How Critical Is The Crisis?
David Cay Johnston says the press and the politicians shouldn’t be so credulous about the need for any sort of emergency measures:
The Administration has scared the markets and some key legislative leaders, but it has not laid out a coherent, specific and compelling need for this enormous proposal, which is the equivalent of a one-time 55 percent income tax surcharge. (Instead the money will be borrowed, so ask from whom and how this much can be raised so quickly if the credit markets are nearly seized up with fear.)
Ask this question — are the credit markets really about to seize up?
If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.
If the problem is toxic mortgages then how come they are still being offered all over the Internet? On the main page AOL generates for me there is an ad for a 1.9% loan (which means you pay that interest rate and the rest of the interest is added to your balance due.) Why oh why or why would taxpayers be bailing out banks that are continuing to sell these toxic loans?
These are decent questions. As far as I know, a person with good credit (and possibly a person without good credit) can still get a mortgage tomorrow with ease. And banks are still handing out credit cards. Is it really so clear that a $700 billion bailout is necessary? What if, instead, we took some kind of more limited measure aimed at keeping money market funds up and running while spending $350 billion on fiscal stimulus to keep the economy moving and prevent more people from defaulting on their mortgage payments? Would that clearly be worse? I have no real idea, but I’m not sure what the basis for thinking the Paulson Plan of $0 of stimulus and $700 billion of bailout is the correct formula.
The talk this morning about the need to avoid “punitive measures” in order to not dissuade firms from “participating” in the bailout program makes me very suspicious. There’s a difference between a bailout package that’s genuinely needed and one that’s merely desired by Wall Street execs. If it’s necessary, then there shouldn’t be any need to make the bailout pot sweet. And if a punitive measure or two would dissuade firms from participating, then it doesn’t sound like this measure is really needed.
UPDATE: See also Roger Lowenstein’s article.
Note also that to question whether a $700 billion bailout is necessary is not the same as questioning whether or not there are some serious economic problems afoot. It’s literally to question whether or not it’s genuinely the case that there’s a specific problem so severe as to warrant a $700 billion bailout. My sense is that if two weeks ago Barack Obama had stood up and said “John McCain says the fundamentals of our economy are strong, but I think we need a $350 billion stimulus package” that the general reaction would have been to say “well, there may be some problems, but adding $350 billion in debt is too much.” Today, though, we need to spend $700 billion? But instead of spending it on middle class stimulus we need to overpay for securities held by wealthy financiers? Really? Maybe in the absence of a $700 billion bailout there really would be a serious economic problem . . . but then again $700 billion is a ton of money. There are lots of serious problems such that, if I asked for $700 billion to solve, I’d be told that $700 billion was way too much money.
Maybe Paulson’s right about this, but he should be made to spell out it and then his spelled-out explanation should be subjected to some scrutiny.
48 Responses to “How Critical Is The Crisis?”
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September 23rd, 2008 at 3:16 pm
The proposal goes by TARP, or the Troubled Asset Relief Program.
Timely Reassignment of Assets Program (TRAP) seems more appropriate
September 23rd, 2008 at 3:16 pm
Matt: Great post. I’ve been wondering about this myself. The stock market certainly doesn’t seem to be reacting very negatively to the Paulson plan’s difficulties on Capitol Hill. Perhaps we simply don’t give our financial system and general economy as much credit as they deserve. Perhaps in the end they’re a lot more resilient than we thought.
September 23rd, 2008 at 3:19 pm
The problem is that it’s very difficult for us to tell. Further, even if we have the sense that it is critical, trusting the Bush admin to exercise good judgment in addressing it is problematic, to say the least.
Such is the state of things with an administration that can’t even lie competently.
September 23rd, 2008 at 3:21 pm
And if a punitive measure or two would dissuade firms from participating, then it doesn’t sound like this measure is really needed.
Exactly. That’s why the equity thing in my view is a MUST. Frankly I don’t see why this crisis — even if it worsens — requires the government to buy any dodgy assets at all. Why not let the financial institutions worry about the bad investments they’ve made, and simply inject capital — in return for shares owned by the taxpayer?
September 23rd, 2008 at 3:23 pm
So Johnston (and you?) are saying that Paulson and Bernanke are just lying? Or does the fact that I get credit card offers mean the financial system is in great shape? I’m NOT in favor of this plan or for that matter any other plan but I have no doubt that the US and world economy is in big trouble.
September 23rd, 2008 at 3:25 pm
The Financial Crisis and Bailout for Dummies:
http://patrick.net/housing/contrib/dog.png
September 23rd, 2008 at 3:29 pm
well, billmon says it stands for “taxpayer anal rape program”, but then he would.
look: could we cut out this nonsense about “punitive measures”?
what’s happening here is that guys who are making millions of bucks are coming to us and saying, “we’re broke! you have to give us a billion bucks!”, and then they are paying themselves more millions.
these bonuses and compensation they want to protect? this is all going to be a straight charge to the taxpayer, taken out of the trillion dollars we are being asked to hand over.
so when taxpayers say, “no; you may not take my money and pay yourself a hundred million dollars”, this is *not* a punitive measure.
this is just the minimum, bedrock, conservative threshold for sanity.
didn’t we use to say that beggars can’t be choosers? and now these bastards come begging to us, and they *still* want to pay themselves a gazillion dollars. of our money!!
it’s not “punitive measures”. it’s a taxpayer who makes 40 grand, refusing to give away 4 grand so that an executive can pay himself 40 million.
September 23rd, 2008 at 3:30 pm
I would like everyone to consider for a moment the massive corruption that has occurred in the Iraq reconstruction program. Now image a similar program with as little oversight, hundreds of billions of additional dollars at stake, and some of the savviest financial minds doing their best to game the system. It won’t be pretty.
September 23rd, 2008 at 3:30 pm
I just got approved for a 30-year fixed at 7.375%. I know that’s not the greatest rate imaginable, but it’s certainly affordable. And it’s a jumbo loan for a multi-unit income property, and my FICO is only marginal, about 640.
September 23rd, 2008 at 3:38 pm
I just got approved for a 30-year fixed at 7.375%. I know that’s not the greatest rate imaginable, but it’s certainly affordable. And it’s a jumbo loan for a multi-unit income property, and my FICO is only marginal, about 640.
Right, exactly. Money is still lending. My bank is accepting deposits and my ATM card works. I paid a credit card bill this morning.
September 23rd, 2008 at 3:39 pm
Matt, we are at war with Oh Sum of Big Billion! Why won’t you just give them the money? Why do you hate America?
September 23rd, 2008 at 3:40 pm
Matt’s anecdotal argument is faintly ridiculous. It is like saying there’s no tsunami coming because the sea is so deliciously calm. The stresses in the credit markets that can cause them to become impaired in quick order are visible in the Secondary markets - Credit default insurance and so on. Its not something visible down at your local bank branch
September 23rd, 2008 at 3:41 pm
of course, looked at in another way, the crisis is very real, and very imminent.
republican crooks have only four more months to steal as much as possible from the public treasury as they can.
they have gotten away with an immense amount over the last eight years–they have added about 6 trillion dollars to the federal debt, and a lot of that has gone straight from my pocket and my children’s pockets into the pockets of the wealthiest few, the bush base.
that gravy train is about to end. obama is going to be the next president.
and that is a crisis.
it is their last chance–their last chance to gin up another panic, another hysteria, another iraq war, to rake off another trillion dollars out of the taxpayers’ pocket and into their own.
if we slow them down–if we stall them off for another four months–then we’ll keep that money in our own pockets.
and that, my friends, is a real crisis for the republicans.
September 23rd, 2008 at 3:43 pm
The issue with punitive measures is a collective-action problem. You, as a Wall Street executive (or a shareholder of a bank), may recognize the abstract need for a bailout along these lines, but if you have a powerful incentive not to have your particular institution participate, why not wait for others to do so? After all, you may be able to get the benefits of the program without actually selling any of your junk.
That would work as follows: If someone else sells securities that are similar to the ones you hold to the Treasury at, say, 50 cents on the dollar, that’s now a marking event for you, and you can value the securities on your books at 50 cents on the dollar. If the market has confidence in the mark established by the sale, then owning those securities on your balance sheet at 50 cents is pretty much as good as having cash. So, you’re able to participate in the benefits of the program (restored market confidence in your balance sheet) without accepting any of the costs (dilution, compensation limits, etc).
The problem, of course, is that if everyone’s thinking like this you end up in a stand-off that just continues the current crisis.
I’m not saying that this argument is correct, but there is a real case against punitive measures.
Oh, and Jasper (comment #2), the S&P 500 was down almost 4% on Monday, pretty much entirely due to fears that the bailout wouldn’t go through. I call that reacting very negatively.
September 23rd, 2008 at 3:45 pm
Well, I think people are right not to trust Paulson. I don’t trust him.
I do, however, trust Krugman, and he’s terrified!
September 23rd, 2008 at 3:46 pm
My wife is a california load officer and compared to two years ago, it’s a completely different ballgame WRT qualifying. The ease at which borrowers and appraised values were approved then and now is vastly different. The range of loan products is far narrower (and that’s definitely an improvement) and, of course, there are far fewer lenders.
You can still get a mortgage, but you’ll have to actually verify your income (shock) and don’t be surprised if the property appraises for a whole lot less than you think.
September 23rd, 2008 at 3:47 pm
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/22/AR2008092202053.html
The latest estimate is that approximately $13 billion of the nearly $50 billion in Iraq reconstruction funds has been lost due to fraud and mismanagement.
Now imagine a $700 billion fund being outsourced to the very financial wizards that created this mess in the first place. They will make Haliburton and KBR look like pikers.
September 23rd, 2008 at 3:48 pm
Matt- I appreciate the update/clarification. It still leaves us at A) do nothing B) do something using the most informed people regarding the potential efficacy of “any” plan while maintaining oversight, prudence, and taxpayer advocacy.
I’m still not sure that my total distrust of this administration out weighs the very real possibility that we’re on the edge of Great Depression II. Some very smart people think we may be there.
September 23rd, 2008 at 3:48 pm
As far as I know, a person with good credit (and possibly a person without good credit) can still get a mortgage tomorrow with ease.
Not unless they have 20% down. People without good credit can’t get PMI right now.
September 23rd, 2008 at 3:49 pm
You might also speculate, as Steve Maich does what 700 billion might get you in public works. Why not bail out the thousands of workers unemployed by the crash of the housing market and get some actual bang for your buck (infrastructure) on behalf of tax payers. If we’re hell bent on socialism, shouldn’t we also consider old-fashioned ideas like egalitarianism?
September 23rd, 2008 at 3:49 pm
Hey! I just spotted a “close tags” button.
September 23rd, 2008 at 3:53 pm
If other central banks are not jumping to the rescue, it might indicate that other institutions are not nearly as convinced that the CDS market turmoil will cause a catastrophic failure. I would let Lehman Brothers’s bankruptcy play out before intervening. Just what will happen when it begins to unravel is unknown, but perhaps it would be worthwhile understanding the consequences, in part, before applying such a radical solution.
September 23rd, 2008 at 3:59 pm
Matt’s anecdotal argument is faintly ridiculous.
Ob: not it’s not. Matt’s not saying nothing should be done. He’s questioning the “wisdom” of building a funnel from your and my paycheck directly to the portfolios of rich bastards who created the problem in the first place. Maybe that’s the best solution. But lots of people doubt it.
You, as a Wall Street executive (or a shareholder of a bank), may recognize the abstract need for a bailout along these lines, but if you have a powerful incentive not to have your particular institution participate, why not wait for others to do so?
Hoover: This is a feature not a bug. Why exactly would it be a problem if some financial institution reckon that, in the end, they don’t need taxpayer money after all. There’s a huge moral hazard (there’s that term again!) issue with the original Paulson plan: financial institutions have absolutely zero incentive to eschew biting off as much taxpayer cash as they can possibly swallow. Forcing them to pay a price (equity) for said cash is a common sense measure to limit taxpayer exposure.
The problem, of course, is that if everyone’s thinking like this you end up in a stand-off that just continues the current crisis
Nonsense. Everyone (ie., every financial institution) does not possess identical financial strength. Some financial institutions will have no choice but to participate in the government bailout plan. Others will be able to survive without it. That is as it should be. As a taxpayer I’d much rather fork over a portion of my paycheck to those institutions who cannot survive without it, than to every F.I. regardless of need. I guess I’m just a cheapskate that way.
the S&P 500 was down almost 4% on Monday, pretty much entirely due to fears that the bailout wouldn’t go through. I call that reacting very negatively.
Says you. Investors may also have been spooked by the particulars of the plan, and its ramifications for the strength of the dollar.
September 23rd, 2008 at 3:59 pm
Back of the napkin question:
How many subprime mortgages would $700 B pay for if we skirt the middle man?
Assuming a median American house price of $213,900 (as of Q4 2005; thanks Wikipedia), $700 B outright pays for something along the lines of 3.3 M homes completely. This calculation would also assume the subprime mortgages were on typical homes and 100% of each mortgage remained, so the real world # of homes whose mortgage could be paid off is likely a few or several hundreds of thousands more.
Surely too much of the $700 B bail-out go towards mark ups and alleged “good will”.
I recommend a portion of the $700 B be held back, for stockades and a supply of not-necessarily-fresh fruits and vegetables.
September 23rd, 2008 at 4:03 pm
isn’t that kind of the point thought? to stop people from lending so damn much? Not that I’m a fan of Paulson’s plan, but don’t we need to reign in lending at some point?
September 23rd, 2008 at 4:11 pm
Much of what is being said is right, and much is wrong. Unfortunately, most of the people doing the talking don’t know jack about finance. And as credible a financial writer as Dan Johnson is, his anecdotal evidence for questioning the existence of a crisis is ridiculous.
This isn’t about credit-worthy individuals not being able to get credit today (although most of the commenters above are correct that it is becoming increasingly difficult, and jumbo mortgages are quickly moving out of reach). The problem is that banks know how incredibly illiquid they and are, and they aren’t finding each other creditworthy.
Overnight bank-to-bank loans are the spine of the financial sector, and they traditionally lend to each other at the prime rate. Many have been borrowing cash at well above the prime rate, because their ability to repay is in question. This is where the looming credit freeze is coming from. The more losses there are in the financial sector, the less creditworthy each institution becomes, and the more money they have to pay to borrow cash. That increased cost won’t bleed into the broader economy immediately, but it will. And once it sets in, it may take 10 years to reverse as it did in the East Asia markets.
I don’t believe the bailout has to happen this week, and I’m absolutely not supporting the Paulson plan. The Dodd bill is the most comprehensive, although the Frank bill does state that this would be an intial $200bn approval, with a requirement for further legislation should more funds be necessary. That must be made a requirement, as is a demand for an equity stake.
But fundamentally misunderstanding the financial sector and so choosing to play politics with this crisis (and it IS a crisis), is idiotic. And that goes for House Republicans and Markos Moulitsas. If you don’t understand it, stay out of it. There are progressives who do, and they aren’t staying even remotely quiet about it. Bottom line is, we’re all going to have to trust somebody, as unpalatable as that may be.
September 23rd, 2008 at 4:14 pm
“But fundamentally misunderstanding the financial sector and so choosing to play politics with this crisis (and it IS a crisis), is idiotic. And that goes for House Republicans and Markos Moulitsas.”
Kos can be counted on for uninformed idiocy regardless of the topic. That’s what he and House Republicans have most in common, actually.
September 23rd, 2008 at 4:14 pm
Bartkid,
1. The total value of subprime mortgages outstanding is around USD 1 trillion.
2. Paulson is not asking for a USD 700 billion check. He’s asking for a USD 1.5 trillion check (he wants to be able to spend up to the statutory federal debt ceiling. The 700 figure limits the amount he can spend at any given time.)
So
3. you could buy up all the outstanding subprime mortgages at face value and still have 500 billion left over for a pony.
Why you would want to do this is beyond me…
September 23rd, 2008 at 4:32 pm
Paulson is threatening a recession if he doesn’t get his way. Sorry, that horse has left the barn.
Paulson is a lying sack of shit.
As for punishing CEOs: if they are unwilling to take a haircut to save their companies I am perfectly happy to accommodate them. This is extortion, plain and simple. Let a few stock holders get a few CEO heads on pikes and then renegotiate. The market will sort it out for us.
My gut feel is this is a bunch of rich guys looking for the hand out of the ages.
September 23rd, 2008 at 4:33 pm
One of the best posts I have seen on the crisis. Matt Y. is really on fire these days!
The egenral point is correct: assuming the need for a bailout, it is not obvious why the banks are the right place to bail. One could either look “earlier” in the chain by providing assistance to homeowners, or “later”, by providing some type of emergency lending facility foor individuals and businesses who would be cut off from bank credit in the event of a genuine credit crisis.
September 23rd, 2008 at 4:46 pm
I just saw an American Express add for a 0%, no fee credit card on CNBC. I just received about 5 credit card offers in the mail today.
I also receive multiple offers to refinance my 5 1/2%, 30 year mortgage. Yea, right!
I am watching CNBC right now. I don’t know who the guest is, but he says to let the holders of bad paper take tax loss credits against future earnings.
September 23rd, 2008 at 4:59 pm
My gut feel is this is a bunch of rich guys looking for the hand out of the ages.
Raid the safe before Obama takes over. And do it like a protection racket: pay up or the economy gets it. Now, Wall Street has proved itself collectively shite at betting recently, but this seems like an obvious bet to make, and the fact that Paulson is lying like a rug here should set off the alarms.
September 23rd, 2008 at 5:01 pm
I’m the last person to claim any expertise on banking or finance. So I might be totally off-base here. But it seems to me that Big Shitpile is not so much a poison that, if isolated, will leave an otherwise healthy economy free to go rolling merrily along. If it were, then emergency measures to contain it would make some sense. Instead, it seems to be that Big Shitpile is a consequence — and not an entirely unpredictable one — of a fundamentally screwed up economy. If that’s the case, the question should be, “How does this $700b-$1.5t help repair and reconstruct a broken economic system?”
If you think the economy is “fundamentally sound” but threatened by a weird, anomalous Wall Street crisis, it might make sense to treat the crisis. But if the crisis is based on fundamental problems, it makes pretty much no sense to spend a fantastically large amount of money on a symptom, thus preventing the country from spending at least some of that money on addressing the real problems.
September 23rd, 2008 at 5:46 pm
I work in state government finance and things are VERY bad from where I sit. Basically the bond market for municipalities to borrow money is closed. This is having bad effects for school districts and such that usually borrow money at the beginning of the year to make payrolls while waiting for the tax checks to come in in April. The rates for government borrowing have sky-rocketed as well. Two weeks ago we were paying under 2% on short-term variable rate debt and now it is up to 9%. All of this will decrease government services and hurt employment.
The fact that you are getting credit card offers is not that enlightening as to the health of the general credit markets. For one thing, banks are desperate for deposits so they are still competing for consumer deposits. Its the governments and large corporations that right now are crippled by the frozen credit markets and investor panic. If this continues to get worse, the cost of financing government and business will make unemployment will go up and the economy will shrink and I don’t doubt that it could tip the global economy into a sustained economic contraction.
None of this is to say that I agree with the Paulson plan but the alternative is very scary and a big proposal to get the credit markets working again seems reasonable.
September 23rd, 2008 at 7:19 pm
>and still have 500 billion left over for a pony.
>Why you would want to do this is beyond me
What do you have against ponies?
September 23rd, 2008 at 8:01 pm
I’m still waiting for some of these Bailout CEO’s and Executives to step up and say “We recognize the enormity of what we’re demanding of the American people, and that’s why, starting as soon as we recieve a single dollar of Bailout money, we will drop our salary to $1 a year, and keep it their until our companies are on a stable footing again”.
Here are some other members of the $1 Salary Club, and their companies/cities/states arent even in financial trouble!
Steve Jobs - Co-founder, Chairman and CEO Apple Inc.
Larry Page - Co-founder and President of Products of Google Inc.
Arnold Schwarzenegger - Governor of California
Sergey Brin - Co-founder and President Technology of Google Inc.
Bill Ford - Chairman of Ford Motor Company
Jerry Yang - Chairman, CEO and Chief Yahoo! of Yahoo! Inc.
Jeffrey Katzenberg - Co-founder and CEO DreamWorks Animation SKG
Michael Bloomberg - Mayor of New York City
Henry Samueli - Co-founder, chairman and CTO Broadcom Co.
John Corzine - Governor of New Jersey
$1 Salary Club
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