What do you think about the $700BN plan?

[Franglais]

Nobody mentioned the Subprimes thing, last week's crash, Lehman Brothers, the $700BN plan to pick up the pieces? I just wonder how this is seen in the States. The picture drawn by the French press:

1. From about 2001 onwards the financial community in the US made a lot of risky loans to poor house buyers. Too many for safety
2. The loans were sold off as various financial products to the entire financial community
3. Interest rates rose & the house buyers couldn't repay, driving down the price of houses and the financial products and finally ruining everybody
4. The US government bit the bullet and stepped in to avoid a disaster

Thank goodness it happened in the US. In Europe there is no way to make a quick decision like that. Let's just hope it will do the trick.

[Frog]

Yeah but in Europe, you wouldn't need it.
It means, again, that the tax payer who isn't rich enough to have fancy deductions, will be bailing out the rich so they can stay rich.
The republicans will still keep touting non-regulation until the last second when the economy teeters on the brink of disaster and then brag about how they saved it by printing more money until money is as valuable as grass.
Personally I'd like some grass right now.

[AgingEyes]

I'm wondering, if they can loan $700BN to those companies, why not just give/loan the money to those taxpayers/investers who're affected instead?

I probably don't know what I'm talking about :blush2:

[mjs1973]

It's bad enough that many middle class families are loosing their homes, now their hard earned tax dollars are going to be spent to make sure the rich stay in their mansions. They can't make their own house payments, but the government feels that it's more important to for the rich to make theirs.

I heard a person over the weekend put it something like this. The republicans are the first people to scream "socialism" when someone mentions turning something over to the government (such as healthcare) but are the first to get the governments help when it comes to them loosing money. The free market works great as long as the rich get richer. As soon as something happens to cause them to loose some money though, they sure to like the sounds of the "socialist" government bailout.

[GB1]

Stupid question perhaps, but where is this $700+ billion coming from?

It is not like we're running surpluses and don't know what to do with the extra cash........................

[Franglais]

I wouldn't say this couldn't happen in Europe. It's unlikely in France because people just hate the idea of variable rate mortgages. Which is not the case in the UK. Margaret Thatcher would have let the whole thing sink. I have the feeling that in a pinch, Americans drop the doctrine and use commonsense.

The $700BN is not a loan. The Government buys the "radioactive" products from the banks, probably for 10%-50% of their face value. If building prices go up then the Government could get its money back eventually.

I don't understand the rest. The newspaper article I was reading says that this plan will increase the debt of the US from $10600BN to $11300BN and some of this debt in the form of US Bonds (I think) by Japan ($592BN) and China ($502BN)

[brmill26]

It means, again, that the tax payer who isn't rich enough to have fancy deductions, will be bailing out the rich so they can stay rich.

I agree this isn't necessarily the best thing in the world, but I honestly can't agree with the idea that this somehow helps the rich. Bailing out the banks and mortgage companies helps everyone (by not sinking the world economy into a HUGE depression), but the people who are really being saved are the middle and lower classes who couldn't afford to pay their mortgages. The home foreclosure rate got up to, what, right around 5% maybe? That's not good, but by no means out of hand. But if all of a sudden all these financial institutions call everyone in default b/c they're cash short (and they are owed by those persons in default - ie, poor and middle class), then the people who are going to get screwed the most would be the poor and middle class. All of a sudden, you have thousands, maybe a million homes foreclosed, cars repossessed, etc. That would be the market solution, and frankly, if you owe somebody and you don't pay, that's their legal right.

What the government did, however, was done for many levels. The most important was preventing a global depression on a scale we've never seen. AIG reportedly held over $1 trillion in assets around the world. A company of that size folding would be disaster. I think everyone can understand that. But there was no way getting around the fact that these companies needed cash and they needed it immediately. There are only two ways to do that, and it's either as above or to get a loan. Well, the money markets were just about frozen because no one else had any cash either. So, the government stepped in and "loaned" it to them. It's really more of a contribution to capital, though, so in effect the government just became a (whatever amount) percentage owner in the companies it bailed. In doing so, they spread the burden to the entire populous instead of forcing the poor and middle class to have their loans called and/or sending the world into depression.

Now, how we got into this situation is already done and dusted, but the reality is that if there weren't government-imposed equal lending laws that force banks and lending institutions to make risky or worthless loans, the entire situation would never have occurred. But, alas, there are liberals who think everyone who wants a house should be able to get one regardless of his inability to pay because he only works 3 months a year at McDonalds. Lending institutions, in relation to their relative size and holdings, are required to make a certain percentage of loans to such people, even though it is almost certain to never be repaid in whole. Those policies have been around for years, and as you may guess, they were Democratically created "social policy."

That's the root of the problem, but of course politician will never blame themselves, and of course the media will never blame them either. So, they place the blame on the institutions who were, in essence, making very risky bets in an extremely complex loan/mortgage buy/sell game. All of a sudden, the market tied up, cash quit flowing, loans defaulted, and they all found themselves with their hands in the cookie jar - way, waaaay over extended and with very little cash. Hence, here we are. Certainly some blame must be attached to their very poor risk management, however, the housing crisis is what lit the fire, and those policies are purely political in origin.

[Medley]

I find that odd Brad, because in my half of the country, it was the GOP's demand that we loosen controls on big business that led to those same risky ventures. "Let the market run free". they said. What happened was the market went wild. You are right in that the investers should take a share of the blame for getting themselves in over their heads, but business did so gleefully. If that McDonalds worker can't make his baloon mortgage payment, then they can foreclose, reclaim the property, and do it all again! Meantime, they've made thousands off the poor scmuck who now has nothing to show for it. Of course, that money wasn't stuck away for some "rainy day fund", it was either siphoned off as profit or reinvested in new loans. More money for big business, which equals more loans, which equals more profit. As a result of the foreclosure rate, home values rise, and more middle and low class people want in on the "buyer's market". The loans are for ever-greater amounts, and the whole thing becomes a vicious cycle that works- for a while.

But soon enough, a handfull of homeowners decide that their home value has increased enough that they want to sell. Slowly at first, home values begun to level off. More homeowners, fearing that the rising values are peaking, also sell. The supply of availables begins to increase, and the demand is beginning to decrease because it's not the hot investment it once was. High supply and low demand drive prices down.

Now people who bought into mortgages near the housing peak begin to figure out that they're locked in to a motgage that's more than their home is worth. Any way they look at it, they're going to take a bath financially, but the best option soon becomes clear: stop throwing bad money after good. Default on the loan, and let the bank foreclose.

Now the banks are stuck. Very large chunks of their capital are tied up in homes and properties that have devalued to the point where the homeowners simply want out from underneath. Foreclosure is no longer a good option, because you can't resell and make a profit. And did the banks hold enough capital in reserve to cover their loses? No, because they weren't required to. Better for the CEO's to reinvest and increase profits ( and their own bonuses), than to be financially prudent.

It's hard to feel sorry for anyone in this scenario, because so much of it was driven by greed. Should the Feds now step in and bail these financial institutions out? probably, though I come to that conclusion reluctantly. The republicans NEED this bailout to work, or face the uncomfortable task of admitting that the last eight years of fiscal policy have failed. It was a LACK of oversight and regulation that led to the current situation, not an overzealous application of them.

Keep in mid that this is NOT a 700 billion dollar bailout. The Feds have already bailed out Fannie Mae and Freddie Mac to the tune of 200 billion, and sunk another 85 billion into AIG. We're talking close to a TRILLION dollar bailout.

So what do I want to see from this bailout? I want to see a forfeiture of bonuses from all CEOs that had anything to do with driving their companies into ruin, I want to see a reduction of "golden parachute" retirement plans ( in theory, they should retire in the same financial shape that they left the company in), and I want to see oversight and strict regulation of how the money is dispersed by the Treasury.

- Joe U.

[GB1]

$ 1 Trillion dollars in additional deficit..... Great.

Answer me this - if the Republicans are such great businessmen, why is it that whenever they reign in the Oval Office they blow the budget? First it was Reagan, then Bush the Elder, now baby Bush. Massive, massive deficits every last freakin' time. Really great businessmen, oh Yeah!

[Anbesol]

You know, I don't know enough to have an opinion, and I just don't trust the mainstream media. Strange that all this happens like 6-7 weeks before election.

[snoid]

What's really strange? Paulson, the guy who will oversee the money.
Former CEO of Goldman Sachs........Conflict of interest anyone?

[reverberation]

Anytime something like this happens, a large amount of money gets extracted from a government, you really have to follow the money. I actually had an arm and refinanced last year. The mortgage brokers had incentive to do any deal they could and it seems obvious they used the outrageous terms of these loans to sucker financial institutions into agreeing to them. The mortgage brokers were double dipping. They got a wad of cash when I bought the house, and another wad when I refinanced two years later.

The funny thing is that when I refinanced the woman who came to my house seemed annoyed at what was happening. According to her the problem was that some people who "did not deserve a home" had homes. Perhaps equally true is the fact that some people who do not deserve jobs in the financial sector have them. The ethics are crystal clear, you don't need a finely tuned moral compass to see what happened. Stealing is wrong, you can't get something for nothing.

The easy way out is to lock all of these mortgages in at a thirty year fixed rate. Thirty year fixed at 5% sounds about right. Minimize the risk and take the losses up front. The more middle class Americans who own homes the better the economy will perform over the long term. I think the best fix for the world economy is to get as many middle class Americans into their own homes, for the lowest possible interest rate possible. Middle class Americans are by far the most powerful group when it comes to economics.

Equity is what you want to give the middle class, financial leverage. I remember "trickle down" economics. This is the same old pig, just with different lipstick. The American middle class are an economic engine that affects global markets. Stealing from them is not a good idea, it harms everyone. You want to give them the lowest cost equity you can, because they spend a much larger proportion of their income. I would buy a new car if my mortgage rate dropped two points. Double or triple the tax rates on the wealthy and help the middle class get economic leverage, the wealthy will get back the money they spend on taxes from investments due to increased spending by the middle class.

[jgredline]

I can't believe I am saying this, but Hillary Clinton has had the best idea that has come to my ears....

[GB1]

I can't believe I am saying this, but Hillary Clinton has had the best idea that has come to my ears....

And what was that? (I didn't listen to Hillary that much.)

[jgredline]

She said something to the effect that what the Government should be doing is mandate that the Lenders work with the home owners to put together a plan that they can affford.
Example, if someone with a bad loan has a payment of 2000.00 but can only really afford 300.00, they need to take the 300.00 as it is better than nothing and the home buyer keeps his home....I like the idea.

[GB1]

She said something to the effect that what the Government should be doing is mandate that the Lenders work with the home owners to put together a plan that they can affford.
Example, if someone with a bad loan has a payment of 2000.00 but can only really afford 300.00, they need to take the 300.00 as it is better than nothing and the home buyer keeps his home....I like the idea.

Sounds too good to be true. If someone is in a home and can only afford less than 1/6 of the payment,something is really wrong here.

I wonder if the lenders really cared if the loans were ever defaulted on? Nowadays they bundle up loans and sell them to investors (that will probably change soon..). The "lenders" never had to worry if the borrower repaid or not since they got nothing more out of it because the loan was sold off anyway.

[jgredline]

Sounds too good to be true. If someone is in a home and can only afford less than 1/6 of the payment,something is really wrong here.

Yep, and this is why we are in the mess we are in...

I wonder if the lenders really cared if the loans were ever defaulted on? Nowadays they bundle up loans and sell them to investors (that will probably change soon..). The "lenders" never had to worry if the borrower repaid or not since they got nothing more out of it because the loan was sold off anyway.

Yep..The problem was that the lenders did NOT care...Once they got paid, the buyer was on his own...I know a few people who did loose their homes this way....I also made a few loans to a few friends to help them keep their homes as well....

So I do like Hillay's idea...Sheesh, I can't believe I said that twice...

[Didache]

The problem with the sub-prime mortgage issue is that lenders really did not care if the home owner defaulted. Partly this was because the debt was just sold on - but mostly (I think) it was because house prices continued to rise so quickly: even if the owner defaulted, say three years down the line, it did not matter because the equity in the house had increased more than enough to still be profitable for the lender. It was when the house price increase slowed down that the whole thing came unravelled.

Mike

[reverberation]

Ultimately, the reality is that any country without a prudent financial reserve can be vulnerable to economic factors. Deficit spending simply does not make sense to me, nor anyone else but a bank owner.

[jgredline]

The problem with the sub-prime mortgage issue is that lenders really did not care if the home owner defaulted. Partly this was because the debt was just sold on - but mostly (I think) it was because house prices continued to rise so quickly: even if the owner defaulted, say three years down the line, it did not matter because the equity in the house had increased more than enough to still be profitable for the lender. It was when the house price increase slowed down that the whole thing came unravelled.

Mike

This is exactly right...

[Medley]

She said something to the effect that what the Government should be doing is mandate that the Lenders work with the home owners to put together a plan that they can affford.

Which is pretty much what the Dems are asking to be added to the bailout package. They're asking that judges be given the authority to reorganize mortgages in bankruptcy to reduce the payments to something people can afford.

The inherit risk in that venture is that the "leftover" debt is then transferred back to the financial institution that approved the loan, deepening their financial crisis and requiring a larger bailout from the govt.

Not surprisingly, the government is resisting any such added language, which also lacks bipartisan support. It is the one thing that Democrats are expected to have to give up. Republicans want this bailout to be strictly a big-business bailout.

One thing that IS receiving bi-partisan support is the call for caps on executives salaries and retirement packages of those companies participating in the bailout. Though the current administration is resisting this as well, I would expect to see some version of it in the final agreement.

Personally, I'd like to see a version of both provisions in the final agreement. The problem was caused by two factors: 1) Institutions loaning money they shouldn't have loaned, and 2) individuals borrowing money they shouldn't have borrowed. As I said earlier, it's hard for me to feel sorry for either one. I purchased a home last December and, due largely to the capital I invested up front, my monthly mortgage payment is a little over $300.00 per month. Could I have borrowed a bunch of money, and bought a much bigger home? Sure, but why? Why go massively in debt if I don't have to?

Anyway, I would propose a bailout for the average homeowner based upon the provision that the only way to get such relief is through a Chapter 13 bankruptcy, You get to reduce your mortgage payment and keep your home, but you must give up all excess income for the next three years. You get to keep your retirement and pension accounts, but cannot contribute to them for the duration of the bankruptcy. You cannot use or start any credit accounts for the length of the bankruptcy, and your credit score takes the hit of having filed for Chapter 13.

Any excessive debt from the mortgage is then transferred back to the financial institution that generated the loan. If the company wishes to participate in the bailout, then executive salaries and retirement packages will be capped at an amount that is reasonable and consistent with the financial health of the corporation- with amounts to be rescinded and repaid if the profits fall below projections, and bonuses paid if the profits exceed projections. In no event shall the money paid for the bailout exceed 100% of the debt, less the financial reserve of the corporation. This allows the company to start with a $0 balance, and some restructuring/ reorganization may be necessary to make the company profitable again.

I would also like to see the government get some sort of stock option from this, with the provision that the stocks could be sold at a profit to recoup some of the taxpayer's money. I haven't worked the details out though.

Anyway, that would be the plan that got my vote- except I really don't get a vote.

- Joe U.

[jgredline]

Here is a great article I read this morning
by Albert Mohler.
http://www.albertmohler.com/blog.php

The headlines tell the story as recent days have seen the American economy and its financial system buffeted by seismic failures and the virtual disappearance of major investment banks. The debate raging in Washington these days concerns the form and extent of government intervention that will be required in order to restore stability to the financial markets.

Comparisons to the Great Depression are inevitable, but today's crisis bears little resemblance to the total economic collapse of the late 1920s. Capitalism is not in crisis and the fundamentals of the American economy remain strong. When President Franklin D. Roosevelt took office in 1933, the nation faced a genuine crisis and economic collapse. For the most part, the banks were closed and the nation was out of business.

Nothing like that is happening now, but the financial system is clearly in need of reform and realism. The fundamentals of the economy remain intact. These include American innovation, a dedicated labor force, strong consumer demand, vast natural resources, and unlimited intellectual capital.

More than anything else, this crisis has to do with what happens when the markets come to term with excessive valuations. Put bluntly, wildly inflated valuations led to risky financial adventures and worse. The sub-prime mortgage collapse came as more realistic real estate valuations forced market corrections. The vast global financial system has accepted the inflated valuations as real and traded in the risky mortgages as if the game would go on forever. This was a fool's errand.

There were other causes of the current distress in the markets and other forces at work within the economy at large. The slide of the dollar and the rising price of oil both played a part, as did more fundamental shifts having to do with a globalized economy and the continuing shift toward a knowledge-based economy in a technological age.

Is this all about greed? Yes and no. In the movie "Wall Street," the character Gordon Gekko famously declares that "greed is good." But is the economy really driven by greed?

This question requires a return to what we might call "Economics 101." No one has explained basic economics as well as Adam Smith did in his 1776 classic, The Wealth of Nations. As the great Scottish thinker explained, an economy is based upon the transfer of goods and services from one individual to another. Each partner in the transaction must believe that this transfer is in his or her own best interest or the transfer is not voluntary. Both parties seek to gain something from the transfer. Since no one person can meet all of his or her own needs alone, a vast economic system quickly takes shape. Individuals trade goods and services through the exchange of currency or another agreed-upon form of value.

At every stage, the transfer is made because those involved desire and intend to achieve a gain. The legal entity of a corporation allows individuals to band together in a common economic cause with certain legal protections. A stock market allows individual investors to buy an interest in a company, thus allowing the corporation to use their capital in hopes of future gain. The market works because all concerned hope to gain through the process.

The development of vast global economic systems simply builds upon the simple principle that all participants are willing to trade one good for another they want even more and to invest in the hope of future gain.

Is this greed? In and of itself, this is not greed at all. The desire for a profit, for income, and for material gain is not in itself greed. The Bible clearly teaches that the worker is worthy of his hire and that rewards should follow labor, thrift, and investment.

Greed raises its ugly head when individuals and groups (such as corporations or retirement funds) seek an unrealistic gain at the expense of others and then use illegitimate means to gain what they want. Given the nature of this fallen world and the reality of human sinfulness, we should expect that greed will be a constant temptation. Greed will entice the rich to oppress the poor, partners in transactions to lie to one another, and investors to take irrational risks. All of these are evident in this current crisis.

Christians should think seriously about this economic crisis and ponder what it would mean to come to a Christian understanding of what it means to be participants in this economy. As Adam Smith recognized, the economy is a moral reality. Human beings actualize their moral selves in making economic choices and through participation in the economic system -- and we are all participants.

Indeed, one of the defining differences between the current crisis and the crisis of the 1920s and 1930s is that the vast majority of Americans are now, in effect, investors. Our retirement accounts are, by and large, mingled with the investments of the titans of industry. Through their pension funds, school teachers are investors right alongside Warren Buffet. This was not the case in the run-up to the Great Depression. We all want and need the stock market to do well, and the outcome of any market crisis effects both Bill Gates and the worker in the local medical clinic.

Christians should look at the economy as a test of our values. The Bible values honest labor and dedicated workers, and so should we. The Bible warns against dishonest business practices, and we must be watchful. False valuations are, in effect, lies. Dishonest accounting practices are just sophisticated forms of lying. Insider information is a form of theft.

The Bible honors investment and thrift, and Christians must be wary of the impulse for short-term gains and pressure for instant profit. Over the long-haul, the entire economy must prosper if the vast majority are to do well and realize a responsible gain.

Thus, the current crisis sheds light on what happens when things get out of control, when various pressures distort the proper operation of the markets, and when irrational valuations entice investors to make poor investments. Dishonesty enters the picture at many levels, and the individual investor is too often left in the dark.

When these things happen the economy is threatened by a lack of trust, and trust is the most essential commodity of all when it comes to economic transactions. Without trust, the entire system collapses.

The big debate in Washington is over the extent of government intervention. Prudence would indicate that the less government intervention, the better. Adam Smith was confident that a "hidden hand" within the economy would rectify excesses and punish bad actors. I think he is basically right, but the government is, like it or not, one of the actors in this economic system.

The problem with letting the markets solve this problem and letting the "hidden hand" punish the bad actors and unwise decisions is that, in this situation, the small investor is crushed along with the tycoon. Furthermore, the entire economy could face a crisis of confidence.

So watch the debates in Washington with interest and consider how a Christian should understand the economy and our economic lives. The free market is not perfect, but capitalism has brought more wealth to more people than any other system. It rewards investment, labor, and thrift and rises on innovation. Better ideas and better products push out inferior ideas and inferior products. Given the reality of human sin, we should not centralize economic control in the hands of the few, but distribute economic power to the many. A free market economy distributes power to multitudes of workers, inventors, investors, and consumers.

No economy is perfect, but the American economy remains a marvel. The present crisis is an opportunity to rethink some basic questions and restore trust. There are no easy ways out of a crisis like this, and no painless solutions. Yet, would you trade this system for any other?

This current crisis should also remind Christians that we are not called to be mere economic actors, but stewards. Everything we are, everything we do, and everything we own truly belongs to God and is to be at the disposal of Kingdom purposes. This world is not our home and our treasure is not found here. We are to do all, invest all, own all, purchase all to the glory of God.

Finally, this current economic crisis just might help Christians to focus on another issue -- retirement. Where in the Bible are we told to aspire to years and decades of leisure without labor? There is nothing wrong with saving for what the world calls retirement. Indeed, that is just good stewardship. Furthermore, there is nothing wrong with workers enjoying the fruit of their labor. But Christians should think of retirement as an opportunity to be redeployed for Kingdom service.

Today's crisis in the financial system should not be a threat to the long-term health and vitality of our economic system. There is cause for concern, but no justification for panic. Rather than hit the panic button, spend that energy thinking about how Christians should glorify God in our economic lives. We should watch the developments and debates in Washington and New York with interest, but we should investigate our own hearts with even greater urgency.

[Medley]

Javier, I agree with you on several points, but am forced to disagree with injecting religion as any part of the solution, as the problem is larger than that.

Stupid question perhaps, but where is this $700+ billion coming from?

$ 1 Trillion dollars in additional deficit..... Great.

Adding to the national debt will not "fix" this problem: no debt transference to any individual or institution will fix the problem. The investment companies need working capital so that they can resume loans and investments to get the economy rolling again.

So where are we going to find $1 Trillion dollars to give to Wall Street? Simple, we're going to make it. We're going to print $1,000,000,000 in new bills. The consequences? A large spike in inflation rates, and a devaluing of the dollar on the world market.

That means that this bailout will affect literally every man, woman, and child in the country. Everything we buy as individuals will cost more due to inflation. Everything we buy as a nation will cost more due to a devalued dollar. The problem transcends political divisions, wealth divisions, and religious divisions, and the solution must do so as well.

I believe that your heart is in the right place Javier, but that by injecting religion, you risk alienating people who will be affected by this crisis and its proposed solution.

- Joe U.

[Skyman]

The only effective way to answer this is with an old (for the internet) proverb:


In the Beginning was the plan.
And then came the assumptions.
And the assumptions were without form.
And the plan was completely without substance.
And the darkness was upon the face of the workers. And they spoke among themselves saying: "It is a crock of sh_t, and it stinketh."

And the workers went unto their supervisors, and sayeth: "It is a pail of dung, and none can abide the odor Thereof"

And the supervisors went unto their managers and sayeth unto them, "It is a container of excrement, and it is very strong, Such that none can abide it."

And the managers went unto the directors and sayeth, "It is a vessel of fertilizer, and none can abide its strength." And the directors spoke amongst themselves, saying one to another: "It contains that which aids plant growth, and is very strong."

And the directors went unto the vice presidents and sayeth to them, "It promotes growth, and is very powerful."

And the vice presidents went unto the president, and sayeth unto him, "This new plan will actively promote growth and efficiency of this company, and certain areas in particular."

And the president looked upon the plan, and saw that it was good.
And the plan became policy.
And this is how **** happens.

[jgredline]

The only effective way to answer this is with an old (for the internet) proverb:


In the Beginning was the plan.
And then came the assumptions.
And the assumptions were without form.
And the plan was completely without substance.
And the darkness was upon the face of the workers. And they spoke among themselves saying: "It is a crock of sh_t, and it stinketh."

And the workers went unto their supervisors, and sayeth: "It is a pail of dung, and none can abide the odor Thereof"

And the supervisors went unto their managers and sayeth unto them, "It is a container of excrement, and it is very strong, Such that none can abide it."

And the managers went unto the directors and sayeth, "It is a vessel of fertilizer, and none can abide its strength." And the directors spoke amongst themselves, saying one to another: "It contains that which aids plant growth, and is very strong."

And the directors went unto the vice presidents and sayeth to them, "It promotes growth, and is very powerful."

And the vice presidents went unto the president, and sayeth unto him, "This new plan will actively promote growth and efficiency of this company, and certain areas in particular."

And the president looked upon the plan, and saw that it was good.
And the plan became policy.
And this is how **** happens.

Now this is funny...