700 billion or dead?!
September 29, 2008 4:51 PM Subscribe
Failed Bailout and stocks plumetted 800 points. Sounds pretty bad but can somebody explain why the 700 billion dollar plan should have passed in the first place.
Why was this so sudden, 2 weeks ago everything was relatively ok and this week financial armageddon? Where do they get 700 billion dollar and the idea of no oversight over such a large sum of money
Iam looking for an explanation in layman's terms as in 700 billion dollar plan for dummies
Two weeks ago, the gasoline-soaked rags hadn't actually caught fire.
posted by flabdablet at 5:52 PM on September 29, 2008 [2 favorites]
posted by flabdablet at 5:52 PM on September 29, 2008 [2 favorites]
I'm not an expert, and I'm simplifying in places, but here's this layman's understanding:
The bailout is necessary because the country's big investment banks won't loan each other money right now, because no-one is sure how many bad bets each potential borrower has already made with the money they borrowed earlier. And since our investment banks are merged with our retail banks these days, that means our retail banks can't operate normally; not only can't ordinary people and businesses borrow money to expand the economy in the long term, large businesses can't borrow money for their day-to-day operating expenses.
Nothing was OK 2 weeks ago; we just hadn't had to face this until, as mortgage defaults rose, a couple of investment banks and then AIG had to get bought or bailed out overnight to avoid immediate closure.
The $700 billion figure is totally arbitrary; the Fed admits that they just picked a number so huge that the investment banks will be willing to loan each other money again, since the borrowers will be selling off their unknown but vast devalued assets. A big part of this is that no-one wants to say how much of these bad assets they're holding, so the bailout number has to be at least the worst-case estimates floating around.
If you mean where would they get the money, they'd get it from investors, mostly foreign, by selling them US Treasury bonds. In theory, as housing prices stabilize, the bad assets they bought from the banks would recover some of their value, and could be sold for enough money to cover some of that new debt. But since they'll have to pay over the market value to get the banks to sell, there's no promise of that happening.
"No oversight" was a bald power grab by the Bush administration. Paulson's proposed bill not only said "no oversight by courts or Congress" it also said "no regulation or restriction on the deals we make" - I'm not sure what language ended up in the bill that the House just rejected. (Rykey, read the original 3-page Paulson proposal - it said, and meant, "no oversight".)
posted by nicwolff at 5:56 PM on September 29, 2008 [6 favorites]
The bailout is necessary because the country's big investment banks won't loan each other money right now, because no-one is sure how many bad bets each potential borrower has already made with the money they borrowed earlier. And since our investment banks are merged with our retail banks these days, that means our retail banks can't operate normally; not only can't ordinary people and businesses borrow money to expand the economy in the long term, large businesses can't borrow money for their day-to-day operating expenses.
Nothing was OK 2 weeks ago; we just hadn't had to face this until, as mortgage defaults rose, a couple of investment banks and then AIG had to get bought or bailed out overnight to avoid immediate closure.
The $700 billion figure is totally arbitrary; the Fed admits that they just picked a number so huge that the investment banks will be willing to loan each other money again, since the borrowers will be selling off their unknown but vast devalued assets. A big part of this is that no-one wants to say how much of these bad assets they're holding, so the bailout number has to be at least the worst-case estimates floating around.
If you mean where would they get the money, they'd get it from investors, mostly foreign, by selling them US Treasury bonds. In theory, as housing prices stabilize, the bad assets they bought from the banks would recover some of their value, and could be sold for enough money to cover some of that new debt. But since they'll have to pay over the market value to get the banks to sell, there's no promise of that happening.
"No oversight" was a bald power grab by the Bush administration. Paulson's proposed bill not only said "no oversight by courts or Congress" it also said "no regulation or restriction on the deals we make" - I'm not sure what language ended up in the bill that the House just rejected. (Rykey, read the original 3-page Paulson proposal - it said, and meant, "no oversight".)
posted by nicwolff at 5:56 PM on September 29, 2008 [6 favorites]
Markets are emotional beasts, driven by either fear or greed, both of which are contagious.
posted by mattoxic at 5:56 PM on September 29, 2008
posted by mattoxic at 5:56 PM on September 29, 2008
It strikes me as interesting that you state you need the "700 billion dollar plan for dummies" while in the same sentence you say "Where do they get 700 billion dollar and the idea of no oversight over such a large sum of money." Not saying I disagree that this may not be the most well thought out plan (otherwise it would have passed?), but it seems a contradiction. Here is a quick read by the Dough Roller including a link to the actual plan. Also, here is the best summary I have read on how we got into this mess.
Good luck getting learn-ed on this complicated mess!
posted by masher at 6:11 PM on September 29, 2008
Good luck getting learn-ed on this complicated mess!
posted by masher at 6:11 PM on September 29, 2008
I believe the "new" version of the bill had actually an oversight commission, plus the GAO would have officers sent over to the Treasury Dept. to monitor as well. -Addressing concerns of oversight.
posted by Atreides at 7:00 PM on September 29, 2008
posted by Atreides at 7:00 PM on September 29, 2008
the $700 bill represents 5% of the country's mortgages. If the country was an actual 'business' a 5% loss would be an ordinary thing. Hope this sheds a little light on this for you. Now, if they took that money and paid off parts or all of some peoples mortgages instead of just GIVING it to the banks, the ramifications would probably (dare I say) put us back into the black-EVENTUALLY. Then all we'd be stuck with was higher taxes and the continuously rising fuel prices. Ah hell -we're screwed...
posted by docmccoy at 7:02 PM on September 29, 2008
posted by docmccoy at 7:02 PM on September 29, 2008
The $10 trillion in mortgages aren't the problem anymore, doc, it's the $54 trillion in bets the investment industry made on the mortgages.
If my friends and I bet millions of dollars we don't have that you can afford to buy dinner tonight, and you can't, then even if the gov't buys you dinner, we've still welshed on our bets, and it's gonna be hard for us to get someone to loan us money tomorrow so we can run our businesses, which happen to be your employers.
posted by nicwolff at 7:08 PM on September 29, 2008
If my friends and I bet millions of dollars we don't have that you can afford to buy dinner tonight, and you can't, then even if the gov't buys you dinner, we've still welshed on our bets, and it's gonna be hard for us to get someone to loan us money tomorrow so we can run our businesses, which happen to be your employers.
posted by nicwolff at 7:08 PM on September 29, 2008
On the other hand, the House Republicans (bless their black grimy little souls) may have just saved us from a royal jacking - if these reports of a secret conference call the Treasury Dep't held with the financial industry are accurate.
posted by nicwolff at 7:12 PM on September 29, 2008
posted by nicwolff at 7:12 PM on September 29, 2008
I haven't read this in great detail, but this TechDirt article has a cogent explanation of what's going on.
posted by Nelson at 7:40 PM on September 29, 2008
posted by Nelson at 7:40 PM on September 29, 2008
The $10 trillion in mortgages aren't the problem anymore, doc, it's the $54 trillion in bets the investment industry made on the mortgages
How exactly did they make 54T in bets with 10T in mortgage assets? Was someone giving them 5 1/2 to 1 odds?
posted by pjern at 7:50 PM on September 29, 2008
How exactly did they make 54T in bets with 10T in mortgage assets? Was someone giving them 5 1/2 to 1 odds?
posted by pjern at 7:50 PM on September 29, 2008
Iam looking for an explanation in layman's terms as in 700 billion dollar plan for dummies
Look through askme from the past week; there've been a few related questions that have good answers.
posted by inigo2 at 8:02 PM on September 29, 2008
Look through askme from the past week; there've been a few related questions that have good answers.
posted by inigo2 at 8:02 PM on September 29, 2008
Easy, the 700B$ bailout wasn't needed. Just capitalize some federal banks, like all the ones owned by the FDIC now. You know, we let the army run the coal mines when miners didn't work.
Anyway, stock market crashes are part of life, but runaway inflation is frigg'n scary.
posted by jeffburdges at 12:00 AM on September 30, 2008
Anyway, stock market crashes are part of life, but runaway inflation is frigg'n scary.
posted by jeffburdges at 12:00 AM on September 30, 2008
It's a political syllogism:
We must do something.
This is something.
Therefore, we must do this.
The idea of shoving money at Wall Street, and expecting that to turn things around instantly is ridiculous. What would Goldman Sachs do with extra cash? Buy back shares? Give out hardship bonuses to executives? Invest in commodities or overseas? Or loan it out to American companies and people when they don't know that they'll actually get paid back? Wall Street spends money where they think the return is best, and it isn't Main Street at the moment.
The stock market is not the economy, despite what Larry Kudlow et al say, and it's decline yesterday probably reflects more disappointment that a windfall isn't coming.
posted by Chuckles McLaughy du Haha, the depressed clown at 5:59 AM on September 30, 2008
We must do something.
This is something.
Therefore, we must do this.
The idea of shoving money at Wall Street, and expecting that to turn things around instantly is ridiculous. What would Goldman Sachs do with extra cash? Buy back shares? Give out hardship bonuses to executives? Invest in commodities or overseas? Or loan it out to American companies and people when they don't know that they'll actually get paid back? Wall Street spends money where they think the return is best, and it isn't Main Street at the moment.
The stock market is not the economy, despite what Larry Kudlow et al say, and it's decline yesterday probably reflects more disappointment that a windfall isn't coming.
posted by Chuckles McLaughy du Haha, the depressed clown at 5:59 AM on September 30, 2008
2 weeks ago everything was relatively ok and this week financial armageddon?
Its been bad for a while. The stock market is not the economy, it is an indicator of the economy. The problem isn't the market at all--its interbank lending--banks lend each other tons of money every day at low rates to make the system work. A business may be extremely profitable but it cannot rely on always having operating cash on hand. This goes double for banks. With all the bad paper out there, banks are afraid to lend money to other banks and to businesses for operating expenses.
Thus perfectly good banks and perfectly good businesses will go under despite the fact that things are going well for them. Make no mistake a credit contraction will lead to a sustained, years-long recession. It has every single time in the past.
Some type of bailout is needed and what Bush and the Dems came up with is the best available politically in the midst of an election year. But the GOP tried to play chicken with the rest of our futures and lost.
BTW interbank lending rates soared today. Not good.
posted by Ironmouth at 8:15 AM on September 30, 2008
Its been bad for a while. The stock market is not the economy, it is an indicator of the economy. The problem isn't the market at all--its interbank lending--banks lend each other tons of money every day at low rates to make the system work. A business may be extremely profitable but it cannot rely on always having operating cash on hand. This goes double for banks. With all the bad paper out there, banks are afraid to lend money to other banks and to businesses for operating expenses.
Thus perfectly good banks and perfectly good businesses will go under despite the fact that things are going well for them. Make no mistake a credit contraction will lead to a sustained, years-long recession. It has every single time in the past.
Some type of bailout is needed and what Bush and the Dems came up with is the best available politically in the midst of an election year. But the GOP tried to play chicken with the rest of our futures and lost.
BTW interbank lending rates soared today. Not good.
posted by Ironmouth at 8:15 AM on September 30, 2008
Another excellent overview is in The Economist.
BTW, half the comments in this thread are naive and/or flat out wrong.
posted by Nelson at 3:01 PM on September 30, 2008
BTW, half the comments in this thread are naive and/or flat out wrong.
posted by Nelson at 3:01 PM on September 30, 2008
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why the 700 billion dollar plan should have passed in the first place.
Because, in the judgment of those who favored it, it is better than the alternative (the economic effects of doing nothing)
Why was this so sudden, 2 weeks ago everything was relatively ok
2 weeks ago everything was not OK. Hell, 2 decades ago everything was not OK. The shit just hit the fan-- a few critical factors, simmering for years in the past, came to a head all at once.
Where do they get 700 billion dollar
Borrowing. It'd be funny if it weren't so sad.
the idea of no oversight over such a large sum of money
The notion of "no oversight" is being thrown around in the media lately, but I'm not convinced there would really be no oversight over a $700B bailout. The quality of that oversight is another story.
posted by Rykey at 5:42 PM on September 29, 2008