Aspects of the Bailout

Discussion in 'Politics, Religion, Social Issues' started by RacerX, Oct 1, 2008.

  1. RacerX macrumors 65832

    Joined:
    Aug 2, 2004
    #1
    I have no background in economics (heck, I don't even deal with my own household funds), but on the broader scale economics looks like aspects of game theory and topology (which I'm more comfortable with).

    Here are a couple of the aspects that I've been seeing that I'm finding troubling...
    • With the number of these big banks shrinking, aren't we moving closer to a situation that our anti-trust laws are design to protect us from? With fewer and fewer banks, aren't we hearing that these banks are now so important that we can't afford to let them fail? Shouldn't that be alarming?
    • The $700 Billion is designed to buy bad (or possibly bad) debt. The goal is to make it easier for banks to return to the loan practices that drive our economy. What makes anyone think that the banks will do this? What incentive do they have to re-loosen the purse strings even if they get this bailout? Isn't it more likely that they'll take this money and hunker down to ride out the recession?
    • This bad (or possibly bad) debt we are buying, as it is now ours, doesn't it make sense to rework the loans so that we get paid back rather than getting stuck with property that is decreasing in value? Foreclosing on homes seems (from my perspective) to hurt the lender as much (if not more) than the borrower when housing prices are falling. Shouldn't the first thing we would want is to keep these people paying (even in smaller amounts) than to get stuck with property that is losing it's value and no one can afford to buy?
    Again, I know nothing about this stuff, but I'm not seeing anyone addressing these aspects of this. This isn't a political issue, I'm just wondering if anyone is taking these aspects into consideration.
     
  2. Anuba macrumors 68040

    Anuba

    Joined:
    Feb 9, 2005
    #2
    Here in Sweden we already did the big bailout thing once, back in 1992 when our economy went down the crapper. I know that American politicians have been studying the Swedish bailout as some kind of pilot case.

    First, we eventually gained everything back (all $11 billion of it) in about a decade, and second, the banks have acted much more responsibly afterwards. Due to the lessons learned in the early 90's, they were careful not to get tangled up in the international housing bubble and the whole subprime mess, and as a result, they're solid as rocks while banks all around the world come tumbling down. They're not invulnerable of course -- if the whole world economy goes up in smoke, Swedish banks will suffer as well.

    Of course, I can't guarantee that American banks will act responsibly just because Swedish banks did. It's in the Swedish nature to be careful and responsible (it's a nation full of 'bears', in stock market lingo), while the American market seems to lack self-preservation and adopts more of a no-holds-barred approach like there was no tomorrow. But I can tell you that without the '92 bailout, Swedes would be living in clay huts by now. It took 10 years to rebuild the economy, but today we have lower unemployment figures and higher GNP per capita than most of our European neighbors.
     
  3. mkrishnan Moderator emeritus

    mkrishnan

    Joined:
    Jan 9, 2004
    Location:
    Grand Rapids, MI, USA
    #3
    The thing here is that not all the debt is bad -- the loan bundles all consist of a range of loans, from some that are just honestly going to be unsalvageable to some that pose essentially minimal risk, even in the current economy.

    As for the banks not lending money... I think it all depends on convincing the market that loans can be reliable, which is a valid point I think you're making already. The banks want to be in the business of lending money -- that's what they do and it's how they make money.

    I think this is a fair point, although it really depends on the situation -- some of these loans were so foolish -- some of these people honestly can't even pay back their interest, to such a degree that even if the loan were refinanced, they probably could not be saved. But there probably are a number of others that could be saved.

    I think it's a bit nearsighted to blame this purely on American temperament. Foreigners from around the world gladly bought up these loans in the first place -- they opened themselves up to this. What's more, the United States is not the only country in which sub-prime lending happened -- banks have been failing this week in the UK as well, not primarily because of their reliance on US debt but because they were doing the same wrong things in their own back yard. And this is happening elsewhere too.

    On the other hand, over the past twenty years, our stock market has become too volatile, and it's getting more and more volatile every year. In terms of index points on the DJIA, the kind of change in value that was catastrophic on Black Monday in 1987 is now pretty much routine. And we've had several periods of rapid expansion and recession or near-recession in the past two decades, and several periods of both labor and job shortage.... We do need to take action to get back to a course of stable growth.
     
  4. Anuba macrumors 68040

    Anuba

    Joined:
    Feb 9, 2005
    #4
    True. Again, my point was that the Swedish bailout had the desired effect -- it saved the economy, we gained back the 'loan' and Swedish banks got their act together, to the point where the effect is still lasting after 16+ years.

    I think it's important to know that there's a precedent, and a successful one at that. I think a lot of Americans feel that they're sailing uncharted waters with this bailout thing and that there's a certain amount of irrational fear, like when people stockpiled food and went underground for fear of the big Y2K bang.

    Yes, which is why it needs regulations in order to preserve stability. Liberterian ideals á la Ron Paul sound good in theory, but just like their polar opposite -- communism -- they only work on paper and fail to take into account something called Homo Sapiens. Regulations which ensure that the bailout (which will happen) wasn't in vain.
     
  5. mkrishnan Moderator emeritus

    mkrishnan

    Joined:
    Jan 9, 2004
    Location:
    Grand Rapids, MI, USA
    #5
    Yes, very true. What scares me most is not the fact that our lawmakers are debating aspects of how the bailout should be done -- I'm actually of an open mind vis-a-vis things like how much money goes to debtors and how much money goes to banks. Some of the aspects are confusing to me, and I'm willing to learn more -- for instance, I haven't seen data supporting the idea that increasing the FDIC insurance limit to $250,000 will actually put more money in banks and help the banks that are in trouble. But those things I'm very flexible on.

    What scares me is the minority of politicians who say things like, "Chairman Bernanke said if we don't do anything, the sky would fall. So we're going to call his bluff." I believe someone from the UK described our House members as having "taken leave of their senses" in voting down the bill. I think that's very accurate for the smaller group of people who voted against this because they believe they can do nothing and that the consequences of inaction are minimal.
     
  6. rdowns macrumors Penryn

    rdowns

    Joined:
    Jul 11, 2003
    #6
    Raising the limit won't put more money into banks. If you were worried about the $100K limit, you just opened another account at another bank.

    The idea behind this is to calm depositors as the last thing anyone wants is depositors running to pull their money out of the banks.

    I'd also point out that McCain opposed raising the insurance from $40K to $100K in 1991.

     
  7. takao macrumors 68040

    takao

    Joined:
    Dec 25, 2003
    Location:
    Dornbirn (Austria)
    #7
    in austria we have a 20k euro limit and our banks aren't in any big problems (so far)

    much more important is the actual saving rate of the individuals ...
     
  8. Anuba macrumors 68040

    Anuba

    Joined:
    Feb 9, 2005
    #8
    Yes, there's certainly a lot of miscommunication and misunderstandings floating around. To label it as a "bailout" was poor judgment, and they haven't bothered to explain to the people what exactly is going on. They have to do that, in terms that a child could understand. Right now, people on Main Street are going "No! Let those rich bastards fry in their own fat!" as if Wall Street was some kind of separate, independent entity like a satellite. They have to understand that it's the heart of the economy, and if the heart fails, the whole body will fall like a house of cards. It's not like Bernanke is making this up. If the heart suffers a massive attack, the appendix and the spleen can't go "Take that you greed bastard! That'll learn ya!" Yes, it sucks having to bail out Wall Street but that's an unfortunate side effect, the main purpose is to save millions of jobs and keep Main Street afloat. Bailout or soup kitchen, those are the alternatives.
     

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