NationStates Jolt Archive

Nationalising two major companies...

http://www.guardian.co.uk/business/2008/sep/08/freddiemacandfanniemae.useconomy

The United States government last night announced the biggest financial bailout in the country's history, as it took the troubled American mortgage giants Freddie Mac and Fannie Mae into temporary public ownership to save them from collapse.

In one of the most dramatic turns in the year-old credit crunch, the treasury secretary, Henry Paulson, said that the Federal Housing Finance Agency, formerly the regulator of the two companies, would run both businesses. Their current management has been replaced and further funds would be made available, he said.

How do you free-wheeling market capitalists feel about this one? Should they just have been allowed to go insolvent?

Does this just bail out the shareholders and management, communism for the elite?

Should the government have just stayed out?

What thoughts my running pig friends?

We can't allow the global economy to be thrown in to chaos, so this is an absolutely necessary move to strengthen these companies and ensure the nascent recovery of the credit markets isn't wiped out. Their management is being replaced and no doubt these companies will see some major long-term changes in their lending practices. I'm pretty confident the government will return these companies to private control in far better shape in all aspects than they were prior to the takeover.

Quite frankly, we're in the midst of what can only be described as the breakdown of the jury-rigged banking system that has really exploded over the past decade or so; the explosion of opaque, semi-regulated derivatives markets have created a whole series of time bombs in the financial system that are rapidly approaching their detonation. The real challenge is whether or not economic authorities can defuse these bombs and implement necessary changes before we're cast down in to recession or worse.

I can say with quite a bit of certainty that the banking system of 10 years from now will be drastically different from the opaque, chaotic free market free-for-all that characterizes it today. Look for a lot more transparency, more universal regulation, more oversight, and tighter lending standards at all levels of the system both locally and globally. There will no doubt be new government agencies tasked with regulating the financial markets, including the dangerous hotspots for manipulation like commodities and derivatives. Ideally, we'll reverse many of the excesses of the past 30 years of deregulation while still keeping the strong points, but I feel that it's likely the end result will be a return to the tighter, more conservative lending practices of the 1950's and 1960's.

On an unrelated note, I do believe this situation has also burst the commodities bubble; with the arrival of a lot more oversight and tighter regulations in the commodities market, prices for commodities have reversed drastically and the dollar has appreciated markedly. Prices are still higher than they were a year ago, but it's hard not to argue that commodities are now in a cyclical downtrend once again. Considering that secular trends in commodities last about 10-12 years or so, it's actually about right for historical cycles.

I don't pretend to have a firm understanding of the technical details...all I know is that I'm tired of companies that distribute their rewards to private shareholders, but spread their risk to public taxpayers.

First of all the government is not bailing out Freddie Mac and Frannie Mae for the simple purpose of ensuring that these two companies survive. What is being done here is to ensure that the American economy and the World economy does not collapse.The government needs to do this in order to ensure that we do not have systemic instability, the government cannot let this spread throughout the American economy and the world as a whole.

I find it disturbing that Obama thinks that "We have to protect taxpayers and not bail out shareholders and management" if he really thinks that this is merely to protect shareholders than I hold grave concern for the world economy if he is elected, I just hope he is saying that to help garner votes from people who don't have a full understanding on what a collapse of two major financial institutions would do to America.

It is the same reason that the Bank of England bailed out Northern Rock and the government nationalised it, to ensure that this instability would not spread into the rest of the market.

No they can't!
Didn't you capitalists say that "THE MARKET"(tm) can fix EVERYTHING?

The global economy should fall because everyone must fail or suceed on their own merits...


Am I being Sacarsitc enough?

*snip*

Dude, you're irritating enough without that signature :), I think we've all got it now, could ya, would ya?

I'm speaking to those who seem to feel that the government should be as small as possible and not help anyone out, I can certainly see the benefits of bailing out Fannie and Freddie though I'm not sure as to nationalisation.

I feel it should be underwritten, the management team should certainly be replaced but not necessarily by the government.

Dude, you're irritating enough without that signature :), I think we've all got it now, could ya, would ya?

I'm speaking to those who seem to feel that the government should be as small as possible and not help anyone out, I can certainly see the benefits of bailing out Fannie and Freddie though I'm not sure as to nationalisation.

I feel it should be underwritten, the management team should certainly be replaced but not necessarily by the government.

Sorry, I was in one of my bs moods when I noticed that my signature was changed, I will change it soon I just haven't got around to it yet.

It is only temporary nationalisation though, really just to ensure that the economy as a whole will not collapse, if it was a small company which may only have had an effect on the local economy should not be bailed out by the government but if a company collapse that would have an effect not only the industry but the entire economy then yes the government should step in.

Well, just like the UK ( and every capitalist country in the world ), the USA know perfectly that if the market really regulate everything, this would be very bad for their power and their economy.

This event is not surprising, the US economy is one of the most protective in the world, advocating free market only in third world countries.

Just look at all the protective measures and public subventions thrown every years into the US agro-alimentar sector ( twice the budget of European Union, something like that... ), all those public subventions thrown into outdated and badly managed industries, like GM and Ford...or just look at this scandal about the tanker contract for the US Air Force...

Everyone knows perfectly that true free and deregulated market is a very very bad thing for your own economic power.

The trick is to force other people into it and in the same time use massive amount of government subventions and anti-trade laws ( like the weight obligations for the cars in USA ), so you can keep your power.

Nationalising two major companies...
How do you free-wheeling market capitalists feel about this one? Should they just have been allowed to go insolvent? Does this just bail out the shareholders and management, communism for the elite? Should the government have just stayed out? What thoughts my running pig friends?

Oink, oink.

It is just what kapitali$t countries have always done: privatizing profits, socializing losses - all while bashing them evil kommiez who want to socialize profits, too, them bastards!

About the same is happening here with the self-appointed "liberist" Berlusconi cabinet and the Alitalia crack. The State-owned company will be divided into a "good" part (who will be bought at bargain price by a joint venture) and a "bad" part (who's going to be given all the debt of Alitalia and go bankrupt).

The EU going postal at the WTO and the IMF could be a good option, but I don't think that it will happen, since the current cabinets of the major EU countries (France, Germany, Italy, UK) are quite brown-nosed when it comes to relationships with the US.

What is being done here is to ensure that the American economy and the World economy does not collapse.
...
It is the same reason that the Bank of England bailed out Northern Rock and the government nationalised it, to ensure that this instability would not spread into the rest of the market.

So, it looks that capitalism doesn't work very well without Mommy State rushing to help. As usual.

So, it looks that capitalism doesn't work very well without Mommy State rushing to help. As usual.

It may have helped if the mummy state hadn't intervened in the first place, such as limiting that banks could only operate within their states, the Glass Stegall Act that was implemented in the 1930's from memory. Now that legislation was abolished in 1999 which has lead to the current crisis but it did stop universal banking which was flourishing before. Of course if we allowed the mummy state we would not have the wealth that we have seen.

Of course if we allowed the mummy state we would not have the wealth that we have seen.

And we would not have LOST the wealth that we have seen either. You have to see it that way as well.

Yay... another Northern Rock. And lacking better ideas its the same response too.

What happens when the bank with which you hold your mortgage goes bankrupt?

Do you just get to keep the house?

I mean, if one doesn't pay installments, the bank forecloses and takes your house so what happens the other way around when there's no bank to pay installments to?

Theoretically, they've paid off the seller so...

Or is it a case of one rule for major corporations and another for the little guy?

What happens when the bank with which you hold your mortgage goes bankrupt?

Do you just get to keep the house?

I mean, if one doesn't pay installments, the bank forecloses and takes your house so what happens the other way around when there's no bank to pay installments to?

Theoretically, they've paid off the seller so...

Or is it a case of one rule for major corporations and another for the little guy?

That's a good question and maybe one of our lawyers on here might be able to answer it. If your mortgage had been bundled up and sold off as an Asset Backed Security then you will still have to pay the owner of the loan which could be anyone. The loan is an asset of the bank so if it goes bankrupt creditors would be seeking to recover funds from the bank as the loan is an asset of the bank then ownership of the loan may transfer over to the creditors and you would then be making payment to them.

That's a good question and maybe one of our lawyers on here might be able to answer it. If your mortgage had been bundled up and sold off as an Asset Backed Security then you will still have to pay the owner of the loan which could be anyone. The loan is an asset of the bank so if it goes bankrupt creditors would be seeking to recover funds from the bank as the loan is an asset of the bank then ownership of the loan may transfer over to the creditors and you would then be making payment to them.

Right, I'm wondering if this is a conversation I had, where someone is no longer paying his mortgage because no one can find who owns the loan anymore. The bank he originally took it out with cannot find it since they've sold it on so many times and don't have the original document, no one seems to, it's like the 'missing body' in court - no one can show the details of the mortgage so he's just not paying.

For some reason, he's under no obligation to show his version.

Something like that, I'm not sure if it was a thread or a RL conversation.

It might be an newly-formed urban legend of the back of the current problems.

The loan is an asset of the bank so if it goes bankrupt creditors would be seeking to recover funds from the bank as the loan is an asset of the bank then ownership of the loan may transfer over to the creditors and you would then be making payment to them.

Dunno about US laws; in Italy that's what would happen.

What happens when the bank with which you hold your mortgage goes bankrupt?

Do you just get to keep the house?

I mean, if one doesn't pay installments, the bank forecloses and takes your house so what happens the other way around when there's no bank to pay installments to?

Theoretically, they've paid off the seller so...

Or is it a case of one rule for major corporations and another for the little guy?

I'm no expert but as far as I know, technically the house is not your asset, but the bank's, until you have paid off your debt. Which means that when the bank goes bust, and they sell of the bank's assets, they will put your house on auction. I think.

So, it looks that capitalism doesn't work very well without Mommy State rushing to help. As usual.

It's the solid backing of Mommy State, actually, which got the system into this situation in the first place. Pursuing a noble goal of letting every American family buy a house, the government put Fannie Mae and Freddie Mac forward as almost its own institutions, and its help made possible these low-rate, long-term mortgages. Plus, everyone knew that whatever happens, gov't will be forced to bail them out. If not for this help, there wouldn't be such a bubble.

It's the solid backing of Mommy State, actually, which got the system into this situation in the first place. Pursuing a noble goal of letting every American family buy a house, the government put Fannie Mae and Freddie Mac forward as almost its own institutions, and its help made possible these low-rate, long-term mortgages. Plus, everyone knew that whatever happens, gov't will be forced to bail them out. If not for this help, there wouldn't be such a bubble.

Well they've been around since the 1930's so it's not like they're directly responsible, they sustain the banks not the individual mortgage holders.

I'd still say that the lowering of capital gains tax from 29% - 20% in '97 - pushed by the Republicans, reluctantly signed by Bill Clinton - accelerated the market then, resulting in the early 2000's crash and the drop to 15% in 2003 pushed the latest wild market speculation. Volume drives markets.

It's not the particular % per se, it's the size of the drop, encouraging people to buy/sell, driving volume, driving prices up, encouraging more people to invest for short-term gains in whichever market is hottest, Tech before, housing later.

Stability is more important than growth, greed is a killer of stability.

This sounds like a good idea. The companies involved were being managed incompetently, but the situation had the potential to spillover onto other, viable businesses. It's in situations like this that the government should step in.

It's all about safe, sane regulated capitalism.

I'm no expert but as far as I know, technically the house is not your asset, but the bank's, until you have paid off your debt. Which means that when the bank goes bust, and they sell of the bank's assets, they will put your house on auction. I think.
The mortgage, not the house itself, is the bank's asset. They sell/auction off the "paper" and then you make your payments to whoever bought it. So no, you won't automatically lose your house!

The selling of mortgages between banks is too chaotic if done right, you (the mortgagee) just get a letter in the mail that says "you will send your payments to [new address]" and some kind of explanation for the change.

In other words, this:
sold off as an Asset Backed Security

This sounds like a good idea. The companies involved were being managed incompetently, but the situation had the potential to spillover onto other, viable businesses. It's in situations like this that the government should step in.

It's all about safe, sane regulated capitalism.

Where is all this money supposed to come from, nationalisation comes with the guarantee of unlimited "backstop liquidity support facility"

1. Raise taxes - taxessss, no, that's another move to communism! Might as well vote in Barack Obama
2. Borrow - have you looked at the Federal deficit lately, who's giving the US unlimited 'backstop liquidity support facility? Payback's a bitch and it's as much political favours as cold cash.
3. Print money (most likely) - consequences?

Providing excess liquidity put the US in this problem in the first place - solution? MOAR excess liquidity.

Will they ever learn?

Still, the stock markets are happy, London's up near 200 points, hate to see the City out on the street.

So what does the Libertarian candidate have to say about this?

2. Borrow - have you looked at the Federal deficit lately, who's giving the US unlimited 'backstop liquidity support facility? Payback's a bitch and it's as much political favours as cold cash.
"It's better to be a debtor than a creditor, because debtors are treasured and creditors are loathed."

Right, I'm wondering if this is a conversation I had, where someone is no longer paying his mortgage because no one can find who owns the loan anymore. The bank he originally took it out with cannot find it since they've sold it on so many times and don't have the original document, no one seems to, it's like the 'missing body' in court - no one can show the details of the mortgage so he's just not paying.

For some reason, he's under no obligation to show his version.

Something like that, I'm not sure if it was a thread or a RL conversation.

It might be an newly-formed urban legend of the back of the current problems.

Maybe an urban legend, but if true and he is under no obligation to pay then good on him, for being one of the very few to slip through the ranks.

"It's better to be a debtor than a creditor, because debtors are treasured and creditors are loathed."

Seriously, better for who?

Better for you? No, it just means they charge interest so they can make money off you. The idea behind the sentence is that if you're in debt, people are willing to lend you more money to stave off bankruptcy, in essence charging you more interest and thus making more money off you.

You're not treasured, you are the treasure and the pirates will certainly be fighting over you.

Well they've been around since the 1930's so it's not like they're directly responsible, they sustain the banks not the individual mortgage holders.

I'd still say that the lowering of capital gains tax from 29% - 20% in '97 - pushed by the Republicans, reluctantly signed by Bill Clinton - accelerated the market then, resulting in the early 2000's crash and the drop to 15% in 2003 pushed the latest wild market speculation. Volume drives markets.

It's not the particular % per se, it's the size of the drop, encouraging people to buy/sell, driving volume, driving prices up, encouraging more people to invest for short-term gains in whichever market is hottest, Tech before, housing later.

Stability is more important than growth, greed is a killer of stability.

Well the whole thing really started with the abolition of the Glass-Stegall Act in 1999, this opened up investment banking and commercial banking to be able to interlink opening up universal banking, this did happen throughout other areas of the world as well as many other governements continued their deregulation which had been in place since the 1980's. I am waiting for Neu Leonstein to pop in he will be able to explain it a lot better than me.

Better for you? No, it just means they charge interest so they can make money off you. The idea behind the sentence is that if you're in debt, people are willing to lend you more money to stave off bankruptcy, in essence charging you more interest and thus making more money off you.
Making back the money they have lent you.

In the end, the winner is the one who ends up with the most money - and foreign nations have lent US hundreds of billions, not to mention they also keep massive dollar reserves. As a result, they all have a vested interest in keeping the US economy alive, and it's they who end up paying a bit every year in exchange for avoiding collapse. US gets the money, and then gets paid for it.

And someday, if further lending becomes impossible, this debt will be simply written off one way or another. There are many realistic scenarios of how it can happen.

Well the whole thing really started with the abolition of the Glass-Stegall Act in 1999, this opened up investment banking and commercial banking to be able to interlink opening up universal banking, this did happen throughout other areas of the world as well as many other governements continued their deregulation which had been in place since the 1980's. I am waiting for Neu Leonstein to pop in he will be able to explain it a lot better than me.

Thanks for directing me to this, it was replaced by the Gramm-Leach-Bliley (http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act) Act - worth reading up.

Steagall by the way :)

3. Print money (most likely) - consequences?
Collecting a tax on the entire world. Say, if there are 100 trillion dollars in the world, of them 10 yours, and you print another 10 trillion, the dollar depreciates by 9%, but you're still the winner - you have 18 trillion "old dollars".
Of course, the rest of the world only has 82 trillion "old dollars" instead of 90.

Thanks for directing me to this, it was replaced by the Gramm-Leach-Bliley (http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act) Act - worth reading up.

Steagall by the way :)

Ah ok yeah thanks, I knew it had been repealed allowing the things that the Gramm-Leach-Bliley Act states, but I didn't know that they had enacted a law to cover it.

Thanks, I thought I had spelt it wrong.

Collecting a tax on the entire world. Say, if there are 100 trillion dollars in the world, of them 10 yours, and you print another 10 trillion, the dollar depreciates by 9%, but you're still the winner - you have 18 trillion "old dollars".
Of course, the rest of the world only has 82 trillion "old dollars" instead of 90.

So, it's like a license to print money?

Something has to be wrong with the above scenario. Where does inflation fit into this?

So, it's like a license to print money?
Yes, sort of. Of course, you also tax your own citizens through it, but you can always cut regular taxes.
That's the benefit of having your fiat currency as the world standard.

Something has to be wrong with the above scenario. Where does inflation fit into this?
Into these 9%. Printing extra 10% of money will cause a 9% inflation. But inflation isn't all that bad, it actually stimulates economic growth if it's reasonable. And the loss of your citizens you more than cover by the newly printed money.

Into these 9%. Printing extra 10% of money will cause a 9% inflation. But inflation isn't all that bad, it actually stimulates economic growth if it's reasonable. And the loss of your citizens you more than cover by the newly printed money.

While some inflation is good 9% is way to much in fact most developed Central banks would aim to keep the inflation rate in between 2%-3%. Though countries really should only be printing money in order to cover money that needs to be replaced.

Barry, if you are bit more interested in the crisis here are a couple of journal articles I found. I just started writing a paper for uni about the subprime mortgage crisis, as I find out more I can let you know if you want to get a bit more depth on it.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1113888&rec=1&srcabs=1071189
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020396&rec=1&srcabs=1113888

While some inflation is good 9% is way to much in fact most developed Central banks would aim to keep the inflation rate in between 2%-3%.
Even 9% isn't all that much, China has more (which helps its growth). But it's not a constant 9%, it's a one-time deal - if you print the money at 2 trillion a year for 5 years, it just adds 2%.


Though countries really should only be printing money in order to cover money that needs to be replaced.
Well, they don't, and all (or almost all) governments print extra currency for their expenses, effectively as a hidden tax. Printing extra money is exactly why inflation happens. It's pretty much the only reason for it, really (with the exception of collapsing economies). No money-printing, no inflation.

So technically option 3 should sound as "Increase the rate of extra money printing.".

I support this move. There is a time to let the market fix things, and a time for government intervention. This is the latter.

Even 9% isn't all that much, China has more (which helps its growth). But it's not a constant 9%, it's a one-time deal - if you print the money at 2 trillion a year for 5 years, it just adds 2%.

I said developed countries, China currently has a developing economy that has a high growth rate, in developed economies like the US 9% is quite high 2-3% is still good. I agree with you some inflation is needed in an economy.

Well, they don't, and all (or almost all) governments print extra currency for their expenses, effectively as a hidden tax. Printing extra money is exactly why inflation happens. It's pretty much the only reason for it, really. No money-printing, no inflation.

So technically option 3 should sound as "Increase the rate of extra money printing.".

Well no it is not the only reason, inflation can also happen from excessive spending which can derive from the private sector it can also be from the public sector such as the government increasing public spending. There may be an inflation shock which can lead to higher inflation such as the 1970's oil crisis. A shock to potential output also causes a rise in the inflation rate. Basically any time there is a change to the potential output and the actual output to an economy will change the rate of inflation. The inflation rate will increase if the actual output is greater than the potential output of an economy.

I said developed countries, China currently has a developing economy that has a high growth rate, in developed economies like the US 9% is quite high 2-3% is still good. I agree with you some inflation is needed in an economy.
Yes, 9% would be high for US. But that would only happen if money was printed at a very high rate. Currently US is 1/5 of the world's economy, and M3 is about 12 trillion, so US would have to print (or "print") 6 trillion a year to incur a 9% rate. That would triple the budget.
A more moderate 1.5-fold budget increase would only involve a 2.2% inflation rate increase.

And US had a 4% rate for quite a while.


Well no it is not the only reason, inflation can also happen from excessive spending which can derive from the private sector it can also be from the public sector such as the government increasing public spending. There may be an inflation shock which can lead to higher inflation such as the 1970's oil crisis. A shock to potential output also causes a rise in the inflation rate.
Yes, and other cases. But these are generally one-time changes. And 1970's crisis was the case of major economic drop. In a growing economy, the inflation is caused by the government's money-printing (not always currency, also other forms of money). With a fixed money supply, a growing economy would rather steer towards deflation.

Yes, 9% would be high for US. But that would only happen if money was printed at a very high rate. Currently US is 1/5 of the world's economy, and M3 is about 12 trillion, so US would have to print (or "print") 6 trillion a year to incur a 9% rate. That would triple the budget.
A more moderate 1.5-fold budget increase would only involve a 2.2% inflation rate increase.

And US had a 4% rate for quite a while.

Yes but only if the amount of money injected into the economy by the government led to inflation, as I have said there or other factors lead to an increase in inflation.

Yes, and other cases. But these are generally one-time changes. And 1970's crisis was the case of major economic drop. In a growing economy, the inflation is caused by the government's money-printing (not always currency, also other forms of money). With a fixed money supply, a growing economy would rather steer towards deflation.

Well it depends, increased spending may be over quite a large number of years, an increased amount of money within the economy is not always because the government is injecting money in the economy, as I said an increase in demand may increase prices over the economy over a sustained period of time. If controlling inflation was a simple as the amount of money a government produced each year things would be a lot simpler and governments could limit the amount of inflation by the amount of money the print each year, but this isn't the case as inflation is more than just the amount of extra money the government puts into circulation each year.

Yes the 1970's oil crisis was the case for a major economic drop but it did increase the inflation rate, in fact it lead to stagflation.

We can't allow the global economy to be thrown in to chaos . . .
Maybe you can't, but I was kind of hoping that is how things would work out. It looks like if you want civilization destroyed, you've got to do it yourself.

Well it depends, increased spending may be over quite a large number of years, an increased amount of money within the economy is not always because the government is injecting money in the economy, as I said an increase in demand may increase prices over the economy over a sustained period of time.
A growing economy has increase in supply compensate for the increase in demand. Each year there are more houses, more cars, more TV sets, more everything. If all that exists with a constant supply of money, then goods will depreciate and money appreciate - a deflation.

There are dynamic factors, but they come and go.


Yes the 1970's oil crisis was the case for a major economic drop but it did increase the inflation rate, in fact it lead to stagflation.
Of course, didn't I say the same? Economic drop leads to inflation. If there are fewer houses, cars, or in this case less oil, for the same money supply, then the goods will appreciate and money depreciate - an inflation.

Nationalising two major companies...

http://www.guardian.co.uk/business/2008/sep/08/freddiemacandfanniemae.useconomy



How do you free-wheeling market capitalists feel about this one? Should they just have been allowed to go insolvent?

Does this just bail out the shareholders and management, communism for the elite?

Should the government have just stayed out?

What thoughts my running pig friends?


This is wrong... Let the market take its toll. Down with protectionism and socialism.

Except we are talking about two government's companies, created to subsidize the housing industry.

Except we are talking about two government's companies, created to subsidize the housing industry.


The government shouldn't be subsidizing any industries. The market is self-correcting. The "Housing Crisis" will correct itself in due time.

The government shouldn't be subsidizing any industries. The market is self-correcting. The "Housing Crisis" will correct itself in due time.
Do you hold libertarian views?
But it's not all that clear.
I agree that it shouldn't. But once it started doing it, abrupt stopping is even worse than going on. The whole point of these two "companies" was a guarantee that the gov't will bail them out whatever happens, so that's what it does. It's not like we have the government bail out random companies.

The government shouldn't be subsidizing any industries. The market is self-correcting. The "Housing Crisis" will correct itself in due time.

*drops of his chair rolls on the ground laughing and dies from a heart attack*

Do you hold libertarian views?
But it's not all that clear.
I agree that it shouldn't. But once it started doing it, abrupt stopping is even worse than going on. The whole point of these two "companies" was a guarantee that the gov't will bail them out whatever happens, so that's what it does. It's not like we have the government bail out random companies.

Yes, I am a Libertarian... Am I really that obvious? :rolleyes:

Uh, the government bails businesses out all the time... It may not be in the same way as this instance, but it does happen. Consider the domestic car industries (Ford, GM, Chevy, etc) or the airline industries... They're like comatose patients with feeding tubes in Saint Government General Hospital... It's called corporate welfare.

*drops of his chair rolls on the ground laughing and dies from a heart attack*

Apparently you don't study economics at all... It's all these government agencies (like the Federal Reserve) that make it harder for the economy to self-correct.

Wait... I thought Bear Stearns fixed everything...?

Seriously this changes nothing for the overall economic picture. People still owe more than their houses are worth and can't pay the debt that they have. And none of this makes covenant lite PIK bonds a good deal. Paulson and Bernanke are pissing into the wind if they think they can restart the credit market by issuing properly underwritten MBS.

Though the real impetus for this was probably threats of a buyers strike from the Chinese and the japanese, so it has very little to do with actually helping out americans or the world economy in general.

The consensus is that this is a 'credit' event too, so lots of CDS are being triggered. There is going to be an announcement at 11 am about this. Which if funny, because the taxpayer just dolled out 28 billion of credit in march to stop exactly that kind of thing from happening. LOL at unintended consequences.

At the very least they should be properly nationalized.

Apparently you don't study economics at all... It's all these government agencies (like the Federal Reserve) that make it harder for the economy to self-correct.
Maybe, but what meaning does capital have outside of a centralized authority? Markets and money are entirely meaningless without some pretense of collective currency. Without agencies along the lines of a Federal Reserve, economy and economic theory don't get any further than bartering.

Maybe, but what meaning does capital have outside of a centralized authority? Markets and money are entirely meaningless without some pretense of collective currency. Without agencies along the lines of a Federal Reserve, economy and economic theory don't get any further than bartering.
And then some tribesman comes with the idea of using shells as currency. And then they discover gold, and it becomes the currency. And then some bank starts issuing certificates that can be exchanged for gold in any of its departments.
See Knight Templars.

And then some tribesman comes with the idea of using shells as currency. And then they discover gold, and it becomes the currency. And then some bank starts issuing certificates that can be exchanged for gold in any of its departments.
See Knight Templars.
My point is that the process creates banks (or some equivalent thereof) that require either central management (or, at least, regulation) or a continued state of bartering over the relative value of these certificates. Until it is understood that collective agreement is the cornerstone of capital, we can't just toss aside the bodies that oversee this agreement.

EDIT: That is, without a central bank of some sort, I have no reason to trust that the currency you offer me is worth anything. For all I know, your bank might be printing money at huge rates with no valuable backing and I might be getting totally swindled by what you offer me as payment.

That is, without a central bank of some sort, I have no reason to trust that the currency you offer me is worth anything. For all I know, your bank might be printing money at huge rates with no valuable backing [...]
Just like most governments do, you mean.

If it really were a mommy state, the executives of the company in question would be getting a good spanking right about now too.

Probably they are.

"Oh! A-ah! O-o-oooh! Yea-ah! Spank me moarr, baby!!"

Fannie and Freddie have never operated in what could be considered a free market. They have always operated with the knowledge that the government was backing them which is why they were run in a manner that would have seen the management of any normal company strung up long ago.

If it really were a mommy state, the executives of the company in question would be getting a good spanking right about now too.

Well, a watered down version is that they are. In essence, this deal comes along with the rule that the CEOs are to be replaced with government officials. At least that's what the article I saw today said was going to happen. Along with a lot of nasty affects for shareholders(However, they are already screwed, so really it's not really going to be more like instead of being screwed completely, they are screwed totally. If you can find the difference, well then good for you!).

Just like most governments do, you mean.
Actually, yeah, and the Foreign exchange market is a good example of how that applies to my point. It's not centrally managed, and so dealing in currency is about bartering and negotiation rather than comparison to some objective standard.

Actually, yeah, and the Foreign exchange market is a good example of how that applies to my point. It's not centrally managed, and so dealing in currency is about bartering and negotiation rather than comparison to some objective standard.
So you agree that the government-issued currency isn't really any different from private currency, right?

So you agree that the government-issued currency isn't really any different from private currency, right?

Government issued currency has government backing of its value. The power to declare currency legal tender and have it backed by the force of law is something no private currency can ever achieve. Its backing is effectively the entire GDP of the issuing country. That's why it's superior to private currency; that currency will be legal tender within the entire nation, and if the country's fiscal and financial systems are sufficiently strong and open it will also be accepted around the world.

Government issued currency has government backing of its value. The power to declare currency legal tender and have it backed by the force of law is something no private currency can ever achieve.
Really? Not even one issued by a NS-style corporation like Aerospace Logistics, which is above the law and has more firepower than most governments?

Because law is just that, rules set by the one with most firepower.

Really? Not even one issued by a NS-style corporation like Aerospace Logistics, which is above the law and has more firepower than most governments?

Because law is just that, rules set by the one with most firepower.

Firepower is meaningless if you don't have the economic base to support it. If they or any other defense company didn't have considerable government subsidies and backing for their products, they would quite likely cease to exist. Blackwater might be a pretty good mercenary force, but I don't see them coming up with $500 billion in funding like the US military.

It's economic strength and openness that make a currency valuable. The Soviet Union had the world's second-largest economy, largest oil production and world's strongest military during the 1970's and early 1980's and yet nobody ever held rubles as a reserve currency outside the Eastern Bloc. Why? Because their markets were closed and the foreign investment and trade that normally make currencies attractive simply weren't there.

i'm no expert in this field---there's a lot that i don't know about how this all works, in technical detail. but:

i'm in favor of the free market, without qualification, and i don't like the bailout.

i look at this situation as the product of too much intervention, already!

why do we have a privately owned institution---the fed---able to dictate interest rates, etc., backed by the coercive power of the federal government?

i think it's that kind of manipulation that has put us into this position, in the first place. the market already wasn't free enough; it hasn't been allowed to correct itself as fully as it should, as quickly as it should.

what we are witnessing---in my opinion---is the effects of highly centralizing and controlling an economy, while pretending that it's a free market. this lie---together with many poor decisions made by those who are wielding this power---was bound to produce this kind of effect, eventually.

and i have been saying that for a long time.

Firepower is meaningless if you don't have the economic base to support it. If they or any other defense company didn't have considerable government subsidies and backing for their products, they would quite likely cease to exist.
What if they own a few countries and a dozen governments already?
I was talking about seriously powerful corporations, larger than ones IRL.

And some of the firepower can be exchanged for economic base - through market or non-market means.


The Soviet Union had the world's second-largest economy, largest oil production and world's strongest military during the 1970's and early 1980's and yet nobody ever held rubles as a reserve currency outside the Eastern Bloc.
Second strongest military, since Navy is all too important; and largest oil production, but lower than OPEC if taken together.

Plus, the use of rubles outside the Eastern Bloc would be heavily punished by US/NATO, as would be the use of dollars outside the West.

The government shouldn't be subsidizing any industries. The market is self-correcting. The "Housing Crisis" will correct itself in due time.

/threadwin.

What if they own a few countries and a dozen governments already?
I was talking about seriously powerful corporations, larger than ones IRL.

And no, some of the firepower can be exchanged for economic base - through market or non-market means.

It's still easier just to use government currency. That's one of the biggest reasons why they don't issue their own.

Second strongest military, since Navy is all too important; and largest oil production, but lower than OPEC if taken together.

Plus, the use of rubles outside the Eastern Bloc would be heavily punished by US/NATO, as would be the use of dollars outside the West.

True. However, you also couldn't freely exchange rubles and had to exchange them at a ridiculously overinflated rate ($2:1) to begin with, so they were unattractive from any perspective.

The government shouldn't be subsidizing any industries. The market is self-correcting. The "Housing Crisis" will correct itself in due time.
Yes, making about half of all mortgages basically prone to massive collapse is a good thing. Yes. The market may be self-correcting to an extent, but with the incredible oversupply in the US market at the moment, things are never going to be how they were ten years back. The only way to really sort it out would be to basically open the borders to people, so long as they were going to live in currently unoccupied housing, but that's not exactly a perfect solution.

It's still easier just to use government currency. That's one of the biggest reasons why they don't issue their own.
Actually, sometimes they do.

People use USD just because US is the most powerful force today. Let EU overtake it, and people switch to Euro. China wins, it's Yuan. Russia, Ruble. OPEC, their currency, say OPEC Dollar. Microsoft-Exxon-Halliburton consortium takes power over US government, it's their currency that's gonna rock.


True. However, you also couldn't freely exchange rubles and had to exchange them at a ridiculously overinflated rate ($2:1) to begin with, so they were unattractive from any perspective.
This mostly has to do with USSR gov't not really trying to set RUR as the world currency, unlike US.

So you agree that the government-issued currency isn't really any different from private currency, right?
I suppose not, though whether we're using government-issued or private currency, there is still a need for a monetary system to be singular for a particular group of people. For instance, when it comes to talking about actual, concrete investments, such as building a tunnel, shooting a rocket into space or hosting an Olympic Games, which involve the funding and interaction of large groups of people, you want your cost estimates to be analysed according to some common system of expenditure. Any time you're discussing whether to go for the American crew for $4b or the British crew for £2.3b, you're going to translate the prices into a single denomination and compare them, but you've also got to factor in the fluctuation of the two currencies, such that it's not actually obvious in the run of the contract which would be the cheaper option. Were the two crews bidding using the same monetary system, you wouldn't have that problem, because the currency variation wouldn't be a factor in deciding the costs of the bid.

And of course, if multiple currencies run competitively parallel to one another in a particular social context, a tribal separation can emerge between those who want to see their bank profit at the others' expense, which doesn't really benefit anyone. Actually, has there ever been any economy where two currencies have been effectively used in parallel?

Actually, sometimes they do.

People use USD just because US is the most powerful force today. Let EU overtake it, and people switch to Euro. China wins, it's Yuan. Russia, Ruble. OPEC, their currency, say OPEC Dollar. Microsoft-Exxon-Halliburton consortium takes power over US government, it's their currency that's gonna rock.

True, which just goes to show that currencies are the means for valuing goods and services, not a store of value in and of themselves. They can be held as a store of value, but only if people hold confidence in that currency's ability to retain it.

It all comes down to convenience, which is the point of money in the first place.

This mostly has to do with USSR gov't not really trying to set RUR as the world currency, unlike US.

It also badly hurt them, though. Without a fair idea of the value of their currency, the Soviets were unable to maintain solid economic growth nor were they able to achieve anywhere near the kind of economic hegemony the US held despite being 70% the size of the US economy at their peak.

The government shouldn't be subsidizing any industries. The market is self-correcting. The "Housing Crisis" will correct itself in due time.

Do you have any evidence to back this up, like a time machine/crystal ball, or is this just standard Libertarian market worship?

Do you have any evidence to back this up, like a time machine/crystal ball, or is this just standard Libertarian market worship?

Oh, no, he's right. It will self correct. Sure it will unleash a brutal recession that would cost millions their homes and millions more their jobs, devastate incomes, and cause the biggest economic decline since the Depression...

...but hey, it's better to adhere to theory than to reality. Economic theories and libertarian arguments kind of lose their luster when you're standing in line for unemployment (and many of them wouldn't even provide that).

Oh, no, he's right. It will self correct. Sure it will unleash a brutal recession that would cost millions their homes and millions more their jobs, devastate incomes, and cause the biggest economic decline since the Depression...

...but hey, it's better to adhere to theory than to reality. Economic theories and libertarian arguments kind of lose their luster when you're standing in line for unemployment (and many of them wouldn't even provide that).

Libertarians, they are about as delusional as communists.

Do you have any evidence to back this up, like a time machine/crystal ball, or is this just standard Libertarian market worship?

Technically he's right; the market WILL self-correct over time. The self-correction will just not be particularly pleasant, what with the economic catastrophe and long-term depression and such.

Oh, no, he's right. It will self correct. Sure it will unleash a brutal recession that would cost millions their homes and millions more their jobs, devastate incomes, and cause the biggest economic decline since the Depression...

...but hey, it's better to adhere to theory than to reality. Economic theories and libertarian arguments kind of lose their luster when you're standing in line for unemployment (and many of them wouldn't even provide that).



Technically he's right; the market WILL self-correct over time. The self-correction will just not be particularly pleasant, what with the economic catastrophe and long-term depression and such.

Indeed. I read into his statement as meaning that the markets self correction would be for the best.

Fannie and Freddie, part of the weird American system of GSE's, were never fully private entities, they were created by the Congress, and are guaranteed by the Congress, and they always knew that they would be backed up, in the event of a sufficient risk. I'm not surprised that the Feds took 'em over, and I actually think that holding them in conservatorship for the time being (i.e., until the market rebounds) and for a time thereafter (however long is needed to recoup what we taxpayers spent on it, and then some) the Feds should re-release these buggers, and make a profit from selling the stock (and straighten out our infrastructure).

Indeed. I read into his statement as meaning that the markets self correction would be for the best.

Even at its origins, economics recognizes that the state does, actually have a role to play in the market. While the market does efficiently and flexibly allocate goods and services, it is imperfect, (as are all things constructed by human beings, en masse or otherwise) and leaves failures. In very specific instances, the state can correct for these failures. I'd say that Adam Smith's example of the lighthouse is a good one to take a look at. There are paralells between what we're seeing now and that.

The GSE system as currently regulated is a mistake; it gives them a free hand to pursue the risky ventures of the private sector without the corresponding accountability and potential downsides. The government is guaranteed to bail them out, so they're effectively encouraged to assume the highest-risk projects possible because the downside risks are buffeted by that guarantee. Sure, it might produce cataclysmic declines in the stock price, but while they're riding the bubble it doesn't quite matter as much. Interestingly enough, they did best in the decade prior to the housing bubble, which probably goes to show just how well institutional investors realized the company's downside risks. I think the writing on the wall was visible for a while, and it's highly disappointing to see that everything failed so spectacularly especially considering these companies control 50% of the market.

The entire concept of GSEs is noble in principle, but badly flawed in practice. They are designed to broaden the availability of credit, not to serve as a more-or-less risk free way for investors to pour money in to CDOs and other forms of asset-backed securities that would likely never have had a chance at existing in a properly regulated market.

This system is so profoundly broken that its very continued existence is indicative of almost criminal negligence on the part of regulators, policy makers and private-sector investors alike. I can only hope the FHFA and its broadened powers mark the beginning of a new, consolidated era of transparency in financial and credit markets rather than merely the most recent attempt at shoring up the decrepit foundations of a failed system.

Where is all this money supposed to come from, nationalisation comes with the guarantee of unlimited "backstop liquidity support facility"

1. Raise taxes - taxessss, no, that's another move to communism! Might as well vote in Barack Obama
2. Borrow - have you looked at the Federal deficit lately, who's giving the US unlimited 'backstop liquidity support facility? Payback's a bitch and it's as much political favours as cold cash.
3. Print money (most likely) - consequences?


The consequences of #3 are that the money will devalue drastically, even more than it has recently, and there will be HYPERinflation, as in, say, three or four HUNDRED dollars for a gallon of gas.

Barry, if you are bit more interested in the crisis here are a couple of journal articles I found. I just started writing a paper for uni about the subprime mortgage crisis, as I find out more I can let you know if you want to get a bit more depth on it.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1113888&rec=1&srcabs=1071189
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020396&rec=1&srcabs=1113888

Thanks, I'll read them, and information is always good so feel free, I'll be the first to admit that economics is a weak area for me.

EDIT: I need log-ins for both it seems.

Oh, no, he's right. It will self correct. Sure it will unleash a brutal recession that would cost millions their homes and millions more their jobs, devastate incomes, and cause the biggest economic decline since the Depression...


Yes, but I'm not sure how anyone thinks that this bail out package changes anything for the average joe six pack. The GSEs were (mostly!) in the prime mortgage space, and if anything the modest portfolio increase - 150bln over next 16 mos. - followed by the proposed run off is going to result in tighter lending standards going forward. At peak, 1trillion of new mortgages were being written every year. House prices will continue to decline and defaults on existing mortgages will continue to rise.

Remember all this deal has done is guarantee the GSE debt, not the existing agency RMBS. All new MBS - the good stuff - will be sold to the treasury. And while interest rates may come down on new mortgages it won't really make that much difference in respect of affordability. Nor is it likely that the most at risk mortgagors will be able to refinance out of trouble, as they won't conform to the underwriting standards and there just isn't the money available under the plan.

One of two things must happen before any stability can return to the housing market; house prices have to fall even further, or wages must start to rise dramatically. The latter eventuality seems unlikely in an environment of rising unemployment, so...

Refi/cashout/heloc added about 800bln a year to the US economy at the peak of the bubble. The full effects of that being removed have not yet begun to be felt. Commercial real estate, credit cards and auto/boat/RV loans have not yet taken the full extent of their losses.

I'll be fair though. It probably did prevent a major dislocation in treasuries. Won't stop the worst recession since WWII though.

Bailouts are necessary because an absolute free market will fail worse than a complete command economy.

We can't allow the global economy to be thrown in to chaos, so this is an absolutely necessary move to strengthen these companies and ensure the nascent recovery of the credit markets isn't wiped out. Their management is being replaced and no doubt these companies will see some major long-term changes in their lending practices. I'm pretty confident the government will return these companies to private control in far better shape in all aspects than they were prior to the takeover.

Quite frankly, we're in the midst of what can only be described as the breakdown of the jury-rigged banking system that has really exploded over the past decade or so; the explosion of opaque, semi-regulated derivatives markets have created a whole series of time bombs in the financial system that are rapidly approaching their detonation. The real challenge is whether or not economic authorities can defuse these bombs and implement necessary changes before we're cast down in to recession or worse.

I can say with quite a bit of certainty that the banking system of 10 years from now will be drastically different from the opaque, chaotic free market free-for-all that characterizes it today. Look for a lot more transparency, more universal regulation, more oversight, and tighter lending standards at all levels of the system both locally and globally. There will no doubt be new government agencies tasked with regulating the financial markets, including the dangerous hotspots for manipulation like commodities and derivatives. Ideally, we'll reverse many of the excesses of the past 30 years of deregulation while still keeping the strong points, but I feel that it's likely the end result will be a return to the tighter, more conservative lending practices of the 1950's and 1960's.

On an unrelated note, I do believe this situation has also burst the commodities bubble; with the arrival of a lot more oversight and tighter regulations in the commodities market, prices for commodities have reversed drastically and the dollar has appreciated markedly. Prices are still higher than they were a year ago, but it's hard not to argue that commodities are now in a cyclical downtrend once again. Considering that secular trends in commodities last about 10-12 years or so, it's actually about right for historical cycles.

Yes, what he just said. I also want to add that I am continously impressed with your answers to some major questions. What school are you going to? I think I need to send my next kid there.

Yes, what he just said. I also want to add that I am continously impressed with your answers to some major questions. What school are you going to? I think I need to send my next kid there.

Ah, thanks a lot. I'm glad to hear it...this forum's consistently been one of the best places to discuss these issues so I always try to really give my opinion on a lot of issues.

As a matter of fact, I'm a junior at Ohio State in the Fisher College of Business with an Accounting/Finance major and Economics minor.

Thanks, I'll read them, and information is always good so feel free, I'll be the first to admit that economics is a weak area for me.

EDIT: I need log-ins for both it seems.

Ah yes sorry Barry, I accessed them on the uni computers and it is automatic, but doing it from home all I had to do was register which is free to do. I then just clicked on the email button above the abstract and said send both abstract and full text to myself, and I got them. If you still cant do this send me a TG with an email address and I will send them to you if you want them.

Vault 10: I will get back to you just a bit pressed for time atm, I think we are agreeing with each other on a broad level but disagreeing on details.

there is no left in america. that is because the political right is on one side of the isle, and the moral right (the REAL moral right) is on the exact opposite other.

{and for the last 8 years, if not the last 30, if not the last 60 or so, the political right has almost always appeared to have held the upper hand, at least in the sense of their backward headed and infantile policies having been given, at least in the eyes of media, and thus frequently a majority of the public, the stamp of officialdom. officialdumb in the long run we will wake up to it having been yet)