I went to the dentist this morning and had my mouth numbed. Strangely, later in the day – with my mouth still numb – my lower lip started to itch. I scratched it, but I guess because it was numb, I couldn’t appease the itching. It drove my crazy that I couldn’t solve the problem.
If I multiply this feeling by 1 Trillion, it would probably come close to how Washington and the rest of the country must feel…..instead of a painful itch there is a huge gash in the financial system and no one can do anything about it….with the most recent bailout proposal not passing.
These two articles (by Julian Van Erlach and Ben Stein (yes that Ben Stein)) awesomely describe this situation.
This crisis is huge, bigger than anyone thinks and most likely will not be resolved – even in the least bit – by a $700B bailout. Given there are $19.4 TRILLION of public securities assets in this country, how could a measly $700 Billion be causing so much trouble?
“Is it plausible that less than 0.36% truly bad assets in relation to identifiable total financial and net tangible assets is causing the jeopardy we face? Or, is the impaired and rapidly becoming impaired human and capital asset base far larger than this; and so, poses a lethal danger to real growth?”
Though Suzie Orman can probably very easily find someone you know who has extended themselves among multiple credit cards and purchased a house that there is no way they could reasonably think they could afford, greedy ordinary Americans being stupid with credit are only the tip of the iceberg…while they should share in a portion of the blame, I don’t think it all lies with them:
“….the most serious problems are not with the bundles of subprime mortgages themselves…..but with derivatives contracts tied to subprime and other dicey debt.....These wagers entail amounts many times larger than the total of subprime loans. In fact, there are roughly $62 trillion in credit-default swap derivatives out there, compared with about $1 trillion of subprime mortgages”
This echoes something I was thinking over the last few weeks, as I am upside-down on my house and would technically be considered in an “unaffordable mortgage” (as defined by the federal government – when the mortgage payment is greater than 30% of the owner’s gross income.):
Why doesn’t the government just buy up all of the houses?
This would give tax payer money right back to us, and ostensibly (I hate that word but it is used like everyday in the New York Times and I felt stupid that I didn’t know what it meant) trickle down to the securities whose values are derived from these troubled assets.
This would be the reverse of what Big Bank Hank Paulson is proposing: bailing out Wall Street and hoping that it would trickle down to taxpayers.
The problem with this, I think, is that the trickle down to Wall Street would not happen fast enough. Right now, banks aren’t lending to each other, much less corporations and businesses. Generally, Corporations and Businesses as part of their normal doings of day-to-day management, use short-term credit (“Commercial Paper”) to buy inventories, finance services, etc. If this screeches to a halt, this brings our economy to a halt.
Why aren’t banks lending to each other? It’s too risky. Most of them have these horrible swap contracts on their books. If these are marked-to-market as generally accepted accounting principles prescribe – valued at what they could actually realize in the market if sold TODAY rather than their purchase price – they would be valued at zero. Shit tons of banks would go out of business and so no one wants to lend out of fear that that will happen.
So here’s what the government should do:
- Buy up bad mortgages
- Temporarily use the Federal Reserve to offer credit facilities to credit-worthy institutions (banks/corporations) to keep the economy moving
- And, my favorite, as suggested by Ben Stein: Annul all of the credit-swap contracts.
“…..by far the most terrifying item I read in my morning paper last week was this: Mr. Paulson demanded that Congress forbid judicial review of his decisions….. if we are actually thinking about tossing the Constitution out the window, why not simply annul these credit-default swap contracts? With that done, the incomprehensibly large liability of the banks would cease, and we wouldn’t need this staggering bailout. Shouldn’t we consider making the speculators pay some of the price?”
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