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February 18, 2009

Carpe Bankum

In the roller-coaster ride of proposals and revised proposals for rescuing the nation’s banking, credit, and mortgage systems, I was happy to see the president suggest rewriting bankruptcy laws. It’s fine to offer consumers a chance to, essentially, refinance their existing loans and save a bit on their monthly mortgage payments through a reduction in interest rates. But giving them no option to write down the principle, especially when it exceeds the current market value of the house, is tantamount to punishing the homeowner exclusively for an “arguably” poor financial decision they made in partnership with a bank. And it’s not even a case of “financially” rewarding those banks, since a high percentage of those loans will default anyway. The only reason for maintaining fictitious home values is that they maintain fictitious bank asset values—a particularly vulgar excuse to throw families out of their homes. Rewriting the law to permit a bankruptcy judge to write down a loan to properly reflect current values will protect both homeowners and “legitimately viable” banks.

But wouldn’t it be nice if we didn’t have to go that far? Or, more to the point, force troubled homeowners to go that far? Joseph Stiglitz and others have been argued that it's time to nationalize the banks--or at least the bad ones. Stiglitz argues:

It is standard practice to shut down banks failing to meet basic requirements on capital, but we almost certainly have been too gentle in enforcing these requirements. (There has been too little transparency in this and every other aspect of government intervention in the financial system.)

To be sure, shareholders and bondholders will lose out, but their gains under the current regime come at the expense of taxpayers. In the good years, they were rewarded for their risk taking. Ownership cannot be a one-sided bet.

Of course, most of the employees will remain, and even much of the management. What then is the difference? The difference is that now, the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.

There are several other marked advantages. One of the problems today is that the banks potentially owe large amounts to each other (through complicated derivatives). With government owning many of the banks, sorting through those obligations ("netting them out," in the jargon) will be far easier.

If this is a little too logical, or if a left-wing Nobel laureate provides too little political cover, then how about Alan Greenspan? In an interfiew with Financial Times, he acknowledged:

"It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Works for me.

Posted by stevemack at 11:58 AM | Comments (0)

February 06, 2009

Sell The Stimulus!

It seems that congressional Republicans (with a little help from Rush Limbaugh) have just schooled President Obama in the limits of bi-partisanship. And by extension, they’ve given him a valuable lesson in the difference between congressional and presidential leadership—one I imagine should pay dividends when it comes to health care reform. In short, no amount of tea and cookies will induce Republicans to join him in a legislative proposal that the people are not specifically demanding. And for that matter, the urgency of a national (indeed, global) economic crisis has about the same motivating power as light refreshments in a White House parlor. It may make sense for legislators to avoid embarrassing each other in front of the cameras in order to cut deals in the back room; but a president needs to exert the pressure of public opinion. They don’t call it the bully pulpit for nothing.

So I was rather glad to see the President on Thursday get a little tough, mock those who don’t understand that spending is what stimulus is all about (even my kid thought that was funny), and in a loud clear voice call for immediate action. For days I’ve been hearing FDR’s voice echoing in my head, famously demanding that the Congress “ACT NOW!” And I’ve been waiting for a similar riff from Obama to drown him out.

Now, it’s time to actually sell the package. And I think that means explaining in clear and simple terms how, exactly, stimulus spending works—how wisely targeted federal dollars multiply throughout the economy. When Republicans ferret out a few bucks of foolishness from a $900 package and hold it up as emblematic of the whole thing, he needs to beat them at their own game by focusing our attention on specific, essential projects. And especially the people they will put back to work. And before Republicans are allowed to characterize the bill as just more pork, or make the spurious claim that tax cuts have the same impact as direct spending, how about turning up the volume on a few important statistics? The bipartisan Congressional Budget Office has testified that the house version of the stimulus bill (H.R.1) will have a massive impact on economic recovery:

In CBO’s judgment, H.R. 1 would provide a substantial boost to economic activity over the next several years relative to what would occur without any legislation. With the legislation, CBO estimates, output would be between 1.3 percent and 3.6 percent higher at the end of this year, higher by a similar amount at the end of next year, and 0.5 percent to 1.4 percent higher at the end of 2011. That additional production would raise the demand for workers, turning some part-time jobs into full-time jobs and boosting the number of people employed. According to CBO’s estimates, the number of jobs would be between 0.8 million and 2.1 million higher at the end of this year, 1.2 million to 3.6 million higher at the end of next year, and 0.7 million to 2.1 million higher at the end of 2011.

And then, when the bill is finally passed and signed (as I think it will be), and it’s time to tackle health care, maybe the fight will begin in the East Room of the White House, with a president speaking boldly about the urgency—and logic—of a specific proposal, not in the well of the house with a few bomb-throwing congressmen railing about socialized medicine.

Posted by stevemack at 04:01 PM | Comments (0)