Your Tax Dollars at Work! [UPDATED]
New details have emerged on how the government came up with the $700,000,000,000 bailout figure:
“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”
They arrived at a figure of 700 billion of our tax dollars because they wanted a big number. Glad we have such consummate professionals working on our behalf out there in Washington.
(hat tip: Radley Balko)
[UPDATE 09/29/08]
The bailout has failed in the House. The Spectator opines:
One of the things the market seems to fear about a bailout is inflation due to the staggering price tag. Even if the government recoups some of its purchases when the market stabilizes, as bailout proponents argue, the spending outlays will be done immediately, requiring a huge increase in the debt limit that’s in the current plan.
…
So a substantial indirect effect of the bailout will be higher prices for food and gasoline, and this will probably hit ordinary households sooner than many politicians expect. When speculators expect the dollar to fall or be volatile, they immediately try to hedge an unstable currency through buying commodity futures. Thus, last week saw a big spike in oil prices, which had been steadily declining over the last few months. Other commodities, notably gold, also shot up. Corn and wheat prices, already boosted because of ethanol mandates, will also likely shoot up in response to a falling dollar.
I’m still pessimistic about the prospects of avoiding a bailout entirely.
[…] isn’t so “shockingly large”, you know (it’s just a “really big number“). It’s a “revenue problem” not a “spending problem”, after […]
Now that the Senate has passed the 700 billon bailout has McCains destiny been sealed?
Interesting, thanks. It’s definitely some more insight, but I would disagree with the conclusion at the end…which seems tied directly to the author’s ideology. Namely, that regulation and government are bad. Pointing to this scenario and ignoring the rest of the contributors is a little disingenuous, but the overall point to the facts the person outlines…those are very relevant.
Chris – Regarding what I was saying earlier (via The Agitator) check out what this guy found in the 1999 NYT.
“Hopefully he can inject that into the Dow and reverse what is likely to get worse.”
I agreed with Tim Cavanaugh at the time, and so far I still do:
“Even through the combative tone, the finely calibrated inanity of Paulson’s comments remains a thing of beauty. It’s a healthy market when prices go up, regardless of the potential value of the asset. It’s a market failure when prices go down, even though they’re going down specifically because we now know the asset was overvalued.”
LOL. Ok.
Chris:
I see no reason to worry about things that are beyond my control. The rest of the world that does, can bite me.
Yeah, fun. I liked Statistics too…the entire sequence.
I just don’t find too many people who even talk about this stuff…so…anyway, glad to see Sakaki is so confident. Hopefully he can inject that into the Dow and reverse what is likely to get worse.
I mean, worst daily loss ever? Not great news for anyone, regardless of ideology.
I’m actually glad the bailout bill failed. Because it means people have to start taking stock in the tangibles that they have.
Frankly, I get tired of people who are doing the “chicken little” dance. The sky is not falling.
Chris – fun? Ehn, I’d sort of prefer that a bunch of bad risk taking hadn’t just caused a big market correction, but you know.
Also, honestly, I’d rather talk about stereochemistry.
I hear ya Tim, not trying to frame your perspective…I was speaking in general terms based off of what you were saying.
It’s fun to talk about this stuff…
I don’t know anything about this subject, but I will also quote Yogi Berra:
“If you come to a fork in the road, take it.”
Well, I wouldn’t say my view is rose tinted so much as thinking that large systems like the economy have so many variables that things can go awry even without ill intent. Nobody’s out there looking at systemic risk, you know? And to quote Yogi Berra, it’s extremely difficult to make predictions, especially about the future.
Well, it wouldn’t be the first time negligence seeped through major business interests in the US…so, I have a less rose-tinted view of the economy in general…but it doesn’t matter (so much) at this point.
Knowing that the risk is high and knowing that the risk will increase are different. Also, guessing or not guessing that housing prices would continue their run up and being right was a 50/50.
If you’ve got an interest only ARM and the price of your house keeps going up, no problem, you can sell it when the rate goes up and get a different house, possibly rolling the profit into a down payment for a traditional 30 year fixed loan. But if the price goes down and you end up in a negative equity position and then can’t afford the payments after the rate adjusts…you are totally boned. The bank is boned too, but I suspect the banks assumed that the default swaps they’d bought would hold, or given the long history of bailouts, assumed that somebody would be along with a pile of money.
Anyway, I’m unwilling to say that there was any malice or even negligence really. Overly optimistic risk assesments and a weird myopathy about real estate prices, yes, but the unfortunate truth is that in the economy most of the bad things that happen can’t really be blamed on anyone and there are very few preventative measures. As they say, economists are very good at predicting the past.
Yeah, but you’re being VERY generous with your coulda’s there….
Applying for a loan you fill out paperwork, meticulous paperwork, and the people who lent the money KNEW there was high risk. Same goes for those who packaged things and counted on all of that risk not biting them in the ass as well. Again, not blame…but it sure as hell was dumb.
You’re right, of course, in your general description…but I’m not sure it applies to the sub-prime stuff. I think the people who applied for and accepted the terms of these loans were dumb as hell too. Americans have been living on debt for far too long and now that and the rest of the financial chicken coop is coming home to shit all over the economy.
Person B could have misjudged the risk, that happens sometimes. Person B could have an asset tied to the loan that Person A will surrender if in default, but that asset could decline in value, making the loan only partly recoverable. Or, Person B could have known that if the loan went bad Person C would be along with a big pile of cash to hand over.
I know…I was hesitant to use that term.
I think it was more of an unholy nexus than anything, but there were some big ingredients added by all players involved.
Using your analogy, I wonder why in the hell person B would take on so much risk in loaning his/her money out. It doesn’t make sense, but it happened on a GRAND scale.
“I hear the arguments from some that it was the people buying houses who are to blame because they couldn
Ignore the URL….the link therein is to a Harvard panel discussion on the economic situation. VERY interesting commentary and arguments being made, some of which seem a little ‘out there’ but are still worth hearing.
HARVARD (real player eventually needed)
The vast majority of loans are still good, but that doesn’t matter when they’re all bundled together and packaged up to back derivatives. You know that some portion of the loans securing your bond are higher risk, but you don’t know which…so
I think the truth of the matter is that pretty simply things go wrong and sometimes there isn’t anyone or anything in particular to blame. Take the credit default swaps that sank AIG, for instance. Now, in a normal environment they’re really fine because they’re set up so that the payout is less than AIG collects…well, defaults go up a lot and BOOM there goes AIG. There are a lot of factors like that, that are fine on their own but when they all go wrong at once…well, shit, systemic risk is a problem. Every player involved was making risk assessments based on what they knew, they missed. It happens.
Regarding F&F, well, they did have a lot of subprime backed bonds. Which is certainly somewhat riskier than more traditional investment grade paper. Although Citi saying they seemed well positioned to weather the storm is a little sadlarious at this point. I do apologize, though, for having my facts a little confused. I’m not a real economist anyway, so I guess I have an excuse.
Anyway, buying up sub-prime backed bonds also contributed to the availability of subprime mortgages – bond prices go up, people want to sell more of those bonds, etc. Bloomberg put an article on this out not too long ago. But, you’re right, the losses aren’t going to be huge and their capital position is more to blame than anything, but so it goes. That article I just linked is actually a pretty good explanation in mostly straight forward language, which is nice, I don’t really have a good understanding of a lot of the arcane debt instruments either.
Detroit needs to find another sector to grow into…I was there over the summer, and that place looks like Khost, Afghanistan when compared to a bustling economic powerhouse like….Tijuana, Mexico. Seriously, that city is depraved.
Tim, I’m looking to sort out this mess somewhat so you’re helping a lot. I hear the arguments from some that it was the people buying houses who are to blame because they couldn’t afford to do so. Then, I hear that it was the lenders who gave them the money that are to blame. Then, I hear that it’s the Fed because it lowered the rate to such a low point that is made it impossible to resist buying a home (hehe). Then, it’s the banks who decided to take on all of the risk and package the loans into packages that they could then trade (as securities?). Then, the economy is to blame because oil went through the roof, costs went with oil and the dollar plunged in the opposite direction. So, people had less purchasing power with the same dollars they had bought their homes with.
I imagine it’s an unholy mixture of all of that, but surely there is a place where more blame can be placed. I’m not looking to find THE sole reason, but I do think that blaming your average home buyer for going in over their head is a bit off of the mark. Average Americans are not experts in finance or investments, but they do their best with what they have. They also rely on what is offered them–basement rate loans (ARM’s, etc) offered by lenders. Now, a lot of lenders are subject-matter experts (one would hope) but they’re also pushing loans as business. What really gets me is how massive banks and corporations who, presumably, have armies of experts in finance, investment, and business….get themselves into this hole.
So I guess I’m blaming the entire situation, but I think that a heavier wag of the finger can be given to the banks because…one would think…they know better.
I also forgot to say that I think you’re wrong on Freddie and Fannie. Due to their status, which is/was wrong (profits to stockholders, losses to public) they were tightly regulated. They also faded from the scene after expanding in the 1990’s…just as real estate was taking off. Why? Because regulators put temporary restraints on F & F that slowed their lending (again, just as things were taking off). They couldn’t do sub-prime lending either, nor could their loans go to people who didn’t meet the strict standards (i.e. large downpayment and meticulously detailed income). They had little to no impact on this current situation because they were not allowed to play. The vast majority of F & F loans are good loans…
…Unfortunately, the magnitude of the burst bubble hit them too. They were going to hit eventually because of the scope of the decline in real estate and because of the sheer quantity of loans they underwrite (5 trillion bucks worth I think). So, EVEN the loans F &F gave out (strict requirements) were turning up sour as things really began to get bad. The other reason they had trouble is because they haven’t been required to put up a lot of capital…so as their assets decreased in value, they were soon under water.
In any case, my point is that F & F were doing bad things in some cases, but none of them had any real impact on the situation we’re in now.
Ted – Yeah, bailing out Detroit is just straight graft. Detroit should learn to make cars people want.
Chris – Well, the Fed Funds and Discount rates have less to do with mortgage rates than you might think*, but relative looseness probably didn’t help a ton. Of course, tightening when you’re about to hit a recession doesn’t help either…just ask Zombie Herbert Hoover.
So the Fed is always in kind of a war with itself – price stability versus economic growth owing to a mandate that tells them they should do both. Please note that these are sometimes, but not always, mutually exclusive goals. It’s like clash of the titans, and sometimes they screw the pooch. This is why Friedman (Milton, not Thomas) suggested replacing the fed with a rule for 3% growth in the money supply per year…problem is measuring monetary aggregates is damn near impossible. Some of the new chain weighting techniques and inflation targeting aren’t too dissimilar from that idea in philosophy or intention, but the implementation is a lot different.
* A lot is going to depend on fixed versus floating and whether or not the loan is interest only or straight amortizing and the loan term. A 30-year fixed rate is going to be costed on something like the over night market swap rate, whereas a floating rate loan might be, say, priced on 90 day LIBOR. Those rates are market determined in markets that are related to, but not the same as, the treasury rates that the Fed influences. Fed Funds is what banks lend to each other at, and is what the Fed targets through the OMC. Discount rate is what it costs to borrow from the Fed. These rates will, of course, influence what banks charge but how the bank determines the Cost of Funds and therefore the spread is going to be a bigger factor. And, here we can see why making money in a market that’s dominated by straight amortizing 30 year assets can be pretty fucking hard. In 2036 will the rate environment even resemble the rate environment in 2006 when I bought my house? I doubt it.
Ok…but what role did the Fed have in propping it all up with low interest rates? It seems that Fannie & Freddie loans that we’ve got on our hands are mostly good and will pay themselves off over time…not true with some of these companies who don’t even know what they’re sitting on.
Thanks for the explanation.
I’m definitely against bailouts in principle, but rescuing the financial sector makes a lot more sense to me than bailing out Detroit. We’ve been busy with the proposed $25b in government loans to American automakers over at TTAC.
Bailout Watch blog series
Fannie and Freddie were quasi-private government entities before the take over, and at root owned a vast majority of the mortgages in the country. I’ll point to Arnold Kling, but the gist is that Freddie was expected to perform a certain amount of work providing low-income housing. In 2003 the new CEO expanded into buying loans with lower down payments – riskier loans. By buying up riskier loans and absorbing the higher loss rate Freddie was in a bad position when the housing bubble burst.
Securitizing those higher risk loans made them more available on the market, and like anything you start getting more marginal participants in the market…yadda yadda. So you’ve got that going on, which is mostly the result of regulatory agency securitization of high risk loans. On top of that keep in mind that mortgage interest is tax deductible, which in and of itself encourages people into buying.
Then when prices started declining because, well, that happens sometimes Freddie’s position in high risk loans with low capitalization didn’t help them as the default rate increased when interest rates finally went up. I mean, nobody who should really own a house takes out a 5-year ARM with zero down payment. The easy availability and securitization of those loans also encourages otherwise sound buyers to buy more house than they need.
Anyway, you can see how the regulatory environment influences behavior.
asuo insider … great comment about the nations financial situation…
It makes perfect sense……….700 billion is a big number……almost as big as a zillioncagiollion. Yea, I think they made the right decision. It may be more effective to to wear a blindfold and throw a dart at a board with other numbers that sound equally big if not bigger.
There is only one thing I’m going to say on this:
Reinvigorate the economy by buying booze, guns, ammo, and cheese.
A bubble created by government pressure to increase the rate of home ownership? Please explain that one.
I’m saying that the people who created this situation were allowed to run amok. Whether it’s regulation, regulation-lite, or some other adjustment…they need to be hemmed in.
I think the theory that regulation makes things worse interesting given that this happened because of deregulation. More complex or not, something needs to be done when it comes to your first paragraph. Especially seeing that the main point of that paragraph seems to be that no matter what, these assholes are going to screw us and the system. If that’s true, screw the bail out and regulation…let everything burn. Maybe a fire-sale and a slow climb out of a deep hole will change that. Granted, your argument seems to mean that it’s a lose-lose-lose situation no matter what happens.
So I’m going to keep drinking.
Oh, and the other thing that needs to be done: Massive Regulation. I
That’s what is so laughable…they don’t know the worth of what they’re buying, they want to bail out the businesses and make the taxpayers pay for their mess, they want to keep it all secret…from everyone, even the courts. Oh, and Paulson wants a Get out of jail free card too.
It’s despicable.
At the very least, taxpayers should get their loans back PLUS INTEREST. More acceptable would be that AND ownership equivalent to the loan given. Something similar to what was done for AIG. They also need to stop rushing things as if things are going to crash tomorrow…or be solved tomorrow if they get their money.
Loans that can be salvaged through a restructuring should be dealt with so that people can keep making payments and foreclosures are mitigated.
$700b should also not be given out carte blanche. I’m not a huge fan of Chuck Schumer, but he made sense when he said that he thinks it would be better to give what Paulson says he needs in the immediate future ($50b per month) and then revisit the entire fiasco in January.
They also need to start freezing these business’ assets. Lehman Brothers is out of the picture and gone, and they’re still handing out 2.5 Billion in employee bonuses! What the hell? There is something fundamentally wrong there.
Oh, and any free-marketeer out there who is now begging for socialism should be tarred and feathered, maybe branded on their forehead, so that we know who they are when this mess is settled.
I have respect for free-marketeers who want the companies to burn, and I have respect for lefties who support the government stepping in to some degree. At least they’re consistent.
Oh, and the other thing that needs to be done: Massive Regulation. I’m not educated enough in economics to get into the details here, but if the taxpayers are going to bail these asses out, we need to regulate the living hell out of the market and keep them from operating with these new habits of theirs.
It’s funny, that people don’t really seem to get it when it comes to business and business interests being out for themselves and themselves alone…until something like this happens. I have a deep-seated hatred for these types of companies and individuals, and I think they should be spared no mercy. If the situation were reversed, they would surely show ‘us’ none.
So…did anyone else hear that Sam Dotters-Katz fired Athan as COS?