Friday, October 10, 2008
Wednesday, October 8, 2008
Friday, October 3, 2008
Many Americans are furious at the prospect of spending nearly a trillion taxpayer dollars to help bailout the mistakes and greed of Wall Street firms and other financial institutions. Their ire is justified, and I count myself as someone who is furious at the excess and greed that has taken place, but I also understand the necessity of assisting the credit markets.
Years of minimal accountability allowed those on Wall Street to profit from risky investments, while a lack of regulation and clever financial schemes hid the true folly of this system. Now this arrogance and greed has led to a meltdown that has consumed many Wall Street firms, some of which had existed for over a century. A person’s first instinct is likely to be to let them suffer for the mess they created (read this article for a look at how this situation exposes a natural desire for retribution in humans) to teach them, and those in charge of such institutions in the future, a lesson.
But this desire for retribution will likely not serve the average American very well if it blocks a bailout package (now its a "rescue" package). There will be time for tackling the excess and greed on Wall Street and the financial industry, but at the moment their screw-ups have placed our entire economy in jeopardy. Americans have only started to realize this in the wake of the failed first attempt to pass a bailout in the House of Representatives.
While the securities backed by mortgages (sub-prime or not) seem like bad debt, most of them are not; it is just that the market cannot value them right now. No investor wants to touch them and these financial institutions cannot unload them, and so they appear as giant anchors on balance sheets because under accounting rules, some sort of present value has to be assigned to them. The problem is that when no one wants to touch them, their value has no where to go but down. These institutions now either have trouble both giving loans and getting them, and this difficulty has spread into the rest of the credit market around the globe as everyone starts to tighten their lending practices and none of the mortgage backed securities can be offloaded quickly. Additionally, companies need to get rid of the securities soon because their inability to get loans and the unwillingness of others to give them in the immediate future is at the core of this crisis.
To be sure, this is completely unfair. The reckless Wall Street firms screws up, and yet they benefit because no American can afford to let them fail (this is moral hazard everyone keeps talking about). Also, those with a mortgage who could otherwise afford to pay it and now can't because of a decline in the market, increased interest rates, or inability to get a loan/credit (due primarily because of the bad lending practices) do not have much to gain from this bailout.
There is some tax relief for homeowners, but this is paltry. However, relief for those with a mortgage is a dicey political issue that would likely not get passed by the current Congress. It does look increasingly likely that Democrats will gain even greater control of Congress as well as the White House, and helping homeowners directly is a top priority on their agenda (Republicans too wish to help homeowners, but they continue to insist on more indirect market oriented methods of helping them so I am making an assumption that more immediate and direct assistance would be more forthcoming under a Democratic Congress and President).
This deal seems to get worse and worse for average taxpayers, Wall Street gets a bailout, and if there is any help for the homeowners (some of which the lender should not have even lent to in the first place), it will not be until at least next year. But the biggest concern that should be on every American’s mind is the failure of the credit market. Why is the credit market so important?
The credit market allows individuals to get loans for homes, education, cars, consumer goods and everything else they need to get by on a day-to-day basis. Stories are starting to trickle in of people being denied a loan (credit), but whether this will continue is unknown; it does, however seem to indicate a probable consequence of a collapsing credit market. But consumers are not the only ones who need credit. Businesses need credit to expand, buy inventory, or even just pay their employees. Without credit, business will start to contract. Local governments are also having trouble getting credit, which they need to keep state services going and pay employees. It also makes it more difficult to finance the sale of state bonds, further contracting state coffers.
The conundrum of an diversified and integrated financial system that touches every aspect of our economy (and the global economy as well) is that we are completely dependent on it continuing to maintain our own personal economic well being. The Free Market does allow greater growth and efficiency, but not always and it will inevitably fail at some point without proper regulation. The current failure is extraordinary, and because the financial system is integrated into all the other aspects of our economy (and Americans are extremely dependent on credit), it is bringing down the whole house of cards.
A bailout may not stave off a recession, which is another downside to this deal, but it may be necessary to avert an even greater economic disaster. This deal is unfair for sure, and it is ironic that there is more political outrage and pushback over such a bailout when compared to issues such as going to war, but it is currently the only game in town for immediate aide (I wouldn't call it a fix, its more like putting a Band-Aid on a wound—hopefully the Band-Aid is big enough). In the best-case scenario, the government can sit on the assets (which still have value, and once the market recovers will gain value again) and eventually make money on the bailout. The worst-case scenario is that the bailout is not enough, or is too late to stop an economic disaster, and it won't matter if Congress forces Wall Street to pay for the losses the taxpayer absorbed because of their incompetence. The choice is a chance at stopping a disaster or just letting it happen, hopefully Americans will recognize the need to do something, the government will make money, and Wall Street will be regulated enough to prevent the need for future bailouts.
Thursday, October 2, 2008
Saturday, September 27, 2008
So I apologize for not having a post up for a few days. Life has been a little hectic, but hopefully things will slow down just a tad in the near future.
Wednesday, September 24, 2008
Obama later went in front of reporters to say that he and McCain had talked earlier that day - apparently Obama's campaign called McCain after Senator Coburn (R-OK) suggested it would be a good idea to give a joint statement - and their campaigns agreed to make a joint statement. Obama expressed his surprise at McCain's statement regarding the suspension of his campaign and a delay in the debate as Obama thought their campaigns would work on a statement before they went to the press.
McCain and the Republicans are saying that he is being bipartisan and that he and Obama are so needed in Washington that the debate can't go forward. On the other hand, Obama and the Democrats are saying McCain is attempting a cynical political move to delay the foreign policy debate - one he has the most likelihood of winning in the eyes of Americans - which would otherwise be lost in the turmoil of the financial crisis.
Regardless of either candidate’s political motivations, the economic crisis is extremely serious at the moment. McCain may have political reasons for wanting to delay the debate and suspend campaigning, but there is a legitimate reason why he and Obama will be returning to Washington soon and why they may even stay through the weekend.
Since financial institutions on Wall Street began to fail, starting this spring first with Bear Sterns and most recently with AIG, the financial system has been deflating. Bear Sterns Treasury Secretary Henry Paulson has been talking about governmental measures similar to taking out "bazooka" to reassure investors; by this he meant governmental intervention disproportionate enough to the problem to reassure investors such that money continues to flow into the credit markets. However, the size of the AIG failure, the lack of a recovery in the housing sector, and the constant stream of bad financial news has spooked investors to such an extent that massive government intervention is necessary to restore investor confidence.
It may seem odd to the average person that our markets are suffering from a lack of confidence; after all, business people and economists deal with money and numbers, things that have value and are absolute. Unfortunately, the market (and economics in general) is more of an experiment in social science and psychology than anything else. Value on the market is assigned by what people are willing to pay for something based on their needs and wants. When a major crisis like the collapsing housing market occurs, no investor is willing to buy a bad investment (such as a subprime mortgage backed security). This makes it difficult to value anything in the market, but it is widely known that those securities are dropping in value. Goldman Sachs and Morgan Stanely, the only significant investment banks left in existence, have been given a free pass to become regular banks in order to gain the greater security that comes with government regulation of that sector of the economy.
Investors are seeking to find the safest possible investments and hold back on lending, thereby freezing up the credit markets even for good borrowers and sound investments. Franchises of McDonald's are now finding it hard to get credit to repair their restaurants, and GM is taking out all the credit it has left for fear of not being able to find cash later. Businesses need access to credit to expand, but they also need it to pay the bills when they have no cash on hand. So not only will the economy not expand, it may contract once businesses start going under after they can't afford to pay their bills, and more importantly their employees. Even individuals with good credit may not be able to get loans for new homes, cars, or higher education tuition.
Secretary Paulson and Federal Reserve Chairman Ben Bernanke believe the situation after the AIG fallout to be so serious that they think the government must intervene and buy the bad mortgages - at a discount as they are so low in value right now - so that financial institutions can pay off their debts and prevent the credit markets from freezing up. However, the political problem here is that this will be an unprecedented bailout of incredible size. Americans are used to hearing billions of dollars being spent, but $700 billion is a massive amount of money. To put this in perspective, the Iraq War has cost $550 billion from its start through August 2008 and the entire budget for 2007 was $2,730 billion ($2.73 trillion).
Paulson and Bernanke believe that this bailout must be passed by next week or the credit markets will freeze. So far, many financial experts seem to agree. Experts also believe that this may not be a losing proposition to Americans, as the assets that are purchased - U.S. mortgages backed securities owned by U.S. or foreign financial institutions - will eventually rise again after institutions are relieved of their bad investments and credit markets begin to flow regularly again. If there is a loss, it won't be the full $700 billion, but there could be a $200 billion loss or even a $200 billion gain.
The key to the current bailout plan, and the reason McCain wants to claim a need to suspend debates, is the need for a speedy government reaction to stop the credit markets from freezing. So far, Republicans have been the more resistant to a bailout because of their faith in the free market and dislike of government spending or intervention. Regardless of what either candidate or party says, the politics of this crisis and the election will always be a major consideration in any decision that has to be made. Fortunately for Americans, both candidates and a majority of Congress agree with the Administration that bailout plan must be passed within the week. Hopefully this will be a big enough "bazooka" to stave off economic collapse such that future intervention of this scale will not be needed.
Monday, September 22, 2008
Today, President Bush announced that the whole world is watching to see if we can act quickly to resolve/contain the U.S. finical crisis. The message he was trying to deliver was not directed at the American public, but at Congress, to act quickly in passing his 700 billion dollar bank bailout proposal. Bush felt that this was necessary as many congressional democrats and a fair number of republicans have questioned the wisdom of the Bush bailout in its current form.