Saturday, September 20, 2008

"That's A Lot of Supertrains"

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

So says Atrios, commenting on the stunning $700 billion bailout plan proposed by the Bush Administration for the financial markets. That would pay for around 17 and a half California High Speed Rails, at the current cost estimate of around $40 billion.

While something needs to be done about the credit markets, several leading economists are saying this is a bad deal. This isn't an economics blog, but you don't need an econ degree to understand common sense about our financial priorities. The US government can find $700 billion to bailout a bunch of bankers who made predictably bad loans, but we're to believe there's just no money for a relatively cheap high speed train? One that would create a significant near-term economic stimulus for California, through the creation of at least 160,000 jobs, and an even larger long-term economic boost through job creation, gas savings, lesser carbon emissions, and the green dividend.

The problem is not that HSR costs money we don't have. It never was the problem. Both California and the USA have more than enough money to build and operate HSR. No, the real issue is one of priorities. Since the 1960s this country has believed that passenger rail is not worth saving, that we would do just fine to build an economy based on freeways and ever-complex deregulated financial instruments. 2008 ought to suggest how well that worked out.

Those who criticize HSR do so because they do not believe passenger rail is a priority. They're the same people who look at a $3 billion cut to California public transportation and clap their hands. The considerable fiscal benefits don't sway them, giving Californians a real and true choice doesn't sway them, and as we saw even good old truth won't sway them.

Nobody expects to really see $700 billion spent on "supertrains" (although if it's between that and a blank check bailout, I'm for the trains). But it does suggest that if the US government can seriously consider such a move, surely it should not be difficult to find the money to build high speed rail. This nation is going to have desperate need of economic stimulus, sustainable transportation, and reliable and safe infrastructure. California high speed rail offers all of that. Rather than mortgage our nation's future to prop up the bad choices of the past, it makes so much more sense to spend some money we have now to prepare ourselves for the future.


Rob Dawg said...

Since the 1960s this country has believed that passenger rail is not worth saving..

So the tens of billions in subsidies given to Amtrak are evidence of...?

Rafael said...

@ rob dawg -

... a political system that protects the interests of minority postions against those of the majority. Relative to other countries and US GDP, the cumulative public investment in Amtrak doesn't amount to a hill of beans.

@ robert cruickshank -

you point out, quite rightly, that opposing HSR on the grounds that California cannot afford it is bogus. Rather, the question is if California should or wants to. According to the most recent poll results I've seen, a clear majority of voters favor prop 1A - but that was prior to last week's financial meltdown.

The $700 billion bailout package compares to roughly $1300 billion in subprime loans outstanding. Many of these will default but then again, the government will be buying the collateral debt obligations (bundles of bits of mortgages) at a deep discount. Plus, many subprime mortgage holders are in fact doing their level best to keep up with payments because they don't want to lose their homes.

The problem here is not that all CDOs are inherently worthless. Rather, these instruments are so opaque that no-one knows how to assess their intrinsic risk and hence, value. Combined with a deluge of actual foreclosures, demand for these securities has collapsed and no-one knows if they can trust any financial institution's balance sheet. Even though interest rates are low, banks are having trouble raising new money, so there's a credit crunch that threatens to strangle the entire economy.

It's entirely possible that the government will buy these securities in open auctions in which the price will be based exclusively on how badly a given financial institution wants to purge its portfolio. In other words, while the taxpayer will almost certainly take a hit, it's not a given that it will be the full amount. Note that the Resolution Trust Corporation (RTC) created to clean up the S&L mess in the 1980s even ended up generating a net profit for the IRS.

Therefore, comparing the $40+ billion total price tag for California's HSR project with the federal bailout of the financial sector strikes me as a little wide of the mark. The former is a choice, much like the decision to invade Iraq was. The latter has become necessary to avoid Grapes of Wrath - the Sequel.

However, this argument works both ways. Just because there will be a massive bailout of a core industry does not mean California's transportation needs can or should be ignored. As this blog has argued for months, HSR not only addresses real transportation needs but is likely to so at a cost that is lower - or at least no higher - than the alternative.

As with the mortgage crisis, the longer you sit on your hands, the more it's going to end up costing you in the long run.

Anonymous said...

I just want to clarify the number.

The $700B rescue package is to buy the "bad" loans. The majority of these loans would be at least partially paid back. A loan worth $300K may be paid back for $250K. Meaning that the $700B is not all really paid out.

Robert Cruickshank said...

My point isn't that a bailout is unnecessary, although I do oppose this particular plan as currently constructed. Instead it's about priorities. It's not enough to bail out the financial industry, because the underlying problem is that high energy prices burst a housing bubble created because folks couldn't afford housing without exotic loans.

HSR is part of a strategy to address that underlying weakness, by providing transportation that isn't going to be hit by inexorably rising oil prices, providing well-paying jobs that will last perhaps a decade, and building a passenger rail backbone that provides value and savings for commuters, business travelers, and Californians who just plain want to travel.

Anonymous said...

Well 700billion here 80 billion for
AIG ..800bill for Fannie Mae..where
are all the The Reason Foundation
members..the Jarvis poeple? what a bunch of ideology hipocrities!!!

Cas said...

These issues are more linked than simply by a comparison of opportunity cost. The current bailout plan does nothing to fix the underlying problem. It avoids an immediate collapse but there's no guarantee that the price the government pays for the bad debts will be enough to keep the major institutions solvent. Even if companies do avoid bankrupty, absent major regulatory reforms this will all just happen again, and probably sooner rather than later.

The ultimate problem is an economy that is built on speculation and debt rather on production of things people need. A long-term solution to our economic woes not only requires good regulations, it requires massive infrastructure investment to create jobs and build a productive base for future growth.

High-speed rail and rail improvements in general are an obvious place to invest in our national infrastructure. Unlike a bailout or military spending, building high-speed rail has a serious return on investment.

I think there's a very high chance that this bailout will fail. That will mean that we'll have to rebuild our economy on a new foundation, starting early in the next presidential administration. Rail, along with green energy in general, will be a key part of that foundation. California is well-situated to lead the way.

Rafael said...

@ robert cruickshank -

what "exotic" loans? Too many people simply wanted to live beyond their means and bought larger homes in fancier neighborhoods than they could really afford.

The financial industry exacerbated this all-American demand for instant gratification by paying its loan officers commissions on deal volume rather than a slice of the repayments. That geve them an incentive to sell the largest possible mortgages, knowing full well that some of their customers were not financially literate enough to understand that they were getting in over their heads.

In particular, reducing or even waiving down payments and offering teaser rates were popular strategies for financial institutions in search of market share rather than a sound debt portfolio. That's because collateralized debt obligations (CDOs) de facto allowed them to sell mortgages to institutions that could otherwise not participate in the mortgage market. This included foreign banks as well as highly leveraged investment banks and hedge funds.

Meanwhile, modestly leveraged retail banks were able to keep selling fresh mortgages, aided by years of low interest rates, a foolhardy level of trust in the vaunted ratings agencies, lax regulatory oversight plus federal tax laws that massively favor home ownership over rentals.

The entire house of cards fell apart when rising oil prices triggered a first wave of foreclosures, which quickly caused new housing starts to plummet. That in turn forced many construction workers out of work, so they couldn't pay their mortgages any longer. From there, things snowballed.

So yes, the rising price of oil did play a role but only as a trigger. The fundamental problem is that money was allowed to chase borrowers rather than the other way around.

Anonymous said...

I agree with almost everything CAS has written, but not all.

Robert as a historian should very well know, the government tried very had to stop the bleeding after the crash in 29. That bubble was caused by speculation in the stock market as a whole and wild 10% margin on stock purchases. They pumped plenty of money in, but it only stopped the debacle short term. The country even with WPA programs etc., really sank back into depths, from which only the buildup to WWII rescued us.

I fear a similar repeat, but for sure CAS comments that real reform is needed is the key. Somehow, we seem to feel that this rescue is going to prevent the average guy on the street from feeling any pain.

Nonsense. The aftermath will be extreme. The expansion of the money supply will cause major inflation, and that is going to affect all of us.

Now to single out this HSR project as being wonderful is just plain nonsense. It is a poorly designed project being led by a bunch of incompetents.

Rafael's point that the whole economic system being put on the verge may well affect the outcome of this ballot Proposition is on target. It would really be interesting to have a new Field poll done now. Rather than 22% of the voters knowing about HSR, how many are now aware? How many favor the project now, and then of course you have the disaster with Metrolink.

Anonymous said...

@ rafael,

Note that overall, the S and L bailout cost several percent of GDP. Overall the government didn't make money, the bailout cost about 160 billion. The original RTC was designed to sell mortgage assets AFTER the S and Ls were already taken over by the government. They took a major hit there, and only later made a small profit from selling those assets on the open market, making a net loss.

As for exotic loans, look at option ARMs, they were exotic enough. A major problem was that people had no equity in their houses, so they quickly became underwater when housing went south.

I think Robert's point is a good one. Many politicians say we cannot afford infrastructure, health care, etc. while they jump at the first opportunity to bail out the filthy rich on Wall Street.

For a great description of a much better plan than Paulson's, see Dean Baker's blog

Spokker said...

"and then of course you have the disaster with Metrolink."

The Metrolink crash has nothing to do with HSR.

Robert Cruickshank said...

Exactly, spokker. Using the Metrolink disaster to undercut HSR is another example of how "truthiness" dominates the HSR deniers' world. They haven't a clue what they are talking about and are merely trying to grasp at any straw they can find to try and justify their anti-HSR stance.