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Comment by quasimojo | Hacker News Reader

good! lawmakers on the radio today were saying 90% of their callers were against it. this is a victory for the stingy saver who doesn't obsess over vacation homes and luxury cars. every THING is about to go on sale, and the prudent will have their day.

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

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Ok, here's the thing: even if you disagree philosophically with the legislation that they put together, you still would be wise to be very worried about the overall state of the economy due to tight credit. Many businesses (good, solid, profitable businesses that employ hard-working people) fund their operations via credit markets that have seized up. Absent some kind of intervention (and I for one would like to see more ideas on the table), even your ideal "prudent" person will probably suffer.

Just because you've done everything prudently on your own micro scale doesn't mean macro events can't hurt you.

I can't pretend that I understand this whole thing, and am quite suspicious of anyone that says they do, who does not report on it more or less full time and have a good grasp of economics, but... one analogy that's come to mind is a car stopping. In one case, with the brakes, in another, by hitting a rock wall. The end result is still a stopped car, but there are some other differences that might be of interest to the occupants.

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://econlog.econlib.org/

http://www.marginalrevolution.com/

http://www.economist.com/blogs/freeexchange/

http://economix.blogs.nytimes.com/

http://delong.typepad.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.

That's a great analogy.

There's a brick wall looming up ahead, and we just cut the line to the brakes.

Like I said, to be honest I do not know if it is in any way an accurate analogy, but it seems to capture the sentiment I hear from some economists saying "yeah, giving money to people who screwed up sucks, but the alternative is much worse".

Looks like I'm not the only one who plain doesn't know:

http://www.marginalrevolution.com/marginalrevolution/2008/09...

Maybe the banks and whomever else holds mortgages will start to seriously restructure mortgages to generate cashflow from those so far behind and feeling hopeless they have just stopped paying altogether.

This way the following doesn't collapse: http://www.nomoneylimitsblog.com/blog/_archives/2008/1/10/34...

I think one of the commonly held misconceptions about this whole 'bailout' thing is that fixing the mortgage market NOW will fix the problem. Fixing the mortgage market in 2006 might have helped, but it also might not have. We'll never know.

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.

No one clicked on my link above or they would have understood what I meant.

I did. No offence, but it's a poor explanation. Actually I think it's flat wrong.

There's a crucial link in the chain she is missing.

If you mean the credit default swaps, those are worthless pieces of paper peddled by companies that didn't have the means to keep up with those contracts. In other words, they are fraudulent.

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.

This is what I meant:

"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.

Pumping in a huge amount of government debt and credit is hitting the accelerator, not hitting the brakes. Cheap credit is the fuel that produced the mess.

This is precisely the sort of "I know exactly what's going on" comment that I'm suspicious of. Perhaps you do, but I am in a "don't trust anyone" sort of mood, I suppose.

If feelings of mistrust are your guide then it should be obvious that the bailout is an evil racket. Cui bono?

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.

"certain well connected individuals"

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.

There is a simple, good test for smartness in the current climate: Who identified and coherently described the housing bubble in 2005 or before? I think everyone on your list fails the test.

After a quick search in The Economist's archives:

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.

The Austrians were predicting it in '02: http://mises.org/story/986

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.

> I think the point of the 'bailout proponents' is that more will go under than otherwise needs be without it.

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.

Japan didn't do "bailouts", from what I've read. More along the lines of simply never facing up to the bad debts and letting some things fail. That certainly has to be part of it, and has been so far.

Warren Buffett in 2003. see http://news.ycombinator.com/item?id=304237

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%.

Buffett bought callable preferred stock and warrants.

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.

I disagree. The bailout gives us more time to find out where the brake pedal is, so that we can press it. We're already speeding towards the wall whether we like it or not.

I think it's more like putting on a gorilla mask and hanging our ass out the passenger window while screaming like tarzan, so we can find the choke cable.

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.

In that case, will you be declaring bankruptcy and putting everyone that much closer to recovery then?

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.

+1, but you have to give it to him for the gorilla mask/ass hanging combination. Genius.[EDIT: Even more apropos given his handle.]

Not really - it's just hand waving. I want clear, cogent argumentation with pertinent facts, and refutations of other points of view, not silly imagery (he does better elsewhere). Like I said, I don't know if my car example is very good or not, but calling it "stupid" and going off on a rant is not the sort of commentary I'm after, which is, again, why I doubt I'll find much of value regarding the issue on this site - people here are hackers, not economists.

Agree on all points, just that image was so inane and off the wall that it gave me a belly laugh after a tough day of coding. That was about the only thing I got out of the whole thread; for reasons you outlined this discussion conveyed zero bits of information to me as well. I expected the usual ideology and armchair analysis, and got it, along with an unexpected laugh.

You don't seem to understand that this is not a matter of choice. Many, many bankruptcies will be happening one way or the other as the macroeconomic fundamentals of saving and interest rates return to balance. The government is powerless to affect this.

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.

My point is that for better or ill, every American is in this together.

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.

That rug really ties the room together.

It's stained with piss.

Absolutely none of that $700 billion will wind up spent a nail salon that is doomed to close, or otherwise enable someone to get a manicure. It will only serve to devalue the dollar and drive up import costs, drive up interest rates (as the credit worthiness of the US is questioned), and feather the nests of certain elites. You seem to favor emotional appeals over a discussion of the macroeconomic reality.

The money would go towards strengthening the distressed loans that everyone is going crazy about. In turn this would (should) hopefully slow the housing crash enough that some real decisions could be made about how to get on with fixing this mess. It's not the end solution, I agree. It is however a better option than smashing headfirst into a recession, possibly even a depression.

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.

too bad the compromise bailout didn't have proper oversight either. Instead of making all transactions publicly available, it would still be a gov secret. The only difference is that it expands it from one person to two committees

I remember reading: "A lack of capital kills you slowly, a lack of liquidity kills you like a slug to the head" - I think the credit crunch is more of the latter (or people claim it is). Who knows...

Part of freedom is being free to fail. Most of the people I have observed fighting this thing are doing so with eyes wide open, knowing full well the economic consequences of defeating it.

The bailout isn't to help taxpayers get credit. It's to help businesses get credit so the prudent will still have jobs in a month. Everything may go on sale, but you can't go on a shopping spree when you're unemployed.

The vast majority of the bailout criticisms I've heard are woefully uninformed.

You can't wave a magic wand and create real reserves to lend. Real credit comes from reserves of savings. This is about stopping a deleveraging process in the financial markets, not about ensuring the flow of credit to businesses. That's just the propaganda.

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.

"Credit demand is collapsing as an economic bubble bursts and this is DRIVING the deleveraging."

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.

> I can't prove that the economy is starved for credit

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.

Hm... That's a possibility. Lower housing values led to decreased home equity, which led to decreased consumer spending, which led to lowered expectations for businesses, which led to fewer loans being made. If this is true, the bailout won't work and we'll head into a recession, possibly a severe one.

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/...).

>"That's just a fact, and I'm not in a mood to give you documenting links"

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.

> You can get a loan at very reasonable rates right now if you meet the criteria.

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.

Would be great to see an essay by you on this fiasco.

this is a victory for the stingy saver who doesn't obsess over vacation homes and luxury cars.

Unfortunately, 90% of America isn't described in the above sentence.

Well, in a way, they sort of had it coming with their negative savings rates and all. Personal accountability really does go to die in the States although other countries are approaching our levels. Fat? Liposuction. Ugly? Plastic surgery. Don't want to exercise or eat right? Pills. Poor? Welfare. Don't know what you're doing with massive gobs of money? $700 Billion Bailout!?

What are you talking about?

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!

Houses are not an investment vehicle. If you buy one, it should be the for the long-term. Otherwise - don't. And I do feel for the minority of people with special circumstances.

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.

You keep speaking on the premise that it is contained to sub-prime mortgages. "The people who took out those loans knew what they were getting into"

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.

No, I don't. I was talking about all houses and all mortgages when I said:

"Houses are not an investment vehicle. If you buy one, it should be for the long-term."

Yeah, I bet those 'stingy savers' didn't go to college, and thus accrue the student loans that are practically required to get an education these days.

The Fed can still print money and screw us savers.

What about those who are young and hacker-ish that have not had the chance to save (I mean compared to someone that has been working for 20 years)? Times might get a little tough.

You guys are much better off. Those of us with houses and bills are going to hurt. Those of us with stretched lines of credit and a penchant for living above our means are really going to hurt.

said another way: you can't lose money you don't have

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

Oh I'm not worried. 95% of my assets are Canadian! :)

Well, let's see how well Canada does if the US economy collapses... :-/ So far the strong loonie has decimated some industry sectors, I'm surprised things aren't worse overall.

Little known fact . . . Canada and the EU opened discussions a while ago on Canada's integration into that politico-Economic body.

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.

Everyone is going to get hit in some form. World diversification for the win...even if you take some lumps, you'll survive.

Canada is arguably set up for a harder fall. Household balance sheets are even worse there, and the dependence on commodities could prove to be a disaster in a global economic downturn.

Household balance sheets are nowhere near as bad here in Canada as they are in the US. This is common knowledge so please provide some figures if you've got something that suggests otherwise. We also have stronger banks and didn't get nearly the "deals" that American's got for mortgages.

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.

> Household balance sheets are nowhere near as bad here in Canada as they are in the US. This is common knowledge

Simply untrue. The debt to income ratios are about the same, but US households on average still have more assets and cash.

Again, a citation is required. Canadian economists regularly state that the D/I ratio is much better in Canada than in the US. (Although it is a cause for concern nonetheless)

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.

Well, we will hack through it.

Well, if you're worth nothing you have nothing to lose, that's the way I see it.

This is precisely correct. Not a joke at all.

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.)

I think that the better statement is 'volatility creates opportunities.'

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.

Not exactly true, there are plenty in good financial standing who had prime mortgages on their single residence, a place they have owned for 10+ years, that because of the depreciation in the market can now no longer sell their home without owing a huge amount to the bank for the difference. That means you can't sell your home if you have to, what if your job tells you that you have to move? What if you have to sell your house to use the cash for medical bills?

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.

Unless you live in an unbelievably depressed area like downtown Detroit (and maybe not even then), home prices in America are substantially higher than they were 10 years ago. So anyone who has had a fixed rate mortgage for 10+ years (unless they've been treating their house as an ATM) is looking at a profit if they sell their house.

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).

This is a victory for the stingy saver

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.

Tax rates are negative, zero, or nominal for most people. There are perhaps 100 million people who pay a substantial amount of income taxes in the US (I am fudging around various numbers to make the math easier, here; see http://www.taxfoundation.org/research/show/1410.html for information on how many people simply don't pay taxes). So that's an average of $7000 per serious taxpayer. $7000 is 5% of $140,000. Do you think a typical 40 year-old taxpayer has a $140,000 equity portfolio?

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