14%
Of all the interesting (and troubling) things that have come to light as a result of the recent financial crisis, one of the most interesting — to me at least — came tonight: Chuck Todd appeared on NBC Nightly News with some data he ran on today’s bailout vote. It turns out most of those who voted “yes” to the bailout aren’t involved in close re-election campaigns (or haven’t been in the past) and most that voted “no” are (or have been).
So essentially, representatives that are scared about their re-election prospects voted no and representatives that aren’t voted yes. No numerical breakdowns were given, but that was the overview.
This is troubling on a number of fronts:
- It shows that our politicians are reacting to a bona fide crisis not on the merits of the crisis but rather on the circumstances of their re-election. This happens a lot, of course, but during a potentially devastating crisis, it’s troubling.
- It shows that what a lot of people think is the “smart” thing to do (passing the bailout), is not the “popular” thing to do. If you believe that your representative should do what you want them to do, the numbers say this bill should not pass (over 50% of Americans think it’s bad). If, however, you think that representatives should do what *they* think is best for you, it should probably pass (most representatives seem to think it’s needed, regardless of how they voted today).
- It shows that politics have absolutely become part of a situation that needs to be solved jointly by both parties.
- It shows that many members of Congress as well as many Americans don’t actually understand what this plan is designed to prevent and who it benefits. It may not be a perfect plan, but it’s not designed to “bail out Wall Street fat cats”. It may not punish Wall Street CEOs like many people would prefer it to, but if you want to do that, do it with a lawsuit.
I can only hope that the failure of the bill eventually just causes us to pass a better bill later this week, but you have to wonder a bit when George W. Bush, Barack Obama, John McCain, and the controlling party in the House all agree on something and Congress still won’t pass it. It’s no wonder why only 14% of Americans approve of the job they are doing.
(Side note: That Gallup site is a pretty spectacular destination for information. Great graphs and polls, updated daily.)
Not directly related to the article’s subject, but I could only reach the permalink when I added %25 to the end of the URL that tried to load.
To be honest, this whole thing confuses the crap out of me, Mike. It seems like almost everyone who wants to explain what’s happening has a personal investment in things, which doesn’t help me develop an informed opinion.
From there, even the people who really know what they’re talking about are speaking in a language full of specialized, financial jargon.
Not that it makes things better, but I guess this is how the elderly feel when everyone around them is talking about technology and they don’t have a clue.
Long time reader, first time commenter.
The % in the title is breaking things (comments link, RSS permalink) To get to this in Firefox 3.0 I had to add a “%25” to the end of the URL.
agreed with Mike the commenter. I just don’t have a damn clue what half this financial mess even means or how it impacts me personally (I have my money in a smaller bank, not one of the remaining “big three”). and I don’t really care to be on the hook for huge companies that weren’t smart enough to see the mortgage disaster looming. I’m still not convinced that passing a bailout bill is wise, but perhaps some more rich folks can explain why I’m wrong–they’re the only ones who seem to think it’s a good deal.
Thanks to everyone who posted and emailed about the URL problem. Looks like we found a WordPress bug! I fixed my permalink for now by spelling out the title.
With regard to what the whole bailout means, I can’t say I know 100% of what I should know either, but as you learn more about the crisis your opinion sways violently from one side to the other. For instance, if all you were told was “we’re spending $700 of your tax money to bail out Wall Street” of course you’d be violently against it. I feel this is as far as a lot of our country’s citizens’ knowledge goes. I’m sure at least one in five people and possibly a lot more have a knowledge of the situation that is roughly equal to this. As you start to dig deeper though and realize what could happen if something like this doesn’t pass, your opinion sways violently in the other direction. If this country experiences bank-runs, it’s all over. But then with a little more digging, you may realize that there could be other ways of avoiding bank runs.
The bottom line, to me, is that:
a) Some amount of taxpayer money must be spent here to restore confidence in banks and the credit markets.
b) How exactly that is prescribed is a negotiation and I hope it gets negotiated correctly, but it needs to happen yesterday.
c) What happens to “crooked Wall Street people” because of this mess and this bailout is *completely* secondary and should *not* keep something like this from passing quickly.
It seems like there is another factor at work as well. I think the general wish was for a bipartisan bill, in part to show that they are working together, but also because the bill as voted on yesterday was a compromise.
I don’t think the Dems wanted to push the bill through and then if anything backfired be held solely responsible. I wonder if, given more bickering between the parties, the Democrats would re-craft the bill in more amenable terms to them, with more consumer/home-owner/bankruptcy protections, and then force it through.
Kevan: I think that’s true. It also kills me to think that the failure of the bill may actually be related to the partisan soapboxing by Nancy Pelosi right before the vote. It’s like she thought insulting Republicans and the country’s leadership would cause MORE Republicans to vote for the bill. I’m sure she lost at least one vote because of this. The question is, did she lose 12 or more. If so, that is just beyond excusable.
I agree that it is very disturbing to note that the voting on the bailout seems to have been driven by re-election concerns rather than a desire to address the country’s problem.
However, despite that fact that pretty much everyone acknowledges a need to do something about the crisis, I’m a little concerned that this particular bill may not actually be a good bill.
Here is what a list of economists who also have reservations:
http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm
I think that they really need to put a little more thought into the details before they just hand over $700 big ones to the former CEO of Goldman Sachs with no real strings attached.
A few observations:
1. The ‘No’ votes comprised about two-thirds of the Republican caucus and roughly two-fifths of the Democratic one. Not all those people are in dead-heat races come November, only a few are. To paint this in broad strokes as people fearing to vote for legislation because their constituencies would oust them is correct, but not necessarily short-term. Many of the people who voted ‘Yes’ will be heavily targeted in 2010 as well.
2. A representative is elected to represent the interests of their people, not the other way around. I expect my representative (In this case Jim McDermott, who voted yes) to accurately represent the interests of the WA-7 people, as opposed to arbitrarily deciding he knows what’s best for us (Which he often does). My initial speculation is that he did not. There is broad opposition to the bailout from both Republican and Democratic sides, for very legitimate reasons.
3. What is ‘Smart’ is letting the market self-correct and regain equilibrium, not this government-induced panic mode. We got into this same mess with the Patriot Act in 2002 because people were hasty and panicked, and the vast majority of elected officials actually voted without even reading it. We have a similar case here, and the whole point of deliberate procedure in government is to avoid irrational decisions that sacrifice long-term stability for short-term gains. We have made that mistake before, and I vehemently oppose doing it now.
4. The panic is on Wall Street, not stable banking institutions. John Allison, CEO of BB&T sent this letter to every member of Congress. It’s worth a read.
For those of you who are struggling to understand the complexity of the whole problem, I’ll do my best to simplify it without being too controversial. To understand all this, you have to go in with some basic knowledge:
A. Profit margins in banking and loans are extremely tight compared to other industries. A manager at Wells Fargo is considered to have a solid portfolio if his delinquency rate hovers around 0.5%. If he rises to 0.5 to 1.0%, there’s considered room for improvement. Over 1.0% and he’s put on warning. Exceeding 1.5% and he’s fired. There is that little room for error.
B. Understanding now that between 98.5 and 99.5% of people (on average) pay their houses off, the banks in turn sell these loans to investment firms, 401K’s, pension funds, etc. This has been common practice for hundreds of years now based on practical application and it works, because the investment risk is so low. Investing in housing is far less risky than anything in the stock market, because a company could go belly-up at any time. Property usually always holds it’s value. This delinquency percentage range is generally referred to as ‘A’ loans, indicating quality credit, good debt ratio and other various positive long-term investment factors.
In the late 90s, we underwent a series of banking reforms aimed at opening up the market to allow lower-income and lesser-abled families to be able to purchase homes, now commonly referred to as “Sub-Prime” borrowers. This wasn’t particularly a smart idea (Phil Gramm, then chairman of the Senate Banking Committee, rallied against it), but it held promise for providing additional opportunities to a market segment that otherwise would not have existed.
This in and of itself is not a bad thing, so long as you’re accountable to it. By introducing low-income housing, you therefore increase the risk of people defaulting on their loans and have to handle them accordingly. When Fannie Mae and Freddie Mac began offering this, a number of banks signed on because despite the risk of delinquency (Which was estimated to be between 3 and 6%), the higher volume of loans and higher interest rates would offset the cost. The aforementioned standard investment firms and pension funds were uninterested in this, however, because the ‘B C D’ paper carried significantly more risk than they were willing to accept (Investment firms won’t typically touch anything over 4%). Other groups however, were willing to purchase it all and deal with the higher risk for the higher rate of return. That’s fine too, more power to them. In addition, Congress made a series of promises to back the banks in the event a significant amount of these sub-prime loans failed, so the proposition was essentially risk-free.
That’s where the trouble began. First of all, the market should never have been manually dictated to allow for sub-prime mortgages. People can either afford housing, or they can’t. The policies initially set forth to provide housing solutions served as a catalyst for a market collapse. On top of that, the banks started passing off the B C D paper to secondary investors as the same A paper they’d been buying for years. They flat-out lied about it. When the delinquency rate exceeded the profit margins of the investment firms, they were instantly out of business. With the firms no longer around to take the mortgages and other remaining institutions gun-shy about buying loans (Since the ‘A’ classification is now questionable, at best), the banks were forced to retain them and eat the losses themselves. And there you have it — Through a ten year domino effect, we have an utter collapse in high risk financial markets because of poor management, bad gambles and excessive government influence in the markets.
It’s very simple. A few banks chose not to participate in said program, and stuck with standard quotients for qualified borrowers. Banks like JP Morgan Chase, Bank of America, BB&T, Wells Fargo, etc. It’s only the banks that hedged their bets on the sub-prime market that took the fall, and the high risk Wall Street investors who followed suit. And what’s worse, the Bush Administration and similar elected officials (including both Barack Obama and John McCain) have extensive ties to the people they’re trying to save, and therefore an unacceptable conflict of interest. Not only that, they’re all Wall Street investors. There is not a single expert in actual banking amongst them.
Now go back and read John Allison’s letter to Congress. The context is eye-opening, and the insight astounding.
Mike,
I agree that something must be done. And I was encouraged on Sunday when it was declared that they had negotiated just that something. Then I spent two-hours reading the bill over at the Sunlight Foundations Public Markup.
It was appallingly vague in part, articulating completely compromised protections and contained whole sections that scream, “I’m open for easy abuse”.
I think this is more a product of the speed of negotiation but there is an additional problem. The dependence of our elected officials on Wall Street’s money for there campaigns and personal matters.
I believe that the “no” were representatives who were responsive to their constituents. Some may have been worried about getting re-elected, but that is the whole point of elections, to hold them accountable. It reminds them who they work for and that they need to be wise in what they do lest we fire them.
The “yes” may have been mostly safe-seats. But that means that they were not wrestling to balance their constituent needs (those who can fire them) against there protfolio and donors needs. Go look at Speaker Pelosi’s stock portfolio [PDF].
Even the representatives that are retiring this time around are compromised. If they want to go into the lobbying business, which is the most lucrative option for former Congressional officials. Handling this matter in a way that Wall Street, a huge lobbyist client base, doesn’t like is a bad career move.
My point is, its not as simple as get a bill and pass it because something must be done. Leveraging our fear of a crisis as we witness these *shocks* to the market is the best way to abuse the public trust. If we are afraid will accept everything that makes the fear go away.
If instead we say no, we will not be afraid, will look this threat in the face and rationally, cautiously and fully informed make a decision—not a snap judgment—then we have a chance.
Right now my reading list is full with material directly related to the financial markets and proposed options. I’m sure your is to some degree as well. But when you have a chance, I highly recommend reading Naomi Klein’s The Shock Doctrine, particularly paying attention to the manner in which free market ideologue’s abused Argentina, Chile and others by taking advantage of crisis to rape their financial system. The solution isn’t in there, but the caution against fear induced rapid decisions is.
Devon, awesome write-up, man. You should put this on a blog! That does clarify some things I had already suspected. Just curious if you know how the sub-prime lending is related to the housing bubble for typical home-buyers, or if they happened to take place at the same time. And whether our current problems might also be due to that.
We’ve already saved Fanny and Freddie’s hides, but hopefully the bailout bill(s) will include some better regulations to prevent high-risk investments. Here’s an idea: We won’t bail you out next time!
One of my favorite blogs is Mark Cuban’s and he’s spent a lot of time recently presenting some ideas for possible solutions. Very interesting reading: http://blogmaverick.com/
Geez Devon has enough in his “comment” to start his own blog. Just kidding mate ;-)
I feel like I am gonna get screwed no matter what. Either my tax dollars pay for the mess or they do nothing and I pay by watching 1/3-1/2 of my retirement portfolio evaporate. I think I’d prefer the former as more people will be contributing including some of the geniuses who got subprime mortgages… and a lot of the people who bet on them. Hardly justice but like Mike said, hopefully when things settle the investigations and indictments will happen.
Right now I just want to sleep better and not lie awake wondering if the whole system isn’t caving in on itself.
Oh why didn’t I keep some money in that high interest account in Zurich? Kill me now.
I’m pretty conflicted – I haven’t borrowed more than I can afford, I’ve worked in the nonprofit sector for the past 25 years, and I get that a collapse will make things even worse. Caught between the pot and the horns of a dilemma!
Here’s the hardest to swallow, though: We’re operating under the assumption that more is always better (more housing, more cash in the market, more pay, more, more, more) – and I’m not sure that a strategy that depends on spending rather than savings is a good one.
More people are going to go dancing when the ship hits the sand. It’s a cheap form of entertainment
A little more political than your usual posts, Mike. You have come to an interesting conclusion and it doesn’t sound far off.
I wonder though, is this a good thing or bad? on the one hand I think that the majority of Americans don’t want this bill passed. I am one of them. But then my thinking is that I would rather fight through hard times now if they are destined to come rather than let my kids face them later. I see it as a shit load of money that would have to be printed or borrowed because we simply don’t have any money for the government to spend.
Now my fear is that the problem and consequences are not being explained to me correctly. It is possible that this bill is what is needed to keep people confident that we can have a semi-stable economy but it really just seems like a measure that is intended to prolong the problem.
This could be a positive sign though. Congress for the first time since Bushes second term is acting in the interest of the people who are screaming ‘No’ to this bill. No we don’t want to be in this crisis to begin with but no we definitely shouldn’t make it worse by allowing so many assets to be bought by a government that has not been doing well for American people. Can you imagine having to make your mortgage payment to Uncle Sam? Lets see… Miss a payment, go to jail..
I am a bit bitter because I would like to have more about this problem explained. I see it as a failure of the free markets for the government to have to intervene in this way to begin with.
I have a little idea, how about we change the system a tad.. call it a tweak.. lets make it so that banks don’t have to lend to people, like myself, who can’t afford a house. I lack the down payment, I lack solid credit, and honestly if I were to get a house at the current prices I would just end up losing the house. So reject me, and reject the next guy.. ultimately I think that sellers would be screwed over the fact that people can’t get a loan for a million dollar shack and quite possibly the real estate markets might come back down to a little place called reality.
I mean shit, I am renting a house that is valued at over $800k. I would not be able to afford to buy a house that was half that value and what I really find to be hilarious is that the house I grew up in cost my parents $30k and had 2 more bedrooms and a hell of a lot more room in the back yard then where I am staying now. Something is wrong with the estimated “value” on homes. Granted I am comparing Orlando, FL prices from 30 years ago to San Jose, CA prices of today but that is still too large of a gap in my opinion.
I experienced that back and forth that you had mentioned Mike.
But when it comes down to it, I think the House Republicans have it right. The taxpayers should not front this “money” to correct the market and fix failing banks.
I quote “money” because it is really just more debt. This bailout is trying to fix bad debt with more bad debt no matter how you look at it. Remember where the money comes from the Fed. That will cause greater inflation than we are experiencing right now.
Talk about saving a drowning man by throwing him more water…
This also is more “trickle down” crap.
Remember that this scenario has already played itself out before in history. The stock market crash of ’29 was directly connected to over extension of credit.
The Republicans have a much wiser solution that to print more money causing an additional 5% or so inflation. Their proposal was to use big business to front the money for the bank collapse. It would be so much easier with the reserves that big business have, plus they can then directly have a stake in these banks.
Maybe not the best solution, there would still need to be oversight and some sort of ethics injected of course, but much better than me and my wife saving banks that barely give us half a percent on a savings account. But the main point is don’t fix the hole in the bucket with a bigger drill.
I think it should also be said that the last time Bush came out on TV and said that that there was this big of a threat, we went to war.
By the way I just found this.
Interesting to see who wrote it…
“The $700 billion bailout for Wall Street is driven by fear, not fact. This is too much money in too a short a time going to too few people while too many questions remain unanswered. Why aren’t we having hearings on the plan we have just received? Why aren’t we questioning the underlying premise of the need for a bailout with taxpayers’ money? Why have we not considered any alternatives other than to give $700 billion to Wall Street? Why aren’t we asking Wall Street to clean up its own mess? Why aren’t we passing new laws to stop the speculation, which triggered this? Why aren’t we putting up new regulatory structures to protect investors? How do we even value the $700 billion in toxic assets?”
— Rep. Dennis Kucinich
It worries me that that a number of things would happen if this bill were to pass:
1. More taxes will be taken from me to aid private enterprise. It is not the responsibility of this nation’s government to prop up the economy. If it is, I beg you to find the line in the constitution that delegates that responsibility.
2. If these business go under, tough luck. That’s the beauty of a free market. When a business fails and the economy goes under, it fixes itself.
3. The government would be buying businesses with this plan, which means nationalization. I hope we didn’t have a cold war just to become The Soviet Socialist States of America by nationalizing the economy.
For those who care, you can read the bill in full, or a short summary here:
http://financialservices.house.gov/
This is a truly great summary (made in May) of the whole mortgage situation that precipitated this crisis:
http://www.thislife.org/Radio_Episode.aspx?episode=355
It starts from scratch and explains things in a very clear and thorough way. I highly recommend listening.
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