demiurgent (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
demiurgent) wrote2008-09-29 09:11 pm
demiurgent) wrote2008-09-29 09:11 pm
In brief: the failure of the bailout
It's surprisingly simple.
Neither major political party was willing to sacrifice the election to save the nation.
There is nothing more basic than that. Neither party would sacrifice personal power in order to save the economy of the United States of America.
My representative voted Nay. For the first time, I'm considering voting against her in November. I'm certainly calling her office tomorrow to express my deep disappointment in her.
For those who don't want to see the bailout of Wall street firms because gorsh, they's all rich and it's not fair? I hope you really, really enjoy the next ten years.
Neither major political party was willing to sacrifice the election to save the nation.
There is nothing more basic than that. Neither party would sacrifice personal power in order to save the economy of the United States of America.
My representative voted Nay. For the first time, I'm considering voting against her in November. I'm certainly calling her office tomorrow to express my deep disappointment in her.
For those who don't want to see the bailout of Wall street firms because gorsh, they's all rich and it's not fair? I hope you really, really enjoy the next ten years.
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If people who make bad investment decisions are given more money to keep their businesses from failing, how likely is it that they will use that money wisely?
In other words, the bailout might not have really helped the economy anyway (http://www.youtube.com/watch?v=zPHUtFxaJ8M).
I don't expect to enjoy the next ten years, but I wasn't planning to. I've seen this coming since the nineties. If you want to blame somebody, try this guy (http://en.wikipedia.org/wiki/Pointy-Haired_Boss). I've long known that with him running things, what is happening now would happen sooner or later.
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If someone proves he can't handle your money, you don't give him more money. You let him go bankrupt and wait for someone else to pick up the pieces.
If you give him more money, he's going to go bankrupt later instead, and now you don't have the money you gave him.
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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.
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The problem is that when you're creatively destroying banks, you have ridiculous and disproportionate collateral damage, because banks are the institutions that are needed to let the smaller businesses jump in and buy the assets of the self-destructing businesses. So when the banks are the self-destructing businesses, instead of going into creative destruction, the system seizes up. Hence why this is different from a normal recession.
That's what the bailout fixes. This isn't just throwing $700 billion to banks and saying "Try again." Banks will still take massive losses on the CMOs and mortgage backed securities, selling them to the government for pennies on the dollar. What it does is it has one of the few major sources of capital to be basically untouched by the crisis - the US federal government, which was not invested in CMOs basically at all - start participating in the market by making a play for the devalued assets. And, if it's done right, it establishes a price point for those assets so that when the flow of capital resumes again creative destruction can take place.
Banks aren't going to go "Aha, now we can resume making subprime mortgages," because banks are going to have gotten ten cents on the dollar for the last set. But what banks will do is float a small business their payroll loan again. Which, as it stands, banks are not doing.
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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.
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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.
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These overpriced derivatives make up the bulk of the "nonperforming assets" that will be purchased under Paulson's bailout plan. For highly inflated prices.
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