The Bailout Round II: Adult Version?
In spite of its best efforts, the Bush administration failed to push through a $700 billion give away to Wall Street. President Bush conjured up scary images of the Great Depression on national television. He even partially backed away from his initial demand for a complete blank check for Henry Paulson. But the public refused to send their tax dollars to Wall Street banks run by incompetent bankers, and they insisted that their representatives in Congress listen to their wishes.
While the editorialists are busy denouncing members of Congress for surrendering to the vulgar masses, it's a good time to quickly check the score card. The United States is in a recession and facing the worst financial crisis in almost 80 years because the folks currently in charge were out to lunch.
They allowed an $8 trillion housing bubble ($110,000 for every homeowner) to grow unchecked. People like Henry Paulson, Ben Bernanke, and Alan Greenspan repeatedly insisted that there was no housing bubble as house prices got ever further out of line with fundamentals. President Bush regularly boasted about record rates of homeownership as the sleazes at outfits like Countrywide, IndyMac, and New Century pushed predatory mortgages on moderate income families, many of whom were black or Hispanic.
It just took a little common sense to see that a disaster was imminent, even if the exact timing and course could not be predicted. But, our elites lacked commonsense, and that is why we now face such a dire economic situation.
The main cause of the economy's weakness is not insolvent banks and lack of credit; it's the loss of $4 trillion to $5 trillion in housing equity as a result of the bubble's partial deflation. Families used their equity to support their consumption in the years from 2002 to 2007, as the savings rate fell to almost zero.
With much of this equity now eliminated by the collapse of the bubble, many families can no longer sustain their levels of consumption. The main reason that banks won't lend to these families is that they no longer have home equity to serve as collateral. It wouldn't matter how much money the banks had, they are not going to make mortgage loans to people who have no equity.
And house prices are not going to come back. This is like Pets.com. We are not going to get the price of $200,000 homes in central California back up to $500,000.
The main problem in recovering from the recession will be finding ways to boost demand other than household consumption. In the longer run, this will mean reducing imports and increasing exports. In the short-run, we will have to rely on government stimulus to help spur growth and reduce unemployment. The Democratic demands for stimulus were not extraneous to the legitimate goal of a bank bailout bill. Fiscal stimulus must be central to any serious effort to boost the economy.
The weakness of the banks contributes to the downturn, but they are not the core of the problem. We would still be facing a recession even if all our banks were flush with cash. Hence the hype about the urgency of the bailout was an invention. It would be good to get our banks in order, but it also would be good to send $100 billion to state and local governments to support infrastructure projects and other spending.
How do we go about getting the banks in order? Almost every economist I know rejects the Paulson approach and argues instead for directly injecting capital into the banks. The taxpayers give them the money and then we own some, or all, of the bank. (That's what Warren Buffet did with Goldman Sachs.)
This isn't about begging for a sliver of equity as a concession for a $700 billion bailout, this is about constructing a bank rescue the way that business people would do it. We have an interest in a well-operating financial system. There is zero public interest in giving away taxpayer dollars to the Wall Street banks and their executives.
If Secretary Paulson constructed a package that was centered around buying direct equity stakes in the banks, he could quickly garner large majority support in both houses. Better yet, Congress could just construct its own package centered on buying equity stakes and send it to President Bush. If he balks, we can just threaten him with stories about the Great Depression.
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Mr. Baker, if only Congress would listen to expert economists like you. Instead, they consult Paulson, Bernanke and Warren Buffett!
What's next -- Donald Trump?
All I heard last night on CNN and MSNBC were scare stories: "We lost $1.2 trillion yesterday! This is all about [saving] you, not Wall Street! We have to do something! Something is better than nothing!" (This last comment was from a man I usually respect: Paul Krugman!
But, the American People have spoken, and through some kind of serendipitous fluke, we got the bill stopped. It wasn't because our representatives listened to us -- it's because some incumbents were scared they'd "lose their jobs"!
Oh, the irony.
Congress should grow a pair and HOLD HEARINGS as soon as they return from their "two-day holiday". You should be called to testify -- along with James Galbraith, William Isaac, Robert Borosage, Ravi Batra, Nouriel Roubini, Ken Rogoff, Joseph E. Stiglitz and others -- on an alternative plan, one that will work. Our worst nightmare will be if they insist on fixing Paulson's folly.
EVERYONE: Call, e-mail Congress to hold hearings! Keep this going!
Let's use the momentum.
Please take heart, the defeat of the Wall Street rescue package was a triumph of democracy. The 90 Democrats who said no, along with the Republicans fighting for their own survival, finally said Not This Time.
You do not have to be a financial expert to realize that making the Treasury Secretary money czar over $700 billion, so the former Goldman Sachs CEO can decide who financially lives or dies, is not a very wise idea.
Representative Marcy Kaptur has recently reminded everyone that Congress is a deliberative body, and anything so monumental should be arrived at through careful, thoughtful deliberation. This Our Way or The Highway approach is totally wrong. Talk to former chairmans of the SEC and FDIC. I am sure a better solution to this problem will be found.
Great article - thanks! I recently read Michael Moore's take on things and it scared the **** out of me - realizing that we were on the verge of a vast, incomprehensible giveaway to people who need it the least just to answer some bogus manufactured crisis before the Bushies leave the White House. The nerve! I am outraged.
There are so many ways that much money could be used better - but priority 1 is just stopping this farce from getting any further.
I pray congress doesn't follow through with this piece of theatre. I hope Obama has the insight and integrity to put a stop to the show and demonstrate true leadership. And thank you house republicans for listening to your constituents and blocking this atrocity.
Dean,
You got it! Bush and the Neo-Con, Fear Machine failed. Bush did not get what he wanted, NOR the Banks.
More Centralized Control.
The sad part is, Wall Street still believe that the BIG Brother Neo-Cons, really have their best interests at heart. The Financial Markets, Derivatives, Hedge Funds were just available,, LESS REGULATED,,, tools for the Neo-Cons to pump up a Popcorn Economy. An economy that produced,,,, NOT SOLVENCY,,, but NUMBERS. As you state,,, and accurately,,, the loophole of Sub-Prime,, originally to ease credit scores for sufferers of the 1980s and early 1990s debacles that hurt GOOD people,,, now were turned into a cavernous portals to drive Ocean Liners through.
The Housing Bubble aside,,, please remember that Bankers were throwing money at Wal-Mart, McDonalds, Home Depot, Burger King, Staples, Taco Bell, Pizza Hut and thousands of other Chain Stores and Big Boxes that were willing to expand,,, Forcing out the Mom and Pop that fudged on their Taxes. Basically, the Corporate takeover of America.
The result, some GOOD JOBS,,,,, BUT Temporary Jobs,,, that PUMPED the early numbers for Bush/Cheney Neo-Cons look good, 2000, 01, 02. 03. WAGES, did flow,, to the Butcher, Baker, Candle Stick maker,,, BUT,, NO,,, Heavy Industry, Light Industry, Durable Goods, Steel, Mining, Auto Manufacturing, with the possible exceptions of Private Prisons, Boeing, Raytheon, a few specialized Defense Sector beneficiaries.
You are 100% right! The Banks HAVE MONEY!
All the best
Knute Neo-LIB
I don't mean this as a dumb comment - It's a serious question.
"How do we go about getting the banks in order? Almost every economist I know rejects the Paulson approach and argues instead for directly injecting capital into the banks. The taxpayers give them the money and then we own some, or all, of the bank. (That's what Warren Buffet did with Goldman Sachs.)"
If that's the answer (or one possible answer), then wouldn't it work to just just give each taxpayer the money, directly deposited into a special bank CD, that couldn't be cashed by the taxpayer for 10 - 20 years? The banks would get some cash and, after quite a while, the taxpayers would get their money back, plus interest.
That strikes me as true taxpayer ownership, and the true meaning of giving banks the needed loans. However, it also matches something I learned long ago - if it sounds too good to be true, it probably is.
Well,,, people have rejected,,, “segregated market” regulations.
Savings and Loans that deal primarily with Community NEEDS.
Auto Insurance Companies that Insure Autos.
Banks that Identify by Product, Business/I
Local Banks, that may be part of or affiliated with a Larger Fiduciary and Underwriting Trust and Corporate Structure, BUT know and grow their community.
Local TV, Radio, Newspapers and News responsive to and supporting of, Community.
Credit Unions that are FDIC backed,,, BUT make the most reasonable priced loans for Appliances, Boats, Cars, and Small Trucks.
Small Business Banks, that specialize in helping SMALL Businesses.
Each of these and other industries are particularly unique in their specialized skill sets and community knowledge, that make them very profitable.
When the rush to Consolidation began, 1972,,, and De-Regulation began in earnest, these diverse markets were looked upon as FAT COWS, ready for the plucking.
Well,,, Bigger is not always better,,,, More is not always efficient and Consolidation does NOT always mean more profit per Unit delivered.
Basically,,, Community and Bottom Up, Neo-LIB, Diversity,, Thousand Hands,,,, was replaced by Supply Side, Trickle Down and Neo-Con Domination, Monopoly and Control.
Under Neo-LIB systems, Little Towns used to be very self-sufficient. They had every advantage of the largest towns or even cities. If you needed a loan, you could call the Banker and the papers would be ready when you got to town.
All the best
Knute Neo-LIB
Thanks!
Thanks, finally a little truth about the bubble economy.
Injecting money won't be a complete solution if the crazy asset is still on the books with no way to value them. How many more writedowns are we prepared to take, and the jitters in the economy? Bank of America has at least 6 more quarters of writedowns thanks to the purchase of Merrill Lynch.
It depends...
The biggest problem the banks have is that "solvancy," is based on the debt to equity ratio. Right now the banks have $30 in debt for every dollar of equity. If the Fed bought 50% of every bank (using 50 to keep the math simple, 30 would be fine, or we could let the banks pick a percentage up to 50%) their debt to equity ratio would become 15 to 1 overnight. Even if the assets they have keep going down, they still have 1/30th of their debt in cash or T-bills or whatever the Fed uses to buy stock. This would be enough to keep most of them solvant.
To reverse eximp directions while stimulating exports the dollar value will have to be competitive - will world economies permit that? Will US allow a devaluation of dollar? Then, US production has to go up and be cheaper than China...is that possible?
Mr. Baker is absolute in his post, the time has come to let the Wall Street Wreckers bury themselves. Like 1929, what was it that corrected the Great Depression that was the result of Wall Street's stupidity of the past? Take the control of the money away from the investment and banking circus clowns and let the government help the main-street builders create a real economy and real jobs. Watching CNN trying to scare the poor viewer with doom and gloom if we don't hand over the loot is sad because for the first time the people are wise to this plum on a mud pie story. The whole system is rotted throwing good scarce gas on the fire is no solution to the overall totally deregulated and dismantled financial sector. let's shore up from the bottom up, the trickle down stuff never makes it to the people who operate on honest social standards as apposed to the greedy thieves of Wall Street.
Since the mid to late 1990s I began to observe, for the first time, people buying groceries on their credit cards. Gradually it became a more and more common sight and I realized that this was the beginning of the end of the Republican model economy.
Too many people have been living beyond their means - credit cards maxed out, all the equity in their homes spent - for too many years.
In 2003, when Bush committed the US to spend at least a trillion dollars in Iraq and property prices rose to beyond what ordinary people could afford, I imagined that in 5 years the economy would go into meltdown. And here it is.
The Republican philosophy, that individuals, corporations and financial institutions can simply regulate themselves is a fallacy. If you give them limitless credit, they'll use it; and when it inevitably all goes wrong it's not just them who pay the consequences - it's everyone.
Just out of curosity -- are you sure they were CREDIT cards?
I can use my DEBIT card just like a credit card (i.e. WITHOUT entering a PIN) -- I doubt a casual obserer would be able to tell the difference?
That's not to take away from the overall point of your post, however.
I do mean credit cards, not debit cards. Walk past any bank and they often actually show a picture of the credit cards on the advertising. The color schemes are usually different to the debit cards. They're not that difficult to identify if you're looking out for them.
In my mind, the number of people you see at the supermarket using a credit card (rather than a debit card) is inversely proportional to the health of the economy. Whether there is any truth in that, I really don't know., but it makes sense to me.
uh..me too. direct debit out of my account before I hit the parking lot and debt free car.
No monthly statement to pay, it's a done deal.
I have a card that works as both, but it's really a debit card in that I can't spend more than is actually in the account, BUT if I use it as the credit card I get cash back.
I have often wondered if folks thing I am charging food
My real rule is this, if the item will be gone before the statement arrives, it can't be charged..i
Great article Mr. Baker, thanks. Here's another elephant in the national living room. Cannabis satavia and cannabis indica and their many hybrids are a ready, easy to grow and quick cash crop. Now is the time to legalize cannabis which is already one of the largest agricultural crops in the USA (30 BILLION) and the stupid government doesn't get a cent of the money instead of regulating it and cashing in. The US is already the worlds largest per capita consumer of cannabis (illegal for the most part) whereas the Netherlands, where it is legal ,is ranked number nine. Plus the US SPENDS six BILLION annually for law enforcement and incarceration. So do the arithmetic ....if it's 30 BILLION as an underground economy it could easily be 90 BILLION in no time short. Everybody is hollering Change, Change, Change ........We
I follow this some and I've called my Congressmen about it. It's crazy. Its one of the most versatile plants - the seeds can be used for food, plastics, and fuel. The stalk is the strongest naturally occurring fiber and can be used for clothing (soft and durable - better than cotton), concrete, etc.
We have farmers on the N. Dakota/Canada border who grow it at an incredible profit on one side of their farm, and it is illegal on the other. It grows in those virtually infertile areas, and we arrest impoverished Indians who try to farm it for hemp/lime concrete to build housing.. (No DEA excuse, Industrial Hemp grows on a different cycle than marijuana, has virtually no THC content, and would actually dilute the potency of any marijuana grown nearby, almost completely reducing the THC in a couple cycles.)
It sounds far fetched initially, but when you learn the history of its farming and prohibitio
Anyway, its been 'legalized' in farming counties in a lot of states - but growing waits for the feds & DEA to wise up, or bow down to public pressure.
here's quick video about the 2007 Industrial Hemp Farming Act
http://www
I think part of the $30B is the price added because it is illegal.
if the risk was reduced the price would come down, if you are a free market thinker.
The numbers are not transferable if the situation changes. However, it's still a good idea. It's a missed opportunity.
Thanks...
A step backward and a deep breath.
But would like to add that it wasn't just houses that were overvalued. Stocks with a p/e of 30 were pushd as safe. Municipal bonds' ratings were inflated as much as the fraudulent real estate valuations that persuaded people to take out mortgages which they expected to be good investments. My broker's list of "safe, conservative" CDs last month reads like a litany of failed and failing banks.
Wish it all were that simple.
" How do we go about getting the banks in order? "
A big part of the problem, the deregulation and market supremecy problem, has to do with this notion of "pricing" risk appropriately. It used to be that bankers were conservative people who would not lend you bank money "unless you could prove to them that you did not need it" (old bankers joke)
Today we have bankers who will lend to anyone, market the paper, and make the interest rate consistent with a market price to yield a profit to the originator of the note. Securitization then packages the risks that were properly priced and we all make some mega bucks. Let me repeat that for you: The problem we endure is the mindset that risk can be properly priced into a note to compensate for the anticipated default rate. If you suffer that mindset, and they do, then what is it that you can expect. Banks historically are risk averse. The banks that have caused these problems are the deregulated entities that assume that the market can adequately price risk instead of avoiding it.
I keep repeating this everywhere I go and all I get are blank stares.
Well thought out and excellent post. I hope people are hearing this!
While Greenspan, Bernacke, Paulsen and all the big shots in DC were championing the great home ownership crase, lowly realtors, appraisers, escrow officers and bank clerks were predicting the housing crash four years ago. The older ones saw it all before in the 70s and 80s when prices skyrocketed only to fall. Only this time, it was like that on steriods. No doc loans were intentionally criminal. Corporations have responsbilities to their investors. These people raped the businesses and the borrowers to churn loan fees. This WAS NOT AN ACCIDENT. THIS WAS A CRIME. After the triage, there should be Enron like indictments across this country.
You should start with Chris Dodd.
I disagree as to the true cause, but do agree that an imbalance in the equation is the true cause of consternation. Either home values are overvalued as you say, or the American worker is undervalued.
For all the talk about American work ethics and ingenuity, $6.00/hr. does not seem representative of all this hyperbole. Good jobs equal good loans. Bad jobs equal bad loans. Rather than lower home costs, and thereby the primary long term savings for a majority of Americans, I would like wages for the bottom half to go up as the wages for the top half go down. Why should some Americans be able to afford 13 homes when most of us can not afford one. I have not met the man who contributes 460 times what I contribute. He may well exist, but I have not met him
Point well said, bet you'll never hear your sharp question on CNN! or ABC! or CBS! or NBC!
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