$700 billion bailout package

[Troyrb]

I hate it but I think it or soemthing like this is needed fast.

[LivingAlmostLarge]

Will Paulson's plan work? | I want your money | The Economist

This is an article about the problems of the bailout and why we need it with all the inherent issues and potential problems.

We need it to inject liquidity in the market.

[glock35ipsc]

Oh, by the way, about the topic. As much as I don't like the word "bail out", the alternative seems to be worse. The market lost $1 trillion today. (so they say.) So, I guess I would support it. Well, it's kind of too late now, or is it?

And in the week following the market reopening after 9-11, the DOW had lost 1,369.7 points (14.3%), and stocks lost $1.4 trillion in value for the week. And we recovered from that.

After the crash of 87, the market ended the year UP .6%, and fully recovered in two years.

Other market crashes (DJIA) that we have survived:

2000-2002, -37.8%
1916-1917, -40.1%
1939-1942, -40.4%
1973-1974, -45.1%
1901-1903, -46.1%
1919-1921, -46.6%
9/1929-11/1929, -47.6%
1906-1907, -48.5%
1937-1938, -49.1%
1930-1932, -86.0%

And yet:

[Pitman]

I'm 100% against it.

[rooskers]

Please explain to me how 700 Billion would inject liquidity into the market. It was my belief that in order to have liquidity you have to have the movement of money (loans being made, people buying stuff). The problem with this plan is even if the banks have the money to loan, the average american is tapped out. If the average person can't afford their house, can't pay off their credit card, can't pay their bills then how is giving banks more money to loan to these people going to help? Sure in some cases it will help the banks with their balance sheets but then what is the bank to do? Oh yeah in order to get "back on track" they will either have to tighten their loan standards which means they will have the money from the tax payers but it won't help or go back to risky lending practices using our tax money and we will be in an even worse mess in a year or two.

Just checked the market everything is up looks like the problems of yesterday are over. I am glad we have such level headed people investing in the markets. One day the world is going to end then next day the world is perfect.

[glock35ipsc]

The entire US of A needs a Total Money Make Over!

[Broken Arrow]

Rooskers, I believe what we are seeing today is known as a "reaction". Yesterday, everything went into a free fall. Today, a lot of value buyers have swooped in to scoop up all the great prices. Hence a "reaction high".

To put it into perspective, yesterday's loss mounted to a Dow drop of 777 points. Right now, it bounced back 248 points, but as you can see, it's still nowhere near where we started from. So, the situation is far from over.

As for liquidity, Uncle Sam is simply paying to buy these bad mortgages (at a discount). In other words, instead of banks hanging on to these bad mortgages, they're exchanging it with Uncle Sam for cash. Liquidity.

Also, average citizens are not the only people out there that needs a loan. Foreign corporations, local business, and other banks need it as well. That's an important point that people need to understand about the bailout. It's not just the little people like us that are at stake, but the whole money supply-- the grease that's oiling the economy-- is also at stake.

[SnoopyCool]

Mixed feelings. Banks brought this on themselves by making ridiculous loans to customers who couldn't possibly afford them.

I agree. I also believe that banks had help along the way with groups such as ACORN and legislation such as The Community Reinvestment Act.

Not sure how I feel... I'm still reading.

[tripods68]

Awesome graph: Without the bailout, stock market will be in the "rut" for the next 15 or 20 years. Companies will not expand as fast, credits will be a lot tighter, and job growth tamed similar to the events that took place from the year 1965 to 1982 (Vietnam War, high gas prices, and double digit inflation).

The solution(s): lower income tax and corporate tax rate. Promote business expansion by lowering the feds fund rate even further while keeping people employed.

[Maismom]

And in the week following the market reopening after 9-11, the DOW had lost 1,369.7 points (14.3%), and stocks lost $1.4 trillion in value for the week. And we recovered from that.

I know the market recovered very well from 9/11. My 401K balance shows it really well.

But this time, it's not by a terrorist attack. This time, it's really an economic problem. Financial institutions are having liquidity issues, and central banks of other countries are pumping money into market like crazy.

My 401K tanked in 2001, but I wasn't too concerned because I knew economy was fundamentally strong at that time. I'm not sure about this one.

It looks like there will be some bumpy rides ahead of us.

[rooskers]

Broken Arrow I understand this is just reactionary I was being more sarcastic (I know doesn't come across well on the internet). I just find it funny that one day is doom and gloom in the market the next day is one of great bargains.

As for liquidity, Uncle Sam is simply paying to buy these bad mortgages (at a discount). In other words, instead of banks hanging on to these bad mortgages, they're exchanging it with Uncle Sam for cash. Liquidity.

I understand that but it is the next point I have a problem with.

local business, and other banks need it as well

I shouldn't have said the average person in the U.S. I should have said the U.S. is tapped out period. Sure they can give more loans but with tightening credit standards they won't have enough people, businesses out there to make a difference unless of course they go back to the loan standards of a few years ago. We all know where that would lead us. The 700 billion will not help. It might make things temporarily seem like it is better kinda like the person who has 8 maxed credit cards and they don't know what to do then all of a sudden some other credit card company gives them another card. This extra card will let them make the minimum payments on the others and give them some money to spend but after all is said and done they will be worse off in a couple months because they will then have 9 maxed out credit cards.

[GoodBuyGirl]

I think the economy needs to fall on its face before we will ever regain any kind of balance. Too many big fish have grown too large eating up all the little fish in their way. Now they are crying because they've ran out of food.

[glock35ipsc]

This plan actually makes sense! From Dave Ramsey:

The Common Sense Fix

Years of bad decisions and stupid mistakes have created an economic nightmare in this country,
but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support
any congressperson who votes to implement such a policy. Instead, I submit the following three-step Common Sense Plan.

I. INSURANCE
a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance.
Government-insured and backed loans would have an instant market all over the
world, creating immediate and needed liquidity.
b. In order for a company to accept the government-backed insurance, they must do two
things:
1. Rewrite any mortgage that is more than three months delinquent to a
6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the
balance. This brings homeowners current and allows them a
chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or
the sale of the property to pay off the bad loan. In the event of
foreclosure or short sale, the borrower will not be held liable
for any deficit balance. FHA does this now, and that
encourages mortgage companies to go the extra mile while
working with the borrower—again limiting foreclosures and
ruined lives.
2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and
executive team members as long as the company holds these
government-insured bonds/mortgages. This keeps underperforming
executives from being paid when they don’t do their jobs.
c. This backstop will cost less than $50 billion—a small fraction of the current proposal.

II. MARK TO MARKET
b Remove mark to market accounting rules for two years on only subprime Tier III
bonds/mortgages. This keeps companies from being forced to artificially mark down
bonds/mortgages below the value of the underlying mortgages and real estate.
b. This move creates patience in the market and has an immediate stabilizing effect on
failing and ailing banks—and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX
a. Remove the capital gains tax completely. Investors will flood the real estate and stock
market in search of tax-free profits, creating tremendous—and immediate—liquidity in
the markets. Again, this costs the taxpayer nothing.
b. This move will be seen as a lightning rod politically because many will say it is helping
the rich. The truth is the rich will benefit, but it will be their money that stimulates the
economy. This will enable all Americans to have more stable jobs and retirement
investments that go up instead of down.

This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.

[jIM_Ohio]

Please explain to me how 700 Billion would inject liquidity into the market. It was my belief that in order to have liquidity you have to have the movement of money (loans being made, people buying stuff). The problem with this plan is even if the banks have the money to loan, the average american is tapped out. If the average person can't afford their house, can't pay off their credit card, can't pay their bills then how is giving banks more money to loan to these people going to help? Sure in some cases it will help the banks with their balance sheets but then what is the bank to do? Oh yeah in order to get "back on track" they will either have to tighten their loan standards which means they will have the money from the tax payers but it won't help or go back to risky lending practices using our tax money and we will be in an even worse mess in a year or two.

Just checked the market everything is up looks like the problems of yesterday are over. I am glad we have such level headed people investing in the markets. One day the world is going to end then next day the world is perfect.

Reading this thread to me sounds like many do not understand how banking works. Remember a few background points- there is consumer banking and investment banking. Slightly different rules, techniques and investments exist in both. I am far from an expert in either, but here is what I understand the issues to be:

1) Mortgages were made to people to buy houses. Some of these mortgages were solid (meaning people had good credit) and some were sub prime (meaning credit or income was shaky). The "Value" of these mortgages made is MORE than $700 billion. The companies which lent the money made money in closing costs on the mortgages.

2) The banks which lent the money have requirements about how much cash on hand they must have for every dollar lent (I think it is 20%). The 20% was put in place after great depression. For a bank to lend more money they must either increase deposits or reduce liabilities. The banks then group the mortgages together and sell them. They sell them to anyone buying- pensions, investment banks, other banks etc... These loans had a value at the time they were sold. The holders of the mortgages make money as people send in their mortgage payments.

3) Many people (companies) which bought the mortgages bought things they did not understand- as various mortgages were packaged together in tiers and some tiers were more risky than other tiers. When the sub prime tier was figured out, it might have been purchased for 500k (it's value) and because of defaults, the value might be reduces to 100k because that risky tier is less likely to be repaid.

4) If you do the math in #3, a pension might have spent 475k to get a mortgage it thought would return it 500k. It had to liquidate 475k in cash to purchase the tiered mortgage. That tier is now valued at 100k. No one will buy this tier from the pension, so that tier is illiquid. The pension needs money to pay it's retirees, but it might not be getting the income it expected from the mortgages it bought to make it's payments.

5) do the math for #4, then realize it's not just pension funds- companies like Bank of America, WaMu and many others were holding these sub prime tiers and were obligated to make payments to their investors. T Rowe Price, Vanguard and Fidelity probably have mutual funds which also bought these sub prime tiers. Other countries like China and Saudi Arabia probably did too.

5a) the real issue is that the holders of the sub prime tiers cannot sell them to anyone because they are valued at next to nothing. Few people or investment banks have 700 billion to invest, much less are willing to take the risk that the 700 billion will be repaid. The 700 billion is probably mortgage valued at a total of 1-2 trillion once all payments are made, but the true number will not be known until the mortgages are repaid or defaulted on by the borrowers.

5b) the 700 billion buys the loans from whoever holds them. This allows the holders to use that capital for other things (other investments). A bank cannot lend more money until it's deposits increase or its liabilities decrease (see #1 above). Until the banks get their bad loans off their books, they have no liquidity (they cannot lend to small businesses for example).

5c) companies like ATT and other large mega corps also rely on lines of credit to fund a new factory, new program, or large project so they can maintain appropriate cash on hand for payrolls and similar. If ATT cannot borrow money, it might decide to layoff the people it would have allocated to the large project which it could not fund because no line of credit was extended by it's bank.

Each day the bank holds the bad loans prevents it from loaning money to small business owners or large corporations.

6) If the federal goverment holds the loans (700 billion worth) that means that when you or I make a mortgage payment which was part of the paper the government bought, our mortgage payment goes into the US treasury (as opposed to pension fund assets, investment bank assets or similar like it does now). Meaning the federal government is taking on the risk that the US homeowners will repay their mortgages on time.

I am willing to live with #6. I don't like the fact it got this far, but that is not a reason to turn my back on the bailout because of political idealogy. I am against government interference in private sector and believe the public sector needs to be downsized quite a bit to boot. But unless someone worth 700 billion is willing to put their net worth on the line to bail this out, and take on the risk that these loans get repaid in full, then this will get much worse before it gets better.

If the person with 700 billion available was named Guido, and he had a son or two named Luigi, Alfonso and Antonio... I would not want Guido knocking down my door if I missed a payment.

This could get a lot worse in so many ways if this bailout is not passed.

[maat55]

I think that might've been an option earlier on, when the situation did not seem as severe. However, at this point, I think basically doing nothing would do a lot more harm than good, as even perfectly good banks and companies, as well as the American economy in general, is being called into question on the global marketplace.

History's controversies surrounding the cause of the Great Depression included President Coolidge's Laissez-Faire policy, which Hoover disagreed, and then FDR promptly ended by bringing in sweeping government reforms and regulations. Many of these changes remain to this day, which included the creation of the FDIC.

In those days, proponents of Laissez-Faire policy spitted venom at all the radical government changes and interferences, saying that it would be ultimately bad for a free market economy. And yet, we don't seem to question most of these measures today, taking it for granted that that's exactly what our government is suppose to do in the first place: The basic services and oversights the government is suppose to offer in exchange for our hard-earned tax dollars.

Up to this point, Bernanke has been mostly reactive, which I've politely criticized in the past for being inadequate to handle the crisis at hand. However, his proposal for this $700 bailout is a paradigm shift. An realization that being simply reactive-- much less for a free market to somehow work itself out-- isn't going to be enough. Right or wrong, I at least applaud him for finally being proactive and decisive.

I know you've brought up Sweden's handling of things, and while I didn't mention it before, but Sweden is a highly-regulated, highly-government-controlled, and highly-taxed, Socialistic country. Truth is, I do like the way Sweden handles their economy, BUT we're not a Socialistic country. But if Sweden means anything, it should also illustrate just how a strong but proper government intervention can help to subdue an economic crisis when it spins out of control.

Add it all up, and you can see basically why I am ultimately in support of the bailout program. Sometimes, some wounds are too deep to heal on its own. When wounds get that severe, we need to get help. The bailout is not perfect. I agree with that. But few things in life are, and anything is better than letting it freefall and hope it doesn't break and kill itself.

That's what I believe....

If we are going to get radical with solving this problem, I would like them to try first, relaxing the Mark to Market rules and cut the corporate tax and eliminate the capital gains tax for a necessary amount of time.

Sweden made their financial institutions pay up first before getting any help. I don't deny that it could help, but it would be the socialistic solution. I would like to at least try the free interprise way first.