Before I get to the post of the afternoon, let me just share my daily anecdotal story of economic doom.
My cousin, Eric, is the manager of a widget factory in Chicago. They either make rubber bands or plastic bags. I can't seem to retain that bit of information. Anyway, about five years, the factory and my cousin were transported to China. All the workers in Chicago were fired, and new, cheaper ones were hired in China. Well, that factory closed in China last week, and all those workers were fired. Nobody wants rubber bands or plastic bags anymore.
Since I'm on a roll irritating the libertarians, I think I'm going to keep going.
David Brooks today writes that Obama is about begin in the world's biggest political engineering project with his economic stimulus package and other policy proposals. While liberals think that government can fix things, conservatives think that human society is way too complicated and anytime that government gets involved, it makes a right mess of things. Welfare=welfare queens.
While Brooks hopes that Obama is successful, he's worried that he won't be.
All in all, I can see why the markets are nervous and dropping. And it’s also clear that we’re on the cusp of the biggest political experiment of our lifetimes. If Obama is mostly successful, then the epistemological skepticism natural to conservatives will have been discredited. We will know that highly trained government experts are capable of quickly designing and executing top-down transformational change. If they mostly fail, then liberalism will suffer a grievous blow, and conservatives will be called upon to restore order and sanity.
It’ll be interesting to see who’s right.
The conservative model has already been discredited. The hands-off approach meant that government turned a blind eye as stock brokers sold crap, people bought cathedral ceilinged monstrosities, and greed raced on without some necessary speed bumps. Now, we are looking at nationalized banks. And the banks are begging for it. There are no libertarians on Wall Street.
I don't know if Obama is going to succeed or not. I have no idea how he's going to create the demand for rubber bands or plastic bags. But the death match between political models has already been fought. The decision has been made.
UPDATE: Read Stephen Walt's reaction. And Tim Burke.
Megan McArdle gives a sensible response.
Apt. 11d 
“I have no idea how he’s going to create the demand for rubber bands or plastic bags.”
Why do you want there to be demand for rubber bands and plastic bags? I thought we were all supposed to be using reusable bags. Regretting the loss of a plastic bag factory is as weird as Obama eulogizing the lost RV industry of Elkhart after calling for austerity during the campaign and telling Americans that “We can’t drive our SUVs and, you know, eat as much as we want and keep our homes on, you know, 72 degrees at all times, whether we’re living in the desert or we’re living in the tundra and then just expect every other country is going to say OK, you know, you guys go ahead keep on using 25 percent of the world’s energy, even though you only account for 3 percent of the population, and we’ll be fine.”
Now that I’ve had a chance to read up on Obama’s housing bailout plan, I am very pleased with it. It’s not going to work out as promised, and it’s beginning to look like that is a feature, rather than a bug. $275 billion is supposed to save $9 million homes. That’s about $30k per home (if successful), which suggests that the targeted homeowners weren’t in that much trouble to begin with. In the worst bubble zones, it is not at all uncommon to owe $400k on a $200k house. $30k doesn’t make much of a dent in that. Furthermore, as I’ve been hearing, only homeowners who owe 105% or less of the value of their homes are eligible to have the loans modified. Very few homeowners are going to be eligible for assistance and even fewer are going to apply. This plan is like bailing out your bathtub with a teaspoon. This is really the best thing for the US economy as a whole, but it’s going to be very disappointing to some people.
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I wasn’t able to find the original Bloomberg source, but Jim the Realtor of bubbleinfo.com has a big chunk of an article up today about how previous loan modification programs are failing.
“The existing loan-modification program is designed to reduce a borrower’s monthly payment to 38 percent of salary by reducing interest rates, extending repayment terms and, in some cases, reducing the outstanding principal.
“Joseph Evers, deputy comptroller at the Office of the Comptroller of the Currency, told lawmakers Tuesday that roughly 57 percent of Fannie and Freddie’s loan modifications made in the first quarter of last year defaulted again within six months of the modification.”
I believe the Obama mortgage plan has lower mortgage payment requirements for participants (31%???), but the high failure rate of the previous mortgage bailout program does not bode well for the Obama program.
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” This plan is like bailing out your bathtub with a teaspoon. This is really the best thing for the US economy as a whole, but it’s going to be very disappointing to some people. ”
Don’t hang your hopes on this idea. Like other bail-out plans, it will be modified if it doesn’t end up being used. The goal is to keep people in some of those homes, because if we don’t, neighborhoods will be destroyed and fall apart and bad things will happen. We’re not just throwing cash, ’cause we’re hoping that we’ll be able to pick a better group of people to throw trash at (the morally better ones, who weren’t just making bad decisions 2 years ago, the ones who really might be able to take advantage of a temporary bailout . . .). But, if that doesn’t work (as you hope, that no one uses the money) we’ll just start throwing cash.
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Oops, no plans to throw trash at anyone :-).
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I think the trash is being sold to government, but I haven’t been keeping up with the different bailout plans and that may have changed.
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“The goal is to keep people in some of those homes, because if we don’t, neighborhoods will be destroyed and fall apart and bad things will happen.”
I was reading today that there’s a certain tipping point at which 20% of underwater homeowners walk away from their houses. I forget what the number was and I’m having trouble turning up the stat. Maybe 20% upside-down?
There are something like thirteen trillion dollars of mortgages out there in the US, and a fair share of these mortgages are so bad that they are beyond redemption (like that bus driver on CNN with the $800,000 house). We’ve heard so many times that certain banks are “too big to fail,” but with mortgages, we’re finally dealing with an entity that is too big to save. Just write these people $5,000 checks and tell them to move out and find a rental.
There’s a cute photo shop allegory entitled TARP that’s been making the rounds that illustrates the issue:
http://www.socketsite.com/archives/2009/02/an_interpretative_tarp_photo_montage_for_a_rather_rough.html#more
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