You have to love The House of Representatives. Each member up for election every two years. Each with a finate and focused constituency. When a bill stinks, it’s the House that sniffs it out. Today’s victory (or failure depending on your onion), was a bipartisan action. The news is leading with the notion that the republicans killed it, but 90+ democrats voted against the bailout as well. A true sign to me that the 2010 election is already on their minds.
Much to my chagrin, I expect a bail out package will eventually go through. Just enough compromise will be done so that House reps will be able to go back to their electorate and say, “yeah it sucks, but…”
This won’t be a popular opinion, but my take on this whole mess is to let it burn. People loosing their houses… let it burn. Lenders closing, credit markets drying up… let it burn. Dow down 800… let it fucking burn. There has to be losers in capitalism. There has to be the threat of recession. There has to be that threat of disaster to keep free markets honest.
Padding the blow through government intervention will only lead us down the road to Communist China or Nazi Germany. Government control over the economy has never worked, will never work, and only dulls the ability of Americans to prosper from their own hard work.
I know it’s a rough day, and a lot of you are pretty frazzeled, but I’m enjoying it. I think I might even make s’mores.
Todd -
Real people – small businesses, individuals, people you know – are going to be very hurt by this. Not a s’mores moment.
That’s where you’re wrong, Todd. We don ‘t live in a free capitalistic system. The government is involved at every layer. Allow an emotional market to freefall and you risk cataclysm. Take it that far and you lay a foundation of discontent with putridity ripe for the rise of a fascist, like Mao or Hitler.
What we have here is a failure of leadership and it’s such a sad shame.
Having the government involved at every layer is not an excuse for getting them more involved. Look where government has done for us so far.
Dave, real people will be even worse off when they do pass this. Today is definitely a day for celebration, even if it is short lived.
Todd, glad to see your “block” (writers) has been removed. I am not and have not been totally in favor a a huge bail out. Let everything run it’s course…the weak will fail and the strong will survive. With all the attention and doomsday speak that’s been constantly talked about, it does make for some very artificial movements until the dust settles. That being said, I’m sure it will pass because the politicians want the dust to settle on their terms.
Todd – I understand the theory well, and a month ago would have agreed with you. But the markets are disrupted beyond a simple recovery – if there is no intervention, they will simply cease to function.
I can’t even imagine how bad it will get if that happens.
You cannot deal with the force of an emotional market with rationality. While pundits and politicians bicker philosophy, flames consume. Collapse – if it happens – happens quickly.
It is the job of the federal government in the type of system in which we live and work to be the buyer of last resort.
I would think mortgage lenders would understand that the securities have value. Most mortgages are performing. The purchase of this paper provides an infusion of stability and confidence into fretful markets and gives companies who opt in some breathing room.
This IS organized and controlled market capitalism at work. It’s just not laissez-faire economics.
The problem Dave, is that very few people bothered to imagine what will happen if the bail out happens. Luckily, 227 members of the House of Representatives did.
It won’t be a casual free fall….it’s gonna hurt bad. But it’s gonna have to hurt to get better. WallStreet played Russian Roulette and here we are. We weren’t living in reality- it was the age of entitlement.
Now it will be the age of enlightenment.
Interesting you say it that way, Rebecca. I have an acquaintance who has been hoping for this kind of collapse for that very reason. I found the wish for that path to enlightenment a bit brutal.
It is a bit brutal, but we’ve been brutal, buying, buying, buying with no real backing and equity…we want it and we want it now and we get it.
And that’s fine if the resources are there….but if the resources dry up and we are still doing that…..what then? how long can that ccontinue.
I don’t welcome the moment, but I don’t welcome a prolonging, I want our country to have a healthy correction. I am a mother of three young children- I want to get out of this to have a good life, for me and for my children.
We need to rebuild. It’s long overdue.
FWIW, I join you Todd in celebrating this day. But with caution and trepidation.
As those of us in the dextrosphere have been discussing for a while now, there are practical emergencies that do sometimes require compromising principle. (Insert random ticking bomb torture scenario here.) This credit crisis may just be one of those scenarios.
What Dave and Rebecca and others are pointing out is that this could be a VERY painful period sans bailout. What you and I and others believe, however, is that government inaction here may actually be better than government action — given the history of government actions in the economy.
And yet, even I have to pause and wonder if this isn’t one of those cases where we put ideological purity aside and see if there’s something we can do to prevent a full-blown economic depression with minimal interference.
I like the insurance plan that the House Republicans pushed (and apparently couldn’t get through); perhaps with a layer of safety net, the private market will start to function again. Fact is that 97% of all mortgages are just fine and dandy (I had a meeting with someone who should know last week). The media distorts the true picture, but then, they’ve been doing that for years now.
If anything, I could see three short-term steps short of fullblown bailout for immediate relief to the market.
#1 — Suspend the “mark to market” accounting rules that are causing some of the panic selling by banks. Just with that, banks will have time to sort through their portfolio of mortgages and MBS to see which ones are junk and which ones are sound.
#2 — Start a trial to test the “insurance” theory. Maybe let the Treasury spend up to $5B in insuring mortgages and MBS; that additional layer of protection might get private entities to want to wade through the morass that is MBS and bid on the ones they think are undervalued. Right now should be an incredible buying opportunity for folks with cash — like Buffet.
#3 — Immediately pass a temporary 90% tax on Hollywood actors, pop musicians, and media personalities who earn more than $500K a year. Call it an “Entertainment Windfall Tax”. They are among our biggest proponents of government programs for “social justice”. Let’s answer their prayers. Use the proceeds to buy toxic assets. Let the pampered stars argue that they can’t make ends meet on $500K a year. That’ll be fun to watch.
-rsh
Yes, but the flight crew can bring us into a bumpy but safe landing saying our prayers with vomit in our bags and a flight of bitching passengers who are alive, though pissed and shaken and still walking – OR – they can fight about who did what to whom, etc. while the plane goes down and the gates of heaven have a few more enlightened angels saying glory.
What we are facing is not the longterm problem. We’re facing a fast shift of potentially deadly emotional wind. We can argue all the ins and outs of who did what to whom LATER.
Do you evacuate when faced with a catastrophic storm or do you sit at home and argue about climate change?
Diane,
I agree with your analogy, because you did express that the outcome will hurt anyway. I just get surprised when people say they didn’t see this coming….and I pray that they take a better look around this time, because it’s this kind of false belief that didn’t help.
The test is, in light of this, will you (In the broad term) still go out and buy a bunch of “frivolous toys tomorrow”?
#3…nice
I totally want what is best for my country, and agree… let it burn. We MUST have moral hazard in my opinion. We MUST lose some Starbucks and Home Depot jobs, and replace them with jobs that are sustainable. Do ya’ll know how hard it is to even find a toothbrush that is made in the USA? And yes, we MUST stop buying houses with Monopoly money as that also is unsustainable. I about fell over in 2003 when we relocated and the realtor (in a little podunk town in flyover country) told us about the new great mortgages… 80/20 loans and no PMI, no down payment or closing costs? It took me two years to be comfortable buying a house, then we were transferred again in less than a year, and I’ve spent two years in a cruddy apartment while empty houses literally rot around me but I am not going to sign my name knowing that if we were transferred again or heaven forbid something happened to my spouse the only option might be to default. Credit is not a right, it’s a privilege. And maybe if we abuse it we should lose it?
While my view might be unpopular, US economy (and by extension global economy as implemented by IMF and World Bank) wasn’t “free” since a long time – an not by a long shot. Not since Bretton Woods Agreements, not since 1971 floating exchange rate allowed the Congress, Treasury and Fed to run huge deficits, not since Fannie and Freddie GSE’s we pressured to pump money into real estate and lending market to “stimulate economy” and create “wealth”, not by production of goods and services but by printing more debt paper. Our economy is all but “free” – it is “political”. Common sense was abandoned long ago. In a skewed “economy”, financial markets simply respond to failed policies by taking advantage of “opportunities”, (and yes they did) by creation of “paper wealth” that was used as “currency”. Nothing lasts forever, the bubble had to bust someday. The global banking and monetary system is broken and it must be revamped, but not by burning it to the ground. US government once tried inaction and it got Great Depression that took 10 years and a war to recover from.
What we need is leadership that would steer through the troubled waters. Do not make a mistake about it – if not put out, turmoil it will be global. Mistakes were made; new order needs to emerge, but not by itself. Money evaporated and will keep evaporating bringing economy to standstill. Corporations will fall, jobs will be lost, pensions and 401k plans will disappear, all but build on “virtual equity” of sustained growth. Did you hear about firefighters, nurses and policemen already seeing 2/3 of their pension plans collapse? (weren’t MBS second best thing to FNMA Agency bonds, right?).
This is dark scenario that would be best breading grounds for fundamentalism, Nazism, and any other -isms that might emerge if left to their own devices. Russia’s communism emerged from war-time poverty, Germany’s nazism emerged from Great Depression, islamic fundamentalism from disparity, poverty, lack of leadership and inaction of Arabic dictators.
Enough of examples. Before the whole system can be replaced, existing machine must be lubricated, hyper-inflated equity and leverage unwound, excess drained. Not by puncturing the balloon, but slowly letting the excess air out of the balloon while holding it firmly in place. Let it loose uncontrollably and it will knock us, bystanders, of our feet.
The crisis does not exist in a vacuum. We all contributed to it, by getting accustomed to spend and live in debt up to our ears. We somehow ‘deserve’ this bigger house, this bigger car, and million other things that clutter our oversized houses.
But the “not my fault” feel-good attitude, while quite liberating (and I agree – I feel the same knee-jerk reaction), “let it burn” stance is simply dangerous. It is like feeling well-masked satisfaction of watching the house of your much hated, arrogant neighbor burn to the ground, not realizing that the fire has already spread to your own. It is time to save at least part of the neighborhood before it all goes up in flames.
Mortgage Jack – Nicely said.
Correct me if I’m wrong, but memory tells me strict accounting mark to market rules came out of the S & L crisis as a solution to prevent failure due to the overstated value of assets.
I don’t think we should take lightly any vacation of mark to market rules.
The core and substance of the Paulson Plan – namely the creation of a reverse auction system in which the Treasury acts as the buyer of last resort for mortgage backed securities to help troubled institutions get this hard to value paper off their books – is a sound plan. I think the public and congress over-reacted and so I’d have to say the administration didn’t do such a great job selling it.
What we have here is a pricing mechanism failure. Rather than masking the problem with a mark to market vacation – which BTW might not be so easy to undo – the auction system could jump start a real market and other buyers might follow. That’s a real fix in which taxpayers are NOT bailing out but buying mortgage backed paper that likely has value far above the purchase price.
I would hope that policiticians could demonstrate leadership and good statemanlike qualities and help their constituents understand simple business concepts rather than the easy role of demagogue.
Diane,
I think you may be right, though I do not know the origin of the mark-to-market rule. And I’m not hostile to the rule itself.
However, given the current market conditions, mark-to-market could cause banks that otherwise would be fine to have to shut their doors. Consider that banks have reserve requirements by law; they have to keep some money in cash at hand. Under current market conditions, the incentive is to keep dropping the price of securities lower and lower until someone steps in. That, to me, explains the enormous losses in equities because holders have to sell them to meet reserve requirements, make margin calls, meet debt covenants, etc. in part due to mark-to-market rules and how they blend with other factors.
I just don’t get the jumpstart argument, frankly. If private entities are willing to buy at $X, but only the Treasury is willing to buy at more than $X… that’s not a mechanism failure but simply a matter of pricing. The Treasury is willing to pay more than what the private market participant is. That to me sounds like a classic bailout.
If you truly believed that these securities have value far above purchase price, then you should be calling your broker to buy them. They can be had for dirt-cheap. This is an opportunity to make a killing.
And so, without the Paulson plan, the market will start to function again. But to buy time, to get some breathing room, I think the gov’t could take a few actions short of a full solution.
-rsh
“If you truly believed that these securities have value far above purchase price, then you should be calling your broker to buy them.”
Agreed and that’s why hubby moved money into positions taking advantage of these discounted assets. Long term I expect to do very well, however, we are making the kinds of buys that institutional investors are individuals with huge capital can. For criminy sake, how much money to you think title agents make? LOL
Then I suppose given any previous financial crises we have suffered in which the federal government stepped in to help resolve a mess you consider bailouts? What then do you think the role of the federal government is in our type of system.? If your goal is ultimately to tear down and try to rebuild liberty from scratch – very dangerous – then by all means ignore potential cataclysm and wait it out and see if it corrects itself. It might, just like Katrina, there was a good chance it might have missed New Orleans and then some folks might have been able to say “I told you so.”
Far as I’m concerned, this isn’t a debate about capitalsim or a welfare state. Its an issue of facing reality, competence (or lack of it) and a fundamental flaw in financial products.
Todd is right that we should let the whole thing burn down, but the reason I say so is because the whole thing is flawed (cheap imports, debts and deficits, subprime borrowing) and needs to be replaced with a more realistic system which reflects the actual financial buying power of the nation. Unless that happens, the markets will keep falling, again and again.
OK, well buy some ammo, fortify your house, stock up on food, and hope for the best.
Oh, and while you’re at it. start improving the condition of the soil around your house using organic matter. You’ll need to garden and the cheapest way to do it will be using naturalized methods. Dandelions are delicious both as a salad and a tea.
Are you people nuts? You all must be sitting on piles of gold bullion. If we let our economy “burn” that is all we will be using for trade.
Every piece of our life that we care about revolves around a functioning credit market. It has stopped working. Your precious lattes and blogs will cease to exist.
Letting the meltdown occur to “clean the system” is like ripping someone’s heart out because they need a pacemaker. It’s stupid and kills the patient. Financial Luddites! Get a grip.
What does everyone think congress would have done if we were not in election season?
@Dave -
Seems to me the person who needs to get a grip is you. Tone down the language a tad, wouldja? I know it’s a stressful time for you, but your ranting isn’t exactly ‘helpful’. Stop reading blogs; go take a calming walk. Have a drink — it isn’t too early.
@Diane -
You may have confused me for some Ronulan who thinks all gov’t is eeeeevil and so on. I’m not opposed to some sort of stabilization, but the devil is in the details. And I’m not aware of any previous financial crises where the federales have stepped in as a direct market participant. Lender of last resort, yes. Injection of capital, yes. Directly buying toxic assets? No.
“What then do you think the role of the federal government is in our type of system.?”
As the above probably makes clear, the Feds are the lender of last resort in times of serious market panic. Frankly, if the Fed were to provide $700B in loans to the top 25 American commercial banks and let them figure out how to deal with toxic assets, I would have fewer issues with the bailout.
Above all, my point is that the Feds can and should take immediate action to create some breathing room. I worry that a truly horrible “plan” gets crammed down due to the emergency. Well, stabilize day by day; let’s take it week by week. Until we have a plan everyone can sign off on.
What a natural disaster has to do with this is beyond my ken, except perhaps as a hyperbole invoking some sort of panic response.
-rsh
Rob – I don’t read blogs all day – I do have a real job and a family – that’s why I care when I see people espousing really dangerous ideas. Interbank lending has stopped. Last night ECB was loaning overnight money at 11%. LIBOR was over 6%.
If this doesn’t get fixed soon, the entire economy grinds to a halt. Do you not believe that’s going to happen?
ROB – you stated
“What you and I and others believe, however, is that
government inaction here may actually be better than
government action — given the history of government
actions in the economy.
And yet, even I have to pause and wonder if this isn’t
one of those cases where we put ideological purity aside
and see if there’s something we can do to prevent a full-
blown economic depression…
That is where I end up at a fork in the road and begin scratchin my noggin’. I gotta believe that NO-ONE really wants this thing [other than a very small minority] but what is it that we “do not know” that is around the corner?
The problem is that we have no trust in those making the decisions to believe that this is absolutely necessary now! Glenn Beck was talking about politicians crying wolf every time something comes up… big or small they shout, “he lied about this, they lied about that” that the American public is fed up! We can’t trust them enough to recognize the rare times that the truth may actually be coming out.
Now… I am not hiding in a corner, but my wife did catch me looking for my ‘blankie’ yesterday!
=0)
Chris
I am with you, Todd. If we have a government bailout, the value of our money will go down and inflation will occur. We MUST work to keep the dollar strong.
I am a Realtor. A decision to NOT bailout would SERIOUSLY affect my business. However, I am still for letting the chips fall where they may.
“What does everyone think congress would have done if we were not in election season?”
PASSED THE BILL.
@George – that is THE question is it not? Imagine what could be done in this country if no one cared WHO got the credit? Wow, great question.
@Diane – I believe that you may be right
Chris
@Dave -
Again, it isn’t about whether I believe something will or will not happen. Try not to panic. We’ll be all right; we’ll get past this. Maybe I’m dead wrong, but I do not believe that the United States has become a nation of nancy boys in two generations. Call me a homer, but I believe in the American people and the American economy.
While I have less faith in the American politician, even they have to recognize that something has to be done. And something will be. There simply is no reason to panic just because the House said nyet.
FWIW, if interbank lending has frozen, then the Fed can step in to become the lender of last resort. If banks all go out of business, the Fed can become the world’s largest commercial bank, providing credit direct to businesses. We’ll get by.
@Chris -
True, the political classes have failed us most spectacularly in recent decades. The media has as well. But again, I’m an optimist, and I remain fundamentally bullish on America.
Now it’s time to go back to work and try to influence the things I actually can control… like deadlines.
-rsh
“If this doesn’t get fixed soon, the entire economy grinds to a halt. Do you not believe that’s going to happen?”
I believe that it’s going to happen regardless.
Why is this $700 B being called an “investment” that will eventually earn a profit? It’s bad notes secured by properties worth far less. Plus, the $700 B will need to be borrowed. Add in that carrying cost plus admin and legal fees to oversee the future sale of these securities and it’s almost guaranteed to end up being nothing but a huge liability.
Mike: Even though we have higher than normal delinquencies and foreclosures, most mortgages are performing. The securities are mortgage backed which means they have real estate as security. It is unlikely that the entire pool would go south but even if it did, the collateral would recover some.
The other interesting angle for those who wish to see borrower relief is that the government may decide to go in and see if they can save some of the paper by renegotiating terms with the borrowers – something the current owners of the securities might not have the wherewithal to do.
DIANE – Are you referring to something like a Short Refinance?
Chris
No, they can modify the existing mortgage without going through a refinance.
PS, Todd. Thanks for a great post. I love this kind of free and open give and take. We all share a love of free speech and isn’t it grand that we have this blog in which to meet and exercise it.
I to believe that it will eventually pass with a little tweaks as really we have no choice at this point.
Not sure how true, but I heard a Dem on TV say it allowed for the Bank of Shanghai in China to transfer its bad loans to it\’s subsidiary in NY which is a US bank sort of, then sell them to the Treasury the next week. He said the global banks are threatening Paulson\’s people telling them they better not limit the bail out to US companies. I\’m not saying they shouldn\’t do anything, but I think it should be private with some govt backing. It\’s very possible looking at the Shiller Home Value to Income graph that this is a very bad investment. Everyone keeps saying we are going to make money, but for 100 years the house value to income ratio stayed almost the same. In the last few years it skyrocketed. It\’s possible we could see a massive, massive decline.. The banks are going to sell assets according to date in my opinion. Any home loans made in 2005 – 2008 will probably never see those kinds of home values again. I seriously doubt many of them will perform either. Foreclosure doesn\’t have the stigma it used to, people don\’t think twice. What if the govt buys them? Hold to maturity might be 50 years easily. I\’ll be damn near dead then, if not very dead. Of course 2K which is about what each tax payer will pay for 700 billion seems like a small price to pay to avoid a 10 year depression. Will it stop us is the magic question I suppose? In 2004 the median home price in Wilmington NC was about 150K. Right now it\’s at about 200K. I completely expect to see it go back down to the 2004 range before recovering. Huge portions of the country will never recover though. Things were normal then, right before we saw this massive leveraging. To sum up, I think loans made before 2005 have solid value, but I seriously doubt that many made in 2005 -2008 have any value. Bernanke knows this, so why is he acting like these loans are so hard to price. It doesn\’t seem like it would be that hard to see where these loans are going to bottom, then figuring out an approximation of how many of these people will actually keep paying. If they don\’t have amazing credit, and decent income, I would say it\’s safe to say they will give up the house. For Bernanke and Paulson to act like these loans may mature meaning house prices will catch up to loan values, is very misleading, and I would hope they know it. The only value will be in the people who keep paying. I have one thing to say, NO ONE had better try to change our immigration laws right now. If immigration stopped suddenly, or if illegals were deported, I think our entire country would collapse very quickly, and I used to be for tighter immigration standards. I’m no economist, but from my experience on Carolina Beach, I knew people were going to pay dearly. So many greedy people got very rich in the last few years, and I love to see them come back down to earth. The most ignorant people on earth were buying oceanfront homes with no income, and making a fortune. The funny thing is, these were just the ones who got stuck with multiple properties when the market turned. Then greed made them too stupid to reduce the price and sell quickly. One thing I learned through all this, is that housing is easy! Even the worst investment could have been sold for almost no loss if people had recognized the severity, and quit trying to milk every penny out of their moron investments. Let them all pay, greedy bastards….
Diane, it is only free speach until the government decides to do a bailout for free speak or the fairness doctrine and take it away from you!!
TONY – The question is “how much pork will have to be added to get the addt’l votes”. that is what i hate about this stuff… individual agendas drive it, not ‘the greater good’.
Chris the implementer
Chris good call, when they are so worried about re election not much Really gets doen just wht they think needs to get done. Im sure alot of pork, bacon, and anything else that they can get in with out America knowing what is going on.
Diane-
“Even though we have higher than normal delinquencies and foreclosures, most mortgages are performing. ”
Yes, most loans are performing, but not these. That’s why these huge companies are going under and why the government’s now involved. Let’s call them for what they are – liabilites. If they were performing, we wouldn’t be having this discussion. What the gov will buy will be the worst of the worst of these liabilities so they can be taken off company books. Renegotiating terms will cost even more.
$700B can be put to better use.
I will be the first to admit, smarter people than me need to figure this out, but I am curious… does anyone think that the private market can repair this organically and without gov’t interference? I soooo want to believe that it can…
Chris Brown
Chris Brown -
I do actually think (now) that the market can repair this organically with zero gov’t interference. I am convinced by Miron’s argument:
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html
Jeff Miron is an economist at Harvard. He’s pretty smart. And his arguments make much sense, especially this one:
That makes so much sense to me that I can no longer support a government bailout of any kind. Lender of last resort, fine. Nothing more.
-rsh
I sure am glad that there is weight behind the ‘markets can heal themselves’ argument, i was beginning to think I was the only one that believed in pure capitalism.
Well, IMHO markets can allways cure themselves, no question about it. Markets will find its balance. Eventually. The unknown part is how long it will take and what happens in process.
Are we really all prepared to see DJIA to drop to half or more for a decade? That it is possible, see where NASDAQ was at the hight of the tech bubble was and where it is now. I strongly recommend reading following two articles:
NYT: Save the Fat Cats
The Economist: Lessons from the lost decade
before making up one’s mind.
Mtg Jack – The Economist article was a moderately good one, but I am not sure ‘nationalization’ is the answer… one the economist’s article implies is a must.
Along with other undertones of the article, does anything in this quote from the article seem a slant away from capitalism? I have never been able to take the Economists content at face value.
“In another new report Richard Jerram, at
Macquarie Securities, concludes that America
“will not come close to repeating the experience
of Japan”, because its regulatory system, financial
markets and political structure will not let it
procrastinate for so long.”
Brian Brady over at Bloodhound, wrote a great article worth reading. In 3 bullet points… I think he nails it!:
http://tinyurl.com/54gd5e
Mortgage Chili