OT - Financial mess 101 ($700 billion bailout)

[JackB1]

F308,

I think most people agree that the stock market will rebound. The question is whether the Dow will be at 10000 or 8000. And that's a lot of wealth to evaporate without a shrug.

Is is best to leave all stock related investments alone right now or move your $$$ into safer bond funds? This whole thing hurts my head.

[RobVarak]

it's better than this huge government intervention/socialism package they're trying to push.

That's such a poor an inaccurate characterization. I heard Rush Limbaugh was pushing the same nonsense. It's not socialism. It's more accurately called an investment or a loan. And belive me, the stock market is only one small part of what's going to go ass-over-tea kettle if they don't work out something to get those bad loans off of the banks' books.

[Teal]

it's better than this huge government intervention/socialism package they're trying to push.

That's such a poor an inaccurate characterization. I heard Rush Limbaugh was pushing the same nonsense. It's not socialism. It's more accurately called an investment or a loan. And belive me, the stock market is only one small part of what's going to go ass-over-tea kettle if they don't work out something to get those bad loans off of the banks' books.

The banks PUT those bad loans on their books-I don't see how it's my responsibility to shoulder that load. So I'm going to be able to *own* someone else's bad loan/debt? How does that benefit me?

America has become a nation of whiners and spineless children. "Do whatever you have to do, just don't make me have to suffer consequences". This bill they tried to push through is not going to save anything, and it's akin to a bandaid on a severed limb-good intention, maybe, but not helping at all. Why would I invest in someone else's very bad judgement? Do you make a practice of putting your money into companies who do what these have done?

I think it's insane to 'bail out' anyone like this, because there's no penalty for terrible management, and zero scruples. Our money isn't going to be worth a s*** if we keep printing it for nefarious things like this. I'm glad the bill went down.

[Teal]

I studied Marx in college (had to, unfortunately), and I agree with this guy:
http://network.nationalpost.com/np/blog ... eback.aspx

[Teal]

And this guy:
http://www.cnn.com/2008/POLITICS/09/29/ ... pstoryview

[RobVarak]

The banks PUT those bad loans on their books-I don't see how it's my responsibility to shoulder that load. So I'm going to be able to *own* someone else's bad loan/debt? How does that benefit me?

Because regardless of whose fault it is, it is in your best interest to have a functioning international banking system. The alternative is a lot worse for you than it is for any CEO's or government officials.

You're not only owning someone else's bad debt. You'll be owning a great deal of good debt as well. The bad debt that you own will give you the option of forebearing on foreclusures, which will in turn help keep people in their homes and help stop the artificially steep drop in housing prices which underlies the crisis. The good debt that you own is an asset that can be sold with the money returned to the US Treasury.

When free market enthusiasts like Gary Becker get behind this thing, I think it lends credibility to claims that it is necessary and not some Democratic power grab.

Edit:

Random anecdotal data point:

I've had my second client in a week see a deal fall through (or hopefully just postponed) because borrowers couldn't get financing to purchase a business. We're talking solvent buyers and very solid businesses here, slam dunks on both sides of the deal. The loans aren't that large, $1m and about $600k respectively, and these guys should have lenders falling all over themselves to make the deals. Banks just aren't lending right now, even in transactions with no mortgages involved.

[matthewk]

The bad debt that you own will give you the option of forebearing on foreclusures, which will in turn help keep people in their homes and help stop the artificially steep drop in housing prices which underlies the crisis.

I agree with most of what you said, but I don't think the drop in home prices is artificially steep. The rise was artificially steep, but now it's correcting itself. I'm not sure if I want us to prop up the values of homes that are still too high in many areas.

[matthewk]

F308,

I think most people agree that the stock market will rebound. The question is whether the Dow will be at 10000 or 8000. And that's a lot of wealth to evaporate without a shrug.

Is is best to leave all stock related investments alone right now or move your $$$ into safer bond funds? This whole thing hurts my head.

I have a couple of 401Ks and a rollerover IRA. They are a mixture of various mutual funds, some money market, and some bonds. I'm leaving mine alone. The market is allover the place right now and moving it around now could just make things worse for you. I'm going to ride it out. The decision is easy for me since I don't plan on taking any of it out for another 25 years.

[XXXIV]

Not touching the 401k...Im not going to day trade it...Im in it for another 25 years. Im thinking if it doesnt go up by 2033 there wont be a USA anyway.

[bdunn13]

I'm glad the bill went down.

Ever watch HGTV? I often see people on there buying homes that are 700K and they are around 24 years old. I would tell my wife, "they will lose their home in 2 years and they will be getting a divorce...."

I don't care if it benefits me or not, I don't want to bailout ANYONE for this crap. It pisses me off beyond belief that my tax dollars could be used to pay for another man's mortgage. I shopped for my house for 2 years before I made a decision on a good deal. I could easily have afforded a house that cost 5 times as much, but I wanted to be smart and frugal. Bail me out and let me go buy a nicer home with that money. Reward me for being smart, don't reward some idiot for buying crap he can't afford.

And this is just a small correction. I expect the house market to drop even further as homes are still WAY overpriced in most areas.


I remember when the interest rates started to drop. That was the start of the problem. Most people thought this was a good thing. I on the other hand rather buy a home for less money and pay more in interest. This way, at least you could refinance later on and get a better rate. If you were to buy a home that's over priced at a low rate, you are still paying the same thing in the end, but you won't have a chance to ever refinance and end the end your house could drop in value.

In the end, there is no proof the bailout will even help, its likely it could make things worse. All economics aside, we would be rewarding stupidity and failure, that's never a good thing.

[RobVarak]

I agree with most of what you said, but I don't think the drop in home prices is artificially steep. The rise was artificially steep, but now it's correcting itself. I'm not sure if I want us to prop up the values of homes that are still too high in many areas.

But the "correction" is skewed because the formerly risk-disregarding lenders and MBS traders are now too risk-averse in reaction. Moreover, lenders are now being irrationally reluctant to loan, which is also artiificially pressuring values lower.

[Brando70]

Despite my liberal voting record, I am reaching across the aisle to agree with Rob very strongly on this. The populist labeling of this as either a bailout of irresponsible homeowners or greedy Wall Street fat cats is not accurate. This problem goes way beyond either issue. These mortgage-backed securities have seeped into every nook and cranny of our financial system. This problem is going to screw over millions of Americans who pay their bills on time and have good credit, like me. Home foreclosures and a credit drought are going to impact anyone trying to sell their house. First-time homeowners are probably going to run into very stiff downpayment requirements. That in turn will slow down construction which in turn will further hurt the economy and so on and so on.

I think the country is strong enough to ride it out, and I don't think it's going to be like the Depression. But it could wind up looking a lot like the late 70s or early 80s, which was pretty bad.

The other thing is, without some type of intervention, the length of the correction could be quite long. The market after 9/11 isn't really an accurate comparison. That was an artificial event that caused a drastic, but temporary drop. This is the result of a rotten economic situation, with problems undermining the very foundation of our economy. Without any federal action, investors and financiers will be very cautious and edgy with their money, which will lead to further contraction. I think the tax burden will be easier to deal with than that economic burden.

[pk500]

Not touching the 401k...Im not going to day trade it...Im in it for another 25 years. Im thinking if it doesnt go up by 2033 there wont be a USA anyway.

Exactly. If you don't need the dough short-term, continue to invest in a diversified portfolio.

I just feel bad for the folks who were planning to retire in a year or two and based their ability to retire on a certain level of investment dividends that now don't exist. Then again, one would hope they already had shifted a good chunk of their money into less-risky investments as they approached retirement.

Take care,
PK

[pk500]

Congress and Bush: The sky is falling, the sky is falling, look to the markets -- THE SKY IS FALLING!

Er, the Dow climbed 260 in its first hour of trading this morning.

Take care,
PK

[RobVarak]

Congress and Bush: The sky is falling, the sky is falling, look to the markets -- THE SKY IS FALLING!

Er, the Dow climbed 260 in its first hour of trading this morning.

Take care,
PK

That's like looking at a patient with brain cancer and saying that since his blood pressure is fine he must be healed.

The stock market is not the only vital sign in the economy, and even if it were a one-day rise or fall is not indicative of anything. This is particularly true given the ban on short-selling which applies to hundreds of stocks.

[pk500]

Congress and Bush: The sky is falling, the sky is falling, look to the markets -- THE SKY IS FALLING!

Er, the Dow climbed 260 in its first hour of trading this morning.

Take care,
PK

That's like looking at a patient with brain cancer and saying that since his blood pressure is fine he must be healed.

The stock market is not the only vital sign in the economy, and even if it were a one-day rise or fall is not indicative of anything. This is particularly true given the ban on short-selling which applies to hundreds of stocks.

It is relevant because many politicians pointed to the sudden drop in the market as an example of imminent financial Armageddon. We've heard for the last 10 days that if the bailout isn't passed within a day or two, then the worldwide markets will implode.

We're at day 10 now since the rush to bailout began, and the markets are battered yet still functioning.

So I ask, and I don't have the answer to this question: Are the cries of the second Great Depression real or just scaremongering? As the days pass, I'm really starting to wonder.

Take care,
PK

[Jared]

I don't like the idea of a bailout either, as you're rewarding actors for stupid, risky behavior. BUT no bailout = a seized up credit market = exacerbating the problems we already have in the economy.

I think the House Republicans might have miscalculated here. If they make any changes to the bill, my guess is that they're going to be more "liberal", as my guess is that it will be easier to move House Democrats than House Republicans. And if the House Republicans keep balking, hello Swedish-style temporary nationalization.

[F308GTB]

But the "correction" is skewed because the formerly risk-disregarding lenders and MBS traders are now too risk-averse in reaction. Moreover, lenders are now being irrationally reluctant to loan, which is also artiificially pressuring values lower.

Good. Lenders should be reluctant to loan. While I feel for your "good credit" clients who have had the deal fall through, the fact of the matter is that the US has become an entitlement society. Where is it written that every man, woman, and child should be in a house? Where is it written that we should all have new cars, no interest 6-12 month credit on purchases, etc? It's me, me, me in this society, and if the economy tanks so be it. I'd rather the American citizenry learn a lesson on managing their own private finances and the American corporate side learn a lesson on fiscal responsibility than to continue to promote extending credit where credit should not be extended.

When I look at the numbers involved, $700 billion really is just a drop in the bucket. It's not even $3k for every American. So we are concerned about these securities that average out to less than $3k yet the average consumer debt is some $10k? Something just doesn't add up here.
There's a hell of a lot more in extended money out there in both good and bad loans. I'm in for about $80k in borrowed money between house and car. Am I worried about not getting another loan? Nope. If I have to save longer on a big purchase, so be it. I'd rather pay in full than borrow anyway.

Turn things around. Give each American $3k as another "stimulus" check. Do you really think that money would infuse that much vitality into the economy? $3k is nice, but it's a pretty darn small amount to me really.

So either Wall Street is suckering Washington into a handout or the problem is MUCH, MUCH bigger than $700 billion. If the latter, this drop in the bucket is merely a band aid trying to stop the blood pouring from an amputated limb.

[wco81]

Congress and Bush: The sky is falling, the sky is falling, look to the markets -- THE SKY IS FALLING!

Er, the Dow climbed 260 in its first hour of trading this morning.

Take care,
PK

One of the reasons attributed to today's rise is that Congress will get its act together and pass the bill later this week.

VIX at yesterday's close was very high. They say that previously, when VIX was at similar levels, the market was up 7% within a year.

But of course, the NASDAQ lost 10% in one day.

The other thing is that the Fed and Central Banks have pumped hundreds of billions into the global banking system just in the past few days. The Europeans have had to nationalize or rescue several banks this week and the Bank of Ireland was guaranteeing deposits. Heard this morning that there was talk about increasing FDIC limit to $250k, which Obama has come out supporting.

Dollar has gained against the Euro and the Yen, because of the banking troubles in other countries as well as the rush to buy T-bills.

How long will this last?

With or without a bailout package, they've pumped hundreds of billions already. Even if they stop the passage of the bailout, the Fed, the Treasury and the FDIC will have to pump hundreds of billions more, especially if they can't stabilize things.

[F308GTB]

I always like listening to Dave Ramsey on the radio. What he said last week - http://a1611.g.akamai.net/f/1611/23575/ ... market.mp3

Also, interesting article - http://www.marketoracle.co.uk/Article6489.html

One thing in there that always bugs me is how people automatically assume houses are an investment. It's a lousy mentality. To me, a house is nothing more than personal rent stabilization.

[RobVarak]

Turn things around. Give each American $3k as another "stimulus" check. Do you really think that money would infuse that much vitality into the economy? $3k is nice, but it's a pretty darn small amount to me really.

The problem with that argument is that it doesn't do anything directly to improve the banking problem. We need a plan that will allow lenders to forebear from foreclosing where appropriate and which will allow banks and investors to shed MBS's that are currently valued at 0 despite having redeemable value.

Simply injecting liquidity into the populace will not accomplish either of those goals.

Incidentally, I think that anything that Jared, Brando and I (is WCO in favor as well?) can agree on should immediately become law

[JackB1]

F308,

I think most people agree that the stock market will rebound. The question is whether the Dow will be at 10000 or 8000. And that's a lot of wealth to evaporate without a shrug.

Is is best to leave all stock related investments alone right now or move your $$$ into safer bond funds? This whole thing hurts my head.

I have a couple of 401Ks and a rollerover IRA. They are a mixture of various mutual funds, some money market, and some bonds. I'm leaving mine alone. The market is allover the place right now and moving it around now could just make things worse for you. I'm going to ride it out. The decision is easy for me since I don't plan on taking any of it out for another 25 years.

good, informative article for those concerned about their money:
http://www.msnbc.msn.com/id/26907361/

[RobVarak]

I just realized that a sizable portion of the Democrats voting against the bill were members of the Congressional Black Caucus, as well as 9 different members of the Illinois delegation. Combined with Pelosi's behavior, I'm beginning to smell a setup in a bill that was far too important for such political shennanigans. C'est la guerre.

[F308GTB]

I just realized that a sizable portion of the Democrats voting against the bill were members of the Congressional Black Caucus, as well as 9 different members of the Illinois delegation. Combined with Pelosi's behavior, I'm beginning to smell a setup in a bill that was far too important for such political shennanigans. C'est la guerre.

I was thoroughly surprised yesterday scanning the votes that a Houston-area Congresswoman, Sheila Jackson-Lee (vice chairwoman of the Black Congressional Caucus), voted nay.

Back on point, I imagine there were a lot of warts tied to the bill. Any way to find out what earmarks were associated with the proposed bill?

[RobVarak]

http://www.latimes.com/media/acrobat/20 ... 631254.pdf