I admit that I am not a finance expert. Neither are the vast majority of people whose tax dollars are going to be spent bailing out institutions that took on risks that they should have known were bad. Therefore this distinction makes sense to me: Have the government buy equity in the banks; don't just buy their $#!+.
That is, instead of simply buying up all the bad debt from banks that acted foolishly (which won't somehow become better debt simply by being paid for), we should buy equity in the banks, thereby stabilizing them and getting some upside from their future recovery. That is, instead of just straight-up socialized risk hell, outright failure combined with privatized gain … we should own a good chunk of that gain.
How about it, Barney Frank? Or is this just another round of soak the taxpayers so that rich people can get away with financial murder?
All comments welcome — tell me if and why I'm wrong. And thanks to Yglesias (here too) and Josh Marshall's commenters for helping cut through the jargon and fog.
Update: Krugman says no deal.
Another update: OK, I've heard, read, and talked a bit more about this, and from what I understand, here are a few important things to know.
- The $700 billion is not just a flat-out expenditure. It's buying assets — distressed assets, but assets nonetheless, presumably with a non-zero value.
This amount of money is vast, frequently compared to the defense outlay for the year. But that's really not an apples-to-apples comparison, since theoretically there's a “something” that we're paying for — something of value the government could eventually sell off.
- The main question is how much the assets are worth, and how much we'd be paying for them.
- The assets would be sold to the government in sort of a “reverse auction”: The government might set a budget for buying certain classes/kinds of assets, and the banks price their assets in the hope that the government can fit them into that budget. So it's kind of like a contract-bidding system: If a bank asks too much for its share of the $#!+pile, then the gov't doesn't buy it. Theoretically.
Therefore the question of how much the assets are worth is dependent on a.) How much the banks want to be rid of them, and b.) How much the government can/wants to pay for them. The “can” part is the practical ability of the gov't to come up with the money; the “want-to” depends on how much the gov't thinks is necessary to stabilize the situation.
Another update: Bob Reich sets some conditions. While these sound good, I'd like to know what our priorities are.
Even yet still more update: Dean Baker sets a lot more conditions.
By the way, right now, tonight, I am a hell of a lot less interested in what party and which individual politicians are more at fault, than in what our goals and standards ought to be for the coming legislation. This is going down right now; there's plenty of time for assessing credit and blame between now and November.
We'll get to that, with a vengeance. But right now we need to make sure our political culture doesn't screw this up — again.
Setting a condition on the bailout that in no company participating the bailout can any officer, executive or employee be paid more than a GS-15 (the highest level for federal civil servants… tops out around $125k)?
but still not target, IMO.
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p>The fact is buying the debt or even equity in the banks doesn’t help the taxpayers who are losing their homes. Foreclosures are behind this crisis, as well as the risk of more of them happening. If the government’s going to bail out anyone, bail out the people who bought the houses in an inflated market and help them from losing their homes. If they lose their homes, even if the banks don’t go under, the economy will still tank – and will be disproportionately bad for tens of millions of Americans. Lets try to save as many homes we can – renegotiate some of this debt, or give them lower interests… or do something more effective that I just don’t have the knowledge about. Better to give welfare that everyone shares in than just corporate welfare. And, bottom line, not only will it save the homes, it’ll still have the same effect of saving the banks.
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p>This just seems like common sense to me…
Your proposal still rewards people who made bad decisions. Why should people be rewarded for overbidding on houses or living in houses that are too big for them to afford? Why should people who saw the housing bubble for what it was have to bail out people who didn’t understand the real estate market?
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p>Foreclosures are not the problem in the economy. They are actually part of the solution. The problem is that housing has become too expensive relative to incomes. The only way to drop house prices is through foreclosures.
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p>There is only one fair way out of this: inflation. We need to raise average incomes far enough that people can afford houses at their current prices. Then people can afford their current mortgages and they don’t have to take a loss when they sell their house. Real house prices will still fall, but people don’t mind selling their house for the same as they bought it after prices for everything else have doubled as they mind selling their house for half of what they paid for it.
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p>And the easy way to create wage inflation is massive government spending. $700B will easily hire 1 million people for 10 years at $40-50k/year plus benefits. And all that hiring by the government will increase competition for workers, which will push up wages in general. Same total cost as the Paulson bailout proposal, but it rewards everyone instead of only people who did things they shouldn’t have done.
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p>and bailing out all the banks doesn’t? No, that’s right, I forgot: it’s okay to bail out big business. We just don’t bail out people, who were told by these businesses they could a) afford these loans and b) that they could get out of their variable rates in time should they jump up. Both things were false for millions of Americans. These companies took on risky loans and now you want to reward them. Real smart! I don’t like much bailing out anyone, but if it’s going to happen, you sure as hell can count on the fact that I’m going to do what actually makes sense – and helps not just big business, but the people who fuel it and this entire freaking country.
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p>The housing market is going to continue to plunge, regardless, if we make sure that no more bad loans go out. So I really don’t see any problem on that front. Meanwhile, keep families inside their homes, instead of homeless and with entire neighborhoods filled with abandoned homes, then the economy will be much, much stronger.
Bad decisions by the banks too Ryan to offer these loans to people who couldn’t afford them
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p>Pressured by the liberals to do away with credit checks
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p>Oh – by the way – an estimated 1% of all the homes are probably owned by illegals anyway – ship them out.
Pressured by the liberals to do away with credit checks
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p>Got a cite on that? What credit checks, and what legislation/regulation did away with them?
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p>an estimated 1% of all the homes are probably owned by illegals anyway
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p>Estimated by whom?
I don’t like bailing out the banks either. I am in favor of inflation. The only reliable way the government can generate inflation is by spending money hiring lots of people. It doesn’t really matter what it hires people to do, what matters is that anyone who wants a job can find one.
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p>This doesn’t bail out anyone. What it does is increase the price of everything in the economy to the same degree that house prices were raised. People’s incomes will rise to the level necessary to pay off their mortgages, so they won’t be foreclosed on. Since people will be paying off their mortgages, the banks will get the back money that they lent out.
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p>There is no way to avoid a massive redistribution or destruction of wealth. Doing nothing will probably lead to the financial system collapsing, leaving no wealth for anyone. Paulson’s plan is a massive redistribution of wealth from taxpayers to banks. Your proposal is a massive redistribution of wealth from taxpayers to people who bought houses they couldn’t afford. My proposal is a massive redistribution of wealth from taxpayers to everyone that works. The advantage of my proposal is that it doesn’t favor people that were irresponsible. The banks will still have huge inflation-adjusted losses. People who overpaid for houses will still have huge inflation-adjusted losses. It just makes the losses move from nominal losses to inflation. Of course for this to work well, we will also have to index social security benefits to inflation properly.
Though I think it would be more difficult to navigate, and could only be one piece of the pie in addressing the economic woes (as it doesn’t directly help the actual crisis). Furthermore, it’s going to be a tall order to get this government – Democrat or Republican – willing to increase taxes by the amounts that could do what you’d want to do. They’ll have to be increased dramatically anyway, just to maintain the status quo.
AND since over fifty percent of the country pay most of the taxes–it’s just the RICH people paying the tab—
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p>See—it’s real simple. It’s called redistribution of wealth, and the wealthy democrats who own the banks and the connected democrats who were Chairman & CEO’s of Fannie Mae and Freddiw Mac get to keep their nice fat pensions, golden parachutes, and bonus’s. All of CHRIS DODD & BARNEY FRANKE’S pals.
It’s taking on the bad loans, not the homes. If people foreclose, they still foreclose – just on the expense of the US taxpayer. Get your facts straight.
This piece by Joe Nocera in the NY Times this morning really made me lose my breakfast appetite. Recommended reading.
I do not want my children sold into serfdom to keep the major contributors to the Republican Party rich and getting richer. The Head of Freddie [or was it Fannie?] earned $197 MILLION and walked away with another 15 MILLION for not setting any standards.
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p>As a no-holds-barred analysis by Michael Hudson, a professor in of all places, Missouri, states:
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p>blockquote>The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work. But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay – all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.
ALL CLINTON APPOINTEES!
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p>Barney Franke—Chairman of House Finacial Services
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p>Chris Dodd Chairman Senate Banking
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p>DEMOCRATS!
was the shaky mortgages that were offered in the early Bush years through the end of the housing boom in 2006. During all that time the Bush administration regualtors did nothing – when the problem was extremely obvious in 2004, they started to write guidelines – but did not produce the final report until September 2006. Most of these loans were written during teh housing boom that ended before the Democrats took over Congress.
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p>To anyone watching Congress, there is very little teh Republicans wanted that they did not get from 2002 until 2007 – the only thing I can think of is they were blocked from drilling in ANWR. Here, no matter how much the right speaks of wanting reform in 2003 and 2005, there was not even ONE vote in the Senate on it. (Many Democrats wanted reform – so there is no way there would have been 41 votes to filibuster it.) Where were Frist and McConnell respectively?
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p>Not to mention, in 2004, the Democratic platform included a plank that dealt with the need for mortgage reform, which included this:
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p>
http://query.nytimes.com/gst/f…
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p>The fact is that the Republicans, including John McCain, were wholeheartedly for deregulation. This is a crisis that occurred because the companies wanted huge short term products and they downweighted long term concerns and regulators did not regulate.
1 – If the US government is just going to give all this money away to stabilize this industry, why give it to the mortgage companies? Why not give it to the citizens so they can cover their mortgages — restabilizing that sector while allowing people to keep their homes?
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p>2 – What effect does this have on investment if the market comes to understand that if you’re a big enough fake success, you’ll never have to become a real failure?
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p>3 – I take it as a given that the money for all this will come from selling still more debt to the Chinese. Doubling our deficit for this year and turning even more leverage to our greatest rival is a national security concern. Has this been factored into the decision-making process?
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p>4 – Why does anyone insist that the problem is “confidence” or “liquidity”? The problem isn’t a shortage of money in the system, but rather a shortage of money because it was all loaned to people who couldn’t repay it — and those debts are still there.
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p>5 – Speaking of which, America now owns a big chunk of the finance market. Can we/it please now fire every sad S.O.B. who managed those companies and screwed everything up forthwith? If Bush is going to insist on trying out Communism, can we at least try to be nice to the people for a while before going straight into the Stalinist school of economic management?
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p>6 – Is it true that this “deal” right now includes the traditional Republican demand that it not be subject to American law or oversight, as rumor has it?
This was brought up by Peter Schiff, former economic adviser to the Ron Paul campaign. He said that Bank of America bought Merrill Lynch in order to become “too big to fail” so they get a bailout.
http://www.youtube.com/watch?v…
Dodd, Franke, Pelosi and Reid—-they all saw it coming—they could have enacted emergency legislation —which is their JOB—and they did NOTHING!
that there’s even a shred of validity in that point (which I doubt). What do you think would have happened if Reid, Pelosi & Co. had enacted “emergency legislation” to re-regulate the financial markets, regulate credit default swaps, etc., at any time prior to the last few weeks?
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p>One word: veto. And you know it.
That the President via his Treasury Secretary proposes emergency legislation by which authority with little or no oversight is sought from the Congress.
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p>Care to place odds now if Congress is going to roll over?
that your question is irrelevant to the point I was making, I think the odds are fair that Congress will roll over, but that it’s not a sure thing. Today’s papers indicate that Schumer, Frank, et al. are looking for more than just a blank check for Henry Paulson to buy whatever crappy debt he wants for however much money he feels like spending. I certainly hope they hold out, in order (1) to establish some oversight, and (2) to include some relief for someone other than Wall Streeters. We’ll see.
when the Democrats took control. Therefore the “go to ” guys were, Frist, Hastert, Shellby and whoever is the Republican who headed the House committee from 2001-2006.
He blames Greenspan and Bush:
http://losangeles.craigslist.o…
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p>(Craigslist, because the Financial Times source requires registration.)
I should have looked it up. Interesting that the Republican head of the committee then blames Bush and Greenspan.
First off may I point it that the Democratic leadership has been in place for under 2 years the issues have taken Decades to develop and the majority of the problems go right back to the leadership of the House and Senate which has been Republican since 1994.
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p>Obviously you missed that fact also under this leadership the very oversight and regulation (go back to Reagan) have been removed or loosened to the point that they have no control Deregulation is the problem not a failed to take a knee jerk reaction as you suggest the Democratic Leadership should do after 20 months.
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p>Last point to your absurd hypothesis is the broader point that most people completely miss who is getting the bail out??????????
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p>We keep pointing to the US corporations Banks, Mortgage Companies, Mutual Funds, and Insurance industry??????? Yes some are holding paper on some of these issues but the vast majority is by foreign investors Like China and the Saudi’s who have the cash to invest in the US economy they are the very entities refusing to risk more money. With out the flow of new cash into our Economy it comes to a screeching halt. So the 700 Billion as I have clearly stated many many times goes like this the US government does not have $700 Billion hidden under George Bush’s mattress nor is it tucked in the Lincoln Bedroom closet. The only way we have it is by selling US treasury notes to Foreign investors then we take that money and we buy back from them through these wall street companies the commercial notes that they bought years ago and are no longer satisfied with.
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p>This accomplishes 2 things it sells them more influence over our country and it buys the US more of their money being loaned to investments that will feel present less risk. Please try and step back and look at this issue and realize in the forest of the complicated issues that the trees are just one investor and the majority of the trees are not home grown here in the US.
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p>In 1929 the great crash on Wall Street was 99.99% a lose in confidence by the American People. Runs on Banks and S&Ls were individual families from Main Street. Today you have major foreign investors who have lost confidence in the American investment and because of promises made by the companies we have heard about all month they are demanding their money back. The bailouts are to pay them back. Let me be clear they are maybe 60-75% of those invested what is really at risk here in the US are the PENSION funds that will be decimated if the 60-75% pull out because those American vehicles will be left with the lose and that will be transferred to the American retiree and worker not a nice prospect considering the Hyperinflation experienced in Energy and food currently.
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p>Oh by the way anyone see the any of the articles on the commodity trading markets pointing to large amounts of investment dollars running into Goldman Sacks specing on higher prices based on the buying up of all supply and only selling when the Projected price points are reached. Market manipulation it is called and before the Gramm-Leech Bliley Act was regulated and would have prevented the majority of the price manipulation from occurring.
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p>This is a simple yet at times complex problem because like a house of cards each is dependent on the other to remain standing. Foriegn investors have us over a barrel and it is cave to them or risk the whole house. This is what no regulation has brought us to.
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p>As Usual Just my Opinion
OK, so, I guess I’m a little concerned that a kid who grew up as a crony capitalist in a political family is making an outgoing move as President of setting up a $Trillion fund for unsupervised purchases of assets nobody else is willing to buy.
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p>I mean, I like Ben Bernanke and think he’s been dealt a bum hand. But I hope he’s capable of cold and calculated discipline, and that he’s got good judgment.
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p>I can’t help but think there ought to be a progressive alternative to the crony plan put forward. For example, a new American homestead act, sell the toxic homes to the highest bidders willing to move in and live in them for three years, with fixed-rate below market mortgages. Or perhaps, tax credits for companies that raise Americans wages high enough to pay the asking price for homes currently inflated way beyond what wage-earners can afford.
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p>I think the FED still doesn’t think inflation matters unless it is wage inflation. So I guess the idea of boosting the economy from the bottom up probably is off the table.
It seems that these would/should help regular investors and account holders too? Many Americans own stock and almost everyone has a bank account so don’t they also stand to benefit?
I think there would be a lot of problems with this approach, so I’m not sure I like it, or at least I would have major concerns.
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p>For example, what are “the banks” talked about in this proposal? There are plenty of banks and other financial institutions — how much would it cost to buy an XX% equity share in all of “the banks”? I would think even more than the $700 billion being discussed.
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p>And if fitting this plan into the $700B number just would mean buying a smaller equity share, then the government will have little control over the operation of the company (at least as a shareholder). The key here is that I don’t know if I want taxpayers’ money basically being controlled by management for an indefinite time while we all hope for a dividend.
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p>What I would rather do is concentrate on the most troubled institutions with the money (instead of buying equity in all (or many?) banks, regardless of how they are doing). That appears to me to be the most efficient approach. In return, however, there must be much more stringent regulations put in place NOW, not later. I simply don’t trust that the regulations will ever follow the money if we simply give out the money first.
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p>I’m not quite sure what those regulations should be, though I’ve seen many good ideas floating around. The point, though, is that government should ultimately stand up and do the job it is supposed to be doing as regulator. It is not supposed to be a minority shareholder in an entire industry. Rather than equity, we need responsible re-regulation.
Picture the world financial market as a hugely overbuilt skyscraper resting on a badly compromised foundation.
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p>The core pillars supporting the structure are rotten and about to collapse, and the failure of any one would rapidly induce failure in all of them. The sensible approach would be to get as far as possible from the impending collapse. The Power Elite’s approach is to force commoners to work in the basement shoring up the mortally stricken building while the Important People evacuate.
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p>That won’t work, of course, and the inevitable collapse will wipe out those left in the basement – but, hey, that’s just the price that has to be paid to save the Important People, who are, after all, more Important than the rest of us.
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p>http://www.lewrockwell.com/gri…
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p>I found this to be a great morning read …
Glad to see that dems arent all giddily walking the plank on this one. Resistance has to start somewhere.
why not bail out mortgages one at a time, with the following option:
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p>Your mortgage is immediately converted to a 35 or 40 year fixed. Yeah, 35. After all, if they’re having trouble with the payments now, stretching out the life of the loan will make the monthly payments a smidge lower. The lower payment and the fixed interest rate will help insure that the occupants can make the payments over the next few years. Hopefully, the economy will grow a bit between now and then, allowing most to weather the storm. Those who can’t will have a more stable housing market in which to sell their house.
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p>Sure, the US will now own some bad debt, but it will also be making some income that exceeds the interest rate on plenty of our bonds. At worst, more people keep their houses if only for a little while longer and the US spends less money. At best, we get quite a bit of stability in the economy and most loans get repaid, and the US comes out A-OK for the process.
If you insist on forcing a reduction to the terms of existing loans to keep people in “their” homes than surely you would agree with a moratorium on property tax which is acting just as quickly to put people on the streets.
Why does noone remember to remember that contributing factor in the equation?
A quick show of hands … how many people have monthly “mortgage” payment that are now at least 33% property tax?
In Massachusetts, for example, does local government just close up shop? No more schools, police, fire department, etc.? Default on all municipal bonds? I’m not sure I’m getting your point.
If someone wants to whine about forcing lenders to renogotiate loans “to help people” than they shouldnt be allowed to do that whining without conceding that TAX is putting people on the street faster than interest rate resets.
You want someone to blame, you needent look any further than your corrupt city hall.
I understand the frustration with the increases in property taxes but have to disagree with the “corrupt” assertion. I happen to live in a town where the town budget is picked over by finance committees, elected boards, and town meeting – all comprised of volunteer taxpayers. I’m not saying that there isn’t corruption elsewhere, but just don’t automatically generalize.
Okay, maybe .. whatever.
From what I have seen so far, one thing we have to be careful to avoid is getting lulled into playing the game of point the finger.
We are being led there and the game does nothing to address the problem being brought conveniently forefront just moments away from an election (a time when all pols become afflicted with spineless disease).
One interesting thing I have read is the statement that it is ONLY when running to do an errand for master does congress move so quickly as we are seeing now.
That cant be good thing, can it?
Another thing I notice is that EVERYONE seems to agree that if we must indeed raise some majority fraction of a trillion dollars and sprinkle it from above in some fashion than there is NO WORSE PROPOSAL FOR HOW TO DO IT than what is being proposed currently.
This consensus disaproval comes from all political persuasions. It seems like the type of anger that could effectivly be channeled if we avoid playing point the finger of blame …
Onward!
S we played that game—and this is the result. Now let’s play “We don’t need a military”. We can show the world our leadership by bending all of our swords into plowshares.
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p>Then we can play, “Strip everyone that has over $500, 000.00 of their excess and give it to the poor—worldwide—and show the world our compassion. (and begin with all of those cockroaches in Hollywood)
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p>It’s a beautiful thing.
This is the conservative trick of picking the weakest, most powerless people in any given game, and blaming them.
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p>The Community Reinvestment Act has been around for 30 years. It didn’t cause this problem. I got my first mortgage on a CRA inner-city plan and I was well vetted for ability to pay and given a low fixed-rate mtg.
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p>These were very sound programs, with banks as participants. The bulk of the mortgage problem was caused by non-bank lenders, not regulated by CRA, who chose subprime as a business model and pursued it aggressively.
Oh, right it was that Bush fellow:
http://www.whitehouse.gov/news…
I’d rather help the American people rather than give a blank check to corporations. One or the other is going to happen, which one do you choose?
What entitles Harvard, Yale Cornell, Princeton, Bryn Mawr, Smith, Mt Holyoke to their massive endowments? Those rich
republicans, who endow those schools stole every penny of it from the poor and the huddles and starving masses in America. Time to wrest it back and to return it to it rightfully belongs—-illegal aliens. Bill gates, The richest republican in the world stole it all as did Fird and Rockefeller and Mellon, Carnegie, the biggest thief of them all. All republicans!
making sense anymore.
Handing money to people to keep them in a home, financed by a mortgage they couldn’t afford in the first place and paid for by taxpayers? Not sure that’s really a starter.
giving a blank check to the very same corporations who gave out this horrible, horrible loans is a starter?
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p>I think if American taxpayers were given the choice of bailing out the financial markets or bailing out the people (and thus the financial markets), they’re going to go with option number 2 by wide margins. Option number one doesn’t even solve the fundamental problem – being foreclosing on their homes.
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p>I’m not saying my plan is ideal, Gary. The ideal plan would have been to prevent the deregulations that the Republicans and their lobbyists wrote that caused all this mess before it started. The ideal thing, of course, would have been to make sure there was transparency and regulations which prevent companies from gleefully taking on bad debt and terrible risks. We already flunked that, Gary. It seems to me that we now have three choices: 1. Allow the financial meltdown to commence (most would be against that, but maybe a purist such as yourself would welcome a 2nd Great Depression), 2. Bail out the companies by taking on their bad debt at terrible prices with absolutely no quid pro quos, or 3. Making sure that in helping the economy stay affloat, we focus on not only preventing industries from going belly under, but make sure that we don’t make people go bankrupt and homeless in the process – devaluing all our properties and causing dire stresses on our welfare when we have to make severe cuts in them just to stay affloat as a country.
First, disfavoring handing welfare to homeowners doesn’t mean I favor handing it to corporations.
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p>
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p>Well, it’s said there are no atheists in foxholes nor libertarians in recessions.
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p>But, I do think it’s high time to step back and evaluate the severity of the situation. Henry Paulson’s a bright guy, Goldman’s alumni, french cuffs and all, reminds me sometimes of Michael Milkin. Paulson can’t see the future, and all the hyperbole’s beginning to bug me.
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p>”Worse situation since the Great Depression!” (in which thousands of banks failed compared to the 12 that failed in the US this year).
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p>Re: 2nd Great Depression. Admittedly, I have an ‘off the grid’ mindset much of the time and my 401K is down a whopping 3.4% from 1/1 so I’m a bit sanguine while other’s hair is ablaze. But Step 1, before shredding $700 billion and concentrating such power into the Treasury’s hands, ought to be take a deep breath before the flash and dazzle of Paulson compels Congress to be very stupid.
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p>
from what I’ve urged on this thread and others? Stop gap measure to keep the companies affloat for a little while, while we can figure out what the hell’s going on and how to fix it, along with giving the next administration a stab at being a part of the solution.
It just refrains from reflexive calls for massive new regulation, refrains from advocating the situation as an opportunity to address the problem of executive compensation/income distribution, and doesn’t pretend that there isn’t plenty of blame to go around.
major problems be used to deal with, well, major problems? If there are substantial problems that exist in the this sector of the economy, now is the time where there’s the clear political will to do something about it – not months from now, when that political will no longer exists and the lobbyists have moved in and gotten everything they want. No. Freaking. Way.
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p>Does the system need new regulations? Yes.
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p>Should we dish out hundreds of billions to companies that are paying their top execs hundreds of millions… and performing so badly that we need to bail them out? I, along with what I’d assume are most Americans, would say no. Just like we have to make cuts before we raise taxes, so should they have to cut funds before they ask for a bailout.
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p>If you don’t do these things now, when we have the best cards on the table, it ain’t ever going to get done. If these companies would rather go bankrupt than sacrifice their corporate exec bonuses for failure, I say let them. That’s only a tiny sliver of what we need to demand before we hand over a massive free check to make these investors billions of dollars instead of losing everything. This is how negotiations work. If we could save this government hundreds of millions, that’ll save my generation billions in interest payments as we have to dig this country out of the mess your generation put us in.
There isn’t enough information yet.
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p>However, I do know that I would support regulation that takes a light handed, pragmatic approach. And that is something that can be accomplished only with slow deliberation, and with significant input from conservatives and from the industry itself.
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p>Striking while the iron is hot is more likely to produce heavy handed, punitive regulation that is well grounded in ideology but ultimately no better than the status quo ante.
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p>In other words, as in all other things political, if it is red meat for the wingnuts then it would be better left undone.
is at Daily Kos. It’s long, but worth a read, because the historical perspective here is really important. Bottom line: Phil Gramm. And, not unimportantly in light of the presidential race, John McCain as loyal foot-soldier in a movement that very nearly destroyed the American economy (and may yet do so).
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p>
I’ll concede the stupid right wing meme that it was low income lending that caused the bust if you’ll drop the “it’s the Gramm-Leach-Bliley” repealed Glass-Steagall meme. That’s just pure nonsense, BUT it does implicate Phil Gramm, which is one reason the
echo chamberDailyKos continues to advance it as real.<
p>First to nit-pick, Glass-Steagall didn’t repeal Glass-Stegall, rather, just one of its provisions.
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p>The Glass-Steagall act that passed in ’33, accomplished three things. First, it regulated interest rates and set the rate on demand deposits at zero.
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p>When Reagan (I think Reagan, 1980? But, may have been Carter.) took office the zero rate mandate was repealed, and money market mutual funds flourished as a direct result. Before that, you may remember, if you opened an account you got a free appliance, or some swag of some sort. They couldn’t get you in the door with rates, so they gave you a toaster.
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p>Second, Glass-Steagall established FDIC to sell insurance on deposits.
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p>And third, Glass-Stealgall split banks into 2 groups: commercial and investment. BAC v. Merrill Lynch, for example. GLB repealed this. Arguably this aspect of Glass-Steagall was already dead. After all, Travelers bought and owned all of Citigroup. How separate could those 2 institutions have been.
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p>Nonetheless, here’s where the legend of the Dark Lord Phil Gramm begins: By failing to separate commercial banks from investment banks, the commercial banks were run too speculatively which combined with securitization led to the bubble and here we are.
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p>The reality based question in my mind is this: can this merging of commercial with investment banks be linked directly or indirectly to speculative behavior?
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p>I’ve seen NO economic study which reaches that conclusion, but I have seen studies that conclude just the opposite.
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p>When a real, card carrying left leaning economist makes that claim, I’ll be first in line to read it. Krugman hasn’t said it.
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p>Suffice to say, if GLB caused rabid mergers and speculation, it seems to me that the Super Banks that have combined investment with commercial, would be the ones failing: Citibank, BAC, Wachovia, and there’s no sign of that. They are in fact the strongest institutions, the ones rescuing failing banks.
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p>Seems that to prove the “GLB did it” meme you’d have to find a commercial + investment bank that failed as a result of its investment division leveraging up on commercially generated loans. There are none. Wachovia is as close as you’ll come, and its derivative risk came from its acquisitions of some California S&Ls and not from derivatives internally generated.
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p>Then your link says that Gramm also was responsible for the ENRON loophole. I’ve no background in the ‘enron loophole’ except to note that I aware it had some deregulative effect on energy trading and I can’t see the relationship to securitized mortgages. I think I can dismiss this portion of the DailyKos article as irrelevant, but YMMV.
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p>Finally, the trifecta. The DailyCrap link says, ok and not only that but, it was securitization that Gramm legalized securitization. Now that claim struck me as odd, because I remember as a young MBA sitting in a Treasurer’s office of then Paine Webber, trying to figure out some Derivative Interest Rate Swaps. Darnest things I’d ever seen. That, I thought as I read your link, is just wrong. Reagan was in office. Gramm wasn’t passing legislation in the early 80s. Seems it’s been around a while.
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p>Securitization:
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Wiki
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p>So. Securitization was around and legal and securitized debt was traded a long time before Gramm.
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p>Looking at the claim–reality based and all–I can with equal certainty say that sunspot activity caused the credit bubble. I just can’t prove it, much the same as you can’t prove that Phil Gramm did it.
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p>Rather it’s probably everyone that did it, and none too many folks can claim any credit for preventing it: Fed, Sec, exec branch, legislative branch, media, borrowers, shady brokers, fat cats…. Bubbles happen.
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Furthermore—-why wouldn’t they president take this to the American people and rale that this has the potential to destroy us all.
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p>You forgot to mention that Gramm got a nice “banking” job shortly thereafter!
It passed the House 362-57-15 and the Senate 90-8-1. That’s a veto-proof majority. Maybe Clinton should have taken a symbolic stand, but there’s a compelling case to be made that you gotta know when to hold ’em and know when to fold ’em.
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p>Besides which, it’s not at all clear – even now – that Gramm-Leach-Bliley makes for the underpinnings of financial disaster. Certainly it’s part of the wave of financial deregulation that was sweeping the nation from about ’99 to ’05, but can you say for sure that GLB is a significant, direct, cause of where we are today? I sure can’t.
But otherwise I like your comment.
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p>With all that said, I wonder about your comment elsewhere in the thread, where you’re skeptical of the bailout. Perhaps.
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p>But right now if you’re asking me to pay Paulson a few thousand taxpayer (patriotic duty!) dollars, in hopes that there’s even, say, a 40% chance that it’ll avert a really bad scenario, I’ll take it. Am I thinking logically?
No question, Wachovia is the weakest of the big banks, but as I wrote (or meant to write), the lousy balance sheet isn’t from internal hubris created from the merger of commercial and investment. It’s from its derivative risk came from its acquisitions of some California S&Ls, so the “GLB repeal caused mergers of commercial banks and investment banks that caused excess speculation” meme simply doesn’t fly.
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p>By “success”, my estimation is that if the Treasury removes troubled assets from the balance sheets of the financial institutions, the banks will lend again with no lingering doubts of viability.
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p>I’m equally confident that the Government will pay too much for the non-performing securities, and liquidate them too cheaply.
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p>If the existing plan does not pass, then what. The Greater Depression ? I don’t know. I can’t even imagine how someone would be so irresponsible to suggest that. Certainly it’s irrational to objectively predict it.
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p>Then, I look at the guy selling the plan. Goldman’s alumni, best and the brightest. He’s really smart, surrounded by smart people. You know, people like the ones who worked in Lehmans, at Bear Sterns.
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p>I’ve been through several recessions, and each one is simply awful. You never know where the bottom is. But suddenly, and historically, stock bubbles pop and the markets adjust pretty quick. The US is pretty good at weathering a recession.
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p>So does Congress jump at a chance to write a $700 billion check under the logic that we have to do something even if it’s wrong (and speaking of wrong, I’m stunned that Pelosi is talking about more rebate checks)?
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p>Or, is it prudent to tell snappy Wall Street guy that “hey Henry, you’ve been wrong before, let’s just wait a bit.”
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p>
an anonymous Democratic lawmaker gives the play by play on how this is likely to play out. It isn’t pretty or encouraging. Yikes:
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p>From the post by Stoller:
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“I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me.
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p>I’m open to other ideas, and I am looking for volunteers who want to hold the sons of bitches so I can beat the crap out of them.”
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p>http://www.openleft.com/showDi…
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p>The Ds need to take this opportunity for what it is worth. We need to put this bill through a wringer of several populist votes (even, nay especially, purely symbolic ones… think the MoveOn comdennation vote) force the GOPpers to show themselves to be the whores that they are.
I believe sub-prime lending is good. I think the Governor supports sub-prime lending. How about you?
plaigarism
You know, hence the LINK
Everyone, do yourselves a favor and stop spreading this number as if it were true. You are doing the FEDS work for them.
The actual wording of the proposal is as follows:
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p>Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
…………
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p>The 700 billion dollars is the FIRST INSTALLMENT IN AN UNKNOWN SEQUENCE WITH AN UNKNOWN AMOUNT OF EQUAL INSTALLEMNTS
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p>http://www.nytimes.com/2008/09…
Crisis disrupts, shocks, and legitimizes emergency powers, new rules, fundamental change. Of course the question is, what kind of change.
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p>We have seen this before and should be none too sanguine. Terrorists get by security at Logan and level the World Trade Center: the Bushies turn this into an opportunity to invade Iraq (!) and embrace torture as national policy. Katrina levels New Orleans and the Bush response is economic ethnic cleansing of the city and urban renewal for the rich.
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p>Paulson has been doing the talk-show rounds today intoning about the need for a “clean” bill, which I take to mean carte blanche, no pesky amendments or we’re all doomed. I expect this bill to continue the work of the past eight years and transfer wealth from the middle class to the already wealthy.
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p>In other words, smash and grab like we’ve seem before but on an unprecedented scale. We have also graduate from opportunistically grabbing crises to, in this case, manufacturing them by those who profit from them.
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p>In principle the crisis is also an opportunity for our side. But in practice I do not see who is principled and audacious enough to seize it.
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p>These are the political and psychological dimensions of this moment. The few details of the plan that have dribbled out so far tend to confirm them.
Caps on purpose folks. If I hear another person talk about banks with this financial fallout, I will scream (and shut out anything further they have to say since if they use BANKS they don’t know what the heck went on).
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p>This go around, contrasting the late 80s debacle, banks were pretty gun shy about entering this debacle. It wasn’t BoA, Wells Fargo, Citibank making these crappy loans. They didn’t want to abandon underwriting standards. This time the fault lies with mortgage brokers, the Merrill Lynches, and anyone else who decided to get in the scheme.
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p>But don’t utter banks in your conversation! If you do, you don’t know what went on.
not sure that still counts when you a) look at what company Bank of America just bought and b) the increasingly blurred lines between major banks and these other companies that very much look and feel like banks.
BoA was in the position to pick up ML and Countrywide because they didn’t follow these practices. Otherwise they would be one of the bereft, rather than one of the firms looking to come to the rescue. Similar, look at Barclays being one of the potential suitors for Lehman Brothers, although they didn’t close the deal because it stank too much.
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p>Talked to my brother on Friday who works for Wells Fargo, and was pretty involved in their mortgage business over the last 10 years (but not a fat cat). WF made a deliberate decision not to chase down business in “funny” mortgages over the last 7 years, despite losing market share. Think their CEO was spot on in that analysis.
Should they lend, now, to subprime borrowers. Should they be allowed?
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p>Again, the same link to the wayback, then March 07.
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p>The so-called bailout is a fait accompli. It matters not what the voters believe as to the wisdom of throwing good money after bad. While many ordinary people have learned that living above their means can only be done for a short period of time before payback time sets in and the debts must be paid down before the interest exceeds the ability to pay the loans off. The public is told that the government is different. “Too big to fail., blah, blah blah.”
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p>The Democrats are showing some smart, bugging out of Washington to leave the scene of the crime. It’s so much easier to point a finger that isn’t dripping in blood.
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p>Too, the big three automakers smell cash in the water and want another measly $50B to save their industry. No question is asked as to what was being done by industry execs during the last forty years to prevent a crisis. (Could they have been making a selling better products?) What are the chances that five years from now the same executives will be crying for another $1T to bail out the auto industry after five years of glorious executive bonuses. 100%?
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p>For many years I’ve worked in government and business with ivy league and MBA graduates. What impressed me most is that so many well educated industry execs couldn’t be trusted to run a small store.
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p>In government we need only look at our Chief Executive. Yale, HBS, failed business. What of the SECTREAS? English Lit, major of Dartmouth, HBS and in and out of various government jobs as well as Goldman Sachs. We trust these guys? Who’s the bigger fools?
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p>In business we see time and again industry bailout of outfits that over time served mostly to guarantee large exec bonuses and perks. Officers that surround themselves with people of lesser ability shields them from being considered fools. Any competent is looked upon as a threat and stands no chance in the business environment. The lesser-abled then proceed up the ladder to ensure further incompetency as they ascend. Yet the corporations show no investor unrest. Who’s the bigger fools?
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p>Our ivy league colleges get the offspring of the incompetent alum and turn out more mediocrity. I understand that the idea of the MBA was to give students the contacts of business and the overview of what can be done in a given situation. Much like the friendships of Ford, Firestone and Edison in another day. Problem is the friendship today is between other incompetents rather than genius.
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p>We have institutionalized competence by one’s position and schooling. One’s resume entry is more important that one’s ability.
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p>We should read our history books more. Pay more attention to the decline of organizations throughout history and their replacement. Governments, businesses, religions.
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p>Is there a way out?
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… There’s a lot of wobbly facts being passed around. Here’s an overview of the situation and some solid facts to go with it…
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p>Basically, people bought houses they couldn’t afford (housing bubble), at rates they couldn’t sustain (subprime), on mortgages that were sold in a succession of leveraged bundlings (securitization) to companies that didn’t know they had them (Lehman, Bear Stearns, Fannie/Freddie, others) who were already way over leveraged.
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p>On the housing bubble: normally, sub-prime loans are heavily regulated. When a certain lender reports a certain amount of loans are subprime and lists the people who applied for them, if the numbers don’t add up, the regulators will step in and see that the number of good mortgages (ones that are fairly certain to be paid off) is high relative to loans that (per actuarial tables and other research) are much riskier. There’s no way to tell for certain if a loan is going to go bad, but overall certain patterns can be discerned and this ratio of less-risk to risk is kept at an optimum level. This did not happen. There was a sub-prime free-for-all and the regulators (specifically Bush era appointees at the top, like oh… I dunno… The Secretary of the Treasury) didn’t step in. Why should they? They don’t believe in regulation.
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p>On securitization: Again, it’s about ratio’s. As mortgages are bundled together and sold up the food chain, some ratio of good mortgages to bad mortgages (an inexact science)is assumed to favor the good mortgages. This appears not to have happened quite simply because there were no regulations regarding ‘swaps’ (the act of bundling mortgages and adding some default insurance into a form of derivative). That’s thanks to Phil Gramm. The swaps are wholly unregulated. There isn’t even a central marketplace (like an exchange) so there’s no central place to pulbish or analyze prices: they are, in word and deed, made up as they go along.
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p>On leverage More ratios! Prior to the Bush administration investment banks (like Lehman) were limited (by regulators) to a 12:1 ratio of debt, meaning for every dollar they had in capital on hand, they could borrow (or hold) no more than 12 dollars (debt). Anybody who was over this limit was getting closer scrutiny from the regulators. In 2004 the SEC granted 5 companies an exception, Goldman, Merrill Lynch, Lehman, Bear Stearns and Morgan Stanly, to carry upwards of 40:1 ratio. Fannie and Freddie were running over 60:1. But because the swap derivatives hid a lot of bad debt these ratios were almost certainly wrong, and not wrong in a way that would make things better. It is estimated that Fannie and Freddie were running closer to 200:1 ratios..
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p>As foreclosures came in, these companies realized that they owed more than they had on hand, and could not determine when the foreclosures would slow or stop. Credit dried up.
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p>And that’s the problem today. There is plenty of bad debt out there… we just don’t know where it is… nor how much. So lenders (the putative adults in this scenario) aren’t able to decide whom it is that is credit worthy.
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p>In essence, the Paulson plan is just ‘after the fact’ bookkeeping: they’re offering to buy (up to 700 B) of dodgy stocks so they can sort out what’s good and what’s bad, put the good back into the market (hopefully at a profit, or less of aloss…) and deal with the bad ‘by another way…’
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p>But the point, and I don’t think it could possibly be clearer, is that regulators failed at nearly every stage. If the subprime market had been better regulated then no problem. If swaps were regulated and prices publicly available, then no problem. If leverage (debt ratios) had been regulated, then no problem.
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p>At EVERY stage the regulators fell down on the job.