Chomsky was right, Geithner bails out everybody

There is no doubt they are trying to prop up the housing market. The article didn't even talk about the enormous balance sheet the fed has by buying up the mortgage securities in order to keep the rates low (could be as high as a trillion). Right now Fed is pretty much the only big buyer for the agency papers from Freddie and Fannie. In a way, lifting the cap would protect the fed balance sheet and possibly increase confidence among investors.

Or they are just anticipating Fannie and Freddie going belly up now that they are asked to take on more crap mortgages to prop up the market.

Either way, it doesn't look good.

 

I've said this before. I don't like the bailouts at all and I agree with Noam Chomsky about a moral hazard problem but at the samtime I have no better idea and can't say if we let AIG, Fannie and Freddie, et al go under if we would've been in a depression. At the moment in my own field that is very sensitive to the credit markets I'm seeing a slow recovery so it seems that while there is a long way to go those bailouts had some sort of positive affect.

I wish there was a better way to have saved the economy but I haven't heard the critics like Chomsky offer up alternatives.

 

Yes I agree this doesn't fix underlying problems but my understanding of the rationale for bailouts was that with a collapse of the banking system would be worse and that it was better to buy sometime with bailouts while working on longterm solutions.

How practical are Chomsky's alternatives to be implemented? From what i recall of critics like Chomsky is that they are calling for major social changes in how we spend and save. I agree as a society we need to do things like that but changes like that couldn't be implemented rapidly when the banking crisis was upon us.

As I've said before I fully admit to not understanding finance that much but from my own limited understanding was that we were facing a situation that could lead to depression. I personally think a depression would be worse for us than the bailouts.

 

I think these moving goal posts are entertaining.

At first, the argument was that the entirety of TARP would be a disaster and cost taxpayers $700B without fixing things.

Then, once it became clear that most banks would get healthier and would return TARP, it was that the big 3 (Bank of America, Citi, and AIG) would be a disaster and cost taxpayers billions.

Then after BAC and C paid their TARP back, it became that AIG was a money hole and would never repay its debt.

Now that it appears AIG is actually righting itself and is likely to pay back all its government debt over time, the new target is Fannie and Freddie. Not saying that it will ultimately be wrong, but it's entertaining to see given the track record of the naysayers vs the government on all these previous bailouts.

 

Outside of the auto bailouts, all the financial bailouts are being done at extremely high interest rates with all the money eventually being paid back. The government is acting basically like a massive private sector lender seeking a profit on it's investment - it was just the only entity with the resources to provide the necessary capital.

The firms paid a huge price for the bailouts, having to borrow money at 15-20% interest rates (extreme junk bond type levels, which made sense given the risk). The lender (the US government) gets paid all the money back with that interest. Basically, the government borrowed money at 2-3% and turned a 15-20% return on it.

Where is the cash grab?

 

To add on to the bailouts of everyone, here's a bailout of the taxpayers...

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html?hpid=topnews

Federal Reserve earned $45 billion in 2009



Wall Street firms aren't the only banks that had a banner year. The Federal Reserve made record profits in 2009, as its unconventional efforts to prop up the economy created a windfall for the government.

The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank. The Fed, unlike most government agencies, funds itself from its own operations and returns its profits to the Treasury.

 

There was no mention of TARP before you brought it up though. There's been a lot of money dumped outside TARP for the reason that it would lead to a deeper retrenchment. Sounds fair, but the public doesn't see anything in return for taking on failed and worthless assets. No accountability. No restructuring. This is before, during, and after TARP. With TARP, we see big banks shoring up capital to pay back TARP loans while giving back record bonuses to their employees from a government driven economy. We commit trillions while the Fed makes billions? Maybe we should give the Fed governors bonuses and stock options for their farsightedness. Shareholder meeting anyone?

Despite these bailouts, Wall Street continues to hinder any idea of true market reform through their lobbyists and paid politicians from both parties.

It's damn shameless and blatantly corrupt. We need to reform our political system just as much as our financial.

 

Not in this particular thread or article. But it's the same theme, and the same people now complaining about this bailout are the ones who wrote articles in the past about TARP, and then specific pieces of TARP, and then AIG (this article talks a lot about AIG, despite the fact that it appears most or all of the money he's claiming was stolen now looks like it will eventually be repaid).

Wait - the post you quoted specifically pointed out a $50B profit to the Fed this year. There were two primary places you had bailouts - TARP (the Treasury) and the Fed's behind-the-scenes stuff. The Fed is where a lot of spending was on "failed and worthless" assets, etc - that's what generated the $50B in profits.

 

Agreed - regardless of the bailouts and the need for them, the financial crisis caused massive hell for the average taxpayer in the form of a huge recession, job losses, etc.

It will be interesting to see the eventual form that financial regulation takes, and if Republicans join in there or play their same obstructionism game. It seems there is more bi-partisan support for it, but you can never tell until it comes down to voting.

 

Somehow this story seems appropriate:

t's a slow day in Mamou , Louisiana . The sun is beating down, and the streets are deserted.* Times are tough, everybody is in debt, and everybody lives on credit in 2010.

On this particular Friday a traveling salesman from Shreveport is driving through town. He stops at the Hotel Cajun and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one in which
to spend the night.

As soon as the man walks upstairs, Pierre, the owner, grabs the bill and runs next door to pay his debt to Boudreaux the butcher.

Boudreaux takes the $100 and runs down the street to retire his debt to Trosclair, the pig farmer.

Trosclair takes the $100 and heads off to pay his bill at T-Boy's Farmer's Co-op, the local supplier of feed and fuel.

T-Boy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, Clarise, who has also been facing hard times and has had to offer her "services" on credit.

Clarise rushes to the hotel and pays off her room bill with Pierre, the hotel owner.

Pierre*then places the $100 back on the counter so the traveling salesman will not suspect anything.

At that moment the salesman comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole town is now out of debt and now looks to the future with a lot more optimism.

And that, my friend, is how the United States Government is conducting business today!!!

 

If only this were true, this would be great and eliminate all of our financial problems. After all, if I owe you money and you owe me money, it's easier to just offset the debt and be done with it.

But, like with most of your chain email stories , this one just isn't true. In the real world, unlike this town, there's someone at the end of the chain that has lent money but hasn't borrowed it. In large part, this is the Chinese government in our case.

(It's also not true because everyone in that chain produced something, earned something, and spent something. That's the basic fundamental of how an economy works. Each person produced something that someone else wanted and sold it to them, sending the money around the economy.)

 

It's just for fun. I almost deleted the last line about the federal government because I knew that some would mistaken it for a serious commentary. While everybody did some work, yes, they still resolved their indebtedness with something that didn't truly belong to them and was provided to them with ill-begotten means.

 

I'm not sure how much that article makes me feel better as it points out that there still are a lot of bonds and mortgage related securities at risk that could lead to a big loss.

[rquoter]While that resulted in higher earnings in 2009, it exposes the Fed to more risks down the road. "They've moved up the risk-return curve, as they have more long-term assets and more things that involve credit risk," said Diane Swonk, chief economist at Mesirow Financial.

If the price of Treasury bonds or mortgage-related securities issued by Fannie Mae and Freddie Mac were to fall in the years ahead, and Fed leaders decided they need to drain money from the financial system by selling off some of their portfolio, the central bank would lose money. "If they do enough asset sales and rates go high enough, that could eat into future profits pretty substantially," said Michael Feroli, an economist at J.P. Morgan Chase. [/rquoter]