pageok
pageok
pageok
Poof!

Let's see, if markets around the world are capitalized at about $50 trillion and they declined, say, 5 percent on average as a result of Congress's vote, then about $2.5 trillion of wealth vanished (okay, maybe a bit lower, according to Jim's account of Asian markets; the rest of the world looks less good). For the United States alone, the loss is about $800 billion. Even by Congress's standards, this is impressive. Further thoughts --

1. Perhaps, the market's response to the failure of the bill came as a surprise to some. Now that it's clear what's at stake, the world should be willing to pay up to $2.5 trillion to get Congress to change its mind. Surely this is enough? Intrade says no; I'd bet against it but I prefer to keep my money under my mattress, thank you. Anyway, the Chicagoan in me says that the market decline already reflects the probability that a subsequent bill will also fail or will come too late.

2. Ilya and Casey say that the bailout was just a transfer of wealth from taxpayers to shareholders. Maybe. But most taxpayers are shareholders, and the return seems pretty good. Even if we confine ourselves to the U.S. stock market, a return of $800 billion on an investment of $700 billion (actually, a lot less, given that money is used to purchase assets that will eventually be sold again even if at a loss) is not bad. If we count the world's $2.5 trillion, the return is quite excellent. (I realize this is not a controlled experiment, but we have to use whatever information is available. As Ilya hints, he can salvage his theory by arguing that the failure of the bill tells shareholders that subsequent bailout bills, spending even more money, are less likely than before.)

3. Intrade says that Obama and the Democrats have benefited. That sounds right to me. The bill is identified with the Democrats, who crossed party lines to make a deal with the Republican administration. Nearly every knowledgeable person supported the bill -- in the sense of believing that the bill was better than nothing, even if he or she believed that some variation would be even better than the actual bill. Republicans are seen as obstructionist, perhaps influenced by libertarian arguments they read on VC (just kidding).

No, the real reason for the no votes is that constituents of at-risk members of Congress don't want to bail out Wall Street. Do these constituents have any insight into the risk that the current financial crisis will cause significant harm to the economy? I doubt it. Perhaps, these words should be carved into the entablature of the Capitol:

"We're all worried about losing our jobs," Rep. Paul Ryan, R-Wis., said, endorsing the bill and voting for it after leading a rebellion against an earlier version last week. "Most of us say, 'I want this thing to pass, but I want you to vote for it, not me,'" he said, speaking for colleagues who have tougher re-election fights than his own.

4. Can the administration be faulted for failing to make an adequate case for the urgency of the situation? Just how is it supposed to do that without being accused of exploiting people's irrational fears in order to expand executive power?

5. If Congress is paralyzed, what can the executive do on its own? Where is that constitutional dictator when you need him?

Blar (mail) (www):
If "the market decline already reflects the probability that a subsequent bill will also fail or will come too late," then the market also reflects the possibility that they will be able to get another bill together in time. Which means that the cost of not passing a bill is more than $2.5 trillion, and the markets will drop further if it becomes clearer that no bill will be passed.
9.29.2008 9:19pm
Splunge:
then about $2.5 trillion of wealth vanished

Um, I don't think so. You're confusing the price of something with its actual value. If the price of corn momentary plummeted by 50%, does that mean half the corn has vanished? Half the food value gone up in smoke?

To be sure, the price usually tracks the value -- but arguably this whole mess is about a case -- these complicated mortgage-backed financial instruments -- where that connection has become totally unglued. No one knows what the true value of those instruments is, or even the value of indirect investments in them (e.g. stock in companies that depend on the financial firms that have backed the securities, et cetera), and hence their price fluctuates wildly, and no one on Capitol Hill or in "Main Street" (ugh) can tell whether they're worth $700 billion or approximately squat.
9.29.2008 9:20pm
PersonFromPorlock:

Nearly every knowledgeable person supported the bill....

These are the same knowledgeable people who missed or discounted the whole problem, right?
9.29.2008 9:22pm
Matt Bruce (mail) (www):
"as a result of Congress's vote" is really begging the question, no? (Especially given the likelihood of a stock rebound.)

If it's that obvious to that many knowledgeable people that some sort of disaster looms then why are they (you) so unable to explain clearly and concisely what the risk actually is* and why a $700B unexpected outlay of taxpayer money is the way to assuage that risk?

*- "The stock markets would plunge" is no answer, unless you can make crystal clear why A causes B. And "the general public would never understand" is no answer, unless you want to claim that democracy is doomed.
9.29.2008 9:23pm
ShelbyC:

Poof!
Let's see, if markets around the world are capitalized at about $50 trillion and they declined, say, 5 percent on average as a result of Congress's vote, then about $2.5 trillion of wealth vanished


It didn't vanish, it just went to other markets, like bonds and gold.
9.29.2008 9:25pm
smitty1e:
@Splunge
Or, if your financial tree falls in the market forest, and no one buys it, does Rep. Nancy Pelosi sound like a credible leader?
9.29.2008 9:25pm
Elisin (mail) (www):
I'd say, nearly every knowledgeable person who didn't see this coming and spent the last two years telling us it was contained supported it. As far as I can tell, every knowledgeable person who did see it coming (Tanta/Calculated Risk, Michael Shedlock, Barry Ritholtz, Nouriel Roubini among others) think it is a terrible bill and deserved to be defeated.
9.29.2008 9:26pm
Michael B (mail):
Poof!

Poof!

"Poof!" should have been heeded a long time ago. Instead, we heard puffery from the Dems and Left/Dems.
9.29.2008 9:27pm
JunkYardLawDog (mail):
If you are correct and an 800 point decline is the full decline for no passage, I'm one of those not knowledgeable people by your standards who doesn't want a bailout bill. Especially not a big spending Bush bailout bill supported by big spending Democrats.

I mean come on the market is still at around 10,000+ which is where it was for a while in 2006. The wheels didn't fall off in 2006.

If we are to pass anything let it be the Newt Gingrich Mellon University supported variety.

Says the "Dog"
9.29.2008 9:28pm
Oren:
Seems unfair to peg the cost of the bailout bill at $700B when a significant portion of that will be recouped. This was a major PR fault of Paulson's plan -- it should not be denominated in total spending amount but by minimum return -- something like $300B (my bet this morning was that we'd get minimum $500B back, not sure that still holds).

At any rate, this post hit the nail on the head.
9.29.2008 9:29pm
Edward A. Hoffman (mail):
"But most taxpayers are shareholders . . . ."
I'll bet most taxpayers are not shareholders in the particular firms that stand to get the bulk of the proposed assistance. But even if I'm wrong, taking money from those taxpayers who don't own stock and giving it to those who do is problematic, especially because the former group is already less well-off than the latter.

I'm not saying the bailout is a bad idea. I'm just saying this particular argument doesn't cut it.
9.29.2008 9:33pm
Fub:
Where is that constitutional dictator when you need him?
I hereby offer my services in that position for a mere .01% of current total market cap per week.

I've got a nice set of dice and a copy of the Constitution ready for the job.

The longer these guys dither around before they do something stupid and venal, the more they'll wish they had called me.
9.29.2008 9:36pm
Angus:

Nearly every knowledgeable person supported the bill
This is, in fact, the source of the problem. If you read the right-wing blogs today, you'll see a lot of crowing and chest pounding of this variety: To hell with those "experts" and their damned "knowledge." My cousin Cletus went to his ATM today and got $20 out without any problems. There ain't no crisis."
9.29.2008 9:38pm
Francis Marion (mail):
What this country needs now is a triumvirate to run things for a while instead of Congress. I nominate Generals Wesley Clark, Colin Powell, and Tommy Franks to run be America's first triumvirs.
9.29.2008 9:40pm
LIly (mail):
For myself, I'd rather loose money in a market adjustment, than have it taxed from me and administered by the government. Even if the market adjustment loss was greater than the tax I would have paid. This is because I value limited government. I don't trust the government officials to act in my best interest, nor do I believe they have the wisdom and knowledge to choose wisely in these matters. My choice would change, however, if the market adjustment loss was extremely higher than the proposed tax. Where is the line? Hard to say, but the market loss would have to be very severe indeed before I would be willing to surrender more market freedom.

Also, I should disclose that I place (at least part of) the blame for the current crisis on historical government intervention in the mortgage markets -- encouraging the market to lend to lower income borrowers with little regard to sound lending practices, and congress' failure to regulate FNMA when it started to become apparent that the sub-prime mortgage market was getting out of hand. Even as they made proposals to 'fix' the current situation, congress was unable to let go of the idea that they necessarily needed to make mortgages available to lower income borrowers. What is to prevent this situation from reoccurring if no action is take to correct the fundamentals that brought us here in the first place?
9.29.2008 9:47pm
Michael B (mail):
Angus,

Of the 435 congressional seats, twenty-six (26) are not running for re-election this term. Twenty-three (23) of those twenty-six voted for the bailout today, three (3) voted against it.

Of the three who voted against, two are Democrats, both of whom are eschewing their congressional seats in order to run for the U.S. Senate.

So much for your "Cletus" theory.
9.29.2008 9:47pm
astrangerwithcandy (mail):

This is, in fact, the source of the problem. If you read the right-wing blogs today, you'll see a lot of crowing and chest pounding of this variety: To hell with those "experts" and their damned "knowledge." My cousin Cletus went to his ATM today and got $20 out without any problems. There ain't no crisis."


ah yes, the caricature. you have been a great source of amusement today as i've ready comments today. i mean that in a condescending liberal way.
9.29.2008 9:51pm
Floridan:
"No, the real reason for the no votes is that constituents of at-risk members of Congress don't want to bail out Wall Street. Do these constituents have any insight into the risk that the current financial crisis will cause significant harm to the economy? I doubt it. "

Wait until these constituents find out that because the value of their IRAs and 401k's have dropped significantly, they can look forward to a lower standard of living in retirement (if they can afford to retire at all).
9.29.2008 9:51pm
Johnny Canuck (mail):

Of the 435 congressional seats, twenty-six (26) are not running for re-election this term. Twenty-three (23) of those twenty-six voted for the bailout today, three (3) voted against it.

Of the three who voted against, two are Democrats, both of whom are eschewing their congressional seats in order to run for the U.S. Senate.


So, of the 24 who don't have to face the electorate, 23 voted yes and 1 voted no.
9.29.2008 9:53pm
Thomasly (mail):
I think that the reason McCain fell in the polls is that he attempted take ownership of this toxic bill. He listened to the experts tell him the bill was needed and the Democrats tell him they wouldn't vote for the bill unless he did, and he fell for it. He should have announced some vague principles ("I support measures to reassure the markets, protect taxpayers, and provide accountability to regulators and Wall Street" or something equally meaningless) and then kept his powder dry.

I bet some people still don't know that Obama wants to give $700 billion in taxpayer's hard earned money to Wall Street fat cats.
9.29.2008 9:56pm
Elliot123 (mail):
"If the price of corn momentary plummeted by 50%, does that mean half the corn has vanished? Half the food value gone up in smoke?"

It means that corn can only be exchanged for half of what it could have been previously exchanged for. Half as much oil, half as much tin, half as many Bic pens...
9.29.2008 10:09pm
Michael F. Martin (mail) (www):
Please, please, please do not confuse price and value. In a nutshell, that confusion is what got us in to this mess.

What happened in the stock market today matters nothing to the long-term health of our economy.
9.29.2008 10:10pm
Michael B (mail):
There's also this piece of genuinely vapid, CYA commentary from none other than House Majority Leader Steny Hoyer, #2 in the House behind Pelosi:

"No Democrat that we could get to vote for the bill didn't vote for the bill."

Likewise, that sentiment dovetails precisely with what Nancy Pelosi herself indicated today.

But we're suppose to pretend otherwise, lest pointing out the obvious is met with yet additional sniping and acrimony.
9.29.2008 10:11pm
Elliot123 (mail):
"I bet some people still don't know that Obama wants to give $700 billion in taxpayer's hard earned money to Wall Street fat cats."

He wants to buy mortgages and mortgage based securities from Wall Street firms. That is far different from simply giving them $700 million.
9.29.2008 10:12pm
Roger Schlafly (www):
Don't forget to figure in all the vanished wealth that has resulted from the drop in the price of a barrel of oil!
9.29.2008 10:16pm
MnZ:
I don't know if the bailout is a good idea or not. However, it seems that many opponents of the bailout strongly agree with the following statement about financial crises:


It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.


Unfortunately, for the rest of us, this statement was made President Hoover's Treasury Secretary Andrew Mellon in 1930.
9.29.2008 10:16pm
Smokey:
The stock market is at its 2006 level. EVERYBODY PANIC!!

And where is 0bama? Why hasn't he weighed in on this, and taken a decisive position on the bailout? Could it be that he lacks political courage? [Liberals, don't answer that!! It's a "gotcha" question.]

When things get bad, wake me. In the mean time, all that's evident is the salivating by our elected representatives over this three-quarters of a trillion dollar handout in an election year.

Once they figure out who gets what, the 'bailout' bill will have clear sailing.
9.29.2008 10:17pm
Steve2:


Wait until these constituents find out that because the value of their IRAs and 401k's have dropped significantly, they can look forward to a lower standard of living in retirement (if they can afford to retire at all).


Only if they're retiring imminently. Otherwise, their shares are still there, and the current price has no bearing on the sunk cost of acquiring those shares in the past or the potential return of cashing out those shares in the future. Which, as has been pointed out already by Splunge, Michael F. Martin, and others, makes today's stock market plunge utterly irrelevant except to the people who sold today.
9.29.2008 10:19pm
Angus:
Michael B,k
Who is talking about re-elections. I'm talking about the rampant anti-intellectualism (aka stupidity) of the right. "If'n all the smart people are fer it, that means I'm agin' it. Smart people don' know nuttin' no how."
9.29.2008 10:22pm
LM (mail):
ShelbyC:

It didn't vanish, it just went to other markets, like bonds and gold.

Some money from today's sell-off no doubt went into other markets, but many commodities were down, an unlikely result if $2.5 trillion was looking for someplace to go.

What you're apparently overlooking is that for the entire drop in market capital to be paid out by some and available to others for re-investment, every share of every company would have to trade at every price change. And you know that can't be right. Most shares are sitting on the sideline. Only a relative handful actually trade when values are changing precipitously like today. When the market goes up or down, most people are getting richer or poorer without buying or selling a thing. (Short traders excepted.)

In other words, yes, the value disappeared.
9.29.2008 10:24pm
Oren:
He wants to buy mortgages and mortgage based securities from Wall Street firms. That is far different from simply giving them $700B.

For some reason, the $700B number sticks, despite the fact that actual amount "given" to the firms will be considerably less.

The bailout has costs, just not $700B.
9.29.2008 10:25pm
Paul Allen:

Nearly every knowledgeable person supported the bill

Bullshit. The Paulson plan was a backwards looking preoccupation with MBS. That was the problem 3 months ago. We've now had four more major institutions fail. Their debt and stock are now worthless, as are their contingent liabilities. That's the next wave which this expensive bill will not solve.

The market drop reflects the dissemination of very bad information about what's going on. Most supporters of the bill appear reflexive in my opinion. Their arguments do not pass the logic sniff test--yes Mr. Bernanke I'm looking at you.
9.29.2008 10:27pm
Michael B (mail):
More arguments against the oft trumpeted and oft relied upon "Cletus" theory:

Via Power Line, Andrew McCarthy at NRO, "I respectfully dissent":

"This was a terrible bill. To take just a few particulars, why is there no reform of the government interventions that got us to this point in the first place? Why aren't Fannie and Freddie being wound down — even after we've now had to make explicit the implicit, disastrous government guarantee? Why is Pelosi saying (as I noted in an earlier post) that the authority in the bill will allow the Treasury Department (perhaps soon an Obama Treasury Department) to take bad debt off the hands of mismanaged state and local governments?"

Likewise, Joseph Calhoun,

"The US government is executing a coup d'etat of capitalism and I fear that we will pay the price for many years to come. Hank Paulson, Ben Bernanke and a host of others tell us the credit market is not working and the only way to get it working again is for the government to intervene. They claim this intervention is urgently needed and if we don't act, the consequences are dire. Dire, as in New Depression dire. Have these supposed experts on capitalism forgotten how it really works?

"Last week Goldman Sachs raised $10 billion in new capital in one day. They sold $5 billion in preferred stock and warrants to Berkshire Hathaway and also completed a secondary offering of common stock that raised another $5 billion. Friday, JP Morgan raised $10 billion in a secondary offering to help pay for the Washington Mutual takeunder. Both of these offerings were oversubscribed, meaning that the companies could have raised more capital if they wanted. There is not a shortage of capital for well run financial companies."

Whatever the answers are - and I remain unsure one way or the other - fear and panic are not foremost among those answers, though they seem to remain primary motivators even at this later date.
9.29.2008 10:36pm
Elliot123 (mail):
"For some reason, the $700B number sticks, despite the fact that actual amount "given" to the firms will be considerably less."

I think the reason is ignorance of how these instrument are structured, traded, and perform. Since relatively few people are in the business, it's natural that most wouldn't understand the MBS market.

There is no reason to put quotes around the word "given." A more accurate statement would be to say the feds will be buying MBS from the firms. The feds will then collect the cash flow from them, and will eventually sell them back into the market. If the feds sell them back for less than they paid, the feds will take a loss. If they sell them back for more than they paid, they will realize a profit.

An interesting experiment is to ask people to describe the fed plan without using the word "bailout." I've been doing that all day, and some very intelligent and well educated people are stumped. They really don't have a clue what they mean when they use the word.
9.29.2008 11:05pm
Angus:
Michael B,
Actually, those you linked are perfect examples of the "Cletus" syndrome. After reading them, they are no more than "I don't care about the consequences. Big government is always bad." In other words, they reached their conclusion and then selectively searched for facts to support their position.

What they don't seem to understand is history. The reaction to massive economic shocks is not less government intervention, but much much more. See: Deal, New (1933-1941).
9.29.2008 11:07pm
Gabriel McCall (mail):
Nearly every knowledgeable person supported the bill

This is one of the most blatant assertions of personal prejudice masquerading as fact I've seen in a VC post. Please define "knowledgeable" according to a standard other than "in agreement with my own biases".

I'd like to take the stance that no knowledgeable person supported the bill, because anyone who did has obviously not read enough Mises or Hayek... but then, I wouldn't go so far as to dismiss anyone who doesn't know everything I know as non-knowledgeable.

Also, wealth is not the same thing as money. Accounting entries are not wealth. No wealth was destroyed today, nor is wealth created when the zigs go upwards instead of downwards.
9.29.2008 11:29pm
b:

See: Deal, New (1933-1941).


so your argument is that 8 years of government intervention is a fine and good thing? if the government is so good at intervening, don't you think maybe they should have been able to bring this miracle cure to the people a shade faster?
9.29.2008 11:37pm
Mac (mail):
5. If Congress is paralyzed, what can the executive do on its own

I apologize if I repeat someone, but must go and don't have time to read all posts.

For what it is worth, Gingrinch says Cox could stablize the markets in the am if he suspended the accounting requirement that makes institutions value everything at today's market value.

He had a name for it, but I can't remember it. Perhaps bsomeone else saw it and remembers?
9.29.2008 11:46pm
MnZ:

so your argument is that 8 years of government intervention is a fine and good thing? if the government is so good at intervening, don't you think maybe they should have been able to bring this miracle cure to the people a shade faster?


I think the point is this. Moderate preventive intervention can prevent the problem from becoming so much worse that heavy intervention is eventually demanded by the voters.

People tend to fall too easily for slippery slope arguments when it comes to government intervention. However, there apre plenty of conterexamples. For example, while Andrew Mellon resistance to government intervention after the Crash kept us off of the slippery slope, we ended up in the river anyway.
9.30.2008 12:00am
ARCraig (mail):
That is not "wealth" that was "lost", that was stocks with artificially and incorrectly inflated prices started to return to their true value as the bubble burst. Not just today, the decline generally.

The bubble has burst. Trying to prop it up will just make things worse by drawing it out- that's why the Great Depression lasted a decade, longer and harder than anything other depression in the nation's history. The only way to get back to building true prosperity is to allow for the market correction by flushing out all the bad debt.
9.30.2008 12:04am
Paul Allen:

An interesting experiment is to ask people to describe the fed plan without using the word "bailout." I've been doing that all day, and some very intelligent and well educated people are stumped. They really don't have a clue what they mean when they use the word.

Personally, I don't object to the bailout bit per-se. I know lots of people are hung up on the idea that this involves a giveaway to the rich bankers, but that does not really faze me one way or the other.

My concern is that the immediate effect of the measure could be better achieved by suspending mark-to-market and possibly having the Treasury establish new mark-to-model accounting guidelines. It is on this point that Bernanke et al. really slipped a disk. Either both the Paulson plan or this plan can work or neither can work. Not one or the other.

Second, MBS have a liquidity problem because of their heterogenous and opaque structure--undocumented loans, who can value that without a lot of work. This is precisely what the Paulson plan is not good at fixing. Reverse auctions only really work on homogeneous goods.

Third, the more general problem is capitalization not liquidity. There is no liquidity because people are fearful of under-capitalization of counterparties. The government can aid this by buying preferred shares. This is better than buying the debt--because it aligns the interests of the banks and the taxpayers directly. It also works against actual mortgage defaults. The Treasury plan does not cover buying debt on which the borrow has defaulted.

Fourth, the mortgages were definitely a triggering event, but now we've had several large institutions collapse. These institutions issued equity, bonds, and contingent liabilities which now have realized losses. These losses must be recognized and they will take out further institutions if those are too close to their capital requirements.

Fifth, because of the fire-sale approach to failed institutions, e.g., Washington Mutual. There is now general and reasonable panic that assets once deemed safe in the event of a bank failure are now at-risk. This is the most tangible change, and it has seized the money-markets. The government would do better to give the FDIC additional funds so that the FDIC need not engage in fire-sales the wipe out bond-holders and preferred equity. Those sales are doing real damage to the ability of banks to raise investor capital.
9.30.2008 12:29am
Jiffy:
Can someone explain to me how changing the accounting rules will help? Doesn't that (to borrow a phrase from both our major party presidential candidates) just put lipstick on the pig?
9.30.2008 12:59am
Paul Allen:

Can someone explain to me how changing the accounting rules will help? Doesn't that (to borrow a phrase from both our major party presidential candidates) just put lipstick on the pig?

The question goes to the heart of Paulson and Bernanke's plan. They suggest that the true value of equities is above the last recorded sale price. Changing the accounting rules would allow institutions to record that true-value price in their books rather than the recorded sale price. As I say before, either both ways work or neither does, but one works at much less cost and risk to the taxpayer.

Suspending some of the liability provisions of SarBox would also help. There is rather extreme pressure (fear of imprisonment) to mark MBS at the lowest arguable price rather than risk prosecution for marking them too high.
9.30.2008 1:10am
Michael B (mail):
"Actually, those you linked are perfect examples of the "Cletus" syndrome. After reading them, they are no more than "I don't care about the consequences. Big government is always bad." In other words, they reached their conclusion and then selectively searched for facts to support their position." Angus

I don't think so. The excerpt previously offered from the first of the two linked pieces alone rebuffs your contention as it asks questions that are entirely viable and - you don't bother to take a solitary one seriously. But other issues are raised as well. You merely dismiss the entirety of it, summarily, tout court.

That's fine, you've sneered and summarized your opinion in doing so, but go hump someone else's leg. Don't imply to me that those who oppose or even question what you believe to be true about this bailout legislation are stupid - while forwarding (quite literally) nothing but mindless, jerkoff sneers yourself.
9.30.2008 1:48am
Mac (mail):

For what it is worth, Gingrinch says Cox could stablize the markets in the am if he suspended the accounting requirement that makes institutions value everything at today's market value.

He had a name for it, but I can't remember it. Perhaps bsomeone else saw it and remembers?



Mark to market is the answer to my question. I don't understand all this, but Rupert Murdoch said he didn't understand the whole mortgage thing either, so I don't feel so bad.

However, given that there are a lot of ideas out there that would not cost 700 billion and God knows how many more dollars, it make sense to try them.
9.30.2008 1:53am
Jody (mail):
I'm confused Eric.

Did the people who sold off their stocks then set their proceeds on fire?

If not, why are you writing as if the US economy lost $800 billion and the world economy $2.5 trillion?

The money taken out of the stock market is still in the US / world economy. It's just doing something other than adding to the price of stocks, which means nothing has been lost, it's only been moved to different investments.

Further, the movement from stocks to other investments will likely lessen any liquidity problems as some fraction will move into CDs, money markets, and savings accounts which would ... increase operating capital for lending - in theory, what the bail out is trying to do.
9.30.2008 6:13am
lonetown (mail):
It seems to me our stock market values are only worth astonomically high values in a global economy. Now that we are moving to a more provincial economy values will have to adjust.

America will not be fueling any global growth for a while.
9.30.2008 6:14am
Daniel Newby (mail) (www):
"Wait until these constituents find out that because the value of their IRAs and 401k's have dropped significantly, they can look forward to a lower standard of living in retirement (if they can afford to retire at all)."

The true-intrinsic-value-to-earnings ratio for most well-run companies is around 10. That is, if somebody bought out a company on the basis of dividends paid out of future earnings, a reasonable net present value is generally ten times annual earnings. We can quibble about the exact value, but that's the right neighborhood for typical profit margins and long term inflation.

In the long term, the price-to-earnings ratio (P/E) has to average about the same as the fair-value-to-earnings ratio. The markets always correctly price value in the end.

Current P/E ratios stand at 20-30. Ergo, stock prices are predestined to fall by 50% to 70% as this bubble bursts.

Also, anybody near retirement who had most of their assets in equities deserves what they get. And they are likely to get it good and hard. Everybody who cared about preserving value moved their investment accounts to Treasuries by late 2007.
9.30.2008 6:29am
taney71:
The money doesn't vanish. In a free market goods and bought and solid at a price people are willing to pay. Just because yesterday people would pay a higher price doesn't mean there is a problem. It is just the ebb and flow of the market or as everyone know S &D.
9.30.2008 8:16am
Jerome Cole (mail) (www):
Real estate in most areas of the United States was and still is priced unreasonably high. Historically the typical home has been priced at three to four times the typical annual income. Right now many areas have median home prices between five and ten times their median incomes. These prices are simply unsustainable. Prices are likely to fall, the defaults are going to continue, and more financial institutions are going to fail.

Good.

The government, the securities industry, banks, and borrowers have been making bad decisions and they deserve to suffer the consequences. This is really the only way to restore rational real estate prices and sound lending practices. There should be no bailout. Period. People who lose money in insured accounts should get their benefits and the government should make good on any mortgages it has guaranteed. Other than that the we don't owe anyone squat. A very large number of borrowers, lenders, realtors, mortgage brokers, and bankers have committed fraud and should just count themselves lucky if they don't end up doing perp walks.

A pox on all their houses.
9.30.2008 9:03am
Justin (mail):
As mentioned above, the $2.5 trillion loss (which is probably overstated because I doubt the world is going to lose 5% of its value) is more likely a correction/overcorrection than a loss of value. Or, more to the point, it isn't that they lost $2.5 trillion, its that they never had that $2.5 trillion to begin with.

For my theory to work, of course, it would have to be that EITHER the $2.5 trillion "loss" is not directly and fully caused by the bailout to fail, or some combination of that the market has overpanicked and recover and/or the market would have dropped to some degree anyway.

I do not know if the $700 billion bailout is in any way wealth-creating or not - particularly since we keep hearing contrasting stories as to how much it will cost and how much and in what way firms will take advantage of it. But I do think looking at a pure numbers game is the wrong judgment. Kalder-Hicks is not necessary the proper efficiency analysis here: Pareto, Utility maximalization, and Rawlsian efficency have roles to play too.
9.30.2008 10:54am
Charlie (Colorado) (mail):

The government, the securities industry, banks, and borrowers have been making bad decisions and they deserve to suffer the consequences


Sadly, it wasn't only the Captain of the Titanic that went down with the ship.
9.30.2008 11:00am
MarkField (mail):
I agree with Paul Allen's points 2-5 in his 12:29 post.
9.30.2008 11:04am
Elliot123 (mail):
<i>"Can someone explain to me how changing the accounting rules will help? Doesn't that (to borrow a phrase from both our major party presidential candidates) just put lipstick on the pig?"</i>

Mark to market means an asset must be carried on the books at the current market value, determined by the bids, offers, and last sales. It has been used for years in commodity futures markets, and works very well. Each day, the closing price of a commodity determines the mark to market price.

For example, if I bought December corn yesterday at $5.20 per bushel, and it closed at $513 per bushel, I now have a loss of $.07 per bushel. I do not keep that corn on the books at the $5.20 I paid. The market price has changed, so I must keep it at $5.13. I must also come up with $.07 in cash to cover my loss. This money goes to the exchange clearing house. The clearing houses for the exchnages figure each potition and send and receive federal funds to settle them.

This has been going on in commodity exchanges for about 150 years.

Now, consider a similar approach being applied to a bundle of mortgages. They are bought and sold in an over the counter market. Thgere is no exchange, and no clearing house. They are also not fungible goods like bushels of corn. Ecah bundle is unique since it represents a unique set of properties.

In the past, such assets were kept on the books at the purchase price. So, if I loaned $100,000, I would keep that loan on the books at $100,000 until it was paid off. I did not adjust it for interest rate fluctuations or what someone else would pay for it. (Yes, I'm simlifying by ignoring declining principal.)

But now, I must decrease the value of that asset if the market for it, or similar instruments falls. So, if that $100,000 loan can be sold for only $80,000 because interest rates have risen, I must carry the loan at $80,000, not $100,000.

Likewise, if interest rates fall and the market rises, I must carry it at a higher price.

Suppose nobody wants to trade mortgages anymore, and there is no market? What is the mark to market value? Hard to tell since there is no market, but the rules force me to carry the asset at a much lower level than $100,000.

So, let's say I am carrying that loan at $60,000 because that's the most the auditors will let me get away with under mark to market. I have a large loss. But that loan may have never missed a single payment, so cash flow remains the same.

Now, suppose the rules change back to the old system and I can carry it at $100,000. Now I have no loss. Let's further presume this loan has been performing and there is no expectation of default. The book value does not change if the market moves up; it does not change if the market value moves down.

If it's lipstick on a pig, then it's a shade those pigs have worn for many years.

This is a simple explanation, and leaves out a lot. Consider it an rough attempt at a concept. It especially does not consider all the derivatives and the high leverage.
9.30.2008 11:30am
ejo:
Enron, in its prime, had a certain inflated value due to the fraud and criminal activity engaged in by the management of the corporation-is it fair to say that its value went "poof" when the deck of cards collapsed or is it more reasonable to say the its "value" was a mirage founded on fraud? what went "poof" yesterday? overvalued assets?
9.30.2008 11:54am
Oren:

That is not "wealth" that was "lost", that was stocks with artificially and incorrectly inflated prices started to return to their true value as the bubble burst

I'm not sure what possible oracle you have to determine the "true value" of these things but surely it's a special talent that needs to be used for the common good instead of merely wasting it on the VC.
9.30.2008 12:03pm
ejo:
oracle? isn't that what is done with stock markets? buy things going up and get rid of the dogs. if the only direction was up, you wouldn't even need stock markets-you would just buy and be assured of gains. stock values go "poof" every day.
9.30.2008 12:10pm
Smokey:
Oren is right. These are auction markets. The "true value" is set by what people are willing to pay.
9.30.2008 12:13pm
Duffy Pratt (mail):
Yes, and because they are auction markets, there is no accurate way to say the "true value" of shares that are not currently offered for trade. The entire theory of gross valuation based on market price capitalization is flawed. It has nothing to do with the realizable value of the shares. Thus, its simply a sham to talk about how much value was lost yesterday, at least with any precision.
9.30.2008 12:56pm
Elliot123 (mail):
Well, if my kid's college fund was in those stocks, and I needed the money, it wouldn't pay for as much tuition as it once did. Does anyone know a college that will take stock certificates in lieu of cash? And will they take them based on something other than the price today? Will they take them if I tell them that the real value hasn't changed at all?

And maybe he won't need the cash until next year. I don't know what the stock price will be next year, but I do know what tuition will be. So, I have to curtail other purchases to build up the fund again. That effects the economy, and when lots of us do it, it has a very big effect.

On the other hand, the GI Bill will pay him a lot of money.
9.30.2008 4:25pm
Dr. T (mail) (www):
Nearly every knowledgeable person supported the bill -- in the sense of believing that the bill was better than nothing, even if he or she believed that some variation would be even better than the actual bill.

Posner writes while wearing blinders. I am very informed about economics, far more so than the average person. I have a net worth of two million dollars, most of which is in stocks, funds, and bonds, so I have a lot to lose if the economy tanks. And, I was adamantly opposed to this poorly conceived bailout/buyout plan.

I favored a much simpler approach: Let failing financial institutions go bankrupt and have the Federal Reserve pay the short-term debts during the early phases of bankruptcy. (The Fed would get that money back later in the bankruptcy process.) The payment of the debts would prevent the domino effect that Paulson used as the club to get his plan enacted. By using the tried-and-true bankruptcy system, the bad actors with the high risk mortgage portfolios would fail, and only the stockholders and executives would lose money. The taxpayers would come out unscathed. Other well informed people believe as I do, so opposition to the bailout plan was not confined to the stupid among us.

The stock market crash was due to the huge number of people who believed the crisis-mongers and scare-mongers about shortages of credit, a domino-effect crash of all financial institutions, etc. It was unmitigated bullcrap. We are not in a credit crunch. Most of the small banks and a good proportion of the large banks are not in trouble and have plenty of money to lend (because few are borrowing in this bad economy). I predict that once most people realize that Chicken Little Paulson was a hyperanxious idiot, the stock market will recover.
9.30.2008 6:46pm
Ventrue Capital (mail) (www):
Eric:

The roleplaying game Mage: The Ascension is based on a cosmology that assumes that natural laws only work the way they do because a consensus of human beings believe that they do, and that those who are "Awakened" can overcome this and change reality by sheer willpower. If you believe that a sudden change of perception literally made over $2 trillion of real wealth simply disappear into thin air, I'd like to invite you to play in my Mage roleplaying campaign.

You can play a member of the Syndicate, the branch of the Technocracy which deals with economics.
10.1.2008 1:08pm
klimmklimm (mail) (www):
Perfect work!
Gluttony kills more men than the sword.
Good health is above wealth

[url=http://buy-xenical-online-klim.blogspot.com/][/url]
9.20.2009 8:24am
petrarka (mail) (www):
Perfect work!
9.24.2009 9:34am
petrarka (mail) (www):
Perfect work!
9.24.2009 9:35am
petrarka (mail) (www):
Perfect work!
9.24.2009 9:35am
petrarka (mail) (www):
Perfect work!
9.24.2009 9:35am

Post as: [Register] [Log In]

Account:
Password:
Remember info?

If you have a comment about spelling, typos, or format errors, please e-mail the poster directly rather than posting a comment.

Comment Policy: We reserve the right to edit or delete comments, and in extreme cases to ban commenters, at our discretion. Comments must be relevant and civil (and, especially, free of name-calling). We think of comment threads like dinner parties at our homes. If you make the party unpleasant for us or for others, we'd rather you went elsewhere. We're happy to see a wide range of viewpoints, but we want all of them to be expressed as politely as possible.

We realize that such a comment policy can never be evenly enforced, because we can't possibly monitor every comment equally well. Hundreds of comments are posted every day here, and we don't read them all. Those we read, we read with different degrees of attention, and in different moods. We try to be fair, but we make no promises.

And remember, it's a big Internet. If you think we were mistaken in removing your post (or, in extreme cases, in removing you) -- or if you prefer a more free-for-all approach -- there are surely plenty of ways you can still get your views out.