Bob Axtell wrote:
> When I got my mortgage about 5 years ago, I looked around carefully and
> I bought one that was clean and somewhat old-fashioned (fixed rate loan
> over a fixed amount of time) because, after looking into the others, I 
> decided
> that they were fraudulent.
>
> Five years later, I discover that those loans WERE fraudulent, just like I
> thought. And everybody that bought them is in trouble. I am in no trouble
> whatever.
>
> Now, the crooks that hatched those frauds are reaping the results of
> their flimflam operations. I say, let them go under, good riddance.
>
> Banks may change hands, but only large depositors (with over
> USD$100K) will be at ANY risk. Everybody else will not lose a thin dime.

I am staunchly pro-free-market, and strongly oppose government intervention. 
However, FWIW, I am convinced that government intervention is necessary. I 
am further convinced that there are enough rational people in Washington, 
and that it will eventually happen (the only question is, in what form and 
whether it will happen this week or next).

The government should bail out the market for two reasons.

1. The market failed in large part because of government's actions. It 
created two monsters -- Fannie Mae and Freddie Mac, and although officially 
they were not backed by the government, there was an expectation that should 
they fail, the government will bail them out. As a result, instead of 
performing the function they were originally designed for (helping people 
purchase houses), they were trying to make money for their shareholders by 
getting cheap credit (cheap, because of the notion that "they can't fail", 
see above), and then reinvesting that money in higher yield (= high risk) 
markets. The Fed was also keeping the interest rates artificially low, 
encouraging people to get mortgages that they could not afford.

2. The cost of inaction is likely to exceed by far the cost of the $700B 
package that the Treasury had asked for. Right now, there is a severe credit 
crunch that affects everybody, from big companies to small businesses to 
individuals. Financial institutions are reluctant to lend to each other, and 
to businesses. Therefore, companies that are financially sound are starting 
to go under because they don't have enough cash for day-to-day operations.


Last Thursday, I was up at 2 am (babysitting), watching C-SPAN. Peter 
Orszag, the Director of US the Congressional Budget Office, was giving a 
testimony on the proposed $700B package. Here are some of the points from 
his speech (as I remember them):

- The consequences of inaction will be very serious. Everybody (not just the 
big investors) will be affected if nothing is done. Suppose you are a small 
business owner, and you need money to purchase inventory to make your 
widgets. The bank however won't lend you the cash you need to buy the 
inventory. You can't make the widgets, therefore your business isn't 
generating revenue, so you go out of business. Your employees are now out of 
a job. They also will have a very hard time getting a mortgage, or a car 
loan.

- The package can be used to address two problems currently affecting the 
financial markets: companies that are at the risk of faling because they 
don't have enough cash for operating expenses (liquidity) and companies that 
were in bad shape even before the crisis (solvency).

- Solving the problem of liquidity may cost the taxpayers nothing, in fact 
it can even make them money. The best way to make it work according to 
Orszag, is to have reverse auctions on selected "trenches" of assetts 
(assets that are very similar, so the government isn't choosing b/w apples 
and oranges). "Reverse auction" means that companies will try to underbid 
each other in trying to sell their mortgage-related assetts to the 
government. If the government holds these assets long enough, it may even be 
able to sell them at a profit.

- Solving the problem of solvency basically means giving money to companies 
that don't simply lack operating cash, but are in bad shape financially. If 
the Treasury decides to bail out such companies, it's a virtual guarantee 
that taxpayers will lose money for sure. Although again the cost of this 
subsidy is likely to be less than the cost of doing nothing.

I think if done properly, the proposed measure can have a zero (or even 
negative) net cost, and is likely to avert a rather nasty economic 
situation.

> Am I affected? Nope, not in the least. I save money by getting my
> dental work done in Mexico.

You must be one of the very lucky few.

Vitaliy 

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