THE CURMUDGEON CHRONICLE - #246

THE CURMUDGEON CHRONICLE ©

AN IRREVERENT VIEW


Time Line: October 1, 2008
Date Line: Flemington New Jersey

It is time for a Congressional reality check.

As I understand the arithmetic, the sub-prime mortgage situation is as follows: Bad credit risk mortgages that totaled about $20 billion were packaged with about $80 billion of loans with conventional credit acceptability. The combined $100 billion was assembled into Packages and sold to institutions and investors around the globe.

Some of the poor credits have defaulted and that has raised doubts about the quality of the Packages which were sold as AAA risks. There is no doubt that the risks were not AAA, and there is little doubt that the Packages will pay off largely as projected, albeit with more difficulty than should accompany AAA risk investments.

On the basis of that scenario, the “crisis” would be a ho-hum event but for the fact that Investment Bankers always alert for an easy road to profits sold “derivatives” based on the Packages. Thed derivatives were wagers on a variety of aspects related to the Packages. They ranged from bets on interest rates in force, to ultimate collectability and all points in between. There were no hard assets underpinning the derivatives other than the credit of the parties to the transaction, all of whom had forgotten that the value of the underlying Packages was only a fraction of the amounts gambled by the buyers and sellers of the derivatives.

When the underlying value of the Packages came into question panic arose and spread. The United States was the fount from which the contagion was unleashed and US institutions, banks, brokerage firms and Rating Agencies were at the forefront. Some of those are no more and some are on the road to oblivion.

We are being called on by the administration to “rescue” the survivors and the economy by giving $750 billion of newly printed paper money to its Secretary of the Treasury to buy up the derivative wagers. That is like buying losing Pari-Mutual tickets at the race-track; a far different matter than buying up (or guarantying the collectability of) $20 billion of sub-prime loans and properties. I commend the Republicans in the House for refusing to go along with the Paulson plan.

We are told that the Paulson plan will assure jobs, credit availability, cure the common cold, and end underarm perspiration. I doubt that is true, (Well, maybe it will cure the underarm problem but it will not do much for jobs and credit for Americans). I wonder if there is a better way to use $750 billion.

Imagine the effect of $150 billion spent on infrastructure development; $100 billion spent on education; $150 billion spent on research and development of industrial capacity; $100 billion spent on medical research, and $100 billion spent on development of energy alternatives. That is a prescription for full employment; prosperity would engulf us.

There would also be $20 billion to underwrite the sub-prime mortgage loans and anther $230 billion in reserve to backstop those financial institutions that merit the help. I fear the Congress will adopt the Bush/Paulson/ Bernanke approach, giving us the financial equivalent of a declaration of war on Iraq.

Seven-hundred-fifty billion dollars to underwrite payment of Wall Street’s gambling debts is not a proper government purpose. I admit my arithmetic may be off by $50 or $60 billion, but fortunately there is a reserve of $230 billion around to handle that kind of glitch.

If we did spend for growth there would be another benefit for Republicans and Democrats alike: there would no need for long term tax increases. Indeed we would shortly arrive in that Beulah Land where the highest marginal rate is 12% for all and you have to earn more than $100,000 to pay any taxes whatever.

Howard Stamer