Do you support the Paulson bail out?

[Texarkandy]

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Originally Posted by Independent 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]

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Originally Posted by Independent 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]

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Originally Posted by socca 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]

Quote:

Originally Posted by 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.

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.

Quote:

Originally Posted by . . . Yrs to Go 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]

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Originally Posted by . . . Yrs to Go "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]

Quote:

Originally Posted by socca 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]

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Originally Posted by Texarkandy 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.

[Texarkandy]

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Originally Posted by . . . Yrs to Go .... 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.

Which brings us back to my point that if the purpose of this bailout is to bring back a free-and-easy, all-may-borrow credit environment (a major cause of this market illness) - then maybe that's not such a good thing.

[audreyh1]

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Originally Posted by Texarkandy Which brings us back to my point that if the purpose of this bailout is to bring back a free-and-easy, all-may-borrow credit environment (a major cause of this market illness) - then maybe that's not such a good thing.

I don't think we have to worry about that easy money environment coming back for a very, very, very long time. What we want to prevent is the pendulum swinging so far the other way (which is exactly where it is heading right now) that almost no one loans at all and the economy shuts down.

Audrey

[Gone4Good]

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Originally Posted by socca 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?

Socca, It helps to understand what Paulson is proposing. He's not talking about going institution to institution and bidding for specific assets. Nor is he talking about buying a certain dollar amount of assets from specific institutions. What he is proposing is a reverse auction structure where the Federal Government bids for a certain dollar amount of a specific type of security. Participating firms essentially compete against one another for the Federal Government's limited bid.

One possible way this could work . . . The governement offers to buy up to $10B of a security in a market that has $100B outstanding. Firms choose whether or not they want to participate. If they participate, they offer their securities to the government at a set price. For example:

Firm A offers $2B at $10
Firm B offers $5B at $12
Firm C offers $3B at $13
Firm D offers $4B at $15
Firm E offers $2B at $16

The government then sets an "auction clearing price" at $13. Every firm who offered their securities at, or below, $13 (Firm A, B, and C) sells their securities at that price. Firms D & E get nothing.

The benefit of this is that the government gets the lowest price at which firms are willing to sell their securities. The market now has a liquid benchmark for security valuation. Participating firms now have $10B of cash.

A useful addition to this structure would be to allow non-government institutions to bid for the assets alongside the government.

So to answer questions, 1) each firm decides for itself whether or not it wants to participate 2) The Treasury will determine which securities to include in the various auctions. This hasn't been spelled out, and shouldn't be in legislation. Several factors will likely be taken into consideration with a goal of targeting the most widespread and illiquid securities 3) Treasury has said companies with US operations will be eligible to participate (including non-US entities) 4) The auction sets the value.

[73ss454]

So, the government is going to invest this money for us so we can make money on it. Sorta like SS I would guess.

[OAG]

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Originally Posted by audreyh1 I don't think we have to worry about that easy money environment coming back for a very, very, very long time. What we want to prevent is the pendulum swinging so far the other way (which is exactly where it is heading right now) that almost no one loans at all and the economy shuts down. Audrey

Along with the approval of "the buy the Junk" program. I would not be surprised to see an emergency rate cut along about mid-week to further assist in "restoring confidence" in the market (and hasten the return to "loose money" days).

[Gone4Good]

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Originally Posted by Texarkandy Which brings us back to my point that if the purpose of this bailout is to bring back a free-and-easy, all-may-borrow credit environment (a major cause of this market illness) - then maybe that's not such a good thing.

I think we're talking about two ends of an extreme. Excess credit is bad. No credit is bad. In our current environment we're more in danger of going to zero credit then too much. Regardless of what the government does, the days of negative amortization, interest only ARM is over. The risk of going to no-financing, cash on the barrel head for all transactions, is very real.

[Gone4Good]

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Originally Posted by 73ss454 So, the government is going to invest this money for us so we can make money on it. Sorta like SS I would guess.

Yes, but not like SS. They are buying real assets from financial institutions (not investing in Treasuries like SS).

[73ss454]

Ya mean like WaMu and Lehman?

[Gone4Good]

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Originally Posted by 73ss454 Ya mean like WaMu and Lehman?

Exactly.

Only they bought the assets at face value. We'll be picking them up for much, much less.

[audreyh1]

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Originally Posted by OAG Along with the approval of "the buy the Junk" program. I would not be surprised to see an emergency rate cut along about mid-week to further assist in "restoring confidence" in the market (and hasten the return to "loose money" days).

Loose money days are a long, long way away. Even if the Fed cut interest rates to 0%!! With all the deleveraging of the system, money will be tight.

Audrey