Bailout Alternatives and Critiques
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awgee_IHB
New member
Eric Janszen over at itulip:
<em>"Our credit markets have suffered a massive heart attack and we?re arguing about whether we should use the defibrillator or who should apply it or how. Doesn?t help that the guys holding the paddles and demanding money to restart the patient?s heart are the ones who killed the him in the first place, after they made a fortune off feeding him cheeseburgers and pizza for 35 years."</em>
<em>"Our credit markets have suffered a massive heart attack and we?re arguing about whether we should use the defibrillator or who should apply it or how. Doesn?t help that the guys holding the paddles and demanding money to restart the patient?s heart are the ones who killed the him in the first place, after they made a fortune off feeding him cheeseburgers and pizza for 35 years."</em>
IrvineRenter_IHB
New member
I have always really liked Rich Toscano's writing:
<a href="http://www.voiceofsandiego.org/articles/2008/10/01/toscano/771bailoutswontwork100108.txt">Bailouts Don't Address the Real Problem</a>
Every pundit on Earth is playing the game of picking the various bailouts apart and proposing their own improved bailout schemes. But I think that most of the conversations going on out there miss a critical point: that this bailout and the ones that will in all likelihood follow it fail to address the root cause of the problems.
That root cause, in my opinion, is that the vast majority of political leaders, regulators, and pundits zealously cling to a deeply flawed analytical framework.
To put it more simply: the people and principles that blithely led us into this mess are absolutely the wrong people and principles to lead us out of it.
The problems we are facing have been coming down the pike for a long time. Many, many people saw them coming. Here at VoiceofSanDiego.org, I wrote about the risks posed by credit default swaps (one of the latest credit crisis bogeymen) in January 2007 and collateralized debt obligations (which were at the heart of the subprime crisis) in June of that year. I wrote about the possibility of widespread mortgage defaults as far back as February of 2006 (my second month of writing for Voice) and I have been writing about the risks of the speculative housing bubble at my own website since mid-2004.
I don't say this to pat myself on the back, but to offer specific examples that these problems were knowable well ahead of time. (This is a necessity, sadly, given the constant historical revisionism practiced by many financial commentators). But it wasn't just me -- a few minutes of Googling will show that many, many analysts identified these problems ahead of time.
So if the problems were knowable to so many people -- including me, a regular guy here in San Diego with no letters behind his name or anything -- then how is it that the people in charge of running the world's largest economy were absolutely blindsided by them?
Consider the following quotes:
"[House] price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas." -- Fed Chairman Ben Bernanke, Oct. 20, 2005
"[The housing downturn] looks to be a very orderly and moderate kind of cooling." -- Fed Chairman Ben Bernanke, May 18, 2006
"All the signs I look at [show] the housing market is at or near the bottom." -- Treasury Secretary Henry Paulson, April 20, 2007
"I don't see [subprime mortgage market troubles] imposing a serious problem. I think it's going to be largely contained." -- Treasury Secretary Henry Paulson, April 20, 2007
?Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.? -- Fed Chairman Ben Bernanke, May 17, 2007
I could dig up enough to fill a book, coming from these two guys and a whole lot more of our leaders, but hopefully the above quotes are enough to give a flavor. These guys had absolutely no idea what was going on. With homes priced in vast excess to any prior relationship they'd had to incomes, Bernanke came out and actually claimed that prices were supported by those same incomes. Paulson then called the bottom in Spring of 2007, with homes still exceedingly overpriced and a huge glut of foreclosures already in the pipeline. And all along they denied that there would be any ill effects outside of homes bought with subprime loans (this after they and their predecessors had for years denied that subprime loans would become a problem at all).
Given the above statements by Paulson and Bernanke, there are only two possibilities: they are incompetent or they are liars. I tend not to think they were lying, because if they really knew what was going on they would have been a lot more non-committal rather than making statements like those above that could later be proven to have been hugely wrong. So that leaves incompetence as the most likely explanation.
I single out Bernanke and Paulson, by the way, because they are spearheading the bailout efforts and because these two unelected men wield phenomenal power over our financial future. But they are absolutely not alone in having had no idea what was underway -- they are joined in this honor by the Administration and, as far as I can tell most of Congress and the financial regulatory structure.
*
Yet all these people are still at the helm. And despite their proven and repeated inability to understand the situation, they are for some reason expected to successfully lead us out of it.
It's not that any of these people are stupid. Not by any stretch. The issue, as I posited at the outset, is that they are under the sway of an analytical framework that is dangerously misguided.
I don't want to get too deep into the weeds, here, but by way of providing some justification for the above statement I will outline below a sampling of the misapprehensions that have been at work in guiding us into this morass. The italicized statements below are all core beliefs of what I would contend has been the mainstream view for many years among politicians, regulators, and pundits. They are all, in my opinion, wrong, for reasons explained after each italicized statement.
Financial market prices are always right. Despite having experienced the world's biggest stock bubble followed by the world's biggest housing bubble in less than a decade, people still cling to this one. The mainstream view is that market prices reflect the combined knowledge of all market participants and so they must be correct. Whatever prices are, it follows that that some rationalization should be reverse-engineered to explain them. See Bernanke's laughable attempt to justify home prices in 2005 as an example. But history has proven time and time again, and is once again proving as we speak, that markets get it wrong all the time.
Debt doesn't matter. The economic boom we just went through was greatly dependent upon people borrowing against rising home prices to increase their consumption spending. Most people only looked at the economic growth side of the equation (such as GDP, or gross domestic product) without seeing that on the other side, our level of indebtedness to foreigners was growing faster than economic activity. This is neither sustainable nor desirable.
There is nothing wrong with borrowing if the proceeds are used to increase future productive capacity by building up infrastructure or the means of production, because these expenditures will lead to an increase in our economic potential and earning power down the road. But when the proceeds are used to buy consumer goods that have no productive capacity -- and houses are consumer goods, by the way -- that increases the debt we will have to eventually pay without a commensurate increase in our future earning power. This is bad.
Consumer spending is the basis of our economy. People panic whenever consumer spending drops and many bailouts, specifically the government "stimulus checks," are directly aimed at increasing consumer spending. But long-term economic strength is based on what a society produces, not what it consumes. Seems like common sense, doesn't it? Yet our economic policies are overwhelming geared towards stimulating consumption.
As a nation we have consumed more than we produced for so long that people think that this pattern can be sustained forever. It cannot. Someday we will have not only to produce the same amount as we consume, but to produce even more than we consume in order to pay back all the debt we've racked up. But as we've seen so many times recently, unsustainable trends like these are often ignored and rationalized until they become crises.
This misunderstanding is tied in closely to the above idea that debt doesn't matter. When the debt starts to matter -- as it inevitably will when our creditors eventually come calling -- it will be clear that it would have been much better to encourage the development of more productive capacity and earning potential rather than to stimulate consumer spending.
A rise in home prices is the same as saving. During the boom we constantly heard that it didn't matter that Americans spent more than they earned. Their home prices were going up, we were told, so the country was getting wealthier. This reasoning is very flawed.
An individual who owns a home that goes up in price can indeed become wealthier if he sells the house. But in that case, the person to whom he sells has to come up with the money to buy the house. There is no increase in overall wealth -- just a transfer of wealth from buyer to seller. If on the other hand the owner keeps the house and takes out some equity, he has to borrow money from someone else in order to do so. Again, there is no net increase in wealth -- just a temporary transfer of money from lender to borrower.
Saving is the act of foregoing current consumption in order to use your capital (money, in this case) at a future date. From an overall standpoint, rising home prices (or any asset prices, for that matter) do not lead to any increase in society's accumulation of saved capital.
<a href="http://www.voiceofsandiego.org/articles/2008/10/01/toscano/771bailoutswontwork100108.txt">Read more at the link...</a>
<a href="http://www.voiceofsandiego.org/articles/2008/10/01/toscano/771bailoutswontwork100108.txt">Bailouts Don't Address the Real Problem</a>
Every pundit on Earth is playing the game of picking the various bailouts apart and proposing their own improved bailout schemes. But I think that most of the conversations going on out there miss a critical point: that this bailout and the ones that will in all likelihood follow it fail to address the root cause of the problems.
That root cause, in my opinion, is that the vast majority of political leaders, regulators, and pundits zealously cling to a deeply flawed analytical framework.
To put it more simply: the people and principles that blithely led us into this mess are absolutely the wrong people and principles to lead us out of it.
The problems we are facing have been coming down the pike for a long time. Many, many people saw them coming. Here at VoiceofSanDiego.org, I wrote about the risks posed by credit default swaps (one of the latest credit crisis bogeymen) in January 2007 and collateralized debt obligations (which were at the heart of the subprime crisis) in June of that year. I wrote about the possibility of widespread mortgage defaults as far back as February of 2006 (my second month of writing for Voice) and I have been writing about the risks of the speculative housing bubble at my own website since mid-2004.
I don't say this to pat myself on the back, but to offer specific examples that these problems were knowable well ahead of time. (This is a necessity, sadly, given the constant historical revisionism practiced by many financial commentators). But it wasn't just me -- a few minutes of Googling will show that many, many analysts identified these problems ahead of time.
So if the problems were knowable to so many people -- including me, a regular guy here in San Diego with no letters behind his name or anything -- then how is it that the people in charge of running the world's largest economy were absolutely blindsided by them?
Consider the following quotes:
"[House] price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas." -- Fed Chairman Ben Bernanke, Oct. 20, 2005
"[The housing downturn] looks to be a very orderly and moderate kind of cooling." -- Fed Chairman Ben Bernanke, May 18, 2006
"All the signs I look at [show] the housing market is at or near the bottom." -- Treasury Secretary Henry Paulson, April 20, 2007
"I don't see [subprime mortgage market troubles] imposing a serious problem. I think it's going to be largely contained." -- Treasury Secretary Henry Paulson, April 20, 2007
?Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.? -- Fed Chairman Ben Bernanke, May 17, 2007
I could dig up enough to fill a book, coming from these two guys and a whole lot more of our leaders, but hopefully the above quotes are enough to give a flavor. These guys had absolutely no idea what was going on. With homes priced in vast excess to any prior relationship they'd had to incomes, Bernanke came out and actually claimed that prices were supported by those same incomes. Paulson then called the bottom in Spring of 2007, with homes still exceedingly overpriced and a huge glut of foreclosures already in the pipeline. And all along they denied that there would be any ill effects outside of homes bought with subprime loans (this after they and their predecessors had for years denied that subprime loans would become a problem at all).
Given the above statements by Paulson and Bernanke, there are only two possibilities: they are incompetent or they are liars. I tend not to think they were lying, because if they really knew what was going on they would have been a lot more non-committal rather than making statements like those above that could later be proven to have been hugely wrong. So that leaves incompetence as the most likely explanation.
I single out Bernanke and Paulson, by the way, because they are spearheading the bailout efforts and because these two unelected men wield phenomenal power over our financial future. But they are absolutely not alone in having had no idea what was underway -- they are joined in this honor by the Administration and, as far as I can tell most of Congress and the financial regulatory structure.
*
Yet all these people are still at the helm. And despite their proven and repeated inability to understand the situation, they are for some reason expected to successfully lead us out of it.
It's not that any of these people are stupid. Not by any stretch. The issue, as I posited at the outset, is that they are under the sway of an analytical framework that is dangerously misguided.
I don't want to get too deep into the weeds, here, but by way of providing some justification for the above statement I will outline below a sampling of the misapprehensions that have been at work in guiding us into this morass. The italicized statements below are all core beliefs of what I would contend has been the mainstream view for many years among politicians, regulators, and pundits. They are all, in my opinion, wrong, for reasons explained after each italicized statement.
Financial market prices are always right. Despite having experienced the world's biggest stock bubble followed by the world's biggest housing bubble in less than a decade, people still cling to this one. The mainstream view is that market prices reflect the combined knowledge of all market participants and so they must be correct. Whatever prices are, it follows that that some rationalization should be reverse-engineered to explain them. See Bernanke's laughable attempt to justify home prices in 2005 as an example. But history has proven time and time again, and is once again proving as we speak, that markets get it wrong all the time.
Debt doesn't matter. The economic boom we just went through was greatly dependent upon people borrowing against rising home prices to increase their consumption spending. Most people only looked at the economic growth side of the equation (such as GDP, or gross domestic product) without seeing that on the other side, our level of indebtedness to foreigners was growing faster than economic activity. This is neither sustainable nor desirable.
There is nothing wrong with borrowing if the proceeds are used to increase future productive capacity by building up infrastructure or the means of production, because these expenditures will lead to an increase in our economic potential and earning power down the road. But when the proceeds are used to buy consumer goods that have no productive capacity -- and houses are consumer goods, by the way -- that increases the debt we will have to eventually pay without a commensurate increase in our future earning power. This is bad.
Consumer spending is the basis of our economy. People panic whenever consumer spending drops and many bailouts, specifically the government "stimulus checks," are directly aimed at increasing consumer spending. But long-term economic strength is based on what a society produces, not what it consumes. Seems like common sense, doesn't it? Yet our economic policies are overwhelming geared towards stimulating consumption.
As a nation we have consumed more than we produced for so long that people think that this pattern can be sustained forever. It cannot. Someday we will have not only to produce the same amount as we consume, but to produce even more than we consume in order to pay back all the debt we've racked up. But as we've seen so many times recently, unsustainable trends like these are often ignored and rationalized until they become crises.
This misunderstanding is tied in closely to the above idea that debt doesn't matter. When the debt starts to matter -- as it inevitably will when our creditors eventually come calling -- it will be clear that it would have been much better to encourage the development of more productive capacity and earning potential rather than to stimulate consumer spending.
A rise in home prices is the same as saving. During the boom we constantly heard that it didn't matter that Americans spent more than they earned. Their home prices were going up, we were told, so the country was getting wealthier. This reasoning is very flawed.
An individual who owns a home that goes up in price can indeed become wealthier if he sells the house. But in that case, the person to whom he sells has to come up with the money to buy the house. There is no increase in overall wealth -- just a transfer of wealth from buyer to seller. If on the other hand the owner keeps the house and takes out some equity, he has to borrow money from someone else in order to do so. Again, there is no net increase in wealth -- just a temporary transfer of money from lender to borrower.
Saving is the act of foregoing current consumption in order to use your capital (money, in this case) at a future date. From an overall standpoint, rising home prices (or any asset prices, for that matter) do not lead to any increase in society's accumulation of saved capital.
<a href="http://www.voiceofsandiego.org/articles/2008/10/01/toscano/771bailoutswontwork100108.txt">Read more at the link...</a>
Trooper_IHB
New member
Found this on Redfin:
<strong>HOW TO COMMIT FRAUD AND GET LOANS APPROVED</strong>
<em>So you all know that they signed the bailout bill last Friday, right? The provisions in the bill include measures that are supposed to help owners avoid foreclosure. But the bill isn?t exactly what I wanted to write about today.
Instead, I wanted to share this with you.
I went back to one of my favorite real estate blogs, BusinessWeeks?s Hot Property, and found an interesting little post. Peter Coy, who wrote JPMorgan?s ?Cheats & Tricks?, uncovered an older article that speaks volumes about the mentality that got us into this mortgage mess. There was a memo that got sent through <strong>JPMorgan Chase?s</strong> email system. The memo details how loan representatives can get Zippy (the Chase loan underwriting system) to approve loans that otherwise would be denied to applicants. Well, the alleged author did get fired (she maintains her innocence in the article) and JPMorgan did issue a statement that the memo was not representative of corporate policy. However, it?s easy to see why so many homeowners are in such a financial mess with friendly mortgage brokers to help along in the process of spending beyond their means.
OK. Just go ahead and read the memo. Feel free to let me know what you think.</em>
<a href="http://blog.redfin.com/losangeles/2008/10/how_to_commit_fraud_and_get_loans_approved.html">So blatant !</a>
<strong>HOW TO COMMIT FRAUD AND GET LOANS APPROVED</strong>
<em>So you all know that they signed the bailout bill last Friday, right? The provisions in the bill include measures that are supposed to help owners avoid foreclosure. But the bill isn?t exactly what I wanted to write about today.
Instead, I wanted to share this with you.
I went back to one of my favorite real estate blogs, BusinessWeeks?s Hot Property, and found an interesting little post. Peter Coy, who wrote JPMorgan?s ?Cheats & Tricks?, uncovered an older article that speaks volumes about the mentality that got us into this mortgage mess. There was a memo that got sent through <strong>JPMorgan Chase?s</strong> email system. The memo details how loan representatives can get Zippy (the Chase loan underwriting system) to approve loans that otherwise would be denied to applicants. Well, the alleged author did get fired (she maintains her innocence in the article) and JPMorgan did issue a statement that the memo was not representative of corporate policy. However, it?s easy to see why so many homeowners are in such a financial mess with friendly mortgage brokers to help along in the process of spending beyond their means.
OK. Just go ahead and read the memo. Feel free to let me know what you think.</em>
<a href="http://blog.redfin.com/losangeles/2008/10/how_to_commit_fraud_and_get_loans_approved.html">So blatant !</a>