The Great Recession - post mortem

[digamma]

Originally Posted by VPI97

I read that article, too...but there was still a question there as to whether the mortgages the gov't would buy could be valued at a few pennies on the dollar or whether they were truly worthless (big difference). I'd be in favor of using a $700b check in order to get a bigger return at a later date, but other that that article, I haven't seen anyone explore that angle to such a depth that it would convince me that a "blank check" would benefit the country and leave us less exposed than a $700b loan would.

I think most investment advisers would tell you that the intrinsic value of these assets exceeds their current market value. That begs the question as to why folks in the market aren't buying them, of course. That's a more complicated issue related to the lack of liquidity, no institutional buyers (who wants to say they made a bet on subprime assets at this point), leaving you with vulture buyers (hedge funds, for instance) and huge bid-ask spreads.

[Flasch186]

when they sell the assets back to the market, once the markets unfreeze and get liquified and confident, they will be worth more than they buy them for today. this actually could take a HUGE bite out of our debt.

[Buccaneer]

A good day to be a libertarian and one that has never put much faith into the financial investment markets. A libertarian commentary posted on cnn.com

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

[molson]

Originally Posted by SirFozzie

Yup: From the link in my last post

"They lost 2-1 on their own side, voting against their president, their presidential candidate and against every leader in their own party," one Democratic source said.

Pelosi said the Democrats lived up their side of the bargain. "We've entered into those conversations in a spirit of bipartisanship, with the understanding that each side would have half of our votes to pass the bill," she said.

"When the legislation came to the floor, the Democratic side more than lived up to its side of the bargain," she added. "While the legislation may have failed, the crisis is still with us."

That's kind of funny, in a sad way.

99% of the effort of this bill (and probably every bill) is political.

1% of the effort, of an already inept group, is being put towards the actual merits of this ridiculously overreaching bailout. So why does almost everyone here have so much confidence in it?

There's something odd about Pelosi blabbing about "the spirit of bipartisanship" when she's criticizing an entire party for not voting exactly per the plan. There's nothing bipartisan about a scheme like this. What's the gain in having a majority of the House when you're too wrapped up in politics to take advantage of it?

This display, more than anything else, damns both sides, and shows more than anything else that GOVERNMENT IS BAD. They cannot save the economy, they absolutely WILL make it worse if given the chance. Bucc's right, it's a good day to be a libertarian.

[VPI97]

Originally Posted by molson

99% of the effort of this bill (and probably every bill) is political.

1% of the effort, of an already inept group, is being put towards the actual merits of this ridiculously overreaching bailout.

That, in a nutshell, is what I have found so sad about today. More people concerned about the politics of this vote than the actual contents of the bill.

[molson]

Originally Posted by Flasch186

because:

See the votes are mostly counted in the back hallways before the actual vote occurs. SOOOOOO, the ones who are in heated elections coming up would vote "no" while people who are comfortable in their races or are not in races at all vote "yeah." Same on the GOP side. Then add in variances and you get the results today.

And yet you have zero problem supporting WHATEVER they came up with in the few seconds they had to spare between the vote swapping.

[Coffee Warlord]

Originally Posted by Flasch186

when they sell the assets back to the market, once the markets unfreeze and get liquified and confident, they will be worth more than they buy them for today. this actually could take a HUGE bite out of our debt.

You're assuming that a worthwhile percentage of these assets are viable.

You're assuming that management of the viable assets will be done properly, if the government has influence in said management.

I have doubts in the former, and complete doubt in the latter.

If this goes through, and my doubts are correct, we're 1000 times more fucked than we are right now.

[Flasch186]

Originally Posted by molson

And yet you have zero problem supporting WHATEVER they came up with in the few seconds they had to spare between the vote swapping.

the bill couldnt change.

[Flasch186]

Originally Posted by Coffee Warlord

You're assuming that a worthwhile percentage of these assets are viable.

You're assuming that management of the viable assets will be done properly, if the government has influence in said management.

I have doubts in the former, and complete doubt in the latter.

If this goes through, and my doubts are correct, we're 1000 times more fucked than we are right now.

you're right that we are on the opposite side in our assumptions.

[molson]

I'm sure there's PLENTY of quotes/clips of Republicans saying the same kind of stuff, but I wonder if it's as entertainingly feisty as these:

[Coffee Warlord]

Originally Posted by Galaxy

Would the government, aside from oversight, be running the "fund" (so to say), or would it Paulson and a group of business-minded people be running it?

Government oversight + an appointed board/commitee/whatever. They'll get their say.

And government appointees are rarely given their gigs based on merit, especially if we're talking money in the trillions. They'll play ball.

[Flasch186]

Originally Posted by Coffee Warlord

Government oversight + an appointed board/commitee/whatever. They'll get their say.

And government appointees are rarely given their gigs based on merit, especially if we're talking money in the trillions. They'll play ball.

What is the Judges and Stewards Commissioner for the International Arabian Horse Association, (IAHA), doing these days?

I digress.

[molson]

Originally Posted by Flasch186

the bill couldnt change.

Of course it could. Not today, under this vote, but it's not this today or nothing forever.

[Coffee Warlord]

Originally Posted by Flasch186

you're right that we are on the opposite side in our assumptions.

I tend to avoid most of the political threads on here like the plague, so I'm not up to full speed on everyone's overall views on various subjects. That said...

I'm extremely curious as to why you have so much faith in our government, especially in regards to money management.

[GrantDawg]

Originally Posted by Coffee Warlord

If this goes through, and my doubts are correct, we're 1000 times more fucked than we are right now.

I very seriously doubt this. This may not be a guarantee "fix," but I doubt it will kill us either.

[Coffee Warlord]

Originally Posted by GrantDawg

I very seriously doubt this. This may not be a guarantee "fix," but I doubt it will kill us either.

If taxpayers are on the hook for some 700 billion and mismanagement/screwups/overestimations of assets/corruption put us right back where we are now in a couple years, I don't see how we're NOT fucked.

[Flasch186]

Originally Posted by Coffee Warlord

I tend to avoid most of the political threads on here like the plague, so I'm not up to full speed on everyone's overall views on various subjects. That said...

I'm extremely curious as to why you have so much faith in our government, especially in regards to money management.

Well, in this case because theyre hiring experts to run it from outside the gov't. so consider them civilian contractors. I have faith they'll do better than actual Gov't employees.

[digamma]

Originally Posted by Coffee Warlord

Government oversight + an appointed board/commitee/whatever. They'll get their say.

And government appointees are rarely given their gigs based on merit, especially if we're talking money in the trillions. They'll play ball.

Actually, the treasury plan included hiring a number of outside investment managers to run the fund.

[Gary Gorski]

Originally Posted by VPI97

That, in a nutshell, is what I have found so sad about today. More people concerned about the politics of this vote than the actual contents of the bill.

Exactly - our government leaders are pretty much useless. The guy from Texas who appeared on CNBC just kept saying that the Dems could have passed it if they wanted to because they have the majority - his mission isn't to save the country from economic disaster - its to make sure we blame the Dems and the same holds true on the other side. Nobody cares about fixing the problems - they just want us to know that the other guy isn't fixing it. This is why elections now for office are "pick the guy you hate less that you think won't screw things up more than the other inept guy".

I'll say this again - SOMETHING needs to happen. If nothing is done today's almost 800 point drop won't be anywhere near the end. I can't even believe that the market fell almost 800 points in one session - like someone mentioned - this is no correction. You don't lose 800 points in one session in a "correction". Raise the FDIC guarantees, change the mark to market, reinstate the uptick rule on short selling - these things can be done immediately without waiting for our inept congressmen and women to continue their grandstanding to get reelected in a couple of weeks.

[Coffee Warlord]

Originally Posted by digamma

Actually, the treasury plan included hiring a number of outside investment managers to run the fund.

Right, which I understand.

However, I am rather of the opinion they'll be hiring outside help who know exactly which people to help a little more than others. The opportunities for greasing palms here has got to be on epic scale, and the politicians are salivating to have these folks in their back pocket.

[Gary Gorski]

Originally Posted by molson

They shouldn't be punished. Don't make this about those who are for the little guy v. those who are against him. NOBODY wants regular people to lose their homes, or their jobs. But is it worth it to save a house today to lose thousands tomorrow?

There's room for difference of opinion, of course, in terms of how many houses are lost today v. tomorrow under varying plans. All I'm saying is that just because someone's a little concerned about a massive panicked government handout that feeds directly into the problems that brought us here in the first place, it doesn't mean that they take glee in people's present-day economic misfortune.

I realize you're not Mr. Potter here but I'm just pointing out that this problem requires intervention immediately. I personally do not want to see the fallout of letting the chips fall where they may on this one. I'm not in favor of bailing out any company but I'm less in favor of letting our economic system collapse in the immediate future. You're definitely right - this problem should have been handled long before now and I have little confidence that the people in Washington are capable of getting anything right let alone doing it in a weekend but time has run out. The market needs stabilty now before its destroyed further.

Cramer (and I'm no fanboy of his) wrote a piece a few days ago about the worst case scenario being the dow at 8400 and I thought how could we possibly lose 25% of the value of the market. Seeing a quarter of that drop happen in one day even with the possibilty of the bailout eventually happening is downright frightening.

[Flasch186]

Originally Posted by Gary Gorski

Exactly - our government leaders are pretty much useless. The guy from Texas who appeared on CNBC just kept saying that the Dems could have passed it if they wanted to because they have the majority - his mission isn't to save the country from economic disaster - its to make sure we blame the Dems and the same holds true on the other side. Nobody cares about fixing the problems - they just want us to know that the other guy isn't fixing it. This is why elections now for office are "pick the guy you hate less that you think won't screw things up more than the other inept guy".

I'll say this again - SOMETHING needs to happen. If nothing is done today's almost 800 point drop won't be anywhere near the end. I can't even believe that the market fell almost 800 points in one session - like someone mentioned - this is no correction. You don't lose 800 points in one session in a "correction". Raise the FDIC guarantees, change the mark to market, reinstate the uptick rule on short selling - these things can be done immediately without waiting for our inept congressmen and women to continue their grandstanding to get reelected in a couple of weeks.

winner

and crazy as it sounds, Kramer's been right and the harbinger of bad things to come has been Oppenheimer's Meredith Whitney who has been looked at as crazy until she started beomcing the allstar for her predictions of dire dire circumstances.

[Coffee Warlord]

Originally Posted by Flasch186

winner

Hey, we agree on something.

[Buccaneer]

The bailout should focus on fixing the root cause of the problems (which is different than not doing anything). Fix those and you are assured of a better future; otherwise, we are still facing downhill.

[molson]

Originally Posted by Gary Gorski

Cramer (and I'm no fanboy of his) wrote a piece a few days ago about the worst case scenario being the dow at 8400 and I thought how could we possibly lose 25% of the value of the market. Seeing a quarter of that drop happen in one day even with the possibilty of the bailout eventually happening is downright frightening.

I'm just afraid the stock market will REALLY take a beating after the 2nd or 3rd massive bailout, when the sentiment seems to be "let's trust our lawmakers to figure it out in the meantime", at the same time everyone agrees that they're useless.

[Flasch186]

that needs to be in addition to, but the ball keeps getting further and further away from us.

[molson]

Originally Posted by Flasch186

winner

Really? So now you're in favor of doing things short of a bailout?

[Flasch186]

Asian markets are getting destroyed.

[Flasch186]

Originally Posted by molson

Really? So now you're in favor of doing things short of a bailout?

There is nothing else on the table and something needs to be done yesterday....so the 'bailout' as youre calling it, needs to happen. Now.

BTW, youre not going to be convinced otherwise, so be it. Im backed up by the facts on the field, market action, number of foreclosures, Statements by experts (Buffet, etc), bankruptcies of huge banks, credit swaps, rates, etc. So stand over there and watch the blood.

[Galaxy]

Originally Posted by SirFozzie

Lawmakers quickly point fingers after bailout fails - CNN.com

Confirmed that the earliest a bill will come up is Thursday.

The House will not be in session Tuesday and Wednesday, but behind-the-scenes work will continue until it reconvenes on Thursday.

If this country faces a major crisis, does the fact that it's a holiday matter? I'm not saying you have to vote on the other bills and such, but this is such a lame excuse.

[Gary Gorski]

Originally Posted by Buccaneer

The bailout should focus on fixing the root cause of the problems (which is different than not doing anything). Fix those and you are assured of a better future; otherwise, we are still facing downhill.

You're absolutely right - and to do that takes time and thought. Time is up. We need stability immediately to buy the time to figure out how to fix it.

[Flasch186]

yup

[Gary Gorski]

Originally Posted by molson

I'm just afraid the stock market will REALLY take a beating after the 2nd or 3rd massive bailout, when the sentiment seems to be "let's trust our lawmakers to figure it out in the meantime", at the same time everyone agrees that they're useless.

If they were to bailout the system now and not fix the problems then yes - subsequent bailouts will mean further destruction of wealth and massive beat downs of the market. But I'm telling you that there is the potential to lose so much right here, right now that something has to happen to stop it. There's more options than the bailout but nobody is willing to do anything apparently. What happened to the days when down 100 was cause for a little worry? Now we're down close to 800 in a day and we're still not concerned enough to do anything about it?

[molson]

Originally Posted by Flasch186

yup

So you acknowledge that the bailout merely delays the inevitable unless further change is made? What should the further change be? Do you trust Congress to do it?

[VPI97]

Originally Posted by Flasch186

Im backed up by the facts on the field, market action, number of foreclosures, Statements by experts (Buffet, etc), bankruptcies of huge banks, credit swaps, rates, etc. So stand over there and watch the blood.

Actually, here are a couple hundred economists who disagree with Paulson's plan.

http://faculty.chicagogsb.edu/john.c...ge_protest.htm

Of course, that was according to how the bill stood a few days ago, but as far as I can tell, nothing much has changed about the bill since then. All they did this weekend was argue politics.

[Flasch186]

Originally Posted by molson

So you acknowledge that the bailout merely delays the inevitable unless further change is made? What should the further change be? Do you trust Congress to do it?

if you mean 'inevitable' to mean additional fixes to the system, than yes. I'll leave add'l moves to the experts to come up with ideas, theyre smarter than me, hence my trust in Paulson and Bernanke on the need for this bill....now. I trust Congress to get this through, yes. I think it'll happen on Friday but hopefully it wont be too late for a bunch of the regional banks and hopefully we dont lose another big house.

and VPI I can find tons who do subscribe to the need for the bill to gain us some time. Your point is taken that there are always people on both sides and we can find facts to defend ours til we keel over...unfortunately my facts are going to bear fruit very very soon.

[DaddyTorgo]

Originally Posted by Flasch186

Asian markets are getting destroyed.

Nikkei already down 477pts (4%)

[Gary Gorski]

Originally Posted by molson

Do you trust Congress to do it?

This is no longer a valid question - I don't think anyone trusts Congress to have been able to wrap their heads around this problem in a weekend when they've had over a year with it staring them in the face. We're out of time and the only people who can stop this bleeding, like it or not, is the SEC and Congress. Believe me, I could come up with a LONG, LONG list of people I would like to see fixing the problem before I got to either Congress or Christopher Cox but time's up and they're the ones who have the power to do something now.

[VPI97]

Originally Posted by Flasch186

and VPI I can find tons who do subscribe to the need for the bill to gain us some time.

The difference is that you're talking about politicians and I'm talking about actual experts in the economy.

In '87, the market went down 22% and the world didn't end. Just because it's down 7% now doesn't mean we should throw $700b into the biggest money pit this country has ever seen.

[Buccaneer]

I'm curious. To those that are strongly advocating immediate actions, are you heavily vested in financial markets for personal net worth? I am trying to understand the difference in attitudes of those that are vs. not.

[GoldenEagle]

Gary, what line of work are you in?

[Raiders Army]

We need surgery, not a band-aid.

[GoldenEagle]

Originally Posted by Buccaneer

I'm curious. To those that are strongly advocating immediate actions, are you heavily vested in financial markets for personal net worth? I am trying to understand the difference in attitudes of those that are vs. not.

I think a bailout is a huge mistake. But I work in a recession proof industry and do not have much invested in my 401(k) yet.

[molson]

Originally Posted by Flasch186

Your point is taken that there are always people on both sides and we can find facts to defend ours til we keel over...unfortunately my facts are going to bear fruit very very soon.

There's going to be a deal though, there's no question about that. I'm not particularly concerned about the stock market long-term, because it's been ridiculously overvalued for a while, and still will be after this mess. It, like the housing market WILL come down to earth, hard, there's absolutely nothing Congress can do about that. The point of the bill, as I understand it, is to ensure that credit will be available. That object isn't hindered by another week or two. Credit is available today, and it will be next week. The stock market is fickle. If the media didn't hype up today as THE DAY everything had to happen, the losses wouldn't have been as great. Once there's a deal, the stock market will quickly recover (and then it will continue it's inevitable decline once again).

But if you're right, we'll all know soon, because there will be a deal this week. You'll probably try to prove how correct you are by the stock market's increase that day, but nothing will be fixed, that money will be burned through in no time, and then we'll back here in no time (except that we'll have way more debt.).

[Buccaneer]

molson, some housing markets have and will fall hard, some are still doing ok. I also think "fickle" is an understatement. With the markets (financial, oil, etc.) becoming the domain of short-term speculative interests, it takes almost nothing to have major swings that up to a few years ago were unthinkable.

[Gary Gorski]

Originally Posted by GoldenEagle

Gary, what line of work are you in?

Funny you should ask...I make computer games Well that and I do some accounting/financial analysis - but just until my games make it big

I'm not a financial manager nor do I even play one on TV. I'm not heavily invested in the market (although if I did have piles of extra money I would be and I wouldn't be working two jobs) - I've always just liked the market alot and followed it and bought a few shares of stock here and there (plus having a 401k). And above all I pray that I'm very, very, very wrong about what I think could happen. I'm concerned about the greater global economical impact of what might happen as opposed to whether or not my couple shares of stock in a company get wiped out (not that I would be crazy about that either)

Why do you ask?

[SirFozzie]

Originally Posted by Raiders Army

We need surgery, not a band-aid.

You need to stabilize the patient before you do invasive surgery.

[Buccaneer]

Originally Posted by VPI97

Actually, here are a couple hundred economists who disagree with Paulson's plan.

http://faculty.chicagogsb.edu/john.c...ge_protest.htm

Of course, that was according to how the bill stood a few days ago, but as far as I can tell, nothing much has changed about the bill since then. All they did this weekend was argue politics.

Jeffery Miron, the libertarian Harvard economist of the commentary I posted above, is on the list.

[Flasch186]

Originally Posted by VPI97

The difference is that you're talking about politicians and I'm talking about actual experts in the economy.

In '87, the market went down 22% and the world didn't end. Just because it's down 7% now doesn't mean we should throw $700b into the biggest money pit this country has ever seen.

hmmm, I'd say the people that are experts giving congress advice are, well, experts.

Bucc, I am not heavily invested but have a 401K and some stocks. I sell homes so I am on the front lines and see the people everyday that are being touched on 'main street'. Good question though.

[Flasch186]

Originally Posted by molson

There's going to be a deal though, there's no question about that. I'm not particularly concerned about the stock market long-term, because it's been ridiculously overvalued for a while, and still will be after this mess. It, like the housing market WILL come down to earth, hard, there's absolutely nothing Congress can do about that. The point of the bill, as I understand it, is to ensure that credit will be available. That object isn't hindered by another week or two. Credit is available today, and it will be next week. The stock market is fickle. If the media didn't hype up today as THE DAY everything had to happen, the losses wouldn't have been as great. Once there's a deal, the stock market will quickly recover (and then it will continue it's inevitable decline once again).

But if you're right, we'll all know soon, because there will be a deal this week. You'll probably try to prove how correct you are by the stock market's increase that day, but nothing will be fixed, that money will be burned through in no time, and then we'll back here in no time (except that we'll have way more debt.).

trust me when I say I want to be proven wrong and credit as you know it may be available but the credit Im talking about is NOT available today, and wont be tomorrow or the next day unless we do something fast. Either way Im with gary and hope Im way wrong.