The $1 Trillion Solution: Will It Work?

Posted by: Michael Mandel on September 19

The numbers have gone so high that they’ve become inconceivable. Now Paulson and Bernanke are proposing a government fund or funds to buy up failed securities and prop up the financial system. The size of the bail-out funds: Roughly $1 trillion, give or take a few hundred billion.

There’s going to be a lot of debate about the details of the funds. But here are the two real questions: Will this plan work? And will it avoid a deep recession? The short answers: Yes it will work, and no, a deep global recession is inevitable.

Here’s why. The root of the problem is that American consumers overspent and overborrowed by roughly $3 trillion over the past ten years (I’ve written about this multiple times, notably here, here, and here). We can argue to the cows come home about how this happened. Probably the blame is shared among greedy financial institutions, weak regulators, and profligate consumers (after all, nobody made Americans spend).

The subprime crisis started people realizing that part of this excess debt wasn’t going to be repaid. In fact, this $3 trillion in debt overhang is all going to have to be dealt with, in one way or another.


baddebt.jpg


The first step in the process: The global financial institutions holding the debt started taking losses. At first they were small amounts, and then they got bigger and bigger. I haven’t seen a recent number on the total size of the write-offs in the financial sector globally, but call it $1 trillion. Eventually the financial sector couldn’t handle any more, and the collapses started.

So that left $2 trillion in potential losses. In steps Bernanke and Paulson. At first they shoveled in $20 or $30 billion at a time for Bear Stearns. Then it was $80-100 billion for AIG. Now they are upping the ante to $1 trillion or so in the new funds.

So the second step in the process: The government takes $1 trillion worth of debt onto its own books. Where does the money come from? Borrowing from overseas, of course. More about that later

But that still leaves $1 trillion in excess debt. And in the end, that will be paid back by American consumers, as they tighten their belts and cut back on spending. Or more likely, if cutbacks are inflicted on them by tighter lending standards and lost jobs. The consumer crunch is here.

The depth of the recession will depend on how fast consumer have to cut back. That $1 trillion is worth roughly 7% or so of GDP. If those cutbacks are taken all at once, that’s a very short and deep recession. If they are spread out over several years, that leads to a shallower but still nasty downturn.

The real joker in that deck is the source of the $1 trillion in government funds. The U.S. government can’t raise it by taxes, so instead will have to borrow it from overseas. In effect, foreign investors will get a chance to make a bet on the future of the whole U.S. economy.

I think the rest of the world will be willing to invest in the funds, if only for their own self-preservation. Far better to invest in the economy as a whole, rather than individual financial companies. But the global economy is not out of the woods yet.


TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

Charles Root

September 19, 2008 11:34 AM

I have two comments to make regarding the whole mess we see here now:

1) If you want to get the wheels of the economy going again, consumers need a way to reduce their mortgage payments. There needs to be some massive waves of refinancing and to that the fed needs to figure a way to get 30 Year Fixed Mortgage Rates down in to the 4.75% range. Such a move I know for me would free us nearly $800 a month. Cash I could spend on.... or pay other debt... you get the idea.

2) Let's assume a worst case scenario here, that the US takes on all this bad debt and yet the economy still continues to spiral down, banks still go under etc, etc. The US government can do the one thing as a Sovereign power that we as "normal people" can't, they could simply walk away from the debt and declare all monies owed to all XYZ entities will never be paid back, very similar to what Russia did in the early 90's. This would be devastating to the market in the short run, but would be essentially like hitting the "reset button"

Stéphane Caron pour Pierre

September 19, 2008 11:53 AM

À lire!

Robert Brown

September 19, 2008 12:11 PM

Please consider UNIFIEDMARKETS.

MC

September 19, 2008 12:36 PM

Wow. Wouldn't that be great. If they go ahead and free us all from our mortgages, that would be great!

AM

September 19, 2008 01:20 PM

To respond to MC: No, only the government walks away from it's debt. You are still on the hook.

LAO

September 19, 2008 01:30 PM

Investors, yes, it's part of the risk, although many feel duped, and it's not just the rich, it's our retirement funds, 401K's, and institutions.

Households, yes, but most of that will also represent a loss to China and Japan and OPEC and other trading partners. It's not so bad -- just 1/3 of one year's retail purchases -- hopefully, the unnecessary 1/3. So, global recession, yes.

Taxpayers, yes, but as best I can tell there are still considerable real assets and potential money streams underneath. The American Enterprise Institute seems to be advising government that they should just absorb the losses and let private enterprise take it from there -- truly socialism for the rich and careless. Since the S-word is being applied by so many already, it surely would be just as viable to aim that potential back at the Treasury, instead of simply crushing the nation with more debt and no stomach for paying it. What the intervention brings is orderliness. It seems reasonable to me that it needn't represent an undeserved handout, but this government is not known for reasonableness.

To Charles Root

September 19, 2008 02:04 PM

But Charles, I didn't buy a house in the overinflated real estate market. I knew it was a bubble and that I would lose money if I bought in. I sold a house and kept my cash on the sidelines waiting for house prices to correct. But what I didn't anticipate was government coming to rescue of the profligate at my expense. You see, I would like to buy a reasonably priced house. That would free up money for me to spend. But instead, you would like Uncle Sam to take $800 a month from me and give it to you. Even though you were the one who bought your mortgage. Do you get the picture?

CEO OF IGNORANCE

September 19, 2008 02:25 PM

If any real hope is to come out of this the government is going to have to eliminate most major foreign debt it holds, one way is what Charles here is saying, but that will not happen in all practicality as the US has people to please: Its own citizens, and other world leaders. Robert's Unified Markets (or R.U.M) is inevitable barring Doom's day, as all does come together, but that is far of in the future, way off. CEO OF IGNORANCE.

Kartik

September 19, 2008 03:25 PM

There is absolutely nothing wrong with Americans getting reacquianted with the exotic notion of having to live within their means.

If that means they have to suffer for 6, 12, or 18 more months, so be it.

However, I am not so sure about the 'deep global recession'. World GDP is still growing at 3%, down from 5%. But that is still GROWTH, and decent 3% growth at that.

If a deep global recession is still 3% growth, I'll take it.

Charles Root

September 19, 2008 03:28 PM

Just to clarify on mortgages, I agree with the poster that it's not fair to penalize people that didn't get in to the housing market. Not being a finance guy by any stretch my thought was that whatever finance mechanism that is used to push down mortgage rates, the government should concentrate in that area, if rates get low enough refinancing would be helpful to people in over their heads AND help people buy new houses. Tighten lending guidelines so that people don't speculate on the housing market and buy like 10 investment houses unless they can prove liquidity, etc. I wouldn't advocate dumping tax payers dollars in to lowering the rate, but maybe that's the only way to do it. Personally I'd rather have 80 billion go to lowering rates instead of buying AIG (on the flip side the United States is now the proud sponsors of Manchester United soccer team LOL )

Brandon W

September 19, 2008 03:30 PM

The current crisis reads like Atlas Shrugged. Except that we got where we are BECAUSE we let the capitalists have free reign

Kartik

September 19, 2008 03:37 PM

Why should the $1T household in debt be measured in relation to GDP? It should instead be measured against assets, as it household wealth.

HH Wealth for the US is about $55 Trillion. The $1T or even $3T should be judged in relation to that. That is how a corporation would manage their balance sheet.

Isabel

September 19, 2008 04:09 PM

Regarding Charles responses- How do you know if Charles bought a resonable priced home or not? Or if he even bought it during the bubble. Maybe he already has plenty of spending money with his current mortgage. He's proposing we have better refinancing oppportunities that would allow everyone (bubble purchases or non bubble purchases) more spending money to help our "service oriented" economy.
He's not saying to cut his mortage in half....

FMARC

September 19, 2008 04:18 PM

It seems to me that what is happening is the disintegration of a 10 years cycle of virtual creation of wealth:
Step 1:
oil and commodities explosion of prices generate the most massive transfer of wealth from western productive economies to mineral rich poorly industrialized regime, thus whose only option is to reinvest most of this money in the western economies.
Step 2:
Demand of stocks, bond, real estate and any kind of properties generate an artificial over evaluation of these piece of properties.
Step 3:
These trillions of dollar are bouncing back from suppliers of commodities to us, from us to suppliers of commodities. the speculation feeds on itself, at such a rate that the US banks have to invent new product to store the overwhelming flow of money, in more and more complex financial products....At the end, these cunning financier are able to sell oil producers their own oil in the future.
Step 4:
The economy starts looking more and more like Mickey mouse unable to stop the multiplication of the brooms in Fantasia. Like in the cartoon, we are starting to drown in the excess of "financial parking" products, in millions of homes built only to generate a mortgage transaction. When the one too many house is built, not finding a buyer, the collapse of the whole system is one catalytic event away. As always, we need a strong event to realize that the king is naked. That will be Katrina.
Step 5: If you want to know what will happen, just wait.

Lord

September 19, 2008 04:28 PM

There may be $3T more in debt but interest rates are lower than they were in the 90s making this something like a third more tolerable. The treasury could lower mortgage rates tomorrow by telling the GSEs what it is willing to buy them at and what to offer them at. No government default would ever be necessary since the debt is in dollars, just expect more import inflation.

Rycoka

September 19, 2008 06:01 PM

Please excuse me for getting emotional but I can’t help but feel there is major injustice at work here. To put the US wage earner (consumer) on the hook for the problem is a classic case of blaming the victim. While there are certainly some real estate profiteers suffering now, most people who are in over their heads at the moment are likely to have ordinary wage earners or small business people who have been poorly advised by their lenders.
These people HAVE RECEIVED NO BENEFIT AT ALL from the economic conditions of the last five or six years and to suggest that they need to “share the suffering” seems very unjust. The people who have received a benefit are the profiteers who have directly bought and sold assets and financial instruments in this bizarre market or have been owners/shareholders of corporations that have done this. Sorry, Warren Buffet is not my hero, he’s a profiteer.
While these individuals have been making out like thieves the US wage earner has actually been going backwards and has needed to go into debt to maintain their standards of living. When Lehmann Bros went belly up my only thought was “great, one down four to go”. The sensible solution to me seems to be to let the corporations that profited go down the tubes and then develop some social programs that allow wage earners to default on some quantity of their debt without penalty (with some safeguards to ensure that speculators don’t cash in).

Kartik

September 19, 2008 06:31 PM

"To put the US wage earner (consumer) on the hook for the problem is a classic case of blaming the victim. "

No. People have to learn to take responsibility for their own foolishness, and have to learn to live within their means.

Had they learned this the easy way, they would not have to learn it the hard way.

It is necessary, and good in the long run.

Lord

September 19, 2008 10:33 PM

It would make more sense to compare it to the change in wealth over the last decade rather than total wealth. Since a lot of this wealth creation was fictitious, and the crisis will have to be dealt with immediately, gdp is not a bad comparison.

liahn

September 19, 2008 10:48 PM


. Sorry, Warren Buffet is not my hero, he’s a profiteer.
While these individuals have been making out like thieves the US wage earner has actually been going backwards and has needed to go into debt to maintain their standards of living.tiffany jewellery

willer

September 19, 2008 10:59 PM

I wouldn't advocate dumping tax payers dollars in to lowering the rate, but maybe that's the only way to do it. Personally I'd rather have 80 billion go to lowering rates Not being a finance guy by any stretch my thought was that whatever finance mechanism that is used to push down mortgage rates, tiffany jewellerythe government should concentrate in that area, if rates get low enough refinancing would be helpful to people in over their heads AND help people buy new houses. Tiffany RingTighten lending guidelines so that people don't speculate on the housing market and buy like 10 investment houses unless they can prove liquidity, etc.

Mike Reardon

September 19, 2008 11:19 PM

It just seems to be set up to give profit to corporations and debt to the government. I would think the next President can enjoy for a few quarters where corporate profits remaining strong. It does not look like it is any real investment plan but it does seem to assure the profits from investments are returned to investors.

Corporation and investors have had and enjoyed strong profits for about 5 years but those were never invested to gained larger domestic employment and have not really been shared with domestic workers.

We should have continued profit’s and the government will off sets the corporate bad debt. We need to gain profit sharing with all consumers. I like Obama’s relief for lower end tax payers it would go directly back into the retail markets. If it had a tax break for the middle class gaining a home by matching funds it might add some wealth into the economy. $1 trillion in universal health care would have keep on giving and relived the burden on corporate expense, but this $1 trillion will only keep profits in the hands of corporate investors.

Remember this date in the Bush Administration 9+19=.08

Rycoka

September 20, 2008 12:35 AM

Kartik,
What you say makes sense, however, recently "living within your means" has meant sinking into poverty while simple assets such as homes skyrocket in price because of fundamental flaws in the economy. It's not pretty and here in Australia I see plenty of it.

Jim

September 20, 2008 01:20 AM

A few options:

- Raise taxes to the roof. No chance of this happening.
- Cut gov't spending in half and renege on Medicare and SS. Yeah right. Although this is probably our best chance at coming out of this unscathed.
- Print money out of thin air. Most likely outcome.

wtbirds92

September 20, 2008 01:49 AM

You didn't explain why the plan would work?

Rob

September 20, 2008 02:29 AM

Just wondering if the same thing would have happened if this wasn't an election year. I bought my house in a bubble, can barely make my payments, but am not seeking a handout (nor do I qualify for one, apparently). At the same time, I don't want my taxes to go up because other people can't meet their obligations. Seems like I'm getting double-whammied.

I don't consider myself 'anti-government', but these bailouts leave me feeling uneasy and seem like a postponement of the inevitable. I say we take our lumps now, before they are compounded any further.

Rycoka

September 20, 2008 04:07 AM

A quick question - in a "service economy" does the $1 trillion in consumer spending cutbacks actually have more impact than just

jam

September 20, 2008 05:51 AM

I guess I will never understand how Americans work in their mind.

A population of 320million people has to bail out some financial companies - if the make the turnaround, they will take the profit and laugh about the stupid tax payers.

What I suspect is that Paulson needs to bail out his former friends of the financial sector - it's not about saving the "country" it's saving his friends a$$es.

I mean if you go back to the history - it didn't get better, after each crash the financial system came up with another disaster and llok where the dollar is now - some 30 years before it was worth 10x more compared to most of the European currencies. If this is going to be real, then the U.S. will only get some time. But as the past showed, nothing will happen and the next bail out will not be 1 trillion - no it will much more !

jam

September 20, 2008 05:54 AM

I guess I will never understand how Americans work in their mind.

A population of 320million people has to bail out some financial companies - if the make the turnaround, they will take the profit and laugh about the stupid tax payers.

What I suspect is that Paulson needs to bail out his former friends of the financial sector - it's not about saving the "country" it's saving his friends a$$es.

I mean if you go back to the history - it didn't get better, after each crash the financial system came up with another disaster and look where the dollar is now - some 30 years before it was worth 10x more compared to most of the European currencies. If this is going to be real, then the U.S. will only get some time. But as the past showed, nothing will happen and the next bail out will not be 1 trillion - no it will much more !

Ron Wilson

September 20, 2008 06:53 AM

My Dear Poor Charles Root,
How I wish that your case were the caricature that it so clearly appears to be. First, the savings you would enjoy from a reduction in your mortgage interest rate is a mere hundred dollars less than my full 15 year mortgage payment. Of course, the curious notion occurred to me and my spouse when we bought our home that we would do best by purchasing a home that we could clearly afford. About the only thing I can say about your second scheme is that perhaps all of the governments of the world should bail out the greediest of their corporations like our government just did and then everyone should sit back and watch what happens next. I can assure you that in the rest of the world, the same thing would happen that is bound to happen in the US. The people who owe money on the mortgages will continue to pay them and the most bestial of the greedy will keep the fruits of their evil attempts to gather as much wealth as possible in the shortest amount of time, damning the rest of the world as they do it.

Ron Wilson

September 20, 2008 07:08 AM

My Dear Poor Charles Root,
How I wish that your case were the caricature that it so clearly appears to be. First, the savings you would enjoy from a reduction in your mortgage interest rate is a mere hundred dollars less than my full 15 year mortgage payment. Of course, the curious notion occurred to me and my spouse when we bought our home that we would do best by purchasing a home that we could clearly afford. About the only thing I can say about your second scheme is that perhaps all of the governments of the world should bail out the greediest of their corporations like our government just did and then everyone should sit back and watch what happens next. I can assure you that in the rest of the world, the same thing would happen that is bound to happen in the US. The people who owe money on the mortgages will continue to pay them and the most bestial of the greedy will keep the fruits of their evil attempts to gather as much wealth as possible in the shortest amount of time, damning the rest of the world as they do it.

wants vs needs

September 20, 2008 08:44 AM

Okay, I don't even pretend to be a finical wizard but I've always lived below my means. Many times I didn't have the new car and nice clothes that my friends had but I owned what I had. It doesn't take a genius to spend less than you make. Our country is based on instant gratification. No one saves to buy anything, we want it now not wait until we can afford it. We also don't know the difference between wants and needs. We are blessed to be in a country where we have our freedom and choices even though there is so much corruption and greed.

EG

September 20, 2008 09:05 AM

The $1 Trillion Solution: Will It Work?

HUM, how can a bandage fix the real problem? Will it fix all the stupid mistakes made so this never happens again?
Will any one be held responsible other than the tax payer?
If the number of unemployed keep rising and small businesses force to close there doors how could anyone really believe this could work.
Your government and big cooperation's are disconnected from the average middle & lower class that are most effected by this mess.
As I see it this being done to keep the rich and greedy from falling and let the tax payers bare the burden for their greed. Government is looking to save these fools but who is going to save the tax payer?
This bailout sends the wrong message, its OK to create a crisis because Uncle Sam will right it for you, because we have a working sector who we can make responsible and pass the burden to.
They should be aloud to fall and get it over with either way it's going to hurt so don't put all the hurt just on a few to bare. It's an injustice to the average consumer.
All this falls on deaf ear's in Washington so back to the question (The $1 Trillion Solution: Will It Work?) for the short term but unless some safe guards are put into place along with this bailout to keep the same mistakes from being made over again the answer is NO, it won't have a chance in hell.

Praveen

September 20, 2008 09:52 AM

Here is an idea to Bush and Paulson. Instead of bailing out the financial institutions and buying bad mortgages........why can't you bail out individual borrowers and bail them out??? Not enough money hey!!!

bab

September 20, 2008 10:45 AM

Once upon a time there were three little pigs, each who wanted to build a house. The first little pig learned that he could build a huge home out of straw - so he, and thousands of other little pigs build a huge highrise out of straw. The next little pig build his house out of twigs...and thousands of other little pigs joined in and also build their homes out of tiwgs...and the last little pig build his home out of brick...he was much more conservative and poked fun of because he didn't take advantage of the sub-prime mortgage opportunity to build a huge straw home.
Now, a little time passed and the economic winds shifted and became strong...blowing down the gigantic straw highrise - the straw building was so huge that it crumpled like the twin towers - not only crushing all the homes made out of straw - but also crumpling the homes of twigs...and all of this came down with such force - that the brick houses were impacted too.
All the little pigs were running around yelling 'poor me', 'poor me'...who's going to help me? And being the little pigs that they are, they continue to eat up more of their fair share - putting all others at risk.
How to coral the pigs:
1. Don't allow them to spend beyond their means - Not everyone needs to own a house. (regulation)
2. Fine brokers/bankers for all 'deals gone bad' - hold them accountablefor loan 'malpractice'. Someone has make a lot of money from all of this...who? find them and make them pay.
3. Free up earmarked federal monies (not just debt) - e.g. SSN and Medicare...if an eligible person already has private insurance...use private insurance dollars first - not Medicare (this is just wrong) redirect the savings. And if they don't 'need' SSN - allow them to default with a tax benefit - so that those dollars can be redirected to other needs. This would free up a chunk of money, without having to assume this in debt...or worse 'print money'.
But...what do I know. I'm just a nurse.


Tangito

September 20, 2008 11:42 AM

Right from the beginning, the financial wizards on Wall Street were expecting a loss of 300 billion from bad mortgage loans under "relaxed" rules, but planned to make trillions in income to offset the loss; their "house of cards" fell right in their faces! No! with thinking like that, the entire financial system will fall and the western world will fall with it.

BJD

September 20, 2008 02:16 PM

I TOLD YOU MEDIA GUYS THIS BACK IN 2006 AND AGAIN BACK IN JUNE AND STILL YOU IGNORE ME! WHEN ARE YOU GOING TO LISTEN????? AND REPORT THE TRUTH FOR ONCE!!!!

THE INDUSTRY IS GOING TO GET CRUSHED AND THE DOW WILL FALL WAY BELOW 9500!!! WE ARE HEADED FOR A NEW GREAT DEPRESSION AND ONLY TIME WILL HELP!

I am sorry but all of you need to face reality here!!! The "American" Dream
is to always spend spend spend!!! To have the most toys and live in the
biggest house has been the trend over the past 20 years!!! Ever since
credit cards were no longer deductible, people have been "rolling" over
their debt into that now expected "deductible" savings account... THEIR
HOUSE! That great big "American Dream" has now become a fraudulent,
over-extended, misguided way for the American public to justify spending
more on credit cards and getting bigger and better "THINGS"!! Pay off the
credit cards with a loan and rack them up again because the American
borrower knows that all he or she has to do is search for that broker that
will give them a yes to refinance them again!!! I see people at the local
pizza joint using their equity line credit cards to buy a piece of
pizza.... I really don't think that the Wallstreet lenders really had that
in mind when developing these types of lending practices.

Wake up people! It's your fault and no one should bail out anyone!!!

The mortgage process is a complex process that takes an application, processing, appraisal, title search, underwriting and a CLOSING... In which any and all information about a mortgage can be questioned, refused, changed or agreed upon! Just because some unqualified 20 year old; so called mortgage originator, is fraudulently inflating your income to qualify you to buy that million dollar house doesn't mean you should sign the papers and buy it if you really can't afford it! All this hogwash about how the borrower was
mislead is nonsense!!!

A BORROWER DOES NOT HAVE TO SIGN ANY LOAN DOCUMENTS IF THERE IS A DISAGREEMENT WITH ANY PART OF THE PROCESS!

All these people who are in "trouble" with their mortgages deserve it! In fact, I wish the FED's would step in and start indicting some of these borrowers for signing and agreeing to a mortgage on fraudulent documents! Research has proven that 70% of all borrowers that are in default right now are probably guilty of some type of mail fraud by allowing the fraudulent mortgage documents to be faxed or mailed to these Wallstreet lenders.
Do you realize that JUST TWO YEARS AGO with a credit score of 800 a 21yr old man or woman could have qualified for a million dollar loan that didn't require any income or asset verification??? Now what moron would give a 21yr old a Million dollars just because of a credit score??
ANSWER: WALLSTREET!!!! But should we blame Wallstreet? ABSOLUTELY NOT! We
NEED to blame the 21yr old for getting over his or her head in debt and we
shouldn't do anything less than take the house away from that irresponsible
little brat! What's next? Helping those who can't pay for their credit
cards because they were just to stupid not to read the credit card holder
agreement and the issuing bank charged them 21.9% on their balances??

OR HERE'S A BETTER ONE!!!

HOW ABOUT WE BAILOUT THAT FAMILY THAT BOUGHT TWO MERCEDES, A MILLION DOLLAR HOUSE, AND TEN PLASMA TV's. BUT ONLY MADE $50K GROSS INCOME ANNUALLY?? They got the loans, but did it fradulently ... GET IT!!!

IF THE GOVERNMENT BAILS OUT ANY OF THOSE FINANCIAL COMPANIES OR GIVES ANYONE ASSISTANCE TO PREVENT A FORECLOSURE THAT'S WHAT EXACTLY WE WILL BE DOING.... BAILING OUT THE IRRESPONSIBLE LITTLE BRATS WHO WANT IT ALL BUT CAN'T AFFORD IT AND WILL LIE TO GET IT!!!

AND IF THE GOVERNMENT DOES DECIDE TO BAILOUT THEM... WELL THEN HELL, LET'S ALL RACK UP OUR CARDS AND BUY ALL THOSE NICE THINGS AND THEN NOT PAY ANYONE FOR IT... WHY NOT?

Funny thing about that though, if you walk in to a Best Buy and grab a tv and steal it, you go to jail... But lie on a Best Buy credit application or a Washington Mutual Mortgage application get the item you now have on credit and then refuse to pay for it... The government will help you pay for it...

ARE YOU KIDDING ME???!!!!!

I have been a Stockbroker, Registered Principle, Investment Adviser, and a
Mortgage Lender over the past twenty years and no matter how many times I
have told people that they can't afford that great big house and denied them
a loan or budgeted them for a smaller house; some way, some how they always
went somewhere else and got approved to overextend themselves with debt and
now they are crying that the "Industry" has mislead them and taken advantage
of their inexperience of what exactly a mortgage means... HOGWASH!! Oh and
let's not even get into the illegal immigrants using fake SSI#'s to get
mortgage's... I once saw a woman who we had to do a SSI# check on and found
that she had 29 different names registered with that SSI#...VERIFIED THROUGH THE SSI ADMIN. ITSELF! We denied her a loan, BUT she eventually found a lender that approved her. In fact the broker bragged to me on how he got it done.
The next 5 years are going to be painful for the American economy. By the way people; THIS IS NOT JUST ABOUT SUBPRIME!!!! IT IS THE WHOLE BANKING
INDUSTRY, Prime, Alt-A, FHA, VA, etc... EVERYTHING about lending is completely out of whack. IN FACT FHA WAS ISSUING MORTGAGES TO ILLEGAL IMMIGRANTS 10 YEARS AGO WITHOUT SSI#'s in their "Everyone must have a home program"... AND NOW WE ARE LOOKING AT THAT SAME GOVERNMENT (DEMS & REPS) WANTING TO BAILOUT WHAT THEY SCREWED UP?????????

Now is the time to actually prepare people for the worst and get their portfolios in a defensive mode. All these "Baby Boomers" are going to lose their retirement if we don't take an aggressive approach to planning for the worst right now!!!

HEY MEDIA PEOPLE...You have the power of the Media. Please use it wisely!

LET THE COMPANIES FALL!!!! AND STOP WASTING MY TAX DOLLARS TO SAVE THE CRIMINALS!! Definition = ANYONE WHO EVER FILLED OUT AN APPLICATION FOR ANYTHING RELATING TO CREDIT WHEN THE INFORMATION WASN'T TRUE AND OBTAINING A CREDIT LINE UNDER FALSE PRETENSES!!!

FORCLOSE ON THEM I SAY!!!!!

BJD - Chicago

k

September 20, 2008 06:22 PM

Why those big banker need our hard earn tax dollars to bail out them out. This totally insane. The bail out just encourage the big guy taking more risk because they always have us( the tax payer ) to bail them out. This is totally deceiving to out hard work tax payer. Last couple days, some of us lost considerable amount of our retirement fund and who is going to bail us out?! Should we all call congress to bail us out? I just could not believe that they just took our tax dollar and hand it over to those big banker. This is really sick.

logic

September 20, 2008 07:00 PM

I agree with Jim above, the temptation to print money is just too great. I expect we'll see stagflation in the next 10 years. What a pity U.S. consumers didn't spend more wisely, and what a pity the government didn't spend on R&D, alternative energy etc. instead of elective wars with no clear goals. Oh well.

Manju

September 20, 2008 08:52 PM

How does a deep recession in US impact the value of US currency aganist other currencies...say Indian rupee? Would US dollar value reduce significantly, untill US work its way back to stronger stance (say 3 years).

Jerry

September 20, 2008 09:36 PM

One of the non-US news companies correctly reported: This is the nationalization of losses and the privatization of profits. In short: Capitalism for the poor and Socialism for the rich!

I tend not to agree in to-to with the above, however, think about it... if these companies are not saved, the economy is doomed; if these are saved, we pay the price! Will the financial institutions pay me back when they make bumper profit @ 24% APR?

Dexter

September 20, 2008 10:24 PM

ALL:
Consider:
Looks like Mr. Paulson (who worked "in" Wall Street two years ago)and Mr. Bernanke convinced the powers in Washington that F$nanc$al collapse of the whole US economy (and by contagion spread globally) would happen if Trillion Dollar bailout fund was not set up to TAKEOVER F$NANCIAL INVESTMENTS THAT ARE NOW "BAD" (AKA losing money) FROM INVESTMENT BANKS AND COMPANIES THAT MADE RECORD PROFITS AND WERE CONSIDERED "SUPERTAR$" TWO YEARS AGO!!! WHERE DID ALL THE PROFIT$ GO? eg LEHMAN....their CEO MADE $490 MIL in 2006 and Guess What? He sold most of his stock before his company bombed unlike a lot of his employees !!! I am not in WALL STREET but I guess there is a WALL here where what happens inside these WALL STREET COMPANIES looks more like a private club....rest of America is now going to pay to HELP these companies inside WALL street to avoid bankruptcy....AND going forward return to making B$LL$ONS.

Pete

September 20, 2008 10:31 PM

The Fleecing of America. Read " The Creature from Jekyll Island " (forgot author) and "What has the Government Done with our Money" by Mises for more. Lies, lies and more lies. These are the same people that said "we're just in a rough patch" 6 months ago and Freddie & Fannie would remain "the same entities" a month ago. It appears this incompetent socialist administration (and go-along Congress), the same people asleep at the wheel while Big Finance fed their greed, wants to bring this great country to its knees. Privatized Profits, Nationalized Losses. I'm so surprised more people aren't outraged at what a mess the next generations will be left with. Little Bush and his handlers have done so much more damage to the USA than Bin Laden will ever do. Both criminals.

F

September 20, 2008 11:25 PM

The problem is the government is the only player big enough to end this cycle. The cycle if allowed to play out would be a destruction of credit markets which would mean ZERO or NEGATIVE GDP growth loss of jobs wages and continued asset deflation. In other words a depression. So this move is the only move.
I agree that assets need to be liquidated and that Wall St firms who failed are included but so are those who took loans they knew they could not repay only to ride the wave ( and receive tens or hundreds of thousands in appreciation) while others were priced out and continued to rent. They also deserve a chance to buy and recent price drops may create that opportunityrather than the bill for those who will not repay.
This is the problem with lending based on income : Income can be lost as in a job or as in an illusion based on false application or off balance sheet securities and derivitives. So taxpayers: we're it. But the problem has been easy money supply and like water it will always find a place to go. The 1999 elimination of separations between banking and securities. Imagine if the banks had their way when they also sought to be allowed to broker property too.

consumer

September 20, 2008 11:59 PM

It doesn't make any sense whatsoever to put all the blame on financial institutions for the mess we are in. In the end its we the consumers who took those mortgage loans to buy expensive houses and broke our bank without understanding what we are getting into. Stop this blame game and crying about tax payer money. Learn and think twice before you splurge next time.

Rajesh

September 21, 2008 12:21 AM

It is totally unrealistic to assume that the $ 3 T problem has to or will be addressed in one go. In fact, it would be great if the brakes are put on to not increasing this overspending and overborrowing problem, which is currently running at ~ $ 700 B a year.

To that extent, I do not agree that the solution of the last $ 1 T will result in huge consumer spending reduction leading to a global and prolonged recession. Americans will take a lot longer to change their spending habits.

The deficit will really change only when the US is able to export more and that will happen through greater competitiveness and lower costs. back to basics, eh ?

CG

September 21, 2008 05:01 AM

We live in a kleptocracy: rule by thieves. This has got to be stopped. Taxpayers have been victimized by banks already through predatory lending - and we're supposed to bail them out when the outlandish risks and leveraging they've been indulging in have finally bitten them in the butt?

How much is this going to really cost us in terms of health care, retirement, schools, colleges, paved roads, libraries and parks that we won't have? And the sad truth that nobody wants to admit is that it still won't be enough. There just isn't enough money anywhere to fix this fiasco. But we'll bankrupt ourselves trying to put off the day of judgment for the gangsta bankstas who have brought all this about.

These people have destroyed the economic sovereignty of the richest nation in history. They shouldn't be bailed out - they should be sitting in prison awaiting the gallows for treason.

liveinsachse

September 21, 2008 05:17 AM

Social irresponsibility at all levels.
Anyone remember the movie it's a wonderful life.
Who has “it”? Who doesn’t?
Mr. Potter had “it”.
The savings and loan didn’t have “it”, when customers showed up.
Who removed “it”?
Where is “it”?
Wealth has been replaced with a system that doesn’t know who
Owns a publicly traded company, and allows systemic irresponsibility for the sake of getting more wealth than the system could provide.
America has eaten its seed corn. Now what?
THE WEALTH OF NATIONS Adam Smith
Interesting read.
Another is TRAGEDY OF THE COMMONS.

rahul

September 21, 2008 05:32 AM

will citibank also collapsew
what will be its effect on india IT companies like infosys?

will we have job cuts?

rahul

September 21, 2008 05:34 AM

will citibank also collapsew
what will be its effect on india IT companies like infosys?

will we have job cuts?

Marios

September 21, 2008 06:58 AM

One of the most important spanish banks is under fire in its own market. A massive scandal that could sum up to €3Bn is going to damage the image around the globe of Santander Bank. Contrary of what appear in the international press "Spain's insurers, funds unaffected by Lehman -govt" the total amount of impact could be well above the €3Bn line

Millions of structured bonds were sold by the Santader Bank and its Private Bank branch "Banif" during last years under the name "Fondos 100% garantizados", translated: "100% guaranteed funds". There was not a single mention on the comercial panflets of "Lehman Brothers" nor anything else. Now suddlenly and with surprise the spanish icon, a potential €3Bn write-off could appear in its balance sheet.

marios

September 21, 2008 06:59 AM

One of the most important spanish banks is under fire in its own market. A massive scandal that could sum up to €3Bn is going to damage the image around the globe of Santander Bank. Contrary of what appear in the international press "Spain's insurers, funds unaffected by Lehman -govt" the total amount of impact could be well above the €3Bn line

Millions of structured bonds were sold by the Santader Bank and its Private Bank branch "Banif" during last years under the name "Fondos 100% garantizados", translated: "100% guaranteed funds". There was not a single mention on the comercial panflets of "Lehman Brothers" nor anything else. Now suddlenly and with surprise the spanish icon, a potential €3Bn write-off could appear in its balance sheet.

http://afectadosporbanif.ning.com/group/pressrelations

CG

September 21, 2008 10:09 AM

"will citibank also collapsew"

My suspicion is that Citi is also insolvent. A recent report showed that they're carrying tons of bad securities on their books at fully double the value Lehman was. If they marked that to true value, they would be shut down. Of course, if our bought and paid for politicians have their way, Citi will never have to mark to market because the innocent taxpayer will be stuck with the bill at what ever rate is necessary to keep that bunch of crooks whole. And people in India and China will get to keep their jobs while Americans are paupered by our elected officials.

Dexter

September 21, 2008 11:11 AM

Pete:

Seems what you said rang a few BELLS....affects the individual and to a larger scale the national psyche when you try and look deeper to find out why why why...who who who?? When people are losing homes and livelihoods its either people living beyond their means (such as using home equity loans expensive vacations, new boats, cars , 60" HDTVs etc etc since there are no shortage of ways to very easily spend money)or being duped by Mortgage companies fraudently. I for one was caught sleeping thinking that people made bad choices or mortage compenies ripped people off.......but it now gets traced back to banks and financial companies on WALL STREET which made available money to mortgage companies that duped consumers into subprime loans. Appears a lot of the money for the subprime loans originated from wall street banks and financial companies based on and supported by very high risk and possibly fraudulent investments(derivatives, slice and dice loans, etc etc ??) that are now going bust....hence the 1 Trillion Dollar bailout.

Prescott

September 21, 2008 02:13 PM

I am disappointed in the writers who savage only individual Americans as the cause - wholly or mostly - of the current financial crisis and offer them nothing more than a "tough s--t." Yes, there were people who "gamed" the system, but there were many, many decent individuals who succumbed to the fraudulent BS about the "American Dream" to which they were constantly exposed.
Financial institutions and the financial industry profited enormously by marketing fraud and as they crumble, our nation is going to bail them & their executives out. At the same time, however, there doesn't appear to be the time or the will to do anything to prevent this from happening again. Paulson (ex-Goldman Chairman) says that "regulation should come later." What a crock!

Pete

September 21, 2008 02:52 PM

Television pundits are trying to point this entire event towards "homeowners" when easy credit created by the Federal Reserve for too many years is more to blame. I know no one personally affected by this so-called credit crisis. Yes, some individuals made bad decisions and spent beyond their means but bankruptcy and foreclosure will consequently follow; there's risk in all financial endeavors. The unscrupulous banks who lent to persons without due deligence however are being unwillingly supported by taxpayers; their risk and losses are spread over the little guy, why not their profits. The individual that made the impossible loan is out of luck (as well as should be). What a rip-off for taxpayers. Government is returning favors for the bribes (read campaign contributions) recieved. Rep. Ron Paul was on TV Sun. morning and remains a breath of fresh air. Youtube videos of him during finance committee hearings - pure truth and so knowledgable on the subject. Our Gov. is drowning in debt, spending like drunken sailors and being unbelievably reckless with valuable taxpayer money. The Founding Fathers are rolling in their graves. If banks don't rob your children though credit, government will deflate the dollar so much it won't buy anything for them. Life will be hard for them.

Ben Bernake

September 21, 2008 04:53 PM

This article is so misleading.

For example, the $1T the fed is using to bail out the finance companies. This money is being used to buy assets at firesale prices. These assets will be sold and some portion of the money will be recovered. In fact, IF the Fed makes the right moves and isn't gamed by the bankers (there will be HELL to pay if this happens), there is a very good chance the Fed will actually MAKE MONEY on the bailout. But it all depends on the details, and I'm sure the prices of these illiquid assets sell for will jump BEFORE the fed buys, just because of the news of 1T in liquidity is entering the market. The Fed needs to INSIST that purchase prices be marked to their values of last week, otherwise there will be a REVOLUTION and the top money people will find themselves hanging from the nearest lightpost.

Ken Tan

September 21, 2008 04:58 PM

If the states decide to "reset" all the debts it owed just like what suggested by "Charles Root", i guess you will expect some nuclear missles landed here by countries like Russia or China.

Pete

September 21, 2008 06:47 PM

Ben - don't be naive. If these risky assets were of value, they would have been sold already in the open market. It's called Toxic Waste for a reason. These are part of the lies being regurgitated by the Treasury Dept. and Fed. If the highly educated, highly paid private sector can't sell this, the government surely won't. Look at the US government balance sheet for proof. This move only removes illiquid assets from Big Finance's balance sheet and puts it on the government's -- spelled S.C.A.M. Sounds familiar doesn't it ? Enron did the same but created "other entities". The government IS Big Finances other entity. Now 'Mumbles' Paulson is trying to push this knee-jerk plan through quickly before everyone realizes its a HUGE power grab by the Executive branch (Treasury). Congress would be direlect (sp) if they authorized this. If there was money to be made on these worthless assets, Wall Street would have already picked it clean. Taxpayers are being left with the Bone.

Pete

September 21, 2008 06:53 PM

Hey. I just found out how you can tell when Mumbles Paulson and Uncle Ben Bernake are lying to hard-working, taxpaying Americans.


Their lips move.

Shashank

September 22, 2008 07:30 AM

Time to sell USA to other countries.
too foolish, the US politicians are, they didn't even knew, they are digging their own graves, when they finished Iraq and Afghanistan. Although what they did was needed to save the world from terrorism, they would have save that money to save themselves.......

- Shashank

R

September 22, 2008 08:57 AM

Guys,

Guess there is only one way out of this mess.

We all have to learn to spend 30% less then what we earn. and thats after paying our taxes.

Longer term every citizen and all the nations as a whole has to build savings, for such rainy days.

never take a mortgage, if you are 40+ years of age.

never take a mortgage if, if you cant pay it back in three-four years, from your income.

never use credit card for credit (only for convenience).

If we all do that, we can avoid the crisis next time.

But this time (probably this generation), its going to be bad. real bad.

you are screwed if you dont follow my advice.

and you are screwed if you follow it! coz, that will mean decline in consumption, and a recession for sure. But we all will come out of it someday, and will be able to avoid it for next gen.

shing

September 22, 2008 02:49 PM

Taxing people to pay for this bailout will only make things worst. People who are just managing to pay their mortages could be pushed over the edge with higher taxes and more foreclosures will follow.

willer

September 22, 2008 09:59 PM

This move only removes illiquid assets from Big Finance's balance sheet and puts it on the government's -- spelled S.C.A.M. Sounds familiar doesn't it ? Enron did the same but created "other entities". The government IS Big Finances other entity. Now 'Mumbles' Paulson is trying to push this knee-jerk plan through quickly before everyone realizes its a HUGE power grab by the Executive branch (Treasury). Congress would be direlect (sp) if they authorized this.Tiffany Jewellery If there was money to be made on these worthless assets, Tiffany Jewellery Wall Street would have already picked it clean.never take a mortgage if, if you cant pay it back in three-four years, from your income.
never use credit card for credit (only for convenience).
If we all do that, we can avoid the crisis next time.
But this time (probably this generation), its going to be bad. real bad.
you are screwed if you dont follow my advice.

Jeremy

September 22, 2008 11:32 PM

US has been going through a great economic change thanks to Regan’s Reganomics, Clinton's NAFTA, and Bush's complete drop of trade quota (steel and textile quotas in particular) and regulations of the market economy—investment banking and banking coming together was very bad.

Trickle down theory doesn’t work. Not when 70% of the economy depends on consumers… I’d say that the economy depends on the money in consumers pockets first, not how much money is in big business.

HOW WE GOT HERE:
With a trade deficit our GDP is lower. Our money’s buying power is diminished. Fake wealth created via the tech bubble, then later in the real-estate, and other bad loans creates more fake wealth. Real US wages have been dropping the past 7 years—as our trade deficit got bigger.

We find ourselves confronted with a nation that has lost its production capability. The US has to import most of our raw material from other nations, even import customer service reps to help us with our own home phone or cell phone services.

People took out loans, re-financed their homes to make up for their drop in real income. All to maintain their standard of living.

Banks were happy to oblige the consumer, as they could sell these loans off and issue more loans. Those loans were sold and IOUs were created, of which other IOUs backed by several other IOUs, made for a fun trading game.

Now that the bills for these loans are due, consumers can't pay them—no more loans to refinance to get more money. Since banks can't get paid, banks can’t pay the investors that bought their loan-bonds and IOUs of IOUs. The whole thing drops.


PURPOSED PLAN:

Government comes in to take the junk off the market. But the government is already knee deep in debt already—$400 billion. So let’s add another $1 Trillion US bonds will be sold to other nations, diluting our dollar even further.

EFFECTS—OR THE LACK THEREOF:
What the US is left with is a nation that has no true production of anything with real value: we no longer produce any tangible good. And our government close to declaring its own bankruptcy on the monetary side-- printing more money as it becomes more worthless everyday.

I don't see the plan working like people hope. Something major will have to give-- the US, after all, did consume the wood to build the homes, the fixtures and furniture, light bulbs, windows, copper wires [home loans], steel, more windows, rubber, aluminum, engines pre-built in Mexico [auto loans], and fund professor salaries [student loans].

The only way to really get out of this mess is to begin producing again in the US-- producing tangible goods. We must stop running around dressed in our Sunday best selling sticky notes of I.O.U.s for I.O.U.s towards the I.O.U of the several other I.O.U.s.

Raj

September 23, 2008 11:42 AM

1990’s communism collapsed , 2008 capitalism collapsed

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

BW Mall - Sponsored Links

Buy a link now!