I don't understand the "Economic Bailout"

[shakeythedrunk]

I (Taxpayer) am lending money to a big bank in the hopes that the bank will loan it back to me?

And that will fix things.

Is that the theory?

 

[JerichoHill]

No. Not at all. Totally not how it works.

It's much more focus on lending among other businesses and institutions, because these are daily transactions.

The idea behind the bailout is the same reason why you take your car to the auto-shop when the engine starts making a funny noise.

Whether or not it works after the fix is another question altogether (unless your mechanic is Wahid of Capital Auto Care in DC, then you're golden)

 

[RulerOfDaPeople]

Well I'd like to know what happened to the Billions of Dollars they already gave the banks who by the way are NOT loaning the money like they were supposed to. Would have been more prudent to simply buy up all the bad mortgages and get to the source. That way the banks AND the tax payers all get a bailout in one swoop because the banks are still getting their money.

 

[amadeus]

The idea behind the bailout is the same reason why you take your car to the auto-shop when the engine starts making a funny noise.

I think car mechanics and government make a very apt comparison.

 

[JerichoHill]

Well I'd like to know what happened to the Billions of Dollars they already gave the banks who by the way are NOT loaning the money like they were supposed to. Would have been more prudent to simply buy up all the bad mortgages and get to the source. That way the banks AND the tax payers all get a bailout in one swoop because the banks are still getting their money.

I think you misunderstand the bailout. It was hoped that by shoring up the bank's daily cash-flow credit needs, they would then be able to start lending again. That a A=>B and B=>C thing.

Further, you can't just buy up all the bad mortgages, because at the time there was no good handle on where they were. Say there's this bad mortgage, M. Part of it might be in a CDO a pension fund is hold, part might be with the original bank, part might be in a MDS (mortgage debt security) in another investment bank. Except they were more chopped up than this. So, since ownership of a single mortgage might be in tens of different accounts, with different owners, you just can't buy them all back up. Yes, its crazy and not transparent and messed up, but that's what a lack of regulation and a lack of uncommon sense caused.

 

[shakeythedrunk]

No. Not at all. Totally not how it works.

It's much more focus on lending among other businesses and institutions, because these are daily transactions.

The idea behind the bailout is the same reason why you take your car to the auto-shop when the engine starts making a funny noise.

Whether or not it works after the fix is another question altogether (unless your mechanic is Wahid of Capital Auto Care in DC, then you're golden)

Well I'm sorry JH...But I just don't get it.
I don't lend money on a daily basis. Last time I loaned money to anyone it was to a friend of mine that lost her job and she needed gas money to get
to work to earn the next pay-check.

I just don't see how throwing money around & letting everyone skim a little off the top does any good.

 

[shakeythedrunk]

Further, you can't just buy up all the bad mortgages, because at the time there was no good handle on where they were. .

So why not just let them fail & let the people that signed up for said bad mortgages take the hit?

I didn't ask for money I can't repay.
I feel bad for them but it's not my problem if you can't pay your bills.

 

[emzie]

Whether or not it works after the fix is another question altogether (unless your mechanic is Wahid of Capital Auto Care in DC, then you're golden)

Do you get a referral bonus or something?

 

[Verbose]

So why not just let them fail & let the people that signed up for said bad mortgages take the hit?

I didn't ask for money I can't repay.
I feel bad for them but it's not my problem if you can't pay your bills.

Feels kind of risky sputing off on JH's turf, but here goes:

Because the ripple effects are global and seemingly strikes frightingly randomly.

My side of the Atlantic we've had a small coastal community in Norway, you know surrounded by majestic mountains by the crystal clear fjord, needing a bail-out so as not to have to declare bankruptcy, as a community, after having bought some of these interesting products from the US credit industry.

And of course they were told the deal was fool-proof, bedrock solid, no WAY they could lose money on it. And there was absolutely no way they could check up on it either.

Now, if it was just the odd little Norwegian municipality going belly up maybe it wouldn't matter, but the bad debts got distributed globally. What the little bankrupted municipality in Norway is a symptom off is that there is nowhere, literally, where banks and credit institutes can turn and be safe from incurring unexpected losses. Under the circumstances ANY deal can be poison, no way of knowing.

Actors on a market really don't like situations like that. So they stopped lending each other money for starters, hoping someone else would ingest the poison. As one economist put it:
"Imagine there are ten glasses in front of a group of people. Nine are fine. The tenth is pure poison, but there's no way of knowing which one. In that situation no one is going to be drinking anything."

And since credit is a major lubricant in the world's economy, things were threatening to just grind to a halt.

At that point government, various governments all over the world in fact, stepped in and offered to act as filter for their various national financial sectors. If there's any poison in there, the government will swollow it and absorb the damage, which is what might require tax-payer money. That should relieve the anxiety of the banks et al. and give them the confidence to go back to business as usual.

Not doing it really opens up prospects much, much worse. If credit dries up it will quickly have ripple effects as industries, their subcontractors, consumers even, all find that they cannot keep their operations going, or pay for stuff already ordered, as they can't get credit (for investements, stocks of necessary rawmaterials etc.), leading to lay-offs, leading to decresed demand as more people find themselves out of a pay-check, leading to more lay-offs etc. etc. I.e. it has the capacity of setting off a self-generating downward economic spiral.

That is at least as far as I have come in trying to figure out what's up.

 

[JerichoHill]

So why not just let them fail & let the people that signed up for said bad mortgages take the hit?

I didn't ask for money I can't repay.
I feel bad for them but it's not my problem if you can't pay your bills.

It's not just the mortgage holders. What about pension holders whose pension managers bought these securities several years ago? Should a 70 year old guy who has a pension lose half his monthly income be penalized for something he had nothing at all to do with? You are not thinking this through at all, because you're using your loan example as how ALL loans are done and how ALL loans are accounted for. That wasn't how it was done, it's not that simple.

The people with the bad mortgages didn't get bailed out. Further, there are many reasons why one might have a bad mortgage

1) You were told you could afford a mortgage product but in fact could not (face it, not everyone is able to calculate NPV and proper cash-flow analysis on the fly).

2) Your neighbors had bad loans, and they defaulted, thus bringing down the value of your house as well. In this case, you did nothing wrong and are not deliquent.

3) You could afford your mortgage until you lost your job because the economy slowed down because of the mortgage mess

I could go on. There are so many different scenarios. In some of them, you're a victim of luck. In others, you were stupid. In others, you were deceived. In others, you were collateral damage.

I really don't think you're grasping that the bailout was to keep banks solvent. Now, if you're like Hoover and don't mind massive bank failures and 25% unemployment and a stagnate economy, hey, I've got a time machine you can travel back to 1929 in.

I just don't see how throwing money around & letting everyone skim a little off the top does any good.

I don't understand this statement.

 

[shakeythedrunk]

I don't understand this statement.

look...Currently the economy of the US is kinda like "Well..Let's just move some money around."

We have people employed that dont do jack but move money around.
They don't build anything.
They don't make any goods...
All they do is move money around.

This is not sustainable.

 

[innonimatu]

I (Taxpayer) am lending money to a big bank in the hopes that the bank will loan it back to me?

And that will fix things.

Is that the theory?

There is no theory. Or rather, the bankers (and keep in mind that the politicians handing over the "bailouts" are bankers) will make up new theories as needed.

The reason there was a bailout was that common citizens and even companies had been squeezed with debt as much as they could be. Money is lent against interest, and the interest payments can only increase until they take all available income free after the payment of "basic needs". The party lasted many years, but finally the point where no further debt could be created was reached.

But many powerful and wealthy people (bankers foremost) want, if not to keep receiving their free money through interest pain by other people, at least keep control over the capital they accumulated in the meanwhile, most of which is lent. Not only cannot most people and companies keep paying interest on it, the economic crisis caused by the collapse of the "financial economy" has reduced income to the point where not even the principal can be paid.
So what do bankers do? Eat the loss and see their wealth influence reduced? Of course not, these are the sociopaths who accumulated wealth because they had no scruples an about exploiting others! They can't go after people with guns and demand the money - especially money those people don't have. So they have the government pay for them, and later the government is supposed to get the money from the people - the government does have tax collectors, prisons, and guns. And they've always got along so nicely with the bankers... that government will eventually end up as a russian-style police state run for the benefit oligarchs, but why should they care? What was done behind the scenes (the "financial economy") can also be done openly, if the people are scared enough not to react.

Go ahead and call this a "conspiracy theory"... but note that some conspiracies are true!

 

[DNK]

Wait, it's supposed to fix things?

I thought it was just a financial industry subsidy.

I'm so bad at these things...

 

[JerichoHill]

Shakey,

Just because a tangible good is not produced doesn't mean that nothing is produced. There are intangible goods as well. You're again, not understanding just what precipitated this crisis and what the bailout was supposed to do.

Inno,

As much as I want to disagree with your conspiracy, parts of it are most likely true, in the the losses will not be eaten in totality by those responsible. I could rant for three pages and on the why and the how, but I'll take the easy route and just blame Bush's "Absolutely Free Market Rulez For My Buddies" approach.

 

[Roller123]

As far as i understand it:

Some banks were giving more money than they were getting back. Sooner or later they are all broke, so normally these banks which cant exist in a healthy capitalistic environment go bankrupt. Since it was on such a large scale, the government gave them money, ie every taxpayer, regardless of whether he actually loaned money or not, was forced to pay money to the banks. You know, like in Russia, Cuba, etc. State supported structures. The interesting question is, this didn't actually eliminate the source of the problem( negative income), but only brought some time. In fact it only makes the problem worse. Because those institutions which are actually profitable, now are asking themselves why should they, since they can get financial help anyway.

 

[lovett]

Go ahead and call this a "conspiracy theory"... but note that some conspiracies are true!

It's a conspiracy theory.

 

[RulerOfDaPeople]

All this topic of discussion reminds me of everything my Grandfather has always said to me. He always cautioned against credit because he despises interest with a passion. He is anti-credit unless you are able to pay a large majority of it on a down payment. I had lunch with him one time and he told all about how he bought his 1st farm 50 years ago. He said 90% was paid for up front and back in that day if you couldn't afford that kind of upfront payment, you couldn't afford to buy it. He told me the standard line of thinking then was you should be able to pay at least 75% of the cost but should really be paying 100% if you could actually afford what you're buying. (Also keep in mind the economy has inflated much since those days.)

Call me Jefferson style old fashioned but this is what we as American's need to remember and return to. I never fully understood my Grandfather's criticism of credit cards and interest untill now seeing all that is happening to the economy through the practice of loose borrowing and loaning and the high interest that is owed. (Let's be honest though, the oil companies played their part in ruining the economy too, but that's another thread.)

I still don't understand how throwing more money at the problem and loaning more currency out is supposed to fix the problem. Isn't that what CAUSED IT in the first place?

But I think we as a people really do need to look ourselves in the mirror (myself as much as anyone too) and gain some self discipline for ourselves and our spending habits.

 

[Cutlass]

The problem with the economy is not credit. In fact, the modern economy simply cannot function without it. Excessive credit abuse is a problem, and people (and business, and governments) should reign in credit to makes a lot more sense.

The problem is not so much the lending of too much money, as the reckless and fraudulent activities that took place after lending too much money.

 

[innonimatu]

The problem with the economy is not credit. In fact, the modern economy simply cannot function without it. Excessive credit abuse is a problem, and people (and business, and governments) should reign in credit to makes a lot more sense.

The problem is not so much the lending of too much money, as the reckless and fraudulent activities that took place after lending too much money.

There's a reason credit was abused. Credit is power - the power to extract payment, to force labor to produce that payment. Default may be an option, but it's never an easy one, so the loan=power equation holds. It's no longer a "company-store economy", but only because now the company store is the whole world! Lend, consume, work to pay off debts - that's how "modern" economists, both "keynesians" and "friedmanites", wanted to engineer the economy. Which is to say, society, and the everyday lives of every single citizen - as an aside, have you noticed that even the word citizen seems to have been replaced in political discourse with consumer?

There is no reason for this particular organization. Why debt, if it must be repaid anyway? It is a burden and a constraint on freedom, yet propaganda depicts it as something liberating - "go out and buy what you want - now!".

Let's analyze the question. A loan can be used either for investment (business loans, essentially, plus some particular cases of private loans), or for personal consumption. The first type is not controversial here. But the second...
People who have the money on hand to spend will obviously not require a loan (and would lose money if they took one, unless they were using it to free their initial capital to some investment, which would make this a just a roundabout business loan). So the target for these loans are the people with not enough money for what they wish or need to spend on personal consumption.
Loans for the purpose of personal consumption (and that includes housing, which is not an investment but a living expense) will be used to buy perishable goods (homes degrade and depreciate) that create no wealth with which to repay the debt. The lender is effectively buying the borrower's future labor, his only wealth-producing "asset" which can be used to repay the debt. And I'm not talking just about the obvious case of payday loans, credit cards are supposed to work the same way. This is supposed to be a form of freedom?! Propaganda can do wonders! Well, horrors, actually.

So, why encourage this? For several reasons.
Because is is in the best interest of those who live off their accumulated capital (profits are one way to do it, but interest can be even better, with almost no work and no risk, usually).
Because it is in the best interest of the "financial industry" - all the people who take a cut from each financial transaction, each loan, each repackaging of loans, each repackaging of packages of loans, each.. you get the idea.
Because those people "own" governments, through corruption and a decades-long campaign to gain influence over the media and the academia. We hold elections in democratic countries, but the political agenda is usually set between these two groups of institutions.
Because "consumers" let themselves be fooled by the propaganda they were fed, and supported policies which were against their own interests. Namely, the shift of an increasing part of their effective disposable income from wages to loans. Simultaneously they also fell for Ponzi schemes build around unrealistic expectations of profits from stock market speculation (no, it's not investment if the money never reaches the company), and even (!) "home equity"! Some might have just wanted dividents, that would be sustainable, but that's not what drew most of the "investment" in stock.

 

[Verbose]

While it's perfectly true that credit has become THE way to finance just about everything, especially for ordinary households (you invest in education often as not, where it might be a good idea to improve your productivity before actually having the money), the flip side of the coin is the Household Savings Rate.

I.e. sure you can finance things using credit, even ordinary people, with no ill effects, on the understanding that you then set enough of your income aside to pay for it all later.

Afaik THAT has been a major problem in the US economy in recent years; using credit for consumption. Had US households, on average, in general, only been saving and paying off debt already incurred at a sufficient rate (what that would have been I don't know) things should have worked out fine.

Why this didn't happen, well, that's partly what we are discussing.