On Demand
It's the Economy
Wednesday, September 24, 2008
Paul O'Neill, former U.S. Treasury Secretary, discusses the proposed economic rescue plan.
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Won't injecting 700 billion dollars that we don't have devalue the dollar, send up inflation and then, in effect, send the stock market crashing again? If that happens, what did we get for our money?
The administration is very resistant to the idea of renegotiating mortgages to help individuals stay in their homes but wouldn't that help the current crisis? If these subprime mortgages continue to go bad isn't the crisis just going to continue?
Presuming that O'Neill is getting behind this bailout (and maybe I am being presumptuous there, as he is, grading on the massive Bush Administration curve, relatively competent and conscientious), I take it upon myself to present another economist's contrary opinion. This comes from an interview with Notre Dame finance professor Richard Sheehan:
"I tend to look at everything in terms of probabilities. So, you could ask the question, what's the probability that we would have a general collapse in the financial sector? If you asked me a year ago, I would have said that probability is as close to zero as you can get. If you'd asked me six months ago, I would have said .01 %, again very very small. Now, in my view, that probability has increased, so now, it's still not high. Is it 1%, is it 2%? That we're even having this discussion suggests it's not a trivial probability anymore, but Paulson will give you the perspective, well, you know, if this next domino goes, the whole castle comes down."
[transcript here: http://www.salon.com/opinion/greenwald/radio/2008/09/23/sheehan/]
So, what are we really talking about? This administration has a history of throwing up doomsday scenarios, and the Democrats and the media have a history of believing everything they say (even now, amazingly). What is our REAL risk of collapse? How substantially is this being exaggerated for the purpose of getting this legislation passed without objection?
I agree with Kate, in that it seems as though we should be trying to solve this crisis from the bottom up instead of the top down.
I am always told that the fundamental issue is that housing prices have not stabilized. How will this bailout solve that problem? Wouldn't providing low interest, fixed rate loans to low-income individuals help more? (and if the answer is "well, that's what got us into this mess" my response is to look at the LOW INTEREST and FIXED part of that). Are these individuals less likely to be creditworthy than the banks we are bailing out?
Your successor, John Snow -- does he deserve blame?
Or, given his role in Nixon and Reagan's cabinet member in charge of regulation, and then as CEO of public/private rail giant CSX -- could he just be our savior?
http://en.wikipedia.org/wiki/John_W._Snow
Could you ask Mr. O'Neill his thought on a concept I've seen flogged to death on the Internet?
Is the Community Reinvestment Act responsible for today's difficulties because banks were "forced to write mortgages to poor people who could not afford them?"
Thanks!
KC-
Well put!!
Scenario 1:
Banks get $700 billion and bankruptcy courts enable homeowners to reduce their home prices, probably by half, in court, sticking banks with billions in evaporated accounts receivable.
Scenario 2:
US Govt. does neither.
Given that (possible) choice, which is your preference?
Brian, I dont believe we should trust Mr. Henry Paulson rushing congress to pass this bail out, we personally never trust anyone who rushes us to make a desision. I belive wall street is trying to hijack the american economy with their greed and misjudgements now tax payers have no desision in the matter.
Paulson wants 700 trillion with no oversight?
He has been wrong for so long. He said the economy was strong all summer. Even I knew it was not.
"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
Insane.
Don't give it to him!
Derek: This may well work, and cost less than the alternative, but why should homeowners who knowingly signed up for adjustable rate loans get a fixed, low-rate loan? Why not the rest of the population also? The moral hazard issue should apply to individuals as well as corporations. I know a lot of "middle class" people who spend in excess of 50% of their income to live in the NYC Metro, who would love their rates lowered at the taxpayers expense.
As always, it's those who pay taxes, live up to to agreements and make their own way in the true American spirit, who get screwed from the bottom and the top.
Dear American:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
Yours Faithfully Minister of Treasury Paulson
Or put more succinctly -- is this another WMD -- with Paulson playing Powell?
10 - Chuck; I agree. I'd urge you all to write your Senators and Congress-person with your views.
Giving a $700B blank check to the Treasury to avert an impeding financial Armageddon sounds much like supporting the Department of Defense's blank check to invade Iraq to avoid impending
Armageddon at the hands of weapons of mass destruction.
It is as foolish to believe that the government might not be lying this time.
Please expose the very real differences between the Resolution Trust and the present proposed bailout as they are stark. As I understand it, RTC took over banks that were insolvent, insured depositors, and liquidated the distressed properties to help recoup some of the money. What is being proposed now is a wholesale give away with no equity position for taxpayers and no assurance of proper pricing of the "assets".
Brilliant Tony.
Oh that is a lie. If we put the "full faith and credit of the US", then it is exactly the same as debt. This is just an accounting gimmick.
ATM analogy --
NO! The analogy is if a business or person needs to borrow money WITHOUT COLLATERAL -- IE NOT GOOD FOR IT -- they cannot borrow the money.
THAT IS GOOD!
Moderator--Can Brian ask about CDS/s??
Please, can some expert be asked about Credit Default Swaps, CDS's, which are, as I understand it, insurance sold on the new "innovative" financial instruments, but were underfunded--and the financial market knowing that is why there illiquidity, no credit flow. I gather there were even financial instruments based on derivatives of the CDS's, making it really Ponzi scheme-like.
No one wants to lend to someone whose "assets" may be backed by "insurance" which isnt' available bcz it isn't there.
Please, can we get a discussion about this?
Yes, of course credit is important, Mr. O'Neill, but you didn't answer the question! You jumped right to the doomsday scenario. You didn't say whether we were actually going to get there any time soon. Why aren't you answering?
For all the people calling for a bottom-up mortgage bailout -- we just had one announced last December. Obviously the bottom solution didn't work.
No blank check!
shmuck.
you were obliged to tell snow "for the good of the country. " when it mattered.
your book was too late to do any good in Iraq and your brilliant insights again are too late to "do any good."
I would like to see the federal government take a good portion of the 700 billion and injected into the housing side of the market to boost home sales through subsidized loan rates and loan guarantees to home buyers. We need buyers to stablizes the values in the housing market which in turn will shore up other existing housing loans.
#17, I found that on the Internet...
Call Allan Meltzer, he had good reason why NOT to give them any money at all and let it take it's natural course. He laid it out on the PBS's Newshour last night and I wouldn't be able to do it justice here were I even to try.
Never thought I would agree with Paul O'Neill but he's right.
also read Martin Wolf in today's Financial Times.
Paulson is not an unbiased advisor. all that is needed is a guarantee not a buyout.
Funny though all those Investment bankers could think of many ways to make money but can only find one way out of this crisis - to their benefit again
Of this much we've been assured :
"No harmful radiation was released."
Brian, I am suprised with you... The sub-prime mortgage disaster was flawed from its inception. It was designed to lend money to mostly the urban poor. People who in actuality could not afford a home. They were deceived because their mortgage started off very low and then exploded into an instrument that the mortgagee could not ultimately afford. This resulted in massive forclosures nationwide. Those resopnsible at Freddie Mac and Fannie Mae should be indicted
not rewarded... As Frankin said " the sting in any rebuke is the truth" NPV
I understand why you bundle and sell mortgage loans, but I don't understand who buys them in the bundles and why, or what do they get out of it. Can you explain?
This is so reminiscent of the Iraq war. The fake sense of urgency, the pressure on Congress to rubber stamp this ludicrous 'bail out' and the sky is falling approach by Paulson just reek of Bush's MO.
And guess what - in January when a new administration takes over, Paulson and his cohorts will be back on Wall Street and will be hired by the government to manage the buyout of these trashy assets etc.
Sound any different from what's being going on in the last 8 years.
War in Iraq - who benefits? Halliburton.
Katrina - give someone the contract to provide trailers that were full of formedahyde. Consequences - NONE!
We cannot give homeowners who are defaulting on their mortgage $$$ if they don't have jobs and the income necessary to make timely payments. We should try and keep people in their homes if they can and convert their high interest mortgages to reasonable rate mortgages. I don't want to bail out people who don't deserve it.
Paul O'Neill makes so much sense in his comments. I want to know that he is communicating these important ideas Senators Dodd, Schumer, and Representative Frank, at least, as soon as possible. Will you please pass this request on to him?
What specific piece of deregulation are people referring to that led to this? The fact is that these banks and the instruments they traded were never regulated in the first place, so to blame this on deregulation is merely rhetoric.
I sent my comments to Senate & House Banking committees:
PAULSON’S $700 G BAILOUT PLAN IS FINANCIAL TERRORISM
This $700 G bailout is another power-grab by this administration to usurp our rights and pocketbooks.
Please, consider these ideas:
1.Freeze foreclosures to put a floor under mortgage losses.
2.Require re-financing (time and terms re-negotiation) of other types of debt.
3.Allow the market to find its own solution – there are other players waiting for a bargain. (E.g., Merrill Lynch & 20% of Morgan Stanley were snatched up).
4.Any US Government involvement should be only on an interest-bearing loan basis. No dividends until loan repaid. Zero $$ for parachutes & bonuses.
5.Prosecute executives who lied (e.g., Robert Fuld, Stan O’Neill); Sarbanes-Oxley requires truthful representations about company’s financial health.
6.Take TIME to devise a comprehensive plan. Usually Congress responds to Bush’s gun-to-the-head tactic by rolling over and abdicating our rights.
7.Require 100% transparency and congressional oversight. It’s an outrage that Paulson wants absolute authority and an exemption from oversight.
8.No lucrative consulting contracts to the financial industry to “solve” this mess.
We know what’s going on here. Don’t underestimate our anger at Washington!
I'm no expert on this stuff, but I want to run a bank. Brilliant.
Why can't the congressional recess be postponed? Is there something more pressing they have to do on Monday?
How about one fundamental (no pun intended) new rule (actually, a return to an old rule)?
Home mortgages must be treated differently (than other loans): If you write a mortgage on a residential property, you keep the paper. You can't bundle it, securitize it, trade it. If you are sold, it moves to the buyer.
Period.
I suggest people would be a lot more careful about writing those mortgages, and more careful about administering them if they knew they had to live with that obligation, that income stream, those debtors, and that underlying property for the life of the mortgage.
I alao agree with Chuck 10 and Stella 14. The US government is committed to taking action -- it will be done soon but it doesn't have to be TODAY! Will the market fall? Probably, but right now the market is not a good barometer of anything -- up today, down tomorrow-- right now it doesn't matter.
1. OVERSIGHT IS ESSENTIAL
2. Taxpayers should have an EQUITY STAKE(BTW this was done w/ some success in Sweden a while ago -- why not follow a proven action rather than winging it?)
3. The COMMITTMENT to do whatever it takes is enough. Chuck Schumer is right -- start with $150 billion, say, and go from there.
4. NO Golden Parachutes. These guys are going down for the third time -- they're going to stop and demand more perks? Come on -- there's plenty of talent out there about to be unemployed. We'll pay them for succeeding, but paying them to FAIL? come on!!
Can someone please make clear this current credit freeze is not just about the mortgage loans?? It's about the piled on profit making selling of insurance on these, as well?
I would say read my comments of the past two days, but better:
Go to Moon of Alabama.org and read through the various posts by Bernhard (singed "b") on the financial sector crises.
He's been writing about this for years.
Mortgage loans are so much easier to understand--it's gone way beyond that.
Interesting comment at his site: things started unraveling when BushCo's SocSec privatization was killed dead. Wall St. had been hoping for this infusion of money to keep the scheme going. It needed new vig--didn't get it--that's when things began to unwind.
Now, we are where we are.
700Billion to bail out a bunch of greedy, money grubbing fraternity boys?! This money would provide a much better return if spent on universal single payer health care and on education. The rich will always find a way to accumulate more. The working class and the middle class needs the help - not to accumulate more, but to have the social safety net that provides a cushion and therefore gives the freedom to start new businesses and employ more people.
some recommended reading :
by Nassim Nicholas Taleb,
"The Black Swan: The Impact of the Highly Improbable"
see also:
http://www.fooledbyrandomness.com/
George (the first commenter) is a wise person
George,
I don't think that currency inflation in and of itself entails a stock market crash---or even significant downward pressure on share prices.
Ask yourself: if prices generally trend up, would you expect that factor by itself to mean that stock share prices are going to fall? Why?
Inflation can accompany rising _or_ falling stock share prices, can't it? Seems so to me.
I'm glad none of you were around in 30's. We'd all still be selling apples.
to manhattan (31), you asked about mortgage packaging and how this mess got going.
Take a look at Paul Solman's blog on PBS. He breaks it all down. His "business desk" blog is at:
http://www.pbs.org/newshour/
Brian, you didn't seem to take O'Neill's proposal seriously, but it was the savviest alternative to a blank check bailout I've heard so far. It could calm and stabilize the market without giving Paulson billions upfront, by responding directly to the credit freeze crisis with a federal guarantee at maturity of the actual value of the toxic debt.
I agree that inflation can accompany rising or falling stock prices, but don't you think it's an artificial product of the extreme over-production of money and credit and interest rate fixing? Inflation is fine if real money also trickled down to regular people upon inflation instead of way after the fact. Hence people would be able to afford their lives on normal salaries. This entire scenario right now just seems like a suppression of the middle/lower class. Should not the ebbs and flows of the free market dictate inflation? What happens when the purchasing power of the dollar completely diminishes? And if we do give em the 700 billion, i agree with schumer somewhat, that we do it in steps and that there should be absolute transparency and congressional oversight into the matter of what happens with the money.
I just heard on Michelle Martin's show that Goldman Sachs is jockeying to be one of the asset-managers in the bail-out. Can this be!!! Is this akin to the fox guarding the hen-house?
Also, who is AIG. I note the total absence of any identification of the responsible parties who got us into this mess. Are they also going to be allowed to "manage" the assets that the Government will have bought in this buy-out?
An overweight patient comes to the hospital with a heartattack - do you argue with him he should not have fries with mayo or do you operate the patient, save his life, and then take corrective action?
I work in the finance industry. We are a capitalistic system last time I checked and everything runs via some form of CASH.
The overleverage hangover and fallout from the irrational exuberance on the housing bubble from all angles (borrowers, lenders, packagers, politicians) threatens the very life blood line of our economy.
We have seen what not caring for the patient can get us in 1929. Do we really want to get there again? First fix the patient, then deal with the prescription in order to avoid a repeat.
From what I can see the FED may stand to make a chunck of money, the loan for AIG isn't exactly a bad deal - think many business leaders would love to run that sort of takeover if they had the balancesheet!
Let the FED buy the mortgages on the low, before there was no bid in the market which is toxic, now if the FED comes in there will be a bid and most likely these securities are so far discounted they stand to make a pretty penny on that as well!
Nobody wants to look at this and say its a good deal. 700 bil to 1.2 tril the figures thrown out there are gravely mistaken. To me it appears as though they are discounting that the govrenment gets 0 back in return.
Kate and Derek, the problem is not that house prices haven't stabalized. The problem is that house prices haven't fallen enough.
This was an asset bubble just like dotcom, tulip bulbs or beanie babies. The only solution is to let house prices fall to the point where there are enough qualfied buyers who can afford to buy them. Right now there aren't because houses are still grossly overpriced.
The alternative suggested, to artificially prop up home prices, will only have the effect of killing the housing market until wage inflation catches up with housing prices. This could take decades.
The solution is to forclose on people. If someone can't pay their mortgage they can't afford their house and will be better off finding a house or rental they can afford.
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