Serve Others : recession

A Failure to Frame

KTrapani — Thu, 02 Oct 2008 12:21:00 GMT

The great unwinding of our governmental competence is finally complete. Having mis-managed the FDA, FEMA, the SEC, the war on terrorism, the Justice Department, and US-Russia realtions, just to name a few areas, this week we failed to respond to the global economic meltdown. We failed on many fronts -- we didn't see it coming, we exacerbated a bad situation by giving the financial markets more, rather than less, freedom -- but I never expected this administration (the one that invented the term "death tax" and presented the proposal to strip away meaningful environmental protections as "The Clear Skies Initiative") to lose a battle because they framed it wrong.

Really, did we ever expect popular support for a "Wall Sreet Bailout"?

By now, we all recognize that we face a crisis. I happen to beleive it's much more a crisis of confidence than a crisis of fact, but it's a crisis nonetheless. Either way, as both Presidential candidates have said, inaction is not an option. At such a crucial time, not only did our economic leaders, Ben and Hank, try to solve the problem with a 3-pager, crafted while watching the NFL a couple of Sundays ago, but they failed miserably to understand how to get their idea passed. Here are a few things they might have considered:

It's an election year. Should it be a surprise that virtually every "no" vote in both the House and Senate came from a legislator in a close re-election race?
$700 Billion is a lot of money. Should it have been a surprise that folks would like some explanation or, God forbid, a moment to consider it?
We're only motivated by fear when the messenger is credible. Most people don't now beleive our economy will grind to a crawl as a result of failing to pass this legislation any more than they beleive Iraq has weapons of mass destruction, or that Iraq was connected with 9.11, or that Brownie was doing a good job. Fool me once, shame on me...
At a time when we can't afford a gallon of gas, we find it hard to feel bad for billionaire bankers. I understand that we're all hitched, says John Q. Public, but why do they get bailed out when struggling homeowners don't?

Let me be clear here: I don't agree with the bailout, either. I think the way to address the crisis is to address the underlying flawed assets: the shaky mortgages. As we now know, most mortgage-backed securities have been discounted significantly on the balance sheets of the financial firms, according to the "mark to market" accounting principles. Lehman, for example, had valued these assets at less than 1/2 of the original market rate... making the assumption of massive foreclosures on their underlying portfolio. I think that's easy to address, without using taxpayer money and without allowing the lenders to step away from their own bad practices: require the banks to re-structure every troubled loan. A year ago, Mr. Paulson made a very big deal out of the "voluntary" program he hatched to do just this. Now, make it manadatory. In short order, with the threat of default gone, the banks' balance sheets would be once again healthy and the liquidity and credit crisis would disappear.

Of course, our government no longer exists for the benefit of the people. It exists now to serve businesses. So, the only plan we have to consider is the $700 Billion -- actually, based on last night's Senate action, it's now $800 Billion -- Paulson/Bernanke proposal, which has grown from 3 to 400 pages and, supposedly, has many protections against excessive CEO compensation and adequate provision for appropriate Congressional oversight (given our track record in this area, I'm sure that will work well...) So, if this is all we have, why not focus on the only benefit it has by framing it so we can support it? It's an investment in our economc future. It's not a bailout, it's not even a "stimulus package" (which was a great idea, wasn't it? Are you enjoying your flat-screen TV...?) It's an investment.

Here's why it's a good investment: These assets that have been written down to 1/2 or less of their original value? There's virtually no chance they will end up anywhere near that bad. Do you know what the foreclosure rate was in the US from 1931 to 1935, the peak of the Great Depression? 1%. Really, 1%. Now that number was made artificially low, because -- here's a good idea -- the banks were forbidden from foreclosing under most circumstances. (Remember that cool idea, "Government for the people..."?) But, let's assume the foreclosure rate would have been higher without the governmental intervention... let's say it would have been ten times higher! OK, that's 10%.

So you see where I'm going with this. If we can buy these assets at their discounted current value, we create a floor for the financial institutions -- nobody has to worry that this could get even worse -- and we create a tremendous upside for the taxpayer, because the actual mortgage failures will almost certainly be fewer than now projected. Now, can you support a good investment in our country's economic future? Will you vote for the Taxpayers' Investment Initiative?

Hail McCain, the great uniter!

KTrapani — Fri, 26 Sep 2008 11:44:00 GMT

"The global economic crisis was barely averted today by the courageous efforts of US Presidential candidate, John McCain, who selflessly set aside his campaign -- putting country first, while rival Barack Obama practiced for a debate -- to work around the clock with a breakaway group of maverick House Republicans to get them to back the $700 billion troubled assets purchase plan first offerred over the weekend by the genius, Henry Paulson, Treaury Secretary.

Senator McCain, as he has done so often in his long and storied career of public service, used his experience to reach across the aisle and single-handedly negotiate the most important piece of legislation ever acted upon by the US government.

In early polling, results show that 75% of Americans now trust McCain on the economy, up from less than 45% just yesterday."

The above excerpt, from tomorrow's New York Times, is the outcome I see developing. I think the Republicans, just like all Americans, want the economy to get healthy. I think they want to take action and they want it to be the right action. They are, in my view, well-motivated public servants.

They also desperately want the White House.

Is it not possible they might choose to use this opportunity to position their man as the hero of the bailout negotiations? Despite the fact that he sat silently in the President's meeting for hours yesterday while Senator Obama peppered Secretary Paulson with questions, the spin could well develop that the group of conservative House Republicans rallied behind McCain and the day was saved. And Americans will buy it. And, as a result, a man who only a few months ago confessed to knowing little about the economy and who has built a career on the very deregulation that brought us to this place, could well be elected our next President.

Watch the spin in the next 24-36 hours. The cynic in me says this will be done in time for him to arrive in Mississippi at the debate tonight as the conquering hero, but the skeptic thinks even that might be impossible to engineer. I don't know if there will be a debate, but I expect there will be. By the way, the spin on that will be that Mr McCain will look bad because, instead of practicing this last few days, he's been trying to save the world...

You and I now underwrite mortgage-backed securities...

KTrapani — Wed, 12 Mar 2008 13:48:00 GMT

Our current economic model -- implemented all across the globe as the partner platform to advancing "democracy" in developing nations -- is not sustainable.

The time has come for us to recognize that any model that is dependent on over-consumption and easy credit and that disproportionately rewards the rich at the expense of services for the rest cannot work over any long period of time. Capitalism alone is not the saviour of society.

Since last August, the Federal Reserve Board Chair, Ben Bernanke, has told us that the "weakness" in the economy has been "contained". First, it was "contained" within the sub-prime mortgage industry. Then, in December, it was "contained" in the broader home-loan sector. Now, it will be "contained" by resolving the liquidity pressures faced by some banks who cannot now use their mortgage-backed securities as collateral. To that end, the Fed will now offer some $200 million in loans to these big banks, who will put up these mortgage-backed securities as collateral for Treasury securities. That means our government -- you and I -- are now holding financial instruments that are attractive to no one else on the planet. If they were, there would be no need for this new facility.

This is the third time in 6 months that the Fed has bailed out the banks, while also lowering their key interest rate significantly. Most observers expect yet another interest rate decrease next week and there is broad speculation there may be even more loan initiatives offerred to banks in the near-term.

Now, I'm not an economist, so it's very possible that these may be exactly the right things for the Fed to be doing right now. What concerns me, beyond these actions, is the context within which all this is happening. The home-loans in question are foreclosing at a record rate because the home values on which they were based were inflated and the terms under which they were established were not manageable for the homeowners after the first few years. The homes were purchased with little or no equity (the equity we now have in our homes, on average, is lower now than at any time since we have been keping the data...) because the initial interest rates were low and the approval process was easy, allowing folks to buy homes when they could not afford them under more sustainable circumstances, or to buy more house than they needed.

By the way, most of us have little to put down on a house any more because we don't save money any more. Our national savings rate is lower now than ever before.

Virtually the same circumstances (easy credit, lack of savings, a society focussed on consumption as status, the suffocating presence of retail promotion and the need for immediate gratification) also drive the crushing consumer debt of the middle class. That debt enabled the phenomenal economic expansion of the late 90s and early 2000s, but we are all now left with flat-screen TVs, IPods, X-Boxes, fast cars, big houses... no savings and family debt we can't service.

In the mean time, on the governmental level, while we continue to finance an unpopular war and short-term energy solutions, we are cutting the heart out of the most basic social services: education, health care, shelter, and even infrastructure maintenance.

This model is not sustainable. Immediate gratification and catering always to business and the wealthy does not adequately support community.

Sustaining our model requires the potponement of gratification. It requires that all of us, families and governments, invest in the future. Investing in an excellent education for all will develop a larger community of innovators and productive workers who can develop responsible products and solve major global problems in the years to come. Instead of turning our backs on immigrants, why not embrace and educate them?

Investing in adequate healthcare for all will lower long-term care costs and develop a more productive community.

Investing in adequate, affordable housing and food programs will develop more nurturing families, more secure kids and... a more productive community.

Sending $600 checks to everyone does not accomplish any long-tem goal. Funding the National Institutes of Health (whose annual budget is less than 1/2 of one quarter's profits at Exxon/Mobil...) does.

These kinds of investments will not pay off in any one Presidential term. They will take years to show a "return on investment." So what? I'm here for the long term... are you?