I am all for keeping the economy afloat. I have no problems with loans to these corporations to keep them on their feet, especially because I think this is likely to lead to some serious restructuring and more importantly, it avoids a total financial meltdown. In principle, I like the idea of addressing the root cause of the current debacles in the financial markets, namely the mortgage crisis. However, the current plan for the Fed to take on an additional 700 billion dollars in “bad” mortgages is going beyond a bailout, it’s a keep you on your feet and cookin’ plan.
A bailout loan is still a loan. It is not a free ride or at least not a total free ride (even if the companies deserve worse). Taking over a mortgage is in essence, buying the loan. It is providing a way out for these corporations with minimal losses. Now, at least the Fed is proposing to use an auction style to buy up these loans, likely to push the price down as no corporation wants to be left holding the bag. However, where is the justice in this, especially considering that the brunt of the mortgage crisis is the fault of these corporations themselves! If you take advantage of someone’s poor financial skills or even stupidity, I don’t care what you say- you’re still taking advantage of them.
While asking for justice now might seem hypocritical considering my support for the previous bailout loans, I believe government must always strike a balance between maintaining a healthy business environment and protecting individuals. I think the bailouts, while not perfect, were enacted with that balance in mind. Some may disagree, but I think keeping the companies afloat was with the common good in mind. An additional 700 billion, however, has lost this balance.
I agree with addressing the root cause of this problem, namely all the bad mortgages and concomitant foreclosures. However, I do not agree with the solution as this is now truly a total bailout of the financial market and one that has very few strings, if any attached (at least now that I’m aware of). Now, I might be ok with it provided there were some serious strings attached, but I don’t understand why they don’t find a better solution that actually helps people (beyond just keeping the market afloat) who were taken advantage of in the first place – especially when we’re talking about 700 billion.
Here is what I would suggest. Rather than only deal with the financial corporations, why not go to individuals who are in foreclosure or in danger of foreclosure (you might even provide an option for those who recently lost their homes – it wouldn’t be perfect no matter what the case). The Fed could provide a two month window or something like that and then negotiate with individuals to restructure their loan(s) on a case by case basis. If we are willing to bail out companies for their bad decisions, there is no reason not to bail out individuals for theirs (although I would argue that many were taken advantage of more than their own greed biting them in the rear). If the Fed provides a way for individuals to restructure their mortgage, corporations get rid of their bad loans and people find a way to keep their homes. Such a plan seems only like a win-win!
Will this happen? Who knows – as in all crises bad plans often get pushed through because no one wants to look like they don’t care or are in any way obstructionists. Remember the Patriot Act?
6 comments:
We're getting closer... but not quite on the same page.
Keeping the companies afloat is nothing short of a massive transfer of public funds to private pockets. Pockets that do not harbor clean hands.
It is critical to remember that this does not simply rest on the basis of dodgy loans made to people that couldn't afford them - the root of this problem was that these loans were then resold, and repackaged in very complex financial instruments designed to minimize (hide) the risks inherent in such loans (not hide from the debtor, hide from the purchasing financial institution). These types of loans (high borrower risk) have been around forever, and should stay around - for reasons that go beyond the scope of this post.
Here's where I see the root of the problem:
Bank makes questionable loan. (This is fine, it's their money, lend it how they want).
Bank resells or repackages loan to another bank (this is stupid to me, because I am not a banker, and am not in a position to dig into the repackaging and assess the actual risk underlying the package)... What happened to the economy is that the emperor was caught naked - the banks that bought these repackaged loans were discovered to be either incapable or unwilling to assess the underlying risk. This is in no way deserving of a bailout, loan or any other governmental help. It's purely a business-to-business transaction, where all parties have the requisite knowledge or capability. The economy failed with the high-risk debtors (surprise) failed to pay, thus creating a problem for whichever financial institution got stuck with the hot potato. Problem is, they all had access, skill, and motivation to assess this risk - AND CHOSE NOT TO. You know, if a bank was asked to do something unusual, or outside the scope of it's expertise, I might have some sympathy - but seriously, they created these instruments, and get paid huge salaries to interpret and analyze them.
Now, letting the banks fail may very well harm investors. The FDIC and SIPC were created for these purposes. The SIPC is there for the purpose of broker-dealer securities fraud, and the FDIC is there for when banks fail. If the investors harmed cannot find redress with one of these existing institutions, then the answer lies with expanding the mission of these institutions and providing redress to the individual, not the [insert cussword] bankers that were at best negligent in assessing the risk. In the end, I don't care about the amount - it should be a function of actual harm to investors, not some oddball amount picked to reimburse corps based on how much they think they will lose.
There are many problems with buying the loans from the corps, even at an 'auction' style.
-if the gov is going to buy them regardless, it's not really an auction and the price will reflect that
-by jumping at whatever figure the corps provide now (700b is a big number) there cannot be any real claim that it is an accurate number - at most it's a quick estimate.
-there is no urgency relating to the investor right now, only to the corporations. Investors can be made whole later after they actually suffer loses - only the corporations stand to suffer immediately.
What exactly is the fear in letting a bank fail? Individuals can be made whole. Corporations will find other places to put their money (new banks will pop up overnight, guaranteed, with the same employees as the previous banks). The only fear I hear so far is coming from the banks themselves. I hear only anger coming from individuals. One point upon which we completely agree is that rushing this produces crap (and the Patriot Act is a fine example).
Thanks for listening.
Happy Tuesday!
Thanks for the comment.
I think your assessment of the casue of this trouble is right on(Banks not assessing risk on the loans they bought and sold, although I would also point to dodgy lenders who knew exactly what they were doing).
But I think because these institutions are all so tangled together you have to weigh the risk of a total financial meltdown, which I think, is real. In this case, new institutions would not be able to take their place (at least not in the near future) as the credit world would be destroyed.
I think we can both agree that serious restructuring is needed, but I think we also need to consider the reality of the current world of credit we all live in. For better or worse, the availability of loans is a major element of our economic engine.
What I like about the initial bail outs is that it forces these companies to sell themselves off in order to mitigate their losses while keeping the credit market afloat. The corporations still have to take losses without the rug being pulled out from everyone's feet. I think its a good balance between keeping the market functioning without completely removing accountability.
In terms of an additional 700 bn, I would fully agree that this is nothing short of a "massive transfer of public funds to private pockets." While I have to admit I don't know much about the SIPC and FDIC (although I don't think the FDIC covers financial banks - also part of the problem) I do think any type of bailout on this scale should work through individuals, rather than corporations.
The Fed has kept the market on its feet (as I argue it should have), but now let it sort itself out. Will there be losses, yes. But like most medicine (aprart from the cherry flavored kind :-), it's bitter, but good for you.
I guess I have a higher tolerance for potential meltdown - so long as we are attacking the root of the problem. I don't think the bailout stands any chance of really fixing the problem - it's getting pushed through, and Congress has a shitty track record for this sort of thing. I fear it will get mired in pork and other distractions, until it is worthless. So, to me, although a meltdown is scary, the end result holds a significantly higher likelihood of success.
http://www.npr.org/templates/story/story.php?storyId=94950330
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em
Still a bailout, but getting better - more like taking control.
Something like this still bothers me on a conceptual level, but much less on a practical level.
Thanks for the articles!
Maybe we should be paying attention to those Scandinavians more often!!
Startling to think that Congress would be giving the Executive branch more power with this bailout than the Patriot or War Powers Acts.
I sincerely hope that if this goes through there are indeed some major strings attached - taking control (I think you could even argue this simply represents holding people accountable) is much more palatable that a handout.
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