What part of "this bailout won't work" don't you get?

The thought that, somehow, $700 billion is going to solve much, if anything, in terms of righting what's wrong within our economy is probably the biggest myth that's been perpetuated by the Bush Administration upon the American public since we were hoodwinked into thinking that venturing into Iraq in 2003 was, in some nebulous way, linked to defeating Al Qaeda.

From today's news; "U.S. Stocks Drop on Economic Data, Rising Bank Rates; GE Falls."


"...people shouldn't be under any illusions about what's going to happen [if we implement the bailout],'' Charles Bobrinskoy, who helps manage about $13 billion as vice chairman of Ariel Investments in Chicago, told Bloomberg Television.

I attempted to address some of these myths in a previous diary, entitled: Bailout myths: what we all need to know. Much of what is said in that diary is discussed and reiterated/confirmed, in even greater detail, in today's headlines, just over the past few hours. (See paragraphs below.)

The financial services industry can play make believe with the valuations of their assets 'til the cows come home, but the bottom line is nobody is going to be able to force a consumer to spend money when consumers see their primary investment--their home--being worth less than what they still owe the bank for it. See today's story: "Metro U.S. Home Prices Fall on Higher Foreclosures (Update2)"

When many regular folks like you and me stop spending money--for whatever reason from unemployment to a realization that they owe tens or hundreds of thousands of dollars more on their residence than it's worth--you then end up in what's known as a deflationary spiral. People stop buying "stuff." Retailers go bust. People making goods for retailers, as well as those servicing retailers, along with the retailer's employees, lose their jobs. Communities then lose large sources of tax revenues. This becomes even more exacerbated when the effort to borrow money (see next paragraph) becomes next to impossible, too, in yet another story from just the past few hours: "U.S. Stocks Drop on Economic Data, Rising Bank Rates; GE Falls."


U.S. stocks dropped for a second day as a jump in borrowing costs and reports showing a worsening economy spurred concern that the government's $700 billion bank bailout plan won't be enough to stimulate growth.

--SNIP--

"If banks aren't willing to lend money to a bank, are they going to be willing to lend to an average person? No, they're not,'' said Frank Ingarra, money manager at Hennessy Advisors Inc., which oversees $1.1 billion in Novato, California.

What's truly at the core of the world's financial services crisis--certainly in this particular instance--is the reality that lenders lose trust in other lenders. If a bank really doesn't know how worthless (how much of a markdown they're going to end up eating) their own portfolios are--i.e. mortgages, consumer loans, etc.--they sure as hell aren't going to trust what they see and hear about their competitors' portfolios. So, doubt and uncertainty rule the day, including today; and, credit dries up between banks: "Libor Soars, Commercial Paper Slumps as Credit Freeze Deepens."

Injecting a few logical words into Mr. Ingarra's quote, above, 'If banks aren't willing to lend money to a bank, are they going to be willing to lend money to corporations or to lend to an average person? No, they're not.' And, that's also happening in the markets now.

What part of the reality that banks don't even trust other banks right now--so they're sure as hell not going to trust consumers--don't our elected representatives and their constituents understand? This is self-evident in the record levels being set with LIBOR right now (today)? ("LIBOR" is the London Interbank Offered Rate, which is the interest rate at which banks loan other banks money.) Today, LIBOR is at its highest rate...EVER. (See link from today's news in previous paragraph.) It is the most basic indicator of the level at which one bank trusts another bank's ability to repay a loan. It's, perhaps, the single-most important indicator of how insiders view the state of the financial services sector, themselves.

If banks don't trust other banks, they aren't going to trust corporations or individual consumers, for that matter. So, why should WE, the taxpayers, trust them?

There's a very basic concept at play here--one which just about anybody can understand--which undermines the entire concept of the supposed intent behind a "bailout." That concept is this: If you give a bank money, do you really think they're going to give it back to you--at anything other than the most exorbitant of rates--rather than hold onto it to either cover other losses, or just (conservatively) otherwise (mis)use it to ride out the worst financial crisis in generations?

What part of our reality is it going to take for our nation's leaders and the public to understand that we've already poured more than $300 billion into the financial services industry this year, all to ease a liquidity crisis which just keeps getting worse and worse with every passing day? (Throughout most of 2008, banks have not been cooperative in easing the liquidity crunch, no matter how much cash they have.)

The bailout bill hasn't even come up for its second vote in the House (that's supposed to happen tomorrow), but all one has to do is click over to Bloomberg's website--or just about anywhere there's a collection of the day's national and international business news stories--and read a few articles from what's nothing less than one hell of an ominous list of news items, all of which more or less say the same thing: pissing away $700 billion is a waste of time. (Oh, and then there's that little reality that it is $700 billion of our money, of course! Truth is, when you add in the new government insurance fund/backstop for U.S. money market accounts, it's actually more than a trillion-dollar bailout.) Estimates of what it would actually take to address this matter start at around the five-trillion-dollar mark and escalate from there.

Why is it so difficult for many of us--let alone our elected officials--to understand this?

Look folks, I'm just one person. Perhaps a bit better-informed than many about this matter; but it's not like you can't go over to NYU Stern School of Business  Professor Nouriel Roubini's website or to The Automatic Earth and read all about this for yourself.

I'm nobody special when it comes to this topic; it's all there for everyone to see in black and white. This is all about a lack of trust--a lack of trust within, and with regard to, the financial services sector particularly in the United States--and its gross and reckless behavior after ravaging through eight years of unbridled (and/or grossly unregulated) greed.  It is this financial services sector which took advantage of basic human nature, fully enabled by its accomplice: a government which looked the other way while these folks pillaged our society, to optimize their revenues to levels of obscenity only matched by the world's oil industry in recent years.

So, what do we propose to do about it? Well, quick, before George Bush leaves office, let's give that same financial services sector everything else we have left, and then some, because when Barack Obama takes office on January 20th, this crap's no longer going to flush. He, simply, won't let them get away with it. We, simply, won't let them get away with it...then? That's the ticket!

There's one problem with this approach.

By then, it'll be too damn late. We're giving it all to them right now, aren't we? By, January 20th, if we go forward with the insanity as it's planned now, we'll have only two choices: print more money and risk turning our country into a 1930's style Weimar economy, or sink into even further despair because the resources we did have remaining were misallocated months and weeks earlier due to the sheer stupidity of walking off a cliff named "bailout," giving our last rationally available credit to the very criminals--that is what they are--that got us into this mess in the first place.

This isn't rocket science folks. It's black and white. And, at 11:59 on our clock of the economy, even the MSM is waking up and reporting about it now, too.

But, everything I'm reporting here--except for today's stories in the MSM--is not new information! It's been out there for at least a year. Some folks, like Nouriel Roubini, have been talking about this for many years.

Do you think a majority of our representatives in government will get a clue? They've got less than 24 hours to figure this out. And, if I've figured it out (and I'm really nobody special, except maybe to myself and my loved ones) maybe there's a chance they will, too.

Tags: 2008 economic bailout, Barack Obama, U.S. Treasury Secretary Henry Paulson (all tags)

Comments

25 Comments

Re: What part of

Bob-

I know you're a busy man, but I wonder if you could draft a form letter outlining your best arguments against the bailout plan and post it as a diary here, and at Daily Kos so people can send it to congressers ahead of the vote tomorrow.

Some other folks on the website may have tips on constructing effective form letters.

by the mollusk 2008-10-02 02:19PM | 0 recs
Government has been deliberately masking losses

in most of our real income with easy credit..

"policy-makers retreated from full employment as a goal, since it allows workers to demand higher wages, which in turn causes inflation.

Reducing worker bargaining power led to disinflation, lower interest rates led to rising asset prices, which in combination with financial innovation, created an until-recently reinforcing cycle whereby rising asset prices funded consumption."

by architek 2008-10-02 03:47PM | 0 recs
Connect the dots!

The bailout's effect will be nominal. Things are going to tank bigtime in coming months. It's a done deal. Why give the GOP any more opportunity to make it appear like this was the doing of a Democratic administration? Bring it on...'cause it's coming, $700 billion pissed away, or not.

by bobswern 2008-10-02 02:21PM | 0 recs
Wrong for government to give money to losers

"Treasury secretary Hank Paulson's plan uses money borrowed by the US government to buy value-impaired debt left over from the credit bubble. In a period of freely available credit, that might not matter. Good investments would get funded and, since additional money is available, some bad investments would, too. Diverting some money into unproductive uses should affect mainly those bad investments, with only modestly negative economic effects.

When money is tight, however, as it is likely to be for some time, withdrawing $700bn from the funding pool to support failed, past investments has a more serious effect on the economy, because capital flows are restricted by market illiquidity and investor trepidation. If that reduces asset prices, it exposes more loans to losses. If it prevents good investments by crowding them out of any chance of getting funding, it reduces economic activity. Either way, it makes the economy less efficient.

Herbert Hoover's Reconstruction Finance Corporation of 1931-32, which made loans to politically connected companies, didn't do much to alleviate the Great Depression. An equivalent amount of welfare handed out through the "Veterans' Bonus", which Hoover opposed, might have boosted consumption and stabilised the economy more quickly.

Japan's 1990s infrastructure spending spree also diverted capital from more productive uses, helping to cause consumption to stagnate and the downturn to extend for 13 years. Paulson's plan differs from both these examples in some ways, but is similar in that it may divert capital from its most productive uses. The danger is that the rescue plan could have similar consequences."

-Martin Hutchinson

by architek 2008-10-02 03:50PM | 0 recs
Trillion Dollar Bailout?

Let's See.  We already have a structural deficit.  We never pay off our debt.  That's 30 billion a year in interest give or take, and over the remaining life of a typical reader (40 years?) that might be 1.2 or 1.3 trillion dollars in interest on the principal.  Then to bribe the Republicans to vote for this turkey, someone stuck in a hundred billion a year in tax cuts, which over the same years is another four trillion.

Add it up.

Henry Paulson--The Six Trillion Dollar Doofus.

By the way, since we have that structural deficit, all this extra interest adds to the Federal debt, and we have to borrow that, too.  For the trillion dollar bill to pay for this

http://lastfreevoice.wordpress.com/2008/ 10/01/help-stop-the-trillion-dollar-ripo ff/

Page to the bottom for the famous New York landmark used as the building on the bill.

Caution: you may not like the rest of the politics.

by phillies 2008-10-02 02:25PM | 0 recs
Hoover wasn't a democrat.

Let me get this right...

Basically you argue that Hoover had it right and Roosevelt didn't know what he was doing?  Let the market figure it out...

No?

As hard as this is to face the Bush financial team is actually fighting in the correct direction on this one.

Granted they made this mess.  Granted there were many opportunities to fix it with FAR less pain.

But don't be stupid.

by dtaylor2 2008-10-02 04:36PM | 0 recs
FDR didn't hand money to the banks,

hoping against economic rationality they would of their own 'laissez faire' free will immediately turn that around and lend it to businesses and individuals in the teeth of a deep recession.

The point is this giveaway doesn't fix anything. Deal with what the diarist writes.

by fairleft 2008-10-02 05:04PM | 0 recs
Bailout will hurt business acess to credit

The government will be COMPETING with business for available credit.

They should not bail out the LOSERS on the mortgage loans after they have already lost..

Its good money after bad..

by architek 2008-10-02 05:20PM | 0 recs
Re: FDR didn't hand money to the banks,

Basically Government can say we will catch you no matter what to a select group of banks.

This removes risk and sweetens the risk/reward.

Its unfair in the individual sense that they were irresponsible so they should fail and take me with them.  But its smart in the if the banks don't fail we may avoid total collapse.

If the government were able to say we will support the bad mortgage debt by virtue of buying it all up and by the way we control via the fed how much the US dollar is worth so we are pretty sure we will be getting a decent deal it would end this mess.

Maybe it costs 3 trillion dollars.

Avoiding the next great depression is worth 3 trillion dollars.

And if we make 3 trillion dollars magically appear the cost of repaying 3 trillion dollars in terms of work and goods sold will be less than what you currently think 3 trillion dollars is.  And if inflation weakens the value of the dollar enough the assets will actually end up worth the paper value paid.

The magical thinking is that we get out of this with a strong dollar, while screwing the credit industry to be "fair" and avoiding a great depression like event.

America just isn't producing exports consistent with that version of reality.

by dtaylor2 2008-10-02 05:53PM | 0 recs
Bush's declaration of nonresponsibility

http://www.glcq.com/docs/(74-11-08)islrs_resignation_form.pdf

by architek 2008-10-02 06:35PM | 0 recs
Re: FDR didn't hand money to the banks,

How are you, a depositor, being 'taken with them' when you're fully insured by FDIC? Unless you invested in financial sector stock, that is.

by fairleft 2008-10-03 07:56AM | 0 recs
This Is an Emergency

I have been spending 90% of my time over on the economics blogs. 90% of the really super-sharp economics analysts are claiming that the bank bailout will likely trigger, rather than restrain, a sudden economic depression. Passage of the bank bailout bill could trigger depression nearly as quickly as an Iran attack. This is a crisis that truly transcends politics. Elaine Meinel Supkis, perhaps the the most astute economics history analyst has said: And the bill: yes, it is a classic, ridiculous Xmas tree. And will bankrupt us. Scores of other top tier analysts have said essentially the same. Bush and Paulson are not receiving input from these top-tier analysts; they are depending on information from sources backed by people who have extensive self-interests.

As I understand the situation, the Senate version of the bill will be taken up by the House tomorrow morning, Friday, October 3, 2008. The stakes could not be higher. So please call and e-mail your House Representatives and demand that they say NO to this bank bailout! You do not want to know about how it will be to stand in a soup line.

Call tonight and early tomorrow morning, please! You can find their phone numbers and e-mail addresses here:

CONTACTING THE CONGRESS

by blues 2008-10-02 08:01PM | 0 recs
He's right...

The government should not step in to rescue these gamblers. They gambled and lost, and that was clear months ago.

Let sleeping dogs lie.

Trickle down economics doesn't work. They are trying to destroy Obama's chances of doing anythng constructive by burdening all of us with a huge amount of debt.

by architek 2008-10-03 08:46AM | 0 recs
You are so dangerously wrong on this topic.

You are right that the basic issue comes down to mistrust.  Where you go wrong is the cause of that mistrust.  It isn't because consumers aren't spending, that's a result of a credit crisis combined with higher unemployment, a weak dollar, and the failure of pay to keep up with inflation.

The banks mistrust each other for one reason alone, the fear that whomever they lend money to may be so leveraged with bad paper they may not get back their money.

Addressing that issue means buying up the bad paper.  Yes, it's bad. . . now.  Assuming that the majority of those underlying assets will be paid for in full will bring value back to that paper.  I'm not saying the government would make a profit on this deal.  I highly doubt that.  But 10 years from now, I think most of that 700 Billion would be made back.

by shalca 2008-10-02 08:10PM | 0 recs
No, you are so dangerously wrong on this topic.

Banks're are reasonable to mistrust each other. The solution is not to bail out at best 5% of the immense leveraged credit catastrophe. Better to stimulate the rest of the economy while watching in fact bankrupt institutions actually go bankrupt. The shareholders lose immensely (90% of us shouldn't have a problem with that), and clean banks emerge that can recycle indirect govt subsidies with strings attached forcing them to invest in the U.S. economy.

by fairleft 2008-10-03 08:00AM | 0 recs
You're skipping a lot of logical steps there,

Especially the part in between the banks failing and clean banks emerging called the second great depression.

It's like people here are completely ignorant on both economics (which can be forgiven) and history (which can't).

by shalca 2008-10-03 02:09PM | 0 recs
I think you should re-read my words.

Consumer spending, or lack thereof, has nothing to do with mistrust. It has to do with the typical consumer's financial reality. So, we more or less agree on that.

We agree on banks' fears regarding unknown leveraging in the marketplace, too.

The concept of the goverment making a profit on this deal is where we do disagree.

When somewhere in the neighborhood of 1/3 of all the money spent is earmarked for institutions headquartered outside of the country, that's a major reality that undermines the entire, bogus concept that there's going to be a profit realized from this debacle. Apparently, we agree on this, too.

So, where exactly am I "dangerously wrong" on this matter, given your comments?

by bobswern 2008-10-03 01:20AM | 0 recs
I think its guaranteed to be a big loss

Unless they buy the toxic debt slices at their real value which us a fraction of what the US government appears willing to buy them at. The $700B will get used up very quickly at full price, using up equity that will be increasingly tight for other things, like commercial credit. The bailout will make the economy worse by sinking good money into politically well connected losers and known bad investments instead of allowing it to fund projects and people that actually make money. The government will thereby be competing with commercial debtors for money, for entirely the wrong purpose.

by architek 2008-10-03 03:33AM | 0 recs
Send Lawyers, guns and money...

This is gonna be a bitch to get over - you're going to hear of people freezing to death in their own homes this winter because they can't pay for heating oil or get it on credit.

by mydailydrunk 2008-10-03 02:08AM | 0 recs
People need to move in together..

We can't live at the level we are living at with our lowered real income. People need to move back in with parents, grandparents. Take a hint from the immigrants and pool resources.

I hope not, but I could see people starting to break apart and burn the vacant McMansions as fuel.

That could get ugly.

by architek 2008-10-03 03:37AM | 0 recs
Re: Send Lawyers, guns and money...

And we're absolutely certain that by buying bad mortgages, the banks will extend credit to (presumbably marginal) borrowers so they can by home heating oil?

by the mollusk 2008-10-03 07:24AM | 0 recs
LMAO!

by fairleft 2008-10-03 08:02AM | 0 recs
Re: this bailout won't work

Obama voted for the bailout so did Biden of course with the promise it would be investigated once they gain the White House.  It's one thing in Obama's long list of "let's look into it once I'm elected".  That list includes did Bush and Cheney commit criminal acts, the FISA Bill, were the American People lied to about Iraq, is Rove guilty of anything and now the Rescue Plan.  Obama's Attorney General will be one busy individual!  Yeah and the check's in the mail!

Let's get real the plan will pass today and if it doesn't the Wall Street Gang will crash the markets!  Who will be hurt the rich CEO's or the workers whose retirement and college fund accounts will be wiped out?  This is a case of if you're going to f*ckup make it so big they have to bail you out.  Remember when Trump almost went down?  He owed the banks so much money they would have gone down with him so they put him on a budget and bailed him out.  It was the same problem for Trump real estate values in Manhattan dropped.  Same thing here only it's on a national level real estate values plunged and plenty of financial institutions are getting sqeezed.

Make no mistake about it they are pefectly willing to put you and your family on the street in the middle of winter if that's what it takes to make you understand it's for the good of the country.

By the way I'm voting for Obama but expecting nothing will change!

by orionwest 2008-10-03 07:33AM | 0 recs
Re: this bailout won't work

They're not going to be bailed out. This may boost financial stock briefly and smart and insiders will know to bail during that very short period of time. The $700 billion doesn't approach 5% of the overall leveraged debt crisis. It's a problem that can't be solved except through bankruptcy. Bankruptcy needs to come soon so we can have banks cleansed of huge unknown debt and use every dollar coming in to push out the door as investment in the real economy.

by fairleft 2008-10-03 08:05AM | 0 recs
Re: this bailout won't work

I'll probably vote for Obama too, what choice do I have? I think he's slightly more likely to deal with a depression or deep recession better than McCain, but it's not based on much. The most likely scenario is deep cutbacks in social programs by either guy once they get into office with an approach $2 trillion deficit.

by fairleft 2008-10-03 08:08AM | 0 recs

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