Just Let Them Die

[grunion]

I believed the President and all the politicians when they told us that we just had to prop up the failing financial institutions with billions of taxpayer dollars. It was just too big, and too wide reaching, that all kinds of pandemonium would erupt if we didn't band together behind our poor brothers and sisters in the banking industry.

And then we saw the house of cards that these mighty institutions built themselves on. These ridiculously complex derivatives that were essentially worthless but were fraudulently passed around to each other like a crack pipe, to jack up the paper value of these companies so managers would get their bonuses.

And the insanely leveraged loans they dangled in front of idiotic consumers who thought they deserved their piece of the American Dream without having to work a lifetime to achieve it, just like the people on the teevee shows.

And then he put Geithner and Summers in charge of the bailout who of course had vested interest in keeping the current banking system afloat. And the who-knows-how-many billions they're going to tell us to keep funneling to their buddies because we just can't do without them.

Well I say enough NOW. I can't see what good an additional AIG or Citicorp or any other "financial services" bailout will do for me. Will it extend my unemployment benefits? Will it help me pay my COBRA? Will it help me find a job? I'm OK with the need for economic stimulus. But the bailout is a colossal waste.

Time for our shiny new President to kick Geithner and Summers to the curb. Do it now before they get too comfortable. They are the scoundrels that got us into this mess. They are bankers with a vested interest in keeping their banking cronies happy. Let's put someone in the job that cares more about the electorate than about Wall Street. Let AIG die its long overdue death, and let's see those investment bankers do something useful with their lives. Let the Dow drop another 1000 points, who gives a frig what Wall Street thinks about it anymore.

[Francesca R]

Thanks for sharing your woo here :D

[rjh01]

If you owe the bank $2,000 and cannot pay then you are in trouble. If you owe the bank 20% of its worth then the bank is in trouble. If 20% of all [large] companies have debt they cannot repay then the economy is in trouble. That is the current situation.

Adjust figures to suit.

[grunion]

Thanks for sharing your woo here :DOK, can you tell me what we're getting for our trillion dollars? I haven't heard an answer that makes any sense yet, other than the usual variations on "if we didn't do it then all hell will break loose."

Do you think it makes sense for bankers to be the ones in charge of fixing the banks?

The "bailout" is the woo.

[grunion]

If you owe the bank $2,000 and cannot pay then you are in trouble. If you owe the bank 20% of its worth then the bank is in trouble. If 20% of all [large] companies have debt they cannot repay then the economy is in trouble. That is the current situation.

Adjust figures to suit.That's OK for a summary. What ticks me off the most though is the sense of entitlement. I play poker with a middle manager from AIG that acts like he is entitled to this enormous taxpayer teat, that it is unpatriotic to question the importance of his institution to the strength of the nation. These are the attitudes that Geithner and Summers bring to their task. Bah, they screwed up. At first it was with their own money. Then it was with their customers money. Now it is with my money. I say no more.

[not_so_new]

That's OK for a summary. What ticks me off the most though is the sense of entitlement. I play poker with a middle manager from AIG that acts like he is entitled to this enormous taxpayer teat, that it is unpatriotic to question the importance of his institution to the strength of the nation. These are the attitudes that Geithner and Summers bring to their task. Bah, they screwed up. At first it was with their own money. Then it was with their customers money. Now it is with my money. I say no more.

You know... when people talk like this I always want to ask..... what if you are wrong?

Seriously.

Just looking at the intangible side of this for a minute. The Dow is not the economy but precisely because people think it is in many ways it becomes true. A good part of the economy is the mental outlook of the citizens. If AIG were to fail it would send shock-waves through the markets and, even IF it didn't effect many other companies financially (which it would) the damage it would do to the confidence of the markets would be astounding.

Look, I don't like these guys. I want to see them walk the plank as much as anyone else but letting them fail because I am miffed at them is like cutting off my nose to spite my face.

It would be akin to throwing the pilot and the co-pilot out the door because they disregarded the warnings about turbulence and flew the plane into really rough air. Yeah, I get my satisfaction but the end result is going be a bunch of very unhappy passengers right before we all hit the ground.

Does bailing out AIG make me happy? NO.... but the consequences are much much worse for me and everyone else if we don't. Sometimes you have to choose the lesser of multiple evils to cause the least amount of general pain.

[grunion]

You have a lot of analogies here but (to use an outdated one) where's the beef? What are the consequences? Do you understand them? Or are you just taking the word of a bunch of bankers with vested interest in the bailout that it would be really, really bad. I did, because so many people that I trust were saying it. But now that I see who's doling out my cash I say enough.

They get the upside, why do we get stuck with the downside? Maybe a good number of insolvent borrowers were able to temporarily reap the benefits from subprime loans. But not me, I have made reasonable decisions with my money. I put 30% down on my house and negotiated a good rate on a 30-year fixed mortgage. Foreclosures and the state of the economy have given my property values a 30% haircut. I have socked away a good portion of my income every month for my kids college funds and for retirement that is now worth less than the cash I put in it.

Well, for many of us it already is really, really bad. I am not looking to bring the rich down with me, no. But it was a scam, and they should not be rewarded for perpetrating it. Not another dime.

Prayer does not heal disease but precisely because people think it does, does that make it true? If there was evidence that it did, you would see me praying night and day. But "what if you're wrong" doesn't work as an argument for me to join a church.

[grunion]

And with regards to "letting them fail" - failure is entirely up to them. This is America, let them pull themselves up by their bootstraps.

We are the ones that deregulated them that let them get so big based on pure fantasy. We have already given them, what, a trillion bucks to fix their problems? What a bunch of suckers we are.

[drkitten]

You have a lot of analogies here but (to use an outdated one) where's the beef? What are the consequences? Do you understand them?

The possible consequences include a complete financial shutdown of the world.

Money will cease to move, and a return to a cash economy. Your grocer will not be able to buy anything without having the cash on hand to purchase it from the vendor, which means he is going to need to amass massive cash reserves before he can buy any more lettuce to supply to you.

Basically, no business in the world today operates on cash -- they all operate on bank-based credit and rely on the banks to sort where the money goes. Wal-Mart, for example, has managed to cut its prices and margins so low precisely because it "owns" almost none of the merchandise on the shelves and never had to pay for it. Instead, it basically acts as a consignment store; when you buy an item, the money that you spend goes directly (via the banks) to the wholesaler or manufacturer. The wholesalers and manufacturers, in turn, can manage to put their goods on the shelves because the banks have fronted them operating credit, so they can manufacture against expected profits when things are finally sold.

This would stop happening if the banks ceased (a) sorting out the consignments, and (b) fronting the manufacturers credit.

We'd be back in the 17th century where you went to a shoemaker, put down a deposit on the specific pair of shoes you wanted, and came back in two days to pay cash for your shoes.

[Francesca R]

And with regards to "letting them fail" - failure is entirely up to them.If you could lose the need to direct massive amounts of blame around the place for a moment, you might be open enough to appreciate that to a certain extent recessions (collective large voluntary contractions in demand) can be nobody's fault at all, and quite fixable. If that is in any way the case, then to stand back and "let the market sort it out", when it is the market that produced it, is as ludicrous as what you pointed out with bankers fixing banks they broke.

The 30 year old story "Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis (http://www.slate.com/id/1937/)" might help.

[not_so_new]

And with regards to "letting them fail" - failure is entirely up to them. This is America, let them pull themselves up by their bootstraps.

We are the ones that deregulated them that let them get so big based on pure fantasy. We have already given them, what, a trillion bucks to fix their problems? What a bunch of suckers we are.

I think you need to read what drkitten said above and then go back and think about what I wrote.

What if, just a hypothetical question here, WHAT IF letting them fail has a severe negative impact on your life and mine, greater than the impact of bailing them out?

Supporting them might feel wrong, it does to me for the same reasons as it does you. My payments are on time, I and fiscally responsible, I didn't cause this mess.

But I recognize that we are in somewhat uncharted waters here. I think no one really knows what is going to happen if they do fail. If we bail them out we have a rough idea on the cost, if we don't bail them out..... :confused: .. no one really knows but ALL the projections are that it would be REALLY REALLY bad for everyone.

I think you are making a mistake. Bailing them out isn't FOR THEM, bailing them out is FOR US. I don't want (and can't really take) things to get much worse. I don't know about you but me, I will take the long term debt that we have to pay back over the short term possibility I could lose my job and my house because some people wanted to take a philosophical stand against the bankers.

[grunion]

I understand the importance of credit and banks to the economy. I understand, also, how dangerous the merger-mania and aggrandizement of the banking community over the past decade has led to a dangerous amount of this credit being placed in the hands of a very few institutions, with questionable metrics that their management has used to drive its decisions.

I haven't seen any evidence that 1) AIG and Citicorp (private companies, last time I checked) are sufficiently trustworthy stewards of our economy to warrant opening our public coffers to them or that 2) A trillion or five or ten trillion in the hands of these crooks and boobs will do the taxpayers any good.

[grunion]

If you could lose the need to direct massive amounts of blame around the place for a moment, you might be open enough to appreciate that to a certain extent recessions (collective large voluntary contractions in demand) can be nobody's fault at all, and quite fixable. If that is in any way the case, then to stand back and "let the market sort it out", when it is the market that produced it, is as ludicrous as what you pointed out with bankers fixing banks they broke.

The 30 year old story "Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis (http://www.slate.com/id/1937/)" might help.It's not a question of blame. Maybe it is nobody's fault, or everybody's. It's a question of a decision that people are making on my behalf to throw my money at a bunch of financially insolvent blunderers. Yes, I am angry, but that's besides the point.

I am not suggesting to just sit back and let the markets sort it out either. There is a role for government in the solution of the liquidity crisis. Geithner and Summers are absolutely the wrong guys for the job of figuring out what it is.

[drkitten]

I understand the importance of credit and banks to the economy.

With respect, you obviously don't.


I haven't seen any evidence that 1) AIG and Citicorp (private companies, last time I checked) are sufficiently trustworthy stewards of our economy to warrant opening our public coffers to them

and this would be relevant if there were in fact viable alternatives to AIG and Citigroup.

The problem is that the world only has one financial system, and it's so tightly interlocked that any major failure is quite likely to bring down the whole system. (We've done that experiment already with Lehman Brothers.) If we had an emergency backup financial system --- a whole bunch of experienced and competent bankers waiting in the wings who for some astonishing reason did not have any financial dealings with any of the players in the primary banking system -- then, yes, we could simply allow AIG and Citigroup to fail.

But as is, we're in the position of a small town with one incompetently-run hospital. And while it's definitely true that the quality of care we're getting is not what we want, we're not going to improve our care by closing the hospital and firing all the doctors. What the town needs, in the long run, is to get rid of the individual incompetent doctors and administrators, but we also need to keep enough medically-trained people in place during the transition to make sure that the immediate needs of the community get met.

or that 2) A trillion or five or ten trillion in the hands of these crooks and boobs will do the taxpayers any good.

See my previous post. I would say that "preventing a total financial collapse of the world" is something that will do the taxpayers good.

[drkitten]

Geithner and Summers are absolutely the wrong guys for the job of figuring out what it is.

Who are the right guys, then? Joe the Plumber? Condi Rice? Warren Buffett? Tony Blair? Pope Benedict IX? Stewie Griffin? Burt, my auto mechanic down on Greenfield St.?

[Francesca R]

It's not a question of blame.You could have fooled me, what with the rhetoric in your OP and subsequent posts, right up to "a bunch of financially insolvent blunderers".

I am not suggesting to just sit back and let the markets sort it out either.Again you could have fooled me, what with: "Let AIG die its long overdue death", "Let the Dow drop another 1000 points, who gives a frig what Wall Street thinks about it anymore" and "This is America, let them pull themselves up by their bootstraps." Now it is easily understandable why you, and a lot of people, might have these views and these recommendations. However, it is economic woo. Misguided, emotionally inspired nonsense. Dangerous nonsense at that, if it prevailed. You have the opportunity to learn more than that should you be interested.

There is a role for government in the solution of the liquidity crisis.Yes. What?

Geithner and Summers are absolutely the wrong guys for the job of figuring out what it is.Who is and why? I assume you would write off Paulson, Snow, O'Neill and Rubin as well?

[grunion]

and this would be relevant if there were in fact viable alternatives to AIG and Citigroup.

The problem is that the world only has one financial system, and it's so tightly interlocked that any major failure is quite likely to bring down the whole system. (We've done that experiment already with Lehman Brothers.) If we had an emergency backup financial system --- a whole bunch of experienced and competent bankers waiting in the wings who for some astonishing reason did not have any financial dealings with any of the players in the primary banking system -- then, yes, we could simply allow AIG and Citigroup to fail.

But as is, we're in the position of a small town with one incompetently-run hospital. And while it's definitely true that the quality of care we're getting is not what we want, we're not going to improve our care by closing the hospital and firing all the doctors. What the town needs, in the long run, is to get rid of the individual incompetent doctors and administrators, but we also need to keep enough medically-trained people in place during the transition to make sure that the immediate needs of the community get met.
The point is well taken. I don't see any alternatives standing around waving their hands saying "pick me." But even assuming that AIG suddenly gets its house together and liquidity starts flowing again over the next several months (what - 3? 6? 12? Maybe 1 month for each $100 Billion we give them, is that a reasonable expectation? No, we just don't know.) aren't we making the next crisis even worse by institutionalizing our further reliance on them?

At the risk of stretching another analogy, what the town needs is for other hospitals and clinics and small practice doctors to fill the void, not giving money to the HMO administration bureaucrats that ran the big hospital into the ground in the first place. Maybe the competition from others will be just what the community needed to get the big hospital working too.

[grunion]

You could have fooled me, what with the rhetoric in your OP and subsequent posts, right up to "a bunch of financially insolvent blunderers". You accurately gauge my anger, but not my blame. By saying "just let them die" I am not saying "kill them."

However, it is economic woo. Misguided, emotionally inspired nonsense. Dangerous nonsense at that, if it prevailed. You have the opportunity to learn more than that should you be interested.What is it that you are continually accusing of being "woo"? I have expressed skepticism about the bailout. What are you expressing skepticism about? If by "woo" I am correct in assuming you mean (as I generally understand the use of that word on this forum) "assertions without any evidence," what assertion are you condemning here?

ETA: Oh, and I wouldn't have posted here (or joined at all) had I not been interested in learning more. I do not find condescension and labeling things "woo" as very productive to that mission.

[not_so_new]

I understand the importance of credit and banks to the economy. I understand, also, how dangerous the merger-mania and aggrandizement of the banking community over the past decade has led to a dangerous amount of this credit being placed in the hands of a very few institutions, with questionable metrics that their management has used to drive its decisions.

I haven't seen any evidence that 1) AIG and Citicorp (private companies, last time I checked) are sufficiently trustworthy stewards of our economy to warrant opening our public coffers to them or that 2) A trillion or five or ten trillion in the hands of these crooks and boobs will do the taxpayers any good.

Correct me if I am wrong here but you are making multiple arguments. One argument is "we don't need to prop these companies up because it isn't going to do any good for the general citizen." The second argument is "look what they did, how can we trust them again."

The second argument is not the right question to ask right now, we don't really have a choice here. It is extremely important (at least to me) that we start getting some regulations back in place to protect us from this happening again but for now, the cat is out of the bag and we only have the system we have to deal with (see drkitten's excellent post above).

The first argument is wrong in my eyes, it will matter to the general citizen and that is the main and only reason why we can't let financial system fail.

[drkitten]

But even assuming that AIG suddenly gets its house together and liquidity starts flowing again over the next several months (what - 3? 6? 12? Maybe 1 month for each $100 Billion we give them, is that a reasonable expectation? No we just don't know.) aren't we making the next crisis even worse by institutionalizing our further reliance on them?

Not necessarily.

What we do now and what we do in the future are two different things --- and once we have the luxury of time, we can look at addressing the long-term sustainability of the system. Beranke has already said that the financial industry needs to be more tightly regulated, and for once the President and Congress appear to be in a position both to take that advice and to act upon it.


At the risk of stretching another analogy, what the town needs is for other hospitals and clinics and small practice doctors to fill the void, not giving money to the HMO administration bureaucrats that ran the hospital into the ground in the first place.

Are they giving it to the HMO administration, though? Or are they giving it to the HMO corporation?

You need to distinguish between the people that ran AIG into the ground and AIG itself. One of the problems, for example, that has been remarked upon for years, but is only being acted upon now, is the problem of executive compensation. Numerous corporate directors and executives appear to have been acting out of their own best interests rather than in the interests of the companies (hence the bonus scandals) -- this can be addressed fairly easily, if bluntly, through legislation. In fact, the new bailout terms already address executive bonuses.

Similarly, if you want to complain that the current crop of CEOs at the major banks are incompetent, then fire them. But there are literally billions of people that depend on Citigroup-the-corporation remaining in business, regardless of who's at the helm. Fire the skipper, but keep the ship afloat. Or, to continue the medical analogy, fire the Director of Oncology, but keep the Oncology Department open. Because otherwise a lot of cancer patients will die through a lack of routine care.


Maybe the competition from others will be just what the community needed to get the big hospital working too.

Doubt it. The small town we're in can't support two hospitals. Dropping the analogy; we literally can't afford to maintain two parallel and independent financial systems; the inefficiencies that it would introduce to keep them apart would be unbelievable. And as soon as they're no longer independent, it's just one big system with the same single-system problems.

[drkitten]

The second argument is not the right question to ask right now, we don't really have a choice here.

You go to war with the army you have, not the army you wish you had.

Similarly, you go into a recession with the banking system you have, not the banking system you wish you had.

[not_so_new]

You go to war with the army you have, not the army you wish you had.

Similarly, you go into a recession with the banking system you have, not the banking system you wish you had.

EXACTLY!!!!!

It is what it is at this point.

[ponderingturtle]

I understand the importance of credit and banks to the economy. I understand, also, how dangerous the merger-mania and aggrandizement of the banking community over the past decade has led to a dangerous amount of this credit being placed in the hands of a very few institutions, with questionable metrics that their management has used to drive its decisions.

I haven't seen any evidence that 1) AIG and Citicorp (private companies, last time I checked) are sufficiently trustworthy stewards of our economy to warrant opening our public coffers to them or that 2) A trillion or five or ten trillion in the hands of these crooks and boobs will do the taxpayers any good.

You know that the goverment owns most of AIG now right?

[drkitten]

But even assuming that AIG suddenly gets its house together and liquidity starts flowing again over the next several months (what - 3? 6? 12? Maybe 1 month for each $100 Billion we give them, is that a reasonable expectation? No, we just don't know.)

FWIW, my tea leaves suggest that we have hit a bottom in the credit crisis. I base this on several things:

* Major investors have started to notice that the interest rate spread is making ordinary, garden-variety loans incredibly profitable. Buffett, in particular, has written about this in the New York Times, so it's hardly "secret news."
* Citigroup made a profit for the first two months of the year, and is up something like 50% on that news, suggesting that it was ridiculously oversold.
* A number of banks are publically repudiating bailout money because it comes with too many strings. Obviously, those banks are confident enough of their own reserves and portfolios at this point that they're not only willing to go it alone, but they're willing to tell the world that they're going it alone (and risk humiliation if they misjudged).

And, yes, at this point I am long on Citigroup (NYSE:C). My tea leaves don't say much about the longer-term recession, but I figure I can make enough on Citigroup to justify not worrying about a lack of tea-related omniscience.

Oh, one more sign the credit crunch is lifting. I am starting to get home-equity-loan junk mail again. Which astonishes me, because it implies that someone thinks that I have equity in my home that is collateral-worthy.

[ponderingturtle]

The problem is that the world only has one financial system, and it's so tightly interlocked that any major failure is quite likely to bring down the whole system. (We've done that experiment already with Lehman Brothers.) If we had an emergency backup financial system --- a whole bunch of experienced and competent bankers waiting in the wings who for some astonishing reason did not have any financial dealings with any of the players in the primary banking system -- then, yes, we could simply allow AIG and Citigroup to fail.

I think it is clear that there is simply not enough competent bankers in the system we have now let alone to have back ups.

I am wondering if this is a lot becuase the markets got to complex so no one understands them. So that this complexity needs to be limited.

[drkitten]

I think it is clear that there is simply not enough competent bankers in the system we have now let alone to have back ups.

Dunno. Competent and trustworthy are two separate things. I think the current crop of bankers are astonishingly competent -- they did an extremely good job of sucking the world's money into their (private) pockets.

I think the regulators were astonishingly incompetent in failing to notice or prevent that.

But ultimately the regulators should win, because they've got the law on their side.

[ServiceSoon]

FWIW, my tea leaves suggest that we have hit a bottom in the credit crisis. I base this on several things:
...* Citigroup made a profit for the first two months of the year, and is up something like 50% on that news, suggesting that it was ridiculously oversold.
...If the gov gave me millions of dollars I would post a profit too?

[drkitten]

If the gov gave me millions of dollars I would post a profit too?

My understanding is that the accountants behind the memo are smarter than that. (I forget what the actual phrasing was -- Citigroup made a profit "ignoring writedowns and unusual circumstances" or something like that.) Basically, ordinary operations are profitable in a way they've not been for a year and a half.

If the accountants behind the memo were not smart enough to point this out, this this just goes to show even more strongly how ridiculously oversold Citigroup was, since the accountants reading the memo would have spotted that, and yet they bought anyway.

[ponderingturtle]

Dunno. Competent and trustworthy are two separate things. I think the current crop of bankers are astonishingly competent -- they did an extremely good job of sucking the world's money into their (private) pockets.


They certainly understood that they have the worlds ecconomy by the balls are are going to squeeze as hard as they can to get more for themselves.

[not_so_new]

They certainly understood that they have the worlds economy by the balls are are going to squeeze as hard as they can to get more for themselves.

This may be the case but it does not negate the fact that they probably do "have the worlds economy by the balls." That is a fact we have to live with and work under because you are correct, our (collective) financial futures are tied to theirs now.

As I said in my reply to grunion above, people seem to have two arguments against any bailout.....

1) we don't need to prop these companies up because it isn't going to do any good for the average citizen (or the variant, they got themselves into this mess why should I help when I didn't do anything wrong)

2) look what they did, how can we trust them again

Argument #2 is water under the bridge at this point. The only thing we can do is try to prevent future problems by enacting and (maybe more importantly) enforcing proper regulations.

As drkitten said above, "....you go into a recession with the banking system you have, not the banking system you wish you had."

To use drkitten's analogy, we have to fight this recession with the situation we have now and what we have now is a failing banking system. THAT is our current battle. We will win the war by thinking long term about regulations but to win the war we need to get over this hurdle first.

[hamelekim]

Thanks for sharing your woo here :D

I can't believe how disrespectful are towards others on this forum. You are not God's gift to the world, and you certainly aren't some billionaire investor giving advise to presidents. You're just some person on a forum who thinks they know what's what about the economy, although given your past comments on the market last year and where it was going, I fear for whoever has their money managed by yourself.

Go read Market Ticker or Mish's comments on cleaning out the System. It is based on sound market principles, not a bunch of woo. I'd put my money with Mish any day of the week over a mainstream market cheerleader like yourself.

Just because you disagree with it doesn't give you the right to personally attack someone and ridicule their beliefs, especially without explaining why you disagree with their views.

Considering governments have been following the Keynesian path of trying to spend their way out of this economic malaise, we can see how much weight those economic "theories" really hold. Things are getting worse, and you will see that nothing will be solved by these current policies of keeping dead banks and companies alive.

I can tell you right now that the trillions of dollars being spent on trying to get people spending money and banks lending money will not work. It's only going to make things worse.

I'll stick by my words, just as I did in a previous thread back at the beginning of 08 where I was ridiculed for saying things were going to get much worse economically.

[hamelekim]

You accurately gauge my anger, but not my blame. By saying "just let them die" I am not saying "kill them."

What is it that you are continually accusing of being "woo"? I have expressed skepticism about the bailout. What are you expressing skepticism about? If by "woo" I am correct in assuming you mean (as I generally understand the use of that word on this forum) "assertions without any evidence," what assertion are you condemning here?

ETA: Oh, and I wouldn't have posted here (or joined at all) had I not been interested in learning more. I do not find condescension and labeling things "woo" as very productive to that mission.

Don't mind Francesca. She thinks because she manages peoples money for a living that it somehow makes her an expert on the economy.

Given that the experts have led us down the road to ruin I wouldn't trust anything that any of them have to say.

She can spout economic theory all day long, that doesn't make it fact. Economics is a social science at best, and at worst it's a bunch of woo.

Given none of the economic models predicted this crash shows how invalid their models all are, and how you cannot accurately predict markets because they are based on human beings, not laws of physics.

It is my personal belief that we are going to have a world wide depression, and that out of that we are going to create a new economic system that will be extremely regulated and visible.

There will be enough rioting and governments falling that people will demand these sorts of things, and governments will put them into place to protect themselves from the peoples wrath.

Call it woo if you want Francesca, but we will see if it comes to pass in the next few years.

[pgwenthold]

Oh, one more sign the credit crunch is lifting. I am starting to get home-equity-loan junk mail again. Which astonishes me, because it implies that someone thinks that I have equity in my home that is collateral-worthy.

So what do your tea leaves say about how long my variable rate home equity line (essentially paid off now, btw) is going to stay at 3.25%

Should I use a year's worth of payments to it to pay down my fixed rate mortgage at 5 7/8%? (btw, I know what you mean by the credit gap - with the "histortically" low interest rates, we still haven't hit low enough to justify a refi)

[ponderingturtle]

This may be the case but it does not negate the fact that they probably do "have the worlds economy by the balls." That is a fact we have to live with and work under because you are correct, our (collective) financial futures are tied to theirs now.

So we are negotiating with these financial terrorists?

These people will always have the ecconomy by the balls, we just have to understand that bankers will screw everyone.

[not_so_new]

Considering governments have been following the Keynesian path of trying to spend their way out of this economic malaise, we can see how much weight those economic "theories" really hold. Things are getting worse, and you will see that nothing will be solved by these current policies of keeping dead banks and companies alive.

Sorry... no you won't.

You can't tell if the "theories" hold or not because all economic situations are different, there are too many variables to say one recession / depression is exactly like the other.

You DO NOT now nor never will know (no matter how much you believe it to be true) what effect the current stimulus packages and bailouts are having.

You think these stimulus packages are hurting, so be it, you are entitled to your opinion but it could be that they are helping immensely. It could be they are softening the inevitable face plant the economy is going to take over the next few months / years.

It could be that the bailouts and stimulus packages are going to prevent a much deeper recession / depression but when that enevitable bottom does hit you can easly say "look the bailouts didn't do anything" to your hearts content right? That's how everyone who plays the "prediction / politics" game are you are ends up spinning it when all is said and done.


I can tell you right now that the trillions of dollars being spent on trying to get people spending money and banks lending money will not work. It's only going to make things worse.

You can now can you? And do you have a way to prove that without the lending etc. things wouldn't have been much worse on their own? Of course you can't because your quote above is nothing but an opinion. It might be backed up by some economist but their opinion is still just an opinion as well because no one really knows what's going to happen.

I am REALLY getting sick of the doom and gloom. The world is not over, the sky is not falling and it's not the end of society as we know it. It's going to be a rough patch, things are going to be bad but they are going to get better.

I'll stick by my words, just as I did in a previous thread back at the beginning of 08 where I was ridiculed for saying things were going to get much worse economically.

Great, nice pick there Nostradamus.

LOL (just a joke, just a joke, easy tiger)

I felt the same thing, so did most folks who watched housing prices around the nation. $50,000 homes going for $300,000? Who doesn't see a problem with that?

Just because you were right on something many people saw coming as well doesn't make you right with what is coming next.... sorry.

[not_so_new]

So we are negotiating with these financial terrorists?

No, I didn't say that. I said we are in a battle to save jobs, homes and our financial system.

The "war" is to take some power back from the people who have us "by the balls" as you put it but you can't win that war until we get out of the immediate battle we are in now.

Seems simple to me, and winning that war is already under way...

http://www.reuters.com/article/gc04/idUSTRE52B5LU20090312

These people will always have the economy by the balls, we just have to understand that bankers will screw everyone.

I disagree, but we can agree to disagree that's fine.

These things go in cycles...

1 People think they know more about the markets than anyone who has even come before, they let government regulations slide.
2 Bankers / business owners and regular citizens mess up the markets with economic bubbles
3 Banks / business owners and citizens suffer
4 Governments step in to ease the economic problems because they are the ONE and ONLY resource large enough to make a difference
5 Economies get better slowly
6 Citizens pressure governments to enact tighter restrictions through regulations
7 Things stay relatively fine and stable for long periods of time
8 People grow old and die, younger people forget the lessons of the generation before them
9 Go to #1 above.... repeat

It's really that simple. We are between steps 3 - 4 now. Of course when we are at step 3 we are going to feel PO'ed at the people we hold accountable. It is only natural that you have the feelings you do but I can't stress enough that these things go in cycles.

If I take out my crystal ball on this I see stronger government regulations around the bend that will limit the power of the bankers to get the "economy by the balls" and the citizens will have a little more power in the future..... until we forget all of this again and fall into the same trap (probably not in our lifetimes).

[ponderingturtle]

I disagree, but we can agree to disagree that's fine.

These things go in cycles...

1 People think they know more about the markets than anyone who has even come before, they let government regulations slide.
2 Bankers / business owners and regular citizens mess up the markets with economic bubbles
3 Banks / business owners and citizens suffer
4 Governments step in to ease the economic problems because they are the ONE and ONLY resource large enough to make a difference
5 Economies get better slowly
6 Citizens pressure governments to enact tighter restrictions through regulations
7 Things stay relatively fine and stable for long periods of time
8 People grow old and die, younger people forget the lessons of the generation before them
9 Go to #1 above.... repeat


Just think about it, we can get more and more complex financial instrument so no one will ever understand the market and keep it in 2 and 3. No one knows who these things work well enough to know who will be holding the bad and it will always end up as the public.

It is so nice to see that the Enron people were just ahead of the game. That and they were not being sufficiently complex people understood what they did.

[geni]

These things go in cycles...

1 People think they know more about the markets than anyone who has even come before, they let government regulations slide.
2 Bankers / business owners and regular citizens mess up the markets with economic bubbles
3 Banks / business owners and citizens suffer
4 Governments step in to ease the economic problems because they are the ONE and ONLY resource large enough to make a difference
5 Economies get better slowly
6 Citizens pressure governments to enact tighter restrictions through regulations
7 Things stay relatively fine and stable for long periods of time
8 People grow old and die, younger people forget the lessons of the generation before them
9 Go to #1 above.... repeat

Questionable. Historicaly there have been long periods of very low regulation without large scale problems.

One cycle that does seem to exist is ignoring long term risks to make more money in the short term. Problem is a company that doesn't match the people takeing more long term risks will have a hard time competeing in the short term.

[drkitten]

So what do your tea leaves say about how long my variable rate home equity line (essentially paid off now, btw) is going to stay at 3.25%

Not much, I'm afraid. All they're really saying right now is "switch to decaf."


Should I use a year's worth of payments to it to pay down my fixed rate mortgage at 5 7/8%?

My bet is that, if anything, the variable rate will go down in the moderate term; if the HELOC market heats up, there will be downward pressure on interest rates, precisely because of the interest rate spread.

But people who take investment advice from anonymous felines on teh Interwebz probably deserve what they get.

[dudalb]

If there are no investment bankers, where is the money to start up new businesses gonna come from?
There has been a HUGE amount of incompentece in the Inverment banking industry, and a number of people in the management positions there need to have their butts fired, but let's not throw the baby out with the bathwater.

[geni]

If there are no investment bankers, where is the money to start up new businesses gonna come from?

Historicaly shareholders.

Back when canals were being built the initial people behind the canal would hold town hall meetings to get subscribers.

Some lords might take some big stakes but smaller ones would be sold to merchants vicars and others. Some of the canals in costal areas would pick up retired navy offices.

[hamelekim]

Sorry... no you won't.

You can't tell if the "theories" hold or not because all economic situations are different, there are too many variables to say one recession / depression is exactly like the other.

If your theories hold true, they should be self evident in all situations. Either it's right or wrong.

You DO NOT now nor never will know (no matter how much you believe it to be true) what effect the current stimulus packages and bailouts are having.

I won't?

I think I'll be reading about it a decade or two from now when all the details come out. We will know very well whether or not the economic policies being followed right now were successful or not.

You think these stimulus packages are hurting, so be it, you are entitled to your opinion but it could be that they are helping immensely. It could be they are softening the inevitable face plant the economy is going to take over the next few months / years.

It could be, and you can base your economic decisions off of whatever you want to believe.

I choose to believe that people have been screaming for several decades that the inevitable conclusion to our fiat money is economic collapse through debt. This whole CDS thing just sped the process up after the killed all the laws put in place after the depression in 1929.

Only time will tell who is correct.

It could be that the bailouts and stimulus packages are going to prevent a much deeper recession / depression but when that enevitable bottom does hit you can easly say "look the bailouts didn't do anything" to your hearts content right? That's how everyone who plays the "prediction / politics" game are you are ends up spinning it when all is said and done.

I don't know. From what I've read, until the corruption, and opaque nature of the current financial system is dealt with these problems will not go away, and will actually get worse.

You can now can you? And do you have a way to prove that without the lending etc. things wouldn't have been much worse on their own? Of course you can't because your quote above is nothing but an opinion. It might be backed up by some economist but their opinion is still just an opinion as well because no one really knows what's going to happen.

I am REALLY getting sick of the doom and gloom. The world is not over, the sky is not falling and it's not the end of society as we know it. It's going to be a rough patch, things are going to be bad but they are going to get better.


I'm sure people were saying that before Mt. Vesuvius erupted too.

There are always signs if you choose to look for them. Once you find enough signs they become a pattern and then we see what is really going on.

Consider the fact that the banks said they were well capitalize, and yet all of the major investment banks that said so went under, or were bought up by others, so essentially went under.

I don't trust what they have to say because greed does funny things to peoples morals.

The financial arena needs to be heavily regulated so that "too big to fail" never happens again.

No one company should be able to bring down an industry let alone a country, or the world. Yet this is essentially what we saw starting with bear sterns.

You can believe bright sky's are ahead, but I kindly disagree with you.

Great, nice pick there Nostradamus.

LOL (just a joke, just a joke, easy tiger)

I felt the same thing, so did most folks who watched housing prices around the nation. $50,000 homes going for $300,000? Who doesn't see a problem with that?

Just because you were right on something many people saw coming as well doesn't make you right with what is coming next.... sorry.

Nope, and it doesn't make you correct either, we will have to watch what happens and look at what we are basing our beliefs on if we are wrong.

As it stands right now, the bank lending rates haven't increased in any significant way, and neither have the shipping numbers, nor other indicators that show the health of the US or global economy.

It might not be depression 2.0 but it is certain a deep, deep recession that will not be over by end of this year.

But again, we will have to wait and see if that is correct or not.

[hamelekim]

If there are no investment bankers, where is the money to start up new businesses gonna come from?
There has been a HUGE amount of incompentece in the Inverment banking industry, and a number of people in the management positions there need to have their butts fired, but let's not throw the baby out with the bathwater.

That's like saying if there are no fat people who is going to eat all the food? Excess does not mean success, and we certainly don't need massive investment banks taking huge risks, which could collapse entire economies, to invest in local business.

[drkitten]

That's like saying if there are no fat people who is going to eat all the food?

Wow. I didn't realize that there was an opposite of insightful -- a statement that would make me understand less than I did before.

Excess does not mean success, and we certainly don't need massive investment banks taking huge risks, which could collapse entire economies, to invest in local business.

... unless, of course, the local business is a huge risk. One of the ways that the UK became the banking powerhouse of the world was because it was the only place that could come up with the kind of money for investment necessary if you were going to do a huge project like cutting a canal across the Suez peninsula That specific project, in fact, is what put the British branch of the Rothschild's in front of the Bank of England; the Old Lady of Threadneedle Street couldn't come up with money fast enough or big enough, but Nathan R. could, and did. Similarly, Nathan Rothschild was the man who kept the UK government solvent in the crisis of 25.


So, yes, we certainly do need massive investment banks, and massive investment banks who are willing to take massive risks that are sufficiently profitable. It would be nice if we had regulators who weren't asleep at the wheel, and who were capable of keeping the economy from being at risk, though.

Funny how all the major recent banking crises -- the Depression, the crash of 2007, the S&L crisis of the 1980s --- are caused by failure of regulators, and as soon as we get the regulations in shape, things not only return to normal, but get better?

[hamelekim]

Wow. I didn't realize that there was an opposite of insightful -- a statement that would make me understand less than I did before.

Instead of asking me what I meant you just spout off this crap?

I can tell where your mind space is...

My point was, since you didn't get it, we don't need to have a country like the US who does nothing but consume most of the resources on the planet.

In fact, everyone would be much better off, have more food, resources, etc... if the US wasn't consuming at all.




... unless, of course, the local business is a huge risk. One of the ways that the UK became the banking powerhouse of the world was because it was the only place that could come up with the kind of money for investment necessary if you were going to do a huge project like cutting a canal across the Suez peninsula That specific project, in fact, is what put the British branch of the Rothschild's in front of the Bank of England; the Old Lady of Threadneedle Street couldn't come up with money fast enough or big enough, but Nathan R. could, and did. Similarly, Nathan Rothschild was the man who kept the UK government solvent in the crisis of 25.


I wouldn't call the Suez Canal a local business. I was thinking more along the lines of small local businesses, not mega projects.


So, yes, we certainly do need massive investment banks, and massive investment banks who are willing to take massive risks that are sufficiently profitable. It would be nice if we had regulators who weren't asleep at the wheel, and who were capable of keeping the economy from being at risk, though.

Funny how all the major recent banking crises -- the Depression, the crash of 2007, the S&L crisis of the 1980s --- are caused by failure of regulators, and as soon as we get the regulations in shape, things not only return to normal, but get better?

The regulators are in collusion with the industry, which makes regulation an impossibility. Look at the SEC and the numerous scandals coming out now. They knew about all of these scams, but ignored them because the people were big players.

They have to much power to be stopped by government.

[Roboramma]

My point was, since you didn't get it, we don't need to have a country like the US who does nothing but consume most of the resources on the planet.

In fact, everyone would be much better off, have more food, resources, etc... if the US wasn't consuming at all. Um... how's that?
I have a friend who owns a foundry just outside of shanghai. He's not particularly happy that people in the US can't come up with the funds to buy his merchandise. Nor are his 200 or so workers, who he's trying hard not to let go, but has already had to with quite a few.
I can't really think of anyone who would be better off without americans as a part of the economy, but maybe you can offer an example.


I wouldn't call the Suez Canal a local business. I was thinking more along the lines of small local businesses, not mega projects. So, if you ignore the useful things that investment bankers do, investment bankers don't do anything useful?

[dudalb]

Historicaly shareholders.

Back when canals were being built the initial people behind the canal would hold town hall meetings to get subscribers.

Some lords might take some big stakes but smaller ones would be sold to merchants vicars and others. Some of the canals in costal areas would pick up retired navy offices.

Not sure that would work with small companies and other start up firsm nowdays.

[drkitten]

Historicaly shareholders.

Back when canals were being built the initial people behind the canal would hold town hall meetings to get subscribers.

Was this also "back when" creating a new share corporation required an Act of Parliament?

That does kind of change the game; by definition, a new corporation would automatically have wealthy and powerful backers if it existed at all.

Part of the job of modern investment bankers and whatnot is to evaluate proposals for funding; essentially, figure out if an investment is any good or not.

[mhaze]

I think you need to read what drkitten said above and then go back and think about what I wrote.

What if, just a hypothetical question here, WHAT IF letting them fail has a severe negative impact on your life and mine, greater than the impact of bailing them out?....Premises seem imperfectly stated, thus your "What if" is irrelevant argument from fear.

Some options were:


Do nothing
Bailout
Chapter 11
Chapter 11 then bailouts
Chapter 7, liquidation

Now where is "letting them fail"? I see it in the current policy.

[leftysergeant]

Maybe bailijng them out is a ridiculous idea. Maybe it would be better just to nationalize them, take over the toxic assets and re-set the interest rates to somethin less than usurious, and finace government out of the mortgage payments. Eventually, it might even bring in more revenue than the income tax.

In the meantime, people will be staying in their homes, stimulating their local ecconomies, people will be able to find work and there will be a market for manufactured goods and agricultural produce.

Slap on a few tariffs, and you have an incentive for people who want to invest money to make it grow to invest in actually making stuff again, instead of trying to get rich quick trading vapor ware.

[rjh01]

I think they need to let a few companies go bankrupt then you can buy the rest of the companies at bargain prices.

[Puppycow]

Turns out taxpayers made an $18 billion (with a 'b') profit on the AIG bailout:

Fed turns AIG bailout into $18 billion profit (http://money.cnn.com/2012/08/23/news/economy/federal-reserve-aig-bailout/)

NEW YORK (CNNMoney) -- The Federal Reserve finally has wiped its hands clean of AIG and turned a nearly $18 billion profit for taxpayers in the process.

Now it's up to the Treasury Department to sell the rest of the U.S. government's stake in the insurance giant.

So we loaned AIG money, and we got all of our money back, plus $18 billion in interest.

Does this change anyone's mind?

ETA:
Oh, and one more thing:
That said, the U.S. government is not entirely free of AIG. The Treasury Department still owns $29 billion, or roughly 53% of AIG's common stock.

The Treasury Department has said it too expects to make a profit on that investment, as it sells the shares over time.
So actually it's $18 billion plus whatever profit Treasury makes when it sells its shares.

[geni]

Was this also "back when" creating a new share corporation required an Act of Parliament?

That does kind of change the game; by definition, a new corporation would automatically have wealthy and powerful backers if it existed at all.

You would generaly put together you initial backers before you got your act of parliment (canals needed them anyway since you effecively needed forced purchase orders to build most of them).

[psionl0]

So we loaned AIG money, and we got all of our money back, plus $18 billion in interest.

Does this change anyone's mind?That's a bit like saying, "but the horse won".

[Puppycow]

That's a bit like saying, "but the horse won".

I don't think the situations are comparable.

Not betting on a horse carries no negative consequences.

Not bailing out a too big to fail company can have very serious consequences as we found out in the Lehman case. Nobody seems to have learned the lesson of that though.

[geni]

Not bailing out a too big to fail company can have very serious consequences as we found out in the Lehman case. Nobody seems to have learned the lesson of that though.

The only reasonable lesson is that such companies shouldn't be allowed to exist a step that would risk being messy.

[psionl0]

Nobody seems to have learned the lesson of that though.What lesson is that? We should allow corporate psychopaths to become "too big to fail" then force taxpayers to gamble on their viability?

[Dymanic]

You would generaly put together you initial backers before you got your act of parliment (canals needed them anyway since you effecively needed forced purchase orders to build most of them).
Of all the posters I've seen disappear from this forum over the years, drkitten is the one I miss the most.

[not_so_new]

What lesson is that? We should allow corporate psychopaths to become "too big to fail" then force taxpayers to gamble on their viability?

That is a different argument. I completely agree that we shouldn't let companies get so large their very existence causes an effect on the economy as a whole. You are arguing for regulation and antitrust law enforcement.

But, using the horse analogy earlier in the thread.... that's like complaining about the latch on the barn door being broken when the riderless horse is already bolting down the road.

Regardless of the fact that the banks should or should not have been able to get that large in the first place, the banks were ALREADY "too big to fail" and by definition we couldn't let them... well..... fail... because they were too big right?

[psionl0]

We are stuck with these "too big to fail" institutions so taxpayers must prop them up until the bitter end?

[Robrob]

We are stuck with these "too big to fail" institutions so taxpayers must prop them up until the bitter end?
That and as long as we want to make an $18 billion profit. :rolleyes:

[psionl0]

That and as long as we want to make an $18 billion profit. :rolleyes:ie Let the bet ride. :boggled:

[Puppycow]

http://www.thedailybeast.com/articles/2012/08/21/bailout-programs-return-1-5-billion.html

Four years after the Lehman Brothers crisis, housing finance remains a mess. But the Trouble Asset Relief Program (TARP), the crisis-era measures aimed at saving the banks, stabilizing credit markets, and preventing the auto companies and the insurer AIG from plunging into liquidation, have largely succeeded. And at a very low cost to the taxpayer. By and large, the recipients of cheap government capital have returned the cash they took—and with interest. The central component of TARP was the Capital Purchase Program, in which Treasury bought interest-yielding preferred shares in banks and received warrants in return. Here is the latest daily TARP update. Between the CPP and extra aid given to Citigroup and Bank of America, Treasury put $245.1 billion into banks. So far, those recipients have returned $231.11 billion of that capital. Add in dividends ($15.2 billion), proceeds from the sale of warrants ($9.19 billion), and cash raised from selling Citigroup and Bank of America stock ($9.36 billion), and the taxpayers have received a total of $264.86 billion back. That’s a profit of nearly $20 billion.

[psionl0]

GOTO 54 (http://forums.randi.org/showthread.php?postid=8562534#post8562534)

[kevsta]

http://articles.latimes.com/2012/apr/25/business/la-fi-mo-tarp-bailout-losses-20120425

WASHINGTON -- The government's watchdog for the $700-billion Troubled Asset Relief Program on Wednesday disputed suggestions the bailout fund would turn a profit for taxpayers, and warned that many small banks are still struggling to repay.

"It is a widely held misconception that TARP will make a profit," said a report by Christy Romero, the special inspector general for the TARP program, known as SIGTARP.

....The Obama administration has said TARP has turned a profit on about $205 billion injected into banks, but still projects losses for the entire fund.

The report to Congress said that one recent cost estimate put TARP losses at about $68 billion and noted that banks and other financial institutions still owe $118.5 billion. And those figures don't include the potential harmful effects of the government precedent of wide-scale bailouts.

Policymakers "should not be focused alone on money in and money out. TARP's costs and legacies involve far more than just dollars and cents," the report said.

"While TARP and other government responses to the financial crisis may have prevented the immediate collapse of our financial and auto manufacturing industries, and improved stability since 2008, the trade-off is not without profound long-term consequences," the report continued. "A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed 'too big to fail.'''

Romero and her predecessor in the watchdog position, Neil Barofsky, have been highly critical of the way the Treasury Department has run TARP. And they have pushed back strongly against the administration's positive stance on TARP's impact and financial outlook.

Last week, administration officials predicted that the U.S. likely would make a profit of as much as $163 billion over the next decade on all the bailout initiatives that began in 2008 to rescue the financial industry.

That result largely would be due to $179 billion in excess profit from the Federal Reserve over the next 10 years, from its extraordinary expansion of its balance sheet to help bail out the industry and stimulate the economy.

The Treasury Department did not project a profit for the entire TARP program. The administration estimated in February that lifetime losses from TARP would be $67.8 billion, largely because of the GM and Chrysler bailouts, as well as mortgage assistance programs.

[grunion]

It's so convenient to redefine the sole objective of TARP as "to turn a profit on the AIG investment" once you determine that that is the only thing that it has really accomplished. Such is the risk inherent in relying on Newsweek's The Daily Beast as a source. It is a blog. Dan Gross, the author, seems to be on an "everything's fine, despite your lyin eyes and mounting bills (http://www.thedailybeast.com/contributors/daniel-gross.html)" kick in his reportage.

[Puppycow]

It's so convenient to redefine the sole objective of TARP as "to turn a profit on the AIG investment" once you determine that that is the only thing that it has really accomplished. Such is the risk inherent in relying on Newsweek's The Daily Beast as a source. It is a blog. Dan Gross, the author, seems to be on an "everything's fine, despite your lyin eyes and mounting bills (http://www.thedailybeast.com/contributors/daniel-gross.html)" kick in his reportage.

Actually, that wasn't the sole objective or even the main objective. It's just icing on the cake. The main objective was to avoid a serious financial crisis that would have had severe negative consequences for the general economy.

[WildCat]

Actually, that wasn't the sole objective or even the main objective. It's just icing on the cake. The main objective was to avoid a serious financial crisis that would have had severe negative consequences for the general economy.
So we're breaking up these "too big to fail" companies now, right?

[Puppycow]

So we're breaking up these "too big to fail" companies now, right?

Here's what they did:

Dodd–Frank Wall Street Reform and Consumer Protection Act (http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer _Protection_Act)

[Segnosaur]

Here's what they did:

Dodd–Frank Wall Street Reform and Consumer Protection Act (http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer _Protection_Act)
Here's my question... will it be enough?

I remember hearing a lot of horror stories several years ago... Obama putting the same people in charge that failed to prevent the meltdown in the first place, regulations that were seen as too limited, offices set up to enforce regulations that had no staff, etc...

Has all that been handled?

[stevea]

I generally agree with grinion and psionl0, the gloom&doom, "had to do it "types really haven't rationally thought through the consequences.

If these huge private banks and re-insurers had to realize THEIR losses, then they would go though the bankruptcy REORGANIZATION. Their functional operations would be spun-off and mostly owned by those who they owed. Their non-functional units closed with assets sold-off (at market prices) to less-stupid competitors (and they exist). The doom&gloomers always conflate bankruptcy with closing "dying" and that is not true.

Yes the value of the M.B.securities did drop (by ~18% at peak IIRC) ,and these are owned by both US and foreign investment institutions, pension funds, foreign central banks, etc. So if these organizations did any reasonable diversification can't take even a 2% asset hit based on MBS.

The re-insurers and AIG specifically would be way underwater in debt, and so some Federal bankruptcy court should divvy up the backing assets reasonably and sell/spin-off the none failing operations and obligations giving ownership of the new corp to those owed.

Note that the re-insurer failure does not mean the mortgage obligations are defunct. INstead the banks holding non-performing mortgages would still need to get a judgment, evict non-payers, and resell the properties, but since they are only going to recoup market prices selling into a market glut, they should rationally be inclined to be "eat some profit" on those loans that are marginally performing. No bank can afford to take a loss on it's major assets, so the kookie idea that we should somehow forgive loans cant work in any scenario. To encourage being lenient on the marginally performing loans the government should require mark-to-market pricing, so the banks can't paper-over their real losses. They have to be realized up front.

The Government controlled entitiesFannieMAE and FreddieMAC are a special case. They did not originate the problem, but they added a government imprimatur and in the end owned a large fraction of the worst assets (much higher non-performing loan rates than private banks). This is a good example of why governments should not play in private markets - they destroy competition. I can't fail to mention that these GSEs were able to donate money to some of the very same politicians who re-wrote the banking laws. They are both effectively bankrupt (FNMA & FMCC are penny stocks now) but the Government won't ever realize these loses - its politically unpleasant.

So yes the current bail-out schema not only rewards losers and creates a bad valuation of risk for future markets, but it has prolonged the pain and prevented a timely healing. It's a plan to take the bandage off over a 5-10 year period. It hides but doesn't remove the real damage, and prolongs the pain.

If they are too big to fail - then let them get small. It's part of the creative destruction that informs markets of efficient resource allocation.

[stevea]

Here's my question... will it be enough?

I remember hearing a lot of horror stories several years ago... Obama putting the same people in charge that failed to prevent the meltdown in the first place, regulations that were seen as too limited, offices set up to enforce regulations that had no staff, etc...

Has all that been handled?

Aside from the extraordinary GM debacle, -Obama didn't put anyone in control of private enterprises. It may not always be obvious, but Obama is a president constrained by law, and not an emperor in charge of all he surveys.

The problem wrt Dodd-Frank isn't that it doesn't address currently hot issues, but that the entire approach is wrong. You can make as many rigid rules as you like and hire as many enforcers as you like and in a decade or three the important issues will have changed an ways to walk the grey-edges of the law will appear, and the people walking the edge may well pay-off politicians to not react to these changes (if they are even obvious).

No - the government should be far more interested in properly labeling of investment risk rather than regulating it. There are some fairly basic metrics of reinsurance and their tiny available capital compared to potential liabilities and an assessment of risk that should have set off alarm bells about anyone examining AIG.

Yes you need modern reporting of activities and analysis of these reports - but that needs to be better to be private since then we could sue and drive the poor evaluators out of business. Sure audits are needed.

This housing bubble and bust was caused by a demand for the MBS that offered a decent return on investment compared to bonds. Yes everyone understands you don't get better returns without taking additional risk, but that risk was underestimated. Here is a news-flash - no one ever sees that we are in an unstable bubble until near the very end - then when the realization causes a stampede to sell & crash. So the idea that we can regulate bubbles out of existence or see the risk miscalculation in advance is foolish. We are just preventing the previous problem, like generals prepared to fight the last war.

[stevea]

That's a bit like saying, "but the horse won".

Right, a gamble I didn't agree to - but one that lost money. It helps offset other gambling losses is all.
http://www.cbo.gov/publication/43143

Only stumblebum gambling addicts quote their winning bets w/o without looking at the bottom line (est ~$32B loss fo TARP).

[Random]

This housing bubble and bust was caused by a demand for the MBS that offered a decent return on investment compared to bonds. Yes everyone understands you don't get better returns without taking additional risk, but that risk was underestimated. Here is a news-flash - no one ever sees that we are in an unstable bubble until near the very end - then when the realization causes a stampede to sell & crash. So the idea that we can regulate bubbles out of existence or see the risk miscalculation in advance is foolish. We are just preventing the previous problem, like generals prepared to fight the last war.

I have to disagree with this line. The risk wasn’t underestimated, at least not by everyone. The risk was systematically and deliberately hidden. Mortgage brokers found flaws in ratings agency models and exploited them ruthlessly. Ratings agencies were reluctant to fix their models for fear of chasing away clients looking for the AAA rubber stamp. And the banks didn’t care what was in the MBS as long as they could sell it as an AAA security. The whole CDO gimmick was used to launder risk, then call it “diversification”.

[grunion]

Really good coverage here from 2008-09. These guys won the Peabody and explain the crisis more clearly than anyone I have ever heard (without laying blame.) They explore every aspect of the food chain as to how the incentives were structured to lead every player, from mortgage holder to CEO, to make the decisions that led to the collapse. Definitely worth a listen.

The Giant Pool Of Money (http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money)
Bad Bank (http://www.thisamericanlife.org/radio-archives/episode/375/bad-bank)
Return To The Giant Pool Of Money (http://www.thisamericanlife.org/radio-archives/episode/390/return-to-the-giant-pool-of-money)

[Segnosaur]

Here's my question... will it be enough?

I remember hearing a lot of horror stories several years ago... Obama putting the same people in charge that failed to prevent the meltdown in the first place, regulations that were seen as too limited, offices set up to enforce regulations that had no staff, etc...

Has all that been handled?
Aside from the extraordinary GM debacle, -Obama didn't put anyone in control of private enterprises. It may not always be obvious, but Obama is a president constrained by law, and not an emperor in charge of all he surveys.
Yes, I know Obama did not (and could not/should not) appoint people to to leadership positions within various companies.

I was referring more to things like his own economic advisers. For example, he had brought in Lawrence Summers, who was one of the people who was pushing for deregulation of financial markets under Clinton, and was brought back in by Obama into his National Economic Council. Or Ben Bernanke, who was made head of the Federal Reserve by Bush, and was reappointed by Obama (even though he has been criticized, rightly or wrongly, for not forseeing the market collapse.)

The problem wrt Dodd-Frank isn't that it doesn't address currently hot issues, but that the entire approach is wrong. You can make as many rigid rules as you like and hire as many enforcers as you like and in a decade or three the important issues will have changed an ways to walk the grey-edges of the law will appear, and the people walking the edge may well pay-off politicians to not react to these changes (if they are even obvious).
Hey I agree... people will always try to "walk the edge" in order to maximize their returns. But you can try to minimize the potential damage that can be done by those engaging in risky behavior.

No - the government should be far more interested in properly labeling of investment risk rather than regulating it.
I agree with this too, in a way. I do think the housing crisis could have been avoided if companies like Standard&Poors were reporting the risks of the derivatives properly.

Looking through the Dodd-Frank act on Wikipedia, it does look as if the bill does have provisions for closer inspections of the credit rating agencies. (I'm not sure if all of the provisions have been put in place though.)

[Manopolus]

So what about letting AIG and Citi fail and bailing out the folks they owe money to, instead? Seems logical to me. That way we get rid of the cause of the problem without the systematic failure. Epic failures like these deserve non-existence as a result.

[DragonLady]

Basically, no business in the world today operates on cash -- they all operate on bank-based credit and rely on the banks to sort where the money goes. Wal-Mart, for example, has managed to cut its prices and margins so low precisely because it "owns" almost none of the merchandise on the shelves and never had to pay for it. Instead, it basically acts as a consignment store; when you buy an item, the money that you spend goes directly (via the banks) to the wholesaler or manufacturer. The wholesalers and manufacturers, in turn, can manage to put their goods on the shelves because the banks have fronted them operating credit, so they can manufacture against expected profits when things are finally sold.


Just jumping in to say that's not true. I operate my business entirely on cash in hand, and I know hundreds of other people who do, too. If I shut down tomorrow, I don't owe a single person or company a single cent. I'm profitable and I have never had to borrow from anyone for business reasons.

The simple fact is: too much money is more poisonous to a lot of business models than too little. Too little means forced creativity, forced investment in products or services that have been proven profitable, and sound, carefully considered decisions. Too much money means being willing to part with it for expensive products and services that may or may not contribute to the bottom line -and usually don't.

[CORed]

OK, can you tell me what we're getting for our trillion dollars? I haven't heard an answer that makes any sense yet, other than the usual variations on "if we didn't do it then all hell will break loose."

Do you think it makes sense for bankers to be the ones in charge of fixing the banks?

Who would you put in charge? Janitors? Engineers? Rocket scientists? Doctors?

The "bailout" is the woo.

[Segnosaur]

So what about letting AIG and Citi fail and bailing out the folks they owe money to, instead? Seems logical to me. That way we get rid of the cause of the problem without the systematic failure. Epic failures like these deserve non-existence as a result.
I think the risk is that people need credit... most people can't buy a house without a mortgage, some businesses cannot get off the ground without a bank loan.

If you let the banks fail, it may be morally justified (after all, AIG/Citi were the ones who screwed up). However, after such a failure credit might be hard to come by.... people may not deposit money in their banks (which means no money to make loans with) for fear of loosing their deposits.

[grunion]

I think the risk is that people need credit... most people can't buy a house without a mortgage, some businesses cannot get off the ground without a bank loan.

If you let the banks fail, it may be morally justified (after all, AIG/Citi were the ones who screwed up). However, after such a failure credit might be hard to come by.... people may not deposit money in their banks (which means no money to make loans with) for fear of loosing their deposits.

No. Deposits in checking, savings, CDs and most Money Market Deposit Accounts in FDIC-Insured banks are insured up to $250,000. What is at risk (as they should be) are speculative investments. And bailing them out without regulating their use of the funds or the terms under which they can operate (a la Glass Stegall) does not one whit to ease the credit crisis.

[grunion]

Who would you put in charge? Janitors? Engineers? Rocket scientists? Doctors?
Someone with both good understanding and proper motivation. Similar to Randi's argument that it takes a magician that is familiar with the tricks of the mentalists and charlatans to monitor the MDC, it takes someone with a strong background in finance to monitor and regulate the banks. Yet it has to be someone with the public interest as her or his clear priority. Putting a banker in charge, with their cronies' private jets and Swiss ski chalets at risk, is like putting Uri Geller's Mom in charge of the MDC. There are loads of economists and finance experts out there that have devoted their careers to public service. Geithner, Summers et al don't qualify.

[Twiler]

Someone with both good understanding and proper motivation. Similar to Randi's argument that it takes a magician that is familiar with the tricks of the mentalists and charlatans to monitor the MDC, it takes someone with a strong background in finance to monitor and regulate the banks. Yet it has to be someone with the public interest as her or his clear priority. Putting a banker in charge, with their cronies' private jets and Swiss ski chalets at risk, is like putting Uri Geller's Mom in charge of the MDC. There are loads of economists and finance experts out there that have devoted their careers to public service. Geithner, Summers et al don't qualify.

So who, specifically?

[Segnosaur]

However, after such a failure credit might be hard to come by.... people may not deposit money in their banks (which means no money to make loans with) for fear of loosing their deposits.
No. Deposits in checking, savings, CDs and most Money Market Deposit Accounts in FDIC-Insured banks are insured up to $250,000.
You are assuming that in the event of a bank collapse that people will act logically. I can see at least some people pulling their money out of their bank account out of panic, because they either don't know about FDIC insurance, or don't trust it.

I could also point out that while $250,000 may seem like a lot to someone like you or me, it may not cover all the savings for some people (e.g. retirees keeping their money in a "safe" bank, wealthy people who want/need a significant amount of available funds in checking accounts, etc.)

[Manopolus]

You are assuming that in the event of a bank collapse that people will act logically. I can see at least some people pulling their money out of their bank account out of panic, because they either don't know about FDIC insurance, or don't trust it.

I could also point out that while $250,000 may seem like a lot to someone like you or me, it may not cover all the savings for some people (e.g. retirees keeping their money in a "safe" bank, wealthy people who want/need a significant amount of available funds in checking accounts, etc.)

Not to mention that there are some banks that have dropped FDIC insurance... I think there was something about the local Bank of America dropping down to only $100,000 in insurance... not even sure if it was FDIC; If it was, it was a lower class of it. They did this right before the time that the economy tanked, as I remember.

Anyway, it was around the time that I closed my account there and went to a smaller local bank... although that was because of a different issue (service charges were getting just a bit high, and the local bank still didn't charge me to have a checking account at all... don't believe the "no free checking" thread, you can still get treated decently at small town banks that cater mostly to farmers).

[balrog666]

So what about letting AIG and Citi fail and bailing out the folks they owe money to, instead? Seems logical to me. That way we get rid of the cause of the problem without the systematic failure. Epic failures like these deserve non-existence as a result.


Except that Fannie Mae and Freddie Mac (and their enabling legislation) were the cause of the problem and they are still operating "open loop" and making it worse all the time!!

Dragging AIG, et al. down would expose the rating companies and other re-insurance companies to legislatively caused damages/bankruptcy as well.

[grunion]

Dragging AIG, et al. down would expose the rating companies and other re-insurance companies to legislatively caused damages/bankruptcy as well.
Is that a bad thing? They screwed up, shouldn't the market punish them?

[Random]

An alternative that was suggested once the whole circular ponzi scheme started to implode was to have the government buy up the mortgages themselves, pay off the CDOs and renegotiate with the homeowners directly. This would have screwed over the CDS holders and the guys holding the lowest tranches of the CDOs, but the overall losses would have been much smaller.

Of course, this would have meant the government would be interfering in the market in a way other than handing rich people a whole lot of cash, and was instantly rejected. Better to have a fifty thousand dollar traffic accident at an unmarked intersection than have the government plunk down two hundred dollars for some stop signs.

[Segnosaur]

Dragging AIG, et al. down would expose the rating companies and other re-insurance companies to legislatively caused damages/bankruptcy as well.
Is that a bad thing? They screwed up, shouldn't the market punish them?
Yes they should be punished. The problem is, by punishing them you could end up hurting the economy as a whole. So yeah, AIG/Citi/etc. goes out of business for being greedy idiots, but afterwards the economy has to adjust, which could end up taking a long time and cause a lot of hardships, for people who want to get bank loans, for companies depending on access to credit, etc.

[geni]

Dragging AIG, et al. down would expose the rating companies and other re-insurance companies to legislatively caused damages/bankruptcy as well.

Thats a fairly minor problem. A more practical problem is that AIG provide a lot of legitimate insurence. Having a lot of companies needing to buy new insurence in the middle of a recession wouldn't end well.

[grunion]

Well gee, it sure is a good thing then that we will no longer let these companies that we bailed out get too big to fail.

Oh, wait, what (http://www.forbes.com/sites/realspin/2012/08/14/too-big-to-fail-has-become-a-permanent-bailout-program/)?

[Segnosaur]

Well gee, it sure is a good thing then that we will no longer let these companies that we bailed out get too big to fail.

Oh, wait, what (http://www.forbes.com/sites/realspin/2012/08/14/too-big-to-fail-has-become-a-permanent-bailout-program/)?
Which brings me to the questions I asked earlier: are the changes they've made to prevent further problems enough?

I'm in Canada. Here, we have 5 major banks. Each one of them would probably be considered "to big to fail". Yet we managed to escape the global financial meltdown relatively unscathed. Part of that is due to the fact that we never had the housing bubble that the U.S. had, but we also benefited from stronger banking regulations.

[grunion]

Which brings me to the questions I asked earlier: are the changes they've made to prevent further problems enough?

I'm in Canada. Here, we have 5 major banks. Each one of them would probably be considered "to big to fail". Yet we managed to escape the global financial meltdown relatively unscathed. Part of that is due to the fact that we never had the housing bubble that the U.S. had, but we also benefited from stronger banking regulations.

When Glass-Steagall was repealed, banks, formerly focused on credit and fiscal management, now went into the business of insurance, brokerage, and other financial services. The executives running the banking divisions now had to compete with the managers running these other guaranteed-lucrative businesses to drive revenues. At first they did it in their traditional usurious ways, by driving up credit rates and fees on the folks that could least afford it, and getting Congress to pass laws giving banks all kinds of special privileges. They gambled with their depositors' money. Even that wasn't enough to feed their gaping piggish maws, so they had to invent all of these new financial instruments and bribe their already bought-and-sold politicians into passing the Commodity Futures Modernization Act.

Even this unbelievable deregulation wasn't enough so they built more and more loopholes into the CFMA to emasculate even its ludicrously minimal restrictions.

Fortunately Canada and other countries maintained some sense of propriety about what should and shouldn't be legal for banking executives to do with depositors' and mortgage-holders' money. Unfortunately, though, national economies are intertwined, and when the USA sneezes, the snot is dispersed everywhere.

[DragonLady]

The problem is, by punishing them you could end up hurting the economy as a whole.


Ughmm.... This jumps out at me because we punish individuals all the time with no regard to the long-term hurt that might be caused to family, friends, businesses, churches, etc.

Why should the "economy" as a whole be an exception?

[Segnosaur]

The problem is, by punishing them you could end up hurting the economy as a whole.
Ughmm.... This jumps out at me because we punish individuals all the time with no regard to the long-term hurt that might be caused to family, friends, businesses, churches, etc.

Why should the "economy" as a whole be an exception?
I think its a question of degrees...

Yes, a family might be hurt to see a family member go to jail, but that's probably minor compared to a possible complete financial collapse that might have resulted without a bailout for the banks.

[balrog666]

Is that a bad thing? They screwed up, shouldn't the market punish them?


Didn't it? :rolleyes:

Oh, and why not punish the people who told fostered the whole cf, Congress, the Fed, and a few presidents who looked the other way ...

[grunion]

Didn't it? :rolleyes:

Oh, and why not punish the people who told fostered the whole cf, Congress, the Fed, and a few presidents who looked the other way ...
The markets are supposed to punish the bad financial decisions, the voters are supposed to punish the bad political decisions - isn't that the way it's supposed to work?