Sunday, March 22, 2009

Economic ebola

I was rattled the whole of yesterday after reading the NYT story about the Geithner plan, which should be called the Paulson-Geithner plan. It isn’t just the fact that, as Matt Taibbi put it, we are meekly accepting an absolutely feudal structure in which the wealthy are given access to the public treasury on a scale never seen before, giving them unprecedented powers. It is not just that having the FDIC cough up, suddenly, 800 billion dollars makes a joke of the FDIC, which will spread the pain of Wall Street on an entirely new level. The runarounds to avoid Congressional authority are, perhaps, the logical end result of unplugging Congress from the power to declare war – the most important thing Congress can do, which has been done, since the forties, by the executive branch without a peep of protest that this is a vile and illegal practice.

All of these are bad things. Politically, they spell out the end of democracy. That's bad. But just as bad is that the plan can’t work. I’m pretty confident of this. Thus, when I went to Brad Delong’s site and saw his FAQ of the Geithner plan, I was at first non-plussed. Just looking at the FAQ, with its detail and busy-ness, makes one think, well, maybe it will work. It is the reality effect Barthes described – the way in which, in Flaubert’s descriptions, some detail will be offered that has no symbolic or other value. Its value is that it is mentioned at all – as if the world is leaking in to the text.

However, the text is all the case is. And in the case of this FAQ, the details are premised on a lie.

It is easy to see where the lie comes in. It is the second point in the whole FAQ:

“Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.”

What is happening here? First, notice the question. The question is deliberately made obscure and petulant. What is in question is the “markets” in general – which is another way of saying, nothing is in question. Then the “fundamentally undervalued” – by which is meant, what if the assets are overvalued by the banks at such a rate that the governments “loans” to buy them are greater than the value that can be squeezed from them. And then notice the non-answer. The non-answer is: to ask that question, you must be a survivalist!

However, let’s ask the question properly. Go to this helpful map of unemployment, put up by the NYT. Put your mouse on the counties where the housing prices were highest, and notice that those are also, often, the counties where the unemployment is now highest. Reflect on the fact that there is nobody who predicts that the unemployment rate is going to get better this year – and in fact the rate has gotten much worse than any of the predictions so far. Then reflect on why the mortgages went bad. To help you along here, I will quote this passage from Michael Lewis’ The End of Wall Street.

“At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.”

Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. “It wasn’t that hard in hindsight to see it,” she says. “It was very hard to know when it would stop.” Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.

By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he’d spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. “What most people don’t realize is that the fixed-income world dwarfs the equity world,” he says. “The equity world is like a fucking zit compared with the bond market.” He shorted companies that originated subprime loans, like New Century and Indy Mac, and companies that built the houses bought with the loans, such as Toll Brothers. Smart as these trades proved to be, they weren’t entirely satisfying. These companies paid high dividends, and their shares were often expensive to borrow; selling them short was a costly proposition.”

Finally, reflect on the fact that, by speaking of “markets” and “undervalued assets”, Delong has deliberately avoided speaking of the real estate market, the mortgages that flowed out of it, and the way they were pooled, sliced and diced and mixed with other loans, and thus interconnected, the bad and the good, in various financial instruments. We have no idea, and the Treasury wants us to have no idea, what instruments it is buying. By calling these “mortgage backed’ securities, the Treasury’s defenders are engaging in deliberate obfuscation. If they were simply securities in which the payoffs matched the mortgages 1 to 1, there would be a gigantic hole; it was made supergigantic by the fact that these securities aren’t structured like that. I think Delong knows this, and just thinks it would “confuse” laymen. Unless the Treasury is assuming that the securities are going to be restructured before they are auctioned off, and that this won’t violate the contracts (which it would – you can’t just restructure a financial security after you have used it to borrow money, or swapped it, or the thousand greasy ways phantom profit comes out of these things) – then we are loaning money for bids on securities based on mortgage pools from mortgages at the housing bubble peak, mixed up and interconnected with a variety of loans, including subprime mortgages that are going bust, at prices high enough that the banks holding them won’t take the hit.
What’s a good estimate of the hit? Eight trillion dollars. As Dean Baker puts it, the Geithner plan conveniently forgets the eight trillion dollar bubble.

Why is this happening? It is quite simple. The establishment – the Wall Street/DC axis – cannot make sense of what just happened. Their Pavlovian response is to grab as much money as is available for themselves – from bonuses to the money made out of thin air by the Fed, the Treasury, and now the FDIC. Will this save them? No. The more they engage in this massive pilfering, the more they threatened every structure which supports their wealth – for remember, no matter how quant-ed the financial sector became, how abstract the billions of the billionaire are made to be, in the end, the whole thing is based on real goods and services. Debauching the currency to this extent, creating purely peculative vehicles to pour money into dying financial entities, is not just immoral, but will have a massively downside effect on the economy. The map of unemployment isn’t just sad for the “losers” – it is a map of business losses. It is a map of clawback, coming not in the form of government taxes, but in the form that was bound to come when and if the business cycle met up with the neo-liberal insistence on displacing social insurance from the public sphere (medicare/Social Security) to the private speculative sphere – 401ks, the numerous tax encouraged money funds, etc. Neo-liberalism only works if the business cycle truly is controlled. As we can see, the business cycle has not been truly controlled. And what is happening now is: the attempt to put this all in slow motion. To slow down the bleeding. But you only slow the bleeding as a preliminary to an operation. There is no operation. The doctors don’t understand this disease. And those that do – read this Galbraith entry – are kept out of the magic circle of policymakers.

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