The horizon is not so far as we can see, but as far as we can imagine

Month: December 2009 Page 1 of 5

How Crises Play Out

A friend sent this to me, and I think it’s pretty accurate:

I do see something of a pattern here in response to a perceived crisis:

1. Make laws and rules.  It doesn’t matter if you understand the problem, if the rules are relevant, if they will help or if they will do more harm than good.  The public sees this as a security crisis (or financial crisis or…whatever), but you the administration (whichever administration) sees it as a PR crisis.  So you need to be seen to be doing something.  So go and generate red tape.

2. Don’t enforce those rules.  Don’t fund their enforcement agencies.  Don’t treat them seriously.  But by all means make sure they incur great costs that could otherwise be diverted to effective measures. And definitely make sure you cause as much hassle and inconvenience to law-abiding civilians as possible.

3.  Don’t worry about unintended consequences at all.  They’ll never happen!

4. Use this as a great opportunity to divert taxpayer dollars to your friends with close to no government scrutiny.

5. When the next crisis / PR moment happens, don’t waste time trying to understand the problem, performing any kind of risk assessment, assessing the effectiveness of the rules in place, increasing the funding, or increasing the power of oversight agencies. That kind of thinking is for godless communist homosexuals!  No, no, no!  Instead, hold a press conference, create new laws (with fancy patriot names!), and go back to step 1.  Rinse and repeat!

Security Theater

Maureen Dowd nails it:

If we can’t catch a Nigerian with a powerful explosive powder in his oddly feminine-looking underpants and a syringe full of acid, a man whose own father had alerted the U.S. Embassy in Nigeria, a traveler whose ticket was paid for in cash and who didn’t check bags, whose visa renewal had been denied by the British, who had studied Arabic in Al Qaeda sanctuary Yemen, whose name was on a counterterrorism watch list, who can we catch?

The new procedures are all security theater.  What is needed is to actually use the tools we already have and to reform them.  For example, the no-fly list has so many false positives that it is worthless.  The majority of people on it aren’t terrorists and everyone knows it, so they don’t enforce it rigorously.  (It’s also unconstitutional, since it is punishment without a trial, being able to face ones accuses and see the evidence against one.  Of course the parts of the US constitution having to do with making war and civil rights are largely in abeyance, anyway, except when it comes to being able to tote around a personal machine gun.)

The kid had every possible warning flag.  He’s the person they should have been strip searching, as opposed to random strip searches and pat downs which do almost nothing.

As for all the new rules, they won’t make anyone safer, but they will make air travel even more unpleasant than it already is.  And given that air travel is already extraordinarily safe, far more so than driving a car or crossing the street, again, the new rules are just security theater.

More Notes on How To Help Homeowners

Let’s run through how it has to be done if it’s going to be done right.

1) The face amount of the mortgage needs to be reduced by the long term value of the house, as if the housing bubble hadn’t occurred. This is both to reduce foreclosures and to help reset housing prices where they should be.

2) Payments need to be set at a maximum of about 30% of income. This is the decades old rule of thumb for how much a family should be paying for housing. It’s also important because the more a person is spending on housing, the less they’re spending on anything else, and consumer spending recovering will be important to any lasting recovery.

3) Any government mortgage needs to be senior, with no other debt able to supersede it.

4) Mortgage contracts going forward, sold by anyone, need to be defined by the government as to what the terms can be. Maximum effective interest rates, which must include any possible combination of fees, must have a maximum set by the government (ie. a federal anti-usury law), probably at prime + X, based on prime at the time the mortgage was written. This will limit balloon payments, jumpers and other such traps.

5) A floor needs to be set under housing prices. That floor should be set at either 30% what the median income in a zip code is, or at what prices were in 2002. This is the value the government will buy out a mortgage for, and it means that everyone knows what the least a mortgage (and therefore the securities based on mortgages) are worth.

6) Bernanke wants to lower interest rates, but he wants to do it indirectly, by buying Ginnie Mae securities or having Congress subsidize the loans. This is inefficient, the simplest way is to just use the banks taken over (which should include Citigroup) to make loans at whatever rate the Fed thinks is appropriate and avoid private banks refusal to lend.

7) Since a collapse in housing prices, while overall a good thing because it will increase real non-debt related consumer spending and will make Americans more competitive, will also cause deflationary pressure, some steps should be taken to increase the real economic value of houses. This means:

* Areas that will be eligible for federal aid in the form of mortgage repurchases and rewrites must change their zoning to allow home businesses;* A major broadband build-out must be done, with no usage caps, to allow folks to work from home. The current 5 gig limit that the majors seem to be moving towards is too low;

* As part of the infrastructure stimulus a massive refit of buildings for energy efficiency and generation must take place, to allow people to micro-generate power and make money that way; and,

* The power net must be reconfigured to allow micro-metering so that people can sell the energy they produce and see how much energy is costing at any given time.

All of these things will increase the real economic value of houses, and after the initial suburban shock at the idea of someone working at home, will increase the value of houses, but will do so in a way that makes economic sense. A place you can make money from, and not just live in, is worth more. A place that takes less energy to run is worth more.

This will also set a floor under a significant cause of the financial crisis, allowing firms to have a chance of actually calculating losses. The problem right now is no one knows where the bottom is, so it’s impossible to know how bad a shape anyone is in. Finding that floor, or rather creating one, is essential to “restoring confidence”.

How To Bail Out Ordinary Mortgage Holders And Not Just Banks

I wrote this post originally in September of 2008.  It appears that Fannie and Freddie are getting their unlimited line of credit because underwater mortgages are sharply up, and they are expecting foreclosures to go through the roof next year, as well as the commercial real-estate market to collapse.  So, here’s what should have been done for homeowners well over a year ago.

I have received multiple e-mails today suggesting that instead of the bailing out banks at the expense of taxpayers, the government should give mortgage holders money to pay off their mortgages.

Both ideas are bad. But there is a better solution.

Why the Government Shouldn’t Just Bail Out The Banks

The government is talking about setting up a Trust to buy distressed debt then sell it again. The problem is that the Trust company will simply bail out banks at taxpayer expense without helping mortgage holders much. The mortgages it sells will still be underwater, or too expensive for many people to service, especially as their houses lose value.

The other proposal, just giving money to people to pay for their mortgages, is bad also. Housing prices are actually dropping, most mortgages issues were bad mortgages with horrible penalty clauses, based on assumptions about housing values which are just wrong. House prices are going to keep dropping.

What the government should do instead is set up a Trust to buy mortgages at a discount, then reset them to 20, 30 or 50 year fixed mortgages with a reduced face amount. If the house is later sold, half of the increase goes to the government, so that taxpayers make a profit. The mortgage cannot be paid off before the end of its term so that financial scavengers cannot come around and, as they did over the last ten years, say “get rid of that mortgage, and take ours. It’s better. Honest!”, because we know that when they say better, they don’t mean better for the mortgage holder. The mortgage is attached to the property and is transfered to any new buyer. And the mortgage cannot be removed from the property, and any new mortgages attached to the property are junior to the government mortgage.

End results:

a) a floor is set for mortgage prices. (Whatever discount the government is buying at. Probably 60% to 70%, but it should be based on what the long run price was in the area before the housing bubble.) This ends the confidence crisis in these securities, because there is now a market price—what the Trust will pay.

b) It helps homeowners stay in their homes.

c) It gets rid of overly complex mortgages and puts in their place a dead simple mortgage that anyone can understand.

d) It punishes lenders, which they deserve, for making loans they should never have made.

e) While it does keep homeowners in their homes, it doesn’t let them off scot-free either. In exchange for a good mortgage they can service, they give up some of the future profits on sales in their houses.

f) The government will almost certainly make a long term profit on this. This is important, because it’s not fair for people who aren’t underwater on mortgages to spend hundreds of billions or trillions bailing out those who are without some expectation that in the end it won’t be more than just a transfer of wealth to them and to investors and banks.

This bailout can be done right. It’s up to Democrats, who appear to be in danger of stampeding into a hasty decision, to stand firm and make sure it’s done right. The last two times they didn’t stand firm and do things right, we got the Patriot Act and the Iraq War. This is too important for Democratic fecklessness. Too important for them to just give the Bush administration whatever it wants.

If they do give the administration what it wants, then Wall Street and the Banks just got bailed out, no help goes to ordinary people and you get stuck with a trillion dollar bill. Taxpayers get all the toxic assets, but Wall Street, who paid themselves more in bonuses in 2007 then 80 million Americans got in raises, keeps the profits.

Democrats need to stand up for ordinary Americans and do the right thing.

Update December 2009: Well, obviously they did give the Bush administration what it wanted, then they gave the banks everything they wanted in 2009.  The result has been as predicted, except the bill may be even larger than I thought at that time.  It is not too late (in theory) to do the right thing.  If the Obama administration can spend unlimited money without Congressional approval to bail out Freddie and Fannie, then they can spend the money instead to set up a Housing Trust which helps everyone but also spreads the pain so it isn’t only ordinary people taking it on the chin for once.

A fundamental cause of healthcare costs exploding

Is that Americans (and Westerners as a group) eat crappy food and don’t get enough exercise.

The author is entirely right that real healthcare reform would tackle these problems. Frankly, if it was up to me, I’d subsidize healthy food (so it’s cheaper than junk food) and heavily tax unhealthy food.  Exercise would be mandatory in all schools, and it would be real exercise, meaning every kid who could handle it would be getting a minimum of half an hour of cardio  3 days a week, and would learn how to use weights as well as being exposed to some form of skilled movement exercise, whether that be climbing, dance, yoga, tai-chi or something else along those lines.  Every kid, when graduating, would be able to put together an exercise program on their own, so that if they needed to in the future, they could.

No mortgage would be considered to be “conforming” for federal mortgage guarantees if the neighbourhood it was in did not have sidewalks, city centers would be off-limit to all cars, with only emergency vehicles allowed in during the day, and commercial vehicles delivering at night.

Etc…  Yes, this might infringe on the holy right of Westerners to be lazy, fat and sick, but so be it.

The Iranian Government Destroys Its Own Legitimacy

I don’t have a ton to say about the riots and protests in Iran.  But what I do think is important is how the regime has destroyed its own legitimacy by killing people on Ashura, when Hussein was killed.  Such killing is strictly forbidden, and even the Shah didn’t kill people on Ashura.

In an Islamic Republic doing such a thing is a violation of the legitimacy of the government itself.  And Iranians are still close enough to their revolution, and brave enough personally, that doing so matters (unlike wholesale violation of the US constitution or widespread vote theft in America, for example, which is meaningless because most Americans don’t actually care enough to get violent about it.)

It is also interesting to note that the same thing is happening here that happened to Shah — cycles of mourning at funerals keep things at a fever pitch.  The more people the government kills, the more mourning there is to be done, the more mourning, the more opportunities for protests and riots.  And since those mourning rituals and funerals are a big deal culturally and religiously, trying to suppress them increases the illegitimacy of the state.

And the Iranians are getting hardcore, they burned down a police station, for example.

I don’t know how this is going to play out.  But, one way or the other, I admire people who are willing to fight.

Worth Reading

This post by Tony Wikrent on globalization, free trade, US manufacturing and the hollowing out of the US economy. Lots of very concrete examples.  Tony’s one of the folks who’s gotten things right for years.

Merry Christmas

hopefully Santa has been kind to you, and Christmas has been and is a happy time for you.

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