While the Obama Administration has done much to be commended, the people they hired to fix this mess are sadly some of the same who got us there. Their actions reek of hubris and continued self-interest. Consider:
The picture is complete and it's quite clear. The greed-obsessed and heedless crowd who wrecked the economy continue to wield considerable power and not only duck punishment, but get rewarded with billions of dollars in taxpayer funds. While their actions in our deregulated world may be technically "legal", these people are criminals in the classic sense of the word - i.e., they knowingly endanger others with their actions and are incapable of remorse.
The officials hired to fix this situation are too enmeshed in this cozy world of corporate socialists and are unlikely to anything that might harm their former colleagues. And last, our elected officials are compromised by the corrupting influence of campaign donations and will do little, other than spouting platitudes, to challenge the status quo.
- Tim Geithner was the chairman of the NY Fed and an active participant in the fumbled, lurching responses of the Bush administration. Similarly, Larry Summers, although he says he is outraged by the meltdown, was a principle architect of the deregulation fest that got us here.
- Geithner's initial hires are dominated by investment bankers and especially recent employees of Goldman Sachs, the alma mater of Secretary Paulson. Goldman played a pivotal role in promoting credit default swaps and other sketchy derivatives (although they were nimble enough to sell early and avoid the worst of the tsunami). GS has not only taken billions directly from taxpayers; but they are a primary beneficiary of the billions of taxpayers' dollars given by AIG to its "secret" counterparties. (Unbelievably, the taxpayers own 80% of AIG, yet even Congress was denied information on who is getting billions of dollars.) In other words, Geithner and his team of Goldman alumni are donating billions of our dollars to former colleagues and employers under a cloak of secrecy.
- The administration has been unwilling to even consider forceful and timely action, such as nationalizing the most disabled banks. The delays in action only prolong the recession while the steady drip, drip of taxpayer funds continue to bail out the wealthiest of the wealthy. And the reason given for inaction is disturbing - they don't want to hurt the shareholders. Well what about the taxpayers?
- And perhaps the most disturbing thing is that these "masters of our universe" have no sense of the outrage they are perpetrating. Instead, they take it for granted that they are entitled to be bailed out ad infinitum and keep getting their swollen bonuses. Their outrage at anyone questioning their entitlement is evidenced by the absurd statement, "we need to pay huge bonuses to retain the most talented individuals". Never mind that these "most talented" have brought down our economy and thrust ordinary Americans and the rest of the world into the worst hardship since the Great Depression. They are so completely out of touch, that they actually believe their own self-serving nonsense and argue that they deserve the billions they continue to pillage.
The picture is complete and it's quite clear. The greed-obsessed and heedless crowd who wrecked the economy continue to wield considerable power and not only duck punishment, but get rewarded with billions of dollars in taxpayer funds. While their actions in our deregulated world may be technically "legal", these people are criminals in the classic sense of the word - i.e., they knowingly endanger others with their actions and are incapable of remorse.
The officials hired to fix this situation are too enmeshed in this cozy world of corporate socialists and are unlikely to anything that might harm their former colleagues. And last, our elected officials are compromised by the corrupting influence of campaign donations and will do little, other than spouting platitudes, to challenge the status quo.
Friday, October 31, 2008
The emerging mortgage bailout plan
Yesterday, the NY Times ran an article titled, "Mortgage Plan May Aid Many and Irk Others". The story described the federal proposal to assist homeowners who are at risk of foreclosure. It's great that the Feds are finally turning to the problem underpinning the crisis; however, it's unfortunate that the Bush administration continues its focus on keeping lenders whole as opposed to helping borrowers. To that end, their plan tries to assess whether it benefits the lender to let a home foreclose versus negotiate easier terms with the borrower. And, of course, if the bank chooses to work out the loan, then the federal government will guarantee it. Unfortunately, this approach, which is far more bank-friendly than consumer-friendly, raises a number of questions:
- Will banks work in good faith with consumers? To date, they haven’t. As Joe Nocera observed in a recent article, even after the Fed invested billions in them, banks have shown greater interest in new mergers than using the funds for their intended purpose - making loans
- The loan servicers tend to operate on auto-pilot when it comes to the foreclosure process. Can we trust the loan servicers to really help borrowers? Here's a clue - most of the loan servicing in the country is conducted by three banks: Chase, Bank of American and Wells Fargo. These are, of course, the three largest institutions who have capitalized on the financial crisis to grow even larger.
- Millions of loans are in jeopardy now. The federal proposal entails considering each loan separately which promises to be an enormously time-consuming process. Will this approach address the crisis quickly enough to make a difference to at risk homeowners?
- To qualify for the program, it appears that borrowers have to miss several monthly payments. As your article notes, this will incentivize many borrowers to stop making monthly payments. Others will feel they are being punished for their continuing to make payments.
- Last, the proposal ignores borrowers who were illegally or unethically prompted to refinance their homes and will continue to face foreclosure. Consider the elderly individuals who owned their homes outright but were "persuaded" to take on a subprime loan.
Saturday, October 4, 2008
The City on the Hill - A Fairy Tale for Our Times
Once upon a time there was a prosperous city high in the mountains. The reason the city was prosperous was that the surrounding hills had deposits of precious gems and gold. The people of the city were greatly admired from afar for their prosperity and the wisdom of their rulers. Many people would try to venture through the dangerous mountains to live in the city; other cities sought to emulate their advanced ways.
Of course, the wealth of the city resulted, in part, from miners who worked the rich veins of precious metals in the surrounding hills. And ordinary citizens benefited greatly when miners returned home and bought things in local stores and paid taxes. With a steady, reliable stream of wealth flowing through the city, citizens found that they could safely buy on credit, knowing that their prosperity would not abate.
Alas, no good thing lasts forever and that was the case for the city on the hill. Over time, a few of the miners grew ever wealthier and began to buy out small mining outfits. After a few years, there were just a few very large, and very powerful, mining companies left. And these companies came under pressure from their owners to generate ever more profits. Some of these profits were spent locally and so everyone was happy.
However, eventually the veins of gold were exhausted and the companies had to start looking elsewhere.
So imagine their surprise and delight when they discovered rich, untapped veins directly beneath their city. At first, the companies mined the veins on the margins of the city and didn't tell anyone what they were doing. However, inevitably the easy veins were tapped out and they had to probe deeper under the city. It was only a matter of time before citizens became aware of the growing sounds of tapping beneath their feet.
A town meeting was convened and some citizens argued that the mining companies should be prohibited from mining below the city. “They'll destroy the city!”, they argued. Others suggested permitting limited mining that wouldn't endanger the city.
The mining companies had a different perspective. They pointed out to everyone that their employees spent their earnings in the city and that the companies paid taxes* to the city government. If the city restricted their activities, they would have to move their operations . . . and money . . . elsewhere. Besides, didn't everyone know that the mining companies had a great safety record and hadn't had a major accident in nearly 80 years. This was true, but the companies didn't mention, and people had forgotten, that the city council had imposed strict safety standards after that tragic accident.
What do do? The city elders were perplexed. They didn't want citizens to get mad at them (especially with an election coming up); but they certainly didn't want to “kill the goose” that provided so much prosperity. Also, over the years, the mining companies had quietly given city elders a share in their companies and had helped them retain their lofty positions through periodic gifts.
So, the city elders sat the mining company owners down and explained the situation.
“Not to worry!” replied one owner. 'Our engineers are the best and they will make sure that our mining operations won't jeopardize the city.”
“Trust us!”, declared another. “We live here too and we would never do anything to endanger the city we love.” The speaker saluted the city's banner to punctuate his point.
And so the city elders explained to the public that the mining companies could be trusted and that government efforts to limit them would only muck things up and, in fact, might make matters even worse, because everyone knew how incompetent government bureaucrats were. And since no one really wanted the wealth to stop flowing, most everyone decided not to push the issue further.
But an odd thing happened. Over the next year or two, many of the mining company owners sold their holdings and moved far, far away (actually, they purchased some rather large islands in the Caribbean – but that's another story).
Meanwhile, back at the city on the hill, strange cracks showed up in the walls of buildings, floors began to tilt and the sounds of drilling grew ever closer.
And, one day, it happened. A section of the city collapsed into the cavern that had grown beneath it. While most of the city was intact, all mining operations had to be severely restricted. Suddenly, the survivors had to contend with the fact that the money coming into the city had declined precipitously. Making matters even worse, many of the citizens who had bought on credit couldn't pay their bills and several merchants went out of business. The merchants' employees who had lost their jobs stopped spending money and this in turn hurt the remaining merchants. The city's economy steadily spiraled downward. A formerly prosperous people were forced to live in reduced circumstances and over time, the city on the hill looked more and more like a dilapidated slum.
The citizens were furious with their leaders and forced them out of office and elected new leaders – some of whom were the same people who had warned about the dangers of mining under the city. But it was too late. Even thoughtful and competent leaders could only moderate the damage that had been done and the city continued its decline.
And the former city elders? Well, they still had their shares in the mining companies and they weren't forgotten by the mining company owners who provided them with very nice homes in their new island havens.
Epilogue
Not surprisingly, the people in other countries who had admired the city on the hill realized their folly. “That whole city was built on a bed of sand”, they declared. The once beautiful city became a laughingstock and, eventually, a cautionary tale about greed. But eventually, even the cautionary tale was forgotten.
*Actually, the mining companies paid less and less in taxes over time. They successfully persuaded the city elders that taxes reduced their profitability and that they would move elsewhere unless they were lowered.
