Bear in mind $700bn is just the headline figure. In reality the cost of the 'bail-out' could make money for the government. That is, all of these loans have such an uncertain value they could drive a fairly hard bargain, get them really cheap, and then there's the possibility that they end up being worth a bit more over time as things settle down+confidence improves and the economy starts growing again. Once that happens they sell them on for a profit, and everyones happy.

Not saying it's likely, but it's certainly a possibility. In any event the full cost won't be $700bn, but a figure likely far less than that if there is a cost.

As to the more general issue, it's somewhat disheartening to see so many people jumping on the knee-jerk 'need more regulation' bandwagon. Before introducing more regulation you need to know what actually went wrong with the original mechanism, and how to fix it. Otherwise you end up just making things worse if you throw a ton of unhelpful and constricting regulation at the problem. So to look at it from that mindset, it seems to me although there were several problems, one issue was the contracts for the bankers/investors - they were rewarded heavily via bonuses for the 'upside' of a deal/decision, yet on the downside all they stood to lose was their job. That means that it is fairly obvious they would be taking excessive risks which might not be likely to pay off, since they only need it to pay off for a few years to make a ton of money, and by then it doesn't matter so much if they lose their job. However the real issue is why did the companies allow this - it clearly wasn't maximising shareholders interests, and so that suggests the shareholders did not have full information regarding this. Does the fault lie then with the management of the company, who may not have been acting in the shareholders best interests (as they should have)? Or was it due to a lack of communication/understanding between different parts of the company, or just the managers and the shareholders?

Then you have the same issue again with companies now thanks to the various bail outs - they know that if they're a big company (i.e. affect lots of voters lives) then the government will look to bail them out most of the time if they get into trouble. So those companies then feel they can take on excessive risks because they won't be allowed to fail, or alternatively if they're not 'too big to fail' they end up merging, forming oligopolies+moving ever closer to monopoly situations, which further harms the consumer by restricting choice+increasing prices on average as a result of the reduced competition.
 Equally the government's not exactly in a desirable position, because if they do nothing and allow the firms to fail then it could have a massive negative impact in the short termAs a result my own opinion is the government shouldn't just bail out these banks automatically, but should look at these loans, decide what they're really worth, and if the price drops below what they think they're worth, then they buy them. If some firms fail as a result, then so be it - it'll be a bitter pill to swallow initially, but you'd end up paying much more in the long term by looking to prop up a failing institution.

The problem here is the assumption that it *wasn't* maximizing shareholder value - in fact it was . . . for a time.

Which means something fairly obvious - every analyst for a firm that told his boss "Stay out of these derivative markets" had to have an answer for his Boss when he looked at the money other firms were making hand over fist, walked back to his desk and said, plaintatively, "Um . . . Why?".

Now - if you're Warren Buffet, you can look the people that own Berkshire Hathaway stock and say "Because I don't understand these derivatives, the way this goes doesn't make sense to me, I ain't doin' it and you can't make me."

When you're Warren Buffet, that happens to work. For every other analyst, you're looking for a new job between the first and second comma's in that sentence - and as it happens, Warren Buffet doesn't need to hire you - he's got a perfectly good analyst that doesn't understand derivatives in the office across from his mirror.

Nobody had full information, because the regulations that would force the full information out into the open weren't in place, but everybody also saw their rivals making money hand over fist, and they're paid by how much they made the company last month.

In other words - the Kool aid tasted GREAT! Who cares if you never saw the guy that mixed it up!

Regulations are not the be all and end all of all things. But they are good for several things.

A. They can help make sure that information doesn't get lost in the shuffle. These derivative market were unregulated specifically because people, mostly Republican, didn't want regulations stifling the creativity of the markets. But that also meant that as stuff got sliced and diced in, and nobody knew what the hell they had - they were selling it off for more than they bought it, so what did they care?

B. They set a standard, a definite moment when you can look at your boss and say "This doesn't smell right - it's gut instinct, but doesn't this feel a lot like what H13-C is designed to prevent?" - and you've at least got a leg to stand on, because H13C is designed to prevent short term gains that turn into long term catastrophes,  firm X ran up against H13-C three years ago and look at that mess - sure, the SEC killed the firm but by then it was a mercy killing.

C. If they're enforced properly, they keep honest people honest. Because you *did* see what happened to Firm X when they skirted H13-C three years ago, which means two things

 1. You don't want to get any of *that* on you, and

 2. you know you're not competing against people that are getting ahead because they're gutsy, manly men that are cheating the rules, because you know the SEC actually *watches* for H13-C violations. So your boss isn't looking at you and going "All the other firms are doing it."

Do they need to be watched carefully? Yes - what that regulation was guarding against may not be relevant today, or it may not be the best way of guarding against it, or heck, it might even have just been wrong at the time, guarding against a bogieman that never did exist.

But the fact that firms *will* go for the short term gain and ignore the long term consequences is not a fictional bogieman. Everyone *always* thinks they have the reflexes to grab the brass ring *and* dodge the consequences - but there's always another brass ring, just inches closer.

Jonnan

Maudlin, you're attempting to apply logic in an illogical manner.

I have just been appointed CEO to a billion dollar industry, when they can me, I'm going to make X million dollars.  If their stock price goes up, I get X million dollars when it does.

Yes, logically, the shareholders don't want their stock to go up five bucks today and down five hundred tomorrow.  Also logically, the CEO doesn't want the same thing the shareholders do.  He makes money by the stock going up, and if it doesn't go up, they'll can him anyway, so trading two bonuses for one bonus just so he can do the sensible thing in the shareholders interest isn't very sensible.

People are stupid, it's an unavoidable reality that must be applied to any and all situations.  Shareholders will fire an intelligent CEO that isn't screwing them over simply because his short term performance is inferior to the ones that do.  Intelligent CEO's know this, and stupid CEO's don't see the cliff before they run off it.  It's why publically traded companies always fluctuate between utter morons and intelligent people in their leadership.  They literally encourage their own demise by being public, only recently following a brush with death are they cognizant enough to recognize their own incompetence.

The free market, when you leave it the fuck alone, is beautiful in that stupid companies run by stupid people, die.  Which is the crux of the bailout problem.  Even if we make money off the 700 billion, it's preventing the natural order of the market.

There are more houses than people that can afford them.  A lot more.  The housing market has to collapse, it's not something that can be stopped simply by buying those bad mortgages.  The houses are also significantly over-valued.  People were selling homes that cost $120k to manufacture for $250k, even if we only buy them for $200k, and the companies take that massive hit that will put many of them under, there's an $80k profit over a newly built home before you can sell them for what you put in.

To get around this, we have to continue encouraging those bad loans, hoping that the market will perpetually expand a bubble to keep them going.  The Bush administration has done a phenominal job of just that, they managed a 7 year run of housing expansion built on bad loans that would have crashed bad when he took office.  You can't continue this indefinitely, the billions will simply continue increasing.  They are going to cause these financial collapses to a greater degree every time the business cycle comes to a downturn.  The next one will probably make the great depression look like a cake walk.

We need to take our medicine now, cut Fannie and Freddie off, abolish the idiotic HUD program, collapse the housing market, put a shitload of contractors out of business(we have way too many of them), sink the stupid banks that couldn't see this coming.  If we let reality punish the people that create it and put up with any potential recession it causes, we might avoid the worldwide collapse the next round will create.  I'd prefer to avoid stockpiling guns and munitions so I can shoot the starving masses trying to steal my food 20 years from now.  It cost about 120 billion to save their bacon in the 80's, they're looking to spend well over a trillion this time around.  We literally can't take the next hit, the money simply isn't going to exist.  The billions they're using now don't exist either, it's all borrowed.  Even if we do survive it, each successive bailout simply encourages the next round of idiocy to a greater degree.

Read up on the S&L crisis, it was the exact same problem, bad mortgages repackaged by the GSE's and sold back to the suckers on Wallstreet.

I agree that we may have to many contractors (way to many bad eggs for sure) and in my area, (Texas gulf coast) contractors have been building homes for 40-50k and selling them for over 100k. But they have alot of people working and are a fuel for our economy here.

I like pie.

Fueling the economy by overselling at 100% markup to people that can't afford them doesn't actually fuel the economy.

You have five bucks, you buy something with it, and sell it to some sucker for six, then he sells it to someone for seven, and so on and so forth.  You haven't actually created any wealth at the end of it, regardless of how high the price goes before the guy holding it can't find another seller.  We're literally running off a thirty year economic boom in the housing sector that flat doesn't exist, they've just been selling each other the same products for continually higher prices.

Gotta remember, this is a housing issue. Your average house costs nearly $300,000. Even a cheap house is gonna be $100,000. It's an enormous purchase compared to pretty much everything else an individual buys.

Or to put it this way: It takes 120 people (men, women, and children) paying $2,500 to pay for a single average house.

Sadly, this is true, and this is what's really causing the collapse: Eventually, you reach the point where people can't afford it, and the whole thing starts to collapse like a house of cards. With housing, it gets worse: The reduced value of a foreclosed home causes the homes around it to devalue, and starts a downward spiral in the entire neighborhood. That can easily mean a loss of several million dollars in a single neighborhood.

The vote will pass and the bailout will occur very soon.

If the rationale for the bailout is that AIG is too big to let fail, then a solution may be that any company that must be rescued by the tax payor should be broken into parts much as ATT was.  This will prevent having to ever bail out this company again due to its size and penalize big time the existing management who's income is tied predominately to the company's performance.  All stock options for executives should be forfeited in the event of a government bailout.

in historic economic tems, i've heard of the three levels/phases of money vs. VALUE vs. ECONOMIC PLATEAUS

1.  the barter system, which was hard to counterfeit because it was a fair trade, which often meant that precious metals, such as gold, silver, and utilitarian metails, such as tin and copper were also traded. now, until the 'TALLY STICK" system came along, the border between actual good and promissory note became blurred.  however, the tally stick system lasted almost 800 years.  in this time, there was NO INFLATION. the value of everything was almost a 1:1 ratio.  people lived in their means.
   
2.  the paper money system, which was easier to counterfeit, becuase not only did it become a "PROMISSORY NOTE", it also became the paper with which bankers documented the transactions.  hence, the term, "FRACTIONAL BANKING"... for those who dont  know, WAMU is the master of FRACTIONAL BANKING.  look where it is as of 9-29-08. in 1973, it was considred the economic watershed year... why? INFLATION ROSE GLOBALLY in that same year. what else happened in 1973? OIL EMBARGO. THE AMAZING THING TODAY IS IF THERE IS LITTLE OIL LEFT ON THE WORLD, WHY DONT WE PUT GAS IN THE CARS EVERY OTHER DAY LIKE 1973?
3. the credit system, which is very easy to couterfeit... look at the following new PHRASES since the CREDIT BOOM: IDENTITY THEFT, the credit firms with the CREDIT REPORTS, HACKING, DIEBOLD, HACKING DIEBOLD, how many times in the news recently have people seen that companies are getting hacked, losing millions and millions of records related to PERSONAL AND FINANCIAL?  INFLATION is totally what it means... INFLATE THE EGO and everything falls into place.

now, im not saying money is bad. historically, every agricultural society has used money, from the mayans, to the aztecs, the ancient egyptians, the mesopotamians, the babylonians, the sumerians, the chinese...

HOWEVER, and this is the best part for you, the fans of SINS OF A SOLAR EMPIRE! the mayans had many calendars.  their solar calendar, their agricultural calendar, simply, was based off a two cycle calendar approach. one was 260 days. one was 360 days. the day of the calendar that these two cycles met at became the topic of the day. the interesting thing was that every 360 days, there would be a mass celebration in the nation.  for five days, everything in the mayan civilization would stop functioning.  as a law, all debts were paid and reset back to ZERO.  there was never any guarantee for any one in the mayan civilization to become long living and prosperous because of religious beliefs, but as far as a chance to return to a starting point and rebuild (without the $700B price tag) is amazing. as humans, we are all given the ability to bounce back from any hardship. the issue is do you listen to the innate abilities or do you listen to the babble from the outside world?

so, in closing, bullet points

• do cycles of time exist? yes, the mayans believe so, as in evidence with the seasons of the year
• do cycles of economic hardship and prosperity exist? absolutely, bernanke and paulson and everybody else point that out.
• does a downturn in the economy happen? absolutely... because the economy is a material representation of the confidence and attitude/moral of a people
• do we need money? absolutely... because it is a means to provide goods and services easiear and faster
• are the laws fair? who knows anymore... it is certainly a devisive factor

to tell the truth, im not sure what will happen in the future.  civilizations come and go.  just like thoughts and one night stands... it looks good in the beginning, but the longer it stays after the party, the more you just want to move on

My friends, we have a problem. This problem is not the government, not the economy, not the foreign trade. It is people. People who give out loans despite bad credit. People who use credit beyond what they can pay. People expecting the government to provide for them instead of simply protecting them.

If you wish to solve the economic problem get rid of the people. That however is unacceptable and undoable, We will see an economic depression, but let us not blame the power of the government nor the financial services. For the blame first lies with us. Who asked for the loans? Who created the credit risk? Was it not the everyday consumer?

I agree something needs to be done, but whatever is done will take time. We will see far worse economic colaspe before this is over.

I am new to these forums but saw this and had to chime in.

If you are a small to medium sized business owner you probably got a few phonecalls today from your NET 45 distributors,  which is an exact reflection of WHY this bailout will work.

Let me explain in layman's terms.

The "Bailout" isn't really a bailout, it should not be called that,  it should be called an economic stability act or something similar.  What it is doing is not giving money to rich people, its buying up all these sub-prime morgage securities that nobody will touch with a 9 foot pole right now and is what is causing everyone to scurry.

Since nobody will buy them, banks no longer have any liquid assets.  Without liquid assets banks cannot borrow from other banks, and therefore can't loan money.  In order to be able to loan X ammount of dollars, an FDIC insured financial institution must have at least 10% of X in a viable liquid asset.  Since Fannie and friends went down the tube these banks which have been coheresed by housing acts in 1977 and 1996 have been taking subprime loans on guarantees from the government sponsored companies.  

The most recent housing act in 1996 lowered regulations and gave postive re-enforcement of Alt-A loans for homes.  These are known as Liar Loans or more common, NINJA loans, meaning No Income No Job no Asset Loans.  These were given to mainly povertly level home buyers but also to real estate speculators.  Of course, before that act in 1996 nobody would have touched any of these people's poor credit and now asset's loans, but with Freddie and co. buying them up why not?

Since the banks could sell the loans they figured the best way to get the people in is show them the low monthly payments and not the balloon of the adjustments.  Uneducated people who were the majority purchasers fell for the bait and defaulted on the loans.  Comes to Economics 101, READ THE FINE PRINT.

Now to his credit, Bush did recognize this as well as McCain.  Bush asked for legistation, McCain put the bill together, and the legislature said "hell no."  Why you ask?  Who want's to be the one who told a low income family they can't get a home?  You lose votes?  Add to the fact nobody wants to be kissing homeless babies, so Washington just turned its head.

Now that this is clear, what will this do to fix it?

Buying out all these mortgage securities would give the banks some liquidity.  That means they will be able to loan money again.  Back to the small-mid businesses,  if you deal with the finances of one you have had creditors calling to see if you can pay early, moreso if they are on a NET 45 status with you.  Why?  Because banks are refusing to loan them the money to buy the raw product they need to sell to you.  Our entire economy works on credit now.  

Take the paper industry, you run a kinkos.   Dunder-Mifflin just called you because they need you to pay your bill early, you don't see this as a problem since it was just mid-terms and you made a good profit this month.  You ask why... Well Dunder-Mifflin hasa contract with Georgia Pacific.  In-order to keep the contracted prices with GP, they have to buy 2 million in paper every month.  They usually go through say, Chase to get a 2 mil loan every month since they do not have that kind of cash laying around, and buy the paper, and with the profit over 2 mil, they pay the employees and such.

Now Chase doesn't have as much liquidity since nobody is buying up these loans, so they can only loan Dunder-Mifflin 1 millon dollars.  Well now Dunder-Mifflin is screwed. Since they can only buy 1/2 their paper they ask customers to pay early in hopes this "bailout" gets passed so they can get a loan.  Even then they only get about 25% back so they have to make due with 75% of normal inventory, hence, lower sales.  They have to fire people, you don't get all the paper you need, so you have to buy from other places.  These places won't even take NET 30 with the current economic status, so you have pay up front, you can only do that for a while before you have to lay off people, since you can't get the credit to buy the paper.

Now you have unemployed people at the papermill since they cannot sell any paper, then you have Jim and Dwight laid off at Dunder-Mifflin because they aren't selling enough since there isn't enough inventory, and you go out of buisness because you cannot afford to pay your employees.

Its long, its detailed, but I hope the bube-toob references help explain it.  Sure its a little socailism.  It stinks, and we all hate paying off other people's debit (re-distribution of wealth anyone?) Its just something we have to do if we want to avoid a depression.  A recession is enevetable, its up to the government to quit pointing fingers and making dumb comments like Pelosi did (and ruined the bill) and just get it done.

The problem is this is an election year, and with a congress with its worst approval rating in 80 years scared for their jobs, everyone is going to be pointing fingers and nothing is going to get done.  We will be wishing for the good ol' Jimmy Carter days.

Bailout defeated 228-205.... Citigroup is absorbing Wachovia, Dutch-Belgian bank Fortis NV gets 11.2 billion Euro bailout...

Banks won't even lend to each other now.

The fact it got shot down is not a bad thing.  Congress got off there butt and did something.  Which in this case is nothing.  And nothing is what they need to do.

The market goes up and down (yes its the biggest drop in years).  Its needs to rebound on its own. If the goverment jumped in it would acutlly hurt is in the long wrong.  All these banks would be in the same place again. Because they did not have to take the fall. 

Look at this as a weeding out of the weak.