mf - story #4584 - The problem is two-f

posted by rick on October 9th, 2008 at 4:32AM

The problem is two-fold: The banks had more capital to dump into failing investments, thus digging themselves into a bigger hole; and they no longer had the reserve to guard against failing investments. It's hard to say how much it would have helped, although I don't believe it would have required $500 billion to fix. Heck, I don't even know where the $700 billion figure came from.

As for why banks would take on risky investments, subprime loans charge higher interests, which generate more profit for them. And as you said, as long as housing prices kept rising, it didn't matter that some borrowers couldn't afford the loan, because they could simply foreclose and sell the house at a higher price for a profit. The banks saw this trend and tried to capitalize, but they couldn't predict when this trend would stop in time.

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posted by dennisn on October 9th, 2008 at 10:08AM

Ricky, are you a part of the government-can-do-no-wrong crowd that was mentioned in one of those articles? :P.

(A: Yes. Wake up!) :D.

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posted by rick on October 9th, 2008 at 4:51PM

I don't think anyone is in the government-can-do-no-wrong crowd at the moment. But I'm not in the government-can-do-no-right crowd either. :)

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posted by dennisn on October 9th, 2008 at 5:30PM

Well, you seemed to be suggesting that maybe, just maybe, it was deregulation that was the problem.

Can we finally all agree on the fact that it was government intrusion in the economy that created this problem?

Because this bailout is a DIRECT component of that exact same intrusion! Part one of the intrusion was the legislation that forced lenders to make the risky loans. Part two was *this* expected bailout. None of this would have happened if a "bailout" wasn't going to happen--that is, if such "bailouts" were forbidden and illegal from the beginning, none of this would have happened--that is, the government would never have been able to take on such risk.

It would be so much more convenient if all the mistakes were behind us. But they're not! This bailout IS STILL that mistake. Agreeing to the bailout is perpetuating the mistake--not to mention perpetuating this evil precedent! What is to stop the next risky gambling fiasco from the government?? If we didn't have the balls to stop them from throwing away 700B of our hard-earned dollars--when will we grow some??

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posted by story on October 9th, 2008 at 6:35PM

>If we didn't have the balls to stop them from throwing away 700B of our hard-earned dollars--when will we grow some??

A minor correction. The $700 billion bailout was rejected. What was passed was actually a $810 billion bill - $700 billion for banks, $110 billion of pork to convince congressmen, who initially rejected it, to pass it.

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

posted by dsk on October 9th, 2008 at 9:39AM

>thus digging themselves into a bigger hole

In which they were already in (or going to be in). I argued that this has nothing to do with the central problem. The hole is already there - why is there?!

>As for why banks would take on risky investments, subprime loans charge higher interests, which generate more profit for them.

Profit is not enough. There's a reason why banks don't take their money to casinos and bet it all on blackjack. The potential profits are staggering but the risk of losing everything is huge. And that's my point.

>The banks saw this trend and tried to capitalize, but they couldn't predict when this trend would stop in time.

This is what doesn't make sense to me. You can't possibly expect me to believe this. Sure, they couldn't predict when this trend would stop, but they knew it would. Everyone knew what was happening to home prices was a bubble that was going to burst. The few years before the housing bust, everyone was just waiting for it to collapse. You think forecasters couldn't see it coming?

So that's the contradiction, or rather evidence of market distortion. They lend money out, knowing full well that there is good chance they won't get it back. This is irrational behavior, which makes sense only when you bring government into the mix, who via the quasi-governmental banks of Fannie Mae and Freddie Mac, in essence guaranteed the subprime loans (not to mention the fact that they pushed for them to happen in the first place).

I will gamble all my savings in a casinos if you tell me you'll reimburse any loses I incur. In this situation, in fact, the most rational action for me to do is play the games with the highest rewards (and therefore the highest risk). At the root of it, that seems to be essentially what happened.

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