My Cardboard Box

A Guest Editorial – Trying to Fix Stupid-Crazy

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Steve White is one of the moderators at Rantburg, and posted this editorial today. He’s kindly granted permission to republish it here:

The Burg, like most good Americans, has been discussing the ‘Bailout’ plan promulgated by Secretary Treasury Hank Paulson. Rantburg University has lived up to its name these past few days as we’ve all learned about mortgage backed securities, commercial paper, the Libor index and the depths of depravity within the soul of the Democratic Party.

I appreciate what some here have said about how fixing the mess is absolutely required to prevent an economic collapse. I think that’s right. I also understand those who are skeptical that we have a real crisis, and if we do, how to fix it.

But I decided to see how bad things really were today in a more personal way. Most investments are continuing the decline that’s been going on the last year. Yes, the market is up occasionally, even now, but it could plunge tomorrow. A great depression could on the way. Or not. I can’t look at the billions and trillions of dollars being tossed about in this plan or that and not have my eyes glaze over. But I can look at the real world at people like me.

A good test, I thought, would be to see how easily John Q Citizen could get a loan. So I took a look.

To start, I checked eLoan and LendingTree to price rates for a new mortgage for a home in my home county (Will County, Illinois). I put in the median price for a new home here and specified 10% down with an excellent credit rating. No problem. Rates are 5.5 – 6%. I didn’t click ‘submit’ but I’m pretty sure that if I did, a perky eLoan agent would get back to me within the promised fifteen minutes.

Then I looked at auto loans. At Chase, a four year loan is 6.2%. At Bank of America the same loan is 5.8%. Those are reasonable rates by any modern historical standard.

I looked into annunities. Within a half-hour I’d found a dozen annuity offers that would take my hypothetical $100K IRA roll-over and turn it into a perpetual $550 a month for life. That’s about 6% a year. Maybe I should retire.

And I threw out, in today’s mail, three more unsolicited offers for credit cards.

So in real life, I can get credit, finance things I want to buy, and prepare for the future. I can find banks and investors who are, today at least, more than happy to work with me. So where’s the crisis?

To apply the Glenn Reynolds rule: “I’ll believe there is a crisis when the people who say that there is a crisis start acting as if there is a crisis.”

To their credit, Paulson, Bernanke and Bush seem to be acting as if there is a crisis. But the national banks and lenders that deal with John Q Citizen aren’t, at least not yet, the Democrats certainly aren’t, and a fair number of Republicans aren’t either.

The root core problem of the current panic, as I see it, is that the mortgage-backed securities are illiquid. We know why — stupid Fannie/Freddie rules, bad, bad Community Reinvestment Act, crooked politicians, con-artists at ACORN and other ‘community organizations’, greedy investors and bankers, and inadequate oversight by the Fed, pension funds, etc. Okay, that’s the problem. Nobody can tell what a typical MBS, particularly the sub-A+ tranches, is worth. So by mark-to-market rules they’re worth ‘zero’, which plainly is stupid — even if every mortgage in an MBS foreclosed, the homes and land would have residual value. But we have, among other stupidities, stupid accounting rules like that ‘157B’ sucker.

That’s it in a nutshell. Paulson is right — the cure is to put a value on the MBS’s so as to make them liquid again. If he’d simply come out with that, and had explained why, and told us with some calm what would happen if we didn’t — and if he’d DONE THIS BEFORE FRIGGIN’ SEPTEMBER OF AN ELECTION YEAR — then we could have had a reasonable debate, no more than the usual political skullduggery, and perhaps had a solution.

But Paulson is an investment banker and an arrogant jerk — I repeat myself, of course — so he couldn’t do that. He said, “gimme the power and I’ll decide what’s best.” Yeah, sure, Hank, we’ll give 700 large to the very people who got us into this mess.

So Paulson went public, and Bush had to back him up, and the press and the markets reacted as you might predict. So did the politicians, particularly the Big O, who saw a 2 point deficit in the national polls become a 5 point lead. And clueless people wonder why San Fran Nan behaved the way she did yesterday on the floor of the House. She and the Big O have what they want and they’re going to ride that horse all the way to election day if only they can. The Republicans act as if they were forced to suck a very large lemon, which they did, since as is typical for them, they were completely out-played in the political arena. Whoa, that’s never happened before.

Now then, the adults in the room, if any are left, might point out that if we don’t fix the MBS mess than the entire commercial paper market just might come down, and when it does companies like Boeing, Cat, GM, etc are going to be in big trouble. It is idiocy that Cat can’t float its 30 day paper easily, but right now it can’t. So Cat and the other big companies, from Boeing to Xerox, will delay plans, slow purchasing, lay-off employees, and in general conserve cash. So will the main street banks over time as the level of mistrust increases. Sure, I have money and you’re my best customer, but that doesn’t mean I’ll loan it to you at any price, even for a month. That thinking will tank the economy.

So for John Q Ciitzen, let me make it clear: I can find an auto loan today. But I might not be able to find one, for any price, in a few months if we don’t fix the problem. Not that I’ll be able to afford a car if my employer just laid off me and a thousand other people.

The market is in a panic precisely because it is irrational, and you don’t fix stupid-crazy by becoming even more stupid-crazy. Behaving that way leads you to goofy people in black bandannas manning the barricades in our urban centers. Our politicians will be even less well behaved. The authoritarian Left will canoodle with the Wall Street cowards which will be easy since many of the latter are already secret admirers of the former. Or not-so-secret, as the Big O’s donation list attests. The end result is liberal fascism, a take over of an increasingly big part of the economy by government to be run as government — that is, the Big O and his friends — say. Oh, business will still be ‘private’, they’ll just have to do as they’re told.

No, not for me, I’ll pass.

So here is what you do to fix the MBS problem and stop the liberal fascists (this time). You fix stupid-crazy by grabbing the attention of the panicked people. You might need to clobber them first — “thanks, I needed that” — but you then lead them to an orderly resolution. Yes, assets will be written down, some banks and investment houses will go bankrupt, some investors will go broke, some homes will be foreclosed, a few people will need temporary shelter. You can ease the pain for the small players but you make sure the bigger players remember what it was like to touch that hot stove.

Review each MBS, put it up for auction, put a value on each one, and make sure government is there to grease the skids and buy those securities that no one else wants at some price that makes grown people complain but not scream. Government puts a floor under our fall; that’s the key feature of any responsible plan. That ensures that people with money can put a value on illiquid securities and buy the ones they want at a price that doesn’t in turn break them. You can do it as ‘insurance’, you can call it a ‘bailout’, whatever you like, but you make sure that there is a market for that which can’t be marketed today.

And do it now. The longer you wait, the worse it gets. The preferred alternative of conservative purists seems to be to let the markets sort it out amongst themselves. Sure, they’ll do that, after a while. A long while. That’s called a ‘recession’, and the sorting could take a few years or more of really painful consequences for John Q Citizen, and in the meantime the liberal fascists are always pointing out to John how they could do it better if he would just gave them more power. That’s what they always say, and that’s how we got into this mess in the first place.

You fix stupid-crazy by stripping what is irrational out of the problem. You save the economy, and perhaps our country, by doing it quickly. That’s being responsible. That’s what adults do when confronted with panic. Are we that responsible?

Addendum: The reason John Q. Citizen doesn’t care — yet — is that HE can still get a loan. That’s one of the reasons why the polls show the public is against this whole package. They see it as Wall Street welfare and don’t yet see the connection between LIBOR and an auto loan. If the credit market locks up they will, but then it will be too late.


Written by PappyBro

September 30, 2008 at 17:45

Posted in Media, National, Politix

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