Speaking of favors for Big Money, economist Mark Thoma points out how America's preference for corporate welfare left us with lingering recession hangover.
Thoma explains that the 2008 recession was a "balance-sheet recession." The housing bubble popped, the financial sector got silly, and lots of paper assets disappeared. Households cut back spending and increased saving to restore the balances they lost. Banks got tight with their loans. Both actions put the brakes on economic growth.
The government threw its banker friends TARP to help restore their balance sheets. But regular folks?
A policy that would have provided households with mortgage debt relief could have made a big difference to those trying to rebuild their balance sheets and eliminate debt.
But households didn't get the kind of attention that big banks got. Instead, Americans were forced to mostly rebuild on their own, and this is a primary cause of the ongoing, slow recovery. It would have still taken time to recover even if households had been helped the way banks were helped. A nation can't quickly dig out of a recession that's so deep -- but it didn't have to take as long as it has [Mark Thoma, "The Great Recession's 'Biggest Policy Mistake'," CBS: Moneywatch, 2014.05.29].
Note Thoma's use of the word primary. If you're really cheesed about the slow economic recovery, you should be wishing we'd have thrown mortgage holders a TARP as well. But such are the policy mistakes we make when corporations are first in line at the government table.
I'm torn on this one. Emergency help to save the US auto industry was a good idea. Even if taxpayers lost $10 billion on GM, the company is alive and profitable today. I bought a GM car I would not otherwise have bought because of the "cash for clunkers" program. Still driving it today and couldn't be happier. $4,000 off a new car is a pretty good deal, especially when my trade was a $1,000 car that I only drove about 500 miles a year. So households did get some stimulus from the government.
But this whole article seems to me to turn President Kennedy's inaugural line on its head. "Ask not what you can do for your country. Ask what your country can do for you." There are far too many people with that attitude today.
And there are far too many corporations with that attitude.
I also believe the bailout of GM and Chrysler were good ideas though I wish at the time there would of been other options for Chrysler than have Fiat purchase it. Fiat was the only company that stepped up to purchase Chrysler and got it for basically a steal of a price.
Now the profits from Chrysler from products developed before the merger are going to support Fiat which is a company that should of died long ago due to a long history of mismanagement and substandard quality.
The Chrysler merger with Daimler didn't go well for Chrysler and then later after Daimler sold it to Cerberus a private equity firm that basically sucked Chrysler dry leading to the bankruptcy, government bailout and sold at a barn burner price to Fiat. It will be interesting to see what happens with Chrysler/Fiat in the long term.
When we bailed out the banks, we could've given the money to the homeowners, who in turn would have paid the banks, and everybody's balance sheet would've been clean. Unfortunately, Wall Street geniuses like Tim Geithner thought that didn't impose enough "moral hazard" (i.e., pain) on ordinary people, so they gave money directly to the banks instead.
It's odd how "moral hazard" doesn't apply to Wall Street, which is bigger than ever and cheerfully gambling with other people's money, just like it did before the Great Recession. Ordinary homeowners? They're out of luck, even though directing those same TARP funds through them first would have helped them, the big banks, and the economy as a whole.
Apparently win-win-win wasn't good enough for the Masters of the Universe on Wall Street. It doesn't count as a win if you don't get to make other people suffer for your mistakes.
It still is a sore spot for me to think about that there were so many people were devastated from the 2008 recession whether they lost all or most of their retirement and investments that were supposedly fairly safe, well rated or put in severe hardships with their mortgages that those few that helped contribute to this mess didn't really lose any skin in the game. Some actually made money. Hardly anyone was punished.
Prior to the recession where I worked there were less than ethical co-workers of mine that were doing some re-financing mortgage schemes on the side as if it were some multi-level marketing get rich quick scheme with little regard to the consequences for those who were their customers.
Wall Street/Banking Industry Bailout(Corporate Welfare) were any safeguards put in place to prevent this from happening again? Last time I checked there really were not due to serious lobbying from the banking and investment industry.
I have an acronym that I have said for years. SOSDD. Same Old S--- Different Day. We went through the Savings and Loan crisis in the 1980s at the tune of a quarter trillion dollars to the taxpayers. Then in 2007 and 2008 we went through the near collapse of the entire world economy, because of "too big to fail" and now according to the Progressive Populist, http://tinyurl.com/llfy56d
through the work of our own Senator Tim Johnson, we are about to privatize Fannie and Freddie, to take all the risk out of home loans for the bankers, as with that privatization, 90% of the loans will be guaranteed by the Federal Government even including the derivatives which is what nearly sunk us in 07 and 08.
Let's see, Tom Daschle is getting a 7 or 8 digit pay because of the connections to the healthcare industry that he made while serving (us???) in Congress. Do you Suppose that Mr Johnson will be able to finagle a like payday from the banking industry when he leaves, in January of next year, and probably Mike Rounds, (if we are dumb enough to elect him) from the insurance industry in 2020 or 2026?
Rorschach and Lynn, I hate to disagree with you on the Auto bailout and cash for clunkers, but that was a huge boondoggle IMHO. I was driving my rusty 30MPG '98 Buick and did not qualify for Cash for clunkers. I finally sold it last year and quit driving. My buddy who drove 10 to 15 mpg f-150s for years and a new one every year or two, bought an old pickup up in the northern part of the state and almost couldn't get it home for how bad it was, and got the 4 grand on a new 18mpg f-150.
Worse yet, cash for clunkers took a lot cars off the market that would have still been perfectly good, but that raised the used care market to the point to where you can hardly buy a used car for less than 5k and that would still not be much of a car.
It had the added effect of putting car parts companies and especially small operators who fixed cars, in tough shape because there were a lot less cars to fix. Oh well just one more incidence of Crony Capitalism.
TARP, unfortunately, was necessary. The government had to shore up the banking system, or the recession would have been a world-side economic collapse. There should have been a lot more done to straighten out the housing issue to keep folks in their homes who had been sold bad mortgages.
Perp walking some of the banksters and the mortgage industry crooks would have been nice. The problem there was that the financial institutions successfully lobbied (after the S&L cases in the Reagan era) for a massive cut in financial regulation, and particularly in the number of personnel involved in referring cases from the regulatory agencies to the FBI. And then you had the FBI sections involved in financial fraud being cut.
But what's to be done now? Lots, including breaking up the big banks and perp walking a few banksters. Maybe a few folks will go to prison, but the big banks will still be there. One good thing that came out of the crisis is we do have the Consumer Financial Protection Bureau, and that will help as long as the banksters and other financial industry interests don't succeed in gutting it.
Lanny I didn't mention the cash for clunkers program was that something that I supported. Your right about what the impact of that program was.
I was primarily for the auto bailout since otherwise it would of been a large negative impact to not only jobs lost but a loss in manufacturing, dealers and suppliers which would of had a ripple effect on our already weak economy at that time.
Based on my research I don't see a good long term future for Chrysler since their profits are keeping Fiat Chrysler's new owner afloat. It was the hard work and dedicated effort of Chrysler's employees despite very limited resources after being owned by Daimler and financially gutted by Cerberus that helped keep that company alive with products that are presently competitive.
Mr Pay, I have posted some, if not all of this on Madville in the past, but here we go again. When I retired from Citibank in 2004, I had made 32k the previous year. CEO of the company Sandi Weil, who had engineered the integration of Travelers Insurance and Citigroup as well as some lesser entities, after the repeal of Glass Steagall, earned 155 million. His last year before he retired from Citi, 2007, because the board of directors allowed his stock options to reload every time he cashed them in, he earned nearly a half billion dollars. The board had allowed him a fixed price in the mid 40 dollar range, so as not to disrupt the market. After the collapse, for sure not more than two years later and maybe less than that, Citi's stock sold for under a buck a share. Now granted today Citi is trading back to 47.57 a share, but I remind you that in 2011, Citi did a reverse stock split of 10 to 1, which of course means that based on the price that it was when Weil sold his shares for the mid 40s it is only worth 4.75 today. Jail? oh hell no although he along with our own Senator Tim Johnson who helped to engineer the repeal of Glass Steagall are both sitting pretty. I hope they can sleep nights.
But whose fault is it, that GM was no longer competitive? The owner constantly wanted to blame it on the autoworkers, and there may have been some responsibility there, but who was doing the negotiating for the company? Look at the automation which over the past 40 years had cut the automaker workforce by 90%. Who was not making new cars that got better mpg? Who allowed VW and Datsun and Honda and finally Toyota to take over the US car market?
The gutting by Daimler of Chrysler and then Fiat are just part of the crony capitalism that is so rampant in this country. It is the same as the Steel companies being bought and after the union pension funds had been gutted, allowed to go belly up. If we as a country allow these types of shenanigans to continue, we will be a banana republic by the middle of this century if not before.
Lanny I'm with you on much of what you have stated from Citi-bank to the auto bailout. GM's issues were brought on mostly from bad management over the years focused so on profit that led to bad decisions over the years and at times producing mediocre products.
An example would be that the designers and engineers would develop an outstanding car that would be competitive, profitable and within budget and then the bean counters would tell them to cut things off the car that would just dumb it down which is similar to the ignition fiasco. If they would of spent that extra 20 cents per vehicle it would of made the difference between a safe or outstanding car not only for the customer but in sales far exceeding that small amount spent in development or in the product.
One of the fears at the time was that if GM and Chrysler went down it would take a number of suppliers with them which would of hurt the remaining auto manufactures such as Ford, Toyota and others that have plants here in the US and they share many of the same suppliers. The auto industry employs an incredible amount of people.
It's frustrating that we as taxpayers have to pay to bail out incompetence and others making profit that we end up subsidizing but in some instances what do we do? The stakes can be huge.
I agree with much of what you say, Lanny. Wall Street gets what it wants from the government to the detriment of most Americans. The fat cats have lobbyists, but you and I don't. It's a good time to be a money shuffler in America. You can privatize the profits, socialize the risks, and run big corporations for the benefit of executives rather than shareholders and workers. Meanwhile the 1% get richer, the middle class gets squeezed, and the poor get the finger.
Exactly Rorschach
One positive note to add is that GM, Ford and Chrysler have some of the best products they have ever made now in terms of quality, design, reviews, fuel economy and performance. Those companies just can't rest on the success of their products they have now and go back to their old ways of doing business which they did so many times in the past.
Hey, Lanny, I don't disagree with you.
After the S&L crisis, the financial industry lobbied a lot of deregulation through the Congress. It wasn't just the financial industry. It was sort of a theological theory among libertarians, conservatives and neo-liberals (including most of the Clintonistas) that the market could take care of fraud and underhanded dealing, so you don't need government. That was the theology that propelled the repeal of Glass-Steagall, as well.
Many industries pumped a lot of money into the political system to get this deregulation done. Even if it wasn't a complete deregulation, the industry effort ended up crippling the regulators through other means (cutting budgets). This was at the same time period when a deregulatory agenda was occurring in the energy markets, communications, trucking and airlines without regard to any of the specifics of each market. In some industries, it worked after much pain, in others it was a disaster. "Deregulation" was theology and bad economics.
So, we got Enron, the California energy meltdown and the financial meltdown, all as a result of "deregulation." And, it must be pointed out the the S & L crisis resulted from deregulation, too.
The really amazing part of the S&L scandal, is of the five US Senators involved with Lincoln S&L also called the Keating 5 because of their relationship in getting Lincoln all the room it needed to perpetrate their fraud, Alan Cranston (D-Calif.), Dennis DeConcini (D-Ariz.), John Glenn (D-Ohio), Donald W. Riegle (D-Mich.), John McCain (R-Ariz.), the only one still in Congress, is the only one who was Republican, McCain. He also somehow came off unscathed by that scandal. The part that also makes it more amazing, is that the President, Secretary of the VA, Shinseki, who just resigned and others have been getting all kinds of criticism for their parts, even though miniscule, in the corruption at the VA, while at the same time, Senator McCain, who is the US Senator from AZ where this round of complaints against the VA originated, but again comes out unscathed. No one has said a word about where were the congress people from AZ on all of this corruption, or did the veterans from AZ get the same type of response from their congress people that folks around the country get when they complain to their congress person about an issue about which the congress person does not agree?
Hate to tell you folks, but that is what happens when we elect bought and paid for people to represent us in Congress. They don't represent us, they represent their "daddies".
First, for the record, I opposed TARP and wrote multiple threads on War College against it. I also opposed Dodd-Frank as a "solution" that protects the "too big too fail banks" and increasing the odds of a future meltdown. Instead, I support a return to Glass-Steagall.
That said, Obama attempted to do what this guy advocated. It was called HAMP. It was such a failure I don't even remember what the acronym stood for.
Secondly, every "correction" is a balance sheet adjustment. To make that statement maybe makes him sound smart. But is as profound as saying, "this mornings flash flood was caused by a rain event."
Maybe TARP was necessary to maintain confidence and not cause an over-reaction that would have been debilitating (I still think it wasn't necessary or was too broad). But, we are more exposed to a meltdown than we ever have been and not worse. So much for not learning from history, even recent history.
P.S. Don, I don't disagree with what I think is your main point but your historical memory is a bit off.
Enron was fraud, like Madoff. Has nothing to do with deregulation per se.
I actually was in DC and working when the S&L crisis occurred. It fundamentally shaped my view on the wisdom of Glass-Steagall. There is much more to the story than just De-regulation. In many ways it was a perfect storm.
That said, there were some good lessons learned from the S&L crisis with regard to metrics bank management developed with regard to stress testing that seems to be forgotten in this long period of low interest rates. The interest rate risk in our system has never been higher than it is today.
Troy, I would be interested in what you mean by "interest rate risk".
You speak of lessons to be learned from the S&L crisis. Why weren't they learned. You speak of Enron as merely fraud, and having nothing to do with deregulation. But I seem to remember Dick Cheney saying that Enron's part in the California power shortage, was exactly the way that deregulation was designed to work. Never mind the fact that CA was till regulating, so what he was saying is if CA wants to regulate, Enron should be able to sell the power to the highest bidder.
I have always been intrigued by the way folks view interest rates. If rates rise or lower from 4% to 5% or vise versa, that is a 1% change, when in actuality it is a 20% change on the decrease and a 25% change on the rise. Consequently, when the banks had to pay us 5% for our money, when I was young and were lending it at 8%, they were making a 60% profit. I am not smart enough to calculate what they make today, when they are getting their money for free from the Federal government and lending it for 3 or 4 or 5% interest, but I would think the percentage would be infintesimal.
When the consumer can no longer spend, as more and more get eaten up by their stagnation in wages or worse yet under or unemployment, the 200 thousand dollar new homes, and the 20,000 to say nothing of the 50,000 dollar new or even used cars will become a thing of the past, and this economy and probably this country, will fold like a cheap suit. There will be no more tricks to play to keep it going.
I might add, Lanny, the banking industry operational software/or system has become so complete many if not most banks are now run by the equivalent of Verizon flip phone sales kids with no idea of what they are doing. Just a pocket full of buzz words with a truckload of power.
Troy, Glass–Steagall Act? Before it was repealed wasn't that when banks were banks and then there were investment brokerage firms with a clear separation on what they could sell?
I remember there were investment brokerage firms that had been in business for close to 100 years and were stable and well respected. One of which I had investments in and then they were purchased by one bank then another bank purchased that bank and it was getting to be like a feeding frenzy with century old institutions being gobbled up along with what seemed like an escalation of very risky shady investments being sold such as derivatives besides the push for consumers to refinance their mortgages losing the valuable equity they had gained. It just turned into perfect storm.
It's interesting that that major bank that in the end purchased that once respected investment brokerage firm had to be bailed out by taxpayers in the "too big to fail" crises and was later fined by the US government for it's mortgage practices.
If you were to walk into that bank today for a simple checking account transaction will be hammered by the customer service rep to purchase all kinds of services so much that they lose focus on the quality and accuracy of service they provide.
I agree with much of the previous. My son and I mess around with old cars...clunkers to some...affordable transportation to others. The cash for clunkers dried up used parts sources and drove up the price of used cars as indicated. It was dumb from start to finish.
Retired Obama administrator who has written a book recently was on Charlie Rose. When asked why there were few prosecutions said he did not know for sure, but the laws that then existed did not make what the bankers and brokers did specifically illegal and any prosecution was likely to be very expensive and also ineffective. I don't know, but that may be why a lot of sleazy creeps escaped prosecution.
A few days ago, a statistic came out on cash purchases of homes. Much of the home purchases now are done with cash.
One other reason for the slow recovery is banks getting money for zero interest and then being unwilling to loan it at a reasonable rate and also taking on absurd costs and fees.
Banks are now charging $40 for a check that might be $2 over the amount in the account. Way back in 1969 or so, Chemical bank had a system that made sense. If you wrote a check that would bounce, you got an automatic loan at a reasonable interest rate if you paid off the loan with deposits. That is the only kind of account "guarantee" that should be allowed.
Smaller SD towns can be collapsing, but there will be one or two impressive, expensive building...the bank or banks. Banks could be run out of a cheap mobile home and SD would be a lot better place for actual development.
Whether people want to talk about it or not, South Dakota, and all ag states for that matter, rode out the recession as if it were only an economic downturn. This state is what I like to call, "geographically insulated" from the rest of the country. When there is an economic downswing, we are the last to feel it's effects, and also the last to start recovering from the downturn. Even when the rest of the country recovers, South Dakota can't seem to gain ground on those states a thousand miles east or west of us.
There are several reasons for this phenomenon. Like it or not agriculture sells products that we have very little control over the selling price. Sure we can play the market for a while but eventually there is debt to pay and operating expenses for the next year that need to be addressed, no matter what the final price may be.
We have very little industry when compared to other states. There used to be reasons for this, "bad roads," but no longer.
We have a GOP attitude in this state that seems to say we are fine with the way things have always been. The lack of progressive leadership from both parties is really a damn shame.
We dont have vast natural resources to help pay the way like Wy, ND, and Mt do.
And finally, when we do something to attract money to this state the monetary effect only reaches a a few of our residents. Think banks here folks.
There was something different about the last recession here in ag country. Ten years ago this month I sat at a table in the Kadoka bar on a friday afternoon with five other ranchers. The talk got around to the cost to graze cattle in western SD. At that time grass could be had for between $26 and $28 a cow calf unit a month. We put pencil to paper that day and determined that at that time you were losing money at anything over $24.
Now move ahead ten years and check the price of grass. There are some ranchers that are paying close to $5O a unit.
Meanwhile, those prices drove land prices up to reflect the added value of the product growen there. Farm ground was the worst but grass followed where farm ground went as far as price per acre goes.
Banks continued to loan money to buy land but the relationship that the lender and the barrower had started to change. Slowly banks, and the federal government started to ask for a higher percentage of equity to qualify for a loan to buy land.
We are now at a tipping point in agriculture. The cost of doing business has outpaced the effecintcy that had previously driven that economy.
Banks are still lending for the purchase of ag land but when the paperwork is done everyone except the worst optimist knows that the chances of seeing that loan through to its conclusion without refinancing is almost 0.
The writing is on the wall. For a time this year baby calves were selling for $700. At the same time land being bought by ag people has started to fall. Foreign investors and the extremely rich are still driving the land prices up but for the operators that land has suddenly become out of reach.
There is an economic storm a brewing. When the price of cattle drops enough, and it will, when commodity prices fall the limit for six consecutive weeks, and it will happen, and when the profit margins for processing ag products approaches 0, it will come.
Would TARP for households have helped drive the economy? It would depend on where they were financially before this all started. For people living in South Dakota I'm thinking not so much.
There is nothing that can be done to fix what is going to happen, it's way to late for that now. We can only learn from our mistakes and hope we survive.
As agriculture goes, so goes South Dakota.
The Blindman
Bill the phenomenon that you describe with the buying of, I would presume pasture land, grassland, with the guy doing the buying needing more of the purchase price up front, is I am sure with all land purchases now. Someone posted about folks buying homes with cash, which tells me that the gap between the haves and the have nots has increased big time.
I heard of a fellow that I know who farms (plants crops on) 12,000 acres. He recently purchase another 8,000. He is the hardest working person I have ever seen but at 10 or 12,000 bucks an acre, I am amazed that he could pay cash for that much land, but I am sure he did.
Lanny,
Interest Rate Risk: If rates rise to high, loans that currently can be repaid become questionable, thus impacting the health of the system.
Bank Profits: Banks operate on spread between cost of funds and what the get in interest income. A three percent spread is fair as cost of operations is usually about 1.5-2.0%.
Thank you Troy,
Bill and Troy, to your points,
"Given the endless zero interest rate regime of the Fed, investment funds are desperate to find investments that yield higher interest. They are so desperate they are pouring money into shale gas and shale or tight oil companies like never before. The companies are operating at losses, loaded with debt and the credit rating agencies rate their debt as “junk”, i.e. in a market downturn, likely to default."
http://journal-neo.org/2014/05/12/washington-s-shale-boom-going-bust/
If the Federal Government, starts playing geopolitical politics with our natural gas, with the EU and by exporting to the EU, because of Russia and the Ukraine, we could easily find ourselves freezing to death in the northern half of the US, within a few winters, like this last one.
Great link Lanny
The Blindman