Gridlocked Markets, Gridlocked Politics
Divided government and bipartisan gridlock has prevented serious revamping of the financial markets for decades-- and, as fingerpointing over the failed bailout bill now shows, has eliminated any sense of accountability, whether for which party leadership acted or failed to act to rein in financial excesses and who needed to act to solve the crisis. One toxic problem was the Democratic leadership's fear of owning a solution and seeking "bipartisan" support, even though this alienated their own party members.
I'm reading Michael Heller's Gridlock Economy, which is primarily about how a multiplicity of property rights from ownership of land to patents undermines economic growth and innovation, but he has a similar point on politics (written even before the recent meltdown). Financial markets loved Dems taking back Congress in 2006, mostly because it promised gridlock on regulation:
According to money manager John Davison, "The market actually likes the executive and legislative branches as it reduces the damage coming out of Washington.. [Markets rose after the 2006 elections] as investors grew more confident that a huge victory by Democrats in congressional elections would result in gridlock and keep lawmakers out of the way of business interests."And the sad political fact is, success or failure, bipartisanship means that no party will be held fully accountable for the results, either of the initial failure of deregulation or the bill itself yesterday. Gridlock in markets, Heller writes, was the source of the mortgage problem in the first place, with too many people owning different parts of each mortgage:
Fragmenting mortgage ownership broke the link between borrower and lender..There were so many partial owners of pooled mortgages that no one cared to act like an old-fashioned mortgage banker with careful underwriting and locan servicing. Until recently, foreclosure had been the bankers last resort because it's costly for everyone, including the lender...[Now] scattered owners of pooled mortgages could not easily reach agreement to restructure troubled loans.And he writes that there was longterm "regulatory gridlock" as well. The new packaging of mortgages meant they were now spread across multiple regulatory authorities, with no single agency with clear authority to fix the problem. Ultimately, Heller's point and the reality of our politics is we don't force any group or political party to "own" the problem and solve it. Presently, if a problem is fixed, everyone claims ownership and if things fail, there's enough shared responsibility for everyone to point fingers. Which encourages gamesmanship day in and day out.
The solution is less clear, but there are a few clear answers. Abolish the filibuster is the first one, since it is the toxic source of bipartisan finger pointing. Pundits should stop praising bipartisanship, as if that's a good thing, and instead demand that parties own their own solutions and condemn them for failures of party discipline. And most of all, the Democrats should step up themselves, own a solution to the present crisis, write a bill that is acceptable to their whole causus, and pass the thing-- take responsibility for solving the crisis without unneeded concessions to House Republicans. Principled partisanship should now replace gameplaying bipartisanship, as the only solution to the present economic crisis-- that as Heller notes itself derived from that toxic bipartisanship.
I think the problem is ill defined. It appears to me that finally enough money has been accumulated by the rich, the ultra rich and large companies that there is simply not enough to go around. In addition, we have been sending boatloads of money to China and oil countries. This is the natural end result of a trickle down economy, where money flows in one direction and becomes dammed up at one end of the economy. Why else would banks not want to make loans, even to people with good credit? There is not enough money left in circulation.
September 30, 2008 11:04 AM | Reply | Permalink
Can't remember the name of the idiot rep who 'blamed' the non-passage of the bail-out bill on Pelosi's pre-vote speech dissing Bush and Republican policies which, according to the idiot, resulted in some Repubs voting against the bill, but I do remember when Gringrich shut down Congress because he was pissed at having to leave AirForce I by the back door.
Politicians really should get that they're all raving narcissists and one doesn't insult a narcissist's sense of himself without suffering dire consequences. Just listen to Clinton these days to get what happens when a supreme narcissist's wife doesn't win a nomination.
September 30, 2008 11:27 AM | Reply | Permalink
The problem may be ill defined as patent1 points out, but it's getting more defined by the minute as voters begin to figure out how this crisis came to be.
For a long time, voters bought the idea that they were the source of the problem. The myths of the overconsuming individual, the dumb folks preyed upon by a few unscrupulous lenders, the investors who tried to pile up money by flipping homes--these myths were put out there and largely believed. The bankers, though perhaps a little unscrupulous, were portrayed as upstanding types doing their patriotic duty by expanding capitalism.
But as Americans come to understand how fragmenting mortgage ownership broke the link between borrower and lender (this is a good way to describe it) and grapple with how to mitigate (not fix) the crisis, they are going to increasingly come down on the side of the borrowers. If a soft landing must be arranged, I'd rather have it be for me and my neighbors, not my banker and his Wall Street friends.
Most Americans understand deep down that owning a home (even if the bank really owns it) is the only real wealth they will ever have, and for banks to slice and dice home ownership, sell it off and THEN proclaim it worthless--people just aren't going to stand for that.
What I am trying to say is that the longer we go without a bailout, the more populist the eventual bill is going to have to be.
I would not be surprised to see (in addition to whatever black magic has to be done in the short term) an eventual re-examination and re-working of every mortgage undertaken between 2001 and 2005. Change them all to 60-year mortgages to make payments affordable and have the govt kick in some money on the principal each month to get the things paid down asap. That will make the eventual house price roughly equivalent to what their neighbors spent, and stabilize neighborhoods.
And oh, I totally agree on the word "bipartisan," if nobody says it for the next 5 weeks it would be fine with me.
September 30, 2008 11:36 AM | Reply | Permalink
This is certainly a contrarian viewpoint! I can't remember ever reading anything opposing bipartisanship. But, I have often wondered how you can have strong opinions about what needs to be done in our country, while at the same time seeking bipartisanship. I can't recall any instance where Republicans, having a majority in the Congress, ever worked for bipartisanship.
Apparently we Democrats do a lot more blustering about what the solutions to our problems are than our beliefs will support. We talk a great show about universal health care, for example, but will never take the next step of actually passing such a piece of legislation.
The problem we Democrats probably suffer from is that we have never been a unified party, with an agreed upon set of goals. We seem to continue to be a coalition of many smaller groups interested only in their specific desires. On all other issues our coalition breaks down.
Now the answer to that problem is.....uh......
September 30, 2008 11:45 AM | Reply | Permalink
After some more thought: The Democratic Party is built from multipartisanship. Because we are a coalition of interest groups the party always has to seek compromises that will at least temporarily unite those groups, otherwise we can never win an election. This predisposes us to bipartisanship once elected.
Republicans long ago settled on favoring tax cuts for the wealthy, under the table support for racism, support for religious fundamentalists (with a wink), and greasing the skids for vast transfers of national wealth to the top 0.1%. Those principles are accepted by all Republicans running for office or in office. So they have no need for bipartisanship.
I think I prefer being a Democrat.
September 30, 2008 11:52 AM | Reply | Permalink
Opposing bipartisanship (or really more the divided government that requires it) is the majority view among political scientists, basically for the reasons Nate gives. That's why they prefer parliamentary systems, as in the UK.
September 30, 2008 12:07 PM | Reply | Permalink
. . . have the govt kick in some money . . . .
Don't you mean the "taxpayers"?
Mild snark aside I've been following your call for a bailout of mortgagors for some time and remain unsure of your preferred method.
It seems to me you're aiming to keep home prices elevated by paying off mortgages with taxpayer money to the benefit of irresponsible if not fraudulent lenders.
Why would you want to do that?
September 30, 2008 11:50 AM | Reply | Permalink
Hi Ellen,
Sorry, I should have been more specific, I do mean the taxpayers. There's no way to sugar coat it, even though everyone tries.
My call for help for mortagers is just based on the idea that before the money goes to help out the banks, it should run through the pockets of mortgagors and their neighborhoods. It's a trickle-up idea to help stabilize individual and neighborhood finances. If that means keeping home prices higher than their "real" values (and eventually rewarding the irresponsible if not fraudulent lenders who turned the sacred principle of property ownership into something that could be bought and sold on the open market) well, I guess I can live with that as long as individuals and neighborhoods derive stability and benefit from it first. Again, it's the Scarlett O'Hara idea that property ownership has value--an antiquated myth, perhaps, but a life-lie one can live with as Ibsen might have said.
I do think there's a correlation between the crass bundling and commoditization of the American mortgage and the crass bundling and commoditization of the American vote--coming up on this election, it seems that people are starting to make the connection. And even though the rescue might be more efficient if the only people who actually see money change hands are on Wall Street, I don't think the stabilization will happen until the money goes to ordinary people. In a way, reaffirming that peoples' mortgages/homes matter is a way of reaffirming that peoples' votes matter, if that makes any sense.
As to the specifics, I'm light on those because I'm not enough of an expert to provide many.
I'm in favor of a cash transfer to cities for a grassroots program by which the govt (taxpayers) would share the cost of bad mortgages with property owners until values stabilize. I like this idea because it doesn't involve mortgage write-downs, there would just be another party helping pay down your loan. There are small organizations with the capability of doing this, for example organizations that make home energy loans. The good thing about local control is that the money could be tied to initiatives to help neighborhoods decimated by the crisis. For example, maybe Uncle Sam would kick in a little extra for you if you join your neighborhood organiztion, run your block club, register to vote, etc.
Again, I'm thinking of extending the length of the loan and keeping interest rates as low as possible to make the homeowner side affordable. The principal payment would be provided by the program. Yup, it's taxpayers footing the bill but at least the money is directly stabilizing (some of which got destabilized partly because the feds cut money to the states who cut money to cities.)
Sorry for the long post. What are your thoughts?
September 30, 2008 3:11 PM | Reply | Permalink
Whoops, that last should be "directly stabilizing neighborhoods, some of which got destabilized...."
September 30, 2008 3:15 PM | Reply | Permalink
OT but does Bush really think he can scare people into voting for the bill? Others have commented that Bush has cried wolf too many times, that's one part.
But more importantly he led by the example that we don't have to make sacrifices and shift financial priorities when circumstances dictate. Sure, we can have a war and tax cuts too! Personal savings are nil compared to personal debt. Even the candidates (BOTH) refused to name projects that would be underfunded or defunded.
This is the new 3rd rail.
September 30, 2008 12:03 PM | Reply | Permalink
Let me get this off the table: As between taking junk (securitized bonds and derivatives) off the banks' hands and taking junk (homeowners' negative equity) off the homeowners' hands, I'll go with the latter.
But, even as to the second choice, the "devil is in the details." © 2008 Ellen :-)*
There's a lot of included fraud in these mortgages -- buyers and lenders; there's a lot of speculation -- buyers and lenders; there's a lot of overreaching -- buyers and lenders. I don't want to reward any of them for those past actions.
Residential mortgagors in extreme stress? Of course.
But the proof of extreme stress is filing for bankruptcy, not convincing some overworked bureaucrat with a monthly "renegotiations" goal to provide a windfall.
Note: My response does require an amendment to the Bankruptcy Code to permit the bankruptcy judge to modify the bankrupt's mortgage. In the current political climate and after Obama's elected, that change should be relatively easy to enact.
* I'm wondering whether the copyright symbol I typed will appear.
September 30, 2008 4:42 PM | Reply | Permalink
I'm all for the amendment to the Bankruptcy Code. And if I were writing the fancy-pants Wall Street bailout, I'd set it up so that companies would either have to declare bankruptcy to get in the program or offer up enough of their equity to the govt to make it about the same as a bankruptcy.
But for ordinary people, I would think it would be better to have more carrot and less stick. Declaring bankruptcy costs money, it's one more level of complex paperwork, plus it further sours your credit rating, your name goes in the paper, you're disqualified for some jobs, etc. etc. So requiring bankruptcy might make it unnecessarily hard for people to get in. The goal is to get people on the program, stabilized in their homes and neighborhoods.
My neighborhood is made up of mostly poor, non-professional people who bought the cheapest houses in town because that's what they qualified for. (And the rental property is mostly small-time landlords.) I don't know how to entirely avoid rewarding fraudsters or eliminate the possibility of overreaching, but I'm thinking that stabilization might be its own reward in this case. (And wouldn't the wall st bailout generate its own crop of folk trying to push the law as hard as they could?)
In thinking about extreme stress, are there other qualifiers? Like maybe if there are already 5 foreclosed houses on your block and 3 have had the copper stolen, could that automatically qualify you? (I'm not trying to be provocative, just wondering if there are some grassroots ways to show mortgagor stress other than pulling together bankruptcy paperwork....)
September 30, 2008 5:21 PM | Reply | Permalink
The circumstance which has pulled at my hard-hearted heart strings the strongest are the people who own their home -- often free and clear -- and have to watch its value depreciate because neighbors' homes are abandoned or boarded up.* They did nothing wrong; they didn't mortgage up; they didn't take that trip to Cancun or buy a Silverado -- all on someone else's money.
But to make good on the claims of the "pushers" -- the lenders who for an extra hundred or so basis points of yield destroyed neighborhoods and lives -- is immoral.
You can't save the world -- and shouldn't try when the effort makes a mockery of the majority who didn't act like material gluttons or fools and when the plan will cost them a passel of money.
I don't know how to succor the unlucky faultless ones who had the bad luck to get caught in this mess. I'm afraid they'll all have to wait many years to recover from their bad fortunes.
Throwing $2-3 trillion at the problem cannot be the solution.
* In many places HOAs are in trouble, also; and in Arizona and Nevada whole towns are bankrupt shells.
September 30, 2008 10:04 PM | Reply | Permalink
By the way, thanks for considering the proposition. And I hope the bankruptcy provision goes into the bill too.
September 30, 2008 5:23 PM | Reply | Permalink