Our Fearless Leaders
I haven't felt like this since almost exactly 6 years ago. Then, like now, our fearless leader came to the Congress weaving a tale of apocalypse, of potential ruin if we don't act, and don't act now. Then, the threat was phantom weapons of mass destruction and the President sought the approval to lead us into a war that destabilized the Middle East, empowered our enemies, and devastated our good name throughout the world. I felt then that we were taking a serious gamble, we better have our facts right, and we were in serious danger of jeopardizing our reputation, our alliances, and the lives of our men and women. It went worse than I could have ever thought possible.
Today we gave our lame duck president and his cabinet the authority to spend $700 billion dollars of our money to save the economy. This price tag is roughly 33% more than we have spent total in Iraq since Oct 2002. And how does this save the economy? From what I can tell, the plan is to buy up all the bad loans so the current owners don't have to worry so much.
A little history and background from what I can glean. This problem started with the bubble burst of the real estate markets, where that market realized that the property they were selling really wasn't worth the prices they were asking (especially in California, Florida, and much of the east coast). This was coupled people who bought homes getting into real bad deals (high interest rates, no money down, adjustable rates) and realizing the house they paid $300,000 for is really only worth $200,000. Some just stopped paying, some couldn't pay, and houses were being foreclosed. Big name mortgage companies took a hit, and we entered into what's know as the sub-prime mortgage crisis. The first effect was a freeze on many mortgages. The buyers of our South Park house lost theirs three days before we closed.
This became a big problem. Unlike other bubble bursts in the past (the dot-coms for instance), the market was fundamentally based off of land-based investments. And this bad debt was spread through out the financial system. Mortgage companies fell, and were acquired by banks and investment firms, inheriting and accumulating much of the bad debt. Many of those would also fall, and be acquired or merged. This is how even the large institutions like AIG, Fannie, and Freddie became afflicted with this. The reason they were acquired... many of the bad investments were bundled with typical investments, and even if there was some risk there, risk tends to be a good long term investment.
So what is the solution we come up with today. Well, I haven't read the 450 page proposal, but if it's in the same vein as the 100 page proposal (just with more incentives), then the big bailout plan will have the government (the taxpayers) buy up specifically the bad debt. Why? Well, the economy is in such bad straights, nobody wants to lend anyone anything. No one trusts the assets the other companies are based on. However, our current economy thrives on an almost continual back and forth lending between institutions. Some liken it the oil that lubricates the motor of the economy. So, to free up the credit crisis, the real bad debt will be held not by the companies stupid (or greedy) enough to buy it, but by us taxpayers.
The problem, though, lies with the fact that all of these assets; the good, bad, and mediocre debt, is based on real estate that is not worth the value paid for it. This bill won't change the fact that the someone's stuck with a $300,000 bill for a $200,000 house, it only means we're the one stuck with the bill. Those assets are the fuel which drive the economy and the underlying problem is we don't have quite the fuel we think we have. There's water in the gas tank (to further butcher a metaphor), and an oil change isn't going to do anything to get us moving again.
I've been researching economic theory regarding the Great Depression, and similarities frighten me. I'm not overly concerned about the Dow Jones or the S&P; the daily ups and downs tend to be more a barometer of financial insecurity. However, many see the causal factors of the Great Depression not so much the stock market crash, but the dramatic increase of overall debt among government, business, and individuals. This led to a growing disparity between income and spending ability. Many in the late twenties felt that although they were making more on paper, they weren't living nearly as well as they did in previous years. The government ignored most of the early warning signs, and only when banks started failing left and right did they step in to bail things out. By the time that happened, it was too late to avert the economic crisis. Many blame Hoover's rapid succession of government bailouts to actually prolonging the length of the Great Depression, preventing the market from righting itself.
See, the thing is, the current market paradigm is showing itself to be untenable. It has to find a new set of assets to base its value on. Even if that is land and real estate, it has to be based on the true value of the asset, not what we had hoped it would be worth. Maybe there are government intercessions that could help. But I can't see how forcing us to buy up the worst pieces of coal in hopes they may one day become diamonds will help. And economic rescue plan cannot begin with forcing every consumer to make risky investments which are likely to fail. And doing what needs to be done to allow the financial markets to pretend that the financial systems are like they were before will not hasten the transition to a stable and vital economy. And that transition is precisely what we need to make.
Today we gave our lame duck president and his cabinet the authority to spend $700 billion dollars of our money to save the economy. This price tag is roughly 33% more than we have spent total in Iraq since Oct 2002. And how does this save the economy? From what I can tell, the plan is to buy up all the bad loans so the current owners don't have to worry so much.
A little history and background from what I can glean. This problem started with the bubble burst of the real estate markets, where that market realized that the property they were selling really wasn't worth the prices they were asking (especially in California, Florida, and much of the east coast). This was coupled people who bought homes getting into real bad deals (high interest rates, no money down, adjustable rates) and realizing the house they paid $300,000 for is really only worth $200,000. Some just stopped paying, some couldn't pay, and houses were being foreclosed. Big name mortgage companies took a hit, and we entered into what's know as the sub-prime mortgage crisis. The first effect was a freeze on many mortgages. The buyers of our South Park house lost theirs three days before we closed.
This became a big problem. Unlike other bubble bursts in the past (the dot-coms for instance), the market was fundamentally based off of land-based investments. And this bad debt was spread through out the financial system. Mortgage companies fell, and were acquired by banks and investment firms, inheriting and accumulating much of the bad debt. Many of those would also fall, and be acquired or merged. This is how even the large institutions like AIG, Fannie, and Freddie became afflicted with this. The reason they were acquired... many of the bad investments were bundled with typical investments, and even if there was some risk there, risk tends to be a good long term investment.
So what is the solution we come up with today. Well, I haven't read the 450 page proposal, but if it's in the same vein as the 100 page proposal (just with more incentives), then the big bailout plan will have the government (the taxpayers) buy up specifically the bad debt. Why? Well, the economy is in such bad straights, nobody wants to lend anyone anything. No one trusts the assets the other companies are based on. However, our current economy thrives on an almost continual back and forth lending between institutions. Some liken it the oil that lubricates the motor of the economy. So, to free up the credit crisis, the real bad debt will be held not by the companies stupid (or greedy) enough to buy it, but by us taxpayers.
The problem, though, lies with the fact that all of these assets; the good, bad, and mediocre debt, is based on real estate that is not worth the value paid for it. This bill won't change the fact that the someone's stuck with a $300,000 bill for a $200,000 house, it only means we're the one stuck with the bill. Those assets are the fuel which drive the economy and the underlying problem is we don't have quite the fuel we think we have. There's water in the gas tank (to further butcher a metaphor), and an oil change isn't going to do anything to get us moving again.
I've been researching economic theory regarding the Great Depression, and similarities frighten me. I'm not overly concerned about the Dow Jones or the S&P; the daily ups and downs tend to be more a barometer of financial insecurity. However, many see the causal factors of the Great Depression not so much the stock market crash, but the dramatic increase of overall debt among government, business, and individuals. This led to a growing disparity between income and spending ability. Many in the late twenties felt that although they were making more on paper, they weren't living nearly as well as they did in previous years. The government ignored most of the early warning signs, and only when banks started failing left and right did they step in to bail things out. By the time that happened, it was too late to avert the economic crisis. Many blame Hoover's rapid succession of government bailouts to actually prolonging the length of the Great Depression, preventing the market from righting itself.
See, the thing is, the current market paradigm is showing itself to be untenable. It has to find a new set of assets to base its value on. Even if that is land and real estate, it has to be based on the true value of the asset, not what we had hoped it would be worth. Maybe there are government intercessions that could help. But I can't see how forcing us to buy up the worst pieces of coal in hopes they may one day become diamonds will help. And economic rescue plan cannot begin with forcing every consumer to make risky investments which are likely to fail. And doing what needs to be done to allow the financial markets to pretend that the financial systems are like they were before will not hasten the transition to a stable and vital economy. And that transition is precisely what we need to make.