There is a lot of public anger on the $700 billion dollar bailout that is being proposed by the Bush Administration. The typical reaction is why bail out well-paid fat cats on Wall Street, who are responsible for the current mess anyway. While it is an understandable response, it is only a matter of time before the crisis deeply affects you and me.
A good illustration of the potential trouble we are in is told is this story in the New York Times:
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.
A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.
We may not own a store in New York or work on Bay Street but it is a good bet that sooner or later, we’ll be needing credit to buy a car, a home, send our kids to school or to expand our business. There is plenty of evidence that the credit crunch is already hitting close to home. The discount off prime offered on variable rate mortgages started shrinking last year and is now disappearing completely. A new home owner taking on a $200,000 mortgage is already paying for the credit crunch to the tune of $1,000 annually (assuming she could have otherwise obtained a 0.5% discount). There is some evidence that the crunch is affecting small businesses that require credit to run their day-to-day operations.
The bailout also doesn’t mean banks or institutions that were reckless shouldn’t pay the price. The shareholders in every single failure so far were mostly wiped out (It is a different story that senior management made out very well when the times were good). Unfortunately, everything that happens on Wall Street, doesn’t stay there. If nothing is done, it is simply a matter of time before the credit crunch spills into the broader economy and we’ll all end up paying a price anyway.
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41 responses so far ↓
1 Redfly // Oct 2, 2008 at 7:01 am
Barack Obama said it best when he said there will be time to punish those who started the fire later. But first, we need to put the fire out. The sentiment against wealthy bankers (often led by stories of $10,000 bar bills and 7 figure incomes and the like) is understandable. But when I see photographs of “20 something” demonstrators with shorts and T-shirts carrying placards saying “No Bail Out”, I wonder if they fully understand that they are very likely calling for a further serious hit to their own homes, portfolios and life-styles. If the American people choose to act with emotion rather than with reason at this precarious time, they will only succeed in adding fuel to the fire.
Perhaps a large part of the problem is the high disapproval ratings of President Bush who has taken to the air waves in an attempt to warn that the sky will be falling. I suspect that the American public has been waiting a long time to stick it back to their President. Unfortunately, this is neither the time nor the place to take that shot. Canadians like myself and others around the World are hoping that they don’t.
2 Four Pillars // Oct 2, 2008 at 7:09 am
I’m starting to come around to the fact that the bailout is necessary however distasteful.
I agree with Redfly - why would they put Bush in front of the cameras supporting this? Nobody believes a word that comes out of his mouth.
Tina Fey would have been a far better choice!
3 Steve Heath // Oct 2, 2008 at 7:13 am
But don’t you think the hit will be coming either way? Both because of the recession which will occur regardless of the bailout as a period of correction is necessary, and because of the further dilution of the american dollar, and the even higher deficits, that will occur because of this pork laden bailout?
I would feel differently if the money were being used as in some of the smarter plans, such as recapitalizing banks directly in exchange for an equity stake, rather than buying the “toxic” debt for what might be a too high price, or guaranteeing the daily interbank loans through FDIC, who is already monitoring bank health, but the pork laden giveaway that they are rushing through because once again the administration has used fear to push through it’s agenda I suspect will be minimally effective and a huge cost to taxpayers.
If it were Canada, I’d be right there with them protesting because of the arguments “omg, look at the stock market, biggest drop ever, we MUST pass this now, don’t ask questions!”… when we all know that in percentage terms even this whole year has not been the largest drop, and further that the drop on Monday was magnified by the quarter end which is when participants in hedge funds are allowed to liquidate, requiring those funds to sell off assets whether it is a wise time to do so or not.
But since it’s Americans faced with this decision, I leave it to them.
4 Redfly // Oct 2, 2008 at 7:48 am
I don’t disagree with all that Steve says. I confess that I do not yet know what the next version of the bailout plan has changed, but believe it was to include tax breaks for Main Street and an increase to the deposit insurance cap that was intended to give greater protection to small business.
However, it is not the US stock market that that is in jeopardy here. It’s their entire financial system. If credit does not flowing, and flowing soon, it will be the families and small, non-publicly traded business who will be unable to function. And it will not be a matter of not getting loans for housing or automobiles or to bridge other commitments. It will mean that people and small business will have their lines of credit called in, even if they are not in actual default. I doubt many are prepared for that and if it happens, there will be a widespread cascading effect of failures – not on Wall Street, but on Main Street were the folks work and live. They will lose their jobs, businesses and homes. Those that will be hardest hit dont even have stock portolios, unless they have a 401k or other employer sponsored plan. And those will be gone too.
Granted, the way the funds are to be used, and how much is to be paid for the toxic debt needs to be monitored carefully. And if it is, there will be recovery to the tax payers later. It’s not just a giveaway with no expectation of a recovery later. The American real estate market is in a state of peril but not even it will be that way for ever.
At the risk of putting forth an “I know I am, what are you” school yard-type argument, I have to ask back at Steve “don’t you think the hit will be coming either way”? I just believe it will come much harder if they simply point fingers at each other until they are no longer above the surface.
And yes, it’s their problem to deal with. But if they don’t, we will pay the price up here big time. That is something we can definitely bank on.
5 Dave in Kanata // Oct 2, 2008 at 8:48 am
I agree with Steve - why buy their worthless junk at a substantial price with taxpayers money instead of lending them the money to get through the bad times then get the money back later. This idea that the government will turn a profit on assets that no one can price and no one wants to own is completely laughable. There is way too much “hurry up and trust us” - sounds like when they tried to sell the Americans on WMDs in Iraq. There is also way too much “we gotta do something”.
6 guinness416 // Oct 2, 2008 at 9:06 am
If you want to see anger in the other direction you should check the last couple of posts on Stanley Bing’s blog. It’s With so much bile on both sides it’s hard for me to form a sensible opinion myself.
The Irish govt just signed a 420bn euro bank guarantee bill into law.
(I think 4P has a crush, that’s the third or fourth time I’ve seen him mention Tina Fey in relation to this).
7 Steve Heath // Oct 2, 2008 at 9:31 am
Redfly… I hear what you are saying, but taking a step back I think there are two fundamental problems causing this. Of course, part of it is the credit freeze stalling inter-bank lending… but by the same token, another problem is that GDP growth was fueled by credit beyond safe levels, with consumers leveraging every bit of their housing bubble “gains” to afford new purchases. Considering how over extended most of those consumers are now, perhaps the solution is not to expand the leverage into the system, but to allow the necessary deleveraging to occur and to encourage Americans to save again.
One of the ways to encourage Americans to save, is to provide higher returns on their investments, and that is exactly what we’re seeing with this credit crisis. Mortgage rates are going up in the states because the people lending the money are demanding a higher return… but come on, CNN was acting like it was the end of the world that a 40 year mortgage was at 6%. SIX PERCENT! How come we didn’t have armagedden in the past when people were paying 16-18%? Once they begin saving, banks will have no choice but to do some interbank lending, since the ones with way more deposits than they are loaning out will be losing money.
I think even more important than the bailout, the American consumer must, if the country is to survive, return to fiscal prudence, and if they do, no matter what, the rest of the world, which has geared up to provide commodities and goods to America at unsustainable rates, will feel some hurt as they ramp down, but in the long run it will be the best for everyone, as opposed to constantly building up more and more and more credit in the States…. because what choice will they have when interest reaches 100% of GDP?
8 Novice // Oct 2, 2008 at 9:42 am
My only input on this very important subject: I also have a crush on Tina Fey.
9 Canadian Capitalist // Oct 2, 2008 at 9:49 am
Redfly: I agree with you that George Bush has no credibility or political capital left. And his leadership skills are lacking (as usual). Apparently, his defense of the package went along the lines of “this sucker is going down!”.
Steve: It may not be necessarily this exact plan that should be passed. But something has to be done. There were discussions about a Chile plan or Swedish plan (after what those countries did in similar crisis) that are quite different from what is proposed. Like Redfly said, it’s not the stock market that should worry us, it’s the health of the entire financial system. When banks are nervous to lend to each other, we have a big problem.
Dave: The problem is not that the debt is worthless. It is worth something because the debt hasn’t been defaulted, interest payments are rolling in but nobody can put a number on it because there used to be a market to price these things, there is no market at all now and there may be a market in the future. Having said that, the point that the US government doesn’t end up overpaying for these assets is a valid one. Hopefully it will be addressed in any bailout plan that is approved.
10 Canadian Capitalist // Oct 2, 2008 at 10:00 am
Boyd Erman wrote an interesting column in the Globe on this topic:
Link
11 Eric // Oct 2, 2008 at 11:12 am
Comparing today to 1929 is complete bullshit. Its the same as comparing Sadam to Hitler. It’s a tactic not a reality. We will have a recession and we need a recession, its a natural and necessary of a market system. What would happen if companies increased salaries to workers (by not paying CEO’s 100s of millions in salary and bonues). Would that help the economy?
Don’t listen to the fear generation machine, they’ll tell you that if they don’t get bailed out then everyone will get cancer and everyone’s daughter will be raped, and they’re family pets will explode. Anything to get you to let them have thier billions.
12 Redfly // Oct 2, 2008 at 11:53 am
Eric, I think the issue is how long of a recession you think the US needs to have. One like Japan’s that lasts for years and years? And just why is it that you think Canada needs a recession at all? I have no issues with entitlement and can do just fine without one, thanks very much. I have worked too hard all my adult life saving, investing and also enjoying life and would very much like that to continue. We have already had enough correction in our markets and certainly don’t need one in housing now too if it can be avoided.
The US Senate needs to hire a branding consultant and get the term “bail out” out of the public’s heads. We don’t know how much will be paid to the banks for their bad debts, but for God’s sake, does anyone really believe they will be getting top dollar? That’s just not going to happen.
I fear the worst. There could not have been a worse time for an election in the US. All of the Representatives are simply listening to their constituents who I do not believe know what they are talking about. They think they are saving their jobs but they wont have any unless they start thinking for themselves.
13 Canadian Capitalist // Oct 2, 2008 at 12:43 pm
Eric: It is not “their billions” we are talking about. Like Redfly points out the package won’t pay out top dollar for toxic debt. It is not the stock market or economy we are talking about here — it is the health of our financial system. Things that are very fundamental to the economy (such as trusting your money in money market funds to be safe, having faith in the accounts held in brokerages, loaning money to each other etc.) are under severe stress. Don’t you think these are kinda important? Even with a bailout, we are probably going to have a recession. Without it, it could be much worse and make no mistake, we’ll start to feel the pain.
14 Blogging About Money // Oct 2, 2008 at 12:55 pm
We’ve had 70 years of non-deflation that has been built into the costs of homes, food, energy, cars, etc. 99.9% wasn’t old enough to remember what it was like in the early 1930s, when the Great Depression and deflation of epic proportions hit. We never allowed the markets fully process a decline in the past, and now we are forced to bailout the companies who created wealth and increased the money-supply. You can’t simply say “No Bailout” and expect everything will continue to work okay. This isn’t a bailout of the banks - this is a bailout of the economy before deflation reeks havoc on most economies, and the lending supply deflates values of everything besides U.S. home prices. You can’t keep your mortgaged home if you can’t renew it. That’s the issue people aren’t seeing right now.
15 Thicken My Wallet // Oct 2, 2008 at 1:30 pm
I am often amazed at how people are pointing fingers at the excess of Wall Street (quite rightfully so) but conveniently ignoring their own lives.
Main Street is leveraged to the hilt too. Average credit card debt per borrower rose over 8% year over year:
http://money.cnn.com/2008/09/15/pf/bc.creditcard.deliquenci.ap/
At the end of the day, Wall and Main Street are doing the exact same thing but in a different scale.
We, collectively, need a bailout from our lack of personal financial responsibility. If Main Street is going to hit the debt wall soon, you may need liquidity from Wall Street to keep it afloat as well so, one way or another, someone needs to free up liquidity and soon.
16 Patch // Oct 2, 2008 at 1:31 pm
Caught the interview with Warren Buffett on Charlie Rose last night. You should be able to watch it here: http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett.
Mr. Buffett makes a comparison with Pearl Harbour - you don’t sit around talking about who’s to blame, you have to go fight that war now. He says that even with the bailout, it’s going to hurt - inflation and unemployment will go up. But it’s the difference between unemployment going up to 7% or 9% (as an example, he doesn’t know how it’ll bottom out). That 2% represents 3 million jobs that don’t have to be lost.
He also thinks that it’s a great deal for the U.S. government in the long run and if he could get in on the action he would!
17 Canadian Capitalist // Oct 2, 2008 at 2:20 pm
Blogging about money: There is already evidence that the market is worried about deflation. Rates on real-return bonds have spiked to 2.2% from 1.5% at the beginning of the quarter.
Thicken: I have a feeling that the fat cats would do just fine. Maybe they’ll be a few hundred million shy but they’ll do okay.
Patch: I suppose when Buffet says — “It’s that bad. If we don’t get it solved next week, I may go back to delivering papers.” — we better start to worry.
18 $ // Oct 2, 2008 at 2:36 pm
As usual, “capitalism” is blamed and more regulation is somehow needed. Government and the Fed get off with no fingers pointed at them, despite being the ones who caused the mess in the first place. Regulations on finance companies to loan money to undesirables or face penalties(Community Renewal Act etc) , the Fed keeping interest rates too low and the suspicion (which turns out to be correct) that the gov’t would bail out Fannie Mae are much more responsible for this then “greedy” wall street.
19 Steve Heath // Oct 2, 2008 at 3:09 pm
Wow… just read some statistics that pointed out that as of today the US National Debt is now at 10 Trillion dollars (not counting unfunded liabilities). A year ago it was at 9 Trillion dollars… and the bailout is just going to increase the pace.
And I was disappointed at the Conservative party wanting to put 3 million per year on our debt, which would take something like 125 years to pay off our debt…. taking their much higher GDP (11.15 times larger in 2006) into account, if they paid off 35 million per year (and stopped increasing the debt instantly today) it would take them 285,714 years to pay off the debt. Of course, instead of even starting they’re increasing the pace to which they add to that debt.
How long can foreign nations keep letting them dig their hole deeper? Wouldn’t it be more merciful to choke them back now?
20 Four Pillars // Oct 2, 2008 at 3:42 pm
I think 4P has a crush
Lol - yah, maybe I do!
I was planning to check out the debate tonight - I’ve never seen the real Palin speak so it might make Fey even funnier…
21 Robillard // Oct 2, 2008 at 3:50 pm
CC, I give you a tip of the hat. This was a good post.
22 Aleks // Oct 2, 2008 at 5:45 pm
“I think the issue is how long of a recession you think the US needs to have. One like Japan’s that lasts for years and years? And just why is it that you think Canada needs a recession at all?”
I think the issue is whether this bailout will shorten or prolong the recession. I happen to think it will drag it out. The recession isn’t so much necessary as inevitable. The last decade or more of supposed GDP growth has actually been fueled by ever-increasing debt. The housing and stock markets have been inflated with debt and consumer spending has been funded by debt. That is fundamentally unsustainable.
Greenspan’s reaction to the crash of the dot com bubble was to blow another, even bigger bubble. It’s now gotten to the point where the Fed can’t blow another bubble. Now the debts have to be paid. Even if people don’t pay back their debt and merely live exactly to their means, just the act of not borrowing more would decrease the GDP by enough to wipe out any growth we’ve had in recent years.
The credit bubble will deflate. It’s inevitable and it’s going to suck massively. The question is, does $700,000,000,000 of additional debt improve or worsen the situation? I don’t think it improves anything. I think it’s like the security theater at airports that doesn’t actually improve security–the US government needs to be seen as doing something, even if it’s the wrong thing.
I’ve seen no convincing evidence or commentary that doing this will actually get the credit markets un-seized. Much like when the Fed started handing out hundreds of billions of dollars in low-interest loans, I expect the companies who get the bailouts to pad their bottom lines and not pass anything on to anyone else. If the government wants to get money flowing again they need to set up something new. I don’t think trust can be restored while these banks will still have untold amounts of toxic debt hidden in level 3 assets. They need to set up something that will guarantee loans to businesses and individuals who need money for legitimate reasons, and not loan money to banks who just keep borrowing more and more to cover losses on their existing debt.
23 Gail // Oct 2, 2008 at 7:47 pm
We all better learn to speak Chinese. By the time this is all over, American’s are going to be very surprised to see who owns their economic drivers.
As for personal responsibility, since WE are spending more than what we GROSS every year, our government is simply a reflection of us.
Our own governments are treating money as if it is an inexhaustible resource. If the lesson from all this mess is that we can’t keep racking up debt, who is going to hold the White Guys to the line when it comes to spending OUR future incomes?
A year or so ago, the yield curve inverted, signaling a recession, but we were all so busy spending money, nobody noticed. Under the guise (read bullsht) that “the fundamental have changed”, the EXPERTS just ignored the signs.
And then there are the credit companies. Y’know, if a financial company can’t figure out how money works and what the ramifications are of breaking some pretty basic rules (like don’t lend to people who can’t afford to repay), why the hell should they be bailed out? They were STUPID! Stupid companies fail. They should fail.
As for the remaining three pillars, we have to save their asses, or we’ll end up with people starving and having no place to live. But it shouldn’t be a ‘bail out’. It should be a loan, with a wickedly high interest rate. And they should have to pay back every single penny with interest, no matter how long it takes.
Personally, I’m sick to death of all the whining. Nobody could see this coming? Really?
24 Forone // Oct 2, 2008 at 8:08 pm
It’s not so much whether something big urgently needs to be done, but whether it’s the Paulson/Bernanke plan (they had over a year to to produce that three page law that boils down to “trust us”) rehashed with a few panicky tack ons, without any independent hearings. The best discussions of all this I know of have been the daily Tom Keene (Bloomberg on the Economy) podcasts.
25 Canadian Capitalist // Oct 3, 2008 at 12:40 am
The question isn’t that bankers who lent money recklessly shouldn’t be allowed to fail. Or borrowers who borrowed more money than they could afford to pay back shouldn’t face the consequences. Of course, they should. And that’s precisely what happened to all the failures so far (Add in AIG which failed because it took stupid risks). The common share holders, who were the owners of these businesses were mostly wiped out.
That’s different from saying that perfectly credit-worthy businesses and individuals should also pay the price for seized up credit markets. Someone buying their first home with 20% down that fits entirely within their budget are also paying a price now. We are replacing some windows in our home. The window contractor took 20% down and will collect the rest of the 80% when the windows are installed. Now meanwhile, they have to go out and order the windows and get temporary credit to pay the manufacturer. Now, suppose they can’t get that credit. They can’t survive as a business anymore. Simple as that. Imagine how many such transactions we make. Replicate that throughout our economy and we are talking about real trouble.
I have no idea if the bailout package will be enough to unclog frozen credit markets. I’m assuming the central bankers know what they are doing. I have little faith that politicians do. The same constituents who are calling them up to complain about the bailout are the same ones that are to their eyeballs in debt.
Steve: This may be surprising but the US debt is nothing unusual (the rate of growth isn’t sustainable, of course). It is currently 62% of their GDP (not counting unfunded future liabilities) less than the OECD average of 77%. For Canada it is 68%.
26 Canadian Personal Finance Blog » Blog Archive » Random Thoughts: Is this the End? // Oct 3, 2008 at 6:21 am
[...] Canadian Capitalist asks a better question Why Bail Out Wall Street ? if we save them this time, what stops them from doing it [...]
27 Stocks and Bonds » Blog Archive » Comment on Why Bailout Wall Street? By Canadian Capitalist // Oct 3, 2008 at 6:48 am
[...] The question isn’t that bankers who lent money recklessly shouldn’t be allowed to fail . Or borrowers who borrowed more money than they could afford to pay back shouldn’t face the consequences. Of course, they should. …[Continue Reading] [...]
28 Steve Heath // Oct 3, 2008 at 8:19 am
CC: I’ve seen those numbers pasted as well before, supposedly based on some CIA world factbook numbers, but they don’t make sense to me. According to the results posted by our government with the 2007 financial statements (http://www.tpsgc-pwgsc.gc.ca/recgen/pdf/49-eng.pdf), at that point …
“• The accumulated deficit (the difference between total liabilities and financial and non-financial assets) stood at $467.3 billion
as of March 31, 2007, a decline of $95.6 billion from its peak of $562.9 billion as of March 31, 1997. The accumulated
deficit-to-GDP (gross domestic product) ratio was 32.3 percent, down sharply from its peak of 68.4 percent as of
March 31, 1996, and is now at its lowest level since March 31, 1982.
• Net debt, a subcomponent of the accumulated deficit (which records the difference between total liabilities and financial assets)
stood at $523.9 billion at the end of 2006-2007, down $85.1 billion from its peak of $609.0 billion at the end of 1996-1997.”
I’m not sure which is the appropriate debt figure to use, but either way we’re down in the 30’s, not anywhere near 68%.
On the other hand, according to the US Bureau of Economics (http://www.bea.gov/national/xls/gdplev.xls) their 2007 GDP was 13,807,500,000… and if we say a year ago their debt was 9 trillion, according to the article I read, then that would be 65%, so in that case the number provided by the world fact book is close enough as to make no difference.
Of course, if their economy grows even by 3% this year that would be 14.221 trillion, and with debt at 10 trillion (or more) they’re up over 70% and climbing… and you’ve got to wonder what rising interest costs are going to do their budget, pushing them up higher, faster…
In any case, as you say, I was just surprised at how fast the rate was accelerating, and hopefully the next administration will do something to rein that in… of course, doing that will likely also compound some of the contraction in their economy. Damned if you do, damned if you don’t.
29 Al // Oct 3, 2008 at 8:23 am
One question that hasn’t come up so far is, can the US Treasury raise $700 billion? What if China and other potential lenders aren’t willing? If the plan passes but the money can’t be raised, then you’ll see real pain. It would be a clear statement that there is no faith in the US government’s ability to pay it’s debts.
There is also an assumption that banks will begin to have faith in each other and begin lending after the bailout plan is signed. So far banks have been more inclined to hoard the money that the Fed and Govt have sent their way. The only proof we have that this will actually work is the word of people who claimed that the mortgage mess was contained to subprime.
30 Canadian Capitalist // Oct 3, 2008 at 10:04 am
Steve: I believe that the OECD numbers are for total government debt, not just the debt at the Federal level (which I think Finance numbers are). I agree with you that US debt has been increasing at breathtaking pace under GWB.
http://oberon.sourceoecd.org/pdf/factbook2008/302008011e-10-01-02.pdf
Al: I’m not sure what the mechanics are when a government wants to raise money. But every trading partner has a vested interest in the US economy. If the US economy tanks who exactly are the Chinese going to sell their trinkets to?
31 Steve Heath // Oct 3, 2008 at 10:25 am
CC: Thanks, that makes sense why Canada would then be where it is, although it shows how important it is we get the provinces to clean up their debt too.
But for the states, I calculated about the same percentage as they report based on the federal debt/GDP… I would expect my calculation to be a lot lower for them as well then since I didn’t include any state debt.
Ah well, either way, it just shows how important it is for voters to keep their governments’ feet on the fire as far as responsible finances.
32 Al // Oct 3, 2008 at 11:00 am
CC,
Agreed China has a vested interest in the US economy, but that still doesn’t mean that they’ll come forward with large amounts of money.
1) Would you put more and more money into a failing business? China already has $500B in US treasuries. Throwing good money after bad.
2) China and other investors would have to believe that the bailout plan will actually work. Will the US buy more trinkets with the plan that without? Even if it is more, is it enough to justify the investment?
3) The US govt is already on track to run a $400B deficit this year, and the $700B will be on top of that. That’s over $1 Trillion in a year. This would take the US debt from around $10T to 11T in one year, or a 10% increase in a single year. Not an investment I’d like to make.
4) If you believe that the US will face recession either way, then GDP will fall. Debt to GDP could top 80%*
*approx $13.8T GDP for 2007. This only has to fall $13.75T to get a Debt to GDP ratio of 80% with a debt of $11T. Debt to GDP was 65% for 2007. It was only above 65% during WWII.
33 Sam Luu // Oct 3, 2008 at 1:44 pm
I understand that this US bailout may be necessary, but why should Canadian pitch in. Doesn’t this affect the Canadian dollar and personal taxes. This is my primary worry - I know Canadian jobs are at risk, but the protectionist Americans will guarantee that anyway.
I don’t believe the bailout plan will have any long term benefits. I believe by not buying market prices for the securities, the US government puts their tax payer at risk. The US deficit may balloon further if this doesn’t pan out. They may end up like the Japanese for 10 years.
34 Canadian Capitalist // Oct 3, 2008 at 1:46 pm
Al: Perhaps. It is hard to say what China or other nations will or won’t do. But the proof is in what’s actually happening in the markets. 30-year Treasury Bonds are yielding about 4% and seems to be only fixed income investors are willing to buy now.
You’re assuming that the entire $700B is a write off. i.e. the Uncle Sam borrowed the money and it went poof. But that’s not the case. They are using the borrowed money to buy distressed securities and may even end up making money. The key is that a market for these assets does not exist, not that they will always be worthless. For instance, they are almost certainly going to make a nice profit on the AIG bailout.
35 Al // Oct 3, 2008 at 3:33 pm
CC,
It will be interesting to see, and I have to admit that a lack of buyers for treasuries is a long shot in the short to medium term. I’m skeptical, however, that the world will continue to allow the US to borrow more and more and more as the prospects of getting paid back get worse and worse. There must be a point of no return when the US will have to either default on its debt or drastically cut back spending.
I’m not actually assuming that the entire $700B is a write off, however in the short term they will have a $700B debt (if they use it all) and an asset they can’t sell. There is no indication on how they will value the assets they are buying. If they go for a current market value, it’s likely that the sellers would become insolvent. If they pay the value on the banks books, the US govt will eat major losses. Any value that is determined in the middle will be harder to judge, but my belief is the US will lose money and worsen their financial position for a long time.
To put things in perspective, the US government collected $2.4T in 2007 and interest payments were $243B. So they paid 10% of their income as interst payments. If the US has to pay 4% on their $11T debt, that would be $440B. If receipts stay the same for 2008(ignoring layoffs etc), the interest payments represents 18% of income. And that’s on an IO loan.
If the world gets nervous and demands a 6% return, then the US is paying around %28 of their income as interest payments. At 11% interest, the US govt would be paying half of their income as interest payments.
I see the bill has passed.
36 Canadian Capitalist // Oct 3, 2008 at 4:05 pm
Fair enough. I do agree with you that this can’t go on forever, especially at the rate at which fiscal deficit has been increasing in the past few years. I think the bill proposes hiring bankers to value all this toxic debt (that’s one of the criticisms of the bill). I also agree with you that profits on this package isn’t a sure thing and there may be losses when all is said and done.
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[...] Why Bailout Wallstreet? | Canadian Capitalist [...]
39 Weekly Roundup: Syncroblog Edition at Clever Dude Personal Finance & Money // Oct 6, 2008 at 7:43 am
[...] - Canadian Capitalist gives his opinion of the bailout. [...]
40 Comment on Why Bailout Wall Street? by Weekly Roundup: Syncroblog b…/b // Oct 6, 2008 at 10:09 am
[...] Weekly Roundup: Syncroblog Edition at Clever Dude Personal Finance Money wrote an interesting post today onComment on Why Bailout Wall Street? by Weekly Roundup: Syncroblog b…/bHere’s a quick excerpt[...] - Canadian Capitalist gives his opinion of the bailout. [...] [...]
41 Thursday Linkstuff // Oct 9, 2008 at 4:57 am
[...] Capitalist wrote an excellent explanation as why the big US bailout is necessary. I tend to [...]
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