“It is useless to attempt to reason a man out of a thing he was never reasoned into”

Jonathan Swift
"The Democrats have moved to the right, and the right has moved into a mental hospital." - Bill Maher
"The city is crowded my friends are away and I'm on my own
It's too hot to handle so I gotta get up and go

It's a cruel ... cruel summer"

Tuesday, September 30, 2008

Riders on The Storm

I hear hurricanes ablowing.
I know the end is coming soon.

I fear rivers over flowing.

I hear the voice of rage and ruin.

-Creedence Clearwater Revival

I love that video.

Wow, this market is a POS right now. $1.1 trillion in wealth disappeared yesterday, and even more over the last few months. Grandpappy Grumpy and Mary Moosechunks took credit for the bailout success, and then it did not happen. Then they retracted.

Then McSame said we should not have a blame game 2 hours after blaming Obama for the bailout bill failure. Gawd.

Oh, the Rethugs killed the bailout because Nancy Pelosi is a big meanie!

I am still wary of the bailout. The bastards who overwhelmingly vote Rethug and wanted to be high flyers don't want to pay up. The democrats who owe favors to the immensly wealthy are scared to stick them with a new tax on investment transactions.

The credit crunch is very real, but a friend who works at a private equity firm says that there is billions on the sidelines. Why? Because banks are not loaning money to investment firms for M&A at a decent interest rate. If you are wanting to buy companies, why pay 9% interest when the taxpayer can eat a large chunk of the big real estate shitpile, and free up the investment banks to loan at 6%. (all rates guestimated)

Good point from my friend, but the real problem is a lack of vision. Of leadership. Obama can step up here. Democrats can put together a bill with serious conditions, and Obama can go on the teevee as our party's head and explain. With Grandpappy McSame cry? Sure! So what!

What should the bill look like? I am just a pissant blogger in this 'ol big world, but let me just pass on a few good reasonable suggestions from FIREDOGLAKE:

1) Buy up mortgages at a discount and give people new fixed rate mortgages. The government shares in further house appreciation (only fair since it bailed the homeowner out). This stabilizes mortgage prices and helps people and banks both. It is essentially identical to what FDR did with the Home Owners Loan Corporation (HOLC), and we know how to do it. Initial price tag? Probably around 20 billion.

2) Use the FDIC (the folks who take over failed banks) to take over failed mutual and money market funds, make sure the investors get as much money back as possible, liquidate the funds in an orderly fashion (or keep them operating if necessary) and if they are kept alive, kick the people who screwed them up to the curb and change how they do business.

3) Declare a national emergency, with judicial review (unlike Paulson's seizure of ultimate power) and use the authority to review all purchases of banks, to institute oil rationing if necessary (or simpler procedures like "every street now has a 55 mile an hour speed limit, if it is normally higher). Also allows release of oil from the reserve, if necessary.

4) Expand the safety net such as food stamps, employment insurance, welfare and so on. We know this is going to get worse no matter what we do, so why aren't we taking care of ordinary people?

In addition to this, the bill must include the necessary regulatory and tax changes to ensure that this does not occur in the future.

I) All income over 1 million dollars a year (MY CHANGE-PS) from any source, including bonuses and options, to be flat-taxed at 50%. (MY CHANGE-PS)

II) No loan can be sold more than two steps beyond origination.

III) No security can be more complex than the underlying transaction. We need to make sure that this situation where no one can value or even understand the instruments at the heart of this problem never happens again. Mortgages are simple contracts, no derivative based on them should be more complex than they are.

IV) Forbid any credit default swaps going forward and start unwinding the ones that currently exist. It's fairly clear that the people buying it used it to offload default risks they knew were too high for them and the people who sold them didn't understand the risks they were buying. In particular, no default insurance for banks. You loan the money, you are responsible for it.

V) End to end leverage of no more than 12 times. No borrowing one place, then getting more leverage somewhere else, then creating a security based on that money, then using that security to borrow again, and other such idiocy.

VI) No leveraged security can be used as collateral. The ratings agencies are not allowed to give any leveraged security more than a B rating.

VII) Simple mortgages which can be understood by anyone with a grade 8 education. If it can't, it can't be sold, and a judge is permitted to set it aside if it was sold anyway.

VIII) Banks may only sell the portion of a mortgage which is equal to what 30% of the median value of earned income in a zip code can finance. If they want to make loans beyond that level, that portion stays on their books and cannot be offloaded on anyone else. Mortgages should be based on what people can afford, and so, ultimately, should housing prices. If we want to modify this we can allow some modification based on an individual's income, but not full modification. After all, the question still remains whether the sort of people who live in that community will be able to buy and afford the house.

IX) Bankruptcy law fixed. 'Nough said.

X) Insure money market funds (not everything, just money market funds and maybe mutual funds) and regulate them. Allow banks to use money market holdings to meet reserve requirements. This allows an increase in the money supply and a new source of money, which is necessary since there isn't actually enough money in the world to pay back all these debts.

XI) Pay for all this with progressive taxation. A 10% surcharge on those with incomes in the top 1% is a good start, but I would suggest just raising income tax levels starting at about $250,000, closing loopholes and taxing capital gains income at the same level as other types of income.

I would also add a 1 cent per 100 shares tax on any mutual find, stock, bond transaction, and 1 cent per 100 contracts option/commodity transaction.

Good stuff . . .

-Prodigal Son