Wednesday, September 17, 2008

On Top of the Issues Last Spring

The spousal unit alerted me to some stuff in the Wall Street Journal concerning the ongoing collapse of the financial industry due to the mortgage crisis. Paul Volker and other economic bigwigs are calling for the creation of an agency (or two) such as the Resolution Trust Corp. or the Home Owners Loan Corporation of the 1930s to handle the crisis:
The fact is that the financial system needs basic, long-term reform, but right now the system is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times.

Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions. This contraction will undercut the financial system, and with it, the broader economy that so far has held up reasonably well.

There is something we can do to resolve the problem. We should move decisively to create a new, temporary resolution mechanism. There are precedents -- such as the Resolution Trust Corporation of the late 1980s and early 1990s, as well as the Home Owners Loan Corporation of the 1930s. This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management.


It is certainly the case that the new institution we are proposing will in the short run require serious money. That will involve a risk to the taxpayer; but the institution, administered by professionals, means that ultimate gains to the taxpayer are also possible.

Moreover, a failure to act boldly in the fashion we are suggesting would cost the taxpayer and the country far more. The pathology of this crisis is that unless you get ahead of it and deal with it from strength, it devours the weakest link in the chain and then moves on to devour the next weakest link. A deteriorating financial system, diminished economic activity, loss of jobs and loss of revenues to the government is enormously costly. And the cost to our citizens' well-being is incalculable.

Resurrect the Resolution Trust Corp.
It's good to know that some folks out there are not merely advocating throwing public funds at the losers who got us into this deal, nor shrieking that the whole thing should be allowed to resolve itself and get the pain over with at once. Pain like a world-wide dperession? Yeah, that's the ticket.

Neither of the fools running for Preznit seem to have a clue of what to do, floundering around with vague or outlandish suggestions instead of offering a clealry defined, demarcated and effective management operation that provides the right kind of government intervention to stabilize a system and prevent catastrophic failures that do the most long-term harm to the actors least able to withstand upheavals in financial markets. The Masters of the Universe formerly employed by the greed machines will be fine after a few months of twiddling their thumbs. They'll network and help each other into lucrative positions in new ventures intended to generate money for nothing and the chicks for free.

The people hurt will be the working class poor, especially minorities and women, who will be hit with double-whammies of toxic loans and a retracting economy. Not that our current Democratic nominee has anything to offer people. He hasn't really thought about it. He warns against doing anything hasty. He's really not much into using the government proactively to help people who are in no position to weather this economic hurricane whose outer bands are starting to send a lot of water over the seawall.

Of course, way back in March, we did have a candidate who could see what was barreling down at us and who was proposing exactly the things Volker et. al. are saying today in the WSJ:
Hillary Clinton said she fears the U.S. is slipping into a Japanese-style economic malaise that will overwhelm the Federal Reserve's considerable powers.

The Democratic presidential candidate said the U.S. government should be ready to buy troubled mortgages from investors and lenders to spur a recovery and avoid a lengthy period of stagnation because of unaddressed weaknesses in the financial sector.

"We might be drifting into a Japanese-like situation," she said Wednesday in a wide-ranging interview with The Wall Street Journal on economic issues. "I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone. I think the Japanese tried that and tried and tried that.


Sen. Clinton said that, if the government's buying and eventual sale of the mortgages is handled well, "over the long term, the government involvement would be self-financing."

Treasury Secretary Henry Paulson Wednesday criticized the Clinton proposal, which harkens back to the New Deal's Home Owners Loan Corp. That agency helped families avoid foreclosure by replacing mortgages in default. It bought mortgages from banks with government bonds and then issued new, lower-cost loans to homeowners. "We do not need a system-wide solution for the vast majority of loans where a homeowner temporarily has negative equity," said Mr. Paulson. "Negative equity does not affect borrowers' ability to pay their loans," and in the long run many homeowners will find their purchases "good investments" despite their current woes, he said.


In a speech on economic policy scheduled for Thursday in New York, Sen. Obama is expected to emphasize tax cuts for middle-class families -- a proposal Sen. Clinton doesn't endorse -- and additional ways to stem foreclosures. His economic advisers caution that the next turn in the financial crisis will be credit-card debt. Credit-card delinquencies are rising as hard-pressed consumers turn to plastic to pay for the rising costs of gasoline, groceries and other necessities, in addition to discretionary purchases, such as furniture.

"You have the same deterioration of credit standards, the same securitization of debt, the same leveraging, the same inability of people to pay," said Austan Goolsbee, the Illinois Democrat's chief economic adviser. "People are using credit cards as their cushion. We're set up for a consumer credit-card debt crisis if we do nothing."


In the interview, Sen. Clinton, a New York Democrat, said even the specter of taking office during a recession hadn't changed her determination to boost taxes on the wealthiest taxpayers by reversing the Bush tax cuts. Those tax cuts are set to expire at the end of 2010. She dismissed the argument that taxpayers look ahead at what their tax bill may be in the future. "I don't buy it," she said. "The tax rates of the '90s did not slow down investment and wealth creation."

Hillary Clinton Pushes for More Governmental Aid to Homeowners

Yup, she called it back in March when the Republicans were pooh-poohing the idea of crisis and where Obama didn't want to be seen agreeing with an opponent. She even challenged the cut-taxes mantra by flatly saying she was going to raise the taxes on the people who had become filthy rich through this financial shell game.

She saw that this was not just a challenge for individual home owners or consumers, as though situations like this because of silly choices by some marginal economic actors and not because of institutional and structural defects in the financial market itself, but a fundamental crisis for the financial system that had gotten in over its head.

Maybe next time we can have a real Democrat on the ticket, not just two guys who owe their souls to the financial services industry?



oceans said...

March seems like forever ago. Remember the legions of Oborg swarming every site with their scathing criticism of Clinton's plan? Mortgages were private contracts, they said. The government couldn't interfere in provate contracts, they said (having slept through history class apparently). The government shouldn't interfere in private contracts, they said (assuming every strapped home was the victim of his/her own greed).

In the most amazing sleight of hand ever, liberalism was replaced with libertarianism. All in the name "change." Heh, change. The sort of change that only Grover Norquist or the Heritage Foundation could love.

I will never forgive the idiots that have destroyed the Democratic Party and saddled us with Obama. When you think that we could have had Hillary leading the way out of this mess...

Anonymous said...

Obama's win over Hillary, whether legitimate or not, is also the win of the affluent over the working class. So, intentionally or not, Obama doesn't support solutions that don't directly support the affluent.

The solutions Hillary was seeking wouldn't seem tp support the short term interest of the affluent; they don't have mortgage or housing problems. The fact that her solutions were the best in the long term, which turned out to be very short, was not even considered.

It's as if Obama repeated the saying greed is good with the addition "for Democrats."

In the end, we have two candidates for president who, at best, represent the interests of at most 10% of the population. The rest follows.

harpie said...

This is exactly what I said to the "Spousal Unit" last night. When I read Hillary's interview with Bloomberg News, when I heard her talk to Jim Cramer on Mad Money and on countless other occasions I was continually reassured that Clinton could and would confront the whole stinking mess, and from a Democratic perspective [just imagine!] unlike these “two guys who owe their souls to the financial services industry?”
Arthur Silber [I don’t know whether or not to thank you for pointing out his site] has a post up about government takeovers as a means of inflicting “financial terror” on the world.

We’re in for a rocky ride. Or, maybe a revolution?

marirebel said...

I do not favor re-creation of the RTC, which is simply another way to transfer money from working class taxpayers to the elites. The people who caused the current financial problems are the ones with the resources to purchase assets of failed institutions from the government. These elites can purchase the lousy financial instruments and mortgages they created at a hugely reduced price, with government guarantees and subsidies to make the purchase financially feasible. The elites end up making a huge profit all over again at the expense of taxpayers. I would favor transfer of any profits from the assets of failed institutions to the folks who lost homes while paying unreasonable mortgages with their life’s blood.

Anne said...

It is precisely because Hillary Clinton knew what to do, that her candidacy was shut down. This is Iraq war economic style come home....economic shock and awe.I saw Harry Reid said Congress won't do anything because they don't know what to of course the person who does know has
been pushed aside.

Because The last trillion has yet to be stolen, the last upper crust who created this mess has yet to be loaded into the life boats. In this crisis, it's women and children last.

Anonymous said...

The one thing I wonder is whether Obama, Biden or any of the Dems have the wit to make the central argument based on these events. Namely, the GOP did another version of this back in the 80's with the S&L debacle and they've done it again now - let their greedy friends lend out hot leveraged money on fucked up deals, and the rest of us pay for it. Why don't we toss all the guys out who view running the government as an opportunity to shut down the watchdogs and enrich themselves at everyone else's expense? Or, to be crude, they've fucked us twice in the last 20 years on a massive scale, do we really want to give them another chance to do it again? Sorry, I forgot, such an argument would be rudely partisan and might upset the rich friends of our "liberal" leaders. My bad.

Anglachel said...

Potato Head,

I'm not posting your comment about Bill Clinton and Glass-Steagal because I consider most of that argument to be a shallow analysis of the entire situation, promoted more by people who are frantic to find "evil" acts to pin on Clinton than anything else.

I myself find Phil Gramm and Republican Party to be the most at fault, followed by the Congressional Democrats who consistently refused to stand with their President to oppose this crap.

Finally, the legislation Clinton signed was not the sole cause of the mortgage feeding frenzy, though it may have been a necessary precursor. Holding to conventional underwriting practices, as Tanta of Calculated Risk tirelessly points out, would make most of the mortgage crisis moot, for example.

My argument is not that Clinton should have signed the legislation, but that trying to make him the most repsonsible party for this financial debacle just stinks to high heaven. The Democrats are currently in control of the Congress - why aren't they reauthorizing Glass-Steagall?

Personally, I'd like to see the Republican-enabling cowards in the Congress bear some responsibility for allowing this (among so many other attacks on the Democratic legacy) to go unopposed, instead of constantly pawing through the garbage to see how we can make this all the singular fault of Bill Clinton.