First Fannie Mae and Freddie Mac. Now a "loan" on the tune of 80 billion dollars to AIG. All in the name of the proletariat....scary, isn't it? We're inching closer and closer to a socialist government and nanny state. I think the true ideals of this country would let a free market dictate the fate, not government stepping in and taking a role they should not take.
The problem is that by the time these companies fail, the government is left with a Hobson's choice: bail them out with taxpayer money or have our financial system collapse. A good chunk of the problem is regulatory. These firms were simply allowed to accept too much risk. Effective oversight of the banking industry would have limited the unreasonable growth of some of these firms by ensuring that their asset ratios stayed at an acceptable level. It would have meant more smaller and medium-sized players instead of the mega firms that dominate this kind of trading. Another problem is consolidation in the financial industry. The players have gotten so big they've become "too big to fail". Bear Stearns understood that the bigger they got, the more risk they took, the more likely it would become that the government couldn't let them go under. They're not stupid. The third problem was the repeal of Glass-Steagall, although the repeal was supposed to solve the problem of thinly-capitalized investment banks. Instead, it caused commercial banks to seek higher returns in the I-banking world. Since commercial bankers generally don't understand the more exotic financial products out there and the compensation for I-bankers is based on an "eat what you kill" basis, the I-bankers simply wrote checks the commercial bankers were expected to cash. The problem was that the commercial bankers didn't understand what they were writing the checks for.
IMO there are two ways Fannie and Freddie can go. Regardless, they need to consolidate into one firm and spin off their ancillary businesses. 1. They remain a government owned entity that simply creates a secondary mortgage market for residential housing. 2. They are spun off into a low-margin, highly-regulated, private entity that creates a secondary mortgage market for residential housing.
I say have our financial system collapse. It will straighten out America. By merely having them stay afloat and fix the problem with band-aids, we're really not changing anything.
I agree. These bailouts are disturbing and I won't be surprised to see one of the "American" automakers get bailed out next. They must be salivating to get in on the bailout action. The helicopter printing press is open for business.
America now is not America. Its an endless array of mini-malls and cookie cutter neighborhoods built by large firms with cheap construction while everyone watches people live life on television. good riddance.
not really. renting cheaply, single, good income, lots of connections, small business that i can run anywhere. I could move to a foreign country with no problems. Have the connections to do so also. It could go all go south but I'm in a better position than alot. no exit strategy in sight, but I don't like the idea of government selectively choosing to support and buy and run companies for the "good of the people". Its very soviet-esque. We could be witnessing the collapse of capitalism, much like how the Soviet Union and Communism collapsed within that country. We may go down a similar path and have a completely new type of social structure. These moves by the government are monumental as it relates to our nation's core economic values.
As far as the risk level, no one had the risk ratings right on the mortgage industry and the entire secondary market of packaged loans. Don't get me started on the repeal of Glass-Stegall
My take on the entire financial situation. There was a lot of pressure on the banks financing mortgages to stop redlining practices and other things to help minorities and poor people become home owners. The problem is two-fold. First, the people getting the loans were in no position to actually pay for quality mortgages and pay for the homes proper. Second, the prices for the homes these people bought were inflated by a bubble. What caused the housing bubble? The "good times" as well as any govt. surplus during the Clinton years were illusory. Tax revenues were generated from capital gains people received for mutual funds they owned. The capital gains were realized by the mutual funds, not passed on to the people as cash or dividends, but the people were stuck with the tax bills. The stock market (NASDAQ) grew by 100% from November 1999 to February 2000, causing massive capital gains in those funds. People ended up borrowing against their homes to pay their tax bill. The govt. revenues on those inflated gains painted a much rosier picture than could truly be maintained. Unfortunately, those companies that fueled that 100% growth in such a short time were hot air - $40M in sales and $40M in losses on their books; not viable entities in reality. There were other companies, like the oldest one in the USA (AT&T) that crumbled to the point it was sold off in pieces, another really old company (Sears) barely made it, MCI/WorldCom imploded despite massive revenues and a solid business fiscally, and the whole Enron mess unfolded. The tax hikes Clinton instituted, as well as Bush I's tax hikes, didn't help matters. They increased the amount people had to borrow to pay that higher tax burden. To pay the tax bills, people first tried to sell their stock/mutual fund positions and saw the market lose several $trillions in value and to the point there were no buyers for the stock, then borrowed against their homes. Put in perspective, the market crash saw more losses to people than the entire federal budget and then some. MASSIVE. The net effect out of all of this is that the budget was balanced by taxing peoples' net worth (e.g. their home equity or life savings) and not income. The national savings rate went negative in the Clinton years as well. This means people borrowed against their homes to pay their bills and justify their lifestyle. The whole economic boom was based on consumer spending, enabled by this borrowing. Though Obama wants to tie McCain to Bush's economic policies, I would argue that to a large degree his policies prevented an all-out Depression - all those high tech jobs when the NASDAQ crashed in 2000, Clinton's last year, and the tapping into peoples' net worth. The fiscal policy has been all of the classic things govt. does to try and prevent these things: lower taxes, massive govt. spending, weaker dollar, lower interest rates. I am finding no fault in any of those things; the last 8 years haven't been anywhere near as bad as my expectations (by a long shot). I would also argue that Bush's economic policies overall have been designed to make a sound economy overall. Companies that have profits were the norm. Even the housing crisis is bringing fiscal sanity to the whole system, though it is causing a lot of pain in the short run. People aren't going to be able to live off of borrowed money against phantom equity caused by a price bubble. The bubble also pushed prices up so high that first time buyers had to win the lottery (or something along those lines) to get a proper down payment. If you think about it with an open mind, we had a shallow recession after the stock market crash in 2000, survived the 9/11 hit on our financial institutions and that almost devastated the whole airline industry, fought two wars, and managed our way through a spike in oil prices while experiencing solid GDP growth. I'm not saying all of Bush's policies have been good. The deficit spending continued after the Depression was averted. Clinton did a good job of keeping govt. growth under control (far better than any republican); the 2001 budget was $2T. Next year's budget is over $3T, and you can only blame maybe $300B per year of this extra $1T in spending on the military efforts in Iraq and Afghanistan. Medicare drug prescription benefit, massive increase in education spending and other social programs, and entitlements deserve 2/3 of the blame. I see little excuse for that 2/3, nor much general benefit from it. The tax cuts proved convincingly that lower taxes means more revenues. The amount of borrowing and the size of our debt doesn't alarm me in the least, though we can't continue to borrow these massive amounts forever. Balanced budgets are not the ideal! Every time the govt. balanced its budget over the past 100+ years, bad economic times followed (recessions). As far as Freddie and Fannie and AIG are concerned, the govt. made the mess, and I see no way out but for govt. to clean it up. To let the mortgage giants expire zaps the common man known as shareholders, and what exactly is going to happen to the mortgages and the homes involved? The govt. is in the position to eat the losses and settle the home prices at a point where people actually can afford them. I just see no other way out.
VERY well stated and I agree 100%. We need to have government check this stuff in a timely manner and not wait until it's after the fact.
Xericx, I understand you not likeing the government bailing out private corporations. It pisses me off that companies that took risks and implemented bad business principles get the help of gov't instead of paying the price of folding. And I don't understand the economics the way other posters have responded. But both the republican and democrats and wall street analysts all agree the gov't had to step in in this case. So I'm guessing it was for the good of the country to give AIG 80 billion in taxpayer money.
Personally, I'm in favor of the bailouts as long as, instead of the top execs getting golden parachutes, they get orange jumpsuits.
The main problem is that the directors/shareholders benefit from these bailouts. The bailouts are not meant to benefit the shareholders, rather the general public who may have their money in these banks. Furthermore, it is to try to protect the overall economy from completely falling into recession. It's a difficult time and will continue to be so for a long time, but this could be the downfall of capitalism. Hopefully.
I'm an advocate of equality, and I don't think anyone can argue that capitalism is the best method for providing equality. Ideally, many industries would be centrally owned, and countries ought to be more self-sufficient. For example, one of the main reasons that Britain is suffering now is because America is suffering, and we are so reliant on America (as are most countries) that we are suffering as a result. I understand that there will be problems due to lack of competition within markets but currently there is problem in the other way, with companies striving to reduce costs so much that products/working conditions suffer as a result. And that is unacceptable.
I'm not really wanting to get into a big discussion of capitalism vs socialism except to say that I believe that the biggest advantage in capitalism is that it provides the opportunity for those who innovate and take risks to be rewarded for such risk and innovation. I'd also be more likely to support socialism when you can show me a model where politics and individual greed don't get involved in these government owned endeavors.
