Paulson PC on Bailout

[Dan]

OK PPP bretherin, I just heard the Paulson press conference and have no idea if what he saying is good or not. Help me to understand - I'm no money economy guru guy that can't even spell liquidity let alone pronounce it.

 

They're changing the rules of the bailout? Putting money into banks, investors and credit card companies? Seems like they're saying the way to help out the country is to keep us all in debt? I still don't understand how if they gave me money to pay off my debts and I then gave that money to the banks - paying off my mortgage, credit cards, car why that wouldn't be good for all. I would be out of debt. The banks get the money they need. We're all better. What they're doing seems to only help the banks but does nothing for me (the consumer).

 

Like I say help me understand what's going on.

[/dev/null]

Perhaps the following football related analogy will clear things up:

http://i183.photobucket.com/albums/x237/ch...hapa/bohica.jpg

[Dan]

Perhaps the following football related analogy will clear things up:

http://i183.photobucket.com/albums/x237/ch...hapa/bohica.jpg

That's what I was thinking.

[molson_golden2002]

OK PPP bretherin, I just heard the Paulson press conference and have no idea if what he saying is good or not. Help me to understand - I'm no money economy guru guy that can't even spell liquidity let alone pronounce it.

 

They're changing the rules of the bailout? Putting money into banks, investors and credit card companies? Seems like they're saying the way to help out the country is to keep us all in debt? I still don't understand how if they gave me money to pay off my debts and I then gave that money to the banks - paying off my mortgage, credit cards, car why that wouldn't be good for all. I would be out of debt. The banks get the money they need. We're all better. What they're doing seems to only help the banks but does nothing for me (the consumer).

 

Like I say help me understand what's going on.

The dreaded "Trickle Up" theory of economics! Great question. It's either that A) it wouldn't work fast enough

B) The banks would rather just take the money themselves and they have the influence to make that happen C) Maybe it has something to do with inflation(?) D) People are worried illegal immigrants would get something free

[bills_fan]

The dreaded "Trickle Up" theory of economics! Great question. It's either that A) it wouldn't work fast enough

B) The banks would rather just take the money themselves and they have the influence to make that happen C) Maybe it has something to do with inflation(?) D) People are worried illegal immigrants would get something free

 

 

In theory, trickle up solves the problem. In practice, there is not nearly enough money to go around to accomplish this (printing enough is not an option), as there is far too much debt. Hence, the reason I suggested eight weeks ago letting people tap their 401(k)s, tax free, to accomplish this.

 

EDIT: Realize that at the end of 2007, US holdhold debt (mortgages, credit cards and auto loans) was almost $15 trillion. The entire US national debt (which has, literally, doubled in the last 8 years under Bush) is $10.2 trillion.

[The Big Cat]

OK PPP bretherin, I just heard the Paulson press conference and have no idea if what he saying is good or not. Help me to understand - I'm no money economy guru guy that can't even spell liquidity let alone pronounce it.

 

They're changing the rules of the bailout? Putting money into banks, investors and credit card companies? Seems like they're saying the way to help out the country is to keep us all in debt? I still don't understand how if they gave me money to pay off my debts and I then gave that money to the banks - paying off my mortgage, credit cards, car why that wouldn't be good for all. I would be out of debt. The banks get the money they need. We're all better. What they're doing seems to only help the banks but does nothing for me (the consumer).

 

Like I say help me understand what's going on.

 

It's also been revealed that the banks are using bailout money for bonuses, employee incentives/perks, and dividends for more bank acquisitions.

[molson_golden2002]

In theory, trickle up solves the problem. In practice, there is not nearly enough money to go around to accomplish this (printing enough is not an option), as there is far too much debt. Hence, the reason I suggested eight weeks ago letting people tap their 401(k)s, tax free, to accomplish this.

So can this problem really be "solved." Or are we just seeing an attempt to cushion the blow? I see that consumer spending is taking a major hit now. How much money would it take to pump that up along with paying the debt consumers already owe?

 

It looks to me like things really are going to get worse.

[Dan]

In theory, trickle up solves the problem. In practice, there is not nearly enough money to go around to accomplish this (printing enough is not an option), as there is far too much debt. Hence, the reason I suggested eight weeks ago letting people tap their 401(k)s, tax free, to accomplish this.

There's an estimated 115million households in the US. Now help me on my math, but if you give $100K to each household, is that $1.15 trillion or a little more than half what we're giving out to banks and companies? Granted $100K isn't going to get everyone completely out of debt, but it would do quite a bit.

 

I'm not actually suggesting we do this. But in my simplistic view of things, it just seems we're giving money to banks and businesses that have been screwing customers for years. And yet we're not doing anything to help the people that need it most.

 

Again, I'm not by any means an economist and am quite proud that I know little about banking. But, I don't like the fed giving $100's of billions of dollars to people that have a history of mismanaging their money, and then changing the rules that were agreed upon by Congress when they agreed to give them the money. It just smells bad. So, I'm hoping I'm missing something. But, I take the silence in this thread to mean that maybe I'm not.

[PromoTheRobot]

BOHICA

 

Basically Paulson is saying that the $700B bailout is now a $3.5 TRILLION bailout and they will need more $$$$. Ponderous.

 

PTR

[DC Tom]

There's an estimated 115million households in the US. Now help me on my math, but if you give $100K to each household, is that $1.15 trillion or a little more than half what we're giving out to banks and companies? Granted $100K isn't going to get everyone completely out of debt, but it would do quite a bit.

 

I'm not actually suggesting we do this. But in my simplistic view of things, it just seems we're giving money to banks and businesses that have been screwing customers for years. And yet we're not doing anything to help the people that need it most.

 

Again, I'm not by any means an economist and am quite proud that I know little about banking. But, I don't like the fed giving $100's of billions of dollars to people that have a history of mismanaging their money, and then changing the rules that were agreed upon by Congress when they agreed to give them the money. It just smells bad. So, I'm hoping I'm missing something. But, I take the silence in this thread to mean that maybe I'm not.

 

First off, they're not "giving" them the money, they're buying assets from the bank.

 

Second, the problem the banks have isn't non-performing consumer debt as much as securities backed by consumer debt that no longer have value. The difference is subtle, but important: if a bank holds your mortgage, and you don't pay, your mortgage is a worthless non-performing asset. If a bank holds a mortgage bond backed by your mortgage (among others), and the pool of mortgages stops paying, it not only makes the bond worthless but calls in to question all the other mortgage bonds out there. In other words, in a securitized world, if you don't pay your mortgage, you can effectively make mine worthless as well.

 

That has always been the real problem: the banks are holding assets that very, very, VERY suddenly became worthless (literally, in Bear-Stearns case, overnight.) When they're holding those assets as cash reserves - which is entirely legal for market securities - and those assets become worthless, banks can fail. Or worse: banks stop lending money, because they have none to lend...which is what happened a couple months ago that prompted this bailout.

 

Paulson's change of plans, I think, is stupid. It might be illegal - I don't know if the bill Congress passed specified the $700B can ONLY be used to buy nonperforming assets; if they did, Paulson's breaking the law. But infusing cash into banks in exchange for equity builds up the banks' cash position...but doesn't solve the problem that the banks still have assets on the books they have to write down. Taking an equity stake in banks while leaving those assets on the books means not only increased risk in the banking system, but increased government exposure to that risk.

[bills_fan]

First off, they're not "giving" them the money, they're buying assets from the bank.

 

Second, the problem the banks have isn't non-performing consumer debt as much as securities backed by consumer debt that no longer have value. The difference is subtle, but important: if a bank holds your mortgage, and you don't pay, your mortgage is a worthless non-performing asset. If a bank holds a mortgage bond backed by your mortgage (among others), and the pool of mortgages stops paying, it not only makes the bond worthless but calls in to question all the other mortgage bonds out there. In other words, in a securitized world, if you don't pay your mortgage, you can effectively make mine worthless as well.

 

That has always been the real problem: the banks are holding assets that very, very, VERY suddenly became worthless (literally, in Bear-Stearns case, overnight.) When they're holding those assets as cash reserves - which is entirely legal for market securities - and those assets become worthless, banks can fail. Or worse: banks stop lending money, because they have none to lend...which is what happened a couple months ago that prompted this bailout.

 

Paulson's change of plans, I think, is stupid. It might be illegal - I don't know if the bill Congress passed specified the $700B can ONLY be used to buy nonperforming assets; if they did, Paulson's breaking the law. But infusing cash into banks in exchange for equity builds up the banks' cash position...but doesn't solve the problem that the banks still have assets on the books they have to write down. Taking an equity stake in banks while leaving those assets on the books means not only increased risk in the banking system, but increased government exposure to that risk.

 

Of course, that bring us to the crux of the problem, if you were to use TARP funds to purchase the non-performing assets that the banks are holding as cash reserves...what price do you pay? Market? If you pay market, you will effectively wipe out the banks, because the market is effectively zero. The bankers themselves can't figure out what the asset is worth and they own it.

[GG]

First off, they're not "giving" them the money, they're buying assets from the bank.

 

Second, the problem the banks have isn't non-performing consumer debt as much as securities backed by consumer debt that no longer have value. The difference is subtle, but important: if a bank holds your mortgage, and you don't pay, your mortgage is a worthless non-performing asset. If a bank holds a mortgage bond backed by your mortgage (among others), and the pool of mortgages stops paying, it not only makes the bond worthless but calls in to question all the other mortgage bonds out there. In other words, in a securitized world, if you don't pay your mortgage, you can effectively make mine worthless as well.

 

That has always been the real problem: the banks are holding assets that very, very, VERY suddenly became worthless (literally, in Bear-Stearns case, overnight.) When they're holding those assets as cash reserves - which is entirely legal for market securities - and those assets become worthless, banks can fail. Or worse: banks stop lending money, because they have none to lend...which is what happened a couple months ago that prompted this bailout.

 

Paulson's change of plans, I think, is stupid. It might be illegal - I don't know if the bill Congress passed specified the $700B can ONLY be used to buy nonperforming assets; if they did, Paulson's breaking the law. But infusing cash into banks in exchange for equity builds up the banks' cash position...but doesn't solve the problem that the banks still have assets on the books they have to write down. Taking an equity stake in banks while leaving those assets on the books means not only increased risk in the banking system, but increased government exposure to that risk.

 

Never mind buying equity without shareholder approval ....

 

Always though buying bad assets is best way out, still do.

 

Injecting equity helps with immediate capital ratios, but by not removing bad assets you still leave possibility of greater losses down the road and not restoring confidence in the sector. But, by buying bad assets and strongly encouraging private capital infusions to restore balance sheets will eliminate many trouble spots.

[bills_fan]

So can this problem really be "solved." Or are we just seeing an attempt to cushion the blow? I see that consumer spending is taking a major hit now. How much money would it take to pump that up along with paying the debt consumers already owe?

 

It looks to me like things really are going to get worse.

 

 

Cushion the blow. The whole purpose of TARP is to try and buy time for deleveraging of assets to occur. Thats why everything is down...stocks, oil, gold, a different hedge fund goes belly up weekly...this is the great unwind of leverage. This will get far worse before it gets better (to use a football analogy, we're still in the 1st half). Most folks don't understand truly how bad off we really are.

 

The real underlying problem, that started the great unwind, is the declining value of housing, the underlying asset in all of this. That unwind has sparked a whole series of other unwinds. It also shined a big spotlight on areas of the financial system that could be catastrophic...CDS.

 

The only real solution is time, price discovery and deleveraging. Thats why, IMHO, in the near-term we have deflation across all asset classes. The Fed has greased the skids to try and keep the economy moving while the great unwind happens. But, if the Fed missteps, we will have massive inflation, as all their "greasing" is put into the real economy along with regular lending practices. Look at the Fed actions toward the latter half of next year, if they are removing money from the economy (or increasing bank reserves) they are doing the right thing and should be lauded for getting us through this. If not...buckle up.

 

Even with the Fed actions, there is one bubble left...if it goes, we're all f*cked....that bubble is US Treasury securities.

[bills_fan]

There's an estimated 115million households in the US. Now help me on my math, but if you give $100K to each household, is that $1.15 trillion or a little more than half what we're giving out to banks and companies? Granted $100K isn't going to get everyone completely out of debt, but it would do quite a bit.

 

I'm not actually suggesting we do this. But in my simplistic view of things, it just seems we're giving money to banks and businesses that have been screwing customers for years. And yet we're not doing anything to help the people that need it most.

 

Again, I'm not by any means an economist and am quite proud that I know little about banking. But, I don't like the fed giving $100's of billions of dollars to people that have a history of mismanaging their money, and then changing the rules that were agreed upon by Congress when they agreed to give them the money. It just smells bad. So, I'm hoping I'm missing something. But, I take the silence in this thread to mean that maybe I'm not.

 

 

Not a bad idea, as long as you mandate that the 100k must be applied to the reduction of debt (with enforceable penalties, such as garnishment of future wages). You would immediately add 1.15 tril to the national debt, but its debateable what TARP (and every other program) will add to it.

[molson_golden2002]

Cushion the blow. The whole purpose of TARP is to try and buy time for deleveraging of assets to occur. Thats why everything is down...stocks, oil, gold, a different hedge fund goes belly up weekly...this is the great unwind of leverage. This will get far worse before it gets better (to use a football analogy, we're still in the 1st half). Most folks don't understand truly how bad off we really are.

 

The real underlying problem, that started the great unwind, is the declining value of housing, the underlying asset in all of this. That unwind has sparked a whole series of other unwinds. It also shined a big spotlight on areas of the financial system that could be catastrophic...CDS.

 

The only real solution is time, price discovery and deleveraging. Thats why, IMHO, in the near-term we have deflation across all asset classes. The Fed has greased the skids to try and keep the economy moving while the great unwind happens. But, if the Fed missteps, we will have massive inflation, as all their "greasing" is put into the real economy along with regular lending practices. Look at the Fed actions toward the latter half of next year, if they are removing money from the economy (or increasing bank reserves) they are doing the right thing and should be lauded for getting us through this. If not...buckle up.

 

Even with the Fed actions, there is one bubble left...if it goes, we're all f*cked....that bubble is US Treasury securities.

So, is the Fed just pumping in money right now to cushion the deflationary aspect of the fall in housing and everytrhing that followed? And you are saying that as we find the bottom the fed should pull the money back out or else we get hit with a massive wave of inflation?

[/dev/null]

Not a bad idea, as long as you mandate that the 100k must be applied to the reduction of debt (with enforceable penalties, such as garnishment of future wages). You would immediately add 1.15 tril to the national debt, but its debateable what TARP (and every other program) will add to it.

 

What about people such as myself that were responsible with their personal finances, didn't borrow more than they could repay, and actually had the silly notion of saving a few dollars?

 

Do we get $100k, or just the unselfish patriotic feeling of paying for our fellow citizens

[molson_golden2002]

What about people such as myself that were responsible with their personal finances, didn't borrow more than they could repay, and actually had the silly notion of saving a few dollars?

 

Do we get $100k, or just the unselfish patriotic feeling of paying for our fellow citizens

I was thinking we could go take out a few more credit cards and max them out before the 100k gets here. Then you can pay it down. Think of the boost to consumer spending!

[Boomer860]

When do I get my free gas and TV ?

[DC Tom]

Of course, that bring us to the crux of the problem, if you were to use TARP funds to purchase the non-performing assets that the banks are holding as cash reserves...what price do you pay? Market? If you pay market, you will effectively wipe out the banks, because the market is effectively zero. The bankers themselves can't figure out what the asset is worth and they own it.

 

The banks can't define the worth of the asset because they are required by regulations to define it as "market value", and there is no market.

 

But that's not the only way of defining their worth. The assets are worthless as cash...but conservatively, as long-term assets, even assuming a high default rate and a six percent markup on 30-year treasuries, they're worth about forty to fifty cents on the dollar. And the bankers know that (that rough and dirty calculation above comes from both Ginnie Mae and Citigroup). But that calculation doesn't change the fact that the market value of those securities is still zero, because there is no market.

[ExiledInIllinois]

OK PPP bretherin, I just heard the Paulson press conference and have no idea if what he saying is good or not. Help me to understand - I'm no money economy guru guy that can't even spell liquidity let alone pronounce it.

 

They're changing the rules of the bailout? Putting money into banks, investors and credit card companies? Seems like they're saying the way to help out the country is to keep us all in debt? I still don't understand how if they gave me money to pay off my debts and I then gave that money to the banks - paying off my mortgage, credit cards, car why that wouldn't be good for all. I would be out of debt. The banks get the money they need. We're all better. What they're doing seems to only help the banks but does nothing for me (the consumer).

 

Like I say help me understand what's going on.

 

But, what happens if they give you the money and you go out and take a trip to Hawaii and buy a big screen TV?