I’ve been traveling this week as the American financial markets came as close to collapse as at anytime since 1929. And make no mistake: this disaster is real, it will unfold in unexpected ways, and it won’t be an event that is over quickly such as in 1987 — or even the S&L scandal. Some early takes:
–It would be ironic if Republican John Sidney McCain III were elected and George W. Bush left one positive legacy by stabilizing the meltdown — the "let the markets rule" so-called conservatives, who saved the day thanks to mechanisms put in place by Woodrow Wilson, FDR and successive liberals. If we didn’t have tools such as the Fed, FDIC, SEC, etc. — this could have been a calamity on the order of the "panics" of the 19th century, with worldwide contagion.
–This event should totally discredit the deregulation, market-religion ideas pursued over the past 25 years — it is the direct result of these policies. But maybe not. The administration may use unprecedented intervention to save capitalism, and then go back to their Milton Friedman sock-puppet talking points. And the duhs and ignos won’t care — Obama’s black, remember?
–Gee, remember when W intended to "spend his political capital" privatizing Social Security into the toxic investment bank dumps that are now failing? Republican John Sidney McCain III still wants to do this.
–Interesting that the usual "conservative" willful incompetence didn’t happen
when the plutocrats’ money was on the line. Brownie and other hacks in a
FEMA ruined from its glory days under Bill Clinton were good enough for
the poor folks in New Orleans. But with this crisis we see real
competence and quick action on the part of Ben Bernanke and Hank
Paulson.
–And yet…this improvisation will have unintended consequences, perhaps
nasty ones. And it may not even stem the trouble. Here again, we see unsustainability
as real, now consequences, not some seminar topic about 2050. I could
go into all the open-market mechanics about how the Fed injects
liquidity, etc., but it comes down to selling more Treasury bonds and,
essentially, printing money. This is playing with inflationary fire.
Meanwhile, we the people now own Freddie, Fannie, a piece of Bear and
AIG. GM may be next. Maybe we need to buy Procter & Gamble with taxpayer money to have a more balanced portfolio.
These are huge liabilities on a government already borrowing heavily from the red Chinese and Saudis to fight two wars and give tax cuts to the rich. The consequences of such crushing debt for our foreign policy and living standards are profound. This is truly uncharted territory, and although the tools for fighting this wildfire are good liberal legacies, the idea of nationalizing these companies is not liberal. Nor is the further consolidation of the banking sector. In addition to lack of regulation, this crisis was precipitated by too much consolidation and concentration, and too little competition.
Stay tuned
Mr. Talton has pointed out in the past that:
“…you’re watching socialism — private socialism. It’s on display with the rescues of the shadow banking system — profits go to the rich while losses and costs are bourne by taxpayers, in other words, socialized.”
How very true. But perhaps there is another way to deal with the problem.
The vulnerability of the economy ultimately devolves to a housing crisis in which households are unable to make their mortgage payments: a self-perpetuating cycle where bad debt leads to depreciated home values, and these in turn lead to more bad debt since many of these non-traditional mortgage contracts have clauses that increase homeowner payments if a home’s loan-to-value ratio erodes.
Instead of buying worthless securities from corporate financial giants for 30-40 cents on the dollar, why not use that money to give homeowners what they need avoid mortgage default, as well as passing legislation designed to ameliorate the contract terms which sharply increase their monthly payments (almost double) when home prices devalue sharply, as they have.
Those homeowners would continue to pay property taxes. They would continue to keep their jobs. So, instead of vacant houses and underfunded local infrastructures, you would avoid all that: and since those mortages would avoid going into default, the debt instruments into which they are bundled would keep their value (or some significant portion of it), thereby allowing their asset values to keep the companies holding them afloat.
At the very least, it’s an idea worth extended public, political and expert debate.
Regarding the part of my comment about property taxes, yes, I think banks owe taxes on foreclosed homes. However, their former owners owe any unpaid back taxes, and it’s unclear if those would be collected. Furthermore, my understanding — and I hasten to add that I am not an expert on this subject — is that banks need not pay their share of property taxes on foreclosed properties when such taxes come due, but can defer them until closing on a new sale. That means the taxes go unpaid in the meantime, and may also be reduced while the property undergoes depreciation; and of course such costs can be added to the final sale value of the home.
One additional point: when a home is foreclosed upon, the property values of nearby homes decrease as well. To the extent that local tax revenue is based on property values, that means more crises in local economies and more neglect of people and infrastructure as budgets are cut more. Furthermore, those decreased home values mean hefty mortgage payment increases for a number of homeowners whose contract requires this when their home loan-to-value ratio erodes. That in turn implies even more mortgage payment failures as owners cannot keep up with the increased payments.
Additionally, the fall in property values in turn perpetuates the whole process, by causing the assets based on mortgages to decrease in value, which in turn means that banks holding those assets in their loan portfolio must increase their equity, which in turn (because of the credit crunch) means that more institutions are left without adequate operating capital and are candidates for failure (and, presumably, additional bailout).
So, integral to the whole process is legislative and financial assistance which gives homeowners the money they need to avoid foreclosure to begin with, otherwise the process continues to spiral downward. So, if somebody has to get a free lunch, why not the little guy instead of the fat cats on Wall Street?