Ok, I'm not an economist. I'm just a layman in all this, but I seriously do not understand how one will stimulate an economy by creating more debt.
Obama is on the boob tube at this time, expounding upon the virtues of acquiring all the "bad debt", or debts owed to the bank that are being written off as unrecoverable losses, so that they can loan people more money.
Um, call me dense, but isn't that part of the reason that we got here? People living beyond their means, borrowing excessive amounts of money and running up their debt, then losing their means of income and having to file for bankruptcy?
What are you really doing to stimulate the economy by handing banks cash to loan to cash-strapped people who, in all likelihood, will wind up creating more "bad debt" by going belly up financially?
Maybe someone more well versed can explain this to me, but right now, I don't see this solving anything, just postponing another meltdown.
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- So... Let's give money to banks to create more debt
So... Let's give money to banks to create more debtFollow
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Olorinus the Ludicrous wrote:
The idea of old school is way more interesting than the reality
You let the banks fail, I suggest you build a moat around your house and buy a gun b/c the global economy will collapse. We absolutely cannot let that happen. Sorry, I like functional currency. I was talking to my more conservative sister about this--she is on a committee (she works in a financial part of her company) analyzing the effects of the bailouts. She emphasizes that all of this--the housing, the bank and the industry bailouts, are absolutely essential. It has nothing to do with charity or excusing bad behavior--it has everything to do with preventing collapse. You need people to stay solvent and stay in their houses because the banks cannot handle the weight of that many bad loans and if the banks can't handle it, it'll have catastrophic effects on our economy. If Citibank is ******* so are we.
What is important is that new regulations need to be introduced to prevent this--Reagan's policy of supply side economics and deregulation and multinationalization of industry brought us here--not excessive government involvement.
Edited, Mar 24th 2009 8:43pm by Annabella
What is important is that new regulations need to be introduced to prevent this--Reagan's policy of supply side economics and deregulation and multinationalization of industry brought us here--not excessive government involvement.
Edited, Mar 24th 2009 8:43pm by Annabella
Turin wrote:
Seriously, what the f*ck nature?
Quote:
What are you really doing to stimulate the economy by handing banks cash to loan to cash-strapped people who, in all likelihood, will wind up creating more "bad debt" by going belly up financially?
If your understanding, and I use the term loosely, is really this dim then I submit that you are not even a layman, but some sort of sub-layman.
In a time of universal deceit, telling the truth is a revolutionary act.
Quote:
it has everything to do with preventing collapse
It has everything to do with postponing collapse.
Notice that no one has even touched the common sense argument laid out by the OP because it really is obviously that stupid of a plan.
The emperor wears no clothes.
I think soulshaver confuses common sense with being overly simplistic.
Edited, Mar 24th 2009 9:56pm by Annabella
Edited, Mar 24th 2009 9:56pm by Annabella
Turin wrote:
Seriously, what the f*ck nature?
Notice that no one has even touched the common sense argument laid out by the OP because it really is obviously that stupid of a plan.
It's not "stupid". It's "the available option that sucks". If your arm becomes pinned by a 14 ton boulder, cutting it off may be "the available option that sucks". Understand? Arguing after the fact "It was stupid to cut your own arm off" sort of loses it's meaning without context.
That's what you're doing here. Of course it sucks to give away money to assholes who took risk *knowing that if they failed we'd give them money*.
That's irrelevant. That's a moron's view of this that ignores context. Doing nothing has predictable outcomes, abject failure of the world economy. You need to understand that I'm not making a hyperbolic statement there. That's the reality; abject failure of the world economy. If you refuse to believe that because you can't understand why it would happen, go find out and stop wasting my time.
Disclaimer:
To make a long story short, I don't take any responsibility for anything I post here. It's not news, it's not truth, it's not serious. It's parody. It's satire. It's bitter. It's angsty. Your mother's a *****. You like to jack off dogs. That's right, you heard me. You like to grab that dog by the bone and rub it like a ski pole. Your dad? Gay. Your priest? Straight. **** off and let me post. It's not true, it's all in good fun. Now go away.
To make a long story short, I don't take any responsibility for anything I post here. It's not news, it's not truth, it's not serious. It's parody. It's satire. It's bitter. It's angsty. Your mother's a *****. You like to jack off dogs. That's right, you heard me. You like to grab that dog by the bone and rub it like a ski pole. Your dad? Gay. Your priest? Straight. **** off and let me post. It's not true, it's all in good fun. Now go away.
Add in to that the fact that the other moderately viable options would be much harder to accomplish and require such dramatic restructuring that they just won't be happening. Some would cost less of your money, but the incentive to seek those options out is in the negatives.
Just as Planned.
At this point, banks are unable or unwilling to loan to people with perfectly good credit and a safe job, because of the fear that they will too go under.
You've also go to realize that many of the now-defaulted loans were made to people who 1. had jobs but then lost them and 2. were making their mortgage payments every month, on time, no problems, until they lost them 3. were scammed by con artists into signing ARMs when they were told they were fixed rates. (These are the people that really need to go to jail, but much of that paperwork has since been deliberately destroyed. The loan officers didn't give a crap; they walked away with a $1500 closing fee on every house they sold regardless of whether the loan was legit or not.)
These days, new cars come with the option of "job-loss insurance": if you lose your job, you can bring the car back to the dealership with no penalty on your credit. Unfortunately, they didn't have the same thing for houses.
You've also go to realize that many of the now-defaulted loans were made to people who 1. had jobs but then lost them and 2. were making their mortgage payments every month, on time, no problems, until they lost them 3. were scammed by con artists into signing ARMs when they were told they were fixed rates. (These are the people that really need to go to jail, but much of that paperwork has since been deliberately destroyed. The loan officers didn't give a crap; they walked away with a $1500 closing fee on every house they sold regardless of whether the loan was legit or not.)
These days, new cars come with the option of "job-loss insurance": if you lose your job, you can bring the car back to the dealership with no penalty on your credit. Unfortunately, they didn't have the same thing for houses.
It also doesn't matter if they "deserved" loans or not. Let's stop acting like a nation of five year olds. Complaining about it doesn't mean ****. The government needs to deal with the implications of what happened.
Turin wrote:
Seriously, what the f*ck nature?
Quote:
At this point, banks are unable or unwilling to loan to people with perfectly good credit and a safe job, because of the fear that they will too go under.
Beyond that, in some instances the banks are not able to loan money to good credit risks because the bank themselves lack liquid assets to loan.
Think about that for a minute.
Yes, it sucks. I'm very sorry for all of you who feel no sense of responsibility and a crushing sense of obligation. I'm right there with you; and so what? The alternative is worse.
In a time of universal deceit, telling the truth is a revolutionary act.
Quote:
That's irrelevant. That's a moron's view of this that ignores context. Doing nothing has predictable outcomes, abject failure of the world economy. You need to understand that I'm not making a hyperbolic statement there. That's the reality; abject failure of the world economy. If you refuse to believe that because you can't understand why it would happen, go find out and stop wasting my time.
So the question is; will the plans succeed in rescuing the world economy from failing?
No, it will delay it. I would rather face the consequences now than try to push them back on a later generation of people who had less to do with our predicament than we did.
So lets say the best possible case is that all of these plans succeed in getting the economy back where it was. What then? Will we not run into the exact same problems we had before, that we have had in the past? The same things keep happening to the economy and we as a majority of people become relatively poorer and poorer.
Its time to completely change the way we conduct ourselves in business, a new philosophy and culture. The greedy mentality is not sustainable and is obviously failing. Our primary focus as a society should be making sure everyone has a sustainable way of living, not trying to buy stocks when the timing is right.
Quote:
No, it will delay it. I would rather face the consequences now than try to push them back on a later generation of people who had less to do with our predicament than we did.
No you wouldn't. Really. I think that you think it isn't as bad as it would be. Imagine the economy of early Weimar Germany but worldwide-- skyrocketing unemployment (like higher than the Great Depression which was originally 25%) and hyperinflation. It'd be a meltdown on a level that I don't think you can imagine--it'd be much worse and more entrenched than the Great Depression.
You do what every responsible government does in a time of crisis. Solve the immediate problems--rescue the country from economic collapse through emergency measures and then introduce legislation to rebuild and correct the problems that created the situation in the first place. You can't introduce reforms when the economy is totally melting down--that's completely irresponsible.
30 Years of Reaganomics have @#%^ed us. Bush was a terrible president. Laissez faire capitalism wasn't working--why would we resort to that as an answer now? And why do we care as tax payers about using our money since if we don't use it, our money would become worthless.
Edited, Mar 25th 2009 12:42am by Annabella
Turin wrote:
Seriously, what the f*ck nature?
Quote:
No, it will delay it. I would rather face the consequences now than try to push them back on a later generation of people who had less to do with our predicament than we did.
You do realize how the economy works right? The fact that it is by its nature a belief based construct? And you realize what the consequences are? Do you also realize that the consequences of wholesale collapse can be pushed back almost indefinitely? And that after a collapse there will be an across the board decrease in standard of living, lifespan, and any really any possible benchmark for measuring the state of human existence?
In spite of those do you still proclaim that we should let the global economic systems collapse, or did you just not understand the resultants of such?
In short, are you ignorant or an idiot?
Just as Planned.
Why do conservatives post W hate $ so much?
"The Rich are there to take all of the money & pay none of the taxes, the middle class is there to do all the work and pay all the taxes, and the poor are there to scare the crap out of the middle class." -George Carlin
soulshaver wrote:
The greedy mentality is not sustainable and is obviously failing. Our primary focus as a society should be making sure everyone has a sustainable way of living, not trying to buy stocks when the timing is right.
I agree with this sentiment. I'm not sure how we can go about implementing it in practice, but I do agree we need to have more solid and stable foundations. A smaller gap between the richest and poorest. That being a teacher or a nurse should not be paid a thousand times less than being, say, a banker. I think this is the direction we should be heading towards.
But we can't get there if the whole thing collapses. As for the OP question, from what I understand, the problem is basically that banks don't lend because of the toxic assets. If the government buys them, bank's assets become clean again, and they can start lending again, which means the economy can start to function again. Having said that, it doesn't mean that reforms won't come. The mere fact that the state is saving all these institutions means that it can have a say into how they are run. Regulation will change. Those two things are not only compatible, they are necessary conditions for each other. It's a million times easier to save and reform than to let crash and rebuild.
Here's an idea... give the bailout to the people in debt to pay off the banks...
See, this idea helps the banks (they get their money) helps the people (they are out of debt) and helps the economy (banks can loan and the people can buy stuff again)!
See, this idea helps the banks (they get their money) helps the people (they are out of debt) and helps the economy (banks can loan and the people can buy stuff again)!
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Olorinus the Ludicrous wrote:
The idea of old school is way more interesting than the reality
Some of that will probably happen; but you must see that it's the same thing you were complaining about in your original post. The only difference is the scale.
People made bad decisions based on bad information. Whether those people were investment bankers or some poor schlubs buying their first house, they were still people making bad decisions based on bad information.
People made bad decisions based on bad information. Whether those people were investment bankers or some poor schlubs buying their first house, they were still people making bad decisions based on bad information.
In a time of universal deceit, telling the truth is a revolutionary act.
Pawkeshup, Assassin Reject wrote:
Here's an idea... give the bailout to the people in debt to pay off the banks...
See, this idea helps the banks (they get their money) helps the people (they are out of debt) and helps the economy (banks can loan and the people can buy stuff again)!
See, this idea helps the banks (they get their money) helps the people (they are out of debt) and helps the economy (banks can loan and the people can buy stuff again)!
If you just give the cash to the people so they can pay off their loans, then the price of alcohol and cigarettes will sky rocket and for some reason, the loans will still not be paid off...
Can't sleep, clown will eat me.
Pawkeshup, Assassin Reject wrote:
Here's an idea... give the bailout to the people in debt to pay off the banks...
See, this idea helps the banks (they get their money) helps the people (they are out of debt) and helps the economy (banks can loan and the people can buy stuff again)!
See, this idea helps the banks (they get their money) helps the people (they are out of debt) and helps the economy (banks can loan and the people can buy stuff again)!
That said, there are programs in place and monies available to restructure home-owner loans when it will help.
Alma wrote:
I lost my post
I'm agreeing with Brad DeLong on this one - I think that the Geithner plan is a step in the right direction.
http://delong.typepad.com/sdj/2009/03/the-geithner-plan-faq.html wrote:
The Geithner Plan FAQ
Q: What is the Geithner Plan?
A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.
Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.
Q: Where does the trillion dollars come from?
A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC in the form of debt, and $30 billion from the hedge fund and pension fund managers who will be hired to make the investments and run the program's operations.
Q: Why is the government making hedge and pension fund managers kick in $30 billion?
A: So that they have skin in the game, and so do not take excessive risks with the taxpayers' money because their own money is on the line as well.
Q: Why then should hedge and pension fund managers agree to run this?
A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money.
Q: Why isn't this just a massive giveaway to yet another set of financiers?
A: The private managers put in $30 billion and the government puts in $970 billion. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year. In this case, the private managers' returns can be thought of as (a) a share of the portfolio's total return proportional to their 3% contribution, plus (b) a "management incentive fee" of (i) 0% of the capital value and (ii) between 0% (if the portfolio returns 3% per year) and 9% (if the portfolio returns 10% per year)--much less than hedge-fund managers typically charge. the Treasury is only paying 0% of the capital value and 17% of the profits every year.[1]
Q: Why do we think that the government will get value from its hiring these hedge and pension fund managers to operate this program?
A: They do get 17% of the equity return. 17% of the return on equity on a $1 trillion portfolio that is leveraged 5-1 is incentive.
Q: So the Treasury is doing this to make money?
A: No: making money is a sidelight. The Treasury is doing this to reduce unemployment.
Q: How does having the U.S. government invest $1 trillion in the world's largest hedge fund operations reduce unemployment?
A: At the moment, those businesses that ought to be expanding and hiring cannot profitably expand and hire because the terms on which they can finance expansion are so lousy. The terms on which they can finance expansion are so lazy because existing financial asset prices are so low. Existing financial asset prices are so low because risk and information discounts have soared. Risk and information discounts have collapsed because the supply of assets is high and the tolerance of financial intermediaries for holding assets that are risky or that might have information-revelation problems are low.
Q: So?
A: So if we are going to boost asset prices to levels at which those firms that ought to be expanding can get finance, we are going to have to shrink the supply of risky assets that our private-sector financial intermediaries have to hold. The government buys up $1 trillion of financial assets, and lo and behold the private sector has to hold $1 trillion less of risky and information-impacted assets. Their price goes up. Supply and demand.
Q: And firms that ought to be expanding can then get financing on good terms again, and so they hire, and unemployment drops?
A: No. Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets, and make it profitable for those businesses that should be hiring and expanding to actually hire and expand.
Q: Oh.
A: But all is not lost. This is not all the administration is doing. This plan consumes $150 billion of second-tranche TARP money and leverages it to take $1 trillion in risky assets off the private sector's books. And the Federal Reserve is taking an additional $1 trillion of risky debt off the private sector's books and replacing it with cash through its program of quantitative easing. And there is the fiscal boost program. And there is a potential second-round stimulus in September. And there is still $200 billion more left in the TARP to be used in other ways.
Think of it this way: the Fed's and the Treasury's announcements in the past week are what we think will be half of what we need to do the job. And if it turns out that we are right, more programs and plans will be on the way.
Q: This sounds very different from the headline of the Andrews, Dash, and Bowley article in the New York Times this morning: "Toxic Asset Plan Foresees Big Subsidies for Investors."
A: You are surprised, after the past decade, to see a New York Times story with a misleading headline?
Q: No.
A: The plan I have just described to you is the plan that was described to Andrews, Dash, and Bowley. They write of "coax[ing] investors to form partnerships with the government" and "taxpayers... would pay for the bulk of the purchases..."--that's the $30 billion from the private managers and the $150 billion from the TARP that makes up the equity tranche of the program. They write of "the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money..."--that's the debt slice of the program. They write that "the government will provide the overwhelming bulk of the money — possibly more than 95 percent..."--that is true, but they don't say that the government gets 80% of the equity profits and what it is owed the FDIC on the debt tranche. That what Andrews, Dash, and Bowley say sounds different is a big problem: they did not explain the plan very well. Deborah Solomon in the Wall Street Journal does, I think, much better. David Cho in tomorrow morning's Washington Post is in the middle.
Q: What is the Geithner Plan?
A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.
Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.
Q: Where does the trillion dollars come from?
A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC in the form of debt, and $30 billion from the hedge fund and pension fund managers who will be hired to make the investments and run the program's operations.
Q: Why is the government making hedge and pension fund managers kick in $30 billion?
A: So that they have skin in the game, and so do not take excessive risks with the taxpayers' money because their own money is on the line as well.
Q: Why then should hedge and pension fund managers agree to run this?
A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money.
Q: Why isn't this just a massive giveaway to yet another set of financiers?
A: The private managers put in $30 billion and the government puts in $970 billion. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year. In this case, the private managers' returns can be thought of as (a) a share of the portfolio's total return proportional to their 3% contribution, plus (b) a "management incentive fee" of (i) 0% of the capital value and (ii) between 0% (if the portfolio returns 3% per year) and 9% (if the portfolio returns 10% per year)--much less than hedge-fund managers typically charge. the Treasury is only paying 0% of the capital value and 17% of the profits every year.[1]
Q: Why do we think that the government will get value from its hiring these hedge and pension fund managers to operate this program?
A: They do get 17% of the equity return. 17% of the return on equity on a $1 trillion portfolio that is leveraged 5-1 is incentive.
Q: So the Treasury is doing this to make money?
A: No: making money is a sidelight. The Treasury is doing this to reduce unemployment.
Q: How does having the U.S. government invest $1 trillion in the world's largest hedge fund operations reduce unemployment?
A: At the moment, those businesses that ought to be expanding and hiring cannot profitably expand and hire because the terms on which they can finance expansion are so lousy. The terms on which they can finance expansion are so lazy because existing financial asset prices are so low. Existing financial asset prices are so low because risk and information discounts have soared. Risk and information discounts have collapsed because the supply of assets is high and the tolerance of financial intermediaries for holding assets that are risky or that might have information-revelation problems are low.
Q: So?
A: So if we are going to boost asset prices to levels at which those firms that ought to be expanding can get finance, we are going to have to shrink the supply of risky assets that our private-sector financial intermediaries have to hold. The government buys up $1 trillion of financial assets, and lo and behold the private sector has to hold $1 trillion less of risky and information-impacted assets. Their price goes up. Supply and demand.
Q: And firms that ought to be expanding can then get financing on good terms again, and so they hire, and unemployment drops?
A: No. Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets, and make it profitable for those businesses that should be hiring and expanding to actually hire and expand.
Q: Oh.
A: But all is not lost. This is not all the administration is doing. This plan consumes $150 billion of second-tranche TARP money and leverages it to take $1 trillion in risky assets off the private sector's books. And the Federal Reserve is taking an additional $1 trillion of risky debt off the private sector's books and replacing it with cash through its program of quantitative easing. And there is the fiscal boost program. And there is a potential second-round stimulus in September. And there is still $200 billion more left in the TARP to be used in other ways.
Think of it this way: the Fed's and the Treasury's announcements in the past week are what we think will be half of what we need to do the job. And if it turns out that we are right, more programs and plans will be on the way.
Q: This sounds very different from the headline of the Andrews, Dash, and Bowley article in the New York Times this morning: "Toxic Asset Plan Foresees Big Subsidies for Investors."
A: You are surprised, after the past decade, to see a New York Times story with a misleading headline?
Q: No.
A: The plan I have just described to you is the plan that was described to Andrews, Dash, and Bowley. They write of "coax[ing] investors to form partnerships with the government" and "taxpayers... would pay for the bulk of the purchases..."--that's the $30 billion from the private managers and the $150 billion from the TARP that makes up the equity tranche of the program. They write of "the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money..."--that's the debt slice of the program. They write that "the government will provide the overwhelming bulk of the money — possibly more than 95 percent..."--that is true, but they don't say that the government gets 80% of the equity profits and what it is owed the FDIC on the debt tranche. That what Andrews, Dash, and Bowley say sounds different is a big problem: they did not explain the plan very well. Deborah Solomon in the Wall Street Journal does, I think, much better. David Cho in tomorrow morning's Washington Post is in the middle.
Pawkeshup, Assassin Reject wrote:
I seriously do not understand how one will stimulate an economy by creating more debt.
You're a fUcking imbecile.
"I started out with nothin' and I still got most of it left" - Seasick Steve
Nobby wrote:
Pawkeshup, Assassin Reject wrote:
I seriously do not understand how one will stimulate an economy by creating more debt.
You're a fUcking imbecile.
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?
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'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.
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Olorinus the Ludicrous wrote:
The idea of old school is way more interesting than the reality
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.
Quote:
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.
Quote:
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.
King Nobby wrote:
More words please
Quote:
Do you also realize that the consequences of wholesale collapse can be pushed back almost indefinitely?
No they can't. In this system that we have created, it is absolutely necessary for some entities to go bankrupt for there to be enough capital to pay off all debts, including interest. This is a result of the fractional reserve lending practices and they we we create money through the federal reserve. There is simply not enough capital in the system because all of it is created with interest attached to it.
If we continue along this path, at some point the interest on our national deficit will be more than our GDP, and we will essentially be bankrupt as a country.
All we do by giving money to banks is delay and enhance the inevitable crash. And yes I understand the consequences of a crash. That is why I have been preparing for it the last 10 years.
Its time for everyone to face the consequences for their way of life, and start a new one.
Pawkeshup, Assassin Reject wrote:
Nobby wrote:
Pawkeshup, Assassin Reject wrote:
I seriously do not understand how one will stimulate an economy by creating more debt.
You're a fUcking imbecile.
Stet.
(gbaji - see? Use fewer words.)
"I started out with nothin' and I still got most of it left" - Seasick Steve
You don't realize something here: Not all the debt is bad.
About 10% of homes are behind on payments or in foreclosure. But that means 9/10 homes are doing just fine.
The reason that the assets are "toxic" is because they got scrambled to together and re-sliced apart afterward. They're not inherantly bad. It's just that you have no idea whether just 1 of the 100 homes that represents a 10% stake in your mortgage-backed security has just been foreclosed, or 20 of them.
That not knowing, that uncertainly, made the mortgage backed security look worthless on paper.
AIG started offering a form of insurance on those mortgage backed securities, called "credit default swaps." If a bank made a large investment in something that, later on, turned out to be worthless, AIG promise to cover the difference between the initial investment and the loss, for a percentage of the profits. Big banks were more than happy to let AIG take a .5% or whatever slice of the pie every month on the derivatives, in exchange for promising to pay up if they ever went bad.
AIG was happy, the big banks were happy, until suddenly people's 3 year ARMs (most of which were illegally processed) came to maturation and their house payments doubled. On top of that, people started getting got laid off. Then people started getting behind on payments. No payments from some houses meant lower dividends for the banks. The banks, keeping an eye on their initial investments, waiting until the tipping point last summer, then cashed in their insurance policies, bankrupting AIG.
It's like a house of dominoes that had been built up over 30 years was tipped over.
FALLACY #1: These loans were not made to irresponsible people. Are you automatically irresponsible when you get laid off from your job? Are you irresponsible because an unscrupulous mortgage broker lied through his teeth and said that your payment wasn't going to go up -- in fact, there's a chance it could even go down? That's why people defaulted. They lost their jobs and got screwed by mortgage thieves years ago.
FALLACY #2: The banks should never have "taken out insurance" on investments. Hey, they were just looking out for their own interests. AIG should never have offered the damn credit default swaps in the first place.
FALLACY #3: Giving the money "directly to the people" isn't going to solve anything if the banks won't renegotiate loans to make payments for affordable for the long term. It's also a bureaucratic nightmare. The stimulus checks mailed out to people last summer were all eaten up in gas within a few months.
How do you decide who qualifies? How fast can you get the money to the people that need it the most.
The Geithner plan @#%^ing sucks. But it's the most viable of all the options on the table, and the one that's going to move money into the economy the fastest.
Edited, Mar 25th 2009 6:53pm by catwho
About 10% of homes are behind on payments or in foreclosure. But that means 9/10 homes are doing just fine.
The reason that the assets are "toxic" is because they got scrambled to together and re-sliced apart afterward. They're not inherantly bad. It's just that you have no idea whether just 1 of the 100 homes that represents a 10% stake in your mortgage-backed security has just been foreclosed, or 20 of them.
That not knowing, that uncertainly, made the mortgage backed security look worthless on paper.
AIG started offering a form of insurance on those mortgage backed securities, called "credit default swaps." If a bank made a large investment in something that, later on, turned out to be worthless, AIG promise to cover the difference between the initial investment and the loss, for a percentage of the profits. Big banks were more than happy to let AIG take a .5% or whatever slice of the pie every month on the derivatives, in exchange for promising to pay up if they ever went bad.
AIG was happy, the big banks were happy, until suddenly people's 3 year ARMs (most of which were illegally processed) came to maturation and their house payments doubled. On top of that, people started getting got laid off. Then people started getting behind on payments. No payments from some houses meant lower dividends for the banks. The banks, keeping an eye on their initial investments, waiting until the tipping point last summer, then cashed in their insurance policies, bankrupting AIG.
It's like a house of dominoes that had been built up over 30 years was tipped over.
FALLACY #1: These loans were not made to irresponsible people. Are you automatically irresponsible when you get laid off from your job? Are you irresponsible because an unscrupulous mortgage broker lied through his teeth and said that your payment wasn't going to go up -- in fact, there's a chance it could even go down? That's why people defaulted. They lost their jobs and got screwed by mortgage thieves years ago.
FALLACY #2: The banks should never have "taken out insurance" on investments. Hey, they were just looking out for their own interests. AIG should never have offered the damn credit default swaps in the first place.
FALLACY #3: Giving the money "directly to the people" isn't going to solve anything if the banks won't renegotiate loans to make payments for affordable for the long term. It's also a bureaucratic nightmare. The stimulus checks mailed out to people last summer were all eaten up in gas within a few months.
How do you decide who qualifies? How fast can you get the money to the people that need it the most.
The Geithner plan @#%^ing sucks. But it's the most viable of all the options on the table, and the one that's going to move money into the economy the fastest.
Edited, Mar 25th 2009 6:53pm by catwho
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