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