Gormal wrote:I thought that the bailout was intended as a loan from the start, or was I just hearing someone inject their ideas into reality?
It was never meant as a loan. Just charity for wall street.
The issue here is not liquidity.. rather its solvency. Liquidity can be provided with loans. The goal here is to inject money into the books of the banks.. to recapitalize them and make them solvent.
The banks own securities that are backed by mortgages. If the mortgages perform well, then the banks make a nice return. Especially if they use leverage to buy a lot more of these securities than they might otherwise be able to afford. For a while it was a huge party. Think millions of dollars in bonuses for joe six pack investment bankers. Unfortunately, the mortgages behind these securities are now not performing well. If offered for sale on the market, many of them would attract no bids at all, or perhaps bids of only a few cents on the dollar.
Because of the leverage, a small decline in the value of these securities can wipe out all shareholder equity and cause the bank to become insolvent. Broke. Thats where pretty much the entire banking system is at now. A loan might put off the inevitable bankruptcy, but it does not make the bank solvent. After all, it has to be paid back.
The bailout bill allows the federal government to buy these mortgage backed securities from the bank. The problem though is one of value. If the government offers to buy the securities at fair market value, the banks will recognize a huge loss and remain undercapitalized. The bailout wouldn't accomplish anything under those circumstances other than accelerate the inevitable depression. Rather, the only way for this plan to recapitalize the banks is for the government to OVERPAY for the securities. Pay more then they are worth. Bernanke alluded to this by testifying that they would be paying 'hold to maturity' value for the securities rather than the 'fire sale' value which the market is currently placing on these securities. Paying more than market value is nothing more than a HANDOUT to wall street.
Some pundits are trying to spin this as a potentially profit making venture by the government. Unfortunately, its complete bullshit. The only way that happens is if home prices becoming reinflated, which simply will not happen. They are currently in the process of reverting back to their historical ratio of approximately 3.5 to 1 between median home prices and median household income. Home prices will probably fall another 20-30% nationwide, possibly even more if they overshoot, which usually happens in a crash. This implies an increase in foreclosures, and a decrease in value of these securities that the government plans to buy. There will be no profit made here.
The cost of the bailout is ENORMOUS. Approximately $2,500 or so for every man woman and child in the country. Your typical family of 4 is on the hook for $10k to make sure wall street doesn't suffer. Realistically this is the burden of the middle class. The rich will not feel the pinch, the poor don't pay taxes.. the middle class will end up paying a lot more than $10k per family. Get ready to work hard to make wall street whole.
This cost does not even take into account the other costly ramifications of the bailout. Inflation being the costliest. People who have saved their whole life will see that nest egg seriously devalued as a result of these inflationary policies. Where do you think this 700 billion dollars is coming from?
Or, for instance, the government will likely see increased borrowing costs as foreign investors lose their appetite for US treasuries due to a perceived inflationary bias in Washington. Since adjustable rate mortgages are tied to the 10 year treasury note, mortgage rates will rise. Uh oh.. more foreclosures!
And if by some miracle the bailout actually managed to reinflate the credit bubble, which I seriously doubt could happen at this point but I'm not prepared to completely rule out.. well that would actually be the worst outcome in the long run. The message to Wall Street would be that you cannot die. You can take the largest risks, which allow you to make the biggest bonuses, but when the shit finally hits the fan and reality returns... well, you'll do fine because the taxpayer will be blackmailed into bailing you out. This is called moral hazard, and it would result in a bigger bubble and eventually a bigger and more painful bailout.
Imagine how you would live your life if you knew that you couldn't die. Saying that banks are too big to fail is essentially telling a business it can't die. If you can't die, why not take huge risks?
The problem that none of the politicians want to publically recognize, is that this recession is normal and in the long run beneficial. Housing prices ARE too expensive, even now. Why would they want to prop them up further? Enormous amounts of mal-investment occurred as a result of artificially cheap credit. These mal-investments are being liquidated and revalued, as they should be. A recession is painful, but its also a healing process. You cannot indefinitely pause the market cycles. We should have felt more pain when the stock market bubble burst, but rather another bubble was inflated and now the day of reckoning will be exponentially more painful. If they could figure out a way to inflate some other bubble, it would just make things even that much worse in the future.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth
Goddamned slippery mage.