$700bn Bailout is shot down by House of Rep Vote (205-228), US stock market plummets
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"To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes"
I think the real reason it failed is that they didn't title it "Flags for Orphans and other stuff".
To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to software developers, information architects and dolphin trainers
In my opinion this is a good thing. You can't have unchecked growth forever. You need to have a downturn to jolt consumer confidence and investor confidence.
When your portfolio "dropped" today you didn't gain or lose anything. You still own the same tiny fraction of some company. All that happened is that some guy sold his tiny fraction to some other guy for less than you paid.
At least, that's how I understand it. I was curious if the original commenter meant something different.
Computers are depreciated around 3 years.
The above is true only if a purchase is "capitalized" and classified as an asset. This "depreciation" allows you to deduct a loss per that 3 or 5 years on your taxes, or incrementally decrease your assets on your balance sheet.
If it is not capitalized and classified as an asset, it is an expense. An expense is noted on the income statement and the entire cost is accounted for in that quarter.
or since most ppl assumed they had that money and spent other money on that assumption, it could also be called 'wealth destruction'
[1] http://video.google.com/videoplay?docid=-9050474362583451279
you are clueless dude... there is wealth creation and wealth destruction. try an econ 101 course!
wealth could have been transferred today if people were allowed to short securities, but what actually happened to many was the realization of losses on the books of the finance industry - at least those who bought for the short term.
but you also have wealth being transferred to those who have been holding stock for several years (long term) and watched them wildly appreciate over the past 5 years, and started selling in the past 2 weeks when they realized the bubble has burst.
The money itself is only as good as the wealth it can purchase, and as that wealth steadily grows, we need more money to carry out the transactions. So it is by no means a zero sum game.
Just read this http://pavankumar.info/?p=52 , If I am wrong, Please let me know.
How can you trust a body that operates like that. Imagine running a company like that.
The only options are a system with where minor laws are passed dishonestly or Stalin.
a country is not a company
OK. But I was not taking the analogy very far. I'm saying that if bills are passed by tacking on little unrelated clauses that benefit the particular interests of certain politicians while flying under the radar in order to bypass democracy, you lose some respect & trust in an institution. It also makes me leery of anyone that thrives in the environment.
These institutions are decision making bodies making decision on behalf of others.
BTW - Apparently (see the comment on substitute bill), this is just a technical trick to bypass paperwork & speed this along.
The White House lobbied heavily for the measure, and the Republicans in the House shot it down. That's interesting.
House Republicans are the only group that are (fiscally) conservative anymore.
I'm so glad my representative (Barbara Lee) voted against this madness.
The bill is duplicitous from the get go. It's entitled "To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes"! If that kind of doublespeak don't get yer hackles up, I can't imagine what would.
Some honest discussion, some real consequences for the people that caused this meltdown (and it was caused, it was not an accident), and some oversight in how a bailout proceeds. Perhaps we, as the folks footing the bill, would also like to know what the total is actually going to be before agreeing to it. My understanding of the bill (admittedly weak) is that it is a blank check for Paulson to distribute amongst his friends in the finance industry, with no oversight and no transparency about how it's going to be used.
The fact that a bailout is being presented as "OMG! We have to do this now, imagine the consequences if we don't!" it has a strikingly similar ring to the "We have to invade Iraq now!" pose of a few years ago. I don't trust salesguys that insist I need to buy now, and I really don't trust politicians when they use the same tactic, especially when they're arguments are based on lies and misdirection.
Yes, something must be done. Accountability would be a great start. Bringing some trust back into our finance industry would be a good way forward. A bailout? I dunno. Maybe there are other ways forward that directly help the people hurt rather than the millionaires and billionaires that caused it.
I don't understand. Surely if all the banks failed that would be a great opportunity for people to start new banks with extra incentive to prove their honesty and trustworthiness, for instance.
It can't be the case that banks will collapse and everyone goes "Oh shit money is now worthless, I'm shutting down my business, firing everyone and going to find a soup kitchen".
Can it? Really?
Good question. And one I think ought to be asked. It's a standard tactic of both sides to frame a debate such that any result is one they'd be happy with. This appears to be a classic case of that. Both sides want a bailout, and so they've framed the debate as "What kind of bailout do we want?" rather than "Do we need a bailout, or can this problem be solved in other ways?"
Interestingly, a huge percentage of Americans (even a few who understand what's going on) don't want a bailout, at all.
Yet the oft mentioned depression of the early 1900s showed people queueing for handout foods.
Farmers would still work because people still need to eat. People would still trade with farmers because they need to eat and farmers need work doing. People would trade with builders and mechanics and plumbers and cooks and delivery people and oil companies because they want things that those people have, and in exchange they have skills that other people want. This is business, this is life, has been for hundreds of years.
So how can that also coexist with unemployed people relying on handouts? What went missing to turn the ongoing network of trades into a fallen pile of cards?
Why are some economies sparkling and growing and others filled with peasants eeking a miserable existance?
Is credit somehow the missing link I'm not getting? If so, why doesn't printing more money fix Zimbabwe? If it's not credit, what else can vanish? America isn't suddenly out of education, is it? Is it trust?
Is there really any kind of meaningful answer to this that doesn't involve pointing at the whole world and saying "that, that's it. Everything that is, that's the answer"?
Zimbabwe has deep problems unrelated to money supply. If you build a successful business in Zimbabwe Mugabe's thugs will kill you and steal it (or allow you to escape the country with the clothes on your back, if you're lucky). In a culture where everyone has to either be a part of the gang that runs the place, or pay for the privilege of mere existence, business cannot grow. The incentives are simply wrong for business to exist. There is no incentive to work hard, build something new, take risks on new ideas, or provide a service (to anyone other than the thugs in charge). If you had no hope of becoming successful would you start a new business? Would you bother working every day to maintain an existing one? Everyone who has the capacity to build products, grow food, and provide knowledge services, has either fled the country or been killed or imprisoned by the government. Of course the economy of Zimbabwe is a shithole.
So, I don't have any answers to any of your other question. I'm by no means an expert on the subject. But the causes of the economic failure of Zimbabwe seems pretty obvious to me. And, the more the US looked like Zimbabwe, politically speaking, the more our economy would look like the economy of Zimbabwe. Luckily, we have a long way to fall to be in quite the same kind of mess as Zimbabwe. But, I do think a bailout without serious oversight and some accountability for the people that caused the problem, would be a big step in the wrong direction.
Base populism has accidentally arrived on what I think is the correct side, for once.
Economics is far from a fundamental science. Very far. It is really more of a description of what happens via all sorts of analogies that usually hold true & help to explain the things that we see happening. Some parts of economics are stronger then others because they are based on manipulating tautologies of various sorts. But others are really more along the lines of: 'If we put a dog here, the sheep will go there'.
As with most non fundamental sciences, economics can break down in extreme circumstances. Neuton's Mechanics is not as fundamental as relativity. It breaks down in extreme cases. That only seems strange because physics is very fundamental. But with Zoology, Sociaology, Phsychology or other "downstream" sciences, this is expected. No one's surprised when techniques break down during psychoanalysis of a woman raised by wolves.
Psychology is explained by Biology, explained by chemistry, explained by physics. And each of those words is just really a number of links in this chain in themselves. Economics is two or three links up that chain. So here's how we go back to the topic:
If a supermarket chain that supplied 85% of food in a region goes out of business, leaving it empty of competitors, what happens? The rules still apply. Consumers seek alternative. Small shops, mail order shopping, markets become very lucrative. Consumers spend more on food or get 'less' for a period. Eventually, a new equilibrium is found.
But what happens if the equivalent food producers go out of business? Wheat doesn't get sown. Coke doesn't get bottled. Sure it's a great opportunity for boutique vegie growers. But the same rules no longer apply. 20% of the food supply means there isn't enough for everyone to eat right. Maybe people sell off Apartments to buy houses with backyards (to grow food). Maybe they take time off work to plant. Maybe things are too volatile for boutique farmers to get investment to grow.
I'm not saying this is a close analogy. I'm certainly not saying the 'bailout' should've happened. If I were American, I'd be as suspicious as SwellJoe of a bill that's called "tax breaks for Peace Corps & stuff" which gives unreal sums to big companies while the salesman-like proponents chants 'This is too complicated for you to understand', 'You need to decide now' & 'Apocalypse is coming so pick mine.' But I am saying that relying on high level economic principles here is not like relying on gravity. Not at all. At best it's like relying on wolves attacking a calf over a bull. It makes sense. It usually happens. But who know what happens to traumatised wolves from a a circus during a thunderstorm.
I'm not in favor of footing the bill for mistakes these financial institutions made. But if we don't help them out it will continue to trickle and things will get worse. But we may help them out and things may get worse anyways. We are in some big trouble and its not even close to over.
I was greatly disappointed to see your vote of "Aye" for the bill entitled "To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes". The bill, of course, includes the provision for the "bailout" of the financial sector.
My first problem lies in the title of the bill. As a friend of mine said, "If that kind of doublespeak don't get yer hackles up, I can't imagine what would." Have you read George Orwell's 1984, sir? I would not like to imply that we are in such a situation, but to allow a bill to pass which is so clearly titled in an obfuscating way is a mistake, one that is insulting to the American people.
My second problem lies in the bailout itself. Instead of punishing those companies that mismanaged their finances, we are instead calling for the entire country to pay for their mistakes. A massive tide of bankruptcies would have 3 major effects:
1. People employed by such companies would lose their jobs. These people are largely white-collar workers who should have some savings put away and should be able to find another job without much trouble. Surely it is better for these individuals to be out of work than for the entire country to be handed a debt that was created by the private sector.
2. It will be harder to get low-rate credit. In a nation that is addicted to such credit, I consider this to be a good thing in general, as it will encourage saving (or filing bankruptcy and starting over without a penchant for overspending). This still poses a minor problem, which I will address below.
3. Some people will lose their retirement investments. This, of course, is a bad thing.
Based on points (2) and (3), I think that $700B+ would be better allocated to:
1. Subsidize home mortgage interest rates and/or offer tax credits for people in low tax brackets. This will allow lower- and middle-class individuals to still be able to purchase homes and spaces for small businesses in spite of the inevitable credit crunch.
2. Create a program for individuals meeting certain criteria (age, total assets) that uses government funds to restore some of their lost investments. This will bring some relief to those who depended on the ill-run companies for their retirement.
I believe that my ideas are better than a bailout because instead of punishing the entire country for the mistakes of a few, it offers relief to the uninvolved parties who will be hit the hardest, while allowing those responsible for this mess to receive the brunt of the punishment.
If, instead, the government proceeds with the bailout, the government is subsidizing the risk of high-risk business practices, which causes companies to take irrational risks and unfairly rake in short-term profits, profits which are later paid for by tax payers who bail the company out when it inevitably goes under.
I plead with you to consider the fair course of action in this case, the one which does not punish everyone for the mismanagement of a few. And if the bailout package is allowed to go through, at least ensure that the bill is correctly titled.
If there is only $100 in the world, and a bank gives it to you and you pay it back with interest, where does the interest come from?
If there's $100 in the world, and a bank "gives $100" to 10 people, who all have to pay back $100 + interest, where does that come from?
You have to borrow it from another bank. Total money in the world increases, the economy grows, but it's a con, a mirage, a convenient consensual fiction. A system based on eternal growth, which relies on pushing around ever increasing debt for its very existence, where repaying the total debt would require giving the banks back all the money they ever loaned plus all the stuff in the world to the value of the conjured extra. How is this not silly?
That's not how fractional reserve banking works. Banks don't lend more than they have in their vaults, they just have less in their vaults than the sum of their depositors' accounts.
That's tangential to your main point, which seems to be an objection to a perpetually increasing amount of money that only exists as numbers in a computer backed by nothing. That only becomes a problem in a severe recession, where the rate of wealth creation slows so much that loans can't be paid back. The system breaks, and governments have to intervene to fix it. This isn't done by just giving banks money, as you suggest. The government typically takes over the banks. The proposed bailout involves buying assets, but it's still not giving banks money.
That is only a problem if you think we'd be better off with the slower economic growth that would result from banning fractional reserve banking. We're not. A system that breaks on a regular basis sounds like a bad idea, but you still have to compare it with the alternative before you condemn it.
As for fractional reserve banking (the regulated version, anyway...), the bank needs only to hold enough capital to write down expected losses on loans. Much of this mess has been caused by the banks voluntarily levering out of this safety margin.
Basically: money lent is less or equal to money deposited; no interest (only fees). Interest including fees is ~2.5%, and will "never" change.
The main difference is that that system isn't built on the assumption that the economy will always expand, which the current system is. I'll leave it to someone who actually knows something about the pros and cons of each to tell you if that's good or bad.. But basic reasoning tells me that it's not likely that something that takes place in a fixed environment (Earth) can expand for ever.
You could skip money and use seashells or chickens or whatever you wanted, the mechanism would still work.
Seize a bank when it's in trouble, "fix" it, and sell it in a public offering. If the income from the sale nets more than the government spend to fix it, that profit is distributed to the original shareholders.
This happened i Sweden in the early 90's. Some banks were in trouble, and the government said that they'd help them, but by nationalization. One of the major banks were then suddently conveniently able to get some capital, and survived on it's own.
And never mind the fact that even if you support a bailout this one was setup with language to specifically prevent oversight of any kind and would hence almost certainly be extremely corrupt, which rather does characterize that bailout as an attempted net transfer of wealth to me.
They didn't. My comment wasn't an argument, it just stated my position. Someone else replied with a different position, and I explained further. In an ideal world, I would've fully explained my position in the first place, but it wasn't worth the time if no one disagreed.
I do call things "silly" too much.
Plus, what would you expect to happen? Investors were counting on about $1 Trillon of free money from the government, and then the government pulled it back at the last minute. In a few days there will be news of a new deal and the DJIA will be up 500 points again. And, if the House of Representatives keeps doing its job, then the DJIA will fall 500 points again when the next "no" vote comes.
The key is this: The DOW dropped 500 points because nothing happened. Theoretically, the markets are in the exact same position they were in Friday, yet they fell.
Once more Wachovias start pilling up, that's when you'll see the slide begin.
The patching of the credit liquidity crisis right now is like using corks to patch a leaky submarine. Not only that, but you don't have enough corks to patch all the holes.
We are going to see a large recession in all of our markets. Even if you pass this bill, no serious economist knows the extent of the financial crisis. All of them can gaurentee, though, that it will be far above $1tril.
Don't fall for this nonsense the politicians and the rich are spouting about. They only want to sustain this failed lesse faire market and continue to benefit from it. We need our economy to be entirely restructured and this is the time to do that.
Fortunes are made buying in bear markets. Though I wouldn't suggest its easy to recognize the bottom.
Different means - same ends.
Just stick it in an index fund and let compound interest be your friend.
If you're interested in how specific Representatives voted, we (I work at the Post) grabbed the data before house.gov keerashed.
So, either Republicans (in the House) have more integrity than I'd given them credit for lately (and more than Democrats, on the whole), or I have less understanding of the bill than I thought I did.
Also, the Washington Post is either a little bit batshit crazy, or they have a strange sense of humor: You can sort the results by astrological sign. If you really wanted to have one more sorting type...the length of time in office would be more interesting to me (and not indicative of being ready for a quiet retirement with fewer disturbances in life).
The older I get, the more I realize that character in politicians is far more important than ideology. Decent people can disagree on the right way to solve the problems our nation faces, including this (very large) one...but lining the pockets of supporters at the expense of everyone else in the nation, particularly those least able to protect their assets, strikes me as a despicable and crassly self-serving act. The only way to a solution that most everybody can agree on is to honestly discuss the issues.
With a bill named "To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes" that hands $700 billion (actually more...) over to a fellow who'll be doling it out to all of his old buddies from the finance industry with no oversight, we've already established that no sane discussion can take place. It's classic doublespeak on the order of the best the Soviets and Red Chinese ever came up with, and that duplicity in and of itself is enough to disqualify this bill from consideration by honest folks.
This is actually a prime example of why I genuinely like Ron Paul. I disagree with him on some major issues (immigration and abortion being the biggest), but I know where he stands, and I know he believes in what he says and acts accordingly. I think I'd like to see a lot more of that, from any side of the political spectrum. But, it seems like crooked Republicans get voted out only to be replaced by crooked Democrats. I'd be happy with a batch of honest Democrats or a batch of honest Republicans, but it seems the only way to keep them close to honest is to keep churning new people in, keep the parties roughly in balance, and keep them at each others throats so they can do the least amount of damage possible.
Not to mention that while payments would be made in installments, there was still no cap.
If I had my druthers, we wouldn't waste ink to put astrological bullshit in the paper every day.
(Length of time in office would indeed be pretty cool. I'll run it by Politics.)
It seems like just buying equity in the failing companies is a more direct way to deal with the problem than throwing money at the problem, in exchange for promises that Paulson will write up warrants that benefit the American taxpayer.
They were overwhelmingly in favor.
What does that say about the state of our democracy
I don't think your perspective is clear.
taxpayers who pay their bills and live wisely don't need credit, they live on cash. these people should not be punished for the greed of everyone else on wall st and main st
Unfortunately, 90% of America isn't described in the above sentence.
There are plenty of people who put 20% down on a fixed rate mortgage, are paying that off perfectly, and the market value of their house is now below what they paid for it. Those people are going to get hammered if they sell the house and owe the bank tens of thousands of dollars. In that situation you just don't sell your house.
But what if you have to sell your house? Medical bills? Job changes? Want to retire?
It's nice that you think you are superior to all this vain people, but this crisis is not about vain people getting fucked. It is about responsible people have their American dream burned to the ground by morons with oversized sub prime mortgages and the banks that lent to them. This goes beyond hurting the people who caused the mess!
I do not think I'm superior; I just try to know what I'm doing before acting.
The people who took out those loans knew what they were getting in to, and if they didn't, they should have. If it sounds too good to be true...
I'm well aware that this affects everyone in some way. We're at a point where fixing liquidity is crucial and something needs to be done, and we need to make sure to profit from any money lent. I really like what Sweden did: http://is.gd/3iO2
I just worry our government is going to react instead of decide.
What about the other 90% of people who live on the same street as the asshole with the sub prime mortgage who are now unable to sell their house if they need to because the sub prime one is at auction for half the price they need to get?
Liquidity isn't going to fix that, we have a problem with too many houses on the market and too few people buying them. If you have enough money you can still get a prime mortgage, people just don't want to buy right now.
"Houses are not an investment vehicle. If you buy one, it should be for the long-term."
To first order, this is great for you. Stocks are going on sale. You want to do your saving immediately after the massive crash, not before.
Of course, that's just the first-order analysis. The second-order problems are potentially, um, annoying: If the economy tanks you might not earn any money to save next year. And your joy at being able to invest in a bear market (because you've got plenty of time to wait for the recovery) might be dampened by the sight of your parents moving in with you to save money because their retirement fund just evaporated. (They don't have time to wait for a recovery.)
For example, depressed real estate markets can create high demand for rentals. You might be able to make money each month on a mortgaged property (a real novelty in Australia for example). And if rental demand is high, prices will probably eventually recover.
The issue is that a recession by definition means most people are worse off.
that might not help, so here's a picture of a pack of corgis on a beach, hope it helps: http://media.tumblr.com/b9vfl4b63eh5j0pmcEfbxxxGo1_500.png
I am sorry to be the bearer of bad news . . . but we are almost certainly on our own with this.
China and Mexico may give token assistance as they are able.
You are correct about our dependence on resources, but the US is only one of several markets we export to. I'm sure China and India won't mind buying our oil and trees.
Simply untrue. The debt to income ratios are about the same, but US households on average still have more assets and cash.
Also, given the dramatic drop in US housing values and only a leveling off of Canadian prices, I question your second point as well, at least looking forward.
Just because you've done everything prudently on your own micro scale doesn't mean macro events can't hurt you.
In any case, most of the discussion that's worth anything is coming from economists, of which there are a wide variety to read. Most people on sites like this one don't seem to have the expertise to say much that's useful, either for or against (and that includes me, thanks).
http://economistsview.typepad.com/
http://www.marginalrevolution.com/
http://www.economist.com/blogs/freeexchange/
http://economix.blogs.nytimes.com/
http://www.ft.com/cms/s/0/290ca9f6-8d8b-11dd-83d5-0000779fd1...
As you can see even those guys are peddling their own ideologies to various degrees, along with everyone else with vested interests - and that's a lot of people, because 700 billion combined with a potential collapse of the economy is pretty high stakes. This doesn't make it easier to understand.
There's a brick wall looming up ahead, and we just cut the line to the brakes.
http://www.marginalrevolution.com/marginalrevolution/2008/09...
This way the following doesn't collapse: http://www.nomoneylimitsblog.com/blog/_archives/2008/1/10/34...
While subprime mortgages got this whole ball rolling, the credit crisis extends way beyond that now, and has taken on a life of its own. This bailout plan was to try and fix the credit crunch by restoring confidence in the financial sector, taking toxic assets off their books, and giving them a more stable capital base. The housing crisis is now a separate issue, and if lawmakers want to address it, it should be in a separate bill.
If the housing crisis continues, it hurts a lot of people that made bad borrowing decisions and it hurts a lot of banks that made bad lending decisions, but the turmoil is mostly in the financial/construction/materials sectors. If the credit crunch continues, just about anything could fail unexpectedly, including things as diverse as insurers and big manufacturers, which could leave a lot of people out of work, and turn this from a Wall St crisis into a Main St crisis.
There's a crucial link in the chain she is missing.
There was one hedge fund that setup a company with $4.5 million dollars to be able to cover a possible default of into the billions.
Those contracts are worse then worthless and should be annulled like a marriage to Britney Spears.
"You deposit $100,000 into a CD. The bank creates three loans based on the original $100,000 deposit. Loan /Asset #1 = $90,000 Loan/Asset #2 = $81,000 Loan/Asset #3 = $72,900. The total = $243,900 in assets for the bank. This is $243,900 in new money."... ..."After it pays you 5% interest, the bank has made a tidy profit of $238,900. ($243,900 - $5,000 = $238,900.)"
The crucial link that wasn't mentioned is that when as loan is issued that money is returned to a bank as a deposit (usually). Only then can then re-issue it as a loan.
The car analogy is stupid. There is no brake and there is no gas pedal. There is a natural balance between savings, loan interest rates, and consumer demand. What's happening now is that demand and savings rates are trying to return to their natural balancing levels after having been knocked out of whack by fake interest rates. The powers that be don't like that rebalancing, but it will happen one way or the other. Government can only exacerbate the process (and make certain insiders rich at public expense).
The simple fact is that thousands of businesses NEED to go under and lots of people NEED to lose their jobs. Many of the businesses and jobs were created to service demand that doesn't really exist. The demand was an illusion created by fake cheap credit. The faster this process is run through the better the ultimate outcome.
No? Then I don't see how it's seen to be acceptable to demand that action of others. The effects of the crunch will go much further than fat cats on wall street.
Thousands of nail salons and restaurants were built because cheap credit made them temporarily profitable as future consumption was taken today while debt loads rose. Well, the future arrived. And now consumption must be forgone. The nail salons and restaurants will go bankrupt and the workers will go unemployed. The faster we get it over with the better.
The question becomes: would you rather have $700 billion to ensure unemployed people don't starve? Or would you rather use it to temporarily prop up nominal asset prices owned by rich people?
> In that case, will you be declaring bankruptcy
I have no debt at all, so that's kind of impossible. However, my savings are part of the solution. The problem is we need more savings. The solution to that is dramatically lower consumption, which is what a recession is all about.
The nail salons and restaurants will go bankrupt and the workers will go unemployed. The faster we get it over with the better.
Those nail salons and restaurants are real people with real money. It may in fact be that many of them are destined to fail, and that many of them shouldn't have been in business in the first place, but the people that allowed them to get in over their heads - that would be the collective American republic - have a duty to make sure they fall as gently as possible. By temporarily putting trust back into the credit markets, this bill would have bought the time to explore the options.
To simply pull the rug out from under the little guy is a violation of the contract that the government has with its people.
It will devalue the dollar, that much is true. Interest rates are fubared either way. Feathering the nest of elites was a major concern, but with proper oversight injected into a succeeding bill, this will be mitigated.
You seem to favor emotional appeals over a discussion of the macroeconomic reality.
And you seem to favour the "let the fuckers burn" attitude that is so similar to that which created this mess: greed and an unfounded confidence in the self.
Outstanding consumer and business debt is something like $40 trillion. Way more than $700 billion of it is at risk. The bailout bill is so small relative to the real credit markets that it can ONLY possibly be a political act for certain well connected individuals. It cannot drive the macroeconomic conditions related to the whole credit market.
Sounds like conspiracy theory territory to me, but maybe I'm misconstruing what you're saying. On the surface, your argument regarding 700 billion vs 40 trillion sounds plausible, but then again, it doesn't seem to be convincing guys like Larry Summers, Mark Thoma, or The Economist ( http://www.economist.com/world/unitedstates/displayStory.cfm... ), and I don't think they're all in on the plot, yet are pretty smart.
On the other hand, if things don't go to hell without the bailout, it will show that Paulson et al. were indeed quite wrong.
http://www.economist.com/finance/displaystory.cfm?story_id=E...
> The technology bubble in the late 1990s at least left behind a modern capital stock, which continues to yield productivity gains; a property boom, in contrast, does nothing to boost long-term growth. Instead, it diverts resources away from more productive sectors and by fuelling consumer spending it exacerbates America's economic imbalances. Eventually, there will be a price to pay.
Also, I'm not sure that predictions of problems equate to knowing what to do to best wind down the current mess. You're right (elsewhere) that some things need to go under. However, I think the point of the 'bailout proponents' is that more will go under than otherwise needs be without it.
Of course I guess we'll really never know for certain in any case, as it's impossible to know what would have happened otherwise. We could have no bailout and massive failures just as we could have a bailout and still have massive failures. Or no massive failures in either case.
I've seen this movie before. If bailouts and stimulus packages worked Japan would have been the economic star of the 1990s and the Depression would have ended before FDR ran for the nomination.
Raines may be in a dream business, but the net result of Fannie Mae’s actions in the credit markets is a nightmare of resource misallocation and massive systemic risk.
Note that he's contributed $5 billion to the bailout of Goldman Sachs, in the form of convertible senior debt, at an interest rate of 10%.
Differences: preferred stock only pays a dividend when Goldman makes a profit. In a bankruptcy, preferred is ahead of common, but behind creditors. At any time, Goldman can pay Buffett a 10% premium to the issue price, and get the preferred back. If Buffett exercises his warrants, he will still own the preferred.
The vast majority of the bailout criticisms I've heard are woefully uninformed.
Credit demand is collapsing as an economic bubble bursts and this is DRIVING the deleveraging. Not the other way around. If the economy were truly starved for credit you'd see 8% rates on CDs as banks scramble to raise reserves to lend out.
You're going to have to explain that more. How does lower credit demand force deleveraging? I was under the impression that the deleveraging is being caused my huge losses on heavily levered investments.
"If the economy were truly starved for credit you'd see 8% rates on CDs as banks scramble to raise reserves to lend out."
The markets for debt have just taken a huge beating. I'm guessing the banks aren't meeting the demand for credit because it has just become more difficult to sell debt. If they are having issues with the loans they've already made, it's easy to see why they aren't rushing to issue more.
I can't prove that the economy is starved for credit, but it's clearly the conventional wisdom. If you're going to call that propaganda, you need to prove that the conventional wisdom is wrong.
You can get a loan at very reasonable rates right now if you meet the criteria. That's just a fact, and I'm not in a mood to give you documenting links. Outstanding credit continues to grow at only a slightly lower rate than before. There is not a credit shortage. There is a shortage of viable uses for credit. There is huge overcapacity in retail, housing, etc. People who can't reasonably be expected to pay back loans can't get them right now. Which is basically a good thing. Businesses can't get loans to expand because nobody in their right mind thinks many kinds of business SHOULD be expanding.
The macro-economic conditions are driving the markets, not the other way around. The financial firms are suffering because the REAL economy ran out of greater fools and hit its maximum tolerable debt load. The real economy is not shuddering because the masters in Wall Street can't grease the wheels; it's the other way around.
However, I wouldn't say that's why the financial firms are suffering. They're suffering because they all made the same bad investments.
Anyway, I doubt that the situation is as simple as what I've laid out here. I don't trust my previous justification for the bailout, but even the economists who opposed it said we still need to do something (http://faculty.chicagogsb.edu/john.cochrane/research/Papers/...).
I would be interested in a link elaborating on your view. The facts I'll take your word on;)
It sounds sensible to me & I am having trouble making sense of all this. It seems plasuible because
-a- The US as a whole consistently borrow to spend. You need to run into a wall sometime. I'm not sure what the wall should look like.
-b- I am aware of the credit stuff you're referring to. It's unwillingness to lend, not inability to that is crunching. Loans were defaulted on.
This is a good point, and one I've read elsewhere. However, I've also read this, which seems to add some nuance, if not quite contradict the above quote:
"The interbank-funds market has seized up and even the most creditworthy corporate and financial firms are paying punitive rates."
http://www.economist.com/world/unitedstates/displayStory.cfm...
It's possible those firms aren't really creditworthy, but giving the 'newspaper' the benefit of the doubt, this would make the situation a bit more complex than you paint it.
Not if he has his savings in stocks. In fact, if he followed the conventional wisdom and put (100 - age) percent of his assets in stocks, a 40 y.o. stingy saver just lost 5% of his savings today alone. Which is almost certainly more than his share of the $700 billion.
There are a lot of people really hurting from this, just because we're a bunch of hackers living in apartments saying HAHA now I can buy a house! Doesn't mean that families who made previously responsible decisions are not getting really hammered. To say "GOOD!" to this is incredibly callous and most likely a sign of great ignorance to what is really going on.
In fact, according to the Case-Shiller index, homeowners in the 20 largest metro areas of the U.S. have seen their homes increase in value by over 60% between January 2000 and June 2008. Of course, this is down from 106% as of the summer of 2006. Falling house prices have definitely put a large number of homeowners underwater, but these people either bought in the past few years or took out one or more HELOCs (home equity line of credit).
I want to keep an eye on those 205 SOBs
I've been reading and racking my brain and it doesn't make sense to me.