Instead of simply giving the fed $1T to spend with as they choose - with no oversite - let the tax payers choose. Issue vouchers that can be placed in a 401k, IRA, or existing mortgage. This would expand the investor class and help save people about to lose their homes.
$1 trillion across every man, woman, and child is $13,000 per family of four or $3,300 per individual. I think it would be much smarter to allow individuals to gain directly from the money they will have to pay back anyways, in the form of taxes.
The current plan is to take from tax payers and give to lenders. That is robbery. And that won't work.
The difference between the plan I have suggested and other stimulus packages is that people would be required to invest it in a 401k, IRA, or home - not on toys made in China from Wal-Mart. It will help the banks, only from the bottom up. And it will directly benefit tax payers.
I think that Obama should propose something like this. With McCain's approach it isn't clear how the average person will be helped. With an approach like I have suggested it is very clear.
This would also just create an uncoordinated influx of money into capital markets. And that could just end up being wasted because the markets could still tank. You are also relying on the decision making of a whole lot of people who know little to nothing about finance. There are a good deal of people who don't even take advantage of 401k plans at their employer (if they are not mandatory). There are people in mandatory plans that never change their asset allocations. And back to my first point, let's say everyone choose to use this money to buy CDs. Well, first CD rates would hit the floor. And then would that mean that banks lend that money? Maybe, or they could just use it to beef up their balance sheets and then we still have the same problem.
Look at credit card debt across America and the folks who call into Suze Orman, there are a lot of people without any sense of how to manage money.
If people no longer need to worry about massive forclosure rates, that increases trust. The entire reason we are here is because of the subprime mess. This solves the root problem.
Your solution requires US to have trust in this administration. Clearly we don't. And the fact that you said:
The coordinated response of Paulson, Bernacke and Geithner (President of the Federal Reserve Bank of NY) had been phenomenal.
is just mind boggling. They all agreed to fleece tax payers to fix problems they and Congress (through de-regulation) caused? Wow, that is coordination alright.
Their fix is the same old trickle down approach we have seen for the last two decades. You are clearly a prodigy of this type of economic policy.
I have a 401k in my own name (my wife has a IRA), managed by us. They are available - and as soon as the vouchers come out these companies will be advertising heavily and teaching people how to invest their money in them.
My solution does increase trust. It gives people the ability to pay off their mortgages. It gives those who don't have mortgages or not in financial strife to invest in a 401k or IRA. It would take a nation from being $5k in debt per household to having $8k in savings.
You are also relying on the decision making of a whole lot of people who know little to nothing about finance.
You need to have a bit more trust in people. Personally, I find your comments to be very elitist. 401k's are designed for people who know little to nothing about finances. That's why the vouchers are for just 401ks or IRAs, or to apply towards their home mortgage - it's not like people could go gambling in the general stock market.
I'm not being elitist. I am just stating the facts. People don't know a lot about finance. That's not their fault. We don't train people in this regard. You don't get this training primary or secondary education. And unless your major includes business courses, you don't get it at the college level.
Giving you a $3k check to put in a 401k is money that the government will not see again until you retire and start to pull money out of that account. These mortgage backed securities pay interest and they are backed by real assets. It is very likely that the government will get a good deal of this money back in the near term.
But I think the idea that we should let just anybody come up with a plan is ridiculous. Why not just listen to Sarah Palin's idea then? Let her craft the plan.
I guess this is a difference between myself and other people here. I respect Secretary Paulson and Chairman Bernacke. They are not President Bush.
Also, just a question for all you down on this idea, what did you think when the Clinton Administration bailed out Mexico?
Checks and balances will be there. Congress will always have oversight power. No act that they pass can override the constitution. The only barrier is if they choose not to exercise their oversight and that is highly unlikely in this Congress.
And yes, I respect Rubin too, also a Goldman Sachs alum by the way. I loathe Phil Gramm. And if there is justice in the world, he will never hold a public office again. And I am an Obama supporter. I have greater faith that he will pick qualified people for his cabinet than John McCain.
I don't think I need to be an economist to know that sounds fishy.
I'm not saying we don't address all of those things you are talking about. But again that is landmark legislation. And as I pointed out with Sarbanes-Oxley, that took over a year. You won't get something that huge out of this Congress.
And if you fundamentally don't trust the administration to manage this plan, why would you trust them to manage any other plan you conceive?
I wouldn't trust this President or his administration to balance my personal budget. I certainly don't trust them with nearly a trillion dollars to spend unrestrained.
What would it take in terms of specific actions to hold us over until early spring 2009 when, no matter who is elected, someone smarter than this President can solve the problem?
That in my view is the alternative. You can't get around the current administration handling this crisis. I mean they could refuse to lend to corporations like they tried with AIG. And then the credit market would contract with serious consequences for Main Street. But that won't happen, the Fed will ensure financial stability lest the world market collapse and political turmoil follows that.
Up to you, do you like owning AIG and other financial firms? Or do you prefer to trade their debt instruments?
The AIG bailout didn't change much. What makes you think that this other bailout will? So we give all this money away and the next thing you know investors lose confidence in the dollar. When that tanks, we have inflation. When does it end?
I've got to call their bluff. I believe tax payers are being taken for a ride - AGAIN. I'm willing to take the risk because more often than not the Bush administration has been proven wrong.
I hope this bill meets gridlock and goes nowhere. Bush can't be trusted - and neither can the folks he has appointed. We've been screwed way too many times by this crowd.
If the sky is falling, it's this Adminstrations own damn fault we don't believe them because they cried wolf one too many times.
So maybe we need to do as you say: nothing. And let the credit market contract. The economy will suffer for it. But we have all been borrowing too much against the future. So maybe it is time to feel some of that pain now, live a little more meager lifestyles, and maybe live without good pay or dual incomes. Our birth rates will fall, beer sales will climb, more people will get their coffee from Dunkin Donuts, and we'll pay off some of this massive debt load in the process.
This was all bound to catch up with us someday. Why not today? Though if we could have kept this going another 100 years, that would have been my preference.
So we can allow them to drive us further into the dirt, or take our licks.
My guess is that this charade will continue (based on the news today) and that we will set ourselves up for an even greater fall.
It really pains me that you mentioned Japan's deficit is at 195%. My wife is Japanese and my B plan (in the event of economic disaster) is to move to Japan. I may need to work on a C plan.
Why not just give people $13,000?
The lack of trust is one component of the slow-down, but the slow-down in consumption is another factor that's starting to come into play. At this stage I'd say I have just as much confidence in ordinary citizen to squander (or invest) the money -- as I have in investment bankers.
People could use the money to pay off debt, purchase goods, or invest overseas.
Needless to say there's no easy answer here.
I'm not holding my breath, but I hope to God that the Feds assume these toxic securities at a steep discount (e.g. 1996 to 1998 market value -- before lenders really started getting reckless with their loan terms).
First reason I changed my mind was that we are actually going into debt for this so I would rather tax payers put the money in a place where it can grow - as opposed to throwing it away on toys made in China. You can always pull money out of a 401k and waste it, but you will be penalized. I believe that most people would choose to do the right thing when it comes to that choice.
To your point on foreign investments, there are foreign funds and you can choose which fund or basket of funds your 401k participates in. Me personally - I'm buying American ;-)
I also would propose allowing people to use it to make payments on existing mortgages. The reason I say existing as opposed to new loans is because I don't want to articifially inflate the housing market and create a new bubble. I want to prevent people from losing their homes, and especially so in the sub-prime market.
The objective is to create trust. I think that reducing forclosures will build trust. I also think that this will get more people to invest their money. When I was a kid my dad bought me a savings bond and I watched it grow. That got me interested in investments. I think that the same thing will happen to the millions of people who don't know what a 401k is.
I'm no economist but I think this solution is better than simply giving a few men the choice what to do with our money. I doubt any of us will ever see this money again under the current legislation. If all the current legislation is buying is trust, there must be a better way where we the tax payers can keep our money.
My two concerns though are that it won't resolve the issue of outstanding liabilities and loan defaults/foreclosures. Second, it doesn't do anything on the consumption end. If people aren't buying products, then companies will just put money away in their cash reserves. Job creation typically seems to follow an increase in consumption. The issue that we seem to have right now is that many of the Fortune 2000 companies have sufficient cash reserves -- they just aren't spending the money, because of concerns about market instability (the exceptions here being airlines, auto, and financials).
On the other hand, if you give people money without any direction and they spend it on things like paying off debt or purchasing goods two things are likely to happen -- 1. in reference to consumer debt, the loan terms would shift from high interest debt owed to credit card companies to lower interest debt, which is owed to foreign investors who buy U.S. T-bills. Lowering these rates would free up some spending in the economy -- part of the issue now is that a lot of money isn't circulating into goods and services because it's being eaten up in the form of debt payments. 2. Increased consumption might serve as something akin to a jump-start/economic defibrillator -- this was one of the ideas behind the "rebate check" that was issued in May. I'm more skeptical about this side, given that the increased consumption would be a one time hit -- once the money is spent in the economy -- there's a pretty good chance that its stimulus benefit would dissipate.
Still I think both of these options are preferable to simply having tax-payers purchase toxic debt from investment banks at above-market value -- which is what this current bail out package seems to be.
Ultimately, it looks like tax-payers will need to purchase this debt, but it should be done at a price where tax-payers actually have the prospect of some long-term returns (e.g. for assuming the debt and relieving the investment banks of illiquid assets, our representatives need to exercise the leverage that they have and purchase these assets at something below market value. The banks won't need to completely write these off, which works to their benefit -- but they will be paying a penalty for reckless lending practices. This strikes me as appropriate given that tax-payers are needing to bail these banks out -- it would also serve as a caution in the future if these actions result in significant, but not crippling losses).
Increasing the transparency of the markets -- and increased regulation -- restoring confidence in U.S. markets seems to be an absolutely essential part of the equation as well.
Very complicated problem.
I'm with you there.
Lowell provided in interesting link to a blog by Stirling Newberry: http://www.dailykos.com/story/...
Since the result of this will be a political catastrophe for the Republicans, the Democrats should propose an alternate bill, make no compromises, and let the Republicans Hooverize the name of George W. Bush.
I don't agree with him on everything he says, but he did say that Democrats should propose an alternative bill, making no compromises. I agree with that. Paulson called a limit on executive compensation for companies we bail out a "poison pill". If we are truly in an emergency, I don't see how this is a poison pill (as pointed out by Newberry).
I think that the Democratic majority can pull off a win here with their own bill. I think that bailing out greedy executives is a poison pill. I'm going to call their bluff.
Perhaps scrapping the 401k part of my proposal and just allowing it to apply towards home loans would be better. Of course, the people without homes would find that unfair. At the end of the day, I don't think this bailout is going to be about what is fair.
As far as the home loans go -- one reason that I'd be opposed to using the cash for those assets is that I believe home values are still too high. That $13,000 might provide a year of relief for some homeowners, but for many it wouldn't solve the problem long term. The issue with a number of these defaults has been that homeowners signed up for adjustable rate mortgages which have reset at levels that they just can't afford. Many of these loans were originally designed in order to ensure that the homeowner would default (the lenders rationale was that, with rising prices, the homeowner would simply refinance, and the lender would collect more fees. The process would repeat itself -- and would be sustainable so long as home prices continued to escalate. Of course, that didn't happen, and it's part of the reason that we're now in this mess).
Another side of this: when the Bankruptcy Reform Act of 2005 was put into place it made it very difficult for homeowners to find relief on loan terms from the court -- a situation that did not exist prior to 2005 -- something that has compounded the current crisis. One bizarre element of the bill is that investment property is treated differently than a primary residence (e.g. someone who owns multiple houses would be able to go to the bankruptcy courts to seek relief -- they have more leverage than someone who goes to court to keep a roof over their head -- a really screwy feature of an absolutely heinous piece of legislation).
In order to have a system where there are fewer defaults its going to be necessary to re-work many of these loan terms so that homeowners can afford their homes. There probably is a way to do this short of flooding the courts -- although fixing the 2005 Bankrupcty Reform Act is something that I've heard highlighted as a necessary component of a comprehensive bailout package.
The people who can't afford their home at a low fixed rate - well not everyone should be bailed out. They made a bad decision and must face the consequences.
However, we can't overlook the price factor -- if someone is tied into a fixed rate mortgage with a loan that's underwater (e.g. the price of the house is well below the cost of the loan) -- there will be a very strong temptation to simply walk away from the obligation, especially if the person is already financially stretched.
When people walk away from mortgages for this reason, it puts additional downward pressure on house prices generally, which in turn encourages more people to walk away from their mortgages. It creates a vicious downward cycle.
Part of the big problem is that house prices in a number of regions are still over-inflated. So long as home values are over-inflated, the market will remain unstable. In a number of these housing markets, it's probably better to find a way to keep people in the houses at levels that they can afford -- some of that may be bringing current loan value in-line line with current house prices; part of that is getting stretched borrowers into fixed rate mortgages.
I don't think the banks should get off scott free. But if we clear half the at risk loans from their books I think that puts them in a much better position.
Or another idea would be to offer government guarantees for all banks if they refinance those in sub prime loans. It would be similar to college loans, except a one-time deal to get us out of this situation. All we need to do is mitigate their risk and they can get these people into fixed rate mortgages.
http://www.usatoday.com/money/...
Homeowners rushed to take advantage of the drop in interest rates following the government's takeover of Fannie Mae and Freddie Mac, data released Wednesday showed.Applications by homeowners looking to refinance their mortgages spiked 88% last week, according to the Mortgage Bankers Association. Refinances accounted for nearly 52% of all application activity, up from 36% the previous week, the trade group said.
The volume of purchase applications also edged up last week by 5%.
The average rate for traditional, 30-year fixed-rate mortgages dropped to 5.82% from 6.06% the prior week.
The average rate for 15-year fixed-rate mortgages, often a popular option for refinancing a home, fell to 5.54% from 5.73%.
http://seattletimes.nwsource.c...
The federal government's recent seizure of Fannie and Freddie reassured financial markets about the health of the mortgage giants.That made investors worldwide willing to swallow lower interest rates on bonds issued by Fannie and Freddie. And because the companies are now buying or financing the majority of new mortgages issued in the U.S. after the subprime meltdown, lower rates on their bonds translate into lower mortgage rates generally.
In certain parts of Southern California, where home prices have fallen as much as 45 percent, lower rates are helping to drive buyer interest in foreclosed properties, said Clem Ziroli, First Mortgage's chairman. September is usually a so-so month for home sales, he said, "but it may be our best month this year in fundings," including refinancings as well as purchase loans.
However, Freddie and Fannie Mae only account for about 50 percent of the overall mortgage market in recent years. They got into the subprime area in 2003 to 2006, but those holdings only account for about 12 percent of their loans.
Most of the subprime holdings are held by investment banks -- so there's a huge chunk of bad mortgages that fall outside of Fannie and Freddie's holdings.
If you're looking for some additional background on this one, the BBC did a great series on the crisis back in 2007 -- some very helpful graphics too.
If you have 15 minutes, I highly recommend reading its article . . .
http://news.bbc.co.uk/2/hi/bus...
One of the interesting take aways from the article is that Deutsche-Bank in Germany looks like it owns Cleveland, Ohio. They underwrote a large chunk of subprime loans in the city which have gone into default.
Fannie and Freddie have gotten a well-deserved bad rap, but the real problem has been in this unregulated section of the real estate market that has come into being over the past 10 years -- funded by investment banks. Even during this out-of-control period loans underwritten by Fannie and Freddie tended to be much higher quality loans to begin with.
If they aren't converted to fixed-interest loans this problem never goes away. Even with this bailout, if at the end of the day all of these loans are ARMs (adjustable rates) the problem continues.
I don't see how we even can be discussing a bailout without discussing the conversion of these loans since the subprime fiasco is the root cause of the problem.
If we aren't fixing this root cause, I think any bailout with a trillion dollar price tag is no deal.
Center for American Progress has outlined a program that echoes many of the ideas that you've talked about.
Elizabeth Warren, a professor at Harvard Law has written compellingly about the negative impact of Bankruptcy Reform on the current crisis. One of the testaments to short-sightedness and greed is that the banks CONTINUE to oppose fixing the 2005 law. Fixing that law can introduce some long-term stability to the market, which is where the public interest rests.
http://tpmcafe.talkingpointsme...
A new paper, Bankruptcy Reform and Foreclosure, argues that the 2005 bankruptcy amendments are deepening the mortgage crisis. The article was written by David Bernstein, an economist at the U.S. Treasury who chose to post this analysis as private citizen listing only his home address and home e-mail address. Drawing on data from the Survey of Consumer Finance, he links credit card debt, access to bankruptcy, and mortgage foreclosures. If more families could use bankruptcy to deal with their credit card debts, more could avoid foreclosure on their homes.Bernstein studies families paying more than 40% of their income on home mortgages (in the trade, known as highly leveraged). This group is 21 times more likely to default on a mortgage than homeowners below the 40% mark. He notes that relieving these high-leverage families of their credit card payment obligations would permit about 1.5 million households to bring their home mortgage payments under 40%, increasing the odds substantially that they could keep their homes. By restricting access to bankruptcy, he argues that "BAPCPA increased home foreclosures, increased the dollar value of financial assets in default, and put downward price pressure on real estate markets."