Tag: Banking

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Economy Politics

How Many New Homes are “Considered” Healthy?

Sometimes, I find myself getting my Dean Baker on. Not that I’m that smart, you understand: I clearly am not. But busting the language used by the media is occasionally fun.

Take for example the following NPR news article about the falling housing market which includes this curiously unqualified statement:

Housing Starts Dive; Food Boosts Wholesale Prices : NPR.

The building pace is far below the 1.2 million units a year that economists consider to be healthy.

Considered by whom, I wonder? By the Commerce Department? If so, why not say that? And what is the normal pace of new home building, per capita, over the history of the United States? Since WWII? Is that what “healthy” means, or is there some other criteria not discussed in the article?

The thing is: we went through ten years of a constantly-climbing housing market which was the result of entirely fictitious loan approvals aimed at supporting a financial investment shell game of monumental, world-wide scope and scale. Every year, we were told that this was a sign of a “healthy” economy. I am not an economist, but may I respectfully submit that perhaps its time that we used another benchmark?

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Obama’s Student Loan Budget Plan

Following on from my previous post about the Student Loan Corporation email I got this morning, it looks like the plan President Obama is proposing is basically to eliminate a subsidy system for private loan corporations that the government has been running for the last fifty years. This WaPo op-ed does a great job of laying out the history.

In short, the government has been insuring low-interest student loans for all this time by basically guaranteeing profits for private banks like Citi Corp who give out those loans. Its a classic Frankenstein Washington program where those who insist on free market rules and those who insist on government assistance get together and insure that neither happens. The Obama plan eliminates the cost of maintaining this facade by letting the Department of Education provide the loans through Treasury.

How much will tax payers save because of this new plan, if adopted? Estimates put that number between $40 and $100 billion annually.

Citi’s email is, typically, effusive with unsupported “facts” about how this will negatively impact both the government’s bottom line and consumers. The claim that this new plan will increase the federal deficit “substantially” is unsubstantiated as yet: there’s no concrete plan that I can find on how the loans will be doled out. Logically, if we can afford multi-trillion dollar bailouts to banks like Citi, I’m sure we can handle a few student loans. The word “substantial” is subjective and relative. Meanwhile as a matter of bookkeeping, since student loans can last for decades without defaulting, they are a relatively stable investment. At the risk of recalling the Subprime problem, student loans can be handled as assets, not debts.

Their claim that this is an anti-choice plan presupposes that those of us who go to college are really in control of where we get loans from. In reality, the student loan game is a rigged one, just like health care. The word “choice” is a double entendre: it sounds like the choice is yours, but the choice is really made by corporations and large institutions – colleges or hospitals, depending on the example.

Citi lists a number of advantages of student loans that it claims are the result of competition, such as default prevention services, education and web access. It is debatable whether web access is an advantage or an inevitability, but default protection and education will surely both continue under the new plan. The problem with this entire line of argument, though, is that if there’s no risk then there’s no real competition. The current system is not a free market system and so the entire argument breaks down right there.

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Citi Group’s Email to It’s Student Loan Customers

I just got this message from the Student Loan Corporation, a division of Citi Corp. At the moment, I have no information one way or the other on the proposed budget changes that Citi is talking about here, but it reads like typical corporate anti-government crap. I’ll look into it some more and let you know:

May 7, 2009

Dear THOMAS BELKNAP,

Thank you for the opportunity to help you obtain the education of your choice. As a student loan provider for the past 50 years, Citi has provided financial aid assistance to millions of students and parents nationwide.

Given the challenging economy and continued increases in the cost of higher education, it is critical that the U.S. student lending system serves the best interests of students and their families. If you believe that competition and choice among student loan providers is valuable, you have an opportunity to make your voice heard.

Why Get Involved?
The government budget outline proposes offering federal student loans solely through the federal government’s Direct Lending Program starting July of next year. While this proposal will not impact a borrower’s ability to obtain a federal student loan, it will eliminate your ability to choose a student loan provider. It will also substantially increase the national debt since each and every federally-insured student loan will be funded by the Federal Treasury through the issuance of treasury securities. This proposal impacts you as a citizen – both as a taxpayer and as a borrower.

Why Does Competition And Choice Matter?
Without private lender involvement through the Federal Family Education Loan Program, students and their families will not enjoy the benefits that competition has made possible for more than 40 years. This competition has provided not only a choice of lenders, but also innovative products and services, such as:

* a variety of borrower benefits that lower your cost of borrowing
* financial literacy programs that educate you on how to borrow responsibly
* web-based tools and resources to advise you about your financing options
* default prevention services to help you pay back your loans

Competition also has driven increased customer satisfaction as a result of the responsiveness, personal attention and on-campus support that student loan lenders have provided to borrowers and schools nationwide.

Make Your Voice Heard
If you value the ability to shop for, evaluate and choose your student loan provider, make your voice heard by contacting your Members of Congress and by signing one of the online petitions that support borrower choice and competition in federal student lending.

Sincerely,

The Student Loan Corporation

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In Their Own Words

via In Their Own Words: Why Dem Senators Screwed Homeowners.

Jon Tester (D-Mont.): “I just think a deal's a deal. I have a lot of empathy for folks who tend to get led astray, but I just think it's going to create some problems — pretty obvious, actually. I don't have to list them. I'm generally opposed. I don't think it works well.”

For those of you playing along at home, that’s at least five different statements in one statement, most of them contradictory. If you have empathy for those who were led astray, then how can you say a deal’s a deal?

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The Geithner Plan

I’m pouring over the various opinions of the Geithner toxic asset plans, as well as the plans themselves, to report back some sort of summary. There’s a lot to take in and even folks who normally agree don’t seem to be on the same page with this one.

But off the top of my head, it seems to me that the plan involves some serious risk, but not as much as a full-on takeover of the banks at a level that might be required if we adopted Paul Krugman’s “Swedish option.” I’m hardly in a position to correct a Nobel Laureate, but even the smartest people can be wrong.

Because he says that this same plan was floated and then discarded during the S&L scandal in the Eighties. Fair enough. But in the Eighties, I remember the word “trillion” as only used by the annoyingly smart kids, as in, “well, I betcha don’t know what comes after a billion!”

And I didn’t, because who had ever heard that number being used?

Now, the plan we’re working off of right now is expected to cost about a trillion dollars by itself. How much more would it cost to own these banks and their failed assets? Seems to me like the scale of the problem required some additional help from outside government.

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I’m a Thinker

I wonder whether the media referring to rightfully pissed off citizens of this country as pitchfork-wielding local hick goons helps or hurts the situation? What’s the upside?

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A Bad Plan

Paul Krugman checks in with a well-constructed, common sense explanation for why the recently-leaked Geithner plan is a crappy one. Basically, the plan only works if there isn’t any underlying problem beyond a market panic, which I think any reasonable person paying a modest amount of attention has to realize is simply not the case.

I’ve always admired Barack Obama for his ability to surround himself with good people who are competent at what they do. His financial team makes plain the down-side of this: without good people, he’s stuck in the mud on the most pressing issue of our day.

Finally for this post, let me also counterbalance these negative thoughts with ones perhaps more calm: the man’s been at work for not quite 60 days. There’s time for him to get things right and maybe if enough smart people tell him what a mistake this plan is – Krugman, Baker, I’m looking in your direction – he can reverse course. The media’s insistence on drumming up fears for the sake of ratings notwithstanding, we’ve managed to bumble along for five months without a permanent solution. I’m sure a little bit more time is not going to break us.

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Simple Economics IV: Nationalization

Once again, I find myself explaining concepts discussed in the media but rarely ever explained by the media. Today’s discussion is “nationalization” of the banking industry.

Or, how about “bankruptcy?” In a bankruptcy of a business, the debt and assets of the company are assumed by the government, who then restructures the company and if necessary, sells of the company’s debts to cover the liens against the company. Then the company is either released to continue or else is sold outright to some buyer who wants a good deal.

If this sounds at all familiar, that’s most likely because this is precisely the remedy proscribed by Dean Baker, Paul Krugman and almost every single other serious minded economist whose looked our current situation. To the extent that the federal government is involved in the day to day operations of businesses in bankruptcy, yes, it is nationalization. But this kind of thing happens all the time to all kinds of businesses without a peep of objection from the Republicans in Congress. In fact, it even happens to local banks all the time, which is one reason that we have a thing called the FDIC.

But it doesn’t happen to the big boys who have the money to pay off politicians and drive the conversation in the most objectionable direction possible.

Interesting side note: guess what the Republican, Dick Shelby proscription is for the Detroit automakers? If you guessed “nationalization,” you’re right!

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Weatherizing

OK, clips of this speech have been all over the news nets for the last two days. It’s the one where Barack Obama announces plans to limit executive pay for companies receiving federal tax dollars. Its an important speech, even if the plan itself is quite toothless in its conception. It’s an act of pure social justice that demands executives benefiting from our largess should be expected to show a measure of humility in the process.

But never mind all that. Check out the window behind him:
[youtube]http://www.youtube.com/watch?v=FeFRLl3LspY[/youtube]
Is that plastic sheeting on those windows? Am I meant to understand that the White House is being weatherized by wrapping up the windows in plastic? No wonder the new prez has been slow to discuss policy publicly: he’s probably got a golf ball sized blister on his hair dryer hand.

Don’t tell me he isn’t serious about weatherizing and energy efficiency!

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Are You Ready for Some (Tax Payer Funded) Football?

Well, too late. Because Bank of America already spent your cash on a “NFL Experience” carnival outside the Superbowl last night. If you hurry, you can probably still get some day-old hotdogs and old napkins that are swirling around on Dale Mabry Highway in Tampa.

I understand the justification that they used: that they already had an obligation to the NFL. But I think under the circumstances, if they said to the NFL, “what do you say we tone this down? Save some cash? Maybe bring half the big-titted beer girls to the show? Or maybe just half the tits?” the NFL would probably have understood just fine. Maybe I’m naive.

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I’m a Thinker

We keep going round and round about “how do you value toxic assets?” meaning that bailing out banks means buying up failed assets worth less than their paper value. This is the “bad bank,” thing you may be hearing a lot about. So, how do we gauge the value of these assets? We know the value has plummeted, but when the entire economy is depressed, the asset is worth even less than it would normally be. What exactly is a fair price?

We’re not talking about one or two, but millions of them. And how do we know that the government’s not going to get ripped off by unscrupulous banks trying to recoup their losses?

Well, how about we take some people who are unemployed and put them to the task of valuing the assets? We should have that process over lickety-split, no shit. And we’d put some people to work in the process.

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Bonuses? Well, Not Really, Actually

While we’re all in a tirade about bank executive bonuses being dealt out, it’s worth noting as Felix Salmon does, that “bonuses,” are often the leftover of salary held in reserve all year long. What’s that you say? That means that in your regular paycheck every week/bi-weekly/month, a certain percentage of your income as a banker is being withheld to be paid out as a “bonus” at the end of the year. Plus the actual bonus money, of course. But some of that $18 billion so much in the news lately is what you’d expect to be paid as any other employee who gets a salary.

It is equally worth noting that Detroit union workers are taking a hit on their paychecks this year to help deal with the looming crisis there, and thus it’s entirely reasonable for taxpayers to expect a similar sacrifice from someone making $100,000 a year. But fair is fair, a fact is a fact, and despite the unfortunate name and odd policy, some of this money is actually a fair paycheck. Take it for what it’s worth.