I Support The Bailout Bill

I was just at DailyKos and read Kos’ latest rant against the bailout package. The problem with this rant, like many others, is that he’s viewing it through a purely partisan, political lens. Markos is not a financial expert and never claims to be one, instead he just raves at it like a pure political beast the way we hate it when Rethugs ignore reality and do everything for the politics of it.

Well, everyone should reach his or her own conclusion. But do so by reading, researching, and speaking with people you trust with extensive knowledge of the financial industry. Do NOT be influenced by political bloggers.

From everyone I’ve spoken with whose judgment I trust who have years of experience in securities and finance, this bailout along the basic lines of the Paulson plan, is absolutely essential to preventing a much longer, more severe global economic recession. Most of these people I’ve spoken with are liberal Democrats. And they couldn’t be more convinced about the need of the bill. Based on that and my own research, I support the bill.

Speak with people you trust and do your own reading. But remember, when you go to political site like DailyKos you’re going to get a political opinion, not a financial one.

September 28, 2008 - Posted by Dan Sachar | Uncategorized | bailout, Economy, Kos

9 Comments »

I agree dansac. As Krugman says, it’s stinks, but it is not as bad as the alternative.

Comment by ClaudeB | September 28, 2008 | Reply
And you’re surprised??
Sadly, the closer to the election we get, the more irrelevant most of DKos is becoming.

Comment by IowaMan | September 29, 2008 | Reply
Summary: As a recent “convert” to the DKos website, I was inspired by the insightful diaries…until the “Bailout Bill” and subsequent mindless flailing by so many bloggers. Fortunately I’ve seen a few more thoughtful posts, like yours, and the courage of legislators who are working despite the pressure from a misinformed electorate.

Disclaimer: I am not an “economist” nor have I done massive research. However, I have been accused of being reasonable and occasionally wise.

The problem as I see it:
Too many people are failing to pay their debts, at a rate that is too high to be absorbed by the lenders (as they normally could) within their profit margins. This has caused distrust of all bank-like companies by stock and bond investors (people, companies, and governments) and other banks. Incoming funds to these bank-like companies are rapidly decreasing, but they are still forced to pay out withdrawals. They have tightened their loan criteria (or stopped lending) to delay and hopefully prevent a cash shortage. This tactic has not always been successful (e.g. WaMu). Unless investor trust is restored, any bank owning a significant number of mortages (or derivatives) is likely to run out of money, and if too many banks run out, the remaining banks and FDIC cannot absorb the withdrawal rate. The Treasury would simply print money for the FDIC as a last resort, but the loss of confidence in the US dollar and economy would result in a depression. Other nations would be affected depending on their levels of investment in the US and their dependence on the US as a trading partner.

“Credit Crunch” is not the real problem. Credit Default Swaps (CDS) are not the real problem. These words are used to prevent a lemming-rush to withdraw our money from the banks and crashing the system before it can be fixed.

The cause…
1a) Some people asked for loans to buy more (house, car, etc) than they could really afford.
1b) Some people believed the economy was stronger than in reality
2a) Some “loan originating” companies wanted short-term profits from loan fees and didn’t care about risk.
2b) Some “mortgage buying” companies did not enforce strict lending practices on #2a through their mortgage-buying criteria because money was too easy / cheap to obtain.
3) Uninformed investors (even the average person with a bank account) gave too much easy money to #2b, perhaps thinking them safer compared to the recently-burst tech stock bubble
4) Anyone who sold real estate for a profit without rolling those profits into another property
5) Deregulators in public office tried to “encourage homeownership” and “the economy” but just enabled the foolishness and greed of #1 and #2
6) Regulators in appointed offices who failed to fully enforce the law
7a) The Bush administration’s “call to action” after the tragedy of 20010911 included a request to spend money, encouraging #1a.
7b) the spending habits of the Republican-controlled goverment was a bad example for the whole nation.
7c) Continued mistatements about the economy reinforced the behavior though #1b.
8) Voters elected various legislators and presidents who supported the trickle-down, fiscally irresponsible tax reduction and deficit spending policies

I am guilty of #3 and #4, and even #8 with my votes in the 1990s. I have met the enemy, and they are us.

The solution:
1) immediately restore enough inflowing cash to prevent bank closures in excess of FDIC funds. This could take the form of direct loans from the government and some courageous investors, or purchases of assets or stock in those banks. Government “investing”, or “bailouts” as some would say, must be transparent to the people and have strict oversight with the ability to halt misuse of the funds.
1a) The goal should be to fully recover the amount loaned or invested within 5 years. The financial services industry must fund all aspects of regulation and FDIC-like insurance, through new “use taxes” that place the burden on themselves and the investors who benefit from the improved stability.
2) establish tough loan criteria to ensure that the loan portfolio risk is reduced. Yes, the “credit crunch” is actually necessary and is good medicine. Banks may be doing this on their own, but we shouldn’t count on their newfound good judgment alone.
3) eliminate “short-term profit” motivations via strong regulations. Executive pay is part of this, but needs to be expanded to discourage transfers of mortgages between lenders, reduce or eliminating “origination fee” profit structures, permit bankruptcy courts to modify loan terms, and eliminate all forms of debt “insurance” (like CDS) so that a lender cannot drag insurers down with their bad decisions, or convolute their balance sheets to confuse investors and regulators.
4) begin to restore stability to the housing market. A mortgage holder must step forward, one with enough long-term fortitude to hold the majority of foreclosed real estate assets OFF THE MARKET until the housing market has recovered enough (for-sale inventory returns to normal levels) to slowly place the assets for sale at higher prices. At the moment, only the US Government (with help from the world) can do this. This is where the real cost to US Taxpayers is found, but the sacrifice must be made or the short-term (#1) solution will ultimately fail.
5) place greater tax burdens on profit from the sale of homes to put downward pressure on real estate price inflation and prevent another housing price bubble. Strict lending rules may not be enough on their own.

The draft bill published today 20080928 appears to make good progress on these points; of course it is not comprehensive – it must focus on immediate action to restore confidence and thereby reduce bank failures. Some of the other solution elements will require wiser elected officials, and thus reinforces my support of Barack Obama regardless of his stance on this bill.

I’m always looking for input to my ideas and alternatives to investigate. I hope this has been worthy of your consideration.

Comment by TheLodge | September 29, 2008 | Reply
You left out medical bills, which figure BIG in mortgage foreclosures.

Our broken health care system that sucks money from lower and middle class people and gives it to the fat cats are a HUGE part of this issue, and a big elephant in the room.

(Emphasis on elephant–as the Repubs have given these people a free ride for 30 years.)

Comment by rradical | September 29, 2008 | Reply
I don’t have a traditional pension anymore. My employer converted their pension plan into a 401(k) plan. My entire retirement savings are in the market.

I can far more easily afford $5000 of my tax dollars to go towards this bailout than I can lose 20 or 30% of my retirement savings.

I support the bailout.

Comment by truth | September 29, 2008 | Reply
Very well said. I have been very disappointed in many of the front-page posts and diaries at DKos. My knowledge about economics and finance is limited but I have been learning as much as I can this last week and the more I learn the more I believe that liberal economists like Paul Krugman and Brad DeLong are right and something like the bailout is necessary.

I thought it was only the right-wing that took pride in their own ignorance the way I have seen a few at DKos do.

Comment by lauramp | September 29, 2008 | Reply
economics and politics aside your diary at dkos is very impressive. bravo

Comment by blklikeme | September 29, 2008 | Reply
Good point, rradical, healthcare costs are probably a big contribution to the foreclosures. Would the lenders have been able to absorb the losses from “normal” foreclosures such as health and job loss that aren’t the fault of the borrower? I don’t know…still, another reason to get people in office who will start peeling back the layers of greed in the health insurance and healthcare system.

Comment by TheLodge | September 29, 2008 | Reply
Most people don’t pay much if any taxes so if you are in a higher tax bracket think in terms of $50,000 as your share.

The problem with the bailout is that it gives Paulson unchecked authority to spend $700 Billion however he wants. The oversight is just reporting oversight, it has no control power. He has messed up so much, why should we trust him? OK, so he could be stopped after spending $350 billion but the point is, too much power in one person.

This bill stinks and it is being forced on us by fear just like we got into Iraq. We probably have 2 weeks before anything happens to the economy. We can do better.

Allen

Comment by Allen Edwards | October 1, 2008 | Reply

Strategy ’08

Obama vs. the other guy, 2008