It’s Your Money
It was, anyway. Remember when you had some? Dow plummets on opening, Wall Street rout drags everyone else down. Look on the bright side. If it’s a banana republic, it’s still your banana republic. Economic roundup of global proportions starts close to home with “John McCain Wants Your Mortgage.” Nice idea, but the devil’s in the details of the little-guy bailout and we haven’t seen enough of those, says WSJ editorial. They understand it, or not, so you don’t have to, or not:
John McCain got the diagnosis right in Tuesday night’s debate with Barack Obama — the economy won’t recover until home prices find a bottom. We’re less convinced that his plan to buy underwater mortgages at taxpayer expense is the cure this patient needs.
… the government will buy the mortgages for their full amount and write a new mortgage that reflects the current (lower) value of the home. The taxpayer — not the lender or homeowner — absorbs the losses on loans that exceed the value of the home.
The McCain campaign said yesterday this program would help 10 million homeowners, which is close to the 12 million whose mortgages are thought to be worth more than the current value of their homes. The campaign adds that the $300 billion estimate might be high, since the program could reduce the need to buy mortgage-backed securities under the Hank Paulson rescue plan.
On the other hand, home prices are likely to keep falling despite the McCain plan if the economy goes into recession, so the best defense against that is to unfreese the credit markets more quickly via capital infusions from the Paulson facility. And unlike the Paulson plan, the McCain proposal appears to offer no upside for taxpayers. They take all the losses up front and don’t participate in any rebound in house prices, so borrowers who overextended and lenders who made reckless loans are made whole, and taxpayers get the bill. At least the $300 billion FHA program imposes at least a 10% haircut on lenders.
Senator McCain’s advisers allow for the possibility that the Treasury could receive some kind of equity kicker in the refinance. Thus a homeowner who later profited from the sale of a house that Treasury had written down would reimburse some of that cost. But there’s no mention of that in the campaign’s materials on the plan.
Meanwhile, it’s far from clear how the Treasury would appraise, underwrite and issue millions of loans in a short space of time …
We’re all for thinking creatively to solve the country’s housing correction, and Mr. McCain’s obvious political intention is to show struggling homeowners that he cares. Perhaps the best argument for the McCain idea is that it is likely to be far less expensive than the Second New Deal that Barack Obama is likely to propose on January 20 if he wins. But Mr. McCain’s plan to transform Treasury into a major mortgage lender, and running the operation at a potential $300 billion loss, raises more questions than it answers.
OK. Meanwhile, same paper opposite page, Kimbverly Strassel on Obama’s Magic Act:
And now, America, we introduce the Great Obama! The world’s most gifted political magician! A thing of wonder. A thing of awe. Just watch him defy politics, economics, even gravity! (And hold your applause until the end, please.)
To kick off our show tonight, Mr. Obama will give 95% of American working families a tax cut, even though 40% of Americans today don’t pay income taxes! How can our star enact such mathemagic? How can he “cut” zero? Abracadabra! It’s called a “refundable tax credit.” It involves the federal government taking money from those who do pay taxes, and writing checks to those who don’t. Yes, yes, in the real world this is known as “welfare,” but please try not to ruin the show.
For his next trick, the Great Obama will jumpstart the economy, and he’ll do it by raising taxes on the very businesses that are today adrift in a financial tsunami! That will include all those among the top 1% of taxpayers who are in fact small-business owners, and the nation’s biggest employers who currently pay some of the highest corporate tax rates in the developed world. Mr. Obama will, with a flick of his fingers, show them how to create more jobs with less money. It’s simple, really. He has a wand.
Next up, Mr. Obama will re-regulate the economy, with no ill effects whatsoever! You may have heard that for the past 40 years most politicians believed deregulation was good for the U.S. economy. You might have even heard that much of today’s financial mess tracks to loose money policy, or Fannie and Freddie excesses. Our magician will show the fault was instead with our failure to clamp down on innovation and risk-taking, and will fix this with new, all-encompassing rules. Presto!
Did someone in the audience just shout “Sarbanes Oxley?” Usher, can you remove that man? Thank you. Mr. Obama will now demonstrate how he gives Americans the “choice” of a “voluntary” government health plan, designed in such a way as to crowd out the private market and eliminate all other choice! Don’t worry people: You won’t have to join, until you do. Mr. Obama will follow this with a demonstration of how his plan will differ from our failing Medicare program. Oops, sorry, folks. The Great Obama just reminded me it is time for an intermission. Maybe we’ll get to that marvel later.
We’re back now. And just watch the Great Obama perform a feat never yet managed in all history. He will create that enormous new government health program, spend billions to transform our energy economy, provide financial assistance to former Soviet satellites, invest in infrastructure, increase education spending, provide job training assistance, and give 95% of Americans a tax (ahem) cut — all without raising the deficit a single penny! And he’ll do it in the middle of a financial crisis. And with falling tax revenues! Voila!
Barry Ritholz, The Big Picture. “Fix the Credit Problem” or Socialize your bank failure:
In recent years, banks ran into three kinds of trouble: They made loans to people who failed to repay them; they did not keep adequate capital on reserve; they compounded their problems by borrowing money from each other to buy back all of those loans after they had been repackaged as fancy securities.
If it sounds ridiculous, it is only because it was.
What makes the current crisis so dangerous is that all these complex financial maneuvers have left the institutions themselves shell shocked. They no longer know who to trust …
Under these circumstances, the original Paulson rescue plan is unlikely to accomplish much. Buying up risky assets from the banks, which is what Troubled Asset Relief Program (TARP) is set to do, is like slapping a coat of paint on a house infested with termites …
So what would solve it? The first step to accomplish this is triage. Identify the banks that cannot survive, and like Old Yeller, gently put them down. Euthanize the bad ones so the good ones can survive. Nationalize ’em, sell their accounts to strong banks, and prevent further liabilities to the FDIC (which insures all accounts up to $250,000).
Next, recapitalize the banks that can survive by buying preferred stock. That is what Warren Buffett did with General Electric and Goldman Sachs when he made his investments …
As this process eliminates the bad banks and recapitalizes the good banks, normal lending will resume … This is how Sweden resolved its financial crisis in the nineties, and how England just started to address their problem this past week.
The good news is that the US is that there are signs the US is starting to move towards the Swedish / British / Buffett model. The bad news is that it has taken this long to even begin contemplating this.
We are a year late, a few trillion dollars short.
Volcker at WSJ, “We Have the Tools …”
Fortunately, there is … good reason to believe that the means are now available to turn the tide. Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and to restore trust.
First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact.
More important in existing circumstances is the clear determination of our Treasury, of European finance ministries, and of central banks to support and defend the stability of major international banks. That approach extends to providing fresh capital to supplement private funds if necessary.
In the U.S., with higher limits of deposit insurance in place, the FDIC has demonstrated its ability to protect depositors, to arrange mergers, and to provide capital for troubled banks. Most other countries now have a comparable capacity.
Recent U.S. legislation has provided authority for large-scale direct intervention by the Treasury in the mortgage and other troubled markets. Along with increased purchases by Fannie Mae and Freddie Mac, now under government control, means of restoring needed liquidity are at hand.
…
None of that is easy. Some of it poses risks for the taxpayer. All of it is decidedly unattractive in the sense of large official intervention in what should be private markets able to stand on their own feet. Unattractive or not in normal circumstances, the point is the needed tools to restore and maintain functioning markets are there. Now is the time to use them …
The inevitable recession can be moderated …
That rebuilding will be the job of another day — of a new administration here in the U.S., of finance ministries and central banks working together …
Boston Herald, a “new and unwelcome wrinkle.”
Federal Reserve Bank of Boston President Eric Rosengren warned yesterday of an unprecedented “liquidity lock” that’s preventing short-term loans and shattering old assumptions about basic economics.
Rosengren, speaking in Wisconsin, made clear the nation’s financial system has entered uncharted territory due to a “new and unwelcome wrinkle” that basically boils down to “extreme risk aversion” among institutions to loan even short-term money.
He dubbed the phenomenon “liquidity lock.”
If the government can’t find the key to unlock liquidity, then the liquidity lock will have a far-reaching impact on the entire economy, he said.
“A liquidity lock makes it more difficult for financial firms and non-financial firms to raise the funds they need,” he said, emphasizing home equity, student and auto loans are all vulnerable.
Washington Post: The End of Yankee Imperialist Capitalist Running Doggism?
In much of the developing world, financial systems still remain far more governed by the state, despite pressure from the United States for those countries to shift power to the private sector and create freer financial markets. They may stay that way for some time.
China had been resisting calls from Washington and Wall Street to introduce a broad range of exotic investments, including many of the once-red-hot derivatives now being blamed for magnifying the crisis in the West. In recent weeks, Beijing has made that position more clear, saying it would not permit an expansion of complex financial instruments.
With the U.S. government’s current push toward intervention and the soul-searching over the role of deregulation in the crisis, the stage appears to be at least temporarily set for a more restrained model of free enterprise, particularly in financial markets.
“If you look around the world, China is doing pretty good right now, and the U.S. isn’t,” said C. Fred Bergsten, director of the Peterson Institute for International Economics. “You may see a push back from globalization in the financial markets.”
Krugman at NYT: Stop playing Russian roulette and pull the trigger on … international roulette.
Belmont Club’s Fernandez at Pajamas: It’s the epistemic arrogance, stupid.
Look who’s smiling now. Jimmy Carter welcomes the prospect that another modern presidency might make his look better.
Carter told reporters on a stopover in Brussels that “profligate spending,” massive borrowing and dramatic tax cuts since President George W. Bush took office in 2001 were behind the market turmoil and economic crisis.
“I think it’s because of the atrocious economic policies of the Bush administration,” said the 84-year-old Democrat, who served in the White House from 1977-1981 during a period of high inflation and energy crisis.
…
“The economic situation is an entrenched problem. It is going to take years to correct what has been done economically,” Carter said, adding he hoped Democrat Barrack Obama would win and immediately improve Washington’s image in the world.
Hey, if W. was his one-term dad’s vindication … or not … maybe Obama is Jimmy’s … or not.
Goldberg at NRO: Too bad the GOP won’t control Congress next year, we won’t get to watch the Dodd hearings.
Powerline: ACORN’s criminal enterprise, continued.
International Herald Tribune: Bananas in the icebox. A North Atlantic banana republic fails.
OK, in closing Hitchens, with “America the Banana Republic” makes the case Krugman tried to more fluently and more entertainly.:
What are the main principles of a banana republic? A very salient one might be that it has a paper currency which is an international laughingstock: a definition that would immediately qualify today’s United States of America. We may snicker at the thriller from Wasilla, who got her first passport only last year, yet millions of once well-traveled Americans are now forced to ask if they can afford even the simplest overseas trip when their folding money is apparently issued by the Boardwalk press of Atlantic City. But still, the chief principle of banana-ism is that of kleptocracy, whereby those in positions of influence use their time in office to maximize their own gains, always ensuring that any shortfall is made up by those unfortunates whose daily life involves earning money rather than making it. At all costs, therefore, the one principle that must not operate is the principle of accountability …
Another feature of a banana republic is the tendency for tribal and cultish elements to flourish at the expense of reason and good order. Did it not seem quite bizarre, as the first vote on the rescue of private greed by public money was being taken, that Congress should adjourn for a religious holiday—Rosh Hashanah—in a country where the majority of Jews are secular? What does this say, incidentally, about the separation of religion and government? And am I the only one who finds it distinctly weird to reflect that the last head of the Federal Reserve and the current head of the Treasury, Alan Greenspan and Hank “The Hammer” Paulson, should be respectively the votaries of the cults of Ayn Rand and Mary Baker Eddy, two of the battiest females ever to have infested the American scene? That Paulson should have gone down on one knee to Speaker Nancy Pelosi, as if prayer and beseechment might get the job done, strikes me as further evidence that sheer superstition and incantation have played their part in all this. Remember the scene at the end of Peter Pan, where the children are told that, if they don’t shout out aloud that they all believe in fairies, then Tinker Bell’s gonna fucking die? That’s what the fall of 2008 was like, and quite a fall it was, at that.
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Now ask yourself another question. Has anybody resigned, from either the public or the private sectors (overlapping so lavishly as they now do)? Has anybody even offered to resign? Have you heard anybody in authority apologize, as in: “So very sorry about your savings and pensions and homes and college funds, and I feel personally rotten about it”? Have you even heard the question being posed? O.K., then, has anybody been fired? Any regulator, any supervisor, any runaway would-be golden-parachute artist? Anyone responsible for smugly putting the word “derivative” like a virus into the system? To ask the question is to answer it.
He also notes that the military may be the most efficient and effective branch of government.
Yeah, OK, only our economy isn’t based on bananas. Too bad, it still might be worth something. Hitchens’ points are good fun, irony enhanced by the truth of his points. However, high-functioning democracy in no danger of being taken over by either military or secret police. The shanty towns might are millionaire’s row by comparison and the peasants get to pick the next dictator. Oh yeah, and when this banana republic goes rotten, the fruit flies infect the entire world.
With thanks to RCP, Memeorandum, Drudge on the roundup.
Posted by Jules Crittenden at 9:45 am on Friday, October 10, 2008
4 Responses to “It’s Your Money”
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October 10th, 2008 at 10:57 am
I especially liked the, “End of Yankee Imperialist Capitalist Running Doggism”…
October 10th, 2008 at 2:55 pm
Not to worry. It’s all part of the change we were waiting for.
October 11th, 2008 at 2:20 pm
Financial Crisis: By Government and For Government
This is a financial crisis produced by the Government, by Rep. Barney Frank (D, MA, Chairman of the Financial Affairs Committee) and Sen. Christopher Dodd (D. CT, Chairman of the Senate Banking, Housing, and Urban Affairs Committee), and supported by most of Congress.
The Government removed Fannie Mae and Freddie Mac from market discipline by guaranteeing it implicitly as its own creation, then told it what to do through legislation, pressure, and its own special regulator OFHEO. Fan and Fred were staffed with government elite.
How could two companies ruin the US and the worlds financial markets? With the power and credit to buy up 90% of all prime mortgages and 20% of all subprime. Fannie and Freddie together guaranteed $5.4 trillion of housing debt (that is $5,400 billion, or $5,400 thousand million). Compare that to the previous $5.5 trillion budget debt of the US.
The market value of subprime loans fell in half when Fannie and Freddie collapsed and could not support that market with its increasing borrowing and purchases. That caused massive losses for institutions worldwide holding the other 80% of subprime mortgage bonds.
Congress ran Fannie Mae and Freddie Mac into the ground, plucking presents along the way. Congress set up Fannie and Freddie, took full responsibility by effectively (but unofficially) guaranteeing repayment of its debts, removed it from private market discipline, funded it through massive private borrowing outside of Government budget accounts, commanded it to do risky business below usual standards, restricted its regulation to a special office set up by Congress (OFHEO), and then ignored that regulator.
Any opposition came from some Republicans and the Bush administration, who were ineffective.
Blaming Bush is misguided; blaming the free market blames something that was not allowed to operate. Blame the corruption of Congress, mostly the Democrats. They assumed oversight of a huge off-budget operation to grant risky loans, and ignored all corruption and warnings.
This is a failure of IN PLACE regulation, actively suppressed by congressional committees who looked the other way, because it was in their political interest for Fannie and Freddie to do just what they were doing. Their motto was “So far, so good”.
My detailed review with links and sources is at
http://easyopinions.blogspot.com/2008/10/we-guarantee-it.html
October 11th, 2008 at 5:52 pm
Careful, Andrew! You don’t want to be called a racist who hates poor people, now do you?