Tuesday, February 24, 2009
The only sad thing is that the market reaction to this story seems all too plausible. Perhaps if they took Congress, we could recover from the entire credit crisis.
Monday, February 23, 2009
Fran, Put Down the Crack Pipe
Fundamentally, the proposal for a TARP v. 2.0 results from a gross misdiagnosis of what ails the American economy. The recession is not the result of a "drop in consumer demand". It is the result of collapse in liquidity resulting from the gross overextension of credit. Our problems are closer to those of Southeast Asia in the 1990s than America in the 1930s. A proposal fundamentally resting on an attempt to reinflate the credit bubble is going to inevitably result in exacerbating the very problems that created the bubble in the first place. Banks are not extending credit because they are trying to rebuild their capital. They are doing what they need to do. The deleveraging process, as painful as it might be, is precisely the financial system functioning properly. The level of borrowing that was occuring two years ago was, like it or not, precisely why the financial system fell apart.
But lets move on to the specifics of your plan.
The loans that are expected to be impaired are not the sort of temporary impairments you are suggesting. The bulk of the distress are in a few select housing markets. Modifying the terms is not going to get these loans up and running. The markets are overbuilt. To the extent that banks could salvage the loans in question by modifying their terms, they've already made clear that they're more than willing to do so. But, a loser is still going to be a loser. A loan that is at 250% of value with a homeowner who doesn't have much in the way of prospects to get back to paying is still a crappy investment.
And make no mistake, these are the loans that are at the heart of the retrenchment in the real estate market. Saying that we won't finance the loans that never should have been made is saying we won't finance the loans that need refinancing. 95% of mortgages are and are expected to remain current. Its the 5% that are toxic. Its also the 5% that will blow through the 30% guarantee. As a result, the 30% guarantee would do nearly nothing to set pricing on the securities backed by the garbage.
The fact of the matter is that the original TARP plan took away the immediate risk of systemic failure. Now, we're going through the long, painful process of recovering from an excess of leverage. The private sector is deleveraging. Attempting to equate orderliness of failures in the financial system with the absence of large-scale failures amounts to creating a system of rewarding the very weakness that created the current crisis. Increasingly though, global markets are looking askance at the United States as a long-term credit risk. That is, rather than fear of another Lehman, markets are wondering if the United States government can be viewed as credible. Between a $750 billion Troubled Asset Relief Program that offered no relief from troubled assets, an $800 billion stimulus program offering only 12% stimulus, the flooding of the money supply, and perpetual bailouts of the Big 3, I can't say I blame them.
The American economy has increasingly become addicted to easy credit, much as an addict gets addicted to crack cocaine. Reinflating the credit market by maintaining the zombies in suspended animation idefinitely only amounts to trying to come off of a bender by taking a little hair of the dog. The only way our economy can ever hope to get itself back on an even footing is for us to put down the crack pipe.
Monday, February 02, 2009
One of the main issues that swept the Democrats into Congress in 2006 was the charge that Congressional Republicans had created a "culture of corruption". This charge was no small part of what Barack Obama campaigned on in 2008 to win the presidency. It is becoming increasingly clear, however that the Democrats have their own culture of corruption, one that far eclipses that shown by the Republicans. More significantly, the corruption exercised by the Democrats gets to the heart of national policy, rather than the offensive sideshow that we saw under Republican leadership.
The Democrats' corruption is particularly evident in the Congress. We are currently being treated, for example, to a "stimulus" package, less than 12% of which is actually stimulus. That bears consideration. Rather than a package with a goal and a little waste, we're getting a package with waste and a little goal. The Congress offering up this package includes such luminaries as Senate Banking Committee Chairman, Chris Dodd, who still hasn't released the details of his sweetheart mortgage from subprime lender Countrywide, House Financial Services Committee Chairman, Barney Frank, who was live-in lovers with one of the executives of Fannie Mae (focusing on their subprime program, no less), and House Ways and Means Committee Chairman, Charles Rangel, who is being given a pass for both tax evasion and fraudulently acquiring multiple subsidized low-income housing units. Significantly, these aren't minor, party back-benchers, like Eleanor Holmes Norton, Al Franken, Alcee Hastings, or William Jefferson. These are members of the Democratic Congress's leadership. This same leadership, despite its claims of bipartisanship, has specifically moved to remove rules established in 1994 to allow minority party input into the legislative process. And less we think, somehow or other, that these are just isolated cases, we merely need to look at Congressional reactions to the recent revelation of Tom Daschle's (D,SD) failure to pay taxes on his limousine services as a high-paid lobbyist. It was described by Democratic Senate Finance Committee Chair, Max Baucus as "disappointing mistakes" and was dismissed by WV Democrat Jay Rockefeller as needing to be compared "in terms of the moral necessity of getting universal health care."
Now, the revelations above regarding Messrs. Dodd and Frank might come as shock, especially in light of the extent to which the two have been busy lambasting Wall Street for the financial crisis. Left unmentioned in their their critique is the role on the crisis played by the GSEs - Fannie Mae and Freddie Mac. You see, far from third parties or accidental victims in the mortgage meltdown, Fannie and Fredddie were active participants in the subprime market. In fact, the GSE's owned a remarkable 10% of the subprime assets outstanding. Even this 10% figure, however, belies the role the GSEs played in the subprime market to the extent that, unlike market makers, the GSEs were not market neutral, offsetting demand pressures with supply pressures. Instead, they had a net long position, specifically a leveraged long position. Unfortunately, in addition to their core business of repackaging mortgages into mortgage-backed securities, the GSEs expanded into directly investing in mortgage assets. To finance this business, Fannie and Freddie relied on their implied guarantee from the federal government. This guarantee allowed them to borrow at below-market rates and collect the spread between this rate and that they realized on their mortgage investments. Trying to boost returns still further, the GSEs began purchasing subprime paper. As a result, GSE losses are looking somewhere in the area of $238 billion. More problematically, the GSEs role of one-way market maker added impetus for the expansion and growth of subprime lending and securitization.
By all accounts, while the bubble was still running, Fannie and Freddie's executives did very, very well, walking away with compensation in the hundreds of millions of dollars. But, the GSEs were not private, independent businesses. They were, for all intents and purposes, sinecures for well placed Democrats. In fact, they had been compared to "retirements homes for Democratic staffers". To see this, look at their excutives: CEO Franklin Raines, Clinton White House budget director and Carter White House Domestic policy staff assistant director; CEO Jim Johnson, Walter Mondale's executive assistant, campaign manager for Mondale's 1984 run, and VP selection chair for John Kerry; or Vice Chairman and General Counsel Jamie Gorelick Janet Reno protoge and 9/11 enabler.
Now, you might be inclined to dismiss all of this as the Democrats' old ways swept now being swept aside in a wave of hopey changitude by Obama adminsitration. But, this interpretations leaves open some very serious questions. Mr. Daschle's, Treasury Secretary Timothy Gaithner's and Chief Performance Officer (isn't that the CEO, or President's job?) candidate Nancy Killefer's tax problems were known before they were nominated. President Obama's Chief of Staff, Rahm Emanuel was in conversations, conversations he denied having, with with Illinois Gov. Rod Blagojevich regarding the latter's appointment to Pres. Obama's vacated Senate seat. Notably, the contents of this conversation are unlikely to be revealed now that the Gov. has been impeached. Even looking at the President himself, we see his long-standing relationship with now-convicted Illinois political operator Antonin Rezko has already been established. However, it's worth noting that even the Finance Chair of Obama's 2008 campaign, Penny Pritzker (yes, of those Pritzkers) ran a failed subprime lender. Already, an administration that has vowed that it would ban lobbyists from serving in the White House has appointed 12 to his goverment already (Not that I necessarily believe that lobbyists are inherently bad. Lobbying itself strikes me as very much within the scope of redressing of greivances. But, to the extent the administration has identified it as a bad thing, I think they're obligated to act accordingly.).
The American system relies, in no small part, on the anonymous nature of our laws, as exemplified by the image of a blindfolded justice. But that principle goes beyond the adjudication of our laws to the nature of the laws themselves. Our constitution forbids laws retroactively and specific to the individual. We are cautious in the initiation of new laws because we know they can well apply to us and we accept laws because we know they are being universally applied. Corruption, and its acceptance by the public, however, undermines this tradition. The current Democratic leadership is increasingly showing itself to consider the behavior I've discussed as completely acceptable on its own part. Worse still, it treats the negative consequences of this behavior as an opportunity to exercise rulership over the country as a whole. Given the role that Democratic corruption played in the current crisis, one would think simple shame might give them pause. Instead, we're seeing these same politicians both aggrandize their own power and pose further restrictions on the public. In a very real sense, then, this corruption undermines the premise on which America's social contract is based. Should this trend continue, I'd be surprised if the country does not eventually see a period of civil unrest.
