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You, Too, Can Become an Expert on the Bailout in 15 Minutes of Less!
If you still aren't sure why a bailout is necessary, how our current financial crisis came to be and why it isn't just the fault of greedy Wall Street investment houses, you owe it to yourself to read this entire post.
By the end, you'll see how declining spending power, a booming housing market, lax regulatory oversight and profit-driven banking all interacted to get us into this mess. You may even see why the $700 billion program is critical to our economy and why we are in for a long, deep recession even if the bailout plan works. Yes, it's long, but trust me. I even sprinkle a few jaw-dropping charts into the mix.
If You Have to Ask, You Can't Afford It
When Barack Obama says American workers have seen their annual wages decline by $2,000 since George W. Bush took office, he's talking about "real wages," what your pay is worth after accounting for inflation. A stunning example of the decline in real wages is last month's report by the Bureau of Labor Statistics. It shows that average real wages dropped .8 percent from June to July, after adjusting for inflation, which rose a staggering .9 percent in July.
In other words, if you're anything like the average worker, what you can afford to buy just dropped nearly 1 percent. In one month alone. Because of recession and accelerating inflation, about half the cut in your real wages since 2001 has come this year.
If It's On Sale, Why Not Buy It Anyway?
The decline in buying power hasn't kept people from trying to buy houses. In fact, until the housing market leveled off and began sliding about three years ago, Americans were buying and selling houses at a record pace over the past decade. More new homes were sold in 2005 than any year in history. Same for sales of existing homes.
How could so many people afford to buy houses while their real wages were dropping?
The answer isn't just that Americans are conspicuous consumers. We are, but that's not a new phenomenon. For a hundred years or more, we've spent more per capita than the rest of the world's people on almost everything. (Trivia: New Zealanders buy more ice cream even than Americans.) No, conspicuous consumption, while contributing to the "Housing Bubble," doesn't by itself explain why home sales rose so fast over the past decade.
One reason is that many Americans who took out loans to buy homes—sometimes even at prices they couldn't afford on current wages—expected their wages to rise. We have always been an optimistic people. And when George Bush told the country to shop after 9/11, well, some folks may have taken patriotism to an extreme while betting the boss would give them a raise.
But there are three other, more important reasons they bought homes they couldn't afford. Those reasons are relaxed regulations, skyrocketing home values and easy credit.
.40 Acres and a Mortgage
Beginning largely in the 1970s and continuing into the early years of this century, the federal government authorized a spate of laws and regulations barring housing discrimination against minorities, the aged and other historically disadvantaged groups. Democrats believed the laws and programs would level the playing field for their constituents. Republicans believed more home ownership would enlarge the base of conservative voters.
Home Lenders Feather the Nest
If more home ownership was the goal, why not make more people eligible for loans? Enter the Gramm-Leach-Billey Act of 1999, which repealed Depression-era regulations on banking, paving the way for widespread use of subprime mortgages. The legislation's author was Phil Gramm, who became a highly paid lobbyist for Swiss bank UBS and, later, chief economic adviser to John McCain.
USA Today explained the ensuing growth of subprime lending in a 2004 article:
Deregulation allowed cross-fertilization between
banks and financial service firms, while the federal government in the
1980s lifted mortgage interest ceilings. Congress in 1986 ended the
deductibility of consumer debt, such as credit card payments, though
still letting filers deduct mortgage interest. The change provided
incentives for refinancing. Even rates for subprime loans at 3
percentage points above prime loans, or about 8% to 9% now, are lower
than many 18% credit card rates.Advances in risk modeling have produced standardization. The bond market for subprime loans has provided cash.
The majority of subprime mortgages are now sold
by the initial lenders, bundled into bonds and offered to individual
and institutional investors. In 1994, $11 billion of subprime mortgages
were sold on the secondary market; in 2003, it was more than $200
billion.
Since 1999, one type of subprime loan in particular, the Adjustable Rate Mortgage (ARM), gained popularity with mortgage lenders as the most potentially lucrative and least regulated loan type ever used outside of loan sharking. Eventually, it became the most devastating time bomb ever inserted into the American economy. As an MBA National Delinquency Survey noted:
In the third quarter of 2007, subprime ARMs only represented 6.8% of the mortgages outstanding in the US, yet they represented 43.0% of the foreclosures started. Subprime fixed mortgages represented 6.3% of outstanding loans and 12.0% of the foreclosures started in the same period.Good for You, Good for Us, What's Not to Like?
Owning a home has always made long-term sense for personal finances, but it began making even more sense in the late 1990s as all the factors we've discussed began to dovetail together. Poorer Americans wanted a piece of the American Dream and they were bombarded with offers for home loans at low interest and no interest, or with low payments and no credit— even no job—required. In the days of abundant credit only a decade ago, Americans began buying more homes. And thus was born the Housing Bubble. If you want to see a stunning graph of this, click here.
In just eight years, home values doubled. Suddenly, a house wasn't just a good investment, it was the kind of investment you could later sell to finance your retirement. As prices rose, home ownership became even more attractive, leading to more buying, more lending and more homes being built. Speculators got in the show. The market supplied houses as fast as anyone could get a loan. And then as suddenly as it began, the bubble started losing air.
The Birth of the Blues
Across the country, Adjustable Rate Mortgages began to reset at higher rates. Literally overnight, $700 monthly payments became $1,200 monthly payments and $1,200 payments became $1,700 payments. All of it was legal, all of it was in the fine print, and none of it made sense for either lenders or borrowers. Defaults started coming thick and fast in late 2005. Foreclosed homes glutted the market, raising the inventory of homes on the market to the highest level in 25 years. Home values began dropping in 2006, accelerating by last month to their lowest values in 17 years. Some people even walked away from their homes, choosing to kill their credit scores instead of making high payments on homes not worth the money they owed.
Banks were in a similar position, only worse. They held the homes, true, but those homes were now worth far less than what the banks had already paid to the original sellers when they issued loans to buyers. They held worthless IOUs for the hundreds of billions owed on millions of homes they could not sell on the real estate market.
Poison Pills (Gulp)
Some banks had sold some mortgage loans before the problems became a full-fledged crisis. Large commercial banks and Wall Street investment banks routinely purchased mortgages of every kind, bundling them together and issuing bonds against their value. Credit default swaps, which allowed unfettered trading of these mortgage-backed securities without any government oversight, became more commonplace. Like the Housing Bubble that fueled it, the mortgage bundling business was good for a while. But bundled with the many good loans purchased by the barrel were ARMs and other home loans, whose skyrocketing default rates began to bring financial institutions to their knees. This summer, the largest wave of ARMs reset to higher interest rates, forcing up default rates even higher and making more loans virtually worthless.
The list of institutions that have failed or been sold recently bears striking resemblance to USA Today's 2004 list of which were investing in subprime loans. Countrywide, Lehman Bros., Morgan Stanley and others are all in that Who's Who of the Extinction to Come.
Epilogue
There are at least 3 million subprime loans out. The default rate topped 25 percent by March of this year. At an average home value of $200,000 at the peak of lending in 2006, the subprime loans in default now leave banks with at least $150 billion in worthless securities. Yet even that red ink is dwarfed by the devaluation of the roughly 10 million "good" mortgages that is killing lenders. It easily totals over $1 trillion.
Note: Several charts and graphs I linked to in JPG format came from http://calculatedrisk.blogspot.com and its associated articles.
Comments (58)
I don't think anyone will disagree that something has to be done about the current financial crisis.
BUT:
Is a carte blanche check for $700B to one person, with minimal oversight, the only form possible?
Here is the actual bill:
http://graphics8.nytimes.com/packages/pdf/business/20080928bailout_text.pdf
I remind people about the panic after 9/11 brought us the Patriot Act and the panic created by Colin Powell at the UN brought us the Iraq War.
So the real question, in my view, is not what to do, but how. A vote against the bailout is not a vote for laissez-faire, but rather a vote against a particular style of intervention.
September 29, 2008 1:30 PM | Reply | Permalink
With declines in the stock market, the collapse or sell-off of every Wall Street investment (read "jobs-making" bank) and the crumbling of some of America's largest banks, more wealth already has evaporated from our economy than is represented by the legislation pending today. Don't wait until your job is gone, too.
September 29, 2008 1:40 PM | Reply | Permalink
The stock market represents the agreed upon "value" of the goods and services of the company.
Propping up that "value" is the equivalent of using government subsidiaries to maintain a buggy whip factory to "protect jobs". That's just another version of a Ponzi scheme.
Since the government doesn't have this money to spend, the value of the money is going to be diluted by the toxic value of the "assets" being bought.
The fact is that these "assets" have no value -- which is why the other banks are no longer buying them. If there was money to be made, they would. Instead, they are selling them to the US government -- or more really, the taxpayer.
As I said, the issue isn't whether government intervention is required, it's what form.
September 29, 2008 1:50 PM | Reply | Permalink
Two points: First, we aren't talking about a $700bn plan - we're talking about $250bn legislation and then a review within 5 months.
Second, a big part of this that nobody is talking about is the credit default swaps and the synthetic CDOs. A CDS is essentailly an insurance policy on a loan(revenue stream) - like reinsurance. A synthetic CDO issues a bunch of CDS policies(I think on cash CDOs?) and sells the stream as a security (with tranches AAA-Toxic).
The CDS market is somewhere around 45-62 trillion (16 trillion in US banks). This is where they've literally been printing money for themselves. The senior tranches aren't funded, so the preferred bond holder carries risk potentially requiring a payout but isn't required to have the funds to cover it.
It's a whole different dimension to the problem. Take a look at the Wiki for CDOs ... scroll down to the synthetic funding part.
http://en.wikipedia.org/wiki/Collateralized_debt_obligations
http://en.wikipedia.org/wiki/Credit_default_swap
I don't really get it all. But it seems bigger than just simply some bad loans.
September 30, 2008 2:05 AM | Reply | Permalink
The plan isn't so much to prop up the price of the companies. I think it's to keep the loans from blowing up.
By setting a floor for some of this stuff. It would allow a true valuation of the toxic securities. That should free up capital to allow investors to snap up the foreclosed houses and turn them into rentals - making a real housing floor and replenishing some of the security pools with better loans.
I think with this floor established, the bank's plan was to finish foreclosing on the subprimes - and resell them at the new floor price. With available good loans - the CDOs don't fail, the other assets grow in value and the government gets it's money back.
Saving the homeowners would also stabilize the loan pool, but it doesn't allow the bankers to keep all the money they got from the bubble and resell all the homes a second time for more profit.
It's not just subsidizing the companies. It's establishing a floor so the market can function again and then reclaiming our money.
September 30, 2008 2:20 AM | Reply | Permalink
You are a complete idiot. You have placed self-aggrandizing rhetoric and faulty logic above the good of the country. You are worse than John McCain because you aren't running for office.
Post in your own thread, moron.
September 29, 2008 1:56 PM | Reply | Permalink
above aimed at my least favorite post-crasher, who forgets that the bailout isn't aimed at Wall Street, but at the basic structure of our economy, on which we all depend. The stock market just reacts more quickly than the rest of us to the news of a coming Depression.
September 29, 2008 2:01 PM | Reply | Permalink
I have to admit, the logic of this escapes me.
Are you saying I should run? Want to be my campaign manager?
September 29, 2008 2:02 PM | Reply | Permalink
I amend my statement. You are, in fact, worse than George W. Bush, who at least finally admitted there is a huge problem looming for us and the world.
You, you preening ostrich, have your head stuck deeply up...er, in the sand. You and others like you wish to play Russian Roulette with out economy. You and the House Republican caucus. What a fabulous entourage you will have, Fisher King.
September 29, 2008 2:57 PM | Reply | Permalink
Hi Ripper,
Good description. Thanks for posting.
Once again, to resume our discussion from the other thread, I cannot nor would attempt to deny any of the facts to which you write. However, now that I am an "expert on the bailout" ;D, I hereby proclaim in my expert opinion that it is deeply flawed, not a solution to the economic problems you describe, and furthermore a waste of money that could be better spent in any of several ways that have far greater potential to actually solve this crisis.
And again, please understand the following is not an attempt to levy slight upon your personal authenticity, which, to the contrary I have reason to believe is redoubtable. It is the exact same request I would make of anyone whom would advise me to "Don't wait until your job is gone, too." If, and only if you feel comfortable doing so, I would ask as the professional journalist you are to consider including a disclaimer if you stand to gain financially by a sudden upward market movement that any bailout ratification would presumably entail. I think such a disclaimer is surely a justified one for the legislators and lobbyists actively pursuing the bailout, and at least a reasonable request of those who support it.
September 29, 2008 2:10 PM | Reply | Permalink
I hold absolutely no investments in stocks, bonds, a home or other financial instruments. I am disabled and going through divorce. I am the canary in the gold mine, and you are next.
September 29, 2008 2:53 PM | Reply | Permalink
Okay, many thanks. In the interest of full disclosure, I do hold positions in the stock market, and have taken a bath as a direct result of today's rejection of the bailout. Further, you could very well be correct as my job is definitely jeopardized by the current financial crisis.
However, I nevertheless maintain the bailout was an extremely ill-conceived plan, and I am relieved it died.
I realize the following statement delves into platitudes, and does not speak directly to why the bailout was a very bad idea (but I have written extensively of that elsewhere):
The bailout was the idea originally put forth by the Bush Gang to "solve" our economic crisis. Suppose you had nothing else to go by, no actual bill to read, no understanding (as you provided) of the causes, no debate or any other outside information... Based solely on the fact that it was a prescribed Bush remedy, would that alone not cause you doubt regarding its ultimate merit? You and I can both count on one finger the things he's done 'right'. Why is this instance so different?
September 29, 2008 3:29 PM | Reply | Permalink
Paulson and Bernanke are two of the only top-level administration figures respected by Democrats on Capitol Hill. That's 1.
This is no CIA "Eyes Only" briefing in a run-up to war. This information is available to Congress in volumes of reports, siftable by its many staffers, verifiable by current, real-world indicators and with an outcome dependent not on the resistance of an outside enemy but on the moral fiber of Congress itself. That's 2.
Even the boy cried "Wolf" correctly once.
September 29, 2008 5:19 PM | Reply | Permalink
I think part of the problem for Paulson, Bernanke, and the congressional leadership is that if they were truly frank about how bad the situation is, they would stoke a panic that would be instantly be self-fulfilling. I'm reading a lot of posts from those on left and the right expressing a smug pleasure in the failure of the bailout, ornamented by what ever ideological baggage they are toting around. It reminds me of urban riots where folks gleefully burn and loot their own neighborhoods as a way of striking back at "The Man." Fools.
September 29, 2008 10:31 PM | Reply | Permalink
By the way, Ripper, excellent diary. Thanks very much. I'd like to recommend my favorite explanation for the origins of this mess:
http://www.thislife.org/Radio_Episode.aspx?sched=1242
September 29, 2008 10:34 PM | Reply | Permalink
Please pardon me if I make a mistake here -- I am no financial wizard, and I am struggling with the logic of this "bailout".
As I understand it, these "troubled assets" are bundles of subprime mortgages (loans on existing home). Right?
The reason these bundles are shaky is because people are having a hard time making payments on their mortgages. Right?
The reason people are having trouble making payments is because these mortgages employ what can be described as "creative accounting" with rates that change (mostly up), big balloon payments, interest-only terms, etc. Right?
If people could continue to make payments on these loans that actually resulted in equity accumulating, these loans would noty be nearly so risky. Right?
Then the bundles of these loans would not be such troubled assets for the banks and non-banks that have been buying them up. Right?
If my logic is correct, then the solution is obvious -- institute requirements that help the homeowner meet the financial obligation of mortgage payments and keep ownership of the home.
That starts with honest appraisals of the homes -- the cornerstones of the bundled mortgage assets. Next, renegotiate loans with realistic terms: no ARMs, no balloons, no interest-only deals. If the homeowners bought too much house in the first place, extend the terms so the owner can build some equity at a minimum. This is a sticking point; I've been upside down on loans before and I know it's a problem. I may not have a good answer to this aspect but someone else might.
The bailout just rejected by Congress seems like another top-down approach that did nothing to restore value in the actual cornerstone assets, the individual home loans themselves.
I welcome critique and comment. Belittling, insulting responses will be internalized for later retribution...
September 29, 2008 3:32 PM | Reply | Permalink
Father OKC, if we had time your suggestion might make a lot of sense, but for two problems:
1) We don't have time
2) Even if the subprime and other loans became current, home prices have fallen about 30 percent in the past couple years, leaving banks holding mortgages worth less than their investment. Read the last couple paragraphs again. The subprime crisis was the needle that pricked a very large balloon.
September 29, 2008 4:24 PM | Reply | Permalink
I think what's happened here is that the Bush administration waited too long to act probably hoping to dump the problem on the Democrats after the election. Now, it's not just a mortgage problem, it's a credit problem and a confidence problem. So something significant is required to inject enough confidence in the system to free up credit.
Alas, our government does not inspire confidence in anyone. The Congress is as worthless as the President. As Krugman says, we've become a banana republic with nukes.
September 29, 2008 11:29 PM | Reply | Permalink
Ripper,
The only thing that would be a particular problem would be a spiraling credit crunch. Supposedly, the whole function of the Federal Reserve is to prevent such a credit crunch. The idea that congress must act at the very last moment before possibly the most significant election in the last 30 years to avert the next great depression seems just a little too much like a script out of a manipulative play book.
I believe action is required. I do not believe the path forward is obvious. I would like to hold the government protected capitalists over a barrel until they are willing to bargain for real social reforms. A light touch now (setting aside provisional authority to act to avert bank failures until January) is all that is required at this time.
September 29, 2008 7:46 PM | Reply | Permalink
Thanks for the tutorial, Ripper. I wonder what Obama will so next.
September 29, 2008 11:28 PM | Reply | Permalink
==Epilogue
There are at least 3 million subprime loans out. The default rate topped 25 percent by March of this year. At an average home value of $200,000 at the peak of lending in 2006, the subprime loans in default now leave banks with at least $150 billion in worthless securities. Yet even that red ink is dwarfed by the devaluation of the roughly 10 million "good" mortgages that is killing lenders. It easily totals over $1 trillion.==
Well, lets do the math. Since the author did not.
There is aboslutely no way $150 billion of "worthless securities" can take down the world financial system. NONE.
The FED is currently shoring up the US banking system to a tune of $180 billion a day. If our entire problem was the lousy "poor people mortgages", it would have been solved in about a day. That is small potatoes.
The real problem, which the nice ditty really doesn't mention much is the huge influx of world capital into the exotic US morgage based securities, which were created specifically to satisfy the world's capital appetite for Triple A rated bonds thay pay over 5%. These securities were made purposefully opaque, so that it would be nearly impossible to tease out the true value of the underlying debt.
The only problem is that the only way the investment banks could "make" these securities is with more American debt, both mortgage, auto and consumer. So they feverishly took advantage of historically low interest rates and Greenspan's refusal to regulate the lending market to sign up ANYBODY with a pulse (sometimes without) for more debt, so they can repackage and resell it to hungry sovereign wealth funds, who could no longer get US Treasury Bonds that paid anything.
Further, other financial players, who were seeing a stream of money pass before their eyes, had another epiphany. Why not "insure" these new bonds with a clever instrument called Default Credit Swap? And while you are at it, insure it for full initial price, since they will only go up, right? Heck, all computer models always show US mortgage debt to be rock solid. We would never have to pay and if we did it would be less than the damn thing is worth - the computer says so.
The bottom line is that the "meme" that this crisis ORIGINATED with American poor people getting "too much house" they couldn't afford and in the process took down the world financial system is ABSURD. They were simply the fresh meat for the gigantic ponzi scheme played out on the stupid and the greedy by the few, who surely knew that this could not last even a few years without imploding. One such individual is our esteemed Secretary of the Treasury, who presided untill very recently over the institution at the center of the creation of this crisis - Goldman Sachs.
September 29, 2008 11:32 PM | Reply | Permalink
Quit taking a dump in my post.
I most certainly did do the math. You demonstrate none, so let me correct your assertion that the Fed routinely gives the markets $180 billion a day. Nonsense, and when it does "inject" capital it is often in the form of loans that must be repaid within two weeks. The Fed isn't Santa Clause, as the NY Times makes clear in tomorrow's edition:
And what's this about the crisis coming down to $150 billion in subprime loans? As I make clear, the larger problem is the decline in home values, topping $1 trillion in losses for banks.
You have a few good points, dmitry, but overall, you just don't have your facts straight. Maybe a few citations would help you scuttle my post better. :)
P.S. I came back this one time only because I care about this subject. And here's the real kicker:
We don't have months to wait on a bailout plan, or even weeks. In a few days, every financial institution in America will report, by law, its Third Quarter earnings statement. Absent a deal in Congress, the resulting news of those negative earnings—coming on the heels of the past few weeks—will shake the world economy to its foundations. So you see, time is running out. We have days—not weeks, not months—for a bailout to be passed.
Now I really am outta here. Good luck, folks.
September 30, 2008 12:02 AM | Reply | Permalink
So I don't have my facts straight about the ongoing FED life support for banks?
Here is what Reuters reports:
-------------------------------------------------
Fed keeps banks afloat as money market crisis deepens
Thu Sep 25, 2008 6:13pm EDT Email | Print | By John Parry and Jamie McGeeever
NEW YORK/LONDON (Reuters) - U.S. banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.
The data on borrowing from the Fed closed out another day of high anxiety in global money markets. Key measures of funding stress hit record levels on both sides of the Atlantic as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.
Federal Reserve data showed on Thursday the total amount banks borrowed nearly quadrupled the previous record of $47.97 billion per day notched just the week before.
...
--------------------------------------------------
http://www.reuters.com/article/ousiv/idUSTRE48O9B920080925
A good question would be where would the FED get ALL that money, day in and day out? Since there did not appear to be selling a trillion dollars of Treasury Bonds a week, I would imagine they "created" this money.
Your point about $1 trillion is also misleading - the problem is about $50-60 trillion in the complete DCS and CDO market - so much money, so interconnected and so spread all over the world, even the FED with their fast running presses can't cover it. A mere trillion dollars is nowhere near enough to even begin to address this problem
The bottom line that it isn't about poor people mortgages (a misleading Republican meme - the poor people did it!), but about large-scale, purposeful, willful abuse of the credit system, by people who should have known better, and probably did.
There isn't a bailout available for what they did.
September 30, 2008 12:32 AM | Reply | Permalink
Ripper. Agree totally that action NOW is required. Anybody that wants to argue with that, well... go away. Don't bother arguing with me, I've given up.
Dimitry actually has his hand on a HUGE fact (bear with me Ripper, it comes back around.) I keep saying it, people read what I'm saying I guess, and then - my only conclusion - their rage just overcomes any possible absorption of this fact. But in the interests of quoting an external source, let me hand you over to another economist, whose nice neat little blog has about 5 major sources that are all written in clear English - Brad Setser.
Look at the charts, ok? Read the damned links he's got in the story. The US is TAKING $700 Billion worth of goods a year, that it hands over money for - the trade deficit. They hand over American money. That foreigners (the madmen) then try to actually use to BUY something, to invest or whatever, since the Us doesn't make enough of anything to fill the need. When T-Bills pay so little, they went pouring into housing. Amongst other things. Now, they have NO CONFIDENCE in those investments. It doesn't matter whether "only" $150 billion go belly up, or $750 billion. The point is, the single biggest thing they were investing in just blew up - and they have no confidence (amongst other investors, but the international ones are HUGE, ok?) And the thing is, they KEEP GETTING $700 BILLION MORE, EVERY YEAR, THAT THEY HAVE TO FIND HOMES FOR. And the consumer and the government are largely the ones running the $700 billion a year debt - the "problem" is not just the bankers, nor the "poor" homebuyers. (By the way, 40% of the subprime mess is MULTI-UNIT buildings, i.e. investors who built rental units, and now are below water. It ain't all poor people, or even just your usual "home-owner.")
And when you check out the article, you'll see that the ones keeping the US afloat are.... the foreign Central Banks. Pouring money in, even at 0% into T-Bills. So why is this worrying? Because they've got nothing else in the US to invest in, but they're daily taking US cash. Housing sucks, credit card and car loans suck, T-Bills suck, insurance sucks, etc. So what can they BUY?
And why is it worrying if they stop? Because the US is about to run a $500 billion to $1 trillion Federal deficit this year. Somebody has to pay for that, in the short-term. Two choices. Us or them. Are you ready to do your bit? No? If it's foreigners, what kind of interest rates do you normally charge someone who's just had hundreds of billions of loans you made to them collapse? INTEREST RATES HAVE TO GO THROUGH THE ROOF. Now how do you think that'll look in the US economy?
These other nations are on the phone to Treasury - just read the damned links in the ARTICLE, ok? I'm not making this shit up.
RESTRAIN YOUR RAGE, AND READ SOMETHING.
In short, agreed with Ripper that action is needed now. Agreed with Dimitry that foreign money has a big role here. Donno the ultimate size of bad mortgage debt - nobody does. Least of all in an environment in which interest rates may soar, and unemployment with it. You wanna see mortgage problems???
All this & two hours dental work. Hell of a day. Grouch grouch.
September 30, 2008 12:39 AM | Reply | Permalink
What you described used to be called a Ponze scheme, when private citizens did it.
It is completely unsustainable. The US can't continuously live on foreign debt, private and public. The CDOs have excarcebated the crisis and brought it to a head, but it has been building for a couple of decades now. It has to stop.
The "bailout", or whatever one calls this is almost entirely besides the point.
The big one is now upon us and the whole US-based debt pyramid is coming down, bailout or no bailout.
September 30, 2008 1:17 AM | Reply | Permalink
Dimitry. TIME has a value. People too often skip over that. To eat up 1 trillion or 5 of bad debt is a completely different game when it's done over 10 years or 20, rather than 1 or 2. In the same way, we may dislike the idea of a lost decade like Japan, but i can assure you that it beats some of the social outcomes we could WELL see coming out of the US if it suddenly, without mental or institutional preparation, collapses.
September 30, 2008 2:09 AM | Reply | Permalink
Care to define it for us? It would put you in legion with Einstein:
http://earthweb.ess.washington.edu/~mkoko/pictures_home/farside_einstein.gif
September 30, 2008 2:16 AM | Reply | Permalink
He's talking about the time value of money.
http://en.wikipedia.org/wiki/Time_value_of_money
September 30, 2008 3:10 AM | Reply | Permalink
Thanks Shrivti1, and also, the societal, political, familial & psychological time required to process significant changes. e.g. A family in which both parents lose their jobs in the same brief period is more likely to fall apart - with major societal costs - than one in which the job losses take place 3 years apart. e.g. A society dealing with a half-dozen major stresses at the same time (see: the US today) may well be less capable of dealing with them than if they can massage some of them out over a longer period.
September 30, 2008 3:19 AM | Reply | Permalink
It's all perceived value. Time has not inherent value. It's what we "agree upon"... and therefore totally arbitrary.
Most time/value arguments rest on "future value" arguments which rest on the notion that the economy grows, roughly at a 2-3% annual basis. That can only happen when the energy for agriculture/manufacturing/shipping/etc is a vanishingly small part of the goods.
People today act as if modern finance, including things like loans, savings accounts, credit cards etc. have been around forever. They are relatively recent inventions and are tied very much to the industrialization of western society.
If we have a flat economy -- and it's coming whether we like it or not -- there will be no way to have loans given out based on future values of companies. The whole thing comes to a grinding halt.
September 30, 2008 4:01 AM | Reply | Permalink
CT. Since you insist on endlessly repeating the same thing, comment after comment after comment, across everyone's posts... why don't you just do a daily post with your view? You know, change the wording slightly from month to month, throw in an "Exponential Curve Of the Day" feature, maybe every Sunday link to an SNL skit? We'll all Recommend it. Occasionally, we'll draw straws, and the losers will go on and "debate" with you. They'll bow before your knowledge of how the world must, inevitably, end.
But that way at least we wouldn't have to listen to you go on and on and on and on and on, drawing from your bottomless certitude, your Johnny One Note theory, and have to bear up as you highjack anyone and everyone's comments and posts with your asocial behavior and your inane opinions - and always, always, oblivious to the fact that his appalling behavior is actually driving people to avoid commenting. In short, you are the kind of ass who would piss in a labmate's experiment.
You're a wrecker, and you're out of control. Stop. It.
September 30, 2008 4:17 AM | Reply | Permalink
Easy. My time has 53,485 uses more valuable than listening to a boor such as yourself. For instance, sticking pencils up a dog's ass & watching him prance around the Washington Monument is 53,484.
So hit the books kid, and come back in a couple of weeks. If you're lucky, maybe there'll be someone new here who'll be willing to retest you. But til then... begone Dull Boy.
September 30, 2008 3:11 AM | Reply | Permalink
For CT.
September 30, 2008 3:20 AM | Reply | Permalink
I'm forever fascinated by your bi-polar postings, quinn. You always admonish others to "play fair" and want to present yourself as an even tempered poster, and yet on the other hand, you use toxic language and base insults when addressing some people -- simply because they don't agree with your comments.
September 30, 2008 4:03 AM | Reply | Permalink
I honestly have found no other solution to you, CT. In case your memory doesn't stretch as far back as the top of this page, perhaps you should sit down and think over what he has said to you, time and again. You behave as though you have the right to show up on anyone's post, no matter what they ask of you, and shit on it. Endlessly. You just will not stop.
I am not an even-tempered person, CT. Nor do I avoid swearing. And I have had fights with a dozen people here, some of those fights fairly harsh. You, however, are an entirely different thing. You're actually quite nasty in how you behave, and socially destructive, and it would not matter to you if 100 people told you so. You just can't hear it.
As an example, the fact that you would be down here, on Ripper's thread, after the exchanges between you two recently, quite flabbergasts me. You're the guest who shits on the carpet, teases the dog, won't leave, and then comes back the next night. And the next. And the next.
So I would like to ask you, please - see, that was polite - to not comment on any of my posts, neither on any of my comments. And I will happily return the favor. And though this is entirely unlikely to register with you, you should know, you are the only person I've got on that list.
September 30, 2008 4:29 AM | Reply | Permalink
I'd actually reply to your amusing theory that certain posts are "off limits" but then I'm sure you'd accuse me of hijacking the thread.
The fact is that where I can see I can make a cogent comment, I do. And I've done it without the types of words that you and others have used.
If it's an issue to you, I suggest you use the scroll wheel located on your mouse.
And by the way, you never did tell me how to quantify time as money. My point being: it's a fluid definition and not fixed.
Sorry for bringing us back to the thread topic.
September 30, 2008 5:23 AM | Reply | Permalink
Oh you are TOO clever for me, CT! Why, since time's value to individuals, families, societies, economies & polities cannot be quantified, then it is "fluid" --- "arbitrary." Which leads, in your words, once again to that fave conclusion - that it all comes to a grinding halt. Why thank you. I'll down tools now. Superior intellect and the pure light of logic wins once again.
Apparently, since no one can quantify time's value to CT's exacting standards, the whole debate must end. All those nations having to choose whether to take 1 year or 10 year to tackle an objective; all those families making decisions about what they can & cannot handle in the short/medium/long-term should stop. In fact, the US today shouldn't worry about handling the timing of the rescue plan costs versus the loss of output over the next few years. Because hey! So what if we sit and wait folks, CT's discovered time is fluid. Any fears that we might pitch into a worse crisis if we have to handle a 10% GDP fall in a month versus over 5 years? Washed away by the blinding intellect!
That's the problem CT. Other people were discussing this stuff, you know Dimitry and Ripper, and you come in with a cartoon and an Einstein reference, yank the wheel over to your view that the entire economy is reducible to energy (a story that always ends in the ditch BTW, no need to retell me your favorite ending), and then - through that oh-so-clever ruse of asking the other commenter a question - you block everyone else who might want to discuss things differently. And as for my comment - which took MY time to write - about Brad Setser's useful piece on the international aspects of this crisis - it's lost now. As is any useful discussion of a fairly central issue these days, how much TIME we have to do things. But hey thanks! What I have for my time now is your view that it's all arbitrary, and that great cartoon! Which I already had.
Here's the thing CT. You don't pay any respect to anyone's credentials. Since YOU can't know them, this being the internet and all, you therefore reduce its likely value to zero. "Unknowable" - to you - equals "zero." I donno dude. Like when you highly recommend books - "they won the Pulitzer Prize!!!" - and I know the winners, and you still condescend, it becomes a question of why bother? I can talk with them, or with you. What's the better use of my time, CT? Got an equation for that?
I wouldn't mind discussing this stuff here, but with you? You don't actually want to hear anything. and you only ever and always say the same things. Your mind and your arguments are entirely self-contained. Closed systems. And so - like other posters here - I veer well away from the areas I know best, because YOU simply will not stop plugging up the discussion. I've chosen to have this talk on Ripper's thread because I know he has also been pushed well past his point of forbearance with you, and has to step (likely just for a time) off the site entirely. But truly, I find again and again that I cannot be bothered to enter a discussion, and why? Because you, as an individual, are already there, eating up entire posts and turning them into cardboard.
But you seem to think as long as you aren't a troll (which I don;t think you are BTW), and as long as you avoid swearing, you MUST be behaving acceptably, contributing. You're not. You're acting like that dumb smart kid who will NOT shut up, and who blocks others from learning from each other. Like the guy people will not invite to meetings because he answers everything with his same hobbyhorse opinions. Why, you ONLY add when you feel you have something cogent to contribute, right? That'd be fine CT, except that you feel you have to add it 1,000 times. I DON'T MIND hearing your views CT, got it? What I mind is hearing them again and again, the same thing. I'm HAPPY to debate and discuss with you, but there's no real debate with you.
I give up bud. Really. People are asking me why I don't post here much these days? Why I don't post on economics? And you know what? It's not the mobs. Them I can handle. But TPM's system doesn't give me any guarantees that what I write won't be dumped on by your load of gravel. You. Your behavior has now become - in the minds of more than just myself - a plague on this site.
I've got other things to do. And I'm really sad that you've chosen to behave like this. I enjoyed this place. I enjoy it less, every day.
September 30, 2008 11:45 AM | Reply | Permalink
==People are asking me why I don't post here much these days?==
Wow, take it easy, man...
It took me 15 minutes to chew through all the text in you recent posts...
This is just a forum for discussions - it makes no sense to try to repel others from using it - they are free to post just like you and me.
September 30, 2008 12:10 PM | Reply | Permalink
Fair enough. I agree that mine are too long Dimitry. There's a reason. I try to make 1-2-3 steps in one argument, see? And then leave them for people. Rather than do 20 comments per piece, arguing stuff I find nonsensical. I just don't have the time or energy to insert 150 comments a day.
But you're right, the board belongs to everyone. And at this point, even though the poster has long since flipped out at a commenter's behavior he can just no longer deal with, I guess I'll step outside for a smoke. There's no value left on this one.
September 30, 2008 12:17 PM | Reply | Permalink
It takes me 15 minutes to get warmed up reading Quinn. Short posts? Those are for the attention enabled. Tell me how it all comes to a halt again, Grandpa. Oh, and for (i=0; i
September 30, 2008 4:22 PM | Reply | Permalink
Yeah, but I'll bet in those 15 minutes you get to consume the finest sentence you've ever read.
0)=# Something something ___ hat.
September 30, 2008 4:33 PM | Reply | Permalink
The blog ate my for loop. Strange appetite,
this software.
September 30, 2008 6:52 PM | Reply | Permalink
Thank you thank you thank you, Ripper! It's good to see some sanity here.
For any of you with more questions about the crisis, here's a simplified explanation as told by stick figures.
As much as I hate the idea of a spending this much money, it's spend it now or be completely screwed later. This isn't like Iraq where we had questionable intelligence used to justify the invasion of a country and the intentional destruction of human life; here we have a clear problem with the financial markets that needs a serious solution that will rebuild faith in American banks.
On a related note, Politico announced Bob Barr as their "winner of the day"... What the hell? He opposed a bill that's failure dropped the market by a record amount for a day, and they think he did great today?
September 29, 2008 11:46 PM | Reply | Permalink
==it's spend it now or be completely screwed later==
Actually, it is spend it now AND be completely screwed later. There is absolutely NO certainty or even large probability that this approach would do much or anything to resolve this crisis.
That money would buy a lot of soup later.
September 29, 2008 11:54 PM | Reply | Permalink
I agree there can't be any certainty that this will help, but when is their certainty? I hate to make the comparison, but was there any guarantee that the New Deal would help us out of the Great Depression? Granted, this plan is very flawed and far from a new deal, but why should we wait for everything to fall apart before we are willing to do something about it?
Right now it is politically impossible to implement the liberal response that I would like to see to this, but I'm not willing to wait until more shit hits the fan to do something.
There are millions of people getting ready for retirement who could be completely screwed even by short term by inaction. There are companies big and small depending on credit to keep things going. The wait and see approach will screw everybody over, so even if there is no certainty, we have to do something.
September 30, 2008 12:12 AM | Reply | Permalink
I think you are mistaking "uncertainty" with "guarrantee". This bill is a complete crapshoot, an off the cuff, spur of the moment "plan" to spend a trillion buying stuff no one wants. There is really no reason to believe that this would "unfreeze" the credit markets. The FED has already spent over $500 billion for an ad hoc version of this program, to no obvious result except maintaining the system of life support.
The New Deal was a comprehensive, multi-year program to restructure the entire economics of a country. Even it did not get us out of the Great Depression (though it undoubtedly helped) - World War Two did that.
Those retirees may benefit from actual aid to needy folks than from an ill-conceived throwaway bailout of financial institutions, which are mostly walking dead anyway.
September 30, 2008 12:24 AM | Reply | Permalink
To look at it another way, this is like saying, "Well, I have cancer, but the treatment is uncertain. I could buy a lot of stuff with that money instead."
It won't matter, because if you don't do anything, then you will die. Just like when you die, if an economy collapses, the money won't be worth shit. We can throw as much money as we want at retired people to buy soup, but if the money isn't worth shit, then it won't do anything. This is the biggest economy in the WORLD. We aren't even just talking about our own stability, but we affect the rest of the world.
This isn't a situation where whatever we keep now can be used for later.
September 30, 2008 12:36 AM | Reply | Permalink
and yet regulation , what would have helped divert this mess ...
On 11/19/93, McCain took to the Senate floor to support an early financial deregulation bill and decry what he called "the tremendous regulatory burden imposed on financial institutions." The guy who now claims to be the trustbusting Teddy Roosevelt back then lamented "the rapidly increasing regulatory burden imposed on banks is to cause them to devote substantial time, energy and money to compliance rather than meeting the credit needs of the community."
Ten years later, McCain was bragging to the Associated Press that "I have a long voting record in support of deregulation," and to CNN that "I am a deregulator. I believe in deregulation."
And, during this year's presidential campaign taking place in the shadow of financial meltdown, McCain was only months ago insisting on PBS that "we need less government [and] less regulation" and that "I'm always for less regulation."
September 30, 2008 12:28 AM | Reply | Permalink
Sure, you can spend it. It isn't likely to do any good and may even hurt (like when banks are forced to acknowledge that they are holding largely devalued assets, after FED's auctions), but heck, if we want to say "we did SOMETHING, no matter how unlikely to succeed", then sure do it.
September 30, 2008 1:10 AM | Reply | Permalink
Above in response to Trailer.
September 30, 2008 1:10 AM | Reply | Permalink
Luigi Zingales makes the most sense:
"Since we do not have time for a Chapter 11 and we do not want to bail out all the creditors, the lesser evil is to do what judges do in contentious and overextended bankruptcy processes: to cram down a restructuring plan on creditors, where part of the debt is forgiven in exchange for some equity or some warrants. And there is a precedent for such a bold move. During the Great Depression, many debt contracts were indexed to gold. So when the dollar convertibility into gold was suspended, the value of that debt soared, threatening the survival of many institutions. The Roosevelt Administration declared the clause invalid, de facto forcing debt forgiveness. Furthermore, the Supreme Court maintained this decision. My colleague and current Fed Governor Randall Koszner studied this episode and showed that not only stock prices, but bond prices as well, soared after the Supreme Court upheld the decision. How is that possible? As corporate finance experts have been saying for the last thirty years, there are real costs from having too much debt and too little equity in the capital structure, and a reduction in the face value of debt can benefit not only the equityholders, but also the debtholders."
http://faculty.chicagogsb.edu/luigi.zingales/Why_Paulson_is_wrong.pdf
September 30, 2008 1:24 AM | Reply | Permalink
Of course this plan doesn't cost the taxpayers anything and can be done overnight. So it will never happen.
September 30, 2008 1:26 AM | Reply | Permalink
Great link. Loved the article. Seems pretty straight-forward to me. Anyone forward to the Obama camp? The American people would love this if it fixes the problem.
September 30, 2008 8:31 AM | Reply | Permalink
I doubt that any of these $700billions will be going to pay the creditors - when Uncle Sam chalks up debts of tens of trillions, he doesn't intend to pay any of it back. Remember "Deficits don't matter" Dick? And no one can do a darn thing about it.
September 30, 2008 2:27 AM | Reply | Permalink
And incidentally, the Republicans are going to hang this around the Democrats' neck. They're already putting out misinformation that Bush *wanted* to pass stricter controls over Freddie & Fannie but was stalled by the Dem-controlled Congress. Also, that Dems are the biggest recipients of F&F largesse, especially Dodd, Obama and Kerry.
September 30, 2008 4:03 AM | Reply | Permalink
Why Conservatives Led the Fight Against the Bailout Deal:
http://www.alternet.org/workplace/100857/why_conservatives_led_the_fight_against
September 30, 2008 9:25 AM | Reply | Permalink
What happened to the mysterious jets in the grassy knoll?
September 30, 2008 11:22 AM | Reply | Permalink
The "culprit" Republicans are dishonestly trying to blame for this mess is minority home ownership that expanded under the Community Reinvestment Act. The fact is the CRA only covers regulated banks, not mortgage brokers and companies like Countrywide. Those are the sleazeballs who wrote most of the "liar loans".
In any case the Bush Administration loosened the CRA regulations with the approval of Republicans in congress like John McCain back in 2001.
Look for Bush's Dept. of Justice to go after some hapless single black mothers in the suburbs just in time for a show trial before the election who are trapped in houses their mortgage brokers told them a few years ago they could refinance to a 30 year fixed rate before the ARM kicked in locking in payments they could afford for the long haul.
I wouldn't be surprised to find Republicans like my own execrable congresswoman Judy Biggert hard at work right now helping to DOJ locate just such "wanton criminals".
September 30, 2008 2:19 PM | Reply | Permalink
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