Do We Need This $700 Billion Bailout?

I don’t like this bailout for several reasons.

First, none of this is my friggin’ fault.  I didn’t get a mortgage that I couldn’t afford, nor did I sucker anyone else into getting a mortgage they couldn’t afford.  I didn’t do any risky or shady trading on the stock market.

Second, this proposed bailout is happening way too fast.  Our government was deliberately designed to be slow-moving in these kinds of issues, with 3 separate branches that keep each other in check, in order to maximize the overall stability of the system.

Third, our economy is cyclical; there must be downturns from time to time.  We can impose artificial measures to prevent downturns, but that doesn’t work indefinitely, and the longer we go without a recession, the more likely it is that we’ll have a depression.

One good analogy that I’ve heard a few times now is that the economy is like a forest.  Forest fires happen naturally, and they are part of the normal cycle of a forest’s life; they’re necessary from time to time to ensure the overall health of the forest.  And the longer we go without a forest fire, the more the underbrush builds up, so that when a fire finally does happen, it’ll be that much worse.  Better to have a few smaller fires every year than to have a few years with no fires followed by a really big, really bad fire.

So, do we really need this bailout?  It seems to me that the bailout will take money out of my pocket and put it into the pockets of irresponsible borrowers, of big financial institutions, and of bureaucrats.  That sounds great and all, but it seems like there’s got to be a better way.  Unfortunately I’m not an economist and I don’t really understand the entire picture here.

If we don’t go through with the bailout, and we have a recession, I’ll consider that a good thing.  On the other hand if it causes a depression, that’ll be a bad thing.  So which will it be?

Posted by Anthony on 3 replies


01. Sep 28, 2008 at 09:40pm by Tasha:

Are you kidding me??
I will start by saying that I am way biased since my job depends on this, but, having said that, you have to understand how lenders effect everything in our country. If lenders aren’t able to lend money, which right now, they are barely able to do, there are no mortgages, which means no jobs for appraisers, brokers, real estate agents, title companies, etc. (all who have no fault either, I don’t have a mortgage I can’t afford- yet, until I lose my job, too, I have a regular 30 year fixed rate). People can’t buy / sell houses. No/very little new construction, or any fix-up construction, tons of job loses for builders, and small and large construction companies. Students aren’t able to get loans, even ones they previously qualified for, which means colleges aren’t making money, and college town aren’t making any money. Car dealers can only sell cars to cash buyers, so dealerships will go out of business. Lets see, credit card companies can’t extend credit, more job losses. People can’t afford to travel, more job losses. Retail & grocery stores lose business, there go more jobs. If you think this bailout is going to cost you (which it may or may not, that depends on what the final deal is, and don’t forget, these foreclosed upon houses DO have value and will eventually be sold, recouping some money), how mush do you think it’s going to cost you when all of these unemployed people have to be supported through our government programs? You need to look at the big picture. It’s not just about bailing out Big Mortgage. It’s about retirement accounts that will be completely lost when the stock market crashes, not just CORRECTS, but actually crashes.
I liken this situation to paying your mortgage with a credit card b/c you don’t have the money to pay it from your checking account. I think everyone agrees that that’s not a great idea, but who wouldn’t do it if they had to?

Quoting Anthony:

If we donít go through with the bailout, and we have a recession, Iíll consider that a good thing.

You can’t be serious!!! Most of these people who would lose their jobs, INCLUDING ME!, didn’t get a mortgage that they couldnít afford, nor sucker anyone else into getting a mortgage they couldnít afford, or do any risky or shady trading on the stock market.
Wow, I’m in disbelief.

02. Sep 29, 2008 at 02:58am by Anthony:

Wow, you’ve completely misunderstood my point.

Quoting Tasha:

lenders aren’t able to lend money
no mortgages
no jobs for appraisers, brokers, real estate agents, title companies
People can’t buy / sell houses
No/very little new construction
Students aren’t able to get loans
colleges aren’t making money
dealerships will go out of business
credit card companies can’t extend credit
People can’t afford to travel

What you’ve described is a depression, not a recession.  A depression is extremely bad.  A recession is bad in some ways, but it’s good in that it’s a relatively subtle market correction, which helps to stabilize the market and make it less likely to suffer a depression.

Everyone including me wants to avoid a depression.  That’s not the question.  The question is whether this bailout is necessary to do that.

03. Sep 30, 2008 at 07:54pm by Anthony:

Scott Adams says this today:

What seems missing in all the discussions of the bailout is some sort of description of what is likely to happen if we do nothing. Personally, I am not persuaded by hand waving and vague pronouncements of doom. I’d like to see the risk illuminated a bit.

For example, is the risk primarily to a number of big financial institutions that wouldn’t be missed by anyone but the stockholders and employees who signed on for the risk? Or is the failure of those companies just the start of a process that would inevitably cause a great depression? I have no idea.

Economist Jeffrey Miron says this:

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. [...]

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. [...]

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.

Here’s a comment (on this post) which seems to be sensible:

It isn’t just about subprime loans, if it was, the entire financial system wouldn’t be melting down. We’ve had housing bubbles before. The reason why this one might collapse our financial sector is because of Republican sponsored deregulation of the financial markets in the early 90’s. In that legislation, depression era firewalls between securities, banks, and insurance were removed. The mess we are in are because sub-prime lenders repackaged their debt and sold it as securities. This gave the lenders the incentive, much more than expansion of the CRA, to make more sub-prime loans, because they could profit by selling these as securities, not just be hoping the lendee paid the loan back with interest. They had collusion with insurance companies, who insured these bad repackaged loans, and with risk rating companies who ignored the risk of an overall housing downturn (the one thing that could and did sink the whole scheme). Everyone who was making a mint in this mess was lobbying Republicans and Democrats to prevent them from regulating these things. Phil Gramm, for instance, made nearly a million dollars lobbying to prevent mortgage industry regulation in the early 2000’s. It may feel good to pretend like this is all the fault of one party, but its not. A solution to the problem, only based on mortgages, isn’t going to prevent a meltdown. It will just delay it. There is more bad debt out there, that has been repackaged as securities, from credit cards and other kinds of loans. Until the underlying issue, caused by deregulation is fixed, we are going to have a series of other shoes dropping.

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