Women and Children First
Today is the Labor Day holiday in the USA, so to honor the more vulnerable parts of our society and economy I’m engaging in this fantasy rethinking of our current economic crisis. If only……
When the “unsinkable” ship Titanic hit an iceberg and sank on its maiden voyage in 1911, as any teenage girl will tell you, the rich people got nearly all the lifeboats (except for John Jacob Astor IV who ordered another drink, giving up his seat), dooming the lower-class passengers including, of course, poor Leonardo DiCaprio. Much the same thing seems to be happening in the case of the current economic crisis, where the people who are hurting the most seem to be getting the least. I’m beginning to believe the crisis could have been fixed quicker and cheaper simply by helping the women and children instead of the bankers.
This began as a mortgage crisis. Lenders dropped their standards on loans, giving them to people who shouldn’t have qualified (yes, they applied for those loans so are also culpable), driving housing prices up in a bubble that eventually popped and here we are with eight percent of all mortgaged houses in foreclosure and home prices down 30-40 percent from two years ago. The technique our government used to deal with this was to prop-up the bankers, not the borrowers.
Why?
That’s a question I have been asking all over and the smart money answer generally comes down to: 1) that’s the way the system is set-up; 2) that’s the way we’ve always done it, and; 3) it would be too complex to deal with individuals — better to deal, instead, with a few dozen banks.
Why?
The system was widely perverted to deal with the current crisis; it wasn’t “business as usual” at all. Companies that weren’t (and still aren’t) bank holding companies were declared to be so and got money from the Fed and Treasury as a result. Same for insurance companies and brokerage firms and car companies that remained as they were but got money still from the Congress or through sleight-of-hand by Fed chairman Bernanke.
Doing things “the way we’ve always done it” is what got us into this mess.
And the miracle of information technology makes it just as easy to send money to people as it is to take it from them in the form of taxes. Saying that a bank has to be in the middle makes no sense at all. PayPal would gladly assume that function, if it is truly needed.
I’m beginning to realize we could have taken a completely different approach to the problem and simply treated the symptom, inserting what computer jocks call a “wait state” into the mortgage system so panic could subside, rational adjustments could be made, and life could be eased back to normal.
Remember that economies are cyclical and a lot of good financial planning is simply having enough reserves to survive until things get better. That could have been our major economic tactic in dealing with the crisis in 2008. Instead of pumping $700 billion to $1.3 trillion (nobody knows the real number) into economic stimulus and bail-outs, the U.S. government could have simply paid everyone’s mortgage — EVERYONE’S — for six months.
There are 51 million mortgages in America and the average mortgage payment in 2006 was $1686, so paying everyone’s mortgage for six months would have cost $516 billion — hundreds of billions less than the Bush/Paulson/Obama/Geithner/Bernanke plan, and quicker, too.
The money that people would otherwise have used to make their mortgage payments could have gone in part for other things, making it effectively a huge economic stimulus in its own right. With mortgages paid in full there would have been no foreclosures OR bank failures during that six month period. Yes, there would still have been problems with the banking system that needed correction, but there would have been six months to do the correcting.
Lehman Brothers would still be in business, Bear Stearns, too. Merrill Lynch would be independent. AIG would not have failed. Even Bernie Madoff would probably still be in business — at least for awhile.
So why didn’t we do it that way? Because it would have been putting women and children first.
I need a drink.
Just because you have terminal cancer or is on life support, it does not mean you should give up on an extra 6 months to live if by some miracle you can get it. I agree with Bob here. There’s an old saying, money is like water; it has to flow to do work. Ask any struggling small business if they would turn down a 6 month CASH FLOW even if the long term outlook is uncertain. Flow of credit – wasn’t that central to the crisis? Banks and brokers faked everyone’s value until they cannot afford it any more. But if you give people vouchers to pay their mortgage, the banks get the bailout money anyway at the end, but it’s real value paid into the system, and people get some breathing room to find a new job, change to a new place – extra TIME – which is worth more than money. You give the money directly to the banks hoping they’ll open up credit, and all it does is the same old trickle-down wishful thinking. It does no work.
You don’t hear any experts talk about when the average middle-class American will see the next pay raise to actually move the economy, because in their current economic model they cannot come up with where else in the world can we get enough consumerism going to base the next scam to generate the next bubble. The American consumer fishery has been depleted.
But *O.B.A.M.A. is owned and operated by Goldman Sachs. Why would you think anything different?
O.B.A.M.A. == one big arse mistake america
I agree that Bob’s suggestion would have had a significantly more positive impact on the economy than the “economic stimulus” carried out by the current administration, but politically this would never fly…I can hear the politicians pontificating right now: “what about all the renters out there? We have to do something for them as well”
I agree that paying everyone’s mortgage is unfair on those who rent. We need to stop buying houses above our means.
I agree that the banks and firms which made bad decisions shouldn’t have been saved by the Fed. Only the people’s bank accounts should be saved by the Fed.
This would be supremely unfair to renters, who may be renting from mortgage-holders.
I liked Dean Baker’s suggestion that the owners would be able to turn their houses over to the banks (which would be regulated by the government), as they went underwater, and the owners would become renters. People would lose their houses, but would not be kicked out of them. That would help other renters, by keeping people out of the rental market.
Later, they could re-purchase their homes when they could afford the so-called market rate, as the value of the comparable homes dropped.
This would have worked much better than the mess we have today, where banks drag their feet on foreclosures, because they don’t want to add inventory to an down market.
People who overbought just a little bit, would buy their house back (after losing all the equity) at a lower, but sustainable price, keeping the house out of the market (thus depressing prices further). People who overbought more could remain renters, or leave and buy a less expensive house.
The government would negotiate payment to the banks for the difference between these prices, making the payout stretch over years, so they could adjust the payout. If the net drop in prices was 20%, then the government would cover around 20%. If the net drop turns out, after several years, to be only 10%, then the government pays out 10%. The banks that could not survive this process would go into trusteeship.
It’s no surprise that your idea duplicates the tactics of the Grameen Bank, probably the original micro-loan program invented by Mohammed Yunus, Nobel Prize winner from Bangladesh. The loans of the Grameen Bank are meant to empower those of greatest financial need, usually women, with small loans that have profoundly changed lives. It’s worth noting that repayment rates have equaled 98%.
Trickle-down economics, the model implicitly followed in the bank bailout, has always worked primarily for the benefit of those who have far less need and has served to increase the concentration of wealth.
There was an article (http://www.boston.com/bostonglobe/ideas/articles/2009/09/13/why_capitalism_fails/) in the Boston Globe a few days ago about the economic theories of the late Hyman Minsky. His theories are now all the rage, though his solutions, which are similar to yours, are not as strongly embraced. Interesting read.
Why couldn’t the government just paid a couple of mortgages and stimulated the economy if that would have been cheaper and faster. Every year the government gives foreigners money to come to the U.S. and start businesses each year. I mean where is my 40 acres and a mule. Well this goes to show that the government doing something right for a change is too much like right!
Keneshia Richardson
FED UP
The root cause of the melt down was concentrated wealth.
The economy is dominated by the law of supply and demand. If you have too much supply relative to demand you get deflation. If you have too much demand relative to supply you get inflation.
There’s one big caveate: the economy is 70% consumption (demand) and 30% production (supply).
Political policy is dominated by tax and subsidy: that which you tax you get less of, that what you subsidize you get more of.
Using tax and subsidies, government has a choice between favoring supply-side bias policies and demand-side bias policies.
If you have too much demand and too little supply then you can arrive at an inflationary recession – or ‘stagflation’. The remedy for an inflationary recession would be supply-side bias policies.
If you have too much supply, and too little demand, then you can find yourself in a deflationary recession. The remedy for a deflationary recession is demand side bias policies.
In 1980 we had stagflation. Reagan introduced supply-side economic policies. Those policies should have been in place for no more than 5 years – in the extent. Instead they have remained the bias for our economy for over 30 years.
In fact, the median wage has remained the same since 1973, even while GNP has gone up 150%. Median family lifestyles have improved only by having more people from a family enter into the workforce, or the family saved less and borrowed more. During the Bush tenure, the median family income was no longer sustainable under any device and so declined 5% (in the first four years, I believe).
What this means is that wealth became enormously concentrated, relative to demand. This breeds not only deflationary recessions/depressions, it also breeds investment bubbles and deregulation. Let me explain how.
Uncle Ronny sold us on supply-side economics. He said give the rich people more money. The Rich people, in turn, would build then build more factories for us to work in, so we’d get richer too. This was the ‘trickle down’ effect.
There’s several problems with Ronnie’s take. It’s the rich people’s job to invest money to build factories and other productive activities. The problem is rich people will not build a factory if there is no demand for the out put of that factory.
The definition of ‘rich’ is not having to work for a living. Instead your money works for you. In order to insure that they will never have to work again, the first and last thing rich people are ever interested in is “return on investment” (ROI). Rich people will simply insist on making a good ROI – they don’t care if it means “orthodox” investments in productive investments, or loan sharking. They just want to make sure they stay rich. The “make sure” part means becoming richer than they are now.
The problem with Uncle Ronnie’s government bias towards giving the rich more money, is that when wealth becomes too concentrated and supply is to great relative to demand, rich people can no longer generate reasonable returns on investment making the orthodox investments (i.e. investing in productive enterprises). There’s just to much investment money sloshing around and too little demand.
Two things happen as a result: The first is investment bubbles. If one part of the economy manages to make decent returns on investment, say a new technology which brings along with it its own latent demand, money floods into that sector like moths to a light bulb. This causes an investment bubble.
The second thing that happens, is rich people (investors) start eyeballing, with lust, unorthodox investment practices that they had previously been roped off from by government regulation. Because they are insistent, and because they are rich and powerful, eventually the government relents. The result is investors involved in vehicles like payday loans, second and third mortgages, sub-prime loans, and so on. Since the fundamental problem of too much supply, too little demand has yet to be remedied, the investment community is still impelled along these lines: they are now trying to create investment vehicles for life insurance policies (I wonder if that will effect the health care reform debate).
When George Bush became president in 2001, he inherited a mild deflationary recession. All the signals were there that we had hit – and passed – a ‘supply side saturation’ point for our economy: deflationary recession, on the heals of an investment bubble popping, and a massive movement for deregulation of financial policy, markets, etc…
All of this suggest that in 2001, demand-side bias policies were highly called for. Instead, Bush administration pored the coals on supply-side bias policies, and covered their tracts by borrowing artificially cheap money from China (in exchange for a good chunk of our industrial base). People took the cheap money and moved up market in housing, or refinanced releasing purchasing power which increased demand. When that string ran out, the second mortgage business bloomed. When that string ran out, sub prime loans were made. This didn’t happen sequentially as I suggest here, but you should understand the point I’m making.
In the mean time, the median family income was still falling. To maintain family lifestyles, people borrowed money through second mortgages, or by other means, such as credit cards, as a bridge until better times returned. When the bridge failed to make it to the new shore, they defaulted and brought down the entire financial system with them.
This took us to the summer of 2008.
The problem is, the solutions implemented are still supply-side biased. As Bob put’s it, the rich have a seat in the life boats, the poor have to fend for themselves. The rich made bad bets, and the government covered a lot of those bad bets. But the government didn’t fix anything.
The real fix is demand-side bias economics.
All of this is little different than the dynamics surrounding the great depression.
The problem wasn’t fixed until demand was restored. That didn’t occur until World War II ten years after 1929. (Although it’s worth noting, ‘Keynsian’ style economics plans were first introduced in Japan in 1932, followed by Germany in 1933, and England in 1934 – in each case each of those economies were out of the Depression by 1933, 34, 35, respectively. In the case of Japan, the military thrusted itself into politics to keep the government spending on munitions, to the extent that Japan’s industrial production in 1939 was double what it had been in 1929).
There is one dynamic that is different. Wealth has become so concentrated that it is like a black hole that warps our politics the way a black hole is so dense it warps light – to such a degree that it may be impossible to implement true demand-side bias polices.
Uncle Ronnie taught the rich that investing a few bucks in politicians brought bigger returns then orthodox investments ever dreamed of, through tax cuts and other largess. Why invest in a risky business when you can buy a politician for a few bucks? Ronnie started a movement that concentrated wealth so much that it began to feed on itself, becoming ever more concentrated all the time.
Politicians can’t escape the gravitational pull that the level of wealth concentration has created. As a result, politicians are not apt to create policies that favor demand over supply any time soon. As a result, we are likely to have a real double dip depression. The second dip is going to be much, much, much worse than the first. And the only people with life boats will be the very rich.
Even Obama has to dance to the tune that Wall Street calls.
To understand this, health care debate is a good example.
A recent OECD study shows that the U.S. government already spends more per capita on health care than any nation except Norway. That means our government is already spending more than, say, France’s government, per person, yet France has (arguably the best) universal health care. The government, in theory, could throw a switch tomorrow, implement France’s system, and the governement’s spending would go down and everyone would be covered. Logically this means that Obama should have been pushing a “private option” instead of ‘public option’ (the public option cost more, in the aggregate, than universal single payer health care) meaning, you can keep your private plan if you want, but it would be redundant because you’d already be covered by the universal plan. The rest of us could roll into work, have our health benefits monetized and rolled into our pay. The resulting increase in purchasing power would increase aggregate demand enormously, the increase in efficiency would make American companies more competitive, and thus, walk us out of the recession in a fortnight.
This is low hanging fruit, policy wise, but in an environment of massively concentrated wealth, is impossible politics-wise.
Concentrated wealth has caused great collamity through out history. It’s like standing up in a dug out canoe: its’ prone to sudden and epic collapse. Concentrated wealth caused or contributed to the collapse of: ancient Egypt’s New Kingdom, Rome, Pre-Islamic Mecca (Islam is, in part, a reaction to concentrated wealth), Byzantium (circa 1071 battle of Manzikurt), Medieval Japan, Hapsburg Spain, Bourbon France, Romanov Russia, Imperial China, Nationalist China, Coolidge/Hoover America and Bush II America (the later two brought to you courtesy of the Republican party, the first instance paving the way to the rise of Hitler, WWII and the holocaust – and as Churchill suggested in his ‘Finest Hour’ speech, nearly brought about a new dark age).
So I agree with much of Bob’s assessment. Giving money to the rich, powerful, corporations and banks, did nothing for the misery of the average get-up-and-go-to-work-everyday American family or aggregate demand. It just supplied some comfort and cushion to the rich. If we somehow get out of this without another big crash in the not to distant future, it will be a small miracle.
Our politics can chip away at the concentration of wealth and bring us back to something more sane. The public option health care plan, if it survives, will eventually lead us to universal single payer, as the public becomes less scared of it, and sees the logic and need of it. Congress might eventually pass ‘card check’ or some other legislation that helps unions organize, which will contribute to giving employees more bargaining power. (Many people blame unions for much of America’s economic problems, but the fact is, all the nations we compete against in the first world, including Korea and Japan, all have unions – so the problem isn’t unions per se, but a problem in our corporate governance models that emphasize short term thinking on the part of executives). All of these policies would contribute to diffusion of wealth.
We might get lucky. No big bumps. Health care reform. Labor Reform. Some finance reform. Then, more health care reform.
There’s other structural problems, beyond our shores. Exporters, like Japan and China, export too much, and so have a similar effect to keeping money on the supply side of the leverage, suppressing demand here and everywhere. Getting the Japanese and the Chinese to spend more of their dollars would help. It would also help if we had something to sell them in exchange for those dollars too.
Paying everyone’s mortgage means that renters and people who own their property free and clear are subsidizing everyone else. Bad idea.
We should have let GM fail and done the minimal propping up. If we wanted to spend stimulus money, it should’ve been a huge one year only tax break.
“Paying everyone’s mortgage means that renters and people who own their property free and clear are subsidizing everyone else. Bad idea.”
And so it is better that most everyone subsidizes a few banks, investment firms and car companies?
When properties are foreclosed, the renters suffer. They get thrown out on their ear with little or no notice.
When foreclosed properties are sold at fire sale prices, the “free and clear” property owners who live next door lose value in their property just like everyone else.
It’s no surprise that your idea duplicates the tactics of the Grameen Bank, probably the original micro-loan program invented by Mohammed Yunus, Nobel Prize winner from Bangladesh. The loans of the Grameen Bank are meant to empower those of greatest financial need, usually women, with small loans that have profoundly changed lives. It’s worth noting that repayment rates have equaled 98%.
Trickle-down economics, the model implicitly followed in the bank bailout, has always worked primarily for the benefit of those who have far less need and has served to increase the concentration of wealth.
I know it is a bit late to comment, but there are two errors in your Titanic analogy. The ship sank in April 1912, not in 1911. As for survivors, the men in second class had the lowest survivor percentage of all classes of pasengers and crew. Only eight percent of second class men survived. Thirty four percent of first class men made it out and thirteen percent of steerage class men lived. Seventy percent of the crew survived.
The demographics for all passengers are different for each class.
63% of first class lived
43% of second class
25% of steerage
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Well the government is creating a bigger pain in the ass with the Obama plan of health care not only will the ship sink but it will be an anchor to our kids and grandkids as well.
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Yes as soon as we can get the Obamanation out of office and get some people in who are conservative and believe people should make their own lives and not depend on government it will be a lot better all of us need to be out supporting conservative candidates and change the government.
It might be really difficult for single mothers at a young age to cope up with the needs of her child. A lot has to be taken care of in bringing up the child which includes the welfare of the child as well as managing with one’s own education. Moreover, it is really tough to lead a life alone after separating from the spouse.
ich bin zu traurig weil mein mann ist gestorben und ich wone mit kinder und titanic ist schön gewesen und gross der kapitän hat nicht auf gepast ist vol auf eis reingetetsch dan hat es schniz gehabt 1 reis dan kaput auf fider sen
halo ich ware im titanic bot mit mein vaterund mutter und bruder dan war unfal der titanic ist auf der eis getest an sind mir wer schrocken und mein mutter ind mein bruder und ich sin geretert aber mein vatter ist gestorben mir sind traurig weil mein vater ist gestorben dan sind wir schauen gegangen er ist im wasser gebleibet dann haben wir em genomen und mit nemen wir schauen em imer an er gset sotraurigan weil er nicht gereten wer vil glüg machen gutes
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I agree that Bob’s suggestion would have had a significantly more positive impact on the economy than the “economic stimulus” carried out by the current administration, but politically this would never fly…I can hear the politicians pontificating right now: “what about all the renters out there? We have to do something for them as well”cheap VPS
I believe the Obamanation is the worst thing that has ever hit our country. He is deliberaterly collapsing the economy and growing government to finish it off.
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