The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.
“Voluntary supervision.” That translates to “promise to be good, and we’ll ignore whatever you do. And allow the economy to collapse.” At least they’re starting to realize that this was a huge, terrible, awful mistake.
Holy crap, that number is so big I don’t even know how to pronounce it. My brain shuts off somewhere after the 8th ‘0′. I think it’s some kind of a defense mechanism. I’m just going to call it a scamtillion. Henry Paulson is asking the United States Congress to give him seven scamtillion dollars.
Okay, so I did some Googling, and it turns out that this number is seven hundred billion dollars. Seven. Hundred. Billion. He claims that this money must be given to him immediately, or the entire US economy will collapse.
What does he plan to do with that money? Here’s a helpful guide to Treasury Secretary Henry Paulson’s plan. No, wait, I’m sorry, that’s the entire plan itself. This guy wants the Congress to give him seven hundred billion dollars, by the end of the week, and his entire proposal, the thing he wants passed into law, is three pages long.
This is one of my favorite parts:
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
This is not a blank check, no sir! We require a paltry seven hundred billion dollars in order to fix the mess that we helped create!
But the best – the absolute best – section is right here:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Go back and read that again, slowly.
“What I do with this money, what I, Henry Paulson, do with seven hundred billion dollars of the taxpayer’s money, cannot be reviewed by Congress, cannot be reviewed by any investigative or regulatory agency, and cannot be reviewed by a court of law. You just have to trust me.”
He is asking for a hundred billion dollar check, and free reign to do with it as he will. His actions, should this “bill” pass, would be unreviewable, by law. If he decided that the best way to fix the economy would be to blow it on hookers and coke, that decision could not be questioned, by law.
But let’s take a more realistic scenario. Let’s say Paulson decides that the best way to fix the economy is to give a whole lot of money to some personal friends on Wall Street. Yeah, the other firms might get a share, but the focus of the relief would be on those firms owned by Paulson’s friends. If that’s what Paulson decided, there would be nothing anybody could do about it, by law.
Or, let’s say some lower-level bureaucrat decides to do something similar. Whatever portion of the seven hundred billion dollars this hypothetical individual is given charge of gets diverted to his friends. Again, there is nothing anybody can do.
Henry Paulson is asking for seven hundred billion dollars, and no accountability. There is no way, no possible way, that something like that can happen in a democracy. The two concepts are antithetical.
Look, folks. The people that got us into this mess are probably not the best people to get us out of it. And I know for sure that the best idea is not to give one man seven hundred billion dollars and look the other way.
Ian Welsh’s recent article Simple Solutions For America #1: Fixing the Mortgage Market makes strong case for how the Government should handle to mortgage meltdown: instead of accepting these junk mortgages as collateral for loans, as the Fed is now doing, Welsh contends that it would be better for the Fed to actually purchase these mortgages outright, at a “fair market value’ (e.g. the mortgages’ price in 2001, before the bubble), and work with the borrowers to establish a fair, workable repayment plan.
The benefits to this plan:
Mortgages, which are not essentially worthless, would have value again. This is imoprtant, since the US economy follows the mortgage economy very closely.
The government would actually make a long-term profit, instead of simply throwing billions of dollars of taxpayers’ money at people who offered and accepted bad loans.
The people responsible for this mess would lose money, which is a principle of the free market, and would discourage these kinds of shenanigans in the future.
After a cursory glance at this plan, I don’t see any glaring problems. Thoughts?
The original title of this post was going to be Cut The Interest Rate All You Want, It Isn’t Going To Fix Anything, And In Fact It’s Going To Make It Worse, And Anyone That Believes Otherwise Should Be Kicked In The Sensitive Parts In Order To Prevent The Possibility Of Their Ignorance Spreading Via Biological Reproduction, but it lacked a certain… elegance.
Look, this is a very simple thing. The problem in our economy right now is that too many people took out loans they could not afford. There is no possible set of circumstances under which the correct answer to this problem is “make it easier to borrow money.” It simply makes no sort of sense, not even the sort of sense you think you make when you’ve had too much to drink and you drunk-dial your accountant at 3 in the morning and tell him to buy mangos, because their futures are going up, man.
A debt crisis cannot be solved by more debt.
For the love of all things logical, a debt crisis cannot be solved by more debt.
Does anyone know the HTML syntax to make something even more emphasized? Because I don’t think I’m adequately conveying the degree to which a debt crisis cannot be solved by more debt.
Ahem.
Anyway, allow me to explain how this whole lending thing works.
Say a bank borrows a thousand dollars from the Fed. This is real money, hard currency.
The bank then lends that money out to Some Guy, who uses it to buy a widget. A really nice widget. The maker of the widget now deposits that thousand dollars in the bank.
The bank now has a thousand dollars of Widget Co.’s money on its books, and an IOU for a thousand dollars from Some Guy. But the bank doesn’t stop there: it lends out Widget Co.’s money to Some Other Guy. This is what banks do, and it’s why they can pay us interest in our deposits.
By law, a bank has to keep some cash on hand in case a depositor comes asking for it, so let’s say it keeps a hundred dollars on hand, and lends nine hundred to Some Other Guy. Some Other Guy buys another widget. A slightly less-nice widget. The maker of the widget now deposits that nine-hundred dollars in the bank.
The bank now has $1,900 of Widget Co.’s money on its books, as well as an IOU for $1,000 from Some Guy, and an IOU for $900 from Some Other Guy. There is now $1,900 dollars in the economy, even though there was only $1,000 “real” dollars to start with. Lending multiplies money.
It is designed to work this way. It is one of the ways our economy grows. But things start to fall apart when people can’t repay their debts.
Let’s say Some Guy can’t afford to pay his $1,000 loan back. The bank now has $1,900 of Widget Co.’s money on its books, as well as an IOU for $900 from Some Other Guy… but the $1,000 it was supposed to get from Some Guy has essentially vanished. It owes $1,000 to Widget Co. that it cannot repay, plus $1,000 to the Fed, which it also cannot repay. The economy has shrunk, and that money is gone. It has to eat that loss, and if it cannot, the bank will go bankrupt. If Widget Co.’s deposit is not insured, it, too, may go bankrupt.
That is essentially what is happening in our economy today. The various financial organizations have been left holding stacks of worthless paper – mortgages – that contain empty promises of repayment. The collateral that backed these mortgages – the properties themselves – are falling rapidly in value, which means that selling them won’t make up the difference. The money that was theoretically represented by those pieces of paper has simply disappeared from the economy, vanished. Trillions of dollars are simply gone, burned up like chaff.
The answer to this problem is, essentially, to be more careful about who we lend money to, and probably some sort of massive bailout from the Fed. As much as I loathe that last part, I don’t think our economy can suffer the alternative.
But I know for darn skippy that the answer to this problem is not to cut the interest rate and let even more people borrow money for stuff they don’t need and can’t afford.
Much like the holidays, it seems to come earlier and earlier every year. Unlike the holidays, though, I don’t see this as an annoyance: I like to get these things taken care of as quickly as possible, and while Jingle Bells in October will send me into fits of rage, getting my W2s and Ps and Qs and sundry other tax-related forms in February and March makes me eager to see just how badly Uncle Sam has stuck it to me in the preceding three hundred and sixty five days, and to take a little bit of that back.
Many financial advisors would accost me for actually getting a tax rebate, saying that I am just giving the Government an interest-free loan. They are correct. On the other hand, I lack the patience for paperwork necessary to correct the issue, and I like getting a check in the beginning of the year. I think of it as enforced savings. Laziness for the win.
Regardless, many Americans are now in the midst of tax preparation, and many of those many are already planning on how they are going to spend their return. A down-payment on a car. A new computer. A shopping spree at the mall. For those less fortunate, a nice, warm cup of coffee.
Allow me to propose some alternatives.
1. Start An Emergency Fund Everyone should have some money set aside for an emergency. If the car breaks down, or the furnace blows up, or your water main breaks – or, if you’re like me, and all three of those happen in the same bloody year – it’s comforting to know that there is already money set aside to deal with the problem. Dave Ramsey, author of The Total Money Makeover, recommends setting aside at least $1,000. I have already done this, so it isn’t an issue for me, but if you don’t have an emergency fund, why not use your tax return to start one?
2. Pay Off Your Debt Debt will cripple you. America’s debt problem is a horrible, amazing thing; millions of people are living beyond their means, and getting further into the hole every day. Why not use your tax return to start climbing out? A portion of my tax return is going toward paying off my student loans.
3. Pre-Pay An Upcoming Bill Getting out of debt is great, but so is not going further into debt. If you have an expense that you know is coming up, why not set aside your tax return to meet it? I’m already thinking about next year’s heating bills, and another portion of my tax return is going toward pre-paying that bill.
4. Break Your Credit Card Habit Continuing on the “debt is bad” theme, you can also use your tax return to help break your credit cad addiction. I will typically put a few hundred dollars a month on my credit card, just to buy groceries, gas, and similar expenses. I pay this off every month, so it isn’t a terribly important issue for me, but for many others, their credit card debt – and the interest the owe on it – grows every month. Why not use your tax return to help change the tide? A portion of my tax return is going to be set aside for the expenses I normally put on my credit card. Then, when next month rolls around, I’ll spend the money I would have used to pay off my credit card to meet that month’s expenses. Credit Card addiction broken.
5. Start Investing Assuming you’ve done all of the above, that you’ve established an emergency fund, payed off your debts, and aren’t in danger of going into more debt, why not start making your money work for you? You don’t have to be a stock broker or financial wizard to get a return on your money; all you need to do is open a high-interest savings account. I use ING Direct, and whatever is left of my tax return this year will go into this account, quietly and consistently earning me about 3.5% every year.
I move almost all of my money around on-line; what I don’t pay for in cash I generally pay via online bill pay. This has two effects: one, I very rarely write checks anymore, and two, it makes it kind of hard to reconcile my checkbook each month.
When you reconcile a checkbook, you go through each transaction the bank has listed, and each transaction you have in your own records, and make sure that they match. This is a pain in the butt, but it’s important to do so every month.
Case in point: I was going through my bills last night, and discovered a charge for $29.99 that I had no record of. It was payed to “Market Billing on behalf of Tel Media.” I’ve never heard of these people, so I know that I didn’t write them a check. Even more interesting, when I downloaded the image of the check, my address was listed as being in Chicago, Illinois.
I did some digging this afternoon, and it turns out that this is a fairly common scam, being run by some company in Cyprus. They somehow got a hold of my bank account info, created a fake address for me, and dummied up a counterfeit check, the same kind of check my bank sends when I use online bill pay. Which makes me one of the thousands of victims of identity theft in America. I feel so honored.
A quick trip to the bank and five minutes of paperwork cleared up the whole matter, but if I hadn’t been checking my account, I would be thirty dollars poorer, and they would be thirty dollars richer.
I have been planning to write an article on the Subprime Mortgage mess for some time now, but I haven’t been able to make it clear enough to be easily understandable and short enough to be readable. Fortunately, this profanity-laden series of stick figures has done all the hard work for me. I present to you: the Subprime Primer
Small Loans, a predatory lender owned by Money Tree, Inc, gave a $200 “payday loan” to a disabled, elderly, illiterate man and thereafter took in his benefits check for him and paid him a small “allowance” out of it, less the money they deducted as “repayment” on the loan. All told, they took thousands from the man over a period of years, bleeding him so badly that he ended up homeless, begging for power to run the machine that treated his chronic lung infection.
Mr. Bevels, who can’t read, says a clerk helped him fill out papers that instructed Social Security to send Mr. Bevels’s $565 monthly benefits to an account at an out-of-state bank, which transferred the money back to Small Loans or its parent, usually within a day. As is often the case, Mr. Bevels’s bank earned no interest and didn’t come with either ATM cards or checks.
Every month for nearly four years, Mr. Bevels, who is known around town as “Buckwheat” because of his thatch of yellow-white hair, rode his motorized mobility scooter to Small Loans to pick up his “allowance,” which was sometimes as little as $180 a month, he says.
I recently watched James Scurlock’s film Maxed Out, a documentary discussing America’s addiction to debt.
This culture of debt is a fairly recent occurrence. A few short decades ago, credit cards didn’t even exist. The movie actually plays a clip from the CBS Evening News, where Dan Rather made the announcement that “today, for the first time since World War II, America became a debtor nation, owing foreign governments more than it is owed.” Today, this seems like the way it has alway been, but back then, it was news.
There were a number of poignant moments in the film, from the soldier called into active duty in Iraq, facing bankruptcy because of his extended tours and small stipend, to the retired woman who is packing up her house because she can no longer afford the payments, and knows it’s only a matter of time before the bank forecloses, but the most harrowing moments come at the end of the film. Two mothers, friends and apparently neighbors, are discussing their children’s college experience. Both students applied for and received multiple credit cards, and each racked up over ten thousand dollars in debt. For a while, they made a go at it, working extra jobs, paying off what they could, but eventually they decided that they had gotten themselves into an unwinnable situation, and so, before they even turned 21, both laid their bills out on their dorm-room beds, and hung themselves.
The tactics employed by the credit companies can only be described as “predatory.” They intentionally target individuals of limited means, individuals that will likely only be able to make minimum payments, thus insuring a customer – and a source of income – virtually for life.
My political views have traditionally been quite laissez faire, but the more I study this issue, the more that is changing. I want to make it clear that the people who get themselves into debt often carry a great deal of blame; often, debt is a result not of desperate circumstances, but stupid decisions. And because of this, I had believed that the government had no legitimate role in all of this: it was up to the consumer to educate and protect themselves, not Washington.
I believe, though, that it is legitimate for government to prevent an individual from intentionally harming another individual. When someone is murdered, we don’t simply say that the victim should have better protected themselves; rather, we find and punish the murderer. When someone is a victim of fraud, we don’t simply say that the victim should have been more savvy, we find and punish the con man.
There is no legitimate reason to charge 30% annual interest. There is no legitimate reason to extend credit to people who will never be able to repay it. There is no legitimate reason target the most financially vulnerable in order to increase wealth. And because there is no legitimate reason, it should end.
Finally, I want to add that not all credit is bad. I would not have been able to go to college if I hadn’t been able to take our a student loan, and my career has made that investment more than worth the cost. I would not be sitting in this house if I had not been able to get a mortgage. And I do occasionally use credit cards, for gas or for groceries, out of convenience, although I am in the process of weaning myself off of that habit.
The point, though, is that I have been careful. My credit cards almost never have more than a couple of hundred dollars on them, and they are paid off each month. My mortgage payment is about 25% of my monthly income, but they told me I was “qualified” for a loan more than three times larger. My student loans have a reasonable interest rate, but I’m still paying them off.
We all need to educate and protect ourselves financially, and if America is going to continue to be the economic power of the past, it must break this addiction to debt.
