Overheard conversation in the hall between two sixty + professionals this afternoon:
"I just hope the market comes back before I retire."
"Well the market will definitely come back before I retire. I just hope I get to retire."
Sully has a nice graphic showing relative sizes of the bailout and other big government outlays. Seven Apollo projects is a damn big bailout.
Is it wrong that I was kind of rooting for the House Republicans to scuttle this bill?
If any of you guys had an extra $2.5 billion lying around, I could've suggested one hell of a bargain.
I feel like counting on the House Republicans to defeat a bad bill is like hoping the Yankees would beat Tampa Bay: I would have liked the outcome, but I felt dirty about the sentiment.
(As it turns out, House GOP 1, Yankees 0.)
Is it wrong that I was kind of rooting for the House Republicans to scuttle this bill?
?! Lots of Democrats voted against it too.
The anti-Wall Street parts of both parties versus the pro-Wall Street parts of both parties, it seems to me.
Don't get me started on baseball. I am VERY angry with the friggin' Red Sox for allowing Mussina to get a 20th win.
Lets go Devil Rays!
Bank of America has only gone down 12% today.
Yesterday my fiancee's day reassured me not to sell it. "People who work there aren't afraid they're going to lose their jobs", he said.
Don't get me started on baseball. I am VERY angry with the friggin' Red Sox for allowing Mussina to get a 20th win.
Magnanimous of you.
Continuing the previous thread, I'm curious if anyone thinks there are prospects for all Democrats uniting around a different plan. "Nationalization" as envisioned by Krugman and others sounds at first too radical to pass, but it's not like we haven't been doing it already, and one doesn't have to call it that. "Recapitalization" maybe.
Mussina has an economics degree from Stanford. Having 20 wins this season enhances his credibility, should he decide to weigh in on the financial crisis.
1: would be very funny if it weren't painfully true.
Looks like the Dow finally found a bottom it could hold, at least for today.
Hey -- that sounds naughty!
The Twins are in the playoffs, for some meanings of the word "playoff". The Twins always exceed expectations, and the Vikings always disappoint. Those are the two poles of Wobegonian superstition.
Sox makeup game rain-delayed. This is tedious, like the last two minutes of a close football game. If the Sox win, the makeup game will be tomorrow. An extra day of rest wouldn't hurt the Twins any.
19: looks like you spoke too soon.
15 minutes to go before the carnage stops.
Boehner says Pelosi's to blame for lack of R votes.
Looks like there's a real possibility of the Dow cracking 10,000 by the end of the week.
whoops, I look like an idiot now. I was looking at the stock futures, which seem to predict more drops.
23: You've gotta see Barney's response. I love that man.
From other thread:
Boehner is on TV blaming Pelosi for being mean and making his herd of little moron shits vote against a good bill. The leader of the Republican opposition is standing behind him smirking.
Maybe Boehner can get them all to parade up and explain one after another that they voted wrong because of blind rage and now want a chance to vote right.
26: I was just about to link to that. He's so good at this.
22, 25: Nope, you were right the first time. It looked like the Dow had tested 10,400 with some success and would close at around 10,500, but then in the last few minutes the bottom dropped out. I was wrong.
May you live in interesting times.
14: Mussina's a Yankee jackass. There's no reason to be magnanimous.
12 & etc: You're trying to drive me back to the 400-comment thread, aren't you?
He was always cheatin'
and he always told lies
he was always cheatin'
and he always told lies
he went down down down
down down down
this boy went solid down
he went down
I've been too busy (Sept. and Oct have been/will be my best months as a professional!) to participate in the other threads on this, but I gotta say that I'm not a fan of the "fuck the bailout" sentiment. We have a party of toddlers in this country, and it's the one with the magnetic ribbons and Jonah Goldberg. I've been unhappy with how Wall St works for a long time (since before the Gramm deregulation, in fact), but I don't think that it's worth the second Great Depression to punish them. Leave the ressentiment to the pros.
Essentially, I've bought into the Krugman-DeLong-B's BritFriend line that letting the whole thing go to shit isn't a good plan. Once we knocked down the original, abominable Paulsen Plan, I was willing to let go of my pessimism and Schadenfreude. If I thought that today's events meant there was even a 50/50 chance of getting a good, Democratic bill instead, then I'd be happy. But instead I see a situation where nothing at all may happen, and we really may go into the shitter. I'm self-employed, AB is at home with Kai, and we have negative savings (not even counting the mortgage, which is an excellent one). Playing chicken with the economy doesn't sound fun to me.
JRoth, I'm not convinced that even a Democratic bill, assembled in haste under the "emergency" framing, would be a good one. Yes, this bill failed, but let's write a better one. I don't think the choices have to be this bill or nothing.
True that Krugman supported the bailout bill , which should carry a lot of weight.
34: Don't sweat it. I'm assured that the Great Depression wasn't so bad, so there's little to worry about even in the worst case. If it all goes to hell, there'll still be songs and camp fire tales a'plenty.
34: Here's Dean Baker (before the vote). I hope it's true because it's what I want to hear:
There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression. There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.
At this point I cannot identify a single good reason to do the bailout.
(Yes, JE, I know you linked to it in the other thread.)
Reposted from a the wine thread. Hoping to get some attention in an active thread.
||
OT bleg: I need to get some sort of athletic shoe and am not sure what to look for. I don't really run, but I'd want to be able to run a little. I'd like to have enough lateral support so that I could hit a tennis ball around if I needed to. Being able to play softball in a very low key rec league would also be good.
I gather that running shoes provide no lateral support, but I don't know where to get any. The only store where any of the employees actually know how to fit shoes focuses on running and walking.
Does anyone have any suggestions?
(I had a pair of Mizuno running shoes that I kind of liked, but they were stolen. They were really ratty anyway.) I'm not sure whether the person who fit me for them said that I pronated or not.
|>
(Actually, I don't really care if I do derail a thread on my birthday.)
If it all goes to hell, there'll still be songs and camp fire tales a'plenty.
That's the spirit!
If the Democrats were good at politics they'd return tomorrow with the "Wall Street Rescue and Universal Healthcare and Bank CEO Public Flogging and a Pony Act of 2008" and double dog-dare the Republicans to vote against it.
I don't think the choices have to be this bill or nothing.
Indeed. Also, this plan and economic collapse aren't necessarily mutually exclusive options.
36: Krugman's support was based on political considerations, rather than economic ones. It was his opinion that a better deal wasn't reachable. Now we will, perhaps, find out.
34:JRoth, I think "this bailout woulda saved the economy" was as much a fantasy as any of the fantasies that motivated the Iraq invasion.
I am sorry for all the pain coming but the pain really isn't my fault, and again, like Iraq, I don't know why I have to "support the generals" like Krugman & DeLong.
The "answers" really aren't that new or exotic. It's just jobs over profits, and has been around since the 30s. Maybe the neiliberals aren't mostly to blame, but they really didn't help, either, and didn't resist the neoclassicals in a strident effective manner, because they had too much sympathy for their theories and wanted to use their tools.
39 was I.
I read a lot of health care policy blogs, and the universal theme is: this banking crisis means that the chance of health care reform is zero. If we had someone with vision, we could say, Look, this proves that things aren't perfectly secure or stable, and companies fail, so we need a new deal that includes health care for everybody. But Democrats are responsible and don't want the deficit to balloon too much.
True that Krugman supported the bailout bill , which should carry a lot of weight.
With whom?
Republicans can talk like Roosevelt, but when it comes to legislating it is hard to imagine them out-Roosevelting the Democrats. People in both parties are now talking about some variation on Roosevelt's Reconstruction Finance Corporation, in which the government gets an equity stake in an enterprise that it bails out. But the Republican version is likely to be more of a giveaway to Wall Street -- mocking the right's rhetoric. As I have been arguing, the entire Paulson approach was flawed. The Democrats were mistaken to try to add some bells and whistles to a concept that was bad at its core.
The Democrats should write a bill that includes:
* An RFC-style agency to have the government take over or take major equity positions in failing banks.
* Direct refinancing of threatened mortgages, on the model of Roosevelt's Home Owners Loan Corporation
* Extension of FDIC guarantees -- and standards -- to other financial institutions, with government takeover if they fail.
* A small transfer tax on financial trades to pay for a lot of the cost of recapitalizing Wall Street.
BG: according to DeLong, Larry Summers argues that this isn't true. We can know for sure that Republicans will be saying that, because they always say that.
Can anybody think of a previous example of a bill that was supported by the leadership of both parties but was defeated because it was very unpopular among the people? I haven't been able to think of one.
I would probably be happier if it had passed, but one way to look at this is that it was a rare victory for democracy.
For the record, as we perhaps go into GD II, Krugman & DeLong & Thoma are still wrong, less wrong than the plutocrats but wrong in a particular way that made them allies of the plutocrats in this instance.
Just as Beinart and O'Hanlon and Pollack aren't Cheney & Perle & the neocons but are still very dangerous and need to be discredited and kept from positions of power.
This is not really a disconnected comparison.
This wasn't a great plan, but it wasn't that bad. I'll take a less-than-perfect plan over a 10% hit on my 401(k).
"this bailout woulda saved the economy"
The last several years the economy has been propped up by the artificially high home prices, and people using that "equity" to fund purchases. The equity is now gone. There is no way to get it back, because no one is buying the exotic paper that created that "equity".
Contraction does not have to be the end of the world.
50: Maybe I've missed it elsewhere, but is there anyone's opinion besides your own that you trust on this?
I read a lot of health care policy blogs, and the universal theme is: this banking crisis means that the chance of health care reform is zero.
It shouldn't.
I am scared & depressed right now, but I won't really despair until 6 months after the election.
It's your birthday, BG? Happy birthday!
As to your shoes problem, I have no real advice, except that when I was fitted for running shoes I explained to the guy that I was looking for something in which I could run, but that chances are I'd be mostly using them for all general athletic activities, including lifting weights, because I really am not a big fan of running. He seemed to think there was no reason I couldn't do those activities in the running shoes. Of course, mine are these New Balance boats designed for stability, since that is the feature my feet lack. So maybe ask for a running shoes that is better for lateral motion, even if wouldn't be ideal for you were you a distance runner?
50:I don't even really consider this my opinion. Do you think I think I am an original thinker?
I know James Galbraith was trying to pass the bailout, but he is very different from DeLong.
Stiglitz. Michael Perelman & Thomas Palley all have blogs, and MP & TP have recently posted articles on "Financialization".
53: Stirling Newberry, maybe Roubini, maybe Dean Baker. Bob is not crazy. Mainstream positions are mostly social consensuses, not truths, and the unthinkable positions actually have lots of smart people working on them.
I found myself humming "Alphabet Street" a couple of minutes ago, and wondered how that song came to be in my head. Then I came over here and realized that it's your fault, Becks.
For lateral support in running shoes, the code word is "trail running" shoes, I believe. Since they're designed to allow you to run on uneven surfaces, they tend to have wider bases and generally be designed to make you less likely to roll an ankle. The pair I own has worked out pretty well as general-purpose sports shoes for anything where I wouldn't wear cleats.
If you're looking for shoes to play tennis in that have lateral support, why not tennis shoes?
I think the wide base might be key. I just pulled out my running shoes to look at the soles and the heel of the shoe is nearly twice as wide on the outside as my heel.
57: I wasn't suggesting that bob is crazy on this stuff. I'm genuinely interested in checking out some of his sources.
I should go and see what Feingold and Sanders are saying about the bailout.
I am sorry for all the pain coming but the pain really isn't my fault
Lies! McManus orchestrated the whole thing.
I've been catching up on the NPR "Planet Money" podcasts, which have been enlightening and disheartening.
For all his hot air, Bob is a member of the Knights of Malta, and he and Justice Scalia are members of the same flagellation society.
I guessed wrong about Bob's sources, but he's been trying to steer the bunch of us to the econoblogs for at least six months.
I recently got a pair of Adidas tennis shoes for (hmm) playing tennis and was really pleased at their support/protection. I've run in them too with no ill effects on my feet, knees, or the shoes themselves.
Of course, after the crash, I'll be grubbing for nuts and berries in those shoes.
51 - the 10% hit to the 401(k) is coming no matter what. This isn't an anomalous event, it's a much needed correction bringing the stock market back to where it should be. The underlying dynamics that produced the overvalued stocks of the past half decade are unsustainable and there is bound to be a drop in the market on way or another.
The real issue here is how bad the transients are going to be during the move to a new more reasonable valuation. That's assuming we don't flip into a serious downturn of the type mcmanus predicts. I'm fairly hopeful that in the long term we'll be OK, but the short term (6 month timescale) things could get really rough.
I found myself humming "Alphabet Street"
Hah - for me it's been "Going Down," and I likewise blame Becks.
Ben got "Down Down Down" in my head. This is really the earworm thread.
Theories of Financial Disturbances was an important book for me in the last couple years. This is mostly a short historical survey, Toporowski's important book is The End of Finance, which I haven't read. Toporowski has moved into developmental economics I think.
Toporowski contributed an article on Kalecki to
Elgar Companion to Post-Keynesian Economics which is like my bible.
I think Galbraith, Perelman, and Palley are Post-Keynesians.
Rahm Emmanuel is a reptile, but I'd love to have him on my side. He's sort of like one of those legendary commando assassins that are indispensable during the war, but can't be allowed to return to civilian life.
Carville's that way too. If I could keep him in a cage and only let him out for specific purposes, I'd love Carville.
We haven't talked about this, but the vote was another utter disaster for McCain. He was taking credit for a settlement this very morning. Not only does he look stupid, but that pisses off the Republicans who voted No.
69 - you can make wine out of earworms.
Ben gave me a real earworm.
And he told you it was made of tofu, whereupon you ate it and pronounced it delicious. Now, was he really so wrong?
Damnit, togolosh. I take solace in the knowledge that my comment is beautifully italicized.
Bernie Sanders is looking for citizens to sign onto his letter on his principles for the bailout.
Ben gave me a real earworm.
When Ben hands you earworms, make earworm wine!
The Elgar Companion is currently open on my desktop.
Also open on my desktop is a book by Avrich on the Russian Anarchists, 1875-1925.
John, I may actually be crazy.
49
Can anybody think of a previous example of a bill that was supported by the leadership of both parties but was defeated because it was very unpopular among the people? I haven't been able to think of one.
Immigration reform.
Crazy in a good way, Bob, except for the performance art.
The White Sox are playing now.
I just saw Paulson while flipping channels to find the Sox game. He looks reptilian too. The next flip was some creepy death metal group whose shaved-head lead singer looked much like Paulson.
Linked in 38, Dean Baker seems to make the argument that if banks fail it isn't the end of the world because the government would merely take them over.
I worry about the credit derivatives. When bank A fails and the government takes it over, other banks, insurance companies, etc. that bet that bank A would remain solvent will suddenly lose a ton of money. And the risk is (ala AIG) that they go bankrupt too. The domino theory of financial collapse.
Nationalization seems to be the consensus non-Republican answer, but it's impossible.
83: There was a time when an invasion of Iraq seemed impossible, and the drowning of New Orleans was a pipe dream. You've got to aim high if you want to get anywhere.
66
the 10% hit to the 401(k) is coming no matter what. ...
What people are worried about is an 50-80% hit. The DJI lost nearly 90% from the 1929 high to the 1932 low.
CN: Yesterday my fiancee's day reassured me not to sell it.
Dammit! I urged you to sell two weeks ago!
JRoth: Essentially, I've bought into the Krugman-DeLong-B's BritFriend line that letting the whole thing go to shit isn't a good plan.
Letting the whole thing go to shit, isn't a good plan. That doesn't get you to endorsing this plan.
Once we knocked down the original, abominable Paulsen Plan, I was willing to let go of my pessimism and Schadenfreude.
To my mind, this plan took 116 pages to say almost exactly the same thing the Paulson plan said in three.
Playing chicken with the economy doesn't sound fun to me.
It isn't. However, if this plan had passed, my humble opinion is that the bolt would've been shot in about 30 days, and we would've been right back where we started but worse off.
The only reason I was hoping for the failure of the plan was because there was no other way to get a good bill and thus no other way to stop the rot.
Which is why I staggered into comments here after having read the Dodd bill and said my brain hurt: the Dodd bill as written implied that a) Paulson didn't know what he was doing, and b) none of the Democrats knew what they were doing and c) the Republicans would oppose and d) many Democrats would oppose and e) hello, clusterfuck! Thus, we were royally screwed one way or another.
max
['Kind of drag man.']
Frank responded to the whiny Republicans pretty effectively.
55: It is my birthday. Teo's too.
Thanks Cala, Po-Mo and bill. I don't want to buy tennis shoes, because I don't actually play tennis, but the other day I was in a class where they threw us out on the tennis court, and I might occasionally want to play---very rarely.
I also might want to play softball, but I don't want to invest in cleats.
Happy B-day to BG and Teo.
To my mind, this plan took 116 pages to say almost exactly the same thing the Paulson plan said in three.
"Give me 700 billion dollars and don't ask any questions."
When Ben hands you earworms, make earworm wine!
This made me laugh.
Here is Mark Thoma's post- mortem, with many outside opinions and William Buiter providing the most dire prognostications
OTOH, Newberry is terse, with four bullet points to get us thru til January (should be February, I think)
Happy birthday, BG and Teo. I hope you each have cake and ice cream and lots of good things to eat.
How long before we're all living off bread & molasses and root vegetables?
So your back, from outer space. I shouldn't have let you back in with that look upon your face.
92:I think Buiter gives us three days,
85: The only reason I was hoping for the failure of the plan was because there was no other way to get a good bill and thus no other way to stop the rot.
Yes.
92: How long before we're all living off bread & molasses and root vegetables?
You aren't already? In the last few days I've baked 4 squashes (2 butternut, 2 delicata); bread is a bit expensive, and one must really begin baking it oneself. In any case, root vegetables get a bad rap. Baked squash with green beans, fresh tomatoes and crumbled feta cheese turns out to be delicious. You might sprinkle some sunflower seeds on there.
Not to quibble, but is squash a root vegetable? This isn't going to sound quite so delicious when what you're sprinkling those sunflower seeds on is parsnips.
Have I ever told y'all that Bruce Wilder, who comments at Thoma's place, is very very good?
Oh, you're right. Not a root vegetable. Of course.
Apparently I have them in the same family because I treat them in roughly the same way: bake, or make into a creamy or curried soup. Squash soup, potato soup, sweet potato soup, carrot soup, variants thereon. Or incorporate into a bread. But yes, sorry.
Parsnips are kind of sweet, so I might could do that with the sunflower seeds if I'd roasted the parsnips. But I'd probably just have them roasted with carrots, whole garlic cloves, onions, potatoes and such. With herbs.
True that Krugman supported the bailout bill , which should carry a lot of weight.
With whom?
Sorry this is hours late, but:
With people who've noticed that Krugman has been pretty much right about everything* in the last 8.5 years? And his Bad Neoliberalism is, at this point, 10 years in the past. I used to curse his name, back in the Seattle days. But I see no reason to believe that he doesn't know more about what's going on than every person on this blog combined. And the counterarguments I see are 90% ressentiment, 10% hopeful handwaving. Even though I love Dean Baker.
Look, people. We've run this experiment before. Take a crashing financial system and do nothing. It was a bad idea, such a bad idea that it led to 35 years of liberal dominance in reaction. Other than contradiction-heightening, I'm not sure why liberals want to be on the wrong side of history this time.
* And I don't just mean political stuff**. He was the earliest and highest profile economist to call Greenspan out. He was ahead of the curve (not ahead of every single person, obvs) on the housing bubble in general. &c.
** Oh, I just remembered: he failed to bow down to the Great Obama. Critiquing him from the left. Off with his head!
98.3 sounds delicious. But Parsimon, I was thinking of conditions of real food scarcity (which isn't really going to happen, right?), in which case, most people have to get by on a very monotonous diet, and without the crumbled feta.
When we are all living on roots I'm going to be on an all-potato diet. With an occasional raw carrot, perhaps, and a rutabaga once in a while. I just say no to parsnips.
The Japanese actually have made an art of bland, monotonous, frugal diets.
So why are Japanese restaurants so expensive?
I just saw Paulson while flipping channels to find the Sox game.
I initially misread this that Paulsen was flipping to find the Sox game. Which would be good for him, but an odd choice for a photo op.
"In the wake of the historic defeat of the bailout bill, Secretary Paulsen said, 'Fuck it, I'm going to check out the ballgame. Can anyone get me tickets if there's a play-in tomorrow?'"
To explicate 104: art isn't cheap.
Also, my German FIL despises root vegetables, as he grew up on them in the aftermath of WW2. A German who won't eat potatoes!
So now will Pelosi make even more concessions to the Republicans, or will she play her own game of chicken? I hope the latter.
First she worked with Bush. Then she worked with the ignorant, borderline-mentally-ill House Republicans. Then they double crossed her. And then Boehner blamed her for having been double-crossed.
So is she going to make even more concessions to these fine people.
102: Isn't it because they serve Japanese glamour food? I have the very possibly wrong impression that in Japan sushi is for special occasions.
I just say no to parsnips
This is just perverse. Matchstick them, toss with olive oil, roast at 500, then toss with orange zest and orange juice to finish (I don't recall whether it goes back in for a few minutes post-juice). Wonderful.
But Parsimon, I was thinking of conditions of real food scarcity (which isn't really going to happen, right?), in which case, most people have to get by on a very monotonous diet, and without the crumbled feta.
I know. I was aware that the feta was an indulgence.
Things aren't really, really bad unless we lose electricity, frankly.
In Taiwan people think of potatoes as an occasional vegetable, but as a staple it's poverty food. It's been claimed that the introduction of potatoes and yams allowed the Chinese population to more than double, because it was a backup during rice famines. Potatoes is one of the best, if not the best source of calories per acre.
108: All very well but in the Road-Warrior-root-vegetable world of the future, we will not be having orange zest in Massachusetts.
Awhile back I mixed mashed potatoes and mashed parsnips 50-50 and then added sauerkraut. For plain peasant food it was very tasty. I didn't thoroughly mix the potatoes and parsnips, so every spoonful was different.
Addendum to 111: Although it certainly sounds worth trying while oranges are still available.
So is she going to make even more concessions to these fine people.
Here's an idea- try to solve the motherfucking problem instead of trying to get a supermajority so you can over ride a veto. The small mindedness in the face of crisis is mindboggling.
She is not alone in this, but she is the "leader". No bill that I am aware of has even scratched the surface, so this is not a Rep/ Dem issue.
102: In China I had a spinach-rice-tofu meal, and it was satisfying and nutritional, but not exciting. Few would go to a restaurant for that.
I'm not 100% sure that I'm thinking of the right person, but hasn't Buiter been wrong about everything for the last year or so? Wasn't he calling for the Fed to raise rates to combat inflation last month or two months ago?
Christ, JRoth, have you actually be reading the threads? Po-Mo, PGD, max, and I have been posting detailed technical comments for two weeks now. Even Bob's comments have been 50% informational and 50% ressentiment. Yet you parachute in here and tell us we've been it all wrong?
I've had two different friends tell me they are reassured that I actually produce food and that moving in with me is their fall-back plan. That's great in concept, but I don't think they have a good appreciation of the limits of my garden.
Nevertheless, I've heard from two other gardeners that they plan to significantly ramp up production this winter and next year. No cover crop for me this winter.
It's a Repub-Dem issue. But Pelosi has been leaning over backwards first for Bush, and then for the demented Republicans who were defying both Bush and then McCain. The shit Eric Cantor backed the bill very lukewarmly at the last minute after organizing resistance, and then when his friends killed the bill's failure.
I didn't even support the bill, but the big impediment facing anyone who wants to do anything positive is the dead weight represented by the ignorant, malicious, demented, sloganeering, ruling majority of the Republican Party. And they blame Pelosi, and lo! -- you blame Pelosi too. But no, you're not a Republican! You're an independent thinker, smarter than us partisans!
Pelosi should be more partisan, not less. She'd get a better bill that way. But it may not be possible to get a better bill, because of the whiny Republican dead weight
Tigers 2-1 in 6th over Sox. Must-win for Sox.
I thought that the quickest road to "Sweden" would be Obama's Treasury Sec announcing in March that the Paulson plan had failed, and that nationalization was the only answer. And by the way, that money we gave you before -- that's all you get.
There's no path to Sweden with Bush in office, I don't think. Unless things get as bad as Paulson seems to think they will, and then who knows.
"and then when his friends killed the bill, he blamed the bill's failure on Pelosi." Deletion error.
Happy Birthday, Bostoniangirl and Teo!
Go Tigers!
(and as my friends from Detroit like to add, and take the Lions with you).
ruling majority of the Republican Party
Last time I checked, the Democrats were the ruling majority, in both houses. I expect people elected to leadership positions to, you know, lead. As has been said numerous times, for a variety of reasons, the President has no credibility, and the first shot out of the gate from Treasury was "Trust us". So while I have had a personal dislike of Pelosi since I lived in San Francisco, I feel no remorse at pillorying her performance. FWIW, I think she is doing a better job than Hastert would have, and I think that while Gingrich would have at least understood the problem, he would use that knowledge to partisan advantage.
125: The Democratic leadership went out of their way to work with the Bush administration to pass a less punitive bill than if the Democrats wrote one alone. They pre-met Bush half-way, assuming that Bush could deliver the Republicans. If the Democrats wrote a Democratic bill with Democratic votes alone, it would be not nearly as favorable to Wall Street and would probably be repudiated by the Bush administration. Rightly or wrongly, Pelosi did what she could to get something done quickly that would have administration buy-in, and it didn't work.
Christ, JRoth, have you actually be reading the threads? Po-Mo, PGD, max, and I have been posting detailed technical comments for two weeks now. Even Bob's comments have been 50% informational and 50% ressentiment. Yet you parachute in here and tell us we've been it all wrong?
I've read just about everything that's been written before this weekend, and I didn't think I was telling any of those people that they were all wrong. I was primarily responding to AWB, plus some of the other gleeful comments.
The comments that I had a problem with (in this thread, as I was explicit that I hadn't seen the previous one) were the ones basically treating Dodd-Frank as indistinguishable from Paulson. I'm pretty sure that Po-Mo, PGD, max and you haven't been saying that. If you have, then I think that you're wrong. But if that's not what you're saying, then you shouldn't take offense.
Look, if I believed that the likely next step was either A. a ballsy, New New Deal über-Democratic bill that Pelosi would push through on a party-line vote or B. a modest stopgap to get us to January on conservative but sound terms, then I'd be satisfied with today's happenings. Shit, if I thought the Dems were capable of hanging this around the neck of every R in the country, I'd be happy. But I think that what's likely is either nothing (bad IMO) or a bill that's even worse (because filled with more R bullshit to get their votes). Oh, and then the Dems get demagogued on it because people are pissed at the notion of a bailout, and so even good liberals are happy to blame Democrats for it.
But that last thing would never happen, would it?
No cover crop for me this winter.
No! That's the sort of short-term thinking that got us into this mess. Keep your soil healthy for the long term, Megan.
the President has no credibility
He still, however, has the veto. And remains the putative head of his party.
Basically, what Walt said in #126.
116:All my references to Buiter were intended to be sarcastic.
OTOH, I don't think he is quite a wingnut, and mainstream for Britain. Mark Thoma quoted him at length.
He still, however, has the veto. And remains the putative head of his party.
Kinda makes a parlimentary democracy look shiny at times, dunnit?
with Democratic votes alone, it would be not nearly as favorable to Wall Street
This will surprise you, but I do not want a bill "favorable" to Wall Street. I am not really interested in "punishing the evil doers" because I think there is plenty of blame to go around. I want a bill that will restore liquidity to the capital markets that includes some recognition of the imbalance between bank balance sheets and the ability of the borrowers to repay the loans.
118: I've had two different friends tell me they are reassured that I actually produce food
My roommate is currently at a meeting -- actually a walk-around of the fields -- of the CSA we belong to, to map out a plan to increase production by 30% this coming year, in order to increase membership by 30%, etc. God knows whether it's possible without more labor. The land is there; is it primed/ready for planting? Has the soil been reclaimed? I don't know. I'll hear, I imagine.
Is it wrong that I was kind of rooting for the House Republicans to scuttle this bill?
Yes. Because if we're lucky, *a* bill will get passed this week. If we're not, it won't. And if it doesn't, a lot of people are going to suffer, a hell of a lot.
The perfect is the enemy of the absolutely necessary no matter how much it sucks.
TLL's right: worry about "punishing the bad guys" once the economy's stable. But cutting off your nose to spite your face is fucking stupid, and will punish a hell of a lot of regular people--and a hell of a lot more than the "bad guys".
re: 39
Squash shoes have good lateral stability and a firm heel-cup. Some have quite running-shoe-like cushioning, although that may not be necessary for you [some people like lots of padding, some people think less is better].
A lot of the people in my martial art class wear squash shoes because of the stability/support they give when twisting and jumping and because they have fairly hard toe caps for kicking people with. I love mine so much I bought a second pair just for walking about it.
Not just the veto, but the Treasury Department. Which is going to execute whatever it turns out to be. Blaming Pelosi for the failure is inane. She brought the thing to the floor on the representation that both sides were going to do their part.
Having read more than the beginning and comment 133, TLL is wrong, and JRoth is right.
Fuck this fucking inside baseball shit. Is any Democrat just saying "You big bunch of whining pussies, 60% of our gang voted for it while 33% of yours did."* Mo one whose vote is in question in this election gives a flying fuck about deals and all of that shit. "If the Repubs had voted like the Dems it would have passed." (Now I think it is OK that it did not pass, but blame the WATBs anyway. Fuck the fuckers)
*Barney Frank is doing pretty well, but Keep It Simple Stupid.
This will surprise you, but I do not want a bill "favorable" to Wall Street. I am not really interested in "punishing the evil doers" because I think there is plenty of blame to go around. I want a bill that will restore liquidity to the capital markets that includes some recognition of the imbalance between bank balance sheets and the ability of the borrowers to repay the loans.
Then you should be pushing for a Sweden-style partial recap, with direct U.S. investment in financial institutions (probably through the purchase of preferred stock). The Paulson slushpile method (and the improved Dodd bill) is an inefficient way to go about restoring liquidity. The advantage was that it was less punitive and therefore more likely to get turned into law, but Boehner and crew just blew a hole below the waterline in that plan. I doubt Pelosi has it in her to get a regulation-heavy "Fuck You, Wall Street" bill in place by Wednesday, but I wish she did.
131: That's funny. I thought maybe I'd mixed up Buiter with somebody else. Thoma has been pretty mediocre through the crisis -- this isn't particularly his area of expertise. De Long and Krugman have been a lot better.
Perelman has his moments, but he doesn't seem to have much feel for the nitty-gritty of finance. For example, he finds stock buybacks completely perplexing and irrational.
140: Sure, a nationalization would be awesome. But you have to deal with the Congress you have, not the Congress you wish you had.
Look almost everybody agrees now that this isn't a liquidity, but a solvency problem. That is why Krugman wanted equity to recapitalize.Solvency problems are not "crises of confidence" and the failure of the bill is not crashing the markets.
To my reading, the equity provisions were inadequate and would not have recapitalized, and were left too much to Paulson's discretion anyway. By crashing Lehman, Paulson at best demonstrated horrible judgement. Would he let Morgan die to help Goldman, even if it meant trashing the economy?
I don't trust him.
PS:Krugman, especially, is in such a position that he really should be very careful about he says. I don't blame him, but this means I need other sources.
140: Sure, a nationalization would be awesome. But you have to deal with the Congress you have, not the Congress you wish you had.
I'm with Krugman on this - a Paulson-style bailout with no taxpayer stake in rescued companies is only marginally better than heaping $700 billion in a pile and setting it on fire, Joker-style. If that's what Congress ends up doing, they should just give the money to the banks and skip the farce of reverse auctions, then go drown themselves in the Potomac.
Snark, Pelosi will rightly worry that offering her own bill will save the Republicans from ownership of the consequences of this screw up. She's stepped up to the plate -- let Paulson come back with something he can testify will work and will have more than tokenestablishment Republican support. Every day she waits makes it hotter for Canter and McCain. Up to about 3.
In the Social Security fight a couple years back, republicans snarked and then pleaded with Democrats to produce their own plan -- something, anything, so they could change the subject, and go on the attack. Dems stood firm. I think this is like that moment.
you should be pushing for a Sweden-style partial recap, with direct U.S. investment in financial institutions
I think something like this is better than what has been presented thus far. And in fact there doesn't have to be an entire re-regulation bill by Wednesday, if at all.
I still think that way too much time is being spent on pet theories and personal vendettas. Fiddling while Rome burns, etc.
Confidence in the market does not mean everybody gets to keep the job they currently have. There will be disruptions, just how much.
TLL: "The ruling majority of the Republican Party" means the wingers who control the Republican party. People cherry-pick rational Republicans, but it's the loonies who run the zoo. I regret my lack of clarity.
Bush failed, Boehner failed, McCain sabotaged, Cantor sabotaged, and you talk about Pelosi? I understand this psychologically, but not in a way that makes me respect you or anything. Pelosi couldn't lead the Republicans. That was for Bush, Boehner, McCain, and Cantor. She dealt fairly with them, and they failed or double-crossed her.
But it's all good. Maybe she'll figure out a way to freeze out the malicious, whiny moron shits who just threw in their monkey wrench even though they'd had their skanky psycho asses kissed by the whole leadership of the Republican Party and half the Democrats. Maybe she'll come up with a better bill.
"Partisan" was the wrong word to throw at Pelosi in this situation.
And in 116 I am talking about the final bill. I know it is 116 pages, but they use a lot of spacing and wide margins. It wasn't so bad.
I don't think Krugman was in a position to really say:"I don't trust Paulson and the bill isn't gonna work"
141:Mark Thoma runs a very fine blog, and seems a good teacher. I am very grateful to him. And I wish I could use an emoticon.
134: I am not really interested in "punishing the evil doers" because I think there is plenty of blame to go around.
Yeah, evildoers and their claques usually feel that. Creep Senator Norm Coleman (R - MN) is very big on not playing the blame game, because his hands are extremely dirty.
TLL is hypnotized by the standard Republican bullshit. Bush isn't expected to lead because he has no credibility. The Republicans can't deliver a majority of their caucus because they can't be expected to behave responsibly. That's just the natural order of things, and not a matter of anyone's agency.
Yet things are fucked up. Who to blame? Well, Pelosi only delivered maybe 60% of her caucus for a bill that writes a nearly blank check to her political opponents. She should have done better.
The practical lesson that TLL and his compadres teach is this: You bend over for a Republican and you get fucked - and then told you were asking for it.
Screw the Republicans. JRoth notwithstanding, somebody needs to put these fuckers down, and if it doesn't happen now, this country is going to continue to get what it deserves.
You can't compromise with terrorists.
Bush, Paulson and Bernanke shit this bed to begin with when they came up with the give the lying crook $700B or we'll all die strategy. The Dems big mistake was coming out of the Thursday meeting *before* they knew how insane the proposal was and agreeing that we must do *something* right now. (Might have been true but you don't come out and say that.) That backed them into a corner right at the start. They tried and this is how far they got.
Next step is the Bush, Paulson, Bernanke triumvurate's to take. Fuck the one day, one week, one month effect on the markets, everyone can shove that up their lily-white daytrader, net-financial-worth-spreadsheet updated daily asses.
Winning the election is more important than doing anything on this right now.
150: TLL is a disgruntled Republican, not a dupe of the Republicans. He's smart enough to distance himself from them in some respects, but he's unlikely to come over to our side.
I'll say again: This is a great time for Pelosi et. al. to put the screws to Bernanke and Paulson, and have them deal with Bush and the media. The Ball has to be put into their court. Bernanke and Paulson can't play dumb the way the House Republicans do, and they have reputations to preserve and may even care about the potential consequences.
151: Fuck the one day, one week, one month effect on the markets, everyone can shove that up their lily-white daytrader, net-financial-worth-spreadsheet updated daily asses.
JP, I agree with you, but you know it doesn't go over well in this environment.
For what it's worth, Obama seems to be faring well in electoral projections.
Unthinkable:
Finally, one other unlikely option talked about on Capitol Hill is to try to pass the bill almost entirely with the Democratic majority in the House. That would require adding a major stimulus package favored by Democrats, infrastructure spending, unemployment insurance spending, and heating and food stamp assistance for low-income Americans.
It should surprise no one that I'm with B and JRoth fully.
Winning the election is more important than doing anything on this right now.
Pelosi's willingness to carry water for Bush/Paulson was an important step in that direction. Whatever, if anything, goes wrong now, it's owned by Canter and McCain. Who didn't make it clear to the people who were complaining about bailing out fatcats that the point of the thing was to avoid huge dislocations in the country at large, and red America in particular.
I don't think the Dems made any mistake here at all. McCain can't really run against this plan: he backed, and it's Bush's plan. Ditto House challengers.
What the Republicans really wanted/needed, was for the thing to pass without their votes. I'm not saying that I think Pelosi knowingly let it go down the other way, but I do know that she can count.
154 -- Unless Bush and Paulson come out in favor of it. So, I guess we'll see just how scared they really are that something awful is going to happen.
155: We would have to scroll up and examine JRoth's views, with which B agreed, in order to determine what you agree with.
Bailout Defeat Offers Opportunity
were the ones basically treating Dodd-Frank as indistinguishable from Paulson.
Absent the many pretty words, the Dodd bill back on Monday was effectively indistinguishable from Paulson. I was hoping that they would improve the bill enough to make it worth passing, but they did not.
I'm pretty sure that Po-Mo, PGD, max and you haven't been saying that. If you have, then I think that you're wrong.
That's fine, you can think I'm wrong.
The argument appears to be that the choices are this bill and everything will be fine til January February when Obama can and will fix everything OR Armageddon. And anybody who doesn't think the bill will work hates America, eats puppies and is a evil moonbat.
And I think you are wrong, and that the Paulson bill by any name, would have done nothing useful, and probably made the situation worse. It would have kicked the can down the road (in terms of market confidence) until about, oh, the middle/end of October, and then: it's meltdown time again. That very possibly would've resulted in a disaster for the D's of the House and Senate, and they would then be required to go back and pass another much larger bailout bill right before the election (or maybe just after) that would have all the same problems of the Paulson bill and would've kicked the can down the road until maybe Thanksgiving or the middle of December, at which point there would be no fixing the situation.
If you want to say I'm wrong, as KDrum did, that's fine, but I am not now, nor have I ever been interested in inducing Armageddon.
max
['And I have been calling this correctly for quite some years, thank you.']
I'm not expecting anything from Bush. I accept the Psycho Theory of Bush. If Paulson and Bernanke are frightened enough, they may have a transformational experience and do the right thing. They'd need to do more than make mild coded statements, though. They'd have to bust some heads behind the scenes, and go public if that doesn't work.
156: I will admit that I am not all confident that I know who is playing whom right now. The one real mistake I do think the Dems made was coming out of that meeting and talking. Since then it is a bit complicated to call. However, I do think that the Repubs were truly pissed at the result today. 60% vs. 33%, suckers. Go explain that to the voters.
I do think some manner of "fix" will be necessary. But Shearer is right above, what you're trying to avoid is the 3-year 90% drop. While trying to restore faith in the government at the same time ....
162 was me. And max is making sense.
JRoth, the bill voted on today was not the Dodd bill. if you read the transcript of the conference call Treasury officials had with investment bankers yesterday, you would see that the Treasury officials went out of their way to make clear to the bankers that every appreciable difference with the Paulson bill was for show only. For example, it was made clear that the stuff about how the Treasury doesn't get all $700 B up front was for pretend. Likewise, any restrictions on executive compensation were token. Whether or not to require warrants was left to the discretion of the Treasury, etc.
Now it's quite possible that the Treasury was lying to Wall Street, but I'm guessing that it's a lot easier to lie to the American people than it is to Wall Street.
I can't believe that Wall Street is still making ultimatums. They've been in the driver's seat for so long they can't comprehend the idea that something's changed.
They had Congress fooled, too. For better or worse, the opposition R and L was pretty grassroots.
I can't believe that Wall Street is still making ultimatums.
No kidding. They should be glad people aren't burning their offices.
Yet.
165: I think it proves they're not as scared as they're pretending to be. (On the other hand, the CEOs of Lehman and AIG acted with totally-delusional self-confidence in the weeks leading to their company's deaths, so maybe it's an occupational hazard on Wall Street.)
TLL, I honestly don't understand what you're arguing. Pelosi tried to put together a bipartisan bill that would sail through Congress and get quick administration approval. What more could she have done? Apply her Magic Leadership Powers?
so collapses are proceeding as scheduled, well, one should experience everything once in this lifetime maybe
Read probably isn't kidding. Japan, Mongolia and Russia have been through their collapses during the last 20 years or more. People in the rest of the world don't find disasters surprising.
Paulson to Try Again ...Calculated Risk
156c - Pelosi delivered, no joke, exactly the 140 votes she said that she would deliver. It didn't work because Boehner, Pence, and Cantor didn't hold up their end.
173 But she gave a *speech* snark, a speech on the floor of Congress!
And I made a *comment*, a comment on Unfogged.
Fuck it. Because of 175 I'm voting for McCain.
Walt, remember, we're dealing here with a failed attempt at the transhuman.
Bérubé's blog is back? That's what our nation needs in this time of crisis!
JRoth notwithstanding, somebody needs to put these fuckers down, and if it doesn't happen now, this country is going to continue to get what it deserves.
Believe me, no one wants to see the Rs put down more than I do. The time I don't spend teaching Iris about Greek gods and touching Kai gently is spent teaching her that Republicans are wicked people who like war, racism, and destroying peoples' jobs (I don't mention you by name, TLL). Nothing in the past...uh, my lifetime makes me believe that the Dems can win this politically without actually doing the scutwork. Rs are able to use race politics and general ressentiment to turn their failures into political victory; I've never once seen Dems pull off the same trick. So if nothing happens and the country goes to shit, I expect approximately 30% of Americans to blame Rs, 30% to blame Dems, and 40% to blame them both. If I thought that this week represented the end of the Republican Party as a viable political entity, I'd be dancing in the streets right now. Instead, I expect fecklessness that will be preferable neither from a political nor a financial POV.
Max, I understand what you're saying, and respect it. I haven't read the bill that was before the House today, and doubt that I could adequately parse it to judge your claims. I certainly accept that a window-dressed Paulson bill would be a pretty shitty outcome. If the result, at the end of the week, is something manifestly better, I will dance in the streets and send you each a (virtual) fruitbasket. In the meantime, pardon my skepticism that the Democratic leadership has a pony up its sleeve.
JRoth, I hope you (and everyone else) are calling and e-mailing your reps. This does seem to be a time when it actually matters.
I've emailed my Rep three times so far. He voted right (No) for the wrong (Blue Dog) reasons.
I don't get what you're worried about, JRoth. The Dems have to absolutely pass the shitty bill today because why? There will never be another bill again?
181: Mine voted wrong 'cause he's a republican, but I'm also e-mailing my should-be rep who was gerrymandered away from me and is voting the right way for the right reasons.
The way things are going we could have a Socialist USA and Capitalist China in a few years time.
Now that would be AWESOME.......
Nikkei down 4.8%, ASX200 down 3.8%, KOSPI200 down 6.4%.
Jamies Galbraith ...for the bill, or the next bill
Matt Stoller against the bill
I don't get what you're worried about, JRoth.
I don't either, but what I'm worried about is the fact that the Ds are going to have to either a)vote for an even shittier bill, b)let the economy abscond, or c) grow a pair. Guess which I figure to happen last.
I don't know if I have a strong enough opinion to call my representative. I don't know what's going on; no one I've read seems to know what's going on at least enough to rule out the other people who seem to know what's going on and concluding the opposite; unfortunately I can't trust the government to know what's going on and act in the interest of the nation. People have changed their minds several times since yesterday.
Calling my rep and saying "don't screw this up" doesn't seem to be helpful.
182:I don't quite get it either.
Dow, currently around 10,500 was at 7700 in 2003. We have survived recessions before.
David Sirota, at the Stoller link above, gets very mad at anybody who thinks we have to prop the markets up, in the short term.
Yeah, I think that at this point, the big losers should be Bush, Boehner, McCain, Bernanke, and Paulson, all of whom have failed, and the Cantor and the House Republicans, who monkeywrenched their own Republican leaders and crashed the stock market. But as our very own TLL has revealed to us, it will be Pelosi who will be expected to make concessions.
And someone's sure to say, about what I just said, "This is too important to be partisan about", even though all of the Republicans were.
Someone big recently said something like "Crashes are psychological, and so we don't understand them." That actually sounds like the Tinker Belle kind of thing a flimflam artist would say, if you believe in it it will work, but it was an economist. It was hard not to think that he believed that if everyone were rational like him, there's never be a crash. Sort of like he hated all the actual human beings in the world, for having messy psychologies and messing up his scientific theories by aring to exist.
Samuelson: ""Unfortunately, we lack experience with stabilizing financial markets, and the issue has been at the fringes of economics.
Post-Keynesianism has been considered fringey since Friedman, although it used to be the alternative mainstream. Like Keynes, who was valued once upon a time, it is precisely about stabilizing markets, perhaps a little at the expense of growth.
Too bad the P-K prescriptions, jobs and equality, are so repellent and scarey to those who want to play "up a basis point, down a basis point, a little open market stuff, way cool"
DeLong abandoned Greenspanism a little while ago. Meaning gotta pop those bubbles. How? As far as I could tell, with Fed policy...induced contractions.
No Brad you burst speculative bubbles before they happen by taking speculators money away. I haven't bought a billion dollars in CDS's for like ages.
DeLong abandoned Greenspanism in the wrong direction AFAICT, putting preventing bubbles first, low inflation second, and full employment third.
192:They are psychological, but not at all hard to understand.
Give a Warren Buffett 50 billion extra dollars and he is gonna gamble. No he doesn't necessarily make the safest investment. Why should he?
John, I'm a bit on the expectations side. Economics really is about mass psychology.
Oh, and not for nothing, but for many hedge fund investors, year-end redemption requests are due tomorrow. Should be good times.
The combined wealth of the 47,000 richest Americans is $2.6 trillion. That's 2004 data, so it's actually higher (or was until the last couple of weeks). Here -- scroll down to the bar graph.
196: Can you break that down for me?
What irritates me about all the anger at Wall Street is that it was the fucking lawmakers who fucking allowed this shit to happen. If you remove the rules, and some dumbass invents some crackpot get-rich-quick scheme, and starts getting rich, and you're competing with the crackpot, then you're going to be under a lot of pressure to basically play his game. Especially if you're a publicly-traded company.
So yeah, fine, Wall Street fucked up. But who created the conditions for that fuckup? The same self-righteous motherfuckers who are refusing the bailout because (1) they're more interested in punishing the Bad Guys than preventing another depression, apparently; or (2) they're so skeered of the word "socialism" that they'll run right over a cliff to avoid it.
198: People with their money in hedge funds can take it out. If people take their money out, then hedge funds have to sell assets to generate the cash to pay people back.
199: It's that Wall Street fucked up and made billions of dollars doing so.
They didn't fuck up. Tom and Daisy, the archetypal Americans, always win.
200.2 Right, so let's punish the fuckers even if it means taking everyone else down with them. Fabulous.
We're trying to put you and PK out in the street, B. Zinging Wall Street would just be a bonus.
Uh, B, Congress is still allowed to pass another bill.
203: Actually I'll probably be okay. Mr. B. has a federal job, and we can buy a house with a VA loan. It's the rest of you stupid assholes who are gonna suffer.
204: Yeah, did you see what happened in the market today? Checked out what's going on in Asia? Do you think that they're going to pass a bill before the week's out? And if it doesn't punish Wall Street enough, are you still gonna oppose it?
And if it doesn't punish Wall Street enough, are you still gonna oppose it?
I probably will. No golden parachute on our dime, godamnit.
B, have you been paying attention? You have leaped to several conclusions that we haven't.
Have I been paying attention to what? To the markets and the congress? Yes. To the discussions here? No, not really.
The Dow rose and fell a thousand points last week. If they pass a bill, the stock market will go up again.
I'm glad to find out that preventing the stock market from going down is a core progressive value, though.
In usual Bush form, this was presented as a panic ultimatum. It turned out that in one believes Bush by now, not even Republicans. Bush's originally offer was utterly horrible in every way, another unitary presidency power grab, and only a few cosmetic modifications were made. Even so, the Democrats dutifully played Bush's game and supported the crappy Republican bill, but Bush, McCain, and Boehner couldn't deliver the Republican vote. Since it was a crappy bill, and since most of us didn't accept the panic for immediate action, we were basically relieved. Maybe we'll get a better bill now. That's the way government works.
We do plan, however, also to destroy your husband's job.
I'm glad to find out that preventing the stock market from going down is a core progressive value, though.
My tuition money is held in a stock fund. Why do you hate higher education?
"no one believes Bush now". Damn.
I was going to go on to say, many of the Wall Street people who caused this problem and who are now begging for a trillion dollars are also strutting around giving us ultimatums and telling us what they will and won't accept. They firmly believe that their interest is our interest, and you apparently believe it, but we don't.
Ditto Walt and Emerson. It's not that we do nothing, but the Democrats need to do better.
Of course, I'm in a govt. job, so this stuff doesn't have the panic factor for me.
We do plan, however, also to destroy your husband's job.
I've always felt his special expertise could be used to talk people down off buildings and such. I bet he'd do a bang-up job getting hostages released, too. Those are state jobs, right?
209: Preventing a second depression, *given that we live in a market-based economy*, is a major progressive goal. Or it damn well should be.
I'll tell you one thing I am tired of, from both the right (McCain was saying it in the debate last week) and the left, is the idea that the single most important thing evah is punishing people who done wrong, no matter what the fucking cost.
shiv will probably not work in the U.S. for eight months if this doesn't get sorted out. Not in the 'oh, I have a secure government job' sense, either, or the 'oh dear, organic pork belly is so expensive' sense. The only reason I'm not in full-out panic is that he can work in Canada, and their economy hasn't crashed yet. Nice long hours, while I sit around back home alone, hoping I can get a job. Unless, of course, he accidentally works away too long and loses his permanent residency here.
I don't know if we need a bailout, because like everyone else, I don't understand it either. But I'm pretty damn pissed off.
B, we have been following this whole thing in incredible, tedious detail. We have written pages and pages of analysis, and argued over a billion different issues. You have no idea what we think, individually or collectively. But hey, we have nothing better to do than to repeat everything we've said for the past two weeks.
John, you go first. I'm more of a closer type, so I'll go last.
It's because you feel so guilty about various things you've done that you feel that way, B.
I'll tell you one thing. Homeownership changes people. I knew that B would be a Republican before long; I just thought it would take longer.
In other news, Joe Zawinul is of Rom (Gypsy) descent. Actually, a related people called the Sinti. He always seemed too cool to be German, though he's not my favorite by any means.
is the idea that the single most important thing evah is punishing people who done wrong, no matter what the fucking cost.
No consequences is why this shit continues to happen. The airlines lobby against basic security measures like reinforced cockpit doors, the when someone flies their planes into buildings, we give them billions to bail them out. The automakers spend decades lobbying against CAFE standards and such, and now we're handing them 25 billion.
And now, the financial sector wants to unload their fucking Ponzi scheme on the taxpayer. Heads DO need to roll, and there needs to be a clear message that if the taxpayers bail your bank out, now the taxpayers own that bank.
Don't repeat yourselves on my account; I wasn't asking you to.
(164: Thanks for mentioning that, Walt! I didn't get to hear the Treasury phone call but I heard about it.)
Anyways, I think Ritholtz's description here is exactly what Paulson was trying to do:
The reason I bring this up today is due to the latest sales pitch from various people, aggressively pushing the bailout plan. The newest spin on the massively expensive plan is "Hey, its a jumbo money maker!"
The spin reminds me of the classic retail stock jockey. The guy has buried his clients in a series of bad trades, bad judgment, poor risk management -- all motivated by his self-interested, commission-generating trades. The only way out of the money losing mess, pitches the broker, is a big, Hail Mary trade.
Sound familiar?
This technique is one of the last ones in the the Shafiroff book. Once an aggressive retail broker is upside down, the plea goes out for raising more money from themarkclient. "Believe me, I hate being under water more than you. I pulled in some favors, this is the trade that makes it all back for us and then some. I could even get in trouble telling you this, so don't mention this to your pals. This is the one -- but I need you to send in more capital so we can recoup the prior trades that went bad on us."
I guess Paulson read the book in the early days of his career. That line of bullshit is identical to what the public is now being fed. A series of OpEds in the Washington Post and the Wall Street Journal (and who knows where else) are all pushing the same nonsensical line: The bailout plan is a big money maker:(More at link)
So that was what Paulson was trying to pull, and the question was, whether the D's in the House would let him. After hearing about the Treasury phone call yesterday and seeing what was in the old Dodd bill AND what was in the new bill, I came back to where I started from: not gonna work, so no point to it.
Paulson, in my opinion, has demonstrated his true colors over the last coupla weeks: he's exclusively focused on the very narrow view of the markets that would be proper to the head of Goldman-Sachs. As a consequence, he let Lehman go down (wrongly) because of old rivalries, then he gave AIG a strange deal because if AIG went down, Goldman-Sachs would've had a big hole blown in its balance sheet. Not to mention the short-selling block.
Then, there's this:
The other dishonest bit is linking the bailout bill to the commercial paper market. As we noted in another post today, that market continues to be under extreme stress. Why? Because the Treasury has done zero, zip, nada to move forward on its promise to backstop money market funds.
I am not making this up. Check the Treasury website. There was an announcement with a general outline of a plan September 21, with a promise of more detail in "coming days". Nothing further has been done. Statements of intent don't get you very far in times like these.
The implosion in the CP market, which is truly dangerous, is completely the result of the Treasury dropping the ball. Is this a bug or a feature? If the Treasury is trying to keep panic up so it can get the bailout bill passed, that is simply heinous. But the lesser charge, that they have neglected this task by virtue of being distracted, is criminal neglect. Take your pick.
So Paulson is showing me that he has no clue as to what the problem actually is. Oh, shit.
Meanwhile, Bernanke's stock in my eyes has been falling all year. Well, it just took a dead cat bounce off of zero (Ian Welsh):
The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
This dovetails with something I've been saying for a long time. In essence Bernanke can print as much money as he wants, so the idea that Hank had to have 700 billion NOW always seemed a bit strange to me. If Congress didn't give Paulson the money, Bernanke could always just make it.Holy shit! They should have started doing that two weeks ago.
DeLong thinks that Bernanke and Paulson are locked-in on the notion of not repeating the mistakes of the Great Depression. To me it looks like the only thing they learned from the Great Depression was to save the banks; outside of that detail, it's Greenspanism all the way.
max
['NO NONONONONONONONONONO...']
They've been pumping out cash for a while now. The $630 billion is just the biggest one. (It was $300 billion last week.) The money market guarantee is supposedly in place as of today.
I think what's going on is that Bernanke is completely in thrall to his theory of the Great Depression (you made that point last week). The crisis has eluded his ability to arrest, which made him vulnerable to being rolled by Paulson. Paulson's limitation is that he's still thinking like an investment banker.
I am not making this up. Check the Treasury website. There was an announcement with a general outline of a plan September 21, with a promise of more detail in "coming days". Nothing further has been done. Statements of intent don't get you very far in times like these.
This was outdated 12 hours after it was written.
I'll tell you one thing I am tired of, from both the right (McCain was saying it in the debate last week) and the left, is the idea that the single most important thing evah is punishing people who done wrong, no matter what the fucking cost.
It's all well and good to be tired of this, but I haven't seen it offered up in any sort of serious manner.
There has been a lot of opposition of the form "why should we believe this bill will help anything anyway, and why the hell should we give $700B to people who up until very recently were making and spending money hand over fist?"
Which, frankly, is a very good question. It would be better for the country if we could trust our government enough to go along with the Treasury Secretary when he says "we need $700B and we need it now and you have to trust us." But we don't.
That's the unpleasant reality, and one that the people in charge need to face up to.
Paulson's limitation is that he's still thinking like an investment banker.
If only he were thinking more like a trader at the moment.
Dirtcheap assets in a panic? Great, lemme take them off your hands with my deep pockets.
Oh... That leaves you broke? Well... I suppose I could get you some equity as well. How about I buy a 20% stake at a 15% discount to last week's market close?
I think as a policy-maker the only idea he has is the "stick everything in a bad bank" idea. This comes across in that conference call, where Treasury officials make it clear they don't want to inconvenience anyone too much that needs to dump low-grade debt on the government.
Personally, I'm with the Krugman best-to-hold-your-nose-and-vote-for-this, but this
"I'll tell you one thing I am tired of, from both the right (McCain was saying it in the debate last week) and the left, is the idea that the single most important thing evah is punishing people who done wrong, no matter what the fucking cost."
is lame and totally unfair to most liberal opponents of the bailout, who think that (a) its a bad deal and (b) won't work and (c) it's a bad deal and won't work because it's largely designed to transfer wealth to banks by buying assets at overvalued prices. That's a serious argument, and is motivated by much more than spite. If everyone agreed that the $700b would save the economy but might let a few wrongdoers off the hook, you wouldn't have the kind of opposition you do have.
Because if we're lucky, *a* bill will get passed this week. If we're not, it won't. And if it doesn't, a lot of people are going to suffer, a hell of a lot.
How will passing something this week make the difference in whether or how much people will suffer?
231 -- I'm no economist, but I think the theory goes something like this: there's a real risk of a panic and a run on the banks. Once there's a real panic, it's hard to get people to put money back into circulation once they've decided to stuff it under the mattress. So delay risks turning a big problem that can barely be managed into total and complete meltdown.
The question for the bailout, for me, isn't whether something needs to be done urgently, it's whether the cure is worse than the disease.
Now is not the time to finagle endlessly about whether the details in the original, amended or amended amended plans were better or worse, now is the time to point out that any plan that boils down to "we need 700 billion dollars NOW to shove into failing banks so we can get stuck with their risks" is awful. There is no crisis, just an enginered panic designed to make Wall Street more money, disaster capitalism at its most transparant.
re: 221
There are lots of famous Sinti musicians. Most of the 'gypsy jazz' players come from the Sinti community. Django, Biréli Lagrène, the awesome Stochelo Rosenberg, etc.
http://uk.youtube.com/watch?v=gZey9fRiH4w&feature=related
Worth watching all the way through. Most of the big name Sinti guitarists are on this clip.
Thanks for that clip, ttaM. What amazing playing.
232: I'm wondering if that's the kind of scenario B. sees playing out. I haven't heard anything from anyone I trust suggesting that's the likely consequence of not rushing a bill through this week.
This was outdated 12 hours after it was written.
I know; it just points up how slow they are.
They've been pumping out cash for a while now. The $630 billion is just the biggest one. (It was $300 billion last week.) The money market guarantee is supposedly in place as of today.
Well, I thought the other interventions were sterilized interventions run through the backdoor of the Treasury. This sounded like they were actually going to add to the monetary base, but evidently not.
I think what's going on is that Bernanke is completely in thrall to his theory of the Great Depression (you made that point last week).
Well, yes, I think he is in thrall to it, but what I realized is that it's a really narrow theory. Basically everything was fine in the stock market until stocks started going down, and then the banks took a hit, so what we need to do is to prop up the stock market and save the banks and everything will be fine.
No room in the concept for asset bubbles, or overleveraging, or fiscal policy, or even the utility of inflation.
As was so pithily summarized by George Will: 'If government makes all the right decisions, the economy will expand forever.' Also, if pigs had wings they could fly out of my ass.
The crisis has eluded his ability to arrest, which made him vulnerable to being rolled by Paulson. Paulson's limitation is that he's still thinking like an investment banker.
Ayup.
If only he were thinking more like a trader at the moment. Dirtcheap assets in a panic? Great, lemme take them off your hands with my deep pockets.
Damn skippy! I mean, if we need to rename it to Paulson's Federal Reserve of Goldman-Sachs to get the man to get off the stick that'd be fine.
This is the way banking should be done!
max
['Hoist the Jolly Roger! I'm gonna buy all them sonsofbitches! Make some money!']
re: 236
There's a lot of great stuff out there on that vein. There's a fairly big 'scene'. Some of it is very derivative [but technically accomplished] playing but there are some people who make great joyous fun music in that style.
On the other hand, this is me, jamming on that same tune with some other people.
http://www.mcgrattan.f2s.com/lesyeuxnoirs.m4v
I'm mostly comping for the other guy, but get a wee solo in the middle. [It turned out we knew the tune in different keys and had to make some last minute changes, so it's not as slick as it could be, plus the bass player had never heard of the tune at all].
BitchPhD is right. It's truly bizarre that just as the princes of capital discover that old man Keynes didn't come up the Thames on his bike (no atheists in foxholes, as Max put it), the consensus on the left seems to be that everyone needs a good stiff dose of Thatcherism to put manners on them. Liquidate stocks, liquidate real estate, liquidate labour, liquidate the farmers! as Secretary Mellon put it.
And somehow the great shutdown will not affect anyone outside the financial sector (hey, who uses credit, saves, or invests? nobody!). You can't sensibly argue that the government should stop A&C Widgets Inc from going bust, in order to protect decent hardworking widgetmakers, but should let Lehman Brothers go because its decent, hardworking sysadmins, back office clerks, call centre phone jockeys etc have insufficient aesthetic/nostalgic lefty points. Which is what this comes down to.
You'll note that the House Republicans who voted against it did so for purely crazy-arsed rightwing bollocks reasons - it's teh socialism! it's "Chavez-esque"! community organisers! can't we call forward the Free Market Pony Brigades instead?
Teachable moment: when the economy goes to shit, THE RIGHT IS NOT YOUR FRIEND. They will do FUCK ALL. I don't see this as a negative - your lot should hang it round their neck.
Teachable moment: when the economy goes to shit, THE RIGHT IS NOT YOUR FRIEND.
Shouldn't this just be, "the right is not your friend, full stop"?
The Irish Government has done its own bailout for Irish banks, following on some recent plummeting of share prices. There are about 4 of them all in the same vulnerable position so instead of nationalising one or two, they've announced (a) unlimited deposit guarantee for two years on all deposits in those banks (just the previous week they guaranteed up to 100,000) (b) "lending" guarantee covering the borrowings those banks make from other financial institutions. Foreign-owned banks operating here don't get this deal, although their depositers are covered up to 100,000.
This plan has been valued at €400 billion or €500 billion, depending on who you believe. Considering the size of the Irish economy this is way bigger than the US proposed bailout, but of course no actual money has been shelled out as yet and presumably the hope is that it won't need to be. The banks are to pay for this privilege, price not yet determined.
It is an interesting data point that the Wachovia deal got done when everyone fully expected that the bailout was going to sail through. Apparently the magic bailout was too late to save them.
Teachable moment: when the economy goes to shit, THE RIGHT IS NOT YOUR FRIEND.
I envision this as a children's book:
When the economy goes to shit, THE RIGHT IS NOT YOUR FRIEND.When your sweater doesn't fit, THE RIGHT IS NOT YOUR FRIEND
When Osama's still at large, THE RIGHT IS NOT YOUR FRIEND
If you have a dog named Marge, THE RIGHT IS NOT YOUR FRIEND.
Every day and hour, forever till the end, dear children please remember: THE RIGHT IS NOT YOUR FRIEND
With better rhymes, of course, and pictures.
re: 244
Pictures like:
http://specullector.files.wordpress.com/2008/08/33.jpg
BG's bday was yesterday???
Happy Birthday!!
In essence Bernanke can print as much money as he wants, so the idea that Hank had to have 700 billion NOW always seemed a bit strange to me.
That's not true. Bernanke controls the general money supply by buying and selling T-bills owned by the Federal Reserve. (He can also lend T-bills directly in exchange for assets, although that is pushing statutory authority and until recently the Fed has been reluctant to do it without Congressional authorization). But he controls a finite stock of assets, and he can't create new T-bills without new borrowing authority from Congress. The $700 billion request may be related to limitations in the size of the current Fed asset stock.
244:Exactly. Exactly.
Ok, around the blogs again, voices pro & con, LIBOR going nuts, the Stiglitz article linked in the comments at Yggles. Stiglitz says it won't work. Krugman says it may help a lttle and won't cost a cent and will have zero zero negative consequences.
What I am scared of is that the baolout won't work and we will go into GD II without any money or means of obtaining any. That is a possiility, no the Fed cannot print infinitely at some point interest rates will rise, stifling growth and further decreasing tax revenues etc etc.
And this is what the plutocratic right want, have wanted, and have planned & executed for 35 years.
A flat broke Federal government during a depression. A gov't that simply doesn't have the means to attempt a FDR-style recovery.
You want a horror? A Great Depression without CCC, WPA, FDIC,, SS, Medicare, Medicaid, revenue-sharing, SEC, unemployment insurance...
DeLong, for all his talk about banning the Republican Party, still can't imagine that his friends Bernanke & Paulson would seek that. He is wrong.
Ok, Paul Krugman says somewhere down the line we will have to drastically raise taxes, and if we can't then GD anyway.
Paul, if we can't get past the Repubs & Blue Dogs at that point, you have given Goldman Sachs the money we needed to feed people.
249: US debt to GDP is 70%. Japan's is 200%. The government is nowhere near the limits of its ability to borrow.
i've read wall street lost yesterday a trillion, so who wins all that then? where all the money goes, i wonder
if nobody wins, then that was maybe just a factitious trillion something like 'dead souls' and it all maybe needed some like defaulting anyway, no? and the stocks going down so much, people are speculating stocks as usually, right?
maybe i'm missing my chance to become a millionaire
though what i understand in all this of course
Walt is absolutely right. If you see the economy go down, the government should and will borrow massively to fund infrastructure and social programs.
McCain, with his going on about the horrible waste of $5 million programs to fund bear genetics, doesn't seem to get this at all. He actually seems to believe the Federal deficit is a major threat tot he economy.
And that earmarks are the cause of the federal debt.
As I keep saying, it's starting to seem that the soundbites used in electioneering have become the actual philosophy and plan of action of the Republican Party. The grownups are all gone. Based on interviews, this seems especially true of McCain, which explains how he could choose Palin, of whom it is even more true.
Paul, if we can't get past the Repubs & Blue Dogs at that point, you have given Goldman Sachs the money we needed to feed people.
We don't have that money anyway. the gov't is going to be issuing bonds to pay for this. Where's the money going to come from? China and the Middle East. They'll pay to protect their current exposure by shoring up the banking system, but not to feed people. If the banks go down, they'll be needing that money to feed their own.
the consensus on the left seems to be that everyone needs a good stiff dose of Thatcherism to put manners on them
I don't think this is the consensus on the left (who is saying this?), and definitely not around here as far as I can tell. The consensus appears to me to be more weighted toward putting more conditions on the bailout, including 1) stricter oversight by Congress; 2) equity stakes and exec comp limits on firms that take the bailout (in part to deter some of them for asking for handouts; and 3) stronger requirements for Fannie & Freddie to renegotiate mortgages.
There are those of us who want to add more, like infrastructure projects.
read,
i've read wall street lost yesterday a trillion, so who wins all that then?
I'll give you my layman's view.
When stocks go down or up in value the losses or gains are not real at that time. If you own a share and it goes down or up the loss or gain is 'potential' and will not become real until you sell the stock.
So at the moment nobody with shares has actually lost anything real. Thus nobody has won anything either.
What the stock market going down does show is that, at the moment, the world of potential buyers have said they value other things more than the stock market. The relative value of things in the world has shifted slightly and the relative value of stocks has declined. The potential 'winners' would be the owners of the other things - real estate, gold, possibly other stocks.
The government is nowhere near the limits of its ability to borrow.
The US Gov't and the Fed is not the one that gets to set that limit.
Japan was, is, and is determined to stay a creditor nation. The US is a net debtor nation. It makes a difference.
Could the Fed sell its bonds domestically if not overseas? Probably not without a wartime economy.
Other ways GD II will not be your greatgrandparents depression
1) A strong experienced committed multifaceted economic Left, here & abroad.
2) We pumped our own oil
3) We grew our own food.
251:Anyway, does that 70% number include private & corporate debt?
Or won't that matter when the Fed starts printing 10s of trillions of dollars in T-bills?
Anyway, does that 70% number include private & corporate debt?
No. It's well over 100% when household and corporate debt are included.
oh, thanks, Tripp, how nice of you
i know that i shouldn't and maybe wouldn't worry about all this unreal things
there is a proverb 'the cow is at peace until the axe's brought down', just saying
Could the Fed sell its bonds domestically if not overseas? Probably not without a wartime economy.
You're kidding right? Our net external debt is only about 17% of GDP. A whole lot of our Treasury debt is held domestically. Those foreign reserves held by China, Japan and the major petrostates only add up all together to a few trillion (probably $5 trillion would be a decent ballpark), and a good chunk of it is held in Euros as well as dollars. With the amount of people shifting money out of equities and high-yield securities in the US, there's high demand for low-risk government paper. Hell, it's basically what our giant money market funds are running on now that commercial paper markets are near dead.
Bond yields may rise if the government starts to loan more money, but it would still hardly be bank-busting compared to past rates. Bonds have had such a massive bull market in the past 25 years that people are accepting 3.75% nominal yields on 10-year investments. There's demand.
read,
Not to be pedantic but I think that should be 'the cow is at peace and then the axe is brought down.'
But worry is a waste of energy. See, then do, then see again.
Errr... "loan" should be "borrow"
Po-Mo, do you have any insight into the corporate paper situation? I understand why no one would want to buy corporate paper put out by financials, but why would it dry up for industrials?
Data point: A neighbor selling a house just cut the asking price 18%. I get the impression that nobody is paying the asking price in my area.
I get the impression that nobody is paying the asking price in my area.
I'd be surprised if anyone is most places. There seems to be general agreement that real estate is overpriced in most of the country, the disagreement is how much. I've heard a couple real estate guys trying to decide if the average drop would be 20% or closer to 50%.
262:Well, hell if it is all that cool & easy, I vote to let Paulson have 10 Trillion instead of 1. No difficulties, no consequences.
Right?
265: Unfortunately no, I don't, but the funding situation looks pretty wild. Mid- to large-cap companies are issuing press releases to announce loan facilities of $600 million.
Has the commercial paper market for industrials really dried up all that much? I thought it just never really got that big in the first place. I'd imagine anyone building major plant assets would rather lock up lots of funding for years at a time, but the companies I covered were all healthcare and had no debt, so take that with a grain of salt. Also, frequent paper auctions seem like a royal pain in the ass for a company whose core competency isn't selling debt. I suppose that some companies may have switched to issuing short-term paper since they could lock in long-term rates through a cheap swap...
Huh, I'll ask around a bit and let you know, actually.
We've talked our sellers down by a little over 20%, and I'm now wondering, with the economy going to shit, if we might not should just back out of this and go for the houses that are now in tthe $350 range, which is almost a 50% drop from where those houses would've been a couple years ago.
265: I read on bloomberg but can't quickly locate something that said the CP market hasn't dried up for industrials. The spread between rates is something over 1% (low 2s to mid 3s).
Didn't a huge amount of debt switch over to using short-term commercial paper type things to try to take advantage of interest rate fluctuations? Wasn't this the problem with the municipal bond market a couple of months ago -- loans to people like the NY Port Authority were actually being financed through short term paper? In some cases the entities themselves were actually going to auction rate securities with very short-term turnover? Then when those markets froze up the municipalities were having to pay ridiculous interest rates for long-term projects with great collateral?
270: My sense is that real estate hasn't finished bleeding out yet, but of course you're going to have a hard time pinning down `the bottom'. From the point of view of a home though, I'd say you're better off aiming for what will make you happy rather than trying to figure out what the stable value will be.
In other words, if you back out, is it because you were really settling on this place and thing you'll be able to find the `right' place in this market, or is it for abstract ideas of a better deal out there somewhere?
272 to 269. Also, re:
frequent paper auctions seem like a royal pain in the ass for a company whose core competency isn't selling debt
intermediaries like underwriters, banks, etc. handle this part and just promise the issuer lower interest rates.
Also, re 270, B was incredibly either fortunate or wise that she didn't buy a house when she first moved to LA.
271: Okay, that makes sense.
269: My impression, which is even less well-informed than my impressions usually are, was that large industrial firms with lots of fixed assets used corporate paper for short-term needs. A company like GM doesn't have positive cash flow every day even when things are going well.
I've discovered that "corporate paper" is a terrible search string to use in Google. I did learn, though, that Microsoft announced they're using corporate paper to help pay for their latest stock buyback.
I'm feeling bad for the guy who bought my house in D.C. at the top of the market, or pretty close. Though values in D.C. won't fall as far as in other places because the federal government is a stable employer.
Speaking of which, I'm looking forward to hundreds of Republicans clearing out in December and January without being able to cash in on the bubble.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAHCiRX_cqUoHere is the article I was thinking of.
We've talked our sellers down by a little over 20%, and I'm now wondering, with the economy going to shit, if we might not should just back out of this and go for the houses that are now in tthe $350 range, which is almost a 50% drop from where those houses would've been a couple years ago.
Can you afford a $350k house? The fact that it would have cost $700k a couple years ago is interesting, but what it might cost in a couple years when you might suddenly have to move is probably more important...
263 'until the axe is about to be brought down', actually
another proverb goes 'shunal ixdvel shulam bolno'
which means
'let your greed prevail, you'll end up becoming shulam - devil' meaning maybe something like you gain somewhere you'll lose somewhere else and vice versa
Then when those markets froze up the municipalities were having to pay ridiculous interest rates for long-term projects with great collateral
Oh yeah, I remember the muni implied-yield spread blowing up a few months ago, but I don't think I'd ever heard what supposedly caused it. Do you know what precluded those long-term projects that were funding themselves with auction-rate securities from shifting to long-term bond issuance when the market got hit? Was it just that the auction-rate securities needed to get turned over much faster than they could plan and enact a sizable bond issuance, forcing local governments to take a few months at punitive rates?
275: Yeah, it wouldn't surprise me if they do that. Commercial paper really is the best way to fund a fair number of short-term needs, but I still thought that they were relatively small issuers compared to financial firms. Much less leverage (even bottlers and steel plants only run about 10-times leveraged versus 20-25 for banks), and a smaller percent of liabilities in the form of commercial paper. So it's mostly that, when the financial commercial paper market freezes up, there's not much else to go around. Personally, I'm amazed that major industrials are having to pay much of a spread over treasuries on that short-term debt given the amount of demand money market funds must have for whatever they issue.
I'm now wondering, with the economy going to shit, if we might not should just back out of this and go for the houses that are now in tthe $350 range, which is almost a 50% drop from where those houses would've been a couple years ago.
But if you back out after your offer is accepted, doesn't that guarantee that you'll lose some lump of money that you put down as a payment? This sounds like a bird-in-the-hand-two-birds-in-the-bush type situation.
I heard it was called commercial paper.
My incredibly naive question is this:
If using short term (commercial paper) loans makes businesses slightly more efficient but also vulnerable to , um, what is happening now, wouldn't it be prudent to switch back to the old way?
I mean OK, commercial paper is now the oxygen of businesses but why does it have to stay that way?
Getting the economy going and money flowing again is one thing but after that shouldn't we ask businesses to rely less on commercial paper to give protection against freeze-ups even though they might pay a cost in efficiency?
Or am I way too stupid and back-to-basics to understand why loans are BAD for regular folks but super-duper and ESSENTIAL for businesses.
B was incredibly either fortunate or wise that she didn't buy a house when she first moved to LA
A little bit of both. We couldn't afford the prices at the time, and neither of us is enough of a risk-taker to buy when we can't afford to.
278: We can, easily. More to the point, if the economy tanks, we might be among the very few who can borrow, since we're talking VA loans, backed by the government. No mortgage insurance. And Mr. B. works for the feds, so again, if the economy goes belly-up, he's about as securely employed as he ca get.
281: We might lose our earnest money, yes, which would really suck and we'd have to think hard. OTOH, $5k out the window in order to save $100k (plus interest over time)? It would be stupid not to.
Plus, I expect the assessment, which should happen this week, to exceed the $5k of repairs that the sellers have agreed to as their maximum expenditure. It's even possible that the assessment will say the house isn't worth the price we've currently agreed on, given what's happening with prices around here. If either of those things happen, then we're not "backing out"; we're just declining to renegotiate, and we get our earnest money back.
This has been another chapter in "The Long Boring Story of B's Adventures in Real Estate."
If the $5k is real and the $100k speculative, it's not so obvious.
285: Eh, I've seen houses on the market that I would buy for asking prices $100k less than what we're talking about right now, so. Obviously I'm not going to walk away from the $5k until and unless I've been inside a couple of those houses and am ready to make another offer.
286: Fair enough. Good luck with all of this, I know it's been a long haul!
For the record, my fear is:
If/when things go to shit (as in, the entire system freezes up; I'll assume that there's a consensus that this is at least a possibility right now, as I, in my ignorance, have a pretty good feel for how it could come to pass), they can't be brought back without a GD-style period of years of misery. Remember, the New Deal didn't end the Depression in a timely fashion, and things didn't really get better until the ultra-Keynesian input of WW2.
IOW, if we miss our intervention window, no amount of money thrown at the problem will solve it. Stitch in time, barndoors, etc.
Why do I think that we may be near the window closing? Well, specifically, TED and LIBOR are in, if not literally unprecedented territory, incredibly unusual territory. Banks are so afraid to lend to each other that they're forced into 3 month Treasuries that are paying effectively 0 interest. My fears have almost nothing to do with the stock market or with the fate of any given bank. I see a situation with a completely real underlying problem (big shitpile) that won't/can't go away on its own; where enough failures have already occurred that everyone is nervous and almost everyone is weakened; and where no one has faith that SOP from the gov't can stabilize things.
So, AFAICT, there's no reason to believe that we have time; no more reason to believe that we have a month, or 6, than to believe that we have days. Of course we may be fine for months; shit, a big Obama win could settle everyone down considerably, and we could be able to handle things through relatively normal means. But we don't know. And if things go to shit tomorrow - that's it. Genie doesn't go back in his bottle. $700B won't be enough anymore. And the position held by the majority of people I loathe, and a minority of people I trust, will have won out.
To repeat myself a bit: I'm not convinced that another 3 days or a week will get us a better bill, due to Dem fecklessness + R evilness; but I'm entirely convinced that 3 days or a week is enough time for disaster to strike.
283
Putting aside any obligation you may have to the sellers, that house never seemed like a particularly good deal to me. It didn't sound like you were getting enough of a discount for the lousy condition.
On the other hand you have to consider that if you start over you will lose all the time you have put into this deal (as well as any unrecoverable cash outlays).
I never had any idea what "commercial paper" meant before. Nobody in the media ever had an incentive to explain things to people or talk about financial things to people who don't already know all about financial things.
But now it's become clear from several articles that "buying commercial paper from IBM" basically just means "loaning money to IBM". In the financial world, buying something from somebody is synonymous with becoming a creditor to them. And "going into debt" is another way of saying "buying things". So if you go into debt temporarily by borrowing $50 from your friend Joe, you could also look at it another way and say you sold him some short-term bonds. That's the way I look at it anyway.
"Commercial paper" is a weird fucking term. I have no idea where it came from. I picture a paper mill producing big piles of paper that say "IBM $1" on them.
JRoth, let's say you knew -- knew with a metaphysical certainty -- that Wall Street knew that you and lots of other people felt that way. What do you think they would do? How would they act?
Two weeks ago, I was thinking "What is this "commercial paper" nonsense? Who cares if people temporarily don't want to buy credit default swaps or commercial paper or other phantasmagorical concepts?"
If it was presented as "banks need to be able to loan each other money" instead of "banks need to be able to sell each other nonexistent entities" it would be a more pleasing concept. Also, if it's not actually a bailout (that is, handing out money in exchange for nothing) but rather an attempt to make credit more possible by temporarily increasing the amount of liquidity everywhere, why use the word "bailout"?
Little known fact: it's permissible to use the same verb three times in a sentence, as long as you italicize the middle usage.
283: We're counting on the assessment to finally prove to the sellers that they need to discount for the condition, yep.
Re. lost time, whatevs. Sunk costs.
294: No, it really is a bailout. The Treasury plans on buying assets off banks for more than they're worth. The government is already providing liquidity -- banks can borrow directly from the Fed, which they are.
but I'm entirely convinced that 3 days or a week is enough time for disaster to strike.
I'm not either, JRoth. Could crash tomorrow.
But:
1) I am told, by for instance Stiglitz & Roubini, that this plan won't work, and in fact might make things worse. I am told otherwise by etc
2) I have not yet been convinced that the failure of this plan would be costfree by the proponents.
This to me is exactly like Iraq. Exactly. Yes, we had only the President we had and Rumsfeld etc, so I did not really have a good plan to back.
But that didn't mean I really had to support Bush's plan.
If you're really happy to walk away from this house (that is, you're not desperate to just be done with the whole thing), using the discounting issue as a way to get out of it sounds like a fine idea. It seems really likely that after the last couple of weeks of all this stuff going on, that you'll be able to find either more house for the same money, or, more sensibly, as much house for a lot less.
If I were a Republican, my Hog Farm plan would be mainstream.
James Galbraith, in his article in support yesterday, had what was either a dismissive or intriguing little line toward the beginning.
Something along the lines of:"If you don't trust Paulson, then this conversation is over."
Some "experts" were "very disappointed" at the complete enduring tragic catastrophe Bush & Rumsfeld created in Iraq. They can do it again.
For me, the conversation is over.
What do you think they would do? How would they act?
Umm, they'd all get together and rationally decide not to panic, since a bailout is inevitable?
I don't think that Wall St is faking this situation to fleece taxpayers. And given that there's a real, underlying problem, I don't think that any amount of cynical self-dealing on the part of Wall St can protect themselves or us. Since no amount of confidence can replace the trillions that are actually gone as a result of the mortgage meltdown, no one can guarantee any particular result.
I guess the one saving grace is that, AFAICT, all of the most vulnerable entities are already gone: the 5 big i-banks plus AIG, the most vulnerable insurer. So maybe all of the big guys whose collapse was inevitable are already collapsed, and we're already in the aftermath - the system-wide freeze I talked about in 288 is now less likely than it was 9 days ago. Since no amount of complaining here will change things, I'll just console myself with that thought.
PS - My Congressman is a labor liberal Dem - his vote is tracking my leanings. If Pelosi has the guts for a liberal bailout, he'll be onboard. He wouldn't have voted for straight-up Paulson
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My own personal financial crisis (minor, but damned annoying): my first paycheck at my new job mysteriously failed to materialize when everyone else's did, and the payroll office has a policy of not answering phone calls but instead replying to messages at their own convenience. Grrrr.
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If using short term (commercial paper) loans makes businesses slightly more efficient but also vulnerable to , um, what is happening now, wouldn't it be prudent to switch back to the old way?I mean OK, commercial paper is now the oxygen of businesses but why does it have to stay that way?
This is how we structure our credit markets now. The institutions who run our credit markets are central to the economy, loans must flow. In the short term, we have institutional lock-in, basically. Government and the public are at the mercy of the people who perform key economic tasks.
However, after the immediate rescue plan I think there will be extensive re-regulation of the markets. That may return things to the "old way", although I wouldn't count on it.
If we had a truly strong radical left -- people who didn't take existing institutional arrangements as the default -- there would be more discussion of routing around the damage and setting up a new credit system. Say, capitalizing a new set of banks to just take over the task of providing credit directly, instead of rescuing the current system. You could certainly do that with $700 billion. Regulate them as public utilities.
The problem with that is that A) it's hard to change horses in midstream, and B) we think private markets do a better job of allocating capital (although now we're wondering).
But now it's become clear from several articles that "buying commercial paper from IBM" basically just means "loaning money to IBM".
Well yeah, but in particular it's a very low-risk loan. That's why money market funds, which exclusively invest in ultra-short-term debt, are so safe and have only broken the buck (i.e. lost money over a month) twice in the history of the industry. Generally, it's hard for a seemingly good company to go bankrupt within a month. That's part of why AIG scared the crap out of everyone, since its death spiral from initial market price drops through announcements of assets losses to penury took only about a week.
That's why the commercial paper market got so severely jostled, because beforehand people just hadn't appreciated how well financial companies could hide their imminent insolvency or how fast it could happen. They'd figured this stuff was nearly riskless, but when a AA-rated company (that actually was considered BB or BBB by the market anyway) announces its on its last legs, everyone loses their shit and refuses to buy any more of the stuff since it's better to be in government bonds getting little return than to take the risk of losing your job by accidentally buying seemingly-safe debt from the next sudden kablooie.
Fire Paulson & Bernanke, put Volcker & Krugman in their places. Or we can talk names. Lame-duck Bush, with the fate of the world at stake, could give us something, if it wasn't a scam.
Then we can talk polcy.
Data point: President Bush today tells the world:
But the reality is that we are in an urgent situation, and the consequences will grow worse each day if we do not act.
I tried hard, but I was unable to suppress my feeling of deja vu.
They're not faking the situation. Banks really have stopped lending to each other. But they're not acting scared -- they're acting entitled. The more I hear market participants talk, the less I become convinced that we're out of time.
Umm, they'd all get together and rationally decide not to panic, since a bailout is inevitable?
Why do you think that? Even if a bailout is inevitable, the more panic they generate the better the terms they get. Paulson announced that the end was nigh, and his solution was not an immediate capital infusion into banks, or an increase in deposit insurance, or an offer to guarantee certain kinds of debt. It was a completely experimental plan to buy assets the banks didn't want anymore at a premium, with no oversight, using unknown mechanisms designed on the fly. Is that the plan you would come up with to stabilize the credit market?
So maybe all of the big guys whose collapse was inevitable are already collapsed, and we're already in the aftermath
Eh, I wouldn't say that. The crisis is only just starting in Europe, and they're probably going to face even worse mortgage write-downs than us.
Also, Goldman and Morgan Stanley never really had much toxic debt on their books, they were just very vulnerable to the run on their equity at the same time as the short-term lending markets froze up. They were probably less vulnerable than retail banks with major exposure to the regions that had the biggest value run-ups. WaMu failed because of the assets they held. Wachovia was a little from column A (bad assets) and a little from column B (no way to raise new equity). I'd be surprised if there aren't more retail banks that are poised to fold once they find out more about how much their mortgage assets are actually worth.
The institutions who run our credit markets are central to the economy, loans must flow.
Not a small part of that is caused by tax policy. Retained earnings (Cash) is taxed. Loan proceeds are not. So if I need a new 10 widget makers, I issue commercial paper. If I need to rely on my profits, I can only buy seven, because I must pay for them in after tax dollars.
We are in dangerous waters to be sure, but I think that a good bailout is worth waiting for. But the markets have to believe one is coming.
Oh, and B, let the deal die. Start looking for a better house.
I think the US is running out of retail banks to lose. But agreed, the biggest danger now is to foreign banks.
Small regionals that held their own portfolio should be ok.
Not a small part of that is caused by tax policy.
Most of this entire mess can be laid at the feet of policy, it seems. I can understand that it seem too big a problem to talk about at the same time as figuring out solutions to the immediate symptoms, but any legislative approach without at least a nod to the fact that the real work remains to be done regardless is a little worrying. It's a bit too easy to imagine a stop-gap measure like all of those tabled working just enough for the system to lurch to the next crisis. If the markets pick up in response and everyone feels it ok to ignore them for a bit, we're really screwed.
I think the US is running out of retail banks to lose.
One thing it would be hard to do here is run out of retail banks. There are a few thousand, are there not? Granted, a lot of them are tiny.
Most of this entire mess can be laid at the feet of policy, it seems
I for one, am not blaming this mess on the changes to CRA and loosening of rules at the GSEs, despite the fact that Franklin Raines was a thief. The market wanted this product. Supposedly safe mortgage backed securities that paid higher than T bills while being only "slightly" riskier. The ibanks could not keep them in stock, asking for more and more. The mortgage brokers and banks filled that demand with increasingly risky loans, but still with the implied Federal government backstop. The incredible demand eventually begat the horror stories we are familiar with, but it didn't start there. The increased buyer pool created by the demand for yield forced real estate markets higher. All this crap about affordable housing when there is 20% year on year appreciation. How the hell is that affordable. Well, it's affordable if you don't pay the lender.
So how do you unscrew this pooch? I think it starts with a massive mortgage cramdown. Hell, for $700 billion you could bring everybody current on their mortgage (just kidding).
303
... because beforehand people just hadn't appreciated how well financial companies could hide their imminent insolvency ...
Speaking of which, what do people think of this claim by reader Dan that when outsiders looked at Lehman's books after the bankruptcy there was $110B missing? Is this true?
adding to 303 and 307: the whole point of a bank run is that seemingly stable institutions can quickly be wiped out. There are the conditions for a modern-style bank run. Extreme case: if everyone tries to sell their private securities and go into Treasuries at once, the value of the private securities goes to zero and everybody is wiped out.
Another interesting way to look at it is that all the credit derivative securities were a fiat currency not underpinned by any government, and people have lost faith in that currency. Now the currency is worthless. Government steps in to both give them some value and get them off the market.
I think the US is running out of retail banks to lose.
I've never been happier to belong to a well-managed credit union.
314: TLL, thank you for being a rational and thoughtful conservative and sparing us the nonsense about how the Democratic GSEs and the black people caused this. Good post. Have you seen Luigi Zingales' piece , he basically agrees with you on the cram down.
316
... Now the currency is worthless. ...
Not exactly, it just isn't liquid. It still is backed by some (highly uncertain) payment streams.
However, on cram downs -- I wonder if helping with the mortgages really would restore value to all of these collateralized debt instruments, I have a vague sense that some are really unstable in an environment where RE prices are not increasing. I wonder if this is why Paulson/Bernanke are so eager to get them off the market, although they couldn't say so because this would amount to admitting that many are worthless.
316: different senses of worthless -- an illiquid currency is no longer functional as a currency.
I've never been happier to belong to a well-managed credit union.
That, too. I gave up on banks ages ago.
320
However, on cram downs -- I wonder if helping with the mortgages really would restore value to all of these collateralized debt instruments,
A cram down means forgiving some portion of a mortgage. In general this does not help the people who own the mortgages as they are now certain not to be paid in full.
317
I've never been happier to belong to a well-managed credit union.
How do you know your credit union is well managed?
In general this does not help the people who own the mortgages as they are now certain not to be paid in full.
Not inherently a bad thing --- there are many ways people will not be paid in full, some worse (globally) than others.
Interesting breakdown by the NYT showing how safe each seat is among the "no" voters. Not that correlation is causation, but interesting.
I for one, am not blaming this mess on the changes to CRA
Good, because that's inane. Effective deregulation does have some role to play, though.
All this crap about affordable housing when there is 20% year on year appreciation.
How else do you think we'd manage the sort of wealth redistribution we've seen in the last decades? Housing markets were just the most convenient vector.
325
Not inherently a bad thing --- there are many ways people will not be paid in full, some worse (globally) than others.
Banks hold a lot of mortgages. If they are not paid the banks will fail which is pretty bad globally.
wonder if helping with the mortgages really would restore value to all of these collateralized debt instruments
Certainly not all. But if the government does a debt for equity swap, plus a cramdown, those who can pay will, and we will have a better sense of the value of the income streams of the newly reconfigured cdos. Some people will lose their homes, to be sure, and some banks will fail. But let's bleed a lot of the air out of the system.
they are now certain not to be paid in full.
Half a loaf is better than none, James. The mortgage holder (or partial mortgage holder) is not going to be fully paid back in any scenario.
315: While this stuff really does confuse the hell out of me, the post you link to appears to be talking about the same issue as this Crooked Timber post speculating on how Lehman's senior debt lost so much value so fast.
320: My main problem with helping out the mortgages themselves is that it would give the greatest reward to the investors who bought up the pools with most overpriced mortgage assets and worst underwriting. I'd rather see secondary legislation passed that basically gives a foreclosed homeowner first dibs on staying in their house with a newly cut-down mortgage reflecting current market prices. Sure, it would reward homebuyers who made the worst decisions in the past few years, but I still think that banks are ultimately more to blame for horrendous homebuying decisions than the customers because while customers are supposed to be overoptimistic about their own prospects, the banks are supposed to use their risk models, financial savvy, and objective viewpoint to produce a much more realistic picture of whether a given family can actually afford a specific mortgage.
332: Waldmann's theory is highly ex recto. You would have to believe that a bankruptcy court would accept the CDS contract as valid.
Banks hold a lot of mortgages. If they are not paid the banks will fail which is pretty bad globally.
No, if they aren't paid enough of them they might fail. They obviously can suck up some loss without failing. This may well be less of a loss than if they foreclose on the same houses and auction in a bad market.
it would give the greatest reward to the investors who bought up the pools with most overpriced mortgage assets and worst underwriting
This is a problem. It could be avoided; avoid touching investment properties, for example.
I don't know enough to personally have an opinion on what's the best approach. It's not clear that some component of direct action on the mortgages is the wrong thing, though.
As for Zingales's plan, it's an interesting one that I think I've mentioned before (though not under his name). It certainly would be the best from a "moral hazard" point of view, since bondholders would get to escape the pain they deserve under almost any other recapitalization scenario. But two quick points:
1) I believe his plan wasn't meant to do anything to the mortgages or the mortgage-backed securities. He just suggested converting enough bank debt to equity that there is no longer any question of whether the banks are solvent. Once that's cleared up, banks can start taking on riskier assets (i.e. lending) to increase income, equity holders no longer need to worry about future dilution, and everyone can just wait out the mortgage-backed assets to see what the final cash flows are.
2) I think the major issue with his plan is that debtholders have managed to connect themselves far too thoroughly with the financial system through the proliferation of credit derivatives (especially credit default swaps). What to do about swaps based upon bank debt is the really gruesome problem facing the government if they try to do a forced debt-to-equity conversion.
If you force the swap sellers to pay up like it was a default, you'll find a lot of insurers, pension funds, and other banks going under in a very messy way (and hedge funds, but no one cares about them). Plus, since the debtholders would be getting the market value of their debt in equity, it's not as if they've lost as much as they would in a true default.
If you forgive the credit default swaps and consider them null-and-void, suddenly a lot of insurers and hedge funds who sold swaps at stupidly low prices 5 years ago will get to keep their shoddy income. As well as any damn synthetic CDOs built off bank debt credit default swaps.
But really, I'm just making semi-educated guesses about who's holding all those credit default swaps based off bank debt rather than the mortgage-based assets. Honestly, there was never much reason to create swaps based on bank debt, but I'm pretty sure it's out there. Debtholders may have created such a complicated web of payments and cross-holdings that they saved themselves from dilution in any rescue effort. Clearly the equity derivatives desks should've been more innovative in the past 5-10 years.
As for Zingales's plan, it's an interesting one that I think I've mentioned before (though not under his name). It certainly would be the best from a "moral hazard" point of view, since bondholders would get to escape the pain they deserve under almost any other recapitalization scenario. But two quick points:
1) I believe his plan wasn't meant to do anything to the mortgages or the mortgage-backed securities. He just suggested converting enough bank debt to equity that there is no longer any question of whether the banks are solvent. Once that's cleared up, banks can start taking on riskier assets (i.e. lending) to increase income, equity holders no longer need to worry about future dilution, and everyone can just wait out the mortgage-backed assets to see what the final cash flows are.
2) I think the major issue with his plan is that debtholders have managed to connect themselves far too thoroughly with the financial system through the proliferation of credit derivatives (especially credit default swaps). What to do about swaps based upon bank debt is the really gruesome problem facing the government if they try to do a forced debt-to-equity conversion.
If you force the swap sellers to pay up like it was a default, you'll find a lot of insurers, pension funds, and other banks going under in a very messy way (and hedge funds, but no one cares about them). Plus, since the debtholders would be getting the market value of their debt in equity, it's not as if they've lost as much as they would in a true default.
If you forgive the credit default swaps and consider them null-and-void, suddenly a lot of insurers and hedge funds who sold swaps at stupidly low prices 5 years ago will get to keep their shoddy income. As well as any damn synthetic CDOs built off bank debt credit default swaps.
But really, I'm just making semi-educated guesses about who's holding all those credit default swaps based off bank debt rather than the mortgage-based assets. Honestly, there was never much reason to create swaps based on bank debt, but I'm pretty sure it's out there. Debtholders may have created such a complicated web of payments and cross-holdings that they saved themselves from dilution in any rescue effort. Clearly the equity derivatives desks should've been more innovative in the past 5-10 years.
317: Its finances have remained stable over the years -- unless they're outright lying of course, but they use truly independent auditors and have a lot less incentive to lie than someone gunning for a $25 million bonus. The finances and governance are a lot more transparent than your average bank. They don't put tentacles into anything other than banking, investment, and loan services.
The asset to liability ratio is 1.1 (that's straight totals; I don't know what the standard ratios are for looking at bank balance sheets), assets are growing at 20%. There haven't been any mass layoffs or other signs of trouble.
338, 339: Whoops. Plus those are hardly "quick" points.
331
Half a loaf is better than none, James. The mortgage holder (or partial mortgage holder) is not going to be fully paid back in any scenario.
Even now, most mortgages are being paid. If you forgive part of all mortgages you magnify the losses.
340 sounds a lot like mine. To some degree you can't really *know* these things, but I have a lot more confidence in them than any bank I've dealt with.
Even now, most mortgages are being paid. If you forgive part of all mortgages you magnify the losses.
Not neccesarily. As previous comment; If the foreclosure rate is high enough and the real estate market bad enough, they'll take a real bath that way too. It's not an obvious thing, James.
If you forgive the credit default swaps and consider them null-and-void, suddenly a lot of insurers and hedge funds who sold swaps at stupidly low prices 5 years ago will get to keep their shoddy income.
A whole lot of stupid behavior is going to be rewarded in any bailout. Can't be helped. But let's not get stuck on stupid. Punish some high profile bankers (I'm looking at you, Angelo) and any fraud that comes to light in discovery during the cramdown.
Given that the economy is something we have built, it has become global, and there really is no suitable substitute for it then why do we ever tolerate people asking us to make it more risky and more likely to suffer catastrophic failure?
Is it because the economy is relatively new and we are like the bridge builders of old who saw much more collapses than we do now? Is it because the economy is not tangible in the same way a bridge is tangible and it is much easier to fool ourselves and others that changes we make won't matter much?
Seriously. Why hasn't economics taken the same steps towards safety that, say, civil engineering has? Where are the building codes? Where are the failure estimates? Where are the stress tests?
Seriously. If we are requiring every person in the world to, in some way or another, use this thing then shouldn't we have some discipline and control over it?
Why do we let the financiers be so reckless?
342: Definitely. Plus there's that whole non-profit co-op thing to groove on.
Oh, a bunch of assholes are going to get/stay rich, regardless of what is done. Can't be helped, and after all it's one of the design features of this system. You shouldn't encourage it, but you can't wish it away. Regulation has to be tightened up though, for next time.
Why do we let the financiers be so reckless?
Caveat emptor. Yield chasing for retirement, with Emerson's understanding of finance. Some people go for the Nigerian emails, too. And somewhere I have those magic beans that I traded the cow for.
343
Not neccesarily. As previous comment; If the foreclosure rate is high enough and the real estate market bad enough, they'll take a real bath that way too. It's not an obvious thing, James.
You are probably giving a gift to a lot of people who were not going to default and I don't see the benefit. They are isolated cases where it is to the benefit of both parties to forgive part of a mortgage in which case they are free to do so. However I see no way of limiting a cram down to these cases. Depends on the specific proposal of course.
I do wonder about the global aspects of the mortgage exposures. From everything that I know, US housing was/is certainly not overpriced relative to much of Europe and many parts of East and South Asia. Do the same vulnerabilities exist there? (I am assuming yes to some degree, and especially if the global economy slows down overall. Though maybe they weren't as heavily used in derivatives?)
Why do we let the financiers be so reckless?
Greed abides (in all of us). Hardly any constituency saw themselves as disadvantaged duirng the run-up. There are a lot of Ponzi-lite* aspects to our economy. They look bad when they inevitably come back to earth.
*Slowly developing, non-obvious, hard to tell which are vapor and which are truly propped up by productive labor, capital and resources, but Ponzi-ish none the less.
350: what makes it complicated is you have to take into account the effect on markets where foreclosures are happening, to see what the end effect to lenders would be. As I noted, it's not obvious (not that I'm saying it's the right thing to do).
If you put the money in at the other end it's a `gift' too.
344, 347: Yeah... Which is why I'd probably prefer a declaration that CDSs based upon that bank debt are just straight-up null-and-void rather than trying to sort out the who-pays-who mess. It would have a shot at being supported in the courts, too, given the case Zingales cites from when we first left the gold standard and Roosevelt had to nullify the clauses in bank debt contracts that allowed creditors to demand a given quantity of gold instead of cash repayment.
Roosevelt had to nullify the clauses in bank debt contracts
Interesting. Makes sense, but I hadn't thought about it before.
Rep. DeFazio of Oregen has introduced a Democratic bailout bill. Not much detail here, but I'm giving you a heads-up. Cosponsors include Rep. Kaptur (OH-09), Rep. Scott (VA-03), Rep. Cummings (MD-07), Rep. Doggett (TX-25), Rep. Holt (NJ-12), Rep. Edwards (MD-04) and Rep. Hirono (HI-02).
Doggett's solid, I grew up in his district.
All those co-sponsors are No voters.
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Someone on my environmental philosophy mailing list just wrote "let's just cancel all "debt"--here as well as in the "developing" world--since it's just a construct anyway, a fiction that is maintained only by the fact that we all continue to believe in it."
Sometimes I am embarrassed by my tribe.
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It seems to me that the science of engineering has been forced to accept certain constraints. Engineering deals with the physical world and, like it or not, there are certain laws and constants that are immutable. Engineering has been forced to live within those constraints.
Economics, on the other hand, does not dwell in the real world. Economics interacts with the real world, but the global economic system, being a humanly created 'system,' has only the constraints we choose to add to it.
Engineers know that certain things, such as a perpetual motion machine, are not possible, at least not in this universe. Engineers are forced to accept constraints and are forced to learn from their mistakes.
Economists, though, are free to construct any system they wish, even a system with no constraints at all. While this is no doubt exhilarating and in some ways amazing, it is simply a fantasy, a castle in the sky.
Why are we moving the entire population into the castle to live? The castle repeatedly falls down, people get hurt and injured, and we must rebuild the castle over and over again. Are we destined to repeat this cycle forever? Must we trod over the same ground over and over again like a beast of burden tethered to a pole? Is the fantasy simply so compelling we are unable to turn away from it?
I hope not.
They claim they base it on 5 simple points made by Walter Isaac, the former head of the FDIC. I found this editorial by Isaac, which only makes 4 simple points. Clearly the fifth point will be that we should switch to socialism tomorrow. I'm shocked, shocked that the Democrats would twist Isaac's words in the cause of socialism.
345 is insightful, but the problem is that civil engineers have a different set of incentives from financiers. You can't simply pass on a poorly built bridge to the next sucker in line and evade responsibility that way. Financiers can pull that off because a certain fraction of what they sell is expected to fail, and what they are trying to do is manage the risks. The bridge analogy would assume a certain fraction of bridges simply fall down for unforseeable reasons.
For something like finance I think the only way to handle regulation is through an independent external body that sets uniform standards. Inevitably those standards will have a price in terms of restricted growth, but that's a reasonable enough price to pay. Over time the standards will weaken due to pressure from business and the fading in of memories of the last crash until eventually something like this comes up and new regulations are put in place. In practice I don't think you can do much better than that.
I second the endorsement of Doggett.
Yesterday I was having trouble finding a pattern in the Democratic No votes. Now I'm wondering whether Pelosi didn't have some votes in reserve who would vote No or Yes strategically, depending on whether the Republicans were coming through with their part of the deal.
If she did, TLL was right! Pelosi was being partisan, and good for her. The Republicans were playing their usual dirty little game, trying to stick the Democrats with an unpopular vote. Then you ask whether Boehner was playing that game too -- he said that twisting arms wasn't his style, or something like that, and his #2 whip Cantor just barely got on board at the last minute.
At the moment Bush, McCain, Boehner, and Paulson all look bad. Pelosi looks fine. The dissident House Republicans look wonderful to themselves and their base and doubtful to everyone else, and they certainly hold the initiative, in the sense of having made something happen. Now's the time for the House Democrats and Obama to make a move.
362: I'm sure that's true, but I don't see how that's partisan. I thought that was SOP for controversial bills.
Cantor just barely got on board at the last minute
Yeah, I was a bit surprised to see that he voted Yes. As I understood it, he was leading the effort of the Republican Study Committee to stir shit up. I guess he still has to suppport Boehner, though, when it comes to the final vote.
but the problem is that civil engineers have a different set of incentives from financiers.
The problem is more fundamental than incentives. Civil engineers have a well established, solid theoretical basis to work from. It doesn't mean everything they do is perfectly understood, but it does mean they start from solid footing. This means expectations can be reasonably managed, and failures understood (and hopefully acted on)
Financiers absolutely do not have such a solid footing, and must be expected to fail in ways that would be unacceptable in engineering. This implies the trust put into their products is logically much lower. The only thing open to question is how that ought to be managed.
362: There were certainly a lot of liberal-left Dems; I don't know enough of them to say what proportion. And it appears that almost all of them are in pretty safe seats. Do you buy either or both of those?
Though given the incumbency advantage, the latter probably doesn't mean much.
Sure, it would reward homebuyers who made the worst decisions in the past few years
Forgive if this is a tangent and/or old news (in fact, I may even have read about it here a week ago or something), but how, if at all, do HELOCs play into this? My understanding is that, aside from investors, the most culpable of homeowners are the ones who took out - and lived off of - HELOCs based entirely on fictive equity. It seems to me that that could give you some kind of handle for dealing with who gets to stay and who has to eat it. Like, your existing ARM for an inflated first mortgage we'll force the bank to refi as a vanilla 30-yr. fixed rate for current (or projected) market price, BUT you need to figure out your HELOC mess. Responsible borrowers can find a way to survive such a deal, but scammers won't.
Do the CDOs distinguish between first mortgages and HELOCs? Do we need to save HELOCs to save the CDOs? If so, I don't see what we can do that will even be within shouting distance of just - it seems that most HELOCs are complete shams.
Just a thought.
332
Thanks for the link however I would like to be sure there is a $110B hole before looking for explanations. Is it plausible that Lehmans's creditors have already gotten a detailed look at the books? I thought bankruptcy cases (like other legal cases) would move a lot slower. Or did Lehman have to disclose a lot of new detail as part of filing for bankruptcy?
If she did, TLL was right!
I'm no Heebie-Geebie, but it is a pretty safe bet to say Pelosi was being partisan at any given time. I think all the no votes were watching the other party, sniffing out the double cross. I guess the bailout wasn't that important after all.
Someone on my environmental philosophy mailing list just wrote "let's just cancel all "debt"--here as well as in the "developing" world--since it's just a construct anyway, a fiction that is maintained only by the fact that we all continue to believe in it."
Sometimes I am embarrassed by my tribe.
Sure, it's nonsense, but it's no more nonsensical than what Ron Paul was just saying on CNN minutes ago (that the cause of the crisis is that the federal government taxes too much, spends too much, and regulates too much; and that the solution is to do less of all the above, and to "liquidate" all the bad debt).
Also, recall that Pat Robertson proposed cancelling the national debt through a biblical jubilee, and he, like Paul, commanded a significant electoral following on the GOP side.
In other words, if anyone should be embarassed by their tribe, it's the GOP.
Do the CDOs distinguish between first mortgages and HELOCs?
Short answer is yes. Helocs are by definition in second position, and so carry more risk. How they were packaged in the CDOs depends on the issuer, AFAIK.
351
If you put the money in at the other end it's a `gift' too.
Depends. There are a lot ($4T?) of government guaranteed bank deposits. Making good on these guarantees is not a gift. So one way or another the government is already on the hook for a lot of money.
Economics, on the other hand, does not dwell in the real world. Economics interacts with the real world, but the global economic system, being a humanly created 'system,' has only the constraints we choose to add to it.
Wait, slow down here. I, like many people here, will happily agree that economists don't check their models against reality. They do, however, have a reality to check their models against. Human behavior is a real part of the world. Just because something is a human institution doesn't mean its is unreal or under the control of a few individuals.
togolosh,
Over time the standards will weaken due to pressure from business and the fading in of memories of the last crash until eventually something like this comes up and new regulations are put in place. In practice I don't think you can do much better than that.
I used to accept that but I've lived through two sort-of crashes like this now and I'm tired of it.
We've got laws that have their roots from, what, 800 years ago? We've got scientific understanding that has been building up for 160 year or so.
Our species is capable of maintaining a cultural record longer than one generation. We have done it with law and science. Why can't we do it with economics?
And if anyone says I'm espousing communism I'll donate 100 dollars to McCain. So don't try to tell me I'm espousing communism.
373
... Helocs are by definition in second position, and so carry more risk. ...
I believe you can get a heloc without having a mortgage. And IANAL but supposedly in California helocs are generally recourse while first mortgages used to buy a house are nonrecourse. So the relative risk is dependent on the details.
So one way or another the government is already on the hook for a lot of money.
No doubt it/we are on the hook. The only possible justification for injecting money at this point is that things will be a lot worse for people if we don't, at a scale that dwarfs the negative effect of the added debt load that they'll carry. This means that the only logical way to look at it is for a given effect on the market what's the cheapest way to get it. Of course, the system isn't well understood so this isn't solveable but it has to be the principle you're operating on. Idealogical blinkers are counter-productive here. It pretty much doesn't matter what you do, you're going to be giving free money (or equivalently forgiving debt) to people who don't deserve it. Other people will get screwed, who also don't deserve it. The only possible justification for even playing this game at all is that if you don't, things will be much much worse. Given that assumption then, you're obligation to taxpayers is to get the best deal/least cost for the debt.
377
And if anyone says I'm espousing communism I'll donate 100 dollars to McCain. So don't try to tell me I'm espousing communism.
You are espousing communism.
We have done it with law and science. Why can't we do it with economics?
Law and science really aren't on the same footing, but ignoring that for a moment the real problem is that nobody understands economics (to the degree necessary for what you suggest).
369: Again, take this for what it's worth, which isn't much. But from both the linked posts, what I understand the $110b 'hole' to be is pretty public -- not something that would require forensic accounting to find. If I've got it right, Lehman has a category of debt that is now circulating at $0.12 on the dollar -- the drop in value of that debt is the 'missing' $110b. So, no need for sophisticated financial analysis to identify that the money is gone, it's a simple matter of knowing how much debt Lehman has issued and what it's trading for -- the question is just why it's lost so much value.
I may be completely confused here, but that's my understanding.
Well, Tripp, you can't say you didn't see 379 coming from a half a mile away. And I think Shearer's the type to demand a receipt...
I have to admit that 380 cracked me up.
aw, and I was really trying for a humorous aside there, LB!
TLL: I don't see going to bat for a failed Republican President with a 23% approval rating as partisan. I don't making concessions to the Republican loonies in order to get the bill passed as partisan. (Almost all of the additions the Dems tried to make to the bill were gutted). Pelosi did those things, but at least she wasn't fooled by their final double cross.
I still haven't forgiven you, neither for blaming this on Pelosi nor for calling her partisan. She came through on her end of the deal, but Boehner and the Republicans tried to stab her in the back.
Now, of course, I blame Pelosi, for playing ball with the Republicans in the first place. No one has to love her or admire her, but what you said was ridiculous.
379
... It pretty much doesn't matter what you do, you're going to be giving free money (or equivalently forgiving debt) to people who don't deserve it. ...
You don't have to forgive any debt (except through the normal discharge of debt in bankruptcy). You could let the banks fail and pay off the depositors. This is not free money, the depositors were given a federal guarantee and were entitled to rely on it.
The problem is the pool of bad loans. Forgiving parts of good loans just turns them into bad loans and increases the problem.
California helocs are generally recourse while first mortgages used to buy a house are nonrecourse
In CA purchase money loans are non recourse. A refi can be in first position and be recourse. If there is no first, the heloc would be in first position and be full recourse. Since helocs are more expensive than a first I don't know why someone would have only a heloc, but it would be very hard for a first position heloc to be underwater.
You could let the banks fail and pay off the depositors.
You could do this. Do you have a good reason to think the net effect is better? How about the total cost to taxpayers? What about uninsured monies?
should have added to 389:
of course you can just let the chips fall where they may, I was talking about the context of a bailout of some sort.
365:Keynes psychological law:the ratio of the propensity to consume to any increase in income is less than one. Therefore the slope of the aggregate demand function is smaller than that of the aggregate supply function. Savings does not increase investment, demand creates investment. Excess savings will go into speculative finance.
Therefore economies with inequality will always tend to boom/bust cycles, and catastrophic financial collapses. Regulation of private finance will not help.
What will help is a full employment policy, to the point that the gov't is the employer of last resort. The goal is permanent structural wage inflation. Price inflation is controlled thru forced savings, e.g., Social Security, Medicare, etc. (less subject to speculation) and public works/common good projects.
This is not socialism.
381
Again, take this for what it's worth, which isn't much. But from both the linked posts, what I understand the $110b 'hole' to be is pretty public -- not something that would require forensic accounting to find. If I've got it right, Lehman has a category of debt that is now circulating at $0.12 on the dollar -- the drop in value of that debt is the 'missing' $110b. So, no need for sophisticated financial analysis to identify that the money is gone, it's a simple matter of knowing how much debt Lehman has issued and what it's trading for -- the question is just why it's lost so much value.
The claim was that this drop in value was caused because after the bankruptcy Lehman's books were examined and there was an unexpected $110B missing. Hence less money for the bondholders as Lehman is liquidated and the drop in value of the bonds. This would be important if true but I am doubtful. Perhaps the bond market just didn't expect the government to let Lehman fail. And I think it usually takes longer to locate holes in the books.
376 - I hear you Tripp. I am also rather disappointed with our performance on this front, but in the end of the day I believe that the intrinsically stochastic nature of the marketplace makes occasional sharp shocks inevitable. The nature of humans and politics makes strong measures to eliminate such shocks impractical, so we have to sort of muddle along trying to mitigate the impact and frequency as best we can.
382, 383,
Well heck Mary Catherine and LB, you don't get very far stealing all the good lines. Ya gotta set one up now and then and let the other guy get the laughs. That's how Johnny Carson did it.
I mean this is the improv room at the Comedy Store, right? Cause if this ain't comedy then it is a bad tragedy. A big, bad, tragedy, and I don't want to think about that.
In other words, if anyone should be embarassed by their tribe, it's the GOP.
I was mostly miffed by the blase attitude toward social reality. "Oh, its just social reality. We can change that worldwide overnight!"
... Since helocs are more expensive than a first I don't know why someone would have only a heloc, ...
Helocs are more flexible.
following on 391, the sufficient cause of the current economic collapse was the previous thirty years of official policy to create downward pressure on wages.
I'm having trouble coping with the slow news day.
372: Embarrassment is not a zero-sum game. We can always make more.
I believe you can get a heloc without having a mortgage. And IANAL but supposedly in California helocs are generally recourse while first mortgages used to buy a house are nonrecourse. So the relative risk is dependent on the details.
A HELOC is a mortgage, in that it's a loan backed by your house. And you're right about California.
393: Hari Seldon will set us right.
Perhaps the bond market just didn't expect the government to let Lehman fail. And I think it usually takes longer to locate holes in the books.
Oh, I got you. Yeah, the drop in the value makes more sense to me as a reaction to the fact of the bankruptcy, rather than to the discovery of something specific in the books, for the reason you give about timing -- it takes time after the filing of a bankruptcy for anyone to actually get access to any information, much less analyze what it means, for purely administrative reasons, and this drop in value seems to have happened instantly.
it's no more nonsensical than what Ron Paul was just saying on CNN minutes ago (that the cause of the crisis is that the federal government taxes too much, spends too much, and regulates too much; and that the solution is to do less of all the above, and to "liquidate" all the bad debt).
As usual, I step in to defend Ron Paul, who I rather admire. Paul is not crazy. As an Austrian school guy, the major Federal regulatory intervention he protests against is Federal Reserve control over the money supply and banking system. Unlike other Republican shibboleths like the GSEs or CRA, Fed overexpansion of the money supply in the early part of this decade has a very real and direct relationship to the crisis we are in. The Austrian solution of getting rid of the Fed and instituting the gold standard really might work to prevent these specific kinds of asset bubbles. It would cause recessions for other reasons, but Paul is presumably willing to accept that risk.
This can actually be seen as a moment of vindication for Paul and other Austrian types, as they have long predicted just this kind of mess due to Fed intervention.
"Oh, its just social reality. We can change that worldwide overnight!"
Otherwise known as `the big crash'. He/she's right, just not in quite the intended way.
Er, HELOCs are lines of credit, which when you draw them down become a mortgage. The bank agrees to loan you a bunch of money secured by your house, but only as you need it.
Just in case it wasn't clear, this first position and second position stuff means that if the bank forecloses and sells the house, the loan in first position gets paid off first, any money left goes to the loan in second position, and any money left after that goes back to the homeowner. So if there is a $400k first mortgage and a $50k second mortgage on a house that gets foreclosed and sold for $350k, the second mortgage holder gets nothing.
This makes loan modification negotiations for houses that aren't seriously underwater tricky, since if the mod works by having the first loan paid off and a new one created, the second mortgage holder has to agree to subordinate their loan to the new one. Which they have minimal incentive to do unless they get something out of the deal.
With the Reagan tax cuts, we got three immediate effects:
1) The first of a series of asset bubbles, each following more catastrophic
2) The increase in Finance as a portion of the economy, from 8% in 1982 to 40% today;and the corresponding loss of the industrial base as effective demand was diminished
3) Real wage declines and rising inequality
4) A more conservative politics, with a loss of will toward fiscal policy and a dependence on monetary policy to influence output.
Which they have minimal incentive to do unless they get something out of the deal.
This is where things get hairy, agreed, and part of the difficulty of attacking the problem at that end.
Stock market closes up 485 points, erasing 62% of yesterday's plunge.
I predict it closes down tomorrow by 200+ points.
This is where things get hairy, agreed, and part of the difficulty of attacking the problem at that end.
Which is why it will probably have to come from the Federal government, by fiat.
This is where things get hairy, agreed, and part of the difficulty of attacking the problem at that end.
It's an interesting game theory problem, for sure. Although we currently have a large surplus of interesting game theory problems.
I have yet to see a convincing argument against letting bankruptcy judges modify loans in Chapter 13. Going through bankruptcy seems painful enough to keep out the financial malingerers, and the conceptual model of breaking the collective action problem via external brute force seems to have a long and successful history.
The bank agrees to loan you a bunch of money secured by your house, but only as you need it.
Not really need it, more ask for it. When this started to unravel there were people who figured they would pay their first with their heloc. Oops. First thing the banks did was wipe out the helocs, because there wasn't the equity to support them. I think too many people thought of equity as real money.
Not really need it, more ask for it. When this started to unravel there were people who figured they would pay their first with their heloc. Oops. First thing the banks did was wipe out the helocs, because there wasn't the equity to support them. I think too many people thought of equity as real money.
Dear god yes. "Tapping equity in your home" == "borrowing money that you will have to repay."
I remember having to go through a counseling session when I got my student loan, where they repeatedly asked if I understood that I had to pay this money back. I think they asked me this once when I bought my house. I wonder if they ever asked people getting HELOCs.
Although we currently have a large surplus of interesting game theory problems.
I'm thinking that we can bundle these interesting game theory problems, slice them into tranches and sell them to securities firms.
409
I have yet to see a convincing argument against letting bankruptcy judges modify loans in Chapter 13. ...
If you do it retroactively you are changing laws people have relied on. If I sell my house for $400k and take back a mortgage I don't want some idiot judge (aren't bankruptcy judges considered the dregs of the judiciary) changing the sales price to $200k. And then have the buyer sell it for $300k.
(aren't bankruptcy judges considered the dregs of the judiciary)
Not as such, no.
I'm thinking that we can bundle these interesting game theory problems, slice them into tranches and sell them to securities firms.
Pretty much what happened, really. With nice graphs and ppt slides.
So tell us, LB, what is considered the dregs of the US judiciary?
aren't bankruptcy judges considered the dregs of the judiciary
416 - In a rational world, Scalia, Thomas, and Alito.
If you do it retroactively you are changing laws people have relied on. If I sell my house for $400k and take back a mortgage I don't want some idiot judge (aren't bankruptcy judges considered the dregs of the judiciary) changing the sales price to $200k. And then have the buyer sell it for $300k.
Changing laws happens all the time. In fact, there was just a massive change to bankruptcy law in the last couple years, and as far as I know it applied to debts that were outstanding when it took effect.
If you don't want to have your debt blown away in bankruptcy court, there are two effective options. Give the collateral a haircut when you make the loan, or renegotiate it before your debtor goes under.
If you took on an organizational structure that makes it hard for you to negotiate with insolvent debtors and offered 100% financing on assets with unstable value, well... you took a risk. The nature of risks is that sometimes you lose. C'est la vie.
I have yet to see a convincing argument against letting bankruptcy judges modify loans in Chapter 13.
Banks will do modifications without a judge, even. Short sales are a loan mod.
The idea of the cramdown is that it is a onetime event to help stabilize the system. Individual Chapter 13 filings would take forever.
Here is a chart of negative equity of US "homeowners"
http://4.bp.blogspot.com/_pMscxxELHEg/SOFlflQmPkI/AAAAAAAADgI/jBDk9NRyc9U/s1600-h/NegativeEquity.jpg
Also, can someone tell me what the fallout of WaMu failing has been? From here it looks like WaMu made a bunch of crappy loans and lost the trust of some of their depositors. Anyone who owned WaMu common stock, WaMu preferred stock, or WaMu subordinated debt got completely wiped out, JP Morgan bought the rest, and things continued more or less without a hitch.
I was going to say, the judge who masturbate under his bench, but that's just one guy.
Banks will do modifications without a judge, even. Short sales are a loan mod.
Yes. But it appears that banks are understaffed to handle loan mods, and in many cases the organizational structure makes it very difficult or impossible to get a loan mod approved in a timely fashion. [1] Bankruptcy exists partly to solve these sorts of problems.
[1] Something about the entities holding the various derivative securities treating it as if they actually owned the mortgage for tax purposes because the intermediaries just pass through payments in a dumb manner and don't actually exercise judgement.
impossible to get a loan mod approved in a timely fashion
True dat. Although some banks are beefing up the workout department, including loan mod.
417. I saw that movie
http://www.imdb.com/title/tt0102558/
Also, can someone tell me what the fallout of WaMu failing has been?
From a depositor's point of view? You're right, not much - WaMu was seized by the FDIC to prevent a run on the bank and their branches and deposits were all sold off to JP Morgan Chase. The question is what happens when that stops being an option -- when Chase (and Citi, which did much the same thing to Wachovia; and Bank of America, Wells Fargo, US Bank, and maybe PNC -- I think that's pretty much the complete list of banks that are big enough to swing a major rescue at this point) stops being interested in taking over a failed bank.
I would expect that sometime soon restrictions on foreign and private equity ownership* will be loosened again to allow someone like Eddie Lampert or a big foreign bank like Santander to make a similar rescue if needed.
* In fact, I'm fairly sure the private equity one already happened, and hedge funds no longer have to file as a bank holding company if they own more than 20% (but less than 50%) of a bank.
Goldman and Morgan Stanley are looking to take over some bank assets, so they would be in the market for any smaller banks that fall over.
I think when that stops working, then the government will just take over the bank and operate it directly until the crisis passes.
414
aren't bankruptcy judges considered the dregs of the judiciary)
Not as such, no.
So how come federal bankruptcy judges don't have life tenure and are paid less than the real judges?
So how come federal bankruptcy judges don't have life tenure and are paid less than the real judges?
Who knows? Maybe because they deal in less critical matters. State and county judges don't have lifetime tenure and make even less money - it's hard to imagine that 90% of the judiciary in this country constitutes "the dregs".
BK judges are generally very good, and are often selected from the top local practitioners in their field. In some jurisdictions, the BK judges are top national practitioners (e.g., the judge in charge of the Lehman bankruptcy). They don't have life tenure, but it's still a very good job and one that's hard to get.
The dregs of the judiciary, if there are any, are at the low levels of the state court system, e.g., traffic court and the like. In the federal system, there are some genuinely ghastly immigration judges, although there are also some very good ones. However, there's huge state-to-state variation in the overall quality of the judiciary, putting aside variations between individual judges in any given state.
417: I remember that article, but I still can't believe that rob was able to recall it, access it, and link it all within 2 minutes. You're like the apo of the non-disgusting internet.
After reading this article, I would put slightly better than even odds on the bailout bill passing as-is within a week.
The Corner sets us straight:
And if the crisis could be confined to the credit markets would the solution not be fairly simple: providing increased liquidity, and matching people with money they want to lend with people who are good credit risks and want to borrow?
If only there were some sort of institutions that could do that sort of thing on a large scale....
435:Tragically.
We coulda done what Iceland did.
With the Dodd expansion of the authority of the FDIC, we aren't that far from what Ireland has done, and pretty close to the Galbraith idea.
But Obama and his moderate friends are going to crash the system, give our money to the plutocrats, and wax self-righteous about it for a generation.
This won't be like Iraq, because there is no economic left in even the Democrat Party.
Newberry has taken to calling this election "McBama"
What do you think?
WE - THE TAXPAYERS SAY -NO- TO ANY BAILOUT! CONGRESS NEEDS TO BEGIN FIXING THE PROBLEMS... NOT CONTRIBUTE TO IT! Barney Frank and Dodd need to be terminated immediately from their positions. Pelosi and Reid need to step down and let more level heads step in.... This DO NOTHING ATTITUDE IN WASHINGTON MUST STOP. WE DO NOT APPROVE OF YOUR JOB PERFORMANCE...... IN NOVEMBER... YOU'RE ALL FIRED!
From a Politico comment line. The nice thing is that the letterwriteradvocates doing nothing, but still complains about the DO NOTHING ATTITUDE.
The cream of the wingnut-o-sphere is out in force, showing their class.
Emerson, I do not appreciate being compared to the wingnuts just because I want something better than the Paulson-Bush bill.
Go read Yves Smith this afternoon.
Fuck you.
Go read Yves Smith this afternoon.
I thought you were banned there...
Rss Feed panes, but shh she might find a way.
Note I didn't link.
Considering how much of the mudlump-o-sphere has phrased this as:"You either want a Depression or not.", it is interesting how neutral Yggles has been.
I have also noticed how well the pro-Bushism on this issue tracks with the fervency of primary Obamacism on the various blogs. With some exceptions, Yglesias among them. And Krugman.
441: 440 refered to the link in 440, as quoted in 439. 39 was posted before I saw 438.
Now that the details are out, what's everyone's take on the DeFazio proposal?
Kos wants a progressive alternative, quoting Digby, who also wants to ditch the Bush Plan.
Why do Digby & Kos want a depression?
446:1 & 5 were the only points that made sense to me, at quick glance. I'll read it again.
Apparently Obama & McCain are trying to raise FDIC limits in the bill. I don't know if a cost can be put on that.
Like the $630 billion the Fed put out Monday, a whole lot of money is disappearing...wait a minute, it ain't real money, and we can do this indefinitely. Or something.
Brenda Rosser at Econospeak has taken a good look at the TAF, and didn't like what she saw.
CSPAN has the deFazio crew right now
446
Now that the details are out, what's everyone's take on the DeFazio proposal?
Point 1 (deprecating mark to market accounting) encourages insolvent banks to pretend they are solvent.
Point 2 (ban naked short selling) and Point 3 (restore uptick rule for short selling) may be good ideas but don't have anything to do with the immediate problem.
Point 4 (net worth certificates) more encouragement for insolvent banks to pretend they are solvent. Pointing out their previous incantation in 1982 is strange becuase Reagan was widely criticized for letting the S&L problems fester vastly increasing the eventual cost of resolving the situation.
Point 5 (increasing FDIC insurance limit) increasing the limit is a good idea, I might include 90% coverage for unlimited amounts.
Bottom line, 5 is a good idea the other points are irrelevant or ways to attempt to avoid dealing with the problem now.
I can't support something with the name "No BAILOUTS".
#1, I'm not sure about. Banks are holding lots of assets that really aren't worth as much as they were, and the banks really are undercapitalized. It's not just an accounting issue. We don't want to allow banks to value assets at too far from reality.
#2 and #3 are not that relevant.
#4 I would need to hear more details about.
#5 fixes a problem that we don't seem to have -- nobody has lost a penny in bank deposits. The FDIC has already gone out of its way to ensure that.
450:encourages insolvent banks to pretend they are solvent.
Analysis at Angry Bear
446: I don't like it very much. It basically tries to reduce the solvency issues through two tactics:
1) Eliminating mark-to-market accounting in favor of more-or-less mark-to-model accounting (where banks try to use their models to produce a "fair economic value" for their assets). This won't do too much because even if it leads to higher asset prices on banks' balance sheets, and thus puts banks closer to solvency on paper, the assets won't have actually changed so investors worried about bankruptcy now will still be worried about it after the accounting switch. Plus, I feel that mark-to-market is really the right system in the vast majority of market situations, so I'd be very loathe to see any moves away from it.
2) Creating these "Net Worth Certificates" which seem to just be short-term debt bought by the FDIC along with a gold star that says the FDIC looked at their books and their management and is REALLY SURE! they're going to make it through. Now, I'm not so sure about what the Fed's discount window and lending operations are already doing, but it seems like they'd satisfy the same liquidity needs that this program could. As for whether the gold star will actually be trusted by investors, reducing liquidity problems in longer-term debt markets? Who knows. The previous program that DeFazio cites from the 80s only lent to banks that totaled $40 billion in assets. WaMu alone had $300 billion. This is a whole new ballgame.
The only way I can really see this helping is if investors feel that current capital requirements are overly cautious and we're almost through the worst. In that case, the loosening of the capital requirements (which is essentially what point 1 is) would have little effect on investors' opinions of whether the banks will make it through ok. This supposes that investors and banks are only being super-cautious about lending because they fear dilution and they're not concerned about the actual value of the banks' assets. But that seems unlikely since bonds are taking such a big hit in the markets, and bondholders are the ones who gain all the eventual excess value of a bank's assets should it go under.
I'm just waiting for someone to come out with Financial Meltdowns for Dummies, which somebody needs to write. I'd buy that book. At full-price too: I wouldn't even wait for it to be remaindered.
If I may presume to summarize James, Walt and Po-Mo, the DeFazio proposal is crap. It's so bad I thought it might be Republican.
455: Probably. I'm not sure what to think of #4, though.
456: Yeah, the details on point 4 are really sketchy non-existent. Still... It seems to state pretty clearly that the financing from Net Worth Certificates would be debt (so not helpful for equity recapitalization), and short-term, so I'm a bit hard-pressed to see how it could help above and beyond current measures.
452: Reuters and Angry Bear (and Floyd Norris) are getting a bit hysterical, I think. Note that the key word here is that the SEC is reminding companies of the rules, not changing them. For instance, Reuters:
In the new guidance, first reported by Reuters, the U.S. Securities and Exchange Commission reminded financial services firms that they don't need to use fire sale prices when evaluating their hard to price assets.
Or Norris:
That is not new policy, but it does state it more strongly than it has been stated.
For the truly wonkish: the FDIC has an online book on what actions it can take when a bank runs into trouble. I'm looking at the section on net worth certificates now.
451
#5 fixes a problem that we don't seem to have -- nobody has lost a penny in bank deposits. The FDIC has already gone out of its way to ensure that.
This is wrong. There were over $500M of uninsured deposits at IndyMac. These people will probably lose half their money. This failure was well publicized in California and probably contributed to the run which was the last straw at Wamu. So the fear of loss is reasonable and is creating problems. It is true that FDIC bailed out the uninsured depositors at Wachovia. But if the FDIC is going to do this anyway it might as well make the guarantee explicit to reassure people.
I see. The net worth certificates count as capital for banking regulation purposes, but not as capital for accounting purposes. Doesn't sound like it would do any good.
461: You live solely for the purpose of typing the words "This is wrong," don't you?
Professor Bainbridge has been particularly spittle-flecked of late, what with his disappointment over the bailout failure and his hard-core rightwing politics, but I think he has the correct take on the SEC/FASB guidance:
Existing interpretations of FASB Statement 157 already clearly permit the use of mark to model valuation with respect to Level 2 and 3 assets. So what's new here? Looks like PR to me.
462: Walt, you ought not razz James when he is being correct and helpful.
What do you want to know?
Oh, just everything, Walt, clearly and concisely explained, with a table of contents and an index for easy reference.
I guess I'd like both a short-term and a longer-term account of why this is happening (what caused it? in other words), and why is it happening just now? How and why were sub-prime mortgages bundled into these instruments/derivatives that I keep hearing about, and how and where have they circulated, and just who owns this junk, anyway?
Seriously, can anyone point me to one or two articles (or quality blog posts, but I do mean quality) that lay this out in detail?
As John said a few days ago, I feel like an ignorant peasant.
464: But I was referring to WaMu and Wachovia. Yes, I was unclear, and I'm happy to clarify, but James just waits for someone to be unclear to say "This is wrong." It's monotonous.
So I have a feeling this is a stupid question, but why aren't we seeing anyone propose a plan that contains the elements that folks like Krugman, DeLong and Roubini have been advocating? (I know the former two are now saying the current bill is better than nothing, but they still say they'd rather do something else.)
I mean, Roubini's post from Sunday makes it sound like there's compelling evidence out there, in the form of an IMF study, that purchasing toxic assets is a relatively untested way to solve a banking crisis, and that there is considerable evidence that these other methods of recapitalization actually work (purchasing preferred shares, Swedish model, etc.). It sure looks like we're ignoring the "standard of care" here.
What I don't get is—and here's the stupid question—why hasn't some congressperson proposed one of these more standard plans yet, just as this DeFazio crew has proposed another (apparently) useless plan? I would love to be able to call my reps and say, "I support Senator X's plan," where X's plan is one of these more tested solutions that everyone is talking about, but I can't do that. It's exasperating to think that this knowledge might be out there, but is just not being taken advantage of for no apparent reason. I just don't get it. Are the advocates of these alternate approaches overstating the certainty of the other plans' superiority?
But maybe it's foolish and naive of me to expect the political process to make sense. Is it really just that these other plans sound too much like socialism to our reps, whereas buying $700 B of toxic crap is somehow, to them, not socialism?
||
Twins could be playing their last half inning of the season right now. Broadcasters are thanking the technical staff. This is why I can't be a real sports fan. I hate devoting hours to something and ending up with nothing but heartache in the end.
Yup, Sox win.
|>
Hey, good question, Otto. By which I mean that I have no idea, either.
My sister watched the last two innings of the Twins' last game with me. She figures she saved a lot of time that way.
Considering that they lost 2 of their 5 best players last year, they did well. Their young pitchers came through for them, and that's a good sign long-term. They weren't expected to contend at all.
465: George Bush's big speech last week was actually an adequate description.
Here is a short summary of the situation. Let's say you have money in the bank. The bank lends the money out, of course, so it's not all there. But they keep a certain amount of it as collateral. They don't keep it literally as cash in a vault; they're supposed to keep it in a low-risk investment like a Treasury bond. It turns out that in fact the collateral for your bank deposit is a mortgage lent to a house flipper who put $30 down on a million dollar McMansion in Laurel Canyon that he planned to sell in 6 months. Now the house flipper is broke, and nobody wants to buy the house.
467: I don't know what Kucinich proposed, but who cares? He's little, short, funny-looking, and kooky.
472: You make a compelling argument.
469
Hey, good question, Otto. By which I mean that I have no idea, either.
I think the reason is that there is no painless solution. The government is going to be out of lot of money no matter what. The public is not happy about this to say the least. So it is a lot safer to snipe at other plans than propose one of your own.
What I don't get is--and here's the stupid question--why hasn't some congressperson proposed one of these more standard plans yet, just as this DeFazio crew has proposed another (apparently) useless plan? I would love to be able to call my reps and say, "I support Senator X's plan," where X's plan is one of these more tested solutions that everyone is talking about, but I can't do that. It's exasperating to think that this knowledge might be out there, but is just not being taken advantage of for no apparent reason. I just don't get it.
Maybe there's something like legislative capture going on. If the only Senators who understand financial issues well enough to confidently propose bailout plans are too identified with the financial industry to go along with a plan that reduces to "push most of the financial sector overboard, assimilate the rest into the government, and go from there." It wouldn't even have to be conscious on their part.
Are the advocates of these alternate approaches overstating the certainty of the other plans' superiority?
This is also possible.
It turns out that in fact the collateral for your bank deposit is a mortgage lent to a house flipper who put $30 down on a million dollar McMansion in Laurel Canyon that he planned to sell in 6 months.
See, this is where it all starts to break down for me. When and why did my bank start acting up in such a feckless, madcap fashion? Yes, I'm one of those economic lefties who expects my bank to behave conservatively, cautiously, prudently: so sue me for ideological inconsistency.
And also: I keep hearing of various financial institutions being over-leveraged. What would be a reasonable (somewhat cautious and prudent, if also somewhat into a game that carries some risk) rate of "leveraged"?
Laurel Canyon should be indexed. I sort of got the resonance at first read, but I had to google it just to be sure.
Senate Bill ...to include massive tax cuts.
Sen Schumer called it "a brilliant move" that will "help pick up votes on both sides of the aisle."
would tack large and contentious tax measures to the bailout bill. Senate leaders figure the House will have to approve it because the tax cuts are too appealing to Republicans and the financial rescue plan will still seem essential to most Democrats.
They really know the way to my heart, don't they. Fed deficit spending plus huge tax cuts, I'm won over now.
What would be a reasonable (somewhat cautious and prudent, if also somewhat into a game that carries some risk) rate of "leveraged"?
12:1 is the old rule. In 2004, 5 firms were aloowed to go to 30:1 - 40:1. Those firms were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley. Two are still in business.
All the people who seem to know what is going on are trimming their proposals in terms of very pessimistic estimates as to what is politically possible. One big chunk of Congresscritters is captured. Another big chunk (the Republicans) seems to have no ideas but the slogans they campaign on.
This does seem to be a time when the mask slips and a lot of dumb populist Republicans realize that their leadership is made up of errand boys for big money. Conservative populism is based on the resentment of the ordinary middle class against welfare mothers, hippies, and cultural-elite decadence. They don't necessarily realize that they've been functioning as errand boys for the financial elite, which doesn't mean that they haven't been happy to get money from them.
As I said earlier, I can't get over the fact that J.P. Morgan still calls the shots. You have to assume that the Elders of Zion and the Bavarian Illuminati have a hand in this too.
I was just going for the resonance. I don't think I've ever even been to Laurel Canyon. I think I've seen it in movies, though.
Banks are required by law to be conservative, cautious, and prudent, in that there are laws on how much collateral they have to hold, in the form of low-risk assets such as Treasury bonds. This is where the bundling comes in. By bundling mortgages into bonds, etc. they were able to make pools of mortgages appear to be low-risk debt. And in fact it was low-risk debt when housing prices kept going up -- who's going to default on a mortgage on a house who's price just went up $100,000? But now that housing prices have stopped going up, the illusion has been revealed.
478: Boy, I sure feel foolish now. What could I possibly have been thinking when I was unhappy that the Monday bill failed? The Monday bill plus tax cuts - now there's liberal heaven!
I'm very surprised by the DeFazio proposal. I really expected a reprise of the bill that went down with stronger oversight and more taxpayer ownership. I wonder if there's some weird political gambit that we're missing.
478: Christ almighty.
Monday's voting pattern explained.
Don't the dems have a majority in both houses?
477
See, this is where it all starts to break down for me. When and why did my bank start acting up in such a feckless, madcap fashion? Yes, I'm one of those economic lefties who expects my bank to behave conservatively, cautiously, prudently: so sue me for ideological inconsistency.
Part of it is Wall Street smoke and mirrors that got a lot of this stuff undeserved AAA ratings from the likes of S&P. Part of it is standard bubble market madness of crowds (it is hard to stay sane when everyone around you is going nuts). Part of it is perverse short term incentive structures (loan officers on up being paid by how many loans they make without adequate regard for the quality of the loans).
This is why I don't blog about politics, I guess.
I was hoping for the Twins.
"Dregs" is a pretty ugly word, and some non-Article III judges are pretty good. Some are not, and even some of those get promoted to Article III positions. I've seen some pretty unimpressive state court judges, but then some others who've been fine. Our "state" court in DC is staffed with presidential appointees, which is better, in terms of discovering quality, than elections. At the trial level, anyway.
486: Dems are not real. You just have quarks arranged Demwise, if that.
477: Part of it was regulatory capture.
The Chicago school economists who proved that government can't do anything right, so everything should be unregulated, probably are still blaming everything on government, because they didn't deregulate right. "Regulatory capture" was one of the things they diagnosed, but the anti-regulation propaganda they pumped out contributed to a different kind of regulatory capture. Finance and business have certainly been working government very effectively during recent decades.
488: I don't like it -- too much reliance on averages. One rep who voted no got $630 K, way above the $200 & something K average.
So far I'm sticking with a combination of free market ideologues, progressives, and members paying attention to constituent calls, whether out of election fear or an actual belief in representation.
493 -- And Reps who wanted to demagogue it, thinking the bill would pass, and Dems who didn't want to get caught out by a challenger demagoguing it . . .
I was hoping for the Twins.
I'm the only White Sox fan here, aren't I? Damn. I blame the Chicago school for this failure, too.
I'm definitely looking forward to the next Twins season. They have a few weak spots, but they have three top players and a ton of good young starters. One of their best relievers (Neshek) will be coming back from an injury.
Okay, Walt Someguy crossed with James B. Shearer is helping me to make sense of all of this.
An unholy, not to mention an unnatural, alliance?
I report, you decide.
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It's like a microcosm of America.
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Walt, Po-Mo, soup, snarkout, togolosh, max, TLL, and others who understand financial instruments and markets way more than I do, I've really appreciated your discussions & explanations over the last week.
I hope I can return the favor when we're in the midst of a national crisis about . . . something that I know something about.
(On preview, slightly pwned by MC.)
Kraab, you might have thanked me for my wonderful development of populist ignorance.
Emerson, my debts to you are too great to be contained in a mere thread comment.
498: I just saw that a few minutes ago. The full clip. Note the dog whistle towards the end where she comments on her one gay friend's "choice". Sigh.
(Also: video is off at first, but the soundtrack syncs back up after a bit.)
498: She couldn't think to say Newsweek or Time or the freaking Juneau Star-Tribune News? Some of her behavior is truly bizarre.
498:
The Dude: ... look, man, I've got certain information, all right? Certain things have come to light. And, you know, has it ever occurred to you, that, instead of, uh, you know, running around, uh, uh, blaming me, you know, given the nature of all this new shit, you know, I-I-I-I... this could be a-a-a-a lot more, uh, uh, uh, uh, uh, uh, complex, I mean, it's not just, it might not be just such a simple... uh, you know?
The Big Lebowski: What in God's holy name are you blathering about?
The Dude: I'll tell you what I'm blathering about... I've got information man!
503 -- She can't name a "liberal" publication like those, and if she told the truth she'd out herself.
498, etc.: I just had a marginally relevant personal encounter. I have a couple of HS friends who live in Alaska. They love Palin. They're conservative Christians though not, as I just found out, charismatics or evangelicals.
They migrated to a Wobegonian Lutheran town in Alaska. Their congregation needed a new pastor, and ended up hiring an ex-Catholic priest who had left the priesthood in order to marry a Chinese woman who he'd met in Peru. Oddly, in the room with us was a local Lutheran pastor who also had a Chinese wife. There are no coincidences.
Then we talked about a mutual friend who had become a PhD New Age self-help adviser to the stars in Beverly Hills before dying of AIDS. My Christian friend had read a couple of our mutual friend's books ("The Good Girl Complex", and something on visualization) and had found value in them, something I'd be much less likely to do.
So what is the lesson in this? You tell me.
How much total footage is there of Palin and Couric, anyway? The transcript of the whole mess would read like Beckett mixed with Hunter S. Thompson, as recounted by a C-average high-school civics student.
507: Nothing is true. Everything is permitted.
506: Yeah, and I guess The New American was right out.
I think that one lesson is that as soon as we've found a third Chinese Lutheran pastorinnen we have a trend.
508: It should all go in the time capsule along with The Chevy Chase Show and whatever they called the Magic Johnson's interview show. (I actually think she will be judged as doing "OK" at the debate on Thursday given where the expectation-o-meter is currently pegged at. I also presume the Obama campaign is beating Biden black and blue with big sticks so he's too tired and sore to do anything other than give minimalist party-line answers.)
I went ahead and main-paged the Palin thing (uh, sort of), in case people want to continue to discuss financial gloom and doom without interruption.
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I had a small dinner at ben w-lfs-n's sister's restaurant this evening. It was delicious. I asked the maitre'd if Sis was around, and claimed to be a friend of her brothers. "Oh, Ben?" he said. "I met him. We spoke in German--I'm German. I think he's read more books in German than I have."
(She wasn't around.)
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What he didn't tell you was that my German was ass.
I hope I can return the favor when we're in the midst of a national crisis about . . . something that I know something about.
Unionization? Grammar?
MyDD claims that the new and exciting liberal alternative to the Bush-Paulson bill consists of the Bush-Paulson bill plus the annual Alternative Minimum Tax adjustment that had a 100% chance of happening already, various tax cuts for corporations, and a requirement for employer-based health care plans to cover mental health care. Why that last thing? Apparently it's a bill that passed the House when Paul Wellstone was still alive, and has been kept hanging around since then so that random other things (for example a mysterious trillion-dollar bailout to prevent a Great Depression) can be attached to it so those things can pass straight through the Senate without having to go through the House.
MyDD seems neutral. SEIU takes the initiative in supporting it? Why?
This just gets more worrisome.
Meanwhile, Ian Welsh seems to be talking about a completely different thing, and endorses it because it will recreate for us the experience of Japan in the 1990s without propping up the existing financial house of cards, instead of recreating the experience of Japan in the 1990s AND propping up the existing financial house of cards. However, I fail to see how any of the five main points of the bill he cites, all of which seem like minor changes, are related to any of the conclusions he draws about the effect on the country.
{waves to Kraabicus Bionicus}
I think Welsh is saying that the existence of any bill on the house floor besides the Paulson bill is good; the bill itself sucks.
I personally think the bill itself is hopelessly pathetic. The bill is an answer searching for a question; and that question is, 'What did we do after we got totally fucked up last night?'
I think the basic problem we have here is that the D's want a bipartisan solution, first and foremost, lest they get blamed for the bailout. That's the only reason I can see not to front a decent bill.
Meanwhile, I am coming around to the point of view of saying that we ought to pass the Paulson bill for the entertainment value when the whole thing goes toes up in three weeks. We are fairly well screwed, real economy-wise, and I am left with no confidence that a general banking meltdown can be prevented by the 2.5 stooges in DC. So we might as well get some entertainment value from our funny money.
(Note: people seem to think this bill will cause the banks to start lending again. Since they will be hoarding cash this seems unlikely.)
max
['Even if there is no panic, the credit bubble must contract.']
519:Note: people seem to think this bill will cause the banks to start lending again. Since they will be hoarding cash this seems unlikely
Newberry thinks, in an attempt to recapitalize, the banks will put the Paulson money where it will get the quickest highest return. Certainly not Ma & Pa retail and light industry.
Commodities? Look a little risky in a global dowturn, but not completely elastic.
John,
So what is the lesson in this? You tell me.
I dunno - be careful who you make friends with in high school? Pretty much standard advice from the standard US mom.
My best friends from HS are now a Vice Provost at a medium sized college and a successful machine shop owner who is losing his business because his customer's all are losing their businesses because the manufacturing work is now in China. My relatives are small town bankers who actually are conservatives, and I mean the old-fashioned prudent kind, not the new-fashioned leverage 35:1 and have taxpayers pick up the pieces kind.
I hear a lot of stories now, and only the University Vice Provost story is actually good news.
Soros' plan. Too bad he's an evil Communist Jewy Jew with a thick accent.
It was a very pleasant encounter. Small town life depends on not arguing about politics or religion.
Welsh on deFazio and a second plan supported by Galbraith.
The fact that Soros is circulating a plan is good. I think the problem here is that the only people with the infrastructure to generate a not-obviously-irrelevant plan are in the tank for the finance industry. I don't think the kinds of people who create or influence policy ever had much interest in finance.
In a healthy society, the present discussion would be a hopeful sign -- it's actually an open question, with all the canned plans in serious trouble and some people starting to think a little. Can America rise to the occasion? Someone willing to bet that we can will get very nice odds.
Besides the Blue Dogs and Republican pod people, and besides the Congressmen in both parties in finance's pocket, a lot of Democrats are purely local retail politicians unlikely to support anything that's risky and hard to understand.
I hope I can return the favor when we're in the midst of a national crisis about . . . something that I know something about.
When the Communication Workers of America decide that the time has come to cast off their changes and launch a putsch, "The Roads Must Roll"-style, I'll come to you for certification that I need not be exiled to rotary phone re-education camp.
492 - Oudemia forwarded me an email from someone she knows (a law professor who might be expected to know better, but is apparently a law-and-economics type and so, then again) in which this was patiently laid out for the benefit of us stoopids who don't understand that regulation is always bad, with a little ahistorical blame-the-blacks-and-Mexicans-and-poor-folk CRA bashing for dessert. This is clearly the line that the right wants to take, which means it's going to get repeated by first politicians and then the media for the next thirty years.
Another question: If buying up the bad debt is not the right solution, what should be done with/about the bad debt?
"Let the banks fail, lower taxes, and deregulate" is the House Republican plan, I think.
That was also the message of the letter signed by Tabarrok and a lot of unknown whiz kids, I think.
If economists don't want the Chicago School to represent their profession, they should find someone better to represent it.
what should be done with/about the bad debt?
The banks have to eat it. If it can't do that and survive, then it gets seized by the feds and put into conservatorship.
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Ingrid Robeyns has a piece at Crooked Timber doubting that analytic political philosophy to say anything interesting about what seems to be the biggest political crisis since the Vietnam War. I didn't have to say a word. I just posted a smiley.
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I saw that and thought of you. Slowly, philosopher by philosopher, you're gnawing away at the credibility of analytical philosophy.
527: My brother heard the same line at work. He called me up and said, "What the fuck are these people talking about?"
Does anyone know a succinct refutation of the talking point I can send him? The Republicans have now pissed him off so much that he wants to push his own talking points.
Wait a minute, this talk about the Chicago school of Economics reminded me of something.
Isn't it true that after the great Chicago fire they eliminated all building codes and made new laws forbidding any future building codes so that Chicago would never face the same catastrophe again? Yeah, and they privatized the fire departments too. That's why there is no public fire department in Chicago to this day. Without those changes Chicago would have probably burnt down two more times since then. Thank God for the foresight of the city leaders.
Yeah, sure, that's what happened all right.
Does anyone know a succinct refutation of the talking point I can send him?
Try my 314. I believe that one has to acknowledge that the rules were changed, but that the rule changes did not create the abuses seen later. Voracious demand for the bonds (i.e. something for nothing) created the abuses, which were suddenly possible because of the rule changes. Or something.
528: The government buying the debt is neither good nor bad on its own. The critical question is the price. If the price is low enough, then it makes sense for the government to buy the debt. If the price is too high, then it's just free money for Wall Street.
The debt is probably even worth more in government hands than in private hands. Part of the problem is that nobody wants to buy the debt, so banks can't sell them if they need money. (This is what people mean when they talk about a "liquidity crisis".) Since the government can always raise more money, the government doesn't need to sell them for cash, so they can just wait for the mortgage payments. Plus, the government is in a better position to negotiate large-scale loan modifications.
The problem is that we don't just have a liquidity crisis. We have an insolvency crisis: some banks might go out of business, but no one is sure which so nobody wants to lend any bank money. WaMu is a good example -- depositors were completely unaffected, but almost anyone else who gave money to WaMu lost it. This is the financial market equivalent of a bank run. The government has to do the equivalent of making a really big deposit in the bank to show that the bank is going to be okay.
"Let the banks fail, lower taxes, and deregulate" is the House Republican plan, I think.
I SAY: LIQUIDATE LABOR, LIQUIDATE STOCKS, LIQUIDATE THE FARMERS, LIQUIDATE REAL ESTATE.
The debt is probably even worth more in government hands than in private hands.
Lots of people seem to be hoping and wishing that the government can buy the debt for a price that is above private market, but below the intrinsic value that the government could recover. Krugman, for one, is highly skeptical - and one disagrees with Krugman at one's peril. But me, I wonder ...
The problem is that we don't just have a liquidity crisis. We have an insolvency crisis
Yeah, that's Krugman's line, and God knows he's been right about everything else. Purely ex recto, it seems to me that the lack of liquidity might be the dominant cause of the insolvency crisis. But what do I know?
WaMu is a good example -- depositors were completely unaffected, but almost anyone else who gave money to WaMu lost it. This is the financial market equivalent of a bank run.
Wasn't WaMu just a plain, old-fashioned bank run? I got the impression that the FDIC wouldn't have stepped in had depositors not started to pull their money.
the lack of liquidity might be the dominant cause of the insolvency crisis
short answer- yep. Say I'm holding AAA CDOs on my books: I'm solvent, plus I can sell those CDOs to anyone at FMV. Then one day I wake up to find those AAA CDOs have been downgraded to BB. Now I am no longer solvent, and since no one will buy this junk I also have liquidity issues.
Does anyone know a succinct refutation of the talking point I can send him?
Yglesias has been very good at directing internet traffic toward refutations. This is his most recent link, but it's not really the best one he's had lately - for one thing, it's not very succinct.
Let me try to distill it into a few talking points:
1. The Community Reinvestment Act was passed in the '70s. If that's the problem, why didn't things blow up sooner?
2. Banks that have been most active under the act aren't the ones that have been worst hit.
3. The banks that are in trouble made loans to poor folks far in excess of CRA requirements.
4. Bad loans are a red herring anyway - they aren't really at the root of the problem. The problem is that ratings agencies and the securitizers of those loans misrepresented their quality to the securities' buyers and the insurers of the loans. Absent that misrepresentation, there is no crisis.
How's that? I'm rehearsing this so it all makes sense when I lay it on my own winger brother.
Absent that misrepresentation, there is no crisis.
This is a really important point. It's not risk per se that's the problem, it's mismanagement and misrepresentation of risk.
The fundamental idea of aggregating sub-primes wasn't crazy, random lenders may be too small to accept that sort of localized volatility but if you can pile enough of it together for the big players they can --- if a) you've correctly identified the foreclosure risk etc. and b) countered it properly (doesn't mean anyone will want to buy, if interest is forced too high). So those are big ifs, but not crazy. What's crazy was wrapping up all those gizzards in wax paper and pretending that turned it into prime rib.
1. The Community Reinvestment Act was passed in the '70s. If that's the problem, why didn't things blow up sooner?
Rule changes in 1999
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=print
4. Bad loans are a red herring anyway - they aren't really at the root of the problem. The problem is that ratings agencies and the securitizers of those loans misrepresented their quality to the securities' buyers and the insurers of the loans. Absent that misrepresentation, there is no crisis.
The bad loans are the root of the problem, but you are right about the ratings. I don't think that the misrepresentation was willful, but rather overly optimistic in what should be a very conservative environment. The buyers wanted the extra yield, and were assuaged by the AAA ratings.
541: While blaming the victims is generally considered bad practice, I also think in this case that the victims were complicit in their own hoodwinking. AIG was suckered, it's true, but they were blinded by greed and really ought to have known better.
Contra James B., though, I'm generally sympathetic to the home-buyers. In some narrow sense they are certainly culpable, but they aren't financial professionals and they were scammed by people who are professionals.
I'll just repeat my peasant wisdom:
A sophisticated, innovative financial instrument provides a windfall profit for the first person who figures out how it really works, though sometimes that collapses the system. The profit is between the difference between what one person understands and what everyone else understands.
For all I know, it's not just possible but inevitable that the system eventually collapses. Are there sophisticated, innovative financial instruments which are also robust?
And probably the windfall profit isn't just an incidental effect of the new instrument, but its very purpose. It's like gymnasts figuring out new stunts that not everyone can do. A stable system would be boring, and without windfall profits.
Wasn't WaMu just a plain, old-fashioned bank run? I got the impression that the FDIC wouldn't have stepped in had depositors not started to pull their money.
Not really. Some news reports have implied that, because about $15 billion in deposits walked out the door. But that was only about 9-10% of deposits and 4-5% of assets. From mid-2007 (when the crisis started) to August of this year, WaMu's equity alone lost about $60 billion in value. And its bonds and short-term debt lost as much or more. If you're looking for the capital loss that killed WaMu, that's what really did it.
And yes, I'm very sure that this is a solvency crisis as well as a liquidity crisis. Without actual concerns about solvency, there's virtually no reason for a liquidity crisis. Loaned funds and derivatives exposures are some of the first debts to get paid back, so banks are very likely to recover any exposures they had to a fellow bank provided its assets are worth anything (i.e. it's solvent). The big problem is that, since the value of these assets is so incredibly uncertain, it will continue to be feared as a potential insolvency crisis until the banks either have an extremely sizable equity cushion or the assets are off their books.
And 541 makes a great point. CDOs are actually a pretty sound idea. They were just implemented in some fucked up ways, by people who got the potential risks and correlations that determine valuation severely wrong.
A stable system would be boring, and without windfall profits.
This should be posted on every bank's front door. Of course, it would be interpreted differently by each reader, but hey, them's the breaks.
TLL, Fannie and Freddie are more complicated, but their problems are:
1. Not the primary cause of the crisis and
2. Not the result of their mandate to hook poorer people up with loans. (Securitization was their big problem. See 540.4.)
I don't think that the misrepresentation was willful, but rather overly optimistic in what should be a very conservative environment.
Shucks, Ponzi made people rich ! He wasn't a fraud, just an inveterate optimist.
My brother took out two business loans about 5-7 years ago, and he really had to fight to get a fixed interest loan. The middlemen were throwing all kinds of junk loans at him. The second time he introduced himself by saying exactly what he wanted, and his contact still tried to sell him junk.
549: smells like commission difference.
PF, as per my 314, the changes to the CRA and GSEs are not the "root" cause of the problem, but those rule changes created the cracks that were then exploited to such an extent to cause the foundation to crumble.
And as someone said the other day, quite a bit of any modern economy is a Ponzi scheme. Can you tell me what a dollar is actually "worth"?
Merely sustaining the value of something through collectively agreeing that it's worth something isn't a ponzi scheme. Otherwise we would think the very concept of a bank is disturbingly risky, because a bank run could occur at any moment.
But sustaining the idea that something will increase forever is a ponzi scheme because...it can't increase forever.
I think the idea of pursuing a certain percentage of growth of the "economy" or "wealth" ever year is not a ponzi scheme in today's world because wealth can be created by extracting value from the environment. But...we only have one planet so what I think is also not correct.
TLL, your 551 reads as if you're saying that without the regulation change the crisis would never have happened. Surely that's not what you mean. (I could accept "slightly less like to have happened".)
552: I think the idea of pursuing a certain percentage of growth of the "economy" or "wealth" ever year is not a ponzi scheme in today's world because wealth can be created by extracting value from the environment. But...we only have one planet so what I think is also not correct.
But it also can be created by using what there is more efficiently. 200 years ago, 90-95% of the population worked in agriculture, to produce the food that would let the rest of the population make everything else. Nowadays, it's 5-10%. Not all of that difference is explained by extraction of fossil fuels, soil fertility, etc. from the environment.
540
Bad loans are a red herring anyway - they aren't really at the root of the problem. The problem is that ratings agencies and the securitizers of those loans misrepresented their quality to the securities' buyers and the insurers of the loans. Absent that misrepresentation, there is no crisis.
I don't think this is exactly correct. As I understand it Wamu got in trouble with loans it made itself and kept. These loans had problems (ballooning payments, dubious appraisals, weak documentation) that can't be blamed on Wall Street. Same with Wachovia (except that that bad loans came with a bank, Golden West, that Wachovia bought).
Not all of that difference is explained by extraction of fossil fuels,
While there is truth in what you say about efficiency, you have to be careful not to overestimate it's effect.
The numbers are more like 70% -> 2%, if you're talking about direct farm work. A huge amount of the difference actually due to extraction of fossils, but leaving that aside, the definition of `agricultural work' is a bit slippery. It's always more than just the farm population, and if you widen it to `delivery of food' then these days you really ought to include a lot of service industry jobs and truck drivers. So the difference is more modest, and the largest effect is fossil fuels.
No argument with the larger point that the difference between todays economy and 1700's is not just explained away by resource extraction. But it's also very commonly overemphasized, in my experience, by fans of markets.
The idea of strictly unlimited economic growth is of course stupid, but that's hardly under (serious) contention.
1) Not just a liquidity crisis and a solvency crisis, but an depression in housing and I will have to go look for the criteria for "depression". Of course all the numbers are fucked up, a lot of GDP the last few years were in that, what, 60% of the economy that is housing + finance? That was imaginary fucking output. And core inflation etc.
But if a recession is sorta kinda 3 decling quarters a depression probably is 5-10
2) For all you folk looking at real estate and screwy mortgages and twisty instruments, these are not the "root" of the crisis.
We are in the second huge bubble & crash in a decade. I don't think they're completely unconnected.
200 years ago, 90-95% of the population worked in agriculture, to produce the food that would let the rest of the population make everything else. Nowadays, it's 5-10%. Not all of that difference is explained by extraction of fossil fuels
Perhaps not all the difference, but certainly a lot of it. The enabling technologies for the green revolution in agriculture are the Haber-Bosch process which allows for the creation of nitrogen fertilizers out of natural gas and mechanized farming equipment that runs on fossil fuels. Fancy hybrid plants are a factor, but we only used them to get the kind of plants that go well with mechanized agriculture on artificially fertilized soil.
It always comes back to the oil.
544
Contra James B., though, I'm generally sympathetic to the home-buyers. In some narrow sense they are certainly culpable, but they aren't financial professionals and they were scammed by people who are professionals.
I will repeat that many of the loans gone bad involve fraud . You can certainly find appealing borrowers in trouble but you can also find unappealing borrowers in trouble. The question is which are more typical. I don't think the very sympathetic cases are at all typical.
Depression ...Wiki
I do not believe we need to hit the depths of 1930-33 to have something we can call a depression. We are meeting many of the non-numerical criteria.
Wiki says a sustained recession, as I said in 557, or a 10% loss of GDP, which I presume might mean a 2% drop each quarter for 5 quarters.
As far as I concerned this downturn started somewhere around Nov-Dec 2007.
But sustaining the idea that something will increase forever is a ponzi scheme because...it can't increase forever.
I think the idea of pursuing a certain percentage of growth of the "economy" or "wealth" ever year is not a ponzi scheme in today's world because wealth can be created by extracting value from the environment. But...we only have one planet so what I think is also not correct.
This organic farmer dude said he expects a four or five percent return on his labor-intensive, low fossil fuel farming and sheparding annually. I'm willing to accept that.
So that's a percentage of growth that I can understand. That is a result of labor and husbandry and solar energy capture and plants. Whenever I hear about growth faster than that, I subtract four or five percent, which could be from growing more things, and I need an explanation for the rest. I'll accept other explanations if they make sense (computers made people work better, information was combined well), but I want to hear what value was added to be worth more than 4 or 5%.
540
How's that? I'm rehearsing this so it all makes sense when I lay it on my own winger brother.
More talking points:
The bad loans in poor and minority areas were a symptom of the fact that bankers had gone crazy, they were not the cause.
The reckless Bush adminstration fiscal policy set a bad example for everyone else.
I don't think the very sympathetic cases are at all typical.
We've all noted that by now, James. As far as I can see, it's on ideological grounds rather than empirical ones.
558: Right, a lot of it really is fossils.
It's also worth noting that an awful lot of what is talked about as `efficiency' gains in (industrial) agriculture are talking about output per individual worker. New seed types and technologies may have similar (or even lower) yield to previous years but allow for less upkeep which means one guy and his tractor can manage a larger area, etc. It's often not efficiency in the sense of more output for given inputs.
I'll repeat that the middlemen very diligently coached buyers and in some cases filled in the blanks for them. There was often complicity on both sides, but there were few cases when a buyer was deceiving a lender.
546
And 541 makes a great point. CDOs are actually a pretty sound idea. They were just implemented in some fucked up ways, by people who got the potential risks and correlations that determine valuation severely wrong.
I don't agree once you go beyond simple pooling for diversification. I suspect the more complicated structures were driven by the illusion of creating value obtained by gaming the rating system. I doubt with accurate ratings there is anything like the same incentive to slice up the pools.
The fundamental idea of aggregating sub-primes wasn't crazy, random lenders may be too small to accept that sort of localized volatility but if you can pile enough of it together for the big players they can --- if a) you've correctly identified the foreclosure risk etc. and b) countered it properly (doesn't mean anyone will want to buy, if interest is forced too high). So those are big ifs, but not crazy. What's crazy was wrapping up all those gizzards in wax paper and pretending that turned it into prime rib.
See, from my point of view, that's precisely why it doesn't make sense.
Take those people on TV that buy up lottery winnings that will pay out in the future for cash now. If someone won a million bucks pread over five years, that's pure profit... if they wait five years. The need extra cash now, so they want to sell it to the TV people. But the TV people have to fork over some cash now for the rights to the future payoff (making it like a bond). But they have to pay a small enough amount money to get a decent return for the time period, one that would beat investing in something else. They are, in short, dividing the profits.
Mortgages are profitable over the long term, but not wildly profitable. If I start reshopping them, I'm slicing up my profit. To make a that work, I need to scale massively, by making a very large number of loans, or I have to loan at payday rates. But then, if I was gonna go to all that trouble, why shouldn't I just not make mortgage loans and get involved in something else that has more potential upside?
So, to my eyes, improperly pricing risk is feature, not a bug; if I priced risk properly, I either wouldn't be able to make it worth my while to bother selling it, or nobody would buy it.
On the other hand, if I cheat by, say, reducing my claimed risk to near zero, and promising to pay profits I won't have, I can essentially book the profits from the loan, and the profits from the CDO sales up front, and then I can get someone else to guarantee the entire mess. Book double profits now, and book no potential losses at all. Unfortunately, when the future arrives, I have to book double losses, plus.
I continue to fail to see how this can be profitable over all unless someone is getting badly screwed. That is, I'm engaged in fraud, essentially, or I'm engaged in blowing future profits I don't have now.
From that point of view, this whole bailout thing is a musical chairs escapade that seeks to determine who is going to be holding the bag for paying off the (fraudulent) profits that were already cashed out.
max
['Apparently, that's going to be the USG.']
I doubt with accurate ratings there is anything like the same incentive to slice up the pools.
I think this is correct. The corruption of the rating agencies is key to what has happened. That corruption was an inevitable result of the incentive structure for those agencies. To prevent something like this from happening again we need to have genuinely independent rating agencies with a revenue stream that is not tied to the people selling the CDOs.
565
... There was often complicity on both sides, but there were few cases when a buyer was deceiving a lender.
Did you look at the article on fraud I linked above.
Mr. Lovett has taken listings for about 60 foreclosed properties this year. He estimates that half of the foreclosures he's encountered are due to fraud.
567: You want to get into mortgages, because they are profitable, but not wildly so. So you need to get some money to lend. Where are you going to get it? One way, if you're a bank, is to sell the loans you have and use the proceeds to lend again.
Shearer, from your article:
Ms. Lynch said the bank relied on an outside "loan officer" at a reputable mortgage broker to serve as its "eyes and ears" in the real-estate transactions. As it turned out, that person was indicted as part of the fraud ring.
I either wouldn't be able to make it worth my while to bother selling it, or nobody would buy it.
Max, I wasn't clear enough -- I was explicitly allowing for this. I said it wasn't a crazy idea, not that it was a particularly good idea. But a modest profit could be made by aggregating to manage the local volatilities, without any funny accounting.
I will repeat that many of the loans gone bad involve fraud .
James, what you persist in failing to see is that the system was designed to create fraud. True, this instance seems to be a case where Bear Stearns was also a victim of fraud, but they were a witting victim. You don't set up a system like that if you are really concerned with having your loans repaid.
as it turned out, that person was indicted as part of the fraud ring.
So LB, you're saying we should take that 50% as a good estimate of the global rate, right?
This organic farmer dude said he expects a four or five percent return on his labor-intensive, low fossil fuel farming and sheparding annually. I'm willing to accept that.
But this is still exponential growth. Five percent growth rate means doubling every 35 years. It might take longer for that kind of growth to explode, but it will explode. If the economic growth you are measuring is somehow tied to the material resources of the planet, you will eventually exhaust those resources.
It's also worth noting that an awful lot of what is talked about as `efficiency' gains in (industrial) agriculture are talking about output per individual worker. New seed types and technologies may have similar (or even lower) yield to previous years but allow for less upkeep which means one guy and his tractor can manage a larger area, etc. It's often not efficiency in the sense of more output for given inputs.
Human effort and attention aren't inputs?
We are in the second huge bubble & crash in a decade. I don't think they're completely unconnected.
Yield chasing will do that. I remember seeing something the other day that turned $100 into $1 billion in 10 years just by buying and holding the proper investments, and selling at the right time (NB, no capital gains taxes were figured, so the totals would be considerably less, but the point is the same).
Human effort and attention aren't inputs?
I didn't say that (and didn't mean to suggest it). My point is that you have to be very careful with what precisely is meant by efficiency when you are talking about this stuff, or else you can easily make comparisons that are nonsense.
It seems utterly clear to me that the reason why our system is so successful is that it can create new large-scale institutions that know how to do useful things, rather than any simple mapping of inputs to outputs. I can't really figure out how to marshal an argument to that effect, though.
what `system' do you have in mind there Walt (there are subthreads here)
Good question. I couldn't think of a better one-word descriptor. The economic system of developed countries, I guess.
563
We've all noted that by now, James. As far as I can see, it's on ideological grounds rather than empirical ones.
So you think my opponents in this case on basing their opinions on empirical grounds rather than their own differing prejudices? Perhaps you can point me to the actual data.
I don't think this is exactly correct.
You think I'm wrong, I know. Go ahead and say it. You don't have to pull your punches with me, James. I can take it.
As I understand it Wamu got in trouble with loans it made itself and kept. These loans had problems (ballooning payments, dubious appraisals, weak documentation) that can't be blamed on Wall Street.
Industry norms went to hell. The folks selling securities were demanding product to sell. The folks making the loans underlying the securities supplied that product without much concern for the niceties. One part of WaMu was running a scam, the other part was victimized by it.
I agree that there's a certain poetic justice to WaMu getting burned, but I'd argue that it was their acquiescence to "Wall Street" norms that ultimately did them in.
So you think my opponents in this case on basing their opinions on empirical grounds rather than their own differing prejudices?
Actually I think there hasn't been much hard data at all.
I was also noting that I doubt anyone is uncertain of your position on it, by now. I suppose it reflects an ideological bent that is poorly supported by the personal experience of many here, which is why you often run into friction.
Megan,
A 6% return on investment is not the same thing as saying the farm can grow by 6% a year.
And Tom Scudder, for the sake of argument let us say you are correct and cheap energy has little to do with our improved 'efficiency' in food production and human ingenuity has everything to do with it.
Even so, there is an absolute upper bound to efficiency. Being 100% efficient is the limit, and no amount of ingenuity will improve efficiency once it hits 100%.
Once your efficiency is 100% and you have maximized the conversion of ALL your inputs to "good things" you will still be constrained by other limits. Worse yet, you will be constrained by the most scarce input. Put another way, given an infinite supply of human ingenuity you still can't make something out of nothing.
These concepts are felt in the bones of people trained to work in the physical world. I wish economists would instinctively know them as well.
James, we really do know your opinion on this. We have reached the point of diminishing returns on this particular point. I suggest you wait until more data comes out that backs you up, and then you can dramatically refute us then.
Mortgages are profitable over the long term, but not wildly profitable. If I start reshopping them, I'm slicing up my profit.
But you're slicing up the profits specifically to get a lower risk, and to get assets which can be held as Tier 1 capital, both of which are worth sacrificing some return for. Especially since there's a good chance they'll still produce a yield spread over dirt-cheap deposit bases. Plus, since there's a limit to how much credit risk banks can actually take on (for both regulatory and common sense reasons), any ability to parcel off some of the higher risk to outside investors will help increase the banks' carrying capacity for higher-risk loans at a fair price, which is something I support overall.
The high-yielding equity and mezzanine tranches that are be sold off to hedge funds, pension funds, i-banks, etc. are also useful because they're fairly clean macroeconomic bets. Furthermore, the extent that isn't a macroeconomic bet is a diversified housing market bet, which shows little correlation with equities or commodities. So it's a reasonable investment and speculative vehicle for those market participants.
Admittedly, there should be fewer CDOs than there were (the limit likely being institutional investors' appetite for the fairly-priced high-risk tranches), and the originators of the loans should need to keep a portion on their books in order to keep their underwriting honest. In general, the moment that the AAA tranches start yielding more than comparable corporate bonds, something fishy is going on. But the ability to slice medium-risk loans into low-risk debt instruments for bank capital purposes and high-risk speculative instruments for major investment institutions is a valuable one, since it allows us to somewhat address a mismatch between the credit quality of the available debtor pool and the types of assets that our financial firms can and should hold.
But all that said, their models were shitty and the incentives for all involved were worse. With some sensible regulation and the increased caution of market participants from this point forward, the pricing will get better, the market will shrink, and it'll all become much more boring.
585: There is a universal danger to think that the things that you feel in your bones apply beyond where they do.
Obama gave or wrote a great speech on the crisis today. Text available in full over at Ezra Klein's and probably elsewhere.
There is, of course, stuff I completely despise in it, but this is the campaign, and it is a homerun.
I endorse 587. Can someone with admin privileges edit it so that it has my name on it instead, and then delete this comment?
Put another way, given an infinite supply of human ingenuity you still can't make something out of nothing.
A stable system would be boring, and without windfall profits.
Bulls and Bears make money, pigs and chickens don't.
Unless those pigs are Emerson's hogs. And he charges admission at feeding time.
568
I think this is correct. The corruption of the rating agencies is key to what has happened. That corruption was an inevitable result of the incentive structure for those agencies. To prevent something like this from happening again we need to have genuinely independent rating agencies with a revenue stream that is not tied to the people selling the CDOs.
This is an oversimplification. Some of the gaming had nothing to do with corruption per se.
For example credit quality is continuous but ratings are discrete AAA, AA etc. So some AAA credits are better than other triple AAA credits but they all tend to trade about the same. And the same for the other credit ratings. This doesn't matter too much as long as the issuers are not gaming the system. If you buy a bunch of AAA bonds some will be relatively good and some will be relatively bad but it will tend to average out. But when people were slicing up the pools it didn't average out because they were constructed so that AAA portion was always the worst possible credit that could get a AAA rating. Similarly the lower ranked portions were always the worst possible credit for their respective ratings.
There is a universal danger to think that the things that you feel in your bones apply beyond where they do.
True enough, but Tripp wasn't talking about one of those cases.
The constraints on economic systems in the real world are real enough. Pretending unlimited growth is sensible may be a useful localized theortical tool, but it's still pretending something that is not treul
587: I knew if I was lazy about it someone would expand on this!
575 - 'Cept that it only applies to his very rich farming region (Ohio Valley, I believe) with his advanced skills. If you trust that estimate, it could apply to breadbasket regions, with everywhere else getting less and mostly much less.
I don't use that estimate for much, but it is the highest that I assume is a sustainable yield based on capture of solar energy and human labor. Above that number, I want an explanation for.
Bringing another point of view to the front, it occurred to me that the recent situation in Wall Street is similar to what would happen in the olden days when we had labor unions and a relatively small(ish) union could still wield great power if it controlled an essential function.
For example, the garbagemen in NY city would go on strike for higher wages, the garbage would pile up and eventually the city had to give in.
Today the businessman on Wall Street have inadvertently(?) shut down an essential function of society and again, the government will have to cave in. When? When businesses stop meeting their payroll. That will be when Wall St concerns become Main St concerns.
So I ask this simple question - if unions are so bad when they are garbageman why are they acceptable when they are businessman?
I think, in this case, the American public has bought the 'unions bad' meme so fully they are applying it, finally, to the businessmen. They may not be able to articulate it as I have but they are totally against a bail-out because it feels so much like caving in to a union.
Too bad we can't do the same thing to the other legal monopolies in the US- Doctors and pharmaceuticals.
If you have a monopoly you can privatize the profits and socialize the costs and the world is your oyster.
It is frustrating to me that there is nothing new here and yet we are hitting the same situation over and over.
the moment that the AAA tranches start yielding more than comparable corporate bonds, something fishy is going on
There are none so blind as he who will not see. Besides, when my bonus depends on my not seeing, I keep my eyes closed.
594 - We're near the thermodynamic limits of what technology can do?
Wait, Megan, are you talking about return or growth?
James, when buyers were encouraged by middlemen to misrepresent themselves, they thought the middleman was representing the lender and saying "This is OK with us". So there was fraud, and there might have been buyer complicity, but the middlemen (in the stories I've heard) were the prime movers. But there also had to be lender (bank) complicity for agreeing to such a risky system, where the incentives encouraged fraud.
And Tom Scudder, for the sake of argument let us say you are correct and cheap energy has little to do with our improved 'efficiency' in food production and human ingenuity has everything to do with it.
I did not in fact say that.
Even so, there is an absolute upper bound to efficiency.
And neither you nor I have the slightest idea if we-as-a-civilization are anywhere near that limit.
We're near the thermodynamic limits of what technology can do?
That has to do with the question of when the assumption falls apart, and a hard upper bound at that (for many reasons, likely to be to simple to be a practical upper bound, either). As I said, locally and for short times, it may be a fine approximation --- but one should never confuse approximations with what they approximate.
Tripp's right that failing to thing about this stuff at all can get you in trouble, as potentially with the current energy economy.
Don't get distracted, soup. Hit me, motherfucker!
Wait, Megan, are you talking about return or growth?
I think I was careless. Lemme go look them up so I can be sure of my answer.
still pretending something that is not treul
I assume that treul is a portmanteau of true and real. I like it.
I did not in fact say that.
Agreed, Tom wasn't saying that.
The mechanisms behind the `green revolution' are quite well understood now though. Technological advances have been made along the way, but they're a second order effect.
Walt,
585: There is a universal danger to think that the things that you feel in your bones apply beyond where they do.
Noted, and I concede the point. I really do.
As a counter I will claim that sometimes knowledge and wisdom from one field may be applied to another.
I'm not claiming to be an expert in this. I'm giving my observations. I am very skeptical of the idea that infinite growth is possible. Not if it in any way interacts with the physical universe. In the physical universe something will always be a limit.
In a way this reminds me of a stupid game we played in my HS economics class. It was a poorly designed fictitious market simulation and it allowed for a guaranteed tiny profit on a transaction with no constraints on time, quantities, or anything.
Once our team spotted that we submitted our strategy of buying an infinite supply of X and selling it for an infinite (plus percentage) amount, making an infinite profit.
This actually led me towards the study of infinities and their classifications.
594: "The earth's not a closed system; it's powered by the sun. So fuck the damn creationists! Doomsday, get my gun." -- MC Hawking
583
Industry norms went to hell. The folks selling securities were demanding product to sell. The folks making the loans underlying the securities supplied that product without much concern for the niceties. One part of WaMu was running a scam, the other part was victimized by it.
I agree that there's a certain poetic justice to WaMu getting burned, but I'd argue that it was their acquiescence to "Wall Street" norms that ultimately did them in.
Wall Street got caught up in the madness but I don't think it was the origin. A lot of the problematic terms (like teaser rates) seem to me to be driven by competition between loan originators.
There's an important difference between indefinite and infinite. If we our economy was miraculously transitioned through the intervention of Alien Space Bats to run on nothing but solar and other renewable energy, I'd still say we could achieve some percentage of economic growth indefinitely, simply because I have no idea where the hard limits are. And we're not exactly living in the Culture yet.
609: the earth + sun is a closed system, to first order.
which is what we're really talking about if you want to look at these things macroscopically.
nearly[*] everything we're doing is converting solar energy. Growing food is the best technology anyone has found for this as yet, but it's problematic for running everything so we also need power plants. They're all indirectly converting solar energy too.
Modern industrial ag is basically sunlight + inputs of old sunlight (fossils) gives more yield than sunlight alone. Fine, but the old stored sunlight will run out soonish and almost all of the additional production along with it. We can replace that falloff with either larger areas under ag, or more efficient processes. Both are possible to some degree, and both have very real practical limitations.
[*]nuke plants don't count here, but they mostly don't matter in practice anyway. Unless someone sorts out fusion.
609: Kicking their punk asses is my paramount priority too, but our economy is not powered by the sun.
573
James, what you persist in failing to see is that the system was designed to create fraud. True, this instance seems to be a case where Bear Stearns was also a victim of fraud, but they were a witting victim. You don't set up a system like that if you are really concerned with having your loans repaid.
This is classic blame the victim language. The woman wouldn't have been dressed like that if she was really concerned about getting raped.
I'd still say we could achieve some percentage of economic growth indefinitely
There's an argument to be made there, but it has some pretty strong assumptions that there is no real reason to accept without support. What I mean is that for example it assumes we will make certain technology transfers, and leave the planet successfully -- neither of which are given.
608: No, that's true, and a lot of what economists say about indefinite growth forever is stupid. Arguments on whether we should do anything about global warming now based on whether GDP growth in 2310 will be 2.9% or 3.0% are silly. Cornucopian arguments on how copper wires are infinitely divisible are embarrassing.
I meant return. Sorry I said that wrong before.
And neither you nor I have the slightest idea if we-as-a-civilization are anywhere near that limit.
In what I've seen, economists are adamant about not even asking whether we're reaching that limit, or what the limit is, or whether there is a limit. They just assume continuous technological improvement, substitutability of inputs, and the discovery of new resources. Physical reality has been bracketed out of their formal system, and an earth scientist or geographer who tries to horn their way in will meet fierce resistance, as though they were poets or hippies or Luddites.
Except for earth scientists supporting the economists' view.
Tom,
Am I correct in thinking that when you say "indefinite" you mean "I dunno," and when you say "indefinitely" you mean "I dunno how long it will last?"
Or do you mean something else. Cause "I dunno" is a pretty slim reed to support the future of the economic system of the world.
This is classic blame the victim language.
To James the powerful who call the shots are helpless victims, and the lowly trying to get by are ruthless, cunning predators.
621: Oh, like that's crazy. Look what happened the dinosaurs. Lumbering along, thinking they ran everything, when the mammals came and ate their eggs. That's what the poor are doing! They're eating our eggs! Stay away from my eggs!
CN,
609: Kicking their punk asses is my paramount priority too, but our economy is not powered by the sun.
True, it is mostly powered by stored solar energy. When that runs out it will be pwered by the sun in real-time. Still, you know what they say, you can't eat human ingenuity. All the human ingenuity in the world can't make something out of nothing.
I'm surprised you don't see this.
They just assume continuous technological improvement
Emerson decides it is time to close the Patent Office after all, one hundred years after the first suggestion.
http://www.sandhill.com/opinion/daily_blog.php?id=34&post=294
Re: 615. I knew I could count on James to bring a feminist perspective to the bail-out discussion.
623: "pwered" should be "pwnered"
I guess I should spell things out. Economists assume that whenever there's a rough spot, the problem will be solved by technological improvement so that growth can continue unimpeded. That's the plan, with no backup plan, and an economist who tries to describe a backup plan (Herman Daly) is well advised to get out of economics.
The earth and the sun comprise a closed system, this is true. It's just very fucking large. Large enough that hard physical limits more or less don't matter. The sun is eventually going to turn into a red giant and evaporate the earth, but that doesn't mean we should all kill ourselves now to save trouble. Hell, as far as we know, the universe will eventually turn into a uniform mass of very hot iron. We're all doomed eventually.
When and where and how are what matter, and for that you have to look at the numbers, and make predictions about technological growth. Claiming that nothing is infinite as if that has any relevance to anything is wankery.
I'd still say we could achieve some percentage of economic growth indefinitely
This is true, and I suspect that people who question it don't get quite what economists mean by "growth". It doesn't have to be material. It just has to be some way of creating additional value that shows up in the money economy.
Indefinite growth in population or resource use is impossible, but indefinite economic growth is.
That's the plan, with no backup plan
Economists as underpants gnomes? No weirder than analytic philosophy or evolutionary psychology, I guess.
This is classic blame the victim language.
It certainly has a lot in common with that language, as I explicitly acknowledged in 544. But the point here is that the "victim" was perfectly willing to accept victimization as collateral damage, because their own fraud required acceptance of victimization.
Most of us have tried to express this point too abstractly, but Emerson has been putting this in nice, concrete terms (601, 569, 545). What you're persistently failing to understand is that there were always crooked borrowers out there, and always stupid borrowers out there. What changed is that lenders' crooked incentives created situations that facilitated their stupidity and crime, instead of fighting it.
When you say that fraud was involved in the bulk of these loans, nobody is disagreeing. But fraud by borrowers is a manageable problem - as are stupidity and irresponsibility on the part of borrowers.
The real problem - the problem threatening the financial system - is that lenders took advantage of the stupid and the irresponsible. In that context, being defrauded was just a cost of doing business.
Wall Street got caught up in the madness but I don't think it was the origin. A lot of the problematic terms (like teaser rates) seem to me to be driven by competition between loan originators.
Here's the part that you are absolutely not understanding. Absent crooked securitization, there never would have been competition between loan originators. Absent crooked securitization, why would a loan originator compete to do business with someone who couldn't pay?
620 - Next time I'm setting economic policy for the planet I'll take that into account.
and 628 is true too. Enough energy is out there, it just has to be tapped somehow.
an economist who tries to describe a backup plan (Herman Daly) is well advised to get out of economics.
well, they should get out of economics and do a tech startup or something. That's not the discipline. On the other hand, an economist who develops a growth model that incorporates very slow or even no growth in energy efficiency would be doing a perfectly standard and accepted thing. Technological change in models is usually parameterized so you can show what will happen if it is faster or slower.
So is now a good time to buy a house or not? I'm feeling uncertain.
Here is a pretty good, non partisan explanation of our current unpleasantness.
http://understandingtax.typepad.com/understanding_tax/
Pace Shearer, he lays the blame on the teaser rates, which are not necessarily fraudulent.
Daly says that his "Steady State Economics" got a very unfriendly reception. He was trying to block out what an economics not based on continuous growth would be like, which strikes me as a perfectly reasonable question to ask.
A continuously growing economy based entirely on tech innovation without an increasing population and without increasing resource use strikes me as weird, but a development of the idea would be interesting.
Claiming that nothing is infinite as if that has any relevance to anything is wankery.
That's why I said previously that while thermodynamic limits are true, they aren't that relevant. It's only useful for establishing that upper bounds make sense. However, thinking about the system as whole and working your way down is actually very sensible, in many ways more so than the (much more usual) start at the bottom and assume their is no top. All of the energy coming at us from the sun is a huge number, sure, but slicing that up the right ways gives us a reasonable back of the envelope calculation for what is reasonable to expect. Take the total amount, make some conservative assumptions about losses and technologically sensible conversion rates, and you'll get a sensible upper bound. This is the sort of thing familiar to any undergrad physics student, but most people (including practicing economists) can screw this up an not even notice.
That's what people are (and should) complaining is wrong with some of the economic thinking.
In other words, what people were referring too is much more practical than how you present it. It's very common, from an economics point of view, to assume that our current energy inputs are, in practice, unbounded.
Of course that's just not true, and trivially so. However, if you call people on that fact, often their answer is nothing more nuanced than `technology will save the day'. This is a stupid answer, for reasons than have been hashed out here before, so I won't bother going over it again.
Indefinite growth in population or resource use is impossible, but indefinite economic growth is.
This is true, but misleading. The fundamental error made by some is not in failing to put some sort of arbitrary limit on economic growth, rather by failing to put physically realistic limits on physical resources ... assuming they're big enough to treat as unbounded.
It's sort of like the heat-bath assumption in physics. It's perfectly good as an assumption for many cases, but if you apply it where it manifestly isn't true, you're numbers get all wonky relative to the real system.
635: ...not necessarily fraudulent.
True for a certain definition of fraudulent. I think the teaser rates are designed with the full knowledge that some people will be suckered into getting the mortgage without genuinely understanding that the rates will go up substantially, and the designer is taking this into account as a feature rather than a bug. That's not legally fraudulent, but it is in my mind certainly morally fraudulent.
I have never seen anyone use the "sensible undergraduate" argument who was not trying to pull a fast one. It's Megan McArdle's stock in trade, for example. This could be the first time, though.
631
Here's the part that you are absolutely not understanding. Absent crooked securitization, there never would have been competition between loan originators. Absent crooked securitization, why would a loan originator compete to do business with someone who couldn't pay?
Loan originators compete for customers like any other business. This has nothing to do with securitization. No borrower is a perfect risk. Bad risks can be profitable with the right price and good risks can be unprofitable with the wrong price. It is common for competition to drive businesses to offer unprofitable terms particularly for things like loans or insurance where it takes some time to determine whether a transaction was profitable. You don't need securitization for competition to explain things like teaser rates.
That's not legally fraudulent, but it is in my mind certainly morally fraudulent.
There's your problem, worrying about morals when we're talking about money. Certainly boatloads of borrowers were convinced, either by themselves or their mortgage broker, that at the time of reset they could just refi again. Oops, indeed.
Daly says that his "Steady State Economics" got a very unfriendly reception.
Heh. I've been wondering at an economy based on managed retreat and planned contraction, which suggests that when I unveil my grand theories, the reception will be worse than unfriendly.
let's see if I can get through this one without further abuse of apostrophes.
use the "sensible undergraduate" argument
Dunno if it helps, Walt, but I had very particular undergrads in mind. I'm sure they'd be lousy at economics in general, too, they're just pretty good at energy by the time they're done.
I'm lousy at economics too. I do know a bit about analysing complex systems though. If you make a simplifying assumption, you really need to know why (and where) it makes sense. Particularly when it is obviously wrong in some sense or at some scale. There's nothing wrong with this approach in general: physics and engineering in practice are lousy with linear approximations that are horrible in general, just perfectly reasonable in a particular location and extend. The trick is to know the location and (even more important) the extent.
My problem is when you see that someone is making a simplifying assumption and ask why, and they can't give a good answer. When the mumble-mumble sounds more like "because it makes our models work" than "because it's the right thing to do".
When resource pressures are answered by `magical technology ponies will fix it' (rather than here is the specific technology that willl do X, which is quite different), I worry. It's a stupid answer for many reasons, but it's also hardly the worst one I've heard.
I'm not pulling anything, fast one or otherwise.
James, I have offered a theory as to what changed in the loan origination business in this decade. You have acknowledged the change, but offered no sensible theory as to why this change took place.
I say: Securitization created moral hazard by creating a situation where lenders had incentives to not worry about loan repayment.
Your response, as best as I can reckon, is lenders made these loans because other lenders were making these loans. But, um, why did the other lenders make the loans?
I know, I know, it's turtles all the way down.
639
True for a certain definition of fraudulent. I think the teaser rates are designed with the full knowledge that some people will be suckered into getting the mortgage without genuinely understanding that the rates will go up substantially, and the designer is taking this into account as a feature rather than a bug. That's not legally fraudulent, but it is in my mind certainly morally fraudulent.
I don't think the appeal of teaser rates is primarily because people don't understand the rate will reset. Instead it is because some people discount the future heavily. It is the same appeal as "fly now pay later" and similar promotions. There is a question as to what degree it is proper to force people to use what we would consider more appropriate discount rates.
Folks, I just had an insight!! I have been too trusting toward Bush & the Republicans.
This is George W Bush's plan, and this bill will be Iraq redux.
His goal will be to hurt the economy as much as he possibly can, and then paralyze the country with a distraction.
So what if Paulson took the entire $750 billion, puts it into 75 Swiss Bank accounts under the names of high Bush officials, after which George Bush issues a full retroactive pardon for those officials?
What would Obama 2009 and the New Congress be able to do? Exactly what new law could be written to cover such future actions?
639: That's well said. I would add that lenders also discouraged borrowers from pondering the possibility that housing prices would fall - and that borrowers' failure to understand this was also a feature, and not a bug.
managed retreat and planned contraction
I think it was the concentration camps co-located with hog farms that caused the initial uneasiness, Megan. That and California being surrounded by a moat filled with alligators.
645
I say: Securitization created moral hazard by creating a situation where lenders had incentives to not worry about loan repayment.
Lenders already had such incentives due to the housing bubble. This made bad loans look good and encouraged lenders to relax standards. Same as a bunch of years without hurricanes (or earthquakes) encourages relaxed building standards. Securitization may have thrown gasoline on the fire but the fire was already there.
647:I mean, so much for Obama's 100 days, huh?
Nothing, absolutely nothing, would get done for years, as the trials and political hate were gotten through. Obama wants to work with Republicans after that? The nation would tear him to pieces. But there are still ~35, enough to slow legislation down.
Maybe Bahrain or Dubai accounts would be even better, as long as it was very public and untouchable.
high Bush officials
Well, somebody's smokin' something.
652:Have I told you lately, Republican, ...never mind.
The key and most important word when understanding Bush and his allies is "irrevocable"
Don't ever forget it.
I'm not trying to defend economics or the assumptions that go into economic models here. I am skeptical that a calculation that an undergraduate (even a super-genius undergraduate) can do can answer the great questions of our times. I don't believe undergraduates when they tell me that increasing the minimum wage always causes unemployment, either.
So these 75 pardoned Bush officials, Bush himself included, take their families to Dubai with a trillion American dollars...
...and exactly what does Obama do?
Your response, as best as I can reckon, is lenders made these loans because other lenders were making these loans. But, um, why did the other lenders make the loans?
Because they made good money until it all blew up. If you rode the wave nearly all the way and jumped out right before the peak, you'd have done insanely well. I had several people tell me this was their exact plan with regards to real estate, and there's even some quote from the then-CEO of Citibank saying "we know this is crazy, but as long as the music is playing, we have to dance."
Of course, not everyone can get out ahead of the curve (by denifition!), but everyone thinks that they're going to be the lucky ones.
This chain of events is the typical argument for regulation, and it's a damn sound one in my book. Unfortunately our country has been run by Republicans who figure they can make a ton of money by looting the government and economy, bail out before it all goes to hell, and leave the mess for the Democrats to clean up. Motherfuckers.
When resource pressures are answered by `magical technology ponies will fix it' (rather than here is the specific technology that willl do X, which is quite different), I worry.
There are some cornucopians out there, and some dimensions of economics certainly encourage that. But I think all that economics as a discipline does is point out that increasing prices caused by resource shortage produce strong incentives to either conserve or in some other way invent around the shortage. We see this process every day, it really is very empirically important. As I said above, actual economic models allow you to vary the speed with which this process happens, as for example in this perfectly conventional model.
The thing to understand is that economists are interested in modeling economic *growth*, and if you assume exhaustion of resources critical to growth that cannot be invented around in any way, at any speed, then your model becomes very simple -- no growth. If there is no growth, then you are looking at a questions about distribution related and related issues about social organization, which is very interesting but not what growth theorists model. (Welfare economics, a smaller but still respected field, does look at this).
Securitization may have thrown gasoline on the fire but the fire was already there.
no, securitization was essential, not just an additional contributor. Securitizing allowed the people financing the loans to offload them and not to be concerned with whether they would be paid back. If you were going to keep those loans directly on your books for years then lenders would certainly have been much more diligent. You didn't have to be a genius to know that the housing bubble wouldn't continue forever.
However, the flood of liquidity provided by the Fed was the critical fuel for the fire, by creating huge demand for the securities.
I am skeptical that a calculation that an undergraduate (even a super-genius undergraduate) can do can answer the great questions of our times.
I'm confused. Wasn't the calculation soup biscuit described just estimating the total energy available to us? That's... fairly simple. I didn't see any claim that this could be easily converted into an estimate of the growth rate of the economy, or anything like that. I thought the point was just that there are obvious upper bounds to what we can do.
I am skeptical that a calculation that an undergraduate can do can answer the great questions of our times.
Oh, I see, you misunderstand my intent entirely. My point was opposite to that: if you are proposing an answer to a problem like this you should at least make certain that you are not violating a true result that could be derived by a decent undergraduate. Or rather, if you do violate it, you should be able to explain why this makes sense.
I wasn't as clear as I should have been, because this discussion became distracted in several directions and the 2nd-law type stuff really isn't that important, on the whole.. but I merged it in a bit.
There is every reason to believe that resource shortages will be a, if not the, defining characteristic of economic and technological development over the next 100 years, say. That doesn't mean nothing else can happen, or that something totally unexpected won't shake things up around the corner (usual does). But the smart money bets this way.
So if you are putting forward a model to drive policy today and you don't feature this centrally in some way, you're either not very good at your job or you are trying to hide something.
and the resources I'm speaking of above have nothing to do with thermodynamic limits either.
I'm confused.
Yes, there was some confusion.
Probably not aided by my rapid procrastination-breaks here. I could have said things more clearly, obviously.
659:They aren't even criminals, they have been pardoned. And in any case, that would be another validation of the "Bush Doctrine" and the use of military force.
The electronic money can be moved at the speed of light, and Paulson is a pro with a lot of help. Good luck on getting it back.
In any case, maybe not this plan. But I do think that we are being wildly magnaminous toward George Bush, Paulson & the Republicans.
They will try to fuck it all up on the way out.
[V. tired. Sorry.]
587: Ok. But it then follows that if a functioning model is to take a very large number of high-quality loans, slice off a small profit of each loan, and then resell that (such that investors only move in capital equivalent to a small amount of a loan), then the quantity of derivatives we have in the market is very likely way way too large. Ergo, it must contract or implode.
It then follows that there's no way in hell that buying the worst of this stuff is going to fix the price problem. The model to use here is equivalent to the lottery ticket model. A given ticket is worth a dollar until the drawing and then most of the tickets are wastepaper.
It also follows that it wasn't reselling the risk so much as finding some suckers. Unfortunately, that didn't really offload the risk onto the investors, it unloaded it onto the system, including the bank doing the selling, so while individually the models may work fine, the collection of individual movements drove the systemic risk to, well, one.
So: from the point of the view of management of the system, I probably ought to ban them (mortgage-backd securities of the common type) outright as more trouble then they are worth.
So jumping off from there, it seems to me that it would be better for a given bank to run a quasi-money market fund (or maybe a quasi-fixed income fund) based on a large pool of mortgages; the bank would maintain a reserve pool of mortgages to swap in as replacements for defaults. That's not selling the risk, which apparently can be priced appropriately, that's raising capital.
Of course, then we're treading on coporate bond territory.
max
['So maybe not.']
no, securitization was essential, not just an additional contributor. Securitizing allowed the people financing the loans to offload them and not to be concerned with whether they would be paid back. If you were going to keep those loans directly on your books for years then lenders would certainly have been much more diligent. You didn't have to be a genius to know that the housing bubble wouldn't continue forever.
Eh. WaMu got absolutely murdered by crappy loans that they made and held. Fannie Mae did fine securitizing mortgages for 30 years, until they branched into subprime loans to "retain market share".
water moccasin,
Large enough that hard physical limits more or less don't matter.
Thank you. Thank you for putting your finger on the root of our disagreement.
You and I disagree on how close we are to certain physical limits. At least you concede that there are limits. That is something.
Now, have you any training in physical science to back up your claim that in the case of cheap energy we are nowhere near the hard physical limit?
Because the thing is that I actually do have some training in these matters and I say that we are at or near our peak oil usage, meaning our usage of millions of years of stored solar energy, and when that runs out we will be left with using the solar energy that comes to our planet every day.
Do you at least agree with that much?
Because the thing is that I actually do have some training in these matters and I say that we are at or near our peak oil usage, meaning our usage of millions of years of stored solar energy, and when that runs out we will be left with using the solar energy that comes to our planet every day.
You're not heading toward an argument that there isn't enough solar energy hitting the earth to meet our energy needs, are you?
Also, there was a long and steady stream of deregulation prior to the meltdown. Investment banks got their leverage limits raised, acceptable lending standards got loosened, etc. I don't see why going back to known-good or at least suspected-good regulatory environments shouldn't be enough in terms of preventing recurrence.
Actually dealing with the situation is another story entirely.
669 - the issue is not energy, it's cheap energy.
You're not heading toward an argument that there isn't enough solar energy hitting the earth to meet our energy needs, are you?
I sure hope not!
the issue is not energy, it's cheap energy.
Yes. And in some sense, even directly available is a problem.
663 - Is the smart money betting this way? I've heard that the oil companies are planning around $60 a barrel.
I just don't believe it, soup. I don't believe that there is a true result that could be derived by an undergraduate that would tell us how likely we are to have resource shortages, and yet this result has been missed by everybody in business and almost everybody in public policy. This goes beyond economists; this is a collective failure to account for the basic facts of physics by oil companies, by governments, by everybody except your undergraduates. I have a decent respect for collective human incompetence, but that just strikes me as unlikely.
WaMu got absolutely murdered by crappy loans that they made and held. Fannie Mae did fine securitizing mortgages for 30 years, until they branched into subprime loans to "retain market share".
OK, yes, you're right, but the market runup created all kinds of pressures on institutions to relax traditional lending standards in order to continue earning profits in the new environment. The housing price inflation alone meant that new buyers could not afford stuff based on the old standards. The flood of new money into the mortgage markets dragged everyone along with it.
Also, the old sleepy GSE securitizations were nothing like the new ones, which were specifically designed to repackage bad credit risks as AAA securities.
Of course the worst scenario is that after the Paulson Corruption Bill is passed, Bush bombs Iran and McCain steals the election in a pretty open, blatant way.
But I don't want to bore you with my paranoid nightmares.
Groceries.
There won't be enough solar energy to fill our energy needs once I blot out the sun.
essear,
I don't want to play word games. There is enough solar energy hitting the earth to meet the world's current energy needs, but there is not enough usable solar energy to meet the world's current energy needs.
I don't see why going back to known-good or at least suspected-good regulatory environments shouldn't be enough in terms of preventing recurrence.
What fun would that be?
We have not even mentioned how the GSEs were campaign contribution piggy banks to all and sundry. I wonder how that affected oversight?
674 as well as the whole thread: Specific technical arguments aside, everyone would do well to take the time to skim (if not read in detail), the econ parts of Mackay's Extraordinary Popular Delusions and the Madness of Crowds.
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!
678: "Usable" is vague, though. We can get a huge amount of energy from solar power, but we need more work to drive down costs. We need DC transmission lines and better energy storage. We need wind power, which is in some sense grabbing some fraction of "unusable" solar power. All of this is going to take a huge amount of work and infrastructure, but I don't see any useful sense in which the massive amounts of energy we get from the sun are less "usable" than the rapidly diminishing supplies we dig out of the ground.
There won't be enough solar energy to fill our energy needs once I blot out the sun.
Scary shaman Walt cleverly hides his copy of The Farmer's Almanac while fooling the Emersonian peasants during the eclipse.
We have not even mentioned how the GSEs were campaign contribution piggy banks to all and sundry. I wonder how that affected oversight?
I may be wrong, but I think this hasn't been discussed much because we haven't found anything to disagree about.
I argue, with a high level of confidence, that fancy new securitizations were a necessary condition for the crisis. Obviously, the GSEs took actions that precipitated their own downfall as part of the crisis.
Here's a question that someone might address: To what degree were the GSEs, and the poor regulation of same, contributors to the overall crisis?
674:
Walt, ok. Mea culpa. This is exactly the mixing up of things I referred to. I don't have time to do this properly just now but I'll sketch.
I tried to describe how the 2nd-law type stuff is a simple way to figure out the existence of absolute hard limits. It's also clear that practical limits are much,much lower than that, and the issue becomes more complex and plenty to quibble about.
The undergraduate stuff doesn't get you past the first point (establishing that there exist hard limits). What's at issue is that some approaches in economics (and even policy, except that's tricky because it extrapolates further than sensible) ignore the existence of even the simple limits without a good explaination of how this is done sensibly. Everybody understand that approximations are made, but approximations without error analysis is crazy talk.
As for research shortages, don't be distracted by the undergrads (i regret throwing that in now), they don't know anything (except they can compute a hard upper limit for us. Now they've done that, forget about them). There is no question of "how likely we are to have resource shortages". Resource shortages are a fact of life. The only question is which ones first, and when.
There is a collective failure to account, but it's not quite the same as you describe. It's more like, say, the failure of the Atlantic cod fisheries. At first the damn things were so plentiful nobody could imagine they could possible run out. Later, it became clear to absolutely everyone that they were running out, but `not yet' became the rallying cry. Curtailing your own fishing while your neighbor hauls in everything he can grab is pretty hard to stomach, especially when you're one of thousands and your own contribution is small. Easy to talk yourself into heading out every morning.
This is sort-of kind-of the situation we're in now with respect to fossils (but more complex). It's not that oil companies don't know, that governments don't know, people don't know. Everybody with half a clue who's thought about it knows. The question isn't "if", it's "when". And that one is really hard to pin down, so there is a prisoners-dillemma aspect to this.
684: Okay, that makes more sense.
To be fair to economists, they have no idea why output grew so much in the 20th century, either.
Walt --- also, about oil pricing. This is a very funny market, because we are so literally dependent on it. Cheap oil is `worth' pushing for (in myriad market distorting ways) until supply becomes unavoidably a problem. Which will happen, of course, given current reliance. But nobody has a really good idea of when.
In some ways the oil based economy is subject to the same sort of confidence problems that floating currencies are... so much of the worlds economy has banked on there being `enough', that even the perception that there is a problem can be hugely damaging. So it's in a lot of people/companies/countries best interests that doesn't happen. At least, short term.
I know what a GSE is, but can someone tell me what a CRA is?
and a requirement for employer-based health care plans to cover mental health care.
I don't think that that's on the table. Previously there were rules which prevented employer plans (ERISA plans) from setting lifetime limits on mental health care that were different from those on other medical illnesses. It didn't prevent plans from charging higher copays for mental health care. I'm pretty sure that that's about all that the bills on offer, The Senate one sponsored by Ted Kennedy, and the House one sponsored by his son Patrick of RI don't actually require employers to provide mental healthcare. Theu just lmit the restrictions that employers who choose to do so can place on it.
It's still possible to get out of them by not covering it at all. Dear old WF did this. My favorite line in the summary of the plan was "no payment shall be made to any psychiatrist". So, if you were hallucinating because you had a brain tumor, you were covered, but if the ER pulled in a psych consult, and it turned out that you had schizophrenia, you were screwed. The drug insurance would pay for antipsychotic medications but not the doctor who was competent to prescribe them.
To be fair to economists, they have no idea why output grew so much in the 20th century, either.
technological change!
687 - Do you mean the Community Reinvestment Act? It's a 1977 law saying that banks have to lend in neighborhoods where they have branches.
Also, I thought that naked short selling was already illegal; it's just that nobody had been enforcing the rules.
689: Oh, I see they're saying that this was all the fault of requiring banks to make some loans to poor people.
Further to 690, I don't actually have an opinion on whether naked short selling contributed to this crisis. I was just asking a technical question about the state of the law.
690: I'm confused about that myself. I think it was allowed for a fixed time period, like 3 days, but currently it's not allowed at all. But I wouldn't swear to that.
Now, have you any training in physical science to back up your claim that in the case of cheap energy we are nowhere near the hard physical limit?
Ah, now it's not just "energy" but "cheap energy". Define "cheap" and we can talk.
As we speak, people are burning natural gas, running the resulting gas through a heat engine, shipping the electricity a hundred miles, and turning it into process heat, because they don't want to spend the couple hundred bucks to get a gas water heater. Other people are moving 3000 pound chunks of metal back and forth a hundred miles a day more or less for the pure hell of it. A lot of this stuff has been getting better recently, but it's still got a long way to go.
Nuclear fission is currently unpopular because the problems of proliferation and waste disposal are more difficult than the alternative problem of political instability in oil-producing countries and global warming from burning coal. If the tradeoff becomes "people in Nevada don't want nuclear waste buried there" vs. "everyone in the US freezes during the winter", you'll see a big hole dug in Nevada and packed full of nuclear waste pretty damn quickly.
681
but I don't see any useful sense in which the massive amounts of energy we get from the sun are less "usable" than the rapidly diminishing supplies we dig out of the ground.
They are less usable in that they are not as cheap as fossil fuels. Electricity costing $1 per kilowatt hour from solar power is not as useful as electricty costing $.1 per kilowatt hour from coal. Etc.
685:Oil.
Really amazing stuff, once you have the technology to use it.
The correlation of oil, population, and output is pretty linear from the late 19th century.
683
I argue, with a high level of confidence, that fancy new securitizations were a necessary condition for the crisis. ...
Depends on your definition of crisis. They weren't needed to render Wamu and Wachovia insolvent which suggests you could generate a pretty big problem without them.
694: They are less usable in that they are not as cheap as fossil fuels. Electricity costing $1 per kilowatt hour from solar power is not as useful as electricty costing $.1 per kilowatt hour from coal. Etc.
It's stupid to compare those numbers, without taking into account the hidden costs of climate change from the carbon, and the massive government subsidies that are going and have gone into the fossil fuel industries for decades. Sure, there will be costs to transitioning, but it's absurd to ignore the costs of not transitioning and to pretend that the playing field has been completely level.
684: [decline of cod fisheries] To me the passenger pigeons were the scariest event, from utterly massive numbers to completely gone over the course of a couple of human generations. Now there appear to be some specific aspects of the lifecycle of the pigeons that contributed to this*, but it is a sobering example of the total collapse of a complex "system".
*Their breeding/foraging/anti-predator strategies were seemingly dependent on massive dense flocks. (They totally overwhelmed an area when they showed up.) When habitat started getting parceled up and really efficient killers showed up in sufficient numbers, they literally had no defenses and no mechanisms to live in small groups in niche environments.
Weird personal anecdote:
Via Calculated Risk, I just watched this
http://kcet.org/socal/
Foreclosure alley- about the neighborhoods that are virtual ghost towns and the problems therein. I recognized the hill the host was standing on while pontificating. It is about half a mile from my old orange ranch, which had to be sold to pay the inheritance tax, and became one of those subdivisions. The old man died at the wrong time, because there would be no IRS agent telling me how valuable that land is as housing, and I could still be farming.
you'll see a big hole dug in Nevada and packed full of nuclear waste pretty damn quickly.
doesn't matter, the US can't plausibly build nuclear plants fast enough to fill the gaps in the shit really hits the fan. What can be built is a lot of coal plants to buy a decade or three.
You're quite right about some of the crazy usage of energy currently; this sort of cost externalization of energy may turn out to be the worst idea of the 20th century. For this reason there is some slack in our infrastructure that can be turned around, but that has to be balanced against bits of the infrastructure that only make sense with cheap fuel/elec. Tricky stuff.
635: A friend of mine is working on a paper for the Bos/ton Fe/d on this. He says that the teaser rates aren't relevant. He and his coauthor disagree on whether the distributor model (or whatever it's called, you know where the person who originates the loan sells it right away contributed to the crisis.
700:Don't worry so much.
Unless we get to nuclear fighter-bombers armed with cruise missles that contain no fossil-fuel derivatives, there isn't any doubt about how this will go in the next generation.
The survivors will have plenty of energy. So just relax.
TLL could have been a man out standing in his field. Or orchard grove, anyway.
A friend of mine is working on a paper
Don't listen to him, BG. Listen to your crazy pretend internet friends.
You're quite right about some of the crazy usage of energy currently; this sort of cost externalization of energy may turn out to be the worst idea of the 20th century. For this reason there is some slack in our infrastructure that can be turned around, but that has to be balanced against bits of the infrastructure that only make sense with cheap fuel/elec. Tricky stuff.
Yes. And your point about the prisoners dilemma aspect of this is true too, especially when it comes to the globally shared amount of carbon dioxide in the atmosphere.
And yes, oil is going to become scarcer and thus more expensive and thus get used less with large-ish dislocations around the world. Is there going to be a mass reshuffling of people moving closer to their jobs? Are we going to see two-year-old pickup trucks being sold for scrap metal? Maybe.
But people who drive pickups aren't claiming that there's an infinite supply of oil, just that it doesn't make sense to worry about it now. I think they're wrong, but it's a different sort of disagreement.
There's another problem with doomsaying, but I don't know how to quantify the risk. There's always a backup plan for dealing with resource shortages lurking in the shadows, namely "Not enough for both of us, so how about I shoot you and take yours." If the choice is to shoot the other guy or drive a smaller car, I have to think most people will drive the smaller car. If the choice is to shoot the other guy or change your lifestyle to something completely unrecognizable... my confidence in humanity only goes so far.
703. shoulda woulda coulda, JE. It was fun while it lasted, but then again I wouldn't have had the time to do this important work that I do now, finding out who is wrong on the internet.
I was just thinking that small boonie towns like Wobegon could have integrated water-sewage-windpower-solarpower plants. They'd have a super large watertower to store energy. They'd be self-sufficient for energy and sell power to the grid when possible. Local people could charge their electric car batteries in windy sunny periods when power was cheap. Certain industries would relocate to the windy sunny areas and schedule around power availability.
697
It's stupid to compare those numbers, without taking into account the hidden costs of climate change from the carbon, and the massive government subsidies that are going and have gone into the fossil fuel industries for decades. Sure, there will be costs to transitioning, but it's absurd to ignore the costs of not transitioning and to pretend that the playing field has been completely level.
Those particular numbers were just illustrative. The oil is running out so we have to find alternatives. The weight of the evidence is that the alternatives will not be nearly as cheap and thus the transistion will be painful.
If the choice is to shoot the other guy or change your lifestyle to something completely unrecognizable... my confidence in humanity only goes so far.
Are the neutron bombs still around? Or will there be another Black Death to reduce the surplus population. What is the number of people that the earth could sustain at current American living standards?
If the choice is to shoot the other guy or change your lifestyle to something completely unrecognizable... my confidence in humanity only goes so far.
Yeah, this is entirely too plausible.
What is the number of people that the earth could sustain at current American living standards?
Indefinitely? Or just for another generation or two?
I'm sure that this is old news, but The Times is reporting that Warren Buffet has announced plans to buy $3 billion in preferred GE stock. He's been good about getting people to issue him preferred shares.
Sustain indefinitely. Round number.
699 - that makes me so sad. The report, the waste, that you aren't still farming (if you want to be).
Sustain indefinitely. Round number.
Depends on what you mean by "current American living standards", I guess. If you relax it to what you might call first-world standards; i.e. effectively zero concern of starvation or death by natural disaster, very little concern of death by disease at a young-ish age, maybe a couple billion? Who knows.
Unless we get to nuclear fighter-bombers armed with cruise missles that contain no fossil-fuel derivatives
As I've mentioned before, biodiesel from algae might be a solution.
http://www.unh.edu/p2/biodiesel/article_alge.html
Heh. I am assuming some sort of non fossil fuel future to make it indefinite. How 'bout just until the sun blows up?
Palin's $250,000 / yr. blue-collar lifestyle.
Another thing I've been harping about, as detailed in the "Blue State, Red State" book I haven't read yet. The culture war is between rich people of one kind, and rich people of a different kind. And the New Religious Right isn't hillbillies and HS dropouts, it's people with money.
Yeah, this is entirely too plausible.
There was a very disturbing line in Collapse, which I managed to track down via Amazon Book Search.
All these people who were about to be killed had land and at times cows. And somebody had to get these lands and those cows after the owners were dead. In a poor and increasingly overpopulated coutnry, this was not a negligible incentive.
They weren't needed to render Wamu and Wachovia insolvent which suggests you could generate a pretty big problem without them.
I know Wachovia and Wamu were done in by their own lending, but you imply that their lending wasn't juiced by securitization. I didn't know that. Is that true?
Anyway, it doesn't matter. Wachovia and Wamu existed in a competitive environment that was juiced by securitization. This is all it takes. How do I know that lenders were induced to make bad loans because their competitors were doing so? Because James B. Shearer told me so.
Depends on what you mean by "current American living standards"
More than not dying by starvation, but less than a Big Screen on every wall and a Hummer in every drive. Housing standards, creature comforts a given, money in the ATM, that sort of thing.
Anyway, it doesn't matter. Wachovia and Wamu existed in a competitive environment that was juiced by securitization. This is all it takes. How do I know that lenders were induced to make bad loans because their competitors were doing so? Because James B. Shearer told me so.
Feh. The argument that if lenders had to keep loans on their books they wouldn't make questionable subprime loans with no hope of repayment is clearly false. Read this article from a year ago. No one was willing to buy the mortgages, WaMu kept making them, and the loans for which they had $300M reserved to cover losses just got written down by $40B after WaMu failed.
Holy shit, from comments at Calculated Risk:
Comrade Misean writes: Comrade Whereismyretirement,"This is a bill that has already passed the House, that is the only way that the Senate could "vote first" on an appropriation bill."
AH SHIT! Why didn't I realize this before. If this passes the Senate it goes to conference committee. No house floor vote. This is PURE BULLSHIT!
Nostrovia,
Comrade Misean | 10.01.08 - 12:38 pm | #
Did anybody else realize there would not be another house floor vote on this bill?
creature comforts a given
That needs parsing as well: the ability to eat whatever you like at any time of the year?
The question of what count as current American living standards is an interesting one in general (one I wouldn't mind seeing a separate post about). What about funding a college education? What about being able to live over, say, 25 miles from your work? (I take it that's addressed by the alternative fuels scenario.)
I don't want to multiply those sorts of questions without straying from the point, which perhaps I should let lie with the incredibly banal observation that there's a great range between "More than not dying by starvation, but less than a Big Screen on every wall and a Hummer in every drive."
Housing standards, creature comforts a given, money in the ATM, that sort of thing.
recalled this, maybe you all have seen it already
the Miniature Earth
724: What? My understanding was that it was now going Senate first, then to the House. Due to the invocation of some obscure precedent that dates back some time and was in service of a rather different issue at the time.
Tax and appropriations bills have to originate in the House for constitutional reasons (article something or other, some section). So it's a bill that started in the House, was passed, and was sent to the Senate, which has no changed it a lot. I'm pretty sure it goes back to the House and not directly to conference, since it's changed so much and people are watching them.
724 is just wrong, what comes out of conference goes back to both house
It is now a bloated atrocity of a bill, with changes for the worse. A far worse bill than Monday's.
FDIC taken up to $250k, but no longer with any bank fees for funding. Bit of a free rider/moralhazard problem there.
Mandatory mark-to-fantasyland.
And yes, the original threat is from overseas. They demanded we buy the garbage back we sold them. And that is where the money is going.
Fair Economist writes: The more I think about this bill the less I like it. I agree with Misean it will suck credit out of the market but it's even worse than that. It's targeted to suck out precisely the most important capital.What we're running desperately short of - and what we can't do without for any length of time without catastrophe - is working capital loans, which are typically 3 months. The treasury is going to issue 700 billion in securites, and it's going to be 3 month securities because that's what the market wants. Once this gets out there will be NO working capital lending, except to a few companies with AAA or government guarantees. Who's going to be numbskull enough to loan to a business with a real risk of going under when they can get T-bills, probably at a semi-decent rate what with the flooding?
The moneys will go into MBS. So, effectively we have a 700 BB market manipulation to draw money from where it's most desperately needed to where it's most completely wasted. This will make the money blunders of the Hoover Fed look like small potatoes.
If this passes, we are heading straight for a Greater Depression, and immediately.
Fair Economist | 10.01.08 - 12:30 pm | #
I will blame the coming Depression on hilzoy, Krugman, DeLong, Ezra Klein, etc....the people who panicked under fire.
725
The question of what count as current American living standards is an interesting one in general (one I wouldn't mind seeing a separate post about). What about funding a college education? What about being able to live over, say, 25 miles from your work? (I take it that's addressed by the alternative fuels scenario.)
Basically an equivalent standard should count. So some things can be worse as long as other things are better. Of course this will vary by taste so say one which most people feel is as least as good.
no s/b now, as in "now changed it a lot"
Or maybe "no" shouldn't be there at all. I don't know. Maybe I should preview next time.
Bob, I notice that you never seem to have much blame for the right. Do you just respect them too much?
732:Republicans are not responsible.
Something close to rabid dogs, I don't blame the dog for biting the owner, I blame the idiot who knowingly tried to make a rabid pitbull a housepet and took it home to his young children.
So let's say the bill passes, and we don't immediately plunge into the Greater Depression. What lesson will you derive from that?
734:There are other possible horrible scenarios, like default.
I don't think there are any bearable outcomes available, say in the next 5 years.
Liberals let Bush break it all.
... what ... count as current American living standards is an interesting one in general
Yes, this is an interesting question. Some parts of the current American expectations may not be maintainable by any method but does that mean a reduced standard? Not clear. Some things we're very used to (driving commutes, say) certainly aren't a positive taken alone, we just believe (well, many do) that they are part of a system of net gain. If day-to-day lives are very, very different, how do you compare `standard of living' ?
730: so say one which most people feel is as least as good.
Sorry, a discussion like that requires a separate thread.
National Debt ...Calculated Risk
It is hard to keep track of all the kinds of money the Fed/Treasury is putting out there. There was something about $630 billion dollars sent out Monday morning. This article shows an additional $150 billion. We are approaching a trillion dollars this week. Before and beyond the "bailout bill."
We are paying next to nothing in interest rates right now, but eventually that stuff must be rolled over.
They are trashing the place, killing the social programs, as we watch.
If day-to-day lives are very, very different, how do you compare `standard of living' ?
Compare mine to Cheney's, Bush's or Hank Paulson's.
Unless their standard of living declines noticably, and going from 300 million to 200 million probably isn't a significant change in lifestyle, mine shouldn't either.
Gerald Corrigan, former NY Fed chief and current managing director of Goldman Sachs, today proposed, in my view, a way to address these concerns.
Corrigan outlined a 3-point plan to accelerate reform of the CDS market that should accompany passage of the TARP legislation.
He argues that one of the reasons the interbank (and by extension the commercial paper and other secondary transmission mechanisms) markets have frozen up is because of the tremendous uncertainty injected into valuation models by shortcomings in the current CDS framework.
borrowed from comments at naked capatalism
In short, he is arguing that by simultaneously reforming the CDS market, we can reduce the risk premia that is intensifying the spike in interest rates and this will help restore trust (and therefore assumption of counterparty risk) within the system.
737: Some parts of the current American expectations may not be maintainable by any method but does that mean a reduced standard? Not clear.
The distinction between expectations and standards is helpful (on a topic I find myself wanting to avoid, despite its importance). As a start: this country is still in some sense wedded to a notion of the American dream: better for your children than for you, bootstrapping yourself from less to more.
I do find distressful the very idea of suggesting that we might give some of this up, that actually our standard -- as yet undefined -- is adequate or even excessive, and our expectations certainly are. I suspect it's an aversion to suggesting something that there's so much resistance to.
And of course the fact is that increasing numbers of people in this country do not enjoy that standard of living, even minimally defined.
742 agreed, and this really does need a separate thread.
this: better for your children than for you
has already (or is expected to)fallen by the wayside by some measures. not that such a thing is easy to measure.
I can understand resistance to engaging with this subject. There be dragons, or at least uncomfortable truths.
742 agreed, and this really does need a separate thread.
this: better for your children than for you
has already (or is expected to)fallen by the wayside by some measures. not that such a thing is easy to measure.
I can understand resistance to engaging with this subject. There be dragons, or at least uncomfortable truths.
742 agreed, and this really does need a separate thread.
this: better for your children than for you
has already (or is expected to)fallen by the wayside by some measures. not that such a thing is easy to measure.
I can understand resistance to engaging with this subject. There be dragons, or at least uncomfortable truths.
I do find distressful the very idea of suggesting that we might give some of this up, that actually our standard -- as yet undefined -- is adequate or even excessive, and our expectations certainly are.
Well what I was getting at was a hypothetical average American family of four, boy and girl, dog and cat, etc. 3+2 sfr, 2 cars. 2 week vacation. Healthcare. Groceries affordable, luxuries periodically. Out to eat once a week at Applebee's, Three times a year to (inset 5 star restaurant). Washer, dryer, refrigerator, microwave, playstation, one plasma, one regular tv.
746, that's way too much. I can't make out "3+2 sfr".
three bedroom, two bath single family residence. Too much what?
748: Right, I figured that out in the meantime. Single family home.
Look, as I said, separate thread, as this one is beginning to take forever to refresh for me.
Briefly, you don't need a plasma tv; you don't need 2 tv's actually. If you've got 2 adults and 2 kids, you don't need 3 bedrooms. You don't really need 2 baths. One and a half is nice, but one isn't exactly intolerable for 4 people. I realize that 2 cars is considered requisite.
It comes down to the fact that I'm assuming conditions of relative self-control and moderation, which we (whoever we are) tend to think of as called for only in conditions of scarcity, but in reality, our apparent conception of a comfortable standard of living is very seriously inflated.
750
The story didn't really allege fraud. Although it did not discuss whether the loan documentation was accurate.
I do find distressful the very idea of suggesting that we might give some of this up, that actually our standard -- as yet undefined -- is adequate or even excessive, and our expectations certainly are. I suspect it's an aversion to suggesting something that there's so much resistance to.
Really? You're facing down an aversion to thinking about this? I've been fascinated by this train of thought for four or five years now. I've worried out the constraints and tried to visualized the process and talked about it with anyone who'll listen. That's why I'm forever asking what it will look like.
I should pitch my sermons to people who are at the beginning of all that and don't really want to engage it yet?
What is the number of people that the earth could sustain at current American living standards?
only 30 more clicks on the miniature earth clip with the answer on that question and if you wait to the end there were that minimum standards illustrated too
sermons or what, just a reminder maybe
You have a very literal mind, Shearer.
Name the parent who doesn't want and hope his/her children to live a better life.
Can we live differently? Sure: for 10 million years, humanity lived on the savannah, consuming mostly carrion. Telling people to want less, or that the things they want are illegitimate, isn't exactly the most compelling way to get a movement going. I don't mean to speak for America, but I don't really think married people with 2 non-infant kids care to be lectured by single people with no children about how much space, or how many TVs, they need. That's what makes the subject so difficult.
Name the parent who doesn't want and hope his/her children to live a better life.
Susan Smith.
That's Susan Smith the Republican, Apo.
746: I like the plasma TV thrown in there.
755: There's also the problem that almost any lowering of expectations and standards is going to be perceived as a loss. I don't mean to pick on TLL, but what he lists would have been a huge step up for my family growing up -- a chain restaurant dinner once a week? a vacation? a five star restaurant ever?? wow!! To him, that's a contraction of expectations. To me, that would have been a standard of living increase.
Offer them a change in lifestyle & expectations instead of a decline. Obviously a massive welfare state, relatively secure from politics. Cradle to grave security & comfort.
Give me a Web cafe with 21" screens, half-mile from my home, with all content available for free, and I'll give up my tv's and computers.
Wouldn't live in NYC for a million a year. But an arcosanti surrounded by 50 sq miles of park? Sure.
Maybe it isn't a "better life" people want for their kids. I doubt it can get that much better than what Charleycarp has, and I doubt he needs his kids to have yachts and Swiss chateaus.
People want a secure life for their kids, and honestly, as the world is currently structured, that is impossible to achieve.
Well, shrinking our GDP to the amount we actually produce domestically would require shrinking the economy by about 6-7%, which means giving up about 3 years of economic growth. Which doesn't seem impossible. But the problem is it's very hard to manage that kind of contraction without a painful recession which hits the poor and lower middle class first and hardest. If there was a way to just skim the cream off the top of the American economy, that would be awesome. (Wait, there is -- if we were willing to have a more radically progressive tax policy and redistribute the proceeds. But the current eagerness to funnel our government rescue of the economy through the tender hands of the financier class is not promising).
Also -- special for McManus -- this piece by Daniel Larison on the limits of populist outrage is fantastic. Larison is one of the most interesting thinkers on the net IMO.
Finally, I'm just getting around to reading this Gary Gorton piece I linked some time ago, and he too takes issue with the idea that the originate-to-distribute model was behind the crisis, he says it's the specific design of subprime ABSs, securitized debt worked well enough for decades in other areas with other designs.
Offer them a change in lifestyle & expectations instead of a decline....People want a secure life for their kids, and honestly, as the world is currently structured, that is impossible to achieve.
really well put. Some portion of American conscpicuous consumption is psychological compensation for lack of security. As capitalism is structured, shrinkages in consumption lead to much less security, not more.
McManus, read the Larison piece in 760, interested to hear what you think of it -- perhaps you'll just find it obvious.
perhaps you'll just find it obvious.
A little, for someone who knows politics, theory & practice, 1875-1925...and maybe is also pessimistic. Vanguardism vs council communism, populists vs progressives. As I read it, Larison doesn't have that understanding.
Elites build & protect, the masses destroy, enabling a new elite. This is the necessary & inevitable dialectic.
A "coherent responsible populist program" is an oxymoron, a self-contradiction usually formulated by a bourgeois elitist in competition for power within his class.
It's about abstractions. The reformist wants to use the existing tools, structures, institutions to achieve ends opposed by the existing elite.
But the existing elite is precisely these tools, structures, institutions. All processes are people.
And the masses are the masses precisely because they lack aren't the mechanisms and means of power & policy. It is a crazed abstraction to imagine the masses "of one mind."
The masses are numbers and emotion.
759 -- I've had, and have a pretty good life, no question about that. There's a whole lot of country, though, between where we are and 'yachts and Swiss chateaus.' I hope my children can get themselves a little better organized than I did, a little earlier than I did, and maybe look at a more comfortable retirement than I'll have. My parents have a gem of a summer home (acquired when I was 21), but no one in my generation, myself included, can sustain it. My children will be sorry when it's gone; as my own father was sorry when his grandmother had to make the same choice in the 1950s. What will my children do if, in their 30s or 40s, they have an opportunity to acquire something nice?
We all live lives where we love that which we don't need. Ask someone to give up what they love, and you'd better have a pretty good story. 'You don't need it' isn't going to work, especially coming from a monk. 'X needs it more than you' is even less effective. 'You don't deserve it,' while probably true, is even less useful.
'It's gone' is understandable, but only when it really is gone.
The question is how much do you have that you don't love or need -- that you're just used to. Is there anything expensive (energy and resource-wise) in that category?
I have to think there's lots. I live very well and comfortably with two non-infant kids in a 2br apartment; it's expensive in terms of money because it's NY, but it's cheaper than a lot of lifestyles in terms of resources. (Not out of noble self-sacrifice on my part, this is just where I live.) Someone 'giving up' the difference between my lifestyle and the backyard and two-cars surburban life would probably be horrified and fearful; at least some people sound that way in blog comments whenever this comes up (at Yglesias's, particularly). But I have to believe that once people did it, it wouldn't feel like much of a hardship.
Again, we eat out (or order in) an awful lot. We're not going to give that up unless it gets more expensive. If it does, I don't think we'll miss it much. And so on.
I live very well and comfortably with two non-infant kids in a 2br apartment
Really? Newt and Sally share a bedroom? Isn't that, like, illegal or something?
My laundry list was meant as a possible set of items that middle America either had or aspired to. Current level of expectation. Obviously, some people have more and some less. The question I was asking was how many people could the earth sustain at that given level? One, maybe two billion? Or is it higher with different political systems in place?
766: Not AFAIK. She's nine -- it's not like they're teenagers. We have a plan to put up a partition at some point, but sharing a room with bunkbeds seems preferable still to having private tiny rooms.
Yes, I meant more as teenagers.
We still have a boys' bedroom and a girls' bedroom here even though they haven't been used that way since 1975 or so.
it's expensive in terms of money because it's NY, but it's cheaper than a lot of lifestyles in terms of resources.
I really need to work on the analysis of the hidden costs or urban living, or the ways the entire economy is interconnected.
For example, "suburban sprawl" to some degree supported the Finance industry, not just recently but since WWII (that debt created credit);without Finance what is NY?
I don't know, just say I have a presumption toward ecology:that if a thing, condition, situation exists, it is because it is needed for the entire system to flourish. So I am very resistant to the idea that reurbanization will provide a free lunch net gain in energy efficiency.
Not that I necessarily oppose reurbanization; just that I think there will be unanticipated costs & losses.
As another example, I think recently someone proved that "energy-miles" was BS:that it is more energy efficient for LA to get its oranges from Chile than Santa Barbara. They weren't looking at the water costs, for one thing.
770: Which one do I get when I come to visit, John?
767:The consensus at the oildrum is around two billion post-fossilfuel, in this century.
For instance, a technology that uses nuclear or solar energy to mass-produce cheap fertilizer is conceivable, but not soon enough.
And I don't think the political system matters:secret police or mass advertising are both expensive enough.
The facts of my resource usage are unimportant. My point was that there's a lot of lifestyle changes that sound huge before you do them, but aren't a big deal when and if you do. If it turned out that moving to a suburban 4br, 2 1/2 bath with two cars and a lawn in a subdivision with no sidewalks turned out to be less resource intensive, and so I found myself having to leave the city when energy prices went up, I'd be horrified, but I probably wouldn't be miserable five years down the road.
The question is whether the changes Americans are going to have to make in their lives, whatever they are, are going to be real hardship, or just changes.
The facts of my resource usage are unimportant. My point was that there's a lot of lifestyle changes that sound huge before you do them, but aren't a big deal when and if you do. If it turned out that moving to a suburban 4br, 2 1/2 bath with two cars and a lawn in a subdivision with no sidewalks turned out to be less resource intensive, and so I found myself having to leave the city when energy prices went up, I'd be horrified, but I probably wouldn't be miserable five years down the road.
The question is whether the changes Americans are going to have to make in their lives, whatever they are, are going to be real hardship, or just changes.
Well, double posting has got to be some sort of misallocation of resources, however you slice it.
My point was that there's a lot of lifestyle changes that sound huge before you do them, but aren't a big deal when and if you do.
I've definitely found this to be true. I think a huge amount could be done that has no net negative effect on `quality of life', or even net positive, for some reasonable definition of q-o-l.
The most problematic shifts are the ones in areas predicated on cheap energy (exurbs, year round fragile produce from everywhere, etc.) but they'll probably happen regarless -- just more painful if not planned for, or tried too rapidly.
And this is the chicken and egg part. There's every reason to think that broad reaching policy shifts that allow comfortable transitions (mostly) are possible if they're done early enough, and allow enough time. But any politician who wants to actually start is liable to get beat up. We should do this --- just not right now is powerful. There's always a convenient excuse why this year isn't the right one (but that's ok, 'cause the problems still far off, right? right?)
Some of this stuff should have been started 30 years ago, when some of the problems were already obvious.
The question is whether the changes Americans are going to have to make in their lives, whatever they are, are going to be real hardship, or just changes.
Agreed, but isn't your example artificial? The chaos and extreme discomfort isn't in whatever equilibrium we arrive at on the other side (fingers-crossed), it's getting there. In citites with sprawling neighborhoods, and that lack public transportation infrastructure, and that lack housing stock dense enough for everyone to pack into to build transportation infrastructure around (even if everyone were happy to up and move into it), and that lack the substantial funds needed to create any of this (especially in a world of higher energy costs), how do we get from point A to point B?
In other words, for the most part the difficult issues aren't about what lifestyle choices people are or aren't willing to make, they're about what choices can realistically be offered.
772: The boys' bedroom sleeps four.
But Brock, doesn't that have more to do with how the transition is managed, and over how long, than the transition itself?
Trivial example: if you make SUVs illegal as of Jan 1st, lot's of people get pissed off and damaged. If they just become unavailable the next time you're looking for a vehicle, much less impact.
Housing stock is harder, but realistically an awful lot of the housing built in the last 25 years is crap, and not likely to last much more than 50. Shifting density and development patterns in places that are all sprawled out isn't going to be easy, but it seems obvious there are less painful and more painful ways to do it.
Of course, some places never should have been built out, and never would have been if externalized costs didn't make them (in some sense falsely) affordable. No getting around that one, and that's part of the `some of this should have been started 30 years ago' I meant above.
778: Isn't that soup's point? In the 70's, we had a warning that energy resources weren't unlimited. At that point, some gentle changes in the zoning laws would have changed patterns of development over the next thirty years, and we'd be in a very different place now.
Thirty years from now, making changes is going to look even harder and more expensive then it does now. But if we're going to have to do it, the earlier we start, the easier it will be.
(One of the few pieces of cracker-barrel family wisdom I've had handed down to me is from my Uncle Harry the CPA, in terms of any long term financial/investment project: "Best time to do that was ten years ago. Second best? Right now.")
(My dad also taught me never to meet anyone except in a bar, because if they're late, you're already in a bar. But while wise, that's less relevant.)
Costs will be distributed unevenly and unfairly and there will be various sorts of domino effects and chain reactions. It would be nice to be able to divide the total pain evenly by 300 million, but no.
The psychological consequences of lifestyle reduction are worse for people lower down on the totem pole and much worse for people with kids. I've seen well-off people without kids lower their spendable income by 50% without much pain. But always when they were moving to a more rewarding job, pleasanter lifestyle, or more leisure time. A single moving form, say, $80,000 to $50,000 whose job remaining equally stressful and his commute remained equally long would be grumbly.
My dad also taught me never to meet anyone except in a bar, because if they're late, you're already in a bar.
Heh. My family's philosophy was the same thing, except for bookstores instead of bars. Yes, I'm a second-generation wimpy liberal overintellectual guy.
I wouldn't argue with the notion that people can survive living in New York. Nor with natives who like living in New York. But then I'm not telling people that they shouldn't want what they want, or don't need what they have. You can live in a cell in Attica. OK, now that we've established the minimum (let's stipulate it) we can stop entirely with talk of "need" and talk about trade-offs. People live the life they can afford, or, unfortunately a bit more. As prices rise, they give up this and that, but these are individual decisions, individually arrived at. It's not for me to say that someone should prefer an additional half bath to a big screen TV.
I wouldn't presume to visit a poor family in Appalachia, for example, and tell them that the life they have is fully materially adequate, and they have no reason to complain or wish for more. (Nor would I say its non-materially inadequate, but that's a different kettle of grits).
Costs will be distributed unevenly and unfairly and there will be various sorts of domino effects and chain reactions.
That's the American Way, John.
But seriously, none of this gets any better by waiting. As LB said, the time for action was yesterday, every minute dithering gets us further behind.
No, it isn't going to be all fun and games.
781: My son and I have that policy.
It's not for me to say that someone should prefer an additional half bath to a big screen TV.
Right, and people make choices within (or nearly so) their means, from the available choices.
The pernicious thing about the sorts of externalized costs we're talking about not being accounted for is that it makes some of the available, affordable choices kind of insane. Particularly when done in large numbers.
A bookstore with a bar would be ideal. Lots of coffee shops in bookstores -- why no bars?
I live very well and comfortably with two non-infant kids in a 2br apartment
Hush! My hopefully-next client is someone with 3 kids in a 3 BR house who wants to expand. If they change their minds because of you, I'll be mighty annoyed.
Wait, when did having 1 bedroom per kid stop being an (attainable) luxury? I mean, I know you're (almost) all latte-sipping coastal elites, but still....
789: I suspect zoning/licensing mostly. oh, and smoking (less so these days). Nobody wants to buy a new book that doesn't smell like a new book.
Bars here and in Oregon are mostly no-smoking. On the other hand, no one wants a beer-soaked book either.
Lots of coffee shops in bookstores -- why no bars?
Sweet, sweet Kramerbooks. Really, their advertising gets it exactly right: if they had a shower, I wouldn't have to leave.
789: There's at least one bar/restaurant/bookstore in DC, but I forget its name now. They're more adjacent the one to the other than inside a la those barnes and noble/starbucks things.
Pwn'd by populuxe. With better detail even.
Pwn'd .... With better detail even.
Yup, this is an advanced technique deserving extra credit.
780
Housing stock is harder, but realistically an awful lot of the housing built in the last 25 years is crap, and not likely to last much more than 50. ...
Compared to what? Isn't new housing weighted towards the high end and on average of higher quality than the existing stock?
791
Wait, when did having 1 bedroom per kid stop being an (attainable) luxury? ...
When people stopped having lots of kids.
I don't think that even high end houses are built to last any more. The assumption seems to be that after a few decades you'll tear down and rebuild, or just move on and let someone less classy move in behind you.
799: Not you, James, I know you're hopelessly out of touch with the common man.
Seriously though, I knew lots of kids who shared rooms. I'm surprised if it's become so unusual. Is it sample bias?
Don't read me wrong, I'm not saying people should forgo the thought of having a bedroom for every kid (far better to think about having less air to heat in all the rooms, probably). I just have trouble imagining it as a bare minimum acceptable as `quality of life'. Certainly lots of families had shared rooms for (particularly younger) kids in the past. Have things changed so much in the last 20 years? I'm not talking about the (upper/whatever)-middle class only, here.
Isn't new housing weighted towards the high end and on average of higher quality than the existing stock?
No.
Somewhat on topic, two houses on my street went on the market recently, and both sold within a month or two. I don't know what that means. This isn't Elgin, but most houses are $100,000 or less.
Sorry James, you deserved a better answer than that.
Compared to what?
Compared to most of what was built 100 years ago, for starters.
John is right, that even a lot of the higher market stuff these days puts the money into location and square footage (and 14ft ceilings) not into material costs. Some construction techniques are much better, but materials are generally not. Peoples planning horizons have changed for buying houses, and the builders along with them (who buys a house thinking a kid will live in it when they're gone, these days?) .
But on top of that, an awful lot of cheap quality houses in exurbs have been built in the last 20 years, and some of this is really terrible quality.
People live the life they can afford, or, unfortunately a bit more. As prices rise, they give up this and that, but these are individual decisions, individually arrived at.
Not exactly. Prices are set, at least partially, by the result of collective decisions, collectively arrived at (e.g., the zoning decisions that have shaped exurban growth over the last thirty years). And so those collective decisions shape people's individual decisions about what they can afford.
What we're talking about (or, more modestly, what I'm thinking about) is changing those collective decisions so as to send more useful price signals to individuals, so that we can transition to a sustainable equilibrium with as little pain as possible.
That's exactly what we're talking about LB.
It's not "Thou shalt not X", so much as "X really costs us all this much, and that should be reflected in its price" or "X here, Y there".
804
Compared to most of what was built 100 years ago, for starters.
There is something called survivorship bias. In any case I would expect modern houses to have better wiring, insulation, heating and air conditioning which seem kind of important.
People buying houses to remodel look for old houses made of good materials. Wiring, insulation, heating, and air conditioning can be added. But ticky-tacky houses are not structurally solid enough to remodel. My guess is that 50 years from now most of the McMansions will be junk.
Survivorship bias is interesting but clearly not all of the explanation. It's easy to find parts of a city where nearly all the buildings are of a similar age and are still there - in my area, that's roughly 1860-1900. If there is such a bias, it resulted in the 1860 house falling down and being replaced by something long-lasting before 1900, and that pattern continuing until the housing stock was quickly built up of sturdy specimens.
(I think the newest house I ever lived in dated from the 1950s, and it was definitely the worst of the lot).
There is survivor bias, true. I was accounting for that. Houses are built and marketed differently, too. I sort of cheated too, 'cause there was some very cheap stock built in the middle of that range.
Insulation has been massively improved. Wiring standards are better, plumbing win some lose some. Heating and AC are better but isn't a clear win though, because it's partially the efficiency of same coupled with low energy costs that have pushed the tendency to larger volumes in houses. This runs counter to reducing energy impact, so it's probably a net loss under any reasonable assumptions. But though these gains have been made, structurally many houses are worse off by design -- people aren't buying them for long ownership so people aren't building them for it. Also, better design competence has reduced overbuilding, which is good if you wan tto build a short-lived house that isn't a lemon, bad if you want to reduce impact. Finishing is pretty terrible overall too, but that was true of cheap houses back when, also.
When I was 15 I worked construction during the summer. At lunch one day I was sitting next to the wall of the finished, unoccupied house on the lot next door to the house we were working on. Bored, I scratched the brick. It crumbled a bit. So I scratched some more. When lunch was up, I had scratched a hole an inch deep in the brick.
Modern houses are built out of shit, so they tend to be nice to start off with and then they decay. Even the fixtures and the wiring tend not be better made, so much as simply newer.
max
['Not built to last, no.']
wiring really depends on the year(s) involved. The code is better, the materials may not be. Insulation is much better these days, as is sealing (but you've got to vent properly, or it's a problem). Fixtures are cheaper. Plumbing is a mixed bag.
814
... Even the fixtures and the wiring tend not be better made, so much as simply newer.
Newer counts.
Newer counts.
Sometimes. Shiny cheap chroming or paint that will peel off in 3 years over thin mass produced metal that will be lucky to outlast it doesn't really win against much, though.
Some of the older fixtures etc. are better not because people were particularly planning for 100 year usage but because nobody had invented a cheap plastic/potmetal/whatever alternative.
Soup gets it right, in both 804 and 810, as does Nathan in 809.
The number one downgrade in housing over the past 100 years is in quality of lumber. Worker housing - the worst of the worst - was built with better wood in 1900 than is available on the market in 2008. They were still building with old growth stuff back then; now a contractor will look through 100 studs to find 20 straight ones. Most builders don't bother, and simply build with crooked ones.*
Further, exterior finishes are exponentially worse than they were. Wood clapboard is a 100-200 year product, even with occasional neglect. Vinyl and aluminum are both prone to impact damage and staining, and can't be renewed. Even very expensive houses are often built with only a single facade of single wythe brick which terminates without turning the corner, meaning a poorly detailed corner joint. I'm not even going to talk about EFIS (Dryvit).
Hydronic (hot water) heating is superior in every way to forced air; it has vanished from the American residential market. Traditionally-designed houses in 2/3 of the country have no need for A/C; A/C is necessary for certain parts of the Sunbelt, plus for poorly designed new tract houses with tiny and/or inoperable windows.
Trim attached by a summer jobber with nail guns is far less secure than trim attached by a skilled carpenter with 16d finish nails. Plaster vs. drywall is more of a tossup, but I can't help but note that plaster skimcoats are a common upgrade for high end houses. Middle class tract housing of 1900 (located in early streetcar "suburbs," which are now thoroughly urban) featured oak trim and doors on the first floor, plus T&G wood flooring throughout, even though it was considered subflooring upstairs. Modern McMansions - the bigger, better housing - typically feature pressboard doors, composite trim, and OSB subfloor throughout. Old tech windows can last forever; modern windows, though marginally more energy efficient (most heat loss at windows is at the perimeter, not the glass), have ~25 year lifespans. PVC and PEX plumbing vs. copper and cast iron.
Now, all that said, there are certainly benefits to modern construction - most new housing is more airtight, basements tend to be drier, and... well, I'm sure the list goes on. But modern tract housing takes advantage of about 15% of the advances that have occurred in the past 100 years, while losing out on 100% of the backsteps (in skill, in material quality, in labor volume). It is not comparable to cars, which have improved exponentially over their predecessors (except, arguably, in styling) - any current Chevy is better than virtually anything built 25 years ago, in pretty much every aspect. But houses were built largely in the same ways in 1950, 1970, and 2008 - the main advances over that time period have been insulation and housewrap.
* My friend bought a "custom" house - classic crappy tract house, "center-hall Colonial" with a dash of McMansion. One of the options was a finished basement, but he didn't want it - he suspected that they would do a crap job. But there was a miscommunication, and they installed the 2x3 walls (it wasn't furred to the concrete block, but was like a stud wall just in front of it) but no drywall. By the time we finished it out a couple years later, some of the 2x3s had warped 90 degrees - a complete quarter-turn in less than 8'! And the builder would have happily drywalled right over them.
Holy shit, don't get me started on plumbing fixtures. My grandfather worked for Chicago Faucets. Motto: "Lasts as long as the building." When I was living at home, we carried our C.F. showerheads from home to home. When I bought this house, we splurged to fit out the main bathroom with C.F. faucets, and the stuff is bulletproof. Even the high-end Kohler unit we bought when we redid the kitchen feels pretty cheap compared to the C.F. stuff.
Chicago Faucets is now, of course, out of the residential business; no more market for high quality plumbing fixtures for houses.
Here's a little secret about how Home Depot stays on the market as the cheapest source for product: they lie about they product numbers. Order a Stanley steel door from a real building supplier, then order the same one from HDepot. The HDepot one is made with lighter gauge metal and/or cheaper welding, even though the product number is the same (obviously, for product tracking purposes, it's there somewhere in the serial #). This is how the entire residential building industry works (as well as how the big box industry works - I trust you've all read the story about Snapper and WalMart) - substitute name brand, but inferior, products in order to move the house to the first buyer, then never worry about it again. A Delta faucet bought through a plumbing warehouse includes a brass tailpiece; the HDepot one has chromed plastic. Etc.
Point being, newer doesn't necessarily count. New but with a 25 year lifespan is in no measurable way superior to 100 years old with a 200 year lifespan. It's an annoying cliche about liberals that they point to Europe as a place where they do things better, but, WRT building practice, it's comically true. Europe is chock full of buildings older than our country; not landmarks, just workaday buildings that were built for the long haul, and are maintained for it as well. The American prejudice that newer=better is effectively absent from the European construction market (as is the mindless American predilection for the faux-antique), and, as a result, people continue to build things to last, as otherwise someone might just as well go with the better quality, older thing. Granted that this results in more expensive housing in Europe; I don't really feel like the American model has a lot to brag about at this moment in history.
Hey! Come back here! Old Man JRoth wants to talk to you about Palladian windows! And double-height entry halls!
I'm listening with interest, JRoth. Please, keep talking.
But.. but granite counter tops and prewired for internet?
I have never lived in a house constructed prior to 1946.
Yes, I am spoiled, but you knew that already.
Aren't most all of those housing technologies hideously more expensive than the stuff that's available now? My house is ~100 years old. The main portion of the upstairs has pretty sweet parquet floors. The addition upstairs has matching wood, but longer strips. The downstairs is carpet.
Re-doing the downstairs in laminate would cost $5k, in hardwood $10k, and when I asked about the parquet the guy told me I didn't even want to know. Something about how when they did it the first time there were probably ten guys in there for a week.
When construction workers can live in average-quality single family homes, the amount of labor available is much less than when construction workers live in small apartments.
I've known some carpenters over they years and they'd talk about the difference between they way they'd build their own home and the way they were told to work by contractors they worked for. They weren't able to feel pride in their work, but they need the job.
This can be explained as rational if the buyers wanted a cheap, disposable house that looked nice for 10 or 20 years.
Also, are those combination forced-induction gas water heater / air handler systems worthwhile? How about the counterflow heat exchangers that continually turn over the air in your house while not dumping a bunch of heat outside?
Around here a lot of people built their own quality homes, though.
Partly it's because there are more people and fewer old trees now, of course.
My grandfather worked for Chicago Faucets.
My house before last had a Chicago Faucets shower, with a waist high nozzles as well as overhead. I did not think to take it with me when I sold. I miss that shower.
821.3 is super-right, although I've heard tell that an awful lot of construction is done by people with extraordinarily low living expenses.
822 is very good. I've worked with guys who spent awhile with the high volume tract home builders, and they all say more or less that.
823.1: I'm not sure what kind of system you mean, frankly. But 823.2 is "absolutely."
In an old, leaky house, put your effort into insulating the attic and plugging holes; install a hydronic heating system, or refurb the one you've got. For cooling, rely on natural ventilation augmented by a whole house fan (and, possibly, external shading - if you look at old pics, all these houses had big canvass awnings outside). Use curtains wisely to keep out the summer sun and keep in the winter warmth.
In a new, presumably tighter house, make sure your holes really are plugged, then invest in high efficiency HVAC systems that interact with outdoor air only insofar as is necessary for fresh air (.6 air changes/hour minimum; a little higher, esp. in summer, is preferable for health).
825 will make me forgive TLL a lot of rightwing rhetoric in the future.
816
... Traditionally-designed houses in 2/3 of the country have no need for A/C; A/C is necessary for certain parts of the Sunbelt, plus for poorly designed new tract houses with tiny and/or inoperable windows.
I think AC is pretty desirable in the Northeast.
... Old tech windows can last forever; modern windows, though marginally more energy efficient (most heat loss at windows is at the perimeter, not the glass), have ~25 year lifespans ...
I have spent some time in a house with old windows. All the sash cords had broken and I was told it was not economically feasible to fix them.
The wood quality thing is a really big deal. Extreme case: In a previous life I worked in the industry a bit, and we demo'd some old warehouses and outbuildings built 150+ years ago on the west coast harbors. At the time they built them with the old growth trees that were in the neighborhood, and they wanted strong... so upshot is these buildings were sitting on something like 3.5x3.5x200', single beams.
Forget the builders; Sawmill reps were lining up to bid on this stuff. They literally couldn't find trees that big anymore in any sort of numbers. Beyond punking up a bit in the outer inch or so, this stuff was beautiful, and had seasoned for 100 years. Sold a few smaller bits to carvers too if I recall correctly. I was just labor, so I don't know how it priced out, but I suspect that was worth more than everything in the buildings combined.
Here's a little secret about how Home Depot stays on the market as the cheapest source for product: they lie about they product numbers.
When I first found out that this is a common and (apparently) legal procedure, I was flabbergasted. It really is absurd.
830: That practice is throughout the `big boxes'. I'd really be surprised if HD is the worst offender that way. It's a big chunk of the business model, after all.
Wall Street problems may not be academic to the academics, now.
http://www.nakedcapitalism.com/
820: My favorite (suburban) houses are from the 20s and 30s. They've got modern plumbing but old-school. Construction. We had one that had a carriage house with room for two or 3 horses, because the owner didn't care for nnew-fangled automobiles. I hate post-war housing and don't think I could ever own one.
823.1: I'm not sure what kind of system you mean, frankly
Something like what's described on page 3 of the pdf here. Which I guess is what they call "forced air hydronic", as opposed to the radiant that I typically think of.
And I had no idea about the lying about part numbers. Does this extend to major appliances?
By the time we finished it out a couple years later, some of the 2x3s had warped 90 degrees - a complete quarter-turn in less than 8'! And the builder would have happily drywalled right over them.
Sweet Baby Jesus!
I built a house with some custom lumber; I had helped with some of the harvesting, and the owner's friend had milled it. Dimensionally. It felt weird, but the heft was comforting.
I had no idea about the parts numbers thing either, and would like to learn more details about this "common and (apparently) legal procedure". Because unless I'm misunderstanding, I'm not sure how exactly it's legal, at least in states with strong consumer protection laws (like MA).
wm, I had one of those (not the Polaris, but a Lennox that first came out in the early 90s). It was terrifically efficient but poorly designed, and when it died last winter I replaced it with a two-stage gas furnace and a tankless water heater, which is more efficient still.
Does anyone want to join a jihad against sash windows?
1) Ugly
2) Unmaintainable
3) Failure modes dire
4) So 2) and 3) no-one double glazes them
5) Noisy due to 4)
6) Energy-hogging due to 4)
Bizarrely protected by UK planning requirements. Let's smash them all!
838: You don't have double-glazed sashes there? What a primitive place.
Oh yes, from the link in 558:Prior to the use of natural gas as a hydrogen source, electricity was used to electrolyse water. The Vemork 60 MW hydro electric plant in Norway was constructed purely to produce hydrogen via electrolysis of water as a precursor to ammonia production, and up until the second world war provided the majority of Europe's ammonia.
Haber and Bosch worked a long time before North Sea gas.
re: 829
Old railway sleepers are often reclaimed, too, I gather. Especially since they are often made from funky hardwoods.
Isn't new housing weighted towards the high end and on average of higher quality than the existing stock?
No; it's sometimes marginally better than stuff put up in the 70s, depending, but there's often lots of differences/corners cut in framing, quality of materials, etc.
All the sash cords had broken and I was told it was not economically feasible to fix them.
This is like someone telling you that it's economically infeasible to replace the windshield wipers on a late model car.
Seriously - for an amateur (anyone who can operate a putty knife and a screwdriver), it's a 2 hour project. Once you've done 3, it's about a 1 hour project. The material costs are negligible (and you should use sash chain - sash cord was one of the dumber innovations in building history).
There's a lesson here, BTW: contractors often use the phrase "not economical" to mean either, "I can sell you another service/product for more profit" or "I don't feel like it." And it's actually the latter at least as often as the former. You'll see contractors demolish an entire wall (as in, sledgehammer plaster & lathe, sawzall old, dimensional studs, and throw the lot in a Dumpster) and build a new one in its place rather than just infill a door opening. Why not? The latter requires skilled labor of some sort, while demo and new studs + drywall are laborer and apprentice work, respectively, and they'll happily pass the material costs along to you.
Good help is hard to find, and keeping skilled employees around requires a commitment to fair dealing, responsible business practices, and generally not being an asshole. Far better for most GCs to sub out the occasional skilled job but force most of their work into non-skilled methods.
Good help is hard to find, and keeping skilled employees around requires a commitment to fair dealing, responsible business practices, and generally not being an asshole. Far better for most GCs to sub out the occasional skilled job but force most of their work into non-skilled methods.
Doesn't this pretty much boil down to "not economical" though? It's clear that the vast majority of the effort going into the house work I'm doing now is in finding qualified contractors, paying for permits, and coordinating everything. Just because it's not going to anything obviously useful doesn't mean it's not a real cost.
If the job could be changed to something that needs "a plumber" rather than "a good plumber", it'd have been VASTLY cheaper.
I'm not sure how exactly it's legal, at least in states with strong consumer protection laws (like MA).
I have no idea how much it varies state-to-state, but the way I've seen this done isn't actually lying, it's more `read the small print'.
Typically: pick a well known brand with a confusing product line up (the 2012, the 2018, the 2538, the 2738, the 3117a, the 3219i ... etc) then get an exclusive deal to sell for them, say the 2728i. This may be even more hidden in the model designation. The trick is, it's a stripped down version of the 2738, say, but nobody else can sell it so it's hard to compare and see how it ought to fit in the lineup. It may seem like a good deal (costs only a little more than the base model!) but when you get right down to it, it's no special deal.
You can do the same thing even without the confusing lineup too. I remember trying to replace a blender that I liked after it burned out. Calling around town --- one place says sure, we've got them in stock. When I get there it was different, so I talked to someone and said I wanted a model X, they told me `that is the same as model X' (it was Xa or something).' What they'd done is replace the glass body with plastic, and put a weaker motor it (which I probably wouldn't have noticed, by itself). The sales person tried to convince me that was the only one they made any more, but in fact it was a model only sold by that chain store. I suspect some of these games get around labeling requirements and consumer protection law (of course, I don't know anything about law so that might be way off).
I wonder how many people don't get passed the `oh, I heard X was good, and here it's only $$' with it.
I'm not sure how exactly it's legal, at least in states with strong consumer protection laws (like MA).
I have no idea how much it varies state-to-state, but the way I've seen this done isn't actually lying, it's more `read the small print'.
Typically: pick a well known brand with a confusing product line up (the 2012, the 2018, the 2538, the 2738, the 3117a, the 3219i ... etc) then get an exclusive deal to sell for them, say the 2728i. This may be even more hidden in the model designation. The trick is, it's a stripped down version of the 2738, say, but nobody else can sell it so it's hard to compare and see how it ought to fit in the lineup. It may seem like a good deal (costs only a little more than the base model!) but when you get right down to it, it's no special deal.
You can do the same thing even without the confusing lineup too. I remember trying to replace a blender that I liked after it burned out. Calling around town --- one place says sure, we've got them in stock. When I get there it was different, so I talked to someone and said I wanted a model X, they told me `that is the same as model X' (it was Xa or something).' What they'd done is replace the glass body with plastic, and put a weaker motor it (which I probably wouldn't have noticed, by itself). The sales person tried to convince me that was the only one they made any more, but in fact it was a model only sold by that chain store. I suspect some of these games get around labeling requirements and consumer protection law (of course, I don't know anything about law so that might be way off).
I wonder how many people don't get passed the `oh, I heard X was good, and here it's only $$' with it.
If the job could be changed to something that needs "a plumber" rather than "a good plumber", it'd have been VASTLY cheaper.
But the point is that it's vastly cheaper in the sense of "crappier." To take a concrete example* from the automotive world, one of the big differences between high end vehicles (eg M-B) and lower end (eg Dodge) is the use of clips vs. screws and other positive fasteners. The clip is a lower-skill item, plus cheaper as a part. So you get 2X savings. But the clip is actually an inferior way to connect two parts (sometimes; obvs., clips have their place). The system necessary to eliminate the skilled worker demands lower build quality.
It's clear that the vast majority of the effort going into the house work I'm doing now is in finding qualified contractors, paying for permits, and coordinating everything. Just because it's not going to anything obviously useful doesn't mean it's not a real cost.
Right; so the typical contractor can't save money by skipping permitting or coordinating trades (high volume guys are very good at the coordinating trades part, but they will make quality tradeoffs to do so), so he saves money by skimping on actual build quality - and telling you he's not. The Libertarian fantasy is that if you get rid of permitting, you get more for less, but one look at the quality of construction out in the permit-less hinterlands puts the lie to that.
* Possibly an outdated one; I haven't taken apart a Mercedes anytime lately
