[Kiwi]

Another view:

CNN -Glenn Beck

[DbPhoenix]

Commentary: Bailing out distressed workers, for a change

By Michael Zweig

NEW YORK (Reuters.com) -- Treasury Secretary Henry Paulson and Federal Reserve Board Chair Ben Bernanke have been in Washington demanding immediate relief for Wall Street, repeatedly emphasizing claims of impending doom for the United States and the entire globe if we do not accede to their rescue plan.

Their behavior is today's equivalent of Condoleezza Rice's infamous evocation of a mushroom cloud as she played her part in frightening Americans in the pre-election (2002) stampede to war in Iraq. Now, as then, the same people who did nothing to protect the country despite many explicit warnings are demanding unlimited authority to dig us deeper into the hole.

The Wall Street debacle has had the added effect of diverting Congressional, media, and public attention from the continuing mortgage foreclosure crisis, which is far from over. In the months leading up to the crashing end of the sub-prime mortgage frenzy in April 2007, increasing numbers of these mortgages were issued, with a two-year period until the terms reset. This means that in the coming eight months we will see an accelerating rate of resets and over a million more homeowners facing foreclosure.

This coming tsunami of grief is only one aspect of the widespread economic distress working people are experiencing throughout the country. In a study about to be released by the Center for Study of Working Class Life at the State University of New York at Stony Brook, we report that economically distressed working class people account for 20.9 percent of all households in the U.S., nearly double the poverty rate, based on U.S. Census data.

They are cashiers, home health care workers, truck drivers, janitors, retail salespeople, secretaries, and many other people we see and rely on every day. They are people whose income is so low they cannot rise above the lowest twenty-five percent of housing stock for a family of their size in the community where they live without spending more than the government standard of thirty percent of income for housing. In short, they are over sixty million people in nearly twenty-three million households with eighteen million kids who can't afford to pay for the basic necessities of housing, food, medical care, and transportation.

We must not allow the financial drama now gripping the country to obscure and push aside the need working people have for real and immediate relief. Congress should act to forestall the foreclosures and to increase income support programs like food stamps, housing subsidies, unemployment compensation, and the Earned Income Tax Credit. They should send money to the states to relieve their budget deficits and restore cuts to Medicaid and other state-based programs for economically distressed people. And while they are throwing hundreds of billions of dollars at Wall Street, they can well afford $110 billion to send an average $2,000 check to each of the fifty-five million households earning less than $50,000 a year, half of the country.

We need to recognize and alleviate the crisis in working America. .

http://www.reuters.com/article/reute...48O8JD20080926

[thrunner]

Originally Posted by DbPhoenix »

Commentary: Bailing out distressed workers, for a change
By Michael Zweig

Michael Zweig, not to be confused with Martin Zweig.


Martin, who once owned the most expensive apartment in NYC.

[DbPhoenix]

Michael has a lot more hair than Marty does these days.....

[DbPhoenix]

But the biggest unknown is whether the government’s pledge to help homeowners at risk of losing their homes will be any more effective than past efforts to slow the pace of defaults and foreclosures. Until that tide begins to turn, the housing market will continue to be bloated with big inventories of bank-owned houses put back on the market at fire-sale prices. That puts downward pressure on all home prices. And until home prices stabilize, it’s impossible to assign a value to the troubled investments at the heart of Wall Street's problems.

http://www.msnbc.msn.com/id/26931454/

[DbPhoenix]

Commentary: Bankruptcy, not bailout, is the right answer

By Jeffrey A. Miron
Special to CNN

Editor's note: Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/

[DbPhoenix]

Commentary: Is this the start of another Great Depression?

By Barry Eichengreen
Special to CNN

Editor's Note: Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. He is the author of "Golden Fetters: the Gold Standard and the Great Depression, 1919-1939."

BERKELEY, California (CNN) -- Every time the economy and stock market turn down, financial historians get predictable calls from reporters.

Could this be the start of another Great Depression? Could "it" possibly happen again? My stock answer has always been no.

The Great Depression resulted from a series of economic and financial shocks -- the end of a housing bubble in 1926 and the end of a high-tech bubble in 1929 -- but also from truly breathtaking neglect and incompetence on the part of policymakers.

It couldn't happen again precisely because policymakers know this history. Fed Chairman Ben Bernanke is a student of the Great Depression. Treasury Secretary Henry Paulson remembers the mistakes of Andrew Mellon, Herbert Hoover's treasury secretary.

We can be confident, I always answered, that there will not be another Great Depression because policymakers have read financial histories like mine. At least that was my line until recently. Now I have stopped taking reporters' calls.

The first thing that made the Great Depression great, of course, was the Fed's failure to act. It basically stood by as the banking system and the economy collapsed around it. This time, in contrast, the Fed can hardly be criticized for inaction. Not only has it cut rates, but it has rolled out one new unprecedented initiative after another.
Unfortunately, it has reacted more than acted. First, it provided funds to the commercial banks. Then, it targeted broker-dealers. Now, it is desperately propping up the commercial paper market. All the while however, the problem has been infecting new parts of the financial system.

One thing that restrained the Fed in the 1930s was the fear that rate cuts might cause capital to flee to other countries and the dollar to crash. The danger was that the same liquidity that the Fed poured in through the top of the bucket might just leak back out through these holes in the bottom.

There was a solution: coordinated rate cuts here and in Europe. Unfortunately, central bankers couldn't agree on what was needed. The result was further instability.
That central banks have learned this lesson of history and now see the need for coordinated action is at least one ground for hope. The problem is that they have already used their bullets.

U.S. Treasury bill rates have essentially fallen to zero, and the Fed's policy interest rates are only slightly above that level. Central banks are out of ammunition. This is no longer a problem they can solve by themselves.

What is needed now is Treasury action to address what has morphed into a global banking crisis. Between 1930 and 1933, not just the U.S. but also Europe and Latin America experienced rolling banking crises.

When Austria took desperate measures to prop up its banking system, its banking crisis only shifted to Germany. When Germany did the same, the crisis spread to the United States.

This was beggar-thy-neighbor policy at its worst. We have seen some disturbing evidence of the same in recent weeks, as when Ireland unilaterally guaranteed all bank deposits and thereby sucked funds out of the British banking system.

G7 leaders, when they meet in Washington at the end of this week [10 Oct], need to explain exactly how they will address this aspect of the problem. They need to commit money to recapitalizing their banking systems -- now, and not next week.

The U.K., which has just announced a $50 billion plan for bank recapitalization, has shown how this can be done in a matter of days. But a coordinated initiative will require the U.S. to put up a considerably larger sum.

My recommendation would be to abandon the idea of reverse auctions for toxic assets and instead use the $700 billion of the recently passed rescue plan for bank recapitalization. Although the Great Depression started in 1929, it took until 1933 for American leaders to grasp this nettle and recapitalize the banks. We can't afford to wait for years this time around.

A final thing that made the Great Depression such a catastrophe was that some of the worst shocks occurred right before the 1932 presidential election. There then followed an extended interregnum between the election and inauguration of the new president when no one was in charge.

The outgoing president, Hoover, asked his successor designate, Franklin Roosevelt, to cooperate with him on joint statements and policies, but FDR refused to do so. Meanwhile, the banking crisis deepened. Corporations failed.

The economy was allowed to spiral downward. It was this disaster that led us to amend the constitution to shorten the time between presidential election and inauguration from 4 to 2½ months.

The implication is clear. The two presidential candidates should be assembling their financial SWAT teams now. Paulson should promise that they will be invited into his office on November 5. This problem cannot wait until Inauguration Day.

http://www.cnn.com/2008/POLITICS/10/...ion=cnn_latest

[DbPhoenix]

What comes after the Great Unwinding?

By James Saft

CHARLESTON, South Carolina (Reuters) - Yes, Virginia, the banking crisis will one day end, but what comes after promises to be even more arduous.

With the solvency of the western banking system seriously in question, there is a temptation to hope that if only the latest bold last ditch rescue plan will work we can go back to the good old days of 2006.

But it's possible to construct an argument that the banking crisis is just the cold sweat, not the flu that follows on. The problem is not just that the banking system has been broken by an orgy of foolish lending, but moreover that huge swathes of the global economy are predicated on that foolish lending and the consumption it allowed.

The bubble wasn't just in real estate, leaving the financial system holding the bag, the bubble was in consumption.

That is not to say that the current scrambling to save the system is pointless; there is a very big difference in the damage that will be done by a disorderly deleveraging compared with a slightly slower, more controlled one.

The banking crisis will have very serious negative effects on the real economy, and the cost will grow. This is true even if the ATM machines continue working, our deposits are safe and gold, bullets, canned goods and bottled water don't become 2008's best asset allocation choices.

The core of the issue isn't even solvency. It's the way in which the debt which is causing the banking insolvency distorted, distended and hollowed out economies around the world.

It caused a massive misallocation in the English speaking economies into property and into consumption that could only seem to make sense to people drunk on property price appreciation. It caused a less huge but still significant misallocation elsewhere; I think we will see that a lot of what was being produced by Europe and Asia's vibrant export industries were products that America and Britain will find they can do without, or with much less of.

Don't get me wrong: the banking crisis is extraordinarily dangerous, but the changes in the global economy that are needed are even more profound. Savings rates are going to need to rise in the developed economies of the English speaking world, and consumption drop. Those economies are also going to have to place a higher priority on producing goods and services they can sell abroad.

MARBLE COUNTERTOPS AND PERSONAL TRAINERS

There are lots of parts of the "service economy" that very likely won't exist in two years time, or only in a very feeble way. Take for example the phenomenon in the United States and Britain of downsized late middle-aged people setting up small service businesses. Very often they used a combination of their redundancy payment plus equity extracted from their houses to provide themselves with working capital, and often to supplement their earnings.

So, someone who, for the purposes of argument, used to work for IBM in the Hudson Valley starts a business installing marble countertops. For four of the last six years that has been a good business, but the people paying for it were only able and willing to do it so long as the illusion that consumption is investment could be maintained. That is over, and significant parts of the U.S. economy will need to be repurposed, and will need to do so at a time when we are suffering asset price deflation and may well get real deflation. The recession will be long and probably ugly.

Or consider a very typical British story, a woman who hating the grind of her job at an insurance company and possessed of a modest house that is now worth 13 times her annual wage, decides to set up shop as a personal trainer. She's done reasonably well and had a great deal of flexibility and satisfaction. But her clients will likely cut back on personal training as times get tough.

Just think about your own lives and the people you know: how many of them do jobs that didn't exist 15 years ago but have nothing really to do with new technology? Many of those jobs are enjoyable and worthwhile offshoots of a credit bubble and will have a very difficult time surviving its demise.

Similarly, it will be tough for those English speaking economies' global enablers. China will need to find somewhere else to sell many of its goods. The grand bargain of China buying U.S. Treasury bonds to finance consumption in the United States will come under enormous and dangerous strain.

Europe too, as well as other exporters, will hit difficulties; not just in their banking systems, which helped to finance the binge, but in their automotive and consumer electronic industries, just to name two.

There is no doubt the needed changes can happen and that these innovative and creative economies can rebalance. But it is going to be very painful.

http://www.reuters.com/article/reute...4993M120081010