Tag Archives: Bailout

The Great Bailout Debate.

The great bailout debate.

Tim Geithner, claims that bank bailouts were a critical part of getting the economy running again, while Neil Barofsky, says the Obama administration should have spent more time bailing out underwater homeowners who were crushed by the housing bust. Who’s right?

Well, like it or not, the banks had to be bailed out, the same way you’d bail out electrical utilities rather than let everyone go without electricity. They’re just too important to the rest of the economy. They clearly should have been more punitive but frankly, given the speed at which the tide rose back in the closing chapter of the Bush administration, there wasn’t time to structure anything. Morally right or wrong, we needed to spend a ton of money to rescue the banks, and stop the bleeding. Did they do what anyone would do if someone handed over a bag of money? Of course they did.

On the other hand, Mr. Barofsky makes a good point: consumer debt overhang has been hobbling the recovery ever since 2008, and it’s outrageous that so little money was spent rescuing consumers right along with the bankers. Obama should have pushed a lot harder for “cram down” legislation; Fannie and Freddie should have been enlisted to rewrite mortgages; money should have been airlifted into consumer pockets, either to spend or to pay down debt; and schemes should have been set up for homeowners who were too far gone, that allowed them to rent their homes back from the banks that foreclosed on them. In fact, my earlier proposal was and still is, force the banks to re-finance all mortgages at current assessed market values without owner qualification.

So, they are both right, but neither of them can get us out of this mess. The only way we are going to start this thing up again is for the US Government to force banks to open their credit spigots, ignore strategic mortgage defaults, start loaning money to sub-700’s again, and re-write all of the existing mortgages, essentially marking them to market (lovely irony here).

And we need to do this before Europe crashes and burns next year. How? We have leverage. What do the banks want more than anything? Where is their greatest source of potential profit? Investment banking. We make a devil’s bargain. The banks come to the credit and mortgage table, and the Government lets them continue to operate as a single entity, with commercial and investment combined.

We stop talking about Glass-Steagall, and we stop threatening to regulate derivatives. The banks open their checkbooks to small business, and they re-write all of the underwater mortgages. That stops the bleeding in housing, jump-starts the small-ball economy, and boosts consumer confidence.

Short of such a drastic measure, we head into 2013, sailing a doomed ship following a doomed course on a fatal journey into the abyss. 

Advertisements

Put A Fork In Them.

Greece is done.

The anti-austerity folks have voted, and it ain’t pretty.  The big winner of the day was the leftist anti-bailout coalition, Syriza. In the last election in 2009, it scored just 4.6%. This time it took second place with almost 17%, beating Pasok whose support base all but collapsed. This nation, punished by two years of the most drastic austerity measures in modern history, has hit out against the bailout, the political mainstream and the painful cuts that have brought Greece to its knees.

A majority has spoken and the message is clear: Rip up the “memorandum” (the bailout agreement with the IMF and the EU) read, Germany, and get rid of all immigrants. The radicals and the neo-Nazis now have the country.

So, in the next three days, the various parties have to form a new government or put on new elections and do it all over again. If anyone doesn’t see that this is a government falling into fascism without hope of civilized central discourse, then they are in denial.

And without a government in place, the next installment of Greece’s international bailout money would probably be put on hold, raising the specter of the country’s bankruptcy within weeks.

In reality, any future government here will have to – at the very least – renegotiate parts of the bailout, following the will of the majority. But the challenge will be to do so, while still ensuring Greece’s membership of the euro – something a large majority of Greeks want, according to opinion polls. That doesn’t seem possible. The opinion polls have been like this for years now, signaling a complete inability to grasp the reality of the situation. Greece needs to abide by the austerity measures of the bailout, or the Germans will withdraw and Greece will have no choice but to default and drop out of the Eurozone.

The fervor among Greeks to throw out any additional austerity measures is being fanned by  the election of France’s new Socialist President, Francois Hollande. He is openly skeptical of austerity, favoring pro-growth policies instead – the winds of change may be blowing from Paris to Athens – and may further embolden those fighting the cuts there.

Greece is where the Eurozone debt crisis began back in 2009. It remains where the problems are most acute. And now this country has been plunged into yet another period of intense instability that it – and Europe – can ill afford.

There really is no way out and the sooner Greece accepts the inevitable and cuts their losses, the better off they and the rest of Europe will be.