Thursday, September 25, 2008

Bailout? More like pillage...

Source: NYT



Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.


The total effect of this bailout will be to issue treasury bonds from the public sector, in order to pay $700 billion to companies hand picked by Treasury Secretary Paulson. My concerns about this are dire. Congress has chosen not to act immediately, and is instead reviewing this proposal. There is probably good reason for that, but I'd just as well they rejected it outright.

First, we have the issue of the maximum positive effect that this bailout could provide. At the moment, mortgage companies are failing. Under this scenario, the ability to draw extra money out of the banking system diminishes. The companies are unable to take part in lending so long as they cannot convince their financiers that the loans will be paid back. Injecting tax dollars directly into this system will allow the mortgage companies to make loans for a while, without having to court private companies for equity. However, if the economy is doing poorly enough, the $700 billion will not be paid back.

And the economy is doing poorly. The financing of this bill, in particular, is coming from treasury bond issue, and the money this bill provides doesn't constitute an economic stimulus. The economic consequences are broad and will be negative in both the short and long term.

Every dollar of treasury bond issue is a dollar that an investor takes out of equity in some private fund and gives to the government. Therefore, in the short term, we would replace private sector funds that would be used for general speculation with government money that would be paid directly to banks. This will have a net negative effect on the economy because a greater portion of private general equity goes toward capital development. Instead, the dollars go to pay of mortgage debts. However, mortgage companies don't have any strings attached in this proposal, so they have no disincentive to forclose on houses. Furthermore, companies that are building new housing developments even as existing homes flood the market will get a secondary boost and we will see this type of development continue even though it is nothing but an exacerbation of the housing crisis.

Every dollar of national debt generates interest payments for the private sector, which come out of public sector spending. In the long term we ensure a lower level of government services relative to the rate of taxation. Since government employs more individuals per dollar than the private sector, this becomes a reduction to the demand for labor.

I have an alternative proposal for how to fix the markets and curtail the housing decline. The government should broker a deal where non-new homes for sale are marked down about 30%. By non-new I mean homes that are 3+ years old. Then, with government backing, individuals with outstanding mortgage debt who sell their houses at this markdown will have a portion of their debt dismissed.

Some might object that my plan would not be appealing enough to banks and that they would need to be forced into it, would go bankrupt, etc. However, what I see this as is a failure of the free market. The free market failed to provide a mechanism whereby people could sell their houses for less, precisely because it would leave them with untenable leftover mortgage debt. The free market (and, yes, many politicians too) sold a lie about the need to own or buy a home. Seen any of the posters that say "You should become a homeowner!"? The banks, which have already failed, shouldn't be able to count on getting this money back from people. If the government plays the cards in the right order (something that the Bush Administration is unfortunately guaranteed not to do), it can keep banks from folding. A plan to dismiss a portion of mortgage debt wouldn't give banks any chance to profit from the drama. If it is followed by or tied to a requirement to sell your home for less, banks might actually welcome the increase in money flow.

The systemic problems underlying the current economic problems are not orginating with the mortgage industry. The real causes of the crisis are the high level of national debt, the terrible and poorly negotiated balance of trade, petroleum dependent urban sprawl, as expensive rental housing market, a labor system that provides little to the workers on the bottom, and the emerging consequences of unsustainable practices resource management. These things are going to get worse. My only hope is that Barack Obama wins the presidency and actually has the vision to implement sensible reforms to our ailing system.

Sunday, September 21, 2008

Economic Decision Making

I'm not satisfied with the set of economic assumptions that make people into rational actors. I'm also not satisfied with the set of assumptions that take the principal role of information gathering out of economic behavior. I define any economic model that makes both of these assumptions as an orthodox one. The evidence against orthodox economics is damning and broad. For one thing, you just can't explain certain parts of our economy in an orthodox model. Advertising is the source of nearly all media funding in the United States, and advertising itself is not easy to explain, let alone the nature or purpose of media. Furthermore, individual preferences seem to empirically fail the tests that allow them to be seen as legitimate goals of rational behavior. Even if the assumption of rationality is made, real-world information does not generally adopt a statistically "nice" character, obscuring available choices and degrading the information that would be used in optimization. There is also the converse problem of engineering, where even in a situation of complete information, the means of making a rational decision is nontrivial. If not for these concerns, few economists would find employment.

I favor modeling the economy as a time dependent, multidimensional, dynamical system.
Here's a diagram:

The central box, The Economy is everything that actually happens. The colored boxes are schools of thought used by individuals in decision making. The boxes in dark gray are the orthodox boxes, the material elements of the economy. Note that the human behavior box is orthodox but that the internal psychology box is light grey. This reflects the tradition of using a simple, behaviorist model of "utility" to model preferences. I reject that tradition and so group human activities into quantifiable behaviors as well as cultures and thought patterns which might be evaluated at a qualitative level.

This chart can further be taxonomically divided by cycle type.

There is only one two cycle, which is between The Economy and Resource Availability. This reflects the hard fact that our economy is directly constrained by resources.

There are several three and four cycles. These reflect the passing of information from one field to the next. Groups that recieve the data are dependent on the analysis made by the group that passed the information to them. For instance, econometric data is gathered from the economy itself and then analyzed before being passed on to the businesspeople. People educated in business do not specialize in economic trends but instead depend on economic and statistical assessments made by people who can do econometrics. Therefore, our economy is not at all self contained but is significantly influenced by a very broad set of factors and schools of thought.

For better or for worse, I have grouped some things in. Government regulations should fit into their appropriate sphere. For instance, funding for environmental research would fall under Ecology and Geology. Minimum wage laws would fall under Business Science and Provisioning.

In order to develop this model further I will need to move on to conceptualizing the actual functions involved. Of greatest interest to me at this time is the possibility of using a leontief type input output model to feed data from The Economy to the other squares, which would then modify the data according to policies and practices used in each field. The series would convert data back to the apropriate input type for the leontief model as cycles returned to the central square.