The Economic Meltdown
dirs. Reagan, Bush, Clinton, Dubya
"There's gonna be some bad shit coming down one of these days, kid."
"Oh yeah? Where are you gonna be? On the moon?"
"I'm gonna be right here headed north at 110 per."
"In this junker?"
- Bud & Otto, Repo Man
"Credit is a sacred trust. You think they give a damn about their bills in Russia?"
"They don't pay bills in Russia. It's all free."
"Free? Free my ass. What are you? A fuckin' commie?"
"No, I ain't no commie."
"You better not be. I don't want no commies in my car. NO CHRISTIANS EITHER!"
- Bud & Otto, Repo Man
"Bud, you're sitting in a car worth $20,000. We take it and split the money, 60/40, you and me."
"Who gets the 60, kid?"
"Well, I don't know, I figure since I found the car first that..."
(Bud draws a gun and cocks the hammer)
"...that you get it."
- Bud & Otto, Repo Man
Okay, it seems that our financial institutions have not been following The Repo Code. How do we sort this out?
The Bad Mortgages
Nothing gets solved until we solve this. This is where the damage started, so this is where it must be stopped.
Long story short: banks loaned a lot of money, a LOT of money, to people who they had no reason to believe could pay it back.
They did this because they believed that the assets that were being borrowed against (homes) would always increase in value and because the risk of default could be offloaded onto an unregulated default swap market.
As we all know, this system worked perfectly, burying risk on an uninformed market and saddling low-income Americans with monumental debts they can't hope to service let alone pay off.
So what do we do? Well, first, forget about asking really nicely for banks to renegotiate these loans or use mark-to-market to revalue assets or anything like that. Banks are in business to make money for their shareholders. They are not interested in writing down any assets to save the global economy.
Instead, the government should take on these loans, either by taking the banks into receivership (ie nationalizing them) or buying the loans from the banks not at their original price, but at the original price minus the cost of foreclosure (which is huge.)
The government then renegotiates these loans with homeowners. Push balloon payments out a decade, renegotiate for 40, 50 or 60 year terms, whatever it takes to get the current payments back down to their original level, keeping homeowners in their homes and buying a little time to sort things out.
Then the government works with the homeowners to either get them on track to be able to afford their mortgages when the 10 year window closes again, or to sell sometime in that decade.
For our trouble, the government takes 50% of whatever future leverage there may be while offering to split the underwater cost of any home that sells in the next 10 years.
Basically, we cosign and gamble that the real estate market will recover at least some of its value in the next decade.
This is feasible because the government can do something that commercial banks can't do: wait for frickin' ever to be repaid. A government bank doesn't have to worry about quarterly profitability, price-to-earnings, market cap or anything else. All it has to do is administer its accounts.
This program, by the way, will create jobs for accountants, real estate agents, home improvement workers, etc while heading off a bunch of unprofitable foreclosures, keeping homes occupied and avoiding flooding the streets of our bankrupt cities with millions more homeless.
It's win-win. Occupied houses retain their value and We The People(tm) may actually turn a profit on this business.
Okay, far be it from me to wax sympathetic to a bunch of banker CEOs who can't live on less than a half-mil a year, but the fact of the matter is that the TARP asks them to do something which they really can't do: give a a shit about the global economy.
These guys have a fiduciary responsibility to their stockholders. If you make the bailout money fungible and you put it in their common fund, they're going to spend it on cocaine and massages because that's how they do business.
The fundamental problem is that the CEOs don't work for us. They work for the board and for the stockholders who apparently endorse the cocaine and massages business model.
Asking why they haven't done a bunch of things that politicians (who ARE supposed to serve the interests of the taxpayers) think they should do is silly. Three months from now, we'll be asking where the other $350 billion went.
There are two ways to solve this:
First, any bank that's so bad off that it's about to fail, take it into receivership (nationalize), fire every motherfucker who doesn't stand at a window and greet the public, install government-hired accounting and management teams and work the institution until it's either solvent or can be dissolved without throwing the earth of its axis.
If this institution mismanages TARP funds, we can do something about it because it'll be our property. Later, when the institution is back on its feet, sell it at public auction for a profit.
Second, for any bank that's still on its feet but needs a little help, you give them TARP funds as we have now, but along with those funds comes an Ombudsman.
Instead of mixing the TARP money into the general coke and massages fund, each and every application of TARP money is vetted by the Ombudsman. The Ombudsman will have full access to the bank's accounting and will have the option of saying "No, I don't think you need $100 million to buy your competitor. Take it out of the coke and massages fund."
This accomplishes two things.
First, it separates taxpayer rescue money from corporate money. We'll know exactly how taxpayer money is spent and toward what end.
Second, it puts responsibility for taxpayer money in the hands of someone (the Ombudsman) whose boss is the president. The Ombudsman doesn't answer to the board and doesn't care about increasing shareholder value.
If the Ombudsman doesn't do his job, we can fire him, not just ask him politely if he wouldn't mind telling us why he didn't do his job.
First, we need to stop wailing and moaning about "where the money is going to come from" and talking about how "our children's children will be paying for this."
There's an idea we all have to start getting used to: money is imaginary. We made it up. It's not like we landed on this planet and found a bunch of money to manage. It's a human invention.
No matter how you slice things up, the fact is that we've got hundreds of millions of people living in an industrialized country with large cities, global institutions, huge agribusiness and a great deal of expertise. That's worth a lot.
If we all just woke up tomorrow, agreed to divide things equitably and implemented a fair and well-regulated market system and social safety net, we'd be fine. The reason we don't do this is because we think it would be unfair and disruptive.
So, if a global depression or crushing national debt ever gets more unfair and disruptive than pushing the reset button, we'll push the reset button. What's good enough for Africa and South America is good enough for us, right?
The question you should ask whenever anyone wrings their hands about all the debt we're incurring is this: WHO will we owe all this money TO?
The answer? Bond holders. That's you and me and our "children's children." All we have to do is regulate the bond market to prevent too much of that debt from going overseas and we'll be fine.
The idea that "our children's children" will be working like slaves in some salt mine suggests that someone besides "our children's children" will be owning these salt mines.
What's critically important is that the money be spent in such a way, and here's the clever bit, as to increase the amount of business that gets done so we can recoup our investment from increased tax revenue.
If we spend it on coke and massages, then the money will leave the economy unless the coke and massage industry stays 100% domestic. The last time we tried this approach to economic stimulus, we ended up having to invade Panama to get our stuff back, like the OJ of global superpowers.
If, on the other hand, we spend it on bridges, hospitals, schools, roads, power grids and scientific research, we then own these things which are valuable, decrease costs, produce revenue or improve efficiencies.
We produce wealth, in other words, that didn't exist before. This increase in wealth is then taxed and the tax revenue is used to buy back the bonds which lowers the debt and allows us to lower taxes.
Everybody wins, except those who profit on poverty, ignorance, misery, resentment, fear and suffering.
If We Don't
If we fail to take this approach, what we will have is large numbers of unemployed homeless people and large numbers of abandoned homes.
You do not have to be a rocket surgeon to figure out what's going to happen.
Homes that aren't burned down by desperate owners looking to cash out with the insurance company will be occupied by legions of otherwise homeless families.
All of this while the cops sit at home on furlough, waiting for the state's coffers to refill.
Why We Almost Certainly Won't Do Anything Like This
What are you, some kind of socialist? Let's just keep lowering taxes. That'll fix it.
J-Dog sez: Welcome...to Planet Detroit.