The Stalled Deal
The Bailout of All Bailouts just got voted down, 228 to 205. There’s the expected partisan finger-pointing but House leaders will schedule another vote as soon as they can convince twelve of the nay-sayers, from either party, to approve.
Wild card: Angry voters who go to the polls in five weeks. Conservatives don’t want government to take over the free market. Liberals don’t want Wall Street fat-cats to get a free ride. And the more the public focuses on the bill, the angrier they become. (Polls show about a third of Americans in favor, a third opposed, and a third undecided; the percent in favor is growing slightly, but the percent against is growing even faster.)
Wild card on the other side: The Dow is dropping precipitously. Roughly half of all American families have some retirement money in the stock market. And even if they don’t own shares of stock, an increasing number are feeling the pinch of an economy gradually grinding to a halt. (This week’s employment report will not be very encouraging.)
Don’t expect easier sailing in the Senate. Fewer than a third of the Senate is up for reelection on November 4, but they’re all hearing from angry constituents.
Prediction: A scaled-down bill will be enacted by the end of the week. It will provide the Treasury with a first installment of $150 billion. Treasury can use it to back Wall Street’s bad debts with lend no-interest loans of up to two years, until the housing market rebounds. Or to invest in Wall Street houses directly, in exchange for stocks and stock warrants. There will be strict oversight. Congressional leaders will promise further installments, but with conditions calling for limits on salaries and relief to distressed homeowners.
Wild card: Angry voters who go to the polls in five weeks. Conservatives don’t want government to take over the free market. Liberals don’t want Wall Street fat-cats to get a free ride. And the more the public focuses on the bill, the angrier they become. (Polls show about a third of Americans in favor, a third opposed, and a third undecided; the percent in favor is growing slightly, but the percent against is growing even faster.)
Wild card on the other side: The Dow is dropping precipitously. Roughly half of all American families have some retirement money in the stock market. And even if they don’t own shares of stock, an increasing number are feeling the pinch of an economy gradually grinding to a halt. (This week’s employment report will not be very encouraging.)
Don’t expect easier sailing in the Senate. Fewer than a third of the Senate is up for reelection on November 4, but they’re all hearing from angry constituents.
Prediction: A scaled-down bill will be enacted by the end of the week. It will provide the Treasury with a first installment of $150 billion. Treasury can use it to back Wall Street’s bad debts with lend no-interest loans of up to two years, until the housing market rebounds. Or to invest in Wall Street houses directly, in exchange for stocks and stock warrants. There will be strict oversight. Congressional leaders will promise further installments, but with conditions calling for limits on salaries and relief to distressed homeowners.
posted by Robert Reich | 1:36 PM
111 Comments:
Thank you for the detailed update...
aly k
Interesting question that might not getting enough debate...
What are the tradeoffs of doing nothing and letting banks fail? Is the outcome dire or is there sharp short-term pain followed by a better long-term outcome?
Bear in mind that I'm not advocating either position here. I'm just asking.
Anonymous Matt
My gut tells me there will be no deal. Whatever the right course of action is for the economy, politically, passing this legislation will be toxic - just like the mortgages it's intended to bail out.
I think, unfortunately, that the markets will have to correct on their own. Let's hope that the correction is short lived and the rest of the economy can get back on track quickly.
All the money is flying to safety, we can only hope that investors will see solid companies as good investments and be willing to move their money back into the marketplace before those solid companies start failing.
The conservative republicans rallied to vote this down. This is another republican media stunt and distraction tactic. Americans are angry and blame much of this situation over the last 8 years on their failed policies or the lack of.
The conservative republicans voting this bill down want a campaign story in an attempt to show how prudent they are and how much they want accountability for Wall Street excesses.
McBush tried the same media stunt, but it seemed to backfire on him.
Americans should pay attention to this and realize that while our economy is failing, the republicans politicize the situation in an attempt to lift their campaign… what a bunch of sad losers.
GREAT thanks to share information
If the economy continues to sag, then obviously the housing market will not recover. If the economy recovers, the price of oil is likely to shoot back up making it difficult for the housing market to recover its overpriced values anytime soon.
If I'm not mistaken, some economists are slyly advocating inflation without saying so. But inflation guarantees the price of oil will simply go up further.
A sluggish economy will make it more difficult to implement new energy policies. But new energy policies are exactly what we need. Some sort of quick bailout probably needs to go through but I think we need to start talking about a much broader approach.
Burn baby burn! The DOW should be somewhere around 8,000 and 9,500. The fallout is going to hit Main street regardless of what is done, and Main street knows it. This whole mess is a shake-out 40 years in the making. It's going to hurt folks. It's also necessary. Main street seems to intuitively understand this far better than any "expert" I have seen speak on the topic. Call it a "glean." Well, they are right in my estimation! Dead on right! So get some marshmallows, and enjoy the looks on the Wall street fat-cats faces as they get just a taste of what they've been dishing out. The pain is coming for you and me anyway, so, enjoy, but don't pay for the privileged as well as endure it. Ha-ha-ha, we've all gone crazy now!
Thank you Mr Reich. It appears that some in the House have lost sight that we retirees have money in the market through our 401Ks. Not only are the values being hit there are some, like myself, need to begin to withdraw funds,( its the law) and we can stand 9% hits all the time. So while they wave Wall Street they forget Main Sreet!
'Ma-Ma-Mama, we're all crazy now' - Slade, 1972 very appropriate. This Bill was not properly vetted to the American People, hence, it reaped what it sowed.
Will this really have more than
a temporary, recoverable effect
on the economy as a whole?
I don't doubt that there will be
some for whom a seven-figure
income isn't enough who, because
of their own behavior, will soon
not have enough; but I wonder
about all the hysteria; and I
remember that all the pundits
believed in WMD, aluminum tubes
and yellowcake from Niger as
well.
I'm increasingly of the opinion that any bail out should be to stressed homeowners, however stupid and venal they were to sign for something they couldn't afford.
My reason is that we are at least hitting the problem from the right angle.
I wish there was more information about the content structure of a CDO to convey a sense of how they might be examined and cleaned up but the Wall street swindlers have made such an inscrutable monstrosity that repairing CDO's is probably a non-starter.
But if the Fed hits the problem's root instead of its twig tips, the flow would go a ways to restore value to this toxic waste paper and stave off more foreclosure.
Much of the argument turns on which idiots do we bail out, the fools who signed off on homes they can't really afford or the swindlers who crafted a deranged system from the loan originators who abrogated fiduciary responsibility on up to the swindlers who bundled these monstrosities.
I'd like to see the utter collapse of fee based banking, get them back to their old pre 1980 5% profit margin, get rid of the 401k fraud and get the public away from Wall street like it was before 1980.
The public has been given a booby prize option of easy credit and 401k in lieu of just adjusting pay to fit living cost.
Easy credit exposes them and the financial system to excessive risk and 401k has bloated and distorted the equities markets from the run of money sloshing in each payroll cycle.
Dr. R.
Thanks for a cool statement of what is going on. I truly hope what you predict will happen, I greatly fear you will be wrong.
In my opinion FEAR is the problem both on Wall Street and Main Street. I am a Main Street small businessman and my customers are other small business' and I can tell you everyone of them is frighten and taking a wait and see position on any spending (my business is off badly so my jusdgment could be off just a bit ;) ).
I had hoped that the bill that failed might help still the growing fear, now I think someone just threw some more fuel on the fire. An hearing someone talk with some calm is just what I needed now, so thanks once again and please keep it up.
Prediction: a deal won't come until around oh...November 5th or shortly thereafter. In the meantime, one or two more banks will be handed over to JP Morgan or Bank of America. No one will worry about the concentration of economic power...
Oh, Barbara, if Bush isn't a tool of the WASP elite who is?! This"bailout" is Them pulling the strings for a final rape of the economy before the end or their ruling days.
Congress should consider your "hellova fire sale" bankruptcy/workout recommendation as long as equity-losing "investor" does not include people like my sister's friend. A Massachusetts-based Merrill-Lynch retiree, she depends upon a 401(k) entrusted to Merrill-Lynch.
Is there any "sunshine" provision in this bill that permits the gov to take a look at the books and communications of these companies, esp. their records for the past seven years? Or one that keeps them in the open for the next seven? After all, if my neighbor had just asked me to borrow a year's salary to save his rather "shady" business, I would want to make sure I took a look at his books first to make sure that I am not simply propping up criminal, litigious, or simply unethical activity.
At the very least, the past seven years worth of data and correspondence would be a valuable tool to ensure the problem doesn't happen again.
Just curious.
It is clear that this mess will not be solved by this bailout plan. It will make people feel better (and that's something, given the emotional nature of the stock market and consumer confidence, etc.), but if people are scared they will stay scared. I went to a WAMU on Friday to deposit my payroll check. The teller told me that everything would be ok and not to worry. When I left, since she was so nice, I said, "Good Luck." She replied, "I'll need it." Need I say that this did not make me feel good. Why is it that Alan Fishman, president of WaMu for 17 days, walked away with a reported 20million dollars, and his teller is scared of losing her job. Truly, capitalism is the cruelest of all systems. Allen Levy (Buck18) levy@chapman.edu
A FEW QUESTIONS:
What is the difference between a bail out and nationalization?
Why does Europe nationalize their banks in times of financial crisis and we bail out ours?
I would love to hear thoughtful responses!!
I'm no expert, but my thought is we should buttress things from the bottom. Here's my idea on how to fix things... 1. Create the Federal Mortgage Holding Agency, or FMHA - that would buy back homes that go into foreclosure. If a bank has a borrower who's about to foreclose, the whole process goes through the FMHA. The borrower gets paid their equity in the home, minus a penalty. The bank gets it's loan paid back, also minus a penalty. The FHMA then owns the house and retains it until it can be sold on the open market.
This way the homeowner is penalized, but not entirely ruined. Ditto for the bank. The credit markets are buttressed from below and don't collapse. When markets improve, the FMHA can sell them again, earning the money back, hopefully at a profit. I'm not an actor, but I play one on TV.
Thoughts, anyone?
The bailout was full of holes with regard to executive compensation. No problem for corporations and CEOs to work around it. The oversight board was to include Paulson himself. Some oversight! The Fed just pumped $630 billion into the financial system with nary a vote from Congress. We're bailing out the whole world! Also we just passed a $600 billion budget for the military-industrial complex. No sweat! What's another measly $700 billion?
If liquidity is the problem, why can't the Fed supply it? Remember the $300 billion they were supposed to supply a few weeks ago? This is Through the Looking Glass. These bozos don't know what they're doing. The real crisis is with the Federal debt and they're just escalating it. Oh well, another stop-gap for now; and then they can deal with the real crisis later ... like in a couple weeks.
Give me a break. There are plenty of intelligent people who know how to fix this mess and there's plenty of people who know exactly why it happened. Bottom line is, they don't want to face the fact that doing what's right means an end to their banquet in the sun—forever.
Hey Prof. Reich, Did you read this? via Greg Mankiw:
http://www.bloomberg.com/apps/news?pid=email_en&refer=worldwide&sid=a9MTZEgukPLY
"The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.
``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode.''
I guess the plan did pass.
So some banks are going to fail. Big deal. They really don't produce anything besides toxic debt and obscene compensations for their higher ups. Better run banks will take over their business and life goes on.
This is a unique opportunity to rid the US economy of the parasite that has been sucking it dry, the financial industry. They have bought out companies, laid of workers and outsourced our jobs to slave laborers in Asia. It's time we get rid of a good part of our financial sector and start bringing real jobs back to the US. Not crummy service jobs that pay minimum wage but real jobs that pay real wages. We need more manufacturing, building infrastructure (like electric trains), alternative energy, education and health care. With or without bailout, our current economic model is not sustainable. It would require one bailout after another. We need to address the underlying causes of this disaster instead of trying to aleviate the symptoms. The main cause is that we as a nation have been living on borrowed resources, borrowed goods and borrowed money. Now it's time to pay the piper.
I'll repeat that George W Bush and Elaine Chao have rarely met their monthly jobs creation target. It take 100K to 130K new jobs created per month in the US just to employ new graduates.
The jobs that have gone offshore are not coming back. They're not being replaced, except by a fairly lengthy retraining process. As Alan Greenspan and Elaine Chao have chirped: health sciences. Nurse, anesthetist, xray technician, physical therapist. A commitment of 3 to 4 or more years. Prerequisites in algebra, anatomy, physiology. Academic courses and hospital ward rotations. Waiting lists. Finding a university or community college close enough to attend. It's not a simple path.
If you're head of a family and you are virtually forced to retrain in health sciences, pay tuition, keep a roof over your family's head, how can mortgage rates reset to a higher monthly payment? The arithmetic doesn't allow it.
If you retrain in a green technology, carpentry tech takes at least one year, not to mention add-ons like plumbing and electrical wok.
I'm glad somebody else pointed out the ignorance and racism in Barbara's post from earlier.
"What are the tradeoffs of doing nothing and letting banks fail?"
Have we ALL gone crazy? This plan comes from the same corrupt regime that gave us the Iraq War.
Let me pose this. What happens if a week passes and the country DOESN'T collapse in a ruinous heap? What then?
Remember, it was just 2 1/2 weeks ago Bush & McCain were declaring the fundamentals of the economy sound. Obvious lies. So now, NOW they're telling the truth? They haven't done that for 8 years and you're telling me they're going to start doing it NOW?!
This is a piece of sh!t and you know it. Is there a crisis? Yes. Will this terribly flawed bill even begin to fix it? No way, and all of you know that.
Folks, this is what happens when legislation and ideas are written by special interest groups, in this case Wall St. banks, and handed to our Congress to be voted on.
They didn't count on people raising their voices in protest. Please, everyone, keep doing it.
I think you're on to something.
America is having an interetsing reaction to this.. They didn't like the $700 bil bailout, but are angry now nothing happened
And as Congress does in times of crisis: They compromise. I think you're right, Mr. Reich
Let the market correct itself. That is what it was supposedly designed to do. That's what laissez faire was for. Well, Wall Street got its "deregulated" environment and they trashed it. F**k them. They have made my life hell for the last 8 years and they don't deserve to keep living high off the hog on my back.
And that goes for all of you who put your ill-found "faith" in the stock market. It's not like you didn't know it was full of vultures. It's not like you all didn't know about the Federal Reserve Banking system being a privately held party of the richest people in the world. Cry me a river about your losses in the market. I paid into social security for myself AND my mother's generation only to hear self-centered selfish little children of my son's generation cry about how THEIR money should be "invested" instead.
It's probably good you're not staying right on top of the polls.
Your third-third-third split is a little dated.
Latest numbers that I saw were 50% against, 25% for, with 4% margin of error.
Almost 60% think the bailout is a power grab.
But 80% think something must be done--just not the something that was proposed.
You can Google for the polls as quickly as I can dig up the urls for you. Although, by the time you do, there may be new numbers out. Public opinion is very volatile on this issue.
Dr. Reich,
What is this discussion of by-passing congress in favor of FDIC that I am hearing on some of the financial news programs. Is it a good Idea? By the way "Barbara" should be a red flag to everyone who beleives that this financial crisis will pass without consequence; if and when Main Street begins to feel the repercussions of this fall-out then everything that is good about our democracy will erode into finding a scapegoat for the mob to lynch. Anger is dawning, hysteria will be next, the God bless the USofA.
If I were Dr Reich, this would be blatant self, promotion, but I'm not, so...
I recommend Dr Reich's book "Supercapitalism" - I just read it yesterday while waiting in airports in Providence RI and Philadelphia PA. It explains why our success as consumers/investors has overwhelmed our ability to influence politics. Time for an update?
Thank you Prof. Reich.
At this horrible juncture, after eight unspeakable years of garbage, people have finally woken up and spoken. Sign me up for the revolution!
Perhaps the timing isn't the greatest, and perhaps we'll pay for this bit of rebellion dearly, but I think we should let the irresponsible fools who fell for cheap and easy credit to pay their dues. The rest of us who have been living a cash lifestyle have learned over the years to get by on less just fine, thank you. Sadly we're all going to have to suffer, but at least the greedy Wall Street crooks will have to start toeing the line.
Why not let the airlines and banks fail? After all, nature abhors a vacuum and this cleansing is way overdue. Life will go on and maybe we'll actually see an overhaul of the SEC. Perhaps they'll even work to restore the Constitution. Sorry, senior moment.
While the Republicans dissent was transparently against impending government oversights, the Democrats were equally guilty of just looking to hand Obama a window of brief clarity prior to the election. All of their motives are suspect and I seriously hope that a simple quick fix won't satisfy folks now. As was mentioned, we should be investing in renewable energy as well as the railroads.
I believe we all realize how much this is going to hurt, and I feel for those with their 401K's on the line, but responsibility has a price tag and doing the right thing is what's required now.
I believe it's time to tighten your belt and help your neighbor; the government won't be available.
Kat
Prof. Reich, what Americans need right now is a clear, simple video explaining what is going on in terms that we can understand. Most Americans did not take basic economics in college. Many Americans didn't go to college. If we are to build the political will to fix this thing -- and it seems clear that Congress was looking to dis-ease among the electorate when it scuttled the last plan -- we must start by getting people to UNDERSTAND what's going on.
I think you can help make that happen. Will you consider it?
- Gene Koo, Cambridge MA
Also asked elsewhere -- hoping some economist will take it as a serious question and give a reply that will teach me something:
Was there really a “worldwide glut of dollar liquidity” — or was that an illusion caused by some leverage or multiplier that was out of line?
There must be a “lessons learned” for this and I assume it’s like an aviation accident — the first mistake happened hours (years) ago, and then a series of other things had to go wrong, be done wrong, or be ignored for the eventual controlled flight into terrain (financial crash).
No black box recorder to be found though.
And I suppose they can’t pick up all the pieces and arrange them carefully in some huge hangar, label them all, and look for the place someone put in a counterfeit bolt that lost its head under stress, or the like.
Pity.
Seriously, for us ordinary folks out here — who wondered at the “awash in liquidity” idea when it was so prominent because it never trickled down — was that the first place there was an illusion relied on??
The most influential constituents weighing in will be retirees whose pensions and investment income may be threatened by a financial meltdown. Some are already being pinched by the seizing up of money market funds. If that gets worse, it could hit them right up against Election Day -- a real nightmare scenario for politicians. Geezers vote, and their votes are critical in the swing states of Florida, Ohio, Pennsylvania and Michigan.
re: why does europe have a nationalized bank system and we bail our banks out: one of many reasons is history. world wars, currencies collapsing and so on. lotsa folks from other parts of the globe actually learn from history. i remember ted koppel saying years ago that one of the things that makes america a dangerous place is we do not learn from history. history is for those 'other countries' like 'old europe' who lost wars.
nationalizing banks is also seen as: GASP!!!!!! socialism. heaven forbid. the dirty "S" word. well, whether we like it or not, that is where we are headed. if we plan to re-engage a more participatory form of democracy in this country, then socialism is a natural part of that. being social. actually seeing beyond our individual concerns and including others in our decision making process. some say in a kind of laissez-faire kind of way, that given the chance people will be good and well behaved. sometimes. but social reminders are good too.
as is regulation of financial institutions and investment firms.
many of us tend toward a socialized capitalism. it tends to keep a focus on the things that are important to people: education, health care, banking, housing.
cowboy economics does not work. allowing the markets to right themselves is not an option at this point. what's it going to take for us to get it?
ps. and i am not sure a 'bailout' of wall street need happen so quickly. also, i have lived in europe for many years and continue to read different european publications weekly. it's good to take a look at how our 'crisis' is viewed from other shores.
This is another fine mess those Republican voters have gotten us into. The House Republicans have put Republican ideology before the best interest of all Americans, from Wall Street to Main Street. Congress and the President must come together to pass legislation to address this economic crisis. The ‘‘Emergency Economic Stabilization Act of 2008’’ may not be the best plan, but it is the only plan that is ready to be passed.
Can I please just remind people that the market performance and the dramatic influx in oil prices was not so significantly linked. Speculators had a lot to do with that spike in prices, and with consumer demand going down as it traditionally does after summer. I doubt oil will rise so much, and even if it does. I do not think it is a bad thing. It is significantly cheaper here than elsewhere in the world. Curbing our demand for oil would not be the worst thing that's happened to this country. Failures of our market would be.
Why are they not writing a bill to buy the mortgages to help the home owner like they did during the great depression?
Heck, they can hire all the people losing their jobs on Wall St. to unravel these CDO's and piece the mortgages back together.
The public is against this because we know they are bailing out JPM and GS. We've seen this story back in the 30's. Why are they doing the same thing? This won't work! Don't they hear the professionals saying this won't work?
For Pete sake. JPM has almost 100 Trillion in derivitives alone. Please someone tell me how 700 billion is going to help?
These banks are sucking up others, like WaMu to take their assets to shore up their own companies. What the heck? Can't they see we are repeating history?
And Bernanke just pumped in, what was it, 680 billion dollars into the system today. Come on, where the hell are the smart people?
Dr. Reich,
The public is finally asserting some common sense to a costly Bailout crisis where no viable Alternative Solutions have been addressed in depth and quickly.
One option is the European approach of Investing Directly in troubled banks in exchange for a major Ownership interest, insuring funds reach homeowners about to lose their homes and offering an upside payback to taxpayers when banks are on a sound footing.
This gives strong, first hand Fed and Treasury Oversight of internal operations of troubled banks. Banks that are clearly beyond financial resusitation should be allowed to fail. In this case, Treasury would come up with a plan to directly help homeowners affected by failed banks.
Another option would be that the banks would simply write down immediately their toxic mortgage debt to 50% of its contractual face value. Treasury would then purchase this debt in exchange for stake in troubled banks proportional to debt buyout. This valuation approach is a compromise between "mark at the market" or the "lower of cost or market" valuation approaches. It provides banks with a capital infusion for purchase of toxic debt that is reasonably discounted, allowing room for the Treasury to minimize taxpayer losses on debt (maybe even make a profit), help with foreclosures directly, and eventually enable taxpayers to come out on top with an appropriate Ownership Stake in the troubled banks.
The Scale of this financial credit crunch is simply too MASSIVE to just let the market take its full destructive correction course.
We must come up fast with a wiser plan that helps home owners directly and minimizes the national Debt explosion as this will only more severely constrain critical job generating Investments needed in our economy. The last thing we want is the Japanese 12 year economic stagnation after their real estate debacle 18 years ago.
Frank Thomas, The Netherlands
Thank you. Your type of honesty, integrity and intelligence is what is needed. This is what is also needed in the corporate world, and this is what is very much needed in politics. Sadly, this is not what we have. The fact of the matter is that this situation arose because of the Super Rich who were and have been Super Greedy. This super greed has shown the results of the of the Super Greedy. This Super Greedy situation and this Super Greedy created financial disaster needs Government (American) action that is based upon the principles of integrity, sincerity, intelligence and authenticity. If those Super Greedy, who are clearly responsible for this disaster - another "D" word - were sitting in jail, there would be a less likelihood of this financial disaster occuring again in the near future. What is also needed is government regulation that is intelligent, has integrity and has authenticity. The unregulated corporate world has shown that it cannot be trusted. Unregulated capitalism - as this financial disaster has shown and proven - is no better than organised crime.
RLP - Australia
From Karl Denninger's Market Ticker website:
The Fed threw $630 billion into the market before the vote, and yet the S&P 500 was down 40 handles anyway, and in fact tanked after the vote.
Note carefully - Paulson's plan was $700 billion, and Bernanke spent $630 billion - almost the entire amount proposed - but failed to fix the problem.
Got it?
Good.
Now do you see what I've been saying?
We were about to piss $700 billion into a tornado and lose it forever.
Fortunately sane people prevailed in The House of Representatives and voted NO.
Ive heard it said on various financial programs that if this bail-out or some form of it isnt passed, that credit will dry up and many businesses who rely on borrowing to make payroll will fail, causing unemployment to soar. Is this true? If so what can be done to prevent it?
Does anyone think this is going to really help homebuyers in the future? I mean, even if there is MORE money, there will be fewer people getting loans because then people will need to put down much more on the homes, say 20%.
On an average $150,000 home that is $30,000.
Maybe I'm just too poor to understand, but do hundreds of thousands (millions?) of people have that kind of money laying around to invest in homes?
How is this really going to help modest income homeowners with say $5,000 - $10,000 (or even less) to put down on homes? Looks like we are headed to a nation that rents as opposes to buys. Not a bad thing, I'm just saying...
Dear genekoo,
You are 100% right.
YOu need to understand what happened and Dr. Reich is not interested. He has tried to sell us PRIVATE Corp FEDeral (un)Reserve as the fourth branch of US government. GOod luck if you want him to to educate you.
Ok. I will try short.
Debt.
Debt Conroller ( Federal Reserve)
little debt equils trust and progress
too much debt is a CONN JOB.
FEDERAL (Un)Reserve allows the second one. Why? because the SOPITALISTS ( WALL STREET, GOVERNMNET , FEDERAL RESERVE, MULTINATIONALS, MEDIA ) are greedy and made public greedy.
Why would Federal UNReserve would do that?
Their entire purpose is to move FIAT DOLLARS around and make Interest on it ( sound familiar? ) They profiteer form debt. That is DEBT=DRUG ( who can refuse) cartel
That goes for all CENTRAL banks of the world
CAPISH?
Dr. Reich never told you this and never will.
come to ANTI-SOPITALIST for more education.
Good Trading
If you need more come to
We can get news anywhere, Bob. Tell us what YOU would do if you were in Paulson's seat. How about those points you made last week? How about a freeze on foreclosures? How about a return to the transaction tax? How about a repeal of Graham-Leech?
The people on Main Street need your support. It's time for a new New Deal NOW! Tell that to Obama! The people are not pleased.
Thank you I really appreciate your blog--
So what does it mean to us that the treasury is printing out 150 billion dollars to lend to the banks and 330 billion for foreign banks--
Could you explain this and what it means to us?
You want to restore investor confidence? Set leverage limits back to where they should be. Restore Glass-Stegal. Stop supporting corporate raiders.
Blogger David said...
You want to restore investor confidence? Set leverage limits back to where they should be. Restore Glass-Stegal. Stop supporting corporate raiders.
Tuesday, 30 September, 2008
Really!
So why is there no provision in the proposed legislation to repeal Gramm/Leach/Bliley?
That would be an undeniable signal that the Congress really meant to rein in their paymasters on wallstreet.
Of COURSE, that aint gonna happen...
Prof Reich
Big fan of yours for many years. Please shout this out to your readers because you know better - THIS IS NOT SPENDING $700 BILLION DOWN A RATHOLE. There is some risk but worst expectations now for only the worst mortgage backed securities is total losses of 30%. That means taxpayers may only lose $210 under worst scenarios. I agree that a different version of the bill will pass. But it can't be or won't be scaled down. The US Treasury must choose some combination of either buying mortgage backed assets (most efficient) or buying equity stakes in financial institutions (less efficient) to unfreeze the credit markets. Although returns to taxpayers may seem more certain under equity stakes I think we would be wiser in most cases to buy the mortgage - backed assets.
Tom
Tom,
I agree but ....
I think it would be even wiser to do Both i.e., buy mortgages at a discount AND get a stake in banks for the taxpayers' well deserved upside for risks taken. See no reason why taxpayers should be put in a definite position of losing in the bailout plan.
Apparently, the GOP strategy is to go back home and run against themselves. It would seem that they think people have forgotten that they're the party of de-regulation, and unfettered greed.
I'm wondering how & why the Republicans are able to stall this bill when they are a minority yet the majority (the Democrats) are unable to stop the war in Iraq?
Anonymous,
Answers are pretty straight forward to your two questions:
Almost 40% of the Democrats joined the Republicans against the bailout. Democrats can't stop Iraq war because they don't have a majority in the Senate.
But what does "stop" mean? Democrats have been successful in convincing people of need to set a deadline to get out of Iraq. For this reason among others, McCain's Iraq war "win" strategy is not being bought by general public with its implied open-ended, costly committment of US troops.
It seems that the "market based approach" of the House republicans involves suspending capital gains tax. Won't this just make an outrageous tax loophole even larger????
What a mess. The have-nots think it's a conspiracy and the ivory tower guys keep shouting in a vacuum. This is what we get when we have a president who thinks he is right all the time and if people don't like it then tuff tudies. Bush doesn't even have credibility in his own party anymore. Trust in authority has completely evaporated. Despair, despair - will it all really collapse?
Our leadership believe that anything Americans can do, folks in Asia can do better. In fact the government pays subsidies to slash jobs and move them overseas.
Perhaps they are right.
It's time to close down Wall Street and outsource it to India.
Here in the US, billion dollar compensation packages get you CEOs that with the reverse Midas touch, that turn everything to crap.
In India I bet you can find hardworking people who will do the same job for $150,000, without destroying everything they touch.
/ Sarcasm off
I'm still waiting from Wall Street to dry up and blow away. It looks like it's still with us, even though the penguin on the tele was supposed to have exploded already.
Will Wall Street still exist tomorrow? I bet it will. I bet that businessmen, faced with unpleasant choices and no welfare payments, will find a way.
I'm sorry about the 401ks. But they'd still be worthless if gasoline goes to $15/gal due to hyperinflation. Millions of Americans can't all retire and draw money out of the market at the same time, without bringing it down, or forcing inflation higher.
This bailout plan can't save the 401ks without driving prices ever higher. The bailout can't be a one off event. It would have to be repeated over and over in ever increasing sums to stay ahead of hyperinflation. This will destroy retirement accounts just as surely as the banks are doing by using them for high stakes gambling.
Investing in the market is gambling. And it is gambling in a rigged house. Everyone with a 401k should be aware that there was never any guarantee that their money would be there when they retire. That's why you signed that paperwork stating that you understand that you were taking an guaranteed risk. You are betting that you can withdraw it before someone else does.
For those of you that think we can make money in the bailout, you should go watch the videos of the hearing.
Bernanke made it clear that the more we spend on these toxic assets, the better off the economy would be. He said he would determine a Hold To Market Value (HTMV) and pay that amount. In other words, he intends that the taxpayer pay full price for the security as if it was really a AAA rated vehicle and guaranteed to pay off.
He argued that the best plan is to buy high and sell low.
Please quit spreading the BS that we're gonna make money on this deal. Only a con man or a mark, would be saying that at this late date.
The panic is hitting main street today. In Georgia, 13 Bill Heard Chevy dealerships closed abruptly because no car loans are available from his banks. Lot's of people out of work today because of this crisis.
Americans killed this bill. Americans who listened to all the people shouting "bail out of Wall Street" when Wall Street was all ready gone. Americans who did not understand that the "bail out" is actually an investment intended to enable good businesses to continue to be able to borrow, & allow good banks to continue to be able to lend (vs. be swept down by the domino effect). This has happened because our leaders are not capable of explaining anything to the citizenry and also because they have been too busy playing politics. SHAME, SHAME, SHAME
During this credit crunch I've stopped receiving the 400 letters per day of credit card offering junk mail.
Maybe banks will bail themselves out with the paper savings they are experiencing.
The postal service staff will have less back pain and result in medical savings.
The trucking will move less weight and save our infrastructure.
The airlines will fly with less weight and save fuel, thus reduce gas prices.
I think this was the Bush (supply side economics) plan that was first proposed by Paulson et al.
I’m glad my congressmen have held their course for a better plan.
Good intentions aren't enough Anonymous.
The public knows what this plan is intended to do. We simply believe that the it is a lie and that it won't work.
Bush has made his case very well. He told us that bad, very bad things will happen, if we don't cover Wall Streets losses by conjuring out of thin air, hundreds of billions and eventually hundreds of trillions of dollars and hyper-inflating the economy with them.
The public doesn't agree with you that this will fix the problem, it simply feed the problem and force it to grow larger.
You can't have infinite growth on a finite planet. You must have periodic corrections. The longer you put them off, as this administration has done, the worst they get.
The longer we put this off, the larger the swath of destruction.
Dr. Reich,
I wanted to bring this to your attention:
http://www.nakedcapitalism.com/2008/09/mussolini-style-corporatism-in-action.html
I have begun to fear that Supercapitalism has morphed into something far more sinister.
As horrendous as the consequences maybe, there is something attractive about having the money changer monkeys off our backs.
Why life must continually become harder,as a working person?
One loses any fear of the terrible future, and says to the bankers and speculators, do your worse.
Weasledog:
I agree with you that excesses can only be cured by periodic corrections. The problem we are facing now is that the excesses that need corrected became so huge that the correction, if allowed to happen suddenly, will have disastrous effects throughout the economy. It will bring down the average Joe, not just the Wall Street bankers I actually do not think the average citizen has understood the catastrophic scenario that will unfold if the crisis of tight credit is not relieved shortly. Many people don’t realize that just about every business (i.e. their employers) depends on the availability of credit even if it is just to finance short term things like payroll & inventory. Rather, I think the public has simply concentrated on the nastiness of Wall Street, and the publics’ unwillingness to bail Wall Street out. Tell the average person that the big five investment banks no longer exist to be bailed out, and I’m sure most would not even believe you
Anonymous, I believe I understand your argument.
I don't believe that what you're explaining is possible.
I don't believe that there is a middle road on the bailout. Bailing out the banks at 1% or bailing them out a 0.5% won't make any difference.
If we want to talk about fixing this, we should probably be talking about giving the banks $70-$700 trillion.
This is so far gone that $700 billion is just vapor. It won't fix anything at all. But it will make things worse.
Would you favor a $70 trillion bailout, if you believed it would the banks recover?
But you're right. We have a borrow and spend economy.
We do not have a produce, sell and spend economy.
This bailout isn't a solution. It's a fix for an addict. In two years, we'll have to bail them out with more money. Two years after that, a bigger bailout... The debt and losses are going up exponentially.
When should we stop? When it's a $700 quadrillion problem?
barb honey:
I reserve the right to express my opinion and to do so without being called vile names since my forefathers gave me free speech and they never said it was conditioned upon Jews' approval.
I'm sorry sweetie but your forefathers did not exempt you from vile names. We, with those same rights as you, can exercise them trying to reason with you, but we all know that would be fruitless, so we can exercise them by calling you vile names.
That's freedom of speech baby!
Weasledog:
I fear we are having a misunderstanding about the true intent of the “bail out”. If you will notice, the government assisted takeovers thus far of financial institutions by other banks have left the stockholders (the owners) with little or nothing (i.e. Bear Stearns, AIG, Lehman Brothers, Washington Mutual, Fannie Mae, and Wachovia). The owners of these firms certainly have not been bailed out. Government guarantees have been made to protect the deposit holders…that is all. I believe the intent of the new comprehensive “bailout” plan is to help out those institutions that, in good faith at the time, made investments in mortgage related paper that has since devalued substantially due to events beyond their control (i.e. popping of the housing bubble.) Remember, most of these loans originated when borrowers went to their local banks, & originated a mortgage loan. These banks then sold the loans to Fannie Mae, which then securitized them. That fact that the ultimate holders of these securities made those poor investments does not now make them terrible, greedy people. But that is beside the fact. As I said, there is no Wall Street left to bail out. The point is that the “bail out” is a lot more about protecting Main Street (via unfreezing credit) than most folks realize. I am not talking about the credit that people abuse. I am talking about the financing that allows businesses to conduct their operations. It is about limiting the carnage that has already taken down Wall Street. It’s about a soft landing vs. a hard landing for the broad economy.
The $700 billion will bail out Paulson's buddies. This good old boy group has decided which investment banks fall, get sold, and which survive.
Paulson should recuse himself due to his ties to Goldman Sachs.
Paulson is the one with a liquidity and solvency problem
Anonymous,
What you said about the Bailout being primarily aimed at "Unfreezing" the credit crunch by helping those under threat of foreclosure and providing more liquidity to the banking system is quite correct.
There is indeed a misunderstanding that we are bailing out Wall Street. This $700 billion, as much as I detest the Debt rampage we are on, is an essential attack at the Symptom of our financial crisis to save Mainstreet's homes, jobs, and ability to borrow for essentials for the business and household.
The domino effect of letting the market take its destructive course, in this global financially connected world, would be devastating for all American households and for world markets.
Implementing a regulation and educational regimen that will effectively prevent such irresponsible speculative overleveraging in our society and that will encourage a lost value of "living within our means" are the next critical steps to get at the CAUSES of the current MESS.
Also required, as I've said many times before, is a gradual but deliberate readjusting of our inherently unstable Economic Model away from its excessive emphasis on Consumption at 70-72% of GDP to 63-65% of GDP; increasing Savings (helped by tax incentives) from ZERO to 6% of GDP; increasing Investments as a driver of the economy from 4% of GDP to 6-8% of GDP ... all over the next 6-8 years.
The increased Savings will help finance the Investments in our economy. The increased Investments will offset reduced Consumption by stimulating stable job growth and money circulation through innovatively growing new industries at home.
Robert-
Recently I watched a documentary on Alexander Hamilton, which glossed over how he used the young country’s debt to build the world’s strongest economy and currency. By all appearences, the $700 billion bailout is being determined by people who, like me, don’t understand higher economic calculus. Most don’t even seem to get the difference between an expense and an investment; is there ever a _balance sheet_ done for the United States?
Lately, I’ve been enchanted with the electoral statistical scientific discussions at the Princeton election analysis website
http://election.princeton.edu/
because they actually do the math.
Are there any websites you could recommend for an economic theory tutorial (sort of like the “Physics for non-physicists” we had in the Physics dept), or some real scientific discussion of the recent financial crises?
My education peaked with a Physics BA from Cal, in the ‘70s. I can still manage equations and some higher math, and I do my own taxes. I run a small bookstore on Claremont Avenue ( where I’ve seen you having coffee next door, at the bakery).
very good blog
Right, the investors didn't get anything. The Principals, got wonderful rewards in extravangant golden parachutes.
Bernanke just unloaded $650 Billion from the Fed to fix this, and it didn't make a ripple.
Further, the government bailout won't even work like the other bailouts. Paulson will by toxic paper high, and sell it back low, over and over.
Now to unwind this derivatives may require $700 trillion dollars. I'm a bit surprised that the scale that this bailout will have to take, doesn't bother you.
You haven't disagreed with my point that this doesn't fix the problem, but feeds it. That the endless cycles of bailouts would continue and that the dollar will rapidly devalue.
Ultimately accelerates the cycles that have been so damaging to our economy since World oil production began stalling out in 2001.
The Fed bailed out the markets in 2001 by creating thr housing boom, and now again, is going to create a bigger buble.
Is there a point where you'd say stop, let's turn this around? Or would you support continued job loss as gasoline goes to $50/gal and bailouts got into the hundreds of trillions a quarter?
Is there a limit where you would say, "No more!"?
I'm so glad you have this blog - it's a true public service for people like me who are growing increasingly petrified by what is going on from Washington to Wall Street.
The Democrats are just going along with a Bush/Paulson bailout plan instead of putting their own stamp on it. Nancy Pelosi, in her rant yesterday (which I approve of BTW) said that the age of Reaganomics, trickle down economics, laissez-faire unregulated economics was over. That's all well and good but why, then, go along with a bailout plan based on trickle down economics? Why not make sure the plan bails out Main Street and not Wall Street. Paulson, who cashed out on $500 million of Goldman Sachs stock (without paying capital gains or any other tax) when he left Wall Street for the Treasury Department, has probably lost a couple hundred million in his portfolio in the current crisis. Don't you think that that fact would set his priorities about whom to bail out? Would it be the wealthy investor or the person trying to get a car loan?
The Fed has added all kinds of liquidity to the system. $630 billion on September 29. Congress voted down $700 billion, but the Fed added almost the same amount at almost the same time. Does this mean that the taxpayers' $700 billion is not needed now? Why should there be such a rush now? On September 17 the Fed bailed out AIG to the tune of $85 billion. The Fed pumped $200 billion into the system on March 11. On March 14 the Fed bailed out Bear Stearns to the tune of $30 billion. That's $945 billion by my tally. And that's still not enough? Let the Fed bail out banks. Congress should bail out the little guy, and the Democrats should start acting like they're in charge. The government has already taken over Fannie Mae and Freddie Mac. They can't provide money for mortgages? It's not believable. I've noticed that my credit cards still work. Somebody must be providing liquidity.
The bailout plan provided for recovering monies for the taxpayer ... but after 5 years. This is ridiculous. How about providing the mechanism now. In 5 years this provision may well be forgotten or superseded by events or reality. The clause in the bailout plan limiting executive compensation was riddled with loopholes and potential work-arounds. And there's nothing about repealing Gramm-Leach-Bliley and reinstating Glass-Steagall. Nothing about making derivatives illegal. Nothing about changing the system structurally. They seem to want to add more regulation of the exotic financial instruments instead of eliminating them altogether. This is no solution.
The final version of the bill included sort of a plan for eventually recouping losses; if the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions. Sure, and a Republican President would submit a plan to recover losses from the financial industry? That's like having the fox submit a plan for restocking the hen house.
Here's a bailout plan that would have a Democratic flavor.
1) Add targeted liquidity for small business short term loans, car loans and student loans.
2) The bailout plan should provide relief for those facing foreclosure. ARMs should be converted to conventional 30 year fixed rate loans.
3) Bernie Sanders' plan should be implemented. Impose a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue.
4) Thom Hartmann's plan should be adopted: If we instate a .25 percent Securities Turnover Excise Tax (STET) on every stock, swap, derivitive, or other trade today, it would produce - in its first year - around $150 billion in revenue.
5) There should be airtight legal language regarding limitations on executive salary, stock options, perks, bonuses and any other form of compensation.
So if Reaganomics is dead, why aren't the Democrats proposing a bottom up bailout for the middle class instead of a trickle down solution which is more of the same failed policies we've had for the last 38 years? Why are they siding with the Bush administration when the Republicans are not even buying the Bush bailout? Why don't they act on Nancy Pelosi's words and have the courage of their convictions? We've already had massive bailouts of the banking system. Let the frozen liquidity of hedge fund derivatives stay where it is until banks can work through it. At the same time liquidity can be targeted for Main Street and relief can be given to homeowners facing foreclosure.
Paulson wants bailout now; reform later. Just the opposite should be the policy of the Democrats. Reform now; bailout for the middle class as needed.
More here
Here's what I don't understand.... The big issue right now is supposed to be that the credit market is "clogged." Banks are not lending - not to each other, not to businesses that need the money for growth, etc., etc. However, where is all the money that was pouring into CDS (doubling in volume every year & now equal to the world's GDP) and other financial instruments?
Is it all being held as banks, institutions, etc. are scared of taking any risks and want to keep liquid? It's not the fact that they loaned money like drunks to anyone with a pulse (and even some without) that is causing the current credit "clog" problems, it's the fact that they have a hangover and have suddenly turned parsimonious and are hanging on tightly to their money and not loaning it to good prospects!! Possibly this is a ridiculously silly suggestion (otherwise surely someone would have suggested this), but perhaps the government intervention shouldn't be on the "back end" (i.e. helping the financial companies clean up their toxic waste), but on the "front end" e.g. some sort of federal guarantee of all new loans struck provided they meet certain criteria...(tied to real assets vs. second, third, fourth order derivatives, etc.) Once this unclogs the system (which is supposed to be the immediate problem) then theyt can look at slowly unwinding all the garbage...
BINGO! thank you for whoever wrote: these are the folks who told us there were weapons of mass destruction and we had to invade iraq. why should we believe what the current administration tells us about a financial plan that 'must go through right away'?
mr. bush who's presidency is already a sunken disaster simply doenst want a trashed economy laid at his feet along with all the other debacles he's had his hand in for the past 8 years.
i am not supporting laissez faire economics. i am supporting we take our time~at least past election days which is only 4 weeks away.
we can afford to wait. it's hard to sort fact from fiction during such an overheated political season. policies can be pushed through and nobody looks at the fine print til it's too late.
remember 'no taxation without representation'?
maybe it's time for another taxpayers revolt.
I have never been a fan of "trickle down" (an apt term for what little is left after the big horses have been at the trough) and am very skeptical that a government "trickle out" will be any different. Though I understand the credit market confidence focus, I propose that any "trickle out" plan include at least half of the government expenditure going straight to the bottom and addressing the home mortgage crisis so it can "geyser up" through the economy.
I propose that anyone who obtained a real estate-secured loan on their primary residence with negative amortization or adjustable rate (with or without a balloon payment) be eligible for reimbursement from the federal government of their principal investment (the cash or equity) they put into the deal (excluding closing costs) in the past five years up to a cap of $50,000 (10 percent down on a $500,000 house). In return, the mortgage holder would be provided expedited ownership of the property to sell at whatever market value they can. Owners in default but still in possession could negotiate to retain ownership by reinvesting the government reimbursement in the "re-purchase" of their home at a presumably reduced and more affordable market value . Those who are already out of their houses would be encouraged with economic incentives to buy other houses with their reimbursement . It could also be put it into savings or used to purchase goods and or services (although I suggest some degree of penalty for non-housing use). Any and all of these would have direct positive impact on the economy.
How does the math work? Off the top of my head, it seems a lot simpler and more plausible than the math it takes to "trickle out" Wall Street. The back of my napkin says that $350,000,000,000 could provide an average $25,000 reimbursement to 14 MILLION sub prime or otherwise high risk borrowers. With about 75 million owner-occupied housing units in the US, it could mean a direct "geyser out" for about 18% of ALL mortgages. For rough comparison, the current inventory of houses foreclosed on in the US today is around 1 million. Will it get 14 times worse than it is today? Maybe, but the reimbursement could help to reduce the actual number of foreclosures. It could be in the mortgage holders' interest to compete with the government reimbursement program by offering to re-negotiate existing mortgages with lower balances rather than see their borrowers take the money and leave them with the properties.
You might ask at this point, what about the banks? The bottom line is that they took the profit on the inflated housing price balloon so now they get to face the wrinkles of deflation. Furthermore, on a percentage basis, the decline in home values is still on a nationwide basis hovering around 25%, although worse in pockets such as South Florida and Las Vegas. The mortgage holders are still secured by valuable assets that can be sold to recover the larger half or more of the outstanding loan balances. And if we think we need to prop up the Fannie Mae and Freddie Mac loan pools and the panoply of other secured mortgage instruments sold to supposedly unwary investors, there is still the $350 BILLION to hose them (us?) down from the trickle down side.
What's the government get for its billions in reimbursements? Nothing, if the reimbursement is put back into the purchase of a primary residence, except that communities will survive and perhaps thrive with pride of ownership to the extent increases in social costs will be more contained (and such increases would come directly out of the federal pocket). But if the reimbursement was not put back into housing, the reimbursement should be taxed as income, in effect rebating some of the taxpayer's investment when the geyser up money is not used for its primary purpose of addressing the home mortgage crisis.
So, I ask the following more than rhetorical question: If the home mortgage crisis is taking the economy down, why isn't it intuitive that fixing the problem at the foundation wouldn't be the way to prop it back up? Put the money where it has the most power in a capitalist system - with the consumer. It has to be as good as what the Bush Administration and Congress are brewing. And at the very least, "geyser up" sounds a hell of a lot more optimistic than "trickle down".
John Lawrence,
John you are right to ask why the rush with the $700 billion Bailout in view of the $630 billion added to system Sept.29th -- which I was unaware of when I wrote my prior post.
There's no clarity behind what we are doing to unfreeze system liquidity versus solving immediate, mass foreclosure actions hitting Joe Doe.
Heavy reliance on "Trickle Down" policies have been a monstrous joke on middle class America since Reagan .... wealth concentration to top 10% of households and stagnant wages for bottom 80% (the convenient victims of outsourcing, downsizing, merger/acquisition redundancies) being two obvious societal gross inequities.
We are trapped in a business culture that has warped its Stakeholder priorities to reward a select few. Specifically, Stakeholder priorities should be,
Employees 1st;
Customers 2nd;
Shareholders 3rd,
....rather than the other way around which ultimately over the long term has entrenched narrow interests, greed and exploitation of the working middle class.
Accordingly, the Bailout focus must be on Taxpayer Joe Doe first and appropriate risk/reward to taxpayers for relieving financial community of its toxic Debt. Therefore, the Bailout should be structured so that Mainstreet taxpayers have a high chance of not losing a cent of their hard earned tax dollars. That's why I recommend, for example, that troubled and toxic Debt be purchased at a sharp 50% (or more) discount .... and make this non-negotiable.
Time to get tough about REAL REFORM NOW in this Bailout as you and others on this blog so well specify, John.
For one gets the impression of panicky financial amateurism by our government representatives ... with little evaluation of viable options while throwing tons of Debt and/or of Printed Money in all directions for future generations to be saddled with.
Plus the bailout plans include European and Chinese banks. Google "Mish" and read Mike Shedlock's blog.
On a lighter note, enjoy the Right Wing Noise Machine as they attempt to coach Sarah Palin for the Thursday night debate. Hide headphones in that beehive hairdo and prepare to go live with the coaching. I stated earlier that Barack Obama (and Joe Biden) should take the gloves off with Karl Rove.
Dr. Reich,
The current Bailout Plan gives the Treasury authority to purchase bad loans Directly from financial banks as a way to inject new money into the financial system. This has brought a public outcry of foul play from Main Street taxpayers.
Without going into detailed addendums and conditions in latest Bailout version, here are what I and others perceive to be the major options the final RESCUE PLAN should reflect in addressing both the Causes of this crisis as well as immediate treatment of the Symptoms (e.g., the credit crunch, mortgage foreclosures):
1. Treasury helps homeowners first by Directly purchasing housing assets at a flat discount (say 50%) and restructure mortgage terms on doable basis for those threatened with foreclosure. To reward taxpayer risks, Treasury offers loans in exchange for Equity ownership to troubled banks and allows really bad banks to fail. Treasury insures depositors´ funds up to $250,000 as now proposed and doesn´t buy bad Debt from banks that might not need new capital.
2. Treasury invests Directly in financial companies by buying new shares (market discounted by fair formula) and let really hopelessly bad banks be closed. Taxpayer returns would have first priority on future positive cash flows of financial institutions. Cash pumped into companies must be used by each firm to restructure its troubled mortgages so that foreclosures are avoided. Treasury insures depositors´ funds up to $250,000 as now proposed.
3. Treasury Directly assists homeowners rather than buying bad assets from financial institutions. This removes bad Debt from balance sheets of financial institutions. In return, those institutions have option to float new stock or bond issues to cover liquidity needs or to borrow from Treasury in exchange for a direct Equity Ownership interest ... which interest would have first priority on dividends and on repayment of outstanding Debt to Treasury over a reasonable time period. Treasury insures depositors´ funds up to $250,000.
4. Treasury lends money Directly to Investors and other Asset Management firms to help them buy the troubled assets from banks ... thereby effectively relieving the taxpayers from assuming the full risk. Treasury would also insure depositors´ funds up to $250,000 under this alternative. One advantage of this alternative is that Asset Management people have best knowledge and understanding of assets that are in good shape, troubled, or hopeless shape. Investor firms would give first priority for Debt repayment (at a premium interest rate) to Treasury obligations.
Restoring market confidence quickly is incredibly important under all these alternatives.
Therefore, it makes abundant sense to raise level of insured deposits to $250,000 as now recommended by many; to focus more sharply on pragmatically helping Main Street forerclosure crisis; and to financially help weak financial institutions with loans that come with an Equity Ownership interest `provision´ to reward taxpayers for unusual risks involved in rescuing Wall Street.
NOTE: Under none of above alternatives, or some variation thereof, should the Treasury buy bad Debt of financial institutions based on `hold-to-market-to-maturity´ valuations. A simple valuation solution that places appropriate immediate share of mortgage losses with financial institutions would be purchasing bad Debt based on a fixed mortgage contract value discount of, say, 50% (as stated in Alternative 1 above).
These are viable, less costly options for thought that shouldn´t take much time to assess and incorporate in final Bailout plan ... but I fully recognize the fearful Reality argument, `we don´t have time for this´ may unfortunately win the day... potentially leading to a hopelessly, non-creative PILE THE DEBT on FIX!
Dr. Reich,
To be clearer, Option 3 above includes a Treasury Equity Ownership stake plus market interest rate for any funds borrowed from the Treasury.
I like many of the solutions presented here.
But do they actually fix the problem the banks are dealing with?
Isn't one of the core the issues, that the lending institutions have generated new loans based the valuations of high interest ARMS?
So if these ARMS are converted to fixed rated loans at a human scale interest rate, the Hold To Maturity Value will decrease, thus putting the loans made based on these ephemeral assets at risk?
Isn't it the case, that it's this counting the chickens before they hatch strategy, that is drying up the banks ability to lend? Or at least this is a large part of the problem?
Because if it weren't for this issue, a bank could conceivably manage their own write downs. But because they used these ARMS to leverage larger loans, they can't convert the mortgages themselves, without losing the ability to lend, right?
Perhaps another solution could involve changing the valuation rules for loans made with a specific time range, allow for higher valuations while converting them to a lower fixed rate so that the homeowner isn't forced into foreclosure. And also changing the rules on ARMS, making them a lending instrument only available for those who can demonstrate the least risk?
If the ACUTE problem here is a shortage of commercial paper, then why not have the government provide the equivalent in the form of very short-term loans and some adjustable rate- this will provide immediately relief to Main Street and let Wall Street sort itself out. Once banks realize that Main street is doing business, they will want to get back into the game, and the government can cut back on the loans. These would be the equivalent of very short term T-bills (I think).
John Rodgers, biologist
John Rogers,
A very good suggestion which is putting some more substance thinking and variations around my Alternative 3.
Questionable aspect is the emphasis on very Short-Term loans as real estate is a long-term asset requiring long-term financing. I understand your point that banks might later get back in and replace short-term loans with long-term financing.
The Treasury lending money to mortgagors whose contract is with a bank is another complication. This could be solved by simply lending the short-term funds to a bank which, once its financial position improves, pays off the Treasury loans and structures new long-term mortages for homeowners.
You've got me thinking more about Alternative 3. The magic lies in keeping the final solution as simple and transparent as possible.
Here are my favorite articles on understanding the crisis:
Mortgage Basics (part 1)
http://scienceblogs.com/goodmath/2008/05/mortgage_basics_part_1.php
Mortgage Basics (part 2): The System is Broken.
http://scienceblogs.com/goodmath/2008/06/mortgage_basics_part_2_the_sys.php
Economic Disasters and Stupid Evil People
http://scienceblogs.com/goodmath/2008/09/economic_disasters_and_stupid.php
Bad Probability and Economic Disaster; or How Ignoring Bayes Theorem Caused the Mess
http://scienceblogs.com/goodmath/2008/09/bad_probability_and_economic_d.php
How Mortgages Turned into a Trillion Dollar Disaster
http://scienceblogs.com/goodmath/2008/09/how_mortgages_turned_into_a_tr.php
Weasaldog,
Banks who wrote mortgages with high adjustable rate provisions were playing the Snake-Oil lending game that got our country into this terrible MESS.
They should pay for this upfront with a Bailout plan that purchases or refinances these mortgages at market or lower based, for example, on a steep mortgage discount, of say 50%, and assuming market interest rates. This reduces Treasury (and hence taxpayer) risk of high losses after taking over mortgages and restructuring same on sensible terms. Importantly, it forces financial institutions to accept some immediate writedowns as punishment for their grossly irresponsible lending behavior.
If Treasury buyout on this basis leaves some banks still short on liquidity, then they must raise funds on the market with perhaps a partial government guarantee of same for a limited period of time. The bad debt is off the balance sheet which should facilitate raising new capital on the market. If not, then as a last resort Treasury can invest for realistic Equity Ownership interest.
Interesting to note that The Netherlands, Luxembourg, and Belgium recently quickly injected over $11 billion to rescue Fortis, a major banking, insurance and real estate firm ... in exchange for a significant ownership position. The firm´s stock torpedoed down for totally other reasons than purchases of sub-prime mortgages... although the US crisis intensified negative investor reactions to firm´s profit developments. Like most European countries have done in the past, the Bailout took the form of Alternative 3 in my earlier post.
On another of your interesting points, I wouldn´t maintain tricky bank lending facades of exhorbitantly high and unreal valuations based on ADM provisions. Reducing interest rates to maintain exhorbitant valuations based the ADMs is like keeping the almost criminal valuation practices visible and giving them credibility. Prefer opposite excess of writing down considerably to remove once and for all the huge `Bubble´ chicanery convincing too many that real eatate is an unending rising bonanza.
Weaseldog,
miner correction: last paragraph,
4th sentence:
... valuations based on the ADMs is ...
Weaseldog,
Sorry, Alternative 3 in 4th paragraph, last sentence should have been ... Alternative 2.
Frank Thomas, I agree with your principles in this matter.
I believe that we're better off just letting the banks sort out their own mess.
But I still believe that our Gov will go with the bailout, so I was looking for middle ground. A strategy that can limit growth of this mess, without killing it, or requiring massive useless bailouts.
It's not a strategy I like, just something that occurred to me. A sacrificial play to mitigate losses.
Weaseldog,
The scale of the MESS is too massive to let market forces entirely solve the problem. After all, this was Greenspan's argument with his cheap money policies from 2002-07. He said, "It's an accident ready to happen." But he did nothing on the premise the market will sort things out. Well, it didn't. Greed took over.
Finally, the compromise you and I both seek lies in all or a slight variation of the 4 Alternatives I discussed in my earlier post.
But, as I concluded, because we are so panicked into the thinking that "time is of the essence," we are not refining the Bailout plan ideally now ... as restoring Confidence in the system is critically important at the moment.
Perfecting the Bailout plan along some of lines suggested in this and other thoughtful blogs HOPEFULLY will come later.
The priority focus now is on the Symptoms, not the root Causes.
Weaseldog,
One final word. When it comes to specifics on Real Reform of the financial system, I think John Lawrence's post above reflects most thinking people's sentiments rather well.
I agree Frank. I just don't do, 'Me too!' posts.
I've been reading similar strategies on many blogs.
It is clear that Paulson will fight these strategies tooth and nail. Or is it cilia and pseudopod?
For instance he wants the bailout to be applicable to mortgages for property outside the US.
Weaseldog,
Paulson has said many stupid things lately so the statement you quote him on doesn't surprise me. It's very fortunate he'll have a mimimal impact on implementing the Bailout when Democrats win the majority in Congress.
While Paulson knows the investment banking world in and out, formally he was immersed in all the financially exotic product maneuvers of the "Fat Cats" to obscenely enrich himself when President of Goldman Sachs.
For me, therefore, he has a number of indirect conflicts of interest that make him persona non grata for overseeing any government Bailout, let alone this $700 billion king of all Bailouts! His oligarchical temperament is hardly at one with the interests of middle class America.
has anyone else seen this?
www.grantkit.org/mccain.htm
scroll to the bottom to see where john s. mccain is part of this. curious how he's giving money away at such a time? loans and grants people never have to pay back??
do tell!
You guys are making my hair hurt.
Lots of good ideas here from many but many of the good ideas seem to beg other issues.
John Lawrence lays out very sound ideas with references to other good ideas but they ignore politics. Many of his proposals can't get pass the Senate and the filibuster rules. The House can likely pull out whatever they want if the Dems are willing to take the risk on their own which they are not inclined to do. The Senate Reps will never accept some of John's proposals and will filibuster while claiming the Dems are trying to take advantage and destroy the free market or that the Dems will destroy the economy by increasing taxes.
Frank has some good ideas but he does keep referencing punishing those criminal entities that offered the dastardly mortgages in the first place. I thought part of the problem was in figuring out which mortgages are which and who owns them. Figuring out who issued them initially would be like looking for a needle in a haystack. It has to be doable for one would believe there is a paper trail somewhere but sorting it all out might take months or more. It is also possible that some of the originators are long gone.
There is guilt as well in the repackagers providing layers and layers of tranches but gettin back to the origin there would also take a long time.
I do agree with Frank that revaluing assets, homes or otherwise, gets dangerous and may perpetuate the fraud.
If we assume that continuing foreclosures are simply moving the finish line further out then why not start by placing a moratorium on foreclosures. It doesn't clear up any existing problems nor does it solve valuation problems or balance sheet issues but it would stave off, somewhat, the rapid decline in home values, especially where neighborhoods are suffering from a few foreclosures and stem the eddy somewhat. Folks could stay in there homes making the payments they have been making and for the most part no one would be aware of the foreclosure risk other than the homeowner.
Even if a bill passes, first iteration, second iteration, no matter, it will take some time to start the ball rolling. I'm sure Paulson has some specific targets for relief, a scary thought, but the line in front of his office will be steady from DC to Wall Street if he gets the go-ahead and then selecting the most urgent or best alternatives could prove less than immediate.
From Capitol Hill and a few on blogs we hear the hue and cry over eliminating mark to market regs. The argument is that this will be salvation since all these marked down assets can be written back up and balance sheets will immediately reflect creditworthiness. Excuse me? If you told me yesterday that your 1959 Edsel was worth nothing and today you inform me that, upon review, it is now worth $50,000, this is supposed to give me a warm fuzzy feeling for loaning you $40,000?
Mark to market rules probably should be eliminated, not because of the forced write downs but because of the ability to write up assets at a date certain, based on a volatile market than could alter values 5 minutes after you receive a loan.
It would seem to me that we should get a rudimentary bill passed with a strong oversight committee, equity provisions, nice to have executive compensation limitations but meaningful restrictions appear to be difficult at this time, certainly directions to Paulson on asset pricing limits would alleviate some anxieties. This action would, hopefully, give financial markets both here and abroad, a little breathing room.
In this time of crisis Congress should probably stay in session and continue follow on legislation supplementing an inital bill and tackling many of the wise solutions being offered up here. Incumbents could be hurt but how badly if your constituents know you are not campaigning because the crisis is more important to the nation's health and you're putting duty first. Could make many of them shoo-ins.
Frank and others:
Great article at NYT. There may be hope for our kids yet.
Here is a perspective on a solution that is worth viewing ---
Joseph Stiglitz, Nobel Prize Winner/Columbia University professor provides an interview to help explain the financial crisis and presenting his best steps towards a solution:
http://www.cnbc.com/id/15840232?video=874100965&play=1
Art,
I've said enough on this subject but I haven't said anything about "punishing entities" in a way which would involve knowing what mortgage is where in the financial pyramid ... a problem I'm aware of.
I've said repeatedly that any Debt assumed by Treasury, whatever the final plan should come with an equity stake in the relevant bank concerned to reward taxpayers for unusual risks taken. This is my "punishment" if you want to call it that, Art. And, obviously, it's quite easy to identify the financial entity the Treasury plans to bail out in some accepted manner.
Lastly, I think the interim Bailout plan should very concretely raise and confirm the key restrictions and intentions to focus on foreclosures/small business loans NOW (as did the refused version) to keep forgetful minds from later manoevering in other subtle market first (middle class later) "trickle down" tricks, etc. Short sighting homeowner sub-prime relief in this Bailout is unacceptable.
So, I agree with being upfront now with John Lawrence's points 1,2 and 5 in this regard. John's other concrete points 3 and 4, as you suggest Art, may take a little longer to discuss along with valid ideas from others to improve financial system structurally.
Dr. Reich,
The "Bailout" word many have correcly said might better be dropped and replaced with
"Rescue Plan." Makes since
to me.
ARM resets continue into 2011, unless they don't. Houses are worth the lumber and nails, very wholesale, at your local home supply store.
However, if Obama raises taxes on the upper one percent, good. They can leave America and go live where their work force lives in India and China. They can continue to live in America and be taxed at confiscatory rates. They should also pay a tax every time they take off or touch down on a runway.
Frank:
Cash pumped into companies must be used by each firm to restructure its troubled mortgages so that foreclosures are avoided. (emphasis added)
"Must", although admittedly mild, is an intimation of punishment suggesting, here's the money and here's what you must do with it.
Banks who wrote mortgages with high adjustable rate provisions were playing the Snake-Oil lending game that got our country into this terrible MESS.
They should pay for this upfront with a Bailout plan that purchases or refinances these mortgages at market or lower based, for example, on a steep mortgage discount, of say 50%, and assuming market interest rates. This reduces Treasury (and hence taxpayer) risk of high losses after taking over mortgages and restructuring same on sensible terms. Importantly, it forces financial institutions to accept some immediate writedowns as punishment for their grossly irresponsible lending behavior. (emphasis added)
Though I certainly agree we need to protect the taxpayers investment, at this point the major objective seems to be to strengthen the commercial sector and arguments abound that buying these assets at fire sale prices does nothing to improve the balance sheets of the teetering companies.
Most of the troubled companies are troubled not because they were involved in "grossly irresponsible lending behavior" but because they purchased or guaranteed securitized mortgage packages containing mortgages from institutions which did practice "grossly irresponsible lending behavior". The companies needing help were guilty of "grossly irresponsible buying and selling behavior" not lending.
I fully understand the anger that you and I and so many others feel about this dilemma but the solutions, whatever they are, cannot be focused on salvage and punishment. We have to focus on righting the ship, with all the protections we can muster for taxpayer funds, but accentuating the negative while trying to effect the positive could be self-defeating.
I am inclined toward the European model of complete nationalization of the troubled institutions but that is paranoia to our populace because we get all hung up on "isms". If we are truly in the dire straits we are told then what you call the solution is academic. First solve the problem and define it in philosophical terms later. I also have serious doubts about whether our government could be as successful at running these institutions in the interim as European countries were. Principles are wonderful things until they run flat up against pragmatism.
@Craig: The comprehensive bankruptcy of the United States, at every level, in all corners, atop each hill and mole-hill, and down not a few rat-holes, is preceding like some kind of hideous multi-media, inter-dimensional cosmic grand opera as produced and directed by the Devil. Every week, some bizarre new subplot is introduced by the stage managers, each turn and twist geared to produce maximum pain and carnage in the US economy, as if to foreclose any possibility of redemption on the way down. Well, the absence of hope is, after all, the essential nature of Hell (setting aside, for the moment, J.P. Sartre's quaint notion that Hell is other people).
Thanks for the assessment. I would like to hear from Prof. Reich about David Walker's take on the future of our economy. Is it as dire as he states? (He spoke on the Bill Maher show tonight on HBO. It is worth watching. He ignored his host and took the opportunity to speak to the public. He seemed truly panicked about our current economic crisis). I do not really understand how his concerns about our inability to continue to fund programs like social security and medicare by 2040 relate to the current economic debacle? Can someone please make the connection for me? Thank you. L.J.J.
Hi
YOur bolg is very nice. I have really learnt a lot from this blog thanks
Frankly I am shocked and appalled at the comment Reich made this week regarding his hope that aid not be made available to "unemployed WHITE construction workers or unemployed professionals".
Bigotry and class warfare are clearly putting our best foot forward in a new administration who campaigned on a message of hope and unity, asking us to begin a new chapter in American history that puts such thinking behind us.
Really disgusting and appalling to hear this.......
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