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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This is perhaps the first time I have ever agreed with an Author on Huffpo on ANYTHING.
But just why did it have to be one of the authors who do not understand the problem they are writing about and go off on a completely irrelevant trajectory?
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Dutiful little Democrat lemmings following George Bush off the cliff. This is how governments fail.
Go to Surviving In Argentina blog and read what is coming to a bank near you. It's not pretty.
No Bailout. Seek Prosecution of the Guilty.
I thought the President, Paulson and Bernanke were Republican.
Did somebody see "a democratic dollar" in circulation vs. "a republican dollar"?
I haven't. Silly me, maybe I am just not paying enough attention?
My wife is from BA. We keep all the cash in bank boxes and pillows. She does not trust banks to give back money.... After what Reuben did to thier econcomy in late 1990s she has no trust for American style bankers. Rightly so.... She went on last Friday to withdraw my salary. They made her wait over 20 minutes.
$700 billion dollars is 2.16% of all non-financial private debt and 7% of all household debt.
Provision of this credit line therefore would allow removal of a maximum of just over 2% of the current nonfinancial private debt from the banking system, assuming only US domiciled debt is included.
If actual losses are $2.5-3 trillion in residential housing and a like amount among commercial real estate, credit cards and LBO loans then the bailout needs to be 5x bigger, or double the US Federal Budget.
USA fails basic math test.
The. Bailout. Will. Not. Work. Again. The Bailout will not work. All stop.
"If actual losses are $2.5-3 trillion in residential housing and a like amount among commercial real estate, credit cards and LBO loans then the bailout needs to be 5x bigger, or double the US Federal Budget."
There are no "actual" losses in the housing bubble. Not one house has been destroyed by it. The real estate is all still there. The only thing that has been destroyed is" perceived value", that's the thing when grandma dreams of selling her 980 square foot cinder box for half a million plus.
But perceived value needs no bailout. Grandma will survive that she has to sell her home for half of what she dreamed she could get.
Now, Grandma will get significantly less money for her home, so she will spend significantly less on cheap Walmart stuff, of course. But since ALL the money she would have spent in the past would have come from somebody's home lone, her income would have been completely funded by debt.
When the housing bubble bursts it will eliminate a lot of future debt and it will force people to up their savings rate. And that is a good thing.
Continuation: If we do not remove the non-performing loans from the banks, they will not loan money - period. I know many people now who can no longer tap their home equity lines. Students denied full loans for tuition. And small businesses denied funding to continue their operations. ALL gainfully employed or profitable -- but no capital in the form of credit is available. GET IT!!!. The concept behind the "bailout", is property asset-acquisition from banks to provide a "floor" to housing values, free up capital through cleaned up balance sheets, and stabilization of the financial markets as a whole. This pontification in this article is neither helpful or informative. It is a doubt creator, which lends to more uncertainty and i find it has no place at a time when the country is experiencing great uncertainty and anxiety. I would urge you and others to exercise some discipline in your commentary.
Sometimes I think we need to repeat
"A home equity line IS NOT a source of income!"
over and over and over again... but somehow it does not seem to sink in with Americans.
Maybe this event will help to hammer it in. But somehow I doubt it.
First, the home's equity is not supposed to be used as an income.
Second, and more importantly, the banks are refusing to loan to people based on home equity. In other words, I bought my house 4 years ago for $200,000. Two years ago it was appraised at $300,000. I then got a Home Equity loan for $100,000. Now the house appraises at $225,000. I will not be able to get a loan for $100,000, merely for $25,000. THAT'S why they are refusing to loan money on HELOCs!!
This is the Democrats 'compassionate' lending at it's finest and the unintended consequences are atrocious. The Dems forced the GSEs to buy tons of mortgages written to sub-prime credits, many of which are minorities and immigrants, and rail on Republicans who do not support such lending. Clash of cultures. And Barney Frank was Cheerleader Number One in allowing the GSE to lever up 50 to 1 on subprime garbage.
NO BAILOUT. URGE PROSECUTION OF THE GUILTY.
1200 lenders, appraisers, etc are already being investigated ( and not widely reported by the mass media). There will be prosecution of many who colluded.
Ha. Means nothing. Those boot licker minions don't and won't amount to squat. I want the people who were culpable and responsible, not the foot soldiers who carried out the orders. Need to go after the politician's and the banker's assets.
Really? The DEMOCRATS forced Freddie and Fannie to buy subprimes??? Cause they each had less than 5% until earlier this year (around the collapse of Bear Stearns) and then BUSH and BERNANKE told Freddie and Fannie to buy up subprimes. Course, as we all know, they are both Democrats!
Demonizing minorities, the Democratic Party, and Community Reinvestment Act has become pretty popular these days, but the data don't quite support that position.
According to HMDA demographic data the government gathers from mortgage applications, non-minorities comprise 72.5% of subprime borrowers with African-Americans and Latinos coming in at 16.2% and 6.2% respectively. 52% of subprime borrowers have incomes ABOVE their area's median income level while 48% are at or below the median.
Also, focusing on "subprime" lending overlooks the impact of Alt-A loans taken out by speculators and flippers. These individuals frequently lied about their incomes on "stated income" applications and misrepresented investment properties as primary residences to obtain lower rates. Again, the lion's share of speculators were neither minority nor low-income borrowers.
So despite what FOXNews may be telling you, the majority of subprime and other problematic borrowers are white and upper middle-class. The Wall Street Journal has a great article (link below) for anyone wishing to acquaint themselves with the actual facts.
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Continuation: The other culprit here is the bundling of home loans and reselling oversees as derivatives and those are taking foreign banks down as evidenced this morning in Europe and England. The U.S. has certain exposure to those failures which will compound our problem as those banks will be unable to repay other loans back to U.S. banks. In the WSJ this morning is an article about a man unable to withdraw funds from Reserve Management Corp; Multiply this by thousands and you start to see the "trickle down" factor at work. Add the Lehman's failure and the house of cards could not longer withstand the pressures ( explained in today's WSJ). continued on next comment...
Yes, it's sort of like Roger Rabbit, except ...
What Bush has actually done is first, destroy the gov't, and then ...
Surprise, surprise! The all-wise bankers destroyed themselves!
Didn't think of that, did you W?
Now he wants the gov't to "intervene" ,and save the Banks. Isn't that "Socialism"?
Of course, we can't have gov't health care....
But the biggest fools of all are the voters who want more of the same.
One of the main purposes of this is for the owners of the Fed to take over banks for pennies on the dollar like they did in the wake of the depression after they raised interest rates and caused it.
Things are looking great. Now since the government has decided to get into business, the first deal they make is to sell $400 billion of good WaMu assets to the Rockefellers for less than $2 billion. The next deal they make is to sell $312 billion worth of Wachovia assets to Citigroup for $42 billion with us assuming all losses. The next deal they make is to buy $700 billion worth of worthless assets in the hopes that house prices will grow back to amounts where no one can afford them or that inflation will be high enough to make the prices seem normal.
Now that the government is a business entity, does this mean we can do a turn around and just fire the President and a bunch of Congressmen and Senators?
This was caused by the government being involved with private business.
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Mr. Baker.
Thanks for an excellent analysis. Oddly enough, it fits well with what many of us non-specialists have concluded. The 'safeguards' are nothing but a fig leaf; Paulson got his deal.
For me the most remarkable aspect of this past week has been the way in which Congress and the White House retreated into groupthink, dismissed our concerns as essentially irrational, and ignored the clearly expressed will of the electorate.
I can't find a single poll today where the 'No' vote against any form of bailout is less than 65%. What then empowers the House of Representatives to ignore us and proceed with the debate?
Agreed!
I think what empowers the House to go ahead with the bailout while the taxpayers they work for are strongly against it is no more than proximity. They're there. We're not. We lose.
I am sorry to say you are very ignorant of the financial system sir. Banks and mortgage lenders are overloaded with non-performing debt in the form of home loans, most of which are sub-prime and ARMs. When Bernanke was speaking last week he let it slip that 10,000 loans are defaulting daily. The day before on NPR, Chuck Dodd stated the number was 5-6000. Here in California we are pegging around 1200 per day. The numbers bear out a REAL CRISIS. The ARMs could have been renegotiated, but the greed factor is well embedded in the system and so nothing was done to avert the predictable crisis. The complication of private insurance being OVERSOLD to the tune trillions of dollars is huge fraud perpetrated on the unwitting public, homeowners of good faith, and solid investors. This story is being tracked by VERY few media. I have looked to find a major media outlet speaking about the default rate of home loans and i cannot find any. The media has been complicit in looking away and being more preoccupied in OP-ED journalism. Make no mistake, this is not recession, this is devaluation -- on properties, currencies, investment portfolios and businesses. When that happens you get a depression. see next comment...
There is nothing wrong with devaluation if the perceived values were based on make belief as they were in the real estate market until very recently.
As KTM says, the devaluation is based on the fact that the homes were OVERVALUED. In other words, when you bought your house that sold a decade ago for $100,000 for $300,000, you overvalued it by a HUGE margin. The average increase in home values for slightly more than a century is available here:
http://gra
You will find that with a baseline of 100,000 (inflation adjusted) starting in 1890 was worth around $110,000 (inflation adjusted) in the late 1990s. In other words, housing values DON'T increase or decrease by large amounts, EXCEPT in the last few years!
Message to my fellow citiziens:
Well, both Obama and McCain are on board this bailout. We know who they have listened to, and it sure aint the common folk! And you thought there was a diference between dems and repubs, how wrong you have been all along! When it comes to Wall Street, both donkey and elephant dance to the same tune.
Remember the names of the politicians, repubs AND dems, who voted for this sellout when you decide to vote for senator and congressman. Time to stop voting the straight party line and reward those that have your interest at heart.
Said it before and I'll say it again...ti
I could go for this bailout if there was any indication it would SOLVE the problem. However, to me, this bailout is like giving a heroin addict a fix. The addict will fill better for a while, but soon, the fix will wear off and he/she will need another or face withdrawal.
I'm inclined to say we should go cold turkey and start all over when we recover.
I've written and called my representative several times over the last two days: Lamar Smith, R, Texas, and told him that if he votes yes on the bill, he will lose my support.
I still hold hope that the House Republicans -- the only ones with the guts to stand up to Bush and the Fed's fear mongering -- will vote NO and the House Democrats will balk without their support.
When I first heard about the collapse I was in favor of it with reservations. But now I think more time should be given to handing over seven hundred billion dollars which is 1/3rd of the Country's budget to the Banks that caused the problem in the first place by their irresponsible actions that was most profitable to their own coffers but not to the rest of us..I understand that there are some major Wall Street financial institutions that where more diligent in their dealings and are not in jeopardy. I would consider NOT rewarding the ones that got us here, Instead I feel that it would be wiser to use the govt. taxpayer's money to prop up the banks that did the right thing--let those smart banks continue to handle credit transactions mortgages etc--But NOT reward the one that failed --they are odds on favorites to repeat- ripping us off again--REWARD THE ONES THAT DID THE RIGHT THING! What a mess.
Agreed! Now convince Congress
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