The talking heads and spin masters have been busy to criticize the Republicans and Democrats who voted against the bailout bill. They have many stories about doom & gloom, threats of a massive financial cliff, and a society forced to live without any credit or debt availability. So why are the markets up 500 points? Fact is, we have a long road of ups and downs ahead of us in the next few years - and they'll mostly be downs. The problem isn't just executive pay, or falling house prices, or defaults, or derivatives, or leverage - its the way they're intertwined to create a system that distorts its real value. In simple terms, it can all be summed up: We've been living beyond our means, We've accumulated too much debt, and we lied on the credit application when they asked about how much our assets are really worth. Borrowing $700B to pay the creditors back isn't going to help our credit rating in the long run. Especially not when the interest comes due on the new debts after we couldn't afford the old ones...
wait till tomorrow mate... wait till tomorrows over before you start celebrating the up 'cause matters will be different in 24 hours...
The US government MUST return to living within its means. This entails massive cuts in defense, withdrawal from the seven conflicts its now involved in--Iraq, Afghanistan, Israel, Iran, Colombia, Bolivia, and Venezuela--and cancellation of the Bush tax cuts. The proposed bailout could actually make it more difficult for consumers and small businesses to borrow money. The Fed will have to go into the markets and borrow the $700 billion gift to the bankers. That, either directly or indirectly, puts the Fed in competition with consumers and small businesses for funds, making those funds more scarce, and more expensive.
I am an advocate of the invisible hands. Would prefer to let the markets decide which banks are to survive and which are to perish. There will be sharp pain in the beginning but I believe the USA economy will be much stronger after that. The $700 billion injection does not bring certainty that the credit markets can be saved. It may well be prolonging the sufferings and deepening an already severe recession.
I absolutely agree with you... But there is one important thing to note here... This economic mess emerged after oil prices got really high. There could be a direct connection between cheap energy and economic prosperity... The main problem is... that US has a debt-based economy, just like most countries in the world. So that means, all the money generated, is through borrowing money on interest, either through the federal reserve, or owed to foreign creditors. Hence, the money owed is always greater than the money in circulation. Even the government borrows money from the FED, on interest, to fund its deficit. So, the only way this system could work is if there is infinite economic growth. But since resources are finite, infinite growth is impossible. Increasing economy demands increasing amounts of "cheap" energy. And without this extra energy, the system cannot continue to work... And I believe the days of cheap energy are over.
Gauharjk: Between 9/30 and today there has been a lot of economic meltdown. The house passed the bailout legislation in part because of huge volumes of voter letters and emails describing how rough things are rapidly becoming. The US banking/finance industry is teetering...and its hitting world wide. I think in time people will go back and trace this very hard and w/ tight time lines. It appears 3 things happened closely in time sequence. Lots of variable rate subprime mortgages. 1. The variable rates hit and the costs were brutal to the mortgage holders. 2. The housing price bubble burst. All speculative bubbles burst at one time or another. Its a function of markets going crazy chasing the fastest easiest dollar. 3. The rapid oil price surge hit during 2nd half 2007 and 1st half 2008, with enormous increases hitting household incomes. Everything together hit the middle and lower middle class all at once. Folks couldn't handle inflationary costs and huge increases in housing costs. Refinancing fell out. The sh!t hit the fan all at once. There is way too much US debt. Over 20 years or so the biggest increases in debt, surprisingly have not been the fed govt (and state govts's) It was in household debt and finance industry debt. Similarly corporate (non finance) debt at rates that were more like the increases in govt debt.....and not as high as households and finance industry. The finance industry is tumbling...and they won't or can't even borrow money from one another as they do so normally and aggressively and in such great quantities on a day to day basis. We never see this process on a day to day basis...but we are seeing its ramifications right now when things go to pot. Meanwhile, as I'm sure you have read, I'm not one who believes in the absolute supremacy of markets without govt intervention. The theory of markets points out that markets are most efficient. BUT.....that only occurs as markets approximate the theory of PERFECT MARKETS. The finance markets moved far from perfect. My experience over close to 30 years is that they do this periodically. I like to call it....chasing the fastest easist buck. They were duplicitly selling mortgage loans that should not have been sold. 2. It appears from a bit of evidence I've seen that higher up the finance chain, the bond rating industries were totally misrepresenting debt. I think that needs to be investigated. It could appear that bond ratings went out with very high quality ratings for huge securities representing tons of subprimes that should not have had ratings anywhere's near as high quality. Its incredibly easier to sell high quality bonds than low quality. Over time, the finance industry needs to be refereed. Its that simple. It moves toward excess or deception. Once it moves in that direction it is no longer a "perfect market" by definition. When that happens it is no longer the most logical or best determiner of market outcomes. I do agree we in the States are overloaded with debt. A cleansing out is taking place. Overvalued assets are losing lots of value. Bankruptcies are occurring. We will see where this moves us.
I agree with your views. Government regulation is essential to maintain the character of free markets. There will always be people who cheat and cut corners to maximize profits at the expense of others. An example is China's melamine-tainted milk scandal. Government has to keep a stronger watch at the financial markets. So many bonds that were AAA rated went straight to D (default) within a week. That was shocking. People believed AAA bonds were "as safe as gold". The ratings agency did a very bad job... It seems to me that the Federal Reserve co-opted most of the new hedge funds, essentially saying that if these funds don't pay back, then the FED would. Thats why all hedge funds that were supposed to be B-rated got AAA ratings. That helped them raise money very easily... Now that the interest rates are resetting higher, and property prices are declining, more people would lose their homes. The next 5 years could be very painful, IMO.