GreNME
09-24-2008, 10:45 PM
If you haven't heard about the current economic crisis and the proposed bail-out by the White House, then you've been avoiding pretty much any news source to miss it. It's being discussed pretty much everywhere. After sitting on commentary on the subject for a while, now I'm going to discuss it.
The nation's economy has been for a while now sinking into a crisis, based most specifically on the credit market for housing and development. This means home mortgages, to be sure, but it also means development loans taken by companies for new buildings, housing development projects, commercial projects, and so on. These things became a problem because the market has, for the last decade and a half, grown immensely and the prices of real estate and homes have grown along with it. Because of this growth, these loans were packaged together into securities and bought or sold on the market for their intrinsic value, each time they were sold making profits for the seller with the same (or similar) expectation of increased value to the buyer. As the value of these mortgages grew and their worth as a commodity grew along with it, they became a popular investment on Wall Street for large companies looking to increase profits quickly on a quickly growing bubble. Some of these packages were repackaged and sold into larger or more specialized securities, further distilling the level of debt into a more concentrated part of the economy. As long as the real estate-- and keep in mind that it's the real estate, not just homes you and I live in-- market continued to grow, these securities were practically a money tree ripe for the plucking.
Over the last couple of years, this money tree started to look a lot more like a house of cards, and the companies holding them began trying to break them apart and spread them back around in the market, the way things used to be. You see, when these sort of things are spread throughout the market in small concentrations, the risk of them failing is significantly lower than it is when they're concentrated in one place (or, in this case, a few key places). Our economic system is built in such a way to handle crises, because things that experience crises normally tend to be spread out and not taking up a huge part of the economy. Think of it like a shield that has multiple layers to keep anything dangerous from breaking all the way through, even if one of those layers falls apart or breaks. In this case, the concentration of these mortgage-backed securities was like moving all of the layers so close together that one layer breaking could risk a cascading effect and break the other layers. Some companies began to notice this and started to take steps to change that.
The problem, to put it simply, is that they failed. They did it too late.
The market was so good for those making money from these securities that they were slow to move things because they wanted to make more money. Who doesn't want to make more money? Even when the market began to decline, the value of these securities was still very high for a good, long time and the companies holding the securities wanted to move them around in ways that would remain profitable. The danger is this was that things stayed too concentrated, the people running these companies holding the securities weren't admitting that there was a decline taking place, while at the same time politicians and some media commentators decided that the problem wasn't so bad. After all, how bad could it get, right? A few people were defaulting on loans but more people were still paying on those mortgages, and even though the values were rising slower they were still rising. For things to get into a dangerous area, the country would have to go into a recession where consumer spending dropped significantly and stayed that way for an extended period of time.
Almost like a bad fiction, that's exactly what happened.
Oil prices were rising. Between speculation and supply questions, oil companies were forced to pay more for their oil and that trickled down into the fuel market. Since pretty much everyone is dependent on oil for fuel, whether in their cars or for electricity or other things, this meant everyone from the richest to the poorest were paying a whole lot more for their fuel. People began driving less and, as a consequence, began buying less. With so many people spending so much less money, under normal circumstances this would be a minor downturn in the economy where markets adjust, supplies (like oil) shift, and people come up with easier or other ways to spend their money. Under normal circumstances, money still finds a way to flow from one place to another, from one set of hands to another, because people are still working and making more money and consuming things (like food, fuel, bills and luxuries).
Unfortunately for the economy, these weren't normal circumstances.
Because the mortgage-backed securities were making less money and beginning to lose value, the lending companies who make loans should have taken that as a hint and slowed down on making loans, but they didn't. Well, not right away they didn't. Before lenders slowed down on making loans, the government decided to give them breaks on interest rates for the loans they were taking out in order to give us (regular people) loans. You might have heard about the "rate cuts" that the Federal Reserve was giving out early in the year. That's what those rate cuts were-- lower interest rates for lenders (like banks) to take loans from the Federal Reserve in order to loan you (the regular people and developers) money for buying things like houses and cars (and stores and parking lots and apartment buildings and so on). The thinking from the government was that as long as the banks and other lenders continued to make loans that the values of these mortgage-backed securities would eventually start going up again because people wanted to buy things like houses and cars and stuff.
The mistake here was that people were buying less stuff, so fewer people were buying homes and fewer developers were moving forward with plans to build more commercial projects. There were still people doing it, and enough people were doing it that a lot of money was still flowing, but it wasn't anywhere near the amount that would cause those securities to continue growing. The price of oil just contributed to that problem, eventually making even fewer people and developers buy stuff taken from loans, meaning even less money flowing. This started a snowball effect in the economy, and now those mortgage-backed securities were beginning to lose value in startling numbers. All of those companies who held them-- some of their names have been in the news lately-- began feeling the pain of holding on to them and not spreading them out more earlier like they should have. Bear Sterns, an investment banking company, was one of the first to feel the real damage that this would cause, though it wasn't the first company to report losses. However, instead of Bear Sterns having to deal with the consequences of the snowball of continually dropping value of their investments, the government decided to step in and intervene on behalf of the investment company. The reason the government gave for intervening was to help keep the economy from collapsing, just like their reasoning for lowering the interest rates to lenders in the months prior. This government intervention was considered an extreme-case scenario by the government and not something that would have a lasting impact on the economy. What was not made clear to the public (though it was mention in passing in the news) was that the government gave Bear Sterns $29 billion in a loan to save it.
To make matters worse, some in our government were still making public statements that the economy was fine and was, as President Bush put it, "fundamentally sound." However, only months after having to bail our Bear Sterns, the government had to step in to the tune of $300 billion dollars to save the mortgage corporations Fannie Mae and Freddie Mac. Not long after that, the snowball continued building when Lehman Brothers filed for Chapter 11 (bankruptcy), Merrill Lynch sold itself to Bank of America, and the insurance company AIG was given a government loan of $85 billion. All of the things mentioned above were coming to a head and major financial institutions in the US were showing signs of heavy damage.
The White House, even though the government had already put forth nearly half a trillion dollars into this crisis, has recently made a proposal to spend another $700 billion to try to buy up all of these mortgage-backed securities. What the thinking behind this move is, in simple terms, is to basically buy these securities while they are low in value with the expectation that they will then go up in value later. The idea is that with the government holding these securities, they will remain safe and not in the hands of a company that might collapse, and may very well wind up making a profit in return later on.
Let me be as clear as I can possibly be on this subject: THIS IS A BAD IDEA AND A GAMBLE AT THE TAXPAYER'S EXPENSE.
I don't think I could properly exhibit how stupid an idea I think this is. More than $400 billion has already been put into this problem to try to fix it, and now the White House wants the public, the American taxpayers who put these people into office, to go another $700 billion in debt with the hope that these securities don't lose any more money, which will wind up costing us even more in the future. It's a plan full of "ifs" and "maybes" that the White House wants Congress to sign as quickly as possible because after more than a year of denying that there's a problem there is all of the sudden a sense of urgency. Even more galling is the fact that even more money will have to be spent to pay the very people from Wall Street who contributed to this problem so that they can manage these securities for the government, because there currently exists no organization in our government to handle this sort of investment already. This means that the people from Wall Street who were part of the contribution to the problem and who took so long in recognizing that there was a problem (and who failed at acting in time) will be hired on by our government at the taxpayer's expense to manage the investment that they failed to manage properly in the first place.
So, along with asking us to throw money at the problem, the White House is also asking us to pay the people who let this become a problem manage it. This is an extremely insane proposition, and what's worse is that Congress is considering it. Sure, Congress is mentioning things like "salary caps" that will be toothless regulations with loopholes that will be found, but the reality is that the people you and I have elected into office are seriously thinking of paying the people who let this become a problem to manage the problem we're going to be heading close to a trillion dollars in debt over. This idea doesn't only sound bad, it sounds dangerous and not at all thought out as far as the ramifications are concerned. President Bush, in his televised address, claims they are addressing the "root cause" for the economic problem, but this proposal does nothing of the sort. In fact, this proposal rewards those involved in the root of the problem by buying the problem from them and paying them to manage it, hoping for the best later on down the line. There's no guarantee that the underlying economic problems will go away and there is absolutely nothing other than some faint hope that this will avoid a recession. Either way, the ramifications are going to cost the American people for years to come, because this type of investment is going to require being held onto for several years before there's any hope of selling it, and even then there's no guarantee that selling it will have this country break even, let alone make any profit. Just based on a guess, adding in the costs of having Wall Street contractors come in and manage this investment, the government will have to sell these securities for a total of around a trillion dollars (possibly more) just to break even. Even in the best-case scenario, where somehow this does wind up having a profit, who gets those profits? If the taxpayers are the ones who are going to foot the bill on this, shouldn't the taxpayers be the ones who get paid as a result? That's how it works in the business world, but so far there's no such explanation from the White House how this is going to pay out to the taxpayers like you and me, and there sure as hell aren't any guarantees to be given because it's spending money we don't yet have for a profit we may not ever see.
This is the time, more than any other that you and I may see in history, to write your Senators and Representatives, and demand that they act responsibly and with accountability to the people who put them into office, and say NO to this proposal. To contact your Senator, follow this link (http://www.senate.gov/general/contact_information/senators_cfm.cfm) to find the ones who represent you in the list. To contact your representative, follow this link (https://forms.house.gov/wyr/welcome.shtml) to find the ones who represent you in the list. Let them know that you want them to say NO to this proposal, and that any other response from them will mean they are voted out of office. These people are in office to serve you, not Wall Street or financial executives who have already made a mess of things. Not all banks and lenders are going to collapse from this, and it's best to let the ones who have failed learn their lesson and the ones who don't fail to become the banking leaders in this country. We don't want an economy where mistakes are rewarded or our economy isn't going to last much longer. Personally, I like my current lifestyle and the threat of a recession doesn't scare me-- I have enough to last me through a recession and I'm confident we can bounce back. What I don't like is the idea that I and the generations to follow me are going to be footing the bill for an investment by the government that makes little or no difference and very likely will not stop a recession from happening anyway (because, let's be honest, we're likely in one already).
Whether you're Democrat or Republican, conservative or liberal, and anything in-between, we all have bills to pay and we want to have a degree of certainty and self-determination for our quality of life. If we let our government make this bad investment on our dime then we're essentially forfeiting our certainty for a crap-shoot made at the expense of not only you and me, but your children and possibly their children.
The nation's economy has been for a while now sinking into a crisis, based most specifically on the credit market for housing and development. This means home mortgages, to be sure, but it also means development loans taken by companies for new buildings, housing development projects, commercial projects, and so on. These things became a problem because the market has, for the last decade and a half, grown immensely and the prices of real estate and homes have grown along with it. Because of this growth, these loans were packaged together into securities and bought or sold on the market for their intrinsic value, each time they were sold making profits for the seller with the same (or similar) expectation of increased value to the buyer. As the value of these mortgages grew and their worth as a commodity grew along with it, they became a popular investment on Wall Street for large companies looking to increase profits quickly on a quickly growing bubble. Some of these packages were repackaged and sold into larger or more specialized securities, further distilling the level of debt into a more concentrated part of the economy. As long as the real estate-- and keep in mind that it's the real estate, not just homes you and I live in-- market continued to grow, these securities were practically a money tree ripe for the plucking.
Over the last couple of years, this money tree started to look a lot more like a house of cards, and the companies holding them began trying to break them apart and spread them back around in the market, the way things used to be. You see, when these sort of things are spread throughout the market in small concentrations, the risk of them failing is significantly lower than it is when they're concentrated in one place (or, in this case, a few key places). Our economic system is built in such a way to handle crises, because things that experience crises normally tend to be spread out and not taking up a huge part of the economy. Think of it like a shield that has multiple layers to keep anything dangerous from breaking all the way through, even if one of those layers falls apart or breaks. In this case, the concentration of these mortgage-backed securities was like moving all of the layers so close together that one layer breaking could risk a cascading effect and break the other layers. Some companies began to notice this and started to take steps to change that.
The problem, to put it simply, is that they failed. They did it too late.
The market was so good for those making money from these securities that they were slow to move things because they wanted to make more money. Who doesn't want to make more money? Even when the market began to decline, the value of these securities was still very high for a good, long time and the companies holding the securities wanted to move them around in ways that would remain profitable. The danger is this was that things stayed too concentrated, the people running these companies holding the securities weren't admitting that there was a decline taking place, while at the same time politicians and some media commentators decided that the problem wasn't so bad. After all, how bad could it get, right? A few people were defaulting on loans but more people were still paying on those mortgages, and even though the values were rising slower they were still rising. For things to get into a dangerous area, the country would have to go into a recession where consumer spending dropped significantly and stayed that way for an extended period of time.
Almost like a bad fiction, that's exactly what happened.
Oil prices were rising. Between speculation and supply questions, oil companies were forced to pay more for their oil and that trickled down into the fuel market. Since pretty much everyone is dependent on oil for fuel, whether in their cars or for electricity or other things, this meant everyone from the richest to the poorest were paying a whole lot more for their fuel. People began driving less and, as a consequence, began buying less. With so many people spending so much less money, under normal circumstances this would be a minor downturn in the economy where markets adjust, supplies (like oil) shift, and people come up with easier or other ways to spend their money. Under normal circumstances, money still finds a way to flow from one place to another, from one set of hands to another, because people are still working and making more money and consuming things (like food, fuel, bills and luxuries).
Unfortunately for the economy, these weren't normal circumstances.
Because the mortgage-backed securities were making less money and beginning to lose value, the lending companies who make loans should have taken that as a hint and slowed down on making loans, but they didn't. Well, not right away they didn't. Before lenders slowed down on making loans, the government decided to give them breaks on interest rates for the loans they were taking out in order to give us (regular people) loans. You might have heard about the "rate cuts" that the Federal Reserve was giving out early in the year. That's what those rate cuts were-- lower interest rates for lenders (like banks) to take loans from the Federal Reserve in order to loan you (the regular people and developers) money for buying things like houses and cars (and stores and parking lots and apartment buildings and so on). The thinking from the government was that as long as the banks and other lenders continued to make loans that the values of these mortgage-backed securities would eventually start going up again because people wanted to buy things like houses and cars and stuff.
The mistake here was that people were buying less stuff, so fewer people were buying homes and fewer developers were moving forward with plans to build more commercial projects. There were still people doing it, and enough people were doing it that a lot of money was still flowing, but it wasn't anywhere near the amount that would cause those securities to continue growing. The price of oil just contributed to that problem, eventually making even fewer people and developers buy stuff taken from loans, meaning even less money flowing. This started a snowball effect in the economy, and now those mortgage-backed securities were beginning to lose value in startling numbers. All of those companies who held them-- some of their names have been in the news lately-- began feeling the pain of holding on to them and not spreading them out more earlier like they should have. Bear Sterns, an investment banking company, was one of the first to feel the real damage that this would cause, though it wasn't the first company to report losses. However, instead of Bear Sterns having to deal with the consequences of the snowball of continually dropping value of their investments, the government decided to step in and intervene on behalf of the investment company. The reason the government gave for intervening was to help keep the economy from collapsing, just like their reasoning for lowering the interest rates to lenders in the months prior. This government intervention was considered an extreme-case scenario by the government and not something that would have a lasting impact on the economy. What was not made clear to the public (though it was mention in passing in the news) was that the government gave Bear Sterns $29 billion in a loan to save it.
To make matters worse, some in our government were still making public statements that the economy was fine and was, as President Bush put it, "fundamentally sound." However, only months after having to bail our Bear Sterns, the government had to step in to the tune of $300 billion dollars to save the mortgage corporations Fannie Mae and Freddie Mac. Not long after that, the snowball continued building when Lehman Brothers filed for Chapter 11 (bankruptcy), Merrill Lynch sold itself to Bank of America, and the insurance company AIG was given a government loan of $85 billion. All of the things mentioned above were coming to a head and major financial institutions in the US were showing signs of heavy damage.
The White House, even though the government had already put forth nearly half a trillion dollars into this crisis, has recently made a proposal to spend another $700 billion to try to buy up all of these mortgage-backed securities. What the thinking behind this move is, in simple terms, is to basically buy these securities while they are low in value with the expectation that they will then go up in value later. The idea is that with the government holding these securities, they will remain safe and not in the hands of a company that might collapse, and may very well wind up making a profit in return later on.
Let me be as clear as I can possibly be on this subject: THIS IS A BAD IDEA AND A GAMBLE AT THE TAXPAYER'S EXPENSE.
I don't think I could properly exhibit how stupid an idea I think this is. More than $400 billion has already been put into this problem to try to fix it, and now the White House wants the public, the American taxpayers who put these people into office, to go another $700 billion in debt with the hope that these securities don't lose any more money, which will wind up costing us even more in the future. It's a plan full of "ifs" and "maybes" that the White House wants Congress to sign as quickly as possible because after more than a year of denying that there's a problem there is all of the sudden a sense of urgency. Even more galling is the fact that even more money will have to be spent to pay the very people from Wall Street who contributed to this problem so that they can manage these securities for the government, because there currently exists no organization in our government to handle this sort of investment already. This means that the people from Wall Street who were part of the contribution to the problem and who took so long in recognizing that there was a problem (and who failed at acting in time) will be hired on by our government at the taxpayer's expense to manage the investment that they failed to manage properly in the first place.
So, along with asking us to throw money at the problem, the White House is also asking us to pay the people who let this become a problem manage it. This is an extremely insane proposition, and what's worse is that Congress is considering it. Sure, Congress is mentioning things like "salary caps" that will be toothless regulations with loopholes that will be found, but the reality is that the people you and I have elected into office are seriously thinking of paying the people who let this become a problem to manage the problem we're going to be heading close to a trillion dollars in debt over. This idea doesn't only sound bad, it sounds dangerous and not at all thought out as far as the ramifications are concerned. President Bush, in his televised address, claims they are addressing the "root cause" for the economic problem, but this proposal does nothing of the sort. In fact, this proposal rewards those involved in the root of the problem by buying the problem from them and paying them to manage it, hoping for the best later on down the line. There's no guarantee that the underlying economic problems will go away and there is absolutely nothing other than some faint hope that this will avoid a recession. Either way, the ramifications are going to cost the American people for years to come, because this type of investment is going to require being held onto for several years before there's any hope of selling it, and even then there's no guarantee that selling it will have this country break even, let alone make any profit. Just based on a guess, adding in the costs of having Wall Street contractors come in and manage this investment, the government will have to sell these securities for a total of around a trillion dollars (possibly more) just to break even. Even in the best-case scenario, where somehow this does wind up having a profit, who gets those profits? If the taxpayers are the ones who are going to foot the bill on this, shouldn't the taxpayers be the ones who get paid as a result? That's how it works in the business world, but so far there's no such explanation from the White House how this is going to pay out to the taxpayers like you and me, and there sure as hell aren't any guarantees to be given because it's spending money we don't yet have for a profit we may not ever see.
This is the time, more than any other that you and I may see in history, to write your Senators and Representatives, and demand that they act responsibly and with accountability to the people who put them into office, and say NO to this proposal. To contact your Senator, follow this link (http://www.senate.gov/general/contact_information/senators_cfm.cfm) to find the ones who represent you in the list. To contact your representative, follow this link (https://forms.house.gov/wyr/welcome.shtml) to find the ones who represent you in the list. Let them know that you want them to say NO to this proposal, and that any other response from them will mean they are voted out of office. These people are in office to serve you, not Wall Street or financial executives who have already made a mess of things. Not all banks and lenders are going to collapse from this, and it's best to let the ones who have failed learn their lesson and the ones who don't fail to become the banking leaders in this country. We don't want an economy where mistakes are rewarded or our economy isn't going to last much longer. Personally, I like my current lifestyle and the threat of a recession doesn't scare me-- I have enough to last me through a recession and I'm confident we can bounce back. What I don't like is the idea that I and the generations to follow me are going to be footing the bill for an investment by the government that makes little or no difference and very likely will not stop a recession from happening anyway (because, let's be honest, we're likely in one already).
Whether you're Democrat or Republican, conservative or liberal, and anything in-between, we all have bills to pay and we want to have a degree of certainty and self-determination for our quality of life. If we let our government make this bad investment on our dime then we're essentially forfeiting our certainty for a crap-shoot made at the expense of not only you and me, but your children and possibly their children.