Big Scary Monster of 2008

The propaganda campaign has begun in earnest. Actually, it started with McCain last week comparing the 2008 Financial Crisis to 9/11, when “everyone came together” as patriots. Or, anyway, as Patriot Acts. Later, someone said the coming disaster would be like Pearl Harbor if nothing were done.

Then there was a little bustling around, some Democrats complaining about how Bush was trying to shove The Bailout Bill down their throats, and McCain rushing in to save the day while tap-dancing for the cameras. Some Republicans balked, but it looked like typical politics, a little back-and-forth for TV cameras before everyone settled down and followed the script.

But then something strange happened. Once every decade or so, democracy delivers on its promises, and the politicians listen to constituents instead of lobbyists or other politicians. This time, some Democrats and Republicans remembered that they had a spine, though perhaps only because they were afraid of being punished on election day. Anyway, they stopped to think for a moment, and realized that The Big Bad Subprime Boogeyman was not going to pop out and say “Boo,” even if they didn’t immediately give Paulson a Big Stick.

Senator Judd Gregg, Republican of New Hampshire, said of the new plan, “If we don’t pass it, we shouldn’t be a Congress.”

(The New York Times)

Perhaps Bush will oblige them and just dissolve Congress, then declare martial law and start Paulsonizing all businesses. After the vote, it was like the devastation after the real Pearl Harbor: Suddenly the Democrats loved Bush, and it was the bad old “populist” Republicans who had revolted and staged a sneak attack on the well-intentioned rescuers.

House Speaker Nancy Pelosi looked ashen as she faced reporters this afternoon, the stock markets plunging on news that the House had defeated, 205-228, a $700 billion bailout of the U.S. financial system. . . .

The scene was the world of Washington turned upside down. As members gathered to vote, Democrats gave ovations to two Republicans, House minority leader John Boehner, R-Ohio, and Financial Services Committee ranking Republican Spencer Bachus, R-Ala. for their courage in supporting the bailout.

As the voting ran into overtime, liberal Democrats such as Dennis Kucinich of Ohio were joined by conservative Republicans shouting, “Regular order!” demanding that the vote be gaveled to a close. . . .

“Everybody was just sitting there in awe,” said Rep. Sam Farr, D-Monterey, who voted for the bill. Republicans “just walked away from their leaders and threw McCain under the bus. . . .”

Telephone calls from President Bush went unheeded. Bush is now poisonous on Capitol Hill. Both parties share profound outrage at the crisis on his watch. There is little faith that an administration that oversaw the events leading to the crisis can fix it now.

Like the boy who cried wolf, said Farr, “Bush just has no credibility. When he ran around saying the sky was falling, nobody believed it. Now we’re in a domestic crisis when the government needs credibility.”

Pelosi, a fierce opponent of the Iraq war, is convinced that the risk of assuming Bush has it wrong this time is too great.

She went on the floor to recall in the starkest terms the warning Federal Reserve chairman Ben Bernanke, whom she called “one of the foremost authorities on the Great Depression,” had delivered to her when he pleaded for the bailout, describing credit meltdown as a once-in-a-century event to drive home its peril.

(The San Francisco Chronicle)

Yeah, the Democrats are incapable of acting like an “opposition” party, since they have no actual principles. I loved it where one California Democrat said that the Republicans with integrity “just walked away from their leaders and threw McCain under the bus.” When will we see that kind of thing from the congressional Democrats?

I can’t say I always like Indiana’s congressional delegation, but Monday they did the right thing at least once.

Many lawmakers who voted “no” say they didn’t like being forced to vote so quickly. . . .

“What I would like to do is see us stay here, not go home, but stay here and solve this problem in a rational way right now, just throwing $700 billion at it is not going to solve the problem and I don’t think anybody else is sure,” Burton said.

House Republicans, like Indiana’s Mike Pence, begged the House to say no to the plan.

“Stand up for limited government and economic freedom,” Pence said. “Stand up for the American taxpayer, reject this bailout. . . .”

[Democrat Baron] Hill did end up voting against the bailout, along with Republicans Pence, Burton and Steve Buyer, and fellow Democrats Peter Visclosky and Andre Carson. Voting “yes” from Indiana were Republican Mark Souder and Democrats Brad Ellsworth and Joe Donnelly.

“It is now imperative that Congress come together and develop a response to the crisis facing our financial markets that reflects the American people’s belief in personal responsibility and fiscal discipline.” – Rep. Mike Pence, Republican.

“I have been rushed to judgment by the Bush Administration before. There hasn’t been enough time to evaluate the impacts this legislation would have if enacted, or to consider alternatives. Congress deserves time to weigh the benefits and the potential pitfalls of borrowing this money.” – Rep. Baron Hill, Democrat.

“We are now in the golden age of thieves. And where I come from we put thieves in jail, we don’t bail them out.” – Rep. Pete Visclosky, Democrat.

“I am bothered that Secretary Paulson offered an immediate government solution rather than taking the time to explore effective private sector and market based solutions. The Paulson plan was an unprecedented infusion of government power into the private financial sector.” – Rep. Steve Buyer, Republican.

. . .

“I believe this particular bill would be devastating to the economy and create an inflationary nightmare. We must also ensure that we are not inadvertently purchasing bad debt from China or other countries.” – Rep. Dan Burton, Republican.

“Ultimately this is about that worker in Vincennes who is wondering if his pension will be there in the future; the single mother in Greencastle who dreams of sending her children to college; or the small business owner in Boonville who is trying to meet payroll. These are the Americans that have everything to lose if Congress fails to act.” – Rep. Brad Ellsworth, Democrat, in a statement before the vote.

(WTHR-TV; updated 5:30 p.m. ET, Mon., Sept. 29, 2008; Tom Walker/Eyewitness News)

Shock and awe ensued. Some crazy folks were off the reservation, and the Good People were scared. If congressmen started representing the will of the people, what could happen next? Dogs and cats living together? Fiery hail and frogs from the sky? No one could tell what might happen, but Chicken Little was having a heart attack.

From that point on, every newscast I heard had some incredibly shrill reporter, financial analyst, banker, congressman, or average citizen wailing and gnashing their teeth:  “Oh, no, who will save us? Who will rescue us? Without credit, the New Economy will melt away, and we will all be living in the stone age, oh please please won’t somebody help us please please our credit cards are melting . . . they’re meeeltiiing . . .”

OK, here are my opinions on the Big Scary Financial Panic of 2008:

  • Apparently, without “looser” credit, most businesses won’t be able to make payroll. What kind of business has to borrow money every week to make payroll? A failing business, I would say; a business that doesn’t deserve any credit, because they don’t have a reliable revenue stream, they don’t have any reserves, and they spend more than they earn.

Tough. I’ve had financial counseling twice. Both times, my counselor did not say, “Gee, if only the federal government would pass a law nullifying all your debts . . .” or “Gee, maybe you could borrow more money from the bank to pile up even more debt . . .” No, both times they said to me, “Gee, you need to start making more money!”

  • Apparently, some people had just shifted most of their 401K assets into stocks with the expectation of getting rich this month and retiring next month. Now it seems that wasn’t very smart, and they might have to wait awhile before the stock market goes up again. Oh, the tragedy of having a lazy investment adviser!

Tough. Maybe you don’t understand the concepts of “short-term risk” and “long-term investing.” You know, you just might have to “work” for your money for awhile instead of relying on investment income.

  • Apparently, some people bought houses they couldn’t afford, with the expectation that they would make lots more money later. Now, if they can’t get “looser” credit (that is, the no-questions-asked kind they got before), they have to continue spending a large percentage of their income on their existing mortgage, and maybe they will have to live a couple more years with the house they bought.

Tough. My house is valued at less than my annual income. It has negative equity, and it always will, until about a year before it falls apart. I don’t have sympathy for anyone whining about how they paid $400,000 for a house that is now worth $350,000, and they’re going to have to cut back on dog toys or cable TV, and maybe they will have to get by on only $6.00 a day for lunches. Start shopping at Aldi, turn off the TV, and try making a budget.

I am going to be quite explicit:  The 2008 Bailout is morally wrong on every level. It has no excuse at all, and of all the whiners I have read and listened to in the last week, none have gained any sympathy from me. They are all big babies, and I don’t care if their net worth falls so low that it’s [gasp!!] only twice as high as mine. Believe me, they will learn to live with it.

Every politician who supports any plan resembling a bailout for banks or consumers deserves to suffer painful defeat at the hands of a dorky third-party candidate. Every banker who knowingly approved bad loans deserves to lose his precious bonus for the next couple of years and start learning how balance sheets work. Every businessman who relies on loans to make payroll every month needs to find out about “savings accounts” and “business plans,” or he deserves to fail big and start working in fast food under the thumb of a teenaged assistant manager. Every consumer who signed for a loan that they knew they couldn’t pay for, and still can’t pay for, might just have to suck it up and sell the Hummer, cancel ESPN, and start eating Ramen noodles for lunch.


5 thoughts on “Big Scary Monster of 2008

  1. Being one of those out of work people, whose unemployment was caused by the real estate meltdown, I’ve spent considerable time educating myself on this issue. CNBC and Bloomberg became my textbooks along with other print mediums.

    Given that we are now in this financial mess, I don’t see a way out of it unless the federal government steps in. There are a few ideas being broached today about having the FDIC and Federal Reserve take a more active role in calming the financial markets, but everyone with any knowledge of financial markets agrees that it would be only serve as a stop gap.

    What is needed to open the frozen credit market is to remove a good many of those bought and sold, sliced and diced, repackaged mortgage securities from the books so banks feel comfortable lending again. Right now, banks are hoarding their cash to show the FDIC that they’re liquid enough to stay in business as well as their being afraid to loan to other banks for fear of not getting their money back, given how many banks are on the threshold of being taken over.

    However, once the government purchases those securities — and no one knows what they’re really worth which is part of the problem — then the government can break up the packages, hold them until stability returns to the mortgage/real estate market, and sell the securities at the new market value. Potentially, the sale will bring money into the Treasury.

    For example, (very simplistically) the Government buys a mortgage security that was originally worth $250K but because real estate has dropped in value so much the security is now work $125K. So the Government buys it for $125K (or less at fire sale prices). The government then holds the security until the market returns to value and sells the security for the original $250K. The government just made a 100% profit (or more) on its investment.

    Now if the government buys up the so-called toxic securities, it means that the government is buying the foreclosures caused by bad, inappropriate loans. Those homes are selling at highly reduced prices so they, at this time, are worth considerably less than market value right now. For example, a $500K house might sell for $100K. These types of fire sale homes make up the toxic securities. Unfortunately, the toxic securities are mixed in with good securities. Therein lies the challenge for the Treasury. How do you price the securities packages accurately when they’re all mixed up? And who will have the authority and oversight to make sure the prices are accurately set when no one knows what the mix is or what the securities are worth? (Treasury or some other board? That’s a major sticking problem for Congress.)

    Nevertheless, that’s part of — if not all — of the argument against the mark to market argument in Congress. Mark to market means marking the price of something — a building or a security or some other asset — to the price it would get today, not sometime in the future or sometime in the past. Right now, banks assets, including buildings, are being assessed on a mark to market rule by bank examiners. Since real estate overall has decreased in value as well as their real estate mortgage holdings, banks are finding themselves with a less equity to liquidity (cash/deposit/profit availability) ratio than the FDIC wants them to have.

    But where does Congress draw the line? If mark to market is eliminated then any securities purchases would be much higher and not affordable. If kept, banks are stuck with not being able to provide loans because they need to hang onto their cash reserves to show liquidity.

    Otherwise the bill appears very sound. It provides all the oversight needed and punitive measures against the original speculators. It allows the government to take an equity position (hold stock) in the company that sells securities to the government, thus potentially realizing a profit from an increase in stock prices. It allows the government to hold onto the securities until the real estate market stabilizes. It allows banks to buy industry-paid-for insurance, covering their mortgage securities, rather than opt into selling to the government and hold onto them until such time as they can be sold at a profit or covering them if they lose money on the sale. It provides some relief to homeowners to renegotiate their mortgages. And in addition, if the government doesn’t make all its original investment back within five years, the government is required to go back to the original sellers of the securities for a “make good” on the price.

    Where Congress is getting hung up is less on the faulty details than on figuring out how to sell the whole plan to their constituents. While a few, like Sen. Shelby, are adamantly opposed to any government intervention in the markets, most are probably weighing their jobs (re-election) against a negative public sentiment. And the public, apparently, really doesn’t understand what is involved. They only see Wall Street getting bailed out and made whole again at their expense. The truth could not be further from their perception, though.

  2. Thanks for the great explanation!

    However, without actually knowing how banks or derivative securities work, I still have a fundamental problem with the whole idea.

    Supposedly, these mortgages on which the derivative securities are based have a certain “real” value. However, supposedly there are no private firms smart enough to see this real value. Isn’t it possible that the real value of your hypothetical property is $100K, and all the private firms who could purchase that $125K mortgage just want to shove all the potential cost onto the government?

    Also, if this arrangement is so safe for anyone jumping into it, why don’t a few billionaires try it? It sounds much better than playing around with stocks right now, they way you explain it! Again, I think the problem is they don’t want to lose money, and they don’t care if the government loses money.

    The bottom line is that no one seems to know what the mortgages in question or the derivatives are really worth, and they are not willing to go through the normal discovery process to determine a market value.

    On the other hand, everyone suspects that both the mortgages and the derivatives may be way overvalued–like maybe by 100% or more. They all know–let me emphasize, THEY ALL KNOW–that the prices of many financial holdings were inflated in the last 15 years way beyond any fundamental value.

    They are afraid that in this particular case, there are no buyers stupid enough to bear the risk except government bureaucrats, as directed by elected legislators, who are answerable only to ignorant constituents.

    Don’t worry about a bill being passed. I have complete confidence in the basic venality and opportunism of our elected representatives. They will find a way to please the lobbyists and big donors without getting the attention of voters. The events on Monday were just a refreshing smackdown of arrogant financiers and politicians, a reminder to them not to do their dirty work out in the open.

  3. Pingback: Houses on Sand « Brainbiter

  4. Dave,

    You pointed to the exact problem why no one is buying the securities. No one knows what they are worth.

    There are good mortgages bundled up with bad ones that are about to default bundled up with mortgages that have already defaulted. As a result no one knows the value of the packages. And since there’s been no transparency, no one can drill down to look at the value of the security packages. And no one with money wants to take the risk.

    Suppose too that you buy a securities package at what you think is a good price and find out when you want to sell it that it’s value is actually much less? Although very complicated, the mark to market vs true value rules of evaluation come into play here.

    Right now, assets are evaluated at mark to market (fair value) which mean the street price now. You’d have to hold the assets until maturity or some time further down the road when prices go up (and who knows low long that will take) to see a profit. True value means that the asset is evaluated at what the Bank or asset buyer thinks it’s worth. Potentially a profit could be seen much sooner…or at least the balance sheet would look much healthier to the market place.

    It’s all pretty arcane…and I’m certainly no accountant. But before I jump to any conclusion, I like to research it so I can make an educated decision.

    Right now the Republicans are rewriting the bill according to their ideology. From what Tom DeLay said tonight on Hardball, it ain’t gonna fly with the Dems. Or me either. See the video on

  5. The claim in the media reports is that the threat to the economy comes from “tight credit.” As far as that goes, the federal government could start guaranteeing even more loans than they already do. However, that does not even seem to be on the table. That suggests to me that the purpose of the bailout is not to save the economy.

    The other supposed threat is from the number of foreclosures. But one figure I have heard is that only about 3% of mortgages are currently in foreclosure. Why can’t the federal government ask mortgage lenders to simply refer all loans in danger of foreclosure to them? Then some FHA folks could decide case-by-case whether to mediate some kind of agreement between the borrower and the mortgage lender, guarantee a refinancing deal, or just buy it outright. Yet, this also does not seem to be on the table. That suggests to me that the purpose of the bailout is not to save borrowers from foreclosure, to save lenders from foreclosures, or even to reduce the number of impending foreclosures at all.

    One report on NPR on Tuesday quoted a homeless advocate as saying that she does not think mortgage lenders are not actively negotiating with borrowers to resolve payment problems. If this were true generally, what would it mean? It might mean that, knowing that most of these loans were shaky, the lenders purchased insurance policies on them, and they would rather call in the insurance claim than negotiate with the borrower.

    This would go along with the other reported threat, concerning bundled mortgage-backed derivatives or “toxic securities.”

    Bailout proponents apparently are mostly concerned with getting the government to buy these “toxic securities.” Why are insurance policies more important than the status of existing borrowers, existing lenders, or future borrowers?

    I think it is because the bulk of the current financial system is built on such poorly conceived assets, a network of IOUs that relies on an active market in valueless tokens in order to sustain an appearance of value. It only works if everyone agrees to pretend that the tokens are worth something.

    I’m sorry, but I just don’t feel sorry for the companies involved in that game. And, to the extent that productive individuals and businesses may be dependent on credit from such financial institutions in order to meet day-to-day expenses (e.g., payroll), I would say they are doing it wrong. They need to restructure their finances and stop borrowing.

Instigate some pointless rambling

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