CNBC's Rick Santelli Fires off on the Solvency/Liquidity Issue

A good moment yesterday morning for the Great Santelli on CNBC's Squawkbox. Here it is. At 1:40 of the segment, which opens with Carl Quintanilla interviewing Umrai Gill, Santelli waves a paper and says he wants to take note of a recent white paper written by Harvard and Princeton economists Joshua Coval, Jakub Jurek and Erik Stafford. The conclusion he reads, however, is not from the Coval/Jurek/Stafford paper. It's from an article about the paper by John Carney of Business Insider. Carney writes (and Rick reads, revising the last sentence):

In short, the government cannot save the banks by improving liquidity or changing mark to market rules because the problem isn't illiquidity or accounting. The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks--because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors.

This caught my attention. Umrai Gill's rejoinder to Santelli did too.

Geithner Releases Public/Private Investment Partnership, Dow Soars 497

Feels like springtime in Obamaland today! Markets worldwide responded favorably to the Tim Geithner's Public/Private Investment Partnership to restore solvency in America's too-big-to-fail banks. But will his plan, in its author's words, get "our financial system back to the business of providing credit to working families and viable businesses, and help prevent future crises?" Here's a running list of responses PRO, CON and NEUTRAL

John Authers asks an underlieing question about bank solvency (3/23)

Bill Gross buys in (3/23 CNBC video)

Paul Krugman all but despairs over the Geithner plan (3/23)

Clive Crook asks Krugman to think twice (3/23)

Tim Geithner argues that his plan is "part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. " (3/23)

Yves Smith, riffing off a WSJ editorial, talks about Fed rescue plan exit strategies (3/23)

Mike Whitney protests the Geithner plan's 5%/95% public/private investor ratio (3/23)

Felix Salmon warns that the plan is yet another "thing-that-has-to-go right in order . . . to work." (3/23)

Wall Street Journal says the plan "isn't the worst idea the federal government has ever had" (3/24)

"NYT "Opinionator" quotes from five mainstream media takes on the plan (3/24)

NYT "Room For Debate" compares responses to the Geithner plan of Krugman, Simon Johnson, Brad DeLong, Mark Thoma (3/24)

Mike Hudson takes a broad 3,000 year view to today's financial crisis in this 10 minute video (2/20). Here's his indispensable 2006 Harper's cover story, "The New Road to Serfdom: an Illustrated Guide to the Coming Real Estate Collapse"

New York Times voices doubts about the Geithner plan (3/24)

Joseph Stiglitz says the plan robs the taxpayer (3/24)

Martin Wolf says an adequate rescue plan is still far away (3/24)

Czech President of the European Union calls the plan "A way to hell". Also, Financial Times (3/25)

Rick Santelli of CNBC asks protests "two years" of government neglect of Nouriel Roubini's warnings about dangers of government exacerbation/funding of the credit bubble. (Go to 7:30 of this 10 minute February Durable Goods Report (Alt. link: http://www.cnbc.com/id/15840232?video=1072009974&play=1. s ) (3/25)

London Economist sits on the fence (3/25)

Nouriel Roubini, "Dr. Doom," sees POSITIVES in the plan! (3/25)

Lee Brodie, of CNBC's Fast Money crew, says Geithner may have rescued America (3/25)

New York Post reporter Mark DeCambre says Geithner plan lets City and B of A "buy back laundered loans at lower rates" (3/25)

Yves Smith, finance blogger, approves Willem Buiter of F.T. taking "Fed and Treasury to Task" (3/26)

Steve Waldman, finance writer, critique New Yorker finance writer James Surowiecki (scroll down to 3/25)

Investor's Business Daily, citing Friedrich Hayek, warns against government (bureaucrat) control of the economy (3/27)

Nouriel Roubini in this 20 min. Bloomberg TV interview says the plan "won't stop bank nationalizations" (3/28)

Newsweek article says Treasury Secretary Geithner is "hitting his stride" (3/28)

Newsweek Cover Story says the White House is ignoring Paul Krugman's criticisms of the Geithner plan (3/28)

Jeffrey Sachs, Yale economist, asks "Will Geithner and Summers Succeed in Raiding the FDIC and Fed?"

Mike Whitney, finance writer, citing DeCambre, Sachs and Stiglitz says "the country will undergo the greatest period of bank consolidation in its 230 year history."

New York Times charges Congress with "bipartisan resistance to a thorough investigation of what caused the collapse" (3/29)

Richard Posner, U.C. Law and jurist, says the Geithner plan "will simplify the banks' balance sheets by removing assets of uncertain value and replacing them with cash (3/29)

Gary Becker, U.C economist and Nobelist, says "it is a strange program indeed where banks get subsidized in proportion to how many 'bad' assets they hold." (3/31)

Joseph Stiglitz, Nobelist, says government overleveraging replicates the bank overleveraging that caused the meltdown.(4/1)

Jonathan Weil , Bloomberg, "Obama Stakes His Fortunes on Failed Banksters" (4/9)

Mike Whitney examines the recent report on the Geithner bank rescue plan released by the Congressional Oversight Committee chaired by Elizabeth Warren.(4/11)

Jeff Cox at CNBC.com says "Flood of US Debt Threatens To 'Crowd Out' Other Borrowers" (4/13)

Financial Times Tarp investigator seeks evidence of book fiddling (4/13)

Nouriel Roubini coming on strong for the first time in several weeks, says "Testing the Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded" (4/13)

Elizabeth Warren, Harvard Professor and Chair of the Congressional Oversight Committee, is interviewed by John Daley at Comedy Central (4/15)

Simon Johnson, MIT economist and former chief economist for the International Monetary Fund, argues in the Atlantic Monthly that "the financial industry has effectively captured our government" and that "recovery will fail unless we break the financial oligarchy that is blocking essential reform" (5/09)

Geithner Testimony arguing for bank stability sparks Wall Street rally (4/21).

What is "The Economy"?

In times of economic recession or depression, if we're going to fix it, or save it, or renew it, or let it heal itself - wouldn't it make sense to know what economy means?

Let's look at two definitions. The Oxford English Dictionary, in the first of many meanings, defines "economy" as "The way in which something is managed; the management of resources; household management.." I like this one. It points, I think, to the economics of the future. For two reasons. First, where people commonly think the of "the economy" rather passively - in terms of the health of markets - this definition speaks of economy in terms of the active role of managers in managing and regulating markets. In this definition, economy is not something that happens, but something that people make happen. The global financial crisis (and globalism itself) is forcing nations (central bankers) everywhere to accept, and accept in concert, this more active definition of economy. Especially with respect to regulation, centrals bankers can no longer afford to be mere spectators of sophisticated yet unregulated financial entities or practices.

Adam Smith spoke of the invisible hand that causes an individual as he advances his own self-interest to advance, invisibly, the well-being of his community as a whole as well. But the global financial crisis has made visible, has it not, the crude hand (pictured here) of those who turned markets worldwide into a giant Ponzi scheme. This brings home an obvious but neglected truth. While Mother Nature makes the weather, markets (while impacted by the weather) are the creation of human beings. To function, markets must be trustworthy: they cannot be rigged. More than this, given the environmental and education challenges confronting the world today, the markets of the future - the economy of the future - will perforce serve the public interest.

I like the OED definition of economy, secondly, because I believe the "resources" mentioned in it will in time include not just the labor and capital resources that have marked economics since the days of David Ricardo and Adam Smith, but also cultural and even spiritual resources as well. Enough said on this point for now.

Now let's look at a second definition. Wikipedia defines economy as "the realized social system of production, exchange, distribution, and consumption of goods and services of a country or other area." Note that apart from its cloudy reference to a "realized system" - to the thing managed and not its managers - this definition is silent on the function of management. It's vulnerable to the notion that economies, in their totality, take shape on their own, without human management. (OK, given the failure of central bankers worldwide to anticipate the current financial meltdown, this reading seems fair enough - but can the world allow this meltdown to occur again?)

Stepping back to look at world's plight today, I see the need for two kinds of leadership. First is the need for top-down, short-term triage stabilization of a broken financial system. But this top-down leadership, even as it repairs what's broken, can do so effectively only if it has a new financial system in mind, one that can be shared with and approved by the general public. I will go farther and say that the new system will necessarily draw its vital energies as much from ordinary citizens as from large corporations and investors.

This is saying a lot, I know. But democracy is a system of check and balances. And the "Great Disruption, as Thomas Friedman is calling the events of 2008, shows us that the direct involvement of ordinary citizens, will in the future be the only possible check on the tendency of financiers, when given the chance, to take not only finance but government itself into their own hands for their own benefit.

Does all this sound far-fetched? It should not to those who have a modicum of faith in the good sense of the American people. Recently Rick Santelli's "Shout heard round the world" jolted CNBC viewers and caught attention of President Obama. But in his follow comments, Santelli insists that it's high time our leaders listened to ALL the people in shaping America's economic future. In this exchange with Peter McCulley of Pimco, for instance, Santelli and McCulley agree on the need for citizens/government dialog, with Santelli calling it "pretty darned American."

A civic media message. (BTW, Santelli has consistently been against ALL government bailouts whether for Wall Street fat cats, automakers or distressed homebuyers. CNBC's Larry Kudlow, by contrast, strikes me as being against bailouts only for the last two.)

Santelli likely understands, as George Gilder predicted in 1988, that America's once-elite economic playing field is being levelled - flattened, democratized, changed forever - by the bottom-up digital Internet's disruption of the top-down analog media that corporate America's stranglehold on the economy for decades. Economics in the future will be as much a matter of public communication as anything else. Successful economies will be those that widely distribute the most vital information. For an open, 'digital', global-network economics to replace the closed, 'analog', old-boy network economics, central planners will include in their idea of economic resources the cultural and even spiritual resources that comprise the totality of human experience. They must also learn to follow the leadership of all members of the interconnected global household. That, more or less, is what President Obama has promised us. Can't say, though, that I see him following through yet. And as I said here (scroll down to Road to Recovery Part I), it's what John Chambers has been doing at CISCO.

The essential problem with the global economy is not so much the lack of leadership in a traditional, top-down sense of the word. It is the feeling and the fact of disconnectedness that pervades the world despite the presence of modern interactive communications technologies. We are not using these technologies effectively. If I am right on this point, it follows that the global economy will not improve until people everywhere feel and are connected. Culturally and spiritually as well as financially.

These connections must occur at local, state, national and international levels. I would stress the bottom-up, local level because the fatal flaw of yesterday's supercapitalism, demonstrated by the global financial meltdown, was its assumption that the top-down management it had imposed on the world since the end of World War II. In a digital age, this assumption becomes illusory.

Interactive media connect people. This site maintains that productive connections are essential to a viable democracy. And the responsibility of ensuring that connections are productive and not destructive lies equally with citizens and government.

Lead by following, we say here, lead by connecting, lead by co-operating. Big task, but for the first time in history we have the tools, talent and technologies to complete it. Let's get going!