So you and I lost $1.2 trillion, in order to save us $700 billion.
Email has been an amazing tool. It has allowed for communication that is faster and more frequent than we ever had before, and it has allowed us to share more than ever. I love email.
Except when I hate it. You know what I’m referring to: it’s forwarded emails. Perhaps if we could all just get it straight in our heads that these things are almost never right or true, we’d all be okay. But it’s not like that: most people actually believe what they are reading, which is probably a holdover from a time when things were fact-checked. Emails, though, are not fact-checked, and sometimes they’re even misleading on purpose, as in the “Obama is a Muslim” nonsense. (A quick sanity check: if it has appeared on the cover of the National Enquirer, you can pretty much guarantee that it’s not true.)
My soon-to-be mother-in-law (hey! I think that’s the world record for hyphens!) passed along the following gem, which she was too smart to fall for:
*Subject:* The Leadbetter Economic Recovery Plan
A FREIND JUST SENT TO ME, LOOKS GOOD TO ME .DICK
This is a fantastic idea – and what could do more for the current economic crisis. Wow just pass it on to everyone and to your Congressmen/women!!!!! I just did.
Hi Pals,
I’m against the $85,000,000,000.00 bailout of AIG.
Instead, I’m in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.
To make the math simple, let’s assume there are 200,000,000 bonafide U.S. Citizens 18+. Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billon that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.
Of course, it would NOT be tax free. So let’s assume a tax rate of 30%. Every individual 18+ has to pay $127,500.00 in taxes. That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket. A husband and wife has $595,000.00. What would you do with $297,500.00 to $595,000.00 in your family?
Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.
If we’re going to re-distribute wealth let’s really do it…instead of trickling out a puny $1000.00 ( “vote buy” ) economic incentive that is being proposed by one of our candidates for President.
If we’re going to do an $85 billion bailout, let’s bail out every adult US Citizen 18+!
As for AIG - liquidate it. Sell off its parts. Let American General go back to being American General. Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up.
Here’s my rationale. We deserve it and AIG doesn’t.
Sure it’s a crazy idea that can “never work.” But can you imagine the Coast-To-Coast Block Party! How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC.
And remember, The plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.
Ahhh…I feel so much better getting that off my chest.
Kindest personal regards, Ed
Ed Leadbetter…., A Creative Guy & Citizen of the Republic
PS: Feel free to pass this along to your pals as it’s either good for a laugh or a tear or a *very sobering thought on how to best use $85 Billion!
There are a whole bunch of problems with this, but let’s focus on just one: Ed may, for all I know, be a creative guy and he’s almost certainly a citizen of the republic, but he’s no mathematician.
You see, $85,000,000,000 divided by 200,000,000 is not $425,000, the supposed amount of the We Deserve It Dividend.
It’s $425.
This happens all the time in emails: not only is the author incorrect, he’s incorrect the the factor of a thousand! Maybe I’m out of touch, but I sort of doubt that $425 per person is going to have the kind of effects that the author is proposing.
Problem is, this is rocketing across the country at (literally) the speed of light, showing up in inboxes everywhere — and most people who read it accept it as true. Less than a day after Rickie sent this to me, I received it from my mother (who had been forewarned). It’s getting around.
Everyone… and I mean, everyone, should bookmark www.snopes.com right now. Use it all the time, to check up on all of the urban legends (such as this one) floating around the net.
My mother and two of my sons have now written to ask: What is happening here? Seems like a good time for an economics primer:
History Lesson
The first thing we need to recognize is this: with respect to housing, we do not live in a true market economy. “Fannie Mae” is an acronym for the Federal National Mortgage Association, created under FDR in 1938 to further the goal of home ownership in the United States. “Freddie Mac” is a (weird) acronym for the Federal Home Loan Mortgage Corporation, created in 1970 as a competitor to Fannie Mae. Both are Government-Sponsored Entitites, or GSEs, which were ultimately privatized, but both operate under the implicit guarantee that the federal government will protect them against serious losses.
In a true market economy, nothing like these organizations would exist. Their raison d’etre is to enable the government’s policy, made plain during the Great Depression and still in existence today, to encourage home ownership beyond market levels in the United States. The “beyond market levels” part of that makes plain the fact that the government has to create and support entities to enable that.
Put another way, this gets really simple: lots and lots of people who do not have the resources to own a home in a natural free market economy, own them anyway because the government has created a way for that to happen. Nothing wrong with owning a home, mind you: I’m just saying that the entire housing market is something other than a free market economically.
This distorts everything about housing in the United States, of course. Through entities like FNMA and FHLMC, and also through tax incentives (deductible mortgage interest, for example), the government almost mandates home ownership in the United States. This creates a dearth of single-family rental properties and other housing that might be appropriate in a free market. Thus we have the oddity of Sacramento and the Central Valley: foreclosures have flooded the market for rentals (lots of people who formerly owned homes are now looking for rental property). All that demand for rentals has driven rents through the roof. Meanwhile, gobs of homes sit vacant, waiting to be sold.
Okay. To encourage more home ownership than would exist in a free market, Fannie Mae and Freddie Mac have long been purchasing individual mortgage loans from banks at their present value, and have bundled huge groups of loans into what are called “mortgage-backed securities.” These securities have market value, because the people to whom the loans were made presumably have a demonstrated ability to repay with interest. That’s worth something, and the market values them. Mortgage-backed securities have historically been a safe investment.
Because Fannie Mae and Freddie Mac have been a willing buyer of tons of mortgages, it has made sense for banks to make more of such loans than they would otherwise. Which they did.
Two things then happened: (1) The increased availability of mortgages creates an unnatural demand for housing (meaning: people who could not normally afford to buy a home can get a mortgage to do just that, so there are more buyers in the market than there would normally be), which of course drives housing prices up. This created the perverse effect that lenders invented ever more esoteric loans, in order to fill this oddball market demand of home-seekers for homes they could not actually afford. Hence we saw “interest-only” mortgages, adjustable-rate mortgages, etc… all for the purpose of putting a home loan in the hands of someone who should not actually be buying a home right now.
(2) As this “industry” of mortgage-backed securities grew, brokerage houses on Wall Street began to use these instruments (which had always been really safe) as collateral for everything they did, propping up other funds. The demand for more of them was insatiable.
Which all sort of works anyway, despite the Frankenstein nature of it, if only the housing market continues to climb. As long as that’s happening, homebuyers can renegotiate their mortgages using the equity in their ever-more-valuable homes and never really pay the piper on the Faustian bargain they made.
But if the housing market stagnates, which it will always do once in a while, or (this is key) if the people to whom loans are made simply fail to pay on their mortgages (because they weren’t credit-worthy to begin with), we have a gigantic problem: the securities which were supposed to be very safe, aren’t. Losses resulting from poorly-conceived loans need to be written down. And because these very loans are collateral against everything brokerage houses are doing, we have a huge problem: it’s not just the mortgage industry, it’s the entire industry for credit.
Bailouts 101
So, what’s happening to fix the problem, then?
Well, the government appears to have reached at least one consensus: that we cannot simply allow the market to correct itself. They have determined that the effects of that correction would be too deep and too widespread not to take some action.
It’s a little hard to tell precisely what that action will be, but it appears to be congealing around something like what was done in the Depression: The government will authorize someone, presumably the Treasury Department and presumably with some oversight, to start buying these bad loans at a discount. The form of purchase will probably be a “reverse auction,” in which the Treasury advertises that it intends to buy, say, a billion dollars’ worth of a certain type of loan, and sellers compete to be the low bid: the Treasury will then proceed to buy from whoever is willing to sell those loans for the least amount of money.
The banks get to unload their bad debt, and the government will simply hold those loans, either until maturity or until the market improves enough that they can be sold for a profit (hopefully). The banks, who now have a more normal capital structure without all of this bad debt, can resume lending operations more normally and the economy resumes — probably limping along at first, but improving. We hope. Might not happen like that, but we can keep soldiering on with crossed fingers, right?
Is it Possible the Government Will Make Money on This?
Well, yes.
The fact is, mortgage-backed securities are trading way, way below their intrinsic value. The math works like this:
The percentage of mortgage payments with one or more delinquent payments (and this is even including the famous subprime mortgages) is 6.4% The national rate for foreclosures is 2.7%.
What this means is: 93.6% of all mortgages are current. By a wide margin, people are paying their mortgages. So, it’s riskier than it used to be, but let’s get real.
If the average rate on an MBS is 5%, then even if we assume that every single delinquent loan is foreclosed (which obviously will not happen), then you should still be able to expect a 4.7% return (94% of 5%).
But things have fallen way more than that: the ABX index for AAA mortgages (the lowest-risk kind) has fallen to 50 cents on the dollar, and that for subprime to less than 10 cents on the dollar.
The foreclosure rate on AAA loans: less than 1%. For subprimes: 12%. (And 88% of 5% is still 4.4%, not 0.5%)
Bottom line: if we do this right, there is a killing to be made on these securities. They are currently way undervalued.
Has Anything Like This Ever Happened Before?
Well, not exactly to this scale, but bailouts happen more often that you’d think: between 1970 and the beginning of 2008, there were eight government bailouts of institutions or industries. To wit (dollar amounts in 2008 dollars):
So, yeah. It’s happened before. Just not like this.
As a guy who is just about to get married, I simply do not have to go through the pathetic early stages of dating. It’s over. Thank heaven.
Tonight, I had a meeting down in San Jose that didn’t end until about 8:30. I was hungry, and of course my only real options are going to be fast food. Equally obvious should be the fact that fast food in California means In ‘N Out.
I stopped at the In ‘N Out off of Rangstorff Road in Palo Alto. As usual it was filled with Stanford students, many of whom were early in the dating process, heading home from the movie theater across the highway. A few snippets of conversation I overheard:
Conversation One:
Girl: “I was going to go party with Megan, but you know, Megan just doesn’t party like I party.”
Guy (chuckling): “No, she sure doesn’t.”
Girl (annoyed now): “What the %&@# do you mean by that?”
Conversation Two:
Guy: “I just say y’all because, you know, ‘you all’ sounds way too formal. And y’all is just accepted in the South, where I’m from.”
Girl: “What about something like ‘you guys’?”
Guy: “That just sounds gay.”
Girl: “Excuse me? Did you just use gay as a pejorative?”
Guy (clearly confused): “Umm, I don’t think so.”
Girl: “Do you know what pejorative means?”
Guy: “Can I get you a drink?”
Just sayin’. Glad not to be a part of that scene.
Two of my college-aged sons have now asked me for some help in deciphering the election. Being a blogger, of course I immediately thought, “New topic!” Herewith, then, a guide to the main issues of the 2008 presidential election:
I’m going to go through the candidates’ positions, issue by issue. I think the key is this: pick the issues that matter most to you, and see which candidate aligns best with your thinking. Not all issues matter to everyone, and certainly not all issues weigh the same in people’s minds. This is why these elections are even slightly interesting.
Economics
John McCain
The first issue to address when talking economics in this election is raw competence, and on that front McCain fares very badly. He has admitted that he knows very little about economics and that he has little interest in the subject, both of which are a surprising admission by a sitting senator with as much time served as McCain has had.
Since the implosion of the financial markets, McCain’s lack of understanding has shown through in some of his comments: on the very day of a meltdown, McCain said that “the fundamentals of the economy remain strong,” and when that became fodder for comedians, he said that he meant that American workers remain strong. He later blamed the economy’s problems on “abuses within Fannie Mae and Freddie Mac,” which is not close to true (Fannie Mae and Freddie Mac got into the subprime mortgage game very late, after watching their market share dwindle at the hands of the more aggressive Wall Street banks). He famously said he would fire SEC chairman Chris Cox, which might be nice in theory, except the SEC chairman doesn’t work for the President.
Second: the whole concept of the Republican fiscal conservative is out the window. A conservative, to my mind, is a person who knows how to handle a budget: don’t spend more than you take in. Back in the day, the knock on Democrats was summed up in a single phrase: the Republican would refer to his opponent as a “tax and spend liberal.” But today’s Republican party is even worse: they are the party of don’t tax and still spend. John McCain, like nearly every Republican before him, vows not to raise taxes. But at the same time, he vows to continue prosecuting a war that costs us $3 billion per week. His party’s economic policies, and to be clear the economy is not where he can even remotely claim to be a “maverick,” have forced us into a situation where we now face a nearly trillion-dollar bailout of Wall Street (that’s $2,000 per person in the U.S., bub). But he won’t raise taxes to pay for these. How will we pay for it? By borrowing more money from China. Translation: if you’re a young man or woman, we’re gonna make you pay for it later, when the loans come due.
All of the above make for a disappointing conclusion about McCain’s economic plan, as posted on www.johnmccain.com: it is utter and complete nonsense.
I’m a little surprised that this doesn’t come up more: we cannot talk economics without noting that John McCain played a very direct role in the 1989 Savings and Loan Scandal. McCain was, in fact, one of the infamous “Keating Five,” a group of lawmakers accused of corruption for aiding the chairman of the failed Lincoln Savings and Loan Association. The Senate Ethics Committee cleared McCain of formal charges, but accused him of having acted with “poor judgment.”
Finally, a fundamental principle: when someone screws up, you don’t reward them. And make no mistake: on the economy, the Republicans have screwed up almost beyond imagining. The current crisis is a direct result of Republican beliefs and policies. Period.
Barack Obama
It is more difficult to assess Obama’s raw competence with respect to the economy. A few things stand out, though: (1) While we can disagree on elements of the Obama economic plan, it is a fundamentally sound document. It makes sense. (2) He has not been given, on the campaign trail, to the economic gaffes of McCain, perhaps demonstrating that he understands the topic better.
I don’t think it would be entirely unfair to refer to Obama as a “tax and spend liberal.” He clearly has some social policies in mind that cost money, and he intends to raise taxes at the extreme top end of the income scale to pay for them. Two points with respect to that are worth noting: (1) His plan would lower taxes for nearly 90% of Americans, according to an independent study. Obama would raise taxes on the wealthiest Americans, but only to the levels they were at during the Clinton administration; and (2) I wonder if he’ll ever be able to get around to social policy, anyway. We may have dug too deep a hole for the next president (whoever he is) to do anything but try to climb out of it.
As I pointed out in a post yesterday, Obama’s party’s basic economic theory would seem to fit today’s world better than the Republican theory of top down economics. At least, we’d have to say that they are not the party to punish in this election for the current crisis.
National Security
John McCain
Don’t fall for the trap that’s being set by the McCain camp. The key question with respect to foreign policy and national security is not, “what was your position with respect to the troop surge?” It is, “what was your position with respect to the Iraq War?”
Let’s just lay it out there: forget about the war hero stuff. Forget about the vaunted experience. John McCain was one of the key supporters of what many analysts believe is the single worst foreign-policy mistake in the history of our nation.
And it gets worse: where even George Bush has abandoned the idea of “victory” in Iraq, John McCain will settle for nothing less. George Bush is willing to discuss a timetable for pulling troops out of Iraq, and John McCain is not.
Remarkably, it gets even worse than that: His bellicose rhetoric toward Iran raises the possibility of yet another Middle Eastern front, and his hard line toward Russia (where his vice presidential nominee has outright suggested we may have to go to war) opens up the possibility of yet another saber-rattling mistake.
The tag line on McCain’s website reads: “Country First: Reform, Prosperity, Peace.” It would be laughable if it weren’t so serious. Put simply: if you are interested in maintaining an endless war in Iraq, baiting terrorists and increasing the likelihood of another attack here on our soil, vote for John McCain.
Barack Obama
Obama may have less foreign-policy experience than John McCain, but (at least lately) he has better judgment. He opposed the Iraq war from the start, correctly noting that it was nothing but a distraction from a legitimate aim, the defeat of al-Qaida and the capture of Osama bin Laden. Obama’s current position — that he would remove most troops from Iraq and put them in Afghanistan to finish what we started — is both strong and smart, and success at this objective would severely cripple radical Islam’s war on America. Moreover, Obama’s views are shared by America’s intelligence agencies, who have reported that the Iraq War has made us less safe.
Another point worth discussing, at least: the rest of the world wants us to elect Barack Obama. I know it’s the immediate reaction of most Americans to thumb their noses at what the Germans or the French think, but it is simply not in our national best interests to be despised by our own allies. America’s moral standing in the world has rapidly diminished in the last seven years, and we are helped as a nation if we can get some of it back. Simple as that.
Energy
John McCain
John McCain is well left of most Republicans on energy issues: he speaks often of our need to reduce dependence on foreign oil in part through fuel efficiency and other methods of energy conservation.
Still, he has tended to favor oil companies: according to GovWatch, his famous “gas tax holiday” proposal will benefit the oil companies, and not consumers. His congressional votes have been consistently in favor of the oil companies.
His plan suggests harnessing multiple energy sources: his ads show windmills and solar panels. His voting record, though gets squarely behind nuclear power as the main alternative fuel.
Overall, his energy plan is sound and sensible, though. McCain is among the most progressive Republicans in terms of energy policy.
His biggest weakness, again, is Sarah Palin. She has said that he intends to put her in charge of energy policy for the country, a subject in which she has surprisingly shown little aptitude. It’s “Drill, baby, drill!” in Mrs. Palin’s world.
Barack Obama
Obama clearly recognizes that energy independence will only come when we wean ourselves from oil and invest in new technologies. He has a bold proposal to invest $150 billion over the next ten years toward the development of electric car batteries and other new technologies. Lest you squawk that $150 billion is a lot of money, let me just make this case: it’s one years’ worth of the Iraq war.
He champions conservation and fuel efficiency, and has a plan that works toward clean coal, wind power and other sources. He’s not entirely against further drilling, but wants us to be realistic about its outcome.
Dirty Politics
Neither candidate has been exactly blameless, but John McCain has been worse by far than Barack Obama. He has attacked Obama’s integrity (“he would lose a war to win an election”), and he has run ads so inherently false and so despicable that: (a) his own party, including even legendary attack dog Karl Rove, has repudiated them; and (b) they were skewered in this hilarious Saturday Night Live sketch (click on the link to view): McCain Approves This Ad.
Social Issues
Both candidates support federal funding of stem-cell research.
John McCain
McCain is fairly centrist, leaning only a little right, on key social issues: he is pro-life, and he opposes gay marriage while supporting civil rights for gay couples.
His issue may lie with his running mate, Sarah Palin. Mrs. Palin opposes abortion even in rape cases, and she has been vocal in her opposition to gay rights. Mrs. Palin is about as far right as you can possibly get.
Barack Obama
Obama leans far to the left of most of the country on social issues. One of his central tenets is that a social issue must be explainable without an appeal to religious doctrine, and that places him in the pro-choice camp, where he has even voted for women to retain the choice for abortion fairly late in pregnancy (although more recently he has stated that the state has a right to restrict late-term abortions). Obama is a little bit of a jumble on gay marriage: he opposes California Proposition 8, a constitutional amendment to define marriage as between a man and a woman, but he has said that we should “disentangle gay rights from gay marriage,” and has said that “gay marriage is less important than equal gay rights.” As recently as 2004, he opposed gay marriage, stating that gays should not face discrimination but should not marry.
Running Mate
You all know how I feel about this. McCain’s choice of Sarah Palin wasn’t a maverick move; it was a dangerous one, one that plays fast and loose with America. Sarah Palin is no more ready to be president of the United States than I am. It is categorically unbelievable that Senator McCain would make such a poor choice. Meanwhile, Senator Obama selected a man who is every bit as ready as Senator McCain is.
For more detailed information on each candidate’s views, visit On the Issues.
Actuarial results are in. Just so we’re all clear on this: given John McCain’s age and health history, the odds that he will die in office are 1 in 3.
Okay, Republicans: how certain are you that Sarah Palin’s ready?
There are, of course, a broad range of economic theories. But among our major political parties, there are fundamentally two opposing views: the “trickle down” or “top down” economics of the Republican Party, and the “bottom up” economics of the Democratic Party. Both have supporters among economic theorists, so I suppose there is not really any one “correct” theory. I’ll suggest, though, that recent top down implementations have gotten us into a really bad mess lately.
In top-down economics, there are a few central tenets:
None of this is entirely nonsense, and it has in fact worked very well in the past (as recently as the Reagan years). It is certainly true that measures to stimulate the top of the economy will almost certainly relieve some pressure at the bottom.
What I wonder is this: (1) Does top-down economics work for any given country in a global economy?, and (2) Have we underestimated the speed at which our economy has become fundamentally global?
Some of what has worked in the past is questionable in a truly global economy: (1) The wealthy, who formerly could be relied upon to make investments in America, now invest post-tax earnings wherever in the world they can get the highest returns. In my industry (high-tech), most large venture capital firms now have funds in India or China — seeking increased returns over what they can get right here in Silicon Valley, of course, but at the same time encouraging innovation elsewhere and (relatively) discouraging it in the United States. These firms are backed by wealthy individuals and funds, who are now investing overseas what they once invested right here. (2) Corporations, including the oil companies and Wall Street firms, are now also truly global and will find low labor costs and high output wherever they will, anywhere in the world.
The point is this: what once inured to the benefit of the United States, now spreads out across the globe. A tax cut or deregulation which could formerly be counted upon to “trickle down” across America, may now be trickling down elsewhere, thereby creating an even greater disparity between the haves and the have-nots than ever before in this country. Are we failing to recognize this? I think so.
Moreover, the recent melt-down of Wall Street (note that yesterday the last two remaining investment banking firms petitioned to become bank holding companies, thereby completing the cycle) was not the unpredictable “once in a century” perfect storm of which Alan Greenspan speaks. The deregulation of the banking industry (spurred by top down economics) that started with the Deregulation and Monetary Control Act of 1980 and the Garn-St. Germaine Act of 1982, and continued throughout the last 25 years, has had an absolutely predictable effect: with fewer and fewer regulations on their behavior (and with a growing economy to back them), banks took more and more risk, seeking more and more reward. They loaded up with debt (of increasingly low quality), until… well. We all saw what happened.
A bottom-up economic theory takes as its central tenet that the growth and health of the American economy is rooted in the ability and productivity of its workers. Therefore:
I’m suggesting this: not that either economic theory is entirely wrong, but that there are “horses for courses,” and the current course (globalization) calls for a re-establishment of a bottom-up economic theory in our government.
This is perhaps not as hard as it looks. Let’s review what has happened recently:
I think it’s interesting to note that three of these companies (AIG, Lehman and Merrill) exercised major stock buybacks in the past 18 months. Hmm…
The simple answer to the question, “Why did these companies take insane risks?”, is simple: because there was absolutely no reason not to.
As CEO pay, and particularly CEO severance, has risen to insane levels, we’ve increased the incentive for a CEO to take risks.
Think of it this way: if you’re Carly Fiorina and the world tells you not to buy Compaq, but you knew that even if it was a major screw-up you’d walk away with $42 million, why not roll the dice? If it works you’re a business superhero; if it doesn’t you’re insanely rich anyway.
The list is long: Fannie Mae and Freddie Mac’s CEOs received $9mm and $14mm, respectively, for their epic messes. The bank accounts of Lehman, Bear and Merrill’s CEOs are overflowing with cash. The CEO of Countrywide, one of the architects of our problem, made $414mm over the last few years, then walked away with another $110mm.
Ask yourself: what would you endure for $42mm? $110mm? Would you care very much whether people thought you’d messed up?
If you know you’re going to be incredibly wealthy no matter what, it begins to become all about heroics. “Maybe I can really knock it out of the park! And if I don’t, so what?”
This decoupling of risk from reward for CEOs is a major reason we’re in the mess we’re in right now.
Neither one of these candidates is going to be able to effect as much real change as they’d like. With the government already committed to hundreds of billions of dollars to rescue or prop up Bear Stearns, AIG, Fannie Mae and/or Freddie Mac, and with potentially similar dollars required for distressed mortgage debt and potentially Detroit automakers, there’s just nothing left.
The deficit is already projected at $500 billion plus. Add these in, and there is no money to pay for Obama’s universal health care, or McCain’s $3.3 trillion in tax cuts. It’s just not going to happen, I’m afraid.
Sheesh.
