700 Billion Dollar Bailout

[SOawesomeness]

http://en.wikipedia.org/wiki/Economic_crisis_of_2008

It's wikipedia, but it's pretty accurate in summing up all the statistics in one pretty place. Nber used to have such a nice pretty website but they screwed with it the last time I visited it in the summer... so I can't find anything and I hate downloading documents.
But comparing it with the recession we had back in 2001-ish, I'd say it's more than a "decline in the Gross Domestic Product (GDP) for two or more consecutive quarters." "Depression [is] a recession that lasts longer and has a larger decline in business activity." (about.com) [note that there are lots and lots of different definitions, but they all mean the same thing.]

[sysadmin]

That's cool.  I want to make sure we're all using the same words to mean the same thing.  [also, I like citations and definitions in the Serious Business forum. ;)]

The technical definitions of recession and depression are interesting, but they're hard to calculate until, like, a year after the fact.  Current GDP growth is probably close to zero though, at least, according to the cites in that Wikipedia article.

But, and this is the hard part for me to swallow, the same people who are giving us the worst-case gloom and doom scenarios, are the same people who were supposedly responsible for not letting us get to this point.   My trust in their solutions is a bit ragged at this point.

We've gone through many rough patches, usually about every 8 years.   It's a cyclic nature.  I'm still trying to figure out why the bailout is strictly necessary though; but I suppose I'd need to study the lending habits of the banks that are not yet bankrupt.
But, considering that we've gone through the last several recessions without a major intervention, why is one inherently needed now?

[G.I.R]

Well, I see the Bail out did wonders for the stock market this week.  (The DJIA closed at 8415.19 today)

[K&K4ever]

Here is all I have to say about this bail out:

WHAT THE FUCK WERE THEY THINKING! Not only did they decide to stiff us with the bill, they did it while we were at Yaoi-con.  First thing I hear on the radio after starting the car to head back from Y-con, is a Talk Show host that I like, ranting on about how this was a shity idea.

[Steve.Young]

So...the bailout has been slow to show any signs of improvement of any kind.

The stock markets have crashed another 10% recently.

The economy is SO BAD, that OIL is dropping like a brick in Jupiter's gravity due to low consumer demand. OPEC can't even cut production to jack/float prices anymore, that is how bad it is.

The Asian and European markets are in a state of flux, as investors worry about the global market as a whole.

Opinions? I honestly thought it was a bad idea. The whole fundamental basis of our economy is competition. Letting weak institutions fail allows those who are strong to survive and those who are innovative to rise up and succeed.

These bailouts are not the "New Deal", they aren't going to fix our problems, and in the long run I think it hurts us more as we didn't restructure our financial institutions just put a large band aid over them.

[Kazuko]

Here is all I have to say about this bail out:

WHAT THE FUCK WERE THEY THINKING! Not only did they decide to stiff us with the bill, they did it while we were at Yaoi-con.  First thing I hear on the radio after starting the car to head back from Y-con, is a Talk Show host that I like, ranting on about how this was a shity idea.

woooah calm the F down with the F bombs we arent allowed to use that crap anymore Censor your swearing please

as for this bailout I have no idea anymore...Im just gonna ride it out till the end

[Mizuki]

Here is all I have to say about this bail out:

WHAT THE FUCK WERE THEY THINKING! Not only did they decide to stiff us with the bill, they did it while we were at Yaoi-con.  First thing I hear on the radio after starting the car to head back from Y-con, is a Talk Show host that I like, ranting on about how this was a shity idea.

Watch your language, I don't want to warn again.

[HarpB]

we'll manage, but its also concern for the future generations. Keep piling more and more depth on ourselves is not a good way to run the country.
Also paying taxpayers money to the big companies only makes the rich, richer and the poor, poorer.

[Mizuki]

Okay guys, I put in the rules, none of this one worded agreement for a quote. I really don't want to have to go through each thread and delete these posts.

[Nyxyin]

Part of the problem with the economy is that economics isn't really a science.  None of the experts really know what they're doing.  The people look at what happens and make up stories about why they might've happened (stocks dropped X on Y fears or gained Z because of stats W and hopes x), and they seem to mostly get lucky in that it doesn't matter most of the time.

The fact that there's a bailout now suggests to me that (a) the government is corrupt or (b) they're clueless and scared.  Generally, I find that ignorance is a more likely explanation than evil.  The bad banks sold mortgages to other banks that sold mortgages to banks internationally and so on.  The experts don't really know what would happen to the world economy if the subprime banks are allowed to go under, and so they believe it's worth bailing things out so they don't risk collapsing the rest of the world.

Added to that, the experts do know that money, whether it's being represented by the paper bills or the electronic digits in a bank account, is actually more of a religion than anything else.  There's no gold in the vaults backing up all those pieces of paper and electronic digits.  It's all based on faith in the government's money policy.  Real resources are easy: conservation of mass prevents things from vanishing.  Faith, however, can just disappear without a trace, and that's scary.  As long as people have faith in the way things currently work, the experts believe that things will keep working.  Their theories are all based on historical models.  But, if certain key banks go under, that might shake the faith of a whole lot of people, as well as many other banks in other parts of the world.  The experts don't know seem to what will happen if people lose faith, and it looks like they're afraid to find out -- to the tune of $700B.

Anyways, back to the bailout, which they're blaming on the subprime mortgages...  Personally, I blame outdated the tax code for the subprime mortgages.  Why do people still get a mortgage deduction to buy a house?  Because of the mortgage deduction, and because mortgages are usually the lowest priced loans on the market, accountants have been preaching that debt is good.  People say over and over again to take out the largest loan you can afford and that it's not useful to buy homes in cash.  This seems to be the wrong kind of attitude for the tax code to encourage.  Going into debt is buying something on the faith that you can afford it eventually.  If something goes wrong (loss of job, loss of health, act of God), then the debt holder is in trouble.  So, people start by taking out larger mortgages, and in taking out larger and larger mortgages, they think they can afford more expensive homes.  Because mortgages were cheaper and the lenders were getting looser with their mortgages due to higher and higher demand, everybody everywhere thought they could afford more.  Unfortunately, there's only a very limited pool of land -- especially in the Bay Area -- so it only forced prices to go up.  That forced building material to go up, builder labor to go up, and so on.  Some people figured out earlier that they just can't afford that much house, while others have one last leap of faith and grabbed lower-rate adjustable mortgages to get into a house just out of their normal reach.  Now, oil goes up, and inflation kicks in, so the Fed raises interest rates.  The adjustable rate folks had faith and counted on mortgage rates staying low.  Uh oh.  Mortgages rates go up, housing prices go down, and they find that nobody has enough faith in the value of their house to buy it nor enough faith in their ability to pay off their mortgage to refinance them into a more stable fixed-rate mortgage.  They lose their house.  Banks lose faith in them.  Investors lose faith in the banks.  Bank sells off house for cheap to appease investors.  Buyers in that market lose faith in the value of the other houses in the neighborhood.

So, I think it's possible that all that happened because people wanted to take advantage of the mortgage deduction.  More fundamentally, I believe that the mortgage deduction is unnecessary (or at least outdated) intervention into the free market economy.  The $700B that taxpayers are paying now might be the combination of all those mortgage deductions that taxpayers have been not paying all along.  In a way, there's almost a certain fairness in the system if we view things this way.  Well, it's at least as fair as Social Security, in which younger workers aren't going to see any worthwhile benefits from all the taxes they're paying into the system, at any rate...

Of course, even if I might be right, this one factor would at most be an infinitesimal drop in the bucket of all the ways the economy is messed up and based on nothing more than lots and lots of faith all around.  One thing that's been happening is that younger people are having more and more faith in themselves, and that's going to compete with faith in money, especially since we've been spending so much in entertainment.  Why would anybody pay $10 to go see a movie if there are enough free YouTube videos and free podcasts to keep people sufficiently entertained?  Why buy a book if a few of the millions of free blogs and Internet forums are just as interesting and possibly more relevant because they stay up to date?  Why buy RIAA music if every teenager can make their own on a Mac?  And, the people posting to forums and making free YouTube videos, podcasts, blogs, and music are going to have that much less time to go consume paid entertainment too.  A bunch of actual money will disappear and turn into social capital on the Internet.  It will probably turn out to be a good thing in the long run, but it'll probably be rather painful getting there.

The question I have is... $700B bailout or not... can the government can really help or hinder the market by very much for very long?  How much can a few people in government really do when there are billions and billions of consumers, all economic forces in their own right, behaving in unpredictable ways?

Finally, the $700B is supposed to be a loan, isn't it?  Isn't the plan to eventually get that $2300/person back, plus interest?  Isn't that what Obama promised?  It'll take a very long time to work, of course, but it seems that we can't stop the $700B from leaving.  Still, I think we should remind the Democrats every now and then that they promised that it's just a loan, and we want to be paid back eventually.

[PyronIkari]

Part of the problem with the economy is that economics isn't really a science.  None of the experts really know what they're doing.  The people look at what happens and make up stories about why they might've happened (stocks dropped X on Y fears or gained Z because of stats W and hopes x), and they seem to mostly get lucky in that it doesn't matter most of the time.

No, it is pretty scientific. It follows the same theoretical ideas as psychology. Trends are scientific and how they work follow themes. So unless you're saying human psychology and trends are "not scientific" then... you're totally wrong about this. How and why the economy fell isn't a mystery.

People know why the economy is failing right now. It's due to major mistakes made by lenders and home owners. Financing isn't a big mystery. Your blind statement is along the lines of "If this was scientific, we could have prevented it" right? It's true, we could have prevented it, if we saw it coming, and as a whole, business, lenders, and owners took the correct action to prevent it from happening. Psssst... people aren't that smart. It's the same as saying "War can be prevented if..." Yes, it can be prevented... but people would need to follow a path that prevents war from happening.

In other words... people would have to not make incorrect decisions, and not follow what they want to do.

Here, I'll explain it again on a smaller scale. A man goes bankrupt. The man could have prevented himself by going bankrupt if he was smarter about how he spent his money. If he didn't buy x things, if he didn't waste money on y, if he saved money accordingly... but he made incorrect decisions and the end result was bankruptcy.

Added to that, the experts do know that money, whether it's being represented by the paper bills or the electronic digits in a bank account, is actually more of a religion than anything else.  There's no gold in the vaults backing up all those pieces of paper and electronic digits.  It's all based on faith in the government's money policy.  Real resources are easy: conservation of mass prevents things from vanishing.  Faith, however, can just disappear without a trace, and that's scary.  As long as people have faith in the way things currently work, the experts believe that things will keep working.  Their theories are all based on historical models.  But, if certain key banks go under, that might shake the faith of a whole lot of people, as well as many other banks in other parts of the world.  The experts don't know seem to what will happen if people lose faith, and it looks like they're afraid to find out -- to the tune of $700B.

Wait wait wait... what are you basing this on? There's no gold in vaults backing up the pieces of paper? The world will disagree, and the forts holding the gold would also disagree. For every dollar bill that exists in the US, there has to be an equal amount in storage by the US gov't. Just like at a casino, for every chip that is issued, there has to be a monetary representative in its vault. Otherwise the Casino is committing fraud by issuing out non valued monetary denominations into the public. If every person turns in their chips to a Casino, and a Casino cannot pay these people, then the Casino is committing fraud.

If we follow what you are saying. A gov't can just print an unlimited amount of money, and spread it amongst the people, never reaching an economical down fall. What money is an issue, here's more, and we'll just pretend that things are better. This causes multiple problems though. This will further drop the value, since the value is unimportant due to the representation not meaning anything... and this also leads to the gov't losing absolutely all integrity and worth.

Anyways, back to the bailout, which they're blaming on the subprime mortgages...  Personally, I blame outdated the tax code for the subprime mortgages.  Why do people still get a mortgage deduction to buy a house?  Because of the mortgage deduction, and because mortgages are usually the lowest priced loans on the market, accountants have been preaching that debt is good.  People say over and over again to take out the largest loan you can afford and that it's not useful to buy homes in cash.  This seems to be the wrong kind of attitude for the tax code to encourage.  Going into debt is buying something on the faith that you can afford it eventually.  If something goes wrong (loss of job, loss of health, act of God), then the debt holder is in trouble.  So, people start by taking out larger mortgages, and in taking out larger and larger mortgages, they think they can afford more expensive homes.  Because mortgages were cheaper and the lenders were getting looser with their mortgages due to higher and higher demand, everybody everywhere thought they could afford more.  Unfortunately, there's only a very limited pool of land -- especially in the Bay Area -- so it only forced prices to go up.  That forced building material to go up, builder labor to go up, and so on.  Some people figured out earlier that they just can't afford that much house, while others have one last leap of faith and grabbed lower-rate adjustable mortgages to get into a house just out of their normal reach.  Now, oil goes up, and inflation kicks in, so the Fed raises interest rates.  The adjustable rate folks had faith and counted on mortgage rates staying low.  Uh oh.  Mortgages rates go up, housing prices go down, and they find that nobody has enough faith in the value of their house to buy it nor enough faith in their ability to pay off their mortgage to refinance them into a more stable fixed-rate mortgage.  They lose their house.  Banks lose faith in them.  Investors lose faith in the banks.  Bank sells off house for cheap to appease investors.  Buyers in that market lose faith in the value of the other houses in the neighborhood.

This is half true, but half false. It has nothing to do with taxes. Where do tax laws even exist in this. The idea of credit is what allows people to do things. For base purchases. Mortgages are no different.

Banks push things like this, because... that's how bank's make money. Banks want people to take out loans, that way the Bank makes money through interest. The idea is that... people have to pay it back. When people fail to do so, all at the same time, a problem occurs. See this returns to the first part of this. It is a science. These people took out loans and mortgages that they couldn't pay back at a large amount. These individuals made mistakes, and the bank was doing their job in making loans and financing mortgages. So tons of money was loaned out, and individuals failed to pay them back. Banks had no way of absolutely knowing this was going to happen, so the individuals made mistakes. This falls back on banks, which in turn hurts the rest of the economy.

*Side note... I wonder where you're getting a lot of these misconceptions from*

So, I think it's possible that all that happened because people wanted to take advantage of the mortgage deduction.  More fundamentally, I believe that the mortgage deduction is unnecessary (or at least outdated) intervention into the free market economy.  The $700B that taxpayers are paying now might be the combination of all those mortgage deductions that taxpayers have been not paying all along.  In a way, there's almost a certain fairness in the system if we view things this way.  Well, it's at least as fair as Social Security, in which younger workers aren't going to see any worthwhile benefits from all the taxes they're paying into the system, at any rate...

It was more than that. It was more about bad decisions on both parts.

Of course, even if I might be right, this one factor would at most be an infinitesimal drop in the bucket of all the ways the economy is messed up and based on nothing more than lots and lots of faith all around.  One thing that's been happening is that younger people are having more and more faith in themselves, and that's going to compete with faith in money, especially since we've been spending so much in entertainment.  Why would anybody pay $10 to go see a movie if there are enough free YouTube videos and free podcasts to keep people sufficiently entertained?  Why buy a book if a few of the millions of free blogs and Internet forums are just as interesting and possibly more relevant because they stay up to date?  Why buy RIAA music if every teenager can make their own on a Mac?  And, the people posting to forums and making free YouTube videos, podcasts, blogs, and music are going to have that much less time to go consume paid entertainment too.  A bunch of actual money will disappear and turn into social capital on the Internet.  It will probably turn out to be a good thing in the long run, but it'll probably be rather painful getting there.

This has jack nothing to do with anything. It's just wild theory that has absolutely no basis. Show me how book sales or movies have been in anyway losing in money due to youtube. Show me any figures showing that movie go'ers have decreased due to the internet showing videos uploaded by the general public.

You can't... because it's not true. This is the same theory that, music companies have lost money due to downloading. The whole napster fiasco a decade ago ring any bells?

The question I have is... $700B bailout or not... can the government can really help or hinder the market by very much for very long?  How much can a few people in government really do when there are billions and billions of consumers, all economic forces in their own right, behaving in unpredictable ways?

Unpredictable? There you go again. There are trends, and they exist. Things happen and they happen for a reason. Let's just say, in theory you are right. Then all econ classes for the past few centuries have all been a lie. People that work in the gov't based on econ degrees are all just guessing and that all of them are working off baseless workings. Everything is all a lie, and the economy truly is random, therefore no one should be attempting this stuff.

Economy is a math, and a social theory. It's based on the individual actions. It's not hard to follow.

Finally, the $700B is supposed to be a loan, isn't it?  Isn't the plan to eventually get that $2300/person back, plus interest?  Isn't that what Obama promised?  It'll take a very long time to work, of course, but it seems that we can't stop the $700B from leaving.  Still, I think we should remind the Democrats every now and then that they promised that it's just a loan, and we want to be paid back eventually.

And this is how economy works. The circulation of money.

:::sigh:::

And then you had to go and make this a political party debate by pointing out the "democrats". It makes me wonder if you actually follow any of this, or are just spouting out theories you have about how the world works.

[Nyxyin]

There's no gold in vaults backing up the pieces of paper? The world will disagree, and the forts holding the gold would also disagree. For every dollar bill that exists in the US, there has to be an equal amount in storage by the US gov't.

These days, Santa Claus is more real than the gold standard.  The gold reserves are just reserves and do not back up the pieces of paper.  The idea that every dollar bill is backed up by an equal amount of gold has been outdated since 1971 at the latest.  Look up "gold standard" and "fiat money".  We've been more off than on the gold standard since 1914.  For example, http://economics.about.com/cs/money/a/gold_standard.htm says, 'Almost every country, including the United States, is on a system of fiat money, which the glossary defines as "money that is intrinsically useless; is used only as a medium of exchange".'

If we follow what you are saying. A gov't can just print an unlimited amount of money, and spread it amongst the people, never reaching an economical down fall.

The first part is true: governments can just print unlimited amounts of money.  The "never reaching an economic downfall" part is utterly false.  That's what makes them think hard before printing money.  Unfortunately, it doesn't stop them.

What money is an issue, here's more, and we'll just pretend that things are better. This causes multiple problems though. This will further drop the value, since the value is unimportant due to the representation not meaning anything... and this also leads to the gov't losing absolutely all integrity and worth.

Yes, exactly.  It's based on faith in an integrity and worth that may already no longer exist.  The only reason we haven't crashed is that none of the other influential countries are on the gold standard either, so countries prop our currency up partly because they have some belief in us and partly because they're also scared about what would happen if people lost faith in the US.  When the US government puts too much money into circulation at once, other governments often match to keep the US dollar from collapsing.

*Side note... I wonder where you're getting a lot of these misconceptions from*

A combination of economics courses and recent news articles about the bailout.  I take both sources with a grain of salt, but I don't think it's any worse of a basis for discussion than other people have, and it's more reasonable than a belief in the gold standard.

[cortana]

Ok, ok. both you and crack are very very misinformed. Let me try to explain things here.

The basis of the current economic problems are quite simple. People got greedy, and stayed greedy. How we actually GOT there, is quite complex, and involves a ton of derivative financial instruments, each of which increased the risk of failure, without making it apparent to the end investor. Many of these instruments were based around Mortgage-backed Securities (MBS), which when the real estate market entered its cyclical downturn, and interest rates spiked along with a spike in foreclosures based on that, many of these MBS suddenly failed to generate income, catching a lot of pension and hedge funds out in the cold.

Here's how the greed works:
a: you want to buy a house, so you shop around and get the best mortgage you can find. People expected homes to appreciate in value over a short period (~5 years), and planning on that, got ARM loans and interest-only loans in order to buy the best house they could manage.

b: mortgage brokers sell the leads on the loan to partner banks, who make the mortgage, and pay the broker a fee for finding the borrower. The bank loads fees on top of the loan at the front-end, in order to make some quick money, then loans the money to the borrower.

c: the bank sells the loan to a larger bank or to FNMA / FHLMC, and gets it off their books, so they can make another loan and make more fees on top of that loan. The entire goal of their lending process was to make the upfront points/fees, not to hold the loan for interest income... so they didn't care if the borrower was able to pay.

d: FNMA/FHLMC/large banks pool and package these loans into a big pile of securitized debt, and sell tranches (slices) to investors, who expect income based on the investment, risk, and rating of the debt. This is fine, too. even if you have some foreclosures, it still works ok. The best rated tranches get paid first, and it trickles down the pyramid to the worst rated mortgages, but in general, everyone gets paid.

e: here comes the nail in the coffin. Brokerages, large banks, and some other orgs take these tranches that they've purchased, and sell securities BASED ON THEM. So now you have a double pyramid, and when people stop paying for their loans, suddenly these secondary pyramids of risk begin to default on payment to investors, getting them quickly down-rated by the ratings analysts.

f: AIG and other large insurance companies have been taking money to insure investors against this risk, but these secondary tranches aren't well understood and are rated far less risky than they should. This insurance is called a Credit Default Swap. These securities start failing, and AIG(for example) suddenly has to pay out huge insurance policies to investors... which depletes their capital and makes them insolvent... then the bailouts start.

--

Now the 'gold standard'. The US's currency hasn't been backed by precious metals since 1933. This is the difference between 'hard' and 'fiat' currency. As long as the nation's credit and reputation remains pristine, this fiat currency is as good as hard currency. In order to maintain 'hard' currency, we needed a stable price on gold, so that fluctuations in the precious metals market didn't massively devalue or overvalue the dollar. This brings on the gold standard, in which we stockpiled massive amount of gold (Fort Knox), and used our reserves to stabilize the price of gold WORLDWIDE. In 1971, President Nixon took us out of that business, and let the world gold market drive itself, which it's done since then. This was when we left the 'gold standard', even though our currency hadn't been backed by gold for almost 40 years.


--

Why do we give people a tax deduction on their home mortgage interest? That's simple. We do that to encourage people to buy and own a home, which builds wealth and increases fiscal security, so long as they do it in such a way as they can pay for their home and retain it.


Ok, this is enough finance / economics / history lesson for now. If you want to know more, ask. I'll detail it out for you.

[ewu]

Ok, ok. both you and crack are very very misinformed. Let me try to explain things here.

No need to insult people....it does not add to the discussion and only leads to heated, aggressive posts.

[cortana]

Point taken, Crack is a good friend of mine, so he won't care if I bust his balls a little. I think misinformed is a kind word to use. I don't mean it out of ill will, but when people spread misinformation as fact, it's bad for everyone.

[ewu]

I concurr:) people are less receptive to correction and education, actually anything when you say they are wrong, let alone insult them...its funny how that works:)

[cortana]

Sometimes though, people need a smack with the Board of Education (2x6). That comes later, in case someone decides to tell me that what I've said is somehow wrong. (and if they do, i will at least investigate their allegation before flying off the handle).

[ewu]

Korematsu is a good one too...

[ewu]

wait....maybe we should scratch that....too much thoughts on the KKK/flag thread:)

edit: *facepalm* I just got the Board of Education thing.....2 days after it was posted.... 2x4 not 2x6!

But honestly this discourse does illustrate the the nebulous nature of the public's knowledge and how the current advice is doing nothing:P

[PyronIkari]

wait....maybe we should scratch that....too much thoughts on the KKK/flag thread:)

;_; Damn it Scott... So much for dragging this out and baiting things so she disproves herself.

Thanks ;_;.