Sometimes good days are hard to manage – you don’t know what to make of them. You’re suspicious. Been Down So Long It Looks Like Up To Me – the famous novel by Richard Fariña – had a great title and was a riff on that suspicion. And Fariña was killed in a stupid motorcycle accident two days after it was published. Being married to Joan Baez’ sister, Mimi, didn’t help at all. Sometimes you can’t catch a break. And when you do, or think you do, you hum that Paul Simon song – the one where he says that when something goes wrong he’s the first to admit it, the first to admit it, but that last one to know. When something goes right it is apt to confuse you.
These days we certainly don’t expect anything to go right, and as in the Fariña title, when you’ve been down so long, anything that is slightly less bad that what you have, seems, in context, really good – although it is always wise to be suspicious. So, it seems we have a national crisis – the economy slowly and steady collapsing – and all we seem to be able to do is keep the collapse from accelerating even more. Think of being in a car without brakes hurtling down a mountain road – if you somehow manage to gain only ten more miles per hour with each second that passes, rather than twenty, you’re making progress. Slowing the rate of acceleration is nothing to sneeze at – even if whatever you’ve done to achieve that is, in the end, or at the bottom, futile. It’s still something.
But the fact is that millions are losing their jobs, millions their homes, the Big Three automakers are effectively bankrupt and being kept alive only so more millions don’t lost their jobs and homes, and the major banks seem to be insolvent, sopping up hundreds of billions of government funds, while they lie and say they aren’t insolvent, and the government, for the sake of public confidence in all financial institutions, won’t say, one way or the other, whether they are or are not. Actually, no one may know, so it’s best to be a bit ambiguous. Henry Kissinger once said that diplomacy is nothing more than purposeful ambiguity. Perhaps he is now advising the Treasury Department.
But then you get a good day, like Monday, March 23, 2009:
Wall Street got the news it wanted on the economy’s biggest problems – banks and housing – and celebrated by hurtling the Dow Jones industrials up nearly 500 points.
Investors added rocket fuel Monday to a two-week-old advance, cheering the government’s plan to help banks remove bad assets from their books and also welcoming a report showing a surprising increase in home sales. Major stock indicators surged about 7 percent, including the Dow, which had its biggest percentage gain since October.
That’s cool, but the very next line is pure Paul Simon:
Analysts who have seen the market’s recent false starts are still hesitant to say Wall Street is indeed recovering from the collapse that began last fall.
Well, it was, after an earlier hint, something specific:
The fleshed-out plan is designed to help fix a value on damaged mortgage loans and other toxic securities. If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the government and private investors would incur losses.
The full plan is here – but it comes down to an auction where anyone who wants can bid for these packages of bundled promises to pay – mortgages and credit card debt and whatnot – and the government will match your bid, and guarantee that if the value of the mystery box you bought at the auction turns out to be far less than the cash you used, they’ll gladly cover your loss. If the value of this stuff goes up, and you can resell this crap, both parties make a profit. It seemed the best possible solution to two trillion dollars worth of securities that no one would previously touch because no one had the slightest idea of what they were worth now, or might be worth in the future. The government is putting a trillion dollars at risk – half of the stated but wholly fictional face value of the troublesome securities. That’s the gamble. Oh – and the name of these things changed. They’re now legacy assets, not toxic assets. You know that game – stewardesses became flight attendants and garbage men sanitation engineers, call the inheritance tax the Death Tax and concessions to the coal industry the Clean Air Initiative. It’s all in the framing. It usually works just fine.
The Newsweek and CNBC guy, Daniel Gross, has some thoughts on this:
Two of the economists whose views I most respect differ widely on it. Paul Krugman hates it. Brad DeLong is more optimistic. The stock market, which is a poor barometer of public policy, totally loves it. In its wisdom, Wall Street could easily decide tomorrow, or next month, that it hates the plan. That’s been the pattern for the last six months of bailouts – excitement and exuberance that the cavalry is about to arrive followed by disappointment that it’s armed with pop guns.
But Gross suggests we sympathize with the problem the Treasury Department faces, and cites Treasury Secretary Timothy Geithner -“Many banks in this country took too much risk, but the risk now to the economy as a whole is that you take too little risk.”
Gross had been saying the same thing but is puzzled by who is taking the risk:
And who stands to reap the rewards? The Treasury acknowledges that private investors will be subsidized to take on the ownership of what it’s calling “legacy loans” and “legacy securities.” (If these horrific securities are legacy loans, then the funeral industry should reclassify corpses as “legacy bodies.”) The Treasury cites as an example a loan valued by a bank at $100 that is sold for $84. In that instance, the private investor and the government would each put in $6, and the investor would borrow the other $72 from the government. If you’re keeping score at home, it means the private investor would put in 7 percent of the cash but would receive a much higher percentage of the profits.
That’s odd, and he wonders where all the damned capitalists went:
Where are all the people who are willing to put their own money, and that of people willing to lend them cash, at risk in pursuit of profit? Why are Wall Street’s tough guys such a bunch of girly men? The Geithner plan assumes that Wall Street’s bravest investors won’t spend a penny or borrow unless the government is willing to cover losses, make loans, and give away extra profits. It assumes, in short, that these great businesspeople are afraid to do business.
He notes this is a new phenomenon:
Many fortunes were made by purchasing assets from the Resolution Trust Corp., the agency formed to handle the leftovers from the savings-and-loans debacle. After the junk-bond market crashed in the early 1990s, investors deploying new pools of capital jumped in, purchased the bonds, and used them to acquire control of companies – a bet that paid off handsomely. Earlier this decade, Warren Buffett and others pounced on telecommunications and energy-trading companies that had become impaired.
The current environment should be a great moment for vulture investors.
But there are none of those now, and he offers some speculation as to why that is:
It could be that potential buyers have lost their nerve (although you can never lose money going long on the nerve of Wall Street operators). It could be that the prices at which sellers are willing to part with lousy “legacy securities” still aren’t sufficiently low to make these trades worthwhile without major leverage. It could be that investors today can’t fathom waiting a couple of years to get paid.
Or it could be many things – the combination of complex instruments and a totally screwed up market – or it could be, as he fears, that Wall Street has lost its nerve:
In this past decade, the controlling assumption of the financial-services industry was that you could have “wealth without risk.” Now it seems to be that you can have “capitalism without capitalists.”
That’s an awfully big shift to consider, but it could be the new economy.
As for the other side of the equation, the Obama administration, just as evangelicals try to soften their ringing denunciation of most everything, by saying they love the sinner, but hate the sin, Molly Redden says Obama is saying Love the Banks, Hate the Bankers. We do need the banks, after all.
Andrew Sullivan has a different take. At least Obama didn’t nationalize the banks:
To get the economy moving again without that exigency is surely worth a shot – and a sign that Obama is a pragmatic liberal before he is an ideological one. You saw that in his caution on healthcare in the campaign, never quite biting off the full Clinton option. But since he took office, you have also seen, even in the haphazard attempt to figure out the economic crisis, a methodical coolness that is the essence of pragmatism.
But was this a good day? Maybe we’ve just been down so long it only looked good. Eric Umansky just doesn’t know:
Citibank up 20% and BofA, up 26% on Geithner’s plan. Does that mean it’s a good plan… or really, really bad?
Matthew Yglesias says it only means those holding specific bank shares had a good day:
As for whether that’s a good sign or a bad sign – one should consider the possibility that these aren’t exclusive choices.
One option for dealing with current problems is simply for the federal government to continue offering implicit guarantees to big banks, combined with low interest rates. That will allow the banks to operate profitably, and over time they’ll recapitalize themselves out of profits, and the crisis will resolve itself. But that will take a long time and be very bad for everyone. Geithner’s plan, by contrast, will almost certainly succeed in restoring the banks’ capital positions more quickly. That will create a better overall situation than the alternative.
But Yglesias prefers the long view:
During the previous economic expansion, an absurdly large proportion of the growth was pocketed by a relatively small number of people working in the financial sector and, apparently, earning a living by selling snake oil. One question facing current policy is when we will shift into the next expansion. But another question is what will the expansion look like? How much of its gains will go back into the pockets of finance? Shifting from a “years of depression” scenario to a “deep recession followed by swift recovery” scenario generates a lot of extra wealth and well-being for everyone. But how much of it will actually go to “everyone” and how much will go to the owners and managers of large financial firms? A plan can work and help restore growth while still being unduly favorable to the interests of finance.
But the bankers are now saying SELL!
Investors should sell bank stocks after they rallied 12 percent today because the Treasury Department’s plan to buy toxic assets won’t stop profits from dropping, Bank of America Corp.’s Richard Bernstein said. Removing devalued loans and securities from banks’ balance sheets is a short-term solution that will delay the problem’s ultimate solution, which is bank takeovers, Bernstein said. The government won’t be able to inflate the prices banks receive for selling bad assets indefinitely, he added.
After all, there are more bad assets on the way soon:
U.S. banks, battered by record losses from the worst housing slump since the Great Depression, now must weather increasing loan delinquencies from owners of skyscrapers and shopping malls. The country’s 10 biggest banks have $327.6 billion in commercial mortgages, which face a wave of defaults as office vacancies grow and retailers and casinos go bankrupt. A projected tripling in the default rate would result in losses of about 7 percent of total unpaid balances, according to estimates from analysts at research firm Reis Inc.
Yes, the fellow from Bank of America said the sky is falling, and the government can’t possible fix is what coming soon, and is just as bad as what we have now. The bank said sell any of our stock you own, now. That’s curious.
But Duncan Black says we’re overthinking this, spending far too much time trying to make sense of a plan which doesn’t make much sense:
The Geithner plan will – 1) Funnel more government money to the banksters – 2) Allow the banksters to pretend for a bit longer that their hunks of big shitpile aren’t quite as shitty as we thought by using the bullshit price that this process comes up with, allowing too big to fail businesses to stay in business for a bit longer.
This might make sense if you truly believe the magic market you believe in fervently is genuinely incorrectly pricing the assets, perhaps because you genuinely believe that if you could turn around the economy fast enough that you could massively reduce expected foreclosures.
But if you genuinely believe that, I don’t think you’ve been paying too much attention to just what’s been going on in the housing market. I don’t think you paid too much attention three years ago when you didn’t realize that it didn’t quite make sense that so many people could afford $700,000+ homes in Orange County. I don’t think you paid too much attention to the degree of speculation and outright fraud that was happening in parts of the country.
Yes, pay attention. Other people have been paying attention, and Felix Solomon suggests something is up:
Might we be seeing the first real rumblings of class warfare – the genuine article, not the Republican talking-point – in this country?
He sees it this way:
In one corner are the technocrats not only in finance but also in government and the media: people who can understand the importance of distinguishing between a $250,000 base salary, a $2.5 million bonus, a $250 million bonus pool, a $2.5 billion bonus pool, a $250 billion bailout package, a $2.5 trillion monetary stimulus, and so on.
In the other corner are the real people, the angry people, the unemployed people – and with them their elected representatives in Congress. They’re not interested in such distinctions anymore; they’re not interested in what’s fair or what’s sensible. They saw their real wages stagnate for decades as the orgy of plutocratic self-congratulation reached obscene levels only to keep on growing. All they ever had was the American Dream: the idea that they, too, might one day become dynastically wealthy and join the overclass.
And now, as that dream is shattered and they sense who shattered it, we’re in for trouble:
While the talking heads in New York and Washington throw around their millions and billions and trillions before commuting home to their comfortable middle-class-and-better lifestyles, the rest of the country is mad as hell, and ain’t gonna take it anymore. They’re not interested in constructive solutions or in leveraging private capital or in the sanctity of contracts: fuck that shit. Those days are over. They want to see jail time, confiscatory policies, and worse.
And it had to happen:
As inequality grew in America over the past 30 years, there was always the risk that it would snap back violently and dramatically. That day is not yet here, but it’s closer than it has ever been, and its possibility cannot be discounted. Barack Obama smells the public mood, and is trying to respond to it in a grown-up and non-incendiary way. Congress smells it too, and is being rather less grown-up about things. And Wall Street still largely remains inside its bubble, watching the tour buses on the outside with fear and incomprehension. But unless some very senior executives start smelling the coffee sharpish, they might end up facing the biggest tail risk of them all.
Heck, even the terribly cute and always perky Erin Burnett of CNBC gets it, and, on Meet the Press, said this:
MS. BURNETT: The average executive in this country of a publicly traded company, not just Wall Street, makes 400 times the average worker. And that has been a dramatic shift over the past two decades. That is something that is causing some of the anger here. In a sense it’s been building, and this is the moment where it breaks.
And the folks on the right don’t get it. As discussed previously, there was Charles Murray’s recent speech to the American Enterprise Institute – the problem with any sort of social democratic model, where there’s a safety net and big people don’t get a chance to wreck the whole system for their own profit, as things are regulated, is that it makes people too fat and happy, thus depriving them of the higher contentment offered by suffering and misery.
Damon Linker summarizes:
But that’s not all. Because genuine happiness, for Murray, requires spending one’s life striving to overcome an endless series of challenges and obstacles, the lavish European safety net ensures that individual Europeans will never experience spiritual contentment or satisfaction. The assumption seems to be that a life of leisure – or at least a life with open access to health care, quality child care, generous unemployment insurance, and 4-6 weeks of guaranteed vacation time a year – will be an unhappy one. (It doesn’t sound half-bad to me, but I’m a Euro-loving liberal.)
Luckily, though, there is the American alternative (at least until Barack Obama gets through with us). Unlike coddled Europeans, Americans face the constant possibility of personal economic catastrophe. They work their lives away just to make ends meet, never knowing if they’ll be rewarded for their efforts by being fired by their employer or impoverished by medical bills after a life-threatening illness. And that constant insecurity is what opens up the possibility of genuine happiness for them, because if they manage to survive, let alone thrive, they’ll know that they did it on their own, without the help of the state, through heroic acts of self-reliance. This ideology – equal parts Christian masochism, Emersonian individualism, and Nietzschean striving – forms the core of American exceptionalism, according to Murray.
Such people are happy with the government using their money to bail out the banks, as long as none of that money comes their way, or something.
Of course that’s mad. But here we are – the Treasury gets together with the banks and works out an insider auction where whatever the bidders do they assured they, and the banks hold the crappy, toxic, legacy assets, will come out with more money than ever before – and the markets soared. Of course they did. It was a good day – been down so long it looks like up to me.
But one should always be suspicious. Come the revolution, you’ll know what’s what.