Bail out corruption

When I first heard the bail out plan, I was a sceptic, to put it mildly. A proposal to transfer billions of dollars of taxpayer money to the lords of Wall Street sounded like another Republican program to benefit their constituencies under the umbrella of economic patriotism. The last 8 years have shown over and over again how the GOP is not a party of ideology, but one to whom socialism and the large hand of government are easily accommodated when in the service of their partisans (military, oil companies, seniors, the very wealthy among others).

I became supportive of the plan as the financial explosion seemed to call for aggressive measures and due to Congressional improvements to the bill, such as ensuring that the public takes part in any financial upside through bad asset purchases at fair value and the acquisition of warrants (rights to purchase financial ownership) in the institutions supported.

A plan to limit executive pay in the supported institutions proved attractive as well. However, since then, a revelatory WSJ article (which has barely received any media attention) has greatly disturbed my faith in the integrity of the plan and its potential efficacy:

http://online.wsj.com/article/SB122360084563521627.html

"Mr. Kashkari [overseer of the Fed's $700B bailout program] told participants in the call [to Wall street executives] that lawmakers' interest in limiting executive compensation was "emotional" and "probably the most difficult part of the negotiation" with Congress. When one industry participant said the caps might discourage participation, Mr. Kashkari noted their limited scope, which he called "a pretty modest hindrance to you coming into the program."

Millions of Americans who had no role in the financial meltdown, i.e. paying homeowners not employed by the sector, have been willing to support the package due to the indusputable fact that we are all in this together. In contrast, incredibly wealthy millionaires who brought this crisis upon us and who face no real future hardship in any real sense of the word balk at making any sacrifices. Note that we are simultaneously asked to believe by Mr. McCain that these same ultra-wealthy folks are deserved of a tax cut due to their dedication to building an economy that benefits all. While I am not one for class warfare rhetoric, anecdotes such as the above certainly play better to a far left view that acquiring great wealth is just as often done by non-value add exploition of the current system.

As troubling to me is the lack of incentive alignment between those running the companies and their equity holders. Most would agree at this point that the greatest source of the current financial crisis stems from the agents of speculators and lenders putting vast amounts of capital on the line while the agents themselves have no skin the game. I.e. 1) The mortgage broker fudges the paperwork to get a loan approved and thus gets his commission, 2) the mortgage underwriter then focuses on the sale-ability of the asset not its inherent value and is able to find a securitization buyer among investors, thus earning his commission. Both of these operators had compensation upside by getting loans made, with none of the downside of ownership when the loans go bad.

In the case of whether bank executives choose to have their companies participate in the bail out, for some, the decision may appear as whether to gamble at keeping a $50M package accepting that their bank may or may not fail, or choosing to take the bail out and a smaller comp package that assuredly benefits the survival of their company.

It's time for the shareholders and their board representatives to put an end to this extortion. Let's really start to question the matra that boards need to pay their executives excessive amounts in order to attract the talent needed for a prospering company (rather than the pushback that executive use their insider positions to bully and extort the shareholders). In fact, I have a suggestion to the bank boards. My propsal will allow them to save enormously on CEO compensation in a way that ensures that the shareholders achieve added value immediately. I offer myself, at a measly pittance of one million dollars, to come in and seize the reins of leadership and ensure that I squeeze out every dollar of government subsidies for the shareholders.

Board members, feel free to leave you contact information in the comments below and I'll get right back to you.

Generation warfare: youth call to arms!

Usually when we talk about economics, we consider two parties in an exchange. A buyer and a seller. Prices going up obviously help the seller and hurt the buyer. In total, price movements seem to be a a wash. Therefore, when we talk about prices in the business press, it can't be said whether price increases are good or bad, right?

In practice, a newspaper speaking to an every day citizen can and does make value judgements about some price movements. For instance, The US consumes much more oil than it produces, so oil pricesincreases on domestic consumers don't have matching domestic gains. Even when price increase gains are kept domestically, a journalistic still reasonably frames that price change as a negative turn of events. For instance, food price increases can stress all families, while very few of us farm. Therefore, we understand that the journalist frames the issue as 98% of us would see it.

Now let's talk about home prices. As home prices fall, who loses? Home owners, i.e. wealthier older people. Who gains? Poorer people who no longer desire to rent, younger people looking for their first home, vacation home buyers. All gains from home price decline are domestic, and and these gaines are not constrained to a small population of Americans. Therefore, why are falling home prices presented as a bad thing?

Yes, precipitous declines in home prices destabilize the economy. But that's not the whole story. The politicians and the business journalists speaking about the decline are obviously the ones disproportionately affected by home prices: i.e. older, wealthier individuals. The world in which they live is permeated by homeowners; the dinner tabel discussions touch upoin their falling equity. Essentally, the demographic that owns homes is framing the entire discussion over the issue of falling values. As long as this persists, the perspective of those who benefit from lower prices will not be heard and will not influence public decision making.

So all you young people out there, let me tell you how you get totally FUCKED. What is happening is that government is borrowing funds to bail out homeowners and capital lenders. This is explicitly meant to keep home prices up, making things more expensive for you. They are working to make sure they squeeze more money out of you folks in your 20's who will buy a house. And to add insult to injury, the subsidies made to make things more expensive for you are borrowed, and will be paid back at a later date, when you in your 20's are more likely to be in your prime earning years and the current home owners are retired. Wake up, young renters! Everyone is working to fuck you.

Here a couple of policy suggestions that don't screw younger renters:
-Let inflation rise so that housing prices can stabilize nominally but will be cheaper to wage earners.
-Significantly increase the capital gains tax on home sales to pay for the bail out.

But first off, I'd like to begin making our voice heard in that falling home prices is not an automatic disadvantage to everyone. Speak up, and let's begin reframing the housing discussion away from its exlcusive attention on the owners.