Monthly Archives: February 2009

Too Big to Fail is Too Big to Be

As we start nationalizing the most insolvent of the major banks we need to take a new look at our anti-trust laws.  In addition to putting teeth back into the idea that competition is a good thing, we need to realize that corporations, and banks in particular, that get “too big to fail” represent huge national security threats.

It is telling that the two attacks that have had the most devastating economic impact on American citizens have both come from our own bankers.  No military threat or action has ever been as damaging to the American people as the Great Depression in the 1930’s or Depression 2.0 that we are entering now.

We need to fully recognize that banking is an absolutely critical function of our way of life, and that anything that threatens our banks threatens us.  And we need to recognize that the most severe threats to our banks have historically come solelyfrom their own executive leadership.  We must nuetralize bank executives’ ability to put the banks that are so central to our public well-being in jeopardy.  The best way to do this is to divide and conquer.  Citibank and Bank of America have to, for the moment, be viewed as the enemy.  And since they are too big to take on head to head, we need to break them up into much smaller pieces, none of which has sufficient power to harm us.

We spend hundreds of billions of dollars a year on our military so that more than anything else, it can be a credible deterrant to attacks on us.  We need to have a similarly sophisticated and credible deterent capable of preventing attacks coming at us from our bankers.  In our nation’s brief lifetime, the most damaging threats to our well being come from inside, not outside.

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C’mon Harry… Make Them Filibuster!

Harry Reid… Grow some and make them filibuster, damn it!

We should not be operating as if the Senate requires a super-majority to pass any legislation.  We especially should not allow this to be the case only when Democrats have Senate majorities!

Let the American people watch their mortgage relief delayed day after day, week after week, by Republicans reading the Bible on C-Span.

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Bye Judd! Bye bye! Bye!

Judd Gregg was a dumb choice for Secretary of Commerce in the first place.  Reaching out to the few moderate Republicans that still exist is all well and good but his views on nearly everything related to commerce were almost diametrically opposed to everything progressives are hoping to achieve.  His inability to reconcile his position in the cabinet with his membership in the Republican Party that caused him not to be able to vote on one of the most important votes since the authorization of the Iraq War demonstrated this in spades.

The fact that he cites the census as one of his reasons puts the issue into even greater relief.  The only difference between how Republicans and Democrats approach the census is that Democrats want to make sure that everyone is counted and that census data is as accurate as possible, while Republicans want to severely limit census takers’ ability to count poor people, brown people, and other groups from Democratic leaning demographics.  If his Republicanism is so strong that he subscribes to the philosophy that it is more important for Republicans to be elected than it is for all American citizens to be accounted for… he has no place in an administration that is striving to be fair and inclusive.

So, good bye Judd.  We’ll try to vote you out of the Senate as soon as possible.

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The Second Major Flaw in the NEW Bank Bailout

Immediately after Treasury Secretary Geithner announced the framework of the new bank bailout program the stock market sank hundreds of points, as I hope he expected it would do.  The plan fails to address the real banking problem and fails to fully acknowledge the real housing problem.

The plan includes a variety of programs and provisions that will help lower mortgage rates on new purchases, make it possible for many borrowers to refinance into mortgages with lower rates, and for some borrowers to be able to restructure their mortgages to avoid foreclosure.  Lowering home owners’ mortgage payments by lowering their interest rates will have a significant stimulative effect on the economy and will reduce the number of families forced into foreclosure by some marginal amount.  It will not solve the core problem and may actually make it worse.

There are two foreclosure crises going on right now.  The first crisis is hitting speculators, many of whom look like very normal people, like you and me, and who would not consider themselves speculators.  But they were.  Any family that used an adjustable rate mortgage or any of the other specialized tools to buy more house than they could afford with a traditional 30 year fixed mortgage was speculating that the price of their house would continue to increase and that they would be able to sell for a profit before their rates started increasing.  When the housing market peaked, these people found themselves unable to sell and they are the ones who have been getting picked off by the adjustable rate mortgages in droves.  To a degree this phenomenon has happened all over the country, but it has only happened in crisis proportions in a few places.  California and Florida had the most upside speculation and have had the worst downside losses.  Nevada’s and Arizona’s populations have soared as people have retreated from the untenable California housing market, which created mini-boomlets in these communities, which now have also collapsed.

For every one of the families that has taken a loss on a speculative real estate investment, remember that another family took a profit earlier.  In fact, very often the families that were able to parlay a series of houses into bigger and better houses through market forces rather than the sweat of their brow, are the same families that are now being forced into the reality of what their money should have been buying them all along.  We should have minimal sympathy for people who took profits on the way up but are now screwed on the way down.

The second foreclosure crisis is a result of the recession created by the credit crisis that sprang from the first foreclosure crisis.  Michigan and Ohio have been hit particularly hard by this crisis as unemployment has soared.  With the deepening recession and spiraling job losses, there will be more of these foreclosures and they will be distributed more evenly around the country.  While they don’t feel any better or worse for it, these are the “innocent bystanders” of this mess.  These are the people who mostly bought homes they could afford, financed with jobs they had every right to expect they could keep, and who have been caught in a crossfire that never should have happened.

Here’s the problem.  These two foreclosure crises are qualitatively different but the solutions on the table only apply to one of them and may aggravate the other.

The main thrust of the mortgage relief program is a variety of ways to lower mortgage interest rates.  When rates are lower, payments are lower, and the line between keeping your house and losing it moves so that a marginal number of people get to stay in their homes who otherwise wouldn’t have.  When rates are lower, houses also become comparatively better investments.  They may not be as good an investment as they were several years ago, and they may even just be a less bad investment than they were last year, but either way, since their competitive position improves compared to other investments, their prices will either go up a little or, at the very least, fall less.  This will have a dramatic impact in California, Florida, and other markets where the primary cause of the foreclosures is the real estate bubble.

Around the rest of the country, where foreclosures are happening because of job losses, no amount of restructuring or changing interest rates is going to make up for a catastrophic loss of income.  The only solution in these parts of the country is getting everybody back to work.  In fact, the prospect of increased housing demand in parts of the country where demand is only depressed because of a poor economy will, what?  That’s right… it will create an artificial increase in housing prices which will likely lead to a whole new batch of dislocations further down the road.

The answer?  If we are so screwed that we have to accept that we have no choice but to make speculators whole for their bad investments… we should limit that to those markets where the most speculation occurred.  Around the rest of the country, we should take whatever funding is going to go into lowering tens of millions of home owners interest payments and put it toward economic stimulus that will benefit the entire economy, including renters.

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The First Major Flaw in the NEW Bank Bailout

Immediately after Treasury Secretary Geithner announced the framework of the new bank bailout program the stock market sank hundreds of points, as I hope he expected it would do.  The plan fails to address the real banking problem and fails to fully acknowledge the real housing problem.

The real banking problem is that the asset bases of hundreds of banks including the very largest among them have collapsed in value.  Banks typically lend about $12 for every $1 in assets they have.  Because the value of their assets have crashed, without moving a muscle many of them have become devastatingly over-leveraged with loan to asset ratios of 30 to 1.  We have known since time immemorial, although we willfully ignore it every time we think we have found free money, that bank leverage ratios at this level lead only to one place… dead banks.

This is why when the first $350 billion of the TARP funds were distributed to the banks they didn’t suddenly start lending.  Those funds rescued them from the brink of collapse but did not reduce their loan to asset ratios to any sort of level that would have made it responsible for them to lend more money out.  If prudent ratios are 12:1, the banks ended up at 30:1, we rescued them by bringing them back to, say, 20:1… they still are going to need a lot more money before they can start resp0nsibly lending again.

To make matters worse, the banks are not teetering on the edge of insolvency.  According to a number of prominant economists including Nobel Laureate Paul Krugman, the big banks are already insolvent and have been for many months now.  The only way these banks have been able to continue functioning in remotely bank-like ways is by everyone agreeing not to realistically value their mortgage backed assets.  By looking the other way and pretending that they are worth more than they are, the banks have continued to borrow money from the Federal Reserve to pay off their own lenders but, in reality, the gig is up.  The banks have collapsed, even if they haven’t fallen down yet.

When banks collapse three groups of people get hurt.

  1. Bank investors lose their investment in the bank.  The value of their stock goes to $0.  This is bad for them, but no worse than when any of their other investments go bankrupt, and they get compensated for this risk through the return they demand on their investment.
  2. Bank bond holders lose their investment in the bank.  The value of their bonds goes to $0.  This is bad for them too but, again, no worse than when any of their other investments go bankrupt and, like stockholders, they get compensated for this risk through the interest they demand on their loans.
  3. Bank customers are the big losers.  There are no mechanisms like interest or dividends that compensate them for the risk that their uninsured deposits and day-to-day operating funds will vanish overnight in a puff of Wall Street smoke.  They lose everything, and the economic ripples start here as businesses, suppliers, employees, and customers all end up eating a share of a loss for which they never received compensation.

The fact that bank customers lose without compensation is the one and only factor that differentiates an insolvent bank from any other insolvent business.  FDIC insurance, to the extent that it covers deposits, was created to ensure that bank collapses would not leave savers penniless.  It does not, however, provide for continued short term operating loans.  So it helps, but it doesn’t help enough to avoid economic shock waves, closures, Main Street bankruptcies, and unemployment.

Protecting these vulnerable, uncompensated bank customers from the effects of bank collapses should be the government’s one and only banking related concern right now.  But that is not what we are seeing in any of the bailout proposals that have come along so far.  All of the bailout proposals and actions have maintained at least some mechanism that maintains at least some value for bank stockholders and bondholders.  That is reason number one why Wall Street crashed dove today.  Making people whole for losses they have already been made whole for does nothing at all to solve the problem and is just patently, blatently, disastrously, unfair.

The second reason Wall Street doesn’t like the new bailout proposal is that it insists that banks lend out the money the government gives them!  This seems logical on the surface, but remember the problem in the first place is that the banks are insolvent!  They already have loan to asset ratios of 30:1.  If we add to their assets and then insist that they lend those assets out, it does very, very little to reduce the lending to asset ratio to a responsible, sustainable level.  We may be able to defer some problems this way, and we may be able to soften the economic blow to the customers this way, but it is massively inefficient and doesn’t ultimately solve the problem.  The banks are insolvent and the only real solutions are going to have to have that as their starting point.

What this means is that the stockholders and bondholders have to be wiped out.  In order to keep the banks functioning without impact to their customers, the government will have to assume their operations and provide them with new assets at a sufficient level so that their loan to asset ratios are sustainable.   Once the government does this, it can go about selling them back to a public that will be as eager to invest in clean, healthy financial institution as they were before this mess.  It is a trade.  The government puts in the money that the old investors lost, and then new investors put their money in so the government can get its money back out.  Bank customers, in the meantime, experience a seamless transition as if nothing had happened.

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Stimulus Package – I’m Getting OK With It

Search Results – THOMAS (Library of Congress).

I have a couple thoughts about the stimulus package.

Lobbying Problem Costs Us Governance Of, By, and For the People

Until we fix the lobbying problem, Washington will be incapable of making any decisions in the interest of the citizenry at large.  We will not be able to fix the economy, health care, Wall Street or anything else right until lobbyists can be eliminated from the equation.  Every time we try, 50% of what we spend and do will be in the interest of small groups at the expense of the whole rather than in the interest of the nation as one.  That said, we can’t just  do nothing until that day comes.

A lot of what is in here really will stimulate the economy.

When discussion of a stimulus package of this sort started, we were done a disservice by those who focused on “infrastructure”, namely, roads and bridges.  Rebuilding roads and bridges and improving mass transit systems will create jobs, will stimulate the economy, and in many cases will prove to be beneficial in the long run.  But when you look at the 3 million people who have lost their jobs in the last few months… you know, how many of Microsoft’s 5,000 layoffs poured concrete for a living?  How many of the tens of thousands laid off from companies like Starbucks, Macy’s, Panasonic, General Motors, Sprint, Pfizer, Caterpillar, or United Airlines would know a piece of re-bar if they tripped on it?

Have you ever driven a bulldozer?

The fact is that if we created 4 million new jobs building roads, we would probably have to take that stupid fence back down to do it.  The  skills that exist in the talent pool being rapidly created in this country is way to diverse to be efficiently sopped up with “shovel ready” concrete-intensive projects.

That’s why the stimulus bill has money going in so many different directions.  It is also why it is over 700 pages long and growing by the minute.  We live in an extremely complex economy, our government itself is extremely complex, and when we have to line item one by one by one even the large buckets of project types and classifications we need to fund… it takes a lot of pages.  At the end of the day, though, this bill is providing stimulus funding of unprecedented scale that will create jobs in the healthcare sector, the information technology sector, the energy sector, construction (of course!), electronics, research, agriculture, security, defense… every major department of government is getting money to use to stimulate those portions of the economy that it interfaces with.

A lot of this stimulus shouldn’t be called stimulus.

For 30 years, since 1981, we have treated the government as a problem rather than a solution.  We have starved it, under-funded it, punished it and neglected it, and then complained about how inefficient it is and how poorly it works.  For instance, there was scalding hot testimony on the hill today from a whistle-blower who gave the SEC intricately detailed evidence of Madoff’s ponzi scheme… in 2001!  The SEC didn’t do anything with it, largely because there apparently wasn’t anyone left there whose job it was to deal with ponzi schemes and outright fraud.  Last year when Congress pushed Chairman Cox to increase the SEC budget so it could do a better job, he declined.

We all complain about education, but we routinely vote against tax increases for education.  We complain about the DMV, but while the people in there do tend to shuffle more than hustle sometimes… the core problem is that it is understaffed by what, 50%?  Our judicial backlogs aren’t just because our courts are inefficient… we simply are not paying for the number of them that we need to handle the work.  When a social worker or a public defender has a case load 5 times what they should, the problem isn’t just that there are too many cases or that these folks are working too slowly.  We are starving these systems to death… and then complaining about how weak and ineffective they are.

Good government like good cars, good wine, good clothes, good toys and good service costs good money.

From what I see, a lot of the money in this stimulus package is going to funding, or at least partially and temporarily funding, many of the starved, malnourished, desperately impoverished functions of government and many of the beneficial and necessary investments we should have been making for decades, that we have failed to make.  This funding will, indeed, have a stimulative effect.  But at this level, all spending stimulates the economy… but not all spending should be considered emergency stimulus spending.  A lot of what is in this bill on a temporary basis are small, probably tiny, down payments on funding decisions that eventually need to be made permanent.

Americans, we do still have the biggest economy and the biggest military in the world, by far.  But we are not the most advanced nation, despite what we are constantly told.  All over the world, nations pay less per capita for health care than we do and they get better results! We do not have the safest, best, and most efficient road system in the world.  We do not have the most modern telecommunications infrastructure in the world.  We do not have the most energy efficient houses.  We do not uniformly have the best schools.  We certainly don’t have the world’s best legal system.  We are not the smartest, we are not the wealthiest, we do not have the richest cultural environment, etc.  We can be, but we have chosen not to invest in these things.  Where we have failed to invest and it is impossible to earn a return from an investment that hasn’t been made.

This bill does a lot of investing in the name of emergency stimulus that ought to be made in the name of good government.  But as I said at the top, until we clean up the lobbying mess, we cannot really make any of these decisions very well.  What we have here isn’t as wasteful as it seems, even though there is a lot of spending that is no doubt, wasteful.

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Facebook | Keith Rouda

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