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To bail or not to bail, that is the question

By undermyne in Politics
Sat Sep 27, 2008 at 01:42:57 AM EST
Tags: (all tags)

So King George got on the TV tonight to let everyone know that yes, the sky will indeed fall if those pesky congress persons don't agree to effectively nationalize a handful of companies that may or may not have been poorly managed.

So the question is, would a bailout have the desired effect? Given that I am not an economist and the extreme complexity surrounding the many aspects that feed into answering that question, I am going to leave that debate to others. At this point I am not even sure that the psychological effect of the bailout would end up playing out as expected. What I am more interested in is the effect that the bailout is going to have on the next two elections.


It was fitting that Bush called Obama and McCain to come for a visit to discuss the whole financial crisis, curious how the timing worked out to cover for McCain and the whole "we can't debate when the second great depression is coming". Bush is going to saddle one of them with a massive albatross that will likely lead to whomever wins being a "one-termer" (and not because of assassination or sudden death). The irony of asking some of the most absent senators to actually come to Washington to do some work is equal parts sad and funny, particularly when it's Bush doing the asking.

If the bailout passes

This seems highly likely given the increased rhetoric surrounding it. At the end of the day a bailout helps republicans more in the short term than it does the democrats.

In the absence of a good war to help build fear among the electorate, aim for the pocketbook. In his address to the nation this evening Bush hit all the "sweet spots". Retirement savings for the old people (the prime voting demographic), foreclosure's for middle class families, and loss of jobs for everyone else. Sarah Palin today indicated that the US faces a second great depression if action isn't taken, but stopped short of indicating that the proposed bailout would have that effect. This trends with the historical republican approach of agressive fear mongering to pull focus away from social issues that they generally would rather not have to stump on.

Crossing to the other side of the aisle we have the democrats that traditionally like to avoid talking about the country's finances as they historically are associated with higher taxes and increased spending. This is particularly poignant in the case of Obama given his relatively limited experience at the executive level (of anything). At the end of the day, it will be difficult for the Obama campaign to properly address the shortcomings of any bailout scenario without exposing themselves to an aggressive counter-attack by the McCain campaign. Even if they want to point out that Bush and the republican congress are arguably responsible for the whole mess, the response would be "What is your proposal Senator Obama" and then they would commence bashing his lack of executive experience and openly mock whatever suggest was put forth.

Does a bailout help McCain?

So I covered off the basic "it helps republicans" argument, but does a bailout put McCain in the white house? Let me preface my comments by saying that I am a conspiracy nut, hardcore. In that light, my gut reaction is to say "yes, a bailout means McCain is the next president". The timing of the big bailout (not the little Bear Sterns rescue) smacks of a setup. It pulls focus away from a very unpopular war at a time when the McCain = Bush comparisons have picked up considerably. It also puts Obama on uneasy footing when approaching economic issues. If I set aside conspiracy for a moment, a bailout hurts not only McCain but a fair number of the republican congresspersons that are up for re-election this fall. A bailout is 700 billion examples of how 6 years of republican rubber stamps have effectively screwed the country. It also means that under that same watch, the national debt has nearly doubled. Even "tax and spend" democrats have a legitimate leg to stand on when they stand up and castigate their republican foes for fiscal irresponsibility. In light of all that, from this perspective a bailout does not necessarily mean Obama = next president but it certainly knocks a dent in McCain's prospects.

Does a bailout help Obama?

So going back to my conspiratory roots, I have to say "oh hell yes". Setting aside political bigotries for a moment, I think that everyone can agree at some level that the last 50 years or so the US has been run by what many like to call "the neo's". Con or Lib, they have been ever present since the second world war. Another fact (of some dispute) is that most of the super-rich people in the US are conservative leaning (at the ballot box anyway). They have supported republicans and the perceived pro-business/anti-tax politicians that make up that party. Those people are the ones at the center of the whole bailout mess. Guys like Ken Lay and the CEO's of Fannie/Freddi/AIG/etc are in the spotlight. The most politically expedient thing that could happen would be for the traditional tax and spend democrats to regain control of Congress and the White House at the exact moment that they country is going to hell in a hand basket. In general, your average American citizen doesn't know enough about what makes the economy tick to understand that what is happening to the economy today is the result of groundwork laid going back years. Subsequently, it is advantageous for <insert global governance group of your choosing here> to have Obama win the election along with a number of his fellow democrats in the House and Senate. A democrat win in '08 almost ensures as second "republican revolution" in '12 and puts a "taint" on democrats for at least a generation (as they ushered in the second great depression).

Keeping in mind that I am not saying that it will be the democrats fault, just that opportunity for that perception to take hold will be ripe.

Does a bailout help your average US citizen?

Now the easy one, over the long term the answer is "no". The United States of Consumerism has been racking up credit debt for too long, both personally and publicly. If the bailout passes, the non-GAAP based US national debt will pass $10 trillion. If the bailout passes GM, Chrysler, Ford and a host of other large companies with massive pension debts will line up with their hands out and because of the nature of politicians, will get it. It will effectively mean the end of traditional capitalism in the US as companies deemed "critical to the economy" will not be permitted to fail regardless of their need to do so.

And setting aside the corporate bailouts, if you take in to account unfunded liabilities, the US national debt ranges (depending on who you believe) from $56 trillion to $100 trillion. Add to that the fact that a significant number of "baby boomers" are set to retire and start collecting Social Security in the next couple years and one realizes that some sort of sustained economic downturn is unavoidable. I'm not predicting the second great depression or anything but it saying that a bailout is going to prevent an economic downturn and save us all from reaping what we have sowed is, to turn a phrase, putting lipstick on a pig.

In summation

As I have indicated on a number of occasions, regardless of bailout or who gets elected, we are in for another 4-8 years of the same exact thing we have had for the last 20+. At the end of the day the social issues aren't going to really matter when everyone struggles to pay bills, buy food, and stay warm in the winter. Abortion will never be outlawed, green-house gasses will always be released, evolution will always be taught in schools, and the empire will continue to flex it's global military muscle. When someone tells you it is a waste to vote third party, remind them that it's more of a waste to vote for the status quo. Bailout or no bailout it's going to be a bumpy ride.

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Display: Sort:
To bail or not to bail, that is the question | 55 comments (46 topical, 9 editorial, 0 hidden)
bail out wall street usa (2.33 / 3) (#3)
by maniac1860 on Thu Sep 25, 2008 at 06:57:36 AM EST

you have to

I need to take a shit (2.00 / 1) (#4)
by Vampire Zombie Abu Musab al Zarqawi on Thu Sep 25, 2008 at 07:00:28 AM EST

Let's see, should I go to the bathroom, or should I shit all over this article? Decisions, decisions.

omg...DailyK5 /// (1.75 / 4) (#5)
by yellow shark on Thu Sep 25, 2008 at 09:02:44 AM EST



dailykos -----> (2.00 / 2) (#6)
by nostalgiphile on Thu Sep 25, 2008 at 09:49:19 AM EST

aw fuggit, +1fp anyways.

"Depending on your perspective you are an optimist or a pessimist[,] and a hopeless one too." --trhurler
interesting analysis (3.00 / 4) (#8)
by Liar on Thu Sep 25, 2008 at 11:48:02 AM EST

the only part where I have strong disagreement is the claim that the bailout doesn't aid the average US citizen. Money and banking are meta-industries, they are the industries upon which all other industries rely. A problem in the banking industry increases costs for anyone who has to take out a loan or deposits their money there, so it's nothing similar to a similar problem in the automotive industry; it hurts everyone.

Also, the US has bailed out Chrysler (and the airlines, and others) and for good reason. The US government could spend X amount of dollars with a loan that the companies could repay or else the government can pay to help all these workers in the welfare lines. That same rationale applies to this banking crisis except across many more industries. You stand a good chance of sabotaging high wage and low wage workers by not offering some sort of relief.

It's also difficult to determine whether this will end up being a net loss for the US. The US will become the owner of these illiquid mortgage backed securities and its probable that the vast majority will be repaid and the remainder become capital for the US government to resell. There's going to be some gains and some losses, but it's not entirely clear which way it will shake out... Remember, the problem with these loans isn't that they are junk, but that they are illiquid (i.e. the loans are backed by homes worth less than the amount of the loan so no one would want to buy the loan and assume liability). If anything, bailing out the companies by accepting these loans puts the US government on the side of the homeowners--it's in everyone's best interest that these loans be repaid including that of the homeowner.

Freeing up the money market means more loans are issued. More loans issued means more home purchases. More home purchases means property costs can rise, and after some time it may be worthwhile to sell these MBS. But, since the money market has this enormous burden it must carry, these loans are likely to remain illiquid.

That said, whether the structure of this particular bailout proposal makes sense, that's harder to say, but I think it's pretty clear that some sort of relief needs to occur before it does more damage to the national and global markets. It's already responsible for the destruction of banks in other countries so it's silly to say that industries and people who rely on banks can afford to sit on the sidelines and do nothing.


I admit I'm a Liar. That's why you can trust me.
I'm curious if there are any precedents (none / 1) (#10)
by Harry B Otch on Thu Sep 25, 2008 at 12:17:25 PM EST

to what you're saying about the necessity of a government bailout of high financial institutions.  Did it ever happen on anywhere close to this scale in Europe?  Asia?  My impression is that the major banks if regions that have had severe economic crises in the past decade or so (Mexico, Thailand) just had to eat their losses just like ordinary citizens did.

I think that even the colossal amounts of money the big U.S. banks are trying to extort is just a temporary band-aid for our economy, which they know perfectly well is beyond maxed-out on credit.   I think austerity is on the horizon here in a big way.  Americans are going to have to experience a long period without the unfettered consumerism we've known for generations now.  This bailout will do nothing to change that.

-----
You shouldn't never use a double negative
[ Parent ]

Not sure (3.00 / 2) (#12)
by Liar on Thu Sep 25, 2008 at 12:49:11 PM EST

Each situation was different and it's difficult to say whether acting soon enough in some cases would have made a difference due to the differences in their crashes. How could Thai have kept the baht from collapsing especially when everyone agrees they were following sound fiscal policies? It would require a different solution than what the U.S. is experiencing.

Still, Thailand (and much of East Asian) did have to be bailed out by the IMF. Mexico has frequently received aid from the U.S. and others due to economic problems. I'm not sure we want even our neighbors to turn into Zimbabwe with 85% unemployment and hyperinflation.

The U.S. in this case has the opportunity to bail itself out and return market stability and that's a good thing for the U.S. and the world in the long run. As long as there is follow-up market reform, there's no reason we cannot have a stable and sustainable economy.

Meanwhile, I'm not sure that letting an economic crisis become worse is going to do anyone any favors. The U.S. already went through one great depression and we've seen that the austerity of that generation didn't carry down to the next. Doing nothing just sounds like spite, in that case. Imagine your neighbor set his house on fire; it takes a shortsighted self-righteousness to say, "eh, let him suffer" when the flames are licking at your roof.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
Nowhere near that scale (3.00 / 2) (#13)
by Vampire Zombie Abu Musab al Zarqawi on Thu Sep 25, 2008 at 02:06:23 PM EST

But at least the Norwegian state still owns major shares in most of the bigger banks from their failures after the yuppie era. Of course, the situation was radically different in many ways, in that Norway could afford it without raising the already ludicrously high taxes or taking debt itself, so the economy picked up quickly and still seems relatively strong. We'll see how our own housing bubble works out, when it comes (and it's on its way).

[ Parent ]
Precedent in U.S. history actually (3.00 / 2) (#16)
by anaesthetica on Thu Sep 25, 2008 at 03:18:40 PM EST

Alexander Hamilton's First and Second Reports on the Public Credit dealt with the massive assumption of debt by the federal government during what might have turned out to be a depression-level crisis for the States of the U.S.A.

Wikilinks:
 - First Report
 - Second Report

Basically, the States had individually run up huge debts during the Revolutionary war to foreign creditors and were facing the possibility of default and economic depression.  The debts were mostly State debts but also domestic debts.

Hamilton's plan was to assume all the debts at face value (basically the federal government took on the obligation of paying them off, releasing the States and other debtors from their obligations).  Then the Federal government floated bonds in order to finance the paying of the debt.  This plan would tie all the States' and the creditors' fates to the Federal government, giving them a stake in its power and survival, and lowering the risk of secession, all while saving the U.S. credit reputation.

There was a big debate over it, and the House voted it down initially after Madison said that assuming domestic debts was a bad idea.  Jefferson persuaded Madison by 1) promising that the Federal capital would be built next to Virginia (Madison was Virginian) and that 2) a large part of Virginia's debt would simply be erased.  After that the Hamilton plan was passed.

The assumption of the debt worked out, the credit-worthyness of the U.S. government was saved, and the Treasury (which Hamilton ran) grew into a large bureaucracy.  He then issued his Second Report, which called for the establishment of the First Bank of the United States (a forerunner of the Fed), and the Report on Manufactures (which was basically an infant-industry protectionism plan that the Germans would later copy).

It worked that time around.  It's unclear whether it will work this time around, because a lot of the fundamental factors are different--the fact that the debt is being assumed principally from private banks not the states, the size of the debt, the pre-existing national debt, the pre-existing Federal Reserve System and national currency, the different economic bases of U.S. productivity, the different foreign debt holders, and the position of the U.S. within the international political economy.

Some of these factors should make it easier on the U.S., some of them should make it harder, and others are still indeterminate.

Nevertheless, a pretty significant precedent exists, one that I'm surprised no one in the mainstream media has mentioned.

—I'm the little engine that didn't.
k5: our trolls go to eleven
[A]S FAR AS A PERSON'S ACTIONS ARE CONCERNED, IT IS NOT TRUE THAT NOTHING BUT GOOD COMES FROM GOOD AND NOTHING BUT EVIL COMES FROM EVIL, BUT RATHER QUITE FREQUENTLY THE OPPOSITE IS THE CASE. ANYONE WHO DOES NOT REALIZE THIS IS IN FACT A MERE CHILD IN POLITICAL MATTERS. max weber, politics as a vocation


[ Parent ]
just what we need (none / 0) (#24)
by d0ink on Thu Sep 25, 2008 at 07:34:57 PM EST

another Whiskey Rebellion on top of everything else.

if the federal government needs money we should legalize marijuana and tax that.  not like anyone has any better ideas.

[ Parent ]

legalize it? (none / 0) (#42)
by azool on Sat Sep 27, 2008 at 03:08:11 PM EST

why does everyone always assume that it has to be legalized in order to be taxed?

http://www.ksrevenue.org/perstaxtypesdrug.htm

[ Parent ]

If the US Government bails them out (none / 0) (#25)
by sholden on Thu Sep 25, 2008 at 09:21:19 PM EST

The USDX falls to a single digit number.

Which fucks everyone in America...

--
The world's dullest web page


[ Parent ]
That's a concern (none / 0) (#26)
by Liar on Thu Sep 25, 2008 at 09:30:26 PM EST

But it's a concern if no bailout occurs. Considering that they're going to be hit by a train anyway, they may as well take measures to minimize the damage so they can set up for a recovery.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
All a bailout will do (none / 0) (#27)
by sholden on Thu Sep 25, 2008 at 09:52:36 PM EST

is delay things and hence make them worse.

The main cause of this mess is that Greenspan/Bush didn't want a recession in 2001 - and basically bailed out the economy from it.

Let it fail, have a severe recession, see the dollar plummet, and then recover. A bailout just delays it some more and makes it worse when it does finally happen.

Printing money is never a good solution...

--
The world's dullest web page


[ Parent ]
you don't know that (none / 1) (#30)
by Liar on Fri Sep 26, 2008 at 12:22:46 AM EST

and since you don't know that a collapse is inevitable, it's irresponsible to not do something about the problems at hand.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
It's simple economics (none / 1) (#31)
by sholden on Fri Sep 26, 2008 at 02:12:09 AM EST

Yes it would be irresponsible for the government to not do something. Doesn't matter if what they do will cause what should be a long and severe recession into a depression or even a complete economic collapse. They have to do something. Letting the market work would be evil.

Of course the reason we are due for the long and severe recession is because the government had to do something last time and turned what should have been a largish recession in 2001 into what we have now.

All they can do is delay and increase the severity. The fundamentals are out of whack, and at some point the piper has to be paid - the longer you wait the more it hurts...

--
The world's dullest web page


[ Parent ]
simple? (none / 1) (#33)
by Liar on Fri Sep 26, 2008 at 10:40:18 AM EST

I hate to think what's complex economics to you.

Please explain how a liquidity crisis is simple, unavoidable and inevitably leads to recession or economic collapse.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
It isn't a liquidity crisis (none / 1) (#34)
by sholden on Fri Sep 26, 2008 at 01:14:24 PM EST

It's a solvency crisis.

Trillions of dollars were loaned (and magnified by derivates) to entities that can not pay it back, because they used it to consume not to invest and it was backed (both directly in the case of mortgages and indirectly in the case of "we'll make the loan because the economy looks OK") by valuations of assets in a huge asset bubble.

The economy as a whole has more debt than it can hope to service, hence the economy as a whole is insolvent and the solution is bankruptcy. When an economy goes bankrupt we call is an economic collapse.

It's the inevitable result of keeping money too cheap for too long.

On the bright side foreign entities hold a large amount of the debt and hence they'll get wiped out too. If you can call that a bright side...

Pretending it's a liquidity issue is nice and all, means the government can increase liquidity to try and fix it - which just creates inflation and does actually help (since inflation is great when you are debt) but in a way that further hurts the economy (inflation sucks for those not overwhelmed by debt).

--
The world's dullest web page


[ Parent ]
no, it is liquidity (none / 1) (#35)
by Liar on Fri Sep 26, 2008 at 01:45:56 PM EST

while there is a percentage that cannot make payments, by and large, the vast, overwhelming other loans are. If you look at default rates, while they are extremely high as a historical trend, they're not as damaging to the larger economy as you think. It's in the range of .2% of the workforce in some parts of the country while lower in others. That's 1/5 of 1%. Typically it's in the range of .04%-.08%, so this is skyrocketing but by itself it's not the widespread insolvency you're imagining it to be.

The problem right now is that there's a large chunk of mortgages (which began being issued in the Clinton era, not that history matters to your partisan perceptions) that are now backed by property that has dropped in value. So, a $100K loan is backed by a $50K property which means no one wants to buy that loan. Whichever bank has that loan can't move it so, so they can't shop loans around (sell this loan which is at 6% in order to buy a loan earning 6.125%), they can't issue loans, or otherwise do business. It's not that their credit is overreached, it's that they can't move the assets they currently have. That's illiquidity, not insolvency.

Meanwhile, the homeowner with that $100K loan is 99.8% of the time still making payments.

That's the problem and why it's the mortgaging companies which have been the first and hardest hit. The average citizen is feeling a pinch because the entire economy is impacted, but it's not as much of an overreach as you're imagining this. Fix the liquidity problem, though, and you've fixed the biggest hurdle to recovery.

Anyway, now that I know you don't have more than a partisan and wrongheaded layman's grasp of the situation, I can safely ignore you.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
Partison perceptions? (none / 1) (#36)
by sholden on Fri Sep 26, 2008 at 03:47:07 PM EST

I mostly blame Greenspan under Clinton for setting this up.

But feel free to jump to conclusions.

--
The world's dullest web page


[ Parent ]
Did you mis-speak? (none / 1) (#37)
by Liar on Fri Sep 26, 2008 at 05:26:41 PM EST

"The main cause of this mess is that Greenspan/Bush didn't want a recession in 2001 - and basically bailed out the economy from it."
-sholden

To assign the cause of the current economic problems on Bush seems partisan especially if you now acknowledge that Clinton should take the blame.

Even so, it seems strange to blame Clinton but not assign him as the cause. It would be reasonable to put things in the reverse--Clinton started a policy (caused it) which if handled properly would have worked out but Bush failed and deserves the blame.

If you want to clarify, that'd be good. I'm not sure your position is tenable.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
No I didn't mispeak (none / 1) (#38)
by sholden on Fri Sep 26, 2008 at 06:42:44 PM EST

Clinton set it up by extending a boom for far longer than it should have run. Bush, however, pulled the trigger and doubled down.

Bush could have prevented this being as severe as it is but instead he doubled down and now it's unavoidable. When Clinton left it was still salvageable.

Basically Clinton was as bad as Bush. But things were obviously unsustainable during Bush's time, I could understand that it wasn't so obvious under Clinton.

They are all just as bad as each other - all politicians will try and push bad things back so that they are the next guys problem, which also makes those things worse magnitude wise.

Also back to the previous post:

"Meanwhile, the homeowner with that $100K loan is 99.8% of the time still making payments."

2.7% of prime loans are delinquent, 12% of alt-A loans are delinquent, subprime is just not worth mentioning. Now delinquent doesn't mean they won't be paid back (though if the borrowers are sane they won't), it does by definition mean they are not "still making payments", so I'm not sure where that 0.2% number comes from...

--
The world's dullest web page


[ Parent ]
.2% of the workforce (none / 0) (#40)
by Liar on Sat Sep 27, 2008 at 03:01:14 AM EST

not of mortgages. If 8 people have all the mortgages and they all go into default, in a nation of 300 million, it doesn't amount to much. You have to look at the defaults in comparison to the workforce at large.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
So you mispke then :) (none / 0) (#41)
by sholden on Sat Sep 27, 2008 at 12:47:19 PM EST

"""
Meanwhile, the homeowner with that $100K loan is 99.8% of the time still making payments.
"""

says 0.2% of people with a loan will bot be making payments, nothing to do the workforce.

Huge mortgage default wouldn't usually hurt anyone but S&Ls, this time round though they are going hurt the rest of the financial sector due to knock on affects of packaging them and derivates from them. And while that would screw over wall street, there's no real reason for the rest of America to care (well other than the government wanting to flush a few more trillion dollars down the drain).

Then add that the US economy is sustained by consumers borrowing money and spending it and a large part of why they felt comfortable doing that was because their "income" seemed about $50,000 more than it actually was since there house was going up in price so much. That money is not getting paid back, and hence those loans will dry up, and hence spending will fall. The "American Consumer" will be shown as just smoke and mirrors and the US economy as unsustainable.

The economy as a whole can not consume more than it produces in the long term. Note, I'm not saying trade deficits are bad or that being a new debtor is bad for a nation in itself. If those that debt is being used to fund productive things it's beneficial - if it's being used to buy overpriced homes and flat screen TVs it is detrimental. All it does is move consumption forward, future consumption must be reduced to pay back the loan, in fact since there is interest future consumption must be reduced by more than what was brought forward giving a net loss.

Of course my made up economics views are much closer to Austrian than anything else, so feel free to ignore it all as insane rantings. You're earlier can safely ignore you deduction is pretty much spot on....

--
The world's dullest web page


[ Parent ]
No, I didn't misspeak (none / 0) (#43)
by Liar on Sun Sep 28, 2008 at 05:57:50 PM EST

if you read earlier in that comment, I said explicitly the phrase ".2% of the workforce." What would have been more accurate in that second quote would have been to say that a person who had a $100K house is 99.8% of the time making payments (because other people own their homes, renting, living with family, etc.). My point was this: the number of individuals failing to make payments is relatively small. You were trying to say there's wide spread insolvency, but if .2% of the U.S. population is considered widespread to you, well, that seems a clear case of blowing things out of proportion.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
Leverage sucks on the way down. (none / 0) (#50)
by sholden on Mon Sep 29, 2008 at 08:09:21 PM EST

So every time you happen to use the same number referring to unrelated things in a post I should derive that you are actually referring to the same thing and the current sentence should be ignored and replaced with what was stated before?

My claim wasn't that most American's are insolvent, my claim was that most of the  financial sector is insolvent. That will either be obvious in a couple of years, or inflation will be so high no one will care anyway.

But yes the knock on effects of the end the HELOC funding consumption for a small percentage of Americans  is going to affect almost everyone.

Also there were 1.2 million foreclosure fillings in 2006 (when the bubble burst started getting up some steam) which is already 5 times your 0.2% number. 20% of sub-prime loans are predicted to default (and that was back in 2007) - but those alt-As and then primes are going to follow the same path. Only an idiot pays their $300,000 mortgage on a house worth $200,000.

The economy has been built on people borrowing money to consume justified by the "fact" that their house kept going up in price and they could "extract the equity". That's over.

It's not the people losing homes that is the problem, the problem is that the government is not going to let things go as they should and they will destroy the US dollar in the process of trying to stop bubble level asset prices from declining. Since essentially everything is imported in the US, that means prices go through the roof (and locally made things get exported anyway, since there'll be more money there).

This will rectify itself, those exports will see to that. But it's going to suck in the middle.

--
The world's dullest web page


[ Parent ]
Question (none / 0) (#44)
by Sgt York on Mon Sep 29, 2008 at 09:49:44 AM EST

My knowledge of economics is limited to an ECON class I took in college, and I've forgotten most of it.

What exactly is the difference between a liquidity crises and a solvency crises? What's the difference between liquidity and solvency?

Also, do you have links to the data you referenced about the default rates?

There is a reason for everything. Sometimes, that reason just sucks.
[ Parent ]

numbers are difficult to find (none / 1) (#45)
by Liar on Mon Sep 29, 2008 at 04:48:10 PM EST

National numbers are hardest to find because an individual may have loans in many states. You'll laugh at the title of one of my sources, but the guy knows his stuff especially about the San Diego housing market and he is fairly well respected in the area (I used to work for him; he's among the five smartest people I've ever met). Anyway, for the San Diego market, here's where I was getting my numbers regarding the number of defaults in the workforce. Also, Rich is a pessimist and his general view is that San Diego is being hit a bit harder than the country in general but isn't the worst hit.

The difference between liquidity and insolvency: Insolvency is that you do not have enough assets to pay your debts, like owing $10,000 when you only have $7,000 in cash and property and cannot make arrangements to pay back the full amount. Creditors cannot expect to receive full value back when you file bankruptcy and so everyone is hurt.

Liquidity is the ability to convert assets into cash (not fully accurate, but close enough). So, if someone borrowed $100K from me, that's an asset that I have but I can't force the borrower to pay faster than our agreed upon schedule. If I want to convert that loan into cash, I have to find someone else to buy this from me and depending upon where the market is at, it may be worthwhile for that sale to happen for the both of us. I can then turn around and use that cash for other purposes, like a shorter term loan to help a company make payroll (such loans are generally paid back in a few of days and are very routine especially among large companies).

This is how illiquidity can make a crisis: Imagine that the $100K loan is backed by a $50,000 house, so that if I need to foreclose on the poor borrower, I won't be able to get back the full value of my loan. If I want to sell this loan to someone else, they're accepting a greater risk which means they're going to want to pay less for this loan than it's worth but not much more than the collateral which backs it. I'm unwilling to sell this $100K loan for less and so even though I have this asset, I can't convert it into something useful even if I desperately need the cash. The loan will likely still be repaid, but no one wants to take the risk. Now, I can't help that previous company make payroll. Or, if I do come into some cash, that cash is more valuable to me so in order to do these payroll loans, I'm going to charge a lot more which increases operating costs for businesses in general.

Simply because housing prices went down, the banking industry is brought to a standstill, which means that much of our industry and services are brought to a standstill--people hold off on a car purchase because banks don't have the money, people can't buy a home except with 100% cash, etc. Now, the people who are in default aren't helping the industry any (in fact, it increases the number of available homes on the market, increased supply = further lowered costs) but if housing prices were to keep rising, this would not be an issue. Thus, it's a reflection of people's acceptance of risk and their willingness to move money around in the economy, and not exactly solvency, per se. Insolvency has a role in this discussion but that's not the immediate problem for these banks.

Illiquidity can lead to insolvency, though. Here's what wikipedia says regarding the FNMA and FHLMC takeover:
    "Over 98 percent of Fannie's loans were paying timely during 2008. Both Fannie and Freddie had positive net worth as of the date of the takeover, meaning the value of their assets exceeded their liabilities. However, Fannie's total assets to capital (leverage ratio) was about 20:1, while Freddie's was about 70:1."
    ...
    "There was concern that the GSEs' liquidity was insufficient to handle growing delinquency rates, such that although viable now, the scale of loss in the future would be sufficient that insolvency would occur and that knowledge of this future failure would induce immediate or near-immediate failure due to buyers refusing to buy debt."
In other words, because the bank couldn't maintain liquidity, the market for the very thing which they are in would shrink faster, leading to a more rapid reduction in liquidity, forcing them into banktuptcy faster.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
Thanks (none / 0) (#46)
by Sgt York on Mon Sep 29, 2008 at 06:29:19 PM EST

That actually made sense to me. I kept imagining those "your lender has been changed" letters I got when I had a mortgage.

So it's the illiquidity of the mortgages that's causing the crisis of the banks, correct? Due to the drop in value of the collateral backing them, banks can't move them to get cash, so they have no cash to loan.

From this standpoint, the bailout seems to make sense. These loans are pretty safe in the long term as long as they are actually still getting paid off. It's just that whoever buys them is stuck with them as a slow trickle of money; they can't flip them to somebody else to get some cash to loan out to make more money.

But then, wouldn't the ratio of unpaid mortgages and loans to total actual loans be more informative than the ratio of unpaid loans to total workforce? It seems to me that doing it by workforce would just dilute the figure.

There is a reason for everything. Sometimes, that reason just sucks.
[ Parent ]

That's about the size of it (none / 0) (#47)
by Liar on Mon Sep 29, 2008 at 06:58:05 PM EST

Or at least, that's my understanding of the current crisis. It's obviously a complex field, and I haven't even mentioned credit default swaps which is probably something I can't explain easily. But they all do have their impacts in dragging down the market. But, yeah, from my understanding a bailout is absolutely vital to everyone--it really is a crisis and we must to get over the idea that we're bailing out the rich. We're not. We're bailing ourselves out.

Still, I looked at it from this perspective because I was trying to counter the other guy's comment that there was widespread insolvency. It's not a perfect measure since those without mortgages may be homeless or otherwise poor, but neither are mortgage failures strictly accurate since many loans can belong to a single entity, like those who leveraged themselves to buy rental properties.

Somewhere between the two numbers is probably the truth, but I'm not aware of any way to measure it accurately, though you have to take jobless rates, etc. into consideration. Overall, you have to build up a picture of market (un)health rather than point at a single set of numbers as he was doing. It's like an IQ test, the only thing it proves is how good people are at taking the IQ test; mortgage failures only shows the health of the economy for those who have mortgages.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
You seem to have a grasp on this (none / 0) (#48)
by Sgt York on Mon Sep 29, 2008 at 07:05:16 PM EST

I, for one, would appreciate an article on the whole thing. I know it would be hard to keep it brief, but some kind of analysis as to how the bailout is supposed to help, and what the potential long-term would be like with and without it (or something similar) would be pretty interesting.

There is a reason for everything. Sometimes, that reason just sucks.
[ Parent ]

I don't think I have the expertise (none / 0) (#49)
by Liar on Mon Sep 29, 2008 at 07:16:24 PM EST

But I'll give it a go. There seems to be a lot of people opposed to any bailout like it's money down the drain when the reality is that we'll get most and maybe all of it back. It's not like welfare which is a pure consumed cost.

Also, if the government does buy up these loans, it means that the high risk homeowners and the U.S. government both have an interest in getting these loans repaid, so that part of the market is likely to see some relief, too.


I admit I'm a Liar. That's why you can trust me.
[ Parent ]
Connect the dots... (none / 0) (#54)
by The Amazing Idiot on Mon Oct 20, 2008 at 12:48:25 AM EST

If our economy is completely vital to them, and we need to "bail them out", shouldn't we just own them instead?

Capitalism has always been historically full of highs and lows. Having federal control of essential banks doesn't sound that bad of an idea. It would eliminate a lot of this "make profit now now now!!!" to slow and boring banks.

As for the taking of control, I had a friend who had a house in a area of new interstate in the Bloomington, IN area. The state came in and took his house and gave a "fair market value" or whatever BS. It's called Eminent Domain. Now, why cant this also be used against the banks?

[ Parent ]

Well one mainstream guy said it too now... (none / 0) (#55)
by sholden on Sun Nov 09, 2008 at 03:30:42 PM EST

"""
Every industrialized nation is putting a lot of supply on the market because they all have insolvent banks, woops I'm not supposed to say insolvent banks, they all have banking issues
"""
   -- Rick Santelli, not on youtube yet it would seem though...

--
The world's dullest web page


[ Parent ]
+1 FP, will contribute to death of k5 (none / 1) (#14)
by GrubbyBeardedHermit on Thu Sep 25, 2008 at 02:24:32 PM EST


GBH

-1, conspiracy (3.00 / 3) (#15)
by Corwin06 on Thu Sep 25, 2008 at 03:04:59 PM EST

Conspiracy theorists are nuts.

The sad fact is that their premise is basically right : groups of people in power will do whatever is necessary to stay there. The discrepancy between reality and delusion is that there are far, far more groups than <insert several conspiracy nut pet names here>.

First, there are people "in power". Those have different levels of power, over different, sometimes overlapping, matters. They all have a constant : they want to stay in power and eventually get more of it over more matters.

I mean, it's a dynamic system, a very complex, even chaotic one. It's somewhat stable in the short-to-middle term, unless something major happens (like a World War) - and even then, some power groups will survive. It's a ... how d'you say "power" in Ancient Greek? A system where power decies who gets more power?

It's also an absolutely corrupt system. It's somewhat self-regulating, too -

Oh fuck it. Other try to get my point across : I have this mental image of a monstrously complex system where people are part of different groups, some with an inclination to do something, and other groups doing opposed things the opposed way, some doing other things, all in different ways.

Doing things here means influencing people. It's a system where everyone wants to wield more power over their matters, then over more matters, until there is a completely stable group that think all the same way, deciding everything at all. (Perfect example : 1984 and the Inner Party.)

This will never happen. And I'm very, very sure of it. There are way too many matters for one group to end up micro-managing everything at all (every matter that concerns people). Even in 1984, they don't do it : the proles are under a light surveillance - enough to ensure they will never do a revolution, but they're mostly free : the scale is too large, the Party just can't (as a group) manage everything at all. This has to do with the way math work : since you'd need <quantity> human resources to manage everything efficiently enough to ensure perfect stability, those humans would have to be aware of <quantity> information about everything - which means the graph of point-to-point communications needed to achieve that is so complex that it implies it is mathematically impossible. That level of control is impossible, because you'd need exponentially more people to control everything than there are even things to control - and if everyone is into surveillance, nothing gets done at all.
(Does that make sense? ... Well, it should.)

Maybe machines could do it, but I suspect that the real world is not consistent enough for that. So, even machines would have to make do with an inferior level of control... Maybe with enough separation between the classes ... but machines can be used and understood by anyone with a brain, and reverse-engineering being a science (it follows the scientific method), it can be distributed among groups small enough to not be detected...

Bah, even that would require strong AI, and that's not gonna happen anytime soon.

So, back to the sort-of point :

There are so many groups competing for overlapping powers, that conspiracy theorists, believing, as they do, that small groups of people wield power over at least most of high-level decisions, are Just Wrong. There are too many groups, with unimaginably (literally) more power over unimaginably more matters, than just the tripartite bilderberg illuminati freemasons, that ... well, in the Real World there are the Reps, the Dems, the lobbies, the Bushs, the maffias, the OPEC, the unions, the UN, the NATO, Slashdot, the EU, your mom, the drug cartels, the NRA, the CIA NSA KGB MI5 <insert random three-letters here> et caetera ad nauseam, and they ALL want MORE power over MORE matters, doing different things, in different ways, for different outcomes, all hoping to eventually become the 1984 Inner Party. And those are all made up of people, grouping as social primates are wont to do,

See? It's so much more complicated than a global conspiracy. The conspiracy is when several people use their combined power to influence some result. There are unimaginably many conspiracies in reality. They're all competing for the same prize, on different levels, with different goals, following different agendas, all in so many different directions.

And THEY DO rule the world. Forget democracy, it means nothing. Do you personally know anyone on the democratic election lists? Yes? How many? One, two, a hundred, two? A human mind can't know above ten thousand people, and that figure is way above the limit anyway. Even only here in .be, we have sixteen governments. You in the US have FIFTY States. I mean, how can anyone hope to understand the real power structure of THAT, and that's only the PUBLIC faces! What about, say, only the lobbies? There are several lobbyists for every person in the US federal govt...

So. Yes, a conspiracy rules the world. It's just that it's bottomlessly unfathomable, chaotic, and pushing/pulling everything in different directions with different... well, hope you got it by now.

Does it really matter who is in the White House? I'd say, no. It's just a power play between only two power groups. The difference won't have much impact anyway, since the laws that will affect you will be bought by the same groups, those who wield power over both the Reps and Dems. They're not completely overlapping, yes, some agendas will be preferred to others depending on which puppet will smile on TV, but cut off the TV and wonder what would be so different if the other had won.

So, smile, bend over, and take it. You can't even see who's screwing you of what for what.

"and you sir, in an argument in a thread with a troll in a story no one is reading in a backwater website, you're a fucking genius
--circletimessquare
good lord man (none / 0) (#17)
by undermyne on Thu Sep 25, 2008 at 03:31:41 PM EST

focus. I will re-read this a few times and see if I can mine out what you are attempting to convey.

If the whole thing is ranting that conspiracy theorists are loony, I conceded that point in the article.

"You're an asshole. You are the greatest troll on this site." Some nullo [ Parent ]
Well, (none / 1) (#20)
by Corwin06 on Thu Sep 25, 2008 at 04:58:56 PM EST

I was attemptng to say something I'd thought of long ago about conspiracy theories and exactly in what way they're all wrong...

I meant to explain how much the Real World is more complicated than their silly fairytales. Then as usual, I had that huuuuuuuge mental image that can only be explained holistically, and I failed miserably at exposing it.

Oh well.

"and you sir, in an argument in a thread with a troll in a story no one is reading in a backwater website, you're a fucking genius
--circletimessquare
[ Parent ]
Next time you have a huge mental image like that.. (none / 1) (#21)
by undermyne on Thu Sep 25, 2008 at 05:51:03 PM EST

use a shotgun to blow it onto the wall so someone else can have a go at communicating it to others.

"You're an asshole. You are the greatest troll on this site." Some nullo [ Parent ]
It more or less made sense to me (none / 0) (#29)
by livus on Thu Sep 25, 2008 at 10:43:36 PM EST

don't mind my meth-smoking colleagues here.

---
HIREZ substitute.
be concrete asshole, or shut up. - CTS
I guess I skipped school or something to drink on the internet? - lonelyhobo
I'd like to hope that any impression you got about us from internet forums was incorrect. - debillitatus
I consider myself trolled more or less just by visiting the site. HollyHopDrive

[ Parent ]
pure fruit loops. can't even recongize the topic (3.00 / 2) (#18)
by circletimessquare on Thu Sep 25, 2008 at 03:38:20 PM EST



The tigers of wrath are wiser than the horses of instruction.

[ Parent ]
tl;dr (3.00 / 2) (#39)
by BJH on Fri Sep 26, 2008 at 09:26:54 PM EST

Try and be a bit more concise next time you get your paranoid rant on.
--
Roses are red, violets are blue.
I'm schizophrenic, and so am I.
-- Oscar Levant

[ Parent ]
Good, but the sudden editorializing... (none / 1) (#32)
by gr3y on Fri Sep 26, 2008 at 09:47:11 AM EST

about voting for a third party was unnecessary and caused me to carefully consider whether to vote this story up or down.

Third parties would be just as susceptible to simple human greed and the stupidity that leads some to believe that money comes from the bank, like meat comes from the grocery store. Paulites, Libertarians, and other fringe political groups desperately want to believe that two parties are the problem, and that the problem will be made less by having more parties involved in the political system.

However, the simple fact of the matter is that none of the fringe political groups have, to date, managed to strike enough of a cord with the American electorate to be recognized as a legitimate addition to American politics. This is also the reason that the Republican and Democratic parties don't compete in the marketplace of ideas: they represent the government most Americans want.

I am a disruptive technology.

seeing as how it's toast, (none / 0) (#51)
by mikelist on Mon Sep 29, 2008 at 10:11:53 PM EST

as a respected economist (the bank respects me because i give them extra fees for being stupid)
i have to say that the bailout would have been a continuation/course correction of the current provably failed economic ideal.

a quote i don't know the author of:
a definition of insanity is doing the same thing the same way repeatedly and hoping for a different result.

my 401 is probably gonna take a hit, but we were all going to pay for this anyway.

the conservative model expects and assumes its adherents to be noble in deed and intent, without any reason to believe they will be.

milwaukee's best ice is pretty good, if it's real cold.

Bailout at best stops the bleeding (none / 0) (#52)
by Grayworld on Tue Sep 30, 2008 at 01:04:18 AM EST

but not the pain


Fair but a bit unbalanced to be sure!
to paraphrase a great future-seer (none / 0) (#53)
by krkrbt on Sat Oct 04, 2008 at 01:25:48 AM EST

... regardless of bailout or who gets elected, we are in for another 4-8 years of the same exact thing we have had for the last 20+.

"Sometimes things change because they have to." That is, the United States can't freeload on the rest of the world forever - China et al won't allow it. 2008 is one of those inflection points in human history, where a certain trend (empire building) went as far as it could, and came to a sudden end.

My copy of Mr. Swann's book is missing, else I'd provide a quotation and page number.

To bail or not to bail, that is the question | 55 comments (46 topical, 9 editorial, 0 hidden)
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