How Can Such Smart People Be So Dumb?
Damn! I KNEW I should have gotten that Ph.D. in economics. It would sure come in handy these days. While it’s certainly possible to read nonstop about the causes of the current financial crisis and the wisdom or lack thereof for the administration’s proposed $700 billion bailout, I think I speak for many of us when I ask, what the hell is going on? By the way, that’s actually a quote in today’s New York Times from Bruce Bartlett, a former economist in the Reagan administration.
Here’s what he said: “The problem is people are operating in a world in which nobody knows what the hell is going on.” And this guy DOES have a Ph.D. in economics.
Crises come, and crises go, but I don’t think I ever recall a matter of such vital importance to Americans and the rest of the world, where it’s clear nobody understands what’s happening. It’s what got us into this mess in the first place; mortgage-backed securities sold and resold and re-resold, financial instruments of such opaque complexity that the brokers who were selling them didn’t understand them. Now the government is proposing to spend up to a trillion dollars to buy back all the bad assets, even though nobody knows what the assets are worth. It’s the blind leading the blind leading the blind.
Take Henry Paulson, The Most Supreme Ruler of the Financial Universe, formerly known as the Secretary of the Treasury. He’s leading the charge for speedy passage of the bailout package, and I’d be inclined to listen to his counsel if he hadn’t been wrong about just about everything in the economy that’s brought us to this point. Didn’t he say several times in the past few weeks that things have stabilized and that the crisis was contained? Or did I dream that? Now he looks America in the eye, so to speak, and says, ‘give me this mind boggling, inconceivably enormous, budget-busting, deficit-ballooning bailout, and I’ll make everything better. Oh, and one more thing; the money is going to go to the very same people who screwed it up before.’
Hank? My man? You have got to be kidding us. You want taxpayers to pay a premium for “assets” that could well turn out to be worthless to everyone but the financial institutions who are having their bacon saved. No wonder members of Congress, after eight years of reclassification as an invertebrate species, is finally developing a little backbone. Even the dimmest, most sheep-like legislator can spot snake oil for sale in this quantity, and most of them have enough people back in their districts losing their homes for them to fall for this “save the crooks and screw their victims” strategy.
But even the coolest heads say something has to be done. Congress is right to slow everything down. We’ve seen what happens with this administration when it says “put a rush on this” (maybe we’ll hear, “we don’t want the smoking mortgages to be a mushroom cloud.”) You know the old saying, “15 times burned, twice shy.” So while lawmakers take a deep breath and figure out exactly “what the hell is going on,” they can maybe turn more attention to the folks on Main Street who need some flexibility with their mortgage terms; in other words, finding more bottom-up solutions for the people hit the hardest, instead of focusing only on top-down schemes that will further enrich the rogue financiers, and might not solve the problem at all.
Comments: 7
Running through my mind this week has been this scene from the great British comedy, "Yes, Prime Minister."
Prime Minister Jim Hacker has just had a stormy cabinet meeting over a sudden financial crisis and is discussing the situation with his private secretary:
Jim Hacker: "Bernard, Humphrey should have seen this coming and warned me."
Bernard: "I don't think Sir Humphrey understands economics, Prime Minister; he did read Classics, you know."
Hacker: "What about Sir Frank? He's head of the Treasury!"
Bernard: "Well, I'm afraid he's at an even greater disadvantage in understanding economics: he's an economist."
Clearly, Bernard was onto something...
What a well written and blunt opinion piece! You write what most of us are thinking. Those who bit off more than they could chew are now hoping we'll all save them with a bailout? My husband and I worked hard to be where we are - the middle class. I'm lucky, so to speak-- I can afford my mortgage payment and don't have any credit card debt. So when will we know the right solution and who do we listen to? I'v got 3 kids, the oldest just started high school. I could retire in 3 years from my law enforcement job in NYC. But many of my colleagues are sticking around for a few more years "just in case". Can't wait to hear more from our leaders.
What a well written and blunt opinion piece! You write what most of us are thinking. Those who bit off more than they could chew are now hoping we'll all save them with a bailout? My husband and I worked hard to be where we are - the middle class. I'm lucky, so to speak-- I can afford my mortgage payment and don't have any credit card debt. So when will we know the right solution and who do we listen to? I'v got 3 kids, the oldest just started high school. I could retire in 3 years from my law enforcement job in NYC. But many of my colleagues are sticking around for a few more years "just in case". Can't wait to hear more from our leaders.
thank you, Wendy for the "yes, prime minister" scene.. it's a hysterical show... my parents, true anglophiles, love it.
Here's my economist joke, told by a Macro Econ 101 professor when I was in college a certain number of years ago:
(a bit of background, always a bad way to start off a joke; economist-talk deals with equations that often begin with "assume a -- whatever" "assume a steady interest rate," or "assume a rising GDP." Okay, now back to the joke.)
three scientists, a chemist, a physicist, and an economist were washed up on a desert island after a shipwreck. They found one can of provisions, but had no way to open it. So they each devised an idea; said the physicist, we'll use gravity to drop a coconut onto the can, with enough strength to crack it."
The chemist said, let's mix the salt water with the bark of this rare tree and create a compound that will gently dissolve the tin covering."
They turned to the economist, for his idea. "Easy," he said. "First, assume a can opener."
something like that.. it was a long time ago. thank you for your response, Christine. Come back to the blog soon
Jim Watkins
Instead of looking at the problem from the top down (saving financial intuitions) look at it from the bottom up (saving homes and families). I just don’t believe that trickle down economics will work for the nation’s current financial problems.
A proposed Housing Crisis Solution:
Suppose you bought a home that is your primary residence and its market value has decreased to a value that is less than 120% of your current mortgage.
You have three options:
1. You can retain 100% equity in your home and continue with your current mortgage payments.
2. If you can qualify financially for a reduced mortgage, you can sell a fractional ownership of your home to a quasi-government agency and pay down your mortgage with this equity investment,
3. If you can not qualify financially for a reduced mortgage, you can sell 100% of the equity in your home to a quasi-government agency for the outstanding mortgage value and rent it back for the current market rate.
When the home is eventually sold, the quasi-government agency would share in any capital gain in proportion to its equity interest.
The quasi-government agency could then go the financial markets and sell shares in the equity they hold in these homes.
Examples:
Example 1 Example 2 Example 3 Rental
Original Cost $338,000 $338,000 $338,000
Current Mortgage $270,000 $338,000 $338,000
Current Market Value $240,000 $240,000 $240,000
Current Mortgage Payment $1600/mo $2000/mo $2000/mo
120% of Mortgage $324,000 $405,000 $405,000
80% of CMV $192,000 $192,000 $192,000
Equity sale to Government $ 78,000 $146,000 $338,000
Equity Interest of Government 28.9% 43.2% 100%
New Mortgage Payment @6% $1138/mo $1138/mo $1138/mo Rent
Instead of looking at the problem from the top down (saving financial intuitions) look at it from the bottom up (saving homes and families). I just don’t believe that trickle down economics will work for the nation’s current financial problems.
A proposed Housing Crisis Solution:
Suppose you bought a home that is your primary residence and its market value has decreased to a value that is less than 120% of your current mortgage.
You have three options:
1. You can retain 100% equity in your home and continue with your current mortgage payments.
2. If you can qualify financially for a reduced mortgage, you can sell a fractional ownership of your home to a quasi-government agency and pay down your mortgage with this equity investment,
3. If you can not qualify financially for a reduced mortgage, you can sell 100% of the equity in your home to a quasi-government agency for the outstanding mortgage value and rent it back for the current market rate.
When the home is eventually sold, the quasi-government agency would share in any capital gain in proportion to its equity interest.
The quasi-government agency could then go the financial markets and sell shares in the equity they hold in these homes.
Examples:
Example 1 Example 2 Example 3 Rental
Original Cost $338,000 $338,000 $338,000
Current Mortgage $270,000 $338,000 $338,000
Current Market Value $240,000 $240,000 $240,000
Current Mortgage Payment $1600/mo $2000/mo $2000/mo
120% of Mortgage $324,000 $405,000 $405,000
80% of CMV $192,000 $192,000 $192,000
Equity sale to Government $ 78,000 $146,000 $338,000
Equity Interest of Government 28.9% 43.2% 100%
New Mortgage Payment @6% $1138/mo $1138/mo $1138/mo Rent
This is most certainly an unnerving time to be living through. Every morning I grab the newspaper off the front step and wonder what the hell is going on out there. The fact that the experts can't reliably predict what needs to be done is the most unsettling part.