Economic Bailout

[Maggie]

The more I think about this subject the more I come to the realization that we collectively must share some of the blame for the state of the economy (and I have hinted at this before). The American electorate is, indirectly or even directly (depending upon how you look at it), responsible for creating the atmosphere that spawned this crisis.

It was not just Wall Street that profited from the boom in the housing market over the past several years. Think about how many shows were created on cable television related to “flipping” a home. These people were “small time” speculators that sought to take advantage of the booming market by purchasing homes, either gutting them or making cosmetic improvements, and then selling the homes at a profit.

Furthermore, as I have pointed out before it became a widely accepted “truth” that everyone deserved to own a home. This lead to a relaxation in lending standards for the “common good”; however, in reality most of these American’s really did not have the wherewithal to produce a real down payment or bought more then they could realistically afford. In other words – if all things were equal they should have continued to rent or shouldn’t have attempted to keep up with the Joneses. Whose fault is that?

Talking to a few friends of mine revealed to me that the problem was/is even deeper than the real estate market. You know a five or six percent return was once thought to be solid; however, investment banks started promising 10% and higher returns on investments. How the investment banks were going to make this happen – no one seemed to ask….well, we know now how the investment banks were able to achieve such returns. However, it was all an illusion – and illusion that many people blindly bought into.

Wall Street executives got their big bonuses – you bet. But a lot of “Johnny Paychecks” – made out pretty well too. If they saved their profits for a rainy day – I say good for them. But if they merely used the profits for a bigger house, a more expensive car, etc. – and now they are hurting….am I responsible….should I save them? Is there greed on Wall Street – of course, but Main Street is not immune.

I don’t have a solution to this mess but I can’t help thinking that the collective “we” certainly encouraged and perhaps even accelerated the crisis.

[Maggie]

Thoughts.....BostonWu, Aargh, Royalshock, etc?

http://online.wsj.com/article/SB122230704116773989.html

[RoyalShock]

My opinion will be worth nil, since that article doesn't use layman terms, which I need to understand it. But nevertheless, here's my take from what I could gather.

#1 - It's pure speculation based on what might happen to the dollar and interest rates. It also assumes certain things being done by the FRB (whose existence pisses me off anyway and is, IMO, a huge reason we have these crises.).

#2 - By the time the purchased obligations are paid off (and their mature value is also pure speculation), inflation may make it a wash, at best.

#3 - I've read interpretations of the bill being discussed that the $700 billion is a line of credit, not a lump sum where when it's gone, it's gone. That means the cost could be the same, more, twice as much, three times as much, we don't know. So any attempt to calculate a return is impossible.

Wasn't it just earlier this month that Paulsen said "under no circumstances" would there be any more bailouts? I'm not quite ready to trust anything this guy wants to do.

[WstateU]

Done Deal?

http://www.foxnews.com/story/0,2933,428021,00.html

[BostonWu]

This goes along the lines of some of the things I’ve gathered from a guy I’ve come to know who worked as upper exec of New York investment banking firms and NY Fed Reserve Bank. He doesn’t believe in the $700B bailout package since the banks have already written down the impaired losses of these assets, which will ultimately prove to be more valuable then they’re priced today. In other words, if the current owners of these mortgage-backed securities could just sit on them they would spare themselves a big loss. But as the article states the banks need cash right now. So this could turn out much in the favor of Uncle Sam and the U.S. taxpayer. Now in the event this turns out to be true then my next question is how are the profits returned to Johnny Paycheck? How about major tax relief over a 10-20 year period???

[RoyalShock]

Major tax relief?

They give us morsels to prevent a revolt. Besides, I'm not convinced that any "proft" would cover the additional debt interest or dollar devaluation (loans or printing press?). And we'll get another beauracracy under the current one to administer the whole thing.

[RoyalShock]

And were you all aware of this?

http://www.washtimes.com/news/2008/sep/23/student-car-debt-quietly-added/

[Maggie]

I don’t know if I agree with this Kessler fellow or not…..

The problem is if this guy turns out to be correct (which would or could be a good thing RoyalShock – in layman’s terms, if you will pardon me– I was and am interested in your opinion) – what would happen to the profits?

As BostonWu points out would the average American get, for example, a real tax cut? How would this benefit “Johnny Paycheck”? Not at all…I say. Not if we keep electing the same representatives that currently sit in Congress……their ideology, those that “butter their bread” have not changed….nor will they. They are still trying to cover their own backsides and what ever is gained out of this fiasco, if anything, will already be allocated to pet projects.

Maybe the government, and by default the taxpayers, will end up on the right side of this coin – but I do agree with RoyalShock in one respect – I’m not sure I trust Paulsen or any government official for that matter. I certainly don’t trust that a government bureaucracy is the best instrument to deal with the aftermath – which is why my gut still tells me the market should adapt on its own…..whatever the short term consequences.

[Maggie]

And were you all aware of this?

http://www.washtimes.com/news/2008/s...quietly-added/

Leon is getting larrrrger……is that your point?

Surprised?

[RoyalShock]

If anyone is interested, here is Ron Paul's take on what's going on.

Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,




Ron Paul

[WstateU]

If anyone is interested, here is Ron Paul's take on what's going on.

Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,




Ron Paul

He makes some great arguments... I pray that he is wrong.

"The only thing we learn from history, I am afraid, is that we do not learn from history."
Ron Paul

[WstateU]

We may be 'forever doomed' because of morons like this representing us in Washington.

:wacko:

http://elections.foxnews.com/2008/09/25/congressman-warns-jews-blacks-to-beware-of-palin/

[Maggie]

Ron Paul makes some good points (points that I and others have made on this forum) but where is his solution? It is fine to blame Washington – and believe me that is where I think the majority of the blame rests in this case - but that doesn’t get us out of this mess.

Paul states “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place;..”

I think I agree with this statement but does that imply Paul would let the market run its course, i.e. no bailouts whatsoever?

[RoyalShock]

I'm pretty sure he is fighting against the bailouts. He is a pretty staunch free-market supporter and I suspect he is concerned not only about more gov't meddling (bailouts) but setting yet another precedent. You can't really have a free-market economy if the gov't is always interfering to create bubbles and/or stave off market corrections.

[BostonWu]

Anyone get the feeling the majority of Congress wants to end it this week so they can get on with their vacation plans? I understand this is an urgent situtation but how in the world do you come to a viable solution in a matter of days?