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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This is a great common sense idea. Invest some capital in the banks to keep it solvent and give it time to work out the nonperforming loans. Much better than buying the loans.
"And the infusion of cash by governments or foreign investors has nothing to do with these problems"
To read the full article: http://democracyandsocialism.com/Articles/WhyRecession.html
The following was reported this afternoon September 29, 2008 14:28 EDT, by Bloomberg.
"Fed Pumps Further $630 Billion Into Financial System (Update3)
By Scott Lanman and Craig Torres
Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities."
This sounds like they no longer need the bailout to free up the credit market. What is going on?
At the end of the last quarter of 2007, the average wage in California was $1035 a week. (Bureau of Labor Statistics: http://www.bls.gov/ro9/qcewca.htm) The standard for how much mortgage a buyer should carry is (or was) 2 ½ times his/her annual salary. At $1035 a week the average buyer’s annual salary would be $53,820. Let’s round that up to $54,000 and make the math a little easier. 2 ½ times $54,000 is exactly $135,000. That’s how much the average home buyer can afford to pay for his/her California house. The housing market in California will not begin to recover until the price of the average house falls to $135,000 or possibly even a little less.
Any bank that gave a $500,000 mortgage on that house would stand to lose $375,000. That’s not a haircut, it’s a scalping! No wonder the banking industry wanted a bailout. The California housing market is terribly overvalued. Home prices are nearly 4 times what they should be (3.7 by my calculations.) The foreclosures, bank failures, and falling home prices will continue until the average Californian can well afford the average California house. Until then keep your head covered.
Note ½ = one half
A little industry vintage for you. A borrower can qualify for a loan with .42 of his gross income. To use your example, .42 of $54000 amount to a monthly payment qualification of $1,890. For a loan of 30 year term and 6.5% fixed interest rate, the borrower qaulifies for a loan of $300000. The bank would lose $200000 which is a wee bit more palatable and a little more in line with the problem that we are looking at.
The median house price in the entire country last month was $211000 after all, and we all now Calif is at least 150% of that.
Yes, but how well is that working out? I've bought 7 homes in my lifetime and I've always used the 2 1/2 times annual income rule. Never caused a housing bubble to burst either.
Virtually everything in our economy is so expensive that wages just can't support prices. We have to address that unless we want to deal with an even worse crisis.
Tonight I had dinner at a favorite Chinese restaurant and there was a new waiter. He had walked away from his job at a mortgage company not long before.
First I congratulated him on getting work in a more respectable industry.
Then I asked, "If a trillion dollars could disappear in a few hours, was it ever really there in the first place?"
"Heck NO," he roared.
"So what are we all so worried about, then?" I said. And we laughed.
All that one could hope for in all of this is that the most gluttonous of those who abused the system and public trust, suffer loss to the same extent they contributed to it.
Just a thought, i expect wall st is feeling pretty threatened and insecure right now ,they dont have controll of their own affairs and stand to lose everything. I believe thats how american indians and african americans, and indiginous people all over the world have felt at some time through no fault of their own, the money mess was created on wall st, by wall st , the feeling of helplessness
to be not in controll but at the mercy of someone else is maybe a lesson in how others feel in the same situation,,people without a job ,without healthcare,to be homeless, all feel powerless.
their is a lesson in this ,if people want to learn.
Mattjoe, this won't happen by itself, it will require that Congress regain the will to regulate the industries on behalf of the citizens of this country. And that will require campaign finance reform.
We are not out of the woods.....but I am glad my wife and I put real money down on our house four years ago, and bought within our means. I just hope my home value doesn't drop too far.
As for the ecomonic "crisis", I heard someone say the other day that the only way to help any of this is to provide the average American worker with a realistic, competetive wage (and not just a silly $600 "stimulus" payment), so they can afford to spend money and pump it back into the economy.
Too bad W and his Repubs gave big corporate tax breaks to send all those jobs to foreign countries that the average American worker was doing right here. We could use those jobs back here right now.
A math equation for W.'s "No Child Left Behind" program:
If my total household income is $45K a year, yet the value of the only decent house I can find near my place of employment has been artificially inflated to $500,000, and the bank lends me 125% of the value of my house at 15% interest, how many hundred years must I live to pay off my mortgage?
Sound familiar?
Nice legacy, W.
One factor perhaps rather small but perhaps not has been the change of policy in the financing of college educations. Hiding assets from the bean counters who determine eligibility for federal loans has been recommended since 2000: refinance, refinance, refinance. Get all your debt into a mortgage, buy another house if you have to, so you can borrow that 4% money. Vanderbilt, Emory, Duke and Brown, to name four I got advice from, practically insisted on it.
To make a sweeping generalization here, I don't want to see anyone (by any means or any theory...) give any bank a "cash-out." I don't want to see anyone handing out get-out-of-jail-free cards.
Instead, I want banking to become the stodgy business that it used to be: loans were good and payback was expected, nay, required. Profit margins were respectable but not stellar.
And now, I want to see it have to work-its-way there. If you have billions of dollars in "non-performing loans" backed by grossly-overstated collaterals, then you will be required to do everything that you CAN do to cause those loans to "perform, somewhat." Slash the value of the collateral and forgive .. yes, forgive .. part of the loan. You have to write-off the forgiven amount as a loss. But suddenly, the loan is performing again and that means you're making some amount of money again, instead of whining to Washington to "bail you out."
Ain't gonna bail you out. Ain't gonna beam you up. You walked in, you walk out.
You are the only one making the best and most obvious point I have seen thus far My house has not dropped in price because the people making offers can not get a loan, no one is making an offer! B
Banks being able to lend have nothing to do with this. This is not going to raise house prices and correct me if I am wrong isn't that the main reason we have this problem.
Why isn't anyone bringing up the point that we have a Pres. that after every problem this country faces his answer is go out there and spend. He did it after 9/11 he sent out stimulus checks to go spend I can't believe now we should spend our money bailing them out.
How does this help me and my neighbors that are not in the market? They keep saying if we can't borrow money the world will go in a depression, maybe that is what we need not to be able to borrow money so easy.
Everyone I know not in the market is ine except for the decline and our home prices and hi gas prices and this does nothing for that!!!!
Urge congress not to pass the same bill cause the market fell doesn't that prove more then ever this is a Wall street bail out and why are the Democrats giving Bush this when his own party is looking like they are listening to the voters???
I most certainly agree with one succinct statement in your post:
"We are not going to get the price of $200,000 homes in central California back up to $500,000".
However, I find the rest does not measure up to what I expect from the Huffington Post.
I'll be brief:
As an Independent voter, in my opinion, you fail to give enough credit to the Democrats for today's failure.
This exercise thus far has been a massive failure of leadership in our government - period.
This crisis goes way beyond families living beyond their means and a government handout to Wall Street.
Why "_THIS_PARTY_?" Why not "_THAT_PARTY_" or even "_THIS_PARTY_ AND _THAT_PARTY_?"
The Congress likes to portray itself as "divided into two primary colors," but that isn't really how it works. Congressmen and Senators actually work together "across the aisle," and it isn't possible to lay any sort of meaningful "blanket blame" upon either one of the colors.
These men and women have been making some very, very foolish votes. During many sessions of Congress, over many years. By Senators and Congressmen wearing both Red and Blue shirts.
Exactly. One Independent to another?
Our government failed yesterday IMHO. Foolish - you are generous.
Thank you for a lucid explanation, mujch better than I have heard elsewhere, of the financial meltdown being the result of on the average living off credit and beyond our means.
For years I wondered how it was that mortgage brokers could offer to lend 125% of appraisal on real estate, and negative amortizations -- I guess the chickens have come home to roost.
During 2007 I was intrigued by an offer to refinance at 4.5% -- it was after I had applied that I found out that what they meant was that THE PAYMENTS would be calculated AS IF the loan were at 4.5%, but really it was a negative amortization loan with up front fees amounting to 17,000 dollars. I almost fell for it and believe me I am a physical scientist with a Ph.D. . . . Any Joe Blow out there could have honestly fallen for it . . .
In other words, Doctor, you were being presented with "attempted fraud."
The bank was not only attempting to defraud you, but also to defraud its investors and the government. Somewhere, it was going to be quite willing to sell-off that mortgage as "performing," as part of a large mortgage-backed security, when in fact it was almost certain that the loan would be defaulted.
But instead of this being a bank literally trying to defraud you, it was a bank following what had somehow become "a standard practice," never mind the fact that said practice was, de-facto, fraudulent in its essential nature.
This, ladies and gentlemen, is a high crime. To have allowed such practices to not only be practiced, but to be regarded as "acceptable standard practices," is in my mind a deliberate malfeasance by some "civil officer" who should be impeached from his or her office and put to trial. (The "civil officer" in this case not being the President, but a member of Treasury.)
Here's an idea. How about offering every soldier returning from Iraq a 5% 30 year fixed rate government backed mortgage if they agree to move into a vacant house that is in foreclosure?
We could call it "Homes for Heros."
Wouldn't that be a VA loan? I'm quite certain they still exist. 0 down too. I can't guarantee the 5% interest rate, but it will be competitive and fixed.
You could tell something was wrong with VA and FHA mortgages fell from favor becuase they didn't have the attractive terms and required an income to loan ratio. It will be quaint to return to them after this crisis settles down.
Maybe I am one of those Joe Blows. The decline in the housing market pushed me underwater so my refi plans are done. I would be helped by the Housing Bill that put out a formula that would allow me to restructure my loan at its current value, but that's vouluntary on the part of the lender. I wonder how the Congress could pass such a bill. Predatory lenders are suddenly going to decide to be the good guys? What we need is for Congress to enforce restructuring of loans and let the housing prices start lower with some equity. Who's against it--the Banking Lobby, Mortgage Banker lobby, and HomeBuilding Lobby. Same group who is against the power of bankruptcy judges to reset interest rates. I wonder why?
Here is an alternative plan: Offer new loans to homeowners with rates that are government-subsidized, and therefore lower than their present rates. The terms would be longer. There would be a fee for participating which would be amortized into the new loan. The loans would be offered through existing lenders.
This way, distressed borrowers are able to make their payments and stay in their homes. Lenders start receiving income again from their previously unproductive loans. Liquidity is restored to the system.
I agree 100%. We need economic slowdown in a sense. We need to balance the trade deficit. We need to be far less dependent on credit. We need engines to drive the economy other than consumer spending.
This would be great if the business of America was....er.....mortgages....but the business of america is business. Not fat cat bonuses, but businesses small and large, that need credit in order to not only prosper, but survive. We are in the middle of a global credit crunch - do you think global markets are crashing because of mortgages? No.
The idea that you want to reduce imports is laughingly naive. Who do you think, now that the consumer has gone away, is supporting our economy - both by purchasing our goods and buying our treasury securities.
Certainly credit is much tighter because of all the defaults from homeowners going into default and now making their monthly payments. Must have some impact. And if a country carrying our debt is not able to make money from selling imports to America, then they may want to get repaid.
NO MORE YEARS.
No more McCain, no more GOP.
Republicans CANNOT GOVERN AT ALL. They've PROVED IT for 8 years!
Republicans by their actions and attitudes proved they aren't statesmen. They've got corporate interests in mind, and not those of average Americans.
Republicans proved they specialize in dividing, not uniting with
anybody on a common goal.
REPUBLICANS PROVED THEY CANNOT GOVERN. They've made one mess after another--and handed the bill to middle income Americans.
We CAN'T AFFORD REPUBLICANS any more.
THEY'RE TOO EXPENSIVE!
We're going bankrupt because they don't want to govern
for the benefit of all Americans and take care of only "their few".
NO MORE YEARS for Republicans.
Enough is enough.
Actually over 30 years of trickle down Reagonomics theory has brought us to the place we deserve. There has been no regulation of any kind on the financial markets and this is our just rewards. We are victims of our own greed.
It strikes me that too many people view 'the world' and this 'financial crisis' through the lens of their own short lifetimes. Compounded by a lack of reading the history of past bank failures, panics, recessions, inflation, deflation, boom followed by bust, time and again.
Try the "Bank of North america", "Bank of the United States", "Second Bank of the United States" and especially, the betrayal of 1913. Google is your friend.
You really don't have a clue huh? This is a democrat made problem. Do some research, you WILL find that democrat administrations pushed the use of sub prime loans on the banks. Not to say that there was adequate regulation (there wasn't), but if you research you will also find that the democrats in congress stalled or killed any new regulatory initiatives when it came to Freddie, Fannie, and sub prime mortgages. Did Bush drop the ball? Well yes, of course. He wasn't paying attention (pretty sure that even if he was he wouldn't know what to do). But blaming all this on Bush and the republicans is foolish if not down right idiotic. Sooner or later the media will dig deep into it and show the truth.
Sad to see sooo many people buying this bull that Pelosi is feeding us. She will be the downfall of the party and we should really look into replacing her as soon as possible. If she didn't see this coming today then she has no business running the house. We The People didn't want this bail out package, and in an election year you can always count on politicians to do what the people want... until after election day.
Blaming the crisis on anti-redlining programs is pathetic.
Have you read any of these posts? I think you should find somewhere else to flog you're dead horse.
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