TARP to cost far less than anticipated

[JPhillips]

For me the continuum is:

TARP+serious reform>TARP+current reform>TARP+no reform>No TARP

I don't like the moral hazard, but wrecking the global financial system so I can prove a point to bankers doesn't help me any.

[dawgfan]

Originally Posted by JPhillips

For me the continuum is:

TARP+serious reform>TARP+current reform>TARP+no reform>No TARP

I don't like the moral hazard, but wrecking the global financial system so I can prove a point to bankers doesn't help me any.

Perfectly stated.

[DaddyTorgo]

Originally Posted by JPhillips

For me the continuum is:

TARP+serious reform>TARP+current reform>TARP+no reform>No TARP

I don't like the moral hazard, but wrecking the global financial system so I can prove a point to bankers doesn't help me any.

This is what I was trying to say much more succintly though.

[Glengoyne]

Originally Posted by JPhillips

TARP+serious reform>TARP+current reform>TARP+no reform>No TARP

Can I +1 that without screwing it up?

[Glengoyne]

At this time, I'd like to quote Winston Wolfe:
"Well let's not start sucking each other's dicks quite yet."

There is a lot of the financial system upheaval that still hasn't been rooted out yet. A helluva lot of those ridiculous upside down mortgages are still out there. Yes the bail out hasn't cost quite what was expected. Which when you consider the scope of the AIG bailout, is pretty remarkable. But I'm still not sure that the other shoe just hasn't dropped yet.

[BishopMVP]

Originally Posted by Glengoyne

There is a lot of the financial system upheaval that still hasn't been rooted out yet. A helluva lot of those ridiculous upside down mortgages are still out there. Yes the bail out hasn't cost quite what was expected. Which when you consider the scope of the AIG bailout, is pretty remarkable. But I'm still not sure that the other shoe just hasn't dropped yet.

I think part of it has dropped with real estate price drop/sale moratorium, and it will slowly find the new baseline there. Fundamentally that was the problem - just as it is neither smart nor possible to have 100% employment there is a certain percentage of people that should not and do not have the ability to own homes. For ~20-30 years the government, with help from everyone else along the way, tried to game that number and it led to a huge artificial increase in "net worth". I think it is a bad thing macro-economically in the medium to longer term because it reduces mobility, but there is an inherent cushion in that system because people will only realize/accept the reduced sale value of their home over time rather than immediately.

[SteveMax58]

Originally Posted by BishopMVP

I think part of it has dropped with real estate price drop/sale moratorium, and it will slowly find the new baseline there. Fundamentally that was the problem - just as it is neither smart nor possible to have 100% employment there is a certain percentage of people that should not and do not have the ability to own homes. For ~20-30 years the government, with help from everyone else along the way, tried to game that number and it led to a huge artificial increase in "net worth". I think it is a bad thing macro-economically in the medium to longer term because it reduces mobility, but there is an inherent cushion in that system because people will only realize/accept the reduced sale value of their home over time rather than immediately.

Yep, agreed on the mobility point and the lingering effects of that over time. That is really why I have believed the fed & treasury's strategy has been to create as much inflation as possible in order to balance the housing market prices vs. everything else relatively (or allow it to decline less, perhaps is the better way to describe it). Of course...jobs to allow people to buy/rent these houses is also needed and that's the crux of the issue in most places imho.

Of course, an inflation strategy could create major problems with the currency, especially given our negative trade balance. This is why I am (and have been) convinced we must cause larger inflation but attempt to balance that by reducing negative trade. The most logical place (all things considered IMHO) is with energy.

Energy independence is not seen as protectionist, it requires innovation (i.e. engineers, white collar jobs, etc.), and if you add on the concept of a national/regional energy grid you will also begin to employ the people who are largely unemployed right now (i.e. construction workers, blue collar workers, etc.). Even if it costs us 1.5 times as much for homegrown energy it will better counter balance our level of inflation by keeping the extra .5 within the US economy...thus making the US buying power better than it otherwise would be in the mid- to longer term. This is really what I was hoping the Stimulus plan would be...and it just wasn't.

[JPhillips]

Originally Posted by SteveMax58

Yep, agreed on the mobility point and the lingering effects of that over time. That is really why I have believed the fed & treasury's strategy has been to create as much inflation as possible

?

Inflation is far lower than the Fed target of 2%, and that target is low enough that inflation won't help stabilize prices. The Fed has gone out of its way to make it clear their main priority is to keep inflation as low as possible.

[SteveMax58]

Originally Posted by JPhillips

?

Inflation is far lower than the Fed target of 2%, and that target is low enough that inflation won't help stabilize prices. The Fed has gone out of its way to make it clear their main priority is to keep inflation as low as possible.

Fed and government collectively is what I meant. I'm talking more about the lowering of interest rates over the past 3 years, additional home buyer tax credits, fed purchases of MBS, etc. I don't think they did enough to accomplish the goal but I think it was their intention originally (starting in 2008).

But my point is that this strategy doesn't fix anything without the rest of the economic issues addressed. Maybe this is why the fed stopped buying MBS?

[flere-imsaho]

Originally Posted by dawgfan

You fail to account for the comprehension level of most people in this country.

Oh, agreed 100%. I probably should have done a after my sentence.

Originally Posted by SteveMax58

I know this was sarcasm but this was actually my biggest issue with TARP. I didn't want the same banks to be allowed to continue if they would have gone bankrupt. It gives a free pass and we really haven't seen any serious movement to make sure it never happens again. Letting them fail doesn't mean others can't continue.

While I certainly agree on one hand, the real problem (at that time) of letting several fail in a row was the eventual cascading effect you'd have, which would basically result in an accelerating number of failures across the system. The huge amount of leverage being practiced at the time (and probably still, to a certain extent) made this a real likelihood. Sadly, I'm not convinced that the financial reform bill really addressed this as well as it should have.

Originally Posted by Dutch

Did the first page include the New York Yankees?

[SportsDino]

Well I'll sit on the other side of the debate and say TARP is still about the worst thing for the economy, and its showing in my opinion.

We have stagnant employment, massive concessions in wages/benefits, government budgets falling apart, massive (and sometimes illegal) foreclosures, a new fragile stock bubble, companies afraid to spend when they have cash reserves and practically FREE interest rates... oh and more money than ever concentrated in fewer banks.

TARP and the thinking behind it is financing this continued depression. A recovery won't happen because a portion of the elite now have a way to extract money from the economy that works faster during bad economic conditions. After the housing supply is fully owned by the banks, don't be surprised when housing takes a turn and all of a sudden prices are back in the stratusphere.

The reason TARP can be paid back is because the companies got the money from somewhere else. Research the process of how the Fed works and dig a bit to get a guesstimate on how much they are lending when the banks are notorius for currently being very tight with the money. My estimate is there is a lot of lending for so little activity.

Why else is there such a nonsensical Fed rate? Does anyone here really think it makes sense for such a rate to be at 0? In a time where it has just been proven that banks are good at ignoring massive amounts of fundamental risk? They say it is to stimulate the economy, but they are working off old and horribly corrupted ideas that hardly reflect Keynesian logic anymore. This rate of near zero is to finance a super-leverage game so they can look good in the short term by extending cash flows into a joke in the long term.

Do some math, how are the banks making record profits in a time of disastrous defaults (traditionally a default is the lose-lose scenario that banks are charging you that wonderful interest rate for, the interest is their price for taking the risk of default). Well a lot is accounted for by banking fees, which are higher during times of recession (yay bad economic conditions). But even that doesn't fully account for the picture, you have to look at how the balance sheets of the banks are changing in the last couple years since TARP and the Fed lending spree began. If you give out billions of dollars and allow companies to restructure their finances in time with great agility (which is one game they've fallen in love with in the banks) you can easily make it look like you are turning a short term profit.

Hell, its Enron-like... at the height of it all we even had the government working up ways to create sham banks to purchase assets (this outside TARP by the way) to make short term books look good.

TARP, and letting the Fed and Treasury run amock, is still one of the worst things that has been pursued by the government. They are painting a rosy picture of it to cover their ass, and to do so they've had to shuffle a lot of money around in ways none of you would consider 'fixing the economy' if you were to know about them. Its not even at the level of a duct tape fix... they haven't even patched the hole, they just stabbed the patient in the eyes so they were too blind to see that the wound is festering and pouring out blood everywhere... but I'm sure you all feel it in your pocketbooks and the lingering feeling of despair that is sitting on the economy.

There were other ways to handle the massive margin call threat. I've never advocated that the 'free market' would have fixed it, but I think the nature of the solution should have been completely different. And I also think that we could have lived just fine with a few banks being completely busted in the process with the valuable assets being reshuffled to smaller and simpler banks. We've paid hundreds of billions to justify a few elites getting millions in pay and bonuses... when we could have paid tens of billions, bankrupted some evil banks, but saved millions of jobs and homes.

To the margin call of doom crowd I can only say one thing, if toxic housing assets and the potential of default was the true cause of the possible near collapse of the economy... then the only answer necessary to completely stop the entire crisis would be for the government to buy out the stakes in the underlying assets for some small period of time. If no loans default in a period of time, than no derivatives based on such assets can default either.

If the government supported real assets instead of trusting ungodly sums in TARP/AIG/Fed/stimulus/etc money to greedy banks, the total bill would have been far smaller, and the financial economy would have recovered much faster. It also would have given the government leverage in foreclosure negotiation, a potential revenue source (stakes in numerous homes/loans), and the ability to enforce the derivates to be unwound or suffer default.

Instead of trusting the solution to the fools who create and profit from the problem, you attack the problem with direct action to the real tangible assets. If banks were busted for being greedy, that is just more money for the 'good banks' who can profit from a government willing to offload a lot of assets after the crisis.

But we got TARP, and we now got the back patting celebration at the successful hoodwinking... and when the bill comes due and the game falls apart (because the unchecked greed is making the system more susceptible to it) you all will be scratching your head at the next trillion dollar cure the government trots out that suspiciously helps out a lot of banks again but doesn't do much for the rest of the economy. Of course, everyone will claim its the end of the world if they don't go that route. And for a lot of people it will be just the same, because they'll be spending another several month or a couple year span of unemployment, and likely multiple years of yet again depressed wage growth and slow job progression.

This is the stagflation cycle, similar to what happened in Japan. Except we will be on the hook for super-leveraged greed and already have a debt well into the trillions, with a public that is already full of spendaholics... we'll manage to do even worst, and inflate the problem through at least another bubble burst before we do anything about it.

[sterlingice]

Unfortunately, I fear this is a case of "see everyone at the next even bigger recession in 10 years". A simple map of the next 10-15 years for me looks like a weak recovery that looks like the mid 2000s, which, frankly, for most people sucked. A few sectors (finance, home construction, finance) did well while everyone else saw wages stagnate. We were about to get killed by inflation- the summer of 2008 had some huge price increases (gas, groceries, housing continue to bubble, etc) and the only thing that "saved us" was the bottom falling out of the market.

So, we'll have a weak recovery starting around 2012 (maybe) while the leeches continue to suck money out of the system. We're going to be due for another huge crash towards the end of the decade and I suspect things will be politically much worse than they are now. Right now they're mostly inept. I think the government will continue to be corrupted more and more from the inside with the money that continues to stream into political power.

Before that, we'll get slammed by massive inflation in this weak "recovery". Real wages will continue to sink and the buying power of the middle class will get less and less, wreaking even more havoc on this consumer-based economy. We'll wake up one day and a 2020 dollar will be worth half a 2000 dollar. Now, that solves the government debt issue, as the debt is suddenly half as much in real dollars; and no, wholly blaming the guy who put the $2.5T cherry on top of the already $10T crap sundae isn't really fair. It also will solve the housing bubble that still exists, to an extent (no, Billy, a $250K median home price in the best cities to live when the per capita family income is $50K and college is something like an additional $50K-$200K per child for education is not sustainable)- suddenly your $400K house really is only a $200K house but your wages just went from $80K to $40K in terms of buying power.

But it will create an even bigger crunch at the bottom of the spectrum as it's not like the minimum wage will shoot up. The rich and poor divide will become even more pronounced. You can't just say "well, tough for the poor" because you live in the same city and country as them and their problems are, to an extent, your problems. You can't just start killing people because they're poor. Tho, on the plus side, this will help us wrest some competitive disadvantages away from China as our real wages will be ever decreasing, tho at the expenses of educating our people as college will still remain astronomically expensive.

Sadly, this recession wasn't bad enough to get people up in arms. Sure, you had a lot of us just look forlorn and lost at what happened. You had a lot of people buy into a false hope. You had a lot of people get mad at all the wrong people. And of the people who caused all this havoc, a few dopes like Madoff got caught and scapegoated while the majority will never be known and those known are well protected politically.

Instead, it's going to take something on the scale of the Great Depression to move enough people to real action. "Good news, Everybody" (Farnsworth)- it's coming. This time there were a lot of people who were unaffected by the recession- at the end of the day, I suspect about 1/3rd but probably less than 1/2 of people will have lost a job or seen a significant pay reduction- if you consider 20% unemployment at pretty much all time since this has started, some have gone back to work while other have lost jobs- it's not the same 1/5th. That's a huge number but it has left enough people around saying "well, this one missed me" (and anyone saying the social Darwinistic "it's because I've put myself in a good position whereas those other people did not" missed the inordinate amount of luck by which they are still employed and someone else nearly identical to them isn't).

We'll see if this time everyone splinters and fights among themselves again or decides to work together. Guess it depends on how good the bad guys are at turning everyone against each other. Worked well this last time.

SI

[digamma]

To the margin call of doom crowd I can only say one thing, if toxic housing assets and the potential of default was the true cause of the possible near collapse of the economy... then the only answer necessary to completely stop the entire crisis would be for the government to buy out the stakes in the underlying assets for some small period of time. If no loans default in a period of time, than no derivatives based on such assets can default either.

There is obviously a lot to your post, SD, but I did want to point out that this statement here is not quite correct. At its base, a derivative is a contract between two parties (of course with its value derived from some underlying asset). So in addition to the underlying asset causing an end to the contract, either party to the contract can cause a default for breach, non-performance or any number of reasons baked into the contract.

Additionally, many of the mortgage backed securities contain (or contained) default terms not based on the default of underlying assets, but rather on valuation thresholds. So, it isn't just buying out assets to prevent default, you have to buy them out at levels which preserve value. I think determining the cost of preserving those values becomes pretty difficult.

That said, your idea isn't totally out there. Something close to that idea was part of the original TARP plan, but working out the details proved prohibitive. Parts of it were incorporated into the PPIP funds, which have performed quite well over the last year plus.

[SportsDino]

Oh, I do concede my statement as written was false, doh! Derivatives can fail based on any sort of term written into the contract, although I argue that each such contract should have a winner and a loser... if one clause fails then SOMEONE ends up with the underlying claim to an asset. If that is not the case, then you are dealing with a contract that was probably illegal upon creation, such as a mortgage duplicated multiple times with fictional leverage.

If the macroeconomic problem is that housing defaults are triggering a massive wave of margin calls, I argue the government support strategy prevents that because the overwhelming majority of value in the market is still there and the only thing forfeited is all the finance penalties associated with the broken derivatives. If the total value of those finance penalties outweighs the actual value of the mortgages they are covering... well in that case I think we have way too many bankers in the business!!! Let them be liquidated, albeit in a systematic, asset preserving way.

EDIT: I removed my somewhat longer rant and tried to boil it down to clearer points.

[SteveMax58]

Well said SI...your points about inflation in 2008 and in the future is exactly what concerns me. We saw our buying power shrinking steadily until the entire financial system collapsed. Sure, at some point home values come back...because you essentially devalue the dollar and wages do not increase with inflation.

I also believe that (all ideology aside here)...we really do need the federal government to step aside. I really do not think any Senate/House controlled by any party will pass legislation that brings any significant progress to the economy. And by contrast...I think the fact that they'll try is truly going to leave businesses on the sideline. I know people will always make the argument that "businesses will not stop trying to make money". This is of course, true. But it misses the point completely.

Businesses do not invest nearly as much when the playing field has too many variables that they don't have a good handle on yet. When there are potentially new taxes, or even convoluted tax breaks which must be analyzed to determine how that can be leveraged to benefit the business...all of these things delay business and add complication to their forecasting & decision to invest. Start the rumors for more new legislation...they pause again. No, not everybody...just everybody who stands to lose/benefit substantially (and many who aren't sure which one they fall under).

So my thing is...if you want to tax rich people more...do it and get it over with. If you want to give breaks for certain behaviors like buying a home...fine, do it & dont put an end date to it. Just please stop making short term changes that force everybody to pause while they sort out all the crap. Because unlike our illustrious leaders...businesses actually read legislation before acting.