Making sense of bailouts

Posted at 8:50 AM on November 25, 2008 by Bob Collins (9 Comments)
Filed under: Economy

Nobody likes to admit he's the stupidest guy in the class, so I'll go first.

The economy is tanking. We all get that now because we can understand things like a talk with the boss who says "I'm letting you go." But how did this happen? Why didn't the media tell us the financial system was failing us? Where were the regulators?

I submit, based on my view from the back of the classroom, that we were told, we just didn't understand what they were talking about and we didn't want to admit we didn't understand what they were talking about.

Case in point: This morning CNBC ran a segment that the prime -- as opposed to the "subprime" market, which I still don't understand -- may be the next big problem in the United States. And to prove it, they put up this graphic:

Yes, that's certainly something to make us all sit up and take notice because -- as everyone knows -- when prime jumbo securitizations have only 3% subordination to Aaaa tranche, well, do I really have to point out the obvious?

But even if business journalists were required to speak English to us -- or we were all required to get a business degree -- it doesn't make common sense.

Case in point: An Associated Press story today says, "Government plans new program to aid credit issuers." Treasury Secretary Henry Paulson apparently intends to give a slice of the $700 bailout to the companies that jam your mailbox with credit card offers.

Interesting timing because last night I came home to this:

They're getting better at this. Now they make these mailings look like your bill, so you have to open it. And, sure enough, there were checks inside:

Now, let's say I wanted to write a check for $100. It will cost me a minimum $10 fee and an interest rate of 28.99%. Last month, I paid off a credit card bill in full and this month I got a bill for another $2.18 finance charge on my zero balance. Keep in mind, too, the credit card companies get a piece of the action from the merchant when a sale is made. If you're a credit card company, how do you not make money with these things? Moreover, how do you tell an autoworker, his industry is too messed up to get help and tell the credit card company theirs isn't?

Here's a way to help the American consumer. Buy each household one of these:

And make us pay cash.

Update 9:12 a.m. Secretary Paulson is having a news conference at this hour and says the government is stepping in to help credit card companies -- a $200 billion bailout -- because consumers are having a difficult time getting credit.

The central bank also launched a $200 billion facility to back consumer loans, including student, auto, and credit card loans and loans backed by the federal Small Business Administration.

Have you had difficulty getting credit or purchasing anything on credit? Or is you reason for not buying that you didn't want to take on any debt right now? Tell me more. This might be one of those times when "helping" the economy and "helping" the consumer are not the same thing.

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Comments (9)

Exactly right. I have plenty of credit, but don't want more debt. I will spend less so that I can pay down those balances as quickly as possible. My family will all accuse me of being a Scrooge, but I think it's the right thing to do.

Does deficit spending at any level ever really make things better in the long run?

Posted by MJA | November 25, 2008 9:46 AM

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The problem isn't lack of consumer debt, its lack of consumer income. We need some wage inflation, not loose credit markets.

Posted by bsimon | November 25, 2008 10:15 AM

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Yes, Americans have been slow to understand the current crisis and it's origins, but not because the explanations are too complex, they simply haven't been offered in the consensus media.

There are two main reasons that Americans have been ill informed regarding the state of the economy. First, We have a predominately consensus media, That's the reason that clear and accurate reporting about the economy was not forthcoming.

The consensus was pro market, and Wall Street centered. This meant that the range of "experts" and commentators was limited to those who promoted the deregulated, finance oriented, free market ideology. Essentially it was faith based economics, ideology passing itself off as economic analysis. The Ideology simply didn't consider the possibility that free markets could produce bad results. This was taken to the extreme a few years ago when some even attempted to characterize economic bubbles as good outcomes. In other words, even bad results are actually good result in a market economy. The belief that markets are self correcting eliminated the need for any real critical examination of underlying economy. Even now you still here this self correcting myth express itself. Yesterday on MPR they talked to a university endowment finance guy who stated the markets were going to correct themselves.

The markets are not correcting themselves, massive government intervention is being deployed to correct the markets. No real critical economic examination was possible under these circumstances. There were a number of respected and well qualified economists who predicted and attempted to describe what was and is happening, but they got nowhere near any consensus newspapers, network cameras, or microphones. The instinctive reaction by almost every consensus media outlet and reporter was to minimize this crises, it was denial and ignorance posing as optimism, posing as analysis.

The second reason for American economic ignorance is conflict of interest amongst those who are supposed to explain these things. Over the last 40 years or so news reporting has largely shifted into a stenography mode. Driven by the notion of "objective" reporting, news agencies have largely abandoned the practice of having reporters research stories and present findings. Instead, they find people who talk about the story and record what they say for reprint or re-broadcast. The idea is that you are being objective if you stay out of the story. The problem with this approach is that while the media relied more and more on people who talked about the news, they never really developed a rational system for vetting the talkers. By default, authority figures who are invested in the status quo ended up being the primary source of quotes and interviews.

In the current crises, this bias expressed itself in the form of market analysts and financial advisors. Consider the fact that the vast majority of American workers are labor. We get the vast majority of our income in the form of wages paid by employers. Yet, there is not a single news program devoted to the labor economy on NPR or public television. Every single day on the evening news, we find out what happened on the stock markets, even if nothing at all happened. Every half hour starting at 8:00am we get stock market updates even if absolutely nothing at all is happening in the stock market. The NPR economic corespondents are market guys, they look at everything from the Wall Street perspective. Even unemployment is filtered through this market prism, the question is always: "how will this affect the markets?", not who's getting laid off and how is it affecting them.

For months now NPR has had a parade of so-called advisors on who have given the same advice over and over again: take the long view, don't panic, stick to your strategy. Ever wonder why these people never bother to ask what your strategy is before they tell you not to change it? Maybe your strategy sucks and you should change, yet they tell you not to. The conflict of interest that develops is that this Wall Street centered coverage is about getting as many people as possible to put as much of their money as possible into the stock market, and keep there. Millions of Americans could have saved billions, maybe even trillions of dollars if they'd been told that they could move money into less volatile funds. Instead of telling people how to find relatively safe havens for their investments and how to move money into them, we were told over and over again NOT to move money. Basically, the problem is that the people who were supposed to be explaining the economy were working for Wall Street. The information they dispensed was skewed towards promoting the interests of the financial markets and therefore unreliable.

Now let me clear; I'm not accusing NPR reporters of misrepresenting themselves, or of deliberately misinforming listeners (although I do think that some of the guests have done). I'm describing a status quo with a certain bias that leads to a certain type of emphasis regarding information. As far as I know most journalists are honorable people doing their best to report the news. The problem is that to the extent they function within the status quo, they tend to emphasize certain perspectives. Those who could have and would have predicted and explained the current economic crises never got on the air, not because of conspiracy, but because they were outside the box of consensus.

Combine these factors with the fact that Americans in general are woefully ignorant about even basic economic principles and you have a perfect storm. The only economic principle most Americans can describe is something about supply and demand, and even that is so overly simplified that it has become a matter of faith rather than an actual economic principle. When Americans don't know what else to say, they spout off about supply and demand.

As far as MPR is concerned, I think it would be really nice if they would look beyond consensus. Why not interview Paul Craig Roberts instead of Thom Friedman? Why not talk to Howard Zinn instead of Henry Kissinger? When Amy Goodman comes to town why not sit down with her for a half hour?

Posted by Paul | November 25, 2008 11:06 AM

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Paul. So what does "prime jumbo securitizations have only 3% subordination to Aaaa tranche,: mean?

Posted by Bob Collins | November 25, 2008 11:57 AM

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"So what does "prime jumbo securitizations have only 3% subordination to Aaaa tranche,: mean?"

It means that when jumbo mortgages are bundled together & split, only 3% of the 'split' are rated as top quality bonds.

When a bunch of mortgages are bundled into bonds, the 'old' way was to rate the whole package's creditworthyness - Aaaa or Caa3, whatever. The 'new' way is to split the package into 'tranches' which break up the package into pieces based on the likelihood each piece will be repaid. Some percentage is very likely to be repaid, and thusly is rated low-risk Aaaa. In this case, that amounts to 3%. So they're saying that of a certain large set of jumbo mortgages (over what, $600K or so?), only 3% of all the debt is rated as highly likely to be repaid.

Posted by bsimon | November 25, 2008 12:24 PM

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Thanks Bsimon,

I was just going to say it means the risk is shifted from the few to the "many" without the many knowing it. But your explanation works to.

Posted by Paul | November 25, 2008 12:57 PM

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Many years ago I worked with a man who was probably in his mid-50's and had been transferred from a remote town in New Foundland to San Francisco. When he bought a new car, he paid cash. We fellow coworkers sort of shook our heads and giggled about how sweet and naive he was. He should have been doing financial advising.

Posted by momkat | November 25, 2008 2:20 PM

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I am anticipating the outrage that the public will express when they figure out that the trillions of dollars in bailouts have been consumed to cover the financial sector's Credit Default Swaps, rather than fixing the economy.

A Credit Default Swap (CDS) is essentially insurance that you take out on an investment should it lose value. Problem is, you don't need to actually OWN the asset to take out the insurance, so it makes it more like a wager than insurance. Oh, and the CDS market is (by law) unregulated and without oversight, so you can issue a CDS without having any assets to back it up. This is where the bailout money is going - to cover the financial sector's bad bets!

Posted by BJ Bonin | November 25, 2008 7:05 PM

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So who does Charlie Rose have sitting at his table tonight? The CEO of Citi Bank. And so it goes.

Posted by Paul | November 25, 2008 10:49 PM

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