Can someone explain the bail out? (Full Version)

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crownlaurel -> Can someone explain the bail out? (9/23/2008 9:14:08 PM)

1. Where are we borrowing the $700bil from and how are we going to pay for it?

2. Who is actually going to benefit from this?

3. Does this mean that any homes in foreclosure will be saved or is it only the banks that will be saved?

4. How do we know that this will not just line the pockets of executives?

5. If taxpayers give them $700bil and then they get mortgage payments or sell the homes, aren't they being paid twice? Shouldn't the mortgage payments be rolled back into the gov't instead of the banks if the banks already have their money?

I guess I am just not getting it. I am worried because we struggle to pay our own mortgage every month and although I have had to pay late a few times, I have never been even 30 days late. We have to pull tgether the money to pay our bills and now at some point in the near or not so near future, we're going to be "asked" to pitch in our "fair" share of this bail out for banks that got greedy and bought up mortgages of people who got greedy and bought homes they couldn't afford (along with some very unfortunate people who ended up in difficult situations but probably won't see a penny of the bail out themselves).

I thought that the possibility of collapse was part of the capitalist system. What would really happen if we let the system collapse? What ramifications will this have for our economy in real terms. Gas has already shot back up. Are we saving the economy for the big guys so we can go back to raising prices for the average person? I know this can lead to political discusson but I want answers based purely on economy and simply what this means for real people.



blessedinnyc -> RE: Can someone explain the bail out? (9/23/2008 9:38:23 PM)

quote:

ORIGINAL: crownlaurel

1. Where are we borrowing the $700bil from and how are we going to pay for it?

We're borrowing the $700 billion to buy mortgages. When you get a mortgage, most banks will sell your mortgage to another firm. Many of those mortgages wound up in the hands of financial institutions that are now in deep trouble after some borrowers didn't pay. They borrowed money to buy these mortgages without being ready to accept a 10,15, or 20% loss.

We will pay for it by issuing treasury bonds. Eventually, we will have to pay them back from tax revenues and the sale of these assets. We may not even need any tax revenues if these mortgages are worth more in the future. The rule on wall street is to buy low, sell high, and we're certainly buying low.

quote:

2. Who is actually going to benefit from this?

The economy in general. If this investment was just to save wall street, the fed wouldn't care. However, this investment is going to save regular corporations- and ultimately, people who work for a living. One of the problems recently was that companies couldn't borrow money to meet their day-to-day funding needs (IE: like making payroll.)

quote:

3. Does this mean that any homes in foreclosure will be saved or is it only the banks that will be saved?

It means home prices will probably stop falling, which means we can probably avoid more foreclosures.

quote:

4. How do we know that this will not just line the pockets of executives?

That's a good question; it's one that lawmakers are asking.

quote:

5. If taxpayers give them $700bil and then they get mortgage payments or sell the homes, aren't they being paid twice? Shouldn't the mortgage payments be rolled back into the gov't instead of the banks if the banks already have their money?

If we give them $700 bil, they will give us the right to collect those mortgage payments. Thus, taxpayers benefit if people start paying those mortgages.

quote:

I guess I am just not getting it. I am worried because we struggle to pay our own mortgage every month and although I have had to pay late a few times, I have never been even 30 days late. We have to pull tgether the money to pay our bills and now at some point in the near or not so near future, we're going to be "asked" to pitch in our "fair" share of this bail out for banks that got greedy and bought up mortgages of people who got greedy and bought homes they couldn't afford (along with some very unfortunate people who ended up in difficult situations but probably won't see a penny of the bail out themselves).

Chances are, this will get paid for (partly) by some inflation. This bodes poorly for the country, but it will mean that you'll probably be earning more relative to your (fixed) mortgage payment in a few years.

quote:

I thought that the possibility of collapse was part of the capitalist system. What would really happen if we let the system collapse? What ramifications will this have for our economy in real terms. Gas has already shot back up. Are we saving the economy for the big guys so we can go back to raising prices for the average person? I know this can lead to political discusson but I want answers based purely on economy and simply what this means for real people.

Somewhere between 10 years of stagnation (like Japan) to the Great Depression.



GroupW -> RE: Can someone explain the bail out? (9/23/2008 9:47:32 PM)

1) The treasury will borrow it under their normal financing operations via government bonds or some RTC-like finance authority (see also REFCO bonds)
2) Depends. If it works like the government says, we all do. Banks unload illiquid assets that they can't sell. This frees them up to continue fresh lending which is currently very sparse. Getting rid of the structural logjam preventing banks from lending should help turn the economy around and either avoid or minimize the depth of any recession.
3) Possibly both. Currently the focus is on replenishing bank capital so they can keep on lending and not shut the economy down completely. That helps banks first and consumers second. If the government focuses on buying up defaulted mortgages, then they have a bit more ability to work with homeowners to keep people in their homes, if they choose to do so. This is currently one of the uncertain points about the bill that has people a bit concerned.
4) For the most part, executives of banks that have had troubles have had tremendous reductions in their wealth. Not that they are starving, but they are far worse off than the were before. Currently, not many execs have been "rescued". But yes, to keep a bank from going under means the execs will likely be better off than they would be if the banks were just allowed to fail. Then again, if it works as stated, you and I will both likely be better off as well. I don't think the fact that a few will benefit disproportionately should keep us from pursuing a workout that will help us all.

5) I don't think I understood your #5. The treasury will spend the $700 billion to purchase distressed loans and securities. The government will now own those obligations and receive any cash or workout payments or foreclosure proceeds. Noone will get paid twice.

The possibility of collapse has always been part of capitalism. So is an effective capital market. Capitalism works just fine as long as the capital markets are functioning. When those markets fall apart, however, lots of innocent people get hurt. Builders can't build new homes for new families. People can't move to get better jobs, because they can't get a mortgage in their new location. People that work for the builders and the Home Depots get laid off.

The effects tend to snowball over time and become huge. The big issue for capitalism is that we don't let people take the gains without accepting the losses. The goal is to punish poor decision making. Sometimes you don't have to bear 100% of the punishment in order to learn the lesson. As long as people feel enough pain to keep them from making the same bad decision again soon ("soon" being the operative word. People will make the same mistakes over and over again eventually. Like Ecclesiastes says, "There is nothing new under the sun.")

In this case, it appears that preventing the major culprits from feeling 100% of the pain will save the rest of us from feeling all the ill effects that might come along with that market discipline.

Unfortunately, the market punishes the guilty and the innocent alike.



crownlaurel -> RE: Can someone explain the bail out? (9/23/2008 10:29:39 PM)

Thanks. I have only heard radio talk and read a few articles but some were talking about whether this was a loan or if it didn't have to be repaid. I think that's where some of us have been confused. If this is an actual "buy-out" rather than a "bail out" then I am less worried but it brings more questions.

Which agency will handle the mortgage payments? Will we need to hire a whole new gov't agency/division to handle this or will we pay the debt holding banks to handle it for us? If so what price will we pay for their handling it?

Are we buying only the debt or are we purchasing the banks that hold the debt?



GroupW -> RE: Can someone explain the bail out? (9/24/2008 12:03:10 AM)

quote:

ORIGINAL: crownlaurel

Thanks. I have only heard radio talk and read a few articles but some were talking about whether this was a loan or if it didn't have to be repaid. I think that's where some of us have been confused. If this is an actual "buy-out" rather than a "bail out" then I am less worried but it brings more questions.

Which agency will handle the mortgage payments? Will we need to hire a whole new gov't agency/division to handle this or will we pay the debt holding banks to handle it for us? If so what price will we pay for their handling it?

Are we buying only the debt or are we purchasing the banks that hold the debt?


So far, it looks like the government will contract with private firms to manage the debt, service the loans, etc. There shouldn't be any new agency required per se, although it might be possible that you'll see a REFCO-II. That was the agency that raised the cash to bail banks out of the last mess. As far as the fees they will pay other people to handle this, that would be one reason that Congress needs to fight back on the degree of oversight that Paulson doesn't think is necessary.

Also, noone is talking about buying the banks that hold the debt - just buying their mortgages. At least that's the discussion so far. This could change, but I hope not and I really doubt it.



InfoCentral -> RE: Can someone explain the bail out? (9/24/2008 10:27:11 AM)

In a Nutshell

Every man, woman, and child, including the baby that was born yesterday would be taking on $3,000 worth of debt. This is why you hear the outrage on TV and the protests have already started at the Federal Buildings here in California.



blessedinnyc -> RE: Can someone explain the bail out? (9/24/2008 1:03:14 PM)

quote:

ORIGINAL: InfoCentral

In a Nutshell

Every man, woman, and child, including the baby that was born yesterday would be taking on $3,000 worth of debt. This is why you hear the outrage on TV and the protests have already started at the Federal Buildings here in California.

In return, they'd be also owning more equity in their homes.

I am not a huge fan of a $700 Billion federal intervention, but at the very least, it's important to be fair on this one. If the downside to taxpayers is more than 50% of that $700 Billion, we will have much bigger problems than the deficit.



GroupW -> RE: Can someone explain the bail out? (9/24/2008 1:13:15 PM)

quote:

ORIGINAL: blessedinnyc

quote:

ORIGINAL: InfoCentral

In a Nutshell

Every man, woman, and child, including the baby that was born yesterday would be taking on $3,000 worth of debt. This is why you hear the outrage on TV and the protests have already started at the Federal Buildings here in California.

In return, they'd be also owning more equity in their homes.

I am not a huge fan of a $700 Billion federal intervention, but at the very least, it's important to be fair on this one. If the downside to taxpayers is more than 50% of that $700 Billion, we will have much bigger problems than the deficit.


Exactly. A balance sheet has 2 sides. You have to account for both of them. As long as you're buying something that has SOME value, the net cost isn't the total cash out the door. It's net of the value you're buying. After all, when I borrowed $120k for my first house I didn't suddenly become $120k poorer.



bzirk -> RE: Can someone explain the bail out? (9/24/2008 9:11:55 PM)

quote:

The rule on wall street is to buy low, sell high, and we're certainly buying low.


This is the only thing about this that gives me hope. Also, if our government doesn't buy these things cheap someone outside the country will.



GroupW -> RE: Can someone explain the bail out? (9/24/2008 11:38:24 PM)

Exactly right.



dianetavegia -> RE: Can someone explain the bail out? (9/25/2008 10:51:47 AM)

What's to say this won't happen again in a year?



InfoCentral -> Financial Socialism (9/25/2008 11:04:23 AM)

Financial Socialism

This is where the United States embraces Socialism as the answer. But where is the United States going to get the money. Its not like Russia which has a surplus to draw from. We are already 11 trillion dollars in debt. Well, we would have to barrow that money and raise the national debt more. The question is at what point does the dollar become junk and the whole economy folds?



GroupW -> RE: Can someone explain the bail out? (9/25/2008 11:12:12 AM)

quote:

ORIGINAL: dianetavegia

What's to say this won't happen again in a year?


Nothing really, but the bailout would make it less likely. There are a couple of things going on that would make it unlikely to happen again. (Edit: make that unlikely to happen again SOON. It WILL happen again. Market based economies are vulnerable to the whims of human fancy. Bubbles and busts happen with alarming regularity. It's human nature to vacilate between euphoria and panic.)

1) The pace of home price declines seems to be abating. The OFHEO home purchase index has actually stopped falling and was stable over the summer.

2) Subprime delinquencies are still rising, but seem to be slowing down a bit. At some point, a phenomenon we call "burnout" starts to occur - basically, at some point everyone that was at significant risk of losing their house has done so, leaving a pool of relatively decent mortgages behind. We seem to be nearing that point.

3) The Fed has pursued a policy of monetary easing for about a year. Normally, we'd be seeing the effects of that by now. Liquidity pressures are keeping the effects a bit invisible to us right now, but at some point it has to take hold. The normal lag time between the start of a monetary easing the time we start seeing it's effects is 6-18 months. We're 12 months into it, so another 6-12 months and we ought to start seeing the light at the end of the tunnel.

4) Just the threat of government intervention seems to be having a positive effect. The fire-sale liquidation of assets seems to have slowed substantially. That has the effect of keeping bank capital from evaporating. The replenishment of bank capital is the one last piece of the puzzle that needs to fall into place. Buffet just put $5 billion into Goldman. Overall, some $250 billion or so has been raised to recapitalize the banking system. As long as that process continues, and the three phenomenon above play out as expected, we should be fine.



GroupW -> RE: Financial Socialism (9/25/2008 11:15:34 AM)

quote:

ORIGINAL: InfoCentral

Financial Socialism

This is where the United States embraces Socialism as the answer. But where is the United States going to get the money. Its not like Russia which has a surplus to draw from. We are already 11 trillion dollars in debt. Well, we would have to barrow that money and raise the national debt more. The question is at what point does the dollar become junk and the whole economy folds?


I don't know the answer to that, but it would appear we're not very close to that level of debt yet. The US has had higher debt levels relative to its GDP in past years and we've muddled through. Obviously, it's not a good situation but it's a long way from being fatal.



GroupW -> RE: Financial Socialism (9/25/2008 11:19:31 AM)

For the record, reading the posts here it seems to me we're still caught up in the bubble/bust mentality of recent years. During the bubble, most folks acted as if nothing could ever go wrong and that there was no reason for prudence. Now, as the bubble has unwound, we've all gone the opposite direction and now seem to feel as if nothing can go right. The sky is falling and there's nothing I can do about it.

In reality, times past were never as good as we thought and the future will not be as bad as we fear. It's human nature to swing between these two extremes. It's good to keep that in mind and not let fickle emotion, greed, nor fear drive our financial, political, and personal decision-making.

Done with my soapbox now. Carry on.



InfoCentral -> RE: Financial Socialism (9/25/2008 11:47:11 AM)

Let us not forget that the dollar has been falling against world currency for a few years now...



GroupW -> RE: Financial Socialism (9/25/2008 12:01:41 PM)

True and a good point I forgot to throw in there.

Mostly it's an interest rate thing. The US has been a bit countercyclical on the interest rate front vs some of the major developed countries. As our rates have come down, others have raised theirs. (Or if we raised, others raised more. If we dropped, others dropped less.)

Interest rate differentials are the prime determinant of currency rates, so much of the decline in the dollar has been related to issues separate and apart from longer term economic & structural concerns. The lower our interest rates go, the less demand there is for US debt. The less demand for US dollar denominated debt, the less demand there is for dollars so the exchange rate falls.

Currently, a weak dollar isn't such a bad thing. Exports are one thing that's been keeping us out of recession lately. A weaker dollar makes exports more attractive to overseas buyers. Right at the moment, a strong dollar has a nice intuitive sound to it but could actually be counterproductive.



Ps103 -> RE: Financial Socialism (9/25/2008 12:22:24 PM)

quote:

Done with my soapbox now. Carry on.


No--stay up there, Brian. And when your soapbox wears out, I will give you mine.



GroupW -> RE: Financial Socialism (9/25/2008 12:24:27 PM)

Most folks will say that the last thing I need is encouragement. It's like feeding the bears at the national parks. Fun to do, but not very wise.[;)]



NoShow -> RE: Financial Socialism (9/25/2008 1:10:30 PM)

quote:

ORIGINAL: GroupW

Most folks will say that the last thing I need is encouragement. It's like feeding the bears at the national parks. Fun to do, but not very wise.[;)]


But you're "smarter than the average bear".



GroupW -> RE: Financial Socialism (9/25/2008 1:11:45 PM)

Thanks. Just keep an eye on your picnic basket!



Ps103 -> RE: Financial Socialism (9/25/2008 2:02:46 PM)

At least you didn't say "Hey, Boo-boo!"[sm=tonguehappy.gif]



GroupW -> RE: Financial Socialism (9/25/2008 2:12:07 PM)

For what it's worth, I posted some interesting numbers on where we stand in the crisis today over here



blessedinnyc -> Historically, only a 99% free-market economy (9/25/2008 2:29:23 PM)

quote:

ORIGINAL: GroupW
I don't know the answer to that, but it would appear we're not very close to that level of debt yet. The US has had higher debt levels relative to its GDP in past years and we've muddled through. Obviously, it's not a good situation but it's a long way from being fatal.

That's true. We have a lower debt level, ironically enough, than most western countries, including Japan (which has nearly three times as much debt, relative to GDP, as we do.) I still think that having a debt that is roughly 3 times our federal deficit is irresponsible, but it's important to view it in context.

quote:

This is where the United States embraces Socialism as the answer. But where is the United States going to get the money. Its not like Russia which has a surplus to draw from. We are already 11 trillion dollars in debt. Well, we would have to barrow that money and raise the national debt more. The question is at what point does the dollar become junk and the whole economy folds?


America is not a purely free-market country- it hasn't been so for at least 100 years. Such a country would be unsustainable (we started to discover this at the end of the 19th century and start passing anti-trust and worker safety laws). It is a managed free-market economy where the government tries to ensure that the system is as efficient as possible. 99% of the time, the government doesn't need to intervene, but 1% of the time- about every 20-30 years- it does. The federal government's intervention with the New Deal, the Penn Central default, and the Savings and Loan Crisis are perfect examples.

This bail-out isn't unprecedented. I am not sure if it is wise, but it certainly isn't unprecedented. We had a greater level of debt relative to GDP back in the late '80s when the Resolution Trust Corporation was formed, and we also had a lot more at stake back then.



kernsfamily -> RE: Historically, only a 99% free-market economy (9/25/2008 3:03:25 PM)

quote:

America is not a purely free-market country- it hasn't been so for at least 100 years. Such a country would be unsustainable (we started to discover this at the end of the 19th century and start passing anti-trust and worker safety laws). It is a managed free-market economy where the government tries to ensure that the system is as efficient as possible. 99% of the time, the government doesn't need to intervene, but 1% of the time- about every 20-30 years- it does. The federal government's intervention with the New Deal, the Penn Central default, and the Savings and Loan Crisis are perfect examples.


true...but, it's certainly the most "free market"/"Free Enterprise"/"Captialistic" country that there is.......which, is what makes our economic system as great as it is....(even in it's "down cycles" and "downturns")

it's not a "perfect" system...but, certainly "more perfect" than anything else out there.



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