Credit markets to Washington: Bailout isn't enough

Great post.

Echoed X10.

 

PANIC PANIC PANIC we need 700 billion dollars!

whew ... well that's all taken care of and now ...

OH **** PANIC PANIC we need more money!

seriously, keep panicking! keep panicking! give us more and we'll make it stop! PANIC!

This is going to be spun in the media and by the media because giant conglomerates, whatever their stripe, are all going to benefit from this. And most people, even politicians who may otherwise object, are going to go along with it because we've all been sold the "it's too complicated for you to understand ... just trust us" line.

 

Ummm, no. It's like trying to stop the gas leak before rebuilding the house. Rebuilding the house is about creating the new regulations - that will come in the spring. You don't try to fix that problem while the house is burning down - you stop the immediate crisis first. That was the purpose of this bill.

This is nonsense. Markets misprice things all the time - if no one has money, that changes what people are willing to buy things for. The market has gone up 4% and down 4% multiple times in the last few weeks. Nothing changed in the actual fundamentals in the economy from the morning to evening those days - but what people are willing to pay for stocks changed due to fear. It happens all the time. There was no market for these things because unless the bleeding stopped, the problem was going to grow worse.

You already have Buffett and others saying they want to buy some of this stuff now. But you have to give it more than one freaking day.

Guaranteeing the loans balloons the potential cost to the government. If a loan is worth $100, the government can buy it for $20 right now. If they guarantee it and it goes under, it costs $100. You also guarantee there is no potential upside for taxpayers.

No one's being let off the hook. Have you seen the values of these financial companies? I don't see how your plan is any better in that regard.

 

$700 billion wasn't going to save an $11-$12trillion mortgage market collapse. It just a waste of $700 billion of taxes and you will get higher taxes. People will still lose jobs and the collapse still happens.

I used to work for a mortgage company last year, they collapsed, and I lost my job. Billions wouldn't have saved them. They had too many bad mortgages.

Even if the company sold every mortgage to the government. They would still have to make new mortgages to stay in business. If they tightened lending standards, they couldn't finance enough people. If they loosened it back up, they wouldn't have anybody to sell the loans to. Unless they sold those new loans to the government. The mortgage company is damned if they do, and damned if they don't get more capital.

 

I wish I shared your optimism

Rocket River

 

Except that the vast majority of that $12 trillion market is solvent.

This isn't even the point of the bailout.

 

The one thing that I know is already happening is the New York state insurance department has already begun drafting new rules for credit default swaps which were previously unregulated. Insurance is a state law issue not really a federal one so the rules have to come from the states. CDS were unregulated before because they're a hybrid product that doesn't really fit into the traditional sphere of securities or insurance.

 

There are 4 immediate crisis that need to be clarified-

1. Stock prices- the crisis of financials sinking do to bad loans
2. The credit crisis- credit markets tightening because of excessive debt and bad loans
3. The bank crisis- banks failing because of bad loans and tight credit.
4. The mortgage crisis- bad loans, excessive debts, tight credit

Now, it seems they are all connected and this bill should fix all the 'immediate' crisis- guess again; the only fix offered was for the banks.

Stocks might rebound some, but the credit crisis is going to worsen as is the mortgage/lending crisis; Loans are going to continue to default at very unacceptable rates, banks are going to go to safer havens and credit is going to tighten alot more. Eventually if the market is to stablize there must be a pretty nice adjustment to ease the tight credit- meaning credit MUST tighten more until the lending industry returns solvent. There will be a bad trickle down to the economy- the recession will be hard.

Fear is an immediate factor, but not the fundemental factor- the mortgage crisis sprung the bank crisis which exposes the debt crisis. No one has money to waste don't expect anything other than a big bad bear market during the correction period.

Well Buffett and others can be as charitible as they want to throw their money away right now- all Buffet is interested in is cashing in his Goldman Sachs play which was brilliant given the bailout

No,no,no if the loan is really worth $100 and anyone in the world could buy it for $20 it would be gone long before the bailout, and of course if it really was worth $100 the bank wouldn't be crying for a bailout and it wouldn't be selling for $20

The economics was so simple on this- banks have a bunch of paper trash loans they can't even value- and there is no private sector market for the trash; so instead of the banks going belly up the govt. bought the trash.

But remember the govt. doesn't have 700 billion- eventually that will be eaten up as more debt to the public/citizens

Yes they are, several financials have a little more time to avoid bankruptcy and alot better chance of getting more money pumped into them either by the FED or govt debt/bailout2

There is a huge liquidity crisis due to the tightening credit.

The tightening credit is a result of the huge credit bubble caused by the FED shoving interest rates too low for the last 15 years several credit bubbles beginning with the consumer credit bubble and coming full circle to the mortgage lending bubble; lenders pushing junk loans across the real estate markets lit the fuse to the current crisis, but the powder keg has been in place.

People are up to their ears in consumer and real estate debt and the govt. is up to its ears in spending debt so unless the borrowing stops there is no solution but an ever tightening credit market- be it today or a year from now, it cannot be avoided.

 

Battle of analogies, alright. Nobody, and I mean nobody, can say with confidence that this bailout stops the economy from burning down. In fact this every thread is about how some believe it's not nearly enough so the idea that this stops a crisis is not knowable. From appearances, this looks like little more than a shot in the dark.

The market is the most effective pricing mechanism that exists. If something isn't selling then it's overpriced according to whatever market it's performing in. There's no inherent value in things, there's only what people will pay for it in any given market. If you're going bankrupt, you don't have the option to sit around and wait for the market to change so you can get more for your assets and you shouldn't have the option of having the government come in and pay what you think the assets are worth rather than what the market says the assets are worth.

Let them buy it all. That's how it should work.

I'm not talking about those that have screwed themselves with these bad loans. I'm talking about the rest of the system. The banks that are healthy that may go under because of a run on banks.

 

Except, to some extent, it's true. Anyone who says that the bailout is supposed to stop a recession, or fix the housing market, or fix the stock market, or costs $700 billion, or argues (as a Congressman apparently did yesterday) that LIBOR is only as high as it was a year ago so it's no big deal, clearly *doesn't* understand the purpose or terms of the bailout.

 

The point of the bailout is to help fix #2 - not to solve it, but to help ease it. That's it. It's not designed to save the stock market, save crappy banks, or fix the housing problem, though all of those would become immeasurably worse if the credit crisis isn't fixed.

The purpose of the bailout is to solve problems like car dealerships not being able to get short term loans to buy the cars that they then re-sell. And to let California actually raise short term capital for a few months while waiting for tax revenues to come in at peak times.

 

The moment the Fed and Treasury Sec said we needed 700 billion to save everyone, there was no way to back down from it.

In hindsight, bailing out Lehman Bear Stearns style would've delayed the pain another month or two and given McCain a better shot of winning the election....

 

You just don't get it. Is the bailout the final, everything is fixed solution? No. Nobody said it is. Could the economy still collapse? Yep. What the bailout did was take us from a position where the economy was sure to collapse and put us in a position where it could collapse. A fighting chance to fix it is what we bought.

Only 6% of the mortgages in this country are in default. $11 trillion times 6% = $660 billion.

To everybody stating how bad this is because Wall Street gets the money, consider one thing. With the asset-backed securities created off these mortgages, the bondholder bears the ultimate risk of loss. Those bondholders include investment funds held by individuals, small towns in Norway, and a school board in Kansas to grow the teacher's retirement system. If the market were allowed to collapse, the effects would certainly be felt on Main Street. This is not just a Wall Street problem.

 

Everytime you say these guys are gone, I think about tulips.

 

More banks are going to fail The Treasury dept has admitted they will probably let others fail before they start buying crap.

I don't care about spurring the credit market as much as I care about putting some kind of economic system in place that is sustainable. If we're so damn tied to credit, maybe we need to be doing something differently.
And please... there are a bunch of plans proposed by a bunch of people that make more sense and that are grounded in experience and rationality.

For the record, I don't like vegans (in general). You have canines for a reason and how could one do without cheesy nachos?

Depends on how they do it... if they contract it out with under similar terms and with the kind of oversight this administration has traditionally provided, I'll be upset with Obama on that issue as well. And Wall Streeters aren't teh only pool out there... you should know that Dem administrations tend towards academics for a lot of jobs that require some level of incorruptibility. Ironically, it was Teddy that set the best example with Gifford Pinchot.

I've never argued the credit stuff wasn't a problem. I've never argued nothing should be done. I've argued that however bad it is, rushing through a bad plan potentially does more harm than good, particularly when the consequences of said plan aren't even considered in the rush to do something NOW!

 

If you look at the bubble, we're only about half way back to where we started. Estimates are that 40-50% of homes will have negative equity before we hit bottom. Right now, we're at 30%.

That doesn't all will face foreclosure, but the strain on those homeowners will be huge and I think I read that foreclosures will be expected to go to 12-15%.

 

I'm sure some have a vested interest in 'persuading' the government to throw in more money into the burning fire.

 

I represent in bankruptcy courts the companies that service mortgages. Negative equity is a poor indicator of whether the loans will perform or not. Most cars have negative equity the nanosecond that they roll off the lot. That has had no correlation to whether or not the debtor makes the payments.

In discussing the economic issues, a much more useful metric is the percentage in default. Right now, default (not foreclosure) is 6% of all mortgages. Will more go into foreclosure? Maybe. The way that the vast majority of the ARM loans are structured, that will depend heavily on what happens with the LIBOR rate. Over the last few months, LIBOR has been retreating.

I represented debtors in bk court until July 2008. What I noticed in the months leading up to that was that the notices of ARM change I was receiving on my clients started having mortgage payment DECREASES. LIBOR was falling. I seriously doubt that LIBOR will track upward any time soon. This would lead to decreased payment levels. Thus, the risk of default on presently performing mortgages is greatly reduced.

 

Well then it will be a miserable failure because credit markets are tight because there is too much debt and bubbles must pop.

Car Dealerships are in trouble because people have too much debt. They just can't afford to keep financing new cars. Low interest rates for the last 10 years fueled every kind of financing trick for car buying just like home buying, 0% down, zero interest and average credit scores for many buyers.

The bailout will send zero- '0' - nada - liquidity into the credit markets. No dealership is going to get any more credit line especially if they need it because they are debt risks.

You see the signal we are getting is bad loans. The reason they are bad is because people cannot afford them. The reason they can't is because they have too much debt already.

Again, when you have a credit crisis the size of this one you have to have a credit tightening- it is impossible to survive without it. That is why the markets are tight and that is what caused what happened in the '70s,

We will either go the way of Japan and try to keep rates low. Which will have everyone fleeing to safety further tightening credit.

Or we will have rates go up, throttling credit into crash levels and pay the price immediately.

Either way the bail out could not possibly avert what is going to have to happen.

When all the debt/credit bubbles burst to the point that big financials are bankrupt, the govt. printing presses only can delay the consequences.

I think gold is a bargain right now if it is under $1000

 

That is encouraging, because I have read several articles that place the number of mortgages currently at risk of default (as of Oct. 1) at about 10% of all mortgages.

If mortgage payments decrease and forclosures ease then it might give some liquidity to the credit markets, but I am quite sure it will be hard to pump up another bubble so the economy will be slow to stopped until someone finds a way to heat up borrowing again.