Wednesday, September 24, 2008

A Metaphor for Subprime America

An eerily prophetic excerpt from Thomas Friedman's "Hot, Flat and Crowded: Why We Need a Green Revolution--and How it Can Renew America",
In some ways, the subprime mortgage mess and housing crisis are metaphors for what has come over America in recent years: A certain connection between hard work, achievement, and accountability has been broken. We’ve become a subprime nation that thinks it can just borrow its way to prosperity—putting nothing down and making no payments for two years. Subprime lenders told us that we could have the American dream—a home of our own—without the discipline or sacrifice that home ownership requires. We didn’t need to study hard and build a solid educational foundation. We didn’t need to save an build a solid credit record. The bank around the corner or online would borrow the money from China and lend it to us—with a credit check no more intrusive than the check you get at the airport when they make sure the name on your airline ticket matches the one on your driver’s license. When the whole pyramid scheme, operated by some of our best financial institutions, collapsed, everyone from simple homeowners to unscrupulous lenders looked to the government for a bailout. The politicians accommodated them, even though everyone knew that the lenders had not been betting that their customers’ penchant for hard work or frugality or innovation would enable them to make the payments. They were simply betting that the housing bubble would keep driving up the prices of homes and that mortgages rates would keep falling—that the market would bail everybody out forever. It did—until it didn’t. As with out houses, so with our country: We have been mortgaging our future rather than investing in it?
So, the question then becomes, what to invest in?

Sunday, September 21, 2008

Concerns About the Bailout

An argument I continue to hear in support of the $700 billion dollar bailout has been that because assets are clogging up the system, credit could be very difficult to obtain if the federal government doesn't step in, quickly. I wonder if easy access to credit, or desire for that credit, wasn't the problem in the first place. From Naked Capitalism,
The US needs to wean itself of unsustainable overconsumption, and since consumption has come to depend on growth in indebtedness, a reversal, however painful, is necessary. Our excesses have been so great that there is no way out of this that does not lead to a general fall in living standards (note that the officialdom in the UK is willing to say that, but since perpetual prosperity is a God-given right in America, admitting we will be getting poorer is verboten). Thus, a sharp contraction in lending seems inevitable; the trick is to prevent it from crossing the tipping point into a vicious, accelerating downward spiral.
Naked Capitalism goes on to summarized two problems with the proposed legislation. The first comes from the direct wording of the bill, "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." So, this bill grants the Secretary of the Treasury power that would exempt him from judicial or legislative review? Not a huge fan.

Secondly, the bill does NOT require the federal government to pay market value for these mortgages. Imagine that, lenders holding the federal government hostage, extracting top dollar for toxic mortgages, while tax payers flip the bill.

While such a bailout may be a necessary evil, hopefully the government does not make a bad situation worse in haste.

(The proposed $700 billion legislation is too dense to read myself, but have at it here if you'd like.)