Monday, October 13, 2008

My Two Cents on the Economy

When I visited San Francisco a few weeks ago, I spoke with a friend who insisted on his desire to convert me to an Obama Democrat. Having great respect for both his tenacity and intellect, I have found it difficult to shy away from such a challenge.

Okay, I’ll be honest, he practically challenged me to a duel.

He even sent me reading material.

I felt fortunate to make it out of San Francisco without someone (not him, of course) poisoning my coffee.

Okay, Mark, you got my attention. The gloves are coming off. I’m ready. It is going to take me several days, but I’ll try to make it through one issue at a time.

Sigh. I barely have time to answer all the questions from my children.

Oh, and excuse me if I take things down an intellectual notch. I am sure you already understand all of these details, perhaps even better than I do, but this will give us a chance to understand if we have a different view of the issue itself.

Okay, enough stalling, here goes . . .


I believe that Mark and I agree that the economy is in a tailspin. We probably even agree that it is due primarily to the mortgage/credit crisis that has caused uncertainty in values in the market. The question here is how do we solve it, and perhaps to a lesser degree, how did we get to this point.

The bailout is absolutely necessary. To keep things in terms my first grader can understand, the government will be buying mortgages. This is necessary because with so many people not paying their mortgages, homes are going into foreclosure. If a bank is left with a home, normally they could sell the asset. But, since they can’t sell the assets and aren’t sure what they are worth, no one knows what these mortgages are worth anymore in the market. So, if the government buys them, then they are worth whatever the government pays.

Since the government is buying something American, we can assume that the government will later be able to sell these assets back to the American people. This is a loan from the government that should be repaid to some degree (not sure how much, of course) after this is all over.

This makes sense to me.

Yes, it also annoys me that my family has NOT gone outside our budget and our tax money is going towards this bailout. This should have been fixed.

What confuses me is why the Democrats are now being touted as the heroes of the economy. Somehow, the Democrats are going to save us from all of this?

I understand that the problem is essentially with Fanny Mae and Freddy Mac. These organizations, which are government supported, were “told” (or at least encouraged by the market and the government) to create mortgages, even (especially?) very risky mortgages. The government, well, the Democrats particularly, encouraged it because it supported their pledge of widely available low cost housing. The market encouraged it because mortgage type securities sold well on Wall Street because people believed the housing market would continue to be strong. Fanny Mae and Freddy Mac didn’t stop, because they are government supported. They could create these securities and sell them at a profit without worrying about the downside risk, because they knew (and they were right) that the government would bail them out.

While I am not suggesting that we should change the system entirely, it does seem curious to me that Fanny Mae and Freddy Mac were able to run wild not because of capitalism gone wild, but because they knew they were not completely at the mercy of market forces. This tells me that more regulation is not necessarily better, it’s the right balance of regulations that is important: tricky stuff.

I also find it curious that the very Democratic Congress that has been in office for the past two years were unable to pass any legislation that was recommended (some as I understand by Sen. McCain) to put the breaks on Fanny Mae and Freddy Mac. Apparently, some people argued that it made no sense to fix something that wasn’t broken. I mean, who wants to deny people the ability to buy homes? That certainly isn’t going to make you very popular. It is really hard to do the right thing when no one is complaining, especially if the American people do not understand the details.

(I am having a very big problem right now with politicians assuming that the general public does not understand issues very well. It is the public’s responsibility to require politicians to talk about the issues, and to vote based on them rather than giving the politicians further incentive to throw mud. Sorry, I digress.)

If the Democrats wanted to fix this problem, they could have done it. Congress knew about it. President Bush didn’t get a bill on his desk and veto it. It is much easier to do nothing and blame it on President Bush, as if he generates legislation. (Go back and watch Schoolhouse Rock again. I’m only a bill, on capital hill . . .hee hee).

Both Senators McCain and Obama received campaign money from Fanny Mae and Freddy Mac. Of course, Sen Obama received six times more money, or at least that is what our media has reported. Wasn’t the work Sen Obama did in Chicago a grass roots effort to help people buy their own homes? Not to say that people owning homes is all bad, but it does seem that Sen Obama should have understood the issue well enough to be pushing for some restraint on Fanny Mae and Freddy Mac. I don’t think he did, but I could be mistaken on that point.

So, based on Sen McCain’s interest in applying restraints on Fanny Mae and Freddy Mac prior to the meltdown, the Democratic Congress’ inability to prevent a meltdown, and the apparent need for high leverage regulation rather than lots of regulation, I do believe the Republicans are more equipped to handle the economic crisis.

Considering that I could go on for a few more pages with as many questions as I have answers, I am now thinking that my friend Mark may need to actually post on my blog to be given a proper response.

What do you think, Mark? Or, perhaps I should go back to writing sweet things about my kids? (I would get more sleep that way).

The only person scarier than someone who doesn’t speak the truth is someone who is not willing to listen for it.

I’m listening. Lay it on me.


scatterbrain said...

I love that you've given it so much thought.

'The only person scarier than someone who doesn’t speak the truth is someone who is not willing to listen for it.' Sooo true.

You do realise that you'll probably attract a huge response to this post, don't you? Get ready.

Jessica said...

Very thoughtful post. My only counter to your post would be that I actually feel very sad that I DO believe the general public doesn't understand the issues well. If you hear polls of people on the street it is amazing how many of them repeat fallacies generated by the media. Even educated people have made decisions based on personalities and attire versus the issues. I think this is b/c they don't understand the issues. I am really frightened that people will make choices based on Barack's name being "Obama" or based on race, gender, their neighbor's gossip...and not the issues. You got me going so one more thing...The $700B bailout was def. the only way out but I wish there was better media coverage on that particular number. Americans were astounded by how large a number. But's let put it in relation to the overall budget...what does that mean.... With no perspective one cannot compare it to their $150, 0000 mortgage...does that make sense?

enthalpymama said...

scatterbrain - Thank you. I guess we will see. I'm ready.

Jessica - Yes, there does seem to be a great deal of confusion about the issues, which has played a role in my needing to post. Must head out to dance class. More later.

Mama Smurf said...

First time to your blog.

Love how you've laid (layed?...oh, what ever) it all out there and thought it through so thoroughly for us.

Couldn't agree more.

Although, I'm still convinced that the bailout is something akin to putting a bandaid on an aortic aneurism.

I also love how you pointed out that everyone bashes Bush for the economic woes of America but he is only one fish in the ocean. He is not the all powerful supreme being that we give him credit for. There's only so much he can do with a democratic government.

Looking forward to seeing all sides of this.

I'll be back.

Indy said...

Hmm. I agree with Jessica. I don't think the average America really understands or has the capacity. Mike and I have agreed that we are not economists. We can grasp a small portion of what is going on but we really have no idea. I think many people might think they know but they don't. I do agree with the bailout and I am thrilled that the governments from around the world are working together. Let's hope this recession won't be too long and that our friends will continue to have jobs.

enthalpymama said...

Mama Smurf - Welcome to my blog, glad you stopped by. I like your bandaid analogy, especially the visual.

Indy - I agree that the general public does not understand the details of the economic situation. The economy and its problems are so complicated that most economists do not understand all of the details - and those who understand the most are not all in agreement. I can only grasp the very very tip of the iceberg (and barely at that).

But, as the general public, we need some way to sort out which leaders we think are best equipped to be responsible for our country. Talking about the issues is just one of those ways.

Yes, let's hope all our friends and fellow citizens keep their jobs. That is the bottom line, isn't it. Well said.

Anonymous said...

I guess I'd have to say that I don't agree with your premise. I agree with Robert Reisch and the guys from This American Life. Here are the links to the podcasts, and then you can listen and decide for yourself.

Robert Reisch -- The Myth of Living Beyond Our Means

This American Life -- Another Frightening Story about the Economy

When institutions create magic "frankenstein" paper that grows money out of nothing, there aren't the goods in the marketplace to support them. When the slices of a family "pie" budget get bigger and bigger (groceries, gas, housing, insurance) without the whole pie getting bigger ... that's trouble.

My family is middle class. Our parents taught us to live within our means. We don't buy on credit that we can't pay off at the end of the month. But, we're lucky in that way. We can do it. Many people can't, and they don't have the time (because many, many people in this country are working 2 and 3 jobs to keep the pie big enough) to read the things that you and I do, or listen to the commentary that you and I do.

These people need what nations always need at the time of crisis. Hope. They need a leader that has a vision of the future, not a look back to the past. Fighting won't get us anywhere, diplomacy will. Our standing in the world is HORSESHIT. The world doesn't respect us. Cowboy, fighter diplomacy doesn't work.

I've been thinking ALOT about this for the past 8 years. I'm with your friend. Obama.

Badass Geek said...

Whenever I see video footage of the lawmakers on C-Span, I imagine a rolled up piece of parchment paper tied with a ribbon sitting in the corner, waiting to sing.

kay from SF said...

I talked to Mark, and he's ready to play, but he's teaching two classes this week in addition to his full-time job, so it'll be the weekend before he can compose a thoughtful reply. I hope it's OK if I chime in while you're waiting. Forgive the long post. I am not as eloquent and concise as you are.

Personally, I think there is probably enough blame to go around to both parties for this mess. Fannie and Freddie are part of that, but it's hard for me to believe that this entire meltdown originates with community housing programs that help a few poor people buy homes. If you want to find the source of the problem, you have to look at who made money of the deal.

However, I'm just a mommy in Cali, and I don't even have my own blog. So I'm going to point you to reading material:

1. Dan Gross at Slate points out that lending money to poor people isn't inherently risky, but lending money to "obscenely rich white guys" can be very risky. Lehman Bros didn't go under because it funded CRA loans. They went under because (among other things) they carelessly invested heavily in real estate at the top of the market.

2. Newsweek credits one of our MIT cohorts (Did we know this guy? Was he cute? Did we serve him drinks at some happy hour?) for inventing the Credit Default Swap, which is so brilliant and confusing it made it difficult for all players to really assess the risks they were taking (and it made a lot of people very rich in the process).

How we got here is worth understanding, and what we do next is probably even more important. Despite the best efforts of each of our families to live within our means, our government has just saddled our children with more debt than they may ever be able to pay off. I'm convinced the bailout was required, but I don't know what this will mean for our children.

More immediately, this will drastically change the ability of each presidential candidate to live up to his campaign promises. McCain will not be able to fun generous tax cuts. Obama will not be able to fund expensive changes to the health care system. With our political system so badly broken by vicious partisan politics, is one candidate better positioned to make things happen? Is one candidate better suited to inspire the American people to come together and help each other if things get really bad?

Despite McCain's claims (and past history) of bipartisanship, the campaign he has run the past few weeks has not inspired the best in the American people, but the worst. Obama has not stayed above the fray, but I think he has more of an opportunity to inspire us to step beyond partisan differences and find that third way, that middle way, away from the left and right fringes, where most of can find things to agree on.

I look forward to after the election, when whichever candidate wins can stop snarking at the other guy and start working on how to move our country forward again.

enthalpymama said...

Standing still & Kay - Thank you both for your thoughtful comments. Although I have read through them both, I wouldn't dare not check out all of your links. Of course, with dinner to make and homework to be done, that will have to wait until late tonight. Just wanted you to know I am listening.

Looks like I have some homework tonight too.