Monday, December 29, 2008
The following is intended as a practical solution to the “credit” crisis. I have been trying in my limited time to think through the problem, this solution, and the consequences of doing it this way. I mentioned it briefly in an earlier post and since then I haven’t been able to come up with major practical flaws in it. Politically it may be a different story but we seem to have entered upon times where maybe, just maybe, good old American practicality will trump the ridiculous ideological wars of the past generation.
First, the problem with the economy is not a credit problem as described in the mainstream media and by the still “in charge” administration. A lack of flowing credit is not the problem but in fact an over-abundance of credit is what created the problem. Too much went to too many for too long and it was secured by too little. The problem is that there is not now and likely never will be enough value to meet the obligations that have been made against it. Our assets are nowhere near as much as our debt. That is the definition of bankrupt. This nation is bankrupt and needs to act accordingly. But the means must be such so that once the plan is in place, it doesn’t relegate us to a second-rate risk for the rest of time. Here’s my plan:
Assuming most of the problem arises from the housing market, the idea is pretty simple. It’s time to reboot. The real estate market went haywire sometime between 2001 and 2003 and pretty much everything after that promises that can never be kept. A house bought in 2002 for $150,000 topped out in value around 2006 or so at maybe $300,000. That level of appreciation is insane and the reaction is that the values are plummeting back down. But it’s happening at such a pace that it’s hard to tell when (or if) it will ever stop and what the value will be when it does.
I suggest deploying an army of appraisers and determining the value of effectively the entire housing market, neighborhood by neighborhood, then offering everyone --- yes everyone --- the chance to refinance (or renegotiate if you prefer) the actual principle of their current loans. Whether they are upside down or not, whether they are in default or not, whether it’s a second home or an investment property or not.
We are not making value judgments on the character of the people who took out the loans, we are not investigating if they committed fraud when they took them out. We will check to see if they have the ability to pay the loan at the new value now and if so, they can have it without any recourse for the difference. It cannot be allowed to affect their credit histories or the plan will not succeed in rebooting the economy.
People who cannot afford a loan at the new value should immediately sign over a Deed in Lieu of Foreclosure to preserve whatever creditworthiness they have, or be foreclosed on and take the usual consequences. The recent notion that everyone in America should own a home is just plain wrong. Everyone is not well-placed, for any number of reasons, to own their own home and theirs nothing wrong with that.
On its face this is a very simple plan and it’s the simplicity that concerns me. On the other hand, the simplicity should make it easy to criticize but I haven’t been able to generate any yet other than that it seems too simple to be viable. But sometimes a simple solution is the best one. Hopefully putting it out here will start a discussion that can either knock this thing into better shape, deem it in good shape as-is, or knock it out altogether. Here are the consequences as I see it so far:
1.It puts appraisers back to work;
2.It sets a floor on the plummeting values;
3.It allows the banks to get back in the business of quality loaning;
4.More people will need to be hired to handle the enormous, legitimate business at the banks;
5.Title companies, surveyors, lien search companies, assorted couriers, and any other business connected with assuring the quality of ownership will shift into high gear with heavy hiring going on;
6.The tax base of cities, counties, and states can stabilize, assuring that services can be maintained and people don’t lose good jobs;
7.At reasonable prices, houses can be bought and sold again between people who can afford to do so. Teachers, firemen, nurses, and cops can live near the communities they serve. And it has a further bolstering effect on the local tax base.
8.When homeowners can lower their mortgage payment, they will end up with more money in their pockets, which will inevitably be spent even if some folks have been spooked into actually saving by this crisis. The economy will still improve with the return of disposable income;
The obvious missing piece here is: what happens to the missing debt obligations? Who takes the hit when a $300,000 mortgage gets knocked back to $150,000? There is the challenge and I suspect the answer that isn’t being discussed yet. Someone with better access to the figures and a better handle on the math than me can do the calculations. I’m guessing though, that the before and after difference will contain somewhere in the neighborhood of the number of zeros which have been flung around for the past few months saving the guys near the top of the pyramid in this giant Ponzi Scheme that the world economy had become. Accordingly, if fairness is folly enough to be included in this scenario, then it only makes sense to throw a similar load of cash out to directly assist the folks on the so-called Main Streets of the nation. And this plan makes it a relatively quick transition from total fear to complete relief and back to (smart) business as usual.
So I guess what I’m saying is that all of us together, by way of our government absorb some of the loss. But if the upside of it is that our economy strengthens and we are all able to pay the national debt down because of it then there’s another benefit.
The banks themselves must take a substantial piece of it as well. Here is a point where someone more knowledgeable than I can help. I feel like some change in accounting rules must be possible so that the losses sustained can be spread out over time instead of taken all at once. That way the loss can eventually be met by the actual returns on the now-safe loans out there generating interest that is being reliably paid back.
Finally, we’ve been led to believe that by far the largest part of the national debt exposure at this point is held by China. Well guess what? China is going to have to eat some of it too. Everyone here is taking the hit to an extent and my view is that they can either go along with this and lose some of their investment, or refuse to participate in some loan forgiveness and thereby end up losing it all. Their economy is not nearly mature enough to absorb domestically the consumer goods they currently ship here. Not that we need more lead painted train sets or melamine flavored dog chew toys, but they have nowhere else to sell it. And if we sink we take pretty much all of the developed world with us anyway.
Perhaps Bono can go to China and lend his voice to our cause…
Friday, December 12, 2008
Thursday, December 11, 2008
The Depression demonstrated the extreme consequences of leaving the markets to operate without controls on extreme behavior. Additionally, tax policy after WWII encouraged wealth creation up to a point, then made it more beneficial for the wealthy to keep money in the stream of commerce rather than in their pockets. Finally, labor policy assured that workers had enough money in their pockets to buy the products they made. These factors effectively created the modern middle class, a class which requires stability and reliability in economics in order to flourish.
That system began to loosen a bit during the Nixon years, with the resultant economic distress of the 70s. The trend towards reversing tax and regulation policy back to a 19th century model accelerated during the Reagan years, a period which also saw the denigration of the average worker by attacking the unions which had built the relationship between management and labor enabling the growth of the middle class. At the same time though, credit availability expanded. That trend continued until the GW Bush administration at which time all regulations were removed or went unenforced, and credit availability exploded. Fake money based on no standards flooded the economy and now that the credit has dried up we are seeing what that flood has washed away.
A generation of conservative economic policy has destroyed what controlled liberalism built two generations before. It is no longer safe to be big much less possible at the moment to grow that big. Until the controls are put back in place and the mess cleaned up, we will become a shadow of our former economic selves. If we don’t pull it together faster than other nations we will become a second-rate power. And we have no one but ourselves to blame for it. We will be the shame of our children. Size won’t matter in a place that can’t be relied upon to manage it properly.
Wednesday, December 10, 2008
The banking industry, the auto industry, certain sectors of the insurance industry, and others like them which are all on the verge of self-immolation have to be given enough cash to buy time to attempt a genuine restructure because they are so big, employ so many people, and are the source of the livelihoods of so many more people that to allow them to fail will plunge the nation and the world into an economic tailspin which would make the Great Depression seem like just a bad day at the office. We could be looking at the start of a New Dark Ages.
This is the peril of uncontrolled Capitalism. Free Marketeers like to talk about the concept of “the invisible hand” and the “magic of the market” as if these concepts, frequently but incorrectly cited as core principles laid out by Adam Smith, function perfectly when no government intervention is allowed. The suggestion is that a perfect balance of supply and demand will only be disrupted if an outside force intervenes. The outside force generally blamed for messing up an economy in a capitalist society is the government. The charge often made, usually from right wingers or other misguided conservatives, is creeping liberalism, socialism, or communism. We started to hear such desperate cries towards the end of the campaign when Barry suggested to poor old Joe the Plumber that tax policy should be restructured in order to assure the wealth of the country could be spread around a bit more fairly. Heavens to Betsy!!
Let me make a distinction right here: Capitalism is an economic system, one which I would argue is the natural state of humanity. Socialism, Communism, and for purposes of this blog, Liberalism, are political systems which seek only to control the excesses of Capitalism. Capitalism can function perfectly well within any of the political systems and has for time immemorial.
Free Marketeers are as blinded by their delightful academic philosophy as are Communists. On a chalkboard in a classroom the graphs and supply lines for both look beautiful and elegant. The poetic language of both magic markets and to each according to his needs is elegant to the point of poetry. They are ideals that each ignores one very important reality – human nature.
Generally speaking humans are decent enough creatures. For the most part we are kind to and generous with our friends and family, the people we work with and for, and random strangers we come across on a daily basis. But not everyone behaves this way. Some are greedy and selfish, some mean and hateful, some plain crazy, psychotic and sociopathic. It doesn’t take too many of those bad folks to wreak an incredible amount of havoc in the world. Just look at what a couple of Arab loons in Afghanistan managed to do by convincing 19 half educated dead-enders to use planes as missiles to see my point. For that reason, to control the folks on the far end of the behavior spectrum, we create laws that lead to punishment for such behavior. In the world of commerce it’s the same. The most aggressive types of people will break or bend the rules of morality and legality to achieve their ends of being the best and the biggest. Sometimes that behavior can lead to incredible risk taking and successful innovation as a result. A fair amount of the country was conceived in that manner by those types of people. But those same people also engaged in the worst kinds of abuse and greed and immoral behavior to accomplish those feats. When too many go too far and then fail, we all suffer as a consequence whether we were in their game or not.
That is why at the beginning of the 20th century, government officials led by that symbol of rock solid Republicanism, Theodore Roosevelt, decided a lot of rules were necessary to protect the public from the abuses of the corporate class. Later his cousin Franklin Roosevelt instituted rules to assure that business worked in a controlled manner without undue risk. In the past 8 years a lot of those rules were thrown out in order to let the invisible hand work its magic. The obvious result is that we are all getting the finger from a handful of people who took untold billions, maybe trillions out of the system leaving us with nothing more than the printing presses to throw more cash into the stream of commerce. And as I said above, we have little real choice but to cut down a few forests to get it out there.
There is an alternative which was suggested during the period that the Roosevelts bookended. Louis Brandeis, Harvard law professor and later Supreme Court Justice advocated for the breakup of all large business conglomerates. He worried about the consequences of bigness in business. It is indeed true that the bigger a business is, the better able it is to benefit from economies of scale, to produce and to sell its products efficiently, widely, and cheaply. This is truly a phenomenon that works in the real world given the opportunity. But the failure of a big concern has ripple effects that extend well beyond the risk taking of the bosses of the company.
Average people, working people are that way because they don’t take the risks that the big boys take and that’s fine. We need people to work the assembly as much as we need them to come up with big ideas and put them into practice. Brandeis advocated for a less risky system that discouraged large companies and instead encouraged many small companies to exist. The wealth might not be as big for the folks at the top, the prices for goods might be a little more than it would be otherwise, but variety can be preserved, regional preferences can flourish, and market stability can be considered more reliable. In the case that some business should fail as indeed they would, the effects could be easily contained.
When a big company is still relatively young and successful, it can seem as if the gravy train can roll on forever. However what we’re seeing in the case of the auto industry for instance, is that with a few generations under its belt, the big three (GM, Ford, Chrysler) thought they were sure how the world works so never questioned their methods when international upstarts entered their market with a different variety of products and manufacturing methods. The men occupying the top of the corporate culture of the Big Three, who had nothing to do with the innovations that made the companies big, failed to innovate in order to compete in a world with competition. And so they are about to fail. That is the true nature of capitalism; not to carry on inevitably but to innovate or die or get eaten by the competition. Competition does not exist for the sake of competition but to destroy the competition til the winner stands alone. It's a brutal world and that can't likely be avoided. But it can be tempered. Only government wields the power to dictate terms that can temper the brutality of the market. And government needs to do that now. To allow the auto industry and any other giant industry to fail now is to simply allow the worst economic disaster to occur. If the government tries, at least there’s a chance of avoiding the worst. Throw out the current management for creating the mess, throw the cash in to get the current bills paid and do it long enough to get a new set of plans rolling quickly to keep people working, continue to get them paid, and to get a good product out. Anything less assures we all end up with nothing except guns and religion to cling to. And next time checks are written to the banks, it has to be done so with a requirement that it immediately moves through the system and into the stream of commerce.
All of this is just a finger in the dyke. The real work is to repair and strengthen the dyke. More about that soon.
Sunday, December 7, 2008
Wednesday, December 3, 2008
The last this and that are starting to happen as regards the George W. Bush administration and as you can guess, for me, they can’t happen fast enough. I will never understand how average, well-meaning Americans could have ever thought this horrible person should have ever been allowed to wield power with anything stronger than a weed whacker in his soon to be former Crawford ranch. But they did and soon it will be over.
I just finished watching the excerpts of Charlie Gibson’s ABC News exit interview with the acting-President. His only real recurrent regret is that the intelligence on
When asked by Charlie Gibson what he hopes people will think about him, acting-President Bush said he hoped people recognized that he never wavered from his principles. What a jerk. He truly and deeply believes that whatever it is he calls principles outweigh the force of law, the Constitution, and most of the time, common sense. He champions consistency over correctness at every turn and will drive straight into the side of a mountain if he thinks he ought to be driving straight to get where he’s going.
I don’t think George W. Bush is quite as stupid as most people seem to think he is. If he was stupid, I mean real stupid, like Darwin Award winner stupid, then I could forgive that. That sort of stupid is built into the brain and can’t be improved upon. I don’t begrudge a genuinely stupid person for being stupid. But if someone who isn’t genuinely stupid chooses to act stupidly, again and again and again, out of principle, then that person is arrogant or, if it results in harm to others, evil. In this case, I won’t call Bush evil (see Dick Cheney to note the distinction), but he has engaged in willful stupidity so often and with such intent that the result has, in too many cases, resulted in evil in the name of the
But for George W. Bush, it is a point of pride that he never wavered, never second-guessed, never did something differently when given a chance, never even so much as admitted that a decision he made was his fault. The closest he comes is to suggest that going into
He is arrogant beyond a fault. Thousands upon thousands of people are dead because of his steadfast principles. Thousands more have been broken in body and spirit. Families are destroyed. Life savings, life’s works, are rendered to dust. An entire city and a big chunk of the gulf coast are still wrecked. The world economy is on the brink of complete collapse. This small man has failed at everything he has ever done in his life and his record remains perfect because he never wavers from his principles.
I have refrained from a lot of harsh language in this blog so far, but you know what??
Fuck you George W. Bush.