Bahu Virupaksha

Join Date 09/2004

The Moral Hazard of the Bail Out

Taxpayer pays for corporate greed

George Bush has done something that no true conservative would ever dream of doing. By using federal resources to buy up the bad debts of Fannie Mae and Freddie Mac, the leading mortgage firm in the US, Bush and his Treasury Secretary have in effect nationalised the company, a policy that runs counter to the basic principles of fiscal conservatism. Yesterday that bailout was further extended with the 85 billion $ bailout of Lehman Brothers. Henry Paulson has set a very bad precedent and the US taxpayer will have to bear the additional burden of paying up front for the errors of judgement and speculative investment. It is unlikely that the moral hazard of taking on the bad debts of private corporations and turning them in non performing assests of the Nation at large will remain hidden for long. The unprecedented bailout has resulted in a run in Wall Street and the US stocks all over the world have plunged very sharply. At a time when the middleclass American home owner is seeing foreclosure of his home mortgage it is highly undesireable that private comapnies are shielded from the inevitable meltdown due to bad management and faulty corporate policies.

Should the Govvernment be in the business of bailing out corporations who have incurred huge losses due to bad business decisions. The falling interest rate and the inability of the Feds to shore up the dollar adds up to a veru y grim economic scenario. Ben Bernanke, the Chairman of the Federal Reserve has promised a comprehensive approach to the problem. We are not sure whether the asprin which is being administered in the form of bailout packages will really help to kick start the US economy. Lehman Brothers has lost 90% of its assets and market value and the ripple effects will be felt right down the the economy. When small business go bust will George Bush and his Treasury Secretary be at hand to provide relief. Obviously Not.

The international effects of this meltdown are too alarming even to imagine, The meltdown of the East Asian economies in 1996/ 97 was bad enough and the region pulled itself out of the recession due to the strength of the US and |Japanese economy. The present crisis is turning all Classical Macro Economic theories on its head and it seems we are back to the Keynesian model.

It is time the US public realised that the Bush and Cheeny duo have virtually mismanaged the economy as they have done the war on terror.

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Yesterday that bailout was further extended with the 85 billion $ bailout of Lehman Brothers.

Just to correct this, it was not Lehman Brothers, it was AIG that was bailed out with the $85 billion. And it is expected that this money will be paid back unlike the money used to bail out Fannie/Freddie.

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It is time the US public realised that the Bush and Cheeny duo have virtually mismanaged the economy as they have done the war on terror.

You may want to look again and realize that this was more than Bush and Cheney. But it doesn't matter since you continue to bash on a Man who will be gone in a few months anyways.

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George Bush has done something that no true conservative would ever dream of doing.

The light finally dawns for you, eh?

It is time the US public realised that the Bush and Cheeny duo have virtually mismanaged the economy as they have done the war on terror.

Just as Clinton Managed Enron? No, again there are 2 critical flaws to this. One is that the government manages the economy. It does not (yet).

Second is that the president has a diddly damn to do with money. Again, CONGRESS is in charge of the purse strings. And they have made a royal mess of it (and continue to do so). For all the hoopla, congress still has to agree with all the steps Bush is proposing (note - not making, proposing).

Clinton did not backrupt Enron. At least conservatives are honest enough to admit that. Are you honest enough to admit your errors?

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And it is expected that this money will be paid back unlike the money used to bail out Fannie/Freddie.

As far as I know the bail out announced by Mr Paulson was without the approval of Congress and congressional approval like the Military spending bills can be taken for granted.

My main point was the economics and the politics of the bailout not the right or the wrong of it. If Merill Lynch and Lehman Brothers can be nationalised why not bail out the hundreds and thousand of small homeowners who have lost their homes due to the foreclosures.

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As far as I know the bail out announced by Mr Paulson was without the approval of Congress and congressional approval like the Military spending bills can be taken for granted.

The president cannot spend dime one! Whether Congress agrees before or after the president opens his mouth, they are there to make the decision. The president just makes the headlines.

Merill Lynch and Lehman Brothers can be nationalised

Neither were. You do have to get your facts right. Lehman was allowed to fail (which is good - medicine is not supposed to taste good) and Merril was bought out before it failed.

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"As far as I know the bail out announced by Mr Paulson was without the approval of Congress and congressional approval like the Military spending bills can be taken for granted."

LOL! That is because to this to this point there has been no "bailout announced" only a proposal that is being voted on this Wednesday.

The premise of your article is pretty much wrong or at least premature.

As Dr. Guy will attest, I would certainly take any Conservative to task for writing something like this. Did you even read any articles about the PROPOSED bailout? If you had, you would have seen the words "proposed" or "plan" used quite a bit....you know, like in the headline.

The plan has been approved by bi-partisan committees, including the Senate Banking Committee, which is chaired by Christopher Dodd, Democrat from Connecticut. The two members of that committee that voted against it were.....cue dramatic music....Republicans! You can read all about it at http://www.washingtonpost.com/wp-dyn/content/article/2008/05/20/AR2008052001330.html

The House Banking Committee has also approved the plan and that committee is chaired by Barney Frank, another Liberal Democrat from Massachusetts. In fact you would be hard-pressed to find anyone more Liberal than Barney Frank. See http://financialservices.house.gov/who.html for a complete listing of committee members.

Heres an article that will explain the upcoming vote: http://query.nytimes.com/gst/fullpage.html?res=950DEFD61130F937A25755C0A96F948260

"My main point was the economics and the politics of the bailout not the right or the wrong of it." And that is the very stuff that you didn't get right. And I don't mean that your opinion isn't right; the facts that you say happened simply haven't occurred.

You might want to consider visiting the Washington Post and/or New York Times web sites before posting next time; you can you know READ about things. And then express your opinion.

I don't know if you are old enough to remember the TV show "Laugh In" but Ruth Buzzi played a character that always heard things wrong and then went on a TV news show to express her opinion. She would hear "Free elections" as "Flea erections" for example. When she was corrected, she would look at the audience and say "Never mind."

You might consider saying those words in this case.

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One is that the government manages the economy. It does not (yet).

The 700billion US$ bailout package will put the US Government as the biggest player in the economy. From a regulator to a player that is a totally different ball game as far as the US is concerned.

The Paulsob Plan does not address the real issue facing the US economy and is merely a bandaid.

And moreover the US Government will own the bad debts incurred by the Banks, Financial Institutions and will not really have the means to recover the assets.

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The 700billion US$ bailout package will put the US Government as the biggest player in the economy. From a regulator to a player that is a totally different ball game as far as the US is concerned.

With or without the bailout, the government is already the biggest player. But player is not manager. BIG difference. And that 700 billion (not in one year, but over several)? Chump change when you have an economy over 13 trillion.

And moreover the US Government will own the bad debts incurred by the Banks, Financial Institutions and will not really have the means to recover the assets.

They have before. But you are probably too young to remember - The S&L buyout. But now you are just throwing up smokescreens. Larry and I already shot your article down, and I see that you have even started to backtrack on it.

If you had come out with an article about the "plan" being "bad", I would have agreed with you. Instead you make this into the USSR II, and it is not.

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With or without the bailout, the government is already the biggest player. But player is not manager. BIG difference. And that 700 billion (not in one year, but over several)?

Are we talking numbers? I love numbers! One that must be taken into consideration is the national debt. Soon to be 11.3 trillion if this bailout occurs. So, really, the U.S government doesn't actually have the money, but if approved they'll give it out anyway with the hopes that foreigners and investors will continue to buy U.S debt (T-bills). In essence, this will be 700 billion that is going to go on a VISA with over 10 trillion already on it. Also on this VISA bill is the 3-trillion some adventures in Iraq and Afghanistan (at present it's something like 600 or 700 billion but by the time they get the troops home plus cost of permanent garrisonning plus VA costs, medical for the 28,800 wounded servicemen, replacement of equipment etc etc)

This at a time that many major foreign investors want to unload their T-bills and China is talking about trading oil in a currency other than the greenback. Hhhmmm.....

They have before. But you are probably too young to remember - The S&L buyout. But now you are just throwing up smokescreens.

The S&L buyout was fundamentally different. The RTC (was it the RTC? Forgive my ignorance if I've got the name wrong) directly took ownership of a bunch of land and then sold it to folks. In this case, the government will be taking ownership of a bunch of toxic debt that no one will want to touch with a ten foot pole. And there's all the "innovative" ie, ridiculously complicated and obscure, financial products that were created from this mess and there's derivatives. It's not by any means a straightforward affair at all, but rather the complete unravelling of the shadow banking system.

Shadow banking system you say? No, it's not a conspiracy theory. What it is is an entire sector of the banking industry that has been:

1) Completely unregulated. Banks didn't have to report to anyone on who or how much money and where it went. This led to 'innovative' financial products which are so convoluted even the major players can't accurately say what their exposure is to toxic debt.

2) Completely opaque. This means no transparency. This means an investor had no way of knowing just what in the hell they were buying or the kind of risk they were exposing themselves too.

3) Based on complicated computer models that calculated supposed risk and profit margins. In essence, a mathematical formula used to predict the 'science' of this particular area of economics. Well, that science turned out to be smoke and mirrors as the house of cards is indeed coming down.

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The S&L buyout was fundamentally different

Yes, it was S&Ls not Banks (this is not either), MOrtgage brokers, or Insurance firms. But other than that, yes it was. The feds (not the Federal reserve this time) sucked up the bad assets and sold the good ones. Just like now.

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It is time the US public realised that the Bush and Cheeny duo have virtually mismanaged the economy as they have done the war on terror.

I've heard it reported that Bush and members of his administrion saw something like this coming and has several times over the past years warned of this very crisis....the problem is they didn't yell it loud enough or warn the right people.

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I'm wondering what would happen if the government didn't implement a bail-out and just let the chips fall where they will?

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If you had come out with an article about the "plan" being "bad", I would have agreed with you. Instead you make this into the USSR II, and it is not.

Even I had not quite thouight of it as USSr II; now that you have mentioned it, maybe there is a wee bit os state socialism in all this. A sin that dare not mention its name.

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I'm wondering what would happen if the government didn't implement a bail-out and just let the chips fall where they will?

Best case scenario, a recession will come up, but we will be able to grow back to economical growth in about 3-4 years, and banking activity will begin again.

Worst case scenario, banking activity will stop within the next months. Main street will be affected, as no loan will be granted to buy cars or house. No new business will be able to start - big or small -. We will head for a complete depression that can last for... we don't know. Banks will bankrupt, and money will stop to circulate around to allow the economy to live. Credit holder will see their interest rate skyrocket, people who loose their jobs won't see new ones opening anytime soon. Business manager won't be able to buy new equipment or hire new crew.

People will loose faith in the banking system and will want to have their cash back, which can lead to high inflation as more cash in on the market. But many people will simply loose their complete bank account.

The financial system is the blood that allows the economy to grow and live. It has to circulate in order to be healthy. Sometimes we get anemic, sometimes we have other problem. But this crisis may give us a stroke that will make the blood to stop moving around.

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