The latest round of bailouts - can someone explain?

[laurence]

U.S. moves to thaw credit for consumers - Economy in Turmoil- msnbc.com

So after all the hemming and hawing about $700 billion, I wake up to find another $600 billion in the mix like it's no big deal? I'm very confused. Where was the authorization for this, and why is giving more money to institutions going to have a different outcome than last time? Am I wrong to understand the banks simply hoarded the last bucket of money instead of lending? So now we expect CC companies to act differently? And now buying up toxic mortgages is a good thing again, after being a bad thing, after being a good thing? What the hell? This is not the way to instill confidence. At the same time, the markets seem to like it. Everyone's balance sheet keeps looking better, I guess.

 

[SteveL]

FED vs Federal Govt.

The latest $600B is the Federal Reserve buying assets from member banks. The Fed needs no addl authority, since it can create money by buying and selling Govt Securities. The Fed cannot invest in banks hence the $700B had to be voted by congress and managed by the Treasury rather than the Fed.

The Fed is the most powerful entity in the mix, and the fact that it couldn't contain this situation tells you how bad things are. By some reports, Citi still has 1.3$ Trillion off-balance sheet assets of potentially dubious value.....

 

[LOL!]

I expect alot more 0%-interest, no-cash-advance, no-balance-transfer-fee offers from my credit cards. I will take them up on it and promptly buy US treasuries with the cash.

 

[FinanceDude]

Maybe the Fed can buy dubious assets from the UAW, since they seem to like owning high risk, high default "assets"..........

 

[Frugality_of_Apathy]

At the same time, the markets seem to like it. Everyone's balance sheet keeps looking better, I guess.

I have to wonder, do the markets really like it or is it just the instant spike in inflation convinced more people they were either going to lose there money to inflation or gamble on the stock market?

Or maybe it's just those banks with 700 billion to burn rolling the dice on the market now that they know the government will always give them more money if they lose what they have.

 

[SteveL]

Watch for the new UAW Bank

Maybe the Fed can buy dubious assets from the UAW, since they seem to like owning high risk, high default "assets"..........

If the UAW could get a bank charter then.......

 

[ChrisC]

If the UAW could get a bank charter then.......

We all would have been spared this mess if Walmart got the bank charter it wanted a few years ago -- it would have added market discipline to the industry, right? Walmart knows how to manage businesses.

It's all a confidence game now.

 

[Architect]

The Fed's pushing on a string unfortunately. They can't even control the Fed Funds rate which is down around zero, and should be 1%.

This is another example of 'even if you throw a horse into the pond you can't necessarily get him to drink'. After years of too much credit, consumers and businesses are prudently cutting back. But the Fed and Treasury don't want that, they want you all to go out and buy more cars or whatnot.

I don't think it'll work, a small committee can't take on the whole economy.

 

[SteveL]

The question is which pain do we want

The Fed's pushing on a string unfortunately. They can't even control the Fed Funds rate which is down around zero, and should be 1%.

This is another example of 'even if you throw a horse into the pond you can't necessarily get him to drink'. After years of too much credit, consumers and businesses are prudently cutting back. But the Fed and Treasury don't want that, they want you all to go out and buy more cars or whatnot.

I don't think it'll work, a small committee can't take on the whole economy.

An economy with all prudent, careful people will be a smaller economy than what we have had before. Not just in the US, but everywhere.

The world average standard of living has to fall. The last time this happened, the result was WWII. Depression in Germany led to rise of Hitler.....

 

[Nords]

Depression in Germany led to rise of Hitler...

Godwin's Law by the 9th post of a thread on economics-- that has to be some sort of doom & gloom record!

 

[OAG]

You want Doom and Gloom. Here is what some learned Russian thinks of the entire US - He accounts for Alaska by saying it was only leased to us anyway. Did not notice where he was putting Hawaii - maybe it was not in his geography book: DRUDGE REPORT: RUSSIAN ANALYST PREDICTS DECLINE AND BREAKUP OF USA 2008®

 

[FinanceDude]

You want Doom and Gloom. Here is what some learned Russian thinks of the entire US - He accounts for Alaska by saying it was only leased to us anyway. Did not notice where he was putting Hawaii - maybe it was not in his geography book: DRUDGE REPORT: RUSSIAN ANALYST PREDICTS DECLINE AND BREAKUP OF USA 2008®

Hey, its easy to criticize. Maybe he needs to relearn a little Russian history to see how an economy can collapse in spectacular fashion...........like the good ole USSR.........

 

[FIRE'd@51]

The private sector (which includes the consumer) is de-leveraging, which is a very painful process. To ease this pain, the Fed and Treasury are leveraging up big time. It's sort of like a "Conservation of Leverage" principle, where the total leverage of the economy is held "constant" to ease the overall pain, while transferring it from the private to the public sector, not unlike the conservation of energy or momentum in a closed system. What possibly awaits us at the other end of this process a few years down the road is frightening to me.

I'm not saying it shouldn't be done. I'm just afraid we may be building a ticking time bomb which could result in serious inflation a few years out. At some point we will have to face the music and de-lever the entire economy. I guess the government believes it can do this slowly over a period of many years, and this will be preferable to having the private sector do it over a shorter time period. Time will tell.

 

[laurence]

Oh, my bad, it's $800 billion, but what's $200b among friends? Paulson said this was to free up the frozen credit markets because consumers can't get loans for basics. Bull#*(%! I went and bought couches last week and took advantage of their 6 months same as cash. They approved me for 3 times the cost of the couches. What he's really saying is people who's credit isn't worth $%#@ can't get loans, and we depend on a busy loan sharking market to keep the economy going. I'm so pissed off, what a bunch of liars.

This makes Obama's plan seem puny. What's another $500b gonna do that $2 trillion didn't?

 

[laurence]

The private sector (which includes the consumer) is de-leveraging, which is a very painful process. To ease this pain, the Fed and Treasury are leveraging up big time. It's sort of like a "Conservation of Leverage" principle, where the total leverage of the economy is held "constant" to ease the overall pain, while transferring it from the private to the public sector, not unlike the conservation of energy or momentum in a closed system. What possibly awaits us at the other end of this process a few years down the road is frightening to me.

I'm not saying it shouldn't be done. I'm just afraid we may be building a ticking time bomb which could result in serious inflation a few years out. At some point we will have to face the music and de-lever the entire economy. I guess the government believes it can do this slowly over a period of many years, and this will be preferable to having the private sector do it over a shorter time period. Time will tell.

Now if only I could RE market time. I'll buy a huge house in a great neighborhood for ~$1 million, then scrape by until 5 years later when the hyperinflation makes a Big Mac cost $10,000.

 

[haha]

Hey, its easy to criticize. Maybe he needs to relearn a little Russian history to see how an economy can collapse in spectacular fashion...........like the good ole USSR.........

I would think that this might make him a better analyst. Much of what he says is clearly true. USA was struggling, and then we put a nail into the coffin with the adventures in the Near East.

When has there ever been an empire that endured with only a dominant military, without the economic strength to maintain it?

And his observation that many of our large banks have failed is correct. We are subsisting on the kindness of states with interests opposed to ours.

What can China offer the world? Incredibly cheap goods, a very strong economy, 1+bln people and a large army. Russia? Natural resources of all kinds, and the ability to create a strong science and military establishment. USA? "We will consume your goods and burn your crude".

Oh, I'll take the USA in this contest!

Ha

 

[FinanceDude]

What can China offer the world? Incredibly cheap goods, a very strong economy, 1+bln people and a large army. Russia? Natural resources of all kinds, and the ability to create a strong science and military establishment. USA? "We will consume your goods and burn your crude".

Oh, I'll take the USA in this contest!

Ha

ROTFLMAO!!

I think I'll take our military over China or Russia's..........

 

[haha]

ROTFLMAO!!

I think I'll take our military over China or Russia's..........

At present, yes. Still, the current conditions do not always foretell future conditions. If they did, nothng would ever change. One would have "taken" Rome's military over the Northern tribes that eventually did them in.

Do you have an example of an economically weak empire, a large net debtor, which endured on the basis of a currently strong military?

I don't think there is one, but I might have missed it.

Ha

 

[laurence]

At present, yes. Still, the current conditions do not always foretell future conditions. If they did, nothng would ever change. One would have "taken" Rome's military over the Northern tribes that eventually did them in.

Do you have an example of an economically weak empire, a large net debtor, which endured on the basis of a currently strong military?

I don't think there is one, but I might have missed it.

Ha

Mongolian empire made it a hundred years that way!

Seriously, I'm not ready to start hammering nails into the coffin lid just yet. In the long run I see a diminished U.S., but one that will be o.k. The Roman empire suffered from civil wars, looting and sacking of Rome multiple times, food shortages etc. and still at least staggered along for a couple hundred years. If you turn on the news and Washington is in flames, that may signal the beginning of the end, but it could take centuries from there. When everybody sees D.C. in flames for the third time and just shrugs, then we may be through.

 

[OAG]

Having lived through President Carter's military years and having a Son who lived through President Clinton's military years, I am sure we will have the finest military on earth. I just hope there is enough financial and public support for it.

 

[haha]

Mongolian empire made it a hundred years that way!

Seriously, I'm not ready to start hammering nails into the coffin lid just yet. In the long run I see a diminished U.S., but one that will be o.k. The Roman empire suffered from civil wars, looting and sacking of Rome multiple times, food shortages etc. and still at least staggered along for a couple hundred years. If you turn on the news and Washington is in flames, that may signal the beginning of the end, but it could take centuries from there. When everybody sees D.C. in flames for the third time and just shrugs, then we may be through.

Didn't the Mongols have the brains to steal enough from their defeated foes to make their wars pay-as-you-go? In contrast, our wars seem to be largely a mechanism to bleed us, rather than those we target.

I am not talking about military defeat. Only large loss of world influence, possibly loss of the $ standard. Loss of the ability to consume much more of the world's natural resources and tradeable goods than we produce. This of course will also mean that USA will have less military influence. Face it, by any rational accounting we have lost bigtime in Iraq already, if there was any goal other than to kill more Iraqis than they were able to kill of us.

I think this loss of empire is already a wrap. The Bush wars have likely advanced the timeline 10 or 20 years.

Ha

 

[deserat]

Hmm, DC in flames.....would that empty out the place and allow new people to then rebuild and occupy it? That would bring about a term limit mechanism, perhaps......I'm thinking more about Congress...

 

[brewer12345]

Oh, my bad, it's $800 billion, but what's $200b among friends? Paulson said this was to free up the frozen credit markets because consumers can't get loans for basics. Bull#*(%! I went and bought couches last week and took advantage of their 6 months same as cash. They approved me for 3 times the cost of the couches. What he's really saying is people who's credit isn't worth $%#@ can't get loans, and we depend on a busy loan sharking market to keep the economy going. I'm so pissed off, what a bunch of liars.

I think that the Treasury has doon a generally poor job of administering the TARP program and I look forward to fresh blood arriving in January. Having said that...

The program announced today appears to be very specifically targeted and well thought out. Agency MBS and bonds are priced at historically wide spreads to treasuries. This directly affects the cost of conforming mortgages (the kind that actually require you to put down a decent deposit, document your income, etc.), which is a huge roadblock in the way of the housing market bottoming, let alone recovering. So having the Fed go out and buy a bunch of these securities quite directly communicates to the market that there is a strong bid for these assets, which encourages others to step in. Since these securities are backed bythe feddle gummint anyway, its not like the Fed is taking any incremental risk.

The asset backed thing they announced is similarly targeted and well thought out. The Fed will lend on AAA rated bonds backed by car loans, credit cards, etc. These are squeaky clean securities but the market has shut down and spreads are at historical levels. Again, this directly affects the cost and availability of consumer credit, the revival of which will be key to reviving the economy. Because of the structure of what the Fed is doing, I believe they essentially are taking no risk.

So I think there was basically no incremental risk being assumed by the Fed (although the treasury put up $20 billion in TARP funds). I believe it is just a way to inject liquidity into very specific, targeted sectors that will help revive the economy. I would prefer they did not have to do this, but stuff like this is a lot les costly than massive stimulus spending that would otherwise be required.

 

[FinanceDude]

I think that the Treasury has doon a generally poor job of administering the TARP program and I look forward to fresh blood arriving in January. Having said that...

You are being kind to say poor.....ABYSMAL is a better word. Congress gave money out like it was confetti until the carmakers wanted some, now we need business plans and such.........

The program announced today appears to be very specifically targeted and well thought out. Agency MBS and bonds are priced at historically wide spreads to treasuries. This directly affects the cost of conforming mortgages (the kind that actually require you to put down a decent deposit, document your income, etc.), which is a huge roadblock in the way of the housing market bottoming, let alone recovering. So having the Fed go out and buy a bunch of these securities quite directly communicates to the market that there is a strong bid for these assets, which encourages others to step in. Since these securities are backed bythe feddle gummint anyway, its not like the Fed is taking any incremental risk.

Does that mean that the banks can no longer us their TARP funds to buy smaller banks at fire sale prices? Because that's all a lot of them have done, while keeping underwriting so strict noone can get a loan. We went from NIV loans to now where even folks with good credit have to jump through hoops........

 

[brewer12345]

Does that mean that the banks can no longer us their TARP funds to buy smaller banks at fire sale prices? Because that's all a lot of them have done, while keeping underwriting so strict noone can get a loan. We went from NIV loans to now where even folks with good credit have to jump through hoops........

I think taking in capital in order to resolve issues with sick banks in a way that reduces the cost to the FDIC is a perfectly reasonable thing to do with some of the TARP money, for the record. But of course we need lenders to lend to get out of this mess.

I don't really have any idea how hard it isto get a loan these days. Anyone tried? I was on the phone with Pen Fed earlier today to make sure they got the ACH information I put in on line and they wanted to increase my credit card limit, but that is hardly representative.