6 ms·

Bankruptcy, not bailout, is the right answer

139 points by gibsonf1 18y ago

known 18y ago
Bankruptcy leads to more business opportunities and jobs.
johnrob 18y ago
I agree that the solution to bad government behavior should not be more of it. The core problem is that over the past 30+ years, the government has tainted the home buying market. The gov encouraged lenders to act irrationally, pushing home prices too high. Had home prices not been able to get so high, they would not have as much room to fall. The last thing we need here is more irrational behavior from the gov - like buying worthless assets for real money.
swombat 18y ago
Neither bankruptcy nor bailout are the right answer. Compromise is the right answer.
- kevTheDev 18y ago
  Would you care to elaborate?
  - unalone 18y ago
    Yeah, I want to hear this too. Usually compromise is just being wishy-washy, so unless you've got a GOOD idea for compromise...
  - swombat 18y ago
    Not particularly. I am not enough of an economist or politician to be able to tell you in detail what the ideal compromise is in this situation, nor do I care to claim that I am. What I do know, however, is things are not black and white. Baying for the banks' blood and shouting "liquidate!" is exactly what they did in 1929 and that kind of behaviour is even more reprehensible than the banks'. Similarly, handing the banks a giant wad of cash with no strings attached is not right either. The solution lies in the middle, as always.
    - byrneseyeview 18y ago
      It doesn't make sense to arbitrarily decide that, if there are two proposals, the answer is to do a little of both. In financial markets, that's often the worst possible course of action. With S&Ls in the early 80's, for example, Congress could have allowed them to fail, or nationalized them. Instead, Congress gave them extra deposit insurance and deregulated their lending -- which caused them to make lots of stupid loans, backed by government insurance. Similarly, California half-deregulated their energy market, which ended up bankrupting their power companies and costing their consumers extra.
    - biohacker42 18y ago
      The middle and compromise are not in and by themselves the right answer. Moderation is often a far superior strategy then extremism, but a little of both is not a superior answer to the question: Is this circuit on or off? The "middle is always right" attitude reminds me of the US media, which will often juxtapose facts and spin, then idly stand by, pointing out that both "extreme" positions are equally valid.
      - swombat 18y ago
        Economics is not an on-off problem.
        biohacker42 18y ago
        Never the less, compromising for the sake of compromising is by no means a smart strategy.
        swombat 18y ago
        How about compromising for the sake of having a job/customers/money?
    - yters 18y ago
      One analysis I've heard is that the current problem is due to compromising between strict regulation and strict deregulation.
- tom_rath 18y ago
  What's wrong with bankruptcy? The assets remain intact, the investors who poorly judged the risk lose their investment and those who buy up the assets (to clean things up and bring about a recovery) rightfully reap the rewards of taking on a very high risk. Enron, to take an example, went bankrupt, but energy kept being generated and traded under new management. Former employees went on to find work at the acquiring company(ies) or took their labour elsewhere. Would things have been better if Enron were still scamming around after a bailout today? How about the dot.com collapse? What if Pets.com and WebVan were given billions of dollars to continue on? Bankruptcy is good. It's the market's way of flushing out bad ideas and starting fresh.
  - swombat 18y ago
    The problem with the bankrupcty solution is it encourages companies to remain secretive about their bad debts until the very last minute. This discourages companies, particularly banks, from trusting each other. The problem we're having now, which is also the problem that brought the Great Depression, is lack of trust. Banks won't lend to each other, or to other businesses, because they don't trust that they'll get their money back. Saying that we should let the banks go bankrupt at their leisure is just letting this problem of trust fester for the next few years and resolve itself one bank at a time, slowly. While the problem is correcting itself, the market doesn't allocate money where it's needed because of the lack of trust, and everyone suffers. The total cost of that is much larger than a trillion dollars. At the other extreme, you could just nationalise the whole banking system. That's a better option, but still not ideal, because governments suck at running businesses, and this would also be less efficient in allocating capital where it's needed (the primary function of banks), So, somewhere in the middle lies the compromise. How can we get the banks to start trusting each other again and yet not nationalise them? Well, one way is to offer them a kind of "knife armistice". Bring out your knives to the police station, hand them in, and we'll let you go free. We'll even give you a water pistol as a compensation prize. Don't be fooled into thinking that just because the bailout bill doesn't put the CEOs of banks in prison, that it will not be followed by further regulation. For better of for worse, tighter regulation will be on its way. But that's a separate debate that's not tied to the bailout. The purpose of the bailout bill is to resolve a crisis right now, not to make long term fixes to the system. Banks are special types of companies because of their effect on the economy. You might let Enron go bust, because after all that's unlikely to cause widespread damage to the entire world economy. Let the banks go bust slowly and painfully, though, and every business pays for it. Calling for "Bankruptcy not bailout" is terribly short-sighted.
- maxharris 18y ago
  Suppose some ostensibly "unforeseen" but avoidable* disaster befell your neighbors, and they got together to rob you and your friends in the chaos. But you don't want to part with your property. Should you (would you) be willing to "split the difference" or "compromise" with them? We can live without these incompetent fly-by-night money men. Bailing them out sustains and rewards their incompetence. * There were honest banks like BB&T that /chose/ not to get involved in these shady deals
  - swombat 18y ago
    If I have a choice between compromising with them or seeing my neighbourhood turn into a ghetto, I think I'll choose compromise. Won't you? Remember in this case we're not looking at one isolated element - this is just one big global neighbourhood. If it turns into a ghetto, we're all still living there.
    - anamax 18y ago
      Foreclosed houses are houses that can be sold to folks who can afford them. You know these folks. They've been saving for a house and watching the market run away from them. Now that prices have dropped, they can afford to buy IF we don't insist on taking their money and giving it to the folks who couldn't handle their existing mortgage keep the house.
      - BrandonM 18y ago
        I wish I had more upvotes for this post. We are so busy debating the effects on banks loaning to each other that we sometimes ignore the responsible people here. The responsible way to buy a house is to save for it. The realistic way is to save a substantial portion and get a fixed-rate loan that you can definitely afford. It will never be impossible to get such a loan from a standard "Home Loan & Savings" bank, because savings accounts can support such loans (provided, of course, that people are saving, but I believe I established this with the "save a substantial portion" part). Making low-rate-variable-interest credit less attainable is not a problem, it's a solution to our current problem that has everyone living beyond their means, with an unfathomable percentage of their earnings going to creditors.
gills 18y ago
They're going to try to ram it through again on Thursday, so if you agree with this economist call your reps. (Sorry for the politics, but I've been on the phone all week about this. I probably deserve some mods down, so pile on!)
- davidw 18y ago
  I think the best commentary I've seen so far is this: http://www.marginalrevolution.com/marginalrevolution/2008/10/my-views-on-the.html http://www.marginalrevolution.com/marginalrevolution/2008/10...
cedsav 18y ago
counterpoint: http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html http://www.businessweek.com/investing/insights/blog/archives...
- msb 18y ago
  However, non-CRA lenders did pressure CRA regulated banks. From the reference: "Many of these companies are like the one in which my next-door neighbor is employed: they are middlemen who arrange mortgage loans for borrowers including "subprime" borrowers with banks, including CRA-regulated banks" http://mises.org/story/2963 http://mises.org/story/2963
lpgauth 18y ago
The crash is only indirectly based on the fact that getting a loan was joke. The real problem is the financial institution which bundle these bad loans in short term currency and starting selling them. It was all good while the housing market was still going up as if the loan wasn't getting paid to could just take back the house, but when it went down these short term bonds where without any value.
hendler 18y ago
We need a new economy. Tech guys create jobs, and save money for old companies with ease. I mean, what's the utility of some of these idiots? Seems like the next phase of obsoletes are just raping the system before they're noticed as completely useless.
jmtame 18y ago
I find it entertaining that Aaron Pressman (author of the counterpoint argument listed by someone else on this thread), who holds a B.S. in History from Columbia, is calling Jeffrey Miron a "know-nothing," who has a Ph.D. in Economics from MIT and is Senior Lecturer and Economist at Harvard University, in addition to the 166 academic economists who were against this bailout. Who else said the CRA is responsible for our current crisis? What's that, Ron Paul? Sounds like these guys just know a whole lot of nothing... Just to expand on this topic a little bit: http://jtame05.wordpress.com/2008/09/30/we-dont-need-a-bailout-and-the-sky-is-not-falling/ http://jtame05.wordpress.com/2008/09/30/we-dont-need-a-bailo...
- bilbo0s 18y ago
  The problem is rampant misuse of CDS, CDO and derivatives in general. ie - Mortgages that were improperly secured. That is at the root of what is threatening the financial system. As a former quant I am well acquainted with the top end of the issue. My problem is understanding the bottom end. The bottom end is a secondary problem, people defaulting on mortgages. Which the system would be able to tolerate in a market place where mortgages are properly secured. That is, a marketplace where people on the top end do their jobs right. This problem is caused only in part by CRA, AND in a manner different than Ron Paul argues. CRA encouraged a large number of middle class people to move back into the city cores around the country. Poor people moved out, hip, young, creative class moved in. All funded by CRA allowances. Gentrification and all that. Basically, Fannie and Freddie were moving 'good' people in, while Ginnie moved 'bad' people out. Problem was, according to the auditors, these "gentrifiers" are defaulting in droves. To the point where Fannie and Freddie collapsed. And, to add insult to injury, Ginnie is fine. The problems it does have it acquired in government attempts to rescue Fannie and Freddie. I, frankly, find this state of affairs difficult to believe. If we were redeveloping the city cores, and then letting the same people who lived there before buy the redeveloped housing, then I could see a high level of defaults. But the people in those neighborhoods now are actually pretty solid. That is one of the most perplexing facets of this entire mess to me. I understand the bad risk assessment at the top end, I think ANYONE generally assigns a higher risk to people in poverty, and a lower one to people in higher socio-economic classes. I would have gotten that risk assessment wrong as well if I was judging that market. So how can so many solid home buyers be hitting the skids at the same time? I would like to think there is something more going on here. I am simply unable to find it.
maxharris 18y ago
Exactly. The government ultimately has to print the money that it uses to bail out these guys (who deserve to fail anyway) - the consequence of this printing is that the dollars in your pocket can't buy as much as they could before. Taxes are not the only way to tax people. * Yes, the government has been playing this game for around a century. But does that make it right to tack on another trillion in the theft?
aschobel 18y ago
Fascinating video from the Newshouur with Jim Lehrer: http://www.pbs.org/newshour/bb/business/july-dec08/bailouttalk_09-23.html http://www.pbs.org/newshour/bb/business/july-dec08/bailoutta... We do need some kind of government intervention, but the current form stinks.
timr 18y ago
This is a good article, and I generally agree, but...there's a danger in calling this particular bailout plan "more government", and then arguing against it by saying that more government is always bad. The problem here isn't "more government" -- it's that the government is showing a willingness to prop up an unsustainable system. If the proposed legislation was a package of hard-nosed reform and regulation, plus some money to bail out the most critical banks to our economy, it would make much more sense. However, in its current state, the bill oinks and waddles just like congressional pork. We got where we are through a lack of government (regulation), and the solution to the problem almost certainly involves more of it; it just has to be the right type.
- Prrometheus 18y ago
  >We got where we are through a lack of government (regulation) I hear this a lot, but what particular regulation do you think would have mitigated the crisis? I can't think of any, except restricting subprime lending - which would be directly contrary to the Government's other goal of more home ownership. Meg Mcardle had a good discussion of possible regulation: http://meganmcardle.theatlantic.com/archives/2008/09/hindsight_regulation.php http://meganmcardle.theatlantic.com/archives/2008/09/hindsig...
  - RobertL 18y ago
    Agreed Prrometheus. More regulation is just going to push more of the business overseas. If Congress screws this one up they could create a situation where there will be no investment capital industry in the United States in the near future.
  - gills 18y ago
    The problem with the goal of "more home ownership" is that it was a tagline from the GSE's for "increase our deal flow", as they had somewhat of a golden goose with throughput being the only limit. It was and still is political suicide to oppose it. Stroke of genius, if you ask me. Even worse than non-enforcement has been the active encouragement by the legislature of lots of this stuff. Tightening up the lobbying and revolving doors might help cool off some of that, but I don't really know. Some of the regulation concepts being floated (not my ideas) are to ban off-balance-sheet vehicles, tighten definitions of what can be put in Level III/model-priced assets, and require that CDSs and other derivatives/wraps be traded on real exchanges so that a market-maker acts as central counterparty). I'm not a financial expert, just trying to learn about this stuff. Maybe someone more knowledgeable will chime in.
davidw 18y ago
The right answer is: some other site.
jsvaughan 18y ago
You should read up on the great depression.
- nsimpson 18y ago
  I don't know why this was modded down ... it's a fascinating subject. http://en.wikipedia.org/wiki/Great_Depression http://en.wikipedia.org/wiki/Great_Depression Every entrepreneur knows that those who choose to ignore history are doomed to repeat it.
jamiequint 18y ago
I disagree. Take a midsize bank market cap of $5B and multiply it by 25-50 for the number of banks that might fail. That is a total loss of around $125B-$250B for which shareholders and employees of these companies bear the losses. Also should these banks fail, the government will have to step in via FDIC. The problem with this is that assuming an average balance of $10000 per depositor $700B covers 70 Million accounts. While this is probably sufficient for average individual depositors, what is to happen to the small businesses that have greater than $100k in assets? Also, what happens to the availability of credit with so many banks in default? Bankruptcy actually seems more risky, as the people who would lose are small businesses and those with over $100k in the bank, people who would never have recourse to get their money back. Rather than socialized losses (through inflation), its losses for an unlucky few. The bailout plan, however, which involves taking warrants in the companies we are giving money to seems to have a good chance of repaying at least a significant portion of what it costs overall. Thoughts?
michaelneale 18y ago
OK so how long will this all take to go to shit (one way or another), I am impatient.
nsimpson 18y ago
For people seeking an informed and academic perspective, you may find this PDF on Liquidation Cycles during the Great Depression to be of interest: http://econ161.berkeley.edu/pdf_files/Liquidation_Cycles.pdf http://econ161.berkeley.edu/pdf_files/Liquidation_Cycles.pdf
lasthemy1 18y ago
Since no one seems to have mentioned leverage and credit default swaps, here's the first summary I could find: http://www.nakedcapitalism.com/2008/04/credit-default-swaps-and-bank-leverage.html http://www.nakedcapitalism.com/2008/04/credit-default-swaps-... There are many better if anyone cares to look; the mortgages defaulting lend themselves to a house of cards analogy. Banks were so heavily leveraged that they may not even be able to handle even a small number of defaulting loans on property that decreased in value.
cbrinker 18y ago
Yes this is the root problem with the credit markets; bad mortgages. However, this doesn't account for the root financial problem of our country that has plagued us since 1913; the federal reserve. These crooks sway the entire economy and have exponentially inflated our currency. The dollar is worthless today. It is worth $0.02 to the dollar of the beginning of the 20th century. We went off the gold standard, we decided fractional reserve banking was a good thing, and we put in charge idiots and crooks to create a lesse faire market that only benefits them. Don't believe me? http://en.wikipedia.org/wiki/Image:USACPI1800.svg http://en.wikipedia.org/wiki/Image:USACPI1800.svg Usury, fraction reserve banking, and crooks.
known 18y ago
bailout is a lose-lose proposition
wschroter 18y ago
Why not just give the $700b to healthy banks so that they can lend to businesses and credit worthy consumers? If we have $700b to give, why use it to buy up toxic debt? I understand wanting to keep the markets moving, so why not address the problem there?

139 points by gibsonf1 18y ago

known 18y ago

Bankruptcy leads to more business opportunities and jobs.

I agree that the solution to bad government behavior should not be more of it. The core problem is that over the past 30+ years, the government has tainted the home buying market. The gov encouraged lenders to act irrationally, pushing home prices too high. Had home prices not been able to get so high, they would not have as much room to fall. The last thing we need here is more irrational behavior from the gov - like buying worthless assets for real money.

swombat 18y ago

Neither bankruptcy nor bailout are the right answer. Compromise is the right answer.

kevTheDev 18y ago
Would you care to elaborate?
- unalone 18y ago
  Yeah, I want to hear this too. Usually compromise is just being wishy-washy, so unless you've got a GOOD idea for compromise...
- swombat 18y ago
  Not particularly. I am not enough of an economist or politician to be able to tell you in detail what the ideal compromise is in this situation, nor do I care to claim that I am. What I do know, however, is things are not black and white. Baying for the banks' blood and shouting "liquidate!" is exactly what they did in 1929 and that kind of behaviour is even more reprehensible than the banks'. Similarly, handing the banks a giant wad of cash with no strings attached is not right either. The solution lies in the middle, as always.
  - byrneseyeview 18y ago
    It doesn't make sense to arbitrarily decide that, if there are two proposals, the answer is to do a little of both. In financial markets, that's often the worst possible course of action. With S&Ls in the early 80's, for example, Congress could have allowed them to fail, or nationalized them. Instead, Congress gave them extra deposit insurance and deregulated their lending -- which caused them to make lots of stupid loans, backed by government insurance. Similarly, California half-deregulated their energy market, which ended up bankrupting their power companies and costing their consumers extra.
  - biohacker42 18y ago
    The middle and compromise are not in and by themselves the right answer. Moderation is often a far superior strategy then extremism, but a little of both is not a superior answer to the question: Is this circuit on or off? The "middle is always right" attitude reminds me of the US media, which will often juxtapose facts and spin, then idly stand by, pointing out that both "extreme" positions are equally valid.
    - swombat 18y ago
      Economics is not an on-off problem.
      - biohacker42 18y ago
        Never the less, compromising for the sake of compromising is by no means a smart strategy.
        swombat 18y ago
        How about compromising for the sake of having a job/customers/money?
  - yters 18y ago
    One analysis I've heard is that the current problem is due to compromising between strict regulation and strict deregulation.
tom_rath 18y ago
What's wrong with bankruptcy? The assets remain intact, the investors who poorly judged the risk lose their investment and those who buy up the assets (to clean things up and bring about a recovery) rightfully reap the rewards of taking on a very high risk. Enron, to take an example, went bankrupt, but energy kept being generated and traded under new management. Former employees went on to find work at the acquiring company(ies) or took their labour elsewhere. Would things have been better if Enron were still scamming around after a bailout today? How about the dot.com collapse? What if Pets.com and WebVan were given billions of dollars to continue on? Bankruptcy is good. It's the market's way of flushing out bad ideas and starting fresh.
- swombat 18y ago
  The problem with the bankrupcty solution is it encourages companies to remain secretive about their bad debts until the very last minute. This discourages companies, particularly banks, from trusting each other. The problem we're having now, which is also the problem that brought the Great Depression, is lack of trust. Banks won't lend to each other, or to other businesses, because they don't trust that they'll get their money back. Saying that we should let the banks go bankrupt at their leisure is just letting this problem of trust fester for the next few years and resolve itself one bank at a time, slowly. While the problem is correcting itself, the market doesn't allocate money where it's needed because of the lack of trust, and everyone suffers. The total cost of that is much larger than a trillion dollars. At the other extreme, you could just nationalise the whole banking system. That's a better option, but still not ideal, because governments suck at running businesses, and this would also be less efficient in allocating capital where it's needed (the primary function of banks), So, somewhere in the middle lies the compromise. How can we get the banks to start trusting each other again and yet not nationalise them? Well, one way is to offer them a kind of "knife armistice". Bring out your knives to the police station, hand them in, and we'll let you go free. We'll even give you a water pistol as a compensation prize. Don't be fooled into thinking that just because the bailout bill doesn't put the CEOs of banks in prison, that it will not be followed by further regulation. For better of for worse, tighter regulation will be on its way. But that's a separate debate that's not tied to the bailout. The purpose of the bailout bill is to resolve a crisis right now, not to make long term fixes to the system. Banks are special types of companies because of their effect on the economy. You might let Enron go bust, because after all that's unlikely to cause widespread damage to the entire world economy. Let the banks go bust slowly and painfully, though, and every business pays for it. Calling for "Bankruptcy not bailout" is terribly short-sighted.
maxharris 18y ago
Suppose some ostensibly "unforeseen" but avoidable* disaster befell your neighbors, and they got together to rob you and your friends in the chaos. But you don't want to part with your property. Should you (would you) be willing to "split the difference" or "compromise" with them? We can live without these incompetent fly-by-night money men. Bailing them out sustains and rewards their incompetence. * There were honest banks like BB&T that /chose/ not to get involved in these shady deals
- swombat 18y ago
  If I have a choice between compromising with them or seeing my neighbourhood turn into a ghetto, I think I'll choose compromise. Won't you? Remember in this case we're not looking at one isolated element - this is just one big global neighbourhood. If it turns into a ghetto, we're all still living there.
  - anamax 18y ago
    Foreclosed houses are houses that can be sold to folks who can afford them. You know these folks. They've been saving for a house and watching the market run away from them. Now that prices have dropped, they can afford to buy IF we don't insist on taking their money and giving it to the folks who couldn't handle their existing mortgage keep the house.
    - BrandonM 18y ago
      I wish I had more upvotes for this post. We are so busy debating the effects on banks loaning to each other that we sometimes ignore the responsible people here. The responsible way to buy a house is to save for it. The realistic way is to save a substantial portion and get a fixed-rate loan that you can definitely afford. It will never be impossible to get such a loan from a standard "Home Loan & Savings" bank, because savings accounts can support such loans (provided, of course, that people are saving, but I believe I established this with the "save a substantial portion" part). Making low-rate-variable-interest credit less attainable is not a problem, it's a solution to our current problem that has everyone living beyond their means, with an unfathomable percentage of their earnings going to creditors.

gills 18y ago

They're going to try to ram it through again on Thursday, so if you agree with this economist call your reps. (Sorry for the politics, but I've been on the phone all week about this. I probably deserve some mods down, so pile on!)

davidw 18y ago
I think the best commentary I've seen so far is this: http://www.marginalrevolution.com/marginalrevolution/2008/10/my-views-on-the.html http://www.marginalrevolution.com/marginalrevolution/2008/10...

cedsav 18y ago

counterpoint: http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html http://www.businessweek.com/investing/insights/blog/archives...

msb 18y ago
However, non-CRA lenders did pressure CRA regulated banks. From the reference: "Many of these companies are like the one in which my next-door neighbor is employed: they are middlemen who arrange mortgage loans for borrowers including "subprime" borrowers with banks, including CRA-regulated banks" http://mises.org/story/2963 http://mises.org/story/2963

lpgauth 18y ago

The crash is only indirectly based on the fact that getting a loan was joke. The real problem is the financial institution which bundle these bad loans in short term currency and starting selling them. It was all good while the housing market was still going up as if the loan wasn't getting paid to could just take back the house, but when it went down these short term bonds where without any value.

hendler 18y ago

We need a new economy. Tech guys create jobs, and save money for old companies with ease. I mean, what's the utility of some of these idiots? Seems like the next phase of obsoletes are just raping the system before they're noticed as completely useless.

jmtame 18y ago

I find it entertaining that Aaron Pressman (author of the counterpoint argument listed by someone else on this thread), who holds a B.S. in History from Columbia, is calling Jeffrey Miron a "know-nothing," who has a Ph.D. in Economics from MIT and is Senior Lecturer and Economist at Harvard University, in addition to the 166 academic economists who were against this bailout. Who else said the CRA is responsible for our current crisis? What's that, Ron Paul? Sounds like these guys just know a whole lot of nothing... Just to expand on this topic a little bit: http://jtame05.wordpress.com/2008/09/30/we-dont-need-a-bailout-and-the-sky-is-not-falling/ http://jtame05.wordpress.com/2008/09/30/we-dont-need-a-bailo...

bilbo0s 18y ago
The problem is rampant misuse of CDS, CDO and derivatives in general. ie - Mortgages that were improperly secured. That is at the root of what is threatening the financial system. As a former quant I am well acquainted with the top end of the issue. My problem is understanding the bottom end. The bottom end is a secondary problem, people defaulting on mortgages. Which the system would be able to tolerate in a market place where mortgages are properly secured. That is, a marketplace where people on the top end do their jobs right. This problem is caused only in part by CRA, AND in a manner different than Ron Paul argues. CRA encouraged a large number of middle class people to move back into the city cores around the country. Poor people moved out, hip, young, creative class moved in. All funded by CRA allowances. Gentrification and all that. Basically, Fannie and Freddie were moving 'good' people in, while Ginnie moved 'bad' people out. Problem was, according to the auditors, these "gentrifiers" are defaulting in droves. To the point where Fannie and Freddie collapsed. And, to add insult to injury, Ginnie is fine. The problems it does have it acquired in government attempts to rescue Fannie and Freddie. I, frankly, find this state of affairs difficult to believe. If we were redeveloping the city cores, and then letting the same people who lived there before buy the redeveloped housing, then I could see a high level of defaults. But the people in those neighborhoods now are actually pretty solid. That is one of the most perplexing facets of this entire mess to me. I understand the bad risk assessment at the top end, I think ANYONE generally assigns a higher risk to people in poverty, and a lower one to people in higher socio-economic classes. I would have gotten that risk assessment wrong as well if I was judging that market. So how can so many solid home buyers be hitting the skids at the same time? I would like to think there is something more going on here. I am simply unable to find it.

maxharris 18y ago

Exactly. The government ultimately has to print the money that it uses to bail out these guys (who deserve to fail anyway) - the consequence of this printing is that the dollars in your pocket can't buy as much as they could before. Taxes are not the only way to tax people. * Yes, the government has been playing this game for around a century. But does that make it right to tack on another trillion in the theft?

aschobel 18y ago

Fascinating video from the Newshouur with Jim Lehrer: http://www.pbs.org/newshour/bb/business/july-dec08/bailouttalk_09-23.html http://www.pbs.org/newshour/bb/business/july-dec08/bailoutta... We do need some kind of government intervention, but the current form stinks.

timr 18y ago

This is a good article, and I generally agree, but...there's a danger in calling this particular bailout plan "more government", and then arguing against it by saying that more government is always bad. The problem here isn't "more government" -- it's that the government is showing a willingness to prop up an unsustainable system. If the proposed legislation was a package of hard-nosed reform and regulation, plus some money to bail out the most critical banks to our economy, it would make much more sense. However, in its current state, the bill oinks and waddles just like congressional pork. We got where we are through a lack of government (regulation), and the solution to the problem almost certainly involves more of it; it just has to be the right type.

Prrometheus 18y ago
>We got where we are through a lack of government (regulation) I hear this a lot, but what particular regulation do you think would have mitigated the crisis? I can't think of any, except restricting subprime lending - which would be directly contrary to the Government's other goal of more home ownership. Meg Mcardle had a good discussion of possible regulation: http://meganmcardle.theatlantic.com/archives/2008/09/hindsight_regulation.php http://meganmcardle.theatlantic.com/archives/2008/09/hindsig...
- RobertL 18y ago
  Agreed Prrometheus. More regulation is just going to push more of the business overseas. If Congress screws this one up they could create a situation where there will be no investment capital industry in the United States in the near future.
- gills 18y ago
  The problem with the goal of "more home ownership" is that it was a tagline from the GSE's for "increase our deal flow", as they had somewhat of a golden goose with throughput being the only limit. It was and still is political suicide to oppose it. Stroke of genius, if you ask me. Even worse than non-enforcement has been the active encouragement by the legislature of lots of this stuff. Tightening up the lobbying and revolving doors might help cool off some of that, but I don't really know. Some of the regulation concepts being floated (not my ideas) are to ban off-balance-sheet vehicles, tighten definitions of what can be put in Level III/model-priced assets, and require that CDSs and other derivatives/wraps be traded on real exchanges so that a market-maker acts as central counterparty). I'm not a financial expert, just trying to learn about this stuff. Maybe someone more knowledgeable will chime in.

davidw 18y ago

The right answer is: some other site.

jsvaughan 18y ago

You should read up on the great depression.

nsimpson 18y ago
I don't know why this was modded down ... it's a fascinating subject. http://en.wikipedia.org/wiki/Great_Depression http://en.wikipedia.org/wiki/Great_Depression Every entrepreneur knows that those who choose to ignore history are doomed to repeat it.

jamiequint 18y ago

I disagree. Take a midsize bank market cap of $5B and multiply it by 25-50 for the number of banks that might fail. That is a total loss of around $125B-$250B for which shareholders and employees of these companies bear the losses. Also should these banks fail, the government will have to step in via FDIC. The problem with this is that assuming an average balance of $10000 per depositor $700B covers 70 Million accounts. While this is probably sufficient for average individual depositors, what is to happen to the small businesses that have greater than $100k in assets? Also, what happens to the availability of credit with so many banks in default? Bankruptcy actually seems more risky, as the people who would lose are small businesses and those with over $100k in the bank, people who would never have recourse to get their money back. Rather than socialized losses (through inflation), its losses for an unlucky few. The bailout plan, however, which involves taking warrants in the companies we are giving money to seems to have a good chance of repaying at least a significant portion of what it costs overall. Thoughts?

michaelneale 18y ago

OK so how long will this all take to go to shit (one way or another), I am impatient.

nsimpson 18y ago

For people seeking an informed and academic perspective, you may find this PDF on Liquidation Cycles during the Great Depression to be of interest: http://econ161.berkeley.edu/pdf_files/Liquidation_Cycles.pdf http://econ161.berkeley.edu/pdf_files/Liquidation_Cycles.pdf

lasthemy1 18y ago

Since no one seems to have mentioned leverage and credit default swaps, here's the first summary I could find: http://www.nakedcapitalism.com/2008/04/credit-default-swaps-and-bank-leverage.html http://www.nakedcapitalism.com/2008/04/credit-default-swaps-... There are many better if anyone cares to look; the mortgages defaulting lend themselves to a house of cards analogy. Banks were so heavily leveraged that they may not even be able to handle even a small number of defaulting loans on property that decreased in value.

cbrinker 18y ago

Yes this is the root problem with the credit markets; bad mortgages. However, this doesn't account for the root financial problem of our country that has plagued us since 1913; the federal reserve. These crooks sway the entire economy and have exponentially inflated our currency. The dollar is worthless today. It is worth $0.02 to the dollar of the beginning of the 20th century. We went off the gold standard, we decided fractional reserve banking was a good thing, and we put in charge idiots and crooks to create a lesse faire market that only benefits them. Don't believe me? http://en.wikipedia.org/wiki/Image:USACPI1800.svg http://en.wikipedia.org/wiki/Image:USACPI1800.svg Usury, fraction reserve banking, and crooks.

known 18y ago

bailout is a lose-lose proposition

wschroter 18y ago

Why not just give the $700b to healthy banks so that they can lend to businesses and credit worthy consumers? If we have $700b to give, why use it to buy up toxic debt? I understand wanting to keep the markets moving, so why not address the problem there?