Hurrah!! The Bail Out Defeated 228 to 205

Tallen234 wrote:I am reluctant to argue politics on this forum, but.....

This mess is very complicated for a variety of reasons, but the fact remains that there is a substantial liquidity problem in the market. Regular businesses can't get credit and this will affect a host of people. For example, Sonic (the fast food place) uses GE Capital as their lender to help their starting fanchisees. GE Capital has stated that it has stopped its loans on further Sonic franchisees, thereby halting new businesses, depriving contractors of business, new employment opportunities, etc.

A lot of the blame rests with Fannie and Freddie Mac who "backed" loans to people with less than desirable credit, especially at very attractive rates (subprime). Because of this federal support, Fannie and Freddie ignored typical risk (and reasonable lending practices) and loaned all kinds of money to very risky people. People, who couldn't afford a particular house, took out a 100% financing loan with the expectation that the market would go up and they would be able to refinance, etc. When the housing market didn't go up, these homeowners started to default and become delinquent on their mortgages. Now, in the business world, these mortgages are packaged as mortgage backed securities. Because of the problems, these securities are now "toxic" and, right now, worthless. Another one of the problems is that there is "mark to market" accounting practices that requires a company to list this asset according to what it could sell it in the market. Although there is still "value" in these securities (i.e. there are still 85-95% good loans in these packages that people are still plying and even the defaulted loans still have property as security), the government requires the company to list them as a 0 on their balance sheet. So, there is very little money left for the company to "loan" to the market and the companies are, in fact, selling off assets to raise money to help balance their ledgers.

Now, I agree that it would be nice to see the sleezy companies who didn't evaluate risk properly to "crash and burn". But, the problem is that this will hurt the majority of us who may require loans in the near future (mortgage, student loans, etc.). I have a friend who had to put something like 35% down recently on his house in order to secure a loan. I know a few people who had their savings accounts at a local bank that went under wiped out. Yes, they were insured to 100,000, but these folks had more than that "saved up" for retirement.

So, now the BIG question, what to do? The bailout was a way for the government to get involved in handling these toxic securities (that still have some intrinsic "worth") and eventually sell them to recoup the 700 billion sometime in the future. Now, there are reasonable economists who believe that the bailout is not the right path and that they should let the free market handle the situation (bankruptcies, etc.). The support for the bill was very strange, both Democrats and Republicans supported it, AARP, Citizens Against Government Waste and the U.S. Chamber of Commerce all supported it. Hardcore conservatives and very liberal democrats voted against it. Strange bedfellows, indeed.

The bailout may work to a certain extent, but nobody knows how effective it will be. There are other options to free up $$$. Raise the FDIC insurance limits on bank accounts, eliminate/freeze the "mark to market" accounting requirement (I think they are doing this), allow the FDIC to "insure" mortgages.

In short, it really is a mess. (my own 401k lost 20% recently!).

DreamStalker wrote:I heard the same things on the news but it still does not make sense. How can they be toxic worthless securities but still have 85% to 95% value? ... and therefore how will 700 billion be recouped?

How does increasing FDIC to 250K make the bailout any better?

How does deregulating market to market accounting make anything less toxic?

Seems like allowing FDIC to insure mortgages would make FDIC less stable (ie. where will they come up with the money to pay claims?).

Yes it is a mess. The cleanup should be paid by the ones who made the mess ... of course Exxon still has not paid for their mess of Prince William Sound 20 years ago

Nevertheless, if nobody pays for the cleanup, somebody should go directly to jail, not pass go, and not collect 700 billion dollars!!

DreamStalker wrote:Seems like allowing FDIC to insure mortgages would make FDIC less stable (ie. where will they come up with the money to pay claims?).

The case against a federal bailout
Steve Chapman
September 25, 2008
The late comedian Jack Benny made a career of claiming to be a cheapskate. In one joke, a robber accosted him and said: "Your money or your life." Getting no response, the thug repeated his demand. Benny replied, "I'm thinking about it!"

That's the sort of dilemma posed by Treasury Secretary Henry Paulson and Federal Reserve chief Ben Bernanke in their proposed rescue of financial institutions. They predict dire consequences if they don't get their way. But the consequences of letting them have their way are so awful that the alternative doesn't look so bad.

What they prescribe is for the federal government to buy $700 billion worth of lousy assets from banks and other lenders, exposing taxpayers to a potentially crushing liability. This plan would nationalize the money-losing part of the financial sector, to the benefit of capitalists who have made spectacularly bad decisions—fostering more bad decisions in the future.

It would add to the liabilities of a government that is already living way beyond its means. It would give unprecedented power to a couple of officials who have proved highly fallible in trying to avert this alleged crisis. And it poses the risk of abuse and corruption because the government has no way to gauge the value of what it will buy.

Nor is there any guarantee the plan would work. The cover of the latest issue of Fortune magazine hails the "steely-eyed Treasury chief" under the headline "Paulson to the Rescue." The story appears brilliantly timed—until you realize it is about the earlier rescue of mortgage giants Fannie Mae and Freddie Mac. That was just one of several steps taken by the feds that were supposed to halt the downward spiral. None of them has.

The latest action was justified by the threat that the entire credit system would cease to function. "Last week, our credit markets froze," Paulson told the Senate Banking Committee. "If that situation were to persist, it would threaten all parts of our economy."

George Kaufman, a finance professor at Loyola University Chicago, is skeptical. "The last refuge of a scoundrel regulator," he says, "is to shout 'systemic risk.' " Usually, the alarm is false. He notes that aside from interbank lending, the credit markets were functioning tolerably well at the height of the crisis. Rates on 30-year mortgages actually dropped last week.

If banks really need to get rid of this junk paper, they could have unloaded it before now. Merrill Lynch & Co. did itself a lot of good by facing reality and taking 22 cents on the dollar. But other companies now have the far more enticing option of selling to the government at a premium.

The point of the plan, after all, is to shore up struggling firms by awarding them more for those assets than they could get anywhere else. As an analysis in The Washington Post put it, "the more effective the plan, the more expensive it will be."

Not only that, the more effective it is, the more damage it will do to the free-market system. Saving companies from their bad gambles turns business into a game of "profits for me, losses for you," corroding the incentives that make capitalism so innovative and efficient.

And for what? Bernanke warns of a recession. But economic downturns are not to be avoided at all costs. And one good thing about recessions is that they end, usually in a matter of months. An intervention of this nature, by contrast, would have malignant consequences for decades to come.

A group of 122 economists, including at least two Nobel laureates, signed a letter this week summarizing the danger: "If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted."

Not to mention the risk of giving the executive branch powers that a Russian czar would envy. If this bailout goes through, the term "limited government" will have to be permanently retired.

Paulson and Bernanke say, and probably believe, that their program is for the good of us all. But remember what Thoreau thought of their 19th Century counterparts. "If I knew for a certainty that a man was coming to my house with the conscious design of doing me good," he wrote, "I should run for my life."

DreamStalker wrote:Economics is not my field of expertise by far ... but I too have come to pretty much the same understanding as Chapman's discussion above. The econmic cycle is ... well, a cycle with ups and downs, winners and losers.

These Washington/Wall St. clowns (I mean crooks), whatever, ... are simply trying to get one last raid of the treasury before the GOP is booted out of power. They are attmepting to rig the already rigged system into the perpetual heads they win, tails we lose often mentioned by Obama (I still don't understand why he is supporting Bush on this bailout).

Bert_Mathews wrote:

DreamStalker wrote:Economics is not my field of expertise by far ... but I too have come to pretty much the same understanding as Chapman's discussion above. The econmic cycle is ... well, a cycle with ups and downs, winners and losers.

These Washington/Wall St. clowns (I mean crooks), whatever, ... are simply trying to get one last raid of the treasury before the GOP is booted out of power. They are attmepting to rig the already rigged system into the perpetual heads they win, tails we lose often mentioned by Obama (I still don't understand why he is supporting Bush on this bailout).

BAILOUT is NOT a Economic Cycle!
Rewording the same bill DOESN'T change it into something we should swallow.....