$700 billion bailout package

[glock35ipsc]

I still like Dave Ramsey's plan the best, and maat55 it contains a couple of your points:

http://www.daveramsey.com/media/pdf/the_common_sense_fix.pdf

[rooskers]

Thank you jIM_Ohio that was a much better explanation than previous ones I have heard although I still agree with some things.

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.

Many of these companies that bought these had degrees from Harvard and had run hedge funds for years. They didn't realize that these securties promising them untold wealth for next to nothing could possibly have a downside. They didn't realize that even though there were some less risky loans packaged with some very risky loans that it couldn't possibly go wrong. I don't believe it and if I am to believe it then our country has people in power who are even dumber than I give them credit for. Either that or they knew full well what they were doing but didn't care because of greed.

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

A nation built upon nothing but credit cards. I understand that with the banks not able to loan money that places like WalMart cannot build more or remodel putting contractors out of business and small business owners will be hard pressed to pay their employees. I am still a believer that this proposal will still not work. We are headed for or already in a recession. So credit is eased and banks loan the money to them. Where is the small business or the large ones going to get the money to repay the credit extended to them. The american consumer is tapped out, has no more money, cannot take on more debt. They are already downsizing as it is even it the bill were to pass.

[maat55]

I still like Dave Ramsey's plan the best, and maat55 it contains a couple of your points:

http://www.daveramsey.com/media/pdf/..._sense_fix.pdf

I posted this same site in Investing and Banking. I think this plan should come before any gov. bailout plan.

[jIM_Ohio]

A nation built upon nothing but credit cards. I understand that with the banks not able to loan money that places like WalMart cannot build more or remodel putting contractors out of business and small business owners will be hard pressed to pay their employees. I am still a believer that this proposal will still not work. We are headed for or already in a recession. So credit is eased and banks loan the money to them. Where is the small business or the large ones going to get the money to repay the credit extended to them. The american consumer is tapped out, has no more money, cannot take on more debt. They are already downsizing as it is even it the bill were to pass.

You jumped from "house of credit cards"- a consumer perspective, to contractors- that is an employer=employee issue- to "american consumer is tapped out"- another consumer issue.

This bailout package has little to do with the credit card issues or consumer spending as you are trying to correllate.

This is about companies (big and small) needing capital to do business. It is credit which is more like revolving credit lines needed for a plumber to purchase more supplies or the large company getting a 1 year line of credit to fund a new project which will employ 20, 100 or 10,000 workers.

Those lines of credit are not things the average american uses or needs. But the average company does need them. At beginning of my post I mentioned the difference between investment banking and consumer banking- this is one of those differences.

Consumer banking is credit cards
Investment banking is businesses doing business with other businesses so both can make money. If banks cannot give credit then businesses do not make money and people lose jobs.

The economy does well if people are employed. But if layoffs start (from small businesses), that will spiral into a worst case situation none of us can comprehend and will rival the great depression.

[disneysteve]

This is about companies (big and small) needing capital to do business. It is credit which is more like revolving credit lines needed for a plumber to purchase more supplies or the large company getting a 1 year line of credit to fund a new project which will employ 20, 100 or 10,000 workers.

Those lines of credit are not things the average american uses or needs. But the average company does need them.

If banks cannot give credit then businesses do not make money and people lose jobs.

I think this is what the average Joe doesn't understand about all the bailout talk. They aren't doing it to bailout some bozo who bought a house he couldn't afford. They are doing it to protect employers who depend on their line of credit to keep their cashflow flowing. That line of credit might be used to pay for new equipment, renovations, ordering supplies or even making payroll.

I'm a doctor. One of our significant expenses is purchasing vaccines, like the hundreds of doses of flu vaccine we now have in our fridge. We will eventually dispense those vaccines, bill the insurance companies and get reimbursed, but that may not happen for 3-6 months. However, we need to pay for the vaccines at the time of purchase. That's just one example of where a line of credit might come into play. Without available credit, you doctor might be unable to afford to keep vaccines in stock.

[glock35ipsc]

I posted this same site in Investing and Banking. I think this plan should come before any gov. bailout plan.

I agree!!!

[Broken Arrow]

Many of these companies that bought these had degrees from Harvard and had run hedge funds for years. They didn't realize that these securties promising them untold wealth for next to nothing could possibly have a downside.

I don't have much to add right now, but I do recall reading an interesting article about young, aggressive Ivy League hedge fund managers.

According to the article, they all pretty much realize that what they're doing probably wouldn't last a good year or two, maybe five at best.

However, during that time, they were literally raking in at least a million dollars a year for managing these high risk, high gain hedge funds.

Their basic reaction, and I'm just recalling from the article, is "So what?" By then, they've banked three to five million, and they want to move on their careers anyway. Some have actually sat down and decided that it was worth delaying their MBAs to do this.

I know this is way off topic, and it doesn't add too much substance to the conversation, but the point is, some knew the risks. The money was just too good to turn down, no matter how short-lived it was going to be.

[rooskers]

This bailout package has little to do with the credit card issues or consumer spending as you are trying to correllate.

Consumer spending has everything to do with it in my opinion. Don't get me wrong I understand businesses need a revolving line of credit. In fact my friend owns his own stereo company business that has been doing great for the past 6 years and there is no way he could purchase the inventory needed for christmas with cash. He needs the money from the banks in order to but the inventory he plans to sell. My point is if he can't sell it come this christmas he won't be able to pay back the money he owes the bank. He has already seen his business shrink and it is getting worse which has nothing to do with the liquidity crunch from banking institutions. It has everything to do with the consumer not having any more money and already in debt over their heads.

That line of credit might be used to pay for new equipment, renovations, ordering supplies or even making payroll.

I agree but I believe that many businesses will not be able to pay this back because of the current financial condition of the consumer. If the consumer does not consume then the business cannot pay back the bank.

While I understad the importance of what you guys are saying and have learned much from reading your replies I think you guys aren't giving enough credit to how much the average persons debt is involved in this mess. Thanks for some real discussion on this which is sadly missing from the media.

[jIM_Ohio]

Consumer spending has everything to do with it in my opinion. Don't get me wrong I understand businesses need a revolving line of credit. In fact my friend owns his own stereo company business that has been doing great for the past 6 years and there is no way he could purchase the inventory needed for christmas with cash. He needs the money from the banks in order to but the inventory he plans to sell. My point is if he can't sell it come this christmas he won't be able to pay back the money he owes the bank. He has already seen his business shrink and it is getting worse which has nothing to do with the liquidity crunch from banking institutions. It has everything to do with the consumer not having any more money and already in debt over their heads.



I agree but I believe that many businesses will not be able to pay this back because of the current financial condition of the consumer. If the consumer does not consume then the business cannot pay back the bank.

While I understad the importance of what you guys are saying and have learned much from reading your replies I think you guys aren't giving enough credit to how much the average persons debt is involved in this mess. Thanks for some real discussion on this which is sadly missing from the media.

The only consumer related issue in the crisis are people which consumed mortgages they could not afford. This has very little, if anything, to do with credit cards being maxed out.

Point to any data which suggests credit cards are the CAUSE of the problem.

Seperating cause from effect is a tough thing. One analagy we use here at work-

is the system load high because the network is slow or is the network slow because system load is high...

Consumer spending has slowed down recently. That data exists... but to extend this to "credit cards are the cause of consumer spending slowing down" is quite a reach and I have not seen that anywhere except on this board at this one site.

Credit card debt will come to forefront when people lose jobs or boomers in consumer debt try to retire.

The reason credit card companies charge such high interest on cc debt is they write a significant amount of cc debt off (meaning the bank paid the merchant the bill, but the client did not pay the bank). So the reality is cc debt does not hurt merchants (like your friend's stereo store), it hurts the bank because they don't get paid, so they just up the interest rates on everyone else's card to recoup the money.

[rooskers]

I didn't mean this has only to do with credit cards being maxed out. I meant that the overall debt load of the consumer (credit cards, mortgage, car loans, home equity lines of credit) is the main problem that is being overlooked. Sure you can take 700 billion to ensure banks can keep open revolving credit lines for businesses. However if the businesses can't pay back the due to the slow down of consumer spending then what happens. To try and solve just the liquidity issue of the banks to me is extremely short sighted and doesn't address the real issue of there being to much debt in the U.S. When I say to much debt in the U.S. I don't mean just consumers but businesses and government alike.

I am not saying we don't need some sort of fix which would likely use tax payers money to some degree I am just saying spending 700 billion to solve just one aspect of this problem will not work. Couple people in my daughters swim lessons are taking their money out of Wells Fargo because they heard rumors they were involved in the mortgage mess. I asked if they would change their mind about taking their money out if the bill containing 700 billion was passed and they said no they were going to take it to a local credit union. So one could speculate the fall of WAMU which was due to a classic run on the bank might not have been prevented regardless of the injected liquidity. Many of the local banks around my area are continuing to issue small business loans and at this point don't seem to be affected as compared to our BoA and Citibank. There was even an article which I forgot the link for saying something like "small business owners flee to small banks for help."

[jIM_Ohio]

I didn't mean this has only to do with credit cards being maxed out. I meant that the overall debt load of the consumer (credit cards, mortgage, car loans, home equity lines of credit) is the main problem that is being overlooked. Sure you can take 700 billion to ensure banks can keep open revolving credit lines for businesses. However if the businesses can't pay back the due to the slow down of consumer spending then what happens. To try and solve just the liquidity issue of the banks to me is extremely short sighted and doesn't address the real issue of there being to much debt in the U.S. When I say to much debt in the U.S. I don't mean just consumers but businesses and government alike.

I am not saying we don't need some sort of fix which would likely use tax payers money to some degree I am just saying spending 700 billion to solve just one aspect of this problem will not work. Couple people in my daughters swim lessons are taking their money out of Wells Fargo because they heard rumors they were involved in the mortgage mess. I asked if they would change their mind about taking their money out if the bill containing 700 billion was passed and they said no they were going to take it to a local credit union. So one could speculate the fall of WAMU which was due to a classic run on the bank might not have been prevented regardless of the injected liquidity. Many of the local banks around my area are continuing to issue small business loans and at this point don't seem to be affected as compared to our BoA and Citibank. There was even an article which I forgot the link for saying something like "small business owners flee to small banks for help."

I think the opinions stated are short sighted opinions without much fact to substantiate or discredit the opinions.

Most businesses which are affected by lines of credit do business with other businesses, not directly to a consumer.

For example ATT funding a new program and needing a line of credit to fund the operation would keep ATT employees paid.

Another example would be a plumber which won a contract for a high rise condo which needs 500 bathrooms installed. The plumber needs credit to purchase the supplies and gets paid when a given unit is completed.

A third example would be the flu shots mentioned at a doctor's office- the office needs the credit to buy the supply, and the insruance companies will eventually pay the doctor's office.

None of the above needed a credit card and none of the above interacted with a consumer which used a credit card.


I understand from your last two sentences that you don't like deficit spending by the government or any consumer which does the same thing. Extending that belief to prevent bailout of the US financial system is short sighted IMO. Questioning the past when a solution is needed quickly is not productive and is probably why deficit spending is needed in many cases to begin with.

[disneysteve]

Jim, I agree with you, but I also think rooskers makes a valid point. Most of the credit issues do ultimately involve consumers. Some businesses use their lines of credit to stock their stores and showrooms with merchandise and display models. If no customers come in to buy stuff, the business owner could have difficulty repaying the line of credit.

To use my doctor example, we ordered this year's flu shot supply based on how many shots we used last year. A fair number of the shots we give are to patients who pay cash to get them. It is certainly possible that some of those patients will opt not to get a flu shot this year to save the $25 it would cost them. If enough patients do that, we could end up with a significant amount of non-reimbursed purchases that we would have to cover ourselves.

Certainly, the building trade would fit in here, also. Not far from me, they built 2 new homes last year, each priced at $1.3 million. Neither one has sold yet. I certainly wouldn't be surprised to learn that the builder borrowed money to build those homes. At some point, that money will need to be repaid. If the homes still haven't sold and the builder can't afford to pay the loan, then what?

Eventually, the consumer does come into play in most of these scenarios as the end user of the goods or services.

[bjl584]

Paulson was asked where the number $700 billion came from. What science or logic was used to derive that number he was asked. His answer, "well, we just wanted to pick a number that was really big."

Well, that's interesting. These people are going to fix the economic problems? I have my doubts.

[sweeps]

Paulson was asked where the number $700 billion came from. What science or logic was used to derive that number he was asked. His answer, "well, we just wanted to pick a number that was really big."

Seriously? Do you have a source?

[bjl584]

Seriously? Do you have a source?

Let me look for it. I heard this on a news radio broadcast yesterday. He said it in an interview. I'll try to find a source.