Bush is Burning
September 24th, 2008 by jack
President Bush gave a speech tonight trying to tell the people why Congress should “[commit] so much of the taxpayers’ hard-earned money” to purchase “the troubled assets, including mortgage-backed securities, now clogging the financial system.” (Read the transcript here.)
Never mind how we got into this mess — the short answer is the socialism of the 1930’s New Deal, which created Fannie Mae. Now we need to look at the proposed solution. This is the gist of it:
First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.
In the short term, this will free up banks to resume the flow of credit to American families and businesses, and this will help our economy grow.
Second, as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply, yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages.
The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal.
Does anyone see the flaw in the plan? What “taxpayer dollars”? What “resources”? We are now nearly 1.0e13 dollars in debt. Where will the 7.0e9 dollars come from? You guessed it — more debt. So if these “troubled assets” were such a good deal, people would buy them instead of the bonds the government must sell to buy these “assets.”
The problem created by socialism, we’re going to fix with socialism.
The word BOHICA comes to mind.
This entry was posted on Wednesday, September 24th, 2008 at 11:35 pm and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
September 25th, 2008 at 1:02 am
Obviously the troubled assets are not a good deal, but they are tangible assets, right? Earlier Ace wrote that it’s significant underlying all the mortgage backed securities there are actual houses whose value is not going to go down to zero. So it’s not like the government is buying vapor.
September 25th, 2008 at 5:35 am
Interesting take, “the problem created by socialism”. Before someone was saying the problem was created by greed? I don’t want to get into the usual circular argument with you that is, “socialism caused this problem because socialism is the problem”, but why is it that it seems of late that the problem is a clear example of why strict capitalism doesn’t work, the same way communism and socialism don’t? Greed seems to ruin all ideals equally.
September 25th, 2008 at 6:04 am
Because it was NOT strict capitalism, Kevin. First, Fannie Mae was created in 1938 as part of the New Deal socialism, to give people the ability to buy houses. The banks would not give people mortgages, because they were poor risks. But with Fannie Mae, the government would buy the mortgages and take on the risks. It was, until 1968, part of the government. (A government company — it doesn’t get more socialist than that.) In 1968, to get the losses off the books, the government “spun off” Fannie Mae. However, they kept oversight, and also created Freddie Mac as “competition.”
Why was there no private competition to Fannie Mae? Because it was making stupid bets and losing money. If the capitalists had figured out a way to make money doing what Fannie Mae was doing, they would have been doing it.
The banks were also not models of capitalism, because the federal government, through Janet Reno, was suing them left and right for “redlining” — making bad loans to people who could not afford them.
Greed does not ruin capitalism, but is actually NECESSARY to it. If people did not want more, they would have little incentive to invest and invent. The problem is, however, exactly what we are seeing happen now — the risk-takers’ getting the rewards for success, and the taxpayers’ paying the price of failure. That system, set up by FDR in 1938, just encourages the risk-takers to take risks that they would not do if they had to pay for their failures themselves.
That is one of the keys to capitalism — you must let the winners succeed and the losers fail.
September 25th, 2008 at 7:54 am
The mortgage backed securities that are being bought by the gov’t bailout do have an unknown value, which is the risk obvioulsy. I have heard “pie in the sky” estimates that the govt could actually make money on the purchases, and as doubtful as I am, apparently the Savings and Loan bailout in the 80’s did eventually pay back the gov’t.
Getting credit flowing and the the economy wheels rolling is the key. Why not eliminate the capital gains and corporate taxes for a year, the influx of foreign money would be huge. I’d like to see figures of how much these 2 taxes bring to the gov’t coffers annually, since elinimating them might be the equivalent of the bailout.
Basically, why charge the taxes in the first place? I’ll tell you why, the gov’t likes to control the flow of the money. McCain should be smart about this and insist on the abolition of these taxes.
September 25th, 2008 at 10:32 am
Damn that infernal Rooooosevelt and his dadburned socialism! Why if that Roooooosevelt shows his face over here he’s gonna git a faceful of buckshot!…
September 25th, 2008 at 11:49 am
Cmac, yes, we do not know the actual value of these securities, and also the intrinsic value will follow the market.
But, is it all gloom and doom ? The existing homes inventory fell 7% in August. Is this a trend or a blip ?
September 25th, 2008 at 11:59 am
Dan, Your question is the crux of the arguement.
The theory is that the overall economy will improve with the bailout, as a result the housing market will stabilize and the value of these securities will as well.
It is just a theory.
September 25th, 2008 at 1:25 pm
“The banks were also not models of capitalism, because the federal government, through Janet Reno, was suing them left and right for “redlining” — making bad loans to people who could not afford them.”
what the hell are you even driving at? …that if the banks hadn’t been sued, all of a sudden the free market would have created an incentive structure through which they would have stopped making such loans? what, suing banks for making bad loans created a positive incentive for them to make more bad loans?
seriously, Jack. The free market is a powerful tool; so is fire, and both of those things will burn you if you let them run amok. case and point: the real world, right now.
September 25th, 2008 at 1:54 pm
The problem was caused by Gramm’s insistence that banks be deregulated. It’s idiocy to say that it was caused in 1938 by the creation of Fannie Mae. That SOLVED the problem of banks failing by the hundreds during the depression.
We’ve been fine until banks were deregulated allowing the growth of huge financial institutions with businesses across all financial sectors. This creates a ripple effect.
You’re also a fool if you think anti-redlining was the problem. No one said the banks had to make bad loans. All that was said was that you can’t deny a loan simply based on what neighborhood someone lived it. You actually had to take into account their ability to pay back the loan. What a concept!
The problem was caused by deregulation with huge financial institutions competing across many sectors across the entire country (unlike when we were younger when a bank’s scope only reached to the state borders). Once one company started making bad loans and improving their short-term financial metrics, the other (mismanaged) companies started doing the same thing to compete. This drove house prices up, and encouraged even more bad loans from folks without the ability to pay. Then once the bubble burst and folks started not making payments, the market softened, more folks were upside down on their loans, foreclosures increased, things snowballed, the financial institutions started failing.
So here we are.
Note that if we hadn’t invaded Iraq, we’d have the money!
September 25th, 2008 at 3:23 pm
Sanity, Are you talking about Glass-Steagell Act repeal ?
“The final bipartisan bill resolving the differences was passed in the Senate 90-8-1 and in the House: 362-57-15. Without forcing a veto vote, this bipartisan, veto proof legislation was signed into law by President Bill Clinton on November 12, 1999.”
Gramm must be a very persuasive guy..
September 25th, 2008 at 7:14 pm
Zimzo, Puffalot and Sanity, were you the three guys doing bong hits in the back of Jeff Spicoli’s van when you were supposed to be in econ 101?
September 25th, 2008 at 7:55 pm
Sanity, et al,
The repeal of the Glass Steagell Act was a bipartisan effort. It passed 90-8-1 in the U.S. Senate. There are two parties in the U.S., the STUPID party, and, the EVIL party. Any bill that passes with 90 votes in the senate is garunteed to be both stupid and evil.