Tuesday, September 30, 2008

Bailouts and bank failures oh my

So: Wachovia gone. Banks not lending money but instead stashing it in their vaults -- which, BTW, causes deflation, since you are in effect increasing the reserve ratio (see: Fractional Reserve Banking) and thereby decreasing the amount of money in the system. People having trouble getting loans because of the deflationary pressures. Retirement systems and 401(k) investors that thought they were avoiding risky stocks by buying into bond funds are stuck with "AAA" grade mortgage-backed bonds that are now worthless because nobody will buy them because nobody knows which bonds have "real" mortgages backing them and which bonds are backed by toxic mortgages that will never be paid. 2 trillion dollars of housing wealth disappears out of the economy over the past two years, and the stock market plunges 9% disappearing another $1.2 trillion out of the economy.

Folks, there's enough canaries warblin' and croakin' in this coal mine to make any economist who has studied the time period 1930-1932 shudder in his boots. Deflationary spirals aren't some fiction invented by Keynesian economists. We have hundreds of years of experience with them, albeit the last time we experienced one was in the period 1930-1932. So in all of this, one of the foremost scholars of the Great Depression, Fed chairman Ben Bernanke, proposes a bailout swapping Treasuries for mortgage-backed securities that will hopefully stabilize the money supply before things go to hell in a handbasket in a spiral that won't be stopped short of complete economic collapse, and gets a Republican Treasury Secretary and a Republican President to present it to Congress and... a majority of Republicans vote against it.

Yeppers. A majority of Republicans won't vote for a Republican written solution that their own President and their own Presidential candidate wants them to pass.

Now, granted, there's one hell of a cacophony out there saying "don't pass this law!", from loony lefties who see it as a "bailout of Wall Street" (uhm, my 401(k) isn't "Wall Street", it's my retirement!) to Republicans who want a deflationary spiral to happen because deflationary spirals always transfer the wealth of the nation from the debtor class (you and I) to the creditor class (the wealthy elite). Add in the fact that the Bush Administration has all the credibility of a Liars Club meeting, and far too many people are willing to ignore what most of the reputable economists are telling them because their "gut" tells them different. But the facts on the ground are pretty friggin' scary right now if you look at just how much dough is vanishing out of the economy. Yes, the Fed is printing money like crazy, sending over $600 billion this week to foreign banks for example. But the Fed can't just create money and have that money go to work doing something useful. That money has to get into the economy somehow. Without a functioning banking system that's pretty damned hard.

So much for that. What irritates me is that people who know nothing about economics keep making these grandiose statements about what the "right" thing to do is, when what they generally suggest would be the worst possible thing to do. Folks, housing prices have to come down. They were way out of the affordability range for most families, and the bubble has to be burst all the way back to an affordable price or we can never get the housing economy working right. But most of the solutions offered by loony lefties and tighty righties both are based on keeping housing prices up, when clearly housing prices in the most severely hit parts of the country were way out of line with people's incomes in those areas and thus have to come down if anybody is going to be able to afford homes in those areas with a conventional mortgage. Then there's the Rethugs who want everybody to take their lumps -- banks, investors, everybody -- but the problem there is that you end up with a deflationary spiral and things go to hell in a handbasket for everybody but the top 5% of the nation (Republicans, naturally!). The fact of the matter is that there are no easy ways out of this now. The only way out would be to go back to 1999 and head off the Internet bubble before it got out of hand, or go back to 2002 and head off the housing bubble before it got out of hand. But nobody did that, and so now we're stuck between a rock and a hard place, an unsatisfactory solution and utter disaster. And, sadly, the majority on both left and right seem more eager to have utter disaster than to compromise their oh-so-sensitive sensibilities in order to pursue a solution that is unsatisfactory but the best we can do given the situation... literally putting principle over reality.

Sigh. Gotta go, need to stock up on rice and beans and flour and corn meal and egg and milk powder...

-- Badtux the Discouraged Penguin

9 comments:

  1. I have read on this and then read more and then read more. But I still do not have a clear appreciation of any of this. Part of me feels that without the bailout we are looking at another depression. Part of me feels like we are headed there no matter what we do. Is bailing out Wall Street really going to help ME? YOU?

    I know that the housing prices need to come back down to reasonable. But my parents looked at the outside of a house Friday night and when they went back on Saturday morning, the price had risen by $10,000. This is a house already in foreclosure, sitting empty, but (before the bailout collapsed) the bank does not need to get it off their books as badly. So those who made poor decisions and helped get the country into this mess are still making poor decisions, how is this going to help us?

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  2. What is "Wall Street"? These fraudulent mortgage-backed securities are in pretty much everybody's pension and retirement plans. That's you and me, LLL. The stock market is going to come back up because people are not going to park their money in 0% Treasuries forever, but these fraudulent securities are not, because they are fraudulent.

    As for banks sitting on foreclosed houses for more than they're worth, that's a nationwide problem. The deal is that the moment they sell the house for half as much money as they loaned to buy it originally, they have to write down that loss on their books. Until they sell the house, they don't. But the problem is that until they sell the house, they don't have any money to make *new* loans, not to mention that all these empty homes are eyesores and are driving up rents. This is dysfunctional and has to be stopped.

    But in your parents' case, what your parents ran into was a real estate agent who said "hey, I got us some suckers who I think we can get to pay $10K more than we have the house listed for!", at which point the only correct response is an offer $10K *below* the original listing price and walk away. Either they'll get a call back or they won't. But it's all part of the game....

    Finally -- the bond rating agencies who defrauded Americans like you and me (assuming you have a pension fund or 401k) by rating trash as investment-grade AAA bonds are no longer doing that. The mortgage companies who issued "liar loans" are no longer doing that, most of them are gone, the rest under new management. The big banks that issued these "liar loans" are gone, collapsed, taken over by other banks. The leaders of Fannie and Freddie who led them into bad loans are gone. There are still people making the poor decision to buy homes they can't afford, but they can't get loans anymore -- indeed, the problem is that in parts of the country you can't buy a home even if you *can* afford it because the lenders aren't lending because they're waiting to collapse or be taken over. That last part has to be addressed, or things will never get back to normal. And sad to say, at this point there just isn't any pleasant way to do it...

    - Badtux the Economics Penguin

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  3. Badtux,

    Believe it or not, I DO understand that the bailout needs to happen. That doesn't stop the anger at cleaning up messes that I didn't make. It doesn't stop the frustration with a system that is and always has been skewed to benefit the rich.

    Who is snapping up fire sale prices on forclosed homes?


    "In the last three years, he has acquired three dozen or so foreclosed homes at discounted prices,"

    I'm angry because I feel like a hostage to the wishes of the rich. Al my daughter did to be 40 grand in debt was to be born in this country. GRRRRR.

    I also spent a lot of years cleaning up after people, literally, so I understand that somebody has to do it. You learn a lot by doing cleaning work. Some people are sick/old and they can't clean up after themselves. Some people don't know how, because they never had to, they're helplessness is endearing at times, and they're grateful for the help. Some people believe that they are just too good to clean up afer themselves, AND are disrespectful of those who clean up after them. They're the only ones that ever irked me, and that's what I feel like we are dealing with now.

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  4. Badtux, I have some questions.

    If this bailout is needed, why are 200 economists saying it's not?

    Also, if credit is scarce and freezing up and all that, why is my bank calling me at home asking if I want to refinance, to get cash out, and/or get a new HELOC?

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  5. Kevin, I can get you 200 biologists who say evolution is a lie. I can get you 200 climatologists who say global warming is a lie. I can get you 200 computer scientists who tell you that object-oriented programming can't work :-). The point being, there are a *lot* of biologists, climatologists, and computer scientists out there, all of whom have their own pet ideologies to peddle. For better or worse, science (and economics) is done by men, and men sometimes let ideology blind them to facts. And the facts are pretty grim. When the vast majority of economists agree that the system is on the verge of collapse, and the facts back up what the vast majority of economists say, then (shrug). What can I say?

    Regarding your bank calling you up, are you sure it's your bank? Most banks do not call anybody. They have contracts with overseas call centers that call people. If the overseas call center is paid by the call, that's why you're getting the calls. Doesn't mean they'll actually loan you money though :-).

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  6. ps, sorry about the typos and mispellings

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  7. I’m sorry Tux, but I’m not convinced. Am I supposed to ignore experts who study this sort of thing full time, some of whom have warned about the problem for years, because of ideology? Instead, I’m supposed to believe the following;
    1: Corrupt politicians, most of them beholden to the industry they’re bailing out (yes, I used bailout, not rescue:)
    2: Paulson, a short-timer who’s probably trying to buy his way into his next job, who said there was no problem until Right Now!!!
    3: A bunch of panicked people seeing their 401K’s being blown away like hostages at a botched police raid. (A friend of mine at work told me he lost 40k)

    By the way, I’m noticing a nice hidden feature of Bush’s “Ownership Society”. Wall Street now has beaucoup working man’s funds, which they can now basically hold hostage until they get they’re way; “Bail us out of our Ponzi Schemes, or your retirement gets it!”

    Yeah, it was my bank who called (Welles Fargo). I know the guy, his brother is a neighbor. I asked him; hey, didn’t you get the memo? What about the credit problem? I thought you guys weren’t given out money. He say’s “No, we got money to give out, we’re just being more careful.” I said; Ok, get back to me when it gets under 5%.

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  8. So what do you say about the 40,000 economists who *do* say we need a bailout?

    Fact is, I can find 200 economists who will tell you that foreclosures are good for the economy. I can find 200 economists who will tell you that deflationary spirals are good for the economy. Hell, I might even be able to find 200 economists who will tell you that the moon is freakin' made of goddamned *CHEESE*. You are committing a logical fallacy called "appeal to authority". The fact that a man managed to survive economics school doesn't mean he's going to be right about the economy 100% of the time. Crap, you want to see a fist-fight, stick four economists into a room from differing schools of economics, step back, and watch as they attack each other's economics as "piffle"!

    I'm looking at the facts. When the facts agree with what Paulson says, then I believe Paulson. When the facts disagree with what Paulson says, then I don't believe Paulson. Facts, not specious appeals to authority, are the principle tool of the reality-based community. Specious appeals to authority are the stock in trade of the Never-Right Wing of American politics... "The Bible Says it, I Believe it, That Settles it." Thus why the Never-Right Wing's VP candidate believes that dinosaurs and men cohabitated the Earth 6,000 years ago... but the fact that some authority says it don't make it true! Only the facts make it true -- or not.

    - Badtux the Fact-based Penguin

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  9. Say the problem is as bad as you and others say it is, is this particular plan the BEST way to solve the problem? What happens when the government buys up all these “assets” and the problem continues to get worse because the foreclosures continue to happen, because they’re not doing anything to help on that end?

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