Wednesday, February 18, 2009

Death By Half Is Still Death

I am ever more deeply believing that the major banks of this country are zombies and have been since the initial crisis hit them last September. TARP was intended to prevent an immediate meltdown at the time and this is it did. It never had much of anything to do with liquidity and possibly may have been a last ditch effort for Bush people to funnel some Treasury cash to their cronies while keeping the banks themselves filled with employees drawing paychecks. I recognize that statement borders on conspiracy theory but we’ll see how things develop in the years ahead. Now, other than the employees (stockholders have already taken their hit), I wonder who at the top end of the pyramid will lose their valuables if the big banks eventually shutter, the zombies no longer able to gnaw on the brains of us taxpayers for sustenance? If they get nationalized we may never find out and instead continue to feel the cold air of day whiffle across our collective financial grey matter. Mmmm, feels like being at dinner with Hannibal Lecter. In other words, I don’t feel bold action is being taken and I wonder why?

The stimulus I am more optimistic about. This I believe is a leading edge for what will require by necessity more financial pumpitude down the line. The infrastructure projects will need to be expanded and maintained, particularly any aimed at developing a new energy grid. Gee, I’m going out on a limb supporting the ideas of the newest Nobel laureate in economics but I’m on the bus with Paul Krugman here that tax breaks don’t do much and we need to spend a lot more to build things up, get money in folks’ pockets and do it by keeping them busy on useful projects.

The foreclosure plan proposed today, well this one seems like a half-measure. I’ve written several times on this blog what I think should be done here to rebuild a housing market. Simply stated it requires a write down of mortgage principal available for everyone regardless of how they got in the situation they are in. We don’t have time to collectively shake our sanctimonious fingers at people who got bad loans through whatever means because getting the economy moving again is vastly more important. At some point, the wide net of devaluing homes will sweep up everyone and then all we’ll have is blame. You can’t eat blame. We’ll have time for that down the road (don’t you worry all you mortgage brokers, we’ll get around to auditing you eventually — yeah I know, it wasn’t just you, but I enjoy the fantasy).

The main focus of the plan is to slow the foreclosure rate so that folks can stay in the homes they are in now. And that’s ok as far as it goes. But for the purposes of a consumer economy, it doesn’t go far enough. This plan does nothing for the principal on loans, which will remain higher than the values of the homes they are on. Interest rates and terms may be stretched out to reduce payments, but the homeowners, although safe in their homes, are effectively trapped in them until such time in the future (at least four or five years in normal times for housing value appreciation, and much longer in the hardest hit places, California, Florida, Arizona, and Nevada) when home values manage to reach back up to where they were when the loans were initially made.

The trouble will be that by that point the banks, receiving regular payments, will have no incentive to approve short sales (the sale of a home for less than the amount due on the loan) so folks can’t relocate, can’t downsize or upsize depending on their circumstances (if they can upsize then they could presumably cover the difference in an undervalued home at closing, but then there’s no cash to pay towards a new home of any size). Meantime, we haven’t even hit bottom on devaluation and now we’re planning ahead for increases? We’ll end up back in the death spiral where the only way to get out is to default.

The only way to affect principal in this plan is through bankruptcy. That may work out for me since I’ve long planned to increase my law practice in that area, but honestly, it’s not good for the nation altogether. The banks will still end up losers in that kind of deal. But now, the homeowners end up having their credit destroyed which will make it difficult to impossible for them to remain involved in a consumer economy in any big way. Cash on the barrelhead for those folks only. In a world short on cash for consumers, that’s no way to run a recovery.

The only semi-reasonable explanation for why my friend Barry is taking this approach, which is feeling like a slowed down death instead of a guillotine on the one hand or a reprieve on the other, is pure political pragmatism. It comes back to doing what you can do. The Republicurs are convinced they have the nation’s ear with their constant trumpeting about tax and spend Democrats. And they’re right, they do have the ear. Except for my friend Barry himself, no Democrat seems yet to have figured out how to explain themselves in such a way that reaches people in the tasty little soundbites that they have to create to swing the discussion their way. It’s frustrating as hell because it doesn’t seem that tough but I haven’t been on TV and been asked the questions so I don’t know (though I’m working out my chops with occasional appearances on the friendly format of Progressive Blend Radio).

I’m halfway hoping that these are half-measures designed to work only so far while the Republicurs act like the philosophical Neanderthals they have become (read, dead-end). By the end of this year or the beginning of next, I’m hoping the results of policies to that point will demonstrate the absolute necessity to go all the way on stimulus spending and mortgage principal modification. At that point John Boner’s head can pop off in the well of the House and the remaining Republicurs can join their Whig forebears in the history books.

The only other thing that can get in the way of this, or anything else, would be something extremely nasty happening in foreign affairs, probably involving Pakistan as it continues to morph in to Talibanistan. In that case at least one thing I have going for me is I can make several wicked varieties of curry so I could have a peace offering in a pinch.

1 comment:

frivolousmusings said...

Hey, did you notice Krugman recently used the zombie analogy for the faltering banks?

http://www.nytimes.com/2009/02/23/opinion/23krugman.html?_r=1

I wonder if he's been reading your blog...