Once again, credit my lovely wife for her wisdom.
During last spring's heavy flooding in Iowa and Missouri, we were watching news coverage of residents of river towns frantically putting up sandbags. My wife made the following observation (I'm paraphrasing):
"It's fine, and understandable, that they're doing that. But the river has pretty much gone where it's wanted to go for centuries, and there's really nothing man can do to stop that."
Somebody please tell Hank Paulson and Ben Bernanke. Quick. Before we all drown in a river of debt.
They started out by pretty much ignoring the rising waters.
On July 19 of last year - two days after the Bear Stearns hedge fund collapse - Bernanke told the Senate Banking Committee that losses from the subprime fiasco might total as much as $100 billion.
Today's estimates? According to the IMF, $1.4 trillion. (To be fair, not all of that is directly from subprime. But whether the flooding comes entirely from rainfall directly on the river itself, or whether some of it comes from various tributaries that are also affected by the rain, the guy watching the water level should see the flood coming.)
It's also interesting that less than a month after Bernanke made that bold estimate, his Fed began cutting interest rates, "acknowledging for the first time that an extraordinary policy shift is needed to contain the subprime-mortgage collapse," according to Bloomberg.
So after ignoring the rising waters, Bernanke and Paulson began casually tossing a sandbag here, another there, thinking the raging waters would be "contained." Now, they're throwing everything they've got at it. Come to think of it, since the US is broke and the Fed is insolvent, they're throwing stuff they don't have at it. In the form of money. Mountains of money.
Our money.
But this thing is looking less like a flooded river, and more like one great big honkin' mother of a tsunami.
And by throwing money at it, they're not really throwing sandbags. They're throwing great big buckets of ... water.
See, the river will seek its natural course, and its natural level. As I laid out yesterday, so will markets, whether they be for stocks, real estate, jobs, dollars ... whatever.
And men trying to stop that from happening is as futile as men trying to alter the course of the Mississippi.
Especially when the men are incompetent.
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Let's get back to that IMF estimate of total losses, because it lies at the heart of part one of the two-part reason Paulson's ever-shifting TARP plan will fail.
Total US bank losses to date have been about $385 billion (for the world, it's $637 billion, or just less than half the IMF forecast). US financials have raised just $338 billion in capital to offset the losses. Now, that doesn't sound too bad - they've raised 88% of what they've lost, so they're only down $50 billion or so.
But they've raised $177 billion of that capital - more than half the total raised - in the third and fourth quarters of this year. And that includes the first round of TARP money - everybody else, from China to Korea to Singapore to Abu Dhabi - is done giving money to Wall Street. And not all of them have yet reported third quarter losses. And none of them have yet reported fourth quarter losses.
It's going to get ugly when they do.
Ultimately, even with the TARP money, the banks will just be back to break-even on their losses to date, if that. So the TARP money will have been wasted. Why?
Because the whole notion behind the shift from buying crappy bonds to injecting capital in the banks has been that the latter will encourage banks to lend. Banking is a leverage game: a dollar of capital can be deployed into a multiple of that dollar in loans. And that primes the economic pump, sending cash from Wall Street to Main Street (oh God, I can't believe I just said that).
Paulson even handed out instructions with his TARP checks, telling the banks to go out and lend, much like his boss told us all after 9/11 to go out and shop. (Remember those ads? "Do your business, all over the country." I used to laugh every time I saw them, since "do your business" is what we tell our dogs when we want them to poop.) Paulson's exact words:
"The needs of our economy require that our financial institutions not take this new capital and hoard it, but to deploy it."
While GMAC isn't a bank and didn't get any TARP money, it is a consumer lender. How is it "deploying" its capital?
It sent a letter to all GM dealers yesterday telling them it would not lend money to any would-be car buyer with a FICO score below 700.
The prime cut-off is 680.
This will really help GM sell cars and avoid bankruptcy.
Other banks aren't going to start lending either. They don't want to go back to the days of making loans to people who can't repay them. And the only way they will is if the government nationalizes them, and does it themselves, using our tax dollars.
Gulp!
(There's a third reason Paulson's plan won't work: Paulson's running it.)
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Here's a sinister little plot for you. Remember why Fannie and Freddie went belly-up? The two largest mortgage insurers in the world, who between them guaranteed more than $5 trillion in loans at their zenith, were originally chartered to buy only "conforming" loans - those that met stringent underwriting standards, and thus were the highest-quality mortgages in the market. But at one point their combined exposure to subprime loans amounted to 48% of their balance sheets.
So what are they up to now that Uncle is at the helm? From the Credit Union Journal:
"The Treasury Department, which took over Fannie Mae and Freddie Mac last month, is directing the two secondary mortgage giants to start buying $40 billion a month of distressed mortgage securities in order to recreate the failing market. Officials plan to pump new liquidity into the secondary market by having Fannie and Freddie buy up subprime, Alt-A and non-performing prime mortgages."
On whose authority? This is an end-around to the TARP. It allows Treasury to ultimately spend the entire $700 billion of TARP money injecting capital into banks, while spending an unlimited amount of money buying crap assets through Fannie and Freddie.
Which is exactly what caused Fannie and Freddie to fail in the first place.
So they're going to make Fannie and Freddie fail again. Only now, we're the shareholders who will take the hit. Write your Congresspersons. This has got to stop, now!
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Still in a quandary about who to vote for in just a few weeks? This won't make it any easier.
I reported before on McCain's plan to spend $300 billion of the TARP money buying up bad mortgages.
Bold prediction: if John McCain is elected, we will see the largest one-month spike in mortgage delinquencies on record, covering every home whose market value is below its mortgage balance, and/or whose mortgage interest rate is above 5.25%.
As for Obama, he produced his own brilliant idea yesterday. Remember a week ago, when he and every other politician was crying, "We can't let the value of people's retirement accounts keep going down!"?
Well, he wants to let people withdraw up to $10,000 from their tax-deferred retirement accounts, penalty-free. Won't that make the value of the accounts go down, even if the market doesn't?
Both of these guys have clearly taken leave of their senses. Probably just dizzy from running around in circles, screaming, "The sky is falling!"
Besides encouraging dis-saving, this hare-brained scheme has another shortcoming:
The people that would do this wouldn't spend the money to stimulate the economy anyway. They'd probably stash it in their new wall safe. A local news station reported that a local company that sells in-home wall safes has seen sales skyrocket over the past several months. That's confidence in the banking system.
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Here's another sign of what's to come: remember the money market mutual fund that "broke the buck" last month, spurring panic in the money markets and leading the feds to basically turn money funds into bank deposits by insuring them (even though the FDIC is about broke)? Well, it had promised to distribute $20 billion to its investors by yesterday.
It can't. Why? It doesn't know what its holdings are. Not what they're worth. But how many shares each investor owns.
Gulp!
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For the people who still blame mark-to-market accounting for the current mess, besides the rational explanations of what it is, how it works and why it's important that I've already provided, here are a couple of more simple rubrics to help you get it.
There was no mark-to-market accounting in 1929. Or in 1987. And the stock market still crashed.
On a similar note, remember how speculators were blamed for the sharp spike in oil prices? How it couldn't possibly be supply and demand fundamentals driving the price?
Suddenly, oil is dropping like a rock. Where are those voices now? Why aren't they blaming speculators for shorting oil? Why are they suddenly accepting the specter of reduced demand from a global recession as a fundamental price driver?
Back to mark-to-market: there have been, in the past, bank bailouts that worked. They were expensive, averaging about 13% of the respective countries' GDP. But some of them worked.
To put that GDP number in perspective, US GDP is around $14 trillion. So the price tag to bail out our banking system would be about $2 trillion. But that doesn't factor in the impact on US inflation, interest rates and tax rates of adding that to an already-trillion dollar deficit. Which is why, in my humble opinion, bailing out US banks won't succeed.
But another reason is that in the case of every successful banking system bailout, the countries have forced immediate write-downs of bad assets to poo levels (poo is just slightly above zero, in case you didn't know).
We want to do just the opposite, and eliminate price transparency altogether. Crazy.
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Random thought, from a good friend and fellow cynic: why do we call it "nationalizing the banks" when Britain does it, and "injecting capital into the banking system" when we do it?
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My t-shirt idea of the week: with Iceland now essentially bankrupt, we can cheer ourselves up with t-shirts that proclaim, "At least we're not Iceland."
On the front. The back would read, "Yet."
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I'll leave you with this additional gem from my wife. Citing the book of Proverbs (Isaiah needs a rest), she referred to the verse that says, "For everything, there is a season ..."
That's akin to seeking the natural course of things. In the markets, there's a time to prosper, and a time to lose your shirt.
But what Washington is trying to do is make it summer all the time. As the leaves start to turn colors and fall, lawmakers are up the trees with Elmer's glue and green spray paint.
Good luck with that.
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4 comments:
Re: Well, he wants to let people withdraw up to $10,000 from their tax-deferred retirement accounts, penalty-free. Won't that make the value of the accounts go down, even if the market doesn't?'
Not necessarily. If you have an 401k or Roth account with stock A, B, C, D etc, and you must withdraw for tax reasons but do not need the cash, you can sell all the stocks,and immediately buy them all back, only now in a taxable account.
Many investors would do this anyway, rather than cash in the stocks at the bottom of the market. In order to encourage more people to do this (hold stocks rather than turn them to cash), it would be simple to wave taxes on this new account for say, three years. (This has not been proposed, but it is what I propose.)
If the 401K holder MUST withdraw the stocks because they need the money -- not because of the age requirement -- then prior to the Obama plan the money involved would have been taxable. The investor would still have had to cash in the stocks, only in this case now there isn't a tax on $10,000.
I'm aware of that - it was actually meant as a joke. But I disagree with your assertion that "many investors would do this anyway" - emphasis on "many," which is a relative term.
Most people would take out the $10k and do something silly with it - and I suspect that's exactly what the good Senator hopes for: stimulate the economy today, by encouraging dis-saving for the future.
Prior to the Obama plan the money would have been taxable. With the Obama plan the money would not be taxable.
Who are we to say that "Most people would take out the $10k and do something silly with it."
Bad economic times are already here, and they are getting worse. When people are unemployed and their unemployment insurance runs out, they may need $10,000 or more that they have put aside in their 401K or IRA.
So, there is a chance that people will withdraw for "something silly," but an even bigger chance that they will withdraw because of unemployment or because they have lost their health insurance.
Frankly, I do not regard this as a major issue in taxes or in the economy. But I do think that thinking that people will use their own money for something silly is (1) not really conservative. It is their money after all, and (2) not being very fair to the people.
By the way, on the question of unemployment insurance, one presidential candidate has consistently opposed extending unemployment insurance and the other consistently voted for extending it. McCain has been the one voting consistently against extending, and Obama has been consistently for extending unemployment insurance.
This may be a minor point to the rich, and to those who do not fear unemployment, but to those who may lose their jobs, it is very major indeed.
Who are we to say how people would spend their retirement money if they could take it out now?
I can't speak for you, but as a long-time student of the economy and the markets, I'll go out on a limb and say: history tells us what they'll do.
Why do you suppose there are penalties on early withdrawal to begin with? You warn people against undesirable behavior with penalties, and you only do it when you suspect they're naturally predisposed to such behavior.
Most people don't have the discipline to save period, let alone to save for retirement, and to keep their hands off their savings. So the government provided incentives to save, and penalties on early withdrawals.
The risk of encouraging or allowing such behavior is that those responsible enough to live within their means will eventually wind up picking up the tab for a group of retirees who suddenly find themselves unable to live on the proceeds of their retirement kitty, because they withdrew from it early.
As for those facing potential job loss, I feel for them. But if they'd lived within their means, prudently minimized their debt burden, and set aside an emergency savings fund, they wouldn't need to tap their retirement savings.
I recognize there are outliers, people with unique combinations of circumstances including health issues, dependent parents/children, job loss, catastrophic loss, etc. But they are the exception, not the rule, just as those "victimized" by predatory lenders are the outliers in the subprime crisis. We needn't write legislation asking the many to subsidize the few, the task of identifying the truly deserving few notwithstanding.
There are also those that simply cannot save for a rainy day on what they earn, and I feel for them too. But they likely don't have retirement accounts to begin with.
Finally, as for the decision whether to extend unemployment benefits - given our current deficit, and the fact that we add to it daily in a system now apparently devoid of checks and balances, I think voting not to extend them is prudent.
Everyone, you and I included, faces the risk of unemployment. A job is not a right, it's a privilege. The government provides unemployment insurance, and places reasonable limits on its term, the idea being that we bear some responsibility for our own living.
Why, then, in every recession, does Congress vote to extend benefits?
Simple: even the unemployed vote. And those that vote for extending benefits care far more about gaining your vote than spending your money to gain it.
In closing, I will repeat that this is not a time for partisanship. I hope all readers of this space will come to understand that, before it's too late.
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