Plowing the ground – stimulating the economy

If there is no struggle, there is no progress. Those who profess to favor freedom, and deprecate agitation, are men who want crops without plowing up the ground, they want rain without thunder and lightning. Frederick Douglass

Boy, were those exit polls ever right – it’s the economy! The good news, so to speak, is that stimulating the economy is a shared priority of our nation’s leadership. I’ve pulled significant quotes from two related stories and provided links to the full text.

Financial crisis complicates Obama transition

As president-elect, Barack Obama faces a tricky task as he begins dealing ever more directly with the economic meltdown, grappling with the worst financial crisis in seven decades but not yet wielding the power to do much about it…

Obama’s victory emboldened Democrats and helped them expand their House and Senate majorities. “The fact is that this president goes into office with more expectations than any president I can ever remember in my lifetime,” said House Speaker Nancy Pelosi.

But some liberal Democrats may expect him to deliver more than they’re likely to get. As Pelosi was quick to note, “The country must be governed from the middle,” and that will increase pressure on Obama to make compromises. (emphasis added)

He may have to scale back some of the long-term spending programs he advocates to pay for crash legislation to keep what already looks like a recession from turning into something much worse.

“The need has never been greater for the absolutely seamless transition of economic teams,” said William Galston, who was a White House domestic policy assistant in President Clinton’s first term. “We’re in a race against time to prevent a global financial meltdown, and I think everybody knows it.”

…Congress convenes for a lame-duck session on Nov. 17, and Obama is giving all indications that he’ll play a direct role rather than keeping his distance until he is sworn in.

Treasury is working to widen the rescue

The federal government is preparing to take tens of billions of dollars in ownership stakes in an array of companies outside the banking sector, dramatically widening the scope of the Treasury Department’s rescue effort beyond the $250 billion set aside for traditional financial firms, government and industry officials said…

The Treasury is also making progress on an initiative that would provide relief to homeowners at risk of foreclosure. Several proposals are on the table, including one crafted by Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., who wants to spend about $40 billion to modify the mortgages for as many as 3 million homeowners. But several government and industry sources close to the matter said Treasury officials view Bair’s plan as flawed and are seeking ways to revise it.

Designing these new programs is difficult because the Treasury will have to hand off the $700 billion rescue package, approved by Congress last month, to the new administration before officials have finished mapping out how to use the money…

Industry sources and a former senior Treasury official said the department deliberately slowed the decision-making process on new rescue programs two weeks ago to accommodate the interests of the incoming administration. The complexity of the issues and a tremendous volume of input and requests for money from all kinds of industries also have complicated matters.

“The last thing you want to do is start something and have the new guys unravel it in 60 days. It sends mixed messages to the markets,” the former Treasury official said. “So I think the thinking was, ‘Let’s kick the can down the road to make sure we are on the right track.’ “

It’s only natural for everyone to want to see the economy respond quickly – and wise to remember

If there is no struggle, there is no progress…

13 thoughts on “Plowing the ground – stimulating the economy”

  1. “no fight no blame” ~Tao te ching
    (it also says “in action, what the timing”

    Ok’soooo, for this kind of money, why can’t we just buy every middle’class home mortgage in the country? Literally? And pay them off early too, like right now? Really.
    Every single home in the country, then you could just include your payments in with the taxes saving a hundred steps?
    I know… what a silly idea.
    Editilly

  2. Not exactly a silly idea Editilla. Just one that like the others have to be paid for.

    In the case of the financial services companies Uncle Sam is also taking an equity position that will have to be repaid. I don’t think your average homeowner wants Uncle Sam as an equity partner on the same terms imposed on AIG.

    The implosion we are seeing now stems from economic excess, as in excess specualtion in real estate and even more excess speculation in credit default swaps.

    Recessions suck but they also eliminate excesses from the marketplace. I’m not an idealogue but there is a point where we crossed into subsidizing bad business decisions where bankruptcy would be more appropriate.

    I know this, there are money changers/insurers that are scared $hitle$$ about the legislation that is coming their way. In the case of the insurance industry federal regulation is coming.

    And FWIW, people have not forgotten the key roles of pols like Senator Chris Dodd in enabling the current disaster. I know I don’t trust him to do anything other than serve his own self interest serving big business interests. That fight will be unfoilding soon IMHO.

    sop

  3. Regulation is definitely needed, Sop, but we seldom get the balance needed – particularly when we regulate with sticks and not carrots. I’m just not certain what the carrots are, the sticks are pretty easy to figure out.

  4. In 2007 there were appx 2 million US housing properties facing foreclosure. If you paid $200,000 per loan, that would be $4,000,000,000… which is what percent of $700,000,000,000? I mean, ok, that would leave ummm, $696,000,000,000 which could be stacked into $1000 bricks and used to build a building larger than the Pentagon, or the Tower of Babel in Baghdad?
    Another great idea like the Vietnam War which also had to be paid for, finally around the end of the Carter Presidency. Not bad when yer’talkin late-model wars, but real national treasure, real lives spent before the first dime of principle was paid.

  5. Editilla

    Unfortunately you are missing a few zeros as to the size of the mortgage problem.

    Value of subprime loans in 2006: about $600 billion.

    Value of alt-A loans in 2006 also about $600 billion.

    In 2008 alone there were $684 billion dollars in adjustable rate mortgage resets. Not all of these have gone into foreclosure to be sure, but they are an indication of the problem.

    Robert Shiller noted in 2007 that the collapse in home prices could lead to a losses of $10 trillion to home owners. More then the $7 trillion dollar lost in the 2000-2002 stock market bust.

  6. I appreciate your kindness, Russel.
    While most of what goes on this blog is waaaayyy over Editilla’s head, I will tell you this: I am just as capable of explaining something that doesn’t exists as the next guy.

    Sorry y’all that one didn’t work out. I was trying to be silly and sarcastic to illustrate how stupid I find this entire enterprise, how Joe the Plumber might come to understand supply-side economics.
    I certainly do not….understand….I just know these bastards have gotten away with it… whatever it is, that is…
    What is a few extra bazillion zeroes here and a few there, when none of this money actually exists…yet, because it never existed in the first place. How does this money exists? This is not money. It is credit. It is reinsurance of credit insurance insurance credit.

  7. I’m as capable of explaining something that doesn’t exist as the next guy.

    Editillia, once again you come up with the definitive statement on an issue.

    I’m having a little trouble with all the zeroes myself as well as understanding who is getting away with what. Think requiring name tags would work?

  8. As he stated only a percentage of Russell’s figures go into default, the number range I hear goes from 9-12%.

    The problem is the “insurance component”, the credit default swap. In the case of Delphi’s BK the related swaps were around 10X the total debt. The implications are chilling with respect to subprime.

    The sheer total number of dollars in unregulated derivative trading is staggering – in the tens of trillions of dollars. For those of us keeping abreast of the “subprime usury scam” for the past three years the only question was the extent of the exposure. We still don’t know.

    The ripples to other large companies continues as this news on GMAC indicates.

    sop

  9. Oooo…t’anks y’all!
    I thought we were talking about Zoroes!
    HA!
    Well that explains everything.

    I knew I had read this story looooo way back when they had State Colleges, so I went to the Great Google and asked it about… 0. And in .06 seconds Big Goo answered upon the first of 11,370,000,000 for 0… Lo’Silly Human, it spateth, speak to da’Wiki –but thank Goddess for Wikipedia now –and whenest thou wineth da’lottery Editilla gonna donate to them Godzillions of Zeroes! Ya’heard me, da’Goo?

    I mean I hate to get all allegorical here but damn, is this not the Pilgrim’s Progress or what?

    The word “zero” came via French z

  10. What I had not realized before as to why Wall Street was so keen to sell default swaps on their products. I mean I understood the logic on “knowledge” level (cash flow), but didn’t comprehend the deeper logic behind it.

    So here it is:

    Lets say you want to sell mortgage bonds but you have run out of mortgages.

    You find somebody who thinks the whole deal is going to crash and sell him a default swap. To buy this default swap they have to make periodic payments to the seller- just like with an insurance policy.

    Well with a little fine tuning you can make their payments match the income stream from the mortgages on which the default swaps were placed.

    You than take this income stream and bundle it up into a package and sell it as a “synthetic” mortgage bond. You see you can know sell mortgage bonds with no mortgages.

    I knew they packaged the default swaps into the CDOs, but I never exactly understood the spin.

    Very slick.

    I came to understand this from here (its an easy read).

    http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true

  11. Russell, that’s such a great comment that it needs to be a post! Thank you for taking that incredibly interesting article and summarizing in such an understandable way.

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