The Bailout To End All Bailouts
But will it work? Here's Paulson's and Bernanke's logic, made explicit at the Senate hearing today: There's only a certain amount of bad debt on Wall Street's books, left over from the wild and woolly days of lax mortgage lending. Once removed from the Streets' books, credit will flow again. And once credit flows again, even Main Street can breath a sigh of relief.
P&B failed to mention that bad debts are growing even among people recently considered good credit risks. At end of August, 6.6 percent of mortgages were at least 30 days past due. That's up from 5.8 percent at end of June. We're also seeing a growing amount of credit card and auto payments past due.
The culprit isn't just those sub-prime loans. With jobs and wages are dropping across America, many people who had been able to pay their bills no longer can.
It's no coincidence that states where mortgage delinquencies are highest are also states with the highest rates of job losses. According to the Bureau of Labor Statistics, the official rate of unemployment in California last month was 7.7 percent. That's up from 5.5 percent a year ago. In Florida, unemployment has climbed to 6.5 percent, from 4.1 percent a year ago. No surprise that bad debts are mounting fastest in California and Florida - and elsewhere around the country where jobs are evaporating fastest.
Note that these are just the official rates. Some 600,000 fewer jobs are listed on the nation's payrolls than were there last year. Millions more Americans are too discouraged even to look for work. And as employers squeeze their payrolls, even people with jobs are putting in fewer hours.
Bailing out Wall Street's bad debts when millions more Americans can't pay their bills is like bailing out a rowboat springing more leaks while the ocean is rising. Many of the average taxpayers being asked to take on Wall Street's bad loans are the same people whose incomes are dropping, which means they're struggling to pay their debts and potentially creating even more bad loans.
Congress should drive the hardest deal it can with Wall Street. But Congress also needs to pay direct attention to Main Street. It should extend unemployment insurance, freeze mortgage rates, and pass a stimulus package that generates more jobs.
Bottom line: Unless Americans on Main Street have more money in their pockets, Wall Street's bad debts will continue to rise -- which means the Bailout of All Bailouts grows even larger, which means taxpayers take on even more risk and cost.
I am not an economist. But I do care about my fellow Americans. I would far rather assist people who want to stay in their homes than bail out greedy financial institutions who preyed upon citizens just like vultures.
Ok. I may lose value in the short run on my investments, but honestly that sounds safer to me than playing footsie with the bush administration and the profligate "financial circus" folk.
If enough Americans simply said, "Relax. Be patient. Help the citizens first," then maybe we could work our way out of this. Spend the money to help the citizens!
People need health care - but we're talking about giving health care to corporations.
Are we not a nation of Persons? Rather than corporations?
Ok. Disagree with me everybody! Or improve upon this idea. I'm risking nothing by throwing this idea out there.
September 23, 2008 7:45 PM | Reply | Permalink
An estimated 2.8 million U.S. households will face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage's value by the end of next year, predicts Moody's Economy.com.
do the math:
$700 Billion =
1.75 million homes at $400,000 mortgage
2.33 million homes at $300,000
2.80 million homes at $250,000
3.50 million homes at $200,000
Looks like Paulson guessed a reasonable mortgage would be about $250,000. The median priced home in America since Feb. 06 has been bouncing around $250,000,
says here: http://www.census.gov/const/uspricemon.pdf. Too bad the home buyer won't get the home, but the bankers will get the money AND the home! Sweet.
Or they simply guessed the taxpayers could handle something slightly less than the price of the Iraq War. More would be rather hard to sell.
September 23, 2008 8:52 PM | Reply | Permalink
Did anyone see that Lehman set aside $3.5 billion for tiny golden parachutes for 10,000 employees in the US before they declared bankruptcy? The money was pulled out of accounts in offices in Europe, who were apparently left high and dry.
http://www.independent.co.uk/news/business/news/fury-at-25bn-bonus-for-lehmans-new-york-staff-937560.html
September 23, 2008 9:57 PM | Reply | Permalink
I don't disagree. I'm with you completely.
I'd rather do nothing, and lose much of the value of my retirement $$, than transfer this much money to the rich and saddle this country (including my children) with another $700 billion debt to China.
Lance the boil and let it drain, and get it over with.
September 24, 2008 7:19 AM | Reply | Permalink
Hey Thera -
This goes to one of the most egregious examples of all time, of "legislating from the bench".
A SCOTUS majority opinion, written by Justice Scalia, declared that "corporations are persons", on the basis of a case brought against railroad companies in the mid-late 1800s. Said case actually declared the opposite of that, but the summary was written by a clerk who had been a railroad employee and promoter, and it was the summary that Scalia used as the basis of his opinion.
That's made me wonder sometime if it would be possible to impeach Scalia on the basis of his statements in that case. Would it be perjury to either mis-state the concluding opinion of a case, OR to have falsely suggested he had read the entire case rather than the summary?
September 24, 2008 12:11 PM | Reply | Permalink
So, Secretary/Professor Reich,
With the problem as you describe it why is nobody talking about simply offering the American homeowner government backed, low-interest mortgages so people can, in fact, pay their mortgages, stay in their homes and keep the system functioning?
Feeding a trillion bucks to Wall Street is just throwing good money after bad and those guys would never lift a finger to help the common man or woman. Why on earth should we help them screw us once again?
September 23, 2008 7:53 PM | Reply | Permalink
No argument with you or TheraP on the substance of your proposals, but I wonder if simply helping people keep their homes is enough to "keep the system functioning", as you put it.
For most people, their mortgage payment was OK till they lost their jobs. So it is only the relative few that need to have their payments reset to make them affordable, but they can only be affordable if they also have jobs.
Seems like the economy, and therefore homeowners, would be better off if the government invested in our rotting and falling down infrastructure on the federal, state and local levels. That investment would provide the jobs that people need to be able to stay in their homes. At the same time, more people would be able to buy a home, start a business, build their payrolls up, etc., all of which would help to restore the financial sector of the economy and get it off the critical list where it now resides.
It's called trickle down economics, and as a method for jump-starting the economy it has a favorable track-record, which is more than we can say about the current theory of economics.
Just my deflated 2 cents.
September 23, 2008 8:54 PM | Reply | Permalink
I'm all for your idea! Because it helps the citizens. They get jobs and we all get infrastructure.
I'd add your idea to mine though.
September 23, 2008 8:58 PM | Reply | Permalink
I'd add your idea to mine though.
I thought that's what I was doing!
(Hi, long time no comment to. Good to 'see' you.)
September 23, 2008 9:00 PM | Reply | Permalink
Oh, good! Sorry if I misunderstood. Yes, long time no comment! And a joy to see you again.
September 23, 2008 9:12 PM | Reply | Permalink
I'm for ya both!
September 24, 2008 9:56 AM | Reply | Permalink
For those that have lost their jobs there should be a freeze on foreclosure for a year in my opinion. Give them time to recover. For everyone else, higher interest rates are impacting their ability to stay in their homes because of ARM's and their ability to buy a new home.
Offering low interest loans direct from Uncle Sam to all who can qualify would certainly keep what is necessary of the system to continue functioning and will invogorate our people across the board and thus our economy as a whole. Making us pay for the bad debts of Wall Street is completely unnecessary. Making the welfar Kings of Wall Street hold their own bag and go bankrupt would, in my opinion, be good for the country. The "bailout" is a heist by another name designed to keep the corrupt and incompetent rich at the expense of the common people. It should be stopped.
It isn't an either/or choice regarding what we do to recover from the excesses of the rich these past 8 years. We can do all the infrastructure needed, establih a national health care system and more by reordering our priorities. Of course that would take some balls on the part of Democrats in Congress so I'm not holding my breath.
But the fact is, we can free up something on the order of a trillion dollars rather quickly by ending the idiotic and illegal war in Iraq while at the same time cutting the defense budget by about 50%. Radical sounding eh? Not really when you consider the US spends as much on defense annually as all the other nations on earth combined. The funds we waste on "defense" is simply put: obscene. This is particularly the case given the vast needs of our people and of our environment at this critical time in history. There is just no way on earth that amount is justified, warranted or needed by anyone. But then they don't ever justify it. They just make the claim that it is all necessary and we, our Congress and the media (fools that we are) swallow that load of crap whole without ever questioning it.
War spending, sorry "defense" spending is simply the welfare program for the arms merchants and their buddies. There is plenty of money in this country to do all that is needed for our people and more. There is not, however, enough money to continue to keep the incompetent rich afloat ad infinitum. George W. Bush is the quintessential representative of this class of parasites, but they all need to be put intheir place once and for all.
September 23, 2008 9:11 PM | Reply | Permalink
As a matter of fact, the Defense budget bill for EVERY family of four is $16000.00 EVERY YEAR!!
George Bush and Dick Cheney and all the rest of the cabal needs to go to jail. This war profiteering, bank speculation, outright theft of taxpayer dollars to prop up the richest class (George's base) has driven this entire country into the abyss. This 'malfeasance' starts at the very top of our government and runs throughout the financial system. The wars (and possibly, even 9/11, were just a way to transfer wealth to a select few. There are ways to change it, and get us back to the country we used to know, but it will be very, very hard. We are now OWNED by the rich landowners (?) and they will not want to relinquish their holdings. As I see it right now, our only hope is Barack Obama. And then, only if he is allowed to GOVERN! Remember Jimmy Carter.
Go here and read about a country, Sweden, that actually went through the same thing and came out of it, with discipline and courage. Also, read Dennis Kucinich's plan and see how close it comes to the same solutions Sweden put into place. Very interesting, but do the members of our Congress have what it takes to do it? THAT is the $64,000.00 question.
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em
http://kucinich.us/index.php?option=com_content&task=view&id=2442&Itemid=1
September 24, 2008 9:57 AM | Reply | Permalink
That's what they should be talking about. In fact, the Dems ought to offer that "take it or leave it" and dare the goopers to vote against it. If the Dems pull their usual cave, we're all in trouble.
September 23, 2008 9:22 PM | Reply | Permalink
Well, if I had to put money down on whether the Dems cave, I'd say we're all in trouble. They are nothing if not a collection of gutless cowards (with a few notale exceptions but only a few).
September 23, 2008 9:43 PM | Reply | Permalink
Sad to say that you are right...I mean they bought into the premise that some kind of bail-out is needed right after that "secret meeting" with Paulson last week. This alone is already a sorry display of gutlessness and an immediate victory for the thugs because it means they will already get something for nothing.
September 24, 2008 11:54 AM | Reply | Permalink
Great point Mr. Reich.
I wonder if we shouldn't take the whole 700B and hand it over to taxpayers. That would be about $2400 a piece, I wonder if that would help get back up on payments and stoke the economy.
Give Trickle Up economics a chance...
September 23, 2008 7:55 PM | Reply | Permalink
I believe it would actually be more than that if you want to hand it over to just taxpayers. It would be that figure for every person though.
September 24, 2008 9:59 AM | Reply | Permalink
You people need to stop making sense.
September 23, 2008 7:57 PM | Reply | Permalink
Try hushing her up:
http://www.youtube.com/watch?v=S27yitK32ds
September 23, 2008 10:06 PM | Reply | Permalink
Can't you see we're trying to destroy a dysfunctional republic here?
September 23, 2008 8:00 PM | Reply | Permalink
I agree. Contain the bloodletting by preventing more bloodletting. Our government should be protecting its citizens first, not corporations. Keep people in their homes and help them keep their mortgages paid to date. That is a win win.
September 23, 2008 8:00 PM | Reply | Permalink
This is typical Repug M.O. Run up spending and debt on the way out and let the more efficient Democratic process make up the difference in off years as the market and the average American does better. Then we can blame Dems for raising taxes to pay for said run-ups and sweep in to power on a Big Gov is Bad platform and punish Dems for running surplus by stealing it. Over , and over, and over...
September 23, 2008 8:06 PM | Reply | Permalink
Some years ago, my wife worked as a counselor in a mental health clinic. She told me the story of one desperate soul who, told that her recovery was going to take time, threw herself on the office floor and screamed "Now! Now! Help me now!" The Wall Street mavens strike me as precisely the same as that poor being: infantile, convinced of their entitlement despite their worst behavior, clueless as to their contribution to their own sickness. These are the same fellas who like to talk about "tough love" when dealing with the poor, who sneer at those taken advantage of in this crisis for not reading the fine print.
There is one thing the Congress must do here. Wait. Wait. Wait.
This bailout is the Financial Mishandlers Enablement Act.
September 23, 2008 8:08 PM | Reply | Permalink
Financial Mishandlers Enablement Act in the government would be known as FMEA.
Notice the many resemblances to FEMA?
September 23, 2008 8:58 PM | Reply | Permalink
We could call it Wealthcare for the layman.
September 23, 2008 9:40 PM | Reply | Permalink
Why not market some of our assets on e-bay? I'd start with the Pentagon building, a few aircraft carriers, we have to have some planes even bigger than that one Sarah sold, sell the foreign military bases, sell the domestic bases, stop me when I get to $700B...
September 23, 2008 8:09 PM | Reply | Permalink
TheraP
I am actually going to agree with you, 100%. The problem is is that I must be dreaming. Actually it's a nightmare that began on 9/11. I remember protesting here in NYC (candle light vigil at Union Square) against the planned military strike on Afghanistan. Not many people were there, most everyone said I was crazy to even go, "The terrorists were going to get what they deserved". I was thinking I hoped they would too but that we all needed to "relax, be patient" and think it through before we unleashing any (if any at all) violent aggression in retribution against any parties as it may in haste fall upon the wrong parties. And I was called crazy.
They must be right because this nightmare just keeps getting worse as my faith in anything diminishes. I wish it was about health care and being fair and not about wars in Afghanistan and Iraq, Enron, Katrina, off shore drilling (which dems just folded on btw!). It's crazy and it's about a nightmare that just won't end.
September 23, 2008 8:15 PM | Reply | Permalink
This is the only piece I've read--except for the one by David Johnston posted earlier--that gets to the heart of this matter.
These securities are bad because the loans they are based on are in default. Simple enough. But why are they in default? It's not that people have simply stopped paying their mortgages. It's not some sort of quiet rebellion. These people are out of cash and having a hard time finding more. To contradict McCain, the fundamentals of our economy are rotted. People are making less while paying more for the same things, for example, their mortgages.
The same thing that happened at Lehman and AIG last week has been happening in micro all over the country for several years now: folks are drowning in obligations at the same time their cash flow has been reduced because of either the unavailability of credit or the general weakness of the economy.
Paulson and Bernanke are not talking about this and so, as you would expect the media is not talking about it. (What's the phrase? Monkey see, monkey do.)
In fact, I think the government is actively trying to distract the public and the Congress from this fact in order to keep the focus on Wall Street. I've read several times in the last week that Main Street depends on Wall Street; well, Wall Street also depends on Main Street.
Remember: these banks wouldn't have a bunch of worthless mortgage securities on their books if those mortgages were being paid. Why are they not being paid? We know how Lehman went bankrupt; what we need to know is why people everywhere are also going bankrupt.
September 23, 2008 8:16 PM | Reply | Permalink
If Paulson and his Wall St. cronies think that it's a great idea for government to buy a bunch of bad debt, then he should form a new corporate entity, do an IPO, and keep all that debt and risk in private hands. It's the conservative way.
September 23, 2008 8:20 PM | Reply | Permalink
But you know, TheraP, all this was in the works before the 9/11 catalyst. It's all part of a plan. Don't lose faith, though. The universe has a way of settling accounts that can sometimes be startling.
September 23, 2008 8:20 PM | Reply | Permalink
Sorry TheraP. To Ingiro...
September 23, 2008 8:22 PM | Reply | Permalink
Is Reich involved in the negotiations at all or speaking to anyone besides TPM (perhaps even advising Obama, I hope)? I keep forwarding his posts to my congresswoman but I have a sinking feeling that no one with any common sense is on the proverbial inside.
September 23, 2008 8:23 PM | Reply | Permalink
He was on Rachael Maddow last night.
September 23, 2008 10:26 PM | Reply | Permalink
Is it just me or does anyone else seem to think that our party leaders still haven't grown a pair and are more than willing to capitulate to these lame duck tards. Good show for trying to "dirty" up any "clean" bill. But where's the gravitas? The teeth? For crisake fight! Now, of all times, is the time! Someone please kick Pelosi in the arse.
September 23, 2008 8:27 PM | Reply | Permalink
Actually, when I think about it, I'm not sure I've seen a more concerted response to date on anything of significance from the Dems. But like others, I'm sure, I can't shake the sinking feeling we're gonna get screwed again, by our our party, and also be expected to provide the grease. Or do without. I mean, wtf does it take? How many letters to our representatives do we have to write?
September 23, 2008 8:38 PM | Reply | Permalink
I'm with the folks who keep asking why bailing out homeowners would NOT solve Wall Street's problem.
If that's a stupid idea, then Prof. Reich ought to be able to demolish it in a few short sentences. If he cannot, why isn't it on the table?
--TP
September 23, 2008 8:41 PM | Reply | Permalink
Because they are all bought into the Paulson/Bernanke scare tactic immediately and are now distracted by golden parachutes and symbolic oversight boards instead of making an effort to independently verify the Administrations claim that the sky is falling.
I mean they are not even being critical as to how Paulson came up with 700 billion. Last night on Rachel Maddow I think it was Sen Barney Frank admitted that it is an "educated guess" and that this was satisfactory to him. Just appalling!
September 24, 2008 12:12 PM | Reply | Permalink
There was an article, I believe on ABC that said right after the crisis McCain called 3 people and Obama called 3 people, one of those thre