Thursday, October 02, 2008
When is a $700 Billion Bail-out Not a $700 Billion Bail-out?
When it costs at least $850 billion. Oh brother...
MORE: Look, folks. If the assets are being essentially bought by the government, this isn't as bad as it seems on its face. If the vast majority of the loans are not defaulted - and I think that's a certainty - then the government can expect to recoup a substantial amount of the money it is injecting into the banking industry. As a practical matter, that's not a bad deal. Even with a 3% default rate (which is the number I keep hearing from people with more economic knowledge that I possess), the government could stand to eventually profit from this deal.
Yes, I most certainly understand the ideological objections to the bail-out (i.e. - the CEOs made their bed, now let them sleep in it, etc.). However, as I have put forth previously, if you want to stand on your ideological ground here, you had better have a solution to the problem. Credit is based so much on perception, and the general perception is that doing nothing in this situation will bring forth a global credit scarcity that no one in my generation or the generation of my parents has ever experienced.
Doing nothing is not an option.
MORE: Look, folks. If the assets are being essentially bought by the government, this isn't as bad as it seems on its face. If the vast majority of the loans are not defaulted - and I think that's a certainty - then the government can expect to recoup a substantial amount of the money it is injecting into the banking industry. As a practical matter, that's not a bad deal. Even with a 3% default rate (which is the number I keep hearing from people with more economic knowledge that I possess), the government could stand to eventually profit from this deal.
Yes, I most certainly understand the ideological objections to the bail-out (i.e. - the CEOs made their bed, now let them sleep in it, etc.). However, as I have put forth previously, if you want to stand on your ideological ground here, you had better have a solution to the problem. Credit is based so much on perception, and the general perception is that doing nothing in this situation will bring forth a global credit scarcity that no one in my generation or the generation of my parents has ever experienced.
Doing nothing is not an option.
Labels: Economy
Permalink posted by Rob Huddleston @ 8:19 AM 
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Rob;
I must disagree...nothing is precisely what we must do, or in 10-20 years, we will deal with this problem again and it will be far worse. The banks and Wall Street will be asking for more bailouts because they will engage in even riskier credit practices...operating on the notion that the government will bail them out.
No sale!
I must disagree...nothing is precisely what we must do, or in 10-20 years, we will deal with this problem again and it will be far worse. The banks and Wall Street will be asking for more bailouts because they will engage in even riskier credit practices...operating on the notion that the government will bail them out.
No sale!
I still do not under stand why the current economic climate would "bring forth a global credit scarcity"
Some guy sold his house at the top of the bubble for $800,000. The buy did 100% financing and expected it to grow 20% year over year. It didn't and then his balloon payment kicks in. He has no money down so he dumps the house and the payments leaving the bank with an $800,000 loan on a $400,000 dollar house.
Where did all the money go? It did not disappear it went from the bank to the seller. That seller is not going to sit on the cash since inflation makes it depreciate. Instead he is going to reinvest it.
Doesn't credit scarcity imply that there are not creditors to give out money? But since the money didn't disappear the seller has it, reinvests it and he becomes the creditor.
The only thing the mortgage crunch might do is drive up the interest rates making home loans a more valuable investment for these creditors.
So what am I missing?
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Some guy sold his house at the top of the bubble for $800,000. The buy did 100% financing and expected it to grow 20% year over year. It didn't and then his balloon payment kicks in. He has no money down so he dumps the house and the payments leaving the bank with an $800,000 loan on a $400,000 dollar house.
Where did all the money go? It did not disappear it went from the bank to the seller. That seller is not going to sit on the cash since inflation makes it depreciate. Instead he is going to reinvest it.
Doesn't credit scarcity imply that there are not creditors to give out money? But since the money didn't disappear the seller has it, reinvests it and he becomes the creditor.
The only thing the mortgage crunch might do is drive up the interest rates making home loans a more valuable investment for these creditors.
So what am I missing?
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