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Thursday, September 25, 2008

Name the crisis the $700 billion bailout is designed to tackle

As the debate goes on over whether Congress should approve a $700 billion bailout for the financial industry, I think we need to be clear on one thing:

This is not a plan to fix the U.S. economy. This is a plan that’s intended to stem the credit crisis.

The credit markets are certainly an important subset of the $14 trillion U.S. economy. But even if Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke convince Congress to OK some sort of bailout, the U.S. economy will remain weak.

No one’s calling for robust growth in gross domestic product. Consumer spending is trending down. Employers are cutting jobs and the unemployment rate has been on the rise.

A $700 billion TARP (which stands for the “troubled asset relief program” that Paulson invoked in his testimony) isn’t going to make us all feel like making this the best Christmas ever.

Far from it. As a nation, we appear to have run out of assets to make a quick killing on. Whether it was tech stocks, resort-area condos or Beanie Babies, those things we could buy and sell at ever-escalating prices are few and far between.

Unless you own some land that sits on top of the Marcellus shale formation (believed to contain one of the biggest deposits of natural gas in the United States), you probably aren’t bragging about how much you’re worth right now.

And deleveraging this nation is simply going to take years. As this spring’s $160 billion tax rebate effort showed, scattering huge amounts of money across the land isn’t going to fix the “systemic problems,” as Paulson calls them, that have built up over the years.

Will a $700 billion bailout aimed at lenders begin to fix the systemic problems? Paulson and Bernanke believe so. And they want Congress to believe and all of us too. But they’re not sure it will work and they can’t be, because we haven’t faced a problem of this magnitude before.

They’re trying to restore confidence in the credit markets where banks are leery of lending to other banks, where few in business seem willing to trust the person sitting across the table.

They warn that the risks of doing nothing are greater and could cost all of us even more. What if, instead of rubber-stamping the Paulson/Bernanke TARP, Congress approves a general framework to begin to assume this toxic debt? Sure, approve some money to actually buy these assets, but not the full bazooka.

Wouldn’t it send more of a message to the global markets that the Bush administration and lawmakers were methodically tackling possible solutions, rather than what it appears: A panic to pass something - anything - fast.

Over the last 13 months, the Federal Reserve has employed a number of its traditional tools and tried other quite inventive approaches to keep the credit markets moving.

Still the financial sector has limped from crisis to crisis. As a total outsider, the last two weeks have looked to me like the Washington financial intelligentsia have been making it up as they go.

How can that possibly inspire confidence?
Posted by Mike Armstrong @ 2:25 AM  Permalink | File Under: Financial Services | | Investing, Markets | | Politics, Taxes | 9 comments
Comments   
  • 0 like this / 0 don't   •   Posted 12:36 PM, 09/25/2008
    mike, this what they used to call a "boondoggle". we've been robbed and you're right...the fed is in panic mode.what scares me is that's contagious for regular joes up to finance firms.what else scares me is that this feel alot like what i've read about 1929..that was based on over extended credit and inside thievery.FDIC aside,this smells like a bucket of dead fish,and our grandkids will still be smelling it decades from now.somebody's gotta go to jail .
    — scorpio27
  • Comment removed.
  • 0 like this / 0 don't   •   Posted 12:53 PM, 09/25/2008
    wake up people and prepare.i'm no chicken little,but if you listened to the president last night,and substitute "depression" when he said "recession",it sounded like FDR circa 1933.the only thing missing was the whole "fear itself" thing.take it from a historian,it often repeats itself,and we're going to witness history right up the wazoo.
    — scorpio27
  • 0 like this / 0 don't   •   Posted 1:06 PM, 09/25/2008
    did you notice wher the smart money did you notice where the smart money went right after the collapse? gold silver and platinum commodities,and T-bills. are we back on the gold standard[like we ever left],or are we now socialists,because one of the definitions of socialism is the gov't controls all moneys,trades,and loans.we are adifferant country than we were two weeks ago.
    — scorpio27
  • 0 like this / 0 don't   •   Posted 1:32 PM, 09/25/2008
    name the crisis the "great 700 billion dollar train robbery"...and they didn't even have to draw their six-shooters.
    — scorpio27
  • 0 like this / 0 don't   •   Posted 2:58 PM, 09/25/2008
    I still don't think you've identified the objective of this plan. To say that it intended to "stem the credit crisis", you're making more of it than it deserves. The objective is to bolster confidence. The hope is that when the government makes a bold step with lots of money, banks will beging lending again and the marketplace will work everything out. It will not stem the credit crisis but cause a brief freeing up of money. It also implies to the financial industry that the they can get back to business and count on the government to bail them out if there decisions turn out to be bad. Here's my question: Traditional banks have the deposits of their customers to do business with. If the problem was simply an issue of freeing up capital, I would expect that traditional banks are doing business and making loans. Are they? Are they doing business with certain banks and not others? Or is the idea that since we're giving them free money, they'll take more risks and go ahead and do business with companies that they wouldn't with their depositors money?
    — MikeP
  • 0 like this / 0 don't   •   Posted 4:30 PM, 09/25/2008
    I wanted to share my opinion regarding the proposed $700 Billion Wall Street Bailout Plan, which I am not in support of. I am a Mortgage Loan Officer and have seen the effects of the past 18months meltdown in our industry, and see a better way to resolve the problem. My plan (which I have dubbed: the Housing & Economic Recovery and Prosperity Act of 2008): - Wall Street made bets on mortgages for the past years, betting (like a football game) that homeowners would win/pay their bill or lose/not pay & result in foreclosure, this is like giving back the bet money in the 3rd quarter of the game just because your team(USA Homeowners) are losing/not paying their mortgages. - My plan would be to fix the root problem, by making these mortgage securities worth something again, as if these securities were bet on the bill/mortgage getting paid. Many people I speak to thought these mortgages and housing was backed by the Government, we should do just that, guarantee every qualified loan that meets certain standards, and all new loans created. Through a new Government Mortgage Housing & Relief Program would have the government look at each individual foreclosure and situation via either a refinance request on qualifiable situations (meeting certain criteria or standards, similiar to how the bankruptcy "cram down" looks at this, or via the foreclosing bank submitted a reimbursement request on the non-qualifiable submissions, thereby paying off the foreclosed mortgage and making good/guaranty on the mortgage back security which would then be of re-asserted value, leading to consumer, investor and homeowner confidence that their home mortgage is federally backed.
    — srip7
  • 0 like this / 0 don't   •   Posted 8:22 AM, 09/27/2008
    "The devil is in the details" someone once said. What does the plan say about stockholder equity? Investors in the failing companies are the ones who took the gamble, not the taxpayer. Investor funds must be liquidated before the treasury steps in. It's the way the free interprize system works.
    — gelwix
  • 0 like this / 0 don't   •   Posted 12:39 PM, 09/27/2008
    The fleecing of the flock just goes on and on, forget all that bailout and political razzel dazzel. After three weeks on the job, the current CEO of the failed Washington Mutual bank, Alan Fishman, will receive between $13 and $18 million in severance and bonus pay!! We taxpayers helped JP Morgan take over the failing Lehman Brothers for a bargain price, some called it a steal. Now that J.P. Morgan Chase is far richer and more powerful, JP can afford to buy poor Washington Mutual so their CEO could get his loot. Nobody even thanked us, not even Mr.Fishman -- hello sucker -- got any hip boots?
    — bottomline


9 comments
About Mike Armstrong
Mike Armstrong, a business editor and writer for nearly two decades, is the Inquirer's business columnist and PhillyInc blog editor. Contact Mike via e-mail or at 215-854-2980
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