General Question

Snoopy's avatar

Bail out or let the chips fall where they may?

Asked by Snoopy (5793points) September 23rd, 2008

How much do you think the federal government (read: tax payers) should help “fix” the current situation in the economy?

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43 Answers

Zaku's avatar

I’d say only in ways that hold them fully accountable and repay the public investment in them with the same level of interest that they extract from individuals.

marinelife's avatar

I wish the bailout was designed in such a way that there were at the least economic penalties for CEOs and CFOs and other architects of these unstable financial instruments who got themselves into this predicament (and dragged us along willy nilly) out of their own greed.

While I don’t think borrowers are blameless, I do think that help to finance real estate in such a way that they can make payments is helpful and not hurtful to society as a whole.

I would LOVE some regulation that required lending documents to be straightforward and in plain English with all fees disclosed and the total amount borrowed and the consquences of ARMs clearly spelled out in plain English.

Anyone who has gone through a real estate purchase and closing can tell you that by the end, you are just glazed over completely and would mostly sign anything just to get out of there. That is, of course, done by design.

As to whether there should be a bailout at all, it is hard to say. The consequences of letting the financial markets tumble like dominoes unchecked would likely be pretty severe. I don’t, however, like the Bush Administration bailout.

robmandu's avatar

I think that there are likely other ways to address this problem. But that we’ll end up going for the quick fix patch of symptoms that do little address the root cause of the problem.

Bri_L's avatar

@ Marina – I read this “I wish the bailout was designed in such a way that there were at the least economic penalties for CEOs and CFOs and other architects of these unstable financial instruments who got themselves into this predicament (and dragged us along willy nilly) out of their own greed.” 4 times before I put the “at” between “were” and “the”.

I couldn’t believe what I was reading. Hehe.

Snoopy's avatar

As an example….I remember reading about “interest only” mortgages a few years ago. Apparently they were originally designed for the “very rich” who would have access to a significant some of money a short time after closing on the house (i.e a stop gap to make the deal—).

In recent years more people (who shouldn’t have had access to them) were given these types of mortgages.

I waffle back and forth as to who is more to blame? Mortgage co? Home buyer? Both equally? I just know that I feel like we shouldn’t have to bail out either side. But I also don’t want all of our 401K’s etc to implode b/c of others’ errors.

So I am wondering if bailout of some kind is or is not the best way to protect the rest of us, no matter how distasteful it might be….?

Bri_L's avatar

The idea that the average person can fully understand the complexity of the financial transaction that takes place when buying a house is somewhat silly.

I wonder how these financial institutions would feel if the programmers who designed the software they used to do there business applied the same practices to them and suddenly they were “inadvertently agreeing” to giving a percentage to them because they use the software.

Not much of a difference in my eyes.

dalepetrie's avatar

OK, here’s what I don’t get. I read that in the month of July, 272,171 households received foreclosure notices. Let’s project that over an 18 month period from 9 months ago until 9 months from now and call that the “current” period, and say we’re looking at almost 5 million foreclosures. Now, let’s say that 20% of that is probably investment property, second homes, etc., and generously, let’s say there are 4 million households in trouble. The median sales price of a home in the United States is $212,400. If the US government were to just buy every single family home that was in risk of foreclosure over an 18 month period, the pricetag would be $850 billion. We’re talking about giving somewhere between $700 billion and $1 Trillion to investment banks, $850 billion is right dead center in the middle of those numbers.

I’m not saying that we should just buy every single house in foreclosure, I’m saying that with what we’re going to be expected to pay, we COULD. Isn’t the problem that is supposedly going to sieze up the entire credit market based on the fact that banks have all this potentially bad mortgage debt and won’t be able to afford to give credit to anyone as these all start to default? So, what if all of a sudden all of these bad mortgages were made good and people started paying on them? Or even a significant portion of them.

Look at the problem….a lot of people are just expected to make payments they can no longer afford, either because of some financial trauma (loss of income, divorce, etc.), or because their rates adjusted and they can’t refinance because they lost equity in their homes. The VAST majority of defaults that are happening could be resolved if these people were to recoup some of their equity and have their payments go down. Seems to me that the average person if they had say 30 grand applied to their mortgage, and then were able to refinance to a longer term at a reasonable interest rate could stay in their homes and would be able to make payments.

There, I’ve just cut the cost of the bailout to $120 billion. We provide assistance to working families who only have the one home and are about to lose it, if they were creditworthy, they were making their payments, and then something unexpected happened (like a financial trauma or having their rates adjust far more than they were led to believe and have now been shut out of refinancing like they were led to believe they were going to be able to do, only to have this equity/credit crisis descend upon them). For about 1/6th of the cost, Wall Street is saved because people will be paying their mortgages (and indirectly $120b has been injected into the system), 4 million people don’t have to leave their homes, the credit market will be able to open up and we won’t have to be stuck bailing out the scum that got us into this mess.

Now, I don’t know how feasible that is, but forgive me for being skeptical when this crisis has been brewing for 3 years and we haven’t done anything about it, and now all of a sudden we’re hearing if we don’t pass a $700b giveaway like this week, we’re all doomed! The stock market will crash and we’ll have a 2nd Great Depression. People won’t be able to get credit cards or borrow for cars! It all seems rather alarmist to me. And lobbyists want to make sure that we just give this money over to be spent without oversight (when if we’d had oversight in the first place this wouldn’t have happened), with no protections that this money won’t go to line the pockets of the CEOs who caused the mess, no help for struggling homeowners and no new regulations on how securities can be bundled and traded? I don’t buy it.

marinelife's avatar

@Bri_L Sorry, that was too long a sentence, and it lacked commas around the “at the least” phrase.

@dalepetrie You raise some good points, although I don’t agree completely with your proposal either.

Bri_L's avatar

@ marina – no apologies. I thought it was funny. I am the LAST person to point that out and I assure that is not what I meant to do!

dalepetrie's avatar


I wouldn’t call what I put forth as a proposal…it’s admittedly an oversimplified look at a problem I don’t know enough about. But it does point to the fact that we’re being pushed into what is probably not the best solution…it seems that just looking at some basic numbers, it’s hard to believe there isn’t a solution which is both cheaper and better for our society as a whole. I’m quite sure that if the problem were looked at from that perspective however that we could find a better solution than the ones they’re giving us.

One solution I’ve heard also questions what we are doing in that we are putting forth all this money for “bad debt”. Instead of buying their bad debt, how about we use that amount of money to invest in these companies at their current stock prices, and in that way we’re buying equity, not debt, but we’re accomplishing the same thing, AND then those who understand the debt instruments will have to figure out how to dispose of it, instead of the government which doesn’t have the experience with the issue.

Bri_L's avatar

I am really afraid of the absolute power being given here.

marinelife's avatar

@dp I definitely agree with your first paragraph.

@Bri_L Don’t apologize. You were right.

dalepetrie's avatar

Marina, yes, that second paragraph, I’m just passing along…not my idea. But again, better to have multiple ideas than just this one forced down our throats. It would be nice if I could believe they were actually thinking outside the box rather than just trying to conform to what the White House wants. Remember in the S&L crisis we were told we needed to do something immediately, but it took Congress 6 months to come up with a bailout solution, and guess what, we still have a credit market.

marinelife's avatar

Anyone watching the Congressional hearings on this issue right now on CNN? It makes it seem like it stinks to high heaven even more.

@dp I ran your but the mortgages idea past my hubby, and he liked it. He did point out that it is almost impossible to know who owns the mortgages after they are sold and resold. That brings up another item they should regulate!!!!!!!!

dalepetrie's avatar

Yes, that is another problem, which is why having the government buy them all and try to sort them out just seems like a recipe for disaster to me, but who knows? Maybe I should write my congresspeople?

Bri_L's avatar

I tried to find in my paperwork where it discussed the selling of my mortgage and couldn’t.

Snoopy's avatar

@dale I think one part of the problem as to why it is occuring now is that the financial system is based on faith and trust. e.g For services rendered, I pay you $10K. You then take that money and count on it being there and pay multiple people to whom you owe bills. Those vendors in turn pay bills. And so on. Now, my check bounces and the whole house of cards begins to crumble.

I think that the levy is just now finally starting to break…...

I know that you have already clarified that you were just floating your ideas as possibilities…..and I think you make some good points. One significant problem I see w/ your idea is the notion that the idea of giving special treatment to those where something happened (finacial tumult, ARM adjusting, etc.)...... someONE (i.e. a live person…not a computer) would have to sit and review, verify and pass judgement on an individual claim. A good idea but not practical considering the volume of the problem as per your example…..

tWrex's avatar

I agree with @dalepetrie 100%. Maybe it’s because I’m one of those homeowners. I bet it is Instead of bailing out the companies, why not bail out the individuals who are in foreclosure by settling new mortgages for them. Hell, pay the mortgages off! You were just going to do the same thing for Mr. Corporation so why not Mr. Homeowner? It just doesn’t make sense to me. I didn’t ask to lose my home. Between the VA screwing me with my payments and benefits, losing my job because I needed a surgery (due to my injuries that the VA should be paying for) and having said major surgery that requires a year recovery I think I pretty much got hosed for all it was worth. Thanks Uncle Scam. Lookin’ out for our boys on the front lines and at home. =)

Unfortunately, my home just got auctioned off last friday. Not sure if it sold or not, but it definitely makes me feel like shit. I drank my sorrows worth sunday at my parents. A 5th of jack felt good, but the bears losing sucked.

tWrex's avatar

And then this Seriously.

Does anyone think that possibly a great deal of new homeowners were unable to pay their mortgages due to the fact that they had to pay back $60,000 in student loans for their state college? Fannie Mae is the leader in student loans and if they’re unable to pay their mortgage to them because of their loans… You see where I’m going with it. Just curious. schooling is so overpriced.

Zaku's avatar

Huh. So atypically, I’m not going to pre-analyze this thought, but, what happens, in modern-day USA, if person A lends person B money, and then person A falls off a cliff and dies? Does someone step in for A’s estate to get B to repay the debt, or does the debt die with A?

And, what happens to B’s debt if person A is instead company A or bank A, and no politicians bail out A and company/bank A goes out of business? Who exactly gets hurt when a giant creditor goes out of business, besides the employees and stockholders of the giant creditor, and people looking to newly get themselves into debt?

tWrex's avatar

The debt gets passed on to the next of kin, except in the case of medical bills. Nice, eh?

Snoopy's avatar

@twrex I believe student loans are also not passed on to next of kin….

tWrex's avatar

Hmmm… didn’t know that. Thanks for the tip @Snoopy

Zaku's avatar

@tWrex – That’s not what I asked, and I’m sure is untrue about what you’re talking about. I’m asking about when the creditor dies, not when the debtor dies. (When the debtor dies, the debt is part of his estate, but no one has to accept inheritance of an estate. If a parent dies owing 10 million dollars, the children don’t suddenly have to pay off his debt – unless perhaps they want the 11-million dollar mansion and art collection that was part of his estate.)

What I’m asking is what if I loan you ten thousand dollars, and then I die and I have no one to inherit my estate, or 7th National Bank of Zaku loans you $10K and then goes bankrupt and out of business?

tWrex's avatar

Ohhhhh… my bad…

Zaku's avatar

Not a problem; just clarifying.

galileogirl's avatar

I have a couple of problems with people who want to be bailed out of their mortgages. The govt buying solid mortgages (85% of the FM’s inventory)and selling them at a fair price when the economy is stronger,not a problem. There might even be a small profit as the govt collects interest. The problem is when people agreed to interest only mortgages, balloon payment mortgages and in some cases ARM’s.

The idea being sold on these mortgages was that the value of the real estate would rise so high over time and the incomes of the purchasers would also increase that in a few years when the payments or balloons jumped up, You would be able to refinance the property at a lower rate, reap a bonanza without investing anything and then take that ‘found’ money and use it as equity.

So these reasonable, intelligent people couldn’t figure out that you never get something for nothing and they are going to lose the value of all their mortgage payments for the last 5 years. Well excuse me but I didn’t try and get something for nothing, I didn’t buy a house I couldn’t afford, I thought about what if. I also paid for shelter, rent, but I don’t cry about not having anything to show for it. What are we expected to do for people who are foreclosed on. It may seem harsh but I say make them start over. Why should those of us who made careful decisions pay for those who didn’t. Go back to renting. Don’t boohoo me because you didn’t end up with equity. BTW didn’t they get a tax credit for those interest expenses these last 3–5 years. Renters didn’t

Another problem that is growing is people who are walking away from upside down mortgages. The rationale is that you took out a second mortgage because you had no down payment (what were you thinking?) and now you owe more than the value of your house. Why should you pay more than something is worth? There better be a bailout or you just walk away.

Either way the prudent careful citizen (with or without a mortgage) is going to pay. Government $$ going to the foolish sends the wrong message. On the other hand we can’t just say that the financial institutions made bad loans so they should pay. Our economy cannot survive without these institutions. What we can do is look forward and establish a strong independent regulatory agency with the right to impose criminal as well as financial penalties. We should also, as a nation demand an explanation, naming names, for what happened and business ethics should be a required course for any postsecondary degree. We have to examine, as a nation, our attachment to the perverted form of capitalism we espouse today.

Snoopy's avatar

@galileogirl I don’t disagree w/ much of what you said…BUT you didn’t say what should be done today.

“Government $$ going to the foolish sends the wrong message. On the other hand we can’t just say that the financial institutions made bad loans so they should pay. Our economy cannot survive without these institutions.”

OK. So which do you want? Bailout or let the chips fall where they may?

Bri_L's avatar

bailout with contingency to repay those who were not involved.

I believe there was predatory lending going on.

galileogirl's avatar

The government should advance the money and stand in for the FM’s soon. Otherwise the stronger institutions will cherry pick the best mortgages and the worst 15% will kill off many smaller banks. We will then have a financial oligarchy that may be able to lobby out of regulations.

I think the financial institutions have to be regulated to within an inch of their lives. People are going to scream govt control but we don’t have capitalism because the silent hand only includes thr supply side. The demand side has no voice in an oligopoly. Govt should regulate everything from hours open to reserves to branch placement, to management salaries.

tWrex's avatar

I’m guessing that those that believe we should bail out big business rather than the little guy probably think this is, ya know, acceptable.

Bri_L's avatar

tWrex – I am missing what you are saying. Sorry. It might just be to late for me.

tWrex's avatar

@Bri_L Some of the folks were stating that we shouldn’t bail out the people because they should have to deal with the fall out of their own mistakes, but we should reward big business which I find amusing since everyone on fluther seems to be left leaning which is normally associated with being against big business and being for the little guy for their mistakes. My point was that people like to add in the human factor when it’s ok for their political pov, but if it doesn’t agree with it then forget it. The link was only a small representation of what that type of ideology promotes. Sorry if I’m not making myself clearer. It’s late here too. I’ve already had to clarify myself elsewhere.

galileogirl's avatar

The problem I am having with the “human factor” in the equation is I saw people who absolutely were not qualified to own their homes, either because they didn’t have the income size or stability to purchase anything or they bought homes way above what they could afford, are expecting government assistance with their mortgages. If you can’t afford what you bought, don’t ask me to pay for it while I am a renter. Either downsize to something you can afford or go back to renting. As part of the “human factor” myself, I choose not to support you in your mistake.

BTW if people did not demand the mini Taj Mahals that made up new homes over the last decade, maybe realistic smaller homes would be developed and more of us COULD afford our own homes.

Snoopy's avatar

twrex Sorry, but I agree w/ galileo girl. Without a job (for me at the time) my husband got a mortgage for our current home while carrying a mortgage on the previous home he was living in at that time. The mortgage co advised him that they would have allowed him a mortgage that would have had payments that consumed 70% of his take home pay.


What they didn’t know or care about is that I had savings, was getting a job and he was going to sell his first house.

I think that too many people got too much home on too little income. Too many “interest only” loans. Too many ARM’s. ARM’s are a roll of the dice. You are “banking” on the fact that you can refinance at a decent interest rate and that the home value will rise.

I heard on the radio yesterday that 30 year fixed mortgages have “risen” to 6.25%
Boo hoo hoo. When we got our mortgage 10 years ago it was 7.25%. The mortgage on my husband’s first house was 11%!!!

I see stuff about predatory lending. I don’t doubt that it exists. I think however, more commonly, people bit off more than they could chew. Ultimately the home owner is responsible for understanding the contracts they are signing.

Snoopy's avatar

If you are interested in commenting on the mortgage situation I have started a new thread here:

kevbo's avatar

I realize this is speculative information, but it appears that our friends on Wall Street may turn their noses up at the bailout package since it is “too restrictive.”

So just how “real” was this crisis to begin with? And what about all the song and dance from the President and Paulson about how Congress needs to take immediate action? Imagine if this didn’t happen five weeks before an election and that bill’s first version had passed.

Snoopy's avatar

@kevbo If the current administration could leverage this much control, it would have been in their best interests to sweep this (problems in the economy) under the rug. As it stands, this has the potential to hurt McCain and the Republicans in this election cycle.

The Democrats are contiually trying to link McCain to Bush and as such are tying McCain to the problems w/ the economy.

I believe that the problem is real. In fact, the problem is a global one….from Russia to the EU. The EU has struggled to address this in a united fashion and now individual countries are bailing out their own banks (e.g. Germany).

Zuma's avatar

Sub-prime mortgages were not the result of unworthy deadbeats fraudulently obtaining credit they did not deserve. It was the industry which engaged in fraudlent predatory lending practices. They neglected to explain to elderly or unsophisticated investors how negative amortization could eat up all their equity and turn them out of their homes before they could do anything about it. Loan agents, in hustling people to sign up for what they touted as this easy credit, neglected to explain how you are supposed to prepare for when your baloon payment comes due. They neglected to explain just how much the borrower might have to pay if their adjustable rate mortgage maxed out. The original lenders neglected to mention that these loans could be resold to unscrupulous companies who might lay a trap for the borrower by sending him a statements that requested only a minimum payment, allowing the unpaid interest to quietly accumulate until it hit a threshold which suddenly triggered the whole note coming due, at which point you would be hustled into refinancing on less favorable terms. When people inevitably got behind in their payments, instead of working things out with them, they reported these “lates” to credit bureaus, ruining their FICO scores and virtually insuring that they could not be able to obtain refinancing.

Once the trap was sprung, the company aggressively rushed to foreclosure in order to capture a windfall in any remaining equity. Why? Because the industry has successfully gotten the laws concerning writing off bad debts rewritten in their favor. Instead of deducting the loss as a cost of doing business, they are able to take a tax credit against future earnings. This makes a write-off suddenly worth several times more lucrative than carrying it to term and being taxed on the profit. Plus they get it all instantly (well, within the year).

Unfortunately, this created an avalanch of nonperforming loans which hollowed out the value of the securities that repackaged them. The owners of these securities, being unable to accurately assess their true value began selling them off, starting a panicked rush for the door that destroyed any remaining value they might have represented. Treasury Secretary Paulson’s first proposal was to use the bailout money to buy up these worthless securities, sticking the taxpayer with the whole mess. But that proved a non-starter as the firestorm of public protest over the bailout forced cooler heads to consider things like replenishing the bank’s capital in exchange for an equity position. This would allow the banks to write off these losses and distribute some of the burden to stock holders. Replenishing bank capital would provide the reserves necessary to stake for bank lending at 12 times the amount put in. That would restore liquidity and confidence to the markets.

It needs to be said that it was the Bush Administration which provided the original impetus for this sub-prime lending debacle, since it was part of Bush’s “ownership society” initiative. This was based on the observation that homeowners tend to become more conservative and vote Republican as the equity in their house increases. The industry was explicitly encouraged to target blacks in the hope that home ownership would co-opt them and lure them away from the Democratic base. While the Bush Administration didn’t exactly endorse the predatory practices of the industry, he did send them clear signals that the door to the candy store would be unguarded by cutting back staff and funding for the SEC, the Office of the Comptroller, and the other regulatory agencies. To be fair, in 1996, it was the Democrats under the Clinton Administration that dismantled the Glass-Steagall act, and removed the restriction on banks from speculating in the securities markets, so when paper money suddenly vanishes from a bank’s portfolio it parralyzes the bank’s ability to lend until they know how much money thay actually have.

The industry entheusiastically responded by aggressively marketing sub-prime loans to marginal borrowers with low teaser rates and other gimmicks that tended to gloss over the fact that that the adjustable rate mortgages will not always remain low. These loans were presented the loans as an easy hassle free way to get capital necessary to realize the American dream. According to a New York Times study, the industry did target blacks, minorities, and other unsophisticated first time home buyers. The borrowers were told not worry, any weakness in their credit would eventually be erased by the equity they would accumulate in an ever-rising real estate market. Borrowers had no reason to question this “blue sky forever” assumption since the agent was supposed to be an expert on these matters, and real estate prices had in fact done nothing but increase in living memory.

What really set the stage for the current meltdown was that banks and brokerage houses went out hired rocket scientists to work out the the advanced math underlying extremely exotic instruments which were sold to investors who did not understand well enough to correctly value and reglators did not understand well enough to regulate. They relied on securities rating companies, who rated them AAA without really understanding them either. Some of these instruments contained provided a kind of insurance and a hedge against adversity. And no less than Alan Greenspan praised them as instruments that they would spread the risk and lead to a more stable system. The people who bought these instruments more or less took all this on faith and loaded up on them. In order get around the statutory requirement of setting aside a prudent reserve to cover the risks inherent in insurance instruments, they decided to call them “swap” instruments instead, and leaveraged themselves to the hilt. Had regulators been actively monitoring the situation, this whole crisis might have been avoided.

Since October 9, 2007, the Dow has lost 5,585 points, or 39.4 percent, in the past year. That’s $8.33 trillion in paper wealth disappearing out of a $14.175 trillion securities market, the bulk of it in the last 20 days. The $850 billion bailout seems a drop in the bucket compared to what has been lost, but (we hope) it was enough to restore confidence in the system and get banks to start lending again. Unfortunately, this $850 billion is as yet unfunded obligation, meaning that although we have commited ourselves to paying for it, we haven’t yet specified in any budget exactly how we are going to pay for it out of a real economy that produces $13.3 trillion GDP per year. This, by the way, is added to several trillion in unfunded Social Security and Medicare obligations, in an economy that is already in debt to the tune of $56 trillion due to a 25-year run-up in credit card and mortgage debt which has grown, and continues to grow, twice as fast as the real economy.

If there is another round of foreclosures, it will set off another devaluation of real estate-backed securities, another panicked rush to unload them, and a run on all dollar-denominated securities. The only reason we are afloat to the extent we are is that the rest of the world still believes we will honor the “full faith and credit” of dollar denominated securities. Should they decide that this is not the case, they will start a panicked sell off of our securities, tens of trillions of dollars will disappear from the world economy bringing not just us down but the whole world economy.

So, when you hear that this could be “really big” and that we are tetering on the “edge of an abyss,” this is what they are talking about. Once the world economy implodes it will be much worse than 1929. If you recall it was extremely difficult to reinflate the national economy after 1929 (it took WWII to do it). It will be incomparably harder to prime the pumps with the world economy in a slump.

Snoopy's avatar

@MZ Thank you for taking the time to write this lengthy explanation. It is very much appreciated.

Bri_L's avatar

@ MontyZuma – Yes, thank you very very much!!!

walterallenhaxton's avatar

The chips are certain to fall where they may. The Federal Government is the ultimate organization that will need a bailout. It is insolvent and it’s management is out of control in it’s spending. It is certain that the rest of the economy can not produce weath fast enough to make up for what it is doing and I am talking about the only economy there is. The world economy.

walterallenhaxton's avatar

@MontyZuma It was the central bank that created the credit environment in which the lenders operated. The government is very much involved because the central bank is the property of the federal government and only appears to be separate so that the politicians can deny responsibility for it. They are perfectly capable of shutting it down. There were also federal laws involved. What the lenders did was considered legal when they did it and it was what everyone else was doing.
Since none of this would have happened if the government had not acted to make it happen the government is responsible for the whole mess. It was effectively the employer of all of those lenders and they were doing what they were paid to do.
In the delusional environment where people thought that the prices would go up forever, which any true economist would have told them was impossible, the lenders did the right thing acting on false information.
This mess was due to false interest rates given to the banks and laws to lend the money no matter what.
Don’t go blaming the foot soldiers for the policies of the generals. They have no power in the matter.

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