Vitaliy wrote:

> 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.

Not to mention the social pressures... "Anyone should be able to buy a 
house."  That's a strong sentiment, that has no basis in fact in a 
modern society, but people deeply believe it here.

It's just not possible without society subsidizing the purchases for 
low-income citizens.

Nope... not everyone CAN afford a house, as we've proven quite handily 
in the last few years.  The government trying to "help" this along with 
low-down-payment mortgages and even assistance to pay that initial tiny 
down-payment, messed with the overall "market".

(Which really isn't a "free market" at all, it's highly regulated, but 
the regulators were looking at the wrong things.)


> 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.

Most people don't realize that the government already voted to cover the 
financing costs of the other bailouts all the way back to Bear Stearns, 
and the real cost BEFORE the $700 billion was almost a trillion dollars 
already, if you include Fannie and Freddie bailouts.  The $700 billion 
was going to make the cost roughly $1.7 trillion.

> 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.

There's two other problems going on:

1. Businesses don't get any higher FDIC insurance than individuals. 
Most businesses have FAR more than $100,000 in cash and are scrambling 
to see where they have it stashed, and moving it around to cover their 
assets... ahem, so to speak.  FDIC insurance at $100K is too low in the 
modern monetary system.

2. There's already a huge outflow of capital from ALL banks -- the 
wealthiest are moving that money out of the system at a horrendous rate. 
   They're doing it quietly and via wire transfers.  The numbers are so 
large, they make a general "run on the banks" look like a pittance if 
every "normal Joe" were to go to the bank and demand their cash.  This 
hasn't been factored into the balance sheets of the banks yet, but it 
can be see in the T-Bill, Bond, and various other markets prices... rich 
people are already making runs on the banks, whether or not "Joe 
average" is being patient or not.

Basically what all of the above means is that every day the package 
isn't done, means huge losses of capitalization, now worldwide.

People don't "get it" that the banking system runs on leverage.  Often 
9:1 for deposit banks, and in some of these securities that were traded 
for mortages, 20:1 or 30:1.

What this means is:  If I put $1 into a bank, they can loan out $9.  The 
Fed believes that's the "safe" number.  The whole system runs on 
promises to pay.  When loans dry up, promises to buy things to build 
things or offer services dry up, which leads to more people looking for 
loans to get by, which just keeps snowballing.

If the American public thinks taking high finance advice from the Great 
Senator Barney Frank of the State of Tennessee (long known as a 
power-house of finance and banking, of course... cough cough...) is a 
good idea, instead of listening to men who have run the very banks that 
are in trouble who work for the Fed and the SEC... they're going to get 
a wild ride straight into Great Depression II.

> - 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).

Kinda.  It gets things moving again, and hopefully the companies that 
were in bad shape take their lumps in the market the "normal" ways 
instead of taking down the good companies with them.

> - 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.

Almost too complex.  The "bailout" money moves the economy back to 
stability, and the upside potential (when you look at all the great 
devalued stocks of companies that are GREAT investments) takes care of 
the rest.  If you're not $20K in credit card debt, you can BUY IN and 
share in the return to normal prices.

Not until the system is solvent and un-stuck is it time to buy (this 
rally today is just hedge funds tricking people into buying so they can 
short them the rest of the week -- they know that Congress went home for 
the Jewish holiday)... but there are some SCREAMING deals out there 
right now, if we can "lubricate" the wheels and get the bad debts that 
no one can even figure out what they own or who owns it, out of the system.

Regulation, oversight, and fixing this so it can't happen again happens 
AFTER the machine is back running.  Just like any machine.

> - 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.

The Treasury needs to the property, not hand money to the companies that 
own it.  That's how the government can make back most, if not all, of 
the money they put in.  I think the sticking point for people is that 
those who "played by the rules" are wanting some kind of reciprocity in 
this thing -- they want to know what they get out of paying for this 
mess out of their taxes.

That part is "important" purely from a socio-economic standpoint.  The 
upside potential for the WORLD is big enough that the government and 
just about every person in the country will get "paid back" by an 
economy that's not stalled and choking on these bad loans.

Let's face it.  We needed to learn lessons that we can't all own houses, 
and we can't all afford mortgages.  We tried it, and it didn't work. 
Now we need to let government do what government is THERE for... to 
correct the HUGE problem in the system, and move on.

> 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.

It's not a zero-sum game.  Capital preservation also means upside 
potential later and the ability to continue along a normal economic path.

Loss of capital that can't easily be replaced once destroyed, means no 
way to HAVE upside potential and a LOT of pain for all.

There's some other things to look at after we zoom back out to the 
higher levels and do some digging... things like how we all thought 
inflation was a worry when China was dumping billions into our economy, 
when the reality was our underlying economy was DE-flating due to 
housing prices dropping... then China literally "disappears" in just 
about every market on the planet and the inflationary "myth" pops and 
we're standing on a badly deflated credit market, held there by low 
interest rates, and bad debt.

Anyone with half a brain here knows this, but we get greedy and take the 
money anyway...

Nate
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