I think the problems were with us and the banks. Some people say it's the banks fault for letting us get loans on homes double what they're worth, so they should have to repay the mortgage. I know this will be a sensitive subject to some, but how could either side see it coming? For the same reason that everyone and their dog wanted to buy a house, because it was gonna make everyone tons of money when they flipped it, the banks didn't anticipate homes losing as much money as they did. Likewise, it is our fault for thinking we could pay a mortgage with payments which increase over time, because we thought we'd be making more money or it would work itself out. People with sub-600 credit scores were getting loans, and though it was still that individual's decision to make the purchase, the banks and loan officers were getting too greedy. Plenty of blame can be thrown either way, but I don't think anyone can argue that it was just our fault, or just the bank's fault. Is it only fair that we now help the banks?
2 questions:
1. Should we have bailed out these companies? There is no question in my mind that the bailouts helped us today. I think our financial markets would have been absolutely destroyed today if it hadn't happened. My biggest reason for asking: did we just delay the inevitable and make our day of reckoning worse?
2. GM has a horrible corporate structure, and few companies can be profitable with pensions like the ones they offer. Especially in these markets. Unions need to be done with...forever. Do you think GM or Chrysler deserved the bailout?
Like I said, I'm just trying to educate myself with everyone else's point of view and knowledge. Throw all the facts and links at me that you can.
22 comments:
One thing I'd like to add is why I think so highly of Hank, or Henry, Paulson. He gets his way, and that may have been detrimental to the non-bailout believers. But he saw this mortgage crisis coming, and made his firm, Goldman Sachs, billions of dollars off it. He is now the Secretary of the Treasury, and he's such a bright guy. Not a great verbal communicator (I wouldn't be surprised if he had a mild form of savant syndrome).
Also, I did not mean to say that nobody in the banking world saw this crisis coming, but just wanted to point out that we were just as greedy as they were.
http://www.cato.org/pubs/policy_report/v32n1/cpr32n1-1.html
Thank you for the link. The final paragraph closely states what I feared the answer to my question would be:
This premise would be questionable enough even if we started with a blank legal slate. But we don't. And there is no conceivable way that we, the people — or our agents in government — can know how to solve the problems of modern societies when our efforts have, in fact, been preceded by generations of previous efforts that have littered the ground with a tangle of rules so thick that we can't possibly know what they all say, let alone how they might interact to create another perfect storm.
I'm curious what the criterion are in order to be labeled "too big to fail." I think it's interesting to watch the banks and other lending institutions who have received TARP money scrambling as quick as possible to pay it back. Why? I think we all know the answer to that - because they don't want the government arbitrarily telling them how to run their business or arbitrarily telling them how much they can and can't pay their executives. The market distortions created by this massive government intervention will continually ripple throughout the economy.
I think Chrysler and GM were "too big to fail" mainly because of the powerful UAW and a democratic administration could not bring itself to see so many of its loyal constituents lose their jobs. Boo hoo. No one bailed out the bank I was working for (I hope I wasn't one of the 'greedy loan officers' you were referring to in your post). I lost my job. And it certainly hasn't been the end of the world. I think Ford was truly wise to not give up its birthright for the government's mess of pottage.
Not all of the banks wanted, more or less needed, the bailout in the first place. The government practically mandated that the 9 largest banks accepted it so there was not a negative stigma for those who did actually need the money. The effectiveness of TARP on stabilizing the markets would have been lessened.
If a customer came in saying, "I make $3,000 a month, what can we do to get me approved for this $350,000 mortgage?" And you said, "Easy, we'll just state your income at $6,000 a month", then I'd consider you a greedy loan officer. That was a frequent occurrence.
I can sleep easy at night knowing that I never pulled anything like that. Even if I did, we didn't originate any "stated" income loans. Our underwriters needed pay stubs, steady job history, a credit score above 600, and other assurances before lending to just anybody. Also, our appraisers were notorious for being ultra conservative (much to the dismay of many of our borrowers). So even if someone said their house was worth 500K on a loan app, once the appraisal came back at 250K = no loan.
Correct me if I am wrong, Devin, but the lender you worked for did 100% portfolio loans - they did not pass the risk of default on to the universe. They were careful with their own money. A lesson for everyone.
What I don't understand is if they were so careful why did they go under?
World Savings, the company that originally hired me, was a portfolio lender, yes. But Wachovia was not. Wachovia buys out World Savings, Wachovia's bad bets go south, Devin and Nic lose their jobs. We find out that we're losing our jobs only months after we find out that we're no longer World Savings, but that we're Wachovia.
I am nowhere educated enough to make intelligent contributions to this subject but I have two questions:
1) Devin, when you ask what the criteria is to be defined as "too big to fail" does that mean you are not opposed to the idea of some sort of a bailout? Is it the arbitrary nature whereby they determine those who are too big to fail that bothers you?
2) Rich in the post you refer to "us" and "we". Who is "us" and "we"? I believe a certain group of people are to be blamed as much as the banks, both to be blamed for their greed. But I don't agree that the rest of the nation should bear the costs of their greed. Whether or not my belief is practical is another story. There are responsible citizens who owe no duty to the banks. As far as fairness goes I don't think we can lump a major portion of this nation's financially responsible individuals into the category of those who owe something to the banks.
To answer your first question, what I mean by "us" and "we" is us and we the people. I understand that most of us did not make decisions that negatively impacted the economy. In fact, my wife and I were able to take advantage of this economy and purchase a home much less expensively than we thought possible. I am talking about the individuals whom took out mortgages from banks, and have not fulfilled their contractual commitments. People are foreclosing on their homes left and right. Some people truly can't afford the mortgage, and others just don't want to pay for a home they won't make a return on.
I agree with you we don't have a responsibility to these banks. They made bad decisions while running a private business, they should fix it or go under. BUT I think that would cost us more than the cost of bailing them out. In fact, bailing out these companies will, theoretically, make returns. The government collected some interest rates. If the companies' structures and practices are fixed, and the money is being repaid, then I think we are all better off because of it. If they all collapsed, I would want to live in a bunker for the next 5-10 years and hope that I never get sick of eating Ramen noodles.
A big problem I have is now that the money is being repaid, the government says, "hey, we have $45 billion dollars. What should we do with it?" Its original purpose is being shifted into other areas instead of just being repaid.
I meant to say the government is collecting some great interest rates. I think (think being a very important word in this sentence) it was almost 9%.
Those are great points. I agree that the practical consequences of not bailing them out would be drastic and something not many of us would want to see - no matter how conservative or libertarian we may be.
Publius - you're suspicions were dead on. I was trying to highlight the arbitrariness of the "too big to fail" label, or as Rich highlighted in his post, the "interconnectedness" threshold. What company is "too big to fail?" How "connected" do you have to be to receive a piece of the TARP pie?
I think Rich over-exaggerates the results of an economy minus the TARP bailouts (probably somewhat tongue-in-cheek I assume?). Bomb shelters? 5-10 years? Look, I don't doubt that there would have been major disruptions in the economy had the government allowed these companies to come to their days of reckoning, but the past has shown that our economy has been incredibly resilient. I think of a garden that is struggling to grow good fruit or vegetables due to the strangling effects of too many weeds. Sometimes, in order for the garden to reach its full potential, the weeds (aka the failed businesses) have to be pulled out. For example, there was a reason why very few private sector investors wanted to go near GM with a 10-foot pole and why its stock price was in the toilet: because GM is a terrible investment! So why do "we" have to bail them out when they can't right their ship on their own? Out a sympathy for Detroit? The union workers?
I guess I'm just uncomfortable with the premise of Keynesian economics - the idea that we can make all our fiscal problems disappear by just throwing more money at them at a deficit. This has never worked in the past (just ask Japan in the 90's). Propping up failed businesses under a mountain of debt by diverting resources from the private sector into the public sector - even if "we" get a return on that "investment" - and separating these fiscally failed businesses and individuals (see homeowner bailouts) from the consequences of their bad decisions creates a huge moral hazard. I'm a firm believer in and supporter of the free market and how it efficiently allocates resources (much more so than the federal government) and capital to the companies that deserve them. Sorry for the lengthy comment.
Tongue-and-cheek? Yes. I wouldn't want to live in a bomb shelter because the closest one I know of doesn't have Sports Center.
If lending completely froze, how could our country possibly avoid a total collapse?
It would eventually recover, but things would be nasty until then.
I don't think lending would have completely frozen. Not every bank in the country was over-leveraged and stretched too thin. Many of the big ones were, yes, and I don't disgree that things would have been nasty. It would have been rough, no question. But for many (like myself), it has been rough regardless of the TARP bailouts. I'm just not 100% convinced that the problems that TARP created are any better than the ones avoided by TARP - mainly because no one really knows what those problems without TARP would have been. The government (both the Bush and Obama administrations) wants us to believe that it would have been Armageddon were it not for TARP.
Ultimately, I think I'm probably biased with this topic because I was a casualty of the market meltdown. I don't have near as much sympathy for other people who are still employed thanks to TARP and other big government solutions. Either way, I enjoy honing my opinion with this helpful discussion with all of you.
And 5-10 years without SportsCenter would be miserable! Haha
It is precisely things like Sports Center that keeps the majority out of politics. We are too distracted as a nation. Dirty Sports Center it distracts me in my school work and drives my wife crazy but I do love it.
Here are 3 short columns by Thomas Sowell's, (a Stanford PhD economist) that might shed some light on the bailouts:
"Bailout Politics"
http://www.jewishworldreview.com/cols/sowell093008.php3
"Do Facts Matter?"
http://www.jewishworldreview.com/cols/sowell100308.php3
and "Economic Whodunit"
http://jewishworldreview.com/cols/sowell022310.php3
Here's a quote from the last one that illustrates the World Savings/Wachovia distinctions I made earlier: "As for lenders, how could they have expected to satisfy their greed by lending to people who were not likely to repay them?"
Here's another great article which illustrates the follies of Keynesian economics, that I mentioned earlier.
http://www.bloomberg.com/apps/news?pid=20601039&sid=a5t.xQdllnbo
Thanks for the links Devin. The books I've read have been mostly from Paulson, Bernanke, Geitner, and different bank CEO's points of view. Obviously, they all agree with TARP. I just ordered a copy of 'Too Big to Save?' which should help better educate me on the opposite view.
4 months ago I was very against these bailouts, but what I've studied since has swapped me over.
On a final note, most of the money from the banks, besides AIG, has been repaid. I still do not agree that GM and Chrysler was a good idea, but that goes back to the argument of who should, and who should not be 'saved.'
No problem Rich. Paulson, Bernanke, and Geitner are all a heck of a lot smarter than me, and I haven't had the time to read books by them in defense of the TARP program, so I'm sure there are great arguments to be made for TARP - I just haven't studied up on them yet like you. What books are they? Maybe I'll see if my library has them so that I can read them this summer after the spring semester ends. I tip my hat to you though for being open-minded and reading up on both sides of the issue.
Too Big to Fail, the one by Andrew Ross Sorkin, showed how quickly things turned around, and what banks did to try and save themselves. On the Brink, by Hank Paulson, talks about the same time-frame, but what was going on in his head. I didn't like it as much.
The Greatest Trade Ever was a quicker read. Awesome book for showing the foresight, or lack of blindness, that other bankers and hedge fund managers should have had. I didn't know who John Paulson was before I read the book, but he sure made a lot of money off these economic troubles.
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