to bailout or not to bailout and 700 billion reasons i dont understand

September 26th, 2008

To Bailout or Not To Bailout, and 700 Billion Reasons I Don’t Understand

I’m just a regular person.  I’m not an economist, and although I like to think about my own money a lot, I don’t really understand the ins and outs of the economy as a whole.  But even my quiet little part of the US has big splashy headlines like “700 Billion Dollars!” on the front page of its newspapers.  So I can’t help but try to understand what the heck is going on with the US economy and what the best course of action is for the future.  Is a $700 billion economic rescue / bailout plan the right course of action?  I wish I knew.

I know that the economic rescue plan is supposed to keep some big financial companies from going bankrupt and throwing the US economy into a tailspin.    I also know that the plan was looking like it was going to be approved and as of right now, is not looking so sure any more.  So what happens if it isn’t approved?  Do I need to start hoarding more toiletries in case my money ends up worthless?

Okay, so I am (mostly) kidding about that last line.   But I can’t help but be nervous.  And the worst part for me is, I can’t figure out how I feel about it all.  I read opinion pieces that talk about how is it fair that the government is bailing out companies that took risks, when it isn’t bailing out the average person’s financial mistakes (yes government, I have some student loans you could have back…) but then on the other hand I read about how our financial system as we know it could be on the edge of collapse and ruin if the financial institutions aren’t bailed out, and I start to get all panicky and freak out.

I’ve spent a lot of time reading CNN’s Financial Crisis section, and my head literally hurts.  Lucky for me I got free Excedrin Tension Headache from Walgreens this month:)

Get out of debt.  Hoard my money in an emergency fund.  Prepare for the worst but hope for the best.  My financial priorities haven’t changed from what they were last week or the week before, but suddenly they feel a lot more urgent.

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31 Responses to “To Bailout or Not To Bailout, and 700 Billion Reasons I Don’t Understand”

  1. That’s the part that makes me mad, I think. My mate and I, being cautious people, could have had a mortgage in addition to our mortgage’s worth of student loans. We chose to rent, instead, because we didn’t want to be in even more debt. We are almost out of credit card debt ($2700 to go!), but we still have 60k-ish in student loans that will go untouched by all of this money flying around.

    This 700 Billion they’re looking for has no science behind it. It’s a number they picked out of the air, according to a Treasury spokeswoman, Forbes said.

    I understand we need to inject some money into the system. I just want it to be based in science, not hysteria.

  2. Ah, I feel exactly the same way! I don’t understand it at all. I am hoping someone can bring this down to laymens terms for me real soon!

  3. I kind of feel the same way, although lately I’ve been finding out that I’m a conservative, or at least have some conservative ideas. I think companies should be responsible for their own mistakes but I think the issue here is that not bailing them out would hurt the average american. I think the people in charge, however, should be punished in some way. I heard they were taking away their golden parachutes. I think that’s a pretty good start.

  4. Separation of church and state. Separation of corporation and state. Easy for CEO’s to make millions-easy for corporations to lose billions. Only the strong, fiscally responsible, will survive. Not every day will be late 1990′s stock market, not every day will be 2005 real estate market. Sometimes, this nation might need to take a step back, to reassess priorities, and make us think twice about decisions we are about to make.

  5. If it makes you feel better the people who are actually going to decide this know even less than you. =) If you watched any of the hearings you know what I mean.

    Neither the president nor congressional leaders have explained it well, but Paulson and Bernanke both have in language that is admittedly dense. Try to think of it as fixing the systemic problem. If your neighbor flushes 100 magazines down the toilet and clogs up the neighborhood sewer system everyone suffers the ill effects. Clearing the clog allows everyone, even the idiot neighbor, the benefit of sanitation. The clog was cleaned so that everyone, unfortunately including the idiot neighbor, may function as normal. Bad banks will be helped by this deal, but that is not at all the reason for it.

  6. Ah I love that analogy! About where it belongs! I do trust Jim Cramer, etc., though, and think we are in a corner created by forces beyond the control of most of us. I DO know that if credit continues not to be available, the country cannot continue to function. Being a WaMu customer slammed this home last night. Sheesh.

  7. 1. Just found your blog, and love it. Keep plugging away, we took 4 years to climb out, and the best day of my life was the day I got back to broke..zero money, but zero debt. You’ll love it, too.

    2. All that is happening now is out of our control, so all there is to do is hope they don’t smash us. In the past, we believed these tinkle-down magicians, and believed that by isolating the rich from risk, we’d be safer, too. Well, now we know. Next time someone talks about privatizing social security, or how making the already rich richer will make you rich, remember today. What we’re learning today is the rich won’t make you rich, but their greed can make you poor.

  8. Comments:

    Why should my hard earned money go toward a CEOs retirement?

    Define “execessive executive compensation” would 50mm be excessive, 40mm, 10mm?

    I had to close my business down due to the economy,, I want my executive compensation too!!!

    Why is executive compensation even being discussed?

  9. I’m bugged by the politics. At a time when they are telling us we are in a crisis they are playing games trying not to be the ‘only ones’ to decide to do this. Both sides. I get the feeling they have no clue if it will work and don’t want to be the ones blamed. Its like– we need leaders and all we got is politicians. frustrating. As for executives who run their company into the ground–well I suppose they negotiated these golden parachutes into their contracts when they were hired. STILL-I have yet to see a company go under and Honor the little guy employees agreements. They just walk out the door with their stuff in a box looking bewildered.

  10. I would be very interested in hearing about what life would be like without the bailout. I remember how the economy bounced back after 9/11. (OK, aside from the airline industry) I would think that the economy would do the same thing here.

    In a capitalistic system people can make huge amounts of money by taking risks. The flip side of that is that people can lose huge amounts of money as well. It’s not unfair. It’s not even unexpected. This is the way of the money game. If people don’t like it they shouldn’t play.

  11. I think it’s one of those situations when you have to hold your nose as you pull the switch. It’s not fair, but that’s not the point. The point is to have a functioning economy with credit available, not “saving” Wall Street. Check around and you’ll see what an issue no credit is becoming. No one knows what will happen if they do something, but many are pretty sure what will happen if they don’t. Thanks to [insert favorite Fed/business/whatever] for putting us in a stinky box.
    What really disturbs me is that we may have been manipulated into this position by those who still stand to gain big time. It’s been outrageous to follow the profiteering of the last few years, and how thoroughly we’ve been deceived as a nation. I would hope the FBI or whomever will follow the trail and track the profiteers of this over the next few months.
    So, anyway, its not a game. It’s about credit and the survival of our current consumerist, capitalistic society.

  12. I liked the analogy above – cuz it’s all in the toilet anyway.

    I feel like I will weather this just fine – but I worry about my kids and grandkids! I don’t need credit, but they might! That’s the part I hope can be fixed… for good honest people with a decent down payment to be able to get credit, a business operating loan, a farm tractor, some more cows, etc.

  13. Please – if you don’t understand what is going on, a gentleman named Karl Denniger has been explaining it in language that is easy to put into perspective.

    http://market-ticker.denninger.net/
    http://www.fedupusa.org/

    If he makes sense to you, CALL CONGRESS! IMO, Ben Bernake is lying and trying to blackmail Congress. Certainly these companies who are looking for a bailout are not telling the whole truth about their financial situation. Their unwillingness to accept responsibility for their poor decision making over the years could very well sell your children and grandchildren into debt slavery. This is far more than just our immediate personal financial situations – this is the very future of our nation that is being decided. Problem is, the people giving the information to the deciders are trying to deceive. Don’t let them!

  14. I, too, wonder how all this will affect the “little guys” like me with a limited income and small savings account.

  15. The freakonomics blog does a decent job laying this out:
    http://freakonomics.blogs.nytimes.com/2008/09/26/erik-hurst-on-the-risks-of-re-regulation/

    (follow links in this post to other posts)

  16. The bill is sad because it’s almost a blank check. There is no alternative solutions right now which is even worse. When you start listening to law makers that support the bill they come back with “Well, this is all we have.”

    The aspect I REALLY do not like about the bill is the Review section, where is basically says that what is done can not be reviewed, even by the judicial system. So, let me get this straight? We are giving Paulson and his cronies 700 billion and we can not hold him accountable for it?

    It’s also a great time to be friends with Paulson because it says in the bill that he will have the power to replace Corporate staff such as CEO’s et cetera at his discretion, and national, state or international laws will not apply to his decisions.

    There is also room for abuse in government contracts in the sense that the bill states he will use the companies as he sees fit, to whatever end he deems necessary.

    So, we will give Paulson up to a 700 billion dollar check, with no bounds, and no consequences if he screws it up. Us tax payers will be left to pay the bill and that is that.

    We still have 4 months left until January.. what else can this administration screw up?

  17. I’ve been watching this stuff all day (great diversion for a cold), and it’s obvious whatever is finally presented and voted on will be different from what Paulson proposed. I doubt he even expected it to be passed as it was, but that’s irrelevant at this point. I have to say its impressive, despite the reason why, to see our legislative process at work. Those folks are busting their a**. The spin, though, is making me a bit nauseous

  18. So….the sky is falling and the crisis is bound to overwhelm us in a sea of misery. WAMU fails and the market rallies? C’mon now. Are we sheep?

  19. I agree…I am feeling really conflicted about all this. I’ve read that if the bailout doesn’t happen, we face huge catastrophe and major job loss. If we do go through with the bailout, we are helping keep the economy running smoothly, but I hate that we are rescuing companies who made poor decisions. I wish there was a way to do this with spending less than $700 billion…like doing it gradually over time to see if smaller amounts help first. Oy vey!

  20. If we go through with the bailout, our currency will be devalued – possibly by up to 90%. I don’t think any amount of personal finance discipline is going to help me when my $100 grocery bill starts costing $500 (and everything else increases in price, as well) with little to no change to my salary. I think we’re going to have One Heck of A Recession no matter what happens, so I hope Congress will support the way that will not consign us to inflation and debt slavery.

  21. Donna – It won’t be THAT bad, in time we may even make money off of this. Probably not, but if they structured it right then I’m sure we could.

    I hate this idea as much as the next guy, I believe people should be held accountable for their actions. As much as I’d like to think this way I also know that Warren Buffet knows more about the devestation this can bring than 99.9% of us.

    He’s calling for the bailout, and fast. I need to side with Buffet on this one.

  22. Maybe Warren Buffet will be on the Oversight Committee! I’m serious.
    It would alleviate a lot of worries ;-)

  23. I feel very much the same way about this Bailout proposal. Its disturbing to me, to hear about so much money going towards companies that are going down because of their own mistakes. But I have little to no knowledge of what kind of impact it will have on my personal situation either way. If it goes through, will I have to pay *more* taxes? Or does it mean that we’re are just more in debt for a longer period of time? If it doesn’t go through am I going to lose my part-time waitressing job?

    So do I think its unfair that the government is going to let them off the hook and not other people? Sure!

    Does that mean I think that the bailout shouldn’t happen? I have NO idea…

    I keep reading as much as I can about this whole bailout, and all I hear is that the alternative(not doing the bailout) would be catastrophic to our economy. I think it’d be great for someone to say how.

  24. Ah. I am more in step with Nouriel Roubini, who accurately predicted everything that has happened up until this point, and far enough back that people thought he was a nutbar.

    This bailout plan does not solve the underlying problems that got us here to begin with. A good plan would force all off-balance sheet “assets” back onto the balance sheet, and force the valuation models and identification of individual assets out of Level 3 and into 10Qs and 10Ks. It would force all OTC derivatives onto a regulated exchange similar to that used by listed options in the equity markets and that would permanently defuse the derivatives time bomb. A good plan would also force leverage by all institutions to no more than 12:1. The SEC intentionally dropped broker/dealer leverage limits in 2004; prior to that date 12:1 was the limit. Every firm that has failed had double or more the leverage of that former 12:1 limit.

    Once these are put in place then we need to send in the OTS and OCC examiners and look at every financial institution in the United States. All who are insolvent and unable to raise private capital immediately are forced through receivership where the debt is converted to equity and existing equity is wiped out. With the systemic risk removed, the bondholders provide the cushion for recapitalization (as it should be) and the restructured firm emerges with no debt while the former bondholders are now the owners (of the equity) in the resulting firm. With a clean balance sheet the restructured firms remain in business and open the next morning able to raise and attract capital.

    For the few firms that have an insufficient debtholder capital cushion to successfully complete this process, they get liquidated. There will be few of these and in fact each of those firms is a regulatory failure, as we should have never permitted a firm to become so far “underwater” that the bondholder’s capital is insufficient to capitalize a restructuring.

    Finally, the shorting restrictions need to be dropped. Liquidity in the market right now stinks and this is a big part of why. Start prosecuting aggressively the rumors and other manipulation that leads to stocks both rising and falling.

    That said, I don’t have much faith in Congress having the political courage to insist on these reforms. It’s always easier to throw money at a problem than to actually try to get to the heart of why the problems happened in the first place.

  25. Obviously some serious reforms are in order, and Donna your discussion is quite informative. What I found scary was when Chris Dodd described the atmosphere in the room after that initial briefing by Paulson as “if all the oxygen had been sucked out of the room”. I don’t think he’s much for hyperbole, so that stark comment certainly conveyed the urgency of the situation.
    It seems something needs to be done now (why didn’t Paulson/Bernanke see it coming: duh) and then the real work can begin.
    Thanks PaidTwice for leaving the door open for folks to talk about this.

  26. Of course Hank Paulson saw it coming. As CEO of Goldman Sachs, he was one of the people behind the whole crazy mortgage securitization mess. Nothing like having one of the robbers guard the banks, eh?

    And here’s the math:

    http://www.denninger.net/letters/mathematics.pdf

    Either the system is not about to fail imminently or it’s going to fail whether or not this bill passes, since the actual amount required to “solve” the problem exceeds the government’s ability to finance it. Either the members of Congress who were briefed by Paulson don’t understand what’s really going on (and that wouldn’t surprise me since most people don’t know) or they were fed an incredible whopper of a tall tale. Probably a bit of both.

    If this passes, we’re all going to suffer mightily because of Congress’ inability to see reason, their financial naieveity in falling for Paulson & Bernake hook, line, and sinker, and their subsequent rush to panic.

  27. Well, here we go.. The Treasury claimed there
    would be 3 million job losses “in weeks” but they intend to wait 2 weeks or perhaps more before they start making purchases. How odd.

    Wachovia is down SIXTY PERCENT this morning premarket.

    All of the G7 nations have told us where to stick this bill, with Canada being the latest to make an announcement yesterday afternoon.

    Supporters of this bill are being gamed AND THE MARKET FIGURED IT OUT ALREADY. IT IS TANKING – NOT STABILIZING.

    We are planning to squander $700 billion of taxpayer money we will need for ordinary Amcericans (people like us) in the coming months. Too bad for us.

  28. The Federal Reserve is what allows the government to create such a huge mess. No one would allow this if they were taking it directly our of our pockets from taxes, but as they take it indirectly from inflation, no one notices. I found http://www.stopthelie.com/what_is_money.html to be a good read about this issue.

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