Posts published in “Politics”

A few followup thoughts on the bailout, after discussion with friends:

• Why we're in this mess:
  One of my friends pointed out that the real problem was banks buying toxic debt and not being willing to sell it for pennies on the dollar; because they sold us a story that they're "too important to fail" we now have a "no banker left behind" bill.  He suggested that the money should go instead to augment the short-term commercial paper market.  Well, this is now happening.  Maybe this guy should be my financial advisor.  Another friend had a similar idea and said it reminded him of Hamilton's Bank of the United States, a 20-year experiment that was used to put the new country's fiscal system on the right track by reducing speculation and increasing private commercial investment.  So there is precedent for these experiments.


• The Fate of Libertarianism:
  The same friend was discussing this situation and said (in his perspective) that it was the death knell of the Libertarian party.  His friend said "try living without the FDA" and pointed out the current food crisis in China as an example; he then suggested that the same thing could be said of the financial markets - perhaps the argument might be "try saving without the FDIC", or "try investing without the Fed".  Maybe that could work, but you'll find plenty of libertarians who'll tell you we weren't doing pure libertarianism before (see the Community Reinvestment Act) and so it's pointless to blame libertarianism for this problem.  Nevertheless, the blame game is going around, and it's been difficult for me to get to the facts because so many people examining this situation are hopelessly partisan.  More in a bit.


• The Fate of Capitalism:
  Another group of friends were wondering about the fate of unrestrained capitalism in the face of this situation.  A fair number of Republicans agreed with them over the past few years, calling for increased regulation which didn't happen while Democrats were arguing for less regulation - an odd flip of their normal positions.  George Bush is being accused of being a "big government socialist" for the bailout by conservatives and liberals are calling for more regulation.  Another friend was wondering if this would lead to fundamental changes in the capitalist system, and, shortly thereafter, the U.S. government started buying shares in banks.  If successful, these shares will jump-start the flow of credit and, if the bailout is successful, will win for the taxpayers.  If unsuccessful, we will be in the Second Great Depression, and the loss of that $250B will be the least of our worries.

So where do I stand?  Right now everyone's too partisan to think clearly: the Republicans are blaming the Democrats, the Democrats are blaming the capitalists, the libertarians are blaming the government, the bankers are looking at their shoes, and no-one's trying to look at the many Americans we were encouraging to buy homes and who are now defaulting.   I don't know if everyone's so scared they're grabbing for their favorite bugaboos or whether, more cynically, they're trying to use the crisis to get their favorite policy change implemented - or perhaps both.

But what I do know is that the amount of the bailout - seven hundred billion dollars - is only around 5 percent of our current GDP.  At the "worst" point of the Great Depression, 1933, the GDP fell to about 50% of its pre-Depression levels.  So at worst, the bet Bernanke is making is 10% of the GDP we should expect to have if things go really south.  So ask yourself: is it worth it to take 5% of your income for a year --- roughly $2300 from each American --- to invest in a business upon which you depend for 50% of your income?  Of course, the question isn't that simple: what help is the $2300? what's the chance that the business will fail anyway? what's the chance you will get it back? and, really, what's the likelihood that the $2300 is going to cause your crazy uncle to do something stupid again?

So I think it is worth it as long as we do the following things with the bailout money:

• Make it accountable: We need to know where the money is going and why.


• Don't throw good money after bad:  If a business is going to fail anyway, don't prop it up.


• Put the money where it is needed:  Whether this is buying short-term commercial paper, propping up mortgages, buying in to central banks to give them liquidity, it should be something that really helps in a material way with our real problems.


• Don't give the money away:  The stakes we are buying in banks pay a hefty dividend.  It goes up if the banks don't pay us back.  All our other investments should have similar incentives for the taxpayer to be paid back.


• Don't get the government in the business of business:  The government encouraging banks to do things they ought not to was a key part of this mess; we don't want the government meddling in the running of these businesses because what government officials think that businesses "ought" to do often has little to do with reality of the market.


• Don't let business get away from its fiduciary duty:  Business leaders and individuals taking on more risk than they should was another part of this mess.  Part of the game of people running businesses as businesses without being exposed personally to the businesses losses is the fiduciary duty of the people running the business: they are responsible for being responsible with the money that they have been given.  Smart regulations should be put into place to discourage financial institutions from taking on the huge risks that they did in this crisis, without taking away their flexibility to do what they need to do to keep the market moving.

In short, if we carefully use this money responsibly, we may be able to blunt the impact of this downturn; if we're even more careful in how we invest it, as we appear to have done by investing in the major banks, the taxpayers may even come out ahead.  We're not out of the woods yet, but there is reason to be hopeful that the bailout can help if we hang on to our principles.

-the Centaur

So the bailout of the financial system passed this week.  And I breathed a sigh of relief, sort of, and wondered what I would have done if that was my decision to make.  I'm torn by two conflicting feelings: first, that we cannot afford to let the financial system collapse, and second, that we cannot afford to throw good money after bad.

Sometimes, of course, we have to let things die.  But the overall financial system is not one of them.  Financial instability is a vicious cycle: once the system becomes unstable, investors become afraid to invest money, making it hard for people and businesses to get money, causing more failures and instability.  Put another way, Main Street depends on the jobs provided by businesses that depend on Wall Street's ability to lend money.

As I understand it, currently many businesses large and small depend on short-term loans for everything from operating capital to pay for stock in their warehouses to emergency funds to pay for the roof busted in last month's storm.  They get this money from banks, who in turn get that money from you and me; they pay these loans back with interest, which the banks shave off as their cut before paying you and me our interest.

But banks right now are afraid to lend money, because so many banks, funds and businesses have recently collapsed.  On paper, the banks have enough assets to loan out, just the same way as the average American with a decent-priced home has enough assets to buy a Lamborghini.  However, most Americans can't buy a Lamborghini at the drop of a hat, even if they wanted to, because their wealth is tied up in longterm IRAs or CDs or in stocks which have dropped or homes with heavy mortgages.  SO on paper you have the money to spend on a midlife crisismobile, but in practice you don't.

 The technical term for this is illiquidity, which is just a fancy way of saying that have wealth on paper, but can't turn it into money without incurring terrible losses.  A lot of banks are in precisely this situation: they want to loan money to a potential new homeowner or to a businessman trying to repair his roof, but their money is all tied up in investments they can't move without losing big --- in this case, mortgage-backed securities.

These "mortgage backed securities" arose because over the past several years housing prices were going up and up, and the government encouraged banks to make loans to people who traditionally were at higher risk than normal.  These so-called subprime mortgages were packaged up into "investment vehicles" and "sold off"  --- essentially meaning the banks that made the loans sold the rights to the interest that the mortgages would make to other people.  That was a good deal while the economy was great because people were paying their mortgages or trading up to better homes.  Then the economy started to stall and the housing bubble burst ... and suddenly people aren't making those payments.

This led to a "liquidity crisis" which is just another big fancy word for "runs on the banks".  Perfectly good banks with great track records and billions of dollars on their books that hit a few rocky patches suddenly saw their money dry up in a number of weeks, leaving them with large short-term debts which in theory they could easily pay off ... except they couldn't move their mortage-backed securities.  One bank failed after the other and in the end banks got afraid to loan money to anyone.

So the point of the bailout: those mortgage backed securities are not actually worthless.  If the economy gets back on its feet (which, eventually, it almost certainly will) and home prices start to rise again (which, eventually, they almost certainly will), some huge percentage of those securities will pay off.  It's just a long waiting game, a game which banks can't play because they're constantly lending and spending, but which the government can play, because of its deeper pocketbooks and constant source of real income from taxpayers.   So the theory behind the bailout is, the government will buy those illiquid securities, allowing Wall Street to start lending money again, so business owners can stay in business, and Main Street can keep its jobs.

Which goes to my second concern, throwing good money after bad.  Our civilization has experienced Dark Ages.  Our country has experienced a Great Depression.  What if we go through ten or twenty years of economic depression, and most of those mortgage backed securities are essentially worthless?  That's over two thousand dollars out of the pocket of every taxpayer, another $700B on top of our $10T debt.  Or, worse, what if the problems in our economic system are more systemic, and other banks are about to fail for other reasons?  We might need that $700B for something else.

So, as I understand it, the bailout is needed.  But, as I understand it, the bailout is risky.  So what would I do if I was in charge?  Well, here are a few rough ideas:

• First, go before the American people, and explain in clear terms what we are doing.  Main Street's jobs depend on Wall Street's ability to lend money to businesses, but that's crippled right now because Wall Street tied up a lot of money in mortgages Main Street is having trouble repaying in this weak economy after the housing bubble burst.  If the government takes over those loans, banks can start lending money again to keep business doors open and paychecks flowing, ultimately paying off those loans so that the government (and the taxpayer) is paid off for its investment.


• Second, demand oversight and accountability.  This is seven hundred billion dollars we're talking about here.  That's a year and a half's worth of defense spending, or almost enough to pay for the fireworks at the opening ceremonies of the Beijing Olympics.  The original version of this plan gave massive powers to Treasury Secretary Paulson and made his actions immune to court challenge.  That's a non-starter --- we understand the need for swift action, but it should be open, transparent, and if necessary subject to legal challenges.


• Third, demand foresight and forebearance.  A necessary step in this process is to not just review the needs of the banks with mortgage backed securities, but to look at the health of the entire financial industry and to make sure there are no other trees that are rotted to the core and about to fall down.  If other big problems are discovered, Secretary Paulson should have the authority to delay or defer spending that money and should go back to Congress if need be to ensure he has the right to apply this money where needed.


• Fourth, think outside the box.  Could this money be applied in other ways?  Could we take $70B of the $700B and use it to help homeowners who face foreclosures?   I understand that homeowners taking on responsibilities they weren't prepared to handle helped cause this, but the banks are also to blame for lending the money.  If we make it possible for the homeowners to pay off the banks ... how does that hurt the banks? 

Some people have decried the culture of greed and called to make sure that none of this money goes into CEO's parachutes.  I empathize with that but ultimately don't understand it.  The problem here wasn't greed --- it was risk.  We want people to be "greedy" in the sense we want them to take actions that benefit themselves --- to make a profit, in short.  But in business you have what's called a "fiduciary duty" to make sound decisions for your shareholders.  Some of the people who are involved in this really fucked up --- be they homeowners who got too big for their britches or CEOs who chomped one too many expensive cigars.  But many other people played by the rules and then got caug ht by extraordinary circumstances.

Like a response to a hurricane, we need to come in and help the survivors without recriminations --- and then make sure that when it is time to rebuild we don't encourage people to put themselves at risk.

I'm not in the market to sell my home, but thanks to the site Zillow I have a rough gauge of how my home is doing on the market. In the first year that I owned my home, I have reason to believe it appreciated between 1% and 2% of its value. More recently ... that's started to change for the worst.

Two months ago, according to Zillow's "zestimate", it had dropped 2% of its value.

Two days ago, it had dropped 10% of its value.

Today, it has dropped an additional 1% of its value.

Fun fun fun! I see "not moving anytime soon" in my immediate (and not-so-immediate) future.

-the Centaur

It's time for a change. This kind of thing cannot go on:

Mayor Ray Nagin urged people to cross a bridge leading to the dry lands of the city's suburban west bank ... [but] evacuees who tried that route ... were met by police with shotguns who refused to allow them into Gretna, a nearby town on the other side.

We're not talking about refugees from a faraway land, desperately trying to reach the land of opportunity on leaky boats. Never mind why were we trying to stop them; these are our people. And our government has locked them in a box without food and water, refused to let them leave, and refused to let anyone deliver help.

It's time for a change. It's time to throw the bums out. And I don't mean the Republicans - I mean anyone in our current government who thinks that their high position means that they're "in charge" and they get to "make the decisions".

Well, you don't. We do not live in a dictatorship; we live in a democracy. You are not the owner of the organizations you control: you are their stewards. You are accountable to the people and the situations we live in as they're actuallly happening, NOT to some idealized image of what world you'd like us to live in. We have to break the hold that "one king rule" thinking has on our publically accountable institutions.

DO as you wish with your own stuff. If this was your house, or your personal business, or your wardrobe, you'd be well within your rights to make whatever stupid decision that you wanted, and to deal with the tragedy that resulted.

But government is not personal business; heck, even business isn't business: the leader of a corporation isn't an "owner in charge" but a hired hand beholden to the shareholder's fiduciary interests. Our businesses all too often forget this, imagining that managers need only pay lip service to their duty; the leaders of our governments cannot be allowed to forget this, as lip service is not clearly not cutting it.

Leaders! Only through some magical thinking could you imagine that it's acceptable for police could turn away refugees from a disaster, or that somehow providing relief services would make things worse. And we've had quite enough of magical thinking, thank you.

We've loaned you your power.

And now we're going to take it back.

-the Centaur

So it's confirmed: the Interdictor, a blogger slogging it out live in New Orleans under end-of-the-world conditions, is actually superhuman:

"On another note: I've just been told that we're being monitored in Iraq! To all the troops there, from one soldier to another, we're hanging tough here and you hang tough too. No matter what you're hearing, we love you guys and want you to know that we know how hard you've got it. Stay strong! "

That's right ... with corpses in the streets, dodging gunfire, keeping his blog running on diesel fuel, the Interdictor takes time to shout out to our soldiers in Iraq to let them know "how hard they've got it." And you know what? The soldiers in Iraq sure do have it hard ... but it takes a hell of a human to stand up and say so while his own world has collapsed into armageddon.

More power to you, man.
-Anthony