It doesn’t help to bail when the boat is under water
I wrote that I didn’t think the “bailout” would work. Apparently the markets are agreeing with me.
Here’s the problem: the 700 billion dollars is to be used to buy the “toxic” (well, worthless, actually) assets of a variety of banks. These assets will be bought for prices greater than the current market price and, in principle, that will “drain the swamp” and bring back “business as usual”. However, to stretch the metaphor, no one really knows how big the swamp is. And no one really knows how many swamps there are.
Right now the focus is on unwinding the securitized sub-prime mortgages. But there is plenty of other consumer debt which has been securitized including credit card debt. How much? Well about $2.6 trillion dollars of which 37% is revolving credit ie. credit cards. (The rest are things like car loans.) How much of that will turn out to be toxic?
For a bailout to be effective it needed to address the full reality of the debt mountain consumers in the US (and Europe) have built up. And it would have had to do that in a structured, orderly, way.
Tossing money at toxic assets and raising the FDIC limits, makes it pretty clear that the great minds in Washington are at a lose as to how to do anything but crisis management. One crisis at a time.
There are a number of things which the US government could do to address the sources of the crisis. One would be to streamline the marking to market and sale of the 3 million foreclosed houses in the US. A second would be to aggressively unwind as many of the toxic assets as can be found including the non-mortgage credit assets. A third would be to significantly reduce the government’s own deficit. A fourth would be to actively participate in the creation of a value (read gold) backed world reserve currency. A fifth would be to levy taxes on credit card balances carried more than one month. A sixth would be to levy sumptuary taxes on things like TVs with greater than 40 inch screens and cars costing more than $40,000.00 and houses larger than 4000 square feet. A sixth would be a deficit reduction supercharge on incomes (from all sources) greater than 1 million dollars. A seventh would be the outlawing of earmarks. An eight would be a tax on college tuition greater than $25,000 per year.
None of these measures need be excessive and all should be a transparent as possible. The objective should be to bring personal and governmental expenditures more into line with real income.
Reality is biting.
October 6th, 2008 at 7:07 pm
The problem is that when a lending institution has an asset, they can then multiply that by 12 or up to 40 in the case of European banks. If the original asset is useless, such as paper based on a dodgy mortgage, the whole tree built upon it becomes dodgy. They can’t come up with the cash to meet obligations, then whoever they sold the 40 times stuff to becomes as insolvent as them.
CIBC got 1.1 billion from a ‘vulture fund’ to get their balance sheet ratios back.
This ain’t done yet, and the spinoff is that anyone who needs operating capital may not be able to get it, forcing profitable operations to contract or close. And the insecurity stops anyone from doing anything.
And no one will lend to a bank right now. Which forces down their assets, which forces them to sell liabilities at a loss, which gives the impression of dodginess, and the circle gets tighter.
It’s a mess. Next is more downward pressure on real estate in Canada. Already in Kelowna, -25%. I talked to a neighbor who sells real estate, he said listing prices have dropped by 10%, but nothing is moving at that. That’s getting into anyone who bought in the last year or two has lost their down payment. What if our prices drop to 2000 levels, what happens to the banks here?
Derek
October 7th, 2008 at 2:15 am
A fifth would be to levy taxes
NO. Raising any kind of taxes is not an answer anytime anywhere. One answer you missed is to have the government stop spending my money like a drunken sailor (and having been a drunken sailor, I know what that’s like). How about having the government resolve to do the job of providing police, fire and military protection, maintain the roads and fund the schools. That’s it. Forget funding “art.” That’s the job of the wealthy; a category that might one day include me if I wasn’t paying so much in taxes.
October 7th, 2008 at 4:24 am
Cost of the U.S. Congress bailout—-$700 billion
Cost of European/Asian bank bailouts (est.)—-$1.1 trillion
Political havoc resulting from Jay’s suggestions—Priceless!
Jay, congratulations for coming up with the most politically unpalatable programme imaginable. Are you hankering for an NDP majority? So, the ordinary people of America have to stop blaming those traders and executives who earned $10 million bonus’s for playing at financial voodoo and start realizing they have only their greedy little selves to blame. A tax on credit card debt? Whooee! I’ve seen plenty of arguments weighing taxes on consumption against taxes on income or even assets, but you are the first I’ve seen argue for taxes on deficits. How about taxes on missed mortgage payments, business losses and late charges at the video store too?
My late, very Victorian grandmother would have approved, although she probably would have wanted to tax sexual excess too.
Have you forgotten how a certain Canadian bank has been flooding us for several years now with ads enticing us to borrow and invest with them by assuring us that “You’re richer than you think”? The same bank that has had pretty posters all over its branches admonishing us to “Get the loan you deserve.”? And now you want the government to come in and say to Canadians: “You feckless deadbeats, how could you have been so stupid? You won’t see government managing its finances that way. Sorry, we’re going to tax you on what you don’t have to punish you for all that irresponsibility so we can keep the banks healthy.”
Sometimes economists should be advised to read less Hayek and more Lenin.
October 8th, 2008 at 3:34 pm
The National Post today said that shipments are sitting on the dock. Payment usually is by a credit note from a bank, but no one trusts the notes, so the shipment doesn’t go.
This is getting rather hairy.
Derek