This is not about keeping people in their homes.

I hear the call from so many to prop up housing and "keep homeowners in their homes." I see the goal however, as a dangerous one. The consequence of trying to do that would be to continue to artificially inflate home prices, preventing new buyers from entering the market. It would prevent housing from reaching a price that is commensurate with median incomes. This is dangerous for the housing market and will leave it stagnant. Propping up home prices is harming prudent people who chose to wait until home prices came back down to a level that is more historically consistent with incomes.

This would likely also harm many of those who are "kept" in their homes, as they may have been better off financially speaking defaulting from their debt and getting out from underneath a massive burden.

Mortgages are not the problem in this financial crisis. The problem is leverage. The institutions in question have over leveraged themselves so that the amount of credit they have outstanding far outstrips their asset base. They cannot afford to support even the smallest of losses.

It is unfortunate that we are faced with this now, but being that the core production of our economy cannot now sustain the levels of credit we have created, a credit contraction must take place.

Doing anything keep the credit party going will only serve to harm us further. We're maxed out congressman, it's time to stop preventing a debt default with more debt.

These companies have to deleverage, and our economy has to adjust. That's the fundamental truth to this.

Congress can work to reinforce time tested regulations. Enforce reasonable capital and leverage requirements. Enforce transparency and accounting principles. Prosecute false and misleading information used to manipulate stock price. Eliminate insider trading (it's happening now and it's troubling). None of this is new, but it's not being done. The opposite is occurring, and it's the opposite that brought about this financial crisis. The measures being taken thus far continue and encourage that troubling behavior.

Extraordinary measures that must be taken will include regulating the derivatives markets, and creating a program that facilitates expedited chapter 11 bankruptcy protection for insolvent financial institutions. Lastly Congress must act to fund the FDIC. The insurance program does not have the money to handle the bailouts that are coming, and congress must demonstrate it's commitment to shoring up the program. These things are new, but they must be done in order to wind things down in a more moderate fashion.

We're in trouble. No matter what is done our economy must undergo a major shift. The Bush/Paulson/Dodd plan makes it much worse. But these measures I've mentioned will help bring up investor confidence, and bring in billions of dollars that is sitting on the sidelines (including my own), and aid in a speedier recovery.

Mortgage Failures are a Symptom, not the Disease.

In numerous places now, most notably the president's speech on behalf of his bank bailout, mortgage failures are being used as the scapegoat for a declining economy.

This is, the way I see it, at very incorrect and dangerous assumption. Mortgage failures are an indicator that something is not well in the system. The resulting impacts of the failures point to the heart of the issue.

Institutions that have been funding the debt have levered themselves to the point that they could not even withstand modest losses. And further more, not unlike some addicts, some of the financial institutions on Wall Street could not sustain any longer if they could not produce more and more mortgages.

Wall Street's financial institutions have over leveraged themselves. This country has over leveraged itself. Investment needs to be made into non-financial productive work.

These mortgage failures are indicators, margin calls. And instead of settling our debts, we're creating a $700 billion dollar bailout that threatens to continue the problem.

UPDATE: Finally here's an article on just this subject from the Financial Times via Naket Captialsim.

Letter to My Congressman. NO Bailouts

Congressman Inslee,

I'm writing you today on an issue that I feel is a part of a defining moment in this country's history.

There are massive shifts occurring in credit markets right now and those shifts are going to have a significant impact on our ways of life.

The Administration via Secretary Paulson has submitted a ridiculous bailout legislation plan that it appears many in congress are taking seriously. Senator Dodd has even crafted legislation that, while significantly cleaning up Paulson's proposal, still follows in lock step.

I've heard members of congress in hearings talking about how it's up to the administration to explain why this bailout is necessary, as if the throngs of angry constituents don't understand.

I want you to know, Congressman, that I do understand. I understand and I am angry. I am angry as I was when we launched the Iraq war, when we passed the patriot act, and when I saw that FEMA had almost no plan or competence to handle the aftermath of Hurricane Katrina.

I understand that our economy is in deep trouble. That a massive deleveraging event is taking place. I understand that this means we will be facing a lot of hardship in the years to come.

But I also can see that there is nothing that can, or should be done about his deleveraging, other than to take measures to make it orderly and to work to support our fellow citizens when the time comes.

Paulson's plan is flawed in so many despicable and obvious ways. But in one core way it is flawed that should stand out.

The plan is guilty of trying to keep "the debt party" going, when there is no reasonable cause to assume that it should.

The debt bubble has eroded much of our economy. While we enjoyed the temporary benefits of massive leverage much of our industry was displaced through movements to other labor markets. We've been lax in exploring new technologies in energy production, and energy efficiency. But it is that very sort of productivity that we find ourselves desperately in need of now.

We are in trouble, and there is a way to deal with the trouble that helps us begin growing new and better institutions that can help us rise out of this decline. But the bailout proposal is not only thievery and economic terrorism on the Administration's part, it is also a denial on the part of others who would like to keep us in the dysfunctional state we've been in.

Congressman, I don't think I'm the only constituent who understands.

Please filibuster any bailout proposal.

Thank you,

Caleb Mardini

contact your senator now.

contact your representative now.

Dodd Amends Paulson's Plan...Still Headed For a Bailout.

Dodd has proposed an alternative, or should I say amended Paulson plan.  I've only breezed through it.  It looks better but it's still a bailout.

That Hurts prudent investors.

Hurts existing homeowners by keeping them in a negative equity situation.

Hurts home owners waiting for a more affordable market to jump in.

Hurts investors, and institutions who avoided entering into this mess.

And most importantly, staves off a de-leveraging event, which must occur in order for our economy to start growing again.

Economists Launch Protest

To the Speaker of the House of Representatives and the President pro tempore of the Senate:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses.  Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If  taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects.  If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity.  Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come. 
Signed

(list)

The letter was signed by over 100 (and growing!) of the leading economists I know — including folks who have very different views about just what got us here.

Via [Freakonomics Blog]

Prescient

U.S. House 1999

"[W]what we are creating now is a group of institutions which are too big to fail. Not only are they going to be big banks, but they are going to be big everything, because they are going to be in securities and insurance, in issuance of stocks and bonds and underwriting, and they are also going to be in banks. And under this legislation, the whole of the regulatory structure is so obfuscated and so confused that liability in one area is going to fall over into liability in the next. Taxpayers are going to be called upon to cure the failures we are creating tonight, and it is going to cost a lot of money, and it is coming. Just be prepared for those events."

Representative John Dingell (D -Michigan) Regarding the repeal of the Glass-Steagall Act of 1999

Via [The Crypt]

And another hopeful sign today from the House and Representative Marcy Kaptur (D-Ohio)

Not a Dime! Stop the Bailout

There is currently a horrifying proposal being fast tracked through congress by the President and Treasury Secretary Henry Paulson. Many members of congress have openly admitted they don't understand the situation and they aren't sure what to do.

I've called my senators offices and I was asked to organize people in a calling campaign. They want to hear what we have to say.

What's happening right now in our financial markets is a major event, regardless of what the government does, I feel it's going to have a major impact on us all. However I believe the proposal being fast tracked threatens to make things much, much worse.

I ask that you read the proposal yourself. It is very short. You can also read the analysis I've posted here.

The chances of preventing this are very limited . But after reading the proposal, please call and email your senator, NOT JUST ONCE, BUT A COUPLE OF TIMES A DAY, for all of this week.

Ask them to block or filibuster any bailout legislation.
Ask them to vote no.
Tell them you don't want to pay for a bailout.

Here's a link to the text of the plan.
Click here for contact information for the Senate.

• The Foxes are in the henhouse.
  Prior to becoming the treasury secretary in 2006 Henry Paulson ran Goldman Sachs bringing the company to the position it is in now. Goldman Sachs stands to benefit a great deal from this bailout.
  Furthermore there is a tremendous conflict of interest as Paulson seeks to hire those who helped create this mess to help decide how to use the public's money.

  From the proposal:

  (2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
  (3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

• The budget is unlimited.
  

  Sec. 6. Maximum Amount of Authorized Purchases. The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

  700 billion is greater than the Pentagon’s budget for 2009 which was record breaking. And that’s just the amount of purchases that can be held on the balance sheet at any moment.
• It doesn’t represent the tax payers. This deal is, in many respects, open ended with no safeguards for taxpayers. While the bill gives lip service to the idea of protecting tax payers it specifically avoids accountability and transparency.

  Sec. 3. Considerations. In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–
  (1) providing stability or preventing disruption to the financial markets or banking system; and
  (2) protecting the taxpayer.

• Completely dubious. While granting extreme powers, there is no review. (this one is really incredible)

  Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

• There are no stipulations for punitive actions. Instead for institutions able to move their bad debt to taxpayers, or able to buy debt at discounted rates this will be quite rewarding.
• The arbitrary nature of the bailout creates greater uncertainty in the markets. Furthermore some market watchers speculate that this could result in a greater devaluation of U.S. credit as there is fear we’ll nearly bankrupt ourselves trying to take on the debts of these failed institutions. The measure calls for raising the national debt for example.

  Sec. 10. Increase in Statutory Limit on the Public Debt. Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

• We already have an excellent solution in place Chapter 11 Bankruptcy.

  In Chapter 11, companies with a solid underlying business generally swap debt for equity: the old equity holders are wiped out and the old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure. Alternatively, the debt holders can agree to cut down the face value of debt, in exchange for some warrants.

  Luigi Zingales and Robert C. Mc Cormack the authors of the above quote maintain the process would have to be faster than chapter 11 normally takes. But passing a law, especially one of the magnitude normally requires much more investigation and vetting. If we can entertain passing a law of this magnitude this quickly, isn’t there a possibility that an expedited Chapter 11 program could be created.
• The Mother of All Bailouts. A measure of this level is unprecedented. You may have heard that this isn’t dissimilar to the Resolution Trust Corporation founded in 1989 to help us out of the S&L Crisis. But

  In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC's job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system. (Sebastion Mallaby of the Washington Post)

  And they want to bailout whatever they decide. This will likely include bailouts for foreign businesses as well.

  The U.S. Treasury submitted revised guidance to Congress on its plan a ... Officials now propose buying what they term troubled assets, without specifying the type. (Bloomberg)

• It goes counter to the spirit of the American free system that maintains those that reap the rewards should bear the losses.

  The basic premise of a free economy is one governed by laws and not men, where property rights are respected, where individuals are free to make contracts with each other, and where honesty and transparency exist in the marketplace.(Mish)

Please contact your senator now and ask them to prevent, block, filibuster, and vote no for any bailout.

I’d also encourage you to drop me an email or a comment if you make the call.

Thank you.

Update: 10/2/2008

Dodd's revised version of the bill made what appear on the face to be significant changes. But upon further examination, the latest proposal doesn't deviate from Paulson's plan. The oversight is there but it's token oversight. The secretary of the treasury, for example would be the head of their own oversight committee. While we've heard sound-bites about greater assurances, very little has been done to alleviate the problems with the bill.

Anyone saying the problems have been fixed are mistaken. Read it for yourself. (First 113 pages or so.)