Economic Gurus - tell me where I am wrong.

[Laura PourMeADrink]

I don't think of it as a bailout of Wall Street - but a bail out of Main Street.
The core of this issue is that people got mortgages who couldn't afford them.

Sure, the market securitized them, not a crime in itself.

But then some of the people who couldn't afford them, couldn't pay. Home prices
dropped. They couldn't sell. They had to bail out. This is a separate segment of
homebuyers that Obama and Pelosi plan to address outside the "bailout"

Those who are still eking by, represent all mortgages left that are the underlying
assets of the securitizations.

Because of the current market, these assets have dropped in value. Banks can
not determine their true worth.

Enter the government, with the bailout bill. Much more precisely it is
an asset purchase by the government. The government will buy these assets
at a reduced cost.

This plan puts liquidity back in the markets which will help the entire economy.
It also provides more hope that terms for these homeowners can be renegotiated
and they can stay in their homes.

It strikes me that this plan is a win win.

[gravity]

1. You got it basically

The terms to renegotiate mortgages were thrown out to get Republicans support, but that might change soon enough.

[Laura PourMeADrink]

2. That's not likely something the repukes will agree to thought, is

it. I suppose also, any renegotiation would affect the value of
the security since a factor in their value is the payment stream.

[maui9002]

12. Actually, there is something in the bill to that effect

I gather it's watered down from what the Democrats proposed, but sections 109 and 110 give authority to the government to provide relief to mortgagors facing foreclosure; it's not an obligation, it's just an authorization, but consider that the people managing this process after January 20, 2009 will be folks appointed by Barack Obama (hope that doesn't jinx him) and a Congress controlled by the Democrats.

[The_Casual_Observer]

3. They never did this before. FDR didn't even propose anything like this.

It's much worse than a some bad mortgages, the big lie is that the "fundamentals are strong". What fundamentals? Google valued at 50 billion or whatever?

There isn't any basis for strength or prosperity anymore. We are a net importer or everything and an exporter of skilled jobs only. It was only a matter of time till the payment came due.

[Laura PourMeADrink]

6. you are right. it's time to pay the piper. Bush's mistake - timing.

He and his cronies knew this would happen - they just thought it would happen after a Dem got in.

[rebel with a cause]

17. We globalized the world and then the world turned around

and globalized us. We, the people, are reaping what they, the corporations, sowed. The bail out may help the corporations, but no bail out will not destroy them. No bail ou will however destroy us because we are reaping what we did not stop from being sowed. We will suffer what those third world countries suffered when we, the corporations of the US, caused them to lose their way of life to the greedy globalized world. Privitation will rule our world completely and we will become human capital.

Just a thought on this early morning.

[spelldmilk]

4. Okay, Riddle me this:

How is it possible that faulty mortgages are able to cripple a global economy? I want to hear someone tally the financial losses from all natural disasters since Katrina, All of them. This would include individual's who lost their homes and jobs, businesses that lost their property and revenue and a consideration of the loss of usable land. Then, after those elements are addressed, I want the same smarty pants to explain why, exactly why, businesses need to recoup projected losses.
I would love it if someone could address this question: What is the percentage, of losses that businesses are claiming, from projected revenue? Everybody's saying that these businesses got to big to fail, and I just do not buy it. I will not buy it.
I just want the truth. WTF is REALLY going on.
Bear with me, I'm a text person, not a numbers person, and I'm not even sure I can articulate this right:
Money is able to generate more money because of "interest," which, while some try to claim method to the madness of rates, is essentially arbitrary. Value is also rendered arbitrary when the relation of supply and demand is discarded, and "demand" becomes a state to be stimulated for further creation of "supply" (goods).
Okay, basically,
I have come to understand this fiasco as an intentionally created collapse. Corporations have depleted their resources: they have wrung out as much money as they possibly could from people's voluntary participation, so now they are just going to take it.
Is this close to home? (no pun intended)
It seems that the ONLY possible plan, one that projects Long Term, is to "bailout" citizens. Lower interest rates and fees on credit cards and loans to the barest minimum, and tell the corporate execs to go fuck themselves. Let the national economy stabilize, and let the multi millionaires sit on their money, or perhaps invest it in green industry, or education, or health clinics, SOMETHING that will help individual humans to become productive and prosperous consumers.
I mean, really, that's what they need, Right?
Ugh…

[Laura PourMeADrink]

5. That's exactly what I was thinking. How could this one segment

ruin everyone? Was there no diversity? They said only 3% of these mortgages will go bad. Past
dues are only at 5 something. There must be so much more.

I like the way you think. If it's the underlying assets that are really the problem - let the money
go to the homeowners in trouble. Instead of trickle down - trickle up. Then the securities will
be worth more and everyone will be happy.

[spelldmilk]

7. Thank YOu !

I don't feel completely crazy now. I've seriously been experiencing vertigo when trying to figure this out.

[vaberella]

9. It's a global situation because of sold debt.

Most of these mortgage loans, credit loans----get sold to world companies and we're actually paying them through a sort of middle man. They hold our debt, so when we fuck up we fuck up their credit.

[GoesTo11]

18. Lack of transparency makes it much worse

When institutions don't know what their investments are worth - how many of these defaulting mortgages they bought - then they have a strong aversion to holding them. In some cases, that's a matter of regulation - they might be in default if some of their asset value / debt ratios get sent too low. In some cases, it's a matter of distrust - for example, if Goldman Sachs was shorting bad mortgages at the same time they were selling them, why would you buy more from them? Things are hard to unload at a time everyone wants to unload them, so values drop, and this causes a spiral. There's more going on, but what I described is already different than a Katrina situation, where insurance companies do what they are expected to do, just more of it.

[sfwriter]

8. Grrrr... Please read up about the SECONDARY CREDIT MARKET...

Before you blame a single former homeowner, please read a bit about why this has become a crisis.

In addition to the lax lending policies of lenders, there is a shadow financial system that is creating this problem. It is not transparent. It is not regulated, and it is 6 to 10 times larger than the mortgage problem. They essentially "whipped" $12 trillion in mortgages into $72 trillion in secondary credit that is undocumented with respect to value. Since it was based on fast and loose lending, and since nobody knows what these financial instruments are worth, nobody knows who to trust and money is not flowing.

http://www.rgemonitor.com/blog/roubini/249924

The people who took out montages really have very little to do with it since they trusted what they were being told by their lenders. It's not like they took the money at gunpoint. I think it is a reasonable assumption that the person loaning you money would make reasonably sure they could get it back, right? Well wrong since the person loaning the money was selling it five time through derivatives and other strange financial instruments created by our pals in the previous Republican congress.

http://en.wikipedia.org/wiki/Shadow_banking_system

Finally, another nail in the coffin is the Republican bankruptcy bill which has driven what would have been otherwise solvent Americans from their homes. Before, when you could actually qualify for bankruptcy and possibly refinance your home, you could stay in it. Now we are seeing people making $100k a year walking out on their homes and debts because they have no bankruptcy protection.

Again, you would think that the person lending the money would take greater care, but no, in the "NEW REPUBLICAN ECONOMY" accountability is for suckers. Without bankruptcy, we'll get blood from that turnip, just wait and see.

Now banks don't know who to trust, and the scary, scary thing is, you can't get crap into Walmart, or grapes into your mega mart without credit along the way to pay for the gas, freight, and other charges. If functional lines of credit dry up, shelves will go bare. Food riots for Christmas anyone? That is the horror story that was shopped to congressional leaders leading to the panic and bail out plan. Is it true, I don't know, but if I were them I would have figured out how to address that little nightmare before bailing out the crooks who created the mess.

Finally, it looks like this was all a chance to grab the national silver on the way out the door after all. Leaked transcripts show collusion between Paulson and these financial institutions. Before the tinder crisp Republicans terrified of election year fire heard their righteously angry constituents and bailed out of the bail out, Paulson and friends were eagerly cutting up the pie. How the hell did the Royal Bank of Scotland get into the picture? See how they chuckle at the possibility of selling overinflated assets to the government? they are oh so smart and secure that their men on the hill have delivered.

http://www.apj.us/index.php?option=com_content&task=view&id=1825&Itemid=2

Anyhow, this is a scam on top of a scandal over a corruption built on deregulated greed and is being blamed on the people who borrowed the money in much the same way a rapist blames the tight blue jeans of his victim.

Again I say, accountability is for suckers to these crooks. And I also say let them burn. save the $700 billion for restoring credit to the solvent institutions for existential lines of credit necessary to real needs in our economy after the fire sale has swept away the crooked. Of course, with another $600 billion pumped out the back door by the fed to service the interest on the growing heap of crap on their books, the fire promises to be even bigger.

[vaberella]

10. Thanks for this, it's very informative.

And don't the Repubs want to use the secondary market to bail us out, with the credit swap?

[sfwriter]

11. Yes, and read the bill...

In addition to the sections that let Paulsen SUSPEND accounting rules RE valuation to set any price he likes, the amount is $700 billion at any one time, essentially a revolving slush fund of crap. Paulson can also give the business of selling these assets to the same firms he is buying them from. I wonder how many times they could float through the shadow system, being resold to the government over and over as they are cleared from the books, bought at a loss to the U.S. and resold to her again.

Everyone talks up the auction plans and ways to set value on them, but further down, the bill gives him the ability to suspend that and hand it off to his Wall Street buddies.

[Laura PourMeADrink]

19. no one is blaming the homeowner. But it is an undisputable

fact - for whatever reason - some people can not afford the mortgages. period.

[abumbyanyothername]

13. The miracles of multiple layers of leverage.

Nobody was using their own money in the whole scheme. Everything was borrowed. Every default causes another default which causes another default which causes . . . etc.

[TheKentuckian]

14. I think people have trouble grasping what a house of cards

that has been allowed to be built on the unchecked greed of people.

All of this crap is leveraged throughout multiple sectors because of practices that sane people would think would be straight up felonies, but of course they aren't. They're literally creating money out of thin air based on bullshit and as it collapses it takes a huge chunk out of the entire economy.

I think all of our existing economic beliefs are to some degree or another rendered moot in this modern global, information and service leveraged system we have. Especially when rules and enforcement of rules is turned off, there's no baseline and little context. By by the time you unwind the shenanigans, its way too late to resolve the problems created.

I think we need some sharp theoretical economists ASAP. All the stuff we've come up with has failed. I think capitalism as we've known it has run it's course.

[On the Road]

15. Yes, That's a Very Straightforward Summary

the debate has been largely about putting controls on the process and making sure the government gets value out of the deal.

[jeanpalmer]

16. The thing about this plan is

it's so vague that people can characterize it just about any way they want to and no one can disprove it.

"This plan puts liquidity back in the markets...." The Fed is capable of putting liquidity back in the markets, as it did today to the tune of about $200 billion. So why is this plan needed?

The Fed is also capable of sopping up the bad assets as it does now with its lending facilities and term auction facilities. The difference is, under these facilities the Fed merely lends money to the banks etc. and takes the bad assets as collateral. The liquidity is still provided, but without the taxpayers' having to buy the bad assets. Eventually, when the banks recover, they will have to take back the bad assets, which is the way it should be. Why not use this approach instead of your plan?

The current problem isn't one of liquidity -- there's plenty of liquidity supplied by the Fed. The problem is that the banks won't lend to anyone, including to other banks and money markets. Why? Because they're afraid of counterparty risk -- they don't want to lend to other entities when they don't know the true financial condition of these entities. Everyone knows about bad mortgage problem and how that can inhibit bank lending, and there may be $2 trillion of bad mortgages depending on whose estimate you use. But a potentially much bigger problem is credit default swaps, of which there are $55 trillion outstanding. Credit default swaps are insurance policies that subject the issuing entity to liability in the event the counterparty defaults on a debt. Some of this debt has been insured 10 times, frequently by entities not parties to the original debt instrument. In other words, they were simply betting on an event they were not involved in as principals, i.e. gambling that someone else might default on a debt. You can see why banks would be reluctant to lend to other entities, when there is this $55 trillion CDS time bomb waiting to go off.

Now comes Paulson's plan. It would buy up mortgages, but how does it solve the CDS problem? If Paulson buys up the mortgages, will that cause banks to start lending? You're a bank. Paulson has bought up the mortgages, but you know there are still $55 trillion in CDS' out there, waiting to fall, like dominos. Would you start lending, knowing that a credit contraction and a recession are in progress? Not likely. More likely, you'll take the money Paulson gives you and buy safe Treasury securities, just like the banks in Japan did in the '90's.

Back to square one. With the exception that the taxpayer has now acquired $2 trillion in bad assets under your plan.