Comments on Leveraged Failure, Taxpayer Bailout
So, why are we bailing out hedge funds, which are basically legalized gambling firms for the rich and the ultra-rich?
Seriously, why?
Why not just do something about mortgages and let the rich lose it all.
Very good post, Golob.
To answer the question you pose in Dear Science, the reason we need the bailout has more to do with liquidity for future borrowing than anything else.
Krugman breaks it down very well today.
http://www.nytimes.com/2008/09/22/opinion/22krugman.html?ref=opinion
If the government is doing to go ahead with this bailout, we damn well better get some major equity (ownership) in these companies.
Here's another useful analogy. You've got a job and let's say you own a house or other valuables, like let's say the jewels grandma left you.
You go out and run up your credit cards on electronics and other stuff, some of which may now be worthless, but the interest rates went up and you can afford the minimum payment any longer.
What this bailout could do is pretty much allow you to skate on your credit card debt.
It ought to be set up more like a pawn shop.
You want Uncle Sam to bailout your debt? Well, let me have all that junk you bought on credit. And, oh yeah, bring in the title to your house and grandma's jewelry. We'll take care of your debt, but we're also now more-than-part owner of your other assets.
Uncle Sam tries to get what they can from the junk you bought on credit. And down the road if you're able to get your act together, I'll let you buy me out of my stake in your goodies.
The government has an 80% stake in AIG. But for the rest of the bailout, as it's being proposed right now, these companies don't seem to have much penalty from walking away from their junk.
The impetus to "save" Wall Street comes from the experience of the Great Depression. Herbert Hoover let a financial panic bring down the banking system and the results weren't pretty.
A flight to safety and resulting credit crunch means that productive capital is hoarded and unemployment spikes. I recall hearing something along the lines of 40% of all new jobs in the last ten years in this country were somehow tied to the housing boom. If the credit markets really seize up unemployment will skyrocket as construction and manufacturing lay off millions of workers.
During the Great Depression everything was cheap, but nobody had money. Today we're seeing a similar massive contraction in lending coupled with a downward spiral of asset prices. Without public intervention at scale, millions of aging baby boomers may be eating dog food for the last 15 years of their lives.
I've been puzzling this one for a bit.
In the news a short while back was the news that the SEC let certain firms 'debt-to-net capital ratios' go from the default 12:1 to 30-40:1. Relating to the example at your link, is that the amount of loans firms are allowed to get versus the amount they are investing?
That seems logical to me, but that term seems to be defined as 'Debt-to-equity ratio' instead so I am unsure.
So, this has been universally panned in the press, and no one I've talked to -- no joe 6packs anyhow -- like it. Yet, no one is doing anything about it. Is this what it's come to? Watch the top 1% pick our pockets in broad daylight and after telling us they're going to do so, and we just grumble and let them do it? Why isn't anyone doing anything?
The time is now:
http://you-read-it-here-first.com/viewtopic.php?t=511
I am announcing a new societal concept: The Guillotine
The Guillotine states:
1. The majority of societies problems are caused by the top 3% of society.
2. The top 3% therefore must be segregated for the general good of the People and the Planet.
3. The form of isolation or sequestering has not been determined.
4. Taking this action will prevent the top 3% from warming the planet further by making movies, organizing electricity-wasting benefit concerts or otherwise getting around a spending a lot of money in the name of "helping".
I liked Krugman today so still not entirely sold on the bailout. But the answer to the question, "Can anyone tell me why banks like this deserve to be saved," is this.
They don't. But we do.
Capitalism can get in a fix where there is a breakdown of liquidity. All this bad paper is impossible for the finance sector to value right now. So they don't know their situation and they are not lending anyone anything, even qualified borrowers who AREN'T shitty risks.
This can make the whole system collapse.
This would hurt you and me and everyone.
The market can't fix the problem but the govt. is beg enough to do so by saying it wil buy all the bad loans, the healthy party of the finance sector is able to get going again. It's like the govt. taking an automobile that has sand put in its gas tank and washing out all its lines.
If the govt. buys the bad paper low enough (I've heard 40 cents on the dollar -- seems a good deal, cuz the foreclosure rate is now where near 60%) -- then in an orderly liquidation over the next few years it will make a profit. This is what happened when Sweden did something similar spending about 3% of its GDP on a smilar bailout and this is what happened with Resolution Trust Company.
I agree this return or potential return (saving us all from disaster, plus possible profit) isn't enough of a quid pro quop thus have been advocating tying this to socializing the risks we (we progressives, not "we the freedo-to-own-pit-bulls crowd) want to socialize, eg health care. I don't know if this shoudl be done explicitiy now, or simply stated nad made a maoral charge on the future in the first 100 days of OBama presidency.
And I like Krugman's point we should get ownership stakes not just buy the bad paper.
But to sit and complain that the rich are getting bailed out, implicitly implying we shouldn't do it, with the result that the whole economy crashes, isn't good for us.
They don't desrve the help. But we do. It's our economy and we can do what we want in our own self interest. The trick is to have the Democrats stand up and have the guts to make the connections and get what we want.
OBama's been kind of bleh on this, he said he doesn't even have a plan, and the little proposals for greater accountability and holding down CEO pay and such are fine and dandy but they're no where near enough quid pro quo. They're typical Democratic measly bullshit.
I say tie this bailout to letting everyone in the USA into the US Senator health care plan, with Tresury to figure out the details later on premiums. Everyone. Now. No pre existing condition exclusions. Premiums tied to income and ability to pay. retroactive to cover evryone saddled with 90K in (heretofore) uncovered costs. Side benefits: many foreclosures promted by medical costs; GM legacy health care costs make it noncompetitive, etc.
In short instead of the usualy leftist ineffective whining and moaning, seize the opportunity to be a more fundamental game changer and move us toward a fundamentally more just society.
Like they have in oh Japan Germany UK Canada and about every other indsutrialized democratic nation on the face of the earth. Punishing the top 3% by itself does nothing to take care of the 97%. We should take care of the 97% of us. (But not the freedom to own pit bull crowd. They are socializing and increasing all our heatlh care costs, and are good examples of greed and irresponsibility that must be restrained thru proper goverment rule of the marketplace, in this case a breed ban. After all, pit bulls are like those sliced and diced mortgage instruments -- bizaare derivatives with wild and unknowable risks, risks that are simply spread to owners who have no ability to understand nor handle them willy nilly, resulting in the end in disastrous consequences both for the owners and the rest of us when such wild risks are uncontained).
Another quid pro quo we despereately need to get out of this is a totally new frame that establishes all capitalsm and markets play only if allowed by the government and where risks can be fairly contained to those able to knowingly take them. that's kind of an intellectual way to put it. Semi socialism would be shorthand. We won't tolerate greed and coruption on Wall St. or in Washington is a better way to communicate it, too bad Obama isn't too firm or clear on his messaging about this. He's doing better but still talking in big lond sentences understandable only to elites with college education. He needs to connect with sectors of working white electorate in Youngstown and Scranton better and I'm not sure they get all fired up about McCain being "fundamentally a deregulator."
Everything you see is all part of the plan.
The bailout of a rotten system, and the rewarding of people who created the problem, is rationalized not by common sense or financial sense, but by fear of socialism.
ok... 2 things
1. if you total up all the bailouts, the sum total will be closer to 2 trillion dollars.
2. my grandparents both lived through the depression and were fine. christ, my grandfather's family (not wealthy) still had a cook and driver.
Indeed, lets look on the bright side. At the least some of you boring people seem interesting to your grandkids by telling them stories of the great sink of '08, sonny boy.
Oops. Should read "...people can seem..."
I think that the word "bailout" has been a bit overstated. I hate to defend Wall Street, but the shareholders have been wiped-out and the management terminated. A lot of the incentives to managers were paid in shares, and those shares have been decimated. The current rescue plan aims to provide a firewall to prevent bond markets from going up in smoke.
I tend to read the commentary from Bill Gross when I'm curious about bonds. He manages the worlds largest collection of Bond Mutual Funds.
A Depression-era bank robber named Willie Sutton once said that the reason he robbed banks was because “that’s where the money is.” Illegal for sure, but close to an 800 SAT score for logic if you were in the business of stealing other people’s money. And now, while some will compare current government bailouts to Slick Willie, citing moral hazard, near criminal regulatory neglect, and further bailouts for Wall Street and the rich, common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.
The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.
The credit card example is more like arbitrage than it is leverage. Since the investment is the same size as the loan. Now if you took the money from your cheap card and bought bonds on margin that would be leverage.
Since the taxes are paid by the top income earners, as it should be, much of the burden will fall on those that made money on these schemes.
And Mike every family had a driver and cook during the depression.....riiiggghhht! They were called Mom and Dad.
Right now saving the system makes sense for most people financially if not philosophically.
Oh and golden parachutes should be taxed at 90%.
McG stole my line; arbitrage is exactly what borrowing at 3 and lending at 6 is what it's all about. scalping the bid and ask price is also arbitrage.
It's time to recognize that taxing capital gains at the same rate we tax middle class people is not encouraging entrepreneurship, but speculation, wild, massive speculation of the type that leaves us with an exagerrated business cycle. Capital gains from the secondary stock market should be taxed as normal income, and only direct investment into companies should receive a tax break.
And we have a model for a bailout that at least gets taxpayers something in return: AIG. Yeah, it's still a bailout, but we get something, 80% of the largest insurance company in the world that has $1 trillion in assets. There's something marketable even if the loan fails. Let's apply that to all these companies, and get you and me a little something for helping these companies recover. After the bailout is done, we can sell off our 80% share of each of these fucked companies, and maybe come out ahead. It'll wipe out the speculators, but that comes with the territory of speculating.
@10, the current generation hasn't faced any adversity even 1/4th the size of the depression and it scares the crap out of them to imagine it happening again. consider that at the time of the depression every person over the age of 18 had at least been alive during WWI and the recession that followed. Many were also alive during the panic of 1907. perhaps even more of grown adults were alive during the great depression that spanned a larger amount of time from 1873 to 1896.
The thing that strikes me as incredible is that the less something happens, the more fear or inability to cope with the situation that happens.
gitai, adding 8% to the tax people pay on capital gains at the upper echelon isn't going to reduce the incentive to speculate nearly as much as you'd believe.
bail out the rich, let the poor suckers who have been foreclosed on suffer.
THIS IS NOT COMING FROM TAXPAYER DOLLARS!
What taxpayer dollars? We've spent the ones we have left after the tax cuts in Iraq and Afghanistan. This bailout cannot be funded by taxpayers unless they explicitly raise taxes to pay for it. Rather,this will be additonal deficit spending financed through the printing of treasury bonds and money. The US govt will sell those bonds to itself for that money it just printed and voila! The good ol boys are safe.
unfortunately, it's a very inflationary move that obliges us to print even more money down the road when we can't pay off the interest on this new self-loan.
They're playing craps with the dollar. Who knows if it can survive this kind of abuse?
If you’re mid-scheme, and the card’s rate unexpectedly jumped, you’d be doomed.
Your only screwed if you can't get the money back you put into the savings account. What is happening now is that the assets bought with borrowed money (mortgage securities) are now worth much less than what was paid. The lenders are now demanding the borrowers put up more capital to restore the capital to debt ratio. No one has any capital so they can't.
As to why we need to bail these people lout. If you have gotten a mortgage in the past decade, congrats you got some of this leveraged money. Credit Unions tend to rely on deposits to lend, but institutions like Freddie and Fannie have no depositors so they securitize the debt and sell it to raise capital to lend.
Now this system might not be ideal, but destroying it in days (which the about 500 billion in sell orders that were set to go Thursday morning would have), would equal major depression. Basically lending would stop, all of it. When this happens say good by to credit cards and business lending which is minor compared to the decrease that would result in home prices.
Since everyone would need cash to buy a home prices would fall maybe 90%. Everyone with a mortgage would be incredibly upside down and most would simply walk away. People with cash, e.g. rich people, could then buy up homes at a huge discount. We could go from about 65% of the homes in the country being owned by the person living it to maybe 10% of people owning all the homes.
So yeah, this is problem that needs to be fixed.
And @10 having a cook and driver might be middle class by McCain standards, but it is pretty wealthy from where most people sit.
70% of Fed income tax comes from top 10%. It could be higher but most of the federal dollars will come from top earners and inflation.
Any bonuses paid in the last two years or to be paid to the execs of these companies should either be repaid to the shareholders or taxed at a very, very high rate.
Creative Destruction (let it ride, no bailout):
http://www.wired.com/wired/archive/10.03/schumpeter.html
Schumpeter argued that capitalism exists in the state of ferment he dubbed "creative destruction," with spurts of innovation destroying established enterprises and yielding new ones. This view seems far more current than Smith's Newtonian notion of an "invisible hand" generating stability in the marketplace.
This post was the straw that pushed me to finally contact my government representatives about this whole bailout thing.
If there is another depression, I have no doubt that we'll get through it. But it sure won't be pretty.
giffy, the problem with your entire premise is you think credit cards and home price deflation is an inherently bad thing. you're stringing along a defunct way of living on life support because you think reincarnation isn't possible.
and seriously i can't believe you're still on the "home ownership is inherently a good thing" trope. It's only good when it makes more financial sense than renting.
The bailout will keep the market from functioning in order to protect the established political and financial powers. Were allowed to continue functioning, we would have a much more rapid economic unwinding. That would bring tremendous opportunities for new businesses and political thinking. We can't have that, so let's protect the status quo. Period.
Well, as I understand it, without some sort of help, there is a very real danger of the entire credit market imploding. And that is something that we should all care about.
If the credit market implodes, that would directly impact our ability to borrow money for car loans, student loans, mortgages, small business loans, credit cards, and everyday small personal loans.
It would also indirectly impact us through massive unemployment. It isn't just regular folks that borrow money to buy things. So do most businesses. Most businesses, like most people, borrow responsibly. But if there is no money to borrow, some businesses will fail. And businesses that stay open will be forced to cut back on growth, production, expansion, etc. That means layoffs and fewer jobs on a massive scale. Many of our jobs could be at stake if the companies we work for can't borrow money to grow.
I'm not sure I support the current bailout, and the details are still being worked out. But some sort of bailout is necessary. Personally, I think it should have a lot of strings attached. All of these financial companies should be place under much stricter regulation. The shareholders and management should feel pain before taxpayers are forced to pick up the tab. If these companies recover, the bailout money should be repaid before shareholders and management see a dime.
No, they don't deserve a bailout. But if properly structured, and with strings attached, a bailout is far, far better than the alternative.
@25. I don;t care if its a good thing or a bad thing writ large, but I know that resolving it through crisis is not the answer.
For better or worse we are were we are. Destroying trillions in assets for millions of people in a matter of days could create a depression we would not escape for at least a decade and would consolidate ownership of America's real estate in to the hands of those with money in Swiss bank accounts.
If you want to make the super rich even richer and more powerful that's fine, but I for one would like to see that not happen.
The bailout is a freaking 700 bil fund for Paulson to spend money on anything he wants without review. And you know exactly why Goldman, etc went to bank status? SO THEY CAN CASH IN ON THE 700 BIL!
This bailout is crap because of a lack of oversight, the obvious attempt of any and every pig to come to the trough, the lack of any reform attached to it. After this nothing changes. Nothing. Back to credit expansion.
Giffy, did that happen during the last depression? further, that is an awfully stupid boogey man to be afraid of. In any economic scenario rich people are going to own more than poor people. In this scenario the rich have gotten even richer by A. gaming the system B. having access to financial instruments that the average person doesn't.
We can't trade this money for universal health care. What's the connection there? Honestly PC the anti-UHC crowd is not just plutocrats that we've now got on the run. It's a bunch of average Americans. People that might be on our side when it comes to handling this financial mess until someone tries to make some sort o spurious political hay.
Trading this for regulation, for the subjugation of the supplicants, for structural change in our economy: sure, we might be able to get a huge majority for that.
OTOH: I'm a renter. I can't help but feel that this chaos and destruction which supposedly hurts us "all" is really going to mostly hurt the fat cats, boomer and other folks who bough recently.
EVEN if we factor in the wider chaos (e.g. unemployment) I have a little money in the bank, I'd be more likely to be able to afford a house after a year of unemployment and falling house prices than I would be going to work and watching the gov't bail out the credit markets.
Now perhaps this analysis is slightly over-colored by self-interest (and self-pity.) Certainly one way or another I'm not 100% motivated by my self-interest and I've noticed that everyone else appears 0% motivated by my self-interested.
why these hyperinflationary policies are scary:
tt, deflation is way scarier apparently.
Daniel, if the financial system tanks, your money is GONE. Either wiped out by inflation or simply evaporated when the banks founder and drag the FDIC down with them. Don't think you'll get out of this okay.
Greg, my money's already maybe a quarter (maybe a half) gone if you take the losses in the market times inflation (plus maybe the value of the dollar.) The question is can the price of housing go down relatively more.
@5:
If you want to do something, call your representatives and senators and tell them you want something better.
Patty Murray: (202) 224-2621
Maria Cantwell: (202) 224-3441
Jim McDermott: 206-553-7170 or 202-225-3106
Dave Reichert: 206-275-3438 or 202-225-7761
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