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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Thank you for the article. You have been the oly person speaking out about the bail out that has made it plain and placed it on the lower shelf, where most Americans can understand.
Best ecomonic analysis related to the bailout that I have read.
Also, why not start ASAP with a small increase in FDIC premiums? When Hurrican Katrina slammed Louisiana, the casualty and property insurance companies sure did not wait 5 years before hiking insurance premiums.
Except that is totally wrong and transparently ideologic. It used to be said never underestimate the intelligence of the American voter but that doesn't work anymore. If Bill-Bob Congressman from Idaho had calls 100-1 against the rescue plan I hope those 100 enjoy losing their jobs and their retirement money, assuming they were marginally bright enough to think past the next football game and contemplate their senior years. Deflation is nasty stuff...
But they WOULDN'T lose their jobs and retirement with a REASONABLE bailout procedure! The fact of the matter is that they ONLY way for the govt to help would be to push the bottom up!! Trickle down theories ALWAYS FAIL!!!
I do not claim to be an economist or have the ability to understand Wall Street and how it operates, but there are some very knowledgeable people who do and they have stated their support for this bill. It is hard to believe that Warren Buffet either doesn't know what he's talking about - or is lying. This man has already gifted nearly his entire fortune to charitable causes. He is one of the wealthiest men in the world - he doesn't need more. I also noted that while the list of leading economist has been waved in the air - I have yet to hear their names. It's not that I want to believe this lack of action by a handful of Republicans will ruin the nation's economy any more than it already has.. but why should I trust your views Dean Baker? All I can say is you had better pray you are right.
Mr. Baker
What happens to the average American who has investments and what happens to the 401K?
Those are the things that would seem to be important, not to mention job losses for the average American citizens. My impression is that this is not just about the Banks, AIG & other companies involved and the rich fat guys but how it will affect the middle class and the average worker out there. How are they going to cope. I seems the House Republicans are using this as a political ploy because of the November elections and they are very vunerable at the polls. Can you address these case scenarios.
The American people are struggling to find jobs, keep their houses, pay for health insurance and put food on their tables.
My recommendation would be to give it to the American people to go toward their homes.
How you ask could this happen? Just like you give information to your checking account in hopes of having your income tax check direct deposited, you would give your mortgage account information to the government for deposit up to $100,000 into your mortgage loan. If you only owed $60,000, then that is all that would be deposited.
This would be available to each family with a foreclosed home (as long as they have not filed bankruptcy) and anyone who currently own's a home to help pay down their debt. Some would have their houses paid off, due to the fact that their loan was lower then the $100,000. Others would have a portion of their home paid for, but still have a remainder in place if their loan was greater then $100,000.
This would help the banks because they would get their money through their clients, while still giving relief to the public and would leave homeowners with money to stimulate the economy.
If we only put a Band-Aid on this and help the corporations, then when the next round of adjustable rate mortgages comes due and increase again, we will be right back where we started and there will be a request for a bailout all over again.
I and almost every person i know knew this meltdown was going to happen. Here is why.
No money down and homes.
10% down on homes
speculation that the rich and middle class did.
PHONY APPRASIALS on homes that were inflated fraudulenty.
Banks gave money and pushed for these phoney apprasials so they looked great on the books.
CEOS of the banks pushed loan officers to loan money on bad deals to compete with other banks.
Many rich and upper middle class were flipping houses and condos some rich would purchase 20 condos and once for no money down or part no money down and the balance10% down.
How can you believe Cramer or any other person on TV including politicians that they had NO clue. They did not not want to see it so they placed blinders on there eyes.
So many Americans saw this coming only i and others could not tell you the date it would happen.
Many need to be convicted of FRAUD that is what everyone wants and it should be done. Those CEOS from banks and Fanny Mae --Feddy Mac need to be investagated and if needed be prosecuted
We all saw "Smartest Guys in the Room"! Why are American Taxpayers always treated as the dumbest?
A lot of people will suffer because they depended on rising property values, but I have to ask them, "Whereever did you get the idea that your were guaranteed to make money on your home?" Do NOT get all excited now. Just open those history books and 'apply yourself !'
I for one, expecting this for some time, actually expecting that this collapse to have occurred at least 6 months to a year ago. I am NOT a broker, or economist. I retired from a career in telecommunications as an hourly employee with only a small IRA and social security. I fired my account manager and adjusted my portfolio and have 2 years worth of cash on hand for just this situation and then some cash to get back in on the upturn. I am only in this position because I was paying attention to how Washington was sucking up to Wall Street to screw America.
Long term, we will all be glad that enough members of the House listened to the voters and voted this give-away down. I thank God, the sun, the moon , and the stars, that this happened before the upcoming election and not after, or just as the author of the above article said, we would be in even greater danger of a "Great Depression' following a major increase in the national debt.
Please Ask yourselves, "How much would my taxes have gone up then?"
Good for you! You are in the minority of intelligent folks left in our unfortunate land! LIving in the area I do, I never expected to make a buck on my house. I knew that the appraisals were simply a tool for closing a deal and inflating payments.T
"The Banks Have a Gun Pointed at Their Head and Are Threatening to Pull the Trigger"
Cleavon Little in "Blazing Saddles."
*LOL
Why do we have to give this money to the banks that failed? Why couldn't we give it to the ones that didn't and let them use it to buy out the failed banks if it is profitable to them, otherwise they can dole out the money to small businesses and refinance for people who have received these outragious loans. Let the failed banks go under as they should. Why are we rewarding the failed companies instead of those that didn't fail? Why is socialism all of a sudden a good idea to those that were against it when it only helped the middle class or "even worse" the poor?
I don't think that wall street should be bailout. But people can't you see what this is about. A republican ploy to help John Mccain win this election. Please people don't be fooled. The bailout will not pass . This is so John Mccain can come in and save the day. Bush, Paulson, Bernacke, and the Gop is all in this togeather. Some where down the road before the election sometime of agreement, or plan will be reached. Remember these words? tHE SPECIAL Interest WILL NOT give up their power easily. They will try to scare you just like they did for the war in IRAQ.
I totally agree with this statement. It IS a Republican ploy to get McCain elected. Save the day, my ass. Mr. Deregulator has no idea how to save the economy. What a joke!!! The Republicans know how to create a crisis and they are very good at it. Wake up Democrats. While you are totally stunned and trying to think of a way out of this crisis, the Republicans already know what they are going to do! Have any of you read "The Shock Doctrine"? I suggesst that you read it and right away. The Republicans never intended to pass this $700 Billion bailout bill. They wanted it to fail. They want John McCain to ride into Washington on his white horse and SAVE THE DAY!! What a laugh!
McCain also wants to deregulate the health care system the way he did the banking system.
As far as the bailout, remember the President said it was imperative to pass the bill, all 2 1/2 pages of it, immediately1 1/2 days after the crises started? When you try to pass something that fast, you know that you are being rail roaded.
The real problem we have here is that Bush and his administration no longer are able to lead this Country - they have absolutely no credibility with the American people. The serious mistake that has been made over the last two years was not impeaching both of them - if that had happened, we might not be in this mess. I don't know whether we have a true crisis on our hands, or Bush is running some agenda that rewards all his rich friends. The reason the bill failed is that Bush could not even get his own Party to buy in - they don't trust him either. What a sorry state of affairs.
Let's all stop for a moment and think about all the thousands of Mom and Pop businesses which have gone under in every small town in America in the last three years. The senior retirees who dump their savings into a small business they dreamed of owning all their hard working lives will not be 'bailed out' like the big guys on Wall Street.
I think Wall Street should not be bailed out. I believe so much damage has been done to the interior of our country during the Bush years, bailing out Wall Street simply will not make a dent in our economy.
I do not think Wall Street should be bailed out. Frankly, I am not an economics expert, but if the 4 monkeys whose picture began this blog want the bailout, then that is enough reason for me to oppose it.
Exactly.
I'm a 64 year-old small sign business owner serving mainy the realty and property development area. We are desperate down here! The only solution I see is a mass cash infusion at the bottom to get the wheels back on this economy and allow people to start buying and selling again.
We need to eliminate the blue dogs 1st & replace them with real democrats. Look up blue dogs.com
let these banks tank, and lets small, personal, competitive, & honest Hometown american banks start our banking system. This is all about monopolies. Walmart is a monopoly. My poor cat died from poison cat food. Tehy're recalling China
s peoducts by the millions.
We must eliminate all these monoplies , and now is the time. Take the hint, it's in the stars. we the people can take control of our country again now. Keep checking Ron Paul ,Dennis Kucinivh & Bernie Sanders websites for honesty & intelligence.
let us be honest for this moment: the economy of this culture since the days of ronnie 'raygun' reagan was not the ecomony of Economics 101. meaning that whereas other cultures such as the UK and Japan possess a strong proclivity for raising taxes to create a FUNCTIONAL economy per se, this culture has set the standards for clinging to (A) tax cuts; (B) speculation as a means to 'seed the economy'. but while taking small homeopathic levels of poison to bolster one's immune system holds beneficial aspects for one's personal biology - to increase those levels of poison beyond the scope and parameters of homeopathy constitutes grave AND apparent dangers. this culture has ignored these homeopathic levels in terms of always using tax cuts and speculation as tools to create a 'robust' economy based upon the illusion that monies are available when, as this crisis reveals - illusions and reality remain NOT ONE IN THE SAME. i continue to believe that the federal government needs to move into the role as REPUBLIC government that caters not to lobbyists and pork BUT to the true functions of a REPUBLIC: to the people, of the people.
We need to get rid of the Federal Reserve. They are a corrupt bunch of money changers who are not federal at all. They are a private bank that runs this country, and are the ones behind this mess. Let's take back our country!!
It's time for another Boston Tea Party.
AMEN!
They're also in as bad shape as the banks. They're holding a whole lotta' very questionable paper!
In the early 90s, Sweden reacted to its own banks' "capital strike" by giving the banks an ultimatum: sell out to the state in return for public financing, or you're on your own. A few banks did make it on their own; most sold out. The economy was saved. When the markets improved, Sweden sold its shares in most of these companies, earning its taxpayers a dividend.
A Swedish official put it this way: "We often squabble in the Riksdag (the Parliament). Many of us are liberals who resist government action in the private sector. But when there's a crisis, government has to stick together, left, right, and center -- and be strong."
Strength is what's missing on our national scene. Everywhere. All the time. The Democrats and the Republicans are equally without vision or leadership. Why can't we identify and then support the true innovators, the public servants with new ideas and the energy and ability to carry them out? Why? Why?
I think it is likely that this whole scare is Bush cashing out of his failed Presidency by putting all that money in his cronie's hands.
Bailing out people who have proven to be incompetent isn't going to help, and that is what this bill looks like to me. They believed in the markets when they were getting fat, let them die with them now!
More likely he's trying to saddle Obama with so much debt that he's unable to carry out his badly needed social programs.
I am undecided on the credit bailout issue. I usually come down firmly on one side or another on issues, but with this one I admit I do not know enough.
Like everyone else, Rs and Ds, I am appalled that we have come to this. Everyone points the blame at everyone else. I think we all share some of the blame, by over leveraging ourselves with debt as individuals and as a nation. Where was the administration? Where were the regulators? Where was congressional oversight?
On the personal side, I have a house I would like to sell as do many others in the country. Neighborhoods are deteriorating with unkempt, foreclosed properties next to houses where families are trying to preserve neighborhoods and raise children.
The houses with uncared for yards and pools breed rats and insects, a hazardous and unpleasant situation. If this bailout can contribute to giving the real estate market a boost, I would favor it.
There may be a better way, but it might take more time to implement and these neighborhoods are deteriorating real fast.
This is a very good post. The responsible thing to do is re establish loans people can afford, either through the banks, FEMA, or any other government agency able to help keep neighborhoods intact.
We have a mess on our hands and we will only make it worse by not taking care of FAMILIES FIRST.
I feel like pieces of the puzzle are missing
but I think it is probably necessary to do the bail out
it is too Bush-esque to sit on your ass and do nothing but watch disaster unfold
although I don't agree with any R policies, we are probably fortunate that Paulson took action
the good news is that taxpayers will get an equity share in companies
and that this is a loan---not a $700B loss
I just want to know--what are the hard real estate assets tied to these securities?
I want to see that specific real estate is linked to them to determine a price
I want to know that there is real data on the existing linked mortgage loans
even if they have to re-constitute all the little sliced up loan pieces
They must say--these 100 properties are tied to these 10,000 shares
and then a price can be estimated
but they must not try to use the same properties for the next group
IT IS VITAL THAT US TAX MONEY NOT GO TO FUND A PONZI SCHEME
gov't must administrate this purchase to assure of this
let's not get hood-winked with the oft repeated phrase "oh these are very complex investments"
BULLSHIT. if they are tied in some fashion to real estate, they can be quantified
and we must know what we are buying
almost every HuffPo reader has bought real estate
don't let them talk over your head
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