bostonbubble.com

[mpr]

[Kaidran]

Excuse my ignorance but is that not assuming that all the assets the govt purchased are good. Surely the whole problem was that a lot of them were toxic and only the govt would buy them. What happens when they disappear? Who ends up paying? It seems impossible that the govt could just create some money use it to buy some worthless asset then simply end up where they started after the asset defaults.

What am I missing?

[mpr]

[john p]

I'm not jumping on you, I'm trying to understand.

It kind of sounds to me like if you had the government buying the mortgage backed securities with valueless printed money, is that money Monopoly money that we printed or is it an obligation that we have to pay to a lender i.e. China.

I guess I am old school and think that whenever you print a dollar it is associated with an obligation for a service or good or repayment of that value with an associated inflation premium (interest rate).

If it is just Monopoly money and it evaporates like a fart in the wind with the value of the mortgage backed security, it's almost like a big forgiveness of risk (bailout) to whomever the US bought the investment from.

What is the down side to printing money to pay for the deficit in your mind?

I am sorry if I don't get it, most have to two-putt it with me...

[mpr]

[john p]

Here is how I think we may not get inflation.

If the FED buys someones mortgage back security for say $100, that person/bank is psyched to get off the hook for owning something that will most likely be worthless in time.

So the FED sponges up all these toxic assets using monopoly money, freeing up their books to lend more? I guess that is where I see potential inflation.

Inflation by printing money in my mind would be if say, we spent the money to built new bridges with it where that money would go into peoples pockets and make them richer giving them more buying power to buy things. Printing money to mop up a mess, just clears out the mess.

I think Kadrian is saying that the rate of the inflationary source in printing money may not be as fast as the deflationary drain.

I guess, I see what you're talking about as the FED is allowing steam out of the kettle, pretty much saying, "ok, I am going to release this amount of toxic assets out of the kettle and the mechanism for doing this is printing money a certain amount.

Here is how I see it. Imagine if a little kid owed their Mom and Dad $50 real dollars for a Play Station 2 game (forgive me if this is an outdated game) and the kid couldn't pay back Mom and Dad. If Mom and Dad got $50 from their Monopoly game and gave it to the kid and said, "Junior, here is a $50 note that you can use to pay me back". Junior is now psyched and has more capacity to go out and buy more stuff because the next real $50 he earns doesn't have to go to his prior debt. In this sense, I can see it freeing up people giving them more buying or lending power.

I guess this was the "Great Settlement" that I was referring to. I think that they have to be fair in seeing who is benefiting from this Monopoly money.

I wonder what the order of magnitude would be (the total cost) if they allowed everyone who was upside down the ability to refinance to their tax assessed value (burning off the bubble surcharge), forfieting any equity or down payment they may have lossed in the price drop? As crazy as that sounds, I wonder how much it would really be, and in this approach, the actual people on Main Street could benefit from the Monopoly money and not just the banks. What is getting me mad is that I had to pay the bubble price for my house, and the banks are going to get all the interest for that bubble price, yet I won't get cash flows the way we all expected things to grow. Why can the banks unload their mortgage back security when I can't write off the bubble amount of my mortgage?

[john p]

I will spare GenXer a post.

I didn't HAVE to buy a house at Bubble Prices.

[balor123]

Something I would see a bit more fair would be to give homeowners the option of extracting their equity and putting the house back on the market, allowing everyone to compete for that home again. However, while we're giving a get out of house free card to everyone, we should tighten up the lending standards so that we can reset the bar finally. The bank then, will take the loss. Since the banking system doesn't have near enough money, the Fed will have to cover the losses. The only moral hazard here is the employees of the banks who walked away with huge bonuses but the number of them is small and we were never going to recoup that money anyway. The big problem with this solution is that the amount of money is probably just beyond our means. In effect, America is stuck in a Ponzi scheme that we just can't fix in the short term. The current path we're walking down is to try and amass enough money over time to fix it in the long term but it's not clear that it will work either, though it postpones the short term problems (which is why it is so attractive an option).

[mpr]

[GenXer]

A broken clock is right twice. Most investors and homebuyers fare much worse. Governments don't care about long term because THEIR term is short. In any case, they have no idea what would happen next year, much less what would happen 10 years ahead, so this means that they often make the wrong decisions. At this point, just because we haven't become Zimbabwe doesn't mean that's not one of the options. We definitely know that Japan is the most obvious option on the horizon (which is not the worst, but is nothing to brag about). You can print money only as long as the economy is expanding rapidly. Otherwise, the ONLY thing you are doing is bloating the government/public sector, while the private one is getting screwed because the 'stimulus' is not stimulating any real job creation. This can only go on for so long - and only as long as it is subsidized. Why should people work when they get paid $30k a year forever? And government jobs require pensions and huge expenses, and they don't create any wealth or add anything to the economy, except more waste. This leads to higher taxes, and this spiral could continue its downward course, especially if there is no economic growth. The golden goose is not there forever - at some point the 'rich' stop being rich, and the middle class is taxed into the ground. This is where the buck stops. Then we either have another election or we are on our way to become Zimbabwe, because even Europe is now slashing costs (France just announced $100B in cuts). I sure hope enough people wake up and vote this November. Does anybody realize how much the taxes will go up in the next 4-5 years? All to pay for the bloated government sector which is killing our economy faster than any crisis.

[john p]

I look at it like certain individuals or institutions or governments make assumptions as to the rate of future growth. What happens is that some guess right and others guess wrong while some rate growths are protected locked in and some are suceptable to the forces of the economy.

Bottom line for the Public Sector workers was that you'd have job security and wouldn't have the stresses and strains of the pace of the private sector, but you weren't going to get rich. Therefore, the rate of government growth was to track inflation.

For example, in local government in Massachusetts we assume that the rate of government spending is 2 1/2 percent (i.e. Proposition 2 1/2). New Jersey's Governor Christie is actually proposing a version of Massachusetts 30 year old law. N.J. was letting government grow at 5-7% per year. In Massachusetts the town has to vote an "Override" to allow spending to go over a 2 1/2% increase and it can't be done every year. Being on my town's finance committee, the way I saw them getting around this was seeing certain line items eating into others and things like maintenance and building and road repairs being neglected.

Bottom line for the Private Sector workers was that you'd have to work harder and have to swim in the more turbulent economic waters. During the boom years you'd see growth beyond the public sector, but in the down years you'd wish you had that job security and pension. During boom years, people would assume that they were going to grow at 4% a year for extended periods so they were planning on growing into their mortgages. During the 1980's when the private sector got wage inflation, their mortgages became less and less of a percentage of their take home pay. Because Mom and Dad advise Junior, you get these echos in behavior and assumptions that the growth rate would speed up at some point so don't worry about stagflation.

The banks make growth assumptions on both sides. On the one hand, they want to make sure that their borrowers are getting salary growth so that they can actually pay their mortgages, but they don't want the money that gets paid back to them to be worth less and less due to inflation. Now to GenXer's point, maybe the CURRENT bankers don't care about what happens 10 years from now.

This was the basic balance and cultural basis of "playing by the rules" that our politics are based (meaning that it is a cultural norm that we accept this range of expectations).

The structural flaw that has thrown off all these growth projections is Globalization. The industries that were suceptable to foreign competition got hurt first, i.e. technology, the auto industry, manufacturing etc. Two basic things happened. Because the Unions had political power because they organized so many people, they moved from the shrinking private sector to the public sector. You saw governments neglect certain functions to afford this new influx of labor. The buildings started to be built cheaply, and bridges and roads were neglected. Secondly, they started investing (via Pensions) in some of the same companies that were sending jobs overseas.

Now because the government protected the government's growth rate, they had things like making laws saying that Pension Funds had to be held at certain levels, even if the nature of what was being invested in was risky. So if a Pension Fund invested in mortgage backed securities and they lost significant amounts of money, the taxpayers would have to replenish these Funds to certain levels by Law. At this point, the Public Sector had one foot on the dock and one on the boat, they were trying to get the best of both worlds.

The Dynamic I want people to consider is OWNERSHIP. I mean we focus on the CEO of British Petroleum (who manages them), but we don't get mad at those that actually OWN B.P. Now, of course the value structure of the ownership would create the impressions or "cut-out" for how a CEO would be. Was it in B.P's Annual Report that we would forgo certain profit levels in order to provide more costly safety measures? When Bill Clinton signed a law saying that their would be tax breaks for moving the rigs further from the shore into deeper waters, the oil companies moved to where more profit was period. Now, the OWNERSHIP of that company didn't give a shit about being in deeper waters, they were looking at their 401k's and these Fund Managers knew it. My point is that THE OWNERSHIP IS EVERY INDIVIDUAL WHO OWNS SHARES IN B.P. People want to blame the CEO, when it is really the ownership that is responsible. I wonder if they decide to divide the shares of the liability to in the same distribution as the shares of the ownership, which is how the profits are doled out. I know this sounds absurd, but my point is that when things are positive, there is a certain ownership structure present to allocate those gains (positive impacts), but when losses arise the owners don't want to absorb the negative impacts. My bottom line on this point is that like the government who protects the public sector and makes many efforts to lock in their rate of gains, the OWNERSHIP RICH also has mechanisms to avoid personal liablity while profiting from irresponsiblity. The fact that nobody frames it in this manner is astounding to me.

The real loser today are the private sector workers. The ownership rich siphon off the profits which are expected to grow at certain rates, they have to pay for the bloated government that have growth rates protected, and they have to compete with other nations that pollute and use child labor and don't have the same regulations we have. These sled dogs are getting killed.

Let's look at today's solutions. The government is concerned about making sure that the banks don't suffer from making the wrong assumption with the growth rate by buying their bad debt, yet the individual who made the wrong assumption about their growth rate has to pay their mortgage that was based on that assumption unless they cant' afford it or want to be a dead beat.

So you have a coalition of the banks, the government, the corporations, and the deadbeats. My passion is based on an understanding that this isn't a long term solution.

The two reasons why we haven't seen a correction is because as the babyboomers retire, their net worth becomes more and more OWNERSHIP RICH, meaning that their income is based on ownership and they don't give a shit how BP does business, they want their dividend. Secondly, the influx of foreign investment has kept our sail up at full height when we should have lowered it when the turbulent wind came.

The question is how do we get an even keel in the growth rates to find a better balance. I think the key is a G20 Summit where we get some consensus of banking rules, safety rules, labor laws, etc. In my industry (Architecture) we have been adopting an International Building Code and our standards and Code intentions have been pulled together and mutually discussed and adopted. Now we have supplemental codes for areas that are prone to things like wind or earthquake that are regional, but when it comes to banking and other stuff, they don't even have a forum, and the environmental folks are flat out of their minds in La-La land. This whole Oil Spill is like watching a movie called "The Wrong Stuff" a comedy of errors, where you see politicans and lawyers and car salesmen trying to change a light bulb.

[john p]

One last point related to the control of the rate of growth:

I have been in Manhattan for the past couple of months and one thing I heard last night on their local news was that the Rent Control Board approved in a 5-4 vote a one year increase of 4% and a 2 year of up to 6%.

Now ask yourself, why is the government controling this first. Second, if the economy is flat and we have 10% unemployment why do they approve 4%?

I guess it is because they don't want property values to decline. Think about it, if you own a condo, part of its value is the cash flow of what you can rent if for; if you increase the potential cash flow, the underlying asset goes up. Does this mean that they will get more money in property taxes? Is this a veiled tax increase?

Weren't these Democrats? Weren't they supposed to be the voice of the people? I think it is the voice of Big Government wanting to take a bigger bite and they want to control growth rates and who bites who.

[Boston ITer]

John, there are three Americas... the ownership class (see CEOs/Board Members, traders/financiers, Hollywood producers, etc), those who work for govt, and then the rest of us, the working private sector.

Well... in a more authoritarian corportist reality, who's on the low end of the pyramid? Exactly, anyone who works for a living in the private sector. He'll be constantly facing downward pressure on wages and endless threats of offshoring. The health care sector is the main non-offshorable bridge between public and private so far and I suspect that soon, that'll be a govt entity as well.

Be ready for a future where if one's not employed with the govt that one will be a perma-temp for retail (holding signs), fixing cars (or detailing 'em), or running the fax servers for big corporations, as documents move from one continent to another. And it doesn't matter if let's say Balor, GenX, or myself invent the next big "widget" or trading robot, as we'd get bought out and that work will end up in east Asia regardless.

[Kaidran]

I like the kid paying his parents with Monopoly money analogy. I think I just have a fundamental problem here with the idea of getting something for nothing. I cannot help but think I'm missing something.

BostonITer: Things may be out of balance but I think your painted future is unrealistic. Maybe the rich will still have the money, power and influence but the public sector will just get their benefits reduced as public dissatisfaction increases. There is already plenty of evidence of that even if you just watch the shitty local news. My only concern is that how the contracts are written, whether they could challenge (and beat) and austerity measures.

[mpr]