Politics: Bailout is a cure worse than the disease
Conservative Republicans aren’t the only ones criticizing the $700 billion bailout. Lefty blog TPM is running this lucid commentary:
The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can’t trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.
That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis.
In other words, the worst case scenario is that we have an extremely scary day in which the markets freeze for a few hours. Then the Fed steps in and takes over the major banks. The system of payments continues to operate exactly as before, but the bank executives are out of their jobs and the bank shareholders have likely lost most of their money. In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion.
In other words, let the system run it’s course. There will be some suffering, but the mechanisms already in place will keep us out of the 2nd Great Depression that we’ve been warned about.
Frankly, I think a little suffering just might be the lesson we need to teach us the folly of interference in the free market for the purpose of establishing economic parity among citizens.
September 30th, 2008 at 6:45 am
“mechanisms already in place will keep us out of the 2nd Great Depression that we’ve been warned about.”
What are they? Did they say that durring the 1929 start of the depression?
If credit dries up or becomes super $$$$ who can borrow money? Will banks call loans before they are due to hedge money before there is a lack of cash for them to operate? I understnd there is FDIC insurance on assets but not on loans. so what protection is present? Bank falures the answear? I guess it is good if it is not your loan or bank that fails.
September 30th, 2008 at 6:52 am
Asthe article to which I linked states, the federal government will step in, if necessary, to ensure banks and will be able to loan money to each other. It’s concern that these short term, big money, loans won’t happen that is causing all this consternation. No doubt this will be painfull, but far less painfull to innocent taxpayers that taking the equivalent of the cost of the Iraq War out of their hands and handing it over to banks.
September 30th, 2008 at 9:02 am
Today’s lesson: never trust free market libertarians on economic matters.
September 30th, 2008 at 9:20 am
Actually, the real problem isn’t those “unworthy” masses who want houses.
Some relaxed the loan qualifications for reasons that were, well, less than altruistic. The idea was that if you give a risky loan to someone who is likely to default, the lender would still come out on top as they were counting on the price of the house to go up! Hence, if the poor slob can’t make the payments, the lender forecloses; the slob loses his/her equity and the lender now has a cheap property that is “sure” to increase in value.
But even better, by bundling up loans such as these with risky loans from different geographical locations (e. g., loans from California with those from New York) and putting in a fair number of more solid ones, you now have a bond to sell!
Then someone writes insurance for this bond thereby driving up its value; don’t worry about having the money to pay out of the bond goes bad as that won’t happen, right?
So many loans from so many locations will have to go bad at the same time; the chances of that happening are low, right?
A couple of cool sources: funny google document
and a detailed analysis.
Bottom line: there is lots of blame to go around, and whether one wants to admit it or not, much of it comes from the investment end.
September 30th, 2008 at 9:22 am
Ps: I botched the google document link:
http://tinyurl.com/2kvosz
September 30th, 2008 at 9:39 am
Postsimian: Correction: Free market libertarians are the ONLY ones you can trust on economic matters. The other guys are pleading on bahalf of their constiuencies’ narrow self interests.
September 30th, 2008 at 10:10 am
Bill: It’s the “free market” part that gives you away.
September 30th, 2008 at 2:23 pm
From everything I’ve read – it’s Phil Gramm’s fault. Seriously. It was his Gramm Leach Bliley Act, and the Commodity Future Modernization Act – both of which gutted the Glass Stegall Act that repaired what lead to the 1st Great Depression.
http://www.motherjones.com/news/feature/2008/07/where-credit-is-due-timeline.html
or
http://www.chron.com/disp/story.mpl/business/steffy/6012610.html
I’m with Billy, though, in that Wall Street and greedy investment bankers need to suffer and lose THEIR houses. And it would be good for people in America to move away from our current society of Instant Gratification and Brand New Stuff Every Year consumption.
September 30th, 2008 at 3:35 pm
If there’s one thing we’ve learned through the popping of the real estate bubble, through the popping of the internet bubble, and through the greed of the oil companies and war profiteers (usually one in the same), it’s this: Unfettered, unregulated capitalism will NOT and does NOT work.
Billy, my man, your words come as if you are a man without a financial care in the world, as if you’re a multi-millionaire lounging on a beach in Cancun. I mean, really, would a free-market “damn any regulations” guy really ask for donations to his website on a regular basis?
September 30th, 2008 at 3:49 pm
there is a great deal of discussion over at DailyKos about the bailout plan, in all forms. This one is particularly detailed:
http://www.dailykos.com/storyonly/2008/9/30/2562/85965/17/615262
And if you’re worried about it being some democratic love fest, may I offer the following quote from the specific story above:
“That is a failure of leadership — and in a financial crisis, no less. Bush, the Republicans, the Democrats — in all of Washington, there seems not one damn group worthy of confidence. Paulson deserves some credit for even coming up with a plan for people to shoot arrows into, given that it’s a hell of a lot more than anyone else in power has done.”
I highly recommend backing out to the main site and reading TrapperJohn’s comment as well. Then hit Kos’s link to Dave Sirota’s comment. All interesting.
September 30th, 2008 at 5:06 pm
I disagree with everything you said, Billy.
September 30th, 2008 at 5:27 pm
Bill, I think what BJ is trying to say is that the invisible hand of the market has given you the finger. Obviously, the market wants this site to fail, and you’re interfering by asking for donations. Where’s your god now? XD
September 30th, 2008 at 7:06 pm
poast, you obviously don’t understand the concept of the market because people do donate/buy ads to keep the site going thus it is still on.
You have to let these banks fail, if that is what is going to happen. If you don’t then you only prolong a mediocre performing market by injecting the $700 billion. If you let the banks teetering on the edge fail then it opens the market for other companies to fill their void thus growing and gaining market share creating more wealth. NO COMPANY is “too big” to fail in our economy, the only economies that have companies too big to fail are managed by Central Planning.
September 30th, 2008 at 7:11 pm
The whole justificationg for the bailout is that the Feds could actually hold onto the bad and good loans, which would be bundled together, until a time that they can be sold off with interest. The only problem with this is that if these mortgages would eventually produce a profit then there isn’t a reason for the Feds to buy them because there would be another entity(ies) willing to take them for profit. There isn’t so they aren’t a good inveestment, but they are a way for some people and companies who really screwed up to keep their jobs.
October 1st, 2008 at 2:45 am
The current power vacuum in Washington is stunning and unprecedented in my 55-year lifetime. Ironic for the end of an administration that systematically and treacherously sought to gather as much power as possible unto itself. Bush’s mind is already back in Texas, and he’s just going through the motions.
Congress’ years of petty, pandering, lobbyist-driven politics have left it with no leaders who command respect.
One can hardly be surprised that there’s no one in Washington who deserves trust right now.
I had hoped the rescue package would pass Monday. I kept hearing Republicans talk about the allegedly partisan speech Nancy Pelosi gave before the vote. I thought they were exaggerating until I saw it early Tuesday on C-SPAN. It was incredibly stupid for her to slap Republicans like that before she needed their votes to prevent what she said was Armageddon.
While most politicians have an air of “we know what’s best for you,” she wears that attitude on her sleeve. It really rubs me the wrong way.
October 1st, 2008 at 7:53 am
These guys agree about as often as a solar eclipse: Soros, Limbaugh, Michael Moore, Michael Savage all agree the bailout was a rip-off and have been as LIVID about this as I have ever seen any of them.
October 1st, 2008 at 7:59 am
Pelosi did not want the bill to pass unless she could blame the Republicans for it. Why else would R. Emmanuel be on the floor managing the Democratic votes against and why would all Democrat members of Barney Franks committee vote against it.
Also: why would the Dems not allow the Reps to amend the bill with the FDIC increase and other amendments that would have gotten enough of them to vote for it.
The angles and cross angles….I am having a hard time keeping them straight.
I think what Pelosi and the most strident Liberals miss is that many of us see Bush and Paulsen as one of them (liberal) so when she bashes Bush, it only reminds us of the $40 billion No Child Left Behind legislation which Bush let Ted Kennedy write and take credit for passing.
October 1st, 2008 at 9:38 am
11Bravo — of course I understand that, it’s just fun to rib the top dog once in awhile.
October 1st, 2008 at 10:17 am
Indeed Chase – “Soros, Limbaugh, Michael Moore, Michael Savage all agree the bailout was a rip-off”
Wow. Icicles in Hell for real.
October 1st, 2008 at 10:29 am
They disagree over why, however. The right wingers, despite their history over the past 8 years of exponentially expanding government, inconsistently cite this as a huge expansion and therefore oppose it. Lefties seem to think it’s giving a blank check to rich bankers who probably don’t deserve it. Believe me, the differences in opinion are staggering.
What they don’t seem to be talking about nearly enough is whether or not it will work, and what will work if not this.
October 1st, 2008 at 1:50 pm
Wow it is amazing how misguided many of you are. There are three primary reasons we are in the mess we are in today:
1. Legislation that allowed financial institutions to “sell” mortgages and thereby creating a system that does not force accountability for underwriting.
2. Legislation that told financial institutions to relax credit rules for home ownership. The whole concept of “everyone” should be able to buy a house is not sound logic…as is evidenced by point no. 3.
3. Never underestimate that there is a large chunk of Americans that are not very smart. Buying a home you can’t afford is a recipe for disaster, when credit rules require little to no down payment.
It is not wallstreet who suffers most in this crisis, but main street. I lost over $20,000 in one day from my 401K dropping. With time to rebound it should be OK but there are millions that are at age 55+ that may never see a full recovery.
Businesses, large and small will find it difficult to obtain financing. Even the largest companies need available access to credit through bond financing, etc. in order to fund short term needs like payroll. With credit becoming less available it becomes more expensive and this leads to one of two things happens – either companies reduce expenses (read… layoffs) or prices will increase — either way Main Street consumers pay the price.
While I am not naive enough to think there aren’t plenty of financial people that took advantage and do not deserve help, the alternative could prove to truly be scary for every American over the age of 50 if we continue down this financial downturn.
October 1st, 2008 at 3:09 pm
Bobiii, I don’t see what your point is other than we need a bailout because layoffs are bad. Of course they are but the markets are cyclical and trying to fight that by having the government loan money that will never get paid back is not a good alternative. Is this how you want the government to react every time we go into a recession? Yes it is unfortunate people will be let go from their jobs but it isn’t the government’s responsibility to insure low unemployment.
As for your 401k, any advisor worth a darn should have their client reallocate their portfolio as their age increases and their tolerance for risk decreases. People with any brains should not have a significant amount of money in the market if they are looking to retire relatively soon.
October 1st, 2008 at 3:14 pm
Yeah, I had the same reaction as 11Bravo. What was the point besides stating the obvious?