A Few Hairs of the Dog What Bit You
It’s a smug column — and given our circumstance, why shouldn’t it be? — in which Martin Hutchinson explains what Germany got right and what America got wrong. Oh, and what everybody else got wrong, too, including Greece:
Greece must be expelled from the euro and allowed to find its own level with a new drachma. Interest rates must immediately be brought up to well above the level of inflation while rigorous programs of public spending cuts must be combined with the closure of tax loopholes to restore integrity in public finances. Slush funds for housing and green energy must be wound down immediately. The Volcker Rule must be rigorously enforced on the largest global banks, so that trading is pushed off into systemically insignificant hedge funds where it belongs.
Something like this almost certainly will happen — if by default rather than by design. And, yes, the pun was intended.
On the US’s woes, Hutchinson is a bit too smug. He discounts the importance to the global economy of American entrepreneurship and risk-taking. Germany manages steady growth with its consensus-driven management, where government, business and labor are all glommed together. What the Germans don’t do very well, grading on a curve, is innovate. But surely we’ve enjoyed a little too much innovation on the financial side. What Apple does in the field of consumer electronics, maybe Bear-Stearns shouldn’t have been doing with our rent money.
So we know how Greece gets out — badly. How can we do better?
The way I see it, Americans need to deleverage more quickly than we’ve been able to with high unemployment and shrinking wages. We need the financial sector to get back in the business of lending — and lending sanely. 14 million Americans need to get back to work. And Democrats and Republicans alike are going to get pissed off.
Here’s my proposal — and it’s a package deal. You can’t really separate any of it out.
• Repeal ObamaCare. Job creation fell of a cliff immediately after ObamaCare became law. It is a jobs-killing program. Reform of Medicare/Medicaid and employer-based insurance must still come, but it can wait for a strong recovery.
• Repeal Dodd-Frank. What ObamaCare does to jobs, Dodd-Frank does to lending.
• Reinstate Glass-Steagall. Sorry, my Republican, Libertarian, and DLC friends — but letting deposit-taking banks get into high-risk investing was just plain stupid. This might not be an ideal solution, but it will reduce systemic risk to the banking system.
• Dissolve Fannie, Freddie, and get the government out of the mortgage business. Twisting banks’ arms to get them to finance bad loans got us into our housing mess. The Gramm–Leach–Bliley Act of 1999, which effectively repealed Glass-Steagall, is what allowed the housing mess to infect the entire economy and send us spiraling into the Great Recession.
• Mortgage relief and restructuring. It’s probably impossible for the housing market to find a bottom — and then start growing again — while a quarter of all mortgages are underwater. Restructure the adjustable-rate mortgages (ARMs) to fixed-rate instruments, and lop off a fixed percentage of the value of all underwater, low-or-no-money down, ARMs. Recapitalize the stupid banks if needed. Let the Big Brains figure out the details on those last two items. I’m sure they’ll get them wrong, but this is a rare case of something being better than nothing.
What we’re suffering from now is the worst of three worlds. We have a government-created financial crisis and recession. We have government making both situations worse. And we have a private sector too hobbled and too scared to grow our way back out.
So — and it pains my free-market self to say this — it’s going to take government to start undoing some of the damage. But, predicating the last item on dissolving Fannie & Freddie ought to go a long way to insuring that this never happens again, and restoring some sense to our banking system.
I know, I know, it sound a lot like “let me have just one more hit and I swear it’ll be the last time.” But I’m not sure there’s a better solution. If I’ve missed anything, please tell me.
Only one thing you forgot: a moratorium on new regulations. The threat of being regulated into oblivion is what’s got every business scared. And since the primary motivating factor of nearly all management in nearly all corporations is fear of loss (Apple is a notable exception), removing or allaying fear is the primary means to repair the damage. Instead of sweaty shaky terrified middle managers trying to figure out how to keep their business unit from hitting the negs, we need arrogant jerks who think they own the universe. The latter may be hard to live with but better to have a job with an arrogant jerk a level or two above you, than not having a job because your bed-wetting management team laid off 25% of the workforce because they were afraid they MIGHT go over budget this quarter. Funny, maybe, but totally serious. I remember when Greenspan gave his ‘irrational exuberance’ speech I wanted to reach through the TV and smack him. Doesn’t he know that all that crap about steely-eyed cold-hearted nothing-but-the-bottom-line capitalists is all leftist twaddle? They’re just people, and they can panic…and do, often. DUH!
While I completely agree with the moratorium (hell, red-line 3/4 of the existing one while we’re at it.), I don’t completely agree with your portrayal of Greenspan. Yes, the guy’s cache has dropped considerably, and the Fed is the source of a huge amount of the problems we’re dealing with. But his analysis of the dotCom bubble was pretty accurate. The problem was too much easy money. That lead to, frankly, irrational speculation by investors and entrepreneurs.
Should there be risk taking? Absolutely. I’m in the middle of that gut-wrenching game myself. And are there times when you’re going to take a flyer on an enormously “bad” idea? Yup. Do there need to be speculators out there who are willing to back up that risk, hoping to make an absolute killing if the idea ends up being a home run? Oh, hell yeah.
But there was entirely too much of that in the late 90s. And there were a bunch of people new to the stock market playing with stocks and options who didn’t know f*ck-all about the reality of the risk they were taking. And there were plenty of cheerleaders in the financial industry who were absolutely playing the system (which brings us back to Steve’s point about Glass-Steagal).
So yes, it was irrational. Hugely. Again, that’s not to dismiss your point entirely. Irrationality brought us out of the caves and onto the savannas. Irrationality had the Wright brothers flying a plane. I could go on. You certainly get the point.
But sometimes it takes an “adult” (no, Greenspan isn’t my first choice either) to tell people–”Hey, that thing with sharp claws and a big mouth full of teeth? It’ll eat you if you wander out there!”
At times, we ignore the adult and wander out of the cave. We get eaten or we don’t. Those who don’t get a chance to become our grandfathers (x1,000,000). But sometimes we pay attention to what the idiot village elder is saying, decide to watch the saber-tooth as it’s prowling the grounds, and figure out how to cut a spear to kill the beastie.
Okay, I’ve beat that metaphor to death. The point being, Greenspan certainly, especially in retrospect, wasn’t the best messenger. But he was right. And it’s up to us to keep educating ourselves and figuring out the BS from the good advice.
Nice program, I would support it, if any candidate would pick it up and quit talking about irrelevancies promoted by the media.
I think Renaissance Nerd above has a good point too.
One amendment, though:
lop off a fixed percentage of the value of EVERY mortgage …. otherwise you are giving a benefit only to those who made bad decisions and punishing the prudent buyers who made good ones. Give it to everyone, and it’s just like a tax holiday or the Bush “stimulus” checks, maybe not a principled idea but at least evenhanded.
I think you’ve outlined the necessaries well enough, but the real trick is how to get Washington to do something for the country’s benefit and not just “reward friends and punish enemies”. Your mortgage restructuring item is what TARP was supposed to accomplish, which would have been a good idea at the time. But it simply turned into a giant hog trough/get-out-the-vote-fund.
Interesting that you mentioned Glass-Steagall. I remember when the GOP Congress and Democratic President Clinton joined togehter to repeal it in ’99 (Gramm–Leach–Bliley Act of 1999) at the height of the dot-com boom. My one thought was “This won’t end well, does anyone read history books anymore?” The dot-com crash happened before the banks could get in too deep, so they used the housing boom. Say what you will about other New Deal policies, but FDR got Glass-Steagall right. Friends from across the political spectrum were saying “this won’t be good” when that happened.
As far as the mortgage stuff goes, I’m not so sure. Any federal subsidy of mortgages will by definition be unfair to large numbers of taxpayers — renters, people whose houses are paid off, etc. And the “fixed percentage” won’t fly when the taxes of the person who bought the $250k house they could afford go to assist the people who bought the $750k house they could not really afford but bought at the peak of the market because “real estate always appreciates”. It’s going to be painful, but if you’re underwater, a deal’s a deal. I feel bad for you if you are forced to sell, but otherwise there’s no difference between paying a $500k mortgage on a house worth $250k and a car payment for a $40k car that will be worth $20k when the loan’s paid off.
NRO’s Daily Links point to a Spiegel article about the German reaction to Obama’s advice. Let’
s just say he is not improving our standing in the world. They find him arrogant. Of course I wasn’t too happy about all the German Michael Moore groupies when Bush was president.
I’m with you on everything except the mortgage plan. We had a similar problem in the late 1980s with the S&L collapse. We formed the Resolution Trust Co which basically liquidated all the bad assets and failed institutions. Yeah, it was painful for those who lost but the economy bounced back and we had the tech boom of the 90s. The extend-and-pretend propping-up-bad-assets stuff ultimately helps nobody, not even those who are bailed out. Economic growth helps everybody. Failure is just nature’s way of saying “you made a mistake” and it must be acknowledged, not suppressed or ignored.
Agreed. Those who are underwater are going to have to either wait for that sunny day in which they become whole again or go the “jingle mail” route. Mortgage modifications have already been shown to be ineffective. The mortgage problem will be sorted out eventually, no matter what the government does.
“We have a government-created financial crisis and recession. We have government making both situations worse. And we have a private sector too hobbled and too scared to grow our way back out. So — and it pains my free-market self to say this — it’s going to take government to start undoing some of the damage.”
Yes, by getting out of the way! When government has been shown to do the wrong things most of the time and to eventually FUBAR even those it does right how can anyone sensibly expect a government solution, regardless of your political leanings?
I’m with you for everything except the mortgage relief.
In order to work correctly, capitalism requires that failure be allowed to happen. Some people took out loans they shouldn’t have — for many reasons, some of which were no doubt due to inappropriate government encouragement. But in the end, they still signed their names to the documents, and so should remain responsible if they can (if they can’t, then either walk away or file for bankruptcy). Same for the banks. They made some bad loans, and should be allowed to fail.
When failure happens, the stronger individuals and companies — the ones that made good decisions — will then be able to step in and begin to set things right. Yes, it will be a bumpy road, but better a couple of years of hell than an eternity in purgatory.
Repealing Glass-Steagal (again) might eventually be OK, but only if the public is completely off the hook for any resulting failures.
As others here have noted, and as you, Mr. Green, have also noted in other articles, we have to roll back regulations. The exec branch should not be writing laws. A Presidential order can wipe out every regulation that was not passed into law by Congress. Give it a 6-month date, say, 7/21/2013. If the Departments and Agencies want a certain regulation kept, they better hie themselves over to Congress, toute de suite.
Yes, FDR got Glass-Steagall right. In the past, I have attributed gutting Glass-Steagll to Lindsay Graham (R-SC). It was, indeed, Phil Gramm (R-TX). I apologize. Mega mea culpa. (Hard to keep these Dems-turned-Pubs straight.)
Repeal the 16th Amendment. Forbid all capital gains, estate, corporate and personal income taxes. Institute a national sales tax at only the retail level. No VAT. Businesses must declare themselves to be wholesale or retail only, so businessmen cannot pretend to be buying stuff from Costco for resale that is really for their own use.
No mortgage relief. This is more government tinkering. Remove the logjam of the government from the river of the economy, and it’ll start flowing again. The houses will then regain value. No taxpayer money need be spent, and no agency need be created or expanded. Do you really want to see HUD run this mortgage relief operation?
Repeal executive order 10988, which allowed Public-sector unionization.
Here’s what you missed: we need to deleverage, and big time, across the board. This means we lower the incentives on borrowing and simultaneously improve the incentives (or more to the point, stop the threats and demagoging) for equity. So, roll out an automatic 1/4% increase in interest rates every quarter for the next three years to get interest rates back into sane territory, immediately drop the capital gains rate and dividend rate to 10%, and tell Warren Buffett to shut the heck up. Bam- fixed. On the regulation front, we need to get out of the mindset of more vs. less regulation and focus more on productive vs. crappy regulation. The appropriate amount of well-crafted regulation is necessary to the functioning of the system. No amount of crappy regulation will do anything but mess things up.
Weren’t most of the Arm loans already defaulted or refinanced already?
A moratorium on regs goes nowhere near far enough, massive repeals are a minimum. I subscribe to the theory that one of reasons the two recessions of the aughts had less vigorous recoveries is due to regulations coming close to the crush point.
I submit that underwater mortgages are overemphasized. Many who had only been in their homes a short time walked away from the “investment”. Many who haven’t taken a big loss in income are still in their homes. Some might not even realize how far underwater their mortgages are. If one became unemployed and remain so or had to take work that pays substantially less it doesn’t matter that their mortgage is underwater if one can’t make payments at all or can’t even afford payments at substantial reduced levels.
While we’re repealing bad law can we dump Sarbanes-Oxely too?
Is “Dodd Frank” the same as the Fin Reg bill that in addition to the job killing regulations installs onerous racial and gender quotas? If so, great, if not, Fin reg needs to go too. RPD’s right about Sarbanes Oxley, and that’s just the beginning of what needs to go.
In spite of my hatred of regulations, I agree bring back Glass Stegall, Banks need time to heal and don’t need to be taking crazy risks while healing.
Disagree on mortgage relief. It’s a different version of the same attitude that got us in this mess. There too many people with mortgages who can’t afford mortgages and the more we try to save them the more they will bring everyone else down with them. When this many people get this badly hurt, you need to do triage. We can’t save everyone, and they more we try to save people who can’t be saved, the more people who could be saved won’t be.
If you unwind Fannie and Freddie, the housing market will fix itself, eventually. They have created a moral hazard wherin the company that lends money for a mortgage does not hold the risk associated with that loan. So it is in the best interest of the banker to lend to whoever he can, as long as he can push the note off onto the taxpayers.
If the banker that makes the loan has to hold the note for the duration, he would not be lending to people who cannot pay him back, he would require a reasonable down payment, and the interest rate would have to reflect the actual risk of default.
I suggest requiring Fannie and Freddie to reduce their mortgage load by 5% annually, and eliminating the two companies entirely 20 years out. That way they won’t dump their entire portfolio onto the market at once, but there will be an orderly unwinding with a date certain for end of operations.
You missed the international side of things relative to the economy. Companies should no longer be able to apply offshoring expenses against their taxable income. The tax model today gives additional incentives to offshore both service jobs (to India) and manufacturing (to China).