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And what about the potential for a very long and painful recession if the credit crunch continues? The administration's plan is making a big assumption--that attacking the problem primarily at the cog in the middle--the MBS--will help get lending going again. But what if the $700 billion isn't enough or for whatever other reasons credit is still constrained even as the rescue plan plays out? Would it be better, along the lines of what Tom Evslin advocates, to use government money for direct lending to businesses that normally get credit from the banks currently in distress? A solution like this would bypass the companies in the center of the storm and surely bring about some serious creative destruction. There will be a huge credit gap to fill if banks can't lend, but what makes us think that the necessary capital won't eventually be mobilized in other ways by new private sector players, perhaps facilitated by a government fund starting things off? Is there any way to mobilize capital of sufficient size outside of the big banks at this point, or is that really the heart of the problem--that they are the only reliable and sufficient sources of capital? I imagine that doing something like this would be painful in the near- and even medium-term (it will take quite a while to get an essentially brand new credit system up and running), but perhaps better over the long-run (and more in the spirit of capitalism)? While the current bailout plan seems to be more of a quick fix but with potentially serious long-run risks (it may not work, taxpayer money will be squandered, moral hazard issues, etc).
Just thinking out loud here really--the current plan is probably the right way to go, but why not explore all options? We are taking a gamble either way and trying to choose the least bad of many terrible options.
I would think that the main problem that is worrying Hanky Panky and Ben is not so much of the falling housing market but the frozen credit market. A frozen credit market has severe direct trickle down effects on the economy and that is exactly what the duo is trying to avert. To try to unfreeze the credit market by tackling the housing market would probably take too long since the recovery will take at least 1 year. By then, the economy would probably be in shatters. Also, isn't it such a waste of capital to destroy the surplus homes which do have value?
"to use government money for direct lending to businesses that normally get credit from the banks currently in distress"
That would be a bad mistake in my opinion as that would mean an abandonment of capitalism and the free markets. Centralized state lending has proved to be less effective than free markets in China's experience and I don't think it would wise to revisit this option.
I think Roger's suggestion is very much similar to the Swedish solution (which was very successful). I do believe that Paulson did consider forcing the banks to give up equity in exchange for financial aid but he probably think that the banks will not participate in this program if so. His fear is that the banks will wait until the very last moment like AIG before participating in the program and if that happens, the credit market will remain frozen for a while and then as one bank after another capitulates and seek financial aid from the government, it'll only further strain the credit market by raising fears on who's next to bail.
My suggestion would be for the government to take the option of not participating in the program away from the banks. Let the Feds check the books of every major bank and force those weaker ones to participate in the program. However, I'm not sure if they are legally powered to do so.
Part of the answer is "yes...those who stand accused.." but the majority of the answer is away from the bandits. The "bailout" is not so much of the folks who manufactured the product but rather those who bought it. It is very likely that one of those (who bought it) sends you a statement every month detailing monthly activity of your primary checking account. And this is somebody you directly don't want to see get screwed up. So in a way...we are really bailing out ourselves...
Based on exactly what empirical data are the write-downs occurring? How is "high risk of failure" determined and how did they [mortgages] get marked to $.70/dollar? Why was a $.30 write-down the right number at the time? No concept-level answers...I am looking for the math...
I am asking the question because I think the answer will be enlightening...
"Earlier in the day, Goldman Sachs economists estimated the amount at risk in the mortgage sector at $1.15 trillion. [I ROUNDED TO $1 TRILLION] They get there by looking at the total number of commercial and residential mortgages in delinquency or foreclosure versus the total value of all U.S. mortgages. Scarily, Goldman estimates more than 9 percent of the $11.3 trillion in outstanding residential loans are at risk (not to mention 4.2 percent of commercial loans)."
Write down amount:
My understanding is Lone Star was $.21/dollar.
I don't agree with the Buffet analogy. I think there is a big difference between the MBS and straight GS preferred. Regardless of how much MBS related assets GS owns.
Does that help?
Financial engineering, no matter how exotic, can't lower asset prices to more appropriate levels without dishing out some serious pain.
It's just hard medicine to swallow.
1. Reduce illegal immigration. Who'd want to come 1000 miles to struggle when they can do it at home.
2. Reduce the level of decadence. Who'll pay $40,000 for box seats at hockey games, who'll pay $200 a month for phone sex, who'll buy designer jeans for $300, who'll be able to afford a BMW for their high school kid?
3. Reduce the terrorist threat. When the evil empire becomes the feeble empire, it takes the fun out of the rhetoric. Also see decadence.
4. Reduce our dependence on foreign oil. We will actually have to change our consumption patterns. Besides, we won't be going anywhere far from home.
5. Reduce the risk of war over far away places and over false causes. It is hard to send an army into battle When there is no money to buy bullets.
6. Shrink government at all levels. When there is no tax to be collected, they'll have to do what they now do not want to do.
7. Strengthen labor unions and re-create the neccessary tension between labor and management
8. Resurrect political parties with clear, opposing philosophies to replace the two parties which are complicitly seeking the same re-election contributions
9. Prove capitalism to be as false a god as communism. Time we recognize that balance and moderation is good for personal and national health.
10. Create another generation of Americans who are self sufficient, value hard work and save(like the Depression kids)
I would like to hear your opinion on SEC's proposed right to be able to "suspend mark-to-market accounting for financial institutions when it thinks doing so is in the public interest."
I find it to be extremely troubling. The whole point of the bailout is to pay more than market until there is a functioning market that results in better price discovery (presumably at a valuation above current prices but less than mark to maturity). Suspending market pricing would defeat this goal.
Without mark-to-market, will we be seeing Japan all over again where banks live in denial for years about how deep in losses they are in?