"From the New Deal, a Way Out of a Mess"

Alan Blinder says it's time to bring back the HOLC:

From the New Deal, a Way Out of a Mess, by Alan S. Blinder, Economic View, NY Times: ...Wounded financial markets are supposed to cure themselves: asset prices fall, bargain hunters rush in and markets return to normal. But so far, that doesn’t seem to be happening much. Instead, house prices keep dropping, the mortgage-foreclosure problem grows and new strains in the financial system keep popping up like a not-very-funny version of Whack-a-Mole.

While the problems are multifaceted, I have several reasons for focusing on just one aspect of the mess: the potential tsunami of home foreclosures. First, it strikes home, literally. Foreclosures throw families — some of whom were victims of deception — into the streets. ...

A second reason is that reducing the wave of foreclosures would mitigate the closely related financial crises in home mortgages and the alphabet soup of financial creations based on them (M.B.S., S.I.V.’s, C.D.O.’s, etc.). ...

A third reason for focusing on foreclosures is that we’ve seen this film before. During the Depression, President Franklin D. Roosevelt and Congress dealt with huge impending foreclosures by creating the Home Owners’ Loan Corporation. Now, a small but growing group of academics and public figures ... is calling for the federal government to bring back something like the HOLC. Count me in.

The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks ... and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.

The scale of the operation was impressive. Within two years, the HOLC received about 1.9 million applications ... and granted just over a million new mortgages. (Adjusting only for population growth, the corresponding mortgage figure today would be almost 2.5 million.) Nearly one of every five mortgages in America became owned by the HOLC. Its total lending over its lifetime amounted to $3.5 billion — a colossal sum equal to 5 percent of a year’s gross domestic product at the time. (The corresponding figure today would be about $750 billion.)

As a public corporation chartered for a public purpose, the HOLC was a patient and even lenient lender. It tried to keep delinquent borrowers on track with debt counseling... But times were tough in the 1930s, and nearly 20 percent of the HOLC’s borrowers defaulted anyway. So the corporation eventually acquired ownership of about 200,000 houses, nearly all of which were sold by 1944. The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.

Today’s lift would be far lighter. And a good thing, too, because our government is far more timid and divided than Roosevelt’s. ...

What about the operation’s scale? Based on current estimates, ... the new HOLC might need to borrow and lend as much as $200 billion to $400 billion. ...

Given current low interest rates, a new HOLC could borrow cheaply and should find it easy to earn a two-percentage-point spread between borrowing and lending rates, for a gross profit of maybe $4 billion to $8 billion a year.

What about loan losses? A 10 percent loss rate, or $20 billion to $40 billion, spread over the life of the institution, seems incredibly pessimistic. (The original HOLC experienced a 9.6 percent loss rate during the Depression.) So the new HOLC seems likely to turn a profit, just as the old one did. But even if it loses a few billion, we must remember its public purpose: to help the economy recover, not to make a buck. By comparison, the new economic stimulus package has a price tag of $168 billion.

It is said that history never repeats itself. But sometimes there are sequels. Now is the time to re-establish the Incredible HOLC.

Count me in too. If the government can improve the flow of resources in financial markets by absorbing some of the risk of foreclosures through a social insurance arrangement, and do so in an way where the downside risk isn't all that large (there's an expected profit under most scenarios), then why not?

Update: Richard Green adds:

Alan Blinder and Mark Thoma want to bring back the HOLC, by Richard Green: ...I am myself a fan of the HOLC, and have said so in articles I wrote with Susan Wachter for Journal of Economic Perspectives and for the Jackson Hole conference last summer, as well as a comment I just wrote for Housing Policy Debate. Yet I am not sure it is alone the medicine for the current crisis.

When the Home Owners Loan Corporation was invented, it was in response to an economic tsunami that swamped lenders and homeowners. Moral hazard was not much of an issue, as loans were stringently underwritten (typical LTVs were 50 percent at origination). But loans had short terms, and therefore were vulnerable when people were forced to refinance in the teeth of the great depression. The HOLC allowed for massive loan modification and helped get incentives for borrowers and lenders aligned correctly.

Now, however, we are in the midst of a crisis that has arisen in part because of agency problems throughout the lending chain. To bail out lenders through some sort of HOLC setup could very well encourage excessive risk taking in the future, which is of course problematic.

I think if we are going to go the HOLC route, it needs to be accompanied by a regulatory structure that will prevent the sort of bad practices that led to the current crisis going forward. As I have noted before, such regulatory changes would require greater transparency, a requirement that everyone who touches a mortgage be subject to federal supervision, and a requirement that everyone who touches a mortgage have some capital at risk.

Comments

[anne]

Count me in too, and I have been pointing out loudly not just the general lasting difficulty of the mortgage-foreclosure mess but the specific community mess in largely African American and Latino communities.

[Joe]

The reason foreclosure rates have not returned to normal YET is because the underlying force behind foreclosures - house pricing - has not returned to normal yet. House sale prices are slow to adjust downward and are still highly elevated above historical levels. Once they've dropped another 30-50% nationally, then you'll start to see your bargain hunters. Until then, any rescue is just an attempt to prop up inflated house prices.

[anne]

This is a brilliant proposal, and reflexive wishes to deny there ever was a New Deal let alone that we should be so continually greatful for it must not be allowed to mask the brilliance of proposal even if it should be sadly turned from.

"The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.

"Today’s lift would be far lighter. And a good thing, too, because our government is far more timid and divided than Roosevelt’s."

[anne]

"Once they've dropped another 30-50% nationally, then you'll start to see your bargain hunters."

This would be an absolute national disaster, and is unthinkable will not be allowed. Prices would fall unevenly and a 30% national fall would mean 60% in sectors. This is absolutely impossible, and will not happen short of a horrible recession.

[anne]

A national price decline of 30% in housing prices would decimate African American communities and African American households, setting back wealth accumulation a generation through no fault of the homeowners who were so largely sold the highest cost mortgages. Impossible, unthinkable.

[Joe]

A return of a commodity price to historical levels is not a disaster.

To consider it such, and to work to prevent it from happening is to do two things: (1) spend resources on a costly and ill-fated long-term effort to protect people from actual market values, and (2) continue for a while to price most people out of the market for a new home.

[odograph]

Would these new loans be more forgiving, but at current face value?

If the government is going to buy loans at 100% face value and then re-loan for a lower market price, then we are back to moral hazards again (and burdens for non-adventurous tax-payers).

[esb]

Anne:

I suggest that you send your detailed comments regarding such a program directly to Senator Obama, inasmuch as it is he who, as President of the United States of America, will be the ultimate "sign off" authority for any project of this nature.

And please put in a "plug" for the use of the term "New New Deal" in your communications (as I have already done).

Expansive thinking will be absolutely essential come Q2 2009.

And fortunately, expansive thinking is precisely what dwells at the core of the Senator.

However, I believe that the Senator leans strongly in the direction of a powerful subsidized first-time-buyer plan since that will empower those who have never had a seat at the table while putting a floor under prices.

What you will discover in the first Obama Administration is that all programs will be "bottom up," providing help to the weakest and excluded first.

And the emphasis will be (and should be) on the excluded.

[anne]

The whole point of the New Deal was thankfully to protect people from market destruction. African Americans were abusively sold the highest cost mortgages for at least a decade, and despite studies and open reports and complaints nothing was done to protect them. Something must be done now. Who am I to decide what normal pricing should be? The idea is absurd. What matters is protecting people, and the heck with some absur fantasy of market that made no diffeence through years of abuse.

[anne]

Actually the Home Owners’ Loan Corporation should be profitable, allowing so many people to remain in homes and fairly pay mortgages.

ESB wishes a name; New Deal, Fair Deal, Square Deal? Have there been others? New, new? I wonder. We must think, but a HOLC could be a critical tool for the coming President. A New, New Deal could just be a New Deal, but I am down either way.

[Joe]

A return of a commodity price to historical levels is not a disaster.

To consider it such, and to work to prevent it from happening is to do two things: (1) spend resources on a costly and ill-fated long-term effort to protect people from actual market values, and (2) continue for a while to price most people out of the market for a new home.

[odograph]

If this New Deal mortgage company would be profitable, why doesn't someone else do it?

(For it to be profitable the loans would have to fall far enough in value, and be acquired at enough of a discount, to allow profit even in the face of large-scale default. Remember, walk-aways are being driven now by the size of negative equity. On the other hand, if the government were to stop in, never mind profit, and simply try to prop up the market to halt the spread of negative equity, it would take trillions .... on top of the trillions of federal debt we already carry. Bad timing all around.)

... in the best of all possible worlds the government could just buy everybody a house ... they do that in Saudi Arabia, don't they? Of course, they have been a little more cash-rich lately.

says...

This plan would make sense to adopt in this circumstance-- although, were we to go forward with such an effort, we should somehow address the regional transfer of wealth that it would entail, if current mortgage amounts were taken at face value, as per the chart associated with this article: http://www.nytimes.com/2008/02/22/business/22homes.html

There needs to be a way that comparable homes in the West and the Northeast come closer to having comparable worth, and if more of the homes in the West than the Northeast have been artificially inflated (and inflated to higher prices), then a HOLC-like program that did not maintain the overvalued prices on the books would be a better bet than one that did-- although possibly that would mean that the program was riskier in terms of paying for itself. At the very least, there would be a big up-front write-down, to reflect the changes in market prices for homes in the previously-overpriced areas.

[kalapu]

Nobody forced anyone to buy a house. No one forced anyone to buy a house that was too big for their budget. No one forced greed and gambling on the public. People got giddy and thought real estate was a perpetual money machine. Now they are shocked to find that it is just another Ponzi scheme, and they are squealing that it is so unfair they got caught holding.

What about the individuals who saw the overvaluation and chose to save their money? Will they now be forced to watch inflation eat away their savings even more rapidly? And the talk is that they should also pay for their neighbor's greed and stupidity--that the 'unjust' situation their neighbors brought upon themselves is the responsibility of the risk averse.

And how are the Great Economists proposing to solve the situation? By governmental purchase of all the housing garbage through devaluation of the currency and higher taxes on the those who refused to participate in this squalid financial merry-go-round. The promise that any organization can possibly make money on all the overvalued junk out there is just silly.

This is not the 1930's. We are not farmers, and we are not on or of the land. The bank down the road does not own our mortgage. We are generally service scammers who regard mud as a bio hazard, and now some bank in Europe may or may not have title to our home loan. We don't even know.

This is a financial hurricane of epic proportions. It did not come without years of warning. We can not now save the property of those who choose to stay on the 'Island'. Anyone advocating a rubber boat rescue is obviously not contemplating getting in that boat. They are just standing by giving frantic instructions and pointing willy-nilly here and there.

I think it is time even economists stop and realize that we need to set a few priorities. The first is the save the Dollar, upon which the financial strength of this country rests. The second is to save our government from bleeding to death. This means seriously reduced expenditures and higher taxes for us all. It means that Fed must stop its liquidity games and once again become a responsible national bank-if that is possible.

Let the markets crash, the evictions take place, the jobs be lost, and suffering begin. The party is over and its time to stop the drinking and sober up.

[Fred]

If we're going to throw $400 billion at the coming recession (and we'll probably need to throw a lot more than that before we are done), the correct way to do so is to boost employment (avoid a rise in unemployment) among the poor so that people who get foreclosed on continue to be in a position to pay rent and don't end up homeless. This proposal just puts money into the hands of Wall Street and ensures that people who overpaid or overborrowed will remain debt peons forever. The New Deal was an economics disaster and we don't need to repeat it. What we need is some people who read and actually understand Keynes.

[Joe]

Sorry - I don't know why that reposted.

How would the HOLC be profitable when buying mortgages for more than the financed homes are worth, at a time when home prices are lower every month?

Conditions now are not like the Depression. People are defaulting now not because they've been thrown out of work, but because they can't - and never could - afford their monthly payments and can no longer refinance due to dropping prices.

For many people, their homeownership was a gamble from the start that prices would continue to climb and allow a quick profit; this is seen in the high rates of default starting just a few months into ownership when it's clear that resale or refinance is not an option.

The fact that many immigrants and African-Americans took this gamble, and were willing to pay subprime rates to play, speaks more of their financial ambition than it does the of their witless victimhood.

[Idaho_Spud]

Is this the same taxpayer-cramdown bank bailout that Tanta over at Calculated Risk commented on today (the one that the banks don't want to be presented as a bank bailout)?

Besides, families displaced from a house are not put "out on the street". They downsize or rent. Unless they've lost a job, in which case this program won't help, will it?

[zinc]

It is my sense that the mortgage crisis, so far, is primarily composed of flippers and speculators on one side and criminal banks on the other. I understand that more real people are being caught in the sting. The emotional appeal that "black and latino families" are losing their homes tears my heart out.

However, the question of moral hazard is a real issue that must be considered. Bailing out the crime family banks, without prosecution is a mistake of biblical proportions. If these scum are made whole, the nation will suffer an inestimable loss to our freedom and capitalist ideal. Is it not ironic to anyone else how vulnerable the chicken hawks have made this country in the name of national security ?

It is not enough to send the aristocratic government in the white house, packing. Their feces has to be cleaned up to remove the odor.

I have no quarrel with the concept of the HOLC. However, I will point out that the crime family banks were declawed by congressional action forcing industry structural changes, combined with regulatory law, and most importantly, enforcement prior to the initiation of the HOLC.

I am sceptical that any value will come until the aristocrats are gone. Slimy and corrupt deals are what has been offered so far. The Iraq war may not be the biggest threat to this great nation, but the internal threat that comes with congenital succession. If the nation has to sacrifice, so be it. IMO, this is the closest we have ever come to a coup. Now is not the time to do anything rash.

[esb]

For those of you who are looking for and desiring a "mark-to-market" effect from the crisis you need not fret since any expansive program under any new President will not be in full force and effect until the end of Q2 2009 or early in Q3 2009. By that time the mark-to-market effect will be essentially over, leaving price/sqft down 20+% nominally nationally and, yes, down around 50% in some zip codes such as those in and around the southern central valley of California and most particularly around Stockton.

Sorry, Stocktonites, but you, my good people, are at "ground zero" for this event.

[Fred]

Prices are already down 50% in Sacramento: Flippers in trouble.

[anne]

I suggest reading Alan Blinders brilliant column several times, the program is workable and fair an especially necessary and could take another Congress and President to be implemented but that will come, and I would not be surprised were it to come in this Presidency. I am simply not interersted in self-destructive marketeers nor ultimately will policy makers be. Herbert Hoover is not returne or returning, ever.

[Alan]

The HOLC is a good idea for managing the house price decline. It is a bad idea if the government is intending to support the current prices.

The original HOLC, as I recall, offered lenders a very much lower rate on properties it took on. Lenders were happy to get it, because it was something rather than nothing. In the current case, the 2008 HOLC should buy mortgages, perhaps buy these opaque, er, innovative instruments, at a deep discount. This is the idea floated last month by Robert Kuttner.

Offer a deep discount on these securities, unpack them, and get to the rational price without bailing out the lenders.

The problem of moral hazard is one concern, but by ratifying these high prices through a bailout, we are also grossly misallocating the society's resources.

[save_the_rustbelt]

A lurking problem is the geographical concentration of the foreclosures, in areas that have been in recession for years (Detroit) and areas that had a bubble (Vegas).

The same number of foreclosures spread evenly over the country might be a little more manageable, but with the problems concentrated the problem magnifies.

If the avalanche continues cities such as Detroit and Cleveland could collapse (including the inner ring suburbs), unable to provide enough services to maintain civilization (remember the movie Robocop?).

Economists and policy makers STILL don't seem to understand that this is an avalanche, and am avalanche buries everything it its path.

[save_the_rustbelt]

"Prices would fall unevenly and a 30% national fall would mean 60% in sectors."

Anne, your thinking is correct, but this has already happened, often in the places that are in permanent recession.

As the foreclosures multiply whole blocks become untenable, the flight begins and entire regions within a county are near collapse.

[anne]

Price declines of 10% nationally will be no decline in many communities and 20% and 30% in others. All that the Home Owners’ Loan Corporation will do is allow owners to afford mortgages and stay in homes preserving lives and families and communities and only indirectly limiting price declines. There would be no more price control than was inherent in veterans' mortgages or Federal Reserve short term intererst rate ajustments or tax deductions for mortgage interest and on....

[Lee A. Arnold]

We should absolutely do something like this, including the more stringent regulatory structure throughout the financial markets. Putting several million more people (including children) out on the street is a very very bad idea. And assuming that a free market exists or can exist without rules, accountability and transparency is a fantasy, an intellectual scandal. It is an embarrassment that the United States has come to this. The politicians, economists, and freemarket taxcutting thinktankers who led us down this path should all be tarred, feathered, horsewhipped. All of the big names too. There isn't a functioning brain in the lot.

[anne]

STR:

"As the foreclosures multiply whole blocks become untenable, the flight begins and entire regions within a county are near collapse."

I know, I know, and you have written often of just this and I have always noted the writings. I do not understand the dynamics of community development and community implosion, but the dangers are evident and not to be looked beyond calmly.

[Winston]

Instead, house prices keep dropping, the mortgage-foreclosure problem grows and new strains in the financial system keep popping up like a not-very-funny version of Whack-a-Mole.

The reason that bargain hunters aren't snapping up foreclosed houses in bubble regions isn't that the market isn't functioning. It is that banks are unwilling to sell them for the true market price, which is far, far under the level at which they're setting minimum bids. In the outer SF Bay area, for example, prices have fallen like 40%. However for homes to fall to where the price of owning them is close to renting, they need to drop another 30% or so from their current prices (for a cumulative drop of 60% from their peak prices). In the inner regions of the SF bay area, prices are off only 20%, which is about 1/3 of the total haircut that owners need to take for the market to move back into balance. Government interference will only make things worse by prolonging the adjustment period. Let prices fall to where they should be. And let the scammers and idiots who lied on their mortgage applications to buy houses they couldn't afford default and let the homes go to people who can afford them.

[James]

Is the purpose of this proposal to save the homeowners, or to save the banks?

http://tinyurl.com/ypkr6o

[anne]

I will read some Jane Jacobs tomorrow, but others than I have a far clearer sense of and exposure to changing community dynamics. My sense is too much of stability, but that is local and artificial at such a time. Besides community change is subtle, and Paul Krugman who is no community specialist has been telling us of slowness about housing for years and criticized for the telling for what was not evident enough.

STR has written of the subtle slowness in negative community change.

[Organic George]

What these economists are really saying is that they want to bail out the banks & brokers for the second time in little over a decade.

People losing their homes is a tragedy, but the underlying problem is the scam that is subprime and derivatives. Can you imagine having an asset on the books, but being unable to determine if there is any real value to the it since it's based on a derivative?

Can anyone say Enron?

The bankers could give a rat's ass about homeowners, the financial system is corrupt, and every CEO, CFO and Board-member of the participating corporations should be fired and their parachutes revoked.

So let's cut to the chase: If the public is going to bail out the banks and brokers, what are we going to get in return? I'm talking a Warren Buffet suck-on-it offer to the bond insurance companies. It time the public treated the financial community like the hat-in-hand basket case they are.

First we re-regulate the banks and brokers, they have proven over and over again they are not responsible fiduciaries of the public trust.

Second kiss the big bonuses and stock deals goodbye for the corporate excutives until the books are truly balanced.

Third make the US govenment a major shareholder with a generous payback for the infusion of cash

I am sick and tired of the financial industry being treated as too big to fail. Let them fail and I assure you the world will not end. There is a lot of money on the sidelines waiting to pick up the pieces of this debacle, such as the aforementioned WB

The purpose of bad markets is to ring out the excess. Over the past several years the government has taken the view that bear markets are bad for the economy. By propping up the markets they are only exacerbating the reversal with it invariably comes.

People are in overpriced homes that are not worth saving. Walk away from a bad investment, that is want professional investors do. Let home values fall to a realistic value and you will find lots of ordinary people with a 20% down payment that will buy the houses. Hold the prices up at an artificial price and you will again make the problem worse in the long run.

What part of Econ 101 did Blinder skip? This is an intellectually dishonest proposal dragged out to keep the discussion off the criminal actions of the financial barons.

I'm with WB on this issue, it's poetic justice for the banks.

[Peter Schaeffer]

Folks, this isn’t 1933. The folks who bought homes they couldn’t afford have zero legitimate claim on the taxpayers of the US. Liar loans, NINJA loans (No Income, No Job, No Assets), option ARMs, 105% LTV ratios etc. were all scams willingly engaged in by folks trying to exploit the bubble. The idea of bailing out the Wall Street types whose greed, avarice, rapacity, and incompetence triggered this crisis is obscene.

Tens of millions of ordinary Americans have patiently saved their money and then bought home they could afford. These folks deserve respect, not mockery via taxpayers bailouts of the improvident and the greedy.

Let the marketplace work. Folks who borrowed money they can’t afford to repay can default via bankruptcy and foreclosure. Wall Street firms can slash bonuses and recapitalize as need be.

Keep in mind the obvious. Behind every proposed bailout of “deceived borrowers” is some nefarious Wall Street “capitalist” whose idea of “free markets” is ten figure payouts for taking “risks” and taxpayers subsidies when the risks become real.

[anne]

Franklin Roosevelt was concerne with saving househols, not banks which will be saved by changes in spreas the Federal Reserve has already structured as long as there is demand for long term financing. The Fed will protect banks, that is not the issue here. Protecting speculators is not the issue. Protecting people who care for a community, who care to support a community, and remain in a home that was hopefully and proudly bought is the issue.

I am not worried about the financial system, actually I am confident about what I find among financial companies.

[Fred]

Franklin Roosevelt was a disaster for this country. What was needed in 1933 was something very simple: guaranteed jobs for all the unemployed to rake leaves or shovel snow or dig holes and fill them back up again afterwards. The money paid to these people would immediately be spent on rent, mortgages, groceries, automobiles, etc, and the result would be a boost in business profits and a restoration of business confidence and an end to the depression. Once confidence is restored, the leave raking make-work could be stopped. The accumulated debt for the leave-raking would be paid for off by the increased taxes due to a restoration of business activity. This is basic Keynesian theory put into practice, it is more or less what Keynes proposed, and it is what we need today. Namely, the government needs to make it clear that if unemployement rises, it will step in and create make-work jobs. By making this guarantee, businesses in the real economy will be assured that their customers will have money in their pockets, and so these businesses will not lay people off or shut down investment plans.

What we don't need is New Deal style price-fixing and other meddling in the economy. If the banks all fail, so what? Pay off the small depositers, let the stock and bond holders eat some losses for a change, and let people like Buffett step in and start up some new banks. The real economy matters to this country. The financial economy doesn't.

[Bruce Wilder]

James asks: "Is the purpose of this proposal to save the homeowners, or to save the banks?"

Save the banks.

Duh.

Calculated Risk comments on what he calls the The BoA Bailout proposal, based on a reading of A ‘Moral Hazard’ for a Housing Bailout: Sorting the Victims From Those Who Volunteered - New York Times

CR writes: Nobody is going to create a functioning new agency with the relevant expertise and staffing and funding and clear mandate out of thin air fast enough to do what this wants to do, if what we want to do is stave off recession. FHA probably has the expertise to credibly attempt the loan-level workouts, but not enough hands to get saddled with $739 billion worth that has to be dealt with before everybody's lawns go brown. Ginnie Mae is, in my view, one of the most efficient and quietly professional government agencies ever: they run a highly successful program with a tiny staff. I can't imagine Ginnie Mae is ready to manage reporting and remittances on a brand-new government-owned pool o' junk of this size with existing resources.

So of course the whole thing would be outsourced to some private company. I'm sure there's a financial institution out there willing to write up a proposal for how the government can pay it a management fee to orchestrate the government's bailout of its last attempt to manage mortgage-lending-related program activities.

Joe exaggerates a bit, I suspect, with a projection of 30%-50% "nationally". First, there is no "nationally" in real estate. The decline has been and will be precipitous in some of the frothiest of bubble markets -- places like Las Vegas or San Diego. The decline will be much less in percentage terms in places like Atlanta and Michigan, which never had a bubble, but which are experiencing record rates of foreclosure already. Even if the decline in house prices is a mere 25% in Michigan, it will absolutely devastate an already devasted State.

But, Joe is absolutely right, when he asserts that it is madness to try to solve this problem by fixing housing prices. Housing prices will have to adjust, and will probably take a long time doing it. Houses are worth what they are worth, and fighting reality is always a losing proposition.

A far more sensible thing to do, would be to create Receivers, which can take over houses in foreclosure and rent them out, where that is possible. The problem of vacant houses, being vacant and attracting vandalism and depressing house prices -- this is a problem, which, in some places at least, is subject to amelioration.

The problem of the Banks being insolvent, however, requires some tough love. IF the U.S. has to nationalize the banks, then let's nationalize the banks. But, let's not go thru some huge giveaway, which rewards massive criminality.

And, while we are at it, could we have a Usury ceiling, please, on Credit Cards?

[gordon]

I think Idaho Spud has this worked out. Yes, it looks exactly like the proposal described by Tanta at Calculated Risk in the post headed "BoA Bailout" dated 23 Feb. (Calculated Risk doesn't seem to have permalinks, or I would have linked directly. It's worth reading).

And the same idea - the Govt. buys the toxic waste - could extend to the stock market too, according to Bernard Connolly in this Reuters item: '"If conventional monetary policy is not enough to [avoid a depression], the government may have to buy equities, financed by the Fed," Connolly said'.

As far as the "buyer should have been beware" argument is concerned, have you ever tried to buy a house in a market that looks as though it's going to rise forever? If you don't get in today, you're convinced you're never going to get in at all. You do whatever it takes to get a loan.

[Jim]

Some investor has to take the loss when overpriced housing falls to realistic levels. It won't be the speculators or upside down homeowners who have to move to a new job because they will walk away from the properties. It will be the financial institutions and holders of badly thought out CDOs who pay. They gambled and should lose. The sooner the shakeout comes and prices get to a proper multiple of the average wage, the sooner we can get on to the next speculative bubble.

[bakho]

Could we actually get a government run system today? Or would we get stuck with "privatization" costs added on to the baseline the way student loans are handled by third parties with no-lose cash cows?

[ken melvin]

Back in Aug 07 I posted at Angry Bear:

"Rather the Fed bailing out Market Street on the housing bubble, suppose the government implemented a scheme that tied the payments for those homeowner’s mortgages facing foreclosure to the home’s current value and stipulated that the rate of interest for the loan always be within a small margin of prime.

An example-model: Say that a homeowner purchase a home for $500k with 20% down leaving a principal of $400k financed initially with an ARM at 6% resulting in interest payments of $24k/yr or $2k/mo. If the interest rate went to 8%, the interest payments would be $32k/yr or $2.67/mo. All well and good if the price of the home continues to go up. Thus, the speculative bubble. But, if the price of the house went down 10% to $450k , the principal 0.8 x $450 = $360k and the $32k/yr is now 8.88% . Little incentative for the homeowner here. But, if the above scheme were implemented and the prime remained the same, the interest payments would be 0.06 x $360k = $21.6/yr or $1.8/mo. Unless they’ve suffered other losses, the homeowners would try their best to hang in there. A major consequence of this scheme is that the lenders are partnered in, making them less likely to fuel the speculative bubble. If applied in a perhaps somewhat modified form during those times when housing prices are rising too rapidly, the scheme could be used to take off some of the speculative edge that leads to bubbles."

These inflated prices destroy communities - cities. The prices of houses in cities like SF reflect speculation, nothing else. They simply must come down.

[zinc]

And, while we are at it, could we have a Usury ceiling, please, on Credit Cards?

Yes, now.

[Technology Should Result in Lower Prices]

"The sooner the shakeout comes and prices get to a proper multiple of the average wage..."

With advances in building technology, prices for new homes should be dropping as a percentage of the median wage. Artificial restriction of supply is keeping prices going up, reducing what the median wage earner has left for other items.

FDR bailed people out, but his policies resulted in smaller, more affordable homes being built. What we need today is a modern day FDR to champion the less well to do. Enough with zoning boards insisting that only castles can be built, and in insufficient numbers to meet demand. The main thing boards care about is maximizing the hopelessly regressive property taxes. The little guy gets harmed by this wanton greed.

[Winslow R.]

For the comparison to the history of 1936 to work, next Blinder will be calling for WWIII to start in 2012?

[Winslow R.]

I believe we will need bank bailouts but this bailout is disguised as a throwback to FDR, negating the need for real financial reform.

A shameful distortion of his legacy that will fool very few Democrats.

[Enough]

Rust..."If the avalanche continues cities such as Detroit and Cleveland could collapse (including the inner ring suburbs), unable to provide enough services to maintain civilization (remember the movie Robocop?)."

Enough with regressive taxes. Tax the rich (raise the maximum rate back up to 40% or so), and use that money to provide services. Stop trying to get so much from the less well to do with highly regressive property taxes. They can barely afford the home, let alone fantastic property tax rates on top of it. Cleveland, for example, has one of the highest property tax rates in the nation, and inflicts this on the poorest people in the nation (Cleveland recently ranked as the poorest large city in the entire nation). This is ridiculous.

[Andrew]

Fred: The New Deal was an economics disaster and we don't need to repeat it. What we need is some people who read and actually understand Keynes.

The New Deal was not a set of comprehensive measures. It was a hodgepodge of policies, some of which were undeniably awful, and some of which were brilliantly creative and effective. Keep in mind, there was no such thing 'Keynesian' economics in the 1930's. The wisdom of the day was balanced budgets, so when Keynes advised Roosevelt to run a huge deficit FDR did not agree.

[gordon]

Bruce Wilder, who anticipated my previous comment by 15 minutes and managed to link directly to the Calculated Risk post says: "Houses are worth what they are worth, and fighting reality is always a losing proposition".

If that is true, then mortgage-backed securities are worth what they are worth (ie. nothing) and fighting reality is always a losing proposition (for the US taxpayer).

That being so, maybe this floating straw called HOLC might better be grasped using debt rather than an outright payment to banks by HOLC for their worthless securities. Instead of, as Blinder suggests, buying old mortgages from banks (which implies giving the banks good money in exchange for worthless securities), the US Govt (via HOLC or whatever) might lend instead. This would inject money into the banking system, which is no doubt a major objective of the exercise, but money which would have to be repaid later. At least that way the US taxpayer might have the satisfaction of thinking that their children might live to see some payback for the bailout.

[SanFranciscoJim]

The prices of houses in cities like SF reflect speculation, nothing else. They simply must come down.

I don't think so. Why are prices going up in San Francisco, while they are going down everywhere else? Are people continuing to speculate on San Francisco real estate, while there is an obvious bubble collapse going on?

I think San Francisco is a bad example. There is a very limited supply here and lots of demand, from a population that is 2/3 renter and from the 1/4M people who commute in everyday to work and getting tired of paying $3.50/gallon and facing increasingly bad commutes.

[wjd123]

I think that it is necessary for the government to take action to achieve some sense of harmony. If the market is allowed to fall precipitously it will probably fall past the harmony point. Prices falling below that point will open business to speculators.

If the government does nothing communities will suffer bringing down the price of real estate even further than need be. The blight in communities will cause more people to try to escape. The real estate hole will become deeper than need be by allowing it to be exposed to the elements instead of intervening to shelter it from the weather.

The market won't adjust in an harmonious way, but in a way that causes more suffering and problems than need be. The market will do its thing. The invisible hand will end up giving many people the finger merely because its thing follows the contours of the earth, pot holes and all.

If HOLC is going to buy mortgages back from the banks, I don't understand why it is assumed by many that the government is getting a bad deal and the banks are getting bailed out. The government has bargaining power. Better for the banks to sell their mortgages at a 2% loss to the government than have a house go into foreclosure.

Better for communities to have people in houses they can afford at a 6% fixed mortgage than home owners walking away from adjustable rate mortgages.

Perhaps the point about harmony can best be seen in the renters market. The more people that walk away from their houses the more it will cost to rent. The unmitigated housing market would be creating a windfall for landlords. This isn't the market adjusting but the market going wild.

Better for the government to try to create steady virtues that lead to harmony through intervention than allow for an environment where harmony and virtue go begging.

A restoration to harmony by creating the best environment in which it can be be restored is what the government should aim for.

Unfortunately, government is cursed with the incompetent Bush Administration.

[hari]

It took old Prof Blinder to come up with a public solution.
What's behind HOLC re-enactment is recognition of failure of Feds regulatory regime on mortgages, per se. And if the regulatory regime is not revisited with some critical mass/vigor, all this effort under public purse will end up as failure! Demos will inherit the messs, if elected.

Laissez faire capitalism is NOT going to go away from what you guys are telling above. Don't try to jump on a freight train, if you don't know exactly what direction or destination it's headed.

Blinder's analysis is transparent but doesn't take into account the moral hazard which is implicit, if HOLC is re-enacted instead of allowing market mechanism to clean up the credit crunch mess. That's still a real alternative!

And, for God's sake, remember this will not be over quickly. There's no quick fix for the cabal which invented this excuberant mortgages (SIV/CDOs) market globally. They must be required to pay for their calumy.

[anne]

http://www.nytimes.com/books/00/11/26/specials/schlesinger-hundred.html

April 10, 1983

The 'Hundred Days' of F.D.R.
By ARTHUR SCHLESINGER Jr.

Exactly half a century ago, the Republic plunged into the Hundred Days - that time of tumultuous change when a flood of legislation swept away venerable market practices and gave the American economic system a new contour.

In the frenzied weeks from March to June 1933, Franklin D. Roosevelt sent 15 messages to Congress and steered 15 major laws to enactment: among them, central planning for industry and for agriculture, new regulation for banking and for the securities exchanges, the Tennessee Valley Authority, the Civilian Conservation Corps and a national system of unemployment relief.

''At the end of February,'' Walter Lippmann wrote when the special session adjourned, ''we were a congeries of disorderly panic stricken mobs and factions. In the hundred days from March to June we became again an organized nation confident of our power to provide for our own security and to control our own destiny.''

The Hundred Days were only the start of a process that ended by transforming American society. Who can now imagine a day when America offered no Social Security, no unemployment compensation, no food stamps, no Federal guarantee of bank deposits, no Federal supervision of the stock market, no Federal protection for collective bargaining, no Federal standards for wages and hours, no Federal support for farm prices or rural electrification, no Federal refinancing for farm and home mortgages, no Federal commitment to high employment or to equal opportunity - in short, no Federal responsibility for Americans who found themselves, through no fault of their own, in economic or social distress?

These social changes have won general approval. Even the Reagan counterrevolution, for all its 19th-century laissez-faire and Social Darwinist passions, shrinks from abolishing the framework of social protection - the ''safety nets'' - created by the New Deal.

But what of the narrowly economic results? How effective was the New Deal in reducing unemployment, promoting economic growth and altering the distribution of income? And does the experience of half a century ago offer any guidance to the nation in its economic perplexities today?

The technique of the New Deal was improvisation and experiment. ''It is common sense to take a method and try it,'' F.D.R. said in the 1932 campaign: ''If it fails, admit it frankly and try another. But above all, try something.''

Except for that part about admitting failure frankly, this continued the rule for Roosevelt's 12 years in the White House. In the intellectual circumstances of the time, there was really no alternative to experiment. The Hundred Days found the country in a state of invincible ignorance. No one knew the causes of the Depression. No one knew the cure. Business leaders and academic economists alike were analytically baffled and impotent.

A fortnight before Roosevelt took office, the Senate Finance Committee summoned a procession of business leaders to testify on the crisis. ''I have nothing to offer, either of fact or theory,'' said John W. Davis, the head of the American bar. ''There is no panacea,'' said W.W. Atterbury, president of the Pennsylvania Railroad.

Economists had been so wrong in the recent past and were in such hot disagreement in the urgent present that no non-economist could take the profession seriously.

In its detail, New Deal experimentation was often chaotic and not seldom contradictory. But it was unified by F.D.R.'s definite conviction about the ends of economic policy - ends prescribed not only by the miseries of the Great Depression but by the President's alert, resourceful and generous-hearted personality.

Born in the Hudson River aristocracy, he inherited a sense of obligation to land and to community. He was indeed, as John T. Flynn labeled him in a once famous polemic, a country squire in the White House. The Republic was Hyde Park writ large, and he saw himself as trustee for a national estate that required vigilant protection and cultivation.

There was more than a touch of paternalism and noblesse oblige in all this, but there was also a vivid feeling of responsibility for the national community as a whole, especially its most defenseless members.

F.D.R. had had a reasonable exposure to the economic thought of his time. At Harvard he had taken more credits in economics than in any field except history and English. His teachers - William Z. Ripley, A. Piatt Andrew, O.M.W. Sprague - were in the reformist school that hoped to mitigate laissez-faire by regulation.

In the 1920's he had been active in the business self-regulation movement. As Governor of New York, he had pioneered in regional planning, conservation, electric power development and welfare legislation.

The President-elect emerged from this varied experience with a patrician disdain for business wisdom and a curiosity about economists. ''This nation asks for action, and action now,'' he said in his inaugural address.

He looked first to national planning, ''a fair and just concert of interests,'' with business, labor, agriculture and consumers working together under government leadership. Each unit ''must think of itself as a part of a greater whole; one piece in a large design.''

This integrative approach sprang from his sense of the nation as a great community. It found particular expression in the National Recovery Administration and the Agricultural Adjustment Administration. These mechanisms of negotiation and coordination soon arrested the fall in production and prices and brought about a measure of re-employment.

But they also encountered difficulties. N.R.A. especially tried to run too much; and, though it gave new status to organized labor, business used its dominating position in many industrial codes to fix prices and restrict production. In the end, the laws fell afoul of the Supreme Court.

The Second New Deal

After 1935 Roosevelt embarked on a new tack: leftward in rhetoric, rightward in policy. Instead of seeking business partnership in the reorganization of economic institutions, the Second New Deal embraced the theory of a competitive economy and strove for recovery through a three-pronged reform campaign.

One prong, which naturally outraged those businessmen who endorsed competition in principle but hated it in practice, was a campaign against the ''economic royalists'' and the concentration of private economic power. The thesis, Roosevelt said in 1938, ''is not that the system of free private enterprise for profit has failed in this generation, but that it has not yet been tried.''

A second prong aimed at the stimulus of the economy through deficit spending. Keynes in his 1936 book ''The General Theory of Employment, Interest, and Money'' gave compensatory fiscal policy its classic rationale.

But the New Deal came to public spending earlier and for its own reasons. It created deficits to combat human suffering, and it found its early justification in the arguments of the Utah banker Marriner Eccles, whom Roosevelt made chairman of the Federal Reserve Board.

He took his ideas from two now forgotten American economic writers, William Trufant Foster and Waddill Catchings, whose irreverent critique of Say's Law in the 1920's had demonstrated the perils of over saving, concluding with the brisk injunction: ''When business begins to look rotten, more public spending.''

F.D.R. had scrawled in his copy of the Foster-Catchings book ''The Road to Plenty'' (1928), ''Too good to be true - You can't get something for nothing.'' Very likely he continued to prefer structural to fiscal remedies. But ''above all, try something.''

The third prong in the Second New Deal was targeted attention to weak sectors in the economy - the South, the West, housing, railroads. Here the Reconstruction Finance Corporation, headed by a Texas banker, Jesse Jones, played a key role. The R.F.C., and later its wartime subsidiary, the Defense Plant Corporation, liberated the colonial South and West from the New York capital market and used government money to lay the foundation for the postwar boom in the Sun Belt.

(The Sun Belt today repays Washington's initiative by opposing, in the sacred name of free enterprise, government intervention on behalf of other parts of the country, as, for example, the decaying industrial heartland of the Middle West and Northeast.)

All this Rooseveltian hyperactivity brought the country through the worst of the Depression. By 1940 the gross national product was higher than in 1929 and over 60 percent higher than in 1933.

As has been often noted, the New Deal did not solve the problem of unemployment. By 1940 the jobless rate had been cut by nearly two thirds, to 9.3 percent of the labor force from 25.2 percent in 1933. Still five million people lacked jobs.

So much re-employment in half a dozen years was a not inconsiderable accomplishment, as Reagan economists, faced with their own problems of reducing unemployment, will perhaps agree.

A Budget Balancer

The reason the New Deal did not do even better was that Roosevelt, though much denounced at the time as a profligate spender, remained at heart a budget-balancer and a planner. In any event, the hysterical opposition of businessmen to public spending for anyone but themselves made it politically impossible for him to spend very much.

The largest peacetime deficit the big spender produced was a feeble $3.5 billion in 1936....

[ilsm]

Look at the externalities and other consequences.

Any program, by the government, which sustains bubble prices is wrong.

I refused to buy in the early stages of the bubbles when I relocated in 2003.

The issue in 1933 was very different from today.

The norm for mrotgages was very different.

In 1933 the issue was money available to lend.

Today there is a flood of newly printed money to lend, but no one will buy or borrow because of the price bubble(s).

We are in a liquidity trap and what is needed is a dissolution of the price bubble, not keeping prices up there.

That is against 'moral hazard' avoiding interests.

[anne]

Franklin Roosevelt an the New Deal were wildly successful, and beyond saving America by lifting the country from the Depression that had brought 25% unemployment by March 1933 when Roosevelt became President, an unemployment all the more profound for not having women significantly in the work force, and by building a secure middle class America. Middle class America as we came to understand it was built from the New Deal and the legacy is eveywhere about us still.

There has in recent years been a determine effort to thoroughly distort the history of the New Deal, with perverse accounts of the period of governing for the purpose of underminging all the legacy from Social Security to children's health care protection. But, trying to re-write history does not change history what actually was history.

[anne]

http://www.nytimes.com/2005/04/18/opinion/18herbert.html

April 18, 2005

A Radical in the White House
By BOB HERBERT

Last week - April 12, to be exact - was the 60th anniversary of the death of Franklin Delano Roosevelt. "I have a terrific headache," he said, before collapsing at the Little White House in Warm Springs, Ga. He died of a massive cerebral hemorrhage on the 83rd day of his fourth term as president. His hold on the nation was such that most Americans, stunned by the announcement of his death that spring afternoon, reacted as though they had lost a close relative.

That more wasn't made of this anniversary is not just a matter of time; it's a measure of the distance the U.S. has traveled from the egalitarian ideals championed by F.D.R. His goal was "to make a country in which no one is left out." That kind of thinking has long since been consigned to the political dumpster. We're now in the age of Bush, Cheney and DeLay, small men committed to the concentration of big bucks in the hands of the fortunate few.

To get a sense of just how radical Roosevelt was (compared with the politics of today), consider the State of the Union address he delivered from the White House on Jan. 11, 1944. * He was already in declining health and, suffering from a cold, he gave the speech over the radio in the form of a fireside chat.

After talking about the war, which was still being fought on two fronts, the president offered what should have been recognized immediately for what it was, nothing less than a blueprint for the future of the United States. It was the clearest statement I've ever seen of the kind of nation the U.S. could have become in the years between the end of World War II and now. Roosevelt referred to his proposals in that speech as "a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race or creed."

Among these rights, he said, are:

"The right to a useful and remunerative job in the industries or shops or farms or mines of the nation.

"The right to earn enough to provide adequate food and clothing and recreation.

"The right of every farmer to raise and sell his products at a return which will give him and his family a decent living.

"The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad.

"The right of every family to a decent home.

"The right to adequate medical care and the opportunity to achieve and enjoy good health.

"The right to adequate protection from the economic fears of old age, sickness, accident and unemployment.

"The right to a good education."

I mentioned this a few days ago to an acquaintance who is 30 years old. She said, "Wow, I can't believe a president would say that."

Roosevelt's vision gave conservatives in both parties apoplexy in 1944 and it would still drive them crazy today. But the truth is that during the 1950's and 60's the nation made substantial progress toward his wonderfully admirable goals, before the momentum of liberal politics slowed with the war in Vietnam and the election in 1968 of Richard Nixon.

It wouldn't be long before Ronald Reagan was, as the historian Robert Dallek put it, attacking Medicare as "the advance wave of socialism" ....

[anne]

http://www.feri.org/common/news/details.cfm?QID=2088&clientid=11005

http://www.feri.org/common/news/details.cfm?QID=2088&clientid=11005

January 11, 1944

Message on the State of the Union
By Franklin Roosevelt

This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights — among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty.

As our Nation has grown in size and stature, however — as our industrial economy expanded — these political rights proved inadequate to assure us equality in the pursuit of happiness.

We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. "Necessitous men are not free men." People who are hungry and out of a job are the stuff of which dictatorships are made.

In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all — regardless of station, race, or creed.

Among these are:

The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;

The right to earn enough to provide adequate food and clothing and recreation;

The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;

The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;

The right of every family to a decent home;

The right to adequate medical care and the opportunity to achieve and enjoy good health;

The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;

The right to a good education.

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.

America's own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for our citizens. For unless there is security here at home there cannot be lasting peace in the world....

[Lafayette]

Herbert Article: Roosevelt's vision gave conservatives in both parties apoplexy in 1944 and it would still drive them crazy today.

Not only apoplexy, but in 2008, recurrent television insinuations that the "headache" was actually the work of sinister Right Wing forces of the DarkSide.

Who knows for sure what they are capable of doing? They've got enough money to do just about anything, short of (perhaps) commandeering the DoD. They've already showed they can manipulate an presidential election such that a pliable dunce is elected.

[Lafayette]

From the From the International Covenant on Human Rights adopted by the United Nations General Assembly on December 16, 1966, and in force from January 3, 1976(signed by the US, but the US Senate has steadfastly refused to ratify):

* Universal right to work in whatever occupation one wants, with "decent living," paid vacations, and paid holidays.

* Right to welfare, social security, and social insurance.

* Right to food, housing, clothing, and "the continuous improvement of living conditions"

* Right to health

Then again, what would you expect of the US Senate, that Club of millionaires.

[ilsm]

"short of (perhaps) commandeering the DoD."

Who own DoD?

[Fred]

These idolizers of Roosevelt seem to forget that a soft heart doesn't compensate for a soft brain, at least where the President of the United States is concerned. So Roosevelt's first 100 days changed the mood in the country to one of confidence among some intellectuals. It certainly didn't change consumer or business confidence because that would have ended the depression. Well, the President of the United States is not just a cheerleader for the intelligentsia. The President has an active role in setting public policy and must be judged on the long term effect of those policies, and in Roosevelt's case, the long term effect is mostly bad, mainly because Roosevelt's obsession with a balanced budget and lack of confidence in or even understanding of market mechanisms undermined everything else. The obsession of certainly so-called progressives today with preventing a massive failure of banks will similarly undermine all the rest of their policy ideas. In particular, bailing out the banks right now will burden the US Treasury with so much debt that everything else on the progressive agenda (universal healthcare, universal daycare, universal vocational/college education, more scientific R&D, etc) will have be postponed indefinitely.

If you want to idolize someone from the 1930's, idolize Keynes.

[save_the_rustbelt]

Any bailout program will likely benefit some who are stupid, duplicitous and/or have committed fraud. No program design is perfect.

Problem is, the spillover effect of mass foreclosures could get so large (think avalanche) that many of the innocent could be crushed as entire suburbs or cities implode.

Cleveland could be destroyed not by flood or fire (both of which bring government intervention) but by an avalanche of foreclosures aggravated by the loss of jobs.

[STS]

Fred:

"... New Deal style price-fixing and other meddling in the economy. If the banks all fail, so what? Pay off the small depositers, ..."

There are plenty of reasonable criticisms to make of the New Deal, but I can't help pointing out that your advice to "pay off the small depositors" is a key part of the New Deal. As much fun as it is to watch bankers squirm, run for the exits and get clobbered financially, it can be hard to stop the avalanche. Backstopping the innocent bystanders (when you can reliably identify them) used to be considered unacceptable moral hazard. Thanks to the New Deal, even folks who talk casually about letting the d&*n banks fail take it for granted that *they* won't lose their savings.

I want my FDIC!

[ken melvin]

Many a question lurks behind letting unfettered markets play housing, letting housing be a commodity. Many more behind propping up the current speculative price. In re SF, these are not market forces in any traditional sense. The pressure's coming from those who own several houses, houses bought because one can't lose because houses always go up and because land always goes up not because this is SF but because this is China. Waste of time to tell these folks about previous bubbles, they know from Hong Kong and China.

[ken melvin]

When two-bedroom bungalows in SF's Sunset reached $800k, where do teachers, firemen, policemen, hotel workers, dot-com workers, ... any working class people live? What industry can pay wages that support such? For the long term good of everyone, this speculative bubble needs to be pricked. For generations the story needs to be told of what happened in 07 and 08.

[Lafayette]

A Political Will

Fred: ... in Roosevelt's case, the long term effect is mostly bad, mainly because Roosevelt's obsession with a balanced budget and lack of confidence in or even understanding of market mechanisms undermined everything else.

We are not idolizing Roosevelt.

But, given the similarity of the economic situation (in both in the poor and middle-classes) between then and now, many do see an interest in the panoply of Alphabet Soup Agencies that embodied a Political Will to better the lot of Americans in the face of obstinate conservative thought -- that largely brought about the Depression. The obstinacy at balancing the budget was born in pre-Roosevelt times. The Fed, young and inexperienced in managing financial matters, did not understand the mechanism of financial expansion in time of deep depression.

Don't try to blame that nefarious period of American economic history on the progressives, because it just wont work. The Political Will of today's morons-in-charge is "Do nothing, it will fix itself".

We are right to be worried.

[James]

Let the government buy it = monetize it.

There is not such thing as a free lunch. The public takes the tab (again).

Its a worse than useless solution UNLESS it includes some significant reforms for the bankng system.

1. reinstation of Glass-Steagall restriction on ALL banks doing business in the US including multinationals.

2. a national usury ceiling on credit rates and fees, both revolving and non-revolving.

3. A return to the concept of regional and local banks through a reinstatement of laws regarding bank ownership of banks covered by the FDIC.

4. A significant set of Congressional hearings and the appointment of a special prosecutor assigned to investigate, with FBI support, the pervasive frauds in the US financial industry from Enron to Subprime.

[Fred]

We are currently at an historical juncture. The Federal debt is modest now which means more debt can be taken on. But we can't take on infinite amounts of new debt. And we about to undergo the greatest asset deflation in the history of the world. In order to prevent a depression, the government will have to run massive budget deficits over the next few years, like $2 trillion a year. The question is this: are those deficits used to pay for the transition costs associated with implementing new progressive programs and while still running older programs at the same time, or are those deficits used to prop up stock and housing values? We are talking about asset deflation of something like $10 trillion, to be compensated for by increased federal debt of something like $6 trillion. This is not pocket change, and I just can't believe that so-called progressives would contemplate using this money to bail out Wall Street and the hedge fund operators as opposed to doing something else with it. And that is ultimately what it means when someone suggests any form of housing bailout.

As for Cleveland: the problem there is unemployment, not foreclosures. The land is not going anywhere. If current housing stock collapses due to neglect, bulldoze them and replace them with manufactured housing at $30K a pop. Furthermore, we wouldn't be seeing so much neglect if the government made it clear that, far from planning to bail out the banks, it was quite prepared to see them all go bankrupt. That would give the banks a powerful incentive to keep those houses occupied and unforeclosed, so as to avoid realizing losses. The unemployment problem can be dealt with in a variety of ways, all of which involve government deficit spending, which is why it is crucial not to waste the deficit spending on bailout out banks.

[odograph]

I think we are heading into a recession with the highest federal debt (as a fraction of GDP) since WWII. We start on an upward trajectory, which as some have noted is poorly timed relative to the business cycle.

How do we get "The Federal debt is modest now which means more debt can be taken on"?

Is that relative to us, the US, or relative to more indebted nations?

[Bruce Wilder]

Nationalize the banks and be done with it.

[Fred]

Yes, there is plenty of idolization of Roosevelt here. Roosevelt would have faced little sustined opposition to a leaf-raking or similar make-work program and that would have ended the Depression pronto. Wall Street may be in thrall to the demon money, but Wall Street is anything but stupid. A makework program would have been greeted with a boom in stock prices and that would have quelled the opposition of the rich right then and there. The opposition to Roosevelt came because of all his hare-brained scheme in lieu of a simple makework programs. He was indeed a man of his times, and those were Communist times, when market mechanism were held in poor regard and there was a failure to distinguish between the active entrepreneur, who is good, versus the passive rentier, who is mostly bad.

As for FDIC, that is yet another bad idea of the Roosevelt years. The original moral hazard scheme. I mentioned paying off the small depositers because FDIC does currently exist, but I have no qualms about abolishing it. Without FDIC, small savers would buy t-bills directly from the federal government instead of using CDs. When a bank went under, ordinary people would lose a few thousand from their checking account, which is chump change these days. Businesses would lose more, but then businesses have the ability AND THE RESPONSIBILITY to monitor the health of their bank. There would be bank runs, and the banks would have to cope by having more equity and by arranging in advance with other banks or capital rich businesses and private investors (Warren Buffett) to buy their assets (loans) at near book value. In fact, our whole financial culture would turn away from debt and towards equity, and I don't see that as necessarily a bad thing.

[ken melvin]

http://calculatedrisk.blogspot.com/2008/02/boa-bailout.html

[Fred]

Z.1 report says fed debt is $5.1 trillion as of Q3 2007, and BEA says GDP is about $14.0 trillion, which means debt is about 36% of GDP. We can easily go to 100% of GDP, and probably will before this crisis is over. I am not going to waste a lot of time making a spreadsheet of debt to GDP since WWII to confirm this, but if I recall correctly, 36% is fairly low compared to the debt levels in the past. Perhaps someone has a link to a chart of debt to GDP since WWII?

The Z.1 report does not count the debt in the so-called trust fund, for good reason, since only economics illiterates think that trust fund debt matters.

[odograph]

If we call debts "contingent liabilities" does that really remove their future impact?

Borrowing them from Minzie Chinn:

The stock of Federal debt held by the public has increased enormously, from $3.3 trillion to a projected $5.6 trillion (end of fiscal years), at exactly the same time that the prospect for even greater funding requirements for entitlements looms on the near horizon. The addition of an enormous new prescription drug entitlement (officially called Medicare Part D) only worsened the long term fiscal position of the U.S. Government. Indeed, GAO estimates that this single provision added $8.7 trillion dollars worth of contingent liabilities to the Federal government's exposure, fully 50% larger than the estimated Social Security exposure. Hence, borrowing for expansionary fiscal policies -- either tax cuts or increased transfers -- may encounter weaker demand on the part of foreigners, as well as domestic residents, as these future borrowing needs loom. This in turn means that expansionary effect of budget deficits may be much smaller and costlier at exactly the time that we need the help of fiscal policy.

I mean, jeez, what was that, a little front-loaded insult to keep contingent liabilities off the table?

Maybe we can call the bailout contingent liabilities too, eh?

[Andrew]

Perhaps someone has a link to a chart of debt to GDP since WWII?

Here.

As I tried to politely point out, Fred, you are judging FDR's desire to keep a balanced budget by modern standards of economic understanding. Keynes was just a bright British guy when he advised FDR in the mid 30's, not the founder of a system of economic thought.
FDR did implement makework programs (cf. CCR).
I actually agree with most of your points about regulation and moral hazard, but you make it hard not to get sidetracked by painting the entire New Deal with a broad brush and deriding posters here as idolizing FDR.

[Andrew]

Before my portrayal of Keynes as 'just a bright British guy' results in a further tangent, I acknowledge that he was considered one of the foremost economic minds of the time.

[Andrew]

Before my portrayal of Keynes as 'just a bright British guy' results in a further tangent, I acknowledge that he was considered one of the foremost economic minds of the time.

[Fred]

I don't blame Roosevelt for not understanding Keynes, since most people still don't fully understand and appreciate him, including perhaps the majority of economists (though their misundstanding may be intentional in some cases). But I do blame Roosevelt for the way he deliberately tried to antagonize businesses and the rich, with the ultimate result of huring the poor far more than the rich. The makework schemes didn't get the rich antagonized, it was the other stuff Roosevelt did. Roosevelt has much in common with Stalin, Hitler, Mussolini, Franco and the other authoritarian tyrants of the 30's and this needs to be clearly recognized. The legacy of all of these leaders is a mostly negative one.

Incidentally, in order to keep the discussion at a heated level, I will mention that I include Social Security in the list of bad ideas from the New Deal. Why are we paying old people NOT to work, as opposed to the government guaranteeing the elderly a job suitable for their reduced capacity to work? SS is both demeaning to the elderly, by reducing them to the level of economically useless parasites, as well as burdensome to the young, who have to work harder than they would if the elderly were employed doing something useful. Yet another Roosevelt innovation needs debunking.

[Keith]

Wow, what a bunch of rubes.

So the banks get the deregulation from the Republicans, totally screw everything up, then sucker the Democrats into bailing them out with taxpayer dollars in exchange for new regulation. Of course the Democrats fall for it because the Democrats are addicted to expanding the role of government and appearing to "be doing something." Of course, simply letting the irresponsible take it in the shorts would be the best way to prevent it from happening again, but since both Democrats and Republican politicians would rather make their money off of lobbying rather than doing something useful with their lives, that ain't going to be on the table.

Then the banks will eventually lobby for deregulation again.

Hey, Democrats, how about going back to caring about the poor, and telling the rich and middle class to get off the tit? For the cost of these proposed moronic bailouts, you could virtually eliminate AIDS in Africa, shore up public defenders so innocent poor people don't automatically go to the slammer, improve public mental health services, and have lots left over to eliminate the deficit and maybe even cute taxes a bit.

But noooo, Dems would rather use government largesse to buy votes.

[anne]

http://newdeal.feri.org/misc/keynes2.htm

December 16, 1933

18, Norham Gardens
Oxford, England

In response to the New York Times' request for his views on the American outlook, Keynes has written "An Open Letter to President Roosevelt," which is scheduled to appear in the Sunday issue of December 31st and is to be syndicated in other parts of the United States.

So that you may see what he has to say before it is published, Keynes this morning sent me the enclosed copy of his article, which I hasten to get off directly to you through Miss LeHand (without forwarding it through the pouch) in the hope that it may catch the Bremen, which leaves tonight.

Yesterday's Times carried illuminating extracts from Wallace's Annual Report. What a good Secretary of Agriculture you have!

With warm regards,

Faithfully yours,

Felix Frankfurter

Hon. Franklin D. Roosevelt
Enc.

[anne]

http://newdeal.feri.org/misc/keynes2.htm

December 16, 1933

An Open Letter to President Roosevelt

Dear Mr President,

You have made yourself the Trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office. This is a sufficient reason why I should venture to lay my reflections before you, though under the disadvantages of distance and partial knowledge.

At the moment your sympathisers in England are nervous and sometimes despondent. We wonder whether the order of different urgencies is rightly understood, whether there is a confusion of aim, and whether some of the advice you get is not crack-brained and queer. If we are disconcerted when we defend you, this may be partly due to the influence of our environment in London. For almost everyone here has a wildly distorted view of what is happening in the United States. The average City man believes that you are engaged on a hare-brained expedition in face of competent advice, that the best hope lies in your ridding yourself of your present advisers to return to the old ways, and that otherwise the United States is heading for some ghastly breakdown. That is what they say they smell. There is a recrudescence of wise head-waging by those who believe that the nose is a nobler organ than the brain. London is convinced that we only have to sit back and wait, in order to see what we shall see. May I crave your attention, whilst I put my own view?

You are engaged on a double task, Recovery and Reform;--recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range Recovery, that you will have the driving force to accomplish long-range Reform. On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old "spoils system" have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once.

Now I am not clear, looking back over the last nine months, that the order of urgency between measures of Recovery and measures of Reform has been duly observed, or that the latter has not sometimes been mistaken for the former. In particular, I cannot detect any material aid to recovery in N.I.R.A., though its social gains have been large. The driving force which has been put behind the vast administrative task set by this Act has seemed to represent a wrong choice in the order of urgencies. The Act is on the Statute Book; a considerable amount has been done towards implementing it; but it might be better for the present to allow experience to accumulate before trying to force through all its details. That is my first reflection--that N.I.R.A., which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery.

My second reflection relates to the technique of Recovery itself. The object of recovery is to increase the national output and put more men to work. In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come n the market. Broadly speaking, therefore, and increase of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out o their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.

Now there are indications that two technical fallacies may have affected the policy of your administration. The first relates to the part played in recovery by rising prices. Rising prices are to be welcomed because they are usually a symptom of rising output and employment. When more purchasing power is spent, one expects rising output at rising prices. Since there cannot be rising output without rising prices, it is essential to ensure that the recovery shall not be held back by the insufficiency of the supply of money to support the increased monetary turn-over. But there is much less to be said in favour of rising prices, if they are brought about at the expense of rising output. Some debtors may be helped, but the national recovery as a whole will be retarded. Thus rising prices caused by deliberately increasing prime costs or by restricting output have a vastly inferior value to rising prices which are the natural result of an increase in the nation's purchasing power.

I do not mean to impugn the social justice and social expediency of the redistribution of incomes aimed at by N.I.R.A. and by the various schemes for agricultural restriction. The latter, in particular, I should strongly support in principle. But too much emphasis on the remedial value of a higher price-level as an object in itself may lead to serious misapprehension as to the part which prices can play in the technique of recovery. The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round.

Thus as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes. Nothing else counts in comparison with this. In a boom inflation can be caused by allowing unlimited credit to support the excited enthusiasm of business speculators. But in a slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure. You, Mr President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction.

The set-back which American recovery experienced this autumn was the predictable consequence of the failure of your administration to organise any material increase in new Loan expenditure during your first six months of office. The position six months hence will entirely depend on whether you have been laying the foundations for larger expenditures in the near future.

I am not surprised that so little has been spent up-to-date. Our own experience has shown how difficult it is to improvise useful Loan-expenditures at short notice. There are many obstacle to be patiently overcome, if waste, inefficiency and corruption are to be avoided. There are many factors, which I need not stop to enumerate, which render especially difficult in the United States the rapid improvisation of a vast programme of public works. I do not blame Mr Ickes for being cautious and careful. But the risks of less speed must be weighed against those of more haste. He must get across the crevasses before it is dark.

The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

It is an even more foolish application of the same ideas to believe that there is a mathematical relation between the price of gold and the prices of other things. It is true that the value of the dollar in terms of foreign currencies will affect the prices of those goods which enter into international trade. In so far as an over-valuation of the dollar was impeding the freedom of domestic price-raising policies or disturbing the balance of payments with foreign countries, it was advisable to depreciate it. But exchange depreciation should follow the success of your domestic price-raising policy as its natural consequence, and should not be allowed to disturb the whole world by preceding its justification at an entirely arbitrary pace. This is another example of trying to put on flesh by letting out the belt.

These criticisms do not mean that I have weakened in my advocacy of a managed currency or in preferring stable prices to stable exchanges. The currency and exchange policy of a country should be entirely subservient to the aim of raising output and employment to the right level. But the recent gyrations of the dollar have looked to me more like a gold standard on the booze than the ideal managed currency of my dreams.

You may be feeling by now, Mr President, that my criticism is more obvious than my sympathy. Yet truly that is not so. You remain for me the ruler whose general outlook and attitude to the tasks of government are the most sympathetic in the world. You are the only one who sees the necessity of a profound change of methods and is attempting it without intolerance, tyranny or destruction. You are feeling your way by trial and error, and are felt to be, as you should be, entirely uncommitted in your own person to the details of a particular technique. In my country, as in your own, your position remains singularly untouched by criticism of this or the other detail. Our hope and our faith are based on broader considerations....

[Keith]

Wow, what a bunch of rubes.

So the banks get the deregulation from the Republicans, totally screw everything up, then sucker the Democrats into bailing them out with taxpayer dollars in exchange for new regulation. Of course the Democrats fall for it because the Democrats are addicted to expanding the role of government and appearing to "be doing something." Of course, simply letting the irresponsible take it in the shorts would be the best way to prevent it from happening again, but since both Democrats and Republican politicians would rather make their money off of lobbying rather than doing something useful with their lives, that ain't going to be on the table.

Then the banks will eventually lobby for deregulation again.

Hey, Democrats, how about going back to caring about the poor, and telling the rich and middle class to get off the tit? For the cost of these proposed moronic bailouts, you could virtually eliminate AIDS in Africa, shore up public defenders so innocent poor people don't automatically go to the slammer, improve public mental health services, and have lots left over to eliminate the deficit and maybe even cut taxes a bit.

But noooo, Dems would rather use government largesse to buy votes.

[anne]

"--------- has much in common with Stalin, Hitler, Mussolini, Franco and the other authoritarian tyrants of the 30's and this needs to be clearly recognized."

What is important for whatever bizarre reason is to write as though a complete maniac.

[anne]

"Hey, Democrats, how about going back to caring about the poor, and telling the rich and middle class to get off the ---?"

What is evidently just as important is to use sexual metaphors to make whatever bizarre point, having absolutely nothing to do with the described proposal.

[Keith]

I mean, I am truly mystified. The market is delivering a big fat smackdown to the truly obnoxious non-reality based undeserving rich, and Democrats are looking to stop it?

I mean, this is even better than a big fat inheritance tax! A tax that automatically falls on stupid rich people! What more could you want?

[Fred]

Well I understand that letter by Keynes and thank you for providing it, Anne, since it confirms what I implied above. To wit, that Keynes understood and was publicly recommending by 1933 the ideas that he more fully presented in the General Theory in 1936. Did everyone else here understand that letter and how it applies to our situation today?

[Keith]

I mean, it really looks like the Democrats and Republicans have coalesced, mainly unintentionally but through common cognitive biases, to a cartel that favors the connected at the expense of the competent.

Rich CEOs who hold their jobs through something other than merit get the Republicans to let them do whatever, mainly because those rich CEOs think they're total geniuses, when they're not. This is because these rich CEOs have lived in a bubble world where they're never had to actually hear that they might be wrong and why.

Then the rich CEOs screw everything up, and face at least public ridicule, and the stockholders and bond-holidng investors might actually learn a valuable lesson about hiring competent people.

But nope, then the Democrats come in and organize a bailout, thus taking away any incentive to actually hire the competent, and preventing the competent and intelligent from getting their just rewards.

In fact, all of this really favors an economy based on lobbying and connections, because that's where the money's at. Just hire the connected bubble-world people, and they'll get bailed out no matter what.

So we just keep getting more and more stupid people with money and power because of the ***** they came out of.

[odograph]

Haven't we done Keynesism all through the last business cycle, with total government obligations growing, even as we head (as I said) to recession?

Now we face the additional "automatic" spending as demands social services increase, as they surely will in any recession.

... not to mention the continuing war funding or cost of service on all forms of debt.

On top of this, some of you are ready to pull the trigger, and name the shape of heightened spending in the midst of this downturn? You will shape it to save home ownership and house prices?

To me it sounds a lot like throwing more money we don't have after bad.

You want some Keynesism? How about bringing college tuitions back to earth? How about giving the next generation a chance to avoid this debt trap?

[anne]

The arguments make sense, both ways, and need consideration.

What Fred has pointed out clearly is that the ideas of Keynes were significantly known, even to a newspaper audience in 1933. My understanding is that Keynes work was most readily accepted in Sweden, which emerged quickly from the Depression. Keynesian implementations in Britain were also effective and set the country to recovery a little slower than Sweden.

Remember how Roosevelt was fought politically from beginning on, even with so much ostensible Congressional support.

Whether Keith is correct and I am missing the extent to which HOLC would be slanted to the benefit of financial companies, I am considering carefully.

[anne]

http://newdeal.feri.org/misc/keynes1.htm

May 8, 1936.

Abstract of Conversation With John Maynard Keynes
By Henry Wallace

The problem of foreign trade, while important, is not the primary economic problem. It is necessary first to increase the domestic demand. With that accomplished, foreign trade will increase in actual volume, while declining in relative importance. If the industrial nations all set to work to increase their domestic demand, they would soon have a revival in their foreign trade without having to worry about it.

Demand can increase through investment--through the creation of new capital goods. It is not necessary to depend either on price declines, or on wage-advances. Ultimately, of course, an increase in capital goods means an increase in consumers goods, and consumption per capita must go up if the balance between production and consumption is to be maintained. But the advantage, particularly in periods of recovery from depression, in raising demand through investment rather than mainly through direct increases in individual consumption is that the operation enlists the cooperation rather than the hostility of the investing groups.

Low interest rates make this procedure possible. American attention should be turned to housing. Comparatively little has been done as yet in the United States, despite the passage of much housing legislation. It should be remembered that interest rates, though low on short-time loans, are not yet low on long investments. It is not yet cheap to finance housing.

Britain appears to be about 18 months ahead of the United States in recovery. I think there is no doubt the United States will follow; but how long the recovery will endure cannot be foretold. I should think not very long. It is vitally important not to relinquish the social services and economic controls that have been developed during the depression, for they will be more necessary than ever in the next one. It is problematical if capitalism can stand another shock like the last one. Certainly, it cannot stand a succession of shocks without social means of alleviating the effects.

Wall Street and the bankers will probably say, when the brief recovery comes, that it came of itself, and would have come more quickly had the government not interfered. They will use that argument as an excuse for going back to complete anarchy. But it is a false argument. The recovery in very large measure is a result of what the administration has done, and further government action is desirable to keep in existence the instrumentalities that have demonstrated their value.

On this side we wonder how you will be able, with your foreign market for farm products drastically curtailed, to adjust output to demand, now that the Supreme Court has decided the federal government has no power to regulate agriculture. Perhaps the new legislation will enable you to accomplish indirectly what you did directly under the A.A.A. But the Supreme Court's decision looks like a pronouncement to the effect that there is no such thing as the United States, and in another great crisis it might precipitate marked separatism in your economic controls. The states will find themselves obliged to attempt singly what the court denies the country's right to do for all the states through the federal government. On this side we do everything you were undertaking under the A.A.A. We have acreage quotas, the equivalent of processing taxes, the compulsion of minorities, barriers against new competition, subsidies, and what not. Most other countries have developed similar devices. It is inconceivable to me that the United States can escape the necessity to do likewise, and efforts to alter the mind of the Supreme Court or to achieve the desired end in some other way seem highly probable. The only way of avoiding that would be through a permanent spontaneous recovery; and I do not expect that....

[anne]

Henry Wallace sent to conservation abstract to Franklin Roosevelt. Roosevelt gave special attention to agriculture from the beginning, and Secretary of Agriculture Wallace was a critical adviser.

[Lafayette]

Keith: Just hire the connected bubble-world people, and they'll get bailed out no matter what.

I keep asking the same question of this kind of post.

Who elected the political connections in your bubble-connected world? Blaming THEM is getting a bit boring - it's too easy and too wrong.

We have no one to blame but ourselves. In our political indifference, we elected the whole lot of 'em.

Any individual with a net worth of above 10 Megabucks is a suspicious candidate for public office. How can anyone that rich possibly imagine what the poor- and middle-classes are enduring?

They never have nor ever will want for anything. And, if they are in politics it is because they haven't the foggiest notion of what to do with their lives otherwise. They really do not need to work and politics brings them a semi-celebrity status that they might not have obtained otherwise.

It is key for the political class of a democracy to be as diverse as possible -- in terms of colour, religion, sex and above all wealth.

[anne]

"American attention should be turned to housing. Comparatively little has been done as yet in the United States, despite the passage of much housing legislation. It should be remembered that interest rates, though low on short-time loans, are not yet low on long investments. It is not yet cheap to finance housing."

So, in May 1936, Keynes was explaining the need to turn to turn to housing and cheapen long term financing to increase demand. The concern was avaliability and price of long term financing, not the price of housing apart from financing. The Home Owners’ Loan Corporation had been formed in June 1933.

[Fred]

Keynes own writing is as applicable today as it was in the 1930's, because Keynes always hints at how his suggestions might go awry and further hints at how to counteract these potential problems. This dreary abstract lacks all Keynes intelligence and the result is a sorry mess of policy suggestions that are most definitely NOT a good idea today.

The agriculture ideas are, not surprisingly, the worst ideas of all. This was one area where Keynes didn't show his usual brilliance. Keynes supported agriculture intervention as an afterthought to his analysis of commodities futures markets. But the progressive approach is not to protect the family farmer but rather to rationalize farming by consolidating the land under corporate control and make the existing farmers employees. And the way to achieve this is to let the existing farmers go bankrupt and be bought out. Even Marx could see that this was progress. Once farming is rationalized in the form of large corporations, then the wild commodity price swings that Keynes discussed in his analysis of the futures markets are not a problem, any more than they are for non-agricultural corporations which use or produce commodities.

[Fred]

So, in May 1936, Keynes was explaining the need to turn to turn to housing and cheapen long term financing to increase demand.

I think we can all agree, based on Keynes underlying theory, that it will be essential to run up the federal debt in the next few yars to counteract the current deflationary forces of the housing bubble collapse and the shift of consumers from dissaving to saving. My idea on how to incur this debt is by fixing the healthcare system and similar progressive initiatives, whereas your idea is to give us another housing bubble. I suspect Keynes would side with me if he were alive today, rather than you.

[Keith]

Let's also understand that Roosevelt's cartel-based approaches, such as the AAA, and NIRA, were disasters (or potential disasters in the case of the NIRA) for the short-term and long-term. Downright counterproductive. They could also be safely labeled fascism, at least under the Mussolini-style definition.

However, Roosevelt's make-jobs programs and associated infrastructute investments were, at the very least, defensible.

[anne]

What housing has represented is a store of middle class wealth, much as small farming with proper protection should be a store of wealth which is highly important in an economy with a significantly rural population. We are not rural, so setting aside thinking of small farming, housing has been a critical walth builder and store for decades.

Veterans mortgages were a significant middle class assistance, unfortunately so largely favoring favoring white veterans. I am not interested in inflating housing prices, simply keeping people in homes presently and assuming housing prices will return to pacing infation as they have historically.

[Keith]

"We have no one to blame but ourselves. In our political indifference, we elected the whole lot of 'em."

But political indifference is perfectly rational.

Limited government, maybe not as strictly limited as Ron Paul would like, of course, is a key to genuine long-term progressivism, where do not end up with a permamnent overclass.

The market itself is presenting the opportunity to part the overly rich fools from their money. It is that process that favors the competent and reality-based over the connected. And interfering too much with that process creates an aristocracy, not equality.

That said, I think there's a solid argument for some level of social welfarism, at least to the point where we can all say to people, "Hey you got what you need from the rest of us through government. Now take responsibility for your own damn life already."

[Keith]

But it's tough for me to get behind otherwise solid social welfare proposals when we have at least one, and possibly two, political parties that wants to bail out everyone for everything. It seems like a formula for bloated government, overtaxation, and the final destruction of the free market system.

Why shouldn't we have a large wealth transfer to the people who were smart enough to rent and save up for a down payment, away from those who followed the herd?

Why shouldn't lazy mortgage bond investors lose their shirts to the smart short sellers?

Why should tax dollars be used to prevent these socially beneficial transfers, especially when there exist actual good uses for tax dollars, and when we need to find a way to lower, not increase government liabilities?

And how is it that Alan Blinder forgot about the basic difference between an accounting profit and an economic profit when he wrote his piece?

[anne]

Early on an approach of the New Deal which was extended from an approach considered by Teddy Roosevelt was to provide for balancing business interests with labor or farm family interests. Interestingly enough, the Supreme Court has just allowed a return to business price regulations as conceived when Teddy Roosevelt was President.

Franklin Roosevelt wanted to balance business influence with competing interests and failed as the Supreme Court limite the approach which Keynes did not approve in any event. Franklin Roosevelt was however always willing to experiment.

[Keith]

"I am not interested in inflating housing prices, simply keeping people in homes presently and assuming housing prices will return to pacing infation as they have historically."

Actually, you are actively using government to prevent a market correction that would induce rational mean reversion in housing prices.

And you are doing so to prop up irresponsible debtors and mortgage bondholders.

You are trying to have the pace of housing price inflation follow its historical norm, right after housing prices exploded way beyond their historical norm. If you really wanted housing to stay on its market growth path, you would let the market correction follow the market bubble, so that housing would be back on its long-run growth path.

In addition, if we don't let the mean reversion occur, then we will depress construction that much longer, because we'll have so many excess houses lying around at an overly high price. If we want building to ever come back, we have to allow the market to clear the excess inventory. (Of course, we may be stuck either way, at least in those areas where the market-clearing price is below the marginal cost of new construction.)

Let the price deflation occur, let the buyers who shouldn't have bought return to renting. Heck, allow them to rent their own house from the bank for awhile, if you like. Let's ease the transition a bit, to prevent severe dislocation.

Let the dumb middle class overpayers/debtors lose to the smart middle class savers. That's good for society, and allows us to move towards the long-term transition we need.

And let's look at the upside. We're finally going to achieve affordable housing, especially for those who saved..

[anne]

Alan Blinder is not thinking of a housing syndicate, or of price regulation whether of housing or home mortgages. I may be missing a mechanism, but a Home Owners’ Loan Corporation would enter the market somewhat as Berkshire Hathaway would in insuring municipal bonds. The protection would be of the homeowner, while holders of mortgage bonds would still have lost. Berkshire is not offering to buy the insurance business at other than current market values which are much below those of 12 or 24 months ago.

[Keith]

"Early on an approach of the New Deal which was extended from an approach considered by Teddy Roosevelt was to provide for balancing business interests with labor or farm family interests."

Yes, and that's essentially forming a government-run cartel, which is poor policy.

Now propping up demand in and emergency by building infrastructure was much better policy.

But a sober assessment of FDR shows he combined some awful policies with some good ones.

I think any decent Supreme Court justice, even a liberal one, would smack down NIRA. It imposed a virtual economic dictatorship. It was insane.