700 Billion Dollar Question

First of all I think there is a misunderstanding about free market and freedom to do anything to keep financial companies numbers growing double-digit each year. If you look at bussineses under pressure right now, what do you see? mainly 99% financial companies, banking, insurance... Why? they where playing a not fair game of increasing people welthiness by allowing them to get debts. That was mainly caused because there was not a clear regulatory independent organism auditing how the system was running...

Here in Spain we have had a similar problem with housing, but there is by far much more margin than in the States, and the consequences right now after stare for a while what happened in USA is that getting money from a bank is harder and more expensive than few years ago.

The european companies that have been more exposed to US markets are now cleaning their wounded bodies and some of them have been experiencing troubles, but most of them not caused by european financial system but north american...

For instance, in Spain, there are one kind of "banks" called "cajas" that cannot expose their customers to the risks banks and mutuals have exposed people on the USA. If you are a welthier man than average, you could think on investing through a bank, of course, but then you are acepting the rules of the way they play, and in the case of USA people think (in a regular manner) they are untouchable, and they should think that people in the power positions are greed by nature and they will not give a damn for the average american who is watching how they take their home or they cannot take their savings because of the way they played blackjack with a money that was not of them...

I will try to keep an eye to how US troubles are evolving to give you an external view that could help you to understand how we are looking your troubles from the other side of the atlantic sea...

Regards,

 

As regulars here know, I have opinions on most things. But this is one where I frankly do not understand exactly how the failure of institutions that behaved in a reckless or a criminal manner is going to affect the economy, or how the present bailout would change that.

I do understand how we got into this mess. I've referred people before to the episode The Global Pool of Money on the radio show This American Life (This American Life) Banks made loans to people they knew could not pay them back because investors were willing to buy mortgage-backed securities without examining the quality of the underlying mortgages, and Moodys and other rating agencies were giving them AAA ratings when they deserved F ratings (if there is such a rating).

I understand that the failure of reckless and criminal banks would rock the economy, but I do not understand how buying bad debt from criminals and incompetents would make matters any better. Because unless we remove the criminals and incompetents from the financial system, they'll just do something similar as soon as the dust settles.

Rather than buying the bad debt, it would make more sense to sieze 100% of the assets of the institutions that allowed the problem to occur. This would solve the problem of "golden parachutes" because the institutions would be left with zero assets with which to pay the crooked or incompetent executives.

Taking over these assets would mean the government would hold the bad debt as well, and could decide on a case by case basis whether to forgive homeowners part of their debt. Someone who has never made a payment does not deserve to keep the house. Someone who has been making payments but has fallen behind due to the crisis might be forgiven the late-payment penalties and the interest that accumulated during the crisis, and allowed to resume making payments.

Then instead of giving $700B to crooks, the government could loan that money to the honest banks which have not failed, so they could resume making loans to people who have legitimate loan requests.

But I honestly do not know whether a bailout of criminal banks who knowingly made bad loans, and of reckless investors who made bad investment choices, would actually restore the economy.

As for the stock market, stock prices reflect assets and productivity of companies, but also the vagaries of investors, who bid stock prices up or down, sometimes based on factors that have nothing to do with the profitability of the companies. Stock prices per se don't matter. It's the smooth functioning of the economy that matters. Investors have sold off stocks, lowering their prices, because they are now afraid of risk. They gambled on high-risk securities and lost, so now they're afraid of any risk at all and are selling the stock of companies that are essentially solid.

So, rather than bail out these stupid investors, the government should assure that solid companies have access to the credit they need to operate. I don't see how a bailout would do that. I say, seize the assets of the bad banks, and use the $700B to make sure that good banks can continue to make loans to solid companies and to home buyers who have an income stream adequate to make the payments. This course would probably require far less than $700B.

I own stocks via mutual funds. The market value of my portfolio has dropped considerably. But I believe the companies whose stock I own are sound, so the market price of my shares is of secondary concern. Unless you are gambling on the day-to-day fluctuations of the market, or you were planning on selling about now to cash in your pension or savings, the per-share dividend of a stock, and its long-term growth, are all that matter, not its price.

 

Thank you, Zildjian.

 

Here you can find an opinion from the Financial Times about Spanish Banking System:

FT.com / Home UK / UK - Time for central bankers to take Spanish lessons

 

The short is 700 bill, without proper over site up to 58 tril is at risk
S.E.C. Chair: Regulate Credit-Default Swaps Now - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Christopher Cox, the chairman of the Securities and Exchange Commission, urged Congress on Tuesday to pass a law that would regulate credit-default swaps, stating that the market, with a notional value of $58 trillion, is “ripe for fraud and manipulation.â€

 

Unfortunately, those that made the decisions will likely not experience any ill effects at all... Instead, you and I will. We need transparency, oversight, and regulation to keep those who profit from making massively bad decisions from destroying the rest of us.

 

The ramifications of living in the "Bling" culture. Thorsten Veblen is doing 360's in his grave. Conspicuous consumption is what has lead to these two examples, I'd wager. The whole mindset of our country is really unsustainable.

If by long term you mean 70 years or so.

 

For those wanting an understanding of the problem, the Brits have nailed it.

 

said it once, and i'll say it again...

i dont think the government is qualified to determine the best way to allocate the money. i think it should be put to a vote at the local level with each locality determining the best way to spend their windfall with the agreement that they determine who gets what within 30 days after the general election.

probably not a popular choice, but i think no less desirable than anyone else's plan

 

Germany's take on this mess.
The End of Arrogance: America Loses Its Dominant Economic Role - SPIEGEL ONLINE - News - International

Excellent read, in 5 parts, and it's hard to disagree with it.

 

well one thing is for sure... preliminary results of my investments for this quarter...

401K lost 3.8 % in total value despite contributions of $1700 this quarter...

my stock portfolio is devalued by $4000 (which nearly wipes out the gains from earlier this year...bummer...so much for beach house on secluded island in the San Juan's)

the only thing i have is a CD, it made its steady 4%....at least i have something that is matching inflation

 

Zildjian, this site requires that one join it. Would you be able to quote the text?

I read this, and I have to agree. It seems in order to get an independent concise view, we can't even rely on our own media, but have to go international.

Sounds like you've made better 401k investment choices than we have. I think we're down about 10% between our stocks and mutual funds. Like you, the only thing to be excited about at this point is our CDs. I'm just holding on tight and hoping the ship doesn't capsize.

 

I think our (the US) problem is we either we don't have the time, or just don't take the time to find the the whole truth. We are reduced to accepting sound bites from the media.

 

tell me about it... i have $6k in TD ameritrade.com balance for possible stock trades. they hold the money in a money market account that pays 5%... makes me want to not trade!!

 

(from der Spiegel, post #111 link)
"The financial crisis will reinvigorate America's tendency toward isolationism, which never quite disappeared. The triumphalism of the Bush years could easily be followed by the "I'll-sit-this-one-out" years of an Obama administration committed to a strict policy of belt-tightening. If that happens, both old and new Europe will have to demonstrate whether the European Union can rightfully claim to be on an equal footing with the United States.
In the past, the US government's solo efforts provided the Europeans with an all-too-comfortable excuse for simply doing nothing. But that excuse is no longer valid."

"Therefore, send not to know
For whom the bell tolls,
It tolls for thee"
(John Donne)

Well it's about time *some* other countries start picking up the tab (in blood and money) for defending their own interests instead of relying on the US family to provide soldiers and the US taxpayer to provide military might. The greed is on both sides of the pond, hence the losses have occured in both places as well. I will be glad to see our country turn towards "isolationism". We have so much at home that needs to be taken care of.

 

That's a good return. Given how volatile the markets are right now I'd park it for a while. 5% is quite good for something as liquid as a MM.

 

I don't want to hurt your pride, but, after 2nd WW, nobody has taken care in Europe of the wars USA has put the world in... even when they are involved, mainly due to treaties that were signed long time ago.

What is the benefit of Iraq War?, Vietnam Was? Korea War? Afghanistan War?

I know the answer, do you know it too?

So please, please, start puting the soldiers at home, making their families happier, and tell me what will happen with those soldiers with nothing to do at home being payed by uncle sam...

 

I wonder if anybody here other than you and I has ever heard of Thorstein Veblen.

 

Are you Keeping up with Jones.