It looks like Congress is going to quickly pass legislation that will provide 700 billion dollars to bail out Wall Street.
Bush spoke three times last week about the mess on Wall Street. He looks weak and unsure of himself, while Paulson and Bernanke have been decisive and knowledgeable. Paulson and Bernanke are now the defacto presidents of the country.
There’s going to be a backlash as average Americans perceive that the government is spending a ton to take care of the rich folks in America.
Congress is going to rush legislation through. In my public policy class this week, I’m going to spend some time talking about when the usual incremental policy-making process in the country actually speeds up.
Apt. 11d 
I think “backlash” is putting it mildly. We’re out a lot of money despite a having only the most pedestrian investments and a too small home. I know the government needs to do something, but if they can’t think of a way to do this without giving millions to somebody whose 2007 bonus was higher than my lifetime earnings, I’m voting for Nader or Barr.
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Krugman make’s comparison’s in his NYT piece about the rush to legislation about the Iraq war. I can only hope that the congress has learned its lesson this time, and will not give blanket authority away with no oversight, as Paulson seems to want.
The problem is that the legislative branch is poorly designed for dealing with emergencies. That’s what we need the executive for. But, we have an executive branch that’s proved itself untrustworthy.
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I read last week that President Bush canceled a trip to a couple of states to stay in D.C. and consult with his economic advisors. My reaction was “Why bother?” As if Bush himself is actually adding anything to the conversation! But he has to pretend he’s in charge, I guess.
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“but if they can’t think of a way to do this without giving millions to somebody whose 2007 bonus was higher than my lifetime earnings”
Would the a cash infusion work for you? Or, what about the dem’s plan to restrict executive pay? Paulson says that won’t work, ’cause then the executives won’t participate.
What I want is not to give away the keys (and I say that even though I’m fervently hoping for a change in party control of the executive branch). I think no one does well with no oversight; my admiration and hopes about Obama do *not* extend that far.
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Haven’t they already been doing cash infusions? As for restricting executive pay, I don’t see how you could do that legally. What would you do, industry specific tax brackets? Retro-active capital gains tax? Everything I can think of seems worse than what they are proposing now.
Like you, I’d demand transparency and continuing oversight. For right now, the other thing I want is for the government to slow this thing down. Unless I can actually see physical smoke pouring out of something, whenever somebody says we have to act now, my reaction is to see how deeply I can put my heels in the ground. I’m not eager to see the normally incremental policy process sped-up too much.
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“As for restricting executive pay, I don’t see how you could do that legally”
You do it as a condition of the cash infusion (or buying the bad loan). I don’t think there’d be a legal problem with it.
I think the retroactive stuff won’t fly (unless fraud is alleged), but proactive restrictions are possible.
“Unless I can actually see physical smoke pouring out of something”
I actually believe them that the banking system might be in danger of collapse. I said in previous emails that I was starting to think about mattresses as a place for my money, but I did actually take a practical step of moving money from a money market fund to a FDIC insured bank (before the announcement that they’d insure money market funds — though I think the funds are going to have to buy that insurance). So, if people are reacting, there is a real fear of a run on the bank situation.
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Tom Maguire of justoneminute.typepad.com had a funny story up, of his child’s understanding of the meltdown:
“OVERHEARD: My eleven year old came back from a soccer game with an interesting story from the financial trenches. Apparently one of the soccer dads was a hedge fund manager who was railing to a sympathetic listener about how the government had changed the rules on Friday and was being totally unfair to everyone (“Something about how you can’t sell banks if you are short” was how my son explained it, but I did not attempt to explain short-selling.) Anyway, my son assured me that this hedge fund guy was Kind of a Big Deal – “Dad, he said he was the biggest trader out there of Bernie Mac bonds.””
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“You do it as a condition of the cash infusion (or buying the bad loan). I don’t think there’d be a legal problem with it.”
Except that with everybody convinced that the banks are about to fail, the Treasury has lost a lot its bargaining position before the bargaining has even started. Which is why the more people push this as a crisis, the more I want this to slow down.
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“..when the usual incremental policy-making process in the country actually speeds up…” I actually got a job out of this sort of speed-up once: Dalkon Shield. You may not remember this hideous event, many women getting painfully ill and made sterile by IUDs. Well, FDA had been angling for oversight responsibility for medical devices for years-and-years, and when this event happened and Congress was casting about for a way to show that it was Doing Something, they had a bill ready for just that and it sailed through, along with money for 700 new FDA inspectors nationwide. I actually got assigned to the fish processor/pickle factory/potato chip beat, and more experienced guys got taken off food and put on to medical devices.
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“I actually got assigned to the fish processor/pickle factory/potato chip beat, and more experienced guys got taken off food and put on to medical devices.”
Because all of that pickle experience prepared them for looking at IUDs? Not that I don’t appreciate having a safe pickle supply, but I can’t think of a single medical device that uses dill.
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Kaus has a bunch of stuff up relevant to the meltdown, including a quick review of why McCain’s plan of putting Andrew Cuomo in charge of the SEC is a bad idea–Cuomo presided over a $250 million housing fraud disaster at HUD in the late 90s. That may sound like small potatoes now, but there are eerie similarities between the HUD issues in the 2006 NYT article that Kaus cites and our current housing woes.
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Could not the backlash simply come in the form of significantly higher taxes for people in the top brackets? Am I misunderstanding something?
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I think some folks are worried about people who bought homes they couldn’t afford getting bailed out, too.
Not just paulson and his .5 billion.
And there’s “punishing” super rich folks like the google guys and bill gates who are not responsible for the mess.
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Whoah, Kaus is trashing a Democrat? ZOMG! Gotta go and read that r*i*g*h*t a*w*a*y!!
“No blank check” seems to be making a good start as a rallying cry. Simple and has the added advantage of being good policy.
Hilzoy was very good yesterday on the politics of the possible bailout, over at Washington Monthly. “Fiscally responsible Republicans” just became a cue for raucous laughter.
If I had a real representative (and really, why don’t the citizens of DC have real representatives and senators? what’s the reasoning behind second-class citizenship?) I’d be on the phones today, politely but firmly saying “no blank check.”
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“why don’t the citizens of DC have real representatives and senators?”
Because the constitution says D.C. doesn’t get any and it takes 3/4 of the real states to change that.
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I’d say that Kaus was trashing a Republican (McCain) for picking a Democrat (Cuomo) to fix a housing meltdown when he had previously (as per the NYT) been the guy in charge during a smaller (but very similar) housing disaster. I particularly cringe at the fact that Cuomo wanted pension money to be more aggressively poured into investing in “affordable housing.” Talk about putting the fox in charge of the chicken coop.
Doug, this choice of Cuomo reflects badly on McCain, so you should be pleased that Kaus is bringing it up. Stuff is happening very quickly right now, so it’s important that somebody be pointing out which solutions (like picking Cuomo) don’t make any sense while there’s still time to make changes.
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Kaus has a new post up on McCain and comprehensive immigration reform, which is Kaus’s white whale. At least recently, Kaus has been mainly gunning for McCain.
————————–
Priorities: McCain pledges to present a ‘comprehensive immigration reform’ plan to Congress (i.e. including some form of amnesty) “the first day” in office. … [Tks. to J.S.] 10:27 A.M.
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I kind of like what I’m reading about Dodd’s plan much better than the Republican plan.
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Dodd was one of the people that got special VIP loans from Countrywide a while back. I don’t know what the terms of his particular loans were (or if that information is available), but the portfolio.com piece on the Countrywide program said:
“According to company documents and emails, the V.I.P.’s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value. For V.I.P.’s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free “float-down” to the lower rate, eschewing its usual charge of half a point. Some V.I.P.’s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.
Unless they asked, V.I.P. borrowers weren’t told exactly how many points were waived on their loans, the former employee says. However, they were typically assured that they were receiving the “Friends of Angelo” discount, and that Mozilo had personally priced their loans.”
http://www.portfolio.com/news-markets/top-5/2008/06/12/Countrywide-Loan-Scandal
I don’t know what the merits of Dodd’s plan are, but I feel really uncomfortable about at least one point mentioned in the politico.com summary:
“* A provision that would require the Treasury to take a 65 percent portion of 20 percent any profits it makes from the newly purchased assets and put it into the federal government’s HOPE program, an affordable housing program.”
http://www.politico.com/blogs/thecrypt/0908/Dodd_bill_much_more_aggressive_than_Treasury_plan.html
“Affordable housing” programs, zero-down financing and “gift” downpayments funneled through “charities” are a big part of how this whole mess started. Have we learned nothing from the events of the last two years?
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Still looks a hell of a lot better than $700B to the administration with no oversight.
And the problem is not so much with the loans themselves — underperforming loans are a known problem — it’s what happened after the loans were made. Big financial players are holding big chunks of securitized loans that nobody wants to sell for fear of discovering that the price they will get is a lot less than they thought. That’s driven the liquidity out of the loan securitization market, and everything else has been a knock-on. Programs like HOPE and charity involvement in housing loans are peanuts, and if I may mix my metaphors mercilessly, a red herring in this case. The Republicans are looking for ways to blame black people for the bankers’ fuck-ups. It’s sleazy, but what else are they gonna do?
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I’m blown away by the accusations that mortgage lenders were giving loans to risky black people under pressure from Democrats. 3-4 years ago, when I was house hunting in Barrington, RI, there was a mortgage lender in every open house along with the realtor, telling all the prospective buyers (white–never saw a non-white person while house hunting in Barrington) of these $350+K houses how they could afford the payments if they’d take out 2 year ARMs with 0 down.
We eventually did not buy in Barrington, but our mortgage is with Countrywide. I learned a year ago that the 3 year pre-payment penalty I didn’t question earned my broker a nice little extra bonus. I never understood why everyone always said buying a house was so difficult. For us it was so easy. Now I know why–they had no lending standards, so there was no pressure on us to “prove” we had good credit! The brokers, the realtors, the lawyers–they were all making good money. Everyone was happy and getting what they wanted.
They were preying on everyone. I’m just glad I listened to Atrios, who has been warning people about ARMs forever. And I’m disappointed with myself for being so naive and buying into the whole housing bubble thing. My husband didn’t want to buy, but I kept insisting.
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How much is the thing going to cost? I don’t think $700 billion is going to do the job.
As to whether or not downpayment assistance programs are a big deal or not, the Nehemiah Corporation’s website says that downpayment assistance programs have put more than a million working class families into houses since 1997. See http://www.dpagroundswell.org/
and http://www.dpagroundswell.org/threat/index.cfm
On the latter page, they say that 40% of FHA loans are originated with downpayment assistance, and that Oct. 1 will be the end of the downpayment programs. They also say that the downpayment requirements are going up from 3% to 3.5%. That sounds like a pretty big deal to me.
The Wall Street stuff is above my pay grade, but I’ve been following the retail housing stuff very closely for at least the past two years, so I know where at least a few of the bodies are buried.
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I think the oversight provision is the most important — to have a real oversight provision that doesn’t give anyone a blank check. And, everything needs to be done out in the open. We need to know where the money is going on a regular basis, with real transparency. I hope the democrats don’t cave.
(and the racist complaints coming from the repubs are just ugly. The fox news guy who said “risky minority folks”? ugh. Apparently the number of Asian’s who are registered as Republicans has sunk to 14%, a 30% decrease since the 2001. There’s a reason for it. I’m not sure why they don’t get it — as Wendy pointed out, if you want to complain about risky lending, you can do so without attacking minority racial groups).
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“And I’m disappointed with myself for being so naive and buying into the whole housing bubble thing. My husband didn’t want to buy, but I kept insisting.”
Around 2005-6, it seemed perfectly natural that the starter homes in Montgomery County MD neighborhoods with so-so schools and lots of poor people were $400,000. Sure, it was expensive, but the school district as a whole was respected and people make a lot of money in metro DC. Never mind that zillow.com said that the houses cost half as much four years ago–that was perfectly normal. And it was perfectly normal that there was such a fierce market for homes that people were waiving inspections to get their bids accepted on the biggest purchase of their lives. There must have been something in the water.
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In my defense, we did not buy in Barrington in the end. We ended up buying a house we could afford, barely, in a different town, not so nice. And we got a 30 year fixed mortgage. But it was still kind of stupid. But it shows why my husband and I are a good couple. He lives in inertia then makes impulsive decisions that I have to talk him out of. I dream big and make lots and lots of plans then let him pull me back down to earth.
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“…they say that 40% of FHA loans are originated with downpayment assistance, and that Oct. 1 will be the end of the downpayment programs.”
And when Rep. Frank and others quit trying to re-instate the downpayment assistance, I’ll be much more confident that the bailout might work.
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Backlash anecdote. Steve said that there were protesters outside of his building today.
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I made a mental note to wait until corn prices drop back to their normal range and then put all of my money into large-scale photosynthesis.
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Yglesias notes:
* only a quarter of subprime loans came from institutions to which [Community Reinvestment Act] was fully applicable; half came from institutions that are exempt from CRA requirements.
* Last, non-CRA institutions were making these loans at twice the rate of institutions covered by the CRA.
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” (and really, why don’t the citizens of DC have real representatives and senators? what’s the reasoning behind second-class citizenship?)”
Doug, the Founders’ idea was that they didn’t want the capitol to be what they saw in Paris or London, sucking the life from other places in the country. The New Yorkers didn’t want the Philadelphians lording it over them, the Bostonians were suspicious of Baltimore…
I think it wasn’t a bad idea, and it’s been imitated in Canada and Brazil and Australia. If your capitol is your national center, you make everything else the provinces.
Does it still make sense? I’m not sure: New York won’t roll over and play dead if DC gets senators, and anyhow we have Steny Hoyer and Barbara Mikulski and Jim Webb paying attention to the suburbs of DC. But that was the idea.
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Doug,
The Nehemiah Corporation says on their website that they don’t work with subprime loans. “FHA loans originated in conjunction with DPA are not sub-prime. They allow hard-working, credit-worthy American families who can afford their monthly mortgage payments the opportunity to purchase homes. All homebuyers must qualify for FHA loans.”
http://www.dpagroundswell.org/impact/index.cfm
I don’t know exactly how to parse that. Some of Nehemiah Corporation’s content is pretty weasely (like when they assert that the downpayments aren’t really being paid by the sellers because they have some sort of Rube Goldberg device that they run the “gifts” through), but I assume that what they say about FHA loans and not being subprime is basically correct.
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The Australian Capital Territory has two representatives and two senators. Residents of Brazil’s Federal District elect eight representatives and three senators. Ottawa is a municipality within the province of Ontario, and thus subject to no special restrictions. So the US is definitely the outlier.
I understand the historical intent, but like a number of things from the 18th century, it ought to be put right for the 21st. There’s half a million US citizens (581,000 says the 2006 Census estimate) living in the District — more than Wyoming and within shouting distance of, say, Alaska — with no real representation. That’s not right.
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Doug, aren’t you in the Georgia without Waffle Houses anyway? (I was about to say the better-armed Georgia, but I decided that was too ambiguous.) Or have I confused you with somebody else?
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I am, but you’re a legal resident of the last place you lived in the States. For me, that’s DC.
Scattered, splattered, smothered and covered might not be the best thing to ask for here, considering recent events. And no country on the jukebox of the not-WH either. Though it’s got a road suitable for WH, should any franchisee be bold enough to try.
I missed a turn off that road at the edge of town the other night and was halfway to Gori before I found a place I trusted to switch back around. But Tbilisi is pretty much back to its normal chaos; I’ve got to step out for a quick grocery run, or there’s no toast tomorrow morning.
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The Fiasco of Political Idiocy
Once again a Senate hearing is not a listening or learning tool but an ego driven expenditure for tax payers. What truth was learned today…more than we already knew? How much time was wasted on Senator’s proclaiming themselves? How many questions were left unanswered or never given? Is not this financial mess as much to blame on Congress as any administration? Where are the “leaders” since the conventions of each party? Surely not in Washington? No… What kind of senior leadership has either presidential candidate shown us in these last few days? Oh… it’s more important to campaign than be there in Washington to meditate a healthy solution to this dilemma? Oh yes… need to get ready for the debate? Really… seems like the National Interest Debate is taking place in Washington… Why hasn’t either candidate found it important to be there????? Mmmmmmm… guess there really isn’t much of a leader in either of them… is there? Are we in more trouble than we can imagine?
Solution: 1) Cancel Friday’s debate. 2) Rearrange campaign schedule and 3) Get To Washington to manage, organize and maintain a healthy debate to resolve the present crisis. Most importantly on this latter issue is ban all special interest and lobbyist from the proceedings.
In other words… Someone in this mess please show true leadership!!!!!
Sincerely,
Patrick Gaffney
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Doug,
I was just sitting down to my usual evening dose of thehousingbubbleblog.com when a post there jogged my memory. We’ve been talking about single family homes, but a big chunk of the housing/banking crisis is or will be failed condo projects. I’ve already mentioned our area’s white elephant, which is a new downtown “loft” condo project with units that are (per square foot) twice as expensive as the most expensive neighborhoods in the area ($200 per square foot versus $100). They’re also offering the units for rent for about 50% more than what I believe market value is. I’m really curious to see what happens to this development which would never, under any conceivable circumstances, have been a good idea.
The past few years, there was a mania for condo-building (all invariably “luxury” condos), as well as the execrable condotel. I wonder how the bailout is going to treat these projects.
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Doug, sorry about the lack of Waffle Houses, and Congressional representation. Of course, I haven’t gotten to vote in a contested U.S. House or PA Senate or House election since moving to Pittsburgh. Too few Republicans for anybody to try. Also, no Waffle Houses in Pittsburgh either. But, we are getting a brand new IHOP about 1/2 mile from my house. And, I do get contested Senate elections.
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http://williambanzai7.blogspot.com/2008/09/charge-of-tarp-brigade-charge-of-light.html
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TARP BAILOUT THRILLER NIGHT (Final version)
(Michael Jackson’s Thriller)
WilliamBanzai7
It’s Midnight this late September night and the street is full of Politicians, Lurking in the Dark.
Under The Moonlight, You See A Sight That Almost Stops Your Heart.
You Try To Scream, But Terror Takes The Sound Before You Make It.
Debt Markets Start To Freeze, As Horror Looks You Right Between The Eyes,
Your Paralyzed
You Hear The Door Slam, And Realize There’s Nowhere Left To Run.
You Feel The Cold Take Hold, And Wonder If You’ll See the Mother of All Bear Runs
You Close Your Eyes, And Hope That This Is Just Imagination,
But All The While, You Hear The GOP Pachydermata Creepin’ Up Behind
You’re Out Of Time
They’re Out to Get You, There’s Demons Closing In On Every Side.
They Will Possess You, Unless You Change The Number On Your Skype.
Now Is the Time for You and Your Trading Quants to huddle Close Together
All Thru The Night, It’ll Save You From The Terror On The Reuter Screen,
It’ll Make You See:
(narrated by Vincent Price)
Darkness Falls Across The Land, The Asian Trading Day Is Close At Hand.
Bottom Feeders Crawl In Search Of Blood To Foreclose on Your Neighborhood
And Whosoever Shall Be Found Without The Soul For Economic Bust
Must Stand And Face The Hounds Of Subprime Hell, And Rot Inside WaMu’s Bankrupt Shell.
The Foulest Stench Is In The Air The Funk Of 700 Billion Bailout Bucks
And Shortselling Ghouls From Every Trading Room Are Closing In To Seal Your Doom
And Though You Fight To Stay Alive Your Net Worth Starts To Shiver
For No Investing Mortal Can Resist The Evil Of The TARP Bailout Thriller
‘Cause this Is Thriller, TARP Bailout make or break Night
and No-ones Gonna Save You from the Beast about to Strike.
You Know its Thriller, TARP Bailout Thriller Night
You’re fighting for Your Monetary Life inside a Killer, Thriller.
Thriller, TARP Bailout Thriller Night
‘Cause I can thrill you More Than Any Market Ghoul Could ever try. (Thriller, Bailout Night)
So Let Me Hold You Tight And Share A Killer, Chiller, Fiscal Massacre
Thriller Here Tonight.
‘Cause this Is Thriller ,TARP Bailout Thriller night
It Will Thrill You More Than Any Ghoul Could ever dare try
Any Ghoul could ever Dare Try
(Daddy, can I be TARP for Halloween? No deary…its too scary! Be something funny
like the McCain campaign )
http://williambanzai7.blogspot.com/
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