Centerblue.org

Crooks & Liars rather deridingly posts that now everyone is an economist, posting on previously inscrutable topics like “mortgage-backed securities” and “credit default swaps.”

I don’t think that’s a bad thing at all. I think it’s GREAT.

There has been a poison spreading secretly in our economy for years, false growth fueled by speculation and over-leveraging of debt. It seeped into every facet of daily life without most people’s knowledge–real estate values, stock prices, commodities, credit cards, and so on. It was all financed by foreigners eager to lend cheap money to Americans and let them continue to spend beyond their means. Americans congratulated themselves on selling ever-more-expensive houses to each other and calling it economic progress.

It was all a farce, but that wasn’t immediately apparent. Most people saw “good times” (or at least “not bad times”) and were complacent. Who cared what was going on on Wall Street as long as house and stock prices kept going up? We turned to other, more interesting (or banal) topics–from politics to American Idol and runway models.

There were people ringing the alarm bells, distinguished economists like Nouriel Roubini–but they were laughed at, dismissed as “economic Eeyores.” Nobody listened until it was too late.

Now the crisis is upon us, and people are waking up! They’re hungry for knowledge, trying to understand why their society and way of life threatens to crash down around everyone’s ears. How could the United States of America possibly witness a situation where the Treasury Secretary goes into an emergency meeting with ashen-faced Members of Congress to inform them that if they don’t pass a bailout bill there “may not be an economy on Monday“?!

Several friends have phoned or contacted me, asking me to explain what’s happening in a way a non-economist can understand. I’m no economist, but I’ve learned a lot about economics over the last few years as I read with ever-increasing alarm about what I thought to be a ticking time bomb. That reading is what led me to sell my condo in 2006 as the housing crash was just beginning.

I basically say this to my friends who have asked: an economy cannot run without trust–whether it be trust in what a dollar is worth, or trust that individuals and institutions will repay their obligations. Banks and Wall Street loaded up on mortgage instruments that they thought were good, but in fact were not. Now, nobody knows what’s good and bad out there, or who has what. Banks are looking at each other and saying “I don’t trust you to be solvent a day or a week from now because of those mortgages you might have, and will therefore not lend to you.” That brings the economy to a screeching halt, as credit (which is lending, after all) dries up. The bailout plan tries to restore trust by removing the mortage instruments clogging up the works, in the hopes that institutions will trust each other enough to lend once again.

That’s really all there is to it, and I’m happy to explain it to anyone who will listen at any level of detail they desire. It’s time that everyone knows the chicanery that has been going on, the wool that has been pulled over everyone’s eyes, the deceit of unfettered de-regulation under the guise of a false posterity.

We’re all in this together, and the more people who know and understand the truth the better.

Time has an interesting article on why people don’t support the bailout. Apart from being viewed as a bailout to rich people and corporations who don’t deserve it (which is true), it’s also that people do not specifically understand the risks associated with failure to act.

It’s like climate change–the risks are too amorphous, fuzzy, not in the here and now. Given the complexity of the situation, most Americans without a sophisticated background in economics simply cannot fathom how not acting could profoundly change American life for the worse. Our leaders have talked a lot of gloom and doom, but have done so in a vague and non-specific manner so as to avoid a widespread financial panic that would make things much worse. But the consequences are that Americans don’t really understand what they’re getting into.

So here’s my attempt to make concrete some of the consequences of failing to do anything (I’m not necessarily advocating the current package, just saying what happens if we do nothing). These are worst-case scenarios that may or may not come to pass, but Americans need to know about the possibilities.

1) You might wake up one morning and the money in your bank might be gone (likelihood: low). This is the Armageddon possibility. While it’s true that FDIC insures deposits up to $100,000, there are finite limits to the funds available. If the current crisis causes a string of banks to fail simultaneously, especially some of the biggest ones, it’s possible that the number of failures might overcome the amount of money available through FDIC. Congress would probably step in with an emergency infusion, but might it be enough to safeguard everyone 100%? Who knows–it depends on the severity of the crisis. This happened once, and was in fact one of the triggers of the Great Depression–which is why FDIC was founded in the first place.

2) Stock market crash, ruination of people’s 401k retirements (likelihood: high). The Dow Jones fell 90% from peak to trough during the Great Depression, and took decades to recover. Anyone with stock wealth would be financially ruined. You’ve been warned.

3) Inability to buy or sell a house, causing a much worse crash in housing prices (likelihood: high). The failure of the credit markets means it is much harder (perhaps eventually impossible) to get a mortgage. Since most people can’t pay for a house in cash given current prices, prices would have to fall and fall until either mortgages become widely available again, or until they fall to the point where people can in fact buy them with whatever cash they have. While renters (including myself) might rejoice at such a possibility, the truth is that the majority of American wealth and retirement security is locked up in their houses and such a deflation would be financially disastrous to millions.

4) Inability to get loans for college, buy a car, start a new business, etc. (likelihood: high). Again, with credit markets malfunctioning people will find it difficult or impossible to get necessary loans for life’s ordinary needs.

5) Mass bankruptcies of American businesses (likelihood: medium). Companies don’t keep spare cash for short term needs in some big massive steel vault. They invest it. If they need cash for those short term needs they also don’t pull the money out of some vault–they borrow it. Choking off credit means companies can’t borrow to meet their short-term needs such as buying inventory–or making payroll. Companies who cannot meet their obligations are insolvent, and bankruptcy is a possibility if they can’t afford or can’t get longer term loans to meet those needs. Even if they don’t go bankrupt, they would have to seriously curtail their expenses–including payroll. (see below)

6) Mass unemployment (likelihood: medium to high). Don’t believe today’s unemployment figures, they’re totally bogus. The government doesn’t include people who’ve despaired to the point they are no longer looking for work, or even people no longer collecting unemployment. So unemployment today is already higher than the 6.5% or so that is claimed. Unemployment reached nearly 25% during the Great Depression, as companies went out of business or had to severely restrain costs. Despite the sunny forecasts from people who a year ago were saying the crisis was "contained" (cough::cough), much higher unemployment is entirely possible.

7) Cities go bankrupt (likelihood: medium to high). Cities with plunging tax revenues from unemployed people, and unable to borrow money, will quickly go bankrupt. Thousands of cities went belly up during the Great Depression. City bankruptcies mean the disruption of many services from schools to police forces. Crime will increase and urban decay will spread rapidly. Civil disorder is a real possibility.

8. Hyperinflation (likelihood: medium). The American government can’t really go bankrupt (although it’s credit rating could be severely impacted)–they can just print more money. But printing more money to address the magnitude of the crisis might lead to inflation or hyper-inflation as everyone is chasing a higher number of dollar bills. Prices on everything could skyrocket almost overnight, severely eroding the value of whatever money people have figuratively stashed under their mattresses. Think it can’t happen? Imagine how it would be like if we suffered the same inflation rate being endured by Zimbabwe, which saw a yearly increase of 66,000%. (That is not a typo).

9) We grow it/make it, they use it (likelihood: medium): One nasty side effect of #8 if it occurs is that printing money devalues the currency (more dollars floating around mean each individual one is worth less)–meaning America will put up a big garage sale sign for foreigners with much stronger currencies like the Euro, who can then swoop in and buy up entire swaths of Americana (buildings, factories, commodities, food, etc.). Think this doesn’t impact you? Consider a hypothetical example where a global drought makes wheat scarce (as happened earlier this year). The US grows much of the world’s wheat, but because the dollar has become so weak, foreigners could outbid us on the open market for our own wheat! We grow it and then grow hungry as the wheat is shipped overseas to feed other people.

10) Deflation (likelihood: medium). The opposite of inflation, deflation is when an economy enters a vicious cycle where people believe that stuff will cost less tomorrow than today, so they put off buying–which causes prices to fall, repeating the cycle over again. Some economists think we’ll have deflation instead of inflation. So basically, everything you own will become pretty worthless, more companies go out of business as they become unable to earn any profits, and wages spiral downwards.

So there you have it: ten nasty things that could happen if we do nothing about the economic crisis. People who oppose "bailouts" in any form should carefully consider these consequences as they make their decisions.

With the emergency economic bailout plan going down in flames in Congress, and with financial institutions continuing to fail at an alarming rate (Wachovia being sold for $1 a share to Citigroup today)–I genuinely fear for the future of our nation. That’s not because I thought the plan was particularly good–I agree with Boehner that it was a "crap sandwich"–but because something profound must be done immediately. Perhaps it’s for the best, because the plan failed to address the number one problem causing the meltdown: the rapidly escalating foreclosures sweeping the country. Until something is done about this root cause, our economy will continue to slide into the toilet.

As Congress dithers, the rivers of credit that form the lifeblood of our economy have ground to a halt. People can’t get mortgages, they can’t sell their houses, they can’t get car loans, they can’t get student loans, they can’t borrow short-term money to fund business needs. Every day that passes under these conditions is another day that hammers towards the destruction of the American economy.

We need a plan and we need it now–but one that stops the foreclosure bleeding and thus stopping the crisis at its source. It’s slow, it’s enormously expensive to administer. But if it’s a choice between buying toxic mortgages of unknown worth from failing banks for $700 billion, and helping homeowners by freezing foreclosures and re-setting their mortgages so they can stay in their houses, I’ll take the latter any day. The fewer owners who default, the fewer overall losses ultimately experienced by the financial system.

Meanwhile–Dow down 720 points and counting.

I don’t think people truly appreciate the magnitude of the painful recession or depression that could result from this crisis. Nobody of recent generations remember the hunger, the 23% unemployment, the slicing of economic output by half, that this nation experienced in the 1930’s. We are not prepared as a nation or as individuals to deal with that.

While I generally agree that it is the anti-regulatory environment pushed by Republicans for the last decade that is primarily responsible for the current crisis, there is one area where that is not the case: Freddie Mac and Fannie Mae.

Democrats, led by Barney Frank and Chuck Schumer, have consistently shielded these entities from further regulation under the argument that their business model encouraged homeownership for lower and middle income families. They did so despite being warned that the over-leveraging these companies engaged in posed precisely the systemic risk we are now seeing come to pass. Meanwhile, Bush and the GOP tried and failed to push for greater oversight (one of the few things over which I’ve agreed with them the last few years).

While this unflattering video is from Fox News, I consider the reporting accurate:

Gotta call a spade a spade.

I’m seething.

Democrats are proposing common sense additions to the mega-bailout being asked for under threat of Armageddon according to Paulson. They’re asking that executive compensation be limited (I believe to $400,000 if I remember correctly) for banks participating in the bailout, and that taxpayers be given the opportunity to purchase ownership shares in companies participating through the use of “warrants”:

Several lawmakers, including Sen. Jack Reed (D-R.I.), an influential member of the Banking Committee, are pushing for a provision that would require participating firms to grant the government warrants to purchase stock.

Sources familiar with the Treasury’s thinking said warrants would limit participation in the program. Only failing banks would be willing to give the government stock in exchange for buying up their bad assets, these sources said. But key Democrats said the point was critical.

“If this is an investment, the taxpayer should not be treated as dumb money,” said Rep. Rahm Emanuel (D-Ill.), chairman of the House Democratic Caucus. “If we’re going to buy these securities that are illiquid, toxic, we need to make sure taxpayers get an equity ride so they get to benefit on the upside.”

Another point of dispute is Democrats’ insistence that the government be given authority to cut the salaries of executives and restrict their severance packages if they take taxpayer money. Paulson has said such a move would be “punitive” and deter companies from participating in the bailout.

Here’s a message for Paulson, in language not often seen on this blog:

GO F*CK YOURSELF.

You’re trying to sell this sack of garbage to Congress and the American public while using a Sword of Damocles over our heads preaching imminent doom, and you have the unmitigated gall to say to our faces that banks might be “deterred” from participating because we insist on an equity stake and executive pay equivalent to that received by the President in order to benefit from taxpayers’ largesse?

Why don’t these banks and their executives take their business, their stock, their toxic mortgage products, their hedge funds, their six digit bonuses, and their fancy yachts and SHOVE them?

Any banks refusing to accede to these conditions make clear that they didn’t really need the bailout to save anything except their own lifestyles and the status quo. And that, my friends, is not worth my taxpayer money.

Democrats, don’t you DARE cave in on these conditions or you will suffer the consequences at the polls in just a few weeks.

One Trillion Dollars. That’s how much the government’s plan to fix the financial crisis is going to cost.

One Trillion Dollars. An unimaginably large sum of money very roughly equivalent to the real cost of the Iraq war. One that is not news, as I said recently. I’m glad the government is being up front about the cost, but it doesn’t have a choice. Actually I think $1 trillion is understating the case, as I think that’s the cost for Fannie and Freddie alone.

Here’s what we could have bought for One Trillion Dollars (and could have bought twice, if you include the Iraq War):

–Doubling of cancer research funding, treatment for every American with heart disease or diabetes, and a global immunization campaign for children–combined, for two decades.

–Giving every man, woman and child in America $3400, or sending $150 to every single person on the planet.

–Five years’ worth of investment towards complete energy independence, along with associated new job creation and other benefits.

–Taking huge steps towards solving the impending insolvency of social security.

–Funding two hundred aircraft super-carriers for the US Navy.

–Securing loose nukes and fissile materials, and securing our ports, so as to prevent terrorists from ever exploding a nuclear weapon in an American city (cost: merely $315 billion over 10 years.)

–Funding the equivalent of 170 National Science Foundations and 200 National Cancer Institutes for one year. Alternatively, funding 28 Departments of Homeland Security and all the work they do securing the nation, for a year.

–Benedictine nun Joan Chittister’s view:

“you could buy a $100,000 house for every family in Kansas, Missouri, Nebraska, Oklahoma and Iowa and you could put a $10,000 car in the garage of every one of those homes. Then there would be enough money left to build 250 $10 million libraries and 250 $10 million hospitals for every city in those states. And after that, there would still be enough money left over to put in the bank and, from the interest alone, pay 10,000 nurses and 10,000 teachers and still give a $5,000 bonus to ever family in those five states. That’s what one trillion dollars will buy in this country today.”

One Trillion Dollars: the price for a failed conservative Republican ideology that pushed the phony ideas that markets are 100% efficient, that they function best completely unfettered by regulation, that government was nothing but a hindrance. Scads of laws, rules and regulations have been modified or repealed in pursuit of this ideology over the last decade.

I’ve never been a fan of excessive regulation, preferring the market to usually sort things out for itself. But in cases where failing to tell the truth, failing to disclose all facts, or failing to do something materially harms the consumer’s health or pocketbook then the government has a duty to step in and enforce truth and honest dealing. The market, left unfettered in these situations, will simply reward selfishness and people lying to one another.

This entire debacle happened in the absence of sensible regulation because of a failure of all parties to tell the truth. Everyone lied: banks lied to customers about their creditworthiness; customers lied to banks about their income and ability to support payments; banks lied to mortgage-buying financial institutions about the quality of what they were selling; financial institutions lied to the SEC and to investors by hiding financial toxic waste through accounting chicanery that allowed them to both mislead and operate their businesses with grossly undercapitalized debt.

One Trillion Dollars is the price the rest of us will now pay for all this lying, enabled by by the rabid and irrational deconstruction of common-sense “tell the truth” regulation pushed primarily by Republicans and George Bush.

One Trillion Dollars that will never be used to capitalize growth, or create new industries, or finance research for medical cures–those benefits will now be left to other countries.

One trillion dollars (and another trillion for Iraq): the price of Empire run amok. The bill is coming due.

Think about that, and about who is responsible, before voting in November.

Wall Street is having a full-on meltdown, the kind you see once in a hundred years. Merrill Lynch has been sold, Lehman Brothers has filed for one of the biggest bankruptcies in history. AIG is next, and other banks from Wachovia on down are having very serious problems. The Feds had to step in and take over Fannie Mae and Freddie Mac last week, Communist-style.

The root of all the evil going on right now is the housing market. People sold houses to each other for way too much money they could not afford, and then all these Wall Street companies sliced and diced these mortgages and sold them to each other while claiming everything was “safe.”

While pushing for a less and less regulated environment, screaming the conservative philosophy that government had to stay out of their businesses so they could fully thrive, Wall Street invented and re-invented all kinds of financial hocus pocus and pretended they were actually contributing to the economy while paying themselves outrageous dividends.

Sooner or later the Ponzi scheme had to stop, and now that it has you hear a whole hell of a lot of screaming on Wall Street, but for something entirely different. Now the screaming is directed at the Fed and its taxpayer money, BEGGING and PLEADING and CRYING and GNASHING for a bailout, so that all those bonuses and six figure incomes and stock options and fancy yachts won’t be relegated to the dustbin of history.

Therein lies the hypocrisy: the Republicans that infest Wall Street insist that the government keep its hands off their finance businesses during the good times…..but when times go bad, they come running and screaming behind Mommy Government’s apron strings.

You can’t have it both ways, sister. If you’re going to push for unlimited freedom from regulation, then you HAVE to take the bitter medicine when all of your plans go awry instead of begging for a taxpayer bailout. Conversely, if you want to have a taxpayer bailout, then you’re going to have to submit your business, especially one so essential to the economy, to reasonable government regulations that require telling the truth and being transparent.

After putting the taxpayer on the hook for potentially hundreds of billions of dollars in losses from toxic mortgages from Fannie, Freddie, and Bear Sterns–a cost similar to another Iraq war in magnitude–the Treasury finally came to its senses over the weekend and said enough was enough, letting Lehman Brothers slide into bankruptcy. Seeing the writing on the wall and that no White Knight would come to the rescue, Merrill Lynch slaughtered its bull mascot and sold itself to Bank of America at firesale prices. Meanwhile, Treasury sharpens its pencil as it prepares to draft a whole slew of regulations that the financial industry now has no choice but to accept.

“He who lives by the sword dies by the sword.” Matthew 26:52. That’s exactly the way it should be, and conservatives should stop caterwauling when they’re forced to face the butt end of their “hands-off,” “leave it entirely to the market” philosophy.

I honestly believe that if the average US voter understood the danger that Fannie Mae and Freddie Mac pose to our credit-hobbled economy there would be some serious blood on the streets in light of what’s going on with these two companies right now.

We face the specter of either an economic depression or financial insolvency if the worst fears about these companies come to pass. And sadly, some powerful Democrats have been asleep at the switch–because Republicans (and some Dems) are the ones that have rightly been setting off clarion calls on the threat posed by these companies for years.

Here’s basically how these companies work: Fannie and Freddie were chartered by Congress to help grease the wheels of the nation’s housing markets. Rather than force banks to extend mortgages and keep them on the books (which reduces available capital for creating new mortgages), Fannie and Freddie swoop in with borrowed money and either buy these loans or guarantee the banks against loss on them. They then repackage these mortgages into securities and sell them to investors, foreign governments, pension funds, and the like–and they are marketed as extremely safe investments.

Meanwhile, banks’ capital is freed up to make more mortgages, which the companies then buy up again, and so on. This easy mortgage availability played a big part in the housing bubble.

Fannie and Freddie make money because they are able to borrow at below-market rates, based on animplicit belief that, because the companies are government-chartered, the the government would step in to bail them out of any trouble. They use this cheap money to buy up mortgages and make a profit by repackaging them to investors at a premium.

In recent years, Fannie and Freddie lowered their lending standards right along with everyone else, so that even though their mortgages aren’t really the worst of subprime, nobody really knows just how much toxic waste has accumulated on these companies’ balance sheets.

These companies now own or guarantee almost half the nation’s mortgages. At the same time, they get away with razor-thin cushions of capital in case things go wrong–thanks to bare-knuckled lobbying of Congress. Rather than force these companies to rein in their business and more deeply cushion their rainy day fund, people like US Sen. Chuck Schumer continually blocked attempts to more thoroughly regulate their activities and basically gave them free rein to gamble with the nation’s economy.

Today these companies own $5.1 trillion in mortgages, and carry only $81 billion in capital to shield against losses. Now Wall Street and everyone who bought these “safe” mortgage securities is starting to get very, very nervous about what exactly these companies are holding. Their stocks fell by half their value last week alone.

Eager to head off another crisis, the Feds stepped in over the weekend–announcing plans to allow the companies to borrow undefined amounts of money from the Fed in the event of cash flow problems, and even saying the Treasury might buy up their stock (with taxpayer money) to shore up confidence. Of course nobody really knows right now just how bad the situation might be. If defaults continue to mount, the risk of failure by these two companies is very real in light of their thin financial cushions–and then the choices become very hard.

We could let the companies fail and all their securities become worthless, in which case we would face an economic depression. The mortgage market that has been supporting higher real estate prices for years would simply flip over and die. Lending would dry up radically as banks no longer have someone to whom they can sell even their best mortgages. Sharply reduced lending will exert severe downward pressure on housing prices as nobody is able to buy or sell, leading to even more foreclosures and distressed sales.

We could swoop in and put the companies into a conservatorship, essentially using taxpayer money to make good on their obligations. But if the bad loans equal in percentage terms anything near what the Bear Stearns of the world have suffered, then we’re looking at a bailout of hundreds of billions of dollars, or roughly equal to another Iraq war. I would argue the US Treasury can’t absorb such a huge cost–and would likely lead either to a wrecked credit rating for the United States with very serious financial consequences, downright insolvency, and/or both.

So–our government created two companies that are too big to fail, and too big not to fail, all in the name of pushing an “ownership society” and encouraging a spiral of housing prices. Now the bill has come due.

Economic depression or financial insolvency. Take your pick.

I decided to evaluate Obama’s and McCain’s proposals for confronting the twin crises of energy scarcity/dependence and climate change. I developed the following grid, based on information provided by the two candidates on their respective web pages devoted to these issues (you can see Obama’s page here, and McCain’s pages here and here.)

(The government report referenced above regarding offshore resources can be found here.)

Bottom line: overall, Obama’s plan beats McCain’s hands down when it comes to aggressiveness and vision. These crises require a national resolve and commitment akin to the Manhattan Project or the Apollo program in order to relieve our oil dependence and prevent a climate catastrophe. We should be throwing everything and the kitchen sink at these problems–government funding, tax incentives, education, efficiency improvements, and every other tool in the book. Both candidates kind of pick and choose, but at the end of the day Obama’s plan shows more of a commitment to resolving these problems than McCain’s.

McCain’s emphasis on developing “clean coal” technology is particularly disappointing. Coal can never truly be clean from an emissions perspective until we develop sound ways to sequester the carbon dioxide emitting from these plants, and we are a long ways off from doing that in a cost-effective and reliable manner.

However, McCain’s plan fills some notable gaps in Obama’s–most notably in pushing for the large-scale development of nuclear power as a cleaner alternative to coal. Nuclear has its problems too, but at least it doesn’t worsen the carbon emissions problem as we ramp up production of renewable energy.

I also oppose continuing subsidies for corn-based ethanol, which Obama favors but McCain does not. We have to stop putting food into our gas tanks as quickly as possible or we will continue to exacerbate food shortages around the world. Cellulosic ethanol is just around the corner, but we need to push very hard right now to make that a viable alternative to corn.

Overall, Obama has it right on these crises–but he would do well to pick up a few elements of McCain’s plan so as to truly commit America to literally saving the world from these pernicious problems that are wrecking our planet, economy, and national security.

US markets were closed today, but in overnight futures trading the Dow Jones Industrial Average is down 528 points. That comes on the heels of markets world-wide falling hard.

It is going to be a very ugly day tomorrow. The economic chickens are finally coming home to roost.