Pawkeshup, Assassin Reject wrote:
Remember, this was a credit implosion. That means mortgages were loaned to people who could not repay it, causing them to write off the debt. The banks made bad decisions. So, you're going to encourage them to do that again?
Bailing them out doesn't encourage them to make bad decisions anymore than the fire department putting out a fire encourages someone to light another one. It's not like these banks choose to do this. They acted on assets they assumed had one value, but in actually had much less value.
I'd also seriously question the concept that it was lack of regulation that caused this. Regulation has a tendency to prevent one problem, but create three others. What happened here is that regulation designed to prevent lenders from unfairly blocking loans to people in poor neighborhoods resulted in the creation of incentives for them to loan money to people who were less likely to be able to afford the loans. Further regulation was layered on top of that to ensure that the investors in the securities for those loans believed that those loans were just as solvent as any other in the market.
This crash was the unintended side effect of too much regulation, not the result of too little.
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Isn't it insane to repeat the same steps and expect a new result? I mean, look at AIG. They are going under, and still giving out multi-millions in bonus money. As said earlier in the thread, this will only delay another crash.
I think you're focusing too much on the past and not enough on the current situation. AIG's problem specifically is that they invested in these bad assets. When the music stopped, too high a percentage of their operating capital was tied up in those assets and lost a ton of value. The leveraged debt they'd borrowed on the value of those assets was higher than the credit value of those assets, so their operating capability went into vapor lock.
The intent of the bailout is not just to help them overcome the bad investments, but to protect the value of all the other investments they hold. More specifically, to protect the value of the contracts they hold on future debt obligations. AIG deals largely in long term debt holding. They hold the back end of pension funds and insurance policies. Thus, the on-book amount they "owe" to others measures in the trillions, but the bulk of that is paid out over decades. If they fail, those future payments disappear. The bailout money gives them sufficient headroom to sell off those accounts to other providers so that the holders of the policies don't get screwed.
And, as I've pointed out in a couple of threads on the subject, in the last 4-5 months, AIG has managed to divest itself of about 75% of those accounts (from over 6 Trillion to about 1.7 Trillion today). That's a huge accomplishment by any measurement.
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I'd rather see buying personal debt up, which will give the money back to the banks (I should have phrased it differently, you would not actually trust the people with the cash). Then, with the debt load off, individuals could spend. Banks would get their cash back. To me, that would go much further than driving individuals further into debt while rewarding banks for making poor decisions on their asset risk.
The problem with that is that you are basically giving people money. Again, you have to look at the entire financial transaction going on here. The guy who took out a 300k loan while working for near minimum wage didn't have 300k to start with. He borrowed money he didn't have and couldn't pay back. He's at worst out whatever he's paid on the mortgage (which is a fraction of the value of the debt).
The only way for your suggestion to work is if the government basically gives that guy 300k. That's monumentally unfair to all the people who took out 300k loans on homes that they could afford, and haven't gotten into financial trouble. The key point again is that the home buyer didn't put the money in and then lose it. He never had it to begin with. Paying off his debt is equivalent to just giving him a free house.
Buying up the toxic assets held by the investor is not the same thing. They *did* have 300k of assets. In most cases, they bought that 300k in bad assets with 300k of good assets. This is certainly the case with AIG btw. Those toxic assets are not their primary business. They simply invested a chunk of their operating capital into mortgage securities and got burned.
That scenario is very much like if you buy 300k worth of stock in a company and then the company goes under. You've actually lost money you started with. You had 300k and now you have nothing. That's why this is causing problems for so many financial institutions. They invested money into these assets. They borrowed money off the value of those assets (which is a common thing to do), but then the assets ended up being worth less than they paid for it, their real assets on hand dropped below the leverage multiplier and suddenly their credit dried up.
Buying up those assets fixes that problem immediately. It doesn't fix whatever other problems have occurred in the meantime, but it's a huge step in the right direction. What's so stunningly strange about this is that this was the original plan under Secretary Paulson. That's what TARP originally entailed (Toxic Asset Relief Plan). Somewhere along the line, the plan changed and instead of buying up assets, they started spending it on other side problems that had cropped up as a result of the asset losses in the first place. A couple trillion dollars of chasing the symptoms later, we still haven't actually removed much of those assets from the books of these companies.
It's the correct course of action. It should have been done 6 months ago. Every day we wait, the problem (and the cost to fix it) grows.