Bailout

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)."

... 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.

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.

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.

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

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.

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.

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."

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.

 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.