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dogged
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Posts: 11
Joined: July 20th, 2007, 4:49 pm

optimal bailout

October 3rd, 2008, 10:01 pm

I am not as learned/experienced as the Folks in this forum. If all the current crisis is started or atleast is attributed maily to credit/lending and people of small buisness or for that matter people on main street are not able to repay in time sa agreed. I dont know exactly how correct is this bailout from the tax payers money. But if the crisis aroused due to repaying credit, why the govt. cannnot just lend some money to all the small buisness may be with 0% apr upto some fixed time..What I mean is that, IF some how Govt. can put money in small buisness/ main street by giving them a govt. loan, instead of bailing out big firms..doent the problem get solved more quickly. I mean why not Govt. act as a banker for a while..Is this not in accordance with the free market philoshophy?.
 
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EBal
Posts: 431
Joined: May 20th, 2005, 1:30 pm

optimal bailout

October 4th, 2008, 2:05 am

You are not alone thinking in this direction:Fix the Bailout to Help Homeowners "Even those political leaders that support the current bailout proposal don’t like it very much. The American people like it less. It creates a complicated bureaucracy, does not directly help homeowners and does not address the foreclosure crisis. ... The program outlined above is simple, achievable and equitable to all Americans. It puts families and homeowners first, solving the problem from the bottom up rather than the top down."Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System?"Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners."
Last edited by EBal on October 3rd, 2008, 10:00 pm, edited 1 time in total.
 
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croot
Posts: 104
Joined: July 23rd, 2006, 8:30 pm

optimal bailout

October 4th, 2008, 9:40 am

Question:will the bailout buy back worthless debt only, or also worthless options on CDS, CDOs, CDO squareds etc.. Is there some measure of what was "a decent attempt at making the economy work" and what was pure speculation/opacity?Remark: So after the packaged mortgages went bad, all banks feared some banks might go bankrupt. This disrupted lending between banks. Turns out all banks had more or less some exposure, and pretty much all banks wrote down something, reducing the amount of cash they could lend. At this stage however the credit tightening didnt need to spread to the industry. In a period where banks were suspect debitors, other corporates were still all good. Why then did the banks spread the credit tightening to the industry? 1: they are selfish morons and like to drag down others with them, hoping for a bailout. More likely though 2: each bank knowing full well the extent of its own exposure to speculative products on toxic debt, knew, given that the fan was hit, the exact amount they were to write down. And this alone was enough to tell them: keep the cash dont lend it, you ll be needing it soon to avoid bankruptcy. So the remark is: it's not a "defiance" crisis, rather every bank is in head deep, and that is why they created the nice recession in the real economy we will be enjoying now. Blather: In the same line, since now the plan is voted, it is time to distribute the blame and think of ways not to err in the same direction. To start, I say: let's forbid all options, traded and OTC. After all, it's been known for 30 years that options are more volatile than the underlying itself, and we have seen how resorting to options did not cure the "incompleteness of markets" ""problem"":In the beginning were corporate clients and they hedged with futures. Then they bought a call and hedged it with future. Then to hedge the call they bought 1st gen exotics. (Then some got distracted and tried to actually win a little money with said exotics.) Then to hedge the call's hedge more calls were needed. Then all these calls needed var swaps, then options on var swaps came along, and now humanity has found the way to have people buying var swaps on baskets of assets in differente currencies, resetting on absurd conditions.. which really have nothing at all do with mitigating the risk of corporate producers. So I say stop: let the banks act as insurers, offsetting the risks of one pool of corporate clients by having a like pool of corporate clients with the opposite interest. (Of course none of this is at all opaque and it would be difficult to siphon away billions in margin.) It turns out, if the sum of corporate interests do not even out, then they should change things in the real world. The capacity of derivatives markets to handle and reduce risk overall has never been convincingly proven to me. Up to this year, the ultimate argument was "it's a trillion dollar industry, and you don't just build a trillion dollar industry on balderdash". (Similar to the existence-of-God argument.) Unfortunately, it's become quite clear this year that balderdash, and trillions, it was. Anyone to join me in a worldwide crusade to forbid derivatives? Any contrary opinion?
Last edited by croot on October 3rd, 2008, 10:00 pm, edited 1 time in total.
 
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fars1d3s
Posts: 451
Joined: August 14th, 2004, 12:28 pm

optimal bailout

October 7th, 2008, 10:31 pm

Professor Luigi Zingales of the University of Chicago argues that this bailout benefits the few at the expense of the public: Zingales' view on bailoutAs during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture. But if it is so simple, why no expert has mentioned it?The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain. Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition. The appeal of the Paulson solution is that it taxes the many and benefits the few.It is enough to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs alumnus. But, as financial experts, this silence is also our responsibility. Just as it is difficult to find a doctor willing to testify against another doctor in a malpractice suit, no matter how egregious the case, finance experts in both political parties are too friendly to the industry they study and work in.See the rest of his opinion here in IndiaTimes: Zingales' opinion
 
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twofish
Posts: 4944
Joined: February 18th, 2005, 6:51 pm

optimal bailout

October 7th, 2008, 10:58 pm

QuoteOriginally posted by: croot2: each bank knowing full well the extent of its own exposure to speculative products on toxic debt, knew, given that the fan was hit, the exact amount they were to write down. And this alone was enough to tell them: keep the cash dont lend it, you ll be needing it soon to avoid bankruptcy.It's the opposite. Banks right now *don't* know their own exposure and have very little idea how much they will ultimately have to write down. This causes people to hoard cash. Quotelet's forbid all options, traded and OTC.I don't think you will be able to. Even if you formally ban options, someone will think of a clever way of getting around the ban, and you'll have them effectively trade options in a market that is totally unregulated. When you ban something, people will come up with very clever ways to get around that ban, and having clever ways to get around a ban generally makes regulating things much more difficult.QuoteSo I say stop: let the banks act as insurers, offsetting the risks of one pool of corporate clients by having a like pool of corporate clients with the opposite interest.Actually that's not what happens. You have corporate clients that want to hedge risk versus speculators putting money in hedge funds that want to buy risk. (And a lot of these people would be gambling in Vegas instead of in derivatives.) Also, as a bank, you can also absorb risk if you have the capital available.QuoteThe capacity of derivatives markets to handle and reduce risk overall has never been convincingly proven to me.The problem is that without derivatives then people can't get 15-year fixed interest mortgages with the ability to prepay. Now you might argue that people *shouldn't* get 15-year fixed interest mortgages with the ability to prepay, but that's a conversation that we need to have.Derivatives markets *don't* reduce risk overall. They are supposed to move risk from people who do want it, to people that can absorb it. The area of regulation I think that is most useful will be to make sure that the people who *say* they can absorb risk have enough capital so that they can do so.QuoteAnyone to join me in a worldwide crusade to forbid derivatives? Any contrary opinion?Sorry. I might or might not be wanting to sell my house next year in Texas to move to New York, and I'd like to have a prepayment option on the mortgage so that I'm not locked in.
 
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twofish
Posts: 4944
Joined: February 18th, 2005, 6:51 pm

optimal bailout

October 7th, 2008, 11:13 pm

QuoteOriginally posted by: fars1d3sBut if it is so simple, why no expert has mentioned it?Because the creditors of your typical bank are the depositors and in order to do a cram-down on the banks, the Federal government has got to renege on depositor insurance. The basic question is whether the Federal government is going to stand by FDIC or isn't it, and if it going to back depositor insurance, then it's going to have to put money into the banks. Period. It can do it through direct transparent mechanisms, or it can try to use indirect opaque mechanisms.QuoteBut, as financial experts, this silence is also our responsibility. Just as it is difficult to find a doctor willing to testify against another doctor in a malpractice suit, no matter how egregious the case, finance experts in both political parties are too friendly to the industry they study and work in.More likely it's because most people in finance with about three minutes of thinking realize the implications of what Zingales is suggesting, and if he doesn't, then he's hardly much of an "expert." I'm wondering if he is being clueless (i.e. he doesn't realize what he is suggesting) or evil (i.e. he does realize what he is suggesting).
 
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bkloss
Posts: 45
Joined: May 22nd, 2002, 11:51 am

optimal bailout

October 8th, 2008, 8:14 am

Quotelet's forbid all options, traded and OTCThat's just plain silly, just like banning short-selling. Did options cause the housing bubble? hardly.Did options cause the apparently large-scale mortgage fraud? I don't think so.Did options cause people to buy lots of stuff, at high leverage, that they didn't understand? I doubt it.
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