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September 25, 2008

Let’s not always see the same hands
Posted by Avram Grumer at 02:46 PM *

Via Nick Mamatas, I see that Forbes has given us a bit of background about that big bad check the government is trying to get us to cash:

“The secretary and the administration need to know that what they have sent to us is not acceptable,” says Committee Chairman Chris Dodd, D-Conn. The committee’s top Republican, Alabama Sen. Richard Shelby, says he’s concerned about its cost and whether it will even work.

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

I guess we should be relieved that they didn’t consult any mathematicians or physicists for advice about really large numbers.

Comments on Let’s not always see the same hands:
#1 ::: Michael Walsh ::: (view all by) ::: September 25, 2008, 03:13 PM:

Well, that's certainly "special" ....

#2 ::: Leah Miller ::: (view all by) ::: September 25, 2008, 03:15 PM:

Oh Dodd, how I love you. It also occurred to me that Dodd is probably one of the very few people in Washington who could have made a statement about having to suspend his campaign briefly to address this issue without it being complete bullshit.

I'm a bit torn about the fact that he didn't go anywhere in the presidential race. On the one hand, he keeps impressing me. On the other, we obviously need him HERE, now, and relatively free of muck.

#3 ::: Stefan Jones ::: (view all by) ::: September 25, 2008, 03:18 PM:

Has everyone written to their representative and senators yet?

My latest demand:

All private and corporate jets and yachts associated with bailed-up banks must be renamed "Your Tax Dollars At Work."

#4 ::: Fragano Ledgister ::: (view all by) ::: September 25, 2008, 03:22 PM:

All art owned by the executives of banks taken over by the feds should immediately be handed over to publicly owned &/or supported museums.

Got a Picasso in your bedroom? It had better be hanging in MOMA or at the Art Institute or the High.

#6 ::: Doctor Science ::: (view all by) ::: September 25, 2008, 03:32 PM:

That statement was what tipped my reaction over the line from train-wreck-of-horror to train-wreck-of-farce. I mean, I had been calling it the And A Pony! Plan, but *I* thought I was kidding.

My husband (the Flaming Moderate) points out that presumably Paulson et al. intended this to be slapping Wall Street with a really big trout to snap them out of their funk. But it's kind of amazing that it never occured to them that the fishmongers were going to get kind of upset.

#7 ::: Josh Jasper ::: (view all by) ::: September 25, 2008, 03:35 PM:

This is all so Doctor Evil.

#8 ::: Tlönista ::: (view all by) ::: September 25, 2008, 03:54 PM:

Josh Jasper, that was all I could think of, too. And when I read about McCain I hear "Brave Sir Robin", and when I read about Palin I hear Londo saying, "Just don't give away the homeworld." The election is much more palatable in pop culture sound bites.

#9 ::: kouredios ::: (view all by) ::: September 25, 2008, 03:59 PM:

Alan Braggins @5: My husband is a CFA, and a huge fan of Bill Gross. He had just been saying to a colleague yesterday that Bill Gross would be a great person to ask to manage the bailout (since he thinks there's a way to do it and still increase the funds) when apparently Gross volunteered to do it without a fee.

#10 ::: Lori Coulson ::: (view all by) ::: September 25, 2008, 04:01 PM:

I keep hearing Llando Calrissian:

"This deal keeps getting worse all the time..."

#11 ::: Nangleator ::: (view all by) ::: September 25, 2008, 04:04 PM:

I keep hearing Kosh say "The avalanche has already started. It is too late for the pebbles to vote."

#12 ::: John Stanning ::: (view all by) ::: September 25, 2008, 04:07 PM:

Two things I like about this episode.

(1) McCain trying to switch (again, the first time was a few hurricanes ago) from being a Republican to being an American. It's plain that he's unable to be be a Republican and an American at the same time - he seems to have to make a major mental effort to work for the good of his country instead of for his party and his friends.

(2) Paulson is quoted as demanding dictatorial power to spend $700 billion on whatever he likes, without responsibility: "Decisions by the Secretary pursuant to this Act are non-reviewable and may not be reviewed by any court of law or any administrative agency." As somone said, "Robert Mugabe, eat your heart out."

#13 ::: John L ::: (view all by) ::: September 25, 2008, 04:09 PM:

So, from the early reports, it appears that Paulson won't have an unlimited debit card to go out and spend like a sailor on shore leave, he's going to have someone looking over his shoulder, and CEO's will have some limit on their reward for panicking Congress into giving them yet more of our money.

Is that it? Will that $700 billion still be a revolving credit limit? Will car loans, student loans and credit card loans (none which have any appreciable future worth) still be included in the mix?

Usually when I get screwed this hard, I'd at least want a dinner out of it. It looks like I get to pay for the dinner this time, though.

#14 ::: Matt Austern ::: (view all by) ::: September 25, 2008, 04:09 PM:

The numbers on that page you link to are piddlingly small! It's not physicists that you want to consult if you want to learn about really big numbers, but theoretical computer scientists or likeminded mathematicians. Some places to start are Ackerman's function, or Knuth's arrow notation.

But yes, I suppose I should be grateful that our fine friends in the Bush administration haven't heard of such things.

#15 ::: Rozasharn ::: (view all by) ::: September 25, 2008, 05:13 PM:

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

That statement crystallized things for me: this is the last stage of a deliberate scam. They're making one last attempt to carry off as much as they can of our money.

#16 ::: Rozasharn ::: (view all by) ::: September 25, 2008, 05:15 PM:

The trouble with the Republicans currently in power is that they KEEP making unfixable messes.

I want to cry.

#17 ::: Rosa ::: (view all by) ::: September 25, 2008, 05:18 PM:

#3 Has everyone written to their representative and senators yet?

I did! I did! I think, with the moderate one, it may have an effect.

Yahoo news says the deal is done, except for the lame duck signature, and it includes an equity stake and the CEO pay cap. But more details are not available.

Bush went for the pay cap, since it is symbolic instead of pragmatic, but I was worried that demanding equity for the bailout money would seem too Swedish.

#18 ::: Constance ::: (view all by) ::: September 25, 2008, 05:35 PM:

Oh, this is rich.

da mav'rik looks more a fool all the time, but there are rethugz gathering around to help him out, so he doesn't have to debate, though the bailout deal was done WITHOUT HIM.

You can't fool Barney Frank.

Whether or no the deal was real, it still seems way too fast to dispose of 700 billion -- after which, we are told another 500 billion must be handed over.

Love, c.

#19 ::: dolloch ::: (view all by) ::: September 25, 2008, 05:44 PM:

I'm still wrapping my head around the actual details of the thing (finance was never my strong suit), but Sinfest has a particularly amusing take on it.

#20 ::: A.R.Yngve ::: (view all by) ::: September 25, 2008, 06:04 PM:

"Bush went for the pay cap, since it is symbolic instead of pragmatic, but I was worried that demanding equity for the bailout money would seem too Swedish."

If the Swedish government tried to pull off a stunt like this bailout deal, it'd be laughed out of the country. Swedes are very touchy about the government fooling around with the taxpayers' hard-earned money.

"Ja, to save the country you must give one man over 700 billion kronas of your money to spend as he sees fit -- and you are not allowed to find out what exactly he does with all that money of yours!"

But what would *Nurglon* do...?
--------------------------------
Sean Inannity: Do you support the bailout plan and giving extraordinary powers to the Treasury?

Nurglon: NO. ALL POWER SHALL BE MINE.

S: And how do you propose solving the financial crisis?

N: THE DOLLAR SHALL BE REPLACED WITH A NEW CURRENCY, THE VALUE OF WHICH IS SET BY AN ABSOLUTE STANDARD.

S: And what standard is that?

N: BLOOD.
-----------------

#21 ::: P J Evans ::: (view all by) ::: September 25, 2008, 06:22 PM:

Well, no bailout tonight. The various parties are not agreeing on stuff.

Dodd says that some of the Republicans came in, after a lot of stuff was more-or-less agreed upon, and proposed their own bill, which of course means that they have to run it through again. (Probably Newtie's let's-deregulate-some-more idea.)

#23 ::: Lee ::: (view all by) ::: September 25, 2008, 06:31 PM:

Hee! Avram, the penny just dropped about your post title. New Math, indeed!

Nangleator, #11: And of course every snowflake in an avalanche pleads "Not Guilty"...

There's what looks like a pretty decent analysis of why they picked the $700B figure on DailyKos, here. It's down near the bottom of the article.

In summary: The Federal Reserve Bank is about to go glub from its own exposure in these "securities", too -- and $700B just about covers the amount of the Fed's securities-based assets. Coincidence? Somehow I doubt it. As icing, the Fed is run by the selfsame people who are at the heads of all these other failing institutions.

#24 ::: albatross ::: (view all by) ::: September 25, 2008, 06:42 PM:

Rozasharn #15:

Wow. This story just gets better and better.

This would all be a hell of a lot more entertaining if it were happening to someone else's country. Though I suppose if the financial meltdown that's queued up for Real Soon Now comes to pass, it will happen to everyone else's country, too.

What the f--k is politics in the US going to look like, when this is done? With the executive branch running a massive, active hand in the credit markets. Anyone want to guess how long it is before we see misbehavior on the level of the US attorneys' scandal? Or even the massive warrantless wiretaps of Americans? What would an unethical, power-hungry administration do with this power? (Of course, why would I imagine we could ever have one of those?)

Wow.

#25 ::: hawkwinglb ::: (view all by) ::: September 25, 2008, 06:55 PM:

I find watching all this go down to be rather terrifying, quite frankly.

I can't quite shake the sense of watching a slow-moving yet somehow farcical catastrophe being played out as political theatre.

#26 ::: miriam beetle ::: (view all by) ::: September 25, 2008, 07:00 PM:

rozasharn,

I want to cry.

same. i've been kind of depressed & lonely since i got back from visiting my family, & i've been relying on makinglight & blogs to get a bit of a voice in my head that isn't mine. but i feel like i might have to unplug from the political blogosphere if i want to be un-depressed enough to get any painting done.

...probably doesn't help that i'm listening to my backlog of fresh air podcasts for company while i work, especially when an expert warns doomily about facing up to the costs of the iraq war, & those numbers suddenly sound so small... maybe this all really did come about just now because they (you know, them) know obama is gonna win, & they want to make sure he has no money to make positive reforms at all.

really. i've gotta stop. & repeat to myself "i'm in canada, i'm in canada..."

#27 ::: Wesley ::: (view all by) ::: September 25, 2008, 07:20 PM:

“We just wanted to choose a really large number.”

We really are living inside an Onion article, now, aren't we?

#28 ::: Wesley ::: (view all by) ::: September 25, 2008, 07:34 PM:

miriam beetle, #26: maybe this all really did come about just now because they (you know, them) know obama is gonna win, & they want to make sure he has no money to make positive reforms at all.

One of Thomas Frank's arguments in The Wrecking Crew is that the right wing Republican movement has made it a goal to "defund the left."

#29 ::: Stefan Jones ::: (view all by) ::: September 25, 2008, 07:51 PM:

#27: "We really are living inside an Onion article, now, aren't we?"

That's the quote of the day, Wesley. What's your last name, so I can credit you when I post it?

#30 ::: Jon Baker ::: (view all by) ::: September 25, 2008, 07:52 PM:

Someone on CNBC's Squawk Box today made a very nice analogy.

See this piece of paper. Say it's a security, from GM or whatever, which is worth 40 cts on the dollar. The gov't buys it to keep it strong, it's backed by real manufacturing and other such services, so its value eventually returns to its normal level, and the gov't can sell it.

This other piece of paper is a mortgage-backed security. A mortgage goes bad, I tear off a strip. Another mortgage goes bad, I tear off another strip. Those are revenue streams that are just GONE. The paper will NEVER be worth it's full value again. The gov't has to buy these for their true value, not for their cover price, or it's just a pure subsidy.

#31 ::: albatross ::: (view all by) ::: September 25, 2008, 07:53 PM:

Wesley #28:

Well, a global financial collapse and worldwide depression will defund the left, that's true. I'm not sure it's the recipe for future Republican victories, though.

#32 ::: Wesley ::: (view all by) ::: September 25, 2008, 08:11 PM:

Stefan Jones, #29: What's your last name, so I can credit you when I post it?

Osam. (By default I tend not to use it when posting to comment threads, but I'm not really hiding it either, so feel free to credit.)

#33 ::: Chris Quinones ::: (view all by) ::: September 25, 2008, 09:09 PM:

Rozasharn, #15: I was reading the transcript to the This American Life piece "The Global Pool of Money" earlier and thinking, "This is the endgame to the ultimate long con." Or the ultimate bust-out.

#34 ::: Epacris ::: (view all by) ::: September 25, 2008, 09:56 PM:

Stefan @29, see also copyright notice on the Super Doomed Planet site, bottom of the home page.

#35 ::: heresiarch ::: (view all by) ::: September 25, 2008, 10:42 PM:

albatross @ 24: "This would all be a hell of a lot more entertaining if it were happening to someone else's country. Though I suppose if the financial meltdown that's queued up for Real Soon Now comes to pass, it will happen to everyone else's country, too."

You know, when I said that free market fubars in Chile, Argentina, etc. were just practice, I thought I was joking.

With any luck, this will be the last nail in coffin of the global neoliberal consensus. Honest t'god, the next time I see some economist on TV arguing for the wonders of the free market, the studio audience better dogpile the ass.

CHINA PAY ATTENTION THIS COULD BE YOU IN TEN YEARS

#36 ::: Brooks Moses ::: (view all by) ::: September 25, 2008, 10:49 PM:

My wife posted a comment about that $700B in her journal earlier today that I thunk is worth sharing:

A study published in 2004 put the cost of transitioning the US from gas to hydrogen at $700 billion dollars, and therefore not feasible. The proposed bailout cost? Yep, $700 billion. Yep, I'm annoyed now.

If that study were accurate (and this is not supposing it is; insert here all the standard arguments about hydrogen as a transportation fuel), we could have completely fixed the "oil independence problem", and quite a lot of the greenhouse-gas climate problem, for this kind of money.

#37 ::: Brooks Moses ::: (view all by) ::: September 25, 2008, 10:50 PM:

Er, "think", not "thunk". Drat this laptop keyboard.

#38 ::: cherish ::: (view all by) ::: September 25, 2008, 11:01 PM:

This came to my inbox via my personal network and it made me holler laughing.

---------------------

I wish I could claim this idea, but it belongs to one of my neighbors.

Instead of the $700 billion 'bail-out' plan, send $1 million to every household in the US, with the requirement that the first use they make of the money be to pay off their mortgage. They can do whatever they want with the remainder. This would repair the 'toxic debt,' AND provide the economy with a huge burst of consumer spending. And, the banks could start issuing new mortgages again!

Remember, this is about a fairly cheap, simple fix, not about fairness, so it doesn't address eliminating illegal immigrants, providing equity between the single and multiple person household, or any of those other considerations.

If you like it, please pass it on.

PS You can find email for your US Senators and Representatives at www.usa.gov

#39 ::: Tom Barclay ::: (view all by) ::: September 25, 2008, 11:05 PM:

Brooks, for such a gob-stopping idea I think "thunk" is appropriate. Perfectly. Onomatopoetic, in fact.

#40 ::: Chris Quinones ::: (view all by) ::: September 25, 2008, 11:12 PM:

Brooks, #36: Well, y'know, $700 billion in 2004 dollars equals about $763 billion in 2008 dollars. That extra $63 billion makes all the difference!!

#41 ::: Marilee ::: (view all by) ::: September 25, 2008, 11:27 PM:

miriam beetle, #26, ready to talk about meeting some locals around the Small Press Expo in Bethesda 10/4 & 5?

#42 ::: Stuart ::: (view all by) ::: September 25, 2008, 11:52 PM:

#35 ::: heresiarch

Did China loan us the money for the rope with which we have hung ourselves?

My dad, who died in 1969, was sure the US was working its way toward the depression to end all depressions. He couldn't have imagined this.

#43 ::: Clifton Royston ::: (view all by) ::: September 26, 2008, 12:09 AM:

cherish:
If we could divide $700 billion by about 100 million households and get $1 million per person, our financial problems would indeed be over. (Or at least they would be very different, focused on solving what had happened to the laws of mathematics recently.) There are a lot of these emails going around, all apparently based on the fact that everybody will pass them on and nobody can be bothered to pick up a calculator.

I know this is coming out sounding like I'm picking on you, which I really don't mean to. It's more the general state of things that a lot of people don't check or think about what they say, and right now we really need everyone to engage their brains and take a close look at what Washington and Wall Street are doing.

(Hmmm... on checking this, I see that "cherish" has never posted to Making Light before, so maybe this is some kind of driveby.)

#44 ::: miriam beetle ::: (view all by) ::: September 26, 2008, 12:37 AM:

marilee,

yep! i'll meet you in the open thread.

#45 ::: Rob Rusick ::: (view all by) ::: September 26, 2008, 12:47 AM:

Stuart @42: I had imagined something like that as a question on an SAT exam (multiple choice):

Communists claimed:
    A) we would sell them the rope they'd use to hang us.
    B) they would sell us the rope we'd use to hang ourselves.
As you say, who would have imagined they'd loan us the money so we could buy that rope.

#46 ::: Matthew Austern ::: (view all by) ::: September 26, 2008, 12:49 AM:

Brooks@36 has the same sort of depressing thought that I've had for the last few days, yes. Atmospheric CO₂ is building up faster than predicted, and there's a disturbing possibility that Arctic Ocean warming is releasing methane. (Which would be really bad if true, because it would mean we've entered a positive feedback loop.)

I've seen a lot of people argue that we shouldn't take serious steps to fight global warming because it would be too expensive and might hurt the economy. How expensive is too expensive? And how much money would a crash program to cut CO₂ emissions in half cost? I don't have numbers, but I'd certainly have to think that 5% of GDP would make a pretty good dent in the problem. It depresses me to see numbers that would seem unthinkably high when we're talking about a major environmental crisis just get tossed around as something unpleasant but necessary when it comes to rescuing the finance industry from its own folly.

#47 ::: cherish ::: (view all by) ::: September 26, 2008, 12:53 AM:

to Clifton Royston @ 43:

I've been lurking a long while. And no, you're not picking on me! I did do the multiplication, after I was done with my happy laughing fit, and besides the math I realized it would not reform the system, which is what is really needed.

Ah, well. That was fun while it lasted. Back to work.

#48 ::: Terry Karney ::: (view all by) ::: September 26, 2008, 12:59 AM:

Cherish: I ran the numbers, and it's something in the realm of impossible to do that.

assuming 100,000,000 households, each getting 1,000,000, you get

100,000,000,000,000 The bailout is
7,000,000,000,000

The extra couple of zeros matter

now... 500,000, would be

500,000,000,000, which might save some money.

#49 ::: Michael Roberts ::: (view all by) ::: September 26, 2008, 01:05 AM:

Terry, you wrote that the bailout will be 7 trillion. Which it probably will be, once Congress gets done bidding on it.

Anybody noticed that the common wisdom seems to be becoming that the Democrats are fighting for the handout, and the Republicans and Great Leader McCain oppose it in favor of protecting the taxpayer? My head is going to explode.

#50 ::: lightning ::: (view all by) ::: September 26, 2008, 01:24 AM:

Let's see now. We had a housing bubble, where lenders wrote a lot of really bad mortgages. Then a bunch of Wall Street types came up with a bunch of ways of slicing 'n dicing mortgages to get around financial regulations. Since these "derivatives" were unregulated, the financial types went crazy with all sorts of "leverage" schemes; the towers of paper reached to the heavens.

Now the whole thing has come crashing down.

And the solution is to bail out the fat cats?? The guys who came up with this nonsense in the first place? The guys who are giving themselves multimillion dollar bonuses?

Why not forgive the bad mortgages? Let folks keep their houses -- free and clear. They're essentially worthless anyway. (Disagree? I have a town house for sale in Phoenix. Make me an offer.) It's tricky to determine who "owns" a house anyway, given the chain of bankruptcies.

#51 ::: Bruce Cohen (SpeakerToManagers) ::: (view all by) ::: September 26, 2008, 01:54 AM:

Rozasharn @ 15

I agree, this whole mess is the last pitch of the organizers of a very large Ponzi scheme, trying to get the late entrants to kick in the rest of their life savings.

And, you know, it is a good thing they don't know about the really large numbers (ever hear of Surreal Numbers?). If they decided to use those, the Fed would spend the next few centuries printing out the zeroes in the bailout amount.

#52 ::: heresiarch ::: (view all by) ::: September 26, 2008, 01:55 AM:

lightning @ 50: "Why not forgive the bad mortgages? Let folks keep their houses -- free and clear. They're essentially worthless anyway. (Disagree? I have a town house for sale in Phoenix. Make me an offer.) It's tricky to determine who "owns" a house anyway, given the chain of bankruptcies."

I was wondering along similar lines myself. Why not just have the federal government just guarantee payment on the bad mortgages? Create a federal corporation to investigate and evaluate mortgages and figure out how much assistance each mortgage holder needs. If I understand the leveraging correctly, this ought to keep the self-reinforcing cycle of defaults from getting out of control, AND people would get to keep their houses.

I really hope there's a good reason this wouldn't work, because otherwise it means I'm smarter than every governmental official working on this issue, which is just too scary.

#53 ::: Randolph ::: (view all by) ::: September 26, 2008, 03:35 AM:

Have decided the Lois McMaster Bujold is writing this part.

Also have decided that a good rule of thumb when the gummint is going to give money away is to give it to the people who need it most, and that doesn't mean desperate bankers.

#54 ::: Pete Darby ::: (view all by) ::: September 26, 2008, 03:42 AM:

@52: Ah, but as the libertarians are saying, if we bail out the people who were sold mortgages they couldn't repay, what incentive do they have for refusing upayable loans in the future? And why should the clever, clever people who refused loans bailout the ones who took them?

(The answer is, in my view, I'd rather have so called stupid people rewarded than turn them into an angry mob marching on capitol hill... and leaving them homeless is punishing the wrong f*cking people, asshole. It's treating financial illiteracy as a moral failing, it's punishing people for believing banks, it's punishing people for acting like honest decent folks when dealing with plausible crooks.)

I'm going to go out later and mug a libertarian, then tell them they should have seen it coming and stayed home.

#55 ::: Juliet E McKenna ::: (view all by) ::: September 26, 2008, 03:54 AM:

Here in the UK, I heard a congressman on the BBC Radio 4 'Today' programme this morning. Jim McDermott? Democrat? (I was in the shower so didn't catch all the details).

From what he was saying, email to congresspeople really does seem to be having an effect, in communicating the public opposition to a blank cheque for Wall Street, the need for oversight, the need to help those facing foreclosure etc.

As one of the journos commented, a lot of senators/representatives will be seeking re-election in six weeks and will have to justify this deal to secure their seats.

Something for anyone debating whether or not to make their voice heard to consider.

#56 ::: albatross ::: (view all by) ::: September 26, 2008, 07:19 AM:

Pete #54:

There's some truth to the argument. Plenty of people were speculating on real estate--see all those books on how to get rich buying real estate. I knew people trying to do that, and a few of the houses we looked at, before we bought this one, were owned by people who had bought them, fixed them up, and were now trying to resell, looking at a big loss because of what the markets had done. (Also, a lot of houses were being used as rental property, sometimes for multiple families.)

But whatever truth is there, it's about a hundred times as true for the investment professionals. A carpenter or auto mechanic who was buying houses, fixing them up, and renting them out was speculating, but it's reasonable to expect only so much financial sophistication from him--he kind of has an excuse, when he points out that he was only following the pattern of the "smartest guys in the room."

I remember several years ago, asking our credit union for what size loan we could get. They pre-approved us for a loan with payments that we obviously could not have made, set up as a triple-mortgage. We didn't jump at that. But when the pros are doing that crap, it's forgivable for first time home buyers to get tricked into thinking it must be okay.

The scary thing is, the financial pros thought the same way. Everyone was doing it, conventional wisdom said these securities based on mortgages were low-risk, and people apparently plugged the numbers and ratings into their computer models and walked right off a cliff. This looks like a feedback loop--bad decisions lead to making more money when the market is irrational, which means that you have more money to gamble, and you're likely to do that continuing your irrational strategy. When the strategy fails, you and hundreds of folks like you lose everything all at once.

#57 ::: heresiarch ::: (view all by) ::: September 26, 2008, 07:30 AM:

Pete Darby @ 54: "Ah, but as the libertarians are saying, if we bail out the people who were sold mortgages they couldn't repay, what incentive do they have for refusing upayable loans in the future? And why should the clever, clever people who refused loans bailout the ones who took them?"

My answer to that is a) most people took out these loans to buy a house. That's not an event that most people* do more than once or twice in their lives. And b) your average home owner (no doubt already risk-averse when it comes to their house), having watched one mortgage collapse and nearly take their house and only saved by the grace of Govt., isn't going to be eager to repeat the experience.

On the other hand you have your average banker, who dealt with hundreds of mortgages on a daily basis and considers financial risks that would leave sane men quivering in terror with a casual insouciance. He is learning as we speak that the Federal government WILL cover his ass when he needs it.

The moral hazard is already out there. Someone is going to avoid the suffering due to them for their mistakes. The only question is who. Personally, I think the victims of the scam deserve more sympathy than the perpetrators.

(None of this is to say that you disagreed with me--but I've been waiting to answer that question for like, days.)

*Those not John McCain, of course.

#58 ::: Paula Lieberman ::: (view all by) ::: September 26, 2008, 08:36 AM:

One of the things bemusing me is that this is Savings & Loan Bailout II, with a similar cast of characters--the "regulation? Ha!" denominations removed all regulation and aggressively promoted "instruments" and organization in total spite of the idea of regulated markets and oversight.

But are they being called on it? To a small degree, yes, but mainly they've escaped getting the blame and the smearing in the press, because the foci include:

o Meltdown! Meltdown! Woe! Woe! Woe! The media has a disaster to focus in on, and the victims to with great relish show the plights of...
o the misdeeds of bankers financial services officials, and no focus on the likes of the brokers of the deals, especially those who in effect have been unlicensed brokers and who directed people to the subprime agendies, the slimey appraisors, and the formation of south western state corporations in which the principals are legally shielded from identification
o the focus on "will there be a bailout? Will there be a bailout?"

There hasn't been much breath from the media spent on "who is responsible for creating and promoting the conditions which facilated this mess, pin their feet to the consequences, charge them and those who financially prospered with financial restitution, and REMOVE those culpable from any and all positions of control" That is, PURGE the members of Congress and others responsible for the lack of reguation, the opposition to oversight, the resistance to imposing any oversight, and for failing to pursue fraud and irregularity checking.

Note the the Republicans have resisted fraud investigations in almost every area of government and civil life since they got into power in Congress and until they stopped having a majority in the House of Representatives, except for the purpose of suppressing voting from those not viewed as Republican-favoring voters.... along with appointing anti-regulations lobbyists and apparatchiks to head up federal agencies and departments within federal agencies (the Mine Safety agency with the anti-regulation lobbyist--how many miners have died in mines with egregious safety violations present over the past 8 years? FEMA and Mike Brown, the agency officials incudin the former head of the White House procurement agency hauled away in handcuffs for various illegalities....)

#59 ::: Paula Lieberman ::: (view all by) ::: September 26, 2008, 08:44 AM:

Barney Frank on the Alternate Bailout plan that House Republicans have been crafted and are apparently proposing as a replacement for the plan that was in the process of being negotiated agreed to in bipartisan committee by Democrats and Republicans: [from quote on radio five minutes ago]

"It's an ambush plan. Sec Paulson testified in front of [Congress or the House of Representatives] Wednesday and [the House Republicans didn't give a peep out about their plan]"

#60 ::: Chris A. Jackson ::: (view all by) ::: September 26, 2008, 09:06 AM:

In the midst of all this, I can't help but think that if I were a fly on the wall of the Oval Office when Paulson, Cheney and Bush were all muddling over this issue, I would have heard the phrase "Okay, so how can we turn this to our advantage?"

Hey, I know, lets write ourselves a check for a trillion dollars and tell everyone we have to spend this without any oversight, or "interference" from anyone, whatsoever.

It's surreal...

What's the national debt now???

#61 ::: John L ::: (view all by) ::: September 26, 2008, 09:17 AM:

Could this alternate Republican bailout plan be some kind of scenario devised to portray McCain as the hero in this mess? Here's the plot:

Democrats and Republicans announce a bipartisan agreement.

Disgruntled Republicans balk at the plan, produce their own.

Media starts reporting "no deal", but McCain is going to DC to help straighten the mess out.

McCain arrives, whips disgruntled Republicans back into line, salvaging original deal.

Media reports that McCain's intervention "saves the day", bankers heave sigh of relief, everyone claims "financial situation stabilized".

McCain ads start running touting his leadership and initiative qualities, using this issue as example.

Now, it doesn't really matter if the bipartisan plan will actually work or not; that's not the issue here. What's important is the media has bought in 100% that if a plan is NOT implemented, financial disaster will happen very shortly. If the plan does nothing more than the equivalent of a bandaid on a spurting artery and delays the meltdown for six months (which some economists believe), it would be enough to get McCain a boost in the polls and presumably into the White House.

If it isn't enough, and Obama still is elected, then Republicans will use the bipartisan plan to beat him mercilessly with when it does all come apart.

#62 ::: Tim Bartik ::: (view all by) ::: September 26, 2008, 09:20 AM:

As an economist, I find many of the comments made here depressing. Obviously the public doesn't like the notion of "bailing out Wall Street", and there is a real possibility that a modified Paulson plan will be shot down due to populist fury from both the left-wing and right-wing.

There is a significant risk that if NOTHING is done, the resulting credit crisis will drive the U.S. economy into a much more serious and prolonged recession than would otherwise be the case. The economic and social costs of this scenario are extremely large, far greater than $700 billion.

Furthermore, if this plan works (admittedly a big if)the net taxpayer cost of a modified Paulson plan are likely to be considerably less than $700 billion. The assets that are purchased will have some market value, and if the plan works, that market value will be enhanced. The modifications pushed by Senator Dodd will also give the taxpayer some equity that will reduce the odds of taxpayer loss.

Obviously there is some risk that this plan won't work even if enacted. But it is worth taking some risk to avoid a much more serious credit collapse and economic downturn.

Everyone seems to have some magic alternative plan that will supposedly solve these problems at less cost and without providing any windfall gains for the undeserving. Some of these alternative plans have merit, some do not. But in the real world, the IMMEDIATE short-run choice is between doing nothing, or adopting some version of the deal worked about between Paulson and the Congressional leadership. People have to choose: do you prefer to do nothing, or do you prefer the modified Paulson plan?

If you're a political liberal, read Brad DeLong's latest September 25 article in Salon on why some type of modified bailout makes sense. If you're a political conservative, read Megan McArdle's most recent posts at the Atlantic Monthly on why something needs to be done.

#63 ::: Seth Gordon ::: (view all by) ::: September 26, 2008, 09:39 AM:

Tim: I accept that there needs to be a bailout. I even accept that the government might really need to commit something in the trillion-dollar range to the bailout. But I hope the Democrats have the spine to vote against any bailout for Wall Street that lacks meaningful help for the ordinary people who began suffering from this mess while Wall Street was still praising capitalism as usual.

If the banking-industry lobbyists are not seizing McCain by the lapels and saying "For God's sake, man! Just give the Democrats what they want!" then either they don't really need to be bailed out or the Democrats aren't twisting them hard enough.

#64 ::: Michael Roberts ::: (view all by) ::: September 26, 2008, 09:45 AM:

lighthning @ 50 and heresiarch @52 - IANAB (banker) and IANAF(financier), but even though mortgage defaults are the trigger of this collapse, paying them off wouldn't help.

The reason for this is really not the stratospherically complex thing everybody says. They say that because telling the truth about it makes them look like idiots -- precisely as idiotic as people paying thousands of gulders or whatever for tulip bulbs. This story is not a new one -- but this bubble was bigger than God, because the people we trust to nip these things in the bud were doing a heckuva job. Henry Paulson is one of those guys.

Basically, all this crap is trading in the futures market for those mortages. We all know that if I buy a house on a 30-year mortgage for $100,000, the total payments I'll make on it are something in the millions, right? So the total "value" of that mortgage is something in the millions, less the probability that I'll default -- or pay it off early. If I pay it off early, the effect on the future value is just as catastrophic as default, because those vaporous millions turn back into vapor.

The problem is that the people selling those bad mortgages, through one trick and another, agreed to pretend to one another that the future value was real. Through two or more multiplying layers, apparently. So when 5% of the mortgages went away, trillions of dollars of pretended value ... vanished.

Of course, the actual money in the banks didn't vanish. The money in deposits made by people who work for a living is still there. The 2.9 billion dollars of Lehman bonus money is still there. But the amount of real money is vanishingly small in comparison with the amount of pretend money that went away.

What the government is trying to do is dance fast enough that all the people with pretend money can go on pretending long enough that this crash won't hurt quite as bad. There is no fix because the pretend money is expressible only in scientific notation -- the bubble has nowhere to go but down, and if anybody had been doing their jobs, it wouldn't have gotten to this point in the first place. Which is just one more reason Bush and Cheney should hang by their thumbnails, but that ain't gonna happen.

Don't count on anybody saying any of this. Financial troubles are probably the #1 reason people lie to their loved ones (certainly true in my case), and if lying actually affects the damn stock market, that's powerful motivation.

But to answer the original question -- no. Paying the mortgages off, while satisfying, would not help the crash. We're stuck with the crash.

#65 ::: Michael Roberts ::: (view all by) ::: September 26, 2008, 09:49 AM:

Seth @ 63 - the bankers don't care, really, because they're going to stay rich no matter what happens. There's no visceral fear.

Which is, essentially, what allows this phenomenon in the first place.

#66 ::: John L ::: (view all by) ::: September 26, 2008, 09:55 AM:

Tim,

While you may be right, the voters are seeing this as the government bailing out already rich bankers with THEIR money, while the voters continue to struggle to make ends meet. That is why there is such fury being directed at the elected officials telling them "don't you DARE do this!".

BTW, there are over 200 economists unaffiliated with Wall Street who are saying this bailout plan would worsen, not improve the situation. I for one am very skeptical of any gloom and doom predictions being made by Wall Street economists, and most voters are thinking the same thing.

#67 ::: Tim Bartik ::: (view all by) ::: September 26, 2008, 10:00 AM:

Seth @ 63

It is difficult to judge the political situation from afar. From the reports, the compromise that was worked out had the Treasury conceding to the Democrats on the issues of stricter oversight, some equity stake, some limits on executive compensation, paying out the $700 billion in stages with some possiblity of later Congressional veto, and some mortgage modifictions. See Ezra Klein's post from yesterday which summarizes the outline of the plan:

http://www.prospect.org/csnc/blogs/ezraklein_archive?month=09&year=2008&base_name=according_to_the_wall_street

The Democrats gave way on including a stimulus package in the deal.

Of course, the devil's in the details. We haven't seen the details.

I would think that if it turns out that House Republicans will not vote for any compromise bailout, the Democrats might want to insist on more modifications to the proposal. That's a political judgement to be made. If the Dems are going to take sole responsibility for the package, they should insist that it include all the elements that are needed.

#68 ::: Tim Bartik ::: (view all by) ::: September 26, 2008, 10:17 AM:

John L. @ 66: I assume you are referring to the petition that appears to have been started by some economists at the Graduate School of Business at the University of Chicago:
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

This petition regarding the Paulson plan is vaguely worded. It amounts to an expression of concerns and a plea for more study. In any event, the petition offers no alternatives to the Paulson plan, even though the petition agrees with "the need for bold action".

Also, for the record, in case there is any confusion, I am not a Wall Street economist. I have no personal stake in this matter.

#69 ::: Steve C. ::: (view all by) ::: September 26, 2008, 10:28 AM:

Michael Roberts @ 64

Basically, all this crap is trading in the futures market for those mortages. We all know that if I buy a house on a 30-year mortgage for $100,000, the total payments I'll make on it are something in the millions, right?

Not unless you had a truly stratospheric interest rate. Over the course of a 30 year loan, you will generally pay about 2.5 to 3 times the value of the principal.

#70 ::: Seth Gordon ::: (view all by) ::: September 26, 2008, 10:32 AM:

Tim, I think you and I are pretty much in agreement.

The proposal that was bruited around yesterday afternoon was one that I could sort of accept with one hand over my nose. My fear at this point is that it will become the starting point for another round of negotiations, this time between the moderates of both parties and the wingnut faction of the Republicans. I don't want to see, for example, the provisions on personal bankruptcy to be thrown overboard for the sake of a deal with the wingnuts.

#71 ::: Rosa ::: (view all by) ::: September 26, 2008, 10:34 AM:

Yeah, the compromise they announced yesterday seemed reasonable to me - except for the Administration's idiotic insistence on not allowing cram downs by bankruptcy judges. Like I said, the executive pay cap is just symbolic, even though people (including me) like it a lot.

I'm worried about the opposite of the "McCain Saves the Day" scenario outlined above - that the looneytoons branch of the Republicans is going to throw the whole thing and stick with their "free markets are God" schtick. A bunch of their nonelected media reps are preaching that. Also, it goes with the right populist "I didn't take out too much on *my* mortgage" sentiment I keep hearing.

Which is disheartening - as a person with absolutely no non-mortgage debt, in a youngish two-income household where either income could pay our mortgage, I know that our anti-debt lifestyle astonishes people. Everyone from my coworkers to our mortgage officer to the plumber who replaced our boiler have been surprised by it. I do not believe that the majority of Americans are so wise with their money that they will be just fine while everyone else fails (including me - my job is dependent on people being able to get student loans, which is dependent on the banks functioning.)

#72 ::: Lizzy L ::: (view all by) ::: September 26, 2008, 10:35 AM:

I am trying to think through the real world consequences of going slow and working out the best solution possible: i.e. of taking two weeks instead of two days to come up with a "bailout." I can easily see one consequences of the current economic situation: my investments have lost about 13% of their value, and the market I assume will not recover until something is done. My house has also lost value, but since I bought it before the bubble, my mortgage payment is still manageable. I buy food, gas for my car, food for my cats and dogs, office supplies to make my business go, energy to cook and run the lights in my house -- are the costs for these items going to go up past my ability to pay for them? Are my clients going to all lose their jobs and be unable to pay me for my work? I'm serious here. I'm not an economist and the relationships are not clear to me. What is going to happen in this very micro level if the credit markets stay stuck for a while? My investments will continue to drop, perhaps. What else? Will factories and farms stop working? Will state governments cease to pay their workers? Are we going to see massive unemployment? Will the country's transportation system freeze in place? Will Bank of America tell me I cannot access my own money?

#73 ::: Tlönista ::: (view all by) ::: September 26, 2008, 10:40 AM:

Thanks, Michael Roberts, for an extremely lucid explanation.

Personally, why I'm one of the "oh hell no"s is because it looks like very very little oversight and accountability for very very much money. And even if Paulson was okay, he's going to be moving on in a few months. Who's replacing him? Do we even know?

It angers me that Neandertals write into the paper every day saying "Homeowners shouldn't have gotten those loans" when the people who actually orchestrated this disaster will be rich for the rest of their lives.

#74 ::: guthrie ::: (view all by) ::: September 26, 2008, 10:53 AM:

The way I put it yesterday to a market worshipper was that the ordinary people who had taken out these mortgages were like small crawling babies who knocked somethign valuable over.
The financial wizards are the adults who put the valuable object in the way of the crawling baby, then act surprised when it gets knocked over.
I mean, whats next? Will market worshippers demand that I become my own doctor, dentist, surgeon, financial advisor, carpenter, electrician, car mechanic, despite the clear fact that I cannot possibly become expert enough to avoid having to rely upon the word of the professional experts in their field?
Sure, I can apply my bullshit detector, and learn enough to understand when someone is making the right noises, but it is simply impossible for me or indeed the majority of the populace to be able to avoid situations like these.

#75 ::: P J Evans ::: (view all by) ::: September 26, 2008, 10:57 AM:

So this morning the captive-audience screen is saying that Paulson wants the Democrats to keep quiet about the talks, so as not to 'spook the market'. Um, shouldn't he be telling the other guys, the ones who killed the talks by suddenly bringing up their own plan?

#76 ::: Tim Bartik ::: (view all by) ::: September 26, 2008, 11:05 AM:

Lizzy @ 72:

The truth is that no one really is certain about what exactly will happen due to a credit squeeze in today's American economy.

I think the most likely scenario is that because of problems in both individuals and businesses getting credit, there will be a big increase in unemployment for a prolonged period of time. My guess is double-digit unemployment for 3 to 5 years., but not Depression era unemployment.

Therefore, in your case, some (not all) of your clients will lose their jobs and be unable to pay you for your work. The other consequences you mention seem much less likely. But I think double-digit unemployment for 3 to 5 years is very bad indeed.

#77 ::: Lizzy L ::: (view all by) ::: September 26, 2008, 11:53 AM:

Tim Bartik at 76: massive unemployment, check. Um, that sucks. How about inflation? Are prices going to skyrocket? Should I buy lots of dog and cat food now, while the prices are low?

#78 ::: Tim Bartik ::: (view all by) ::: September 26, 2008, 12:32 PM:

Lizzy L @ #77

I assume you realize that as someone once said (Yogi Berra?), predictions are difficult to make, especially about the future.

I don't think it is clear what will happen with inflation. Increasing unemployment will tend to reduce upward pressure on prices and wages. There should be continuing deflation in housing prices, as it looks like we still have about half the housing bubble to work off before owner-occupied housing prices get back to a more normal level relative to rental housing prices and other prices.

On the other hand, it may be tempting to some policymakers to try to use inflation to get our way out of this problem. That is, if all prices went up, including housing prices, then this might reduce the magnitude of the bad debt in real terms.

In short, my answer is "it depends", which, unfortunately, is no help at all.

#79 ::: Michael Roberts ::: (view all by) ::: September 26, 2008, 01:08 PM:

Lizzy @72 - since the Republicans have not yet dismantled the FDIC, your deposits are safe up to $100,000 (more under certain circumstances).

PJ @75 - yeah. The Democrats want that big bailout, you know -- the Republicans are fighting tooth and claw to save the taxpayers' money, because they understand markets so much better.

#80 ::: Earl Cooley III ::: (view all by) ::: September 26, 2008, 01:12 PM:

Since this weblog has an international scope of participants, we need to make sure we agree on just what a billion actually is.

#81 ::: Christopher Davis ::: (view all by) ::: September 26, 2008, 01:14 PM:

Rosa (#71): as a person with absolutely no non-mortgage debt, in a youngish two-income household where either income could pay our mortgage, I know that our anti-debt lifestyle astonishes people.

My wife and I are similarly debt-averse and non-indebted, but I also recognize that there's an element of luck in (a) not having any student loan debt, (b) living and working such that we don't need to own a car, (c) having skills that makes (b) much easier to do, and (d) not having experienced huge, unreimbursed medical expenses.

Some people seek debt; some have debt thrust upon them.

#82 ::: John L ::: (view all by) ::: September 26, 2008, 01:21 PM:

Tim,

Yes, that was the petition I was referencing. I've also heard many other unaffiliated economists, who have not signed that petition, warn against just throwing money at the bankers in the hope this will cure their reluctance to lend money.

At the same time, I've seen no one, other than Wall Street economists, saying Paulson's plan would work. I didn't think you were with Wall Street either, btw.

Everyone I've spoken to is concerned about this, but at the same time they are nearly unanimous in their opinion that Wall Street shouldn't be getting OUR money for THEIR mistakes, when hard working people down at our level are still being asked to pay off our own debts without any help at all.

I don't want Congress to be panicked into doing something that may or may not work, or just result in doubling the national debt. I think the legislators realize that thanks to the barrage of calls and emails they've been getting, warning them that a huge giveaway of our money WILL be remembered on Election Day. I think this last week has also shown just how little Bush's credibility is worth; it's probably worth less than the "toxic bonds" Paulson is proposing to buy up...

#83 ::: Earl Cooley III ::: (view all by) ::: September 26, 2008, 01:33 PM:

I could use some more debt, especially the juicy executive golden parachute kind that I'd never have to pay back. In exchange, I promise to continue to provide pithy comments to all of my favorite online discussion venues; I don't think I could gather a sufficient audience on my own to run a paypal-financed site specifically devoted to my point of view.

#84 ::: James Moar ::: (view all by) ::: September 26, 2008, 01:33 PM:

Earl @ 80

I think that article understates the adoption of the American billion in British usage. I think it's pretty much become the modern standard.

#85 ::: James Moar ::: (view all by) ::: September 26, 2008, 01:42 PM:

I think I just started two consecutive sentences with the words "I think."

#86 ::: Stefan Jones ::: (view all by) ::: September 26, 2008, 01:43 PM:

Breaking News!

Jerry Pournelle blames it all on illegal immigrants having no business owning homes anyway.

Reinforces walls of Chaos Manor with old copies of BYTE Magazine and calls for space-based laser weapons to kill homeowners defaulting on loans.

Film at 11.

#87 ::: Ken Brown ::: (view all by) ::: September 26, 2008, 01:51 PM:

Anyone seen "The New Scam" at "Dispatches fron the Culture Wars"?

http://scienceblogs.com/dispatches/2008/09/the_new_scam.php#more

It starts:

"Dear American:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had a crisis that has caused the need for a large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you."

:-)

#88 ::: Graydon ::: (view all by) ::: September 26, 2008, 02:00 PM:

It would be pretty easy to fix this, as such things go, if it were not for the awful confusion of profit as a virtue.

(The fix? You don't bail anybody out. You take them over, pauperize the directors and officers of the corporation (and I mean 100 bucks in cash, one shirt, one pair of pants, one pair of shoes, total assets, pauperize[1]), and liquidate the corporation. Preferably into many small regional financial services offices. Results of pauperizing and liquidation go to offset the bad debt; presumable a lot of loans need to be adjusted to be payable/maintainable, too.)

Profit is a necessity, not a virtue. Treating it like a virtue produces, well, this. (Which is not even close to done; this is still just the real estate over-leveraging. Hedge fund unwinding will be much worse, and has already started.)

[1] because for the next hundred years, the idea of being suspected of departing from utter fiscal probity on the part of the officers of a bank or other financial services corporation ought to cause involuntary whimpering, night sweats, and panic.

#89 ::: Michael Roberts ::: (view all by) ::: September 26, 2008, 02:14 PM:

Graydon, I have to agree with you. Until there's a stop to the notion that risk can be externalized like this, it's just going to keep happening.

#90 ::: guthrie ::: (view all by) ::: September 26, 2008, 02:30 PM:

James Moar #84- yes, the American usage of Billion has been standard amongst everyone I know for as long as I can remember here in the UK. (I'm 31)

#91 ::: Rosa ::: (view all by) ::: September 26, 2008, 02:31 PM:

Chris Davis @81 - Oh yes, there is a lot of luck in there, I forget to mention that because I assume people know it.

But I don't think there are enough of us lucky people to man the meme factory pumping out the "I shouldn't have to bail out the people who took out mortgages they could not afford." - I think most of the people saying that have some debt. In fact, a lot of the people saying it start out with "We only have our mortgage, student loans, and car loan to pay..."

Number one reason for bankruptcy in the US is still medical costs. Though that may change when this year's numbers come out.

#92 ::: Clifton Royston ::: (view all by) ::: September 26, 2008, 02:33 PM:

Paulson doesn't want anyone to "spook the markets"? Would spooking the markets include telling them that the whole financial system will collapse unless he gets $700 billion handed to him Right Now?

#93 ::: Joel Polowin ::: (view all by) ::: September 26, 2008, 03:01 PM:

Would spooking the markets include telling them that the whole financial system will collapse unless he gets $700 billion handed to him Right Now?

Not to mention the “we just wanted to choose a really large number” thing. It doesn't exactly inspire confidence.

#94 ::: Stefan Jones ::: (view all by) ::: September 26, 2008, 03:08 PM:

I forgot where I posted this already, so please forgive me if this is a repeat.

If anyone bitches about Democrats forcing home loans for poor people down the throats of the poor defenseless bankers, point them at the 2004 Republican Party Platform:

2004 Republican Party Platform

It specifically, and in great detail, advocates minority home ownership and regulations on the housing industry:

Homeownership is central to the American dream, and Republicans want to make it a reality for everyone. That starts with access to capital for entrepreneurs and access to credit for consumers. Both have improved immensely in the past four years, resulting in record levels of homeownership. For the first time, more than half of all minorities own their home.

We support the President's goal of increasing the number of minority homeowners by at least 5.5 million families by the end of the decade. Since President Bush announced his initiative in 2002, an additional 1.6 million minorities have become homeowners. The Self-Help Homeownership Opportunities Program helps low-income families purchase a home. The most significant barrier to homeownership is the down payment. We support efforts to reduce that barrier, like the American Dream Downpayment Act and Zero Downpayment Mortgages.


...
In many areas, housing prices are higher than they need to be because of regulations that drive up building costs. Some regulation is of course necessary, and so is sensible zoning. We urge states and localities to work with local builders and lenders to eliminate unnecessary burdens that price many families out of the market. We see no role for any federal regulation of homebuilding.

In other words: We support the stuff that Limbaugh, Coulter, and Pournelle are blaming on the Democrats, and we wanted an unsustainable building boom too.

#95 ::: dolloch ::: (view all by) ::: September 26, 2008, 03:22 PM:

John L. @ 61 and others

I've got a weird conspiracy theory:

Bush is taking the piss to try to get McCain elected.

Here's the specious evidence so far. Bush supports the bail-out. Democrats have been brought on board to support the bail-out. The Republicans are now grumbling against it. There are some Republicans here at work who were talking this morning about this, as if it were just another sign of Democrat weakness that they're doing the bail-out. They didn't mention that McCain is a Maverick™ flying in the face of Bush in favor of "good common sense", but it seemed to be in the subtext.

Bush has just refused to support an Israeli attack on Iran. McCain has been beating the Bomb Iran drum for a while now. Up until fairly recently, Bush was sounding pro-attack as well.

If somehow the Republicans are reacting as a well-coordinated group (or if not the whole, a loyal core of them), then The Party could have issued the edict that they are to make a pariah of Bush on his way out to make the Maverick™ for Change meme stick better.

#96 ::: C. Wingate ::: (view all by) ::: September 26, 2008, 03:33 PM:

It's a bipartisan crisis. Clinton himself signed the bill rolling back some of the key restrictions.


#97 ::: Lee ::: (view all by) ::: September 26, 2008, 03:40 PM:

Pete, #54: The response to that is to turn it around: if we bail out the people who MADE those bad loans in the first place, what incentive do they have not to get right back into the bad-loan business? You can't shut down criminal activity by hitting the demand side, you have to go for the source. (And heresiarch said it even better, at #57.)

Tlonista, #73: It angers me that Neandertals write into the paper every day saying "Homeowners shouldn't have gotten those loans" when the people who actually orchestrated this disaster will be rich for the rest of their lives.

Yes. That. I want to see executive bank accounts stripped and luxury assets sold at forced auction; it won't solve the problem, but it would at least partially level the playing field.

Michael, #89: You're using the wrong word. They aren't "externalizing" risk, they're socializing it. This is one of those places where a language meme could reframe the entire argument, if we could get it out there into the discourse. "Republican socialism: the rich reap the benefits, you pay for the losses."

One thing that people can do to minimize their own exposure: if you bank with one of those multi-state monster banks, consider shifting your money to a local or regional one... or splitting it among several such, just to avoid having all your eggs in one basket. FDIC insurance won't mean much if too many banks implode at once. (I am now kicking myself for not having pursued the transfer of my IRA from Citibank to my own bank more aggressively. I can still probably get it done, but Citi is certainly going to come up with extra hoops for me to jump, in addition to the ones they've already demanded.)

#98 ::: Lee ::: (view all by) ::: September 26, 2008, 03:44 PM:

C. Wingate, #95: I am BLOODY SICK AND TIRED of hearing the same old Clinton-bashing over and over and over again. If that kind of whining is all you can contribute, go do it on your own blog. Making it be All Bill Clinton's Fault won't do a damn thing to solve the problem.

#99 ::: Matthew Brown ::: (view all by) ::: September 26, 2008, 04:10 PM:

There was a lot of wilful blindness going on all over, that I'm sure, but I do very much agree with the point that it's one thing for a regular person to be wrong about financial matters, quite another for someone whose job it is to be more knowledgable about these things to be so wrong and blinkered about it.

I'm reminded of the adage (whose provenance I forget) that it's amazing how hard it is for someone to see the truth of something when their job depends on their not acknowleding it.

The ability of an average person to buy a house is fundamentally limited by their income and thus the dollar amount they can reasonably afford monthly. That fact is fundamentally unchanged, and this payment amount can only really go up, across the economy, if people become fundamentally better off.

Now there's a degree to which people can be persuaded to spend a greater proportion of their income than is really sensible on their mortgage, and this is sometimes a rational tradeoff; if you are pretty sure that your income will go up substantially in a few years, for instance. However, lending standards are supposed to minimize this; lenders have historically known that the risks of default increase as the proportion of someone's income being spent on their mortgage increases, since it takes a smaller degree of hard times to push someone's finances beyond their abilities.

But still, there's a hard limit on the amount of real cash people can pay monthly for a house, and it doesn't really go up. So how can house prices go up, long-term, faster than wages do? Only in markets where the demand is increasing and the supply isn't, and only to the degree that that lasts. This means that certain in-demand markets can do so, to a degree, but only to the degree that makes demand (at that price) equal to supply.

So why did house prices suddenly soar? Well, for one thing, the cheaper it gets to borrow money, the bigger a loan you can service with the same monthly payment. This is why, when interest rates got so low after the end of the tech bubble (i.e. very early 2000s), house prices began a sharp rise. People had more effective money available for the same monthly outlay, so house prices could go up.

However, the interest rate didn't keep getting lower; in fact, it began to slowly rise. House prices should have levelled off. They didn't. How come? Because everyone who depended on continued high house prices pushed hard to keep it going. This included the government; the housing boom had powered us out of what could have been a bad recession in the early 2000s. The low interest rates had worked their magic there, keeping the economy going - or at least, by pushing the consequences out into the future through the creation of an asset price bubble.

It struck me then and it still does that there were many similarities between the way the economy and the Iraq war were treated. In both cases, the Government and Republican line was that the only possible cause for anything to go wrong was lack of confidence; if we remained upbeat, then the war and the economy would do well, and the only reason things could go badly is if The Enemy At Home torpedoed American confidence by asking questions and being skeptical.

Questioning the health of the economy became, it felt to me, as "treasonous" as questioning the Iraq war. Both became matters, the Republicans insisted, of faith, not of reason.

And in the financial industry, too much of peoples' individual jobs, incomes and livelihood depended on their keeping alive the fiction of this going on forever. Investors, after all, never seemed to ask about how much risk was being taken - all that mattered was this quarter's results and next. One's bonus depended on keeping things rolling, and lower numbers could only be a result of personal failing, not because a boom couldn't go on forever.

So when there was no more room for house prices to go up based on cheap interest rates, other means of increasing purchasing power were tried, abandoning historical caution about using them. Realtors, appraisers, and loan officers had no interest in asking questions about whether these new loans were really safe for anyone; too much of their income was at stake. The institutions that bought these loans didn't want to ask too many questions either; they needed the continued growth too. The government didn't ask the hard questions either; they had too much invested, policy-wise and philosophy-wise, in keeping the fiction going.

Note in the latter case it wasn't JUST the republicans, either; politicians have a vested interest in keeping the good times rolling, because it keeps the money rolling for their projects and their fundraisers. The financial industry were big campaign donors for everyone, and nobody wanted to kill the golden goose by looking at it too closely.

#100 ::: Stefan Jones ::: (view all by) ::: September 26, 2008, 04:14 PM:

I entered a post with the links and excerpts from the 2004 Republican Party Platform. It is being held for moderation.

But in brief: The GOP wanted to promote "homeownership", specifically among minorities, and championed no-down-payment loans. They also called for getting rid of regulations holding back the housing agency.

I've read that the 2002 platform had similar language.

Remember the "ownership society" thing? They were really rah-rah about it.

They wanted it, badly. It was good for business and they saw it as a way of making new Republicans.

The revisionists can bite themselves. The GOP policy of deregulation started this feeding frenzy.

#101 ::: Steve C. ::: (view all by) ::: September 26, 2008, 04:24 PM:

Matthew, you make some excellent points in your #98. I might add that the growth in home prices also led to people borrowing and spending with home equity lines of credit that the banks were only too happy to provide.

I'm wondering if we shouldn't rethink the way that we've handled housing in this country. Would it really kill the business if we didn't have a tax deduction for mortgage interest? Or for property taxes? I know that this isn't the right time to propose that, but perhaps later after we're past this mess. Sure, home prices would take a hit if we eliminated these incentives for ownership, but one could argue that homes have been overvalued for a good while.

Secondly, there are cases where ownership makes sense and where it doesn't. Sometimes, believe it or not, it's better to rent.

#102 ::: abi ::: (view all by) ::: September 26, 2008, 04:25 PM:

Stefan Jones:
I have released the post from moderation. It is now post 94.

All:
All number references between 94 and this point may be off. Check commenter/content if in doubt.

Lee:
Keep your temper. Use facts rather than fury.

C Wingate:
You might consider brushing up on your persuasive writing techniques if you're trying to argue effectively from a minority position.

#103 ::: C. Wingate ::: (view all by) ::: September 26, 2008, 04:30 PM:

Awww, come on, Lee. Sure-- you can assign to Bush all the blame you want for not attempting to pop the bubble a lot earlier. I'm all for that. But the loosening of the reins had already happened before he took office. It's not "bashing" Clinton to say that. The point is more along the lines that Republicans weren't and aren't the only ones exploiting the situation (or getting themselves overextended, for that matter).

#104 ::: Madeline F ::: (view all by) ::: September 26, 2008, 05:44 PM:

My friend tavella was saying that the problem was, basically, that someone had gotten the bright idea to insure that mortgage-backed securities would always go up in value. I'm still trying to get my head around that. What? Whatwhat?

She was saying that, like with insuring a house that's still being built, maybe the carpenter and the general contractor and the owner, all sorts of people who want to see that house come to fruition, they all have insurance to the value of what the house will be, and so if it burns down the insurance company pays out several times its value. Likewise, apparently a lot of different companies with mortgage-backed securities had the same security insured, and that's why the entire credit system is fucked... If it was just mortgages failing, might take out a bank; just mortgage-backed securities failing, might take out an investment firm; but with the insurance we've gotten to the point where there's more imaginary money lost than the entire GDP.

What? Who insures a security?! The whole point of investing is that stuff goes up and down!

Anyway, so the way I've heard it, that's why the credit system is completely hosed right now. Anyone want to take another run at explaining this? Can someone point out why this insuring was allowed, but similarly dumb ideas like insuring the continued value of your basic run-of-the-mill stock don't seem to exist? I'm guessing that mortgage-backed securites found themselves a loophole, because they're a new flavor of security? Can we blame any specific legislation for this, or is this something that arose because no legislation particularly seemed to apply and people handling securities were idiots?

Anyone got a link? I think "insurance" is called "leverage" in the jargon...?

#105 ::: FungiFromYuggoth ::: (view all by) ::: September 26, 2008, 06:01 PM:

Interesting, C.Wingate's argument seems to be a mutation of the popular right-wing meme of blaming minorities for the mortgage meltdown. The earlier version blamed the CRA specifically, but the documentation about the CRA made that allegation too difficult to back up.

I agree that the Democrats are partially to blame, but they're to blame for not fighting the Republicans hard enough. You can't really blame Bill Clinton for slashing the FBI's budget for investigating mortgage fraud back in 2002.

Still, there's something nostalgic about hearing "Clinton did it too!"

#106 ::: P J Evans ::: (view all by) ::: September 26, 2008, 06:11 PM:

C. Wingate:
Who was running Congress after 1994? It wasn't the Democrats. If you want to get into first causes, try Ronald Reagan and 'trickle-down economics' and the idea that regulation of business somehow was a bad thing for everyone.
(I guess the people who hate regulation missed the part of US history class covering the muckrakers of the late 19th and early 20th century, that led to the (fully justified) imposition of regulations. They certainly were present for the 'robber barons' lecture.)

#107 ::: Serge ::: (view all by) ::: September 26, 2008, 06:20 PM:

FungiFromYuggoth @ 105... You can't really blame Bill Clinton for slashing the FBI's budget for investigating mortgage fraud back in 2002.

Oh, I'm sure they could find a way to blame Bill, even without resorting to Time And Relative Dimensions In Space.

#108 ::: Arachne ::: (view all by) ::: September 26, 2008, 06:22 PM:

I vote for a YouTube clip to go with this post.

#109 ::: John L ::: (view all by) ::: September 26, 2008, 06:35 PM:

I had always heard that Clinton signed that bill because it was veto-proof in both houses. He might have signed it but he really had no choice.

The insurance on securities was so that the investors could make money on them whether their price went up OR down. When everyone realized how lucrative this was, though, multiple parties began insuring securities, making the payout value much larger than the original security value.

#110 ::: Stefan Jones ::: (view all by) ::: September 26, 2008, 07:01 PM:

What ticks me off isn't so much the "Clinton did it!" as the racist dogwhistles.

Oh, not dogwhistles really. Fire sirens: Ann Coulter's editorial mentions jump shots, food stamps, and "daughters named Caylee."

Jerry Pournelle thinks illegal immigrants are to blame.

This blatant scapegoating. It is how the usual suspects divert attention from the real problem and how the solution gets turned into an excuse for more of the same. ("Capital gains tax cuts? Why of course!")

#111 ::: albatross ::: (view all by) ::: September 26, 2008, 07:24 PM:

Lee #98:

There's a difference between "Clinton did it too" and "These chickens are coming home to roost from both Democratic and Republican policies." The housing bubble was inflated under both Democrats and Republicans, encouraging more and more people to buy houses as a matter of policy was supported by both parties. Fannie and Freddie were just as happy to spend money keeping Republicans happy as Democrats, and the congresscritters of both parties happily kept them happy back. That endless housing price bubble as a matter of policy provided gasoline for the current fire.

Now, maybe my memory is failing, but I don't seem to recall any prominent politician from either party saying anything bad about housing prices endlessly rising. Instead, the early discussions I remember as the bubble began to deflate were overwhelmingly about what policies might get housing prices to go back up, instead of down. I remember this very well, because we were in the market for a house, and every time I heard this, I thought "thanks a lot, guys!" I'm pretty sure it wasn't just Republicans trying to find ways to keep the housing prices up.

For one window on this, you can check out this list of the major recipients of money from Fannie and Freddie, the two quasi-governmental agencies that were behind a lot of the housing bubble, as I understand it, and that were recently (re)nationalized. That looks like a pretty bipartisan list, to me.

Turning mortgages into these securities arose long before W came to power, and another major cause of this crisis appears to me to have been the massive errors by the whole financial industry and regulatory structure in assessing the risk on these securities. I don't see any way that this could be a Republican or Democratic sort of screw-up, as the people committing the errors were pretty much purely motivated by greed, and they overwhelmingly drank their own kool-aid, to the point of bankruptcy in a whole bunch of cases.

As far as the deregulation, I really don't know much about either which regulations should not have been removed, or which ones should have been put into place. (I'm pretty doubtful that you do, either.) It is worth pointing out, though, that like McCain's maverick anti-corruption outsider image, the image of prominent Democrats as the reformers fighting against the evils of irresponsible, unregulated investment banks doesn't track all that well with the political donations. Indeed, the lobbying moneyfrom the investment industry seems to have tracked pretty well with which party could help them the most in the next few years.

#112 ::: Clifton Royston ::: (view all by) ::: September 26, 2008, 07:40 PM:

Stefan: "daughters named Caylee" as opposed to more sensibly naming kids Truck, Dweezil, Moondust and Torg - excuse me, that was silly, I meant Track, Bristol, Piper, and Trig.

#113 ::: Stefan Jones ::: (view all by) ::: September 26, 2008, 07:55 PM:

#112: Don't forget Burlap and Nukkel! The twins no one talks about, what after they got a college degree and read and all.

#114 ::: Doctor Science ::: (view all by) ::: September 26, 2008, 08:30 PM:

Stefan @110:

Jerry Pournelle thinks illegal immigrants are to blame.

I truly do not understand how anyone can use a brain to produce something that evil yet *stupid*. I mean, it's aggressively, in-your-face stupid -- and this from a guy who prides himself (however wrongly) on his intellect and rationality.

albatross @111:

I don't see any way that this could be a Republican or Democratic sort of screw-up, as the people committing the errors were pretty much purely motivated by greed

I agree that greed was the number one driving force in the whole catastrophe, but I disagree about which party is more to blame. Though both Dems & Reps politicians helped grease the skids, unfettered capitalism is part of the Republican brand. "The market will decide" has been their mantra for decades now, along with reducing regulation, reducing taxes on the rich, letting wealth "trickle down". Hell, this dates back to the 1920s at least, probably further.

What is notable to me is that racism, a much more recent element in the Republican brand, seems to trump capitalism for so many. That's what happened in the collapse of the immigration bill, too: the fat capitalist cats wanted "pro-business" immigration reform, but the Republican base said No.

#115 ::: albatross ::: (view all by) ::: September 26, 2008, 08:57 PM:

Doctor Science #114:

Well, okay, but the Republican brand also includes smaller government and balanced budgets. Do they get credit for those good ideas that aren't being followed? The Democrats' brand includes a concern for civil liberties. Do we give them credit for that in the face of the telecom immunity bill? The fact is, the parties strike a lot of ideological poses that have very little to do with how they govern. That doesn't mean there's no difference--there is, but the differences are often not very well described by the two parties' "brands."

BTW, what changes in financial market regulation were enacted or vetoed in the last couple years, since the Democrats have had congress, to address these problems? (I really don't know if there are any or not. I expect not, but I don't know.)

#116 ::: Doctor Science ::: (view all by) ::: September 26, 2008, 09:21 PM:

albatross:

Branding is partly a matter of who identifies with a party, and partly a matter of "ownership". So: if the Dems are in power and create a massive government program that fails, they "own" it -- it resonates with their brand. Conversely, though a Republican President (Nixon) started the Clean Air Act, the GOP doesn't "own" its successes -- it's not part of the party's self-identification, and (thinking as I type this) because it's not part of the GOP's self-identity, neither the Republicans nor the rest of the country expects them to *build* on it. And that expectation is a substantially self-fulfilling prophecy, because the parties tend to attract people who like the brand.

#117 ::: Doctor Science ::: (view all by) ::: September 26, 2008, 09:27 PM:

albatross @115:

what changes in financial market regulation were enacted or vetoed in the last couple years, since the Democrats have had congress, to address these problems?

None that I know of -- but I can think of very little in that way of regulation of *any* kind that the feckless Dems in Congress have been able to pass, against the solid wall of GOP (& Presidential) opposition.

Sadly, "feckless" appears to be part of the Democratic brand these days, or at least a Charlie Brown-like willingness to go for the football one more time.

#118 ::: Earl Cooley III ::: (view all by) ::: September 26, 2008, 10:10 PM:

I don't think that C*ulter's use of "daughters named Caylee" is a racist dogwhistle, but merely callous.

#119 ::: Lee ::: (view all by) ::: September 26, 2008, 10:32 PM:

C. Wingate, #103: Your immediate leap to claim that It's Clinton's Fault is exactly the same tactic used by men who come into a discussion of rape issues to whine, "But what about the MEN who are falsely accused?" Put a sock in it; nobody's buying.

#120 ::: Serge ::: (view all by) ::: September 26, 2008, 11:14 PM:

Lee @ 119... Put a sock in it; nobody's buying.

I find this image vaguely disturbing. At least you didn't suggest that 'it' be put inside a sock with a 'for sale' sign.

#121 ::: C. Wingate ::: (view all by) ::: September 26, 2008, 11:19 PM:

re 105: In the final Senate vote on GLBA, I see 8 nays (one R, seven D) one empty seat, and 2 abstentions (both R-- McCain was one of them). That's over 2/3s of the Ds voting for it. The house vote was not so lopsided, but still, 3/4s of the Ds voted for it. Yes, it was a veto-proof majority, and it was made so with a great deal of Democrat help. I'm pretty much with Albatross in 111 on this, and I tend to view the liberal meme of the Rs being for "unfettered capitalism" as being a less outrageous creature in the same genus as the kind stereotyped things conservatives say about liberals. When push comes to shove, neither party wants the government out of the economy; they just want it out of the way of whatever they have in mind at the moment. When it came to the housing market, everyone was quite happy to be making money in a crazily rising market, even those of us who had bought in before the rush and were suddenly seeing the prices of our houses double.

And Lee, "It's Clinton's Fault" is your statement, not mine. The problem is not that it is or is not Clinton's "fault", but that the conditions for the bubble were created with not just the cooperation, but with the assistance of Democrats. Also, your rape equivalence argument is routine, lame, and offensive. If we must go down that route, then the majority of congressional Democrats are like the buddies of the rapist, who know full well what's going on-- if indeed their culpability is that slight.

#122 ::: Serge ::: (view all by) ::: September 26, 2008, 11:30 PM:

Lee... I'd suggest not responding. After all, it's not as if he really cares what people here have to say as long as their responses show that he is having an irritating effect.

#123 ::: C. Wingate ::: (view all by) ::: September 26, 2008, 11:36 PM:

And not that Krauthammer is my idea of a great political oracle, because he isn't, but I'm looking at the two American Prospect articles, and they do not accurately represent what he said (nor for that matter what the NYT article from 1999 said: "In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders."). It would be one thing if we were talking about an after-the-fact claim, but unless the Times is falsifying their archives, we're talking contemporary testimony.

#124 ::: albatross ::: (view all by) ::: September 26, 2008, 11:51 PM:

Serge:

I'm missing what C Wingate said that wasn't true.

I think the irritation here is coming from your disagreeing with what he says, but that's kind of a given in political discussions, right?

#125 ::: Debra Doyle ::: (view all by) ::: September 26, 2008, 11:53 PM:

Lee@119: Observing that the Democratic Party, while demonstrably less culpable than the Republicans in the present mess, is nevertheless not completely blameless and without sin is not the same as proclaiming that it was all Clinton's fault, and I am fairly certain (based on my reading of the text) that C. Wingate said no such thing.

Also: I cry unfair debating tactics, in that invoking the rape analogy attempts to force one's opponent into the apparent position of defending the indefensible.

#126 ::: Steve C. ::: (view all by) ::: September 26, 2008, 11:58 PM:

Incontrovertible Rule 1: There will always be speculative bubbles popping up in one investment or another.

Incontrovertible Rule 2: While they're going up, damn near everyone thinks they're wonderful.

Incontrovertible Rule 3: They always end in spectacular crashes.

Incontrovertible Rule 4: After much gab and, more importantly, the assignment of blame, we'll create legislation that will stop this from ever happening again.

Incontrovertible Rule 5: Rule 4 never works.

#127 ::: Serge ::: (view all by) ::: September 27, 2008, 12:09 AM:

Albatross and Debra Doyle... Well, it may be that my memory is on the fritz, but I remember his tendency to lay the blame equally at the feet of the Democrats. If he didn't actually say so, he has done everything possible to imply it. Kind of like the White House saying it had never said that Iraq had weapons of mass destruction. But that's just my own irritating opinion.

#128 ::: Doug Burbidge ::: (view all by) ::: September 27, 2008, 06:13 AM:

Australian / New Zealand comedian John Clarke and his straight-man Brian Dawe on the official U.S. position.

(Each week Dawe interviews Clarke, with Clarke pretending to be a different person: the prime minister, the treasurer, et cetera. Clarke always speaks in his own (deadpan) voice, merely speaking from the point of view of the person he is impersonating.)

#129 ::: heresiarch ::: (view all by) ::: September 27, 2008, 07:16 AM:

Michael Roberts @ 64: "The problem is that the people selling those bad mortgages, through one trick and another, agreed to pretend to one another that the future value was real. Through two or more multiplying layers, apparently. So when 5% of the mortgages went away, trillions of dollars of pretended value ... vanished."

That's not my understanding of what happened. Madeleine F @ 104 is closer, but the best explanation I've read was here:

How do you take a bunch of loans that might not be repaid, and turn them into something that's safe? Well, what do you do if you had a lot of money tied up in a piece of property that you could lose in an accident? Like, say, a car or a house? You'd buy insurance!

That's basically what the investment firms did. They gave out shit loans that any sane person should have known couldn't be repaid, and then they bought insurance on them to guarantee that at least the principal would be safe.

So who did they buy insurance from? Mostly each other.

It's not the bad loans that are the big problem. It's that each loan is insured for many times its worth, and now all those insurance payments are all coming due at the same time. So if most of the loans continue to be paid, then the cripplingly high insurance payments that no one has the cash on hand to pay never need come due.

Graydon @ 88: "(The fix? You don't bail anybody out. You take them over, pauperize the directors and officers of the corporation (and I mean 100 bucks in cash, one shirt, one pair of pants, one pair of shoes, total assets, pauperize[1]), and liquidate the corporation. Preferably into many small regional financial services offices. Results of pauperizing and liquidation go to offset the bad debt; presumable a lot of loans need to be adjusted to be payable/maintainable, too.)"

Yes. As long as the gains that accrue to the individual are insulated from the costs of that individual's mistakes, they are going to behave recklessly. Only when people are personally liable for the damage they cause will this cycle end.

#130 ::: heresiarch ::: (view all by) ::: September 27, 2008, 09:32 AM:

albatross @ 111: "Turning mortgages into these securities arose long before W came to power, and another major cause of this crisis appears to me to have been the massive errors by the whole financial industry and regulatory structure in assessing the risk on these securities. I don't see any way that this could be a Republican or Democratic sort of screw-up, as the people committing the errors were pretty much purely motivated by greed, and they overwhelmingly drank their own kool-aid, to the point of bankruptcy in a whole bunch of cases."

I'm amazed that you can't see the Republican culpability here--I mean, these are the people who are advocating a repeal of the capital gains tax as a solution for our current woes! It's just insane! Republicans have been pushing deregulation relentlessly for decades, and that a Democratic president once signed a deregulation bill doesn't somehow make Democrats equally culpable.

I'm not going to lie--Democrats are big business's second-best friends. But there's a substantial gap there between first and second place. For instance, when was the last time you heard a Democrat arguing for privatizing Social Security (a giant hand-out to financiers)? John McCain argued for it last month. Who sub-contracts out military missions? Who funneled Medicare Part D coverage through private insurance? Who deregulated the energy markets in California and Oregon?

No--the Democrats' sin has been to go along when they should have resisted, and to trade away things which should be non-negotiable. It is the Republicans who have led the charge to deregulate and privatize, and they who deserve the blame.

P.S. Obama's recieved more money from Securities and Investment only in raw numbers--percentage-wise, it's almost identical. (McCain has a lead if you include the whole financial sector.)

#131 ::: C. Wingate ::: (view all by) ::: September 27, 2008, 10:51 AM:

Serge et al, reviewing the history of the affair leads me to the conclusion that the whole thing arose from a rather benign and seemingly bipartisan win-win project to increase house ownership. To do this, the financial people had to convince themselves that they weren't increasing their exposure excessively, and helpfully, the accompanying changes made it easier to create this appearance.

When control passed to Bush, I suspect three things came into play: First, Bush was made into the 9/11 president and really didn't care about domestic issues. Second, he had just as much to gain politically from increasing home ownership as Clinton did, so he had a strong incentive to keep things moving in that direction. Third, he had a lot of personal incentive not to try to rein things in-- largely bad incentives, because they are marks of a weak character.

I imagine that politically it's always easier to let matters develop into a crisis that has to be dealt with rather than to try to buck the Spirit of the Age. This what second-raters do, and if there's anything I'd say about Bush, it's that he's a second rater-- maybe third.

#132 ::: Lee ::: (view all by) ::: September 27, 2008, 11:37 AM:

Debra, #125: We're obviously seeing different things. What I saw was a clear-cut attempt to distract the discussion from the issue at hand by playing the "But Clinton did it too!" card. This is pretty much exactly the way some men will come into a discussion of women's issues (not just rape, but any discussion where the focus is on issues affecting women) and try to hijack the discussion into being about men instead. It's an attempt to shift the focus to the hijacker's talking point.

heresiarch, #129: As long as the gains that accrue to the individual are insulated from the costs of that individual's mistakes

AKA "privatizing benefits and socializing risks."

#133 ::: Debra Doyle ::: (view all by) ::: September 27, 2008, 11:58 AM:

Lee@132:We're obviously seeing different things.

It would seem so, indeed. But by and large, I have a fairly high level of confidence in my ability to interpret the written word.

It's an attempt to shift the focus to the hijacker's talking point.

And attributing to the speaker (or typist) a stronger assertion than he or she in fact made, and then arguing with that attribution rather than with the actual text, is not?

#134 ::: FungiFromYuggoth ::: (view all by) ::: September 27, 2008, 12:18 PM:

What I'm seeing is a tendency to focus on an extremely small part of the situation, and exclude all other input that might disagree with the conclusion he wants to reach.

Krauthammer's column is vapid enough to be interpreted as being in favor of the "CRA-started-it-all" meme (as TAP did) or C.Wingate's improved "The NYT said that Clinton caused the problem".

However, Krauthammer claims two things: first, that subprime lending was at the root of the problem; second, that "only a fool or a presidential candidate" would claim that predatory lending was a major factor in this crisis.

Even Freddie Mac acknowledges that 1 in 5 of subprime borrowers actually qualified for a prime loan but were screwed out of it because of discrimination or predatory loans. There's a claim that it's as many as one in two. Whether it's 20% or 50%, that's still a major factor.

The same expert pegs the start of the "aggressive subprime lending" at the end of 3Q 2005. That seems to implicate the bankruptcy bill more than the 1999 Freddie/Fannie tuning. And yes, Democrats including Joe Biden were complicit in passing that monstrosity.

Finally - the passive voice "Bush was made into the 9/11 president and really didn't care about domestic issues" is worthy of a threadjack dissection all its own. It's part minimizing, part rewriting history, and definitely a piece of work.

#135 ::: Madeline F ::: (view all by) ::: September 27, 2008, 12:27 PM:

First off, every talking point that starts with "we gave minorities home loans and now the whole economic system is fucked" is racist and scapegoat-y, and I find it immensely distasteful to see it proposed.

I have been doing a bunch of research on this "insurance" thing. It's called "credit default swaps." Originally it seemed like a kind of sensible idea, like health insurance... The thought was, if you bundle a whole bunch of mortgages, only a few of them will fail! So if you pay me every month for each mortage, I will pay you if a few of them fail.

But no one looked at the health of this pool of mortgages. One site I read mentioned that something like 63% of all mortgages in San Diego had teaser rates...

-------
And just an aside, somehow I doubt that in one of the most expensive markets in the nation, it was minorities buying 63% of those million-dollar homes. It wasn't government regulation that made banks go, "Hey, so we've created this bullshit type of mortgage so people can be loaned way more money than they should be loaned... Let's apply it across the board!"

One guy I saw who started with the "those upstart poor supported by evil government regulations" had a vaguely sensible explanation:

The housing bubble of the 00's was driven by a (well intended) change in the law in the 90's that caused banks to start handing out mortgages to a whole new class of people - the poor. The number of buyers increased while the number of houses remained relatively fixed; simple supply and demand drove up price. That alone would not have caused housing prices to double, but this upward movement attracted speculators, driving prices up further.

Now, I can see how the poor horning in on small cheap houses would drive up their prices. I don't see that it necessarily follows that the middle class then has to buy larger houses than they can afford... Here in the Bay Area we hear all the time about how one section of the housing market, like "luxury homes" is stagnanting, while another, like "homes near good schools" is still going great guns.

But anyway, the "whee, let's give crap credit to anyone!" attitude of the banks lead to rapid increases in housing prices, which made it incredibly attractive to bundle up a bunch of mortgages and sell them as a security that had caught the gravy train.
-------

So, there's these mortgage-backed securities (MBSes) that are like licenses to print money. And there's these credit default swaps (CDSes) that insure the mortgages... But wait, the CDSes aren't being sold by insurance companies. They're being sold by guys who have a few thou in their basement. They are crap, and only work at all if you assume no one will ever default.

But since they're fraud, they're inredibly lucrative... Pay me 500 a month to insure that pink unicorns won't trample the cost of my MBS? Sure! License to print money.

So the CDSes also get sold as securities.

At this point, people have lost track of the actual mortgages. Maybe originally a CDS went with a specific MBS, but now they're both sold separately, and the CDSes get cloned, and so one crap MBS supports who knows how many crap CDSes.

That is why we're screwed. Bad mortgages could have maybe taken down a bank, but it was the blind greed and fraud in the securities markets that caused us to be on the hook for trillions.

So, when did this all go down? According to this Reuters article, CDSes were invented in the mid-90s. In 2000, they were a $631 billion market... That still sounds sort of like it might be tied to something real. In 2003, "Warren Buffett called them a 'time bomb' and 'financial weapons of mass destruction' and directed the insurance arm of his Berkshire Hathaway Inc to exit the business." In the first half of 2007, they were a $46 trillion market.

Everyone knew that the housing market was a bubble, and everyone was waiting for the crash. But no one in the government looked away from Iraq long enough to say, "Oh, hey, there's more wrong here than just a bunch of people losing half the value of their houses..."

This isn't about bad poor brown people and their mortgages. This is about unchecked fraud in the securities market.

Another credit default swap explanining link from Nov. 2007, where he's like, um, maaaaybe it won't explode...

BTW, heresiarch, I love you dearly, and my name has only 2 E's. :)

#136 ::: Earl Cooley III ::: (view all by) ::: September 27, 2008, 12:38 PM:

A better use of the $700 billion bailout would be to use the money to pay off as many peoples' mortgages as possible, prioritized by need, no strings attached; the increase in the ability of consumers to improve the economy through retail spending, unfettered by worry about a roof over their heads, would be considerable. Let the financial sector bankroll the criminal incarceration of their directors and executives; that would be a great investment in public confidence. Halliburton's no-bid contract for mass immigration confinement could be usefully repurposed to hold criminal executives and cynically soulless investors instead.

#137 ::: FungiFromYuggoth ::: (view all by) ::: September 27, 2008, 01:06 PM:

Via Atrios: no one could have predicted that voluntary regulation would fail and contribute to the collapse of investment banks.

And yes, voluntary regulation doesn't seem to work well when Democrats try it either. But there seems to be a lot more of it when Republicans are in office. Anyone have any ideas why?

#138 ::: Constance ::: (view all by) ::: September 27, 2008, 02:29 PM:

Some of us have noticed that gentrification has never been mentioned in this mess.

One of the primary reasons for the subprime loan instruments and structures getting implemented, it seems to me, from where I sit, here in one of the most expensive real estate markets on the globe, and what I saw happen in this city, is that people don’t have anywhere to live!

There are no rentals, at least not any that people can afford. No dearth of luxury rental property, but very little, if any, for middle-class and poor people. So you do go for a mortgage and house, at any sort of deal, because there is no other choice. At the same time where you used to live has been taken away from you, torn down, for either a single family mcmansion, or luxury condos. You have been pushed out of your neighborhood, and the same process has been going on everywhere else. There isn't enough housing. So ... here you go -- get a mortgage and house and by golly, that's your only choice.

That there was / is not other choice also appears to me, from where I sit, not an accident or a coincidence. These sub-prime mortgage lenders and bundlers and buyers and gamblers got very rich from the desperation of less affluent people.

Not that it is news that some groups gets rich from the miseries of others. That’s history. But not any more acceptable for that, particularly in a nation that trumpets democracy.

Love, C.

#139 ::: Serge ::: (view all by) ::: September 27, 2008, 02:58 PM:

C Wingate @ 131...

So, basically, the greed of Democrats is as much to blame. I'd grant you that except that it kind of contradicts the Republican's stereotype of Democrats as communists who'd like nothing better than to take away the wealth of hard-working people. Mind you, I'm not saying that you believe that.

As for your being willing to say that Bush is a third-rate President... It'd have been better for the country if more Republicans had openly said so before George messed things up.

#140 ::: Madeline F ::: (view all by) ::: September 27, 2008, 04:52 PM:

When my comment from this morning is released from moderation, your socks will be rocked. LO, I have discovered the name of the "insurance"... It is called "credit default swaps" and Warren Buffett was calling it a time bomb in 2003.

#141 ::: abi ::: (view all by) ::: September 27, 2008, 05:00 PM:

Thanks for the poke, Madeline F. The comment is out of Limbo now and living under the name of Sanders 135

I see no references made inaccurate by its release.

#142 ::: Lee ::: (view all by) ::: September 27, 2008, 06:33 PM:

Madeline, #135: This isn't about bad poor brown people and their mortgages. This is about unchecked fraud in the securities market.

Or, phrasing it another way, it's about how nobody gave a damn until it started affecting People Who Matter. And (vide McCain) until you make $5,000,000 per year, you're not one of the People Who Matter.

#143 ::: Madeline F ::: (view all by) ::: September 27, 2008, 06:42 PM:

Thanks for the release of the comment, abi!

It looks to me, with the 100-fold increase in the CDS market in 7 years, that people were beginning to get worried about the MBSes that at various times they owned. So everyone who had a tiny bit of a MBS got their own CDS... Without even considering that the CDS was as much BS as the MBS?!

#144 ::: albatross ::: (view all by) ::: September 27, 2008, 08:28 PM:

Madeline F #135:

The largest insurance company in the world, AIG, was basically driven into bankruptcy (it was nationalized to avoid having it go bankrupt) by credit default swaps, so I'm not sure your comment about this not being done by insurance companies is quite right.

What seems clear to me, as an outsider, is that the market completely failed to assess these risks correctly. (Warren Buffet assessed them correctly, but the market as a whole got it wrong.) AIG was the biggest insurance company in the world. They knew a little something about the insurance business and pricing risk. But they got the assessment wrong. I would like to understand why, because I suspect that this is the underlying problem that drove this crisis--both for the credit default swaps and for the mortgage based securities. (But I'm way outside my expertise here.)

I gather that some of the problem with assessing the risks of CDSs came from their lack of regulation--basically, the issuers weren't held to the kind of transparency rules that other bits of the insurance business were held to, but I don't really understand the details too well.

#145 ::: P J Evans ::: (view all by) ::: September 27, 2008, 08:43 PM:

If I understand CDSs, they're based on a group of mortgages, and the seller says 'Yes, it has Boardwalk and it also has Baltic Avenue. But I [don't know]/[can't tell you] how many of each it has.' So you're betting that it's good, without knowing anything more than that it's a bunch of mortgage futures (so to speak).

#146 ::: Lila ::: (view all by) ::: September 27, 2008, 08:44 PM:

AIG's subsidiary, VALIC, holds my husband's retirement account.

We have, of course, been assured that there's no problem, no problem at all!

#147 ::: Earl Cooley III ::: (view all by) ::: September 27, 2008, 08:45 PM:

Madeline #143: MBS

That stands for mono-bloatium-suitimate, right?

#148 ::: Madeline F ::: (view all by) ::: September 27, 2008, 09:00 PM:

It is true that some CDSes were backed by real insurance companies; but some (probably many) were backed by hedge funds only in it for the profits. There must have been some compelling reason that AIG got it wrong, but I'm keeping in mind that being a world leader in your field doens't mean you're top-notch internally: there was Arthur Andersen, after all.

Anyway, here is the latest research that I've found, presented for the edification of Making Light:

Mortgage-backed security is a class term, like "canine". The specific problem ("dog") seems to have been mostly the CMOs: Collateralized Mortgage Obligation... The type of MBS that's broken down into parts ("tranches") with each part sold off to a person with a different risk desire. So one bad mortgage feeds hundreds of bondholders, who all probably took out CDSes on it which were then sold them on the market.

The CMO was created in 1983, according to wikipedia. Why did it take so long to explode? Perhaps here we can blame the lending law in the 90s, which actually, does anyone have a link explaining what that specifically did? Anyway, forced to make weird loans, lenders went for the CMO, since one of the benefits it offered was that the loan got shunted off behind a firewall and all the risk was on the holders of the hundreds of bonds. You've all seen the Subprime Primer link, right? Here people started to just make loans right and left thinking others would be holding the bag.

The link in FungiFromYuggoth's #134 explains another bad thing about the CMO: when a mortgage needs to be renegotiated, it's pretty much impossible, because to keep the "firewall" going the company that manages and offers the CMO can't have any say in what happens inside it. The person who wanted to renegotiate to stay in their house would have to track down the hundreds of people who bought the bonds and renegotiate with each of them... And the guys in the First Paid Low Risk tranche aren't going to want the same thing as the guys in the Maybe Paid Higher Risk tranche. The risk of lawsuits and the sheer overhead of talking to all those people make foreclosure far more likely. This must be what the "bankruptcy judges should be able to renegotiate mortgages" suggestion comes from: at last there would be one person with the power to fix something.

So we can go for the opposite of "blame Clinton" and blame Reagan, since the CMO issues sound like they should have been pretty obvious. ;)

Fungi's link further has the financial dude suggesting that the bankruptcy bill of 2005 made it harder to shield your house from creditors, and subprime loans/CMOs took off like crazy after that. (Someone somewhere must have thought that maybe being in the Meh tranche wasn't much good if the person could keep their house, and that removed that fear.)

#149 ::: Debra Doyle ::: (view all by) ::: September 27, 2008, 09:30 PM:

PJ Evans@145: So you're betting that it's good, without knowing anything more than that it's a bunch of mortgage futures (so to speak).

In the part of the world where I grew up, I believe the technical term for something like that was "buying a pig in a poke."

#150 ::: Allan Beatty ::: (view all by) ::: September 27, 2008, 10:00 PM:

If it's actually a bailout, they're doing it wrong. Nobody "deserves" to be bailed out of this mess. By this I mean that funnelling $700,000,000,000.00 of our and our grandchildren's money to any defined group of individuals or one particular industry is just a raid on the treasury, not a solution to a problem. (And as several others have already pointed out, the least deserving are those who were in the best position to know better. This includes Paulson and his former colleagues at Goldman Sachs.)

Instead, what is needed, is first of all the politicians should stop being part of the problem. In a more civilised country than ours, there would be a vote of no confidence in the government. In a less civilized country, Paulson's head would be on a pike outside the castle.

Instead of handouts for one segment, what is needed is keeping the financial marketplaces as a whole running sanely. This doesn't mean that no banks ever ever fail or that no houses are ever foreclosed. It just means that savers and borrowers, investors and entrepreneurs can find each other and make rational deals that benefit all parties.

A functioning economy is a public good which justifies spending some taxpayers' money to promote it. But instead of handouts to whoever can ingratiate themselves with the Secretary of the Treasury, a much smaller amount should go towards hiring some more researchers and analysts and enforcers at the various agencies to better enforce the regulations we already have, and to hire some more human relations and civil service and inspector general people to help shield the regulators from political pressure.

The regulations might also need some attention. Here I'm speaking not so much about the overall level of regulation, but about how different things are regulated in varying degrees. If buying stock on margin is heavily restricted, but credit default swaps are loose and fancy free, well we see what happens. The government in effect has its thumb on the scale, encouraging risk-takers to take particular kinds of risks.

The defaulting homebuyers might benefit from some adjustments to the bankruptcy laws.

I've been reading economist Tyler Cowen's blog and left-libertarian Arthur Silber's rants, among other sources.

#151 ::: Allan Beatty ::: (view all by) ::: September 27, 2008, 10:03 PM:

The regulations might also need some attention.

Strike the word "might".

#152 ::: heresiarch ::: (view all by) ::: September 28, 2008, 03:26 AM:

Lee @ 132: "AKA "privatizing benefits and socializing risks." "

Yep. Which, when I got to thinking about it, is essentially the function of the corporation. No wonder they all think paying for their mistakes is so totally unfair--they're just products of corporate culture.

Madeleine F @ 135: "That is why we're screwed. Bad mortgages could have maybe taken down a bank, but it was the blind greed and fraud in the securities markets that caused us to be on the hook for trillions."

Yeah--CDSes are basically a multiplier, "leveraging" billions of dollars of bad mortgages into trillions of dollars of debt.

What gets to me is how inescapably linked their eventual downfall was to their initial rise. The sub-prime mortgages that made all that money in the short-term are the same ones that began the bubble that has destroyed the housing market. The CDSes that were supposed to protect those mortgages are the same CDSes that are bringing down the entire US (world?) financial system. There's no way you could have one without the other.

It's like building a giant cannon shoot you to the moon, explaining "Sure, it will only accelerate me for less than a second, but it will be at such high g force that it will still break escape velocity!" without ever working out that that selfsame high g force with splatter you inside your capsule like an overripe pumpkin. A drastic failure to connect cause to undesirable effects.

"BTW, heresiarch, I love you dearly, and my name has only 2 E's. :)"

Oops! Sorry. *shamefaced*

albatross @ 144: "But they got the assessment wrong. I would like to understand why, because I suspect that this is the underlying problem that drove this crisis--both for the credit default swaps and for the mortgage based securities."

“It is difficult to get a man to understand something when his salary depends upon his not understanding it”

-Upton Sinclair

#153 ::: guthrie ::: (view all by) ::: September 28, 2008, 05:04 AM:

IN all this I couldn't help but think of this simple quote:

"Does a population have informed consent when that population is not taught the inner workings of its monetary system, and then is drawn, all unknowing, into economic adventures?"

(From "The Dosadi Experiment")

#154 ::: Craig R. ::: (view all by) ::: September 28, 2008, 05:40 AM:

Guthrie -
"drawn, all unknowing, into economic adventures?"

At one point, for a very short while, I was willing to lay primary blame on all the borrowers in this subprime mess,

Then I started thinking, more and more, how they *got* those loans,

The borrowers were not writing the loans.

The borrowers were not supplying the cash for these loans.

The borrowers were not securitizing the loans.

The borrowers were not originating and securitizing the CDEs

The borrowers certainly were not either deregulating, or refusing to regulate, the marketplace.

#155 ::: Sica ::: (view all by) ::: September 28, 2008, 07:39 AM:

albatross @ 144: "But they got the assessment wrong. I would like to understand why, because I suspect that this is the underlying problem that drove this crisis--both for the credit default swaps and for the mortgage based securities."

I think part of the risk assessment going wrong is that they assumed that the risk of each mortgage failing was independent. I.e there's x% chance of a mortage failing and that's completely independent from the odds of all the other mortages failing. So you can then bundle a ton of mortgages together and voila! with tranching you can have vasts sums of 100% safe, yeah for real, honest! investment.

This gives nice and easy math to calculate out the risk but unfortunately reality doesn't quite work that way. Mortgages tend to start failing when there are interest rate rises or if unemployment is on the rise etc. and that's not something that affects all the mortgages so the odds of each mortgage failing failing goes up when a few of them start to fail and the whole house of cards comes crashing down.

So yeah, they cheated at math.

Here's a post over at Good Math, Bad Math that goes into this in more detail: Bad Probability and Economic Disaster; or How Ignoring Bayes Theorem Caused the Mess

#156 ::: John L ::: (view all by) ::: September 28, 2008, 08:45 AM:

Well, CNN's saying a deal has been reached in Congress for this bailout bill. Oversight and an insurance scheme is included, as well as limits on golden parachutes and profit sharing for the public if the purchased stocks are resold profitably. There's a conflict of interest clause too, but there's no help for homeowners facing foreclosure and no details on what the oversight board will do, who will be on it, or any limits on the $700 billion value the Treasury Secretary wanted.

Presumably it will be voted on by the House today, and if passed will go to the Senate for final confirmation and be on Bush's desk this evening to be signed.

#157 ::: Lenny Bailes ::: (view all by) ::: September 28, 2008, 03:41 PM:

About the newly-brokered 250/100/350 billion modified Paulson plan, this AP story says:

To help struggling homeowners, the plan requires the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes.

Is this consistent with what Madeleine points out in #148? Would the government actually be able to renegotiate mortgages that have been bound into CMOs? And how might that ability be impacted by the government being the insurer and not the owner of the "rescued" securities?

#158 ::: John L ::: (view all by) ::: September 28, 2008, 03:55 PM:

Neither the CNN nor the Washington Post articles on this story mention anything like what the AP is saying about renegotiating bad mortgages.

The oversight board is, according to CNN, made up of appointed members of various financial agencies, but the Post says the board will be made up of Congressional approved members.

#159 ::: Christopher Davis ::: (view all by) ::: September 28, 2008, 04:03 PM:

Sica (#155): the aviation equivalent of this is the question of how many engines an airliner should have. In most cases of multiple-engine failure, there's a common cause involved; whether you have two engines or four, running out of fuel is going to be a problem.

With a common cause of engine damage (like the L-1011 that lost all three engines due to uninstalled O-rings or the 747 that hit a cloud of volcanic ash) more engines may still be helpful; in both of these cases, the pilots were able to restart one or more engines, and the more engines you have the better your chances that one or more will be sufficiently operable to keep you going.

#160 ::: CHip ::: (view all by) ::: September 28, 2008, 04:36 PM:

Lizzy L@72: NPR discussed that later Friday; the explanation given was that there had already been periods when ultrashort-term loans (1-7 days) had been frozen, and that there are enough businesses dependent on these loans that the effects of not dealing with the freeze ASAP could be horrendous. It sounded very convincing, except that they did not explain why such businesses could not simply get creditors to postpone for a few days.

Graydon@88: Pauperize? What do you do with all the real assets you've just taken over? Sell in a falling market? And how does that generate enough money to unfreeze the mess? Vengeance can be fun, but often it's not helpful.

dolloch@95: How do you think the party would persuade a notoriously willful president to fall on his sword?

#161 ::: guthrie ::: (view all by) ::: September 28, 2008, 06:38 PM:

Craig R- exactly. Sure, people end up taking a risk when they borrow lots of money for a house. But for the organisations doing the lending to then multiply that risk, despite their supposed specialist knowledge, is ridiculous.

#162 ::: Lenny Bailes ::: (view all by) ::: September 28, 2008, 07:32 PM:

There's nothing in this later CNN report about renegotiating mortages to provide relief for home owners.

If I didn't already think so, I'd be convinced by Digby's recent post quoting Nouriel Roubini--that Congressional Democrats should request help from professional economists to develop legislation that might actually help the current situation. Roubini, who predicted the current meltdown two years ago, says:

The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.

It looks like the Democrats have been spooked by the fear that Atrios characterized last week: "Do something NOW, NOW, NOW." The pressure from the fear stampede is blocking them from getting the larger picture--that Paulson's plan isn't worth saving.

Where's Hillary Clinton been this last week?

#163 ::: Wesley ::: (view all by) ::: September 28, 2008, 07:59 PM:

The Hullabaloo post linked in #162 is particularly worrying when combined with this one (quoting Digby):

Right now I'm watching Pelosi and Reid, Frank and Dodd stand there all by themselves taking "credit" for this bill. They are handing out plaudits to all the others who "helped" them get it done like members of "the Hills" at the MTV awards.

Here's a prediction, based on those posts: a year from now, the Republicans will be selling this as the "Democrats' bailout." Assuming Obama wins, they'll use the bailout to scuttle any idea he tries to launch--because we already spent that money, y'know? And they're likely to succeed--as we know from experience, the Democrats in congress aren't willing to fight them at all.

#164 ::: Lizzy L ::: (view all by) ::: September 28, 2008, 08:49 PM:

In a less civilized country, Paulson's head would be on a pike outside the castle.

First Peasant: I'll vote for that.

Second Peasant: What's "vote?" Hand me that pitchfork.

I am so not reassured by the Paulson plan.

#165 ::: Madeline F ::: (view all by) ::: September 28, 2008, 09:00 PM:

The latest two bits of info I came by:

From the New York Times, September 18th:

During the Depression, Congress separated commercial banks, which take deposits and make loans, from investment banks, which underwrite and trade securities. The investment banks were allowed to do business with less oversight, while commercial banks operated with tighter supervision.

But after Congress repealed those Depression-era laws in 1999, commercial banks began muscling in on Wall Street's turf. As the new competition whittled down profit margins, investment banks used more of their capital to trade securities and also began developing financial derivatives to fuel profit.

There was suddenly ruthless competition in the securities niche, and banks were looking hard for something juicy that would let them keep getting the kinds of monthy returns they had been. Thus driving the market towards crazy CMO securities that Just! Might! Work! (yeahno).

Also, spoke with my mom today; she's a bookkeeper for a HVAC firm. They had to lay off a bunch of HVAC workers last week because the general contractor couldn't get the next part of the building loan from the bank, so people were sitting around not working. "Don't they have a contract where the bank has to pay certain amounts of money on certain dates?" I asked. "They have a contract where the bank has to pay certain amounts of money when certain stages of work are completed. Now they're saying, 'Oh, we're sending someone out to check on that work'. They're dragging their feet."

So, credit crunch affecting actual people.

Also, thanks heresiarch! I really do look forward to the stuff you post. :)

#166 ::: Terry Karney ::: (view all by) ::: September 28, 2008, 09:00 PM:

I forget where I was reading it... Obama has to get his ass in gear. After the first 100 days or so, his ability to get things done will be much lower. The reactionary elements will have once again recovered their footing and will fight tooth and nail to prevent him from making changes.

How we get the House/Senate to actually move with him is a whole nother problem.

Now is the time to get the cards and letters started. One, it sets up what we want; in advance, two it makes it seem we believe he's really going to win, and three (harder) reminds them what the people who believed wanted; just maybe making them nervous that failure to deliver might have consequences.

#167 ::: heresiarch ::: (view all by) ::: September 28, 2008, 10:00 PM:

Wesley @ 163: "Here's a prediction, based on those posts: a year from now, the Republicans will be selling this as the "Democrats' bailout." Assuming Obama wins, they'll use the bailout to scuttle any idea he tries to launch--because we already spent that money, y'know? And they're likely to succeed--as we know from experience, the Democrats in congress aren't willing to fight them at all."

You know, I'm tired of always assuming that no matter what happens, it will help the Republicans. "Look, X happened! The Republicans will surely benefit." "Oh look, the exact opposite of X happened. The Republicans will doubtlessly benefit." I'm tired of it. Like, actually tired: it fills me with exhaustion and ennui.

So I'm going to stop treating every hypothetical Republican line of attack as though it has already been successfully executed. I'm going to stop assuming that potential backlash against any Democratic proposal or action is certain, and therefore sufficient reason not to try it at all. I'm done with that. If the Republicans want to convince me that standing up for liberal principles and fighting Republican fubars is a losing strategy, they're going to have to actually make it so.

If Republicans want to spend the next two, four years bringing up this mess, then fine: that's a battlefield I'm more than willing to meet them on. I'm willing to stand up and say, "Every flaw that bill had came from the compromises we had to make with YOUR party. The mess that forced us to pass that bill was the brainchild of YOUR party. And now here you stand, arguing that YOUR legislative incompetence is a reason to keep government from doing the things that it needs to do? No--all that means is you need to sit down and shut up, and let us try to repair this country."

Madeline F @ 165: "Also, thanks heresiarch! I really do look forward to the stuff you post. :)"

Aw, thanks! That's always good to hear. =)

#168 ::: FungiFromYuggoth ::: (view all by) ::: September 28, 2008, 10:51 PM:

heresiarch wrote: So I'm going to stop treating every hypothetical Republican line of attack as though it has already been successfully executed.

Hypothetical? It's been a week since attacking the "Bush-Pelosi plan" was floated. (hat tip, Digby).

For me, what's frustrating is not that the Republicans will try (with uncertain success, you're right about that) to blame this on the Democrats. What's frustrating is that the Democrats think that facts will insulate them from attack. By this point, they should be resigned to being attacked by people who think that FDR extended the Great Depression until the Germans bombed Pearl Harbor, and have the backbone to go ahead and fight for a good bill. Which this does not seem to be.

Lenny Bailes @ 162: I believe that the bundled and resliced mortgages can be renegotiated, it just requires buy-in from everyone who owns a slice of the mortgage. Which is why bankruptcy judge cram-downs are the only way it's going to happen. A bill that requires the federal government to 'try' something means two things, and one of them is Jack and the other isn't Harkness.

#169 ::: Terry Karney ::: (view all by) ::: September 28, 2008, 10:58 PM:

Heresiarch: Hear! Hear!

I'm already fighting part of that, with a guy who says talking about the causes (and needed solutions) is "academic" because nothing will be done to fix it (and saying, On another note, I really think that people forgot that if you borrow any amount of money, you will be required to pay it back in full. It is a VERY basic priniciple. Money doesn't fall from the sky or magically appear. Being tempted is not the same as being forced. People were tempted, and they bought in. But he's not blaming anyone nope. Not at all. The date rape analogy he tosses in... well I don't know quite what to make of that; somehow frat boys and drunk chicks were brought in to make it seem the borrowers were going into the loans with open eyes, and informed consent. It was bizarre).

So he says we have to bend over and take it: Remember everyone who voted for it, replace them and accept that it will never get better, even if we are activist.

But you can bet he'll blame the dems if it doesn't go perfectly, and find a way to credit the Repubs if it does.

But I'll be banging that drum with you.

#170 ::: Terry Karney ::: (view all by) ::: September 28, 2008, 11:00 PM:

Heresiarch: Hear! Hear!

I'm already fighting part of that, with a guy who says talking about the causes (and needed solutions) is "academic" because nothing will be done to fix it (and saying, On another note, I really think that people forgot that if you borrow any amount of money, you will be required to pay it back in full. It is a VERY basic priniciple. Money doesn't fall from the sky or magically appear. Being tempted is not the same as being forced. People were tempted, and they bought in. But he's not blaming anyone nope. Not at all. The date rape analogy he tosses in... well I don't know quite what to make of that; somehow frat boys and drunk chicks were brought in to make it seem the borrowers were going into the loans with open eyes, and informed consent. It was bizarre).

So he says we have to bend over and take it: Remember everyone who voted for it, replace them and accept that it will never get better, even if we are activist.

But you can bet he'll blame the dems if it doesn't go perfectly, and find a way to credit the Repubs if it does.

But I'll be banging that drum with you.

#171 ::: albatross ::: (view all by) ::: September 28, 2008, 11:14 PM:

Lenny #162:

Let's think about the post-9/11 fear stampede, and the Iraq war runup fear stampede. There seem to be a couple big parallels with the current fear stampede. (A lot of this is inspired by a recent LJ post by Patri Friedman, which got me thinking about the strategy involved.)

First, there's some event that triggers widespread fear. (9/11 attacks, horrible financial news)

Second, while the panic is irrational, there are real things to be scared of. Most everyone can think of stuff that now seems uncomfortably likely, like another 9/11 scale attack, or a massive global recession.

Third, there are people who already had an agenda and ideas about how to deal with this kind of situation. (FBI/CIA/NSA/military + neocons, financial industry insiders) While everyone else is trying to figure out what the hell just happened, these folks are ready to go out and tell people what need to be done.

Those three set up a really powerful strategy for getting some policies enacted: Get lots of respectable, serious people to go out in the media, and tell everyone that the feared disaster (another 9/11, a terrorist nuke in Chicag, another great depression) will happen unless your policies are enacted. Make it urgent, emphasize that that the clock is ticking, that "our first warning might be a mushroom cloud rising over an American city."

Now, you are a skeptic. You recognize the stuff in the Patriot act as crap the FBI has wanted for ages; you doubt the Iraqis would ever give a nuke to Al Qaida even if they had one; you suspect the bailout is more about saving a politically important industry than saving the economy.

You also know that the thing that's been threatened could very well happen--for example, another 9/11 scale attack could clearly happen, and a massive recession looks like a good bet right now. You know that if you oppose the Patriot Act or wiretapping or whatever, and then another major attack happens, your political career is over. If your party opposes it, it may be several elections before your party has a realistic shot at power again.

So, the safe bet is to go along with the proposed cure, even if you don't think it will help, so long as lots of voters seem to believe it will help, and will blame you if you oppose it, it isn't enacted, and then another 9/11 attack, a terrorist WMD, or a horrible global recession happens. You are buying insurance against that bad outcome. When the big recession hits and we get 15% unemployment and house prices falling another 30%, you can say "well, we tried to save the economy with that bailout, but the rot simply went too deep in the financial system, and we weren't able to save it."

It seems like pretty much the whole war on terror has been run this way, as is this bailout and the runup to the war in Iraq.

#172 ::: Earl Cooley III ::: (view all by) ::: September 28, 2008, 11:57 PM:

So, is the bailout the October Surprise for this election, or is there another shoe waiting to drop? An Israeli strike on Iran's nuclear weapons facilities, with the US backing up the escalation, perhaps?

#173 ::: Lee ::: (view all by) ::: September 29, 2008, 12:39 AM:

Lizzy, #164: I think Vir said it best.
I want to live long enough to see your head on a pike in the courtyard on Centauri Prime, as a reminder to the next seven generations that some favors come at too high a price. I'd look up into your dead eyes and wave, like this. [waves] Can your associates arrange that for me, Mr. Morden?

#174 ::: Lenny Bailes ::: (view all by) ::: September 29, 2008, 12:59 AM:

The text of the “Emergency Economic Stabilization Act of 2008,” here, says:


Section 109. Foreclosure Mitigation Efforts.
The Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.

Section 110. Assistance to Homeowners.
Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.

So, if these sections are enforced, maybe there will be some good in it.

#175 ::: Rozasharn ::: (view all by) ::: September 29, 2008, 01:27 AM:

Albatross, Sica, Heresiarch, Madeline, and the other people who've been discussing why the mortgage risk assessments were wrong:

The best source I've found for this is the analysis posts on Irvine Housing Blog, particularly Structured Finance 101 and Systemic Risk in the Housing Market.

Conventional mortgages are the way they are for a reason. The interest rate is fixed so your payment will be fixed and predictable. You have to prove you can afford it by documenting your income and its reliability.

'Afford it' means the mortgage payment is only 25% of your monthly income; maybe 28% if the banker feels like living on the edge. Anything higher means you won't have enough left to cover other expenses. No, really: owning a house means maintenance and repairs are no longer covered by your rent payment. So homeowners have to save money toward predictable long-term expenses, like replacing the roof every twenty years, and unpredictable ones, like repairs after the furnace blows up or after a tree knocks the house down.

This is why you also need a down payment from your own money: owners have to be people who can reliably save money from their current income, and the down payment demonstrates that.

As near as I can tell, the reason the standard down payment was 20% is that in previous housing bubbles, house values fell by 20 to 25%. So even if a person bought a house at the peak with a 20% down payment, and then the bubble popped suddenly and one year later they lost their job, the bank could foreclose and sell the house for most or all of the outstanding mortgage balance. 20% down payments meant banks could reliably get their money back.

Also, banks used to insist on an appraisal by an independent appraiser to make sure the house was worth more than you wanted to borrow. Borrowing more than the house's value was right out. During the bubble, though, brokerages started lending more than the price of the house. And they started pressuring appraisers to inflate values.

A lot of people who bought during the bubble used adjustable mortgages, negative-amortization mortgages, or 100+% mortgages specifically because they couldn't afford the payment on a conventional mortgage: they could only afford the teaser rate on an adjustable mortgage, and they were counting on refinancing or selling for a profit before the rate adjusted. This means they couldn't really afford to buy the house.

Banks and brokerages knew their customers couldn't afford those houses; knew those loans were ticking time bombs. Nevertheless, when they sold those loans as CMOs or SIVs or CDSs, they used the default-rate data from conventional loans to design and market investments in no-documentation, adjustable, negative-amortization, 100+% loans. This is why far more of them are failing than was predicted by data on completely different loans.

The cascade effect of mass foreclosures driving prices down is just a side effect of making huge numbers of unpayable loans.

Side note: IIRC, individual mortgage brokers, like insurance brokers, get paid a commission shortly after they originate a loan. Their personal income is not affected if the loan goes into default a few years later. They also tend to be highly money-motivated. Brokerage companies are the ones who lose money when loans go into default, so they usually enforce strict rules about which loans brokers are allowed to make.

But with all these nifty ways of selling mortgages for immediate cash, brokerages figured they didn't need to worry about the long term either, so they gave up the strict rules. Instead they sold out for quick cash and invested it in...other people's unsupportable mortgages.

#176 ::: Serge ::: (view all by) ::: September 29, 2008, 06:07 AM:

albatross @ 171... the safe bet is to go along with the proposed cure, even if you don't think it will help, so long as lots of voters seem to believe it will help, and will blame you if you oppose it

Thus did we get the Security Theater, and why we now have to take our shoes off at the airport. And when the media is owned by your politial enemies, we know who molds the perceptions and thus who sets the rules of the game.

#177 ::: Wesley ::: (view all by) ::: September 29, 2008, 08:01 AM:

heresiarch, #167: If Republicans want to spend the next two, four years bringing up this mess, then fine: that's a battlefield I'm more than willing to meet them on. I'm willing to stand up and say, "Every flaw that bill had came from the compromises we had to make with YOUR party. The mess that forced us to pass that bill was the brainchild of YOUR party. And now here you stand, arguing that YOUR legislative incompetence is a reason to keep government from doing the things that it needs to do? No--all that means is you need to sit down and shut up, and let us try to repair this country."

If we could convince more Democrats in congress--in particular, the ones in leadership positions--to think and talk like this, we'd be in great shape.

#178 ::: Sica ::: (view all by) ::: September 29, 2008, 02:07 PM:

Rozasharn @ 175

Thanks for the comment and the links *heads over to read*

#179 ::: P J Evans ::: (view all by) ::: September 29, 2008, 02:37 PM:

Well, the bill didn't pass in the House. 205-228 and one not voting.

#180 ::: Constance ::: (view all by) ::: September 29, 2008, 02:43 PM:

Looks like the House ain't voting for a $7 billion bailout for Wall Street.

Predictably, both sides are blaming the other, and some of both are both blaming Pelosi.

Love, C.

#181 ::: Clifton Royston ::: (view all by) ::: September 29, 2008, 03:07 PM:

Yes, per the BBC, 2/3 of the Republicans voted against it and so the Republican leaders are claiming "It's the Democrats' fault it didn't pass - they should all have voted for it and passed it over our objections!" Wha'?

Honestly, even if the markets are a mess right now, I think I'm glad it didn't pass. It was still too close to the original "give us $700B and we'll make something up quick" plan. I'd like to see a serious proposal based on some of the suggestions from Krugman et al.

#182 ::: Leva Cygnet ::: (view all by) ::: September 29, 2008, 03:08 PM:

PJ, the one not voting is probably physically unable to vote, so that's a remarkable tally. Not one congrescritter abstained.

Gonna plant a very large garden tonight. Rows are laid out, fence is up, I just have to put the seeds in the ground and aim water at it.(I'm country, I have space to do "really big.") At best, I'll have fresh veggies plus plenty to can for later. At worst ... if they can't keep something resembling our economy tottering along ... well, I don't want to think about "at worst." Thinking about "at worst" feels like tin foil hat thinking.

#183 ::: dolloch ::: (view all by) ::: September 29, 2008, 03:14 PM:

Chip @ 160

The only way I see it really being true is if the Republican party is a cabal dictating to the members how to act and not a collective of thugs with the same purpose. That's why I call it a conspiracy theory and not a possibility. Still fun to think about, if your idea of fun is being completely wigged out and stressed 24/7... :)

#184 ::: John L ::: (view all by) ::: September 29, 2008, 03:44 PM:

Lots of finger pointing in Congress now, lots of gnashing and wailing and blame assigning.

40% of Democrats voted against it; 65% of Republicans voted no as well. The naysayers basically said "we do not believe in giving taxpayer money to bailout bad decisions by private companies"; the two sides said it differently but that's what it boils down to.

Stories are popping up that Nancy Pelosi's speech on the House floor drove a dozen Republicans away from voting "yes" with her partisan comments. Democrats are saying the Republicans reneged out on their promise to support the bill, and reminded them that no way would they vote it in with their majority only to have Republicans use it as a club to bash them with the voters.

Meanwhile, the Stock Market is in free fall worldwide, and everyone's looking at each other and asking "well, now what?".

CNN is saying that Congress wants to adjourn so those up for reelection can get home and defend their vote to their constituents; they may not stay to try and create a second bailout bill.

Maine's government cannot sell municipal bonds to pay for road repairs. Our school system down here in Raleigh deferred selling bonds prior to this bill being voted on to see what would happen. I suspect that kind of thing is taking place around the nation.

Stay tuned...

#185 ::: albatross ::: (view all by) ::: September 29, 2008, 03:48 PM:

Man, I hate when my beautiful theory is beaten up by a nasty gang of facts.

Wow. I'm not sure if this is good or bad news. But it certainly is going to be an interesting few weeks....

#186 ::: Rosa ::: (view all by) ::: September 29, 2008, 03:53 PM:

You know, I was always taught that Hoover made a recession into the Great Depression by cutting spending and not helping people.

I have no idea if that's true, but it was the party line in all our history textbooks. Was that true back in the '50s-'60s when most of Congress went to elementary school?

#187 ::: Lizzy L ::: (view all by) ::: September 29, 2008, 03:59 PM:

Interesting commentary on the failure of the current bailout bill, by Dean Baker.

I am deliberately not looking at my investments: there is nothing I can do about the market drop, and it would be insane to sell. I have mixed feelings about the failure of the bill. The bill, as written, sucked. Can we get a better plan? I don't know. Is nationalization a la Sweden the answer? I don't know. I think I am not going to end up on the street, but some people will.

#188 ::: Steve C. ::: (view all by) ::: September 29, 2008, 04:04 PM:

Nearly 80 years later, the multiple causes of the Great Depression (and it's prolonged duration) are still the subject of argument. One of the factors was almost certainly the contraction in the money supply. It shrank by one-third from 1929 to 1933. This was caused in part by regulations requiring credit issued by the Fed to be backed in gold.

#189 ::: Lizzy L ::: (view all by) ::: September 29, 2008, 04:14 PM:

John L at 184: Stories are popping up that Nancy Pelosi's speech on the House floor drove a dozen Republicans away from voting "yes" with her partisan comments.

If you hunt, you will find a devastating comment by Barney Frank (speech available on YouTube, sorry, my link-fu is not strong) in which he describes the Republican complaints thusly (I paraphrase, but very closely): "The Republicans' feelings were hurt, so they decided to punish the country." He also pointed out that, coincidentally, the number of people whose feelings were hurt by what Pelosi said was exactly the number needed to pass the bill.

Funny, that...

#190 ::: C. Wingate ::: (view all by) ::: September 29, 2008, 05:25 PM:

Meanwhile Wachovia (#4 bank in USA) implodes. It's beginning to look as though we're going to find out what really happens when the FDIC runs dry.

I do have a dumb question for anyone who wants to play economist: assuming that they do come up with some bail-out that ratchets the federal debt up by several hundred gigabucks, isn't that going to produce yet another credit problem? After all, they're going to have to borrow that money from somewhere.

#191 ::: John L ::: (view all by) ::: September 29, 2008, 05:35 PM:

C.Wingate@190:

Yes, that's exactly why so many economists felt bailing out the banks was a bad idea. It doesn't address the root cause, only symptoms, there wasn't any guarantee it would work to restore confidence, and it certainly would have devalued the dollar on the worldwide financial market.

#192 ::: Leva Cygnet ::: (view all by) ::: September 29, 2008, 05:37 PM:

C. Wingate ... basically, they're printing money and/or borrowing it. This might cause lots and lots of inflation, at best.

It occurs to me that lots and lots of inflation might actually fix the mortgage crisis. Eventually. After lots and lots of other financial angst, and with some rather severe complications caused by the fix.

#193 ::: Rosa ::: (view all by) ::: September 29, 2008, 05:39 PM:

Well, Citi's buying them (as of a few hours ago, but I haven't seen news that they backed off from the deal.) If this goes on, they won't have to pass a bailout, the fed can just keep making expensive promises to bribe banks into merging.

The AP says "In addition to assuming $53 billion worth of debt, Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the Federal Deposit Insurance Corp. agreeing to cover any remaining losses. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC." So the FDIC isn't on the hook for all of it, and none of it right this moment.

Wachovia had been saying $5.57 billion in bad debt as of Q2 this year (the AP article isn't clear - you'd have to check Edgar to see if that was just for Q2 or if it was their entire bad debt allowance on their balance sheet as of the end of Q2). So who knows how much Citi & the Federal Reserve thinks is in there.

http://ap.google.com/article/ALeqM5jBpTstzcj2LSvdE72t247CeMqW6QD93GILR81

#194 ::: Madeline F ::: (view all by) ::: September 29, 2008, 05:46 PM:

I don't have access to any of the bank rating services, but the SF Chronicle's financial reporter Kathleen Pender had an article that listed the biggest banks and their ratings as of March. Citigroup was rated worse than WaMu or Wachovia (who were both bad). I'm kindof doubting that combining two bad banks makes something that won't fail.

#195 ::: Earl Cooley III ::: (view all by) ::: September 29, 2008, 06:03 PM:

I think of the ongoing stock market crash as Wall Street's irrational temper tantrum over not getting to loot the middle class as much as they'd like. Stock devaluation piddles on the efforts of the people who actually do the basic work of the companies that employ them. I don't believe that all profit is theft, just the predatory kind.

#196 ::: Xopher ::: (view all by) ::: September 29, 2008, 06:11 PM:

I've been too depressed to comment about this. The idea that the Bush Administration would say "Yeah, we deregulated the economy into a tailspin, so now you have to give us a huge and arbitrary amount of money and carte blanche to do with it as we please, not subject to any review, and we'll fix it," and have Congress do anything but scream obscenities, is just mindblowingly sad.

Does anyone else think that sounded like "OK, you're finished digging. Now hand me up the shovel"? You know the guy with the gun isn't going to pull you out of the hole. So why give him the shovel?

#197 ::: Kathryn from Sunnyvale ::: (view all by) ::: September 29, 2008, 06:24 PM:

Sometime over the weekend I saw reference* to a quote from a Republican congressman (House iirc) along the lines of:

"Wouldn't another depression be better than [giving up our values/ bailing out failure/ something to do with the $700B]?"**

Does anyone have a link to the quote or his name?

----------------
* probably in a blog, not a newspaper
** I don't recall if it was a quote or a paraphrase, or in what context he originally said it.

#198 ::: Linkmeister ::: (view all by) ::: September 29, 2008, 06:41 PM:

albatross @ #171, the scenario you describe is the one that Naomi Klein postulates in her book "The Shock Doctrine." It's a book guaranteed to infuriate even as it enlightens.

#199 ::: Stefan Jones ::: (view all by) ::: September 29, 2008, 06:52 PM:

My Soylent Corporation stock is way up.

#200 ::: C. Wingate ::: (view all by) ::: September 29, 2008, 07:01 PM:

re 194: Googling for Fitch "your bank" rating is likely to pull up a reasonably detailed report. I looked up to the two main banks we do business with, and while our mortgage holder is in good shape, our main bank is getting hurt.

#201 ::: albatross ::: (view all by) ::: September 29, 2008, 07:21 PM:

Stefan:

Corporate motto: To Serve Man[1]


[1] This may simply be an extension of an initial desire not to be evil....

#202 ::: albatross ::: (view all by) ::: September 29, 2008, 07:25 PM:

Madeline #194:

In practice, I think Citibank's credit rating is Too Big To Fail.

#203 ::: heresiarch ::: (view all by) ::: September 29, 2008, 09:47 PM:

Terry Karney @ 170: "But I'll be banging that drum with you."

Thanks =)

Wesley @ 177: "If we could convince more Democrats in congress--in particular, the ones in leadership positions--to think and talk like this, we'd be in great shape."

I don't think you get there by pointing out how they can, and will, fail all the time.

#204 ::: geekosaur ::: (view all by) ::: September 29, 2008, 09:57 PM:

Madeline F. @194:

I don't have access to any of the bank rating services
Free bank and credit union rating service

#205 ::: albatross ::: (view all by) ::: September 29, 2008, 10:09 PM:

Xopher #196:

Yeah, I've been really torn on this. On the one hand, some pretty sensible, well-informed people seem to think a bailout is a good idea. On the other hand, pretty much every other big crisis-mode thing the Bush administration has done has been a fkng disaster (and usually a scary power grab as well), so it's hard to see why I should believe that this one would make any sense?

And it's important to recognize that we're on entirely unmapped territory right now. Nobody is smart enough to predict what the economy is going to do, or how to head off the apparent meltdown we're maybe looking at. Not Bernake, not Paulson, not Greenspan, and sure as hell not Bush.

#206 ::: Terry Karney ::: (view all by) ::: September 29, 2008, 11:02 PM:

My two cents: I want it done right.

I think the waiting, and not seeing a total, and immediate implosion is a good thing.

I also think Pelosi scuttled the bill when she told the repubs that she's gotten them all the cover she was going to, and they had to come up wth the rest.

Boehner saying, "I want the members of the republican part to vote thier conscience" sounded like it ought to be a death knell, to me, because it meant he was arranging to have it usuable at a bludgeon in elections.

The Dems would be painted as partisan hacks, and the repubs as a party of principle.

Bugger that.

#207 ::: Scott Taylor ::: (view all by) ::: September 29, 2008, 11:39 PM:

Geekosaur @ 204 -
>I don't have access to any of the bank rating services
Free bank and credit union rating service

Well, using that, it appears my Credit Union (hallowed be the name of George Eastman, all glory and praise unto him*...) is pretty well suited to weather any troubles - strong foundations, solid lending practices, good liquidity and capitalization.

Which is pretty much what I figured, and one of the reasons I keep my money and banking there, even though other banks would be more convenient.

*only half-facetious.

#208 ::: Rosa ::: (view all by) ::: September 30, 2008, 01:54 AM:

Terry, if we were having an implosion, would we know?

I'm not being facetious. Of my coworkers, who are generally knowledgeable people (or at least literate and able to operate an elevator, and not visibly addicted to anything), only the crazy conspiracy theory dude and I are following this at all.

Conspiracy Dude and I were talking about the bailout plan today, and another coworker said "bailing out what?"

So how do we know this is just a recession, and not the beginning of a serious implosion? It feels bad to me, but I only vaguely remember the '80s recession. Still, I ride past 3 boarded-up houses on my way to work every morning, and several more for sale by the bank. It's not good.

#209 ::: John L ::: (view all by) ::: September 30, 2008, 04:23 AM:

Well, if you actually believe all these doomsday predictions that are running around now that Bush isn't getting his bailout bill, what we'll soon start to see are:

-businesses unable to get short-term loans to pay workers, get supplies, pay bills and conduct day-to-day transactions

-local governments unable to issue bonds and purchase goods and services from contractors

-credit card companies not extending credit

IOW, it sounds as if a financial Apocalypse is fast approaching, and Something Must Be Done before it gets here.

Other than some isolated situations such as Maine not being able to sell highway repair bonds, though, there's been little fallout since Paulson hit up Congress for his $700 billion bailout.

#210 ::: Andy Brazil ::: (view all by) ::: September 30, 2008, 04:59 AM:

Over here in the UK we're coming up to the quarter day. That's when a lot of companies pay their rent for the next three months. Turns out a lot of retail businesses routinely borrow this chunk of cash and then pay it back out of revenue over the next three months. Only the banks aren't making loans at the moment, so we've had three or four big retail chains go out of business so far this week. Do you have a similar system in the US, cos if so expect some big failures soon.

The number of mortgage loans made in the UK last month are down 96% on last year - so basically no-one can buy a house except with cash. And the bottom feeders aren't going to be coming out for a while yet. So a lot more house price falls to come. A lot of folk ran up big credit card debts, secure in the knowledge that their house was worth loads more than they paid for it - all of a sudden they're feeling poor. So a big retail slump is on the cards. And the UK economy is pretty much built on shopping (and finance of course)! Basically we're doomed.

Oh yes, and the tax base is collapsing, so government is running out of money. And inflation is ramping up. (Incidently, of course, that's how central banks are going to deal with all of this - they take the toxic debts and then let roaring inflation devalue them to a managable level.)

By the way, a lot of US comment I've seen has been on how the $700b works out as circa $2K per head for every man, woman and child in the US - if it helps, our Govt's bailout of failing banks has left the UK taxpayer holding £150b of mortgages - or nearly $3K per head, and we haven't started on dealing with the CSD's yet. Your $700b is starting to look quite cheap.

#211 ::: guthrie ::: (view all by) ::: September 30, 2008, 07:33 AM:

And thus are the mighty fallen through hubris or whatever else. Gordon Brown claimed boom and bust was a thing of the past. Instead, as I have been saying for years, it is clear he hasn't a clue how the real world works. I'd almost feel sorry for him.

#212 ::: Leva Cygnet ::: (view all by) ::: September 30, 2008, 10:51 AM:

Holiday shopping season is coming up real soon now. I wonder how many businesses buy their holiday inventory on credit? Plus, consumers are going to be reluctant to buy, and retailers rely on those holiday sales to turn a profit.

#213 ::: Faren Miller ::: (view all by) ::: September 30, 2008, 11:09 AM:

In the NY Times Op-Ed section, Bob Herbert really lacerates Republican financial idiocy in "When Madmen Rule".

#214 ::: Faren Miller ::: (view all by) ::: September 30, 2008, 11:11 AM:

Oops, last word of that title should have been "Reign" -- even more appropriate.

#215 ::: Trey ::: (view all by) ::: September 30, 2008, 11:58 AM:

Leva @ 212: Shit. Hadn't thought that far ahead - that could get very ugly, very fast.

#216 ::: Serge ::: (view all by) ::: September 30, 2008, 12:04 PM:

albatross @ 201...

"To Serve Man! It's... it's a cooked book!"

#217 ::: albatross ::: (view all by) ::: September 30, 2008, 12:34 PM:

Madeline F #135:

First off, every talking point that starts with "we gave minorities home loans and now the whole economic system is fucked" is racist and scapegoat-y, and I find it immensely distasteful to see it proposed.

Well, the main problem with that talking point is that it's wrong. I mean, if CRA were a remotely plausible cause of the current disaster, that would be worth knowing, so we could fix it. But it's not. (Basic argument against it: The CRA was passed in the 70s, and we've weathered several recessions since then without a global financial collapse. Lenders covered under the CRA have fewer subprime mortgages than the ones not covered under the CRA, probably because the same lenders covered by the CRA were/are subject to much more regulation.)

More broadly, any explanation for why a financial meltdown occurred that postulates that demonstrably bad financial decisions by poor people buying their first homes were more important than demonstrably bad decisions by huge financial institutions and credit rating agencies has a pretty high burden of proof to meet.

The CRA was one of many reasons given for lowering mortgage requirements, but I'm pretty sure it was a justification, not a cause. ("We very rich and powerful people care so much about poor minorities, we're going to change the rules to benefit them, in a way that by great good luck just happens to make us a whole bunch of money.")

#218 ::: Ambar ::: (view all by) ::: September 30, 2008, 02:26 PM:

Details on predicted financial apocalypse from an LSE economist, writing for the Financial Times.

#219 ::: Leva Cygnet ::: (view all by) ::: September 30, 2008, 03:18 PM:

The other thing that could cause this to get really ugly really fast is the number of truck drivers and trucking firms who buy fuel on credit. And I suspect trains do the same.

Your average truck driver does not have $700-800 cash on hand to fuel up his truck, and for a cross country trip, they have to fuel up several times. I know less about trains but I have a sneaking suspicion there's some large amounts of $$$$ involved in fueling a locomotive engine and it's probably not a cash business.

If you can't move goods around, the economy stops. And people start getting hungry.

#220 ::: Lila ::: (view all by) ::: September 30, 2008, 03:40 PM:

geekosaur @ #204, ouch. Now I wish I hadn't looked. Our mortgage holder: 3 out of 5 stars. Our credit union: 1 out of 5 (worst possible rating).

#221 ::: Rosa ::: (view all by) ::: September 30, 2008, 03:52 PM:

Leva Cygnet, both of those examples are business-to-business credit. The retailer buys from their supplier with a promise to pay in 30, 60, or 90 days. They don't usually take out a bank loan or use a credit card (except a really small business). Independent truckers might use credit cards but company drivers like my dad, the trucking company has an agreement with a truck stop chain for their drivers to get credit.

So that won't grind to a halt unless the gas supplier or first-level producer runs on credit and can't get it because of the credit crunch. Or, like has been happening with fuel oil, if enough of the suppliers customers (retail stores, trucking firms) fail to pay on term and the supplier runs out of cash to keep going - today's crisis, but we won't see it for a month or two.

Some of the middle layers might get squeezed out (Flying J might not be able to float the gas, and then BP might see an opportunity to gain some market share by dealing with trucking companies directly). Which isn't great, but it's not the end of civilization.

I wonder about the big retailers, though. Most of the producers of retail goods are in other countries, so they may be insulated from our credit idiocy. Or they may tighten up terms (30 days instead of 90) which would make retail firms run on a tighter cycle, which in the long run would insulate them from recessions. Except hasn't everyone gone to Just In Time supply, anyway?

If this didn't freak me out so much, it would be really fascinating to watch this unwind.

p.s. anyone have a good source for toddler's 3T long johns? It's going to be a cold winter and Target is failing me this year.

#222 ::: Jen Roth ::: (view all by) ::: September 30, 2008, 05:10 PM:

Rosa: eBay?

#223 ::: Jacque ::: (view all by) ::: September 30, 2008, 05:28 PM:

So, ya got your CDSs & MBSs & CMOs....

So what you're really saying is that the clothes have no emperor...?

#224 ::: Epacris ::: (view all by) ::: September 30, 2008, 08:49 PM:

Trey @212: round here many stores start putting their Christmas decorations up & supplies & gift displays out around the start of October, so it's not all that "far ahead" — tho' many of us do complain that it is too early to be doing that.

I've had reports that some have done it already. mebbe 'cos school term holidays are on & quite a few parents have time off work & could shop early so the run up to the end of the year & the long summer holidays wouldn't be so crazy-busy.

PS: Today, 1st October, here is both Eid, the celebration at the end of Ramadan for Muslims & Rosh Hashana[h] / Yom Ha-Zikkaron / Yom Teruah, called the Jewish New Year. Celebrations are being held in the western suburbs round Lakemba Mosque & the eastern suburbs, our centre of Jewish culture. Definitely a holiday time of year.

#225 ::: CHip ::: (view all by) ::: September 30, 2008, 09:59 PM:

Andy@210: There's a difference between the amount of money put in and the ostensible value of the holdings; depending on how it's used, the $700 billion could leave the US govt. holding trillions of dollars worth of paper. (I've seen a figure of $6.4e12 but forget whether that was the total value of mortgages or just the face value of the subprimes.)

#226 ::: Lee ::: (view all by) ::: September 30, 2008, 11:30 PM:

Epacris, #223: Xma$ stuff was out in several places here as of mid-September. I've been bitching mightily to employees (with the message "Tell your boss it's a Really Dumb Idea") whenever possible. I do make an exception for crafts stores -- handmade gifts take some lead time, and that's a different thing.

#227 ::: Clifton Royston ::: (view all by) ::: October 01, 2008, 02:11 AM:

Wondermark weighs in on the situation

...

The credit crunch problem is very likely real.

The problem now (vastly oversimplified) is that banks now have basically no idea what some of their assets are worth, so they can not extend the loans they normally would even to credit-worthy customers without potentially going over their maximum loan/asset ratios. The banks do need to be recapitalized, but economists don't necessarily agree what the best way to do that is. (Most of them seem to feel last week's proposal was not a good way, however.)

#228 ::: Lee ::: (view all by) ::: October 01, 2008, 02:18 AM:

Oh, now this is interesting.

RNC releases TV ads smearing Democrats for the bailout before the bill fails.

Is this another "Dewey Defeats Truman"?

#229 ::: albatross ::: (view all by) ::: October 01, 2008, 08:48 AM:

Random comment: I posted something with a single link, which has been in moderation for a day now. Anyone know what might have triggered the problem? Oddly, it shows up on my "view all by" but not on the thread.

It wasn't any great nugget of wisdom, but I'm curious why it fell into the black hole of moderation....

#230 ::: Serge ::: (view all by) ::: October 01, 2008, 11:35 AM:

albatross @ 228... I'm curious why it fell into the black hole of moderation

I blame Maximilian Schell.

#231 ::: TomB ::: (view all by) ::: October 01, 2008, 12:28 PM:

The problem now (vastly oversimplified) is that the bad loans were mixed with good loans and packaged as securities where it is not possible to separate the good from the bad, or tell how much is which. Comparisons with ground beef, pet food, and milk powder are entirely appropriate.

#232 ::: Clifton Royston ::: (view all by) ::: October 01, 2008, 12:29 PM:

Lee @ 277:
Well, now we know why McCain had to suspend his campaign and race back for the negotiations. He had to make sure what would be in those ads blaming it on Obama.

#233 ::: Gabrielle ::: (view all by) ::: October 21, 2008, 04:51 PM:

She must show affection to those small dweebs.

#234 ::: abi ::: (view all by) ::: October 21, 2008, 04:58 PM:

Sorry, Gabrielle, but what? Who must show affection to which small dweebs?

#235 ::: P J Evans ::: (view all by) ::: October 21, 2008, 05:29 PM:

abi, I think 'Gabrielle' might be a bot or something - its other comments are just as disconnected from the thread topic.

#236 ::: joann ::: (view all by) ::: October 21, 2008, 05:37 PM:

PJ Evans #235:

And the email address seems suggestive to me--anagram it.

#237 ::: abi ::: (view all by) ::: October 21, 2008, 05:38 PM:

Gabrielle is gnomic, but not out of the bounds of the merely oblique.

And the Super Sekrit Backroom Stuff doesn't show anything unusual or strange. A bot would have a payload.

#238 ::: Serge ::: (view all by) ::: October 21, 2008, 05:44 PM:

Isn't Gabrielle a moon of planet Xena?

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