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Donnie B.
2008-Sep-29, 09:11 PM
Okay, so Congress choked on the bailout plan. And for good reasons, perhaps. It certainly was unpopular with the voters.

So (trying to avoid anything explicitly political), let's look at the problem it was supposed to solve, and see if there's a different approach that makes any sense.

Disclaimer: I'm an engineer, not a financial wiz. I may misuse terms and misunderstand the problem at a deep level, so YMMV. (Let's discuss!)


The fundamental issue that's causing the problem in the banking system is something called "mortgage-backed securities", basically equity paper that bundles a lot of mortgages (mostly home mortgages, I believe, but perhaps some commercial real estate as well). The banks put these equities together when it seemed house prices would go up forever. Now they're going the other way.

Many of the mortgages that underlie the securities are "sub-prime" -- they were structured to allow people who really couldn't afford their homes to get in at a low interest rate. The idea was that by the time they had to pay a higher rate, the house would be worth more, so they'd be okay. But no...

So lots of people are delinquent on their payments, or have already been foreclosed on, or they now owe much, much more on the house than it's worth. The whole housing sector is in a mess, and the mortgage-backed securities are worth... well, not nothing, but nobody really knows what they're worth. Ergo, banks are in trouble, and nobody's willing to lend any money because they have no idea who's going to be solvent tomorrow.

The bailout plan that was killed today tried to shore up the system by buying up those securities at a price to be set by the Treasury Secretary. The taxpayer would then own securities that might be worth something, someday, or might not be worth anything ever; meanwhile, the banks would have some cash and could start lending again.

But it's hardly surprising that the average taxpayer would balk at laying out huge bucks for something that might be worthless, while the banks and their shareholders get off nearly scot free for making such bad investments.


Sooo.... here's my idea. Maybe Congress is attacking the wrong end. Instead of bailing out the banks, maybe they should fix the fundamental problem -- the mortgages on which those securities are based.

It seems to me that taking that approach could be a win-win. Homeowners get to refinance at an affordable rate and stay in their homes. Houses stop being foreclosed on, so neighborhoods benefit (no more abandoned properties). Property values are propped up, so tax revenues stop tanking. The mortgage-backed securities now have some real value, so the financial system stabilizes. Bankers and CEOs get to keep their jobs, unless the boards or shareholders boot them out.

The downside is that the taxpayers have to pick up a good part of the tab for the refinanced mortgages -- essentially a large fraction of difference between the mortgage balance and the property's current worth. This could easily amount to billions, maybe just as much as the current bailout proposal. Furthermore, the taxpayers end up with nothing tangible, since the banks would keep the securities.

Still, though, it seems like such a proposal would be far more palatable than the bailout. At least the money is going to the average Mom who's about to lose her home, rather than Mr. Moneybags at the Giant Conglomerate Bank.

Whaddyathink? Am I just nutty as a moon-brain, or could this approach actually work?

Larry Jacks
2008-Sep-29, 09:47 PM
From what I've read, part of the problem came when lending institutions were forced to make loans to people with bad credit. They then sold these loans to outfits like Fannie Mae and Freddie Mac, who in turn bundled them (the so-called "toxic loans") along with others and sold them as investment articles. Like any Ponzi scheme, everyone seems to win so long as the money keeps coming in. Housing prices were going up (25% per year in San Diego according to my son who lives there), people were buying homes with adjustable rate interest only loans, and cashing out the equity to buy stuff.

However, reality always hits sooner or later. The housing bubble burst (as all bubbles eventually do) and a lot of people were left owning properties that were worth less than the amount owed. At the same time, the adjustable mortgage payments increased (as they almost always do). People couldn't refinance to a fixed rate mortgage because they were upside down (owed more than the properties were worth) and many couldn't afford the increased payments. Defaults and foreclosures skyrocketed.

Many people and institutions around the world bought those investment articles but they're almost worthless now. I don't know if simply letting people refinance their homes will do much good. For one thing, a high percentage of those who couldn't pay for their mortgages have already lost their homes. It's too late to help them. The question is whether we should bail out those who bought those toxic loan investment articles (artifically propping up the market) or take our lumps and let the market correct itself. Propping up the market may save us some pain today but there's little guarantee they won't be coming back asking for more money next year (and the years after). Perhaps we need to suffer several years of hardship and let things work out. However, that doesn't buy as many votes as bailing out politically connected people who - in many cases - made some very foolish decisions.

HenrikOlsen
2008-Sep-29, 10:01 PM
The fundamental problem with bailing out bad mortgages is that this will send a very big signal that taking out bad loans is the way to live.
This will simply set the stage for the next crash.

It's my impression that the current level of help to the banks was to allow them to survive without defaulting on people's savings, foreclosures on bad loans should still happen and the banks should still hurt for overextending themselves on them.

As for being forced to take out bad loans, not really, they where forced to look at all applications rather than simply deny anyone in specific geographic locations.
That part didn't really do much.

People not realizing that the nice bank guy telling them how much they can afford to borrow is not actually an economic adviser, he's a salesman for the bank, probably paid based on how many loans he can sell, may have had a lot more to do with it.

Larry Jacks
2008-Sep-29, 10:29 PM
The fundamental problem with bailing out bad mortgages is that this will send a very big signal that taking out bad loans is the way to live. This will simply set the stage for the next crash.'

One thing is certain - when you subsidize something, you get more of it. If you don't fix the real causes of the problem, all the bailout will do is push the problem down the road a bit.

Jim
2008-Sep-29, 10:31 PM
No one forced the mortgage companies to make those high risk loans; they chose to do so because (1) the economy was good and looked like it would continue to be so, and (2) they could make lots of money from those loans.

The loans they offered were usually ARM (adjustable rate... start at 6.75% and jump to 13% after 5 years, say) or came with balloons (same rate but a lump sum of $10,000 after 5 years, say). Either type would be okay in a growing economy; the house increases in value and can be sold at a profit, or the buyer gets lots of raises and can pay the loan, or the buyer can refinance in a favorable market.

The problem started when housing prices didn't keep going up, and wages didn't either. Or, at least, not as much as everyone thought they would.

So, the mortgage company holds a $250,000 loan at 13%. The buyer can't pay the note, and can't sell the house for enough to break even. The mortgage company forecloses, or the buyer defaults, and the mortgage company now owns a house it can't sell for enough to recoup its original investment. Now do that a few hundred (or thousand) times.

It's like the car dealer who claims to lose money on every sale. "But, how do you stay in business?" "Volume!" Ri-i-i-i-ight.

tdvance
2008-Sep-29, 10:32 PM
and (3)--FM and FM were buying up the bad loans--so it was, er, money in the bank for those who approved them!

Larry Jacks
2008-Sep-29, 10:46 PM
No one forced the mortgage companies to make those high risk loans; they chose to do so because (1) the economy was good and looked like it would continue to be so, and (2) they could make lots of money from those loans.

Actually, there was government pressure to make those loans to people with bad credit histories for political purposes. From this 1999 New York Times article (http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F9582 60&sec=&spon=&pagewanted=print):

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

...

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

I've read quite a few reports indicting that banks were under pressure to make these loans or risk being labeled as racist. The fact that they could offload them to someone else didn't reduce the problem. If anything, it made it more widespread.

mahesh
2008-Sep-30, 02:22 AM
Ha!
thanks L J.....
NYT: ....But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's....

what a quick, clean robbery that was!

EricM407
2008-Sep-30, 02:20 PM
No one forced the mortgage companies to make those high risk loans; they chose to do so because (1) the economy was good and looked like it would continue to be so, and (2) they could make lots of money from those loans.

Actually, there was government pressure to make those loans to people with bad credit histories for political purposes. From this 1999 New York Times article (http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F9582 60&sec=&spon=&pagewanted=print):

[I]In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets ó including the New York metropolitan region ó will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nationís biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.


Nobody forced Fanny into that. Their stockholders looked at the killing investment banks were making on securities backed by those types of mortgages and begged the government to let Fanny in on the action.

samkent
2008-Sep-30, 03:51 PM
What I can’t figure is. How did some of the businesses justify running themselves on credit alone?
Example from CNBC tv yesterday. A car dealership calls and said without a short tem loan they won’t be able to make payroll this week. How can you run a business that way??? I would think after being in business for a certain period, there should be some cash reserves. At least for payroll.

As to the bad loans. I want retribution for my bailout money. Allow the institutions to choke for a portion of the cost. If they go belly up so be it. Then have the government loan money to the new bank that picks up the remains. They bought those investments without knowing exactly what they were getting. That’s the way of the stock market. I didn’t get a bailout on my bad stock choices.

Click Ticker
2008-Sep-30, 04:09 PM
What I canít figure is. How did some of the businesses justify running themselves on credit alone?
Example from CNBC tv yesterday. A car dealership calls and said without a short tem loan they wonít be able to make payroll this week. How can you run a business that way??? I would think after being in business for a certain period, there should be some cash reserves. At least for payroll.

As to the bad loans. I want retribution for my bailout money. Allow the institutions to choke for a portion of the cost. If they go belly up so be it. Then have the government loan money to the new bank that picks up the remains. They bought those investments without knowing exactly what they were getting. Thatís the way of the stock market. I didnít get a bailout on my bad stock choices.

Why risk your own capital when you can risk someone else's? Take all the cash out of the business while you can so you can to shield it from liability. In the event of a lawsuit - the business is responsible, not the individual (to a degree). Congratulations on your settlement, but the company is now bankrupt and doesn't exist anymore. Excuse me while I retire to my winter home in Florida.

Small business owners are generally required to personally guarantee the company loans, so if the business defaults, the bank has some recourse. But it's still safer in some respects to cash out while you can.

banquo's_bumble_puppy
2008-Sep-30, 04:20 PM
I had the same idea as well. Keep people in their homes and keep them from defaulting.

Larry Jacks
2008-Sep-30, 04:22 PM
What I can’t figure is. How did some of the businesses justify running themselves on credit alone? Example from CNBC tv yesterday. A car dealership calls and said without a short tem loan they won’t be able to make payroll this week. How can you run a business that way??? I would think after being in business for a certain period, there should be some cash reserves. At least for payroll.

A lot of business can run into cash flow problems so they use short term credit to get by. For example, a patient goes to a doctor for treatment and pays a nominal copay. The doctor has to have an employee to haggle with the insurance company (or the government in the case of Medicare/Medicaid) to get paid. This can often take weeks or longer. At the same time, the doctor still has to pay the employees' salaries, office rent, supplies, etc. Short term credit can help bridge the gap between when an expense is incurred and the payment is received.

HenrikOlsen
2008-Sep-30, 05:31 PM
As to the bad loans. I want retribution for my bailout money. Allow the institutions to choke for a portion of the cost.
The bailout money are already in the form of loans, with interest, so they wilol have to pay to be bailed out..


I had the same idea as well. Keep people in their homes and keep them from defaulting.
If the homes are bought for loans they couldn't afford, why should the government save them?

Grey
2008-Sep-30, 06:36 PM
If the homes are bought for loans they couldn't afford, why should the government save them?I expect the thought is that it would be for the same reasoning as the existing bailout proposal. That the economic turmoil caused by all of these foreclosures at once is large enough that it merits action. Is it better to help the many homeowners who bought more expensive homes than they could afford, or instead to help out large investment banks that made investments that were too risky? Or are neither of those actions defensible, and it would be better to do nothing? And if the government does take action, will it actually help to stabilize the economy, or will it just postpone the problem? Or would taking no action be so disastrous that it shouldn't be considered? I do know that the decisions are being based not just on what might be "right" or "fair", but also on the pragmatic effects of those decisions. It might be fair to let either homebuyers or investment bankers suffer the consequences of their poor decisions, but it may be true that the results of that would be very bad for everyone else as well. I don't know the answer to any of those questions, actually, and I'm reasonably glad that I'm not one of the people that has to try to come up with what the best plan is in this case.

jfribrg
2008-Sep-30, 06:43 PM
Maybe we need to take a step back and look at how things were 30 years ago. Back then, most banks were required to be local banks. That meant that the bankers were supposedly knowledgeable about the real estate market, and therefore knew how much a property was worth, etc. One of the problems here was fraudulent appraisals of properties, combined with fraudulent mortgage applications. Usually the subprime homeowner was clueless about the fraud; the banker simply said sign here and we'll take care of the paperwork. The homeowner is still part of the problem for not understanding what they were getting themselves into, but frequently they were just dumb, not criminal. Add in the incentive to make a company look profitable in the short term. A bank executive who gets a bonus based on the stock price has a real incentive to take great long term risks. They get the bonus, and then they are gone before the bad mortgages make the stock value nearly zero.

We can't go back to that happier time and place (it's happier only because we choose to forget about 12% unemployment,15% inflation and the Soviet threat). Back then, you couldn't pay off a mortgage without a penalty and banks couldn't sell the mortgages. Mortgage rates today are lower than they otherwise would be because they are marketable. Somehow though we need to have some assurance that the mortgage appraisers are being honest, and that no company becomes so big that they pull the entire economy down with it. I like the idea that banking executives not receive any golden parachutes. I would like to go further and require that any executive compensation incentives be based on long term performance of the company and that the compensation be deferred for 5 or 10 years. I don't have a problem with rewarding an executive for making a company profitable, but we need to be sure that the company really is profitable. An incentive in the form of a bonus payable in 5 years based on the stock price 5 years from now would require the executives to think long term.

I'm not sure that the problems was with banks being forced to lend to people who would not otherwise be qualified. I think this was a lobbying ploy from Fannie and Freddie to justify their desire to expand, and not the real reason they went into the subprime market. There has been community reinvestment requirements on banks for decades. It wasn't until the real estate bubble that these folks figured out how to make it profitable, at least in the short term. Before then it was a cost of doing business. Then suddenly it became a cash cow. Sort of like the junk bond fiasco in the 1980's (one of several fiascos that occurred back then).



I know I didn't list a whole lot of solutions in this long post, but it is just food for thought. Here is my summary of what needs to occur before this problem is behind us:
1) take the criminal element out of the whole process
2) Take the short term incentives away from the executives
3) Give the executives long term incentives
4) Don't reward the folks who caused the problem unless you also prevent the same abuses from recurring.

Finally, here is my one suggestion: Instead of buying the mortgages, why not make interest only payments on these mortgages in return for liens on the properties and other changes in the way the companies do business. That way the government can leverage its funds, the bank shareholders aren't unduly rewarded, and the goverment stays out of the mortgage banking business.

Larry Jacks
2008-Sep-30, 07:43 PM
it better to help the many homeowners who bought more expensive homes than they could afford, or instead to help out large investment banks that made investments that were too risky? Or are neither of those actions defensible, and it would be better to do nothing?

If I had a say in the matter, I'd pick option C from your list. Bite the bullet and put up with a lot of pain for a time (perhaps years), change the regulations to prevent it from happening again, and let the market go where it needs to go.

Edit: At this moment, the Dow is up 485 points. It could be that some people expect the "free money" bailout to go through this week, it could be people are snapping up what they consider to be bargains, or it could be that yesterday was an over-reaction. Regardless, it looks like the market has regained about 70% from yesterday's sell-off.

Jim
2008-Sep-30, 09:03 PM
I'm not sure that the problems was with banks being forced to lend to people who would not otherwise be qualified. I think this was a lobbying ploy from Fannie and Freddie to justify their desire to expand, and not the real reason they went into the subprime market. There has been community reinvestment requirements on banks for decades. It wasn't until the real estate bubble that these folks figured out how to make it profitable, at least in the short term. Before then it was a cost of doing business. Then suddenly it became a cash cow. Sort of like the junk bond fiasco in the 1980's (one of several fiascos that occurred back then).

Requiring lenders to give greater consideration to low income/high risk buyers does not also require the lenders to give the types of loans they did. That was pure profit motive.


I know I didn't list a whole lot of solutions in this long post, but it is just food for thought. Here is my summary of what needs to occur before this problem is behind us:
1) take the criminal element out of the whole process
2) Take the short term incentives away from the executives
3) Give the executives long term incentives
4) Don't reward the folks who caused the problem unless you also prevent the same abuses from recurring.

I would brek #4 into two items,
4) Don't reward the folks who caused the problem
5) prevent the same abuses from recurring

Also, could you elaborate on #1? What "criminal element?" Or do you mean no criminal punishments?

Oh, and I'd add that any bailout for buyers would be only for their homesteads; I don't think we need to bailout someone's vacation home in Aspen or investment property in Fort Lauderdale.

Jim
2008-Sep-30, 09:08 PM
If I had a say in the matter, I'd pick option C (better to do nothing) from your list. Bite the bullet and put up with a lot of pain for a time (perhaps years), change the regulations to prevent it from happening again, and let the market go where it needs to go.

Long term, that may be the best solution. However, you have a generation of Baby Boomers coming up on retirement and depending on their stock-based 401ks for survival. Most of them (us) did nothing to cause this crisis; asking them (us) to bear the majority of the pain/burden just seems unfair.

But, as noted, I'm prejudiced.


Edit: At this moment, the Dow is up 485 points. It could be that some people expect the "free money" bailout to go through this week, it could be people are snapping up what they consider to be bargains, or it could be that yesterday was an over-reaction. Regardless, it looks like the market has regained about 70% from yesterday's sell-off.

Lots of bargains as a result of an over-reaction, and a feeling that Unca Sam will eventually make things better.

jfribrg
2008-Sep-30, 09:50 PM
Also, could you elaborate on #1? What "criminal element?" Or do you mean no criminal punishments?

I guess my choice of words might have implied some kind of mob influence, but that is not what I meant. I was referring to the fraudulent mortgage appraisers who knowingly appraised properties for more than their true value. I was also referring to the loan officers who made fraudulent loan applications on behalf of non-creditworthy applicants who didn't know what they were getting into. I was also referring to the rating services who gave fraudulently high credit ratings to mortgage portfolios that they knew were extremely risky. I would be remiss if I didn't mention the former Fannie executives who cooked the books to make the company look better than it actually was. There are probably others, but these are the ones who caused the sub prime meltdown.

Regarding #4, I would love to avoid rewarding the people who caused the mess, but in all likelihood, in order to save the financial system, we probably can't avoid some of the culprits benefiting from the bailout. The only way to prevent anyone from benefitting from their misdeeds would be to do nothing, but that would end up hurting vast numbers of people who had no part in creating the mess. Sometimes you have to be pragmatic. I think that this may be one of those times.

Doodler
2008-Sep-30, 11:17 PM
What I canít figure is. How did some of the businesses justify running themselves on credit alone?
Example from CNBC tv yesterday. A car dealership calls and said without a short tem loan they wonít be able to make payroll this week. How can you run a business that way??? I would think after being in business for a certain period, there should be some cash reserves. At least for payroll.

As to the bad loans. I want retribution for my bailout money. Allow the institutions to choke for a portion of the cost. If they go belly up so be it. Then have the government loan money to the new bank that picks up the remains. They bought those investments without knowing exactly what they were getting. Thatís the way of the stock market. I didnít get a bailout on my bad stock choices.

I work in an industry where I typically won't see my money for a good 45-60 days after I submit a bill, despite the terms being 30 days. A bridge loan allows companies shafted by industries that have no problem pressuring subcontractors into hurrying to complete work, then waiting until you're on the phone with your lawyer before cutting a check.

That's one aspect where a line of credit (which I've applied for, and been denied) keeps companies afloat until the unmentionables in accounting quit tightfisting the money.

In terms of large item sales, there's typically a lag between cutting a deal and a bank/lender funding the sale, which is where they need the loan to make ends meet while they wait for the bean counters at the bank to come up with the money.

Basically, its advancing money ahead of an industry that sees paying on time as something optional at their end. Only the little people pay late fees. :mad:

TheHalcyonYear
2008-Oct-01, 01:33 AM
I think we just let em all fail!!

Ozzy
2008-Oct-01, 05:27 AM
Have the thousands of houses valued. Then the US government buys up the houses for the amount of the original loan (this will stop the market being flooded with houses and driving the prices down, and protect investors).
Sell the houses to the original owners at the true value if they can afford the repayments.
Sue/charge with fraud/seize the assets of the company directors, loan officers, valuers, bank managers,investmet advisors etc who financially benefited by pushing loans and investment bundles, to recover the difference between the loans and the true value.

Probably not feasible, but it has a ring of justice to it.

mugaliens
2008-Oct-01, 07:53 AM
It's reasonable for the government to simply offer loans, itself, at a reasonably competitive rate, providing people meet certain qualification standards.

This would do three things:

1. It would allow companies to compete, offering better rates for more highly qualified individuals.

2. It would allow companies to cover those who may not meet the government requirements.

3. It would provide a stabilizing point around which other companies would be forced (by market economics, rather than my government edict), to target their mortgage products.

Oh. Four things: It would save $800 Billion dollars of money being thrown out the window...

Two other things would help:

1. Halt all foreign investment in our real estate.

2. Reform mortgages to eliminate 100% of all hidden fees. APR and points - that's it. All other fees would be rolled up into either the APR value or the points, both of which are easy to compare to other APR/point values using a simple chart.

Salty
2008-Oct-01, 10:51 AM
Hi, Donnie B -

Sounds like you have a good idea. I'm not an economist, either. And, I think part of the $700billion is supposed to do just that.

However, I think the proposed bailout's just a band aid, until more socialism is blocked out of the American economy.

As long as our capitalist economy suffers contamination by more socialism, we'll have problems. Actually socialist incursions make capitalism look questionable. However, Freddy Mac and Fannie Mae failed twice and both stand as socialist ventures into our economy. Anytime government meddles in the free market, the resulting problems were caused by the government.

I've twice heard this proposal on talk radio: Take the $700billion and divide it by the number of American citizens 18yo and older. This comes to about $3million per person. We citizens could then spend and work our way out of this crisis. But, nobody pays attention to the electorate doing something we'd like to do, that's positive, it seems.:(

Donnie B.
2008-Oct-01, 11:38 AM
I think your math is off by a few orders of magnitude, Salty. I'm not sure of the exact population numbers, but assuming there are about 300 million Americans over age 18, it's under $2500 each.

That would be a nice economic stimulus check, but not exactly a windfall except for the poorest families.

As for your comments about socialism, I think we may be treading close to the politics line. I will just comment that there is no such thing as a purely capitalist country, and if there were I'm pretty sure I wouldn't want to live there.

NEOWatcher
2008-Oct-01, 12:12 PM
I think your math is off by a few orders of magnitude, Salty....
Think?
Actually, I heard that one on the radio yesterday. It's in some badly worded email that seems to take random ratios and numbers and make them sound reasonable. I would love to see it myself since it's obviously got a lot of holes in it.

The radio host spent about 10 minutes with the guy that called in with it. That guy was convinced it was right. Even when the radio host went through the calculation step by step, the caller said the host's calculator didn't have enough digits.

Doodler
2008-Oct-01, 12:18 PM
Hi, Donnie B -

Sounds like you have a good idea. I'm not an economist, either. And, I think part of the $700billion is supposed to do just that.

However, I think the proposed bailout's just a band aid, until more socialism is blocked out of the American economy.

As long as our capitalist economy suffers contamination by more socialism, we'll have problems. Actually socialist incursions make capitalism look questionable. However, Freddy Mac and Fannie Mae failed twice and both stand as socialist ventures into our economy. Anytime government meddles in the free market, the resulting problems were caused by the government.

I've twice heard this proposal on talk radio: Take the $700billion and divide it by the number of American citizens 18yo and older. This comes to about $3million per person. We citizens could then spend and work our way out of this crisis. But, nobody pays attention to the electorate doing something we'd like to do, that's positive, it seems.:(

Nothing particularly wrong with Freddy and Fannie, actually. They were originally held to pretty high standards of capitalization in order to avoid this kind of disaster. It was at the hands of Presidential pressure that they loosened the rules and got into the leveraging game.

Oh, and that President wasn't the current one, either.

Jim
2008-Oct-01, 12:54 PM
Have the thousands of houses valued. Then the US government buys up the houses for the amount of the original loan (this will stop the market being flooded with houses and driving the prices down, and protect investors).
Sell the houses to the original owners at the true value if they can afford the repayments.
Sue/charge with fraud/seize the assets of the company directors, loan officers, valuers, bank managers,investmet advisors etc who financially benefited by pushing loans and investment bundles, to recover the difference between the loans and the true value.

That actually sounds pretty good. Especially that last part.

I'd at least like to see some sort of sliding surcharge applied to Golden Parachutes. It could be based on how well your company performed during your tenure; if it's value increased, you'd keep most of the GP, but if it decreased, you'd pony up most of it.

Jim
2008-Oct-01, 01:25 PM
For discussion, here's an alternative proposal from the Institute for Regional Forecasting:

First we need to abandon all rules and pressures for banks to evaluate assets at mark-to-market fair value (and instead) evaluate illiquid assets as an estimate of their present discounted value to maturity... This would reduce to some degree the size of the “bailout” and remove the irrational practice of forcing institutions to evaluate assets that have become illiquid in a panic at the lowest of fire sale prices. ...

... banks should then be required to provide additional capitalization ... by borrowing or by selling stock in the market place. ... the Federal Government should commit to act as a “buyer of last resort” ... create a government owned holding company that would own the stocks and participate in bank governance. The stock purchases would come with a buy-back guarantee ... at a price equal to the government purchase price plus 10% annual interest. ...

... establish reasonable, but not excessive, rules for lending that make the quality of loans and their repackaging transparent and all asset packages easy to evaluate. ...

... the FED make a rather bold one time move by increasing the reserve requirements for all banks within the FED’s control while simultaneously providing ample liquidity in the banking system to mitigate its consequences. ...

Policy reform shouldn’t hold financial institutions accountable without also holding home buyers accountable for their actions as well. ...

http://www.uh.edu/irf/Commentary17.htm

It makes sense. Comments?

apolloman
2008-Oct-01, 01:29 PM
Has anybody thought that all these crisis' might just be another aspect of the global economic power-shifting that has been going on for the past 10-15 years ?
We in the West are on the way down, the East is rising.
As we go down, those issues (political, economical etc) that were swept under the carpet for years will come up and bad capitalism (or bad business ethics) is just one of them.
Look 15-20 years into the future and these times will be seen as the beginning of the end for wealthy Western societies. I hope not but thats my gut feeling.

Until a few years ago, I think most free-market capitalists would have found the very idea of a 700 Billion dollar package impossible to accept: it would have been against their beliefs. I'm not sure very many see it that way today.

On a final note, can we be sure just how bad this crisis is ? Is there any institution that can give us the reality of the situation ? I mean, is there really a fundemental problem or is somebody set to gain out of the mayhem ?

All western socities need to start NOW investing heavily into technological R & D, across all industries, space related and not. Lets triple or quadruple ESA, NASA's budgets and pile cash into the private sector.
China is already the factory of the world - if it becomes the laboratory of the world as well (Shenzhou 7 is a good example of things to come- in the very near future), we've had it.

NEOWatcher
2008-Oct-01, 01:32 PM
That actually sounds pretty good...
I would agree, but it sounds like a beaurocratic nightmare.

...It could be based on how well your company performed during your tenure...
Unfortunately, some of those situations are time delayed, and the one who pushed the value of the company is the one who put the company in that situation. In other words, is the same person who delayed the effect, the same person that got hit with the delay.

worzel
2008-Oct-01, 01:57 PM
I've twice heard this proposal on talk radio: Take the $700billion and divide it by the number of American citizens 18yo and older. This comes to about $3million per person.
More like $3 thousand, isn't it?


We citizens could then spend and work our way out of this crisis. But, nobody pays attention to the electorate doing something we'd like to do, that's positive, it seems.:(
Hey, what a great idea, make every one a millionaire then no one has to work any more. That'll boost GDP!

Neverfly
2008-Oct-01, 02:07 PM
Hey, what a great idea, make every one a millionaire then no one has to work any more. That'll boost GDP!

Uhhh...:neutral:

I AGREE! Let's do THAT!

worzel
2008-Oct-01, 02:08 PM
We in the West are on the way down, the East is rising.
As we go down, those issues (political, economical etc) that were swept under the carpet for years will come up and bad capitalism (or bad business ethics) is just one of them.
Look 15-20 years into the future and these times will be seen as the beginning of the end for wealthy Western societies. I hope not but thats my gut feeling.
I suspect that depends on whether the West's wealth is largely based on technology per se or on merely being ahead of the rest of the world. I've always suspected that technology itself was the ultimate cause of wealth, so I don't worry too much about the rest of the world catching up.


China is already the factory of the world - if it becomes the laboratory of the world as well (Shenzhou 7 is a good example of things to come- in the very near future), we've had it.
If/when China equalizes with America economically then it'll become cheaper to manufacture goods for American consumption in America, wouldn't it?

Ronald Brak
2008-Oct-01, 02:18 PM
The United States has greatly benefited from scientific advances that were made in Japan. I see no reason why the US wouldn't benefit from scientific advances made in China.

apolloman
2008-Oct-01, 02:52 PM
IMO, its cutting-edge technical know-how that creates wealth and being at the very forefront of technological advances as well. The overall prosperity of a country surely depends greatly on these points.
IMO, the reason the West has been growing since the end of WWII is because we were at the front of the line exporting our know-how and technology to the rest of the world (and to ourselves as well), while reaping the benfits and investing in the next new thing.
Its not about being caught up or having the same technology as the next guy but about being able to produce new technology that the next guy wants.
The day China will invest more money in new R&D than the US will be a bad one.

Theres no doubt that benefits are to be gained from other country's advances but in the long run if most of these advances are coming from the same country then thats where the greatest benefit will lie.

HenrikOlsen
2008-Oct-01, 03:15 PM
I suspect that depends on whether the West's wealth is largely based on technology per se or on merely being ahead of the rest of the world.
A large part was caused by the outright military backed theft of resources during the colonial times which was replaced by import of military backed cheap resources.
The current adjustments in such things as the oil price is partially because we're starting to have to pay the real price these resources are actually worth.

tdvance
2008-Oct-01, 03:40 PM
The United States has greatly benefited from scientific advances that were made in Japan. I see no reason why the US wouldn't benefit from scientific advances made in China.

I agree--the only time another country's rise would hurt the US would be if they took their money and used it to bomb the US or something. In the global marketplace, a rising tide does lift all boats. The opposite is true as well--Asian markets were hit hard the past week as well--the markets are interconnected.

worzel
2008-Oct-01, 04:28 PM
Theres no doubt that benefits are to be gained from other country's advances but in the long run if most of these advances are coming from the same country then thats where the greatest benefit will lie.
True, but would we actually be worse off just because we were over taken? Being poor today in England is positive luxury compared to being poor here 200 years ago (or even relatively well off 200 years ago), despite England's diminishing global standing since.

Ozzy
2008-Oct-01, 10:53 PM
Part of the problem is that US prosperity is consumption based, rather than production based.

Although you cannot compete with Asian manufacturers on price, you can on quality. You have the capacity to revamp your manufacturing with a focus on "green" principles.

Discerning purchasers would select US products because they are the best (i.e. manufactured in the most environmenally friendly way).

Then regulate your banks and lending institutions. You dont break a good horse's spirit by putting a harness on it. you are just make sure it heads in the right direction, and doesnt run itself off a cliff (taking the wagon with it!)

Yee Haaa!

Salty
2008-Oct-03, 02:51 AM
Hi, Donnie B, NEOWatcher and worzel:

Thanks for bringing that to my attention; I didn't check the math myself, and I should have. Actually, the proposal was give to 18yo and older, which brings the population figure down to where each recipient receives about $3K.

Hi, Jim

The proposal you give could have merit. I don't know enough to correctly assess its value. I would like to present a quote from my email, a letter from my congressman, Rep. Burgess, as his alternative:

"As a consequence, I offered an alternative measure. According to the Department of Treasury, there are two problems that need to be addressed: the short term liquidity emergency, and the long-term toxic mortgage asset holdings. To address the liquidity emergency, my plan would reduce all personal and corporate capital gains taxes to zero percent for one year, reduce the Federal Funds Rate (FFR) to zero percent for one month with a reoccurring month to month option, and allow the Department of Treasury to loan current funds to lending institutions at the rate of inflation plus three percent or LIBOR plus three percent. This plan would get the markets moving and allow Congress adequate time to address the mortgage assets situation while we investigate those corporations or government regulators who may be criminally negligent. "


My main point in recognizing your alternative and in presenting my Congressman's alternative, is to show that, unlike last week, that this week there are viable alternatives, to bring to the table.

I'm rather vexed by the out of order parlimantery procedures: nothing has gone through committee and our Constitution does not allow the Senate, but requires that funding originate in the House. I think that a committee should review Sec. Paulson's, yours, Rep. Burgess' and the alternative which other Congresspeopl have come up with, by this week. Until that happens, the house should shoot down any proposal.

Now, I know what to write to my Congresspeople. Thanks for letting me work it out, on this thread.

Ronald Brak
2008-Oct-03, 03:54 AM
Here is an interview with an economist (a real economist, not someone on TV who calls themselves and economist and tells you what stocks to buy) on the financial disaster:

http://delong.typepad.com/sdj/2008/10/the-mercury-new.html

The beginning of the interview:


Q: What's the most important thing an ordinary person needs to know about the bailout plan Congress was considering this week?

A: It is not supposed to be a bailout plan. The idea is to make sure that the shareholders of banks and institutions that made stupid and unwise loans suffer enormously in terms of losses of wealth while still preserving the flow of funds through the financial sector to the real economy so that companies can create jobs.

Q: So they will suffer?

A: The CEO of Bear Stearns lost 95 percent of his personal portfolio in the forced merger of last March.

Q: What do you think of this plan? Is it what needs to be done?

A: I think the Paulson-Dodd-Frank plan as it is emerging is much, much less effective than it could be. But it is still much better than doing nothing, which is kind of like being poked in the eye with a sharp stick.

Q: Are there still things the government could do that would be more effective?

A: Yes, I think something like the Swedish Plan — by which the government invests in the major banks of New York and elsewhere and essentially takes them over and runs them for a few years, and then when they become profitable again sells off its stake to private investors — would be much more effective and a much better use of the public's money. Indeed, that's why the Swedes did it when they faced a similar crisis back in 1992.

Larry Jacks
2008-Oct-03, 12:30 PM
Q: Are there still things the government could do that would be more effective?

A: Yes, I think something like the Swedish Plan — by which the government invests in the major banks of New York and elsewhere and essentially takes them over and runs them for a few years, and then when they become profitable again sells off its stake to private investors — would be much more effective and a much better use of the public's money. Indeed, that's why the Swedes did it when they faced a similar crisis back in 1992.

That would be based on the assumption that the government could do a good job managing the banks. Given how well the government manages its budget, I find at assumption shaky at best.

worzel
2008-Oct-03, 01:39 PM
Hi, Donnie B, NEOWatcher and worzel:

Thanks for bringing that to my attention; I didn't check the math myself, and I should have. Actually, the proposal was give to 18yo and older, which brings the population figure down to where each recipient receives about $3K.
It can't be a serious proposal, though, cat it? Tax everyone and then give it back to them, what's the point? And the $700 billion in question is the amount to be underwritten, not an amount of cash they're actually going to have to raise.

tdvance
2008-Oct-03, 06:16 PM
Q: Are there still things the government could do that would be more effective?

A: Yes, I think something like the Swedish Plan ó by which the government invests in the major banks of New York and elsewhere and essentially takes them over and runs them for a few years, and then when they become profitable again sells off its stake to private investors ó would be much more effective and a much better use of the public's money. Indeed, that's why the Swedes did it when they faced a similar crisis back in 1992.

That would be based on the assumption that the government could do a good job managing the banks. Given how well the government manages its budget, I find at assumption shaky at best.

and scary too--you know how "temporary" programs have this bad habit of becoming permanent.

HenrikOlsen
2008-Oct-03, 11:38 PM
Just remember that the Swedes, with supposedly much more socialist tendencies than the Americans, actually did sell the banks back, which recouped most if not all of the money invested in the plan resulting in almost no cost to the taxpayers.

Ronald Brak
2008-Oct-04, 03:55 AM
That would be based on the assumption that the government could do a good job managing the banks. Given how well the government manages its budget, I find at assumption shaky at best.

The, "We're too incompetent!" arguement applies to anything the government might do, so the question is, would nationalization by incompetents better or worse than any other solution performed by incompetents? But looking on the brighter side, the US budget has been more or less sensible about 70% of the time since World War II, so the US government may not be quite as incompetent as many think.

Warren Platts
2008-Oct-04, 04:11 AM
You can always trust the Americans to do the right thing--after all other options are exhausted! ;)

TheHalcyonYear
2008-Oct-04, 07:27 AM
The, "We're too incompetent!" arguement applies to anything the government might do, so the question is, would nationalization by incompetents better or worse than any other solution performed by incompetents? But looking on the brighter side, the US budget has been more or less sensible about 70% of the time since World War II, so the US government may not be quite as incompetent as many think.
Well glad to see that this discussion hasn't turned political. I make such statements and I risk getting banned.

Ronald Brak
2008-Oct-04, 08:33 AM
I think the trick is to not mention any US policital groups or politicians, such as Bushton or Obamacain, by name and to try to stick to economics. And incompetance (or quality of governance if you prefer) is an economic issue.

Back to the issue at hand, the US government could try the New South Wales solution. This was when the Australian state of New South Wales bypassed the banking system alltogether during the great depression so it wouldn't have to pay money it owed Britain for the privilage of sending soliders to fight in world war one. All tax money was collected by hand and transported to Sydney by train and stuffed in the celler of the treasury building. When the New South Wales government finally gave up and went back to using banks and the money stuffed in the treasury building celler was counted, it was found that all the money was there, I think to within a few shillings. It is interesting to note that this was during a time of widespread poverty and unemployment and that Australian ultra-nationist and facist groups had thousand strong private armies, so having the treasury stormed was always a possibility.

tdvance
2008-Oct-04, 03:29 PM
The, "We're too incompetent!" arguement applies to anything the government might do, so the question is, would nationalization by incompetents better or worse than any other solution performed by incompetents? But looking on the brighter side, the US budget has been more or less sensible about 70% of the time since World War II, so the US government may not be quite as incompetent as many think.

Well, the government can be both. It's that, for things that aren't inherently collective like national defense, a smaller, more local, less thickly bureaucratic solution is usually better--that usually means let the business make the business decisions, within the usual bounds of playing nicely together. Competition is a good thing--a government is by its nature a monopoly, at best a necessary one, at worst, an intolerable one (sorry TJ!).

TheHalcyonYear
2008-Oct-05, 01:00 AM
I think the trick is to not mention any US policital groups or politicians, such as Bushton or Obamacain, by name and to try to stick to economics. And incompetance (or quality of governance if you prefer) is an economic issue.

Nope... mine defined communism, as an economic system, and made a comment about how our government used the term incorrectly during the cold war and I was warned.

tdvance
2008-Oct-05, 08:08 PM
Nope... mine defined communism, as an economic system, and made a comment about how our government used the term incorrectly during the cold war and I was warned.

This subject probably belongs on "About Baut" instead of this thread, which is about the bailout and alternative(s).

ASEI
2008-Oct-05, 09:16 PM
No one forced the mortgage companies to make those high risk loans; they chose to do so because (1) the economy was good and looked like it would continue to be so, and (2) they could make lots of money from those loans. I was under the impression that the fair housing laws did force those banks to make stupid loans. Since no one is talking about fixing those (it would be cruuuueel, sob!), the problem will recurr periodically until it sinks our banking system.

HenrikOlsen
2008-Oct-05, 09:26 PM
Nope... mine defined communism, as an economic system, and made a comment about how our government used the term incorrectly during the cold war and I was warned.
There's no explicit, carved in obsidian, clear-cut, rule of whatever digit you might want for when a post crosses the line.
What there is, is a dislike for threads that gets so heated that people stop thinking before they post and break the rules badly.
This means that it is hypothetically possible to post the exact same thing in two different threads and get warned in only one of them, if it looks likely to induce a flamewar in one thread, but the other thread has a calmer tone.

Van Rijn
2008-Oct-05, 10:46 PM
Nope... mine defined communism, as an economic system, and made a comment about how our government used the term incorrectly during the cold war and I was warned.

It sounds like you're talking about a certain post in Q&A. Here's what it looked like from my point of view: You started with a complaint about someone else making a political comment, which was a fair comment that I agreed with, but then you responded with political statements yourself. I found those statements to be highly questionable (one also seemed insulting), and I was tempted to point out problems, but that would have been rather obviously against the board rules. Someone else later did point out a problem with one of them, and that received an in-thread comment by a moderator. And remember, this was all in Q&A, which is much more focused on space and astronomy questions and answers than the more free-flowing discussions in OTB.

TheHalcyonYear
2008-Oct-06, 02:50 AM
It sounds like you're talking about a certain post in Q&A. Here's what it looked like from my point of view: You started with a complaint about someone else making a political comment, which was a fair comment that I agreed with, but then you responded with political statements yourself. I found those statements to be highly questionable (one also seemed insulting), and I was tempted to point out problems, but that would have been rather obviously against the board rules. Someone else later did point out a problem with one of them, and that received an in-thread comment by a moderator. And remember, this was all in Q&A, which is much more focused on space and astronomy questions and answers than the more free-flowing discussions in OTB.
This is the problem with making posts like that to an audience that doesn't understand a lot of economics. My points were economic in nature with references to back each one up, but I didn't post the references for fear of being accused of hijacking the thread. As for insulting political comments, I made only one which was more nuanced and far less harsh than those Ronald Brak made in this thread.

And now I intend to back out of this discussion because between this thread and another one on this board I think I have used up any and all good will that the mods may have ever had toward me.

Van Rijn
2008-Oct-06, 02:57 AM
This is the problem with making posts like that to an audience that doesn't understand a lot of economics. My points were economic in nature with references to back each one up, but I didn't post the references for fear of being accused of hijacking the thread.


If you want, I can explain by PM why I considered your statements to be political and wrong. I am familiar with the relevant subjects, political and economic.

EricM407
2008-Oct-07, 01:37 PM
I was under the impression that the fair housing laws did force those banks to make stupid loans.

That's an impression that some would like you to have. I can't recall any time in the history of the world where a government had to force a company to make tons of money though.

HenrikOlsen
2008-Oct-07, 02:17 PM
I was under the impression that the fair housing laws did force those banks to make stupid loans.
What they did was prevent the banks from drawing big red circles on the map of the city and way anyone within these areas are automatically disqualified from getting loans.

If was the perceived ability to offload the risk to others *cough*F&F*cough* that made it profitable to make stupid loans, which "forced" them to do so.

Jim
2008-Oct-07, 03:34 PM
What they did was prevent the banks from drawing big red circles on the map of the city and way anyone within these areas are automatically disqualified from getting loans.

This is the Community Reinvestment Act of 1977 (http://en.wikipedia.org/wiki/Community_Reinvestment_Act). It prohibited the longstanding redlining of entire communities and required "the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation." (Note the emphasis.)

The large majority of the subprime loans were made by institutions that did not fall under the CRA.


It was the perceived ability to offload the risk to others *cough*F&F*cough* that made it profitable to make stupid loans, which "forced" them to do so.

And this came about because of changes made in 2003/4 (I think) which allowed F&F to meet their goals by buying subprime mortgage-backed securities. Which, of course, made them more attractive to lenders.

Click Ticker
2008-Oct-07, 04:19 PM
And this came about because of changes made in 2003/4 (I think) which allowed F&F to meet their goals by buying subprime mortgage-backed securities. Which, of course, made them more attractive to lenders.


It started in 1995, was expanded in 1999, disallowed in 2000, re-allowed in 2004.


In 1995, Fannie Mae began receiving affordable housing credit for buying subprime securities. In 1999, the Clinton administration and Fannie Mae shareholders encouraged the lender to increase the number of mortgage loans offered to those of low and moderate income, both to improve rates of home ownership among those groups and to increase profits.[7]

In 2000, due to a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.[8]

http://en.wikipedia.org/wiki/Federal_National_Mortgage_Association