Tuesday, September 30, 2008

Thoughts on the financial crisis


I've been following the drama in Washington over the so-called "rescue package" for banks and financial institutions, as have we all, I guess.

I'm both depressed, and mad as hell, because none of the politicians spearheading the "rescue package" are being honest about the origins of the problem. Furthermore, none of them are being honest about the future.

Let's take a look at where this all started. It's actually quite simple, and has two elements.

One is that financial markets have been steadily deregulated, and standards of supervision relaxed. This has happened because lobbyists (read: 'those who bribe legislators on behalf of outside interests') have worked steadily on politicians to get them to change laws, or amend regulatory standards, in the interests of their clients. "Need some money for your 're-election fund', Congressman? You want your son (or daughter) to get a scholarship to an Ivy League university? You need a zero-interest mortgage on a holiday property? You need the free use of a corporate jet to fly to some jet-setter's paradise for the weekend? We can help you - but first, would you please help us out by voting for (or against) this, or that, or the other law?" Money talks - and the banks and financial institutions made their money talk to politicians, so that they could make even more money. Greed. On both sides.

The second is the 'entitlement culture' that infests our political system at the moment. There are many forms of it: spending on education, housing, welfare, family assistance, and a host of other things. A couple of decades ago, pressure began to help poor families to buy their own homes. This resulted in laws encouraging 'entitlement banking' (note that there are two links there, both important). These basically penalized financial institutions if they didn't make loans to sectors of society that had historically not met their standards for an acceptable-risk loan. These laws punished banks who didn't make such loans by restricting their ability to do business in other fields. Not surprisingly, the banks complied - and the legislators compounded their folly by not only allowing, but encouraging quasi-Governmental organizations like Fannie Mae and Freddie Mac to underwrite such high-risk loans.

In other words, a very large part of the current crisis has been created by our politicians, who were either negligent in their duty to act in the best interests of the country (instead of pandering to their 'base', whoever those groups might be, or accepting money for their 're-election funds', or other benefits, from special interest groups and their lobbyists), or deliberately sought to undermine sound fiscal discipline in the interests of a partisan ideological perspective.

Those same politicians are the ones who are now trying to legislate a way out of this mess. No wonder so many Americans are profoundly suspicious of their attempts. We don't believe they're honest to begin with: and we worry about the hidden agendas in their legislation, that will funnel even more Government money - OUR money, since it's our taxes that provide it - to 'special interests' or pork-barrel politics or greedy fat-cats.

What about the actual need for a 'rescue package'? Is it truly a necessity at this time, or is it just another political smoke-screen? A few days ago I quoted H. L. Mencken:

The whole aim of practical politics is to keep the populace alarmed [and hence clamorous to be led to safety] by menacing it with an endless series of hobgoblins, all of them imaginary.


Is this whole financial mess just another hobgoblin?

Unfortunately, it's more than just a scare tactic. Many financial institutions will go broke unless they're thrown a lifeline. Whilst most of us, as individuals, may not be affected by their bankruptcy in a direct, immediate and personal way, we certainly will be affected indirectly. You see, those institutions are the ones that have bought up the ill-advised mortgages issued by 'regular' banks at the behest of politicians. They didn't only buy them: they 'securitized' them and sold them on to investors (both corporate and individual) in this country and around the world. A depressingly large proportion of the US private national debt (as opposed to State debt) is now tied up in such financial instruments. If the institutions that issued them go under, the instruments they've sold become essentially valueless - and that means that the overseas money that helps keep the US economy afloat will probably dry up, as investors will be reluctant (to put it mildly) to throw good money after bad. That certainly will affect all of us.

It's a worldwide picture. As Max Hastings wrote in England today:

We are entering a new world, the landscape of which is still shrouded in mist.

Its most obvious characteristic is that both states and peoples will have less to spend.

For years ahead, outside the oil-producing countries and gangster cultures such as that of Russia, conspicuous consumption will become unfashionable.

Just as the heady, decadent Twenties gave way to the much more sober and austere Thirties following the Crash of 1929, so in the next decade we are likely to see less champagne drunk, fewer yachts launched, the eclipse of in-yer-face extravagance.

People who make real things, as distinct from mere money, and do real jobs as distinct from manipulating idiot financial-instruments, should regain some of the respect which they lost in the Age of Greed.

Government spending will be drastically curbed. The Exchequer will lack tax revenues or borrowing capacity to pay an army of political correctness enforcers, to fund the bloated benefits system and grandiose public works.

Much of this will seem welcome to ordinary people. For years, they have recoiled - and not out of envy or meanness - from the excesses of Wall Street, the City and the Exchequer. They instinctively understood that surfing upon oceans of cash was as corrupting as drug addiction or over-eating

We have become a morally obese society. Now it is diet time, with a vengeance.

Unfortunately, however, and as I suggested here a fortnight ago, neither in Britain nor in the U.S. can we allow ourselves the luxury of revenge upon the pretty horrible and incompetent people who have got us into this mess.

It is vital that the financial system should recover from this shambles, that Wall Street and the City should once more play a dominant part in the affairs of the world.

If primacy in this field passes to Asia, as our manufacturing has already done, then our future in the 21st century will look bleak indeed.

Delicious as it would be to see some bankers swinging gently in the autumn breeze from lampposts outside their offices, we cannot afford that indulgence.

We should pray that the U.S. Congress thinks better of its impulse on Monday, prompted by the fury of the American people, who wanted to leave the bankers to face the consequences of their great failure. If they go down, we go with them.

To recall Kipling's words after the Boer War, we have had no end of a lesson. The hubris of Anglo-American capitalism has been brought low in a fashion which even three months ago would have seemed unimaginable.

All of us are going to lose money - the only question is how much. Some of us are going to forfeit jobs and homes - the only uncertainty concerns how many.


I agree with the skeptics that the currently-proposed 'rescue package' is full of pork, loaded down with handouts to 'special interests', and highly unsatisfactory at best. It needs radical change before it'll be even remotely acceptable. However, some sort of 'rescue package' is probably necessary. Whether we'll get a good one, or whether we (and our children, and our children's children) will be saddled with the catastrophically high costs of yet another Washington boondoggle, is up to us.

I urge all readers to contact their Congressional representatives and Senators, making it clear to them that we'll hold them accountable for their votes on this issue. If they vote for another boondoggle, throw them out of office at the next election. That sort of promise gets the attention of professional politicians better than almost anything else - they don't want to be thrown off the Washington gravy train!

For myself, I'd like to see any 'rescue package' include the following elements:

  • No money at all to financial institutions unless and until all executives who received massive bonuses and other rewards for getting us into this mess are forced to repay the entire amount, plus interest. If they can't be made to do so, then the institutions that paid out these inflated, ridiculous benefits should be fined an equal amount as punishment;
  • Any payout to any financial institution should be matched by the US Government being given a matching equity position in that institution, based on its current market value, to be held by a specially established Government agency, and sold as soon as prudent and possible on the open market to recoup for the Government the money it's paid out;
  • No money at all to financial institutions in exchange for their worthless investments. If such investments are financially unsound in private hands, they'll be equally unsound in Government hands;
  • If home-owners can't afford the terms of their loans, let the 'rescue agency' established by the Government buy the loans from the banks at fair market value - not the inflated value the banks put upon them, or the ridiculous valuations of homes often given by so-called 'experts', but the actual value of the home(s) concerned based upon their current market worth. That way, the 'rescue package' will directly benefit the people who most need it - ordinary Americans, not the fat-cats of the banking world.

The last point can be achieved fairly easily. Market value of any home can easily be determined by taking the price paid for all homes in a given suburb or sub-division or area over the past year; dividing the price paid for each home by its area in square feet; and coming up with an average price per square foot for homes in that area. This can be adjusted up or down by up to, say, 25% for a particularly nice or particularly poor property. That should lower the valuations involved quite substantially - and the banks will have to write off the balance on their books as a 'bad investment', which will be suitable punishment for their greed. The home-owners can then negotiate repayment terms based on actual value. If they can't meet even those payments, they don't deserve to be in their own home. That's an economic fact of life. Under those circumstances, let their homes be sold to the highest bidder and the loans liquidated.

One final wish. As part of the 'rescue package', I'd like to see every politician who contributed to the problem by pushing for inappropriate loans to those who couldn't afford them, or resisted pressure to investigate the growing problems in this area in past years, kicked out of office. Let them pay for their ideological blindness and/or lax exercise of their responsibilities by losing their seats on the gravy train.

(That's a pipe-dream, I know. If you think it'll happen, there's a bridge in Brooklyn, NYC, I'd like to sell you. Cash only, please, and in small bills.)

A 'rescue package' is probably best described right now as a necessary evil. Something will have to be done - but we must hold accountable those responsible for this mess, both legislators and private-sector executives. If we don't, this will happen again, a few years or decades down the road. So, this election, consider the voting record of your representatives and Senators on these issues - and kick out those who don't deserve your support. Vote against every last one of them who voted in favor of the 'boondoggle package' that went down last Monday. That'll be the best hope for change any of us will get right now.

As for the Presidential election, I'm not enthusiastic about either candidate, and I suspect neither is equal to the challenge facing the victor - but ask yourself this. Of the two candidates, which comes from a constituency of 'entitlement politics', has always voted in its interests, and is therefore more likely to pander to such elements? Which comes from a constituency placing greater emphasis on self-reliance and individual responsibility, and is therefore less likely to pander to 'entitlement politics' pressure groups?

You'd better vote for the second . . . or else.

Peter

2 comments:

Anonymous said...

What I don't understand is why that Congress is not being asked to share in the bitter pills. The number one condition should be the repeal of the laws [CRA] that created the mess! Dave

Griffin3 said...

Gawds. I figure on voting for the "conservative" party from what I've seen so far ... but I couldn't say with a straight face that they are not part of the "constituency of 'entitlement politics'". We've got two sorry choices this year: one party that thinks the government should spend all of our money to keep the poor people happy, another one that thinks they should spend all our money to keep the poor people under control.

And both parties define the "poor people" so broadly that us working folks can barely keep ourselves from joining them.