Fed Bailout

Alex_Chow

Not sure why we're wasting tax payer money on this. Why can't we just let free market capitalism reign?

DenSter

I'm not so sure that a completely free market will be any help, because free market principles have led us to this crisis in the first place, but I agree that just pouring that kind of money into Wall Street without some sort of oversight is definately NOT the right thing to do. I am worried though, VERY worried. There IS no $700B, they will have to 'print money', which leads to more inflation than the market can adjust for, and pretty much the dollar won't be worth the paper that it's printed on. I have a feeling that the trip to Europe that I am on right now will be the last one in years that I will be ale to afford...

Alex_Chow

DenSter wrote:

I'm not so sure that a completely free market will be any help, because free market principles have led us to this crisis in the first place, but I agree that just pouring that kind of money into Wall Street without some sort of oversight is definately NOT the right thing to do. I am worried though, VERY worried. There IS no $700B, they will have to 'print money', which leads to more inflation than the market can adjust for, and pretty much the dollar won't be worth the paper that it's printed on. I have a feeling that the trip to Europe that I am on right now will be the last one in years that I will be ale to afford...

Don't worry Daniel. The whole developed world is in deep sh|t, not just the US. This meltdown affects Europe and Asia as well so your dollar is still worth something at this point..

Privatize profits and socialize losses. This is a good slogan for the bailout.

Seems with this bailout we're rewarding risky behavior (what economists call Moral Hazard). In the end, greed is what got us here. We can blame all the dumb people who bought crap they knew they couldn't afford in the first place. The stupid Robert Kiyosaki cult following that were led to believe you can buy real estate with no money at all.

The current debate to "rescue" homeowners that couldn't keep their homes made me think that I should've bought a big home I couldn't afford so I can get bailed out by my fellow taxpayers. Instead, the smart people that saved their money get screwed watching their savings get chewed away by inflation and knowing that the taxes they paid are helping reckless homebuyers stay in their McMansions.

Sorry, I had to vent.

DenSter

The thing is though, that the money for the bailout is not going to the McMansion owners, it's going to the folks who enabled that behavior. In the process, if there are not going to be any oversight regulations, because the bailout WILL happen one way or another, the same folks who were in charge of creating the mess will be thrown out the door with big payouts.

Then I agree, the stupid-a$$ people who knew exactly what they were doing I have no sympathy for. If you buy beyond your means you're asking for trouble. The people who have no clue why all of a sudden the bank are tripling their house payments without warning (because they were lied to in the first place when they were sold a sub-prime mortgage) deserve some sort of hope. Not in the form of free money, but maybe some sort of way that their mortgage could be rewritten at an affordable interest rate.

What I don't know is how many of either types of folks are in this mess.

By the way, you're right that it's a global problem. Here in Holland there are reports that people are withdrawing their savings by the billions.

David_Singleton

Alex Chow wrote:

Privatize profits and socialize losses. This is a good slogan for the bailout.

That I think sums up my opinion of this situation.

Quite a few people are going to get very very rich out of this.

David_Singleton

DenSter wrote:

(because they were lied to in the first place when they were sold a sub-prime mortgage)

Actually a core issue here is that the majority of people (believe it or not) still don't know what a sub prime mortgage is. Many people think that sub prime, means that the interest rate is below (sub) the the prime rate. Actually a sub prime mortgage means that the person taking out the mortgage is a high risk borrower that really is not able to repay the loan. And actually most of these loans were at HIGHER interest rates than someone with a good credit rating will pay. So the issue is not so much interest rates increasing, The issue is that people borrowed more than they could afford to pay, but expected that pay rise, bonus, new job or lottery win to pay the loans.

The perpetrators of this were greedy bankers that wanted to get the higher interest rates, and gave loans to people on the basis that "if they don't pay we will foreclose and resell the home". Those people got it right up till the "Resell the home" part, which ain't gonna happen now.

The sad thing is that the people that caused all this have all ready got their multi million dollar bonuses, and (as Alex points out) are just sitting waiting to get more.

Anyway at least once its all sorted out people will think more about easy credit.

Alex_Chow

David Singleton wrote:

Anyway at least once its all sorted out people will think more about easy credit.

I highly doubt that. Because buying crap that we don't need has become our way of life. 10 years from now, we'll have another financial crisis stemming from another creative financing.

bbrown

This is a $700 Billion taxpayer-funded mulligan for the banking industry.

DenSter

bbrown wrote:

This is a $700 Billion taxpayer-funded mulligan for the banking industry.

Nice metaphore Brian. The thing that worries me is that it isn't exactly Tiger Woods teeing.....

davmac1

I get a regular emailed newsletter from John Mauldin that is free and available to anyone. He does an excellent job of explaining why we need the bailout to save us. Don't forget that Bernanke, the Fed government is an expert in what caused the Great Depression.
The problems were caused by greed and stupidity. Lots of people made easy money. Lots of people borrowed money they had no hope of repaying ever.
Unfortunately, the mess effects everyone - individuals, our customers, our vendors.
That is why we need to clean it up, so we can go on with our lives.
Hopefully the government will reclaim some of the ill-gotten gains and throw a few people in jail.

If you are interested in one more economic view - visit: www.frontlinethoughts.com and sign up for his free newletter.

Savatage

Didn't Bush claim "It's all cleaned up" after Enron crushed peoples lifesavings & then getting Tyco & Worldcom, etc.

http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act **I guess this didn't help**

I guess I shouldn't be surprised he dropped the ball again.

If you have to bailout then I guess we'll have to suck that up, But why can't we do both?
Bailout and bring these CEO's & CFO's to justice.

How about repossessing 10 out of they're 11 cars, take the yachts and summer homes to help pay for their negligence .

ssingla

I am waiting for more details on how this has happened. I am not convinced the way it suddenly crashed in less than 1 year (the period between the sub-prime crisis and today). Balance Sheets of the banks/financial institutions should have warned for the same and lot of provision are normally required. The fed bank rules must not be simpler than what our govt. has imposed here.

Alex_Chow

This bailout is more psychological than anything else. This $700B bailout is a liquidity issue, not meant to do away with sub-prime mess altogether.

Look at the recent bank mergers, this proves that free market capitalism works. Weak banks that made stupid decisions will be chopped up and sold off. The weak lending hurts, yes, and our vendors and customers are hurting, but this is a necessary pain for the market to correct itself without pumping $700B causing problems down the line like inflation.

Like I said, the people who suffers in the end are the hard working people who saved their money. They will see their money slowly chipped away by inflation. They are the ones that didn't get to party and are left with the bill.

davmac1

WSJ - good article:
Lehman's Demise Triggered
Cash Crunch Around Globe
Two weeks ago, Wall Street titans and the government's most powerful economic stewards made a fateful choice: Rather than propping up another failing financial institution, they let 158-year-old Lehman Brothers Holdings Inc. collapse.

Now, the consequences of that decision look more dire than almost anyone imagined.

---

The problem is they created the problems while the President AND Congress AND the European and Asian governments ignored it.
Now we are paying for it. $1 trillion and counting. Some of the money will be recovered. The total risky debt is at least $3 trillion! What are the assets really worth? California home prices have to drop about 60% from their peak to be affordable by the typical middle class wage earner. Usually the market bottoms below average.

David_Singleton

ssingla wrote:

... suddenly crashed in less than 1 year (the period between the sub-prime crisis and today).

:-k Not sure what you mean by this. The subprime crisis starting in the late 90's when banks were told by the governement to make it possible for every American to own a home whether they could afford it or not. It has taken about 10-12 years for it to all come to a crunch, but to say it happened in a year is just not true. it maybe took 9-11 years for people to realize the folly of what they were doing.

To give you an analogy, its like someone at the track saying they lost all their lifes savings in 3 seconds, because their horse fumbled, and came in second 3 seconds after the winner, and they had bet all their money on that horse coming in first.

In fact, the person had to decide to go to the races, they had to take all their money out of thebank, they had to go to the track, they had to place the bet, they watched the horses and jockys get on the track, watched th race, and then felt they lost their money in the last seconds. No they lost their money when they made the stupid decision to bet their lifes savings on a horse race, believing that the hrose would win. That process of colapse took a lot longer than 3 seconds.

No this is the results of 10-12 years of greed and stupidity.

Alex_Chow

davmac1 wrote:

California home prices have to drop about 60% from their peak to be affordable by the typical middle class wage earner. Usually the market bottoms below average.

Which part of California are you talking about? Homes are still freaking expensive in my neck of the woods.

bbrown

They're hearing us


http://www.washingtonpost.com/wp-dyn/co ... 00623.html

Alex_Chow

Wow... take a look at the stock market. I guess Wall Street didn't like the news too much. I still believe this is a necessary evil, even though my portfolio has shed 20% of its value...

As a firm believer in free market capitalism, we will prevail in this crisis. And the financial crisis after this one.

Savatage

warned that inaction would lead to a seizure of credit markets and a virtual halt to the lending that allows Americans to acquire mortgages and other types of loans

That doesn't sound like the end of the world to me. They make it sound like we're all running out begging for loans. I wonder where they pulled that 700b figure from, out their a$$?

ssingla

David Singleton wrote:

ssingla wrote:

... suddenly crashed in less than 1 year (the period between the sub-prime crisis and today).

No this is the results of 10-12 years of greed and stupidity.

What were the auditors and other regulatory authorities doing? How government and financial institutions balance sheet never required the provision?
Its not somebody made the mess but what were watchdogs doing? Those were the people who should have acted but seems the big fish is going to run and the smaller will be left to suffer.

Alex_Chow

Most governments in the world will only react when things blow up. No government will interfere when everything is going perfectly.

As the saying goes: "When you sell, everything is okay"

Savatage

GOP & bush believe in less regulation and try to cut & did cut regulation where they could.

Which then allows these big companies do what they want.
Which in theory sounds fine,
but if they destroy they're own company then it's their own fault and the public shouldn't have to pay to save them from their own mistakes due to greed and arrogance.

Alex said it way earlier -
Privatize Profits - Socialize losses.

Where's the line? Who get's saved & who doesn't? Can Carvel or dunkin donuts be saved? They have employees all over the country too.

Alex_Chow

I guess the good that came out of it is I don't have to sit through those dumb "get rich quick through real estate" infomercials on TV.

And I don't have to listen to people telling me to refinance on the radio.

DenSter

David Singleton wrote:

The subprime crisis starting in the late 90's when banks were told by the governement to make it possible for every American to own a home whether they could afford it or not. It has taken about 10-12 years for it to all come to a crunch, but to say it happened in a year is just not true. it maybe took 9-11 years for people to realize the folly of what they were doing.

Dutch TV last night aired a speech in october of 2002 by Bush where he was delivering a passionate speech about enabling home ownership for all people, and that Freddie Mac and Fanny Mae were "prividing the funds to make this happen" (paraphrasing there). They then also showed a graph of numbers of sub prime mortgages, which dramatically increased right after that speech was delivered.

While it's true that this idea of wealth and progress should also include home ownership for the less affluent started during the Clinton administration in the late 90's, the biggest push for increased volumes of sub-prime mortgages didn't happen until 2002, when the current administration dropped all sorts of regulations. Granted, the problems had been accumulating for many years, and this crisis is not just because of the mortgages, but the sub prime mess didn't get full underway until this administration cleared the way for banks to push those types of mortgages in 2002.

DenSter

Alex Chow wrote:

the people who suffers in the end are the hard working people who saved their money

Exactly why some sort of gov't intervention is needed. Not to bail out the banks or the people that manage them, but to help prevent economic disaster for regular folks on a massive scale. As far as I'm concerned there should be a massive criminal investigation to nail the people that are responsible for this which of course will never happen.

There need to be firm regulations, and application of the same standard globally. It's the greed of the financial industry (which in essence is what free trade is all about) that caused the crisis, but deregulation is what enabled it. If the Fed for instance had put in place a maximum number that you can loan (like say 4 times your annual salary), some sort of maximum interest bandwidth, or tie mortgage bonuses to the monthly payment amount instead of the loan amount, or any other mechanisms to prevent disaster, things would not have been so bad.

I believe in free trade too, and that everything eventually works toward a balance. In this case though, when it affects more than a few companies, you can't just let it happen.

Alex_Chow

The market is correcting itself as we speak as weak banks are being forcefully sold off to stronger banks (with the help of FDIC) without the bailout.

By the time Congress passes any kind of bailout, the market would've correct itself. Politicians cannot fix the economy, they can only work to get themselves re-elected, which is a awful shame.

Savatage

True, One side or the other will somehow claim "Victory", when there is nothing victorious about it.

Alex_Chow

Savatage wrote:

True, One side or the other will somehow claim "Victory", when there is nothing victorious about it.

You're mistaken, they're talking about their re-election campaign.

davmac1

I think one of the biggest problems was allowing the banks to show deferred interest as if it had been paid instead of as a loss.
If the mortgage was made at a 1% interest payment rate, but really accrued at 6%, then that should not have counted as actual revenue. With better accounting showing huge upfront losses, nobody would have made these ridiculous loans.

ssingla

The bailout package being rejected, markets tumbling..... What Next

DenSter

Alex Chow wrote:

The market is correcting itself as we speak as weak banks are being forcefully sold off to stronger banks (with the help of FDIC) without the bailout.

I believe that the market was coming back around because everybody still believes that there will be a bailout, that Conress is merely stuck in the details. If it truly dies, there's going to be big problems.

I'd like to qualify what you are saying about free market. Eventually a free market system will move toward an equilibrium, but that doesn't mean that problems are "automatically solved" by the absence of regulation. The reason why there needs to be regulation is because it is not always a good thing (not even in YOUR view of free market) where that equilibrium will end up.