With this public funding of 700 billion dollars towards the bailout, will all the Wall St. executives be forced to take a massive pay cut without any bonuses at christmas for putting this nation and world in this crisis ?

wibbit wrote:
Quote:

brewster wrote:

The problem is, the other side is saying the analogy is more like repairing a dam, if it goes it takes out every town below, so you gotta try to repair it even if structurally you're better off letting it fail and starting from scratch. But nobody knows how high the water behind the dam actually is, or how structurally unsound the dam is, so a informed choice is impossible.

that's a very good summary. ianmac47 is the guy who lives in the town a few miles away from the dam, he thinks he wont be affected by the flood, while in reality if the dam broke and the rest of the towns around it are flooded, he would be much worse off as well.

wibbit wrote: that's a very good summary. ianmac47 is the guy who lives in the town a few miles away from the dam, he thinks he wont be affected by the flood, while in reality if the dam broke and the rest of the towns around it are flooded, he would be much worse off as well.

brewster wrote:

The problem is, the other side is saying the analogy is more like repairing a dam, if it goes it takes out every town below, so you gotta try to repair it even if structurally you're better off letting it fail and starting from scratch. But nobody knows how high the water behind the dam actually is, or how structurally unsound the dam is, so a informed choice is impossible.

ianmac47 wrote:
Defending the bail out presupposes several things.

1. The collapse of the financial industry is necessarily a bad thing.
2. A preemptive bail out is the only or best solution.

I think neither of these points is true, and in fact, may ultimately damage the American economy in the long term.

The problem is, the other side is saying the analogy is more like repairing a dam, if it goes it takes out every town below, so you gotta try to repair it even if structurally you're better off letting it fail and starting from scratch. But nobody knows how high the water behind the dam actually is, or how structurally unsound the dam is, so a informed choice is impossible.

PAUL KRUGMAN wrote:

And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to ? a share in ownership, so that all the gains if the rescue plan works don?t go to the people who made the mess in the first place.

That?s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It?s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a ?clean? plan. ?Clean,? in this context, means a taxpayer-financed bailout with no strings attached ? no quid pro quo on the part of those being bailed out. Why is that a good thing?

I?m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad.

ianmac47 wrote:
Quote:

AlexC wrote:
Maybe they should let the whole thing happen in a quick car crash, (instead of a log-drawn-out slow motion blowup) then figure out where the money ought to be spent.

This is exactly what I'm arguing for. Another analogy is that of ripping off a bandaid in one painful tug rather than slowly peeling it back.

AlexC wrote:
Maybe they should let the whole thing happen in a quick car crash, (instead of a log-drawn-out slow motion blowup) then figure out where the money ought to be spent.

It probably won't work and we'll be no better off a year from, and the federal government will be out $700 billion. Yay.

wibbit wrote:
Like speaking to a brick wall, it is a BAD thing as others have explained - that's a fact.

Maybe not the best solution, but do you have a better one?

I hope this plan will work, because if it doesnt and the market continues to fall, i am really not sure what else anyone can do at that point.

ianmac47 wrote:
1. The collapse of the financial industry is necessarily a bad thing.

2. A preemptive bail out is the only or best solution.

ianmac47 wrote:

And Washington Mutual and maybe even Wachovia would have collapsed too. But so what? Small depositors are insured by the FDIC, which was not the case until 1933.

Second, once the financial institutions collapsed, the federal government could have acted to infuse money into the economy without giving a dole to big corporations.

Instead of giving $700 billion to the people who created this mess through bad investments, the federal government should send the money directly into the economy by building things like bridges, mass transit, schools, hospitals and infrastructure. At least then the taxpayers actually get something for their investment.

The bail out is paying for the mistakes of the American aristocracy while straddling the proletariat with their debt. Now the federal government is saying, "if you make risky investments, make sure you do it so wildly recklessly the entire economy will collapse, because then you will get free money." Where is the incentive to make smart investments if the federal government will hand over tax dollars every time you make bad decisions?

mfadam wrote:
Wibbit - I thiink the problem is valuing the assets. Wall St banks aren't playing nice with each other because they really don't know what value to put on the assets. Furthermore the structures are quite complex making pricing very subjective. If I were to bet on who comes out a winner in a trading competition between wall st sharpies versus the govt - my money is on the wall st sharpies every time.

I think the govt will get soaked on the deal. No different than RTC back in the early 90s. This problem was 20 years in the making as banks became less regulated, why hurry to "solve" it in a week? The whole thing is just the opinion of 2 people, whom I wouldn't say are totally impartial....

What Caused The Problem?
The Fed
Congress
Fractional Reserve Lending
The Treasury

The problem is not a lack of liquidity,
it is not a lack of trust,
it is not lack of consumer confidence,
it is not subprime lending,
in fact the problem is not housing at all.

The problem is consumers and corporations are deep in debt with no way to service that debt.

AlexC wrote:
Dear Congress

Treasury Secretary Paulson is asking you to rush through a $700 billion package because "we?re literally maybe days away from a complete meltdown of our financial system".

Paulson states that it must be done quickly and that it is better than the alternatives. Fed Chairman Bernanke agrees.

The first question Congress should ask is how would Paulson or Bernanke know?

It was only a month ago Paulson was reiterating to anyone who would listen how sound our banking system is. The fact of the matter is that neither Paulson nor Bernanke saw this coming, yet now Congress is supposed to trust they now "know" the solution.

Problem Defined

Before one can work out a solution, the first step is to identify the problem. The problem is not a lack of liquidity, it is not a lack of trust, it is not lack of consumer confidence, it is not subprime lending, and in fact the problem is not housing at all.

The problem is consumers and corporations are deep in debt with no way to service that debt.

Attempts to bail out banks and brokers at taxpayer expense will do nothing but add to consumer debt, weaken the US dollar, and literally waste $700+ billion dollars that can and should go to more productive uses.

What Caused The Problem?



The Fed
Congress
Fractional Reserve Lending
The Treasury


The root cause of this problem is the Fed micromanaging interest rates, the Treasury cheerleading every step of the way, and Congressional sponsored spending that went wild. The critical issue that ties everything together is fractional reserve lending allows banks to borrow money (credit really) into existence with insane amounts of leverage.

To top it all off, Greenspan slashed rates to 1% fueling the biggest global housing bubble the world has ever seen. Congress needs to figure out a way to eliminate the Fed.

Fed Uncertainty Principle

I kindly ask of you to please read the Fed Uncertainty Principle written April 03, 2008 before any hint of this meltdown occurred. Here is Corollary Number Two.

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Why The Paulson Solution Fails

The Paulson solution fails because it does not help consumers or businesses service debt, it does not create any jobs, it increases the national debt, and it encourages more reckless lending by banks. Attempting to bail out banks on the back of cash strapped consumers is simply doomed to fail.

If printing money was the solution to all problems, Zimbabwe would be the most prosperous country in the world.

The Barney Frank Non-Solution

"We're going to be buying up a lot of mortgage paper" said House Financial Services Committee Chairman Barney Frank.

Sadly, that will not do a single thing in and of itself to stop foreclosures. All that will do is bail out banks and brokers at taxpayer expense.

Barney Frank also stated ?We should be more willing to write down the mortgages. We?ll become the lender. The government will wind up in a controlling position so that we can reduce the number of foreclosures.?

Congress needs to ask "How much extra will Barney Frank's proposal cost taxpayers?"

Were does the madness end?

As stated earlier the problem is not housing in the first place, and besides taxpayers who pay their mortgages on time should not be subsidizing those who don't!

Banks Need To Recapitalize

Paulson wants to recapitalize banks so they can keep lending. Ironically, one of the problems is lending. The US has been on a credit binge to such an extent that I have to ask what more do we need? More Pizza Huts? More Home Depots? More Houses? More Nail Salons? More Car Dealers? What?

What is the urgent need to lend still more?

We are in this mess because of too much reckless lending. We do not need more lending, we need more saving!

Paulson's idea that more lending is needed is ass backwards. Paulson's proposal cheapens the dollar, and discourages the one thing that is desperately needed: saving.

Alternatives Discussed

In the mad rush to push through this package, Paulson states it is better than the alternatives. That is an interesting statement because no alternative have even been presented to Congress, let alone discussed.

Shouldn't there be a discussion of alternatives before doing a mad dash to sign a $700 billion package?

Paulson is attempting to hoodwink Congress to pass his plan without any discussion of alternatives. I believe the Paulson proposal is the worst of all solutions in that it bails out banks at the expense of the taxpayer and the taxpayer gets virtually nothing out of the deal: no jobs, no tax relief, no health care.

Paulson claims that taxpayer will benefit by the bailout indirectly because one the government owns the debt, servicers will be more willing to negotiate terms. Once again, it will be taxpayers on the hook for any negotiation granted. Paulson conveniently ignores this cost as does Barney Frank.

Taxpayer Gets Nothing From Current Bailout Proposals

The taxpayer gets nothing for this bailout $700 billion. Actually the taxpayer gets a negative benefit because the Paulson and Frank proposals will cheapen the US dollar, increase the deficit, and ultimately cause prices of imported goods to rise for everyone, while saving a relative few.

The solution is to address the recapitalization of banks in a fair way that does not jeopardize the taxpayer but instead puts the onus of responsibility on banks making reckless lending.

Recapitalizing Banks

Banks are undercapitalized. They need funding badly. Here is what I propose.


Reduce the capital gains tax by 50% for any investor willing to cash out stocks and invest in 5 year bank CDs.

Eliminate the difference between long term and short term capital gains.

Eliminate taxable interest on savings accounts, CDs, and US treasuries.

The above would promote saving rather over speculation and provide a big boost in government revenues as well. Stock prices will not be affected over the long haul by these measures.

Jobs, Jobs, Jobs

I am a libertarian. I do not believe in makeshift government proposals. However, I would rather get something than nothing for $700 Billion. Paulson's proposal scores a big fat zero in term of providing an jobs or any real economic stimulus.

It is no secret that infrastructure in the US is decaying and needs to be fixed. A collapsing bridge in Minnesota is one key example. And what out our aging energy grid? Instead of giving $700 billion to banks that deserve to go under, I would rather give half that for jobs programs.

To create as many jobs as possible at the least cost Congress needs to scrap the Davis-Bacon Act. It would be better to create 3 construction jobs at $12 an hour than 1 job at $36 an hour. The idea here is to get as most bang for the buck and create as many jobs as possible for the money spent.

Waste In Iraq

We need to admit the mistakes in Iraq. The public never supported this war and the public was correct. The war in Iraq easily cost $1 trillion dollars if you count future medical bills. That is $1 trillion dollars that could have been spent right here in the US.

I propose we declare the war won and get out, totally and completely. Offer returning veterans first crack at any infrastructure rebuilding jobs. It is the least we can do to those who are likely going to be emotionally if not physically scarred for the rest of their lives fighting a war that never should have been fought.

Congressional Spending

Congress needs to admit its own role in this mess. Congress passed hundreds of programs to make housing more affordable. They all failed including the biggest failure of all: Fannie Mae and Freddie Mac.

It should not be the role of Congress to promote housing vs. renting. The very act of doing so creates an artificial demand for housing. Ownership society madness culminated with many financially unqualified to buy a house buying house anyway because Congress and the White House promoted the idea.

Congress is also directly responsible for deficit spending and that weakened the US dollar. Indeed there was virtually a panic out of dollars for this reason. Adding another $700 billion to the deficit as Paulson is asking you to do is adding insult upon injury. Don't do it.

Instead balance the budget. It can be done.

span style="font-weight: bold;">Who Am I?

Who am I to suggest what Congress should do? I am nobody. However, this nobody and a bunch of fellow nobody bloggers and bunch of nobody fund managers who I respect all saw this all coming 3-4 years ago. Paulson did not, Bernanke did not, and almost everyone in Congress did not.

So the choice Congress needs to make is who to believe. Congress can believe Bernanke and Paulson who have been totally wrong about everything for years, or Congress can listen to people who not only understand what is happening but predicted it.

Desire To Believe

You desperately want to believe that Paulson and Bernanke are telling the truth. You have for years put your faith and trust in them. It is a very difficult thing to do to admit you are wrong.

However, it is critical that you look at the simple facts for what they are.

The fact is Paulson is grasping at straw in a tornado. So is Bernanke. Problems cannot be cured by printing money, and problems cannot be on the backs of already overburdened consumers.

No problem is fixed by madly and blindly rushing into solutions where no alternatives are discussed. You now have alternatives.

I will also offer one more alternative but it is not from me. I kindly ask Congress to consider An Open Letter to the U.S. Congress Regarding the Current Financial Crisis by John P. Hussman, Ph.D., an economist and investment manager whose opinion I trust.

Hussman too has an opinion as to how to address this issue without impacting the taxpayer. For the record, I have no idea what he might think of my proposal.

However, between the Hussman proposal and mine, I am sure there is fertile ground for further discussion and for doing something other than what I believe to be the worst possible alternative, the proposal submitted by Treasury Secretary Paulson.

No problem is too big that a solution has to be rushed into without considering the alternatives. I ask that you consider these alternative proposals either over an extended session or by letting the next Congress tackle the issue.

Heaven help us if recess is more important than taking the time to seriously consider all reasonable alternatives.

Sincerely

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com