73 Comments

1. David Thomson:

“The business is sure to be encumbered with all sorts of political mandates and requirements from Congress”

This is how we got into much of the mess in the first place. The Democrats forced the lending institutions to provide mortgages to minorities with poor credit histories. Republicans deserve probably no more than 20% of the blame. The crisis is mostly the result of Democratic Party’s politically correct shenanigans. Why is Arnold Kling seemingly reluctant to mention this harsh fact?

Sep 24, 2008 - 3:56 am 2. Ex-fetus:

Keep the banking regulations where they are and adjust the rest of the industry to match.
There is a tendency to look upon all regulation as the same. That is wrong. Regulations should make crime difficult and honest profit easy.
Instead of loosening up on the Audits, they should be tightened. Two suggestions. The SEC should assign Auditors on a rotating basis and pay them out of a pool created by the Corporations being audited, with that pool being managed by the GAO or OMB. A BIG part of the problem is that the Auditors are paid by those they audit. If that isn’t insane, what is? Almost 3rd world in nature. Sort of like paying a cop right there on the spot for speeding tickets. Save on court costs, but there are problems….
As far as the Trillion dollars, forget about it. They want the money up front in one chunk. That means it is a con. One thing EVERY scam has in common is needing the Money up front and in a lump sum. EVERY scam. I know about that because I still own that gold mine I bought with the cash up front. Still No gold in it.
While I think the problems were created by the normal combination of stupidity and greed, the stock market roller coaster wasn’t. That is good old fashioned market manipulation, plain and simple. Eventually the SEC will figure it out. They always do. Then we will find out who had the BIG brass ones and the capital to try and scam the Government ( taxpayers) out of a TRILLION DOLLARS.
The best way out of this mess is to sit tight and crank a little inflation into the system. I know pure eonomist get hives and weak bladders whenever inflation is mentioned, but it has as good a chance of working as giving 700 BILLION, with more to follow, to some person or persons unknown in the vague hope that it will make things better.
Traditionally, inflation has always lifted the value of real property. A 4 or 5 % increase in property values would make a lot of the mortgages that are the problem performers again. I think that buying up Treasuries might work. The good thing about that is the Fed could buy up blocks of 50 billion or so and wait to see how that worked before buying another block.
I think once it becomes clear that Congress isn’t going to just hand over 700 billion dollars as a first installment on a trillion plus scam, the markets will stabilize. After all, the indicators are still as good now as they were 3 weeks ago. That will stop whoever is manipulating the market. Whoever is working the con has to be on a deadline. If they hang out to long, they will get caught.
Think of cranking in inflation as a sort of back fire like they use to stop a forest fire. Or counter flooding on a ship with a bad list. Sometimes the most efficient way to solve a problem is by making it worse.

“There are 10^11 stars in the galaxy. That used to be a huge number. But it’s only a hundred billion. It’s less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.”
Richard Feynman
US educator & physicist (1918 – 1988)

Sep 24, 2008 - 4:39 am 3. Cowcup:

A Two Minutes Tale of Two Standard Explanations

John wanted to buy a house. He cannot pay cash. So he went to the banks asking for mortgage. The banks didn’t trust he can pay back. Bad news to John. The good news was that the Democrats came to rescue. The banks were pushed to give John the mortgage he wanted.

If the Johns and Janes cannot pay back the mortgage, they would lose the houses to the banks. But the banks prefer the mortgage being paid. They didn’t want to live in those houses after all. The banks were unhappy with the risks. The good news to them was that the prices of the houses kept rising, which means the banks can handsomely sell those houses if anything happens. Lucky!

Unfortunately, since last year, the prices of houses felt. The banks ended up with many houses that they cannot really sell that well. And their money was lent to John to built that house only John wanted. Bad, really bad. The banks went bankrupt.

Bad news for the economy at large! Why? Because the currency level would fall when banks went down. The banks published all kinds of papers that were used in transactions around the economy. Those papers would again be merely papers when banks die. No longer would any body accept them in exchange for their products.

When currency level falls, the whole economy goes down. It led to the Great Depression when, the last time, the bad policys dragged the situation further down. How to fix it? The government should keep the currency level. By cutting taxes. Don’t take money away from people. Then you can keep the currency level. No bailout is needed.

The standard tale of the Democrats is that the Wall Street was betting on the rising prices of the houses. The Wall Street was wrong. The Bankers were the bad guys. A good point.

The standard tale of the Republicans is that the policy that pushed bankers to lend money to unqualified borrowers was wrong. The Democrats pushing the policy were the bad guys. A good point too.

Sep 24, 2008 - 4:44 am 4. Cowcup:

Arnold Kling made a very good point. Bailout not only was morally wrong and against the Free Market. It also is making the matter worse and worse. The prospect of bailout means the market cannot, will not, adjust itself.

Everybody should understand, when banks die, the only difference of that and a shoe factory dies is the currency level, or money supply falls.

When money supply falls, the prices are all messed up, and need ajustment. This process is painful. So, the government should try to keep the money supply. But that can be done by cutting taxes. There is really no other good coming out from a bailout except it would keep the currency level. But that can be achieved in other means.

Sep 24, 2008 - 4:56 am 5. TomP:

Count on Congress to make matters worse. They are the root cause of the problem. Anyone remember ‘red-lining’?
Attempts at social engineering, no matter how well meaning, are always accompanied with unintended consequences.

Sep 24, 2008 - 5:21 am 6. Mike M:

I think this analysis is entirely correct. The whole bailout mentality is born from a socialist sandbox that created the cheap money for real estate boom in the first place. It was GOVERNMENT POLICY that provided the cheap money that fueled the balloon of real estate prices that enriched MANY politicians in DC who are heavily invested in real estate.

I was in dream land just a few years ago wondering WHY my house had TRIPLED in value in only 10 years? It made no sense at all to me back then because; 1. the population growth of Massachusetts was NEGATIVE, (perhaps it still is?); 2. There NO boom going on in the rest of the MA economy; 3. The people buying houses like mine back then were not rich people. They were getting financing for FAR MORE than what they needed to buy the house. They took the huge gain they made selling their prior house and didn’t re-invest it to buy the their next house, they took the profit and stuffed at into their pocket because the mortgage company LET THEM get a mortgage way beyond their means no different than letting the first time buyers get one beyond their means.

Now it all makes sense to me – GOVERNMENT CREATED THE PRIOR REAL ESTATE BOOM! I smell a HUGE rat and want the see the real estate transaction of EVERY SINGLE MEMBER OF CONGRESS OVER THE LAST SIX YEARS!

And our economy does NOT revolve around real estate anyway. Real estate sits there and does NOTHING but get older.

Affordable housing? How about AFFORDABLE ENERGY!? It’s things like ENERGY that drive industry and jobs that PRODUCE stuff we can actually TRADE with, (can we pack up all those empty condos and sell em’ on the world market?)

If Freddie Mac and Fannie Mae had not ever existed in the first place – would we be having this discussion? The answer in clearly no we would not…

Sep 24, 2008 - 6:04 am 7. David Thomson:

“Arnold Kling made a very good point.”

Absolutely. I completely agree with it. It is what Arnold Kling doesn’t say that is troublesome. One continues to wonder why he hesitates to primarily blame the Democrats for the mess. This is their ugly baby left on the taxpayer’s doorstep—and Kling is very well aware of the facts! What does he have against Republicans?

Sep 24, 2008 - 6:24 am 8. Mike M:

One of the more disappointing aspects of all this is how George Bush looks like a deer stopped in the middle of the road staring at the headlights as he kowtows lock step with the socialists who are all in this just to enrich themselves and maintain their POWER over us. More than that, it’s makes me ill…

Sep 24, 2008 - 6:37 am 9. Cowcup:

When John McCain said he didn’t know about economics. He exhibited a common sense among people, that economics jargon is horrible and better left in the hands of experts. A very dangerous common sense for Democracy.

One thing that FDR did that was extremely good for the Democracy was his common sense explanation of the mess of 1929–1932. He was wrong in a few ways. But the use of people’s language was tremendously effective. Reagan knew that. Almost every good president knew that.

When Palin asked the question—how will tax increase help her sister opening a small business—she knew that too. At this moment, I wish McCain and Palin can take the chance, explain the mess in ordinary language. It’s not really that hard to explain to ordinary folks.

The jargon, as the bailout, is not needed. Actually, they are the causes.

Sep 24, 2008 - 6:53 am 10. Dr. Kenneth Noisewater:

So in theory there’s a pretty simple rule of thumb to find a “true” valuation of these homes.. 100x median rent, 2.5-3x median income, with adjustments for oversupply, damage/depreciation, etc.

Of course, they could pass a law forcing these companies to sell their assets at any price they demand, or be locked out of the process entirely and left to the tender mercies of Mr. Market.

Methinks King Henry needs to spend less time worrying about whether these private enterprises are going to be happy about whatever the government comes up with: they lost the right to complain when they pushed the cleanup onto the tax payer. They could always clean it up themselves!!

Sep 24, 2008 - 7:32 am 11. Toby Bianchi:

What about instead of buying the debt, the Treasury were to force Banks with the debt to issue new stock and then purchase that stock?

That would be the capital infusion to insure liquidity while not spreading the risk of the bad paper among the sound and not so sound banks?

It was my shower thought for the day.

Sep 24, 2008 - 7:40 am 12. Cowcup:

Dear Dr. Kenneth Noisewater, the bankers are not complaining. They are eager, they are happy. The bailout, and the prior boom created by the government, the bankers love it.

It is not a fight between the Wall St and the government. It is a party!

The government created the chance. The banks happily take the chance. That’s the boom part.

Now the bankers created the chance. The government is happily stepping in. That’s the bailout part.

A mini-series in two episodes.

Sep 24, 2008 - 7:49 am 13. dj:

Dr. K -
If those valuation techniques are correct, then the problem down here in Miami was going on since 1992 when Andrew hit. Median income for Miami is approximately 45000/yr, but we’ll adjust up to 50K for easy math. That means my average home is probably worth 150K? If that’s the case, then I bought it for the right price… in 1995! I would have no growth for 14 years, because the median income in Miami is so low.

If it’s 100X median rent, and you take out South Beach for obvious reasons, then we’re probably looking at about 120K-150K. Again, no growth whatsoever for 14 years.

I’m not complaining about your valuation technique, it just strikes me that those values look the same as they did back in ‘95. That’s a long time to have had Zero growth, when indeed insurance costs have tripled over that time period.

Sep 24, 2008 - 7:55 am 14. Scott:

This bailout is an absolute travesty. What is the point of the bailout? If it is to get these crappy assets off the books of banks and other financial institutions, there is NO need for a bailout as there have been over 90 hedge funds set up in the past year or so to invest in distressed assets. The problem is that banks DO NOT WANT TO SELL THESE ASSETS AT DISTRESSED PRICES since it will then require massive capital infusions. Unless mark-to-market accounting is suspended, I don’t see why the treasury offering to take the place of the distressed asset investor will change anything. This is a horrendous bailout.

Sep 24, 2008 - 8:00 am 15. Paul in CA:

I respectfully disagree with Mr. Kling’s conclusion. The risk of doing nothing is greater than the risk of enacting the Paulson plan. Warren Buffet gave a very illuminating interview this morning that illustrates why. When Goldman Sachs tried to sell some of the mortgage backed bonds in its portfolio the best offers it could get required GS to “carry back” 75% of the purchase price, presumably in the form of a note from the buyer. One has to assume that GS could have absorbed the capital loss that would have resulted from the sale, given its strong balance sheet. What it could not accept was replacing one highly illiquid asset (the mortgage backed bonds)with another illiquid asset that could not readily be converted to cash (the purchase note from the buyer).

In the same interview, Buffet also said that if he could borrow $700 Billion on the same terms as the Treasury, he would be doing exactly what the Paulson plan appears to be aimed at — making a market in these troubled assets that converts them from illiquid to liquid and establishes a real, market-based price rather than a hypothetical “mark” for their value — and Buffet would fully expect to make a worthwhile profit in doing so, since he would be buying at steep discounts from face value and holding them to maturity.

The Paulson plan is not the complete solution for the financial system or the economy, and there are many worthwhile proposals for other measures to address the problem, including those suggested by Mr. Kling. All of these deserve consideration. Unfortunately, Congress wants to adjourn in a matter of days, and hasn’t yet managed to decide on Paulson’s relatively simple proposal, let alone a more comprehensive approach.

If the credit market freezes, as it almost did last Wednesday night, and as Buffet clearly thinks it will if Congress adjourns without approving this plan in some form, the consequences are not hard to foresee. Busineses large and small will immediately implement layoffs — some will bounce paychecks, some will just close the doors — because they can’t get the normal short-term financing that they rely on to fund payrolls and day to day operations. Bank failures will cascade, more home mortgages will go into default. By the time Congress and the next administration can agree on a “rescue” plan the $700 Billion will look like peanuts, and millions of people will have been severely damaged.

This is not about corporate welfare or socializing losses and there is no liberal or conservative position to be attacked or defended. Choose your own metaphor — the house is on fire, the patient is bleeding to death, you’re trapped in a car on the railroad tracks: we need to deal with the immediate problem now, as in “right now.”

Sep 24, 2008 - 8:14 am 16. Mister Snitch!:

I’m afraid that Mr. Kling is entirely correct, but it won’t matter. The mob is all about being seen as “doing something”, and it is about the Right Now, not the Consequences Later.

Since we know that going in, this would be the time for Mr. Kling to give the average independent investor some advice on how best to prepare for (and profit from?) the inevitable calamity.

Sep 24, 2008 - 8:30 am 17. guyinadiner:

The government created the absurd mark-to-market regulations. Now the government must create the market. Prices must be based on understandable and transparent metrics, such as credit quality, coupon, extension and prepayment variability, and the spread to treasury so that anyone with a bloomberg could value their paper. The government needs $700 billion give or take to make and support this market but would, I believe, end up owning only a fraction of the paper that it could quickly resell. As things stand now, no market equals no price equals no value and ends up in an extreme market-down. Any further bells and whistles hung on this plan are completly unecessary.

Sep 24, 2008 - 8:50 am 18. Cowcup:

Dear Paul in CA,

“If the credit market freezes [...] Busineses large and small will immediately implement layoffs — some will bounce paychecks, some will just close the doors — because they can’t get the normal short-term financing that they rely on to fund payrolls and day to day operations.”

Government can and need to send out money. The money can be sent to the failed banks, or the money can be sent to the businesses, DIRECTLY.

Cut tax. No bailout.

Sep 24, 2008 - 8:54 am 19. Mike M:

Paul in CA said “Busineses large and small will immediately implement layoffs — some will bounce paychecks, some will just close the doors — because they can’t get the normal short-term financing that they rely on to fund payrolls and day to day operations.”

That is simply not true. Private companies who need to get loans to kite their payrolls don’t deserve to be in business! Would you invest money in a company that does that? Investment money is for capital improvements, for GROWTH – not for paying day to day expenses. Tight money will just curtail frivolous spending and spending by those who cannot actually afford what they want. Go down the street of any low income / heavily subsidized neighborhood on garbage collection day and gander all the JUNK, (like crappy ‘furniture’ and toys from China), that people wasted their money on and then throw out – compared to what’s on the street in upper-middle class neighborhoods who tend to save their money and buy stuff they really need and that will last a while? Frugality has never been the enemy of prosperity; most people who have some money have it because they SAVED IT.

Sep 24, 2008 - 8:57 am 20. BunnySlippers:

The key here is to suspend mark-to-market acctg and reinstitute the uptick rule on short sales. Since there is no market for these CMOs, the accountants are making them write their value down to something close to zero. This causes huge writedowns that destroy the equity base of the holder of the CMOs. When they go out to the market to raise new equity, short sellers, no longer being inhibited by the uptick rule, drive the stock price down to the point that the enterprise is no longer valued on fundamentals, but panic. Merrill Lynch is a classic example of this.

One thing that is certain is that the subprime mortgages all have a home standing behind each one, meaning that valuing them at zero as FASB is forcing them to do is silly as well as seizing up the credit markets. My guess is that if you loosened or suspended market to market accounting on CMOs that would give each financial institution time to work out their problems.

Sep 24, 2008 - 9:04 am 21. Financial Crisis: Bail out people, not powerful! | The Anchoress:

[...] Arnold Kling says the bailout currently under consideration in congress could hurt more than help. I believe [...]

Sep 24, 2008 - 9:15 am 22. Karl K:

I like Arnold Kling’s take on most matters, I really do, especially on health care.

But frankly, Arnold is out of his depth here and so are the commentators who support his position.

Arnold said if Paulson presented his proposal to a venture capital firm he’d be “laughed out of the office.” Apparently Arnold didn’t listen to Warren Buffet this morning, as Paul above did, when Warren said he’d love to have $700 billion to structure the same deal.

What does that tell you?

Don’t you see the REAL reason behind this whole plan? It’s to set up an EXCHANGE. The reverse auction process will immediately create pricing transparency for these securities. Watch the sellers offer high ask prices that STILL undervalue these securities, and private equity folks step in — really smart private equity folks come in — and offer just a bit more.

Anyway, all this notion of “bailout” and “socializing the credit markets” is just a bunch of hot air. There’s going to be a bill out of Congress this week, and it’s going to be $700 billion, and that’s that.

And it’s a good thing…not a bad thing.

Sep 24, 2008 - 9:16 am 23. Howard:

REGARDING OUR ECONOMY …
What’s the rush? There always seems to be time to fix things, but never enough time to do it right the first time around. Remember … “an ounce of prevention is worth a pound of cure”. The consequences of whatever is decided will dramatically affect Americans for decades … so, why not take the proper time and steps to properly explore all alternatives. Newt suggested taking a step back and creating a plan B … perhaps calling upon the people who advised Ronald Reagan, and turned the economy around back then. Besides, we should let the FBI investigation play out, before we decide to make a permanent decision. Like all good carpenters … going back to Jesus … I say: “Measure twice, cut once”.

Sep 24, 2008 - 9:17 am 24. BunnySlippers:

The rush is that last week money market funds nearly seized up (one was trading at 98 cents on the dollar). What’s next, Treasuries?? Not advocating this bailout, mind you, but when even clearly liquid assets are trading below par, virtually all credit markets are in deep trouble.

Sep 24, 2008 - 9:29 am 25. Gina:

THE BAILOUT?
Why not bring Alan Greenspan into the mix. He’s the one who warned about this meltdown back in April. Remember, when the democrats voted against his advised legislation to prevent this mess. And, how about Newt, who suggested that we consider a plan B, and consult with the advisers who successfully turned the economy around before, during the Reagan administration. Why are we looking to Paulson and Bernecke? Aren’t they the ones at the helm when this mess took place? An independent panel should determine who will benefit from this bailout … and, who’s asses will be saved by it … and, if any of those people are the ones pushing it through? Let’s not be rushed by foxes, who might be guarding the chicken coup … AGAIN !!!

Sep 24, 2008 - 9:55 am 26. Cowcup:

Karl K.

What that tells me is that Warren Buffet is smart. He’s counting on the bailout. And he’s pushing it really hard. Then, after the bailout, the banks and everyone else can have another round of rising-prices driven by the government. Wow! They can do that, THAT, again, AGAIN! I am thrilled!

Sep 24, 2008 - 10:04 am 27. poorgeezer:

dj,

Which of the gods of fortune decreed that you should always see growth in housing values? Here in rural Ohio we have seen zero increase for the last 15 years. Rents have even fallen a little in our area. Meanwhile insurance and energy costs increase, roofs have to be replaced, the bathrooms need new fixtures, etc. Miami is a good example of a market where values by all that is right should have fallen after Andrew given that incomes remained stagnant and the risk of catastrophe increased exponentially. But instead easy money and shifting hurricane risk to the taxpayer created an overheated and overbuilt market. Your home investment does not come with a guarantee of future increases in value. Get used to the idea. We certainly have had to, and it is especially grating to now be handed the bill for the excesses of those who have already benefited from housing value increases.

That isn’t to say that there aren’t plenty of properties in default sitting around waiting to be ‘liquidated’ here. And there are plenty of people willing to buy, at a reasonable price. They go to the sherriff’s sales only to be told the bank won’t sell. No one is going to pay more than market for an abandoned, bank-owned property, I don’t care how new it is. Let the market decide what the properties are worth, not the government. Penalize the banks for holding non-performing assets and not liquidating them. I’d really like to be able to buy some of these properties, and I’m sure there are buyers like me all over the country. Instead the government wants to use my money to buy them and place them out of my reach.

Sep 24, 2008 - 10:09 am 28. Cowcup:

“Now the government must create the market.”

What you mean is the government should help raise the prices.

Last time the government did this by asking banks to lend money to unqualified borrowers, the prices of houses rise as consequence. It made everyone happy. The bankers, the buyers, and the politicians receiving donations. The rest is history.

Sep 24, 2008 - 10:11 am 29. John Moore:

I believe the analysis is deeply flawed.

The problem is not *just* that mortgages are underwater, but that all sorts of complex derivatives, some with high leverage, are potentially or known to be tied to those mortgages. This includes common money market funds, among other things.

The result is that, even though only a few hundred billion in mortgages are under water, nobody (NOBODY) knows the value of a huge array of financial contracts (derivatives) worth tens of trillions of dollars. They cannot know that value until this stuff is “unwound”- and it takes liquidity to do that.

This means that, without some sort of guarantee, nobody will buy any of this stuff, which leaves the whole financial system locked up. Right now, it appears markets are trading, treading water awaiting government action. They have been doing this all week (look at the movements in stocks, oil, gold, dollar).

If a “bailout” (intervention is a MUCH better word) is not done, the chances are that the credit markets will freeze again, literally stopping the world’s economy in its tracks, as commenter “Paul in CA” has pointed out.

It may be that, even after unwinding, there will be too much bad mortgage debt. In that case, we and our central banks will face a choice between ’70s stagflation and ’30s depression! In other words, inflation will raise housing valuations (in inflated dollars), restoring the housing market and revaluing the mortgages, but at a major cost to the economy. The alternative may be deflation, with q true 1930’s level depression – 25% unemployment and inevitably massive socialization by the government.

Sep 24, 2008 - 10:32 am 30. Sandy Salt:

I do not have an economics degree, but I do understand the herd mentality of politicians. I know that they will not go home before they produce a bad piece of legislation because the American public wants some sort of action. I really don’t care who is at fault at this point because the answer is all of the above. We need to stabilize the market and that can be done a bunch of ways both good and bad.

I really do think that some of these companies should go under and houses should be taken away from people that never could afford them to begin with because that is how a true market system works. We are already seeing housing prices falling to levels that they should have never risen above and if lending requirements are tightened then housing prices will continue to fall to where they should be without the artifical inflation caused by the cycle of greed allowed by the government.

People will then be able to afford the houses they are buying and not default on the mortgages. Is that to say that there won’t be tough times for a lot of people? No, a lot of people myself included have lost in the current housing market and many more will in the near future bailout or not. That is called risk and since when did our government ensure everyone against risk. There is unfair risk because someone did something illegal, which I am sure we will see from the investigation by the FBI, but then there is just risk such as the market will go down or your property values will not be artificially inflated each year and you only gain equity from paying your mortgage. You earn so much money and can only reasonibly afford a house that costs 40% of income (if you have one).

We need to let the weak parrish in this market and prosecute the guilty.

Sep 24, 2008 - 10:56 am 31. Daily Pundit » Do Nothingism - The Best Policy?:

[...] Pajamas Media » An Alternative to the Wall Street Bailout In contrast, the bailout proposal takes the Treasury into completely uncharted territory. The Treasury has no expertise in evaluating mortgage credit risk. This is a very complex mathematical problem. I know, because I used to do it for a living. [...]

Sep 24, 2008 - 11:03 am 32. VRWC:

All of this talk about disliking the bailout on the “principle” of moral hazard misses the point.

The mortgage paper that we are bailing out is owned by every bank in the country, not just Lehman and AIG.

That paper was bought with depositors money. That money is already insured by the Feds thru FDIC. The only difference is that commercial banks can’t leverage up as much as investment banks, but they would still fail.

So, you want one big bailout now? Or 5,000/10,000 bank bailouts and a totally trashed economy later?

Sep 24, 2008 - 11:26 am 33. dj:

poorgeezer, I agree with you. When my home value doubled, then tripled in only a few years, I knew something was “wrong.” The Andrew situation was unique in that it caused a housing crunch. There was so much devasation that many homes were unlivable, and remaining homes “held” their value. We didn’t see a big increase from 1993-2000 – there was nominal growth, a few percent a year, which I think is reasonable given this is a metro area.

I didn’t buy my house as an investment, I bought it because I have a bunch of big dogs that I can’t keep in an apartment. I actually lost money when I sold to move to Miami from the rust-belt Northeast (Pocono mountains). Somewhere in the neighborhood of 20%.

If the metric given holds, then indeed we have seen Zero to Negative growth. It’s ok, but I would rather have seen slow growth year over year. It could have been maintained that way, but greed got in the way. I had to pass a difficult income/debt ratio to buy my place back then, the bank only approved me based on a conservative formula. Obviously, people who make $75K should not have been buying a home for 450K.

Sep 24, 2008 - 11:49 am 34. Ditto:

Okay, how about this for a market correction. Instead of giving $85 billion to people who obviously can’t do business ethically or profitably and reward them for their misdeeds, we give that same money to every American citizen over the age of 18 who pays taxes… roughly 200 million adults. That’s $425K each.

Of course, being taxpayers, these people will need to pay their tax on the windfall, assuming a rate of 30% or $127K each back to the US Treasury. Each taxpaying American now has $287K left after taxes to spend. I’d pay down my mortgage so it couldn’t be forclosed on, pay off my student loan and finish my Masters.

I’d buy things. I’d get a car. My fiance, who owns his own business, could hire people and grow his business. Come on, if we’re going to be wealth re-distributors, let’s do it right. Don’t bail out companies that caused their own problems. Break them up and sell off the pieces. Instead of bailing them out, bail out the citizens.

It’s the only way the government will see any of that original $85 billion anyway. At least they’d get $25.5 billion back in taxes.

Sep 24, 2008 - 12:04 pm 35. Sandy Salt:

I’m with Ditto on this one. I find that to be the most thoughtout and reasonable answer that I’ve heard from anyone.

Sep 24, 2008 - 12:12 pm 36. Cowcup:

Ditto’s the only answer that makes sense.

There are good economists thinking the same:

http://www.marginalrevolution.com/marginalrevolution/

Sep 24, 2008 - 1:09 pm 37. VRWC:

Ditto needs to recheck his calculator. $85 Billion divided by 200 million is $425, not $425,000.

Sep 24, 2008 - 1:31 pm 38. David R. Henderson:

Dear Ditto,
Put aside the fact that there are really more like 100 million actual payers of the income tax, not 200 million. Let’s take 200 million. $85 billion divided by 200 million is NOT $425K; it’s $425. You’re off by 3 orders of magnitude.
Best,
David

Sep 24, 2008 - 1:37 pm 39. incongruities:

Paul in CA said: “millions of people will have been severely damaged” if we don’t hand out free money to banks “right now”.

In the grand scheme of things a million people is only about one third of one percent of the US population. My guess is Paul is numbered among these.

My house is not on fire, I am not bleeding at all, and my car is not on the tracks. The only thing that does make me feel like I am in a continual no win situation is my ever growing tax obligations. I feel no urgency in giving $700 Billion to these failed businesses. In the marketplace, one person’s demise many times represents another’s opportunity. To insulate the banks from a demise of their own stupid actions is to deny opportunity to many others. In other words, the bailout protects those at the top at the expense of those at the bottom who might aspire to the top. The bailout is worse than socialism; it’s corrupt socialism.

Paulson can send me $150K to cover my business expenses and then maybe I will sign on. Until then, to Hell with the banks and everyone who works there.

Sep 24, 2008 - 2:21 pm 40. Sonny in FL:

Paul in CA…..If certain segments of business in this country are in such dire straits as to need loans to make payrolls and other short term expenses, I suspect that their destiny has already been determined. That’s what so great about our economy. People with good models succeed, people with models that are destined to fail should not be supported artificially by anyone, not even those with good intentions. Lets continue to support what we know works for our country, not what we know always fails.

Sep 24, 2008 - 3:03 pm 41. Allan:

Paulson’s a farm boy – it’s entirely plausible he’d get his hands dirty.

Sep 24, 2008 - 3:52 pm 42. SteveS:

Why is it better for me as a taxpayer to own this illiquid paper than for the idiots who generated it to hold it? How does the ownership of the paper change it’s value, except to the investment houses that managed to unload theirs? How exactly does that solve anything?

Oh, well, the government will buy it at a discount, I’m told, and hold it to maturity so that we taxpayers won’t necessarily loose anything by it. Well, then, why can’t the investment houses do the same thing? Sit on these instruments; tie up their liquidity for years; retard the credit markets, and so forth, until it matures so that they don’t lose anything. Isn’t that what is supposed to happen if we taxpayers wind up buying this paper? Why can’t that be priced, and made liquid, and traded in the normal days’ business?

Not only is this whole bail-out a scam, it is also a game of ‘chicken’, with our dearly beloved investment community gambling that Congress will blink.

Sep 24, 2008 - 8:29 pm 43. BizzyBlog » Quote of the Day: On the Bailout:

[...] Kling, at Pajamas Media: The risks of enacting the plan are far worse than the risks of doing [...]

Sep 25, 2008 - 6:04 am 44. Ex-fetus:

What seems to be avoided by everybody is that a 700 BILLION bailout would just be the tip of the iceberg. IIRC that is 5% of the actual market or 1400 TRILLION dollars.
Considering that ALL of this is just theory so far and the 700 Billion is real, taxpayer dollars, Congress should not be any rush. Back when I owned an automoblie dealership it was illegal to run a business on a net 90 basis. I wonder when that changed. When I took over the business it was floor planned ( net 90 on inventory ) but I turned around and started paying for my vehicles when they hit the ground. When I sold the business, EVERY bumper on that lot was paid for.
If you have to take a net 90 (or 30, I suppose) to cover payroll, you are WWWAAAAAY over leveraged. OPM can be overdone.
I think it would be funny if the 98% or so that pay their mortgage on time and are not very happy about paying the mortgage for some deadbeat start skipping their payments. Why not? Maybe thy will get a bailout too.
If the banks go, they go. Tough on the banker. If some business that lives of OPM goes, let them go. Tough on that business an it’s employees.
Not EVERY bank will go, the well managed ones will ride out the storm. Not every business will go, the well managed ones will ride out the storm. Then Congress can use the survivors to define what ‘well managed’ means and write laws to promote regulations that make it easy to manage well and hard on those that steal or mismanage.
The bailout is temporary and will have to be repeated ever so often. Especially when the pack sees how well crooks like Buffet do;

http://hubpages.com/hub/Warren-Buffet

Steal a little money, you go to jail, steal millions and you get on the cover of Times. Steal Billions as Soros did and you can control nations. Not sure what the reward for stealing TRILLIONS is, but we are about to find out.

Sorry, Winnie;
“Never in human history has so much been stolen from so many by so few.

Sep 25, 2008 - 7:20 am 45. VRWC:

incongruities;

Your house may not be on fire but would you like to be able to get cash from your checking account? Because sure as shooting your local bank either bought Fannie Mae paper with the money you have on deposit or has counterparties who do and they are more than likely leveraged up to boot.

Shareholders in Fannie, Freddie and Lehman were wiped out and that is as it should be, but the bailout is about keeping the nation’s banking syatem liquid. You can pay $700 Billion now, and that may not be enough, or you can pay much more down the road in FDIC insured payouts while 5 or 10 thousand banks fail.

Sep 25, 2008 - 8:13 am 46. Ditto:

Darnit! Now we all know why I didn’t choose a career in economics.

Thanks for the correction!

Sep 25, 2008 - 9:06 am 47. cfbleachers:

The points made here do not add up to the key points missed. It’s little wonder, because we have not been fed any real facts in the scenario.

First, one commenter said to paraphrase “A little inflation is not a bad thing”.

Forget debating that point, we would be looking at a hyperinflationary period of undetermined length and ferocity. 700 billion dollars of printed money, (more likely a trillion dollars, Congress…and especially the Democrats have never met a budget they couldn’t overinflate)…is a very tough pill to swallow economically speaking.

Second, the holders of the mortgage backed securities don’t want to take 75-80 cents on the dollar FROM THE HOMEOWNER UPON WHOM THEY MADE THEIR BETS. That is, they don’t want to back the horse and jockey now after the bet has been made, they want the house to pay them off, in advance. At this pari-mutuel track…YOU…the taxpayer…pay off all wagers.

Third, the REAL problem comes…when Fannie Mae and Freddie Mac act as the bagman for the banks in delivering the money and waiting for the horses to cross the finish line. The homeowners are STILL going to default in large numbers. This “bailout” is NOT for them.

Freddie and Fannie will have the ticket stubs on all the horses…but the 80 cents they paid, will net them only 40 cents on the sale of those stubs. Nobody is going to buy an inventory of bad bets at 80 cents on the dollar. Investors in residential real estate can wait forever…because you will have a half trillion dollars worth of inventory…and nobody to “flip” the house to…there aren’t enough qualified buyers.

Moreover, in hyperinflationary times… banks will be charging HIGHER…not lower…interest rates. They have to …the Treasury will have to get money back for this “bailout loan” and they will have to get some of it from raising their rates. The banks in turn, will raise theirs.

This means…YOU…will be punished for the mess…because ALL of YOUR rates are going up too.

In fact, if you are a responsible, successful, diligent, taxpayer…and you happen to fall in the top 25% of all income earners…YOU WILL (statistically speaking) have caused not ONE IOTA of this mess…and you will be saddled with the lion’s share of fixing it. YOUR taxes will be raised. They have to be. The Democrats will call you “rich” and try to “blame” you. Every single marginal tax increase that can be levied, will be levied.

The banks get off scot free. The homeowners who got “liar loans” won’t be paying this off.

You will. And the “government” is going to be watching over your pocketbook, because they “know best” how to spend your money.

Sep 25, 2008 - 9:08 am 48. David:

Why is is that so many people think handing a blank check is the best and ONLY way for government to be involved? I’m in support of the free-market alternatives, especially if government’s role is only restricted as a mediator rather than an interference. Why can’t the government, instead of just throwing money at the problem, help network other financial companies so that they can work together to buy these securities in reverse-auctions and renegotiate their interest rates for the homeowners? In other words, why can’t government let these hulking behemoths of Wall Street have their bodies consumed by smaller competitors?

The fall of these institutions is a a mix of market opportunities and busts, not a complete catastrophe as would be argued by the Bush administration. If they were as noble as they claim, they would buy these securities out of their own pockets rather than forcing us to fork over the bill.

Sep 25, 2008 - 9:49 am 49. incongruities:

VRWC:

You are saying if we don’t do the $700 Billion I wont be able to get my paltry bit of money from my bank. Thats laughable and I call bullshit. But even it it was so, why wouldn’t I just expect the government to bail out the FDIC and make me whole? Certainly the government wouldn’t just leave the little guy hanging, would they?

Sep 25, 2008 - 10:16 am 50. Justaworkistiff:

Here’s an interesting take on the financial situation in the country that I find quite logical..it leaves me wondering if there is even one politician in this country with the smarts…and the balls to suggest it in our hallowed halls of congress

http://www.atimes.com/atimes/Global_Economy/JI23Dj06.html

anyone think there is anyone on either side of teh asile with the courage to say just let the banks sor it and and the chips fall where they may…nope me neither too many highly conected fat cats with thier moey on the line

Sep 25, 2008 - 10:37 am 51. bear:

This is all about risk. What are we willing to risk as a nation. I’m not sure what the best solution is, but my gut tells me that without a bailout (of some sort) it won’t be just economic turmoil we’re looking at. Sure I’d like to skewer the folks that caused this, but I’m not prepared for the the tipping point that will make global warming commentary meaningless.

Sep 25, 2008 - 12:03 pm 52. Shef Rogers:

Can anybody explain to me why Bush didn’t just say, “Let the free market do its job”? Isn’t that what he’s been saying his whole life? Now, the first time he’s asked to put that principle ahead of favors to some of his fat-cat friends, he dumps the principle without a struggle. That’s what floors me: there’s no sign it even bothered him! I just don’t know what to say. I’ve never been this astonished, or disgusted, in my life.

Sep 25, 2008 - 12:22 pm 53. Cowcup:

What scares Bush and Bernanke and Paulson, suppose they are honest, is monetary contraction.

Monetary contraction happens when banks die. When that happens, some money becomes paper. Then, the prices of everything need adjustment, because people and their businesses’ relative wealth suddenly change. Their demands change. Those changes are painful. Someone will lose their jobs. Etc.

Think about a technology change will bring change in the production and the job market and etc. Then somebody would lose job. Their old knowledge won’t be useful. Their old demands won’t be satisfied. The change brought about by monetary contraction is just such a change only it’s big.

To avoid such change, the government should keep the money supply at the old level. But there is no reason that the government should supply the money to the failed banks. There are other ways to send out the money, to avoid the monetary contraction.

Sep 25, 2008 - 12:52 pm 54. Cowcup:

I think most of the members of Congress and the leaders here and there understand and are trying to avoid the monetary contraction. That is, to send out money. What they are arguing at this moment, is to whom to send the money, and what benefit can they, themselves, get. It’s a party now. And, there really is little chance that this won’t be smoothed out soon. Also, there is little chance that these politicians will let go this opportunity to grab their share. It will just be politics as usual in a few weeks. You need someone as dramatic as Reagan or FDR to bring real change. Neither candidates are that material. I am looking forward to Sarah Palin. But McCain camp’s attitude towards VP debate is rather strange. It rips my confidence in our next Thatcher. But I can still hope at this moment. She’s young, after all.

Sep 25, 2008 - 1:04 pm 55. Cowcup:

You know, you can think of this as Wall Street’s mocking the change mantra.

The politicians can have slogans. You know. But the Wall Street can throw money out. And they did this masterfully.

Sep 25, 2008 - 1:26 pm 56. steve@missouri.edu:

Or perhaps a ‘trickle-up’ approach might work ??

As you know the Feds already subsidize homeowners via the Mortgage interest deduction.

Would it not be easier, quicker, safer and a more ‘populist’ political act to simple adjust our tax laws so that, for example, for the remainder of 08 & 2009 a married-filing-joint couple with an adjusted gross income of under a quarter million could replace their current mortgage interest *deduction* with a 50 to 90% mortgage interest ‘refundable credit’.

While insufficient to assist some unemployed folks who couldn’t make payments regardless, for most struggling middle-class citizens the promise of a fat IRS refund in April would provide a huge incentive to *make their mortgage payments* as well as provide incentives for new home buyers.

End result = fewer mortgage defaults, bank stock values soar, home sales skyrocket and the Federal subsidy to eliminate this problem goes to millions of individual taxpaying families rather than to a relatively small group of already wealthy gamblers…

Your thoughts ??
Steve

Sep 25, 2008 - 3:48 pm 57. Jeb:

The reason we have a crisis of this scale is because of the deregulation contained in the 1995 and 2005 “fixes”. Not until 1995 was it legal to securitize CRA loans. They could not be packaged and repackaged and routinely leveraged 20:1 to 30:1. We may or may not have had a crisis situation because of pressures to make some bad loans. The thing is, if that was the only problem we would be dealing with a problem of considerably less than $100 bill and likely in the range of $20-30 bill. In 2005 most of the regulations for CRA were removed from the small to medium sized lenders, but they continued to make these loans. Why? Did the government trick them or did they see a cash cow and an open gate. They knew the debt was shakey at best and yet they continued to repackage it and leverage it as far as they could to make bets on the market. It is mind boggling to me that this crisis made orders of magnitude larger by deregulation over the past 13 years is being used by some as an argument for more deregulation. 4 more years.

Sep 25, 2008 - 6:22 pm 58. kabud:

Thank you very much for this article.

So true.

Sep 25, 2008 - 6:33 pm 59. RE:

Just wondering, Is a period of economic difficulty a solution to the illegal alien problem? In short, I don’t trust the government with and ‘bailout’ and I’m looking for silver linings in this situation.

It seems that much of the hysteria is over keeping things going the way they are – when the system clearly broken in more ways than one. Perhaps we should put an end to this kicking he can down the road mentality once and for all – even if it does cause pain.

Sep 25, 2008 - 6:53 pm 60. nlcatter:

amazing that I agree wit hGOP sectreas

and Bush.

and mccain looks like a fool,

and Palin is one on TV

what a day !

Sep 25, 2008 - 9:32 pm 61. kabud:

Say NO to bailout:

most of us work hard for the money and pay the bills: so we HAVE to WIN

And those who don’t- must lose.

Big speculators must lose MORE

Sep 25, 2008 - 10:37 pm 62. Ex-fetus:

Jeb, what do you expect when the ’solution’ is brought to you be the same people that created the problem?
I would like to see a time out. send them to a corner and make them sit for a while.
Close Wall Street for a day or so. Let’s see if the world really ends. If it doesn’t we will know that somebody is blowing smoke. Close it for 3 days. A cure for a panic attack is to stop, sit down and take a deep breath.
Fire Cox. Grab all the transaction records for the last 10 days and let the SEC start doing their job. Have the FBI look into just why they haven’t been. See who Cox is in bed with and how long they have been together.

http://www.sec.gov/news/press/2008/2008-214.htm

This investigation should have been started a while back. Maybe when countryeide tanked, certainly when Fannie got caught cooking the books.
Out here in the red states, we don’t wait until we hear the horse being ridden away to check the barn door latch. Something AIN’T right.
Close the Markets, hold Congress over and start digging into this mess. A lot of funny things going on. If there is a credit crunch, why can I get a 30 yr fixed for under 10% I have lived thru real credir crunches. 30 year fixed at 17% is a credit crunh, Under 10 is somebody blowin smoke.

Sep 25, 2008 - 11:29 pm 63. Ex-fetus:

Your thoughts ??
Steve

That would work, but there is one small problem. The crooks running this scam won’t be able to skim a few hundred billion off the top.
All the panic is BS. Markets have crashed before, they will crash again. Hyper-venttilating over tales of doom and gloom is funny. The market crash part of this is a scam, a con. The US Taxpayer is being hustled yet again.
As was pointed out above, if the banks crash, FDIC will payout to the small customers. The BIG guys will get hosed, which is a real change. The kind you can dream about. It’s better for the country to pay out thru FDIC then some monster bailout plan that will only help the crooks that got us in this mess in the first.
I frankly don’t believe the tales of the entire economy crashing. Only those hand-to-mouth businesses will and they need to. Well managed business will be in clover as all those people with their FDIC checks will be looking to buy something. The banks that haven’t gone into the tank will have LOTS of capital to work with as those FDIC checks are deposited.
The crooks can gather around their bottle of 4 roses under an overpass and trade stories about how rich they would be if Congress had just given them that Trillion dollars.

Sep 25, 2008 - 11:53 pm 64. Cowcup:

Say no to bailout. Say yes to tax cut.

Bush has proved himself again he’s not real conservative. And this time he does not have another Petraeus to save him.

I don’t know if McCain is real for reform. This $700b is just huge earmark in making.

I wish Sarah can prove herself to be the next Reagan, and tell Congress: No Bailout, and Cut Taxes.

Obama? This is a golden chance for him to implement all his favorite social engineering programs. And a new New Deal to prolong this mess for another 4 years ’till …

These are the options and pipe dreams.

Sep 26, 2008 - 12:14 am 65. RE:

HotAir is reporting that the Dems want to direct 20% of the bailout ‘profits’ to fund ACORN! Outrageous! No F’ing way!

http://hotair.com/archives/2008/09/26/the-democratic-acorn-bailout/

Sep 26, 2008 - 5:14 am 66. cfbleachers:

Democrats forcing through a bill that relaxes mortgage lending standards to ridiculous lows in order to allow the “populist” masses to “own” homes. — 3 million foreclosures

Democrats blaming “the rich” for making “excessive” profits on junk mortgages and “liar loans” that they encouraged. — 100 bank failures

Democrats trying to push through a “bailout” plan that buys the non-performing junk loans, fails to protect the homeowner from foreclosure, creates an inventory of a trillion dollars worth of white elephants, increases the tax burden on the “rich” (the top 25% income earners and small business owners), sells those loans to bulk REO purchasers at half the purchase price…and blames the Republicans for not supporting it. —- One Trillion Dollars worth of inflation and higher taxes, higher interest rates.

Democrats stuffing in a 20% pork windfall for their own party benefit, through Acorn and La Raza.— Priceless

Sep 26, 2008 - 6:47 am 67. Pelayo:

Repeal the Community Reinvestment Act, now yesterday would be better! That law was ignored by Reagan and Bush #1, Clinton began to vigorously enforce it, and here we are.

Sep 26, 2008 - 6:22 pm 68. Keegy United States - An Alternative to the Wall Street Bailout:

[...] An Alternative to the Wall Street Bailout [...]

Sep 26, 2008 - 8:16 pm 69. Doddlin:

Burning down the house – Please watch and get the facts.
http://www.youtube.com/watch?v=H5tZc8oH–o

Sep 26, 2008 - 8:58 pm 70. Constitutional Patriot:

You are WRONG!!

Bailing out Wall Street in this way is NOT “socialism” of any type.

It is Fascism. Whenever the public bears the losses and private money gets all the profitd from the same venture, that is fascism. Mussolini’s Economic miracle – which the Bush Family have been trying to bring to the US since Grandaddy Prescott (the traitor whose companies were seized for his dealings with the enemy) was butt-boy to the Harriman fortune.

Sep 28, 2008 - 9:06 am 71. eric:

clean up those corrupt new york banksters investigate barney frank immediately

Sep 30, 2008 - 1:42 pm 72. Marv Michigan:

Instead of giving 700 billion to Wall street crooks, the government could save nearly 6.7 billion with a stimulus package of 1 million to each American, all nearly 304 million of us and require that each person pay off his or her home mortgage with it, which would then solve the banking liquidity problem and the sub-prime mortgage mess.

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Nov 13, 2008 - 2:38 pm