Let me give it a shot. It's not that "nationalization" per se is necessarily a bad thing. It's just that given what they want to accomplish, it is a temporary stop-gap measure which, in long run, may turn out to prolong the problem. OK. $700 billion. Now $540 billion. Put this into context first (see this thread:
Putting it all into perspective) We see this as being a start, not a solution, and that is what scares me.
For the most part, I think that both democrats and republicans agree that the basis of our economy is free enterprise with some grains of salt - those being rules and regulations in place so that big business doesn't take advantage of the little guy, and so that systems of reporting are in place such that investors understand what they're investing in, and the government gets paid the taxes it has coming to it.
So in a simplistic nutshell, I guess, it's that the government investing directly in businesses means that the risk of investing is being transferred from the investors to the government, and they're doing it to kick-start the credit markets - which are frozen because of a lack of confidence AND the problem of the falling housing and RE prices in the U.S. and now globally.
So what I see as being the real problem is - what if it ISN'T enough? Then what happens? The government now has an equity stake.
I posted this in another thread - I don't remember where, so I'll just post it again. But Christopher Whalen, MD of Institutional Risk Analytics puts it - I think - quite clearly:
Quote:
| Rather than resolving the crisis, the government's plan to inject capital into big banks is "merely the appetizer and soup course" in what will ultimate be a multi-course meal... |
Here's a link to the summary article and the more comprehensive video interview:
Bailout Nation
Greenspan got lucky with the tech bubble, because it got replaced by the housing bubble - and then he wasn't responsible anymore. But what, right now, is going to drive the economy? So our government proposed to kick-start the credit markets by taking equity stakes in our failing banks. And the banks definitely needed recapitalizing. But is this the "right" method to accomplish it? It helps restore confidence - but it doesn't fix the underlying problem.
In most of human history, credit has been based on the borrowers ability to repay. But for the first part of the 21st century the lenders ability to securitize and repackage mortgages became the basis of credit. And yet for those decisions, we are bailing out the businesses that made those decisions.
Cindy - you're right. Some people are in homes they couldn't afford. But many didn't understand they couldn't afford them - so the issue is basically moot. What happens now? The treasury plans to date have not addressed the problem of reducing the debt burden of the distressed homeowner. Without such a component, the debt overhang of the household sector will continue to depress consumer spending, which will exacerbate the current economic recession.
Taking equity stakes in the banks makes MUCH more sense than buying up the toxic assets of those banks. In order to kick-start the credit markets, the banks had to be recapitalized and confidence restored.
But was this the best way to do it? Again - the underlying problem is STILL the value of the housing market.
At current levels, the average American still can't afford the average house. Despite the creativity of its new policies, Washington can't alter that math. Ultimately, the only mechanism to restore balance and get the credit flowing is for prices to fall steeply to true market levels (in housing and for the value of loans and related derivatives, etc.), and for losses (for consumers and corporations) to be recognized and absorbed. So how does our government taking an equity stake in JP Morgan, B of A, Citigroup, etc. achieve that? The underlying value of their loan portfolios IS STILL FALLING - and what were being reported as gains during the rise of home values will now have to become additional reserves, as the housing market continues to fall. In other words - they will need to be recapitalized again.
So with this bailout - taking equity stakes in banks, buying commerical paper, and now taking equity stakes in money market mutual funds - the government is trying in vain to get funds flowing again and to essentially put a floor under prices. But it's too late.
Maybe it helps to summarize it like this. U.S. home prices were like a beach house supported by eight pillars:
1) lax lending standards,
2) low down payments,
3) 'teaser' interest rates,
4) widespread real estate speculation,
5) pliant appraisers,
6) willing lenders,
7) easy refinancing, and
8) a market for mortgage-backed securities.
So knock out even half of these pillars and the house comes crashing down. We've knocked out all of them - but our government appears to be hoping that by putting one or two of those pillars back up that the house can defy gravity and that bubble-era prices can be sustained in a post-bubble world.
Does that help?
Laurie
