.

Sen. Biden falsely claimed that Obama didn’t pledge to meet with Iran’s president, Mahmoud Ahmadinejad; he falsely claimed Gov. Sarah Palin supported a windfall profits tax on oil companies; he said he’s always been for clean coal in spite of his record of voting against it in the Senate.

Biden said we have to drill for more of our own oil, easily leading viewers to conclude he and Obama are in favor of more domestic drilling, but as the American Thinker blog’s Rick Moran noted in a list of “Biden’s Big Lies,” “Biden has opposed offshore drilling and even compared offshore drilling to ‘raping’ the Outer Continental Shelf.”

Gov. Palin called Biden on his claim that Gen. David McKiernan in Afghanistan said that the surge could not be applied in Afghanistan; in fact, McKiernan has said that some aspects of Gen. David Petraeus’ Iraq strategy could be part of our war efforts in Afghanistan.

And Biden was wrong when he claimed that both McCain and Obama opposed troop funding; McCain simply opposed legislation with a withdrawal deadline.

The Delaware Democrat falsely claimed that McCain’s health care plan raises taxes, failing to mention his proposal’s offsetting tax credit. And he was untruthful in claiming that under an Obama Administration the middle class will “pay no more than they did under Ronald Reagan.” Obama, in fact, says he will return income tax rates to the Clinton levels, which were significantly higher than those in effect after tax reform during the Reagan Administration.

National Review’s Jim Geraghty noted Biden’s claim that “we spend more money in three weeks on combat in Iraq than we spent on the entirety of the last seven years that we have been in Afghanistan building that country” and concluded Biden was “off by 2,000%.”

The NY Post added another: “Biden…smeared Dick Cheney as ‘the most dangerous vice president we’ve had probably in American history.’ To which we must take specific offense: After all, the founder of this newspaper, Alexander Hamilton, was killed in a duel by then-Vice President Aaron Burr.”

UK Prime Minister Gordon Brown at the EU summit today, via WSJ:

“I want the message to go out that no solvent bank should be allowed to fail for lack of liquidity”

That’s the nub of the issue, and it’s a pity that we had to get to this point to finally have clarity. Banks often fail, not due to a lack of solvency, but due to a lack of liquidity.

In recent days, we have seen solvent institutions like AIG and arguably solvent firms like Lehman Brothers, get wiped out in the wake of the government’s decision to nationalize Fannie and Freddie — companies whose stocks were rated a ‘buy’ at the very moment the government decided to step in. The wiping out of the shareholders of Freddie and Fannie briefly re-established “moral hazard,” but even more than that, the US government established a virtually risk-free strategy for traders and speculators to bankrupt every other bank and financial institution.

As Anatole Kaletsky pointed out, at that moment, Henry Paulson’s Treasury Department created a Doomsday Machine that could sequentially wipe out every other leveraged financial institution on the planet. All because the government didn’t want to be seen to be bailing out shareholders. And now we have the biggest bailout in history as a result — and it’s likely to get even bigger.

Maybe things would have gotten this bad on their own. We don’t know. But the government’s to-date inconsistent actions have not helped matters. As one market observer noted: “The government’s capriciousness is legion: Fannie and Freddie ‘are well capitalized,’ then they are seized. Bear is too big to fail at $300 billion in debt, Lehman is not too big to fail at $700 billion.”

One thing that is clear is that, by letting solvent institutions fail, and thus make liquidity in the system dry up, the government has made itself the biggest lender on the planet. Tony Crescenzi explains in his analysis of the Fed’s fascinating weekly publication, Factors Affecting Reserve Balances:

the U.S. financial system is currently on life support, with the Federal Reserve seemingly the only lender of any consequence…This was apparent in Thursday’s figures on commercial paper issuance, which posted a record weekly drop of $94.9 billion, and in figures on bond issuance ($7 billion in three weeks — a tenth of the norm), and bank lending, although new data indicate that there has been some shift to bank credit from other sources of borrowing.

Federal Reserve credit, which measures all monies injected into the financial system by the Federal Reserve, increased massively, by an unprecedented daily average of $253.6 billion to $1.388 trillion in the week ended Wednesday, following an equally massive $203.6 billion the previous week. Mind you, this is a figure that tends to increase only a few percent per year. Last week’s increase was about five times greater than the last two large infusions, which occurred in September 2001 and the period surrounding Y2K.

Many factors bloated the Fed’s balance sheet. For starters, primary dealers increased their borrowing by a daily average of $59.5 billion to a record $147.692 billion, a clear sign of stress amongst dealers. Three weeks ago, this figure was zero.

Question: back at the time of the Bear Stearns fiasco, if the government had made it clear that “no solvent bank should be allowed to fail for lack of liquidity,” but made ambiguous the means by which that would achieved in particular cases, would we still be in this pickle today?

Apparently the Palin-Biden debate was must-see TV:

Thursday’s debate was…
– 33% higher than Friday’s top-of-the-ticket debate between John McCain and Barack Obama (52.4 million).
– 61% higher than the 2004 vp debate between Dick Cheney and John Edwards (43.6 million).
– 23% higher than the 1984 match up between George Bush and Geraldine Ferrarro (56.7 million), the former title-holder for the most-watched vp debate.

The Biden-Palin summit was expected to overthrow Friday’s presidential debate in viewers due to questions about Palin’s readiness and because the vp match was held on a Thursday — television’s most-watched night of the week. But this ratings blowout exceeds industry expectations. The audience response puts the election back onto the historic and record-breaking ratings territory that characterized the convention coverage.

The Nielsen measurement includes viewers watching the debate live on 11 networks — NBC, ABC, CBS, FOX, PBS, CNN, Fox News, CSPAN, MSNBC, CNBC, Telemundo, and Telefutura.

ABC drew the largest debate audience with 13.1 million viewers. Among broadcast networks, ABC was followed by NBC (12.8 million), CBS (11.1 million) and Fox (4.5 million).

On cable, Fox News led with 11.1 million — the most-watched telecast in the network’s 12-year history. CNN drew 10.7 million, the channel’s third most-watched telecast ever. MSNBC had 4.4 million. In addition, PBS projects 3.5 million viewers watched its coverage. Friday night may have been the most-watched debate since Reagan vs. Carter (80.6 million). The total from last night is 69,989,000 viewers.

Palin seems to be willing to go after Senator Obama harder than McCain (via Fox): “Some of his comments that he has made about the war that I think may in my world disqualifies someone from consideration as the next commander in chief…Some of his comments about Afghanistan and what we are doing there supposedly -– just air raiding villages and killing civilians. That’s reckless.” Governor Palin would appear possibly once again have made it John McCain’s race to win or lose.

Dominic Lawson in the Independent discusses some of the root causes of our current financial mess:

What is the proximate cause of the collapse of confidence in the world’s banks? Millions of improvident loans to American housebuyers. Which organisations were on their own responsible for guaranteeing half of this $12 trillion market? Freddie Mac and Fannie Mae, the so-called Government Sponsored Enterprises which last month were formally nationalised to prevent their immediate and catastrophic collapse. Now, who do you think were among the leading figures blocking all the earlier attempts by President Bush – and other Republicans – to bring these lending behemoths under greater regulatory control? Step forward, Barney Frank and Chris Dodd.

In September 2003 the Bush administration launched a measure to bring Fannie Mae and Freddie Mac under stricter regulatory control, after a report by outside investigators established that they were not adequately hedging against risks and that Fannie Mae in particular had scandalously mis-stated its accounts. In 2006, it was revealed that Fannie Mae had overstated its earnings – to which its senior executives’ bonuses were linked – by a stunning $9.3billion. Between 1998 and 2003, Fannie Mae’s executive chairman, Franklin Raines, picked up over $90m in bonuses and stock options.

Yet Barney Frank and his chums blocked all Bush’s attempts to put a rein on Raines. During the House Financial Services Committee hearing following Bush’s initiative, Frank declared: “The more people exaggerate a threat of safety and soundness [at Freddie Mac and Fannie Mae], the more people conjure up the possibility of serious financial losses to the Treasury which I do not see. I think we see entities that are fundamentally sound financially.” His colleague on the committee, the California Democrat Maxine Walters, said: “There were nearly a dozen hearings where we were trying to fix something that wasn’t broke. Mr Chairman, we do not have a crisis at Freddie Mac and particularly at Fannie Mae under the outstanding leadership of Mr Franklin Raines.”

When Mr Raines himself was challenged by the Republican Christopher Shays, to the effect that his ratio of capital to assets (that is, mortgages) of 3 per cent was dangerously low, the Fannie Mae boss retorted that “our assets are so riskless, we could have a capital ratio of under 2 per cent”.

That was back in 2003 and of course things got much worse from there. In 2008, four months after we reported that Fannie and Freddie might be insolvent, Massachusetts Congressman Barney Frank, the Chairman of the Financial Services Committee, on July 14, 2008, said this:

I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under. They’re not the best investment these days from a long term standpoint going back. I think they are in good shape going forward. They’re in the housing market. I do think their prospects going forward are very solid. And in fact we’ll do some things that will improve them.

Only seven weeks after Frank’s upbeat comments, the US government decided to “take control of troubled mortgage giants Fannie Mae and Freddie Mac and replace the companies’ chief executives…The government rescue of Fannie and Freddie is likely to leave a trail of billions of dollars in losses for stockholders.” The two institutions endorsed as “fundamentally sound” by their chief congressional overseer were, in effect, nationalized.

When the book comes out on this systemwide crisis, there will be no shortage of villains. Wall Street underwriters, derivatives packagers, and their willing accomplices in the ratings agencies will no doubt figure prominently, but none will be more prominent than the managements of Fannie and Freddie and their political enablers. It will be a politically incorrect bestseller. However, it is still to be determined if the book will have any heroes.

In last night’s debate (at 8:45 in the video), Sarah Palin said something that scored in the 80’s with both Democrats and Republicans in Frank Luntz’s focus group (note the italicized portion):

Darn right it was the predator lenders, who tried to talk Americans into thinking that it was smart to buy a $300,000 house if we could only afford a $100,000 house. There was deception there, and there was greed and there is corruption on Wall Street. And we need to stop that. Again, John McCain and I, that commitment that we have made, and we’re going to follow through on that, getting rid of that corruption.

One thing that Americans do at this time, also, though, is let’s commit ourselves just every day American people, Joe Six Pack, hockey moms across the nation, I think we need to band together and say never again. Never will we be exploited and taken advantage of again by those who are managing our money and loaning us these dollars.

We need to make sure that we demand from the federal government strict oversight of those entities in charge of our investments and our savings and we need also to not get ourselves in debt. Let’s do what our parents told us before we probably even got that first credit card. Don’t live outside of our means. We need to make sure that as individuals we’re taking personal responsibility through all of this. It’s not the American peoples fault that the economy is hurtin’ like it is, but we have an opportunity to learn a heck of a lot of good lessons through this and say never again will we be taken advantage of.

Many, if not most, Americans are furious about a government bailout that involves sums of astronomical proportions for a problem that no one was talking about until, it seems, just the other day. Probably just as many Americans are convinced that no politician is going to really change things much. (As you know, we think the Paulson plan is only step one of a multi-part program that is likely to be even more expensive and intrusive than the government is currently admitting.)

Last night, the focus group was almost perfectly in tune with Sarah Palin when she tapped into that deep anger and frustration. In the days remaining before the election, the McCain campaign might do well to go with the “never again” theme. Palin is an excellent vessel for that theme. Though Peggy Noonan thought she was a bit over the top, she succeeded in making the three others in the race look like politicians by comparison. And people are pretty fed up with politicians.