The Great Recession - post mortem

[SteveMax58]

Originally Posted by Coffee Warlord

You realize the 'toxic' packages you've been talking about are, by definition, the LEAST likely assets to have a legitimate value, and LEAST likely to rebuild value in the future.

This simply transfers who assumes a rather shitty risk. The government cannot indefinately hold onto worthless assets any more than a company can without severe repercussions down the road.

Yep...and holding onto these "assets" for years will not increase their value. Unless of course, we anticipate an increased market for homes that have sit unoccupied for years with no maintenance and likely vandalised.

[molson]

Originally Posted by Mac Howard

Point them out to me will you?

If that's what you think you're reading then it's no wonder you don't get it.

I wasn't responding to your post.

But I should have added a number #3. There's a HUGE amount of arrogance here - if someone disagrees with you (or even raises concerns), they "just don't get it".

Nobody knows what will happen. 100+ economists from elite American universities are against this. But they just don't get it either I guess.

I don't have a problem with someone telling me I'm wrong, but it gets annoying when pro-intervention crowd claims moral superiority, and when anyone has decided that they're 100% infallible and has a superior understanding than anyone who disagrees with them (even if the other people have better credentials than them).

[DaddyTorgo]

Originally Posted by Coffee Warlord

You realize the 'toxic' packages you've been talking about are, by definition, the LEAST likely assets to have a legitimate value, and LEAST likely to rebuild value in the future.

This simply transfers who assumes a rather shitty risk. The government cannot indefinately hold onto worthless assets any more than a company can without severe repercussions down the road.

this is certainly a problem with the current plan. however this problem is mitigated TO A DEGREE if the government takes equity stakes in these companies in exchange for removing the "toxic" assets off their books (really the only way the bailout has any hope of benefitting us -- i hold very little hope that the assets will recover enough value to make us avoid having to take a bath of say $250 billion. especially considering the housing market is overdue for a correction). IF the government takes an equity share in these companies then it will both have a say in corporate governance of them, and also have the ability to recoup some of the (what i view as inevitable) losses that it takes on the "toxic assets" by selling off its equity shares (either back to the companies themselves or to the market) when the companies stock prices recover due to the removal of the "toxic assets" from their books.

[Coffee Warlord]

Originally Posted by SteveMax58

Yep...and holding onto these "assets" for years will not increase their value. Unless of course, we anticipate an increased market for homes that have sit unoccupied for years with no maintenance and likely vandalised.

Here's the problem with that. These aren't straight loans. These are derivatives that have been pulped, sifted, processed, shat out, and in general made into such a mind-numbing mess that god knows WHAT they are based off of. The money that is directly tied to property have value (that can and will likely increase) by their very nature. These potentially don't, thusly causing the problem to begin with.

[Mac Howard]

Originally Posted by molson

I wasn't responding to your post.

But I should have added a number #3. There's a HUGE amount of arrogance here - if someone disagrees with you, they "just don't get it".

Arrogance has nothing whatsoever to do with it, it's consensus. You don't get Bush. You don't get the Senate Republicans. You don't get the Senate Democrats. You don't get the House Democrats, you don't get the 90% of financial commentators that are trying to get through to you.

There's the arrogance!

But I invite you again to point out all those posts that you refer to.

[SteveMax58]

Originally Posted by Mac Howard

Because none of that will fix the financial/banking system which is on the verge of collapse and with that collapse will go the affluent society you currently enjoy.

Many of these things can be done after to avoid the situation being repeated but at the moment you have to bail out the banking system by removing these toxic packages that dog their balance sheets and free up the system again.

Agreed it will "help" loosen the lending in the short term. Agreed that the "current model" will likely collapse if nothing is done quickly. I think the distinction I have here, is that this assumes the banking system will not collapse again regardless...and with the government left holding worthless(or worth less than the debt purchase may be a better way to put it) assets.

Out of curiosity...do you not believe a short-term increase in borrowing to FI's is not a reasonable response until a more comprehensive solution can be reached? I'm not sold myself, just curious if you believe that the "affluent society" that I happen to live in is something that is sustainable(i.e. this bailout brings it to normalized)...or if you think it is artificially propped up(in which case this just propagates the same problem which could get even worse in the mid- to long-term)? Perhaps there is another way to see it that does not ignore the long term affects of government "owning" assets that are not guaranteed to come up in value.

[DaddyTorgo]

what the government will have to do, or should end up doing is: taking them all in, absorbing them into one big pool and untangling the legitimate mortgages from all the derivative products that have no intrinsic value, passing new laws regarding how much they can be repackaged and in what form, and then reselling them back into the market.

ie govt says: "you can only resell a mortgage if it includes all of the years of one property. no breaking it up into tranches of years." So the govt assumes the burden of untangling all of these mortgages from each other and reassembling them back into "here's a 30 year fixed-rate on this one house" and packages it with a bunch of other 30 year fixed-rates at the same rate and resells that.

like i said though, i don't hold any hope that this will offset the entire cost of the bailout, which is why i think equity in any company that the govt takes these assets from is essential.

and in a significant percentage: $1bn = ~5% of the company (or something significant)

[Marc Vaughan]

Originally Posted by SteveMax58

Agreed it will "help" loosen the lending in the short term. Agreed that the "current model" will likely collapse if nothing is done quickly. I think the distinction I have here, is that this assumes the banking system will not collapse again regardless...and with the government left holding worthless(or worth less than the debt purchase may be a better way to put it) assets.

I may be wrong but as I read the revised bill the goverment receives equity in the companies participating - these would not be worthless regardless of what happens with the 'toxic assets' (which incidentally many economists believe will hold considerably value when held to maturity).

[DaddyTorgo]

Marc - can you confirm please that the economic problems and the freeze of the credit markets won't affect the release date of FM 2009??

[Tekneek]

Market indexes seem to be up today. So much for the bottom falling out. They apparently don't think the sky is falling after all.

I expected things to move up today, after that emotional outburst from yesterday.

[DaddyTorgo]

Originally Posted by Tekneek

Market indexes seem to be up today. So much for the bottom falling out. They apparently don't think the sky is falling after all.

I expected things to move up today, after that emotional outburst from yesterday.

great buying opportunities today on solid companies that were dragged along in the free-fall yesterday is primarily what's driving the uptick today.

[Daimyo]

Originally Posted by Coffee Warlord

You realize the 'toxic' packages you've been talking about are, by definition, the LEAST likely assets to have a legitimate value, and LEAST likely to rebuild value in the future.

This simply transfers who assumes a rather shitty risk. The government cannot indefinately hold onto worthless assets any more than a company can without severe repercussions down the road.

The toxic assets seem to be toxic mainly because they are too complex and splintered and ultimately backed by houses that have dropped in value. If the government can purchase enough of them it seems they should be able to untangle them and perhaps even reconstruct the underlying individual mortgages. Those mortgages are ultimately backed by actual houses, so the only way the assets would truly be worthless is if you believe the housing market will never recover... if that's the case we're screwed no matter what we do.

No private party could do that because no private party could possible purchase enough of them to do any useful untangling or handle the exposure of waiting out the housing market.

[darkenigma510]

nvmind

As long as Paulson doesn't get to do what he wants without judicial review or oversight....like he originally wanted

[Tekneek]

Originally Posted by DaddyTorgo

great buying opportunities today on solid companies that were dragged along in the free-fall yesterday is primarily what's driving the uptick today.

But... if they thought the whole thing was about to collapse, why would they buy anything? Especially in any amount that would move the Dow over 280 pts up?

[Coffee Warlord]

Originally Posted by Tekneek

But... if they thought the whole thing was about to collapse, why would they buy anything? Especially in any amount that would move the Dow over 280 pts up?

Like he just said. A LOT of companies that have absolutely nothing to do with this situation got dragged down amidst the FUD. Investors spotted this and acted accordingly. There's a lot of money to be made after a sharp drop like that.

[SteveMax58]

Originally Posted by Coffee Warlord

Here's the problem with that. These aren't straight loans. These are derivatives that have been pulped, sifted, processed, shat out, and in general made into such a mind-numbing mess that god knows WHAT they are based off of. The money that is directly tied to property have value (that can and will likely increase) by their very nature. These potentially don't, thusly causing the problem to begin with.

I realize I am simplifying the assets by referring to them as if they are straight property deeds or loans for property...but as you said, I'm not sure there is an effective way to grasp the fallout of owning these.

I'll readily admit that I'm out of my expertise on this topic...but the fact that it has come to an immediate "meltdown crisis" shows I'm not the only one.

[Tekneek]

Originally Posted by Coffee Warlord

Like he just said. A LOT of companies that have absolutely nothing to do with this situation got dragged down amidst the FUD. Investors spotted this and acted accordingly. There's a lot of money to be made after a sharp drop like that.

But, I thought this collapse was going to take everybody with it? Are these foolish investors who are about to lose their shirt?

I'm trying to understand what is happening here. Chicken Little was out in full force yesterday afternoon, but now we either have over-confident investors pulling the market up today, or there are a significant amount of people out there who don't believe we are on the verge of a complete collapse.

[molson]

Originally Posted by Mac Howard

Arrogance has nothing whatsoever to do with it, it's consensus. You don't get Bush. You don't get the Senate Republicans. You don't get the Senate Democrats. You don't get the House Democrats, you don't get the 90% of financial commentators that are trying to get through to you.

There's the arrogance!

But I invite you again to point out all those posts that you refer to.

I get it. I'm not even really against it.

I'll try another hypothetical. Imagine Congress had come up with a plan that was 10 times as massive as this one, incredibly more reckless, benefitted nobody, and ultamitely resulted in our currency being worthless. I'm just scared that in this environment, there would be huge pressure to do it anyway, because "it's the only plan we have".

So how do we know this plan isn't that plan? Panic moves during times of economic turmoil don't really have a great track record. Congress couldn't manage a pet store efficiently. The complete and utter confidence in this bill as our "only option" just feels like one of those historical moments in time where everyone should have seen the impending disaster but didn't.

And my second fear, as I've stated, is that propping up a unsustainable system will solve nothing and make things worse without appropriate further action that Congress isn't qualified or motivated to provide. Is that really that insane a concern? Again, it's a CONCERN, not at all an argument against any government intervention.

In the most simple terms, and going beyond this particular situation, I think we're just too afraid of recessions. That doesn't mean I don't care about people suffering from a recession. Under this CONCERN (I'm not arguing this will happen specifically, I'm just revealing the thought process behind my views), we can have a year of recession and then a recovery, or we can have 5 years of stagnation in a desperate attempt to avoid the recession, then 5 years of a deeper recession.

But as for the posts I was refering to, you can start with the one I was responding to, and then your debut post in this thread:

"I can't quite believe some of the posts above. Guys, this bail-out is FOR YOU!

If you have shares, it's for you (or your shares will plummet in price). If you have a house, it's for you (or the value of your house will drop like a stone). If you have a pension plan, it's for you (your money is invested in the stock market). If you have a health scheme, and insurance scheme, it's for you (your money is invested similarly). If you have a job, it's for you (unemployment will leap up). If you run a business, it's for you (you won't be able to get money to grow your business or maybe even pay your employees). If you have debt - credit card, loan etc - this is for you (the bank could call in the debt).

Wake up, guys. This is not about rewarding or punishing the perpetrators of this, it's about saving your own skins (and mine). The credit market is frozen. There is currently no money to do anything. The banking system is close to collapse."

The assumption you're making is that anyone who has concerns about all this must not understand that the intention is to help "main street and not wall street". As I responded to you then, we get the idea behind it. Whether it works long-term is another story.

[Mac Howard]

Originally Posted by SteveMax58

Agreed it will "help" loosen the lending in the short term. Agreed that the "current model" will likely collapse if nothing is done quickly. I think the distinction I have here, is that this assumes the banking system will not collapse again regardless...and with the government left holding worthless(or worth less than the debt purchase may be a better way to put it) assets.

The bailout isn't the be all and end all of the solution. But it's essential that this is done and then you begin removing the cause with improved regulation.

Out of curiosity...do you not believe a short-term increase in borrowing to FI's is not a reasonable response until a more comprehensive solution can be reached?

No because these currently worthless assets will still be on the banks' books and cause concern about the health of the bank. We have had a government loan to small banks here in Australia to offset the problem caused by the leak-through of this problem through the credit system but our banks don't have these bad debts so they're sound. The loan, for small banks and non-bank home loan operators, keeps them liquid but there's no need to improve their balance sheets so the loans are sufficient.

But the American banks need to lose those assets.

I'm not sold myself, just curious if you believe that the "affluent society" that I happen to live in is something that is sustainable(i.e. this bailout brings it to normalized)

Yes. I have no problem with it at all. I live in such a society. The difference is that we have greater regulation on bank lending that has avoided the bad debt problem.

I wouldn't say that the bailout will normalise the system, it could be too late. But without it there could be a major catastrophe coming. With it there'll probably still be a recession but not as deep or long.

Perhaps there is another way to see it that does not ignore the long term affects of government "owning" assets that are not guaranteed to come up in value.

The housing market, and the value of the assets, will return. How long I've no idea. 5 years? 10 years? I don't know. But that's why government must hold them because no commercial organisation could. There's no reason to believe they'll remain forever valueless.

But even if they go belly up, you've lost 700 billion (assuming he spends it all - he's only after 250 billion to start with).

Compare that with what will happen if the bailout doesn't take place. The stock market lost 1.2 trillion yesterday. If the banking system fails there's no knowing where the stock market will end up. certainly many trillions can be lost.

It's something of a Hobson's Choice (two unacceptable choices). But the bailout is the better of two evils.

[Galaxy]

Originally Posted by Coffee Warlord

Like he just said. A LOT of companies that have absolutely nothing to do with this situation got dragged down amidst the FUD. Investors spotted this and acted accordingly. There's a lot of money to be made after a sharp drop like that.

Plus, I think news that they will try a new bill on Thursday increased hopes as well.

[SteveMax58]

Originally Posted by Marc Vaughan

I may be wrong but as I read the revised bill the goverment receives equity in the companies participating - these would not be worthless regardless of what happens with the 'toxic assets' (which incidentally many economists believe will hold considerably value when held to maturity).

I believe you are right, and it may in fact end up profitable if all goes as "hoped".

I think the problem I have is whether this crisis just pops back up in a few months with the same practices being continued by the FI's and general speculation.

[Galaxy]

Originally Posted by Mac Howard

The difference is that we have greater regulation on bank lending that has avoided the bad debt problem.

Just curious, what regulations does Australia have?

[sterlingice]

Originally Posted by molson

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?

Yeah, this is the part of it all that scares me.

SI

[Marc Vaughan]

Originally Posted by SteveMax58

I believe you are right, and it may in fact end up profitable if all goes as "hoped".

I think the problem I have is whether this crisis just pops back up in a few months with the same practices being continued by the FI's and general speculation.

I'm presuming part of the arguement against this is that the FI's where the goverment has some control (ie. owns equity) aren't likely to allow those practices any more.

The ones which remain independant will hopefully have learnt their lessons or will eventually lose equity to the goverment and thus behave afterwards.

[Marc Vaughan]

Originally Posted by Galaxy

Plus, I think news that they will try a new bill on Thursday increased hopes as well.

I think the new bill is almost a certainty to go through - the politicians have now done their posturing and 'played hardball' to get the 'best deal possible for their constituents' ....

So now they can fold quietly in confidence that they'll get re-elected

[Marc Vaughan]

Originally Posted by DaddyTorgo

Marc - can you confirm please that the economic problems and the freeze of the credit markets won't affect the release date of FM 2009??

LOL

Its definitely not affected Manchester City who have caused us to have to revamp the economic model somewhat to take into account the ludicrous budgets their new owners have made available ....

PS - FMH2009 PSP now comes with a 2d match view and multiple leagues running at once (end plug ).

[Coffee Warlord]

Originally Posted by Tekneek

But, I thought this collapse was going to take everybody with it? Are these foolish investors who are about to lose their shirt?

I'm trying to understand what is happening here. Chicken Little was out in full force yesterday afternoon, but now we either have over-confident investors pulling the market up today, or there are a significant amount of people out there who don't believe we are on the verge of a complete collapse.

I don't believe we're on the verge of a complete collapse of everything and their little brother. I believe a lot of this action is investors buying up companies that were incorrectly dragged down yesterday - in my mind, a smart move.

One could argue that this is because of the White House + Congress's assurances that something will be done. To that I retort: They said that yesterday, and things kept plummeting. There was a lot of collateral damage yesterday, and I believe what we're seeing now is a response to that.

Be interested to see the breakdown in trading right now between companies most directly affected and those not particularly involved.

[DaddyTorgo]

Originally Posted by Marc Vaughan

LOL

Its definitely not affected Manchester City who have caused us to have to revamp the economic model somewhat to take into account the ludicrous budgets their new owners have made available ....

PS - FMH2009 PSP now comes with a 2d match view and multiple leagues running at once (end plug ).

Manchester City - blahh. kooky new owners. *shaking my head*

Hahah - nice plug!

And yes, I was kidding with my initial question.

Apologies, bit of a one-track mind at the moment.

[JonInMiddleGA]

Originally Posted by Marc Vaughan

So now they can fold quietly in confidence that they'll get re-elected

Which was going to happen for the large majority of them regardless of what they did yesterday. Congressional re-election rates have not dipped below 60% since 1932, and not below 70% since then.

[Gary Gorski]

Originally Posted by Tekneek

But, I thought this collapse was going to take everybody with it? Are these foolish investors who are about to lose their shirt?

I'm trying to understand what is happening here. Chicken Little was out in full force yesterday afternoon, but now we either have over-confident investors pulling the market up today, or there are a significant amount of people out there who don't believe we are on the verge of a complete collapse.

Two factors - there was easy money to be made today and sentiment is that we're getting some kind of bill this week from Congress. The Congress leaders have already said "We'll get it done this week" so the market is calmed. Hopefully they do because if they don't we'll see yesterday all over again.

Valuation of companies is not driving this market (well at least outside of financials). Fear is in control - today the fear is less because of the belief that Congress is going to get it done. Like others said, there are GREAT deals to be had if you're a long term investor. I only wish I had money to put to work here because there are legendary companies at bargain prices. But if for some reason that bill fails it all goes out the window. Fear will skyrocket and we'll go crashing down again until we either do get some intervention or until we actually hit the bottom.

[molson]

I wonder how rampant this kind of stuff is (my guess is very). And I don't hear about this stuff being prosecuted very often. I wonder how many US Attorney's Offices even have specific divisions for this kind of thing.

http://www.idahostatesman.com/localn...ry/518905.html

"Federal prosecutors say the scheme involved using more than 40 "straw borrowers" to get 49 construction loans totaling $20 million. Cobos, a loan officer, allegedly helped approve the loans and in return received kickbacks. Upchurch, a building contractor, withdrew the money from the loans but didn't always build the house, court records show. The others received "finder fees" for locating the straw borrowers, prosecutors say. The FBI spent two years investigating the case"

I wonder how much the government is paying for these loans - not really a great investment.

[sterlingice]

Originally Posted by molson

Big banks were painted as the enemy last week, with many even suggesting government imposed size-caps. Now all of the sudden, massive banks are considered critical to the economy.

The three SuperBanks that have been formed out of the last couple of months scare me more than anything and definitely moreso than the government nationalizing anything.

SI

[Mac Howard]

Originally Posted by Galaxy

Just curious, what regulations does Australia have?

Essentially that any lender has to have reserves to cover a higher percentage of the loan. I don't know the figure but it means that, if defaults take place the bank has to have in place the reserves to cover them. This makes them demand acceptable documentary proof that you can afford the mortgage.

Part of the trouble is that house price rises force up the amount needed to buy the house. We've had that for the last 10 years or so - a tripling of prices in this town in 8 years. There are two solutions to this - there are now 40 and 50 year mortgages which means you can borrow twice the capital with approximately the same monthly repayments (but for twice the time) and there is a government scheme whereby you buy half the house and the government the other half. On selling the government takes half the capital gains - though you can make extra repayments if you wish and eat into the governments half and come to own more than half the house.

Defaults are kept within the ability of the reserve to cover.

Non-bank lenders have to stick to the same rules.

But all the time care is taken to see that you have the ability to service the loan. Nothing more than that is needed.

[sterlingice]

Originally Posted by Mac Howard

I can't quite believe some of the posts above. Guys, this bail-out is FOR YOU!

If you have shares, it's for you (or your shares will plummet in price). If you have a house, it's for you (or the value of your house will drop like a stone). If you have a pension plan, it's for you (your money is invested in the stock market). If you have a health scheme, and insurance scheme, it's for you (your money is invested similarly). If you have a job, it's for you (unemployment will leap up). If you run a business, it's for you (you won't be able to get money to grow your business or maybe even pay your employees). If you have debt - credit card, loan etc - this is for you (the bank could call in the debt).

Wake up, guys. This is not about rewarding or punishing the perpetrators of this, it's about saving your own skins (and mine). The credit market is frozen. There is currently no money to do anything. The banking system is close to collapse.

700 billion? You just lost 1.2 trillion today alone! Worldwide, that was closer to 5 trillion!

But it's just not that simple. $700B today is great. But that also equates out to a number with trillion after it in the future in terms of how much we just borrowed to fix it.

And what's to say the immediate, apparent plan is the correct one. Not acting for a couple of weeks this year might hurt. But stupidly spending that kind of money and sinking us into years of problems would hurt much worse.

SI

[sterlingice]

Originally Posted by Marc Vaughan

It can definitely be done - if you look throughout Europe you'll find a history of profit making nationalised companes and indeed in England its been semi-frequent for a company to be nationalised, made profitable sent back into the private sector only to go bust again and be recyled again ...

Generally the companies involved are either flag bearers for the country (ie. associated with England - eg. Rolls Royce), natural monopolies (ie. British Rail) or have a fundamental import to the overall economy (normally a large centralised work force in one area - ie. British Steel).

I think there's definitely historic data indicating this approach is probably the safest and most sensible way to defuse this issue - indeed as might have been mentioned on the forum already Sweden went through a similar situation a while back and solved it by nationalising the banks involved.

So, if the government buys and holds a company and then spins a profit, selling it on the free market, does that make the action capitalist or socialist?

SI

[Passacaglia]

Where's that Birkemeier guy? I think I'd like to cash out my $425,000 now. I deserve it.

[JonInMiddleGA]

Good intentions are at the root of American financial crisis | Commentary

Pretty good column by syndicated writer Clarence Page, which I believe highlights the blame that policies of both the Clinton & Bush administrations deserve for a lot of the current mess. edit to add: Although I think I'd argue that trying to buy votes had as much to do with those policies as "good intentions".

[DaddyTorgo]

hmm - i have some $$ - I actually as I have mentioned before have been pondering putting into ETF's - particularly financials. Might have to take a look at things and see if there's a place there to put it to work before Thursday, or in ordinaries.

[sterlingice]

Originally Posted by JonInMiddleGA

Sigh.

I'm sitting here with:
-- a house that hasn't sold over nearly three years, with a willing buyer who has been fighting his own mortgage situation which is holding up the sale
-- a current client that's a custom home builder
-- a small business that {gasp} has run for more than a decade without living off the sort of credit you're talking about but certainly encounters those who do on a regular basis

You think I don't have some passing familiarity with what you're talking about?
Give me a fucking break.

The issue isn't whether credit is a part of the equation at the consumer nor business level. I'm not even sure I've seen anyone question that. The issue is whether the bailouts on the table to date have been the appropriate response to the current situation.

I'm sitting here directly & negatively affected by the situation in more ways than one & yet I've not been remotely convinced that what's been proposed so far is the right solution. More to the point (since "right" is ultimately going to have to be proven by time), I'm not convinced that we've seen an acceptable solution to date. And at this point "acceptable" simply means better than the alternative of waiting until a revised plan is developed.

Sooner or later, there will be something that's deemed better than nothing. So far, that hasn't emerged for a sufficient number of people.

(I'm trying to word this nicely as I think it's a point worth making and I don't want to attack you as a poster but it illustrates my point perfectly. Also, why I tried to use the literary "we" rather than "you" in the directed comments since it's all inclusive.)

I think this mentality, for all it's worth, shows why many (particularly economists but also posters) are going around shouting that the sky is falling and no one can see it. Most of us only see a few steps beyond us and no one is really good at seeing the "entire picture". Sure, we have mortgages and small businesses but the big businesses- those that really make the economy run with large employment numbers- we just have no idea.

Indeed, at a nuts and bolts level, most of us will see very little short term change whether there is a bailout or not. Our bank deposits were all FDIC insured, our 401Ks take a beating but are still there, there's no change with our mortgages except perhaps that we're paying a bank with a different name, etc.

However, what happens long term with this? If we go into a prolonged recession as a result of this, you bet there's a huge effect to all of us. How about if we suddenly create some giant banks which control so much wealth that we don't allow them to fail? What if we don't implement some regulations and this becomes a downward spiral where this happens again and again every few years? What if we introduce huge moral hazard to the markets by just handing out checks to distressed companies which helps push us into that spiral? Are we missing a giant opportunity for the country to buy up some assets, sit on them, and then pay down the debt by trillions, thus saving huge future taxes?

We really don't know anything- either the doom-and-gloomers or the free-marketers. So, yeah, it's insulting to go around and tell you that we don't know anything, I know. But to them turn around and think we have a great grasp on the situation because we see such small snippets of the economy, that's just ignorant.

In short, we don't know anything.

(But I suppose that shouldn't keep us from speculating- it's not like the "experts" are doing any better )

SI

[sterlingice]

Originally Posted by bronconick

I've done enough reading and paid enough attention to know that something is going to have to be done, and most of what I've just charcterized isn't actually what's occuring. But until someone actually sits down and tells Joe Six-Pack why this is necessary, don't be astonished when the public response is 500-1 against it. And in an election season with a lame duck President with low approval ratings, there's no one to do that talking.

Who gets to play the role of Ross Perot and the little graphs on network tv?

SI

[Mac Howard]

Sorry molson for the delay in answering. I had just answered all your questions in detail and then accidentally touched a key and Firefox closed down losing everything. So if I get tetchy it's not you I'm getting at

Originally Posted by molson

I'll try another hypothetical. Imagine Congress had come up with a plan that was 10 times as massive as this one, incredibly more reckless, benefitted nobody, and ultamitely resulted in our currency being worthless. I'm just scared that in this environment, there would be huge pressure to do it anyway, because "it's the only plan we have".

I would have thought Congress was the least enthusiastic about this and least likely to pull this confidence trick on you.

But the compulsion comes from the financial world and the collapse of banks, insurance companies etc. I think we can accept that these have not been created just to enforce a Congress scam.

This thing is real.

So how do we know this plan isn't that plan? Panic moves during times of economic turmoil don't really have a great track record. Congress couldn't manage a pet store efficiently. The complete and utter confidence in this bill as our "only option" just feels like one of those historical moments in time where everyone should have seen the impending disaster but didn't.

The problem is that the consequences of your scepticism are so dire that you have to take a chance. It's a bit like a burglar holding a gun to your head - you're not going to argue with him that it's not loaded are you?

As I said Bush, Senate Republicans, Senate Democrats, House Democrats and 90% of financial commentators are all telling you the same thing. That's a hell of a crowd to get together for something that isn't important. I think that you have to give them some credit some time.

And my second fear, as I've stated, is that propping up a unsustainable system will solve nothing and make things worse without appropriate further action that Congress isn't qualified or motivated to provide. Is that really that insane a concern? Again, it's a CONCERN, not at all an argument against any government intervention.

It's not insane but again you're playing with fire with enormous consequences if your wrong.

In the most simple terms, and going beyond this particular situation, I think we're just too afraid of recessions. That doesn't mean I don't care about people suffering from a recession.

If the banking system collapses you're going to get something much more severe than a recession. You have a recession already and you'll have one even if the bailout goes ahead but if it doesn't and the banking system goes belly up then you're looking at something much closer to 1929/33.

The collapse of banks and insurance companies already should warn you that this isn't hyperbole.

But as for the posts I was refering to, you can start with the one I was responding to, and then your debut post in this thread:

The assumption you're making is that anyone who has concerns about all this must not understand that the intention is to help "main street and not wall street". As I responded to you then, we get the idea behind it. Whether it works long-term is another story.

The first question in this post justifies exactly this post, molson : essentially 'is this a Congress beatup?" You don't believe it's real. Many contributors' objection to the bailout is that it's a bailout of Wall St - they don't want these guys to be let off the hook (incidentally precisely the attitude that led to the 1929 crash). If you know your house value will plummet, if you know your pension plan will be savaged, if you know you may lose your job then you're not nearly as dismissive of a solution as so many posts are. At least you give a possible solution a fair hearing.

But the reaction to the bailout isn't a studied analysis of it's merits, it's an antagonistic attack with little attempt to understand. There is no feeling at all that these posts indicate the poster is aware of the consequences for him.

Was it arrogant to point these things out? I think not because no post had shown anything that suggested these consequences were known to the poster.

[sterlingice]

Originally Posted by Warhammer

RealClearMarkets - Articles - In Times of Crisis, Trust Capitalism
I thought this was a great article.

I didn't realize the information about lending from the fed. Very interesting article.

Also, it helps to hit home with the message that a lot of money isn't frozen. It's just waiting on the sidelines to see if they can get a more favorable deal from the government.

Once again, the more and more I read about this, the more and more I just want to let the markets sort themselves out but provide the banks with an out in terms of a government vehicle buying for buying up major stakes and holding onto them to spin for a profit later.

SI

[Mac Howard]

Originally Posted by sterlingice

But it's just not that simple. $700B today is great. But that also equates out to a number with trillion after it in the future in terms of how much we just borrowed to fix it.

And what's to say the immediate, apparent plan is the correct one. Not acting for a couple of weeks this year might hurt. But stupidly spending that kind of money and sinking us into years of problems would hurt much worse.

SI

Because the consequence of doing nothing is dire, will cost you very much more and hit you personally in ways you would never wish to be hit.

The collapse of the banks and insurance companies ought to convince you that this is real. It's not a beatup by Congress or Bush. These bankrupcies are real and there are many more on the way if you do nothing. The financial system that oils the society you live in is on the point of collapse. The "It'll be right" mentality would be fatal.

As for the amount of money, note the 1.2 trillion lost on Wall St yesterday. If the banking system goes belly up that's nothing with what will be lost.

[Marc Vaughan]

Originally Posted by sterlingice

So, if the government buys and holds a company and then spins a profit, selling it on the free market, does that make the action capitalist or socialist?

SI

I'd always seen it as 'pragmatic capitalism', where a society is generally free market apart from when that fails the societies basic aim (which is to improve the lifestyle of its people at its core).

In England British Steel was nationalised (years ago) because it would have adversely affected its core industrial areas for it to fall because it was the main employer in them.

Once it was 'turned around' (ie. made profitable) it was put back into the marketplace again.

Its similar to the idea of the 'lender of last resort' which I've heard mentioned in America but just in a slightly different way - the goverment steps in when required to prevent a potential social disaster because of poor management of a situation by a company.

(its not hugely dissimilar to whats proposed in America presently - most people accept that the American financial institutions are generally hugely profitable even when run sensibly, so taking ownership of them makes huge sense for the goverment in the long run because (1) it prevents further economic/social problems from this crisis, (2) they can flog them for a profit later on once they're back on their feet and thats ignoring the profit which will hopefully be made during the interim time)

[JonInMiddleGA]

Originally Posted by sterlingice

We really don't know anything- either the doom-and-gloomers or the free-marketers. ... In short, we don't know anything.

FWIW, I'm pretty sure I get where you're coming from & took no offense to it.
I've got no problem with acknowledging that there probably isn't a soul on this board that has a full grasp on the subject.

What I took offense to, and was trying to illustrate, is
-- the suggestion that anyone who isn't fully on board with the proposals to date just "doesn't get it"
-- More specifically, that those who aren't on board somehow "get it" less than some of the more vocal ones here who support it.

There are quite a few people in this thread who seem to have at least a roughly equal understanding of both the micro & macro economics involved (however limited that equal understanding may be), they're just reaching different conclusions about the solution, impact, etc.

[SportsDino]

This whole bailout thing seems like someone pointing a gun at your head and asking you for all your money. It is all fear-mongering to get some really bad legislation enacted.

As for 90% of financial commentators, Congress, and the President, they LOVE to lie, hasn't anyone noticed it quite yet. Why believe them about the necessity of this bailout?

If you want to spend 700 billion dollars, track down the mortgage entry points. Somewhere, somehow, one guy mails one check to one bank to pay off his mortgage. From there somehow the money gets sent to a billion places thanks to these foolish derivatives (that should not have been created in the first place).

The market pressure is coming from that mortgage being defaulted, and effectively worthless, therefore all other derived value is worthless.

Have the government buy the mortgage right there, at whatever price they determine makes sense (say 50%). Rework the deal with the dude paying the mortgage so that they pay something with interest, say at least 90% of principle plus some interest rate.

All of the derivatives need to untangle themselves and request their payments from the government. If they can not demonstrate a clear claim to a portion of the mortgage, they are worthless. The amount paid to the derivative is prorated based on the relative proportions of the original mortgage and the reworked contract.

End result, less defaults, and a mechanism for some of those 'troubled assets' to have value greater than a penny on the dollar... if they can be resolved by these supposed experts into a valid claim.

Does nothing for bank trust, if they bought shit its still shit. Will change the liquidity situation though for anything that is trackable enough... once the mortgage is reworked by the government instead of being written off at 0 it will be at some percentage, probably a fairly high one (most people don't want to lose their home).

If a person cannot refinance, the home defaults and is written off, the government auctions off the property starting bid at the price it was acquired.

So the government acquires a large percentage of the mortgage revenue or a lot of land (hopefully some of it will sell, but some will just sit on the shelf to be sold during the next boom time whenever that is). Losses will at least be estimated, instead of buying fictional contracts that will become worthless because government acquisition does not effect the consumer side default situation whatsoever, the government restores some value in a REAL economic sense. It will not bail out the worst and naughtiest banks/funds, it will help people and derivatives that are transparent enough to hold water.


Tell me how that set up is worst than buying all the worst parts of various banks balance sheets, for equity in banks that will probably go under after everyone liquidates their position during the government cash infusion? That 700 billion will be sucked straight into stabilizing big speculators recent losses and halting their margin calls until they can get their fictional assets off the books (shift them onto the companies, which they will then suddenly back out of and they will mysteriously fail, setting off another round of stock market drops... if they are smart they'll remember to set up a put option before they do it too).

[SportsDino]

repeat

[Gary Gorski]

Breaking news according to CNBC - FDIC is seeking authority to boost the deposit insurance limit above 100,000.

[Mac Howard]

It's quite wrong to say that we know nothing. We know a great deal - particularly about what happens if you do nothing. We know that because we've been doing nothing. And what has happened? The largest banks have gone bust. Insurance companies, mortgage lenders, mortgage security companies - all going bust. We also know that financial organisations are refusing to deal with each other. We know there's a credit crunch bordering on credit freeze. This is not "nothing". This is very real information indeed.

So what happens if we do nothing? Well, much of the same. We know many of the banks have exactly the same problems as the ones that have gone bust. So why would they not fail too if we do nothing. And we know when one financial company fails it brings down another. We know how this snowballs because we've seen it before.

If we do nothing there is no reason to believe that one bank, insurance company, mortgage lender etc after another not will fail.

That's not "nothing". That's real information.

Do we know how far this will go? Of course not. It's doubtful that we will wait 4 years as they did in 1929/33 before we realise we must intervene.

So, realising that we must eventually intervene then surely it is best to do so before half the financial system has disappeared.

If we enact the bailout do we know what will happen? Not exactly. We do know that we'll remove one of the causes of the banks failures - the toxic assets that are ruining their balance sheets. That's a start because that is the original cause of the whole problem.

Will it solve the problem? We really don't know. But there's a chance which is much better than the chance if we do nothing.

[JonInMiddleGA]

Originally Posted by Mac Howard

So, realising that we must eventually intervene then surely it is best to do so before half the financial system has disappeared.

Not "surely" at all actually. A certain thinning of the herd might not be the worst thing possible.

We do know that we'll remove one of the causes of the banks failures - the toxic assets that are ruining their balance sheets. That's a start because that is the original cause of the whole problem.

Wouldn't the creation of those toxic assets be the "original" cause of that aspect of the problem? If so, are there adequate safeguards in place to prevent a bailed out lender from repeating the same mistakes again? For that matter, are there adequate safeguards in place to prevent the new government interest holders from repeating the same mistakes again?

And those are just quickie questions without adequate answers for starters.