$700 billion!

[Lou]

David Jackson 60 wrote:

NPC Dave wrote:

You are correct that the Federal Reserve doesn't control how the money gets lent out or how it gets spent. But the business cyle you refer to, the boom and bust cycle, is caused by fractional reserve banking. Fractional reserve banking precedes the Federal Reserve, and you can trace just about every single big bust/crash in economic history since the 17th century to fractional reserve banking, with a notable exception being the Dutch tulip mania. That exception had other causes but those causes duplicated in some ways the effects of fractional reserve banking.

Would it be fair to say that Fannie and Freddie do control how the money gets lent out?

Here's a small article on how fannie and freddie might have been part of the problem. It's fairly politically charged and doesn't mention the contributing factors the republicans made to this problem, but I think the assessment of fannie and freddie, and how they helped drive the bubble is fairly accurate.

I don't know, dude. It's a reasonable thesis. But effectively underwriting an additional 12% of affordable housing crap into the mortgage market (assuming all 20% is crap, which even at, say 19%, would remains an innaccurate assumption) strikes me more like an amplifier and not a driver. The driver seems to be all the crap Fannie and Freddie bought into its portfolio, regardless of whether it was connected to affordable housing or not.

I'd have to plug numbers into a working model to be more definitive, but I don't think that the 20% of its portoflio supporting affordable housing initiatives can really be the core cause of the problem.

Here's where you and I definitely agree, though: allowing the banks to think they could escape the risk of writing sooooo many s@@* loans by selling those loans off to Fannie/Freddie and/or other securitizing buyers was a big mistake.

EDIT: I take that back, I misread. Your article says 20% of all loans in the US were subprime or alt-a by 2006. Is that right? It seems low.

Anyway, does anyone have real figures on what percentage of the loans Fannie and Freddie purchased and securitized were subprime/alt-a by definition? And further what % of those were in turn tied to houses and buyers that are properly categorized as coming under "affordable housing" initiatives? And lastly what % fannie/freddie represent of the total mortgage backed securities market?

These are the numbers wer really need to start getting a true handle on how much a the political drive to provide affordable housing really contributed to the collapse.

My gut has no doubt there was a contribution, but without those numbers anyone (not David Jackson 60) claiming either that affordable housing 'caused' the collapse, or, conversely, that it had no role is just blowing smoke.

[Aubrey the Malformed]

Russ Taylor wrote:

Folks, if you like transparency in business, you like regulation. Without regulation, business can and will be completely opaque whenever it suits them.

Also, it never ceases to amaze me how free market koolaid drinkers refuse to admit anything is ever the fault of the market - capitalism in raw form or even under-regulated form is boom-and-bust. Welcome to bust, population US.

Capitalism and the law go hand in hand - if you don't have both, you get gansterism instead. You don't have that in the US, so don't worry.

If you think that regulation is going to be a panacea, you are wrong. Regulation will be set up to prevent this happening again, but the next crisis will be different. Plus regulators never have access to enough information and in any case regulation doesn't pay enough to attract good people. Plus, it has been fairly comprehensively demonstrated that central direction of economic activity leads to inefficient resource allocation.

Boom and bust happens. It just does. I don't know how old many of you are (old enough, suspect) but I remember the last big recession at the beginning of the early 90s. Boom and bust is hard-wired into the human psyche because we are lousy at genuinely assessing financial risk. I'm not suggesting that financial regulation should not be reformed, but I don't expect it to achieve a terrific amount. I have met financial regulators - nice people, but very often out of their depth.

[Aubrey the Malformed]

Lou wrote:

Here's where you and I definitely agree, though: allowing the banks to think they could escape the risk of writing sooooo many s&%@ loans by selling those loans off to Fannie/Freddie and/or other securitizing buyers was a big mistake.

Fundamentally, there was a failure of risk management. Fannie and Freddie went down because they were grossly undercapitalised (and allowed to be by a supine regulator and a Congress subject to fierce lobbying), as indeed were the investment banks. The investment banks failed to account for the potential losses on their portfolios and were highly geared, amplifying the problems. A system of incentives made an industry of writing loans for anyone who might come along, so they could be repackaged into securitised assets and then sold on, generating fees for those selling the loans and packaging them. And Joe Public went and borrowed like there was no tomorrow. (It is all well and good blaming banks, and they certainly have a lot of blame rightfully coming their way, but ultimately these loans have gone bad because individuals took them out without really assessing properly if they could actually pay them back.)

[Paul Watson]

Aubrey the Malformed wrote:

Lou wrote:

Here's where you and I definitely agree, though: allowing the banks to think they could escape the risk of writing sooooo many s&%@ loans by selling those loans off to Fannie/Freddie and/or other securitizing buyers was a big mistake.

Fundamentally, there was a failure of risk management. Fannie and Freddie went down because they were grossly undercapitalised (and allowed to be by a supine regulator and a Congress subject to fierce lobbying), as indeed were the investment banks. The investment banks failed to account for the potential losses on their portfolios and were highly geared, amplifying the problems. A system of incentives made an industry of writing loans for anyone who might come along, so they could be repackaged into securitised assets and then sold on, generating fees for those selling the loans and packaging them. And Joe Public went and borrowed like there was no tomorrow. (It is all well and good blaming banks, and they certainly have a lot of blame rightfully coming their way, but ultimately these loans have gone bad because individuals took them out without really assessing properly if they could actually pay them back.)

Now, now Aubrey, don't you go brining in any wacky notions of personal responsibility into this. It's clearly all the fault of those evil money-grabbing banks. Oh, and the Democrats/Republicans (delete as applicable)

[NPC Dave]

Lou wrote:

12. I don't see Goldman's and Morgan's becoming commerical banks as a bailout, at all. Also the article didn't say anything about either institution swapping 'bad investments'. If you've another article around, I'd like to see that, too. Also, Goldman and Morgan are stil laround because they don't have that kind of bad investment exposure.

And just pointing to an increase in the stock price as proof of collusion is, I think, not enough. The stock took a hit because the whole finance sector took a hit. Any company that gets a new source of revenue will see its price go up. So what?

There are lots of other reasons it makes sense to have Goldman and Morgan become bank holding companys. Ways that are good for the US financial system but outside both banks investment models. Including the fact that they'll then be regulated in their ability to invest or handle mortgages related lending and mortgage backed securities. I'd have to check my news files but I'm pretty sure of the two Goldman has never wanted to be a commercial bank and Morgan has.

It's hard to tell from the Bloomberg article precisely which kinds of 'direct loans from the central bank' G & M now have access to. Some of it sounds like standard depository overnight lending. It also sounds like some of the temporary emergency loans for commercial banks may now be on the table for them. Which makes sense if they are becoming commercial banks (in part).

You may be right in that this was just an illegal move to prop up Goldman's stock price at worst, or a 'kill two birds' move (one of which is illegal) at best. But neither firm was suffering in a way that required a bailout, and making the two institutions that didn't buy into this MBS/subprime mess take on the task of keeping standard deposit banks alive and well, may also not be a bad thing for we average Americans. I don't think the Bloomberg article alone gives enough information to say, definitively.

Lou, I read through further on to your later post and saw your statement on agreeing to disagree, that is fine. Collecting this data and writing long posts are time-consuming.

But in case you or anyone else is curious. I collected some info on your query about how the government and Federal Reserve are stepping in to bailout Goldman Sachs.

Now to be up front, at this point, all the details haven't been worked out yet, and even when they are, it can take awhile to fully grasp what happened because the information isn't going to be publicized.

Also, I can't say any of this assistance for Goldman Sachs would be illegal. Congress gave the Federal Reserve the power to regulate itself, which means technically anything the Federal Reserve does can be considered legal. I could argue it is unethical, but I would have a much harder time arguing it is illegal.

First up, the NY times and Bloomberg published articles saying that Goldman Sachs was dangerously exposed to an AIG failure. If AIG failed Goldman Sachs would have faced steep losses. The article I link to actually has GS disputing that claim, but here it is.

Link

Unfortunately the Bloomberg article I read earlier this morning is no longer accessible, if I can get it back I will provide a working link. In summary, the bailout for AIG was a bailout for Goldman indirectly.

Second, take a look at this chart

The chart you are looking at shows what the Federal Reserve began doing late 2007 and early 2008. Treasury assets are referred to as non-borrowed reserves. Notice the precipitous drop starting in roughly late 2007.

When this credit crisis began in 2007, Bernanke didn't start creating new money. He presumably feared inflation which was rampant(and, as I assert, caused by Greenspan creating too much new money).

However Bernanke had a problem with banks failing due to bad loans. His solution, lend money to banks using AA-rated paper as collateral. In other words, the bank provides the Federal Reserve with its bad loans(as in shouldn't be AA-rated) and the Federal Reserve gives it money. The Federal Reserve then sells Treasury debt to offset these loans.

This Treasury debt was accumulated over many years of the Federal Reserve being in operation. It has run through what it could sell, at least most of it.

In essence, banks were given the opportunity to trade in their bad loans, in exchange for new credit for the Federal Reserve. They use this new money to shore up their portfolio, and let the Federal Reserve keep the bad loan.

Since the Fed was already doing this, I expect them to do this with Goldman Sachs. They will take all of Goldman Sachs bad paper, letting them transition from an investment bank to a regulated FDIC bank.

In 2004 the SEC gave 5 firms an exemption to go from a debt-to-net capital ratio of 12-to-1 to 30-to-1 or higher. Those firms were Goldman Sachs, Merril Lynch, Lehman Brothers, Bear Steans and JP Morgan Stanley.

Link

Three of those firms are now gone. The remaining two are now going through major transitions with Federal Reserve support.

Can I prove my conclusion beyond a reasonable doubt? No, at least not yet. But everyone can read my argument and decide for themselves.

[NPC Dave]

Robert Hawkshaw wrote:

Reactions to the presidential address?

Yes, I have a few things.

Bush stated that "the market is not working properly."

False, the market is working properly, it is purging these companies that lost billions or trillions of dollars. It is driving them to their true market values, which are 0 or close to it. The market is supposed to reflect market values for companies, and thus the market is working properly. A healthy market can then recover once these companies are gone.

What Bush really means is the market isn't working the way he wants.

Well, Iraq didn't work out the way he wanted either. Government power can only do so much. It can kill people and blow up armies and decimate cities, but it can't take away the will to resist in native populations that suffer under an occupational regime. Thus the guerilla war in Iraq continues.

Likewise, the US government can prop up these companies and throw money at them in order to make them solvent again, but that money has to come from somewhere. In enriching these companies and major shareholders he will have to take away wealth from US taxpayers to do it.

And ultimately, the market economy will stagnate in that scenario, productive capital is spent on unproductive companies.

Bush is a lame-duck president that doesn't care what happens after he leaves, he can't be trusted anymore than he could be trusted when he was lying to get into an Iraq war.

Bush and Paulson are pushing for this bailout for billionaires. A bunch of billionaires are on their way to becoming multi-millionaires. A bunch of multi-millionaires are on their way to becoming mono-millionaires.

[NPC Dave]

Lou wrote:

14. I just don't see Paulson trying to prop up prices. Prices of what? Milk? Share prices in companies? Morgan and Goldman definitely hadn't lost trillions. Lehman went into the tank. Poof. Bear Sterns is gone, acquired. Nothing there to prop up. WaMu is on the block.

15. Once again, what's this 'taxpayers' throwing money anywhere? Where is the plan that says, "hey you, living over there, pay more taxes?" I haven't heard concrete word one on a plan to finance this with taxes.

What I have heard is Bernacke (sp?) tell congress he has the powers to write up to $800 billion ($100 billion over the bailout amount - $20 billion over if you take out the AIG commitment) in Treasury bills. I have heard about putting Goldman and Morgan in a position to maintain deposit accounts, buy up failing banks, etc. -- which probably involves a conflict of interest for Paulson but certainly benefits the average American and lightens the pressure on the fed.

And I have heard the speculation that if the government buys the mortgage backed securities and housing prices never come back, then the government will have spent, say, $10 for something that winds up being worth $5. Then they characterized that $5 loss as a money the American taxpayers lost. On which I call BS, since we only lost it if we paid for it with tax money as opposed to, say, t-bill money (t-bill interest payments being covered by treasury investments of a portion of the principal).

Moreover, if it were to come down to it that a portion of t-bill interest on the $700 billion had to be paid for with tax money, then (a) that doesn't need to result in a tax increase. It might. But it certainly doesn't need to be, and (b) that's interest payments over 30 years, a much much easier burden for the economy and the taxpayer to bear and (c) in this hypothetical scenario we're talking about a portion of the interest on a portion of the value, over 30 years; so definitely a much lower figure.

But the notion that housing prices won't go back up in the next 30 years, jamming the Gov't with write-downs is pretty ludicrous. Its part of the exact same thinking that got us into this mess in the first places: replace "prices will always go up" with "prices will never go up". Prices always go up and down.

Lou, hope you don't mind if I answer these questions you raised here.

When I say they are trying to prop up prices, I mean:

Paulson is trying to prop up share prices. Not just for Goldman Sachs but for banking CEOs in general. In Washington Mutual's case, the FDIC steps in and bails out depositors, not shareholders. Washington Mutual was 19 cents last I checked. Shareholders and bondholders get screwed. CEOs and executives are big shareholders. They get screwed in an FDIC bailout.

Paulson's bailout will bailout shareholders, by propping up these companies by having the government take over the bad debt(one way or another). So Paulson is attempting to prop up prices on financial companies specifically, and stock market corporations in general. Also housing in general but mainly that as a means to an end in propping up financial companies.

Now, regarding the government taking on these bad debts, it isn't as simple as taking on something for $10 that winds up being $5. The government also can't just "buy things 20 cents on the dollar" as some TV talking heads are saying.

The problem is credit default swaps for investment banks and large insurers, which were sold to other counterparties for risk mitigation.

Say a big investment house uses its privileged credit rating to take on the risk of A company defaulting. It does this by selling a swap as insurance to company ABC, which is seeking to mitigate that risk of A defaulting.

First scenario, A improves. The swap instrument decreases in value in favor to the investment house.

Second scenario, A declines. The swap increases in value in favor to company ABC.

So the investment house is considered "short" for the swap position.

We are in the second scenario, as the market declines, A gets worse. To cut its losses, the investment house must sell the swap at a substantial loss. Or it can ask the US government to step in and buy back the short swap at a discount so the investment house doesn't lose money.

So the easiest way to save this scenario for the investment house, is for the US government to take the swap. In other words, replace investment house with the US government. But the bailout is not going to do that.

Instead, the US government will purchase enough from the investment house in order to make sure that if the swap goes bad, the investment house will still have enough money to cover it.

So the US government will have to pay much higher prices for things like mortgages, just to cover the investment house's short swaps. Much higher than the market will value them.

You are talking about buying something for $25 or $30 that was only worth $10 at the peak, and that you might sell at $5.

And nothing stops these companies from coming back for more bailouts later. Because they will need more money to cover their swaps. These guys consider $700 billion a downpayment. I read one analyst said the number could end up being $5 trillion.

Now here is the sinker, is my $25 or $30 cost for $5 value a real scenario? We have no idea. We don't know what we are buying. Congress is being asked to write a blank check so a lame-duck Treasury secretary can start buying up a portfolio no one has ever seen.

Who would invest in a mutual fund that won't tell you what they do, won't tell you what they own, and won't tell you how much you could lose?

I will make another post that addresses your valid point that prices go up and prices go down, that we can't forecast prices will remain down forever. As i want to make it more general and explain why propping up housing prices is dangerous.

[Lord Fyre]

Lord Fyre wrote:

veector wrote:

Emperor7 wrote:

I can see the panic/implications but I'm really against bailouts.

The problem is that everyone (globally too) gets screwed if they don't bail them out.

And this is bad for what reason?

The "cancer" in our economy has to be excised. The long term effect of propping up these companies that suffer from decades of poor management is to allow the financial market to continue to avoid reality.

No, not letting the market correct itself (Yes, I know that would through a lot of people out of work - myself included - but it is the only way to really fix what has happened.)

Well, now that it looks like we are here, let's hope that I was right. :/

Check this out.

[Charles Evans 25]

Well it looks like Congress isn't going to be spending $700 billion after all.
I just wonder what those representatives who voted it down will be telling their voters this time next year if financial meltdown now results.
Viewing this news from the UK, I wonder very much if this was a case of 'cutting off the nose to spite the face'?

[Ubermench]

The house voted against the bail out today. Most of the votes against the bailout were republicans, (thank god some congressmen have got their balls back) defying Bush junior, their reason "the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.
After the bill was voted down both sides blamed each other for the failure of the bill. It has been over two weeks since Bush warned of a imminent financial meltdown unless the bill was passed, yet the only indication of financial melt down was the NY stock market fell about 200 points. 200 points off the stock market equates to a bad weekend of trading not the worldwide collapse of the American free market system.
IMHO we don't need a bailout, let the banks and lending houses fail on there own merits. it will only serve to re-teach the lessons of frugality learned after the 1920's stock market collapse and forgotten over the last 80 years.

[Ubermench]

Charles Evans 25 wrote:

Well it looks like Congress isn't going to be spending $700 billion after all.

I just wonder what those representatives who voted it down will be telling their voters this time next year if financial meltdown now results.
Viewing this news from the UK, I wonder very much if this was a case of 'cutting off the nose to spite the face'?

Didn't some U.K. bank fail and then be taken over by the British government?

[Charles Evans 25]

Ubermench wrote:

Charles Evans 25 wrote:

Well it looks like Congress isn't going to be spending $700 billion after all.

I just wonder what those representatives who voted it down will be telling their voters this time next year if financial meltdown now results.
Viewing this news from the UK, I wonder very much if this was a case of 'cutting off the nose to spite the face'?

Didn't some U.K. bank fail and then be taken over by the British government?

Northern Rock, yes, although the government took too long over that (see, our government makes mistakes, too :D) and Bradford & Bingley have had their mortgages taken over by the British Government too, this morning (this morning, UK time, that is).

We seem to have a problem over here of the government sitting around shutting their eyes to a problem and/or moving too slowly on some occasions.

[Ubermench]

No wonder why our goverments are so close, they have so much in common.
;)

[Charles Evans 25]

Ubermench wrote:

The house voted against the bail out today. Most of the votes against the bailout were republicans, (thank god some congressmen have got their balls back) defying Bush junior, their reason "the bill was cobbled together in too much haste and might amount to throwing good money from taxpayers after bad investments from Wall Street gamblers.

After the bill was voted down both sides blamed each other for the failure of the bill. It has been over two weeks since Bush warned of a imminent financial meltdown unless the bill was passed, yet the only indication of financial melt down was the NY stock market fell about 200 points. 200 points off the stock market equates to a bad weekend of trading not the worldwide collapse of the American free market system.
IMHO we don't need a bailout, let the banks and lending houses fail on there own merits. it will only serve to re-teach the lessons of frugality learned after the 1920's stock market collapse and forgotten over the last 80 years.

Oh yes, definitely agree on the frugality point. The British banks which have come out of this the best have been ones not interested in crazy risks like bad mortgages or being dependent on interbank loans to keep going themselves.

I seem to remember from Alistair Cooke's 'Letter from America' radio series, that at the start of The Great Depression that the situation seemed to stablise for a while after the initial crisis, before everything suddenly collapsed?

[Dragnmoon]

Ubermench wrote:

yet the only indication of financial melt down was the NY stock market fell about 200 points. 200 points off the stock market equates to a bad weekend of trading not the worldwide collapse of the American free market system.

It Dow fell 778 points, worse one day loss ever... About a 7% Decline, There have been higher Percentage drop before.

[Ubermench]

In the 20's the banks weren’t as interconnected as they are today thus the delayed collapse also the president wasn’t allowed to close the stock market. Today the if the with the banks interconnected a total collapse would be felt immediately. If banks started to act like dominos and the stock market plunged into a freefall the president is supposed to shut the market down until things stabilized preventing a duplicate of the 20's crash. The only problem with the presidents ability to shut down the stock market is his willingness to do so. Bush juniors deep connections to big business would prevent him from ever closeing the stock market because the companies he is a major stockholder in would profit from the collapse of the economy. Another lesson learned but forgotten from the 20's is the only people who suffered from the economic collapse was the middle and lower classes, the upper classes lost money but when you lose 20% of a million yo'ur still rich.

[Ubermench]

Dragnmoon wrote:

Ubermench wrote:

yet the only indication of financial melt down was the NY stock market fell about 200 points. 200 points off the stock market equates to a bad weekend of trading not the worldwide collapse of the American free market system.

It Dow fell 778 points, worse one day loss ever... About a 7% Decline, There have been higher Percentage drop before.

I stand corrected. but still not a death knell to the economy.

Thank you for the update Dragonmoon.

[Andrew Turner]

Ubermench wrote:

...Another lesson learned but forgotten from the 20's is the only people who suffered from the economic collapse was the middle and lower classes, the upper classes lost money but when you lose 20% of a million yo'ur still rich.

Many of the wealthy of '29 lost as much as 80% of their assets due to the Crash.

It's all relative. 20% of a million is an impressive-lot-of-rich for a guy making $13K at McDonalds, but it's a pittance to the guy who went from $1M to $200K; the guy who's annual expenses exceed $600K.

It's easy to look at the 'rich' and say, "hey, if you lose 80% of your money and you're still making 15 times as much as I do, f$** you!" but what we don't realize is that for the guy making that much, in many ways, it's equivalent to you and I going from $13,000 to $2,600--we would have to sell everything we possibly could sell; we'd be broke.

Relativity.

disclaimer: I am a government employee; so I don't make anywhere near a lot of money.

[Ubermench]

Andrew Turner wrote:

Ubermench wrote:

...Another lesson learned but forgotten from the 20's is the only people who suffered from the economic collapse was the middle and lower classes, the upper classes lost money but when you lose 20% of a million yo'ur still rich.

Many of the wealthy of '29 lost as much as 80% of their assets due to the Crash.

It's all relative. 20% of a million is an impressive-lot-of-rich for a guy making $13K at McDonalds, but it's a pittance to the guy who went from $1M to $200K; the guy who's annual expenses exceed $600K.

It's easy to look at the 'rich' and say, "hey, if you lose 80% of your money and you're still making 15 times as much as I do, f@@* you!" but what we don't realize is that for the guy making that much, in many ways, it's equivalent to you and I going from $13,000 to $2,600--we would have to sell everything we possibly could sell; we'd be broke.

Relativity.

disclaimer: I am a government employee; so I don't make anywhere near a lot of money.

I was referring to the likes of J.D. Rockefeller, J.P. Morgan, W.R. Hearst, F.D. Roosevelt and so on. It was still a bad example anyway, but the main point still stands. The top 10% won't feel the loss in the same way as the other 90%

[Samuel Weiss]

I love how they are playing the blame game.
The Republicans blame Nancy Pelosi for being obnoxious and making some people bail at the last minute, as well as the bill having flaws.
The Democrats respond by having Barney Frank be even more obnoxious while ignoring the 1/3 of Democrats that he and Nancy Pelosi could not get to support them.
The Democrats blame McCain for getting 65 Republicans to vote for it instead of 4. They ignore Obama not getting 95 Democrats to vote for it.
The Republicans just note that in passing.

As for whether the bill is good or not, looking at it I see every time it sets a limits it also allows for an exception to that limit "if deemed necessary".
Those are not limits; those are a shell game hiding a unrestricted bailout that voters do not want.

And now the Jewish High Holy days along with the 30 day countdown to the election with them either trapped in D.C. demonstrating their inability to do what the voters want or going home to campaign while not coming up with a solution to the "crisis" and "disaster" they tell us we are facing.

[NPC Dave]

The Bloomberg article I mentioned about how Goldman Sachs benefited from the AIG bailout is here.

Link

[Kirth Gersen]

Ubermench wrote:

In the 20's the banks weren’t as interconnected as they are today thus the delayed collapse also the president wasn’t allowed to close the stock market. Today the if the with the banks interconnected a total collapse would be felt immediately.

I worry a lot less about the stock market than I do about the credit market. If credit becomes hard to get, and stays that way, businesses can't borrow and end up contracting -- which means layoffs. That was the worst part of the Depression -- unemployment rates of like 80% at the peak. And that situation would mount gradually, not come all at once. A year or two from now, if we all still have jobs, we can re-convene here and breathe a sigh of relief that it was all just fear-mongering.

[James Keegan]

Neither candidate really deserves credit for what (if anything) gets passed. Grand-standing and credit hogging didn't help at all, though I doubt that will stop them when something is put together.

I'm actually glad that it didn't pass one way or another. The Bush administration's panic tactics finally failed (after how many years of success?) likely to everyone's benefit. $700 billion to fix a $100 billion problem is too much to swallow, especially when everyone but the administration, the Secretary of the Treasury and (unfortunately) the leadership for the Democratic and Republican parties realizes that there are more effective and cheaper solutions. Panic doesn't help anyone and I think it's a definite sign of progress that this was rejected by members on both sides of the isle even as members of both sides tried to rush to accept it.

[Nicolas Logue]

Here's some food for thought: If you divided that bailout among every American citizen of age 18 or older, it shakes out to over $250,000 per person.

F@+% the banks. Give us the f!@&ing money.

[Kirth Gersen]

James Keegan wrote:

I'm actually glad that it didn't pass one way or another. The Bush administration's panic tactics finally failed (after how many years of success?) likely to everyone's benefit.

Kirth Gersen wrote:

A year or two from now, if we all still have jobs, we can re-convene here and breathe a sigh of relief that it was all just fear-mongering.

I hope to God you're right.

[Lord Fyre]

Nicolas Logue wrote:

Here's some food for thought: If you divided that bailout among every American citizen of age 18 or older, it shakes out to over $250,000 per person.

f*%! the banks. Give us the f*%!ing money.

Actually, not a completely silly idea. That would allow many people to get out of their unsustainable morgage, with would stop the problem at the source.

[Vigil]

Nicolas Logue wrote:

Here's some food for thought: If you divided that bailout among every American citizen of age 18 or older, it shakes out to over $250,000 per person.

f*@# the banks. Give us the f*@#ing money.

I think that's a little high.

Lets see... $700,000,000,000 / 225,746,456 (estimated US pop over 18 as of 2006) = $3,100 per person by my math.

[Lou]

Aubrey the Malformed wrote:

Lou wrote:

Here's where you and I definitely agree, though: allowing the banks to think they could escape the risk of writing sooooo many s&%@ loans by selling those loans off to Fannie/Freddie and/or other securitizing buyers was a big mistake.

Fundamentally, there was a failure of risk management. Fannie and Freddie went down because they were grossly undercapitalised (and allowed to be by a supine regulator and a Congress subject to fierce lobbying), as indeed were the investment banks. The investment banks failed to account for the potential losses on their portfolios and were highly geared, amplifying the problems. A system of incentives made an industry of writing loans for anyone who might come along, so they could be repackaged into securitised assets and then sold on, generating fees for those selling the loans and packaging them. And Joe Public went and borrowed like there was no tomorrow. (It is all well and good blaming banks, and they certainly have a lot of blame rightfully coming their way, but ultimately these loans have gone bad because individuals took them out without really assessing properly if they could actually pay them back.)

That's pretty spot on. I'd just add in that had the 1999 congress not passed legislation permitting the investment banks to buy up commercial bank mortgages and securitize them, we'd never have started walking down this path.

[Werecorpse]

Nicolas Logue wrote:

Here's some food for thought: If you divided that bailout among every American citizen of age 18 or older, it shakes out to over $250,000 per person.

f%%* the banks. Give us the f%%*ing money.

That is where the government GETS the money, from the taxpayers. They are not going to give it back - you would just spend 90% on hookers and blow and waste the rest.

Yes please give lots of money to the banks, so they will have enough money to honor their debt to taxpayers, so the taxpayers can pay their taxes to the government so...

Dammit!

Spoiler:

I know very little about economics, it is just whenever anyone explains it to me it sounds like a bunch of people playing pass the parcel with a nasty present inside

[Lord Fyre]

Lou wrote:

Aubrey the Malformed wrote:

Fundamentally, there was a failure of risk management. Fannie and Freddie went down because they were grossly undercapitalised (and allowed to be by a supine regulator and a Congress subject to fierce lobbying), as indeed were the investment banks. The investment banks failed to account for the potential losses on their portfolios and were highly geared, amplifying the problems. A system of incentives made an industry of writing loans for anyone who might come along, so they could be repackaged into securitised assets and then sold on, generating fees for those selling the loans and packaging them. And Joe Public went and borrowed like there was no tomorrow. (It is all well and good blaming banks, and they certainly have a lot of blame rightfully coming their way, but ultimately these loans have gone bad because individuals took them out without really assessing properly if they could actually pay them back.)

That's pretty spot on. I'd just add in that had the 1999 congress not passed legislation permitting the investment banks to buy up commercial bank mortgages and securitize them, we'd never have started walking down this path.

Historical question: Which party controlled Congress at the time? And did President Clinton sign or veto the legislation?

[Lou]

NPC Dave wrote:

Hope you don't mind if I answer...

Nah, I don't mind. But FYI, WaMu is gone. Poof. All the assets were outright seized after a $16.9 billion bank run by people who didn't understand their deposits were/are insured up to $100k. Then the gov't sold the assets to JPMorgan Chase for $1.9bil. There are no more share prices to prop up. The stock is just a shell. The company no longer exists. It's just pending delisting and final dismantling. All the shareholders are out their investments.

Including me. :(

Here's a question: who handles FDIC insurance? Do they use AIG to underwrite that?

[Lou]

Ubermench wrote:

Dragnmoon wrote:

Ubermench wrote:

yet the only indication of financial melt down was the NY stock market fell about 200 points. 200 points off the stock market equates to a bad weekend of trading not the worldwide collapse of the American free market system.

It Dow fell 778 points, worse one day loss ever... About a 7% Decline, There have been higher Percentage drop before.

I stand corrected. but still not a death knell to the economy.

Thank you for the update Dragonmoon.

Any disaster that results will be lagging as the effects permutate through the economy over the next 6 months. I hope I'm wrong but my model says without a bailout we're heading for Great Depression 2 by next year.

[Lou]

Kirth Gersen wrote:

Ubermench wrote:

In the 20's the banks weren’t as interconnected as they are today thus the delayed collapse also the president wasn’t allowed to close the stock market. Today the if the with the banks interconnected a total collapse would be felt immediately.

I worry a lot less about the stock market than I do about the credit market. If credit becomes hard to get, and stays that way, businesses can't borrow and end up contracting -- which means layoffs. That was the worst part of the Depression -- unemployment rates of like 80% at the peak. And that situation would mount gradually, not come all at once. A year or two from now, if we all still have jobs, we can re-convene here and breathe a sigh of relief that it was all just fear-mongering.

Bingo. Not to mention hordes of homeless folks. Haven't any of you seen Grapes of Wrath?

[NPC Dave]

Lou wrote:

NPC Dave wrote:

Hope you don't mind if I answer...

Nah, I don't mind. But FYI, WaMu is gone. Poof. All the assets were outright seized after a $16.9 billion bank run, then sold to JPMorgan Chase for $1.9bil. There are no more share prices to prop up. The stock is just a shell. The company no longer exists. It's just pending delisting and final dismantling. All the shareholders are out their investments.

Yes, that is exactly what Paulson doesn't want to have happen for these other financial companies. He wants to bail out the shareholders, not just the depositors. That is why he is pushing his bailout plan, rather than let the FDIC do it.

I suspect Washington Mutual was taken over on a Thursday rather than a late Friday afternoon in order to put more pressure on Congress to pass the bailout. Every other bank taken over by the FDIC this year and last year was taken over on a late Friday afternoon, so as to minimize immediate stock market reaction.

[Lou]

NPC Dave wrote:

The Bloomberg article I mentioned about how Goldman Sachs benefited from the AIG bailout is here.

Link

Ok, I see what you mean, and I get the conspiracy angle, but I'm not really buying it. The reasons for bailing out AIG are the same for a bailout period. I have a hard time criticizing the insurance company for working like an insurance company once it could afford too to do so.

The crisis is a confidence crisis in large part. The collapse of the insurance arm would have been disastrous. It's the worlds largest insurer of such securities, with many clients. I'm sure quite a few peopel were hoping propping up AIG would be all it took to avoid this mess.

I could explain that more, but I'm going to pass. Just because someone benefits from an action doesn't mean they were behaving criminally or colluding with officials. Not that that doesn't happen either, of course.

Goldman was among the least exposed because they did things like insure what bets they made. As opposed to, say, WaMu which now doesn't exist.

Later.

Later.

[Kruelaid]

Ubermench wrote:

I hope I'm wrong but my model says without a bailout we're heading for Great Depression 2 by next year.

Well... all you need is a major drought in the breadbasket and you're good to go.

[Lou]

Nicolas Logue wrote:

Here's some food for thought: If you divided that bailout among every American citizen of age 18 or older, it shakes out to over $250,000 per person.

f%~& the banks. Give us the f%~&ing money.

You know what, I could pay off a mortgage with that. Good f%$!ing idea!

[Lord Fyre]

Kruelaid wrote:

Ubermench wrote:

I hope I'm wrong but my model says without a bailout we're heading for Great Depression 2 by next year.

Well... all you need is a major drought in the breadbasket and you're good to go.

With the weather disasters that we have been having, that too may be arround the courner . . .

[Lou]

Vigil wrote:

Nicolas Logue wrote:

Here's some food for thought: If you divided that bailout among every American citizen of age 18 or older, it shakes out to over $250,000 per person.

f*@# the banks. Give us the f*@#ing money.

I think that's a little high.

Lets see... $700,000,000,000 / 225,746,456 (estimated US pop over 18 as of 2006) = $3,100 per person by my math.

Damn. I was hoping for $250k. Why'd you get my hopes up Logue? Damn you!

Gah - most Americans probably would have just bought trinkets and booze with that anyway.

[Lou]

Lord Fyre wrote:

Lou wrote:

Aubrey the Malformed wrote:

Fundamentally, there was a failure of risk management. Fannie and Freddie went down because they were grossly undercapitalised (and allowed to be by a supine regulator and a Congress subject to fierce lobbying), as indeed were the investment banks. The investment banks failed to account for the potential losses on their portfolios and were highly geared, amplifying the problems. A system of incentives made an industry of writing loans for anyone who might come along, so they could be repackaged into securitised assets and then sold on, generating fees for those selling the loans and packaging them. And Joe Public went and borrowed like there was no tomorrow. (It is all well and good blaming banks, and they certainly have a lot of blame rightfully coming their way, but ultimately these loans have gone bad because individuals took them out without really assessing properly if they could actually pay them back.)

That's pretty spot on. I'd just add in that had the 1999 congress not passed legislation permitting the investment banks to buy up commercial bank mortgages and securitize them, we'd never have started walking down this path.

Historical question: Which party controlled Congress at the time? And did President Clinton sign or veto the legislation?

Republicans, AFIK. Clinton couldn't have vetoed or it wouldn't have happened, I'm thinking. So he must have signed it.

[Lord Fyre]

Lou wrote:

Nicolas Logue wrote:

Here's some food for thought: If you divided that bailout among every American citizen of age 18 or older, it shakes out to over $250,000 per person.

f%~& the banks. Give us the f%~&ing money.

You know what, I could pay off a mortgage with that. Good f&@!ing idea!

I believe I had also said something along those lines.

[Lord Fyre]

Lou wrote:

Lord Fyre wrote:

Lou wrote:

Aubrey the Malformed wrote:

Fundamentally, there was a failure of risk management. Fannie and Freddie went down because they were grossly undercapitalised (and allowed to be by a supine regulator and a Congress subject to fierce lobbying), as indeed were the investment banks. The investment banks failed to account for the potential losses on their portfolios and were highly geared, amplifying the problems. A system of incentives made an industry of writing loans for anyone who might come along, so they could be repackaged into securitised assets and then sold on, generating fees for those selling the loans and packaging them. And Joe Public went and borrowed like there was no tomorrow. (It is all well and good blaming banks, and they certainly have a lot of blame rightfully coming their way, but ultimately these loans have gone bad because individuals took them out without really assessing properly if they could actually pay them back.)

That's pretty spot on. I'd just add in that had the 1999 congress not passed legislation permitting the investment banks to buy up commercial bank mortgages and securitize them, we'd never have started walking down this path.

Historical question: Which party controlled Congress at the time? And did President Clinton sign or veto the legislation?

Republicans, AFIK. Clinton couldn't have vetoed or it wouldn't have happened, I'm thinking. So he must have signed it.

In other words, there is plenty of blame for everyone. :)

[Lord Fyre]

Lou wrote:

Vigil wrote:

Nicolas Logue wrote:

Here's some food for thought: If you divided that bailout among every American citizen of age 18 or older, it shakes out to over $250,000 per person.

f*@# the banks. Give us the f*@#ing money.

I think that's a little high.

Lets see... $700,000,000,000 / 225,746,456 (estimated US pop over 18 as of 2006) = $3,100 per person by my math.

Damn. I was hoping for $250k. Why'd you get my hopes up Logue? Damn you!

Gah - most Americans probably would have just bought trinkets and booze with that anyway.

I think Mr. Logue was only counting the people who actually vote.

[Lou]

Kruelaid wrote:

Ubermench wrote:

I hope I'm wrong but my model says without a bailout we're heading for Great Depression 2 by next year.

Well... all you need is a major drought in the breadbasket and you're good to go.

Actually the Great Depression 2 comment was me.

[Kirth Gersen]

Kruelaid wrote:

Well... all you need is a major drought in the breadbasket and you're good to go.

Or an energy crisis to parallel that... oh, wait, we already have one of those.

[Jeremy Mac Donald]

Ubermench wrote:

Another lesson learned but forgotten from the 20's is the only people who suffered from the economic collapse was the middle and lower classes, the upper classes lost money but when you lose 20% of a million yo'ur still rich.

Technically this would seem to be true but the rich often have a lot of self esteem tied up in their money. People that are making 10 (down from 20) times what the average Joe is making will be putting guns in their mouths these days.

[Lord Fyre]

Jeremy Mac Donald wrote:

Ubermench wrote:

Another lesson learned but forgotten from the 20's is the only people who suffered from the economic collapse was the middle and lower classes, the upper classes lost money but when you lose 20% of a million yo'ur still rich.

Technically this would seem to be true but the rich often have a lot of self esteem tied up in their money. People that are making 10 (down from 20) times what the average Joe is making will be putting guns in their mouths these days.

And yet, it is still hard to find pity for those "lead & gunpowder" connoisseurs

[Ubermench]

Lou wrote:

Kirth Gersen wrote:

Ubermench wrote:

In the 20's the banks weren’t as interconnected as they are today thus the delayed collapse also the president wasn’t allowed to close the stock market. Today the if the with the banks interconnected a total collapse would be felt immediately.

I worry a lot less about the stock market than I do about the credit market. If credit becomes hard to get, and stays that way, businesses can't borrow and end up contracting -- which means layoffs. That was the worst part of the Depression -- unemployment rates of like 80% at the peak. And that situation would mount gradually, not come all at once. A year or two from now, if we all still have jobs, we can re-convene here and breathe a sigh of relief that it was all just fear-mongering.

Bingo. Not to mention hordes of homeless folks. Haven't any of you seen Grapes of Wrath?

The major causes of homelessness during the great depression was the dust bowl and the lack of homeowners rights. Hundreds of thousands of rural people fled the dust bowl or were kicked off their farms by creditors demanding payment in full. Most dispossessed people moved to the cities looking for work, the cities could not handle the influx of so many people and the people moving to urban areas ended up homeless. With out the homeowner rights we have today creditors during the depression where able to demand all debts to be paid in full anytime the creditor wished and evict the owners without notice or any kind of legal recourse if payment was not made. With the homeowners rights we have today and the majority of Americans living in urban areas would prevent the kind of mass homelessness that occurred in the 30’s.

Also the highest unemployed rate during the great depression was 25% in 1933.

[NPC Dave]

So when I say prices need to fall, and then a recovery can begin, let me explain a bit more about what I mean.

First take a look at this $1 house

How did this happen? When the house sold for $65,000, we were past the peak of the housing market, but the price was still way too high. The owner couldn't afford it, probably mistakenly believing they could wait for equity to accumulate as prices rose, or perhaps they didn't understand financing.

The bank forecloses. Now the bank didn't want to sell this house at the market value, which was considerably less than what they have outstanding on the loan. Instead they wanted to sell the house at a price to cover the loan.

But they couldn't get that price. The market had moved against them.

Result- Paralysis.

The bank doesn't want to sell the house at a loss, because then the loss goes on the accounting books. If they don't sell it, they don't have a loss and their quarterly numbers look better. They just claim they have an asset, the house, at the value of the loan.

And paralysis continues.

The market doesn't turn around, and what happens to an empty house that just sits there? Best case scenario, it decays, worst case scenario, read the article.

As the bank waited, their asset went into the crapper. They didn't just lose their loan value, they lost another $9999 to get rid of that house.

The Great Depression was caused by paralysis just like this. The government, under both Hoover and FDR decided low prices were the culprit. They desperately fought lower prices for years, keeping prices and failing companies propped up.

But buyers wouldn't buy. Because the market prices, at which buyers were willing to buy, were less than the prices approved by the government.

Again-Paralysis.

For this Detroit house to have been saved, and for the housing market to be saved, prices must fall. They must fall because otherwise, buyers are not going to come back and buy. Propping up housing prices prolongs the housing slump, because buyers will not buy. Home owners will either be foreclosed or trapped in a home they cannot sell if they need to.

Without a price drop, homes will sit empty, people will be foreclosed and end up in apartments, and homes will deteriorate or be stripped to a shell. You can't have a recovery if capital gets thrown to unproductive use. And empty houses are an incredible waste.

No other economic program is going to work, the bailout won't work, no law can be passed to stop or end the housing slump. All the government can accomplish is to create another prolonged recession/depression.

A recession has already begun, the only question is how much effort will the government expend to prop up prices and prolong the situation.

If anyone contacted their Congressional representative to demand they block the bailout, thank you. It is rare Congress listens to the people rather than the lobbyists, but enough listened this time.

Unfortunately, another vote will happen, probably by the end of the week. The bankers aren't going to give up, they want your money. Democracy in the United States means we get to vote and vote until the big banks and big business get the vote result they wanted, and then we aren't allowed to vote anymore.

Still, if your representative voted against the bill, it wouldn't hurt to call up their office and thank them while urging them not to cave to the pressure now being exerted.

[NPC Dave]

I didn't notice anyone had posted this article

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

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

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

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