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Understanding the Size of the Bailout Proposal - And Why I Think The Bailout Is Worse Than The Crash
As is now common knowledge, the topic du jour througout America is the $700 billion Wall Street bailout originally proposed by Treasury Secretary Henry Paulson.
But, really, what's $700 billion among friends? After all, it took about $150 billion to finish the S&L bailout (thanks, Keating Five!). And we all recently "bought" shares in AIG, the nation's largest insurer. The price tag? A paltry $85 billion.
So, what's so tough about $700 billion? We can't be out of money - after all, our Mint still has paper and ink, right?
I'm not an economist, but I wanted to try and wrap my head around just how much money we're talking here. I decided to compare this bailout price tag with some other numbers. What I found floored me.
Remember, now, Paulson wants $700 billion dollars.
$695.4 billion: Gross domestic product of Taiwan. (If the bailout were a country it would be the 21st largest GDP.)
$580 billion: cost of Iraq war - to date.
$515.4 billion: proposed 2009 Pentagon budget
$315 billion: John McCain's nuclear energy plan
$295 billion: amount of Pentagon overspending on 2008 budget.
$150 billion: Obama's energy plan cost
$50-$65 billion: Obama's health care plan cost, per year
$59.2 billion: proposed 2009 U.S. education budget
$10 billion: McCain health care proposal cost, per year
$42 million: Carly Fiorina's golden parachute when Hewlett-Packard fired her
$38 million: Paulson's post-2004 salary as Chairman & CEO of Goldman Sachs
$43,371: The 2004 median Ohio household income
$32,000: The average national debt obligation of each American
Of course, you could always look at the bright side. The proposed bailout is only 7% of the $10 trillion that is expected to be the national debt around January 20, 2009.
Personally, the way I've come to see this is as follows. When my wife and I looked at moving into a new house in 2004, we had a particular number in mind, both for the cost of the house and the monthly mortgage payment. We knew we couldn't afford more, even though we were offered bigger mortgages. So, we stayed within our means.
I recognize that some borrowers were not intending to live beyond their means - rather, they were sold on overextending themselves by predatory lenders (here's looking at you, Ameriquest). However, the fact is that these borrowers did not do their own research. They should suffer the consequences. Yes, it's rough. But I cannot afford to help pay for my neighbor's foreclosure, lest I suffer a foreclosure of my own.
I have absolutely zero sympathy for those investment houses that are going down in the wake of the mortgage and credit crises. If the homeowners were irresponsible for borrowing excessively, these institutions have treble responsibility. It was their relaxed procedures - stoked by the greedy rush to grab big fistfuls of the subprime pie - that caused them to lend so much - in many cases, to people they would have rejected pro forma three years ago. Now, they want hundreds of billions of dollars - not to pay off debts and close their books, like the rotten S&Ls, but rather to remain operational and ultimately become profitable again.
This is analogous to me hiring a driver with two DUIs, a previously suspended license and five prior accidents...to drive my son's school bus. The reason? Well, the driver knows what went wrong before, and promises to not let it happen again.
To hell with that nonsense. No bailout. Let Darwinian economics run its course. I believe we'll survive a crash - if there is one; no one has projected exactly what would happen if we don't bail out Wall Street. Moreover, I think we would come out, long-term, in a much sounder position than if we keep bailing out these greedy firms and their greedy borrowers.
No corporate welfare. No raising my debt obligation by $3,000 to help someone who decided to get a $300,000 mortgage while making $40,000 a year, just because it was there. And no cutting off the energy and health care plans we so desperately need, just so Maurice Greenberg and his pals can have their billion-dollar cakes and eat them too.
Yes, there will be suffering. I understand that letting those irresponsible investment houses crash will cause job loss and further-eroded confidence in our dollar. I don't dismiss any of that, and I know times will be hard.
But isn't one of the major conservative fiscal talking points that the market can self-correct? And isn't letting a badly-managed business fail, snapping up the useful parts, and putting them to work in a better-managed business part of that self-correction?
These are only my opinions, formed after several days of researching this issue. I'm trying to apply common sense to this issue, but I'm not an economist. What do you folks think?
Comments (43)
I don't know how we as a nation and country send a billion here and a billion there to other places in the world without the American public knowing or at least saying something? I know that government makes policy decisions based on national security. I think it might time to reel in and roll back the empire--700 military bases we have everywhere in the world. I know this is going to be unpopular but someone has to tell the American people the truth; otherwise we will find out the hard way. Just like we are learning about Wall Street.
I guess we just keep the government printers working over over-time until the stuff hits the fan?
September 23, 2008 6:00 PM | Reply | Permalink
Right on OP!
No way, no how, no bailout.
September 23, 2008 8:26 PM | Reply | Permalink
An estimated 2.8 million U.S. households will face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage's value by the end of next year, predicts Moody's Economy.com.
do the math:
$700 Billion =
1.75 million homes at $400,000 mortgage
2.33 million homes at $300,000
2.80 million homes at $250,000
3.50 million homes at $200,000
Looks like Paulson guessed a reasonable mortgage would be about $250,000. The median priced home in America since Feb. 06 has been bouncing around $250,000,
says here: http://www.census.gov/const/uspricemon.pdf. Too bad the home buyer won't get the home, but the bankers will get the money AND the home! Sweet.
Or they simply guessed the taxpayers could handle something slightly less than the price of the Iraq War. More would be rather hard to sell.
September 23, 2008 9:06 PM | Reply | Permalink
I think you're wrong.
The problem is when any bank fails that causes all the other banks who have loaned them money
to write those loans down to zero which causes at least some of those banks to fail and there's no reason for this cascade to halt until every bank locks its doors.
That's wrong.
September 23, 2008 6:07 PM | Reply | Permalink
I see what you're saying. Two things, though.
(1) I don't think every bank fails in this scenario. It's been estimated that maybe half of the nation's 16,000 investment banks might not make it through this. But, if they're making bad loans - to individuals, or other institutions, or wherever - that's their problem, not mine.
(2) I have a problem with the logic of bailing an institution out of its poor business decisions. I think this causes a problem with those institutions who DID manage themselves correctly. Moreover, bailing out the moronns - especially without any help for the homeowners affected in this - is simply wrong to me.
September 23, 2008 6:27 PM | Reply | Permalink
The problem with your thinking is that unless you're a tenured professor, 8,000 bankrupt investment banks is your problem. And regardless, it's everyone else's problem. The crash that preceded the Great Depression was also the result of over-leveraged banks. The bankers paid their dues in the end, I suppose, but the real victims were the families in Hoover towns. I'm not saying that we're headed for a depression or that the bailout plan shouldn't be modified, but there are real consequences to these banks collapsing. Broadly speaking, credit will dry up. Banks will be afraid to loan money. Jack & Jill Smith won't be able to get a loan to buy a house at all. More importantly, businesses won't be able to get credit, and many of them will have to downsize. Then Jack & Jill will be laid off, and they definitely won't be able to buy a house. There have been numerous threads that spell out the scenario in more detail than me. I encourage you to educate yourself on the matter and then see whether you still feel so comfortable with losing 8,000 banks. For starters, I recommend one of shrivti1's comments: http://tpmcafe.talkingpointsmemo.com/talk/2008/09/i-say-let-em-crash.php#comment-3121636
September 24, 2008 2:27 PM | Reply | Permalink
I believe you and the poster you quoted are wrong. I've read those arguments, and my concern for this money being pissed down a black hole of corporate pirates is not allayed in the slightest. What I read is, "We gotta do something now, or else we'll have a global meltdown!"
This is like watching a kid get sick from gorging himself on ice cream and cookies - and then concluding that the kid's real problem is the lack of ice cream and cookies, and giving him the keys to the local Baskin-Robbins warehouse, with only his word to be more careful in the future as our promissory note.
I understand that a massive failure is one of the possible consequences of allowing the damaged houses to fall. I repeat - POSSIBLE. The truth is, no one knows for sure what will happen if the major culprits are simply allowed to fail. And yes, I've seen photos and read accounts of the Great Depression. I don't want to do bread lines. But I don't want to just put them off with irresponsible enabling, either.
What I do know is that we can't keep doing the same things, over and over, and expect different results. How many bad S&Ls, banks, airlines, investment houses and mortgage companies do we have to prop up before we actually confront the real problem?
Any huge financial deal with a clock in it - like this bailout proposal that proponents want passed by week's end - is usually a scam. This is the exact same "rush to panic" that preceded our involvement in Iraq. You can only cry "wolf" so many times before I stop running to save you, only to find out that you were just tricking me after all.
The problem with the bailout - that I'm not hearing addressed at all - is that we keep putting off the moment when we have to take our medicine. Maybe we have to do something - after all, mom-and-pop retirement accounts could go up in smoke here too as collateral damage. But rushing to throw more devalued paper at this festering problem is not the best solution, and as our history has shown, never has been.
While your concern is appreciated, you can rest easy about educating myself. Santayana was no economist, but he was right about one thing: those who fail to learn from the past are destined to repeat it. Until I see some evidence that we're prepared to put maximum safeguards on any bailout - and that same bailout is going to help Main Street as well as Wall Street - I remain firmly opposed to it.
September 24, 2008 2:47 PM | Reply | Permalink
What do you do for a living that makes you able to pay YOUR mortgage? Is that job going to still be there? Do you have enough food in storage to feed your family for 2-3 years while we work through the problems? Where are you going to live? Do you know someone whose house is paid for that will be able to put a roof over your head?
I don't believe there is anyone who is any more pissed than I am that this is happening. We played by the rules, always lived below our means, saved money every month, even if it meant doing w/o something we wanted, chose a job that didn't pay very well in comparison to others in exchange for health care and a good pension, sent our kids to college so they didn't have to be burdened by student loans, planned for retirement, so that even after inflation eats up a good portion of our pension we had enough money in safe investments that we could draw on to make up the difference, and paid for long term health care insurance for much of our working lives so that we would never be a burden to our children.
We never borrowed more than we could afford to repay. We never ran up our credit card debt. We never refinanced our house to buy a boat or go on vacation or buy fancy clothes and jewelry.
We did everything right. And now we are being asked to finance a bailout for people who didn't.
There's nothing I would like better than to tell them to take a flying you know what at a rolling doughnut...But I can't. Because if I do, we lose all the material things we've worked so hard all of our lives for, as well as our peace of mind when it comes to the future. Our kids lose what they've worked for, and our grandchildren will have no foundation to build from. If I don't bail out these greedy bastards, I lose. They may well deserve what they get...But I don't.
So if I have to suck it up and take this chance, I guess that's what I have to do. I hope to God those we have entrusted our futures to can come up with something that will work... I'm afraid that if this country has to re-live the depression, it will be a lot uglier than it was before. Back then we didn't kill each other for tennis shoes.
September 23, 2008 6:26 PM | Reply | Permalink
My working definition of "insanity": Doing the same thing over, and over, and over - and hoping for a different result.
We did this in the early '90s, remember? Paid $150 billion for the S&L bailout? The one that happened because of deregulation?
We just swallowed Freddie Mac and Fannie mae whole, right? The mortgage companies that paid millions in lobbying fees...to remain deregulated? So they could blow their wad in short-term money grabs?
We just paid $85 billion for AIG, right? The insurer that was allowed to overstretch itself...because of deregulation?
And now, Paulson suggests that we hand him $700 billion - and put his decisions beyond all judicial review...forever?
And why are we doing this? Because we're worried about the short term. Frankly, I think the short term way of thinking is exactly why we're where we are now.
We cannot keep covering up for corporate incompetence. I hate swallowing this particular pill, but how many of these buyouts, bailouts and/or collapses can we stand before we come back to some sort of fiscal sensibility?
I'm sorry, but I can't figure why I should swallow a bailout that will increase my own debt load. I can't figure why I should swallow a bailout that will likely wipe out much of Obama's planned programs for health care reform and energy development. I can't figure why I should help to bail out businesses that are so badly managed that they need huge infusions of our already devalued dollars to stay afloat.
One more thing. Don't EVER assume I don't think of my family - especially my children. They are the ones being stuck with this bill. I may struggle for now, but this is a correction that has to happen, IMHO. Better I deal with it than my son.
September 23, 2008 6:40 PM | Reply | Permalink
We're not talking about short-term problems or corrections...we're talking major world wide depression...
September 23, 2008 7:27 PM | Reply | Permalink
I'm not so sure that I buy any of the talking points about this whole situation...I think that it is a political ploy and a rip-off.
Several huge banks and brokerage houses have already declared bankruptcy and the world hasn't ended. Businesses have life-cycles, probably it is time to move on to some other way of doing things. The whole "consumer society" has been a big failure and it is time for it to end.
September 23, 2008 8:43 PM | Reply | Permalink
Even if that's the case - which I don't believe - it still begs a simple question.
How long can we keep borrowing, raising our debt limit, and propping up bad businesses?
This is a bill that was going to come due sooner or later. I believe it's due now - and to try and "refinance" it, with more bad debt and devalued money, only makes the problem that much worse for the next generation or two.
The fact is that Reagan/Bush 41 took the national debt from $1 trillion to about $4.4 trillion. In Bill Clinton's eight years, it only went up to $5.8 trillion, with growth around $100 billion a year for his last three years. We were on the road to paying it down.
Now, Bush 43 is going to add as much to the national debt in his eight years as the debt ITSELF was when Bush 41 left office. This is absolute madness - and corporate welfare is a HUGE part of this looking-glass situation. "Charge-and-spend" neocons put us in this position. True free-market principles can get us out.
September 23, 2008 10:36 PM | Reply | Permalink
You are speaking from a position of rage not reason.
If the financial system collapses it will have very large effects on the real economy. In other words a lot of economic activity depends on the ability to borrow, even if only for a very short while.
We can all have our assessment of how close we are to that happening, but your intuition or your guess that there is no problem here that a little survival of the fittest can;t solve is not very valuable. Many people who know a lot about this issue are very worried.
What is the probability of a major collapse? What is the cost to you if it happens and there is no bailout? SO far you have given glib answers or have only described one side of the ledger.
I think you are misunderstanding the cost of the program. Some of the costs will be re-couped when the government re-sells the the riskiest debts. It is clear that the revised Congressional plan will demand that. So the bottom line price while unclear is almost certainly less than the debt authority. The government has the ability to wait in order to recoup value while companies may not.
September 24, 2008 10:35 AM | Reply | Permalink
You have made a faulty evaluation of the basis for my statements. I'm angry because we are not following economic reason, not in spite of economic reason.
We keep bailing out large businesses that overreach themselves. Nothing changes in their behavior, except they push for more and more deregulation.
I have always felt that the S&L bailout set a bad precedent, which we are following to the letter even now. We have been propping up bad businesses with taxpayer money for close to 20 years now. If this doesn't stop it, what will?
I understand there may be a big cost to me if there is no bailout. But my contention is that the system, as currently comprised, will fail at some point, and the longer we wait, the worse the failure will be across the board. So, if you want to point out the potential major problems with letting these poorly run businesses fail and be cannibalized by better run banks, YOU need to explain that.
Plus, you need to account for how $700 billion alone will take care of the bailout if foreclosed homeowners are included. Paulson made no such allowances for them in that figure. This means the REAL cost of the bailout - if Dodd's plan goes through - will be well over $1 trillion.
My position is that allowing bad business to fail is the only solution that is completely fair to the responsibly-run banks/investment houses and the responsible individuals who didn't gorge themselves at the poisoned trough.
Continuing to raise our debt ceiling once a year, which encourages the same reckless lending and investing procedures, forces our children to write checks that cannot be cashed. If that doesn't stoke some rage in you, then that's your problem, not mine.
September 24, 2008 10:55 AM | Reply | Permalink
Thanks, we understand the principle of moral hazard. That is why most everyone out there is calling for imposing a cost on those who will take government assistance. That is not something for nothing. The trick is to impose a significant cost while keeping the system running.
You would like to teach everyone a lesson. OK. What is the cost of that? Seriously.
Of course you have opened yourself up to a series of ideological counter points, that I expect you wouldn't agree with. For example, why should we provide Social Security if people are not responsible enough to save for their own retirement?
The general point being, why should there be a (tax payer funded) safety net for anyone?
September 24, 2008 3:45 PM | Reply | Permalink
You're attempting to lecture, and doing it poorly. I'm not talking about morals here - I'm talking about the logical consequences of pumping hundreds of billions of dollars to prop up a fundamentally broken system.
I will benefit from Social Security when I reach retirement age. I'll get the money back that I've been paying into it, so I don't really worry about that. If the fund collapses before then, I lose the money I've paid in - but it's money I never really "had", and every other payer loses it too. (This may actually happen, as the existing funds are going to have a massive run on them from boomers hitting 65.)
I wouldn't worry about NOT having it, either. I don't see the problem with having everyone be 100% responsible for investing their own money. I imagine you disagree with THAT, but that's my opinion. So your attempted parallel, for me, is pointless.
What "cost" for those firms accepting government money are we talking about here? You say there is one. I'd dearly love to know what it is. This still looks like a Michael Milken deal here - steal $1.5 billion, do some country-club jail time, repay $900 million, and net a cool $600 million for your criminal efforts - without the jail time, and with a lot of extra zeroes before the decimal point.
September 24, 2008 4:27 PM | Reply | Permalink
Boyd, I salute you for including that last number in your list: national debt equals $32K per person.
If I had my way, no politician, pundit, or even blogger, would be allowed to speak, write, or otherwise communicate a federal budget number in anything but per-household terms.
This abridgement of free-speech rights would be mitigated somewhat by the convenient fact that for practical purposes there are roughly 100 million households in the US. Thus $1 billion of federal dollars translates to $10 in household dollars. So, it's no trouble to compute, and it's reasonable to say, that Hank Paulson wants each household in America to put up $7,000 and give him unsupervised authority to spend it.
The downside of my modest proposal would be that "$10 here, $10 there, and pretty soon we're talking real money" just doesn't sound as funny.
--TP
September 23, 2008 6:31 PM | Reply | Permalink
There are theories aplenty that the S&L Bailout was considered license in the financial sector that the government would step in should trouble occur again in the future.
In other words, it was a license to kill.
Let's not forget that some of the S&L fiasco included the President's brother and the GOP nominee.
The GOP and FNC always talk in terms of free markets. It's time to let it happen.
I agree that banks execs should be held culpable -- just "following orders" is not an excuse.
I agree that irresponsible homeowners should go down as well. Bailing them out will only hurt the honest, decent folks twice: first because the irresponsible kept the honest folks from purchasing houses by inflating prices and living beyond their means, second because bailing them out will prevent the collapse of their inflated home price.
The notion of not being able to short a stock is ludicrous in the same way:
You can't decide to gamble after the cards are dealt.
People must learn fear of risk again. Bailouts continue to promote bad behavior, both from the lenders and the lendees.
Rec'ed.
September 23, 2008 8:05 PM | Reply | Permalink
Most of these Bail Out criticisims are valid.
But so is the fear of economists like Krugman and Dean Baker that unless some Governmental action is taken the cascading effect of individual investment bank failures will convert an annoying but fixable sub prime problem into a world wide financial catastrophe.
We need to address the problem which worries the economists while either fixing, or exacerbating as little as possible those valid Bail Out objections.
Seems to me the Dodd mark does that. Our effort should be on insuring that the Dodd mark is the final bill.
September 23, 2008 9:14 PM | Reply | Permalink
A timed response, sector-specific is far better than spreading money around -- a traditional Dem solution, by the way.
In engineering the worst type of control is 'bang-bang' (on-off) as it wears on the system. Much better to have PID (proportional/integral/differential) control where you have other positions on your throttle.
Most of the people posting here do not say the government should sit on it's hands -- they are merely saying that institutional and personal responsibility must be considered before writing checks for a "bailout".
September 23, 2008 11:02 PM | Reply | Permalink
As a general statement of course you're right.
But
reminds me of New Yorker cartoon. The physicist is standing in front of a black board full of equations , pointing at one spot and saying
"Here's where a miracle occurs".
Everyone can and will let their own assessment of institutional and personal responsibility color their assessment of how the Bail Out should be structured. However, reaching a consensus on those "responsibilities" seems so unlikely that it can't be made a condition of deciding on
what we do right now. A Commission perhaps could reach a consensus and that would make interesting reading after the fact. But we have to take some sort of action now.
September 24, 2008 6:56 AM | Reply | Permalink
The problem with taking action RIGHT NOW!!! is that there is only one immediate action to take: issuing a blank check to someone, somewhere, and hoping they get it right.
This "cure" is worse than the disease.
Where will the money go? $700 billion MIGHT be enough - MAYBE - to cover the banks' liabilities. It doesn't even begin to help the homeowners, who are certainly complicit in this crisis but deserve to at least have their tax dollars help THEM in some way.
So, eliminate the homeowners. The banks will basically get their bad loans paid off. BAM! Instant booster shot. BUT...the banks get to KEEP the foreclosed houses, too.
In summary, the banks not only get to keep those irresponsible borrowers' homes, they get to keep the lion's share of the bailout bonanza too? With no regulation, of course, because we're wanting to do something immediately?
That just seems absolutely insane to me.
September 24, 2008 7:10 AM | Reply | Permalink
As usual you don't understand. If the banks sell the mortgages to the Gov't, the gov't holds the mortgage. If the people default, the gov't can set terms on foreclosure or renegotiate with them. The liberal argument seems to be: Banks should be allowed to go out of business because they did what Congress pressed them to do, loan money to low income people to buy homes. It's not the people who borrowed the money's fault, it the bad people who did what they were asked and lent the money.
September 24, 2008 9:51 AM | Reply | Permalink
If I don't understand, then neither does your party of choice.
September 24, 2008 11:13 AM | Reply | Permalink
Grr....blockquotes are screwed up. My apologies.
The first paragraph of the above quote is from the GOP platform for this year.
September 24, 2008 11:14 AM | Reply | Permalink
Bulldog - the complexity of what we're dealing with is lost on you and you're totally wrong about CRA being to blame. CRA was enacted after banks were caught redlining - or not lending in certain minority communities based upon applicant address. This republican talking point is, frankly, ludicrous as there absolutely ZERO evidence that shows higher default rates among minorities. Second, much of the blame for this crisis lies at the feet of institutions who were not subject CRA.
If you go back to the roots of this crisis you'll find the problems initially started with mortgage brokers - non-bank lenders who were completely unregulated and therefore were not subject to CRA requirements. Their game was to sell their loans on as quickly as possible (often to Countrywide) who repackaged them into MBSs and sold them on to investors (often to investment banks who engineered the MBS into structured instruments like CDOs). For all of these players, profits were driven by volume, meaning proper underwriting - the core principal of banking - became a barrier to profit.
This unregulated sector forced regulated depositories to make riskier and poorly underwritten loans to preserve market share and stay in the mortgage business - banks like C, BAC, WM and large regionals etc... This business environment drove numerous more conservative lenders (like most of the nation's 8500 community banks) out of the mortgage business entirely.
The GSEs did NOT purchase subprime loans directly from originators only far more conservative "conforming" loans. The real reason for the Fannie, Freddie crisis was the pressure that falling house prices put on safer, more conventional mortgages. The GSEs repurchase delinquent loans out of the mortgage pools that underlying their bond issuance. Eventually, with declining home prices preventing refinancings and delinquent loans reaching critical mass, Fannie and Freddie became insolvent. They were not involved in buying or guaranteeing risky subprime loans until the crisis was well underway and even then they had only limited indirect exposure to subprime through private label MBS issuances.
Secondly, much of what the government will buy are derivative instruments linked to underlying mortgages like MBS and CDOs, not the mortgages themselves. If it were the mortgages, it would be as simple as you say, but when the mortgages are tied into securities, those contracts create enormous barriers to modifying the underlying loans. This problem does go away if the government owns the securities because in many cases the Government would have to own the entire issuance in order to modify the loans, or have permission from all holders. See article here for full explanation.
It isn't anywhere near as simple as you suggest.
September 24, 2008 1:33 PM | Reply | Permalink
This plan has been referred to as Wealthcare. Sad that we'll have to choose.
September 23, 2008 9:20 PM | Reply | Permalink
There should be pre-conditons for any kind of dealhttp://tpmcafe.talkingpointsmemo.com/talk/2008/09/precondition-for-signing-any-k.php
September 23, 2008 9:29 PM | Reply | Permalink
September 23, 2008 (LPAC)--``The relevant financial institutions must, first, be put into reorganization-in-bankruptcy, while the original intention of the bank holding law should be used to nullify Federal Reserve Chairman Bernanke's lunatic decision,'' said Lyndon LaRouche today, about Congress's response to the Paulson bailout swindle. ``The citizens will back up the Congress, if the Congress finds the guts to reject Paulson flatly, demanding a proceeding in bankruptcy first, before any Federal assistance to bankrupt entities is considered.''
``If the Congress does not have the guts to do that, then the present Federal Constitution and what it represents, is nullified. If that happens, a New Dark age for the planet is virtually guaranteed for delivery in short order.''
http://www.larouchepac.com/news/2008/09/23/larouche-straight-out-fascism.html
http://www.larouchepac.com/news/2008/09/23/fed-escorts-pirates-banks.html
September 24, 2008 12:04 AM | Reply | Permalink
I think you are oversimplifying the crisis a bit. The mortgage loan packages or bundles that we're being asked to buy up are not the whole story. The real problem is the legalized gambling, err, excuse me, credit default swaps. These are insurance policies written by the banks to cover the loan packages that are basically bets that the loan packages will fail or not. These were manipulated so that the policies covered far more than the underlying mortgages were worth - many times over. The upshot is that the loan holders get paid a LOT more if the loans fail than if they are paid. Hence Ameriquest is encouraging folks to take out loans they couldn't afford. They get paid more on the credit swap if the loans failed.
If the banks or insurance companies have far more liability than asset on these policies, and they hold enough of them, they are going down. If the government buys up the junk mortgages, we take the hit and the bank doesn't have to pay off the policy. This is what happens when you have no regulation or oversight.
So the homeowner that took out the loan is at fault. But the crisis is more due to the pumped up value of the credit default swaps by lenders gaming the system.
At least that's my understanding. If I misunderstood, someone please enlighten me! It's a confusing mess.
September 24, 2008 1:41 AM | Reply | Permalink
I think you have it right - and no, I don't think I oversimplified.
Part of what Wall Streeters rely on when confronted with problems like this is complicating the situation so that those who are charged with the oversight throw up their hands and say, "OK, you're the experts. Do whatever you think you need to do."
This situation really is as simple as I've described it, I believe. It's classic neoconservative "charge-and-spend" at its worst.
A bank takes on a ton of risky mortgages, then writes up credit default swaps basically as securities for other banks. All the banks involved in this are rooting for the mortgages to go unpaid - so that some underlying pool of money will pay off their swaps and drive their revenues up.
The problem? There was no underlying pool of money that big existing at the time these mortgages were granted. AND THEY ALL KNEW THIS. The only way they could have still gone ahead with the plan is if they figured the money would be provided by the government, based on the "too big to fail" school of thought.
The sad part is, they had plenty of reason to think they'd be bailed out. After all, we did it with the S&Ls, we've done it with Fannie Mae, we've done it with Freddie Mac and we've done it with AIG.
What I'm saying is, these institutions have NO REASON to change their fundamentally flawed practices if we keep chucking out huge taxpayer dollars to cover the losses incurred by their greed. Screw the politics involved. This is about truly putting "country first".
These big companies treat our Mint like it's a bottomless bong that they can just toke on whenever they feel they need a hit to wipe away their previous bad acts. ENOUGH.
September 24, 2008 7:01 AM | Reply | Permalink
WALL STREET's RECKONING!
(Yet, it Took 10 Years to Raise MinWage $1.00)
http://www.youtube.com/watch?v=S27yitK32ds
"Rule one: Rush the decision. Time the game to fall in the week before Congress is set to adjourn and just 6 weeks before an historic election so your opponents will be preoccupied, pressured, distracted, and in a hurry.
Rule two: Disarm the public through fear. Warn that the entire global financial system will collapse and the world will fall into another Great Depression. Control the media enough to ensure that the public will not notice this. Bailout will indebt them for generations, taking from them trillions of dollars they earned and deserve to keep.
Rule three: Control the playing field and set the rules. Hide from the public and most of the Congress just who is arranging this deal. Communicate with the public through leaks to media insiders. Limit any open congressional hearings. Communicate with Congress via private teleconferencing calls. Heighten political anxiety by contacting each political party separately. Treat Members of Congress condescendingly, telling them that the matter is so complex that they must rely on those few insiders who really do know what's going on!"
September 24, 2008 11:48 AM | Reply | Permalink
It's not just mortgages in default, it's the insane derivatives from these mortgages packed and sold to the tune of trillions to cluesless global investors by Wall St and the entire Mortgage Industry in a quasi-criminal ponzi scheme that is causing the meltdown. I get so mad when stupid Republicans drop by to rail about the piss-poor signing onto mortgages to own homes they can't afford.
This NPR transcript should clarify once and for all in plain language for anyone still unsure about the workings of the entire pyramid scheme. The interviews of all the players in the scheme are particularly stupefying...the SEC not only let these people get drunk, they handed them the car keys to the global pool of investment, the savings of billions of ordinary people around the world:
http://www.thislife.org/extras/radio/355_transcript.pdf
September 24, 2008 1:13 PM | Reply | Permalink
This package is a stealth recapitalization that tries to make the shareholders whole at the expense of taxpayers. It is a transfer of financial losses from private investors to the taxpayer.
Treasury plans to overpay for the securities it buys in order to establish an artificially inflated price for these securities that prevent the acknowledgment of mark-to-market losses. Banks are using wildly different valuations for these securities on their balance sheet, and the price will set near the high-water mark.
A real recapitalization package that dilutes shareholders, limits executives compensation (imagine the result of shareholder lawsuits if an exec didn't participate because their pay would be limited) and gives taxpayers an equity stake in return for our support would be far preferable. A good bank/bad bank solution along swedish lines would also be preferable and has the added benefit of a proven track record.
September 24, 2008 1:44 PM | Reply | Permalink
What exactly is this financial system meltdown, everyone is talking about?
There has been VERY few retail or commercial bank failures and the FED has repeatedly assured that no great numbers of banks are about to fail.
Wall street investment banks that have incompetently and greedily invested in trash bonds via leveraged CDS transactions have failed, were bailed out or have changed their business model. They don't exist anymore as a business segment and the bailout will not revive them, nor should it.
FDIC is already insuring the retail banking sector and the FED is regulating the commercial banking sector. If the credit market freeze is a serious concern, than further lending via FED credit vehicles can be offered to more financial players.
If the problem is that of "crisis of confidence", then it is far from clear that anything the federal government can do will restore the confidence in the American credit market, which for years have been winding up a series of exceptionally complex and likely fraudulent global trades.
If the problem is that of "bank liquidity" than a trillion dollars would be a pittance in the global credit market, but would have significant adverse effects to our national debt, the value of the dollar and viability of domestic programs.
The bottom line is that if the system is as close to "collapse" as Paulson and Bernanke are saying, it can not be saved at this point with a trillion dollars. If, however, it is not as close as they are saying, this trillion dollars is better spent actually addressing the systemic problems in the financial system to prevent the actual collapse. Injecting a teaser amount into a system that apparently is in trouble because of engineered overly easy access to capital in the first place will not help.
September 24, 2008 2:16 PM | Reply | Permalink
I suspect the bigger threat is the dumping of the Treasuries that so many of these countries hold in reserve if they were to collectively lose their shirts over this sub-prime fraud, i.e. a few $$$ trillions.
Here's the link to the new blog, it's fast disappearing down the list, so if some others here will blog about this themselves and attach the NPR link, it'll really help us get some perspective.
http://tpmcafe.talkingpointsmemo.com/talk/2008/09/the-ponzi-scheme-in-plain-lang.php
September 24, 2008 2:51 PM | Reply | Permalink
I hope you folks rec Qwerty's blog, as I did, so it will stay on the front page for a while. I wasn't aware of the information he presents via the NPR link, and I suspect many of us aren't either, if we've been following various media reports on the bailout.
September 24, 2008 3:10 PM | Reply | Permalink
To get back to the part before the rearranging of the deck chairs, I've started a separate blog with the NPR transcript link which really helps to clarify how and why it all started. I suspect the ramnifications is not just for Wall St or Main St, it's a global seizure - there are already several bank write-offs and runs in countries from the Europe to Asia. I'd be stunned if the $1 trillion goes merely to prop up Wall St., the situation is getting more dire by the day, but this $1 trillion is a drop in the bucket. The real figure for the global stake is suggested by this NPR program to be at some $30 trillion.
September 24, 2008 2:30 PM | Reply | Permalink
I looked at the NPR transcript you posted. It's a good review of the situation. Thanks for the additional information.
As I read it, the $30 trillion figure is a guess - an educated guess, but a guess all the same. At this point, though, I still say that the financial institutions involved will have to sink or swim on their own, unless homeowners are protected too. Many of the countries where banks are feeling the pain have their own internal issues that are not directly related to the US credit crisis.
Do you see us being in a position to assist with an international bailout? (Not asking for snark purposes; I want to learn more about this.)
September 24, 2008 3:02 PM | Reply | Permalink
I doubt the $1 trillion would make a huge difference...The "bailout" is to buy time, I suspect, which is why they're making it seem like a life or death situation. It's beyond my comprehension what this really means, but I'm already seeing news reports about bank runs, I cannot imagine what it might mean when half the world find out a good chunk of their savings' gone.
I know what we've seen so far is only the tip of the iceberg, how many trillions exactly, only the global banking cartel knows.
What's chilling is that this could have been stopped, there were so many ways to do it over the past 8 years, but the small global clique of elite in charge of this massive wealth made mistake after mistake.
September 24, 2008 3:44 PM | Reply | Permalink
An excellent episode of "This American Life". It did not talk about Credit Default Swaps, which I think are also a big part of the leveraging problem and the lack of insetives to sell actually performing mortgages, but it is an excellent explanation of the whole process.
My take is that $1t is not going to help this problem at this point. This isn't really about toxic mortages - these folks simply used the mortgage process to setup a massive global ponze scheme. They manipulated a very complex process to fool large numbers of financial proffessionals globally, enrich themsleves, and setup a terrific instability in the global financial system.
Since most players here have been deeply leveraged, their losses will be far greater than the initial exposure, itself a huge amount.
These CDOs and CDSs are basically impossible to value, they have been created with an explicit purpose to be opaque. I think they simply should be considered financial fraud, and retired in their entirety. However, we as a taxpayer, should not be buying them - they are called "toxic" for a reason and we don't want our national treasury involved in this scheme.
We can attempt to be proactive in guarding against commercial and retail banking failure, offer more federal insurance to deposits and facilitate more access to borrowing from the FED. We can also legislate restructuring for loans that have a decent chance of surviving.
As I learn more about the root cause of this crisis, buying these fraudulent investment vehicles is out of the question.
September 24, 2008 3:38 PM | Reply | Permalink
I agree completely. Credit default swaps are, I think, the slimy ball of wax inside the nice, respectable looking packaging of investment opportunity.
It's pretty clear what I think about investing our money in this endeavor. Buying piles of manure for pennies on the dollar doesn't help, as it's still manure, and we'll never get it off our books.
September 24, 2008 3:44 PM | Reply | Permalink
I suspect it's not really buying them off Wall St, but their clients, i.e. SWFs, other central banks, etc.
September 24, 2008 3:47 PM | Reply | Permalink
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