Skip to comments.Economists say bailout plan is flawed and isn't needed
Posted on 09/27/2008 4:03:55 PM PDT by Tempest
"It's more hype than real risk," said James K. Galbraith, a University of Texas economist and son of the late economic historian John Kenneth Galbraith. "A nasty recession is possible, but the bailout will not cure that. So it's mainly relevant to the financial industry."
Another doubter of the Great Depression theme is Kenneth Rogoff, a Harvard University economics professor, who thinks the intervention may prevent or delay the necessary failure of weak financial institutions.
"It is time to take stock of the crisis and recognize that the financial industry is undergoing fundamental shifts, and is not simply the victim of speculative panic against housing loans," he wrote in a syndicated column. "Certainly better regulation is part of the answer over the longer run, but it is no panacea. Today's financial firm equity and bond holders must bear the main cost, or there is little hope they will behave more responsibly in the future."
(Excerpt) Read more at miamiherald.com ...
Do you mean this?
Alright, from your response I don’t see the reason for rushing in without further allowing the market to correct itself.
The problem with waiting for the market to correct itself, as I've stated, is that one it may not correct itself to where it was prior to the financial crash, and two if it does correct itself it could take a long time for it to do so.
The market was as over valued as home prices were prior to the crash. If you expect it to correct itself to that point in short order you’re kidding yourself.
Not at all. Simply the idea that the market could stabilize itself back to an equilibrium. One, that may not happen as a sharp downturn could change certain market dynamics making an undesirable condition the new equilibrium. And two any such correction could take several months or years.
The overvalued home prices were an example of the market being seriously out of equilibrium.
there you see, not the end of the world. see the video from my tagline.
1: “You dont restore trust by allowing the same corrupt entities to exist. 2: I also take contention with your statement that we sold them the toxic paper.”
I wouldn’t put it that (1) way. It is not the entities themselves, it is the sales methods that were employed. Right now, today, Lehman essentially no longer exists. You cannot open a brokerage acount with them. If “Goldman Sachs” or “JP Morgan” were to suddenly enter that same state and a new bank “J. Smith Bancorp” or “F. J. Zappabank” suddenly opened their doors, somehow I don’t think the trust thing would suddenly dissipate. These banks, I agree, need to eat their own losses, but might as well stay as named. What irks those potential investors or re-investors is the way they were duped into buying so-called “AAA” paper that was actually crud...even in good times, it was crud. As we do on this forum, we can discuss ad infinitum whose fault it was and try to parse blame among 1: weak appraisers 2: lying borrowers 3: banks who knew well what they were doing but thought they could escape culpability by tranching their toxics into unrecognizable vapors, spread out to the four corners of the world. 4: Ratings agencies who, in a macro version of the corrupt appraiser who needs to “make the number” so he’ll get the call for the appraisal, “made the numbers” on mortgage debt that was shockingly weak in collateral and serviceability depth.
I say, that is not the point. The point is, if you stand outside the US (or if you are a manager for a Harvard endowment or a CALPERs) and see this piece of paper you bought that was supposed to be infinitesimally riskier than Tsy bills, which you bought for the extra 1/3% yield, now utterly illiquid and trading at 22 cents, you are not a parser. You got bludgeoned. You got snookered. This was supposed to be a “no brainer” deal because Moody’s and S&P had rated the bonds “AAA” and that was all the due dilly you ever had to do. Up to now. Now you have more money to put to use, to lend, by buying yielding debt. You gonna buy more?
And now....over and above those bruises, we have Paulson coming and and just “canceling” FNM & FRE preferred debt. And, even banning shorting which is a common means to hedge ownership of preferred. [OK, OK, non-naked shorting is not “banned” but the fact of the matter is you CAN be forced to buy-in at any time, so it is not a desirable thing to buy as one side of a hedge because you can be dumped out of it at any moment] My point here is that plenty of financial rules are being changed mid-game, and that, too is a contributor to the atmosphere of distrust. That is the common theme, it’s not whether one piece maybe works better today or used to be like this or is suspected to change to that, it is that this stuff is changing, in all cases, on Sunday nights, without notice, by fiat. You, the fund manager, get judged on your results. Just think, you could have beaten your present results by having NEVER made a decision to invest in anything, to be sitting in cash or Tsys or Ginnie Mae bonds. Instead you’re down 78% = ELEVEN (or so) YEARS of interest for being a wiseguy. This isn’t a matter of “enjoying a challenge”; if the US financial system is going to change the rules on you mid-game and you have a FIDUCIARY DUTY to invest funds prudently, conservatively, you flat out cannot play.
By “we”, I’m just trying to emphasize the view of a potential foreign investor. No, I didn’t sell any of this stuff either, so I’m entirely with you as to feeling like my taxes being raised to pay for these crimes is grossly unfair.
So at least we seem to agree that there was a lack of due diligence on the part of the investor. I'm sorry but when your putting forth million of dollars into an investment and all your going to do is look at what some easily influenced trade report is telling you. You shouldn't be surprised if you get burned.
Investments do not guarantee a rate of return. If I lost a million dollars at a casino I wouldn't go to the government expecting my money back. Regardless these investors are not much different than habitual gamblers, they just want to make the next buck and getting burned once will make them more cautious yes. But the vast majority of them will be back at the tables feeding there addiction soon enough. After all it sure beats a real job...
Although i do agree there is no lack of liquidity there’s a lack of faith, which really isn’t really faith either it’s more confusion as to where the herd will go next to make a quick buck.
“Dang it! you anti-bailout people are making TOO MUCH SENSE! Still rethinking my position...”
It’s a terrible idea, (bailout v 1.0) just awful. You know and I know, that the final bill will be minimally 3 times this $700 bil figure. That’s providing it doesn’t turn into the world’s longest pig feeding trough, which it already looks to become. Tranche #1 will only serve to justify traches #2, 3, and 4, because “we can’t stop now”. Feh. Once these spigots have been opened there will be no possibility of turning them off, but there is really no way to gauge whether this will work or not. WaMu alone took $233 billion out of FDIC, that’s 1/3rd of $700 bil in a frickin day. The sum total of other bad loans out there are probably at least twice this number, spread out over a hundred or more cruddy little banks. BUT YOU SEE, it is going to be a race to get a spot at the piggy trough, and you better know it will be the Wall St bankers who are going to have the inside track. So in essence, the guiltiest parties will have the first dibs on the glory pile.
And it’s a terrible idea because it is in the end a ratification of the financial shenanigans that produced the condition that led to the need for the bailout!! It doesn’t mean the next piece of paper you buy from GS rated by Moody’s as “AAA” will be materially different from dog turds. No. Those guys are still in biz and pumping paper and rating debt like nothing happened. Oh sure, maybe you, the debtholder, get your money back, thanks to the gullibility of the US taxpayer, but is this a road you’re eager to traipse down again? You’re OK being lied to, even conspired against (the sum of the bad paper PLUS knowing the ratings agys were either complicit or asleep) as long as SOMEBODY saves your butt? I don’t see it.
One time, in a former career as an engineer, I spec’ed two pieces of electronic measuring gear that went into a rack of other gear. Those pieces of gear were built using power transformers that were from a bad batch (and they weren’t built by the product mfr-—they were bought as parts) which later caught fire and burned up or threw gunky smoke on everything in the rack and the room the gear was in. The test gear manufacturer rapidly replaced ALL the gear in the rack, the rack itself, paid to clean up my client’s room, even compensated him some for lost studio time, and apologized profusely. The mfr paid $30K for his $3K wholesale worth of gear. Did I EVER EVER spec in that gear again? What do you think?
The issue, I say again, is trust. Transparency. Integrity. That includes culpability for having violated existing rules. The way to do that is to show that the purveyors were punished, to show that new regs and safeguards are in place, and to have those purveyors, if they are still in business, take serious hits to their balance sheets, and to ask nicely from that much less arrogant position for new business. Otherwise, you can expect capital flight from our markets, and my FRiend, that will not be pretty. THAT will be collapse. Stocks dropping 10-15-20% isn’t spit compared to they type of scenario we could see if there is global capital flight.
The bailout does not address trust. It sabotages trust. It ratifies the buddy-buddy network that got us here. It is furthermore a violent change of rules mid-game. IMO, it has every possibility of making things significantly worse.
“AAA”, “AA”, or “A” paper is all considered investment grade. If “AA” paper is subject to 78% losses or even worse, what should be expected from “BB” paper? 98.3% losses?
How are the Credit Default Swaps/receipts impacted by a Republican House Insurance plan? This is all very confusing, but my thinking is that the government should not sign on to be responsible for any of those derivative instruments—especially since they don’t seem to have any real assets backing them. Bad investment idea, so banks, hedge funds, etc. that had em lose!!
Sorry, that’s why it’s called an investment right? Don’t worry the gamblers will be back at the tables soon. They’re just holding out hoping that the house is going to start passing out some comps.
Its frustrating. We’re in a raft on the river shouting, “there is a waterfall coming 5 miles ahead!”
No response from the masses...
“There is a waterfall coming 4 miles ahead!”
Same thing, 3 miles, then 2 miles, then one mile.
When the entire raft full of people hears the mighty roar of cascading water, then all scream, “oh crap! a waterfall is just ahead! Where is the Coast Guard to save us?”
Meanwhile, I’ve put on my life preserver and jumped paddling hard to shore, but I’m still tethered to the raft. The idiots who haven’t paid any heed to the warning when it was first raised are pulling me over with them.
You need to seriously educate yourself on this crisis. This is the worst financial crisis the USA has experienced since the Great Depression.
Please don’t let that reference lose you. My point is, the crisis is extremely serious and urgent. If people lose confidence in the market, activity stops and there is no jump starting it.
Major institutions have lost confidence in the markets and are hoarding cash rather than lending it out. Money to the economy is like blood in the body. When the heart stops pumping blood, the body dies. When the markets stop pumping money, the economy dies. As it is much easier to keep a man alive than to restart his heart with a defibrilator, it is much easier to keep the economy alive than restart the process of getting people to lend, borrow, buy and invest.
When people lose confidence in the market, they cause bank runs, drain money from the banks, causing bankruptcies.
The logjam in lending is occuring among the huge lending institutions, so you are not yet seeing it in your daily life. If that happens, if you see stark evidence of this in your daily life, it is because the markets are already dead and the money stoppage is trickling down. By that time it is too late to do anything, so you really don’t want to see 1st hand evidence of this in your life.
Credit is very hard to come by. Here are 3 articles describing how hard it has become for companies and people with good credit to get loans:
You may scoff at the urgency to get institutions to lend again, but it is a very real problem. In the meantime, businesses that need operating capital to pay creditors and can’t get that capital are having to declare bankruptcy.
This urgency goes way beyond your ability to get a new credit card.
This crisis is for real. Please read more about it.
If a company as bad as McClatchy could get refinanced how severe could this credit crisis really be?
I think I’ll re-read your post 5 or 6 times. Things are starting to sink in.
The flip answer is just look at history. A lot of rafts and and a lot of waterfalls. But as churchill said, Americans always do the right thing — after they’ve exhausted all other possibilities. (that’s a paraphrase)
On the positive side, the system is working. a lot of hoopla and then a brawl to reach a solution. It’s the American way.
The actual quote:
You can always count on Americans to do the right thing - after they’ve tried everything else.
It seems like the House GOP is among the 70% majority. The problem is that the other guys get lots of campaign contributions from the folks who have been ripping us off, and now want to be bailed out of their malfeasance.
I’m going to reserve judgment whether the system is working until after I see we did not fall into a depression. I like to see managed systems that mitigate severe widespread risk.
In other words, that we have great prenatal care and such a low rate of child mortality, I would say, “the system if working.” If we did nothing and let the weak children would die, someone could make the claim “the strong survive to procreate while the weak die. See, the system is working”. I would call that system “not working” since there is so much we can do to insure the survival of most young children.
Maybe I misunderstand you when you say “the system is working”. I really like the way debt is just being rapidly destroyed. Japan refused to do that and spent 20 years trying to grow their economy. If we fall into a depression then I would not label that “the system is working”, but that “the system already failed years ago by allowing massive credit bubbles, and now we are just paying the logical prices of those long ago failures.”
Here is a “one pager” that’s designed to be more cogent than my blatherings.
And here’s Karl’s video for today about this:
I am not sure if this is behind a “membership” barrier, I’d suspect not since it’s meant for dissemination.
~~10 min video:
I’m not a cultmember, but Karl Denninger states it much more cogently than I can. He’s got more videos at www.fedupusa.com
Not trying to overload you, but http://www.financialsense.com/ the interview with Doug 09/27 Noland is just superb.
The only people promoting bank runs are the idiots promoting a state of fear.
You idiots do realize that it was easy credit that caused this mess don’t you?