Interesting. http://www.nytimes.com/2008/09/28/business/28every.html Everybodyâs Business In Financial Food Chains, Little Guys Canât Win By BEN STEIN Published: September 27, 2008 IMAGINE, if you will, that a man who had much to do with creating the present credit crisis now says he is the man to fix this giant problem, and that his work is so important that he will need a trillion dollars or so of your money. Then add that this man thinks he is so indispensable that he wants Congress to forbid any judicial or administrative questioning of anything he does with your dollars. You might think of a latter-day Lenin or Fidel Castro, but you would be far afield. Instead, you should be thinking of Treasury Secretary Henry M. Paulson Jr. and the rapidly disintegrating United States of America, right here and now. But I am getting ahead of myself. First, I am furious at what the traders, speculators, hedge funds and the government have done to everyone who is saving and investing for retirement and future security. Millions of us did nothing wrong, according to the accepted wisdom of the age. We saved. We put a large part of our money into the stock market, as we were urged to do. Because the market wasnât at ridiculously high levels, it seemed prudent to invest in broad indexes, foreign indexes and small- and large-cap indexes. Now we have had the rug pulled out from under us. Our retirements have been put into severe jeopardy. The âearningsâ part of those price-to-earnings ratios turns out to have been fiction for some financial companies, which normally account for a big part of total corporate earnings. In fact, earnings of giant finance players were often wildly negative, creating a situation rarely seen since the Great Depression, when the aggregate earnings of the Dow 30 were negative. The current negativity occurred because of wild, casino-type operations of big finance players, creating liabilities way beyond anything we could have reasonably expected. This looks a lot like theft on a spectacular scale â of our wallets, our peace of mind, our futures. Second, according to what I hear from my betters in the world of finance, the most serious problems are not with the bundles of subprime mortgages themselves â a large but not lethal quantum as far as I can tell â but with derivatives contracts tied to subprime and other dicey debt. These contracts are superficially an attempt to âinsureâ against risks of default, hence the name âcredit-default swaps.â In fact, they are an immense wager â which anyone with lots of money or borrowing ability can enter â about how mortgage-backed bonds, leveraged loan bonds, student loan bonds, credit card bonds and the like will perform. These wagers entail amounts many times larger than the total of subprime loans. In fact, there are roughly $62 trillion in credit-default swap derivatives out there, compared with about $1 trillion of subprime mortgages. These derivatives are âweapons of financial mass destruction,â in the prophetic words of Warren E. Buffett. (Apparently believing that the worst is over, at least for one big investment bank, Mr. Buffett is now investing in Goldman Sachs.) The swaps market has been unregulated. It has been just a lot of people making bets with one another. Some of them made incredibly fortunate payoff wagers against the mortgage bonds, using credit-default swaps as their wagering vehicle. I am not sure who the big winners are, but they are out there, and the gains were big enough to cripple the part of Wall Street on the losing side of the bets. Almost no one (except Mr. Buffett) saw this coming, at least not on this scale. But letâs get back to the man of the hour. Why didnât Mr. Paulson, the Treasury secretary, see it? He was once the head of Goldman Sachs, an immense player in the swaps world. Didnât people at Treasury have a clue? If they didnât, what was going on in their heads? If they did, why didnât they do something about it a year ago, when saving the world would have been a lot cheaper? If Mr. Paulson and Ben S. Bernanke, the chairman of the Federal Reserve, didnât see this train coming, what else have they missed? What other freight train is barreling down the track at us? All of this would be bad enough. But by far the most terrifying item I read in my morning paper last week was this: Mr. Paulson demanded that Congress forbid judicial review of his decisions on use of the money in the mortgage bailout. This would amount to an abrogation of the Constitution. Not only would his decisions be sacrosanct and above the law, but so would the actions of his pals in the banking world in connection with this bailout. The people whose conduct got us into this catastrophe have not only taken our money, hopes and peace of mind, but they apparently also want a trillion or so more dollars to put into their Wall Street Buddy System Fund. This may be the most dangerous attack on the law in my lifetime. What anarchists even dared consider this plan? Thank heaven that minds more devoted to the Constitution on Capitol Hill are questioning this shocking request. By the way, if we are actually thinking about tossing the Constitution out the window, why not simply annul these credit-default swap contracts? With that done, the incomprehensibly large liability of the banks would cease, and we wouldnât need this staggering bailout. Shouldnât we consider making the speculators pay some of the price? WE have survived housing-price corrections before. Why is this one causing so much anguish? It must be the side bets, the credit-default swap bets, multiplying the effect of the housing downturn many times over. Maybe we should just get rid of these exotic bets and start again without them. âInsuranceâ on market moves is always a bad idea, because it does not tamp down market disruptions but instead greatly magnifies them â as in the disastrous effect of âportfolio insuranceâ in the 1987 crash. Then there was Mr. Paulsonâs insistence that there be no compensation caps for executives of companies being bailed out by the factory workers, the farmers, the schoolteachers and the medical doctors. He told a skeptical Congress on Tuesday that if these caps were put into place, bank executives simply wouldnât participate in the bailout or sell us suckers their debts. Fine with me. If the banks are in good enough shape so that petulant executives can simply opt out rather than live on a few million a year, maybe we donât need the bailout at all. Maybe we would be better off if those executives simply bailed out and were replaced by people with more sense and more patriotism. One final little thought bubbles into my mind: Maybe the bailout should not be of the banks at all, but of homeowners themselves. Maybe if we make the government the buyer of last resort of homes, we will stabilize the markets, stabilize the debt associated with the markets and take the gain out of the credit-default swaps for the speculators. Yes, price would be a huge issue, but so it is for Mr. Paulsonâs plan for buying debt from banks. Why not? We do it for farmers. Why not for the individual homeowner? Oh, right. Because Treasury secretaries donât know any of those people.
1) I don't care for Ben Stein, but he is regarded as conservative; 2) His article is timely, thought-provoking and contains some objective truths about the financial system as it functions now; 3) Only people who are insecure with their own beliefs are 'afraid' to see opinions or comments that challenge their soft underbellies posted, and would ever request that they 'not be posted.' How about reading the article and tackling whatever it is you disagree with Ben Stein about head on?
The logic makes sense, Government buys the bad loans from the banks and they in turn keep the money in the financial system. The homeowners are not foreclosed and not have to move out, they are still liable for their home loans but to the government. Government will not foreclose on them fast like banks and credit unions would and would even be happy with 50% payment of the monthly mortgage to keep the economic machine moving forward while efficiencies are sought and corrected all round in the system. When times improve, the homeowners will have their checks garnished by government to pay off the loans in full and total. In turn the standard of living will have to adjust. Luxaries like two cars, fast speed internet, cell phones, eat outs twice per week and drive through morning coffees will have to give way. End result, Financial system is saved from the shock but economic growth in long run takes a hit. Better to have slow and sluggish growth than face off with depression and resulting nonsense. Has the US entered the decade long recession that Japan faced in the 90s? Given the reslience of US economy, a two-three year recession can be anticipated.
because the homeowners are deadbeats who tried to live beyond their means and are now getting what they deserve -- foreclosure. too bad there's no debtors' prison
that's right...you own to a government-you became government bitch, until you pay,what you own. the government can send you to oil fields,iraq,mines or whatever..that would be fine with me...pay your f*** debt and learn your lesson hard way.. maybe next time-you will think twice,when you buy 1M house with 50K salary
I can't take Ben Stien seriously on anything. I have been reading his yahoo articles for the past year now, and up until the last one, he never even acknowledged that there were problems with wall street or that a recession in the US could even happen. This guy is a tool.
the problem is not who is wrong here- it's who is more wrong. Is an executive at WAMU or wherever, who might earn $25 million neext year or two... all on the back of the US taxpayer, less wrong than the average homeowner who gets shafted because either: A. His real estate or mortgage advisor earns a commision based on the size and complexity of the loan he sold to this naive potential homebuyer B. He was in fact a greedy, selfish, shortsighted homebuyer who thought he could build to flip in the middle of a desert... You decide who is more wrong... apparently thats the job of congress, but they can't seem to be altruistic in this manner given the lobby dollars they continue to receive.
The average homeowner isn't "getting shafted" except by this stupid bailout plan and the other consequences of others' bad decisions.. The average homeowner pays their mortgage on time. A minority of homeowners shafted themselves, either through greed or stupidity or a combination. Nobody forced anything on them with a gun and they're all adults and responsible for their decisions.
I'm not sure this addresses the problem. The problem from what I understand is that the conveyor belt of money has seized up. It is not circulating as it should but is instead clogged up in the banks who are unwilling to lend. Going directly to the homeowners if my analogy is right is akin to a bypass operation that ignores the problem with the banks and the money stuck in their toxic waste. I'm not sure though if ignoring the financial institutions if they serve like a pump can really be considered solving the problem.
this is all relative to the overpaid bank executive, not average homeowner etc.... thats all my point was. If the Market can't digest an idea, its unlikely that we can here on ET...