too funny.

Although I am not an expert in economists (by any stretch of the imagination), I have to think that this bailout goes against my idea of capitalism.

You did (and always do) a great job of breaking down complicated ideas. I was wondering if you (or any Wisebread blogger) could break down the rationale behind this bail-out. I have read a lot about it, and on Meet the Press this morning, Paulson was either talking over my head or not answering questions. I understand that they believe that if these massive corporations would cause a ripple effect on other companies, but I don't understand how (in a capitalistic economy) we can save these companies? I thought the cream rises to the top? I thought that when one business fails, a better business rises? I really want to understand THEIR logic behind why we could not let them fail. Could you please explain?

No one can "rationally" explain this situation. It's not rational as Phil clearly stated (I think).

Fat Cats got fatter, with the concurrence of a broken Federal Government. The legislation put in place after the "Great" [sic] Depression", to avoid this kind of a problem, was systematically torn down by 40,000 lobbyists, 300 million dollars in gifts to 535 congressmen and the most incredible incompetence and criminality of the SEC and many, many other regulatory bodies. 

Washington has become the new Sodom and Gomorrah. Money floats around like snowflakes in a blizzard. "Honest Politicos" is the ultimate oxymoron. So now it's broke, the answer is to pay off the folks who caused the problem. If you'd like to know the reason for the final nails in the coffin, you'll have to spend about two hours in google, doing your own research on "credit derivative swaps", because you won't find a simple explanation anywhere. Once you have an idea of how these pieces fit the puzzle, then you'll understand why 1.4 quadrillion dollars of notional value is is the piece that will make any solution impossible. 

The answer is the same as it was in 2003... Let them FAIL! 

If the Government had obeyed it's own laws, the problem would have been solved then. If the government stayed out of it now, we'd all hurt... but we could have come through it with just a few scars. 

Now that we've been deceived and lied to again, it's over.

We've been "sold down the river"... which means we're slaves. 

...sigh 

my opinion only

One thing we have plenty of in America... ignorance.

Long read... only for anyone interested in knowing what's going on. 

http://henryckliu.com/page169.html 

my opinion only

Philip.. 

I hope you're right... but my fear lies in the second part of what we don't know, and that is the cost.  

Credit Default Swaps have been sliced diced, sold and resold so many times that they have lost their identity.  Indeed, it has been reported that some banks have bought and sold (meaning insured and reinsured) the same securities three times.  The accounting is so obscure, that teams of auditors have been unable to unravel a small portion of one hedge fund's trades, after working for three months.

The commonly accepted explanation of Derivative "Notional" Value, is always accompanied by a disclaimer that this does not represent an actual value.  In fact, until  the SEC "experts" were unable to develop an accounting value, most people, including most traders.. believed that "notional value" was more of a measure of trading volume.

In order to try to sort out the current debt, several attempts have been made by the banks and brokers themselves, to accept some kind of "fuzzy" value, inorder to develop some liquidity.  In fact, the very reason that they were unable to do this, even in extremis.. is an indication that  any so-called  solution with an injection of arbitrary liquidity will probably be doomed to failure.  Open ended debt (via CDS's) may end up with a cost, many times the proferred 700 Billion.  Try this for details... http://www.theaustralian.news.com.au/story/0,25197,24380944-643,00.html 

 (A pretty good and simple explanation)

The US has laws regarding bankruptcy.  Somehow, this has been ignored.  "Too big to fail" is not part of the laws.

Here's an ercerpt from  

http://kwitsach-hadera.livejournal.com/

............................................................... 

"The second, much bigger, reason is that the US Treasury Secretary, Hank Paulson, in collusion with the US Congress, is about to commit an act of blatant treason.

Instead of doing the right thing, which would have been to place the system in administratrion (bankruptcy reorganisation), he has decided to make the United States itself bankrupt.

The bankers are laughing up their sleeves.

What Paulson has announced is this: he will establish a Federal agency to buy up what will amount to trillions of dollars of bad debt. The debt will become the liability of the US taxpayer. The bankers will get off scot free. The US will also insure investors in US money-market funds, which have seen significant withdrawals in recent days.

The idea is that, in a reflection of the Resolution Trust Corporation, the debt will be warehoused so that it can get the chance “for much of it to recover a portion of its value.”

But make no mistake, as far as the financial system is concerned, this will achieve nothing, other than delay the inevitable once again.

The real benefit for Paulson’s controllers, is that long held goal of the financial elites - the end of the United States, and that pesky Constitution.

What about us, here in the UK? For us, there’s the small matter of the spectre of hyperinflation which will make Weimar Germany pale into insignificance. "

..............................................................................

I don't know what will happen, but my current sense of this terrible problem is that we are just delaying the inevitable, and in a matter of less than a week, making a mistake that could reduce our great nation to the stature of a banana republic.  

Even the most optimistic pronouncement from the most optimistic member of government  has  a strong hedge of uncertainty.  That is not encouraging.  

Unfortunately all we can do is stand by and watch.  ..and wonder if the people that we elected know what they are doing.

..................................................................... 

my opinion only

The "laughing" comment was from the Aussie, but there's a lot of sentiment out there that agrees. 

http://www.alternet.org/workplace/99660/wall_street_is_licking_its_chops_at_the_bush_team's_multi-hundred_billion_dollar_giveaway_plan/?page=entire 

 The part of this whole sad story that bothers me the most, is that no one except a few serious bloggers with a legal background, have even suggested the mechanics of an alternative to the bailout.

Do you think it's because there "IS" no alternative?

My personal vendetta rests on the rules change... midstream, so to speak.  After working my way to and through retirement with extra conservative savings through  FDIC guaranteed (low interest) IRA's and IBonds, I look at others who bet on high risk... lost the bet, and now are being saved... What will the NEW RULES be?  

Life, Liberty, and the Pursuit of happiness... I don't remember the word "guarantee".

Remember Jean Valjean?  Prison for theft of a loaf of bread.  And now, conciousless bankers and manipulators who have stolen our future, and the futures of our children... and no one yet, at any level of government has mentioned the word "JUSTICE". 

by the way.... total cost so far (including the $700Bn) = $15,000 per American Family.   

my opinion only

@Philip Brewer - I agree with what you said. "punish the wrongdoers" was tried in 1929 and it lead to the Great Depression. Moral principles are all great, but failing financial institutions aren't exactly the same as failing local bookstores. There is a huge effect on the economy and on our jobs. Yours and mine and many people who had nothing to do with this mess in either as a lender or as a borrower.... As to the "artificially low risk" - how is having your company taken over by the government is a low risk? There is a new CEO at AIG.

Also, mutual funds are major holders of AIG debt, not just banks. People who own these mutual funds are you and me in our 401K. Letting AIG fail, would've hurt our money as well.

Also is getting a loan at 11%+ and losing 80% of the company such a great bailout? I read the link posted by lghbob, but it is one person's opinion. Wall Street Journal and other papers' views are different - . One listed the break up value of AIG to be 150 billion; also that the sale of the couple of its profitable businesses could raise enough to repay the government's loan. CNBC thinks the government gets a great deal and may actually make money. We do know that the government did end up making a lot of money when they bailed out Chrysler in 1980 giving them money in exchange of stock options. At the time Chrysler stock was worthless; when the company rebounded, the government made money. We really don't know what is going to happen now.

Same with bad debt - the issue will be the price that will be determined on a reverse auction. The price may end up being 40 cents on each dollar or less. Depending on how many loans will default and on the final price, we don't really know how much of our money will be lost or if the deal will end up making money.

Besides, when banks fail, FDIC takes over. Isn't FDIC' money also taxpayers money? If FDIC reserves dry up, the government will need to spend more taxpayers money or print more money. Either we pay for bailout or we pay for deposits at failed banks via FDIC.

The fact that the Great Depression was hard does not change the fact that it was necessary (I'm sure I can only say this because I was born 50 years after it ended)

Nevertheless, when businesses (and consumers) become too leveraged and have engaged in too many risky behaviors, the market needs to correct itself. The sooner it does so, the smaller and less devastating the cleanup is.

In just about any scope of life, there are infinite parallels where consistent maintenance is better than remedial solutions How about: " A stitch in time saves nine?"

When the market is not allowed to correct itself, it merely postpones that pain to some point in the future. At this point, it looks that it may be quite a few years until we have to deal with the predicament since the government keeps shouldering more and more of the debt. As a result, our financial system won't be the only thing to collapse. Now that these are inter-twined, our financial system won't go down until our government systems collapse as well. I think most everyone can agree that this will be a bigger problem to contend with than just the downfall of our banks.

The reason our government is crippling our market system and pushing back reality is because we have elected officials, but the real power of our country lies in our corporations. They exercise so much power on our officials because they've all been bought and paid for to get them to the place of power they are. If companies can rig up a system that allows them to continue to make consistent profits while the government shoulders their risk, that is exactly what they will do.

I was around for a while in the aftermath of the depression (which really didn't end until 1954 when the market regained its 1929 highs).  While we didn't live in tents, there were many days when potato peel soup was featured on the household menu du jour. 

Interesting about the FDIC reserves... in fact, they're already gone... as is the Pension Benefit Guaranty Fund, the Social Security Fund, and the Medicare/Medicaid fund.  They exist on paper, but in reality  the funds will come from the same place the "bailout" funds will come from.  DEBT.

About AIG... As far as I can tell, no one knows how many dollars are involved.  Since AIG was working with derivatives, and swaps, no one has been able to say just how far reaching their transactions went.

The push is to "Save the Banks",  to "Save the Brokers" and maybe to "Save the Foreign Investment Banks.  And so far, Mr. Paulson et al, have not said that the $700B would fix the problem.. Estimates go to $3.6 Trillion. 

We DO have laws that cover bankruptcy, and procedures to follow to insure the residual assets.  

This is very complex, and there are no certain answers.  Given that, my personal feeling is that putting off the inevitable will result in compounding the problem.  Had we taken the "hit" back in 2003, it might have been much , much less than it is today.

So, I'd prefer to let nature take it's course.... to abide by the existing rules, and to avoid the creative 3 day plan to "Fix it".  Instead of leaving the revaluation of the mysterious  bank assets to the same people who built the problem,  we should do it by using government  personnel without a vested interest in the results.

My feeling is that if we are going to spend the money, it should go towards making the innocent victims whole. 

As far as "Fixing the System"?  I believe that the private sector will find a way to return to the market economy, and that it would be better built from the ground up, than by Government intervention.  

but that's  

my opinion only

I have one more question:

Is there any thing that we can do to stop this? I mean, not the bailouts that have already happened, because they are done deals. But is there any way that we can put a stop to this abuse of power (in my opinion)?

It seems strange that they cannot even answer simple questions about this situation, yet they expect us to "get behind them."

I know that I can control the decisions that I make, but I just wish that this was put to a vote or something.

I guess wish in one hand...

Some people are calling these bailouts the "splurge".

http://www.avc.com/a_vc/2008/09/rules-for-the-s.html

Heh.

It's a bad situation all around, for sure, but if the alternative is in fact worse than the bailouts... well, what else can we do?

"It also took over 20 years for stock values to reach the same level they were at in 1929 before the crash. Which means most of us would lose our savings."

That's a rough spot to be in, and I'm sorry that's the case. You might forget that when an economy experiences turmoil, virtually everyone suffers. So even though I may not have the life savings that you've accumulated in your years, My financial welfare will be strained as well. Unfortunately, that sheds no light on whether a depression needs to happen or not. All this shows is that letting the market correct itself will be very, very hard for everyone.

Which means we need to get out of the way, let it run its course, and remember to address these problems sooner rather than later from now on.

"Which means we need to get out of the way, let it run its course, and remember to address these problems sooner rather than later from now on."
This is your opinion, and just like mine it is not necessarily the truth. It is the opinions like yours that caused the Great Depression when most analysts agree it could've been averted. What makes you think the recession or the next Great Depression is necessary and cannot be avoided?

I also think you underestimate the seriousness of today's situation. Right now companies find it extremely difficult to get credit. Since businesses don't normally have piles of cash lying around in FDIC-insured savings but have them invested into business, they need credit for everything including paying your salary. They borrow to pay salary, then pay it back from income. The companies cannot quickly raise money to meet their obligations, they have to declare bankruptcy even if they have other assets. It is not like S&L crisis where only a subset of companies were affected. Most banks are affected and without banks the economy cannot function.

@ Kitty,
Some of these homes will have very little recovery. Even earlier this summer there are cases of some old rental homes that went to foreclosure due to the landlords making bad investments. What I was seeing is tons and tons of housing stock in either rundown or emerging neighborhoods for $8000 to $20,000.

Part of me wanted to run with a fistfull of savings to grab a cool looking old house for that cheap. There is a real fear though, of what is going to happen when you have an entire neighborhood full of homes like that. Not a situation I want to sink rennovation money into.

If we can pull off a quick recovery or even stability some more desirable homes could recover 50% of their value. But markets where homes jumped to $800,000 due to the frenzy when they are really worth about $250,000 are going to be very hard to recover.

I think I share a real frustration with many people. We just do not know enough and we don't have a source we trust to tell us where we really are right now. The govt. has a habit of either lying to make things seem rosy to avoid a panic or misrepresenting things as a means to a specific ideological end. The financial sector has no credibility left. Paulson and Bernanke, hmm hard to tell. Bernanke I at least put some stock in what he says since he was a scholar for so long but he is still appointed by Bush and I don't know if that impacts his credibility and what he is saying.

Henry Paulson was a CEO for Goldman Sachs. So it really bothers me to be asked to believe what he says without something substantial to back it up.

BAILOUT
"WE DESERVE IT DIVIDEND"

The only thing that has made any sense this week!!

The Birk Economic Recovery Plan
-----------

I'm against the $85,000,000,000.00 bailout of AIG.

Instead, I'm in favor of giving $85,000,000,000 to America in a
We Deserve It Dividend.

To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+.

Our population is about 301,000,000 +/- counting every man,woman and child. So 200,000,000 might be a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a "We Deserve It Dividend".

Of course, it would NOT be tax free.

So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife has $595,000.00.

This even takes care of the AIG employees that lose their job.

What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

If you had insurance from AIG, now you have the money to replace it with a more stable company.

Repay college loans - what a great boost to new grads

Put away money for college - it'll be there

Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobs

Invest in the market - capital drives growth

Pay for your parent's medical insurance - health care improves

Enable Deadbeat Dads to come clean - or else

Remember this is for every adult U S Citizen 18+ including the folkswho lost their jobs at Lehman Brothers and every other company
that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( "vote buy" ) economic
incentive that is being proposed by one of our candidates for President.

If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!

As for AIG - liquidate it. Sell off its parts.

Let American General go back to being American General.

Sell off the real estate.

Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't.

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion "We Deserve It Dividend" more than I do the geniuses at AIG or in Washington DC.

And remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

And theoretically with the boost to the economy most of these people would be more productive and pay enough in additional taxes over a 5 to 10 year period to repay the $59.5 Billion.