Like everyone I'm struggling to figure out what this financial crisis means. Although I must say I predicted to a friend, last Saturday, that stocks would tumble on Monday when people saw what the Bush plan was - i.e. no oversight, no accountability.
Two of the easiest articles to follow are posted on the BBC website.
Here are easy things for US citizens to look for
What price does the US government pay for the debt it's taking on?
If it buys at book value we consumers are getting screwed and the banks are being protected.
If it buys at 'distressed' value, taxpayers at least have the possibility of making some money back if some of the mortgage debt recovers its value.
Basically though, investment banks are now being permitted to take on retail accounts. This was not allowed in the past, to protect the little guy from having to pay when corporations made bad financial decisions.
Now, it looks to me like Goldman Sachs and Morgan Stanley can use retail accounts to cover losses from bad investments - so we get screwed again. And business gets protected.
A bigger issue is how do we get out of this? It sounds like no European or Asian country is going to take on US debt, which will only worsen our financial situation. Because no one has confidence in the US anymore.
If for no other reason than to attempt to change the way the US is perceived in the world, Obama is the only candidate who might make sense.
But no matter who gets in, you can kiss tax cuts and health care reform goodbye. There is no more money for that.
http://news.bbc.co.uk/2/hi/business/7626071.stm
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/bye_bye_bulgebracket.html
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Paul Krugman, NYT columnist and economist, thinks the only way the bailout as proposed by Paulson would work, is if the government paid extraordinarily INFLATED prices for the bad paper. Since he knows far more than I do about economics, I tend to believe him.
Until I read the NYT this morning, I thought the bailout was either a fact of life or kiss my retirement goodbye. Three columnists, including conservative Kristol, are against it, at least in its current form. That makes me feel a little better....that it's not exactly the end of the world.
Then, of course, the market falls on hearing that Barney Frank (I agree with you, Ralph, he is a very smart guy) has spearheaded some very REASONABLE modifications with safeguards.
Am I the only person who is sick to death of being lead around by the nose by the markets? Let the people who have been getting dividends throughout this fiasco pony up for the bailout.
I just heard some surprisingly reasonable comments from Newt on NPR urging Congress to do its job as a check on the administration's powers, to look at the bigger picture of consequences, to reject inflated prices during the bailout (excuse me, the metaphor of "bailing out" is frightening--as if we were afloat before and will be again!), and recommending that no Wall Street boss get a salary higher than the highest paid government official's pay-- the Pres at $400,000-- instead of several trillions.
And the unreasonable from Bush in the bailout proposal.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
No one can review it?
As Kuttner wrote, it is outrageous
The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc. He plans to retain Wall Street firms as advisors to decide just how to cut deals to value and mop up Wall Street's dubious paper. There are to be no limits on executive compensation for the firms that get relief, and no equity share for the government in exchange for this massive infusion of capital.
I don't think he's going to get this one through though. Too many people are paying close attention to this one.
It is truly frightening what our reps in Congress almost signed on to. They were so panicked by Paulson's pitch that they seemed to think they had no choice but to go along. When I saw Chris Dodd on This Week yesterday morning, he was talking about a few minor modifications, but he was not up in arms like he should have been.
Now 24 hours later, he has a counter plan, as does Barney Frank.
The most outrageous part to me was that no court or agency could say anything about it. Turning over $700 BILLION dollars to the discretion of one person? And they almost did it?
Is the whole country crazy?
Here is a view of the economic crisis from a conservative independent in a nut shell.
Following the tech bubble, when the economy was going good, pressure was put on lenders by Dems to give loans to people that had not traditionally qualified (i.e. the lower middle class to lower class). This increased the risk for the lending institutes.
The lending institutes then put pressure on the Repubs (who now controlled both houses) to allow them to bundle the loans and sell them off as a group. This caused the risk to be diversified (somewhat). The Repubs also allowed the lending institutes to play some games with the accounting and not properly account for the risk associated with the lending that was being done. In addition, the Repubs (through deregulation) allowed the investment banks to diversify into other businesses that they were prohibited from owning since the congressional acts that were passed following the great depression.
Because the risk was not accounted for and the housing market was going good (if someone was foreclosed on the house was likely worth more then it was mortgaged for and could be sold for a profit or push), the lending institutes looked like better investments then they really were and investors who did not do their research invested in lending institutes in greater quantities.
Other investors, the ones who did their research, began investing in commodities and futures and thus began driving up the price of oil and other commodities. Look at the price rise of precious metals. Gold has more then tripled in value since 2001 (http://en.wikipedia.org/wiki/Gold#Long_term_price_trends). People who do their research are still finding smart places to put their money.
Since the banks that were originating loans were no longer holding onto the mortgages and thus avoiding much of the risk, they began making even riskier loans. This brought about predatory lending and the creation of products like interest only loans and no income verification loans that should not be utilized by most people but were pushed due to the greed of the originating banks. Since the risk was not being reported accurately, investors continued to put their money into the large investment banks that were buying up the risky loans.
The housing market began to slow; people began foreclosing on homes at higher numbers. This was because people who couldn’t afford their mortgage no longer had the out of selling their home for more then they had bought it for. Also, most of the people that were going into foreclosure never should have qualified for the loan in the first place. If you can only afford the house because you have an adjustable rate that will eventually mature or an interest only loan, then you couldn’t afford it in the first place.
[Anecdote time. My wife and I are both working professionals with college degrees. When we decided to buy our house we called EastWest Mortgage. They qualified us for a loan for $400K. We did a budget and new that we could not afford a house that cost more then $275K. When we told them the house we were making an offer on was only $240K they tried to talk us out of buying the house or taking more money for home improvements. My point of bringing up this story was to give an example of predatory lending and to show that personal choice also comes into play in this crisis.]
Now the chickens are coming home to roost and people (investors, lending institutes, and home owners) are seeing everything collapse around them.
So who’s to blame?
Everyone! The Dems for forcing the lending to risky people. The Repubs for allowing the lending institutes to play games with how the risk is reported. (not for allowing investment banks to diversify by buying other institutes or allowing loans to be bundled and sold) The investors for not doing adequate research and continuing to invest in places where the risk was not being properly accounted. Home buyers who were not making good personal financial decisions and got into debt on loans they never had a chance to payback. Originating banks that got greedy and pushed loans at people they knew couldn’t pay them back.
So what do we do?
NOTHING!!!
Let the whole thing collapse. People need to see some failures to be reminded that there is risk associated with investing, lending and borrowing. Once the smoke clears, the lending institutes that will be left standing will get back to making smarter loans (as long as the Dems don’t force them to make bad loans). Investors will start doing their research and will stay away from institutes that don’t properly account for risk (as long as the Repubs don’t cave under pressure from financial institutes and allow them to hide risk). Home buyers will start looking at what they can afford for themselves and understand what a good loan is. And maybe this will lead to a resurgence of the neighborhood bank over the large interstate banks, since banks will be more incline to lend money to people they have a relationship with then a stranger.
We shouldn’t bail out the financial institutions, pass strict controls on the market or put some in sort of protections for people to keep homes they never could afford in the first place.
We should make the lending institutes clearly and accurately account for risk. A couple of accounting changes that will make financial statements more accurate. We should also allow banks to decide who to lend to based on financial and risk management factors.
Jesse, thanks for your comprehensive view of what happened. I do take a bit of exception to your seeming to imply that the Democrats started it all by forcing banks to make bad loans.
That's a little like "the devil made me do it" defense. Even if you are right that Dems pushed, I seem to recall "ownership society" as one of George Bush's mantras.
Besides, aren't those responsible for other people's invested money supposed to be able to say no?
If we want to go back to original causes, none of this would have been possible without the massive deregulation in the first place. And don't they usually give credit for that to the Reagen Revolution?
I mentioed several posts ago that they aren't bailing out anyone in England. Maybe we should look at that as a serious option - and not just one out of petty self-interest.
In the meantime, Jesse, since people who do their research find smart places to put their money, why don't you tell me a place to put mine?
Sorry, I forgot. I don't have any money.
Never mind.
The problem with doing nothing is that money/credit becomes very tight for everyone else, including those who managed their money responsibly. Small businesses and people with good credit can't get loans. If the problem is liquidity, then they need to find a way to inject money into the system without directly assisting the bad players. I don't buy into the "we're all guilty" scenario. Policies can be warped, but some people took advantage. Some have been shouting about this for a long time.
Ralph,
The “Reagan Revolution” dealt more with the removal of price controls, tax cuts and a supply-side (as apposed to demand-side) economic belief then deregulation. The deregulation done by Reagan was moderate.
The deregulation that many believe lead to the current economic crisis was the Gramm-Leach-Bliley Act. This act was signed into law in 1999 and repealed part of the Glass-Steagal Act. (By the way, who was the president in 1999? It wasn’t W.) The Glass-Steagall Act was put in place following the Great Depression and said that banks could not offer investment banking, commercial banking and insurance services. In other words, prior to 1999 (well 1994 actually, but that gets complicated) you had investment banks where people would get higher return on their money but had a higher risk of loosing their money, commercial banks where people would keep their savings accounts (low risk but low return) and insurance companies. Now the three were allowed to merge. This act also lead to the poor accounting practices that allowed the banks to hide the risk associated with the loans.
As for the Dems involvement, Slick Willy pushed throughout his administration for banks to make riskier and riskier loans through the Community Reinvestment Act and finally through a provision in the Gramm-Leach_Bliley Act that he would have vetoed without these requirements. Besides, do you really think that Repubs would push for loans to low income people to promote home ownership? They can’t be Darth Vador like bent on world domination and driven by greed AND be financial philanthropist who want to lend money to the poor and downtrodden at the same time.
As for this line “Besides, aren't those responsible for other people's invested money supposed to be able to say no?”
NO THEY CAN’T!!! That is my point when I say the Dems are partly to blame, the Community Reinvestment Act, as pushed by the Clinton Administration, prevented the lenders for saying no to loans they would have traditionally passed on.
Richard,
England is experiencing many of the same issues as the US (http://en.wikipedia.org/wiki/Economic_crisis_of_2008#Crisis_in_the_United_Kingdom). Some of their responses have just been better then ours. For instance, they put a ban on short-selling of financial stock right away. We let the market take a huge hit before the head of the SEC finally put a ban on short-selling. I believe that either Greenspan or Newt said the head of the SEC should be fired on the spot for not putting the ban on shorting stock the first day.
And I did tell you were to invest, precious metals. I have been big into gold since 2003 and it has done me well.
Raleigh,
Yeah, people have been "shouting about this for a long time", including the "evil" W (http://en.wikipedia.org/wiki/Community_Reinvestment_Act#George_W._Bush_Administration_Proposed_Changes_of_2003).
Money is tight for all right now, but if you are not a speculator and have a solid plan the money is out there. My work is tied to construction (geologist/project manager for environmental consultant managing cleanup activities on redevelopment sites) and I have been busier this year then I have been for the last four. The money is out there for solid developers with good plans.
Interesting - you put the word 'Dummies' in the post title and everyone wants to talk. Hmmmm?
I think everyone has a lot of good points here - and that's the problem with economics, it's tough to find certitude.
But I think it's a stretch to imply the crisis we're facing is due primarily to the Community Reinvestment Act.
Those $500,000, $600,000, $800,000 mortgages weren't filtered through that. The CRA did not force banks to make risky high end mortgages. Or bad investments.
And it certainly wasn't the Community Reinvestment Act that 'forced' Lehman to pay their chief executive Richard Fuld $34.4 million last year, or 'forced' Lehman, in the days prior to their bankrupstcy filing, to transfer $8 billion dollars out of European offices - where their rank and file are no longer guaranteed even their basic salaries - so they could have money for executive bonuses.
At this point, though, let's be honest. No reasonable person can make a single argument why John 'The Economy is not my strong point' McCain and Sarah ' I haven't had a real thought in my head since kindergarten' Palin are even remotely capable of dealing with this situation. Obama and Biden might not be either, but they at least have some knowledge, education, and intelligence. So they have some resources to draw on.
I never said the CRA was "primarily" responsible for the crisis. It is one of the dominoes that has fallen and lead to the crisis.
As I said in my original post, when the banks had the ability to hide the risk associated with bad loans, they started making more bad loans. Hence you get the large loans you brought up.
As far as CEO pay, let them make what the market will pay. If the board of Lehman is willing to pay $34.4 Mil, so be it. It is up to the board and the investors to decide what the pay should be for executives.
The transferring of money to the European offices to avoid paying creditors, that is a matter for the courts.
None of these candidates have the knowledge of economics needed to fix this current crisis. Too bad Ross Perot isn't running this time, he might of had a chance. There is Ron Paul but he is too out there on other issues. All we can hope for is that who ever wins, they choose good economic advisers. If it is Obama, then the advisers will likely recommend price controls, restricting the market, "windfall" taxes, increased income taxes and possibly nationalizing some means of production. If it is McCain, then the advisers will likely recommend allowing the market to respond with some nudges in the right direction, lower taxes on the upper class to start more spending and reductions in the controls of the CRA.
Here's the question in its simplest form -
Who do you really think would do a better job with the economy...
Obama's advisers, whose policies/theories contributed to the prosperity of the Clinton years...
Or McCain's advisers, whose policies?theories helped formulate the disastrous George Bush' policies...
Because theory is fine, and explanations are great,but when you come right down to the basic choice we have to make when deciding which hole to punch in the ballot, that, my friend, is the only choice we have here. It's one or the other. And as my friends sing on Youtube
http://www.youtube.com/watch?v=kcodA1X3mAg
Jesse, to your one point, that Republicans wouldn't push for loans to low income people to promote home ownership?:
Yes, they would, if there was a way for them to make a profit, which this complex scheme of passing along debt at a profit allowed. And the proof is in the pudding: they did make huge profits, until the house of cards started to collapse.
Jesse - whoever you are - you are my new hero!
Layniac
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