The week plus that was, after my last post, has offered lots of reinforcement for my stated angst. It was not so much the behavior of the markets, which was as anticipated, but the exposure to moronic utterances of those elected officials who we have entrusted with our well being.
Utterances by Mr. Obama and Mr. McCain were no better.
Obama made the case that the economy was the Bush economy and that McCain would be four more years of Bush. First, the mortgage, housing market mess goes back to at least early in the Clinton administration and perhaps well before that. As earlier mentioned, Fannie Mae and Freddie Mac were put in place to provide ease for those seeking to buy a house to gain financing. The intent went so far that it threw out sound credit scoring and encouragedthose with little to no hope of keeping up with payments to overbid and to still gain a mortgage. It was not just the low income folks who took advantage of the easy money. It drove the entire housing market with everyone willing to go far out on a limb to move up and keep up or ahead of the Jones’. The inflated prices that the excess credit fueled led to home equity loans on houses with inflated values that fueled still further consumer spending that was then again parlayed with growing credit card debt.
And now the party is over.
As a society and as a nation we have spent far more than we can afford and the way out of the mess, so called bailout or not will be long and painful. All we can hope for now is that it will not be a cataclysmic correction.
Henry Paulson, the Secretary of the Treasury and Ben Bernanke the Chairman of the Federal Reserve Bank have put their health and well being on the line as they struggle seven days a week and in the night time too, as they try to forge a mechanism that will hold the Apocalypse back.
Their recommended program, for the government to take the banks bad debts off their balance sheet , at a fire sale price, makes sense as we face desperation. It may not work but it is the best shot we have. The debt, taken in to the Treasuryat a major markdown from face value. All ofthe paper in question is not totally bad and the government should be able to recoup it’s investment and perhaps more, over the coming years.
It is by no means a bailout. Rather it is an attempt to use the remaining credibility of the United States of America to take one grand additional massive mortgage on the country's future. Senators, in pompous pose and Congressman awash in ignorance have berated and pilloried Paulson and Bernanke in public hearings, shaming themselves and those who voted them into power.
As some have bemoaned the load being put on the taxpayer Paulson has correctly stated that the load is all ready on the taxpayer and that to do nothing will bury the taxpayer. He is right.
Certainly clever greedy types have made a fortune catering to the wants and wishes of the not so clever but greedy citizens. The root cause is the over extension, by the public, and the willingness of the politicians to help the public, their constituents, to do just realize dreams that they cannot afford.
Now, tonight, Obama and McCain will have their first debate. I am not optimistic that much light will be shed on this key subject.
For McCain it is a critical juncture as his running mate Sarah Palin has, in her exposure to interviews by Katie Couric of CBS, failed badly. And his rush to Washington to help out in ending the congressional side show on the credit package came off as posturing with no position.
Showing posts with label Paulson. Show all posts
Showing posts with label Paulson. Show all posts
Friday, September 26, 2008
Tuesday, September 9, 2008
Capitalism, free enterprise and common sense
In a Republican administration that prides itself on global and market economies, the government has, in the last two years, stepped in to tweak the system. It has taken control of the side flippers on the pinball machine of economic well being and is trying to prevent a world wide economic tilt and I wish them well.
At the same time I think the whole mess deserves serious thought by the general public. Unfortunately this is wishful thinking.
Our economy, which the Democrats try to lay at the feet of the Bush administration, belongs to all. Until recently Bush and his administration have done virtually nothing to improve our steadily deteriorating economic foundation and it can be convincingly argued that he has hastened the erosion. However, in the end, it is the general tone and expectations of our population, egged on by politicians and fools of both parties, who, for over 60 years has generated the conditions that we now find ourselves in.
The Great Depression of the 1930's "cured" by the demands and sacrifices, in blood and treasure, of World War II, provided a pent up demand that propelled this country forward into the 1960's. As the natural momentum slowed the Republicans amplified their preaching of free enterprise and the Democrats, supposedly echoing Franklin D. Roosevelt, urged programs that would "take care of the little guy." But, in the era of the great depression that was not only what Roosevelt was trying to do. Roosevelt was desperately trying to right the economic foundations of this country, a foundation built on excesses, that had crumbled.
It is interesting to find that it is now a Republican administration that is attempting to do the same thing and using tools that were first developed in the Roosevelt administration. I do not believe that Bush is leading this effort. In fact, I have not read or heard him say anything that indicates that he even recognizes or comprehends the fundamentals of what has transpired and what the possible ramifications are.
For perhaps different reasons neither of the two candidates for president or their running mates have given any indication that they are intellectually invested in the dilemma other than to toss blame.
Out on a limb, indeed very far out on a limb, is Secretary of the Treasury Henry Paulson. Paulson, who came to government after running Goldman Sachs, the free market, capitalistic giant of Wall Street, is wielding a large club and banging around the vested interests of this era’s financial excesses. He is, using long standing powers, that are vested in his position, as well as new powers recently voted by congress, to take steps that are unprecedented since Roosevelt declared a four day bank "holiday" in 1933.
First, a year ago, he took great liberty with his powers and forced the teetering Bear, Stearns, a Wall Street firm that was a perfect model of a traders and, bare knuckled , risk takers. A firm that believed "the market price, is the market price" showing no mercy, to those on the other side of a bad bet, and forced them to eat their own cake. He forced them to sell themselves to J. P. Morgan, Chase at a pittance. He did this as Bear had made tremendous bets on the mortgage market "securities" that, as the housing bubble burst, were anything but secure.
Helping the housing boom, supported by Democrats and Republicans alike, was the creation of two companies, whose roots are historically tied to the Roosevelt era, that came to be called Fannie Mae and Freddy Mac. They were odd hybrids. Each was chartered as private, publicly traded corporations and were labeled Government Sponsored Entities. Their charter was for them to buy mortgages placed by banks, combine them into other forms of securities and sell those securities to all comers. Thus, they continuously replenished the originating banks capital creating a rolling snowball of revolving money with everyone involved taking fees. The Democrats looked at these GSE’s as a way to promote home ownership for the lower end of the middle class and the Republicans looked at them as engines of infinite liquidity and profit for all. The buyers of the securities issued by the GSE’s, banks, foreign and domestic, foreign government sovereign funds, etc. considered the investments to be implicitly backed by the United States government but nowhere did the securities that the Fannie’s issued state that they had the "full faith and backing" of our government. Still, the Fannie’s sold, or guaranteed, in the neighborhood of at least $ 5 trillion of paper.
Alas, some of the ultimate mortgages that backed the Fannie’s paper, in total fully one half of all mortgages in place in this country, started to sink rapidly in value as those who had been urged to buy homes, that they really could not afford, with mortgages that should never have been written, fell into foreclosure. All of a sudden the buyers of Fannie paper, the banks of Europe, China, Russia, etc. got very nervous. Paulson, fully realizing that a collapse of the Fannie’s could lead to a worldwide financial freeze up, not so different to the Great Depression, took government control of the Fannie’s using a conservatorship. Call it a gentle form of bankruptcy without using the word.
Economists have estimated that in the end this debacle may cost us taxpayers some $100 billion to cover the rotten paper. If it works, it will be cheap.
What we must think about is what will happen if it does not work. And on the brighter side, what can we do to stop it from happening again.
At the same time I think the whole mess deserves serious thought by the general public. Unfortunately this is wishful thinking.
Our economy, which the Democrats try to lay at the feet of the Bush administration, belongs to all. Until recently Bush and his administration have done virtually nothing to improve our steadily deteriorating economic foundation and it can be convincingly argued that he has hastened the erosion. However, in the end, it is the general tone and expectations of our population, egged on by politicians and fools of both parties, who, for over 60 years has generated the conditions that we now find ourselves in.
The Great Depression of the 1930's "cured" by the demands and sacrifices, in blood and treasure, of World War II, provided a pent up demand that propelled this country forward into the 1960's. As the natural momentum slowed the Republicans amplified their preaching of free enterprise and the Democrats, supposedly echoing Franklin D. Roosevelt, urged programs that would "take care of the little guy." But, in the era of the great depression that was not only what Roosevelt was trying to do. Roosevelt was desperately trying to right the economic foundations of this country, a foundation built on excesses, that had crumbled.
It is interesting to find that it is now a Republican administration that is attempting to do the same thing and using tools that were first developed in the Roosevelt administration. I do not believe that Bush is leading this effort. In fact, I have not read or heard him say anything that indicates that he even recognizes or comprehends the fundamentals of what has transpired and what the possible ramifications are.
For perhaps different reasons neither of the two candidates for president or their running mates have given any indication that they are intellectually invested in the dilemma other than to toss blame.
Out on a limb, indeed very far out on a limb, is Secretary of the Treasury Henry Paulson. Paulson, who came to government after running Goldman Sachs, the free market, capitalistic giant of Wall Street, is wielding a large club and banging around the vested interests of this era’s financial excesses. He is, using long standing powers, that are vested in his position, as well as new powers recently voted by congress, to take steps that are unprecedented since Roosevelt declared a four day bank "holiday" in 1933.
First, a year ago, he took great liberty with his powers and forced the teetering Bear, Stearns, a Wall Street firm that was a perfect model of a traders and, bare knuckled , risk takers. A firm that believed "the market price, is the market price" showing no mercy, to those on the other side of a bad bet, and forced them to eat their own cake. He forced them to sell themselves to J. P. Morgan, Chase at a pittance. He did this as Bear had made tremendous bets on the mortgage market "securities" that, as the housing bubble burst, were anything but secure.
Helping the housing boom, supported by Democrats and Republicans alike, was the creation of two companies, whose roots are historically tied to the Roosevelt era, that came to be called Fannie Mae and Freddy Mac. They were odd hybrids. Each was chartered as private, publicly traded corporations and were labeled Government Sponsored Entities. Their charter was for them to buy mortgages placed by banks, combine them into other forms of securities and sell those securities to all comers. Thus, they continuously replenished the originating banks capital creating a rolling snowball of revolving money with everyone involved taking fees. The Democrats looked at these GSE’s as a way to promote home ownership for the lower end of the middle class and the Republicans looked at them as engines of infinite liquidity and profit for all. The buyers of the securities issued by the GSE’s, banks, foreign and domestic, foreign government sovereign funds, etc. considered the investments to be implicitly backed by the United States government but nowhere did the securities that the Fannie’s issued state that they had the "full faith and backing" of our government. Still, the Fannie’s sold, or guaranteed, in the neighborhood of at least $ 5 trillion of paper.
Alas, some of the ultimate mortgages that backed the Fannie’s paper, in total fully one half of all mortgages in place in this country, started to sink rapidly in value as those who had been urged to buy homes, that they really could not afford, with mortgages that should never have been written, fell into foreclosure. All of a sudden the buyers of Fannie paper, the banks of Europe, China, Russia, etc. got very nervous. Paulson, fully realizing that a collapse of the Fannie’s could lead to a worldwide financial freeze up, not so different to the Great Depression, took government control of the Fannie’s using a conservatorship. Call it a gentle form of bankruptcy without using the word.
Economists have estimated that in the end this debacle may cost us taxpayers some $100 billion to cover the rotten paper. If it works, it will be cheap.
What we must think about is what will happen if it does not work. And on the brighter side, what can we do to stop it from happening again.
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