But Is There a Plan B For Detroit?

The consensus wisdom emerging about the Big 3 automakers is "Let 'em fail." There are some awfully good arguments for this. Yes, what's happening with the automakers is their own fault, the consequence of decades of bad decisions. Yes, to extend the bailout beyond the financial industry invites every ailing business in the country to run to the bailout trough. Yes, the shock therapy of bankruptcy may be the only way to make the US auto industry viable in the long run.

But what other choice is there? This is not a rhetorical question. I really don't know. It's easy to say that we should let them fail. But if John Dingell stares down at you (and I've sat in the audience when Dingell's stared down from his elevated perch--trust me, you can go many years without seeing a stare as blood curdling as his) and asks what your plan is for all the autoworkers who are going to be displaced, what's your answer? It seems to me that at the moment we have none. And anyone who says we should just let the industry go bankrupt and let it sort and downsize itself out had better have some answer to this.

PS: If you want to get some historical perspective on the dialogue here, check out A Step Toward Feudalism: The Chrysler Bailout, a paper from back in 1980 that the Cato Institute has put online (points to them for not just throwing out the sillier stuff when they were digitizing the archive). We bailed out Chrysler and the nation survived -- though it did mean years of listening to Lee Iacocca's turnaround story.

The Newest Bank Holding Company: Me

Dear Hank,

Please consider this post a formal statement of my intent to register with the Treasury Department as a bank holding company. As you know, a number of companies, including American Express and several insurers, have transformed themselves to gain access to the Treasury loan facility. These companies have asked for several billion dollars each.

I'd like to point out that I, too, am a highly leveraged entity that in the current economic climate may be only a short time away from defaulting on my obligations. My default would have far reaching effects on the financial system, leading to losses at a minimum of five financial services companies, including all three of the country's largest banks. Conversely, the ability to borrow money from the loan facility at favorable rates would allow me to restructure my debt, assure my continued solvency, and ameliorate any potential damage to the counter-parties in my loan and credit transactions. The improvement in my capital position would allow me to increase my holiday shopping and create positive feedback effects in the retail sector. The beneficial effects of this would require a capital infusion from Treasury no bigger than the low six figures, substantially less than the amounts requested by many other bank holding companies.

I sincerely hope that you will allow this proposed recapitalization to go forward with all deliberate speed. Your prompt attention in this busy post-election season is greatly appreciated.

Department of Repetitions

Robert H. Frank, a Cornell economist who has always struck me as a great practitioner of the art of deciding where you want to end up and coming up with the theory to justify it (I touch on some of his ideas about inequality in this Slate story) advances a tax on consumption as the solution to the current fiscal crisis. Says Frank:

... with the country sliding into what promises to be a sharp and protracted economic downturn, it is imperative to increase spending over the short run, regardless of how we pay for it.

Frank's idea is that we increase government spending (ok, we get this) ... and then we pay for it with a consumption tax. Huh? Doesn't that just cancel out what you hope to get from the government spending in the first place? Well, yes. But Frank seems pretty set on the consumption tax idea--he floated the exact same proposal a year ago. What a nice silver lining to the current crisis: any idea that never quite got off the ground can be resurrected as a "solution."

While You Weren't Looking

Yes, the stock market was open on election day. And unfortunately the two days after, in which the Dow has fallen close to 1,000 points. When the market falls that far in one day, it's a national crisis. Over two or three days, it's business as usual. This is how the downward drift happens. A big crash or the recent 900-plus point rally makes news, but more or less the same thing happening over several days barely registers.

Is the post-election day drop the effect of electing a Democratic president? I can't imagine it is. Whatever the markets might think of Obama, his election is no surprise. This is where the market would've been headed anyway. But just as the fall isn't an Obama effect, don't expect the economy to do him the favor of magically bouncing back. (Though amid all the gloom and doom of this blog, I might note that not everything is a mess--I wrote about what's still okay in this story for The Big Money).

The Age Of Diminished Expectations

From a spirited defense of George Bush in today's Wall Street Journal that has somehow come to top the list of the day's most read stories:

He never lost faith in America or her people, and has tried his hardest to continue leading our nation during a very difficult time.

Tried his hardest to continue leading? As opposed to what? Said to hell with it and quit?

Make Google Share! Uh, Whatever...

An amazing little piece by publisher Peter Osnos calls news organizations to task for letting Google News pick up their stories without giving them a cut of the profits. The problem here is that Osnos somehow didn't check to see how Google News actually works. It links to stories on the publishers' own sites, from which news organizations do get a cut of the profits--100 percent. And it has no ads of its own.

The dispiriting wisdom these days seems to be that online news still hasn't found a business model that works and will support the kind of journalism we want. This is true, but for most news organizations, the problem goes beyond the business model. It's the product. The complaint about the lack of business models seems most prevalent in the world of magazines, and especially newspapers, which mostly put out a product leached of a style or interest and produced in conditions no sane person would work in (the same could probably be said of the nightly network news, but really I don't know enough to judge). For years the news has relied on the idea that people would read the paper or watch the evening news because they had to. This idea is being demolished more fully each day, and no new business model will fix that.

Morally Conflicted About Walking Away? Don't Be.

In my last post I mentioned that it was not my responsibility to give lectures in responsibility to borrowers struggling to make the payments on their houses. I want to delve into this a little bit further for a second. In story after story about the foreclosure crisis, you will find the implicit idea that borrowers who can afford to pay their mortgage should keep on paying it no matter how much their house sinks in value because they have made a promise to pay and to do otherwise would be an abuse of the system.

Propagating this idea is good for lenders and probably good for taxpayers, but basically, it's nonsense. Most states--California being the most relevant example--make it very difficult for a lender to go after borrowers for more money after they have foreclosed on a house. In California, lenders can foreclose in two ways. One way, the non-judicial foreclosure, lets the lender take back the deed with a 60 day notice after the first missed payment. In practice, this means that lenders can take the house in a matter of about four months. If they do that, however, they cannot get any more money. The other way lets lenders go to court to get the full amount due on the mortgage. This can take years. If the lender wins in court, then the borrower still has 366 days to pay off the mortgage and take back the house, which means that for all practical purposes it can't be sold. Thanks to California's "one action" rule, a lender cannot pursue both options: the bank must choose one.

In practice, this means that a bank that doesn't want to get bogged down in a two year long morass has little option but to take back the keys, accept a huge loss, and call it even. Is this an "abuse" of the system? I don't see how. The loss was something that lenders could have anticipated at least as easily as borrowers. The reality is that ordinary people are lousy at figuring out the ins and outs of real estate transactions. Relying on the one act rule to get out of a mortgage is not to abuse the system--it is to use the system in precisely the way it was intended to be used. The reason that the one act rule exists is that lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth. The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses. I see nothing wrong with that legislative choice.

It's worth noting, also, that invariably stories that mention the prospect of foreclosure talk about the hit that this causes to a borrowers' credit rating. Obviously, there is a hit. However, journalists are mistaken when they imagine that a credit score is a judgment on the character of borrowers. It's not. It's a judgment about the likelihood of someone repaying a loan. Bad marks like a foreclosure affect this. But being overextended on credit affects this even more. You might imagine that if you have the magic word "foreclosure" on your record you are automatically a worse risk than someone who doesn't. That's just not true. Lenders don't like to lend money to people who have not paid their debts in the past. But what they like even less is lending money to people who have a mortgage they can't afford and are likely to stop paying their debts in the future.


Update Oct. 2009: This post was written a while ago. My basic views haven't changed, but I expand on them somewhat in a more recent story for The Big Money.