CONGRESS SHOULD ADJOURN. JUST GO HOME.

–More thoughts on the bailout

1. CONGRESS SHOULD ADJOURN. JUST GO HOME.

–The immediate question, right now, is whether the bailout bill can still be defeated in Congress. I have no prediction about the outcome—though obviously I hope it will be defeated. But it is a reasonable prediction that the news media, today and tomorrow, will be filled with horse-race treatment on the topic. We all know the kind; it was the kind of media treatment that the Bush team got when trying to gin up the war with Iraq. This is the kind of thing the big media outlets do whenever possible, even when one outcome is unthinkably horrible: Will Sarah Palin get through the debate without revealing her ignorance and incapacity? [etc] We could avoid seeing our major media outlets throw some more credibility, as well as save our nation some fiscal dreadfulness, if Congress would just adjourn. Take the autumn recess.Go home.

2. More on immediate remedies: Persons gifted with hundreds of millions of dollars should pick a county and, forthwith, start paying off hard-working fellow Americans’ mortgages. Pick a county, any county [thanx to Groucho Marx]—the one they grew up in, the one they live in, the poorest county in the nation; the single county hardest hit—whichever that might be—by the current ‘liquidity problems’; the county they were born in; the county their parents were born in; etc. Be sentimental. Be clinical. I don’t care. Just pick one, bonanza winner. Secretary Paulson, you could set the example.

Or they could pick a zip code: Admittedly even a multi-millionaire, could not single-handedly carry away the mortgage debt of a whole state, with the possible exception of Montana. But our country does have individuals—and this is a historic inequity—who could single-handedly carry away the mortgage debt of, say, the ten poorest zip codes in the U.S. [Disclaimer: This proposal contains nothing that could benefit me personally; for one thing, my mortgage is paid off, via the wonder of EE Series U.S. savings bonds; for another, I do not live in one of the 10 poorest zip codes.] [N.b.: This is what I would do if I were to win some mega-lottery.] Paulson is not the only figure who could carry out this feat, of course; VP Cheney, several members of the Bush family, and a number of former CEOs of current and former companies could do likewise.

3. Speaking of personal interest, it is somewhat remarkable how little our journalists are being held to any standard of disclosure, while they scream in favor of the bailout. The WashPost’s Dana Milbank, e.g., published an uncharacteristically heated column Tuesday on how ‘the lunatics had taken over the asylum’ in Congress, and Milbank is not exactly an apache. There is a real question re which journalists screaming in favor of the bailout have 401(k)s affected temporarily by the drop on the stock market on Tues—that kind of bloodthirsty fervor is usually the sign of the small investor—but you notice they’re not saying. Their editors are not making them follow the principle of journalistic disclosure—Hey, why shd they have to follow the rules when their richers and betters don’t. [Disclaimer: In the interest of full disclosure, I am not checking how the immediate situation affects my own family, so I do not know whether I am writing against interest. Obviously I think that our long-term interest, including mine, wd be better served other ways.]

Anyway, an astounding assortment of historians, economists, pop-economists and other commentators weighing in on behalf of this bailout—including some whose commentary I generally respect–are not being required to disclose their personal, individual stake in the topic.

4. A serious list of 200 well-respected economists oppose the bailout. That shd be a sign.

5. And oh yes, on that topic of inflation: GIVEN THE POTENTIAL FOR HYPER-INFLATION IN PUMPING A TRILLION DOLLARS INTO THE FINANCIAL SECTOR, ONE COULD REASONABLY SUSPECT how little the Fed’s concern was ‘inflation,’ all those times it raised the key interest rate, before. Washington novelist David Baldacci (I think–can’t remember the title of the novel) has a passage in one of his whodunits, on how the Fed knows exactly, can compute exactly, the ripple effect of human loss, every time it raises the interest rate: for every quarter of a point, thus much job loss, marital breakups, spikes in gambling and substance abuse . . .

Either it’s going to be hard for the Fed to have credibility, in coming months, raising interest rate to contain ‘inflation,’ or real inflation will give them cover to do exact that—right when the new Obama administration comes in.

WHO WILL WIN THE RACE? – THE SENATE OR THE PUBLIC?

OUR SENATE IS RACING TO COMPLETE A MISSION IT SHOULD NEVER HAVE TAKEN ON.

–Upending its constitutional place as the deliberative body in our bicameral legislature, the Senate is planning to vote tonight–instead of tomorrow–on a massive ‘package’ that includes the $700 billion in giveaways for financial entities already rejected by the U.S. House.

The senators’ reason for taking up this legislation tonight, of course, is simply to outwit and outflank the public. When the House was taking up the bailout, emails and calls overwhelmed the Capitol. The senators know that. Further public demonstrations are being organized for tomorrow. The senators know that.

In taking up the bailout, the senate is including some measures not included in the House version–including one provision that may actually be a good idea, raising FDIC insurance on bank deposits to cover up to $250,000 from its current $100,000. This provision could have been rushed through both houses pretty efficiently.

For the rest, though, the Senate is rushing pell-mell to vote against fiscal probity (as well as to reward bad behavior by some very well-heeled entities). How do we know this? Simple. Even for those of us who are not economists, who did not major in finance or commerce in college, we can use logic.

First logical step: Think; which parts of the bailout are certainty, and which are not?

Certainty: Up to $700 billion is authorized TO BUY BAD MORTGAGES AND MYSTERIOUS MORTGAGE-RELATED PRODUCTS. We know that this is certainty, because this is the guts of the bailout bill. This is its central purpose.

Certainty: Any immediate financial benefit from these purchases will accrue to the business entities (dignified by the term ‘institutions’) that sell them. If the mortgage products were profitable and valuable, the companies would not be selling them. This is no secret; this aspect of the deal is again part of its guts.

Certainty: Thus, to a logical certainty, these purchases stand to transfer up to $700 billion to financial entities that we do not yet know the names of, for ‘troubled assets.’ This in spite of the fact that even supporters of the bailout are criticizing the conduct of the businesses that stand to receive this money.

Now to some uncertainties:

Uncertainty: We are told that some of these troubled assets may eventually improve in value or become valuable. But the bailout includes no guarantee, no amounts, not even a percentage, and not even a timeline. Related:

Uncertainty: We are told that defaults and foreclosures led to this problem. But we are not told what proportion of the $700 billion is to be spent buying mortgages, and what proportion will go instead to paying lenders, insurance companies, etc., for their bad artificial mortgage products–derivatives and the rest.

Uncertainty: We are told that these purchases are needed to ‘stabilize the markets.’ But the bailout includes no guarantee and not even a kicker clause–something saying that the purchases will be voided or revoked, etc., if they do not stabilize the markets.

Uncertainty: We are told that credit is drying up–and indeed it has been, for months now–

 with some implication that purchasing these bad mortgage products will free up monies to be lent to Americans who want to buy houses or cars or college educations. This argument was made by commentator Maria Bartiromo, who used to be pretty good, on Chris Matthews’ Nerfball last night. (Bartiromo did not mention the derivatives, of course.) But the bailout includes no guarantee and again, no kick-out clause, saying that unless the lenders turn around and lend, the deals will be rescinded.

Uncertainty: We are told that the economy needs this bailout because of job loss, housing foreclosures, unemployment. But the bailout does not include a guarantee or even a strong argument that it will improve employment or housing. As other writers have pointed out, it does not address health care costs, the single biggest reason, aside from or along with job loss, why ordinary householders default on mortgages. It also has nothing to address the inflation, let alone hyper-inflation, that a full trillion injected into the financial sector–at the cost of watering the dollar and trying to borrow yet more from abroad–may well unleash.

For good measure, the bailout does not include specifics on how to make real estate companies and agents bear some of the pain for pushing real estate deals that result in default.

And–of all the cruelties–it still does not include specifics designed to prevent foreclosures.

If we really wanted to ‘stabilize’ the housing market, we would start with the FDIC measure and a moratorium on foreclosures under some circumstances (with reasonable conditions).

Net: This bill is certainty as a bailout. Uncertainty–to put it nicely–as a rescue.

THEY ARE TRYING TO WATER THE DOLLAR WHILE PRETENDING THE SKY IS FALLING

Not the kind of ‘inflation’ hawked as a bogeyman in connection with wages–CNBC just aired an interesting stat that the median salary of white men in their thirties declined 12 percent from 2004 to 2007–but genuine inflation, the kind you get in Germany at the collapse of governments between the wars and at the collapse of the Third Reich. The kind where citizens joked, gallows-humor style, that they had to fill their grocery carts with Marks (currency) to buy a single head of cabbage.

There must be a lot of Congress members panicking over the prospect of 401Ks losing money in the stock market. But the biggest supporter of the bailout package, be it noted, is George W. Bush. Cable networks supported by Wall Street advertisers also support it. Some major newspapers support it, backed by their biggest investors.

WHY DIDN’T THE GOVERNMENT JUST INTERVENE TO PAY OFF VULNERABLE MORTGAGES?

Sign of the times

FUNNY HOW THIS SEEMS TO HAVE OCCURRED TO NO ONE IN THE BUSH ADMINISTRATION–

but the waves of foreclosures that are said to have begun the current financial crisis, if it is one, could have been held back from the get-go. How? Simple: Through government intervention. If Uncle Sam was going to jump into the housing market with fistfuls of billions, he could have paid off selected mortgages. Here is what A. Maslow would call the hierarchy of needs in the current situation, as broad-brushed by this morning’s Washington Post: “In a practical sense, the government is trying to revive the markets because buying up all the troubled assets would require far more than $700 billion.

Twenty of the nation’s largest financial institutions owned a combined total of $2.3 trillion in mortgages as of June 30. They owned another $1.2 trillion of mortgage-backed securities. And they reported selling another $1.2 trillion in mortgage-related investments on which they retained hundreds of billions of dollars in potential liability, according to filings the firms made with regulatory agencies. The numbers do not include investments derived from mortgages in more complicated ways, such as collateralized debt obligations.”

Setting aside if one could how horrible all this is, what one notices is that

1. Mortgages themselves are less than half the total indebtedness: $2.3 trillion.

2. This $2.3 trillion number in mortgages is huge but comes to far less than the combined total estimated at $1.2 trillion in ‘mortgage-backed securities,’ plus $1.2 trillion in ‘mortgage-related investments’ ($2.4 trillion so far), plus ‘collateralized debt obligations’ with an unestimated paper value–thus probably about twice the rest of the Ponzi total. We can thus estimate a total in mortgage-backed financial mirages of somewhere around $5 trillion.

3. It should be pointed out that most mortgages are not in trouble. What proportion of these mortgages are commercial and what proportion are residential is not stated, but in any case, the overwhelming majority of people with mortgages are paying them. Notwithstanding the horrendous difficulties facing Detroit, in residential real estate one-third of all U.S. mortgages now in trouble are in California–where residential real estate prices went to vertiginous and unstable highs unrelated to concrete land values. (The West Coast is desirable, but it is not squeezed for space. It is not Hawaii.)

Back to basics.

If foreclosures were indeed what started the current problems, and if government intervention is warranted, then government should step in by paying off people’s mortgages. Help the people–homeowners–who really need the help. Help the city blocks and the streets in midsized towns that really need help. Stabilize the real estate markets by keeping nice people in their houses.

This remedy would have to be applied within limits, of course, and the Treasury Secretary would have to be given some latitude in picking his jurisdictions (counties or towns):

a) He could start with a short list of the hundred poorest zip codes in the United States and simply pay off troubled mortgages in those zip codes. Given house prices in the poorest regions, that assistance would amount to less than one percent of one percent of the dollar totals being bandied in Washington. He could then move on to another short list of the hundred next-poorest zip codes in the nation, and pay off the troubled mortgages in those zip codes. He could then progress up the list to the next hundred poorest zip codes in the U.S., and pay off the troubled mortgages there.

b) He could also start with a short list of the hundred zip codes in the U.S. with the highest foreclosure rates, and pay off troubled mortgages in those zip codes, proceeding as above in a).

c) He could also start with a short list of hundred zip codes in the U.S. where abusive lenders have done their worst–abusive ARMs, low-balling, etc.–and pay off the troubled mortgages in those zip codes, proceeding as above in a) and b).

Certain conditions would apply: The houses would have to be the mortgage holders’ primary and actual residences–not investment properties or second homes. The owners would have to have lived there some set number of years, say 3 years; to have made their payments up to some set point; to have made a good-faith effort, in other words, to meet their mortgage payments. There would have to be a cap on the mortgage balances to be paid off–no jumbo mortgages–and some cap on the income of householders eligible to receive the help–no millionaires.

This would be no single-pronged attack on the problem. It would have to accompany investigation and conviction for abusive lenders, a thorough crackdown on corporate fraud at all levels, and a stringent reining in of corporate waste–including lobbying, advertising and executive compensation. 

But surely the banks and other mortgage lenders would have little to complain about. After all, they would be getting their money, the money they lent via those mortgages, plus the hundreds of billions in interest already paid on the mortgages.

The only things not supported by government—taxpayers–would be those nebulous collateralized obligations and mortgage-backed securities, which they never should have invented in the first place.

What’s not to like?

WHY ARE THEY LISTENING TO WARREN BUFFETT?

Why is Congress inviting in a major investor–who stands to recoup more billions of $ in the wake of the bailout proposal, if enacted–to weigh in on legislation?

You want some perspective on Buffett as the populist protector? 1) He was one of Arnold Schwarzenegger’s top two or three advisors, when Schwarzenegger hijacked the California recall campaign conducted mostly by Darrell Issa and unceremoniously replaced Issa with himself. GOP movers and shakers enforced the replacement–which took place within hours of the successful recall. One result is that Californians–who are suffering mightily from a lethal bubble in the real estate market in that state–are stuck with Schwarzenegger as Gov. And Buffett was, as mentioned, his advisor.

2) Buffett is a major stakeholder in the Washington Post Company, the parent company of the Washington Post newspaper. This connection is sometimes mentioned in Post news reports and columns, sometimes not. (Why the editors do not insist on making the mention routine, every time Buffett’s name appears in their newspaper, is beyond me.) Buffett has been connected with the Post ever since the Post started trending toward the rightwing Washington Times, including the period in which the WP treated George W. Bush as a credible presidential candidate.

These people are not unbiased sources on questions like whether the purchase of “troubled assets”–essentially, a guaranteed price for an unguaranteed product, except multiplied by millions–is genuinely in the longterm public interest.

Otherwise they would carry about as much weight as John McCain’s repeated claim, on This Week with George Stephanopoulos this morning, that he is “a Teddy Roosevelt Republican.”