Dear Madame Representative


Thank you for keeping the interests of the 99th District in mind in your consideration of the various Wall Street bailout proposals. As a local taxpayer and economist by profession, I am concerned that Congress has been deceived by Wall Street. Wall Street and the finance industry claim that lending is crucial to American businesses everywhere. This is true enough. They also claim that an enormous bailout would solve the problem. This claim is not true.

If Congress gives $700 billion to Wall Street in exchange for worthless assets, where is the $700 billion going to come from? In the long run, from taxpayers like me. In the short run, it has to come from lenders. If the Federal Government is sucking $700 billion out of lending markets in the next year, lenders won't be able to loan that money to businesses that create jobs! What's more, the move will raise interest rates, making borrowing more expensive and dampening lending further.

Even if the government did not have to borrow the $700 billion in the short run, the bailout would probably not prevent a recession. Remember, what brought on this crisis was exuberant lending. No amount of bailing out is going to make bad loans look good to bankers now. An unsound business model is still going to be unsound, even if a government handout allows it to be solvent for a few extra weeks or months.

Suppose I am wrong. Suppose a $700 billion bailout really could prevent a recession. The most severe recession since World War II was the 1973-1975 recession. How much did the economy shrink? By about 5%. In today’s economy, a 5% contraction would be about $700 billion. Spending $700 billion to avoid a recession of less than $700 billion seems like a losing proposition to me – even if the bailout works.

Please vote against any resolutions that will use tax revenues or borrowing to bail out Wall Street.

Thank you for your time and your efforts.

Sincerely,

- "Chops"
Department of Economics
Such-and-Such University

The preceding is an open letter I sent today to my U.S. representative. Because she is a politician, I used very small words.

Posted by Chops at September 30, 2008 1:27 PM
Comments
Comment #265189

Chops,
You should know better than to suggest the crisis was brought on by exuberant lending. It was brought on by a debacle in the credit default swap market. That is what the crisis is all about. And it’s not even just CDS securities tied to mortgages. AIG and Lehman Bros had enormous positions in oil futures. Unloading those futures would drive oil down to the high $60’s and result in enormous losses.

Banks will not extend credit to one another because they have the CDS securities, and so do other banks. They cannot sell them because there is no market, and the CDS’s are underwater. As long as assets, particularly houses, continue declining, it will be extremely difficult to act effectively.

Much of the market occurs in dark pools, and other unregulated markets with no oversight. This must be corrected. CEO pay needs to be legally tied by ratio to the pay of the lowest paid individual for publicly held corporations.
Whether it is wise or not, America is rejecting the grotesque wealth disparity, and rejecting the bailout of wealthy people. With so few people invested in maintaining the status quo, way too many people are willing to let the credit crunch proceed.

As for the $700 billion bailout, for now that’s sidelined…

Posted by: phx8 at September 30, 2008 1:51 PM
Comment #265195

Phx8 -

The CDS market is a derivative (literally and figuratively) of the exuberant lending environment. In order to justify lending money to high-risk borrowers, companies needed external loan guarantees. CDS seemed to offer that.

The CDS market wouldn’t matter if loan default weren’t a big problem.

Posted by: Chops at September 30, 2008 2:09 PM
Comment #265201

Guarantees on mortgages? This was a market that was created to generate fees and “manage risk” by people who understood complex transactions, but obviously understood very little about the realities of risk management. In other words, the derivatives were essentially unnecessary. They simply leveraged the initial investment, creating a market with a notional value of $45 trillion, perhaps more- consider that in light of the fact that there are roughly $7 trillion in mortgages outstanding. Only 2.7% of those mortgages have been foreclosed, representing a value of roughly $200 billion.

Chops, most people don’t want to hear this stuff because they don’t understand it, and they don’t care. However, it is being presented to most people as ‘mortgage related securities,’ a subtle form of class warfare which implies the problem was caused be poor people not paying the mortgage, and unscrupulous bureaucrats at Fannie and Freddie.

Issuing subprime loans was a problem, and so was the incompetence and corruption at Fannie, Freddie, and probably at the ratings agencies.

However, all of those problems were easily manageable. The crisis is with an unregulated, unsupervised market that went out on a limb, and was unprepared for a decline. Every market has its ups and downs. This problem with CSD’s was inevitable. The rest is a distraction.

Posted by: phx8 at September 30, 2008 2:21 PM
Comment #265202

Chops, first, those toxic assets are NOT worthless. It is estimated that only 1/7 of them would prove to have no value, the other 6/7ths are subject to falling and or devalued status of an indeterminate nature due to the falling valuations on key areas of the country.

Your article appears to completely fail to grasp the situation. The economy is slowing. That will continue regardless of the rescue plan. But, if that slowing is concurrent with financial institutions inability to make loans for auto purchases, home purchases, college tuition loans, and business to business loans, it is like shooting out the tires of a vehicle which is slowing down. That vehicle loses steerage and direction and will come to rather abrupt halt.

In other words, it will hasten and deepen the recession. If you have ample savings to ride out a deepened and protracted recession caused by the illiquidity and fear of lending for lack of ability to determine the financial soundness of the borrower’s balance sheet.

The Rescue plan removes the vicious cycle of illiquidity causing lower valuations causing more illiquidity in the credit markets, causing even lower valuations of real estate properties, etc.

I am a bit perplexed why your education in economics appears to be an impediment to your grasping the nuts and bolts of this situation. For even a student of economics, this is not all that complicated.

The rescue infusion of up to $700 billion dollars by the only source with that sum available to apply to the problem simultaneously infuses lending cash into the financial system while buying and removing real estate mortgages whose present and future value cannot be determined at this paralytic point in time. The majority of those mortgages will be paid off, and even those which default, most will not be worthless, but have salvage value in a future stabilized housing value period.

Therefore, a majority of the $700 billion would be recovered. At risk is perhaps, $200 billion in possible write offs. But, at the same time, the potential of the sale of those mortgages in a future market at a net gain, is also real. We just don’t know until that future market and period arrives. But, the majority of the $700 billion would not be lost in perpetuity.

In the meantime, the rescue of buying these mortgages off financial institutions balance sheets make their balance sheets worthy of borrowing and lending again, which translates into renewed economic activity, which in turn translates into the more liquidity, more jobs, more government tax revenues, and decreasing the recessionary pressures in general.


Posted by: David R. Remer at September 30, 2008 2:23 PM
Comment #265209

David -

The $700 billion has to come from somewhere in the short run. That, I think, more than anything else, has the potential to bring the economy to a crashing halt, as investors take their bailout and run for the hills.

Where do you propose to find $700 bill in the current economy? Seriously, where?

Posted by: Chops at September 30, 2008 2:42 PM
Comment #265215

Chops -

We’ll get it the same place where Bush got the half-trillion spent so far in Iraq - from loans from other countries.

Unlike Iraq, though, at least THIS plan would have a ghost of a chance of being backed up by the hard assets (American properties) that the government would take over if the debtors can’t pay up.

Posted by: Glenn Contrarian at September 30, 2008 3:07 PM
Comment #265220

Chops

The $700 billion has to come from somewhere. Where did the 1.3 trillion lost monday go?

I’m not sure what qualifies someone to be considered an economist, but are you being real here?

Posted by: googlumpugus at September 30, 2008 3:33 PM
Comment #265223

I’m not the only one who thinks the 2008 Credit Crisis is comparable to the Panic of 1907. Gordon Crovitz writes in the Journal:

A key holdup to getting past this crisis is the continuing unknown of the remaining value of mortgage-based securities. In Morgan’s day, price discovery resulted when he went around the room seeking details of balance sheets… Getting our arms around the scope of the bad debt would define the capital needs for banks, and there would be prices set that potential private-sector buyers of the debt could consider.

Wall Street doesn’t need extra cash - they need a proper valuation of their existing assets. Googlumpus, the $1.3 trillion wasn’t “lost” - it never existed. It was a chimeric misevaluation of assets.

We need to know what *real* assets exist, price them properly, and then take our time getting back to business as usual.

Posted by: Chops at September 30, 2008 3:58 PM
Comment #265225

The LIBOR (London Interbank Offered Rate) doubled overnight. This is the interest rate for unsecured overnight loans that banks charge one another in on the London market.

Banks are charging each other more interest for overnight loans to one another (6.875%) than they charge many people for a 30 year mortgage.

This means credit is in the process of freezing, which means banks will be unable to do loans. Hold on to you hat!

Posted by: phx8 at September 30, 2008 4:01 PM
Comment #265227

Chops said: “Where do you propose to find $700 bill in the current economy?”

Same place we found 700 billion for the Iraq War, Chops. Borrow it. If the economy improves in 2010, a floor in housing valuations is achieved in 2009, the increased tax revenues from increased GDP growth alone will cover half or more of the $700 billion. Sales of those mortgages beginning in 2010 at rising valuation levels can easily recover the rest. Assuming we even get to borrowing 700 Billion.

The last iteration of the bill authorized only 350 Billion in two increments before Congress reviewed and deliberated on whether the other $350 Billion should be borrowed down the road. I am confident a similar provision will remain in this new iteration of the Rescue Bill.

Posted by: David R. Remer at September 30, 2008 4:09 PM
Comment #265230

Chops, think of it like this. A person has just been diagnosed with lung cancer and later that day a mugger gives the patient a choice, your money or your life.

The debt is the cancer, potentially curable as far as anyone knows at the moment. But, the gun (the credit crisis) has a far more immediate and certain outcome. Therefore the patient chooses to give up the money to keep the opportunity for beating the cancer open and available down the road.

Posted by: David R. Remer at September 30, 2008 4:13 PM
Comment #265234

Chops,
From your linked article:
“Indeed, perhaps the biggest remaining unknown is the some $60 trillion of notional debt outstanding in credit-default swaps. This instrument was a smart innovation, even if there was too much of a good thing. These swaps give lenders protection from bad borrowers, thus increasing funds available for investments. But swaps are private contracts, not securities, and because they don’t trade on exchanges, they are not subject to disclosure requirements. Securities and Exchange Commission Chairman Chris Cox has urged that some level of disclosure be required.”

THIS is the heart of the crisis. Thanks to the repeal of Glass Steagall, and thanks to the insertion of a 262 CFMA bill by Phil Gramm into a 11,000 page budget bill in 2000, insurance companies and commercial banks and investment banks created this market with a notional value of $62 trillion. They are all leveraged to the hilt, and the underlying market has tanked, magnifying and multiplying the losses.

After this is over, there will still be local credit unions and savings and loans. At most, there will be an oligopoly of three banking groups: Bank of America, Citicorp, and JP Morgan/Chase.

As long as American taxpayers are on the hook, we might as well cut to the chase, and nationalize the financial oligopolies. The old system didn’t work, and it’s too late to re-regulate them, so we might as well nationalize, and let credit unions/savings and loans replace commercial banks.

One question I don’t know if we’ll ever have an answer to- would it be better to risk $700 billion to prevent the financial collapse, or would it be better to save the money, on the assumption the collapse will happen anyway.

Gosh, if we could just privatize social security the way Bush and McCain want, and let people put it into the stock markets, why just think how wonderful that would be…

If our experience with this collapse mirrors the recent Japanese experience, the DJIA will be at 4259 in the year 2026.

Posted by: phx8 at September 30, 2008 4:18 PM
Comment #265235

Why do y’all insist on calling this a rescue? It aint. It’s a bailout to reward crininals.

Posted by: Ron Brown at September 30, 2008 4:22 PM
Comment #265236

phx8, yes, I was watching that LIBOR take off yesterday. That is the fire that will force Congress back to a rescue bill to put that fire out.

It’s why I went 80% into stocks after the closing bell last night, and am being handsomely rewarded today on market anticipation that a rescue bill will be achieved. Needless to say, a bit of hedging and reaping profits was warranted just before the close of today’s market. But 50% in stocks is left to ride for the reflex - relief rally upon announcement that a rescue bill has been approved and will be signed by the President.

Nothing motivates one to pay attention like having large parts of one’s life savings riding on the line. And make no mistake, voter’s life savings are indeed on the line here.

Posted by: David R. Remer at September 30, 2008 4:22 PM
Comment #265237

Ron Brown, it is a rescue. Volumes have been written now on why it is. Perhaps reading some of those explanations would help with understanding.

It is my wife’s pension and job, and my 401K and investments which are on the line, here. It is a rescue from certain international banking and lending breakdown which would harm us all.

Provisions were already agreed in the last bill to insure no golden parachutes were paid to execs of corporations whose balance sheets were cleared by the Rescue Plan. You are not keeping up with the details.

Posted by: David R. Remer at September 30, 2008 4:27 PM
Comment #265239

If exuberance in lending were the problem, we would have merely seen a calming of the market, following the collapse of a few irresponsible lenders.

It was worse than that. First the exuberance was in lending to those who they knew could not repay. Being somewhat rational actors, there had to be a reason these people were willing to this. In part it’s because debt can be the gift that keeps on giving, as people are forced into perpetual debt, and also its because that bad debt could be sold to others as a security.

To ensure this could continue, others exuberantly took out credit derivatives, betting on whether or not folks would default on the mortgages.

Unfortunately, these derivatives became common, the quality of the securities, opaque as they were became questionable, and the derivatives became a huge question mark over the heads of many banks.

The exuberance here is in creating a system that generates wealth for investors at all costs, even when there is no real underlying something to justify that economic growth.

In the end, that’s what we shaped with our regulations. We allowed mortgage companies to be aggressive, allowed them to target consumers who could not pay. Same with credit card companies. We created a system where building up debt on people without regard for their ability to pay it off has become the norm.

The truth is, people are being hit with more costs and more debts, but their ability to handle those challenges has not been helped by the system, which has been rigged so that businesses and those who run them, can keep more of the money to themselves.

With this economic elitism, we’ve essentially seen the system bleed more and more economic power from the Middle Class, and put them further into debt.

The problem is, those are the people we rely upon to keep our economy moving. When they cut back, stop buying, and so on and so forth, the rest of the market suffers.

If I had to sum it up, what’s happening here is that the predicament of the middle and working classes in America has finally, inexorably, and perhaps catastrophically fed back into the situation in Wall Street. Creating problems of circulation for most Americans has finally created health problems for Wall Street.

The economic priories of main street have to be taken up, once again. We put them down, thinking that this could solve the problems we encounted in the 70s, but ultimately, we just recapitulated the same mistakes people in the 1920’s made.

Posted by: Stephen Daugherty at September 30, 2008 4:28 PM
Comment #265242

Stephen D., you have provided a very long winded way of saying that the current accepted practice of using $1 in assets to make $10 in loans, is a house of cards awaiting a stiff breeze.

Posted by: David R. Remer at September 30, 2008 4:42 PM
Comment #265248

Just a couple points to add.

To David R I would agree with what you’ve said and only add the the Treasury can be the “long term holder”. ie not the hyper-kinetic investment banker in need of his ADHD meds. This “helps” the market find the real value.

Phx, The CDS market notional values are a black hole no doubt. However, the “notional” value is often misquoted in my experience. It’s kind of like “transaction value.” If I bought one share of stock from you for $1 and at the end of the day it was worth $1.05 I would have a profit of .05 and you a loss of .05. But the “notional” transaction value was $2 (the sum of what each of us transacted). So - the “net notional value” (adjusted for profits and losses) to me would seem to be a VERY important number….alas I have yet to find that anywhere. And with our investment banks being the stellar citizens they are I have no doubt that there were games going on including each side reporting a “profit” even though one side held the opposite side’s position!

Chops,
I guess I just disagree with your analysis - it doesn’t make sense with what is happening in the real world with spreads and real transactions between parties (and transactions that have been restricted). So it just seems to be a non-starter. That said - I’d like to see the stabilization plan include some other features.

Like this

http://www.rgemonitor.com/roubini-monitor

This guy has been right for quite a while.

good discussion.

Posted by: MT Cross at September 30, 2008 4:53 PM
Comment #265254

MT Cross,
Yes, the notional value can be misleading. It would probably be safe to say that, right now, no one knows the value of the CDS contracts because there is no market. They are not being bought and sold, but the underlying value is probably in the trillions… If anyone knows better, I’m all ears.

Posted by: phx8 at September 30, 2008 5:05 PM
Comment #265271

David -

My question stands, whence the $700 billion? Yes of course they’re going to borrow it, but from whom? Nobody wants to lend, you say (see the LIBOR rates). Then who is going to lend to the Federal government?

And if the Federal gov’t takes $700 billion of available loans off the market, who’s going to be making loans to other borrowers? Simply the act of attempting this “rescue” is going to put even more upward pressure on rates and squeeze out legitimate borrowers.

By lending $700 billion from the same industry to which we’re giving $700 billion, the U.S. taxpayers are essentially agreeing to pay interest on $700 billion for the foreseeable future.

This is simply too much money to play with, and that’s what lawmakers are doing. They don’t know - you don’t know - for sure whether this will work or fail. But you do know for sure that it will cost more than any recession in the last 60 years. So yeah, go ahead and pull the trigger. Your gun’s empty.

Posted by: Chops at September 30, 2008 6:32 PM
Comment #265272

Oops! Third paragraph above should read:

By borrowing $700 billion from the same industry to which we’re giving $700 billion, the U.S. taxpayers are essentially agreeing to pay interest on $700 billion for the foreseeable future.
Posted by: Chops at September 30, 2008 6:34 PM
Comment #265274

Ron Brown, this rescue will Help Main street. did you read Phx8’S comment about the 6.875% rates, that has to be the highest rate in over twenty years ,credit is almost slammed shut their are so many houses in foreclosure in Florida and California and many areas throughout this country, my one house in California on the same street their has been four houses up for short sale and foreclosure their are many folks who qualify for loans and can buy these places right now and will fix them back up but they are being shut out by the tight credit, this rescue plan will help credit and sale these places and that will help stabilize the housing market and economy.

Posted by: Rodney Brown at September 30, 2008 6:42 PM
Comment #265275

Ron Brown, unfortunately for you (and most Americans) these “criminals” were responsible for managing some of the more fundamental workings of our economy. Call it what you want, but letting so many major financial institutions go under will necessarily involve many “average” Americans paying the consequences.

Posted by: Zeek at September 30, 2008 6:49 PM
Comment #265276

$1 in assets to make $10 in loans would have been safer than $1 in assets to make $30 in loans, which was more like what was happening. It seems that the political parties have changed places on this issue. W wants to bail out his base, “the haves and the have mores”, but the Rpblcns aren’t having any of it. Some Democrats aligned with them, like Jesse Jackson Jr., a supporter of BHO, who voted against the bailout. It looks like it’s both sides against the middle here, and so far, the middle is losing.

Posted by: ohrealy at September 30, 2008 7:14 PM
Comment #265277

To all trying to talk sense to Ron Brown et al -

If you’ll notice, these guys who oppose the bailout are doing so more because of emotion and ideology than of any hard-and-fast understanding of the damage the economic crisis can do to America. Their view is understandable for the man on the street, but is completely out of touch with the big picture.

Which, if you’ll think about it, is how Bush got elected. Joe Six-Pack liked him good enough to elect him…and Joe never realized that both he and Bush were looking at the world through a rose-colored straw.

Posted by: Glenn Contrarian at September 30, 2008 7:22 PM
Comment #265284

Anyone remember the RTC? I don’t understand what all this doom and gloom is about. There is a portion of these mortgages that must go through the process. It’s sad but true! For those people that fell on hard times (unexpected death, loss of income, etc…) but can make their payments going forward, restructure the loans. Take the missed payments, add them to the loan balance and restructure at today’s going rate (forget their credit, forget their income, forget the value of the house —— IT DOESN’T MATTER!). Change to fixed rates at 40 year terms if needed to make the payments affordable. The owner reqlinqiushes any future appreciation and cannot short sale the loan.

What have we done here… the loan is now performing. No need for added reserves for a defaulted loan. Added interest income back to the banks books. OH YEAH, someone got to keep their house! We’ve also reduced the flood of foreclosures into the market therefore keeping the decline in market values from that of the “GREAT DEPRESSION”. This is Part I.

Part II
For those that can’t make their payments, even at the reduced interest rate and extended term, liquidate. Harsh yes, but necessary. Banks will take the losses, but with the loans that are restructured they should be able to stay afloat. If they can’t, FDIC should step in, liquidate the assets to make account holders whole and those people will move their money to other stable institutions.

Part III
No Bail Outs and all CEO’s with Golden Parachutes…. remove these from your contract or face litigation from the AG office. How these were ever allowed in the first place blows my mind. Board of Directors and stockholders should be ashamed for allowing such things.

Lets see…. take the job of turning around a company, but get a contract that states if you fail miserably you’ll be compensated greatly. WHY IN THE WORLD WOULD A CEO DO HIS JOB? What incentive do they have. What happened to do a good job get paid well, do a poor job and get a pink slip.

The rest is just politics!


Posted by: CurtIndi at September 30, 2008 8:13 PM
Comment #265285


Joe Six-pack may have voted for Bush but, he didn’t bend over for him.

Posted by: jlw at September 30, 2008 8:23 PM
Comment #265286

Media Disconnect On Housing Woes

I watched the Today Show on Monday morning of this week. Senator Chris Dodd showed up and did a live interview with NBC’s Matt Lauer. I thought for sure that Lauer, being the great journalist that I have heard he is, would’ve taken the opportunity to ask Senator Dodd (D-Connecticut) about the sweetheart loans that he had gotten from Countrywide Mortgage, or about how he shows up at the top of the list for campaign contributions from Fannie Mae and Freddie Mac.

Guess Matt didn’t have time to get to those questions. Never asked.

Instead questions were asked of the Fox about how to keep the Hen house safe (that had just been raided by the Fox). Brilliant bit of journalism there.

The activist old media is virtually ignoring the Democrats role in this current mess. Let’s go through this slowly:

* Beginning in 1992 Democrats change the rules to make it easier for everybody to buy “affordable housing”. Eventually Democrats push for rules to be changed to make it so that banks would be forced (or face heavy fines) to give sub-prime loans, 100% loans, and loans based on “stated income”. Just say how much you make, and move into the house.

* Around 2003, home sales go through the roof, builders can’t keep up, prices skyrocket, the Bubble is created because housing prices skyrocket way above inflation (look at a graph-there’s your Bubble).

* 2004, Republicans see the problem and regulators push Fannie Mae and Freddie Mac to stop giving so many risky loans. Democrats fight the move to regulate Fannie and Freddie while Franklin Raines, the CEO of Fannie Mae (Barack Obama advisor), gets millions in bonuses while “cooking the books” and buying many of these bogus loans from other banks.

* Home prices fall, homes foreclose, banks get stuck with bad loans forced on them by the Feds, and what do you know, you have a crisis in the markets. Banks failing, out of money. Consumers struggle. Crisis is created.

Don’t expect the media to go through this simple explanation. Not enough time. It doesn’t do context very well. Don’t have time for context, you see…..the activist old media has an election to win for the Democrats this year.

Posted by: Ron Futrell at September 30, 2008 8:36 PM
Comment #265288

I’m prepared to take a big hit if it means the power’s above me have to restructure their practice’s. They need us more than we need them.

And to those who may try talking sense to Glen Contraryian, don’t bother he’s too smart for you.

Posted by: andy at September 30, 2008 8:39 PM
Comment #265296

Ron Futrell, your partisan cherry picking of historical data is truly BS while leaving out the Gramm-Leach-Bliley Act of 1999.

Your comment has no credibility with its allusions to partisan conclusions because you make no attempt at objectivity or comprehensive assessment. Fox News might have a role for you though.

Posted by: David R. Remer at September 30, 2008 9:48 PM
Comment #265297

CurtIndi, I think that is precisely what will be contained in the next iteration of the rescue plan, along with other provisions.

Posted by: David R. Remer at September 30, 2008 9:49 PM
Comment #265299

ohrealy, that is a very accurate assessment of what is happening. You will see Dennis Kucinich working closely with the likes of Roy Blunt and Eric Canter to produce a more bottom up approach that keeps people in their homes, arrests the falling value of property values as a result, insures repayment of the majority of these dubious mortgages, while forcing a payment from Wall Street as a self insurance against future failures.

The far left and the far right are not far apart at all on on this particular issue. Which of course, could spell real trouble for getting any bill passed in a timely fashion to prevent massive incumbent harm befalling everyone.

The irony and tragedy are worthy of Aeschylus or Euripides.

Posted by: David R. Remer at September 30, 2008 9:55 PM
Comment #265302

I don’t think a bottom-up approach will work.

It’s not that I’m not philosophically inclined to support it. The problem is that the horse is already out of the barn. A bottom-up approach might stabilize the housing market, but it cannot change what already happened. It cannot re-inflate the market, or relieve the current problems in the credit markets. It confuses two separate problems. I’m not dissing the idea of mortgage relief, or siding with the little guy. I’m all for it. But it does not address the overwhelming problem which faces us.

Ron, Curtindi,
With all do respect, you’re talking about mortgages because, like most people, you understand them. Your comments suggest that you, like most people, do not understand what is happening. Hardly anyone does. It’s complicated. It has to do with investment contracts which most people have never heard of. The problem is NOT with mortgages. The problem is with ‘mortgage related securities,’ which refers to the CDS market I referred to in previous comments on this thread.

The horse is out of the barn. The CDS contracts reflect mortgages which have already failed, and mortgages which have already declined in value, so unless you can somehow magically pump up real estate values back to their peak in a veryshort period of time, the bottom-up approach won’t help the CDS market. It won’t matter.

Sorry. This problem is NOT simple.

Posted by: phx8 at September 30, 2008 10:28 PM
Comment #265303

phx8, if the White House and Congressional Middle get the cash infusion into the lending banks while relieving them of substantial amounts of their illiquid assets, and the far left and right get agreement on a bottom up approach discussed above, you could find an overwhelming supportive response.

The biggest hurdle is how to set the amount. $700 Bill may be too little to accommodate both approaches, but, if each is willing to take some compromise on the amounts, say 400 Billion for purchasing illiquid assets, and 300 billion for shoring up homeowners pending foreclosure, a deal could be struck and perhaps in time to forestall dramatically more financial and other businesses buckling in the interim.

It is possible. I wouldn’t bet on it. But, it is far more possible today than it was three days ago.

Posted by: David R. Remer at September 30, 2008 10:38 PM
Comment #265307

phx8 wont the bottom up approach help to stabilize the bundled mortgages/unregulated securities as they stabilize the housing market?
It is my understanding that the value of the unregulated securities is unknown because they are bundled and because the housing market is still going down.

Not only that, right now us Americans have no confidence in where this $700b is going nor do we any confidence that this crisis is real. The average American is against this bail out, and the younger they are the less they have invested the less they are in favor of this bail out because they know it won’t gain them much if anything but a bigger tax bill.

Another thing that needs to be in the bill or explained is how things are going to change so this type of crisis wont happen next year or next decade. Because there is no trust that those that gained from this have no reason to curb their ways. Judging from the denial shown by Jim M and others the righties think its all Fannie and Freddie.

What us average Americans are good at is taking the 140k each and blowing it so quick that the economy would have no choice but to rebound. We are willing to try the trickle up approach for a change :)


Posted by: j2t2 at September 30, 2008 10:47 PM
Comment #265317

j2ts & David,
Yes, the bottom-up approach needs to be implemented soon for two reasons: 1) because helping people in economic distress is the right thing to do, and 2) if the real estate market isn’t stabilized, and housing prices continue to drop, we will continue to be in a world of hurt.

The crisis- the one that needs to be addressed immediately- is the problem with the CDS market. As long as those contracts are carried on the books, they will be “toxic” because they represent such huge losses.

One of the awful things about this situation is that very few people have an understanding of what is happening, and that’s not going to change. It probably shouldn’t change. Options and commodoties and derivatives can be real mind benders, and there’s simply no reason for most people to know about them. Terms like ‘dark pools’ mean nothing to most people, and they shouldn’t exist in the first place.

So by all means, we should re-regulate, provide oversight, reform Freddie and Frannie, ban predatory mortgage practices, and give relief to people who deserve it.

Right now, though, the CDS market issue has to be addressed. IMMEDIATELY. I think Paulson is right, and with some oversight and legal restraint, he needs to be given money in order to unwind the bad CDS contracts. It will probably involve putting US taxpayer money into dark pools, illegal markets, and also foreign banks. It also requires an ability to move fast.

I don’t like Paulson’s philosophy. I don’t trust Bush. We’re depending on the people who failed to foresee this problem to solve the problem.

Since the GOP cannot get its act together enough for its members to follow its leaders, the Democrats should probably just skip the bipartisan approach and do a progressive version, use majorities to pass it quickly, and dare Bush to veto it.

No one wants this, but it needs to be done.

Posted by: phx8 at September 30, 2008 11:18 PM
Comment #265321

andy
“I’m prepared to take a big hit if it means the power’s above me have to restructure their practice’s. They need us more than we need them.”

Well, that is good because you are likely to take a big hit regardless. But you are approaching this in the wrong way. We are not at war with the credit lenders. It is not an issue of who will hurt who more. Ultimately, we should be trying to improve our collective situation even if that means improving the situation of the corporations that have been irresponsible. To do otherwise would be cutting our nose to spite our face.

Posted by: Zeek at September 30, 2008 11:52 PM
Comment #265322

I am copying and pasting a plan conceived by economist Dave Ramsey (daveramsey.com) and many other top economists of the country. I already know that DRR is against the plan, but my question is will it work and will it cost less than $700+ billion dollars?

“Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while
working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.


II. MARK TO MARKET

A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.


III. CAPITAL GAINS TAX

A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down. This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.”

Posted by: Oldguy at September 30, 2008 11:55 PM
Comment #265324

Oldguy,
Ramsey is an idiot. For starters, capital gains taxes are paid on profits. Why would investors flood into real estate and stock markets? The idea is to make money, not lose it, and right now there are a lot better alternatives than US real estate or equities. What a stupid idea. This guy is an economist? You must be kidding. And cutting capital gains costs the taxpayer nothing? That doesn’t even make sense. Let’s see. Tax revenues decline when capital gains taxes are removed, and are replaced by… hmmm, let me get my calculator… Okay, there’s the answer: it comes out to zero. Nothing whatsoever.

There may be some changes in accounting practices. This idea is being championed by DeFazio, a progressive. It was originally developed by a former chairman of the FDIC, William Isaac. Ramsey did not develop this plan.

Insurance was already considered and dismissed by Paulson and others.

Contract law determines CEO golden parachutes. Doesn’t matter whether it seems fair or not, if it was already negotiated as a condition of hiring, then it cannot be abrogated.

In the future, CEO and high level officials of publicly owned entities should have their compensation based upon a ratio, receiving, say, a maximum of 35 times what the lowest paid employee receives. THAT is a proposition that makes sense. Everyone benefits by making sure everyone benefits. What a concept.

Posted by: phx8 at October 1, 2008 1:00 AM
Comment #265343

Chop,

Remember, what brought on this crisis was exuberant lending.

Remember, what brought on this exuberant lending was exuberantly low Federal Reserve’s lending rate.

Now, who remember what brought exuberant low Federal Reserve’s rates?

Posted by: Philippe Houdoin at October 1, 2008 5:08 AM
Comment #265346

Zeek,

unfortunately for you (and most Americans) these “criminals” were responsible for managing some of the more fundamental workings of our economy. Call it what you want, but letting so many major financial institutions go under will necessarily involve many “average” Americans paying the consequences.

And allowing them to continue manage these fundamental workings as usual is the recipe for similar crisis to happen again and again in the future.

Posted by: Philippe Houdoin at October 1, 2008 5:31 AM
Comment #265370

phx8

I believe it is a fact that cutting any kind of taxes increases revenue. So cutting the capital gaines taxes will create investment, just as cutting taxes on companies creates investments in expansion, meaning more jobs.

Even JFK understood a larger volume of production increased revenues more than raising taxes.

If Defazio championed ideas that would help the country, why haven’t they made it to the floor of the congress?

Paulson is asking for total control of $700 billion dollars and you say he dismissed the insurance angle. Go figure.

Posted by: Oldguy at October 1, 2008 10:00 AM
Comment #265416

Philip
“And allowing them to continue manage these fundamental workings as usual is the recipe for similar crisis to happen again and again in the future.”

Would you like to suggest an alternative?

Posted by: Zeek at October 1, 2008 2:00 PM
Comment #265447

Oldguy,

Ireland has proven that a more business friendly environment and lower corporate taxes increases prosperity and jobs much more than over-regulation and a hostile tax policy.

But it runs counter to the progressive philosophy so it is discounted out of hand

Posted by: Rhinehold at October 1, 2008 4:18 PM
Comment #265448
There may be some changes in accounting practices. This idea is being championed by DeFazio, a progressive. It was originally developed by a former chairman of the FDIC, William Isaac. Ramsey did not develop this plan.

And I was the first one to bring it up here and was lambasted by the left for it. Go fig.

The first people I saw mentioning Issac’s plan were the House Republicans… Nice of DeFazio to come along I suppose. Does it make it more pallattable to you when a progressive proffers it?

Posted by: Rhinehold at October 1, 2008 4:21 PM
Comment #265449

The capital gains tax doesn’t have to be removed completely, just cut in half. We need to be cautious there, in order to not set off a wave of selling, which may happen after election day anyway, if BHO wins, promising to raise the tax. Most likely, the election will be disputed, and people will hold on to their investments until they are sure of what will happen.

Posted by: ohrealy at October 1, 2008 4:21 PM
Comment #265460

DeFazio is a good man, and I like his politics, but I don’t think the change of accounting methods will work. It comes up with a way of assigning value, which is helpful, but it may not be an accurate value, which is not so helpful. As difficult to understand as accounting might be, the idea is to give an accurate financial picture. The change of accounting method doesn’t change the actual financial strength or vulnerability of a company. I’ll leave the determination of value up to the accountants.

Cutting capital gains makes no sense whatsoever in the current context. And if taxes hinder business, then 1% or no taxes whatsoever would be an ideal environment for business. And yet, modern nations which do not collect taxes, such as Somalia, are hardly libertarian paradises.

The idea is to balance taxation and revenues in such a way that it allows government to fulfill its social functions for all individuals, with an individual’s inalienable rights.

Posted by: phx8 at October 1, 2008 4:49 PM
Comment #265466

And being ignorant of what is going on for political reasons doesn’t help. Like when Obama opposed the suspension of the gas tax earlier in the year. Of course, it probably shouldn’t have been ‘elminiated’ but reduced to help.

The result was that the cost was so high that revenues into the system decreased as people stayed home over the summer months. So much so that it was considered nearly broke recently. Had the tax been reduced to encourage people to continue their vacation plans by making it more cost effective to do so, then more revenue would have been generated.

We are entering a slowdown possibly, so we will lose funds unless we lower taxes a little to balance where that line should be.

However, I am of a different mind as you know, as I understand the real truth that those taxes that are applied to corporations end up being funneled down to the consumer anyway, you and me. So while people like Obama think that they are getting their money from the rich, they are just sucking it from our wallets without our being able to see it and measure it in any reasonable way.

As for the plan, it will work, as Isaac pointed out if we had had those rules in place during the S&L crisis, we would just now be coming out of the depression it would have created. They were ready to take over over 6,000! banks.

The loans are not work 0. Most likely they are worth nearly their full amount, perhaps 10% less. But because of the law in place, they have to be reported at 75% or less of that value.

Posted by: Rhinehold at October 1, 2008 5:01 PM
Comment #265472

My son owns his own business. When the price of fuel goes up, he places a fuel surcharge on his bill. When his company has to pay more in taxes, he raises the price of his service to accommodate the same income. He has union employees, when their contract calls for higher wages and benefits; he again passes this on to his customers. I say this to prove a point.

Rhinehold is exactly right; when the democrats attack big business and try to create class warfare by driving a wedge between the American people and business and preach for raising taxes on big business, we are the ones who pay for those taxes.

Lowering capital gains taxes encourages selling and buying stocks. Those who sell and make a profit still have to pay income taxes. The democrats, as a whole, have never been able to grasp the concept that lower taxes means higher revenue. Big business is not the enemy. If there were no business, there would be no employment. If my son were forced out of business, many people would be unemployed.

Stock ownership is no longer for the elite or rich. Millions own stock as part of their 401-k or private investment. So when the democrat’s attack wall street and investors, they are attacking a whole lot of people.

Posted by: Oldguy at October 1, 2008 5:52 PM
Comment #265533

Oldguy,
50 million Americans own stock. The other 250 million do not own stock. Of the 50 million who do own it, 45% of all stock is held by less than 3 million Americans, less than 1% of the population.

Why are you shilling for the richest of the rich? “Create class warfare”? What do you think happened?

The GOP puts out talking points about how Fannie and Freddie and poor people defaulting on mortgages caused the current crisis. Yet the cost of covering all those foreclosures is less than $200 billion. Fannie and Freddie have already been nationalized.

So why does the government want $700 billion?

“… lower taxes means higher revenue.”

Uh huh. And here we are today, after seven years of Bush tax cuts, facing an economic catastrophe.

Posted by: phx8 at October 2, 2008 1:18 AM
Comment #265534

oldguy-
The real problem here is that we have a game of musical chairs with these mortgage securities, and all the chairs are invisible. Nobody’s going to sit down because it’s difficult to impossible to know whether the mortgages that serve as collateral are good. The folks who pick wrong will lose their investors money, either by refusing good mortgages that could provide income streams, or accepting bad mortgages that would end up as liability on their balance sheet.

As for wages and such? Here’s the trick: one of the reason we are in a recession due to the burst of the housing bubble, is that people were taking out debt and financing other things with it.

They’ve done that and similar things, like take on credit cards, because the government, since Reagan, has taken your approach on reducing inflation: helping to stagnate wages. Sounds like a good idea until you realize that money flows back from people as well as to them. The rich are keeping money at an ever greater rate, while everybody else has to charge it or take out a loan and hope that they keep up the payments.

The economy’s suffering from bad circulation. I have no problem with the rich, really, but America didn’t really start to prosper as a whole until money started going to the Middle Class. Unions helped that, so did better education. We created a consumer economy, which unsurprisingly requires people who can shell out money.

But the economic elites in this country have fought against that. We see the results now. Neither they nor the rest of us are that happy. The reality is, what people like me support is more a truce than a class war. In the end, if you pay the lower and middle class better, the money still percolates up, and in the meantime, like water through a mill, it helps drive the rest of the economy.

What the Republicans support right now is the financial markets as a Casino, with real bets being made (that’s what those mortgage derivatives are in essence) point spread being shot for and so on and so forth. That’s why companies like AIG, Bear Stearns, Lehman Brothers and other non-mortgage financial corporations are having a hard time. A lot of bets have been made, and now many of those bets are uncertain in their outcome. People don’t know whether they have a winning horse, or a nag who has to be shot on the track.

The best idea may be to find ways to clear the dust, but that might require government intervention and regulations that folks like you have made a point of rejecting on principle.

Posted by: Stephen Daugherty at October 2, 2008 1:21 AM
Comment #265579

Zeek,

And allowing them to continue manage these fundamental workings as usual is the recipe for similar crisis to happen again and again in the future.

Would you like to suggest an alternative?

1) Setup this badly missing international finance cops body.
2) Fire managers. Sue them when apply.
3) Hire fresh new managers.
4) Train them to the new rules.
5) Put a finance cop behind every fundamental institution
6) Trap every manager breaking the rules
7) Go to 2)

Instead, the current plan is:

1) Save their ass.
2) Let them play again.
3) Repeat

Save instutions, okay.
Save their ass, no way.

Posted by: Philippe Houdoin at October 2, 2008 12:26 PM
Comment #265591

Philippe, let me just clarify some things with your plan before we go any further:

1)What exactly are these people supposed to be/do/etc?

2)For non-government owned companies this is not possible to do. Are you suggesting some level of nationalization is in order?

3)Who would these people be and what would make them different from the “old” people?

4) Ok.

5) See question 1.

6) Ok.

Posted by: Zeek at October 2, 2008 1:58 PM
Comment #265593

Oldguy:

I seem to remember Greenspan or Bernanke, or maybe both, admitting that lowering taxes increases revenue only in the short term and only for a limited amount. Then it reverts back to the prior status. In other words, it doesn’t work like the Republican talking points claim it will.

Posted by: womanmarine at October 2, 2008 2:00 PM
Comment #265620

womanmarine

“I seem to remember Greenspan or Bernanke, or maybe both, admitting that lowering taxes increases revenue only in the short term and only for a limited amount. Then it reverts back to the prior status.”

This statement is not logical. If lowering taxes would spur growth and increase revenue in the short term, why wouldn’t it continue to spur growth and increase revenue in the long term?

The whole idea is to free up money for investments and growth. Investors and companies don’t reach a point and say, “well, we have made enough money”. As long as they continue to make money, they will continue to grow. Which creates even more jobs and more revenue to the government.

Posted by: Oldguy at October 2, 2008 4:57 PM
Comment #265668

oldguy,

I believe it is a fact that cutting any kind of taxes increases revenue.

Nobody will argue against.

So cutting the capital gaines taxes will create investment

Many argue against, in particular against the “so” part. It’s far from being automatic.
In fact, more and more capital gaines are not invested on long term, the only ones that actually help economy, but instead used to speculate on bigger gaines on shorter and shorter term.

What used to be true, aka capital was fueling companies investments and so their expansion and so creating jobs, is less and less true today, as capital is now fueling short-term speculation, which don’t give enough time for economic expansion and never will create jobs. More even, often the contrary. Short term gaines. Aka global finance “casino”.

Posted by: Philippe Houdoin at October 3, 2008 3:30 AM
Comment #265670

Zeek,

1)What exactly are these people supposed to be/do/etc?

Define a set of strong international finance rules. No regulation game is over.

Control rules are not broken. This should work at international level, aka controling bodies should be from whatever nations worldwide, and full access to data granted. That’s should be a requirement to play on worldwide financial field, period.

Nations have ONU rules.
International companies must play by WTO rules.
World Finance should have a referee body too.
A game with no rule is not a game, it’s a sheat recipe.

2)For non-government owned companies this is not possible to do.

Of course it’s possible: save the company *only* at this condition. Company owners will take their responsability. Between losing all and firing their buddies, we all know what they will choose, right?

Plus sueing these managers is not only possible but only possible under government power.

Are you suggesting some level of nationalization is in order?

Nationalization of financial managers doesn’t make any sense. Their contract are under private law. Plus they worth nothing, as they show how much skilled they are. Not.

Nationalization, aka taking ownership with public funds, of core financial institutions mismanaged by these guys would make far more sense, indeed. As a temporary save plan, in order to protect citizens interests. And it has already happened.

3)Who would these people be and what would make them different from the “old” people?

They would know for good that not playing by the rules will throw you in jail and/or in poverty the next second. The actual ones knows they wont ever. This feeling of impunity should not exists at first, and clearly it’s time it doesn’t *anymore*.

Posted by: Philippe Houdoin at October 3, 2008 4:08 AM
Comment #265672

CHEAT recipe, not sheat!
Sorry. English is not my native language, please be kind for any mistake.

Posted by: Philippe Houdoin at October 3, 2008 4:13 AM
Comment #265794

Philippe,

“Define a set of strong international finance rules. No regulation game is over.

Control rules are not broken. This should work at international level, aka controling bodies should be from whatever nations worldwide, and full access to data granted. That’s should be a requirement to play on worldwide financial field, period.

Nations have ONU rules.
International companies must play by WTO rules.
World Finance should have a referee body too.
A game with no rule is not a game, it’s a sheat recipe.”

In general companies only play by rules if they are favorable to them. I am not exactly sure how you are going to compel them to play by rules that hamstring them.

“Of course it’s possible: save the company *only* at this condition. Company owners will take their responsability. Between losing all and firing their buddies, we all know what they will choose, right?”

Then the managers will simply let the company go under. They have golden parachutes so why wouldn’t they?

Posted by: Zeek at October 4, 2008 12:06 AM
Comment #268328

Are you confused, or wondering what Joe Biden Really meant about Barack Obama potentially being “tested” There is a simple explanation for your worries.. Ever since America has been America, every elected president in history has been “tested”. When John F. Kennedy was in office, his test came in the form of the Cuban Missile Crisis, which almost set off a nuclear war, but in the end, did not. Another example.. when George Bush was elected. very soon after Alkaida operatives, under Osama Bin Laden’s direction, flew a plan into the world trade center buildings. None of these things are Intentionally committed against the U.S.A, or the presidency for that matter, by an inside culprit, they simply happen, naturally, due to the inevitable dis-agreements, threats, economic differences, hatred, etc.. issues that every country suffers from around the World!. Every president in history, in every country has been un-intentionally “tested” by the powers from another country.. If this did not occur, obviously, there would literally be world peace, people!. This is simply what Joe Biden was conveying when he made his statement, and obviously alot of people with little or no “common political sense” understand what the Hell he meant, Omg!. Also, what Joe Biden meant when he said “It’s not going to be apparent initially; it’s not going to be apparent that we’re right.” obviously, has a similar meaning; not every president in history was praised for his decision making, but eventually.. we got through it, and it was later apparent that it indeed, Was the correct thing to do!, (Just like Abraham Lincoln freeing the slaves!). If after reading this, you still do not understand, or get the point, as simple as I have put it for you; then perhaps you should not be voting in the first place. Thank you for your time… and good luck!.

Posted by: CrystaL C. at October 25, 2008 3:55 PM
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