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Tuesday, November 25, 2008

Seeing the light

The federal bailout gurus are tired of waiting for the banks to stop hoarding cash and resume making loans. So the government is going to start making loans directly:

To calm anxious markets, the Federal Reserve and the Treasury plan to announce a major lending program on Tuesday to jump-start frozen loan markets, administration officials said. The Treasury had signaled earlier this month that it was considering such an action for consumer loans, but the action to be announced will broaden the program to include business debt.

In effect, the program would create a government bank to finance hundreds of billions of dollars in commercial debt, like car loans, student loans and business leases. The Treasury is expected to contribute $10 billion to $20 billion in seed capital, which would come from the $700 billion originally provided to shore up the financial system. The Federal Reserve would lend the new entity as much as 20 times that amount.

This is pretty much what I suggested here on September 30:

Here's a different idea that we've been mulling over for the last couple of days: If the banks won't stop hoarding cash, it may be time for the government to step in and do the banks' jobs for them. For $700 billion, why doesn't the federal government just start a direct loan program, making loans to worthy homebuyers, students, and businesses?
The feds ought to stop pumping money into the banks. Let them go down now, rather than later. If real people need loans, Uncle Sam, then just lend them some money.

And have the agency run by somebody making $200,000 a year -- not $20 million. It can easily be done.

Comments (17)

I've been sorting through the analogies trying to get a read on this. Yesterday Deeds compared our economic problem to Godzilla. i thought that was vivid.
By the way, I came up with one for the gas price drop. It's like when the oceanic water level goes down before the tsunami comes in.
The one that caught my ear on Citigroup, AIG and so many others was delivered last night on the evening news by a Harvard professor. He said these troubled banks are on life support. They are breathing on respirators. What we are doing pumping cash into them is like putting a feeding tube into a patient on life support. They go on living but they're still breathing on a respirator.
I thought that was pretty vivid too.
Yikes.

My fear (not that the banks seem to be any good at this) is that people who are totally unqualified to get a loan, will get one under the government. Then, again, we will end up will lots of people walking away from their responsibility and leaving the government (the lender) with something that can't be sold for what is owed on it. This entire bailout thing is a bad idea. Excellent example of the old slippery slope problem.

One has to hope the economic team Obama is assembling is capable of learning from their mistakes. If so, they bring a certain political credibility, or maybe it's just practical familiarity, to the table whose import can't be overestimated in a time of crises and transition. If they are not capable of making philosophical adjustmens, the next bubble in the US economy will be cetainly be in the manufacturing and maintainance of guillotines.

But, you know, Obama faces an even larger task which is to redefine wealth to the American people. I think of Roosevelts four freedoms here: Freedom of speech, Freedom of religion, Freedom from want, Freedom from fear. A nation's wealth then, should be defined by how well it nutures these four freedoms, (although I personally think of Freedom of Religion as the Freedom inherent in the separation of Church and State.)

Still, if a nation defines its wealth by how many palaces are built, the nation is doomed to topple. If it defines its wealth by the the quality and access of its medical care, its schools, its infrastructure; if it defines its wealth by its universality of purpose and commitment to the common weal (rather than the common squeal,) well, that country can survive any crises. That is the sense of nationhood Obama is charged with leading us towards.

Yes, direct injections of Moneytox will smooth out the wrinkles and makes things look good . . . for a while.

Ejs says it so very well it bears repeating. A plan to send us back into the malls with borrowed money for more gadgets and fashions from foreign countries isn't the right thing any more. It's time to make a big change in the life we live. I was encouraged by the references in Obama's latest public statements to infrastructure and alternative energy. These things will take time to develop and implement, but they (along with changes to the health care system and, maybe new, high-speed rail for passengers and freight) are what will steer us toward a more stable future.

If you are a small business person wondering how in the world you can survive the slowdown in sales without your formerly trusty credit line to tap, this lifeline could not have come too soon. These are not fly-by-night startups, but long standing pillars of the business community. At last, some real economy relief - just in the nick of time. Whew.

"people who are totally unqualified to get a loan, will get one under the government."

FHA still allows you to buy a house with 3% down.

I don't know if we need to redefine our lifestyle, but if they are going to spend on infrastructure like roads and sewers, it'd be worth it. My fear is that these things go from a $750M I-5 bridge with no extra car lanes to a $4B bridge once every little interest group gets served. Not to mention Randy trying to siphon off money for a soccer stadium.

I am fervently hoping Mr Obama is the first politician I can trust in a long while.

But, you know, Obama faces an even larger task which is to redefine wealth to the American people.

My first instinct was a smart aleck comeback to this statement. I will say this is a tall order..business as usual does have to change, that's a fact.

How about helping consumers refinance their debts with interest rates over 10 %. There are a lot of us who's sneaky, nasty, decietful credit cards have upped rates to 24% and above. We might have a shot at repaying them within our lifetimes if the rates and fees didn't eat up each moths payment.

At lease require any company who uses this seed money to make loans to go back and lower rates for prior borrowers who are paying more than the new loans rates.

For any of you have the feeling, like I do, that pumping even $25 or $50 billion into Citigroup (a $2 trillion operation) pretty good article that agrees:

http://money.cnn.com/2008/11/25/news/banks_medicine.fortune/index.htm

At the end, one analyst recommends the government just goes whole hog, nationalizes them, repackages the good parts and sells them back off. I find that argument compelling, because right now I have the feeling that we're throwing multiple trillions into banks which may fail anyway.

Someone above mentioned the infrastructure-spending stimulus. I've heard some conservatives poo poo this because the money would be pumped into public projects rather than directly into the private economy. I see that argument, but at this point I'm all for the infrastructure spending. Our infrastructure needs it. The construction industry needs jobs. And after this is all over, we can put our hand on a new bridge or improved freeway.

What are the tangible results of a stimulous to encourage more spending (i.e. this summer's stimulous checks)? I can't remember what we spent ours on. And now we'd use it pay down debt, not on new consumption.

My first sentence should have read:

"For any of you who have the feeling, like I do, that pumping even $25 or $50 billion into Citigroup (a $2 trillion operation) won't do much, here is a pretty good article that agrees:"

The NYT's reports that Citigroup began its recent decline when it failed to buy Wachovia, losing it to Wells Fargo. You know it's bad when a bank fails because it couldn't buy another bank that already failed.

Bill, that insanity is unfortunately typical in the business community, as I've experienced quite a few times over the years. The idea is for companies already about to collapse that buy up other failing companies, with the idea of dumping their debt upon the new acquisition, stealing the few components of the dead company that actually make money, and then jettisoning the corpse in time to collect a hefty tax cut. Sometimes this doesn't work so well: Computer Associates tried this back in 2001 when it bought Sterling Software, only CA's damage was so extensive and Sterling's former owner was so pissed at how the company was being used that it backfired. I was working for CA at the time, and when you get called into a meeting a week before layoffs and the only hope brought up by executives is "The CEOs are good close personal friends of George W. Bush's, and George will send a lot of business our way," it's bad. (In my case, I was working as a contractor for CA in what was guaranteed to be a two-year contract, and my entire department was given a whole hour's notice to clear out our desks and get the hell out of the building.)

Sometimes, watching the merger of two failed companies is the height of entertainment. Back in 1999, the planned merger of Sprint and Nextel blew up because the execs of both companies were planning on dumping their debt upon the other and moving their employees into spots held by the other, and they couldn't make a decision on which group of execs got the better deal. Meanwhile, the smart employees who got the hell out of both companies were the winners: the merger finally went through about four years later, after the companies' value had dropped by nearly half and after both had laid off thousands of employees.

Oh, and Jack? You can't have a program that offers loans directly to the public without it going through the banks! That leads to...socialism!

Seriously, I agree both with you and with those who argue that any such program needs extensive safeguards to make sure that they're not abused. Even if the program suffers some abuse, though, we're probably going to be doing a lot better than if it's left to the banks. Maybe I've lived in Dallas for too long, but I still see the scars from the "gentlemen's agreements" of the late Eighties and early Nineties, when bank presidents cut deals for their frat brothers without any thought as to whether or not the scum would ever pay back the money. Just Google up "Vernon Savings" and "Bluebonnet Savings", and figure that the current bailout isn't offering a feeding tube to a patient on life support. It's giving an enema to a corpse.

Looks like we just got the definitive analogy.

"My fear (not that the banks seem to be any good at this) is that people who are totally unqualified to get a loan, will get one under the government. Then, again, we will end up will lots of people walking away from their responsibility and leaving the government (the lender) with something that can't be sold for what is owed on it.

This collapse did not happen because the loans were "bad." It happened because the banks used the assets they represented as the basis of a pyramid scheme that was way more complicated and way more crooked than any classic Ponzi scheme. If miraculously everybody suddenly paid off their mortgages, the banking system would have collapsed overnight, just as if all the investors in a Ponzi managed to pull out. The banks wanted to write a lot of those mortgages because they generated several dollars in electronic "money" for every dollar they lent out, and their executives and shareholders redeemed the fictional money for the real stuff at the other end.

The middle class was offered increased credit as income stagnated, and wealth was siphoned out of the economy by the credit "industry."

Henry Ford said: "A business that makes nothing but money is a poor business." But that is what our entire economy has come to be designed around, concentrating wealth in a very few places. Banking, energy and insurance industries are designed to do covertly what the gambling industry does overtly, treat the extraction of wealth as their mission.

I wrote a longer diary on this subject a couple of months ago here: Life in the Casino

It's called "maximizing the asset", a term I am growing sick of hearing. Money over morality rules in the credit industry and the credit card empire - which didn't exist 60 or so years ago - has had things their way for far too long. Speaking as an individual and not as a corporation, I resent having my worth and risk determined solely by a credit card score.

If you don't own a credit card, carry monthly debt and function as a guppy (team player), you are SOL if you try to get a loan, rent an apartment, buy a car, etc. regardless of whether you have no debts and have paid all utilities, leases, loans in the past, etc. on time with checks, money orders or cash. Heaven forbid that you should find yourself in the position of (after being laid off and emptying your 401K and your savings accounts to pay for daily expenses including medical care and essentially ending up with 0 assets) being backed into a corner with a single uncooperative credit card company and forced to declare bankrupty (after having never missed a payment until the attorney advised that it would be stupid to make any more after initiating bankrupty proceedings).

Your previous sterling, 100% perfect credit rating gone, your choices are now to either bend over and pay outrageous fees for a low balance debit credit card to build your credit rating back up or live without a credit card and rely upon finding people willing to rent to you, sell to you or loan to you without the magic credit rating. It sucks. And there are more and more of us.

There needs to be an auxiliary method of demonstrating fiscal responsiblity and don't say it can't be done; we USED to do without the magic plastic system.


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