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Bankruptcy or Bailout? You decide...

Discussion in 'Off Topic [BG]' started by Johnny Fila, Sep 30, 2008.

  1. Bailout

    6 vote(s)
  2. Bankruptcy

    68 vote(s)
  3. I don't know

    11 vote(s)
  1. Johnny Fila

    Johnny Fila Formerly "The Crusader" Supporting Member

    Nov 21, 2004
    Elmont, NY (near NYC)
    From CNN commentary: http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview

    Commentary: Bankruptcy, not bailout, is the right answer

    By Jeffrey A. Miron
    Special to CNN

    Editor's note: Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.
    Economist Jeffrey Miron says the bailout plan presented to Congress was the wrong solution to the crisis

    CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

    This bailout was a terrible idea. Here's why.

    The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

    Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

    This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

    Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

    The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

    The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

    Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

    In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

    Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

    Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

    Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

    The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

    If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

    The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

    Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

    So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

    The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.
  2. mrokern

    mrokern TB's resident Rush freak

    Jul 20, 2007
    Minneapolis, MN
    Yup. Kind of goes back to what we were talking about in a previous (now closed) thread.

    Let's see if this one can stay open. Discussion of this topic does not automatically mean it has to be political.

  3. Ladies and gents,

    Might I present the visual definition of a trillion?


    If you counted to a million by one every second, you'd get there in a little over 12 days. If you counted to a billion every second, you'd arrive in about 31 years and 8-1/2 months.

    And if you counted to a trillion... in 31,688 years you would be done.

    We cannot even begin to imagine how much money is being thrown around. There's insane, and then there's beyond description.
  4. fenderx55


    Jan 15, 2005
    I voted bankruptcy, however, before reading that piece I would have voted for a bailout. I live in the NY suburbs but I work in the city as a new hire at a company in the luxury sector. Usually, high end luxury does ok in times like these, however, 100% of our customer base are affluent women, and their husbands are telling them not to shop. This is a problem.

    But at the same time, if the long term benefits of "teaching them a lesson" outweight the short term, then I guess I can go along with that... mostly because I live with my parents.

    I gotta say though, I'm not looking forward to what this will do to Manhattan. We're going to lose billions in revenue when brokers and the others on wall street stop spending or move. While they're a fraction of the population, they represent the majority of taxation and discretional spending. A really good illustration of this is the side-by-side BMW and Mercedes dealerships in the Financial District, strategically located to suck in guys with a fresh bonus burning a hole through their Burberry suits. The Times or NY magazine reported on this last week, I'll see if I can find it and edit this post, for nothing else than to back up the above. It's not just the city and Long Island that will hurt, but Jersey City, Connecticut, and the like will all feel this a bit.
    Edit: Found it, or if not the article, something close: http://cityroom.blogs.nytimes.com/2008/09/15/bloomberg-and-aides-meet-on-banking-crisis/

    I feel for the people that will lose their homes, I can't imagine the heartbreak of such a thing, but I thought I'd throw a light on the people being vilified. Did Wall Street act imprudently? Yup. But we must remember that there is literally an army of people that will be touched by this: doormen, delivery services, restaurants, theater--basically anyone in the service industry.

    One of the things bothering me is that the pundits throw around the quip that "what's good for wall st isn't good for main st," and I'd like to point out that I have a main street too. New York City has many main streets and they're going to hurt. Does warrant a 700 billion dollar pay out from everyone else? No. But I think I'm a little sensitive, having lived in and around Manhattan for my life, to the far far right wing referring to the City as evil, the new Babylon, etc. I even took a course in that kind of thing. There are just as many people in this city that didn't mess with someone's money a la Boiler Room. Let's not start the whole Small Town vs. Big City Liberal thing. That's so Decision 2004.

    Is this thread political? if so I retract my statement and I was never here. :bag:
  5. GregC

    GregC Johnny and Joe Gold Supporting Member

    Jan 19, 2007
    That's a political editorial, not a balanced view of the situation. That's all I'm gonna say here.
  6. SteveC

    SteveC Moderator Staff Member

    Nov 12, 2004
    North Dakota
    It is an amount of money that most people can't even wrap their mind around. Let the chips fall. Wacovia went belly up and was bought out. It will happen to other banks/companies as well. It happens all the time.
  7. MonetBass

    MonetBass ♪ Just listen ♫ Supporting Member

    Sep 15, 2006
    Tulsa, OK
    I refuse to pay for the government's screw-ups.
  8. MakiSupaStar

    MakiSupaStar The Lowdown Diggler

    Apr 12, 2006
    Huntington Beach, CA
  9. It's not all about the government messing up. There was a lack of regulation in the lending market. This is mostly private sector. Trust me, people would complain if the government were setting rules and standards, obviously before something like this happened and showed why there needed to be some sort of intervention. Private citizens made poor judgment calls with their loans and other debt while lending institutions encouraged these loans to many who weren't truly able to afford them.
  10. buzzbass

    buzzbass Shoo Shoo Retarded Flu !

    Apr 23, 2003
    "No Bailout for you !"

    *soup nazi voice off*
  11. Visirale


    Mar 23, 2003
    Bankruptcy, easily.

    We can't always be bailing firms out. We need to let the market naturally correct itself for all the mortgage BS the country has created. I'm for laissez-faire economics, so just let the banks fail.

    But they should tell me personally before it happens either way so I know whether to sell my stocks or buy more :).
  12. jkritchey


    Jul 23, 2002
    Northern Va.

    This is not a proposed bailout of firms that benefits a bunch of fat cats. That's populist drivel. It's a rescue for the economy we all use. Keep reading, don't stop there.
  13. Yep the poll is poluted with the C.N.N. article. Repost it with out the editorial.
  14. Johnny Fila

    Johnny Fila Formerly "The Crusader" Supporting Member

    Nov 21, 2004
    Elmont, NY (near NYC)
    I actually went with the "I don't know" answer. I'm pro bailout, but at the same time, that's not really free market, now is it? So what's the right answer? I could argue it either way.....
  15. biohazed


    Aug 31, 2008
    Philadelphia, PA
    I'm Anti -Bailout ... I'm so sick of the government bailing out thise big companies .. why not do something to help the people of this country instead of covering up Big Business screw-ups. Instead of paying off all that money to WaMu and whatever other company why not do something like pay off everyone's mortgage to a certain amount ... that way it may help jump start our failing economy
  16. jkritchey


    Jul 23, 2002
    Northern Va.
    With all due respect: the point of this is to do something to help the people of this country; namely, keep their banks, businesses and real estate markets functioning.

    Keep reading there's good info out there...
  17. Philbiker

    Philbiker Pat's the best!

    Dec 28, 2000
    Northern Virginia, USA
    That's the problem. The point is to keep business as usual running. Business is usual has proven untennable. What we need is a measure that intends to fix the problems that caused this situation in the first place.
  18. jkritchey


    Jul 23, 2002
    Northern Va.
    Indeed but we need something immediate (IMVHO), and then something else, carefully considered,that will fix it. I don't think you can fix it in the time necessary to unfreeze the banks, and I don't think we can wait until it's perfect and the political winds are blowing just so.
  19. Visirale


    Mar 23, 2003
    But at what point do we just need to let a bank failure be a bank failure?
  20. jkritchey


    Jul 23, 2002
    Northern Va.
    Single bank? Let it go. We already have. I was referring to the banking system, not any individual bank.

    Linc: That's the kind of political stuff that will close this thread.

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