Commentators keep trying to explain the financial meltdown and subsequent bailout debate by using analogies that "average Americans" can understand. We hear such things as "imagine Wall Street was your kid that ate a big bag of candy and got sick, then wanted more candy," etc.
The problem is that the calamity is so bad partly because it is not simple. The venality behind it is something everyone should understand (and many "average Americans," with their get-rich-through-liar-loan-financed-rent-houses schemes participated in). But the essential mechanics and details of how we got here, and how the situation might be improved, are highly complex. This is a stark reminder of a danger facing us: America is saddled with one of the least informed electorates of an advanced nation, and one hardly as intelligent or engaged as their forebears who actually built the wealth in money, institutions and ideas that we are now rapidly throwing away. It shows the risk of the continued governance by "conservatism," which by its very nature can’t handle complexity.
Here’s an analogy for the bailout: triage, longer-term care and rehab. The paramedics and ER personnel need to identify those that can’t be saved and set them aside, while focusing on the most life-threatening cases where the patient can still be saved, leaving the less injured for later. But I can dumb it down no further. I can only add complicating factors. As in, the paramedics have tools that will have unpredictable effects not only on the patients but also on everyone in the world. The patients’ bodies are wired into everyone else in the world. And the medics are working on injuries they never trained for.
Simple enough? Of course not.
It seems as if the immediate level-one trauma issue is lack of liquidity in the markets because of some trillion dollars in bad debt in the American system. But Hank Paulson’s Bushian demand that he be given money to make deals with no oversight was rightly a non-starter. We should be suspicious of Goldman Sachs alumnus Paulson, anyway. The rush to "do something," including the president’s "be afraid!" speech last night conjured memories of the rush into the Iraq fiasco. The deal that appears to be emerging now in Congress, which would give out the money in installments, providing oversight, while giving taxpayers an equity stake and limiting executive pay, is a better start.
It is still a dangerous plan that can produce unintended consequences. Years of gambling and greed by the smartest guys in the room got us into this mess. Putting more money down the Wall Street rathole, overseen by the Republican administration that allowed the bubble and malfeasance to happen, then denied for years it was a problem, won’t fix it. The problems are fundamental.
That Warren Buffet got into the game this week isn’t a sign that a turnaround is imminent, you greedy dolts, it’s a sign that he, like J.P. Morgan a century ago, realized the full measure of the catastrophe and its implications for America if some patriotic swells didn’t act. Analogies with the Great Depression are almost counter-productive. In many ways, especially the health of basic American institutions and trajectory of our society, today’s predicament is far worse. It is merely cloaked by the nation’s immense wealth and the legacy institutions now being swiftly vaporized. But we have to start somewhere.
And Republican John Sidney McCain III, head of the party that wrecked America, the great deregulator and whose campaign manager and closest economic adviser are among the chief culprits, needn’t rush back to Washington to "help."
But the longer-term care and rehab are essential, too. Of prime importance is restoring the overall health and balance of the American economy. It’s not just that the domestic economy has been hollowed out to the point that its main focus in recent years was the "financial services" swindles and factory work of building houses. It’s not just that American taxpayers unborn could face falling living standards to repay the profligacy. It’s not just that Wall Street has become an institution that would give a mobbed up casino a bad name by comparison. Or even the unsustainability facing us with peak oil and global warming.
We’re the world’s largest debtor, and the debt has been pissed away for nothing, on wars, no-bid contracts to Republican companies and a real-estate bubble. The dollar is no longer the world’s only reserve currency, and we’re dangerously close to an exodus of overseas investors in dollar-denominated assets. For the duhs and ignos: this will make your monster truck worth less, your gasoline for endless driving cost more and even the chicken-bone-tossing seats at NASCAR out of reach. And your creditor, bubba, that nice man from Red China, won’t let Washington gut the value of his investments like the leggy Sarah dressing a moose carcass.
So everything we do must be accompanied by a sense of how it will play with our creditors. We must embark on a broad agenda of reform and national renewal (for a few ideas, see here and here).
Corporate governance must be changed to limit executive pay. Antitrust laws must be enforced and mergers given less favorable tax treatment. Anti-union and anti-worker laws must be repealed. Concentrated industries must be broken up (including in banking, where size was part of the problem) and monopolists such as Wal-Mart must be made to follow fair-trade rules so they don’t kill small competitors. Criminal executives should get hard time with heavily tattooed cellmates. Transparency, smart regulation, competition and honesty must be the guiding principles of American markets. Bubbles should be pricked early. Get tax rates back where they were under Clinton and aggressively go after the corporate tax cheats. If we can destroy Iraq, I’m sure we can make life hell for "tax havens" like the Caymans. Increase funding to research, science and schools.
And while we’re cutting off the gravy train for private contractors, we need a new New Deal with pump priming investments to build a 21st century infrastructure, including the high-speed rail and mass transit that will do the most to ease oil dependency, greenhouse gases and the environmental destruction of sprawl. And we must pull back from our imperial military adventures, which have so worsened our fiscal nightmare.
But national renewal will also require individual sacrifice, thrift and a recommitment to the principles of common good that created the great nation most of us remember, and whose fumes we’re still running on. Then, as all this reform revives the economy in expansions based on real production of real things, we pay down the federal debt.
It’s all connected. We’re out of second chances. Simple enough?
Here you go, Jon; perhaps this article will summarize the financial mess the nation is in.
Per Stephen Schwarzman, WSJ, 9/25/08; Deal Journal:
“It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.
Those loans were packaged into CDOs rated AAA, which led the invstment-banking firms (buying them) to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.
When they started defaulting, out of bad luck or bad judgement, we implemented fair-value accounting. . . You had wildly different marks for this kind of security, which led to massive write-offs by the commercial-banking and investment-banking system.
In the face of those losses . . . you needed to raise new equity . . which came from sovereign-wealth funds, in part, which then caused political resistance to sovereign-wealth funds, who predictable have withdrawn from putting money into the system . . . It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries (such as investment banks) is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.
So, that’s the story of how we got there.”
Jon, this is the most succinct explanation of this mess I know of, and I’m glad to share it with you – bitter socialist that you are. I still like your mysteries!
Be well & prosper. Terry Dudas
I found both Jon’s analogy and Terry’s explanation quite helpful. To add to the long-term care (LTC) analogy, leadership and public education are musts. Leadership with a will to get the ball rolling and ongoing public education of the ill-informed so that we have lasting change. There’s a difference between not knowing that politics affects everyone’s daily life and not having the ability to know. Again, ongoing public education of how government works is essential at the earliest possible grade level.
Sorry, Terry, but that’s the story of how we got here – from the point of view of the rich investors, banks and Wall Street.
Why are we talking about ‘bailing out’ the rich? They are not losing their homes, they are losing private jets and yachts and, maybe, their 11th home. They are not going on bread lines, they will be forced to limit their winter vacation to two weeks instead of six.
The people who are suffering are the ones who got into mortgages they can’t afford. They were encouraged to do so by the people I described above. They are 100% of their only source of equity and getting a (possibly deserved) bad credit rating that will affect them for years.
We should triage, as Jon suggests, and let the ones who lied on their loans, go under. Those who are merely stuck with an ARM that has escalated beyond their ability to pay should receive some help.
Now, that makes the problem more complex because we are talking about millions of families instead of hundreds of institutions, but doesn’t that solve a root cause of the crisis? Wouldn’t that keep the mortgage payments flowing and liquify credit?
We still need to work on Wall Street and the rest as you all have pointed out. I bought my current home three years ago, a condo. I was pre-qualified for $600,000 but chose a unit for less than $70,000. Everyone from the Real Estate Agent to the Home Inspector were shocked to hear that. Everyone thought that I should try to get something for $750,000 but I chose to live within, even below, my means.
Now, I have a mortgage payment that I could pay while working at McDonald’s (Though I don’t). Housing prices inflated the value of my place to 150% of its value in less than two years, and now its sliding back to about what I paid. But even if it slides down to 50% of what I paid, it will still meet my basic housing needs and be affordable, even if my income goes down.
Why doesn’t ‘the system’ encourage that kind of investment? Why doesn’t the government require that they do so? The answer is that everyone profits more they way things are – until the system breaks. And even then, most of the players have already made their money and are isolated from the default. But they are not isolated enough, as they are learning now.
Some of the comments here have missed the point of this blog article.
Mr. Talton isn’t walking around with his head in the clouds wondering what the IMMEDIATE PRECURSOR of the financial mess is: he reads the news voraciously, and those of us who have followed the New York Times and other links he has provided in his “The Front Page” section, and read his other blog items, know that he understands the role played by a collapse of the housing market with respect to bundled securities of failed and at-risk mortgages held as assets by some of the nation’s largest financial institutions.
What he’s SAYING is that the housing crisis was not the ONLY factor leading up to this mess; he’s also saying that if a bailout is the first step in putting the system on a healthy footing, it’s ONLY the first step; he’s saying that neither the pre-existing group of contributing factors, nor the putative “solution” being offered, can be considered in isolation, because the economy is interconnected in a dynamic and complex way, both domestically and internationally, and that the consequences of major changes to the system are ramified, may be far-reaching, and require sophisticated, systemic analysis.
He’s also saying that the system as a whole seems to be poorly understood by many in both the private and public sectors, and that whether this is the consequence of intrinsic complexity, or a poorly developed understanding of the system, or both, that actions taken to fix one problem may unpredictably cause others; and that the best way to reduce both the risk of recurrence and the risk of unwanted complications, is for legislators to take a holistic approach; otherwise, they might be left chasing their own tails.
Finally, both within this blog article, and by reference to previous blog articles (links to which are imbedded), Mr. Talton elucidated some of those interconnected factors and problems, and proposed a set of policies intended to systemically address them.