An Old-Fashioned Run on a Bank

[Hal_Crawford]

I live in the DC area and this evening I spoke to someone well connected to what is happening on the hill. Phones are ringing and it isn't the same message that Representatives were getting before Monday's vote. Congressmen are listening. A Rescue Bill will pass House this week. Senate was already on board so things should move pretty quickly. I doubt that we will be out of the woods but we should be in a lot better shape.

[Beavah]

A Rescue Bill will pass House this week. Senate was already on board so things should move pretty quickly. I doubt that we will be out of the woods but we should be in a lot better shape.

 

Yah, I sure hope not, Hal_Crawford. A borrow-and-spend rescue package would be about da worst thing we could do for the medium to long run. Yah, sure, solves da short term problem and gets those Congressional bozos through da election. But then what?

 

In rescuin' some foolish, over-extended banks, we're making the Federal Reserve and the National Treasury overextended on credit. That is settin' up a disaster from which there is no bailout, and no recovery.

 

How long with this kind of out of control borrowing would a rational person continue to rate US Bonds at AAA? At this kind of low rate of return, how long will our lenders continue to buy and hold dollars and treasuries?

 

This bailout if it passes takes da nation to the brink of the absolute precipice, with dragons around and no bullets left in the gun. It should be voted down.

 

Beavah

 

[packsaddle]

Different George W. I sometimes agree with this one:

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/30/AR2008093002320.html

 

"'His name was George F. Babbitt. He was 46 years old now, in April 1920, and he made nothing in particular, neither butter nor shoes nor poetry, but he was nimble in the calling of selling houses for more than people could afford to pay.'

 

-- 'Babbitt,' by Sinclair Lewis

 

We are waist deep in evasions because one cannot talk sense about the cultural roots of the financial crisis without transgressing this cardinal principle of politics: Never shall be heard a discouraging word about the public."

 

[ScoutMomSD]

solutions?

 

read the George Will link - no solutions I can find, more blaming.

 

So we all suck. Great.

 

How do we fix the banks and the market? the money is spent, on credit, in homes, etc. And each day I see more homes for sale. I check them on zillow and most were under water compared to purchase date.

 

Enough moralizing. Solutions?????

 

 

[Hal_Crawford]

ScoutMomSD:

I couldn't have said it better that their is no time for moralizing. The solution is being debated in Congress as we speak. It's not perfect and no one is happy that we are at this point but we are and this isn't just a bailout for the bankers or the Congressmen; it's a bailout (the preferred term is "Rescue", whatever) for all of us. It doesn't matter as much who put a hole in the boat as it does that the boat is sinking and we are ALL in it.

 

The bill before the Senate today is much better than the one originally proposed by Sec. Paulson and with an increase in the FDIC limits to $250k it is better than the one voted down on Monday. It is not a blank check and there is a real possibility we will get some if not all of it back. It is supported not only by the President but by both Obama and McCain. They haven't agreed on much lately but they do on this. Come January 20 one of them will inherit whatever comes out of this week so that both support this says a lot to me. A 778 point drop in the Dow sure said a lot as well. The fact that there is no credit available for businesses, farms and individuals says a lot to me.

 

Don't get me wrong, I hate that we are in this mess. There is a ton of blame to go around including bankers, "congressional bozos" of both parties and the last 5 presidents. That knowledge really doesn't help with what has to happen this week but will be fodder for the discussions about banking reform that I hope will follow.

[packsaddle]

From a market perspective, those of us who can swim may survive. Those of us who can't swim shouldn't. This is the payoff of the Faustian bargain and sooner or later it is unavoidable. I'd rather bear the burden myself now than have my children or their children bear an even heavier one.

[Beavah]

Yah, sorry Hal_Crawford, I just don't see that da biggest government socialist intervention in da markets in the history of the nation has to happen in a week or less because an administration which has demonstrated its lack of competence suddenly finds it urgent to be given an $850 billion transfer to executive control.

 

And don't think for a minute that da sudden increase of the FDIC insured limit comes without a big taxpayer price tag as well, eh? There's been no time to collect premiums to offer that kind of insurance, so the bill specifies that the FDIC has unlimited borrowing authority from the Treasury. Yah, dat's right. On top of $850 billion, this bill authorizes unlimited additional borrowing.

 

And it still probably ain't enough to fix da problem, eh? Best estimates at one point were that there were around $60 trillion in mortgage derivative bets outstanding.

 

But da bailout has long term consequences, eh?

 

One of 'em is it guarantees the worldwide decline of the dollar. In one bill, added to the insanely loose Federal Reserve actions, we're inflating our currency 20% or more.

 

Second is it guarantees that oil prices will go up to over $200 or more a barrel sooner rather than later - because of both da decline of the dollar and because oil will be seen as a safer investment than T-bonds. Are yeh ready for $8 a gallon gas?

 

Third is that such a level of unconstrained borrow-and-spend fiscal irresponsibility puts the value of our debt instruments - T-bonds and T-bills, at risk. If in order to finance our humongous debt we have to sell treasuries that out-perform inflation on the dollar, we're goin' to need to be payin' higher and higher interest. That's a stock-market and credit market killer, eh? And as interest goes up, so does our debt, eventually puttin' the bond rating of da country in question.

 

That's da financial equivalent of Nuclear Annihilation.

 

The risk here isn't da failure of banks and loose credit. We lost 10 times as many banks during da Savings and Loan debacle in the 80s. The risk here is to the dollar and our debt exposure to the world. There is no bailout from those.

 

We are selling our childrens' and our grandchildrens' future - the very future of da U.S. - for this ill-conceived, rushed bailout of a bunch of bad actors.

 

Beavah

(This message has been edited by Beavah)

[Hal_Crawford]

Beavah:

We'll just have to disagree. With this I believe there is a good chance that things will start to get better in a matter of months; without it it could be a long hard recession. It passed the Senate tonight 74-25. I'm guessing Kennedy is probably the missing vote since it would have been big news if he had come in for it.

 

Here's a dilemma for you: Both presidential candidates just voted for the rescue. Unless you want to vote for one of the Senators who voted for this bill you are left with Nader, Barr or just staying home.

 

 

 

[packsaddle]

I can't speak for Beavah, but I am resigned to this fate...and I am prepared for it, I think. But I will be as big an irritant over this mistake as I possibly can, if only to make people feel some pain and understand why something even worse is on the way and continued lies and self-deception is not going to make that disappear.

 

As for McCain and Obama...I just saw estimates that the McCain tax plan will ultimately increase the national debt by an additional $5 Trillion, the Obama plan a mere $3.5 Trillion. People were deceived during the trickle-down days of the '80s like they are today. If lowering taxes generates increased revenue, then take them to zero...watch for the surpluses. That should solve all our debt problems. It's IDIOTIC.

 

Beavah is right, what we're going to face is the opposite of what we had in hand near the end of 2000, a situation where we could actually pay down some debt, thus lowering, in real terms, the interest rates because there was more real capital available for loan.

But I do disagree slightly about the price of oil. It may cost $200 per barrel someday and of that I have no doubt. But at that same time it may only cost 100 Euros or perhaps 80 roubles.

On 26 October 2000 (during our surplus days) the Euro was worth $0.83. On 22 July this year it was worth $1.59. This was not simply due to the excellent economies of Europe. During the eight years of this administration, the profligate spending and growth of debt took a toll as well.

What's that old quote? Lenin:

"When the time is right we will make great concessions and overtures of peace to the capitalists and they will sell us the rope with which we will hang them."

They don't need any help, we're hanging OURSELVES folks.

 

Edited part: ScoutMomSD, there IS a solution. GROW UP and face the consequences! Let the market take its toll. Learn to live within our means. Pay our bills on time. Be responsible in our financial matters. Take responsibility for our mistakes. Teach these things to our children.

We've failed miserably in these things so far and the passage of this bill will just be one more notch for another failure.(This message has been edited by packsaddle)

[ScoutMomSD]

"GROW UP and face the consequences! Let the market take its toll. Learn to live within our means. Pay our bills on time. Be responsible in our financial matters. Take responsibility for our mistakes. Teach these things to our children.We've failed miserably in these things so far and the passage of this bill will just be one more notch for another failure."

 

PULLLEEZ! I had a great boss years ago who taught me a great lesson - dont come to me with a problem unless you have a solution.

 

So to say okay we will just let all these individuals who got us to this place as well as companies (builders who overbuilt and walked away from partially done tracts, people whose mortgage payments will go up 50% or more, etc) fix themselves?

 

In San Diego county, here is the impact. Rents have gone through the roof as folks lose their home and have to rent. There are 2 tracts, one close and one about 7 miles away, where builders just walked away from the property. One tract would have been in the $800k range, the other by Barrett American is homes in the $1.5 mill plus range - these are now empty half built homes. Lenders are shutting down financing to builders who yes are to blame but do we just let them go under and have the rest of the surrounding property go down?

 

 

[scoutingagain]

Thanks for the explanations folks. As I suspected they are more insightful than what I've been able to find in the media, expecially the electronic media.

 

I'm still skeptical though. Listened to NPR yesterday and several economists interviewed said the worst case scenario is bad, but not end of the world as we know it bad, but a recession, bad enough where we would feel it. Others interviewed seemed to think worst case would be a long deep recession. Worse than anything we've seen since the depression.

 

It seems as if congress will pass this bailout/rescue though. Why I don't know. If it was a bad plan to begin with, I don't see how adding a few hundred billion in tax breaks makes it better or increasing the government's liability through the FDIC. If anything it makes the bill even worse.

 

I tend to agree with Beav and Pack. This is a short term fix that delays the inevitable. There are long term consequences to borrowing all that money, better to take a near term hit now than delay something worse in 10 years or so. To believe we can somehow work our way out of this without some major economic pain one way or the other seems naive.

 

SA

 

 

[Beavah]

Yah, Hal_Crawford, We've got no great candidates for president, eh? What else is new?

 

Yeh can't point to an essentially unconstitutional action by the Senate to make me feel any better, though, eh? All spendin' bills must originate in the House. There's a reason for da Constitution, even though this administration and congress don't seem to like it much.

 

But at least yeh heard the alternate voice, and had a chance to make a reasoned decision. Right now congress is gettin' rushed by an inept executive and overrun by lobbyists. Not a good recipe for makin' a decision in our long-term best interests. I would love to hear, though, how yeh think this bailout package isn't goin' to cause us a lot more pain in the mid-to-long run. I agree with yeh, in the short run, through the election and into next year a bit, it will make things seem better.

 

ScoutMomSD, I think any real solution has to address a bunch of things, and is goin' to cause us pain and sacrifice. Yeh don't go on a 40 year credit bender without wakin' up with a heck of a hangover and a lot of mess to clean up. But da real solution has to address:

 

1) Regulation of structured products

2) The nature and existence of problem securities (which aren't touched by this legislation at all).

3) A means of accurately and transparently pricing those problem securities.

4) A cleanup of attendant instruments like credit default swaps that are massively contributing to the problem and sinkin' the economy almost on their own.

5) A short-term set of accounting principles, short of eliminating mark-to-market, which allow bankst to hold these problem securities without incurring unrealistic writedowns.

6) A means of helping homeowners directly, including sensible tax and capital gains treatment.

 

I've seen some decent proposals on all these things, but none of 'em are gettin' much air time in da face of the simplicity and lobbyist delight in just throwin' a trillion or more taxpayer dollars at da problem and praying.

 

This ain't my area, of course. I rely on folks down da hall and in the buildin' next door when it comes to understandin' this sort of thing, eh? But there's a lot of folks out there who understand da system better than congress.

 

Yah, and I will add, now that I've got some understandin' of da crazy contractual things some of these banks did in these structured products, that long, hard jail time and public ridicule should be part of da mix.

 

Beavah

(This message has been edited by Beavah)

[Gold Winger]

What's that old quote? Lenin:

"When the time is right we will make great concessions and overtures of peace to the capitalists and they will sell us the rope with which we will hang them.

 

I'm sorry to tell you this but neither Lenin nor Lennon ever said that.

[evmori]

OK so the problem gets fixed. What are they doing to ensure it doesn't happen again?

[packsaddle]

GW, yeah I've read those arguments in the blogs too. But what I DIDN'T write was that Lenin WROTE that quote. You've no way to determine whether or not he SAID it. Anyway, even the experts argue over it. I just used it for emphasis.

 

ScoutMomSD, I am very sympathetic. Tell those guys I'll give them $20K for each of those properties, cash, sight unseen. Then I'll move my double-wide in and finish them myself. And YES, let the market take its toll on the surrounding properties. If they're not WORTH whatever value people think, the market will eventually determine a realistic value for them. It's part of the 'growing up' process.

If people aren't willing to pay high rents, then the rents will come down. But high rents are indicative of people's willingness to pay them.

Otherwise, they need to find a something they can afford, maybe move to Mississippi or Alabama, you can survive cheaply there.

So, YES, it will be painful. There will be real harm to real people, some of whom did nothing to set this situation up. The market doesn't care about that. The market has no morality other than optimization of efficiency of transactions. The market has no sense of future or direction. It is cold and hard and that is the world we've chosen to have.

And THAT is part of the payoff of the Faustian bargain we made. There is nothing that will make those consequences go away, except perhaps delaying them so they can happen to our children instead. Me, I'd rather see those who are responsible suffer the consequences.