To bail or not to bail?

Let's set aside the demands of the extremists on the right, calling for more deregulation and tax cuts to address the financial crisis. It's like trying to discuss the finer points of Plato with a small, yapping dog. Otherwise, I can understand the desire on the left and right to "punish Wall Street" by defeating the bailout plan. Unfortunately, the markets are so intertwined and inherently fragile, the first casualties are going to be on "Main Street" (a bittersweet anachronism for a nation that has mostly abandoned its main streets).

Wall Street -- and increasingly overseas investors -- owns Main Street.

The plan voted down yesterday was flawed but better than the original Czar Paulson contraption, which would have given the former head of Goldman Sachs unlimited access to use American treasure trying to extinguish the wildfire he and his greedy buddies started. Well, not quite -- and here we get back to the unworkability of "punish Wall Street" argument. Deregulation, a casino-like attitude on Wall Street and a bubble-blowing Fed were the biggest culprits in the mess. But, so, too were the American people.

We voted in the deregulators and stood cow-like as it happened, the jobs disappearing, wages stagnating. Worse, too many of us thought we could get rich quick off real estate, like day trading before it. We bought overside houses and ran up credit-card debt we couldn't afford. We bought SUVs to drive ever-longer distances as oil was peaking. We wanted tax cuts that gutted our schools and infrastructure. We wanted all that stuff at Wal-Mart. The casino became our ruling totem. It's quite a remove from the generation of the Boomers' parents that saved and waited to make purchases until it could afford them. It's their passed-along wealth that is helping cloak the "banana republic with nukes" that we're becoming.

So here we are. Were it not for the legacy of Franklin Roosevelt, we would already be seeing bread lines. And how many better ways could we use $700 billion...

It could go into a 21st century public works program, to create high-speed rail lines, turn around urban school districts, retrofit suburbia for an era of much more costly energy, invest in science and research, and do some -- some -- of the green technology that Tom Friedman harps on.

It's tempting, if for no other reason that nobody knows if the "rescue" plan will work. Much of what ails the capital markets are complex derivatives that are actually tied to no real assets. Nothing. There's no house to sell later, no factory equipment to move and redeploy, recouping something for taxpayers. These are pyramid schemes wrapped in Ponzi schemes concealed by computer models that nobody really understands. They have become much of the "value" created by the American economy in recent years as manufacturing and even research has moved offshore and our college graduates have gone to work in call centers and chain stores.

So let these bets unwind and crash. And let the foreclosures continue. Why should the taxpayers bail out the house owner who took on too much debt? This is how recessions work out the bad bets, so a new business cycle can begin. Then, repeal the deregulation of Phil Gramm -- Republican John Sidney McCain's Treasury secretary-designate -- including the one that prevented the government from regulating derivatives. And begin a program of serious reform.

Tempting.

Yet a great risk -- we're all tied to the same rope, and a great weight is pulling us all off the side of the cliff. So much for the fiction of the rugged individualist.

Comments

[Joanna]

Change, real change does not happen overnight or as a result of one election. We have to chip away at it, sometimes taking large swings.

In my opinion, the bailout bill needed to fail because:

Our so-called congressional leaders took Paulson's 3 page arrogant non-starter
proposal, turned it to 110 pages and didn't expect the taxpayer to actually notice:

(1) Section 107: Allows the Secretary (Paulson) to "waive provisions of the
Federal Acquisition Regulation where compelling circumstances make compliance
contrary to the public interest."

I read this as a rewording of the infamous 32 words regarding no government oversight. Paulson would have the authority to do as he pleased "in the public interest."

(2) Speaker Pelosi's comment: "the era of golden parachutes is over."

Hogwash. The shiny new 110 page bill only bans golden parachutes for "incoming
executives."

Outgoing executives awarded severance packages more than three
times their salary would be forced to to pay a 20 percent excise tax on the
money. Ahhh, too bad. Twenty percent of sometimes 30 - 40 million. The average
taxpayer pays over 30 percent income tax.

[Chuck LeDuc Díaz]

"It's quite a remove from the generation of Boomer parents that saved and waited to make purchases until it could afford them."

WTF? The boomers caused this mess with their selfish deregulation, ran up completely unsustainable debt, and systematically destroyed our political system. The boomers are still firmly in control, and we'll be paying the price for their misdeeds for generations to come.

[eclecticdog]

Let's see how the hedge funds do today. It's one of the four windows (Sep 30) for investors to withdraw money from these funds. If there isn't a rush and the hedge funds survive to invest for another day, maybe the bailout isn't such a good idea. The market recovered nicely today (not completely, but still up, and not down). I have a feeling the wolves are waiting for the rabbits to run so they can scoop up even greater deals. There is still a lot of cash standing on the sidelines, waiting to jump in. Let the bankers that didn't do their due diligence or were frauds get eaten. Those that survive will be wiser, richer, and better businessmen (one would hope).

[Buford]

I'm in favor of letting those who made bets take the lumps of losing the bet. That's the market-forces argument so beloved of the right, isn't it?

I'm NOT in favor of letting ordinary people who simply bought a house on the strong recommendations of those in the housing and mortgage industry. They DID buy a house they couldn't afford. They DID get a mortgage that was was poorly conceived with a time bomb embedded in it. They did it because people they paid for advice told them they should.

There must be some way we can help those who are losing 100% of their real wealth due to foreclosure. Instead we are looking at plans to help people who are merely losing percentage-points off their profits.

Everyone in "the markets" ought to know they are taking a risk, making a bet. Many of those who were encouraged to buy a home during the peak are people who do not invest in the markets, unless their retirement plans do it for them. They were not aware of this part of the risk because it was deliberately hidden from them.

I experienced this first hand. The mortgage broker told me to buy a $500,000 home - just because I was 'qualified' for it. My buyers-agent Realtor recommended that I buy a $750,000 home when I was pre-qualified for $500,000. "You'll be able to find a mortgage you can afford." I resisted those temptations despite strong resistance from every person involved in the process.

I'd like to claim it was wisdom or prescience, but it is really a personal reluctance to spend more than 25% of my net income on housing combined with a reluctance to bet heavily on my future employment prospects. As a result, I'm in pretty good shape come hell (McCain) or high water (Obama).

The initial bail-out was targeted to save only market investors. If the immediate cause of the credit liquidity crisis is mortgage failures, why not address the repairs to that cause? (I'll answer my own question) Because then the federal money would not go directly to the rich people.

[Emil Pulsifer]

I'm glad the House rejected the measure.

Of course, I don't for a moment accept the naive assertion that the Republicans who derailed this were acceding to populist pressure from their constituents: I think, rather, that they hope to use the pressure of additional delay to advance their political agenda in drafting a new compromise; "constituent pressure" was simply a convenient excuse.

I understand Mr. Talton's ambivalence on this issue, but my sense is that his earlier voiced suspicions about the Bush administration's urgency in a call for action were justified; and it is becoming clearer, certainly to those in the legislature, that the economy will not collapse tomorrow, nor next week, nor the week after; and, at least among those Democrats holding out for more responsible terms, that the country would be ill-served by a hasty, poorly considered, yet far reaching piece of hallmark legislation.

Shrill voices in the media contribute to the public's sense that the sky is falling. The Arizona Republic shouted about the largest one-day point drop in the Dow Jones, but saw fit only in a caption on an inside page of the business section to note that as a percentage of market size, Monday's drop was "only 18th worst" in historical terms. And that drop was largely offset in next day's trading.

According to a new blog piece in Barron's, banks have already loosened lending simply because the new quarter has started (and because of the way this affects accounting). And recent injections of liquidity by central banks around the world have also had their effect:

http://blogs.barrons.com/stockstowatchtoday/2008/10/01/backwardization-sets-in-banks-loosen-lending-stocks-set-to-fall

Of course, the longer term problem remains, but the credit crisis isn't due to a shortage of cash: banks have been hoarding cash because foreclosures have caused a plunge in property values, and as a consequence so has the value of mortgage-based securities derived from them, which are held as assets by these firms; and as a result, their capital position is precarious. For such companies, operating in a market where property values are expected to further erode and economic activity is expected to slow and remain in recession, money lending is a bad bet.

To a significant extent, these financial firms' capitalization problems exist only on paper, and their positions would dramatically improve if the collapse of the housing market is stopped (more still if it is reversed).

Unfortunately, the housing market slide shows no sign of abating. The much talked about federal HOPE Act takes effect today, ostensibly allocating up to $300 billion for borrowers in default on their mortgages and those in danger of defaulting, to refinance; but aside from the fact that the terms aren't favorable enough for homeowners, the big problem is that (as one newspaper business section writer notes) "many in the housing industry say the law won't have much impact on the foreclosure rate because lenders are not obligated to participate in the program".

I don't think the bailout legislation (that was rejected) adequately addressed this issue. Its main focus was backward looking and reactive, and far too concentrated on purchasing bad investments from the fat cats instead of addressing the fundamental underlying problem.

My view is that only by legislation aimed at assisting homeowners, both legally and financially, is there any real chance of putting the brakes on the housing slide any time soon. And it must be wholesale, not symbolic: public funds, if they are to be lavished, should be lavished at the bottom -- call it "trickle-up economics" thereby saving not only the little guy but also the fat-cats whose bundled, mortgage based securities held as capitalizing assets are in danger of further erosion as rising foreclosures and declining property values continue on a mutually reinforcing downward spiral.

Another point: oil prices, which are far more likely to affect the standard of living of the average individual than stock market fluctuations, had resumed their rocket climb immediately upon the initial announcement of intent to bailout Wall Street. Since the bailout has been delayed and become uncertain, oil prices have sunk equally fast, again, to less than $100 a barrel for the first time in a long while.

(And isn't that a curious fact? Nobody will convince me that actual, day to day oil demand of the PRODUCTIVE world economy has changed that much, that fast: remember, we're talking about a meteoric rise and fall in just a couple of weeks, predicated on nothing more than some news about bailout plans and problems with them.)

Falling property values do theoretically make housing more affordable, even if credit remains tight, though boding ill in the long term. I have full confidence that liquidity will be found when the industry founders sufficiently to force it to accept drastically lower profit margins as the only alternative to none.

And if the delay in passing legislation should precipitate the kinds of problems which have been suggested? History shows that fundamental change in this country is usually a response to crisis; otherwise, the status quo simply lacks a motive to compromise. Consider for example the Square Deal, the New Deal, and the Great Society programs. One can argue about the extent to which such programs actually addressed the problems of the time, but there is no question that they were conceived and succeeded only in response to economic and social crises.

[Emil Pulsifer]

Mr. Talton hits the nail on the head, of course, with respect to the issue of deregulation over the past 28 years; but note that the conservatives have already begun a propaganda campaign to place blame elsewhere.

In a previous blog, Mr. Talton noted the receipt of numerous, suspiciously similar emails (falsely) asserting that the crisis was precipitated by Democratic pressure to lend to unqualified minorities.

Lately, I've noticed a new tack in newspaper editorials and analysis in the Arizona Republic, which I suspect is reproduced in many other daily newspapers of record: the claim that "mortgage fraud is behind many of the bad loans causing the nation's financial crisis".

Never mind the fact that vigorous oversight would have prevented this, even assuming that it was the case. And of course, there are no doubt a number of such cases.

Still, I fully expected the announcement, AHEAD of the FBI investigation, of a pending investigation. After all, conservatives (and their business clients/hosts) don't want to accept a new, relatively strict regulatory regime. Then, if the culprit wasn't lax enforcement and deregulation, it must be that old standby, fraud and corruption.

Consider the spin put on the matter by one local regulator, superindendent of the Arizona Department of Financial Institutions:

"Now with more loans in default, lenders are looking at the underlying loan documentation and finding fabrications and misstatements that were so sophisticated they were undetectable before."

Really? And note that, according to this, it isn't the lenders who conceived and perpetrated these these super-sophisticated frauds, but apparently potential homeowners seeking loans.

Look for more of this spin in the months to come, as right-wing paper mills flood media offices with position papers and research "studies".