This isn’t the kind of thing I would normally post here on EMUTalk.org, but this $700 billion or so bailout that is necessary to save the U.S. and the world economy from collapse is most certainly big news that might hurt higher ed, or, at least according to the opening paragraph of this “for pay” article in the CHE, this bailout might help banks loaning to students and thus help higher ed.
So I thought it might be something worthy of discussion here.
There has already been a fair amount of debate about whether or not this is a good idea (see this liberal view and this conservative view, for example). I am not going to pretend to know the answer personally. But I guess I’m posting this to ask two questions:
- EMUTalk.org-types who understand things like the economy: what do you think? Is this a good idea or what?
- I was really struck this morning by something John McCain said this morning at a speech in New York. I just saw part of it while I was at the gym, but McCain pointed out that $700 billion is enough money to repair all the infrastructure in every community in the United States. And this got me to thinking: what else could we be spending this kind of money on?
For example, if we could just wiggle our noses and pass a $700 billion or so bailout for infrastructure across the U.S., wouldn’t that be a better investment than bailing out banks that made bad investments? How about bailing out education? It would cost a lot less than $700 billion to give every community college, college, and university student in this country free tuition; wouldn’t that be a pretty good investment?
How about universal health care? How about shoring up social security, a “promise” that people in my generation (I’m 42) just assume will not be kept? How about investing heavily in research in alternative fuels that can get the U.S. oil-free? And so and and so forth…
So, what do you think?
Oh, and why not use this money to fund the BuyMyShitPile.com requests?
Not to be a pessimist, but we’re screwed. We spent too much before, and now we’re all in debt up to the sky. Thank you Alan Greenspan and your irrational exuberance on future money availability – spend spend spend!
I notice there has been zero talk about the student loan industry, which I’m sure is next on the list for failure. With all these students taking out 30-50k on average and not finding jobs that can pay them back, it won’t be long until we’re talking bailout about those too.
Eagle Talon raises an extremely good point. So far there has been little talk about student loans (which are bought and sold just like mortgages). Perhaps worse is the credit card industry. With significant job loss in the US, foreclosures, rise in gas prices (and concurrently food prices) many have turned to credit cards. Which were as early as Feb. 08 reports of credit card borrowing was accerlating (4 times faster than ’07). As people begin to default on credit card borrowing what is to come next? Another bailout of this time approximately $900 billion?
While I have been following this issue intensely I won’t say I understand all of the ins and outs of the economy. Figures of $700 billion are too abstract, the closest concrete description I can understand is McCain’s approximation that it is rougly $10,000 per household. This bailout only seems to be a finger in the damn approach, with lots of leaks ready to burst elsewhere.
If it is approved I hope that there are some extremely strict regulations passed that affect not only mortage lending but everything from credit cards to personal loans to education loans.
Think how bad the economy would be if all that oil in Irag wasn’t paying all the bills for our ongoing occupation. I’m also ever so glad we’re not just sending billions of dollars on pallets over there to be lost with no accountability in place.
If only we had allowed the privatization of social security when we had the chance, because, after all, look how successful the economy has been for the truly important people in the US (Hint: Must have more than 5 million dollars to be a member of the club. Marrying an heiress couldn’t hurt.). Now these people are forced into making obvious public attempts to finish looting the wealth of our nation from the dwindling middle class.
I can see the MOON from my house! I must be an astronaut!
The whole thing is like a bunch of arsonists running around with fire hats on asking to put out the fire.
I can see the moon. he-he. That’s a good one….
Well, let me just state my views here briefly because this topic has been debated non stop lately in my field (personal finance).
We are dealing with a very painful deleveraging process that may go on for a while. I am the last person to call for government intervention in such a massive way but I am convinced that the plan by Henry Paulson and Ben Bernanke is a MUST do plan right NOW! It has nothing to do with bailing out anyone or this and that and other details, it has to do with restoring CONFIDENCE in our system and get the credit flowing again and it has to be done FAST. As a side note, I have never voted Republican and likely never will. But these two guys are good and very smart guys and if they were not around things would likely be even worse now. In addition, I think this plan will end up not costing the taxpayers much money in the end…It may turn out to be the most brilliant move ever (I hope I do not eat my words one day…things change and there is a reason Warren Buffet has called the stock markets manic depressive). But politically you got all these congress people whose training in economics is mostly non-existent and they are all so worried about being reelected and trying to please their constituents who really have no clue what’s going on…
You asked for my take on it, here it is. Again, the plan has nothing to do with bailing out bad people and bad companies, it is a massive move to let institutions everywhere know that the government is determined to do whatever is necessary to keep our system going. Based on Bush’s crappy history of scaring us needlessly, I am afraid that people and the Congress won’t fall this time when they should…
My 2 cents.
You could buy Water Street.
My sense is that you’re right, EagleG. But a) the same people who got us into this mess (W. et al, not to mention the various bankers and CEOs and whoever else on Wall Street) are the same jokers we’re trusting to get us out of this mess, and b) no one really knows ultimately if this is going to work.
Conversely, if you took a measly $200 billion and invested it in higher ed (for example) maybe by doing something like giving every undergrad student a voucher to cover a certain amount of tuition, then I am quite certain we as a nation would see a great benefit.
I appreciate that something has to be done and it has to be done soon. I don’t know though if that “something” is $700 billion worth and if “soon” is so fast there’s no time to debate it.
EagleG– Smart observations, thank you for them. But a few concerns. The Hank P. & Ben B. plan seems to lack the support of their own party in the House, and it’s massively unpopular with voters, since it involves cash for Wall Street plans but not much for people losing their homes. It looks to many like welfare for the rich, free enterprise for the little guys: and presenting a plan that looks like that is inept politically, as far as getting it enacted. (Paul Krugman had a great column on the plan’s shortcomings yesterday…..) And if the taxpayer is putting in $700 Billion, shouldn’t the tax payer get some equity for that $? Surely getting equity for govt. $ is no less a violation of free market principles than out right federal gifts of billions to private firms. It’s normal for those who provide capital to get equity shares in a capitalist market. Sweden did this a decade or so ago and it worked out well….
Hank & Ben, i fear, just took a guess at how much is required — just as they have flip flopped several times in the last 6 months. I don’t mean to be too harsh on them, they are operating in unknown waters, but they let the White House turn the negotiations over this into a McCain campaign strategy event, and that appears likely to seriously delay the plan: GOP House members want to distance themselves from both Bush and McCain, unless McCain comes out against the plan. How’s that gonna help pass it? Nor have they or the White House addressed the seemingly iinevitable conclusion to be drawn from the fact they have made this proposal, which is that the very principles that have governed this Administration’s approach to the economy — deregulation, govt. out of the economy, let businessmen be in charge — is fundamentally terribly incorrect. After arguing for years or decades against the govt. having a strong regulatory role, it’s hard to suddenly say now the govt. must step into “save” the system without people whose homes are not deemed worthy of being saved feeling that the whole thing is more of a rip off than it is Good Government.
to sitedad:
>>>>>>>a) the same people who got us into this mess (W. et al, not to mention the various bankers and CEOs and whoever else on Wall Street) are the same jokers we’re trusting to get us out of this mess, and b) no one really knows ultimately if this is going to work.
Henry Paulson has not been around for too long and Ben Bernanke is supposed to be above politics anyway. Henry Paulson is a good guy here and he made sure before he got the job that he would be above politics and do whatever he thinks is best for the nation. Two anecdotes about his proposal he did to show how serious the situation is:
-he said if this does not pass “heaven help us all” and
-last night, he went down to one knee to the Republicans Congressmen meeting not to come up with another plan (they did).
to Mark:
>>>>>>>>>>>The Hank P. & Ben B. plan seems to lack the support of their own party in the House, and it’s massively unpopular with voters…
Never underestimate the incredible power of Republicans to screw up things:-)
Of course it’s unpopular…this is not designed to be a beauty contest.
As WaMu failed last night maybe Henry Paulson should hire Photoshop experts to create pics of Congrressmen being lynched for governing while there is a run on the banks so they get it…Very tall task to sell this I agree. BUT is needed desperately IMHO.
Thankfully my clients and me have 15 plus years to go before we need the money in our investment portfolios and we intend to ride things out. We have been making small selective purchases all along. I do not make stupid bets as in “I am going all cash tomorrow and wait until next month to get back in the market”, this market timing is a waste of time because no one has a crystall ball. But as an advisor dealing in this area for a long time I must admit this is the most worrying time I have ever faced about the state of our economy. This administration has made us all poorer and I think has set us back for a generation.
Hope the Congressmen get it together today….I should have know when McCain decided to step in.
In the meantime, pray…I did last night:-)
Less than a year ago, Paulson, Bernanke, and all the rest of them where saying repeatedly that they have things under control, the economy was sound, don’t worry about Freddie and Fannie, etc. All of a sudden– and I do mean like all of a sudden– the freakin’ world is going to end. This does not pass the chicken little/ “bullshit” test.
I can appreciate the fact that there is a problem here, but as far as I can tell, no one has really bothered to explain in any detail to non-Wall Street-types just what the problem is and why this bailout is a good approach. The only explanation I’ve heard is that if the feds don’t step in, then it will be really hard to borrow money and credit will be hard to get for folks who don’t have great credit already. Well, isn’t this kind of a summary of what got us into this mess in the first place? People/banks/investors borrowing money that they couldn’t afford to borrow? Isn’t this throwing gasoline onto a fire?
Sure, something has to be done. Probably, though as this piece by James K. Galbraith indicates, not everyone agrees with that. Regardless, $700 billion is a made-up number, it would be foolish for Democrats to give the Republican leadership cover when this is a plan being fought by folks within the Republican party, and what is sorely lacking in these last days of the Bush administration are the grown-ups.
sitedad: this is what Ken Lewis, the Bank of America had to say in a letter to WSJ today…maybe this will explain things better I hope.
Again, this should not be about politics and is definitely not about Wall Street which is dead as we have known it!
Main Street Needs the Treasury Plan
By KENNETH D. LEWIS
In our national debate about Treasury Secretary Hank Paulson’s proposed financial rescue package, we are having the wrong conversation.
This is not about how to bail out Wall Street. This is about saving the U.S. financial system for the benefit of American businesses, consumers and the economy at large. I believe that Mr. Paulson’s plan will accomplish this goal. Congress should include provisions it feels are necessary to ensure oversight and accountability. And it should then pass the legislation as soon as possible.
There is no question in my mind that our financial system and our economy are at risk. Right now, the flow of funds that makes our economy run is threatened by a lack of confidence in the value of financial assets, particularly mortgage assets. Financial institutions are extremely hesitant to purchase assets or lend money to one another to fund the system.
The inability of investors to price many of these assets has resulted in a blockage of liquidity — no one is willing to buy or sell anything. Banks must pay more to fund themselves because investors are wary of risks, both real and perceived. Assets decline in value as demand drops. Ratings agencies downgrade banks’ debt, further increasing the cost of funding. The banks that are under the most balance-sheet pressure respond by shrinking assets, and conserve capital by reducing lending.
The result is less credit to buy homes, cars or other large-ticket items, followed by further declines in home prices, reduced production of goods, shrinking economic activity and rising unemployment. Both small and large businesses are facing shortages of operating funds and increasing capital pressure.
At Bank of America, we’ve seen an increase in commercial clients of other banks coming to us with urgent credit needs, saying that their other banks are cutting off or repricing lines of credit. Without a systemic solution, this problem will get worse. Workers will bear much of the impact.
Just as optimism in times of growth encourages an upward trend, pessimism in uncertain times can feed a downward trend. Allowing such a trend to gain strength is our great risk.
The proposed rescue legislation accomplishes one simple goal: It provides a buyer (the Treasury) for financial assets that cannot be priced today because the market for such assets has temporarily frozen up, enabling financial institutions to stabilize their balance sheets, regain confidence in the system and one another, and start lending again.
The most critical point for the public to understand is that the money being proposed — $700 billion — is not going away. It will be used by the government to purchase assets at a negotiated price — presumably a price based on the fundamental value of the underlying collateral (taking into account the underlying risks). When the markets recover, the government will then resell these assets — perhaps at a loss, but not necessarily. The American taxpayer could break even on this transaction, or even post a financial gain.
In the meantime, consumers will see value as money starts to flow, home prices stabilize, and the economy avoids what could otherwise be a deep — and preventable — recession.
Some will argue that I favor this legislation only because my company will benefit from it. In fact, while we have suffered in the current environment, our balance sheet is comparatively strong. We have been gaining market share in deposits and loans, while some of our competitors have struggled. This bill may help a number of our competitors much more than it will help us.
I support this bill because the overall benefits to consumers, businesses and the economy are infinitely more important to Bank of America than short-term concerns about our competitive position in the marketplace.
I am confident that my company can compete and win, given a strong economy and a functioning financial system. Congress and the administration have a plan before them that will greatly enhance confidence in our system, putting us back on a path to growth. I urge them to enact it soon.
Mr. Lewis is chairman, CEO and president of Bank of America.
How about what will $68,000,000 buy. That’s the amount of money that Janet Stroh invested in the Auction Rate Bond Market that has been frozen since February. EMU gets it money back in October.
Hey, it’s good she didn’t invest it in any products by Lehman Brothers:-)
There’s an interesting petition from academics from a wide variety of different perspectives who are against this plan. Among other things, as this Chronicle of Higher Education piece points out that is rather rare for academic petitions of this sort to have a lot of weight/value. Interesting stuff.
“Bank Bailout: Scholars’ Views Fuel Republican Revolt.”
For an excellent read on the matter please click here:
http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2008/09/27/who-s-afraid-of-a-big-bad-bailout.aspx
“Who’s Afraid of a Big Bad Bailout?”
I’m an expert on bailouts. I bailed out 5 times–and only once was due to enemy fire. But I don’t like to mention that I was a POW–except for all the times that I have mention it to show that I’m a maverick even to myself.
My friends, when the tax and spend liberals accuse me of flip-flopping nearly 100 times during the course of this campaign, that’s just me being all mavericky again.
And just like mavericks that are home on the range (I mean the range they’re on BEFORE they get cooked on the range at one of my 8 houses–OOPS!–one of my wife’s 8 houses), I’m pretty good at producing what mavericks produce.
Time for this tough guy to take a nap. My non-elitist $500 loafers are a little heavy.