Quote of the Year:
Where did the $700 billion figure come from, a figure that Paulson insisted on when members of Congress suggested that perhaps they could authorize some of the money right away, and then provide more later?
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."
Why not 12 gazillion?
Of course, the fact that it doesn't matter (and couldn't possibly sustain losses of 100% and actually cost the taxpayers $700BN) are lost in the wind here.
Because $9.3 gazillion would clearly have been sufficient.
Close enough for government work.
She probably meant that the 700 billion USD doesn't represent the likely real cost of the bill (it would end up being ~=700billion - real value of subprime loans + time value of money), or even represent the amount spent at the start of the program.
"Talk of Armageddon, however, is ridiculous scare mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.
"Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.
"The costs of the bailout, moreover, are almost certainly being understated."
Because the crisis is about confidence. In order to restore confidence it needs to be a really large, but still realistic number.
Good links both.
it was kind of depressing to read some of the comments on CNN (second link, article by Jeff Miron) - no wonder most people in the country don't have a basic understanding of how economy works!
coz "Gazillion" is not a real number:)
Anyone who understands who stands to gain will just say "NO" to bailing out these losing Wall Street GAMBLERS who knew, or should have known, the risk they were taking. Big gains (which they desired) come from big risks (which they knowingly took). Not my problem, old man.
From Fortune Magazine:
He already screwed up the psychological leverage by announcing the request, thus setting off a Wall street feeding expectation frenzy.
10↑1 = 10
10↑2 = 10,000,000,000
10↑3 = 1 followed by 10,000,000,000 zeros
Now we can really outdo the Hungarians when it comes to hyperinflation. They issued a 100 billion billion pengo banknote, which is a mere ten to the 20th power.
This is no joke. This is really happening. Call your representative and tell him to vote "no" on the bailout.
Who is this treasury "spokesman"?
Did anyone ask Paulson?
We are as much a victim of biased reporting as rogue accounting, actually more so.
Think about it. Or do we all just believe what we want to in the run-up to November?
One difference: in commodity options, if the market moves against you, you have to come up with the difference in hard cash. Nothing like that in swaps; there is no organized exchange, no supervision, it is all private - except when the defaults happen en masse, whereupon Joe Lunchbox sees the upshot in his tax bill.
I know all the free market capitalists are screaming about that and if you look back at my posts before I was with you guys. Not anymore. The thing is, this is not the result of the free market. This is the result of stupid regulation of the market. As such, it shouldn’t be those who merely did what the government required of them who should suffer; it should be us, frankly, for letting our government be so stupid.
This is all like the time during the Clinton administration where they were doing “controlled burnings” New Mexico and then they accidentally set half the state on fire. I remember when that happened and a more senior lawyer friend saying “what a colossal fuck up” when he learned. Refusing to bail out in this case, is like refusing to declare New Mexico a disaster zone after that fire. We colossally fucked up and we should pay.
Long term, though, this is an argument for less regulation in general. Unless you are talking about Freddie and Fannie, which obviously needs to be regulated even more and in the right way.
CS, I think you were off by 3 orders of magnitude, that is 14.5 trillion rather than 14.5 billion.
I would like a VC post about the level of Supreme Court knowledge prerequisite to act as president. Palin, when asked about court cases, could only name one - Roe v. Wade. Is it relevant that someone who might be appointing justices doesn't know Marbury, McCullough, Dartmouth, Plessy, Dred Scott, Kelo, Heller, Brown, etc?
I'd love to hear what the VC community says.
$721,234,568,982.32
It's the 32 cents that makes all the difference.
I also hear she can't count past 7. Perhaps we should have her committed?
Zarkov,
Up arrow is nothing, he should just have gone with Ackermann (5,5).
Then again, perhaps 42 would have been more auspicious.
I suspect most non-lawyers have no clue about the names of cases. But they know what the Courts have generally ruled. And it is the holding, not the case name, that is relevant.
I also know criminal attorneys who don't know the difference between Miranda and Massiah rights--and why the distinction is important. But most of the time it is not critical to praciticing law.
See "Senate bailout bill hits the Internet" at http://hotair.com/
If politicians keep trying to save me financially, I'll soon end up in bankruptcy.
Yes, CDOs are derivatives. They "derive from" the underlying obligations.
Agreed.
And I think that's screwing up. Aggravating a panic makes solving the panic more urgent, but you'd have been better off not causing it to begin with.
His opening move gave away all the cards to Wall Street. He could have gotten a much better deal involving much more private capital, but instead he created a gargantuan moral hazard and committed the government to a course of action that even if it solves the immediate problem will not solve the underlying issues and will be an expensive boondoggle to boot.
I like the number "godzillions" myself. (I think Dave Barry invented it.)
Fair enough. In any event, in answer to Oren's question of why the limit matters because Paulson wouldn't be stupid enough to spend to the hilt, thus depriving himself of psychological leverage: He either is stupid enough, or he's not interested in holding psychological leverage.
The real problem with CDOs is that there is no requirement that the seller be capable of actually upholding their side of the bargain.
Insurance companies have capitalization requirements, so that buyers of insurance can be pretty confident that they are actually covered in the event of a loss. Not CDOs.
Even if you did your research and bought a CDO from someone who is actually capable of paying out, there's nothing to stop them from selling that obligation on to someone else who isn't.
The whole CDO thing is retarded.
This may all be irrelevant, as Paulson probably won't be the Treasury secretary after January. I can't imagine Obama keeping any political holdovers from Bush, and McCain would fire Paulson right after he fires Christoper Cox (and probably right before he fires Ruth Bader Ginsburg).
In the cobwebs of my brain I have a recollection of Obama saying he would be open to keeping Gates at SecDef. This surprised me when I heard it but it was second-hand so I'm not sure if it's true. From what I understand Gates has been well received by both sides so it's at least not impossible. Is it?
Actually, $700,000,000,000.00 isn't a real number to most people either.
Perhaps recasting it as "$2,300 from each American" would help people understand. Or, if you take out children and the poor, a drastically higher number from each taxpaying American would be even more real to most people.
McCain (if he lurches uncontrollably into the Presidency, an unlikely event according to the Intrade Market), can't fire Ruth Bader Ginsburg, as she has a lifetime Supreme Court appointment; and he can only remove Cox as chairman, he would remain a member of the SEC.
Both McCain and Obama have spoke of retaining Gates until their own SECDEF is approved; Gates has made no secret he wants to return to the University of Texas. He has been an excellent SECDEF, however, far bettr than many of his predecessors.
The Vatican has also asked us to announce that it "doesn't have a gazillion Basilians" to spare. More on this issue here:
en.wikipedia.org/wiki/Congregation_of_St._Basil
I am also deeply disturbed by the liquidity crisis. I have severe doubts that Wall Street can solve the problem without government intervention. And frankly, I don't give a damn about the Wall Street player. I do care if the credit markets dry up.
Frankly, the scariest thing to me (having worked in the financial industry prior to law school) was a money market mutual fund actually falling below $1 a share. That happened two weeks ago. The possibility of it happening again scares the hell out of me.
If money market mutual funds are no longer considered safe, the capital market will dry up faster than the Sahara Desert. I kid you not.
I was being sarcastic when I mentioned RBG (playing off the criticism of McCain's statement that he'd fire Chris Cox). Sorry if that didn't come through.
Haven't heard the talk about keeping Gates. Allow me to modify my initial comment to say that neither candidate would keep Paulson around permanently. Therefore the majority of the work on the program will be handled by his successor.
How would less regulation help with global credit swings? Doesn't this argue for a government fund to help bail out the economy in these situations? Why should future unborn taxpayers have to pay for this mess? Each generation needs to live within their means.
The CDOs move risk around alright. But not only do they spread it out, they also concentrate it.
From a New York Times article, “Plan’s Mystery: What’s All This Stuff Worth?” (Sept 24, 2008):
(Emphasis added.)
The key point is that the risk is non-linear. And the whole system is coupled together with these non-linear functions.
Btw, as long as some of you are talking about really big growth functions, let me throw in the derivative of a Dirac delta—that is, the second derivative of a step function.
Any of you guys ever studied control systems, say an EE class or a Aeronautical Engineering class?
"We're in the process of privatizing profit and nationalizing losses in the financial community." - Anon
control freak, you're talking to lawyers. Do you think any of us took classes requiring spending weekend nights (or weekday nights) in the library studying?
> Do you just make this stuff up as you go along? Sub-prime lending was done almost exclusively by mortgage brokers, which (unlike banks) are almost completely unregulated...
Because then they knew Freddie and Fannie would buy them out. This is our stupid fault. And more deregulation is in order, but in the short term, so is a bailout, though Paulson can kiss my ass if he thinks he is getting 700B.
neurodoc
> Can you make even a semi-convincing case to support your contention that this debacle somehow proves the need for less rather than more regulation of these financial markets?
Yeah. Banks are failing because of bad loans. Congressional and agency regulation of the markets forced and enticed them to take bad loans. Therefore, those regulations are bad—to the point of risking an unnecessary great depression. Yet the latest example of our government’s incompetent intervention in the economy.
Because people who completed
high schoolfourth grade know that isn't a number?So I might as well be speaking Martian? If I tell y'all that pole-zero cancellation is a bad idea....
Bingo.
And now we're about to compound the problem by saying its okay for Wall street to make bad bets- apparently if one business makes a bad bet they're screwed, but if everyone does then taxpayers will cut you a check. Just what Wall street needs, more encouragement to engage in herd behavior.
control freak:
Try Ewok. Most of us have the Star Wars, Director's Cut, HD, DVD collection. That's pretty close to science isn't it?
> Freddie and Fannie are publicly traded for-profit organizations which (as far as I know) are not forced to buy anyone or any mortgage. They are (implicitly) government backed, which probably exacerbated the problem
They are run by the government and they have actively pursued a policy of buying the worst possible loans.
I would direct you to that famous video but it was taken down for copyright concerns (they use a lot of rock songs in the background, without any apparent permission). I checked it and they are right.
The democrats have pursued three decades of policies designed to encourage ever more reckless lending, to even punish those who say no way. And there is no one to blame for this happening than ourselves; so we have to fix it. And then we need to stop interfering with the market so we don’t have to do this again. But’s the old pottery barn rule: “you break it, you buy it.”
(Actually, the pottery barn doesn’t have that rule, but you get my point.)
1. Fannie and Freddie are not run by the government and they are for-profit, therefore they are interested in buying the most profitable loans, not the "worst loans". Furthermore, they resell most of their mortgages loans that they have bought in the form of securities. If they bought only the "worst loans", investors wouldn't be interested in their securities.
2. What policies are you talking about? Subprime lending got started in the early 2000s, when Republicans were in complete control. Fannie and Freddie are from the New Deal, the CSA is from the 70s, and the amendment during Clinton's years decreased, not increased, its regulation. Not to mention most subprime loans were made by entitites that are completely or largely unregulated by the CSA.
3. Part of your confusion might be that you are getting your information from youtube videos that use unlicensed rock songs in the background.
Indeed -- the very next poster on the topic never even read the links before regurgitating wingnut talking points.
This would have been a real problem if the banks had remained the owners of the mortgages. What turned a problem into a catastrophe was (a) securitizing these loans; and (b) then leveraging them.
Despite the wingnut attempts to blame Fannie and Freddie (who bear only a small amount of blame) or black people, it's the lack of regulation on steps (a) and (b) which left us in this mess.
I have mixed feelings about the plan. On the one hand, I hate bailing out Wall Street. On the other, I'm pretty convinced we need to do it to save ourselves. On the third, I'd prefer a different plan. On the fourth, I do understand political reality. At this point, I'm out of hands and feet.
I will say this, though. While I blame Wall Street mostly, it's not the only source of fault here. The relevant blameworthy population is a pretty substantial subset of all of us. That makes me more willing to accept government intervention, notwithstanding my personal purity. :)
I don't know what sort of new or additional regulations would cause ratings agencies to act properly.
Nick
Yes, that was sloppy of me to phrase it that way. I should have said the private securitization of mortgages got out of control after about 2003. As did Fannie and Freddie, but on a relatively small scale.
Yes, sorry. Meant to write trillion.