Monday, September 29, 2008

Nancy Pelosi Hurts Feelings of Poor Widdle Repubwicans; Stock Market Tanks

Happy New Year to those of us of the Jewish persuasion. Now I have to remember to write 5769 on my checks.

This column is now generally moot (well, at least until tomorrow). But I figured I had to take a stand on the bailout -- and not the one I thought I would take last Monday. Sheesh, I hate being responsible. It’s no longer the mommy party and the daddy party; instead we have the grown-up party and the other party. But I am glad to see that those of you who don’t live in Arizona are starting to see the John McCain that we’ve had to live with.

East Valley Tribune, Sep. 28, 2008

It might appear that the current financial crisis is getting worse. The largest bank failure ever, Washington Mutual, happened last Thursday, when usually the regulators shut down failed banks on Fridays so they have the weekend to sort things out. So the previous record failure, IndyMac, lost its title after only a few short weeks. It’s like how the home run record kept falling in the late 1990’s, with poorly-understood and improperly-underwritten mortgage-backed securities playing the role of steroids.

It might appear that while you’re still getting credit card solicitations, the effects of the credit crunch are spreading. Short-term credit markets (overnight Treasury repos, short-term commercial paper, and floating-rate municipal bonds) are showing increasing stress. These are basic commercial markets, where companies with some extra cash park money to earn some extra interest, while companies needing liquidity can borrow relatively cheaply. But the amounts aren’t huge, so if the companies with extra cash get spooked, they’ll just hoard their cash -- and a good business with seasonal or fluctuating results might run short for payroll.

It also might appear that despite the toxic unpopularity of the financial bailout politically, including a huge national case of schadenfreude over letting those Wall Street types get what they’ve got coming, the disease is worse than the cure, and we’re going to have to take our medicine. There are all sorts of reasons why a government bailout is wrong in theory, and the original Paulson plan -- give us $700 billion, right now, and no oversight please, we’re Republicans -- was a 3-page joke. But in practice, we don’t have better alternatives to a bailout. As Steven Pearlstein wrote in The Washington Post, the problem is that we can try to prevent a financial meltdown or try to teach Wall Street a lesson, but we can’t do both at the same time.

And it might appear that here in Arizona, where so much of our economy depends on finance, insurance, and real estate, we shouldn’t get too high-and-mighty about those scoundrels who made and securitized bad loans into incomprehensible financial instruments now worth peanuts. Those same bad lending standards and loose credits powered our own boom in real estate prices. Sure, we talk about climate, our low tax burden, the California regulatory state; we should have been saluting loose lenders, incompetent underwriters, and the greater fools bought, bought, bought both real estate and mortgage-backed securities, because they deserve the credit, not us.

Yeah, Wall Street stinks, but we also had a ticket on that gravy train, given the centrality in Arizona of real estate transactions, construction, and homebuilding. It’s going to take a long time to work off the hangover from the binge that caused home prices to leap past sustainable levels. Based on long-term historical trends, prices still have a way to fall. But getting over our hangover won’t be any easier if the credit markets noisily seize up.

And it might appear that the “conservative” approach to the crisis are merely political fig-leafs to have a “plan,” no matter how incoherent, to justify ideological intransigence. As for government “insurance” of these financial instruments, it’s not clear how insuring securities at face value is better than purchasing them at a discount, but it does hide the cost a bit. And a two-year suspension of capital gains taxes, supposedly to encourage sales of assets, is just nonsense. The credit crunch is due to securities that have lost value, and eliminating the tax makes them harder to sell because those losses can’t be used to offset other gains.

So the bailout stinks, but the alternatives are worse. There, I’ve taken a stand, without (tempting though it was) suspending my column-writing duties due to the crisis. That’s more “straight talk” than you’ve gotten from our state’s senior senator, who was “mostly silent” at the White House meeting he orchestrated, retired to one of his homes by 6 pm, and whose campaign issued a statement that “he did not attack any proposal, or endorse any plan.” Darn, I wish I could show leadership like that.

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