Geithner v. The American Oligarchs
There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that - they say - will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains.
Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble? The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about. And fully escaping the grip of crisis really means breaking their power.
Not only is this a standard way of thinking about crisis resolution in many developing and post-communist countries, it also turns out to be a good guide to thinking about the US today. We have a powerful banking industry that has mismanaged its way into deep trouble. Yet these banks obtained an initial bailout - the Troubled Asset Relief Program, or TARP - on generous terms, and have consistently failed to use the opportunity provided by this government support to turn their operations around. Not only that, but they have flaunted their power - and their arrogance - through paying themselves large and largely inappropriate bonuses.
We come now, this week, to the podium. And Treasury Secretary Tim Geithner takes the stand (on Tuesday), to tell us how he proposes to use the remainder of the TARP funds, support from the Federal Reserve, and other policies to turn around the financial system and pull us out of recession. We elsewhere posed relevant technical questions for this week; answers (or lack of answers) to these should determine if Geithner's approach is likely to succeed. Think of that as a framework for reasonable technocratic assessment. But there is also the key political dimension to emphasize.
The elites who run the US banking industry have had a great run of economic good fortune. They used this wealth to further strengthen their political power, both through donations to politicians of almost all stripes and more broadly through taking positions of formal and informal influence throughout the executive and legislative branches.
Our unsustainable debt-fuelled boom, in other words, produced both the conditions for a major global financial disaster, and a political strengthening of the people who benefited most from the risk-taking and associated compensation packages that made this disaster possible. Ending the financial crisis is relatively straightforward - a forced recapitalization and change of ownership/management in the banking system - although this will not immediately lead to an economic recovery (more on that here). But seen in deeper political terms, decisive action to restructure large banks is almost impossible. Such action would require overcoming perhaps the single strongest interest group in the United States today.
How can you do it? The answer must be by splitting this powerful interest group into competing factions, and taking them on one by one. Can this be done? Definitely, yes. In particular, bank recapitalization - if implemented right - can use private equity interests against the powerful large bank insiders. Then you need to force the new private equity owners of banks to break them up so they are no longer too big to fail. And then... there is always more to do to contain the power of a lobby that is boosted by any boom and which, the more it succeeds, the more likely it is to ruin us all.
Dick Cheney vs. Big Oil
February 8, 2009 8:15 PM | Reply | Permalink
Geithner vs. the American oligarchs?
Why does everybody blindly accept the idea that the "american" banks are owned or controlled by Americans?
February 9, 2009 7:47 AM | Reply | Permalink
If you think that Geithner will do anything to weaken the banking insiders, you are nuts.
His professional life has been as a protege of these people.
He will bend over backwards to protect them.
February 10, 2009 11:31 AM | Reply | Permalink
Typical. More of the same tiresome prescriptions.
How 'bout we ---
1. Send out checks for a trillion dollars to the American people and follow it up with another trillion dollars later.
2. Cut the FDIC guarantee to $50K or less -- spread that money around.
3. Not one more penny for the big banks and cancel the guarantees. Let 'em fail.
4. You want a loan? Go to Northern Trust. Go to Republic. Hell, you could even go to PNC. They'll all have plenty of money in their coffers.
February 8, 2009 8:36 PM | Reply | Permalink
I like your thinking Elen. Though I very much doubt that those in Washington would.
C
February 8, 2009 9:03 PM | Reply | Permalink
Any government capable of going back on its contractual obligations established in the past three months will lose all credibility.
Most people would conclude that the government was untrustworthy, and then you would have real panic.
What you have now is fear-induced deflation as everyone stops spending in an effort to save, but that just makes prices drop - then salaries drop - and you end up with everyone having less nominal income but the same nominal debt; everyone ends up poorer.
getting out of that trap involves building up trust and confidence that, eg. your bank isn't going to go bust tomorrow, that jobs are not going away and/or coming back, etc.
Wild policy prescriptions are gratifying fantasies, but the time for childish things is over, as the man says
February 8, 2009 9:55 PM | Reply | Permalink
Contractual obligations? Were there contracts signed? So if the US government doesn't come up with the second half of the stimulus it can be sued by the banks for breach of contract for not giving them money to cover their losses? The US government is now bound by contract to cover these losses? Seriously?
February 8, 2009 10:03 PM | Reply | Permalink
Sorry I meant bailout money not stimulus money, my bad.
February 8, 2009 10:06 PM | Reply | Permalink
"Contractual obligations? Were there contracts signed?"
- not on the second round of TARP. But yes, on the FDIC guarantees for deposits up to 250.000, for most bonds issued since november, for BofA and Citi assets of 550 bn. Also I don't think the government can get out of fulfilling the insurance obligations on credit default (the famous CDS derivatives) incurred by AIG if a big bank fails.
Collectively the government has already committed to trillions in subsidies to bank stakeholders. That horse has left the barn.
February 8, 2009 10:26 PM | Reply | Permalink
Ok I see...as far as AIG goes that makes sense. The US government did take fiduciary control of the company.
Maybe Buffet will buy it eventually but I don't know if he can with his ownership of GenRe, but I digress.
February 8, 2009 10:46 PM | Reply | Permalink
Don't give up so easily, Libertine.
There isn't one of these Paulson/Bernanke "government insurance contracts" which couldn't be set aside on equitable grounds (give a few lawyers and accountants a chance to pour over AIG's or Citi's or BoA's books and equitable fraud will pop up all over the place).
Those "contracts" can be rescinded; of course, the government would have to return the consideration it received.
Umm -- just what did the government receive?
February 8, 2009 10:57 PM | Reply | Permalink
Well not being expert on law...especially in this area so I deferred from any additional comments on the point at this time Ellen. But I am far from giving up on this issue.
But I do know enough that if there is fraud found it could let AIG/the US Government out of any contractual obligations. So a very good point taken. I'll let the legal types sort it all out. Yeah and great summation...what did the government (see: 'we the people') receive in that deal? Inquiring minds would like to know...
February 8, 2009 11:06 PM | Reply | Permalink
Guvmint got paper on paper. Fed has been churning corporate paper to unknown good. TARP got the Treasury some IOUs in the form of preferred stock etc.
Those pesky loan guarantees to Citi and BAC? I believe the government under Bush got shafted. Is shafting commutative?
February 9, 2009 3:34 AM | Reply | Permalink
"There isn't one of these Paulson/Bernanke "government insurance contracts" which couldn't be set aside on equitable grounds"
Three points on this - one, if they do find fraud committed by bank management, then they can prosecute the bank and get the TARP loans (200 bn) back. But these people have mastered the art of deniability - we find fraud in teh banks all the time, but its only ever attributable to some patsy trader or trading desk.
Two - Most of the government's liabilities are to bank creditors (depositors, bondholders, other banks). And the legal status of these liabilities does not stand or fall with the exposure of the bank's management being fraudulent.
Three - where is the government going to find competent auditors/lawyers? Oh yeah, we have this brilliant agency called the SEC, whose lawyers are so dumb they think they can plead executive privilege by themselves. They literally could not find fraud when it was served to them on a platter in a 60 page memo. hilarious but sad.
February 9, 2009 5:28 AM | Reply | Permalink
The roughly half trillion dollars in AIG credit default swaps were contracted by AIG Financial Products in London. This is the pile of paper that became problematic in the wake of Lehman's failure.
I think that most of the derivative paper (over $600 trillion notional value now) is done in London by subsidiaries of various financial institutions.
Does UK law work the same way?
February 9, 2009 10:37 AM | Reply | Permalink
Obey, you sound like some rube from Nebraska hiding his money in 1931.
People aren't afraid of an unsound financial system as you seem to think. They're afraid they'll lose their jobs; lose their retirement expectation; be unable to send their kids to college.
The big zombie banks are sucking up (and "destroying") money that could be used to revive the economy. Worse, those in charge are wasting their time and destroying the few neurons they still have left (electrical short circuits of their brains) trying to come up with a solution to an unsolvable problem.
All Zombies Must Die!
February 8, 2009 10:47 PM | Reply | Permalink
Nice sound bite, Ellen.
I won't quibble about money vs. credit here.
I will say that to be fair to investors (not the banks, rather their creditors except where banks held the securities themselves), it seems that homeowners consumed $9T in home equity in the decade through 2006. When that "stimulus" to the economy dried up, real economic activity had to fall.
Some zombies can be cured, in principle. Let's not throw all the babies out with the bathwater.
February 9, 2009 3:43 AM | Reply | Permalink
I know this will come as a shock to some (Geithner for sure), but the government of the United States of America was not constituted for the purpose of insuring the investor class.
"Investors" handed their money over to "homeowners." It looks like those investors aren't going to get all their money back -- unless, of course, the government gives it to them.
You either support Lemon Socialism or you don't. I don't!
February 9, 2009 8:04 AM | Reply | Permalink
but the government of the United States of America was not constituted for the purpose of insuring the investor class.
George Washington - largest distiller in the Colonies,
Ben Franklin - the Rupert Murdoch of his day
Boston traders and merchants
Virgia and Carolina landowners and slaveholders
Of course the United States of America was constituted for the purpose of insuring the investor class.
February 9, 2009 10:15 AM | Reply | Permalink
There is Constitutional and un-Constitutional "insurance". I think Ellen is against the latter in all cases and the former in some cases.
"provide for the common defense, promote the general welfare" can both be read as offering insurance on the assets of the investment class to some extent. 'assurance' might be a more proper term.
February 9, 2009 4:16 PM | Reply | Permalink
The "investors" should get the collateral for the loans. The "gamblers" should go to jail or simply be run out of town trailing tar and feathers, if they have the effrontery to demand recourse for their bad bets.
It's too simple, but it's the core of the moral issue.
And yes, real people may suffer financial losses and huge write-downs of their personal expectation values (valued hopes and plans). That's what safety nets are for.
No taxpayer money to gamblers or crooks!
February 9, 2009 4:22 PM | Reply | Permalink
"Obey, you sound like some rube from Nebraska hiding his money in 1931."
- Look, I'm all for killing zombies. But that is a different issue from going back on past commitments. You're basically suggesting that the government default on its debt in order to save a couple of trillion dollars. There are a lot of ways of looking at the consequences of doing this.
Try this: The safest investment out there is US treasuries. It's the reference point for the risk rating of all other kinds of debt. China has 2 trillion, the Social Security trust fund has 4 trillion, etc. If the government defaults on its bailout-related debt, then the price of treasuries plummets to distressed levels - say 70 cents on the dollar. In one swipe you've destroyed a pillar of the international financial system, you've destroyed the massive central bank reserves of a lot of countries. You've crippled the SS trust fund. The government can no longer sell bonds on the market. All the small savers who took their retirement savings out of the stock market in november and parked them in 'safe' treasuries, or in cash accounts, see their savings cut by another 30%. I could go on.
February 9, 2009 5:01 AM | Reply | Permalink
I'm afraid I don't see how rescinding a few guaranties based on undisclosed and/or erroneous accounting facts ("equitable fraud") leads to the USG defaulting on its debt.
In the event default is -- when you own the reserve currency -- always accomplished through the mode of inflation ("running the printing presses"). That's when interest rates zoom and the price of treasuries falls.
Backing out of some half-baked guaranty contracts won't tell Mr. Market whether or when the USG will attack its own currency (or even whether, in a deflationary environment, the USG is able to inflate).
February 9, 2009 7:52 AM | Reply | Permalink
I don't understand the 'half-baked' part. Say Tom has a contractual claim on Dick's money. The fact that Harry defrauded Dick has no legal impact on Tom's contractual claim. Fraudulent activity on the part of bank management has no impact (and shouldn't) on the USG's commitments towards bank bond-holders.
Also don't get why you think debt inflation and default are equivalent. If you refuse to pay money you are contractually committed to paying, well, that is just defaulting. The USG can choose to default, though it might prefer inflation. It's a cost-benefit calculation. The situation now is that bank bondholders hold the legal equivalent of USG debt. If the USG decides to wipe out that debt, that IS defaulting.
Inflating away your debt is not default, though for CDS contract purposes it does apparently trigger pay-outs as well.
February 9, 2009 8:04 AM | Reply | Permalink
Well, now you're into third party beneficiaries of a contract -- and you're right to go there.
The "contracts" (has anyone in the public seen one of these things?) were made between the USG and the banks (principally, Citi and BoA and the insurance company AIG). The question is whether the creditors of these financial institutions relied upon those contracts in taking actions to their detriment. Unless they did, they have no third-party claims against either principal party.
I don't believe those third-party beneficiaries (bank creditors) relied upon the guaranties.
Remember, the purpose of the guaranties was short-term -- to quiet fears and to get banks to lend to each other in the fourth quarter of '08.
Those guaranties were not advertised as creditor bailouts.
February 9, 2009 8:14 AM | Reply | Permalink
"purpose of the guaranties was short-term"
- Doesn't matter WHY you enter a badly negotiated long-term deal. You can do it to please your mother, for all I care. ITS A LONG-TERM CONTRACT! You can't just rescind a contract without cause. And saying your public official was dumb isn't cause.
I'm not defending anyone's actions, here. It would already be great if we can stop the government from CONTINUING these insane policies. But you've got to have minimal respect for the law and not just randomly rescind deals because they look imprudent in retrospect.
February 9, 2009 9:00 AM | Reply | Permalink
"I don't believe those third-party beneficiaries (bank creditors) relied upon the guaranties."
That is flat wrong. go take a look at unsecured bond prices immediately subsequent to the launching of the guarantee program. I don't know anyone who didn't dive in. Its been the only part of the market up 20+%. The banks are slowly buying up the non-guaranteed stuff and financing the purchase with cheap guaranteed bonds.
February 9, 2009 9:12 AM | Reply | Permalink
The situation now is that bank bondholders hold the legal equivalent of USG debt. Obey
What did the "bank bondholders" pay for the USG's promise to convert their trash into the "legal equivalent of USG debt"?
That's all they should receive on rescission.
February 9, 2009 8:21 AM | Reply | Permalink
So sue Paulson for negotiating the tax-payer a bad deal. Good luck with that.
Negotiating badly however is not the same as being defrauded. you can't just throw out a deal because you no longer like the terms.
February 9, 2009 8:47 AM | Reply | Permalink
Sure you can. Happens every day.
That's why we have courts. And if I were one of these free-lunching bank creditors, I wouldn't anticipate a lot of success in that venue.
February 9, 2009 9:03 AM | Reply | Permalink
"Sure you can. Happens every day."
- you're going to have to do better than this. The courts will throw out the contract if you can provide adequate grounds within the terms of the contract itself or some fraud committed in entering the contract. So which is it?
February 9, 2009 9:19 AM | Reply | Permalink
fraud committed in entering the contract
I have not the slightest doubt, (had I not rehabilitated myself, and thus found myself arguing this matter to a jury) that I could find misrepresentations made by the rescued institutions both to regulators before the flood, and to negotiators after, which would amount to a failure of consideration legitimizing non performance by the Government side.
After all, the only consideration supporting this "*contract" at all, is the promise of "best efforts in future" by the banks. Best efforts, of course, are limited by the resources one brings to the table--precisely the issue on which the banks were their most mendacious.
*Promises of gifts are, after all, unenforceable.
February 9, 2009 11:32 AM | Reply | Permalink
And I'm pretty certain you can't. Mainly because regulations are so lax. If they use the government's own inflated figures for future economic trends (unemployment maxing at 8%, my butt) as input for their pricing models, the government can't seriously charge them with misrepresentation.
that aside, I was mainly talking about the CDS we've been writing on bank bonds, and strengthened deposit guarantees. If you do no due diligence, caveat emptor is going to lose you the verdict.
February 9, 2009 11:52 AM | Reply | Permalink
strengthened deposit guarantees
As to FDIC, I don't think we will see a necessity for large scale resort to the courts by previously protected depositers trying to enforce the federal guarantee.
In real world terms, the litigation would probably only arise as a a government initiated "clawback".
I bet the case would settle favorably to the (agency) plaintiff. YMMV.
February 9, 2009 12:13 PM | Reply | Permalink
Obey, I think this is wrong:
"The situation now is that bank bondholders hold the legal equivalent of USG debt. If the USG decides to wipe out that debt, that IS defaulting."
Except for FDIC covered assets, if you're talking about rescinding TARP injections or loan guarantees, those are not the legal equivalent of debt. For one thing, the bondholders did not know of TARP etc. when they bought the bonds in the first place.
The thread is hard to follow, so maybe I lost the context along the way...
February 9, 2009 4:38 PM | Reply | Permalink
Really? I'll take your word for it. I don't know how you 'rescind' preferred stock. If I've bought stock, can I just rescind that purchase and credit my own account with the amount for which I bought the shares. Brilliant. That solves a lot of my problems...
As for loan guarantees, if you're talking about the CDS written on newly issued bonds, I'm stunned...
February 9, 2009 5:17 PM | Reply | Permalink
I think you're just trashing here.
:(
February 9, 2009 5:35 PM | Reply | Permalink
no offence intended buddy.
I'm always happy to learn when I'm wrong.
February 9, 2009 7:15 PM | Reply | Permalink
The government didn't just buy stock on the open market, there was a contract. That contract is the point at issue here.
I don't know how to read "I'm stunned..." but it looks like some kind of weak sarcasm. I was talking about the BAC and Citi loan loss guarantees, which I believe amount to criminal dealings by Treasury, in effect giving money to the banks and what stockholders they had at the time, for nothing in return.
February 9, 2009 8:54 PM | Reply | Permalink
"In particular, bank recapitalization - if implemented right - can use private equity interests against the powerful large bank insiders."
Who exactly are these 'private equity interests' who are not dependent on the big banks for credit? Divide-and-conquer sounds great in principle, but the banking sector is so consolidated that there is no wedge left to divide interests.
there should be a wedge between solvent banks and insolvent banks, but its difficult to find.
February 8, 2009 9:47 PM | Reply | Permalink
Is it so difficult to find?
The problem is driving a stake through the heart of a bank which is half vampire and half human, in search of keeping the one half alive.
The cash borrowed by consumers against home equity etc. is out there somewhere. To name two: Buffet seems to have a lot, and Soros is said to have done well last year. Are these good guys or bad guys here?
February 9, 2009 3:48 AM | Reply | Permalink
"Is it so difficult to find?"
I'm talking about the political wedge to gain a decent constituency within the industry for an equitable solution to the banking problem. You're talking about finding the wedge between the good and bad parts of a bank. That is, you're right, the least of our problems.
February 9, 2009 8:09 AM | Reply | Permalink
"political wedge to gain a decent constituency within the industry "
I don't know the industry inside out. Is the insider constituency the key, or is public policy something which can trump marginal inside reservations?
February 9, 2009 4:45 PM | Reply | Permalink
The point of the article seems to be that the failure to do the obviously right thing in the present circumstances is due the power of vested interests within the industry. The rest of the country smells a rat, but like in a lot of policy areas, most of the pressure is coming from one very powerful party. As long as the MSM and govt officials can work the smoke and mirrors, the country will grudgingly go along.
February 9, 2009 5:12 PM | Reply | Permalink
driving a stake through the heart
Does that work for a zombie?? I thought you had to burn them...
February 9, 2009 11:58 AM | Reply | Permalink
The point about killing Zombie Banks is on the mark. A bank that's no longer alive enough to actually function as a bank is a plague on the system. Nationalize them and either close them down or set them free without the junk on their books.
Unfortunately, you can't just divide the banks into zombies and healthy ones. There's a lot in between, sick from all the bad assets on their books. There's got to be a plan to address these banks too.
Aside from that, what's the supposed benefit from reducing the FDIC guarantee? I don't get that one.
February 9, 2009 8:08 AM | Reply | Permalink
"Unfortunately, you can't just divide the banks into zombies and healthy ones. There's a lot in between, sick from all the bad assets on their books. There's got to be a plan to address these banks too."
- That's why 'triage' (as practiced by battefield medics)is the word to watch out for. It involves a credible audit of all the banks, letting the healthy ones be, putting the borderline one's on life-support (equity injections), and providing for an orderly liquidation of the clearly insolvent. Sadly, no sign yet that Geithner is considering it.
February 9, 2009 9:34 AM | Reply | Permalink
Your "triage" sounds reasonable to me.
February 10, 2009 1:12 AM | Reply | Permalink
Please tell me why the argument that the continued looting of the US Treasury to cover the arse of worldwide wealth is in fact the right answer for the Amerivcan taxpaying middle class and the correct decision? This is pie in the sky stink bait to give cover that no real difference exists between Bush and Obama in that they will bend the taxpayers over backwards so that wealth does not take a hit.
With that said, fuck awaiting your promised result when letting the market function as it must will get us there today of the banks were allowed to fail. Simply put, this argument appears to be nothing more than one of a closet apologist for this theft.
February 9, 2009 2:58 PM | Reply | Permalink
The spirits of Sun Tzu, von Klausewitz, and Machiavaelli, are all smiling on your strategic acumen. Is it possible that anyone in this Admin will heed your wise words? If there's a complete economic collapse will there be a better chance of being heard? Can't happen a moment too soon. I'm sorry to make my first post disrespectful, but the lack of strategic acumen and realpolitik in the commentary doesn't speak well for the prospect of implementing your intelligent plan.
February 9, 2009 6:33 PM | Reply | Permalink
You may clean you face now.
February 9, 2009 6:59 PM | Reply | Permalink
All great strategy works by giving thse that have controlled the money for generations trillions of taxpayer dollars to cover the wound created by their continued greed and folly, all hoping this inanity will result in changing their ways and their continued control of the the money. I would hope your cut is juicy for promoting such a fucking farce?
February 9, 2009 7:02 PM | Reply | Permalink
utterly oblivious headline...
either TOTALLY oblivius or a willful attempt to smoke and mirrors Mr Geithner and Team Obama and their agenda.
Go ahead and read THE NORMAL BIOS of Mr. Geithner...a SHILL/SYCOPHANT/TOADY/MINION/LACKEY/PUPPET
AND EMPLOYEE OF
Rockefeller Mouth of Sauron 1 Word Henry Kissenger.
And we are to think Mr Geitner is VERSUS THE CORPORATE SOCIALIST ELITES?????????
right....
but...
IF you are trying to point out THIS hypocricy then at least say so.
the demand for rearranging the deck chairs...and the Brer Rabbit-like demand to NOT Nationalize ie SEIZE LIKE IN COMMUNIST COUNTRIES the banking of this country....is quite deafening...and the abyss which we are on the edge of is quite ominous.
PRIVATE "Federal" Reserve and its FIAT worthless paper currency...now the masses with torches and pitchforks(and conditioned shill MSM and liberal do-gooders) will storm the Bastille er WhiteHouse and DEMAND the Govt to SIEZE the banks... and gee what will happen..
FINALLY the imposition of the last plank of SOCIALIST Karl Marx's Communist Manifesto's 10 Planks(a STATE CENTRAL BANK with MONOPOLY OF CURRENCY ISSUANCE AND CREDIT CREATION) will occur.
And that will be all she wrote for America.
Thanks.....I fought it(you) for 20 years...for nothing..oh well....hope you enjoy the currency collapse/the Amero/Martial Law and Halliburton FEMA "temporary" Detention Facilities...ask LIBERAL Congressman former IMPEACHED Judge Alcee Hastings why he just introduced a bill to LEGALIZE THIS??????
February 9, 2009 7:00 PM | Reply | Permalink
I bet this blog post by Simon Johnson was crafted by a team at a big public relations firm in D.C., and relied on previous focus group data to cater to a skeptical (but still gullible) left leaning audience.
I don't think it's working, and I'm very curious as to the circumstances that led up to TPM publishing it.
February 9, 2009 8:02 PM | Reply | Permalink
For the record:
--------
Feb. 9 (Bloomberg) -- The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.
--------
What I don't understand is, if the last 10 years of GDP (not to say 30) have been based mainly on leverage (whether direct or indirect through easy monetary policy) rather than actual value (witness stagnated wages), how can any injection now do anything but delay an eventual correction, not to say make it worse by the size and length of the delay?
It seems to me quite a chunk of the mirage of U.S. wealth has evaporated forever, though yet to be fully recognized in equities and real estate.
Do I misaprehend the nature of the problem?
February 9, 2009 10:10 PM | Reply | Permalink
Hi. I cannot parse your question into meaning, but I do believe that homeowners withdrew equity from homes to the tune of about $9T or more over the last decade. So that potential wealth was transferred to lenders and the cash presumably spent as consumption, propping up GDP at about $1T/year.
I have not seen the 9.7T figure but it seems high.
February 10, 2009 12:57 AM | Reply | Permalink
"So that potential wealth was transferred to lenders and the cash presumably spent as consumption, propping up GDP at about $1T/year
Like the reasoning, but you need to look at debt trends beyond second liens, (though 9T sounds high to me (?)). Also, the 'presumably' plays a pretty important role in your argument. Seems a lot of the money went to university fees, home improvements, business owner investments, etc.
February 10, 2009 9:18 AM | Reply | Permalink
I don't see home equity loans being a big fraction of the producer side, but it's plausible that people started small businesses with the cash. But either way, doesn't that spending contribute to GDP? Home improvements keep Home Depot in business... college education keeps staff and professors employed, etc.
$9T comes from Soros citing Feldstein in the decade through 2006, in his recent book, page xv of Setting the Stage intro.
And yes, $9T is a lower bound, as all the sellers who didn't plow the money back into another property took that money out of the market too. I just posted a related blog about tulips...
February 10, 2009 11:29 AM | Reply | Permalink
Looked at the tulips. Good stuff.
Sure investment contributes to GDP, but I was addressing your suggestion that equity withdrawals were "propping up GDP at about $1T/year." By propping up, I take you to mean 'beyond a sustainable long-run growth rate' or something. Investment presumably creates sustainable growth, no? Finding out the extent of 'artificial' growth caused by the credit bubble seems a bit more tricky than you're suggesting.
February 10, 2009 11:52 AM | Reply | Permalink
"By propping up, I take you to mean 'beyond a sustainable long-run growth rate' or something."
Or something. Not growth at all, thus propping up. People borrowed to consume. That consumption is a crutch. You are correct that not all home equity loans went directly into end-consumer spending, and I thought I acknowledged that point.
"I don't see home equity loans being a big fraction of the producer side, but it's plausible that people started small businesses with the cash."
We might ask how much long term sustainable contribution to "growth" this made. My hunch is that it's marginal at best. How many small businesses succeed and how many fail in the first couple of year or so, for instance?
The economy is not a sacred cow, and growing it is not some religious devotion we should make/have. This notion (that it is a sacred cow...) is prevalent in almost all discussions, MSM or not. I find it obnoxious, intellectually speaking.
February 10, 2009 7:55 PM | Reply | Permalink