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Bailouts are sometimes necessary
Elki
get busyModerator, ClubPA Mod Emeritus
get busyModerator, ClubPA Mod Emeritus
Because meltdowns aren't pretty.
Is it right to spend so much money to bailout giant corporations? Well, the alternative is economic catastrophe, so yes. And stop asking such stupid questions.
Can't it wait? Unlikely, and also unlikely to be delayed in the Hill. Everyone coming out of the meetings seemed suitably terrified.
Who do you blame? You. Remember when I told about the housing bubble, messieurs Jeff/Shinto, and how you laughed? But who laughs now? I do! Ahahahaha!
Victory!
Is it right to spend so much money to bailout giant corporations? Well, the alternative is economic catastrophe, so yes. And stop asking such stupid questions.
Can't it wait? Unlikely, and also unlikely to be delayed in the Hill. Everyone coming out of the meetings seemed suitably terrified.
Who do you blame? You. Remember when I told about the housing bubble, messieurs Jeff/Shinto, and how you laughed? But who laughs now? I do! Ahahahaha!
Victory!
Elki on
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As linked in the Presidency Thread, The Fed is Nearly Broke
Could it be that Paulson is really only trying to cover his own incompetencies? SCANDAL!!!
See the CBC and Air Canada. :P
EDIT: Yes, I see the difference.
Yes, but while we argue about what to do instead, the economy sinks.
the "no true scotch man" fallacy.
There's other things you can do with money?
/Paulson
Edit: But seriously, this is pretty fascinating and terrifying at the same time. Yay economics!
QEDMF xbl: PantsB G+
It's $700 billion, we could do lots of stuff. We could make a money fort for CEO's to play in, a giant money slide...
I'm partial to the money train idea. As in, a train made out of money.
Not now, no. But the cannons seemed well aimed, and only at the firms whose demise would bring about big-fucking-trouble.
You could make so many hats out of it.
Where can I stand to get hit by one of these bricks of money?
In all seriousness, though, generally my answer is no, but this is a special situation. I just think what they are doing now is class-A retarded. If we're going to spend this much money on securities which have no market value right now and which we have no guarantee whatsoever will ever be turned into assets by the feds, why aren't we just paying off 700 billion dollars worth of mortgages? Why do financial institutions, arguably more at fault for the crisis, get the break while homeowners whose rates have now skyrocketed far beyond what they ever expected get left in the lurch?
Also, under no circumstances should any official of the Bush administration be given a piece of law that says "here's 700 billion dollars, do whatever you want with it and oh yeah, there will never be the opportunity of court review of any actions you take with it." They've lost that privilege.
Essentially yes, there are plenty of things we could do with it, but just handing the cash to Paulson and saying "do something! do something!!" isn't really policy. We're talking about a huge federal deficit resulting from this, a huge increase in inflation, and a huge drop in the value of the dollar, for something that we are just hoping will be enough to stem the flow of blood from these financial institutions. Seems a little risky to me.
That is so appalling to me that I'm almost willing to believe the conspiracy theories on dailykos.
We could use those t-shirt launchers they have at sporting events instead.
In any case, is this going to be enough to stave off whatever bad things might happen?
Of course, if we have to start printing bills to cover it, we're fucked anyway.
O RLY?
More seriously, I have no problem with the democrats having trouble believing the party of deregulation and hating minorities was acting purely in good faith there.
Like UBS?
If by "tighter controls" you mean "removing the barriers that stopped these things from happening that were implemented after the last financial crisis that then caused the enron debacle" then yes, they were for "tighter controls"
I mean, just because they wanted to have a new regulatory structure doesn't mean they wanted tighter regulation. Especially considering their track record on the subject.
Included because it uses non-threatening cartoons
Give us a break, more government regulation on F&F wouldn't have prevented this one bit. You've said yourself you think the government was pushing these securities, why would regulation have changed that.
It's the mortgage security insurance industry that has never had to show itself to the light of day before regulators, and I've not heard a peep from anyone about working on them.
Edit: also, we still don't know what Paulson is going to do with that money. He essentially gets to decide for himself. If he wants to run a reverse auction he can, if he wants to target particular banks he deems more important he can.
What we do know is that nothing he does with the money can be illegal.
Bad enough that every time someone tells me, "It's not so bad", it gets worse.
But it's not so bad.
but they're listening to every word I say
Obligatory:
The problem is basically one of insurance, particularly insuring different types of credit. And unfortunately we are precariously set up for the greatest insurance fraud in history due to the unchecked and unregulated greed of the players on all sides of the game.
No, they did not realize that F&F needed "tighter controls". That is a lie. They said that they wanted "different controls"
Tighter=/=different
Because the major problem is a freezing up of interbank lending and a tightening of credit. The mortgage problem is what has caused this, but it isn't the real problem. Counterparty risk is massive between all of the firms, so if a critical one fails, then shit hits the fan, and that why there is a need to prop these firms up.
How, exactly, does that work?
edit: also, that doesn't look like the most objective source, since it's a website about, well, gold.
I'd like to see a link to the legislation McCain was calling for, because I've heard it would have regulated nothing but haven't seen any details for it.
The dailykos article and the non-threatening cartoon version didn't really dumb it down enough for me
Its true. There has been stuff on it on NPR as well as other papers.
The basics of it is a piece security called a "credit default swap"
Wikipedia has a pretty good description of it
A "derivative" is an asset that has value based on underlying factors rather than its own properties. Such a credit derivative is an asset that has value based on underlying factors of credit risk.
Counterparties just means the legal entities involved in the transaction.
The best and simplest way to define it is an insurance policy on something you don't have to own.
You can do a lot of funky things with it[like make people think a company is failing]and there are legitimate reasons to own them[because its hard to insure a debt]. But in the end it means that a lot of people are buying insurance policies on things they don't have to own. And if they end up paying out it the people who are issuing the swaps are going to fold extremely fast.
edit 2: Such, a lot of these swaps got issued because people thought that the debts would never go unpaid. If the swaps get called on, the 46 trillion is essentially the amount the issuers are going to have to pay[iirc].
To put it another way, its like a casino puts up a "long shot bet" at 1000 to 1 and allows all comers. Lots of people play. If the bet wins, the casino folds and very few people get paid. If the bet looses nothing really happens. Such, the problem with the credit default swap is the 10 million dollar bet in a casino looking like its going to win those 1000 to 1 odds.
edit 3:
The article in question is actually pretty good about explaining what may happen and why.
also, isn't the credit derivatives market more than just credit default swaps?
Yes, but credit default swaps are currently 46-55 trillion dollars of that estimated 60 trillion dollar credit derivatives market.
More info from wiki. Its by no means complete. But its still quite good. The Wiki-Finance guys are top notch and probably a little too scrutinizing of their work
http://en.wikipedia.org/wiki/Credit_derivative
^^ rated Start
http://en.wikipedia.org/wiki/Credit_default_swap
^^ Rated "B"
E.G. this is what is considered a "good article" for the scope of "a brief history"
http://en.wikipedia.org/wiki/History_of_private_equity_and_venture_capital
Are you familiar with insurance and insurance fraud at all? The Credit Default Swap portion of the problem can be thought of in those terms.
Let's say there's guys selling insurance on houses in Southern California. Say it protects against the home getting destroyed by something like fires, but it also covers against things like earthquakes. Let's say the insurance salesmen want to make a quick buck, and they only take into account the risk of a house burning down independent of other houses, figure out what proportion of houses would burn down on average and what that cost would be, and then price accordingly and pocket a nice margin as a bonus for how profitable you are. However, let's say they borrow money with these policies as collateral to sell more insurance policies and then borrow more money on those, and only really leave enough money on hand to pay off houses burning down randomly. They don't even think about the earthquakes, because hey there hasn't been an earthquake in awhile.
Uh oh, then there's an earthquake, and the insurance business can't pay out the insurance for all the houses destroyed by it. The insurance business goes under, leaving the lender who let them borrow sitting on worthless collateral and having to compete with the homeowners over the remains of the insurance business.
Now imagine that people were buying and selling insurance on the insurance sellers with the same lax standards of not having enough money on hand to pay them off, and others buying and selling insurance on the loan the bank made to the first group of insurers.
Make it worse by making it so you didn't have to own the home to own insurance on that home, and there are guys with box of matches or even an earthquake machine who can buy up that insurance. Guys who wouldn't have qualms about using their earthquake machine to get a payout on the policies they bought on all the homes in a city.
Probably not the most accurate description of the problem, but you can probably get a good idea of how easily something like this could go to shit.