November 27, 2008, 8:25 a.m.
or
How to Create an "Upward Spiral" Economy
Americans have much to be thankful for this Thanksgiving Day, 2008. For almost all of us things could be much worse than they are.
But those who have the most to be thankful for are the day traders who bought stock at the market's current bottom, and watched President-Elect Obama talk it up 1500 points for four trading days in a row before they sold. Or the CEOs who greedily either knowingly, or stupidly, drove their corporations and the nation's economy into the ditch -- but are still enjoying multi-million-dollar salary/bonus/benefit packages, flying around the country in corporate jets, and holding corporate meetings at five-star spas.
Obama has certainly brought together a group of economic advisers with experience and the ability to warm the hearts and fill the pockets of Wall Street financiers and bankers. But their combined economic wisdom for our new president has, so far, been a continuation of the old "trickle down" philosophy.
The wealthy who have made colossal multi-hundred-billion if not trillion-dollar blunders with bad investments need not worry. We, the taxpayers (or rather our grandchildren), are silently accepting the obligation to express our sympathy for what would otherwise be their personal hardship, let bygones be bygones, and agree to give them what is now estimated to have been something on the order of five trillion dollars over the past month or so.
What would have happened if that five trillion gift had been part of a real "spread the wealth" program instead? With roughly 100 million American families, that would have meant $50,000 per family; $50,000 to help banks by our making regular mortgage and credit card payments, $50,000 to help the auto industry by buying cars, $50,000 to help retail sales by buying year-end holiday gifts, $50,000 to help students (and their parents) pay increasing college tuition.
I'm not seriously suggesting that should have been done. But it helps make the point. Wouldn't that have done more to turn around our economy than giving trillions of dollars to Wall Street investors, bankers, and corporate CEOs of failing corporations? Indeed, isn't it obvious that the quickest way, indeed the only way, to "spiral up" this economy is to get money (hopefully by way of wages for jobs improving the nation's infrastructure rather than handouts) into the hands of 299 million Americans -- rather than the one million wealthiest?
Where is the voice for that 95% of the American people for whom Obama has promised a tax cut? Not the tax cut; this may or may not be a good idea right now. I'm just asking who is speaking for the unemployed, those who are -- or are about to be made -- homeless, whose credit cards are maxed out, who can't afford essential medical services, or who have had to drop out of college?
Oh, you answer, but isn't that the purpose of the latest $700 billion proposal from the new administration-to-be?
Not quite.
Not everyone who is jobless is "unemployed." A single mother, limited to part-time employment, is not eligible for unemployment compensation when she's let go. A laid-off worker now working for half his or her former salary is not "unemployed" -- and we don't offer "under-employment" compensation. Someone who was "unemployed" is no longer entitled to unemployment compensation once their benefits "run out." A jobless person who has become so discouraged from months of unsuccessful looking for work that they've simply given up is not considered "unemployed."
Generously providing banks trillions of dollars, whether to buy their worthless "toxic assets" or their stock, was supposed to solve the problem and make them more willing to make loans to each other and their customers. Instead, many have used the money to continue the lifestyles to which their executives feel a sense of entitlement, buy more banks, or to simply hold as cash reserves.
But even if they were to use the money for the purpose for which intended, how is that going to be of any assistance to those who need it most? Their problem is not that the banks don't have money to loan, it's that they wouldn't qualify for the loans -- or be any better able to pay off those loans than the loans they already have.
Consider these excerpts from what the New York Times has to say this morning (November 27) about the latest taxpayer giveaway ("U.S. Consumer Loan Aid Will Trickle Only So Far"):
If you’re buying a home, refinancing a mortgage or seeking an auto or student loan, the new government plans to make borrowing cheaper and easier sound like a gift.Ron Lieber and Tara Stegel Bernard, "U.S. Consumer Loan Aid Will Trickle Only So Far," New York Times, November 27, 2008.
One problem, however, is that whole categories of people may be ineligible. If you are refinancing, you could be out of luck if your mortgage balance is more than your house is worth. And for all kinds of new loans, lenders have raised their standards even as their customers’ credit records are deteriorating because of late payments and other problems.
And then there is the fact that the government’s efforts may take a while to start working — if they do at all. Once again, the government hopes that the benefits to consumers will trickle down. It is not simply lending to them directly. . . .
The federal government made two big moves on Tuesday [November 25]. The first, already known as TALF, for Term Asset-Backed Securities Loan Facility, is a $200 billion program that will lend money to private investors who buy securities backed by student and auto loans, credit card debt and small-business loans guaranteed by the Small Business Administration. . . .
In the second part of the program, the Fed has agreed to purchase $500 billion of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. . . .
But that does not necessarily mean banks will be any more likely to oblige. Another complication is that the value of many homes — even those owned by people with stellar credit — have declined, making refinancing difficult.
“At the end of the day, it still comes down not to just a rate discussion, but a discussion about qualifications as well,” said Cameron Findlay, chief economist at LendingTree. “There are fundamental elements of qualifications for loans that will inhibit the ability of this program to have any meaningful, significant impact.”
Lower mortgage rates do little when unemployment rises and wages stagnate, he added.
To qualify for the best rates, borrowers will need to have a credit score of at least 720 and a down payment of at least 10 percent and probably closer to 20 percent. Borrowers seeking to refinance will need to have the same amounts in home equity. . . .
The efforts to loosen the purse strings in other areas of consumer lending may take longer, however, if they work at all. Most of the big credit card companies are parts of banks with billions on deposit. They can already use those deposits as a ready source for new credit card loans.
“Banks may want to fund fewer of these loans out of their deposits,” said Odysseas Papadimitriou, who worked in the card industry at Capital One . . .. It is possible, he said, that they will . . . not increase the total amount of loans that they are willing to make. . . .
But none of the government’s moves alters some unfortunate facts. Lenders want better credit scores from consumers in every category. At the same time, millions of people are much less creditworthy than they used to be, because of the damage they have done to their credit scores through late or missed payments.
Lenders themselves have contributed to the downturn in creditworthiness by lowering the credit limits on huge numbers of customers’ credit cards. This has the effect of raising the percentage of available credit that a consumer is using, which usually causes their credit scores to fall.
Clearly, the banks do not have the confidence in how consumers will handle credit that they might have had six months ago. It is not clear whether a new source of funds will cure this skittishness.
Nor is it certain how much untapped desire to borrow exists. The fact that consumer spending fell an entire percentage point last month, as the Commerce Department reported Wednesday, may reflect something other than a lack of capital.
“If consumers are afraid to make purchases, it doesn’t really matter how much available credit you have,” said Mr. Papadimitriou of Evolution Finance.
In short, we've yet to do anything really meaningful for the only Americans who hold the power to create an "upward spiral" in our economy -- that 95% Obama refers to as "the middle class."
Someone wrote a comment on my Citigroup blog entry that puts the contrast between the Wall Street and banks bailout, on the one hand, and the loans you and I get, on the other, much more succinctly. (And no, I don't know who either "Me" or "D" is.):
"Me said...
I like D's comment to me this weekend: "Sure, we'll lend them [Wall Street investors and the bankers] money. At 15.9% over prime, and if they miss a payment it will raise to 29.9%. . . . " And they'd better get the check in the mail a week ahead of time or it might be late anyway due to our reasonable processing time.
11/26/2008 07:37:00 AM"
Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008.
Indeed, both the Citigroup deal and this new "consumer" effort are but two more classic illustrations of how "the Golden Rule" has become "those who have the gold make the rules." For elaboration see the new book, Nicholas Johnson, Are We There Yet? Reflections on Politics in America (2008), Part IX. Gold; or the earlier blog entries, Nicholas Johnson, "Golden Rules & Revolutions: A Series, Part VIII: Money and Lobbyists in Iowa: Smoke and Mirrors," April 19, 2008 (with links to Parts I-VII).
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