Cutting Through The Crap

Tuesday, September 30, 2008

Bailout





One of the few times I cried with my wife (except at some movies, of course: I'm a sensitive guy) was the day I flew off to Vietnam. It was the helplessness of being made to do something really huge, really unwanted, potentially fatal to me, or our marriage, or my career. That's what it was. The helplessness. (In the end, ironically, I was glad I went.)

I haven't shed tears (yet) but this bailout thing feels a little bit the same. Despite being pretty conservative (financially) I've lost a significant amount of my savings, on which I'm now entirely dependent. The cost of the bailout (or of a non-bailout) is not yet measurable, but it seems certain that it'll impact us all, in very bad ways. I don't much doubt it'd be worse if nothing were done. Still: this is all a result of failings and screwups and politics and ideas, philosophies and greed, of which I was not a part. Other people have done this to me, and to all of us. And what's really galling is that it's the very people whose corruption and stupidity got us to this point, who are the recipients of our largess. They screwed up; they're getting bailed out; it's screwing us all; yet there may be no choice but to do it. That's helplessness, and way beyond frustration. (And just to show I'm more open-minded than some might think, I just about choked when I heard Nancy Pelosi say "We sent a message to Wall Street - the party is over.") (Scene in my head: Parents come home early, find their kids and about fifty others partying, drinking, shooting up, screwing on the couches. "Okay kids, party's over," they say, handing out booze, money, drugs, and condoms. For sure, condoms...)

I saw Joe Stiglitz (I knew him a little in college, where we were together) on TV Sunday, saying the only place champagne corks were popping over this thing was on Wall Street. A sucker was found, willing to buy up all their "toxic" debt. The sucker, he said, is us. No bubbly here. But there, there is. (Joe also said action was necessary.)

When John McCain "suspended" his campaign, he first met with Congressional Republicans who were balking. Unable to admit their complicity in the very philosophy that led to the mess, they couldn't accept the deal. To do so would be actually to accept responsibility. Reports suggest McCain, who had no proposal of his own, only served to stir it up further. It's clear he didn't solve anything because, well, it didn't happen.

For his entire career, John McCain has been a self-described deregulator. Proud of it. Mentioning it whenever he could (whenever he wasn't mentioning, y'know, the thing he doesn't like to mention). His advisers are entirely of that cloth, writers of the un-rules in fact. How can people accept him as a possible savior of the situation with this record? Only days earlier, he'd said "the fundamentals of the economy are strong." (And then, straight-talker that he is, he claimed he'd meant the workers of this country are strong. Gimme a friggin' break! If that's what he meant, why didn't he say it? Especially when he'd, Nero-like, phiddled the phrase umpteen times before. Even George Bush hadn't said it THAT recently. Straight talkin' country-firster, indeed.)

The whole thing sucks. I admire those on both sides who voted for the bill, because it's clear the vast majority of the electorate is against it. I don't know who's right. But I know that taking such a vote can only be based on the conclusion that the result of inaction is worse; and a willingness to lay their careers on the line. And THAT, my friends, is country first.

So here we are, where we are. I'm mostly convinced the bailout is necessary (it'd be easier if the people who testify to the direness weren't the same ones lying about how everything was fine a few months ago, and if it weren't so reminiscent.) But what's curiously missing -- and it's nearly as frustrating as the plan itself -- is the slightest admission on the part of the conservatives who led the fight against regulations that they have anything for which to apologize, that the philosophy they've been touting all these years has come a cropper.

No tears.

Makes me want to scream.

[Addendum: here's a link to the complete text of an Obama speech this morning. As we've come to expect, it's thoughtful, comprehensive, and clear. I'd call it "presidential." The contrast is stark.]

13 comments:

MargaretWV said...

But haven't you heard? Conservatives are blaming the Community Reinvestment Act of 1977 for the subprime mortgage crisis. That's right: Democrats and low-income minorities did it.

http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

Sid Schwab said...

Oh yes, I'm well aware. And of the information that suggests the loans made under CRA were actually safer.

Timmyson said...

I'm curious, you say, "I admire those on both sides who voted for the bill, because it's clear the vast majority of the electorate is against it."

Do you believe that the electorate just doesn't properly understand? In that case I suppose it falls to their congresspeople to make a more educated decision.

However, perhaps they feel that while it may hurt them, it's the just desserts of financial mismanagement, that only if the consequences are serious and painful will policy-makers (and voters) realize that government has a vital role to play in the regulation of the free market.

Prima facie, it seems like a bad idea for congresspeople to go against their constituents' wishes. Why do you admire them?

Sid Schwab said...

timmyson: it's a fair question, and maybe a little hard to explain. First, I don't agree that congresspeople shouldn't ever go against the wishes of their constituents. Theoretically, it's their job to learn about issues in depth not available to "average" voters. They're elected not to be conduits, but to be leaders. Otherwise, we'd just have purely direct democracy, in which every issue would be voted on by everyone. Perhaps it'd work. I doubt it, given the fact that voters seem to decide based on who they'd like to have a beer with.

As to the bailout: I've said I don't understand the details of the situation well enough to know with certainty. I happen to be persuaded, mostly, that the consequences of no plan are worse than letting the chips fall. My persuasion is based, in part, on the opinions of people I respect: Paul Krugman, Joe Stiglitz, Barney Frank, Chris Dodd. Given the fact that the situation is enormously complex, and given the fact that most of "the people" seem to be reacting on instinct, I think it's brave of leaders to buck the tide and do what they think is right. It's only when the times are really tough, and there's a need to make really unpopular decisions, that you find actual leaders. McCain has been all over the map, taking credit, placing blame, hedging bets. Taking one position, then another. It's not leadership. It's politics at its most craven and ineffective. The ones who are working for a solution, and who voted for the bailout (as I said, rightly or wrongly) have taken the position that it's what's best despite reaction against it. In doing so, they're risking their careers. I think that's brave. Whether it's right remains to be seen.

Sid Schwab said...

P.S: the bulk of the Republicans who balked, according to their own statements, are NOT doing it to make it clear that regulation is needed. The exact opposite, in fact: they're doing it on "Republican" principles of "free market" and "lower taxes." Insisting, in other words, on riding the sinking ship down to the bottom, unwilling to admit that those principles are what got us here. That's not leadership: it's pig-headed insistence that nothing has been wrong with their beliefs.

Health Train Express said...

At the start of it all I was very pro McCain. I wanted to believe him. The alternative of Obama is not pleasant to my way of thought as I also lean toward being a Libertarian, and coming from an east coast Jewish background I have always been fairly liberal. In today's world defining oneself as liberal or conservative means making changes or not making changes. In terms of the bailout we are damned if we do and perhaps a little less damned if we don't. It's about like being a little bit pregnant...The people like you and me are going to be hurt either way...credit will eventually come back...people will have to save to buy things...like new suv's every year,, boats, second homes. Some of those folks may need to sell their second or third homes in the Hamptons, Palm Springs, etc.
Specific areas, such as school loans, small business loans, and even large business loans should be addressed individually. Why bail out the large leveraged markets? Our children and grandchildren will be the ones really paying for the meltdown.

Sid Schwab said...

HTE: I agree. I've been trying to find the answer to this: why not restore liquidity by providing money directly for loans, rather than by propping up those who screwed up? I haven't been able to find a good response, and I'm ill-equipped to figure it out myself.

Baysage said...

If you haven't already, you need to read Greg Greenwald at Salon.com for the most cogent arguments against this Bush bailout bill, although I'm sure you've steeped yourself in all the arguments. Why are so many people succumbing to the notion that passing this rotten piece of dung is better than being deliberate and looking a host of alternatives? This Bush-Paulson solution is being crammed down the throat of Congress with a haste that's unseemly at the very best and insane at the worst. The sky is not falling. Bush and company just want us to believe it is. It's the tactic they've used since the very beginning. Maybe we're finally wising up.

Timmyson said...

Regarding bailout philosophy:
I can somewhat understand the point-of-view of staunch free-marketeers. The market will eventually correct itself, and make mistakes, and correct itself again. Any government involvement at any stage impinges upon the freedom of the market which has all sorts of little (individually insignificant) costs that are hard to notice or measure (think of how anti-porn legislation harms free speech, or border-security harms free trade). Introducing government involvement may lead to it manipulating the market for non-regulatory ends (see Income Trust fiasco here in Canada where the government threatened to change taxation, and government insiders allegedly exploited the volatility it generated).

I understand but to not agree with this principle because I think that the goods are worth the harms, but I understand the fear of government, and every time a new scanadal breaks, I'm tempted to go really-free-market. However, ultimately, I think governmental watchdog agencies (which failed, in this instance) generally do a much better job than private ones (like auditing companies that theoretically catch this sort of thing and report it to shareholders).

Regarding bailout at the top rather than the bottom:
I see the problem as a practicality of fairly subsidizing from the bottom.

How would a bailout at the bottom be provided? Governmentally undoing all mortgage defaults over a time period means spending a lot of money on people who would have defaulted anyway, and there's always a proportion. Further, it's a perverse incentive, rewarding people who "can't pay" rather than people who just barely make it.

Every property has a different value, and the values are constantly in flux (at least they are in Canada, I'm assuming that property values for tax purposes are re-evaluated on a regular basis and thus property value to mortgage amount owing is variable in the US too?) so providing a government subsidy (even proportional to property values) are going to be massively difficult to calculate. There was also something going on with (Federal protectionist mucking with) softwood lumber imports from Canada that was skewing new home construction costs and valuations, I think.

So there's a huge difficulty of creating a method that's even marginally fair. I think the motivation for starting at the top is this: Banks are calling in their debts because they're low on cash (for whosever fault it was), so if they weren't low on cash, then they wouldn't be foreclosing on people's mortgages and there would be no problem. Then, they try to implement some sort of gimme-back system so that the guys at the top don't benefit too much.

So this solution seems simpler (and thus cheaper and easier to properly regulate) but founded on more question marks, vs a solution that is certainly more complex (and to an unknown degree more expensive and more prone to exploitation) and requires even more of a philosophy shift in government's direct role in the market, but may result in greater payoffs. How you assess the magnitude of those pros and cons depends to a great degree on your political stripe.

Sid Schwab said...

baysage: I'm inclined to think you're right about the need for deliberation. I'm concerned (because others are) about the lockdown in credit which, it seems, is really here and now. But, as the video to which I linked (from the Daily Show) suggests, the fact that Bush is for the immediate bailout, and the similarities to his immediacy in Iraq, are cause for deep concern.

timmyson: thanks for a cogent and helpful response. It makes sense.

I liked what Obama said this morning, to which I linked in an addendum to this post. And I really meant it when I said there's a deep sense of helplessness: both in terms of the crisis (or not) itself, and in the need to rely so heavily on the decisions of others without being able really to know.

John Baldwin said...

It is real easy to blame Bush and Wall Street. It's fun and makes people feel vindicated.
The problem, however, started at the little metal desk at Countrywide, and Your City Mortgage Broker, Inc., where mortgage lenders, in hand with home builders, termite inspector, appraisers and local bankers sold people mortgages two and three years ago with no income documentation, no principle, interest only at a low rate (to jump in two years with principle too),no concept of what taxes are going to be on a $300,000 home, no concept that the mortgage got bigger as the months went by as principle was added, and no clue as to whether both husband and wife would maintain both their jobs in order to keep the house.
Multiply that by 500,000 to 1 million, (Fannie did 51 million mortgages in last ten years) then bundle these Countrywide, WAMU and Wachovia mortgages with some good ones and sell them to Fannie Mae and Freddy Mac. Toxic paper.

Then the housing bubble burst and people lived in homes worth LESS than the mortgage, and could not make the payments. Divorce, job layoffs and taxes enter the scene. Bingo: delinquency and foreclosure and the 300,000 dollar house is unsellable at $175,000, but the mortgage is $360,000 because the owners did a re-fi and took $20,000for a car and cruise and the unpaid principle had keep adding up.
This arose because of greed and avarice on on sides, right up to the highest levels of government. The Glass-Steagall Act of 1933, which would have prevented some of this, was repealed in the Clinton administration. None other than Jamie Gorelick, Deputy Attorney General of the United States along with Janet Reno, Attorney General set this stage by warning banks that "red-lining" the practice of due diligence in investigating proposed borrowers be stopped, and that all efforts be made to get the low income people into "owned" homes. The threat of Justice Department investigation was made quite clear, and so the loans went out, regardless of ability to qualify. Of interest is the incredibly low interest $900,000 loan to Ms. Gorelick for her home, from Countrywide while she was on the Board of Fannie Mae.
It would seem that the House Finance Committee during the last four years was chaired by the incomparable Barney Frank, and during this time nothing was done, despite seven specific references to the dangers of Fannie Mae loans by President Bush and Ben Bernanke, among others.
Yes, I respect Dr. Schwab and his bloggers tremendously but sometimes the truth is that a whole lot of people, including stupid and greedy home-buyers and many, many politicians are part of the mix. But it's easier to demonize "Wall Street" because class envy is in, big time.
Know what? Those folks looking out the window at the "Forclosure" sign were just RENTING. Nothing down, nothing lost. Time to walk away. Didn't have time to save for a down payment like we used to do, and anyway, none was needed.
And you, you Americans who already own Yellowstone, The Grand Canyon and the Statue of Liberty, also own their home.
But it is so much easier to blame your favorites. After all, it is an election year.
And not one of you bloggers or the blogger in chief really UNDERSTAND this bill or where the heck the $$$ is going or to whom, but you are not alone, the folks voting FOR and AGAINST it don't either. Nor, honestly, do I.
Enjoy your new homes!

Sid Schwab said...

Dr Baldwin: each side is happily blaming the other. In the case of McCain, he's blaming Obama while saying it's no time to blame. When prematurely claiming credit for the bailout, before it failed, he lambasted Democrats and Obama and patted himself on the back. When it failed, he immediately said it was because Obama and the Dems had politicized it.

You failed to note that the main drivers of the repeal of the Glass-Steagal act were Phil Gram, McCain's main economic advisor, and Alan Greenspan, whose book McCain claims to have read. Why Clinton bought in, I can't say. But he was no flaming liberal, economically.

Clearly, however, you're right that mortgages were allowed to run wild (Obama spoke out about it in March); the packaging and reselling thereof (including to overseas banks), in ways I in no way claim to understand, is evidently a significant part of the house of cards as well.

I've never pretended to understand much of this; but I've said I'm persuaded that something must be done. What that something is, I must leave to others. Which is part of the problem.

MargaretWV said...

Phil Gramm also gets the "credit" for the Commodities Futures Modernization Act of 2000 which specifically banned regulation of credit default swaps.

I like this article from Forbes' Investopedia, "The Fuel That Fed the Subprime Mortgage Meltdown."
http://www.investopedia.com/articles/07/subprime-overview.asp?Page=1

The fuel (or at least the gasoline thrown on the already-blazing fire) was the mortgage-backed securities market.

(As if you need yet another thing to read on this mess.)