Rushing into an enormously expensive bailout may not be the answer to the current economic crisis.
The problem at the heart of the demand from the financial sector for a bailout of Fannie Mae, Freddie Mac, and other failing financial businesses comes down to one very simple thing, the practice of many modern businesses of relying on the availability of large amounts of easy credit for their day to day operations.…
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76 - Dave Nalle
Bliffle, one thing you do have to take into consideration is that for the $700 billion to be passed on completely to the taxpayers the assets of Fannie and Freddie would have to be worth only a tiny fraction of their presumed value. Even if they are leveraged at 20 to 1, they'd still be worth about half of the amount being fronted by the government, and if they can be managed for several years the asset value would increase to offset any leveraging, so in the long term the obligation for taxpayers is probably going to be fairly small unless we see a real and complete economic collapse in which case it won't really matter as money and taxes will all be fantasy anyway.
Dave
77 - bliffle
Dave sez:
"...if they can be managed for several years the asset value would increase to offset any leveraging,..."
This is at the heart of the problem: the belief that these (overpriced) properties and securities will recover and exceed their previous values. It cannot be taken as a given.
Take my friend J for example: he has a $700k (a very modest residence there) townhouse in Los Altos, which is an excellent community, good schools, last to be hit by recession, always in demand. His mortgage is $600k, but the current assessment is only $550k. He's 50k under water. His canny judgement about 5 months ago was that it was not worth $3500/month to defend that investment, so he quit payments, although he still lives there (it's a very nice place, but he has other options). The bank quit calling him and only sends threatening mail.
He doesn't care. He'll enjoy the place as long as he can and then go to one of his other options. In the meantime he saves $4500/mo. He doesn't care about Credit Ratings because he hasn't depended on THAT in years! He has cash and property.
His judgement was that $4500 cash was worth a lot more than any hope of future price recovery AND price appreciation. He figures that he followed prudent investment policy by mortgaging to the max because that would serve whether there was inflation (ride it up!) or recession (bailout with cash).
Who wants to wait around for YEARS to recover the price? Then, even more years to get a profit?
Now, if this Paulson/Bernanke/Bush scheme comes into play and they actually buy J's property with anywhere near it's "mark-to-model" value then it will represent the US government throwing money away.
QED.
78 - Dave Nalle
You miss a vitally important part of the formula, Bliffle. As the dollar is devalued, the price tag on that real estate is bound to go up. There's never been a real estate bust that wasn't followed by a recovery, and if the value of the dollar goes down at the same time then the new prices which result should be crazy high, at least on paper.
Who wants to wait around for YEARS to recover the price? Then, even more years to get a profit?
No one. But the government CAN afford to wait those years, unlike most private investors or corporations.
Dave
79 - whodunnit
Dave Nalle:
"But the government CAN afford to wait those years"
Who is the government?
Ans. The poor suckers who are also but infrequently known as taxpayers.
The question is whether the taxpayers can wait.
80 - bliffle
Dave,
So you want the government (the poor belabored taxpayers, really) to sit out the fallow period?
Can I come back in X years and have my property back after the gov has weathered the fallow period? Where do I sign up?!
It's a daft idea, Dave. Daft.
81 - Silas Kain
Well one week into this financial melt down and the Republic still stands. Who lied to us? Inquiring minds want to know.
82 - bliffle
Who lied?
Anyone who said they knew what was happening and what the solution is, was lying.
The truth is that WallStreet can take a lot of adversity: that's why it is there, to take risk. We should be VERY reluctant to bailout WallStreet.
The critical asset that we should defend is MainStreet. That's where the REAL value is. Everything else is fluff. We should be VERY reluctant to damage Mainstreet in favor of WallStreet. But that is what is proposed by the Paulson/Bernanke/Bush plan.
83 - Cindy D
Well, I've about had it with the freak show for tonight.
How a bunch of assholes making shit up that will get them elected is of any use to actual problem-solving has got me puzzled.
84 - Silas Kain
Well, my union buddies supporting Obama are apoplectic tonight. They thought Palin would tank and they saw a tough lady.
And as far as this bailout goes -- NO DEAL! I'd suggest we start watching the Republic of Ireland. Evidently their little "bailout package" may very well lead to the fall of the Euro. And THAT should be a cause of major concern to every American.
85 - Dave Nalle
Guess Cindy didn't like what she saw in the debate.
Dave
86 - Clavos
With all due respect to Cindy, whom I respect, she was predisposed not to...
87 - DaveNalle
Well, my union buddies supporting Obama are apoplectic tonight. They thought Palin would tank and they saw a tough lady.
A tough lady with 4 union members in her immediate family, something none of the other candidates can claim. This may be the year that the unions finally wake up.
Dave