One of the common claims is that no one is going to starve if the bailout doesn't happen. That's probably true, but picture the following situation
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"But other questions which absolutely need to be answered are things like: why do these same bankers -- the same ones who screwed up last time -- need to be in charge of it this time? They blew their first $700 billion dollars. Why on earth should we go out of our way to trust them with $700 billon more?"
Well, most likely they will not *want* to take the money. It will result in losses which are quite significant, losses that if they can hold to term, will be avoided. However, I see this as functioning as buying assets out of bankruptcy, so that other bondholders get some of their money back.
"Basically where exactly is this $700 billion dollars coming from?"
Oh, that's easy. Leverage. The government is the only institution that can still borrow money relatively cheaply. They should make a killing on the spread.
"Can't the government just lend out the money to people who need it, instead of giving it to these same old failed bankers?"
These are relatively large transactions. The government doesn't have the manpower or the expertise to handle what you're describing. Though, I suppose it would be possible to nationalize a couple more banks and handle it that way...but that would still be problematic.
"OK. So the government has leverage, which is good. But still, who are their borrowing the money from? Hopefully not these same banks they're lending it to. But then, who exactly?"
Foreign investors, i.e. those with trade surpluses. Scared investors. Treasury rates are still really low, so *someone* is interested in lending money to uncle sam.
"Maybe not, but based on the banks track records of the last fifteen years, the banks don't have the expertise to handle this kind of a thing either."
Yeah, I don't have a great response to this, other than the fact that they knew they were being greedy at the time, and now they have been reminded what can go wrong. This seems to happen in cycles, i.e. the S&L crisis, etc. They'll probably do a fine job for at least 15 years, until people forget. But, that isn't too bad. We should have sold most of the securities by then anyway.
Well, most likely they will not *want* to take the money. It will result in losses which are quite significant, losses that if they can hold to term, will be avoided. However, I see this as functioning as buying assets out of bankruptcy, so that other bondholders get some of their money back.
"Basically where exactly is this $700 billion dollars coming from?"
Oh, that's easy. Leverage. The government is the only institution that can still borrow money relatively cheaply. They should make a killing on the spread.
"Can't the government just lend out the money to people who need it, instead of giving it to these same old failed bankers?"
These are relatively large transactions. The government doesn't have the manpower or the expertise to handle what you're describing. Though, I suppose it would be possible to nationalize a couple more banks and handle it that way...but that would still be problematic.
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Foreign investors, i.e. those with trade surpluses. Scared investors. Treasury rates are still really low, so *someone* is interested in lending money to uncle sam.
"Maybe not, but based on the banks track records of the last fifteen years, the banks don't have the expertise to handle this kind of a thing either."
Yeah, I don't have a great response to this, other than the fact that they knew they were being greedy at the time, and now they have been reminded what can go wrong. This seems to happen in cycles, i.e. the S&L crisis, etc. They'll probably do a fine job for at least 15 years, until people forget. But, that isn't too bad. We should have sold most of the securities by then anyway.
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