March 25, 2008 12:41PM
How Congress Can Fix the Crisis
By Elizabeth MacDonald
It’s the question of the hour: How can Congress fix the housing and credit crisis? And where are we in this crisis? We’ve been talking about this issue on our morning show Money for Breakfast.
I don’t make it a habit of trying to call the end of the world and I don’t think we’re headed for the abyss. I also fully support a moonshot to Mars so we can pack all those recession fanatics on it so they can annoy each other into oblivion. It’s true, if you call a recession long enough, you can call yourself a seer, as someone once said–a stopped clock is right twice a day. Global growth is here to stay.
Same for the market’s “bottom callers,” in full regalia now, telling us to expect an upswing, though beats me why if they’re that good, they’re even sticking around and not hitting the beaches on the Riviera.
The market hasn’t hit the bottom yet because housing hasn’t found its bottom yet. Do the math and we’re still in at best inning three. Congress is going to hold hearings next month on the crisis. There is a way for elected officials to get us out of this crisis and avoid future disasters.
First the parade of horribles. Foreclosed properties held by lenders accounted for 493,000 of all homes on the market in January. Again, that’s held by lenders, and that’s out of an estimated 3.3 million home-mortgage defaults in 2007 and 2008, with about two-thirds of those homeowners losing their homes, says Moody’s.com.
Western banks have taken about $180b in writedowns to date out of the projected $300b-$400b. And that’s only for subprime, it doesn’t include other credit problems like leveraged loans and other consumer installment credit. Credit problems are the reason why GDP growth rates will slow and return to trend at the earliest in 2010. Analysts estimate the economic cost to clean up the current crisis is $1.1T, or 9% of GDP–the bailout of Argentina cost 55% of GDP to fix, the S&L crisis here in the US cost 3% of GDP.
What to do now? Set aside the government bailouts–yes it’s unfortunate that traders, investors and borrowers like to be Milton Friedman, free-market types on the way up, but John Keynesian, “run to Uncle Sam” ninnies on the way down. Yes we privatize the gains and socialize the pain, hearing that now is like chewing tin foil. Yes we want as much homeownership as possible–but this is one heck of a grossly expensive, upside down way to get there.
Here’s a rundown of how Congress can fix the mess–and how it could save us grief in the future:
DON’T GET LOST IN THE WEEDS. Take heart in this broad-zoom perspective. The world is still in the early innings of globalization. Already, China, India, Indonesia, South America, places a generation ago considered dirt-poor, are now seeing explosive growth in the middle class. Some 1.8b new entrants are expected to join the middle class over the next 12 years. By 2010 the world’s middle class will make up 52% of the total world population, up from 30% now. As the middle class grows, that means burgeoning demand for things like healthier diets, better, more fuel efficient cars and gadgets. Global growth, in fits and starts, is here to stay.
BOOST IMMIGRATION. Ballooning housing inventory is now at a record levels, with foreclosure signs popping up like crabgrass in Nevada, Arizona, California, Florida–which is why the volume about government bailouts has turned up in these key swing states in this presidential election year. Strengthen the borders, absolutely, but boost LEGAL immigration. It’s good that teachers, firemen, policemen can now afford first-time homes. Hardworking immigrants can help pick up the slack, too (and let’s face it, can they help Social Security? Watch that debate in coming months as well).
SUPPORT BUZZSAW BEN. Time to turn down the volume in Congress on the criticism of Federal Reserve Chairman Ben Bernanke–much of it is self-serving, arm-chair quarterbacking. Dramatic cuts in interest rates help homeowners facing some $350b in ARMs resetting, as the cuts lower the hikes in their monthly payments to an increase of about 10% from 25%. And Bernanke’s creative moves such as broadening the discount window and auction facilities to reliquefy bank balance sheets could cement his place in the history books as helping to soften a cataclysm set in motion by his predecessor Alan Greenspan, who kept rates too low for too long and disregarded growing subprime excesses while telling borrowers to take out riskier ARMs vs traditional fixed rate loans. “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage,” Greenspan once said.
YANK THE LIQUIDITY PUNCH BOWL. To avoid inflation and repair the weak-dollar damage, Congress must fingerwag Bernanke by telling him to avoid tipping the economy into the bottomless liquidity punch bowl. He has to be ready to hike rates when the economy returns to trend in 2010 and 2011, as the Fed expects. The dollar is at its weakest since the era of floating exchange rates began in 1973, and inflation is coming a cropper. Central bankers would do well to heed the advice of Richard Fisher at the Federal Reserve Bank of Dallas: “Easy money is like truly tasty tequila, it’s tasty–but dangerous.”
BRING BACK SOME VERSION OF GLASS-STEAGALL. Originally enacted in 1933 after the crisis of the Great Depression, it took another crisis–the 1987 crash–to get bankers to start lobbying for its repeal, which took 12 years to do. The act separated the barbarians of Wall Street from the mahogany-lined board rooms of white shoe bankers. Since its repeal in 1999, which let banks compete for the first time in the securities industry, the free market banking system has turned into a disastrous free-for-all.
Banks lobbied hard to repeal this act soon after the 1987 crash as foreign competition from Japan bore down on them–Japan, whose banks did not face the same strict rules on maintaining capital reserves and whose calamitous lending helped foster the lost decade of zero growth in that country in the ‘90s.
Congress should ignore mindless, self-serving entreaties from the bankers now. Listen to what Dennis Weatherstone, president of J.P. Morgan, said in the late ‘80s: “I don’t think the repeal of Glass-Steagall should be seen as a way of providing relief for the banks,” adding, “rather, I think it should be seen as a way of making capital markets more efficient.” Abolishing Glass-Steagall let Citigroup make disastrous bets underwriting and trading mortgage-backed securities and collateralized debt obligations. Citi now faces potentially another $15b in write-downs on top of the $22b it’s already taken due to the housing and credit crisis.
Footnote: Talking to top executives on Wall Street about the crisis, a number of them now brazenly finger the act’s repeal as the reason behind their woes, proving with age comes no maturity.
PUT UP THE GUARDRAILS. I’ve noted in prior blogs how deregulation shoved 3/4ths of Wall Street borrowing into the shadow lands, away from the prying eyes of regulators. If the investment houses want access to taxpayer-backed financing from the Federal Reserve, a historic move the central bankers have made, then these investment houses must meet commensurate capital reserve requirements that are forced on the big banks, which means new regulation forcing them to hold more capital on their balance sheets. Watch the securities industry lobbyists fight this one hard. They want all of the upside of taxpayer-backed funding with none of the downside.
KEEP TABS ON LOANS. It’s been suggested that lenders should be forced under new regulation to keep the riskiest parts of securitized loans on their balance sheets, and I agree. Banks broke the last vestige of oversight of derelict borrowers when they sold these loans off the balance sheets and into the ether.
MORE HEDGE FUND DISCLOSURES. Congress should enact laws that would get the Securities & Exchange Commission to force hedge funds at minimum to publish their balance sheets so the brokerage houses can truly see how leveraged they are before risking their house money in loans to these funds. It’s what got Bear Stearns in trouble. Investment banks and hedge funds tend to blow out their leverage in boom periods, then dry out in bumpy times, spreading their hangover to the rest of us. With debt that amounts to half of all leverage outstanding, expect more collapses and shotgun weddings at these shops.
BRING CREDIT DERIVATIVES INTO THE LIGHT. Bring credit derivatives onto one of the major exchanges. Yes it’ll be costly, but transparency is better at catching future problems then wasting tax dollars fighting a financial nuclear winter.
REPORT CARD FOR THE RATINGS AGENCIES. Congress should force Moody’s Investors Service, Standard & Poor’s, Fitch Ratings, Egan Jones, all the ratings agencies to publish a report card on their prior ratings calls from now on. They’ve got a virtual monopoly on this business, time their feet is held to the fire.
STOP THE AFTER-THE-FACT REFEREEING. Congress, regulators, the government has found it a lot simpler to more or less let things happen. With bureaucratic apathy comes wasted tax dollars. Enough is enough.
March 25th, 2008 at 2:49 pm
Great quote from Richard Fisher, the next Margarita night, I will use it and give him credit (no Obama treatment)! Cheers!
March 25th, 2008 at 3:04 pm
ELIZABETH MACDONALD FOR PRESIDENT—OR AT THE VERY LEAST SEC OF THE TREASURY
March 25th, 2008 at 9:11 pm
PRESIDENT FOR LIFE
How about any municipality that uses interest rate swaps loses its tax exempt status. They, after all, are transferring huge risk to the unsuspecting taxpayers who foot the bill when the swaps don’t work. Or maybe if the swap doesn’t work have the city council members pay the difference.
March 26th, 2008 at 4:17 am
One word Powerful!!! You take a complex problem and break it down into smaller pieces that make sense. The only thing is Cogress does not like logic. I use a similar phrase like yours. Mine is “a broken watch is right twice a day”. The banks forgot to use the most basic questions to give loans. The brokerage houses packaged these loans. The tax payer will bear the cost of this mess. From on Accounting Geek to another ( I saw the Saint Paddy’s day show with Stuart and that’s what you called yourself). We need to have a Liz only segement on the show for a few minutes. Liz’s Call, Liz’s View, Liz’s Word, etc. Keep up the great work.
March 26th, 2008 at 11:54 am
WOW, I JUST READ THAT THE BUSH ADMINISTRATION HAS UNVEILED ITS NEW “REGULATION” OF THE INVESTMENT HOUSES OF WALL STREET. THE TRUTH? I DIDN´T SEE ANY “REGULATION” AT ALL. ALL THERE ARE IS A COMMITMENT TO BAIL OUT THE INVESTMENT HOUSES WITH TAX PAYER MONEY!
WE CAN OUT THE AIRLINES AFTER 911 AFTER THEY ENJOYED YEARS OF “FEES” AND ALL KINDS OF OUTRAGOUS SUR CHARGES.
NOW WE CAN USE TAX PAYER MONEY TO BAIL OUT THE INVESTMENT HOUSE.
HOWEVER, WE CAN´T HELP BAIL OUT HOME OWNERS BECAUSE THEY “DIDN´T READ THE SMALL PRINT”? IN REALITY, THESE HOMEOWNERS WERE TOLD BY THE LENDERS THAT THIS WAS THE BEST AND ONLY DEAL THEY COULD GET.
LONG LIVE SAVAGE CAPITALISIM……IT WILL BE THE END OF US SOMEDAY, TRUST ME.
March 26th, 2008 at 12:15 pm
Get the control of money back to US treasury.
Tap crude from Alaska commesurate to oil being sold by Iran, Venezuela and other “OPEC” nations in other currencies (Not dollars such as Iran). Use this additional energy to fuel an increase of our GNP.
Congress to limit the administration’s credit card. Don’t let them spend money like drunken sailors at a high-end fun house. Cut spending.
March 26th, 2008 at 4:50 pm
I would like to mention that people who talk of recession should be taken seriously. Whenever a financial bubble is created it encourages bad debt and less savings. No one can predict when a recession will come but there is always a time when the bad debt has to be liquidated and people have to start saving. I also have a suggestions for you, get rid of the Fed, we don’t need it, and it directly causes the inflation tax and mal-investment
March 26th, 2008 at 9:52 pm
Let the cycles come and go. No regulation - as that simply changes the timeframe of the booms and busts. Other than that, you go girl!
gk
March 27th, 2008 at 1:53 am
My god your an idiot!!!!!
March 27th, 2008 at 10:12 am
I’m surprised only one commenter aside from myself has suggested that dismantling the fed is the solution. With their tinkering, the dollar has lost value for decades and inflation has never been worse. Going back on the gold standard is the only thing that will truly save our economic system.
March 27th, 2008 at 9:59 pm
this is off topic, i know. but this was the first way to give my opinion i could find on this site. with all due respect, mr. paul, i am highly dissapointed in you. i understand you want to respect your tx delegates, but you are the only chance we americans have for an actual real leader. please, i beg of you to run independant.
March 28th, 2008 at 11:15 am
How about overhaul of the credit rating system and how lenders are allowed to report so as not to disinfranchise potential home owners from having a fixed rate to begin with just because they experienced a medical emergency that has ruined their credit score.
Lenders should not be allowed to arbitrarely raise interest rates because it suits them. It hurts folks to the point of abandoning their debt when a CC issuer says” oh we noticed your score dropped so we are increasing your rate to the legal limit in your state” after a consumer has had perfect payment history for many years.
Lets call it what it is, GREED! Really bottom line is that’s why banks are in the fix they are in. Not only do they get us for their APR and annual fees, but now we get to pay for it while shopping for basic neccessities through inflation when the fed prints more money to bail them out.
They got themselves in this mess, why do we have to pay for their greed over and over again??
“Anything more than you need = greed” (The Bible calls it coveting)
To quote a line from Forrest Gump “Momma always said there’s only so much money a man needs, the rest is just for showing off”.
March 28th, 2008 at 7:30 pm
Earlier today I mentioned to someone how the Bear Stearns deal was going to end up costing the taxpayers money. The person I was talking to has a “thing” for the Federal Reserve and refuses to believe that they act out of anything but the taxpayers’ best interest. Clearly the actions taken over the last month has shown us that WE are the big losers here. When you figure that inflation has risen 12% since September our taxes have absolutely skyrocketed. At least now I can look forward to my “economic stimulus” package which just compounds the problem. But hey! I’ll have cash in my pocket, right? *sigh*
Thanks, Elizabeth for writing excellent articles about money and the economy. We won’t effect any real change in this country without this kind of straight-talk about this one critical issue.
March 29th, 2008 at 9:38 am
Hi Liz. I agree with everything you write. I read that subprime problems are similar in Europe. Very importantly, none of any new regulations that congress or the Fed creates should disadvantage U.S. financial companies. Ideally, new regulations should give U.S. financials an advantages.
April 1st, 2008 at 1:25 am
It’s about time Fox had a real business site for the people to speak out. I agree with Nat. As an ex- mortgage broker, having been in the business for many years, I saw how the industry changed. Credit scoring is a sham. The FICO software scoring model was developed by an ex-TRW (now Transunion) big wig. The scores have nothing to do with your ability to pay in reality. Their purpose is to divide people into levels, which the banks increase from time to time to give them an excuse to charge a higher rate. Such as- scores to 680 your loan is priced at one rate, 700 another rate, etc.
You have no control or can figure out how this is determined. It should be outlawed as the lenders have abused it. In addition, every time they pull your credit report the credit bureaus get paid a fee. Who owns those companies? The banks can re-write the loans and lower the rates if they want to. It would be better than foreclosing. Trying to charge people high rates is what is part of the housing problem. Adjustable loans aren’t all bad, but the lenders got greedy and set the adjustments too high. FNMA & FHLMC were the ones that set the underwriting guidelines for the banks to adhere to. The banks just offered the borrowers the programs that FNMA & FHLMC set as they bought the pools of loans the banks made. They were the ones to initially set the stage for mortgage backed securities. Then other investors got in the game and thats where wall street investment companies got greedy. The president was supposed to appoint 5 board members to the board of FNMA. They have been vacant for some time now. Where was Bush in his role in the lack of oversight? I’m wondering if the Leo Wanta fund money is not part of the bigger picture. The banks owe $4.5 trillion+ To Wanta’s Ameritrust Groupe and this money is in trust for the American people. Also, what is happening with the lawsuit from Russia filed last year against the Bank of New York for $22 billion for money laundering? I’m sure there is much left for us to find out in this financial mess.
April 8th, 2008 at 3:35 am
It has often been said that money is the root of all evil. Personally, I think that money is innocent. Unmitigated greed for wealth, vanity, and power is the root of all evil. Greed is a hierarchical beast, a Tower of Babel, if you will. “Surely, there is a penthouse”, the players all say, “and I want to see it”. But, no one has ever seen it. It just stretches indefinitely like a pyramid from no matter where on the structure one resides. At some point, looking downward produces the exact same visual effect. Has the structure really lost its base? Fear is the food of greed. More, more, higher, higher. Nobody remembers the players two floors down, nobody sees the players two floors up. A different language is spoken on each floor. Maybe the word ‘evil’ is just somewhat pejorative. What say you?