Why the Bailout Bill Alone Won't Solve the Credit Crisis 22 comments
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I'm not surprised that three-month Libor ticked up again today, to 4.21%. TED's now at 357bp (chart above), which is really bad, and it's going up, not down. While the stock market has settled down after the chaos of Monday, the interbank market most emphatically has not. Even AT&T (T) can't borrow at terms longer than overnight: I'm getting almost nostalgic for the days when three-month money was considered short-term.
Will the bailout bill help bring liquidity back to the money markets in general? If it passes, will banks start lending 90-day funds to each other again? I fear the answer is no.
The problem is that no one knows the answers to two simple questions, even assuming the bailout passes the House:
- How long will it take for the $700 billion ($350 billion to start) to flow from the government into the financial system?
- How big of a spread will there be between the prices the government pays and today's market prices? The difference is essentially the degree to which banks will be recapitalized, and therefore safer.
When I say that no one knows the answers, I mean that no one knows the answers -- not even Hank Pauslon. Until the answers emerge, I doubt there will be much in the way of increased confidence in the banking system. And once the answers emerge, they might not be the answers that the markets would most like to see.
To put it another way: Passage in the House is necessary for the banking system to return to some semblance of normality. But it's not remotely sufficient.
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First you say the money will not work because there is no certainty that banks will start lending, even though it is in their best interest to start lending. But with out the back stop of the $700, the no lending part is a certainty. So ur first question becomes irrelavent.
Second, the price the government pays is essencial for the gov. The market (via the stock prices, not of the actual assets) are already pricing these assets to basically zero.
Also, if no one know, how in the world can you say it will not work?!?
The main thing is to get enough of the bad assets out of the balance sheets, and let the system TRY to function normally. (Its better then doing nothing. If you do nothing it will cost much more than 700b in market cap.)
Note how the ban on short selling will last until a bailout package is passed, propping up asset prices until they can be sold. This bailout is a transfer of wealth, period.
If they get rock bottom prices there is no point because it doesn't really help the banks.
The day BEFORE the House voted down their version of the bailout,. the Fed quietly moved $845 Billion to foreign banks and other "sqeaky wheels". And since the "discount window" was opened, $Trillions - very hard to know the exact amount because it is not reported - have been funneled to insolvent financial institutions. The $700 Billion in the "recovery act" is chump change. Congress and the financial gurus are betting on the ignorance of the American people to push these continuing programs to bail out financial institutions that have lost TRILLIONS of dollars with their stupid, greedy, incompetent business practices. Worse, most of the media informational sources on which Americans rely are part of the financial empire that created this mess.
Anyone who thinks this input of a few hundred billion dollars will "fix" things is absolutely, totally wrong. Our financial institutions are holding - off the books - hundreds of TRILLIONs of dollars of derivatives, much of which is worth 12 to 65 cents on the dollar. Really. No, I am not making this up.
And you - the American citizens - want our elected "leaders" - and I use that term loosely - to commit $700 Billion dollars to "fix" the hundreds of Trillions of dollars problem. Do the math. You cannot fix a $100 Trillion problem with $700 Billion.
Meanwhile, the US government is loaning more $Trillions of dollars to American financial companies at 2% interest by borrowing the money from foreign governments at 5% interest. You have to be seriously financially challenged to not understand that this is a stupid, disastrouds policy. The business model from hell.
What it all eventually boils down to is that the American voter is ignorant - doesn't have a clue what really is happening, what really is at stake, what really matters. The 'talking heads' are winning. They say that we "must" bailout Wall Strreet, that we "must" approve some bailout plan, and , worse, that if we do approve and fund a bailout plan, that it will fix the problem. It won't. The IOUSA is a nation that has swapped its strength for the weakness of a debtor. We don't own our homes, the bank does. We don't own our cars, the finance company does. We don't own our furniture, our carpets, our anything. Heck, even the groceries in our refrigerators were put on various credit cards. We are broke. But we won't admit it. We got the money for our new granite countertops from China. But we won't admit it. We think we "own" it.
Debt is nothing more than pre-spent income. By mortgaging future income to China, Russia, India, etc, what we Americans are doing is supporting THEIR economic development and ruining ours. Anyone who tells you different is relying on the ideas that come from the folks that recently called themselves the "masters of the universe" who, it turns out, couldn't even manage an investment bank. Masters of distraction, perhaps. Masters of deception, yes. Masters of exaggeration, for sure. And one of them is making believe he can fix this problem that he and his buddies created. And he's going to do it by getting the credit markets going again. Or, in plain English, by re-inflating the credit bubble. Really. And Congress believes him. They're buying it. I'm buying gold.
Oh, and with the anti-oversight clause in this bailout package (no one can prosecute Paulson for misuse of the funds and he has complete discretion on where it's spent), he could spend all $700B on strippers and there would be no recourse. That's your tax $$$ at work!
I also do not see how changing mark-to-market rules will help us going forward either as the market can determine prices in a normal (possibly abnormal) context much better than a small group of individuals.
Not true: From 1800 to 1912 the CPI went from the upper 40s to the upper 20s, excepting some raises during years of war. A giant 100 year deflation. Anyone making $5/hr in 1912 had a better standard of living than someone making $5/hr in 1800 by a long shot.
Of course the dollar was backed by a fixed amount of gold for most of that time period.
If your unit of savings maintains value over time, deflation is a good thing. You can buy more with the same income. It's only when the unit of saving loses value over time that people fall behind because their savings erode.
for Reviving the Economy
by Stan Muse
The Federal Reserve is out of Federal Funds rate options and now the Congress is about to pass legislation which will be the largest bailout bill in the history of the world. Fannie Mae and Freddie Mac are now penny stocks with perhaps over 1000 bank failures yet to come. The American taxpayer will be told that they and their children will be writing big checks to rescue the Wall Street crooks and congressmen that caused all the problems, while receiving nothing in return.
Anyone who has been following recent congressional hearings knows by now that this is unacceptable to Main Street, the voters who will be firing their congressmen for turning the USA into a socialist country. It is also widely believed that this bailout bill may not be embraced by Wall Street because of its onerous terms even if passed. Finally, it will not provide sufficient liquidity for improving the rest of the economy.
A much more effective and fairer way to end our economic crisis is easily attainable. To state it simply, all Congress has to do is to pass a Mortgage Investment bill which allows individuals a one-time option to use some of the funds in their IRAs to pay off their mortgage balance in full, without any penalty, interest, or taxes for doing so. In return, individuals choosing to exercise this option give up their mortgage interest tax deduction for life. This bill could be passed quickly and independently of any other economy-related legislation currently being debated, or included in the current bill. Individuals choosing this option would need sufficient IRA funds to pay mortgage balance in full. The actual payment to the individual’s mortgage company would be done by the IRA managing institution to avoid fraud.
As one senator recently stated, ‘for most people their home is their IRA’. For many others, their 401-K plans hold many trillions of dollars, much of which by now is parked in money market funds or T-bills as mine is. If these IRA funds could be released to pay off mortgages, we could possibly avert, or at least significantly shorten, the economic recession we now find ourselves in. In fact, no other bailout legislation may even be necessary, although more regulatory legislation is certainly needed.
I asked Allan Meltzer, Arthur Segel, and Ellen Zentner to review this proposal and received some positive responses. Ellen said it seemed to be fool-proof and better than a reverse mortgage. In fact, it is a no-brainer for the homeowner with a large 401-K balance, and for the government. The only people who might object, as Ellen stated, are the bankers who want to keep homeowners dependant on them, especially those in the upper-income group. But even the bankers can not want the government to own a large stake in their business for a multitude of reasons.
It makes sense to allow people to use their IRA money, which they earned, to invest in the best and safest investment they could ever make, their home. Presumably they will need a place to live in retirement on a fixed income. It makes no sense for someone with more than enough IRA funds to cover their mortgage balance to loose their home because they lost their job and can not pay their mortgage. It also makes sense because it is not some form of government bailout which rewards the bad behavior of mortgage companies and unqualified borrowers. Instead, it rewards the good behavior of those who have saved and invested in the economy
If only 5 million people chose this option, for an average of only $200,000 each, the result would be $1 Trillion in paid-off mortgages, providing liquidity to the mortgage industry. By executing the option, an individual’s annual mortgage payment would become disposable income to put back into the economy or back into IRA accounts. To the individual, the effect is the same as lowering taxes. If only 5 Million people were able to put back $20,000 per year into the economy, the result would be a $100 Billion per year stimulus package for many years to come.
In my case, with $800K in IRAs and a secure pension, I would increase disposable income by $1600 per month while reducing the IRA balance by only $160K, but saving over $120K in future interest payments. I could retire, which I can not afford to now, and leave my six figure job to someone else. I could also quickly replenish the IRA money used to pay off my mortgage with the extra income.
Adding a further provision to delay receiving Social Security payments for a year in order to exercise the option would be a baby step towards privatization of Social Security. Anyone financially able to exercise the option should be able to delay the payments. For every 5 million people choosing the option, approximately $100 Billion would remain in the Social Security fund. This could fix our problems with Social Security for good.
Some of the benefits of this plan would be to:
• Immediately increase an individual’s or married couple’s disposable income by tens of thousands of dollars each year while enabling them to become debt free, helping families to stay together
• Save homeowners hundreds of thousands of dollars in mortgage interest payments
• Encourage individual IRA savings by many who have never saved
• Allow many people to retire earlier than they otherwise could
• Create demand for housing, reducing inventory, and stopping the decline in home prices
• Stimulate the overall economy, creating and saving jobs
• Not cost the government anything, and actually Increase federal, state, and local tax revenues by eliminating individual mortgage interest tax deductions, without raising tax rates
• Force the banks to sell their good loan assets to cover their bad loan losses, instead of forcing the taxpayer to buy their worst loans, and increase liquidity for new loans to those who need them
• Allow the free market economy to work through the crisis rather than resorting to socialism
• Not increase the national debt nor the money supply as a bailout would do and contribute to inflation
• Allow the individual home owner to the freedom to become their own banker with the money they earn, reducing America’s dependence on bankers, and changing America from renters and borrowers to homeowners and savers
The merits of this simple plan, the Mortgage Investment bill, for saving the economy, instead of trillions of dollars for a Wall Street bailout which will socialize the finance industry, are obvious and would benefit everyone involved. The individual gets more disposable income and a chance to live debt free, the capital markets get needed liquidity, the government collects more taxes and collects them sooner at the expense of the bankers, the housing market gets more demand, and the general economy gets a much needed boost for the next few years.
Democrats should like this plan because they can claim that it lets the wealthy pay for this mess. Republicans should like it because it increases disposable income, which has the same effect the same lowering taxes. The average voter should like it because it addresses all segments of the economy with a huge economic stimulus package, not just Wall Street, and costs nothing while helping to pay off the national debt and potentially fixing Social Security.
good banks are not supposed to collapse if their assets are
good, is Economics 101, or all the banks full of garbage debt?
Bad banks must die and their depositors needs to be bailed out
Ireland style by the rest of taxpayers, is not fair but the option is
unacceptable. There are some moral decissions to be taken now.
Is true that GS benefited from AIG collapse? I really dont know.
Of course all the "savings" for the paid-off homeowner over time will come out of the bankers' profits, so it will never pass Congress in a million years. :-(
Perhaps they should give a few bucks of the bail-out money to people in Michigan...
$700 Billion to criminals on Wall Street and in the REAL WORLD homes are now selling for $1.75 on Ebay. That is not a mistake! $1.75. From a report on a Tampa Bay's newspapers website:
www.tampabay.com/news/...
People have followed the CNBC, ABC, CBS, Bloomberg, New York Times and Wall Street Journal Pied Pipers straight to hell.
Ten times the $700 billion will not help the mess this economy is in globally.
The local currency depreciated significantly, increasing the competitiveness of the exports and attracting a huge flow of foreign investment so real state market was ready to grow next year. Government debt traded in the secondary market with a big discount,
and debt to equity swaps created opportunities for foreign investment in most of the economic sectors. The economy was growing China style 2 years after. Pain now, gain tomorrow matbe Obamacaine have the guts, I recognize that it was POW lifestyle for a while, but it worked.
$ 700.000.000.000
potential closures
6.000.000 households
bailout/potential closure
$ 116.667
$ 700b is enough if expended wisely.
"When I say that no one knows the answers, I mean that no one knows the answers -- not even Hank Pauslon."
Oh! We'll know what the problems really are THE WEEK AFTER the legislation passes. Remember Mae and Mack? They wouldn't need the bazooka... Then they looked at the books... Boom-Boom!
E-mail, FAX, Write or call your member of the U.S. House of Representatives and tell them NO on this crooked piece of legislation that is the economic equivalent of the Gulf of Tonkin Resolution. Just like Vietnam, this will never end until we stop Bush-Paulson and their wreckless economic policies.
You do raise an interesting point that has been a major failure of the Bush Administration since day one. Where is plan B? Where is Plan C?
I guess this corrupt bail-out plan was another of Bush's my way or the highway bits of legislation. When it didn't pass, no plan B. Now they are putting pork and lipstick to dress up this bad bill hoping that the U.S. Reps will bite. DON'T! Bill 2 is even worse than Bill 1 - Massive spending PLUS tax cuts... That should put us into debt until the stars fall from the sky.
What's worse, this won't have any stimulative effect anyway -- even with clean(er) balance sheets, there simply won't be that much lending going on. We've all apparently woken up to the fact that we are in recession (how deep?) and everyone is tightening the belt...not willing to go get a loan for anything that's not absolutely necessary. Any business that is being hurt by the credit markets seizing...you just have to question whether it was doing well to begin with -- if it needed short-term funding for its day-to-day operations. That just seems like a band-aid on an arterial bleed.
Furthermore, look at Obama's *many* affiliations with ACORN -- an association of "community organizers" who *actively* blackmailed banks into making bad loans under threats of discrimination. Franks et al then made sure Fannie and Freddie were authorized to buy the subprime junk off the banks after the banks began wailing about having the bad debt on their balance sheets!! Enter the government.
In 2005, John McCain sponsored a bill that would have cleaned up Fannie and Freddie, and warned about the consequences of failing to do so. The bill was defeated...and 3 years later, here we are!
Do your homework before blaming Bush or Republicans for this mess!!