Finance Market Bailout, Stock Market Reaction, other reasons to love Washington right now....

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SteveC1981

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As I am posting, today's 777-point loss on the Dow is currently the largest point drop to date and as a percentage, it's still one of the larger drops ever(over 7%). Coincedentally, the price of oil also dropped (over $10...the largest ever); typically, oil fares well on bad days for stocks (since it is a tangible good, which is why gold is so expensive).



Anyways, what I wanted to ask ...what are everyone's thoughts/feelings on the whole "bailout" idea? Basically, I'm pretty disappointed that they worked all weekend to come up with something, only to shoot it down (although the fact that the nays were not completely partisan suggest maybe the plan may have been imperfect). One would think that the CURRENT Congress would want this done, rather than waiting 3 months; the economy can't wait that long just because some people want to save their seats in Congress.
 

NEJay

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The value of the dollar is up considerably today, too. Thank god the bailout wasn't passed.

This guy knows what he's talking about:

Jeffrey A. Miron said:
CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.
The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.
In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.
Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.
The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.
 

Darkfinn

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I think this is a really fvcked up situation... and wall street is completely to blame. Personally I think the CEOs and board members of these lending companies should all be hunted down by the FBI and brought up on charges of terrorism. Their unethical profit-mongering haa caused more damage to the US economy than the attacks of 9/11... and they didn't have to kill a single person. The fallout from the events of the past year will take at least the next 20 years to get over... possibly longer than that. The rich bastards up in new york have screwed us all folks... we should be thanking them. In the future it is going to be nearly impossible to buy a house or get a loan to start a business or buy a car without a substancial amount of collateral down up-front.... I'm talking 10-25%... I don't know about y'all... but I don't have $10,000 to $25,000 sitting around... and it will take 5-10 years to save that much.
 

Ace

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I hate to say it, but the "easy credit" which was so readily available in the past decade is largely to blame. Lenders lent money to way too many people who couldn't pay and now they are paying the price. The bailout plan was not to just give 700 Billion to the big banks, rather to allocate that money in a loan format with pretty bad terms. This is really not much better than the banks giving loans to people who had bad credit. I say, give this some time, and it will get better.

I know the last week was bad, and the last few months have been pretty horrible for the economy, but the nation will be ok.
 

Darkfinn

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Honestly I'd rather see all these billions of dollars distributed as stipend checks to the American people. Don't we deserve it instead of the money-grabbers on wall street?

Let's not forget to count the 10 billion a month wasted on that war in Iraq which has been going on for 6 years now...

let's see... that would have been 720 billion right there... more than enough to cover that "bailout plan" and it wouldn't have cost the American people anything more...
 
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Sorry, Darkfinn, but those people that took those loans when they knew they couldn't pay them back are to blame also, along with the people that overvalued homes, the loan officers that made the loans to get their commissions, etc. It is not just the CEO's and board members.

The problem with what the esteemed Mr. Miron has to say is that they based upon his politics. The debts are worth something, because most of them were used to buy houses, and the houses have value, but financial institutions don't want the houses, they want the money. Most of the people that have these mortgages can't pay them back to a bank. The government could refinance these loans, extending the length of time that the loan would be paid back, reducing the monthly payments to what they can pay. It will end up costing the "government" something, but it won't be the $700 Bn.

But the government has to do something to prevent this from happening again.
 

BromeTeks

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In all likelyhood, it'll bounce back. It always has in the past, but it still nonetheless is going to make things hard for now in the USA
 

Nam Repaid

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Yea I lost 10G... Bush should shut up and leave the market to it's own.

I blame greedy morgage officers and especally real estate agents. The realtors notch up the prices just out of reach for greater comissions and the lenders created thease crazy loans for people who can't afford them so they can get their comissions. Then they buyers defalt and the banks go down their long gone with their cut in their pocket. When I bought my home (15 years ago) My morgage with taxes and insurance had to be less than 1/3 my income. The kid that works wtih me got one for 100% of his pay two years ago. He is having major problems now that overtime is limited.

If George W. does get a bail out plan passed it should recover the money from the greedy salesmen.

Nam
 

Fire2box

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I think this is a really fvcked up situation... and wall street is completely to blame..
Since people who take out loans that don't pay back can not be at fault at all or people who take out adjustable loans thinking the rate can only go down, not up.

Really even when these adjustable loans were all the rage you could still find fixed rates, my dad did. Quit trying to only blame CEO's and BS, you can at least admit its EVERYBODY'S fault instead of blaming people who in actuality do hard work (though not labor) looking after a company that employees thousands if not millions of people.

:rolleyes:
 
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Sometimes I really wish we had democracy in the US, then maybe things like this wouldn't happen.
 

Fire2box

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Am I the only one who thinks Pres. Bush let it happen so they can make a excuse to enact martial law.
You want proof:We Are Under Martial Law! As Declared By The Speaker Last Night! Rep Burgess - CSPANJUNKIEdotORG
This is from C-Span. Listen to the dropped hints to US sheep.
Oct 1st-5th Stay awake and fight. 4:00 AM.
::Sighs:: Your a idiot... (Holy Jesus did he just really call betagame a idiot!? he did, he did!)

If the speaker of the house really did say we are under martial law he meant it about the representatives not the public in general. Also it would be about how they need to work hard and together if they have any shot in hell at fixing this problem our nation both in government and in the public is currently having with spending its money or lack of spending money.

Again you are a idiot and maybe just the biggest I ever seen.


Heres a link to a new draft to "fix" this situation. http://www.foxnews.com/projects/pdf/rescuebill_First_Draft.pdf
 
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Am I the only one who thinks Pres. Bush let it happen so they can make a excuse to enact martial law.
You want proof:We Are Under Martial Law! As Declared By The Speaker Last Night! Rep Burgess - CSPANJUNKIEdotORG
This is from C-Span. Listen to the dropped hints to US sheep.
Oct 1st-5th Stay awake and fight. 4:00 AM.
What Rep Burgess was talking about, was a phrase used by Congress to signify that congressmen are being forced to vote on a bill without having time to read it.
 

dogboy

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Well, I'm sure I lost a load in my retirement plan yesterday. What I can't understand is that the bailout plan is not a free giveaway. I heard that it would probably be paid back to the taxpayer in 2 years. When Pres. Clinton loaned the Mexican government 110 billion, the U.S. taxpayer made 500 million in profit. It's sad that party partisinship played such a big role. And then instead of getting down to business, they all leave for several days because it's the Jewish New Year. Our elected officials are complete idiots. I work with Junior Highs all day, and many of them are a lot smarter and more mature! I only hope the market recovers in the next 2 months. Meanwhile, I wouldn't try to get a loan if you're thinking about buying a car.
 

Darkfinn

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Since people who take out loans that don't pay back can not be at fault at all or people who take out adjustable loans thinking the rate can only go down, not up.

Really even when these adjustable loans were all the rage you could still find fixed rates, my dad did. Quit trying to only blame CEO's and BS, you can at least admit its EVERYBODY'S fault instead of blaming people who in actuality do hard work (though not labor) looking after a company that employees thousands if not millions of people.

:rolleyes:
You just don't get it do you... the American people are sheep... they can't think... they will blindly follow wherever you lead, and take whatever you hand to them.

The banks were giving these loans away like they were candy to people who could never afford them. They failed in their responcibility by not doing proper credit checks or employment/income verification... if you signed your name on the paper, you got a loan whether you could afford it or not. Most people aren't smart enough to know a bad deal when they see one. That is why they go to loan officers and mortgage brokers in the first place... to get a loan that they can afford from a person they are supposed to be able to trust. The banks were only after money... and were rigging the books in any way necessary to get it.

The banks then bundled up all these loans into shady "mortgage securities" and sold them off to the highest bidder... typically mutual funds... so they could get even more money. When the customers stopped paying on their loans the "securities" suddenly became poision and the banks and credit companies started going belly-up... when this domino effect started the bankers all began cashing out and heading for the hills as fast as possible.

This situation, along with the rediculous cost of food and fuel, and the highest unemployment rate in 7 years, has lead us to where we are today.

I have no respect for CEOs or Board Members... they abuse their power and make bad decisions that cost people like me and you our livelihoods all the while raking in millions in bonuses hand over foot. WaMu's CEO got a bonus of 9 MILLION when his bank got bought out... we call these things "golden parachutes". Now I don't know about you... but where I'm from the captain goes down with the ship.
 
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Hmmm, that's definitely cleared a few things up for me Darkfinn. :thumbsup: Nowadays it's hard to find a good explanation that a person with no knowledge of the topic can understand.

The reason I'm concerned about this is because the Australian Securities Exchange (ASX) could very well hit trouble as well if Wall St goes bust... well, actually, today (or yesterday as of 50 minutes ago), the ASX opened up with the biggest drop in value, essentially setting investors back 3 years.

All I can say is, I just hope America sorts it out with as little further damage as possible.
 
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You just don't get it do you... the American people are sheep... they can't think... they will blindly follow wherever you lead, and take whatever you hand to them.

The banks were giving these loans away like they were candy to people who could never afford them. They failed in their responcibility by not doing proper credit checks or employment/income verification... if you signed your name on the paper, you got a loan whether you could afford it or not. Most people aren't smart enough to know a bad deal when they see one. That is why they go to loan officers and mortgage brokers in the first place... to get a loan that they can afford from a person they are supposed to be able to trust. The banks were only after money... and were rigging the books in any way necessary to get it.

The banks then bundled up all these loans into shady "mortgage securities" and sold them off to the highest bidder... typically mutual funds... so they could get even more money. When the customers stopped paying on their loans the "securities" suddenly became poision and the banks and credit companies started going belly-up... when this domino effect started the bankers all began cashing out and heading for the hills as fast as possible.

This situation, along with the rediculous cost of food and fuel, and the highest unemployment rate in 7 years, has lead us to where we are today.

I have no respect for CEOs or Board Members... they abuse their power and make bad decisions that cost people like me and you our livelihoods all the while raking in millions in bonuses hand over foot. WaMu's CEO got a bonus of 9 MILLION when his bank got bought out... we call these things "golden parachutes". Now I don't know about you... but where I'm from the captain goes down with the ship.
What about the loan officer that pushed the loan, ao he could get a commission, or his boss, that pushed the loan officers to lend more money because it meant a bigger bonus, or the appraiser that said the property was worth more than it was because it meant a bigger cut for him? You want to just blame the top people, when there is a lot of other people that were involved. And yes the guy who signed the loan paper when it said he was going to be paying 75% of his monthly income in loan payments, or the guy without a job that agreed to the loan, or the guy that lied about how much he made to buy a house; they are all at fault to.
 

Darkfinn

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Differences aside people... we could argue this back and forth all day... it all boils down to greed and unethical practices... "the man" taking advantage of the American consumer so he can make a quick buck.

Also... the bailout plan needs to happen... period. If it doesn't happen the banks will clam up and just stop lending. When the banks don't lend money it means companies can't get loans... so they can't finance new enterprises or expansion. When companies stop growing our economy stops growing... that is called a recession. Maybe it is going to take some well-known companies going under to really wake people up and realise what is going on here. But I can lay a chain out for you.

1: Banks severely curtail lending.
2: Without access to loans companies can't grow and expand into new markets, they can't hire new people or develop new products.
3: Without new jobs and products consumer spending (I.E. demand) declines.
4: When demand declines companies see their sales and profits fall... they start cutting back. Firing people... closing stores... consolidating things down to just what they need to survive. No more big raises... no more christmas bonus... no more overtime.
5: More people out of work leads to a further reduction of demand for goods and services.
6: See #4
7: See #5
8: Less money in the economy means less money for government programs like Social Security... which was teetering on the verge of collapse anyways. When Social Security collapses we are all in for a world of shit.

Maybe a year from now... when another million people are out of work... when the economy is back down to 1991 levels... we will begin to realise that we should have done something when we had the chance.

And as many of the non-Americans on here will tell you... the collapse of America's economy will effect markets worldwide in Sydney, Tokyo, Moscow, and London... dragging the rest of the civilised world down along with us.

Now this may all sound like gloom and doom... but the longer a rescue plan is delayed... the closer it comes to reality.
 

Peachy

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Well, do you want to know the real reason why the housing market was bound to fail? Sure, banks gave loans to people who weren't financially sound enough to take out a loan (mostly for buying/building a house). The underlying problem is this:


Source: Federal Reserve Bank of NY ( http://www.newyorkfed.org/research/current_issues/ci13-4.pdf )

In other words: Americans save less money than they used to do and spend most of their available income on consumption, in recent years they spent even more than their income on consumption on average. They racked up debt for living a life of luxury. A similar trend can be observed in other Anglo-American countries, such as the UK and Australia, as this table shows:


Source: Federal Reserve Bank of St. Louis ( http://research.stlouisfed.org/publications/net/20060501/cover.pdf )

It doesn't take much intelligence that no one can live off other people's money forever, so the whole system was bound to collapse. How it happened (through sub-prime mortgages) is not really relevant.

So what about the bailout program? I'm torn between being in favor and against it.
I'm in favor because I know that the economy can't live without working banks. None of us can go through life without, at some point, spending more money than we have, so we all depend on loans. THe same is true for banks - they need temporary loans to keep their business going, except they need money by the billion. However, right now, banks don't trust one another one tiny bit and won't loan each other a single dollar. As a result, any bank that needs money for a very short period of time but is otherwise perfectly healthy finds itself without any source of finance...and collapses. So keeping the banking system going by moving some of the financial risk to the government will increase the availability of credit for banks and thus keep the whole financial system working. I'm sure the total cost will be a lot less than $700 billion because the government will mostly hand out loans which should be paid back eventually.
I am, however, opposed to bailing out banks in general because the banks made mistakes, and where'S the point in giving huge bonuses to the bankers and shareholders of the bank when their business is doing well and then paying losses with taxpayers' money? No, if banks screwed up, they have to pay for it themselves. Survival of the fittest, as Darwin said. If some banks decided to hand out money to people who'Re not creditworthy, then let them fail. Worse yet, those banks securitized those bad loans and sold them to other banks or investors who had no idea what they were buying in the first place. Well, if I buy something I don't understand or don't want in a store, will the store or even the government take it back and give me a refund? I doubt it!

That said, the only way to cure the crises is by coming up with more radical changes. Americans have to learn not to live beyond what they can afford, and learn (again) the concept of saving. No more 5 Xboxes per houshold, no more 3 cars (none of which was paid in full, all financed through the seller), no more expensive appliances or shopping trips to the mall. It's time Americans learn something they aren't very experienced in: Common sense! Spend what you can afford to spend, not what any bank may be willing to hand out to you! Easy in theory, very hard to implement when your neighbors have all the cool stuff and you don't.
It seems there's a whole change in culture involved. Something on bailout plan, no Bush, no Fed can accomplish ...overnight! As the second table I posted shows, however, it's only a problem of culture - neither Germans nor Japanese people have, on average, embraced the idea of spending borrowed money. We're still saving 12-14% of our income!

Peachy
 
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