How Main Street Will Profit (Op-Ed from Washington Post)

By William H. Gross
Wednesday, September 24, 2008; A23


Capitalism is a delicate balance between production and finance. Today, our seemingly guaranteed living standard is threatened, much like it has been in previous recessions or, some would say, the Depression. Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors; the delicate balance has once again been disrupted; production, and with it jobs and our national standard of living, is declining.

If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. Today's housing bubble, unlike that of the stock market's before it, was financed with excessive and poorly regulated mortgage debt, and as housing prices began to tumble from the peak, the delinquencies and foreclosures have led to a downward spiral of debt liquidation that in turn led to even lower prices and more foreclosures.

And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.

In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp., created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a "best efforts" future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below "par" or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction -- financial derivatives -- that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.

The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic. Democratic Party earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight.

The writer is chief investment officer and founder of the investment management firm PIMCO.

tank ass wrote:

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i was watching Tom BrokenJaw interviewing Bloomberg recently, I wanted to reach into the screen and smack him.

the interview went something like this:

Brokaw asked him, "so, once your term is over and you are no longer mayor, what do you plan on doing?"

Bloomberg makes this silly comment that he wants to take Brokaw's job, and then says, "everyone working here seems to be doing well, much better than my $1 a day salary as mayor."

Brokaw says, "Ok, but your net worth puts us all to shame."

Bloomberg says, "well.....it all goes to charity....," and then quickly changes the subject.

With all the money the rich have pilfered from the everyday american over the past 10 years, maybe you're right TankAss, maybe they should just cough some of it up to pay for this disaster, but in the end, I blame American people as well. Americans refuse to change their lifestyles or mentalities, and although there was no regulation with these banks for the loans they continued to sign, people gotta learn to live within their means. When you earn $60,000, don't live $80,000. We can only hope that at the very least, this bad turn of events will go down as a lesson learned for people who have no control over their spending habits, and that goes for the rich all the way down to the poor.

And who has been running the financial system???

Welfare mothers and the unemployed???

COME ON!!!!

Nobody wants to take Responsibility?

That is for Congress to try and fix in 2 minutes for a MESS YOU shit heads have dealt us over 10 years???

Nice.

Obama IS DEFINITELY NOW the next President.

I just want to clear the air a little bit.

Who am I and what is my agenda and affiliation?
I am a resident of Downtown Jersey City since 1995. I live on Manila Avenue (Grove Street) near 3rd Street. Over the years I have made friends of many of the merchants in the area. I like the area and the people. In my free time I do some volunteer work and some of it is for the Historic Downtown Special Improvement District (HDSID). I think that they are doing good work and helping to improve the atmosphere in the neighborhood. They pay for sidewalk cleaning so the area looks better, not perfect, but better. The sponsor events like Groove on Grove and the Farmer?s Market and during them advertise for local businesses. The arrange for group advertising rates for local businesses. I have talked to a lot of the merchants and what they want are more customers. I never hear a desire for Newark Avenue to be one-way traffic because cars don?t stop. They want people walking past their shops so they will stop in and buy. They want the improvements to the sidewalks and the benches and the lighting. Anything that will make Newark Avenue and Grove Street an enjoyable place for people to come and shop. In short, I live here, I shop here, and I like it here and would like to see it better. I want to see the merchants we have stay open and to see more as time goes by.

That being said. I do support the Newark Avenue Redevelopment Plan. It?s a start. We also need more. Yes we need to do the same thing farther up Newark Avenue, to Brunswick and beyond. We also need to extend it on Grove Street from 1st to Grand. It was the City and the HDSID working with the developers of Grove Pointe that got the Plaza at the Grove Street PATH Station build from the toilet of a park it was to what it is now. And it is a combination of the cleaning crews from the City, Grove Pointe, and HDSID that are keeping it clean.

Things may not be moving a fast as you want or extending a far as you want it to go in this step but don?t forget Jersey City is large and Downtown is not the only area that needs improvement. The Plaza was step 1, and Newark Avenue to Jersey Avenue is step 2. I know that the HDSID does not want to stop there.

I would like to see the plan passed at the next council meeting. Then while the work is being done we can begin raising the cash to plan out and do the next step.

Rob

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Or maybe I'm on the Ark waiting for the flood to wash away the sins of the world.

With this public funding of 700 billion dollars towards the bailout, will all the Wall St. executives be forced to take a massive pay cut without any bonuses at christmas for putting this nation and world in this crisis ?

BTW this is JOKE, NOT REAL, FAKE and should not be copied, printed, altered to look real, made into anything illegal or bad, etc! The creator of this does not take responsibility for any illegal act that maybe committed by anyone using his art illegally or in a malicious manner.

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I smell a hog!

September 23, 2008
Op-Ed Columnist
The Establishment Lives!
By DAVID BROOKS
Once, there was a financial elite in this country. During the first two-thirds of the 20th century, middle-aged men with names like Mellon and McCloy led Wall Street firms, corporate boards and white-shoe law firms and occasionally emerged to serve in government.

Starting in the 1960s, that cohesive elite began to fall apart. Liberal interest groups took control of Democratic economic policy. Supply-side think tankers and Southern conservatives dominated the GOP.

In the 1980s, the old power structures frayed, even on Wall Street. Corporate raiders took on the old business elite. Math geeks created complicated financial instruments that the top executives couldn?t control or understand. (The market for credit-default swaps alone has exploded to $45.5 trillion, up from $900 billion in 2001.)

Year followed year, and the idea of a cohesive financial establishment seemed increasingly like a thing of the past.

No more. Over the past week, Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and Tim Geithner of the New York Fed have nearly revived it. At its base, the turmoil wracking the world financial markets is a crisis of confidence. What Paulson, et al. have tried to do is reassert authority ? the sort that used to be wielded by the Mellons and Rockefellers and other rich men in private clubs.

Inspired in part by Paul Volcker, Nicholas Brady and Eugene Ludwig, and announced last week, the Paulson plan is a pure establishment play. It would assign nearly unlimited authority to a small coterie of policy makers. It does not rely on any system of checks and balances, but on the wisdom and public spiritedness of those in charge. It offers succor to the investment banks that contributed to this mess and will burn through large piles of taxpayer money. But in exchange, it promises to restore confidence. Somebody, amid all the turmoil, will occupy the commanding heights. Somebody will have the power to absorb debt and establish stability.

Liberals and conservatives generally dislike the plan. William Greider of The Nation writes: ?If Wall Street gets away with this, it will represent an historic swindle of the American public ? all sugar for the villains, lasting pain and damage for the victims.?

He approvingly quotes the conservative economist Christopher Whalen of Institutional Risk Analytics: ?The joyous reception from Congressional Democrats to Paulson?s latest massive bailout proposal smells an awful lot like yet another corporatist love fest between Washington?s one-party government and the Sell Side investment banks.?

Thanks to their criticism, the plan will be pinned back. Oversight will be put in place. But the plan will probably not be stopped. The markets would tank. There is a hunger for stability, which only the Treasury and the Fed can provide.

So we have arrived at one of those moments. The global financial turmoil has pulled nearly everybody out of their normal ideological categories. The pressure of reality has compelled new thinking about the relationship between government and the economy. And lo and behold, a new center and a new establishment is emerging.

The Paulson rescue plan is one chapter. But there will be others. Over the next few years, the U.S. will have to climb out from under mountainous piles of debt. Many predict a long, gray recession. The country will not turn to free-market supply-siders. Nor will it turn to left-wing populists. It will turn to the safe heads from the investment banks. For Republicans, people like Paulson. For Democrats, the guiding lights will be those establishment figures who advised Barack Obama last week ? including Volcker, Robert Rubin and Warren Buffett.

These time-tested advisers, or more precisely, their acolytes, are going to make the health and survival of the financial markets their first order of business, because without that stability, the entire economy will be in danger. Beyond that, they will embrace a certain sort of governing approach.

The government will be much more active in economic management (pleasing a certain sort of establishment Democrat). Government activism will provide support to corporations, banks and business and will be used to shore up the stable conditions they need to thrive (pleasing a certain sort of establishment Republican). Tax revenues from business activities will pay for progressive but business-friendly causes ? investments in green technology, health care reform, infrastructure spending, education reform and scientific research.

If you wanted to devise a name for this approach, you might pick the phrase economist Arnold Kling has used: Progressive Corporatism. We?re not entering a phase in which government stands back and lets the chips fall. We?re not entering an era when the government pounds the powerful on behalf of the people. We?re entering an era of the educated establishment, in which government acts to create a stable ? and often oligarchic ? framework for capitalist endeavor.

After a liberal era and then a conservative era, we?re getting a glimpse of what comes next.

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No what would be funny is if looked both ways before crossing but a car doesn't see you or the stop signs and you become a hood ornament !

You people crack me up. You have nothing else better to do but worry about a car parked on the street. I wouldn't be so proud saying you got hit twice by a car. Didn't mommy teach you to look both ways before crossing. Grow up and stop complaining. You complain about the cops but you probably call them for every stupid little thing that goes on.

Quote: He could be flying over the town.

I had a friend that had a fantastic band for her wedding. That was up in Rochester but I could see what I could find out... I have no idea where they're based.

+10 to Br6dR

I'd just change the ticket number so the powers that be don't track you down that way and don't fear some finger print crap, it would stretch JCPD's budget.

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that's a very good summary. ianmac47 is the guy who lives in the town a few miles away from the dam, he thinks he wont be affected by the flood, while in reality if the dam broke and the rest of the towns around it are flooded, he would be much worse off as well.

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So, if you think that something isn't true, you believe that the reverse IS true... So let me see if I understand you...

1) You're saying you think the collapse of the financial system is either a good thing or a neutral thing.
2) The proposal to purchase assets from financial firms is not a good idea? I.e. there is a better solution available.

Statement #1 is very strange indeed considering you live in Jersey City. The growth of this town over the last several years owes quite a bit to the growth in the financial sector. That sector collapsing is certainly not good news for residents of Jersey City: Less demand for housing, lower tax revenue, fewer jobs created, etc etc. I would love to hear how the collapse of the financial sector is not a very bad thing for this area...

In my view, should the financial system collapse foreign investment in this country goes away, hence, our government needs to offer much higher interest rates to attract foreign investment. Presumably, the dollar goes thru the floor as foreigners sell dollars and buy whatever else they can get. Think it's hard to get a mortgage now? Wait till interest rates go to 12%... Think it's a pain going abroad now, wait till 5 dollars buys you one euro. I'm glad you have your FDIC insurance, but if no one believes in the fiat currency, what good will it do you?

Statement #2 - If you think it's a terrible idea, let's hear your alternative solution...One that will actually address the underlying problem. Investing in infrastructure does not accomplish that goal.

I don't agree on using taxpayers money to rescue private entities. If we are to do that, the whole financial system should be nationalized. This will mean equity investors will be wiped out, but assets will be in some sort of government trust.

The way I look at the bailout is: bail out now or bail out later, and now is probably cheaper than later. As has been stated before the end result of the financial meltdown will be dire for everyone: a very cheap dollar, high inflation, hign unemployment and the decimation of everyone's savings (money market funds, stocks, bonds, insurance policies, retirement savings, etc). The government (at all levels) already has guarantees on a whole litany of people's financial assets. Money market funds were added to the list last week. When the meltdown comes, the government will have to make good on those guarantees and those sums are much larger than the $700 billion of this bailout.

The financial world depends on confidence (actually all of human activity depends on it) and that is what's lacking now and what the bailout is trying to address, to allow the financial system to realize its gains and losses and not just guess about what they may be.

Last week, when the market was melting down, I was about to cash out of my life insurance policy even though it meant paying a penalty because I was nervous that if my insurance company went bankrupt, it would be a real mess. I didn't do it because the bailout was announced shortly thereafter. All of you that oppose the bailout, I want you to pause for a minute and imagine what would happen if everyone, individuals, corporations, local governments, foreigners etc. all decide to bail out of the financial system at the same time. That's what we're talking about here.

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Yeah - did anyone see (Treasury Sec) Paulson on TV over the weekend? I found this commentary on Minyanville:

http://www.minyanville.com/articles/P ... reasury-TAF/index/a/19114

________

Much of this weird tension today stems directly from Treasury Secretary Hank Paulson's rounds yesterday on the Sunday morning news shows. His behavior was jarringly disturbing and erratic. On "This Week" with George Stephanopolous, Paulson could barely answer a single question without glancing nervously over his shoulder like a man who had just escaped from a medical detention center hurriedly explaining his side of the story to a passing motorist.

And what was his side of the story? Well, that is the awful crux of it. There was no side; there was simply "The Abyss." We have "narrowly avoided it," according to some. We have "stared into it and stepped back," according to others. Some say we have "faced it." Still others, that we "came within hair of plunging into it." But no one anywhere will say with any definitive completeness what, exactly, "The Abyss" is.

Shortly after Paulson disintegrated into a sweaty, jabbering mess under the TV lights on "This Week,' Senator Christopher Dodd (D-CT) and Representative John Boehner (R-OH) appeared.

"What is it will happen if we don't have this legislation?" Stephanopolous asked. It's a reasonable question. In fact, it's the only reasonable question.

The answer from Dodd and Boehner? Silence. Pressed, Boehner said, "You can't describe on Sunday morning how ugly this picture would look if we don't act."

"Why not?"

No answer.

Ok, we'll skip that part for now. How about this, will it work? Although unprecedented in magnitude, the solution proposed by the Treasury is hardly unique.

The TARP being proposed falls somewhere on the other side of both the Resolution Trust Corporation that was created to handle the Savings & Loan crisis in 1989 and the Reconstruction Finance Corporation created in 1932 to deal with massive bank failures and the inability to get credit into the economy.

How did markets respond to the Reconstruction Finance Corp. passage in 1932?


Click to enlarge

What about the RTC in 1989?


Click to enlarge

And today?


Click to enlarge

Keep in mind, the RTC came eight years into one of the the largest bull market in history. Know where the Dow and S&P 500 were eight years ago? 11,388 and 1255, respectively.

We don't know the solution but we've definitely identified the problem:

Here you go. Change a few things with paint.net and slap one on his car every morning. If nothing else, you'll really piss him off.

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And this is what I meant when I said we'd read that this "plan" is a bad one pushed through at the tail end of a presidential election. Leave it to the Bush Administration to deal with every crisis by shoveling huge sums of our money into the coffers of corporations with little in return.

I agree with this poster on the food at Oh Calamares

We visited the restaurant on Sunday and staff + food added up to an amazing dining experience

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The problem is, the other side is saying the analogy is more like repairing a dam, if it goes it takes out every town below, so you gotta try to repair it even if structurally you're better off letting it fail and starting from scratch. But nobody knows how high the water behind the dam actually is, or how structurally unsound the dam is, so a informed choice is impossible.

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This is exactly what I'm arguing for. Another analogy is that of ripping off a bandaid in one painful tug rather than slowly peeling it back.

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I agree with that.

This seems to be the opinion of those that are not directly invested in what the outcome will be.

Maybe they should let the whole thing happen in a quick car crash, (instead of a log-drawn-out slow motion blowup) then figure out where the money ought to be spent.

This article should help sell those over-priced condos at the Beacon....

Cash for Trash

By PAUL KRUGMAN
Published: September 21, 2008
New York Times


Some skeptics are calling Henry Paulson?s $700 billion rescue plan for the U.S. financial system ?cash for trash.? Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There?s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself ? and for his successor ? to deploy taxpayers? money on behalf of a plan that, as far as I can see, doesn?t make sense.

Some are saying that we should simply trust Mr. Paulson, because he?s a smart guy who knows what he?s doing. But that?s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half ? a period during which Mr. Paulson repeatedly declared the financial crisis ?contained,? and then offered a series of unsuccessful fixes ? justifies the belief that he knows what he?s doing? He?s making it up as he goes along, just like the rest of us.

So let?s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities ? assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital ? too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven?t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the ?paradox of deleveraging.?

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might ? might ? break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn?t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms ? and their stockholders and executives ? a giant windfall at taxpayer expense. Did I mention that I?m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to ? a share in ownership, so that all the gains if the rescue plan works don?t go to the people who made the mess in the first place.

That?s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It?s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a ?clean? plan. ?Clean,? in this context, means a taxpayer-financed bailout with no strings attached ? no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review ?by any court of law or any administrative agency,? and this adds up to an unacceptable proposal.

I?m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I?d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don?t let yourself be railroaded ? if this plan goes through in anything like its current form, we?ll all be very sorry in the not-too-distant future.

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Don't confuse fact with opinion.

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Yes. Allow the meltdown to happen, and encourage it to happen quickly, and then rebuild in the aftermath.

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It probably won't work and we'll be no better off a year from, and the federal government will be out $700 billion. Yay.

Hi all,

Does anybody know of a steel drum band in the area of that would be willing to travel to North Bergen? I'm getting married (reception is in NB) and would like a steel drum band for the cocktail hr. I know cost is relatively but nothing over the top.