Now that we’ve gotten through an ugly spasm of political theater and legislative sausage-making and enacted the Paulson rescue plan, it’s time to ask whether it’s working, and how we’ll be able to tell.
As I’ve said before, there are two different crises in the financial world. We have an acute credit crisis that directly affects capital markets and is now in the process of creating a serious recession. But we have a longer-term solvency crisis that affects the ability of the financial industry to fund business expansion and consumer spending.
I’ve talked a lot in recent days about the credit crisis, which has now broken through into the media spotlight in a way that suggests it’s at or near its peak. You already know that when you start getting hot stock tips from grocery-store clerks, it’s time to get out of the stock market.
Well, when media types do woman-in-the-street interviews and ask people if they know what LIBOR is, you know it’s time to ask whether the credit crisis may soon abate.
At any rate, I’ll give you a roundup on the current state of credit and capital markets in another post. Today I want to look at the solvency crisis.
The source of all the disorder in the financial world is the loss of value in the housing market, as the bubble deflated. The losses arising from lower home values have to find a place to go, and that is what financial firms are wrestling with.
The Paulson rescue plan as currently enacted is very likely to provide a transmission channel for this financial stress. Whether this was aforethought or an unintended consequence is a question for Paulson and Bernanke. I did have a brief conversation with Congressman Hensarling yesterday, in which he told me that creating unintended consequences is one of the things Congress does best.
So let’s trace this through.
If you bought a house for a $750,000 and it’s now worth more like $650,000, someone has to flush $100,000 down the toilet. Multiply that by millions of houses and you have a sense of the problem. We have to ask who it is that will eat that loss.
Well, who should take the loss? You can argue that it’s the guy who bought more house than he could afford. Or you can say that it’s the bank’s fault for selling cheap mortgages without coherent underwriting standards.
But as interesting and contentious as that question is, it’s beside the point. When you have a problem this big, the pain is never taken by who’s at fault (even if you could clearly establish who that is). The pain will be taken by whoever is in the best position to take it.
That’s the lesson of our political system, which responds to squeaky wheels by creating channels for transmitting stress to less squeaky wheels.
So imagine a woman who bought a house in the last year or two with one of those exotic mortgages, probably with an extremely low LTV, and maybe with interest-rate reset features.
Our heroine has very little incentive to stay in that house. She may owe more on the mortgage than the house is now worth. Even worse, she may be stuck with a monthly payment that is simply beyond her means. And her equity position in the house is little or nothing.
The rational thing for her to do is to walk away.
That leaves the bank with a house that’s worth far less than the amount they put up to fund the mortgage. The homeowner doesn’t really take an inordinate amount of pain. The pain shifts to the bank. Or more precisely, to the investors who own the mortgage-backed securities that take the cash flows from the mortgage.
Those investors are now left with a massive capital loss. And because of that loss, their ability to make new investments is much reduced. Multiplied by millions of investors, that produces a net drag on economic activity throughout the world. There’s just no money to fund business expansion.
(There’s another extremely important structural factor in the diminution of investing power, and that’s de-leveraging. That’s a point for another post.)
At this point, Congress and the FDIC enter the picture. For nearly two years, FDIC chairwoman Sheila Bair has been aggressively saying that we need foreclosure relief. And Congress took this message completely to heart. The Housing Recovery Act passed in July provides up to $300 billion in bailout money for people who can’t pay their mortgages (among other provisions).
But what are we saying when we assume that the most important goal is to prevent foreclosures?
We’re saying that we don’t want homeowners to suffer the consequences of the loss in housing value, whether it’s their fault or not. The ethical question has been completely sidestepped, but forget about that for now. By extension, we’re saying that we don’t really want to let the housing market find its own level.
Chairwoman Bair has been pressing for measures that would encourage or even compel banks to avoid foreclosing on people who can’t pay their mortgages. When she seized IndyMac and became its de facto CEO, she went so far as to suspend all of the foreclosures that the failed bank had in process.
Instead, she wants bankers to reduce the principal amount of loans outstanding to distressed borrowers. For a variety of reasons (some good, some bad), banks are very reluctant to do this, preferring to offer interest-rate reductions.
What happens when you reduce the principal amount of a mortgage to someone who has little or no equity in the home? It’s exactly as if you reduced the price at which the person bought the house.
Foreclosure relief is all about rolling back the worst excesses of the housing bubble, as experienced by the people who were among the last to buy. Again, try to forget about the moral dimensions of this as we follow the analysis.
Even if you shift all of the pain off the homebuyers, it still has to go somewhere. And this is where the just-enacted Paulson rescue plan comes into the picture.
Foreclosure relief through reduction of mortgage principal amounts is probably going to become the government’s favored means of dealing with the housing mess. That means that the value of mortgage-backed securities will tend to fall sharply, as monthly payments from newly-reduced mortgages fall.
But wait! These are the same securities that are currently unmarketable, because the prices that buyers are willing to pay are far below what sellers are willing to accept.
And they’re the same securities that the Treasury will now have up to $700 billion to buy.
What’s the valuation at which those securities will be purchased? That’s a marvelous question. It’s widely agreed that the prices need to be set somewhat above the current market values. Otherwise you don’t do anything to address the solvency problem faced by banks and Wall Street firms.
And voila. We’ve just created a channel through which the pain of housing overvaluation will be transmitted to the taxpayers as a whole.
If FDIC and Congress follows through on their plans to induce banks and other intermediaries to reduce the principal amounts of a great many mortgages, the reduced cash flows will directly impact the value of MBS that will be purchased by the Treasury.
This is a directly inflationary outcome. Is that a bad thing? That’s another complicated question. The answer is not necessarily yes, especially compared with the alternatives.
But how do you deal with the overwhelming moral hazard that you create by giving a mulligan to everyone who paid too much for her house? At least some of these people will learn that if you play dirty, you’ll win because the suckers who play by the rules will bail you out.
There’s one and only one way to deal with moral hazard created by government. And that’s with a massive clampdown by government itself on free-market activity.
And this part of the picture is already in place.
The broad effect of the Fannie Mae/Freddie Mac takeover is to impose a price control on the entire housing market.
What the heck does that mean? It means that the mortgage business has now been almost 100% nationalized. Debt issued by Fannie and Freddie is now explicitly guaranteed by the government, so any conforming mortgage will almost automatically be funded by Fannie and Freddie.
This is the reality of the housing market today. People with good credit and good down payments will generally have no trouble buying houses, as long as they are priced below the Fannie/Freddie conformance limit.
Everyone else will have a very, very hard time getting a mortgage, and the prices for those mortgages will be exorbitant.
In this way, the government has made it all-but-impossible for home values to ever rise very high again. And that takes care of your moral hazard, big-government style.
-Francis Cianfrocca
Moe Lane
Steve Maley
Dan McLaughlin
Neil Stevens
Daniel Horowitz
I'm trying to get my head around this.
Robert L. Mayo (Diary) Saturday, October 4th at 10:27AM EST (link)Great explanation, as always, but I’m having trouble understanding something.
If the original sin (after congress attempting to social engineer the housing market) is the inability of homeowners to pay their mortgages, why wouldn’t a more direct way to channel the loss to the taxpayer be to provide more direct taxpayer assistance to distressed homeowners?
If another couple hundred billion was pumped into helping people pay their overvalued mortgages, wouldn’t that eliminate the reduction in value of MBS and eliminate the need for the MBS bailout?
It seems more direct to channel the losses straight from the homeowner to the taxpayer and avoid the secondary mortgage market as a loss conduit with all the financial market turmoil that causes.
I assume there is a good reason why that wouldn’t work, but I can’t see what it is.
Robert L. Mayo
Dream no small dreams for they have no power to move the hearts of men.
- Goethe
I thought the bailout was supposed to make it all better! :)
alchemist17 (Diary) Saturday, October 4th at 10:40AM EST (link)By my understanding, over the past years we have been financing economic growth through increased debt leverage due to the housing mania combined with cheap lending policies from the Fed, and clearly the collapse in the housing market was the proximal cause of the current panic.
What I haven’t seen as much attention to is the effects of unrolling all of this debt – it strikes me that the high-leverage that has been applied is essentially the same as lowering the bank reserve ratio, and as such the unrolling at the investment level is deflationary as it destroys a fair amount of near-money equivalents.
At the same time, we’re transferring the pain onto investors (by steering them to lower-yielding Treasuries rather than other investments) as well as a likely direct confiscation into the black hole of the government.
In the short term this certainly helps the liquidity crisis, as government can bring this credit online far faster than private investors will surmount the investment fears. In the long term it would seem there is a risk that the diversion of investment streams into government directed actions reduces capital available for investment, potentially exacerbating the deflationary aspects of deleveraging and driving up lending costs. Is this just a case of no good options?
That's identical to creating another bubble
Francis Cianfrocca (Diary) Saturday, October 4th at 10:41AM EST (link)You’re talking about directly supporting the price of something (a house) in excess of its value (in the sense of economic utility).
The deflation of housing values must occur somehow or other.
We had two choices up until yesterday. We could either devastate homeowners, or devastate the financial industry.
With the Paulson plan, we have a third option: repackage it in the form of dollar risk to global investors.
I’m telling you, the rocket science going on here is palpable. People will be writing books and dissertations on this episode for decades to come.
I don't agree with all of this
Francis Cianfrocca (Diary) Saturday, October 4th at 10:53AM EST (link)In your first paragraph, I think you’re confusing cause and effect. The sharp increase in leverage ratios by intermediaries in the “shadow banking system” (mostly Wall St. firms) largely preceded the stampede into housing.
We don’t have all the answers yet, and may not have for many years. But as of now, I’m more inclined to buy the argument that the bubble happened because the extraordinary over-abundance of cheap capital had no good place to go. So it went to a place it shouldn’t have, which was residential finance.
Your second paragraph, I couldn’t agree with more. That analysis is spot-on. The result of this is that we will be living in a capital-constrained world for years to come.
Unless the government decides to find out where inflation ends and hyper-inflation begins.
Here's a Kowalski
Francis Cianfrocca (Diary) Saturday, October 4th at 11:02AM EST (link)I thought about it some more. Maybe you’re right. I’m vaguely remembering some analysis I read, that said housing prices started going into overvaluation back in 2000 or so. That was long before the 2004 rule change that allowed Wall St. firms to run 30-1 leverage.
This is worth some more research.
Not going beyond the current bailout.
John E. (Diary) Saturday, October 4th at 11:13AM EST (link)“The rational thing is for her to walk away.”
Ture, if she bought a home just to make money or more home than she can afford. Otherwise, she has the home she wants even if she paid too much. If she gives it up she should lose her ability to get easy credit and her good reputation.
If the bank wants to sue the government for requiring to make this loan, then maybe they can recover some loss that way. Otherwise they deserve the loss and should bear it.
Then housing prices and rate at which the real estate market fuels economic growth is back where it should be.
We are getting back grounds on which common sense can show us the way. The government should not become a lender to resolve the long term capital problem.
Im cranky
Alberta (Diary) Saturday, October 4th at 11:49AM EST (link)I dont mean to be all whiner like, but most people are not swimming in cash. The biggest investment most people make in their lives will probably be their homes. And because homes are where you live, you kinda need one. So the government has just put a defacto cap on the value that can accrue in that investment. Notwithstanding the fact that Im assuming that with a cap on how high there is a cap on how low the price can go, wont this hurt the vast majority of people?
If your house can no longer accrue substantially in value, isnt it now a black hole? I mean, besides the obvious benefits of having a house versus not having one (nobody likes sleeping in parks) why would someone invest in housing? Have we not just blocked a corridor for capital investment to flow (in the future when doomsday is discounted?).
And moral hazard for mainstreet is one thing, but what about on wallstreet? If Uncle Sam is going to pay for the toxic at full or close to full price, what kills the moral hazard?
Lastly, and thanks for sticking in, but how does this get the toxic paper outa the system? If the government is buying these things to hold and one day resell (at profit they tell you with a straight face) but at the same time has killed the ability for homes to get more valuable, who is going to be buying this poison in the future?
Sir, my concern is not whether God is on our side; my greatest concern is to be on God’s side, for God is always right.
Abraham Lincoln
Housing is not an investment, and it never has been
Francis Cianfrocca (Diary) Saturday, October 4th at 12:04PM EST (link)It’s something you live in, and you derive value from that. Over long stretches of time, the value of housing tends to match the population, and patterns of where people want to live.
If you want to consider a house to be a store of value, something that you can cash out of when you retire, that makes sense to me. But it makes no sense to buy a house looking for appreciation. Not unless you’re a professional investor willing to evaluate risk.
As far as moral hazard on Wall St is concerned: it’s already gone. Every one of the five investment banks we started the year with is out of business, merged into a bank, or has become a bank. They all face much tighter regulation going forward.
The days of $5 million bonuses for 25-year-old traders are gone forever.
Excellent Analysis
GregInFla (Diary) Saturday, October 4th at 12:06PM EST (link)My question is: can we just limit the government intrusion into past mortgages, like mortgages made prior to this past Monday? Clean up the old mess, and let the free market go on from here, without a Fannie or Freddie or any GSE in this new mortgage market? The easy access to mortgage money via the GSEs caused the increase in demand, and combined with the restrictions on supply (illustrated extremely well by Thomas Sowell in several of his books, including the recent Econominc Facts and Fallacies) we had higher housing prices.
I just don’t understand why the Feds have to remain in the ongoing market. Would have either insuring the bad debt or allowing people to deduct their housing losses on the income tax been another alternative?
I really appreciate your straightforward explanations and analysis, and look forward to the next in this series.
– A true evolutionist would let endangered species die off. Think about it.
– The sign outside the courthouse said no signs allowed. So I took it down.
– Atlas Shrugged is now on the non-fiction aisle at Amazon.
To borrow a point from Moe
Neil Stevens (Diary) Saturday, October 4th at 12:06PM EST (link)The Government has a unique ability to change the terms of the investments which it can buy under the plan.
So as I understand it, it can detoxify them if it wants. Or it can just hold them to maturity, and not have to sell like all the private institutions have to.
So that’s how the toxic stuff gets out of the system, as I understand it.
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One more thing
GregInFla (Diary) Saturday, October 4th at 12:08PM EST (link)Will taxpayers be required to report, as they are now, that principal reduction as taxable income? It only seems fair to those of us who stayed in their same home for past 18 years and did not take out any cash, and have 70% equity in their homes, and as such, benefitted very little by the bubble.
– A true evolutionist would let endangered species die off. Think about it.
– The sign outside the courthouse said no signs allowed. So I took it down.
– Atlas Shrugged is now on the non-fiction aisle at Amazon.
More Fuel on the Fire
Mike Friesen (Diary) Saturday, October 4th at 12:19PM EST (link)It is easy to picture a whole new conservative movement focused on privatizing Freddie/Fannie, repealing Sarbanes-Oxley/McCain-Feingold, etc. The increased government intrusion fuels my passion for us to return to limited government.
As I understand our founding documents, government properly has a careful role to play in the larger things we could not do for ourselves as individuals (national defense, basic infrastructure, and so on). We are drifting away from what made us great.
With the bailout, I believed the challenges big enough that Congress had to do something. It was irritating though to hear various people say “we have to pass a bad bill because it is better than nothing.” What about passing a good bill? The lack of common sense is appalling.
Bottom line, we need more conservatives in a variety of quarters who will fight for principle.
Best regards,
Michael
Might we see a constitutional challenge to it?
GregInFla (Diary) Saturday, October 4th at 12:25PM EST (link)Maybe we should put Sen. Thompson on a retainer to file a lawsuit on the grounds that this act is unconstitutional. Just sayin…
– A true evolutionist would let endangered species die off. Think about it.
– The sign outside the courthouse said no signs allowed. So I took it down.
– Atlas Shrugged is now on the non-fiction aisle at Amazon.
Can't we limit taxpayer exposure in finance?
Spiral (Diary) Saturday, October 4th at 12:38PM EST (link)What about a 2 step approach:
(1) Require all banks with FDIC taxpayer-backed insurance to invest 100 percent of their assets in US Treasuries.
(2) Make bank membership in FDIC voluntary, not mandatory.
In other words, banks would be mostly risk free, at least in terms of their investments. So, the average worker could put their money in a checking account without worrying about a run on the bank. And the taxpayer wouldn’t be exposed to the FDIC created risk that became apparent when the S & L crisis occurred.
For those who want to earn a rate of return on their money, banks wouldn’t be attractive. They could invest in mutual funds, stocks or other financial assets.
But the system we have now does two things that distort the market:
(1) It forces taxpayers to take risk when many do not want to take risk. (FDIC for banks that invest in risky assets. FHA, Fannie Mae and Freddie Mac.)
(2) It prohibits people from taking risk when they want to take risk. (Bans on short selling.)
See where I’m going? If we could make sure that the government is not forcing some people to expose themselves to risk while others enjoy the benefits of that risk, we can make sure that government isn’t distorting the economy.
Similarly, too much regulation can prevent distortions in the other direction.
The Obama Bread Lines
What if the Fed had purchase 700 B of US debt?
Spiral (Diary) Saturday, October 4th at 12:48PM EST (link)What I do not understand is why, instead of asking Congress to pass the Paulson plan (or a variant of it), the Federal Reserve didn’t simply purchase 700 billion dollars of US Treasuries?
US Treasuries are a fairly neutral asset. So, we wouldn’t have to worry about whether the federal government is favoring this bank over that bank, this struggling corporation over that struggling corporation because the government wouldn’t be purchasing assets from private corporations directly. It would simply buy up federal debt and drop 700 billion dollars of cash into the economy.
Instead, with the plan that passed Congress, the Treasury is going to put 700 billion dollars of cash into the economy, but in exchange, it’s going to hold assets that are risky with uncertain value.
What we have done is transfer up to 700 billion dollars of risk to the US taxpayer.
If there is liquidity crisis, the federal reserve can increase the money supply.
If there is a capital crisis, Congress can make capital investment in the US more attractive by modifying tax law, modifying regulations, making the federal budget more solvent, reducing the threat of litigation against capital investors in the US and so on.
But having the US Treasury start its own 700 billion dollar hedge fund seems entirely beside the point. It doesn’t get to the problem at hand.
The Obama Bread Lines
Why not restructure mortgages?
jphamlore (Diary) Saturday, October 4th at 12:50PM EST (link)Blackhedd, isn’t what you are saying exactly what Nouriel Roubini was saying, that at least three issues of illiquidity, insolvency, and reducing the debt payments of households need to be addressed before a recovery can begin?
What I don’t get is why Bernanke and others didn’t propose the solution that was used during the Great Depression, a program that Bernanke apparently thought was one of the only two that were effective–a second HOLC. The big idea was to increase mortgage lengths from the unaffordable 5 years plus balloon payment at the end to twenty years or more with a fixed rate.
Instead of forgiving principle, refinance people into 40 or even 50 year fixed rate mortgages and give them the option to pass their houses to their children tax-free even within their lifetimes as long as their children agree to continue to pay the mortgage. This creates instant inter-generational community stability and is a helping hand from the government not a hand-out.
Very True
MSU_Charles Saturday, October 4th at 12:56PM EST (link)Francis,
That is a good point on dissertations. I almost wish I could go back and do that process again.
Now for the serious part of my comment/questions:
Very nice explanation and more importantly the questions you pose should be of great concern to many.
Why do those in Washington absolutely refuse to address the solvency issue? I have watched & read everything possible regarding the bailout and economy and I have yet to hear 1 person in Washington address this. Why? Personally, I think they don’t know how to deal it.
The inflation issue concerns me. With the amount of amount money the government has put out lately, I see no way to avoid inflation. To me, the big question becomes is this Demand-Pull or Cost-Push inflation? I think we have both. But we can’t cure it, until we have a handle on its cause. Also, do you think we could see stagflation (remember Jimmy Carter introduced us to this wonderful term) combined with the inflation. What do we do if inflation gets too out of control? If the Fed increases rates, credit security prices are going to plummet and I believe sling us into an even deeper downturn/recession. Just curious on your thoughts.
If you were making some of these policy decisions, what would you do to begin getting capital working again? (I like the ideas of lowering/suspending capital gains, raising retirement fund contribution limits, and accelerating depreciation schedules all to increase capital movement).
Just curious about your further thoughts.
Great stuff, blackhedd!
streetwise (Diary) Saturday, October 4th at 12:58PM EST (link)The government is largely responsible for the mess because of the previous “implicit” guarantee of Fannie/Freddie, so it is responsible for helping to clean it up.
Of course, the government solution will be flawed and have unintended consequences.
That’s life in an imperfect world.
As Roseanne Rosannadanna of Saturday Night Live fame would say- it’s always something!
Why purchase toxic assets?
Spiral (Diary) Saturday, October 4th at 1:10PM EST (link)We are told that many banks have these “toxic assets” in their portfolio and they can’t sell them because no one knows the value of these assets.
First. Why would any intelligent person purchase an asset if he doesn’t have an understanding or a good estimate of its value.
I certainly don’t purchase a car sight unseen. Why do smart Wall Street types purchase Mortgage Backed Securities without knowing whether the debtor is in a good position to pay the mortgage?
Second. Is handing over taxpayer cash to someone who appears to be an incompetent Wall Street money manager (who purchased an asset that he didn’t know the value of because his lunch buddies were doing the same thing) the most effective way to “unfreeze” the credit market? Do we really want this incompetent Wall Street guy making more “investments” given his track record? Isn’t capitalism a system that rewards good decisions and punishes bad ones?
We are told that the credit market is “frozen.” Isn’t this hyperbole? My wife got a credit card offer in the mail for 0 percent interest on purchases for the next 6 months. Toyota corporation is offering 0 percent interest. And is it necessarily a bad thing when people and businesses are a little reluctant to lend money to people who might not be able to pay the money back?
If a borrower has to pay a higher interest rate in the commercial paper market, isn’t this simply the market responding to new information and, therefore, the proper functioning of the market? Why should the government try to distort the commerical paper market into stimulating more lending than the market would generate?
The Obama Bread Lines
Mortgage Fraud
izoneguy (Diary) Saturday, October 4th at 1:20PM EST (link)Don’t forget – many thousands of these “toxic assets” were the result of mortgage fraud. Some homes were flipped so many times and the price run up to the point of being totally unrealistic. Investigations need to drill down at local levels to un cover as much as the fraud as possible.
More Bail Out News
The point cannot be made often enough: Modern liberalism, as embodied in the Obama presidency, is the defender of the status quo. And the status quo is a road to economic ruin. Political forces cannot redistribute the wealth that the economic system does not produce.
That giant sucking sound you're hearing....
MrSandman (Diary) Saturday, October 4th at 1:25PM EST (link)is the USD headed straight down the toilet.
The “unintended consequences” from this turd of a bill could actually make the problem worse. Many think that’s far more likely than any semblance of a turnaround.
I’ve appreciated your diaries very much BH. Clear explanations indeed….however…I don’t agree that we are anywhere near a “bottom” in the credit crisis. What’s going to happen to all those ARMS when the rates start climbing? Is the Fed the prime to 0?? That worked out real well for Japan.
A bunch of politicians come up with a pork laden bill….with no input other than the incompetent folks who were telling us just last year how everything was peaches and cream.
No other input. Not one single economist. Not one single expert of any kind.
Just Congress and Paulson and Bernanke.
It begs the question. What are they not saying? Why all the stagecraft and spin….yet no expert testimony.
I fear we’re now a banana republic dressed up like a superpower. It’s pathetic and depressing as hell. I mourn for my children and their children. We are mortgaging their future on the word of incompetent WS bagmen and politicians. Very sad.
“Americans can no longer trust the economic information they are getting from this Administration.”
— Republican Senator Jim DeMint
IIRC...
rbdwiggins (Diary) Saturday, October 4th at 1:29PM EST (link)Housing prices became “uncoupled” from the CPI around 1997. About the same time Bear Stearns first securitized loans made under CRA, essentially creating the subprime market.
“Well, the trouble with our liberal friends is not that they are ignorant, but that they know so much that isn’t so.” – Ronald Reagan
These folks need to GO.
MrSandman (Diary) Saturday, October 4th at 1:31PM EST (link)Spineless lackeys….the lot of them.
Abercrombie
Ackerman
Alexander
Allen
Andrews
Arcuri
Baca
Bachus
Baird
Baldwin
Barrett (SC)
Bean
Berkley
Berman
Berry
Biggert
Bishop (GA)
Bishop (NY)
Blunt
Boehner
Bonner
Bono Mack
Boozman
Boren
Boswell
Boucher
Boustany
Boyd (FL)
Brady (PA)
Brady (TX)
Braley (IA)
Brown (SC)
Brown, Corrine
Buchanan
Calvert
Camp (MI)
Campbell (CA)
Cannon
Cantor
Capps
Capuano
Cardoza
Carnahan
Carson
Castle
Clarke
Cleaver
Clyburn
Coble
Cohen
Cole (OK)
Conaway
Cooper
Costa
Cramer
Crenshaw
Crowley
Cubin
Cuellar
Cummings
Davis (AL)
Davis (CA)
Davis (IL)
Davis, Tom
DeGette
DeLauro
Dent
Dicks
Dingell
Donnelly
Doyle
Dreier
Edwards (MD)
Edwards (TX)
Ehlers
Ellison
Ellsworth
Emanuel
Emerson
Engel
Eshoo
Etheridge
Everett
Fallin
Farr
Fattah
Ferguson
Fossella
Foster
Frank (MA)
Frelinghuysen
Gerlach
Giffords
Gilchrest
Gonzalez
Gordon
Granger
Green, Al
Gutierrez
Hall (NY)
Hare
Harman
Hastings (FL)
Herger
Higgins
Hinojosa
Hirono
Hobson
Hoekstra
Holt
Honda
Hooley
Hoyer
Inglis (SC)
Israel
Jackson (IL)
Jackson-Lee (TX)
Johnson, E. B.
Kanjorski
Kennedy
Kildee
Kilpatrick
Kind
King (NY)
Kirk
Klein (FL)
Kline (MN)
Knollenberg
Kuhl (NY)
LaHood
Langevin
Larsen (WA)
Larson (CT)
Lee
Levin
Lewis (CA)
Lewis (GA)
Lewis (KY)
Loebsack
Lofgren, Zoe
Lowey
Lungren, Daniel E.
Mahoney (FL)
Maloney (NY)
Markey
Marshall
Matsui
McCarthy (NY)
McCollum (MN)
McCrery
McGovern
McHugh
McKeon
McNerney
McNulty
Meek (FL)
Meeks (NY)
Melancon
Miller (NC)
Miller, Gary
Miller, George
Mitchell
Mollohan
Moore (KS)
Moore (WI)
Moran (VA)
Murphy (CT)
Murphy, Patrick
Murtha
Myrick
Nadler
Neal (MA)
Oberstar
Obey
Olver
Ortiz
Pallone
Pascrell
Pastor
Pelosi
Perlmutter
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Pickering
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Price (NC)
Pryce (OH)
Putnam
Radanovich
Rahall
Ramstad
Rangel
Regula
Reyes
Reynolds
Richardson
Rogers (AL)
Rogers (KY)
Ros-Lehtinen
Ross
Ruppersberger
Rush
Ryan (OH)
Ryan (WI)
Sarbanes
Saxton
Schakowsky
Schiff
Schmidt
Schwartz
Scott (GA)
Sessions
Sestak
Shadegg
Shays
Shuster
Simpson
Sires
Skelton
Slaughter
Smith (TX)
Smith (WA)
Snyder
Solis
Souder
Space
Speier
Spratt
Sullivan
Sutton
Tancredo
Tanner
Tauscher
Terry
Thompson (CA)
Thornberry
Tiberi
Tierney
Towns
Tsongas
Upton
Van Hollen
Velázquez
Walden (OR)
Walsh (NY)
Wamp
Wasserman Schultz
Waters
Watson
Watt
Waxman
Weiner
Welch (VT)
Weldon (FL)
Weller
Wexler
Wilson (NM)
Wilson (OH)
Wilson (SC)
Wolf
Woolsey
Wu
Yarmuth
“Americans can no longer trust the economic information they are getting from this Administration.”
— Republican Senator Jim DeMint
Govt MADE these MBS assets toxic!
Freedoms Truth (Diary) Saturday, October 4th at 2:42PM EST (link)That’s the hidden message of the exposition.
the Housing Relief bill and the other govt pressure was ALL about taking the bubble-burst burden off of homeowners and putting on mortgage holders.that of course leads to the obvious result: The value of mortgage assets falls further, as their position in terms of actually getting money back weakens. The bankruptcy ‘cram-down’ idea (in Dodd bailout bill) would have been the ultimate insult and the ultimate destroyer of mortgage contracts.
Like the Cat in the Hat, the govt cleans up one mess by creating another (bigger) one.
Had the Govt NOT intervened as strongly, the market forces would have more correctly “shared the load” of the malinvestment. We would NOT have seen as much MBS writedown and we therefore would not be staring at this bad of a credit crisis.
As it is, what we have here is a grifting operation where the prey is the taxpayer described in colorful detail. The “forgotten taxpayer” is the ultimate “deepest pocket” to raid.
The end result is to weaken long-term fiscal position, make mortgages MORE EXPENSIVE, over-regulate and distort housing markets, and induce moral hazard. Maybe it is the best of a bad situation (thought I doubt it), but talking like this is a good thing is appalling.
Freedoms Truth,
Travis Monitor – http://travismonitor.blogspot.com
Austin, TX
We Will Face the Choice Again
Mike Friesen (Diary) Saturday, October 4th at 3:06PM EST (link)A pilot friend of mine expects the airline industry will need a bailout soon too … will we nationalize them too?
Best regards,
Michael
Where's the independent commission on Freddie/Fannie?!?
Hammer2008 (Diary) Saturday, October 4th at 3:18PM EST (link)It was good enough for 9/11, why the hell not one for this mess.
If I’m to understand further (with Blackhead’s spot on analysis), those of us who bought our home with a traditional 30-year mortgage will bear the brunt of this mess. While those who bought/sold houses via sub-prime or other mortgage schemes, get a mulligan AND a better interest rate than what I’m paying now (6.025% in 2006).
Fannie and Freddie need to be foreclosed on, period.
McCain/Palin should be running on that! Announce it at this Tuesday’s debate and put Barack Obama on the defense of it…
~~~~~~~~~~~~
Too much noise! “Noise! You’ll have noise enough before long. The Regulars are coming out.” ~ Paul Revere (April 18th, 1775′s eve…)
Exactly
wennejunk (Diary) Saturday, October 4th at 4:14PM EST (link)A friend told me today (as he explained he and his new wife had commissioned a custom home and that it would be more expensive than the neighborhood trend):
“I guess we can’t really think of our house as an investment anymore”
I told him it had never been an investment, just a place where you live.
You have to decide if the price you pay is worth what you get in satisfaction/quality of life.
There are only two kinds of people in the end: those who say to God, ‘Thy will be done,’ and those to whom God says, in the end, ‘Thy will be done.’ -C. S. Lewis
One is gone
GregInFla (Diary) Saturday, October 4th at 4:37PM EST (link)Weldon (FL) is leaving after this year. That was likely his last vote. A terrible legacy for what was otherwise a great voting record. I wonder how many of the rest are also not running for re-election.
– A true evolutionist would let endangered species die off. Think about it.
– The sign outside the courthouse said no signs allowed. So I took it down.
– Atlas Shrugged is now on the non-fiction aisle at Amazon.
Agreed, Fannie and Freddie should be liquidated
GregInFla (Diary) Saturday, October 4th at 4:41PM EST (link)If they were a private company, bankruptcy for liquidation would be their current situation. Plus high-level execs in front of grand juries. McCain should announce this on Monday, so that he can get his conservative base back into his corner (or at least leaning in that direction)!
– A true evolutionist would let endangered species die off. Think about it.
– The sign outside the courthouse said no signs allowed. So I took it down.
– Atlas Shrugged is now on the non-fiction aisle at Amazon.
Shuster (R ) is mine, but he is safe
Samsara (Diary) Saturday, October 4th at 9:48PM EST (link)In 2002 the PA’s 9th Congressional District was gerrymandered by the Republican controlled legislature. The result was to eliminate one Democrats seat, make the Ninth solidly Republican, and ensure John P. Murtha could continue the pork train to Western PA for years to come.
I think Shuster did the right thing in changing his vote, and he can afford to.
Thanks Blackhedd
Samsara (Diary) Saturday, October 4th at 9:59PM EST (link)I got your name right this time.
The more voters rightly understand what has happened in the economy over the past decade, the better it is for John McCain. Thanks
That's one of the problems
Francis Cianfrocca (Diary) Saturday, October 4th at 10:41PM EST (link)We had this conversation back in the spring. This is one of the things that make principal-reduction problematic.
It was suggested that IRS should suspend the rule which requires that debt forgiveness be considered taxable income. As a matter of logic, it has to be taxable, because the party that forgives the debt has to be able to write off the loss, and the government needs a way to get their cut of that money back.
I can’t remember how this was resolved, if it ever was.
We often say that it's our money, not the government's.
Francis Cianfrocca (Diary) Saturday, October 4th at 10:47PM EST (link)But that’s no longer true. The government is in full control of the value of the money that we use for private transactions and as a store of value. And it’s illegal for us to use any money but theirs.
If you were so inclined, you could recognize this as an argument that economic policy is one of the things that “properly” (your word) belong in the government’s purview.
By the way, that happened in the early New Deal, which was a period of extreme economic stress, during which the majority view was that free markets “don’t work.”
Just like today.
This is not the problem.
itrytobenice (Diary) Saturday, October 4th at 11:06PM EST (link)(1) Require all banks with FDIC taxpayer-backed insurance to invest 100 percent of their assets in US Treasuries.
This is not a workable restriction. Communities rely on banks to make car loans, small business loans, construction loans and noncomforming home loans, which are all considered bank assets. Additionally, most banks have a pretty significant investment in facilities and equipment.
And for diversity and community relations, we also generally have pretty significant municipal bond holdings.
(2) Make bank membership in FDIC voluntary, not mandatory.
It already is. All the banks are members of FDIC because they couldn’t attract one single depositor without membership.
And the taxpayer wouldn’t be exposed to the FDIC created risk that became apparent when the S & L crisis occurred.
This risk is pretty slight as it is, as the FDIC maintains a relatively safe reserve ratio, which is maintained 100% by member banks. As the covered accounts have increased due to the bailout, I expect that reserve will be increased, but the increase will come from bank paid premiums.
(1) It forces taxpayers to take risk when many do not want to take risk. (FDIC for banks that invest in risky assets. FHA, Fannie Mae and Freddie Mac.)
Banks are not in the same category as FHA (a gov’t agency) or FNMA/FMAC (GSEs).
We are private enterprises that pay money to purchase heavily regulated insurance.
Proper grammar saves lives.
Let’s eat Grandma.
Let’s eat, Grandma.
and to pull a Kowalski
itrytobenice (Diary) Saturday, October 4th at 11:24PM EST (link)Many, if not most, community banks are not having any problems at all with this crisis. I work for two banks, both of which are managed in a conservative manner. This is common when the owner(s) is/are also the CEO/officers.
Both banks not only don’t have any mark to market losses in their investment portfolios, they actually have gains. They never did purchase any exotics.
That is not to say that they never have losses. There are times when things go wrong. At one of them, a borrower kept drums of chemicals rather than properly dispose of them. When his business failed, the bank was unable to foreclose due to the EPA and the potential for a gagillion $ EPA cleanup bill. That loan was a loss.
Proper grammar saves lives.
Let’s eat Grandma.
Let’s eat, Grandma.
You really can't do that
Francis Cianfrocca (Diary) Saturday, October 4th at 11:32PM EST (link)The Fed’s total balance sheet is $800 billion now. If you forced them to monetize $700 bn in Treasury paper, it would trigger a hyper-inflation.
AWESOME - NT
Mike gamecock DeVine (Diary) Saturday, October 4th at 11:39PM EST (link)5
Mike DeVine’s Examiner.com, Charlotte Observer and The Minority Report columns
“One man with courage makes a majority.” – Andrew Jackson
I have it on pretty good authority that Bernanke...
Francis Cianfrocca (Diary) Saturday, October 4th at 11:45PM EST (link)…may not be entirely convinced that this bailout is going to do anything positive for the housing problem. I think the entire housing market needs to reset at a considerably lower level.
That’s ultimately a healthy process, but Bernanke knows as well as anyone that markets generally overcorrect for any excess. It’s the overcorrection that is dangerous.
The bailout is a shock absorber for the financial system. Among the hopeful signs we saw that it may be helping, have been the Buffett deals (Goldman and GE Cap), the Mitsubishi deal with Morgan, and the Wells Fargo bid for Wachovia.
Homeowners bearing the brunt of the mess
Francis Cianfrocca (Diary) Saturday, October 4th at 11:53PM EST (link)As I said, Congress is committed to the idea that foreclosures should be prevented at all costs. This is a direct manipulation of the market, but such manipulations always fail. If you squeeze one end of a balloon, the other end expands.
As much as I respect Sheila Bair (and she’s impressed a lot of people recently), I think she and Congress are wrong on emphasizing foreclosure prevention.
I think people in stressed mortgages, especially exotic ones taken out near the end of the bubble, should not be protected from foreclosure.
And this definitely could be a potent political issue, if only some Republican were smart enough to see it for what it is.
AMTRAK
izoneguy (Diary) Saturday, October 4th at 11:55PM EST (link)AMTRAK
The point cannot be made often enough: Modern liberalism, as embodied in the Obama presidency, is the defender of the status quo. And the status quo is a road to economic ruin. Political forces cannot redistribute the wealth that the economic system does not produce.
But will they understand
izoneguy (Diary) Saturday, October 4th at 11:57PM EST (link)Most Obamatrons are on the starship.
They are ready for blastoff. They don’t understand that they will go down the toilet with us.
The point cannot be made often enough: Modern liberalism, as embodied in the Obama presidency, is the defender of the status quo. And the status quo is a road to economic ruin. Political forces cannot redistribute the wealth that the economic system does not produce.
Click on Board of directors ..
DavidS1787 (Diary) Sunday, October 5th at 12:18AM EST (link)The you see the Name Mr. R. Hunter Biden Joe Biden’s son and a lobbyist.
Can't Pay you should not play
izoneguy (Diary) Sunday, October 5th at 12:22AM EST (link)You know they always say if you are having trouble paying your mortgage
you should talk to your mortgage company.
So now those people have to talk to the Federal Government?
Good Luck – you should have that fixed in about 10 years. The Feds need to start dumping these homes and for cash.
There will be plenty of buyers if the red tape is not there. If they is a bunch of crap and red tape they will never get sold. And now with the feds owning the homes, do you think the IRS will get involved to make some settlements?
The point cannot be made often enough: Modern liberalism, as embodied in the Obama presidency, is the defender of the status quo. And the status quo is a road to economic ruin. Political forces cannot redistribute the wealth that the economic system does not produce.
Here is a link to my Diary and some comments about this issue
DavidS1787 (Diary) Sunday, October 5th at 12:26AM EST (link)http://www.redstate.com/diaries/davids1787/2008/sep/20/r-hunter-biden-a-lobbyist/#c37544
Debt forgiveness: reduce cost basis?
GregInFla (Diary) Sunday, October 5th at 12:26AM EST (link)I think it’s a little different if the homeowner is forgiven debt and remains the owner of the home, versus turning the home back to the lender and walking away with the debt forgiven. If the owner stays in the home, then they got an instant gain. You could have it reduce their cost basis, so that the money is on the books somewhere.
– A true evolutionist would let endangered species die off. Think about it.
– The sign outside the courthouse said no signs allowed. So I took it down.
– Atlas Shrugged is now on the non-fiction aisle at Amazon.
Herbert Hoover vs. George Bush
q1stman Sunday, October 5th at 12:59AM EST (link)I called a Financial Talkshow today and asked the question if there were similiarities and differences regarding the Great Depression of 1929 and today’s Economic Crisis.
The host complimented me on my question and proceeded to talk about the History of what Herbert Hoover did (or didn’t do) in 1929-1931, as compared to what George Bush did.
In 1929-1931 Herbert Hoover did NOTHING. That was the “stark” contrast between the 2 Presidents. During these 3 years, Herbert Hoover more-or-less “hid” in the White House while banks foreclosed on homes and the economy collapsed. In fact, my great-grandfather lost his home during the Great Depression.
He also said something very interesting in comparing Barack Obama to Herbert Hoover regarding TAX Policies. The year before Herbert Hoover left office in 1931, he RAISED TAXES to 62% in an effort to turn the Economy around. This made people SUFFER even WORSE. Herbert Hoover’s “inaction” created alot of damage that took 10 years to overcome. But the RAISING of TAXES made it much much WORSE. History doesn’t lie.
I don’t particularly like the Bill which was passed that included “goodies” which are totally irrelevant to the Economic Crisis, but at least George Bush did SOMETHING! And if Barack Obama is elected President and he raises TAXES as Herbert Hoover did, it will be MOST DEVASTATING to our Economic Recovery.
The Obama supporters are TOTALLY IGNORANT to Economics and to how our Financial system works. They seem to think that Barack’s TAX Policy will somehow BENEFIT THEM! That couldn’t be FURTHER from the Truth.
Some responses to Spiral
Francis Cianfrocca (Diary) Sunday, October 5th at 6:19AM EST (link)It’s the secondary market for MBS that is nonfunctional, although to be fair, there never really was one. This isn’t unusual for debt securities, most of which are purchased with the intention of holding them to maturity.
Default rates on mortgages are historically extremely low. Makes sense, because people generally go out of their way to make their payments. That’s what made these securities so safe. That’s also why everyone was so surprised when people starting defaulting on mortgages as the bubble popped.
If you had come out in 2005 or so and said “This will end badly,” no one would have invested with you because your quarterly returns would have underperformed your peers. So there’s more to this than just doing what your lunch buddies are doing.
The availability of consumer unsecured credit (your wife’s credit card offer) isn’t the same as the capital markets where large businesses go for day-to-day working capital. The latter markets are indeed frozen for all but companies with the very, very best credit ratings. And the interbank lending market is also frozen.
Market pricing for commercial paper: let’s say you’re a capital-intensive business with a gross profit margin like 12% or so, and you’re used to paying LIBOR plus 200 basis points for term financing. Now, the price is LIBOR+750, if you can get it at all. Your gross margin just went below 5%.
At that point, your business may not even make sense. Do you see now why there’s a direct economic impact from the credit freeze?
This was not the behavior of a great nation
JSobieski (Diary) Sunday, October 5th at 7:00AM EST (link)I agree with everything that you said above. I know that small businesses (who are the vast majority of my client base) were and are feeling the pinch.
Of course, we still don’t know:
(1) whether the rescue plan will work
(2) whether there were better alternative plans out there
The most troubling thing about this rescue plan is not the $150B in pork spending that was added on, or even the $700B in government spending, it was the glaring indictment of this entire fiasco on:
(1) the MSM–could the coverage of this issue been any less informative? The ratio of heat to light was close to infinity.
(2) the government –elected government officials were no more substantive in this crisis than the MSM. Not sure what Reagan would have done here in terms of policy, but one thing I am sure of is that he would have taken the opportunity to educate the public. Was there any leadership here? One person stuck out his neck (an unelected Treasury Secretary) and the vast majority of politicians were no more than caricatures.
(3) the citizens – we let both the MSM and the government get away with a public discourse at the second grade level. Economics needs to be taught in this country, but are there enough educated people in the country to serve as teachers?
Bottom Line: There is nothing in this crisis that inspires confidence. This was not the behavior of a great nation. This crisis reveals systemic weaknesses in our Republic that appear to grow worse by the day. For a people enjoying the fruits of an information revolution, we are on average less informed and less effective than the average voter in 1789.
My rules of the road for primary season.
Rule #1: Vote for YOUR first choice in the primaries
Rule #2: Vote for the R in the general.
Rule #3: Don’t let anyone convince you to violate Rule #1 or Rule #2
Rule #4: When in a center-right argument, reaffirm Rules #1-#3–it will help us all to get along better.
Rule #5: If you are using the language of the left, you probably aren’t furthering conservativism
Rule #6: The priority is issues first, candidates second, and supporters third. Nobody is bigger than the issues. Conversely, if you spend your time focusing on supporters, you are wasting everyone’s time.
STOP THE MADNESS!
A reduction in the rate of spending increases is NOT a cut!
In-state tuition for illegals is NOT amnesty!
Requiring someone to pay their medical bills is NOT an individual mandate!
Reducing tax rates is NOT a tax increase!
bailing out the home
Xraxnd_Caracarn Sunday, October 5th at 1:28PM EST (link)owners is exactly why every adult home owner i know is head exploding mad over this plan. 90+ % of this country pays the bills and the morgage and the ^^&%^%U^&& government is bending over backwards to help the stupid and greedy. And they know they are gettng screwed over. As for my self I want blood in barrels maybe super tanker qualities.
Thanks Cafepress... this one says it all
Hammer2008 (Diary) Sunday, October 5th at 9:25PM EST (link)~~~~~~~~~~~~
Too much noise! “Noise! You’ll have noise enough before long. The Regulars are coming out.” ~ Paul Revere (April 18th, 1775′s eve…)
Re: Some responses to Spiral
Spiral (Diary) Monday, October 6th at 4:44PM EST (link)I still have to question the idea that the federal government should be manipulating the credit market.
Put it this way. Domestic steel companies often ask the federal government to assist them by imposing steel tariffs. Certainly one can look at the low cost of imported steel as a threat to the viability of many domestic steel businesses. But that doesn’t mean that we should impose steel tariffs.
Similarly, with the higher cost of the commericial paper market. We don’t know if this higher cost of commerical paper is going to be temporary or permanent. But in any case, when a business is faced with higher costs of any kind, energy costs, wage costs, raw materials cost, conservatives usually don’t ask the government to intervene and distort the market. Instead, we usually argue that the businesses should adjust to market conditions. In this case, businesses would do one of a few things:
(1) They could believe that this higher commerical paper cost is temporary and decide to “eat” these costs to keep their customers/clients happy.
(2) They could believe that this higher commerical paper cost is permanent and decide to raise their price, even at the risk of losing their customers to competitors. But, remember, their competitors are confronting the same commericial paper market.
The bottom line is this: If conservatives believe that the federal government should intervene when the “risk spreads” get too high, we are less credible when we tell the voting public that we support “limited government” and “a free market economy.”
The Obama Bread Lines