Interesting Analysis from Jeff Miron

Selfishly I support the bill.. however he makes great points. I'm not sure if it is overly idealistic, assuming that allowing Chapter 11s and restoration of normalcy to just "happen".. but I guess we'll see.

Either you sling crack rock or you got a wicked jump shot

He makes good points, but sorely underestimates the impact of all of these companies declaring bankruptcy. Why doesn't anyone ever place any blame on the sub-prime borrowers? Their defaults are the reason these assets turned toxic...why should they get a free pass if we're going to slosh around blame?

He has a lot of good points. Honestly, I'm torn on the bailout. I was for it, but now that I think about it, the pain that would result from the bailout's failure might be worth it for the market correction that would almost certainly happen. It could really really really suck in the short term, but it would be much better in the long term to take our licks now than push them off to future generations (but to a much greater degree).

I'd much rather see more consolidation of the financial services industry than the government intervene. If the bailout goes through, we'll see a lot of jockeying amongst firms to get the most assistance for the least cost. It will be incredibly inefficient.

Like I said, though, I'm torn on the issue. To quote my roommate (and maybe many other people, too), "The only thing worse than the bailout is not passing the bailout." Something needs to be done, but I don't know if this bailout is the best solution.

Restoring liquidity in the markets is essential. I believe the bailout will do just that. Is it a perfect solution? No. Is it a desirable solution? No. But, should we allow these securities to continue to be irrationally valued at the cost of losing our economic stability and cutting our output/income to depression levels? Definitely not. Something must be done to intervene and restore RATIONALITY in the markets. Right now, it's just a wild gambling game gone haywire.

Good read. I found the article a little too theoretical. I think the situation is more complex than he makes it out to be. Granted, he’s probably dumbing down his argument so laypeople can understand it.

The problem is – this mess is a vicious cycle. Right now, no one wants to lend money. As a result, businesses (large and small) can’t get the financing they need to operate. Without financing, some of these companies can’t afford to pay their workers’ salaries. This could lead to layoffs at all levels (top to bottom). Layoffs at the bottom will likely make these subprime mortgages less valuable, which leads to further deterioration of the balance sheets of banks. As a result of the deterioration of balance sheet assets, banks can’t get the financing THEY need to make more loans.

The solution: buy these toxic assets from banks. This will give them cash to make loans. Loans will allow many businesses to stay in business (because they now have financing to pay their workers). These workers won’t be laid off, and they can keep paying their mortgages.

I think it comes down to this: who should you punish: 1) the banks that made loans to subprime borrowers, or 2) the borrowers who knowingly or unknowingly became over leveraged? I don’t think ignorance should be rewarded. These borrowers knowingly entered into these agreements to purchase a home for nothing down. Everyone wants to blame the banks, but the banks simply filled a market niche. I compare it to the fast food, tobacco, or porn industries: none of these things are “good” things (in my opinion), but there’s a market for these products. Yes – there are tobacco companies that have marketed their products to kids, and yes, there were banks/real estate brokers that engaged in predatory lending, and that is entirely unethical and wrong. However, I believe the predatory lenders play a very small role in this big mess. Don’t throw good apples out with the bad. The predatory lenders should be punished, not the banks that filled a market niche. Borrowers who didn’t know better or knowingly became over leveraged should be punished (or at least not rewarded/their debt burden should continue).

The increase in subprime lending was primarily driven by market opportunity, not predatory lending. For the first time, banks began making loans to subprime borrowers because interest rates were low enough that the “subprimers” could actually afford to pay the mortgage. I don’t like the idea of the government meddling with the markets, but – selfishly – I don’t mind if it lubes up the credit markets and helps us bring in more deals. Without considering my own self interest, I think the consequences of not passing the bailout plan could be extremely severe (not Armageddon, but severe).

“…if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time. Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.” Here the author glazes over the chance of recession, hedging his statements with “may” and “for a time”. He says this view has “a grain of truth.” If this bailout is not passed (which, it most certainly will be passed by the end of the week – last week’s failure was a game of charades), there will certainly be a severe recession, and it may last for years. He may be comfortable from his Ivy Tower, but have some skin in the game so-to-speak. Additionally, if there are more bankruptcies, there will be bidders for these businesses: foreign entities. American businesses will be up for sales at deep discount prices. Additionally, the author mentions loans will continue because it represents a profit opportunity for someone else. Who is this someone else? China? A European country? It may be hasty to assume that the buyers will be foreign entities, but it makes sense to me now.

Anyway, those are my thoughts. I’m open to comments/feedback.

Here's where I would push you. Couldn't you also say that being levered 30-40x capital or lending to people without requiring income/job verification is an unsustainable business model? In short, my point is that banks knowingly took these risks. Investment banks became overlevered and commercial banks abandoned time-tested lending practices. Why shouldn't these reckless firms be punished? Were they ignorant? Of course not. In the same way you don't think consumers' ignorance should be rewarded, I don't think firms that knowingly engaged in risky behavior should be bailed out without giving up a whole lot in return for the government keeping them in business. In fact, if this issue involved another industry that wasn't the facilitator of the world economy, I would say let these firms wither and die. If you take big risks that don't pan out and you have a crapload of debt on the balance sheet, then you should go under.

That said, the bailout needs to happen because the market is saying so. It's become pretty clear that banks will not lend to the consumer or even to one another without the government taking the initiative to do something. I feel it's a game of cat and mouse between the banks and the government and it's one that the government cannot win.

After talking with some people in my office yesterday, I learned that my tendency is to want to blame one group for the mess. In reality, the blame should be shared (banks, consumers, rating agencies, regulators, etc.).

I don't even place much blame on the Street. The Street just recognized an opportunity for abuse and exploited it for profit. Business as usual.

In my mind, the government is almost exclusively to blame. They applied the double-edged sword of forcing banks to lend to deadbeats that can't pay and then implied that they (the govt) would back the loans in case of default.

I don't blame reckless borrowers. If some idiot has screwed creditors his whole life and you decide to take a chance on him, is it his fault when he does what he's always done and screws you too? 125% LTV loan? Give me a fucking break. You know it's bad when the industry even has an acronym for the type of loan - NINJA loan (No Income, No Job, no Assets).

Social engineering and now free market capitalism can be added to the list of failed experiments in this country. I have no doubt that the House will accept the pork-laden POS that the Senate passed.

It's like putting the rat in charge of the cheese.