The point of buying the assets is to make all banks GOOD banks, even with a loan we still have default risk and bad banks which people will be afraid to trade with. By buying the assets the Fed is creating a price that everyone can settle on, right now no one wants to take anybody's word on what the true price of the mortgages is. By the way the Fed has already given a $690Bn loan to banks. -Neo
Neo Dude, thanks for the reply. One more question: Does the government have negeotiating power to get good prices on those assets by threatening to shut down the banks?
Unfortunately that one of the unknown variables in the equation. There are many who think that the fed will get ripped off by the banks, but considering how low the prices on mortgage back securities already are at this point maybe there isn't much that the banks can do cheat uncle Sam. I think Paulson's plan focuses on the idea that banks are so desperate to get rid of their bad assets that when the reverse auctions take place banks will still sell to the fed at a discount in order to get this mess behind them and continue with business as usual. -Neo
Sounds like the businesses have an addiction to credit and the banks are the dealers (with the Fed being the main production facility). So when hard times hit the dealer, he asks for a bailout from the addicts, so that he can get them more credit that they need.
Stop being so gullible. Paulson is rotten head to toe, it takes a special kind of scumbag to do what he has done and what he does. He does not even have the social etiquette to properly present his "stick-up" plan. The basic agenda of this bailout is so obvious that even the average Joe can see right through it. The deeper agenda is what you won't see till you read the plan and take note of the powers being bestowed upon the entity being created. Once the "revised"plan passes ( I hope it won't), USA will technically become a fascist state. A corporate fascist state, to be exact.
I do find it interesting that the idea of cutting government in other areas to help finance this rescue has never even been mentioned. It's like the idea is so preposterous that that no one has even considered it.
Neodude, thanks for your posts in this thread. I just wanted to ask your thoughts on something. My wife really hasn't followed much of this at all. She heard someone give a rundown of the problem. Her synopsis was this: Banks made a bunch of crappy loans, didn't get paid back and now we are in this mess where they don't have the capital to make any more crappy loans. We need this bailout so they can start making crappy loans again. Does this sound right? Of course, not all loans are crappy. But I would suggest that given the fact we are headed into a recession regardless, there is a good chance that a greater number of newly made loans will turn to crap. As an example, CNBC was showing some "effect on Main street" thing today. They had a segment about a lady who started a store selling high priced homemade organic olive oil, or something like that. She wanted a 250,000 dollar loan to expand and open a new store and the bank turned her down. This was of course portrayed as a tragedy. My thinking was she should never get a loan right now for an expansion. We are headed for (or in) a recession. The first thing that people cut back on will be stuff like overpriced homemade organic olive oil. No way she should be expanding - she should be figuring out how her business will survive the recession. I honestly hoped they would name the bank that turned her down, because I wanted to move my money there. Anyway, we have more or less been told that giving cheap and easy credit to people that probably shouldn't be getting it is the lifeblood of the economy. How can that be the backbone of a healthy economy? All this bailout seems to do to give us time (months? years?) until we get right back to where we are now, except next time it will be 1.5 trillion or whatever.
Everyone who supports the bailout uses the same uninformed argument that is 1929 and if we do nothing just like in 1929 we will have a bank run and a great depression. Except. 1) There was a lot done in 1929 including the following - Liquidity injections, Friedman was wrong credit contraction was beyond the governments ability to stop it because it was market reaction. - government programs, plenty of those none of them worked. How it is not even close to 1929 - FDIC insurance - FIAT Money that can be inflated a much quicker rate, (unfortunately for that) - Sophiscated banking system - While Glass-Stegal was repealed many smaller and regional banks are still isolated. - faster movement of information There is a slow down in lending There is most likely going to be a contraction We will probably have a recession But things will only get worse if you continue to have government intervention distort the normal market mechanisms add the compounding effect of increasing the national debt and burden on American Industry and Individuals for this massive wealth redistribution and you will truly get your depression We are going to continue to prop up a dead industry and a mechanism the market is desperately trying to move away from. Additionally by centralizing market power in the government the incentives shift from producing goods the markets demand to manipulating technocrats. 1929 much distortion, Japan 1990 very much distortion Its amazing how people use panic and fear mongering to justify this horrible horrible plan. Banks are businesses they may regroup and credit may slow but it does them no good to pile cash to the rafters.
jordanf, your wife is partially right. There is a possibility that some banks will make the same mistakes again. However, there should be a respite from bad behavior for at least a few years. Banking has always been a cyclical business and today's events will repeat themselves in the future, it is the nature of capitalism. Today's Tsunami will result in the following, which should keep bad behavior in check for a while. 1. Increased regulation. 2. Increased interest rates, even if we get a rate cut, there will be a long term increase in interest rates. 3. The failure of banks will result in less lending competition which will result in more prudent lending practices. I don't want to give anyone the idea that the Fed's market manipulation is a good thing, but it is probably the lesser of two evils. Paulson and Bernanke know very well that this cash injection will not start a new bull market, instead they are hoping that it will prevent a sudden crash, which can cause social unrest. Of course many will argue that we need a crash, unfortunately when such an event happens prices tend to overshoot their equilibrium point punishing everyone, not just the bankers. As a side note, I think we are not spreading the blame evenly. Everyone likes to point the finger at bankers, but we should remember that there weren't any bankers going around forcing people to take out mortgages they couldn't afford. Everyone thinks that the American dream is their right, yet not too many people are willing to work for it. Ultimately it is us, the consumer who is responsible, the bankers just sold us the rope that is tightening around our necks. In conclusion, yes, this will happen again in the future, but it is something you have to get used to if you want capitalism. Everything comes with a price, if you are prepared and smart enough you can find opportunities in these events. -Neo
Precisely, problem is research has shown that people are spiteful, study gave people money and said share it, but if your counter party is unhappy you both get nothing. So if I get $100 and give you 1c rationally you are better off, right, what do you do reject the deal, result I don't get the 99.99 and you miss out on the 1c. The problem with the bailout is that main street does not understand that they stand to lose a lot of cash if it does not pass, the concept is too abstract.