Sunday, September 28, 2008


Sam Smith

In Washington, for officials and media alike, numbers are treated like adjectives - created, inflated or diminished to serve the purpose of the moment. So instead of saying "awesome," one declares "$700 billion," as confirmed by the Treasury official who admitted to Forbes that the figure had been pulled out of the air.

Everyone just says it's a crisis and goes about their business resolving it with the same disinterest in solid information that got them into the mess in the first place.

Having been taught by Miss Darnell in high school that you can't add apples and pianos, I have been looking futilely for some hint of a budget for the $700 billion, some sign that the hard working negotiators had actually seen some hard spreadsheets and what was on them, some moderately detailed information on who will get the money and what it will be used for. It's what simpler folk call a budget.

I'm not questioning the existence of the crisis, only it's shape. For example, it is widely assumed that housing foreclosures are the central problem. Good, let's see the figures. How much of the $700 billion will go to cover bad housing loans and how much will go for things such as losses that multi-millionaire speculators experienced in wild business ventures or sneaky fiscal manipulations? How much is funny money, created out of leveraging by hedge funds and others? How much of the loss involves foreign speculators or foreign investments by American speculators?

Finally, how much involves the fiscal cleansing of criminal cash, such as from an illegal drug industry estimated to be as large as legal pharmaceutical trade? Bear in mind, for example, that last year the Coast Guard seized nearly $5 billion worth of cocaine. Yet, together, all of law enforcement grabs but a small percentage of the drugs that are out there, the rest generating huge amounts of cash yearning to be laundered.

Now let's take a closer look at those housing foreclosures. Consider this tale of a home's woe from the Washington Post:

"The most recent owner, Phyllis High Jones, refinanced the house through Countrywide Home Loans in 2006, taking out a $208,000 mortgage that would gradually inflate to $226,000. That same year, Fannie Mae bought the loan from Countrywide. Then the housing market collapsed in Prince William County. Jones defaulted this year. The townhouse went up for auction, but there were no takers. Fannie Mae had no choice but to become the buyer of record -- sale price $226,000. This summer, Fannie Mae tried to sell the townhouse for $149,000. Still no reasonable offers. The price has now been lowered to $69,900."

By current bookkeeping, that is a $226,000 loss added to the federal books. But did it have to be? Unless she was trying to sell her home, the fact that the housing market collapsed doesn't explain Jones' default. More likely the increase in the mortgage and/or some personal problems made it impossible for her to cover it. Thus what appears to be a $266,000 loss may in reality only have been one as small as $18,000 (the change in her mortgage) or the $266,000 minus whatever she still able to pay.

Instead of buying the mortgage for $226,000, Fannnie Mae could have become a passive equity partner with Jones in the amount of whatever Jones couldn't handled. Let's say Jones could have supported all but $69,900 of her mortgage; Fannie Mae would assume that portion. Today, Jones would still have her house, Fannie Mae would have saved itself $156,100 plus whatever profit it makes on its equity when the house is sold down the road, and there would be no fire sale going on - lowering other house prices in the neighborhood.

Multiply this approach by the 54,000 foreclosed homes Fannnie Mae had last June, and the national story changes dramatically.

But Washington doesn't deal with numbers that way. Here are a few examples of how numbers are really handled in the capital, with one of the most important facts being that you probably rightly don't recall the media making much of them.

For example, this from the Christian Science Monitor last April:

|||||| The Pentagon has gone hundreds of billions of dollars over budget in recent years on key weapons systems, including aircraft, ships, and satellite, said a government audit. The Government Accountability Office said for the sixth year in a row that the Pentagon had significantly gone over budget, but according to a report presented to Congress this week, the problem is getting worse.

The Washington Post reports: 'The Government Accountability Office found that 95 major systems have exceeded their original budgets by a total of $295 billion, bringing their total cost to $1.6 trillion, and are delivered almost two years late on average. . . Auditors said the Defense Department showed few signs of improvement since the GAO began issuing its annual assessments of selected weapons systems six years ago.

"Every dollar spent inefficiently in developing and procuring weapon systems is less money available for many other internal and external budget priorities – such as the global war on terror and growing entitlement programs (such as social security)," Gene Dodaro, the GAO's acting comptroller general, said in the report." ||||||

$1.6 trillion - double the amount of the current proposed bailout - and it's one day's news in a few papers and then forgotten.

And it's not a new problem. Back in 2002, CBS reported:

|||||||| According to some estimates we cannot track $2.3 trillion in transactions," [Defense Secretary] Rumsfeld admitted. $2.3 trillion - that's $8,000 for every man, woman and child in America. To understand how the Pentagon can lose track of trillions, consider the case of one military accountant who tried to find out what happened to a mere $300 million.

"We know it's gone. But we don't know what they spent it on," said Jim Minnery, Defense Finance and Accounting Service.

Minnery, a former Marine turned whistle-blower, is risking his job by speaking out for the first time about the millions he noticed were missing from one defense agency's balance sheets. Minnery tried to follow the money trail, even crisscrossing the country looking for records.

"The director looked at me and said 'Why do you care about this stuff?' It took me aback, you know? My supervisor asking me why I care about doing a good job," said Minnery.

He was reassigned and says officials then covered up the problem by just writing it off.

Twenty years ago, Department of Defense Analyst Franklin C. Spinney made headlines exposing what he calls the 'accounting games.' He's still there, and although he does not speak for the Pentagon, he believes the problem has gotten worse. 'Those numbers are pie in the sky. The books are cooked routinely year after year,' he said. |||||||||

Closer to the topic at hand, you probably also didn't know that $59 billion (twice what is expected to be needed to bail out Fannie Mae) couldn't even be accounted for when Andrew Cuomo left as head of Housing & Urban Development in 2001. Said a spokesman for the HUD inspector general: "There is no audit of the financial statements for 1999. The department said they decided not to reissue any of the stuff we mentioned that was problematic - they’re not going to give us what we went through. They simply said, ‘Fine, thanks.’ They said, ‘Okay that was 1999 - what a mess now - let’s move on.'"

There recently has been a lot of talk about earmarks - which used to be called pork barrel until the hog industry apparently sent its metaphor police to Washington. In fact, all the earmarks currently in the budget amount to less than one third of the money you didn't even know had been missing over at HUD.

Why are earmarks so important, then? In part because we know exactly how the money is being spent, whether to help fund needed medical research or build bridges to nowhere in Alaska. They are an odd sum in the national budget that everyone can understand. They are, in that sense, a rare virtue: an oasis of specificity in a desert of uncertainty.

In a sense, the mysterious $700 billion is completely in sync with Washington accounting. No one knows what's it is for, how it will be spent and, when it's gone, who will have gotten what and who will have benefited the most. So don't be surprised at all the surprises they forgot to tell you.


At September 29, 2008 6:17 PM, Anonymous Anonymous said...

Thanks for this excellent essay, Sam. This is for you as a reward(another poster at Nouriel Roubini's great Global Economomitor site put it up a couple days ago):

Tom Paine on debt-based finance:

Mr. Pitt continually talks of credit, and the national resources. These are two of the feigned appearances by which the approaches to bankruptcy are concealed. That which he calls credit may exist, as I have just shown, in a state of insolvency, and is always what I have before described it to be, suspicion asleep.

As to national resources, Mr. Pitt, like all English financiers that preceded him since the funding system began, has uniformly mistaken the nature of a resource; that is, they have mistaken it consistently with the delusion of the funding system; but time is explaining the delusion. That which he calls, and which they call, a resource, is not a resource, but is the anticipation of a resource. They have anticipated what would have been a resource in another generation, had not the use of it been so anticipated. The funding system is a system of anticipation. Those who established it an hundred years ago anticipated the resources of those who were to live an hundred years after; for the people of the present day have to pay the interest of the debts contracted at that time, and all debts contracted since. But it is the last feather that breaks the horse's back. Had the system begun an hundred years before, the amount of taxes at this time to pay the annual interest at four per cent. (could we suppose such a system of insanity could have continued) would be two hundred and twenty millions annually: for the capital of the debt would be 5486 millions, according to the ratio that ascertains the expense of the wars for the hundred years that are past. But long before it could have reached this period, the value of bank notes, from the immense quantity of them, (for it is in paper only that such a nominal revenue could be collected,) would have been as low or lower than continental paper has been in America, or assignats in France; and as to the idea of exchanging them, for gold and silver, it is too absurd to be contradicted.

Do we not see that nature, in all her operations, disowns the visionary basis upon which the funding system is built? She acts always by renewed successions, and never by accumulating additions perpetually progressing. Animals and vegetables, men and trees, have existed since the world began: but that existence has been carried on by succession of generations, and not by continuing the same men and the same trees in existence that existed first; and to make room for the new she removes the old. Every natural idiot can see this; it is the stock-jobbing idiot only that mistakes. He has conceived that art can do what nature cannot. He is teaching her a new system-that there is no occasion for man to die-that the scheme of creation can be carried on upon the plan of the funding system-that it can proceed by continual additions of new beings, like new loans, and all live together in eternal youth.

Go, count the graves, thou idiot, and learn the folly of thy arithmetic!


At October 9, 2008 12:48 AM, Anonymous OhioWolfMan said...

"I'm not questioning the existence of the crisis, only it's shape. For example, it is widely assumed that housing foreclosures are the central problem. Good, let's see the figures. How much of the $700 billion will go to cover bad housing loans and how much will go for things such as losses that multi-millionaire speculators experienced in wild business ventures or sneaky fiscal manipulations?"

An excellent question, to which I am sure not a soul knows the answer. This is most likely why they had to 'make up a really large number'. A second thought, why did Congress and the Senate trust Bush and Paulson's fear-mongering? The problem in the market is confidence, and the P.O.T.U.S. is gloom and dooming?

Here is an observation, everytime the FOMC (Federal Open Market Committee) meets, the market waits anxiously to see if they do what everyone thought they would do. Congress had all the leverage in this situation, the market would have sat, trading volume would have been very low, and everyone would be wildly speculating what Congress would do. The drama of waiting for the action over the weekend would likely have made this credit crisis less potent. The relief of action would loosen the market, and we could have bailed out some mortgage backed homeowners, too. For less than $700 billion.


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