Over the last few days I have tried numerous times to sit down and write a blog update regarding the bailout. Each time I have stopped short of posting something because I have felt that what came out was more of a political rant than anything of value.
Now that the bailout proposal has failed to pass the House of Representatives, I feel like I need to at least write something, even if that something ends up being a rant on the current state of politics in the United States.
Q: Why didn't the bill pass?
A: In what is strictly my opinion, the bill did not pass due to political bullshit. In other words, there is an election in 40 days and everyone from Presidential Candidates to House Representatives are employing CYOA (Cover Your Own Ass) politics.
Q: What do you have to support that claim?
A: During the 1st presidential debate the candidates spent 40 minutes talking around a possible bailout. Why did they do this? Because they are playing up to the vast majority of the voting public who are uneducated when it comes to the financial crisis that our country is facing right now. Spending taxpayer money is by no means popular, even if it is the right thing to do.
Speaking of spending taxpayer money not being popular, here is a prime example of that...
The proposal for the bailout broke the authorization of $700 billion into three pieces. The first $250 billion was to be authorized immediately, the second tranche of $100 billion was subject to approval by the President, and the third tranche of $350 billion required congressional approval. Looking beyond the political bullshit, here is what that translates to...
"We realize that authorizing $700 billion to solve this crisis is the right thing to do, but it isn't going to make us very popular. So lets do this, lets all share in the responsibility for the first $250 billion of taxpayer money we spend.
The next $100 billion, well, there really isn't much reason to separate it from the first $250 billion, except we don't responsibility for spending it. So George... err Mr. President, you're going to have to bite the bullet on this one. But since you are already unpopular and don't have to worry about getting being re-elected, you won't mind,right?
As for the last $350 billion, we are only going to authorize that when we know that this is going to work, at which point, we will want the credit for doing what was necessary in order to lead our economy beyond this crisis."
Well, it turns out that there were not enough CYOA provisions in the bill, and it was shot down. If this crisis hit 40 days from now, I suspect that we would be seeing a completely different result of todays vote. Sadly, it seems that members of the House are more concerned with being being re-elected, than doing what actually needs to be done.
Q: Wow, you weren't kidding about this being a rant...
A: Yeah. I'm pretty pissed off actually.
Q: What happens now?
A: It is likely that politicians will try to breathe new life into the bill and it will be brought before the house again (plus or minus a few hundred billion dollars, along with some provisions). Even if the bailout passes the second time around, we will most likely see more banking failures, more losses in the US stock market, and possible spikes in inflation before anything happens. When Bush, Bernanke, and Paulson said that we needed to act now, they weren't kidding.
The Treasury will continue to deal with each failing institution on a case by case basis and we will continue to see the patchwork fixes that have have only served to delay the problem instead of dealing with the underlying issues of this crisis. Meanwhile, the Federal Reserve could lower interest rates to try and provide relief to the credit markets, as well as slow down the effects in the stock market. This will most likely cause inflation within the US economy.
In the worst case scenario, large commercial banks will fail and no one will have the capital available to buy them. At this point the FDIC won't be facilitating a bank buyout like in the case of WaMu, but they will be eating the entire cost. Incase that isn't clear, the FDIC is backed by the Treasury, which is funded by... you guess it, taxpayer money.
So like it or not, taxpayer money will be used to deal with this crisis regardless of congressional approval. What remains to be seen is if congress is willing to move beyond their political bullshit and allow taxpayer money to be spent in a way that will serve as more than just a stopgap.
Q: Can you please explain the worst case scenario a little more?
A: If commercial banks fail and no one is able to buy them, the FDIC will step in and guarantee deposits up to $100,000. As these failures mount up, the Deposit Insurance Fund would eventually be depleted, and the FDIC would turn to the Treasury for funds. So instead of spending $700 billion in taxpayer money (which, under the failed bill, would be completely repaid) to remove the underlying cause of this crisis, we have opened ourselves up to feeling the direct impact of this crisis to anyone who has a depository account at any banking institution.
Q: Wow, that sucks. Why didn't anyone say that before this went to vote?
A: Political bullshit...
Q: I have more questions for you and/or completely disagree with you...
A: Post a comment and respond later. This MNF game just went into OT and demands my full attention.
Update: Steelers just kicked a field goal in OT to win it. Also, I don't actually think we will see the worst case scenario come about, mainly because "Too Big To Fail" policy would kick in before then...
-dunkie
5 comments:
"Financial bail-outs of lending institutions by governments or central banks can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses..." MORAL HAZARD.
F-Wall Street, let it fail and let it burn. In it's ashes new financial markets will arise.
The FDIC must insure deposits up to $100,000 after that, the money in those accounts can evaporate for all I care. Then people will be more prudent in the future.
America still has amazing workers and the best technology, it will rise right back to the top and be stronger that ever... The financial crisis will pass.
The last thing I wanna do is bailout the idiots that created this mess so they can sail away with their golden parachutes to an exotic tropical island somewhere in the south Pacific. And a fresh crowd of Harvard MBAs can take their place and repeat the same mistakes, because they know Uncle Sam will rescue them.
This is reminiscent of when the government bailed out the Airline industry... Look what that did for the american taxpayer... The executives got away with millions while your average Joe is still flying on a cramped and crowded MD-80 with terrible service and worse food, and forget about changing a reservation, because you're only gonna get routed to somebody in India. Awesome. Oh, and make sure you bring 15 bucks so you can PAY TO CHECK A BAG!!!
So if you want more of the same old terrible financial institutions that use YOUR money recklessly and count on the government to bail them out so that they can retire and buy private jets, then by all means, call your congress person and urge for a bailout deal.
Or you can say, sorry guys, but y'all are gonna have to clean-up your own mess.
Christopher,
1) Moral hazard is a very valid point that you bring up. However, please understand that moral hazard does not just apply to the lending institutions. Moral hazard can also be applied to the borrows who are now defaulting on their loans.
Furthermore, one can argue that inaction by Congress to pass the bailout is in fact moral hazard, because they are protected from the consequences of their poor decision making.
2) In regards to your comments against Wall Street, Wall Street has already failed. The face of the US financial market has changed drastically in the last month. Still, the fires are burning and if the treasury is not given the funds needed to put out the fires, we may find ourselves with little financial markets to speak of.
3) As for the FDIC, it does indeed insure deposits up to $100,000. Please be aware that a large commercial bank failure could quickly dissolve the DIF (deposit insurance fund), as some of these banks have over $500 billion in deposits alone. To compare, the DIF has about $40 billion in funds. Beyond that, money would have to come from the Treasury in in form of a loan to cover the deposits.
3.5) Going off on a tangent here... the FDIC is an insurance fund that receives its funding form banks, which makes up the DIF. If a loan were to be taken from the Treasury, it would be paid back over time. In effect, this is the same as passing a bailout, except that it would occur all at once, and instead of having a positive impact on investor confidence, it would have an increasingly negative effect.
4) America does have amazing workers and great technology. However, without available credit they wont be able to invest in more technology. Also, businesses will have to tighten their belts and those amazing workers will lose jobs.
I agree that this financial crisis will pass. Although, it remains to be seen on how many legs we will be left standing, if we are left standing at all.
5) Like it or not, we are all in this together. A bailout will help the idiots, as well as the everyday American. The result of inaction will send shock waves throughout our economy and even hit the shores of other countries. Make no mistake, this crisis effects everyone.
6) How scary is that two-faced lady in that airline commercial?
7) Yes, call your congress person and urge them to accept a bailout deal.
8) The Treasury and Fed will clean this up and it will cost the taxpayer money. It is just a matter of if Congress is willing to get their hands dirty and help the matter, and try to soften the impact to the American people, who don't realize that they are about to be hit my a passing semi truck.
9) Sincerely,
10) -dunkie
it looks like "Anonymous" just spammed your blog with his radical communist agenda.
Before anyone repeats the nonsense spewed by Anonymous please run his rant "by any professor of economics or socio-economics."
http://money.cnn.com/2008/09/30/markets/markets_newyork/index.htm?cnn=yes
everybody's a speculator. trying to get rich when Uncle Sam comes to the rescue.
However, Lou Dobbs hates the bail out, so good for him.
TS.
In the meantime, I think we should all buy gold
From "The Creature of Jekyll Island: A Second Look at the Federal Reserve," written in 1994 (1st Edition) by G. Edward Griffin
Chapter Two: "The Name of the Game is Bailout"
"It was stated in the previous chapter that the Jekyll Island group which conceived the Federal Reserve System actually created a national cartel which was dominated by the larger banks. It was also stated that a primary objective of that cartel was to involve the federal government as an agent for shifting the inevitable losses from the owners of those banks to the taxpayers."
"The name of the game is BAILOUT. As state previously, the objective of this game is to shift the inevitable losses from the owners of the larger banks to the taxpayers. The procedure by which this is accomplished is as follows:
RULES OF THE GAME
The game begins when the Federal Reserve System allows commercial banks to create checkbook money out of nothing. The banks derive profit from this easy money, not by spending it, but by lending it to others collecting interest.
When such a loan is placed on the bank's books it is shown as an asset because it is earning interest and, presumably, someday will be paid back. At the same time an equal entry is made on the liability side of the ledger. That is because the newly created checkbook money is now in circulation, and most of it will end up in other banks which will return the canceled checks to the issuing bank for payment. Individuals may also bring some of this checkbook money back to the bank and request cash. The issuing bank, therefore, has a potential money pay-out liability equal to the amount of the loan asset.
When a borrower cannot repay and there are no assets which can be taken to compensate, the bank must write off that loan as a loss. However, since most of the money originally was created out of nothing and cost the bank nothing except bookkeeping overhead, there is little of tangible value that is actual lost. It is primarily a bookkeeping entry.
A bookkeeping loss can still be undesirable to a bank because it causes the loan to be removed from the ledger as an asset without a reduction in liabilities. The difference must come from the equity of those who own the bank. In other words, the loan asset is removed, but the money liability remains. The original checkbook money is still circulating out there even though the borrower cannot repay, and the issuing bank still has the obligation to redeem those checks. The only way to do this and balance the books once again is to draw upon the capital which was invested by the bank's stockholders or to deduct the loss from the bank's current profits. In either case, the owners of the bank lose an amount equal to the value of the defaulted loan. So, to THEM, the loss becomes very real. If the bank is forced to write off a large amount of bad loans, the amount could exceed the entire value of the owner's equity. When that happens, the game is over and the bank is insolvent.
This concern would be sufficient to motivate most bankers to be very conservative in their loan policy, and in fact most of them do act with great caution when dealing with individuals and small business. But the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Federal Deposit Loan Corporation now guarantee that massive loans made to large corporations and to other governments will not be allowed to fall entirely upon the bank's owners should those loans go into default. This is done under the argument that, if these corporations or banks are allowed to fail, the nation would suffer from vast unemployment and economic disruption. More on that in a moment.
(skipping to chapter summary)
SUMMARY
Although national monetary events may appear mysterious and chaotic, they are governed by well-established rules which bankers and politicians rigidly follow. The central fact to understanding these events is that all the money in the banking system has been created out of nothing through the process of making loans. A defaulted loan, therefore, costs the bank little of tangible value, but it shows up on the ledger as a reduction in assets without as a corresponding reduction in liabilities. If the bad loans exceed the size of the assets, the bank becomes technically insolvent and must close its doors. The first rule of survival, therefore, is to avoid writing off large, bad loans and, if possible, to at least continue receiving interest payments on them. To accomplish that, the endangered loans are rolled over and increased in size. This provides the borrower with money to continue paying interest plus fresh funds for new spending. The basic problem is not solved, but it is postponed for a little while and made worse.
The final solution on behalf of the banking cartel is to have the federal government guarantee payment of the loan should the borrower default in the future. This is accomplished by convincing Congress that not to do so would result in great damage to the economy and hardship for the people. From the that point forward, the burden of the loan is removed from the banks ledger and transferred to the taxpayer. Should this effort fail and the bank be forced into insolvency, the last resort is to use the FDIC to pay off the depositors. The FDIC is not insurance, because the presence of "moral hazard" makes the thing it supposedly protects against more likely to happen. A portion of the FDIC funds are derived from assessments against the banks. Ultimately, however, they are paid by the depositors themselves. When these funds run out, the balance is provided by the Federal Reserve System in the form of freshly created new money. This floods through the economy causing the appearance of rising prices but which, in reality, is the lowering of the value of the dollar. The final cost of the bailout, therefore, is passed to the public in the form of a hidden tax called inflation.
So much for the rules of the game."
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