I just spent a week with four friends, all of whom are voting for Barack Obama. I retained my sanity and calm good nature by clinging to my new philosophy: If Obama wins in November and his Presidency is as disastrous as I anticipate, I will at least have the satisfaction of being able to say “I told you so” for the next four years.
(When I asked a select group of correspondents if there was a word for saying “I told you so” - the same sort of word as, say, “hypocrisy” or “irony” or “gloating” - my brother said “The word is life.” Hence the title of this post.)
Wednesday, October 22, 2008
Thursday, October 9, 2008
Off the grid
I’m going to have very little if any access to the Internet between now and October 22, so I’m shutting down comments for the blog.
Sunday, October 5, 2008
BUB Four
Boy, Item 2 of this plan sounds famliar:
I don’t know whether to feel gratified or terrified that an economist Greg Mankiw references came up with practically the same plan I did. Although I wasn’t going to take the whole profit at resale. And my government wouldn’t charge interest.
*****
Since I keep adding BUB posts, I updated this on December 13, 2008, to put all BUB posts in their own category. That way they can easily be found without my having to keep updating all the existing ones each time I add a new one.
To be honest, I don't know the exact details of how this Wall Street "fire" ought to be fought. I suspect it should involve two simultaneous strategies:
1. A government fund to buy distressed derivatives, which would inject capital into the system and provide some mechanism for pricing these opaque securities. The first step toward recovery is making the securities liquid again, meaning that they can be bought and sold at a predictable price, even if it's a low price.
2. A government fund to buy mortgages in foreclosure, or at risk of foreclosure, from lenders at a discounted price. So if I've got a $200,000 mortgage and I can't make the payments anymore, the government would buy it from my lender for something like $180,000. The lender still gets a haircut, but probably ends up better off than taking on the administrative expense of foreclosure and then having to sell the house in a dismal market.
The government would then restructure my loan with terms that I could afford, such as stretching the payments over 40 years instead of 30, or perhaps even lowering the value of the outstanding loan.
As a homeowner, I, too, should have to pay a price for borrowing more than I could afford. The government should be entitled to any profits on the eventual sale of my home up to the amount of whatever break they've given me. So if the Treasury knocks my mortgage down from $200,000 to $160,000, and I'm eventually able to sell the house for a profit, I should send a check to Uncle Sam at closing for $40,000 -- plus interest.
That's the essence of a sensible plan: Restore stability to the housing market at realistic prices; and inject liquidity into Wall Street, again at realistic prices. Just to stop the fire from spreading.
I don’t know whether to feel gratified or terrified that an economist Greg Mankiw references came up with practically the same plan I did. Although I wasn’t going to take the whole profit at resale. And my government wouldn’t charge interest.
*****
Since I keep adding BUB posts, I updated this on December 13, 2008, to put all BUB posts in their own category. That way they can easily be found without my having to keep updating all the existing ones each time I add a new one.
Two Americas (Bill Maher version)
[October 24, 20008: Updated title to remove apostrophe from “Americas”. I can’t believe I made the Useless Apostrophe Mistake. I’m totally humiliated.]
Bill Maher appeared on The Daily Show and provided an excellent thumbnail sketch of the progressive view of the Presidential election:
There you have it. For progressives, this election is a choice between, oh, say, ”Cousin, Cousine” and ”Deliverance”.
Does that mean I’m regressive if the contrast between a European nation and Sarah Palin instead makes me think along the lines of ”Last Tango in Paris” versus ”Mr. Smith Goes to Washington”?
Bill Maher appeared on The Daily Show and provided an excellent thumbnail sketch of the progressive view of the Presidential election:
I do think that America’s a country now, it is two Americas. There’s the progressive European nation that a lot of us live in or would like to live in and it’s being strangled by the Sarah Palins of the world. It can’t quite be born because this other stupid redneck nation won’t allow it.
There you have it. For progressives, this election is a choice between, oh, say, ”Cousin, Cousine” and ”Deliverance”.
Does that mean I’m regressive if the contrast between a European nation and Sarah Palin instead makes me think along the lines of ”Last Tango in Paris” versus ”Mr. Smith Goes to Washington”?
Wednesday, October 1, 2008
Major mistake
I just heard Major Garrett on Fox’s Hannity & Colmes ranting about how when Katie Couric asked Sarah Palin about John McCain’s regulatory efforts Palin didn’t bring up McCain’s attempts to rein in Fannie Mae and Freddie Mac. Wrong, Major. Here’s the exchange (emphasis mine):
Palin did not bring up McCain’s attempts to rein in Fan-Fred because Couric had already taken those off the table. Palin, did, however, emphasize that those attempts were “paramount”.
Sheesh. How bad are things getting when even Fox is misquoting Palin?
(I’d never read the whole exchange before - usually sources just report the initial Couric question and Palin answer and then the final Couric question and Palin answer. Palin sounds better now that I see the whole thing. I may have to go read the whole transcript.)
Couric: You've said, quote, "John McCain will reform the way Wall Street does business." Other than supporting stricter regulations of Fannie Mae and Freddie Mac two years ago, can you give us any more example of his leading the charge for more oversight?
Palin: I think that the example that you just cited, with his warnings two years ago about Fannie and Freddie - that, that's paramount. That's more than a heck of a lot of other senators and representatives did for us.
Couric: But he's been in Congress for 26 years. He's been chairman of the powerful Commerce Committee. And he has almost always sided with less regulation, not more.
Palin: He's also known as the maverick though, taking shots from his own party, and certainly taking shots from the other party. Trying to get people to understand what he's been talking about - the need to reform government.
Couric: But can you give me any other concrete examples? Because I know you've said Barack Obama is a lot of talk and no action. Can you give me any other examples in his 26 years of John McCain truly taking a stand on this?
Palin: I can give you examples of things that John McCain has done, that has shown his foresight, his pragmatism, and his leadership abilities. And that is what America needs today.
Couric: I'm just going to ask you one more time - not to belabor the point. Specific examples in his 26 years of pushing for more regulation.
Palin: I'll try to find you some and I'll bring them to you.
Palin did not bring up McCain’s attempts to rein in Fan-Fred because Couric had already taken those off the table. Palin, did, however, emphasize that those attempts were “paramount”.
Sheesh. How bad are things getting when even Fox is misquoting Palin?
(I’d never read the whole exchange before - usually sources just report the initial Couric question and Palin answer and then the final Couric question and Palin answer. Palin sounds better now that I see the whole thing. I may have to go read the whole transcript.)
Kicking the can down the road
A more accurate title would be “Kicking the cans down the road” because there are at least three reckonings the response to the financial crisis is postponing: taking losses on mortgage-based assets (MBA); paying for the bailout; and fixing the root of the problem.
Today the Securities and Exchange Commission ”clarified” the rules on mark-to-market accounting. The SEC hasn’t made new rules but has cleared the way for entities that hold the “illiquid” mortgage-based assets to use information other than market price to decide how much those assets are worth. The best explanation of why this is believed to be helpful in easing the crisis is probably found in Newt Gingrich’s Forbes article:
The basis for this argument is, of course, that the market value for the MBA don’t reflect their actual value; that is, the market for them will recover eventually so the MBA retain value. This is also the part of the Paulson Plan that is now being talked about more: the government will make back some or all of its $700 Billion when the market recovers; we might even make a profit. This contention on the part of those who support the Paulson Plan makes it difficult for them to argue against suspending mark-to-market accounting.
The problem is that we don’t know what value the MBA will ultimately have. As I discuss here, Mort Zuckerman believes the housing market will fall another 20% and insists we have no idea how much the MBA will be worth once the dust settles; Jeffrey Miron states flatly that the MBA may well be worthless. If the MBA do turn out to be worthless - or even worth substantially less than whatever value their holders assign them after abandoning mark-to-market accounting - we have simply postponed the point at which someone somewhere will actually have to suffer the pain of the losses they have incurred by investing in these assets.
That postponement may work to our benefit: if the losses are incurred over a long period of time as the assets mature or as a rolling average price gradually accounts for the market drop then the financial system may absorb the shock better. We simply need to remember that allowing financial institutions to go back to marking these assets to “make believe” doesn’t change the fact that they may be worth exactly what the market now says they are: nothing.
The second reckoning being put off is, of course, the cost of the bailout. If we spend $700 Billion to buy up toxic MBA and Zuckerman and Miron are right, we are not going to get back that money. It will add to the debt and that debt must be paid at some point by us, our children, and our children’s children. The Blue Dog’s “recoupment” provision and the provisions to give the government some kind of equity in the assisted firms are attempts to insure we get our money back even if Zuckerman and Miron are right. It will be interesting to see if they make it into the final bailout bill.
The third and most important reckoning is fixing what caused this problem. I believe the basic cause is simple: people bought houses they couldn’t afford. We can have lively arguments about why: CRA, speculation, greed. I suspect they all had a hand in it. Regardless of why this happened, there are two simple rules that would have prevented this meltdown and can prevent future ones:
1) No Adjustable Rate Mortgages
2) Lenders must require a 20% down payment and a reasonable income to mortgage payment ratio based on income tax returns
If the consensus is that people who cannot meet these requirements should still be able to buy homes then the government itself should act as the lender, thus keeping risky loans segregated from the financial system as a whole.
Part of the reason I prefer a Bottom-Up Bailout is that it is easier to effectively regulate the behavior of consumers seeking mortgages than it is to regulate the behavior of financial institutions making asset-buying decisions. Whether we use government money to help people who made stupid home-buying decisions or to help institutions that made stupid MBA-buying decisions, we are protecting those we help from the risks inherent in their decisions. That protection will encourage further imprudent risk-taking since the expectation will be that any later crisis will be addressed by the government. To avoid that “moral hazard” it will be necessary to regulate behavior to prevent such behavior in the future. It is far easier to regulate the behavior of mortgage-seekers (as with my two simple rules) than it is to regulate the behavior of institutions that pay whole departments of bright young employees to develop more and more incomprehensible vehicles and strategies.
Bail out the institutions that hold MBA and it is almost impossible to both restrict their idiotic behavior and allow their creativity free rein. Bail out the mortgage holders and it is very simple to restrict future mortgage-seeking behavior by simply outlawing the lending practices that got us into this mess.
As a last thought, this is why I hate the spate of articles that have sprung up arguing the American people simply don’t understand what’s a stake in the bailout or they wouldn’t have opposed it. Some writers seem to feel that Americans are willing to cause the whole economy to fail in order to “punish” fat cats on Wall Street. Perhaps. But I would argue that Americans may well realize that if we bail out the financial institutions that made bad decisions there is simply no way for us to make them believe we won’t continue to bail them out for future bad decisions and no good way for us to regulate them to prevent those future bad decisions. Maybe Americans are willing to take their medicine now rather than kicking that can down the road.
Today the Securities and Exchange Commission ”clarified” the rules on mark-to-market accounting. The SEC hasn’t made new rules but has cleared the way for entities that hold the “illiquid” mortgage-based assets to use information other than market price to decide how much those assets are worth. The best explanation of why this is believed to be helpful in easing the crisis is probably found in Newt Gingrich’s Forbes article:
Mark-to-market accounting (also known as "fair value" accounting) means that companies must value the assets on their balance sheets based on the latest market indicators of the price that those assets could be sold for immediately. Under such a rule, declining housing prices don't just reduce the value of defaulting mortgages. They reduce the value of all mortgages and all mortgage-related securities because the housing collateral protecting them is worth less.
Moreover, when a company in financial distress begins fire sales of its assets to raise capital to meet regulatory requirements, the market-bottom prices it sells out for become the new standard for the valuation of all similar securities held by other companies under mark-to-market. This has begun a downward death spiral for financial companies large and small.
The basis for this argument is, of course, that the market value for the MBA don’t reflect their actual value; that is, the market for them will recover eventually so the MBA retain value. This is also the part of the Paulson Plan that is now being talked about more: the government will make back some or all of its $700 Billion when the market recovers; we might even make a profit. This contention on the part of those who support the Paulson Plan makes it difficult for them to argue against suspending mark-to-market accounting.
The problem is that we don’t know what value the MBA will ultimately have. As I discuss here, Mort Zuckerman believes the housing market will fall another 20% and insists we have no idea how much the MBA will be worth once the dust settles; Jeffrey Miron states flatly that the MBA may well be worthless. If the MBA do turn out to be worthless - or even worth substantially less than whatever value their holders assign them after abandoning mark-to-market accounting - we have simply postponed the point at which someone somewhere will actually have to suffer the pain of the losses they have incurred by investing in these assets.
That postponement may work to our benefit: if the losses are incurred over a long period of time as the assets mature or as a rolling average price gradually accounts for the market drop then the financial system may absorb the shock better. We simply need to remember that allowing financial institutions to go back to marking these assets to “make believe” doesn’t change the fact that they may be worth exactly what the market now says they are: nothing.
The second reckoning being put off is, of course, the cost of the bailout. If we spend $700 Billion to buy up toxic MBA and Zuckerman and Miron are right, we are not going to get back that money. It will add to the debt and that debt must be paid at some point by us, our children, and our children’s children. The Blue Dog’s “recoupment” provision and the provisions to give the government some kind of equity in the assisted firms are attempts to insure we get our money back even if Zuckerman and Miron are right. It will be interesting to see if they make it into the final bailout bill.
The third and most important reckoning is fixing what caused this problem. I believe the basic cause is simple: people bought houses they couldn’t afford. We can have lively arguments about why: CRA, speculation, greed. I suspect they all had a hand in it. Regardless of why this happened, there are two simple rules that would have prevented this meltdown and can prevent future ones:
1) No Adjustable Rate Mortgages
2) Lenders must require a 20% down payment and a reasonable income to mortgage payment ratio based on income tax returns
If the consensus is that people who cannot meet these requirements should still be able to buy homes then the government itself should act as the lender, thus keeping risky loans segregated from the financial system as a whole.
Part of the reason I prefer a Bottom-Up Bailout is that it is easier to effectively regulate the behavior of consumers seeking mortgages than it is to regulate the behavior of financial institutions making asset-buying decisions. Whether we use government money to help people who made stupid home-buying decisions or to help institutions that made stupid MBA-buying decisions, we are protecting those we help from the risks inherent in their decisions. That protection will encourage further imprudent risk-taking since the expectation will be that any later crisis will be addressed by the government. To avoid that “moral hazard” it will be necessary to regulate behavior to prevent such behavior in the future. It is far easier to regulate the behavior of mortgage-seekers (as with my two simple rules) than it is to regulate the behavior of institutions that pay whole departments of bright young employees to develop more and more incomprehensible vehicles and strategies.
Bail out the institutions that hold MBA and it is almost impossible to both restrict their idiotic behavior and allow their creativity free rein. Bail out the mortgage holders and it is very simple to restrict future mortgage-seeking behavior by simply outlawing the lending practices that got us into this mess.
As a last thought, this is why I hate the spate of articles that have sprung up arguing the American people simply don’t understand what’s a stake in the bailout or they wouldn’t have opposed it. Some writers seem to feel that Americans are willing to cause the whole economy to fail in order to “punish” fat cats on Wall Street. Perhaps. But I would argue that Americans may well realize that if we bail out the financial institutions that made bad decisions there is simply no way for us to make them believe we won’t continue to bail them out for future bad decisions and no good way for us to regulate them to prevent those future bad decisions. Maybe Americans are willing to take their medicine now rather than kicking that can down the road.
Subscribe to:
Posts (Atom)
Posts
