
On day of Bear bailout, economy's cracks widen - gibsonf1
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2008/03/15/MN4HVK1R0.DTL
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s_baar
This is absolutely shameless. Why should Main Street pay for Wall Street's
mistake?

~~~
timr
This isn't just Wall Street's mistake.

Did you read the bit in the article about the 25-year-old kid with "investment
properties" in San Francisco and a "lifeline" in the form of a huge home
equity loan? That's nothing more than _gambling_ , dressed up as investment
(of course, investment banks and hedge funds were doing the same thing on a
much larger scale, so it's hard to say that kid was being much dumber than
anyone else.)

The article very clearly describes the downward feedback loop that is
underway, but what it _doesn't_ tell you, is how this loop is a mirror image
of the feedback loop that puffed up home prices in the first place:

1) People overpaid for houses because capital was cheap.

2) Rising home prices made mortgage-backed equities look like a safe, high-
return investment.

3) High-risk investment funds (such as hedge funds) went on margin to buy
these MBEs in large quantities.

4) Increased demand for MBEs caused mortgage originators to lower lending
standards, which made capital cheaper.

5) Goto 1.

I'm certainly annoyed that the government is bailing out companies that should
have had better judgment in these matters (companies like Bear Stearns could
have interrupted the cycle at step 3; mortgage lenders should have been
exercising better judgment at step 4), but I don't see that it now has a
choice. When banks the size of Washington Mutual (whose bonds are now almost
junk) and Bear Stearns start to go bust, the greater economy has one foot in
the grave, and another on a banana peel.

That said, I don't think the Fed is going to save us from our own greed. They
can only do so much before they risk turning the dollar into toilet paper. The
rest of us just have to _not_ be the 25-year-old kid in San Francisco with
huge debt and multiple property "investments" -- he deserves to lose his ass.

~~~
johnrob
What bothers me is how we bail out people like that 25 year old, which happens
when the government tells banks not to foreclose. People take risks, and
people get burned. Nobody understands that better than entrepreneurs. It's not
like the government comes and gives your startup a bridge loan if you can't
raise VC money.

~~~
ashu
I think in this case, the 25 year old does get burnt - at least a little bit.
The question at this moment really is: do we let the whole economy (other
saner people who had nothing to do with this mess) suffer now that the plague
is spreading, or provide some respite to the entire economy (and not care if,
as a by-product, the 25 year old is bailed out a little bit.)

------
nazgulnarsil
yeah instead of letting a few businesses fail let the whole economy take a
stab in the gut. great idea.

these people got themselves into this with the same retarded thing humans
always do: assume things will stay the same. in this case the derivatives they
were using as securities had a blip because foreign investors got cold feet.
guess what? when you over leverage your securities and those securities dip it
has a disproportionate impact!

