Obama Gets an "A" on Health Care; Needs Improvement on Banks
President Obama reaffirmed his commitment to reform health care tonight. This will be a huge undertaking, which he clearly understands. But, he has repeatedly said that he would make this a top priority and he fully intends to move forward with this process. This is one of those cases where everything will be in the details, but it is very encouraging that he is prepared to devote his time and political capital to this task.
His discussion of the banks did not give the whole story. Yes, the public has an interest in keeping the banks alive, but it has zero interest in rewarding the shareholders of these banks or the executives who brought them and the economy to ruin.
There is a growing consensus within the economics profession that the fairest and most efficient route would be to put the banks through the same sort of receivership process that the FDIC uses all the time when it takes over insolvent banks. For some reason, he has refused to do this even with clearly insolvent banks like Citigroup.
While some have implied that such a takeover would amount to a socialist nationalization, the opposite is true. In a capitalist economy, failed companies go into bankruptcy. Bankruptcy is not appropriate for banks because of their centrality in the economy, but the receivership would be a bankruptcy type arrangement. The banks' books would be cleaned up as quickly as possible and then the restructured banks would be resold to the private sector.
We know why the banks' lobbyists don't want the government to go this route. We don't know why the Obama administration is not choosing this path.
Why did he get an A on healthcare? All he did was promise to cut costs. Sounds a lot like BCBS to me.
February 24, 2009 11:15 PM | Reply | Permalink
You are right to ask this question bluebell. He didn't really say anything about healthcare other than we have to do something about it this year. He said not one word about what he would do or what he would propose.
February 25, 2009 2:45 AM | Reply | Permalink
Dean, here is my take, FWIW. The problem is that the system is so fragile, they don't know exactly what may happen. So they are being careful.
Over the last few weeks the general mood has shifted to accept an FDIC-type receivership for the large banks. (I was advocating for that exact thing on these discussion boards a few weeks ago.)
In part because of that shift, the political price for doing this will not be significant. Obama would not hesitate to have this argument and "defend" his administration against any charges of "socialism" for "nationalizing" the banks. The public will support him, as long as it works.
Aye, there's the rub.
The problem is that they don't know yet whether it will work, or exactly how it might work. If Mega-Bank-X goes into receivership, who are all the counter-parties and what happens to them? Everybody owes everybody else five times over. What happens to Mega-Bank-Y and Mini-Bank-Z? If one goes, do three or nine or twenty need to go simultaneously?
I think they are working on getting their ducks in a row, and will try to implement this as carefully as possible to avoid a disaster. I think it's a game of Jenga, and they will have to be pretty darned careful.
At this point, I worry because it's clear that they are worried. Otherwise they'd just do it. On the other hand, I like that they are being careful about it.
I sure hope they get it right.
-- ARG
February 24, 2009 11:17 PM | Reply | Permalink
This morning Bernanke told a House committee where he's coming from, "We protect banks to protect the public." Given that since 2000, the American financial sector is one-half as big as the total profits of America's non-financial sector, his remark may be the truth.
On the other hand, his remark may merely amount to some sort of Machiavellian ploy, a political/free market expediency placed above morality.
February 25, 2009 3:04 PM | Reply | Permalink
. . . the public . . . has zero interest in rewarding the shareholders of these banks or the executives . . . . Dean Baker
But that's not the issue and it's not what worries those who would have to decide to put a too-big-to-fail bank into receivership. Nobody cares a hoot about the shareholders or the executives.
It's the bank's creditors and contract counterparties that are the cause for concern.
None of us -- and certainly not Mr. Baker -- knows what's sitting on Citibank's balance sheet and just as importantly, what's not (in the form of off-balance sheet SIVs), and as to both, what the values are.
Receivership enthusiasts -- as far as I can figure -- are ready to pay the bank's creditors only as much as is covered by the value of the assets.
How much is that in -- Citibank for one example?
Who are the creditors and counterparties? What happens to their solvency when the receiver pays them fifty cents on the dollar? Do we have to bail them out? No? Put them into receivership, too?
Isn't that the death spiral that Geithner and Bernanke can't allow to happen?
February 25, 2009 12:58 AM | Reply | Permalink
"Isn't that the death spiral that Geithner and Bernanke can't allow to happen?"
contracts which violate the public interest should be frozen or declared to be null and void.
February 25, 2009 1:50 AM | Reply | Permalink
Agree. It's the creditors and counterpartners.
Obama is in a fix.
o If the creditors take a haircut surely that will affect all other bank creditors-or more importantly , potential creditors- re- freezing the credit market.(not sure whether squeezing the counter partners would have precisely the same effect.Maybe they are regarded as different from plain vanilla creditors. )
o If they don't, then the tax payers will be subsidizing investors who made a bad business decision and should(!)therefore pay the price in a conventional bankruptcy."Moral hazard" anyone?
February 26, 2009 12:09 PM | Reply | Permalink
[retry]
Obama is being rational about banks. That is, he not being ideological. He's waiting for facts to come out, not quite to force his hand so much as rule out bad paths. This childish if not addicted need to have a quick fix is just pathetic.
One line I hated in his speech, the line about getting banks lending. It was disgusting to hear this bullshit line coming from Obama. Banks are lending. Lack of lending is not the problem. Lack of sound credit with lack of sound plans in the private sector, these are the problem. If you have good credit and solid collateral, you can borrow at pretty cheap rates at the consumer level. Can we keep it real, please?
The main problem with the banks/firms is secrecy, enforced or natural. Risk is part of investing, but uncertain risk defies rationality. The other problem is that some investments are still souring towards uncertain trajectories, whether held by banks or held by other parties who have a claim on banks.
As of last summer there were $57T credit default swaps and about $460T interest rate swaps (notional value), with $3T and $9T "market value" respectively. How much of that has been unwound, and how much of that unwinding has eaten away at TARP and other funds? How much more is out there?
How much government money has gone to pay off side bets such as those made by Paulson and Eisman?
February 25, 2009 1:53 AM | Reply | Permalink
One thing I thought was gratuitous and just dishonest of the President was his mention at least twice of homeowners who knowingly got mortgages they knew they couldn't pay.
I'll grant the President that there really were some people out there who did get mortgages they knew they couldn't pay. But if you could isolate those people from the vast sea of people who are losing their homes or are in danger of losing their homes, you wouldn't find but a handul and I'd guess less than 1% who "knowingly" took out loans they "knew" they could never repay. That was and is just pure bullshit to keep tossing out there as though the poor bastards who trusted the bankers, mortgage brokers and agents who told them not to worry, just sign on the dotted line are at the root of the problem. It is exceptionally clear that it was the irresponsible scheming and scamming of the banks and their partners in finance/thievery/fraud that created, sold, and ran amuck with the mortgages and caused this crisis. The President and everyone else who has been building up this straw man about people knowing they couldn't pay need to cut it out. There are very few people who would fit in that category. Continuing to flog that dead horse makes the uninformed think that perhaps these slacker took advantage of the poor bankers or something like that which is utterly preposterous!
Most of the people who are in trouble on their mortgages are not there because they had champagne taste and budweiser wallets. They have lost their jobs or find themselves upside down in the market and unable to refinance, can't sell because of the crisis and so on. It really is dishonest and misleading for the President to throw that line out there given what a small percentage of the crisis is comprised of people who simply knew they borrowed more than they could every repay.
February 25, 2009 2:58 AM | Reply | Permalink
1% of homeowners is a large fraction of the problem, if the problem is about 8% of homes.
Anyone who got a negative or zero amortization loan "knew" they couldn't pay off the loan. Anyone who counted on capital appreciation "knew" they could not...
Anyone who bought a 2nd or 3rd... house as an investment and didn't have a sound business plan "knew"... (I've heard that a large fraction of sales near the top were this kind)
It would not be fair to tar and feather all troubled homeowners based on these gamblers, but I don't get Obama doing that.
February 25, 2009 3:45 AM | Reply | Permalink
And speculators such as you describe are a completely different category.
February 25, 2009 4:19 AM | Reply | Permalink
How so?
But even so, you allow 2/3 of my point.
February 25, 2009 3:15 PM | Reply | Permalink
I didn't mean 1% of all homeowners and I think that's rather obvious. I mean 1% of all the people who are in trouble on their mortgages. The people who "knew" they were agreeing to an obligation they could never make good on are a very small number and are in now way a primary or even a major cause of the mortgage crisis.
February 25, 2009 4:18 AM | Reply | Permalink
Cause? They are playing a causal role, for sure. Did they do it on their own. No, duh.
I simply pointed out three ways in which people "knew".
Do you have evidence for your 1% claim? I've seen it said that in the peak years on the order of 1/4 or more of houses were "investment" purchases (Nth houses) not a needed place to live in. And if someone lived in an adequate house, bought a McMansion intending to live in it while renting out the adequate house, that's included.
February 25, 2009 3:24 PM | Reply | Permalink
eds, you don't know what you're talking about.
Go tell a mortgage banker or broker that lack of lending isn't the problem and that "if you have good credit and solid collateral, you can borrow at pretty cheap rates at the consumer level." You will be told that it is difficult to get a jumbo mortgage, even with excellent credit and 30 percent equity. If you have a HELOC and want to refinance, good luck getting the second lienholder to resubordinate. Want to refinance your Florida condo with 19 percent equity? You can't do it. More than half of mortgage applications aren't being funded -- and lenders are discouraging people from even applying if they have lousy credit or insufficient equity. Contrary to what you believe.
As for this "8 percent" number you're throwing around -- care to share with us what your source for that percentage is?
How about this: At the end of September -- five months ago -- 2.97 percent of mortgage houses in this country were in foreclosure, according to the Mortgage Bankers Association. On top of that, another 6.99 percent of mortgages were at least 30 days past due. So about 10 percent of mortgages were delinquent or in foreclosure, five months ago. The problem has worsened since then.
February 25, 2009 5:36 AM | Reply | Permalink
Actually I do know what I'm talking about, and your ad hominem and other fallacies aren't compelling. The Treasury released a report last week confirming my personal views (based on trusted contacts in the market). Lending is happening.
The age of mindless credit is over, get used to it.
February 25, 2009 3:14 PM | Reply | Permalink
"contracts which violate the public interest should be frozen or declared to be null and void."
Are you suggesting there's something fundamentally wrong with casino capitalism? Are you saying you don't like to see capitalist gamblers play with your money, lose your home and make a profit for themselves? Are you suggesting actual change to the universe's most workable economic system? Who do you think you are?!
February 25, 2009 7:12 AM | Reply | Permalink
I think I'm slightly humor-impaired in my moderateness.
Were you trying to be supportive of my point? I'm referring primarily to the use of future (and past) taxpayer money being funneled into the pockets of gamblers or crooks via TARP and similar programs based on bets on credit and housing market fluctuations.
February 25, 2009 3:29 PM | Reply | Permalink
Do you work for the insurers or the drug companies? Something is really off here.
February 25, 2009 3:10 PM | Reply | Permalink
Don't touch my money! Don't tax me and give to the undeserving, the lazy, the incompetent, and the irresponsible.
Above is what we are really hearing from the eds, the O'Rilleys, and the Limbaughs. The irony will be that every dog has its day. Wait, eds, you will someday see. What goes around comes around. You are so proud of your personal fiscal responsibility that you cannot see the plight of others. You cannot see any further than your nose. You wait, life has a way of giving you what you pass out. Life has a way of judging you by the way you judge others. You will find yourself needing help someday. Just wait.
February 26, 2009 5:26 AM | Reply | Permalink