Slog
News & ArtsMonday, January 26, 2009
Economy Then and Now
Posted by Charles Mudede on Mon, Jan 26, 2009 at 9:18 AM
Krugman's letter to Obama offers this picture of the past:
About those successes: The way FDR dealt with his own era's financial mess offers a very good model. Then, as now, the government had to deploy taxpayer money in order to rescue the financial system. In particular, the Reconstruction Finance Corporation initially played a role similar to that of the Bush administration's Troubled Assets Relief Program (the $700 billion program everyone knows about). Like the TARP, the RFC bulked up the cash position of troubled banks by using public funds to buy up stock in those banks.There was, however, a big difference between FDR's approach to taxpayer-subsidized financial rescue and that of the Bush administration: Namely, FDR wasn't shy about demanding that the public's money be used to serve the public good. By 1935 the U.S. government owned about a third of the banking system, and the Roosevelt administration used that ownership stake to insist that banks actually help the economy, pressuring them to lend out the money they were getting from Washington.
WSJ offers this picture of the present:
Lending at many of the nation's largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results.
Those 13 banks have collected the lion's share of the roughly $200 ...
The government must not only loan banks money, it needs to run them. There is no other option but the nationalization of the banking system.
1
The government is no more a prudent lender that helps the economy than investment or retail banks receiving TARP. It is subject to the political whims of whoever is in power.
This FDR worship is getting ridiculous. Almost as ridiculous as the oversimplification of the resolution to the Great Depression. The government can't spend its way out of a problem if it is spending money it doesn't have (or rather, it is just delaying and spreading the pain out to another point in time through debt issuance). Simply going back to the status quo is no good answer. This is a once in a generation chance to evaluate and change our behavior, and yet the cries to "get things back to normal" is nauseating. Normal consumer debt loads? Normal government spending? Normal political pork? The normal of the past 30 years is exactly what has lead to this position we are in.
This FDR worship is getting ridiculous. Almost as ridiculous as the oversimplification of the resolution to the Great Depression. The government can't spend its way out of a problem if it is spending money it doesn't have (or rather, it is just delaying and spreading the pain out to another point in time through debt issuance). Simply going back to the status quo is no good answer. This is a once in a generation chance to evaluate and change our behavior, and yet the cries to "get things back to normal" is nauseating. Normal consumer debt loads? Normal government spending? Normal political pork? The normal of the past 30 years is exactly what has lead to this position we are in.
4
@1,
I concur. I don't believe the the Depression was alleviated by Roosevelt's New Deal policies. What definitely got the US out of the Great Depression was entry into WWII. I'm not sure Nationalization will work. The Obama Administration is "dancing around the idea" according to the NY Times. I believe a long drawn out recovery is what's going to happen. But, it will hurt in the short term.
I concur. I don't believe the the Depression was alleviated by Roosevelt's New Deal policies. What definitely got the US out of the Great Depression was entry into WWII. I'm not sure Nationalization will work. The Obama Administration is "dancing around the idea" according to the NY Times. I believe a long drawn out recovery is what's going to happen. But, it will hurt in the short term.
5
The problem is, this whole crisis was created by the banks giving out crappy loans in the first place. Those loans sustained a bubble economy--that is an unrealistic one. Why do we want the banks to make more crappy loans? Why do people think that if the banks would "just start lending again" that asset prices will rise back to their bubble levels? Even if the banks wanted to lend, who wants to take out a mortgage and buy a house right now? Who wants to start a business?
What should be happening is that the government should let the banks that are insolvent fail and prop up the solvent banks until the economy recovers. The solvent banks should use the money to buy whatever viable assets the failing banks have. They should be getting their balance sheets in order. They should not be lending. (Nor should they be giving out bonuses, obviously)
You can't reinflate the bubble, unscramble the egg, or whatever cliche you want to use. Housing prices and asset prices fell because they were way too high. People aren't lending because borrowers were way overleveraged. Banks were taking way too much risk. We lent our way into this problem, but we can't lend our way out. Anyone whining about the banks not lending has no concept what this crisis is all about.
What should be happening is that the government should let the banks that are insolvent fail and prop up the solvent banks until the economy recovers. The solvent banks should use the money to buy whatever viable assets the failing banks have. They should be getting their balance sheets in order. They should not be lending. (Nor should they be giving out bonuses, obviously)
You can't reinflate the bubble, unscramble the egg, or whatever cliche you want to use. Housing prices and asset prices fell because they were way too high. People aren't lending because borrowers were way overleveraged. Banks were taking way too much risk. We lent our way into this problem, but we can't lend our way out. Anyone whining about the banks not lending has no concept what this crisis is all about.
6
"no other option"!? Way to think outside the box again, Charles.
How about addressing the root of all these problems? How about moving toward a real currency?
How about addressing the root of all these problems? How about moving toward a real currency?
7
@6,
A real currency? I have no more faith in a shiny mutable metal as a backing for currency than I do in any fiat currency. The only thing that matters in a currency is its acceptance as a transfer and holder of value.
A real currency? I have no more faith in a shiny mutable metal as a backing for currency than I do in any fiat currency. The only thing that matters in a currency is its acceptance as a transfer and holder of value.
8
The smartest guy I ever met says:
Nationalize all fed-chartered banks; immediately apply FASB standards; write down all bad assets thus uncovered; force mergers, bankruptcies and liquidations, injecting Treasury capital as needed; set healthy banks free again to romp capitalistically, under tight supervision; hard-ass Congressional investigations of bad practices.
The goal is to restore enough confidence in investors around the world to get them to invest in the debt required to float a sufficient stimulus, roughly two to three times that suggested by Dems so far.
Otherwise what we think of as stimulus is just money down a rathole.
Nationalize all fed-chartered banks; immediately apply FASB standards; write down all bad assets thus uncovered; force mergers, bankruptcies and liquidations, injecting Treasury capital as needed; set healthy banks free again to romp capitalistically, under tight supervision; hard-ass Congressional investigations of bad practices.
The goal is to restore enough confidence in investors around the world to get them to invest in the debt required to float a sufficient stimulus, roughly two to three times that suggested by Dems so far.
Otherwise what we think of as stimulus is just money down a rathole.
9
http://seekingalpha.com/article/116499-o…
@8
How does nationalizing banks restore confidence? As an investor and an employer, I would find the liquidation of equity by government force to undermine any confidence I have in our systems.
@8
How does nationalizing banks restore confidence? As an investor and an employer, I would find the liquidation of equity by government force to undermine any confidence I have in our systems.
10
I agree that comparing our current predicament to the Great Depression when it comes to solutions is perhaps not the most effective idea. While the causes between our current downturn and the Depression may be similar (buying on the margin and debt monetization both created an avalanche of toxic assets) we have changed too much as a society to assume the same solutions will work (especially since we can't make money supplying both sides of an inter-continental war).
A better analogy is to think of our economic system as a young person who has suffered a stroke. Right now the patient is incapacitated, you can put that person in a hospital bed and give them food, but they're not in a position to rehabilitate themselves. They need outside attention and help to become self-sufficient again. They also need to examine what behaviors lead to the stroke in the first place and determine the best ways to change their habits.
Nationalizing the banks may be a bad idea, but having the Gov buy preferred stock to prop them up and then using the power of a commanding share or stock agreement to ensure that until banks can payback the federal dollars they are lending (and lending responsibly) under the direct oversight of a government agency may be the only way to ensure our financial industry will heal properly and that the vicious cycle of diminishing capital on main street is reversed.
A better analogy is to think of our economic system as a young person who has suffered a stroke. Right now the patient is incapacitated, you can put that person in a hospital bed and give them food, but they're not in a position to rehabilitate themselves. They need outside attention and help to become self-sufficient again. They also need to examine what behaviors lead to the stroke in the first place and determine the best ways to change their habits.
Nationalizing the banks may be a bad idea, but having the Gov buy preferred stock to prop them up and then using the power of a commanding share or stock agreement to ensure that until banks can payback the federal dollars they are lending (and lending responsibly) under the direct oversight of a government agency may be the only way to ensure our financial industry will heal properly and that the vicious cycle of diminishing capital on main street is reversed.
13
@9, temporary nationalization is the catalyst for immediate asset price discovery, without which confidence will remain an impossibility.
14
The problem was not bad loans folks. Bad loans, even lots of bad loans, the system can deal with. The problem is the wacky world of recursive derivatives that the banks used to quite deliberately hide their true capitalization to again quite deliberately shoot for huge short term profits without much regard for the long term consequences.
Nationalization might be the only solution ultimately becuase it might just turn out that everyone in the banking industry is a dishonest sack of excrement and that we have no choice but to take over the banks in order to route them out.
And the New Deal did too reverse the direction of the Great Depression. It cut the unemployement rate almost in half. The problem was that Roosevelt then initiated Social Security taxes which nudged the economy backward a bit. That was more or less intentional though. The unemployment rate for those over 60 was nearly 50% and the country was crawling with destitute elderly that were pushing quite vocally for very radical relief (e.g. massive wealth confiscation to pay for relief payments).
Nationalization might be the only solution ultimately becuase it might just turn out that everyone in the banking industry is a dishonest sack of excrement and that we have no choice but to take over the banks in order to route them out.
And the New Deal did too reverse the direction of the Great Depression. It cut the unemployement rate almost in half. The problem was that Roosevelt then initiated Social Security taxes which nudged the economy backward a bit. That was more or less intentional though. The unemployment rate for those over 60 was nearly 50% and the country was crawling with destitute elderly that were pushing quite vocally for very radical relief (e.g. massive wealth confiscation to pay for relief payments).
16
@5: Mr. Me, how would you define "solvent"?
See Krugman's recent op-ed, "Wall Street Voodoo". In it, Krugman argues that while many people fear nationalization of the banks, many of those banks are already wards of the state, and that we need to face the facts and implement the obvious solution: an explicit, though temporary, government takeover.
He describes a hypothetical bank with $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion, but with $400 billion of those assets in mortgage-backed securities that can't be sold for more than $200 billion. He calls this a zombie bank: one that is operating but has already gone bust. Any value of its stock is based on the hope that shareholders will be rescued by government bailout.
Letting such banks fail would send disastrous shock waves through the global economy. Giving them a handout would encourage similar mismanagement in the future. Instead, he suggests handling them like we did the S&L's of the late 1980s: seize the defunct banks, transfer their bad assets to a special institution, pay off enough of the debts to make the banks solvent, then sell the banks to new owners.
See Krugman's recent op-ed, "Wall Street Voodoo". In it, Krugman argues that while many people fear nationalization of the banks, many of those banks are already wards of the state, and that we need to face the facts and implement the obvious solution: an explicit, though temporary, government takeover.
He describes a hypothetical bank with $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion, but with $400 billion of those assets in mortgage-backed securities that can't be sold for more than $200 billion. He calls this a zombie bank: one that is operating but has already gone bust. Any value of its stock is based on the hope that shareholders will be rescued by government bailout.
Letting such banks fail would send disastrous shock waves through the global economy. Giving them a handout would encourage similar mismanagement in the future. Instead, he suggests handling them like we did the S&L's of the late 1980s: seize the defunct banks, transfer their bad assets to a special institution, pay off enough of the debts to make the banks solvent, then sell the banks to new owners.
18
Whether FDR's New Deal got us out of the Depression or not, it got the USA some basic social services that every other industrialized nation was moving toward during that time. Sure, we didn't get socialized health care, but before Social Security the elderly were the poorest segment of our population. SS also provided a safety net for children whose parents are killed/maimed, the handicapped, etc.
So, I think some FDR "worship" isn't so much crediting him with single-handedly ending the depression but rather looking around at the socialized world of W. Europe, Canada, Japan, etc and realizing that what little bit of that the USA does have is thanks to the New Deal.
So, I think some FDR "worship" isn't so much crediting him with single-handedly ending the depression but rather looking around at the socialized world of W. Europe, Canada, Japan, etc and realizing that what little bit of that the USA does have is thanks to the New Deal.
19
@16, the shortcoming of Krugman's idea is that it presupposes seizing only the banks identifiably defunct. No entity has a handle on which federally-chartered banks are insolvent this very moment and which are likely to be within various time horizons. One look at the FDIC fund losses for each seized bank suggests they simply haven't the staff to catch even the smaller fruit before it falls - the principle upon which FDIC was founded.
We can't afford to have the world continue to suppose the better-connected banks are escaping scrutiny, so must grab them all.
We can't afford to have the world continue to suppose the better-connected banks are escaping scrutiny, so must grab them all.
20
@14-- I have to disagree. The problem is explicitly the bad loans. Yes, the derivatives market turned piles of crappy loans into glimmering towers of shit, but the bricks were still the loans. It was the demand from the securitizers that drove down lending standards. Just as you couldn't have subprime mortgage-backed securities without subprime mortgage loans, you also wouldn't have subprime mortgage loans without a booming demand for subprime MBSs. This is the point: there was too much lending, and we can't lend our way out.
However, I also agree with @15 in terms of adopting a "bad bank" model. I consider having a bank nationalized, chopped up, and sold for scrap a "failure" of that bank. When I say a "solvent" bank, substitute "a bank that can be saved." What I was getting at was the absurd notion, held by many (I'm looking at you, Barney Frank) that if the banks would just start lending again, the problem would go away. This is a crisis of confidence AND solvency. You can't have one without the other.
However, I also agree with @15 in terms of adopting a "bad bank" model. I consider having a bank nationalized, chopped up, and sold for scrap a "failure" of that bank. When I say a "solvent" bank, substitute "a bank that can be saved." What I was getting at was the absurd notion, held by many (I'm looking at you, Barney Frank) that if the banks would just start lending again, the problem would go away. This is a crisis of confidence AND solvency. You can't have one without the other.
21
Three things:
1. Banks aren't lending, spending the money on dividends and CEO/prior CEO/exec pay/benefits instead. Call the loans in if they won't lend.
2. CDOs are bundles of fractions of mortgages - buy out the underlying US-only mortgages and forcibly refi them at 5 percent 30 or 40 year fixed to the current "owners" to solve the underlying problem. Let the rest die. It's a market - become the market maker.
3. Liquidity is severely impacted for small business (e.g. people who make $250K or less) and consumers (same). Credit card rates for more than half of this debt is in the 26 to 30 percent range. Force usury laws on the industry in the 30 year fixed mortgage rate + 10 percent (e.g. 14 to 15 percent).
If it ain't in America don't fix it - force their countries to fix it.
1. Banks aren't lending, spending the money on dividends and CEO/prior CEO/exec pay/benefits instead. Call the loans in if they won't lend.
2. CDOs are bundles of fractions of mortgages - buy out the underlying US-only mortgages and forcibly refi them at 5 percent 30 or 40 year fixed to the current "owners" to solve the underlying problem. Let the rest die. It's a market - become the market maker.
3. Liquidity is severely impacted for small business (e.g. people who make $250K or less) and consumers (same). Credit card rates for more than half of this debt is in the 26 to 30 percent range. Force usury laws on the industry in the 30 year fixed mortgage rate + 10 percent (e.g. 14 to 15 percent).
If it ain't in America don't fix it - force their countries to fix it.
22
Will:
1) Who should the banks lend to? Should they make risky loans to companies or individuals that will be insolvent months from now anyways? Should they be buying GM commercial paper that will be worthless by this time next year? The idea that banks are spending the money on CEO bonuses is a canard. That's a minuscule, irrelevant part of the problem.
2) How does refinancing people into 30 year mortgages help? Remember, housing prices have dropped 30% or more in a lot of markets, and the smart money predicts a fall of another 20% in the coming year. If you stick people who bought in 2006 with a fixed-rate 30-year mortgage on a house that is worth half of the loan they're paying off, how are you helping them?
I think you also underestimate the feasibility of unbundling MBSs and CDOs. CDOs are often triple securitized-- in other words, the assets in a CDO are usually tranches of another security, the assets of which are another security and so on. You have to go down many levels to get to the underlying mortgages.
Nope, a period of painful deleveraging is pretty much the only option here.
As to the FDR talk: Maybe he helped, maybe he didn't. Our understanding of the economy is rudimentary at best and often based on ideological mythology. I suggest you look at what Warren Buffet says of feasibility of the current plans: No one knows if they will work, but you have to try.
http://www.usnews.com/blogs/the-ticker/2…
1) Who should the banks lend to? Should they make risky loans to companies or individuals that will be insolvent months from now anyways? Should they be buying GM commercial paper that will be worthless by this time next year? The idea that banks are spending the money on CEO bonuses is a canard. That's a minuscule, irrelevant part of the problem.
2) How does refinancing people into 30 year mortgages help? Remember, housing prices have dropped 30% or more in a lot of markets, and the smart money predicts a fall of another 20% in the coming year. If you stick people who bought in 2006 with a fixed-rate 30-year mortgage on a house that is worth half of the loan they're paying off, how are you helping them?
I think you also underestimate the feasibility of unbundling MBSs and CDOs. CDOs are often triple securitized-- in other words, the assets in a CDO are usually tranches of another security, the assets of which are another security and so on. You have to go down many levels to get to the underlying mortgages.
Nope, a period of painful deleveraging is pretty much the only option here.
As to the FDR talk: Maybe he helped, maybe he didn't. Our understanding of the economy is rudimentary at best and often based on ideological mythology. I suggest you look at what Warren Buffet says of feasibility of the current plans: No one knows if they will work, but you have to try.
http://www.usnews.com/blogs/the-ticker/2…
24
#7
I wasn't specifically thinking of gold-backed currency but I'm not sure why it wouldn't meet your requirements for being a good holder of value. We agree 100% on what a real currency is though. The dollar and the way it is manipulated does not represent real currency.
I wasn't specifically thinking of gold-backed currency but I'm not sure why it wouldn't meet your requirements for being a good holder of value. We agree 100% on what a real currency is though. The dollar and the way it is manipulated does not represent real currency.
Advertisement
Most Commented on Slog
-
Hating People Doesn't Make Them Thinner by Jen Graves
-
Los Angeles Gay Bar Bans Bachelorette Parties Until Marriage Equality Is Attained by David Schmader
-
Fill in the Blank by Grant Brissey
-
This Reminds Me of the Great Calculator Scare of the Late '70s/Early '80s by David Schmader
-
Idiot Tries to Defend Bigoted Anti-Gay-Marriage Preacher on Anderson Cooper by Paul Constant
-
SL Letter of the Day: Putting It In by Dan Savage
-
Six Moms with Too Much Time on Their Hands and a Shitty Website Decide to Fight Gay Superheroes by Paul Constant
-
Why Mayor McGinn's Wife Canceled Her Family's Seattle Times Subscription by Eli Sanders
-
What the Hell Is Wrong With Seattle's Pride Parade? by Dominic Holden
-
Meet the UW "Swagga Suit" by David Schmader
RSS
Facebook
Twitter
Comments (24) RSS