[drbrumley]

Originally Posted by chrysostom

Who appoints the head of the Federal Reserve?

Usually the President and then confirmed by the Senate for 14 year terms.

[chrysostom]

Originally Posted by drbrumley

Usually the President and then confirmed by the Senate for 14 year terms.

They are the government

[assuranceagent]

I have mixed feelings about this, but here's my take on it:

The downside: Markets are efficient, meaning they self-right any irregularities and take into account all available information instantaneously. Any artificial involvement or manipulation of the markets results in corrective action by the market.

For several years now, the market has been manipulated by over-leveraging and asset collaboration among competing hedge funds to the extent that several major sectors of our market have been artificially pushed northwards into a near-bubble.

Now the Government proposes to come in and save us from the inevitable market backlash by further manipulating the market with artificial injection of capital. That's a rather frightening prospect when you consider the possible outcome.

That said, I'm not sure it's the most frightening prospect...

Pro: You see, we've had the opportunity once before to bail out the big financials and we elected not to do so at that time.

The result? - this is largely considered to be one of the major triggers to what is now known as the Great Depression. It's true that the market corrected it's own irregularities, but like a force of nature, it did so violently and decisively with no regard for how it would affect the average American. The market does not take into account your personal well-being.

So now here we are again and this time the government seems to be ready to experiment with the other side of the coin. "Well, we saw what happens when we don't intervene, lets see what happens when we do."

Realistically, I can say that I think that the intervention WILL have the effect of blunting the total economic damage, but at the expense of time. What I mean is that without the intervention, our economy would likely fall into a violent and relatively short-lived correction and possible depression. With the intervention we will see a more prolonged but shallow recession.

So then the question to ask is if it is worth our tax dollars - I think that it is, understanding that I'm guarded in saying that.

With our current, global economy, and the fact that most Americans are investors to some degree, I can't think of much else that would be more worthy of our tax dollars than attempting to blunt the damage this problem could generate. Should we slide into true recession or, God forbid, depression, the rest of the world would likely follow in our footsteps. And our leading the way wouldn't just be an economic problem, it could be a problem of national security.

I see many making the error of saying that this is about bailing out the debaucherous CEOs and who all who led us into this mess in the first place. It's not. It's about protecting the general public, and indeed, the world, from what your grandparents and great grandparents would tell you is a devastating and life-altering event that hopefully will NEVER repeat itself.

Failing to bail out those companies doesn't just affect them, it has the potential to devastate US ALL from an economic standpoint.

In summary, if the government wants to use my tax dollars to save us all from having to face the potential of a global depression, I have a hard time thinking of a better use of those funds.

The question is only: will it work?

That said, I think that every single member of every single management team of every single financial services company (or any other major company for that matter) that caused or contributed to this situation ought to be investigated and if found to have been willingly and knowingly complicit in fraudulent or market manipulative activity, jailed. For a long, long time.

I can understand the positions of those of you who say that this is a bad idea and that we shouldn't bail out the very companies that started the problem in the first place. But I have to say. As much as I'd like them to get their just desserts, I'm not willing to face the reality of not being able to put food on my table or gas in my car or make basic provision for my family just for the sake of 'teaching them a lesson.'

Yes, lets teach them a lesson. But let's protect ourselves first.

[drbrumley]

Originally Posted by chrysostom

They are the government

So?

Just because they don't understand the US Constitution and appoints a person more powerful than the President doesn't make it part of the Federal Government.

They are more powerful then the Federal Government I submit.

Money Masters

[assuranceagent]

I want to point out by the way that my post is speaking of a bailout plan in general, not necessarily the one being proposed.

The way the current proposal is written is downright terrifying to me.

[drbrumley]

This video is factual. I even called the FED to ask if some of the referenced procedures were right. They said yes.

Sickening.

[drbrumley]

Originally Posted by assuranceagent

I want to point out by the way that my post is speaking of a bailout plan in general, not necessarily the one being proposed.

The way the current proposal is written is downright terrifying to me.

It is terrifying. We have been sold out long before this, so this new proposal is nothing new. We continue to be sold out.

[drbrumley]

But as Proverbs says,

Proverbs 22

The rich ruleth over the poor, and the borrower is servant to the lender.

Please Chrys, I implore you, don't make the same mistake as I did before I knew this was going on. There is so much you don't understand. The Federal Government is authorized to coin money. They don't. They have given that away to private banks for their own profit. Please wake up. Under this new plan, the government will ask the Federal Reserve to print $7,000,000,000. All that has to be paid back plus 6% when all is said and done.

[drbrumley]

Loan amount $700,000,000,000

First Congress appropriates the money. After that, the US Government gives the Federal Reserve T bills which equal 3% of the $700,000,000,000. 700 BILLION! That equals $21,000,000,000. 21 BILLION! 21 BILLION the FEDERAL RESERVE just made out of thin air. Now if the FEDERAL RESERVE is part of the government, why does the US GOVERNMENT have to pay them 21 BILLION? On top of that, that $700,000,000,000 has to paid back somehow with INTEREST. Usually an additional 3 %.

Thats the basics.

[kmoney]

Originally Posted by chestertonrules

The paper is devalued because people can't pay off their loans, not because the underlying real estate is worthless.

Of course the collateral isn't worthless but in many cases it's below mortgaged amount. That's part of why this is so bad. If the properties were all worth what people paid for them then many people would be able to refinance into more affordable mortgages, but the fact that we are seeing so many foreclosures says that not only can people not afford the payments, but the properties are overvalued. We need to get the loans down to the right values.

[kmoney]

Paulson plan could make a lot of money in the end

Here's someone who agrees that this could be a great investment.

.....
Here's what's happened so far. New technology like electronic trading meant that Wall Street's bread-and-butter business of investment banking and trading stocks stopped making much money years ago. So investment banks took their enormous capital and at first packaged yield-enhanced, subprime mortgage loans into complex derivatives such as collateralized debt obligations (CDOs). Eventually and stupidly, these institutions owned them for themselves -- lots of them, often at 30-to-1 leverage. The financial products were made "safe" by insurance products known as credit default swaps, a credit derivative from companies such as AIG. When housing turned down, the mortgages and derivatives were worth a lot less and no one would lend Wall Street money anymore.

Then the piling on started. Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street's balance sheets. This was pretty easy to do in an illiquid market. Because of the Federal Accounting Standards Board's mark-to-market 157 rule, Wall Street had to write off the lower value of these securities and raise more capital, diluting shareholders. So the stock prices would drop, which is what the shorts wanted in the first place. It was all legit.

There is a saying on Wall Street that goes, "The market can stay irrational longer than you can stay solvent." Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.

Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason.

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.

So the U.S. will be stuck with a portfolio in the trillions of dollars in bad loans and last-to-be-paid derivatives. Where is the trade in that?

Well, unlike Mr. Buffett or any hedge fund, the Treasury and the Federal Reserve get to cheat. It's not without risk, but the Feds, with lots of levers, can and will pump capital into the U.S. economy to get it moving again. Future heads of Treasury and the Federal Reserve will be growth advocates -- in effect, "talking their book." While normally this creates a threat of inflation and a run on the dollar, and we may see dollar exchange rates turn south near term, don't expect it to last.

First, with Goldman Sachs and Morgan Stanley now operating as low-leverage bank holding companies, a dollar injected into the economy will most likely turn into $10 in capital (instead of $30 when they were investment banks). This is a huge change. Plus, a stronger U.S. economy, with its financial players having clean balance sheets, will become a safe haven for capital.

....

I haven't seen many positive reports on this plan but this one is making me think.

[Freedomcry]

Originally Posted by Knight

All we are doing now is laying the ground work to do this same thing every time the market is in trouble.

After all....
Why make wise business decisions when you know "big brother" is going to bail you out in the end?

Your temporary band-aid is the beginning of an infection that no anti-biotic will be able to cure.

Amen.

[chestertonrules]

Originally Posted by kmoney

Of course the collateral isn't worthless but in many cases it's below mortgaged amount. That's part of why this is so bad. If the properties were all worth what people paid for them then many people would be able to refinance into more affordable mortgages, but the fact that we are seeing so many foreclosures says that not only can people not afford the payments, but the properties are overvalued. We need to get the loans down to the right values.

That's true.

However, real estate valuation is cyclical. We have had large drops recently.

These properties will rebound, and the real estate values will come back more rapidly with this bailout than without it.


Not to mention, we still have a house in Houston we are trying to sell!

[drbrumley]

Originally Posted by chestertonrules

However, real estate valuation is cyclical. We have had large drops recently.

These properties will rebound, and the real estate values will come back more rapidly with this bailout than without it.

You don't know that with certainty.

[kmoney]

Originally Posted by chestertonrules

That's true.

However, real estate valuation is cyclical. We have had large drops recently.

These properties will rebound, and the real estate values will come back more rapidly with this bailout than without it.


Not to mention, we still have a house in Houston we are trying to sell!

Why do you think the property values will rise more with this bailout?