What, exactly, will happen if there's no bailout?

[Little-Acorn]

Maybe Congress will never approve a bailout package, who knows.

So we have a lot of people who got mortgages on houses, and they can't keep up the payments, now that adjustable rates have gone up and house values have gone down. They are maybe 3-5% of all house mortgages total, meaning 95-97% of mortgages are doing fine. These quasi-governmental groups Freddie and Fannie have bought most of the risky ones for some reason.

A bailout is apparently when the govt buys those risky mortgages from Freddie and Fannie. If the govt doesn't, then what will happen? I'd imagine the F&F will stop buying risky mortgages (duh!), which means the mortgage companies will stop offering them. Which means the mortgage companies, to avoid going out of business entirely, will offer only "safer" mortgages: Higher down payments, good-credit-rating customers only, etc.

Sounds to me like things will simply go back to where they were before govt started pressuring F&F to make the risky loans in the 1990s. And maybe they'll go farther, with even higher down payments required, for a while.

I keep hearing that people may lose their jobs, the economy will slow, and/or a general economic collapse may result. How, exactly? How would I, or the guy at the local gas station, or the ones working for Toyota in Princeton, Indiana lose their jobs? What, exactly, will make the economy collapse?

I'm no economist, though I know the basics as well as the next guy. Can some economic person fill in some details here?

[stang56k]

Well the main thing you will see, which the market is trying to do now is a big correction as the credit bubble is trying to pop. The bail outs are just preventing and swelling the bubble. It looks good temporarly but preventing the bubble to pop will just make the end ruseult even worse. basily let the markets adjust on thier own we might see a recession for a year or two, keep making the illusion everything is alright with bail outs and inflation the currency you get a great depression for a decade or so.

Heres an article that is a good read to put it in perspective. You might not like the guy but he is right on when it comes to fiscal terms.


Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,




Ron Paul

[Little-Acorn]

So, no answers to the questions I asked? Nothing but cut/paste bromides on how stupid people have been and what we should hav done back then?

The questions were:


I keep hearing that people may lose their jobs, the economy will slow, and/or a general economic collapse may result. How, exactly? How would I, or the guy at the local gas station, or the ones working for Toyota in Princeton, Indiana lose their jobs? What, exactly, will make the economy collapse?

[stang56k]

Its way too complicated to explain... Here is a comic that puts it into lamins terms on how the free market economy is ran and why it grows/shrinks.

http://www.takelifeback.com/hegawid/

[Mr. P]

I've been asking the same question, LA.

Some things are causing me to change my mind and oppose a bail out.

It's looking a bit like it's almost a cover for Government incompetence.
I mean if this is such a disaster why the hell is Congress taking the day off?

Like you I haven't yet to hear anything to explain what will happen if no action is taken. I see the markets reaction but I'm beginning to think that it looks like a bunch of kids throwing a tantrum cuz they didn't get their way. Heck the market is on an up-tic today (at least now), does that make sense in the face of a disaster?

Even though I'm taken it hard on my 401k, -25%, I'm thinking NO bailout!

[Trigg]

Maybe Congress will never approve a bailout package, who knows.

So we have a lot of people who got mortgages on houses, and they can't keep up the payments, now that adjustable rates have gone up and house values have gone down. They are maybe 3-5% of all house mortgages total, meaning 95-97% of mortgages are doing fine. These quasi-governmental groups Freddie and Fannie have bought most of the risky ones for some reason.

A bailout is apparently when the govt buys those risky mortgages from Freddie and Fannie. If the govt doesn't, then what will happen? I'd imagine the F&F will stop buying risky mortgages (duh!), which means the mortgage companies will stop offering them. Which means the mortgage companies, to avoid going out of business entirely, will offer only "safer" mortgages: Higher down payments, good-credit-rating customers only, etc.

Sounds to me like things will simply go back to where they were before govt started pressuring F&F to make the risky loans in the 1990s. And maybe they'll go farther, with even higher down payments required, for a while.

I keep hearing that people may lose their jobs, the economy will slow, and/or a general economic collapse may result. How, exactly? How would I, or the guy at the local gas station, or the ones working for Toyota in Princeton, Indiana lose their jobs? What, exactly, will make the economy collapse?


Maybe I"m optimistic, but here is what I see happening. I'm no economic either, here goes.

If there is no bailout. I see banks working with the 3-5% of people with mortgages they can't afford. Banks don't want to own houses that they then have to maintain and try to sell again. I think they would offer to refinance these houses, doing away with adjustable rate and balloon payments that more than likely got these people into trouble in the first place. Yes, people might be stuck with houses that they owe more on than they're worth, but give it a few years and more than likely the value of the house will catch up to the loan amount.

I then see the banks tightening up their lending practices so that it is harder to get a loan or credit cards. Basically going back to how it used to be before they were encouraged to "look the other way" in regards to people's credit history.

[Immanuel]

Maybe Congress will never approve a bailout package, who knows.

So we have a lot of people who got mortgages on houses, and they can't keep up the payments, now that adjustable rates have gone up and house values have gone down. They are maybe 3-5% of all house mortgages total, meaning 95-97% of mortgages are doing fine. These quasi-governmental groups Freddie and Fannie have bought most of the risky ones for some reason.

A bailout is apparently when the govt buys those risky mortgages from Freddie and Fannie. If the govt doesn't, then what will happen? I'd imagine the F&F will stop buying risky mortgages (duh!), which means the mortgage companies will stop offering them. Which means the mortgage companies, to avoid going out of business entirely, will offer only "safer" mortgages: Higher down payments, good-credit-rating customers only, etc.

Sounds to me like things will simply go back to where they were before govt started pressuring F&F to make the risky loans in the 1990s. And maybe they'll go farther, with even higher down payments required, for a while.

I keep hearing that people may lose their jobs, the economy will slow, and/or a general economic collapse may result. How, exactly? How would I, or the guy at the local gas station, or the ones working for Toyota in Princeton, Indiana lose their jobs? What, exactly, will make the economy collapse?

I'm no economist, though I know the basics as well as the next guy. Can some economic person fill in some details here?

I'm no economist either, but I agree with you, I don't think that you or I or the guys at the local gas station or grocery store etc. are going to lose our jobs. If the economy does go into recession then I am sure some will lose their jobs, but the people that need to worry are the people that work at the banks and lending institutions. These institutions are likely to feel a crunch for a while as revenue sources dry up a little bit. In the end, the market will correct itself and business will go back to "business as usual". These institutions are going to begin to make cutbacks and trim their waste beginning with the little guy who was only taking orders and trying to make a living.

Immie

[Trigg]

Here is something else to think about.

The policies put into place during the Great Depression actually prolonged it.

http://www.parapundit.com/archives/002293.html


Will a big bailout hurt us in the long run??????

[stang56k]

Here is something else to think about.

The policies put into place during the Great Depression actually prolonged it.

http://www.parapundit.com/archives/002293.html


Will a big bailout hurt us in the long run??????

A scary thought is... You would have to assume Washington and the fed know this. Why are they using these policies now even though history shows us not to?

[Mr. P]

Maybe I"m optimistic, but here is what I see happening. I'm no economic either, here goes.

If there is no bailout. I see banks working with the 3-5% of people with mortgages they can't afford. Banks don't want to own houses that they then have to maintain and try to sell again. I think they would offer to refinance these houses, doing away with adjustable rate and balloon payments that more than likely got these people into trouble in the first place. Yes, people might be stuck with houses that they owe more on than they're worth, but give it a few years and more than likely the value of the house will catch up to the loan amount.

I then see the banks tightening up their lending practices so that it is harder to get a loan or credit cards. Basically going back to how it used to be before they were encouraged to "look the other way" in regards to people's credit history.

But that won't work, Trigg. This 3-5% can't afford nor qualify for a standard mortgage which is why these sub-primes were offered. They simply can't afford to own a home.

[avatar4321]

My understanding is this issue is about liquid cash. See companies often take short term loans to cover expenses between the time a good is sold or service is performed and the reciept of payment for those services. These expenses are those such as payroll, overhead, etc.

Because of the bad loans, they dont have liquid money available to make short term loans so corporations that need to borrow to make payments for overhead costs cant borrow.

[Mr. P]

My understanding is this issue is about liquid cash. See companies often take short term loans to cover expenses between the time a good is sold or service is performed and the reciept of payment for those services. These expenses are those such as payroll, overhead, etc.

Because of the bad loans, they dont have liquid money available to make short term loans so corporations that need to borrow to make payments for overhead costs cant borrow.

That may be true, but I'd say if any business has to float loans to pay overhead they're operating on the edge anyway. Not efficient or profitable enough to stay in business if the economy burps, close shop. Lots of that going on right now BTW.

[avatar4321]

That may be true, but I'd say if any business has to float loans to pay overhead they're operating on the edge anyway. Not efficient or profitable enough to stay in business if the economy burps, close shop. Lots of that going on right now BTW.

Oh i completely agree. I dont think it's a good way to run a business.

[stang56k]

This man speaks the truth of the situation...

http://www.youtube.com/watch?v=YBStWyQW6Rk

[mundame]

We cannot know what will happen if the Wall Street bailout isn't passed, because that's in the future and prediction of the future doesn't work.

I'd rather we dealt with present occurances, things actually happening.

That makes sense. A lot of wild future predictions designed to fill bankers' pockets? Lots of sense for them, little for us.