In brief: the failure of the bailout

[demiurgent]

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.

Comments

[snowspinner.livejournal.com]

"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.

[richm90071.livejournal.com]

If you think this is just about "bad debt" then you don't really understand the problem. Most of the lost value comes from derivatives (http://en.wikipedia.org/wiki/Derivative_(finance)) like Mortgage Backed Securities (http://en.wikipedia.org/wiki/Mortgage-backed_security) and Credit Default Swaps (http://en.wikipedia.org/wiki/Credit_default_swaps). The models used to calculate the values of these financial instruments were seriously flawed (). The risk of default on the underlying mortgages was underestimated, consequently, the value of the derivatives was overestimated. This is the "fictitious wealth" I'm referring to, and now that the flaws in the models are known, that "wealth" cannot be recovered.

These overpriced derivatives make up the bulk of the "nonperforming assets" that will be purchased under Paulson's bailout plan. For highly inflated prices.

[richm90071.livejournal.com]

Sorry, left out this link: How Risk Models Failed Wall St. and Washington (http://www.washingtonpost.com/wp-dyn/content/article/2008/10/01/AR2008100101149.html)