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Your post made me happy, briefly, but sometimes the level of public debate is just plain sad. CNN’s “debate meter” was the perfect illustration. It -spiked- at the mention of “greedy CEOs” but flatlined whenever complexity was introduced. As if a public caning of CEOs is all we need to unfreeze our credit markets. As if we can point a finger without three pointing back at us.
Bottom line: like a household with a huge debt load, we need to be smart about expenses. Yet we can’t afford a game-changing pay cut (topline stagnation/nosedive). Nor should we seek to bear risk without commensurate compensation. If we could have got a Warren Buffet to negotiate on behalf of taxpayers — as if it was his bottom dollar — I suspect the plan would be radically different, as would the debate.]]>
The problem for all the investment companies is that there is NO MARKET for their assets – the pools of bad loans. Therefore according to our mark-to-market accounting standards, the assets must be declared worthless and written off.
So all the government is doing is creating that market by passing a law that ALLOWS them (not compels them) to buy up to $700B in those “worthless” assets from these companies. Once the companies’ balance sheets are cleaner, they’ll be free to lend to people again and they’ll be seen as stronger and healthier and the markets will stabalize.
The government will buy those assets at a fraction of their original cost and may even end up MAKING MONEY on the deal over the long term since they will hold the loans until maturity rather than sell them off. Most of those loans will probably not go bad, though they will be paid back (to the government as opposed to the banks) slowly over years and decades.
In short, it’s NOT A STUPID IDEA. It’s actually kind of a brilliant solution. Of course it would have been better if it was never necessary, but it’s no reason to move to Canada either.]]>
Sadly, the bailout may pass. This is simply an extension of the problem of irresponsible lending and is itself an example of irresponsible lending. This problem has been building for many years. The real question is why is this suddenly a crisis that leaves us with few options?
I am afraid that the only solution that would work is a natural correction which will cause the economy to completely bottom out–not a good time for anyone.
I’m no economist so I don’t really know how to fix the problems created by a combination of consumers wanting everything now and lenders giving them what they want, neither considering the consequences. But it’s even more complicated than that.
Many are calling for some sort of taxpayer give-back to be added to the plan. Also why if the FDIC can step in and fire CEO’s and take over banks, why doesn’t the government consider doing same with investment entities–because of the socialism aspect. At that rate the feds would be running everything in no time. That’s why government rescues are bad for the US. If capitalism is let to correct itself we’ll have to hit some very rough times before we can enjoy a smooth ride again.]]>