Entry tags:

economy

What to do about the meltdown?
My dad asked me what I thought should be done about the global financial meltdown--it wasn't an easy question to answer--but I did frame it to him, the way I thought about it.

What Are Our Options?
Here's what I laid out:

1. Let Them Fail. If we "do nothing" a bunch of financial institutions, banks, and maybe governments will fail. The good side is that this is what is "supposed to happen." The bad side is that (a) it'll really suck and (b) what if it goes "all the way" (to the guns and water scenario)? We don't want to risk that--no one does. That's uncontrolled free-fall, Capitalist or not. No one wants to play bumper-cars with their nation.
2. Save the Most Innocent. If you are going to start bailing out anyone don't you want to save the most innocent people involved? Sure you do. The most innocent people, though, are the tax-payers who aren't involved(they pay their mortgages)--so who in the "value chain" is salvageable? Well, there's individual home owners who were victims of predatory-lending. Sure--if you consider them innocent, you can try to help them (and people are)--but the big boys are the financial services institutions who are one-step up from the sharks (the actual predatory lenders who are no longer around). If you decide to let these "enablers" suffer? Well ... you're back to solution 1. So saving the innocent won't get you out of the dark times. You have to help the guilty too.
3. Go Utilitarian. Let's just save who'll do the most good. That's a great way to approach this. Unfortunately it's hard to know: saving any of these institutions leads to two questions (a) what do you mean by "save them?" and (b) what are the consequences of this saving? If I keep giving the auto-industry money I'll certainly be "saving them" for a while--but since they are losing like 58k per minute that's not sustainable. On the other hand, if I nationalize a bank here and there, what'll happen to the rest of the economy? No one knows: this is the "law of unintended consequences." It could be bad.
4. So We'll Just Increase The Money Supply. And Then Change Some Laws. As far as I can tell the government would prefer not to nationalize banks (see above), wants to protect industry--and has a few options on the book for doing so. I happen to "agree" with this approach--so we'll look at it in more detail. What laws? What happens to the money supply?

Breakin' The Law
One of the laws that might get changed is mark-to-market accounting were you have to declare assets at the current market value. I am no expert on this--but I am told that if we allow you to declare some of these complex financial instruments at "what you think they are worth" we could get good mileage out of that because it would remove uncertainty. I am not an expert--and I don't fully understand the value here. I'm sure someone can explain it.

One of the things I do understand though is the proposed change to the bankruptcy laws to allow a "cram down" of mortgage rates. Today if you declare bankruptcy you have a choice to include your house--or not. If you include it, yeah, you don't have to pay--but they'll take it. If you don't? You gotta pay. So bankruptcy doesn't traditionally scare mortgage holders. However, the proposed change would allow you to renegotiate your mortgage--that's pretty nice ... for the home owner.

It's also, today, nice for the bank: rather than getting another house (DO NOT WANT) they manage to get something for it--and if that renegotiation is legal then they are protected from all the marginal mortgage holders coming back after them. So it's win-win ... right?

Well, right for them. For the people who deal in un-collateralized debt it's a nightmare. The credit card companies are deathly afraid that you'll go bankrupt, renegotiate your mortgage to something payable and say goodbye to your CC debt. This might not be so attractive if you couldn't save your home? But if you suddenly can? It's a no-brainer! What are credit card companies doing? Well American Express is doing the following: If you shop at Walmart they are cutting your credit limit with them. They are cutting other people's just "because" (with a not-very-nice letter: I know someone who got one). Finally, more nicely, they are offering customers 300.00 to pay off their account and close it!

I had a credit card closed on me for not using it. Why? I wasn't making them money--and I presume they are terrified I would lose my job and rack up a ton of debt and go "tough."

What About The Money Supply?
This one is more complex: by running a massive deficit what happens to the economy when it is flooded with government fiat-money? I don't know--but here are a few things to consider:

Firstly, how much money has been destroyed? If the housing market collapse is destroying money then this adding might not result in inflation.

Secondly, what happens if the money collects in banks and financial institutions? The problem right now is that people aren't lending. If this money gets caught in the fear-zone of zero-risk money-lending (especially because banks are now likely to be asked to de-leverage to the point where they have to have a lot more money on hand than they used to). Can the banks just "not lend"?

I think the answer lays in what happens to restructuring. Just like the auto-industry, if it survives in any form, will need to renegotiate with its lenders--including the unions--these financial institutions will need to renegotiate with various holders of insurance (Credit Default Swaps) and so on. Depending on how that goes, it can be orderly or horrific.

In any event, we should see inflation hit the energy sector pretty hard (if not "first and foremost") since all oil is traded in dollars. I would suggest another gas-crunch would be reasonable.


In Any Event, If You Have Not Seen It, This Is Good
It's a kick-ass animation of the Credit Crisis.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.
-Marco