From a social standpoint the government was very appreciative of Wall Street to take the risk in ultra risky or low interest loans to people who were marginally able to afford them, if at all. The game/goal was to get more people into a home and thus encouraged home ownership. This raises local property taxes for the community and stimulates the local economy as people need stuff to put in there home. Everyone wins and the Banks take all the risk. But on the flip side, they get all of the rewards too. Government turns a blind eye to risky investments.
Now that the money to be made has been squeezed out of the market by the early innovators of the sub prime industry, banks and brokerage house are now left with toxic assets. They have sold off all of the good loans and / or stripped off the good pieces (STRPs and DRIPs) and sold them. What is left over is to service the crap items that were not easily sold. So the banks bought insurance designed to insulate them from loss. Again, the government avoids the risk and it appears Wall Street is taking care of its own.
It is my premise that this didn't happen overnight. Oversight has been lax to the point that there are grave problems on Wall Street. But the bankers and brokers are gaming the system by pricing in the intended bail out. Local communities allowed expansion into areas that didn’t necessarily warrant the location of safe and affordable neighborhoods. For example, The Natomas Area which backs up on the river; Sacramento city decided that Yolo County could grow tomatoes and corn and Sacramento could expand its property tax base by allowing new homes to be built. They could pass on the cost of fire protection by mandating fire sprinklers in new housing and condo buildings and don’t have to build as many fire houses. They could encourage the builder to offer the instillation of burglar alarms and motion detecting lights to pass on the cost of Policing if the neighborhood’s perception was of safety due to their own expense of paying for the lights and alarms.
The bottleneck now is in the ultra-short term commercial paper market. No one is lending their extra cash at the moment or if they are, it comes at a premium. Again, the price of risk is added into the loan moving the Libor rate from 2% to almost 5%. At the moment no one is willing to take those terms. Everyone is waiting; waiting on the bail out to inject money back into the system. If they can sell their toxic assets they can then start loaning instead of protecting their positions by holding cash and meeting their cash reserves for the fed reserve requirements. The American way, use credit extensions to pay for everything and hope it all doesn't come apart i.e., Bush's comments on the proverbial house of cards. I foresee an increase in prices as the cost of higher credit is passed along.
If Wall Street has toxic assets for sale, they can sell them today. Basic economics on supply and demand state that if the price is right a market will be made. There is someone out there willing to take the risk and buy these assets at 10 cents on the dollar. However, the banks and brokerage houses think the bailout will allow them to price them at 30 - 40 cents (or higher) on the dollar to the Feds.
The Feds are not shrewd enough and do not have incentive to force these securities to the rock bottom. Those folks who are shrewd enough all work on Wall Street and got themselves into this pickle. They are shrewd enough to figure out how to mitigate their losses by holding out until the Feds throw money at the problem. There is conversation that if the Feds pay too little, they will not do enough to get cash infused and liquidity going. But you are have to look at the definition of enough; how much is too enough? From Wall Streets perspective they want it all gone and from Main Streets perspective, they want to rock bottom price be/c they are going to garner the risk and as such should be entitled to the reward if a profit is going to be turned. And who wouldn’t want to dump all of their mistakes and have someone pick it up and make it all better? Wouldn’t a rescue of Wall Street keep the economy at an artificially high perspective and encourage growth based upon a poor foundation?
How about putting those securities up to auction? Let the market bid on them from the standpoint of a Dutch auction. We will find out the true value of what the market is willing to pay. Set up a system so that it is not direct Fed money being used. Perhaps a tax credit mechanism spread out over several years with no carry forwards allowed. Another would be a break on capital gains as they apply to auction bought securities. There is a supposed $2T held by baby boomers, what about the transfer of wealth via inheritance now thus providing a different mechanism to stimulate the economy. For example, no tax consequences on the purchase of a home or business by a parent and given to a child.
This is America for crying out loud. 335M people are not going to sit around and let the ball of string come unwound around them. If you can one thing, we are innovative and adaptive. Here it is Oct 1. Payday has passed for many businesses and no one really faltered that I heard. Mom and Pop shops and perhaps some medium companies might have problems in the short term but these things will work themselves out. Credit markets in general are going to knee jerk react into ultra tight requirements and overall the economy will be in a slow down for a time being. But as with all things, this too will pass. In ‘78 – ‘82 the sky didn’t fall. One of the problems with the situation today, economic doom sells newspapers and air time and gets people to watch. Those people who do not understand the entire picture could be easily swayed into an ill-informed thought process and thus decision.
I believe this is what Wall Street wants the public to think. One of the ways to make money as a day trader is to buy a stock, hype it up on several blogs so the price goes up as other people buy in and then sell out. What does anyone care that you made your incremental profit and everyone else can figure it out. Wall Street is hyping up the need for the bail out and then is going to leave the American public holding the bag.
I say do nothing and do not approve the bail out. Let those who made this problem sit in their stench for a while until they figure out how to get themselves out of it. There are banks buying banks today at fire sale prices. It makes for a bad cycle to break in the future if everyone thinks there is a governmental safety net behind every faulty scheme. Buckle down and let the market do its own thing. The government can take a smaller portion of $700B to clean up the mess that Wall Street creates as it rights itself over time. Those banks should be rewarded for having the reserves to be able to let someone eat all the risk and buy up the most valuable assets of a company that are still producing.
Pull back our troops from Iraq and Afghanistan and use the war funding to increase our activity in NATO. Spend the same amount of money to protect our own borders and increase spending on education in the US. There is a cost line between pro-active and reactive. I believe we have surpassed that line and a better return on the dollar would be to be protective and reactive than pro-active. (Pro-active in terms of spending money in Afghanistan and Iraq and reactive meaning retaliation in the event of an attack or disruption). You have a better chance of dying by a drunk driver each year then all 6 years of the Iraqi war. Dare I say “Isolationism” but perhaps that is a pretty good view these days.
There makes a good argument for rolling up on your own 50 – 60 acres of land and be a sustenance farmer / rancher. I for one, is someone who doesn’t need potato chips and pop tarts in my life. (Internet is almost a basic necessity these days but television not so much except for the girls). If it were not for comparative advantage to earn a greater yield via a coop arrangement or learning of a greater need for a particular crop; i.e., Ricardian Marginal Land Use theory and corn for ethanol then we wouldn’t need much outside involvement.
