Credit and bailouts and homes and watery analogies
Bush’s speech last night was a good attempt to explain in relatively simple terms how we got here and what Bush thinks should be done.
I’ve started to visualize the whole meltdown this way: the initial bad loans werei as though some sort of poison was dropped into some of our rivers. It then spread far and wide and infected the whole system by blending with other rivers (financial institutions) that hadn’t been initially poisoned (that hadn’t made the bad loans). Now the entire water supply was tainted, if only a small amount. But for various reasons (bundling and derivatives and mark-to-market accounting, for example) we lost our ability to determine exactly how much poison was in each body of water, and how dangerous it might be to drink from that body. So the entire supply had to be condemned. Now Congress is searching for a way to keep us going on bottled water while we take some time to isolate all the really bad poison and slowly neutralize it.
I’ll drop the already-strained analogy and add that, if all goes really well, in the end the extraordinary expense of doing all this will be at least partly—and perhaps even mostly—recouped by the taxpayer.
The problem is that no one has ever done this before and no one really knows for sure the best way to do it, or even a good way to do it, and the expenses are staggering. Congress not only is a notoriously contentious, political, and sloooow institution; it has also shown itself to be downright stupid in the past on these very issues.
To use another watery analogy, the current crisis is somewhat like the problems that led to the sinking of the Titanic in that the disaster was multiply determined. And the solution seems almost as difficult as turning the Titanic around. We think we see the iceberg ahead and the collision course we’re on—but can this huge ship be steered away in time (and intelligently) by a Congress that tends to work stupidly and at glacial speed?
News reports are optimistic, however, that the biggest elements of the deal have been pretty much been agreed on. It won’t take long to find out.
The water analogy is pretty good – but I would suggest a better analogy may be to compare the current problem to a viral infection.
You infect the healthiest, smartest, strongest man on the planet with the right microscopic sized virus in some part of his body, allow that virus to multiply and infect other parts of the body without any intervention, and it can either make him very sick or even kill him in the end if nothing is done.
In this case, the USA is the nominally healthy body and the financial shenanigans within Fannie Mae and Freddy Mac is the virus whose effects have now spread throughout the US economy.
Some bitter medicine is in order…..
We have to change at least ONE set of rules. Serving in the house or the senate is NO LONGER a life time job.
Just like the president, 8 years is enough. Maybe even 4 years.
Sweet Jesus, look at the caliber of men who wrote the Declaration and Constitution, against who we have in there now. The difference is bordering on treason.
Term limits only make the staff behind the scenes even more powerful and completely beyond the reach of the public to have any influence on them.
What I want to know is this: what happens if we do something BESIDES the big federal bailout? Aren’t there ANY alternatives out there? Do we HAVE to do this?
I’m just feeling very resentful right now. I was not involved in any of this crap…I was not responsible for any of it. I got a fixed-rate mortgage with a monthly payment that I can actually afford. I did the responsible thing. Why do I have to take the hit for all these other jackasses?
neo wrote:
“The problem is that no one has ever done this before…”
As a matter of fact, the govt. has done something very similar years ago when the whole Savings & Loan Bank scandal, and some 200 banks were wiped out with the uncertainty of the rest hanging in the balance.
The U.S. govt. actually reaped a tidy PROFIT once the market had stabilized. In the current proposed “bailout,” the President and Treasury Secretary Paulson, who was an investment banker, and one-time head of Goldman-Sachs, heretofore regarded as one of the safest and smartest investment banks in existence, look at the infusion of proposed govt. funds first and foremost, infuse cash into the system and then, in time, just as before, when the market stablizes, not only recoup that investment, but make an even bigger profit (which might, by the way, go a long ways to reversing the current deficit). Unfortunately, because of the timing, this all occurring at the end of President Bush’s term, it will be some future President (probably either Obama or McCain who will take all the credit for this when the assets bought are eventually sold, not for the discounted value they are to be currently bought at, but much closer to full value, if not increased value — thus creating the profit. Surely, as always, many of our breast-beating self-congratulatory Congressmen will be eager to stake their claim when the expected outcome comes to fruition.
Note: “Bailout” is rather an unfortunate term as it misleads most of the population who are not highly educated in very complex economics. It seems that popular belief is that the govt. is proposing to just give taxpayers’ money away, and give it to “rich” investment banks who through their greed created this mess (this latter part being true) just to fix them and restore their ability to go back and conduct business as usual. I think most of the folks out there have absolutely no concept of how the “stuff” (problems) going on “way up there” (i.e. in the elite rich and powerful banking institurions) threatens their own lives in every basic way. I have a rather good basic understanding of finance and much of this is way above my head.
For example: the complexities of derivatives (which are essentially elaborate formulas tied to various factors which are created and used by bankers (increasingly in the last 2 decades give or take a few years) to calculate the amount of investment they make to return a desired profit; such actual formulas are publicized, usually proprietary, and continuously evolving (which also makes it very difficult to go in and audit deals, and, more to the point currently, created the difficulty for even the banks to track how much of the assets they were dealing in were bad debts.).
Finally, the use of the word “crisis” is indeed a fearful, often panic-inducing word which has been dangerously bandied about — I believe originating in Obama’s political rhetoric and posturing weeks and weeks ago — long before the actual extent of credit problems was known — as he blamed all financial problems on the Bush administration and then painted McCain as a Bush replication. I don’t think he has even a rudimentary understanding of economics save for the message his advisors send him out with each day. The worst thing to do when there are setbacks in the economy is to exaggerate (forget about politics for a moment) as dire warnings easily induce panics. Panics induce people to immediately want to protect their money and run to banks to withdraw all their money. You want to see a real DEPRESSION come to pass? That’s the quickest way to get there. When McCain started picking up the same manner of talk and blaming greedy bankers and this govt., both he and Obama failed the leadership test. In times of trouble the first mission is to calm the people, avoid panic, explain the realities in as simple terms as possible to allow the most people to understand. That’s something George Bush did rather well last night in about 12 minutes.
For a rather good explanation of how the proposed bailout could very probably bring the govt. nice returns, there is an article on the Wall St. Journal’s Op-Ed page today by Andy Kessler, “The Paulson Plan Will Make Money For Taxpayers,” p. A19 — can be viewed online at http://online.wsj.com/article/SB122230704116773989.html?mod=todays_us_opinion
(Sorry for such a long post; too many thoughts?)
Oops! In the above commentary on derivatives, I meant to say “such actual formulas are RARELY publicized,….”
Missing in those analogies, I think, is why the poison (or virus) was not headed off and destroyed, as in a healthy system. Why was greed, always present, able to run wild this time?
The cancer cells, always lurking, found an opening. Artificially low interest rates and an implicit guarentee from our FED (Greenspan put) were the weak spots. The cells multiplied in the form of fancy financial leverage techniques. The body’s normal defenses – the extant accounting procedures – were overwhelmed.
Now the patient is very, very sick.
My analogizing on the subject has taken a rather more scatological bent, which I’ve found to be more in keeping with the tone of my emotions on the matter.
“Why do I have to take the hit for all these other jackasses?”
True enough, but my question for now is:
What are the REAL consequences of NOT pulling this off?
The only “water” analogy I’ll offer is…
If your house is on fire and you are trying to hose it down, that would really be a lousy time for someone to get in a snit and shut off the faucet because he’s worried about the water bill.