Do you support the Paulson bail out?

[cardude]

I own a business that relies on functioning credit markets, so yes I'm for the plan. It pisses me off that our elected politicians are mucking this thing up because it needs to happen quickly from what I understand from Buffett's comments and others who KNOW WHAT THEY ARE TALKING ABOUT. The crazy thing is it's republicans now who are throwing a wrench into the works (Shelby from Alabama) because the original plan does not help "main street". Excuse me, but when did conservative republicans really start to worry about the common man? Insane, and I've always voted R because of the business I'm in.

I want to know how the "common man" is going to function without efficeint credit markets, and what will happen to their job if credit freezes up any worse? Do they realize that the company they work for probably uses the credit markets to fund ongoing operations to some extent? Inventories? Lines of credit? How many businesses are there that use no leverage at all? Not many. What about retail businesses like mine who rely on credit so the regular Joe can afford big ticket items? Lots of people work for retail based busiensses if I'm not mistaken.

 

[harley]

I own a business that relies on functioning credit markets, so yes I'm for the plan. It pisses me off that our elected politicians are mucking this thing up because it needs to happen quickly from what I understand from Buffett's comments and others who KNOW WHAT THEY ARE TALKING ABOUT. The crazy thing is it's republicans now who are throwing a wrench into the works (Shelby from Alabama) because the original plan does not help "main street". Excuse me, but when did conservative republicans really start to worry about the common man? Insane, and I've always voted R because of the business I'm in.

I seem to be repeating myself, but I can't understand why people are finding it hard to believe Rs are against this plan. This is exactly the kind of plan Rs are supposed to be against - big gov't, market controls, socialism, etc. My only real surprise is that they actually still feel this way. I had been thinking that the Ds were socialists, the Rs were Ds, and the Libertarians were the only real Rs left.

I'm not saying we don't need some kind of bill, but I can't understand why there can't be any controls allowed, why there can't be judicial review in case of hanky-panky (or hanky-paulsony ), why it has to be sold the same way timeshares are (act now! you'll never get this chance again). I want the bill to go through, but with the kinds of checks and balances that any one of us would insist on in a contract we were entering in on.

 

[MichaelB]

The man has spoken!

The circle is now complete.

Sept. 26 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan urged lawmakers to back ``extensive'' measures to tackle the worst financial crisis since the 1930s and head off a recession.
``We urgently advocate immediate, extensive action that would maintain the functions of credit markets and prevent a serious economic contraction,'' according to an e-mailed statement, which was sent to lawmakers in Washington last night. It was also signed by former Treasury Secretary George Shultz and Stanford University economist Robert Hall.

Bloomberg report Bloomberg.com: Worldwide

Greenspan letter Real Time Economics : Greenspan Calls for Action on Financial Crisis

 

[chinaco]

I support some sort of action. I am sure Paulson's plan can be improved.

I am concerned about what may happen if intervention does not occur.

 

[Texarkandy]

I'm no expert on this - but just some random thoughts:

If we bail out the securities companies, their investors, CDS folks, how does that change the risk of default in any of the underlying mortgages embedded in these securities? Seems to me it just saves a bunch of investors (who took a speculative risk by the way).

How does this stop or even slow the decline in housing prices? (which is the major underlying cause of these securities becoming worthless in the first place as I understand)

If we have to bail out anybody I'm in favor of trickle-up rather than trickle down in this case - perhaps we (the fed govt) could offer to refinance individual mortgagees - let them come into some local govt office, show us their situation and if they are truly at default risk we will refinance them into 40 - 50 year loans if necessary - (I bet the feds could offer a very low interest rate considering how cheap we are loaning money to the finance industry.)

At least that might slow the slide in real estate prices & thus prop-up some other mortgages not currently at risk of default.

both parties are guilty & took a risk - both parties should accept the consequences of their risk - however if we have to pick one guilty party or the other to bail out - I'll pick my neighbor (despite his foolish housebuying decision).

Note: I qualified the above with "if we a have to bail out anybody" - in that I am kind of philosophically oppose to bailing out anybody at all.

 

[ChrisC]

This nonsense about the government/taxpayer maybe making a profit in the end is just that. The bailout only works if the bad loans, or securities built on top of them, are purchased at or close to book value, not true value.

I find it delicious irony that Bernie Sanders, self-described democratic socialist, is one of the ones saying "talk to the invisible hand," while many of the erstwhile rugged-free-marketeers are begging for government handouts.

If you lay me 2:1 odds, I'm willing to wage that bet with you. I might even take 1:5 to 1 odds, as well. I think the purchase will be at fair value or mark-to-market value, with a steep haircut, which could translate into a very good price for the Government, especially if it does this "reverse auction" thing they have floated. It's all net, interest margin profit, right?(I don't understand what you're saying about a profit if purchased at book value.) You know, the last time the Government did this, it turned a profit, after the depression. You can throw out the RTC example because the RTC was quickly liquidating and not holding assets, which many claimed it should have done.

The only thing that would upset a major profit would be if the bottom of the housing market is not around the corner and we're in a housing market free-fall. And the securities are badly priced and valued. However, the plan would be successful if it only accomplishes its primary design: to "reliquify" the credit markets by injecting cash for trash (assuming the trash doesn't turn out to be gold).

That's a very ironic point you make; the whole situation is filled with political irony; a Democratic-controlled Congress coming to the rescue of a free-market, lame duck Republican Administration.

 

[wildcat]

FPA's (Rodriquez's firm) released this article in response to the bail out. I read his commentary from time to time.

He is a pretty gloomy guy but he has been warning of this for years so I give him some credit. His and most of the FPA funds have been 35-45% cash and actually placed his firm on a buying strike for about 6-8 months.

FPA News Article

 

[Gone4Good]

I'm not saying we don't need some kind of bill, but I can't understand why there can't be any controls allowed, why there can't be judicial review in case of hanky-panky (or hanky-paulsony )

Congressional oversight of the plan was one of the first changes that everyone agreed to. Whatever happens, rest assured that an oversight board will be part of the final bill.

 

[Gone4Good]

How does this stop or even slow the decline in housing prices?

Because if you can't get a mortgage you can't buy a house. Meanwhile, there are always people who NEED to sell. If you have forced sellers but no buyers, prices absolutely collapse.

If we have to bail out anybody I'm in favor of trickle-up rather than trickle down in this case - perhaps we (the fed govt) could offer to refinance individual mortgagees

This may be a preferred solution, but is probably logistically impossible to execute over a reasonable time frame. The Federal government currently has no agency that can handle millions of refinancings. And probably couldn't set up the capacity to do so for several years.

Note: I qualified the above with "if we a have to bail out anybody" - in that I am kind of philosophically oppose to bailing out anybody at all.c

Unfortunately, things will likely be worse if we don't.

 

[audreyh1]

Personally I think they out to look at the risks to the economy and work backwards from there. Not from the root causes out (underwater homeowners, overleveraged financial companies), but in the other direction.

IMO the major risk right now is containing the financial fallout so that it doesn't impede normal operation of non-financial companies. Right now, there is a horrible credit freeze up and it's starting to cause real problems with businesses being able to run their day-to-day operations. Financial companies are showing an unwillingness to lend.

The people who bought overpriced houses are already in trouble and some steps have already been taken to provide some relief and renegotiating room. The financial community has had a huge amount of assistance provided, lots of "relief valves" opened although they seem to be getting more and more stuck. Money market funds have been provided a 1 year Federal guarantee to "not break the buck" which hopefully will prevent runs on MM funds - although it is yet to be seen where the runs have really subsided. I hear rumors to the contrary. So, the financial fallout is not yet contained.

Now all the focus needs to be freeing up credit for American business. Personally, I'm not convinced that buying bad assets from financial companies will quickly result in those companies turning around and lending as usual. They don't seem willing to lend to each other or their customers any more. I guess the balance sheets are too badly damaged. There needs to be a more direct way to get the needed credit to non-financial businesses before inventory cutbacks, payroll cuts and other cutbacks start to occur on a routine basis.

Audrey

 

[haha]

FPA's (Rodriquez's firm) released this article in response to the bail out. I read his commentary from time to time.

He is a pretty gloomy guy but he has been warning of this for years so I give him some credit. His and most of the FPA funds have been 35-45% cash and actually placed his firm on a buying strike for about 6-8 months.

FPA News Article

Very interesting article, this time by Steve Romick rather than Rodriguez.

They have been excellent at keeping their powder dry. However, recently they have also made what investments they did make in some solidly underperforming stocks.

One thing I take away from this piece is that no matter how this is resolved, we likely should not expect the markets to head off to the races, other than perhaps a short term relief rally.

Many of these businesses that do survive will perhaps never again trade at their peak multiples, nor achieve their peak ROEs.

This has been the real bubble. Dot.com was just a rehearsal.

Ha

 

[FIREd]

There needs to be a more direct way to get the needed credit to non-financial businesses before inventory cutbacks, payroll cuts and other cutbacks start to occur on a routine basis.

I agree. If unemployment starts ticking up, then even people who could easily afford their mortgage (exotic or 30 year fixed, it doesn't matter) while they had a job, could be forced into foreclosure and make the real estate market even worse. Think about it, in the past 2 years the housing market has been on its knees while the economy was still relatively healthy. Add a deep recession to the mix and that could be a disaster. People might not be able to borrow money from their house (because of declining house values and credit tightening), their 401Ks might have dwindled with the stock market, and unless they have substantial cash savings, even the people who have not so far been impacted by the credit crunch and/or bad housing market might find themselves in hot water. Even people who did everything right (bought a house they could afford with a fixed interest mortgage, saved some money for retirement, had 3 months in an EF, etc...) might start being impacted by the financial crisis if unemployment starts moving upwards rapidly.

 

[Texarkandy]

How does this stop or even slow the decline in housing prices?

Because if you can't get a mortgage you can't buy a house. Meanwhile, there are always people who NEED to sell. If you have forced sellers but no buyers, prices absolutely collapse.

No offense - not saying I'm right, you're wrong - just thinking out loud here, but:

So if the bailout plan accomplishes the feat of a free & easy mortgage environment again, then people can start buying houses (they can't afford) again and all will be well?

As far as prices collapsing - I wonder if prices can really collapse for very long too far below the cost of building new - people gotta live somewhere - what's the US average cost to build a residential home now? $100 sq ft?

Seems to me any mortgage credit crunch would be short term - people with money they would like to earn interest on will eventually find responsible credit worthy borrowers.

 

[Independent]

0

If we have to bail out anybody I'm in favor of trickle-up rather than trickle down in this case - perhaps we (the fed govt) could offer to refinance individual mortgagees - let them come into some local govt office, show us their situation and if they are truly at default risk we will refinance them into 40 - 50 year loans if necessary - (I bet the feds could offer a very low interest rate considering how cheap we are loaning money to the finance industry.)

both parties are guilty & took a risk - both parties should accept the consequences of their risk - however if we have to pick one guilty party or the other to bail out - I'll pick my neighbor (despite his foolish housebuying decision).

Note: I qualified the above with "if we a have to bail out anybody" - in that I am kind of philosophically oppose to bailing out anybody at all.

I'm with you, I'd rather try "trickle up".

My idea is simple - send a $XX,000 voucher to anyone who bought a house in 2005 or 2006. Make it big enough to offset about half the market loss we're expecting on the average house. The voucher can be used for a lump sum payment on a mortgage, or it goes into an escrow account which will cover the monthly mortgage payments for a while.

This will immediately save some houses from defaults - directly helping the value of the MBS's. It will improve confidence that other people will be able to stay current. It will pay result in some payouts on some MBS slices. And, it will generally put money in the hands of people who will spend it.

Paulson and Berneke will say that this isn't as efficient as trickle-down - we get more bang for the buck with their plan. I'd agree, but say that this is politically doable (I'm not sure that their plan is) and avoids aggravating the class split that's growing in our country.

I agree that both the buyers and the lenders missed the fact that we were in a bubble. I'd rather bail out the ordinary Joe buyers the the multi-millionaire lenders who told everyone that their big compensation packages were "earned" because they were running their companies so brilliantly.

(I didn't lay out the details - smaller payments for some other years, payments vary by the size of the bubble in your area, etc.)

 

[Gone4Good]

So if the bailout plan accomplishes the feat of a free & easy mortgage environment again, then people can start buying houses (they can't afford) again and all will be well?

"Afford" is an interesting concept. There are few people in the US who can currently "afford" a house without borrowing. So at what price would the housing market clear if people had to pay cash . . . $20,000? . . . $50,000?

As far as prices collapsing - I wonder if prices can really collapse for very long too far below the cost of building new - people gotta live somewhere - what's the US average cost to build a residential home now? $100 sq ft?

We talked a little bit about this in a thread Ha started concerning the Q-ratio. I'd agree that over the "long-run" housing prices have to support new build construction costs . . . but how long is the long run? According to Ha's graph, it looked to be about 10yrs.

I'd also argue that replacement costs were inflated alongside the credit fueled building boom.

 

[Texarkandy]

I'm with you, I'd rather try "trickle up".

My idea is simple - send a $XX,000 voucher to anyone who bought a house in 2005 or 2006. Make it big enough to offset about half the market loss we're expecting on the average house. The voucher can be used for a lump sum payment on a mortgage, or it goes into an escrow account which will cover the monthly mortgage payments for a while.

Except that this plan would simply outrage those homeowners who didn't get checks - a revolution may ensue - at the least many politicians would certainly be voted out of office -

whereas in the alternative - congress doesn't think that joe six-pack would see the Paulson plan as the same thing since he's not missing out on a check somebody else is getting.

 

[Gone4Good]

The voucher can be used for a lump sum payment on a mortgage, or it goes into an escrow account which will cover the monthly mortgage payments for a while.

A lump sum mortgage payment may not help because folks who are defaulting face a monthly payment problem, not a principal balance problem. Restructuring the loan with a smaller balance and lower monthly payments or escrowing the money to cover a portion of the monthly payment could work in theory. However this idea faces a huge logistics problem. How do you administer this program on several million loans?

 

[socca]

One of the key enablers for the position that the bailout is a good idea is the beauty of borrowing: you can enjoy the benefits of the loan today, and worry about repaying the loan tomorrow. Of the many ironies associated with the current mess, this is one of the most delicious: we're going to use the same faulty attitude that got us into the mess to get us out of it!!

If my neighbor wants to go to the local casino each weekend to play the slots, more power to him. However, I object strongly when he uses his powerful contacts in Washington to force me to cover his gambling losses. This is a roundabout quasi-legal version of the purely illegal approach, which is to simply come over to my house with a gun and rob me in order to cover his gambling losses.

One of the more bizarre but widely held beliefs (thanks to fear-mongering by the kleptocrats) is that financial markets are going to 'lock up' without a bailout. If we have a truly free market, then this absolutely will not occur. This represents a fundamental lack of understanding regarding how free-market economies work. A market arises when someone has a need, and someone else offers a product or service to fill that need. If the current providers of a product or service are deemed unacceptable, then new providers will rise to take their place.

Many people are nervous because they believe that they are going to log into their brokerage accounts and see additional losses without a bailout. These people don't understand what it means to be an investor. They believe that they are entitled to endless upside and no downside.

It will be interesting to see if Americans ever fully learn who the true beneficiaries of the bailout really are, and the extent to which they have benefited at the expense of all of us. The kleptocrats are usually highly skilled at hiding their thefts behind supposedly public institutions. If you could climb inside Treasury Secretary Paulson's head, you would see clearly that this is not a bailout of the 'financial system', this is a bailout of his beloved Goldman Sachs.

One possible medium- or long-term consequence of the bailout may be the rise of credible alternative political parties. We first need instant runoff voting before this can occur.

 

[al_bundy]

we had true free markets in the 1800's. it was a lot worse than today. half the century was a deep recesion or a depression

 

[Gone4Good]

One of the more bizarre but widely held beliefs (thanks to fear-mongering by the kleptocrats) is that financial markets are going to 'lock up' without a bailout. If we have a truly free market, then this absolutely will not occur. This represents a fundamental lack of understanding regarding how free-market economies work. A market arises when someone has a need, and someone else offers a product or service to fill that need. If the current providers of a product or service are deemed unacceptable, then new providers will rise to take their place.

Imagine a scenario where all providers of a service, say credit, could no longer provide that service. Walk me through how the market copes with that and over what time frame "new providers rise to take their place".

 

[Texarkandy]

One of the key enablers for the position that the bailout is a good idea is the beauty of borrowing: you can enjoy the benefits of the loan today, and worry about repaying the loan tomorrow. Of the many ironies associated with the current mess, this is one of the most delicious: we're going to use the same faulty attitude that got us into the mess to get us out of it!!

If my neighbor wants to go to the local casino each weekend to play the slots, more power to him. However, I object strongly when he uses his powerful contacts in Washington to force me to cover his gambling losses. This is a roundabout quasi-legal version of the purely illegal approach, which is to simply come over to my house with a gun and rob me in order to cover his gambling losses.

One of the more bizarre but widely held beliefs (thanks to fear-mongering by the kleptocrats) is that financial markets are going to 'lock up' without a bailout. If we have a truly free market, then this absolutely will not occur. This represents a fundamental lack of understanding regarding how free-market economies work. A market arises when someone has a need, and someone else offers a product or service to fill that need. If the current providers of a product or service are deemed unacceptable, then new providers will rise to take their place.

Many people are nervous because they believe that they are going to log into their brokerage accounts and see additional losses without a bailout. These people don't understand what it means to be an investor. They believe that they are entitled to endless upside and no downside.

It will be interesting to see if Americans ever fully learn who the true beneficiaries of the bailout really are, and the extent to which they have benefited at the expense of all of us. The kleptocrats are usually highly skilled at hiding their thefts behind supposedly public institutions. If you could climb inside Treasury Secretary Paulson's head, you would see clearly that this is not a bailout of the 'financial system', this is a bailout of his beloved Goldman Sachs.

One possible medium- or long-term consequence of the bailout may be the rise of credible alternative political parties. We first need instant runoff voting before this can occur.

Agreed - except I might add that the gambler is threatening that if the casino goes under you will lose your job because your employer does some business with the casino.

Imagine a scenario where all providers of a service, say credit, could no longer provide that service. Walk me through how the market copes with that and over what time frame "new providers rise to take their place".

I suspect it might not be as long as the fear-mongers would like us to believe - or that all the providers of that service would go under anyway. Perhaps an opportunity would be created for the smaller, more responsible, providers of credit to grow & fill the void.

I'm not sure I buy into all of this "the sky is falling", "the world is going to end" hype. I can't exactly say why, but it just smells of high pressure sales hype. Why is there only one solution? Why do Paulson & Bernanke offer no alternative proposals for the Congress to consider & outline the pros, cons, & estimated degree of effectiveness of each. Why is the only solution for the feds to directly purchase these securities?

I've seen enough articles & books re: "how to survive the coming economic collapse of the" - 70's, 80's, 90's etc

Sure Paulson & Bernanke are supposed to be "experts" on this stuff. "Expert" scientists in the 70's also predicted we were going to have an ice age.

I'd kind of like to see a bit of crisis happen before we take very expensive emergency bail-out measures to prevent this predicted "apocolypse" (measures by the way that none of the "experts" seem to be able to guarantee will really "prevent" it anyway" )

 

[Texarkandy]

"Afford" is an interesting concept. There are few people in the US who can currently "afford" a house without borrowing. So at what price would the housing market clear if people had to pay cash . . . $20,000? . . . $50,000?

I think you are skewing my suggestion a bit.

It was never my suggestion people should/would pay cash for their houses - just that lenders would perhaps come to only loan to those with decent credit histories, good debt-income ratios, substantial down payment, & decent likelihood they would be able to make payments.

 

[donheff]

One of the more bizarre but widely held beliefs (thanks to fear-mongering by the kleptocrats) is that financial markets are going to 'lock up' without a bailout. If we have a truly free market, then this absolutely will not occur. This represents a fundamental lack of understanding regarding how free-market economies work. A market arises when someone has a need, and someone else offers a product or service to fill that need. If the current providers of a product or service are deemed unacceptable, then new providers will rise to take their place.

You may be correct -- in the long term. But, after a global meltdown, it could be a very, very long term until new institutions arise to replace the old and develop the level of trust needed to function. You and I could be lying comfortably in our pauper's graves by the time things sorted out. The market acts like a crowded superhighway - traffic backs up in uncontrolled bunches, then frees up, then bunches up. Once in a while it just jams the f** up for miles and miles. Without speed limits and cops it would be worse, not better.

 

[socca]

I find this whole thing fascinating, because of the connection between psychological engineering (changing a belief or attitude) and technical engineering (solving a particular well-defined problem using hardware and software). I have done the latter for many years, but I've never done the former.

In this case, the stated goal is to 'restore confidence in the financial system'. This is psychological engineering. The technical solution is to translate some of the trash being carried on the books of some financial institutions to cash. If I were personally responsible for making the psychological engineering work (for example, I would be executed if it failed), I would have a whole host of questions that must be answered before I would sign off on the plan. For example:
+ for any particular financial institution, just how much trash needs to be converted to cash before other players suddenly become confident in that institution?
+ just how trashy does an investment have to be before it is eligible to be off-loaded onto the taxpayer?
+ which financial institutions are eligible? all of them? only U.S. or any worldwide?
+ how much is the trash worth? How should it be valued?

I'm not a financial wizard, but the whole trash-to-cash concept as a way of performing psychological engineering seems faulty to me. Of course, it's possible that the bailout details don't matter. Just the knowledge that some kind of bailout has been approved may be enough to 'restore confidence'. However, will this confidence be justified? What if confidence falters again down the road? Will another bailout (a surge) finally do the trick?

One final note: when we perform

trash --> cash

we may actually be performing

cash --> trash

If this is true, then those of us whose financial future rests on inflation staying under control (the prudent savers) may be in deep doo-doo.

 

[Gone4Good]

I think you are skewing my suggestion a bit.

It was never my suggestion people should/would pay cash for their houses - just that lenders would perhaps come to only loan to those with decent credit histories, good debt-income ratios, substantial down payment, & decent likelihood they would be able to make payments.

I was using an extreme example to make a point. The concept of "affordability" is inseparably tied to the cost and availability of financing (which is precisely what we're talking about). And not surprisingly, market prices are determined by affordability. In the extreme case, where no financing is available, sales can take place only on a cash basis, meaning very few houses get sold and then only at very low prices.

But let's assume that even in a severe credit crunch mortgage lenders are willing to lend under the terms you've laid out. Put aside the fact that we've screened out a very large portion of potential buyers, which, in and of itself means prices have to come down (in economic speak our demand curve has shifted to the right). For those remaining borrowers we can safely assume that the cost of a mortgage is going waaay up (fewer lenders, higher overall risk premiums, declining colateral value, ect.) Because the cost has gone up, affordability comes down. That puts downward pressure on home prices. An example:

If our borrower can afford a $1,200 / month payment, he can afford a $200,000 30 year fixed rate mortgage at 6%. At 9% he can only afford $150,000. This again shifts our demand curve to the right meaning fewer homes get sold and those that do get sold are at lower prices.

Your original question was "how will this 'bailout' help stabilize home prices?". The answer is that it helps increase the availability, and reduce the cost, of credit.