Thursday, November 20, 2008
CRASH TALK
Progress Report - Part of conservatives' efforts to curb any talk of rescuing car makers has involved placing blame for the crisis on labor unions. Sen. Jim DeMint (R-SC) claimed that "some auto manufacturers are struggling because of a bad business structure with high unionized labor costs," while Sen. Jon Kyl (R-AZ) said on Sunday that the auto industry has "been sick" for years because of a "bad business model" with "contracts negotiated with the United Auto Workers that impose huge costs." But unions have repeatedly made concessions to auto executives over recent years. Bad executive leadership is more likely the catalyst for the Big Three's woes. GM Vice Chairman Bob Lutz has dismissed global warming as "a total crock of shit." Such sentiments from Detroit's leadership has contributed to the Big Three basing their business model on a future of cheap oil while fighting fuel efficiency standards despite repeated warnings against pursuing such a strategy.
Many rescue measure critics also argue that the Big Three should instead file for Chapter 11 bankruptcy protection. But because the auto industry depends heavily on credit -- and the credit markets are frozen -- the Big Three would likely soon be forced to file Chapter 7 bankruptcy, "which would entail total liquidation." As Princeton economist and New York Times columnist Paul Krugman noted, "If the economy as a whole were in reasonably good shape and the credit markets were functioning, Chapter 11 would be the way to go." But because of the current economic crisis, a wide ranging default in Detroit "would probably mean loss of ability to pay suppliers, which would mean liquidation -- and that, in turn, would mean wiping out probably well over a million jobs at the worst possible moment." Indeed, the Center for Automotive Research predicts that "the impact on the U.S. economy would be substantial were all -- or even half -- of the three Detroit-based automotive manufacturers' U.S. facilities to cease operations. . . Nearly 3 million jobs would be lost in the first year if there is a 100 percent reduction in Detroit Three U.S. operations."
"Every auto plant job generates another five jobs among suppliers and the surrounding community," writes auto industry representative Dave McCurdy. "By comparison, a Wall Street job generates two additional jobs." Moreover, one in 10 American jobs is related to auto manufacturing.
In a letter urging Treasury Secretary Henry Paulson to give assistance to America's auto industry, Senate Majority Leader Harry Reid (D-NV) and House Speaker Nancy Pelosi (D-CA) argued that any federal aid should come with "strong conditions" such as requirements that automakers manufacture more fuel efficient vehicles. Oversight of the bailout must also be stronger than the bank bailout, as "reports continue to circulate about the banks potentially hoarding portions of the $250 billion Treasury has offered to invest in exchange for senior preferred stock, or using the money for purposes other than lending."
Dean Baker, Truth Out - The number of foreclosure filings (there are typically two or more filing for every actual foreclosure) is now approaching 300,000 per month.
For those not offended by simplicity, there is an easy solution. Congress can temporarily modify the rules on foreclosure to give families facing foreclosure the right to rent their homes at the market rate for a substantial period of time. Rep. Raul Grijalva proposed such a change in the Saving Family Homes Act, which would allow homeowners the option to remain as renters for up to 20 years following a foreclosure.
This bill would immediately give families security in their home, so that if they like the home, the neighborhood, the school for their kids, they would have the option to stay in the house for a substantial period of time. This also has the great benefit for the neighborhood that homes will remain occupied.
Perhaps more importantly, this change in foreclosure rules will give banks a real incentive to negotiate conditions under which homeowners can stay in their homes as owners. Banks do not want to become landlords. The bank will own the house after a foreclosure, but a house with a renter is worth much less to them than a house over which it has complete control.
Progressive Review - It's interesting that the drop in the NASDAQ index in the closing year of both the Bush and the Clinton administration was in the 45-50% range. One difference is that the Clinton bust happened faster - beginning in March 2000 - while the Bush collapse began a year ago October. The other difference is that, thanks to a friendly press, Clinton was the only president to ever preside over such a collapse and not get blamed for it.
NY Times - While few Americans are sheltered from the jolt of the recent economic crisis, the nation's newest veterans, particularly the wounded, are being hit especially hard. The triple-whammy of injury, unemployment and waiting for disability claims to be processed has forced many veterans into foreclosure, or sent them teetering on its edge, according to veterans' organizations.
The problem is hard to quantify because there are no foreclosure statistics singling out veterans and service members. . . "The demand curve has gone almost straight up this year," said Bill Nelson, executive director for USA Cares, a nonprofit group that provides financial help to members of the military and to veterans. Housing. . .
Congress has recently taken small steps to help, banning lenders from foreclosing on military personnel for nine months after their return from overseas, up from three months, and ensuring that interest rates on their loans remain stable for a year. Another relief bill to prevent certain injured veterans from losing their homes while they wait for their disability money was signed into law in October. The protection is good for one year. . .
But the short-term measures do little to address the underlying economic difficulties that new veterans face, beginning with the job hunt. Veterans, particularly those in their 20s, have faced higher unemployment rates in recent years than those who never served in the military, though the gap has shrunk as the economy has worsened. (Veterans traditionally have lower unemployment rates than non-veterans.)
Tara Siegel Bernard and Jenny Anderson, Washington Post - The deep troubles of the U.S. economy are pushing a growing number of already struggling Americans into bankruptcy, often with far more debt than those who filed in previous downturns.Plummeting home values, dwindling incomes and the near disappearance of credit have proved a potent . . . The number of personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years, said Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company. Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult - and often twice as expensive - to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day last month, up nearly 34 percent from October 2007.
Nicholas von Hoffman, The Nation With his latest policy switch to buying stock in banks and other companies, Henry Paulson has more zigs and zags to his credit than a fox trying to escape a pack of hounds. . . Sums of incalculable size are being spent or pledged by Paulson and his playmate, Ben Bernanke, chairman of the Federal Reserve Board, and nobody outside their organizations, or maybe inside them either, knows who got what, how much they got, and under what conditions they got it. In the past couple of months Bernanke has loaned out $2 trillion to unnamed companies under eleven different programs and all but three of them were slapped together in the past fifteen months of financial crisis.
To repeat, we do not know who got this money or what collateral was put up in return for the loans or what conditions were attached to them.
The sums involved are almost three times as large as Paulson's $700 billion muddled bailout efforts that Congress voted for last month. Bernanke does have the legal authority to pass out these trillions without Congressional authorization and without explanation, but secrecy breeds suspicion and loss of confidence.
James McCusker, Everett Herald, WA - [Lawrence Christiano and Patrick Kehoe's] working paper, No. 666 (a matter of sequence, not symbolism) was published by the Research Department of the Minneapolis Federal Reserve Bank last month, and is entitled, "Myths about the Financial Crisis of 2008." According to the abstract they "show that four widely held beliefs about the financial crisis of 2008 are false."
One of the alleged myths they examine is that "Banks play a large role in channeling funds from savers to borrowers." This one is particularly interesting, and not just because, as taxpayers, we are now part owners of the biggest banks in the country -- and some smaller ones, too.
The idea that banks take the money we have on deposit and lend it out to other people is fundamental to our idea, our model, of what a bank is all about. It is the same model that George Bailey (James Stewart) explained to his panicked depositors in "It's A Wonderful Life." More importantly, it is the model upon which our fractional reserve system, the Federal Reserve, and the idea of monetary policy is built. If it turns out to be more myth than model, we have a problem. . .
One policy implication of their conclusion is clear. If banks aren't all that necessary as intermediaries between lenders and borrowers, we shouldn't waste time and money rescuing them. Although they didn't put it this way, it would boil down to something like this: "The banks seasoned their own soup. Let them drink it." . . .
Bank lending, though, is still very important to the smaller businesses in our economy that, in many respects, make the big businesses possible. A healthy banking system that provides direct lending to businesses is still crucial to our economy.
How important is banking to monetary policy, though? In examining bank lending and the other "myths" of the financial crisis, researchers have put the spotlight on the changes that have transformed the banking industry and raised questions about how effective monetary policy can be.
Banks, especially big ones, have become players more than lenders -- a structural change that goes far to explain their new relationship with risk. In the face of this, it is hard to believe that the Federal Reserve's actions on short-term interest rates would have the same effect as those taken, say, in 1966 or 1987.
Dean Baker, Prospect It would be reasonable for USA Today to remind readers that the forecasters whose views it presents in the article, "Economic forecasters' survey says recession to last 14 months," all somehow managed to overlook the massive housing bubble. They were therefore caught by surprise when it collapsed, pushing the economy into the most severe downturn since World War II. Readers may have found this background helpful in assessing the predictions from this group of economists.
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