September 25th, 2008
|05:21 pm - Two economic thoughts|
$700 billion seems like a lot of money. It seems particularly a large amount of money to use in making bad investments. Please correct me if I'm wrong, but isn't that what's being suggested? My impression is that places like AIG and Lehman Bros. are in trouble because they bought a bunch of mortgage-backed securities that are no longer worth as much as they used to be. So our plan to fix this is to buy those poor-performing investments? Why not skip the middle-man and simply buy the houses that have been foreclosed on? Turn them into public housing for the homeless. That would shore up the mortgage-backed securities because now those mortgages would be paid off (or being paid off; it might make more sense to assume the mortgages than make out-right purchases). Better yet, how about using that $700 billion in a program so that people who are defaulting on their mortgages can get caught up and get into a mortgage plan they can afford?
Which leads me to my second thought: President Bush told us last night this was at least partially about providing capital so that banks could make loans. Seems to me, the banks in question were making loans that got us into this mess in the first place. So why not take that $700 billion and build a new bank? Don't give the money to these failing banks that made bad decisions, but find some new bankers to do the job right and get them started with some new capital. Then build in a plan where said bankers use their profits to buy back the government interest in their corporation over time, slowly becoming an independent entity. That seems to me like it would get the capital necessary for driving the economy back into circulation and would give the government oversight into how things were run to avoid a similar problem in the future.
I'm guessing I'm highly naive about how these things work, but it is frustrating to hear that the options are to either bail out the fuck-ups or the global economy goes boom. Surely there are some other options.
|Date:||September 25th, 2008 11:24 pm (UTC)|| |
I don't think you're naive; I think you've got it exactly.
You're not naive, but you don't see the interrelationship between many financial instruments.
For example (and this is a made up scenario based on real ones), a financial institution makes many kinds of loans, and the financial institution borrows money to carry those loans. What they were betting is that enough of the bad loans would come in to pay off their operating debt. When property values go up, this is a good bet. But property values went down, and their bets turned sour.
In the current case, they screwed up and made many bad loans and now they can't pay off the debt on the loans they're carrying. Worse, the good debt -- the people who are paying off their loans -- are all of a sudden being serviced by a financial instrument with a higher degree of risk. That is, they pay more for their loans. (This doesn't affect current homeowner loans much, but does affect many business loans.) In other words: When the financial institution fails, the smart guys suffer with the stupid ones.
Merril Lynch sold the company for pennies on the dollar. The company that bought Merril knew much of their loans would never come in, but it also knew some of them would.
What Paulsen is proposing (if I understand it right) is to buy the bad paper not so much to own bad paper but to ensure the liquidity of the whole revenue stream. Believe me, it's more complicated than this. The immediate effect will be to make bad gambles look like good ones, but (Paulsen is saying), the House always wins and the US government has much deeper pockets than any one bank and can hold on to bad paper longer and potentially sell it at a profit given enough time. (This is what Coleman is talking about, though he's pretty clueless as to how or if it works.)
Okay, that was the medium short answer. Here's the even shorter answer: The bailout isn't about mortgages, it's about keeping money flowing.
The problem is that much of the money will flow to UBS (the Swiss firm that Phil Gramm works for) and the Chinese, and others who own a lot of the Bush Debt.
Hope this helps.