It’s interesting to see the ideas that come and go while we collectively wait around like Wile E. Coyote for Isaac Newton to take control of the colossal mortgage mess. The Fed, for example, can keep cutting interest rates to negative infinity and it still won’t make the mortgage-backed securities worth anything. We could let the free market sort out businesses which lack the sense and/or leadership to make sustainable choices, but it looks like free-market fundamentalists only care about privatizing profit. As far as I’m concerned if we need a painful readjustment to get back to stable growth based on solid fundamentals then so be it. The pain may even spur some sensible limits on the now-discredited theory that a deregulated financial services industry will police itself.
But who am I kidding. In a Democratic country any painful readjustment always means extra pain for whoever controls fiscal policy, which means that most governments will do practically anything to avoid it. If you’re wondering how far they might go, how about buying the entire reeking CDO pile with tax dollars and handing it off to the next administration in the form of debt.
Central banks and governments in advanced economies will be forced to buy mortgage-backed securities within the next few months to stop the credit crisis, according to a former chief economist of the European Bank for Reconstruction and Development.
“Central banks will be managers for years to come of rather interesting portfolios,” predicted Professor Willem Buiter of the London School of Economics, as the Federal Reserve and the Bank of England sought to play down conversations officials have had regarding purchases of mortgage-related assets.
The major players are denying the story, as well they should. The mortgage-backed securities are literally worthless. Most firms can’t sell them at any price, and even if they could most won’t because selling a large enough batch would establish a real value for the toilet paper securities that everyone else is holding. A honest valuation would reassess a huge part of some large firms’ holdings to next to nothing, and down comes the entire house of cards.
Thus, according to the Financial Times, the central banks are thinking about literally buying nothing. The idea is to fill a huge CDO-sized hole in the balance sheets of the most irresponsible firms with taxpayer cash. That seems even worse than a bailout. It’s like buying a disease. Worse, it rewards the most irresponsible players and does nothing at all to fix the Greenspantarian system of deregulation and bailout that encourages these damaging bubbles in the first place.
Anyhow, the FT report is certainly true in a literal sense; policymakers would be negligent not to weigh every possible option for managing a crisis. We should reserve impeachment, tar, feathers, rail and pillory for the unlikely event that the idea was something more than one bullet added to a list for the sake of completeness.
John Cole
That picture is classic.
Walker
Hillary Clinton’s choice to clean up the mortgage mess is Alan Greenspan. As in the man that everyone believes is largely to blame for the formation of the shadow financial system. I have long doubted that she had any economic sense because of her ties to Robert Rubin. This clinches it. If she becomes president, she will not be able to pull this economy of this economic mess.
Of course, that’s not saying Obama will be any better. What with McCain listening to Phil Gramm and Clinton listening to Rubin and Greenspan, I am expecting to next hear that Obama is taking advice from David Lereah.
sparky
Yeah, the photo is spot-on.
I would suggest that it is something other than another bullet point, though in another sense it is just that. What we are seeing is the death of the “conservative” ideology by its collision with facts. It was a long run, and clever misdirection kept it going far longer than I ever thought possible, but it has finally crashed to the ground everywhere–first abroad, now in the US. I hope that we can (1) clean up the mess without too much more catastrophe-making and (2) that we might learn something from this period. But whether that’s so, who knows? Some good ideas came out of the debris of WW I and the Great Depression, but horrors gained traction too.
Walker
The major players are denying the story, as well they should. The mortgage-backed securities are literally worthless.
Actually, JPM put a price on them today for accounting purposes. 5 cents on the dollar.
Xenos
I have been following the Big Shitpile, soon to known as the Global Big Shitpile. for a few years now. As bad as our deregulation regime has been, certain European central governments have pushed and facilitated much worse housing bubbles than have been seen in this country outside of New York and San Francisco. While Germany has no bubble, Holland and the UK have enormous ones.
Britian’s version of Countrywide was nationalized last summer in order to keep the Realty-Industrial Complex, and the economy as a whole, afloat. The JPM/Bear Stearns is troubling but not yet at such a stage, at least not yet. On both sides of the Atlantic the problems arise from mis-regulation, whether a form of malign neglect here or a foolish attempt to make everyone rich over there.
And surprise, the Germans thought this all out long in advance. Maybe they will be reintroducing the Mark as the continental currency in the end.
Fraud Guy
Just floating an idea, here.
We, as taxpayers, will probably have to pay for the bailout, one way or another.
But, many execs at these companies garnered huge bonuses for creating the stinking pile while the getting was good (re:Bear Stearns). The list of those who got bonuses, then, for thinking of, creating, and sustaining the pile of junk can be found easily, as well as the list of those regulators who signed off or avoided dealing with this mess.
In return for the bailout (and future, more stringent regulation), all of those who benefited, created, or enlarged the mess are to be banned for life from dealing with any financial products; as an employee, manager, executive, regulator, lobbyist, or outside consultant. You created the mess, you can no longer play in our financial future. Period.
Not likely, but it would be nice.
Walker
The UK is the California of Europe. They will take this much harder than anyone else, even us.
4tehlulz
This is pretty much what the Japanese are advising us to do.
Walker
Thinks will get that bad once the option ARMs explode and WAMU finally collapses.
ThatLeftTurnInABQ
The moves made by the Fed have been sterilized up to this point (i.e. they aren’t just printing money). That’s the good news. The bad news is that Ben has already burned through something like 60% of the 700+ billion the Fed has to work with on a sterilized basis, IIRC. The best he can do is to try to slow down the unwinding a little bit to prevent a 1930 style bank run.
Any attempt to prop up or buy out the MBS pile of fertilizer (rather than letting it crash back to values supported by the fundamentals, i.e. median income levels) will be highly inflationary no matter how it is done, whether via monetary or fiscal policy. We won’t really be removing that debt, just inflating it away and destroying the value of any other remaining dollar assets which still preserve wealth. The MBS are to the US today what reparations were to Weimar Germany. The same inflationary temptations apply in both cases.
The chances of this happening are pretty good, actually. Hyperinflation is a form of class warfare, pitting savers vs. non-savers. Japan in the 1990’s had a very high savings rate, so inflation was never an option for them. How many savers do we have in the US? How many voters have significant savings to protect vs. how many would benefit from seeing their debt inflated away. You do the math.
As if that wasn’t enough good news, look at the cost of debt service as a fraction of the US Federal budget. Now anticipate interest rates going forward in this context. Did I mention that the last T-bill auction went poorly? What if the Chinese stop showing up to purchase our new debt at non-usurious rates? Do you see what I see? The troops in Iraq might as well start packing their bags now, because by this time next year we’ll be doing well if we can scrape up enough money not borrowed from foreigners to pay for the US Coast Guard.
Xenos
My prediction is that millions are just going to walk away from their jumbo loans, much like sub-prime borrowers are doing now. I can’t see why they ought to stay, and while Fannie Mae can make a market for fixed-rate jumbos, it can’t be the market – who is going to buy all that paper? We can hardly even get anyone to show up for ten-year T-bill auctions!
srv
Republicans can never find enough ways to bankrupt this country. Economically and morally.
Walker
I do not call a $30 billion non-recourse loan (e.g. one that does not have to be paid back if Bear’s debts go south) to JPM to be sterile. Indeed, this exact point is a major controversy on the economics blogs right now.
ntr Fausto Carmona
Actually, Obama has Paul Volcker in his corner, so that’s a definite point in his favor.
ThatLeftTurnInABQ
Agreed, I’ve also read widely divergent interpretations of this move, but remember that the JPM/BSC backstop is only a small fraction of what the Fed has been up to lately. The parking of questionable collateral via the TAF is a bigger potential scandal IMHO, but we don’t really know what is going on behind the curtain there. The latter looks to me like the Fed is experimenting with an alternative path to bailing out the IB’s which would be to effectively suspend mark-to-market rules. I don’t know if they see this as only a temporary measure to slow down the unwind, or realize that once you start down this road it will be difficult to go back (in which case hello 1990’s Japan).
Walker
It is funny how much Volcker is respected now. He was hated when he jacked those interest rates to get inflation under control. The infamous scene with the tractors on C-street and all that. It is only in hindsight that we see the value of his actions.
I would be very impressed if a political leader had the balls to do that again.
TenguPhule
A rope, a tree and a horse are all we need.
Oregon guy
I see Paul Volcker as the macroeconomic version of Mr. Wolf in Pulp Fiction.
If Volcker is involved, things are going to get pretty rough.
PaulB
It seems that there should be two discussions going on right now, but I’m only seeing evidence of one.
1. What can we do about the current mess?
2. What can we do to make damn sure that this doesn’t happen again?
A discussion of the first question is happening, as it should. I don’t agree with all of the decisions made or the proposals floated, but at least it’s happening. The second discussion, arguably the more important one, doesn’t appear to be happening at all.
If we’re talking about hundreds of billions of dollars of federal bailout funds, and I think we are, why aren’t we talking about regulating these industries to make sure that we don’t see this again?
Enlightened Layperson
Let’s face it. Any time you deregulate any industry you will get a boom, followed by a bust and shakeout of the foolish (usually the majority). Fine and good in most industries. Disastrous in finance. So next time the government considers a major deregulation, it really should consider whether it can withstand the bust that inevitably follows the boom.
Doorman
This entire mess began back in the Clinton administration and when the annoucement was clearly made:’the day of big government is over”. Well in fact what that meant was the day of government oversite and regulation to out of control monetary and financial markets and the days of OSHA and standards for EPA were to be over – but the days of big government were just beginning under the Bush years post 911.
We need regulation of lending markets to stop this insane predatory and speculative crap.
Alan
I romantically used to think of free market capitalism as a formulation of efficiency, innovation and risk. But now it seems investment banks can operate without a care for bad decisions. The Fed’s got their back. It’s a new and improved Risk-Free Market Capitalism.
Tax Analyst
$30 billion non-recourse loan is a pretty sweet deal for the recipient. You can’t pay it back? OK, you just walk away, brush by us kneeling taxpayer’s on your way out the door and dump your cigar ash is our outstretched, waiting hands.
Although they might stop if they thought you could give them a good, quick blow-job.
So what does Mr. Average Taxpayer get out of this deal? Let’s see, he has given up actual cash dollars and received 30 billion in virtually non-negotiable loan paper and also gets bit in the ass by the inflation.
But he does get $600, cash-money in a month or two…although that may just be an ADVANCE on his eventual refund in his Tax filing for 2008…I’m not sure on that yet, I haven’t seen the actual wording and I’m still to involved in hacking my way through the brambles and bushes of Tax Year 2007’s shenanigans.
I remember a couple of years ago I mentioned that if the Chinese decided they could get a better (or more secure) return on their money that we could really be screwed and I was told I was a crazy alarmist and that this could never happen.
I hope it doesn’t…but I wouldn’t want to count on “Goodwill” or “sympathy” factoring into their thinking.
qwerty42
Whoa now — that sounds like “surrender”.
Asti
How about because as Grover Norquist so ineloquently put it, the plan all along was to drown government in a bathtub?
The plan is going accordingly. They don’t expect there to be a government to bail anyone/anything out next time.