What does a wave of immigrants do to an economy? It was fine for Florida in 1980

There is little to no hard data showing that immigrants hurt a local economy, but there are some cases where their benefits (or lack of harm) were clearly documented: http://www.npr.org/2015/10/01/444912593/when-cuban-migrants-flooded-miami-what-did-it-do-to-the-local-economy

In the case of the "Scarface" sudden influx of 125K Cubans to South FL in 1980 (incl. 25K former criminals according to the film), there was no economic evidence of negative impact. Many were processed and enrolled in jobs/school quickly, so their need for gov't services was minor. Also they served to "grow the pie" by creating more economic demand (125K refugees = 125K consumers), which resulted in more jobs and sales for Americans. Local wages did not fall. And eventually many of them got education and contributed intellectual capital to the US. Europe, with an aging population and plummeting birth rate, actually NEEDS a lot more productive young people who are willing to work manual/unskilled jobs.

I know 1980 was a different time, and many Cubans benefited from previously-migrated relatives and a familiar culture in FL. But clearly the US will not take in 100K people from the Mideast, and they won't be concentrated in one state. As we discussed before, many Syrian refugees are educated and may also speak English, so it's not like the typical Latin American migrant profile. Detractors will come up with all sorts of excuses to oppose refugee resettlement (cost, security, culture clash), but the bottom line is they have no evidence to back up those suspicions, and as a UN member we have an obligation to act. There will always been some criminals and deadbeats among any group of people, but refugees are no worse than a random sampling of Americans (in fact they're likely better).  

Refugee crisis

http://www.pri.org/stories/2015-09-03/5-groups-doing-important-work-help-refugees-you-may-not-have-heard
http://www.theguardian.com/world/2015/sep/03/migration-crisis-germany-presses-europe-into-sharing-refugees

Frankly I've been avoiding this topic because it's just too damn depressing. Being a refugee fleeing war is one of the scariest situations to me - I can't possibly imagine leaving your whole existence behind to flee to a foreign place. Because if you don't, you or your loved ones will starve/be conscripted/get raped-murdered.

The US helped many in my family who were refugees in the 1970s, but we really haven't done that recently, not since Somalia. What are the UN, US, and UK doing about the current crisis? Germany has been forced into a leadership situation and pledged to absorb 800K mostly Syrian refugees (out of a potential 4M). If we won't physically take in people, at least we can send cash and supplies to those who are.

I've already written about how the US turned its back on allies and refugees before (below). Are we complacent to hide behind our geographic isolation? The UK's excuse is that the world should focus on "improving conditions" in Syria so there isn't a need to flee. Well they aren't doing squat about that either, so what gives? I know every nations has very needy people domestically and may not be able to support many new visitors. Greece is on the front lines, and obviously is not in the best position to handle the crisis. If the US was as welcoming as Scandinavians per capita, we would be taking in 5M refugees this year. And we can, for probably the cost it takes to maintain a nuclear carrier. But we won't.

http://worldaffairs-manwnoname.blogspot.com/2014/08/children-fleeing-central-america.html
http://worldaffairs-manwnoname.blogspot.com/2014/05/refugee-to-native-ratios.html
http://worldaffairs-manwnoname.blogspot.com/2013/08/syria-and-responsibility-to-protect.html
http://worldaffairs-manwnoname.blogspot.com/2013/10/with-friends-like-these.html

How about China too? Aren't they the #2 economy and don't they want to be respected as a global leader? Syria is a key partner - what are they doing for their friends? Like climate change, it's someone else's problem, even if the victims are innocent and the definition of deserving help.

The SF Bay Area housing crisis

http://blogs.kqed.org/newsfix/2013/10/30/kqed-launches-priced-out-the-high-cost-of-housing-in-the-bay-area/

This is probably he most important social issue for the area. It's strange that SF has a proud history of inclusion (and a pretty good record in overall today), but this housing crisis is driven by exclusion and privilege, not necessarily "normal economics."

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Well if you average the entire Bay Area, places like Brentwood and Antioch will bring down the average. But SF is #3 priciest per sq. ft. in the US behind NYC and HNL. Versus the whole world, SF is not that bad, but real estate is really messed up in older, more cramped cities in the EU and Asia.

http://curbed.com/archives/2011/09/27/heres-a-chart-of-the-worlds-cities-by-price-per-square-foot.php

It's not even about rent vs. own. Renting is very pricey too, obviously. I think one aspect of the problem is that landlords are taking rent-controlled (or regular) units off the market in order to convert them to TIC/condos for more $, or sell the whole bldg to speculators because there is no much insane pent-up demand and high willingness to pay from the upper classes. So rental supply is going down, which causes rents to rise too.

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If you hit Wikipedia for median income by city in ca you'll find that those areas are also quite rich.  Housing doesn't happen in a vacuum.  More a function of income and the real problem is income inequality

It also happens with respect to density. The more houses/apartments available = the cheaper the rent. Nimbys in the Bay Area would like to still have their .5 acre ranch houses on some of the most valuable land on earth, meaning that the poors have to live 2 hours commute from their jobs.

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Totally agree. The social justice element also comes into play that historically lower income, blue collar, often minority neighborhoods (Mission, Castro, etc.) used to be less desirable for yuppies and therefore more affordable and off the radar of speculators. But now they are hipster paradises, and with gentrification, the "traditional residents" can't even maintain their old lives and are priced out of the market. I guess that is like economic eminent domain.

Measures like rent control or mandated affordable housing are often economically inefficient and flawed (because they are written and implemented by flawed bureaucrats, like healthcare.gov), but sometime optimal economics must take a back seat to concerns about fairness and social values (see taxes, labor laws). I'd rather have confusing rent control laws and too high minimum wage than a total lack of regulation (at least imperfect laws are a springboard for iteration and improvement). Because as you said, with the huge inequality gap, what is the point for the poorest 60% to struggle so hard trying to fit into the rich man's world (yet not really be allowed to live in the rich man's world... I guess like the "Elysium" plot, which I did not see)? Most people with a shred of heart would probably agree that there is something inherently unjust with greedy politicians/companies and wealthy invaders "annexing" and developing suddenly desirable land, which leads to the economic eviction of the residents who were there before (through legal market mechanisms and the landlords/property owners). Pardon my melodrama, but it's scarily similar to the Trail of Tears.

I heard an interview about the subject a while back, and one new SF resident and tech employee said something like, "Assholes (his word) like me can afford $3K/1BR rent and are making it hard on the previous residents, but hey, I want to live here." At least he had clear eyes. It's just sad because everyone has one life to live, and we don't want to compromise or suffer if we don't have to - even at cost to others (esp. when others' suffering at our hands is mostly invisible). Sorry for stereotyping, but I think the Gen X-ers and Millennials especially (present company excluded) really fixate on what I like to call "life maximization." Similar to their work habits of optimizing, achieving, and disrupting everything, in life they want it their way and they want it all. Best job, best home, best network, best gear, best marathon time, best family... best, best, best. When that is not really the goal but the status quo expectation in SF/Si Valley (when excellent becomes average/normal, what do all the sub-excellent people do?), then that doesn't really encourage a culture of togetherness and SHARING. We don't need the best life... can't we just enjoy our regular life? Isn't enough enough? Can I give a little up and still live a plenty comfy life so that more needy people can get a break? People don't ask these questions of themselves enough (myself included).

Sharing is the key I think. This isn't my world, it's our world. There is PLENTY of food, money, and room for everyone if we share reasonably, but the problem is the fucking 1% and the institutions who advocate for them just don't want to (and don't have to). Americans and some other cultures really fixate on fencing off what's yours and amassing/diving the pie, so that breeds an adversarial, zero-sum attitude that conservatives really eat up. Therefore, it's especially sad when educated, young, open-minded "liberal" West Coast people do the same and may not even realize it. At least liberals don't bad-mouth and hate the people they marginalize, but that doesn't leave them in the clear (myself included).

The best teachers I have had in my life (not necessarily in school) really cared about expanding the pie rather than dividing it. How can we make everyone happier? Any asshole with a bit of smarts can compete and beat others. But a truly smart, wise person goes out of his/her way to cooperate, find ways to align incentives, and make everyone better off - not just him/herself. For all the smug talent and genius brains and big money in the Bay, that skill is scarily absent. Don't get me wrong, some people practice it faithfully and I am in awe of them, but it's not enough to stem the tide. That's why I probably will leave this place next year, as much as it makes me sad and for all I am leaving behind. I don't want my kid to grow up in such a culture. At least I will make room for another person/family to have my stressful job and little slice of condo.

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Sorry I realize that I was unclear about one point in my last rant (unclear about at least one point, haha).

The Google buses are often scapegoats but not really the problem. By no means am I placing the bulk of the blame on the young, techie hipsters invading the Bay. They are not really the 1% and not the real driver of the problem, they are just a "symptom". Except for Zuck who bought a whole block of SF for privacy haha.

As usual, the problem is the old rich Nimby fucks that A alluded to. They are the ones who gobbled up all the choice land decades ago, and who currently occupy all the seats of political power and business influence. They are the ones who invested/profited from the tech boom (more than the current workforce), and stand to profit from real estate development and appreciation. They took so much that the current hipsters are practically forced to gentrify the Mission and maybe Hunter's Point soon. I bet most hipsters would much rather live in Nob Hill or downtown Paly, but all the old rich pricks there are just cramping their style anyway (and even a Twitter engineer still can't afford a $5M Nob Hill pad).

As A alluded to, we are not in the '50s Levittowns anymore, or not even in the '90s nouveau-riche gated golf communities. But the assholes want to keep us in the past, because they like the status and lifestyle they have, and don't want to give up even a shred to others. The city of Paris (and many other ancient cities) is like a 10-layer cake. New generations tear down the old crap that isn't working anymore and rebuild to fit the needs of the current people. We aren't really doing that, because the old fossils control the bulldozers. So all we have is SF Elysium vs. Vallejo. 

But "the people" are fighting back, and at least voted down a luxury condo development on the Embarcadero. It's a small victory in a long war that the good guys will almost certainly lose. But we might as well smoke a blunt and celebrate while we can. :)

http://www.sfgate.com/bayarea/nevius/article/Following-the-bankroll-for-SF-s-Propositions-B-C-4961999.php
http://www.npr.org/templates/story/story.php?storyId=243537913&ft=1&f=2&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NprProgramsATC+%28NPR+Programs%3A+All+Things+Considered%29&utm_content=Yahoo+Search+Results 

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i once heard someone say cities are either places to live or places people come to make money.  he was talking about SF and that we were at a crossroads.  it was when matt gonzalez was running for mayor against gavin Newsome.  The speaker was making the case that if Newsome wins, the city will lose its soul, it's artist community, it's diversity of culture and class.  that's what you're looking at here….plain and simple.  and, you know what?  the city sucks now.  It's filled with people who are in a hurry, who lay on their horns, who yell.  

Treasury not buying up troubled assets and the auto bailout

http://news.yahoo.com/s/bloomberg/20081113/pl_bloomberg/apwpjfpf6mgu_1

``This is a flip-flop, but on the other hand, when they first proposed the thing, they didn't really know what they were doing,'' said Bill Fleckenstein, president of Fleckenstein Capital Inc. in Seattle and author of the book ``Greenspan's Bubbles.'' [Treasury Secretary Henry] Paulson has pushed some ``cockamamie schemes,'' he said. ``So one has to ask, does he have any clue?'' -Bloomberg.com

In September, Bush and Paulson sold the rescue package to Congress and the public as such: taking the toxic mortgage-backed securities off Wall Street's books would help restore recently lost confidence and unclog the financial sector. Uncle Sam would hold onto these investments until the economy rebounds and they turn profitable, maybe even making a pretty penny for the taxpayers. After initial resistance, Congress signed on, and up to $700B was available for Paulson to buy up whatever he felt would help the economy.

Yet two months later, how many securities has the government purchased? Yep, a big fat zero. This is partly because of the credit crisis taking priority and stocks tanking. Lending dried up, the economy was grinding to a halt, and banks requested cash infusions and lowered interest rates to try to right the ship. Like in Europe and Asia, our government also wanted to buy up shares of troubled companies to stanch the bleeding. So what about the bundled mortgages? Washington hasn't moved on those toxic securities because even the experts have no friggin' clue what those assets are worth (if anything), and who really owns them. It's too darn difficult to research and ascertain the value of those securities to decide what to buy. So instead, they just take the easy approach: pump more money in the credit markets, keep interest rates low (will the Fed rate even fall to 0%?), and hope for the best.

Paulson generally received praise for his swift, decisive handling of the financial crisis this fall (but decisiveness is only commendable when you're making good decisions). Now he said that he won't apologize for changing his approach as the facts change. That is fair, and much better than clinging to an outdated, flawed strategy. But maybe he could have handled his PR a little more delicately. The Wall Street bailout was already very controversial in Congress and more so on struggling Main Street. Some Americans still feel very outraged, and anti-fat-cat backlash is the strongest its been in decades. The taxpayers have given unprecedented authority and a gargantuan loan to Bush/Paulson to fix the economy. If the custodians of our cash appear wavering, maybe people will start to feel jerked around. It also sends mixed signals and uncertainty to the markets, which responded as expected (Dow and Nikkei lost 4-5% on Wednesday). So they don't have to pick one plan and stick with it no matter what, but at least speak plainly with us (something Paulson is not known for). Is this bailout about restructuring mortgages, increasing lending, buying up stakes in troubled companies that are "too big to fail", or taking toxic paper off private sector books? I am sure we need to do all those things, so let's have a cohesive, comprehensive plan of attack already. It's been two months, and more people's lives are being shattered each day longer that Washington flounders.

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http://www.economist.com/opinion/displaystory.cfm?story_id=12601932

"Bailing out Detroit would be a bad use of public money." -The Economist

Also, what do you guys think about Obama/Pelosi pushing for an auto industry bailout? As J and I noted in September, the Big 3 already got $25B in "loans" from a rushed spending bill in Congress, to help them modernize and get more efficient (things they promised to do years ago, but kept making SUVs instead). Now Obama is calling for another $50B in a move that would resemble Chrysler's rescue in 1979. But America and Detroit were very different back then. Auto was and still is huge, but to give you a sense of scale, UPS has more employees than the Big 3 combined. Manufacturing was a much larger sector of our economy back then, Wall Street was relatively healthier, and Chrysler had the very effective and innovative Lee Iacocca at the helm (he axed many bad car concepts, rolled out the first American minivan, and laid the groundwork for the Jeep Cherokee). I don't think the current bozo CEOs would measure up. US auto sales are way down across the board (even for Toyota), and the Big 3 are hemorrhaging money to keep their expensive operations going while their lots are chock full of unsold vehicles. They have announced new rounds of layoffs, factory closures, and reduced hours/production. But this is nothing new - Detroit has been contracting for a decade or longer ("Roger and Me"). Maybe they would have failed earlier if not for all the lobbying in Washington for huge tax breaks and other government assistance.

The rescue might sound outrageously huge, but to be fair, the entire proposed auto bailout is just 42% of what one company already got from Paulson ($120B to AIG). Though AIG had its tentacles in most of the big players in global finance, so its failure would make Detroit's vast problems look like a piece of cake. Rescuing auto will add to the bad precedent of the Wall Street bailout: companies can screw up as much as they like, and Uncle Sam will clean up the mess (as long as they demonstrate that they are "vital to the economy"). But the Big 3 are not, at least not as much as banks/credit. For years, Detroit kept saying they are this close to finishing their restructuring for modern competitiveness, and just need one last push to get over the hump. Maybe this bailout is that last push, or maybe they are willing to say anything for a handout. Sure in a perfect world we would want to help Detroit. But lending and resources are very tight now. Imagine all the good that $50B could do for expanding green industries and critical infrastructure projects (things Obama promised during the campaign), which also creates jobs and commerce. Instead of a bailout, the Big 3 can file for Chapter 11 as the airlines successfully did after 9/11. If it wasn't for the spike in jet fuel, many of our airlines might be healthy and profitable now. Auto can continue to pay their workers and maintain some operations during the bankruptcy negotiations, and it won't cost taxpayers nearly as much. Then in a few years after this recession has abated, they can emerge as leaner, stronger companies ready to compete it the new hot markets (developing nations, not saturated Western countries).

Though of course the auto industry has sentimental and symbolic value to America, and its labor unions have much political influence. But does that mean we have to use our dime to keep those screw-ups on life support? In a market economy, companies are free to fail. Yes it's true that the ripple effects will be huge (losing the Big 3 would also kill thousands of dealerships, parts suppliers, mechanics, etc.). But they are not the only show in town; foreign auto makers also have dozens of huge plants in the US and employ almost as many Americans as the Big 3. We don't have to build or buy American cars if we can't do it well. Or will auto become another taxpayer-subsidized unprofitable industry like agriculture? Already our domestic electronics and textile sectors are all but gone due to globalization - why not let auto go if the costs of supporting them are too great? It will be painful, but auto is not the only industry in deep trouble. The gambling entertainment industry (which employs more Americans than the Big 3, and generates billions in tax revenues) is also on the rocks due to restricted leisure spending in this economic downturn (I guess it's not recession-proof after all). The major casino corporations have seen their stocks drop over 50% in the last 12 months. The airlines are desperate too: Delta-Northwest merged out of survival, and even though oil dropped from $140 to $55/barrel this year, the industry will still report billions in losses. The big carriers' stocks all lost over 20% yesterday on news that Americans would be predictably curbing their travel habits next year. Who deserves a bailout and who doesn't? Who is more vital to our economy?

And what about the housing sector? Isn't that the root of many of our problems? Millions of households are still at risk of foreclosure in the next year. What about their rescue? The mortgage and housing sectors employ many more people and are a much larger chunk of our GDP than auto.

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http://marketplace.publicradio.org/

Some interesting interviews on these issues:

First, though, Henry Paulson. We've told you over the past couple of weeks that there isn't any buying up of troubled assets going on. Today, Hank Paulson made it official.
Our Washington bureau chief John Dimsdale starts us off.


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Dimsdale: Secretary Paulson was unapologetic about the change in plans. He said the purchase of bad assets would have been too slow to help banks, while the new strategy of injecting government capital will shore up banks and attract private investments.

Tape of Henry Paulson: As the situation worsened, the facts change. The thing I'm grateful for is we were prescient enough, Congress was, that we got a wide array of authorities and tools under this legislation. And I will never apologize for changing an approach or strategy when the facts change.

Paulson said he might use some of what's left in the bailout to encourage broader lending to consumers, now that credit card, student and car loans are drying up. The Department is reportedly thinking of requiring that lenders match future government payments with money they raise on their own. And John Dearie at the Financial Services Forum says forcing lenders to come up with their own capital eases the perception that the government is choosing winners and losers with its money.

John Dearie: The extent to which you can minimize government involvement by trying to leverage the government's involvement by bringing in or encouraging private capital, I think that's wise on Secretary Paulson's part.

Paulson is also under pressure to use bailout money to help homeowners facing foreclosure. He praised Fannie and Freddie's plans to set voluntary standards for banks to ease mortgage terms, but stopped short of endorsing an FDIC-backed plan to buy distressed mortgages. He said that crosses the line into a government spending program.

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RYSSDAL: I wanted to pick up on a couple of themes that John Dimsdale just laid out for us. First of all, why? Why didn't the original plan to buy up those toxic assets work?

PETROU: Well, they've never tried it. But, in part, it didn't work because it was always going to be hard. And not anticipating how hard it was going to be, Treasury was sideswiped when it figured that out and then had to quickly construct Plan B.

RYSSDAL: Was it the thing that we heard about as that plan was being floated -- that you couldn't figure out how to price these assets? You didn't know what they were worth?

PETROU: Bingo. The assets are complicated. They're hard to price. They're held by thousands of investors around the world. This isn't e-Bay here. This is tricky.

RYSSDAL: All right. Well, then, why is bank recapitalization better?

PETROU: In the long run I'm not sure it is. It's just easier. I think in time in poses significant issues, most notably the question of combining troubled banks into huge, bigger troubled banks. Or handing problems that ought better to be resolved by the FDIC over to big banks that then get weaker. But it was easier. It was quicker to corral those nine big banks, put them in a room and force the capital on them than it turned out to be to run the asset disposition and purchase process.

RYSSDAL: Here we are, two months into this bailout program and still the secretary of the Treasury said this morning that he is worried about systemic failure in the economy. Did that catch your ear at all?

PETROU: Anytime he says that, it sure does. It's pretty scary out there still.

RYSSDAL: Why?

PETROU: I think it is because we've taken the financial markets from a liquidity problem, which was where we were starting in August of 2007, and a very delayed recognition by the federal regulators and Treasury about how serious that was. Then we moved into a rapid collapse of the housing market, particularly prices and the residential market freezing up. Now we're looking at a recessionary scenario -- one thing building on the next, with a sharp drop-off in retail sales and the unemployment issues. So, that's a lot of scary reality built on top of the liquidity and market-confidence issues. And that's the problem Treasury Secretary Paulson was referencing this morning.

RYSSDAL: Let me ask you sort of a strategic question. It seems now the government's attacking this problem two ways: One, sort of top-down with the Treasury and the bailout money, and also, especially, yesterday with some mortgage relief. How did that come to pass and is one better than the other?

PETROU: I think we need all of them. We need more mortgage relief. And the plan announced yesterday with Fannie Mae and Freddie Mac is a piece of the problem. As you all know, the FDIC is looking at another program that would involve guarantees. We're going to need still more in the mortgage sector. But we've got problems throughout the financial sector -- autos coming immediately to mind, commercial mortages. There are different tracks for each one of these asset sectors.

RYSSDAL: Where do the tracks all lead, then, Karen?

PETROU: Ah, to you and me and the rest of us as taxpayers! I hate to say it but that's where, right now, all the tracks are coming into each one of our houses.

RYSSDAL: Karen Shaw Petrou is a managing partner at Federal Financial Analytics in Washington. Karen, thanks a lot.

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Yeah, the problem with bailing out the Big 3 is tough. I'm sure the US Gov't will demand their requisite pound of flesh for bailing them out (equity, limitation on executive pay, etc). The problem this time comes from the high possibility that you create zombie firms; sure, this time they only ask for $25 billion, but what about when they keep losing money and have to come asking again? Are we going to say no then?

On the other side, there is the fact that if just GM went out of business, 100,000 people lose their jobs, with a multiplier effect of maybe up to 500,000 people losing their jobs (supplier companies, etc.). If all 3 went out of business, we'd be talking about well over 1 million people. In the middle of perhaps one of the worst recessions in the last 50 years. It's a pretty steep price for creative destruction; it would no doubt further sink the economy and prolong the recession.

So ideally you'd want a company to come in and buy up GM or Ford's productive assets (like the bank bailouts); lay some percentage of the people off, but basically keep the plants and whatnot running as going concerns. But who wants to buy these turds of a company now?

It's a really tough nut to crack. I guess I'd probably come down on the side of bailout, but hardly enthusiastic about it. I'd probably bail them out but only under the agreement that they work on parting themselves out as quickly as possible...

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Well, I agree that we shouldn't "punish" the Big 3 and ancillary employees for their industry's mismanagement. But let's not be alarmist - it's not like 100% of those jobs will be lost and they'll all go on welfare. And where do you draw the line then? How do you justify saving some and not others? We have seen how the markets responded to the ambiguity of saving Bear but not Lehman. We can't possibly save them all, unless we want our future economy to be semi-private. How many other troubled industries will come crying to Washington for rescue? Just today Citi announced over 50,000 layoffs - that is half of GM. Sure that company is still solvent, and probably the move is meant to downsize from their bloated status during the financial bubble. But why should Washington care more about auto workers than those workers, or the 1.2M+ Americans (according to CNN) who have lost their jobs in the last 12 months for a variety of reasons?

Plus, we're not talking about the Big 3 disappearing. Maybe Chrysler is beyond salvation, and will be carved up and sold on the open market no matter what. But the other two will be around, just maybe in diminished form or merged, even during Chapter 11. Unlike Chrysler's rescue in 1979, the Big 3's current problems have less to do with finances. They just have a screwed-up business model and produce the wrong products for the 21st Century. Ford and GM are successful in overseas developing markets (often because they enjoy near exclusive trade rights), but other makers are catching up. They have had almost a decade to reconfigure their facilities and change their production to match demand. But they haven't yet. I know it's a pain in the ass to negotiate with the UAW, shareholders, and change is like molasses for some companies. But what is it... like Japan needs 2 years to get a car from blackboard to showroom, yet Detroit needs 8? Will another $25B in loans be able to fix that? Their problems extend far beyond executive pay.

Whatever we do, it's going to be painful no doubt, and some lives will be ruined. But it boils down to choice. Will those billions be best spent by our government on an auto bailout, or maybe other public works and economic stimulation programs that could deliver more widespread impact? Let's be honest; Michigan, Ohio, and much of the Midwest rust belt are dying economies, even if the auto industry was more robust. And auto bailout just postpones the inevitable. And even if the Big 3 have to lay off 100,000's, I really doubt that the Obama administration would just cut them loose. Already there are plans for job retraining and other assistance programs, right? And a lot of those supply chain logistics jobs can translate into many other industries. We bailed out the banks because we didn't have a choice. I don't think that is the case with the Big 3. But as you say, there is quite a strong argument to still do it. Maybe the pros outweigh the cons. We just won't be happy about it.

Preventing bank runs

The guy writing the Forbes article sounds kind of nutty to me. It's certainly interesting to see people challenge the current set of beliefs if only because it helps to ensure that we really are fact-checking. But I don't buy it.

The deposit insurance stuff is really interesting to me. On the face of it, it would seem like a bank run is unlikely - anyone with less than 100k in a bank would be irrational to take out their money, right? But I think there's more to it.

First, it depends on the belief that the government can afford to pay out that money. As is fairly well-documented, the FDIC itself is pretty under-capitalized right now. The FDIC has some $53B in available funds - a worst-case resolution of the Washington Mutual failure would have eaten $20B of that. If there were a systematic bank run (i.e. several national banks in a nation-wide panic, not a few isolated cases) the FDIC wouldn't be able to back all of it. It seems fairly clear that the Fed and Treasury would then bail out the FDIC, but ... would you want your money depending on that?

Second, it depends on the belief that you will get your money back quickly. Given the option, do you want to go through the hassle of having the government figure how much they owe you and pay it out? Best-case that takes a few weeks, and a large number of Americans live paycheck-to-paycheck. Obviously the timeline involved gets much worse if the government has to bail out the FDIC.

Third, there's actually a surprising amount of money outside the limits of what's FDIC-insured. I know a couple people who've had to move money around to get under the per-bank cap, so my guess is it's probably more like 90% of Americans have their deposits fully-covered by the FDIC. This article, http://www.economist.com/finance/displaystory.cfm?story_id=12342681, suggests that some 38% of money in deposits is outside the coverage of the FDIC at the old 100k limit, and that 27% will remain outside the coverage after the bump to a 250k limit (my guess is most of those are retirees' accounts - the truly wealthy fat cats aren't storing their money in savings accounts). So even if people withdraw just what's outside the FDIC insurance, that's 27% of deposits (though presumably some fraction of that would then be deposited in a savings account at another bank).

So it does seem like there's some cause for concern about bank runs. And then there's the example of Washington Mutual. WaMu obviously got itself in trouble through risky mortgages and other financial voodoo. But what pushed the bank from "uh oh" to "oh shit" was that over a ten-day period depositors withdrew some 16.5B - essentially, speculation that the bank was going to go under caused a bank run, which in turn pushed deposits so low that the bank did buckle.

From http://www.economist.com/finance/displaystory.cfm?story_id=12321761:

"Even more alarming, WaMu's demise shows that depositors will flee the most troubled banks, even when their money is backed by the state.

WaMu had been struggling for months. Reckless expansion during the housing boom saddled it with more than $50 billion in option adjustable-rate mortgages, among the most likely to explode when markets turned. But its troubles accelerated after the bankruptcy of Lehman on September 15th. Over the following ten days, frightened depositors yanked almost a tenth of their money, despite a federal guarantee of all deposits up to $100,000."

Which is a long way of saying that while I think a legitimate nation-wide bank run is unlikely, I do think there's a legitimate risk that regulators ought to focus on preventing.

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The other big group that have large accounts in banks, it turns out, are mostly small businesses that have to make payroll. Obviously they have to keep a fairly large amount of cash on hand to pay everyone every month (those of you with real jobs will probably recall on your paystubs that the company parks its payroll money in Wachovia or Wells Fargo or somesuch bank).

So for them it's a double whammy. On one hand they lose the money that they use to regularly make payroll if a bank goes under. On top of that, they have to fight a federal regulator to get out the money that they just had insured. Also, whereas private people can move money around to multiple banks to get under the $100,000 (or $250,000 caps or whatever), this is obviously not a possible strategy for small businesses that use it for payroll and ongoing expenses.

And, in fact, they're relatively more incentivized to figure out what's going on at their bank - if they can't make payroll for two weeks because of a bank problem and all of their checks bounce, customers are going to go away and employees are going to quit.

In the end, bank runs these days are more likely to occur via small and large businesses transferring away money than they are having grannies lining up around the block...

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Thank you for the links J and expanding upon the ambiguities of deposit insurance. Yeah I guess the numbers just don't add up - the FDIC has $53B, which equals only 1.5% of all US bank deposits. But say this crisis gets worse and the FDIC actually needs to clear its shelves and even take loans from the Fed to reimburse customers from more big failed banks. That is kind of an economic doomsday scenario anyway - so I don't think any amount of preparation or safeguards would be enough. $100k, $250k, $1M - people will lose major money and maybe a run on the remaining solvent banks would happen anyway.

Like no matter what they promise, home insurance companies are just physically unable to cover all claims from huge disasters like an 8.0 quake in SF-LA or a Katrina (I guess similar to how AIG couldn't possibly pay out if all their credit-swaps went bad). So they try to weasel their way out through contract loopholes, stall with red tape, or shortchange customers on damage assessments. People should know that before taking out a policy, and probably by now they do. I guess that's why there's a new push to have a disaster relief fund run by Washington and funded by tax dollars, which might give people more "confidence" that the money in their homes will be protected. But those two examples lead me to wonder if it's proper for the government to play the role of guarantor against any and all public catastrophes. Maybe it was feasible in New Deal times, but investments are more costly and complex these days, and the effects of disasters spread further. Shit happens, and human government is not wise and efficient enough to protect us against the larger natural or man-made disasters. Now some insurance is relatively "easier" for the state to guarantee, like retirement and health care, but we just lack the political will for the required sacrifices and reforms (but that's a separate discussion).

Regarding bank runs, hopefully more stable banks will just buy up the struggling ones and cover threatened deposits that way, as was the case with Wachovia, so the FDIC doesn't have to step in. Competitors recognize deals and will pounce when they can. Or the government will force a buyout, like they did with JPMorgan-Bear? But for WaMu's case, they were extraordinary screw-ups, so hopefully other banks won't get in such hot water and incur the justified run. I'm just amazed they were able to pull an Enron for so long and dupe customers into thinking that they would take care of their money. Maybe people assume that large banks are safe (like how I assumed that Palin, being a state governor, would know how to give interviews), or was it the free checking!?! I guess so much of it is psychological as the Economist said - just make sure people at least have a shred of confidence in their banks to let their money stay put, earning 2%. Well, the SEC decided to prohibit short-selling of some stocks, but not others, this month. Can the government prevent bank runs by blocking large withdrawals? It may not be Constitutional, but it's for the greater public good, right?

Well, if the premise behind the Wall Street rescue is that the Fed is large and stable enough, and not burdened by the short-term constraints of a publicly-traded company, to hold onto toxic securities until they turn profitable, can we apply that to private banking too? The Treasury/Fed used to be the "lender of last resort", but obviously that has gone out the window, as commercial entities as well as financial institutions are now getting cash advances. If we can't trust private bank wackos like WaMu to safeguard our money and respect risk, then could private citizens have savings accounts at the Fed instead? Why borrow from China when they can borrow from us? 30-year T-notes aren't flexible enough (though they are considering bringing back the 3-year note). Just thinking out of the box here. Like Freddie and Fannie (in theory), they could offer a safer alternative than commercial banks, and customers can make the choice. It would also incentivize private banks to be more cautious, or risk losing business to Uncle Sam.

To close, some of my coworkers were wondering if our company's cash reserves (in the billions) are similarly protected in case of bank failure. Like A mentioned that small businesses might want to withdraw their cash, because it may exceed the $250k protection limit and they need security because they have daily expenses to cover to stay alive. But of course large companies have billions, so where the heck do they put their cash? And is it any safer? Cayman Islands and Suisse? I guess a lot of big companies just become banks themselves, like GE and Toyota?

More on the bailout

Some interesting follow-up links:

A contentious discussion on the crisis between Economics Profs. Reich and Henderson, the former a Clintonite and the latter a Reaganite:
http://www.kqed.org/epArchive/R810060900 (mp3 should be available by Mon. evening or Tues.)

Lehman was lining executives' pockets while begging Uncle Sam for a bailout and cancelling employee severance:
http://thehill.com/leading-the-news/waxman-slams-lehman-brothers-on-executive-pay-2008-10-06.html
http://www.nypost.com/seven/10042008/news/regionalnews/lehman_staff_gets_the_shaft_in_severance_132071.htm

Is the "freezing up of credit markets" exaggerated?
http://www.forbes.com/opinions/2008/09/28/bernanke-bailout-crisis-oped-cx_drh_0928henderson.html

Some justifications for this Wall Street rescue is (1) to increase credit liquidity and (2) to improve depositor confidence to prevent a 1930-like bank run. But...

According to data provided by the St. Louis Federal Reserve Bank, lending by banks for consumer loans and commercial and industrial loans was at an all-time high on Aug. 1. Bank lending for mortgages was only one-quarter of 1% below its level on May 1, when it was at an all-time high. [Forbes.com]

I know people and small businesses are having some problems maintaining or increasing their lines of credit, but obviously many others out there are still lending and borrowing normally. And in response to the Depression, the FDIC has insured accounts up to $100,000 for years (now $250,000), which covers 99% of us. Yes I'm sure some irrational panickers will still withdraw their savings amidst this crisis, but it's very unlikely to see a repeat of 1930, except for smaller cowboy banks like IndyMac that were already on the rocks. But averting Wall Street sell-offs by huge fund managers and high-roller investors is a different, and tougher, problem (as we've seen from >5% losses by the Dow and foreign markets recently, even after the passing of the rescue bill).

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Well, I guess a major lesson learned again is the importance of information. Economics and markets won't work, or won't be fair at least, with imbalanced or highly defficient information. I would hope that investors can do a better job in actually knowing and having accountability for what the hell they're buying and selling, especially risky speculations like higher-order derivatives. Maybe regulation plays a role in that, to parse through and elucidate all these exotic investment vehicles. Maybe regulation will never keep the lid on ever evolving and multiplying casino economics, but at least we can expose bad paper for what it is, and not rescue morons who ignore the warnings and still shoot themselves in the foot.

The financial crisis and bailout

WHEN DOES A COMPANY QUALIFY FOR A BAILOUT?

http://www.newsweek.com/id/158615
Wall Street is consumed with the subject of bailouts. As analysts chewed over the implications of the government's decision to assume the debt of ailing mortgage giants Fannie Mae and Freddie Mac, traders (and their real-estate brokers) wondered whether erstwhile titans Lehman Brothers and Washington Mutual would be next in line for government assistance. Meanwhile, lobbyists for the big three automakers were refining their pitches for $25 billion in loan guarantees. It is sure to be another long weekend for Treasury Secretary Henry Paulson.
Bailouts—the government's stepping in and providing financial assistance or credit guarantees to private-sector companies—are a highly confusing subject. As policymakers hasten to save some companies from the ravages of creative destruction, they leave others to fail. Some 5,644 businesses went bankrupt in July, up 80 percent from July 2007. So are there some objective criteria we can use to determine whether the government will toss a lifeline to a particular company?
It's a truism that the bigger you are, and the more you owe, the more forbearance you're likely to get. In 1984, when Continential Illinois, whose reckless lending practices had catapulted it into the ranks of the nation's 10 largest banks, ran into trouble, the government bought some of its loans and provided extraordinary compensation to depositors. "We have a new kind of bank," complained Fernand St. Germain, a congressman from Rhode Island, "It is called too big to fail." (St. Germain, who shepherded the bill that deregulated the savings-and-loan industry, would be blamed in part for the record-setting bailout of S&Ls later that decade).
But these days, size alone doesn't matter. Earlier this decade, Enron, WorldCom, and Global Crossing, three gargantuan companies, went bust while the government looked the other way. Of course, when the aforementioned companies filed for Chapter 11, nobody lost electricity or was unable to make a phone call. "But if the government envisions that a failure will have a serious adverse consequence on the economy, it's going to step in," said Benton Gup, a professor of banking at the University of Alabama and editor of the collection Too Big To Fail: Policies and Practices in Government Bailouts.
For that reason, certain types of financial institutions are much more likely to be helped than others. A bank that lends to people with dodgy credit in California doesn't pose much of a threat to the Davos crowd. But financial intermediaries like Bear Stearns and the FM twins function like the heart of the global financial system. If they go into cardiac arrest, the whole body is in danger. Since Bear Stearns was a counterparty to (and guarantor of) trades and financial arrangements with the world's major financial players, its failure would have triggered a cascade of losses. In the same vein, huge quantities of the $5.4 trillion in debt issued and insured by Fannie Mae and Freddie Mac sit on the balance sheets of central banks and financial institutions around the globe. For the U.S. government simply to let this debt—which it had been implicitly backing for decades—go bad would have meant inflicting severe damage on America's most significant diplomatic and trading partners. Fannie Mae wasn't too big to fail, one Wall Street wag told me this week. It was too Chinese to fail.
To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients' cash. It got a bailout. Lehman Brothers, which has taken painful measures to reduce its risk, is perversely less likely to get direct government help. "The worst Lehman can do is destroy the firm," said Barry Ritholtz, CEO of Wall Street research firm FusionIQ and author of the forthcoming Bailout Nation. "Bear Stearns, on the other hand, set up the firm so that if they screwed up, they could threaten the entire financial system." That may explain why Treasury Secretary Paulson has thus far resisted providing federal succor to Lehman.
Finally, companies seeking the tender mercies of the taxpayer must have good timing. Nearly all the great corporate bailouts of modern times have come in election years. Congress enacted loan guarantees for Chrysler in January 1980, ensuring that a company that employed about 130,000 people, many of them in the swing state of Michigan, would not go bust on the eve of primary season. So, if your company is in trouble, what should you do? Double down. Establish links to other firms. Export your products with abandon. And hustle. There are only seven more weeks until the election.
PERSONAL NARRATIVES AND EMOTIONS IN ELECTION PSYCHOLOGY

http://www.newsweek.com/id/158749

Narratives have been used to attract voters at least since Lincoln's campaign managers cast him as the rugged rail-splitter from the country's frontier, not the prosperous railroad lawyer and sophisticated writer he was, notes historian Michael Beschloss: voters are drawn to someone they can relate to, and the way to make that happen is by offering them stories. (The human brain is wired so that we can follow a chain of events that have people doing things in chronological order more easily than we can follow abstractions.) But the power of the narrative has grown as party identification has weakened—putting more voters in play—and as the culture has changed. Television has made voters expect to, and think they can, "see into people's souls to take their measure," says Beschloss. To do that, "they need clues," and there are few clues so potent as the challenges a person has faced and how he or she has met them. "The feeling that we need to know who these people are has become so enormous that a good part of Sarah Palin's appeal is her life history, the choices she made, things that let voters form a bond with her," says Beschloss.
The outsized power of the personal narrative today compared with even a generation ago (in 1980, Ronald Reagan ran not on personal narrative, but on hope and the promise of change) reflects something that has become almost a cliché in political analysis—namely, that emotions, more than a dispassionate and rational analysis of candidates' records and positions, determine many voters' choice on election day. The emotion can be hope or fear, pride or disgust. And don't be too quick to pat yourself on the back for thinking you cast your vote based on a logical parsing of a candidate's positions. For all but the most wonkish wonks, what matters is how the prospect of pulling out of Iraq or expanding oil drilling or any other policy makes you feel, and not a pro-and-con analysis of its pluses and minuses, which few people can figure out.
All of this has been true for decades. What's new is that the circumstances of this election have conspired to push people away from the reason- and knowledge-based system of decision-making and more down the competing emotion-based one. The latter is more ancient and has, throughout the course of human evolution, "assured our survival and brought us to where we are," says neuroscientist Antonio Damasio of the University of Southern California, a pioneer in the study of human emotions and decision-making. ...One of the most salient circumstances of this campaign is the sheer amount of information voters are bombarded with, says Damasio. You can barely pass a screen (TV or computer) or overhear a radio without being pummeled with the latest brouhaha over lipstick-wearing pigs or which candidate was cozier with lobbyists for the failed mortgage giants. When FDR was making radio addresses, "people had the time needed for reflection, to mix emotion with facts and reason," says Damasio. "But now, with 24-hour cable news and the Web, you have a climate in which you don't have time to reflect. The amount and speed of information, combined with less time to analyze every new development, pushes us toward the emotion-based decision pathway." And not even emotions such as hope. Voters are being driven "by pure like and dislike, comfort or discomfort with a personality," says Damasio. "And voters judge that by a candidate's narrative."

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The bailout article is interesting, but to me that's mostly because it shows how shamelessly the media is fanning the flames here. The article implies a substantial moral hazard in finance - that management/employees are rewarded (get money) for doing the wrong thing (blowing up the economy). There's certainly some of that, primarily in compensation paid during the boom and liquidated (i.e. not kept in company stock). That's very hard to resolve post-facto (it would be illegal for the g't to take back money already paid, though they can regulate for future booms). But it's not nearly as bad as the article implies.

The bailouts we've seen this year have not been soft landings for the companies involved. They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value. In the year preceding Fannie Mae's "bailout", the stock lost ~90% of its value (from mid-60's to ~6), and since the g't stepped in it's lost another ~95% (to 0.43); that blows up a lot of the moral hazard, particularly given how much company stock was owned by employees and management. Management was fired (and it's not like people are going to be lining up to hire those folks). AIG's stock took a similar path (from mid-60's a year ago to 2.3 today), management was fired, and the money the g't is loaning them is at 850 basis points over the LIBOR (which is to say, borderline usury). Nobody is intentionally going to drive their firm into the rocks in order to lose 99% of its value and get fired.

In terms of the value of the company and assets, the difference between bankruptcy and bailout seems semantic - I mean, that's roughly what happened to Lehman. The article suggests that companies would somehow *want* to set up their company to be so big and entangled that they would get a bailout. The results when they fail seem pretty similar, though. And the big difference is that Lehman had a much better chance of surviving, exactly because they worked to get untangled. Merrill took a similar approach, and managed to get bought, albeit at firesale prices - not an ideal situation, certainly, but better than either bankruptcy or bailout.

The other bit that seems totally over the top is the assertion that the GSE's were bailed out to help Chinese investors. In calendar year 2008, Fannie Mae and Freddie Mac financed 80% of new mortgage issues. If those two companies suddenly evaporated, it would be dramatically harder for people to get new mortgages ... which means fewer home sales, increased mortgage rates, lower housing prices, and generally a steel-toed kick in the balls for the whole housing market. China benefits as well, but the main beneficiary was the American homeowner. Again, I'm not thrilled about it - it's essentially a generational transfer of wealth, as our parents' generation gets bailed out and mails the bill to you and me 20 years from now, in the form of debt.

I mean, I'm not suggesting things are working well. I think the government should have gone further in fully nationalizing the GSE's and then made clear they were going to be completely dismantled and sold for parts. I think the government should also be more transparent in making these determinations. And I think Wall Street compensation should have a large component of long-term results so some of those financial profits could be pulled out of those folks' pockets as we discover years later just how they earned their money (being leveraged 33 times over, for example). At the same time, Paulson and Bernanke have an incredibly hard job which would be challenging to do even if they could see the future.

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Well, I don't think the article was suggesting that these companies deliberately screwed up huge in order to "merit" a bailout. I think the author was being facetious to say that ironically, the biggest greedy morons get more help than those who admitted fault and really tried to help themselves. Like the Prodigal's Son story.

I'm not quite sure what you mean by: They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value.

Definitely upper management played a large role in the crisis, and they should be punished accordingly. Maybe they lost a lot of their assets when the stock's value tanked, but they have plenty of diversified savings left and will recover from this mess, much better than their underlings at least. They will also get hired again, despite this black mark on their CV (maybe not as officers, but definitely into powerful positions). There is plenty of historical precedent for that. But for the ordinary workers, this is a killer, like the telecom and energy trading meltdowns before. Especially because it wasn't really their fault, unless they could have "blown the whistle" to alert others to the unwise business practices taking place, but no one was listening anyway during the housing boom when people were blind with greed. As you said, their savings in company stock has evaporated, and it will be hard to get re-hired quickly, because competing companies are in similar messes, and suddenly thousands of desperate, qualified workers have just entered the job pool. 100,000 financial sector jobs have been lost (maybe only 5-10% of that is management?), so that's 1/6 of total US new unemployment in 2008. So yeah, it wasn't any leader's intent to destroy his or her company, but their decisions contributed to the crisis so they should be held accountable. I don't think companies structure their business plans to make them more desirable for bailout (I hope not at least). But like in law enforcement, it's more efficient and socially preferrable if we can discourage bad behavior before we have to punish it after the damage was done. I don't know how DC can do that effectively though, without major political-economic backlash and accusations of interference in the free market.

How do we mitigate problems so they don't have to reach the bankruptcy/bailout stage? In America, people and companies are free to succeed or fail. Companies can, do, and must fail at times. Even dominant companies like Standard Oil, AOL, and PanAm were destroyed, either by the government, world/economic events, or their own mistakes. So when is a company "too important" to fail? I agree with you that Fannie & Freddie qualify - without them the housing sector grinds to a halt. The American Dream was made possible to millions over the years because of the 30-year-fixed, which no other nation can provide to the masses (so then why the hell did so many people take variable-rate loans instead!?!). However, maybe America doesn't have to have a mortgage-based home ownership system. Other modern nations like South Korea don't give home loans. People pay for apartments and homes with cash. It's a huge upfront cost, but then it's your asset 100% and no more hassles. But America is a borrow & spend culture, so probably we could never accept a change.

Maybe it's in the government's interests to prevent companies in critical sectors from qualifying to be too big to fail. It's horrible precedent to bail out companies with tax dollars, or force rivals to "take one for the team" and absorb another company's debt. Freddie was only created to give Fannie some competition. So maybe more competition/customer choice will keep these companies more honest and risk conservative? There are 5 major i-banks (well, 2 now). Is that too many or too few? Who knows, but I'm leaning towards too few. Other industries like wireless, oil, and airlines are heading down that path with merger-mania.

Regarding the China comments, of course Washington doesn't base its bail-out decisions chiefly on foreign considerations. But at the same time, economic turmoil abroad hurts us at home in this globalized commercial system. It would be bad for everyone if our mortage/financial crisis spread to other continents, and it already has (Asian markets down 5% this week, Europe 3%). The housing bubble also burst in Spain and the UK. European banks have folded or needed rescue too (UK's biggest mortgage bank was just bailed out this week), since they bought up so many American SIVs too. Foreigners must be pissed at us because through no fault of their own, their savings have shrunk because too many dumb Yanks and dumb banks engaged in bad loans.

So a large, troubled American company with significant foreign investment is probably more qualifying of assistance than one without. I think it makes sense. Countrywide wasn't bailed out (unless BofA was "persuaded" to do so by the Feds), and neither were smaller, more regional mortgage banks like IndyMac.

Yeah I agree with you that Paulson, Bernanke, and president 44 will have a hell of a time cleaning up this mess. You really need balls of steel for those jobs, and as you said, even a crystal ball may not save you. That's why it's so idiotic and repugnant for the presidential candidates to claim that they "understand" the economy and know how to "fix" it.

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I guess the problem, is, though, how do you legislate that? Being incompetent isn't (generally) a crime - it's only clear that they were incompetent post-facto (as in, after they were awarded their bonuses, which is an incentive problem I wrote at earlier), so by what mechanism do you decide to take their money away? And how can you make it so that they can't get a well-paying job again? By throwing them in jail?

I think the government did about the best it could, in wiping out nearly 90-95% of many of these company executives' personal wealth, without getting into punishments that would deviate from due-process and legal-based actions. I think it's a generalized problem of American life where well-connected people "fail-upward," as President Bush did, but no amount of legislating, unfortunately, is ever going to stop that problem (short of a total makeover of how society works). It's the same reason that all these political retreads get cushy jobs as political commentators spouting stuff that any idiot on the internet could come up with.

But I think that we do need to come up with, as Obama put it, a way to help out people on Main Street as well as Wall Street. A package that extends unemployment benefits, increases availability of food stamps, extends COBRA programs for those who recently lost their jobs, etc. Krugman and other economists have made the point that average citizens generally aren't as susceptible to the moral hazard problem - after all, most people only buy a few houses in their lifetime and bailing them out once isn't going to radically change their behavior, as it might with banks.

So I hope that the new rescue plan put forward is sufficiently draconian on companies and their executives; some people are actually speculating that the government might make money off of all of this (because no one has the money to buy these assets, many of them have fallen well below their long-term price. So the government, with a good source of capital, can now snatch them up). Hopefully they can use that money to repay the costs of helping out those on Mainstreet...

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Thanks for the comments A, and I agree it's a sticky situation for the government to decide how much to intervene on these economic matters. As you said, it's difficult and controversial for a government to punish business incompetence after the fact, and probably a company's own board is better equipped to punish poorly performing executives instead (unless the executives appointed the board). What do you mean by the government took away 90-95% of the executives' wealth? Because they lost their bonuses and the value of the company stock tanked? Can the government revoke private sector pay for poor performance?

In terms of helping out Main Street, it's clear that economic stimulus checks aren't the long-term answer. Bush's recent effort had only a minor impact for about 2 months at best; a drop in the bucket at the cost of billions borrowed. Unemployment assistance is a good step, but I think Senate Republicans and Bush, while he's around, may try to block it at every turn (they said it was excessive spending, yet they spend 100s of billions on Wall Street "welfare"?). Finally the Dems had to attach unemployment assistance to a war supplemental for Bush to accept it. But maybe now the situation has gotten more dire, and with the election approaching, the GOP should try to shed the stereotype that they don't care about the troubles of the Average Joe (unless it's true).

http://seattletimes.nwsource.com/html/politics/2004469503_apjoblessbenefits.html
http://www.military.com/news/article/bush-threatens-veto-over-gi-bill-adds.html

Unemployment insurance, COBRA, etc. can keep some people afloat for a few more months, but I don't know how we can go about creating over 1M new jobs in the next 12 months (what would be needed to bring unemployment back down to 5%). And minimum-wage service jobs with scant benefits won't cut it. The new jobs from the "green economy" won't materialize as long as this recession persists, lending is tight, and government spending is curtailed by the wars and tax cuts. Gas and food will not get significantly cheaper, even if there is a global economic slowdown (which causes other problems too). GM and some airlines are so deep in the red they might ask for bailouts too (but won't get them). The dollar's gains in int'l money markets may mean that exports slow somewhat. Even China is showing signs of economic cool-off. I don't know how we can get people back to work quickly. It seems like companies are laying low, besides the financial sector snatching up bargains of course, as you said of government takeovers too (that raises another interesting question - what will the Feds do with these companies once they start becoming profitable again?). Everyone is waiting for peak foreclosures to pass and home prices to adjust to rock-bottom (for this cycle at least), so the growth curve can re-commence with restored lending fluidity and market confidence. But who knows when that will be? 6, 12, 24 months or longer?

I agree that citizens are not exposed to the moral hazard like company officers, but nevertheless they can and do make decisions to hurt themselves. In many cases, predatory lenders didn't even need to persuade customers to enter into suicidal mortgages. And some of the same people who didn't learn their lesson after the dot-bomb made the same greedy mistakes in the housing bubble. And they will F up again during the next boom/bust. It's endemic in this greedy society to a certain extent. Some people are just predisposed to gambling, ignoring warnings, and screwing themselves. What do we do about them? I know we can enact some laws to protect citizens from themselves, but how do we do that without adding a new layer of bureaucracy to the already unjust and convoluted lending industry? And it's not like Washington has had a good track record of regulating anything intelligently. What completely sucks is that some speculators obviously got away with it if their timing was right. And the people who played it safe and played by the rules still get screwed by the reckless to some degree, yet they are the ones who get the least reward/assistance for their good behavior, because their situations may not be as dire as the gamblers. Well, I guess "being good" is its own reward, and I doubt they would want to trade places with the desperate.

More causes to the subprime crisis, but why do we always find out too late?

http://www.npr.org/templates/story/story.php?storyId=90840958

Auditor: Supervisors Covered Up Risky Loans
by Chris Arnold

Morning Edition, May 27, 2008 · Now that millions of people are facing foreclosure because they got into loans that never should have been approved, everybody's looking for someone to blame. Borrowers, or their brokers, lied on loan applications. Others got high interest rates they couldn't afford.
A big unanswered question is whether the Wall Street investment banks that were packaging these mortgages knew they were selling garbage loans to investors. A wave of litigation is starting against these firms. One former worker whose job was to catch bad loans says her supervisors covered them up.
Mortgage Quality Control
Tracy Warren is not surprised by the foreclosure crisis. She saw the roots of it firsthand every day. She worked for a quality-control contractor that reviewed subprime loans for investment banks before they were sold off on Wall Street.
It was her job to dig into the loans and ferret out problems. By 2006, they were easy to find.
"I'd see people who were hotel workers saying that they made, in California, making $15,000 a month so that they could qualify for a $500,000 home," Warren says. "If a hotel worker is making $15,000 a month changing sheets at the Days Inn, everybody would want to do it. It just really made no sense."

Warren has worked in the mortgage business for 25 years, the past five in quality control. Most recently, she was a contract worker for a company called Watterson-Prime, which did loan audits for investment banks. She says their biggest client was Bear Stearns, which recently all but collapsed because of its exposure to bad loans.
Putting Bad Apples Back in the Barrel
Warren thinks her supervisors didn't want her to do her job. She says that when she would reject, or kick out, a loan, they usually would overrule her and approve it.
"The QC reviewer who reviewed our kicks would say, 'Well, I thought it had merit.' And it was like 'What?' Their credit score was below 580. And if it was an income verification, a lot of times they weren't making the income. And it was like, 'What kind of merit could you have determined?' And they were like, 'Oh, it's fine. Don't worry about it.' "
After a while, Warren says, her supervisors stopped telling her when she had been overruled. She figured it out by going back later and pulling the loans up on her computer.
"I would look every couple of days, and just see, if it was a loan that I thought was a bad loan, I'd go back and see if it was pulled."
About 75 percent of the time, loans that should have been rejected were still put into the pool and sold, she says.
'A Smoking Gun'
Some legal experts say it's a pretty big deal that people like Warren are willing to talk.
"This is a smoking gun," says Christopher Peterson, a law professor at the University of Utah who has been studying the subprime mess and meeting with regulators. "It suggests that auditors working for Wall Street investment bankers knew how preposterous these loans were, and that could mean Wall Street liability for aiding and abetting fraud."
Bear Stearns had no comment.
The loan-auditing firm Watterson-Prime's parent company, Fidelity National Information Services, provided a statement. It says the company has no incentive to give loans a passing review if they fail to meet underwriting criteria and that it uses additional quality-control measures to further check up on loan reviews.

But Peterson says such breakdowns in quality control must have happened at a lot of companies. How else did millions of people wind up in loans that they can't pay?
"People have a tendency to think about economic trends as though they're an uncontrollable force that no one understands. This isn't the weather. These are people who are individually making decisions to approve and pass on fraudulent loans," he says.
Accountability on Wall Street
Peterson said auditors like Warren basically were hired to find the bad apples in the barrel and pull them out: borrowers with payments they couldn't afford, houses with inflated appraisals, people lying about their income.
But Warren says her bosses were taking a lot of those bad apples and putting them back in. And Peterson says he thinks the investment banks had a strong financial incentive to do that.
"They put the bad apples back in the barrel because they knew that they could sell the bad apples along with the good apples and, at least in the short term, nobody would know the difference. That's why they put them back in — because they made more money that way," Peterson says.
"There's a name for this — it's called 'passing the trash,' " says David Grais, an attorney getting ready to sue Wall Street firms on behalf of investors — big pension funds and others — who bought the bad loans.
"These were immensely profitable deals. One study showed that the investment banks were making a 40 percent return on equity every two months on these securitizations, which is an eye-popping number," he says.
Grais says many people on Wall Street make huge bonuses when their business unit is making big money. So the faster they could package up loans — good, bad or ugly ones — and sell them to investors, the more money that they made, he says.
Warren thinks her managers got bonuses for how quickly they reviewed loans, not for how many bad loans they caught.

Watterson-Prime disputes that. It says its managers, staff and contractors are compensated on an hourly or salary basis and never by the number of loans reviewed.
Report: Banks Agreed to Limit Loan Rejections
Other evidence is emerging.
A bankruptcy examiner in the case of the collapsed subprime lender New Century recently released a 500-page report, and buried inside it is a pretty interesting detail. According to the report, some investment banks agreed to reject only 2.5 percent of the loans that New Century sent them to package up and sell to investors.
If that's true, it would be like saying no matter how many bad apples are in the barrel, only a tiny fraction of them will be rejected.
"It's amazing if any investment bank agreed to a maximum number of loans they would kick back for defects. That means that they were willing to accept junk. There's no other way to put it," says Kurt Eggert, a law professor at Chapman University.
Meanwhile, the attorney general in New York and other prosecutors are taking a look at all of this. They, too, want to know whether Wall Street firms were covering up bad loans and selling them to investors.
Analysis: Lenders, Investors, Buyers Fed Loan Crisis
by Robert Smith and Adam Davidson

Morning Edition, May 27, 2008 · Co-host Robert Smith talks to NPR's Adam Davidson about how lenders, investors and buyers all contributed to the subprime mortgage crisis.

Davidson says everyone at every step of the chain acted irresponsibly, "taking on way more risk than was appropriate." He says he has interviewed dozens of homeowners, subprime home buyers who bought way more house than they could afford, who said they knew they were taking on more risk than was reasonable. And the mortgage brokers and mortgage banks knew, too.
Brokers didn't mind the extreme risk because they were passing on loans quickly to the banks; banks didn't mind because they were passing on the loans to Wall Street. Wall Street knew about the extreme risk but was passing it on to global investors, many of whom said they weren't paying enough attention because they trusted the credit rating agencies — but now those agencies admit that their models were flawed and faulty, Davidson says.
Many thought the reward would outweigh the risk, he says. Everyone "was making massive amounts of money — you're talking about 25-year-old kids who don't have a college degree making over a million a year."
Shady Practices Led to New Century Financial's Fall
by Carrie Kahn

Morning Edition, March 27, 2008 · Two years ago, New Century Financial was the country's second largest subprime mortgage lender. Now, it's in bankruptcy, and a new report mandated by the bankruptcy court shines light on the company's shady practices.


Business
New Century's Risky Lending Practices Detailed
by Chris Arnold

All Things Considered, March 26, 2008 · Before the mortgage company New Century went bankrupt last year, it was the second-largest sub-prime lender in the country. A court-appointed examiner released a new report Wednesday that finds widespread wrongdoing at the company and also alleges negligence by the company's auditor KPMG.
The report says New Century had a brazen obsession with selling more loans without due regard to the risks.
Michael J. Missal, the examiner appointed to dig into New Century's collapse as part of the bankruptcy process, says, "What we found was it really shows the embryo of the credit crisis and how easy it was to originate very risky loans and put them into the financial system."
In its quest for new customers, New Century made increasingly unwise loans, according to the report. Borrowers incomes weren't documented. Loans were offered for the full value of a house. Missal adds, "They took risky products — made them that much riskier — and essentially created a ticking time bomb that exploded in 2007 as the market was changing."
Missal was also charged with finding causes for lawsuits that creditors might pursue. He named New Century's accounting firm, KPMG:
"Their independent auditors, KPMG, were supposed to be there to test and be skeptical of the way New Century was doing business. I found that KPMG failed to do so and a cause of action may exist."
A spokesman for KPMG says the report needs to be reviewed.

Missal says executives at New Century also failed in their oversight responsibilities and engaged in improper accounting. He says top executives were paid millions of dollars in bonuses that were calculated based on inaccurate financial statements.
The SEC and Department of Justice are both investigating New Century.
A Lot of Blame to Share in Subprime Sinkhole
http://www.npr.org/templates/story/story.php?storyId=12847198

All Things Considered, August 16, 2007 · Robert Siegel talks with Financial Times reporter Saskia Scholtes about the article "As Subprime Bites, U.S. Investigators Look for Culprits."
Scholtes, and colleague Brooke Masters, found fraud at myriad levels of the market, from borrowers who overstate their incomes, to fraudulent companies that offer help to lie about income, to lenders who don't bother to check.
As subprime bites, US investigators look for culprits
By Brooke Masters and Saskia Scholtes
Wednesday Aug 8 2007 14:05

http://us.ft.com/ftgateway/superpage.ft?news_id=fto080820071539268198
At the height of the US subprime lending boom, taking out a mortgage   could not have been easier. Low credit score and history of bankruptcy? No problem. Income too low to qualify for a mortgage? Inflate what you earn on a "stated income" loan. Nervous that your lender might check up on your "stated income"? Visit www.verifyemployment.net.
For a $55 fee, the operators of this small California company will help you get a loan by employing you as an "independent contractor". They provide payslips as "proof" of income and, for an additional $25, they also man the telephones to give you a glowing reference should your lender need it.
But perhaps the most absurd aspect of the US subprime mortgage market in recent years is that lenders became so generous with credit provision for out-of-pocket borrowers that very few checks were ever made.
That left the system extraordinarily vulnerable to widespread fraud, a possibility that federal and state prosecutors across the US have begun to look into. With the subprime crisis expected to cost investors between $50bn (£24bn, €36bn) and $100bn, according to the US Federal Reserve, these investigations could transform it from a market correction to a full-blown national scandal.
At the root of the subprime problem was easy credit: lenders and their brokers were often rewarded for generating new mortgages on the basis of volume, without being directly exposed to the consequences of borrowers defaulting. During several years of strong capital markets and strong investor appetite for high-yielding securities, lenders became accustomed to easily selling the risky home loans they made to Wall Street banks. The banks in turn packaged them into securities and sold them to investors around the globe.
Such ease of mortgage funding allowed thousands of borrowers to get away with fraudulently mis-stating their incomes, often with the encouragement of their brokers. More ambitious fraudsters appear to have taken out multiple mortgages and walked away with the cash.
Karen Gelernt, a partner at law firm Cadwalader, Wickersham & Taft, says: "The difficulty is getting a handle on the size of the problem, because there is no real mechanism for reporting fraud for most originators in this market. In fact, they had every incentive not to report."
Fraud has been detected up and down the financing chain: just as borrowers have lied to get better rates and larger loans, mortgage brokers and loan officers have lied to borrowers about the terms of their loans and may also have lied to the banks about the qualifications of the borrowers. Appraisers, likewise, have lied about the value of the properties involved.
"The recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and, in some cases, by abusive lending practices and outright fraud," Ben Bernanke, Fed chairman, recently told lawmakers. With mortgage rates rising and house prices falling, subprime borrowers have been defaulting at record rates.
The fallout is working its way up from the retail level – forcing people out of their homes and lenders into bankruptcy. Investment banks have lost revenue as investors back away from mortgage securities and a handful of high-profile hedge funds have collapsed – most notably two highly leveraged funds managed by
Bear Stearns (NYSE:BSC) . The crisis has contributed to turmoil in financial markets in recent weeks and could threaten the health of the US economy as lenders tighten access to credit, putting a drag on consumer spending.
For some, this rapid and dramatic unravelling of the subprime lending industry has echoes of the costly savings and loans crisis of the early 1980s – a meltdown that also had its origins in financial market innovation and inadequate oversight, and which many cite as a contributing factor in the 1990-91 economic recession. That crisis ended with a federal bail-out of $150bn and a handful of high-profile convictions for fraud.
This time around, the major losers have been hedge funds, which in theory are limited to wealthy investors. But some analysts believe the pain could spread – many pension funds and college endowments have turned to hedge funds to heat up their returns and some, including Harvard University, are starting to get their fingers burned. Harvard is estimated to have lost $350m of the $550m it invested in a hedge fund run by Jeffrey Larson, a former Harvard money manager, that collapsed recently as a result of positions related to the subprime market.
If the losses trickle down and end up hurting small investors, pressure may grow for a public bail-out. Rumours swept the market earlier this week that Fannie Mae (NYSE:FNM) and Freddie Mac, the government-backed mortgage agencies, might get the authority to make sweeping purchases of underpriced mortgage securities.
"The US mortgage landscape has become a top-of-mind political talking point, and we would not be surprised to see the usual 'flow like mud' legislative process fast-tracked with respect to items offering relief to the ­troubled mortgage market," says Louise Purtle, strategist at ­CreditSights, a research firm.

Most fraud in subprime lending appears to have been so-called "fraud for purchase" – lying about income so as to win a mortgage approval. In reviewing a sample of "no doc" loans that relied on borrowers' statements, the Mortgage Asset Research Institute recently found that almost all would-be home owners had exaggerated their income, with almost 60 per cent inflating it by more than 50 per cent.
These fraudulent borrowers are often difficult to uncover, says Ms Gelernt, because they often stretch to meet their minimum payments for some time before they eventually default. The time lag between initial fraud and default also makes a conviction hard to obtain, she adds, while mortgage investors also have little chance of recovering their losses from individual borrowers in these circumstances.
Many of the originators to blame for poor quality control standards may not be held to account either – with several such lenders already in bankruptcy. "There's a real problem in finding fraud after the fact because the money is already out the door and you won't get the recovery," says Ms Gelernt.
Loose lending standards also facilitated fraud for profit. US prosecutors around the country have broken up at least a dozen mortgage fraud rings and more cases are expected.
In one New York case, the FBI charged 26 people who used stolen identities, invented purchasers and inflated appraisals to obtain subprime loans on more than $200m of property. In an Ohio case, 49 per cent of the mortgages processed by a ­single broker never made even a first payment.
The fate of a series of North Carolina neighbourhoods built by Beazer Homes (NYSE:BZH) may offer a foretaste of the looming problem. Low income home-buyers around Charlotte have sued the builder alleging that its lending arm steered them into mortgages they could not afford, leading to widespread foreclosures.

The homeowners allege that sales agents misrepresented their personal data, including assets and income, to help them qualify for government-insured mortgages starting in 2002. By the beginning of this year, 10 Beazer subdivisions in Charlotte had foreclosure rates of 20 per cent or higher, compared with 3 per cent state-wide, according to a local newspaper analysis.
The FBI is probing Beazer for possible fraud and the US Housing and Urban Development is examining whether its sales practices violated government-insured mortgage rules. Beazer has defended its sales practices and says it has a "commitment to managing and conducting business in an honest, ethical and lawful manner". In June it announced that it had fired its chief accounting officer for allegedly attempting to destroy documents. The company's shares have lost 75 per cent of their value since the probes began.
Several state attorneys-general are also on the trail. Andrew Cuomo of New York state made headlines this spring with a series of subpoenas to property appraisal companies and has said publicly that he is probing the entire industry. Sources familiar with the office's work say the investigation is still at a relatively early stage.
Marc Dann, the Ohio attorney- general, is looking further up the funding chain. He has been outspoken in his criticism of the role the financial services industry may have played in the large numbers of foreclosures in his state. "There's a whole series of people that knew or should have known that there was fraud in the acquisition of these mortgages," Mr Dann told the Financial Times. "We're looking at ways to hold everybody who aided and abetted that fraud."
Mr Dann's office is looking at brokers, appraisers, rating agencies and securitisers and plans to use several legal methods to hold bad actors accountable. The Ohio attorney-general not only has criminal enforcement powers, but also represents the third-largest set of public pensions in the country and can thus file civil lawsuits on behalf of investors.

"But for the mechanism of packaging these loans, the fraud never would have existed," Mr Dann says. "We're following this trail from homeowner to bondholder." He says his investigation could take six months to a year to bear fruit.
The Securities and , for its part, is investigating whether Bear Stearns and other hedge fund managers were forthright about disclosing the rapidly declining value of their holdings.
Many of the mortgage-related securities bought by the hedge funds are rarely traded and difficult to value accurately. They are often valued in portfolios according to complex mathematical models because real market prices are not available, making it possible to disguise underperformance if models are not updated.
The SEC has not brought a case in the area so far, but current and former regulators note that it has previously won settlements from several mutual funds and banks that failed to revise the prices of illiquid assets during a falling market.
Private securities lawyers are also starting to file securities fraud lawsuits on behalf of investors who have lost out because of the subprime meltdown.
Jake Zamansky, a lawyer who negotiated an early settlement from Merrill Lynch in the scandal over skewed investment bank research, has filed an arbitration claim against Bear Stearns alleging the firm misled investors about its exposure to the mortgage-backed securities market.
The class action law firm of Bernstein Litowitz is also preparing a claim against Bear Stearns, alleging the firm made material mis-statements in the offering documents for its now defunct hedge funds.
"This was simply about a hedge fund strategy that failed," said a Bear Stearns spokesman. "We plan on defending ourselves vigorously against the allegations in these complaints."
Other hedge funds may also come under political or legal pressure over their role in the loan crisis.
Richard Carnell, a professor at Fordham law school, says it may be possible to hold the investment banks that securitised the mortgages at least partially responsible in the case of a major collapse of the market. "There are two things you can object to in the securitisers' conduct: failing to disclose material facts about the credit quality of the mortgages; and you can also criticise them for acting as an enabler for someone they know is a bad actor," he says.

But putting together a case will not be easy because the hedge funds and other investors who bought such securities are presumed to be sophisticated about financial matters. This means it will be harder for them to prove they were not properly warned about the risks involved.
In the case of the Bear Stearns funds, investors may face new hurdles to recovering any money through US lawsuits. Though the funds operated mostly in New York, they were incorporated in the Cayman Islands and that is where they have filed for bankruptcy. In what could be a test case for international bankruptcy laws, the liquidators have applied to the US courts asking them to block US lawsuits during the liquidation process.
Bear Stearns said in a statement: "Because the two funds are incorporated in the Cayman Islands, the funds' boards filed for liquidation there . . . The return to creditors and investors will be based on the underlying assets and liabilities of the funds not on the location of the filing."
Even if the US lawsuits do go forward, a case pending before the Supreme Court could also prove crucial to investors who hope to make a case that hedge funds and rating agencies enabled widespread fraud.
In Stoneridge Investment Partners v Scientific Atlanta, the court is considering whether investors can recover from firms – including accountants, lawyers and bankers – that help a public company commit fraud by participating in a "scheme to defraud". If the high court rules against "scheme liability", investors who lost money in the subprime market will have very few places to turn to try to get some of it back.
William Poole of the Federal Reserve Bank of St. Louis thinks that this may be what investors who lose money on subprime mortgage-linked securities deserve for not looking at them closely enough.

Criticising Wall Street underwriting standards recently, he said: "The punishment has been meted out to those who have done misdeeds and made bad judgments. We are getting good evidence that the companies and hedge funds that are being hit are the ones who deserve it.''
RISING PRICES OFFSET A BRITISH SUBPRIME SNIFFLE
Last month some of the most senior figures in the UK mortgage industry gathered at London's Royal Albert Hall for a glittering awards dinner, writes Jane Croft.
Entertainment was provided by British comedian Al Murray and a colourful troupe of can-can dancers. But in spite of the celebratory mood, the chatter soon turned to recent findings by the UK's Financial Services Authority on problems with subprime mortgages. The regulator had said it was "very concerned" about "the high level of subprime arrears in a benign market" and had uncovered "weaknesses" in lending practices.
The level of defaults has been much lower than across the Atlantic – partly because the UK subprime market is much smaller, accounting for around 8 per cent of mortgages compared with 20 per cent in the US.
However, a recent report by Standard & Poor's showed overall arrears and repossession rates in the British subprime sector rising. The rating agency's non-conforming Residential Mortgage Backed Securities (RMBS) index tracks the performance of subprime mortgages securitised into capital markets. It found 10.5 per cent of loans in the first quarter of 2007 were more than 90 days in arrears – up from 7 per cent in 2004.
This is still far below the US, where research by the Centre for predicts that one in five subprime mortgages made in the past two years will end in foreclosure.
A big concern raised by the FSA is whether UK mortgage brokers and lenders are properly assessing how much borrowers can afford to pay back each month. While he acknowledges there are key differences between the US and UK, Clive Briault, managing director of retail markets at the FSA, admitted recently that "we cannot completely ignore the parallels with our own market".

The FSA is also concerned that rising house prices are encouraging some over-indebted borrowers to increase their levels of debt by borrowing against their property.
In its review, the FSA examined 11 lenders and 485 case files at 34 mortgage brokers. It found that in a third of the files, brokers had made an "inadequate assessment" of the customers' ability to afford the loan. It also found failings amongst lenders that resulted in "the approval of potentially unaffordable mortgages".
Figures from the Council of last week showed that home repossessions jumped 30 per cent year-on-year, rising to 14,000 in the first half of 2007. The industry body said some of the increase was due to rising defaults on subprime mortgages. Indeed, a third of the possession hearings in one local study by the Citizens Advice Bureau last year were brought by subprime mortgage lenders.
The buoyancy of the UK market, at least, means there is still an escape route. "House prices have not been impacted as they have in the US," says Andrew South, an analyst at S&P. "That gives borrowers more refinancing options if they get into difficulties."