AIG - they broke it, we bought it.

There's a lot of justified outrage about the AIG bonuses. And one man arguing that they are needed. (And here's a rebuttal by Cindy Casella)

It's very hard to support the bonuses. Let's see the contracts. If they are non-legit, like Madoff transferring all his assets to his wife, lets throw the book at them. If they are backdated, if a legal clause doesn't have a period in the right place, refute it.

But, if they are legit, I think we are stuck paying the bonuses. Cause we are a nation of laws.

As Sorkin writes:

"If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right"

Casella argues that union contracts at Ford were rewritten, why not AIG? True. So were contracts at United and a host of others. But these contracts were years into the future. The bonuses were short term. Before the bonuses were due, when they had leverage, Treasury should have renegotiated. Somebody at Treasury doesn't deserve a bonus this year! And any future bonuses should be renegotiated. BTW, Treasure should immediately look at any other "Contractural" bonuses at all the other companies we own. So this never happens again.

Much as I really hate to say it, we should not break laws and "blow-up" AIG in a hissy fit. Cause, for better or worse, we own it. Sorkin is right. Look at it this way - if paying out $165 million in admittedly disgusting and undeserved bonuses helps preserve AIG "more" intact, or stabilizes markets by not retroactively trashing legitimate contracts, taxpayers will reap rewards since AIG will be worth more, and the economy will recover sooner. If pouring billions into stupid undeserved greedy risky bad loans is a good idea, so is pouring millions into AIG. This once.

Yes, this really leaves a bad taste in my mouth, and here's hoping that some "voluntary" pressure will work. And certainly, if there is any flaw in the bonus contracts, revoke them.

Some of the good news from all this is that AIG is not hoarding the money - they are paying billions out to other institutions. Which is good - the whole point is for them to keep the wheels of business rolling. I have no idea if they are paying the right people and how it will work, but at least we can't complain that they are sitting on the money like some banks were.

Be careful what you wish for

Looks like democracy is trying to break out across Pakistan. I don't know what will happen, nor does anybody else, but as an optimist I like to think that, in the long run, the government following the will of the people is a good thing. My friend Ray may differ. See his blog for more up to date details. It sounds like Sharif is willing to step down as leader of the PML (at least not to run for office) in return for concessions. Good on him if this is really putting democracy and an indepedent judiciary in front of his own personal iterests. It at least looks good.

I can't claim any credit from my earlier post on the cricket team attack, since I don't think any Pakistanis have read it. But it does look like the Pakistani people are awake. Lets hope it leads to a good, or at least a tolerable, conclusion.

Let's Lower the Principal on Bad Loans

I find myself agreeing with recent editorials in the New York Times that advocate lowering the principal on bad loans, instead of President Obama's plan to lower interest payments.  What impressed me about this editorial is that they study the rates at which people default (walk away) from their mortgages.

"... default rates for subprime mortgages and other non-prime mortgages are stunningly sensitive to whether a homeowner has an ownership stake in his home. Every month, another 8 percent of the subprime homeowners whose mortgages (first plus any others) are 160 percent of the estimated value of their houses become seriously delinquent. On the other hand, subprime homeowners whose loans are worth 60 percent of the current value of their house become delinquent at a rate of only 1 percent per month."

Since our goal is to prop up housing prices and reduce "toxic" assets by reducing foreclosures, this is strong evidence that reducing principal is a far superior approach to reducing payments.  I think of it as "sabremetrics" applied to politics / economics.

Still, I'd add some wrinkles.  Taxpayers taking a hit to lower loan principal is a nice carrot for those who made bad loan decisions.  There should be some stick.  Ideally, I'd propose that the names of those receiving this benefit be added to a "you blew it" list.  When the next bubble bursts, the same people who received this gift on their mortgages shouldn't go clamoring to the government cause they were stupid or took big risks and lost yet again.  We don't want to reward bad behavior without consequences since it will simply encourage future bad behavior.  In effect, give these guys a yellow card and say "this is, literally, a once in a lifetime bailout".

Such a list is probably hard to maintain.  So, as an alternative, penalize the recipients of this taxpayer largess by reducing the tax deductibility of their interest payments.  Or give the taxpayers a small equity stake in the house.  If they sell it later at a profit, Uncle Sam gets 10%.  And there probably needs to be a blackout period - they can't immediately sell / flip the house and make money just after taxpayers lowered their principal!  No sales for, say 5 years.

This bailout will be more palatable to the great majority of Americans who didn't screw up, if they also get a benefit.  Moderately wealthy non-house owners have arguably benefitted from low interest rates and the huge decline in housing prices.  Many first time buyers can now afford houses.  So, to some extent, they are covered.  Poor non-house owners are getting some nice tax breaks, and will (hopefully) benefit greatly from Obama's initiatives in health care and education. 

I propose that current home owners (with a mortgage), who have not gone underwater with poor or greedy decisions, also receive some benefit.  Either a direct payment, or, more likely, increased tax deductibility of their interest payments.  In the interest of full disclosure, I'd benefit from this.

These tweaks takes a good idea and make it more fair to all.  Thoughts???

Will the Pakistani People Wake Up Now?

I don't claim any deep knowledge of Pakistani politics, though I do follow a friend's blog on the subject.  But here's hoping that whatever reasonable and moderate people of Pakistan still remain, plus, more importantly, any loyal members of their judiciary, government and military, wake up and take control from the extremists.

I wont even go into various ISI shenanigans, culminating in the Mumbai attacks.  Just very recent events:

First, the government signs a truce with the Taliban.  Let's set back women's rights hundreds of years.    This cynical deal lasts only a couple of weeks, as Taliban forces attack soldiers and kidnap local officials.  Any coincidence that this is eerily reminiscent of various Hamas and Hezbollah kidnappings of Israeli soldiers?  Doubtful.  Muslim extremists have learned that their apologists will support such kidnappings.

But the real clincher is a Mumbai-style terrorist attack on a visiting cricket team.  I know Pakistanis love their cricket, will this outrage finally convince them to retake control of their own country?  I don't know.  It's hard for an American to imagine the situation, but if (very hypothetically!) rabid followers of Rush Limbaugh or Rachel Maddow attacked Baseball's Opening Day I would hope that Americans would respond forcefully to denounce them and eliminate their influence on society.

If not, I'm afraid we may have to write off the Pakistanis (and, in the baseball example, we'd have to write off Americans).  There's no hope for them to save their state.

Maybe I'm too much of a "glass half full" guy, but I really see this cricket incident as a potentially good thing - revealing to all just how mindless and nihilistic the extremists are.  Let's all hope the Pakistani people wake up.

Too much Redistribution?

President Obama's budget proposal will raise effective taxes on those making more than $250,000 a year, to raise around 1 trillion over ten years.  That's 100 billion a year.  About 2% of American taxpayers are in this category.  Assuming for round numbers that 100 million tax returns are files (I think the real number is more like 60 million), that's 2 million filers.  By my math, the average tax increase will be $50,000!  Of course, the median will be lower, but I'm still seeing numbers in the $10,000 range for that.   (Sorry, I need to find that link again)  For the very top 1%, the tax increase will average $100,000.

And that's just the feds.  Already cash strapped state governments are planning to follow suit.  Oregon may hike taxes on those earning more than $250,000 by 2%, which is another $5000.  Plus reduce medical deductions for higher-incomes.

Roughly half of this money will be returned directly to lower income Americans as a median tax break of $800.  They will also benefit from a slew of new social programs, such as in health care and education.

As a slightly rightward-leaning centrist, I wonder if this proposal is too much redistribution.  I can accept increased taxes on the wealthy.  And accept some increased funding (and hopefully improvements!) in social programs that benefit all, though they tilt to the non-rich.  But, in a time of fiscal problems, to spend a substantial amount to lower taxes on the poor and middle-class may be a step too far.  If paying taxes is "patriotic", especially with current budget deficits, why do only a few percent of Americans get to be patriots?

In my opinion, if you want to reduce income disparity, especially extreme high CEO pay, do something with the corporate tax codes to discourage this.  

On the positive side, Obama proposes to reform Medicare for cost efficiencies.  A great idea, echoing some of the "sabremetrics" ideas of Billy Beane et. al.

Hooray for Economic Honesty

To his great credit, Obama is going to be honest about the budget.

"After eight years of budget practices that often camouflaged federal spending, President Obama is planning a new strategy of putting on the books as many costs as possible to demonstrate the extent of the nation's economic troubles, senior White House officials say."
...
"The president is determined to treat the American people as adults"

This is partly political, since it exposes how bad off we are today, so that any improvements are more obvious and reflect well upon Obama. But it is refreshing honesty and necessity. Until Americans soberly understand the facts of where we are in deficits, borrowing, and entitlements, there will be little political will for change.

Obama's tentative calls for entitlement reform, combined with increased revenues from letting some of Bush's tax cuts lapse, seem a good direction to start. Just like it took Nixon to go to China, it will probably take a democrat to reform entitlements.

Obama's Mortgage Bailout Plan

The Center for American Progress has an article praising the (tentative) Obama mortgage relief plan. Overall, I'm not sure about all the details of the still sketchy plan, many make sense, but some comments.

"The administration estimates that the average homeowner will be protected from $6,000 in price declines on their homes as a result of their plan."

Since this administration has already thrown out clearly imaginary and unmeasurable numbers on the numbers of jobs that will be saved/created by the stimulous plan, without some hard data I don't believe this. However, even if true, the recent 1 trillionish stimulus plan adds about $3000 in debt to every American. And surely more debt to the wealthier types who own a house. So a couple that owns a house easily has $10000 in increased debts. The $75 Billion in TARP funds to be spent on just this mortgage plan adds about $250 in debt to every American. If you assume an "average" household of 4 people, that's $1000 debt. Factor in that they are probably wealthier and pay more taxes, and you could estimate more like $2000 and up. So it isn't clear to me that this $6000, even if believable, is worth it.

"Importantly, this element of the Obama plan is expected to be nearly costless, as the losses from reduced interest payments are offset by not incurring high foreclosure costs."

I don't know the exact details of the math to support this, but, even if true, this seems to assume that all these houses will be foreclosed. So, if you assume the worst, we aren't paying any more than the worst. Not exactly high praise. Plus, I wonder if this math assumes that none of the newly "saved" mortgages will face foreclosure. I've been seeing recent figures that these "saved" and refinanced mortgages are still defaulting, a few months later, at a near 50% rate.

Don't get me wrong. I do want to see housing prices stabilize, which can only happen with fewer foreclosures, plus incentives (tax breaks, lower interest rates) to encourage first time buyers into the market. I've proposed my own "brilliant" plan. Obama's program has some interesting ideas. But I don't think that claims that it will cost nothing and prop up housing values by some imaginary number they pulled out of their backside are good arguments for it.