On The Bailout

President Bush, Henry Paulson and Ben Bernanke haven’t been able to push through bailout legislation without pushback from Republicans and Democrats alike.

This is good. For a while.

Time is still of the essence.

The market today agrees so far, rising on expectations that the bailout will happen, and not fretting over the fact that cooler minds are prevailing; giving pause.

Free market purists are calling for a no bailout approach but this situation has devolved to the extent that inaction is no longer an option.

The cause and the action needed to rectify the effect need to be treated separately. The patient needs to be stabilized before we call in forensics. In time, the facts will show the blame will fall across multiple administrations and both parties in congress. True to form in any bubble, irrational exuberance will have been exhibited by all parties involved. Once the market lost its luster, real estate became the highest and best use for capital. For individuals and corporations alike.

Too much money chasing any particular ascendant asset class results in the potential for a bubble to form. Coupled with a congressional mandate to push all citizens, even those that truly don’t qualify, into home ownership, you have the potential for a disaster.

Another perfect storm.

In the wake, the bailout needs to be right more than it needs to be fast. Past examples are rare, but there is a chance, if structured properly, that the American taxpayer could recoup much or all of the bailout dollars. A knee-jerk reaction focused on quick action over prudent action will all but prevent this.

If we are buying the assets, we need to be in a position to benefit from their appreciation in value and/or proceeds of their sale. Congressional oversight and control of executive compensation must also be mandatory provisions.

As for the finger pointing? Blaming this disaster solely on Wall Street is inaccurate and unproductive. This was a systemic failure. A failure of regulation. A failure of ethics. A failure of speculation. We are not bailing out Wall Street, we are bailing out our entire national financial system.

Mrs. Roosh and I will be travelling to New York tonight through Sunday to see what we can do. We will keep you posted on our progress. Okay, it’s more of a vacation, planned since February. I promise if Hank, Ben, or G.W. call on me, I will drop what I’m doing. In the John McCain idiom, we will roll up our sleeves and work tirelessly to restore confidence in our financial systems.

…and we’ll take some pictures.

Update:

Bailout: Lawmakers say they’ve reached deal

The Paulson Plan Will Make Money For Taxpayers

 

30 thoughts on “On The Bailout

  1. Greenspan warned Congress back in 2004 that Fannie & Freddie had gone into the business of printing money; that is, F&F were acting like an new branch of the treasury, sans oversight. F&F didn’t want regulation, shelled out lobbying money & congress took it with both hands.
    Even if the deal works & the government makes money a significant portion of the economy will be left in the hands of the same people who spend, every year, the excess money that is paid into social security.
    The bailout talk puts me in mind of a fox demanding that Farmer Jones restock his hen house.

  2. Agree with Terry – this Administration was warned in 2004, in fact it was warned in 2001.

    That said, remember, F&F were obligated to buy FHA loans, often which were pushed at them through secondary markets where they had little transparency or choice.

    Roosh, fundmaentally, greed drove this. Greed by consumers to get the best and quickest returns, regardless of the character of the investment – while much of this drive comes from the very wealthy and/or institutional investors, still, the American people bought into unfettered, unsupervised capitalism as the panacea that it utlimately proved to exactly NOT be.

  3. Peev, the reason you are blaming an intangible thing like “greed” rather than a specific individual or policy is that the actual individuals & policies have the word “democrat” stamped all over them.

  4. Peeve is like the three year old taking his first ride on a merry-go-round….all he’s aware of is a blur of action and noise. It’s scary and he is hugging his moonbat indoctrination like a blankee.

    I have hope that cooler heads will prevail and not a cent of taxpayer bailout will find it’s way into our capital markets. Because if it does, mark my words…there will be no stopping this socialist train.

    Our economy is deep enough to take this hit on it’s own. And if we have to take pay cuts to allow our employers to make it through a period of tight credit, it would be a small price to pay considering the alternative.

    Not. One. Penny.

  5. Peevee is like a three year old kid taking his first ride on the merry-go-round. All he is aware of is a blur of motion and noise. It’s scary for the little guy and he’s clutching his moonbat indoctrination like a blankee.

  6. From the N.Y. Times Sept 2003

    “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry. ”

    But, democrats didn’t see the need.

    ”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing. Representative Melvin L. Watt, Democrat of North Carolina, agreed. ” ”

    Barney Frank should be stipped of all leadership positions and paraded through the streets of DC wearing nothing but mens underwear.

  7. I have hope that cooler heads will prevail and not one penny of taxpayer bailout will reach our capital markets.

    Our economy is deep enough to take this hit on it’s own, and if we have to take a pay cut to help our employers through a period of tight credit it will be a very small price to pay consideriing the alternative.

    Because if the government gets it’s greasy beak into the marketplace, make my words; there will be no stopping this socialist train.

  8. Peev:
    “…the American people bought into unfettered, unsupervised capitalism…”

    Unfettered and unsupervised. Really? Really?

  9. You can’t blame this debacle on the faults of a free market because it wasn’t one.

    It’s not a free market when Fannie and Freddie make business decisions under the pressure of a mandate from congress to buy and promote bad mortgages all the while knowing they would be bailed out if they failed.

  10. I’d like to believe the updates here, but if there is a 3x win on buying out the securities of Fannie, Freddie, and others, why the heck aren’t private investors lining up to do just this? Why does government need to step in if there is this much money on the table?

    Sorry, this ain’t a win for the taxpayer, it’s the sound of our pockets being picked.

  11. I’d like to believe the updates here, but if there is a 3x win on buying out the securities of Fannie, Freddie, and others, why the heck aren’t private investors lining up to do just this?

    No kidding, BB. I’ve seen more sensible proposals in Nigerian e-mails.

  12. BB: Basically, because there has to be a HUGE influx of money. The credit markets are drying up, which means that there just aren’t any private investors with enough cash to make a difference.

    This situation is, to put it mildly, FUBAR. Private investors can’t get the capital to bring the markets back up – only Uncle Sam can do so.

    Doing nothing isn’t an option. The credit situation is so bad that a lot of businesses, small, medium, and large can’t get enough credit to make payroll. We’re teetering right at the edge of a catastrophe here, and sadly, some kind of bailout is the only way to correct the system.

  13. No Terry, they don’t,

    They have Democrat AND Republican, but unfettered capitialism, that has Republican stamped all over it.

    Jesus, are you people completely incapable of having a civil, rational discussion? I blamed Democrats on this point in the past Terry, you certainly could recall it if you gave it half a thought.

    J – and others – first CRA – banks using CRA provided sub-prime at HALF the rate of those not using CRA. CRA stipulates loans are NOT to be made under risky circumstances. Your radio talking points are white elephants. Move on. However, if Frank said what is quoted in 2003 – I agree, he should be stripped of his position – AS SHOULD EVERY REPUBLICAN IN THIS ADMINISTRATION. Why is it that you’re ready to hold Democrats accountable, but not Republicans?

    Bush was warned in 2001 about F&F – his reaction was to make CRA MORE LAX via an attempt in 2003, and then essentially edict in 2005, creating a 3 tier system where banks

  14. JR – btw, we’ve NEVER had a free market, but one of the weaknesses of a ‘free market’ is that catastrophe is more than just possible, it happens with routine as the herd follows the lead cow over the cliff.

  15. Also, J, I understand you work in this field, so consider this.

    In 2001, wages went stagnant, in part due to the end of the Y2K boom, but also in part due to the end of the internet boom (tech boom) too. Wages were driven up in the 90′s by the collateral pressure of increasing wages in the technology sector. Because of increasing wages AND low rates, home values climbed sharply.

    However, energy costs and health care costs, didn’t stagnate along with wages. Incentives existed for investors to invest OFF shore, not onshore – not tax incentives in the US (although they existed) but simple labor/expense opportunities (as they appeared) in China/India. They started investing, as much as 10 Trillion dollars, in Chinese and Indian infrastructure. Offshoring was SUPPOSED to lead to an on-shore boom in management jobs. That never transpired.

    People, starting in 2001, but continuing since, funded their lifestyles, meaning they paid basic bills, off of accrued equity. They refinanced and refinanced, good credit risk people did this, took out ARMs., raided 401ks, raided IRA’s.

    Then, some silly people decided investing in interest only loans and flipping houses was a sound investment – I had a couple I worked with – that was unsound, but not a huge sector of the market (at least in MN).

    Increasing debt spending by the US Government shrinks the value of the dollar, exacerbating energy costs and inching up pressure on inflation. The Fed reacts in 2006-07 by rasing rates, suddenly the ARMS look bad, and people can’t refi any more, too costly, and equity is gone.

    That’s what brought us to today MUCH moreso than Barney Frank or John McCain. What is the root of the problem?

  16. Peni,

    Unfettered capitalism? Since when? We’ve been highly fettered since late 1929.

    Capitalism in itself is not a great goal. Even Communist China is in the business of amassing capital. Free-market capitalism is what we need, & do not have.

  17. …not tax incentives in the US (although they existed)

    The second highest corporate tax rate in the world is not an incentive to move as much work overseas as you can?

    Offshoring was SUPPOSED to lead to an on-shore boom in management jobs. That never transpired.

    I work with overseas divisions. You can manage European divisions, but it’s not practical to even work closely with divisions in India and China as there’s just too many timezones difference.

    Then, some silly people decided investing in interest only loans and flipping houses was a sound investment

    Strangely enough, that’s about the sole reason for the crisis and about the only reason I’d support a limited bailout.

    Look, we’ve got a bunch of folks underwater on those loans now, and that’s depressing the housing market. If the market keeps going down we’ll get more and more folks underwater and more and more bankruptcies mean more foreclosures, etc. We’re in a vicious positive feedback loop right now and we have to break that loop before we reach a point where housing isn’t an asset but becomes a liability for the vast majority of homeowners.

    Banks are horribly exposed on bad loans. But they have to have reserves to cover those losses. Those reserves are money they can’t lend. Taking on some of the bad loans, preferably at a discount, will stabilize the market.

    Banks are now loading up on cash figuring they’re going to get hit with massive withdrawals if things keep going south and as a defensive position to make their access to credit somewhat easier. They’re probably right in doing so.

    I tend to think if something isn’t done we’re heading into another early-80s style recession, and that will be brutal given how exposed many folks are since we haven’t had even a moderate recession for quite some time. There’s a whole generation out there who’ve never seen how bad it can get and have no buffer.

    What is the root of the problem?

    Too much easy credit and too much money chasing too little in the way of returns.

    Where did the easy credit originate? Freddie and Fannie, run by whom? And what ideology pressured them to extend credit to one and all, even to vast numbers of illegal aliens whose understanding of finance is even less than the typical American’s?

    Then there were the foreign banks in Europe chasing better returns in the States without understanding what was going on.

    If we go, we could well take the world with us, though. You think US banks are exposed? Check out Deutche Bank’s leverage ratio — it’s over 50 and the total liabilities of that bank are 80% of Germany’s GDP. And we’re worried about Freddie and Fannie’s liabilities of 40% of GDP on a leverage ratio of 62; and Barclays which has liabilities greater than Britain’s GDP has the same ratio as F&F. A deep recession here could throw many very heavily leveraged European banks that are “too big to fail” over the edge even if they limited their exposure to US mortgage loans. And that would add to the implosion, sending a recession into depression type areas.

    So, meltdown? Yeah, we’re not that far from it. And we’ll pay for it either way. We’re stuck in the position of one of those London prostitutes and hoping that’s just the thug Uncle Sam coming down the alley to mug us and not a deep recession/depression Jack the Ripper.

  18. With all these Neo-socialists around here, maybe we should have an FDR/New Deal type plan to stop the falling value of housing.

    FDR wanted to raise agriculture prices so he ordained that surplus grain be burned, and millions of livestock animals be destroyed before they could go to market. all this while people were literally starving to death.

    So in that spirit, let’s let the government buy up these mortgages, & overbuilt subdivisions & condo complexes, and bulldoze them. then light the remains on fire. Anyone caught even thinking of building anything bigger than a garden shed should be thrown in prison… or better yet a concentration camp in Nevada.

    Now that will raise real estate prices.

    OR, we could just form a regulatory agency, preferably with a name that can be reduced to a 3-4 letter acronym, that could just mandate the value of your home. Now THAT is a true FDR-esque plan if I ever heard one… & hey, he solved the Great Depression, right!

  19. The bailout is falling apart.

    As a direct result WaMu bought the farm since they were terribly exposed — half their portfolio on subprime, HELOCs, and ARMs?! No wonder nobody would touch them.

    Should be an interesting day on Wall Street tomorrow.

  20. Watch. By 5PM EDT, there will be a compromise deal ready to go to the floor after the debates. And McCain and Obama WILL be there. Or McCain may not have to be there, and Obama will have to.

    Either way, a deal will be dealt with, McCain will win out and look great, and this 700 billion dollar bailout, with 100 billion going to ACORN will be scuttled.

    Then, it’s Bye-Bye, Obummer.

  21. Haha! Yeah, Cheech. Everything’s going according to plan.

    The Republicans slogan: “I meant to do that.”

  22. 100 billion going to ACORN! That is enough to scuttle the entire thing. Locally we could have “fun” with that

    I’ve watched way too much CNBC in the last ten months since my constitutionally protected first funding MN PERA early retirement. CNBC seems fair overall in their coverage (great Sarah Palen interview done before the announcement) but I saw no indication of this credit crisis coming to a head. I knew the basics of “creative financing” were bad but didn’t see an immediate crisis.

    The 1977 CRA was always throwing a lot of money at the “hood”. I lived in the Minneapolis Phillips neighborhood for a couple of years before buying a house in the Longfellow neighborhood. I recall getting a lot of very attractive finance programs if I would want to buy in he Phillips neighborhood. For the neighborhoods like Phillips this was good to attract responsible homeowners but like the Jeffersons I wanted to “move on up” and not deal with the hassles of the “hood”. Buying in Longfellow definitely improved my “quality of life” (here in Longfellow someone took my ten year old garden hose but even there an ex girlfriend with a propensity for “borrowing” things is a key suspect. That is my “crime of the decade” here in Longfellow.

    My old Phillips neiborhood is holding on due to immigrants who didn’t know about the “creative financing” thing where repayment of the loan is optional.

    Go to the near North Side and it’s far worse. Would responsible people want to buy a house in a “war zone”? They dumped huge amounts of money into North Minneapolis and they have this huge default percentage. This did nothing to help the responsible people who bought houses there. A former roommate just filed criminal charges against a North Minneapolis building inspector who solicited money for a marginal scrap lumber violation. I think it was $300 to remove it and “make the complaint go away”. This person had a court related job so this person knew how to set a trap and deal with it.

    You might recall that Barak Obama was “associated” with a few Chicago Real Estate projects in the “hood” that defaulted. Somehow the mainstream media doesn’t seem interested in this. Also, the figure of some called “subprime mortgages at risk is under 5% of total owner occupied housing. I don’t thing the vast majority of the public, including myself, who paid off my mortgage in under 20 years and never did a takeout will be be sympathetic to these “something for nothing” subprime borrowers.

    There will need to be a bailout but who caused it. That said, I suspect the public has little sympathy for the six, seven and eight figure compensation “geniuses” on the “supply” side. If any impropriety, lock them up for life sharing a cell with “spike” and throw away the key. This prosecution should go deep.

  23. OK, Jay, I’ll bite and concede that private money isn’t out there; now where the heck are the dollars coming from for Paulson and Bernanke to do it publicly?

    Right out of the same pot that would otherwise go to private investment. I think we’re back at square one; if it’s such a good idea to do this, why aren’t sound banks like Chase and Wells Fargo lining up to do this? (I’ll give you Warren Buffett)

  24. Peev, the problem is not “capitalist greed”. Capitalism rewards people for creating and distributing products people want at the lowest cost. The US allows this to a greater extent than most other Western governments. As a result the US is the wealthiest, most powerfull nation in the world. People literally risk their lives to come here to work at jobs most Americans would think are beneath them.
    The current crisis is not caused by capitalism, but by congress. Congress should have seen this coming and done something. They didn’t when the GOP had comfortable majorities in both houses, ditto the Democrats.
    This problem was not inevitable.
    Freddie & Fannie are creatures of congress, not Wall Street.

  25. Terry, I agree with you on the culpability of Congress but don’t forget the Fed, who kept rates too low too long, literally pushing money into the bubble that real estate became.

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