2008 September 29 Monday
Congress House Votes Down Bailout
The first attempt at a bailout bill failed 228-205. One complaint about the bailout is that it does not help mortgage holders hang onto their partially-owned houses (or 0 owned if they owe more than market price). But housing is overpriced compared to various historical ratios of housing prices versus income and rents. Housing prices need to fall to market-clearing levels. Trying to prop up people in mortgages they can't afford delays that correction and rewards real estate speculators to boot. The idea that Wall Street is evil but home buyers are innocent doesn't hold up to close scrutiny.
A more compelling argument against the bailout is that it will cause more harm than good. I can't tell. Some think that absent a bailout we'll go into a depression. A recent Wall Street Journal article outline how the Lehmann failure caused a crisis in confidence that made the AIG bailout necessary. If these people are being honest then, hey, economic depression seems plausible.
Then there is the form of the bailout. Buy bonds? Or get preferred stock to be sold later? I like the idea that some CEOs should lose their jobs and that at least stockholders should get wiped out. I think Paulson's plan doesn't inflict enough pain on top management and stockholders. So I prefer a plan that doesn't just buy up bonds from banks. But I most just want to avoid a global economic depression.
I agree with those who argue that Congress set the ball in motion that led to the massive irresponsible lending in the first place. So to blame it all on CEOs and traders is unfair and misleading.
Update: I'm watching CNBC. Some Democratic Congressmen had constituents 100:1 against this bailout bill. Main Street has contempt for Wall Street. I suspect the feeling is mutual. My guess is the elites will find ways to basically go around the democratic process. The Fed will come up with moves to inject money that do not involve appropriated funds. But will the non-democratic methods of intervention be strong enough? Another possibility: put some seemingly innocuous changes into legislation that really open the door for more radical policy changes.
We can't have a financial system that even 110 IQ people can't understand. Complex systems require complex minds to support them. We might have a depression just because the public are mad. Is there some stopping point short of a depression that'll shock people to support bigger policy changes to prevent a financial meltdown?
Why is a lame duck President selling this bailout to the people? Why isn't this an election issue? Or at least, if everyone is in agreement, why aren't the presidential candidates, both of whom are Senators, uniting to sell this bailout to the people?
If the elites take things too far, a reprise of the French Revolution is possible.
Things could get a lot worse, and I question the ability of either party or either candidate to deal with them. This election could be a repeat of 1928, an election which, in retrospect, neither party wanted to win. The Republicans did win and got blamed, with some justification, for the Great Depression. Maybe it's the Democrats turn now....
Housing is not a financial investment but an emotional one - families buy homes not property. People do not stop paying their mortgage because the home happens to be notionally worth less now than when they bought it. People will go without food before they stop paying their mortgages.
The investment banks have a different problem. They've been trading packages of mortgages valued at bubble prices. The bubble burst and the sector started to revalue their mortgage backed securities and realised that the investment banks were actually much more highly leveraged than they had been the day before. Risk increased faster than the most highly leveraged investment banks could adjust.
The whiff of taxpayer money has stopped the market from adjusting - everything is on-hold as the bankers wait to see who is going to get the biggest suck at the taxpayer's teat.
Giving a trillion dollars to investment bankers will only have one effect - the price of cocaine will skyrocket.
It may be that the foreign central banks are giving us an ultimatum to stand behind the securitized subprime debt, and our politicians are resisting. The federal reserve's 'owned outright' holdings are more than enough to buy up all such debt if they have to, as per foreign threat of retaliation for what they may consider to be default.
The idea that Wall Street is evil but home buyers are innocent doesn't hold up to close scrutiny.
If you are going to put in either/or terms like that, then yes it does hold up to close scrutiny even taking into account illegal aliens buying plasma wide screen TVs on home equity loans they intended to "flip" before the balloon.
Median home equity (true "ownership") per household is unsustainably low.
All the guvvies would have to do is change the "bailout" to be a modified adoption of Charles Murray's "Plan" outlined in his recent book "In Our Hands" -- $10k/household/year citizen's dividend for _all_ households with the only qualification that the be legal citizens of the US. The modification being that the monthly payment must go toward raising the credit score of those with poor credit ratings. This would be a true bailout worthy of consideration by the House of Representatives.
For people who are here illegally, they could be provided with a one-time payment of $10K per household in exchange for turning States Evidence against their employers, giving mug-shots, fingerprints and DNA samples and returning to their homeland.
$10k/household/year citizen's dividend for _all_ households with the only qualification that the be legal citizens of the US. The modification being that the monthly payment must go toward raising the credit score of those with poor credit ratings.
You've got to be kidding - the taxpayer gives every household $10,000 per year just because they have a mortgage??
Pretty soon every man and his dog will have their own house and the suburbs would run on forever with one person per house. Imagine the otherwise productive investment that would be tranferred from other areas of production to cope with the consumer demand for more houses. Imagine your tax bill as the government taxes you in order to pay every householder $10,000 every year. Imagine the initial massive house price bubble. Imagine the massive bubble in land prices. Imagine the subsequent house price collapse. Imagine the subsequent collapse in land prices.
Imagine the impending bankruptcy of your government.
Cheer up, guys.
A deep economic downturn would be good for our demographic profile.
The Census has reported net legal and illegal immigration fell by 1.3 million people in 2007 compared to 2006 due to the slowing economy:
"Data Show Big Dip in Migration To the U.S."
The economy has only gotten worse since 2007. We can expect more outmigration of legal and illegal immigrants as we enter a downturn. About half of all early 20th century European immigrants went home during the Depression. Peter Brimelow has noted that net immigration was negative during the Depression Era. 30% of Turkish Gastarbeiter (Guest Worker) immigrants ended up leaving Germany.
Without huge waves of cheap credit to buy houses, and a lack of jobs, many unskilled legal and illegal immigrants will leave because it is hard for low IQ workers to earn enough money to live comfortably in a high cost of living nation, unless those low skill workers have some sort of government safety net. And money for any expanded immigrant safety net is going to be increasingly hard to come by for the Federal Government and the states when you consider the effects of the entitlement crunch.
In hard economic times, white American's tolerance for absorbing more poverty will decline.
A big dose of economic reality is badly needed.
More on the slowdown in immigration:
Immigration Slows in Face of Economic Downturn
here's a priceless video (courtesy of Steve Sailer) with our own Bush II talking about the joys of increasing minority home ownership:
If you will allow me another post, here's a nice video of House Democrats saying in 2004 that there's nothing at all wrong with Fanny and Freddie:
Truly a bipartisan effort!
I had written: $10k/household/year citizen's dividend for _all_ households with the only qualification that the be legal citizens of the US. The modification being that the monthly payment must go toward raising the credit score of those with poor credit ratings.
Stephen "asked": You've got to be kidding - the taxpayer gives every household $10,000 per year just because they have a mortgage??
No, that's not what Charles Murray proposes. What Charles Murray proposes is that a "household" gets $10,000 per year because it consists of legal citizens. That includes households that rent, households that own their houses free and clear, households that are "above water" on their mortgage and households that are on the margins of credit-worthiness. The modification is merely that those who are on the margins of credit-worthiness don't get to see their cash directly -- it goes to their creditors in such a way as to optimally raise their credit scores.
Whether one has to own the house or not is irrelevant. As Stephen points out, people will form new households just to get the extra $10k. Husbands and wives will pretend to separate. Kids will move out on their own sooner rather than later. Shared accommodations will become a thing of the past.
In the end, it will drive up rents as well as house prices.
Bob, I did err in that aspect of my representation of Charles Murray's plan which is, as reported by National Review Online:
"Give the money to the people," Charles Murray argues in his new book, In Our Hands : A Plan To Replace The Welfare State. His plan would give a $10,000 yearly grant to all Americans, once 21, who are not in jail.
Murray is actually pumping double the money into married households -- which is closer to what I had envisioned for a citizens' dividend funded by a use fee for net assets beyond subsistence assets.
But you further erroneously said: In the end, it will drive up rents as well as house prices.
No it won't. It will distribute populations to areas where land is more affordable. The difference between a $400,000 house in Silicon Valley and an equivalent $70,000 house in the rural south is lot price. If anything, it will drive the median price of a home down both because of more distributed population and because of industrial learning curve.
I'm not tracking your argument, James. You mean a surfer dude in Santa Barbara will move to Bent Fork, Louisiana, because the government gives him $10K a year (or him and his co-surfer $20K)? I don't know, my wife and I could use an extra 20,000 bills to rub together, but there aren't very many places it would motivate us to live if we weren't planning to anyway.
Your claim sounds like a variation on the one about massive immigration not creating overpopulation and congestion "because there's still lots of land." People tend to cluster and live where the jobs and amenities are, and where they can be around people they are comfortable with. Settling where real estate is relatively cheap comes well down the list for almost everyone except poor retirees.
Murray's plan or some variation on it for replacing welfare with a system that works only for individuals who use their benefits responsibly is certainly worth considering (although it's far too radical a break with tradition to be adopted unless social circumstances change drastically). But it's hard to see it as a cure for housing costs. The only thing that will fill empty houses is for their prices to fall to realistic levels instead of ludicrously inflated ones. When that happens, people will start buying them and banks will start lending for them. And the hustlers and angle players who paid absurd prices for houses to sell them to "greater fools" will pay the price for their con games.
Rick writes: You mean a surfer dude in Santa Barbara will move to Bent Fork, Louisiana, because the government gives him $10K a year (or him and his co-surfer $20K)? I don't know, my wife and I could use an extra 20,000 bills to rub together, but there aren't very many places it would motivate us to live if we weren't planning to anyway.
This isn't really very good sampling now is it?
Better sampling methods would reveal the fact that a great deal of population immobility, particularly at the lower income levels, is fear of income instability during relocation. If people thought they really could move to a low crime area with rent prices 1/3 of the area where they are currently living (the devil they know) without fear of running out of money, there would be a massive relocation of households to more rural areas.
Despite the elites' comforting self-deceptions about middle class decline being a consequence of people 'living beyond their means' as a result of purchasing wide screen plasma TVs on credit cards, the reality is people are falling further and further into debt primarily because economic policies have centralized wealth in a vicious class war -- a war that has had the side-effect of also centralizing the locales where someone can hope to find jobs.
Rick also opines: although it's far too radical a break with tradition to be adopted unless social circumstances change drastically
Actually, given the Republican Party's desperate situation, it's quite viable.
McCain should call up Charles Murray over a the AEI and draft a policy for the implementation of "The Plan" outlined in his book "In Our Hands" whereby every citizen age 21 or above who isn't incarcerated receives $10K/year in monthly payments -- thereby replacing all transfer/"entitlement" programs.
If the Republicans could uniformly get behind this conservative think-tank plan, they'd sweep the election and dismantle the core of public sector rent-seeking that provides Democrats with their political base.
The only question is whether the Republicans want to dismantle the political machinery of the Democratic party and win decisive control of the government.