Wednesday, October 01, 2008

Burning The Lean Tissue

While we await the passing of the renewed bailout package in Washington, here's a video from PBS in Southern California that profoundly illustrates the crisis that's taking place. Don't we owe it to ourselves to come up with a real solution to this problem, instead of just throwing a bunch of money at it? What could possibly be done in Washington that would change these outcomes?

35 comments :

Anonymous said...

I think we fundamentally disagree on what exactly is the problem. This bill will not really help in terms of housing. Housing will burn down in its natural course, and it will bring down alot of the economy with it. That I see and accept it, and am ok with it.

What this bill is supposed to do, is to allow the much broader economy, largely disconnected to housing continue to function. Once the pool is drained (assuming it works). The rest of us who dont have anything to do with housing will have far less to worry about.

Yes the broader economy will continue to melt down, and yes some us responsible types will continue to lose our jobs. But for gods sake, lets do what we can to limit the collateral damage.

Same thing goes for the auto bailout bill. Here my attitude is F em because there is not a bunch of automaker debt threatening to take down the broader economy. Detroit will rise and fall on its own successes and failures, and just like the automotive downturn of the 70s & 80s, whatever emerges will be leaner than it was before.

This bill is not a panacea. All it is intended to do is prevent an inevitable downturn into a burndown. Housing will do what housing will do, and as long as the broader economy survives, we will all be better off for it.

Max said...

I think we fundamentally disagree on what exactly is the problem.

From the new proposed bill:

(9) TROUBLED ASSETS.—The term "troubled assets" means—
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the pur-chase of which the Secretary determines promotes financial market stability; and
(B) any other financial instrument that the Secretary, after consultation with the Chairman
of the Board of Governors of the Federal Reserve System, determines the purchase of which
is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

Patient Renter said...

Wow. So is it me or is the new bill actually worse than the original proposal?

Let me get this straight. Not only will this new bill allow taxpayer money to be used to (most likely) overpay for mortgage debt from US companies, and from foreign companies (by transferring debt to US subsidiaries), but now the taxpayer is open to buying any asset at any price from any company in the world (so long as they have a US partner/subsidiary), all at the sole discretion of the Economic Czar, I mean, Treasury Secretary?

This may be the most atrocious single piece of legislation that Congress has ever seen - which shouldn't be surprising given that it comes during a time of "crisis".

Anonymous said...

Max - note the key words in what you quote there: "promotes financial market stability"

That was my whole point. Are you now saying you agree?

Deflationary Jane said...

Holy cow - That is actually worse then the original ! There could be market stability but that latest piece of garage isn't going to do bupkus to bring it about.

Patient Renter said...
This comment has been removed by the author.
Patient Renter said...

note the key words in what you quote there: "promotes financial market stability"

That's a major problem. God save us is this much power is concentrated with the people who couldn't spot the housing bubble when it was right in front of them, that the bursting of the bubble would cause chaos, that the problem was not "contained", that Fannie and Freddie were not okay, that we were heading into recession, that the economy was not fundamentally sound, etc.

I wouldn't trust these clowns to watch my dog, let alone to manage a massive amount of taxpayer money. They are, in a word, incompetent... to say the least.

Bryan said...

The clear problem with reading that requirement in the statutory provision is that the arbitrariness with which it can be administered by the executive is more troubling that the supposed restraint which the phrase "necessary to promote financial market stability." The executive will be free to totally disregard this phrase in the effective present, notwithstanding a court's a posteriori decision that this or that executive act turned out not to promote financial market stability.

Even setting aside healthy skepticism about the power of a statute's stated intent to bridle the acts of an "energetic" (as Jefferson would have negatively called it) executive, you run into the problem of what the hell that even means. Because great minds can and now do disagree utterly on what acts would do that and in what way, the phrase becomes almost meaningless. It's a teddy bear. Such acts would likely be treated like something akin to "business decisions" which courts habitually eschew judgment on, even when it turns out to be wrong, ex post. I can't imagine an executive officer would feel any great degree of restraint or fear of reciprocity for overstepping it (let alone knowing what act qualifies as overstepping it).

Is there a third party making a "promotes financial market stability" finding? That would at least give it some teeth, if baby ones.

Anonymous said...

Patient renter - what do you want it to say? Someone needs to determine what exactly "promotes financial stability" - who should it be? Congress? Could you imagine Pelosi & Co trying to figure this out?

Lets put it another way, someone needs to make that decision - who do you propose to do it?

Deflationary Jane said...

"Lets put it another way, someone needs to make that decision - who do you propose to do it?"

No one associated with the current administration, that's for sure. So we wait until after the election which is fine by me.

BTW who is the nooge posting as anon all the time? get a freaking name already.

Patient Renter said...

Someone needs to determine what exactly "promotes financial stability" - who should it be?

A better question, what is financial stability? Is it halting the decline of inflated assets (something which simply will not happen)? Is it somehow forcing lenders to lend? Forcing borrowers to borrow?

As for your question, I have no idea, but common sense would say that it certainly shouldn't be anyone who has proven themselves to be incompetent with such matters in very recent history. Don't you think? Unfortunately that rules out most of the politicos in Washington.

DrDoom said...

Max:

In our non-housing retail business we have had 40% of the lending banks exit the market in the last 30 days. Bye Bye. They are out.

Our credit line which is libor based has increased in rates by 50% this week. OUr risk has not changed but banks don't trust each other now.

I am convinced by personal events that there are finacial problems with banks that are impacting many things beyound the housing market. I vote we do something now.

I have a lot of respect for your opinions but we need to get beyound the "Just Don't Do It". I am convinced that the bailout bill will pass in some form and soon. I would love to see some alternative game plans.

In the mean time I think I will get some popcorn and drinks as I watch the game play out in the Senate tonight. Not much else that can be done but choose a side and root for them.

Unless of course, you have specific suggestions.

Patient Renter said...

A little quote from G. Edward Griffin to remind us of the roots of the Fed:

One of the objectives they (Representatives of J. P. Morgan, Rockefeller, Rothschild, Warburg, Kuhn Loeb) had for the creation of the Federal Reserve System was to create a structure which would have a hand in the public purse, so that when the banks got into trouble they would be able to draw upon tax payers’ support to bail them out, and they would do so under the banner of protecting the public. It’s a very clever ploy.

Nooge said...

Fair enough Deflationary Jane see my name above).

As to your (and patient renter's) comments as to who this should be. Be glad we are coming up on an election. The new president will be able to decide on a number of cabinet posts - including secretary of the treasury. So that means one of the decision makers very well can be someone new (you get your wish). Still somethign tells me that either candidate will keep paulson on board for a while.

Incidentally, this whole idea of reluctance to seat power in someone is something you need to think through. In law school, we had a professor, who likend these sorts of to "treasue of the sierra madre". Essentially someone is in charge, but can we trust him? I know lets create a board to watchers to watch him. But can we trust the watchers? I know, lets create a board of watchers to watch the watchers to watch him. But can we trust the watchers of the watchers...you see where I am going right.

In the end, it all comes down to whether you want to see type I or type II errors (doing too much because of too much power or doing to little because of lack of power)unless you want to have decisions via bureaucracy, you need to have someone in charge. In the end you need to pick your poision - either way, they are goign to be wrong sometimes...

Anonymous said...

Nothing but time will correct this market. Modifying FASB 157 and allowing banks to do "in essence" what the goverment will do after this toxix debt is transfered to our balance sheet. There is too much emotion and not enough fact-based analysis being done. Fear is driving today's behavior - just like greed drove us to this destination. There are a lot of smart economists that have weighed in on a new plan...trouble is they're too calm about it. There's not enough drama to get anyone's attention.

Nooge said...

BTW - sorry for the horrendous spelling and grammar in that prior post. I think you see my point.

Incidentally, you want someone "independent" involved in this, we have them, person is Bernanke. The Fed Chariman is an appointed position, they do not serve "at the pleasure of the president" the way the secretaries (i.e. Paulson) do. So there you have it, we have an independent party involved in the whole thing.

But wait, Bernanke didnt see it coming - we need someone independent to watch Bernanke...but what if that person doesnt see it coming...and around and around we go.

Bryan said...

The argument doesn't defeat the clear benefits of oversight. Law school classrooms are fun rhetorical playgrounds for these sorts of theoretical slippery slopes and ad nauseum arguments, but having at least ONE level of oversight of otherwise arbitrarily exercised power has merit. Yes, a cabal could bring us all down, but the conspiracy is that much more likely to be found out.

But yes, we need to be reasonable.

Nooge said...

BTW - having one person in charge, not reportable to anyone may not be such a bad thing. Many believe this crisis is very similar to the panic of 1907.

At the time, J.P. Morgan called together wall street banks, told them this is how were gonna do it - period. To this day, Morgan is largely credited with steming that crisis before it got too far out of hand. Something to think about.

Nooge said...

"but having at least ONE level of oversight of otherwise arbitrarily exercised power has merit."

Agree Bryan but I think we have that to a degree. Take a look at (9)(b) the secretary can purchase other assetsl;

"after consultation with the Chairman of the Board of Governors of the Federal Reserve System"

AND

"but only upon transmittal of such determination, in writing, to the appropriate committees of Congress."

Sounds like some oversight to me.

Max said...

That was my whole point. Are you now saying you agree?

So is housing the cause of the problem or not? The reason these securities are in trouble is the same reason that family abandoned their house. If you can't see the connection, I don't know what to say.

Nooge said...

All - it should be obvious by now that I am purposefully playing devils advocate here. The draft legislation comes out, and everyone denounces it with superlatives like "worst bill ever"

Hyperbole aside, the point here is to see that its not always as clear cut as everyone thinks. They say drafting legislation is like making sausage - its best if you dont know whats in there - and to a degree thats what I want to import here. There are a myriad of decisions to be made in terms of oversight, checks and balances, expendiency, efficency, etc. etc.

There is a certain point at which you have beat a piece of legislation to death, and its time to now get it out there - make changes as you see what works and what doesnt, but at some point you have to pull the trigger. As I see it that time has come - lets just hope our fearless leaders are right. See ya!

Bryan said...

You're right of course, though I wonder if these phrases endow these bodies with the explicit right to overrule the Secretary.

But certainly oversight is the point of those clauses. It's disheartening that the oversight comes from the very lemmings jumping off the cliff, many of whom seem anxious to rubberstamp, but we really couldn't expect yet another layer of oversight and overrulling power.

In times of crisis, Rome appointed dictators. So shall we. Most of them stepped down when the crisis was averted. So shall this one. But we hope (1) he doesn't screw the pooch in the mean time, and (2) we aren't setting a precedent for foolish behavior that requires the increasing intervention of unified executive power (I'm trying to avoid the rhetorical heavy-handedness of the word 'dictator').

Nooge said...

Max - Housing most certainly is the problem, but its not what we are trying to address with this bill. Putting aside the possibility that the govt will try to rework mortgages for a minute, on its face this bill is every renters wet dream

1. Contain the fire such that the jobs and the economy we all rely on is only minimally hit AND

2. Let housing continue to burn down - just separate, to the best you can from the rest of the economy.

Now - at the end of the day, we are still going into a recession - there is nothing we, the govt or anyone can do about that. But heres the whole point. Imagine a subdivision - for the last 14 months the "house of housing" has been burning down, the "house of finance" and the "house of the larger economy" were getting smoke damage only.

Then - 2.5 weeks ago - when lehman went down, and the ted spread exploded the "house of finance" and "house of larger economy" both caught fire. The point of this bill is to extinguish these two fires. In the end, they will continue to get smoke damage as the "house of housing" continues to burn, but at least at the end of the day these two will still be standing - God willing.

Patient Renter said...

Essentially someone is in charge, but can we trust him?

It's not so much a matter of trust, it's a matter of competence. As I pointed out, recent history clearly shows that Paulson and company are incompetent.

Incidentally, you want someone "independent" involved in this, we have them, person is Bernanke

You really might want to learn a bit more about the Federal Reserve. It is very dependent on and influenced by big banking, and was in fact architected by big bankers (as the G. Edward Griffin quote I posted above comments on). So no, Bernanke is not independent.

Patient Renter said...

"after consultation with the Chairman of the Board of Governors of the Federal Reserve System"
...
Sounds like some oversight to me.


Let me speak more clearly - The Federal Reserve is a banking cartel. Any "oversight" provided by its chairman is not the kind that can be expected to benefit American taxpayers.

Deflationary Jane said...

LOL Thanks Nooge >; )

Been watching the senate vote. I think I fell a little in love with the firebrand from Vermont (Saunders).

Someone on CR said that Feinstein was Giuliani in drag. While it was funny (mostly because there is a lot of truth to it) I can't help wishing I vote the old biatch off the island and replace her with Bernie.

Did anyone see Graham's testimony? I seriously hope he tips his security detail well. And someone needs to spank Boxer - bad senator, no cookie.

Patient Renter said...

Yea - it's amazing how so many legislators who are clearly intelligient on a variety of issues just completely lose their grasp on common sense when it comes to financial issues... or maybe it's just fear driving them at this point?

Anonymous said...

This thing is so weighted down with crap. I was for a "bailout," but now I am not. This is not the way to do it. I hate politicians. I thought of all people the senators would have more reason than the completely looney house reps.

Nooge said...

Patient Renter said...
"You really might want to learn a bit more about the Federal Reserve. It is very dependent on and influenced by big banking, and was in fact architected by big bankers (as the G. Edward Griffin quote I posted above comments on). So no, Bernanke is not independent."

Patient - you missed my intended irony in that bernanke was supposed to serve as that "independent" party. Therein lies the problem. After a while, the independent becomes part of the establishment, and then you need a new independent to watch the old, and around we go.

Incidentally, I saw an interview with Warren Buffet last night regarding his view on Paulson as being the right person for the job. His words (in essence) "I know its not popular to say this in Washington, but I would give Paulson a blank check". I damn near fell on the floor!

Patient Renter said...

Of course Buffet would give Paulson a blank check being that he stands to benefit (with his Goldman stake) greatly from the bailout, also keeping in mind that 6 years ago Paulson was heading Goldman.

Gotta love America.

Nooge said...

good point

Anonymous said...

FWIW - here are some more blurbs from the Buffet interview last night.

http://biz.yahoo.com/ap/081002/buffett_economy.html

Darth Toll said...

Here's another take on the bailout plan:

http://market-ticker.denninger.net/archives/597-UPDATED-China-and-Other-Foreigners-Declare-Economic-War.html

This video shows a congressman plainly stating that this bill is actually designed to bailout foreigners and their bad bets on mortgage paper. Paulson crafted this plan because the Chinese and others threatened to pull the plug on Treasury support if the taxpayers didn't bail out their bad bets (including FNM bets). This guys isn't some chump. He has law and economics degrees and is highly regarded by others in congress as being a very sharp dude.

Patient Renter said...

Yea, Ritholtz had an exerpt from a Kudlow interview a few days ago with some Congressman (the same one?) who was saying the same thing. He said he introduced an amendment to the bill that would close the foreign exploitation loophole and not only was it shot down, but Paulson said he'd recommend to the President that the bill be vetoed if such an amendment made it in.

Personally, I think that if the China threat were true, Paulson would be better served by just being honest to Americans about the problem we're facing (China pulling the plug) and that our markets needed to be propped up in order to appease the Chinese. Honesty goes a long way. As it is though, there is still so much wrong with the bill.

Darth Toll said...

I don't know pr. Can you imagine the huge public outcry if Paulson actually said that? It would be like 300 million people immediately waking up from being inside the Matrix. Talk about a bucket of cold water being thrown on you when you are asleep.

Either that or people would demand we go to war with China. "How dare China extort us like that!" would be the public refrain, without even realizing that they (and Japan, Saudis, etc.) have been financing our debt for years.