Why Bail? The Banks Have a Gun Pointed at Their Head and Are Threatening to Pull the Trigger
If you have a real story, you don't have to make up phony stories. That's pretty straightforward.
I've heard lots of phony stories. Much of the country's political and economic leadership has been running around raising the prospect of the Great Depression and a breakdown in the banking system (I actually had taken the latter seriously). These stories are absolutely not true.
There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression. There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.
At this point I cannot identify a single good reason to do the bailout.
The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can't trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.
That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis.
In other words, the worst case scenario is that we have an extremely scary day in which the markets freeze for a few hours. Then the Fed steps in and takes over the major banks. The system of payments continues to operate exactly as before, but the bank executives are out of their jobs and the bank shareholders have likely lost most of their money. In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion.
If we are not worried about this worst case scenario (to be clear, I wouldn't want to see it), then why should we do the bailout?
There has been a mountain of scare stories and misinformation circulated to push the bailout. Yes, banks have tightened credit. Yes, we are in a recession. But the problem is not a freeze up of the banking system. The problem is the collapse of an $8 trillion housing bubble. (It was remarkable how many so-called experts somehow could not see the housing bubble as it grew to ever more dangerous levels. It is even more remarkable that many of these experts still don't recognize the bubble even as its collapse sinks the economy and the financial system.) The decline in housing prices to date has already cost the economy $4 trillion to $5 trillion in housing equity. This would be expected to lead to a decline in annual consumption on the order of $160 billion to $300 billion.
Given the loss of housing equity, I have actually been surprised that the downturn has not been sharper. Homeowners had been consuming based on their home equity. Much of that equity has now disappeared with the collapse of the bubble. We would expect that their consumption would fall. We also would expect that banks would be reluctant to lend to people who no longer have any collateral.
This is the story of the downturn and of course the bailout does almost nothing to counter this drop in demand. At best, it will make capital available to some marginal lenders who would not otherwise receive loans. We should demand more for $700 billion.
For the record, the restrictions on executive pay and the commitment to give the taxpayers equity in banks in exchange for buying bad assets are jokes. These provisions are sops to provide cover. There are now written in ways to be binding. (And Congress knows how to write binding rules.)
Finally, the bailout absolutely can make things worse. We are going to be in a serious recession because of the collapse of the housing bubble. We will need effective stimulus measures to boost the economy and keep the recession from getting worse.
However, the $700 billion outlay on the bailout is likely to be used as an argument against effective stimulus. We have already seen voices like the Washington Post and the Wall Street funded Peterson Foundation arguing that the government will have to make serious cutbacks because of the bailout.
While their argument is wrong, these are powerful voices in national debates. If the bailout proves to be an obstacle to effective stimulus in future months and years, then the bailout could lead to exactly the sort of prolonged economic downturn that its proponents claim it is intended to prevent.
In short, the bailout rewards some of the richest people in the country for their incompetence. It provides little obvious economic benefit and could lead to long-term harm. That looks like a pretty bad deal.
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Now everyone has a comment about the banking industry! The Banks have been putting the squeeze on Main St people with those ridiculous fees, make a math error and pay out your ass for it with no mercy $36-$40 NSF fees. Duh, the banks were trying to pay for that bad debt off your pay check to pay check lifestyle. The outcry should have begun then.
No one said a thing about the Credit Bureaus! Equifax, TransUnion, and Experian have no accurate information and they could care less. Id Theft is created & allowed by the Banks and the Credit Bureaus, just so Banks can charge-off bad debt like the Chinese eat rice and no one says anything to their Congressmen. Call the Federal Trade Commission and get the run around "Who Cares?" As a former Fraud Investigator for a Credit Lending Bank, I saw the creation of debt, collection, and charge-off all maneuvered by the Risk Department. Debt is an asset used to create capital for a corporation. Ronald Reagan approved increased corporate debt leverage, the corporations went borrow crazy and accountants/CPA’s justified the game for the IRS.
Remember the Merger Acquisition days of the 80’s? WARNING!!!! A corporation failing is consumed by another corporation and then the consuming corp. submits an amended tax return 1120x to the charge-back and carry-forward department. Thereby, claiming the losses of the consumed back 6 yrs forward 15 yrs, the IRS processes refunds for the losses!
AS THEY DESTROY PEOPLE'S LIVES , CREDIT, & HEALTH.
Does anyone remember the late 1970's? The 80's? Because I do. I remember high inflation and high fuel costs and a lot of people saying we needed to break our dependency on foreign oil before it became an issue of national security. We heard a lot of bad news we didn't want to hear, regardless of the truth. So we voted out the bearers of bad news (truth) and brought in the Morning in America crowd. They lied to us right and left - they told us stories about rising tides and boats. After campaigning on the issue of balancing the budget, that guy gave us the largest deficits in history, at the time.
Americans can't handle bad news and they don't question good lies. They are still selling us the trickle down theory of economics, despite ample evidence - hard, numerical, factual evidence - to the contrary. Back in the 80's, economists said we would not be able to maintain our standard of living unless we did something about the deficit, or more specifically the national debt. We didn't listen. Now we will live it.
Last night global stock markets had already begun to fall a lot. The NYSE began down some 400 points (carry over from other global exchanges). The "controls" and no short sales doesn't happen at the futures exchanges. In 2004 I wrote to Mr. Donaldson (SEC), Mr. Mudd (Fannie Mae), and Mr. Syron (Freddie Mac) telling them there was fraud being traded and in the mortgages. No response. In 2008 I wrote to Mr. Mudd and Mr. Syron and explained a solution to the problem. Again, no response.
The problem is that people can not make the mortgage payment (principal, interest, and real estate taxes). People want to live in their homes.
Solution, refinance all mortgages into one product a 2% interest rate, 30 year fixed rate mortgage. Combine the 1st, 2nd, and the 3rd. Primary residence only. Offer to new purchases also. The property wouldn't be able to be sold until values rise and the new mortgage balance declines. The file documentation would still be an appraisal, the credit report, income, employment, and assets. The people are in the house so at some point they made the payments. This has been done successfully for many years. This standardizes mortgages that Treasury is backing and sold. The insurance that has been tossed around has no value - the mortgages are backed by the government. There is no need for any more funds, the treasury has access to FHA, FNMA, and Freddie. The warehousing lines are already there. The bailout dehumanizes all
Fascinating academic theorizing.....
Reality though is very different than theory and reality here bites and hurts those who have the least.
That means jobs. If money isn't moving, assets are not worth much and will keep tumbling until they find cash value (that's how Citi picked up a premier asset worth 400 billion and only paid 2.1 billion last night), jobs disappear and aggregate, and housing prices continue to fall because they have no value and even if sold can not be mortgaged. It is a vicious cycle.
How many of you want to volunteer to loose your job while the academic do-nothing-because-I'm-bitter plan takes hold and chokes off this economy?
Seriously, get over the blame game. Academic economic quantitative models share a hunk of blame in the risk-taking of the last 8 years.
Hopefully the scorned (how sad) republicans lost some of their retirement savings today as the market came crashing down. False outrage abounds.
Sounds like you are one of the relatively few (when you consider the country as a whole) who has lost money in the market recently. Me too. My portfolio is down 60% over all. I refuse to whine about it in the face of this possibly cataclysmic decision to hand over what amounts to th rest of what our country is worth in cash to the people who have already raped us for everything we are worth.
Do you think Bush came up with this on his own? Don't be a fool, again. Don't be fooled again. BushCo has never and will never have our best interests at heart. Why Obama insists on backing this bill I am not sure. I pray he is man enough to stand up to a stance that may have been in haste. Something tells me their are powerful foreign interests threatening to pull their money out of the market if we don't pay them back for the bad mortgage securities they were fool enough to buy into. Screw them.
AS with the Enron collaps. Most losses in 401K's are paper losses. Yes I lost a bunch but when I look at actual dollars invested I can still take 10% loss and break even. There is Banker B.S. in all of us.,
"Do I think Bush came up with this on his own? " Heavens to Mergatroids, no! Bush hates this plan with every ounce of his being. He's been warned by Paulson and Bernake for years. No, as Bush and his dereg-happy legislators were driving the bus wrecklessly toward a cliff, Bernanke and Paulson came together to grab the steering wheel and smack Bush to the floor. I have to respect these guys. Too bad that Colin Powell and Condi Rice and others did not do as much when Bush, McCain and Cheney were careening toward Iraq.
As for Obama... Listen to what Obama asked in the meeting with the pres, et al... gather some insight into Obama's daily contacts with Paulson and Bernanke. Obama has successfully avoided politicizing this bill and has grappled with the severity of what is going on right now.
Foreigners have been taking their money out of American banks at such a rapid pace over the last week, it is frightening. And who can blame them when this matter has become a populist bucket of rhetoric. Bail out? Give me a break look at the RTC -
I hear people say let the banks fail, the FDIC will come in and pick up the pieces. Well, that will end up costing the American taxpayer way more than having the government hold these distressed assets and sell them off during a recovery period. This isn't a bail out for anyone, it is a bridge.
Hey Man, the line about a gun to its head or else, tells me you know more than me.
This link is what I am about.
http://www.justpeace.org/mondragon.htm
If you have yet to hear about this Cooperative, we are behind the times.
The Workers own the Banks in this Coop. Not much different than Farmers or a credit Union.
Since we are going to own the Banks, why can't that 2% on ever debit or credit card go right to the Fed, care of US?
You know, the Republicans have been trying to sell us their "trickle down" theory for years. If we give corporations tax incentives, if we deregulate, if we roll over and give them carte blanche to do as they please, it will encourage economic growth and create job oportunities for all Americans. So what did the greedy corporate pigs do? They accepted our gifts, without so much as a thank you or a go to hell, and proceeded to lay off American workers, while sending their operations overseas or south of the border. The money they saved? Paid for that nice little vacation to the Greek Islands and a lovely bonus package.
So now, they want us to believe that after we bail out Wall Street and these "poor" banks ... once again, the resulting financial relief will "trickle down" to the Americans on Main Street USA, whose jobs will somehow be more secure. The banks will be able to go on loaning money (more cautiously this time of COURSE!), and life will go on as before...
We should start a relief fund... we'll call it "Save a Banker" with its sister fund called "Save a Broker". We could show a CEO in last year's suit, driving last year's Lexus, looking pathetic as he is forced to accept a scaled back bonus package. Now he must sail the Greek Islands in a leased catamaran or yacht. Thankfully, things aren't so bad that he's had to sell his vacation home in Thessoloniki.
When I first heard of the trickle down theory I wondered about cause and effect.
Was this a really viable study, or just another bureaucrat trick.
Now that I old , yep I'm darned near Dead.
I find what actually trickled down came directly on my Head!!
Truth be known, conservatives who actually live lives of self-reliance have my sincerest respect. They are among the 136 GOP reps who gave thumbs down to the Bush-Paulson rescue plan. They include an Arizona congressman, Jeff Flake, who, as a member of the LDS Church, could teach George W. a thing or two about nest-egg building.
The Big Boys of Wall Street know that the market will rebound, but hey, if Liberals can tap the taxpayers for their pet projects, the Suits figure its Us Too Time. Here' where we the people make things right:
1. No bailout, period. You made your bed; have a nice snooze.
2. The world markets sit down and start thinking, SERIOUSLY, about a universal common currency.
Dollars, Euros, Rubles, Bolivarian Pesos, whatever; the fact is, no one nation can control all markets, nor can one corporate entity. A common universal currency will ensure the orderly flow of capital worldwide, 24/7, without the need for cost-ineffective nationalist regulation
3. We get over the mindset that finances are only interesting when the dough is rolling in. Financial education, like charity, conservation and moral rectitude, begins at home. My father taught me to know where every dime I made came from and where it was heading;-preferably where it would do some good. Schools and social groups need to augment the earnest efforts of millions of parents in this vein, not promote recklessness.
ONE WORLD GOVERNMENT!!! Control the money you control the world!! Sorry Pal NO DEAL!!!
This debacle is the fault of the Republican Party's obsession to use the free market in every instance from healthcare to the occupation of Iraq's reliance on private contractors, from the attempt to privatize Social Security to allow pharmaceutical companies to dictate the provisions of Medicare Part D
This problem was caused by an unregulated free-wheeling corrupt market based on the greed of Wall Street insiders. I am in favor of the bailout, but my solution would not have penalized the taxpayers but would have nationalized the slop criminal profiteers spilled on Main Street. It cannot be corrected using free market principles which, by the way, is an oxymoron.
Love to read the propraganda distributed for those unable or unwilling to research and understand the truth.
Mr. Baker this is a good article! Today, we have seen the most courageous,
Bi-Partisan congressional work! Today, we saw Democrats and Republicans join together to say: Enough bovine-biomass from the standard party lines.
We told the Banker NO DEAL! We the American citizen must choose again! We must take another chance that the Bankers are blowing smoke up our britches.
Conservative Demcorats and Republicans stood tall and said no! No to spending money without oversight without authority. No, to a package that has no guarantee that the tax payer will make a profit. No, to partisan "he said-she said" petty posturing! No Deal! Final Answer.
The neo-con liberals and the neo-con conservative all showed their true colors. The camp today is easy to distinguished between patriots and politicans. Conservative methods, taxpayer protections, fiscal prudence, and clarity with authority! Otherwise, your dollar will have no value at all!
The Community Reinvestment Act was meant to redress red-lining and discrimination in banking. Subprime loans, and no income loans are sheer idiocy. I think it should be voted down so that $700 B can be invested better and wiser in the next administration.
I agree that this bailout is a bad idea. Poorly run companies or companies that take bad risks need to be allowed to fail for capitalism to work. You morons that want to blame everything on Bush need to get your heads out and read the historic record. Every administration since Carter is to blame for this, enought to go around. It started with the Community Reinvestment Act 1977, intended to give people affordable housing and went on steriods during the Clinton administration, when lenders were told that Freddie and Fannie would back these subprime and no-no loans. Greenspan, Bush, and Barney Frank pushed them like crack dealers on the playground. Government meddling caused this. No mortgage company would have sold these loans and no investment bank would have bought them, had they not been assurred by our government that is was 'aight'! Get government out of business!!
I agree except that I'd go back to the Nixon Aministration when Nixon took the dollar off the gold standard. That's when the Fed started to attempt to regulate the market through interest rate increases and decreases to increase or decrease cost of borrowing. And, began to attempt to further regulate liquidity in the money supply by printing dollars or withholding dollars as needed. At the end of the day, the dollar became an arbitrary measure of value at this point in our history. And, "regulatory" measures like these could happen. I'm not necessarily an advocate of the gold standard. But, I do believe that attempting to regulate the market through interest rate increases or decreases, and money supply increases and decreases is like trying to drive a car from the trunk..............
Sorry Pal It wasn't Nixon! It happened back in the 50's they just didn't call alll the old money Silver Certificats untill the late sixtys. I know I got some old one's I held on to. and I quit holding US Dollars in 1964.
Extortion is all this is. If we don't get bailed out, look what will happen.......
There has never been a request from George Bush that did not include the choice of " terror is behind that door " or we are faced with utter calamity if we don't heed his advice and give him what he wants. And, without oversight or transparency or responsibility. Thats why we are in trouble. No accountability by George or his cronies.
I still don't understand the rush. Money is there to cover a few billion for a short term loan to keep businesses running and money for clean loans. Rushing headlong into a 700 hundred billion
dollar without safeguards is another Iraq scam. Who took over all the foreclosed properties ? Who is collecting the mortgages income from the late paying owners ? Are the closed banks paying out
millions to execs as special perks for being ousted ? There is much hidden behind the scenes .
Ok Dean, looks like we'll get to see your theory put to the test. After the bill failed to pass, the Dow dropped almost 800 points ( the largest single-day drop ever) and I predict it is just the beginning. Then, we'll have runs on banks, good and bad as the ignorant public makes no distinction, and they will collapse due to the lack of liquidity. So, in short order we will have severe credit restrictions, followed by disintermediation (deposit outflows) of mammoth proportion and no central bank is prepared for that scenario. And we'll all be dusting off the history books to see how the "free market" policies of the Hoover administration are being repeated right here, right now. Credit between banks are already at extremely high rates, and will continue to climb. This will impact everyone of us in some form or fashion, very, very soon!
There is an easy way to inject liquidity into the system without giving tons of money to people who already have tons of money. Take that $700 billion and create a massive public works project that creates jobs and injects cash into the system from the bottom. Then there wouldn't be a run on banks and the system of payments wouldn't freeze up. In addition, people with a new influx of income wouldn't continue defaulting on their mortgages. This money would still find its way to the top, but it would help the people who need it most along the way. This bailout is a giveaway and is utterly ridiculous.
Wrong on largest single day. corrected for inflation it doesn't compare.
Again: Adjusted for Inflation over approx 30 years It does't compare.
First, I think it's significant that Mr. Baker is assuming the Fed has some contingency for his worst case scenario. The yahoos in this administration haven't developed contingencies for the rest of their failures; why should we trust they will now? The bailout is certainly not an optimum solution and I agree protections for taxpayers and homeowners as well as caps on executive compensation should be codified in the strongest terms. However, it seems to me there are a lot of folks in Congress as well as in the conservative media who are willing to fall on the saber of their ideology and risk taking the rest of us with them. Not only do I fear a breakdown in our system of payments--or an extended bank holiday--I fear the inevitable consolidation of our financial sector if the "free market" is left to its own devices. JP Morgan Chase bought Bear Stearns and WaMu, BofA bought Merrill Lynch and now Citigroup is buying Wachovia, all at fire sale prices. I'd like to continue having the choice of more than two or three banks with to do business.
Two or three would sufice. We are headed to a single world currency value. More devaluation of the Dollar.
It is a little strange to me that the American people will spend TRILLIONS of dollars on the occupation in Iraq, but are unwilling to spend $700 Billion to SAVE the US economy from chaos and ruin.
That said, I totally empathize with the NO BAILOUT crowd. And don't disagree with the issues they raise. Fact is, just because they are LIARS and CROOKS doesn't mean they didn't break the economy so badly, we have to fix it.
In this case, I think doing nothing is actually worse than doing something.
The same people that demanded an invasion of Iraq are demanding an immediate solution to a problem they haven't proven exists.
A New Deal to rebuild the roads, fix the schools, even reviving things like the Federal Theater Project would put money into the economy.
This scam is a transfer of wealth to the wealthy.
you forgot the word MORE in front of transfer!!!
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