demiurgent | In brief: the failure of the bailout

We're not giving him money. We're not.

We're talking about buying up mortgages for pennies on the dollar, sitting on them while the market recovers, and then selling them off at a profit.

As I've said in other replies, if I had $700 billion, I'd do the bailout myself, and I'd make money hand over fist doing it. It's a spectacularly good investment opportunity.

You're working from the assumption that all that bad debt isn't dramatically overinflated. I have seen houses in nice neighborhoods that sold a couple years ago for $250,000+ offered at sheriff's sale for $100,000 - and being bought back by the bank in a paper purchase because there are no bidders.

Will this eventually turn around? Yes, someday. If there was some mechanism in the bailout plan that would actually pay back the treasury, then I would be more inclined toward the plan. But at this point, it doesn't even give us that.

This.

I know, I know ... and from what I heard about the actual version being run - with controls and equity and limits on executive compensation - I even support it. But I don't feel good about it, just the same.

Australia. Additional advantage: it's <a href="http://www.msnbc.msn.com/id/26853933/>south of the equator</a>, so if nukes get involved, it's out of the way of most of the (literal) fallout.

The debt is overinflated. Though how overinflated depends on the neighborhood. If we're talking California and Florida? Yeah. Those should be bought at 10, 20 cents on the dollar. Mortgages in other places are closer to sanely valued.

I'd like to see decisions made now about what to do with the fund after it's turned a profit, but I can't see how to do that and have it pass Congress. It's probably easier to do it separately, because there are plenty of people who would support a bill to take profits from an existing fund and apply them towards the federal debt/Social Security/whatever who would not vote to support the creation of said fund. So that's just legislative reality.

Oh, neither do I. I'm appalled that it got to the point where a purchase like this is necessary.

Which is exactly why the first versions of the bill - the 3-page proposal, which did not even acquire the debt and the just-defeated version - needed to go down. I'm not completely against a bailout, but I am against leaving the same foxes to guard the henhouse. The whole economy is not going to implode because they are taking time to write something worth signing. That's why I think it was brave to stand up against the usual White House Chicken Little tactics and say no.

House prices will be 50% of what they were in 2007 at best. There will be a lot less credit floating around. Too much credit was the problem. Adding more credit willy-nilly isn't the correct way to go about doing it. Giving the treasury secretary carte blanche to do whatever he wants with 700 billion dollars with no oversight is a ridiculous response.

Every day we try to push back a credit collapse makes it that much worse in the end. If they were pitching this bill as a means for orderly liquidation of the bad debt market instead of a bailout, they might have more popular support.

There's nothing to 'save' right now. Just overpriced assets to liquidate.

The compromise bill was a little better than the original, but it was still a steaming pile. A very small segment of the U.S. population has done this to us. Bankers/Wall streeters/and people who took mortgages they couldn't repay. None of them deserve to keep anything that they have. Halting foreclosures will prolong the problem. Propping up bad banks rewards them for being retards.

The fact is that America has been 'living high' on credit, and that's about to end. Quality of life in the U.S. is going to go down. We can try and do it in an orderly fashion with a non-panicked response, or we can make it worse by trying to respike the punch bowl in a panic, or we can wait paralyzed until the current problems cause a crash. The WORST option is the panicked respiking of the punch bowl, which is what the 'bailout bill' is represented to us as. Give us a blank check and we'll fix it, and housing prices will shoot back up and the stock market will be at 15k in no time!

I meant the plan. It seems to me like an intentional walk in baseball - sure, you have a better chance for the double-play or the force, but there's another runner on base, one more way for you to lose. Why shouldn't we be throwing for the strikeout instead?

That's kind of my point. I can't say with certainty no bail out is necessary, my knowledge of economics is such I don't think I have solid grasp of the consequences of making that kind of call. If there was a bail out we should only be handing money to absolutely vital companies, preferably with a plan to recover the money before the business can profit. The recent iteration of the bailout plan was primed to just hand out bucket fulls of free money.

While there's a visible consensus that this is super bad, I'm not actually seeing a consensus that the sky is in fact falling and what we should do about it.

Most of the 'Smart people' that are adamant we are teetering on the brink of disaster and our best bet is to ram through legislation seem to fall into two categories; those that will most benefit from a huge bailout with no strings attached, or those that otherwise benefit from whipping up hysteria, such as the news channels that trade in fear mongering. There are plenty of Smart People that recognize there's a problem but don't advocate giving a massive amount of money with again, no oversight, to people that either caused this mess or didn't see it coming. It's bit of a red flag that Paulson or his people said that they need $50 billion, the other $650 is a number they came up with just in case. The House would have probably passed a lesser sum, but then there wouldn't be an emergency to leverage against a lack of safeguards.

Banks are necessary businesses.

Snowspinner said it better than I, but if the banks go, so does everything else, because payrolls stop getting paid, capital stops moving into other companies, goods and services can't make production and operating costs.

If the economic center goes down, it takes out essentially everything else. And the timeframe for that happening is frighteningly small.

How frightening small? It would not shock me to see a massive business failure of legitimate, profitable businesses by Friday. Not businesses that have invested heavily in subprime mortgages -- businesses that are producing goods they sell at a profit. Because those businesses still use credit services every day to meet their operating expenses.

If that chain cascade happens? 700 billion won't bail them out. It won't come close. If that happens, we go from 0 to "most everyone I know is out of work and can't keep food or lights in the house" in a shockingly short period of time.

Bitterly ironically? The very people who led us to the brink will likely be fine during all this.

I'm with Snowspinner. Buy up the mortgages. Put them on a shelf, waiting for those properties to begin to reappreciate value. If you only get $100,000 for a property that was (bad mortgage) sold at $350,000, but you paid $35,000 for it, you're still making $65,000 in profit.

As a side bonus, we still get to buy food and have electricity in our houses.

I'm not arguing with the plan in as much as I am arguing with the lack of oversight to make sure that $700 billion is going to the plan. Our government has proven very bad at making sure money is going to the public good rather than the pockets of the buddies of the guy distributing it. Oversight seems to be a very small thing compared to Imminent Financial Collapse so why is it such a sticking point?

This wasn't a plan. It was a $700 billion hail mary. The Treasury has outright said that that figure isn't based on anything, and they just wanted a really big number.

Of course, by insisting on such a ridiculous amount, they've pretty much doomed any more moderate proposal, because a smaller amount will be perceived as insufficient. And in economics, perception is reality.

For once, the Republicans in Congress actually did something right, IMO. Of course, they did it for the wrong reasons ("Nancy Pelosi said something mean!"), but still.

It's unpopularity is with a lot of economists (including nearly the entire Chicago School, most of which signed a letter that boils down to "Paulson needs to eat shit and die, because he's trying to fleece us all."), and a wide-ranging array of other folks who are basically saying "whoa nelly, is this actually going to work, and whose going to make sure the people paying for it (taxpayers) aren't screwed with their pants on in the process, because there isn't a lot of specifics here, and an awful lot of power being placed in the hands of the SecTreas".

I'd love to see something that restores trust in the liquidity of the system. I'd like to see Wall Street working properly again (although I'm sure many, many brokers would be aghast at what I'd consider "properly" - but I'm an old curmudgeon, and my assumption is that if a bright eighteen year old with ECON103 under their belt can't figure out how the money is being made, what directions it's flowing in, and why, then it's likely too complex to be legal on Wall Street).

But not at the cost of the Republic. Which this bill, in its current form, is still all too likely to do. We don't know who the next SecTreas will be - and I don't trust seven hundred billion dollars in the hands of someone who, for all we know, Governor Palin might end up appointing, because McCain could well get elected, then blow a gasket on the way up to the acceptance speech.

But they did just hand over bucketfuls of free money to the automakers. 25 Billion.

Then I agree, that's ridiculous.

The supposed "lockup" may be a sham. Toward the end of this article (http://www.bloomberg.com/apps/news?pid=20601087&sid=aNKGD.bJwmRA&refer=home), an economist says "I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout."

That won't necessarily help. Check this (http://ml-implode.com/staticnews/2008-10-01_TheTopFiveReasonsTheBailoutInterventionsAreMakingThingsWorse.html) out.

Funny you should mention that. I turned up something interesting while researching this.

According to Karl Denninger, the bailout is primarily for the benefit of foreign banks (http://market-ticker.denninger.net/archives/596-The-TRUTH-About-The-Bailout.html), not US banks. Representative Brad Sherman (http://globaleconomicanalysis.blogspot.com/2008/10/rep-brad-sherman-on-bailing-out-foreign.html) confirms that this is the case. Backing up these claims are statements from UK Prime Minister Gordon Brown (http://afp.google.com/article/ALeqM5ijNM_cMwGE1tTgw7S77ClXislztw) and European Central Bank President Jean- Claude Trichet (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=awjusn9I2MWk), asserting that it is the responsibility of the US government to bail out global finance and fix the global economy.

That may be slightly beyond the even US government's ability to make problems go away by throwing massive amounts of money at them.

This is true. The coming phase of the economic cycle will destroy the good along with the bad. If the bailout could prevent "good" businesses from failing, it might be worthwhile.

The problem is, it won't. The financial system isn't in danger of failing. It has already failed, past tense. The reason you're just noticing it now is that the bankers have been covering up their losses. Trillions of dollars of fictitious "wealth" have already vanished into thin air. That's gone, it's not coming back, and the government can't do anything about it. And it's already wrecking the economy, present tense.

The bailout won't stop the process. In the long run all it will achieve is putting the government even deeper in the hole it's already in, and severely weakening the US dollar.

All that said, I should note that I'm not actually against the bailout bill. I think it would be very salutary for the bill to pass so people can watch it fail miserably. The sooner people learn that the government cannot magically bail out your ass when you screw up, the better off we'll be.

Indeed, the market behavior changed when the rescue plan started getting dangled in front of it. Which is natural. However, credit was locked before the rescue was floated, so it doesn't really explain the data adequately.

If this were a bailout in the traditional sense, I'd agree. But the US government stands to profit massively on this.

Yes, this ends up repairing the global finance system. To say that's not for the US's benefit is absurd, though - it's not like our economy is insulated from the global economy. And it's not like there are many other institutions with the ability to invest $700 billion.

"Fictitious wealth" is a really misleading way to describe the bad debt. It's debt backed by material assets with lasting value. The problem is that the assets are totally illiquid, and the debt has been defaulted on, leading to a clusterfuck. But the wealth isn't fictitious.

Now, it's true that the basic assets - in this case the debt - did not appreciate in value, and have in fact depreciated. But that's not evaporating wealth. That's simple loss of value. That's like saying that if you drop an expensive vase and it shatters the wealth evaporated. No - you just substantially de-valued the asset. It happens. Wealth is a measurement of value. It's not a thing in and of itself.

The thing is, the main assets are also behaving irrationally because of transient market conditions - a glut of houses on the market, a lack of real knowledge or understanding about the long term risks of the debt, and a blind panic are all leading to the assets being severely depreciated in value. But again - value changes. The problem is that you have to find a home for the assets while the value changes. The major criteria of that home is, basically, that it has to be someone with a staggeringly large amount of money.

Enter one of the few entities in the world to fit the bill, the United States Department of Treasury. Who can afford to buy the assets at distressed prices and sit on them until the market returns to rationality, then sell them at a profit from what the Treasury paid. Which, for the worst of the assets, should be in the 15-25 cents on the dollar range.

Now, that doesn't remove the recession. You're right - nothing will do that. You can't have trillions of dollars of assets lose 50%+ of their value without causing a recession. That's obvious. Anyone who is expecting the rescue plan to go through and instantly repair the economy is delusional. What it will do, however, is prevent a rapid deterioration of the situation from "really bad recession" to "complete financial breakdown." But yes - the recession ship has already sailed.

In brief: the failure of the bailout

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