Lipstick on a real pig
Paulson’s dreadful scheme will become law, because Americans love their bankers. The bankers enable their collective gambling habit. Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt. At this point, the townspeople people vote to tax themselves in order to bail out the casino. Collectively, the gamblers cannot help but lose; individually they nonetheless hope to win their way out of the hole.
Americans are so deep in the hole that they might as well keep putting borrowed quarters into the one-armed bandit. They have hardly saved anything for the past 10 years. Instead, they counted on capital gains to replace the retirement savings they never put aside, first in tech stocks, then in houses. That hasn’t worked out. The S&P 500 Index of American equities today is worth what it was in 1997, after adjusting for inflation (and a pensioner who sells stock purchased in 1997 will pay a 20% capital gains tax on an illusory inflationary gain of 40%). Home prices doubled between 1997 and 2007 before falling by more than 20%, with no floor in sight. spengler asia times
I was having a chat today with a man who I do a lot of business with – “The world we knew is gone.”
He is old enough to have seen other market crises. And, to a degree he, and Spengler, are right. Despite the apparent willingness of the Americans to borrow to somehow “finese” the loony lending of their banking class, the golden crumbs have essentially stopped falling off the deals.
At some point the 3 million plus homes which have been foreclosed in the US will have to be “marked to market”. This “bailout” will not prevent that. Nor will it prevent the devastation to banks’ balance sheets of actually valuing their assets at real market value.
No, what the 700 billion is about is allowing a fraction of the transactions to be unwound without actually dealing with the underlying fact of the housing bubble.
When the dot coms died at the turn of the century the market was left to deal with them as best it could. Certainly there was liquidity injected into the market but the dot coms failed in their hundreds and took billions of notional market capitalization with them.
Pretending that the housing market (and after that the personal credit market) is somehow to be preserved from the market’s discipline is King Canute stupid.
What is needed is a real marking to market of the housing stock of America, a means of purchasing that stock and then a means of renting those houses to the people who no longer have the illusion of being able to buy them. The in rushing tide will not be stopped; but 700 billion dollars could build a lot of boats.
September 29th, 2008 at 1:25 am
I’ve read quite a few pretty intelligent-sounding arguments both for and against the bailout in the past week, and I’m still at sea. This despite having studied economics, being more or less familiar with the lingo and having dabbled in economic history. T’is a puzzlement, and a scary one!
But one objection I have to the anti-bailout “let the market correct itself” crowd is political naivity. There is a big difference between losing a pile in dot.com investments or Dutch tulips and watching millions lose their homes. The potential for personal hardship, social dislocation and a populist revolt appears much, much greater with this. Conservatives were in the political wilderness for decades because they couldn’t understand that, markets be damned, the public would not accept theories of individual freedom and financial responsibility as justifications for being resigned to the plight of a sick child, an unschooled child, a homeless aged person or a family that couldn’t afford to eat, whatever or whoever was responsible. It was only after we made our peace with the notion of collective responsibilities in these areas that we started to come back, something some diehard libertarians still don’t get. The public won’t accept millions of homeless (or even the spectre of it) whatever the Chicago school says.
There sure seems to be a lot of bi-partisan fury and even lust for punishment. Krauthammer argued against salary caps on economic grounds, but suggested only half-whimsically that a few public executions on TV might be warranted. Perhaps he had just finished reading the message in Lehman Brothers’ last annual report. (via Captain Capitalism)
September 29th, 2008 at 7:46 am
Peter, I share your “at sea” feeling. The question is how best to reach shore.
On the mortgage side a foreclosure, rent back scenario with the asset valued on the banks books at a fixed multiple of the rent actually paid might bring the required discipline back into the market without causing unnecessary hardship.
The point being that somehow all those houses are going to have to have their notional price brought into line with the real market. Where is the price discovery mechanism to do that given the sheer volume of housing involved? Regulatory regime is simply going to spend a lot of money getting it wrong. But a legal regime forcing the houses to market for people who actually will live in them might allow a real market to develop.