mf - story #4566 - I think the bailout

posted by rick on October 2nd, 2008 at 5:36PM

I think the bailout takes away more freedoms from financial institutions than individuals. It does make government bigger, in the form of regulations for these institutions. I think it's worth the effort to investigate and discuss what the bailout actually is, because there are misconceptions about it and it hasn't been sold very well by politicians. (Admittedly, I don't know enough about it to start this conversation, so I'll need to do some investigation myself.)

Yes, you did nothing to cause this mess, but you will definitely feel the effects of it. Something needs to be done, and no one wants to pay for it. This was evident in the vote in the House; everyone secretly wanted the bill to pass, but no one wanted to commit to it themselves.

But this is where one of the misconceptions come in. From what I understand, the bailout is more of a loan than a hand-out. Someone coined the term "bailout" at the beginning of the process and it kind of stuck. Again, I don't know enough about it to discuss in detail at the moment.

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posted by rick on October 3rd, 2008 at 5:12PM

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posted by dennisn on October 2nd, 2008 at 6:20PM

You know Ricky, you're a really stubborn guy ;P.

Here's a brief history of what happened. Decades ago, the Democratic party (which hasn't changed much/at all) began interfering in housing markets, under the misguided goal of giving poor people houses. They created Freddie and Fannie--essentially government monopolies which blindly gave out loans to anyone who "needed" them. Clinton perpetuated this fiasco by actually *forcing* mortgage lenders (primarily Freddie and Fannie) to give out loans to poor (risky) home-wanters. This government interference created a bubble in housing prices, since people knew they could charge whatever they wanted for their houses, knowing that the government would ALWAYS grant them a loan, which was essentially GUARANTEED. (The government would never allow itself to "default"--considering it has millions of willing slaves to steal from.) The bubble inevitably popped and, as was always expected, the government became/is under pressure to back it's loans.

In conclusion, government made this whole mess, knowing that gullible slaves (like you) would always be there to dutifully rescue them.

It was wrong decades ago. It is wrong today. Stop doing what you know is wrong!

(I'm afraid you have been deeply indoctrinated to believe in everything The State tells you. I hope it's not too late to save you ;D.)

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posted by rick on October 3rd, 2008 at 5:13PM

Right. So it was wrong for the lenders to give out risky loans. And it was wrong for consumers to live beyond their means and take on debt they can't afford. I don't deny that. If anything I thought it was government /de/regulation of the last few years that allowed this to happen.

That doesn't change the fact that right now we are in a situation where no one can get credit, in an economy driven by credit. This is what the bill addresses.

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posted by dsk on October 7th, 2008 at 8:30AM

>And it was wrong for consumers to live beyond their means and take on debt they can't afford.

I can see this happening.

>So it was wrong for the lenders to give out risky loans.

But why did they do it? Lenders were giving out 20, 30, 40 year mortgages to 'subprime' (i.e. high-risk borrowers). The only way you can rationally justify those loans, under a free-market, is if house price would continue to rise at the level that they did forever. Nobody was that stupid, not the internet peanut gallery who saw this as a bubble years ago, and certainly not the financial guys making millions forecasting markets, nor the banks who put up their own money. Rick, you can not convince me people were that stupid. When it comes to their own money, people are smart. When it comes to billions of dollars of their own money they are very very smart.

Everyone knew that the incredible rise of house-prices was going to drop dramatically within a few years. Even without this, real-estate is cyclical, it goes up and it goes down. So why would a bank issue a 40 year mortgage to a person who has little chance of paying it back, and with the knowledge that house price will stop rising at the level that they did (and even fall). There had to have bee a massive market distortion for this to happen. Banks which operate billions of dollars are not that stupid - and you're trying to tell me that they are.

This market distortion could only have been caused by government.

I've read a few articles on this. Here's two of them:
http://www.investors.com/...=306370789279709

http://www.bloomberg.com/...sid=aSKSoiNbnQY0

The articles may or may not have gotten the whole story. They may or may not be right. But what they say makes infinitely more sense to me, than what you're trying to convince me of (that is, entities with billions of dollars whose sole reason for existing is to lend money, in fact don't know how to do it. That the right market strategy for them to make money is in the hands of a random software developer from Seattle).

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posted by rick on October 9th, 2008 at 5:09AM

Some random researching led me to http://www.letxa.com/articles/25 this article.

What are financial derivatives? What are Credit Default Swaps (CDS)? They are sort of like insurance against loans, except they are not regulated as insurance, so they are more like bets against the borrower being able to repay the loans. But since they are simply contracts between entities, there is no regulation to ensure that the sellers of CDSs actually have a capital reserve in case the borrower defaults on a loan. Also, as the article points out, they can sell multiple CDSs on a single loan, even to entities that aren't lending any money.

Knowing this, a series of mortgage defaults can trigger an avalanche of claims that can overwhelm banks that sell these derivatives.

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posted by rick on October 7th, 2008 at 8:09PM

No argument here. That's consistent with some articles I've come across. Specifically, http://query.nytimes.com/...on=&pagewanted=1 this one about Fannie Mae responding to pressure from the Clinton Administration to lend to low-income borrowers.

I'll bring up another http://www.nytimes.com/20...n01NhrLJAjQLHx5V w&oref=slogin article though. The investment banks successfully pushed to remove regulation that dictated how much money they had to keep in reserve to buffer against losses from failed investments. So the banks have to accept some of the blame as well.

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>The investment banks successf by dsk on October 8th, 2008 at 12:26AM.

The problem is two-fold: The b by rick on October 9th, 2008 at 4:32AM.

Ricky, are you a part of the g by dennisn on October 9th, 2008 at 10:08AM.

I don't think anyone is in the by rick on October 9th, 2008 at 4:51PM.

Well, you seemed to be suggest by dennisn on October 9th, 2008 at 5:30PM.

>If we didn't have the balls t by story on October 9th, 2008 at 6:35PM.

If you can somehow say, with a by dennisn on October 10th, 2008 at 11:54AM.

>thus digging themselves into by dsk on October 9th, 2008 at 9:39AM.

No. The the banks did not beha by dennisn on October 7th, 2008 at 10:24PM.

>Housing prices were rising, w by dsk on October 9th, 2008 at 9:56AM.

Yes and no. The banks knew th by rick on October 9th, 2008 at 5:02AM.

posted by dennisn on October 3rd, 2008 at 7:21PM

As I said before, there are two key points here:

(1) Will this "fix" actually help "the economy". I strongly say no. You appear to suggest yes. I highly doubt there's anything you can say to change my mind. I am a dedicated laissez-faire capitalist. I believe in individual freedom.

(2) Is it right to make me pay for OTHERS' mistakes? Clearly not.

Conclusion. The bailout is absolutely WRONG.

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