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Over and over I read and heard the pouting that the bailout died Monday only because there’s an election in November. If so, it makes me wish we never more than three months away from elections for the House. It isn’t too surprising that those favoring massive government intervention in the economy also express contempt for democracy. |
I keep hearing them say that people will not be able to get loans if this bailout doesn’t happen. Is that true? Can anyone demonstrate this is the case? It seems more likely that people who have bad credit will not be able to get loans – which I don’t see as a problem at all. The quote I keep hearing is that government isn’t trying to bail out Wall Street – but that the government is trying to bail out the economy. I am skeptical of the whole bailout push. I have yet to read a convincing argument that it is absolutely necessary. I’m not saying it’s impossible that is the case – but it’s amazing that these people are demanding $700 billion and simultaneously are saying they might need to come back and ask for more! Who specifically is getting the $700 billion? How will that money be accounted for? What does the government get in return for that money? What do the American people get in return for that money? How many executives whose companies are failing will still be receiving multimillion dollar golden parachutes? |
Danithew, here is one economist who is wondering “Where is the Credit Crunch?”
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Part of the panic stems from the press erroneously reporting that “not even McDonald’s has been able to get a loan.” FWIW, I bought a new minivan on Monday with no trouble. But many people have said the credit crunch just hasn’t trickled down to the consumers yet. |
Yeah, they apparently were saying about the credit crunch in February too. |
Two of my brothers work in the commercial loan office of a large regional bank. Their department is greatly restricting the amount of loans they are giving and are trying to sell off a lot of their current ones. This impacts my brothers since they are used to getting bonuses based on the loans they bring in, which they are now being forbidden from doing. And it impacts the rest of us because, no loans. |
It does appear that the bill being worked on right now, which will apparently be voted on by the Senat tonight, is much better than the bill voted on Monday, and much, much better than the original Paulson plan. This whole thing had a Patriot Act feeling to me, so I’m glad it was initially voted down. |
There will be loans. Loans are the revenue engines of banks — they don’t make money by paying you interest on your savings. There are people with money, which means that there will be banks with money. Whatever the state of bank lending at this very moment, any absence of lenders willing to loan money to credit-worthy borrowers will create an economic opportunity for those who are willing to loan. |
#2 asks all the right questions, and points out why this is a bad idea. No one in government really has any idea what to do. It’s a Wall St. bank bailout, plain and simple. |
danithew, Your questions are good ones, and hopefully the current bill being negotiated will answer them, but I haven’t seen that bill. As for the golden parachutes: anyone who currently has one will get his or her money. He or she has a contract right to it, often (depending on the employment contract) even if he or she is dismissed for non-felony cause. In retrospect, it probably wasn’t wise to provide such extreme compensation with virtually no accountability, but I doubt that will change. The same kinds of things were happening back in 2001/2002 with Enron, Tyco, WorldCom, et al. |
The “gee I don’t see any problem” attitude that is blocking this bill is amusing and terrifying at the same time. I my opinion it is like watching the fuse burn on a bomb in the room and saying “this isn’t so bad”. Just because the bomb hasn’t gone off yet doesn’t mean it won’t soon. Some loans are still there today. But the financial markets are all connected. The economy is like an organism and the flow of credit is the lifeblood of that figurative body. If there is a major artery blockage it doesn’t mean sudden death, but it does mean really bad things coming soon (stroke, heart attack, aneurysm, whatever). It starts with loans being harder to get for businesses and consumers. When businesses of all size can’t borrow they can’t buy the inventory and services they used to buy so everyone starts buying less stuff and thus every business starts making less money. Pretty soon these businesses need to cut costs to survive so the layoffs start. With unemployment rising consumers have less money to buy anything so the vicious downward spiral is on. The knuckleheads who claim this is no big thing seriously need to pull their heads out. This is a big thing. I called an yelled at my retarded congressman (well, left an unhappy message for him) for his short-sightedness in voting no last time. I recommend you all do the same. |
One thing to keep in mind is that saying it’s a $700 million bailout is a bit misleading. Most of that money will end up coming back to the government. |
The problem is that everyone is looking at the Stock Markets rather than the Credit Markets. Folks, look to the Credit Markets to see the problems. This is a credit issue and not a stock issue. |
“Folks, look to the Credit Markets to see the problems. This is a credit issue and not a stock issue.” Good point. And the press, not to mention the gov’t, has done a ridiculous job explaining this and other points to the public. |
Clark, As I wrote in my invisible hand post it is completely unclear how much money will come back to the government. Let’s say that they lose 20 cents on every dollar they spend. That doesn’t mean that at the end of the program they’ll have only spent $140 billion. They get the $700 billion pool of money to buy and sell and buy and sell again and again. So after one round they’ll be down to $560 billion. Then $448 billion. Then $358 billion. I would guess that the smaller rounds will go faster and faster. Depending on a number of factors they could evaporate most of the $700 billion or they could actually make a profit. It sounds like they are looking to pay well above market prices though and then sell them, for what I assume will be market prices. The question is how long will they hold them, and will they repackage them somehow to make them more palatable. If they hold for a long time they won’t be able to inject as much liquidity into the system. But if they buy and sell quickly they will have larger losses and less money to play with in the next round. |
I don’t buy the idea that our problem is that “all our assets are good but we can’t tell what they’re worth, so the financial sector is stuck.” If all those bright people running the banks have no idea what assets are worth, then they aren’t contributing much to economic stablity, and there isn’t much point in propping them up with government loans and backing. I suspect they do have a pretty good idea of the value of their assets, and that that value is lower than they want us to think. In this case, the bailout can’t do anything but prolong an illusion of wealth while swindling us for a few hundred billion. If we have a problem, it is due to excessive credit. Those portions of the economy that can’t survive without more of the same should die. If we’re holding a bomb, I’d rather see it blow up then continue holding it. |
#11, there is a big problem, and people realize it. The question is whether this approach will help or just waste taxpayer money that we do not have. This is the beginning of a long and painful deflationary deleveraging that will last quite some time. Credit will contract, the economy will slow, jobs will continue to be lost. People realize it is a big problem, but this approach is bad. The losses can be very large for the reasons outlined in #15. In no way under the current plan will the government be making money. The credit and stock markets are linked, and lately the debt markets are leading the stock markets in predicting problems. Furthermore, this is not a liquidity crisis as the fed can already provide massive amounts of liquidity to the banking system (and it has recently). |
I have absolutely no problem with lawmakers stepping back for a few days to really make sure the best thing happens. Unfortunately they seem to be stepping back to look at what the polls want them to do instead of stepping back to learn more and make better decision. |
Interesting interview with Clinton on whether 1999 deregulation caused the problems. A bit surprising although with Clinton one never can be entirely sure why he says what he says. (i.e. sincerity isn’t something I’d ever assume on any statement from the Clintons) |
John, I completely agree it’s not clear how much money the government will lose (if any) on the bailout. The problem is that this has not been at all communicated to the public. As you note there’s a reasonable chance the government will make money. And quite a few very smart economists and business analysts think that’s the likely scenario. |
While I’ll fault the management all over the place for a lot of stupidity and duplicity I think one thing almost everyone agrees upon is that it’s completely unclear how much assets are worth. That’s what did AIG in. They really couldn’t give a good analysis of what their assets were worth so everyone just assumed the worst case scenario. |
Nearly all business right now depends upon credit for nearly everything. It’ll take time to transition back to doing things like payroll with less liquidity. What you are advocating ends up saying,”let most of the economy blow up.” Are you really willing to say that? |
Clark to Mansfield: What you are advocating ends up saying,â€let most of the economy blow up.†Are you really willing to say that? Mansfield: If we’re holding a bomb, I’d rather see it blow up then continue holding it. I hope that answers your question Clark. He does indeed have a financial deathwish. |
I think the point is not that he wants it to blow up, but that he doesn’t want to convince ourselves (falsely) that we have solved the problem only have to have it blow up in our faces 5 years from now. |
No, I’m not saying “let most of the economy blow up,” because the financial industry is just a fraction of the economy. I don’t believe their blackmail that everyone will die unless we hand over the money they demand. If half the banks in America go under, we’ll do business as before with the half that remain. |
Greater regulation is will prevent future infernos. But this bailout is about putting out this major fire before it burns the place to the ground. To me whining about the bailout is like whining about the water bill that would result extinguishing the fire that is about to burn our house down. (Although I can see concerns about overdoing it causing unnecessary water damage…) Not infusing the credit markets would cost a lot more than moving ahead with this. The leaders of both parties agree on this fact. |
Crap. I need to edit comments better before hitting submit. There are extra and missing words in a couple of places in that last one… Sorry ’bout that. |
How is the government buying bad assets at inflated prices “infusing the credit markets?” Assets are only worth what someone else is willing to pay for them. What did AIG in was massive overleveraging and insufficient loss allowances. |
Bombs, burning houses. What’s the next frightful metaphor? Geoff J., suppose Congress ends up doing pretty much nothing: Where do think we will be two years from now that would be different from if they had passed the bailout? |
John, you’ve hit the nail on the head, that’s the real question. I submit things will be about the same, only we’ll be out a lot more money if this passes in its current form. None of the financial interventions so far this last year have done much (other than weaken our government’s balance sheet) to prevent the deleveraging taking place. The equity markets continue relentlessly lower, and the debt markets continue to experience disruptions. |
Woodboy: How is the government buying bad assets at inflated prices “infusing the credit markets?†Is this a trick question or something? The answer is self evident. Well just in case try this: If the U.S. buys the assets (especially if they buy them at an inflated price) the banks will have the cash they need to start lending again. Pretty simple stuff really. How does this plan directly affect small business lines of credit? See above. Mansfield: suppose Congress ends up doing pretty much nothing: Where do think we will be two years from now that would be different from if they had passed the bailout? I personally suspect we would be in a depression with massive unemployment if the government does nothing. Why not? That is one of the risks of truly free markets right? Other than that no biggie though. The irony of it all is that the “do nothing congress” finally wanted to do something and the super-smart constituents insisted they shouldn’t. I find the “burn baby, burn” attitudes astonishing. It is not Wall Street that will be burned, it is all of us. |
#266, To me passing this bailout would be more like calling the fire department when your house is on fire, but then they drive to the wrong address and spray water all over someone else’s house. Furthermore, the fire department has done this several times previously. Plus, they send you a big bill at the end of it. |
Geoff, I don’t think the consituents, myself included, wanted Congress to do nothing. They wanted them to do the right thing. Doing nothing isn’t necessarily worse than doing the wrong thing. Again, I’ll bring up that this whole thing had a Patriot Act feeling to it. |
Geoff, I can assure you that I understand the issues well. It is not a trick question. Buying deflated assets is not infusing the credit markets. Buying bonds would be doing that. If the point as you suggest is to give the banks cash, this is a pretty inefficient way to do it. I am in agreement that the banks badly need to be recapitalized. But directly providing $700b in capital (through equity/debt/hybrid purchases) would certainly be a more straightforward way to do this than buying bad assets. Unless of course you are a banker, in which case this plan makes perfect sense as you get to dump your bad assets at great prices, and not have to give up any control at all or dilute out your shareholders or scare your bondholders. Furthermore, you are assuming that if banks had more cash, they would be just as willing to lend it out as they were before. |
jj(#18): Are you saying/suggesting that politicians SHOULDN’T reflect the will of the citizens??? |
31: “If the U.S. buys the assets (especially if they buy them at an inflated price) the banks will have the cash they need to start lending again. Pretty simple stuff really.” So, just how is the government supposed to make any money at all on assets that we’re agreeing was bought at an inflated price? “Buy high, sell higher.” A nice economic philosophy, if you can make it work. |
That is not a bad argument about getting more out of the same $700B woodboy. I think that the notion being pitched is that it is too late and too risky at this juncture to do much else besides absorbing some of that bad debt. Leaders and economists from all kinds of political persuasions agree with this sentiment. I am certain the American people want blood eventually for this mess so there will be blood soon enough on Wall Street. Plus there is no doubt in my mind that there will be a lot of new regulations preventing this fiasco from recurring. I do think it is safe to assume banks will lend money if they have it. That is what they are in the business of doing after all. Mark N: So, just how is the government supposed to make any money at all on assets that we’re agreeing was bought at an inflated price? They probably won’t. But even if all $700B were lost (and it certainly won’t be), if it helped prevents tens of trillions in losses in the broader economy it would be money very well invested. |
Geoff J: The “gee I don’t see any problem” attitude that is blocking this bill is amusing and terrifying at the same time. This begs the questions at hand, which are (a) whether the bailout is necessary, and (b) whether the bailout will actually solve the problem. You can’t just assume a “yes” answer to both questions and then go off half-cocked about how scary it is to survey the landscape in an attempt to answer the questions. Geoff J: With unemployment rising consumers have less money to buy anything so the vicious downward spiral is on. When I was in college, most mainstream economists pegged “full employment” at an unemployment rate upwards of 6%. The unemployment rate hasn’t ben much above 6% since 1994. In the thick of the recession at the beginning of this decade, unemployment was lower than the economic boom years from 1984-1987 (you remember the decade of greed?). Unemployment may be edging upwards, but it’s no where close to a level that puts the economy in jeopardy. Nor is it increasing at a rate outside of normal fluctuation. (Here’s a graph of unemployment over the past few decades.) |
This from the IMF:
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Clark: The problem is that everyone is looking at the Stock Markets rather than the Credit Markets. I emphatically disagree with this. As Peter Robinson noted on National Review Online earlier today:
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DKL: Unemployment may be edging upwards, but it’s no where close to a level that puts the economy in jeopardy. What is happening this month is entirely beside the point I was making. I am more concerned about what might happen in six months if the credit markets remained largely frozen. |
John, I think you are seriously underestimating how interrrelated the economy is. To quote Donne, “no man is an island.” DKL, I understand what you are saying but I think you still have to acknowledge they are measuring different things. |
Just put 830 billion dollars in the bag and noone gets hurt. |
DKL, I would love to see a correlation between the Dow and GDP, unemployment, etc. The Dow is such a small index, it only does a fair job of portraying market activity. I think Clark is right on this one. Lending rates for banks are out of control right now and it’s only a matter of time before Joe Six-Pack feels the pinch. Thank goodness for a better-informed Senate. |
#36, just because that is the notion being pitched does not make it so. And there are a ton of economists who also disagree with the plan, like the U. Chicago group that sent the letter to Congress. I guess it’s not much of an issue as the bailout will pass tomorrow. Ultimately the plan will fail, they will come back asking for more, which we will give them, and a few years down the road we’ll have to recapitalize the banks anyway, so I’d rather just see us do it now. As for the regulation, i also have no doubt there will be a lot of new regulations. There always are after a crisis. However, they won’t prevent the next one. It’s the economic cycle, boom and bust. And yes, banks are in the business of lending, but if they are deleveraging they will use new money to bolster capital rather than originate new loans. And in an environment of falling asset values, banks are less likely to lend or be much more careful about who they lend to. |
#43, the Dow is a small index, true, but it portrays market activity well. If you prefer, use the S&P 500. They never diverge to any significant degree. And the stock market is a great predictor of GDP/unemployment. The difference is the stock market is forward discounting, so problems show up there first, while GDP and unemployment are lagging indicators. I am not aware of any recessionary period where the stock market has not fallen. Joe Six-Pack is going to feel the pinch for a long time regardless of any legislation that is passed. We should not expect lenders to be as liberal as they were the last several years for a good long time to come. |
Woodboy: just because that is the notion being pitched does not make it so Yup, I fully understand that. (That’s why I specifically called it “the notion being pitched” instead of “The Truth”). So it comes down to a judgment call. With the proverbial house on fire I side with the folks that say let’s turn on the water hoses right now and contain this as much as possible immediately. Yes, there is a risk that doing so will not contain the fire after and will just add a big water bill to the fire damage. I just happen to believe in this case that the Republican and Democratic leaders are correct in this case that waiting poses a much greater risk than acting. I think most in congress believe that too but they are more worried about offending their under-educated (on this issue) constituents than doing what they believe is best for the country. It seems to me that many of these congressmen were voting no and praying for it to pass anyway. |
I guess it depends on whether or not you trust the government to do what is right. I for one do not. Even if you stick to economic issues for the last year, their track record is not too good. These are the same people who were crowing about how the Economic Stimulus Act would save the economy and we’d have a robust recovery in the second half of ’08. Or the emergency rate cuts that would save the stock market. Or the money that they swore they would never have to use to buy Fannie and Freddie. Government intervention in the markets does not work, it never has. The stock market will continue lower, no doubt about it. I agree people are under-educated on this issue, but I wouldn’t say anyone who opposes it doesn’t understand it necessarily. And you’re right, Congresspeople were hoping it would pass, but didn’t want to vote for it themselves. I imagine they will pass it tomorrow though on the second try. |
Where’s the VP debate live thread? Anyway, I’m glad she mentioned the “maverick” bit about McCain. I’ve never heard that before. |
I didn’t make a live debate thread, because I didn’t think that there’d be interest. I’ll be posting my analysis later tonight. [update: here it is] |