It's been an intense week for political economics. Here's a rundown and one beltway denizen's view of what it all means.
McCain's Pain, Gramm version: Phil Gramm's economic policies from his days in the Senate are making life hard for millions of people right now. But it was his gum-flapping last week that was particularly tough for McCain. Gramm is McCain's top economic advisor, so when he described the current economic downturn as existing in people's heads ("a mental recession") and called us a "nation of whiners" -- well, I guess he gets points for calling it like he sees it. From McCain's perspective though, he's a bit off message.
One policy note caught my eye re Gramm's role in the current meltdown in financial markets, especially in a week where the problems at Fannie and Freddie came into light (more on that later). As I discuss in the link above, many believe that a bill Gramm championed -- Gramm-Leach-Bliley, which open up investment banks and insurers to commercial lending, but without the oversight of commercial banks--helped pave the way to the housing bubble, the credit crunch, and the current downturn.
But check out Dr. Phil's response from this obsequious interview with Gramm by Steve Moore of the Wall St. Journal's editorial page, itself a cauldron of crazed economics. When Moore "delicately" broaches the subject of Gramm's bill in today's crisis, he responds, "There's every evidence that the markets were made more stable by the diversification. J.P. Morgan could not have bought Bear Stearns and prevented a meltdown without Gramm-Leach-Bliley."
Markets more stable!? If they were any less stable, Wall St. would fall into the Hudson Bay. And how about the comment re Morgan buying Bear? It's like saying, "don't you get it? If I hadn't gotten rid of the cops, then one street gang couldn't have beat up the other street gang." The fact that Morgan had to bail out Bear is a bad thing, Phil. Shareholders and employees lost millions in equity and the deal has exposed the taxpayer to huge potential liabilities.
What kind of person thinks like that? Or perhaps the better question is: what kind of person hires that kind of person to be their top economic advisor?
McCain's Pain, self-inflicted version: McCain also hit us with some straight talk re Social Security this week, calling the program a disgrace. What he specifically found disgraceful was the fact that today's young workers sacrifice a portion of their paychecks to finance the guaranteed pensions of today's retirees. But that's the program.
To me, the quote sounded like he just discovered that this is how it works. But Social Security is the biggest single program we fund; at $600 billion, it's one-fifth of the damn budget. And he's been up there for almost 30 years. I'm not saying I want a policy wonk for president. But this betrays a scary lack of understanding of basic government functioning.
It also betrays something deeper. The intergenerational dimension of Social Security is one the wonderful things about it...sorry if I sound sentimental, but this part just always chokes me up. When they were younger, today's retirees worked to create the economy we have today. They produced the capital, the infrastructure, they taught us in our schools, and treated us in our hospitals. We've inherited these goods, public and private, and we're using them to create the growth that our families enjoy today. Under Social Security, we shave off a portion of that growth to help provide for those who came before us, while creating a new economy for our progeny, who will do the same for us ("Circle of Life" music swells up here...).
To the extent that McCain's thinks about stuff like this, he's a YOYO economist (you're on your own), which is why he wants to drain the risk pool that makes Social Security work, and introduce private accounts. Further evidence that the YOYOs are congenitally unable to appreciate anything that smacks of WITT (we're in this together).
The Ballad of Fannie and Freddie: The nation's largest secondary mortgage insurers are on the ropes. Fannie Mae and Freddie Mac are government sponsored institutions -- the feds created them, but they operate in the private market and the government does not guarantee their investments -- that buy mortgages from primary lenders (the people who lend them to you and me). This makes for a more liquid system of lending for home buyers--banks that make the loans are quickly recapitalized when they sell those loans to Fannie or Freddie.
But like so many of the institutions out there right now, the bursting housing bubble is wreaking havoc on the solvency of these two companies, as some of the debt they're holding starts to go bad. They're even less capitalized than Bear Stearns was -- they borrow a lot, take on lots of debt, and don't keep a lot of money lying around -- in part because they've always been able to borrow freely at very favorable rates. And the reason for this is that most lenders assume the government will backstop them.
And most lenders are almost certainly right. Treasury Sec'y Hank Paulson stresses that the feds are not planning a bailout, by which I suspect he means the feds are planning a bailout. Because if anybody's TBTF (too big to fail), it's this guy and gal (Fred and Fan).
Yes, once again, Mr. and Ms. Taxpayer, you may well be about to hold the bag for a failing financial institution, infusing these firms with the money they need to keep buying and selling mortgage debt, while any sorry souls with stock in the companies will find themselves facing an "equity wipe," as they quaintly call it on the street.
So what can we learn from this, Dorothy? Here are a few random observations, all of which have bearing on the actions of the next administration.
-- Bubbles are much worse than we like to think, and we should work much harder to identify and prevent them. By "we" I mean, among others, the Federal Reserve, who, under Greenspan, had a fairly explicitly stated policy of waiting by the sidelines as the bubbles inflated, mops at the ready.
-- Overleveraging means undercapitalizing. See Fannie/Freddie/Bear Stearns and pretty much every hedge fund and investment bank that borrows short and lends long. It's one thing if big banks want to play with fire. It's quite another if I'm going to be called upon to put the fire out. If you're TBTF, then we must provide you with the necessary oversight to avoid charging a costly bailout to US taxpayers.
-- When derivatives are worth multiples more than the underlying value of the equity or bond from which their value is derived, that's not a hedge. It's a big, speculative bet and a recipe for greater volatility and risk ... risk which will typically be under-priced.
-- Speaking of pricing risk, yes, moral hazard is a big problem that contributes to the underpricing of risk (which, at some level, is the main factor behind all the bad stuff that's happening now). But the time to worry about moral hazard is not the weekend when the big bank is failing. It's years before, when you're setting up the regulations under which the financial system can flourish without going off the rails.
These are tough challenges, and deep-pocketed, powerful forces will fight reform every step of the way. It's going to take equally tough, persistent focus by the next administration and Congress to craft the regulations that truly promote greater stability in the financial system. Enough already with the shampoo approach to economic growth: bubble, bust, repeat.
Maybe it's me, but I don't think the McCain/Gramm team is up to the challenge.
So, why doesn't your candidate just put his foot down and say, "Not this time."
You seem to want to have your cake and eat it too, Jared. Whine about poor regulation, but, continually step in to bail out the Republican mismanagers.
Every time they screw the country, you can bet the Democrats will be there to telling us to lay back and enjoy it for the good of the economy.
And now it must borrow more money from socialistic China to help the 'free market' in the US.
Every time I hear the phrase: the 'Bush Plan' I know it will fail.
Regarding bank foreclosures: you can get a list to bank databases of foreclosure properties here:
http://www.nancys-kids.com/reo.htm
And this can spill over such that you lose your job.. the house may be paid for, but you still have property taxes each year, electrical bills and maintenace.
regards
We moved here to North Carolina and now have an acre of land and a home built in 1998.
My son and his wife just bought their first home due to the deflation in housing prices in the same city.
We have been bucking the market with oil stocks and green energy stocks, backed up by commodeties and gold etf's
We have always been middle class and have never been in favor of all of the deregulation of all of the things which have screwed up in the last few years. In fact I am a liberal Democrat!
Thanks again to all of you that fell for the Republican talking points. I bet I am one of the few working poor that made money on all of the phony deals perpetrated on America by the Military, Industrial, Corporate Pirates represented by BOOOSH! And next, McBOOOSH!
Also Google Richard Bove at Ladenburg Thalmann: He has run a few screens on bank stocks to see who elese may be in danger of failing.
Foreclosed Condos with 175k mortgage being sold by bank for just $35K. Now thats the comparable for the other units around it. Do those owners walk or make 1500 payment ona 35K condo you can rent for $500?... In some complexes half the units are in foreclosure so those trying to stay are paying double the Condo Assoc. dues. For how long? With the drops in value, there is no way to refinance and get lower monthly payments, even if interest rates were down.
This wholesale devaluation will cut City tax revenue in Half.. City employees will/are being let go. Road work and city improvements on hold... so subcontractors losing work.
Abandoned property being gutted even in neighborhoods of 1 million dollar homes.
As gas/diesel prices surge, owners are walking away from their boats; defaulting...The same for RVs/ cars.. This will result in a huge number of bank failures and more lost jobs. Finance is 30% of the GDP and the largest employer oustide of retail.
Tourist locations hurting. More lost jobs. Airlines laying off.
If the oil bubble is not busted, this will be a depression. The snow ball is rolling down the hill.
,
One guess!
The person who made more on the house than he should can next out bid some one else. The money was easy to get and by the way people who waited for a year for prices to come down in 2000 and 2001 and 2003, all paid more in the end.... Momentum, just like with oil speculation now.
In other parts of the country like florida, the Cheapo dollar meant U.S. buyers were competing with foreign buyers.
Pls note given the devaluation of the dollar (and this is a direct result of BUsh tax Policies/wars) and rise of comodoties, houses are selling at below replacement cost in many cases. The cost of reroofing has doubled in the past 5 years.
Regards
Regards
Fatso that is Gramm is typical. Gramm has been ripping off the upper=levels of fat for 25 yrs with huge
companies in Europe--and was almost nominated for President by McCcain.\
McCain cannot escape who he really is--a soldier who nearly died in a forgotten and tragic war--
he has no military vision or strategy, and is hopeless in economics. Moreoever, he has Lieberman at his
side pressing the cause of the Israeli lobbies--bomb Iran.
It is classic pre-destruct to predict destruction--of course there will be an attack in the first months of
McCain's presidency--because McCain has campaigned on anti-Iran atttacks. Terrorists will do to
him what they did to Bussh in 9/11===Osama said so--when Bush left Israel roam at will all over Gaza
and Lebanan, and to bomb as suitable, Osama said would happen==and we're in for a re-run.
That presumes McCain wins---and the powerful lobbies plus corporate failures will see to it that
he does win--fair means, fews as they be, and foul--as in as many are for sale. J Gorman
Stop buying all this fattening manufactured food. Try to buy nothing processed.
Join unions. Refuse to work without benefits. If everybody does it, things will change.
I know, I am dreaming. This society is so sleepschooled to do everything they are told to do by the big corporations, that they actually think life is not worth living without all the gimmicks, the fast food, the sodas, the stupid entertainment etc.
In fact as consummers stop spending, which they are doing.... the problems will get worse....
Regards
Everybody has been trained to think that the solution is shopping. But we are shopping for products which are manufactured in other countries.
If people stop buying they are forced to lower prices and to rethink their policies of penalities and high interest rates. We have been lulled into thinking that we all have credit to buy anything we want. Now with all the foreclosures and repos they are forced to think about other solutions. Hundred thousand of unsold houses and unsold cars are just the tip of the iceberg. Fifty million without health insurance is the much bigger problem and a problem which will get even bigger. This is supposed to be the greatest country on earth? Well, keep dreaming. Only because people cannot afford to travel anymore, they have no idea how much better people live in other countries.
Doctores without borders now have to work in this country. No need to go into third world countries. Third world is right here.
The gas price is never going to go down again and the U.S. lacks public transportation in huge parts of the country. Keep pushing for railroads being built and solar power stations while you ride your bike or walk.
I would bet everything that none of our political leaders have the cajones to propose any of this.
bush should be in jail and is assistants for giving the order to not regulate, to not follow the law of the land-
everyone at S&p and others giving top ratings should be in jail, everyone who began and sold these slippery shady mortgages should be in jail,
why dont we know there names, im sure everyone in the industry knows these shady guys who are involved in all these busts, the enron, the housing bubble, the internet bubble, the savings and loans, its the same people, cant we isolate these people, make their names public,
anyone involved on with these shady illegal, heartless activity should be
bush should be in jail and is assistants for giving the order to not regulate, to not follow the law of the land-
everyone at S&p and others giving top ratings should be in jail, everyone who began and sold these slippery shady mortgages should be in jail,
why dont we know there names, im sure everyone in the industry knows these shady guys who are involved in all these busts, the enron, the housing bubble, the internet bubble, the savings and loans, its the same people, cant we isolate these people, make their names public,
anyone involved on with these shady illegal, heartless activity should be blacklisted from the industry,
Obama '08!
While this wouldn't be entirely fair (some people made their money the old fashioned way... they earrrrrned it), it would certainly be a way for the country to ask those who grow obscenely rich due to the extremely lax and friendly-to-the-rich legal system we have, to contribute back to the workings of society.
Of course, McCain and all other fiscal conservatives consider taxation to be heresy and asking the rich to pay their fair share of taxes to be "socialism." This is a crock. Warren Buffett himself has wondered why his secretary, who makes about 60 grand a year, pays almost 30% in taxes, while he pays about 17%.
Seem fair to you?