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Let them eat cake

by Frank Schnittger Sat Sep 27th, 2008 at 05:56:04 AM EST

Some may call it irrational antipathy to rich bankers who gambled huge fortunes of other people's money and lost - but not before they had paid themselves $Billions in bonuses.  But I have a real problem bailing out the bankers.  No problem with bailing out homeowners who were conned by predatory lending practices.  No problem providing capital for real businesses producing real goods and services.  But will the world really end if Wall Street is allowed to implode?  Is that model of funding business not irreparably broken?  

If the bankers succeed in conning the Government into giving them $700Billion in taxpayers money, what is to prevent them from coming back and looking for more, and more, and more - each time with the same extortionate demand that the alternative is a collapse of the real economy?

Promoted with an edit by afew


The remarkable thing is that it is Obama and the Democrats who look like they are trying to cut a deal with Bush - while it is the GOP conservatives who are bolting from a deal which they consider smacks of socialism.  And McCain, the great Maverick, looks like he is trying to ride two horses at once.  Claiming the credit if Bush/Paulson/Bernanke do manage to cut a deal, and claiming to have fought for the little man if the whole thing falls down around their ears.  You see, he really is independent from Bush after all!

Sometimes there really isn't any alternative to a revolutionary change in the way the economy is managed, and trying to shore up a broken system is just throwing good money after bad.  Do we really think that the Wall Street model of gambling on the way underlying assets might perform - where the ultimate risks are borne by the taxpayer is the way to go into the future?

Obama has the difficult task of trying to appear calm, reasoned.  consistent, non-partisan and Presidential in the face of some very suboptimal choices, but it looks as if the Republicans are going to save him from having to endorse a very unpopular deal.  Bush has been unable to rally his own party behind the Paulson/Bernanke plan, so why on earth should Democrats bail him out?  

The key thing is not to be found to be the one playing silly buggers when the music stops and the markets go into freefall - as they now almost surely will.  McCain rode in all guns blazing and saying he was going to sort out the mess.  The White house meeting - which excluded Paulson - was organised almost entirely for McCain's benefit.  

But even House Republicans are running from the deal in the face of almost unprecedented voter anger.  This deal is everything that small Government, libertarian conservatives hate - even about the Bush White House.  Obama risks becoming the focus of that voter anger should he actually endorse a deal voted down by many Republicans.  And there is absolutely no telling what McCain might do next - up to and including denouncing a deal negotiated by his own President and leading Democrats.

Obama, by contrast, has seemed more measured and Presidential in his approach - being prepared to work towards a bipartisan agreement.  If the deal falls through because of conservative resistance he loses nothing - whereas McCain could be seen as responsible for the stock market bloodbath that seems sure to follow.  Indeed the prospect of a deal seemed to recede the moment McCain hit town.  Even his own party members are wary of being blindsided by him.

This whole mess blows the Conservative consensus wide open - an uneasy coalition between small town business and international capitalism which never really had all that much in common with each other in the first place.  But the biggest scam of all is the logic of the "too big to fail" argument.  Ultimately it legitimises the systematic extortion of the poor by the very rich on the grounds that the very rich would take their money elsewhere if their ransom demands are not met.

Of course the consequences of a Wall Street melt-down will be stark and terrible in the short term - with many ordinary people losing their jobs and homes.  But the system is so irreparably broken that only a very rapid and dramatic change process - normally seen only in brief revolutionary interludes - has any prospect of allowing the development of a more rational way of organising financial services into the future.  I know this sounds very close to the "creative destruction" argument of many conservative free market theorists.  On this occasion they may very well be right.

The Presidential Election has to date seemed almost a toss-up between two very unsubstantial and inarticulate visions which said nothing very much very concrete at all.   Vacuous rhetoric about change contrasted with false images of a maverick.  Even the derisory inclusion of Palin lent much needed excitement and novelty to the debate.  It shows you how little is now expected of politicians provided they "share your values".  That may now change.  Real leadership is required, and sometimes real leadership also means saying that some things just can't be fixed and need to be allowed to die their natural death.

It is not Obama's job to try to fix this mess before the election.  The fall-out will be so huge it will probably dominate his entire first term as President in any case.  But right now it is a Republican problem, and the Republicans must be left to stew in their own entrails.  The notion that it can be fixed by a once-off injection of taxpayers cash is the great illusion which must be challenged.

Historic changes in US politics happen when one side wins the argument - as happened in 1972 and 1980.  Under those circumstances a Presidential election can result in a 50 state blow-out - not the very marginal race now expected.  If McCain fails to show for the debate today his empty chair may well come to symbolise the day the argument was lost - and McCain will be exposed for the pathetic opportunist he has always been.

Either way, Obama just needs to keep his cool now and let the Republicans destroy themselves in the total contradictions their own policies have created.  It won't be a pretty sight, but it will be a necessary one.

Display:
Of course the consequences of a Wall Street melt-down will be stark and terrible in the short term - with many ordinary people losing their jobs and homes.

More terrible than usual, only in the fact it will all happen at once, visibly. ordinary people have been losing their houses and jobs for years as a result of having these policies in place. The fact that they have been salami-sliced away rather than being cleaved off in one stroke dosn't make the losses any less painful.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Fri Sep 26th, 2008 at 03:56:08 AM EST
It will be more terrible in the sense that many good businesses and "solid citizens" will also be swept away in the meltdown.  It's not just the gamblers and crooks who will suffer - and they are probably so rich anyway, they won't care.  Pensions will implode.  Profitable businesses won't be able to access capital to sustain or expand their operations.  Inflation will impoverish those on fixed incomes and kill off those on little or none.  When a solid system fails it is only those on the margins who suffer.  When a house of cards collapses, almost everyone is swept away in its wake.

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 26th, 2008 at 06:12:15 AM EST
[ Parent ]
Have you been using [Frank's Crystal Ball of Doom™ Technology] ?

Which is not to say that I disagree -at least to an extent.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sat Sep 27th, 2008 at 07:08:33 AM EST
[ Parent ]
When people like Bush start using phrases like "economic 9/11", worst economic crises since the Great Depression, etc. you can take it that a degree of alarm is widespread within the system, and often more extreme in the case of those in the know.  Banks have stopped lending to each other precisely because all trust and confidence has broken down.  When the largest bank failure in history (Washington Mutual) is but one item amongst many on a daily news cycle you know there are some problems around - and you shouldn't need me to tell you so!!!.

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 27th, 2008 at 07:24:16 AM EST
[ Parent ]
Oh, I know the system is collapsing. It leads me to heated discussions with some colleagues who tend to ridicule me for mentioning it.

On the other hand, we have a couple of silver linings.
One is that quite a lot of the non-financial economy is holding reasonably well in a lot of the world. I don't know about USA all that much (don't feel like going as long as they spread paranoia at the airport), but a lot of activity is pretty much business as usual in Europe.

The other, main one, is that there is a ready plan for the crisis, which has been discussed here repeatedly. And, unlike in the 30s, it's highly unlikely that a lot of the economy will be directed towards a global war.
Now, will this plan see the day? I don't know. USA have taught me to be pessimistic. But can I just state that everyone will starve? I don't think so. A sustainable development Marshall plan would do wonders.

It's a major crisis, but I'm still more far concerned by environmental degradation, water depletion and global warming than by the financial system collapse.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sat Sep 27th, 2008 at 08:59:46 AM EST
[ Parent ]
If this is an economic 911, does that make Bush the terrorist pilot aiming at World Trade?
by Andhakari on Sat Sep 27th, 2008 at 09:38:25 AM EST
[ Parent ]
No, but it means that he allowed two disasters to happen on his watch, and this time he was a major contributor to it happening

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 27th, 2008 at 10:05:08 AM EST
[ Parent ]

this guy is right on the money...

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sat Sep 27th, 2008 at 07:42:25 AM EST
[ Parent ]
i should have said, this is kevin phillips

'Bad Money' by Kevin Phillips - Los Angeles Times


Still, "Bad Money" isn't entirely lacking in those. Who knew, for example, that former KGB agent Vladimir Putin earned the Russian equivalent of a doctorate from a prestigious St. Petersburg mining institute and that the dissertation he defended there dealt with the exploitation of natural resources as an engine of national development? As Phillips glancingly but provocatively suggests, knowing that tells us something instructive about Putin's transformation of Russia into a global oil titan, as well as about his aspirations for further development of a polar oil field with resources that may exceed Saudi Arabia's. (Phillips hasn't lost his talent for phrase making, and "kommissar kapitalism" seems a particularly apt description of Putin's Russia.)

Because he knows the territory in a deep and reflective way, Phillips has a keen eye for the relevant historical quotation. America's recent economic folly, for example, is neatly summarized in a remark that the British colonial secretary, Joseph Chamberlain, made in 1904 to a smug group of his country's financiers: "Granted that you are the clearinghouse of the world, [but] are you entirely beyond anxiety as to the permanence of your great position? . . . Banking is not the creator of our prosperity but is the creation of it. It is not the cause of our wealth, but it is the consequence of our wealth."



"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Sat Sep 27th, 2008 at 07:50:31 AM EST
[ Parent ]
The only way to clean up the mess is to clean out Wall St - nationalise the investment banks and (as per ATinNM) create a single national investment bank whose sole aim is investment in new technology, not speculation.

Bail out home owners, even if it means buying their homes and reducing rents and property prices to realistic levels.

Make the speculators unemployed, with jail time for the most obvious offenders.

Place a small extra tax on all speculation and a larger tax to discourage capital flight.

The crisis is moral - Wall St is full of slimy opportunists who have no ethical sense. Why is anyone surprised that you can't trust bottom feeders of poor character with money?

Coring out the banking system and replacing it with an operation which is clearly trustworthy would put a floor on the death spiral and lay the foundations for a future recovery.

An international conference to rework the rules, as per Bretton Woods etc, might be somewhat useful too.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Sep 26th, 2008 at 05:46:52 AM EST
The problem is that globalisation has created a race to the bottom.  Increased marginal tax rates, taxes on speculators etc. will only succeed in driving money to Singapore or the Cayman Islands.   What is required is a global response - an embryonic global governance, but that is the very thing the neo-cons have worked so hard to destroy.  Extreme wealth requires extreme privilege to create and sustain it, and so long as poverty and or corruption is endemic in the world, there will always be states willing to pay the price.

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 26th, 2008 at 06:18:37 AM EST
[ Parent ]
I'm with you on global governance, but at the same time there aren't many places left for the money to go. There isn't another east Asia laying about filled with a decently educated and regimented populace ready to run a million factories at 1/10th the cost of the Western world.

you are the media you consume.

by MillMan (millguy at gmail) on Fri Sep 26th, 2008 at 01:46:13 PM EST
[ Parent ]
The money doesn't necessarily go for productive purposes anywhere - but for conspicuous consumption by the idle rich with large Swiss bank accounts etc.  When you have a few millions you are more worried about losing them than making more.  That is part of the Anglo disease problem - the rich get richer and offshore their wealth.  If that money was used to fund better housing, health care, education etc. - the wealth (and jobs) and welfare would stay within the country and have a far higher marginal impact on people's welfare than another (larger) yacht.

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 26th, 2008 at 02:22:56 PM EST
[ Parent ]
ah, you said "money," not "jobs." I read your comment completely wrong.

you are the media you consume.

by MillMan (millguy at gmail) on Fri Sep 26th, 2008 at 02:29:11 PM EST
[ Parent ]
Money doesn't matter. Stuff matters. It may well be that money can be moved to Singapore before the tax-man gets to it, but a lot of Stuff can't be. Think factories, shipyards, refineries, natural resources and so on. If you control the industry and the resources and the other guy controls a lot of paper money, you win.

Witness the re-bound of the Mercosur economies after they enacted sane economic policies. Far from being crippled by capital flight, they are now more stable and prosperous than when they were taking orders from the IMF.

And if (as it looks like) the Americans will need to do a complete overhaul of their currency before the fat lady sings, that would be an excellent time to institute some constraints on capital mobility - after all, you'd have to redeem your old dollars in US banks. Sure, they'll lose some € and Yen in the process, but we're hardly talking Argentina 3.0.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Sep 27th, 2008 at 10:53:38 PM EST
[ Parent ]
Nut you could be taking the end of the $ as the world reserve currency and a lot of the hidden benefits that has historically conveyed to the US

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Sep 28th, 2008 at 12:36:44 PM EST
[ Parent ]
To me, that looks like a done deal whatever happens.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 29th, 2008 at 01:26:53 PM EST
[ Parent ]
The more I think about it, the more I like this solution.

and add in an explicit mandate to run an industrial policy with a simple focus on (i) infrastructure, ie public transport, electricity grid and (ii) energy transformation, ie housing insulation and renewable energy.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Sep 26th, 2008 at 07:08:27 AM EST
[ Parent ]
The Finnish model, in miniature, has a 'national investment bank' in the form of a network of funding institutions such as Tekes - Tekes invested 469 million euros in R&D and innovation.

Tekes mostly funds technology innovation, but other state funded organizations specialize in other areas - including eg forestry. These account for the 3% + of Finnish GDP that taxpayers provide each year. The taxpayers' investment comes back in skilled jobs, revitalizing start-ups, and a largely impartial infrastructuring for the future of society.

You can't be me, I'm taken

by Sven Triloqvist on Fri Sep 26th, 2008 at 07:34:37 AM EST
[ Parent ]
A networked approach, not a monolithic "top down" Gosplan approach....

Of course, some investment decisions are national in scope, but they require a Swiss style bottom up approach to decision making, I think.

More participative than representative decision making, I think.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Sep 26th, 2008 at 08:12:23 AM EST
[ Parent ]
Well, I shouldn't oversell the Finnish model ;-)

It is so that the governors of these institutions are academic/political appointments ie representatives. But they are largely there to ensure oversight management of the funding according to government strategy, rather than to be involved in investment funding decisions. We should also remember that a finely balanced consensus coalition (3 main parties at the moment) ensures that long term strategic changes get quite a public airing.

The ascending buzz phrase in Finland is 'Living Labs' - a term for research projects that bring together government, business and academia with the vital 4th component = end users.

In my experience (and I work equally on communications with start-ups and established businesses) the funding is a continuing success story. I am just working with a newly established gaming company eg, that has had Tekes funding to develop a massively multiplayer strategy game. So the scope of investment is wide.

Another example for leisure industries


You can't be me, I'm taken

by Sven Triloqvist on Fri Sep 26th, 2008 at 08:46:38 AM EST
[ Parent ]
Bail out home owners, even if it means buying their homes and reducing rents and property prices to realistic levels.

Part of the problem is that home loans were given to people without income verification. It is not just the banks that were engaging in highly dubious activities. It was everyone connected with housing sales - including the purchaser with the no verification (liar) income statements.

In this sense, to bail out home owners one must as you state - buy their homes. There is no guarantee that even this is enough. A home owner must maintain insurance and pay property taxes. Depending on how marginal the participants in this scam were - it is  possible a percentage of the homes will be foreclosed no matter what. What that percentage is is unknown to me.

"Reducing rents and property prices" is an interesting phrase. The two are not mutually independent. Rents reflect the price to purchase - it is the bottom line competition to rental. If it becomes cheap enough, one buys instead of rents. Of course a shortage of rental units or a surpless of rental units will adjust the price up or down - but the bottom line is the property prices.

To some extent it sounds like rents may already be falling:

"A comparison of houses-for-rent classified ads in the Aug. 14, 2008 issue of The Mountain News with similar ads one year earlier shows 89 houses on the rental market this year and only 65 the year before, an increase of 26 percent."

"`A lot of houses became rentals when their owners realized they weren't selling,' said Sue-Ellen Knapp of Re/Max Lake Arrowhead Realty. And because of the flood of houses for rent, renters can get more for their money."

"`What used to go for $1,500 now goes for about $1,200,' Knapp said. Knapp said...that $1,200 a month might translate into a three-bedroom, two-bath home in Lake Arrowhead, while $1,500 could rent a similar home with a garage. The latter property, she said, would have rented for $1,900 before the economy's downturn."

http://thehousingbubbleblog.com/index.php?s=rents

At least in some areas an entirely different problem may be happening - rents may be too low. If they go below a certain point it becomes impossible to maintain a property. At that point it becomes a slum.

This moves into another problem with purchasing homes for people. What about the landlords who purchased 2 - 3 - 6 homes or whatever. Should we buy them all for the landlord?

I don't see any good solutions to this mess. Too much corruption by too many people.

Well if someone is going to be bailed out - agreed, the small guy should be bailed out. A lot were innocent. Those that were not - well better them than the multinationals.

aspiring to genteel poverty

by edwin (eeeeeeee222222rrrrreeeeeaaaaadddddd@@@@yyyyaaaaaaa) on Fri Sep 26th, 2008 at 07:47:53 AM EST
[ Parent ]
A home owner must maintain insurance and pay property taxes. Depending on how marginal the participants in this scam were - it is  possible a percentage of the homes will be foreclosed no matter what. What that percentage is is unknown to me.

You can't save everyone, but you could - possibly - save the economy as a whole.

It would be the difference between controlled demolition and an uncontrolled implosion.

Part of the problem is - literally - the lack of control, which means that no one knows what the limits of the disaster are. The bailout plan is a finger-in-the-dyke attempt to plug some of the holes, and it's not bad as far as it goes - which possibly won't be very far.

It's the system of uncontrolled detached speculation which is the problem. The current proto-meltdown is an effect, not a primary cause.

Replacing explicit control would start to restore confidence by setting some firm boundaries.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Sep 26th, 2008 at 08:04:08 AM EST
[ Parent ]
Agree they're treating the symptoms rather than the disease.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Sep 26th, 2008 at 08:09:04 AM EST
[ Parent ]
Treating the disease is impossible without different basic political assumptions.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Sep 26th, 2008 at 08:13:00 AM EST
[ Parent ]
That's part of the key point. But the other part of the key point is that the existing system is so obviously broken that even low info types are starting to notice.

So if there's going to be a political change, now is the time for it.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Sep 26th, 2008 at 08:20:49 AM EST
[ Parent ]
The kind of solutions the disease demands will only come from a new paradigm, visionary politic, supported by leaders who understand the vision.  Where those leaders are i don't know.

What we're achieving here in our discussions is a foundation which can be used by those necessary visionaries, that undergirds the courage needed to tell the truth and propose a way out.  This situation demands the equivalent to real entrepreneurship.  Many can write about or support innovation, but true entrepreneurship is very rare.  It demands the ability to stand up and say no, willing to walk away from a deal that does not really reflect what you seek... despite the deal being partly worthwhile.

So it is now.  The system is so broken, only those with the courage to actually say it can move us forward.  I too, like Grandpa, believe the global economic fundamentals are sound, only just not on this planet.

A National Investment Bank (internationally supported) has to be but a main gear in the drive train building a sustainable infrastructure.  Simple, except the dinosaur interests like the coal lobby are flailing with all their power to survive by crushing us.  An international Apollo program of sustainability, which begins with building insulation and the immediate re-channeling of industrial infrastructure towards wind and solar on a massive scale, is indeed our best hope.

But then there's GE's Wall STreet  darling, Jeffrey Immelt yesterday, calling on Congress to ratify the nuclear deal with India, and calling nuclear power " the safest, non-polluting energy generation technology."  I don't hear him pontificating about GE's wind turbines (decent but not particularly the heights of the industry), as they only make up some 3% of GE's gross.

But then i've been saying pretty much the same damn thing for decades now.  Sustainability is only tens of millions of purposeful jobs globally in an aggressive program to fix this civilization.  And windsmiths love their work, because it's satisfying working hard towards a dream.  "Hey man, i did 3 turbines yesterday, and climbed 5 times!"

/rant

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Sat Sep 27th, 2008 at 08:07:58 AM EST
[ Parent ]
we've done it before i believe, but we could have a diary about the program details of establishing a global sustainability infrastructure like Apollo or Gore's thing, so it all can be found in one place, perhaps even ongoing.

another thing, i have to report i'm certifiably insane.  Despite three decades of high-level fighting against the combustion of fossil fuels, i'm going to spend part of this gorgeous weekend in Germany watching the glitz and glamour circus of the fastest Benzin-burning vehicles in the world, now running under the world's biggest and brightest lighting system, as the Ecclestone ecstasy moves to that bastion of future capitalism, Singapore.  (OK, i dream of sponsoring Formula 1 cars running on renewably-generated hydrogen.)

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Sat Sep 27th, 2008 at 08:17:31 AM EST
[ Parent ]
Don't worry - those races don't actually happen in the real world.  They're all computer generated fantasies and special effects and the results are by negotiated and paid for agreement!

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 27th, 2008 at 08:25:08 AM EST
[ Parent ]
btw, fine diary and discussion.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin
by Crazy Horse on Sat Sep 27th, 2008 at 08:40:12 AM EST
[ Parent ]
Thanks.  I still hope, some day, to write  diary that wins the supreme Oscar around here - a recommendation by the Crazy Horse!  Now that would be a collectors piece :-).

I'm thinking of doing one on the single malts of Islay....

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 27th, 2008 at 08:46:20 AM EST
[ Parent ]
you do it. as long as it can be drunk along with.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sat Sep 27th, 2008 at 09:26:00 AM EST
[ Parent ]
Well, Grasshopper, you still have a long apprenticeship to serve before you achieve the necessary state of enlightenment.....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Sep 27th, 2008 at 09:27:15 AM EST
[ Parent ]
Anything which reduces the pressures on holders of distressed assets will help - interest rate reductions, interest payment moratoriums, tax credits for interest payments etc.  It won't, of course, help the most toxic asset holders, or help banks to make bigger profits.  C'est la vie!

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 26th, 2008 at 08:15:09 AM EST
[ Parent ]
And it won't help the small guy who has a pension of former blue chip stocks.

Treating the disease is impossible without different basic political assumptions.

Yup.


aspiring to genteel poverty

by edwin (eeeeeeee222222rrrrreeeeeaaaaadddddd@@@@yyyyaaaaaaa) on Fri Sep 26th, 2008 at 08:25:43 AM EST
[ Parent ]
A "Debt/Equity Swap" of mortgage loans into "Rental Pool" quasi REIT's will actually solve both problems.

For the Occupier, the "affordability" of reasonable index-linked house rentals means it's more likely that they can pay.

ie affordability = certainty.

For the Small Guy Investor, such property-based Units of index-linked rentals would provide a nice solid home for at least part of his pension portfolio.....

For the Occupier, it is a new "Rent to Buy" option where he can gradually acquire Units of rental values of land held by a "Custodian" (exactly as blue chip stocks are technically held by Custodians like State Street now) until the nominal income on his Units offsets the nominal rental due  in respect of his occupation.

ie he is "Paying it Forward".

And if times are hard, then Occupiers can pay rentals in saved Units, not $....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Sep 26th, 2008 at 08:55:01 AM EST
[ Parent ]
That's standard procedure.. nationalzie.. it has always been.. and it is not clear wether is better or worse than Dodd's plan.

which is not to say that a public bank is not a bad idea..

But looking at Spain... a good boring highly cntrolled banking system is pretty efficient.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Sep 26th, 2008 at 11:37:15 AM EST
[ Parent ]
Make the speculators unemployed, with jail time for the most obvious offenders.
Jail time cost money.  Strip them of all assets.  Use military force or the threat of force to recapture assets in Panama and the Cayman Islands. Simultaneously enter negotiations with governments sheltering other tax havens. Make them un-bondable and  impose a lifetime ban on their employment in any financial institution and a lifetime marginal tax of 80% on any income over 2x poverty level. This won't get back much money. (The Forbes 400 are only worth 1.57 Trillion combined.) But it would be strongly exemplary.  At the rate public perceptions and opinion are evolving, this might be conservative by January 21, 2009.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Sep 26th, 2008 at 03:57:34 PM EST
[ Parent ]
and a larger tax to discourage capital flight.

Can't be done in a country with a current account deficit. You discourage capital flight, you discourage capital inflow. Domestic rates shoot up, and the economic crash is even worse.

As far as jailing the speculators - if you can find a way to do it, great. But I suspect most of the big boys and girls didn't violate any criminal statutes, at least not beyond a reasonable doubt. They've got a lot of very competent and very well paid lawyers to make sure of that.

On the national investment bank - NOOOOO!

Eventually the Republicans will come back to power. If you think the current administration was bad in terms of corruption, patronage, and cronyism, just imagine what they could do in that situation.

The crisis isn't simply moral. The system designed to foster immoral behaviour. If you choose not to play the pyramid game you're fired or your firm gets bought out as its stock price tanks. From the perspective of any individual Wall Streeter, you can either find another career, or you go along with the system. And many of them don't have particularly good alternate options. A combination Tobin tax with a new top marginal rate for very high incomes would go a long way to solving the problem. Add in a proper regulatory framework and you'd be fine. At least until memories have faded enough to allow everything to be dismantled again. But that's fine. I'd be perfectly happy if we could fix things for a generation or two.

by MarekNYC on Fri Sep 26th, 2008 at 04:27:58 PM EST
[ Parent ]
I like the idea of a national investment bank.  In fact, I like it a lot.
by Maryb2004 on Sat Sep 27th, 2008 at 03:38:22 PM EST
[ Parent ]
One might also say that that it should be one of the principal instruments of any government to ensure the future of society, not just a reaction to catastrophe.

In a system with a policy range of only a year ahead or so - or up to the next election, a national investment bank should be one of the ways to think long-term about the future. Education is another.

A national investment bank should not be politically directed, though oversight is needed. All the functions and processes of the bank should be transparent. The bank is owned 100% by the people. The policy and project leadership should contain academics from different disciplines, business figures, finance professionals, as well as respected citizens in the arts, for instance.  They would not be political appointments, though I don't know how that could work.

You can't be me, I'm taken

by Sven Triloqvist on Sat Sep 27th, 2008 at 04:11:49 PM EST
[ Parent ]
They would not be political appointments, though I don't know how that could work.

That's a difficulty.  

by Maryb2004 on Sat Sep 27th, 2008 at 04:29:13 PM EST
[ Parent ]
If Justice Department rules were applied to the bank ie appointments based on merit, it could work.

It is easier in Finland that has similar existing institutions. The top person is usually a political appointee who is no longer active in politics - for instance a former PM. (being unicameral, there is no place to shuffle off the ex-PMs to.  

Tekes (Finnish Funding Agency for Technology and Innovation), for instance, has an oversight board made up more or less as I described earlier. Then there is strategic management, research management etc. It is cumbersome in some ways, but ensures that ideologies have less influence. Salaries are academic standard for the levels. Some business members at higher level are seconded by their companies.

But it is easier in Finland to get the best people because a) the differential in upper and lowers salaries is much narrower than in the US and b) a job with such an institution gives a valuable overview.

There is a certain amount of revolving door going on, but it is the sort of move that goes from macro to micro - ie a researcher or enabler for some new technology might leave the funding institution to join a project as a start-up, in order to guide it. As far as I know, this is actually encouraged. It's called seeding ideas and know-how.

You can't be me, I'm taken

by Sven Triloqvist on Sat Sep 27th, 2008 at 06:05:42 PM EST
[ Parent ]
(being unicameral, there is no place to shuffle off the ex-PMs to)

Bruxelles? ;-P

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Sep 28th, 2008 at 12:33:40 AM EST
[ Parent ]
Exactly - where they go to practice their very poor language skills ;-)

You can't be me, I'm taken
by Sven Triloqvist on Sun Sep 28th, 2008 at 03:44:01 AM EST
[ Parent ]
Yes, all states should have a national investment bank. It would also greatly help managing change -say kickstarting a network of batteries change stations for electric cars.
Of course, in Europe the state involvement sometimes looks like an investment bank. So in a way we have some of it. So let's ACTUALLY have it. Then other investment banks are free to compete agains the Government one, and we'll see if they are truly more efficient (maybe that's why we don't have it yet -they don't want to display the likely answer).

And let's make sure that it is not allowed to have a trading P&L on its own funds. Better, no trading P&L at all.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sun Sep 28th, 2008 at 04:17:56 AM EST
[ Parent ]
Right. And there are many areas where commercial investment banks are unable to function because of the time scales. Forestry needs a 30 year look ahead. Mobile comms is 8 - 10 years. Nationwide infrastructure is always a national investment imo.

Long term investment also needs to be closely related to education policies at all levels. Not to train people in specific jobs that might not be there when they graduate - but in providing opportunities in all the disciplines.

You can't be me, I'm taken

by Sven Triloqvist on Sun Sep 28th, 2008 at 05:14:56 AM EST
[ Parent ]
The Irish Industrial Development Authority - IDA has an outstanding track record of attracting all the top (mainly US) high tech, IT, Pharma, and financial services operations to base their European HQ's here - sometimes just manufacturing sites, but increasingly R&D and professional services as well.  It has a very long-term strategic remit -= i.e. identify new growth industries, key players, likely winners - and encourage them with grants, low tax, ready made sites, highly educated english speaking work force etc. - to locate here despite increasingly higher costs.

The strategy needs a revamp, but it has been extremely successful in the past - arguably the greatest single factor in the Celtic Tiger success.

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Sep 28th, 2008 at 12:46:57 PM EST
[ Parent ]
Sorry of some of my comments in Interesting Times seem to echo some of yours, Frank. I wrote that on the fly on seeing the news this morning, before I'd read your diary.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Sep 26th, 2008 at 05:48:34 AM EST
No harm in having two diaries making more or less the same points.  Mine, too, was a late night stream of consciousness written off the cuff - or perhaps "from the gut" driven by a sense of outrage at what appeared to be happening in Washington.  I didn't even bother with sourcing references and quotes because things seem to be happening so quickly.  It is difficult to imagine a more destructive influence than McCain in the attempts to arrive at a coherent response.  He seems to be as much loathed and distrusted by his own side as by the Democrats, and makes Bush look ...er...almost Presidential by comparison.  (Did I just say that!!!)

The basis of a historical novel or morality tale in times to come, no doubt.

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 26th, 2008 at 06:27:00 AM EST
[ Parent ]
interesting..it's the republicans who are stopping the legislation going through...too socialist!

"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Fri Sep 26th, 2008 at 09:41:29 AM EST
[ Parent ]
Helps them to appear to be running against both the toxic Bush and Wall Street brands whilst Obama is getting into bed with them...

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 26th, 2008 at 09:45:14 AM EST
[ Parent ]
When the bailout is passed all you guys'll be pissin' and moanin' butI'll be singing this.

http://www.youtube.com/watch?v=fS9FJwMoJaM

Hey, Grandma Moses started late!

by LEP on Fri Sep 26th, 2008 at 11:24:07 AM EST
Hey Lep - I think you got this wrong - I don't think the bail-out is about re-floating Geezer's boat or your investment portfolio - its for the guys who are charging you a lot of money to look after your money for you!

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 26th, 2008 at 12:19:13 PM EST
[ Parent ]
What me worry! All my money's in France and Sarko's just personally guaranteed it :-).

Hey, Grandma Moses started late!
by LEP on Fri Sep 26th, 2008 at 12:28:21 PM EST
[ Parent ]
When I hear Sarkozy say this, my first move is to check my wallet...
by Bernard on Sat Sep 27th, 2008 at 05:23:47 AM EST
[ Parent ]
Sarkozy just took a pre-existing legal guarantee and appear to make it a personal one.  Now which would you prefer to have on your side - the law, or a politician's promise?

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 27th, 2008 at 05:48:47 AM EST
[ Parent ]
Hey, where I come from, a man's word is his bond :-)

Hey, Grandma Moses started late!
by LEP on Sat Sep 27th, 2008 at 06:59:36 AM EST
[ Parent ]
When the politician in question is the one enforcing the law, that's when I'm really worried.
by Bernard on Sat Sep 27th, 2008 at 08:11:45 AM EST
[ Parent ]
Did you say refloating?
The Navy brass tried to bluff it out, but they were pretty lame about it. They just declared the sunken ships "refloated" so the game could go on as planned. This is the kind of word-game that makes the military look so damn dumb. Too bad Bonaparte never thought of that after Trafalgar: "My vleete, she is now reflotte!" Too bad Phillip didn't demand a refloat after the Armada went down: "Oye, vatos, dees English sink todos mi ships, chinga sus madres, so escuche: el fleet es ahora refloated, OK?"


A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Sep 27th, 2008 at 09:47:39 AM EST
[ Parent ]
whatever floats your boat....

Vote McCain for war without gain
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 27th, 2008 at 10:10:36 AM EST
[ Parent ]


A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sat Sep 27th, 2008 at 09:45:35 AM EST
[ Parent ]
"No problem with bailing out homeowners who were conned by predatory lending practices"

I'm not sure how one could identify conned homeowners from speculators. Some of them (how many?) bought houses during the real estate bubble much like a stockmarket investment; they did their own kind of leveraging, betting (insufficient) ressources against further increase of real estate price. The moment their house's value started down, they sent the keys by mail and walked away, thus bringing their own contribution to the crisis. Is there to blame the subprime customer who took his mortgage at a higher, variable rate, sometimes lying about his income, or those who made that loan available?

IMO the fundamental problem is with America's culture of living on the edge, taking risks in the hope of an income greater than the debt - and this, from individual level to state level, passing through companies and banks.

"No problem providing capital for real businesses producing real goods and services.  But will the world really end if Wall Street is allowed to implode"

Wall Street implosion will produce banks implosion (and not just investment banks), and no banks means business suffocation from lack of financial flows. Everything is so interconnected and fluid today, that a big fall in one place risks shattering other segments, and other countries. This is why derivatives knew such success, and also where the danger come from. Is the solution a compartimented world, both vertically, in terms of segments of economy, and horizontally, between countries? IMO safety and efficiency must be well balanced, instead of rollercoasting between extremes each time a crisis strikes.

My two cents...

Free at last! Free at last! Thank God Almighty, we are free at last! (Martin Luther King)

by ValentinD (walentijn arobase free spot frança) on Fri Sep 26th, 2008 at 08:18:50 PM EST
I'm not sure how one could identify conned homeowners from speculators.

How about we start with the elderly and poor who have either lost their homes or the equity in them through predatory lending practices?  I've yet to meet this apparently elusive "speculator" who blithely lies then sends in the keys.

Maybe we can eventually make language a complete impediment to understanding. -Hobbes

by Izzy (izzy at eurotrib dot com) on Fri Sep 26th, 2008 at 11:13:07 PM EST
[ Parent ]
Indeed a non-toxic mechanism for "Equity Release" is one of the most attractive aspects of the model I've been evolving....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Sep 27th, 2008 at 06:00:17 AM EST
[ Parent ]
I'm not passing any moral judgement, people are in their right to make an investment decision rather than a shelter one, and some did so. When the house price is less than the value of the mortgage, there is a strong incentive to give up a home even if the homeowner is able to pay the mortgage - there were real cases on French TV earlier this year.

Here notes from a FreddieMac webcast :


"For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater - you know we're even seeing it when we try to modify and renegotiate those loans - they are walking away. They're finding it not constructive."

Here's an analysis  of the subprime crisis:

"an increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms.
However, once housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. ...
The mortgage lenders that retained credit risk (the risk of payment default) were the first to be affected, as borrowers became unable or unwilling to make payments."

LA Times was once featuring a company promising to help "Unshackle yourself today from a losing investment and use our proven method to Walk Away" - which is quite normal in a society already inclined to stockmarket gambling.

I'm not sure taxpayer money should help bail out speculators of any kind - not without a price. Or in this cases, individuals have their part of responsibility, just like real estate brokers, investment banks and governments (warnings about the real estate bubble explosion in Britain, Spain and the US could be heard from 2006 already, without any one taking any kind of measure. Just like the derivatives market, this one too was supposed to "self-regulate", of course).

Free at last! Free at last! Thank God Almighty, we are free at last! (Martin Luther King)

by ValentinD (walentijn arobase free spot frança) on Sat Sep 27th, 2008 at 07:42:11 AM EST
[ Parent ]
I agree that what is needed is a "wholesale" solution and the state doesn't have the means to conduct a discriminary review of every mortgage transaction.  However it is clear that even basic common sense and banking rules were violated:  there was often no verification of income claims, no stress testing of ability to pay, and everone in the business knew the market was grossly overheated but continued to incentivise salesmen and "securitise" or bundle assets they knew to be toxic.

So whilst obviously there would have been individual instances of home buyers irresponsibly taking on comments they couldn't afford, or not factoring in risks of redundancy etc.,the overall failure was a systemic one.

Thus regulatory reform - includes rules regarding interest rates, miss-selling, income verification and stress testing, and overall transparency of the process are required.

However larger systemic measures are also required to reduce the toxicity of existing assets - which are threatening a depression greater than anybody might have reasonably anticipated (except for a few professional economic doom mongers - mentioning no names!) - and thus measures like interest rate reductions, repayment moratoriums, income tax deductions for interest and other incentives to stabilise house prices and the ability to fund associated costs are required if the market isn't to melt down completely.

This isn't a purely Wall street problem - individual home owners also needed to be bailed out to a degree, and those banks which abused the process need to be reformed, taken over, or shut down and replaced by those that will - as is already beginning to happen.

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 27th, 2008 at 07:17:34 AM EST
[ Parent ]
Buyouts, not bailouts! Lowering interest rates won't prevent house prices from correcting, nor will they stabilise them at sane levels. More likely, they'll just be an invitation to another round of Ponzi scams.

Homeowners that default on their mortgage should have the home taken over by the state and rented back at an affordable rent. The banks should be paid up to a smaller-than-one fraction of the current value of the house - say 80 %. If the bank has loaned out more than 80 % of the current value of the house, they have ipso facto been behaving irresponsibly and get to take the loss. If they have loaned out less (unlikely, since we're talking about people who default on their mortgage, but still), the owner gets what's left of the 80 % of current value.

If and when the current occupants move out, the state can rent out the property to people who are otherwise unable to find a home - whether due to a poverty or other social ills, thus securing that everyone in society has roof over his or her head.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Sep 28th, 2008 at 04:56:52 AM EST
[ Parent ]


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