Thursday, September 25, 2008

The political class is failing the test 

Calculated Risk links to the various news stories that describe the collapse of negotiations today over the Paulson plan. Even taking much of the MSM reporting, blog coverage, and gum-flapping of politicians with a grain of salt, this much has become clear if it was not already obvious: Our political class has become completely dysfunctional not only when the stakes are trivial, but when they are actually, genuinely, enormous. After today, neither the Congressional leaders nor the presidential candidates of either party can be said to be taking this international crisis more seriously than their own political careers. It is as disgusting as it is tragic.


By Anonymous Anonymous, at Fri Sep 26, 12:37:00 AM:

Pelosi's "Most ethical Congress ever", isn't.  

By Blogger Miss Ladybug, at Fri Sep 26, 12:43:00 AM:

I can't say that I'm upset about the collapse of these "talks". Congress is rushing into this without everyone knowing all the facts, and now certain members of Congress are trying to lard it up with other pork (like giving even more money to criminal ACORN). Everyone needs to slow down and take a deep breath. Doing this, as presented, will create another bureaucracy that will never go away and get the federal government's fingers in yet another pie they shouldn't have access to. Congress is the one responsible for this mess, and we shouldn't so lightly accept their "solution" to it...  

By Blogger Escort81, at Fri Sep 26, 01:26:00 AM:

Prediction: 500+ point loss on the Dow tomorrow in the first hour. If no deal by Monday, another 500+ points down.

Other things being equal, the equity markets should be robust, since business is not horrible, if not all that great. The credit markets are in poor shape, and it's only a matter of time before it spills over and has an impact on the operations of good businesses unconnected the mortgage mess.

Why are House Republicans so negative on the proposal? Do they believe their constituents think that Paulson is trying to game the system for his old colleagues at Goldman Sachs? Paulson needs this circus like a hole in the head. Bernanke would, I suspect, simply like to give the politicians who don't seem to grasp intermediate economic concepts such as market price discovery mechanisms in reverse auctions an "F" as if they were hungover students in his old Princeton precept.

What's the point of making hundreds of millions of dollars during your career managing and running one of the premier financial companies in the world, then agreeing to serve your country in one of the most important finance related positions in government, only to be second guessed by the likes of Richard Shelby (who founded and still owns a title insurance company -- I wonder if he liked over a decade of easy mortgage money) or Chuck Schumer? It is going to get harder and harder to get good talent to go to Washington.

Maybe Barney Frank will resign from Congress and agree to run and manage the rescue operation. He was so on the ball about Fran and Fred being in fine shape in 2003 and not needing additional regulation, shoot, I am sure he has a better grasp on things than Bernanke and Paulson.

One thing I would do if I was senior staff to either Bernanke or Paulson would be to whip up a quick spreadsheet by state and by Congressional district showing default rates, total dollar volume of mortgages in default, number of defaulted mortgages that had greater than a 90% original loan to value ratio, number of defaulted mortgages that were interest only, number of open cases of loan fraud investigations, existing home sales price and volume data for the past five years, and other relevant discoverable facts. Then go to people like Shelby and say, "your consituents don't like this deal? -- heck, they helped cause it!"

TH is right, this is a failure of the political class thus far.  

By Anonymous Anonymous, at Fri Sep 26, 03:10:00 AM:

I'm with ladybug on this one.

I am educated in economics and math - not an expert, but I know just enough to realize that economics and finance "experts" should never be trusted. Previous successes in finance - normally due to some luck and good sales tactics - are no indicator of future successes.

Over what's becoming a long career in business, I have observed that, almost without exception, projects that must be approved in a hurry fail.  

By Blogger davod, at Fri Sep 26, 05:21:00 AM:

Paulson comes from Wall Street and he is looking for a handout not a solution.

Congress always sees a problem as how to load up the fix with expenditure not associated with fixing the problem (Money for Detroit, ACORN).

I heard a Congressman say that the market could right itself if the one trillion dollars currently sitting on the sidelines was injected back into the market. The way to do this was have a two year moritorium on the capital gains tax.

I do not know whether this would work. However, the most obvious benefit, apart from being a market based solution, is that would keep our money away from the Congress's grubby paws.  

By Blogger TigerHawk, at Fri Sep 26, 06:38:00 AM:

I agree that Paulson needs this like a hole in the head. The people I know who knew him believe that he will be extremely tough on the bid and probably end up making money for the government.

Look, responsibility for this problem is absolutely vast. Trying to sort out responsibility for it during this period is to distract ourselves dangerously.

Here's the thing. There is no way that prices for American banks can support a $25 trillion mortgage market on Jimmy Stewart balance sheets. Our high prices and huge market required capital from international investors, and that could only have been done through the MBS market. If that market remains closed, American home prices will fall much further and homes will take a very long time to be sold.  

By Anonymous Anonymous, at Fri Sep 26, 07:58:00 AM:

"It is as disgusting as it is tragic."

And it started a long time ago. my neighborhood was about 95% white in 1975, now my grandson is the only student in his class who is not in English As A Second Language class. The people in Washington just don't care about forcing that kind of change on us illegally. Bush, Feinstien, Boxer, Pelosi, Sanchez, Schwarzenegger, Correa and all of those that preceded them have selectively refused to enforce certain laws. That is a real "culture of corruption".  

By Anonymous Anonymous, at Fri Sep 26, 08:19:00 AM:

Frankly, I'm tired of people complaining about how the value of homes would go down. I live in North Jersey and in 2000, I bought my 1000 sq ft ranch house (that had a 70's living/dining room and a 50's kitchen)on a 50 by 100 ft lot for an overpriced $155,000. In 2008 I'm told that it's value has gone to $280,000 and all we've done is minor rehab!! I love my house dearly, but there is NO WAY it should be worth that much. I still think the housing market needs to correct itself. KILL THE BAILOUT - stop taking from the taxpayers. People need to learn that actions have consequences and the gov't won't and shouldn't always be there to bail them out.  

By Anonymous Anonymous, at Fri Sep 26, 09:40:00 AM:

My children would certainly profit if the price of home dropped to an affordable level. Unfortunately, our political class seems to have given us a system that required unaffordable housing in order to work. My home cost $9,900 brand new in 1950. At the height of the real estate boom it could have sold for over half a million. 3 bedrooms, one bath, no central air, $560,000.

Not so long ago only one income could be used to qualify for a mortgage. The lenders said allowing two or more incomes was going to make homes more affordable, and it did, for those who had tow or more incomes. Our neighbors once had six incomes, and six families living in one house. We have to be very careful with this current legislation, it will have far reaching effects on our quality of life.  

By Blogger D.E. Cloutier, at Fri Sep 26, 10:18:00 AM:

Michael Barone:

"Note to Paulson: The Key to Passing the $700 Billion Bailout Is Insurance"


By Blogger Dan Kauffman, at Fri Sep 26, 11:15:00 AM:

Why are House Republicans so negative on the proposal?

Maybe because the Democrats tried to mandate that a portion of funds paid back to the government be siphoned off into ACORN?

You know that supposed Housing Advocate group that keeps getting caught registering fraudulent voters?

"And this deal that’s on the table now is not a very good deal. Twenty percent of the money that should go to retire debt that will be created to solve this problem winds up in a housing organization called ACORN that is an absolute ill-run enterprise, and I can’t believe we would take money away from debt retirement to put it in a housing program that doesn’t work."  

By Blogger Dan Kauffman, at Fri Sep 26, 11:19:00 AM:

Democratic ACORN bailout

More ACORN Vote Fraud Attempts  

By Anonymous Anonymous, at Fri Sep 26, 11:48:00 AM:

Some realism about the bubble in home prices:

2000 to 2006 did experience a bubble - overinvestment, house prices being bid up rapidly in many areas.

But Tyree's point is off. GDP has grown at approximately 7.2% since 1950. If his children are buying a house which reflects that change in standard of living, the house would be $526,000 - or very close to the $560,000 that they paid.

In other words, if they are living the life of their parents, relative to the rest of the country, they were in the same ballpark.

A similar analysis of the house bought for $200K. At a 4% rate of appreciation - normally assumed for home prices in places that aren't either booming or busting - the house would be worth $273,000 today - not far off from the $280,000.

There are flip sides to this story, which I have tried to explain to real estate agents. But they are equally clueless. So I stopped.  

By Blogger Andrewdb, at Fri Sep 26, 11:51:00 AM:

I'll give you that Paulson and Bernenke are good and know what they are doing, but do you think Paulson will be there after January 20? Do you think he will be done by than?  

By Blogger D.E. Cloutier, at Fri Sep 26, 12:17:00 PM:

This comment has been removed by the author.  

By Blogger D.E. Cloutier, at Fri Sep 26, 12:19:00 PM:

Re: "bubble in home prices"

The bubble reminded me of the old joke about two farmers and a mule.

The farmers sold the mule to each other several times--each time at a profit. One day one of the farmers sold the mule to a stranger.

"Why did you do that?" the other farmer asked angrily. "How are we going to make any money?"  

By Blogger Escort81, at Fri Sep 26, 01:03:00 PM:

OK, so I am wrong about the 500+ down day on the Dow. Obviously, the market believes a deal will get done.

Andrewdb - Bernanke serves out his term at the Fed whether it is McCain or Obama in the WH. McCain might think about retaining Paulson for the sake of continuity, and because Paulson is good. Obama might think about bringing back Rubin (who lots of people in the Democratic base no longer like and regard as the guy Clinton "sold out" to -- no huge spending on social programs -- early in his presidency to keep the bond markets happy with lower deficits), and Rubin might tell him to hang in there with his old partner Paulson. Maybe Obama appoints Raines -- think he could get confirmed??

Tyree - I don't think you mean to imply that non-whites can't pay their mortgages. I can tell you that my family has owned a house on a nice suburban street outside of Philadelphia for half a century, and the composition of the neighborhood has certainly changed, but across the street is an African-American family and next door is a Korean family, both of whom are good neighbors, and do an excellent job maintaining their homes (meaning it is likely they are current on P&I). Don't confuse race with creditworthiness, no matter how correlated you think they are. There are plenty of white folks who took out sub-prime mortgages and defaulted. Remember, there are more whites on welfare than there are non-whites. There is only one color here that is important -- green -- as in, do you have enough cash flow to pay your mortgage and your bills? I know Michelle Malkin is arguing that illegal immigrants were a major cause of widespread sub-prime mortgage defaults, and tries to present some interesting anecdotal data focusing on counties in certain states where both default rates are high and the population of illegal immigrants is high, but I am not buying that. That would be a lot of fake SSNs, and you can't possibly account for the scope of the problem by looking at a subset of the population that otherwise tries to live under the radar. None of this excuses Barney Frank's denial in 2003 (which should play on an endless video loop) that Fran and Fred were fine and needed no further oversight, when proposals were coming from the other side of the aisle to do just that.

Dan - Obviosuly, no carving up of the "profit" should be done until the entire facility is made whole to the taxpayers. That is one problem with the language cited in the Hot Air link you provided -- "each property." In this crisis, can't both sides agree that rather than earmarking profit distrubutions (if any), it would just go toward retiring the national debt?

Anon 3:10 AM - see this piece in the Economist, and the 12th paragraph indicates that the early elements of this plan have been in the works for a month. I see your point about rushing, but some things done under exigent circumstances actually work out (the Berlin airlift?),

DEC - good link re: insurance. I don't think that greatly alters the size of the facility that is needed. Whether the government is acting as insurer or purchaser, I think the overall scope of the problem is the same. Both can be done -- it's not mutually exclusive. I suppose the premiums taken in would offset outflows to buy securities to some small extent, but there's a good chance that there would be payout on some of those policies anyway. This is a classic water balloon problem -- squeeze one end and the other end gets fatter.  

By Anonymous Anonymous, at Fri Sep 26, 01:40:00 PM:

Corncob ... the reality is that too few of us want to live like our parents.

I don't know about you, but my parents didn't pay for TV, cellphones, internet service, computers, IPODs, electronic toys, lease cars, wear designer clothes, or expect to live like a doctor or lawyer or mythical high wage person. We didn't aspire to dress, speak or live like rap stars, etc. Not all of us were destined to go to college, and we believed we'd be just fine working in trades. And we didn't expect to put a family of 4 into a 4-5000 foot McMansion with the Lux vehicles filling up the garage. Mom didn't need to work, so it didn't take a village. Dad mowed the lawn, and you helped. Mom cooked and you did dishes, and vacuumed. You did it for an allowance, perhaps. Or you did it in protest, looking for the tool to get the ol man's shoe out of your butt after he kicked it.

The trouble here is that people are stuck in some fantasy about all the crap they think they cannot live without, are entitled to, and refuse to do without. To steal a line from Fight Club ... and I paraphrase ... we work jobs we hate, to buy stuff we don't need ...

And I think that sums it up.  

By Blogger Dawnfire82, at Fri Sep 26, 02:22:00 PM:

I've not been paying a super amount of attention to all of this because, frankly, most of it is over my head.

A hypothesis on the political stalemate, however...

The House Republicans and Democrats are in a game of chicken. The Dems could just ram through whatever legislation they please; there's no filibuster rule for the House like there is in the Senate. But they won't. They want Republican support so they can say that their 'solution' is bi-partisan.

I put solution in scare quotes because if they truly thought they had a solution, they would want credit for it. But they're trying to avoid *blame.*

Hmm. Why would that be? I read yesterday a whole list of things that unnamed Democrats wanted to include in the 'solution,' things that smelled a lot like trojan horse socialism. Apparently, these ideas are at the root of the 'screaming matches' in the closed meetings yesterday. Naturally, the Republicans won't have anything to do with them.

The Democrats appear to have said, 'fine, then nothing will get done because we won't move without you.'

So it's a game of chicken; who will crack and give in first? The Democrats, who want to socialize the country and think that this is a great time to kick start things, but don't want to be solely responsible for the after-effects? Or the Republicans, who have no intention of signing their names to a bill that violates all of their (and their constituencies') core principles? Or the economy?

Only a hypothesis, so far, but a damning indictment of the fuck-tards in Washington if true (or close).  

By Anonymous Anonymous, at Fri Sep 26, 02:38:00 PM:


After the economics and consequences have been discussed, then it is ALL politics to get it done. I think you have it pretty well nailed.

A great many Democratic party Congressmen (from center-right districts) are NOT going to support this without a significant number of Republicans going along, because of their re-election peril.

And to be honest, nobody but a few financial wizards truly UNDERSTANDS what is taking place and what will take place regarding the policy that is to be made. We all understand little parts, but few really KNOW what is about to happen. So if it all goes south (which is a significant possibility), everybody is in a CYA mode (politically).

If we don't have time to do it right, how are we going to have time to do it over again?
Paulson may be exceedingly smart and honest, but he is, in my humble opinion, trying to stampede political action based on information he is receiving from Goldman-Sachs. There may be urgency, but at this point, the public has to have some notion of the consequences and cost.


By Anonymous Anonymous, at Fri Sep 26, 04:01:00 PM:

In addition to the 'Christmas tree' problem, House Republicans have little incentive to cooperate.

They are making an observation and an assumption.

Observation: Their constituents hate the bailout plan.

Assumption: John McCain is going to lose.

Thus, House Republicans see themselves alone next year, facing Pres. Obama and a Democratic Congress.

Their calculation? They will get no benefit, and possibly good rewards, for opposing the bailout.

If the bailout passes (over their objections) and it works (stabilizes the markets), they will get no credit for this outcome. They would also get no credit or benefit if they supported it.

If the bailout passes (over their opposition) and it fails, House Republicans can say, "We told you so."

If they block the bailout and the markets stabilize anyway, they will look like principled geniuses.

And if they block the bailout and the markets and economy slump further, Pres. Obama and the Democrats will not be able to add programs or raise taxes. Also, Republicans might be able to pick up seats in 2010 due to a poor economy.

One may not like these political calculations. But they are rational.  

By Blogger D.E. Cloutier, at Fri Sep 26, 04:52:00 PM:

DF82: "things that smelled a lot like trojan horse socialism"

You may find Susan Lee's column at Forbes interesting: "Ancient Egyptian Bailout."

A quote from the column: "And thus does Joseph transform the Egyptian people from free holders to sharecroppers."


By Blogger rhhardin, at Fri Sep 26, 05:35:00 PM:

It started in 2000 with Al Gore contesting a close election.

If an election is close, that means that, as far as the democracy is concerned, it doesn't care. I mean, people care, but equal numbers each way. Either result is democratic.

What democracy cares very much about, though, is that the decision is final. If you lose a close election, you lost. Try again next term.

No vote counting method is good enough for a close election, and this is exactly the case where you don't need good counting at all, democratically speaking. It just has to be good-faith fair.

Gore put his own interest above the nation's, and now that rule is broken.

Nixon, for example, went along with it. Try to have character at least as good as Nixon's, might be good advice for patriots.  

By Blogger Miss Ladybug, at Fri Sep 26, 06:16:00 PM:

billy bob corncob~

I'm not sure I buy the implication that if looking at growth in GDP since 1950 would mean a $10K home in 1950 would then be worth over half a million dollars today.

Does a job that paid $10k in 1950 now pay over half a million? Somehow, I doubt it.

Out of curiosity, I wondered how much a new car cost in 1950. Found this answer:

The average annual income in 1955 was $3301.44. In 2005 it was $36,952.94. The average new car cost in the 1950's was $1750. Average cost in 2006 was $27,800.

Using your GDP calculation, salaries today should average about $160-170k. They don't. Cars "should" cost, on average, $100k. They don't. So, I just don't buy that a home that cost $10K 60 years ago should cost $500k today...  

By Blogger D.E. Cloutier, at Fri Sep 26, 06:33:00 PM:

I was six years old in 1950, Miss Ladybug, but I remember some of the prices in Great Neck, Long Island, New York:

Candy bar - 5 cents
Pack of gum - 5 cents
6-ounce bottle of Coke - 5 cents
Ice cream soda - 25 cents
Bag of marbles - 29 cents  

By Blogger Miss Ladybug, at Fri Sep 26, 06:51:00 PM:

So those 5¢ items "should" cost about $2.50 today, and 25¢ would equal 12.50... You prove my point. You can't just arbitrarily look at GDP grow to determine the worth of something today vs. some prior point in time...

Home prices have risen irrationally. I bought a house in late '98 for about $60k. Sold it six years later for about $85k. The area I was living in was growing fast, and the housing bubble had yet to burst. I just don't know that my home truly appreciated that much in such a short period of time... If I hadn't been moving back to Texas, I'm sure I would still in that same little house in Arkansas. I know - I would talk to customers in town from California, and they just couldn't believe how little I paid for my 900 sq.ft. home, telling me it would have cost a quarter of a million out there. That, IMO, is completely unreasonable. Housing prices need to move south into a more realistic range for the average American family.  

By Anonymous Anonymous, at Sat Sep 27, 01:49:00 AM:

Thanks, Ladybug. That is my point exactly.
The income required to buy a median priced house on my area is just shy of $90,000. The median wage is no where near that. I asked my daughter why I hadn't seen any of her old friends. She said because all of them have moved away. All of them. That is not a good situation, despite what the economists and politicians might think.  

By Blogger Miss Ladybug, at Sat Sep 27, 02:19:00 AM:


Want to know how we got here in the first place? You'll see how housing prices are just completely out of whack, too...  

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