Bailout Redux: The Real Choice Ahead
If the choice is between a lousy bailout bill and economic Armageddon, I'd vote for the lousy bailout bill.
But make no mistake: This is a lousy bill. It doesn't do the most important thing -- help distressed homeowners avoid foreclosure (that role is given to the Treasury Department, which is the equivalent of putting it into the permanent circular file). It doesn't make Wall Street more transparent (there's almost no word in it about improved transparency and capital requirements, or avoiding conflicts of interest and market manipulation). It doesn't control the most egregious aspects of executive salaries (the bill contains a contorted detour for controlling certain golden parachutes when the government has made direct equity purchases of financial companies rather than taken their bad paper through an auction). It does have provisions designed to protect taxpayers should the bad securities continue to be bad, but the responsibility for acting on this is left up to the next President. And the Senate version has lots of additional stuff -- some good (extending deposit insurance), some unnecessary (extending certain tax credits), but most of which should never have been added.
And while the bailout bill may avoid economic Armageddon, it won't avoid a severe deterioration of the American economy in the months ahead. The bailout will help keep credit markets functioning. But ask yourself: what's the point of keeping credit markets functioning if most Americans can't afford to go deeper into debt anyway? And why does anyone suppose that businesses will continue to borrow from credit markets when their customers have stopped buying?
Wall Street and its creditors are not at the core of the American economy. Main Street and consumers are at the core. So even if the bailout bill keeps Wall Street going and prevents the sort of massive defaults that would freeze global credit markets, it does virtually nothing to help the vast majority of American consumers who are already at the end of their ropes -- who right now need extended unemployment insurance, affordable health coverage, and assistance in meeting their mortgage payments and fuel bills. And as long as Americans remain at the end of their ropes, the American economy will continue to decline.
So the real choice isn't between a lousy bailout bill or economic Armageddon. It's between taking prompt action to help average Americans or watching the nation fall into a deeper and deeper recession. Wall Street will be bailed out. The bigger question is whether Congress and the next administration do what's needed to rescue the rest of America, and the overall economy.
But make no mistake: This is a lousy bill. It doesn't do the most important thing -- help distressed homeowners avoid foreclosure (that role is given to the Treasury Department, which is the equivalent of putting it into the permanent circular file). It doesn't make Wall Street more transparent (there's almost no word in it about improved transparency and capital requirements, or avoiding conflicts of interest and market manipulation). It doesn't control the most egregious aspects of executive salaries (the bill contains a contorted detour for controlling certain golden parachutes when the government has made direct equity purchases of financial companies rather than taken their bad paper through an auction). It does have provisions designed to protect taxpayers should the bad securities continue to be bad, but the responsibility for acting on this is left up to the next President. And the Senate version has lots of additional stuff -- some good (extending deposit insurance), some unnecessary (extending certain tax credits), but most of which should never have been added.
And while the bailout bill may avoid economic Armageddon, it won't avoid a severe deterioration of the American economy in the months ahead. The bailout will help keep credit markets functioning. But ask yourself: what's the point of keeping credit markets functioning if most Americans can't afford to go deeper into debt anyway? And why does anyone suppose that businesses will continue to borrow from credit markets when their customers have stopped buying?
Wall Street and its creditors are not at the core of the American economy. Main Street and consumers are at the core. So even if the bailout bill keeps Wall Street going and prevents the sort of massive defaults that would freeze global credit markets, it does virtually nothing to help the vast majority of American consumers who are already at the end of their ropes -- who right now need extended unemployment insurance, affordable health coverage, and assistance in meeting their mortgage payments and fuel bills. And as long as Americans remain at the end of their ropes, the American economy will continue to decline.
So the real choice isn't between a lousy bailout bill or economic Armageddon. It's between taking prompt action to help average Americans or watching the nation fall into a deeper and deeper recession. Wall Street will be bailed out. The bigger question is whether Congress and the next administration do what's needed to rescue the rest of America, and the overall economy.
posted by Robert Reich | 3:56 PM
46 Comments:
I agree that the working class is the real heart of the economy and the group that really needs the help, so why isn't this a $700 Billion infrastructure project, with executive salary caps and on the job training for all those who need work and who would be needed for a project of that scale?
"Wall Street and its creditors are not at the core of the American economy."
Amen. Can we trade Rubin for you? You should be one of Obama's advisors!
It is amusing how fiercely the lenders and their running dogs beat back even the hint of bankruptcy "reform"--i.e., the rollback of the 2005 amendment barring mortgage "cramdowns" in Chapter 13 proceedings.
It is not amusing how supinely the Democrats surrendered on the issue.
Perhaps fortune will smile, the Blue Dogs will bolt in a fit of fiscal dudgeon, and the progressive caucus, newly empowered by necessity, will have a chance to extract this crumb of economic justice from the bailout process, but I doubt it.
Robert,
I am with you most of the way here, but I would say the most important need is not *only* to help homeowners avoid foreclosure, but to help *all* borrowers- individuals and businesses- do the same.
If I run a business I need both customers to buy products and employees to create/provide the products.
The customers may be hard to find in the next 6-24 months. If I can't borrow to pay my employees and stay alive- going much deeper into debt than I ever wanted in the process- I may simply be dead before the customers come back.
There is a line here from employee -> employer -> lender -> Fed. Everyone along the way needs direct help from the Fed, but the answer to your question about keeping credit markets functioning is that lots of individuals and businesses need the credit *even though* they can't afford it. The Fed needs to either lend money to people and businesses directly or convince lenders they can afford to do so.
So how do you convince lenders to extend more credit to businesses and individuals who could be high default risks in the short term? That is the $700B question, to be sure.
I believe Congress is heterogeneous enough that it is incapable of giving a single answer to a question like that- the pitfall of democracy, I suppose.
Still though, the bailout package sure does miss the boat on a lot of issues.
Dr. Reich: I really hope Obama is talking with you about a cabinet level post in his administration, you deserve it.
The problem with the entire bailout/buyout, whatever you want to call it is that Bush and Co. and many members of Congress were absolutely sure that the world was going to come to an end if we did not invade Iraq. They had the proof. They had the experts tell us that Iraq had a nuclear program, etc.
Yes, many of us didn't believe them and we were right.
How can you be so absolutely convinced that a bill like this will help what is essentially a confidence game built on top of a huge pile of mistakes? I simply do not trust people who tell me that if we don't spend $700 billion the world as we know it will end. It smells familiar to me.
Not dealing with what got us into this mess as we pass the bill is as bad as the fact that we still have not dealt with what got us into Iraq. How can we trust the government to follow through when they have such a poor recent track record for followthrough?
It sounds like you are asking for some additional spending. How are we to deal with that? Are you advising us to increase the budget deficit in the short term, or are there some taxes that you want to raise or cuts that you want to make to offset this additional spending? How far can we go into debt before that problem in and of itself keeps us from fully recovering? Don the libertarian Democrat
"General Motors is not in the business of making cars. General Motors is in the business of making money." -- Thomas Murphy, former chairman of GM
For a long time now, you can make more "money" by screwing around with numbers on Wall Street than you can by actually producing a product or service.
The "money" that we're dealing with here is real only as long as everybody agrees it's real. We're finding out that a lot of our so- called "money" is based on nothing more than wishful thinking and bad arithmetic.
Why are we so accepting of a lousy bailout bill? We are are buying the crap and leaving the banks with the profitable loans.
Warren Buffett just injected billions of $'s of "liquidity" into GE and Goldman, but like some Northern European countries have done during similar crises, took preferred stock and warrants. Downside protection with upside potential; sounds pretty smart to me.
The government should pass a bailout in the form of a long-term loan to cities and states, with the intent that they spend it on infrastructure, like roads, sewers and bridges, wind, solar and maybe nuclear power, and a modernized electrical distribution system.
It's been 10 years of neo-con-job Republicans mocking the idea that citizens should care about an investment on anything but the military or their own selfish material desires. The economy is going to be dragged down further and further over time if a typical worker in America continues to drive an hour a day in oversized cars, to work in meaningless, unsatisfying jobs for money to spend on over-large houses filled with cheap junk made in China, rather than improving the things Americans collectively share and ought to be proud of. America needs to repossess the "ownership society", because it has defaulted.
From the blog Some Assembly Required:
If Wall Street and Washington know what to do now,
why didn't they know what they were doing then?
Here's quite a different opinion of what's going on from Mike Whitney:
http://www.smirkingchimp.com/thread/17633
Art, heads up... On the last post I asked what parts of my comment were Sci-Fi, as I don't see anything about the 19th century of understanding of energy to be Sci-Fi.
I'd really like to know where you thought I went off the deep end.
Dr. Reich. Why vote for a lousy bill if it's not going to get the job done? It's this kind of capitulation that has weakened Democrats to the current state we find ourselves in.
This is not just a stand on principle, it's a stand on f*****g practicality! If the bill doesn't work, it doesn't work.
Take a look at what this paper from the International Monetary Fund has to say about these bailout plans (published just last month): http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
The Paulson plan HAS NOT worked in the past.
Why doesn't the government have contingency planning in place for when economic crisis looms, like they supposedly do for things like hurricanes and terrorist attacks? It seems odd to me that we have to come up with a vast emergency bill, concocted at the last possible moment while everyone is suffering a panic attack. Anyone with half a brain saw that real estate prices were inflated way above sustainable levels.
weaseldog:
I answered your sci-fi query on the post where you first asked about it.
Amazing. The first ever global depression will go down in history horribly misunderstood. What a pathetic bunch of ignorant fools we have become. Consumer junkie credit card morons. Perfect little victims. Say that reminds me.
Don’t believe one optimistic word from any public figure about the economy or humanity in general. They are all part of the problem. Its like a game of Monopoly. In America, the richest 1% now hold ALMOST 1/2 OF ALL UNITED STATES WEALTH. Unlike ‘lesser’ estimates, this includes all stocks, bonds, cash, offshore accounts, and material assets held by America’s richest 1%. Even that filthy pig Oprah acknowledged that it was at about 50% in 2006. Naturally, she put her own ‘humanitarian’ spin on it. Calling attention to her own ‘good will’. WHAT A DISGUSTING HYPOCRITE SLOB. THE RICHEST ONE PERCENT HAVE LITERALLY MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. Don’t fall for any of their ‘humanitarian’ CRAP. ITS A SHAM. THESE PEOPLE ARE CAUSING THE SAME PROBLEMS THEY PRETEND TO CARE ABOUT. Ask any professor of economics. Money does not grow on trees. The government can’t just print up more on a whim. At any given time, there is a relative limit to the wealth within ANY economy of ANY size. So when too much wealth accumulates at the top, the middle class slip further into debt and the lower class further into poverty. A similar rule applies worldwide. The world’s richest 1% now own over 40% of ALL WORLD WEALTH. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. ITS A SHAM. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the current US recession. The middle class can no longer afford to sustain their share of the economy. Their wealth has been gradually transfered to the richest 1%. One way or another, we suffer because of their incredible greed. We are talking about TRILLIONS of dollars which have been transfered FROM US TO THEM. All over a period of about 27 years. Thats Reaganomics for you. The wealth does not ‘trickle down’ as we were told it would. It just accumulates at the top. Shrinking the middle class and expanding the lower class. Causing a domino effect of socio-economic problems. But the rich will never stop. They just keep getting richer. Leaving even less of the pie for the other 99% of us to share. At the same time, they throw back a few tax deductible crumbs and call themselves ‘humanitarians’. Cashing in on the PR and getting even richer the following year. IT CAN’T WORK THIS WAY. Their bogus efforts to make the world a better place can not possibly succeed. Any ‘humanitarian’ progress made in one area will be lost in another. EVERY SINGLE TIME. IT ABSOLUTELY CAN NOT WORK THIS WAY. This is going to end just like a game of Monopoly. The current US recession will drag on for years and lead into the worst US depression of all time. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. So don’t fall for any of this PR CRAP from Hollywood, Pro Sports, and Wall Street PIGS. ITS A SHAM. Remember: They are filthy rich EVEN AFTER their tax deductible contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. Crime, poverty, and suicide will skyrocket. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that HUGE transfer of wealth to the rich. Anyway, those other factors are all related and further aggrivated because of GREED. If it weren’t for the OBSCENE distribution of wealth within our country, there never would have been such a market for sub-prime to begin with. IF IT WEREN’T FOR THE OBSCENE, UNREASONABLE, AND UNJUST DISTRIBUTION OF UNITED STATES WEALTH, THERE NEVER WOULD HAVE BEEN SUCH A MARKET FOR SUB-PRIME AND THERE NEVER WOULD HAVE BEEN A COLLAPSE IN THE HOUSING MARKET. Sub-prime did not cause the problem. It only accelerated the outcome. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. The credit industry has been ENDORSED by people like Oprah Winfrey, Ellen DeGeneres, Dr Phil, and many other celebrities. IT MAKES THEM RICHER. In fact, they specifically endorsed Countrywide by name. The same Countrywide widely responsible for predatory adjustable rate sub-prime lending and the accelerated collapse of the housing market. ENDORSED BY OPRAH WINFREY, ELLEN DEGENERES, AND DR PHIL. Now, there are commercial ties between nearly every industry and every public figure. IT MAKES THEM RICHER. It also drives up the cost for nearly every product and service on the market. So don’t fall for their ‘good will’ BS. ITS A LIE. If you fall for it, then you’re a fool. If you see any real difference between the moral character of a celebrity, politician, attorney, or executive, then you’re a fool. No offense fellow citizens. But we have been mislead by nearly every public figure. We still are. Even now, they claim to be ‘hurting’ right along with the rest of us. As if gas prices actually effect the lifestyle of a millionaire. ITS A LIE. IN 2007, THE RICHEST 1% INCREASED THEIR AVERAGE BOTTOM LINE WEALTH AGAIN. On average, they are now worth over $4,000,000 each. Thats an all time high. As a group, they are now worth well over $17,000,000,000,000. THATS WELL OVER SEVENTEEN TRILLION DOLLARS. Another all time high. Which by the way, is much more than the entire middle and lower classes combined. Also more than enough to pay off our national debt, fund the Iraq war for a decade, repair our infrastructure, and bail out the US housing market. Still think that our biggest problem is China? Think again. Its the 1% club. That means every big name celebrity, athlete, executive, entrepreneur, developer, banker, and lottery winner. Along with many attorneys, doctors, and politicians. If they are rich, then they are part of the problem. Their incredible wealth was not ‘created’, ‘generated’, grown in their back yard, or printed up on their command. It was transfered FROM US TO THEM. Directly and indirectly. Its become near impossible to spend a dollar without making some greedy pig even richer. Don’t be fooled by the occasional loss of a millionaire’s fortune. Overall, they just keep getting richer. They absolutely will not stop. Still, they have the nerve to pretend as if they care about ordinary people. ITS A LIE. NOTHING BUT CALCULATED PR CRAP. WAKE UP PEOPLE. THEIR GOAL IS TO WIN THE GAME. The 1% club will always say or do whatever it takes to get as rich as possible. Without the slightest regard for anything or anyone but themselves. Reaganomics. Their idea. Loans from China. Their idea. NAFTA. Their idea. Outsourcing. Their idea. Sub-prime. Their idea. High energy prices. Their idea. Oil ‘futures’. Their idea. Obscene health care charges. Their idea. The commercial lobbyist. Their idea. The multi-million dollar lawsuit. Their idea. The multi-million dollar endorsement deal. Their idea. $200 cell phone bills. Their idea. $200 basketball shoes. Their idea. $30 late fees. Their idea. $30 NSF fees. Their idea. $20 DVDs. Their idea. Subliminal advertising. Their idea. Brainwash plots on TV. Their idea. Vioxx, and Celebrex. Their idea. Excessive medical testing. Their idea. The MASSIVE campaign to turn every American into a brainwashed, credit card, pharmaceutical, medical testing, love-sick, celebrity junkie. Their idea. All of the above drive up the cost of living, shrink the middle class, concentrate the world’s wealth and resources, create a dominoe effect of socio-economic problems, and wreak havok on society. All of which have been CREATED AND ENDORSED by celebrities, athletes, executives, entrepreneurs, attorneys, and politicians. IT MAKES THEM RICHER. So don’t fall for any of their ‘good will’ ‘humanitarian’ BS. ITS A SHAM. NOTHING BUT TAX DEDUCTIBLE PR CRAP. In many cases, the ‘charitable’ contribution is almost entirely offset. Not to mention the opportunity to plug their name, image, product, and ‘good will’ all at once. Which is usually done just before or after the release of their latest commercial project. IT MAKES THEM RICHER. These filthy pigs even have the nerve to throw a fit and spin up a misleading defense with regard to ‘federal tax revenue’. ITS A SHAM. THEY SCREWED UP THE EQUATION TO BEGIN WITH. If the middle and lower classes had a greater share of the pie, they could easily cover a greater share of the federal tax revenue. They are held down in many ways because of greed. Wages remain stagnant for millions because the executives, celebrities, athletes, attorneys, and entrepreneurs, are paid millions. They over-sell, over-charge, under-pay, outsource, cut jobs, and benefits to increase their bottom line. As their profits rise, so do the stock values. Which are owned primarily by the richest 5%. As more United States wealth rises to the top, the middle and lower classes inevitably suffer. This reduces the potential tax reveue drawn from those brackets. At the same time, it wreaks havok on middle and lower class communities and increases the need for financial aid. Not to mention the spike in crime because of it. There is a dominoe effect to consider. IT CAN’T WORK THIS WAY. But our leaders refuse to acknowledge this. Instead they come up with one trick after another to milk the system and screw the majority. These decisions are heavily influensed by the 1% club. Every year, billions of federal tax dollars are diverted behind the scenes back to the rich and their respective industries. Loans from China have been necessary to compensate in part, for the red ink and multi-trillion dollar transfer of wealth to the rich. At the same time, the feds have been pushing more financial burden onto the states who push them lower onto the cities. Again, the hardship is felt more by the majority and less by the 1% club. The rich prefer to live in exclusive areas or upper class communities. They get the best of everything. Reliable city services, new schools, freshly paved roads, upscale parks, ect. The middle and lower class communities get little or nothing without a local tax increase. Which, they usually can’t afford. So the red ink flows followed by service cuts and lay-offs. All because of the OBSCENE distribution of bottom line wealth in this country. Anyway, when you account for all federal, state, and local taxes, the middle class actually pay about the same rate as the rich. The devil is in the details. So when people forgive the rich for their incredible greed and then praise them for paying a greater share of the FEDERAL income taxes, its like nails on a chalk board. I can not accept any theory that our economy would suffer in any way with a more reasonable distribution of wealth. Afterall, it was more reasonable 30 years ago. Before Reaganomics came along. Before GREED became such an epidemic. Before we had an army of over-paid executives, bankers, celebrities, athletes, attorneys, doctors, investors, entrepreneurs, developers, and sold-out politicians to kiss their asses. As a nation, we were in much better shape. Strong middle class, free and clear assets, lower crime rate, more widespread prosperity, stable job market, lower deficit, ect. Our economy as a whole was much more stable and prosperous for the majority. WITHOUT LOANS FROM CHINA. Now, we have a more obscene distribution of bottom line wealth than ever before. We have a sold-out government, crumbling infrastructure, energy crisis, home forclosure epidemic, credit crunch, weak US dollar, 13 figure national deficit, and 12 figure annual shortfall. The cost of living is higher than ever before. Most people can’t even afford basic health care. ALL BECAUSE OF GREED. I really don’t blame the 2nd -5th percentiles in general. No economy could ever function without some reasonable scale of personal wealth and income. But it can’t be allowed to run wild like a mad dog. ALBERT EINSTEIN TRIED TO MAKE PEOPLE UNDERSTAND. UNBRIDLED CAPITALISM ABSOLUTELY CAN NOT WORK. TOP HEAVY ECONOMIES ALWAYS COLLAPSE. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. The American dream will be shattered. and thats just the beginning. Greed will eventually tank every major economy in the world. Causing millions to suffer and die. Oprah, Angelina, Brad, Bono, and Bill are not part of the solution. They are part of the problem. THERE IS NO SUCH THING AS A MULTI-MILLIONAIRE HUMANITARIAN. EXTREME WEALTH MAKES WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. WITHOUT WORLD PROSPERITY, THERE WILL NEVER BE WORLD PEACE OR ANYTHING EVEN CLOSE. GREED KILLS. IT WILL BE OUR DOWNFALL. Of course, the rich will throw a fit and call me a madman. Of course, they will jump to small minded conclusions about ‘jealousy’, ‘envy’, or ’socialism’. Of course, their ignorant fans will do the same. You have to expect that. But I speak the truth. If you don’t believe me, then copy this entry and run it by any professor of economics or socio-economics. Then tell a friend. Call the local radio station. Re-post this entry or put it in your own words. Be one of the first to predict the worst economic and cultural crisis of all time and explain its cause. WE ARE IN BIG TROUBLE.
So what can we do about it? Well, not much. Unfortunately, we are stuck on a runaway train. The problem has gone unchecked for too many years. The US/global depression is comming thanks to the 1% club. It would take a massive effort by the vast majority to prevent it. Along with a voluntary sacrifice by the rich. THATS NOT GOING TO HAPPEN. But if you believe in miracles, then spend your money as wisely as possible. Especially in middle and lower class communities. Check the Fortune 500 list and limit your support of high profit/low labor industries (Hollywood, pro sports, energy, credit, pharmaceutical, cable, satelite, internet advertising, cell phone, high fashion, jewelry, ect.). Cancel all but one credit card for emergencies only. If you need a cell phone, then do your homework and find the best deal on a local pre-pay. If you want home internet access, then use the least expensive provider, and share accounts whenever possible. If you need to search, then use the less popular search engines. They usually produce the same results anyway. Don’t click on any internet ad. If you need the product or service, then look up the phone number or address and contact that business directly. Don’t pay to see any blockbuster movie. Instead, wait a few months and rent the DVD from a local store or buy it USED. If you want to see a big name game or event, then watch it in a local bar, club, or at home on network TV. Don’t buy any high end official merchendise and don’t support the high end sponsors. If its endorsed by a big name celebrity, then don’t buy it. If you can afford a new car, then make an exception for GM, Ford, and Dodge. If they don’t increase their market share soon, then a lot more people are going to get screwed out of their pensions and/or benefits. Of course, you must know by now to avoid those big trucks and SUVs unless you truly need one for its intended purpose. Don’t be ashamed to buy a foreign car if you prefer it. Afterall, those with the most fuel efficient vehicles consume a lot less foreign oil. Which accounts for a pretty big chunk of our trade deficit. Anyway, the global economy is worth supporting to some extent. Its the obscene profit margins, trade deficits, and BS from OPEC that get us into trouble. Otherwise, the global economy would be a good thing for everyone. Just keep in mind that the big 3 are struggling and they do produce a few smaller reliable cars. Don’t frequent any high end department store or any business in a newly developed upper class community. By doing so, you make developers richer and draw support away from industrial areas and away from the middle class communities. Instead, support the local retailer and the less popular shopping centers. Especially in lower or middle class communities. If you can afford to buy a home, then do so. But go smaller and less expensive. Don’t get yourself in too deep and don’t buy into the newly developed condos or gated communities. Instead, find a modest home in a building or neighborhood at least 20 years old. If you live in one of the poorer states, then try to support its economy first and foremost. Be on the lookout for commercial brainwash plots on TV. They are written into nearly every scene of nearly every show. Most cater to network sponsors and parent companies. Especially commercial health care. Big business is fine on occasion depending on the profit margins and profit sharing. Do your homework. If you want to support any legitimate charity, then do so directly. Never support any celebrity foundation. They spend most of their funding on PR campaigns, travel, and high end accomodations for themselves. Instead, go to Charitywatch.org and look up a top rated charity to support your favorite cause. In general, support the little guy as much as possible and the big guy as little as possible. Do your part to reverse the transfer of wealth away from the rich and back to the middle and lower classes. Unfortunately, there is no perfect answer. Jobs will be lost either way. Innocent children will starve and die either way. But we need to support the largest group of workers with the most reasonable profit margins. We also need to support LEGITIMATE charities (Check that list at Charitywatch.org). This is our only chance to limit the severity and/or duration of the comming US/global depression. In the meantime, don’t listen to Bernanke, Paulson, Bartiromo, Orman, Dobbs, Kramer, OReiley, or any other public figure with regard to the economy. They are all plenty smart but I swear to you that they will lie right through their rotten teeth. IT MAKES THEM RICHER. These people work for big business. The ‘experts’ they cite also work for big business. They are all motivated by their desire to accumulate more wealth. THEY WILL LIE RIGHT THROUGH THEIR ROTTEN TEETH. So don’t fall for their tricks. Instead, look at the big picture. The economic problems we face have been mounting for well over 20 years. All of them caused or aggrivated by a constant transfer of wealth from poorer to richer. Soon, it will cause the first ever GLOBAL DEPRESION. Its not brain surgery. Its simple math. Like I said, you are welcome to run this by any professor of economics or socio-economics. If thats not good enough, then look up what Einstein had to say about greed, extreme wealth, and its horrible concequences. I speak the truth. GREED KILLS. IT WILL BE OUR DOWNFALL.
Its already underway. A massive campaign to divert our attention. Trump, Buffet, OReiley, Dobbs, Pickens, Norris, and several other well known filthy rich public figures have been running their mouths about the economy. Finally admitting a hint of severity after almost 2 years of denial. They even have the nerve to acknowledge the possibility of a US/global depression. Still, they refuse to acknowledge the single greatest underlying cause. Remember: Our national debt was way up BEFORE sub-prime. Consumer debt was way up BEFORE sub-prime. The cost of living was up BEFORE sub-prime. Wall Street profits were obscene BEFORE sub-prime. The middle class were loosing free and clear assets BEFORE sub-prime. Our infrastructure was in bad shape BEFORE sub-prime. Loans from China were taken out BEFORE sub-prime. The dollar was loosing value BEFORE sub-prime. So don’t let these cowardly filthy rich public figures divert your attention or limit your range of thought. THE CURRENT ECONOMIC CRISIS WAS NOT CAUSED BY A SINGLE POLICY OR PROCEDURE. IT WAS CAUSED PRIMARILY BY A MASSIVE TRANSFER OF WEALTH FROM POOR TO RICH. OTHERWISE, THERE WOULD NOT HAVE BEEN SUCH A MARKET FOR SUB-PRIME AND THERE WOULD NOT HAVE BEEN A GLOBAL CREDIT CRUNCH. MONEY DOES NOT GROW ON TREES AND IT DOES NOT FLOAT AWAY. IT ONLY TRANSFERS FROM ONE PARTY TO ANOTHER. ALBERT EINSTEIN TRIED TO MAKE PEOPLE UNDERSTAND. GREED KILLS. IT WILL BE OUR DOWNFALL.
A word for those who respond with the usual ‘I know more than you. Look how smart, knowledgable, and articulate I am’ crap. Let me say this in advance. I don’t claim to be an expert in this field. But I did go on record with these predictions long before any public figure uttered the word ‘recession’. If you search long enough, you will find my early postings from ‘05′ and ‘06′. Including the first draft of this rant. Since then, I’ve gone on record against people like Greenspan, Bernanke, and Paulson. So far, my predictions have been accurate. Like I said. This is not brain surgery. For the mostpart, its simple math. When you concentrate the world’s wealth, you also concentrate its capital and shrink the middle class along with the potential market for every major industry. Homes go unsold. Bills go unpaid. Banks fail. More products go unsold. Jobs are lost. More banks fail. and so on. and so on. It happened 80 years ago. It will happen again. This time on a global scale. Throughout the cycle, the rich will tighten their grip. Concentrating the world’s wealth and resources even further and ensuring the collapse of every major economy worldwide. Think it can’t happen? Think again. GREED KILLS. IT WILL BE OUR DOWNFALL.
Another thing. I don’t want credit for any of this. Otherwise, I would have given my full name a long time ago. As far as I’m concerned, you can put this rant in your own words and take credit for all of it. I don’t care. Just spread the word. Otherwise, the greatest injustice of all time will go down in history unchecked.
By the way. The bailout won’t work. IT WON’T WORK. The plan fails to address the fundamental problem. The middle class don’t need more credit. They need a reasonable share of the economic pie. They also need a lower cost of living and a chance to catch their breath. Most of all, they need to wake up and see the truth. GREED KILLS. IT WILL BE OUR DOWNFALL.
Dr. Reich, cc: John Lawrence
Dr. Reich points out three major flaws in Rescue Plan you, esspecially, myself and others I have been harping on aggressively for some time, namely:
1. help for distressed homeowners in need of avoiding foreclosure is absent (or indication of a backup plan that confronts this problem)
2. obscene executive salaries are not curtailed
3. provisions are absent to insure Wall Street Transparency in all financial products and interconnected transactions
Good thing was that Depositors'insurance was raised. The British government now admits that their failure to raise Depositors'insurance was a major flaw that contributed to the nationalization of Northern Rock bank.
Notably, Obama voted for revised Senate plan so he must have been comforted the above extremely important provisions will be dealt with "later."
But I remain very suspicious of good intentions delayed. The Rescue plan is about Wall Street banking liquidity first and "later" working middle class America... the pervasive Republican economic "Trickle Down" verbal fraud remains alive and well.
Avoid foreclosure! Please! For most of those people it is simply avoiding the inevitable. The real estate market will find no bottom line with bailouts of people in foreclosure. This mentality of everybody having a right to be a homeowner and Greenspan's inability to turn off the spigot is what got us where we are. So what are we doing turning on the spigot again and trying to keep people in homes they could never really afford. That sounds brilliant!
Dr. Reich,
I must take strong exception to your capitulation on the mother of all bailouts. I have great admiration for you but in this case, you are dead wrong.
At a time when Americans faith in their leadership has been shaken to the core, we are being presented a "solution" that has no shred of credibility; shall we say Lipstick on a Pig. It is but the final, desperate act to perpetuate the Ponzi scheme of our financial system by making future generations the bagholders.
American have awoken to this deception and see it for what it is: more of the same but on a cosmic scale. Dr. Reich, you know this as well and have said as much recently. You and others have suggested well-reasoned alternatives. We need to redouble our resolve to get this right. I am making a desperate plea to everyone to help avert this disaster by urging Congress to reject the Paulson plan.
Let me close with a quote from FDR's acceptance speech of 1933:
"In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory."
Kevin,
No Kevin, nice story conclusion, but not the full truth. People were in the main snake-eyed by devious lenders to enter mortgage contracts they couldn´t afford.
Weere some borrowers stupid? Yes. Did leneders take advantage of this? Also Yes.
Secondly, the devious lending practices were done on such a grand scale the `bubble´ in homes prices escalated that fed on the confidence game.
And you´re telling me, a comfortablely retired entrepreneur who knows a lot about risk taking,
that All those threatened by foreclosure are getting what they deserve and the Fat Cats of Wall Street deserve being saved? Come on!
As for home values, those helped will likely see the home price discounted down on some basis with a lower-cost interest rate. The weak financial institutions precipitating the toxic mortgages must take their losses in the form of sharing in the writedowns. It´s called Divine Equity... `Thou shall reap what thou has sowed´ ... applying to both irresponsible lenders and borrowers (latter speculating with 2nd homes purchases).
Frank Thomas, The Netherlands
Kevin,
sorry minor corrections 1st paragraph:
Were some borrowers stupid? Yes. Did lenders take...
You raise a good point. But the fact of the matter is if the economy collapses then the average american won't exist and there will be no body to help.
Dr. Reich,
Another provison I'm happy is retained in latest Rescue plan is that the Taxpayers will be made WHOLE ... they will "eventually" be paid back fully. I'm unhappy this promise is apparently not assured by an upfront Equity Stake NOW ... but instead is a contract obligation that will be honored in the FUTURE. Don't trust this -- but must accept it given fact our nation is near the precipice of a total financial collapse!
As Buffet mentioned a couple of days ago, our current U.S. crisis is more like the Tulip Mania Crisis than Great Depression and we as a country will survive and move on. What I would like to ask you Dr. Reich is if we are entering a new phase of western democratic capitalism? Three points:
1. It seems to me that the Chinese are happy to relinquish a bit of personal liberty in exchange for personal wealth and consumption, are we getting closer to the day in which the west feels the same way?
2. Our institutions are lagging behind the information revolution; per your stated example - management transparency can be attained through information technology, how do we incourage innovation?
3. If the 20th century was basically a shift from European Imperalism as an economic basis to free markets, how do we reconcile free markets with the economically disadvataged? Let's be real, there are some people who have bad luck, or lack natural capacities to do any work above minimal mental or physical requirements for success in the free-market system, should we care?
Frank,
You read too many newspapers! The reality is that many of the borrowers happily lied about their income. You don't think the no doc mortgages were created to make easier for the banks. Many years ago I worked for a bank in the mortgage department; people would ask what is a reasonable salary to claim for their occupation. Also, the predatory mortgage salesman taking advantage of the home buyer is a fairy tale told by people to claim it is the big bad bank taking advantage of the poor little home buyer. Bullshit. When they show you the amortization schedule and you decide not to read it you are an idiot and deserve what you get. Everybody talks about the greed on the side of biz; what about the greed of homebuyers willing to look the other way so they can get a home worth $500k when they only make $90k? I am not saying everybody that is going into foreclosure deserves it; in fact none deserve it, but most should not have bought their home. I could see some derivative idea, but not this. There is contract law; this will ruin it for everybody going forward. If you can prove predatory lending then maybe but otherwise I stand by my comment that they should not be homeowners at least at what ever value of home they failed on. Some people should be renters! As far as bailing out; fine don't don't do it but unfortunately they set a precedent and they even blew it with Lehman. Reality is Lehman had bigger implications than they realized and really exacerbated the situation. If we had just stuck with the status quo and only allowed people that had the 20% to buy a home we would not be here today. Instead we have it labeled that not giving mortgages to people that are marginal borrowers is a racial problem. Congress wanted banks to find a way to lend to them. So they come up with Alt A and subprimes and CMOs to pass the risk around. It all looked brilliant and you know what it is as long as a 100 year flood doesn't happen then all hell breaks loose. So the peole that create the products are blamed because they provided what everyone wanted! Again, BS. You bought the damn home when you couldn't really afford it.
Congress has betrayed the people. I believe we are now on the road to a 2nd American Revolution.
Kevin,
The rules in The Netherlands are incredibly clear and strict. You must show: three years personal income tax statements; your recent three month bank statements showing salary deposits. Lender checks your total debt obligations (including credit card debt)filed in a central system. If you pass this, then real estate agent may be asked to provide comparable last 5 year home sales data to banks or bank may conduct an independent property assessment the prospective homeowner must pay for. Finally, and most importantly, your gross salary income must be at least 3.5 times your total monthly debt payments, including the home mortgage payment.
You have an uphill battle to convince me that over 1.5 million homeowners and another 2 million expected homeowners who have already been foreclosed, or are in the process, or will be filing for foreclosure within next 12-18 months have all lied about their income ... and the lending agents didn't know this, never checked this nor the prospect's debt status while sitting possibly in prospects' low to medium income apartment dwelling discussing the new home deal? Sure people lie. That's what proper lending rules are for. Sure some ethnic preference lending rules may have contributed to toxic loan buildup. But whose fault is that?
The system should be "Verify and then Trust." The stories of predatory lending practices, lack of fundamental due diligence, hidden terms such as adjustable rate mortgage provisions in fine print, 100% loans with up to 3 years of interest free arrangements, canned or phoney or no home evaluation assessments by real estate agents are prolific and documented.
I agree that borrowers who cleverly concealed their true financial status or who were irresponsibly speculating (spurred by Greenspan's 2002-07 cheap money policies) in more than one home property should get no help.
But these situations hardly constitute the majority of foreclosures according to most published reports and homeowner lawsuits now in process.
The already wealthy who were caught up in the euphoria to reach a higher egoistic status in the pecking order also should not be helped. I assume, admittedly perhaps too optimistically, most of the abuse cases sited above can be identified and sorted out.
The gigantic scale of homeowner loan defaults at diverse household income levels is simply too huge to put the blame entirely on the borrowers ... too huge to simply sit idly by as nearby homes fall in price en masse due to the proliferation of For Sale signs resulting from foreclosures.
I would support your tough line 1000% if the Dutch home financing and evaluation rules were in place. But, even this statement is a contradiction as such rules would effectively obviate typical predatory lending practices or lies by the prospect buyers of homes from ever happening in significant numbers.
It's a mess. Now that the plan has passed, I'm hoping for the best. Whatever that is. In the meantime, I found this hilarious song about the bailout. Anything to lighten up a grim topic: Bailout song
After listening to so many people who are against any sort of protection for homeowners I begin to think that they see every living American as lying thieving cheat, that should be imprisoned, not owning a home.
There are speculators and flippers, as we've seen on TV.
But for each of those, I know many homeowners that are honest and hardworking, having a harder time every day, covering their mortgage, simply because the free and easy money from the government is driving up the price of everything. The rising price of gasoline, food, electricity and all the rest is squeezing millions of good hard working Americans that aren't getting pay raises to match, or are losing their jobs because the Gov is at war with our economy.
Not every American is evil.
If the government wasn't spewing trillions in wasteful spending, we'd have lower inflation and job growth. The middle class would not be in the fix they are in.
If the government really want to help out the citizenry, they could start by cutting their spending.
If they refuse and instead want to drive prices higher and destroy jobs, then why shouldn't they have an obligation to help those whose lives they are destroying?
Sortition, Disintermediation, Incrementalism
Obviously, there are businesses and individuals that need emergency relief
from the credit crisis. Some individuals are trapped into mortgages
they cannot afford but are in reasonable-sized homes for their families.
Most, if not all, Americans want to give them a hand.
Let juries of American Taxpayers approve the benefits to those who need them.
No loan or relief without approval by a jury. (This is known as sortition,
letting randomly chosen groups of citizens or taxpayers make decisions.)
Those who are hurting throw themselves on the
mercy of the American Taxpayer juries. Give them only what they need for
this month and come back again each month in later months. Don't worry about
whether it a loan or a grant right now.
We have millions of unemployed hard working Americans. They should be
required to serve full-time on these juries and should be paid to do so--no
unemployment. Everyone else should be strongly encouraged
to volunteer. Give each the group to help out those who need help,
especially if they are providing an essential service. (Some things
can wait. Mr. McCain mentioned that franchisees of a hamburger chain
have their remodelling loans held up. The American Tax Juries might decide
that giving money to an exporter to purchase raw materials for orders in
hand might be more urgent.)
In throwing themselves at the mercy of the American Taxpayers, they agree
to pay whatever amount of taxes that jury asks for later, regardless of
the tax laws. (They may be able to appeal to another tax jury, but not
a judge). That amount would
depend upon how fast they pay back the money given to them, whether they
truly and accurately and completely described their economic plight when
they originally asked for help in plain English, and their ability to pay.
The taxpayer juries would also have the power to assess special taxes on those
employees earning about $100,000.00 at these firms.
(Only about ten percent of Americans earn this much so the average person
doesn't need to worry.)
That way, we ensure that those operations that need money
or credit to make important things happen get credit.
We bypass the obviously dysfunctional financial system and put the money
where it is needed, a stimulus by any other name.
We can sort out blame and repayment terms later, when people go before
tax juries later. Some individuals will quickly pay back their loans or
grants and will be released back to te market. Others will have to explain
each month why they wasted the money for the rest of their lives.
It is amazing how the republicans, even Bush's recent speeches, have blamed Main Street for this problem by providing easy credit to persons trying to better themselves and their family.
The rescue bill doesn't address the reason for the blame and does nothing for Main Street mortgagees.
This logic is like the argument that it is a parent's fault for leaving the child go to a park to be sexually assaulted. Wall Street is a sexual predator with no ankle bracelets and no transparency as to where they are living (investing). They prey on the weak and uninformed.
No mention that it is imprudent to have a bank leverage themselves by 30+ times assets. No mention that Wall Street built a Ponzi scheme using derivatives.
No mention that Wall Street used excessive lobbying for deregulation
Congress still sucks for loading this bill with Pork-barrel spending, same old congress and bribery for voting favors.
Dr. Reich, cc: John Lawrence, Art Layman
Well, just today a fascinating and surprising bank crisis development has happened involving my present home country, The Netherlands.
Briefly, a Belgium bank, Fortis together with Santander, the Royal Bank of Scotland bought ABN-AMRO ... a fantastic, solid Dutch bank for 71 billion Euros (+-$100 billion)!
Recently, for many reasons I'll not go into here, Fortis came into serious problems because they paid too much for their part in the ABN-AMRO acquisition. Their have shares plummeted over 80%% in past two weeks.
Today, the Dutch government announced it would buy ABN-AMRO from Fortis for 16.8 billion Euros (+-$24 billion). So, ABN-AMRO will be nationalized by the Dutch government representing their taxpayers. The Dutch, for different reasons, are following a variation of the Swedish nationalization of their banks in 1992 (involving a similarly serious financial banking crisis as in the US now).
What are the differences? First, ABN-AMRO is not at all afflicted with the Sub-Prime mortgage virus. ABN-AMRO is a modern as well as traditional, profitable retail and private bank with a record of solidity and outstanding service for their clients. Historically for over 14 decades, ABN-AMRO has played a very important role in supporting Dutch companies of all sizes and types.
So why did the Dutch government take this quick step to nationalize the bank? The main reasons are to bring some calm to the bank's further developments in a hectic financial climate; to prevent a foreign bank or equity group from taking over the ABN-AMRO as it is felt such outsiders would not respect or fit harmoniuosly with the Dutch banking system and culture. Equity investors were not an option it was felt banking is too complicated a business for investors without a deep knowhow.
So now the Dutch government will assign a Board of Directors and will have Oversight of ABN-AMRO for 3 to 4 years. The current management structure is sound.
The plan then is to go public with the bank -- precisely as was done in Sweden --when the current financial crisis has subsided and share market conditions are much improved.
Currently, ABN-AMRO's profitability yields a 10% annual return on the Dutch government's (taxpayers') acquisition price of 16.8 billion Euros. And Fortis receives a much needed substantial capital injection.
All in all, a tremendous deal for the bank, for its employees and customers, and ultimately very promising for the taxpayers ... as the purchase price is less than 10 times earnings.
The Swedish nationalization model happening in my adopted country brings home the global interconnectedness of the MESS created in America.
Frank Thomas, The Netherlands
Dr. Reich,
One important point I should add that the Dutch government is purchasing ADN-AMRO's Holland operations ... not its operations outside Holland which will be integrated into Fortis.
What to do?
"Full employment act of 1946"
Dust it off, full employment tightens labor market, raises wages naturally by competition and increases output, which we'll need to service this mountain of debt.
Construction is still a largely domestic industry. Look at the trade deficit, and dump the laissez faire attitude. We can all agree oil imports hurt our economy, adopt measures that will reduce that. Same with other areas of imports, find ways to help tip the scales to domestic sourcing where possible.
I understand wars have emanated from trade, but Dr. Kevorkian economics isn't a plan for the future either.
Dr. Ravi Batra came up with a novel idea to spur exports with China for example, by creating a dual exchange rate. If they can fix their currency, we can fix an exchange with ours at an attractive rate for exporters.
To counter inflationary forces, once the economy is at full employment, balance the budget, pay down the debt, put enforce a more progressive tax scheme, to dampen inequality and provide a base for workers, the wealth producers (see Lincoln) and consumers. In fact anything Greenspan thought was a boffo idea, do the opposite, and you're on safe ground.
Restore earlier economic measures. To still maintain this economy isn't officially in a recession, or that inflation is 6% is a joke, and the public knows it.
Time to start with honesty.
The dollar = a unit of American labor. Devalue that, you devalue your currency.
One congressmans voted last week no and now yest, because a racingtrack profit bill was attached to
the bailout. I want to crunch this guy, he is a fireman stealing on the job. We first need trancpanacy and accountablilyty for the lawmakers before we can get the finacial guys.
Mr. Reich,
Nobody talks about those of us who attempted to buy a house several years back with reasonable offers, with a 30 yr fixed lined up from real paychecks but were out bid a dozen or so times... We knew about the tulip bubble... We knew about the Japanese real estate bubble. We knew this would happen here. It always does. We were patiently waiting for today while the others mocked us for not diving in... Ha, even our real estate agent was mocking us... All the while friends in the financial industries were literally visiting 30K/night prostitutes and such...
Yeah, we didn't even ask for senior preferred shares for what we are going to pay for thru' the bill...
Our government is soooooo bought...
Good Luck people. GBush is presenting a big phat mess to the next President. He knew what he was doing. He is hoping he will be seen as the president "who did ~something~". What a farce! Inflation is about to go through the roof, we are headed for recession, and $810B (whatever the number is now)of your dollars are about to go to companies who have deceived, lied, cheated, and did what they've wanted for the last few years. I'm thinking about moving - to another country~~unfortunately, I'm certain my house (with a 30 fixed rate regular mortgage ~ that yes, I can afford), will not sell for a very long time.
The blame-game here is all wrong!
Hey, if the liar-loans caused this,
lets ask ourselves this question:
What if the liar-loans are never made?
Here is my answer: because the
fake-stimulus acts of '01 and '03
were just CRUDE wealth grabs, we
get a double dip recession and
The Boy -- W -- only gets four years to redistribute wealth up-
wards at the speed of light.
Thats what happens. So now, instead
of 300,000+ jobs per month leading
up to the '04 election, we get
bleeding jobs instead. How then
does he win?
Look, the root-cause of all this is
grabbing a bunch of wealth and
income that used to belong to people who SPEND money...and putting it into the hands of people
who SIT ON their money -- that is,
the root-cause of this mess is
a lack of consumer demand.
Moreover, when labor-markets are
always slack, labor is too cheap
and thus used inefficiantly.
So trickle-down caused this mess!
US Real Estate: From Goldmine To Money Pit
Mortgage Backed Securities and Derivatives are Flawed and Failing
The mortgage debt problem is simple really, it has been a total mis-appropriation of equity. The equity lost on flat screen TV's, boats, new cars, vacations, and other living expenses; is equity lost forever. This loss of equity spent on consumer goods and expenses is a pyramid scheme of hyper-capitalism that is flawed and failing. Equity not spent on the property the equity comes from, is equity lost forever, a mis-appropriation of funds, and inappropriate; it is a failing economic model.
Mortgage debt is public, and traded globally, but home appreciation on debt is private profit. This economic model does not work. The idea that mortgage debt is a shared risk of the global economy, interest on the debt is deductible to homeowners, and the appreciation on the debt is private profit; is an economic model that does not work.
The US government promotes and encourages home ownership with tax incentives. The more you owe, the more interest you pay and write off on your taxes, and the more money you make on the appreciation on the debt; if the house goes up, and always goes up in value. This is a failing economic model; because of mortgage interest deductions, shared debt risk, and private profit.
Keeping home mortgage interest tax deductible for the homeowner while they collect equity appreciation on their debt, is a self inflating pyramid scheme propped up by the federal government. The homeowner is rewarded for taking on a higher interest mortgage payment, and this encourages and rewards debt. (People get the biggest house they can afford or maybe two, and use it as a "write off".) This is just plain wrong and this house of cards is flawed and failing. (Home equity loans that are not spent on home repair, remodel, or improvement, is equity lost forever; and its deductible! If everyone's idea is to "up size" now and "downsize" later, who is going to be "up sizing later"? - The retiring baby boomers?.)
The federal governments debt, mortgage debt, and the loss of value in real estate is going to continue to climb. Housing prices will fall until people can afford to buy homes on what they actually earn. The United States has destroyed its reputation and economic trust globally and trashed the constitution here at home. This is a meltdown globally from the US being seen as a respected "superpower" to now being seen; as a bully you cannot trust. All the federal debt and real estate value loss is going to cost the US government a lot, but I feel the damage done to the United States reputation globally and at home; will cost it even more.
I have felt for twenty years real estate has been over-valued, and over priced. Real estate appreciation has been ridiculous and unsustainable. I am still not ready to buy, as the prices are still not low enough, and have 20 to 30 percent - and even 40 percent to drop, before people, on what they make can afford them. This is real estate coming back down to earth, and I am not panicked, or in crisis.
Americans are making less, and housing just kept rising and costing more, more, and more. Hows that working for you?
I have heard there are 70 million (plus) disenfranchised (under-paid) Americans who do not file income tax. I feel more people are feeling disenfranchised with the federal government and I feel this number will rise. This disenfranchisement causes people to shy away from passive participation with the federal government, to active non-participation in the economic affairs of the federal government.
Buying a house turns your life into a business, and the federal government then has total access and knowledge of your finances. The financial markets use government papers to qualify you for a loan.
The federal government has ruined itself in my eyes. I hope for its "fiscal" failure; due to deficit spending. I hope the federal government becomes bankrupt and irrelevant.
It is all about the real estate, which is all about the money, and the federal governments goldmine of income tax collection, turning out to be a dilapidated money pit.
The debt from bad war, torture, illegal imprisonment, domestic spying and "other" bad debts; that the US federal government has yet to realize, tabulate, or equitize. - If you have lost your job and your home; the US has lost a taxpayer.
From Gold Mine to Money Pit - the 2008 fall of US Residential Real Estate. A Trillion Dollar band-aid Bail Out that - (like most homeowners did with there equity money and their last home repair; put a band aid on it, and spent the money somewhere else) does not fix the problem.
Are you part of the problem?
The US governments encouragement towards home ownership and the tax benefits granted are well known. With real estate appreciation and the tax credit, it is like living in a little gold mine. You can chisel out equity as you go along your merry way and chuckle at all those people who did not buy real estate sooner.
Where I live houses have doubled in six-seven years and land has doubled in five years. Now land and houses are not selling even at reduced prices, because they have not come down enough to be affordable to the people who live here. (A lot of Californians moved to Washington state and that drove up prices - boy has that slowed down!)
This "bail out" is an absolute joke. The idea the US government can control or diminish house mortgage failure or control or influence the price of housing; is absurd.
Many more people will be walking away from their home mortgages and a lot more mortgage derivatives will fail. This is not the stock market talking, it is home prices on main street.
It is the chiseling away at equity by homeowners who now find their little gold mine is a money pit. It is worth less than their debt they have piled onto their home and the mortgage, and it only makes sense to walk away and buy the house next door for thousands less.
Will the bail out work?
No one knows if the US governments bail out of bad mortgage debt will work.
I feel it is a trillion dollar band aid for a much larger problem; and whether or not it works - will mean what you meant by; "Will the bailout work?"
I feel it is only going to slow the economic problem down in hopes US residential real estate will start to appreciate and the "crisis" is solved.
So the question really is; When will US residential real estate start to appreciate?
No one knows, but here is my opinion;
The US residential real estate market will not be appreciating much over the next ten years.
US real estate is over-valued and still has not come down enough to sell excess suburban homes.
A lot of US residential real estate built over the last 30 years was built out of materials with a 30 year lifespan.
Tens of millions of US homeowners are aging and selling homes in the suburbs and this will accelerate.
There is an exodus from the suburbs to population centers as traffic, cost, age, and pollution, become more of a concern.
The US is experiencing high unemployment, and an economic "slowdown" as "consumers" have less to spend.
The number of residential mortgages "underwater" will continue to rise for at least a year.
It is no longer a new homeowner "sub-prime" lending problem - as many "prime" older homeowners are now underwater due to the constant chiseling away at their equity through second mortgages, and equity lines of credit.
Sixty to eighty percent of US residents are two weeks from the streets, if their lines of credit-money and/or job is lost.
So, if banks hand over their "bad" loans to the Gov.,
1) How will the mark to market changes help;
2) With their smaller total assets, how will they be able to borrow more?
Or, does this mean that we will see lower borrowing amounts due to the lower total assets? That would be a start.
Mr. Reich
Credit market deterioration is only the publically-traded version of what is really starting to happen. The world is at peak-oil. Read 'The Long Emergency' by James Kunstlet - The long emergency is where we are headed. This is only the beginning.
kenn spacefield:
I have felt for twenty years real estate has been over-valued, and over priced.
One certainly appreciates your feelings but one is confused as to how you calculated your premise. Seems like housing prices, more than many other tangible goods, are market driven. I could be wrong.
Housing prices only rise if there is sufficient demand for homes. Demand is affected by many variables, many of which appear to be in play currently. If mortgage loans are limited or not available then buyers can't get them and thus demand declines. Neighborhoods experiencing multiple foreclosures with boarded up houses, with weeds and grass growing in yards, are less attractive to potential buyers and thus demand declines. Many buyers who have access to credit and can afford homes are reluctant to buy presently because they want to try and buy at the bottom of housing prices and thus demand declines.
Since you are visiting this site one must assume you have some knowledge of economics and realize that when demand declines prices drop.
I know of no way to calculate an intrinsic value of a particular home beyond just land and material and labor costs and those costs have minimal influence on market driven prices. Maybe that's a flaw in my education. My guess would be, however, that once things settle down, demand for homes will increase and once equilibrium returns to the marketplace home values will rise again, albeit perhaps more slowly.
It is worth less than their debt they have piled onto their home and the mortgage, and it only makes sense to walk away and buy the house next door for thousands less.
Now the first flaw I see here is that if you default on one mortgage you will not find a rush of banks willing to offer you another mortgage. Secondly, why would you walk away, assuming you can afford the payments? Depending on the severity of the drop in value you still have an asset that has value and in the long term will likely gain in value. Since it is highly unlikely that you can secure a new mortgage in the near future, you will have to evaluate the cost of renting versus your mortgage payment and then determine if it makes financial sense to give up some value for no value at all, with possible similar cash outlays. You also seem to have forgotten that the buffer to home values dropping too low is rents. Notwithstanding credit terms, availability and down payments, rental costs will be a prime determinate in establishing a bottom for home values.
In the present environment chances are rents will increase which will hasten a bottom in the housing market.
You propose that many are leaving the suburbs for the urban areas and there are examples of that happening in many regions. What do you think is going to happen to home prices, rental or owned, in those urban areas? The rise in values will probably occur much quicker since most urban areas have little room for new growth.
No doubt we have severe general economic problems that will greatly affect any rebound in the housing market but it's not like we have never had economic problems before. The key will be in the solutions. I am not in disagreement with you on the value of the current "fix" but I do have faith if we make the right decisions on November 4th the turnaround will begin and it won't be with McCain.
This bailout is just one more example of the indivisible handjob stroking irresponsible CEOs and CFOs with billions so that they can run the American economy even further into the ground. So much for Keynesian economics. If the goal is to stimulate the economy, why not give the money directly to the American taxpayers? The government could do twice as much good for the economy by returning half as much money (as the bailout requires) directly to the hardworking American taxpayers. A bird in the hand is worth two in the bush administration.
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