
Bankruptcy, not bailout, is the right answer - gibsonf1
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview
======
timr
This is a good article, and I generally agree, but...there's a danger in
calling this particular bailout plan "more government", and then arguing
against it by saying that more government is always bad.

The problem here isn't "more government" -- it's that the government is
showing a willingness to prop up an unsustainable system. If the proposed
legislation was a package of hard-nosed reform and regulation, plus some money
to bail out the most critical banks to our economy, it would make much more
sense. However, in its current state, the bill oinks and waddles just like
congressional pork.

We got where we are through a _lack_ of government (regulation), and the
solution to the problem almost certainly involves more of it; it just has to
be the right type.

~~~
Prrometheus
>We got where we are through a lack of government (regulation)

I hear this a lot, but what particular regulation do you think would have
mitigated the crisis? I can't think of any, except restricting subprime
lending - which would be directly contrary to the Government's other goal of
more home ownership.

Meg Mcardle had a good discussion of possible regulation:

[http://meganmcardle.theatlantic.com/archives/2008/09/hindsig...](http://meganmcardle.theatlantic.com/archives/2008/09/hindsight_regulation.php)

~~~
bilbo0s
I am still a little confused as to what exactly is causing this crisis. I
looked into the whole sub prime Fannie and Freddie thing and I found some
surprising things. The first thing I found was that poor people get home loans
through mechanisms other than sub prime lending. They go through the whole
Ginnie Mae umbrella, where all the inner city HUD and FHA stuff is handled,
along with rural housing, housing for native americans and there is also a
special allowance for veterans of the military to cover them under Ginnie. All
of these groups use mechanisms OTHER THAN SUB PRIME! Or rather, sub prime or
not, these people have loans that are guaranteed EXPLICITLY by the government,
unlike the loans backed by Fannie and Freddie which had IMPLICIT guarantees.
How can Ginnie Mae be sound and Fannie and Freddie be such basket cases? Even
if 100% of the poor people defaulted, Fannie and Freddie would be untouched.
Another question is, who, exactly, was using these sub prime mechanisms that
Fannie and Freddie ended up backing? The auditors are claiming that they were
primarily used by people making between $40000 and $150000 to afford mortgages
that they would otherwise be denied. But something is out of place. Why would
the middle class be defaulting at such a high rate? There is some money
missing here. I have yet to get a really complete understanding of what went
on exactly. After reading through all of the financial info, I am left even
more confused.

Is there an economist on Hacker News somewhere that can explain these
inconsistencies to us? The only thing I could come up with is that these
people wanted to live beyond their means. My quandary is that I have either
severely underestimated the number of middle class Americans who want to live
beyond their means, or overestimated my capacity for financial analysis.

And yes . . . it could be both.

~~~
wallflower
This American Life "The Giant Pool of Money" episode offers a good background
on the crisis: <http://www.thislife.org/extras/radio/355_transcript.pdf>

Act I: "Alan Greenspan: 'The FOMC stands prepared to maintain a highly
accommodative stance of policy for as long as needed to promote satisfactory
economic performance.'...

What he’s technically saying is he’s going to keep the Fed Funds rate at the
absurdly low level of one percent. It tells every investor in the world: you
are not going to make any money at all on US treasury bonds for a very long
time. Go somewhere else. We can’t help you."

Act II "And they sold so many mortgages that there came a point in 2003 where
just about everybody who wanted a mortgage and was qualified to get one ....
had gotten one.

But the pool of money had just gotten started. They wanted more mortgage
backed securities.

So Wall Street had to find more people to take out mortgages. Which meant
lending to people who never would’ve qualified before."

"At the height I was making between 75 and 100 grand a month" -Glen
Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage
in upstate New York."

Act III: "The global pool of money is avoiding anything with even the
slightest hint of risk and that affects everybody, no matter who you are. It's
harder to borrow money to buy a house, or build a factory, or bring your
country boldly into the 21st century. Take Iceland. A year ago it was easy for
them to borrow billions. Now, they're seen as too risky. Their central bank
has to pay more than 15 percent interest get anyone to loan them money. They
could do better putting their national debt on a credit card."

~~~
netcan
Here's what i don't understand. If the global pool of money is getting
tighter, why aren't interest rates going up?

~~~
MaysonL
_Some_ interests are going up: Google "TED Spread". Also, note that 3 month
Treasury securities, the safest investments in the world, have been selling to
yield less than 1%. LIBOR - the "prime" rate for loans between banks, hit over
5% - for 1 day loans! Banks are very scared of lending to other banks, because
they don't have any idea whether the other guy is broke.

~~~
netcan
Does 'increasing the supply of money' fix this?

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gills
They're going to try to ram it through again on Thursday, so if you agree with
this economist call your reps. (Sorry for the politics, but I've been on the
phone all week about this. I probably deserve some mods down, so pile on!)

~~~
davidw
I think the best commentary I've seen so far is this:

[http://www.marginalrevolution.com/marginalrevolution/2008/10...](http://www.marginalrevolution.com/marginalrevolution/2008/10/my-
views-on-the.html)

------
jmtame
I find it entertaining that Aaron Pressman (author of the counterpoint
argument listed by someone else on this thread), who holds a B.S. in History
from Columbia, is calling Jeffrey Miron a "know-nothing," who has a Ph.D. in
Economics from MIT and is Senior Lecturer and Economist at Harvard University,
in addition to the 166 academic economists who were against this bailout. Who
else said the CRA is responsible for our current crisis? What's that, Ron
Paul?

Sounds like these guys just know a whole lot of nothing...

Just to expand on this topic a little bit:
[http://jtame05.wordpress.com/2008/09/30/we-dont-need-a-
bailo...](http://jtame05.wordpress.com/2008/09/30/we-dont-need-a-bailout-and-
the-sky-is-not-falling/)

~~~
bilbo0s
The problem is rampant misuse of CDS, CDO and derivatives in general. ie -
Mortgages that were improperly secured. That is at the root of what is
threatening the financial system. As a former quant I am well acquainted with
the top end of the issue. My problem is understanding the bottom end.

The bottom end is a secondary problem, people defaulting on mortgages. Which
the system would be able to tolerate in a market place where mortgages are
properly secured. That is, a marketplace where people on the top end do their
jobs right. This problem is caused only in part by CRA, AND in a manner
different than Ron Paul argues. CRA encouraged a large number of middle class
people to move back into the city cores around the country. Poor people moved
out, hip, young, creative class moved in. All funded by CRA allowances.
Gentrification and all that. Basically, Fannie and Freddie were moving 'good'
people in, while Ginnie moved 'bad' people out. Problem was, according to the
auditors, these "gentrifiers" are defaulting in droves. To the point where
Fannie and Freddie collapsed. And, to add insult to injury, Ginnie is fine.
The problems it does have it acquired in government attempts to rescue Fannie
and Freddie.

I, frankly, find this state of affairs difficult to believe. If we were
redeveloping the city cores, and then letting the same people who lived there
before buy the redeveloped housing, then I could see a high level of defaults.
But the people in those neighborhoods now are actually pretty solid. That is
one of the most perplexing facets of this entire mess to me. I understand the
bad risk assessment at the top end, I think ANYONE generally assigns a higher
risk to people in poverty, and a lower one to people in higher socio-economic
classes. I would have gotten that risk assessment wrong as well if I was
judging that market. So how can so many solid home buyers be hitting the skids
at the same time? I would like to think there is something more going on here.
I am simply unable to find it.

~~~
nostrademons
I'd like to read more about the majority of defaults being middle-class,
gentrified buyers. Are there public sources available? It's very much at odds
with the "common wisdom" portrayed by the media.

As for how it could happen - my cubemate bought a house in the South End of
Boston in 2006, right next to downtown. He's a well-established professional,
solid skills, solid resume, and I believe makes over 6 figures. But he bought
the house with a $500k interest only mortgage. His banker told him that nearly
everything they wrote these days is interest-only, and he should buy the
biggest home he could afford. So if housing prices fall, he has every
incentive to walk away. It hasn't happened yet (he got promoted to CTO, and
prices are still rising in the South End), but I could imagine there're many
people who took out similar terms but don't have the same wherewithal to pay
them.

------
johnrob
I agree that the solution to bad government behavior should not be more of it.
The core problem is that over the past 30+ years, the government has tainted
the home buying market. The gov encouraged lenders to act irrationally,
pushing home prices too high. Had home prices not been able to get so high,
they would not have as much room to fall. The last thing we need here is more
irrational behavior from the gov - like buying worthless assets for real
money.

------
jamiequint
I disagree.

Take a midsize bank market cap of $5B and multiply it by 25-50 for the number
of banks that might fail. That is a total loss of around $125B-$250B for which
shareholders and employees of these companies bear the losses. Also should
these banks fail, the government will have to step in via FDIC. The problem
with this is that assuming an average balance of $10000 per depositor $700B
covers 70 Million accounts. While this is probably sufficient for average
individual depositors, what is to happen to the small businesses that have
greater than $100k in assets? Also, what happens to the availability of credit
with so many banks in default?

Bankruptcy actually seems more risky, as the people who would lose are small
businesses and those with over $100k in the bank, people who would _never_
have recourse to get their money back. Rather than socialized losses (through
inflation), its losses for an unlucky few. The bailout plan, however, which
involves taking warrants in the companies we are giving money to seems to have
a good chance of repaying at least a significant portion of what it costs
overall.

Thoughts?

------
lpgauth
The crash is only indirectly based on the fact that getting a loan was joke.
The real problem is the financial institution which bundle these bad loans in
short term currency and starting selling them. It was all good while the
housing market was still going up as if the loan wasn't getting paid to could
just take back the house, but when it went down these short term bonds where
without any value.

------
aschobel
Fascinating video from the Newshouur with Jim Lehrer:
[http://www.pbs.org/newshour/bb/business/july-
dec08/bailoutta...](http://www.pbs.org/newshour/bb/business/july-
dec08/bailouttalk_09-23.html)

We do need some kind of government intervention, but the current form stinks.

------
wschroter
Why not just give the $700b to healthy banks so that they can lend to
businesses and credit worthy consumers?

If we have $700b to give, why use it to buy up toxic debt? I understand
wanting to keep the markets moving, so why not address the problem there?

------
lasthemy1
Since no one seems to have mentioned leverage and credit default swaps, here's
the first summary I could find:
[http://www.nakedcapitalism.com/2008/04/credit-default-
swaps-...](http://www.nakedcapitalism.com/2008/04/credit-default-swaps-and-
bank-leverage.html)

There are many better if anyone cares to look; the mortgages defaulting lend
themselves to a house of cards analogy. Banks were so heavily leveraged that
they may not even be able to handle even a small number of defaulting loans on
property that decreased in value.

------
nsimpson
For people seeking an informed and academic perspective, you may find this PDF
on Liquidation Cycles during the Great Depression to be of interest:
<http://econ161.berkeley.edu/pdf_files/Liquidation_Cycles.pdf>

------
cbrinker
Yes this is the root problem with the credit markets; bad mortgages.

However, this doesn't account for the root financial problem of our country
that has plagued us since 1913; the federal reserve. These crooks sway the
entire economy and have exponentially inflated our currency. The dollar is
worthless today. It is worth $0.02 to the dollar of the beginning of the 20th
century.

We went off the gold standard, we decided fractional reserve banking was a
good thing, and we put in charge idiots and crooks to create a lesse faire
market that only benefits them.

Don't believe me?

<http://en.wikipedia.org/wiki/Image:USACPI1800.svg>

Usury, fraction reserve banking, and crooks.

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maxharris
Exactly. The government ultimately has to print the money that it uses to bail
out these guys (who deserve to fail anyway) - the consequence of this printing
is that the dollars in your pocket can't buy as much as they could before.

Taxes are not the only way to tax people.

* Yes, the government has been playing this game for around a century. But does that make it right to tack on another trillion in the theft?

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davidw
The right answer is: some other site.

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cedsav
counterpoint:
[http://www.businessweek.com/investing/insights/blog/archives...](http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html)

~~~
msb
However, non-CRA lenders did pressure CRA regulated banks. From the reference:

"Many of these companies are like the one in which my next-door neighbor is
employed: they are middlemen who arrange mortgage loans for borrowers
including "subprime" borrowers with banks, including CRA-regulated banks"

<http://mises.org/story/2963>

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swombat
Neither bankruptcy nor bailout are the right answer.

Compromise is the right answer.

~~~
kevTheDev
Would you care to elaborate?

~~~
swombat
Not particularly.

I am not enough of an economist or politician to be able to tell you in detail
what the ideal compromise is in this situation, nor do I care to claim that I
am.

What I do know, however, is things are not black and white. Baying for the
banks' blood and shouting "liquidate!" is exactly what they did in 1929 and
that kind of behaviour is even more reprehensible than the banks'.

Similarly, handing the banks a giant wad of cash with no strings attached is
not right either.

The solution lies in the middle, as always.

~~~
biohacker42
The middle and compromise are not in and by themselves the right answer.

Moderation is often a far superior strategy then extremism, but a little of
both is not a superior answer to the question: Is this circuit on or off?

The "middle is always right" attitude reminds me of the US media, which will
often juxtapose facts and spin, then idly stand by, pointing out that both
"extreme" positions are equally valid.

~~~
swombat
Economics is not an on-off problem.

~~~
biohacker42
Never the less, compromising for the sake of compromising is by no means a
smart strategy.

~~~
swombat
How about compromising for the sake of having a job/customers/money?

------
known
Bankruptcy leads to more business opportunities and jobs.

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jsvaughan
You should read up on the great depression.

~~~
nsimpson
I don't know why this was modded down ... it's a fascinating subject.
<http://en.wikipedia.org/wiki/Great_Depression>

Every entrepreneur knows that those who choose to ignore history are doomed to
repeat it.

------
michaelneale
OK so how long will this all take to go to shit (one way or another), I am
impatient.

------
known
bailout is a lose-lose proposition

------
hendler
We need a new economy.

Tech guys create jobs, and save money for old companies with ease. I mean,
what's the utility of some of these idiots? Seems like the next phase of
obsoletes are just raping the system before they're noticed as completely
useless.

