Lesson from the Mislabeled “Fiscal Cliff”: Please Spare Us Any Future Countdowns

A breathless Market Watch

Gimme a break.

Remember Y2K?

I rang in the year 2000 in a windowless Wall Street bunker, part of a multidisciplinary rapid-response team standing by to spring into action and muster resources from across the company in the event of a disaster anywhere in the world.

I performed this solemn duty while playing video games on my laptop.  I also practiced with a putter and golf ball someone else had brought. Every three hours the team assembled for a scheduled conference call with the company’s smaller command centers around the world, giving everyone a chance to tell jokes.

All this comes to mind, of course, during the breathless countdown to the so-called “fiscal cliff.”  Wolf Blitzer shows off the ticking clock every afternoon on CNN, and there are competing websites where you can get your own ticking clock widget for your blog or website. Please don’t.

Here’s Rex Nutting of the Wall Street Journal‘s MarketWatch.com to put it into perspective:

In truth, nothing much will happen to the economy on Jan. 1 or Jan. 2 or Jan. 3, despite the expiration of tax cuts and the automatic reductions in federal spending. … The fiscal cliff is a misleading metaphor. The laws will change on that day, it’s true, but the impact will be spread out over many, many months. In fact, the effects are already being felt, particularly in financial markets. Businesses, investors, workers and consumers have begun to prepare for the changes, and that’s caused the economy to slow a bit already.

It’s not a Niagara Falls, with billions of gallons going over a cliff. It’s more like a bathtub slowly filling up. And, on Jan. 1, it’s going to spill over the edge. Eventually, it will flood the house, but that’ll take time.

Hey Rex, tell it to whoever put a countdown clock on your own website’s homepage! Mercifully, the countdown craze for this manufactured crisis has not yet spread as widely as the craze for the last manufactured crisis — the debt ceiling struggle in 2011.  Here’s my take on that countdown:

Much of the news media is guilty of malpractice for pretending that August 2 was a consequential deadline.  The cable news networks and even the Washington Post had clocks ticking down the number of hours and minutes until midnight August 2, sometimes labeling those clocks as a countdown to default.  But if the clock had struck midnight without a deal in place, the awful consequences would have been… absolutely nothing.

The country would continue to pay most of its bills, including all of its debt-servicing bills, through the time-honored business practice of “maturing their payables” — making some creditors wait.  The next major step would be a partial shut-down of government, which certainly would have ratcheted up the drama.  But we were weeks away from any danger of default.

This countdown is perhaps slightly more real than the debt ceiling because at least it ends on a date where something actually will happen, whereas the deadline for the debt ceiling was an estimate pulled out of Tim Geithner’s ear three months in advance.

The U.S. Chamber of Commerce jumped on the countdown bandwagon early, but to their credit they’re not displaying it now.

As a commenter pointed out in my previous post, the January 1 deadline was created by an act of legislature, and the same legislature can vote at any time to stop the clock or overturn the law altogether. If the President and the House Republicans don’t reach a deal before January 1, both sides will begin discussing plans to undo much of the damage triggered by the law.  Then the Republicans will have to fold their tent on the tax issue, unless they want to vote against a tax cut for the middle class.

One more Y2K memory: Later that holiday weekend, when I was off duty, someone found an actual problem to report! I got an urgent call at home from the communications person who was staffing the increasingly irrelevant command center.  I was the intranet guy at the time, managing the corporate homepage for our far-flung internal website. On a locally managed site overseas (I forget where), the Y2K preparations had missed a problematic bit of code.  A script had updated by adding 1 to the two-digit field for the year, resulting in an internal page dated January 1, 19100.

OK, I said.  I’ll call them Monday.

.

Honest Labor: From Mach 2 to Muenster to Madison

(Welcome, Maplewood Patch readers, and thanks to Mary Mann for the kind words.)

A summer evening in 1995: My boss’s boss, a Merrill Lynch executive who has never called me at home, calls me at home.  His opening line still ranks in my mind as one of the most interesting possible ways to start a business conversation:  “Kirk, do you have a passport?”

It turns out I do.  “OK, pack a bag, you’re getting on the Concorde to London in the morning.  We’re buying a British firm, and you’re going to write the script for the press conference.”

A September morning in 2009: The manager of the local supermarket flips through my application, which discloses work experience and a salary history he’s not used to seeing.  Plus there’s the whole Princeton thing.

He says, “all I have to offer is a job in the deli. Are you sure about this?”

It’s an excellent question, and the answer isn’t obvious, even to me.  But I manage to convince both of us.

The Concorde was surprisingly cramped inside. The main thing that distinguished the experience from a puddle-jumping commuter plane was the digital display at the front of the cabin, which indicated we topped out at Mach 2 (over 1,300 mph) and 60,000 feet.

I had been told to pack for three days, but I ended up staying for 10.  Those were flush times on Wall Street, and Merrill’s executives and support Gumbys alike were all housed at The Dorchester, widely considered one of the world’s finest hotels.  (I suppose it is — they certainly kept up with my laundry needs.)

The target company was called Smith New Court.  Late one night, at a crucial juncture of the negotiations, it became necessary to briefly evict the Smith New Court personnel from the giant Dorchester suite where the talks were being held, so the Merrill team could confer by speaker phone with other executives in New York.  The Smithies needed a place to cool their heels, and the hotel’s business center was closed.

I was in my single room down the hall, casually dressed and thinking about bed, when there came a knock at my door.  Suddenly a wave of bespoke-suited Brits came flooding into the room, including the top two executives of Smith New Court, herded by a junior member of the Merrill team.

Padding around in my bare feet, I served sodas and spring water from the minibar and tried to make everyone at home.  Nervous laughter and small talk ensued for half an hour or so.  Then the negotiations resumed, and a billion-dollar deal was struck.

There were more trips to London that summer, and over the next dozen years, various employers and clients sent me to Tokyo, Cologne, Shanghai and Cleveland.  (I was able to squeeze in an Indians game — Jacobs Field is as nice as they say it is.)

I was the speechwriter for a CEO, I edited internal websites for two huge companies, I prepped executives for Congressional testimony, I helped clients spin bankruptcies, regulatory issues and involuntary CEO transitions.  I developed a taste for custom shirts, car service and single-malt whiskey.

For a job that pays $10 an hour, the deli counter gig wasn’t bad.  Probably the worst part was having to stand on my aging feet throughout a six-hour shift, except for a 15-minute break.  That, and cleaning the goo off the cheese slicer at closing time.

I generally enjoyed waiting on customers, most of whom responded well to a cheerful smile.  I learned that even though customers usually want their roast beef “sliced thin,” you have to set the slicer thicker than for turkey.  I discovered that low-sodium ham isn’t bad, but low-fat cheese tastes like glue.  Management wanted us to up-sell, so I said “would you like some salad with that?” and flattered myself that I was honing my marketing skills.  At one time or another, at least three fellow employees asked some variation of “how old are you, anyway?”

I had started my own consulting business in 2007, and I did pretty well for a while.  Then I did OK for a while.  Then the economy imploded, and after having virtually no income for a year, it had become clear that my entrepreneurial experiment was, at the very least, ill-timed.

I applied for dozens of full-time communications jobs while I was trying to drum up clients, and it was hard to decide which was more depressing — forcing myself to network with people who weren’t going to do business with me, or crafting thoughtful cover letters to hiring managers who weren’t going to interview me.  The guilty knowledge that I “should be doing more” repeatedly collided with the paralyzing reality that nothing in particular had to be done today.

At 51 (which is not old, dammit!), I’ve learned some hard things about the job market.  It turns out that if the job description calls for “8-10 years of experience” in a role, that’s not really a minimum — it’s more like a maximum.

It turns out that “overqualified” is code for “too old.”  (I’ve promised myself that the next time a potential employer tells me I’m overqualified, I’m going to offer to work below my full capacity.)

I kind of dared myself into applying for the supermarket job.  While commiserating with another idle consultant about the work we did back in the day, I heard myself saying, “at this point, I can’t imagine turning down any job at any salary.”

The instant I said it, I started wondering whether I really meant it.  When I saw the words “Now hiring!” on my supermarket receipt, it was time to put up or shut up.

The supermarket manager, naturally, said I was overqualified.  If the line had come to me in time, I would have said “I’ve never worked retail before — maybe I’m underqualified.”  The manager looked to be about my age, maybe he felt some kinship.  For whatever reason, he gave me a shot.

As it turned out, I was only there three months.  My new gig is a step up in both status and pay.  On January 4 I became the parish administrator of Grace Episcopal Church in Madison, NJ.  I’m now responsible for producing four weekly service bulletins and running the busy office at one of the largest Episcopal churches in North Jersey.

I got the position the old-fashioned way — through family connections.  Up until a few months ago, it had been the Web Goddess’s job for five years.

My beloved left Grace Church after she parlayed her years of self-taught website work and her knowledge of all things Episcopal into a newly created job, as Director of Communications and Technology for the Episcopal Diocese of Newark, which includes 108 parishes in northern New Jersey.  She has quickly started raising the profile of the diocese by redesigning a weekly newsletter and leveraging social media, while supporting the bishop’s communications activities.  It’s her first professional venture into the arena where I’ve played for 30 years, and she’s a natural talent.

So, let’s review: My wife landed a job in my field when I couldn’t.  Now I have the admin job she held before her promotion.  How’s the ol’ ego holding up, Kirk?

Well, negotiations with my ego are continuing.  Ironically, each recent improvement in my income has brought fresh challenges for my self esteem.

For most of 2009 I was entirely supported by my wife’s income and savings.  By any objective measure, a part-time supermarket job was a step up from unemployment, and I made a conscious choice to take pride in my work.  But it took a while to get used to being spotted by friends in my white coat and funny hat.  The Web Goddess aptly called it a “survival job,” and I used that term as protective cover.

The full-time church job feels more like a career transition.  It also feels like an abandonment of the conceit that I’m a primary bread-winner who belongs in a globe-trotting world.  I’m not sure I would have been open to taking the job if I had not just spent three months slicing cheese and cleaning up.

It helps — a lot — that I like the people I’m working with, and I care about the organization.  For more than a decade the Web Goddess and I have found fulfillment and a powerful sense of community at our home parish of St. George’s Episcopal, and Grace is a similar environment in many ways.  I see and feel the spiritual nourishment that Grace provides to its parishioners, and I feel privileged to have an opportunity to help.

I don’t expect I’ll be there until retirement, but the priest who is now my boss asked, quite reasonably, for a one-year commitment, so I’m not looking for jobs in 2010.  (Part-time projects in my off hours are another matter… let me know if I can help your business or organization meet your communications needs.)

Long ago I learned that job satisfaction does not primarily depend on how much money you make, or the type of work you do, or the prestige of the organization you serve.  In 12 years at Merrill Lynch I played several different roles while my income steadily grew, and I went through cycles of being both energized and miserable.

No, the most important factor in job satisfaction is whether you get along with your immediate boss.  It’s still early days at Grace, but I’m liking my chances, working for a woman of the cloth.  (In the words of the prominent Episcopal theologian Robin Williams, “Male and female God created them; male and female we ordain them.”)

In addition to a paycheck, my new job provides support for my spiritual infrastructure.  It helps me focus on living one day at a time, and on being grateful for all the blessings in my life.

And I am richly blessed.  I’m safe, and healthy, and in love with my wife.  I’m a United States citizen, having won that lottery the day I was born. I have a fixed-rate mortgage, and positive equity in a comfortable house in a nice town.  Around the world, billions of people would trade places with me in a heartbeat.

The job gives me a reason to get out the door in the morning, and I look forward to arriving at the office.  I’m doing real work that needs to be done, and I stretch myself to meet deadlines. People are counting on me, and I get recognized when I do good work.

If things get hectic, across the hall from the office is a … sanctuary … where I can seek through prayer and meditation to improve my conscious contact with God.  Staff meetings end with the words “Go in peace to love and serve the Lord.”

I may never again make the kind of money I made a few short years ago, but I won’t have that kind of pressure, either.  Not that it’s a slow-paced job — there are more than 1,000 parishioners, four Sunday bulletins in two different liturgies, a Eucharist or prayer service every day of the year, multiple tenants in a large physical plant, an office that buzzes with activity.  The Web Goddess set a high standard of efficiency and excellence, and all the details seem overwhelming sometimes.

But it’s not the corporate world.  After letting a detail slip one day, I told the Rector I was used to an environment where I’d be crucified for a minor transgression like that.  She replied, “we think one crucifixion was enough — we focus more on redemption.”

Amen.

.

Curse You, NY Post: I Had "Reign of Thain" First

In 2007, when John Thain became the first outsider named to lead Merrill Lynch in the firm’s history, I called a bunch of former colleagues there, looking for the insider scoop on the company where I worked for 12 years.

Making conversation, I said to a couple of people, “As a stockholder, I wish him well, but if the new guy doesn’t work out, at least you’d be able to say “the reign of Thain is regarded with disdain.” I should have copyrighted the phrase.

Comes now the news that Thain, who briefly was a genius for selling the company to Bank of America, thereby preventing the stock from going to zero, managed to spend $1.2 million of the shareholders’ money redecorating his office. This prompted the headline above in the New York Post (if you’re reading via RSS, it says “The Reign of Thain Was Mainly Just a Pain.”) I like my version better (imagine that!), although theirs is more true to the original rhyme scheme.

Now, I don’t expect the CEO of Merrill Lynch to get his new office furniture at Ikea. But Thain was hired away from the New York Stock Exchange specifically to rescue Merrill Lynch after predecessor Stan O’Neal golfed while the subprime crisis swirled. Even on Wall Street, you’d expect he would know better than to pay a celebrity interior designer $800,000 to buy knick-knacks like an $88,000 rug. Two words, Mr. Thain: Dennis Kozlowski.

It brings to mind another legendary Wall Street titan, Ace Greenberg, who used to send quirky staff memos urging employees to save money by, for example, reusing paper clips. At least he had the symbolism right. But all those paper clips were not enough to save Bear Stearns, which sold out to JPMorgan Chase in the early days of the Wall Street meltdown.

Bankruptcy is the Right Medicine for Automakers

Look at the bright side – GM stock
only has $3 farther to fall. (From Yahoo Finance)

The more I read and think about a potential further bailout of the auto industry, the nuttier the idea sounds.

Michael E. Levine is a former airline executive, so he knows about bankruptcy. He puts it this way in today’s Wall Street Journal:

General Motors is a once-great company caught in a web of relationships designed for another era. It should not be fed while still caught, because that will leave it trapped until we get tired of feeding it. Then it will die. The only possibility of saving it is to take the risk of cutting it free. In other words, GM should be allowed to go bankrupt.

Even one of the auto industry’s hometown papers, the Detroit News, said in an editorial Friday that bankruptcy might be preferable to the appointment of an automotive “czar,” an idea that has been floated by the Obama transition team.

It’s also been suggested that the government will take an equity stake in the companies and demand seats on their boards. That would almost certainly restrict the ability of the automakers to shut plants and lay off workers.

For all practical purposes, these moves would nationalize the auto industry and make its return to profitable, independent operation even more of a long shot. Presumably, an automotive “czar” could manage all of this meddling.

If that’s the case, Detroit’s automakers might want to rethink whether it’s safer for them to be in the bankruptcy courts than beneath the oppressive wing of a federal overseer.

Bankruptcy doesn’t mean GM goes out of business, and it certainly doesn’t mean the entire American car industry goes out of business. Bankruptcy protection would allow GM to reorganize, shrink substantially, and renegotiate its ruinous contracts with unions and dealers.

Levine describes the problem:

Foreign-owned manufacturers who build cars with American workers pay wages similar to GM’s. But their expenses for benefits are a fraction of GM’s. GM is contractually required to support thousands of workers in the UAW’s “Jobs Bank” program, which guarantees nearly full wages and benefits for workers who lose their jobs due to automation or plant closure. It supports more retirees than current workers. It owns or leases enormous amounts of property for facilities it’s not using and probably will never use again, and is obliged to support revenue bonds for municipalities that issued them to build these facilities. It has other contractual obligations such as health coverage for union retirees. All of these commitments drain its cash every month. Moreover, GM supports myriad suppliers and supports a huge infrastructure of firms and localities that depend on it. Many of them have contractual claims; they all have moral claims. They all want GM to be more or less what it is.

But GM can’t continue to be what it is. The beauty of the bankruptcy system is that it would give GM leverage to pursue cost-cutting more aggressively than would otherwise be possible. The longer that corrective action is delayed, the more traumatic the eventual restructuring will be.

Yes, there’s a perception issue involved in bailing out the “Wall Street fat cats” while refusing to help manufacturing industries and their blue-collar workers. That’s why it’s a bad idea for government to get involved in picking winners and losers in the first place. But the financial industry is special a special case, because of its critical role in making the entire economy function. The purpose of the rescue plan was not to bail out financial firms, but to unfreeze the credit markets, the lifeblood of the entire economy. Any proposed bailouts of other industries have to be held to a much higher standard

It’s a Bad Idea to Ridicule Others (They May Be Right)

Via Andrew Sullivan, a video showing how Peter Schiff, a.k.a. “permabear” and “Dr. Doom,” was subjected to an extraordinary level of derision on cable business programs last year as he correctly forecast the coming economic crisis.

It’s longish (10 minutes) but offers a powerful statement about why it’s generally a bad idea to ridicule people with whom you disagree. Two snippets jump out at me, the first starting at about 3:15, where multiple panelists cackle in the rudest way imaginable throughout this statement by Peter Schiff:

“Most of the profits in real estate are going to vanish, just like the profits in the dot-coms in 1999-2000. It’s a fantasy, people can’t sell their homes, the inventory is exploding all over the country, houses are on the market for six months and there are no bidders — the prices are going to go through the floor.”

Advantage: Schiff. Another point that struck me begins at 6:30, in an August 2007 broadcast, where Ben Stein offers his best pick for an undervalued stock: “I particularly like Merrill Lynch, an astonishingly well-run company … they might as well be putting it in cereal boxes and giving it away, that’s how cheap it is.” As he speaks, data on the screen show that MER closed at $76.04 that day, down from a high of $98.68 earlier in the year.

Ouch. At least I didn’t buy more Merrill stock that day, but as I’ve written before, I sure do wish I had sold the modest cache of shares in my Merrill pension account. Today’s price is about $13.

The Slippery Slope of Government Bailouts

Stephen Bainbridge has done the best job I’ve seen of describing why bailing out the U.S. automobile industry — as proposed by Congressional Democratic leaders — would be a terrible mistake. Point by point he shows why the public interest would be better served by letting the big automakers go bankrupt, because bankruptcy reorganization would give them the leverage they need to modify ruinous contracts with unions and dealers.

Using GM as an example, he summarizes:

Letting GM avoid bankruptcy by giving it a federal bailout ought to be unthinkable, because of the very real risk that a federal bailout will come with conditions that preclude GM from fixing its core problems. It’s likely to preserve the gold plated union contracts, the excess payroll numbers, the excess plant capacity, and the excess number of dealers.

This helps illustrate why it was conservative Republicans, rather than Democrats, who led the initial opposition to the Wall Street rescue plan, and succeeded in voting down the first proposal. Stereotypes would lead a person to believe that Republicans would be more sympathetic to Wall Street than Democrats. But the conservatives were not opposing Wall Street — they were opposing creeping socialism. They knew that other troubled industries would soon be jockeying for position at the government trough.

If belief in capitalism and free markets means anything, it means the markets must be able to reallocate capital to more productive uses. It means reckless or uncompetitive companies have to be allowed to fail. Viewed through this filter, any financial calamity caused by allowing the giant Wall Street firms to fail could be considered a necessary side effect of adhering to capitalist principles.

I’m an ardent capitalist, but I quickly became persuaded that a Wall Street bailout was a necessary evil. (I’m sure Hank Paulson would have been relieved to learn that I was on board.) The financial services industry is a special case, because the flow of capital affects virtually every business, government and individual in the world.

The credit markets effectively were frozen, and 15 years as a Wall Street gumby has helped me understand what a potentially devastating problem that is. The short-term credit markets are like oxygen for banks and big companies. They have to be able to breathe capital in and out on a daily basis to meet their daily needs. It was only a matter of time — and not very much time — before even healthy blue-chip companies would be unable to issue paychecks on schedule, to pick just one example of the potential for panic.

The analogy that comes to mind for the Wall Street bailout is, let’s say your child misbehaves and you tell her she’s grounded for a week. On principal, you should not then allow her to go see a movie two days later, no matter how much she pleads. However, if the house catches fire, you need to set principle aside and let her escape.

The automakers are a completely different story. Bankruptcy reorganization would be a severe financial blow to huge numbers of individuals and communities — but it would not bring the entire economy to a halt.

Wall Street Compensation in the Bailout Era

As bonus time approaches, Wall Street firms are trying to balance the need to retain key executives against concern about the “optics” of giving boatloads of bailout money to the people who arguably created the need for the bailout.

It’s easy to sneer at what passes for frugality on Wall Street when it comes to compensation… so let’s indulge for a moment. From today’s Wall Street Journal (I think it’s a free link, but if not you can get the gist from the excerpt below):

In a sign that Wall Street is waking up to the political tempest over billions of dollars in year-end bonuses likely to be paid out at securities firms lining up for government infusions, top executives are in discussions to possibly cap their own compensation, according to people familiar with the situation….

“There are going to be some people in the financial-services industry who will show real leadership here and recognize the reality of the situation,” one senior Wall Street official said.

At least one major firm has looked at former PepsiCo Inc. Chairman and Chief Executive Roger Enrico’s move in 1998 to give up his $900,000 salary. Instead, Mr. Enrico asked PepsiCo directors to fund scholarships for children of “frontline employees.” Mr. Enrico still got a $1.8 million bonus that year.

Yes indeedy, “real leadership” — give up the high six-figure salary but keep the seven-figure bonus. And of course, the 1998 bonus of a soda-pop CEO is one or even two orders of magnitude lower than what is available on Wall Street in a good year.

I have mixed feelings about this. I’m a fervent capitalist and I lean libertarian, so I believe salaries and other prices should be set primarily by markets, not by government decree. I toiled in the Wall Street vineyards for many years, mostly at Merrill Lynch, and I believe my old firm and its competitors play a crucial role in the economy. I was support staff, not a revenue producer, which meant my annual bonus was a fraction of my salary, not a multiple. But I never complained about executive comp, because when the poobahs got more money, so did the gumbies.

Vermont Senator Bernie Sanders, a self-described democratic socialist, has renewed calls for capping compensation for executives of bailed-out companies at the $400,000 salary of the U.S. President. The idea has a lot of populist appeal — even John McCain expressed support for it during the height of the turmoil last month. (I could probably scrape by on $400K a year. I’d like to give it a shot, anyway.)

But I suspect the best financial minds on Wall Street will continue to find ways to reward themselves handsomely. If such a limit could even be enforced realistically, it would simply drive the top talent into less-regulated pursuits. Do we really want to move the center of gravity of global finance out of the public securities firms and into hedge funds?

So, what should be done about the admittedly scandalous prospect of paying zillions of dollars in bonuses with money ponied up by taxpayers? I dunno… that’s above my pay scale.

In Defense of "Wall Street Greed"

The titans of Wall Street gathered this morning at the NYSE to discuss the ongoing crisis. The writeup of the gathering in the WSJ Deal Journal blog is well worth reading, once you get past the inexplicable opening links to poetry and “Error 404″. (Blogging famously involves publishing without an editor, and here we see the downside.)

I liked this bit from the Q&A:

The first question is a great one: the questioner notes that the four candidates for president and vice president rarely say “Wall Street” without also saying “greed and corruption.” Which is funny because, you know, it’s Washington.

Now, I’m as opposed to Wall Street corruption as the next fella, but Wall Street greed has gotten a bad rap. Whenever I hear the word greed, my mind substitutes “self-actualization.” “Greed” is too often conflated with simply acting in one’s own self-interest — the wonderfully relentless force of nature that underpins capitalism and makes it possible. (I’m a big fan of capitalism — one of God’s greatest gifts to humanity, and the only truly moral economic system — but more about that another time.)

The present unpleasantness is the result of a bursting bubble of housing prices. The prices were driven up because over the years, more and more capital was allocated to housing stock. If society is going to build more housing, it needs people to live in that housing, so the joys of homeownership were extended well beyond the pool of people who could actually, you know, afford to own a home.

The mechanism for this was the securitization of mortgages, through which Wall Street took risky loans off the books of banks and sold them to investors around the world — thereby seemingly making the risk disappear by distributing it widely. The housing bubble would not have been possible without the existence of mortgage-backed securities, an invention that served as a cash cow for Wall Street for many years.

So greedy Wall Street is at fault, right? Well, no. Wall Street did what Wall Street does, which is to find a way to distribute risk, while raking a little off the top of each transaction, thank you very much. But Wall Street didn’t create the risk. The gummint did — with the best of intentions. Roger Kimball describes the process as well as I’ve seen it described. An excerpt:

* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to “under-served populations,” i.e., those with poor credit.

The buzz word was “affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.

* In 1995, Bill Clinton’s administration made various changes to the CRA, increasing “access to mortgage credit for inner city and distressed rural communities,” i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.”

Bottom line? It forced banks to issue $1 trillion in sub-prime mortgages. $1 trillion, i.e., a thousand billion dollars in sub-prime, i.e., risky, mortgages, in order to push this latest example of social engineering.

But wait: how did it force banks to do this? Easy. Introduce a federal requirement that banks make the loans or face penalties.

Emphasis added.

All of this explains why it’s deeply ironic that the crisis apparently is benefiting the Democrats. Maybe it’s only natural to blame the incumbent party for any economic debacle. But in this case, as Kimball documents, the Bush administration and John McCain are on record as having raised alarm bells years ago about the gathering mortgage crisis, while Democrats in Congress stifled attempts to do anything that would cut off the flow of capital to provide home ownership for people who could not afford it.

Good luck, President Obama. And I mean that sincerely. For all of our sakes.

Bailout Wisdom from Various Sources

Bill Whittle recently had a very painful medical mishap, which inspired him to refer to “the $700 billion kidney stone the economy is trying to pass.” He prescribes some therapeutic pain:

Every decision we make is based on a risk/reward calculation. If we take away the consequences of risky behavior, we will see more of it. And if there’s a money-back guarantee for greedy and stupid decisions, we’re in real trouble, because there is only so much money in the bank but supplies of greed and stupidity are endless.

So how do we inflict some badly-needed pain on people who need to feel it, without hurting the rest of the good and honest folks who pay their bills [responsibly]? Well, there are three simple rules that we must follow. Unfortunately, no one knows what those three rules are. So here we are. I’m as flummoxed as the rest of you.

At the risk of being a name-dropper, prominent economist Greg Mankiw was a classmate of mine as a Princeton undergraduate. (I didn’t know him at school, but chatted with him at Reunions once. He seemed like a nice man.) On his blog he’s been fairly neutral about the bailout — he doesn’t seem to dispute that something big has to be done, but he does inject a cautionary note:

Nonetheless, one has to be at least a bit skeptical about the idea that government policymakers gambling with other people’s money are better at judging the value of complex financial instruments than are private investors gambling with their own.

Now, Greg Mankiw wrote a best-selling economics text and did a stint as Chairman of the Council of Economic Advisors under President Bush. I took introductory econ courses at Princeton, and also at Rutgers while working toward an MBA I didn’t finish, and to this day I get confused about the effect of currency exchange fluctuations on domestic inflationary pressure.

So I’d like to take this opportunity to point out a flaw in Greg’s reasoning: seems to me that “private investors gambling with their own money” does not describe the process that got us into this mess. The damage seems to have been caused by titans of Wall Street gambling largely with other people’s money.

I’m by no means a Wall Street basher — I worked there for nearly 15 years, and would be willing to do so again. (I called an ex-boss who’s still at Merrill Lynch… it turns out they’re not hiring this month.) But I certainly understand the impulse to bash Wall Street and the financial Establishment — vital institutions led by people who have a lot to answer for.

Count on uber-libertarian Ron Paul to step up to the plate (hat tip: Bill C.). Under the headline “The Creation of the Second Great Depression,” he writes:

The bailout package that is about to be rammed down Congress’ throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder.

I’m not sure Congressman Paul’s internally coherent but overstated case actually constitutes “wisdom” as referenced in my headline, but it certainly is a colorful dose of what he believes is moral clarity. Who knows, maybe he’s right. I can see why he has a strong following… and why he’ll never be president.

Isn’t Marking to Market Supposed to be a Good Thing?

OK, I’m trying to get my head wrapped around this whole market meltdown thing. One of the things that has puzzled me is seeing complaints that some of the various bailouts have been triggered in part by regulations that force companies to mark mortgage-backed securities to market — that is, to account for changes in the value of the securities they own when market conditions change.

I seem to recall that prior meltdowns were caused in part because financial companies did NOT mark to market, but rather carried securities on their books at artificially high prices after market declines (and then borrowed against those inflated securities).

So here’s a good explanation of the problem with mark-to-market accounting in volatile circumstances (hat tip: Iain Murray):

Imagine if you had a $200,000 mortgage on a $300,000 house that you planned on living in for 20 years. But a neighbor, because of very special circumstances had to sell his house for $150,000. Then, imagine if your banker said you had to mark to this “new market” and give the bank $80,000 in cash immediately (so that you would have 20% down), or lose your home. Would this reflect reality? Not at all. Would this create chaos? Absolutely.

The original article also answers the question in my headline:

Mark-to-market accounting is a good thing. It makes sense most of the time for most financial instruments that are traded frequently and openly. But there are special circumstances, and today’s financial market problems would meet any definition of the word special.