Conservative columnist Glen Beck on our "financial disaster:"
So now that we're here, what do we do? I am massively conflicted about this bailout program. The idea of government stepping in to bail out international banks that were reckless with their own business literally makes my stomach churn. We are privatizing gains and socializing losses.
As George Will wrote this week: "Treasury Secretary Paulson, asked about conservative complaints that his rescue program amounts to socialism, said, essentially: This is not socialism, this is necessary. That non sequitur might be politically necessary, but remember that government control of capital is government control of capitalism."
Unfortunately, he's right. In fact, it would have to take an absolute disaster to make me even consider supporting something like this. Welcome to that absolute disaster.
I will have to say that I have absolutely no strong opinions about Wall Street or "the Market" in general, as I just don't understand it much. I'm inclined to think that I don't understand it because it's not a logic-based system, but more of a faith-based belief system in a faith language that is foreign to me.
Full disclosure: I don't invest. I don't have an IRA or retirement fund. I plan on working until I die. I'm not hung up about it and if it feels okay to you, then I'm not upset that others do the investment thing, it's just not something that fits within my belief system.
Partly, again, because I don't understand it all.
So, my inclination is to say: What the heck's going on? Why are we even thinking of giving hundreds of billions of dollars to for-profit corporations?? While I don't generally agree with Beck, this sure sounds like we've privatized profits and are considering socializing losses? What gives?
Now, I understand that some say that this kind of "disaster" might mean (or WILL mean) that many (millions?) of regular people will lose their money or some of it and for that reason, we ought to support this sort of bail-out.
I remain skeptical, but am concerned for the regular folk who might be hurt, if that is indeed the case.
So my one thought and two questions are:
1. If we even consider this bail out, there ought to be a good many strings attached.
2. Wouldn't this kind of thing argue against the privatization of Social Security?
3. Can anyone explain this to someone like me who is not a part of the capitalist religion?
16 comments:
1. Pretty much. I'm wholly disinclined to support the transfer of hundreds of billions of dollars from American taxpayers to reckless and wealthy companies and people -- even if their are immediate, short-term consequences for the little people who will be effected by the collapse of these companies. The bailout would be like giving a drug addict in withdrawal more drugs in order to get him temporarily functional. I like this comparison between the bailout and the martingale strategy in gambling.
2. Not really, although I get what you're saying. The federal government has made robbing Social Security a part of normal operations, whereas it is less common in the private sector. CEOs and CFOs have occasionally gone to prison for embezzling activities, but members of Congress never have for robbing Social Security.
3. Sorry, but I'm not qualified.
I really don't understand the issues in anything even approaching surface-level complexity, but my gut tells me that the American people will be shafted by this bailout plan.
By the way -- I'm in a very tight financial situation. How do I get Congress to bail me out?
There's no way, of course. Rules are for the little people, not the elites.
I'm in a very tight financial situation. How do I get Congress to bail me out?
I suppose the lesson learned here is that you aren't in ENOUGH debt, yet. See if you can't spend a few hundred billion into debt and THEN see if you can get some gov't aid?
To be honest Dan, I don't know a whole lot about it. On the surface, I tend to think bailouts cause more harm than good, but I am not informed enough to really explain anything, plus I am biased toward capitalism anyway.
2. Wouldn't this kind of thing argue against the privatization of Social Security?
First of all, I agree with you, in that I don't want to go 20 years of my life simply not working. I plan to do something until I can't.
Anyway, one thing with my investment plan is that the amount of risk you put into your plan is very dependent on how long it is until you retire. So, for someone like me, my gains will go down this quarter, but I have over 30 years to make it up. Not only that, but my investment dollars go further since stocks are cheaper( although I don't invest directly into stocks). When I am older and have less time and more money to lose, the wise thing to do is to make my investment allocation much more conservative, so that I would lose less.
That being said, someone would have to know these things, but I think it would be reasonable for the Social Security fund, or whatever it is, to manage it to some extent and allow the person to change it if desired. I think the default for a privatized Social Security fund would be to put it in a money market, which is pretty safe, and even insure it to some extent.
Anyway, I don't know if that helps since I am such a strong free-market advocate, so my opinion may sound like the expected one.
I do agree with John in that giving our money to politicians is always a losing bet, but you may think the same about corporations.
To be clear: I am not AT ALL convinced that giving $700 billion from the taxpayer to these corporations via the gov't is a good thing at all.
This whole mess was started by the government forcing wall-street to go into debt in order to give poor people "affordable" housing. Well as the famous preacher said our chickens have come home to roost. The answer is to give the bailout and lift the requirement for banks to give loans to poor people.
http://www.youtube.com/watch?v=H5tZc8oH--o
Edwin Drood is about as wrong as wrong could be. What happened is this. Banks made mortgages at a time of low interest and general prosperity. These mortgages were then bundled together and sold to larger institutions - investment banks, brokerage firms - who used them as collateral for leveraged investments in all sorts of things. In other words, they used the promise of payment, the stated dollar value of a whole group of mortgages, rather than any accrued equity, as insurance to take out even bigger loans to play the stock market.
The system became self-perpetuating. As the investment banks realized strong gains, and as the original banks continued to make money, and as real estate agents continued to see the value of their products rise, no one really paid much mind to the artificiality of it all. Mortgages were made on increasingly shoddy terms - interest only loans; little or no down payment; variable yield mortgages in which the payments would jump, but only after a few years (presumably to persons who did not believe they would live in the houses when the payments suddenly doubled or even tripled) - and many, many loans were given under fraudulent terms, not the least of them being the falsification of everything to stated income to the value of assets used as equity. These were not the fault of government "forcing" banks to loan to poor people of color. These CRA - Community Reinvestment Act - loans are among the most stable and best repaid mortgages on the books. Rather, what happened is the artificial appreciation of real estate suddenly became too precarious to uphold, and last summer the bubble burst. Suddenly, millions of homeowners held mortgages in which whatever equity they may have managed to attain vanished as the value of their property sank below the dollar value they owed. Added to that was the sudden increase too many people faced as their variable-rate mortgage suddenly demanded a payment far in excess of affordability. The people were left holding mortgages that were, in essence, worthless. The banks that had originally made these mortgages didn't care so much, but those to whom they were bundled and sold suddenly found themselves with worthless collateral used to support loans they were using for market speculation. Rather than an old-fashioned bank run, what occurred was an investment bank run. Big banks like Citi, J. P. Morgan Chase, the now defunct Washington Mutual, the soon-to-be defunct Wachovia all had loaned money to the big investment banks, and they knew these loans were now in peril. They demanded immediate repayment - a kind of run. The big investment banks, needing cash, tried to sell the bundled mortgages, and found they could not. In other words, so much of their assets were now worthless they essentially went bankrupt almost instantly.
I personally have said that not a single solitary penny (well, OK, I said dime) should go to these people. The argument they are "too big to fail" is simply ridiculous on its face. Businesses fail all the time, even banks. Rather than hand these people a bunch of cash for worthless pieces of paper, it might be better to simply nationalize them - seize their assets and operate them on a non-profit basis, selling off their profitable business interests while either forgiving or slowly liquidating the unprofitable ones. This, too, is socialism, but it is far more in keeping with our history and traditions than handing the Treasury a check, blank or not, strings or not, to give to private firms to keep them solvent in some way.
Mortgage meltdown is a result of Predatory lending which is a result of the Community Reinvestment Act (CRA), combined with Democrats blocking regulation of the CRA.
http://www.youtube.com/watch?v=H5tZc8oH--o
We can prevent this from ever happening again if we do away with the Community Reinvestment Act.
3. Simply put, or every $1 of mortgage, there was about $3 of investments created that relied on the mortgage being repaid to maintain it's value. That's $2 based on nothing but a promise of repayment.
That extra value was re-invested again and often it was in mortgages again which means that the original $2 that was created out of thin air was creating more money out of thin air.
Large banks (in the US and globally) had a lot of their investments in these $2 pieces based on mortgage repayments. When it became obvious that the housing market was recessing and defaults were rising, suddenly the thin air money became very hard to value and left these banks with no money.
It may seem a little strange to have a condition where there is money coming from thin air - but it's a fundamental of our economy if you think about it. We generate value from human capital which can't be owned. An assembly plant is no good if no one is building the producct -so in essence a lot of the value that goes into real products we buy is "thin air" too.
The real problem with mortgage problem was that the thin air was used to create more thin air - not hard assets and when a small rise in mortgage defaults occurred (a few percentage points - the default rate is still only 5-7%) the air leaked out so to speak.
Having said that, the real problem is that the investment banks that are in trouble are also the source of credit that most companies rely on to pay their payrolls. In a worst case scenario, even though the company is profitable and selling real products, they may not be able to get short term loans from their banks to pay the payroll. Without payroll a lot of families will hurt.
Some bailout is probably necessary for just that reason. How much - I don't know.
Edwin Drood, the CRA was passed in 1977. Thirty one years ago. The practice of bundling mortgages together, selling them, and using the value of the promised payment as collateral developed after the revocation of the Glass-Steagall banking act, which happened in 1999, under a Republican Congress. CRA loans are among the safest, and surest in the country.
The problem was two-fold - housing prices were way over-valued, even as banks offered more and easier and different types of mortgages to borrowers more and more on the margins (not an issue with CRA, which has strict guidelines for lending). There was rampant fraud, as these mortgages were seen not as a consumer product, but rather a potential commercial potential.
This has been seriously debunked all over the place, and I really, really will not waste any more time trying to explain facts to someone who is either too ignorant to understand, or simply chooses, for whatever reason, to ignore them.
When Carter passed the CRA it was OK, government gave wall street incentives to give low income earners home loans.
In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities.
In 1995 Clinton Authorized subprime mortgages in order to reach more low income earners.
Wall street complained that there was no way to mitigate the risk they were taking for loaning money to poor people.
The government responded by allowing them to securitize the mortgages and sell them off.
Wall street took it and ran issuing 1 trillion dollars in subprime loans. (This is known as the law of unintended consequences)
Demand rose as more home buyers entered the market so home values rose (as one would expect)
If companies did not give poor people loans they would be penalized by the government.
How do you give a poor person a big loan??
that's right predatory lending.
The Government caused this it is the fault of congress and specifically the congressmen who took huge payoffs from lobbyists to block legislation(2003, 2005) that would have prevented this from happening.
We obviously should expect them to fix it.
Perhaps it is too much to say do away with the CRA. But at least we should rewind it back to 1972 were it was meant to help poor people who were bettering themselves and didn't need bad credit dragging them down.
As far as the congressman who took the most money from freddie/fanny I will give you two hints.
1) two of them are from IL
2) one of them is running for President
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sources:
http://boards.msn.com/MSNBCboards/thread.aspx?threadid=793869
http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html
http://www.govtrack.us/congress/bill.xpd?bill=s109-190
I know that I don't understand the internal structures of Wall Street. However, I think we are in enormous crisis. The picture that goes through my mind is that of the Twin Towers. We are now watching them burn. Without some kind of intervention, this structure we know as Wall Street will fall. The problem with allowing that to happen is that everyone will be destroyed. The poor people will go first. I think this is an opportunity for socialist redistribution if they government plays this properly. That is the very best we can hope for.
I just read this great line from Mark Steyn on the subject of the bailout:
As a general proposition, when told by unanimous elites that a particular course of action is urgent and necessary to avoid disaster, there's a lot to be said for going fishing
Thanks for your thoughts, everyone. As I said, I don't have much insight into this area. I do like your last quote there, John.
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