Citigroup Scores
If you had any doubt at all about the primacy of Wall Street over Main Street; the utter lack of transparency behind the biggest government giveaway in history to financial executives, and their shareholders, directors, and creditors; and the intimate connections the lie between Administrations -- both Republican and Democratic -- and the heavyweights on Wall Street, your doubts should be laid to rest. Today it was decided the government will guarantee more than $300 billion of troubled mortgages and other assets of Citigroup under a federal plan to stabilize the lender after its stock fell 60 percent last week. The company will also will get a $20 billion cash infusion from the Treasury Department, adding to the $25 billion the bank received last month under the Troubled Asset Relief Program.
This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi. In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.
Meanwhile, more than a million workers in the automobile industry, along with six million homeowners in danger of losing their homes, and a millions of Americans who depend on small businesses and retailers for paychecks, are getting nothing at all.
This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi. In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.
Meanwhile, more than a million workers in the automobile industry, along with six million homeowners in danger of losing their homes, and a millions of Americans who depend on small businesses and retailers for paychecks, are getting nothing at all.
posted by Robert Reich | 10:16 PM
187 Comments:
professor reich
Did you ever wonder if you could have
done the people a great favor by pushing
Rubin down a long flight of stairs at
the white house?
"The American public, including the media, have not the slightest clue what just happened."
Boy, you're not kidding. I can see why the American people are getting bailout fatigue. First we hear this is the biggest emergency in the whole wide world, hurry pass a bailout! Then we do and Paulsen says we're actually not going to use it for what I said we were going to use it for, and we don't need to use it all before Obama gets to town (what happened to the big emergency?) Then we hear that the auto industry needs some, but they may not get any. And now a new approach, not buying the troubled bank assets, not investing in the bank, but guaranteeing the assets. What's next?
I think at this point Americans are just going to stick their fingers in their ears and say "la la la la--I can't hear you!"
Citigroup can still go bust. It's liable for a further $50bn in asset write-downs.
This is good news. I am finished with the US Banking system. I will withdraw every dime I have from every account and use cash from now on. We are going to withdraw every penny from what is leftover in our retirement accounts and pay off our credit cards. I would much rather owe the government than a bank who is robbing us blind. If you haven't noticed already, check your next bank statement. The banks are trying to take your money through bogus fees. Thank you America's Banks, and thank you Wall Street. You have destroyed our country.
Citi gets bailed out for one reason, confidence of the fiat money system depends on it.
Dear Professor Reich,
The US government made the right decision. Failure of Citi or Bank of America or JP Morgan was not an option. The systemic consequences of such an institution's failure are catastrofic on a global scale. This crisis was the US government's doing and it is moving boldly in the right direction to fix it. The next step will be to move swiftly and smartly to reform the regulatory framework in order to prevent a
repeat.
The deal is great for everyone concerned. The government gets an 8% yield on the preferreds and a warrant to buy stock at $ 10 and change. Citi gets the opportunity to focus on its business and execute their repositioning plan. Investors, both domestic and foreign, rebuild their confidence in the financial institutions and eventually see opportunities to invest in them. Jobs are protected. Defaulted mortgages get better workout conditions therefore reducing foreclosures and stabilizing the residential market. Banks get back to their basic business of prudent lending thus unblocking the pipelines ready to fuel the economic recovery.
The next urgent step is to help the US auto industry retructure outside a Chapter 11 framework. This can definitely be done. Put the squeeze on management to perform superbly and urgently within a defined timetable.Put the squeeze on UAW to agree on a reasonable and sustainable collective agreement. The UAW knows that it must be part of the permanent solution. Extend to the domestic industry all the financial backing needed to regain supremacy in this sector and position for the global needs of 2050 and beyond. Think big not small within and industrial and technological strategy for the future. The US Big 3 can be formidable global competitors if you allow them to succeed. If the CEOs fail to achieve an annual objective, replace them with new leaders.
You might also want to listen to Mr. Icahn and help reform corporate law to deal with entrenched ,incompentent and arrogant boards. This will help energize US competitiveness and profitability.
Alex Joannou
Professor Reich,
Is that $306 billion nominal for the amount the government will backstop? Or is that $306 billion reflective of a marked value (for example, $1 trillion in toxic assets valued at 30.6 cents.) If $306 billion is the actual nominal value, then I do not see how the taxpayer does not get screwed. Thanks. I enjoy the blog.
This is a great blog! Thank you for posting! Did you know the Citigroup bailout is going to give more money to the people.
Bailout Citizens
What do you think?
Dr. Reich,
Sounds like a sensible arrangement
although whole deal is somewhat vague. An 8% return on preferred stock with a possibility to acquire common stock for $27 billion at $10/share strikes me as reasonable ... but what would be government's approximate equity ownership interest for $27 billion? How will the $300 billion of mortgage guarantees be drawn down? Is the guarantee at Face Value? What is the overall downside exposure? What are government oversight conditions? At least it's a concrete step to finally help homeowners facing foreclosures.
Now to make an equally aggressive Rescue Plan for the Big Three based on clearer understanding of the 4-5 year cashflow requirements.
Yeah, might have been a good idea to push Rubin down that flight of stairs, but now you'd also have to sneak back in and do the same to Geithner.
Alex Joannou,
Few would argue Citi didn't need help. But where the government goes wrong is in refusing to use that equity position to force through changes. The government could reshuffle the boards, shake up management and force billions in bonuses to be slashed. I don't expect an overnight revolution, but announcing steps in that direction would be nice.
Dear Dr. Reich,
I fucked up. I bought a house at a reasonable price. While I didn't put money down, I didn't get an ARM or any other crazy loan.
Then during the orgy of spending in the last few years, I racked up enough consumer debt that I can barely feed my family. Of course, a lot of that consumer debt comes from a student loan I took out because I foresaw a time when my reasonably paying tech industry job would not be enough.
I got laid off from my reasonably paying tech industry job and when I was rehired, it was at a lower salary. Now, I am lucky if I have 20$ left over the night before payday. I am not so worried about myself: I can live in a garage on ramen if I need to. I am worried about my five year old daughter. She is bright, smart and is literally the future my tax dollars are paying into.
I am not someone who takes handouts. I never got a degree because I had to drop out of school; so that I could work. My situation fell into that purgatory of our education system where I was smart enough and performed well enough to be accepted with distinction at a University; but my parents made just enough that they could not afford to pay nor did I qualify for adequate financial aide. But I used the time I had to educate myself and get myself into professional work as a Quality Engineer.
I worked hard at a startup company during the tech boom and I now make less money than I did 5 years ago. How is it that a man who goes to work every day, in a contributing role, can barely pay for groceries? How is this America?
My credit cards are maxed out. If there is a health issue, an automobile failure, a 1% decrease in pay... I am bankrupt. I have applied to 10 retail stores for a second job, but of course they are suffering too and not hiring. My marriage is about to end (further bankruptcy jeopardy) and it is all because of finances.
I need a bailout Dr. Reich. And while we get pithy about bailout fatigue for these mega corporations, I have to say I suspect I am not representing the only family out there in the same situation.
My name is Shane Harris. My email is shane.harris@gmail.com
I stood there in class and said the pledge of allegiance. For what? Is this what the social contract has bought me? Credit card companies raising my rates? My home price being decimated?
Yeah, so I fucked up. I should have saved instead of consumed. It's all my fault. My mom used to say that bullshit to me: "It's your own damn fault." I ask: how is that going to help when I am homeless and can't contribute at all? How is that going to help if my daughter doesn't get the nutrition and healthcare and education she need?
How is any of this going to help when these megacorporations get bailouts because "the system depends on them."
When is anyone anywhere going to realize the system depends on me?
My name is Shane Harris and I am the American Dream.
Jobs (and extravagant bonuses) protected, Citi workers begin booking vacation plans.
I need a renter's bailout. Here's how it works. I go and buy a house with a payment I know I can't make. Then, when I fall behind, the fed steps in and pays the difference between what I can pay and I what I committed to pay. It's just a bottom-up (Main St.) version of what's being done for Wall St. And I will spend the money the fed saves me, thus providing an economic stimulus. Funny how these options never get considered. (Ha-ha!)
Why is no one talking about wealth redistribution now? Anytime the subject of Earned Income Tax Credits or extending unemployment insurance (or other safety net programs) the right gets whipped into a frenzy about socialism and wealth redistribution. Yet, turn on Fox News right now, and they're calling this an "investment" in American business and how the government may actually make money on it long term. Bullshit. This is socialization of all downside risk. If the government did not intervene (and yes, this is an intervention for all of you free marketers too blind to understand it) the wealthy would have lost fortunes, so these bailouts have the effect of redistributing wealth upwards. I am not advocating a do-nothing policy as that would be catastrophic. However, when the crisis is over it will be time for DRASTIC re-regulation of the financial sector.
Will this bailot be enough to save Citi? Don't think so. This is the second 25 billion $. And I'm sure there will be more and more... FEDand Treasury are just throwing dimes to and endless wish pit.
These corps took lots of risks and earned a fortune. Now it's the payoff time for those risks.
In my opinion GM, Ford etc should be saved not financial corps.
I wrote what's below in a list-serve battle with an old friend, he's in the financial industry. I live in Michigan, and though I'm not in the auto industry, well, I live in Michigan. Yes, US automakers screwed up, but they did that under the pressure of Wall Street investors. Imagine if GM had, in 2003, cut SUV and truck production to spend a few billion bringing to Opel Agila to the US - Wall Street would have killed them. So now Wall Street gets bailed out and US autoworkers get nothing.
Anyway, we, in the upper Midwest, feel mighty abandoned. And here are my thoughts:
Michigan is a weird thing these days. It is (outside of Ann Arbor) pretty much a state that makes things. Cars, Trucks, Furniture, Appliances, Musical Instruments, Medical Instruments, even Lionel Trains. With Ohio and Indiana, these are places that I don't think Americans really understand anymore. Not even "assembly" states, where things are put together, but states where raw materials are converted into parts and put together into actual things. Those who aren't building things are engineering those things. It is very "pre 1970" all around. There are other places like this in the "developed world" - in Japan and Korea, in Glasgow and Belfast and Manchester. In Goteberg, Sweden, in Turino, in parts of Germany, but they are increasingly rare.
There's actually a great deal of pride in what these people think they "do." You know, you may think their cars suck and their office furniture sucks and their washers and dryers, pianos and trumpets all suck, and maybe they do. But I guess the more I've been around this the more I think they deserve every bit as much respect as people who program computers or who place bets on the market. Because, they're really not morons, and they're not even much in the way of "anti east/west coast" culture warriors. They don't live particularly well - they have their little houses and their fishing boats - and if they can afford to shop at Meijer and Penney's instead of Wal-Mart and Goodwill, they don't much care about the rest. They've never imagined sending their kids to private colleges, or thought of adding anything fancier to their house than an above ground pool. For all the supposed "UAW excesses," 40% of that claimed $80 an hour labor cost is health care, I sure don't see people getting rich. Never have. Not in Lansing anyway. Not in Muskegon. Not in Holland.
So I don't know. Maybe ---'s right, we should write them all off. Maybe its cheaper just to expand welfare. This kind of economy might just have been a brief flicker, 100 years when people could actually work and make themselves ok economically. Wasn't true before Henry Ford, might not be true post Reagan/Bush.
So I know I've said too much about it all, but this is a really sad place right now, and it pisses me off.
http://speedchange.blogspot.com/
Alex Jannou,
Must disagree with you on the merits of this deal. The government's only compensation for underwriting a loss exposure of approx $250B (after taking the $29B first loss and the 90/10 sharing into account) is a $7B preferred (worth less than $7B on day one, look up where Citi's preferred now trade....yields well into double digits), and warrants for less than 10% of the fully diluted equity. And then the USG provides another $20B in preferred at below market terms...net effect: basically no guarantee fee at all. What a scam. If we're going to bail these people out, could we at least get the same terms that rescue finance would demand in the private market?? Little wonder that Citi's pre-opening market value this mornihng has increased by more than $10B.
In a discussion I had on another page, the position put forth was that "Business exists to provide goods and services to its customers and dividends for its shareholders. Business does not exist to provide Social Services!"
Since when do wages for work and the creation of goods and services constitute Welfare?
Shane is absolutely right. Somewhere, even our working class citizens have been brainwashed into forgetting that Labor is the foundation of all wealth.
We sit around blaming each other for wanting living wages while paying huge bonuses to the CEOs who created this mess.
The only way to shake up that "Holy Grail" of corporate greed is to collectively take our labor and walk.
We need to stop immigration. The 2.5 million jobs Obama wants to create are about the number who will come in the next 2 or 3 years. Immigration has a built in substitution effect called the Wright Island Model in biology.
http://www.pubmedcentral.nih.gov/picrender.fcgi?artid=1213928&blobtype=pdf
"We investigated various cases of the island model with stochastic migration. If the population is infinite, the immigrants have a fixed gene frequency and the alleles are neutral, the gene frequency on the island converges to that of the immigrants." Nagylaki.
That happens by losing jobs. The theorem creates a force that hits the people. The experience related above is an inevitable consequence of this theorem. The theorem says no matter what good you do, the bad will increase even more to cause our genetic replacement. Those who ignore this theorem are doomed to extinction.
I have a better idea than stopping immigration: stop nationalism.
It's not just Detroit! In my view, Citigroup also made lousy products - the charge often leveled at the big 3. These were financial products, but they also miscalculated and are stuck with things they can no longer sell.
So why the acclaim for an Obama team as willing to write hot checks as Bush did? There's no change; only the permanent capture of the government by the wealthy.
So how do we make them stop? Why is it that Main Street is going to be allowed to go under? This is all so frustrating even to those of us who understand why the government would consider this. Where is the effort to help families who are are going to struggle to put food on the table for Thanskgiving and pray at the dinner table that they don't lose their jobs and health insurance?
what is the "Non-recourse" stuff about?
and what is with the
"enhanced executive compensation restrictions" ??
enhanced for whom?
I took a look at the term sheet, and the guarantee is structured as a $266 billion or so *non-recourse* loan (the interest is recourse, the principal is non-recourse) on the bad securities.
I can't see this as anything less than a $2,660 gift from every household in America to Citibank's shareholders and executives.
Where on earth do these guys get the authority for such a big give away? The TARP money is almost all gone already.
I don't want to seem like a n00b. Regarding this topic, it seems americans (including you) are unable to learn from history. You can go the Swedish way or Japanese. If you were in Sweden (early 90's), the government would have taken over Citibank. Split it in 2 parts, one "good bank good assets" the other "bad bank, bad assets'. Sell it off 3-5 years later. Citi has >1 trillion off the books, WTF is up with that? That's going Japanese.
BTW nominating Tim Geithner is a bad idea, but still better than Paulson. Bush managed to set the bar low.
Ok, idiot question. But what would happen if Citi had to file for Chapter11, while the government puts in guarantees that will prevent it from filing for chapter 7?
"Meanwhile, more than a million workers in the automobile industry, along with six million mortgagees, and a millions of Americans who depend on small businesses and retailers for paychecks, are getting nothing at all."
Did you mean six million mortgagors? (The mortgagee is the lender.)
OK, so the gov't is bailing out Citibank, but what would happen if they didn't? Citibank appeared to be very healthy until a few weeks ago. If they failed, would the entire private banking system fail?
What happens to credit, small business investment, and big business? What happens to BIG MONEY? Big money is essential in any kind of free economy based on capital investment. What happens when the bank that holds your mortgage fails?
With so many banks failing, the gov't would have lots of banks to take over, and can gov't employees really run banks better than the bank professionals themselves???? And with so many banks going under, where is all this expertise and personnel going to come from?
Don't we need to have healthy *private* financial institutions..to issue credit, manage mortgages, finance business and the like. If we had no healthy banking institutions, and the government took over most of the banks, then we'd have a nationalized banking system...quite simply, socialism, a "managed" economy and I am not sure that is what we want. Or do we?
Is socialism the next step? It guess it would be less wasteful.
I am no expert in any of this, but I am wondering what comes next.
Let me reply briefly to Anonymous above who began his lengthy post as follows: "The US government made the right decision. Failure of Citi or Bank of America or JP Morgan was not an option. The systemic consequences of such an institution's failure are catastrofic on a global scale...."
The USG decision is only right if one accepts the assumption that saving the global financial system is the right thing to do. That conclusion has to be based on a judgment that the global financial system is serving the world economy. More specifically, that it is serving the Amerian taxpayer who bear the cost of the bailout.
I do not believe the global financial system is (or has) served the global economy. In its heyday, it sort of served the owners/shareholders of the institutions through vastly inflated derivative-driven spreadsheets while vastly enriching its executive ranks. Now the balance sheets are melting down, and we discover that the financial system serves only to enrich its executives. As a result, the current bailout, as with the other bank bailouts that have preceded it, certainly do not serve the world economy American taxpayer.
I'm hoping Eric Holder is preparing indictments for all the sorry S.O.B.'s that got us into this mess.
Until top leaders start calling for prison time for the tens of thousands of criminals out here, NOTHING is going to change.
I'm not a banker, but my understanding is that a "non-recourse" loan is one where the only remedy for failure to repay the loan is that the lender gets to keep the collateral.
So, when Paulson gives a non-recourse loan to Citibank for the $266 billion in bad paper, what that means is that if Citibank doesn't repay it, the US gets to keep the bad paper, but can't ask Citibank itself to come up with the money.
Given the likelihood that a huge chunk of Citibank's securities are bad (not to mention the huge piles of off-balance sheet CDOs they have), this turns the $266B loan from a very high risk loan, into an outright gift.
Truly, it is a bank robbery, only with the bank doing the robbing.
Linda: You've been brainwashed - I'm sure by the propaganda driven American education you received. What is socialism? It's a caring society which makes decisions based on information other than quarterly profit statements. The financial industry need not be fully nationalized, nor need the auto industry be, but government (by which we mean "us" and "society") having ownership stakes and influence so that "stakeholders" would include more than Wall Street bookies, would likely mean a more dependable economic and industrial system.
It's a sad state of affairs. Once again, the administration proves to us that in their eyes corporations are more important than people.
Narrator,
I have not been brainwashed. I had an excellent education at one of the most radical economic departments in the country and was exposed to the socialistic viewpoint as well as traditional viewpoints. I am not FOR one or the other. I am simply asking questions.
You must be aware that there is no such thing as a non-subjective, non-self interested leadership. The socialists have had lots of problems too, and I have read papers written by scholars critical of socialism in Eastern Europe who have experienced it firsthand and understand the problems that it engenders...
Since, I (a taxpayer) have been financing Wall Street bailouts and now own pieces of large corporate entities, my stock exposure (portfolio risk) has risen. These bailouts are really stock ownership with preferred rights and special dividend rates for the taxpayers providing these bailouts. I know own more stock in America then I anticipated and Bush’s buddies have become my stock broker and stock pickers since they decide which corporations get saved or snuffed out.
Given this, I have been considering taking my money out of the market and paying off my mortgage. This will ensure my money gets a 5.65% guaranteed return on my money (this is my mortgage rate). It also gives me great satisfaction that I am not paying $1500 each month to a risky (mismanaged) bank.
This also will buffer me in the job (income) side of the equation. I will then be able to work for minimum wage, which is really all that is left in America, to cover my living expenses.
This will get me by until I can get to the government transfer payment systems (individual bailout systems) such as unemployment, welfare, & social security.
Bush (et al.) has put America in shame and on the brink of bankruptcy. I hope he goes to hell.
I need it explained to me how our current system is not socialism already. We just have the worst kind: one that subsidizes a massive military industrial complex instead of supporting middle class, healthcare and educational programs.
Dr. Reich,
I simply adore your honesty. This was well written and on the money as usual!
Alex
It's here that I have to point out a small comparison between American and German Automakers: AUDI, VW, BMW, MERCEDES ALL produce well made, quality vehicles 'the public wants to buy' in an environment of HIGH wage earners, HIGH benefits packages and STRONG Union power! NONE need a bailout! Seems sad really, and, on a global basis, kind of embarrassing for America. If these companies can't get their shi... together, then let them pass into history! We have, even in this country, plants from Toyota, Nissan, etc! NONE in need of bailing out!
Congratulations on your Lou Hobbs impression. This is a purely ridiculous post, with zero merit. Berkeley should fire you for gross incompetence.
Linda: I apologize for misreading. I guess I would see three (or four) possibilities.
(1) "State Socialism" (the old Soviet bloc, China) in which the goal of the state sector is maintenance of the power of the state's empowered elite, but which may do this through generally satisfying needs and thus making revolution less likely (nice vacations, guaranteed work in the DDR)
(2, 3) "Democratic Socialism" done either well (one option) or badly (another), in which the purpose of the state sector is to spread economic benefits widely, and to judge actions - to a great extent - based on their impact on society in general. Whether you get option 2 or option 3 depends on the quality of political leadership.
(4) "Market Capitalism" in which the role of the state sector is to ensure that wealth can be aggregated and maintained by those who pay to support the political leaders themselves.
So I see the choices being made right now through these lenses. (1) The government IS the banking industry (China). (2,3) The government will back up but control the banking industry (more or less) (UK, France, Ireland, Germany). (4) The government will make sure the owners of the banks are not hurt too badly, at least not so badly that political contributions might drop off (US).
Robert Moran.
Besides not knowing the difference between brands and corporations, you're making a few wrong assumptions. First VW (of which Audi is part) is partly government owned. The equity stake is already there. And all these German companies have benefited from very substantial government supports over a very long time - none more important than the German Health Insurance structure. Second, they certainly have discussed loan guarantees with their government. Third, would you agree that US trade policy should match Japan's? So that Japanese imports were severely limited in the US? That's a structural support Japan gives Toyota which the US does not give the 'Big 3.' Fourth, we have Toyota, Honda, Nissan assembly plants in this country - we don't have an industry behind them (other than ports and railroads which carry in their imported parts). Check that "North American Content" sticker sometime.
I love German cars as well, but much of what they are is based on their being based in a socialist nation.
The need to bolster big banks needs to be parsed in terms of the tradeoff between the unfairness of paying the bankers and the positives of saving the economy -- a worse meltdown. Nonetheless this is I believe the best take on what is happening inside the Obama economic group. Thanks for the window. I've linked to it.
Dear Narrator,
Thank you for your second answer. BTW, what is your identity and who do you represent? I am new here.
What concerns me now is the possibility that we are "falling" into a socialized economy be default.
A socialized economy is a planned economy, a free economy or capitalist economy is not. Right now we have something part way between the two because we have regulated capitalism.
When I was a college student, we were reading all the 20th century economists...we were reading about the past. No one seemed to tackle the future in a very major way except Immanuel Wallerstein, with his theory of the Modern World System. I am not even sure his theory was a theory.
If we are falling into socialism by default, then what happens? What are we planning and do we know what we are doing? I am not at all sure. I think we need to have a better of what is going on before we take the plunge.
Linda
BTW, Narrator, I live in Michigan too and I've seen the value of my house drop by 60%. What hurts the auto industry hurts me too.
But I want what is best for the country as a whole.
Linda:
I represent myself and my experiences on both sides of the Atlantic. So I don't think "a socialist economy is a planned economy." I think a socialist economy is a balanced economy, one where needs are met, but controls are limited to "what needs it."
I'm in education, which is always socialist, because "we" (even Americans) understand that this is an essential government service.
http://speedchange.blogspot.com/
yet another shoe to drop. but the 'big 3' failures will be more like a boot drop.
When are these scumbags going to be investigated and prosecuted for fraud?
Dr. Reich,
The American public absolutely knows what just happened. Don't short sell our intelligence for a quick one-liner.
Thank you,
Melody Wells
Mr. Reich... hopefully, soon we can call you secretary Reich (maybe of labor again?)...
I certainly hope that Obama is still listening to you. I know you are part of his transition team... There has a been a disturbing shift in tone from the Obama camp where it sounds like they are going to do a 180 and now are about to stick it to Michigan and Ohio. I hope he remembers the hard working democrats in these states that got him where he is, and will not forget or abandon U.S. Manufacturing as David Axelrod's comments seem to indicate...
The big banks will never ever see another dime of my money, that's for sure. I've avoided them for over 20 years and will continue to do so.
Credit Unions for the win.
Shane Harris,
Your honesty moved me to tears with the exposure of your foolish, dumb mistakes (everyone makes), your goddamm decent heart and hard working character. Your story is universal and reflects the frustrations of so many middle class Americans who are marginalized in a kind of cut throat, humanly isolated Capitalism.
My advice: don't give up, a quality I know you have. Just punch forward to make the world for your lovely daughter richer in stretching the mind -- Not for Riches -- but for loving herself and understanding what makes for real happiness ... all building an imaginative self-confidence to deal with life´s inequities and opportunities with a calm steadfastness.
Deep thanks for the beautiful sharing of your heart's frustrations and longings! We Americans need more of this unashamed self-reflection and community realization "We're all
in this together."
This has nothing to do with the stupid words like "Socialism" but with the common decency of most Americans who are being ignored in our Divided Social-Economic System ... "The We and They Division."
Good luck and never give up! Some advice from someone who came from a poor upbringing who also has learned the hardway what really matters in this short life on earth.
Frank Thomas, The Netherlands
One day, a scorpion looked around at the mountain where he lived and decided that he wanted a change. So he set out on a journey through the forests and hills. He climbed over rocks and under vines and kept going until he reached a river.
The river was wide and swift, and the scorpion stopped to reconsider the situation. He couldn't see any way across. So he ran upriver and then checked downriver, all the while thinking that he might have to turn back.
Suddenly, he saw a frog sitting in the rushes by the bank of the stream on the other side of the river. He decided to ask the frog for help getting across the stream.
"Hellooo Mr. Frog!" called the scorpion across the water, "Would you be so kind as to give me a ride on your back across the river?"
"Well now, Mr. Scorpion! How do I know that if I try to help you, you wont try to kill me?" asked the frog hesitantly.
"Because," the scorpion replied, "If I try to kill you, then I would die too, for you see I cannot swim!"
Now this seemed to make sense to the frog. But he asked. "What about when I get close to the bank? You could still try to kill me and get back to the shore!"
"This is true," agreed the scorpion, "But then I wouldn't be able to get to the other side of the river!"
"Alright then...how do I know you wont just wait till we get to the other side and THEN kill me?" said the frog.
"Ahh...," crooned the scorpion, "Because you see, once you've taken me to the other side of this river, I will be so grateful for your help, that it would hardly be fair to reward you with death, now would it?!"
So the frog agreed to take the scorpion across the river. He swam over to the bank and settled himself near the mud to pick up his passenger. The scorpion crawled onto the frog's back, his sharp claws prickling into the frog's soft hide, and the frog slid into the river. The muddy water swirled around them, but the frog stayed near the surface so the scorpion would not drown. He kicked strongly through the first half of the stream, his flippers paddling wildly against the current.
Halfway across the river, the frog suddenly felt a sharp sting in his back and, out of the corner of his eye, saw the scorpion remove his stinger from the frog's back. A deadening numbness began to creep into his limbs.
"You fool!" croaked the frog, "Now we shall both die! Why on earth did you do that?"
The scorpion shrugged, and did a little jig on the drownings frog's back.
"I could not help myself. It is my nature."
Then they both sank into the muddy waters of the swiftly flowing river.
Self destruction - "Its my Nature", said the Scorpion...
One day, a scorpion looked around at the mountain where he lived and decided that he wanted a change. So he set out on a journey through the forests and hills. He climbed over rocks and under vines and kept going until he reached a river.
The river was wide and swift, and the scorpion stopped to reconsider the situation. He couldn't see any way across. So he ran upriver and then checked downriver, all the while thinking that he might have to turn back.
Suddenly, he saw a frog sitting in the rushes by the bank of the stream on the other side of the river. He decided to ask the frog for help getting across the stream.
"Hellooo Mr. Frog!" called the scorpion across the water, "Would you be so kind as to give me a ride on your back across the river?"
"Well now, Mr. Scorpion! How do I know that if I try to help you, you wont try to kill me?" asked the frog hesitantly.
"Because," the scorpion replied, "If I try to kill you, then I would die too, for you see I cannot swim!"
Now this seemed to make sense to the frog. But he asked. "What about when I get close to the bank? You could still try to kill me and get back to the shore!"
"This is true," agreed the scorpion, "But then I wouldn't be able to get to the other side of the river!"
"Alright then...how do I know you wont just wait till we get to the other side and THEN kill me?" said the frog.
"Ahh...," crooned the scorpion, "Because you see, once you've taken me to the other side of this river, I will be so grateful for your help, that it would hardly be fair to reward you with death, now would it?!"
So the frog agreed to take the scorpion across the river. He swam over to the bank and settled himself near the mud to pick up his passenger. The scorpion crawled onto the frog's back, his sharp claws prickling into the frog's soft hide, and the frog slid into the river. The muddy water swirled around them, but the frog stayed near the surface so the scorpion would not drown. He kicked strongly through the first half of the stream, his flippers paddling wildly against the current.
Halfway across the river, the frog suddenly felt a sharp sting in his back and, out of the corner of his eye, saw the scorpion remove his stinger from the frog's back. A deadening numbness began to creep into his limbs.
"You fool!" croaked the frog, "Now we shall both die! Why on earth did you do that?"
The scorpion shrugged, and did a little jig on the drownings frog's back.
"I could not help myself. It is my nature."
Then they both sank into the muddy waters of the swiftly flowing river.
Self destruction - "Its my Nature", said the Scorpion...
Linda
I'm sorry to say that you're not falling into socialism. I grew up in a socialist country and moved to the US in my 20's. I have never seen anything like this. This is corporate socialism. More like fascism. In a socialist state the focus is on the need of the "workers" (but remember it's still capitalism). Here the focus is on the corporate elite. If you were a socialist country the government would take over the failing banks (not bail out the stockholders) restructure the bank and sell it.
Narrator
DDR was a communist country, not socialist. So was the soviet union. At the end of the Soviet union Gorbachev pointed out that he wanted the country (what remained)to become a socialist country like Sweden.
Dr. Reich,
Thanks to the “bailout” as you call it, Citigroup stockholders are today down only 90% over the last two years.
Why do you continue to frame your discussions in the context of class struggle?
Do you believe such rhetoric is conductive to Obama’s pledge to unite America? Or do you believe that pledge includes everyone except the owners of public companies? You must know that such rhetoric is divisive and injurious to America. Who do you think owns these public corporations you continue to bash? You must know that it is the middle class that owns the stock & bonds of these public companies via their retirement plans. Do you believe your readers so naïve to not be aware of this? Well, as a person of meager means, who has managed to save & invest, I can tell you from my last brokerage account that I was not one of the owners who got bailed out.
I suggest you use your voice to unite and inform, rather than misinform & divide.
Anonymous:
Those are really political terms. "Communist" countries had "State Socialist" economic systems. The nations of the EU all have "Democratic Socialist" economic systems. The US has a "Market Capitalist" system, which is, as the previous Anonymous suggests, "corporate socialism" - Franco/Mussolini "socialism" - transferring wealth from the bottom and middle to the top.
One huge problem in the US is the painful lack of economics education - even at the university level it is rarely a truly comparative education. That allows corporate media and their political operatives to lie without much challenge.
We do know what just happened, we just can't seem to figure out how to mobilize to put a stop to this madness.
Excellent blog- your candor is totally refreshing.
A Said: said,
Did you mean six million mortgagors? (The mortgagee is the lender.)
He had it right. The mortagor grants the mortgage. The mortgagee receives a loan using property for collaterol. (I used to be a Realtor, among my many previous incarnations) Most of the online "dictionary" sites either have it backwards or have the same definition for both.
This isn't so much a bailout as a quarterly maintenance plan.
This pit has no bottom.
Narrator,
"That allows corporate media and their political operatives to lie without much challenge."
It has very little to do with the education system. It's the product of "manufacturing consent" (Noam Chomsky). And sufficient bread, water and entertainment to the masses. There probably should be a course taught on civil unrest. Public protests tend to be uncommon in countries that do no celebrate May 1st.
Given the survival of the investment banking industry it is not a giveaway: THEY WILL RETURN THE MONEY BACK. Only question is will they survive. I do not think so. On the other hand, giving money to people would not be returned back to treasury, only prolong the situation. Saving citigroup also is prolonging the situation at almost no cost. The situation is that majority of people do not have money to spend after paying the debt alone due to diminished buying power. Consumers buying power is deminishing due to jump in health care costs, energy prices and loosing home equity. Corporations do not have money because they spend money from investors on outrageous menagement salaries and commissions, instead of investing in productivity and market share. Giving higher wages to the labor force is partialy investing in productivity and market share. The problem is how to educate power holders (CEOs, republican part of government) that investing in labor force is way to enrich their investments. Answer is UNIONS all acros the country, if not federal laws that will replace unions in doing the right thing. Since they have the power of dacisions, CEOs will always sacrifice labor jobs and wages in order to save the company in crises, even tough the labor costs are way lower then menagement costs. Everyone in their position will do the same, that is not a question of morality but a question of federal incentives that allowes them to do so.
If there is going to be a tax credit for new jobs, there should be tax penalties for laying off labor jobs. This meassure is necessary to recover the continous loss of negotiating power of labor force since Nixon, which is clear in percentage of union members. This would be not needed if government used antitrust powers that had abandoned long time ago. Too big to fail are also too big with power over government. This economic colapse is creating even bigger companies with even more power and that leads to fashisam.
Narrator
Yes, communism=economics+ideology. I just never heard that countries behind the iron curtan were anything but communist economies. Defined by a 5 year economic plan that had little to do with the demand/need of the people (I don't see any socialism in a 5 year plan). Maybe this difference is rooted in your Anglo-Saxon educational background.
"Marx"
Socialism is the transitional state between capitalism and communism.
Ah yes Narrator...it is becoming quite obvious that you don't know quite as much about socialism or economics as you pretend to...but ignorance has its own rewards.
It would be interesting to see Robert Reich's response to some of these questions...
The roots of this mess are the misapplication of economic measures. We allowed cartels and applied tariffs and import barriers, when we should have overseen new emerging markets.
The OPEC cartel squeezed crude oil prices twice in the seventies. Why such anti-capitalistic cartels are allowed to exist is beyond me. They are anathema to free markets and societies.
The high price of oil led to an import boom in low cost, energy efficient, reliable automobiles from resurgent WWII enemies, Japan and Germany. The U.S. passed tariffs and import duties to save our century old auto industry.
When Clinton #1 campaigned for president, he said we could not save our manufacturing base from cheap over seas labor and materials. Foreign carmakers began assembling automobiles here in the U.S., which allowed them to make larger, more luxurious, more powerful American style automobiles.
U.S. market share of the Detroit 3 fell below 50% for the first time in July 2007. Now Toyota and Honda models have more domestic content than many Detroit 3 automobiles.
(http://findarticles.com/p/articles/mi_qa3631/is_200710/ai_n21033393)
The current Republican administration did nothing about systemically high unemployment rates and yet another oil cartel squeeze. It did nothing about 65 million acres in unused oil leases or releasing oil from the Strategic Reserves. It did nothing about shipping more oil from the newly captured fourth largest reserves in the world. Saddam Hussein pumped more oil than Bush 2 did. It did nothing when Greenspan warned that 25% of mortgages in the housing boom were speculative only. Or Freddie and Fannie made a secondary market in $300B of IndyMac liar loans. It let Paulson and his buddies set leverage limits for themselves with their own risk models.
This administration and Congress failed to let either the SEC or the CFTC regulate the credit swap market. The result was a loophole that greedy bankers and traders could drive a fleet of borrowed oil tankers through!
Doc:
One has to wonder if you pose these same issues to your classes. If so, I would bet that the conversation is similar to what we find here but in the end there are no resolutions; just more questions.
It is fascinating that we find posters here positing solutions from the ridiculous to the sublime. There are tremendous varieties in the knowledge and understanding levels of the various posters. Some exhibit significant knowledge of the facts, others significant understanding of the facts, still others exhibiting both and then others, like me, that possess neither.
What I do find missing in most is a connecting of the dots. Criticisms are directed at one faction of our economy or another.
We find frequent condemnations of Wall Street or the auto industry, even business in general, consumers and politicians.
The consumer, in the sense of average American, gets skewered for his insane spending habits and his lack of savings and wise investing for his future (I use "his" here for simplicity not gender discrimination).
Every home buyer who stretched his payment capacity is labeled an idiot or an opportunist.
Those abusing credit when faced with declining wage growth have placed our whole lifstyle in jeopardy.
Excessive pays for executives have put all below the top 5% on welfare.
Boards of Directors have become nothing more than rubber stamps for greedy executives and their only concern for stockholders is that they usually own a decent number of shares in their respective companies.
Unions have so distorted wage and benefit levels in specific industries that they are causing the failure of those industries.
Politicians have become nothing more than puppets and the lobbyists are pulling all the strings.
Everyone in a position of power who can affect solutions is totally focused on self-interest.
The banking industry is only interested in winning the Monopoly game, making sure they start by owning Park Place and Boardwalk.
All these and the many more presented contain elements of truth. Some more and some less but there is plenty of blame to go around. At the same time they are all integral to our economic system. The system doesn't function well, if at all, without anyone of these players. Ideally they would all be working in concert to produce maximum welfare for us and the world. In normal times they come closer but in perilous times they fragment and they begin to focus on their own needs. What they often miss is that if they don't function in their prescribed roles the whole system begins to deteriorate.
You have posed the banking industry as "intermediaries" who connect savers with investors and borrowers. Adding that there is nothing magical about this role. Few could argue with that description. In that sense, though, they become the oil that lubricates the assembly line. If the line breaks down due to a lack of oil the products can still move along by hand but that's terribly inefficient and production outputs decline by huge numbers. If the oil supply is not fixed we need to add more hands to the assembly line to achieve as much production as possible. This step increases costs and is akin to "bailing out" the assembly line.
It would follow that the most important solution is to fix the oil supply. It would seem that is what we are trying to do. Our economic engine depends on a constant supply of lubrication from the oiling mechanism and if it is not fixed things tend to come to a halt. In fixing that mechanism we will waste some oil. Vendors understanding the importance of the problem may take advantage of us and charge higher prices, reaping higher profits. Nevertheless we can't get back on track until we fix the problem so our focus has to be on the oil mechanism. The lubrication system does not add anything to our product, it is an "intermediary" to the process but if it's not working our whole revenue/cost/profit structure is destroyed.
It appears clear to me that if we don't get the banking system back to doing their part our economy will languish if not tank. We have to accept that in our culture there will be those who seek personal gain from any attempts at resolving problems. We can try and impose tight restrictions but if we go over the line we merely impair the repairers and redirect their efforts to overcoming the impairments.
Many here like to take the unions to task for having made the auto industry uncompetitive. One can little argue that they have contributed, significantly, to the problem. Their contracts however were enacted requiring management signatures. I will say again that were it not for many of the pay raises and benefits they have secured over the years, we would all be working much closer to slave wages in sweatshop environments. Forcing them to take meaningful pay/benefit cuts will, indeed, cause a "trickle down" across the entire economy of lower wages and benefits.
I admit that the legacy costs may be a different issue and some special considerations may have to be made to ease those costs but in a larger sense could you not argue that the UAW contracts, over the years, were not the best model to be followed for the welfare of all workers, including provisions for retirees?
Many of the issues listed above are manageable, but not necessarily controllable. Tax policy could be used to manage executive salaries but not by current proposals. Tighter regulations are needed and can be imposed to limit the excesses of Wall Streets and banks. Even those would be a tight rope walk, trying to balance against excess while allowing innovation. Little can be done about the behavior of Boards of Directors short of legislation granting stockholders more influence but then what do you get? A corporation that can't buy new equipment without shareholder approval? Do we really believe in "collective wisdom"?
If we solve our current mess and return to normal growth how do we create more jobs? New jobs require more businesses offering more goods or more services. That requires more consumption of goods and services. Do we start lampooning savers because they are causing unemployment?
Some here have suggested that wage levels are the problem, and they're not wrong, but how do you increase wages across the board? Raise the minimum wage to $25/hour? What will happen to inflation rates? In deference to my friend (nemesis?) weaseldog, even forgetting natural resources, we have a growing population and we have an increase in automation, even in service sectors. That combination does not portend a lot of new jobs. We also have an increase in corporate consolidations driven by necessity to compete on a global basis. This also leads to a decline in jobs, albeit more in the white collar arena. As abhorrent as that is for those displaced it does make economic sense for the corporations involved.
Our economists promote more productivity and efficiency proclaiming more jobs, higher wages and more profits feeding more growth. Pre-automation that might have been more true but automation has led to lower wages and fewer jobs, leaving only rising profits as a result. Using the increased profits for growth is not happening. At least not at a pace that can keep up with population growth. What growth there is often goes overseas so does little for our workers other than create more jobs at Walmart to sell more imported goods.
An argument can be made for returning to isolationism. For looking after our own. It will follow that most other countries will do the same. That solution is fraught with severe issues not the least of which is (weaseldog again) a decline in natural resources around the world. In an isolationist world those countries that have plentiful natural resources will fair well; the US is no longer one of those. This is a looming problem that future generations will have to deal with.
In the interim we are probably going to have to segue to a capitalistic system where the government plays a bigger role. That role will be as a stronger regulator; a stronger mediator and as a financing provider of more than last resort. An "intermediate"? In more normal economic times could our economy withstand the failure of the American auto industry?
It's immaterial what label we pin on it.
I do know that one thing that will not be an answer is 4 or 5 year cash flow forecasts. ;)
After a long and careful analysis of the situation, I've decided to invest all my money in whiskey and powerful painkillers. Assuming I actually live through the next few weeks, what steps will I need to take to get bailed out?
This is so funny. Most of americans do not know (except narrator from this blog )what socialisam is, or even communisam. For that we can be thankfull to McCarthy. His witchhunt has lasting importance. If you do not know what socialisam is you are bound to get to it. If you know what socialisam is then you would strive for it. When you are mad about bailout of Wall Street instead Main Street thats your inner socialist talking. And You are totaly right about it. Socialist derives from social, socialy aware, aware of your impact on others.
No matter how much people are aginst socialisam we are bound to achieve it at some point in time. History prooves that people strive for better and better systems, comming from slavery system, over feudal to capital system we are now. Next step is socialisam then communisam. Communisam might be 1,000 years from now, but it is inevitable. Communisam is very comparable to a religion, it is utopia that we all strive for. and religion drives us to communisam. There always are reactionary forces to better ways out of fear for loosing status quo but they are overcomed in times of crises. Socialisam is when government members hold prefered stocks and decide of the future of a company, Communisam is when employees hold preffered stocks and democratically vote on the future of a company.
how much it matters to you if a member of a government decide on a company or some overschooled private person. I do not see the difference as long as there are controls over that person. Government members are subjects to voting out, while private CEO is subject to profits dictated by market value and we see what that inevitably leads to. It all comes down to leadership of a country. We see what Bush leadership is given us when he proclaimed "Go shooping to save economy" after 9/11. We all were encouraged to spend and borrow by Bush, from bottom up, from street sweeper to broker to president. This should teach us to carefully choose a president, not only when things are bad but also when things are great.
I loved Bush's inane statement on the situation today "If we make any important decisions we will... make sure the incoming president is... informed"
Thus the Right continuous in it's strategy to box in and stymie as many options as possible for the Obama Administration.
By the way steambadger make sure it's proper Scots whiskey you invest in... there's a very good distillery just out of sight of my home here in Glasgow :-)
Robert you are so predicatable and your I am for the little guy just retrain him for a new job new life mantra is old news but will probably be part of the Obama change rant.
Easy is cry about the Citi bailout but what you are really mad about is that the Democrats will be blamed for the bank nationalizations that will take place during your watch..well you passed Glass-Segall back in 97 so you get the rewards now.
Soviet Union was not communist by practice, only by fictional system and idelogical claim. It was completely unexistant due to two resons.
-'manufacturing consent' from fear of dictator Stalin
- revolution and wars that kill most of educated and inteligence savy people.
The country closest to communisam was Yugoslavia, but even there we were tought that communisam is an utopia due to levels of people's interconecting consiousness. We were also tought that religion is also an utopia due to same reason and it was competition to communist ideology.
Narrator is right about education lacking problem that allows corrupt, lieing people to achieve power in this country. The problem can be corrected by teaching "verbal fallacies" from 5th grade, not only college levels. I was aware of problem in FDA aproved foods and Bush lieing long ago due to using "verbal fallacie" fullproofing of evry advertising and political speaches and also in my private life.
Steambadger,
You need to invest in Whiskey and Guns...I for one am currently stocking up on JD and 22 shells in anticipation for the great meltdown.
If you would read Karl Marx and Fridrich Engleis you would see that they present means for psycological control of greed and corruption. Kapitalist system has physical means to control the same, mostly in a way of taxing. Tax means were completly messed up thanks to too big to fail (too powerfull) companies and their lobbyists.
Weather or not we switch to socialist system temporarily, there is always great times in new systems, (historically looking) untill there is too much belief in undestructabillity and infalability in such system. History is repetitive state no matter what we do, but history leads to better and better systems. It is a system of education untill we reach the heaven (perfection). Is it not that what the Bible and Jesus teaches us?
Art,
Good post. I believe the only way to achieve real wage growth is to achieve real productivity gains.
Robert Reich,
Like Art a Layman, I am totally amazed at the range of knowledge and misknowledge here, and some of the kooky approaches people have to solving problems ..from "unplanned" socialistic economies, to just letting history lead us to heaven, to investing in whiskey and painkillers.
This is really pitiful and it is very scary...we are on the brink of national financial collapse...and possibly global financial collapse and no one seems to be aware of the fact that our economic system could end up in total chaos...
Obama seems to have a good approach to trying to get this country back on the road to recovery, to bolster the infrastructure, but he will need to borrow a lot of money to do this and the country is already heavily in debt.
But I am still wondering if you really think it is a good idea to let the banks fail? If Citigroup--one of the largest, strongest most powerful banks in the country--went haywire, what would happen to other banks? What would happen to our banking system, the world banking system?
I have long been wondering if we should be investing so much in the auto industry. Do we really need three car companies? For decades our industry has not been innovative, but Japan's has. Cars are expensive, wasteful, and use up gasoline faster than the world supply it. What we need is a public transportation system, like Europe's...a train system that can move more people around more easily at a smaller energy cost...
Tomorrow is another day. Looking forward to your next blog.
Linda
Dr. Reich,
I think Obama has got it right in his unequivocal demand tonight that the Big Three must come up with a Plan covering near and long-term strategies, actions and figures before big sums of taxpayer rescue money are haphazardly dolled out. Right on!
This is pretty disgusting. Here we are helping to bail out a company, as large as it is, that makes money charging regular people interest on loans, credit cards, etc., while the auto industry, which makes a product, as flawed as its thinking may be, that actually help people keep jobs, gets nothing for its workers. We all know that the auto industry has made grave mistakes---but it actually employs living breathing people, people who, if they have money, actually buy things, which is what we need to bring us out of this Depression. Where is the Progressive voice in the Obama cabinet. No where to be heard. This bailout will not work and we will in even worse shape than ever, except for those people who "invest" (read that as "gamble") in the stock market. I am not a happy guy. Robert Reich--- why does no one listen to you!
Linda:
I'm still not sure who told you that "socialist" economies were "planned economies," but if you believe that, the dollar is up against the Euro, hop on a flight to Europe. Look around. I think you will learn a few things. And if you want to see "state socialism" - that is, a planned economy, flights leave many times a day to Cuba from Toronto.
I think we do need multiple auto companies. Yes, Europe is a "bigger" economy in some ways (though not in most) and they have, in addition to Ford and GM, Fiat, VW, BMW, Daimler, Peugeot-Citroen, Renault, plus the Japanese and Korean firms. That's competition which really drives innovation - as the smaller US automakers (AMC, Studebaker) drove US auto innovation "back then." Japan (clearly smaller in every way) has Nissan, Toyota, Honda, Mitsubishi, Mazda, Suzuki - again, competition drives innovation.
Does it make sense to save the US banking system? Probably. Surely HSBC and Santander could do it for the US, but just as local communities in the US lost dearly when these giant national banks replaced banks which depended on healthy local economies for their own health, HSBC is no more interested in US development than JP Morgan Chase cares about Holland, Michigan. Each of those "socialist" European nations has stepped up for their banks (simplest plan award goes to Ireland), though each has applied far more 'strings' than Ol' Paulson has here.
Does it make sense to save the US auto industry. I'd say yes. These are vital manufacturing jobs that create middle class families. It is why Japan backs their car makers, France , Germany backs (and owns, in part) theirs, the UK has backed a ton of incentives to keep Ford and BMW building things there.
And finally, does it make sense to invest in teaching Americans economics? Clearly, yes. I'm not talking about the demand curves that are taught. Oh sure, they have their place - but I mean real comparative economics which would allow US citizens to understand the choices societies face, and the options available.
Then maybe the US wouldn't be a place where "Joe the Plumber" could be mistaken as important in political discourse.
Hey Narrator,
Got your comments on saving banking and or the auto industry...but there wasn't any logic or thought or rationale behind what you said.
As for teaching "American Economics," I don't know that that is, but if it's what you've been spouting, I'd say it's a total waste.
I am rarely this rude in public, but I am appalled at the lack of knowledge and expertise here. But you know, it is not just a matter of being rude anymore, it is a matter of survival. And dialogs such as yours get us nowhere.
narrator,
"Does it make sense to save the US auto industry. I'd say yes."
Unfortunately the US auto industry isn't fit for the future. Japan backs their care makers, because they are making cars that people want. In France, they need small cars. US carmakers have shown an incredible inability to adjust to the need of the market. What makes you think you can save the US auto industry at a reasonable cost? Most economists pull their numbers out of their behind (make assumptions that frequently takes you in various directions).
The UK lacks a domestic brand. What would be wrong about the US lacking the same? Toyota makes great cars in the US.
This post has been removed by the author.
Blogger Linda said...
Thank you Anonymous.
We are not just dealing with a world economic crisis, we are dealing with a world energy crisis. Personal cars that consume lots of gasoline that is refined from oil in finite supply do not make sense. Especially when other countries have manage quite well with excellent train systems to move goods and people.
We are stupid to throw more money into the auto industry. Do you know what it is like to live in Michigan and have no bus, no train, no way of getting anywhere except a personal vehicle? And the pressure is here to buy a new car every other year!! This is wasteful and stupid. Sure it keeps the guys working at the factory, but you know, the guys could be working at train factories instead, and their kids could be getting educated to use their brains instead of their hands.
There are kids now in school who need new careers, and I say, let's start moving in the direction of a positive future rather supporting old money and old interests and an old tired infrastructure that are out of date. Let's get good minds focused on new problems and solve them.
Let's be a little more creative and innovative when we think about the future.
Linda
Whe have 350 to 400 million people in the US why can't washington give each family 500,000 to 1 million dollars and let them take care of there own problems. people would start spending again. business's would get buying customers etc.. This is a lot cheaper then what they want to do and it would help the people that really need help. As for the banks all homes being forclosed on would now have the money to pay off there loans. This is not perfect but it seems better in the long run.
Hey...how about this? All the Mortgagers (the banks) forgive the Mortagees (Us) our mortgages?!!! This means we all own our homes outright.
Real estate values would escalate back to former values.
We'd all have more money to spend on computers, electronic devices, college educations, vacations, health, and charities.
The economy would boom. The banks would go out of business (but that was happening already). And we could all start thinking about second homes and retirement?!!!
NOW HERE'S AN IDEA WE CAN REALLY GET BEHIND!!
GIVE 'MERICA BACK TO 'MERICANS (and all that good ole apple pie)!!! At least we'd have land we owned that we could plant on when the Federal well runs dry!!!
Miz Linda
Anonymous:
I have no problem with anyone making cars in the US, but I don't want an "auto industry lite" unless you have a plan to replace the jobs.
What's "auto industry lite"? It's what Toyota and Honda do, importing 80% of the cars and just assembling them in the US. What makes the US auto industry so job rich is the web of suppliers making parts in the US.
Now, you want to talk costs. What are the cost differences? They lie in what Mitt Romney calls "legacy costs." In other words, your grandfather's pension and health care. So one way to equalize this, and create a level playing field, would be National Health Insurance (which lies behind the cost advantages of Japanese cars made in Japan, European cars made in Europe), another might be an industry-wide pension fund. I don't think we want to do what Japan does and block imports, and I doubt you do either.
Which gets us down to direct labor costs, quality, and model line-up. UAW labor costs more. It is also more likely to actually show up for work. BMW and Toyota have had major quality problems in their non-union plants. Yes, they usually have fixed the cars, but I'm not sure they are saving money. Next, well, Consumer Reports says Fords are more dependable than Toyotas. But model line-up, yup, that's the rub - but it really is only half the automakers' fault - the rest lies with US citizens and their government.
Europe and Japan have forced the development of small cars with 60 years of massive gasoline taxes. The US did not do that.
I'll ask you, Linda, etc: If in 1999 or 2003 General Motors had announced that they were cutting truck and SUV production - their most profitable and fastest selling vehicles - and cutting dividends in order to invest in bringing the Opel Agila (their European microcar) to North America, Wall Street and US consumers would have? Well, you tell me.
Just two years ago Ford was so struggling to sell the Focus - a top rated, great mileage car - that they could no longer afford to build four models and had to drop to two - and, because they needed to keep prices so low to offset truck sales under CAFE rules, they couldn't afford to bring the new European Focus to the US because it would have had to sell at a higher price. (The Focus starts at over $19,000 US in the United Kingdom - it is among the best selling cars on the planet.)
So, what's the cost? That's your question, right Anonymous? Well, you measure cost by (a) the cost of doing something vs. (b) the cost of not doing anything. As Dr. Reich has laid out on this blog, the cost of not saving the auto industry is massive. Let's just start with these three companies defaulting on between $100 bn and $120 bn in loans from top US banks, pension funds, and insurance companies (minus whatever they get for selling the old real estate). Add to that a $50 to $60 billion tax hit - federal, state, and local. Then, consider doubling what's being spent on unemployment, plus vast additions to welfare, medicare, and medicaid. Suppose we were to say the cost would "only" be $400 billion over the next three years (a very low figure). If that's the case, would you bet $25 billion to insure yourself against losing $400 billion? $50 billion? That's the choice.
There are also the questions of societal stability, and humanity - but those might be too "socialistic" for you.
With the banks? I can't make as strong a case. Employment losses would be large, we'd be back to bailing out New York City. But the effect would not spread as far. The only thing is, your company would need to ask someone in London or Madrid if you could borrow money. That situation does have a cost. It's a cost I actually think most Americans would not want to pay. For example, a huge source of GM's current sales problems is it's inability to finance its own sales - because it sold GMAC. A problem? You betcha!
I think everyone with any passing knowledge of economics, from left or right, from Robert Reich to Spencer Abraham, has laid these facts out. There are damn good reasons why every nation supports its banking industry, and every nation works very hard to protect its auto industry.
So if you're looking for facts, that's what I've got. I'm not an economist, but I read, and I have lived in the actual world with my eyes open.
The Big 3 automakers flew corporate jets to Washington to beg for $25 billion from Congress. I suppose they just expected Congress to say, "Here take the $25 billion - no strings attached!" But no, Congress was not going to be such an easy mark. Nancy Pelosi said, "Show us the plan before we show you the money." This is all well and good, but it does not go far enough. Why should Congress take some plan that the automakers come up with as the last word on the subject? What are they going to say, "Oh I see you have a plan; here's $25 billion." No Congress needs to come up with its own plan. They need to commission a group of experts to independently come up with an alternative plan. Then there would be at least two for Congress to mull over, choose one or the other or a combination of both. They shouldn't be stampeded into giving the automakers $25 billion. Also they should conduct an independent audit to see if they really need the money. The automakers need to prove they really need it. No one should just take their word for it. What about all their successful foreign operations? Are they firewalling their profits from overseas operations? If so they have the money; they're just using accounting tricks to isolate it.
Now Obama wants to create 2.5 million jobs, and he wants to encourage a green auto industry. Here's his chance to at least preserve a million jobs and maybe create some too. He can kill two or three birds with one stone. Congress should impose demands on the auto makers in return for the $25 billion. Here's what I think they should demand:
1) All the executive management should step down. They're responsible for the mess the American auto industry is in. They shouldn't profit from any bailout.
2) It should be mandated that all gas only vehicles be phased out as rapidly as possible. Only plug in hybrids, flex-fuel vehicles, all electric and various combinations thereof should be built after present inventory is exhausted.
3) Caps should be set on executive compensation.
4) No dividends should be paid for a
period of time.
5) No lobbying for a period of time.
6) Congress should have one seat on the Board of Directiors to oversee what's really going on going forward.
7) The industry should build mass transit vehicles in addition to personal automobiles.
8) No jobs can be outsourced.
9) Government gets an equity stake.
Also posted on Will Blog For Food
Narrator you totaly went astray. If you belive that legacy costs are bigger then menagement cost you live in menagement world, blind of ground problems. You do not even check out what is under the hood of US cars comparing to european cars. US cars have so many control sensors and added luxury items that supposedly atract people. It does atract only buyers egoes and waranty repairs, but it doesn't serve any real purpose. European cars are better cause their manufacturer have consumers real interests in mind. Sweedish SAAB invented seat belts. They ballance marketability and durability and profit in the long run. US carmakers ballance marketability and profitability to profit in short run, everything else is forced upon them. But they spend a lot of money on lobbying and mennaging, European CEOs do not have such bonuses. US car makers spend a lot of money on convincing people that there is no global warming or that only hummers can save their children in case of crash, but there is no real driving schools as they are in Europe. Simply put US car makers have much more overhead then foreign carmakers.
BTW Linda history teaches us that there is a lot of sweat and blood on the way to perfectionisam.
so, if Citi goes bankrupt, will that cancel out the small fortune worth's of debt I have stored up on my trusty Citi-card?
Jordan, you said it I didn't.
I'm just afraid we're going to have to make a detour back to the pre-industrial era if the entire economy goes haywire. We'll be generating that sweat and blood tilling in the hot sun over our own victory gardens and we'll have to all learn to become more self reliant. But maybe that wouldn't be a bad thing. We'd develop regional economies, local crafts and trades, and with no large wasteful industries we'd each be leaving a smaller carbon footprint. Countries do survive this way...just look at India, Africa, or Turkey.
John Lawrence..you may have something there with your 9 point set of demands to the auto industry. Why can't we make them build trains instead of cars?
Movie Buff...I wish I had the answer to your question. It just might be the Answer we're all looking for.
Really Jordan? Like those Saabs from General Motors? Or is it those German Fords, or Opels (GM)? Or maybe the cars made as Ford Kas are too complicated but the FIAT 500s are not - though they are built in the same plant?
If you go to any European car website and click "configure my car" you'll see all the same choices as in the US, from every manufacturer. If you lift the hood of a new Jetta TDI you won't find simplicity. Nor should you.
And, you'll find that their cars cost more (I think I just indicated that) - because of their wage and tax structures. (the new Jetta TDI that starts under $24,000 in the US starts well over $30,000 in Germany).
As for management costs. Sure, Germany limits executive compensation, but not all countries do. Those guys earn a lot - though you are right, not as much as in the US. But their engineering staffs earn more.
If you really think that (a) European cars are less complicated, or that (b) executive pay is a bigger issue than retiree (and current employee) health care costs, you really know nothing about cars or costs.
(Just for kicks sometime, get to work on the suspension system of a 60s or 70s Citroen, you'll be impressed with the simplicity...) )
"So, what's the cost? That's your question, right Anonymous? Well, you measure cost by (a) the cost of doing something vs. (b) the cost of not doing anything."
Nobody investor with any common sense would consider (b)?
Are you familiar with US bankruptcy laws?
Where do you get your $120 billions in loans to banks, pension funds etc? Please provide a reference.
The pensions will be covered in The Pension Protection Fund (not 100%, but there's gov coverage). Loans to banks... well we got TARP for that!
Insurance company... talk to AIG!
We do have a 3rd option (c) doing the right thing. Let GM file for chapter 11, but let the government step in and protect the company (due to the financial crisis, stay financially solvent) while it is in chapter 11 to prevent it from filing for chapter 7. What's the cost for this scenario?
While in chapter 11 GM can split the company in many parts, sell off SAAB (been a loser since the beginning of the 90's), get rid of some brands. Restructure! However, the problems with GM are so severe that I expect Gm to be in the same situation as Delphi which has been in Chapter 11 since 2005.
narrator
"For example, a huge source of GM's current sales problems is it's inability to finance its own sales - because it sold GMAC"
That was a smart move, GMAC should be by bankrupt by now. But with the generous donation of taxpayers, we allowed GMAC to turn into a bank so it could access the fed's money (and TARP). This company should be bankrupt. At least GM got some money from selling it.
GMAC were idiots. They sold GMs to people who could not afford them. Great business plan!
If citi goes bankrupt their debt is kinda forgiven but a debt to them stays. Their debt has to be payed off by debt to them in preferential order. The difference is forgiven and thats usually common stocks. 401K are holding common stocks and thats where the trick is. Thats why bailout is way cheaper then bankruptcy. Given survival, citi will pay principal with interest back, so bailout is not giveaway, it is a loan and Fed serves as a bank.
It is against constitution to put a cap on executive salaries unles gov. owns a company. Given that citi was worth $29 bill yesterday and $35bill today it would be cheaper to buy all stocks and then dictate anything untill recovery and then sell the stock at multiple price. That would be temporary socialisam.
No car maker can shove hybrids down our troaths after they advertise that tere is no global warming. They have to change their advertising and follow world view on global warming in order to achieve higher sales.
Pure electric cars use a lot of power on AC in extreme climates, so that is not easy to sell. Only hybrids are good for any climate. But even toyota resisted instaling recharging outlet even that is inexpensive, but mostly is inconvinient.
Given public consiousnes that could be forced only by demand. I would suggest
installing decorative looking solar panels on every hybrid roof, that would provide free recharging without inconvinience.
There is another way of recharging. Nikola Tesla invented wireless electricity transportation 100 years ago. That could be used to recharge cars while moving, there is only safety problem to be solved. Read about Nikola Tesla on internet, you could be amazed by this genius.
Another much better way to cut down on polution is to switch to LNG (liquid natural gas). It requires some modest modifications and infrastructure, but it is basicaly safety modifications. LNG doesnt require refineries, which contribute to polution even before gets to the gas stations. On the other hand, there is no ground polutions in case of leaks as gasoline permanently polutes ground waters, LNG eveporates in the air. LNG gives a huge benefit for a little inconvinience.
READ ABOUT NIKOLA TESLA, it is amasing and amusing
Narrator,
to my knowledge, Robert Reich never never received a research degree. What was his thesis about? and where did he get his PhD (or is this a "fake" honorary doctorate?)? It's not Dr Reich.
He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.
Jordan
"It is against constitution to put a cap on executive salaries unles gov. owns a company."
Where is this in the constitution?
Are you making this up? reference please
Its stock may be in the drink, but Citigroup is clearly liked but the social media set. The bank scored highest in a ranking of social media marketing prowess conducted by BankNet360. With the lightening growth of online social media, a new market concept has been born called Net Promoter Score, which measures a company’s marketing catalyst on social media sites.
------------------
Sally
Promoter
Narrator, do you think i don't know about citroen and renault suspension systems? I used to own one. But that is a special case. European cars are more expensive due to two things: higher sales taxes and higher material quality.
The fact that european engeneers are paid better then their executives just proves my case that they pay more attention to quality of product then to marketability. Marketing strategy alone is what is wrong with US car makers. It works in short term, but just as Bush wanted to say: "if you cheat me once, shame on you, if you cheat me twice shame on me". They tought we were stupid, now they are in problems, just as we are.
And just as Henry Ford said:"I want my workers to be able to buy my cars" So do not blame laborers who did their job, no matter how much they are paid, when there are executives paid 1,000 times more that do not do their job in patriotic way, only selfbenefit way.
They open a car parts factory in labor cheap country and then claim that domestic factory is inefficient due to labor costs, while profits are hidden in offshore accounts. While begging for help or they will shut down, they blame powerless labor while they get away with huge bonusses on basis of savings. Is that patriotic?
Bankrupcy will open up the books and thats why they do not even consider it, they would rather close US production then do what's right. And thats what it means too big to fail, when they are too big so they can have an option to outsource while smaller companies do not outsource and fail due to uncompetitivness. Thats where antitrust laws should be applied. This is not an economy of scale, this is economy of power to have an option.
unless you're really young, you should know there are no atheists in foxholes..........free market capitalist only exist until they screw up and need the gov to bail them out!
So Robert, on another subject, how do the other large banks stay competitive now that Citi is Nationalized?
Bank of America will be begging for money early next year
Good post
Make it stop, Prof. Reich!!! ::sob::
Dear Professor,
Loved your 'Citigroup Scores' commentary. Yes, I agree that Main St. didn't know what hit them but they will in time. I am originally from the MidWest and know first hand of the hatred of Eastern bankers handed down from generation to generation from their actions in the 1880-90s.
I suspect that the Midwestern 'working man' will soon have a new hatred to hand down.
For a bit of comic relief please see my video mash-up concerning Citibank and their outstanding management - http://www.youtube.com/watch?v=pPfbXFf4g2k
What is happening in America?
History has proven that Jews eventually rot every nation they settle in.
Yes, and nobody seemed to care when New Orleans , their economy and their people and city were destroyed either. In this country it seems no one cares until something directly affects them... people have a problem with empathy for others and not wanting to know the full truth and facts. The Bush Administration abandoned the city of New Orleans and the surrounding areas, but not the Republican towns in Mississippi. The Army Corps of Engineers FAILED the city and they are a Federal Department, noboby cares, when do people become outraged at what the leaders of this country have done to the people of this country? There must be an investigation of the failure of the flood protection system in the city of New Orleans and there must be rebuilding of these levees and flood protection systems. I certainly hope this will be one of the infrastructure programs high on the list of president elect Obama. SAVE NEW ORLEANS , THE LEVEES, AND THE WETLANDS AND BARRIER ISLANDS. There was money for the criminals in the financial industry, and the criminals in the auto industry but no money for the working poor and middle class people in a major city in this county. That must change now.
http://idusmartiae.blogspot.com/2008/11/does-anyone-know-how-to-naked-short-us.html#links
Want a Positive Solution:
We should replace the Federal Reserve with a new US currency, The INTEREST-FREE GREEN-BACK, that is not tied to any commodity (e.g. gold), but is legally restricted from ever bearing interest. Our government can print as many as it chooses, but knowing that each one it prints devalues the total. Banks can lend them, too, but none can charge any interest rates. This solution will replace the tax system, as government will just print the money it needs for any budget, but knowing that as it prints the money, it is taking value from everyone, including themselves, in exact proportion to the amount of wealth each individual owns. Double the amount of money in the system, and the value of the currency is cut in half. This acts as a self governing system, print too many Interest-Free Green-Backs and the wealthy and powerful will hammer you for devaluing their script, print too few to run the essential services of government and the voters will replace you (as long as democracy truly exists). Thus, the number of Green-Backs will tend to remain stable and rise only with increases in productivity and population. Government will remain as small as the democracy allows. Each person who chooses to be free will only work for Green-Backs, and will set their own wage as is appropriated to their ability, thus wealth will tend to be redistributed through a true free-market meritocracy. This will not solve all problems of social and environmental justice, just end the Keynesian economic Ponzi-Scheme that is crashing around us.
http://en.wikipedia.org/wiki/Keynesian
http://idusmartiae.blogspot.com/2008/10/john-mccain-has-experience-see-keating.html#links
I agree with previous comment, why do we need american automakers? We have toyota building cars here in the U.S. The problem is also that other countries automakers don't need to pay health insurance, it is supplied by the gov't. Why is no one looking at what systems work in other countries??? Oh, that's right it's because all of the corporations here have Lobbyists who are paid millions to steal from the middle class. We are sick of it, and like a previous comment we also are using cash and getting out of the banks and already paid off credit cards. I want nothing to do with any of these companies that do nothing but steal and cheat and destroy this country and the working people in it. Shameful. I have no confidence in this government, in this country nor in it's deceitful corporations.
http://idusmartiae.blogspot.com/2008/11/does-anyone-know-how-to-naked-short-us.html#links
Want a Positive Solution:
We should replace the Federal Reserve with a new US currency, The INTEREST-FREE GREEN-BACK, that is not tied to any commodity (e.g. gold), but is legally restricted from ever bearing interest. Our government can print as many as it chooses, but knowing that each one it prints devalues the total. Banks can lend them, too, but none can charge any interest rates. This solution will replace the tax system, as government will just print the money it needs for any budget, but knowing that as it prints the money, it is taking value from everyone, including themselves, in exact proportion to the amount of wealth each individual owns. Double the amount of money in the system, and the value of the currency is cut in half. This acts as a self governing system, print too many Interest-Free Green-Backs and the wealthy and powerful will hammer you for devaluing their script, print too few to run the essential services of government and the voters will replace you (as long as democracy truly exists). Thus, the number of Green-Backs will tend to remain stable and rise only with increases in productivity and population. Government will remain as small as the democracy allows. Each person who chooses to be free will only work for Green-Backs, and will set their own wage as is appropriated to their ability, thus wealth will tend to be redistributed through a true free-market meritocracy. This will not solve all problems of social and environmental justice, just end the Keynesian economic Ponzi-Scheme that is crashing around us.
http://en.wikipedia.org/wiki/Keynesian
http://idusmartiae.blogspot.com/2008/10/john-mccain-has-experience-see-keating.html#links
Professor Reichert..
Please educate us. In your earlier blog about Citibank, you state that Wall Street's "view of the world is essentially flawed," in thinking that banks are important to the economy.
You say that the "perception of GM as a clunky old manufacturing company" and of Citibank as "being too big and important" to be allowed to fail are misperceptions. You describe banks as "intermediaries" between savers, investors, and borrowers, but you say that there is "nothing magical" about this relationship and that if Citigroup went bellyup this would do the economy no harm. "The public does not understand the intricacies of finance."
Clearly there is a lack of understanding here. If you are right, it is more than the public who doesn't understand, but the people making the decisions..or do they? Is this just Uncle George taking care of his buddies again?
Please explain to us the intricacies of finance. How would the economy survive without banks? I am utterly sincere in asking you this question and I think more people need to understand what you are talking about, because it is clearly obvious from the comments on this latest blog that we are ignorant.
Linda
The Auto Industry should indeed be bailed out. For those of you who insist its not stable for the future, I suggest you look at the new lineups of vehicles Ford and GM have put out for next year. Ford has the best fuel efficiency coming out, mark my words； provided they survive long enough.
Seeing Citi and the Fat Cats being bailed out, makes me sick to my stomach. How you can reward greed and ignorant risk taking is beyond my scope of knowledge. What makes it worse, is they are blaming the citizens of the USA for causing all of this. People are being pawned, cheated, and blindsided by their negligence. I bet half the people who posted comments on here have no idea that companies who were issuing loans blatantly lied on peoples applications so they could get loans for houses etc etc. Workers of these companies even admitted to doing this because the higher ups wanted them to. How is it people are so quick to blame those "bastard poor people" for taking out loans they couldn't "afford", when the poor people had no idea they really couldn't afford them? I know, I know, those damned poor people, they should keep track of their credit! I mean its obviously the American peoples' fault for letting those with smaller incomes make payments on houses that many of them could indeed "afford". The problem was and always will be, the companies didn't explain or tell them these rates were changeable as they saw fit. The average American can barely remember what their stat capital is, let alone what the fine print in a contract means. You can blame each other and those less fortunate than yourselves, but the harsh, cold, depressing reality is; Wall Street knew what it was doing and did it on purpose.
My suggestion to all of you who are from the USA, is to stop listening to the biased media, stop blaming those less fortunate for this mess, and look to the companies who took advantage of a law that was designed to increase competition that backfired.
Linda, Narrator, Jordan, Others:
The Pension Benefit Guaranty Corporation protects pensions if a company goes belly-up BUT ... the PBGC is practically belly-up itself. It's funds are very limited because of all the companies that have gone belly-up so to say that pensions are protected by Chapter 11 is a bit of a stretch. The government would have to manufacture even more money out of thin air to protect all pensions.
Regarding executive pay vs worker pay in Europe, I think they have the right model and we have the wrong. There's is more egalitarian and each worker makes a good living whereas our model compensates those at the top outrageously while beggaring workers ... the typical model for a third world country.
The advertising model, of course, would have to change. Instead of "Built Ford Tough," they would have to advertise the virtues of being green. Instead of a glinty -eyed cowboy driving 80 mph over a bumpy trail, they would have to use Kermit the Frog driving responsibly. This would be a major change because the car culture that has been built up through advertising in this country is formidable. All those urban cowboys in their F-150s and muscle cars and pick-ups who never picked up anything except somebody from the airport would have to go. And what about NASCAR and drag racing where gasoline is gulped like there's no tomorrow. Many people see this as the American Way of Life which Dick Cheney said was non-negotiable.
We finally got rid of the Marlboro man. Are muscle cars and urban cowboys next?
Hey Linda, i can help with my understanding of wall street. These banks are not the same as the ones we are using for savings and deposit. There are deposit and investment banks. Citi, wells fargo, Wachovia, JPM Chase, and Bank of America are a mix of deposit and investment banks. Others like Meryll Lynch, Lehman, Bear Sterns are purely investment banks. Original banks will gather our savings and give them as loans and they will bear the risk of a default. In time they discovered that they can sell guaranties for their loans, called securities, to other investors while charging commision and fees. Basically they were providing a connection between people with a lot of savings and people that want to use those savings to, lets say, buy a house. Those people with a lot of savings, wealthy, did not want to deal with problem of dealing with single customers, especialy in a case of a default. Banks provided simple means, and legal actions to invest and bear interest. Today such banks are regional small banks and credit unions.
In time there were more people with huge amounts of money that could buy loans from many banks but they do not wanna deal with many banks. So they would open another bank that would buy only securities. Those are investment banks. In time, there were even wealthier people that do not wanna open their own bank, they would buy securities from banks that buys, package and sell securities. Basically securities of securities of securities of securities, and every time they charge fees and commisions.
The problem with investment banks was that whenewer they have some cash they could use it to borrow more money from other banks. If they have $100 in cash they could borrow 10 times that, and every reseling faze did that. Thats called leveraging and it is cyclical, which means if you start with $100 you can borrow $5,000 from one end to another of a cycle. Thats 50:1 ratio. some banks went to 70:1 ratio.
Deposit banks are allowed only 8:1 ratio while investment banks were not regulated and they went sky high in leveraging. They were basically making money on difference in their borrowing interest rate and higher interest lending. So if these banks that do not lend to people and businesses go away they would not hurt the economy, since they only borrow and lend with each other, and maybe provide some huge loans that are riskier. Since they sell that loan to others they do not bear the risk of it.
Deposit banks do not provide sub-prime mortgages, only rarely when Acorn pushes them to do so. Deposit banks are not failing and they are essential for survival of the economy.
On the other hand, investment banks were doing mostly sub-prime mortgages (ARM, no document loans and Alt-A) since they would sell the risk of those loans they did not care if the loan defaults. But they would buy other investment banks securities and used them as levereging asset, believing that they are not risky.
In begining subprime loans were not risky since they were mainly designed to be used short term and then refinanced after a first-time home buyer developes better credit rating, and qualifies for prime (fixed rate) mortgages with deposit banks. But since 2003 they proved to be highly profitable and more people used sub-prime borrowing. In last 4 years sub-prime market share went from 13% to about 40%.
The problem came when people could not refinance those mortgages, they could not qualify for fixed rate when they owed more then the house was worth (underwater) and ARM started readjusting to higher interest rates which means higher monthly payments.
IF THIS WAS TOO COMPLICATED this is simpler version:
Deposit banks, such as regional banks and credit unions, are providing connections between those that save and those that want to borrow those savings.
Investment banks use cheaper borrowing from other investment banks to lend at higher prices. And investing in those banks is investing in other investing, basically investing money on other money and speculating to achieve earnings. they are uselessand speculative, and should go away. Only use is as a source for huge borrowing by huge corporations that are too big to fail, like GM and Ford. Today, car makers need to borrow $25 billion. That is such a huge amount that no regional bank have enough to provide such loan. Some might have that amount, but they would be crazy to invest all in a single borower that might fail.
Credit freeze is not because deposit banks do not have money to lend, it is mostly that most people and small businesses do not qualify for a prime-loan at regional banks and credit unions that have money and they are doing business as usual. their loans today default at usual rates of 1-2 %. Subprime loans default at 25-30% rate and it will go even higher. Big corporations that need to borrow huge amounts can borrow only from government today. Other investment banks are afraid that other banks might fail and they do not lend anymore.
where do they get money(who is giving money to US goverment)!!!?I expect small wave of deflation 2009 -2011,then afther that is inflation (weimar republic) !!!any whay if you want to get out from deflation ,us dollar$ will be devaluated like in history Wilson did it!!!!fed and interest rate will be 0%....japan will be the key!!!!sorry but english economy scholl is disaster !!!JOHN Maynard Keynes was wrong!!!!you will have inflation in both ways> borrowing from foregin investitors or printing money ,,,there is no difference!!!!down 4300-5100 !!!thx
John Lawrence
John:
I agree with your comments and conditions regarding Big Three crisis. It's good that Obama has taken a firm position placing the burden on the Big Three to come up with "Survival Plans " before they receive any substantial rescue money. Having a couple of independent studies simultaneously done to compare is an excellent idea!
If any of the Big Three is running out of cash by end of this year (as may be true for GM) with no options to raise funds on the market, I have been suggesting Congress consider loaning a firm Emergency sums up to $15 billion for operational liquidity purposes until a real Plan comes forward, say by Feb. 15 or earlier. Reasonably intelligent decisions regarding final government-automaker deal necessitate much clearer idea of the strategic actions and related total intermediate-term funds required for Liquidity, Solvency and Investments in new tooling to ensure long-term survival.
Frank Thomas, The Netherlands
Is CitiGroup an American bank?
I thought they were primarily owned by the House of Saud. While Bank of America was held by the Bin Ladens?
The kindly wise men in Washington want to make it easier for people that can't pay their current bills to borrow more money.
Treasury, Fed act to boost lending
So, the idea is to loan more money to people who can't afford to pay it back, to buy houses that they can't afford to live in?
And this will fix the economy?
Jordan,
Thank you for your long and detailed explanation of investment banks. I knew something about them but I had no idea that they could leverage at the ratios you are talking about...Yes, I agree with you completely...they should go away.
Here in Michigan (and I don't know about elsewhere) we've watched the regional banks disappear and get bought out by bigger and bigger banks. The bank that owns our mortgage was bought out by Bank of America. You describe some of these really big banks, like Wachovia, Bank of America, and Citigroup as a mix of investment and traditional banks. If they fail, do the traditional deposit sectors of these banks fail as well? And since they have replaced so many of the regional banks, wouldn't this hurt the traditional banking economy?
Also..you mention that it is these big investments that lend to big corporations...where would these corporations borrow money when they needed it?....the Big Money I was talking about in my first comment here yesterday?
Oi vay...what is wrong with just letting all these investment banks fail and letting the big businesses fail so that the economy can find its own natural zero point...and start from there...???? Wouldn't a failure by GM be healthy for the other two big companies in the long run? You can only sell so many cars.
This borrowing is totally nuts!!! I'm hearing that since our gov't has run out of money we're borrowing from the Chinese. What if China suddenly decides that the US is a bad investment...and stops coming up with the cash? What happens then?
Linda
I agree this is a horrible idea. What is worse is that the government is now buying bad credit card debt from the credit card companies. Will the government use its power to garnish wages against Americans who fell victim to predatory practices? Will we bring back debtors prisons for the poor while rich CEOs who bankrupted industries fly around on their private jets? The sky is, indeed, falling.
I am going to go buy a motorcycle. They get good gas mileage. I think gas shortages are the next logical thing to arise out of this crisis. Congratulations, Mr. President-elect, you're leading a country which is coming apart at the seems.
Doc:
WOW!!!!
I'm not sure that somewhere on here is the makings of a Masters degree, maybe even a PhD. To a great extent the information here is about as worthwhile as that which you can receive in an institution of higher learning. That's being facetious folks!
Am glad we got off the "ism" discussion. I'm certainly not qualified to enter that discussion other than to suggest that, with possibly a few minor exceptions, no country is or has operated in any of the pure "isms" as a socio-political system. They have all been hybrids of one kind or another.
Now listening to the bashers of the American auto industry you would think their collective market share, here and around the world, had gone to zero or below. Jesus guys, GM is still teetering with the largest market share in the world. Yea, the Big Three have lost significant market share in the US but they still hover right around 50% of the market. The current problem is that 50% of nothing is still nothing.
One would think that American made autos, here and around the world, are tinker toys when compared to the outstanding quality of foreign made cars. Current research reports would suggest otherwise but then what do they know. I will admit that for years many European cars were much better engineered than American cars, maybe that's still true today but those positing same are beginning to rely on esoteric differences which the average consumer knows little about and cares even less.
Much is said about how the Big Three, especially GM, has been hemorrhaging losses but should we look a little closer. First I would suggest that heading into labor negotiations in 2007 it would not make a lot of sense to be posting huge profits. A closer look shows us that GM lost $51 billion in 2005, 2006 and 2007 but their cash and cash equivalents increased by $9.4 billion. As an accountant that tells me a lot. The rest of you who seem to have a handle on things can figure it out.
Personally, I question the divestiture of 51% of GMAC but I do have the advantage of hindsight. My best recollection is that GMAC was deliverying decent profits to GM for the last few years.
One would think, if we listen to many here, that these ignorant managers of the Big Three have been languishing in the sun while Rome burns. That they had no strategies or Plans for the futures of their companies. It would appear that those many, as bright and knowledgeable as they seem to be, fail to comprehend that turning an aircraft carrier around takes a lot of time and space. There have been strategies in place and at work for many years. Perfect? Hell no! In the words of one wise responder, what is?
Now a few here and many out and about suggest, that we need a Plan. The Big Three need to "show us the money" or at least the way to it. How do you forecast cash needs when you have no friggin idea what revenues will be? No Business Plan can find ink on paper if you don't know what sales and revenues are going to be. Now you can assume various things but are we not familiar with assuming?
Of course we have the admonition of Obama that they must present a Plan. To some that provides validation to their solutions. Apparently they didn't listen to Obama's remarks right after demanding a Plan. I sincerely believe in Obama and I have HOPE that he can turn our economy around but he also has to play politics, it is the name of the game. Currently, aware that the Congress nor the President is not going to pass any bailout legislation for the auto industry, he has to kick the can down the road until he gains control. The most palatable way to do that is to buy time by demanding a Plan. It let's our feeble Congress off the hook, for the time being; it assuages the fury of taxpayers whose heads are swiveling over a billion here and a billion there. Further his Plan demand was left hanging. He didn't define it as a 5 or 6 year Plan, as some here. Nor did he suggest that it had to be a restructuring Plan, as others have posed. Once in office he knows that he will have to address the problem and Plan or no Plan he is going to have to weigh all the horrors of letting the Big Three fail. As has been pointed out here those horrors are many, far exceeding simply the rise in unemployment.
Now John Lawrence, and John is no dummy, wants a Plan as well and he wants to go so far as to have the government establish the marketing strategy for the basis of that Plan. One can only applaud his trust in his government. Imagine the furor when the Big Three present a Plan and it includes continuing to build SUVs and BIG trucks. The shame and condemnation will echo all over the nation's Capital.
What seems to be missing in all of this, from many of the posters, excepting "narrator", is consumer desires. I personally believe that the auto makers create much of that desire but it exists and legislating that the Big Three must focus on nothing but fuel efficient cars will leave that market to foreign auto makers without even having to fight for it. We have an awful lot of people in this country who want SUVs and can afford to put gas in them, even at $4/gallon. The government has a vital role in this fiasco. Setting business strategies should not be one of them.
Linda would have us build miles and miles of rail transportation to minimize our dependence on autos, arguing we should follow Europe's lead. Not all together a bad idea, but I would ask if it works so well in Europe why are car sales there still pretty significant? Notwithstanding that her solution would take decades to accomplish, are we sure that enough consumers would use the services to make them viable from a profit standpoint. If she would answer in the affirmative maybe she can explain why the government has to subsidize Amtrak.
It may be that our government is going to have to be deeply involved in commerce going forward in a variety of ways but that will create havoc in our economic system, especially for foreign competitors and could result in paradigm shifts all around the world. Not all of those shifts will likely be positive.
I am often castigated here for failing to offer solutions; for being the "naysayer". Valid complaints, but my experience is that you can't solve problems until you correctly define the issues and that is what I attempt to do. I don't have the answers. I have ideas but like many here my ideas are just more problematic than helpful. Many offer Valhallic solutions but fail to remember that "the devil is in the details".
If ever there was a time, now is the time for us to "think outside the box". To the extent that most of you do that, I applaud most of the responses here. Brainstorming does not require solid foundations behind every idea. Actually making decisions does.
Doc:
I should add that while many love to point to this country and that as examples of roads to be traveled, they give short shrift to cultural differences. There is much to be learned from other's ways but until that understanding begins to seep into our culture, a generational process, we are not going to see much desire for cultural change.
Selling the solutions that are based on the premise that other countries have better ideas is dicey. If you start by suggesting that we are wrong and they are right, you lose, right off the bat. The average American devotes minimal time to "thinking". That is "thinking" beyond what's on TV tonight or who's bringing the beer.
Granted the eventual selling of those kinds of ideas will fall on the shoulders of government but if not done properly that government will find itself replaced in the next election.
Further, change, of any kind in the US, is dependent on politically feasibility. New Presidents and Congresses get a very short window of time to effect significant change. If the public does not see advantages from those changes, in short order, we "throw the bums out".
Why is Obama backing off on taxing the upper income brackets in order to recover at least SOME of the false profits they received (and which We the Taxpayers are now making good by putting on our national credit card? What is this nonsense? The $700 billion are REPLACEMENT funds for false profits that went to fees, commissions and bonuses. They need to be returned to make this country whole again. Otherwise, we are nothing but a hopelessly corrupt kleptocracy.
This began with the last Bush and his wretched S&L bailout, which we're still paying off. And now, once again, the theft is prevailing. What a country.
What is wrong with Obama that he would throw in with this grand theft? How did the US govt. get to be so despicable?
Anonymous:
One would guess that Obama is listening to his economic advisors who are likely telling him that while raising taxes during a recession is not suicide, raising them in the face of a depression may very well be.
Remember, all things are political. He has the fortunate advantage, even though he has to wait a year, that the Bush tax reductions will expire at the end of 2010. Why focus energies and poiltical capital on something that solves itself in one more year. Obama cannot bear too much blame if the Congress fails to extend the Bush tax cuts.
Likely they will have to address the Estate Tax issues, since, if memory serves me correctly, Estate Taxes will go to zero in 2010 before returning to pre-Bush levels in 2011. Not sure they even want to tinker with those for just a one year benefit. Often politically it's best to let sleeping dogs lie.
After scanning through the many points of view here re-reading dr. reich's post~I have to say, I don't on some level know what's going on at all. My default is cynicism. Knowing that, what I thought I heard Mr. Obama say multiple times in the past two days is: Detroit will receive assistance but not a blank check. I find that quite reasonable. Detroit is easy to blame but let's remember they produce the cars that people have wanted. When gasoline was 99 cents a gallon in the late 1990's consumers couldnt get their bellys full enough of SUVs and other gas guzzlers. Detroit complied. Once we saw gasoline spike at $4-5/gallon (which we will see again and beyond) I saw the car lots overflowing with big autos and the for sale signs on SUVS on the street. Somewhere along the line, we as consumers have to give up our victim mentality. Which is not the same thing as blaming ourselves. It's more about a serious re-evaluation of 'wants' vs. 'needs'. True enough Madison Avenue has become quite clever in blurring that line. But what about reclaiming responsibility for our own minds and actions? We can't sit back now and just blame 'the system' for screwing us. Well, o.k. we can but it isnt a way out. It just perpetuates more of the same activity. Wall Street for as much as they anger all of us~was doing what investors ought to have been doing: making all of us money. Who out there who writes on this blog doesnt have investments?
And who out there who has investments does not want to see his/her portfolio doing just fine?
We forget that the price for 'sucess' has come at the expense of Wall Street whoring itself, seduced by it's own greed. In love with it's own image. And we cheered them on because our portolios were plump.
A bit of self reflection can be useful during such times. Who is 'they' and 'we' and 'them'. It's all of us having a hand in this debacle. And again, not blame but rather how to indeed become the change we'd like to see. It's one step at a time from where I sit. Having the guts to take our lives back and really take a serious look at what we are doing as citizens, not consumers.
I'd like an explanation of how the option to buy Citi shares at $10 is a good deal, when Citi is currently trading at less than $5/share.
I also agree with the poster from Michigan who correctly points out that there are still some parts of the country where people still engineer and make things that at least some people want to buy. I don't see much hope for us if we continue to destroy those business environments in favor of those businesses which merely push paper, make bets and charge ordinary citizens usurious interest rates to borrow money.
Meg:
Decent post but if you think we won't end up giving the auto industry a "blank check", methinks your naivete is showing. No doubt we'll shroud the decision in smoke and mirrors but it's gonna have to be done, Plan or no Plan. There will be a Plan but likely it should be written on toilet paper.
As for investments; I am not sure my holdings could any longer be classed as investments. All I'm doing is my small part in keeping the Dow from dropping further.
The wisdom of the Citi bailout is a moot point, done deal, over, end of discussion. Dr. Reich the bigger challenge seems to be transparency in the financial market. Are you privy to any strategies the Obama team might employ?
To Art, Jordan, John, Others...
I live out close to motown and over the years I have had many conversations with people who are studying the feasibility of alternative transportation systems.
Amtrak needs to be subsidized in this country because it is such a small, archaic system. If you want to go somewhere, try finding a scheduled train that goes there. It doesn't exist...except for some old established routes in the Eastern sector that date back to the pre-highway days. Anyone who has been to Europe knows what excellent train service is...it is one of the most convenient, safe and comfortable ways to travel. Imagine being able to drink a cup of coffee and catch up on the morning news quietly on your way to work each morning.
The U.S. has put a huge investment in roads and creating infrastructure to support the auto industry because automobiles have been at the core of our industry since the industrial revolution. But personal cars may soon become obsolete, whether we like them or not. The oil supply could run out a lot quicker than people realize. For example, I live in a town close to the auto factories where people commute let's say 35 miles a day to work. When gas prices were high last spring, it cost upwards from $20 a day for some employees just to make the daily round trip to the factory. It is conceivable that in the next five years, or even the next couple years, that gasoline prices could rise to the point where a single commuter roundtrip would cost $100. What would happen then? How would people get to their jobs?
Trains are a much more energy efficient way to get people to their jobs than cars. Right now in Michigan, local government is looking into a way to get an old railroad line working in our community and people are very excited about it.
You say that it would take decades to build a good railroad system..not necessarily, especially if it were a major national priority. Obama wants to build the infrastructure: this would be a great way to put people to work and give people jobs, and in a very short space of time, it would be an industry that would be self-sustaining and stimulate other sectors of the economy.
Obama says he wants to work on the infrastructure by building more roads, and this worries me. I think it's time to get in there and suggest that we work on a railway system instead.
Linda
Art, it does take a while for a corporation as big as GM to turn around.
But a few years ago, even as gasoline prices began to rise and GM was losing market share, GM announced it would stick to it's course.
GM didn't change course until it hit the rocks.
Sailing blindly and only turning the wheel after to collide with an obstacle isn't a good way to sail a ship.
GM needs a navigator.
Linda:
Good and valid points and certainly future oil prices and availability loom as the real gorilla in the room.
As far as a profitable venture goes, that will greatly depend on our cultural propensities. Now we can argue chicken or egg but the fact is that American consumers don't want to leave their cars at home. That has been the reason for the long and prosperous car industry in America. Even more, in America cars have become an extension of our personna. Many consumers seek cars with styling that fits the image they have of themselves or dream of having. That's one of the reasons we still see big engines and high speed capability. Americans thrive on big and it seems that mankind in general is enthralled with speed, but none more than we Americans.
There are many areas around the US where existing rail infrastructure would be a good start. There are many others where suburban expansion, for miles around, has moved much of the populace away from existing railroad tracks. This will mean expanding tracks, establishing way stations, quite often on privately owned land. Some owners will jump at the chance to sell their land for a profit, others, for whatever reason, will not want to sell. No problem, eminent domain laws, simple. Except that lawsuits ensue, possibly all the way up to the Supreme Court and again, Tempest fugits.
Now I'm not familair with Europe but my understanding is that rail systems have existed there for a long time. Further the population/land density is significantly different than in the US. If rail transportation was vital as cities expanded certainly that would have been considered in municipal planning. In the US no such consideration was necessary. Major cities where the industrial sector is situated around the urban centers likely are better suited for rail transportation as a means of commuting to work, which would have to be the primary driver of the industry. In cities where I have lived there has been great movement away from urban centers by businesses, manufacturing, distribution, etc., to avoid crime and to establish places of work closer to where residents live and allow for ease of expansion, to say nothing of cheaper land costs. This has located many large employers, beyond retail, into small cities and towns within a 25 to 50 mile range of where their workers live, in all directions.
This expansion of living and working centers exacerbates the design, cost and scheduling viability of creating a rail system in those areas that can end up with the conclusion that it cannot be profitable without government subsidies, which means we all pay, even if we cannot use the rail systems.
Part of the solution when gas prices rise is car pooling. This works somewhat and could be enhanced by companies figuring out how they could provide that service in order to maximize using that alternative. A big stumbling block to car pooling is changes in daily planning. We have a tremendous number of working moms, and dads of course. Frequently, calls are received informing them that Johnny is sick or Susie or Sam and all of the sudden mom/dad has to leave work to go pick them up. Hard to do when todays car pool driver has an important meeting he has to attend. Or if mom/dad happen to be today's driver what happens to the others in the car pool? All the others get to go home early? Employers love that.
Many cities have bus service providing the same service you propose from rail and use the existing roads so no need for adding tracks, etc. Expansion of bus service would not require anywhere near the capital cost you are suggesting. Problem is in profitablility when extending service to many outlying areas, similar to your train concept. You can have your morning coffee and read the newspaper on a bus as well. Hell I have done it while driving my car. I wasn't supposed to do that?
Now you will respond that bus service relies on oil based fuels so when oil runs out they will be extinct. Good thought but I was raised in Dayton, Ohio and we had electric buses from before I was born(and that was awhile ago)up until just a few years ago. Works in the city proper, becomes problematic beyond that unless we perfect batteries that could power a bus until it got back to trolley lines.
Your idea is not bad. There are many debates going on around the country regarding the same issue. Most of the time the issue comes down to investment cost and generating profits.
In all, it comes back to culture, culture, culture. Driving our cars is the last thread to the frontier days. It's a trip to the old west everyday as we go to work. Like the cowboys of old we have to meander the herds of cows (cars) but often that gets the juices flowing for the day. We are a self-directed culture. We no longer have control once at work. Our paychecks, along with credit, delimit other options. Our kids, and we love them, deprive us of the freedom to come and go as we please. What's left? Let me get in my car and drive!
Now if it comes to no choice, we're screwed but we'll adapt. Until then we will not be inclined to "go quietly into that good night".
Wease:
No doubt GM could benefit from better foresight. Is that problem not systemic to our American economic institutions?
The profit margins are huge in SUVs, etc., when compared to regular, especially smaller cars. I doubt there are many executives in the hallowed halls of corporatdom who would have done it much differently. Besides they were manufactuirng and selling smaller cars with fuel efficiencies that were in the ballpark with foreign cars. Admittedly, one was at home plate while the other was near the centerfield fence.
Again, poor judgment often pervades our American commercial organizations. We just don't usually hear about it until there's a calamity. And when we do hear about it we can't seem to be satisified with any answer short of shooting the bas---ds. Doesn't that seem so....French?
Busses that run on LNG are the answer for public transit. Railroads are impossible to implement due to wastnes of our country. Gasoline prices were due to speculating, when one bubble bursts, investors rush to the commodities such as oil futures, gold and ttreasuries untill they find another thriving sector to invest, bubble it and then burst. Gas prices would remain low if we would implement ban on non users to enter commodity market, just as we have ban on agriculture investments. Oil will not cross $100 for another 20 years.
Question about investment banks is so difficult that even president with so many adviser does not know the right answer. There is an idea to replace our financial system with a brand new one with different rules. There was so much money spent that we could have done that already. Fed spend about $2 trillion and my guess is it will need 2 times that to restart it.
Any radical changes could radically impact our lives, but i would say it allready impacted it just as much. Investments banks are not making new loans anyway, since they cannot find qualified borrowers anymore using pre 9/11 standards. Many businesses will fail without the bridge loan till better times. But they do not qualify for a new loan, just as many overdebt people do not qualify for a prime-loan.
I’m with Meg. We need to give up our victim mentality and return to personal responsibility. What we need is to determine why disequilibrium in the housing market occurred in the first place.
Let’s not forget that this whole problem began with disequilibrium in real estate prices. I would argue that the failure of investment banks is the result of the housing bubble, not the cause. As one of the bloggers pointed out, these investment banks did not make the initial housing loans, nor did they set the interest rates or terms of those loans. That doesn’t mean the investment banks should be bailed out. They erred by investing in overvalued assets. If their bets paid off, they would have profited. It is only right for them to lose if their bets soured.
On the other hand, I don’t think the facts support the notion that the “greedy investment banks” conspired to rip off the American middle class. The sequence of events as I understand it is a follows: housing prices were bid up higher than affordability via mortgage debt at costs not reflective of market equilibrium; investment banks traded the mortgage backed securities (which derived their value from the underlying mortgage assets); and finally, the investment banks got caught holding the bag of mortgage backed securities (did not sell before the values of those asset backed securities began spiraling downward).
Isn’t what we should be focusing on is how the disequilibrium in real estate prices happened in the first place, and how we can avoid that occurrence in the future? A lot of our discussions is about who is to blame. But, we as people are motivated by the same things that have always motivated us. Shouldn’t we, Dr. Reich, be sending more of our time determining how to fix the systemic deficiencies that caused the problems to occur in the first place?
Very few are talking about the real core problems that has led us to where we are: over consumption & lack of personal responsibility. Our next president won his campaign on a charming, but ridiculous pledge that he can somehow help the middle class. That, unfortunately, is not an indication of a return to personal responsibility. How foolish we are to believe that artificially stimulating the economy; i.e. printing more money and transferring it from this group to that group, will make us any better off.
Dr. Reich, you are simply orchestrating and promoting tensions between different classes of people. You are a highly educated man and should be advising real solutions that promote American savings, investment, productivity, & fiscal responsibility.
Jordan:
Hadn't thought of LNG. Are there any safety issues with using that fuel source?
Would disagree with your rail analysis in two respects. One in certain areas local transit could be viable if all the factors make sense. Second, and we have been moving in that direction, cross country freight. More use of cross country rail for moving freight is more economical, saves fuel, and greatly reduces wear and tear on our roads, bridges infrastructure, by minimizing semi usage. Does inflict severe harm on trucking industry and the drivers but society benefits greatly.
Rebuilding that infrastructure would be costly as well but there may be good payback.
Here are some questions I've been asking since the Citi debacle:
- why doesn't Robert Rubin resign? In fact, it makes me even less confident in Obama's team that his key advisors are all personal/professional friends. A close fraternity of Wall Street execs, former White House members and quasi-economists. How is this brain trust any more reliable and trust-worthy than the current regime under Bush?
- transparency? What's that? The board of directors of these MAJOR financial supertankers are completely worthless. We have to beg for the truth after the shareholders' value has been destroyed by the capriciousness and hubris of these BODs. It's not protecting investors.
- value for value. We're not getting it for the risk we're taking by eating these assets that are underwater. Citi knew years ago that they were dealing in junk. They obviously didn't think it would ever unravel on them.
- moral hazard and "too big to fail" - someone is going to receive the Nobel Prize in economics for explaining how capitalism and free markets are eventually destabilized from within as un-checked "monopolistic" practices, M&A transactions and limited regulatory oversight leads to systemic failures in large companies.
Is it time to create a national government owned bank that deals strictly in consumer banking with no other operations or temptations (brokerage house/insurance/derivative trading/wealth management).
It would give me peace of mind if Congress called CitiCorp to testify before the American people to explain why they are being bailed out and what they paid themselves the last five years as they created a financial disaster for their shareholders.
And while we're doing this, I would like all of the rating agencies to testify as well. They enabled this junk to be passed along.
Dr. Reich:
As I was saying, peoples’ motivations remain the same as they have always been. Some call it greed, but the fact is that people are naturally driven to gain the most for them selves. This is natural and there is nothing wrong with it, in my opinion. Normally, greed is kept in check by fear. In the matter of the housing market bubble, I believe that the element of fear (of loss) was withdrawn or at least hidden by some mechanism. The bubble was thus allowed to grow abnormally. This is my opinion, and I believe it is necessary that we determine what mechanism interfered with this greed / fear balance, and make sure we not allow that mechanism to exist in the future.
Anonymous:
One can argue about blame and who deserves how much of it but the investment banks were not exactly innocent victims of this process.
It's my understanding that they created the securitization process that lead to the bundling and the wholesale buying/selling of mortgages to feed these packages. Now for their trouble they received substantial fees as well as commissions when they sold them.
Now this alone does not make them bad guys but consistent with many other critiques of other industries here, does it not make sense that if they were going to sell them they should have been more interested in the specifics of the assets underlying their expensive packages? Would you as a professional in an industry not have requested recourse arrangements with the mortgage sellers?
There is no way they could have audited every mortgage for the ability of the home buyer to meet the eventual terms but it is not uncommon when dealing with multi-pronged products with no clear means of verifying the solidity of the product to require guarantees for at least a period of time.
That action might have not been a strong deterrent to the sellers but those who were knowingly giving away mortgages might have been hesitant to grant them if they knew they couldn't escape liability for them by selling them.
Then they compounded the problems by utilizing CDS's, which had been around for awhile, to mitigate the risk, they thought.
Everybody got a little giddy over this seemingly riskless paper sale and the investment banks created the market and then abused it. Not what one would expect of the best and brightest.
Art:
I believe you are saying the problem was that the final holders of the securities were too far removed via the securitization process to be able to have good information regarding the quality of the underlying loans. Is that correct, and how do we solve this going forward? Do you believe the mortgage originators were irresponsible given their ability to transfer risk via the securitization process? Does securitization as it was intended provide any usefulness to our economic system?
I really don’t think there is any value to arguing about who is to blame. Since we can’t ever “fix” greed, it’s important that we fix the system. Thanks for your input.
Anonymous:
No, I don't put any blame of the final holders, other than maybe investment banks, because they bought the packages from what they believed to be reliable sources and they were rated as very good risks, perhaps the biggest culprits of all, the rating agencies.
The investment banks, in general, were only once removed from the loan process so I do put the onus on them to know the veracity of what they're selling.
There is no doubt that the original mortgagors, those granting indiscriminate mortgages, are big culprits here. Had they not been able to readily sell these bad mortgages there would have been fewer of them, if any.
It would seem to me that there is some benefit to the securitization process but somewhere it does need some strong oversight. Don't necessarily feel that has to be government oversight. These securitized packages can do a lot for liquidity and allow more flexibility to those selling into the securitized products but they also, as we see, have a lack of transparency, by nature, and can absorb a lot of sins if no one is keeping track of the underlying pieces.
Art,
Good, logical, analysis. I agree with the majority of what you have said. You are correct, the rating agencies definitely did not do their job.
I believe that interest rates were kept too low, too long, after the ’91 recession. I believe a lot of the risk in the housing market was artificially hidden by too easy money. The easy money led to the inflation of the housing bubble. Once this began, a lot of people, borrowers, lenders, investment banks, got swept up in the belief that housing prices would continue to rise. It has not been so long ago, and I remember many, many people investing in houses, becoming real estate brokers, etc. It was a mania shared by many parts of the economy. At that point, it all seemed very harmless, the natural thing to do…go make money in real estate. So, everyone was following their natural instinct to benefit. I don’t believe any of these parties meant to harm the others, although I know that there were cases of fraudulent behavior amongst all the groups.
CORRECTION* - I believe that interest rates were kept too low, too long, after the 2001 recession.
CORRECTION - I believe that interest rates were kept too low, too long, after the 2001 recession.
Anonymous, Dr. Reich
If I may add to what Art has said about securitization. The rest of the world doesn't engage in this financial pyramid process. If other countries had done so on scale we did with loose controls, the world today would be in a state of financial collapse that would make the Great Depression seem like a mild economic pause.
It's a kind of sophisticated highly leveraged liquidity game -- often supported by inadequate and/or overvalued underlying assets -- that inevitably spawns irresponsible waves of debt buildup (turning sour or crashing with the slightest systemic malfunction or distrust) ... hence a very dangerous practice if not seriously reformed around the following principles:
*Oversight at Federal Level
*Strict Risk Management Rules
*Universal Valuation Norms
*Transparency
*Integrity
Once the Fannie Mae and Freddie Macs packaged the mortgages and sold them to the next link in the pyramid chain, a culture of responsibility disappeared from the shoulders of the Fannie and Freddie twins ... who were then engaged in how to the repeat process with the new bundles of cash received from investors, hedge funds or investments banks.
A Las Vagas casino is a better gamble compared to the blind greed factor ovetaking the complex, unregulated, insider game of securitization. If not eliminated, securitization must be reformed for maximum risk safety at all links of the process chain ... or its potential financial destruction will be activated again.
I also screwed up. I put a large down payment on my house over 20 years ago. Over the years I scrimped and saved, drove used cars until my mechanic told me to get rid of them and failed to rack up any other debt. I've always had a decent job as well as side income (which I actually reported).
I paid off my Mortgage 6 years early, had saved a large amount in 401k's and IRAs and have absolutely no debt.
Because I screwed up so bad, now I have to bail out the people who were smart enough to realize that they could spend money like a bunch of drunken Republicans and some damn fool would pick up the tab.
My 401k's are worth 2/3 of what they were a year ago, but I still have a decent paying job, though I no longer have the energy for a 2nd job.
Dumbass
I am so glad the government is subsidizing Citi. I received a notice from them to opt out of their mandatory credit card rate increase which took my fixed 7.99% rate to 24.99%. After a call to the supervisor in their credit department, I learned this is being forced on all citicard holders to help mitigate the losses they have already suffered. However, their site is still offering 7.49% APR on their cards. Our wonderful government is pulling the wool over the american consumer's eyes while giving away the whole lamb to underperforming corporations whose greed and bad decisions have left them in their current financial state.
Art, Linda, narrator
I wanna explain all how it came to be. It includes, historic trends, human nature, voting system and 9/11.
Let start from voting system and Reagan, an inexperienced president. he does all his advisors tell him, they are republicans with set of principles that are good only when equlibrium of demand and supply is present. demand is fueled by peoples earnings and confidence to borrow. When you give tax cuts to rich they put excess in banks or stock market. That fuels investments into companies that invest in prductivity and more workers. More workers means more employed people that can buy more, hence increasing the demand. Increased productivity means same people employed , higher production which represent supply. If higher production does not meet higher demand in a way of higher wages and more employed it brings deflation, higher dollar and lower prices
Thats where democrats come in place to increase demand by enforcing higher wages, better health benefits and tax cuts to poor. This is necessery to keep the ballance of demand and supply.
When Reagan came to power there was too much demand,that cause inflation and weaker dollar. He did his turn and tax increases as he was supposed to. Everything was going towards the center of equilibrium when Clinton came to power. He intended to rewerse the trend, as he was supposed to but when republicans came to power in 96 they did not allow him to do so. Result was too much free cash from tax cuts to wealthy. Colapse of asian markets also brought back home a lot of cash that was invested in asia. That excess of cash fueled .com bubble.
A bubble is when there is too much cash to be invested on the Wall Street that doesnt meet demand from higher wages. That extra money fuels investments in new industries, like IT sector was at the time. There is a tremendous growth and virtual demand for such services. When first problems start, many investors pull out of such sector, businesses colapse and only strongest survive. Extra cash goes inside 'mattres' or invested in safe comodities. That is called a recession.
There are diferent ways to fight a recession: Fed can lower interest rate, give tax cuts to rich to inccure more investments or give more to poor to increase demand. It depends if there is deflation or inflation you should know which way to go.
That's where 9/11 comes into play. It was outside influence that caused crash of confidence and many investments were pulled out of Wall Street. Imbecile Bush came with "go shopping" in order to increase demand and recover economy. At the same time Greenspan lowered interest rates to infuse more cash. That was a double whammy that fueled next bubble, Real estate bubble. There was another whammy, hidden from usual indicators of economy, and that was huge cash from arabs and from extra rich people. It was only a crash of confidence but everyone independently encouraged growth. There was so much money waiting that actually became free money for all.
That was in 2003, when president was into Iraq, instead into economy, and Greenspan was waiting to be replaced. So everyone that should keep an eye on the matter was busy with other things, while economy was booming, bubbling to imense proportions. Excess money was hiden by peoples borrowing, and wasted on executives bonuses. Supply was met by more borrowing instead by real wages. 100% of people represent demand and only 5% richest represent supply side. Middle class represent both. 95% of people make less then $250,000 and they do not save much, so they are mostly demand.
The trick is that almost never happens that there is such amount of excess cash in market and other factors that confuse regulators. last time it happened was just before the Great Deppression. Thats where those who know whats wrong say that this will be next Great Depression. Bush and his illiteracy, toghether with republicans who simply can not grasp the possibility of too much cash is dangerous as much as too litle are doing opposite of what is needed to stop total colapse.
Thats what happens when a president is an idiot and only thing that matters to him is to look good in conservative eyes. To believe that God himself is directing him, instead reading reports cronys are giving him. He can barely speak english let alone read something that requires intelect. All republicans want is to be elected and to lead one way, conservetive.
republicans are advocating Smiths teachings, while democrats are advocating Keynesian teachings, mostly but not always. That is the trick. There is no difference in teachings, its nly different situations that are asking for different actions. It depends if there is inflation or deflation, given other things are the same. Dollar taged to gold ensured that other things stay the same, but since 1971 US dollar was untaged from gold, due to France asking money back in gold and lack of gold in Fort Knox. Thats where'hate french' commes from.
Another problem is that greedy executives looked at excess cash and found ways to skimm it. Investments in corporations must not be wasted on CEOs bonuses and old jobs, only on productivity and market share in order for company to survive, cause borrowing costs, wheather trough simple borrowing or paying dividends.
This is what happens when:
we choose a president based on good looks and mellow words in good times, instead paying close attention to what tey are saying as we doo in bad times.
chery pick statistics as in measuring real wages and including top 1% that incresed their earnings 100 fold.
we even consider a person who cannot pronounce 'nuclear", which is a sure sign he cannot read, for president
we believe that government is a problem instead of our helper
we consider constitution only when we need to defend our hate speach
when we think that what we posess is more important then that we do the right thing
Art
you are very close to the cause of the problem. It was Bush who pressured for more lending by saying 'Go shoping" after 9/11 and the WS crash. Major problem is in rating agencies who were supposed to be the back stop for iresponsible lending.
Securities have to go trough rating system in order to be sold further. When a mortgage company sells a security it gets rid of the risk of the default that goes with a loan that they made. They all were hard pressed to make more loans due to exces of available cash and their own need to make more money.
Another step where everything failed is loan officers. Most of the mortgage brokers do sub-prime loans, while deposit banks do only prime-loans.
Untill 2003, all loans had same rate of default. When mortgage brokers started faking W-2s and faking borower earnings just so they could make a commision, they were allowed to do so by their loan company underwriters, since they would sell that loan further in a way of securities. Those securities were sold to investment banks, and then resold to bigger investment banks, and then resold to other banks on the Wall Street to whole world. There could be up to 7 steps and only the last one holds the risk of a default of original loan.
Loan officers did not only fake borrower's earnings but also look for assesors that will put higher value on the house. assesors were doing so they could have more jobs and earn more, loan officers were doing so they could make more money from sub-prime loans then from prime loans. Deposit bank loan officer never work on a commission like independent officers do, so deposit banks do not suffer from increased defaults of their loans.
rating agencies were not rating properly because they were paid by security issuer, and they wanted more business and were pressured by regulators to do so.
Basicaly there were all regulations in place but nobody was enforcing them. And SEC was pressured by Bush not to enforce regulations. That is why McCain wanted to fire SEC chairman Cox, even tough only Paulson can replace him.
The problem with securities is that they remove the risk of a default. If loan undervriters were allowed to sell securitise only a portion of a loan then some risk would stay with them, and that would prevent all this.
Fannie Mae and Freddie Mac did not make a single loan. Only thing that they did was to buy securities from originators, package them and sell. their securities were guarantied by government so people considered them less risky. You cannot blame them for believing the rating agencies who acctualy stamped AAA on every security GSEs bought. Republicans wanted to block GSEs in 2005, only so other investment banks,that were lobbying to republicans, could grab GSE's market share. It was such a rush to make loans, there was so much money available.
When democrats came to power in 2007, they warnned rating agencies to start doing their jobs. Thats where all hell broke loose. Nobody could knew it was such huge problem. It was such change in rating policy that started, not caused, the enraveling. If rating agencies never stoped doing their job, this would never happen.
In order to prevent this from ever happening again, there should be a ban on independent loan officers to do sub-prime loans. And loan originators have to hold a risk from a default when they sell securities, in a way of partial loan holding or guaranties of taking securities back in case of a default. Original Securities can not be derived further.
Executive salaries can not be paid in stocks, only taged to value of stocks.
rating agencies have to have their own rating agency or a controler of their job.
Not more regulations, just better regulations
And most important we should use verbal fallacie check when listening to presidential campaigns
This whole thing is making me sick. I guess it's get ready for a depression as Bush has definitely tilted the odds toward it happening no matter what money the taxpayers throw at the banking world-- money the government doesn't actually have. It's getting scary
Yes there are safety issues with LNG but only in a case of severe accidents. That can be prevented by making LNG tanks out of one layer titanium and another layer kevlar. And use LNG in buses and semi trucks only. there has been a fleet of public buses in Chicago consisting of hydrogen cells powered machines. But let's not forget that hydrogen powered machine cost over a million dollars. And hydrogen production is very expensive also. titanium/kevlar LNG tanks could cost only $1,000 more then gasoline tanks. LNG have same power output as gasoline or diesel per price, but much less polution. Gasoline engines do not need modifications to run on LNG. There is only LNG infrastructure that might be expensive.
Most people don't realize how much money there is out there. During economic times like this, there is more money to be had than ever. Because of the bailouts and economy, lenders are bending over backwards to bail you out too. Believe it or not, there is people getting tons of cheap money nowdays to start businesses, buy homes, pay off debt, and more. Bailouts for Everyone
Art, Linda, Jordan, Frank, Others:
I'm totally with Linda as to rail transportation. Art your remark that you've never experienced rail transportation in Europe is telling. They are so far ahead of us. As an example, I spent three weeks in Holland a few years ago. I could get anywhere in the country by rail and back to Amsterdam the same day. But here's the kicker: I never had to wait more than 5 minutes for a train to Amsterdam from any where in the country. Even in former communist countries like the Czech Republic you can get anywhere by rail and/or bus. Some of the connections are Toonerville Trollies but so what. When you add the TGV in France and other high speed rail, you have a marvelous transportation system in which you don't need a car to get anywhere. Even so there is a mix of cars, rail and air transportation in Europe.
Here in San Diego all city buses are LNG. That's what makes living downtown tolerable. You can stand in back of one of these buses and breathe freely, and they don't pollute. The only problem is the private charter buses are gas based and you don't want to get near any of these. San Diego has increased its trolley system (using European built cars) using existing and former rights of way. Only problem is it's underutilized due to car culture. It's still not to the level it was in the 1890s in terms of network. Also suburban commuter trains are doing well here. The Coaster transports commuters to north county using rail lines shared with Amtrak and BNSF freight trains. Just this year they added an east-west link from Oceanside inland to Escondido called the Sprinter - again using former rights of way.
Car culture in this country is created by advertising. Why else do you think every other add is a car ad on TV? (The rest of the ads are for pharmaceuticals something that should be outlawed.)Urban cowboys are created by advertising. It's that simple. Remember when smoking was accepted as de rigeur? Smoking culture was created by advertising. Since it has been verboten and negative ads went on TV against smoking we've seen smoking come to a point of being socially unacceptable. The same thing could be done with car culture. It would take government prohibitions against certain forms of advertising as it did with smoking.
The trolley and bus network was deliberately sh*tcanned by the auto industry to get people to buy cars and use more gas. In LA they used to have a wonderful network of streetcars and trolleys. This is being brought back. Many people don't know this, but LA has built a wonderful trolley system using mainly old rights of way. You can go to Pasadena on the Gold line, anywhere in downtown (yes, there is a downtown in LA) on the Red line. You can even get from Union Station to LAX on the Blue line. They just need to extend the Red line all the way to Santa Monica. Right now you have to get off and take the Metro Rapide which is a high speed, limited stop bus that can control the traffic lights in its favor. Exclusive bus lanes for buses on freeways is also being done in southern CA.
Fortunately, we don't have to wait for the Federal government to do everything. Cities and municipalities have already been taking action to get cars off the road and reduce the senseless suburban commute. Urban planning such as the CCDC in San Diego has been encouraging high rise infill projects next to trolley lines and downtown high rises as an alternative to living in suburbia.
All that cities need from the Federal government is a little encouragement (and money) to do more along these lines. That's how it normally works anyway. So I disagree with Art's pessimism about rail transportation. It can be done, Art, but you gotta believe. Just like the EV1 which was crushed by GM, rail in this country was deliberately deconstructed by the auto and gas industries especially in LA, the epicenter of car culture.
Trucks use the public highways at little expense for maintenance while railroads have to pay to maintain their own track beds. Government could change this incentive structure. The widening of freeways and creation of additional lanes, bridges and underpasses has gone to insane heights in CA in order to accomodate more and more vehicular traffic, a large portion of which is trucks moving goods that could be moved by rail including all sorts of toxics and nuclear waste. Do you like driving in the next lane alongside that? On some freeways around here it's a permanent non-stop building project. It never ends. It's nuts.
Art, do yourself a favor. Go to Europe and ride the trains! It's very convenient. The scenery's outstanding and the food's not bad either!
John (& Art) et al,
I was too tired last night to blog after a nearly sleepless night the night before worrying about all these issues we've been discussing. I meant to get an answer into Art about American culture, but John, I'm glad you got here first, because you said it better than I could.
I just love the trains in Europe...they are big comfortable, slick. You can eat, drink, sit in huge comfortable seats. You can meet people, strike up conversations, start a romance!!!
Trains in Europe are not like subways or like buses. They are big, roomy, more like long narrow living rooms with all the comforts of home. A bathroom when you need it, coffee, reading material, or simply a long gaze at the countryside. And wide aisles for walking when you get restless.
At night the rooms can turn into sleeping cars with beds and comfortable mattresses.
It's all a matter of marketing and packaging. We could consider a two class system like the Europeans, first class for those who want the luxuries and can't abide the thought of being crammed next to a thousand anonymous bodies like on a city subway...and second class for those who don't want to spend so much.
First class, or perhaps "World Class" cars could have comfortable seats, lush upholstery, stewards, seat side service and all the special amenities.
But second class ("Commuter Class") is pretty nice too, much more upscale than anything we have here in the U.S. If the Europeans can do, why can't we?
As for freight...there are already specialized cars that deal with huge bulk items like coal, fuel, and other materials, that can drive right up to factories and load up directly from factory shutes. No need to pallatize.
And the nice thing about trains is that they are modular...all you need to is add and subtract cars, you can have luxury cars, commuter cars, and coal and cattle trucks all hooked up together.
Energy wise, they represent a huge savings, because the momentum of each car is added to the momentum of the next car. There is little stopping and starting, and few traffic accidents.
Well, I could go on and on but I'm getting a little off the subject here...
Linda
Linda and Art:
I also posted your comments (hopefully with your permission) on my blog here.
Maybe we need a separate thread on why we need expanded passenger rail. But something needs to be said about America being dominated by a "car culture." And that is that it didn't spring up organically, but was actually created by government policies and government investments. For the past 60 or 70 years or more, car use has grown and passenger rail has declined as government investment in roads has grown and in rail has declined. The federal government built the Interstate highway system, the free market is incapable of creating such a system. And the cost for road projects is not cheaper than building and maintaining rail. So our preference for cars is ultimately not an expression of our culture so much as an expression of government activities. Activities that have been heavily promoted (as in lobbied for) by auto companies and road builders (the latter are a very powerful lobby in case you didn't know).
And suburban sprawl? ... same thing. Government support for mortgages (the fact that Fanny Mae and Freddy Mac buy them from the banks) are what enable banks to lend you hundreds of thousands of dollars with a 30 year pay back period at interest of 7 percent or so (give or take a few points). Under a truly free market system no one would ever lend you money for 30 years at 7 percent.
Rail does move people in a more energy efficient way, and passenger rail has been a key part of redevelopment plans in places like Denver and Portland, Oregon.
I understand that people and municipal officials are getting interested in regional passenger rail even in Michigan. We could have good rail service that people would use. And we need it, gasoline is going to get expensive again (see The Oil Drum and Energy Bulletin, both blogs, for more insight on that) and alternatives like bio-fuels, hydrogen, etc. are actually not likely to give us the abundance of cheap energy that petroleum has for the last few decades.
Will
Yes Art, shortsightedness seems to a new American Tradition.
And with Henry Paulson, and Bernanke, it appears that the tradition continues.
When I screw up, it's my problem. I'm responsible.
When GM Management screws up, it's my problem. I'm responsible.
When Henry Paulson screws up, it's my problem, I'm responsible.
When the House of Saud screws up with CitiBank. It's my problem. I'm responsible.
When The Bin Ladens screw up with Bank of America, it will be my problem. I will be responsible.
This is the new way. This is the American way.
Wease:
You always see through the glass darkly. The opposite view might be that we have all become Supermen called upon to save the day.
We all came from a family and in families mistakes are made; bad judgments lead to heinous results; misfit siblings encumber parents and their brothers and sisters through irresponsible or greedy behavior, but we learn that we are all family and we must bear the burden of righting the wrongs of our relatives. In essence we become responsible.
As much as we, in this country, are a loose group of self-indulgent individuals, we are at the same time, a family. As such when mistakes happen; due to greed, ignorance, overreaching or nonchalance, we are the only ones who can right the wrongs. It is the basis of community.
Would not argue that criticism is called for. Don't have a big problem with condemnation, if it's tempered and sensible. But whining advances nothing.
In that vain, let me be the first to thank you for your acceptance of responsibility and any help that you can offer.
Art said, "You always see through the glass darkly. The opposite view might be that we have all become Supermen called upon to save the day."
Don't put on a cape and go jumping off of buildings Art. :)
I had a relative with a problem drug addiction once. I visited my mother and she had been cleaned out by this relative.
If we had followed the Paulson plan, we would've gone deep in debt to finance the drug addiction.
We didn't do that. We changed the locks and that relative had to change behavior, because we didn't enable it. We weren't SuperMen who could print trillions of dollars to feed the addiction.
BTW Art, if you are such a SuperMan, would you mind giving me $50,000? I promise to waste some of it, and spend some on my friends. and I promise not to hit you up for more money, for at least a month.
As a SuperMan it should be easy for you to gift me endless packages of large bills.
Linda, John, even Will:
I would guess that you didn't closely read my couple of posts on rail. I didn't disagree with many of the advantages you all have posted.
There is no doubt that it is more efficient. I explicitly stated that using rail for freight should be a priority. John, I do ride the roads next to those semis and I hate it. There was a time when truck drivers were the best and most courteous drivers on the road. Today, they are all frustrated NASCAR drivers, with few of the talents.
Now when we get to cause and effect I think some of you are being a little myopic. There is a great deal of chicken or egg about which came first and what drove our desire for a "car culture". When Eisenhower laid the plans for a nationwide interstate system lobbyists were not a big influence in Washington. My best recollection was that it was as much about national security as feeding the car beast.
I also suggested that in major urban centers, old and new, that rail transport for workers might work very well. To your point John, where rights of way already exist, a major hurdle is overcome. Far from the vestiges of Portland or San Diego or LA or NY or Denver, there is a vast area of communities that actually never had much rail service, other than perhaps freight rail. Those communities began expanding in a time when the automobile was king and municipal planning did not include a factor for the use of rail transportation. In many of those areas "suburban sprawl" occurred, not because of governments or mortgage companies but because people were seeking more security and, though abhorrent, many were seeking relief from the intercity schools and the attendent integration. The latter didn't work long. Many also wanted more land and a view of something other than another row of apartment buildings. Fresh air was a sought after novelty for many.
In many of those areas, industry (jobs) has moved outward as well, for reasons I stated earlier. In Dayton and in Raleigh, my experience base, new industrial plants were built far away from the urban center. The Research Triangle Park sprung up in this area during the 70s and continues to grow, population wise, at a faster rate than the US. The Park was built in a very attractive setting a reasonable distance from the cities of Raleigh, Durham and Chapel Hill. It is closer to Durham and Chapel Hill but most of those employed there come from the Raleigh area; mostly the Raleigh suburbs. From where I live it's about 20 miles, give or take.
We have just undergone an effort to establish a rail system in the area and public opinion was strongly against it. Building the infrastructure was going to be very expensive and while there would have been some riders most of the populace saw just another government subsidized system. Could that be culture? We are continuing to expand suburbia in all directions and businesses and homes are inhabiting that expansion. Now if the new employers only hire locals that can keep everything confined to a small community but if the employer is large then future employees will come from all around the area. We have a reasonable highway system in and around the area, albeit very crowded, by NC standards, not LA standards. In this area you're not going to easily convince folks to get on a train or even move closer to work. There's no great advantage to living close to work when you don't know if your job will be there beyond next year and your next job may be 25 miles the other way.
Now I never trashed the European systems. I have always understood that they are comfortable, fast and convenient. My point was that they have pretty much always existed and thus the culture was not only used to them but favored them. Not true in the US.
True we have many metropolitan areas where living close is impossible, price wise, so people move farther out and the traffic volumes coming and going creates a demand for rail service in and out of the hub of jobs. NY city certainly would be a significant example. I have often thought that riding a train to work, enjoying all the accouterments that you all speak of, would be fun. Of course many of those practicing that in the NYC area turn 8 hour days into 12 hour days. Leisure time with family has some benefits.
The "find the curmudgeon" game is always interesting. Will blames our destiny on governments and lobbyists. John on advertising. Get a grip guys! No doubt there are many aspects of our socio-economic system that affect our cultural desires but trying to skinny them down to some one or two things is fanciful and frivilous. I won't deny that their are many influences that cause cultural shifts or reinforce them but governments and the business world still react to consumer desires. If we demand more suburban homes, a developer will come along who will build them. Cities and counties will go along, and yes even promote, because tax bases are increased and more homes mean an influx of more workers.
I agree that we are manipulated much more than we would like to admit by advertising but free will isn't destroyed by advertising, merely enlightened. John, your smoking analogy is beneath your intellect level. When I was young smoking pervaded our culture. Folks smoked in public, on their porches, standing in the streets talking. Movies were loaded with actors smoking. Smoking was everywhere and that was before TV was even available. Surely outlawing TV advertising, and other subsequent media advertising, of cigarettes, provided a dampening effect but the health issue is the real driver here. If it were proven tomorrow that cigarette smoking was good for your health, the industry would blossom without one minute or inch of advertising. It's often our failing to let pet peeves become the harbingers of all ills. I remember TV ads for cigarettes when I was young and my most vivid memories, then and now, isn't the cigarettes or the smoking it was the snippet from Grofe's Grand Canyon Suite and actor James Daly. Don't know why about Daly but I remember him. I never smoked either of the brands associated with those commercials.
"Car culture", the same thing. Long before TV advertising was available, living accomodations began to create a need for at least one car per family. As wives and mothers entered the work force, often traveling in an opposite direction, two cars per became the norm. As folks moved farther out from shopping hubs even those mothers who didn't work needed another car to do her daily errands, mostly shopping. Kids began to want cars and that may have been due greatly to advertising but a reluctance on the part of parents to be tied to their kid's schedules played a role as well.
Our "car culture" was much less due to advertising than the choice of the cars we desired. We will want the cars, even if you cancel all the advertising for them.
No matter what the root cause, and there is not just one or two, we now have a "car culture" and it will not go away or decline peaceably.
It is highly likely that a return to very high gas prices will stir further interest in rail transportation and a move away from reliance on cars but we are entering an era where fuels for cars will not be oil based so gas prices will have less effect. If all that comes about you are not going to see a rush to the trains.
Read what I post a little more carefully. Not intending to be defensive here but there is a tendency on blogs for folks to get carried away with their own demons and read into a seemingly opposing view combative assertions.
Wease:
How did you know?
You are next on my list just as soon as I have all I need. I also have to get my printer fixed.
Stay by the phone.
If we can not stop this theft, we must change the money system. Dual currency? Barter? How do we plan for the complete collapse of the American dollar?
What is our vision? What is the economy for? Betrand Russell forcefully said in 1918 in his book "Proposed Roads to Freedom" that it is possible to meet the needs of every individual with less than 4 hours of work!
"Economy anarchy is the real evil" albert einstein
Jordan, Anonymous:
Tom Friedman has an excellent op-ed today right on target with our discussion yesterday, see it here.
Art...
This is what you said:
* * * * * *
'In all, it comes back to culture, culture, culture. Driving our cars is the last thread to the frontier days. It's a trip to the old west everyday as we go to work. Like the cowboys of old we have to meander the herds of cows (cars) but often that gets the juices flowing for the day. We are a self-directed culture. We no longer have control once at work. Our paychecks, along with credit, delimit other options. Our kids, and we love them, deprive us of the freedom to come and go as we please. What's left? Let me get in my car and drive!
Now if it comes to no choice, we're screwed but we'll adapt. Until then we will not be inclined to "go quietly into that good night".'
* * * * * *
It didn't exactly seem like you were saying Hooray, but I'm glad we got you talking and thinking.
Linda
Addendum to last...
I think it is time for us to start thinking out of the box...to start thinking about the future and how we can change, not about how we should maintain the status quo.
These are changing times.
The biggest impediment to innovation is a huge, archaic, out-of-date infrastructure. Since our gasoline supply could run out very soon, why wait until the last minute or the next major socioeconomic crisis? Why not begin planning for it?
Linda
From whence the funds for the economic stimulus?
The thing is, they are going to have all the money for 5 years, while we pay 31% on credit cards.
If the US goes bankrupt they will have our money from our future earnings so they will be in the cat birds seat.
Linda:
I see nowhere in my quote that I suggested that rail was bad, that I disdained it in any way other than it is contrary to our cultural bents. Cultural bents do not change easily even when forced.
We Americans love our cars, regardless the origin of that love, and we will not be inclined to opt for alternatives until we have no choice. There are, as I stated, environments where rail makes sense and is or will work but those are limited venues.
Since we have industry already on its way to manufacturing none gasoline cars it would not seem wise to spend a lot of funds trying to create rail transportation systems across the US to facilitate workers going to and from work or around town.
In those areas where it's feasible local governments can take up the gauntlet and there already are federal funding options available. The impetus will have to come from the local "cultures".
Meanwhile cars are not going to go away as the main mode of transportation for most of the country so rebuilding roads and bridges where sorely needed would appear the most utilitarian. In the first place many will have to travel roads and some bridges to get to the train stations.
I'm not opposed to your position, nor necessarily in favor of it, I merely tried to point out that when you attempt to change cultural behavior you will often fail unless there is no other choice.
We are currently faced with some serious problems and our leadership energies need to be focused on resolving those expeditiously. Road and bridge projects will require a short window of planning time before launching the actual work, employing folks. A massive look at new or refurbished rail systems around the country would require months, if not years of study, to determine needs, methods and viabilities.
Were we able to start a few projects quickly we would have to rely on foreign manufacturers of railroad cars because I don't believe we do any of that in the US anymore. I am not derogating foreign suppliers but we are not talking a highly sophisticated manufacturing process that we are unfamiliar with so I would think we would want to establish American companies to do most of the work. Especially if the government is funding it.
With limited funds, although that seems hard to believe these days, one could also suggest we focus on improving bus transportation in local areas. Again, likely faster and cheaper.
But the real reason the focus is on car travel related infrastructure, in addition to needing it, is to get people back on payrolls as soon as possible. The roads and bridges exist and need repair. Most states and locales have project plans already drawn up but they've been held up by funding shortages. A fairly short review period by a funding authority and we're set to go.
Thinking outside the box is good but when actions are needed immediately and you already know the needs that are in the box it seems superfluous. One must always be careful when thinking outside the box that one doesn't end up outside the box looking in.
At my age I have thought about most everything worth thinking about at one time or another; maybe except for rocket science. As for talking, all who know me and those who frequent here, are well aware that I will talk forever on whatever subject. Most of them would prefer you didn't get me to talking.
John, Art:
As I've been saying off and on for many months now on this blog, America is almost a third-class nation when it comes to social-infrastructure ... whether it be health care for all at a reasonable cost (e.g., compared to Canada), state-of-art transit systems, roads and railways.
Why? One of the main (if not THE primary) reasons is because we spend -- as I have previously shown with figures -- 45-50% of our annual Federal Budget on Defense (excluding Social Security and Medicare which have their separate tax inflows and payment outflows).
But anyone who suggests reducing the Military Budget is immediately characterized as endangering America's security and even of being unpatriotic. But the reality is that this very budget is bankrupting us. We simply cannot afford 700 bases; troops sitting idly by for decades in Germany, Japan, and North Korea; $18 billion a month for the Iraq and Afghanistan war adventures; duplicate aircraft of many types being purchased by the Air Force, Navy, Army, Marine Corp.; exotic airplanes and navy fleet ships showing enormous cost overrruns and doubtful practical utility; a stupendously costly outer-space "stars wars" technology that encourages others (e.g., China) to join the planetary militarization herd. The waste is enormous ... compounded by cost-plus contracts that end up being open-ended money trees for the Defense industry.
Obama wants to increase the Marine forces by 60,000 troops ... a questionable goal but if valid, then why not convert existing idle troops to Marines and save millions of dollars? This is a small example of how cost-efficient we must become WITHOUT compromising our security.
So must we begin to get line-item expenditure realistic and tough (as Obama is saying), but even in the Defense area where we are now spending over $585 billion annually -- excluding some $+- 150 billion Interest Cost on Deficits caused by bloated Defense budgets over past decades.
We should be considering a smaller high tech, fast in-and-out coordinated Military complex with highly trained troop forces and intelligence devoid of duplication ... while encouraging other Western nations to bump up their Defense expenditures by +- 0.5% from low average of 1.5-2.0% of GDP now.
We can then redirect scarce government funds to more productive internal investments
that multiply into more interesting expenditure dollars and jobs than investing in tanks and idle troops (including costly, diversionary and unproductive wars in Iraq and Afghanistan).
This is a perfect time to spend next 10-12 years concentrating investments on our internal economy and bringing Defense expenditues down to 3.0-3.5% of GDP or to 30% of annual Federal Budget over next 4 years. For we have a 10-12 year window of opportunity keep Defense spending at more prudent but responsible level since China and India are clearly completely preoccupied in controlling the industrialization of their potentially massive economies. Accordingly, they are in all probability in no grand rush or position to accelerate their military expenditures much above current 1.5% of GDP.
Meanwhile, not surprisingly, we still haven't reconstructed the damage done by Katrina after more than 6 years. WHY? ... because there's little money!Additionally, as most know, our social-infrastructure has been ignored for decades ... along with related added productivity improvements and job generation. This too must change!
European countries are far ahead of us here. They have conveniently acquiesced to US obsession to be the world's primary Protector and Defender ... thereby freeing up vast funds to maintain their social-infrastructures in tip-top up-to-date shape. Under enlightened, collaborative, diplomatic US leadership -- this self-inflicted costly imbalance also has to change!
But first and foremost we had better get our own internal house in order. As I've said before -- having been in Europe for over 35 years working for European international firms -- Europeans never hesitate to pick our brains and to selectively incorporate partly or wholly our original ideas and successes into their own unique value systems. We could start learning a lesson here in areas we are particularly weak in, namely, health care; all aspects of a modern infrastructure embracing high-speed trains, inter-city transit, sewer and water systems; compact, highly efficient cars; bulk transport via inland water ways and rail; alternate green fuels, and energy conservation.Arrogant inclinations we know everything especially in the social services sphere must also change!
Believe me: I've witnessed first-hand how the rate of innovation has been picking up markedly in Europe over last 10 years ... while it seems to have been sliding into almost neutral gear in the US. This too must change!
Frank Thomas, The Netherlands
Art, Layman,
You indicate we need to be responsible for our country and indeed, we are. However, where was that spirit for New Orleans and the people of that city after Hurricane Katrina. That was not the fault of the people who have lived in that city for generations? Why is no one interested in rebuilding a good flood protection system which is certainly possible with funding. It is a disgrace that this country is not willing to take care of the people, the infrastructure and the happiness factor of citizens. The priorities in this country have gone off track. I hope this "depression" will show people what is really important again.
NO Bailout for the City of New Orleans and all of the Hard WORKING people there who lost everything including their homes, businesses, and families who moved away and those who died there because they never had anything like this happen before and never needed to evacuate in years past. Many were elderly dying in the attics of their homes. Nobody in America cared, they just kept shopping while their fellow Americans suffered and did everything themselves. America is not the place it once was and I am saddened by that. I don't believe it ever will be in my lifetime. I am discouraged to the point that I would seriously consider leaving the country at some point down the road. GREED is a sin , it is immoral, it destroys everything around it.....GREED !!! America is Greed !!!!!
Art
I have read T. Friedman's article, and i can see he is finaly realizing the full extent of the problem. He basicaly repeated what i have been writing last 3 months and knew a year ago. Currently there is a fight between Smith and Keynes followers. Republicans are Smith and democrats are Keynes followers.
But i would say that both of them are right in their analasys, the problem comes in gathering the facts that our economists do when deciding on a policy.
Let's take rising home prices between 2003-2007. That jump in prices must have reflect in inflation rates, but inflation was prety steady troughout. The reason was that the inflation calculating was curbed by cherypicking in order not to cause consumer confidence fallout which was so evident after 9/11. The problem was that economists used those fake numbers to shape their policy.
Previously, all bubbles were curbed by interest rate jump, but not this one. Result is not fully recognized yet, maybe in a year we will know full extent of this deppression.
Situation changes fast but policy changes are laging too much in case when there is a political tie in congress and the house.
No one would even consider that there is too much of investments oh NO, that is Karl Marks/ communist thinking. Oh, No That is Taboo. To me what is important is that iT IS A FACT. Untill that is considered as a fact we will go deep into deflation and deppression. But that is what happened when dollar is not tagged to gold. Smith and Keynes are both right when currency is tagged to gold, and Karl Marx is right when is not tagged. There will be more and more of such opinions untill there is new McCarthy or we become social kapitalists. Just as history repeats itself. Same conditions were only during Great Deppression. Taboo prevent us from finding the solution, by not even considering it. Too much of invstments can be destructive just as too litle of it. Yin and yang principle is at play here, just as in everything.
Only way to solve the colapse is to make policy to remove some investments from circulation and transfer it to consumers. I suggest 80% tax for 3 years on those making over $1 million and employ and school unemployed.
Rise minimum wage and unionise.
Fix health care so it is not burden to business.
tax cut to business and remove corporate tax deductions for those making over what president of USA makes.
Ban payments of bonuses in stock options, but tagg it to it.
And, where is my REWARD for being smarter than Wall Street, Greenspan and Citigroup??????
Those of us who work hard, live within our means, pay our bills, we get nothing as usual except higher taxes and debt to pay off for those who stole billions of dollars in these last several years. Things better change..... this country is not bettter than a 3rd world country, it steals from the poor and working class and gives it ALL to the Rich and well-connected ......Don't think that will continue to work as alot of us are really tired of it all.
Frank Thomas You are totaly right about military budget. The reason all communist countries failed was percentage of millitary budgets, up to 70%. It marginalized all future planning and developement, inovations and social needs. Lack of motivation and lack of competition is another reason of colapse, but its effects are comparable to effect of greed in this country.
It is amasing how US government mistreats wounded veterans. When you compare it what Croatia, where i come from, after the half of its industry was destroyed in war for independence, gave their wounded veterans. They have total compensations for cars, homes and home care besides higher salary, even PTSP veterans. It is appauling how PTSP is ignored here.
It is not so much that the public doesn't have a clue - nobody I know is happy about it - it is that we have such a poor understanding of economics that it intimidates us. We gripe, but we don't know whether these actions are "right" or not. Your work, Dr. Reich, is much appreciated in helping guys like me understand it - although I am still rather dependent on your opinions. I suppose you could support a "Bailout for Berkeley" and I'd go along at this point!
WAKE UP EVERYONE!! If you don't research the current finances, you'll never know what is going on. The bailout is helping, but it's more fashionable to say it's not. Whether you take advantage of this situation or not it doesn't matter to me, because I'm literally drowning in money right now because I know where to look. Most people don't realize how much money there is out there. During economic times like this, there is more money to be had than ever. Because of the bailouts and economy, lenders are bending over backwards to bail you out too. Believe it or not, there is people getting tons of cheap money nowdays to start businesses, buy homes, pay off debt, and more. Bailout is for You Too!
And Citi choses this week to send letters to it's credit card customers telling them that as of Wednesday, the interest rate will be jacked up to Prime + 8.99% with a minimum of 14.99%. Given that prime is 4.00% this week, they are invoking the minimum. My rate will more than double.
Luckily, there is an opt out option whereby you can keep your current terms until your card expires. Pity the people who don't notice that in the fine print.
They are crooks and liars and we should just take the pain of letting them fail now, rather then delaying it and being $306 billion poorer as a nation when it eventually happens. I was in the UK when there was a run on the Pound and the Conservative gov't tried to keep it in the ERM. It didn't work, but the country spent a huge amount of its reserve trying to hold back the tide. I think this will end the same way and it won't be pretty.
Mberenis, I think you are violating the user agreement to come over here and try to sell us your credit.
Hows the bailout working?
Citibank has refused to talk to me about a one month deferment because I don't make enough money! I have a 725 credit score and my wife is over 700 also. I payed over 500K for a house that is barely worth 250K, Never been late on a payment. But have decided enough is enough so Citi can have my house. I am walking and converting all my assets into gold before the rest of the country collapses from the weight of the Bailouts to Billionaires.
Geez Bushman I am so sorry to hear this!!! Not just for you but for the others like you.
Citibank is our mortgage bank also.
I don't know how much money you had into your house but I am hoping you aren't walking away from a lot. We have too much money into our to walk away if the problem arose.
Good luck and keep us informed.
#$&&(*$@&#*!!!
New to the blog - Robert Reisch was my top three for Obama cabinent. What happened?
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Well, now that the plan is in motion, what do you think about Citigroup honoring their naming rights deal with the Mets???! "The 20-year deal is the most lucrative in the history of pro sports, worth an average of $20 million a year..." (www.forbes.com)
The problem with bailing out the banks is executive payment and this is an excellent example of what it is like to deal with Citibank:
Cancel your credit card before you die.........(hilarious!)
Now some people are really stupid!!!!
Be sure and cancel your credit cards before you die
This is so priceless, and so, so easy to see happening, customer service being what it is today.
A lady died this past January, and Citibank billed her for February and March for their annual service charges on her credit card, and added late fees and interest on the monthly charge. The balance had been $0.00 when she died, but now somewhere around $60.00. A family member placed a call to Citibank.
Here is the exchange :
Family Member: 'I calling to tell you she died back in January.'
Citibank: 'The account was never closed and the late fees and charges still apply.'
Family Member: 'Maybe, you should turn it over to collections.'
Citibank: 'Since it is two months past due, it already has been.'
Family Member: So, what will they do when they find out she is dead?'
Citibank: 'Either report her account to frauds division or report her to the credit bureau, maybe both!'
Family Member: 'Do you think God will be mad at her?'
Citibank: 'Excuse me?'
Family Member: 'Did you just get what I was telling you - the part about her being dead?'
Citibank: 'Sir, you'll have to speak to my supervisor.'
Supervisor gets on the phone:
Family Memb: 'I'm calling to tell you, she died back in January with a $0 balance.'
Citibank: 'The account was never closed and late fees and charges still apply.'
Family Member: 'You mean you want to collect from her estate?'
Citibank: (Stammer) 'Are you her lawyer?'
Family Member: 'No, I'm her great nephew.' (Lawyer info was given)
Citibank: 'Could you fax us a certificate of death?'
Family Member: 'Sure.' (Fax number was given )
After they get the fax :
Citibank: 'Our system just isn't setup for death. I don't know what more I can do to help.'
Family Member: 'Well, if you figure it out, great! If not, you could just keep billing her. She won't care.'
Citibank: 'Well, the late fees and charges will still apply.'
(What is wrong with these people?!?)
Family Member: 'Would you like her new billing address?'
Citibank: 'That might help...'
Family Member: ' Odessa Memorial Cemetery , Highway 129, Plot Number 69.'
Citibank: 'Sir, that's a cemetery!'
SPAN>
Family Member: 'And what do you do with dead people on your planet???'
^^ nice blog!! ^@^
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