Pure genius this is…
Barney Frank, the Democratic chairman of the House Finance Committee, said Mr Geithner should not to repeat the mistakes of his predecessor Hank Paulson, who “lost sight of the rest of the country and pissed them off entirely,” with his initial bank bailout.
Frank warned the Treasury Secretary that voters want to see fewer foreclosures and more bank lending to ordinary consumers before they support the rest of the financial rescue plan. “They understand the political need,” Mr Frank said.
The plan will help distressed homeowners get modified loans, subsidising lenders who cut interest rates. Mr Frank said the plan would aim ensure that such householders need pay no more than 31 per cent of their income on their mortgage.
Voters want to see fewer foreclosures and more bank lending to ordinary consumers. No doubt they do. I assume they also want more sex, better cars, more holidays and yet another Rocky movie to be made. Or maybe a Caddyshack remake.
So the political and financial elites decided that if more and more people could be made home owners, that would benefit both sections of said elite, or as I like to call them collectively, the Political Looter Class… tax money and government guarantees (which are not cost free) and, when necessary, actual threats to financial institutions that were reluctant to loan money to people who might well not ever pay it back, pushed the number of homeowners ever higher as ever more money was borrowed by John Q. Public and invested in mortgages. The political looter class was happy and so were the millions upon millions of people who voted for them again and again and again.
And of course why should everyone not be happy? A loan is a bank asset, right? And banks with more assets can lend more money, and that means even more people, voting people, can buy houses.
Well yes loans are a bank’s ‘assets’… but only if there is a realistic chance of that loan ever being paid off, otherwise it is in fact a liability (or more accurately, a loss, although through the mystical political arts it does not actually get called that as often as it logically should when the ‘loss’ is incurred by a member of a voting block the likes of Barney Frank, or for that matter, George Bush, wish to pander to). I only state this obvious fact because it does not seem obvious to the political section of the looter class. It was of course always obvious to the financial sector of the looter class, which is why all those ‘assets’ (which were actually liabilities) were wrapped up in complex financial packages and splendidly ‘securitized’ with the open connivance, indeed encouragement, of the political elite… and whilst there is absolutely nothing wrong with securitization per se, it ain’t quite so splendid when it is being used to spread what we now call ‘toxic debt’ throughout the entire financial system, making it enormously harder and often impossible to assess loan risk.
But to the entire political looter class, and I mean not just the elite elements but also including the millions and millions of people who took loans they could not repay and voted for the people whose regulations provided the perverse incentives for banks to loan money to them, the important things was to… keep lending. And this, boys and girls, is what we call a Credit Bubble. And why do we call it a bubble? Because when loans are given out at a rate greater than actual economic growth can support, the amount of loans (assets) that go bad increases because the increased lending was not supported by an increased ability to pay the loans back… and when that fact becomes clear, people with money suddenly stop lending… the ‘bubble’ bursts.
And when the state decides to fix that by motivating more people to borrow by reducing interest rates to almost zero, that of course makes no damn difference at all because lenders, not borrowers, are the ones suddenly back in touch with reality. And just because the government (i.e. central bank) says “the price of loans is 0.1%”, that actually does not mean jack shit, because the genuine price of loans has to include the premiums needed to cover bad debts. Moreover if it cannot be determined how risky it may be to lend due to the poisonous spread of toxic debt, it is safer to just hold onto the money rather that flush it down the toxic debt toilet.
And how are the political looter class trying to remedy this situation? Well they are trying to re-inflate the bubble with the extra added spice of making the secured assets (property) even harder to repossess (in effect un-securing questionable loans either by fiat or with money plucked from the government’s magic money tree). Pure genius.
And the next news item just around the corner? Think about US Treasuries… or ‘Junk Bonds’ as they will soon be known. ‘Screwed’ does not even begin to describe it.
Barney fucking Frank needs to met a lone nut with a $12 Mannlicher Carcano. Fast.
Perry,
Part of the reason Barney Rubble wants to stop foreclosures……..
http://www.calculatedriskblog.com/2009/02/ny-times-fdic-struggles-to-dispose-of.html
The true depth of the US deficit, readers are strongly advised to read the linked Federal Treasury report….
http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=88851
Distributation of US Treasury bonds…..
http://4.bp.blogspot.com/_3-h7k_OIJk0/SZcXayEnx0I/AAAAAAAAAjc/xP8lZ-zE3Cs/s1600-h/Owe4.png
Have a great day…….
An interesting post that offers a perceptive insight into the politicization of the credit and capital markets; except I have a quibble regarding this:
Well yes loans are a bank’s ‘assets’… but only if there is a realistic chance of that loan ever being paid off, otherwise it is in fact a liability. I only state this obvious fact because it does not seem obvious to the political section of the looter class.
A loan that cannot be paid off is not a liability. It cannot become a liability; it is in fact a loss. A bank deposit is a liability because the bank is required to pay it back to the depositor.
When a loan is classified as a loss, the balance due is charged against the bank’s provision for loan losses. This in turn reduces the bank’s capital. If enough loans are charged off, capital reserves are wiped out and eventually the bank is taken over by the regulators, and the taxpayers take a hit.
It’s a bad situation, and the policymakers only seem to make it worse. Let’s hope we all make it through in one piece.
Perry — you talk as if these financial shenanigans were a bad thing. I beg to differ on that.
Democracy has failed, as is quite obvious now in the US as well as elsewhere. The only constraint left on the Political Looter Class is reality. And they are about to have a “head, meet wall” type of close encounter with reality.
You have declined earlier requests to put your fine mind onto the topic of what Libertarians should do on the day after, when the Political Looter Class are sitting on the ground, holding their sore heads, their eyes blinded by their own blood. I wish you would mull that topic over, because (a) it really is coming, and (b) I for one would be very interested in your perspective.
Yes you are right Patrick, but they *don’t* classify it as a loss. In fact they tend to keep it on the books and still call it an asset… so they are lending on ‘assets’ that do not actually exist. Perhaps liability was not the best word for that but not sure what to call a fictitious asset used to measure a bank’s “worth”. Even calling it a ‘toxic debt’ implies it is a debt rather than a loss.
I added this:
The political looter class are not just the elite leaders.
Oh I agree entirely and have said as much myself on many occasions.
Not ‘declined’ really, I am just a bit preoccupied trying to figure out how to avoid finding myself sitting in the same financial crater as the people who actually voted for this shit… which is not unrelated to your question in fact. I will say something on that topic when I know what the hell to prudently say 🙂
The government forces us all to have bank accounts (why do I have to have one to have a job ffs?), and thus we are all bound to the banks.
Thus, in a market where people are their customers through no choice of their own, the banks have managed to lose money. Even with a monopoly, these incompetent morons, headed by people appointed via the old boys network, can’t keep their books balanced.
The government and the banks are totally symbiotic, they are one and the same, both seeking to control us and spy on us, both hungry for ever more wealth and power.
Then we have Scum like Hank Paulson, who sued taxpayers money to line the pockets of his friends and spitefully destroy his enemies (Lehman Brothers).
Both Jefferson and Lincoln regarded the banks as Anti-American enemies of the people.
Let the banks die. They do not make anything and are thus of no use to the economy. The people should instead use the post office and co-operatives to handle their money. The British Post Office already provides a better transaction service than the banks anyhow.
Actually, Patrick’s technical correction is accurate. Until there is no legal possibility of collecting on a loan (i.e., after the foreclosure is completed and the property is sold) or the bank has conceded the practical impossibility of collection (i.e., the loan is charged off), there is no other way to characterize a loan except as an asset. The proper way to reflect the decline in its real value (the amount which the bank anticipates actually collecting) is through making a “provision” for the anticipated loss, which is reflected in the loss reserves. That’s why, if you look at a bank’s balance sheet, you will see a bottom-line figure for “loans net of reserves” or something equivalent. The real problem is that very few banks have adequate loss reserves. If a bank doesn’t have reserves at least equal to its nonperforming assets (and preferably a multiple of them) you know it’s in trouble.
But I don’t disagree with anything else in your analysis. Easy credit (“hair of the dog”) isn’t the solution to a credit bubble, and interfering with the collection process (through foreclosure moratoriums, changing the bankruptcy laws to permit judicial “cram-downs”, etc.) is definitely counter-productive. Barney Frank is a true triple threat: stupid, arrogant and ugly.
“And how are the political looter class trying to remedy this situation? Well they are trying to re-inflate the bubble…”
Now, there are some free market fundamentalists who don’t like this whole bubble-model, but the people who have been successfully bribed with their own, or indeed somebody else’s debts, i.e. home-owners, are passionately opposed to the one tax that would prevent bubbles arising in the first place.
But you’ve asked me not to mention it, presumably because somewhere along the line, the owners of this site secretly like property price and credit bubbles.
No Mark, my objection to the Georgist model is it pretends land is not property like anything else.
Lending, which has now somehow become loaning (like skiing?), requires borrowers and lenders.
In current reviews in the U.S, it seems pretty clear that there is a consumers’ reluctance to create more debt for themselves. E.g., Credit Card Balances, dropping.
Some of the studies of the recent trends in lending patterns seem to make it clear that a huge swath of loans were made on the basis of asset valuations rather than returns to be derived by the borrower from the application or use of the loan funds.
There is SO MUCH more. But then, it is more fun to niggle over what is “debt” and what is an “asset.”
Incidentally, how did the noun loan come to replace the verb lend? Is it part of the process where “pleaded” has replaced “pled?'” Ah well, small children have often said “he hided from me.”
Oh dear God no! Have you no heart, man? No kindness of the soul at all? *weeps at the very concept*
Yeah, I’ll take Rambo any time. The last one was even tolerable.
BTW Perry:
I for one would certainly appreciate any wisdom you might be willing to share on the subject with the audience here, whatever they might have voted, if at all:-)
The three people in the quotation (Barney Frank and the past and present Tres Sec) should be in prison.
As for the deficit – about 13% of G.D.P. this year (according to the Wall Street Journal Editorial Board team – although I have still not forgiven most of them for not opposing TARP last year).
To give people some context – the previous worst year on record was in the 1980s, and the deficit came in at 6% of G.D.P.
“Keep up lending and maintain the housing market”
Rather than letting the bankrupt banks (such as the scumbags of Citigroup and Bank of America – both of which are a disgrace even if one has NOTHING against the fractional reserve concept, they are just criminals by any definition) go bankrupt and allowing the housing market to clear.
And, of course, most people have not even noticed the commerical and retail property bubble yet.
All the empty shops and offices (more every day), and all with a pile of debt behind them.
I wish Paul would not call people he does not like “criminals” – after all many people support fractional reserve banking.
In case anyone is thinking that I repeat that Bank of America and Citigroup (and some of the other big banks) are run by a bunch of crooks – even if one has NOTHING against the fractional reserve system.
These people are just as bad as the “friends of Barney Frank and Chris Dodd” who ran Fannie Mae.
We are now told that “up to two TRILLION extra” Dollars will be needed to “save the financial system”.
Yet the books of these banks show no such liabilities.
“We have not had time to calculate our exposure” may have convinced trusting people last year, but that it still seems to convince some people astonishes me.
I repeat, several of the big banks are run by crooks – even by the current (very loose) definitions of criminality.
Their accounts are works of fiction.
Sadly not “needless to say”.
Nothing on anything like this scale could have happened without Alan “saves the world” Greenspan and his sidekick at the New York Fed (Mr Tim G.)
There endless “rescue missions” and what not provided the raw material (the basic credit money) on which this mountain of vice was built.
Paul Krugman sneers that Austrian economics has a “moral theory of the business cycle” (being what he is “moral” is a boo word to him). But in this case he is correct – what was done was not just bad policy, it was corrupt.
This is one of those cases where I find myself in agreement with Paul (and I do not share his opposition to fractional reserve banking).
When will you all understand that the corruption at the base of the world wide financial collapse is selling something not owned or not being able to produce. A massive amount of zero valued debt was created by buyers of BBB bonds sold short and then repackaged into more AAA, AA, A, BBB investments with no value being based on assets sold short having zero value.
Fractional reserve banking is of the same corruption as banks are creating money from nothing and loaning it.
Regulation will never work as politicians will always corrupt the regulators. The only thing that will work to reduce corruption is prosecution.
Late I know. But I have some additional cheer regarding present efforts to “get the credit markets moving again”
In 2004, one could buy a house here in California and finance it for around 6.5%. Prices were rising at 18 to 20%. So, one was looking at a profit of 20% minus 6.5% = 13.5% of the market value of the house. In the town I live in, median home prices hit $1.2 Million. Hold a house for a couple of years and make 300k. (On a 220k investment plus payments, assuming 20% down.)
Of COURSE people were buying. Many if not most knew it couldn’t go on forever, but how do you know when? Damn foggy crystal ball!
Roll forward to 2009. You can now borrow for less than 5%. However, Real Estate is declining in California at about 15% per annum. 5% plus 15 % is 20%. Just who the hell is going to buy a declining, leveraged asset that is costing them 20% of total value per annum?
The banks ARE lending. When they can find a willing borrower. There are few – people who just need a roof and don’t like rent.
The same is going on, of course, in the commercial Real Estate market, albeit at somewhat different rates of credit and decline.
The dolts in Congress are still blathering about getting – no, requiring – the banks to start lending again.
Clueless.
Oh, and after all the events of the last 6 months. another Rocky movie? Please, just shoot me now.
…my objection to the Georgist model is it pretends land is not property like anything else.
Added to which, it is utterly incoherent about what “land” actually is, or how the magical land-value can be calculated. Say what you like about the mainstream macroeconomic theorists, they are at least prepared to be explicit about the definitions of the aggregate entities they deal in.
Oh, yes, he did say Rocky, not Rambo…
And, of course, the question remains unanswered:
“Who is going to have to take the bath?”
So far, it looks like taxpayers. For myself, I would have chosen the investors and executives at these formerly respected financial institutions. Their self-interested and feckless behavior continues to stagger: “What’s that you say, if we take the TARP money we have to take salary and bonus cuts/caps? Well. Then. Just keep your damned old dirty TARP money. I’d rather see this company insolvent and broken up than to bow to that unreasonable demand.”
Great post, Perry. There are a couple of other things to consider.
First, the rest of the world is in worse shape than we are. Japan starts with a debt four times the size of ours. Europe’s banks are insolvent because they were lending to the developing world like we lent to the folks with bad credit. They’re getting killed now.
The reason we’ve been able to get away with this is that we’re still the safe haven. In addition to this, China has pegged their yuan to the dollar and has a vested interest in keeping us afloat as well as lending to us to import more Chinese goods.
Now a little crystal ball work. The treasury auctions will soon overwhelm the Chinese ability to lend. Everyone else who used to buy Treasuries will be out of the game as they are blowing their money just like we are. This will cause us to monetize the debt and the Fed will print money to buy the Treasuries.
At some point, the Chinese may decide to decouple the yuan and the dollar. When that happens, the party is really over.
The Keynesian / borrowing madness is global, not confined to the US. The first country to get over the borrow / spend disease will win.
Letalis,
“Who is going to have to take the bath?”
So far, it looks like taxpayers.
I don’t think so. I’d argue that it will be all of us. There simply isn’t enough of a taxpayer base to finance all of the spending. Think of an ant trying to carry a bowling ball.
Instead, they’ll have to print money by the truckload. The resulting inflation will devalue everyone’s buying power, taxpayer and looter alike. After that, how about some wage and price controls?
When you’ve got economic illiterates like the Democrats and the MSM holding the reins, you can expect every bad idea in the world to be tried once more.
“in effect un-securing questionable loans either by fiat”
Excellent point.
” ..millions and millions of people who took loans they could not repay and voted for the people whose regulations provided the perverse incentives for banks to loan money to them”
You’re overestimating the intelligence of these people if you think they were acting as you describe. Most of them can barely balance their checkbook. They acted out of ignorance rather than malice.
Oh I agree, but it is also why I am fresh out of sympathy and it does not absolve them of any responsibility whatsoever. people voted, both at the ballot box and with their signatures on loan agreements. They got what they voted for.
“They got what they voted for.”
Grrr. Trouble is, I also got what they voted for.
I call for ending the secret ballot. I want to know who is to blame.
RRS: Incidentally, how did the noun loan come to replace the verb lend? Is it part of the process where “pleaded” has replaced “pled?'” Ah well, small children have often said “he hided from me.”
Actually, pleaded is correct. Pled is a word that people use, and it even appears in spell check and online dictionaries, but it isn’t a word. It sounds like is should be correct, but pleaded is the past tense of the verb plead.
Historical footnote: one of the places that the Henry George’s single-tax model was actually tried was the town of Fairhope, Alabama, starting around 1905. As noted above, George’s theories provide no actual mechanism for determining the appropriate “rent-ish” tax on land. In practice, this determination fell to an elected committee, which in practice produced (as readers of this blog might expect) barely acceptable results, accompanied by a barely tolerable level of political shenanigans and low-grade corruption. The town center still operates on the single-tax model, although outlying areas were developed later under conventional real estate law.
Interesting side effect: as a town with unconventional government, it became a magnet for unconventional people, i.e. an artists colony. Although the founders envisioned it as an agricultural town, its economy has long been based on “exporting” art, craftwork pieces, and tourism.
I for one would certainly appreciate any wisdom you might be willing to share on the subject with the audience here
Look at the ProShares Ultra Short funds.
SKF if you think the US financials are going to further impode.
FXP if you believe China will explode.
etc.
There is a smorgasbord of possibilities.
I actually think Oil will make a comeback and I am accumulating the DIG, along with SKF and FXP.
I agree with Alice,
This is the end of western socialism and thus a cause for celebration. Libertarians need to survive and preserve capital as Keynesian and other clueless leftists destroy everything they can (especially currencies) in a vain effort to keep from being flushed down the drain of history. They will be no more successful than the communists were in the USSR. God, gold , guns and friends are what we will need to survive. Hold your savings in gold and silver and wait for the Keynesian dolts to devalue currencies into junk.
Investment can come later .
The whole structure of the wests economies and politics is being recast.
My question is what will the new structure look like ?
The 1929 depression ended with the transformation of the US from an agrarian economy to an industrialized economy, and much of the west followed.
My guess is the majority of current malinvestment is in suburbs/malls and the future lies in a bifurcation between urban centers where jobs requiring physical presence will be located and country/small towns where the residents will be employed primarily in jobs which can be done remotely . Such living can be off grid as technology improves (solar, etc) or with small locally run grids. Small towns peopled by citizens whose livelihood is not dependent upon the town itself or it’s laws hold out the possibility of local governance with less corruption than in the past. It would be wonderful if this could give rise to a Jeffersonian type of existence , the practitioners of which would be less dependent upon and more hostile to centralized services (especially overpriced services) .
Anyway that’s my stab at optimism. I am tired of being gloomy.
Federal Reserve delendum est
“God, gold , guns and friends are what we will need to survive.”
OK, I have a handful of Sovereigns, a new AR-15, and a small circle of friends. Two out of three.
I’m an atheist, but Obama, Pelosi and Ried are making me believe in evil spirits. Can I credit that for item 1?
If you believe that there such a thing as truth (in more than the mathematical logic sense) you aren’t really an atheist , and you cant survive very long if you think everything is false.
But the short answer is that if you have 500+ rounds of ammo yes you get credit for everything.
Paul Marks said: “Rather than letting the bankrupt banks (such as the scumbags of Citigroup and Bank of America – both of which are a disgrace even if one has NOTHING against the fractional reserve concept, they are just criminals by any definition) go bankrupt and allowing the housing market to clear.”
In an interview promoting his book on C-SPAN, none other than Paul Krugman – the abominable statist Keynesian that he is – said he estimates at least 5 of the top 10 US banks would not pass an honest stress test of the kind Geithner was talking about. Thus 2 option:
1) As Mr. Marks points out, a few big boys will have to go down – and the result would be a credit freeze much, much worse than the one that followed Lehman’s crash, or
2) The stress test will be nothing of the sort, and Geithner will go back to Paulson’s schtick – saving banks, and not the banking system.
I know which one I believe, and that’s why I took my profits in SKF at $180 a share.
The two posts by KT Cat (especially the first) were very interesting; I don’t think anyone has paid them enough attention.
Mr. Cat, are you suggesting that we invest in Chinese companies? Or Chinese bonds? I would think that they wouldn’t “decide to decouple the yuan and the dollar” unless they felt it was to their advantage to do so.
It is impossible to know what the malinvestments are in advance – and many things that are not malinvestments are dragged down in a big bust. That is just the way the universe is – if you do not want honest well managed enterprises to get dragged down, then do not support the credit/money boom in the first place.
But it is vain to talk about programs of reform such as “what will come after…” (although, by the way, the United States was not an “agarian society” in the 1920s).
I feel like Edmund Burke when asked what constitutional reforms he would favour (being a life long opponent of absolute monarchy) in France – as he did not like the “reform process”as it was proceeding in France after the Revolution.
It is vain to talk of programs of reform – your King is in prison and the government is controllled by savage criminals.
There is going to be no orderly recovery.
Sorry good Brit Hume of Fox News (and he is a good man) – but there are factors preventing this.
The vast sums of money the government is printing and spending.
They will prevent any orderly recovery – they will mean that the capital structure gets more and more distorted.
As for Paul Krugman:
Let me guess – his “alternative” to endless bailouts for the worst banks is nationalization?
I.E. not an “alternative” at all.
He will not accept bankruptcy and the liquidation of malinvestments.
None of the elite will allow the market to clear.
They would rather cut out babies from mothers wombs and eat them, than allow the market to clear.
By the way “the elite” contains neocon “Republicans” also – Charles K. for one.
He supported TARP and he supports the home loan government spending binge also.
And of course, if one supports the one it is logical (although, of course, evil) to also support the other.
It is magazines like the “Economist” that are trapped in contradictions.