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