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Tuesday, November 25, 2008

Paulson must go!

It is clear that the Treasury is flailing.

Mr. Paulson should go. He has let the country down badly.

In March the coming crisis was forseeable, yet when it hit in
September, Mr Paulson and his colleagues did not have a contingency
plan in place. The Treasury was dominated by Wall Street alumni so
when they did begin crisis planning, groupthink concentrated their
minds on saving Wall Street. Their blindness prevented them from
seeing that saving Wall Street led through saving Main Street.

They really need to keep the mortgages whole possibly through a widely
available shared appreciation plan, then the whole pyramid of phatom
securities would also be made whole.

Finally Secretary Paulson's recent refusal to consider taking steps to
aid homeowners in defiance of Congressional legislation renders him
unfit for office.

He must resign immediately.

Sent to the New York Times

Who is to Blame

In his recent column, Mr. Jacoby tells us that regulatory rigor increased dramatically under the administration of George W. Bush (The blame for bloated economy, Boston Globe, November 19, 2008).

Among the data that he presents in support of this view is the fact that the number of regulators almost doubled to 264,000 from 2000 to 2008. But numbers do not tell the whole story. The question is whether they were effectively deployed.

There are enough clues to suggest that they were not. For some time, senior scientists at the FDA have been complaining that their scientific recommendations were being watered down or overruled by their political superiors. We have similar complaints at the Environmental Protection Agency. At the Justice Department we have seen a politicization of the non-political jobs.

In addition an enormous regulatory regimen has been established to monitor the activities of government officials and contractors in Iraq: a group of regulators with no influence or responsibility for actions in the United States.

Yes, there many be more regulators, but are they engaged in effective regulation? I think not because there is no political will to regulate.

Sent to the Boston Globe

Fighting the Financial Crisis

Secretary Paulson answers the question about what the administration is doing for homeowners by saying that they are increasing the access to low cost mortgages (Fighting the Financial Crisis, One Challenge at a Time, New York Times, November 18, 2008: A23). It is clear from what he wrote that he just does not get it. People already have mortgages, their lenders refuse, or are unable, to renegotiate the mortgages, so that people are facing foreclosure.

What we need is a totally different approach that will enable people to pay their mortgages with government help and thus remain in their homes. This will contribute to stabilizing the housing market and, perhaps more importantly, stabilizing neighborhoods.

Some version of a plan involving a Shared Appreciation Mortgage would be an appropriate response. In such a plan, the homeowner pays what he or she can, the government pays the remainder of the monthly mortgage. Over time both build up equity in the house which they share proportionally when the house is sold.

If Mr. Paulson is unwilling to consider such a plan then he should be replaced by someone more in touch with the problems facing Main Street.

Sent to New York Times

Memo to Congress: Act Now

You report that Barney Frank claims that the economic rests on three legs. He is incorrect, there is a fourth: the towns, cities, and States of America (Memo to Congress: Act Now, Boston Globe, November 18, 2008: A22). Any stimulus package must provide an infusion of funds to these lower levels of government so that they do not lay off employees and contribute to a downward spiral in employment and tax revenues. You imply this in your editorial.

The reluctance of Secretary Paulson to provide direct help to those facing foreclosure is incomprehensible. The best plan is for the government to go into partnership with the embattled home owner and help pay the mortgage. Then both homeowner and government will build up equity in the house which can be realized when the house is ultimately sold with each getting their proportionate share.

If the Secretary is unwilling to take this kind of step -- there are several similar plans around -- then he should be removed from office and replaced by a person more in touch with the urgent needs of Main Street.

Sent to Boston Globe

Thursday, November 20, 2008

Two Letters on the Automobile Companies

I strongly agree with your correspondent, Michael Flaherty (Letters, Boston Globe, November 13, 2008). I would go further. As we are in a stage where government intervenes at will into the economy, it should do the right thing and compel each of the three biggest oil companies to merge with one of the big three automobile companies.

Each oil company has a division involved in the development of providing energy through renewable resources. The merger would strengthen the manufacturing arm of these divisions. Over a five year period the automobile companies could move over to building wind turbines, high efficiency batteries, and solar cell arrays, as well as fuel efficient cars.

The beauty is that no taxpayer money would be involved. We would all be winners

Sent to Boston Globe


Your lead editorial and your columnist, Bob Herbert (whom I usually agree with), try to make the case for a taxpayer bailout of the automobile industry (New York Times, November 15, 2008).

Such an intervention in the market would be wrong and ultimately ineffective. The bailout of Chrysler merely postponed the inevitable for 30 years.

Mr. Herbert puts the case most strongly; " The U.S. auto industry is the cornerstone of American manufacturing. It supports millions of jobs, directly or indirectly, in a vast array of businesses.

Start with the thousands of parts in each vehicle. They are produced by suppliers across the country, from one coast to the other. Those supplies have to be manufactured, packaged and transported. Truck drivers, railway systems and shipping companies are involved.

And, of course, there are dealers everywhere. And the auto repair industry. And the insurance industry. And vast systems of advertising supporting every kind of job you can imagine, from messengers to accountants to film makers and beyond. All of that advertising funnels absolutely crucial revenues to television, magazines, newspapers ­ you name it."

The problem is that all these people are engaged in supporting the 21st. century equivalent of buggy and buggy whip makers. Imagine what could be done in the sphere of renewable energy, in the sphere of public education, and in the sphere of infrastructure development if these resources were committed there.

The problem lies in the bridge between here and there. Allowing Detroit to collapse will be enormously disruptive. The solution lies not in propping up Detroit but to provide support for the workers, suppliers, and contractors who will lose their sources of income. First unemployment benefits must be boosted; second the government should take over the health care plans of those who lose their jobs as a first step in a national health care system; third, a Public Works Administration should begin a major investment in repairing, refurbishing and adding to the national infrastructure. Meanwhile new bottom up initiatives from the entrepreneurial people who are no longer bound by their shackles to Detroit, will emerge.

Yes, I have laid out a best case scenario but we are entering the era of the "Audacity of Hope."

Sent to the New York Times


Reforming the Turnpike: Higher Gas tax

The Governor's Plan to reconfigure the turnpike is ill conceived
(Patrick seeking turnpike shakeup, Boston Globe, November 11, 2008:
A1; Redirecting our Transport System, Boston Globe, November 13, 2008).

As an organization theorist, I find the idea of two different agencies
running different sections of the turnpike as absurd as the current
system of one road being run by the turnpike and the rest by Massachusetts
Highways department (except for the Tobin Bridge which is run by
Massachusetts Port Authority).

We need to simplify not create an equally complex infrastructure. The
problem with two agencies is that financial resources have to be
expended to coordinate their activities where the two roads meet. If
coordination is poor we will have a strip on unploughed and unrepaired
road because both agencies pass the buck saying "It is their job." At
least that's what happens with the ploughing of a section of sidewalk
near my home.

Here is the solution:
1. Give the Mass Pike to the Highways Department.
2. Give the Tobin Bridge to the Highways Department
3. Remove all the tolls.
4. Increase the gasoline tax to about $0.50.

Here is why:

All of us benefit from the turnpike every day of our lives. The food
we eat, the consumer products we buy all reach the cities and towns of
the state via the turnpike. Those of us who live closer to it may
benefit a little more through reduced congestion when other users
travel the turnpike rather than local roads. Those of us who use the
turnpike benefit most of all, but we do not benefit more than those
who use Interstate 95 and pay no tolls at all.

It is therefore clear, that the turnpike tolls are an additional tax
imposed on those who drive on the turnpike; logic -- as opposed to
politics -- tells us that, as we all benefit from the turnpike then we
should all pay for it.

Last year, the gas tax at 23.5 cents per gallon raised about $600
million. Raising the tax to 50 cents per gallon would raise about
$1.26 billion or an additional $626 million. While, if oil prices stay
constant, the price would increase to about to about $3.00 per gallon.

This would cover all the turnpike revenue from tolls (about $250
million as of December 2006) and leave over $370 million to be
allocated to the road and bridge repairs that we desperately need or
to pay down the debt.

Sent to Boston Globe

More on Bailouts

The latest mortgage bailout proposed by the Administration is lighter than the New York Times believes (Foreclosure Prevention Lite, New York Times, November 13, 2008: A28).

Nearly all of the plans so far require an adjustment to the mortgage. None of these plans solve the problem of the phantom derivatives (monetized mortgages, credit swaps, and insurance contracts) built upon the shaky foundation of bad mortgages. An adjusted mortgage will a lower face value than the original or with a lower interest rate, and longer term will not create the income stream that the initial owner of the security expected. The price of the security will decline and the banks and insurance companies will only be a little better off than they are now.

The thing to do is make the mortgages whole. To his credit, this was suggested by Senator McCain during the campaign. This will be expensive and it will, alas, benefit the people who sold these mortgages, the foolish people who took out these loans, and the even more foolish people who bought the securities. But this may be the only way to stabilize the world financial system.

They way for the government to do this is to enter a partnership with the homeowner who is at risk. The homeowners will pay what they can afford on the mortgage, the government will pick up the rest. As the mortgage is paid down, the homeowner and the government will build up equity in the home and when the home is eventually sold, the homeowner and the government will share in the proceeds proportional to their total investment. If the house is sold when the outstanding mortgage is still greater than the sale price, the mortgage will have to be rolled over to the new owner under the same terms.

Sent to the New York Times

This is the only way to get out of the mess and it is unfortunate that the government has spent several months on the unsuccessful Plan A, B, and the most recent Plan C which will meet the fate of its predecessors: too little, too late.

Thursday, November 13, 2008

China's Stimulus Plan

Over the last three years, China has increased its foreign currency reserves by about $700 billion dollars of this about $400 billion is in dollar denominated assets. From 2006-2007 the increase in China's US currency assets rose $220 billion.

With its announcement that China is to invest in its infrastructure some $568 billion (China Announces Sweeping Plan to Aid Economy. New York Times, Monday, November 10, 2008:A1, A8), it seems that the US may have great difficulty borrowing from China to fund its current wars, the $700 billion bank bailout and the other necessary bailouts that will likely require an equivalent amount. And then there is the much needed stimulus package of about $300 billion.

Who and where are the lenders that will step into the gap?

Sent to the New York Times

Campaign Notebook: Palin and the Bake Sale

Governor Palin mentioned yesterday in a sarcastic tone that if the Democrats slashed defense spending by 25% we would have to hold bake sales to support our troops (Campaign 2008: We would have to hold bake sales to support our troops in Iraq, Boston Globe, October 31, 2008: A11).

Of course, that is exactly what people had to do to buy body armor for their sons and daughters in Iraq in the early stages of the war: under the Republican administration.

Sent to Boston Globe

Drivers take to the Road Again as Gas Prices Fal

So we are going back to our extravagant ways (Drivers take to the Road Again as Gas Prices Fall, New York Times, October 30, 2008:B1, 14). The fall in gasoline prices opens up a major opportunity for enhancing state government revenues -- and boy, do they need enhancing.

We mostly adjusted reasonably well to gas prices of about $3.80. States should therefore increase their gasoline taxes to about $1.00 to bring gasoline prices back to the $3.80 level. Here in Massachusetts, the gas taxes are $0.23. An extra $0.75 would enable us to abolish tolls on the Massachusetts Turnpike; provide much needed funds for the repairs to our tolls and bridges; and provide some relief to the poorest among us who might be harmed financially by the gas tax increase.

By increasing gasoline taxes, we will also encourage the development of fuel efficient cars and trucks. Surely that's a win-win.

Sent to New York Times

"Borrow-and-Spend" Republicans

Senator McCain has been excoriating Senator Obama for being a tax-and-spend liberal. But McCain himself, if elected, will be a "borrow-and-spend" Republican like his predecessor.

I would rather not pass on the costs to my grandson. Better to tax now and not pay the costs, financial and political, of borrowing.

Sent to Boston Globe