I think we are all a bit shell-shocked by the whirl of events, which makes it hard to know what to think. Add to an already complex financial conundrum, the various policy issues at play and, now, high political theater and it almost boggles the mind.
Looking over the recent posts, I am both impressed with the quality of commentary and relative paucity of posts/comments, which may reflect the complexity and speed of events. We are still trying to synthesize it all. Major ‘credit’ goes to Zach, for his cogent, thorough and innovative thinking on the crisis. But he is also a hard act to follow...
Pulling together my own thoughts (and with goodly prodding from others, including Zach), I’ve had a hard time believing that the very people who helped to get us into a very large mess (from ex-Goldman CEO Paulson to Rep. Barney Frank and Senator Christopher Dodd to Ben Bernanke’s weak dollar and negative real interest rates) will miraculously devise a solution. Talk about the fox in charge of the chicken coop!
As Zach wisely points out, a drastic government bailout should be the last option, not the first. As Zach also mentions, Alan Greenspan doubts whether $700b would be the end of it, once we start (no, continue) going down the government takeover parade route. (Our government now owns/runs, though AIG and Freddie and Fannie, what is it? half of the insurance market and half of the nation’s mortgages?) Chris Bailly, in his equally wise series of questions to my last post, brought up the huge question of moral hazard which, after Paulson’s and Bernanke’s shoot-from-the-hip recent interventions, may already be too far out of the barn to ever get back in – despite Paulson’s belated attempt to restore a bit of real-life hazard by letting Lehman fail.
So the question arises, what if $700b is just a drop in the bucket? (Apparently the wet finger number in the air comes from 5% of total US mortgages.) And once every US and foreign bank which rashly bought ‘toxic’ mortgage backed securities is taken care of, who and what else will get in the bailout line, the large garage sale of Clean Your Balance Sheet Now, care of the US Gov’t? How about the credit card companies? Or all those shaky car loans and leases? While we are at it, why not an even more massive bailout (apparently $30b for Detroit was already slipped into a recent spending bill) for our failing car manufacturers? Once Washington gets into the French-specialty business of supporting national champions and trying to keep every bad business, including many banks, afloat, where does it all end? With a massive flight from the dollar (as Chris points out) that could end its position as the world’s reserve currency? In national bankruptcy? (OK, OK, that’s hyperbole.)
Call me crazy, but I’m starting to listen to people like Ron Paul and Newt Gingrich who have opposed the boondoggle from the start. Gingrich, perhaps sagaciously, recommends scraping the ill-advised bailout (which House Republicans, complaining of tsunami waves of phone calls opposed, are ready to bail on) and taking some different steps. First, change the inane ‘mark to market’ accounting rule which caused the downward spiral in balance sheets to occur and change it to a three year moving average for these toxic assets. (So instead of immediately reducing the mortgage securities to fire sale values of 10-15%, forcing companies to urgently raise capital, you take the slow road, allowing the market to work out the values over time.) Second, instead of buying these impossible-to-fairly-value assets, offer preferred debt loans at better than market rates to help these companies raise the capital that Zach points out is the second, economist-preferred means for correcting these lopsided balance sheets. (I might take issue with Zach’s suggestion of Uncle Sam’s outright purchase of equity in all these companies: do we really want the Federal Gov’t, with all its political and mischievous ways, to take ownership? Senior debt might not give the taxpayers such a high upside, but it would maintain an arm’s length at least.)
So, while I’m far from an economist, and even further from being a lawyer, couldn’t a more incremental deal along these lines be hammered out – before insisting on going the equivalent of financial nuclear?
No doubt our financial sector is going to have to shrink some. (By virtue of morphing back into commercial banks, leverage ratios will drop from 30 to 1 to 10 to 1 for these former investment banks, with high capital reserve requirements.) But shouldn’t we at least let the markets try to sort things out – with help from Uncle Sam to avoid the worst of accounting distortions and provide credit when needed as a consequence of the temporarily frozen credit markets – before short-circuiting everything?
News flash: new home sales in Southern Florida ticked up for the first time last month. Could it be we aren’t that far from the bottom of the real estate market?
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4 comments:
I never thought I'd see the day when congressional Republicans were in open revolt while the Democrats backed Bush, but these are extreme times we're living in. I've been impressed with Ron Paul and Newt Gingrich's perspectives on the financial mess too - these will certainly be two voices to follow in the days ahead.
That said, with each passing day the bailout is becoming more and more palatable. Concessions have been made to the original to incorporate both Democratic and Republican criticisms, and the original three pages have ballooned to 106. As painful as all of this is, I'm a lot more comfortable with the bill now than I was when deliberations started last week. Nothing is going to be perfect, and people are going to be upset no matter what (who likes to have their money spent on saving Wall Street's ass). But the new and improved Paulson Plan may just be the best thing we can come up with in such a short amount of time to staunch the bleeding. I didn't think I'd say it early last week, but if I were a congress member, at this point, I'd probably vote for the bill.
bill just got vetoed: :) ? :( ?
Not vetoed per se, rather the house failed to pass it, 228-205.
Ben - from cunningrealist.blogspot.com
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No One Could Have Predicted...
I signed into law the American Dream Downpayment initiative, which authorizes $200 million a year to assist an estimated 40,000 low-income families with downpayment funds. In this year's budget, I proposed the Zero Downpayment initiative, which would eliminate the statutory requirement of a minimum 3% downpayment for Federal Housing Administration-insured single-family mortgages for first-time homebuyers.
George Bush 9/20/04
The Zero Downpayment Act, as its names suggests, creates a federal program that allows some homebuyers to obtain federally-insured mortgages without making a down payment. “Federally-insured” really means taxpayer-insured, as taxpayers like you foot the bill for defaults...Between the Federal Housing Administration, which is the largest insurer of mortgages in the world, and the government-created Fannie Mae and Freddie Mac corporations, the mortgage market is hopelessly distorted. Millions of mortgages in this country are federally insured, and the tax bill for defaults could be astronomical if the housing bubble bursts.
Ron Paul 6/21/04
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