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Monday, December 29, 2008

Just kicking an idea out there...
Posted by Jill | 5:12 AM
Mr. Brilliant and I were talking over the weekend about the $700 billion bank bailout, and how every day it looks more and more like this "bank rescue plan" to "save the economy and loosen the credit markets" was "Iran has WMD all over again" -- a lie told by the Bush Administration to get what it wants, in this case boatloads of Federal taxpayer cash stuffed into the pockets of "the haves and the have mores." And if that sounds a bit too Zagat Guide for you, I'll dispense with the quotation marks now.

But the fact remains that $350,000,000,000 unaccountable dollars later, credit markets are as tight as ever, 2.5 million mortgages remain in trouble, we've just finished the worst retail holiday season in a quarter century, and nothing seems to be working.

So Mr. Brilliant opined the following: Why are we bailing out banks and other financial institutions that are little more than brick and mortar Bernie Madoffs? If the problem originates with housing, why not address it with housing? Assuming that fairness seems to be off the table, and that people who either have paid off their mortgages or didn't buy more house than they could afford or didn't pull equity out of their houses for luxury kitchens and Cadillac Escalades and vacations in St. Barths are going to be screwed anyway, why not at least use that money to bail out mortgagees -- consumers -- instead of banks? Restructure every single troubled mortgage in the country to a level that the homeowner can pay for, and have the loans insured by the Federal government. If that means lowering principal, then lower the principal balance to current market value. If that means no-cost refinancing to a fixed rate that means the same payment as the homeowner is currently making on the subprime, or Alt-A, or interest-only, or adjustable rate mortgage, then so be it. If in fact mortgages are the problem, then why not address it at the mortgage level?

Helping dig homeowners, even those whose eyes were bigger than their wallets, out of their own mistakes may be a tough pill for those of us weren't irresponsible to swallow. But while I might find it hard to sympathize with someone for whom a "POS Cape" wasn't good enough but had to have a McMansion with a private bathroom for each bedroom, a home theatre, and a Subzero range, I have more for people who simply wanted what most Americans want -- to have a place to call their own.

When we bought our house, I wanted a house the way most women want babies. We had a great rental deal with our small 1-bedroom apartment. Our landlord was great, he hadn't raised our rent in eight years, and while the apartment was small, everything worked. But our landlord was ill and failing rapidly, we knew we wouldn't get a deal like that again, and we had two cats and at the age of 41, I felt I shouldn't have to go begging "Please Mr. Landlord, I'll be reeeeaaaallll good and take care of it. Can I PLEEEEZZZZZ keep my kitties?" -- like a four-year-old begging his parents for a kitten. So I understand house hunger. Yes, when it turned out that we couldn't afford what we wanted, we waited a year. But there's a difference between having to wait a year and being completely unable to ever pull together $60,000 cash at once. We put down less than 10%, paid the private mortgage insurance, and two years later were able to drop it because of price appreciation. That's what ought to be happening in a normal market.

Bailing out the banks is just changing numbers on a balance sheet. Bank losses are still losses, they just no longer appear on the balance sheet. Perhaps someone with a background in economics can explain if this won't work (maybe that Big Blue Guy can put his expertise to work), but it seems to me that if we have to spend this money, digging individuals out of even their own mistakes seems a far more effective way of doing it.

On December 15, Joshua Holland at Alternet described what the banks are actually doing with the bailout money:

So far, much of Washington’s ad hoc, ham-fisted response to the economic crisis has been based on the dictum that the financial institutions must be prevented from taking their losses.

That should come as no surprise. Big finance’s lobbyists have been all over the "bailout" (it should be bailouts, plural) from the very start, Wall Street pumped piles of cash into the elections — AIG, recipient of tens of billions in taxpayer largesse, ponied up $750,000 for both the Democratic and Republican conventions — and the whole thing’s been designed by "free-market" ideologues who came to Washington directly from Wall Street.

But the hard reality is that the institutions that created this mess have to take their losses — no doubt huge losses in many cases — if we're to have any chance of avoiding a deep recession that drags on for years.

Some will be wiped out in the process, but propping up firms that have massive -- and not entirely known -- quantities of so-called toxic securities on their books only delays the inevitable day of reckoning.

The rot has spread far beyond real estate, but that offers a nice concrete example of the danger of keeping Big Finance from taking its lumps. So far, their lobbyists have fought off attempts to force them to renegotiate mortgages, especially plans that call for writing down the value of the loans to reflect the post-bubble market. This is understandable. But the reality is that there are a lot of homes "under water" — that is, worth less than the value of their mortgages — and a lot of mortgages with "teaser rates" are about to adjust upward. Foreclosures only drive down the value of the whole market further -- who wants to pay today's fair value when two other houses on the same street are headed toward foreclosure and might be had for a song in a few months?

The justification for creating the big bailout honeypot for Wall Street was that banks are hoarding money, causing a "credit crunch" that's killing the whole economy. But that’s only true to a point; while financial institutions are holding cash, including, reportedly, those billions they gouged from the taxpayers, they appear to be doing so to protect their balance sheets, and in some cases, to fund mergers. The bigger problem -- one the bailout is hardly touching -- is that trillions in home equity and retirement accounts have vanished, and there aren’t a lot of people — or firms — looking to borrow money to buy stuff or expand right now.



And today he states quite baldly that the "credit crunch" requiring huge quantities of cash shoveled into the pockets of bank executives may very well be just more self-serving Bush fiefdom horsepuckey:

That the American people don't have the appetite to go deeper into debt than they already are in order to make new purchases is hard to dispute. In November, consumer prices across the board fell at a record rate for the second month in a row. And even with mortgage rates plummeting, so many homeowners are "underwater" -- owing more on their homes than they're worth -- that they're unable to refinance because the equity isn't there. Paul Schuster, a vice president at Marketplace Home Mortgage, told the St. Paul Pioneer Press, "What I'm really concerned about is the job picture ... If (people) don't feel good about their jobs, rates aren't going to matter."

The National Federal of Independent Business' November survey of small-business owners found no evidence of a credit crunch to date, concluding that if "credit is going untapped, it's largely because company operators are not choosing to pursue the credit. It's not that companies can't get the extra money, it's that they don't want or need it because of the broader slowdown in economic activity."

The credit crunch narrative -- and the justification for creating Paulson's $700 billion TARP honeypot -- is built on three related assertions: 1) banks, fearing that they'll be unable to meet their own financial obligations, aren't lending money to one another; 2) they're also not lending to the public at large -- neither to firms nor individuals; and 3) businesses are further unable to raise money through ordinary channels because investors aren't eager to buy up corporate debt, including commercial paper issued by companies with decent balance sheets.



[snip]

Economists at the Federal Reserve Bank of Minnesota's research department -- V.V. Chari and Patrick Kehoe of the University of Minnesota, and Northwestern University's Lawrence Christiano -- crunched the Fed's numbers in an examination of these bits of conventional wisdom (PDF), and concluded that all three claims are myths.

The researchers found that "interbank lending is healthy" and "bank credit has not declined during the financial crisis"; that they've seen "no evidence that the financial crisis has affected lending to non-financial businesses" and that "while commercial paper issued by financial institutions has declined, commercial paper issued by non-financial institutions is essentially unchanged during the financial crisis." The researchers called on lawmakers to "articulate the precise nature of the market failure they see, [and] to present hard evidence that differentiates their view of the data from other views."

That finding was backed up by a study issued by Celent Financial Services, a consulting firm, again using the Treasury Department's own data. According to a story on the report by Reuters, Celent's researchers concluded that the "data actually suggest world credit markets are functioning remarkably well." Rather than a widespread banking problem, Celent found that the rot was limited to "a few big, vocal banks and industries such as car manufacturing, which would be in difficulty anyway."



So...if the reality we're facing is that this huge expenditure of taxpayer money is inevitable anyway, wouldn't it make more sense to spend it doing something that might actually help the people that Washington is SUPPOSED to serve?

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