The Senate just can't help itself

Folks,

If you're struggling to get your bearings on the current financial crisis and the need for a "bailout", watch Charlie Rose's interview with Warren Buffet from last night. It really gets to the heart of the matter and clears up a lot of confusion. Five stars.

tinyurl.com/3wej5g

I'm supposed to be getting ready for a business trip so I'm going back into lurker mode now.

Pretty soon, we're going to reach China.

Well played, sir.

And when we reach China, as we stand on its smoldering, radioactive ruins, we will have to repeat the question that Ghenghis Khan's chief lieutenant asked, "Now that we have it, what are we going to do with it?"

And I'm not sure that I'm joking. But now we know why there has not been a Senator elected to the Presidency since 1960 and with luck there will never be another one.

Jennifer, do please ignore the sniping at your prose style. It has no bearing on the situation.

You raise important points, which have gone unnoticed and unnoted just about forever. You do leave out some important details, though, that bear examination:

1) Real estate market inflation is not reason enough to force mortgage originators to bear the loss when property values drop. While your 200k-150k example is reasonable, it misses what I consider the most important point: originators should act to preserve the repayment of the mortgage, and letting judges decrease the prinicpal amount has nothing to do with the panicked reactions on all sides. Your example is for a current house value. What would you say to a bank asking to restore the original principal amount at some future date when the market value of the house comes back up to 200k? Why wouldn't you, in our hypothetical scenrio, lobby for letting banks increase principal amounts in an up market, say if the 200k purchase price becomes a 300k market value down the road? If the homeowner is protected from such a practice when realizing such a gain, the mortgage originator should be protected from the reverse situation.

2) The biggest single culprit in the sub-prime fiasco is adjustable rate mortgages. There are countless stories of people who were able to affort their monthly payment before the rate adjusted upwards. The simpler approach would be to give judges the authority to fix the interest rate at the lower level. The vast majority of foreclosures would be mitigated just from that. Let the originators bear the consequences of their risk, by being forced to be content with a lower interest rate as the balance to avoiding foreclosure because of inability to pay the monthly amount. The mechanics of this is relief for those homeowners who were unable to refinance to a fixed rate.

There exists a process right now that illustrates both points. My wife and I are about two years ahead on our principle, and the earlier we pay off our mortgage, the lower the effective interest rate and consequent "profit" realized by our mortgage company. The book rate stays the same. No adjustments to rate or principle balance, whether by a judge or by our refinancing, enters the picture.

Cleveland, my friend, long time no see. I hope all is well with you.

I am supremely unsurprised that political expediency and quid pro quo remanin the rules in the Game of Congress. Regardless of who you choose as avatar for your preferred ideology, they are all players, and they are more interested in the Game than in any attention to the crisis and its root causes. Rod is expressing his observation of the game. Criticize his opinions and/or conclusions (as I do), but at least acknowledge that the observations are needed.

Yes, Rod, just keep right on digging the nation into a deep hole by constantly slamming Palin, whose very DNA opposes vote-buying pork, and thus helping Obama, whose Socialism will facilitate the Senate vote into becoming a routine in the future.

Even if what you say is true,McCain has no such aversion, as demonstrated by his vote for this latest effort in hole-digging. That it will become routine in the future is already guaranteed, there is nothing to stop another Wall Street blackmail of the taxpayer, they will almost certainly keep on coming back to the well, at least until a guillotine is erected on Wall Street. It is doubtful that Obama would be any better, or any worse, than McCain, both will be dutiful corporate stooges.

This "mortgage downsizing" in Federal Bankruptcy Court is ludicrous. For one, imagine the potential for inequitable treatment from court to court. There will be a market for these houses. Yes, at lower prices. And yes, all houses in an area of many foreclosures will have lowered prices. But this is one of those liberal ideas that I just can't go along with. (And I am not a Republican.) A financial meltdown in Texas occurred during the late '80s. It was very painful, but the foreclosed housing stock was repurchased in an orderly fashion. It will occur again. To implement a "mortgage downsizing plan" will just encourage more "wealth recapture strategies." It is going to happen anyway, but we don't need to encourage it.

They talk about getting the credit flowing again. I don't need anymore credit. I believe most Americans have too much credit. Just look at how many students receive a credit card offer for an obscene limit. Most if not all of them find themselves in a financial hole before they make enough money to pay it back.

If the government, the largest company of all, wants to help me out, stay out of my pockets. Stay out of my way. And quit punishing me for reaching higher. I work hard to get to a level of income I am at now, way below 250K way below 100K even, however some how they take more money from me every year, every pay check. I f I work harder longer hours, you guessed it, they suck up the extra I make because, well I am sooooo rich. I know many people that have to watch how many hours they work over time because after 10 -11 hours of overtime they bring home a smaller check then they would if they didn't work any over time. So why should we, the american people bailout wall street? It seems to rebound when they say they will not help, then as soon as it looks like help is on the way the market takes a dive because they just want the free ride.

Get he government out of business, all business.

Jennifer,

Very good article. I have to take issue, though, with giving bankruptcy judges the power to restructure home mortgages. I think this is a terrible idea. What lending institution would offer anyone a mortgage if the repayment terms could be changed on them willy-nilly? Mortgage interest rates would skyrocket ... exactly what we don't want to happen.

And can you imagine the political blowback from responsible citizens who would now be subsidizing the reckless behavior of their less sensible neighbors? Talk about democratizing moral hazard!

It would be a financial and political disaster.

As I'm sure you know, the "bailout" is designed to address the liquidity crisis. It will not, and cannot, solve the insolvency crisis that we're going to be facing. We have to work through the insolvency crisis the old-fashioned way: bankruptcy, write offs, and recapitalization of surviving financial institutions.

Bruce and Larry,

Watch the interview with Warren Buffett that I linked to in the first combox entry. Once you understand what the "bailout" entails and how it works, feel free to comment. You guys need to get clear on this.

With the utmost sincerity and good will,

P.

Watch the interview with Warren Buffett that I linked to in the first combox entry. Once you understand what the "bailout" entails and how it works, feel free to comment. You guys need to get clear on this.

I don't need to listen to Buffet's self serving comments to recognize theft and fascism. Buffet is going to be one the biggest beneficiaries of this little piece of blackmail, I would hardly expect him to speak against it.

Problem is, when they get to China, the Chinese government will have wised up coming off this Arrow-smith nonsense and stop buying T-bills.

As per Biden,bankruptcy courts will now tell banks what their debtors' principal and interest will be, like they're utter children. So we need a LARGE RANDOM NUMBER BAILOUT FIGURE federal bailout (Paulson's own words) so idiots who shouldn't have bought houses in the first place can be subsidized to stay in their foreclosed Mcmansions by those of us who have treated our home financing like adults.

If only ROn Paul had run 3rd party. If The Maverick is not on his high horse about this, there's little difference between him and Obama. Either will be taking orders from Bernanke and the Treasury.Sec.

In-Freaking-Sane.

Larry,

How is it theft? The government stands a good chance of making a profit -- that is, if the politicians don't interfere. The money center banks and broker dealers are taking a huge hit on this deal.

How is it blackmail? The commercial credit market is on the verge of collapse. The 'bailout' an attempt to keep the liquidity crisis from spreading to the real economy with catastrophic consequences.

How is it fascist? It's a form of monetarism -- advocated by economic advisors since the days of Milton Friedman.

"I ask you not to assume that I don't know what I'm talking about because I disagree with you."

I'm an economist who specialized in the Japanese financial crisis for a good period of my professional career. Let's just say I don't have much confidence in your knowledge of the situation. Believe it or not, knowledge matters.

The Hill has made a mockery of what's left of US dignity. They wasted a week with a 'bailout' and chose to vote on one rife with 'pork goodies.' The original item (albeit not complete) had none of this. Shame on them.

They've just voted themselves BILLIONs of dollars to waste (as usual), on themselves. Repeal of wooden arrow tax that costs $200k? Money for wool research? $100million for freakin NASCAR? Are you kidding me?

I thought this was to bailout a country in crisis. Gosh, I'm an idjit.

And even though Wachovia has a company willing to MERGE with it intact, without Government assistance, The Government will now force us all to watch while they back Citicorp (who CANNOT afford to do this) - because the stupid FEDs forced Citicorp into this a week ago.

The Feds should not force these things. The government should not OWN companies. We were never a democracy, we now no longer a Republic. We are socialist, like it or not. And no, one should not assume these derivatives and other horrid 'paper' schemes will somehow be sold at profit. That's nonsense.

We, the taxpayer, will now pay for an ill-equipped company to sort of buy, sort of not buy, a failing bank. Wells Fargo can do this deal. The Feds should make the wise move and back Wells Fargo.

You're probably thinking of Myron Scholes and the Black-Scholes equation. Dr. Scholes did not cause this crisis.

No, but people who relied on his work did cause it. Still gives little reason to trust economists.

Larry, with respect, your logic is tantamount to deciding that all surgeons are incompetent because the one who took out your appendix left a clamp in you when he sewed you up.

Experts will disagree amongst themselves. They all will, at one point or another, be wrong. The fallacy of expertise is not that one cannot have it, but that it makes you suddenly better than human and incapable of making mistakes.

In my first career, the last few years of it I was considered an expert, and I believe I earned the reputation. Even so, my employer carried a $1 million liability bond on my work, and while (fortunately) it never needed to be used, I made plenty of mistakes.

Pyrrho suggests that the Buffett interview will make you and anyone else who cares to view it better informed. He has not asserted that it will change your opinions on anything, though he does seem to imply that he hopes it might.

Know your enemy, Larry. Do not assume that, as time passes, you still know everything you need to know.

Know your enemy, Larry. Do not assume that, as time passes, you still know everything you need to know.

I never do, but "Trust me, I'm a trained expert", doesn't impress me much. Its merely an appeal to unnamed authority. And how much to do you need to know to recognize theft, blackmail and fascism? Or, for that matter, to recognize the difference between an economic argument and a moral one?

It would if you were suffering a massive heart attack and an EMT appeared on the scene.

Not if it were a well known fact that quack EMT's were running around killing people either through malice or incompetence.

Why do we need to keep these incompetent, greedy and stupid firms alive? Let them fail, if I start a business and I do stupid, greedy and incompetent things I will go out of business, and nobody will try to bail me out. Why do we have socialism for the rich and not for the poor or middle class? If socialism is such a good thing for the rich, I want some of it, too (and not just the bill for it). And don't try the 'too big to fail' line, if they are too big to fail they are too big to allow their continued existence, particularly since this "rescue" is going to result in even fewer, but much larger, firms. At the very least, if they are 'too big to fail', make splitting them up into smaller firms, ones that aren't too big to fail, a condition of getting aid.

And no, its not that serious, and even it was, since you are so fond of medical analogies, "first do no harm".

"Regardless of who you choose as avatar for your preferred ideology, they are all players, and they are more interested in the Game than in any attention to the crisis and its root causes. Rod is expressing his observation of the game. Criticize his opinions and/or conclusions (as I do), but at least acknowledge that the observations are needed." Franklin Evans

Hi, Franklin. If by their interest in the "Game" you mean they place their self interest (staying in office) over any attention to the root causes (their own vote-buying Socialist legislation which critically hampers our economy's underpinning--the free market), I would agree with you.

As to my criticism of Rod's observation that our fearless legislators just can't help themselves (while he constantly and almost gratuitously snipes at Palin, the opponent of such Congressional pathology), I have to respectfully disagree that I should at least acknowledge that Rod's observation is needed. Some things, my friend, are so painfully self-evident that the manner of "observation" of them can take on a partisan or hypocritical flavor.

Now I hear on the radio (NPR, I'm not a complete Neandertal) that it will take "several weeks" before Paulson actually starts buying these securities that would be the death of us all if they remained in private hands. Now that they have their hands on the money it appears that the emergency has passed. All of you "economists" out there who managed to stampede people in and out of Congress into supporting this steaming heap, good work. For your effort in supporting the cause, your chains will be made lighter.