Bailout

Reader Mail

Joe Mathews — Fri, 22 May 2009 18:21:00 -0400

One of the polite email responses I received to my op-ed this morning in the New York Times (readers of that elite broadsheet are more foul-mouthed than one might think) came from a New Yorker familiar with the federal assistance to his city in the 1970s. Here is an interesting bit, which I checked out:

"When NYC asked not for $$ but simply for loan guarantees in the
1970s, the [MY NOTE, THEN FORMER] Governor of California (Ronald Reagan) said that he got
down on his knees every night and prayed that NYC would not be given
those guarantees.

"Another point: NYC was treated like a beggar, but in fact NYC gives
the federal government far more in taxes than it gets back. I would
guess that California might too. At first, this simply seems like it
would have to be true, as we give $$ to the Federal government for
defense, but, for example, when Newt Gingrich represented an ex-burb
in Georgia, his district got far more in federal $$ than it
contributed to the federal government in taxes (even as they were
complaining about great urban center such as NYC begging for $$ to
support education still 2 decades after Reagan)."

Bailout On the Ballot....

Joe Mathews — Sun, 11 Jan 2009 14:41:00 -0500

... in Colorado Springs. This isn't an advisory vote on federal efforts like TARP. It's a likely vote on a city plan to use a tax to create a city fund that would help boost the local economy. There's plenty of opposition in Colorado Springs, the state's conservative stronghold. This local dispute may be worth watching. it pits Republicans who won't support bailouts vs. Republicans who will, and thus may provide a very local verdict on a bigger national debate.

Top Thinkers on the Global Economy: Dec. 16

Daniel Mandel — Tue, 16 Dec 2008 15:06:00 -0500

Each morning, New America's Next Social Contract Initiative scans the leading media outlets for must-read analysis on the economic crisis and recovery efforts. Today's highlights include:

Housing Starts Decline to Record Low
Calculated Risk, http://calculatedrisk.blogspot.com/, 16 December 2008
Total housing starts were at 625 thousand (SAAR) in November, by far the lowest level since the Census Bureau began tracking housing starts in 1959.

"The Barking Swan"
Mark Thoma: Economist's View, http://economistsview.typepad.com/, 16 December 2008
Does the financial crisis justify "vilifying statements about economists, statisticians, finance professionals and their entire canon"?

This is what a crisis looks like in the balance of payments data
Brad Setser: Follow the Money, http://blogs.cfr.org/setser/, 15 December 2008
At least a crisis marked by a run out of risky US assets and into safe US assets.

China's economy hits the wall
Gideon Rachman, Financial Times, 15 December 2008
It is now clear that, far from being immune to the global financial crisis, China is very vulnerable. Its economy may not be hit as hard as that of the US. But as a poorer country - with a less resilient political system - it could suffer worse, writes Gideon Rachman.

The Lessons From 30 Years of Chinese Reform
Hugo Restall, Wall Street Journal, 16 December 2008
One of the greatest economic booms in history, but an emerging turn back to the left.

Our view on credit cards: A break for borrowers
Editorial, USA Today, 16 December 2008
Overdue action will protect consumers from egregious practices.

Opposing view: Higher rates, tighter credit
Top four credit card issuers' public comments, USA Today, 16 December 2008
Fed's rules will hurt the very people they're supposed to help.

The low oil price calls for a fresh set of rules
Nick Butler, Financial Times, 15 December 2008
Producers and consumers require realistic forecasts and an orderly market. The need is to develop a common understanding, writes Nick Butler.

The crisis gives the US new financial power
Ricardo Hausmann, Financial Times, 15 December 2008
It remains the world's only super-borrower and able to issue thousands of billions of dollars in debt at record low rates, writes Ricardo Hausmann.

It's no time to panic
Jonah Goldberg, Los Angeles Times, 16 December 2008
Economic crisis is leading some to abandon time-honored wisdom.

Can Africa Trade Its Way to Peace?
Herman J. Cohen, New York Times, 15 December 2008
If undertaken with enough will and persistence, an American-led mediation to create a common market in East Africa could end the war and transform the region.

How Bernard Madoff's Pyramid Scheme Will Erode Trust
Anne Applebaum, Washington Post, 16 December 2008
Bernard Madoff's Ponzi scheme will help bring down the trust that enabled it.

Best Buy Cites "Historic Slowdown", cuts Capital Spending Plans in Half
Calculated Risk, http://calculatedrisk.blogspot.com/, 16 December 2008

President rises above politics on auto bailout
DeWayne Wickham, USA Today, 16 December 2008
George W. Bush may have saved the Republican Party from itself and pumped a bit of helium into his deflated approval rating.

The Senate GOP Seems Set on Hastening the Death of Detroit
Eugene Robinson, Washington Post, 16 December 2008
Only a free-market fundamentalist, lunatic or Senate Republican would want to hasten Detroit's demise.

Bankruptcy Is the Perfect Remedy for Detroit
Todd J. Zywicki, Wall Street Journal, 16 December 2008
Washington hates the idea because it would lose leverage.

For more on New America's work on the economy, stimulus plans and recovery efforts, please click here.

The Roadblock to Obama's Infrastructure Dreams

Mark Paul — Tue, 09 Dec 2008 19:36:00 -0500

President-elect Obama's call for enormous new investment in national instructure has the potential, as Steve Coll recently noted, to both stimulate the economy in the short run and strengthen it for the long haul. But as the situation in California illustrates, the economy cannot get the full benefit of that infrastructure package unless the stimulus package also includes a large dose of direct aid to state budgets.

In every respect but one, California is ideally positioned to take advantage of Obama's infrastructure plans. With its congested freeways, crumbling levees, and burgeoning population, it has boundless infrastructure needs. It has existing voter authorization to issue tens of billions worth of state bonds to cover the state's share of cost for projects. It has a bountiful supply of workers, now idled by the collapse of housing construction, to retrofit buildings for energy efficiency or to repair schools and public buildings. It has a vigorous corps of entrepreneurs and venture capitalists to spur a wave of green infrastructure investments, contributing new ideas and technologies to the effort.

It has everything to carry out an infrastructure stimulus program except cash.

Speaking December 8 to an unusual joint session of the California Legislature, Treasurer Bill Lockyer announced that, as of December 17, the state of California, its till increasingly bare, will have to stop providing the short-term cash financing needed by most state infrastructure projects. Billions of dollars worth of planned and approved projects –– school builidings, road and transit projects, levee improvements –– will come to a stop, resulting in the loss of $12.5 billion worth of private sector activity and 200,000 jobs, according to Lockyer's estimate.

When the media and politicians talk about infrastructure and bonds, the discussion usually involves a simple shorthand: Voters approve bonds; state sells bonds; state uses bond proceeds to build projects. In actual fact, the financial plumbing is more tangled. Because of federal tax laws, most infrastructure financing must follow a two-step process. When a state agency is ready to begin an infrastructure project with authorized bond funding, it first applies for a loan from the state's Pooled Money Investment Account, the cash reserve where state and local revenues and special fund cash balances are temporarily parked until they are needed. This bridge financing is used to build the project. Once the project is ready, the state sells authorized bonds and uses the proceeds to pay the short-term loan with interest.

In normal times, this process works seamlessly and without any public attention. (In the 18 months I served as executive secretary of the Pooled Money Investment Board, I never saw a reporter at a board meeting.) But today it is ready to break down.

The state's cash reserves, already depleted by years of internal borrowing and budget gimmickry, are fast draining as the recession drives down revenue collections. To make matters worse, the meltdown of the financial markets prevented the state earlier this autumn from being able to sell the full amount of revenue anticipation notes it normally issues to keep its cash drawer full until most of its tax revenues arrive in the spring. Because the pool in the state's cash reserve is already so low, all of the remaining dollars will have to be loaned to the general fund over the next several months to pay day-to-day bills, leaving none available for infrastructure financing. And without drastic and immediate action by the Legislature to raise taxes or cut state programs, the state will run out of cash, in February or March, for any purpose. In Governor Schwarzenegger's words, California is "headed toward a financial Armageddon."

Yet even drastic action won't be enough to make infrastructure financing available in California for more than a few months. At the same joint session, Controller John Chiang told lawmakers that the state's revenue loss is so great that the cash crisis will return next summer, at the beginning of the next fiscal year, in which the state faces a projected deficit of $19 billion, roughly equal to 20 percent of its general fund. To close that deficit by spending cuts alone would require closing the University of California and the California State University system, ending welfare payments, and eliminating all state funding for the developmentally disabled, for mental health, and for In-Home Supportive Services.

Given that the California Legislature has been unable, to date, to take budget actions, either tax increases or spending cuts, far less painful than these, it seems unlikely that California finances will permit the normal funding of infrastructure at any time in the next several years.

Obama has said he will provide infrastructure funding for the states, which must use it quickly or lose it. But without federal assistance to cope with its budget calamity, California, and likely other states as well, will be in no financial shape to take full advantage of this infrastructure moment. As I have written before, using the coming stimulus bill to bolster state finances is essential to prevent state budget actions from deepening the recession. But as California's plight illustrates, generous assistance to the states, on the order of $100 billion to $150 billion, is also vital to making Obama's infrastructure hopes come alive.

Why States Belong In the Stimulus Package

Joe Mathews — Thu, 20 Nov 2008 16:55:00 -0500

Over at the California Progress Report, my New America colleague Mark Paul explains why.

James Lockhart and Ellen Seidman on Fannie, Freddie, and the Conservatorship

Mark Huelsman — Mon, 17 Nov 2008 14:54:00 -0500

James Lockhart, Director and Chairman of the Oversight Board at the Federal Housing Finance Agency (the entity overseeing Fannie Mae and Freddie Mac) joined Ellen Seidman to discuss the conservatorship of Fannie and Freddie. The interview followed an event, "Foreclosures: What are Fannie and Freddie Doing to Stem the Tide?" on November 13.

Banks: Lubricant or Just Another Industry?

Ellen Seidman — Sun, 26 Oct 2008 02:53:00 -0400

Can we get this straight? Are banks the critical lubricant for the economy or just another industry? This week's Business Week provides a contrast worthy of those conflicting headlines about the same event the New Yorker used to run at the bottom of short columns. In an interview with Maria Bartiromo at the front of the magazine, Wells Fargo CEO Richard Kovacevich is quoted as saying that Treasury should support banks before other industries because "for every dollar you put in, institutions get to lever that 10 to 20 times in terms of the loans they can make." And "It's important to invest in the banks because banks are the grease that keeps the real economy moving." Yet 10 pages later, Business Week tells us that banks are saying they won't lend until 2010, and the government money flowing into them won't help. Kovacevich himself is quoted in this article as saying "lending won't start until everyone agrees the bottom has been reached," although to be fair, in the earlier article he says he hopes the bottom will be reached quickly.

Unless banks are going to lend with the government funds they're getting, they might as well get in line behind firms in the real economy, like autos, airlines, and manufacturing in general. Because if a bank doesn't lend, it's just another corporation, and not one producing real goods. While I'd like the banks' attitude to be different, I don't particularly blame the banks for this stance, especially those whose capital condition is somewhat shaky because of doubt about the actual value of the assets they are holding. As a fiduciary matter, if they're concerned about having enough capital to satisfy examiners as well as the market, that's probably the right stance.

No, the problem lies with the Treasury. As Kovacevich points out, a dollar of bank equity capital can be turned into $10 to $20 of loans. But it need not be levered up that much to be effective. If the Treasury were to say to the banks -it's not too late, as it appears no actual agreements have been signed-that for every dollar of equity we put in, you need to make $5 or $7 of loans, the banks would still be getting a good deal, would still be enhancing their equity position, and would, contrary to the current situation, actually be lubricating the economy. Any chance the Treasury will explain why this isn't a good idea? Or better yet, just adopt it.

The Mainstream Comes On Board--CRA Didn't Cause the Current Mess

Ellen Seidman — Wed, 15 Oct 2008 16:44:00 -0400

Those who, like me, believe that CRA not only did not cause the current mess but has been a positive force, are gratified that the mainstream press has finally started to pick up the theme. For example, this morning the New York Times ran an editorial pointing up both the fallacies of the anti-CRA argument and the good CRA has done. And last week Forbes carried a piece by Luis Ubinas, the new President of the Ford Foundation, pointing out that the crisis was caused by risky mortgages (by risky, non-CRA-regulated lenders), not risky borrowers, and in particular not poor borrowers.

Perhaps even more important for countering the effects of the "blame CRA" campaign in middle America, the McClatchy papers have distributed a news item blasting the myth, noting, "What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans. These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans."

Ubinas' piece builds on an extremely timely and compelling study by the Center for Community Capital at the University of North Carolina. The study is also referenced in the Times editorial. Using matched samples of sub-prime borrowers who got well-underwritten, conventional, fixed-rate loans from banks and credit unions and those who got adjustable rate loans with prepayment penalties from brokers, the study found that the borrowers with good loans had significantly lower default rates than those with the bad loans. And nothing else accounted for the difference. As the study states: "all other characteristics being equal, borrowers are three to five times more likely to default if they obtained their mortgages through brokers. When the feature broker-origination channel is combined with the adjustable rate and/or prepayment penalty, the default risk is even higher."

So, enough already. Let's put the blame where it's due: on bad products sold by people with no interest in repayment to investors who didn't understand what they were buying in an unregulated market run amok. Good products sold by lenders with an interest in success to borrowers who understood what they were getting did much, much better.

Some Good News: An IndyMac Update

Ellen Seidman — Wed, 08 Oct 2008 22:01:00 -0400

In the midst of all the market turmoil, one innovative program to deal with the underlying housing and mortgage issues is moving ahead smartly. You will recall that, fast upon the heels of its takeover of IndyMac, the FDIC announced an aggressive program to modify loans owned or serviced by IndyMac to prevent avoidable foreclosures. Initially, the FDIC wrote almost 5,000 borrowers and proposed to modify their loans and reduce their payments-all they needed to do was send back a check in the new payment amount, sign a modification agreement, and grant permission to check the borrower's tax return. (Where the tax return information does not conform to information in IndyMac's files, the FDIC requires further verification of borrower income.) One of the best aspects of the program for borrowers is that the letter they received included a specific new payment amount, not just an invitation to call their servicer.

So far IndyMac has sent out thousands more modification proposals and, to date, the FDIC has gotten more than a 70% response rate to these mailings. Several thousand loans have now been restructured. The FDIC has worked within IndyMac's existing servicing agreements and with the owners (or trustees for owners) of mortgages IndyMac was servicing to allow quite aggressive modifications, including deferral of principal until the property is sold or refinance-a strategy that prevents a borrower newly relieved of excessive mortgage obligations from getting back into trouble by releveraging. Next up, working with non-profits to do outreach to 19,000 borrowers who the FDIC believes will be harder to reach.

What's particularly exciting about this is not only that borrowers and their communities are being saved and the FDIC and its insurance fund are meeting their least-cost obligation, it's also serving as a model. When Bank of America announced a settlement with 11 state Attorneys General on Sunday in which it pledged to modify mortgages at a cost of $8.4 billion, it was following the FDIC's lead. Really. A government agency showing the private sector how to do something constructive. I suspect we'll see a good deal more of that in the next several years.

Bail-out or Build-out?

Terry Tamminen — Tue, 07 Oct 2008 18:34:00 -0400

As Washington and Wall Street dicker over a financial rescue plan, everyone is missing the real opportunity to fix the problem. Some see the variously proposed plans as bailouts of dumb borrowers and dumber lenders, while others view it as a chance to restore liquidity to the marketplace so we can all have access to credit again, whether it's for student loans or to finance the acquisition of industrial machinery.

But when the "Great Depression" struck America more than 70 years ago, we didn't just make more money available and hope people would borrow it to jump start the economy. President Roosevelt put us back to work, building bridges, highways, schools, and water projects. All of that infrastructure has served us well over the years, although at the time it must have looked like a lot of pork barrel spending designed to keep workers off of street corners and out of soup kitchens. What if we could do something like that again, but this time, make it a build-out that had fantastic economic, environmental, and social return on the invested capital?

In 2003, President Bush spoke about hydrogen cars in his State of the Union address. Shortly thereafter, the American Petroleum Institute (API) warned that building a hydrogen fueling infrastructure that could reach all Americans would cost $140 billion. Although I'm sure the API had no reason to use scare tactics and biased estimates (well, OK, maybe I'm not THAT sure), let's assume that's an accurate figure.

If we built those fueling stations, we would also need vehicles that run on hydrogen. It takes about $5,000 to retrofit a car or truck to run on hydrogen. Yup, almost any car or truck (or bus or train for that matter) that currently runs on gasoline or diesel fuel will also run on hydrogen gas. It's not the most efficient use of hydrogen (a fuel cell, which converts hydrogen to electricity and thereby powers an electric motor in an all-electric car is far more efficient), but anything is more efficient than digging oil out of the ground and making it into transportation fuel. Let's say we convert 50 million cars and trucks nationwide to run on hydrogen - - that's $250 billion more.

So for just under $400 billion, we could eliminate the need for all of the oil we now import (and a lot of the domestic supply for that matter). We would have given tens of thousands of Americans jobs in the design, building, and servicing of hydrogen fueling stations; and tens of thousands more would be working in the new retrofit business. Detroit could now start making new hydrogen powered cars, knowing that the marketplace accepts these products, so we would simultaneously revitalize our domestic auto industry.

We could recoup 100% of this investment when retailers sell hydrogen fuel with a few cents per unit sales tax, just like the gasoline tax. But we would recoup it even faster with the payroll and business taxes generated from all of the new employment and businesses created with this program.

So there you have it - - a domestic jobs program that will kick the oil addiction, solve global warming, create new industries and jobs that can't be outsourced to India or China, eliminate billions in annual subsidies to oil companies and billions more that we now spend on defense costs to protect our oil supply. For half what we will spend on Wall Street and 20% of what we have spent securing oil in Iraq so far, we will have social, economic and environmental prosperity for as far as the eye can see.

This build-out sounds crazy at first blush until you realize that we already produce 3 trillion cubic feet of hydrogen in America every year, but use the majority of that to strip sulfur from petroleum to make gasoline instead of just putting the hydrogen right into our cars. How crazy is that?! No, make no mistake, we can do this and reap all of the benefits.

Now if we just had another Roosevelt around to get us started...