Bailout -- or else?

Don't most people have a 401k or an IRA? When 1.4 trillion dollars disappeared yesterday, did these people think "Alright those Wall street fat cats are really getting theirs!" We are all Wall Street. What is wrong with America?

I can remember as a child watching my dad some nights take leftover cornbread from dinner, but it in a tall glass, fill it with milk and eat the mush with a spoon.

Hey, that's what I call Cornbread and Sweet Milk. Love it!

Don't most people have a 401k or an IRA? When 1.4 trillion dollars disappeared yesterday, did these people think "Alright those Wall street fat cats are really getting theirs!" We are all Wall Street. What is wrong with America?

Have you seen the Dow today? It's up over 200 points. The things that those $1.4 trillion dollars represent didn't disappear. The market is up, the market is down; that's life. The real things in life won't be taken away by a few bad days on the market. Good things, like cornbread and sweet milk.

The problem is, Rod, you've got it backwards. We are going into a Recession with or without this bailout package. If we say yes to the Bailout and continuing to pump liquidity into the credit markets (essentially creating billions or trillions of dollars out of thin air and flooding the world banks with them), we say yes to turning that Recession into a Depression because we'll have totally undermined the dollar and caused the collapse of the dollar-dependent global financial markets. If we say no to the bailout, we'll have to tighten our belts for a year or so. Then, we'll have about 5-10 years to make radical and lasting changes so that we don't kill the dollar with the impending Boomer entitlement crisis and experience a Depression *then*.

The "let 'em burn" sentiment that would accept/prefer a Second Great Depression to violating principles via a bailout (regardless of details) brings to mind the following lines:

"Let justice be done, though the heavens fall."

"Civilizations have the morality & ethics that they can afford."

Rod,

your discussion presupposes that the choice is between chaotic, economic crash and massive government intervention to preserve order.

What if the real choice is between massive economic downturn now and massive economic downturn later. It is not clear to me that the Paulson proposal actually stabilizes anything. The taxpayers get stuck with a massive increase in the deficit that I am not convinced we can ever pay back.

My principle in opposing the bailout and telling my representative to do likewise was based on the notion that an economic downturn might at this point be inevitable and its severity beyond our control. In that sort of equation, I would rather not give unlimited powers to the executive branch.

The Paulson proposal puts an inflated price on mortgage backed securities, which have little real value. If the government must act, I would rather see them purchase the foreclosed houses behind the worthless securities and sell them at their current market value. Although I doubt that those homes will ever be worth the inflated prices they used to command, they do have some value. This could stem the losses to banks and may actually help shore up the housing market. Then again it might fail dramatically.

Anyway, it is an interesting time to be an American. I need to get home and plant my fall lettuce crop.

The question isn't the desirability of a depression, no non-deranged person wants that, but how to best avoid it. This bailout is simply going down the same path that Hoover and Roosevelt did, and would likely have the same results. Throwing more money at a problem that was caused by too much money in the first place is unlikely to help. Some economic pain in our future is unavoidable, the damage has already been done, we've been partying for 20 years, now its time for the hangover, continuing to party isn't really a good idea.

WRT bailout & recession:

As I understand it, the choice isn't between bailout or recession. The latter is probably inevitable at this point, owing to our massive debt overhang; see, e.g.,

economistsview.typepad.com/economistsview/2008/09/fed-watch-regar.html

for details.

The choice, rather, is rather between a recession that is somewhat more painful than normal, and a Second Great Depression brought about by the annihilation of our financial system:

blogs.ft.com/maverecon/2008/09/those-whom-the-gods-would-destroy-they-first-make-mad/

Any bailout ought to aim at preventing this eventuality by preserving (by whatever means) some semblance of a functional financial system.

I've spent time in the last few days doing some research and have come to the following conclusions:
1. Our situation today is virtually identical to the late 20s, ealy 30s.
2. We have systems and programs in place which would prevent the prolonged suffering experienced in the Great Depression from happening again.
3. Houses and stocks are overvalued and need to correct downward to more realistic values.
4. This inflation, and the corresponding over-extension of debt got that way due to foolish monetary policy.
5. That monetary policy was the result of trying to avoid the pain of normal cycles of correction which prevent things like housing and stocks from being very over valued.
6. This plan is based on that very same urge to avoid a necessary correction and, like all of the policies which went before it, will only delay the day when we pay an even uglier, higher price - and that's if we're lucky.

Based on all of this, I am very much opposed to this bail out.

Keeping in mind that Rod is the messenger here, the blog title is a lie: it is not bail out or bust. There are viable alternatives being passed over mostly for their simple failure to protect those who have been profiting from the mess they helped to create.

Listen to MI, people. He knows whereof he speaks.

I'm off to Japan. I hope there's a functioning financial system over here when I get back.

Do people realize that there are emergency FDIC powers which the president has not signed which would help prevent insolvency of many of these banks?

I've heard rumors of such powers; could you provide a source (Preferably a US code citation)? Tyler Cowen mentions something like this:

marginalrevolution.com/marginalrevolution/2008/09/should-the-fed.html

but gives no cite.

As an aside, it does appear that the Fed has authority to buy up illiquid securities:

volokh.com/posts/1222779135.shtml

...although presumably they'd still run up against the statutory debt limit (which the Paulson Plan would've lifted).

Depression? Hah! There is just too much money and creative energy and information on the planet right now. Fear may be rampant right now, but greed never goes away. New money and initiatives formed by pockets of risk takers will appear. But now on a global scale with instantaneous information awareness that will catalyze any recovery.

Let me reiterate that. Global information awareness will not allow 1929 to reoccur. Just as it precludes another sneak attack on Pearl Harbor. There is just too much information in play. I was watching Fox Business News. And already there are creative people looking at creative ways to find and exploit opportunities embedded in this scenario. There are still tons of needs out there. What, do you think the rest of the world is just going to roll over and play dead because Wall Street got lost in its hyper-dimensional derivative space? People will still buy and sell because they have to. And not only that, but because they WANT to.

And the creative risk-taking types are just too energetic to sit back and not respond to these market gyrations. And unlike 1929, information about opportunities is viral. It's those risk takers who will catalyze a much more rapid recovery than even in the pre-Internet post-1987 period.

This whole thing reminds me of a Seinfeld episode. Kramer was in an airport lounge making bets with a Texan on which flights would arrive and depart on time. The real asset, (wealth) was embedded in those airlines delivering those passengers in those airplanes. Kramer and the Texan had invented their own little derivative sideshow. It was a function of real assets but the gains and losses between the two were totally disconnected from the fundamental the value creation. So when that guy writes "...$1.2 trillion in wealth vanished yesterday" it's the same thing as Kramer losing those bets and the government bailing him out.

So subsidize stupidity? Heck no. Squeeze out the bad money, get a new set of players, introduce corrected oversight and roll the dice again. This is like The Godfather when Clemenza was talking to Mike in the basement about the upcoming war after he whacks Sollozzo. Every 5, 10 years it’s gotta happen.

All I know is that there has got to be a way to make a bundle of money out of this mess and I'm working on figuring that out, not worrying about society or culture.

"their affirmative action lending policies"

Ahhh, there it is, Lancelot. The standard conservative response to every problem: Blame the poors!

Put me down against the Chicken Littles.

It's worth noting, too, that during the Depression food prices were kept artificially high by the Roosevelt administration. While our grandparents were eating mush, federal employees were destroying food stocks to prevent price reductions. Not all interventions are a good idea. The rushed nature of this one doesn't bode well. The only regret I have about its failure is that Bush and the Dems will cook up an even more disgusting pile of manure and rush it through.

They say that heart disease and similar things went into near non-existence in some European countries when the effects of the war made eating meat a luxury and people had to subsist on beans and bread and vegetables.

If people have no money for fast food, we may solve our medical costs crisis as a result of this coming recession.

This may be a gift in disguise.

Hmmmm... Seems there's a lot angst out there. Just last week, they were saying that the US will be irrelevant...

www.breitbart.com/article.php?id=080930121824.24k1fx4j&show_article=1

now they're hollering "SAVE US"!!!!

Ok, I'm up to the challenge.

wholesale government reform.

1. Abolish all income taxes, switch to retail only sales tax.
2. Abolish death taxes, capital gains taxes.
3. Drill here, drill there, drill now, drill for everything.
4. Regulatory reduction so we actually CAN do something besides waddle around in armor, unable to accomplish anything.
5. End all - ALL entitlements, including Social Security. It's going to take 50 years, but that's no excuse to not start now. First, conversion from entitlement to voted amount benefit, and then eventual turnover to the states, with commensurate tax reductions on the people. I doubt this will be "pure". I'm sure that you'll find that there's perhaps 10% of our current entitlement mess that will be found useful enough to keep, just so long as we stop defining it as unlimited dining for all who come, and instead start controlling thier costs.

Yeah, we can carry Europe and hte rest of the world if we need to.

When the going gets tough, the tough get going.

What are you all sitting there for?

I can remember as a child watching my dad some nights take leftover cornbread from dinner, but it in a tall glass, fill it with milk and eat the mush with a spoon.

My dad used to do this too, only he used buttermilk. It grossed me out completely to see him eat that! He grew up dirt poor in the Kentucky mountains during the Depression; mostly, they ate beans and when they ran out of beans they had cornbread mush for dinner. Dad didn't own a pair of shoes when he was a kid; and for the rest of his life he was usually barefoot whenever he could be and his favorite foods were bean soup and cornbread mush!

My mother used to tell me what her childhood during the Depression was like; they were poor but not as poor as my dad's family. My grandpa was a factory worker, he often found work as a "scab" replacing striking union workers. Mom remembered him getting knifed on the way home from work, and having rocks thrown through their windows and threatening notes from the union workers. Apparently collective bargaining and organized labor were concepts lost on my grandpa. He was an immigrant from Eastern Europe and did not see the logic of going on strike when times were hard and he had six children to feed. Mom also remembered that the family raised chickens for eggs and meat, and one time Grandpa got the idea to raise rabbits for meat but the children got very attached to the bunnies and no one could bring themselves to eat the stew they ultimately became.

Both sets of grandparents were better set up to weather hard times than I would be, I'm afraid. Dad's family had a small farm; Mom's family lived in town but had a large enough yard for chickens, a large vegetable garden, fruit trees, and a grape arbor. Plus, my Appalachian forebears were hardy folk accustomed to hard work and near-starvation from two centuries spent living in the mountains far from civilization; and my Hungarian grandparents had only recently left their isolated village in the Carpathians where their way of life had been unchanged for centuries. My mother recalled that my grandpa had made most of their furniture himself, and my grandma had woven the rugs, sewed the curtains, sheets and quilts, and was well versed in the art of "use it up, wear it out, make it do or do without."

Me, well, I don't know how we would weather economic collapse. We grow vegetables, but not enough to last the winter; my husband doesn't hunt; I have been known to hem pants with duct tape or staples rather than sew, and while I like knitting, there is probably a limit to how many lopsided hats and mittens we will need. On the other hand, I do at least know how to cook using ingredients rather than processed crap, and we have much less debt than most people I know. But the fact is that my grandparents' expectations of life were quite low -- not dying in childbirth and not starving was quite enough for them, whereas I was brought up to think a rewarding career, nice house, nice car, and college educations for my kids were inalienable rights.

\

Rod, I highly recommend Richard Cohen's column in today's WaPo, "Topical Depression: Bernanke Knows What We Have to Fear." Cohen talks about how we forget that the last Great Depression contributed mightily to the rise of Hitler's Germany. Think it can't happen again? Worse could happen, in my opinion.

I think the Bailout is terrible, except for the alternatives. We have to bite the bullet, and straighten out the financial and regulatory and mortgage mess after we solve the immediate crisis. And tell the deregulators to "take a hike."

Like the market that is apparently unable to value collateralized debt obligations?

Even Karl Marx believed that capitalism was eventually self-correcting.

The idea that Congress can, should, or is capable of...

Have you learned nothing the last month?

Douthat's idea -- and to be fair to Ross, it's not really an idea he's explicated, but a notion he's floated -- is that as awful as this bailout proposal is, the cost to society in terms of the instability a Great Depression redux would cause to the civic order would be worse.

Anytime we start putting principles ahead of living, breathing people, people whom God loves far more than we are capable of loving those we love the most, then we've gone off the rails.

Jesus gave us two principles - Commandments, actually: to love the Lord with all our heart, soul, mind, and strength; and to love our neighbors as ourselves.

If we let any principle trump these, we've put it ahead of what Jesus called the two greatest commandments. That would be a big 'oops.'

So if we have to violate some cherished principles in order to avoid throwing the world into chaos, then it's time to violate some cherished principles, because if the world is thrown into chaos, millions of real human beings whom God loves will pay a heavy price.

Mind you, that still doesn't provide any guidance on whether to support yesterday's bailout bill. There's nothing I've seen that says the bailout has to take place this week, and I'm a good deal less than convinced that yesterday's bill was anything more than a very, VERY expensive stopgap. I personally believe we can do better, and we've still got time to do better. But that's a whole 'nother debate.

Loudon-is-a-Fool wrote: "Also I peg Kirk as a mega fat cat for whom the current volatility presents a buying opportunity..." etc. etc.

Would that it were true! No, I think you are confusing me with another poster.

Time to ask my stupid questions: I hear every week or so about some bank, investment place, or similar failing--but they all seem to be bought up right away by another such creature and all the news reports talk about how smart the second organization was to buy the first at 'fire sale' prices. That sounds to me like business is working the way it should. I hear about smaller community banks saying they are fine and people can still come to them, I see folks at ATMs getting out the usual $20 bills. That seems like business working as it should. I just don't see or hear a crises. I do understand that there is a problem with credit between banks, but between when this first started and now we haven't fallen off a cliff. So perhpas in hindsight (of 2 weeks) we could have come up with a better, more reasoned plan that we could have actually passed without all this handwringing and drama? No?

how many times are you willing to let them go back to the well? [...] what measure of retribution will be due the perpetrators?

Fish - given my druthers, I'd only let financial institutions "go to the well" once. I'd require them to write down their toxic assets to realistic values, and then recapitalize them either via debt-for-equity swaps, or direct injection of public funds, or shotgun marriage to a stronger institution. With solvency restored, the institutions in question should have no further need of government aid.

As for retribution, the wipeout of existing shareholders, and the deletion of senior management's bonuses, "golden parachutes", etc., should be a sine qua non of any government assistance in restoring solvency. I wouldn't have a problem with prosecuting senior management, provided no ex post facto laws were involved.

As a former Journalism major who's in a current state of extreme disgust with the broad state of the profession, I have a hard time believing all the hype.

Every news outlet was selling a bailout to the people last night. They all crowed "America doesn't want to spend $700B on a bailout, but they just lost $1.2T yesterday!"

Yes, let's mortgage away our principles to ramrod through a bailout package that will only cede the Executive Branch more power without oversight, and without its decisions subject to a court of law, because the Dow lost 7% yesterday. Some publications say it "plunged". 7% is a dip, not a plunge, a plummet, or a crash.

And look...the Dow gained back 485 today, effectively netting yesterday's so-called "crash" a 292-point deficit from Friday. BFD.

I'm single. And to be honest, my job's on the bubble if the market really does head for the drain.

What I'm most afraid of, however, has nothing to do with whether or not my future kids will be eating squirrel (truth is, we'll still probably have more than most people in most nations), but that we can all be cowed by our media and politicians in an effort to give them EXACTLY what they want: more money and more power, with less accountability.

That's what our president's Iraq War was all about. And we kissed goodbye a couple of amendments and habeas corpus in the process, all in the name of fighting terrorism, as we watched the colors get closer to red on the Homeland Security scale.

This time, they're telling us that we need to give them what they want, for fear of our jobs, our savings accounts, etc. Excuse me if I don't trust those who made this mess in the first place, ceded themselves untold powers all the while, and are now back for money and power, using the same fear tactics.

If things really do get bad like they did in the Depression, there'll be even more impetus for us to live more communally, and more simply. And that lifestyle wouls certainly have its trade-offs. But I'd rather accept those than be ruled absolutely by an increasingly tyrranical government and financial system that will only continue to exacerbate problems, profit from fear, and all at my permission.

Yes, it's being overhyped. I can't believe how many people are falling for the media mania about this. What fools they must think we are. The media survives based on panics and crises and bombshell stories of the week, etc. This is another news-grabber for them. And the Washington politicians are using it to make us think we need them to save us. They know that their approval rating is at an all-time low. If they can "save America" from economic disaster [/sarcasm], then they expect us to be eternally grateful on November 4 and keep them in office.

Idiots.

Corn bread and milk? That's actually a standard dish in the South! Definitely not an indicator of poverty (although it does make for a tasty treat that is cheap). My Dad still eats it every time my mom fixes cornbread (and he did not grow up in the depression). While I don't like it as much as my Dad, I still think it is quite tasty.

Not being southern, I haven't heard of that, but we did grow up with a mom who made polenta, of which leftovers got cubed, fried in butter, and served with syrup. My little sister called these "her scrambled eggs" since she was allergic to actual eggs.

There's a lot of fear-mongering going on. Everybody's got an anecdote. Here are some of mine.

Years ago for a grade school project, my daughter interviewed her now-late grandmother about growing up during the Great Depression. I still remember her answers. "We didn't notice it, hardly." They really didn't. They lived on a farm in rural Missouri. Her mother had an egg business. Her father farmed. They ate vegetables when they were in season, and a lot of sauerkraut otherwise. (I still remember the huge crocks being auctioned off when the farm was demolished for a highway. Ah, progress.)

My own distant farm relatives just kept milking the cows and plowing the fields, as well.

My children's grandfather grew up in Chicago. His father (their great-grandfather) made money during the GD, buying and selling 2nd mortgages, as well as running a busy dental practice. Their grandfather used to sneak into the cemetery near the Howard Street station and steal the mafiosi's flowers from their graves, then re-sold them on the main street up there.

A dear friend's grandmother went to art school in Brooklyn, and had great stories of growing up in NYC at that time.

I don't mean to minimize the sufferings of those who had it bad. But the GD was not a universal disaster for everyone. The country survived, and it will survive this time as well. Hopefully, though, it will serve as a wakeup call to end the madness of "endless" credit, consumerism, and development.

A friend of mine is a contractor, his main business consists of flooring, finish work, and tile. I asked him, so what's your builder friends doing or planning.

He looked at me and said. "Keep building."

Every farmer I know is harvesting and/or getting ready for fall planting / soil work in preparation to plan in the spring.

We're still planning to take our church youth group on a 3 week trip next August.

I got a phone call today from a leasing company that turned me down a few months ago, and they're offering funding for new equipment and inventory now.

The sky has not fallen.

Things my get rough. Things may get tough. We're tougher than they are. So are you. You just don't know it yet.

here's a great article on "deregulation" and some myths about it...

www.wsj.com/article/SB122282635048992995.html

Truth wins out eventually...

"All I know is that there has got to be a way to make a bundle of money out of this mess and I'm working on figuring that out, not worrying about society or culture."

There, in a nutshell, is how we got into this mess, and why we're having such trouble getting out of it.

If you think you're immune to a severe recession, think again. Social disruption will affect you. Public-health crises will affect you. A deteriorating infrastructure will affect you. Growing political extremism will affect you. The decline of this country will affect you.

If you think you are somehow independent of this society, you are fantasizing. The rest of us can no longer afford to indulge your fantasies.

the GD was not a universal disaster for everyone. The country survived, and it will survive this time as well.

Paraphasing a line in "The Forgotten Man": The Depression wasn't so bad if you had a job.

I agree that our country would probably survive a Second Great Depression. Whether the Republic would survive, I'm not so sure. A nation impoverished...large masses of unemployed...existing political system discredited for leading the country into such hardship...strikes me as perfect fodder for demagogues promising bread & circuses, "national greatness", etc.

Thanks, Ostrea. I agree completely. The least amount of regulation necessary is preferable, but "turning a blind eye" and hoping the courts will work it out some day is not what I have in mind.