Local Public Radio KUOW On Government Bailouts

A friend pointed me toward an interesting radio segment that aired on local public radio KUOW today: Should the Federal Government Bailout Banks and Homeowners?

You can listen to the full segment at the link above. Here’s a short excerpt from the beginning:

It seems that most of the people that called in were against a government bailout, despite the fact that both Hilary Clinton and Barack Obama would like to spend billions to do just that. I don’t like to get too much into politics on here, but I have to wonder if the democratic candidates really have their finger on the pulse of their base when so many people from a town like Seattle call in to say that they disagree with both of them.

Anyway, the program is an interesting listen. I wish I would have known about it while it was airing and could have called in.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

25 comments:

  1. 1
    Alan says:

    Tim, the video you added a few posts below is messing up IE.

  2. 2
    Alan says:

    Also, if you are against mortgage bailouts, be sure you let your congressmen know.

    http://www.house.gov/
    http://www.senate.gov/

  3. 3
    vboring says:

    McCain, at least, has said that he is opposed to any bailout that helps speculators.

    A step in the right direction.

  4. 4
    old timer says:

    It should be obvious from both the caucus process and the super delegate concept that the “Democratic Party” could care less about the ‘pulse’ of the base and is interested only in the party itself.
    It makes no difference, whoever is elected will be managing a real mess, and will do as instructed by the folks who paid for the election.
    And those who vote will end up with a leaky, smelly bag.

  5. 5
    The Tim says:

    Alan, I think I fixed the video thing. At least, it looks fine in IE to me now.

    Also, for what it’s worth, I personally was a fan of Ron Paul, even though I knew he had no hope because of the way these elections are run.

  6. 6
    Sniglet says:

    Banks bail-outs are bad enough, but what really bothers me is the bailing out of bank customers. Why are the customers of Bear Stearns are getting off so easily? If anything, it is the irresonponsible behaviour of banking customers that has led us to this mess in the first place. Instead of choosing banks to work with based on sound balance sheets and their prudent management, customers have been choosing banks based on whoever offers the best deals, or will be counterparty to the riskiest contracts. The bail-out of Bear customers just re-inforces this atrocious behaviour.

    Why should customers care about the soundness of their bank if they know the government has their backs, and will honour any contracts, loans, or deposits? Moreover, how can any truly prudent banks exist when customers just chase the best deals? It is this very race to the bottom that got us into the mess we face now, and I don’t see how the bail-outs are helping to change these attitudes.

    Somehow we need to instill the fear of God into banking customers, so that they will think twice about doing business with any shaky institution, regardless of how good the interest rates, fees, or loose lending on offer. It’s all these utterly evil banking customers who need to feel the pain of this credit crunch.

  7. 7
    Alan says:

    It looks fixed to me too, Tim.

  8. 8
    Chris says:

    Tim, that is not an accurate portrayal of Barack Obama’s positon. In a speech today he outlined his economic plan. Providing specific pools of funds to refinance loands and supporting cramdowns is not equivalent to a bailout. In the first second on the need for reform or oversight in FS institutions, he specifically mentions not wanted to bailout Wall Street.

    Read the document. I think you’ll be impressed. I was.

    http://obama.3cdn.net/f9836ef496f75a9be0_39gimvt5b.pdf

  9. 9
    The Tim says:

    Chris, from the document you linked to:

    This plan will provide a federal guarantee for lenders to reduce the outstanding principal amount of loans that are currently unaffordable in order to enable new, affordable mortgages for homeowners.

    That sounds to me like “give federal dollars to lenders to offset a reduction of the loan balance owed by borrowers.” Am I reading that wrong? Because that sounds like a federal bailout.

    Barack Obama calls on lenders to take action as early as possible when borrowers are at risk of financial trouble or when property values drop precipitously so that principal can be reduced or other solutions can be found before a homeowner faces foreclosure.

    Again, what incentive would a lender have to reduce the principal? The goodness of their hearts, or a federal reimbursement?

    Obama will ensure that middle-class Americans get the financial assistance they need to purchase or keep their own home by creating a 10 percent universal mortgage credit that gives tax relief to all Americans who have a home mortgage.

    Isn’t that just another way of saying “we’re going to hand out federal dollars to homeowners”?

    I’m not trying to be facetious or combative here, I’m honestly just not seeing how Obama’s plan is being mischaracterized by the KUOW program when they say that he’s essentially proposing an expensive government bailout. Could you explain what I’m missing?

  10. 10
    Sorin says:

    Sniglet,
    That is exactly what needs to be avoided right now, otherwise the banking system would be facing systemic collapse. If there were no government backing for deposits, what bank would you choose to keep your money in? If a company like Bear can tank overnight, what is to prevent any large institutional bank from experiencing a run based on nothing more than speculation, regardless of how sound or not the institution actually is? If there is no trust in the banking system, everyone would be buying gold and tucking it under their mattresses, which kills any sort of lending (not just consumer lending). Not a rosy possibility.

  11. 11
    Nolaguy says:

    Sorin,

    When the Gramm-Leach-Bliley Act passed in 1999, each and everyone of us became even more responsible for where we put our money. Basically, the bill repealed the a law (Glass-Steagall) which prohibited banks from having investment services.

    These investment services are what are imploding today (see WAMU).

    Bear Sterns is an investment bank. There is inherent risk in investing, right? But since 1999, retail banks can also offer these services.

    As consumers, we are responsible of how much risk we are willing to take with a company. Lack of due-dillagence is not an excuse.

    FDIC still insures deposits up to 100k. But even if a bank goes TU (see WAMU), how long will it be until you can get your money? 1 week? 1 month? I urge you, and everyone, to take a close look at your bank ratings and balance sheets and determine if they meet your risk tolerance.

    IMO, the government should not guarantee anything beyond deposits. (see “moral hazard”). What they’ve don’e with Bear, which is an I-bank, is pretty much that.

  12. 12
    Sniglet says:

    That is exactly what needs to be avoided right now, otherwise the banking system would be facing systemic collapse.

    If we can’t allow customers to ever feel pain from bank failures then I guess we are saying we will never be able to straighten up the mess our financial industry is in. Until customers feel the fear of God, with a strong incentive to only choose sound banks, we will continue to have a race to the bottom, with everyone choosing the shakiest, and riskiest, instutions to bank with.

  13. 13
    Olaf says:

    Nolaguy,

    How does one look up the ratings on a bank?

    thanks.

  14. 14
    Sniglet says:

    How does one look up the ratings on a bank?

    Some links were given for looking up bank ratings on this thread.

    http://seattlebubble.com/forum/viewtopic.php?f=5&t=1196

  15. 15
    John says:

    A systemic collapse can be a very good thing. Get rid of the excess. People will learn to save more than spend. Rebuild into a stronger country.

  16. 16
    Nolaguy says:

    Bankrate.com has some free information on banks:

    http://www.bankrate.com/brm/safesound/select.asp?insttype=0

    FWIW, from my research, Washington Federal Savings and Loan is the highest rated local bank.

  17. 17
    Chris says:

    Tim,

    I think the “federal guarantee” is a mortgage insurance program similar to other existing FHA credit enhancement programs. Hopefully it would be crafted as to narrowly apply to a) people in first homes b) people most in need of a workout, c) only whan the lended takes some pain through principle reduction and d) the buyer has a reasonable back end debt-income ratio

    Per the cramdown issue – its the same stance the current admin has, asking the bank s to reduce principal. Its a political document meant to garner votes, and this provision has no teeth. I think this is a good thing.

    The third point you highlight is a mortgage deduction that would apply to everyone, not just those who itemize, presumably allowing a deduction in excess of the standard deduction for lower-income home owners.

    None of these are bailouts in my opinion and are fairly light in terms of invention in the market relative to much worse alternatives.

  18. 18
    The Tim says:

    I’m seeing a lot of qualifiers like “hopefully” and “presumably” in your reply, which doesn’t exactly give me a lot of confidence that we’re not talking about a bailout here. Sorry, I’m just a cynical kind of guy and it’s to a politician’s advantage to use intentionally vague language in things like this so that everyone can interpret it to mean whatever makes them feel warm and fuzzy inside.

    Honestly though, given the general track record of politicians when it comes to keeping campaign promises, it’s probably a pointless discussion anyway. It seems silly to debate what-if plans from an individual that may or may not ever be in a position to implement them anyway. This discussion would be much more meaningful if we were talking about an actual piece of legislation that we could contact our senators and representatives about.

  19. 19
    biliruben says:

    As far as I know, cramdown’s occur on the judicial side. A bankruptcy judge is given the power to say “make it so'” and the lender has no choice but to cut the principal.

    Sniglet – you’ve got to be kidding, right? I’m going to assume sarcasm there.

    You can’t expect joe- and jane-bank customer to have the sophistication to determine whether a given bank is going to remain solvent. That’s absurd.

  20. 20
    Joel says:

    I think the “federal guarantee” is a mortgage insurance program similar to other existing FHA credit enhancement programs.

    If the government guarantees risky investments then there’s no incentive to avoid risky investments. And complete apathy of the risks of these investments is what caused the crisis in the first place.

    Why do Americans need financial assistance to buy houses? Because they’re overpriced. The solution to them being overpriced is not to help keep them overpriced, but to let them fall in price until they’re affordable again. It’s too bad Obama doesn’t understand this because I’m actually considering voting for him.

  21. 21
    Alan says:

    I would love to vote for Obama or Clinton, but if they both insist on mortgage bailouts then I’m voting for McCain.

  22. 22
    slug says:

    Yesterday (Thursday) on CNBC (Closing Bell?), Obama was interviewed about his thoughts on the housing market.

    He specifically said, and I quote “The government needs to PUT A FLOOR under the housing market.” His reasoning is that it will help those who bought overpriced housing avoid foreclosure.

    In other words, he wants to help those who overpaid for a roof over their heads in the past few years and THROW EVERYBODY ELSE from here on in UNDER THE BUS.

    I’m really distressed about this . I thought Obama was our best hope as a nation out of these three losers we have to choose from.

    But clearly, he is completely out of touch with the middle class if he believes that paying most of ones income towards a mortgage on an over-inflated home til the day you die is more desirable than letting home prices fall to a place where the middle class can actually OWN their home outright.

    McCain makes me sick. But he’s got my vote now. At least with him, I might be able to OWN a home one day, rather than rent from the bank til the day I die and pay through the teeth for some realtors’ cushy Bahamas vacation.

    Also, Hillary and Obama each had THREE times the contributions from subprime lenders to their campaigns as McCain. Three times! Hillary was at @ 1.6 million, Obama was at @1.5 million and McCain @ 500K. This info also from CNBC yesterday.

    It looks like Obama has finally sucumbed to the business as usual Lending/NAR cartel that the Dems have, unfortunately, cast their lot in with.

    Does anyone have a link to that Obama interview?

    I cannot vote for someone who makes government sponsored overpriced housing part of their platform. So that leaves all the Dems out now. Sickening.

  23. 23
    patient says:

    Vey, very disturbing. I thought I had democratic values as in being in favour of fair pricing/availibility of neccessities as health care and schooling by partial funding from taxes. Apparently it now also includes paying for people to keep homes they can’t otherwise afford. It’s like if my budget only allowed me to ride the bus I should with taxes help paying for people who took out loans to buy Mercedes’s to ensure that those poor people do not have to ride the bus like I do.

    This could be one of the very few issues where our current government is on a better track. From treasury secretary Paulsson:

    “We will continue to pursue policies that strike the right balance: that do not slow the housing correction, yet also help avoid preventable foreclosures and unnecessary capital market turmoil,”

  24. 24

    Obama isn’t in favor of a “bailout”. He’s proposed a $30 billion dollar program to assist with the fallout of the bubble crashing. As much as I hate the fact that any taxpayer money will be used to clean up this mess, unfortunately we are actually on the brink of a crisis. We have not experienced a blow to financial markets like this since the Great Depression. We are looking at a catastrophe, and $30 billion seems minuscule to me. We are looking at rising homelessness and unemployment, bank failures, rampant inflation, and destroyed neighborhoods. The govt will need to step in and soften the blow, and if anyone doesn’t think that we won’t need Americans working together to make it through this is crazy. Obama and Clinton isn’t proposing anything more than that. Besides, $30 billion = about 2 months in Iraq. Think about that.

    McCain, on the other hand, is against any Govt assistance for the financial crisis that will offer a helping hand to poor and middle class people that are affected. Instead, his proposal is two fold 1) he supports bailouts for investment banks like Bear Stearns 2) he proposes extending the Bush tax cuts for the wealthy and even expanding on those tax cuts.

    McCain has said that “our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital.” Basically more of the same that Bush has given us.

    If you guys liked the last eight years of Bush, be sure to vote for McCain. He’s even worse: limited financial regulation for wall St, low taxes for the rich and super-rich, more war in Iraq (and Iran), and no assistance for poor and middle class people in need.

    Clinton and Obama are on the right track and aren’t that far apart from each other. But there are some differences. Clinton blames most of the economic downturn on the housing slump. Obama, getting at the root of the problem in my opinion, sees that deregulation and Wall St ponzi schemes are the cause. That’s were his emphasis is, and that’s why he has my support. I’d be happy with Clinton, but a McCain presidency would be a nightmare. Basically George W Bush on steroids.

  25. 25
    David McManus says:

    Hmm, and I thought we weren’t supposed to get political on these boards. Silly me.

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