Tuesday, September 30, 2008

Bee: "Bailout rejection could hurt Sacramento region's recovery"

From the Sacramento Bee:

The rejection of the Wall Street rescue plan may have jolted Sacramento's struggling economy and harmed the fragile recovery in the region's housing market...[Real estate broker Steven] Krohn, who's also an economist, had been seeing evidence lately that housing prices were firming up in Sacramento. Now he wonders where the market's going. "We have a lot more gloom and doom than confidence," Krohn said.
Others, though, were pleased with the House vote. Rick Hagstrom, chief operating officer at Tri Counties Bank in Chico, called the bill "a gross disruption of free markets" and said its proponents were exaggerating the severity of the problem. There's money available, he said, but borrowers are becoming gun-shy.
Kevin Harper, a resident of Cool in El Dorado County, had his house repossessed this year. A carpenter who worked on bridges, he was injured on the job. Unable to work, he said the banks wouldn't help him stay out of foreclosure. Now, he has no interest in seeing Wall Street bailed out. "I think they should have to pay exactly like I had to pay," he said. "I had to declare bankruptcy. Those fools, they should, too."
From the Sacramento Bee's Editorial Page:
Could more Republican members of the House of Representatives act like adults, please? If they can bring themselves to do so, the House may yet do the responsible thing and pass the financial bailout bill that failed on Monday. If not – well, let's not dwell on such a depressing prospect. What happened Monday was depressing enough.
Looks like The Bee may need its own bailout soon enough:
The McClatchy Co. had its credit rating downgraded again Monday amid continuing fears about the Sacramento publisher's falling revenue and profit. Standard & Poor's Ratings Services said it was concerned about McClatchy's announcement Friday that it had renegotiated its bank loans to provide more breathing room for the company. While investors seemed to welcome the news, S&P took it as a sign that McClatchy's troubles are deepening more quickly than expected amid a weak economy and competition from the Internet.
From the Associated Press:
The three vulnerable Democrats voting "yes" [on the bailout bill] were Tim Mahoney of Florida, Paul E. Kanjorski of Pennsylvania and Jerry McNerney of California. Some of those who voted for the bailout said they did so in possible conflict with the districts they represent.

McNerney, a wind engineer and political neophyte before his election to Congress in 2006, said his district opposed the bailout but he felt it was best for the economy. "People's jobs are a great deal dependent on this," he said, as well as "their home loans and all of their livelihood."
From News10:
Doris Matsui, D-Sacramento, also supported the bailout plan, stating that it would have taken responsible steps toward solving the financial crisis..."We must protect people's jobs. We cannot stand by and watch as businesses are forced to cut back operations. We have to preserve people's retirement accounts, their ability to access credit to buy a home, to open a small business or take out a loan to send their children to college," said Matsui.
From the Financial Post:
At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.
[W]hat should be done when that pyramidal scheme starts crashing to the floor, because of a series of cascading failures or concern from the central bank that inflation is getting out of control? It’s obvious that credit will shrink, because everyone will want to get out of risky businesses, to call back loans and to put their money in safe places. Malinvestments have to be liquidated; prices have to come down to realistic levels; and resources stuck in unproductive uses have to be freed and moved to sectors that have real demand. Only then will capital again become available for productive investments.
As Friedrich Hayek wrote in 1932, “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about ...”


norcaljeff said...

Yea let's blame the No votes in Congress rather than the bankers, brokers, lenders, CEOs, appraisers, etc who were all in bed together doing their money orgy and getting rich off the system. Makes real sense. Sacto RE got too hot too fast and people didn't take a step back and look at the big picture and see that a property in Natomas, a.k.a. North Highlands, was not worth $250/sqft.

Buying Time said...

"We must protect people's jobs. We cannot stand by and watch as businesses are forced to cut back operations. We have to preserve people's retirement accounts, their ability to access credit to buy a home, to open a small business or take out a loan to send their children to college,"

Golly, and I thought that $700billion was just going to be traded for bad bank assets, in the distant hope they would start lending again.....there must be some additional provisions in this bill that I wasn't aware of.

Not quite sure how it became an economic panacea.

Patient Renter said...

Wow, I think I've lost whatever pity I had for the laid off Bee employees. Are they owned by the democratic party? - because the rhetoric coming from their editorial page could easily be confused with a quote direct from Pelosi.

The Republican AND Democratic Congressmen who chose to vote against the bailout did so for many valid reasons, certainly none of them being that they are "not adults". I'd think the Democrats would be better served to recognize why a majority of Congressman voted against this legislation than to resort to name-calling.

The hypocrisy of these people is absolutely astounding, having allowed this mess to be created they chastise those who don't want to force taxpayers to clean it up.

Patient Renter said...

People's jobs are a great deal dependent on this," he said, as well as "their home loans and all of their livelihood.

How do these idiots get elected? What does shifting debt from private institutions to the government at the expense of taxpayers have to do with keeping anyone in their homes?

Is he just making some vague reference to "home loans" hoping to trick uninformed constituents into thinking this bailout of Wall Street will somehow help their home loan situation?

Diggin Deeper said...

Friends, we have problem and it is the reponsibility of every American to voice an opinion on this bail out.

I urge all of those who approve or oppose a taxpayer debt program to send your congressman or woman an email demanding a "YES" or"NO" vote on the bailout.

By submitting your vote, yes or no, you will at least instruct your representative how to act on your behalf.

With an election so close, you can be assured that your voice counts this time!

If our system works, the American people will instruct, and their representatives will comply, based on the votes received from their districts.

I could care less about party politics. I don't particularily agree with my congresswoman's views, but she's all I've got. I reside in her district, I have a voice. and I will use it on this issue. Howvthis ends up should be determined by the people...and for once, the leadership is listening.

Jacob said...

They make it seem like the only thing stopping you from selling your home for a lot more is cause people can't get credit. But even if the credit were available people wouldn't be buying. Credit was flowing full speed when the bubble burst.

I was watching a piece on CNN today and idiot A was interviewing idiot B about their inability to pay for their home.

They owed $270k on their home. And had a combined income of $104k per year and had 1 kid.

Their debt was listed as $14k on student loands and something like $2500 on credit cards.

So I am listening to this and can't see the problem. The mortgage was just under $2000 a month. They make at least $5000 a month after taxes and 401k, IRA, whatever. Probably even $6000 a month free and clear.

Credit card bills and the student loan wouldn't be that much so they should still be able to pay easily.

But the real problem was the home was "worth" $30k less than the mortgage.

Either that or they are spending $4k a month on crack.

watchingthebubble said...

In a perverse way, I'm enjoying watching Wall Street getting b****slapped. Even if it isn't supposedly in my best interest as a "Main Streeter."

I'm in the process of getting a mortgage, and I had to turn over far more documentation and prove myself far more creditworthy than Wall Street did under the original Paulson plan. Had I known I could get $700 billion with a three-page proposal, maybe I would have asked my mortgage broker for more and submitted far less . . .

Was anyone else as insulted as I was as a taxpayer to see the Bush Administration have the balls of an elephant to ask for that much money with no guarantees of returns to the taxpayer, no regulatory oversight, and no cap on corporate executive salaries? Any member of Congress worth her salt should have b-slapped Paulson and Bernanke on the spot for even bringing that BS to Congress.

I think if any taxpayer money is on the table, it should be a loan, not a grant or a gift.

I wonder if people who could possibly save their homes are thinking about just walking away simply because their homes are worth less than what they paid. Wouldn't it be easier just to take the hit to your credit, rent for a few years, and get back into the real estate market when you can buy something more affordable?

I'm thinking of giving the IRS a three-page proposal next April for the taxes I know I'm going to owe and asking for a bailout simply because it would be good for my economy.

Deflationary Jane said...

More documentation? Not for us. I called my local CW broker to see if my pre-qual was still good. Sure it was and since we paid off the credit card from the move, they wanted to know he'd like to increase our limit.

Chase even raised my limit with no rate change on my primary card (the one we just paid off).

So much for constrained credit!

Jacob said...

The problem is not that banks don't have money to lend, it is that people don't qualify to get it. And nothing will change that.

People have more debt than they can ever pay back.

I'm waiting to see how many companies die this xmas season.

Diggin Deeper said...

For now it really affects more of Wall St then Main St when talking about the credit crunch. Overnight and short term cashflow financing by big corporations is the norm. If they can't get cash you can imagine how that will cascade down through the public sector in the form of plant closings and job losses. The feds want to bailout Wall St. because they have no choice.

Odd that they couldn't contain the problem long enough to skip by the elections. The market is doing what it will regardless of the whims of politicians. It's about time!

Jacob said...

How about we bail out main street directly and let it trickle up to wall street.

Patient Renter said...

even if the credit were available people wouldn't be buying. Credit was flowing full speed when the bubble burst.

Exactly. All the credit in the world can't force people to spend, and it won't force people (like me and you) to buy homes at inflated prices.

Was anyone else as insulted as I was

Yes. Truly, I don't think there was an expert in all of American who liked the initial Paulson proposal. It was just so horrible.

Patient Renter said...

Everyone should see this exerpt from a Kudlow interview of Rep. Brad Sherman (who voted against the bailout):

"The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury.

Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure that can happen."

It's absolutely incredible that the Democratic leadership (and misguided media such as the Bee) think that blatant use of taxpayer dollars to bail out foreign corporations is acceptable.

Diggin Deeper said...

My first instinct is to let the strong survive...but somehow the enormity of the problem trumps that thought.

Europe is in much deeper trouble than they're letting on. Barclays and Deutsche Bank are leveraged 50-1. If either or both were to fail, the leveraged losses are nearly the size of their respective country's GDP...When a bank can put that kind of pressure on a country, that's a real problem.

We need something for certain, but how its structured, is of key importance. Steve Wynn mentioned that one way to keep the taxpayer out this was to have the financial institutions issue preferred stock to the govt in exchange for the value of their bad paper. This would allow Wall St to finance their problems and keep you and I from handing the money over to Hank. The govt. then is in a preferred credit position, is earning interest (ala Buffet and Goldman Sachs), and can then later sell these bad assets when the market improves.

We need something innovative, and soon.

Diggin Deeper said...

The FDIC now wants to borrow $100B in order raise the insurance level from $100K to $250K. Let's tally up the costs so far:

Fannie/Freddie $200B
FDIC $100B
Bail out $700B
AIG $85B
Ford/GM $25B
'09 Deficit $480B

Total so far $1.59 Trillion

And this what we've had to dole in the span of the last 60 days. Heaven help what the number will be in six months.

smf said...

Couple of issues:

1. The original problem was way too much credit. Is it really solving that problem by extending additional credit?

2. You cannot reward bad behavior. It only encourages more of it. Those who made bad decisions should suffer the consequences.

3. Governments are still not acknowledging that the 'subprime' problem is but a part of the overall crisis. What happens when Alt-A and prime truly hit. Does the government have anything else they can do then?

4. Say banks truly stop lending. How would they make money then? A bank that doesn't extend credit will cease to be a bank, period.

Patient Renter said...

3. Governments are still not acknowledging that the 'subprime' problem is but a part of the overall crisis.

I'd say most important is that the government is still not acknowledging that falling housing prices cannot be stopped, and that it's wasteful to try. The whole premise for the bailout is that the government somehow knows better than the market what these assets are worth. Is it because they think housing prices will not fall farther? Is it because they think they can prevent prices from falling further? Neither is going to happen.

smf said...

Not to mention that still way too many people believe that even while prices may fall further, we will see 2005 prices again soon.

So the Fed is assuming that the $400K mortgage that cannot be sold for $200K now will be worth $400K in the future.

May I remind people:

The NASDAQ, that fell 75% after the crash, is not even 50% recovered from its 2000 high after 8 years. That is what happens with bubbles.

Diggin Deeper said...

"Neither is going to happen."

That's a more likely outcome than not. I read somewhere that Paulson believes that a 5% failure rate on these bad assets, including Fannie/Freddie was about all we'd see. Actual failure rates of these bad assets are running upwards of 9% as we've learned over the last several weeks when tallying NODS and actual foreclosure rates.

Why the disconnect? In a straight line projection failure rates would be higher by upwards of 75-80% over the projected 5% failure rate by the govt. I guess the assumption is that people upside down on their mortgage by 30% or more will just renegotiate their mortgages, stay, and forego mailing in the keys. That's a broad assumption that probably has no merit

I've also read that the home prices across the country could fall as much as 30% peak to trough. That basically leaves another 13-14% in potential price declines which would further pressure those failure ratios higher.

So if they can't arrest future price declines and are understated on true failure rates, they really get blind sided on both ends.

That's why the $700B is just for starters...

smf said...

Not to mention that there are stories than even in Baltimore, 50-70% of the homes purchased in one year were by investors.

What happens then?

Easy to let your 'investment' home(s) go into foreclosure. And there is nothing that can help that.

PeonInChief said...

That's why banks are requiring large down payments for investor-owner properties. The banks may have been behaved stupidly, but they now see how easy it is for an investor to walk away from a rental property. So, yeah, they want big down payments.

And they're not going to cut off anyone's credit card. Banks make most of their money off people who don't pay them off.

What's really going to cause the crunch is that people can't use their HELOCs any more. That's going to cut spending some, as well as people either becoming unemployed or fearing it.

(It should be noted that Sacramento has the highest mortgage/HELOC LTV in the country, so the home equity crunch should be particularly nasty here. What saves us--insofar as we can be saved--is government employment.)

What would be most sensible would be to dump a bunch of money into infrastructure projects, particularly green stuff. That would pump money into the economy without requiring that people run up their credit cards to spend.

Diggin Deeper said...

"What happens when Alt-A and prime truly hit"

This adds to the problem but it's no more than a blasting cap on a dynamite stick. The worldwide derivative market is over $1 Quadrillion and a portion of it will fail and has failed.

Some believe that the credit crisis escalated because of our unwillingness to bail out Lehman Brothers. They lost $600B. Ok, big number but doable. What they fail to mention is that their total liabilities were levered 20-30 times that figure.

Multiply a $600B liability/loss by 25 and see what you get. I guarantee you an "E" message on your calculator.

All Lehman derivatives won't fail, but it doesn't take but a failure rate of Hank's 5% to create losses in excess of a $1.3 Trillon {$600B + ($30B x 25)}. We're getting a bargain if $700B is all they'll need?

One can see why Washington is in in complete dissaray when trying to find a solution... and why "mark to market" accounting rules are doomed from here.

Just because we are having no problems getting credit, today, doesn't necessarily mean things won't change rapidly as the world unwinds this mess.