I'm sure the liberal Deficit hawks will be all over thisFollow

gbaji, I don't really see how your solution is any better. You want to buy out all the bad assets and leave the system in place? Wouldn't that just encourage them to keep doing the same?

Let's say you were making a lot of big-risk investments that gave off high-yield dividends. So you make some good money off the dividends, but then the stocks themselves crash. Instead of having to take a loss on the stock prices, someone else comes along and buys off the bad stock for you. Wouldn't that just encourage you to do it again?

Yes and no. Remember, these assets are "bad assets" because right now, no one knows for sure how much risk and value they represent. They aren't actually worth "zero", but since no one knows how much they are worth and how risky they are, no one will buy them.

The process I outline is a stopgap. It lets the market begin flowing again. The idea is that over a couple years time, the true value and risk of those assets can be determined, and the businesses can adjust their economic models accordingly.

You need to understand how leverage works. A company holds an asset (a bunch of them, but we'll look at just one). The market determines that this asset has a certain risk and a certain value. Risk is essentially the odds that the asset will drop in value (it's more complex than that, but that's sufficient for this example). If you know the risk and you know the value, you can essentially put that asset up as a form of collateral. Banks will extend you a line of credit on that asset. What happened with the financial system is that due to the way Freddie and Fannie bundled up the mortgage securities, it concealed the ratio of sub-prime (specifically high risk subprime) from the investor. Thus, the entire financial system was acting upon an assumed risk and value of these bundles. Over time, as the percentage of increasingly risky loans were handed out and bundled up and put on the market, a gap between the real risk and value and the perceived risk and value grew. Businesses acted on the assumption that those assets were worth more than they were. Banks extended lines of credit based on those false beliefs as well.

As a result, many financial companies had leveraged these assets far more than the true value and risk would support. One the bubble burst, suddenly they were over extended. They had borrowed more money on those assets than the banks could extend in credit on those assets. The entire market goes into vapor lock, and we're in trouble.

You buy up the assets at the last traded value (or even some percentage of it). This frees up the log jam. You hold that floor for a set amount of time (say 2 years). This gives everyone involved time to adjust their portfolio, assets, and credit to the new "real" value of the assets in question. They can be stupid and continue to assume they're worth what the government is paying, but most people aren't going to be that stupid. They didn't get into this mess because they wanted to. They really honestly were lied to about the value of these bundles. Had they known, they would not have leveraged them to the degree they did. More importantly, the banks would never have allowed them to be leveraged that much.


It's not a perfect nor complete solution, but it was/is a step in the right direction. What actually happened was pretty clearly about grabbing the economy, not fixing it.

It's 3 Trillion maximum. That assumes that the government has to buy the back end of every single mortgage in the entire US. Not all the mortgages were handled by Freddie and Fannie. Not all of them were bundled. Not all of them are held by companies at risk. So the total possible amount the government might have to buy would be some amount less than 3 Trillion.

Additionally, as I already explained (and you ignored). Once the government offers to buy them, this creates a floor for that asset. No one needs to sell them to the government anymore. The banks can act on the existing assets as though they are worth that much, at least for the short term. They just need this to work long enough for the players in the market to spread out the toxic assets and remove their reliance on higher than supportable leverage on those assets.

Did you just not read the earlier post in which I explained this?



That's exactly the plan that was floated Smash:



The original plan was indeed just to buy up those assets. But, unfortunately, folks with opinions like this lead to a movement to "do more" than just buy up assets.





This lead to a new plan which looks nothing like what was originally intended:




So. When folks point to Bush's plan and the "Paulson Plan" and say that what Obama and the Dems are doing right now was started by the Bush administration, they are misleading us. This is *not* what Bush and Paulson originally wanted to do. It's really freaking obvious that what happened was the the Dems used their majority in both houses to force changes that utterly warped the original intent and turned it into something aimed more at ensuring the government gained control over these industries instead of just fixing an economic problem.


There's a whole lot of lies being tossed around here. What's startling to me is that this all happened right in front of our eyes and yet *still* many people don't realize what happened. The plan changed. The plan being followed today is 100% the work of the Democrats. The massive costs of this plan have nothing to do with Bush and everything to do with the Dems taking advantage of their control of Congress and their victory in the November election to push forward with something completely different and vastly more expensive.



Absolutely false. The cost for the original plan was projected to be about half a trillion dollars. That's pocket change compared to what we've paid so far under the Dem plan, and there's no end in sight to how much more we're likely going to have to spend.

The Dems are not trying to fix the economic problem. They are using the economic problem to seize control of the private sectors of the economy. This should be pretty obvious to anyone who actually takes the blinders off for a second and looks at what's going on.


And just for those interested in truth, here's the Text of the original Paulson Plan

Funny thing is that I hadn't read the whole thing until just now. I guessed a period of two years and got that spot on. That's *exactly* what they were going to do. Buy up assets for up to 2 years. Gee. It's like they knew what they were doing or something.


I'll also point out that this was essentially the same process used in the 80s to correct the S&L crash. It worked incredibly well then. Does anyone remember us going trillions of dollars in debt with no end in sight? No? Maybe because we followed this sort of plan back then and it worked. What we're doing right now does not work, has not worked, and will not work. Unless your objective is to just gain control of the private sector that is...

Edited, May 12th 2009 4:12pm by gbaji

I'll also point out that this was essentially the same process used in the 80s to correct the S&L crash.

No, the RTC was even vaguely similar to the current process. Geitner has proposed something similar, a "bad bank" to buy the assets, I'm glad you support the current Treasury Secretary's thinking so heartily.

I just posted a couple news articles and the text of the original plan Smash. You need to do more than just insist that I'm getting it wrong. I don't know how "The plan involves buying up hundreds of billions of dollars in bad mortgages to take them off the books of financial institutions that otherwise might fail." doesn't match what I said the plan was.

The dollar amounts in play. Because you're a moron, your thought process was that the "assets" in question were actual mortgages. It's not your fault, you're a fucking clueless idiot when it comes to Economics, don't feel bad.


Given that the entire mortgage market in the US was valued at about $3 Trillion just before the bubble, that's pretty clearly a false statement.

One, the residential mortgage market alone, just the mortgage market, mind you not the derivative market, was over $10 Trillion in '06, so I have no idea what *** you're pulling your imaginary number from. My number is from the Aug '07 Chicago Fed report. We can argue later if they were inflating it because of bias and if the Geocities site with the flashing tits animated .gif yours came from is more accurate.

At any rate, the market *derived* from the mortgage market, is VASTLY larger. The mortgage swap market alone was over $60 Trillion. Larger than the GDP OF THE WORLD. That's just the swap market. Just the market in insurance on all of the other mortgage derivatives. Are you starting to understand how you've massively fucked up the scale here, yet?


Edited, May 12th 2009 8:43pm by Smasharoo

Lol. I already said that. But the derived market is based on various leveraging and extending of the core assets themselves. The "smart" way to fix things is to fix the value of the asset upon which the rest of that stuff is based. The "dumb" way to do this is to fix the resulting values changes.


The original Paulson Plan approached this the smart way. The Dems then swooped in and changed it to the dumb way. One can assume that they did this because the dumb way would be vastly more expensive, could not possibly work, but along the way would allow them to effectively collapse the economic system and purchase large chunks of it for future government control.


I already know this Smash. My entire point is based on an understanding that the total market depending on those assets is vastly larger than the core value of those assets. I explained this already. Maybe you just forgot or something...

Lol. I already said that. But the derived market is based on various leveraging and extending of the core assets themselves. The "smart" way to fix things is to fix the value of the asset upon which the rest of that stuff is based. The "dumb" way to do this is to fix the resulting values changes.


So the "smart" way is for the government to purchase all of the real estate mortgages in the country. Marx might agree.


The original Paulson Plan approached this the smart way.

No. You're wrong, game over. I'm not playing the "that's what I meant" game when you're proven dead wrong. No plan has ever involved buying actual mortgages, because while to a simpleton it seems like the obvious thing to do, the actual problem, for the 1000000th time has *virtually nothing* to do with actual mortgages on real estate.

Remember the text you linked (but apparently still haven't read)? Here's a fun game. Search for the word "mortgage". Now look at the two words that always follow the word "mortgage". See if you can discern why they're there.

I won't be posting about this again. You have no fucking clue what you're talking about, which is pretty standard, but you've really done a spectacular job of demonstrating it this time, which isn't always the case.

Funny, it was an issue with you when you declared that Smash was making a "false statement" because he had the numbers (according to you) wrong.

Edited, May 12th 2009 8:37pm by Jophiel

And then spent several paragraphs explaining how the full amount of all the mortgages in the country didn't have any direct bearing on how much it would cost to implement the plan in question?

Yes. I do recall that...


And for the record, the false statement was that it would cost 20 Trillion dollars to implement the original Paulson Plan. That statement is still false regardless of what the total value of all mortgages in the country are.