The $700billion Gorilla

Philosophy Forums Society, Government, and Economics
1

I have been listening to economists trying to explain the how and the why of the stock market crisis. From a host of resources I think I have gleaned a reasonable idea of what has happened and how it will affect us.

Most probably know how and why the crisis happened, but for those who don’t this is what I think started it…

How the Bubble Grew

My guess is that the germ of the idea began maybe as along as a decade ago on Wall Street when an entrepreneur came with an idea for accelerating the growth of the housing market. He looked for on of the major national mortgage houses, not to give him money, but allow him to use their leveraging powers and initiate the program. The scheme had to skirt around a few technical barriers that were unlikely to be uncovered on the unregulated market, but even if they were it would not rebound on the major backer.

The foundation of the scheme was based on the solidarity of the housing market and the sound history of American homeowners mortgage payments, juxtaposed that against the general rise of real estate. Every American family wants a house of their dreams, and would definitely buy a new one if they could afford it. What held them back was not high enough income to secure a large loan. This delay in realizing their dreams could be overcome if banks factored in the future value of their home prior to purchase. Each new buyer would be given a three year start with very low interest rates, before the rates went up. . At that time the increased value of the home would give them enough equity to refinance the home and keep the mortgage payments within their means.

The financial hurdle for qualification could be over-come if buyers artificially inflated their income on their loan applications. Certified loan investigators could be brought on board and made to see the long-term advantages for all and simply approve loan applications without a background check. This approval allowed regulated banks to go ahead and legally grant the loan. The banks could secure the loans by selling the mortgage contacts to the larger national banks. This vast influx of new business would inflate the value of stocks on the international market.

The over-all result would be a win/win situation for everyone. Families would have the home of their dreams faster than they ever dreamed. The realtors and loan officers would get far more commissions than they ever dreamed. All the lenders along the chain would make more profits than they had ever dreamed. And America would live happily ever after.

How the bubble burst

The bubble burst when millions of new homes were built faster than ever before, the expected rise in their value stalled out and the over-extended home-owners could not keep up with their mortgage payments. Not to mention an unaccounted new statistic that showed the earnings of homeowners was double that of the national average.

The Fall Out.

Massive home fore-closures with tens of thousands of American families left with broken dreams. The liquidity of the worlds largest corporations dried up in billions of bad mortgage contracts that nobody will buy. Without liquidity, the nations industries are left with nowhere to go to get credit for new business… Large and small businesses fail. Massive unemployment. A recession heading for a depression.

The Bail Out.

The President and the Fed propose a $700Billion bail out with tax-payers money.
Approval from Congress is stalled by conflicting party ideologies.

The Stall Out.

The Democrats are willing to approve the Presidents proposal; subject to Congressional oversight; profit sharing; no bonuses to corporate execs, and provision for families loosing their homes.

The is a bad deal from the Republican point of view. Their constituents will vote then out of office for allowing such a massive social program to take place.

The Republicans want the market to bail it itself out. The liquidity problem can be solved by bring corporate taxes down from 30% to 5%, thus allowing a flood of money into the stock market as businesses come back home to take advantage of it.

This is a bad deal from the democratic point of view. Its back to giving tax braks to the rich and powerful, who are already cheating on tax loop-holes. So they will take the fall out.

This is where we are as it stands today. Stalemate.

The Solution.

Which takes me back to the idea I put forward a couple of days ago,
Put liquidity into the market by investing the $700 billion in the infrastructure, renewable energy, education and health care. This money will generate millions of jobs, and elevate the stocks have companies contracted to repair the country.

America lives happily ever after,

2

Your solution is a bad solution:

  1. health care already has too much money in it, maybe money should be taken away from health care;

  2. education is a fairy tale, more education never solved any problems, all the business phds and masters at wall street made this mess with all the “education” they had, maybe education is mostly a big scam fairy tale;

  3. renweable energy is another scam and fairy tale, the most you can do is create synth fuels from carbon, ethanol etc. but it is business as usual;

  4. infrastructures are public “socialistic”, “communistic” things, things for the general good, for the general public and america is all about and only about private goods, private profit, the social - common good is bad in america, is considered very evil and wicked so no money should go there;

Maybe build 10 million homes for rent at about 400 dollars a month would be a good use of that money. The government gets back some money each month as rents and the people can get on living only paying 400 dollars a month for rent.

We should go back to appreciating rent and not want to be owners of homes, such an idiotic idea, you just need a home to live in, you don’t need to own it as an “americam dream” or “status symbol”.

10 million homes times 100,000 dollars to build each makes 1 trillion, the exact amount the fed has to pour out to fix the “economy”…

3

Tell that to families with sick children and no insurance. Making profits out of sickness is sick in itself. As it stands right now, doctors spend more on buying insurance against malpractice than they do on up-grading their practice. Health care should be absolutely free and it should provide the best tech there is on the planet to rich and poor alike, period. Doctoring is not a business. It is a vocation. If the healing gift is not innate, don’t do it.

Without education we would still be hunter/gatherers. What is wrong is not enough emphasis placed on encouraging personal ethics. 12 years inside a classroom is a complete waste of time. Keep the kids at home and teach them family values and let the internet teach the technology. Use the existing education budget to support the families doing home-schooling. It takes both parents to instill sound social values.

Tapping into the real energy of the planet requires vast effort and long-term thinking. The short-term goals of present government and business adminstrations do not even contemplate going there.

There is enough lunar energy in the Gulf of California to power half of America, let alone what is available in the rest of the world’s oceans. We have not even begun to tap atmospheric differentials. We are wasting energy via urban sprawl and traffic grid-lock. Cities must go up, not out, and put gravity to work. Carbon deposits are finite and dirty.

Agreed. Privatization of essential social support systems is a form of robbery. It uses all the benefits that tax dollars put into the growth and upkeep of transport, energy, communication and legal protection, pays the least possible to its employees, and then resists feeding a portion of the profits back into the system. The fat cats skimming it off the top end up with a dozen homes and endless toys, and scream “socialism” at any protest.

The cost of policing ownership is bankrupting us.
Custodianship has to be the guiding ethic of the future.

Until that enlightenment enters the general consciousness, lets grab the $700 Billion for better house-keeping and keep it out of the hands of the gamblers.

4

Most likely, I don’t understand everything that’s happening as well as I should, but perhaps putting money into the things you’ve mentioned ISN’T as fruitful as injecting money into the financial sector to allow loans to be made.

When you allow money to be borrowed for the purchase of houses, cars, starting new businesses, etc., then I’d think it automatically creates new jobs (especially in the case of business loans). The fear now is that banks won’t loan out money, which is going to freeze economic growth, since businesses won’t be able to borrow money, and new businesses won’t be able to get started without borrowed money.

5

Another thing I’d like to point out.

I now see the blogosphere has erupted as to who’s fault it is that this thing didn’t pass, dems vs republicans, same old BS.

Maybe this bailout was essential. Maybe it would’ve helped. Maybe it would’ve dragged an inevitable recession or depression on for even longer than it would if it doesn’t pass at all.

It’s just a shame to see the “main street” peons babbling about who’s fault it is, what got us into this mess, whether we should or shouldn’t do it, when really nobody understands what the hell is going to happen, with or without passage of this bill.

6

All you are saying is lets just go back to the same old same o that got us into this mess.

I am proposing an entirely new idea that will definately give the RIGHT kind of new jobs and economic growth.

7

With all due respect, I don’t think that your idea is entirely new. I’ve seen it mentioned several times on CNN’s iReports, and it is essentially Obama’s policy of putting money back into America. If it really were as simple as investing the money back into America to see economic prosperity, it would be a no-brainer. Not only would we be repairing infrastructure, bettering education, finding alternative fuels and making America energy independent, but it would also restore the economy? Who would possibly turn an idea like that down? That’s what makes me think that those who are much smarter than I when it comes to economic policy haven’t given the idea much consideration.

I don’t know how putting money into the things you’ve mentioned would, for instance, free up credit and unfreeze liquidity. How would giving money to rebuild infrastructure and better education, in the short term, encourage banks to loan credit to small businesses so they can pay their employees?

8

Isn’t it ironic and a paradox that the USA with about 10 to 15 million vacant houses (no one even knows how many ?) and many empty all over the place, foreclosures and all, people are forced to be evicted and live in “tent cities” ? It is an example of excess capacity, of a society being too rich, of a society having too much of a basic product, too many empty homes that creates poverty, it is a contradiction that having too much of a good thing, having done all the right things, you get a result that it is the exact opposite of what you would logically expect.

The more you build, the more you invest, the more products, the poorer you get, the less everyone has, the greater the inequality. Many poor countries worldwide would like to have the huge “glut” of houses and cars and every other product the USA has, but this makes the USA poor. Diminishing returns of technology and capitalism, maybe we should just give a billion dollars each to the richest 1000 americans, so we can create greater inequality, since inequality is the most cherished american value, the fact that people are not all “equal” is the greatest spiritual and ethical conquest and value of america. America loves inequality so much that they didn’t pass the bail out bill because it was “too socialistic”. Those richest 1000 are the only ones who worked hard for their money, they are the only ones who deserve anything, the rest of the 300 million average slobs should just get out of the way and starve to death, they do not deserve anything!

Wow, talk about a country that is going down the drain real fast, hope brazil and russia take over the whole north america real fast, at least it may become a somewhat civilized place again…

9

Last time I checked Brazil and Russia have even much more economic inequality than the USA. So much for “civilized”…

Anyways msn has an article stating:

“Traders booed on the floor of the New York Stock Exchange as the closing bell rang. For good reason: The slump wiped out some $1.2 trillion in market capitalization from the U.S. stock market.”

Well 1.2 trillion is more than the trillion needed to build the 10 million houses for rent at 400 dollars a month, so what the hell, just put the money into building these homes and renting them, we are losing even more of that amount anyways by the natural course of events.

10

You guys need to read Keynesian Theory. The bailout is necessary and appropriate, which is why it’s going to pass even though both parties will capitalize on it politically as much as they can before it happens.

While Wall Street seems to be catching all the flak for this, that’s all politically motivated. The real culprit is the consumer, who took on loans they knowingly couldn’t afford long-term. No matter how you slice it, the consumer is the one with final say! The buck stops there, as they say. Our society idolizes “living in the moment” as opposed to long-term planning, and that attitude is why this happened. If you want to point the finger, look in the mirror.

That being said, the Federal Reserve exists to prevent the consumer from making poor decisions which inflate the economy. Greenspan should have raised interest rates, but didn’t. If you’re looking for a failure at the top level, that’s where it goes. However, that’s a bit like blaming somebody for not locking their car after it gets stolen. Sure, it’s stupid, but the criminal is the one at fault.

11

I disagree, I don’t think it is “necessary” and “appropriate.” There are a lot of people who think Keynesian Theory is a poor economic model, although I don’t know enough about it to say whether or not it is.

I agree, it is disappointing that nobody in the media, and of course the presidential candidates, don’t talk about the elephant in the room: the consumer. But the consumer wasn’t the only cause. People expect big businesses to be more prudent when loaning out money. Companies shouldn’t be loaning out money to people who say they make a certain amount, or have a certain amount saved away, without any kind of verification. I worked with a guy in mortgages, and they were in the business of strong-arming people into loans they couldn’t afford. The bigger the mortgage, the more money they made, so even if it wasn’t best for the client, they were trying to get them into it. And they didn’t do the necessary homework to see if people could afford it. It’s both parties fault.

12

Well, for better or worse, the bailout bill has passed.

This will undoubtedly either be looked back upon as the beginning of the end of capitalism as we know it, a complete failure, or one of the most genius moves in our country’s history. And that will depend on the next few years.

I feel sorry for whoever the next president is…

13

There are a million con men each planning their own next heist already. They have an endless mine. Just dig up the root of evil and you will uncover a million suckers.

14

Shit, maybe I need to become one of these suckers so I can get paid. ](*,)

15

I think this just dug our grave seven hundred billion dollars deeper

16

Go read Henry Hazlitt’s Economics in One Lesson. All of you.

17

Libertarian economics are incompatible with democratic government. It ignores the fact that the government is itself necessarily an economic entity, although one which is of unique character, having no competitors and rising and falling according to a vote rather than the natural forces of supply and demand. As such it is an artificial entity, it’s role must be artificially defined. Keynes lays down some fundamental principles as to that role, however, he was at heart a free-market economist and would be appalled at the fact that government programs implemented in the 30’s under the guise of pulling the nation out of the Great Depression are still in effect today. His call was for targeted intervention that served a specific economic purpose, namely, easing the business cycle and promoting employment. Since then, liberals have used the clout of his economic theory to promote a political platform of economic federalization which is a bastardization of his original intent. As with any theory of that nature, the specifics have been criticized and refined, but the fundamental understanding of the role of government is still applicable.

18

That sounds a bit like somebody giving you a new car because your bank account is in the red. Wouldn’t you prefer cash? What I mean is if the problem is in the capital markets, how does it help to invest in other industries? Are you wanting to punish people? Like I said earlier, the consumer is at fault. Now we’re paying the price. Sounds like applicable punishment to me.

19

Let the capital markets look after their own problem. They made it, THEY should be punished, not the tax payer. We are going into massive debt without any hardware to show for it. My plan puts public needs first and lets us pay later. It also gives the lender (China) confidence that they are putting their money to good use.

20

It’s not about punishment. There’s no crime here. That’s ridiculously naive. The capital markets aren’t isolated. If the banks have no cash to lend, how does the consumer borrow money? How do people purchase homes and cars? Yes, you could let it fix itself, but everybody suffers from that approach. The idea should be to find the smoothest, most expediant solution. Funding other industries is like flying around the world to get from New York to Philadelphia.