How to Spend Part II of the TARP
We will be hearing from the new administration numerous plans as to how to spend the $350 billion TARP in the coming days. I have been reading about the various proposals, and thinking about each one. All are problematic in terms of fixing the financial sector, and restoring credit.
The only thing I have been able to imagine that resolves the problem is temporary nationalization, wiping out the banks debts and starting over. Call it a financial mulligan. But as George Soros pointed out yesterday, nationalization remains politically and even culturally unpalatable. Which is a polite way to say our leaders lack the cojones to perform this needed task. Eventually, when it will be much more dire, they may not have a choice. By then, the costs will escalate dramatically.
Barring any plan for nationalization, we will be deciding between a bad bank, an insurance wrap plan, and other ineffectual attempts to prop up insolvent institutions run by the people who made them that way. Same corporate culture, same risk management, same misaligned financial incentives.
Is there any reason to expect a different outcome when the same players, with the same coach calling the same plays, take the field?
I have a different idea for $350 billion TARP II.
The key problems as I see them is we have a vastly undercapitalized financial sector, a contracting economy that is getting worse, a spent-out consumer, lack of credit generally — and more defaults and foreclosures on homes and credit in the future.
My plan is very simple: Take 175 million taxpaying households — the bottom 80% or so of all taxpayers. They each get a Debt Reduction check for $2,000 each from Uncle Sam. The twist is it can only be used to pay a pre-existing debt (February 1, 2009 or older) — Mortgages, auto lease/loans, student loans, and revolving credit (MC, V, AMEX) or any retail credit card (Sears, Macys, etc.). The check must be used within 90 days — or its forfeited.
What will this accomplish? Consider the following:
• These monies will find their way to Banks and finance companies; its not quite recapitalization, but it gets cash to banks in a productive way;
• Banks experience a (temporary) decrease in delinquencies and defaults;
• Households will reduce their indebtedness by a significant amount; The typical family has $8,000 in credit card and other revolving credit debt;
• The consumer will have the ability to spend a little more freely, due to their increased credit position. We do not want them to go on another credit fueled consumption binge, but spend some money now that they are less over extended;
• The taxpayer actually benefits from the use of his own taxpayer dollars — a welcome change.
• It does not reward the misfeasance of the financial sector;
The logistics of this are daunting. Ensuring that only pre-existing debts are paid won’t be easy — perhaps enforcement can be accomplished by requiring all taxpayers to demonstrate on their personal income tax form that the money was used to pay off debt (fail to show that and get tagged for $2000).
Its not that this is such a brilliant idea; to be blunt, its not. Its just that all the other TARP concepts are so terrible — expensive, wasteful, inequitable, filled with moral hazard, and as we have seen, utterly ineffectual.
>
Previously:
Why Not Nationalization? (February 4th, 2009)
http://www.ritholtz.com/blog/2009/02/why-not-nationalization/
Nationalize Now (January 26th, 2009)
http://www.ritholtz.com/blog/2009/01/nationalize-now/
The Moral Hazard of the “Bad Bank” (January 29th, 2009)
http://www.ritholtz.com/blog/2009/01/who-is-the-treasury-secretarys-boss/
February 5th, 2009 at 7:21 am
Sounds reasonable to me.
Therefore, it will never be done.
February 5th, 2009 at 7:32 am
The use of the word “spend” in the headline is interesting in that it comes close to accurately reflecting how the TARP is being used. It’s not an “investment” nor a “loan”. TARP money will never be returned to the taxpayer, nor will it (or can it) be applied to solving the clusterfuck these entities have created. In addition, as we must borrow any money we use for this purpose – knowing that we will not pay it back to those from whom we’ve borrowed it – the TARP is fraudulent from it’s conception.
Continuing criminal enterprise.
February 5th, 2009 at 7:36 am
Barry, Barry, Barry….you old Pollyanna you….
Maybe you could call Paul Volcker who we know was taken on board the O administration to help lead us through this crisis, as he had done once before….er, wait…
http://www.bloomberg.com/apps/news?pid=20601103&sid=aaLzJZKNcc6Y&refer=us
Volcker Chafes at Obama Panel Delay, Strains With Summers Rise
Perhaps these guys, who may not even be smart enough to pay taxes properly, don’t want any help. When you are king of the universe…help may not be appreciated…
I think we all knew Tall Paul would be wasted…and I suspect input through the recession/depression is really not wanted…
~~~
BR: Chris mentioned that this morning.
February 5th, 2009 at 7:39 am
“… our leaders like the cojones to perform this needed task.” A small edit, but I think you mean lack rather than like.
On your plan, what about those of us who’ve paid all of our debts??? Do I get a check for, say $3,000? I’d take a free flat panel TV and a subsidized trip overseas courtesy of Uncle Sam.
February 5th, 2009 at 7:43 am
By the way, a few months ago ITulip.com speculated every American adult would get a $2k debit card within a year and a stipulation so much must be spent every month or it would disappear automatically.
February 5th, 2009 at 7:43 am
I am like Chief, no debt and proud of it. What’s in it for me?
February 5th, 2009 at 7:55 am
Got that one figured out doug and Chief. If you have no debt, you have to put the money in a savings account with a financial institution and leave it for at least a year. Both credit paydown or infusion of deposits, they both work to help the banks.
February 5th, 2009 at 8:02 am
Whatever Uncle Stupid does, it will be the wrong thing. Money will go where it will do the least amount of good, although it will look absolutely necessary that it went there. I suspect there are still too many trickle down idiots running things. By giving the most cash to the people who need it least, somehow this will make everyone better off, according to them.
Re your idea: nice try but would you send enforcement agents to throw an offender in jail because they bought groceries and day care? You take that job, I don’t want it. “Book ‘em Danno, Illegal Purchase Of Macaroni, aka Fraud Against Uncle Stupid”
Hint: if cash goes to the bottom in a trickle up scheme, I believe that people at the top will work hard to attract some of that bottom money. It really doesn’t matter what it is spent on. If it goes top down, uninspired and relatively useless executives will do nothing productive with it except try to figure out ways to personally benefit from a windfall from Uncle Stupid.
February 5th, 2009 at 8:03 am
It would be administered like the annual charity selection forms some businesses use.
Each taxpayer gets a form from Treasury with a place to provide institution name, account #, etc. They would also have a secure on-line site, as well.
Disbursements are paid directly from Treasury to the institutions in the name of the taxpayer.
February 5th, 2009 at 8:14 am
Or you could offer $20,000 to 17.5 million homeowners to purchase, refinance and pay down debt or work out of foreclosure.
February 5th, 2009 at 8:15 am
Transor Z,
You nailed it. All major financial institutions can accept electronic payments. Having the Treasury issue the check directly to the financial instituion would make it work. At least on the credit card side, I could see some add’l benefits for borrowers; there are many programs for principal, interest, and fee forgiveness out there right now. In actuality, I bet Americans in very bad shape would be able to get at least 2,500 to 3,000 in credit debt taken care of with a 2,000 check from Uncle Sam.
February 5th, 2009 at 8:19 am
Another ’screw the savers’ plan. They all are, in the end… aren’t they?
February 5th, 2009 at 8:20 am
Here’s an idea.
People are afraid to borrow becuae of uncertainty about the future. Banks are afraid to lend because people might be reluctant tp pay them back if they lose their jobs.
In reality, few people will have financial problems although 1) the press will make it look like everyone is ready to die, 2) default rates will certainly be higher than normal for a while.
Thus, Uncle Stupid should use the cash as a form of credit default insurance. The 350 billion could cover 3.5 trillion or so of lending (and purchasing) , assuming a 10% default rate. Lenders could even pay a token amount for insurance, potentially making it a profit maker if defaults are low. This would provide a lot of gas to the economy.
February 5th, 2009 at 8:27 am
Typical liberal idea, steal from Peter to pay Paul. Soon those top 20% who are about to get the bill for all this nonsense will join Jim Rogers in Asia, and the country will be stuck with a country of people who can barely wipe their behind much less support themselves.
~~~
BR: Interesting, um “analysis.”
How do you describe the money spent of the 1st half of the Tarp? $350 billion dollars (borrowed from Peter to pay who?), plus the $254 billion to Citi and the $185 billion to AIG and the $100 billion plus to BofA ?
If your contribution to the discussion is empty political rhetoric and name calling, you won’t be welcome here much longer.
February 5th, 2009 at 8:27 am
The “what’s in it for me” statements above reflect the reality of the situation more than any other comments.
In a global system, if you tweak just one ‘nerve’, the entire sytem is effected. In this case a gift to one taxpayer, short changes another. This is no different than having a different tax bracket for each level of income. Why should a 70,000 earner pay a few per cent more than a 40,000 earner? The ‘justice’ of
systems designed by humans is never equal.
The problem lies in the original design of an intentionally faulty system and the ‘change orders’ along the way that created the bubble. In this case, frenetic, gluttonous gamblers on Wall Street and to them from the entire mortgage chain, from raw land ‘packagers’ to finished units, were permitted, encouraged, motivated, by outsized bonuses to take the retirement savings of hundreds of millions of people and construct bizarre vehicles that would enrich the creators of these ‘innovative’ credits WITH NO BASIS IN REALITY beyond their wildest dreams.
Every step of the way from the lowly honest or shyster mortgage broker to the company she works for, to the bank mortgage lenders and their upper management to the Wall Street investment bankers, each one got a cut of the money in a ponzi scheme from borrowed money. In a just system, those perpetrators would be held to account to return all the money they were paid or stole.
A system built on a fiction that permits one to essentially take borrowed money to pay a $100,000 bonus to a Wall Street secretary and 400 Billion to her bosses is inherently going to fail, as any ponzi scheme does eventually.
And now the injustice of such a system is going to let those who were fortunate enough to capture trillions of borrowed money, WITHOUT RECOURSE, go free. And if we want to establish some stability the powers that be are going to socialize its cost one way or another. It’s only a matter of whose ox will be gored and you can bet it will be the people’s.
February 5th, 2009 at 8:30 am
Wally, nope. We send the check to the 401K, IRA, or Savings account or your choice where it is locked up for a year.
dead hobo,
Its an interesting idea, but execution would be tough. What and who qualifies for the insurance? All expenditures made today going forward? The losses being sustained by most consumer-based lending would eat that up almost immediately and who and when the money is being spent would be hard to track. If you had “separate” accounts where the default insurance would only be provided than it would be profitable enough to only lend to good borrowers. Personally I would rather have no NCL because of back-stopped credit insurance and lend to the higher end of the FICO range than go too deep into a file right now and worry about default later. Bad balances stick around, good balances pay off. This would mean, many Americans who need the lending would still not get it. Of course to combat that we would have to put a lot of restrictions on who got that money. This would unnecessarily tedious. I think Barry has the right idea on directing payments to debts already incurred. If you then hit the savers with a deposit into a one-year CD or into a 401K I think this could work rather well.
February 5th, 2009 at 8:30 am
Yes well this is all just cribbed from Jon Stewart, isn’t it!? (Check out his interview of Lawrence Lindsay, where Lindsay endorses it – kind of). I’m too lazy to link, sorry.
As for Doug’s concern, what needs to be done involves putting the money in the hands of people where it will do some good, not in the hands of people who happen to be good. This isn’t a morality play. So tough cookie.
That said, the objective evaluation of where it will do the most good constitutes only a small part of the considerations going into shaping a policy. In a democracy, you’ve got to go with (1) the best objective policy that (2) elicits the least outrage in the population. And here Ritholtz’s proposal fails, IMO. The populace seems much more emotionally amenable to bailing out bank shareholders and bondholders – as long as someone insults their representatives like Thain on television – than to bailing out irresponsible consumer debtors. As evidence for this opinion, I present you Doug’s reaction…
I don’t know why the population has this bizarre emotional disposition, but its there. Maybe if we could elect some ‘Representative for irresponsible debtors’, we could then bail them out and have politicians insult him/her on television, and the broader public would get their required moral catharsis.
~~~
BR: Lindsey wants to subsidize mortgages, and encourage more borrow and spending by consumers — something I believe makes no sense.
February 5th, 2009 at 8:33 am
I said
Thus, Uncle Stupid should use the cash as a form of credit default insurance. The 350 billion could cover 3.5 trillion or so of lending (and purchasing) , assuming a 10% default rate.
elaboration:
New credit only, not old loans.
This would amount to the equivalent of reserves being directly added to banks with the stipulation they must be used for credit. Only banks would be bypassed in favor of consumers. Give a bank a dollar and they will probably hide it somewhere. Tell a bank that a riskless profit is available and they will lend. Charge them for the insurance and it might even make a little money.
This also supports my thesis that money alone is not inflationary, credit is. Cash is inert by itself. If it is not used it has no helpful or harmful effect on an economy. The multiplier effect would be the amount directly injected as credit insurance divided by the estimated actual default rate.
Bypass the banks.
February 5th, 2009 at 8:40 am
Not going to matter…unemployment going to get away from us (you realize just four weeks ago the initial claims were in the 400k region), all countries weakening their currencies in unison, and this TARP money is going into the open maw of the early depression..
We are going to have to weather this…Americans did once before…we’ll manage again.
February 5th, 2009 at 8:46 am
@ Ventura2012,
Uh huh. And we got into this mess because the poor outsmarted the rich?
I must say it was amusing watching Sean Hannity, he of the calm, cool, rational thinking, react to the nationalization of the financial system because free markets had run amok. ["Quick, somebody, what on EARTH are my talking points for this debacle!?!]
February 5th, 2009 at 8:58 am
Turns out there are only about 135mm households that file income taxes, of which only 90mm actually have a non-zero tax liability. As the number of tax-paying households become a minority among the voting population, public policy will probably put an even greater burden on taxpayers.
February 5th, 2009 at 8:58 am
@ Chief Tomahawk
When did the US have free markets? Manipulating interest rates to continually inflate assets and then encouraging citizens to not save and buy real estate and stocks is hardly a free market. You liberals crack me up when you blame this on the free markets, shows a true lack of understanding, just as we are seeing from this administration whom you all thought would come in and bring change. The only change was the biggest change in price in the DOW in January in modern history.
February 5th, 2009 at 9:14 am
Are these 2 cases being reopened just shovel ready projects for the police?
ie 1982 Tylenol poisonings in Chicago and the JonBenet Ramsey murder
Last year here in Illinois we had a take down at a gas station of a stolen car that involved a a couple shots fired. It closed down the station all afternoon and brought nearly a couple dozen cars of investigators 100s of miles.
Point of story … do we have an SOP and I wonder where is the threshold .. let these slip into the dark do this and money is no object.
2nd point … repair TBP to avoid all these situations thru psychology and financial system upgrades … imo prevention is cheaper than losses / investigation / processing / incarceration.
To bring this post back to original line of thought … I’ve been hear’g lots of talk – this pork is pork .. more need for job creation spending .. imo all TARP money spent – if spent in Americas borders is a benefit .. also imo all money spent has a percentage of return on investment over the long haul .. focus on the percentages in all tiers off job creation.
February 5th, 2009 at 9:18 am
More details about the TARP 350 billion credit default insurance program.
1) Banks could charge a nominal amount for it, take their cut, and remit the balance of the premium to Uncle Stupid for program administration costs.
2) Consumers are only on the hook for 1/2 of the outstanding balance at any time. The insurance pays for the rest. For example, You buy a car and borrow $15,000. At any given time 1/2 of the outstanding balance is insured. If the car is repossessed for nonpayment, the consumer is only on the hook for 1/2 of the outstanding balance. Sale of the asset will probably cover that amount. Uncle Stupid’s TARP credit default insurance covers the balance for the bank. If the car is sold for more than 1/2 of the outstanding balance, the defaulter gets the excess. Since it is and insurance program, proceeds are tax free to all recipients and premiums are non deductible.
3) Competition for riskless loans should lower the cost of borrowing or Uncle Stupid could stipulate loan terms to prevent gouging.
4) Everybody wins and the cost should end up being far less than 350 billion. GDP should skyrocket. Jobs should return. This plan is just a cornucopia of benefits.
February 5th, 2009 at 9:21 am
YES, to the Jon Stewart plan (quick we need a catchy acronym)!
IF we as a nation are going to borrow (if we can sell that much debt) to cost shift the tab for the banks’ egregious behavior onto our own backs and the backs of our children and grandchildren, we damn well should channel it through the citizens’ balance sheets first, rather than shovel it directly into the banks’ black debt holes.
February 5th, 2009 at 9:33 am
ps – re-reading the specific steps ..
what about all the repayment making the bank & its stock look good for incentive payouts to employees? And some advice to the new future stock holders .. looking to get in on the next big wave
imo “remember this .. we are NOT in an insolvent bank problem .. we are in an insolvent individual problem”
“We have not even begun to discuss living and living within our means .. with that thought of living within ones means trashing the system”
so before submit button – “this is a get for the Financial Capital of the World” imo
February 5th, 2009 at 9:43 am
Under your plan, Barry, we’ll be right back here next year.
You write: “The key problems as I see them is we have a vastly undercapitalized financial sector, a contracting economy that is getting worse, a spent-out consumer, lack of credit generally — and more defaults and foreclosureson homes and credit int he future.”
You’re simply reciting the symptoms of the disease.
The problem isn’t recapitlization of banks of the financial sector, etc., etc. The problem is a global economy fueled by too much debt, and how we proceed now that we are completely saturated in that debt. Paying the debt down with a measley 2k/household only buys us one more Holiday Shopping Season.
We need to stop buying and start selling.
China and Japan (until they get too old) need to stop selling and start buying.
Any plan that focuses on stimulating the alcoholic to just “dry-out” for a year or two without addressing this underlying problem just isn’t credible.
The stimulus plan must address how we are going to eventually get a healthy, functioning economy that isn’t so ridiculously reliant on credit cards or house as ATM.
Maybe your plan will buy us time to sort things out…but it’s an expensive deferral that appears more likely to just dig us deeper in this same hole.
February 5th, 2009 at 9:46 am
I don’t think that your plan works long-term, Barry.
Give everyone $2000.
They all do exactly as you want and pay off debt (or stash it in savings), which helps out the banks as you said.
Everyone feels a little better and spends some more money, building up some debt again.
Then, eventually, the government has to tax each person an additional $2000 plus interest to pay off the gifts.
And eventually all of those people you helped are worse off then they were before.
$2000 stimulus checks are just not a sound investment that will return a profit.
I keep hearing about the government building a bad bank to absorb all of the toxic debt. This just rewards the fools and criminals who built this mess. I think we ought to go the other direction entirely. Don’t put my (taxpayer) money into bad banks, where I am sure to lose it. Put my money into good banks, where it can do some good and might return a profit.
If you put a dollar in a bad bank it just gets soaked up covering an existing loss–you have gained nothing until you put enough money in to cover all of the losses. You’re just throwing good money after bad. If you put a dollar in a good bank it can immediately be lent out. If you want to get credit moving, put money in to good banks.
If we let the bad banks fail then their assets get sold off to pay their debts. If there is a negative left over then somebody will get stuck with it. I say we should seize the property of the people who caused the mess and profited most directly from it.
This is a plan that requires cojones:
* Arrest the managers and CEOs of the big banks, including Hank Paulson (who was at the helm of Goldman when this avalanche really started) and charge them with fraud and theft. Seize their personal assets, and use that money to pay off this mess.
* Let the big bad banks fail.
* Invest all of the remaining TARP money, and all of the upcoming bailout bonanza, in every good bank that you can find in the country. From what I understand this will be almost all of the medium-sized regional banks who aren’t carrying a bunch of toxic debt.
Then the good banks who exercised wisdom and restraint get the rewards–a moral hazard I can live with. They get flush with cash and can go on lending, hiring, and buying sprees. Hopefully the profits from the good banks will eventually pay back the monies we invest today, as the government sells off it’s stock over the next several years, so average citizens never get that tax bill.
February 5th, 2009 at 9:50 am
Dan Duncan — I agree with you —
The plan I put forward is merely less crappy than the Band Banks/Insurance wrap p[lans
February 5th, 2009 at 9:52 am
nice bloomberg article on Citi’s love of school lunches:
http://www.bloomberg.com/apps/news?pid=20601039&sid=aQdj5yq_WnDI
“While you won’t find any mention of deferred taxes in Citigroup’s latest earnings release, this may be the most important asset on the bank’s books today. It also looks the fishiest, at more than three times what it was a year ago, and more than double the company’s $19 billion stock-market value. ”
That’s right deferred taxes (wink, wink) are more than DOUBLE it’s market value…
February 5th, 2009 at 9:54 am
Kill the bad banks, start new banks, allow interest rates to rise to realistic levels so they can make money.
People with debt – deal with it. Got a house you can’t afford? Sell it to someone who can.
If none of the above happens, buy GDX and TBT.
February 5th, 2009 at 9:55 am
WADR, probably one of the worst ideas yet. Very surprising coming from you.
February 5th, 2009 at 9:57 am
The banks are not going to lend because they don’t need to (if we give them money) and they don’t want to take the risk. No matter how much money we give them. The economy needs lending institutions. So when a bank fails, the government should nationalize that bank. Maybe that is not the right answer, but certainly buying capitalizing the banks we have now is the wrong answer.
And then we need to use taxes to provide incentives for banks to do the right thing. Banks that don’t lend should be taxed so that it makes it more profitable to lend than to hold onto the money. And banks that pay outrageous salaries and benefits and other aberrant behavior need to have those practices taxed so heavily that they are discouraged. Taxes are a powerful tool to control behavior.
And finally the power of the banking industry to make their own rules needs to be changed. “Lobbying” by banks should not be outlawed, but the activity should be so prohibitively expensive (taxes) and public that banks will only use it when needed.
February 5th, 2009 at 10:02 am
This is exactly what Jon Stewart suggested earlier this week, give money to U.S. taxpayers to reduce their debt.
If we’re going to do that, why not hit the global economic reset button and everyone start over? Then build a better economy based on clean energy, savings, etc. Is this really a ridiculous idea?
February 5th, 2009 at 10:02 am
@ Ventura2012,
Where has the nationwide ad campaigns been to object to the policies which have placed us in the situation we’re in? Surely there were many educated people “in the know” who could’ve deduced where this would all lead. Yet it would appear those folks, rather than object, were too busy taking a share.
Is that your version of conservatism?
Your swing at change reads of a sore loser. Political campaigns have always had slogans. Take a break and get some fresh air before the liberals you fear take it away from you.
February 5th, 2009 at 10:10 am
Barry–Forget trying to control where the money goes. Those who want to spend it on more unneeded imported crap will just pay off one credit card and run up another.
How about giving the money to the good banks with solid managements that didn’t engage in speculation to pad their bonuses, with the stipulation that the money must be used to staff up for all the new business they’ll get when we shut down the culprits like C, BAC, etc. Kill the vampire banks and let the managers who’ve shown competence reap the rewards!
February 5th, 2009 at 10:14 am
I still say the best way is prepackaged bankruptcy of the “too big to fail gang/too big to succeed”. Work out deals that would wipe out shareholders, convert debt holders to new equity holders etc. Would cost significantly less and would recapitalize the system.
Work out a compromise on mark to market. Start with Citi, them move to BofA. Let the FDIC run it. Treasury is totally incapable of it. Geithner is Paulson with better hair.
February 5th, 2009 at 10:15 am
Thanks for posting this idea, Barry. It’s the sort of thing I’ve been thinking: If we have to have a bailout, it should be from the bottom-up, not the top-down.
One tweak I might make: I bet there that some small portion of those families in the bottom 80% have no debts at all, and we should reward them for their prudence. So instead of saying they forfeit their cut, how about letting them put that into, say, a 10-year, FDIC-insured CD? This serves the same goal of helping put money back into the financial sector while not rewarding banks for being too big to fail.
But what if we can get some of these meme rolling? “Bottom-up bailout” should be the phrase on everyone’s lips.
February 5th, 2009 at 10:18 am
Why not give people a tax credit on their 2009 taxes if they can prove the money went to pay down their debt? If it pays for daycare, food, or a new flat screen – well you dont get the credit, but you pay no penalties either. it will have a multiplying effect – debt reduction and some sort of future additional gain. a trickle up multipler effect – easy enough to prove with a credit card statement.
If you are lucky enough to be one of the few who were already debt free, and did go buy the flat screen- prove your debt free with a credit report and get the 09 tax credit as well! So basically we’re talking one extra form on your tax return and a line item credit – easy enough for the existing system to handle with minimal fanfare.
~~~
BR: Works for me !
February 5th, 2009 at 10:19 am
Barry,
If we are going to give money out, why don’t we just give a really big number, like $50k to each household instead of stimulus. This would allow the individual to repair their balance sheets, use those funds to purchase homes, or even use to start up a new business. Seems more effective that what is currently proposed. Not a fan but like it better than what is coming through congress.
February 5th, 2009 at 10:34 am
Interesting thread, and boy, do I dislike politics and religion in an economic blog site..that said, the Obama cap of upper echelon employees at 500k looks like the first volley in a real dogfight for the next four years between increasing government and traditional capitalism.
Should we cap most salaries at 500k?
What about athletes? Didn’t Mickey Mantle work for a lot less in constant dollars?
Shouldn’t more of us work for the government?
Aren’t we glad we have all these social services? The medicare drug plans were a good idea, weren’t they, even if we didn’t raise taxes to pay for them…? Universal health care..good, right?
Isn’t it inevitable that as countries mature they evolve into some form of socialism?
Is this cap just the first step toward a more government controlled economy, or is it an isolated incident of an egregious wrong that had to be corrected…?
Should be a very interesting year!
February 5th, 2009 at 10:40 am
Good grief..factory orders last week revised to – 6.5%…
Schwarzchild’s radius….
February 5th, 2009 at 10:45 am
@ Leftback:
“Kill the bad banks, start new banks, allow interest rates to rise to realistic levels so they can make money.
People with debt – deal with it. Got a house you can’t afford? Sell it to someone who can.
If none of the above happens, buy GDX and TBT.”
Thats my boy, Leftback!!!
After laying awake last night… I had an epiphany… with BAC, C, GE, all in the death spiral… Nationalize them now a la Sweden. Sack management. Wipe the debts. Sell what they can. Insure all the deposits. Equity holders are wiped out. Secured bondholders insured.
Put some new blood in there, the dream team if you will, to manage them going forward… hopefully someone who has absolutely nothing to do with politics. Have Gross and his boys manage the bonds situation.
Put a clause in the legislation to ensure that this nationalization is temporary, the government gets their dividends on all the preferreds they already own, and return that to tax payers. Place common stock incentive pay structure for all senior management and employees so there is a vested interest in success, and ensure that they manage risk like they are supposed to.
But above all… Sack the management and get some new blood in there.
February 5th, 2009 at 10:48 am
“Invest all of the remaining TARP money, and all of the upcoming bailout bonanza, in every good bank that you can find in the country. From what I understand this will be almost all of the medium-sized regional banks who aren’t carrying a bunch of toxic debt.”
Good banks don’t want TARP money. They can find capital in the market without problems. What you don’t want is the good banks paying for the failed banks through higher FDIC deposit-insurance premiums in the future. If you want to subsidize the good banks, hand the money over to the FDIC’s deposit insurance fund. Or use the TARP funds on capitalizing borderline solvent banks… maybe Wells. But to find that out you have to look at the books, which the government does not want to do for some reason.
A second point – there are good banks out there apart from the big regionals. They’re just glued to the big lumbering banking conglomerates called BOA and Citi. The government should use their existing equity clout in those giants to force them to spin off Travelers, Smith Barney, etc. These are solid franchises that can then attract capital and ramp up their balance sheets while the toxic rest of BOA and Citi are left in the lap of bondholders.
February 5th, 2009 at 10:50 am
@chief
I along with the typical american was a loser whether McCain or Obama won. Where were the nationwide campaign ads you ask…did you not listen to what Ron Paul was saying…did you not hear him the last 3 years warn the fed and other politicians?
February 5th, 2009 at 10:53 am
@ Left:
OT… but did Jah just buy UNG??? What the hell was that?
February 5th, 2009 at 10:55 am
This is all pie in the sky rubbish. What we need are Gangsters. make the 350B a prize for the gangster organization that can rub out the most crooked mortgage, banking and financial institutions in say one years time. No holds barred anythings legal, top guns win. Once the dust settles the 350 billion goes to the winners to lend at exhorbitant rates to what will be a captive market.
February 5th, 2009 at 10:56 am
Love the simplicity of it, Barry, but you know the Feds will never to take the simplest route to anything. They need to prove their “brilliance” by doing all the wrong things first and at great cost. After all, we’re the U.S. and we’re better than everyone else.
February 5th, 2009 at 11:05 am
@ Bruce:
Wow, Schwarzchild’s radius. Had to look that one up. Thought you were waxing Ron Burgundy:
“By the beard of Zeus!”
“Great Odin’s Raven!”
“Sweet Lincoln’s Mullet!”
“Son of a Bee Sting!”
“Knights of Columbus, that hurt!”
February 5th, 2009 at 11:11 am
Barry- crappy idea. Wally @8:19 is right- the savers by doing the “right thing” and being frugal are now being penalized with zero percent interest. How about this for a solution- the government does “no more harm” and lets the people who over leveraged themsleves with poor gambles in the housing market and who maxed out their credit cards to satisfy their childish urges suffer the consequences (what better way to learn). And let the insolvent banks fail (they are FDIC insured right?)
Outside of providing for unemployment insurance and food stamps to get folks through the lean times the government should step aside. Sure the stock market may tank- but who cares? Without the government shouldering the burden of propping up what would have already been left to shake out of the system we can expect the sun to shine much quicker.
February 5th, 2009 at 11:12 am
one more thing about the big rebate versus the 2k. by repairing the balance sheet of individuals, you effectively repair the balance sheet of the banks because a lot of people will use it to eliminate personal debt. which will change the capital ratio of the banks.
February 5th, 2009 at 11:24 am
The best way to spend TARP II is not to spend it at all. TARP I proved what we already knew about how effectively people spend other people’s money. I remember back when we used to talk about Japan’s lost decade where they weren’t honest about their losses; funny how we are doing the same thing now that we are in their shoes. If what we really need is more credit, then cut out the middle men and loan directly. Have the gov’t keep the traditional 1% markup that useless brokers get to pay off the trillion dollar deficits that are on the way. But none of this really matters since underlying all of this we have a totally fake economy. The last 30 years, we have done nothing but import cheap labor and export businesses that actually produce things. The fix is something that will not be done until things get much worse.
February 5th, 2009 at 11:27 am
@call me ahab: I agree with you in principle (I am a saver and have no credit card debt, after all), but what if by allowing those things to happen and the negative consequences pull you down, affecting you, me and others negatively in the process? I think that’s the concern here. Are you truly ready for that?
February 5th, 2009 at 11:28 am
Barry, your suggestion does not go far enough. Here’s a repeat of my post on this topic yesterday, with typos corrected…
bemused Says:
February 4th, 2009 at 10:23 pm
I would like to put another thought in here; really a sequence of thoughts. Please follow my logic and the show me where I’m wrong:
1) Any ideas put forward should help revive the economy short term while advancing systemic solutions long term. No other suggestions should be entertained.
2) The writedowns of the last 6-12 months have resulted from the devaluation of what are now value-free securities (ie. those for which there are illiquid markets), backed by an unknown mix of mortgages of varying underlying value, including many sub-prime, etc.
3) The banks have already taken the hit on these and either recapitalized or taken TARP or other govt infusions. Ie if these the securities ever regain any significant value, the banks holding them will make money…
4) Since the outcome of 3 is unlikely to happen soon, pass on the loss to the underlying instruments. Yes, I do mean that. Devalue the debt owed, so that If the nominal value of an MBS is $100M but it is currently (over?) valued at $20M and has no market, reduce the obligation of the underlying mortgages by 80% accross the board. That will almost certainly ensure that the homeowners concerned will be able to pay the balance off, will improve their credit ratings, and will have more disposable income to spend and stimulate the economy. It will also guarantee the new $20m face value of the MBS.
5) note that 4 costs both the taxpayer and the banks exactly $0.
(I have been considering airing this for a while, then I heard that John Stewart was proposing that the TARP money be given to the debtors so that they could pay down their mortgages, which would still not solve the liquidity and credit problems.)
February 5th, 2009 at 11:42 am
@ I-Man: OT… but did Jah just buy UNG??? What the hell was that?
I do have a position, and as you know I like to live large…. this sucker may have bottomed out, eh?
February 5th, 2009 at 11:42 am
@ Mannwhich
I understand your concerns- however I cannot now, especially with all the bungling that has already occurred, expect the government to do anything other than slop everything up even more. Lets except the quick intense pain that occurs with a clean break instead of the long grinding chronic pain we are sure to endure with the government acting as our physician.
February 5th, 2009 at 11:45 am
The Debt Reduction Check (for taxpayers only) is a great idea…I bet it would even work for the politicians. This idea is one way of maybe getting people thinking a little more positive…and energized. It would offer alot of people something tangible.
February 5th, 2009 at 12:03 pm
If the goal is recapitalization of the banks, I don’t think your plan works. My accounting is rusty, but I think this is what will happen:
When the taxpayer sends in his $2K debt reduction payment to the bank, doesn’t the bank just swap one asset (a recieveable) for another asset (cash)? The right side of the balance sheet only improves if the recieveable swapped for the cash had previously been marked down below par. In that case, the bank will reverse the previous charge to equity when the recieveable was recognized as impaired and capitalization will be improved by the amount of the reversed impairment.
If the bank ultimately uses the $2K cash to reduce it’s liabilities by $2K, then capitalization would be improved. But then the bank won’t be able to relend that $2K and the balance sheet shrinks.
Policymakers are encouraging, almost demanding, that banks increase loan growth to stimulate economic activity, not shrink their balance sheet.
Someone set me straight if I’m thinking about this wrong.
February 5th, 2009 at 12:10 pm
Barry – in response to my 8:30 post, you said
“BR: Lindsey wants to subsidize mortgages, and encourage more borrow and spending by consumers — something I believe makes no sense.”
In case it wasn’t clear, I was just pointing out that your plan is similar in spirit to suggestions made by Jon Stewart to Gwen Ifil, and then aired again when he interviewed Lindsey on his own show. It was not a plan presented by Lindsey.
February 5th, 2009 at 12:32 pm
The best use of TARP far and away is the Jon Stewart plan.
http://www.hulu.com/watch/54985/the-daily-show-with-jon-stewart-tue-jan-27-2009
February 5th, 2009 at 12:34 pm
Why is everyone so squeamish about just putting the banks in receivership? Let the bad ones die so sunlight can reach the good ones. We don’t want the incompetent managers continuing to mis-manage, do we? Any bailout or attempt to sweep bad asset under the rug just gives bad banks a competitive advantage over the good ones. The entire industry is weakened by that.
Prevention is even easier. Just legislate total transparency in financial statements. If banks/corporations can no longer obfuscate and manage earnings, stock and bond investors will naturally punish risky behavior before it threatens the whole system.
This is really easy folks. Stop over complicating it.
February 5th, 2009 at 12:47 pm
@mkkby: I don’t think many of us are “squeamish” about it at all, but we just know the feds probably don’t have the cojones to do that, so we’re trying to find a somewhat palatable “Plan B”.
February 5th, 2009 at 1:08 pm
Barry,
I agree most of the other plans are nonsense but your plan is nothing I’d agree to either.
First, $2,000 isn’t going to do anything for people that really need money.
Figure out how much a person who lost his/her job a while ago must pay once Cobra runs out. Have food prices gone down? What if you have a child in college?
Take three normal debts of a household:
$200k mortgage with a fixed rate
P&I monthly payment: Maybe around $850 on the low end
Auto Loan with balance at 4-6% interest: $300/month
Credit Card payment $8k balance @ 15% interest: $200/mo thinking they were actually going to try and pay that off.
I’d be a little more careful about things like:
Households will reduce their indebtedness by a significant amount; (the scenario I gave above is not exactly a “highly leveraged” household)
To your comment I’d say…. significant? It’s 2 grand! And then you follow it up with this:
The typical family has $8,000 in credit card and other revolving credit debt;
Wait a minute?
What is $2k going to do for someone that has say just a $100,000 mortgage payment. The answer is nothing. An $8,000 mastercard balance at 20% interest, nothing. An auto loan for $15k at 6% interest, nothing.
You can’t even buy 1 new macbook pro with $2k.
I like how you are thinking about how this is better than just taking tax money for the banks and consumers get nothing in return but when you start to put the numbers together for a household it becomes obvious just how big this problem is.
Further, then you suggest that after all this debt reduction people could go out and spend a little more. I like how you stress spend a little more, but, on what? Let’s say they were responsible and then only spent 25% of the $2k amount (I’m assuming these households in need don’t have discretionary income, they spend on needs) That probably goes right back on the credit card btw. These people don’t have savings and as you posted here not long ago, average household income has 60% or so going towards neccessities. So what kind of stuff can you buy for $500. If you are a family of 4 or 5 that might, might, just get you food for the month.
I’m certain you probably don’t come in contact with many clients or friends that are overextended but I can tell you without doubt that $2k for someone overextended will do nothing but delay the inevitable.
I appreciate that you are thinking about different approaches but I don’t think this would work at all.
No, I do not have a better solution.
February 5th, 2009 at 1:18 pm
Barry -
What about a reverse 911 call but w/the IRS. Kick back the taxes currently being paid into the system – that way the folks that have saved and don’t carry big debt participate. Instant stimulus, and like your idea, let them make the call – pay down debt & get favorable treatment, or spend it and get taxed on the reverse flow of tax-holiday income.
Forced lending and stimulus that must be spent sounds like some kind of gov’t backed consumer methadone clinic – the way to get them off of the “Smack” of over-consumption is gov’t fueled spending?
The devil’s in the details and the accounting would be tricky. It doesn’t seem to matter how the recapitalization takes place, whether the banks get it or Main Street gets it, both seem hell bent to save it. I’m struggling to find out how that’s bad, since recapitalization at the grass roots/micro level would help out at the macro level.
My clients are deleveraging and re-prioritizing their spending, to the point that I see this as a multi-year issue. Personal balance sheets are now the topic of dinner table conversation and every meeting I hold these days. The palpable nervousness has spread and seems to have taken hold, perhaps influencing consumer and investor behaviour for several quarters to come if not years. We’ll clearly be better for it once we’re on the other side of this, but what kind of economical damage will happen in the meantime?
I feel like Jim Cantore of Weather Channel fame reporting live from the seawall where the waves of this self-induced Perfect Storm are cresting and flooding the streets of America. The view here is surreal.
February 5th, 2009 at 1:41 pm
The Democrats (e.g., Pelosi) will hate this one. Their view is that the more overextended individuals are, the better off we are as a country.
The Pelosi/Obama types want MORE debt (not less) at both the consumer level and government level.
February 5th, 2009 at 3:43 pm
How does this plan help the Banks screw the peasants? I mean, if I’m selling heroin, and the Govt wants to come in and give everybody a few months of methadone, how does that help me? I still owe the cartels.
This would delay the dream of an Ownership Society, you know- I owned your father, I own you, I will own your children.
So, me and Smirkin’ Bernie and Lord Jacob say ‘No Deal’. We will consider P-I-Ks (payment in kidneys-fresh ones only).
On a serious note:
It’s the vig. Those whose assets (and source of income) are primarily the monies owed to them by others have to be screwed.
February 6th, 2009 at 1:01 am
I’ve thought about the need for economic stimulus, had several ideas and would like to know from you why they are BAD ideas.
Auto Industry:
Reduce Aid to or Sell
- all Municipal, Police and Gov’t Vehicles to Africa, South America, Iraq ect.
- School Buses to Africa, South America, Middle East for public transportation infrastructure.
Replace US Fleet with 2009/2010 Ford, GM and Chrysler.
Distribute between the three(or more) based on amount of US based workers and available capacity to rehire and fire up mfg lines.
Benefits: Expand global market penetration of US cars
Future sales channel for parts
Save aid money
Rehire Autoworkers fast and support US car parts industry
Upgrade US police, municipal and gov’t car fleet
Make US fleet more fuel efficient
Constraint: Ensure that a majority of the profits from the gov’t contract is invested in R&D for the next generation of fuel efficient cars.
Computer and Education:
Reduce Aid to or Sell
- all older/used computers from schools, public colleges, libraries and gov’t offices to Schools in Africa, South America, Middle East
Replace with personal computers assembled/manufactured in the US or by US companies. (Replace a Mac with a Mac and an IBM with an IBM)
Benefits: Improve US and 3rd world educational infrastructure
Positive impact on hardware and software world markets
Health Industry:
Same as above but with hospital equipment such as Xray machines ect.
Don’t stop here – many used US assets could LARGELY benefit 2nd and 3rd world countries!
We would improve the world, while saving on aid money and instead giving real assets, expanding US product penetration, improve standing in the world with this major aid program, keep our private sector busy until US consumer is confident again, investment in private sector more likely to sustain jobs compared to added gov’t jobs/funds, save foreign aid money for domestic program like this one…
Please tell me why this is not a good idea?
February 6th, 2009 at 8:21 am
I could not believe my eyes when I read this. Are we really this stupid? Have we not learned anything?
Fannie Mae to Loosen Rules for Home-Loan Refinancing
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTu9HA5cZgQ4
By Jody Shenn
Feb. 5 (Bloomberg)
February 6th, 2009 at 9:23 am
An interesting idea.
Some will say you get more bang for your buck to shread excess capacity*, make folks buy new what they need.
Not me.
Behind my place in the alley next to my glass-plastic-paper recycle bin and garbage can and compost bin
is a red “USAgain” recycle your old clothes hamper.
Have ya seen the news story of all that home stuff going into 20 yard dumpsters from depressed housing?
not the story – a picture I referenced for size help
https://www.dumpster.com/
JoJo “a waste is a terrible thing to mind”
* humans included
February 6th, 2009 at 12:48 pm
Can you clarify the numbers?
According to the US Census Bureau, there were just under 112 million occupied housing units in December 2008. (link: http://www.census.gov/hhes/www/housing/hvs/qtr408/files/q408press.pdf)
Is your reference to “175 million households” meant to refer to “tax-payers”? If so, I’m still a little confused because I believe that the number of federal personal tax forms filed each year is about 140 million, of which about 100 million end up paying tax.
I am guessing that you are referring to 175 million “individual members” of tax-paying households… in which case, you are advocating approximately $2,000 x 2.7 = $5,400 per qualifying household, assuming 2.7 people per household.
Thanks.