Begging the Banks

Treasury Secretary Henry Paulson today called on the banks that the federal government has just given $250 billion dollars to make that money available to others in the economy.

“We must restore confidence in our financial system,” Paulson said. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

The “needs of our economy” might require that the banks not hoard the money that the government has given them, but the Bush administration isn’t requiring much of anything.

I agree with Paulson that the economy will not begin to recover until there is liquidity in the credit markets.  That, indeed, was the rationale behind the government’s massive and unprecedented bailout of the financial industry.

Why, then, is Paulson asking the banks to do the only thing that justified giving them those billions of taxpayer dollars?

If, as is apparent to just about everyone, the economy will not recover until liquidity is restored to financial markets, why doesn’t the federal government require that the banks not hoard the billions that the government is giving them?

The answer is that, despite the acuteness of the financial crisis, and despite the government’s belated decision to take large scale action, the basic approach of the Bush administration has not changed.

In fact, for the past year, the Bush administration has taken a consistent, and faulty, two pronged approach to dealing with the expanding economic crisis, and this approach has not changed with the latest bailout.

This two pronged approach is

• (1) make capital available at extremely low rates to banks and financial institutions with the goal of restoring liquidity, and then
• (2) beg and plead with these same banks and financial institutions to move this capital into the economy.

As the housing and mortgage crisis worsened, Federal Reserve Chairman Ben Bernanke announced a series of cuts in interest rates.  Each time, Bernanke repeated his call for lenders to voluntarily reduce the principal on delinquent loans to adjust them for the drop in home prices, rejecting the far more more forceful action proposed by Democrats favoring legislation that would require the refinancing of hundreds of thousands of mortgages.

Of course, the banks did not voluntarily do what Bernanke requested.

Now Treasury Secretary Paulson is following the same dead end path in asking the banks to voluntarily take the actions that are needed for the restoration of the market.

The Bush adminstration’s beg and plead approach did not work in the past, and it will not work now.

Of course, no one, except the apocalypticals of the far Left and Right, and Libertarians driven crazy by ideology or alcoholism, want to see the global economy collapse.  Sane people don’t want to see bread lines or live with their guns at the ready in a bunker in the woods.

But we can now longer expect that capitalists, driven by personal gain, will voluntarily act to save the system that sustains them.

What is needed is a comprehensive and mandatory overhaul of the entire banking and financial system and the credit markets on the order of the Securities and Exchange Act of 1934.

And for that, we’ll have to wait at least until a new Congress, a new administration, and a new political and economic philosophy take over in January 2009.

I hope we last that long.

John McCain, New Deal Democrat?

Meet John McCain, New Deal Democrat.

In the presidential debate this week, McCain shocked many of fellow Republicans by proposing the largest and most expensive government intervention in the housing market in U.S. history.

Specifically, McCain announced that he would tell his treasury secretary to spend $300 billion to buy the mortgages of homeowners in financial trouble and replace them with more affordable loans.  The program, which McCain calls the American Homeownership Resurgence Plan -– there’s that word “surge” again — would be available to mortgagors for whom the property is their primary residence, who can prove they were creditworthy when the original loan was made, and who made a down payment.

According to the McCain campaign:

“John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis.”

“America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.”

“The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.”

“The McCain resurgence plan would be available to mortgage holders that:

• Live in the home (primary residence only)
• Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).”

“The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of ‘negative equity’ in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.”

“The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government’s conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit.”

This certainly doesn’t sound like a Republican plan to me.

In fact, it isn’t. 

As the New York Times has pointed out, “The mortgage renewal idea actually originated with Senator Hillary Rodham Clinton, said Charlie Black, a senior adviser to Mr. McCain. And Mrs. Clinton, who proposed the idea in a recent newspaper column, borrowed it from a Depression-era New Deal agency, the Home Owner’s Loan Corporation.”

How seriously should we take McCain’s plan?

First, we should appreciate what a stunning turn-around this proposal is for John McCain, who has previously railed against the “moral hazard” of bailing out homeowners who took out larger mortgages than they could afford.

Only last March, McCain declared — in response to the Hillary Clinton plan that McCain has now closely appropriated — that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” 

As the New York Times then observed, “Mr. McCain’s remarks on Tuesday represented a stark tonal shift from the increasing calls for helping homeowners, as he faulted not only borrowers who engaged in risky lending, but suggested that some homeowners engaged in dangerous financial practices. ‘Some Americans bought homes they couldn’t afford, betting that rising prices would make it easier to refinance later at more affordable rates,’ he said. Mr. McCain argued that even during the ongoing crisis, the vast majority of mortgage holders continued to make their payments. ‘Of those 80 million homeowners, only 55 million have a mortgage at all, and 51 million homeowners are doing what is necessary — working a second job, skipping a vacation and managing their budgets to make their payments on time,’ he said. ‘That leaves us with a puzzling situation: how could 4 million mortgages cause this much trouble for us all?’”

Second, we should note that McCain’s point man for the plan is his senior economic advisor Douglas Holtz-Eakin.  Holtz-Eakin was the Chief Economist for the President’s Council of Economic Advisors under President George W. Bush and Senior Staff Economist for President George H. W. Bush’s Council of Economic Advisors.  He was, therefore, as responsible for the deregulation that lead to the mortgage mess as any single economist could be.  (He was also the person who claimed that McCain was responsible for the invention of the Blackberry phone.)   If we are to take McCain’s proposal seriously, then we must assume that Holt-Eakin has also had a Saint Paul-like sudden conversion and is now not a Bushite but a New Deal Democrat.

Third, we should look at the conservative reaction to McCain’s plan.  If they thought that McCain was serious about his plan, they’d be exploding with condemnation and accusations of betrayal.  But, so far, the National Review has nothing to say about it.  Conservative blogs mostly call it “pandering”  — and while they’re not happy about it, they understand it as an election ploy.  The Wall Street Journal doesn’t seem very upset either, taking an uncharacteristically wait-and-see attitude toward a proposal that would violate the foundational principles of modern Republican economics: “The idea must have puzzled many viewers and we’ll reserve judgment until we see the fine print,” the Journal said.” At a glance, it doesn’t sound like something Democrats would oppose — and elections are decided on differences.”

Our conclusion?

The McCain proposal isn’t serious, and few conservatives believe that either (1) McCain will win (and therefore be in a position to implement the plan) or (2) that McCain would implement the plan if elected.

We think that McCain’s new homeowner bailout program should really be called the “McCain Campaign Resurgence Plan.” 

Falling precipitously behind in the polls, especially in so-called “swing states” like Ohio, Florida and Michigan that have been hit hard by foreclosures and falling home prices, McCain has suddenly — and unconvincingly – decided that his favorite president is not Ronald Reagan but Franklin Roosevelt.

We’re not buying it.

Nevertheless, it is a watershed moment in American political history when the Republican candidate for President — and self-described foot soldier in the Reagan Revolution — attempts to outdo the Democratic candidate as a New Deal Liberal.

UPDATE:

Now that a few days have passed and the McCain campaign has repeated its call for a $300 billion bailout of mortgage holders at taxpayer’s expense, conservatives have taken the proposal seriously enough to lambast it.

CNN.com offers a good roundup of conservative commentary: 

” In a sharply worded editorial on its Web site Thursday, the editors of The National Review — an influential bastion of conservative thought — derided the plan as “creating a level of moral hazard that is unacceptable” and called it a “gift to lenders who abandoned any sense of prudence during the boom years.”

“Prominent conservative blogger Michelle Malkin went one step further, calling the plan “rotten” and declaring on her blog, ‘We’re Screwed ’08’.”

“Matt Lewis, a contributing writer for the conservative Web site Townhall.com, told CNN the plan only further riles conservatives upset with McCain’s backing of the massive government bailout plan passed last week.”

“‘Fundamentally, the problem is John McCain accepts a lot of liberal notions, unfortunately. There is somewhat of a populist streak,’ he said. ‘Most conservatives really did not like the bailout to begin with, and this was really kind of picking at the scab’.”

 

Morals, Money and the Bailout

We’ve heard lots of moralism about the economy recently from both ends of the political spectrum.  Wall Street is guilty of greed and homeowners in trouble are guilty of irresponsibility. Instead of offering a cogent systemic analysis of how we got into this financial mess, and the best way to change our economic and financial system in order to fix it, both parties seem to prefer preaching about the wages of sin. 

But while wagging a self-righteous finger while invoking the Seven Deadly Sins (in particular Greed, Envy, Sloth, and Pride, but we could also make a case for Gluttony and Lust) makes for good politics, it is a terrible way to approach the current crisis. 

We should not expect capitalists not to be greedy.  And we should not expect consumers to want fewer or less expensive goods, including fewer and less expensive homes and cars.

The desire for more, for bigger, and for better is not the enemy of capitalism. 

Unregulated capitalism is the enemy of capitalism.

What we should expect, and what we need, is for the economic and financial system to be structured by law and regulation to channel the desires of both capitalists and consumers for more, for bigger, and for better into productive, sustainable economic growth.

Moralism won’t get us there, and will distract us from seeing the problem for what it is: a matter of systemic, not moral or individual, failure.

Catastrophe Worsens for Housing Market — Home Prices and Home Sales Fall Again

As Congress meets to bailout the financial industry and George Bush vies with Freddie Krueger for the nation’s archetypal face of visceral terror, the latest report from the Census Bureau shows that the housing catastrophe continues to get worse. 

Here’s the summary of the bad news:

• New homes sales in August dropped to the lowest level since January 1991.
• Home prices hit a four-year low. 
• Inventory continues to rise, creating more downward pressure for home prices.

And here are some of the ugly new numbers:

• New home sales had a seasonally adjusted annual rate of 460,000, down 11.5 percent from a revised 520,000 in July and down 24.5 percent from a year ago.
• Only 39,000 new homes were sold in July, the lowest level since December 1991.
• Prices for new homes were at their lowest level since September 2004.
• The median price of a new home sold in August was $221,900, down 5.5 percent from $234,900 in July and down 6.2 percent from $236,500 a year ago.
• 166,000 new homes came on the market in August, bringing total inventory to a seasonally adjusted 408,000, equal to 10.9-month supply, up from a 10.3 month supply in July.
• New home sales fell 31.9 percent in the Northeast, 2.1 percent in the South and 36.1 percent in the West. Only the Midwest showed an increase in new home sales, up 7.2 percent.
• Three out of four builders reported having to pay buyers’ closing costs or offer other incentives such as expensive features for free in order to maintain sales.

The housing market is so bad that the main cheerleader for an I-can-see-the-light-at-the-end-of-the-tunnel approach to the real estate crisis – the National Association of Realtors (NAR) – has finally admitted, albeit with NAR’s typical understatement of the obvious, that “the pendulum in the mortgage market has swung too far.”

But if you’re looking for a bright side to the nation’s residential real estate fire sale, NAR’s number one Pollyanna-in-Chief, economist Lawrence Yun, still has a bromide to offer.

“August sales reflect higher interest rates before the government takeover of Freddie Mac and Fannie Mae, and the sudden drop in mortgage interest rates over the past couple weeks is improving housing affordability,” Yun said. “With higher loan limits and a beefing up of the FHA program, all the mechanisms have been falling into place to increase mortgage availability.”

Yeah.  Right.

Fire Sale Continues for American Homes

The fire sale of American homes continues unabated, according to the latest report of the Standard & Poors’ Case-Shiller Index.

All 20 cities measured by the Case-Shiller Index reported annual declines in June, with seven cities showing price drops of more than 20 percent.

The worst losses, both for the year and for the past month, were in the former boom regions in the West and Florida.

Las Vegas lead the nation with the most severe annual decline, with values dropping 28.6 percent in the past year. Prices in Miami fell 28.3 percent, values in Phoenix dropped 27.9 percent, and in Los Angeles prices fell 25.3 percent.

The cities with the least annual declines in home value were Charlotte (-1.0 percent), Dallas (-3.2 percent), Denver (-4.7 percent), and Portland (-5.3 percent).

San Francisco led the nation with the greatest loss from May 2008 to June 2008.  The cities with the biggest drop in the past month were San Francisco (-1.8 percent), Miami (-1.7 percent), Las Vegas (-1.6 percent), San Diego (-1.5 percent), and Los Angeles (-1.4 percent).

Cities showing the greatest price increases for the past month were Denver (1.5 percent), Boston (1.2 percent), Minneapolis (1.0 percent), Dallas (0.7 percent), and Cleveland (0.7 percent).

Given these catastrophic figures, we can take some small comfort in the belief that home prices must eventually stop falling.

After all, American homes can’t be worth zero.

Can they?

Ed McMahon Finds Solution to Beverly Hills Housing Crisis

We’re sure you’ve heard about Johnny Carson’s former “Tonight Show” side-kick Ed McMahon’s financial troubles and the near foreclosure of his Beverly Hills estate.

You’ve probably also heard the news that Donald Trump offered to buy McMahon’s house and let him continue to live there.

Now the news is that the home was sold, but not to Trump.  When the sale is complete, the McMahons will move on to live somewhere else.

The home was offered for $4.6 million, marked down from an original asking price of $7 million.  McMahon had apparently taken out a loan of $4.8 million to buy the home in 1990.  According to CNN.com, he was $644,000 in arrears.

The home is located at 12000 Crest Court, Beverly Hills, CA 90210.  According to the website of real estate agent Alex Davis, the house is 7,013 square feet and on a 14,736 square foot lot with ocean views.

The agent’s website notes that “The foreign imported doors and meticulously chosen fireplaces are unlike any other. The master suite with his and hers baths and closets, overlooks the yard and sweeping canyon.” 

It is an amazing home — and you can see pictures of the house here and here.

Just this week, the New York Times published an article on the trend toward real estate downsizing by the wealthy in Los Angeles.  The article focused on Candy Spelling, widow of the television producer Aaron Spelling, who is downsizing from a 56,500-square-foot French chateau-style home called The Manor (compete with a wine-tasting room, a bowling alley, a silver room, a china room and a gift-wrapping room) to a $47 million, 16,500 square foot condominium. 

Perhaps Ed McMahon read the article and thought “Gee, if Candy Spelling can move into a condo, maybe I can, too.”

It is nice to know that there is a solution to the Beverly Hills housing crisis.

“What You Get for…$1.00” — The Housing Crisis Gets Crazy

The New York Times has a weekly real estate feature called “Property Values” that shows “What You Get for…” a certain a mount of money. 

This week the Times shows you “What You Get for…$10 Million” and it pictures palatial estates in Newport, Rhode Island, Kauari, Hawaii, and Whitefish, Montana.

But this week’s most interesting — and relevant — “What You Get for…” story wasn’t published in the Times, and the property isn’t situated in an up-scale locale.

The story was published in the Detroit News.

And the property — a cozy two story — is located in the foreclosure-ravaged Motor City.

It recently sold for $1.00 — after being on the market for for 19 days.

After reading the story, we tried an experiment. 

We went to realtor.com and looked up houses in Detroit.  For the minimum amount would put $0 and for the maximum amount we put $1000. 

The result was four more houses for $1, eight more for $100 or less, and a total of 172 properties at or under $1000.

Then we tried Cleveland, Ohio. 

The result was 10 properties available for $1 and five more for $1000 or less.

You can try the same experiment with other cities.  We think you’ll find similar results.

We noticed, too, that this example of America’s housing misery was providing aid and comfort to an old — and perhaps renewed — enemy.

The online edition of Pravda — which used to be the official newspaper of the Soviet Union and is now the official newspaper of Russia’s new bosses — put the Detroit Press story on the front page of its English language edition, just below the news about its shooting war in Georgia and South Ossetia.

President Bush Signs Housing Bill in Near Secret Without Ceremony or Photo Ops

We don’t understand why President Bush took such an under-the-radar approach to his eventual support for the new housing bill that he signed into law on Wednesday.

For months, Bush said that he opposed the bill and would veto it if it passed Congress.

Then he changed his mind.

We suspect that political polls trumped Bush’s conservative principles and that he was convinced by senior members of his party that if he followed through with his veto threat, Republicans would face an even bleaker November.

But why, then, did he appear to want to sign the bill in secret?

Instead of orchestrating a high-visibility signing ceremony, in which he could assert Republican Party leadership in dealing with the three-headed monster of the housing-mortgage-and-credit crisis, Bush opted for a muted 7 a.m. affair with only his Treasury Secretary and a few aides present. 

No members of Congress — either Republican or Democrat — were there to get a pen and a photo opportunity.

If he could, before the signing he probably would have borrowed an invisibility cloak from Harry Potter.

This seems to us to have been the worst possible outcome for Republicans and John McCain. 

First, President Bush signed a bill that he had repeatedly insisted he would veto — appearing to capitulate to political pressure and to be following the Democrats rather than leading the country on the central issues in the economy. 

Then, by signing the bill in near secret, he deprived Senator McCain and the Republican Party of an opportunity to stage their concern for beleaguered homeowners and their command of the country’s economic problems, complete with photo ops of presidential handshakes and congratulations to the Republican leadership, taking credit (however undeserved) for the government’s response to the housing crisis.

Whether the housing bill will actually help homeowners remains to be seen.

But it is clear that President Bush seems intent on it not helping Senator McCain or his struggling Republican Party.

Home Prices Fall Again — Down 15.8% From Last Year

According to the Standard & Poor’s/Case-Shiller Index, which measures the sale price of existing single family homes in 20 major metropolitan areas, prices fell another 0.9 percent in May 2008,  and were down 15.8 percent from May 2007.

File this information under “Tell Us Something We Didn’t Know.”

Actually, we knew it was bad, but we didn’t know it was this bad.

The Standard and Poors Report states that “For the second straight month, all 20 MSAs posted annual declines, nine of which are posting record lows and 10 of which are in double-digits. Both the 10-City Composite and the 20-City Composite are reporting record low annual declines.”

“Since August 2006, there has not been one month where we have seen overall price increases . . . For the month of May, markets that experienced large gains in the recent real estate boom continue to be the biggest decliners. Miami and Las Vegas were the worst performers returning -3.6% and -2.9%, respectively. On a brighter note, Charlotte and Dallas have recorded three consecutive months of positive returns. These two markets are also showing the smallest annual declines, with Charlotte own 0.2% and Dallas down 3.1% versus May of 2007. From a longer-term perspective, since January 2000, the best performing markets are Washington, Los Angeles, New York and Miami. The value of housing in Detroit is lower than it was in January 2000. Over the month, no region reported gains in excess of 1%. But for those that reported monthly declines, three were in excess of 2%.”

And with the credit market frozen, there is no end in sight to falling home prices and the housing crisis, now rapidly becoming the housing disaster.

Credit Markets are Frozen as Economy Stalls — The Fed’s Efforts to Increase Lending Fail Despite Billions to Banks

Federal Reserve Chair Ben Bernanke and his fellow monetary watchdogs have taken unprecedented steps in the past year to increase liquidity in the credit market.  They’ve cut the short-term interest rate seven times since September 2007.  They’ve committeded billions of public dollars to prevent the bankruptcy of Bear Stearns and other major financial institutions, and billions more to prop-up mortgage giants Fannie Mae and Freddie Mac.  The goal has been to stabilize the financial markets and increase liquidity — that is, to make more money available to more people and businesses.

What has been the result of the Fed’s efforts?

The answer is: Not much.

Despite the Fed’s efforts — and the billions of public dollars invested over the past year in the financial industry — the banking business has just about shut down.

In fact, it is harder now for most business to borrow money than it was before the Fed started its rating-cutting.

As the New York Times reports, “Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.  Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.”

The effect of the banks’ tight money policy could be devastating to the economy. 

Mortgage rates will continue to climb, further increasing foreclosures and heightening the housing crisis.  Those industries closely allied with real estate, such as construction, will continue to collapse.  Even successful businesses will be unable to expand, further increasing the jobless rate.  Smaller businesses, which provide a large percentage of American jobs, will be particularly hard hit, since they will be entirely frozen out of the credit market.  Bankruptcies, both large and small, will continue to spiral upward. 

What is the answer?

The Fed’s rate-cutting hasn’t worked, and the piece-meal approach being taken by Congress and the administration (including the new mortgage relief legislation) won’t work either.

What is needed is a comprehensive overhaul of the entire banking and financial system and the credit markets, including the securities laws.

And for that, we’ll have to wait at least until a new Congress and a new administration take over in January 2008.  Even then, comprehensive and systemic change is unlikely.

We need a 21st Century Franklin Roosevelt. 

Unfortunately, that’s probably impossible until we’re in the midst of a 21st Century Great Depression.