The financial services community and state governments that are asking for/begging for/pleading for/demanding/expecting help from the federal government seem to be assuming that Washington will just go away after the help has been provided.
Think again.
The $700 billion Wal Street plan, the growing liklihood that something similar will be needed for states, and the plan for the governmegt to buy commercial paper means that the federal government will be far more actively involved in the day-to-day activities of financial markets and financial services firms than has ever been the case.
This will go far beyond the Securities and Exchange Commission and other regulatory agencies that up to now have had the responsibiity for overseeing these activities. Indeed, given what's happened on their watch, these agencies will also come under serious additional scrutiny.
The big change will be on Capital Hill: every committee that conceivably can claim jurisdiction over some aspect of financial markets, corporate finance, and state and local government finance will do so. There will be hearings galore, lots of investigations, new proposals every day, and members of Congress appearing as regularly on CNBC as CEOs and stock analysts.
But the impact will go far beyond direct government involvement. The huge increase in the deficit caused by Paulson 2.0 combined with the new and much deeper suspicions about what Wall Street and the corporate community have done will make any reductions in corporate taxes a much toughher sell. For example, maintaining the tax cuts put in place in 2001 and 2003 that seem to benefit investors and upper income individuals -- the top marginal rate, capital gains, dividends, and estate taxes -- will be far more difficult (and probably impossible) than was assumed not that long ago.
Wall Street, the corporate community, and state governments are likely to demand that the federal government get out of ther lives once the assistance has been provided. That's what Chrysler did after the government provided it with a loan guarantee in 1979. I was working on Capital Hill at the time and remember Lee Iococca personally lobbying members to get the government not to exercise the warrants it received as part of the loan guarantee deal.
But Iococca, who at the time was a national icon, was told to go away. Try to imagine todays Wall Street leaders, who at the moment are pariahs rather than icons, doing the equivalent and you get the sense that it will be quite some time before anyone on the Hill will be listening.
My guess is that it will take a decade.
Wall Street Inside the Beltway
You assume it is a bad thing that Washington will be looking over Wall Street's shoulder for a decade. But it isn't.
America is still reeling from events of the past several weeks that will take years to play out. No one can yet say America is impoverished, but one thing is very clear -- America has quite literally thrown away trillions of dollars. We don't yet know how many trillions more will go because we aren't yet at the end.
This kind of misallocation of resources is exactly what capitalism is designed to prevent. That it didn't awaits analysis but can probably be attributed to trying to run capitalism without enough capital, using debt instead. Gain in asset values achieved by ratcheting up demand financed and only made possible by debt leverage created the illusion of real returns. But it couldn't last. To be honest, it has been a long time since America innovated anything important, or showed real foresight, or provided real leadership to the rest of the world, or did anything more than coast. What America became good at was transferring risk, while ignoring that improper policy was creating more and more net risk each day. It was only a matter of time until the system required a reboot.
The Bush administration will soon leave town in disgrace, having trashed the economy and America's position in the world. A fledgeling, unproved government will try to find its way through new, dangerous, and uncharted waters. The new wall street types now assembling in Bethesda will need decisive and correct guidance on how to manage the sea of bad assets and get the economy going again.
Even though it is going to be a difficult time, there are portions of the Bush legacy that will help. Since the corporate sector controlled the federal government under Bush, they expanded the doctrine of preemption to forestall regulation at the state level. And of course, when the bubble burst, the federal government assumed levels of authority undreamed of in recent times. Once the new government assumes power it will soon restore all of the federal regulation that was emasculated under Bush, and will find itself playing a much stronger regulatory hand than at any time in the past.
The nature of the crisis will also consolidate federal power. Falling housing prices lead to diminished property tax collections, undercutting municipal finances and requiring much more support at the state level. It is said that a number of states are close to basket case status. They too will be looking to the magic of the federal money printing process.
It will be many years before Wall Street stops needing the new regulation to undo the damage Wall Street did. With the return of common sense, we will all be the better for it.
Must see Soros interview
http://www.pbs.org/moyers/journal/10102008/watch.html
He talks about reflexivity, which I've mentioned before on this board.
Thanks... that was insightful
I fundamentally oppose fundamentalism :)
700b
With $700b can save the America's economy.
This financial meltdown
This financial meltdown marks the culmination and end of the Reagan Revolution. It shows that government is not always necessarily bad and, in fact, plays an important role.
And it would help to have wise people in the government, not just those beholden to party loyalty.
Ps. Can you make the reCaptcha words easier to read. Why the guantlet just to post here?
International oversight
The reaction to American stewardship among nations of the world is negative. The Europeans no longer trust us. Gordon Brown talked about the UK leading the way. Going forward, Big Finance will find itself under international rules. It has gone far beyond Big Finance being able to pay off American politicians to cover for their mistakes.
The government has been there all along
Stan Liebowitz details it here:
http://www.independent.org/pdf/policy_reports/2008-10-03-trainwreck.pdf
----------quote---------
Why did the mortgage market melt down so badly?
Why were there so many defaults when the economy
was not particularly weak? Why were the securities
based upon these mortgages not considered anywhere as risky as they actually turned out to be?
This report concludes that, in an attempt to increase home ownership, particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-underwriting standards as an “innovation” in mortgage lending.
This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk.
The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percentage increase of foreclosures and at the same time. Nor is it consistent with the “nasty subprime lender” hypothesis currently considered to be the cause of the mortgage meltdown. Instead, the important factor is the distinction between adjustable-rate and fixed-rate mortgages. This evidence is consistent with speculators turning and running when housing prices stopped rising.
----------endquote---------
Mr. Sullivan: Did you see
Mr. Sullivan: Did you see this weekend's McClathy Newspaper analysis:
http://www.mcclatchydc.com/251/story/53802.html
But these loans, and those to low- and moderate-income families represent a small portion of overall lending. And at the height of the housing boom in 2005 and 2006, Republicans and their party's standard bearer, President Bush, didn't criticize any sort of lending, frequently boasting that they were presiding over the highest-ever rates of U.S. homeownership.
Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.
During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.
In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.
Fueled by low interest rates and cheap credit, home prices between 2001 and 2007 galloped beyond anything ever seen, and that fueled demand for mortgage-backed securities, the technical term for mortgages that are sold to a company, usually an investment bank, which then pools and sells them into the secondary mortgage market.
About 70 percent of all U.S. mortgages are in this secondary mortgage market, according to the Federal Reserve.
Mr. Yet Another...did you bother...
To read even the excerpt I quoted?