Is the Sky Falling? My View on the Bailout.

When I left work Thursday I had an account with Washington Mutual. By the time I got home, I had an account at JP Morgan Chase. The transition was smooth. No one waited in line. No accountholders lost a dime. Is that how a crisis unfolds?

I’m not an economist, but I do have common sense. I’ve listened to the politicians and I’ve listened to the economists. Although some agree with the bailout, most agree that it won’t solve the core problem, and may not have any effect at all. So is this crisis a true disaster or is it Wall Street’s panic over its own profits causing the rest of us pain? Is the current bailout plan the right solution?

First, a few quotes from the Telegraph:
“There is a kind of suggestion in the Paulson proposal that if only we provide enough money to financial markets, this problem will disappear. But that does nothing to address the fundamental problem of bleeding foreclosures and the holes in the balance sheets of banks.”
Joseph Stiglitz, Nobel Prize-winning economist

“It’s more hype than real risk. A nasty recession is possible, but the bailout will not cure that. So it’s mainly relevant to the financial industry. My sense is it will delay a disaster, given that you only have three months left in this administration. But it will not cure the problem in the financial industry, or prevent the shakeout and downsizing of the industry.”
James K. Galbraith, University of Texas economist and son of the late economic historian John Kenneth Galbraith

“It will have no impact. They propose to give banks Treasury paper for illiquid assets, and suppose this will allow banks to start lending to the real economy again. What we have to do is get the bad banks out of the system. Once we do that, everything else is going to be fine – the financial system will start operating again and then we can start focusing on the economy.”
Christopher Whalen, MD of Institutional Risk Analytics

Those are only the quotes that don’t support the bailout. We’ve all seen the people supporting it on our television, but the above quotes from people who really do understand the economy have me concerned that borrowing more than $700 billion (or just printing it) won’t do a darn thing to fix this economy. I’m not completely convinced that it needs external forces to fix it, anyway.

Would the Banks Really Have Stopped ALL Lending Without a Bailout?
No. Banks will stop lending to people and companies who are bad risks, though. People will be forced to spend less and borrow less. People will be forced to save up larger down payments. People will be forced to drive their cars longer. Most people would not be living in tent cities and begging for food, as the people squawking for money would have us believe. Just Thursday of last week, Caterpillar was able to borrow a large sum of money.  They had to pay a higher interest rate, but they were able to borrow because they’re a financially sound company.

People whose personal economies are strong would be able to get mortgages if they chose to buy houses they could reasonably afford and can pay a solid down payment. To receive lower interest rates, they’s also have to qualify for a loan less than $417,000.

People would be able to get car loans if they chose to buy reasonably-priced cars they could reasonably afford and were willing to put down a few thousand dollars.

People would be able to get credit for purchases, just not as much as they might like. They might have to buy the $500 TV instead of the $1,000 TV. Or, maybe, they’d have to save their money to buy a new TV.

Most of our consumer banks are not on the verge of a collapse. Yes, credit is tighter and they are considering loans more carefully, but they are still conducting their basic business: collecting deposits and paying interest on them. Banks typically make loans at higher interest rates to earn the money to pay interest on those deposits. They can’t do one without doing the other.

Would Our Recession Have Extended Without the Bailout?
Yes, probably. Some people would lose jobs, especially those in the finance sector. The bailout won’t stop that. Some people would lose houses. The bailout won’t stop that. Some people would struggle to pay their massive personal debt. The bailout won’t stop that. No one can even say if the bailout will prevent the recession from continuing.

What Does the Bailout Do?
So what the heck is all this money for us and what does it get us?

It gets us a pretend cap on executive salaries.

It gets us an ownership stake in companies the government has no business owning.

It gives us the salve that participating companies may have to repay the loans issued by the Secretary in five years if there’s a shortfall on the return on our investment, but that assumes that those companies will still exist in five years.

It gives us a Treasury Secretary with the ability to encourage mortgage holders to modify them rather than foreclose. He may choose to modify the loans, as well, but how likely is that, really? Most of these mortgages are carved up into tiny pieces, not placed whole into a single mortgage-backed security. It’s unlikely the Treasury would be able to find all the pieces of those mortgages in order to make it whole and then reduce it.

There’s no doubt that this bill will pass. We can only hope it does some good.

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