I’ve admired Nancy Pelosi over the years. Yesterday, her speech from the house floor haranguing George Bush for blowing the huge surplus inherited from the Clinton-Democrats was 100 percent right and totally amok.
But it was also the wrong speech at the wrong time. In crisis, we need a little less obvious harangue, and a little more kumbaya.
Intuitively, I’m actually on the side of the free-marketers here. Let the capitalists bail their own sorry asses out. The crisis was created by capitalists and should be solved by other capitalists.
But then I found out just how screwed we all are.
We just don’t have enough Warren Buffets to go around to save us.
The problem is that no one is really telling it like it is in a “Howard Cosell-easy to understand way.” Really, this is a country that doesn’t like to save or balance a checkbook. It’s going to understand a bailout?
So some help is needed to really understand the abyss we’re in.
This is more than just about bad sub-prime loans in places like Stockton and Modesto. It’s about banks and institutions re-packaging those mortgages and re-selling them off as securities. These are people who are too bored with plain stocks and bonds, and want exotic action that could make them filthy wealthy.
That’s where the greed comes in.
Institutions were basically buying, selling and speculating on these debt-based securities. As long as the housing market was great, everything was fine. But when the housing prices dropped, consumers felt the pain, then the banks, then the investors who bought the debt, and then the speculators who bought the securities based on the debt.
Do you see where this is going? The investors and speculators in question often were subsidiaries of other big institutions and banks trading and hedging their own mortgage debt, or the debt of others. When mortgages defaulted, institutions caught on the wrong side merely borrowed money to stay afloat. But when the defaulting continued and banks needed more cash, they couldn’t get loans.
Oops, no cash. That’s your liquidity crisis.
Suddenly, there was no lending to banks with massive junk portfolios because no one could figure out an honest way to value these securities based mostly on junk sub-prime mortgages. It was just part of being in this “Wild West” financial environment where there was no transparency, no regulators, and no accountability.
And just how much is estimated to be out there in these kind of securities? Just in so-called “credit default swaps,” there’s $62 trillion.
That’s how serious this is.
In 2007, Wachovia had 89% of its capital exposed to debt securities of some sort. And it wasn’t even the largest bank. All the big banks have exposure to this junk. It doesn’t take long for the unthinkable to occur. For Wachovia, it was this week. It couldn’t cover the demands on bad bets made in the credit markets. Add to that a run on deposits, and Wachovia was done.
If all our financial institutions engaged in this activity, you can see, how troubling this is for our economic stability.
So at this point, we really are talking about the “good of the country.”
Do we really want to see bank failures left and right?
Then we better stop talking about left and right, and about one great U.S. economy and one great democracy.
You can’t get to a bailout plan without that kind of bi-partisan attitude.
A good bailout plan would address the unregulated trading in debt and provide transparency. If we knew how much one of those junk securities was really worth, we’d have a sense of value. That means the taxpayer wouldn’t have to overpay if we had to take over these loans.
At the very least, we need a shot of confidence. Boosting the FDIC guarantees from $100,000 to $250,000 doesn’t seem like much, but at least, it would help people to relax and not panic.
Mostly we need people in Congress to assure us that we’re in good hands, and that we’ll be all right.
We already know who to blame for all this. Now, more than a bailout, we just need a few heroic leaders to step up.