News Is the American Dream in Jeopardy?

[JasonRox]

With McCain pulling the plug on his campaign right now to focus on the "economy", how's the economy going to be like now?

Sounds like the McCain and Bush plan is merely get lots of money before it's too late and run!

What's going to happen now?

 

[Astronuc]

American Dream Over?

No.

We'll get through the current crisis, and hopefully we'll be better for it.

 

[LowlyPion]

With McCain pulling the plug on his campaign right now to focus on the "economy", how's the economy going to be like now?

Sounds like the McCain and Bush plan is merely get lots of money before it's too late and run!

What's going to happen now?

He might as well pull the plug. For all his floundering around using his "verbiage" that the economy fundamentals were sound (shades of Herbert Hoover) and now the country teeters on Depression, he might as well haul his inept behind back to Washington and at least look like he is doing something instead of campaigning and proving that he doesn't have the slightest idea about the economy other than to help his banking lobbyist benefactors. Behind closed doors who's to know how confused, forgetful and out of touch he might be? That way at least the reporters can't sound bite him to death.

 

[Ivan Seeking]

What's going to happen now?

We will get through it, but this will severely limit what we can do to address other problems, like healthcare, infrastructure, energy, education, national debt, national security, rebuilding the military, border control... And it will likely get worse before it gets better. For starters, perhaps millions of people will have lost their homes before this is over.

 

[Art]

We will get through it, but this will severely limit what we can do to address other problems, like healthcare, infrastructure, energy, education, national debt, national security, rebuilding the military, border control... And it will likely get worse before it gets better. For starters, perhaps millions of people will have lost their homes before this is over.

Much as I hate seeing the financial institutions being helped out of the mess they created through their own greed I do think the gov't bail out is a necessary response as unfortunately if the banks go down they take everybody else with them.

I do think though the gov't should take proportionate equity from each company they help to ensure the taxpayers benefit from the revived fortunes of the banks. This would also help ensure no banks try to fleece the fund, as it would cost them more share capital, which I have no doubt given half a chance they would as I very much doubt the managers whose greed created this mess have suddenly changed their mindsets.

 

[Cyrus]

I don't follow economics. Is what happened here an enron case of banking greed? I heard there were too many high risk loans. Also, the crash of the housing market had a big role in this whole thing also, right? So it's not the banks fault alone is it?

 

[Greg Bernhardt]

Another obvious political stunt. Didn't McCain say himself he doesn't know much about the economy? How much help could he really be?

 

[LowlyPion]

They say he canceled David Letterman this afternoon because he was going back to Washington, but strangely stayed on to give an interview to Katie Couric ... at the same time that Letterman was taping. And so concerned was he for the Nation's plight and the urgent need for his alleged statesmanship, he will be staying in New York through tonight and won't get there until tomorrow.

Reverend Muthee come pray for us.

 

[Astronuc]

Another obvious political stunt. Didn't McCain say himself he doesn't know much about the economy? How much help could he really be?

At this point, I have to wonder if anyone on the U.S. Senate Committee on Banking, Housing, and Urban Affairs or anyone one on the US House Committee on Financial Services really knows what they are doing.

The current situation didn't just happen. It evolved over time, and there has been plenty of time to recognize what what happening and take action. But, for whatever reasons, the current fiasco was allowed to happen. The US government failed in its obligation to protect the General Welfare and Domestic Tranquility of the People of the United States.

 

[Art]

I don't follow economics. Is what happened here an enron case of banking greed? I heard there were too many high risk loans. Also, the crash of the housing market had a big role in this whole thing also, right? So it's not the banks fault alone is it?

The high risk loans led to the crash in the housing market and so it is fair to say that the fundamentals of the crisis are the banks' doing. However without greedy speculators borrowing more money than they could afford to pay back there wouldn't have been the defaults leading to the housing crash and so the banks' customers are also to blame for taking the loans the banks should never have given them.

One wonders though if £700b is actually enough to save the finance sector? I would like to see the banks help themselves too by rights issues.

 

[jal]

Those who have access to money are going to make a killing buying low.
Did someone happen to mention that the new owners/bosses could be from the middle east?

 

[Cyrus]

The high risk loans led to the crash in the housing market and so it is fair to say that the fundamentals of the crisis are the banks' doing. However without greedy speculators borrowing more money than they could afford to pay back there wouldn't have been the defaults leading to the housing crash and so the banks' customers are also to blame for taking the loans the banks should never have given them.

One wonders though if £700b is actually enough to save the finance sector?

Let's define some terms so we are talking the same language here:

speculators? (Heard this term, no clue what it means though)
defaults? (You mean the bank taking back the house?)

Also, why was there nothing in place (regulations) to revent this from occurring to the degree it has?

 

[Art]

Let's define some terms so we are talking the same language here:

speculators? (Heard this term, no clue what it means though)
defaults? (You mean the bank taking back the house?)

Speculators covers those people who bought property under the motivation that the house value would rise so they would be able to unload it at a profit.

Default means they weren't keeping up with the payments so the bank foreclosed on them.

The way it works is in many instances the borrowers, nor the banks who lent them the money, ever expected to be able to make the repayments. Both sides went into the deal gambling the price of the property would rise and so when the house was sold in 6 months or so time the bank would get back it's money plus the interest and the borrower would walk away with a nice profit too.

When property prices stopped rising the banks worried about being able to get back the money they had lent tried to claw back their loans as quickly as possible resulting in more properties going on the market leading to further falls in property prices which quickly created a meltdown in the housing market. As a huge part of the banks assets are the mortgages they hold whose value is intrinsically linked to the value of the property it represents it meant the value of their assets took a huge hit hence the current problem.

That's the simple version. It is also complicated by the fact banks trade these mortgages between themselves and so banks which may not be in the mortgage business directly may still be carrying a ton of these now toxic assets on their books.

The reason there were no regulations to prevent this from happening is political. The powers that be in Washington are firm believers in free markets and so it naturally follows they are anti-regulatory in their views.

 

[LowlyPion]

Christopher Dodd the Chairman of the Senate Finance Committee hasn't yet heard from McCain about any of this financial mess. His opinion was that McCain wasn't rushing back to save the National Economy so much as he was rushing back in an attempt to save his campaign.

 

[Cyrus]

Yeah but, since the depression this kind of thing could have happened, yet it didn't happen until now. Why?

I assume it was anti-regulatory this entire time. So, is this simply a case of greedy guys at the top that once replaced, will make this problem go away for a good time to come?

In other words, this one time event isn't a good enough reason to be regulatory thereafter.

Also, I did not know banks trade mortgages between themselves. How does that work? The person taking out the loan obviously pays the bank the got the loan from. I guess at the end of the month that bank then gives that loan payments to the bank it traded the mortgage to?

 

[JasonRox]

I'm glad you guys believe it's in semi-good hands and that it will turn around. My gut feeling says no because ever since 9/11 came around, Americans were relying more and more on credit to live and hence "fooled" everyone that the economy was sound.

Plus with the $700 billion Bush plan... that's a method of disaster. Did anyone read about that?

 

[Cyrus]

I'm glad you guys believe it's in semi-good hands and that it will turn around. My gut feeling says no because ever since 9/11 came around, Americans were relying more and more on credit to live and hence "fooled" everyone that the economy was sound.

Plus with the $700 billion Bush plan... that's a method of disaster. Did anyone read about that?

Do you have any supporting evidence that 'Americans were relying more and more on credit to live'? I've never heard about this before.

Man, $700 billion is $28k per citizen.

Katrina, housing crash, economy crash, false war in Iraq.....

Um, do we have monkeys running the government? This is incompetence beyond extreme.

 

[Art]

Yeah but, since the depression this kind of thing could have happened, yet it didn't happen until now. Why?

I assume it was anti-regulatory this entire time. So, is this simply a case of greedy guys at the top that once replaced, will make this problem go away for a good time to come?

In other words, this one time event isn't a good enough reason to be regulatory thereafter.

Also, I did not know banks trade mortgages between themselves. How does that work? The person taking out the loan obviously pays the bank the got the loan from. I guess at the end of the month that bank then gives that loan payments to the bank it traded the mortgage to?

No it wasn't always deregulated: in 1999 the Gramm-Leach-Bliley Act relaxed banking rules making it easier for banks to lend money and gave rise to the practice of mortgage derivatives whereby the lending companies on the coal face bundle mortgages and sell them on to other institutions. In theory this covers them from carrying all the risk as it is now spread around amongst all those companies which bought these bundles. In practice these mortgages were not worth anything like the value they were sold on for as the banks negated the rules governing how much they can lend against such and such an income etc. (which is why many are now being investigated for fraud).

Although the front end banks may at first glance seem to have successfully off-loaded their problems onto someone else, in practice they were screwed too, as the problems they created downstream resulted in tighter credit where banks either could not or would not lend to each other. Without this influx of funds to lend out, the mortgage companies no longer have a business, and even if they had the money to lend out no-one is going to buy their mortgage derivative packages any more, and so their fundamental business model is broken.

With credit thus tightening there are less people buying houses with this reduced demand being reflected in lower property prices and so the snowball just keeps getting bigger.

The hope is that, with the banks who hold the toxic assets being bailed out by the gov't, inter-bank liquidity will improve and the whole machine will start working again though IMO although the bail out solves the immediate problem of bank's going bust in the wider picture there is still a chicken and egg situation. The financial markets can't return to normal until the housing crisis ends and property prices stabilize and property prices won't stabilize until the financial markets return to normal.

 

[Astronuc]

Do you have any supporting evidence that 'Americans were relying more and more on credit to live'? I've never heard about this before.

It's quite true, and it has been evolving since the 1980's.

I wrote this Sep 18, 2006

Skyhunter simply pointed out that the 'good news' is not the whole story. The downside was omitted - and thus the conclusion that 'nothing' is wrong is a fallacy.

What's wrong - for one, the US economy is highly leveraged. The aggregate debt is increasing. What happens when even the interest can't be paid?

I could have elaborated - can't make the monthly payments (mortgage, credit card, . . . . ).

The only reason the economy has grown in the last several years is because the US government has been deficit spending. That would be like an individual claiming increase wealth/income while charging on the credit card.

There are other systemic problems such as under-employment and chronic temporary unemployment that have compromised the economy.

 

[Cyrus]

It's quite true, and it has been evolving since the 1980's.

I wrote this Sep 18, 2006
I could have elaborated - can't make the monthly payments (mortgage, credit card, . . . . ).

The only reason the economy has grown in the last several years is because the US government has been deficit spending. That would be like an individual claiming increase wealth/income while charging on the credit card.

There are other systemic problems such as under-employment and chronic temporary unemployment that have compromised the economy.

Ah, I see.

 

[Jimmy Snyder]

That would be like an individual claiming increase wealth/income while charging on the credit card.

Commercial ventures have alway relied on borrowed money. It's the capital in Capitalism. It makes no more sense for the country to waste money than it does for an individual. But if the money is used to increase economic activity, then the sooner spent the better. The alternative is fiscal order and economic chaos.

 

[vanesch]

I wrote this Sep 18, 2006

Astronuc for president !

 

[Astronuc]

Commercial ventures have alway relied on borrowed money. It's the capital in Capitalism. It makes no more sense for the country to waste money than it does for an individual. But if the money is used to increase economic activity, then the sooner spent the better. The alternative is fiscal order and economic chaos.

The problem comes when the obligation to repay the credit exceeds the ability to pay or earn, and that is where too much of the economy is at the moment. That and the inflated value of real propery in too many cases, and that fact that too many people 'bought' (on credit) more than they could afford.

There is also income/revenue (including profit), and necessarily profit/income exceeds the repayment of debt (positive feedback). Then one is expected to reinvest the profit. When repayment of debt exceeds income/revenue, there is a negative feedback, and capital is lost.

The US financial system is unfortunately in a perfect storm. Too much is owed (on credit) and there is insufficient revenue to cover expenses including repayment of credit (debt).

 

[cristo]

One thing I don't understand, and this is a genuine question rather than a cheap shot, is how can the government bailing out these huge companies be constitutional? I'll admit I don't know all that much about the US constitution, but I thought the one thing that the US was about was having a small government that didn't meddle in the everyday lives of its citizens. But then, I don't see how a government that now in essence owns the monopoly of the mortgage lenders, and huge insurance companies, as well as investment banks can be a 'small' government.

This somewhat confuses me since, especially from views I've heard on PF, 'constitutional rights' are the most important thing to US citizens: c.f. comments against gun control. Isn't this rather hypocritical?

 

[Astronuc]

Congress is authorized to appropriate money, not the executive branch, and Congress has the power to tax, and regulate the economy. So the only Constitutional issue is whether or not the Secretary of Treasury can spend the money to inject capital in the markets. He can, but only if authorized (by law) by Congress. So now Congress must fashion a bill/law that will enable the government to rescue the economy.


US Consitution, Section. 8.
Clause 1: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

Clause 2: To borrow Money on the credit of the United States;

Clause 3: To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

Clause 5: To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

Clause 18: To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.

 

[Ivan Seeking]

One thing I don't understand, and this is a genuine question rather than a cheap shot, is how can the government bailing out these huge companies be constitutional? I'll admit I don't know all that much about the US constitution, but I thought the one thing that the US was about was having a small government that didn't meddle in the everyday lives of its citizens. But then, I don't see how a government that now in essence owns the monopoly of the mortgage lenders, and huge insurance companies, as well as investment banks can be a 'small' government.

This somewhat confuses me since, especially from views I've heard on PF, 'constitutional rights' are the most important thing to US citizens: c.f. comments against gun control. Isn't this rather hypocritical?

It isn't so much a matter of the constitution as it is our economic model. Since Roosevelt's New Deal, I would guess, one key distinction between the two political parties has been the view of the size and role of the government. Until this adminstration, and in the most general terms, the Republicans generally wanted less government, and the Democrats wanted more. This economic failure is a catastrophic blow to the Republican view that less regulation leads to a stronger economy.

Ironically, by insisting that the markets be too free and unregulated, we have been driven to socialism as a solution to the resulting crisis. What we are seeing is a catastrophic failure of the Republican's economic philosophy.

 

[mheslep]

...This economic failure is a catastrophic blow to the Republican view that less regulation leads to a stronger economy.

Ironically, by insisting that the markets be too free and unregulated, we have been driven to socialism as a solution to the resulting crisis. What we are seeing is a catastrophic failure of the Republican's economic philosophy.

This case has not been made. If
A = credit crisis / failure due to the subprime market collapse
B = less regulation
then we can only say for certain that we have A. Even if one grants B and I don't know that I do in the Bush years, the case has still not been made that if B->A. I think its more likely that GSE's were the key enabler of A, the source of oxygen for the small fires. Don't get me wrong, there have been plenty of abuses that perhaps need more regulation, but I contend none of it would have reached the current systemic scale without the GSEs and Congressional encouragement to keep going.

An observation that one can make, that doesn't require a predicate: Republicans have not realized smaller government.

 

[edward]

To get an idea of what is happening and where the subprime crisis is headed fiddle around with this interactive map.

http://www.newyorkfed.org/mortgagemaps/

Everyone from your grandmother to the Wall street sharks were speculating in the housing market.

A lot of people took out a subprime mortgage because they could get into a decent home with no money down. Sure they share the blame, but so does the more sophisticated lenders who wrote the loans and sold them to the even more financially knowledgeable financial institutions.

In my area most of the new home builders had their own sales people and financing sources. They knew what they were doing.

Just take a look on the map at the percentage of subprime loans that were made where there was little or no documentation of the borrowers ability to pay.

The Fed calls the loans nonprime for some reason.

 

[LowlyPion]

This case has not been made. If
A = credit crisis / failure due to the subprime market collapse
B = less regulation
then we can only say for certain that we have A. Even if one grants B and I don't know that I do in the Bush years, the case has still not been made that if B->A. I think its more likely that GSE's were the key enabler of A, the source of oxygen for the small fires. Don't get me wrong, there have been plenty of abuses that perhaps need more regulation, but I contend none of it would have reached the current systemic scale without the GSEs and Congressional encouragement to keep going.

An observation that one can make, that doesn't require a predicate: Republicans have not realized smaller government.

The GSE's may have created the conditions under which the derivatives and credit swap markets could have flourished, but I think it was without a doubt the lack of regulation, the lack of checks on the greed of man, a highly predictable result, that brings us to where we are today.

I think it was people like Anthony Mozilo at Countrywide that were incented to write whatever trash mortgages he could because who cared? He could bundle and collateralize them and push out whatever risk there was into the markets, where others were unaware of the toxic nature of the underlying debt risk. Housing prices fed upon themselves and rose delaying discovery of how much toxicity was there from lax lending practices and the markets hemorrhaged more and more of this inflated value until this rot can not sustain itself, and in the process threatens to seize up all lending.

Without a question in my mind it's been the very deregulation that McCain has been the puppet for advancing these last 26 years of drinking from the banking lobbyists trough. From the Savings and Loan through the the Sub Prime Melt Down to the Trillion dollar bailout McCain is hands down now the poster boy.

 

[mheslep]

The GSE's may have created the conditions under which the derivatives and credit swap markets could have flourished, but I think it was without a doubt the lack of regulation, the lack of checks on the greed of man, a highly predictable result, that brings us to where we are today.

I think it was people like Anthony Mozilo at Countrywide that were incented to write whatever trash mortgages he could because who cared? He could bundle and collateralize them and push out whatever risk there was into the markets, where others were unaware of the toxic nature of the underlying debt risk. Housing prices fed upon themselves and rose delaying discovery of how much toxicity was there from lax lending practices and the markets hemorrhaged more and more of this inflated value until this rot can not sustain itself, and in the process threatens to seize up all lending.

Without a question in my mind it's been the very deregulation that McCain has been the puppet for advancing these last 26 years of drinking from the banking lobbyists trough. From the Savings and Loan through the the Sub Prime Melt Down to the Trillion dollar bailout McCain is hands down now the poster boy.

You miss the point. No GSEs, no nationwide crisis requiring a bailout, at least very, very unlikely. Instead we'd have an Enron, or an AOL size bust. Big deal. Without GSEs, the Mozillo's in this story would have been section 2 news in the business section.

 

[LowlyPion]

You miss the point. No GSEs, no nationwide crisis requiring a bailout, at least very, very unlikely. Instead we'd have an Enron, or an AOL size bust. Big deal. Without GSEs, the Mozillo's in this story would have been section 2 news in the business section.

It doesn't miss the point. The lax regulation is what failed the system. Merely because Fannie and Freddie were so big doesn't absolve the regulation from preventing it. "The let the market determine" attitude inevitably devolves into "whatever they can get away with" without adequate regulation.

 

[Astronuc]

Besides the GSEs and entities like Countrywide, it appears many financial institutions failed with respect to due diligence, and passed along bad/faulty instruments as fast as possible. Then the question becomes - was this simply negligence or was there criminal intent.

There was also a lot of people taking out home equity loans, who then couldn't afford to repay two mortgages and the other living expenses.


When I bought a house and took a mortgage, I bought what I could afford at the time, with the expectation that my salary would increase while the monthly payment stayed constant (except for the gradual increase in local/school taxes). Then when I expanded the house, I took out a home equity loan, which I could also afford, but it went into expanding the house and not buying a car or other stuff. Subsequently, I was able to consolidate and refinance at a lower interest rate, which brought down my monthly payment to less than both mortgages separately. Meanwhile the property appreciated and we don't have to pay a PMI.

 

[Ivan Seeking]

Yes, the key point is that the free market now effectively requires socialism to save it; so we are told. One couldn't ask for a better example of a failed philosophy.

Profits are privatized. Risk is nationalized.

 

[chemisttree]

What's next? http://www.time.com/time/business/article/0,8599,1723152,00.html"

Subprime mortages are small potatoes. http://marketplace.publicradio.org/display/web/2008/04/01/credit_default_swaps_q/" are valued at 45 trillion dollars last year. The size of the entire mortgage market is only 7 trillion, and the subprime market is a small subset of that.

RYSSDAL: So I take it what we're about to hear is another thing that we knew nothing about, but yet somehow now we need to be really, really concerned about?

MOON: I'm afraid so. In this case, what you don't know can hurt you. I'm going to try to mention this term only once, Kai. We're talking about something called "credit default swaps."

RYSSDAL: And they are?

MOON: They were invented a few years back so banks and bondholders -- the investors -- could make sure that they got paid back when companies failed to pay their loans. So in a way, you could call this insurance.

RYSSDAL: You could call it that, but we don't -- we call it something else. How do these things work?

MOON: Well, this is where it gets tough, Kai, because a lot of people on Wall Street, even some of the leading economists in the academic world, don't really understand exactly how these things work. A lot of them are whipped up with some computer wizardry, some advanced math -- think of those fancy Greek letters turned on their sides. And there's a lot of guesswork to this, too, about how much they're really worth.

Sounds chillingly familiar...

MOON: OK, I'm about to unload some numbers on you here, so I'll speak slowly so you can follow this.

The value of the entire U.S. Treasuries market: $4.5 trillion.

The value of the entire mortgage market: $7 trillion.

The size of the U.S. stock market: $22 trillion.

OK, you ready?

The size of the credit default swap market last year: $45 trillion.

RYSSDAL: That's a lot of money, Bob.

MOON: It is, and the great unknown here is that these things get traded, or swapped, between the banks and hedge funds and other investors, and there's really no one who oversees or regulates these trades to guarantee that the buyer actually is going to be able to make good on these if they have to. And these things end up being so interconnected that it's not just like single line of dominoes falling, if one fails. Imagine one falling domino taking down two more, and those taking down four more, and eight, and so on.

RYSSDAL: OK, I'm with you, but let me ask you this. We just had the secretary of the Treasury yesterday with a big policy announcement. If these things are so bad, what's being done about it?

MOON: The irony here is that the former Fed Chairman Alan Greenspan, a couple of years ago he called credit default swaps "probably the most important instrument in finance," because they were supposed to spread risk around and stabilize the market. Well, critics now say that they've had exactly the opposite effect. One of the leading critics of these things is Christopher Whalen. He's an expert on financial risk at Institutional Risk Analytics. And he told me that this is nothing more than government-guaranteed gambling:

CHRISTOPHER WHALEN: They are the most hideous kind of speculation. To have a federally insured bank like JPMorgan as the largest dealer in this market, to me says we don't know what we're doing anymore, and we don't understand the difference between real work -- real economic activity -- and something that's essentially wasting.

MOON: And Whalen points out that Bear Stearns had more than $2.5 trillion in credit default swaps. He suspects that that's why JPMorgan came to the rescue, so it didn't get pulled down.

RYSSDAL: Yeah, not too big to fail, but too interconnected to fail, right?

MOON: That's right.

Time to buy some gold...

 

[edward]

FBI Began Investigating AIG in March

On Feb. 28, AIG posted its largest quarterly loss ever, blaming complex financial instruments known as derivatives for write-downs of more than $11 billion. Martin J. Sullivan, the insurer's chief executive at the time, resigned in June after AIG suffered another multibillion-dollar quarterly loss on its derivatives connected to defaulting home mortgages.

The company's near-death is largely being blamed on its heavy involvement in a kind of unregulated derivative called credit default swaps, whereby AIG earned hefty premiums in exchange for guaranteeing another company's mortgage investments if the mortgages defaulted. AIG bet that many of the mortgages would never fail, but an unusually high percentage did

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092403589.html

 

[edward]

It appears that there is now a big rush to regulate credit default sawps..

On Tuesday, SEC Chairman Christopher Cox called for giving the agency the authority to regulate credit default swaps. Testifying before the Senate Banking Committee on the turmoil in U.S. credit markets, Cox told Congress “the $58 trillion notional market in credit default swaps— double the amount outstanding in 2006 – is regulated by no one.”

http://www.advancedtrading.com/blog/archives/2008/09/the_rush_to_reg.html

Too little too late

 

[Ivan Seeking]

One point of note that provides an interesting perspective: A one-time $700 Billion bailout is considered a crisis.

We now spend $700 Billion every year on foreign oil.

 

[russ_watters]

Also, I did not know banks trade mortgages between themselves. How does that work? The person taking out the loan obviously pays the bank the got the loan from. I guess at the end of the month that bank then gives that loan payments to the bank it traded the mortgage to?

No, you pay the owner of the loan. I took out my mortage through a subsidiary of LendingTree and a month later got a notice saying to start sending my checks to Citibank.

Man, $700 billion is $28k per citizen.

Please note: what the government is doing is buying loans, just like these banks bought and sold the loans. The difference? The packages of loans have crashed in value and/because the banks are desperate to get rid of them. That means that the government will be getting them for far less than face value (40-60%, iirc). If this works and home prices stabilize and delinquencies drop back to normal levels, the government gets that money back the same way the banks do: people pay their mortgages.

Initially, there will be a huge outlay of cash, but it is near certain that the government will get most of that money back. And since they are buying the loans in a firesale, there is a small but real possibility that the government could profit from this venture. Some hypothetical numbers as an example:

If you have $700 billion in loans and you expect 5% of them to default without ever paying a dime back, they are really only worth $665 billion. So you strucutre them to ensure that with a 5% failure rate, you'll still turn a profit. If the failure rate doubles (it has), then you stand to lose an additional $35 billion. But if your comopany needs cash badly and so sells the loan for 80% of its value, the buyer stands to make a profit of $70 billion even if the market doesn't improve.

IMO, the best thing that the government can do here after buying the loans is to re-negotiate the terms with people who are at risk of defaulting, at least long enough for the real estate market to recover and the value of the houses to go back up (say, 3-5 years). That way if the govt does need to sieze and sell the houses, they stand a good chance of selling them for a good amount. And if all they do is decrease the number of defaults, those loans will "merely" return their face value to the government (who bought them for far less than face value). Fannie and Freddy are big companies, but they can't beat the federal government in ability to ride out a storm. And that's the key to being able to profit from picking up the pieces of a shattered company.

Here's an article on the subject:

Once it collects all that trash, the government is expected to hold the world's largest garage sale of distressed securities and bad mortgages and business loans. Years from now, when the dust clears, the U.S. might even make money on the deal.

http://www.chicagotribune.com/business/chi-sat-how-it-works-sep20,0,5185626.story

It would be a pretty sweet irony: banks screw up and fail and the government picks up the pieces, profits, and gives the money to the people (via reduced national debt).

 

[LowlyPion]

Please note: what the government is doing is buying loans, just like these banks bought and sold the loans. ... If this works and home prices stabilize and delinquencies drop back to normal levels, the government gets that money back the same way the banks do: people pay their mortgages.

Doesn't this argument sound eerily like the assurances before the Iraq war that once liberated all their oil would be available to pay for our being there?

And now we're shelling out $10B a month and have carted back 4,000 body bags?

 

[mheslep]

What's next? http://www.time.com/time/business/article/0,8599,1723152,00.html"

Subprime mortages are small potatoes. http://marketplace.publicradio.org/display/web/2008/04/01/credit_default_swaps_q/" are valued at 45 trillion dollars last year. The size of the entire mortgage market is only 7 trillion, and the subprime market is a small subset of that.

Well I can't fathom that Time piece, it reads like hype. First, the Fed lists the mortgage debt is $14 trillion as of '08 1st qtr, not $7t
http://www.federalreserve.gov/pubs/supplement/2008/05/table1_54.htm
Ok, perhaps they're referring to market volume, not value? Well they mentioned a $22 trillion US stock market - that's value. US stock market volume is several $hundred billion every day. The $4 trillion treasury - value. Second, the CDS market numbers - $45 trillion/ 2007 from the International SD Assoc. That is a world wide market number, not just US, and again its an activity number. The actual underlying value is a small percentage of that. Finally, both Moon (who?) and Time cite the CDS numbers as if they're a problem on top of but separate from the mortgage securities problem. That's double counting, as much of the US CDS's are instruments based on the underlying mortgage securities.

 

[russ_watters]

Yes, the key point is that the free market now effectively requires socialism to save it; so we are told. One couldn't ask for a better example of a failed philosophy.

You have got to be kidding. That's an utterly rediculous post. The free market isn't going away because an already pseudo-government company becomes more government run. And you can't call a philosophy a failure after an economy levels off (without even dropping) after two centuries and thousands of percent of gains.

Profits are privatized. Risk is nationalized.

Try telling that to the shareholders.

 

[russ_watters]

One point of note that provides an interesting perspective: A one-time $700 Billion bailout is considered a crisis.

We now spend $700 Billion every year on foreign oil.

Social security is also about $700 billion a year. So what? I don't see how that's relevant, much less interesting, much less interesting.

 

[Gokul43201]

You have got to be kidding. That's an utterly rediculous post. The free market isn't going away because an already pseudo-government company becomes more government run.

AIG was a "pseudo-government company"?

 

[russ_watters]

Doesn't this argument sound eerily like the assurances before the Iraq war that once liberated all their oil would be available to pay for our being there?

And now we're shelling out $10B a month and have carted back 4,000 body bags?

No, you're wrong twice in one sentence! I gave no assurances, nor did the government ever say that Iraqis would pay for their own reconstruction. For us to take their oil profit for the reconstruction would be the very imperialism people like to accuse us of. It wouldn't be ethical and maybe wouldn't be legal either.

 

[Gokul43201]

No, you're wrong twice in one sentence! I gave no assurances, nor did the government ever say that Iraqis would pay for their own reconstruction.

Deputy Defense Secretary Paul Wolfowitz, speaking to the House Appropriations Committee on March 27, 2003, estimated the figure in the tens of billions of dollars if Iraq's oil fields were not destroyed.

"We're dealing with a country that can really finance its own reconstruction, and relatively soon," he said.

For us to take their oil profit for the reconstruction would be the very imperialism people like to accuse us of. It wouldn't be ethical and probably wouldn't be

Wouldn't be what? Legal?

 

[fuzzyfelt]

Well I can't fathom that Time piece, it reads like hype. First, the Fed lists the mortgage debt is $14 trillion as of '08 1st qtr, not $7t
http://www.federalreserve.gov/pubs/supplement/2008/05/table1_54.htm
Ok, perhaps they're referring to market volume, not value? Well they mentioned a $22 trillion US stock market - that's value. US stock market volume is several $hundred billion every day. The $4 trillion treasury - value. Second, the CDS market numbers - $45 trillion/ 2007 from the International SD Assoc. That is a world wide market number, not just US, and again its an activity number. The actual underlying value is a small percentage of that. Finally, both Moon (who?) and Time cite the CDS numbers as if they're a problem on top of but separate from the mortgage securities problem. That's double counting, as much of the US CDS's are instruments based on the underlying mortgage securities.

Yes, and the Time piece was published back in March, prior to what happened to AIG, which held many CDSs and prior to Lehmans defaulting.

 

[russ_watters]

AIG was a "pseudo-government company"?

Who said anything about AIG? The $700 billion bailout is of fannie mae and freddie mac.

 

[russ_watters]

Wouldn't be what? Legal?

Heh. I think I was trying to decide between "legal" and "ethical", didn't finish the thought. Certainly it would be inethical. I'm not as sure about it being illegal. Wording fixed now.

 

[russ_watters]

The only reason the economy has grown in the last several years is because the US government has been deficit spending.

That's interesting: When Clinton left office, we were in a recession. So then the only reason Clinton's recession isn't still with us is deficit spending from Republicans?

 

[russ_watters]

Yes, the key point is that the free market now effectively requires socialism to save it; so we are told. One couldn't ask for a better example of a failed philosophy.

Just so we're clear here, by calling capitalism a "failed philosophy", does that mean you are a socialist, not a capitalist?