Let them sweat a little

Whatever their motives, I am so glad those elephant humpers put a halt to that charade of a thumbs-up photo-op they had planned for yesterday afternoon. I called my two Senators and Rep (PA) to complain about the damn bail-out, and I was shaking with anger. That probably had to do with low glucose levels, but it certainly added to the effect. Probably need to see a doctor about that. On the upside, my blood pressure is A-OK.

I certainly wasn't the only one calling blinded by rage. I had to try several times to reach the Senators--lines were busy or went to voicemail, and the inboxes were full. The staff for Casey and Specter were like zombies, completely flat, listened to what I had to say, and said nothing in return. I think they've been taking a serious beating. It pisses me off when I hear on TV that only conservatives are complaining. My district's Rep seems a lot more relaxed. I had a long conversation with staffers who discussed their support for Barney Frank's proposals. Helped calm me down a bit.

What is our GDP? $13 Trillion? Our debt is $10 Trillion? Just throw another Trillion on there. Can't hurt. Except there are no guarantees any bail-out will work, and if it gums the system up even more adding a Trillion in debt is going to help who exactly? At this point, I see no way that the faith in the greenback can be maintained, which means we will be forced to live within our means as we watch GDP slowly decline over the short term. Why do I see no discussion of the debt in all of this?

I know Germanicu$ is sure these "unpriceable" assets are worth so much more than the confused market claims, and the NYT printed this crap to back him up, but if the going rate is zilch you don't rush in offering a premium. Chrysler is no example. That was one company that produced durable goods. Here you're looking at a systemic problem, and I don't see how it can be solved through a rapidly appreciating I.O.U.

There's other reasons why I think this whole thing smells funny:

Here's one from Devilstower, at DailyKos, asking, Why can't the good assets be sorted out from the bad ones?:

Now the real question: how many of those loans are in trouble?

Foreclosures were up a steep 79% in 2007, reaching just over 1% of mortgages. The numbers are up again so far in 2008 (though not as steeply). We could top 2% in default this year or next. There are some expectations that foreclosures could triple from today's historically high levels, meaning ultimately 3% of mortgages could be in trouble.

And that's where we get that math problem. 1% of all mortgages -- the amount now in default -- comes out to $111 billion. Triple that, and you've got $333 billion. Let's round that up to $350 billion. So even if we reach the point where three percent of all mortgages are in foreclosure, the total dollars to flat out buy all those mortgages would be half of what the Bush-Paulson-McCain plan calls for.

Then we need to factor in that a purchased mortgage isn't worth zero. After all, these documents come with property attached. Even with home prices falling and some of the homes lying around unsold, it's safe to assume that some portion of these values could be recovered. In the S&L crisis, about 70% of asset value was recovered, but let's say we don't do that well. Let's say we hit 50%. Then the real outlay for taxpayers would be around $175 billion.

Which, frankly, is a number that Wall Street should be able to handle without our help. After all, the top firms on Wall Steet payed out $120 billion in bonuses alone between 2000 and 2006. If they've got that kind of mad money, why do they need us to step in now? And why do they need twice as much as all the mortgages that are even likely to implode?

In going for $700 billion, what the Bush administration is saying is:

Our pals on the street have been very creative in coming up with instruments in which they've entangled bad mortgages with good mortgages, and rather than untangle them, would rather we keep them from all that difficult paperwork.
Oh, and while we're at it, we might as well buy up a chunk of the swaps and derivatives that were created in an unregulated shadow market so they could double-triple-quadruple dip on the value of these loans.

There's a few more reasons in this mortgage protest from economists, including several from my own grizzled institution of higher learning:

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

Just to make sure no one thinks I'm letting Republicans off the hook, Ken Houghton at Angry Bear, explains why golden parachutes and bankruptcy protection do matter:

Let me say this slowly, so even a NYT reporter can understand it: If you are taking an equity stake in a firm, one factor is how much cash the firm will have on hand. Cash paid to executives is not cash on hand, nor can it be used to produce future capital, investments, and free cashflow, or even "the miracle of compound interest." So executive pay is very much a factor in equity calculations.

Changing the bankruptcy laws is more tangential, but let's again explain this slowly. Mortgage-backed securities are, well, backed by mortgages. Their value depends directly on those payments. If it becomes easier to workout a mortgage in bankruptcy court, the holders of those MBSes are liable to (1) receive a higher value and (2) know sooner how severely their securities are impaired. So changing the bankruptcy law will, again, make the value of the assets clearer sooner. Which is especially important if we're all going to pretend that this thing is going away after two years.

Let Wall Street stew in its juice a little bit longer, and figure out a way to get it to pay for the bulk of this mess.