Why the Bailout Plan Failed
There is a parable I learned long ago from the continuous improvement management philosophy. It’s called “rocks and water.”
Imagine you want to row your boat along a full, gently flowing river. No sweat. Imagine the water level drops significantly, exposing the jagged rocks along the riverbed. Now try rowing. Can’t do it; too many rocks.
In the parable, the water is any enabling resource of which having lots can obscure problems. In many businesses, the water is cash. Too much cash makes it easy to ignore the rocks underwater. Only when the water is drained can we see — and remove — the rocks. Many of the best organizations keep their water level low on purpose so that when rocks begin to appear they can be seen and dealt with.
Now with a panicking New York-DC axis, I can’t help but think about rocks and water. We’ve let the water level rise for decades, hoping it would keep everyone floating along. The so-called “predatory lending” that some point to is just a sliver of the problem. The real problem is that, driven by well-intentioned policies, some smart pencil-pushers figured out how to create a mechanism for avoiding risk altogether. Make the loans, sell the risk to someone else. This opened the floodgates as it became easy to invest with little apparent downside. With the system set up this way, no one feels the pain — until everyone feels the pain.
The river’s drying up now.
The main story being told is that those idiot “back bench” House members scuttled the imperfect-yet-necessary rescue boat for the American economy. In the howls from the editorial columns you can hear the derision. Almost the entire elite of America was unified behind the need to take the rescue deal on offer. How dare these rebels place mere “politics” ahead of the needs of the “market?” Don’t they understand the stakes? To read the coverage, you’d think some small minority had sunk the rescue dinghy because they did not like the color it was painted. Idiots. Cowards.
Americans making foolish decisions under duress, panic and in haste is no news to me. Iraq war, anyone?
d(-_-)b
demosthenes – a foolish decision made under duress, panic and haste regarding the Iraq war: you mean the left’s hostility to the surge?
today the Senate is pushing for a do-over, this time with some tax breaks to make the poison go down easier… reminds me of the arrogance the local school board showed this year when voters turned down their budget in a close vote… they held a closed door meeting and said “we just need to SELL it a little better, and it will pass next time”… and the budget was defeated by even more the next time around… the American people are really NOT that stupid… are we really going to bail out the crooks: http://online.wsj.com/article/SB122273062657688131.html How about we just give every person in America a million bucks and save about $699.7 billion instead?
Says demosthenes:
Americans making foolish decisions under duress, panic and in haste is no news to me. Iraq war, anyone?
There was 9 months of debate in the media and Congress not to mention 14 UN resolutions before there was an invasion and before Congress made the authorization to go to war. It was not a decision made in duress and not a panic decision it was one that included many debates, long intelligence reports that were read, checking with allies and confirmed the data. There was a coming to agreement and authorizing the President to move forward. It was made based on the narrative carried forward by the first Bush, Clinton and Second Bush administrations and the analysis of the intelligence communities. Stop drinking the Kool Aid from leftist blog sites about a rush to war and remember or find out what really happened. There was flaws in the intelligence information and common narrative of WMD but it was not a rush to war made in haste. We also have no concept of what it would look like now with Saddam having stayed in power. I suspect the Middle East would have seen even more trouble.
John
It failed because voters at large tell voters in the house, “NO!”
God Bless You, House Republicans!
this country does not need this bailout. the reason credit is tight is because the banks are waiting for the bailout. don’t endorse this socialist government assistence, it was government that got us here to begin with.
I would recommend checking out this link from Stratfor:
http://www.stratfor.com/weekly/20080930_political_nature_economic_crisis
It’s the most objective account I’ve read about how politics and economics intersect and how this current financial crisis compares from a historical perspective.
Bottom line: political finger pointing is delaying what could be a (although not necessarily an efficient, wise, or desirable) reasonable govt intervention in a serious financial crisis; which in turn could lead to much more serious economic crisis.
I’ll leave the partisan debating to the other bloggers here…
Carter’s CRA in ’77, Clintonite reforms in ’95 that resulted in easing/increasing of CRA lending, McCain and other warning Fannie and Freddie were in serious need of reform in 2005 and 2007, only to be shot down by (mainly) key DNC pols. Government created this mess in a drive to fund social justice. Now we might find out how much “social justice” really costs.
The people could be wrong. The markets are so intricate the greatest experts cannot predict what will happen. The general investor, meaning me and you, are the last people to know the insides of finance. So when we direct our representative to vote a certain way we could and probably are making a big mistake. Do the passengers on an airplane make piloting decisions? Not for an instant whether normal operations and certainly not in emergency situations. Yet here the passengers are determining which actions the pilot can take.
Apparently, regardless of the will of ‘we the people’, the Fed goes ahead and does as they wish:
“U.S. banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.”
http://www.reuters.com/article/ousiv/idUSTRE48O9B920080925?sp=true
Is this important news? The reader will decide.
The majority of Americans don’t want the bailout which is why it didn’t pass. Now, the fearmongering has been ratcheted up in order to make the public understand that we absolutely, positively have to do a bailout. Why?
What disturbs me most about this process are two things:
1. Why weren’t other alternatives put on the table to discuss? Why did we go full-steam ahead with just Paulson’s bailout strategy? Last night, billionaire Steve Wynn was on television saying that he and other businesspeople are against the bailout. They believe there’s another solution that will not cost us as much. So why haven’t we been able to consider these? Why only one solution?
2. Also, why hasn’t there been any discussion about investigating the cause of this catastrophe? Have you noticed that no one has talked about finding out who is responsible? Why? I tend to agree with the suppositions that this all started with Fannie Mae and Freddie Mac. If so, you can understand why Obama, Pelosi, Reid, Frank and Dodd don’t want one because it would hurt their party. But isn’t country supposed to be first? Don’t we want to avoid this happening again?
I heard an interesting counter-proposal yesterday:
1. Eliminate the capital gains tax.
2. Drop mark-to-market (apparently the SEC fuzzed up that rule yesterday). This would automatically improve the troubled balance sheets.
I’d like to try this first before obligating the taxpayers.
This situation does not pass the smell test.
I couldn’t afford to buy my first house until I was forty, and only after a career change put me at the income level required to qualify for a $180k mortgage. I also has to borrow the down payment from my in-laws.
Owning a house is a privilege and a huge financial responsibility, which, until one is lucky enough to achieve, one cannot fully appreciate.
The entitlement mentality of some Americans, sponsored by the left, is wrong and unfair.
The American Dream is turning into a nightmare thanks to the political morons that have twisted what once was seen as a privilege to a right (home ownership) with their social engineering policies.
I say NO to the bailout. Let the market adjust like it did during the dotcom boom/bust.
It is worth a few minutes to listen to what Rep McCotter (R) 11th Congressional District Michigan has to say about this issue. Go to YouTube and do a search for “McCotter” . . .
Interesting Article on Obama, his radical associations and our Economic Crisis.
http://www.americanthinker.com/2008/09/barack_obama_and_the_strategy.html
The free market ( use DJIA as a benchmark). Is really the best indicator of the future value of a major decision. It is millions of individuals and groups allocating dollars according to their perception of risks and rewards.
After the initial crisis mongering, it was no wonder the market dropped on the news the bailout was dead. However as more and more is learned by the investors, the market isnt continuing to tumble. If the original bill passed today, I assume the market would tank as knowledgeable investors would understand what a crappy deal it was.
So, know that the “financial crisis” is being studied more and more.. and knowledgeable investors realize that saddling the country with debt and inflation is a bad idea.. dont expect a huge pop if some crappy bailout deal is passed. Expect a pop if there are benefits to the market.
It wasn’t a bail out, it was a rip off. Throwing good money after bad is in5an3.
And your water and rocks analogy is completely bonkers. My Economics professor wouldn’t have tried that, he would have gotten laughed out of class. ‘course, that was back in the 60′s and things were different. Students were expected to think and to question their professors.
I would have suggested using some of that capital to buy a truck, fuk that river sh1t.
“A well-informed mind is the best security against the contagion of folly and of vice. The vacant mind is ever on the watch for relief, and ready to plunge into error, to escape from the languor of idleness.”
Ann Radcliffe, The Mysteries of Udolpho, 1764
bailout plan is designed by the enemies of American people
and
is going to target MIDDLE CLASS AMERICANS
We don’t want our tax dollars to go to the pockets of billionaires, owning MAJOR BANKS and bankrupt corporations!!!
WE WANT CORPORATE WORLD TO VANISH
WE WANT ECONOMIC POWER RETURN BACK TO AMERICANS
Hey Bill, chk your math. 300 million people times 1 million bucks is 300 trillion. Even the Dems couldn’t give that much away.
Two unpopular thoughts-
One the economy must tank occasionaly to get rid of the deadwood and unprofitable vetures. Subprime loans anyone?
And two, in the eighties the upper echelon business schools started pushing quartely maximising profits. This meant planning for the quartely results instead of looking at the future returns. Add government interference and you have a bust.
The bail out only prolongs the pain and punishes those who played by the rules.
demosthenes:
“Americans making foolish decisions under duress, panic and in haste is no news to me. Iraq war, anyone?”
The problem with Americans is they blame whoever took action with their supports when things quieted down. They seldom take responsibilities.
After Dow tanked almost 800 points, they blamed House Republicans for voting against the bill, eventhough those 1000 to 1 phone calls forced the Representatives to vote no.
The problem is the American people who keep electing scam artists to lord over them, then complain those politicians are looking out for themselves and their cronies. If they really wanted change, then vote the bums out.
We don’t need to look far to see accomplices and enablers in this mess.
harry:
“The people could be wrong. The markets are so intricate the greatest experts cannot predict what will happen. The general investor, meaning me and you, are the last people to know the insides of finance. So when we direct our representative to vote a certain way we could and probably are making a big mistake.”
Hey, we need a class of people who “understand” to make decisions for us. Like setting up a Poliburo to make decisions for us to follow? Just remember, the experts’ expert manipulation of the markets, mortgages, and debts brought this mess upon us. Yeah, they know what they are doing, and we rubes must follow.
“Do the passengers on an airplane make piloting decisions?”
Yeah, but I don’t have to bailout the pilots with my money, do I?
If the experts know more, then play with their own money. I admire Warren Buffet. Yes.
When pilots made bad decisions, I got paid. Or my family got paid. I do not pay them. Right?
“Mark-to-market accounting rules have turned a large problem into a humongous one. A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values.
For example, the prices of assets on the books of Washington Mutual, when it was bought by J.P. Morgan at a fire-sale price, were cited as a reason to mark-down the assets on the books of Wachovia. This, some say, forced the FDIC to arrange its sale to Citibank.
The same is true of what happened to Fannie Mae and Freddie Mac, which had positive cash flow when they were nationalized by the Treasury. Here’s something you won’t believe: Fannie Mae and Freddie Mac have not drawn a dime from the Treasury’s $200 billion facility that was created to bail them out. It was the use of mark-to-market accounting that allowed Treasury to declare them bankrupt. On a cash flow basis, they were solvent.”
http://online.wsj.com/article/SB122282734447293049.html
That is what we do when we listened to experts. Mark-to-market was a Sarbene-Oxley rule to take care of Enron-nesque problems. Self-proclaimed wise men set wise rules, deny responsibilities, make more wise rules.
Confucius said: If wisemen don’t die off, grand larcenies won’t stop.
The most valuable assets that wisemen robbed us of are our common sense, self confidence, and judgment to distinguish between right and wrong.
No, they don’t know better than we do, except they know how to cover up their ignorance and hold us responsible for their mistakes.
The people could very well be wrong. Blindly believing is the number one mistake.
“After Dow tanked almost 800 points, they blamed House Republicans for voting against the bill…”
Who blamed House Republicans? The media? Sorry, but they are not the people, OK?
If you want this bailout to pass both houses, you need to give the homeowner’s something, even if it’s a glimmer of hope. Then, those politicians who are facing a reelection will look like heros.
I am in Ft. Myers, housing crisis central. My business is foreclosures. I see 4 types of people who are being foreclosed on.
The first two types should not be bailed out. They are the types that lied on their mortgage application. The ones that said that they were going to make the property their homestead, but were really investors. They lied to get 100% financing. The second type is the illegal immigrant who can’t legally hold a job or even have a driver’s license.
The second two types should be bailed out. They are the families that are caught with the spiriling interest rates. These people are not the accountants or finance majors of the world. They are the teachers, nurses, and policemen who relied on the financial system to tell them that they “ok” buying a house when our houses were becoming out of reach in this market. They ‘betted’ on the fact that housing prices would continue to rise, a lie that the US Government helped to create. So, now when the US Government does not want to bail “us” out but wants to bail out Wall Street, there is a backlash. Ya think?
The other group that perhaps should be bailed out are those who were in the construction and real estate industries. These people have been out of work for some time from our crash. They need employment retraining and their mortgages graced until they (or the housing/construction) gets back on its feet. Again, they relied on growing their businesses to meet the false demand that the hurricane called “Freddie and Fannie” helped create.
Lee County hired back its retired judges. We are now getting through the foreclosures in a speedy fashion. We are at 6 months, instead of 18 months. Speedy foreclosures help purge the system and create housing price stability. Loans are very hard to get, because appraised values are very hard to figure out.
Congress needs to give judges the power to bail these people out, by giving the judges sound guidelines. Something like 3 percent over prime, 20% debt to earnings ratio, and legthening the loan terms. Judges can do it with 1 hand tied behind their backs. Judges handle financial mattes all the time: divorce, bankruptcy, business law, etc.
Freedom is just another word for nothing left to lose.
To wpb:
I read the article from the link you posted. It’s a really great insight into our system’s needs in government. But I have to say, I think that the crisis should be less driven by political parties and should be more corrected through bipartisan agreement. But politics in the sense of governmental regulation needs to occur and that was a good point from this article.
I completely agree that “it can best be understood by someone who approaches it from a moral standpoint, since economics makes significant assumptions about both human nature and proper behavior.” Great writings.
And for this article, the rocks and water analogy is great. I think we should try to keep our “water” levels low enough to see the “rocks” after this mess is resolved. Keep our eyes on what’s going on and tone down our materialistic impulses.
Dear All–
Thanks very much for your thoughtful comments. I especially want to thank “Freedom,” immediately above, for providing a very helpful on-the-ground view of what the housing spiral looks like in practice.
Thanks, too, to “ex-fetus” for calling my analogy “bonkers.” I rank it up there with the time a commenter referred to an essay I wrote as “horse-hockey.”
I am not being ironic here: Keep me honest!
Thank you.
–Brad
I have to tell you, the latest version of the bail out bill should NOT be passed as well. They loaded it up with “sweeteners”. The bill does nothing of substance to help the credit market going forward. All it does is transfer cash from the taxpayers of the United States to banks and Wall Street.
Here is what needs to happen. First, the government can take the bad assets-but in return it needs preferred shares in entities-just like Warren Buffett received from Goldman. Preferred shares will act as a counterbalance against management-dividends and profits will go to the preferred shares first. Second, executive pay should be limited for any company that takes tax dollars. Third, the FDIC limit should be raised to reflect inflation and to encourage greater saving. Fourth, going forward, all of the OTC derivatives that can be, should be cleared through a privately held clearing house.
This bail out is a bust. No Republicans should vote for it. McCain should not support it.
I thank Brad for reading my post. I sometimes think that no one hears me.
Lee County courts need to hire about 3 more people, so we can get through the 22,000 foreclosures that are still out there. The few judges hired a a few months ago are really speeding things up, and I’ve seen a record flurry of cases getting out of foreclosure thanks to the retired judges coming back. Three judges may cost about $300,000, a small pricetag for market stability.
For the most part, I see banks taking back the deeds and then selling the homes. Newer Gulf access, waterfront homes in Cape Coral are being listed for $300,000, a fraction of their estimated $900,000 price tag a few years ago. The bank puts the house on the market on Friday, and by Monday has multiple offers. The houses I watch have 30+ offers, and the banks take the highest offer…several thousand over the asking price. Carpetbaggers, Canadians, and Europeans are snapping them up. It’s best to have cash, as appraisals are hard to come by. Without an appraisal, you can’t get a mortgage…. Anyway, a German television crew came here to do a documentary/news story on the foreclosures. The crew rode on a “foreclosure tour bus” (yes, capitalism is good & well here). Germans and Brits flock here.
In short, I think the free market can take care of itself. But if there was any help to give to those who are losing their homes, it should be giving them a chance to requalify for a modified loan. The other help is a few more accountants and a few more judges in the high foreclosure rate places.
That being said, the Florida Bar is stepping up to the plate by offering free legal help to distressed homeowners who are facing foreclosure. See http://www.flabar.org . The attorneys in my state seem to “get it” that the average person needs advice and representation when dealing with institutions.
Yes the water that was floating our boat for so many years was the excessive liquidity of the Greenspan years which juiced the economy and cushioned us from downturns but you don’t get something for nothing and the aftereffects / hangover of this loose money policy gave us the stock market bubble in 1999 and now the housing bubble.
The plan is a bad idea on so many levels.
Dave
http://www.islandersoftware.com/weblog/2008/09/27/just-say-no-to-the-bailout-plan/
What I find amusing is how Congress is planning on soaking the rich yet again by taking away their ‘golden parachutes’.
Socialist haven’t learned after geting hit on the head with it countless times that you CANNOT ‘soak’ the rich. They just take THEIR money and hire somebody to put it where Congress cannot get at it.
All those golden parachutes are mostly made of stock options. So the Bail Out will make them rich anyway by propping up stock prices.
Instead of a golden parachute, they have golden whoopie cushions. Either way it’s a soft landing.
The Market is overdue for a crash and crash it will. The bail out won’t change that, especially since the bail out doesn’t address the issues that contributed to the crash. So the guys that got their golden parachutes pulled will land on their golden whoopie cushion and watch the crash while laughing at the poor suckers left holding the bag.
Then when this bail out doesn’t work, there will be another, then another.
Congress critters have a genius for getting elected. Beyond that, most of them give IQ points to a fence post.
Houses serve two functions. The first is shelter, the second is squishy self esteem, dream functions.
The government has done everything possible to price out basic shelter. Excessive building codes, land regulation, paperwork, taxes, permits, all have restricted and priced up supply. Bad.
McCain, Obama, Congress have all stated that they will do what they can to ‘keep up’ prices.
Which of course means more taxes for Section-8, housing projects and such. More taxes to ‘assist’ people that took mortgages on overpriced/overcosted homes. So, we are all going to tax each other to support each other.
Yeah, that will keep working. We need to bring in another sucker to hold the bag, so to speak.
The second is that thinking everyone would get into the building industry and sell to each other, borrow, flip, securitize forever. Wrong.
Just for laughs, anyone care to guess what future problem will be created by today’s Congress’s ‘solutions’?
It all still boils down to the Community Reinvestment Act (CRA) that loaned money to people who were clearly NOT qualified. Add to this relaxation of policies in the mid nineties, plus a system that “forced” banks to make loans or face fines & media exposure as racists, & what we got was a mountain of bad debt.
The “bailout” helps the financial industry calm itself down. Its help to consumers is minimal. The “pork” add-ons are despicable. Feeding activist organizations with funds when it was those very groups who pressured for the less than desirable lending practices.
This was all compounded by some politicians refusing to pass regulatory actions. Barney Frank was a main player as he told those seeking regulation, that scaremongering and forecasts of financial doom were only tactics to discriminate against those most in need!
In short, we have someone pushing for social engineering telling us to open our pocketbooks, even when logic dictates otherwise!
People don’t let you Congressmen allow the destruction of our Liberties!
Bernanke,Greenspan,Frank,Cantor,Goldman&Sachs is it me or does this not smell “kosher” pun intended.Tell these wall street criminals and Wolf Blitzer to shove it!!
Bush is up against a wall. Our creditors (the Chinese, the Saudis, the Japanese, etc) have told him he has a few days to stabilize this situation by throwing money to cover their investment or else they will dump everything (stocks, bonds, dollars) on the market rendering our economy bankrupt (no buying oil, no imports/exports, complete cut off business with the world).
That is what is causing this “bailout” rush. No matter the cost, Bush has to rescue the market or they will toast us.
Bush won’t admit the threat because he knows that if “We The People” realize we are being held hostage by foreigners there will be a total popular uprising against any deal with the world by our people (and maybe against the government in general).
Congress won’t admit the threat because some of them are afraid of “We The People” revolting, but mostly they figure they can make out like bandits on earmarks for this trainwreck (and cover their butts for causing it to happen).
looks like bill o’reilly just ripped good old barney frank a new one and this time barney probably didn’t enjoy having it ripped.never really thought much of bill, but i got to give him props he had “queenie”barney stuttering and stammering like a caught rat.let’s keep exposing these parasitical creeps
Wayne,
He who has the gold makes the rules. The Golden Rule.
I’m hopeful proposal, now passed, will do some good. They have to do something. But in the meantime, I found a hilarious song about it called “Bailout Man” to lighten a grim subject: Bail out song
what did you expect when Goldman&Sachs is the leading contributor to both Obama and Mccain’s campaigns.this dual party system is a load of crap bought and paid for by the “kosher” New York banksters and championed by a corrupt deceitful marxist media.vote independent!!!