What if no bailout happens?

[GreNME]

"These institutions" are the banking industry.

No, they're really not, and that's the biggest problem with this whole mess.

The banking industry is what "these institutions" are allowed to engage in, and you can bet your bottom that if the current institutions start dropping that there are others just waiting to jump in, buy up the remnants of the institutions, and keep the cycle going after the losers have fallen.

That what really irks me about this bailout: it assumes that we need these specific named institutions instead of other institutions who would inevitably take their place, and it assumes so basically on the premise of "that how it's always been." Pure, unadulterated baloney. I don't care that AIG has been around for years, I care about what's going to be around for the next fifty years-- a company propped up by its own savvy and merits or one propped up primarily by my tax dollars. Basically, this move would be the White House out-socializing the Democratic Party and a large portion of Europe (the latter of whom think the idea is stupid anyway).

You were spot-on when you said that it was Paulson's proposal and his Chicken Little sales pitch that started the beginnings of economic panic. Despite what he might be saying there's likely going to be a recession anyway-- we're not going to know until afterward regardless, because that's just how slow accurate reporting on the economy works. He's just using the recession as his impetus for the proposed golden-parachute-placebo with the hopes of hedging confidence. Why does continuing to play games "by the gut" seem at all logical for the health of the economy as a whole?

 

[Meadmaker]

I would give the same response again. If shareholders "perceived this" they would flee. (I agree that there are incentives for executives to enrich themselves at the expense of shareholders, and that they often do this if they can (without it being illegal). I don't think that CEO compensation falls into this category, given the disclosure requirements.)

I have mixed feelings about the whole CEO pay "scandal". It is outrageous what these guys make, but Francesca is right and it's very easy to find out, and choose where to invest.

In 1998 my old company was purchased, and I had the option of where to roll over my old 401k plan. I rolled it into a self managed IRA that I have managed ever since. So, I pick a combination of mutual funds and stocks. When I go to pick stocks, I usually decide an industry that I think will do well, and find a stock in that industry. One thing I almost always look at is CEO and other officer salary. If it's too high, I go to the competition. If it's that big, I figure the board is looking out for the executives, and not the shareholders.

I don't know if I'm lucky or smart, but over a 10 year period I have consistently outperformed the S&P 500.

So, I have a real problem when it comes to regulation of CEO pay. On the one hand, I think typical CEOs make too much money, and those companies could find people just as good at half the cost. On the other hand, every one of those CEOs makes exactly what he has convinced the owners, which is us, to give him. It's hard to see why we need to pass a law against that.

On balance, I suppose I'm against CEO pay limits, because outlandish CEO pay is one of the indicators I have used to help me make money in the stock market. Not much money, but money.

Let's see if my outperformance continues. I did some panic selling this week, along with some opportunistic buying. Will I still be patting myself on the back next year?

 

[Richard Masters]

Yeah. What is the point of the bailout if we should really just use the same money to support the banking industry? Why not put all that money into FDIC so that no runs on banks will occur and let the financial institutions who created this fiasco die their natural death, as those folks who argue against regulations would have it?

Yes, I've been wondering the same thing.

But why give these institutions a free ride (essentially) when they made such horrible decisions when our primary concern is a collapse of the banking industry? If we could avoid that, then there should be no huge problem.

Sure, a recession is going to hit no matter what. Personally, I don't see how this sort of bailout is going to change that fact, but, again I don't know that much about this stuff. Is there actually a way that such a bailout could completely avert a slowdown in the economy?

I'm sort of with Beth on this. I don't see how saving these companies helps us. The debt is still going to be bad, and I think it also looks like throwing good money after bad.

Why not simply insure the fluidity of the banking industry and let the losers lose? Isn't that what a free market is supposed to do?

I get the impression that there are political and not economic motivations behind this bailout.

I think it would be preferable if the FDIC were awarded the money, though I'm willing to accept that I may be ignorant of other economic factors currently in consideration.

It actually seems wrong to let speculators get away with risky investments and then reward them for it. In my opinion, we need fewer of the real estate speculators that caused this mess in the first place. To just throw money at them again seems recursively idiotic.

When this happens with pyramid schemes, the government seizes the funds and lets the operators die a slow death. Not that I favor pyramid schemesters (whatsoever), but we should be consistent with our policies.

 

[Richard Masters]

...[snip]...

As I said, the heads of the organisations have mostly all been fired. Of course they earned millions before then, but that is a matter for the companies they served to have decided on, and it is company boards and ultimately shareholders who are accountable for what they pay their leaders.

Exactly. They all share the responsibility. If I go invest in the latest pyramid scams, and I lose 60% of my money, should I be rewarded by the government and allowed to continue wasting "my" money on bad investments?

If the answer were 'yes', then the government's money is being put to very bad use.

The list of investment bank CEOs who have walked the plank is getting lengthy

Restructuring and hostile take-overs is the right move. Teach the shareholders that we can't bail them out every time they vote for a bad board member or CEO.

If they can learn that, they'll vote more carefully, or they will divert their money into something less risky than real estate.

Investing is supposed to be risky. If we provide too big of a cushion, they'll ignore the risk even when the government can't afford the cushion, and even when the cushion can't make a difference.

But that's part of the problem -- at least, part of the political problem. The "scandal" of CEO pay has been brewing for the better part of a decade, and the shareholders who are "ultimately" accountable for the mismanagement of the company have in practical terms almost no say in who the leaders are, what they are paid, or how the company is actually run.

I agree.

In practical terms, CEO-ship is a closed oligarchy; the board of a major corporation is made up of other top executives or similar financial titians who are (perceived to have been) enriching themselves at the expense both of the corporate drones and the individual shareholders. (No less a titian than Buffett has written extensively about this, for example, how the stock options granted to top executives and board members are almost a deliberate accounting trick to keep earnings per share high while diluting the actual money paid to the outsiders.)

Creative Accounting.

 

[Richard Masters]

No, they're really not, and that's the biggest problem with this whole mess.

The banking industry is what "these institutions" are allowed to engage in, and you can bet your bottom that if the current institutions start dropping that there are others just waiting to jump in, buy up the remnants of the institutions, and keep the cycle going after the losers have fallen.

That what really irks me about this bailout: it assumes that we need these specific named institutions instead of other institutions who would inevitably take their place, and it assumes so basically on the premise of "that how it's always been.

That's exactly what bothers me the most as well. Why do we have so much dogmatic sentimental value for Wall Street. What precludes having a Hollywood Street, or Silicon Valley Street instead?

From what I gather, it's pure dogma. Faith in Wall-Street.
This faith cannot be justified by definition. But it's not logical to assume that a particular Financial Institution needs more help than another.
I don't actually know the answer to this somewhat rhetorical question, but do we bail-out the smaller financial institutions too? If not, why the double standard?

You were spot-on when you said that it was Paulson's proposal and his Chicken Little sales pitch that started the beginnings of economic panic. Despite what he might be saying there's likely going to be a recession anyway-- we're not going to know until afterward regardless, because that's just how slow accurate reporting on the economy works. He's just using the recession as his impetus for the proposed golden-parachute-placebo with the hopes of hedging confidence. Why does continuing to play games "by the gut" seem at all logical for the health of the economy as a whole?

Paulson sounds to me like a retard. It's like bailing out the ponzi industry when it fails. If mortgage investments were risky, then they are still risky. Why perpetuate the existence of these risky institutions?

If you can't afford a house, don't buy it. This saves everyone some trouble.
(In fact, en masse, it forces the cost of a house down).
If you can't afford the risk of lending money, don't lend it.
(This gives banks with best practices credibility, and the trust of the people).

And if the government is going to bailout (subsidize) a particular lending company, then why not subsidize my private college loans as well? If my lender is going to charge outrageous interest rates which reflect the risk of lending me money, then the interest rates should be their bailout, not my tax money. They can keep one or the other but not both.

Paulson's plan is like giving a compulsive gambler more money and free rides to Las Vegas.

 

[Francesca R]

Wrong again. Open market activity is where perhaps the most looting of all takes place - via the monetization of debt. The non-stop monetary inflation functions as a flat-tax on anyone who holds dollars, or the currency in question.

Rejected, for exactly the same reasons as the last time you tried to pull this one. Inflation that is expected does not transfer any real wealth from savers to borrowers, unless the savers hold something other than fiat currency, or take it out of circulation voluntarily. You know--the kind of thing you do.

If inflation was a "surreptitious" tax, why does the government offer you the opportunity to get off scot-free by buying TIPS?

Through these discussions it is apparent how little you really know about markets.

 

[Francesca R]

No, they're really not, and that's the biggest problem with this whole mess.

I'm not sure if this is a muted call for reinstatement of Glass-Steagall or what? Yes the institutions are the banking industry. What do you think felled Washington Mutual in the US, and Northern Rock in the UK?

The banking industry is what "these institutions" are allowed to engage in, and you can bet your bottom that if the current institutions start dropping that there are others just waiting to jump in, buy up the remnants of the institutions, and keep the cycle going after the losers have fallen.

This is incorrect. If it was true then nobody would need a central bank and you could tolerate a free-market in overnight interest rates. There is not always a private lender of last resort.

That what really irks me about this bailout: it assumes that we need these specific named institutions instead of other institutions who would inevitably take their place, and it assumes so basically on the premise of "that how it's always been." Pure, unadulterated baloney. I don't care that AIG has been around for years, I care about what's going to be around for the next fifty years-- a company propped up by its own savvy and merits or one propped up primarily by my tax dollars. Basically, this move would be the White House out-socializing the Democratic Party and a large portion of Europe (the latter of whom think the idea is stupid anyway).

It assumes nothing of the kind. And Europe does not think it is "stupid" when one of their banks gets into trouble. Northern Rock plc was taken into public ownership earlier this year putting UK taxpayers at risk. Other governments in Europe would follow suit if they experienced similar situations.

There is to my mind a degree of free-riderism about the non-US governments' current approach though. A bit like "If the US does its bailout, confidence will improve and we will not need to, and if they don't then anything we do will have no effect now anyway". I think it would have been better to co-ordinate an international government response. Alas that seems unlikely.

You were spot-on when you said that it was Paulson's proposal and his Chicken Little sales pitch that started the beginnings of economic panic. Despite what he might be saying there's likely going to be a recession anyway-- we're not going to know until afterward regardless, because that's just how slow accurate reporting on the economy works. He's just using the recession as his impetus for the proposed golden-parachute-placebo with the hopes of hedging confidence. Why does continuing to play games "by the gut" seem at all logical for the health of the economy as a whole?

I sort of agree with all that, though it is extremely hard to know what would have happened if "nobody had ever mentioned a bailout".

 

[Old Bob]

Miss management and thieves created this mess that will even affect us in Australia. A jail instead of a hand out. This has been planed to happen and the real reason is yet to be exposed, we can all guess, but my bet would be the UK has the steering wheel.

 

[dann]

How's the Marxist candidate for president doing right now?

There is one???! Why??

He does not bother to explain what he will replace the idea of private Property with.

Sorry, I did not know that you wanted it to be replaced!

 

[Phaedrus74]

<snip>
There is to my mind a degree of free-riderism about the non-US governments' current approach though. A bit like "If the US does its bailout, confidence will improve and we will not need to, and if they don't then anything we do will have no effect now anyway". I think it would have been better to co-ordinate an international government response. Alas that seems unlikely.
<snip>

Could you elaborate on this point. Since it is the second time you've brought it up I'm wondering what causes you to claim this.

Isn't it normal to let a sovereign nation sort out it's own problems? Especially considering they themselves caused these problems in the first place.

Expecting Europe to volunteer to bail the U.S. out in these matters is tantamount to giving a free-ride to a system that (apparently) lacks proper oversight.

[I'm overstating a bit, I know, but these thoughts popped into my head when I read your remark but I'm not encumbered by any relevant knowledge (of economics/business). So I might be (probably am?) a bit off base...]

 

[Francesca R]

Could you elaborate on this point. Since it is the second time you've brought it up I'm wondering what causes you to claim this.

Isn't it normal to let a sovereign nation sort out it's own problems? Especially considering they themselves caused these problems in the first place.

The original draft Bernanke/Paulson plan has the US government buying distressed MBS from non-US banks that operate in the US, thus helping the solvency and liquidity of foreign institutions that pay tax outside the US.

Expecting Europe to volunteer to bail the U.S. out in these matters is tantamount to giving a free-ride to a system that (apparently) lacks proper oversight.

It is not bailing out "the US"--it is bailing out banking institutions and the global flow of credit.

With the ad-hoc approach that has been followed so far, it has fallen to individual governments to support their own private institutions, via nationalisation (Northern Rock, FHMLC, FNMA, AIG) or "forced marriage" (JPM-Bear Steanrs, BOA-Merrill Lynch, LloydsTSB-HBOS, JPM-WaMu). Most of those are US but two of them are UK. The share prices and CDS spreads of banks that are still in business indicate that distress (possible future failure) is not completely US focused.

The $700bio plan is a switch to a comprehensive approach in place of an ad-hoc effort. The credit market function that it hopes to address, and the assets it plans to buy, and the balance sheets of institutions that it hopes to recapitalise, are not all located in the US, so I ask why other governments do not feel any need to contribute.

Either they think that this is a local US problem (which is wrong), or they don't believe it is a serious as the US Treasury/Fed does (possible) or, more likely, they conclude that "If the US fixes it we don't need to; if the US does nothing then nothing we do will help". That's the free-rider problem. I may be overstating it, and it probably *is* more serious to the US economy than others, but the total absence of participation from any other government is, interesting.

 

[Gurdur]

... There is to my mind a degree of free-riderism about the non-US governments' current approach though. A bit like "If the US does its bailout, confidence will improve and we will not need to, and if they don't then anything we do will have no effect now anyway". I think it would have been better to co-ordinate an international government response.

This to me seems utterly wrong, on two counts.

1) European govt's are not doing "nothing" at all; in fact, they watch liquidity closely, and since you referred to the UK Northen Rock, and since you must know of German and other govt initiatives to pump emergency cash in, then just why this allegation?

2) What you seem from this post and another is to expect European govts to happily donate cash to the USA for its septic bank funds. Just why? Predatory lending is restriced in most western European countries, if not extremely heavily restricted as in Germany, and the subprime problem does not exist in Europe by and largely.

So just why should European govts in effect give cash to the USA simply because the USA doesn't like meaningful regulation and likes to let people party till it all ends in tears? "Free-riderism" ? Really?

It would most definitely be free-riderism to grab cash off the Europeans to pay for American incompetence and ideologically-based idiocy.

 

[rjwould]

I'm not smart about money and high finance. What is everyone so afraid will happen if the government doesn't bailout the wall street firms? Why is the bailout a better option than letting them figure out their own way out of the mess? Why is it a better option for our government than, say, financing public works projects to make sure that there are plenty of jobs for people who are willing to work and financing social security for those who are unable to work?

Heres a very informative video which is easy to understand concerning how our banking system works. Its 47 minutes in length, but I promise you that you will be all the better informed on what is happening, the possible consequences and what could be done to help in the longterm.

The information in this video is so important for the average person to understand.

Enjoy! BTW-it takes a minute to begin.

 

[GreNME]

I'm not sure if this is a muted call for reinstatement of Glass-Steagall or what? Yes the institutions are the banking industry. What do you think felled Washington Mutual in the US, and Northern Rock in the UK?

I simply can't agree that the institutions are the industry. That, to me, is like saying that Microsoft and Apple are the personal computing industry, and that's just plain backwards. They're vehicles for this industry, and there's no stopping the industry from getting new vehicles and continuing forward as usual.

The banking industry is what "these institutions" are allowed to engage in, and you can bet your bottom that if the current institutions start dropping that there are others just waiting to jump in, buy up the remnants of the institutions, and keep the cycle going after the losers have fallen.

This is incorrect. If it was true then nobody would need a central bank and you could tolerate a free-market in overnight interest rates. There is not always a private lender of last resort.

Perhaps I didn't convey my thoughts clearly enough to be understandable. I never meant to imply that there is always a lender of last resort. What is being proposed in this bailout isn't a case of a lender of last resort stepping in, it's a case of paying the companies who made mistakes with toxic investments to buy their toxic investments, then paying them to manage those same investments for us in the interim. That's not going to fix the underlying problems within the industry, it's going to ignore the underlying problems and treat the symptoms. Sometimes a company has to fail for the market to get healthy again, because otherwise these symptoms are going to come back in another sector later on.

It assumes nothing of the kind. And Europe does not think it is "stupid" when one of their banks gets into trouble. Northern Rock plc was taken into public ownership earlier this year putting UK taxpayers at risk. Other governments in Europe would follow suit if they experienced similar situations.

I think you're discussing something completely different than what I was talking about there. The European governments do not simply bail out for reasons amounting to histrionics, and currently there's nothing about the US proposal from Paulson that doesn't reek of histrionics. Euro banks are being hit by this crisis as well-- which of them are European governments spending hundreds of billions in taxpayer money to buy up their bad debt? Taking a company into public ownership after it is failing is not the same thing as what Paulson is suggesting the US do. I have no problem with things like what just happened to Washington Mutual, where the government stepped in and then allowed another company to take over its assets. My accounts with WaMu are quite safe and there was no cost incurred to the US taxpayers for JP Morgan to acquire WaMu. I have no problem with it because that's the way the jungle works.

Expecting the government to bail out a failing market before it can correct itself is exactly like expecting a lender of last resort to come in and make all the scariness of failure go away, just like having mommy kiss away the hurt, but not by lending money. Instead, it's expecting the lender to act as a buyer and buy all the failure from them.

There is to my mind a degree of free-riderism about the non-US governments' current approach though. A bit like "If the US does its bailout, confidence will improve and we will not need to, and if they don't then anything we do will have no effect now anyway". I think it would have been better to co-ordinate an international government response. Alas that seems unlikely.

As Gurdur points out, the European governments aren't doing nothing about this, and European markets have plenty to lose if everything crashes across the pond. I think you're not giving enough credit to the European entities who have decided not to offer to pay through their citizens' future wealth to engage in a plan that offers no better odds than a craps table at this point.

You were spot-on when you said that it was Paulson's proposal and his Chicken Little sales pitch that started the beginnings of economic panic. Despite what he might be saying there's likely going to be a recession anyway-- we're not going to know until afterward regardless, because that's just how slow accurate reporting on the economy works. He's just using the recession as his impetus for the proposed golden-parachute-placebo with the hopes of hedging confidence. Why does continuing to play games "by the gut" seem at all logical for the health of the economy as a whole?

I sort of agree with all that, though it is extremely hard to know what would have happened if "nobody had ever mentioned a bailout".

I'm not interested in "what if Hank never said anything?" to be perfectly honest. I was acknowledging that you correctly identified a key influence to the past week's worth of panic. The point I was attempting to make from it is that regardless of his panic and the ratcheting-up of financial panic-- because let's be honest, there has already been a low-level panic for months-- there is nothing to indicate that making rash moves to try to fix something that has built up over years can be achieved through the current proposal. At best the current proposal is a huge "maybe" where there's been little explanation on details-- like how much more than $700 billion USD is it going to cost to have independent contractors (from Wall Street, natch) to manage these toxic investments until they are no longer toxic? At worst the current proposal is an obvious attempt to pay off the investors and investment banks who continued over several years to concentrate these bad debts into huge securities with fancy names-- essentially boiling down to rewarding failure. How is Paulson's plan supposed to change whether the US is in a recession now or is soon to have a recession? I've seen no information (outside of his statements that it would) that supports such a claim, which I find incredibly dubious to begin with considering any accurate accounts of a recession period aren't reported until a couple years after the recession began.

I'm saying that when a little bit of healthy skepticism is applied to the current proposal, Paulson's claims and the arguments made so far (that we know of) aren't much more than a Chicken Little act that's making an already bad situation worse-- not a very logical or reasonable justification to agree with his plan at all. Further, all the "maybe the values of the securities will go up and generate profit" speculation being made sounds almost identical to the types of sales pitches realtors made to talk so many people into sub-prime mortgages in the first place-- spend money you don't have now because the profits will more than make up for the loss. I don't buy it, and I'm asking for an explanation a whole lot better than what I've seen from various reports and pleas to go forward with this so far. As someone who is basically a potential investor in this mess I'm not in the mood for government or anyone else condescending me with "it's complicated" responses when I require more detail. It's really not that complicated, or where it is complicated it's only artificially (or superficially) so.

 

[Francesca R]

1) European govt's are not doing "nothing" at all; in fact, they watch liquidity closely, and since you referred to the UK Northen Rock, and since you must know of German and other govt initiatives to pump emergency cash in, then just why this allegation?

"Doing nothing" refers specifically to an intiative to purchase bombed-out assets in general from financial institutions. Not ad-hoc restructuring or taking under state control of individual institutions, which I have already mentioned they have done. And not open market "liquidity injections" either which all the major central banks are doing. So you mis-read the claim.

2) What you seem from this post and another is to expect European govts to happily donate cash to the USA for its septic bank funds. Just why?

Incorrect, and I have said that non-US banks (including European ones) are also struggling with holdings of cratered mortgage-backed debt (see Fortis, UBS, Dethsche), and are also withdrawing from lending to each other, and are also therefore exerting a quite severe contractionary impulse on European economic activity, which is at or near recession in many countries. Indeed, Paulson wants US taxpayer funds to be used to buy assets from non-US banks. Why should the US government buy Deutsche Bank's and UBS' assets while the German and Swiss taxpayers risk nothing directly?

the subprime problem does not exist in Europe by and largely.

False, but dream on if it pleases you to remain uninformed.

 

[GreNME]

Some food for thought: when Parmalat collapsed a few years ago, European agencies enacted more strict regulatory and accountability controls to keep any such collapse from irrevocably damaging the market in the future. The US, on the other hand, when faced with an opportunity to revamp its regulatory and accountability practices, wound up doing nothing even though Greenspan and then-Secretary-of-Treasury Paul O'Neill proposed doing something immediately after Enron ^[linky]. That's an important thing to keep in mind when comparing the European markets and the US market currently, because it factors heavily into why we don't see Europe volunteering any money to bail out these bad debt packages.

 

[Francesca R]

I simply can't agree that the institutions are the industry. That, to me, is like saying that Microsoft and Apple are the personal computing industry, and that's just plain backwards. They're vehicles for this industry, and there's no stopping the industry from getting new vehicles and continuing forward as usual.

This seems like a semantic point that does not affect the argument I make at all. Call it what you like. If, say, Citibank, UBS and Barclays all went down, there would not be a brand new set of banks opening up shop the next day, nor a whole lot of business for them to take on. What are you saying? It does not matter if several institutions fail, eventually new ones will arrive? Well maybe in a couple of decades. . . .

Perhaps I didn't convey my thoughts clearly enough to be understandable. I never meant to imply that there is always a lender of last resort. What is being proposed in this bailout isn't a case of a lender of last resort stepping in, it's a case of paying the companies who made mistakes with toxic investments to buy their toxic investments, then paying them to manage those same investments for us in the interim. That's not going to fix the underlying problems within the industry, it's going to ignore the underlying problems and treat the symptoms.

The asset purchase will fix the symptoms, yes. "The symptoms" are feared (by policymakers) to be severe enough that they will kill the "patients" (the banks) and a whole bunch of innocent bystanders along with them (business and the public). Sometimes you need to treat symptoms. Do you disagree, always, out of some principled doctrinaire persuasion that "bailouts are bad"? Probably not, right?

Sometimes a company has to fail for the market to get healthy again, because otherwise these symptoms are going to come back in another sector later on.

I am aware of this. Do you suggest that those in positions of authority are not? And nobody is saying (certainly not me--read a few other threads here) that the causes need no attention.

I think you're discussing something completely different than what I was talking about there. The European governments do not simply bail out for reasons amounting to histrionics, and currently there's nothing about the US proposal from Paulson that doesn't reek of histrionics.

How deeply have you analysed the situation? How much working capital can GE borrow and for how long and at what rate as of now? Is it enough to meet payrolls and creditors for the next month? Are you sure that a huge company nothing to do with financial services will not be driven into chapter 11 within weeks because of what is happening in money markets if nothing is done? I think the truth is you have no idea when you say "histrionics". And I don't know either. But you're claiming that you do.

Euro banks are being hit by this crisis as well-- which of them are European governments spending hundreds of billions in taxpayer money to buy up their bad debt?

This is my point and see previous post. As things stand, the US public would buy bombed out mortgage-backed securities from UBS and Deutsche. So the Europeans don't need to. Please do not take an observation that a free-rider effect is occurring as anything other than what it is.

As Gurdur points out, the European governments aren't doing nothing about this, and European markets have plenty to lose if everything crashes across the pond.

And I never said "European governments are doing nothing". In fact I stated what they have done. Hopefully that is clear so that there is no need to allege anything different again.

I think you're not giving enough credit to the European entities who have decided not to offer to pay through their citizens' future wealth to engage in a plan that offers no better odds than a craps table at this point.

You could interpret that way. You could also interpret it the way I outlined. The reality probably involves some of both. Do you reject utterly that there is any view on the part of European governments that "We don't need to tap the public if the US does, and if they don't there's no point in us doing it"? How would you know, actually? I don't know for sure, but I conclude that is part of it.

I don't buy it, and I'm asking for an explanation a whole lot better than what I've seen from various reports and pleas to go forward with this so far. As someone who is basically a potential investor in this mess I'm not in the mood for government or anyone else condescending me with "it's complicated" responses when I require more detail. It's really not that complicated, or where it is complicated it's only artificially (or superficially) so.

You are correct to dismiss "it's complicated" answers. I think if you perused this sub-forum you would find something very much more helpful than that from many posters here. But it may serve you not to dismiss that out of hand as well.

 

[Blue Mountain]

the subprime problem does not exist in Europe by and largely.

False, but dream on if it pleases you to remain uninformed.

Can you elaborate on this, please? Are you saying that Europe has engaged in the same risky subprime lending practices that the US has over the past decade? Or are you saying that because the US financial system is in trouble (due in part to this subprime mortgages), it's a problem for Europe as well?

 

[GreNME]

This seems like a semantic point that does not affect the argument I make at all. Call it what you like. If, say, Citibank, UBS and Barclays all went down, there would not be a brand new set of banks opening up shop the next day, nor a whole lot of business for them to take on. What are you saying? It does not matter if several institutions fail, eventually new ones will arrive? Well maybe in a couple of decades. . . .

That's just a silly argument, because it ignores the fact that Citibank, UBS, and Barclays aren't the only games in town. One of the things that will inevitably happen is that a competitor who has more stability buys them out-- not unlike the puchase of WaMu by JP Morgan yesterday. Another example is that the failing company is broken up and business units are sold off separately from the company as a whole-- Berkshire Hathoway (to use a large, well-known example) is known for this. Aside from those two (of many) ways, there are also smaller banks with not as much capital as the giants but good enough credit to step in and take over business units or, through mergers, whole companies-- large entities like AIG or Washington Mutual would be like winning a prize to many of these companies, having loads of infrastructure already in place and saving lots of time and investment.

Now, of course this does mean a likely period of recession as things realign and the market surrounding the acquisitions stabilizes. However, as I've been repeating in other posts, if there are already indications that we're in a recession now or that we're heading to one already, then it makes more sense to prepare the market for the period of instability and slowed investment, not contributing to the instability by purchasing all the toxic securities and hoping they stop plummeting in value.

The asset purchase will fix the symptoms, yes. "The symptoms" are feared (by policymakers) to be severe enough that they will kill the "patients" (the banks) and a whole bunch of innocent bystanders along with them (business and the public). Sometimes you need to treat symptoms. Do you disagree, always, out of some principled doctrinaire persuasion that "bailouts are bad"? Probably not, right?

No, of course not. However, wouldn't you agree that it's still not quite clear that the figurative symptoms are severe enough to kill the patient (patient = economy)? The picture I get currently from the market as a whole is that no one is going to be able to accurately predict what's going to happen, and that conclusive predictions should be looked at skeptically. Are you getting a different picture?

I am aware of this. Do you suggest that those in positions of authority are not? And nobody is saying (certainly not me--read a few other threads here) that the causes need no attention.

Nobody including myself. However, regarding whether I think those in "positions of authority" are aware of the fact that some companies are going to have to go the way of the dodo before things get better, my answer would be a very tentative "probably." My concern isn't whether they're aware of it, but whether they are using sound reasoning for picking and choosing who gets bailed out and who goes under, along with the secondary question of conflicts of interests. Frankly, I don't think the US Congress, the Fed, or the US Treasury are equipped to decide who stays and who goes, and I get the impression that this proposal is another step in trying to take that authority on themselves. Who is equipped? No one, because no market has (or should have) that kind of certainty to it. Those are casino house rules, and this proposal would be treating the American taxpayer like a gambler.

How deeply have you analysed the situation?

I've been paying close attention to it for a few years now, ever since I took on a vested interest in real estate. However, that question has little to do with the following:

How much working capital can GE borrow and for how long and at what rate as of now? Is it enough to meet payrolls and creditors for the next month? Are you sure that a huge company nothing to do with financial services will not be driven into chapter 11 within weeks because of what is happening in money markets if nothing is done? I think the truth is you have no idea when you say "histrionics". And I don't know either. But you're claiming that you do.

I'm not claiming that I do, I'm questioning the fact that Paulson is claiming that he does. My entire point is that no one can be so sure, and to expect the kind of investment his bailout proposal requires pretty much hinges on how sure he claims he is. The fact that he's claiming certainty in an uncertain period is precisely why I'm so critical.

This is my point and see previous post. As things stand, the US public would buy bombed out mortgage-backed securities from UBS and Deutsche. So the Europeans don't need to. Please do not take an observation that a free-rider effect is occurring as anything other than what it is.

Oh baloney. The US is not behaving like some knight in shining armor for the Euro banks. The reason the European governments aren't taking part in this is because they currently see no need to. You're assigning motivations-- continuing to call this "free-riding" on the part of the European governments-- where no proof of such a motivation exists. The major difference between the European systems and the American system is that a few years ago Europe took moves to regulate banking and lending where the US specifically refused to take any such action (see my previous post). Other than that, the only other difference is that the US Fed is now claiming that the only way to "fix" things is to have the US government take all the risk onto itself and not continue letting the ones who bought, sold, and packaged all of this risk together to be accountable for their actions.

And I never said "European governments are doing nothing". In fact I stated what they have done. Hopefully that is clear so that there is no need to allege anything different again.

Aside from your statements about the "free-rider effect" alluding to their activities, exactly why do you posit the European governments are volunteering billions of Euros to assist in the crisis? I am saying that the answer to such a question is important in understanding why I don't think it's a good idea for the US to rush into such a move.

I think you're not giving enough credit to the European entities who have decided not to offer to pay through their citizens' future wealth to engage in a plan that offers no better odds than a craps table at this point.

You could interpret that way. You could also interpret it the way I outlined. The reality probably involves some of both. Do you reject utterly that there is any view on the part of European governments that "We don't need to tap the public if the US does, and if they don't there's no point in us doing it"? How would you know, actually? I don't know for sure, but I conclude that is part of it.

I don't know for certain that any European government doesn't hold to such reasoning, but like I've already pointed out considering the number of regulatory and accountability measures European governments (and the EU) have taken on since the Parmalat debacle it's pretty safe to assume that they don't feel such action is warranted. If you are saying the reasons for why the European governments don't think it's warranted is an important factor to examine, then I'd say that I pretty much agree-- let's find out, shall we?

You are correct to dismiss "it's complicated" answers. I think if you perused this sub-forum you would find something very much more helpful than that from many posters here. But it may serve you not to dismiss that out of hand as well.

I don't dismiss "it's complicated" based on anything anyone on this forum has said. I mostly only read (instead of post) in this subforum but I don't get that impression from anyone on this subject. Instead, I definitely get that impression from the statements coming out of Washington, DC and from many of the pundits on television, as well as the politicization of the problem by the presidential candidates. To the latter, I think one of the worst things to happen in this crisis is to have it come under the influence of presidential campaigning, because political campaigning has a way of skewing facts and distorting the issues until they only barely resemble reality. To the former, I get the impression that the Treasury and Fed wanted this to happen too fast and that the fallout from the inevitable questions to follow isn't being handled well by the White House (who gave a wholly uninformative speech on the subject), the Fed, or the Treasury.

My position: The way this bailout proposal has come to Congress and the requirements therein are too fast and too broad (respectively) with far too little explanation and information as to why and how (respectively) the Fed and the White House (including the POTUS and Treasury Sec.) feels this is the only option for the economy right now. I understand the situation and I know it's bad. It's been that way for months now, despite recent past statements by the very individuals selling this proposal that were to the contrary. Since it's my (as a taxpayer) money and my (as a consumer) confidence that are necessary for this to even go through, then every elected and delegated official involved in this-- namely the POTUS, the Fed Chair, the Treasury Secretary, and the Senate & House Banking Committee (and possibly others)-- need to be a whole heck of a lot more transparent with me as to requiring answers and explanations, particularly on the subject of why the sudden turnaround and why the Fed and Treasury think this is the only (or even the best) answer.

Does that position really sound unreasonable to you? The same as you, I understand the reasoning being put forth by the Fed and Treasury in the proposal. I simply find that reasoning to be faulty and/or insufficient (for reasons partially touched on above).

 

[GreNME]

Can you elaborate on this, please? Are you saying that Europe has engaged in the same risky subprime lending practices that the US has over the past decade? Or are you saying that because the US financial system is in trouble (due in part to this subprime mortgages), it's a problem for Europe as well?

The answer is basically "neither of those two." The reason Europe has a stake in this is because these subprime loans, in the process of being packaged into securities and sold to investment firms and other banks or organizations, made their way pretty much all over the place in the world banking market, since mortgage-backed securities with fancy names were considered sound investments in the same way real estate is normally considered a sound investment. As such, this means there are a lot of these securities that have been bought by banks in Europe, Asia, South America, and other places along with the firms we know and "love" in the USA. These other banks may not be facing complete meltdown or collapse as a result, but they do stand to lose plenty of money in the process, possibly to the tune of billions or tens of billions (and maybe more). So yes, it is a problem for Europe as well.