Obama Economic Plan: Bailout Debate (UPDATED)

Angela I disagree with your perception of what Obama is advocating. First all of, if you look at his speech today most of his focus was exclusively on increasing regulation and going back to some regulations that were overturned only about 10 years ago. The only money that he explicitly mentioned today -- $30 billion -- would be to increase unemployment insurance.

If you look at his housing "bailout" money, it is primarily to give to local governments to help them keep foreclosed sites from falling apart and perhaps purchasing some houses to have low cost rent and sell when the market recovers. Very little how his money would go to homeowners at all, contra Hillary's plan.

Also he is against freezing foreclosures or interest rates. The only bailout of homeowners that I know he's advocated is allowing bankruptcy judges to change the mortgage terms...but I'm not sure how it's a bailout once you've lost everything already.

Angela,
Would you agree then, that the "bailout" of Bear Stearns is a bad idea?

Obviously McCain doesn't even agree with himself on this issue:

Asked whether the Fed went too far in helping Bear Stearns, McCain said: “It’s a close call, but I don’t think so.” He said he doesn’t support federal bailouts unless it has catastrophic effects on the entire financial marketplace and there were indications that a Bear Stearns failure would have rippled across the entire economy.

ChrisWWW beat me to it, but I'd also question why we allow Bear Stearns to be bailed out of it's self-inflicted morass, but homeowners are to be left swinging in the wind.

I've no doubt that there are plenty of people who DO need to learn more responsibility, but so long as the government is going to approach this situation with a view that large banks and investment houses are "too big" to fail, but the average homeowner needs to take it on the chin, I'm going to side with Obama.

This view sums up how I view his proposals.

I think there is a slight misperception about Bear Stearns. It wasn't exactly a bailout, and indeed even JP Morgan is taking a huge risk in taking on their liabilities (well JPM is probably screwed anyway) but the real point is that it was necessary to prevent an immediate collapse of the financial system. This goes to the heart of Obama's speech. The major problem is that the current crisis has arisen because regulations were removed that kept things somewhat separated and now things are a gigantic singular beast.

The worst part about the Fed is that it is now taking non-US Treasury bonds as collateral and their loan to JP morgan was non-recourse. So while it isn't a direct bailout per se, it assures that when things go wrong the strength of our central bank will be incredibly weakened.

I think you're probably right about Obama's proposals, mikkel (I'll have to look at it all in more detail when I get a chance) but Angela is still correct about the rhetoric. Obama was correct, I think, that McCain misrepresented him by saying he's all about big government programs, but he repays the favor when he says that McCain (and Bush) are telling everyone that they're "on their own." They're both misrepresenting each other's real positions there, don't you think?

mikkel's right and I think there's another misperception, too. The Federal Reserve is not the Treasury Department. It isn't “the government”. It's an odd public-private hybrid. We don't have a central bank here in the sense that, say, Germany does.

So “we” are not bailing out Bear Sterns (unless you're a banker, of course).

I don't know if he is misrepresenting McCain's proposals because I have read McCain's proposals and they are extremely scattershot and unfocused. All that is clearly evident is he wants to change tax rules, but as many people have pointed out (e.g. here and here (don't even get me started on how ridiculous it is to suggest that a major driver of the problem is the tax rules surrounding moving assets between tiers, although I don't have an opinion on whether it is a minor problem or not)) his solutions don't make sense.

McCain is going completely on rhetoric and his plans aren't even internally consistent. He is by far the weakest on the economy, although Hillary is more wrong than him so perhaps his weakness is actually a strength compared to him.

Still, I am extremely worried, and have said as much about other things as well, that although Obama's actual thoughts and proposals are extremely moderate and I think prudent, his rhetoric is sometimes far removed from them. I am concerned about misplaced expectations and views of what he actually wants and that there may be buyer's remorse that hurts him greatly regardless of the efficacy of his ideas.

Not only does Obama speak like he actually understands economic policy, he uses his speech to actually try and educate others. Very presidential and once again he leaves McCain in the dust, stammering on about "trickle down" policies and deregulation that has slowly destroyed the US financial stability.

"He is by far the weakest on the economy, although Hillary is more wrong than him so perhaps his weakness is actually a strength compared to her."

Oops.

Dave I do have a slight disagreement about whether or not "we" do bailouts.

Even if the Fed merely sterilizes, if there is too much liquidity and too little productive stuff to put that liquidity, it'll go into inflation, which is a huge invisible tax that completely messes up all our projections. (This was the problem recently, although I don't think it's one now.)

Once the Fed starts monetizing (which technically they haven't done, but effectively they have if they get stuck with that bad collateral) then the inflation will get really bad really quickly. Although the Fed is technically deflating the monetary base right now, they are setting themselves up to be potentially hamstrung and need to start expanding the monetary base by a ton down the road. If this occurs it would be disastrous and a very real "tax" on us all.

We do not do bailouts of these people who speculated and lost. Evidence shows that most people bought way more house then they could afford with the hopes and dreams that the housing would continue to soar. It didnt. They gambled and lost.

The waaayyyy farther left then his mainstream counterparts is showing here. Bad times? Heres a government handout.

Yes, I agree that is a mistake too.

Incidentally, I think this article very succinctly illustrates the challenges we are going to face over the next 4-8 years and how much the standard framework of views is going to be quickly meaningless.

Maybe someone smarter than I can explain the use of the term "bailout". As my limited brain understood it, it is presently a collateralized loan without recourse.

At this juncture of everyone talking, has there been any default to point to?

McCain’s method may be more painful for all of us, and it may even be unfair to some people, but it is a better way to get most people more responsible for themselves.

No, it isn't. No one in this country is "responsible for themselves" outside of the larger context of the economic system they live under, and the health of that system at any given time. Most people make decisions based on the circumstances, information, and options that are available to them at the time, or that appear to be available to them. Responsibility for making "good" choices and consequences for not making "good" choices are not assigned or shared equally in this country. I would stake my entire book collection (because it's the only thing I have a lot of) that the vast majority of Americans who are suffering because of the mortgage crisis and because of the rotten economy in general are not "irresponsible" and did not set out to make "irresponsible" decisions.

Allowing people to suffer extreme economic hardship and dislocation -- whether it be homeowners facing foreclosure or people who are facing eviction or who don't have health insurance, or any one of a number of similar scenarios -- on the theory that suffering and hardship and terrible distress "gets people more responsible for themselves" -- is not just callous, but also profoundly misinformed. In a democracy, the common good and the general welfare are just as important as personal responsibility -- maybe more. Ignoring that means evading our collective responsibility as citizens of a democracy to each other. And you don't teach responsibility by modeling irresponsibility.

"Evidence shows that most people bought way more house then they could afford with the hopes and dreams that the housing would continue to soar. It didnt. They gambled and lost."

We are not just talking about homeowners Who, there were a few things that the banks did with all that paper they were holding after they made those loans. Please read the following link for the shortest, most accurate account of what went on.


http://docs.google.com/TeamPresent?docid=ddp4zq...

Sorry, but McCain's stand certainly does seem to be one of everyone being on their own. I was listening to coverage on NPR of the contrasting stands and they played segments of speeches each of them gave recently. McCain's stance certainly was one of let the markets rule and devil take the hindmost. Condemnation of regulations and the whole "Free markets rule." mantra was what he was talking up.

I don't know if I agree with 100% of this, and I do think he needs to go a bit further and develop his plans more, but I think it's important to at least direct people to McCain's actual words instead of other people paraphrasing him or continually regurgitating his admission in a moment of candor (I thought we liked that in politicians, to admit that they aren't perfect?) that he needed further education about economics.
http://www.realclearpolitics.com/articles/2008/...

Sorry about the snark about McCain admitting he needed to learn more about economics- I didn't actually mean to direct that at anyone here, I'm just sick of hearing Obama and Hillary use that quote to attack McCain over and over again.

Yes what happened is that greedy banks lent money to people that could not pay back their loans. That is the American way. But what Barak Obama is responding to is our basic sense of decency.

If you lose your home then you poison the neighbors home values. Yeah. People have been losing their homes when the economy was roaring and everything was fine.

Now Barak Obama is lieing out his arse to score political points. The deregulation that created the problems we are seeing occured under both Clinton and Bush. Yet its the course GWB laid out for us that single handedly has ruined this country. He took us to war with 80 percent of the nation patting him on the back and saying get er dun.

Lets be honest as a country. We are all to blame. Why do we continue to blame someone else when we screw up and dont pay our bills? When we misunderstand the fine print and get screwed its someone elses fault. The war was everyones fault. The economy is everyones fault.

I am so sick and tired of blame this, blame that. Blame everyone but us. Democrats, republicans, independents. Citizens all come together and decide what they want. In the last several years they all decided they wanted a million dollar house on a 200,000 dollar budget.

Banks in their greed said.....alllrighhhtttyyy then.........We love money.

Who doesnt.

CS I hadn't read that particular speech and it sounds like McCain actually has a beginning grasp of what's going on, although he (and so far the other contenders) haven't actually addressed that this is a solvency crisis instead of a credit crisis. I.e. It's not that people are just scared like McCain seems to suggest, but that the debt in this country is way too big to fully support what we've been doing (per my previous link).

I'd also like to say that what kathyedits describes is called an information cascade. Economists have been confused how bubbles form in the first place since rational models cannot predict them, but those models have been relying on false assumptions -- assumptions that are really killing as right now. There was a recent model that focused more on behavioral economics and tested a case were each individual had a 60% chance of being right. While the disconnected model said that each individual would have a 40% chance of being wrong, the connected model showed that once the individuals start basing their decision in part on what the others were doing, suddenly there was a 60% chance of being wrong. And that's being completely rational, sans emotion.

So I guess my point is that millions of people actually did act "rationally." I'm not saying that they should be absolved because the key to breaking an information cascade is to encourage counter-thought and if there was no punishment (indeed, there would be a punishment against the prudent) then it would encourage worse bubbles in the future. I'm just saying that it's not necessarily because people are reckless, it is that the system itself can become reckless and their behavior was rational.

I love comment chains like this where people are so clearly better informed than me. It shows I am in a place I can learn something.

As for mikkel's comments on economic modeling, do any of these take into account the nature of authority? It's been known for decades that people will do things they consider immoral or even irrational if the right authority figure tells them to do so. The classic case in intro to psych was the experiment in the 50s (I believe) where participants were told by a person in a white coat to give electric shocks to people in another room and many of the participants kept on giving those (fake) shocks even when they heard the other person screaming.

The point is that many of these decisions to take unwise mortgages were made in part because people trusted that the financial authorities who told them they were a safe investment. They just trusted the authority of those voices. Both people who are very conservative and very risk-tolerant investors base most of their decisions on trust. The conservative investor who does consistent asset allocation, balances bonds and mutual funds, doesn't risk the equity in their primary residence, etc., usually makes all those decisions, not because they have carefully studied the topics, but because they trust the people who say this is the safe way to invest, just as the people who put no money down in ARMs based their decision on trusting someone.

I don't know. I think most people know that a real estate agent's job is to buy and sell things, not act as financial counselors. As such, they take the advice into account but know not to stop there. But when the salesmanship invades financial counselors, brokers, and such, a lot of the guards come down. There's going to always be a substantial number of people who do what they are told because they trust this advice, not because they are gamblers. It seems that regulation or market pressures to keep the divisions between counseling and selling as strong as possible are truly necessary to limit these sorts of occurrences in the future.

It might be worth noting that trusting authority is absolutely necessary to function in the world. I believe what I believe about the speed of light, the existence of Mozambique, that Senator Clinton made such and such a speech, and that my roof won't fall on my head tonight because the appropriate authorities have told me so, not because I have any direct experience with these facts. By giving up these parts of life to the "right" people, it frees me up to be an authority on my own little corner of the world.

mikkel: I'm not nearly as knowledgeable about economics as you seem to be, but my take on McCain's speech was similar to yours.

One other point that isn't being discussed, and I think because it's like a third rail issue, is the part played by racial quotas in the subprime mortgage problem. Seems to me that this was terribly mishandled; if the goal was to regulate against racial discrimination in the mortgage market, it should have been handled in a different manner, not quotas- because if a lender is forced to make up for a shortfall of qualified black borrowers, then the lender is going to create a mortgage product that will mitigate the higher risks and find ways to package it so it seems attractive to the unqualified borrowers, even though that's a real detriment to the borrower who is naive to the process and doesn't understand that he's getting in over his head. Just seems like a real case of good intentions creating a bad scenario.

CS I'm not aware of the quotas you mention. The only quotas I've heard about are ones where over decades minorities were restricted in the help they got from the government housing programs in order to make things more "fair" and some people say that indirectly led to some of the systemic poverty today.

I know that Bush had a huge push to give minority home ownership but I thought it was more about incentives rather than quotas. I do agree that the premise that a lot of poor people are poor because they didn't own a home was a large factor in the genesis of the bubble. Instead of addressing the underlying reasons of poverty and encouraging people to build up enough wealth to save, the credit terms were just extended to everyone.

pacatrue: Yeah that is definitely a factor. But I think conforming to society as a whole is a large factor as well. There was so much pressure to get a house "because prices never fall" (not true) or into stocks because they are the best investment (only true over extremely long time frames, as their gains are made in only a few periods), etc. When you are watching everyone get "rich" around you then it's hard to resist. That's why the philosophy amongst savvy investors is that once people start talking about investments at parties as polite conversation, get out!

I think the major problem you point to is that the authorities currently in "charge" are wrong or self interested. It's not necessarily that they are taking advantage of people consciously either. I've looked at a lot of the supposed analysis that leads to the mainstream advice giving and it is severely flawed. The amount of selective filtering that most people do (for instance, a lot of "historical" analysis starts in the mid-70s or early 80s because that's when the most data appeared) is obscene.

Hmm, the quota thing is something I've heard occasional comments on, but now you've got me wondering whether or not it's accurate. Possible that I either misunderstood something or accepted something at face value that isn't true-so I'll have to track back to see if I can find where I picked this up and then look into it further.

I'd also like to say that what kathyedits describes is called an information cascade.

Wow. I didn't know there was a name for it. I feel so validated! :-)