Tag Archives: bailout

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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Want Bailout Money? Fine. No More Lobbying.

New rule:   Any company that receives bailout money is forbidden now and forever from spending any money whatsoever on lobbying government officials or making campaign contributions and/or doing business with any customers, suppliers, unions, investors, lenders, associations, nations or any other entities that spend any money on lobbying government officials or make campaign contributions.

What do you think?

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Democrats are making a major strategic mistake on the auto bailout.

This is about the point where I end up feeling left out in the cold, completely without representation.  The country has swung so far to the right in so many ways that for years I’ve been the fabled “Yellow Dog Democrat” casting my measly little vote every couple of years to drag the country back, even just a little, toward the center.

Leave it to my fellow Democrats, though, before we’ve moved even a little bit to the center, to go overboard and make a major lefty mistake.

While the banking industry gets $700 billion to do whatever it pleases, with no strings attached, the auto makers, in exchange for $15 in short term loans, are going to get a government oversight board consisting of multiple cabinet level leaders.  The idea seems to be that if we’re giving them money, we have to insist that they actually start building more fuel efficient cars, rework their union contracts, and slim down their dealer networks.

All these things may be true, but I see no reason to believe that high level government leaders are going to be any more likely to be able to solve the problems the car companies have than the car companies themselves.  Frankly, even without the government oversight board, the government has been responsible for most of the car company problems anyway.

Take fuel economy standards, as the most glaring example. Our U.S. car companies have spent millions and millions of dollars lobbying the government not to make stringent fuel economy standards and to write those we do have in such a way as to give them an unfair advantage of foreign competitors.  Shame on them, right?  Right.  But shame on our government representatives, shame on our congressmen and senators for being swayed in their responsible voting by the lobbying dollars!

Can we fault the car companies for lobbying in their self interest when lobbying has proven to be so effective?  Hell no.  What we can do is make lobbying less effective by being hysterically, unreasonably, disproportionately pissed off when our representatives vote for their campaign coffers instead of our best interest.

The car companies have lobbied for free trade agreements, so they can do manufacture and assembly overseas where it is cheaper, and our government has given it to them in spades.  The car companies didn’t have the brains, apparently, to negotiate into these agreements any kind of fair trade practices such as tariffs to balance out the effects of economies that don’t invest in worker safety, environmental protection, accounting practices, or other important things that we force our companies to invest in.  But neither did the people we elected to run our government.  Why do we suddenly expect them to be any more enlightened, or any less susceptible to lobbying, than they have been until now?

The worst outcome of the oversight board isn’t even going to be a raft of questionable business decisions for the car companies, but a major fracture within the Democratic Party.  We are about to pitt the entire Obama cabinet and administration against the unions.  They are literally going to be sitting on opposite sides of the bargaining table.  Great!  Good thinking.  Excellent idea.  Karl Rove couldn’t have come up with such an idea in his wildest wet dream.

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Can Larry really understand the problem with making $115 million?

This is (below) a well thought out piece by Frank Rich that is worth reading.

I really don’t think most of the people who voted for Obama have the messiah complex Republicans think we have, but there is a Camelot quality to it that we need to acknowledge, and we need to stay awake and alert.

I won’t retell his column… go read it.

And ask yourself this.  Can anyone who made $115 million in 9 years really, really, understand the flaw in the system that allowed that to happen?  I mean, intellectually, perhaps.  But plenty of us see the billions of dollars that got paid out to Wall Street wunderkinds as blood money.  As ill gotten gains.  Does Larry see it that way?  I’m cautiously in his corner, for now.  But it does seem likely that he and some others may have some blind spots.  We have to be engaged enough to scream bloody murder if we see them pulling into a lane with truck already in it.

http://www.nytimes.com/2008/12/07/opinion/07rich.html?partner=permalink&exprod=permalink

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Auto makers, bailout, moral hazard… Pork, pork, pork.

Reporters say it seems very likely that with GM and Chrysler threatening bankruptcy within the next 60 days “something” will be worked out by Congress to help them.  Some in Congress say that the auto makers are playing chicken with Congress.

Does anybody else have a sense of deja vu?  We already know what it takes to overcome skittish lawmakers’ concerns.  It takes pork. Lots of pork.  That’s what it took to get the $700 billion bailout package through, and that’s what it will take to get the $34 billion auto bailout through.

The warnings about a moral hazard were more prescient than we knew.  I assumed they meant things like “if we bail out the banks, next we’ll see the auto companies at the trough.”  What I didn’t think, but should have, is that once Congressional Representatives are in charge of picking winners and losers, we need to remember that their services and decisions do not come for free.  They are for sale to the highest bidder, and the bids don’t have to have anything to do with the matter at hand.  They are as corrupt as the Mafia Dons.

It’s a shame so many of them can’t ever seem to make a decision based on what is right or wrong or what is best for the country.  It always comes down to what fills their campaign coffers.

Shame on them.

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How much should you worry about a $7 trillion bailout? Less than you think.

All of the bailout programs the government has announced so far fall into three categories.  Insurance, Investment, and loans.

Because of the nature of what the government is trying to do, there is a good chance that it will lose more in insurance claims than the revenues it realizes for insurance premiums, there’s a good chance that more of the investments will fail than the dividends it will receive, and there’s a good chance that more of the loans will default than the interest payments in receives.

That said, the amount of money that the government is likely to actually have to be paid back by taxpayers is probably in the low hundreds of billions, not the high single digit, possible double digit trillions.

To paraphrase someone a long time ago… “A hundred billion here and a hundred billion there, and pretty soon you’re talking about real money.”  Taking on a tax burden of hundreds of billions of dollars isn’t going to be very much fun.  Everyone is always free to make their own judgment about whether the good that will come from it outweighs the cost or not.  But when you hear people talking about the government spending $7 trillion or $8 trillion on the bailout… remember that the vast, vast, vast majority of that is coming back.

If you’ve been learning about credit default swaps, which are the financial instruments at the core of the mess, you may have heard that the “notional value” of all the Credit Default Swaps out there is in the neighborhood of $70 trillion!  This seems stunning because it is considerably larger than the Global Domestic Product.  While today’s unregulated credit default swaps pose such a gigantic risk for the economy that the worst economic collapse since the 1920’s is because of them… the risk isn’t $70 trillion worth.  CDS are basically insurance policies, so the $70 trillion refers to the amount the insurers would have to pay if every policy had to suddenly be paid out in full.  This would mean that every single bond, for every single company and country in the world got defaulted on in one day.  There is a range of bad and while our CDS problem is bad, it isn’t $70 trillion bad.  That’s similar to our situation with the bailout.  We’re talking about incurring, in all likelihood, a lot of new debt for the taxpayer to pay back… but not $7 trillion worth by any stretch of the imagination.

It seems unlikely, but there is still even a possibility that the government will end up making huge profits from all of these business activities.

Here is a great article that goes into more detail about this and also links to a New York Times chart showing the actual commitments.

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Grab a Bucket For Detroit – Part I

Detroit has irritated me as much as anyone over the years.  I tried my best.  I really did.  I bought a Mercury Topaz, then two Saturns, then an Explorer, then a Villager… and by then I couldn’t take it any more and I bought a Nissan Altima.  I love it more than I have ever loved any car.  And shame on Detroit for allowing my level of satisfaction, after five(!) American cars… to drive me into the waiting arms of the Japanese.  Shame on them!

That said, there are a number of reasons why we should loan our auto companies taxpayer money to use for restructuring, retooling, and survival.  I’ll provide some background in this posting and then individual reasons in the next several on this topic.

Those Who Don’t Understand History Are Doomed To Repeat It.  Here’s Some Now.
There was a time in the American capitalist experiment before global trade became what it was today.  Robert Reich describes the era and the logic to it excellently in his book Supercapitalism.  For reason that was rational at the time, more or less of a balance had been achieved wherein competition was much more managed than our Cold War rhetoric would have had us believe.  In the name of mass production, companies had built and supported many of the government regulatory agencies to make barriers to entry steeper and to deliberately limit competition.  They also, grudgingly, supported the growth of unions.

Mass production required accurate forecasting, and accurate forecasting required stability.  Limited, oligopolistic competition, controlled with the assistance of the government, and a generally docile labor force managed by the unions made that possible.   In this era the middle class was created and it thrived.  The disparity between rich and poor was more narrow than before or since.  There was a lot of wealth to go around.  This came at a cost.  This broadly distributed wealth that enabled the middle class to become what it did came at the expense of investor profits, which rarely exceeded 3% to 5% and also at the expense of innovation which, by its nature, diminished stability rather than increased it.

During this era, which Reich calls “The Almost Golden Age” (acknowledging that minorities and women were, for the most part, not invited to the party), where wages for working people became truly meaningful, the 40 hour work week became the norm, and healthcare and pensions became standard corporate benefits, to the benefit of us all.

This pleasant enough stability came to an end with the massive expansion of the Vietnam War.  In order to keep our troops supplied, we developed the modern shipping container and the ports, ships, rail lines, and trucks to get goods and containers to Asia.  Rather than dead head back, the ships would stop off in Japan, pick up a load of generally poor quality merchandise, and sell it here.  This was the beginning of the global economy and global competition.  By the mid 1970’s competition was happening with or without the regulations that had made everybody so comfortable, so we began shedding them, starting actually in the Carter era.  By Ronald Reagan’s 1980’s, de-regulation was in full swing, corporate downsizing reached a fever pitch, innovation and quality skyrocketed, prices (adjusted for inflation and quality) plummeted, and corporate profits exploded.

In short, we as consumers and we as investors benefited enormously from global competition, but millions of us as workers (including white collar workers, by the way) got creamed as cheaper sources of labor were found elsewhere.  And we as citizens got creamed as control and the benefit of the government shifted away from our interests to those of corporations and lobbyists, as the disparity between rich and poor exploded, as our infrastructure spending crashed, etc.  Huge numbers of our industries vanished overseas… steel, textiles, manufacturing, programming, customer service…

During Reich’s “Almost Golden Age” our industrial giants, as part and parcel of the bargain that made the age what it was, took on substantial commitments to their workers.  In the shape of wages, working conditions and healthcare, corporations took on layers of current costs, and in the shape of pensions and retiree healthcare, they took on layers untold of future costs.  Those few companies and industries that have survived so far are now “burdened” with these legacy costs that stem from a balance of power between investors and workers that has long since been lost.

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