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Archive for Saturday, October 4, 2008

Area economists say bailout right thing to do

October 4, 2008

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The nation's financial system has its bailout legislation.

Now, will it work?

Nobody knows for sure.

"It's not a sure thing, but I think the odds are a little better than 50-50," said Lloyd Thomas, professor of economics and department head at Kansas State University.

But passing the bailout bill was the right thing to do, said Thomas and Bob DeYoung, Capital Federal professor in financial markets and institutions at Kansas University. DeYoung said it would have been "shortsighted" for the bill not to be passed.

"Unfortunately it's a necessary thing. I wish it wasn't," DeYoung said.

On Friday, President Bush signed into law the bill passed by Congress, which allows the U.S. Treasury secretary to buy as much as $700 billion in bad mortgage-related securities. The so-called "toxic securities" were slowing the flow of credit in the U.S. economy and threatening to dry it up, bill supporters said.

The Treasury is investing in the assets and will sell them in the future, DeYoung noted. Generally, when the Treasury borrows money and increases the debt, there are no assets to be sold or gained back, he said.

"Whether that $700 billion will be able to pay off, nobody knows the answer," DeYoung said. "The final bill to the taxpayers will be far less than the $700 billion, and there's a small chance they will profit from it."

Any payback will take years, DeYoung said.

If there were no bailout and the federal government did nothing, it would have been only a few weeks before the average American would start noticing problems on Main Street, DeYoung and Thomas said. Banks wouldn't be lending among themselves and businesses would have trouble getting credit and finding the money to meet payroll and do regular business.

"It's too bad you have to reward the people who caused the problem, but I think the problem would be five to 10 times worse if you didn't," Thomas said. "This is the most dangerous thing in economics I've seen in my life, and I'm 66 years old."

To prevent similar crises, there should be more federal supervision of mortgage brokers and other mortgage lenders, which were behind many of the bad loans, DeYoung and Thomas said. Those financial institutions are not monitored and regulated the way banks and thrifts are, they said.

"You should have some regulation to make sure that the lending is done responsibly and that loans are not made to people who can't pay them off," DeYoung said.

"The great economist John Maynard Keynes used to argue that capitalism is the best system in the world by far, but occasionally it needs some government guidance," Thomas said.

Comments

staff04 6 years, 2 months ago

Bondmen, is your argument that Congress should not have acted?I have read every page of the bill and am very close to those who wrote it. Have you? I am disappointed at the Senate amendment, but on the whole the fundamentals are sound. I think you are making a statement backed by emotion, not backed by understanding. Feel free to correct me if I am off-base and you can give specifics of what makes the new law so bad that it warrants inaction.

Godot 6 years, 2 months ago

deafening silence from staff04. Partying hardy? or just flummoxed?

50YearResident 6 years, 2 months ago

George W Bush, bankrupt two businesses and now has bankrupt the United Stated of America.

bondmen 6 years, 2 months ago

Here is a short list of reasons America is in the financial situation it finds itself in currently: * -Fractional-reserve banking, which is inherently unstable and entirely a confidence game * -Congress for passing the Federal Reserve Act and creating the Federal Reserve, the third central bank in the history of the US * -Woodrow Wilson for using the Fed to finance World War 1 * -Benjamin Strong, the President of the Federal Reserve Bank of New York from 1914-1928, for inflating the money supply in the '20s to help out Great Britain which led to the Great Depression * -Herbert Hoover for his economic intervention from 1929-1932. He was not laissez-faire by any means. * -John Maynard Keynes for laying the foundation of a miseducated public * -FDR for banning private ownership of gold, enacting the New Deal, creating Social Security and Fannie Mae, and exacerbating the Great Depression * -The FDIC for lulling the American public into a false sense of security regarding their bank deposits and training the public to unquestionably trust the financial system * -LBJ for the guns and butter of the '60s * -Nixon for severing all ties between the US dollar and gold * -Reagan's intellectual duplicity, using free market, small government rhetoric while turning the US into a chronic debtor nation * -Alan Greenspan, one of the most duplicitous, arrogant, and incompetent individuals in the history of the United States. If I had to pin this crisis on any one man, it would be he. * -George W. Bush for cutting taxes while raising spending and his full embrace of Cheney's doctrine of "deficits don't matter" * -Ben Bernanke for following the Greenspan doctrine to its inevitable conclusion * -The heads of Fannie Mae and Freddie Mac for using artificially low borrowing costs to create systemically-dangerous housing institutions * -Christopher Dodd and Barney Frank for beating the socialist drum * -Christopher Cox for thinking a ban on short-selling will solve anything * -Hank Paulson for folding the hand he was dealt * -The ratings agencies for rubber stamping garbage assets as AAA * -The heads of the major banks and brokerages on Wall Street for turning a blind eye as their institutions were taking on massive leverage that threatens to take down the financial system * -The hedge funds that levered up structured finance to dangerous levels * -Generations of lawmakers for kicking the looming financial crisis can down the road * -Home buyers who lied about their income and creditworthiness * -Predatory lenders who put people into mortgages they could never affordDid the economists quoted above even mention one of these?

Sigmund 6 years, 2 months ago

All three of our Senators who are trying to convince us they are agents of change voted FOR the bailout proposed by the current Bush administration and against the expressed will of the majority of American people of all political stripes. Where is our choice in this election? Where was the competing visions, the debates, the sober deliberation of alternative legislation? These three don't just represent the same old politics of pork and giveaways, they ARE what we despise in politics - politicians who give little thought to throwing our money at problems they created and sending us tab for the free pork dinners they used to buy our votes.The opposition to this bill was as close to a "No Confidence" vote as we have in this country. In the long run that is a far more serious problem than a falling stock market, a few weak and predatory banks going under, or even a recession. While we have long suspected that our leaders in Washington and on Wall Street are corrupt, increasingly Americans have serious doubts they are even competent. That is the real crisis of confidence we face as a nation and it can't be solved by simply taking $700 billion of taxpayer money.

monkeyspunk 6 years, 2 months ago

staff04, you are plain wrong and so were those "close" to you. The fact that this was the only option presented by Washington does not speak to its value, only to the lack of intelligence and guts possessed by our leaders.There were other options, the fact that there were banks able to buy those with toxic assets shows that there was some life. Any money should have went to those banks that did not make foolish investments. Money should have been spent to reinforce the lending power of those companies only, not the ones that still could die even with the injection. They should have been allowed to die. They would have been chopped up, and bought by the semi to fully healthy remaining banks with the help of the Federal Gov't if they needed it. THIS alone would have improved confidence which is all the market really needed. Most of this money will be squandered and by the time we realize it, this whole thing will have been forgotten because of some random scandal, war or terrorist threat. America and the next generation of Americans just inherited hundreds of billions of dollars of worthless debt because our leaders are unable to make the tough choices.

63BC 6 years, 2 months ago

We spent $700 billion.Nobody knows if it will work.And it was "the right thing to do?"Successful enterprises, private or public, do not spend that kind of money on things they are unsure of.

Sigmund 6 years, 2 months ago

I dare anyone in the media to ask any Senator who voted for this bill if they actually read all 400+ pages before voting and which provision(s) they felt most effectively addressed the systemic problems at Freddie and Fannie? This Bailout Bill may have dealt with symptoms but it didn't address the disease. It's like calling three doctors about a brain tumor and being told $700 billion of aspirin, from their campaign contributor Bayer, is the answer and no need to get a second opinion. The perception, and likely the truth, is it was the Congress who panicked, worrying voters might discover is was their malpractice that is at the heart of the problem. Then under a banner of "we must act decisively and do something!" these three "leaders" helped produced a crackpot cure that is likely to be worse than the disease. And if the patient dies, what better way to cover up your mistakes than a burial under a pile of $700 billion?And it isn't just dummies like me and my friends who think this Bailout Plan was a very bad idea. Jeffrey A. Miron, a senior lecturer in economics at Harvard University, and 166 academic economists signed a letter to congressional leaders last week opposing the government bailout plan, ": a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources."Their letter concludes, "So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending."http://72.14.205.104/search?q=cache:TiRgwOFuywgJ:www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html+Jeffrey+A.+Miron&hl=en&ct=clnk&cd=4&gl=us"Commentary: Bankruptcy, not bailout , is the right answer" by Jeffery A. Miron, CNNPolitics.com, September 29, 2008.

Godot 6 years, 2 months ago

"Arguments can be made fairly that this isn't the right way to solve the problem, but simply beating the drum and saying we shouldn't be acting is, at the very best, shortsighted."That statement is, at the very minimum, shortsighted. This bill will do more harm than good. It is a monstrously bad piece of legislation.

Sigmund 6 years, 2 months ago

50YearResident (Anonymous) says: "George W Bush, bankrupt two businesses and now has bankrupt the United Stated of America."With Nancy Pelosi and Barack Obama as his willing allies. The Bush Administration warned of the problem every year since 2002 and proposed additional regulations. There are both Congressional democrats and republicans fingerprints at the scene of this crime. If we are going to survive we had better not go down the road of "the crooks in my party are better than the crooks in your party" style of politics. It was what got us here in the first place.

Steve Jacob 6 years, 2 months ago

Even after this bailout, retail will still be weak, banks will still close, jobs will still be lost. People will still ask in 2009 what was the purpose of the bailout to begin with.Have fun Mr Obama (okey maybe McCain) getting us out of this mess. I miss both of them would grow a pair and tell us what they will have to cut, or what promise they had made they can't do because of this. http://www.cnn.com/2008/POLITICS/10/03/campbell.brown.debate/index.html

moveforward 6 years, 2 months ago

The federal government figured out late into the carter administration that the primary means for propping up the us economy was to inflate and excellerate the housing industry. What this did was to make many a developer rich and inflate the cost of housing for millions of americans. Between artificially low interest rates and a mortgage (subsidy) tax write off, there was reason for lazy americans to think of their home as their sole investment/savings instead of sound savings and investment. Truth be told a home is simply a cost of living just like an automobile or food.All was ok until the greedy got greedier and the whole thing imploded. The simple and long term solution is for the fed to be decentralized.

John Hamm 6 years, 2 months ago

Bondmen you might want to add Economists - for telling us how great it is to get away from a "production" economy to a "service" economy.

Godot 6 years, 2 months ago

How is this good for the taxpayer, staff04?"The TARP program permits the Treasury to purchase mortgage-backed bonds or any other "troubled assets" from financial institutions. The idea is that because banks have become so hesitant to lend to each other, this law will help unstick the gears of the modern financial economy. Some loopholes exist. It's possible for a bank to buy $100 billion of bad debt--perhaps in the form of subprime mortgages that are becoming quickly worthless-- declare bankruptcy, and sell it to the Treasury Department for $120 billion, or $200 billion. In other words, although the Treasury Department is supposed to look out for the best interests of taxpayers, there's no law forbidding such profits in the case of firms involved in bankruptcy, receivership, or mergers."

Godot 6 years, 2 months ago

Hey, staff04, are you proud of this one?"In response to grassroots pressure from Americans upset about Wall Street executives cashing in, Section 111 is titled "Executive Compensation and Corporate Governance." It does not include, however, any statutory dollar limit on how high executive salaries of TARP bailout recipients can be. Instead, it lets Treasury Secretary Henry Paulson, the former CEO of Goldman Sachs, come up with "appropriate standards." In addition, only the top five executives will have their golden parachutes limited; all the rest will remain untouched, even if their second-tier salaries and bonuses happen to be in the millions or tens of millions of dollars."

staff04 6 years, 2 months ago

Bondmen-I seldom agree with you, but I think you have made an excellent assessment of what caused the problem. Unfortunately, we have the problem now and we must deal with it. Identifying the cause of the problem is only part of the equation. Arguments can be made fairly that this isn't the right way to solve the problem, but simply beating the drum and saying we shouldn't be acting is, at the very best, shortsighted.

ASBESTOS 6 years, 2 months ago

There are at least 200 other economists that are very worried about this, as there is now no longer any money to "try anything else" if this fails.They would have been better to "give" the money to the ppublic which fuels and drives the economy, that is where business is "Created" not in these banks and financial instituations.This is pretty lame.

Godot 6 years, 2 months ago

Okay, staff04, can you explain why this is a good thing and why it was appropriate to put it in a so-called rescue plan?"There's another section of the bailout bill worth noting. It lets the IRS give information from individual tax returns to any federal law enforcement agency investigating suspected "terrorist" activity, which can, in turn, share it with local and state police. Intelligence agencies such as the CIA and the National Security Agency can also receive that information. The information that can be shared includes "a taxpayer's identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return." http://news.cnet.com/8301-13578_3-10057618-38.html?tag=nl.e433

Sigmund 6 years, 2 months ago

Newell_Post (Anonymous) says: "I'll tell you where the money will come from: a combination of even more government debt and increasing the money supply. In other words they are going to inflate the problem away and pay the bill in less-valuable dollars. Remember the inflation of the 1970s? Get ready for it again."If you are not going to do the hard work of solving the Freddie and Fannie problem, what easier way is there to raise sinking home values than inflation to match their mortgages? Before it is over I expect 20% annual inflation rate and 15% US Treasury Bonds.

Newell_Post 6 years, 2 months ago

I do think the government needs to do something to prevent a cascading collapse of the banking system. However, the pork is shameful and the remedy may be the wrong method.Here's an option. Have the President and Treasury Secretary say to the troubled banks: "We're not going to bail you out. If you are in that kind of trouble we are going to nationalize you. We are going to take total ownership of you and then use the power of the government to repudiate your bad debts. Then we are going to keep your good assets and operate your bank as a government-owned enterprise. We will then use the profit we make to fund Medicare, Social Security, and the national debt. Oh, and by the way. We are filing criminal fraud charges against you for deceiving your investors, depositors, and borrowers. You don't like that scenario? Fine. You sort out your own financial problems."

Newell_Post 6 years, 2 months ago

It is really about $500B in bailout and $300B in earmarked political pork. They couldn't even stifle the pork machine for something of this importance.The entire federal budget for the year is roughly $3 trillion. In other words, this represents roughly 25% of the entire federal budget for a year. Where is this money going to come from? They are already running over budget by around $500B per year. McCain wants to reduce taxes and Obama wants to raise taxes on only a few people.I'll tell you where the money will come from: a combination of even more government debt and increasing the money supply. In other words they are going to inflate the problem away and pay the bill in less-valuable dollars. Remember the inflation of the 1970s? Get ready for it again.

Godot 6 years, 2 months ago

And, staff04, please defend this little "rescue" for mainstreet:"The bailout bill also gives the Internal Revenue Service new authority to conduct undercover operations. It would immunize the IRS from a passel of federal laws, including permitting IRS agents to run businesses for an extended sting operation, to open their own personal bank accounts with U.S. tax dollars, and so on. (Think IRS agents posing as accountants or tax preparers and saying, "I'm not sure if that deduction is entirely legal, but it'll save you $1,000. Want to take it?") That section had expired as of January 1, 2008, and would now be renewed. "

staff04 6 years, 2 months ago

Nope, godot, just taking a break from the internets. Monkeysplooge, acting to protect the millions who have their retirements invested in the markets is not the wrong thing to do. You must love welfare if you disagree.

Godot 6 years, 2 months ago

Yeah, the bailout worked so well today, didn't it? And Fuld spilling the goods on the lies and deception that created this mess. Those guys are definitely deserving to be given $700BN while we lose our shirts.

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