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.

The more I read and think about the proposed government bailout for Wall Street, the more outraged I get. As are many others across the entire political spectrum, I’m coming to view this bailout as nothing less than the mass raping of the American taxpayer–with no accountability, no help for people in foreclosure who really need it, and no stopping the people who benefited from this disaster from benefiting even more.

Nobody puts the flaws I find in this proposal better than my friend and consumer advocate Boztopia. I shamelessly rip this off from his blog, because I could not possibly say it better myself:

No oversight. The Bush administration is asking Congress to hand it a blank check for $700 billion without any controls or strings attached. This is the same corrupt regime that has wasted uncountable billions in Iraq through fraud, graft, corruption, and simple wasteful spending on unnecessary projects. The same regime that demanded vast new powers of surveillance with only the most minimal oversight to ensure that it is not abused. Do you really think Paulson is going to tell the truth in those reports to Congress, or that Congress will do anything about it if he lies?

Unchecked power. If this bill passes as written, it will make Henry Paulson the most powerful man in America, with incredible leverage to utilize trillions of dollars’ worth of capital as he sees fit. As an unelected official not chosen by the people, do you trust him to look out for your interests?

Foreign bank bailouts. Henry Paulson is on record as saying that Americans are too stupid to care if he uses our money to prop up banks based outside of the United States (Seriously, go read this article–that’s essentially what he says.) If that doesn’t set my right-wing friends in firm opposition to this plan, I don’t know what will.

No protections for homeowners or curbs on CEO pay. Paulson is actively resisting any attempt to add punitive or regulatory measures to the package, including foreclosure protections, additional economic stimulus packages, or stronger oversight of the financial markets to prevent something like this from happening again. This is a life raft to the very people who got us into this mess, mortgaging our financial futures to do so.

Rewarding irresponsibility. This is a clear message to Wall Street and the global markets that it’s completely okay to engage in ever-more-complex and opaque financial tomfoolery, because the government will bail you out when it gets rough. No consequences, no responsibility, no real fear of the vicissitudes of capitalism. In a true free market, banks that overleveraged themselves with crappy loans and nonsensical derivatives would collapse. It would be painful and turbulent, but is that really worse than enabling them to keep on going with the same awful practices that have left thousands of people with homes worth less than what they paid for them, with 401ks barely performing at a value worth the investment, and a dollar that can’t buy a fraction of what it used to? Again, tell your right-wing friends that this is as blatant an example of ignoring personal accountability as there ever has been.

Constraining our future. As I said yesterday, not only will this bailout deny us access to capital that we could have used for countless new projects and investments that we desperately need, but it will further constrain us from engaging in any sort of new infrastructure building or real innovation to put this country back on track. While Obama’s administration may be able to push through legislation that amends or changes existing laws, the real big-ticket items–climate change mobilization, national health care, broadband investment–will not happen without capital to fund them. This is a political time bomb designed to sabotage any attempt Obama will make at real change by hamstringing him financially until the Republicans move to take back Congress in 2010. It’s no coincidence that Paulson’s package is on a two-year timeframe, after all. [Me: I don't agree with this last characterization, I think the intent is truly to rescue the economy no matter how misguided the effort--but I can see why Boztopia would feel as he does.]

It won’t solve anything. Most of all, this bill is a Band-Aid on cancer. As this excellent article by Joshua Holland details, our financial structure and system is fundamentally sick, crippled, and retooled to act solely as a process to transfer money from the many to the few. Pumping more capital into it is like giving a blood transfusion to someone who’s undergoing heart surgery and is being kept alive by machines–it’ll help keep them alive, but it won’t fix the problem at hand.

On the last point, the issue really is that nobody knows if it will solve anything. The crisis on Wall Street is exactly because nobody knows what these toxic financial products are worth, and people therefore refuse to buy them or trust others who have them. That’s why it’s impossible to say how much this bailout will really cost, or whether it will work.

I’m not stridently opposed to ANY bailout–just THIS one. I’m deeply troubled by the complete lack of accountability, the inability of taxpayers to potentially profit from this move, and by the concentration of too much power in the hands of the Treasury Secretary.