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 ...
13 years to recover? No thanks.
The problem with the House Republican's insurance alternative is that it would do next to nothing to fix the current situation. While it could be a possibility to prevent later situations, that does not help what is going on currently.
As I said, the current plan offered is not perfect, but it at least affords us an opportunity to stabilize the financial markets, which is something that needs to happen soon.
Bush says the credit market will dry up and you won’t be able to get a loan.....every week it seems I get 2 or 3 offers from credit card co.s or banks with blank checks to write my own loans at 5% interest....and the banks are only paying LESS than 2% in savings and if you can find a MM acount paying 3% you are doing good....doesn’t sound like a tight market to me ?
“If 80% of Americans do not want this bailout, then why is Obama pulling ahead in the polls?”
Bigger question is this: Why is Congress rushing to put this bill through?
Time to call some folks home.
Something tells me that either you’re a shill or you’ve bought into this fasle sense of urgency. Pray tell, what is the current situation?
“80% of Americans do not want this bailout.”
And rightfully so. Although, there were some anxious posters on this very site who, just a few days ago, were urging for the immediate passage of the first bill presented, lest the bottom fall out by Friday (yesterday).
No, the economy did not grow at 2.8%. Take away the $150 Billion “taxpayer bailout” called the “Stimulus package” and GDP growth was anemic.
The unprecedented amount of spending should give you a clue to the scale of the economic downturn we are talking about. Do you really think they would spend trillions to avert a normal recession? The answer is no. In normal times, the 2% Fed funds rate would be sufficient to stimulate the ecnomy.
We are not talking a run of the mill recession. We are talking about a depression. Nobody in power is willing to use that word, because they don’t want to hurt market confidence any more than hit has been. Instead of depression, they are saying a “long deep recession”. The trillions being bandied about should be all the clue you need that is true.
most people like to wait until the problem is in front of them before looking for a solution. that’s what makes for interesting history.
Currently we have a situation where the financial market is dropping sharply, due in large part to bad loans. The recent bank failures have highlighted this. There is a very real possibility that credit could shrink. While yes, this is only possible, it is something to be concerned about. Our economy is already weak and while not actually in a recession it is close.
Another aspect to consider with the current financial situation is that the market is in large part psychologically driven. Uncertainty in the markets is pushing it down even further. If the stock market continues to decline as it has, it is possible that the economy could be pushed further down.
As we speak the Democrats are loading the "rescue bill" with so much pork it should be embarrassing to all citizens.
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.