Explain this logic to me? How is letting banks fail and consumers go belly up a good thing?

[Blackhatjack]

I keep reading so-called market experts pontificate that the Fed should just allow financial entities like banks, brokerages and financial investment firms take the hard fall(translate fail and/or be taken over by wealthier competitors), and in turn allow consumers to 'go upside down' on their mortgages and walk away, so that everyone will know exactly what their loans and properties are worth(30% or more less today than last week).

How is raising interest rates and allowing lending to dry up, which will kill off many businesses and bankrupt families, the right prescription?

This has all the hallmarks of an even larger failure than has been contemplated to this point.

[MannyGoldstein]

1. Ask Herbert Hoover - He'll Tell You How Well It Works

Sadly, as in the 1920s and 1930s, we may have to hit bottom before we get a clue.

[ananda]

8. hate

From the seventies on, people started letting
hate rule their politics, voting for Reeps
against their own best interests, just because
they didn't want minorites to get welfare
or affirmative action, or else they didn't want
other targeted groups to be treated fairly or
equally.

This has allowed the ignorant and idiotic
evangelists and neocons to take over the country,
and being ignorant and idiotic, the corporations
could take them over and ruin the country and
the world.

The racist nazi-like elitists have been engineering
what they consider to be a global takeover, but I
think they might have underestimated how stupid and
ignorant rightwing religious fanatics and greedmongers
can be...

Also, the propaganda machine and diversions of fear
and terror have been very effective in keeping people
stupid and ignorant and so full of hate that they just
couldn't see what more level liberal heads have been
telling us for years.

All of this has been predicted... and it's happening.

Sue

[MannyGoldstein]

11. Yep [nt]

[NNN0LHI]

13. I think you are right

Rush Limbaugh does it. Lou Dobbs does the same thing. Yet seemingly intelligent Dems fall for Dobbs.

I don't understand it?

Don

[xchrom]

2. i certainly can't see the logic of expanding this pain

in ever widening circles.

[Blackhatjack]

3. But so far all the $billions are going to the big boys, and not to the smaller banks/consumers...

Why give them billions and then proclaim you will feed 'tough medicine' to the smaller banks and consumers so we can see where we stand?

If they had injected those billions into the hands of consumers, the housing market values would not be in a free-fall right now, and those 'big boys' would not be on the end of margin calls they cannot meet.

[PSPS]

9. The housing market SHOULD be in a free fall

Housing prices are way overinflated. They should be 40-50% lower than they are now.

"Giving" money to "consumers" does nothing to remedy this. In fact, it would make matters worse by increasing the pool of potential buyers of overpriced property. The "E Z credit" scam that started this mess isn't any different from the fed "injecting billions into the hands of consumers." The result is the same.

[daa]

12. You are correct

What is the point of keeping people in houses they can't afford? Let's face it, they rented something they can[t afford and now its time to give it back. Do they have equity?

[defendandprotect]

43. THIS time if government bails out the banks . . . WE OWN THEM . . .

nationalize them ---

We can also free foreclosures --- and support states in that ---

A free for all on housing isn't going to help anyone ---

[Kittycat]

4. CEOs get to retire with their bonuses & unbrellas?

Quick way for them to cash out and retire?

[Birthmark]

5. There are two answers to that.

It sucks big league in the short term. No use sugar coating it. It will be excruciatingly painful to live through.

In the long term, though, it may be a good thing. Because maybe the next time the free marketeers try the latest, greatest version of trickle down economics the people will tell them to go to hell since the last couple of times trickle down has been tried it led to economic depression.

No, I don't like it...but this IS part of the "business cycle" that the free marketeers blather on about. Of course, they only like to talk about the good times.

[PSPS]

6. Because doing otherwise amounts to public funding of a criminal enterprise.

The whole CDO mess was a criminal ponzi scheme. As a result, for example, housing prices are way overinflated. Instead of the average cost for a house being about 2-1/2 times the median annual income, it has swelled to five times or, in many markets, more.

The more bush bails out his criminal buddies, the less likely there will be anything close to realistically priced housing.

The more bush bails out his criminal buddies, the lower the value of the dollar will go, making everything from gas to bread more expensive.

[ThomWV]

16. That too! Good point.

[El Pinko]

7. Because passing the debt on to the government only makes the government more insolvent

and debases the currency, which raises the price of fuel and food, which depresses consumption, which hurts companies, which destroys jobs, which creates more defaults, which in turn require more bailouts - and on and on and on...

[Earth_First]

10. It isn't just the so-called market experts calling for economic failure...

there are also DUers (several louder than others) that are calling for the same situation to unfold.

[El Pinko]

22. The failures will happen regardless of the bailouts.

The bailouts will only make the depression more protracted and severe, and will result in government insolvency and a worthless dollar. It will inflate away a lot of the dollar debt, but will leave the average American destitute in the face of hyperinflation, and a dearth of jobs.

Bailouts will not fix our economy. Rebuilding US industries and investing in infrastructure and alternative energy just might, if it is a full-tilt effort starting ASAP...

[girl gone mad]

38. Thank you El Pinko.

I think you are doing a good job explaining it. It frustrates me to see people so disconnected from the concept of inflation.

Edit: Here's Peter Schiff arguing with that dope Neil Cavuto on Fox News about this very point:

http://www.youtube.com/watch?v=hgkrtXYL5rk

Just what you said, we cannot engineer a bailout of these banks. They will fail. We are down to deciding whether that failure is going to be paid for by all of us common people via huge price hikes in our food, energy and other necessities, or by the upper class who gambled away their money chasing 20% annual returns.

[greyghost]

40. Indeed. They are simply printing more WORTHLESS money which

will do nothing but increase inflation.

[gravity]

14. It will create in economic collapse

If you have massive bank failures, it will cause a depression which is 10x worst than a recession. It will hurt American families a whole lot more as wealth will disappear everywhere and unemployment will skyrocket. That money you saved for retirement could be all gone.

The Fed has to make tough choices about its actions because its actions have negative consequences in other areas. The problem is that a failing financial sector is much worst than inflation or possible moral hazards. The Fed takes these factors in consideration every time they make a decision, but sometimes it is the lesser of the evils.

The financial sector is in big trouble and the Fed wants them to bleed from taking too much risks, but at the same time, they don't want them to die.

[ThomWV]

15. It punishes economic inefficency and so the remaining system is stronger

All you get when you prop up the failures is more failure. Think of it as Darwin gone backwards and it might make more sense to you.

[Homer12]

17. All this shows is that an un-regulated "Free Market"

Will self-implode.

The idea of "Free Markets" is a lie.

Deregulation is not always the answer.

[BR_Parkway]

18. Part of me wonders if it wouldn't be easier to start from scratch

If it all crashed, we'd see the "wealth" not so concentrated in the hands of the very few.

And the rich corporations wouldn't be so entrenched with "our" politicians.

Things have gotten so out of whack, maybe starting over would be the simplest way to undo the mess we're in now.

Not to mention that a large chunk of that "wealth" is paper and schemes - not anything that we actually made here.

[Xenotime]

19. Exactly. I imagine a new country with a different constitution...

where equality is spelled out and delivers people from suffering.

[ThomWV]

21. Really? I immagine our country where our Constitution actually means something.

[glowing]

23. Have you read the original.. Its pretty good.. Its just not ever followed.

[defendandprotect]

44. Except for the deals with the elites, with the males, and with slave holders --- !!!

[bicentennial_baby]

50. It's really interesting when you read it as an Economic document,

rather than a political one. There is so much economics wrapped up in there, it's really interesting. We've been studying this in my American Economic History class.

[defendandprotect]

56. Is that still permitted . . . . . ???? !!!!

Hi -- great to hear that ---

We certainly don't have economic democracy in America ---

look at the new FED bail out of Wall St and banks --- $200 BILLION freshly printed dollars ---

We need to bust the wall that keeps back this truth --
of our takeover of this land, the viciousness of it ---
of this nation built on the backs of Africans held in slavery ---
and the whole propaganda of white male history ---

Thanks for the bit of good news you've provided ---

I guess in this rant I'm angry at myself in the main ---
You know, you sit in your third grade class and you hear about the genocide of the American Indian
and you notice that there's no reaction to that news ---

No one does anything about it --- it's justified up and down the line --- !!!!

I hope that's ending --- we need it to end faster than ever ---

[mondo joe]

24. How many middle and lower income people are you willing to sacrifice in the crash?

And for how long?

[BR_Parkway]

47. You're assuming they haven't been sacrificed already? Their once

comfortable, solid - life supporting jobs have been shipped overseas and they've been retrained to work in Wal-Mart.

Their guaranteed pensions were stolen by Wall St in the 80's and "replaced" with 401K's that are quickly becoming worthless.

Their wages were kept low to the point that they aren't even making as much as they did in the 70's once inflation is factored in.

Now their home equity is trashed by the most recent Ponzi scheme while the robbers have made off with the profits.

Their schools and community services have been paid nothing but lip service for decades, while discussions are underway to sell it all off to private, for profit corporations.

Their health care has been stolen for the enrichment of the Pharmaceutical and Insurance companies.

Their representation in DC has been stolen by the lobbyists.

And their Constitutionally guaranteed civil rights to things like not being spied upon have been stolen by the man who took the Oath of Office to protect and defend those rights.

What exactly do you see that we have left to sacrifice?

[mondo joe]

51. Are you seriously asking what's left to sacrifice? Everyone who's still hanging on -

people living precariously on fixed incomes inadequate to their needs - especially the elderly; people who are still managing okay despite it all.

There are a lot of people hanging on, and many just hanging on. How many of them are you willing to sacrifice outright? And for how long?

[BR_Parkway]

57. No, my original question was would it be easier to start over with

a different system. It was based on the premise that the current system is crashing and I don't beleive they can stop it - considering all the "propping up" they've been doing.

So if the money system we have no dissolves, how could we start it over. Bartering is a form of currency - trade you some tomatoes for some of eggs....

One thing it would do is unlock the stranglehold these corporations and lobbyists have on "our" representatives - and hopefully a population pissed off enough to put the right people in office and the right laws/rules in place to make sure this doesn't keep happening every decade or so like it has been.

Do you honestly think those on fixed incomes will be able to survive if the the hyper-inflation kicks in like so many are talking about? Not with dollars they won't. So what are the alternatives? If we have a chance to start over without all the corruption and pollution of the big money interests, how do we do it better?

I went back and re-read what I wrote several times now - I can't understand why you thought I was being so heartless and saying "just throw them all to the wolves". I felt like I'd wandered into GD-P by mistake.

[earth mom]

27. Are you fucking kidding?! Do you really think the powers that be will let the people

create a new Constitution or have a say in anything?!!! No way in hell!

Don't you see that what is happening is what * & Co wants to happen?

They want the United States & the Constitution destroyed so they can create The North American Union where they can call all the shots!

And * can become Dictatortot or King!



FYI-You are advocating for the end of the United States of America.

Read the Constitution.

You will see that it is the peoples duty to fight what is happening!

Wanting this country to crash is the antithesis of what the founding fathers fought so hard for.

Or what The Constitution stands for.


Be very very very careful what you wish for.

[BR_Parkway]

48. Sorry if it wasn't clear - I was talking about the financial system crashing

not advocating for a new Constitution.

Mostly because everything is so entrenched and innertwined its hard to see another way out where we actually have politicians who work for the people, not the corporations (not to discount the rare but lucky few of you out there who still have this)

I'm still trying to figure out if this crash is intentional or simply one more example of Jr's incompetence.

[pitohui]

34. only if you're under 30

the reality is that one's active working life has limits and you can only start over from scratch so many times before it becomes impossible for you to recover or have a decent life without committing some crime for the money needed

[NashVegas]

20. Because the Market MUST Correct Itself

Assets, specifically home ownership without debt enslavery, has been put out of the reach of honest people of average means.

A formal class structure is arising as a result; huge money makers at the very top; governess / constables get to hang around, as long as they behave they're be patronized; tradesmen can rent; everyone leftover are peasants, exiled from the community. Look at this trend:

Fearing an exodus of teachers headed for less expensive homes, a Santa Barbara schools committee is moving forward on a plan to use district-owned land to build affordable housing for faculty.

The 11 member advisory committee, formed seven months ago to investigate how to generate money from unused school property, recently submitted its proposal. School board members are likely to begin discussing it soon.

The site the committee has in mind is 23 acres in the unincorporated Goleta valley, west of San Marcos High School and just east of El Camino Junior High School. Under one scenario, school faculty would be able to purchase market-rate homes at half price with no down payment. **

If the idea succeeds, the school district would be one of the first in the state to provide subsidized housing for teachers.

Such a plan would have been a dream come true for Harding School teacher Raquel Frausto. The single mother had longed for a home on the South Coast, but with the median cost now past $1 million, her $50,000 salary doesn't come close.

http://www.santabarbaraproperties.com/outlook/teacgerho...

** the logical conclusion is that either the local housing market there is 100% over-valued, or the local building and real estate industry refuses to serve all but those who can afford to pay 100% over the average bread-winner.

There's also a movement to create "affordable" housing subsidies for police and firefighters.

It sounds like a nice gesture, but it's completely bogus that there is income-appropriate housing in a community that's set aside for one person making the average US salary, on the condition that person is servicing those making above and beyond the average salary. Bank tellers? Sorry, no dice. Hair dressers? We need you, but not *that* much.

[MilesColtrane]

25. Thanks to FDR the money in your bank account is insured (up to $100,000) should the bank fail.

Letting an investment bank like Bear Stearns fail because they over speculated is another matter.

If the government steps in and bails them out, it just encourages more institutions to take wilder risks on more crap shoots like derivatives and hedge funds.

Those loans that are drying up are ones that shouldn't be made in the first place.

[uppityperson]

26. I've a question about that insurance by gvt. Where does gvt get that money from?

If the gvt is so far in debt, where does it get the money to pay that insurance from?

[MilesColtrane]

28. Banks pay premiums to the FDIC for the mandatory insurance.

That money, of course, they get from their customers.

[Uncle Joe]

29. So if the customers pay the premiums, the government is essentially bailing itself out

by putting the customers further in debt, am I reading that correctly?

http://www.democraticunderground.com/discuss/duboard.ph...

[MilesColtrane]

32. That's what happened during the savings & loan crisis, because the FSLIC itself...

...became insolvent and couldn't repay all it's insured depositors.

So, taxpayers ponied up.

This created a moral hazard, and acted as encouragement to lenders to make similar higher risk loans leading us to where we are today.

[uppityperson]

31. So the gvt saves the money paid by the banks taken from the customers to give back to the customers

if the bank fails? I got that, but was wondering that happens if the gvt is severely in debt and hasn't socked that money away and doesn't have enough in its coffers to pay the bank? If the gvt is broke, it can't pay out on the insurance, that's what I was wondering. Except to borrow from (China?) and go further into debt?

[MilesColtrane]

35. Well, the choices aren't pretty.

You can either opt for a taxpayer funded bailout, along with the increase in the budget deficit.

Or, you sit back and allow the collapse of the United States financial system. Then you've got yourself a second Great Depression.

[Uncle Joe]

39. Yes but wasn't that Hoover's solution and also check out post #20 on this thread.

http://www.democraticunderground.com/discuss/duboard.ph...

[Generic Brad]

41. $100,000 Deposit Insurance Was Great in the 1930's

But in the 2000's it is not enough. The Fed needs to up that amount, especially in the light of inflation. The purchase power of a 2008 dollar is considerably less than a 1935 dollar.

[MilesColtrane]

49. The insurance is actually for all of your acounts, up to $100,000 per bank.

So if you have over one hundred grand and you're really afraid of losing that money, you can spread it around among different banks.

I think the maximum FDIC coverage in the 30's was $10,000.

[defendandprotect]

45. Well...that's a bit of a problem right THERE . . . the accounts were supposed to be

insured up to only $10,000 per bank ---

And the reason was to protect the Treasury/government and taxpayers ---

If a bank went under due to embezzlement .... taxpayers would only be open for accounts which could only hold $10,000 . . .

If you wanted to put more than that in a bank, you had to put it in a different bank ---

THIS presumed that a problem would occur at one bank or even two ---

but not that we would have a conspiracy to rip off banks as we did with the S&L Theft and
Embezzlements --- and by that time the accounts were covered for $100,000 so that each
failure meant a great catastrophe for taxpayers ---

finally $500 to $700 BILLION . . . !!!

[Igel]

30. Here's one rationale.

You have a house or a piece of paper; both are currently on the books as being worth $150k.

Now you want to get a loan based upon it, or sell it. What's it worth? Last week it was worth $160k; the week before it was worth $180k. The problem is that there are lots of houses and pieces of paper out there, but because the government's trying to prop up the system, nobody knows how low their value will go.

"Value" is what somebody's willing to pay for it, presumably. But nobody wants to pay $150k for a piece of paper that'll be worth $120k in 3 weeks. It might appreciate in value. It might not. Too big a risk.

It's worthless for liquidity, because nobody will buy it. It's not good collateral. If it were allowed to find its bottom, even at $70k, it would be more useful. Of course, it means somebody or a group of somebodies have to write off $110k from their books. Do that enough, and you have bankruptcy.

Don't do it, and you don't have trust that assets have value. Hence, no loans. No sales. No liquidity. And the lack of liquidity will *also* cause businesses to fail--a different set of them, in all likelihood, possibly businesses that didn't create the problem. In other words, liquidity is good, and one big problem right now is that there's a credit crunch and a loss of confidence in what securities and real property is actually worth, or going to be worth.

I'm not an economist. I'm merely repeating what I heard. Don't like it? Fine by me.

[Mike03]

33. Taking a wild guess: Moral Hazard

Your question is a great one, but it's complicated, and there are a number of answers.

1. It's considered morally hazardous to save a failed institution because it encourages other institutions to allow themselves to fail at the expense of their customers and shareholders.

2. At some point, the reckless lending and egregious "fake" liquidity in this economy has to be let out like the air out of an over sized balloon, or else the bubble will just move around the way it did from the tech sector to the housing sector over the past 8 years.

We are the largest debtor nation on the face of the planet now. We are for all intents and purposes bankrupt, living atop a pyramid of funny money. It has to end at some point. Five years ago, it would have been painful. Now it is excruciating. But if we prolong it another five years, it will be indescribably painful.

[MilesColtrane]

37. Unfortunately that seems to be the Fed's policy.

Bernanke's solution is to airdrop more money into the economy, prolonging the inevitable, and just making it worse.

[girl gone mad]

36. These bailouts are not for the benefit of normal people..

with a few thousand in savings. The Fed (via our printing presses) is bailing out billionaire hedge fund investors who gambled and lost. We already have an option for rescuing little guys from bank failures - the FDIC.

Privatizing profits and socializing risk is a moral hazard. It's also fascistic socialism.

The inflation it causes is like a hug tax on the middle and lower classes.

[jberryhill]

42. What's "the right prescription" for an oxycodone addict?

More oxycodone?

[defendandprotect]

46. The Fed has to be STOPPED from printing money ---

and we have to have Congress make the economic decisions that the FED is doing now ---
that's their responsibility--!!!

These are political questions and the Congress should be responding --- not the FED!!

What we should do is simply put all of the New Deal regulations back in place ---

These are conspiracies to look our Treasury and taxpayers ---

[Greyhound]

52. There is a great difference between covering deposits and bailing out banks.

Covering the deposits and allowing the institution to fail will help the people that are the economy while ridding the economy of a liability.

Bailing out the banks only protects the owners and officers while leaving the people vulnerable.

[Fire Walk With Me]

53. Contemplate "Bush as Nero" and you'll get a better idea.

If you need supporting evidence, consider "New Orleans".

[AngryAmish]

54. In economics it is know as the problem of "moral hazard"

People repeat behavior that they get rewarded for. So folks (from bankers to homeowners) took risks they either did not appreciate or did appreciate and decided to roll the dice on the transaction.

If they do not get punished for the downside they are inappropriately rewarded for the upside. Thus we will get more risky financial behavior in the future.

Also, many people were conservative in their borrowing and do not like the idea of rewarding those who were not so conservative.

[Blackhatjack]

55. Keep in mind that businesses will fail as well as foreclosures, bank failures and unemployment rise

This is not about 'punishing' people who tried to take advantage of economic opportunities.

THis will affect every American, and those with lots of wealth will pick up the pieces for 'pennies on the dollars' -- a massive transfer of wealth to the already super-wealthy.

[napi21]

58. I think letting them fail would cause a run on all banks. THAT would hurt

all of us because most of us have 401K's that would almost instantly become worthless too! Bear Sterns failure doesn't only affect the rich any more.

[natrat]

59. it is surreal how this seems to be unfolding on a time table

at first the mainstream take was economy resilient followed by potential shallow recession , then throw in the first bank failure and the depression word is just starting to creep in. Not that this is surprising because the information has been out there , just a little strange as it begins to hit home. I suppose ,though, that strange is a lot better feeling than outright fear and hunger. Oh well.

[natrat]

62. they really are killing the whole system off

"The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is. This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages."

http://www.democraticunderground.com/discuss/duboard.ph...

[leftofthedial]

60. how America could ever have let repukes run things

is beyond me.

greed kills. capitalism is cancer. unregulated (repuke) capitalism is metastasized cancer.

[NashVegas]

61. We're Never Going to Legislate These Corporations Away

Hasn't it been proven enough for you?

[RB TexLa]

63. There has to be consequences for breaking underwriting rules

you don't just bail out people that do that so they can do it again.

[newportdadde]

64. Because we might run out of wheelbarrows otherwise?

What we are doing to our currency is a joke. Its like a junkie going back again and again for a credit hit. We need to tight up this money supply now we are getting eaten alive by inflation.