Thanks, Cara, for the link to this article from the Washington Post:
"In the year since Maryland launched a series of foreclosure prevention programs, the state has helped just 88 troubled borrowers get into new loans or keep up with their payments, at a cost of about $17.9 million".Hmm -- the math on that is $203,409 per borrower. Except I am sure each homedebtor did not receive that much . . . but some bureaucrats stayed employed.
"State officials say their efforts have been hamstrung by borrowers who wait too long to ask for help or are disqualified by low credit scores. Negotiations with lenders to expand the programs have stalled. The 'big-picture lesson we have learned is that we can't refinance our way out of this problem,' said Raymond A. Skinner, secretary of Maryland's Department of Housing and Community development".Nope.
22 comments:
Do you think maybe most of the homeowners in trouble just spent too much?
WaPo will be running a correction on that one tomorrow.
What an amazing thing. I just watched the Bush speech. No surprises, really, but the sheer scope of what is happening is just incredible. I've lived more than half my life and have never seen anything like this.
The price of housing, whether to buy or not, is no longer an interesting question.
Clearly, it will take years for something close to a rational market to return.
But what is important is whether the U.S. can continue to move forward; in my mind, it's more important to ensure that all our children can attend college, the one of their choice, and grow up feeling that the world is full of possibility and hope.
Here is a page from Suntrust regarding their Home Retention Program.
Depending on individual circumstances, loan status, and loan product type, SunTrust may be able to provide temporary or long-term options to prevent foreclosure.
Below are some of the options that we may offer depending on your financial situation:
Special Forbearance (Repayment plan)
If you are experiencing a short-term financial problem a repayment plan will allow you to repay your missed payments in installment payments.
Loan modification
Adjusting the terms of your loan by lengthening the amortization schedule, lowering the interest rate, or rolling the delinquent amount into the loan and re-amortizing the new balance to help bring your loan current.
Short sale
Allowing you to sell your home for less than the outstanding loan balance and forgive you of all or part of any remaining unpaid principal balance.
Short refinance
Forgiving some of your debt and refinancing the remaining balance into a new loan.
Deed in Lieu of Foreclosure
Voluntarily transfer your property to your lender if you are unable to maintain payments and cannot sell the home at market value.
Consult your tax advisor regarding the potential tax implications associated with the above options.
"Clearly, it will take years for something close to a rational market to return."
The rational market IS returning, that is the whole problem.
The financial system woke up one morning and realized that what they had been doing for years was unbelievably stupid and decided to stop... all at once.
This will likely prove to be disruptive in the short term, but it is not going to be the end of the US economy. We may get a relatively serious recession, but we have been long overdue for that anyway.
Yeah . . . the only thing I could think of during the speech was
"LIES, LIES and more DAMN LIES".
(sorry for the profanity).
The whole mess has been promulgated by too much credit (read increase in the money supply) which fueled the housing bubble.
The Austrian school of economics predicts this to a T. The only real solution to a massive credit bubble is the massive credit deflation. Unfortunately, no one wants to admit we have spent too much, have too much debt, and the boom over the last 7 years was fake, and needs to correct. Everyone wants to prevent the correction.
It's no different than the drug addict who desperately wants the next hit to prevent the inevitable crash that comes from withdrawal. If that next hit is given, it just makes the withdrawal that much more painful until the addict dies.
gte811i,
Yup that next hit could be the overdose that completely destroys all foreign confidence in our money.
cara,
actually my fear is that foreign entities know the US is a crack addict and they are the drug dealers. They know we are DOA, but they want to extract their pound of flesh.
How much do you want to bet the "urgency" of this bailout is pressure from China, saying give us our money "or else".
Remember a huge portion of FF bailout was to pay China (who held the debt).
gte,
Scary. That's the most logical argument I've seen yet for why/how this "bailout" is needed this particular instant and in this bizarre way.
I'm also thinking that the complete lack of over-sight and lack of equity exchange were just bargaining tactics to grease this thing through the democratic congress so that they can look like they did something.
The executive pay caps are a joke, and I wish the news media would stop covering that stunt. However, GS-level pay grades for Fannie and Freddie would have been nice and could be realistic if they were to truly become government agencies once and for all.
gte, cara,
what would the "or else" from China be that would be more imminent and costly than $700 billion?
mm,
There are two possibilities that I can think of . . . this is all unsubstantiated of course . . . but the US is not an island and we are so interconnected with the world (b/c we owe them) it would be interesting to know what other countries are saying.
Possibility #1) China, as a holder of lots of US Treasuries, and dollars, dumps them by either converting them to euros or gold. This could torpedo the US dollar, and who knows what would happen if China decides not to play ball with us anymore.
Possibility #2) Militarily . . . China's military is nothing to sneeze at, they could mobilize a lot more people than us. I think this route is highly unlikely . . . however if you look at the history of wars, many started over economic problems.
I think #1 is more likely. Think of it this way. If you hold any amount of debt, and you tell the creditors you can't pay they get pretty upset, send the collectors etc. They can garnish your wages, take your home, your car, etc. In order to prevent this you either find the money to pay them or you declare bankruptcy.
The US is a debtor nation . . . and many of the vehicles used to finance that debt are going under, i.e. the creditors aren't getting paid. We either find the money to pay them (print it), say sorry we're just not going to pay, tell them to stick it, or declare bankruptcy. None of them are pretty options.
Another option exists, which is what they are trying to do IMHO, get the markets back up again, pay the creditors an installment now and tell them as soon as we get through this blip we'll resume regular payments. The token, I can't pay you all now but I can pay you some now.
But what do I know. . . just things I think about after reading, reading, and doing more reading.
Again I don't even know if any of these between country talks is true. The only facts I have are that the US is a debtor nation, and one of our major creditors is China.
Gte - I agree with #1 as I have been thinking about that a long time. The only problem I see with it is - it would be financial suicide for them to do so. The got so much of our debt that if they did dump it, it would have little value the instant it was dumped. Even if they affirmatively said, we arent buying any more us dollars, that alone could really hurt us, but all their existing us dollars as well.
My best guess is when they do get tired of holding our debt, they will signal, we arent buying any more (less of a shock to both of us). IIRC, the sent a shot across the bow about this a few weeks ago, but they havent pulled the trigger- yet.
When that happens, one can only hope, the US will realize we are their bitch, and start belt tightening, raise taxes, means testing for social security, whatever. I also hope that this need for a bailout will be a wake up call. I dont think china will do anything now, so we have effectively bought us about 10 years to fix this. Whether congress has the will to do it, we shall see.
As I see it,
Incidentally, given your economic leanings, I would love your imput on this (as well as anyone else who has ideas).
Assume for the moment, China is off the table - they just sit back and watch and buy our debt at the same pace as now.
That said, we have 2 competing forces (1) a bailolut from bernanke & Co - essentially printing new money and putting it out there into circulation, and (2) continued erosion of jobs, access to credit (even with the bailout), less ability to pay for things, less demand, lower prices as supply adjusts.
So on the one hand we have a clear sign of inflation - even without chinas dumping, we have more money coming into the system.
But on the other hand, we have clear signs of deflation, job loss, lowering demand for goods, etc.
In the end which one wins - are we in an inflationary cycle, or a deflationary cycle - thoughts?
crt,
As a I am a strict Austrian, you raise a very important question. It's a complicated issue and the short answer from my understanding is it depends :-).
Murray Rothbard stated that four main factors exists in determining the general price level.
Supply/demand of money and the supply/demand of goods.
Basic economic principles state if the supply goes up price goes down, if demand goes up price goes up, etc.
As you stated multiple massive forces are coming to play.
Before 1913, we had a hard money economy. From 1913-1973 it was semi-hard money, and since 1973 it is entirely paper based, fiat, debt. Our entire currency is based upon leveraged debt (aka Fractional Reserve Banking). The system exists to ever expand the money supply based upon leveraging and debt. Banks sell assets to the Federal Reserve and in return they get paper, upon the paper commercial banks can lend up to 90%. The investment banks have been able to leverage >40:1.
Essentially, over the past 7 years we have have an unprecedented massive increase in the money supply (using Austrian standards of money supply).
see
http://mises.org/content/nofed/chart.aspx?series=TMS
Basically >70% increase in 6 years.
We didn't see "inflation" in most goods except housing. Currently this massive increase is leveling off (banks not loaning out more than they have already loaned out), but it's still growing. Some (Mish) claim it's shrinking . . . everything I've seen says it's still growing ~1-3%.
Demand for money. This is difficult to measure, but from what I gather its the desire to hold money vs. lending it (this is different than increasing the money supply). Due to the way the banking system is, demand for money and the supply are somewhat intertwined (even though in a free market they shouldn't be). Banks aren't as willing to lend so demand for money is increasing, so you have a stagnant money supply and an increase in the demand for money.
Supply/demand of goods. Lot's of oversupply in houses, cars, etc. Demand for these items are dropping, however due to JIT manufacturing any oversupply in most things (especially autos) can be cleared pretty quickly.
Put all these things together and it's quite interesting. I'm not sure what will happen, but I know what the free-market solution would be. It would be deflation.
Of course, slow gradual deflation is the natural state of the market vs. slow inflation as we have been lead to believe for the past 100 years.
Think about it, as economies become more developed longer, and longer more efficient production chains are employed. The natural state is for things to get cheaper.
Deflation is not bad . . . deflation didn't necessarily kill us in the GD . . . it was a 2-fold problem. The government stepped in and wouldn't let prices or wages fall, and there was massive unemployment. B/c prices weren't allowed to fall (especially farm prices) people starved. The 2nd thing was debt as debt becomes more expensive in deflation.
So deflation should be the natural state, however with the gov. stepping in they want to reinflate. They realize they we can't deflate b/c it makes servicing the debt impossible (i.e. we'd eventually have to default on it) The problem with reinflation is that they can't force money to go were they want it. They can only make the money available, it will find a home were it can make the best return. They tried to reinflate in '01, money found a home in houses. If (and they appear that they will succeed) they reinflate now, I personally think the money will find a home in commodities.
If they get too loosey goosy with the money supply, or if our "friends" realize we are just printing money to pay them, things could get real interesting. They could loose the handle on inflation and then all bets are off.
So ultimately what I think will happen is that home prices will continue to decline and commodity prices will take on a boom and then bubble like the housing bubble. Some could argue that commodities were in a bubble. . . I say just wait. I call for biflation, deflation in home prices and stocks and inflation in commodities.
I think the preceding paragraph is the best case, IF they avoid hyperinflate. The problem is if they get out of this mess this time . . . we will deal with a bigger mess in another 7-10 years. The root of the problem is that our system is systematically flawed (based on debt and ever expanding fictional "money").
It is inherently unstable . . . whether it collapses now or in the future is irrelevant . . . it will collapse, unless we fix the root problem.
Sorry for the long answer . . .
And finally a quote from Ludwig von Mises.
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved".
"biflation, deflation in home prices and stocks and inflation in commodities"
I kind of came to that conclusion too, but I didnt know such a condition could exist. I just did some reading on it, and it appears that biflation to be the inflation of commodities, but the deflation of non commodities. The only problem I see is housing, (at least the shelter component of housing) is indeed a commodity. Yet I feel certain housing prices will continue to fall.
Maybe the true answer is housing continues to fall (i.e. removing the excesses of the bubble), but not as much as it otherwise should in a "flat" market because of inflationary pressures.
As for other commodities, and the potential for a bubble, it would be interesting to track the rise in prices in gold and oil versus other commodities. Whenever anyone sparks the fear of inflation, all you ever hear about is gold and oil, gold and oil, every J6P talks about gold and oil, as if other commodities did not even exist.
Thus I worry that too much of the masses head to one or two classes of commodities, while neglecting the others, meaning part of the rise is due to inflationary pressures, and part is due to a herd mentality if you will - (pretty much the same thing that caused the housing bubble).
Overall, I do agree with your comments, but there is one I do not.
"whether it collapses now or in the future is irrelevant"
Speak for yourself on that one :) Some civilizations were able to stave off their day of reckoning for 200 years or more. If I had my way, it would be some great great great grandkids of mine that have to deal with this - its much harder to care about people I will never know than those you now know and love.
"Speak for yourself on that one :) Some civilizations were able to stave off their day of reckoning for 200 years or more. If I had my way, it would be some great great great grandkids of mine that have to deal with this - its much harder to care about people I will never know than those you now know and love."
crt,
I agree with you to a large extent. I guess I was referring to the fact that unless you build a country (or your life) upon sound principles the day of reckoning and the fall will inevitably come.
Now I don't claim to know if this is the exact situation, for a slightly different take, but with the same end here is a comment from the Big Picture (see below). The only saving grace we might have is with the internet people might finally be waking up to the load of crap we are in. Again, we may be able to stave it off, but unless the currency is built on sound principles it won't last.
"This is a cut 'n paste from a thread on the Bailout from Mish's blog (http://globaleconomicanalysis.blogspot.com/) which was continued over at the Ticker Forum...
I believe the real reasons for the Bailout are contained within as well as the curious provision about accepting toxic waste of certain FOREIGN banks....
"Nobody can come out and say that. Period."
As far as the US Treasury and Federal Reserve is concerned, there are 16 VERY good reasons why this "bailout" MUST go through ASAP. They are:
BNP Paribas Securities Corp.
Bank of America Securities LLC
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
RBS Greenwich Capital
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.
These are the primary dealers in US Treasury securities. Between them, THEY PURCHASE THE VAST MAJORITY OF US GOVERNMENT SECURITIES SOLD AT AUCTION and then re-sell them to their foreign and domestic customers.
When they have a problem (like hopelessly impaired balance sheets), the US Treasury has a problem. The impaired balance sheets of many of the primary dealers is starting to hinder their ability to participate in Treasury auctions.
This could lead to FAILED Treasury auctions in the very near future.
The reason the real truth cannot be stated by anyone is obvious. They would have to state flat out:
"The economy is going to hell in a handbasket and the deficit next year is going to go through the roof. To get ready to finance this whopper of a deficit, we are going to have to help out our primary dealers by giving them $700 Billion in balance sheet relief. The Treasury will do this by buying distressed assets from them at above market prices."
Even at today's ridiculous artificially low Treasury yields, the interest on the Federal Debt is over $400 billion per year.
This year's budget deficit was around $400 Billion. With next year's budget deficit expected to approach or maybe exceed $1 TRILLION, they will need to have the primary dealers be able to absorb an ADDITIONAL $600-$700 Billion.
Do you think they plucked that $700 Billion figure out of thin air?
Paulson's plan is to give the primary dealers $700 billion of balance sheet relief with the understanding that they replace DOLLAR FOR DOLLAR the toxic mortgage securities they offload to the Taxpayer with newly issued US Treasuries.
Makes getting through next year's "challenging Treasury calendar" a heck of a lot easier.
No Tin Foil required here. It is simply a matter of financing the Gubbermint.
This whole thing is about lining up financing for next year's HUMUNGOUS Federal Budget Deficit in advance.
The $700 Billion "gift" allows the primary dealers to handle $600-$700 Billlion more in expected 2009 Treasury issuance than they were able to do this year. They were able to handle $400+ Billion this year, so with $700 Billion of "help", they should be able to absorb the $1 Trillion next year.
Can you imagine Paulson and Bernanke telling a Congressional Committee that we expect the economy to completely tank next year and that the budget deficit is going to approach or exceed $1 Trillion? And by the way we need you to help the Primary Dealers out with $700 Billion in balance sheet relief at taxpayer expense so that they can help us finance it.
No. They can't do that. So this is what we get. Vague references to "financial meltdown". It's not like they are out-and-out lying. Failed Treasury auctions will not produce pleasant consequences for anyone in the US.
I have said before that I am sure that the Chinese have already made "the phone call". The one where they say "You start printing and we start selling." This approach keeps them in the game.
The taxpayer gets benefits from this as well. Assuming the primary dealers get the $700 Billion in balance sheet relief and are able to absorb the $1 Trillion in new issuance next year, the taxpayer avoids a tax increase and interest rates stay low.
--This is a ****ing death spiral, using debt to wedge open channels to acquire more debt to pay for existing debt.
we shouldn't have let even the feddie/fannie bailout happen, or even the stimulus. Those obviously did nothing to improve our deficit.
US debt is going to ****ing explode.
They underestimated this year's borrowings. We will have borrowed $792B in money from US Treasuries for this fiscal year. Hmmmmmm...next year's red ink is going to be much worse.
Interesting. Primary dealers must meet certain liquidity and quality requirements. So, if all of the existing primary dealers withdrew from the list of primary dealers (since they are pretty much insolvent), then funding of US dept will skyrocket.
As Doug Noland would say, Ponzi Finance Dynamics. No matter how much money you throw at the problem the next round is exponentially bigger because it's a freakin' Ponzi scheme.
Then what's gonna happen if they only get 150 billion?
BOOM!"
"GTE said.
No. They can't do that. So this is what we get. Vague references to "financial meltdown". It's not like they are out-and-out lying. Failed Treasury auctions will not produce pleasant consequences for anyone in the US."
GTE - I have no doubt there is a bunch of shenanigans at work here, but now that a deal is in the works, I feel more free to say that there very well could have been much more to this "meltdown" than meets the casual eye. My job as a transactional attorney gives me somewhat of an "inside the workings" perspective, yet my world is far far removed from the world of wall street, treasuries and the like.
Still, even at this far removed perch of small businessess and small banks I can say without reservation that I was really spooked as of last tuesday and wednesday. We had guys here - 20+ year practioners who had been thru S&L and said this was far worse than anything they had seen.
For the time being, lets just say, I suddenly saw how the whole meltdown thing is possible. My world involves very complicated web of interelated agreements involving a series of cross default provisions and strict requirements on cash ratios, debt to equity ratios, etc. that were suddenly called into serious question. For a while there I could totally see this whole thing going down the tube in a wave of cross defaults.
Thats why my free market ideology something I have had for my entire adult life - went completely out the window last week. I really saw the need for this and fast.
Now that we got it, I hope that others in similar positions to me had this same realization. I hope that some of our elected leaders, or those in my ranks who are thinking of running for public office one day will keep this last week in mind. I seriously hope they will all realize that once we get throught the next 18 months or so, we really need to face these issues related to long term debt in a much more serious manner.
In sum, lets just say, I am glad they approved this package. I very well could have been wrong in what I was envisioning, but I can say it was a strong enough feeling to cast away my entire ideology. Theres a saying - there are no atheists in foxholes - I have a newfound respect for what that means now.
crt,
1st off . . . let me say I have enjoyed this conversation so far, seriously.
Maybe it's b/c I'm somewhat young, and somewhat brash, somewhat idealistic ;-), but I truly believe that if a meltdown occurs (and we aren't out of the woods yet as no package as of yet has been passed and we have no idea what comes next), that as long as the foundations of whatever is put in place afterwards is based upon sound economic principles that the recovery will be much better and stronger than the house of cards we have now.
Fear is good, if it motivates one to prepare and as long as one is prepared then there is nothing to fear.
The problem comes when no one prepares. That is where things get really dicey. As a country we are woefully unprepared for any bad times. When you have an unprepared populace and things get bad, things could get really bad (like Argentina/Wiemar bad). The people panic b/c they realize they haven't prepared for the what-if scenario.
My two guiding economic principles are
#1) absolute freedom of exchange
#2) which derives from #1, fraud and theft will not be tolerated and will be punished to the utmost extent.
If you base an economy on those two principles you have a sound basis. Our currency is not sound b/c it is based upon fraud and theft, and it can never be sound. The entire banking/investment industry is built around fraud (FRB is fraud and theft), and will consequently never be sound as long as it is based on fraud.
Personally, I think the atheist in foxhole analogy is not the correct analogy. An atheist's principles are not true principles, and thus when TSHTF they fall completely apart.
True principles never fail, b/c if they did then they wouldn't be true.
I think the analogy is more akin to a God-fearing individual renouncing God when a gun is put to their head and their family's head and are told to renounce or else.
If they had a true conviction of God, they wouldn't renounce. Renouncing just means they never held a true conviction.
GTE enjoyed it here too. Last comment for today as it looks to be another awful day.
Writing last night, it looked like the deal was in the works, then later reports "its off" - what a bunch of BS. Negotiating 101 - you never announce you have a deal if you know others will deny it - especially since you are dealing with sensitive information with literally billions of dollars on the line. I seriously have to wonder if Richard Shelby's blind trust is heavily shorting the market. The market wants confidence and decision right now, and our fearless leaders are giving them indecision and public infighting. Either there is a deal or their isnt - period.
Also, I need to backtrack on my earlier statement a bit. I said earlier this week that my guess is if there is no bailout there is about a 20% chance we go down the tubes now, and an 80% chance we will be fine (moderate recession) and high single digit or so unemployment. I need to keep that in mind because I recently dwell too much on the 20% as if it was my view of what I really "think" will happen.
The thing that kills me about this is seeing first hand the break down of finance and credit in all sectors, even in those that use it and price it responsibly - this is something I dont ever want to go away. When I worked overseas, I got a taste of "Hawala" - finance in accordance with islamic principals. Essentially, interest is forbidden, and thus credit by and large, doesnt flow well.
After dealing with that for a while, it is thus no surprise to me that much of the islamic world is well behind the west in terms of advances in of technology and medicine. In a word their system is "too" sound - without the free flow of credit, no one has the incentive or the means to take risks that advance the larger society.
Anything to do with R&D and the like totally relies on credit and its not flowing right now - its a market failure - something that in economic parlance really shouldnt happen.
In law school, I was lucky enough to take afew classes with Vernon Smith (pre nobel laureate in econ days). I came out of school very grounded in certain economic principles. That said, the reality of the way things work in western and middle eastern systems of finance has caused me to become less grounded in the basic principals - mostly because I have found some instances where they simply dont work.
Thus my view now is one clearly less guided by principals and based more on pragmatism. I think there is a good chance we get out of this (the 20% doom scenario) if we (a) pass this now, and then (b) spend the next 10 years tightening things up, but in a more responsible manner.
gte and crt
At least one onlooker has distinctly enjoyed this too.
I've always said about the bust that if my husband and I can't get financing, then there will be bigger fish to fry than us not buying a house. Here's hoping your 20% scenario doesn't come to pass.
What I'm confused about is the mechanism by which this bailout is supposed to work. Will banks actually sell these assets to the (fed or treasury, I'm not clear on which)? How different is this than the fed lending window allowing these toxic products as collateral for loans from the Fed? It's really "off the balance sheet" that way, and there's no loan to pay back, just equity sharing if things go well for the bank. Is that sufficiently better to make this fly? Currently banks have been incredibly hesitant to use the lender of last resort window, because it was such a huge sign of intrinsic weakness. (or at least it's portrayed that way in the media, I don't know whether that's actually true). Will selling the assets to the Fed be judged any differently by investors? One would naively think they should rally to any bank that gets rid of its junk soonest and cleans up its balance sheet, but is there some other negative that I'm missing? Like is the equity sharing aspect going to be negative enough of an impact on future earnings that investors will baulk like Paulson said they would?
Am I asking unanswerable questions?
>Anything to do with R&D and the like totally relies on credit and its not flowing right now - its a market failure - something that in economic parlance really shouldnt happen.<
R&D is something I track and right now U.S. firms are moving more and more of it overseas because of lower cost. If U.S. assistance for R&D is constrained by this meltdown, it's going to be a serious problem for U.S. longterm.
I have two broad concerns.
If the U.S. fails to come up with a rescue, companies will increasingly look to cut margins as deep as possible and send as much work overseas as they can. The U.S. will have to offer tax incentives to (The R&D tax credit won't be enough) to keep it here; it can try negative tactics, as well but those may backfire.
The other concern is this. Regardless of whether the U.S. funds a bail out or doesn't, spending is going to be seriously constrained. Both Obama and McCain want to hike R&D for basic research, although they are approaching it different ways. Obama wants to hike federal spending and get more control on how basic research money is spent; McCain wants to improve tax incentives. Both have costs and I'm really concerned that who ever is the next president, is going to have trouble funding R&D.
This really has me concerned. R&D is directly linked to growth. New investment in nanotech, biotech, energy research, etc., are critical if we are going to stay ahead. And we can't afford to take a five year pause while the bad debt works its way out.
Cara your instincts are largely correct. As I understand it, it is different from the lending window because it really is a purchase - it (should) drain the pool so we find out who is swimming nude.
You are also right to question the mechanism by which this will happen since the bad actors are so afraid to tip their weakness at the lending window. Right now everyone still swears they have their suits on but we know some are lying - we (credit markets) just arent totally sure which is which.
I see 2 basic mechanism choices, but no one seems to be clear which is the one the treasury will use.
1. Overpay for the junk loans so that the weak banks will no longer be weak (throw them a pair of shorts). They will now have tons of cash and no toxic liability hanging over their heads - thus trusted by others and free to lend. The problem here is that its a bailout with a capital B and hard to swallow in washington.
2. Second option is to pay something close to "mark to market" prices. But again, this will expose some as being nude and how can you force them to agree to that (since they wont use the lending window now for the same reason)? The one way I see is through "forceful" persuasion.
Sometimes when congress investigates some industry like airlines, baseball (Steroids), credit card companies, etc. they suddenly decide to "voluntarily" clean up their act. The real reason is congress sent a message "clean yourself up, or I will do it to you and you wont like that". Thus it could be accept this price or I will do something to your industry you really wont like. That in and of itself could casue the clothed to put tremendous pressure on the naked to come clean - and allow the nude to work out deals for their survival (mergers, sales, etc) once the pool is drained.
Personally, I like #2 because its less of a big B bailout, but it still clears the credit markets of crap. Yes banks will fail, but the remaining ones will now know its Ok to lend to each other as they really had shorts on the whole time.
Either way, I support something being done now, for exactly the reasons Kob noted. Since the credit markets are so frozen right now, we are not only destroying the weak (builders and the like which should happen), but also the strong (high tech or really anything that just cash flows poorly). This should not be happening, the credit markets must be functioning again to keep the healthy in the game. Its just a shame that we had to get to this point in the first place.
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