Thursday, October 2, 2008

The Recession and you

I am in my late twenties. I have a full-time job that pays a decent hourly wage and provides fairly reasonable health insurance. I have no retirement savings, no 401k, no IRAs, and (probably through my own fault) almost no regular savings of which to speak. I pretty much live paycheck to paycheck, as do quite a few of my fellow citizens.

Basically, if I were to lose my job, I'd be in a pretty shitty position. And my long-term prospects, as they currently stand, are not great. I need to start saving--and start saving soon--if I want to retire at any point before I get a nice certificate in the mail from the president congratulating me on being a century old.

My situation is not unique, and I'm not laying this all out to garner sympathy (I long ago came to terms with my artistic temperament and the personal economic situation it would likely get me into). There are a lot of people who are far worse off than me.

And that's just the problem. There are lots of people worse off than me. And I'm no great shakes. Being that we're either staring over the edge of / tumbling into the abyss known as Recession (whether we're there already or just well on our way is a matter of some contention, but everyone seems to agree that Recession Is the Future), this fact becomes especially onerous when taken together with this whole "bail out" thing Congress is currently in a tizzy over.

Honestly, I wasn't entirely sure what to make of the plan at first - certainly, the economy is facing a major crisis and some sort of major action needs to be taken to help stave off absolute disaster. But giving unfettered control of $700 billion dollars to one guy so that he could bail out the monstrously large corporations whose own stupid, greedy actions got us into this mess in the first place? That didn't quite jive, ya dig?

Some of the changes made to the bill by the House (like actual oversight) seemed reasonable to me, but overall, it still left a bad taste in my mouth. So I was somewhat relieved when the they voted it down, and frustrated when the Senate then passed a bloated version of the bill yesterday (Feingold, ever our rock, voted against it). Tax credits for hybrid vehicles are all well-and-good, but should this bill be the place for them? Especially considering some of the other wackadoodle stuff that ended up in there, too, like some sort of tax break for a company that makes toy arrows and various other pieces of blatant pork.

All this, apparently, to sweeten the deal enough to convince hold-outs to vote for the damn thing. I suppose it shouldn't come as a surprise that some of our elected officials need to be given candy before they'll eat their veggies, but seeing it laid so bare is always a bit of a shock to the system.

Ultimately, pork or no, I think the bill is a bad idea. I came to this conclusion through my own meaty brain powers, but also by consulting with a lot of people what holds fancy degrees and credentials as actual economists. Apparently the vast majority of 'em, too, think the bill is a bust and would much rather the government buy out the bad mortgages instead of handing over a huge wad of cash directly to the banks. Glenn Greenwald over at Salon has a pretty excellent take on this, and I encourage you to give it a read before continuing on with my ramblings. Here's a sample:
...Jonathan G.S. Koppell and William N. Goetzmann of the Yale School of Management argued that a far preferable solution is to have the government pay off all delinquent mortgages -- which would transform the toxic waste into solid instruments and would prevent people from having their homes foreclosed....

Johnston condemned what he called the "atrocious" journalism on the financial crisis, and said "there's an enormous amount of just wrong reporting going on." In particular, Johnston documented the fear-mongering taking place among TV journalists that has plainly put the public into the state of submissive panic that Pearlstein wants them to be in, whereby -- exactly as was true for Iraq, eavesdropping, the Patriot Act and a whole host of other measures -- they come to be convinced that they better unquestioningly and immediately submit to the dictates of the political and media establishment, they better relinquish any belief that they should question what they're being told, lest they suffer imminent, inevitable, catastrophic doom.
And that's another thing that really puts me off: it was only for my insane blog-reading habits that I came across this apparently widespread economists' consensus over a better way to deal with the crisis. I've heard nothing about it on the radio or in newspapers (and I'm sure there hasn't been much on TV, but I don't have one, so I'm not sure), only the continued "we must act now or diiiiie!" quotes coming from Washington and a general sense of urgent beffudlement. Even Obama has gone in for this thing, which, while somewhat understandable, is still disappointing.

I, for one, would really rather not see tens of thousands (if not millions) of people lose their homes, their jobs, etc. So yes, action must be taken to stabilize the economy and put liquidity back into the credit markets. But bailing out the big banks that caused the problem in the first place? Hell no. How about some trickle up, instead of trickle down, for once? Clearly, there are alternatives to what's being championed by Bush and a strangely bipartisan coalition in DC, so what gives? Is it just a panic mentality, or is something more insidious, yet again, happening?

We've been tricked-through-fear into supporting and passing other terrible legislation in the not-so-distant past, so I can't help but wonder if this isn't just more of the same. Think authorization for the Iraq War. Think the Patriot Act. OMGactnoworwe'reallgonnadiiiiiie! Same sort of thing.

Only this time, the consequences won't just effect soldiers, Iraqis, dissidents, activists, etc., - ie: others. And that, apparently, is finally enough to make a broad coalition of folks stand up and take notice. Because the people guiding this bill--Paulson and the like--come from the very institutions that caused the problem, though, we're being led pretty fucking astray as to how to best go about dealing with it.

Meltdowns like this should be a great opportunity to start setting things right, to make sure we have a system in place that actually works to prevent the exact same thing from happening every decade or so. Sadly, and yet again so far in this case, we tend to go in for the same old stuff time and time again, no matter how roundly the methods have been disproved. And it will continue on like that so long as we allow for massive deregulation, cronyism, corruption, etc., to rule the roost.

I, for one, would rather the state of my personal finances be left up to my own devices--that is, if I work hard and play it smart, I might actually do all right for myself in the long-term--as opposed to having the deck stacked so firmly against me by people who make more money in a day than I'll see in years. I'd rather that be true for all of us. I'm not interested in "getting mine" and then pulling up the ladder behind me. I want parity. Ya dig?


Six String Scientist said...

I dig. We recovered from the dot com crash without anything like this. While the circumstances and widespread outcomes surrounding this are a bit different and we do need some sort of action, it disturbs me that while being reported we weren't in a recession and that the economy is strong, this plan is being worked up under our current administration behind closed doors. While I'm glad that some oversight was granted in comparison to the original plan, I'm dismayed that there wasn't more discussion on other options. We need some help sure, but after dropping over 700 points, the next day the Dow recovered close to 500 points the next day. Not exactly the "oh shit if we don't pass this right now we'll all fail at everything forever" that was being preached from capitol hill. I don't follow all the angles as closely as some, but common sense should tell people that this isn't going to crush our country in a matter of hours, and serious thought should be put into how we deal with it.

John A said...

Just a brief perspective: I worked for four years in the Treasury department of a (former) investment bank, and wrote a lot of the systems that track the credit indicators that are going crazy now. I've got a pretty strong understanding of the mechanics that are freezing the system now.

And while Six String Scientist is right that this isn't going to crush out economy in a matter of hours, a week or two might do it. Time is seriously of the essence.

I'd commented somewhere earlier that the quickie passage attempt of the initial draft of bill reminded me of the Patriot Act, which was the kind of bill that didn't need a quick passage. This isn't that kind of bill. (And truth be told, I'm not sure the Treasury technically needs a bill to do what they want, but that's a different topic.)

Without the kind of cash infusion we're talking about here, virtually any business that operates on credit will be at a high risk of failure in a few weeks. And nearly all large businesses run on short term credit.

In an obvious though trivial example, Ford is taking an additional hit now because a lot of their prospective buyers can't get a loan approved, even at super high rates, because of the current credit freeze.

The nature of the modern business environment is such that without credit, it seizes. This problem has nothing to do with the stock market, it's all about liquidity and the short term debt market.

The simple truth right now is that America is going to pay a lot of money to fix this problem. Fixing it up front is going to cost significantly less than fixing it six months from now.

Emily said...

John - I hear you, and thanks for the perspective. I still don't think this was the right bill (especially with all the added pork), but I'm curious what you think of the idea of having the government buy out the bad mortgages and the like instead. It may be a moot point now, but do you think that might have been a better way of freeing up banks' credit giving abilities?

John A said...

I agree, the pork bugs me. I don't know that it was necessary either, but at least some of the energy stuff is good.

I personally have a big issue with the idea of the government paying off the mortgages, on an ideological level.

The current plan calls for the government to buy the mortgages, taking the bad debt off the books of the banks who currently hold them. The government will hold the mortgages until the market corrects itself, at which point the investments should be worth close to market value, thereby negating much of the cost of the program. In other words, the government is buying $700b in assets that are really worth a lot more than that. When the market corrects itself and the assets gain value, they can be sold for a gain. That makes the assumption that the value will reset, which isn't a sure bet.

The other plan (paying off everyone's mortgages) simply says "All of you people who took on more credit than you could handle and stopped paying your mortgage, here's a freebie. Your house is now free. Enjoy!" As someone who has spent much of the last 10 years scrimping and saving to buy a house, this pisses me off to no end. It is the definition of a free ride. Even if the gov't then resets a mortgage based on a perceived fair value, I think this creates a dangerous precedent that has a lot of potential impacts. It's one thing to create the impression that the government will bail out businesses. Allowing the government to bail out individuals directly contributes to the idea of a welfare state. Even as a left-leaning guy, I don't like the idea of training a generation of lower income gamblers that the government will personally bail them out if they're in trouble.

The bailout plan isn't a free ride, since the the companies involved give up freedoms in exchange for the assets, and the government will likely get some of their money back.

John A said...

And very quickly: Here's a very concrete example of how quickly frozen credit markets can hit:

California's government is on the verge of collapse.

Emily said...

Yikes, that's a pile of bad.

Thanks again for your take on this. It's all been pretty overwhelming for us non-economists, and I don't pretend to understand it all that well.

I, too, would rather not see a full-scale bail out of people who bought houses well above their means. I guess I was/am just skeptical that bailing out the big corporations that cooked books and went in for shady loan practices is the way to go, either.

Clearly, however, something needed to be done, and the situation in California is a pretty clear example of why.

I just hope hope hope that, for once, we actually learn something from this debacle and put in place regulations and the like that would prevent it from happening again. I feel like we usually just panic, throw a band-aid on it, and then go right back to the shitty practices that got us into trouble in the first place.

The Lost Albatross