Friday, September 26, 2008

"What Is This Money Even For?"

Hunter (front-paged now on Kos):
What Devilstower said in an earlier post can't be repeated enough. The $700 billion figure isn't an explainable one, given the purported problem at hand of "bad mortgages".

And that's where we get that math problem. 1% of all mortgages -- the amount now in default -- comes out to $111 billion. Triple that, and you've got $333 billion. Let's round that up to $350 billion. So even if we reach the point where three percent of all mortgages are in foreclosure, the total dollars to flat out buy all those mortgages would be half of what the Bush-Paulson-McCain plan calls for.

Then we need to factor in that a purchased mortgage isn't worth zero. After all, these documents come with property attached. Even with home prices falling and some of the homes lying around unsold, it's safe to assume that some portion of these values could be recovered. In the S&L crisis, about 70% of asset value was recovered, but let's say we don't do that well. Let's say we hit 50%. Then the real outlay for taxpayers would be around $175 billion.

Which, frankly, is a number that Wall Street should be able to handle without our help. After all, the top firms on Wall Steet payed out $120 billion in bonuses alone between 2000 and 2006. If they've got that kind of mad money, why do they need us to step in now? And why do they need twice as much as all the mortgages that are even likely to implode?

Indeed. And despite what we've been told, then, we can only presume that the problem is in fact not all the bad, scary subprime mortgages. And it's not. Yes, a lot of people are finding themselves upside-down on their houses right now, but Paulson isn't proposing we do squat to solve that -- and even the "controversial" Democratic counterproposal, that we actually do at least a little something to help those people, after they've already gone bankrupt, is pathetically weak.

Instead, we're getting a Wall Street bailout not of the mortgages, but of the absurd, speculative, economy-wrecking derivatives based on those mortgages, derivatives that investors and banks ravenously sold each other at unsupportable and quite-probably-crooked prices. Those derivatives, generally speaking, are "bets" on the state of the underlying mortgages. And they didn't just bet wrong -- they bet irrationally, based on presumptions of near-zero risks to those underlying mortgages. And worse, the big banks even -- bafflingly -- got special permission to overleverage themselves 40 to 1, all but assuring collapse if those derivatives went south. Which they did.

Fine, then, but how is that self-induced bubble an unweatherable economic crisis for the rest of us? Yes, those banks may fail -- as they should. It'd be a crime if they didn't, given their mismanagement of their accounts. But the real problem is that those banks are, literally, too big to be allowed to fail. Their failure would present a liquidity problem for the rest of the market. They can do anything -- they could even burn money on the street -- and the strong preference of government would be to bail them out for it, because the alternative is financial chaos.

The subprime mortgages aren't the problem. And the overleveraged firms shouldn't be a problem. The problem is keeping the rest of the economy afloat no matter what happens to the firms in trouble.

The problem is that there's a lot of different ways to do that, and it's not at all clear that Paulson's way is the best. Paulson proposes to bailout the firms in question, by giving them the Mother Of All Do-Overs. We taxpayers will buy, from banks both in trouble and not in trouble, up to $700 billion dollars worth of the overpriced, now-worth-much-much-less derivatives in question. That will provide a real (inflated) price for the derivatives, and lo and behold -- the firms will be saved, because we've now created a market for their unmarketable, worthless products. They stay afloat, because the taxpayers pay them to do it. And, importantly, since all the banks now know that if any of the other banks are hemorrhaging money through these bad derivatives, the taxpayers will bail them out at some decent price, all the banks trust each other again, and feel free to loan each other money again, and the liquidity problems are solved. In theory. If the Fed can keep up with all the bad paper being tossed at them.

But while that's unquestionably the best possible plan Wall Street could themselves possibly come up with -- it doesn't just save their bacon, it makes large parts of their debts simply vanish -- it's an obscenely expensive thing, and is rife with problems. The temptation for profiteering on the part of the corporations is going to be huge, and quite doable. The underlying mortgages are still defaulting, and more importantly the bursting of the housing bubble has put millions of people into an insupportable amount of debt, and those are not going to be happy consumers, so the economy is still going to go very south, very quickly.

And it smacks, strongly, of the very same dynamic that has governed the last few decades of American history. We're transferring yet another giant chunk of money from the general public to the most wealthy. In this case, a trillion dollars or so worth.

All the while, we're being told that we can't be punitive about this, and punish the firms in question. We can't set new regulations. We can't take equity in the firms we're giving so much money too. We can't do squat except buy their bad paper, and hope to hell that they survive, while the rest of us wallow in the steep recession almost certain to come as a result of the housing bubble collapse.

Is that the best approach? I'm not convinced, and I'm more than a little angry at the Democrats for, once again, accepting what they are given and trying to tweak it rather than coming up with true counterproposals. Propping the housing market up from the bottom may be much cheaper than trying to prop up the entire derivatives market from the top, and would seemingly have the same stabilizing market effects. Taking equity in firms in exchange for taking their crappy, non-marketable products would, yes, seem the absolute least we could do -- there must be an upside for the taxpayer in providing this trillion-dollar investment at the expense of ballooning our national debt and crippling public sector works for a decade or more. But that's still weak tea, all things considered.

Not being talked about as much, though, is that we must allow overextended companies to fail. It is an essential part of our economy that economy-threatening recklessness on the part of speculators not be rewarded, and especially not be rewarded by the government. Any actions to stabilize the economy should indeed inject liquidity -- but it's not clear that injecting liquidity through the very companies most in trouble is sustainable or even rational.

More than that, I think Americans can and should be quite furious at the way this extraordinarily business-friendly proposal has been steamrolled through under premise of imminent crisis, with no serious debate of any more balanced alternatives. It is another black mark in the legacy of the Bush years -- for both parties. If the Congress really passes the Paulson plan with, as it looks now, absolutely no substantive debate of alternative plans, it has once again shirked its most basic duties, and is an embarrassment to the nation it supposedly represents.

One thing is for certain, though. No matter how bad a deal looks, doctrinaire Republicans can always be counted on to come up with an "alternative" that would be ten times worse. Their "alternative" plan, the one they're holding out for? Cut corporate taxes -- again -- and remove even more regulations on those companies -- again. Because that'll release the magic money fairies and the problem will be solved. And no, I'm not kidding. Except about the fairies. Maybe.

There's been nothing about the Washington reaction to this that has inspired confidence. And now that the fight has turned explicitly political -- with no regard whatsoever for the underlying economics -- I can only imagine it getting less substantive from here.



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