Main Street Bail Out

How do you bail out Main Street? And how would such a  Taxpayer bail out get repaid?

 In all the other recent Bail Outs, the Taxpayers   got repaid ( in whole or for the most part) by those who were Bailed Out.

The  Big Banks repaid all of their Bail Outs, with a $40 Billion profit to the Taxpayers. AIG repaid it's Bail Out, with a sizable profit to the Taxpayers as well. Even the Auto Companies repaid most of their Bail Out funds.

In all of these Bail Outs the recipients gave the government stock, warrants , other collateral, or otherwise  promised  to  repay the Bail Out. They did  repay their Bail Outs, and in the case of the Big Banks in a relatively short time .

How would we Bail Out Main Street?  What kind of collateral would the government receive?  And once the Taxpayers did Bail Out Main Street, how would the Taxpayers get repaid?

I'm not trying to be cute or facetious. I just would like to know the answers to these questions because  the question of why Main Street has not been Bailed Out has become such a mainstay of our  political discourse.

Eric

Today's Red Guard?

Seeing recent videos of The Red Guard rallies in connection the 50th  anniversary of the Cultural Revolutions reminds me of Sanders young supporters.

Recall how Mao dealt with inequality. Totalitarianism appears to be only effective solution to income inequality. However we all know how well that went.

 Taxation and minimum wage increases may help the poor, but won't raised middle class wages. I've suggested strengthening private ( not public) sector unions and greater corporate shareholder activism  to rein in excessive compensation. I also like the idea of  employee capitalism and a guaranteed minimum income for everybody.

What other solutions are there in a free society?

> http://www.nytimes.com/2016/05/17/us/politics/bernie-sanders-supporters-nevada.html?smprod=nytcore-iphone&smid=nytcore-iphone-share

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> The senator’s supporters were incensed at a state convention they believe epitomized a rigged political system, with some threatening officials online.

Progress Deniers

What am I missing?

 It struck me while riding the train to work,  and going to and from the United Center, and just generally travelling around the City of Chicago and the Country, that it's obvious that there has been substantial improvement in quality of life for most Americans in my lifetime. 

 I remember looking out the window on those rides years ago and things have improved big time.

In addition, I'm seeing so many women and minorities in all walks of life . Business managers and executives, lawyers, doctors, bankers, government, military-- I could go on and on.  Major positive change.

The hard core poor have Medicaid, Food Stamps and subsidized housing, among other safety net programs. What they need is more jobs and better training for the age we live in.

Crime is down. Of course problems persist , especially gun violence

Rust Belt cities have rebounded and Gentrification of city neighborhood has become a bigger concern than what once was called Urban Decay. However the poor have not disappeared and homelessness and poverty persists. 

The quality of the environment has improved in the air, land and water.

We now are approaching energy independence and fossil fuel alternative energy sources are becoming more viable

 Safety has improved for cars, work place and in general.

 Major improvements in food production and consumption- the whole natural/  organic, farm- to-table/ locally grown , healthier food movements.

Only working poor and working class white men are doing worse, or have experienced little progress. Also the cost of higher education ( while more accessible) has become out of reach without incurring crushing debt.

Yet all politicians and most media , not just Trump and Sanders, say these are the worst of times, and harken back to a bygone era. When was that?

I know I live and work in an "ivory tower" , and I'm not as aware of the world the poor inhabit. However  with respect to the undeniable progress that has been made over the last several decades, what am I missing here? Why are so many in denial of that progress?

Eric

Root Cause of the Great Recession - Part 2

Lately I have come across two knowledgeable experts who share my view of what really triggered the financial crisis. As I set forth in Part 1 in my post on the Root Cause of the Great Recession, the financial crisis was not  triggered  by Wall St. and the Big Banks  but rather by subprime lending and political reaction to pressures to increase home ownership for all; even those not creditworthy under traditional underwriting standards.

In the Financial Times April 18, 2016  interview with Jack Guttentag, the 96 year old Wharton professor emeritus and mortgage expert , FT wrote the following:

"He is forthright on the recent boom and bust in US real estate, which he says had little to do with shady practices at Wall Street banks.

Instead, he suggests, it was caused by a broad belief that house prices would keep rising - allied with strong demand created by government agencies, under orders to boost home ownership among lower-income segments.

Lenders and the investment banks that sold their loans through securitization had "every reason" to believe they were doing what the government wanted them to do, he wrote in a recent article.

"None of the congressmen responsible for imposing purchase quotas on the agencies has yet gone to jail," he complained."

When I read that I knew I had found a kindred spirit who was reputable and well regarded in his field. 

 I felt the same way when I read Peter Wallison's book Hidden In Plain Sight. It's  an excellent book which, while critical of the role of Wall Street, powerfully set forth  how the financial crisis leading to the Great Recession really began. The premise of his book is that "the crisis was caused by government housing policies". 

Some day the truth will win out , but not this election cycle!

Eric

The Establishment

Just like the term " politically correct ", I have never heard the term "The Establishment " used as anything other than a term of derision.

What I object to is the use of the term itself.

For example,most people against Trump are not just The Establishment, but more accurately should be described as moderates, sensible or even rational (I'm resisting saying "not crazy").

Any such term would be  much less pejorative term and more accurate.

Same is true, even if to a lesser extent, on the Democratic side. Here again The Establishment is somehow sinister as opposed to moderate,centerist or traditional.

It's amazing how certain words get coined by someone and takes over the conversation, irrespective of reality. For example, who invented the term "mass incarceration"? It's clearly lost it's actual meaning, but that's for a future post.

Words matter. How do their actual meanings  become distorted and politicized?

Eric

Too Big To Fail is not the real problem

As I see it, the issue of solutions to address the problems revealed by the financial crisis is not breaking up Big Banks deemed too big to fail, but rather preventing  the risk of contagion once problems arise. Once panic sets in it spreads throughout the interconnected financial world, whether it's 10 big banks or 50 smaller ones.

Example-- securitizations were actually designed and thought to contain and reduce risk through wide spread diversification and broad dissemination of risk across a very wide universe of investors.

In fact when the housing bubble burst those securitizations actually spread the contagion to those many interconnected investors. Rather then reduce the risk as everyone thought,  this interconnectedness actually spread the contagion of the initial  panic.

Once again I go back to my view that the root cause of the financial crisis  was unregulated subprime lending; made by relatively small and under regulated lenders, virtually none of whom were Big Banks.

Of course the banks that securitized those loans are culpable as well , but breaking them up won't solve that problem. Lehman Brothers was actually pretty small.

The whole subprime phenomenon  was allowed to happened based on the political decision ( both parties) to push for home ownership for " everyone", regardless of creditworthiness. "Liar" loans to NINJAS ( no income, no jobs, no assets, and of course no money down). 

Once the collapse started with the subprime loans,  even well underwritten loans went under with the plunge in property values. When that happened the whole global financial market eventually froze. The rest is history. 

As Paul Krugman pointed out years ago, Canada only had 5 Banks in the whole country and they were all too big to fail; yet Canada didn’t have the same financial crisis problem we had. By law, Canada had virtually no subprime lending. Only credit worthy borrowers, who put down 20% , could get mortgage loans there.

That's how you solve a problem ( at least the last one) .  Banks should be more tightly regulated in a way that insures ( to the extent possible) that they make only "good " loans rather than simply be broken up.

 If that reduces their profits , so be it. 

Eric

Guaranteed Minimum Income

I have become intrigued with a concept known as "guaranteed minimum income". Everyone would be guaranteed, by the government, to make at least a certain reasonably subsistence level of income.

If you make more than that amount, that's great.   But if you make below it, or indeed don't make anything at all,  the government will pick up the difference.

The result would be that nobody would be really poor, and those who wanted more could still work to become richer.  

The good news is you would then eliminate almost  all social welfare programs and the cost to the bureaucracy to run it . However, the cost savings doesn't quite make up for the amount which the government would have to pay out, so taxes would have to be raised.  Still  we should be a rich enough country to afford doing it.

This isn't a completely new idea ( Google it), but it's' time may be coming, especially  for a rich country like ours.

I know , it sounds like fantasyland but it's worth thinking about.

Eric