Paulson Shifts Focus of Rescue to Consumer Lending (credit cards)

[Peter3_1]

What banks were paying 50% for their money?  When?  CD's , which are supposed to be their long term stability capital , have been well below 4% for years. 

[Vagabond]

What banks were paying 50% for their money?  When?  CD's , which are supposed to be their long term stability capital , have been well below 4% for years. 

Inter-bank lending flat out froze solid.  

The LIBOR basis points spiked at around 420 about a month ago, and prior to the bailout.  Normal is about twenty, the higher the number the less banks are willing to lend to each other short term.  The less willing theyare to lend to each other, the less willing to make other loans they become, because they might not be able to get a loan to cover a daily shortage which would break the bank.  Yes, at the time if the banks could get a loan it was at an astronomical rate.  That was why it was absolutely necessary.

[Vagabond]

What banks were paying 50% for their money?  When?  CD's , which are supposed to be their long term stability capital , have been well below 4% for years. 

In that four to five day window?  The ones that could get loans from other banks.  CD's just give a bank a somewhat known reserve, if their failure analysis goes is blown, they still fail.  They are covered by the FDIC.  Further CDs can be closed at intervals, and at the banker has to analyze how many will close. Those rates are terrible precisely because of these issues, just like regular accounts with the FDIC. 

You could buy a bond from the bank and enjoy a return on that of around 10% currently.  Of course, the value of the bond is subject to fluctuate and the FDIC does not cover it, but it does earn more.  Just how much risk are you willing to take on?  If you think a bank might fail are you going to buy a bond from it?  Do you think a bank will buy bonds from another bank that has a high probality to fail?  Of course, the higher the return the more willing you might become to take a risk, hence the extremely high rates.

If one wants to know something really frightening it's this.  There were two days in this window when US T-bill rates spiked because nobody was buying them.  The last time LIBOR spiked high and US T-bill rates spiked we wound up with the great depression.  It was very touch and go there for a bit, thankfully we seem to have averted the worst possibility. 

Capital and capital markets are absolutely essential in today's economy.  Lose them and we are cold, hungry, and in the dark in very short order.

[rich_t]

What other industries are you willing to bail out?  These banks need to pay for their bad management judgements.  If that means some of them fail, then let them fail.  All of them are not nearly as at risk as some would have us believe.

They need to keep their greedy little hands out of my pocket!

[Vagabond]

At what point, and under which hat, are you willing to pay?  If the Federal Reserve handles it lender of last resort duties, as it should have when Lehman Bros. went under we wouldn't be talking about this, AIG and others went into the sick ward because of this failure.  Had Lehman been allowed to call on the Federal Reserve the immediate cost would have been in the $40B range, but they were allowed collapse instead of an orderly liquidation.  That $40B then became $400B, meaning the Fed no longer had an asset sheet deep enough to cover it.  It then went global and ballooned to $4T dead minimum worldwide.

The next hat to try is the US treasury.  The congress could authorize several methods here, the best being make all the money the Fed needs to avert the crisis available.  That was the $700B and deeply flawed package, and it might work.

Now, let's look at the next cap you could use to help the banks pay their creditors (you and me).  If the banks fail then their insured creditors are going to the guy with the FDIC cap.  This is the most expensive possible choice with the least possible return guaranteed.

If you still won't pay?  Everything collapses in value, adjusted to the T1 money supply right now.  T1 money is currency; there is currently about $827B of this, all else is leveraged off of this.  I am dead serious, farmers won't be able to plant their crops, vendors won't be able to restock their shelves, gas stations won't be able to buy the next load of fuel for their tanks, power plants won't be able to buy their next delivery of fuel, and employers will not be able to pay employees.  This isn't a might happen, it is a will happen in that event. 

Re-capitalizing the banks will cost the US at least $2.5T before it is all done.  The banks weren't being especially greedy.  The banks bought loans in lots and accepted the risk with an agreement that the firms selling these would buy them back if they reached a certain failure rate.  The problem is the people who took the loans then defaulted don't have the money, so their blown out.  Then the companies that issued and sold the loans payed what they could and were blown out.  The banks got stuck holding a bag in a lot of cases, and they did what they could before asking for help.

If the government had not acted to re-capitalize the banks, the price (interest rate) of available capital would go up until the potential return justified the risk.  This still would have caused a very serious depression.  The banks have paid dearly for their misjudgements, look around the world at how many have failed.  I just want to keep the system alive because I know what happens if I don't.  I rather like to eat.

[rich_t]

At what point, and under which hat, are you willing to pay?

None, if that means paying for the piss poor judgement of others.  I am a very firm believer in personal responsiblilty.

I've made my share of mistakes, even financial ones, and I owned up to them.  What I didn't do was put my hand out and ask others to pay for my mistakes.

I detest those that do.

You Vagabond, are starting to sound a bit like a proponent of wealth redistribution IMO.

You seem to want me and millions like me to pay for the mistakes made by others.

This bank bailout is nothing more than corporate welfare.  It's akin to paying some lazy non-working welfare queen more money for having more kids writ large IMO.  It's like asking me to let my own child go hungry while forcing me to feed another's child, just cuz the parent of that other child is irresponsible.

I sir, ain't buying.

Let the whole house of cards fall and rebuild.  Those that survive will hopefully learn from it and will take steps to prevent it from happening again.  If I am one that does not survive it so be it.  I'll take that risk.

What you are proposing amounts to involuntary servitude IMO.  You seem to want me and millions like me to work, for free, to benefit another's wallet.

When we talk about this trillion dollar and rising "bailout", we aren't talking about federal funds... There is no such critter.

We are talking about my money and the money of those of us that pay taxes.  It is OUR money, and I don't want to see it spent rewarding or protecting assholes that made piss poor finacial decisions.

I'll ask again:  What other industries to you want to bailout and where does it end?

[Peter3_1]

You are right, I am not buying bonds from GE either, tho they pay well. Immelt reminds me too much of Revlon's Pearlman.

It would be the mortgage bonds, tho, that cause the shortfall in income, as these earn as little as 4.5 to 6% and bundling and selling them is what led to the current "problem".

That and the insane "mark to market" accounting that made the entire bundle worth zero if it became illiquid. Thanks, Congress, you're swell.

[Vagabond]

None, if that means paying for the piss poor judgement of others.  I am a very firm believer in personal responsiblilty.

I've made my share of mistakes, even financial ones, and I owned up to them.  What I didn't do was put my hand out and ask others to pay for my mistakes.

I detest those that do.

You Vagabond, are starting to sound a bit like a proponent of wealth redistribution IMO.

You seem to want me and millions like me to pay for the mistakes made by others.

This bank bailout is nothing more than corporate welfare.  It's akin to paying some lazy non-working welfare queen more money for having more kids writ large IMO.  It's like asking me to let my own child go hungry while forcing me to feed another's child, just cuz the parent of that other child is irresponsible.

I sir, ain't buying.

Let the whole house of cards fall and rebuild.  Those that survive will hopefully learn from it and will take steps to prevent it from happening again.  If I am one that does not survive it so be it.  I'll take that risk.

What you are proposing amounts to involuntary servitude IMO.  You seem to want me and millions like me to work, for free, to benefit another's wallet.

When we talk about this trillion dollar and rising "bailout", we aren't talking about federal funds... There is no such critter.

We are talking about my money and the money of those of us that pay taxes.  It is OUR money, and I don't want to see it spent rewarding or protecting assholes that made piss poor finacial decisions.

I'll ask again:  What other industries to you want to bailout and where does it end?

You do realize that the financial sector pays in to the US treasury directly via taxation about $700B a year, right?  They do this year in and year out, and usually don't see a dime of it back.  Once every twenty or so years they run into a problem and need to be recapitalized, it's worth the cost.  Why begrudge it?  they weren't welfare queens before and won't be after either.   

What was their mistake?  Their mistake was thinking people on main street would make good on their loans.  Put another way, they trusted main street who promptly robbed them and is now slandering them.

As I said, the financial capital sector is a special case.  Normally it reliably and efficiently deploys money where it can do the most good at any given time.  The loan an American farmer paid off at harvest time can become the loan an Australian farmer uses to plant his crops.  When he pays it could go to a factory owner who wants to do a production run of some new product.  The financial sector is very, very efficient at this.  Take it away and we all would be worse off.

We can either give a sector 1/20th or so of the taxes it has paid in over a number of years or we head into the abyss.

[rich_t]

You do realize that the financial sector pays in to the US treasury directly via taxation about $700B a year, right?  They do this year in and year out, and usually don't see a dime of it back.  Once every twenty or so years they run into a problem and need to be recapitalized, it's worth the cost.  Why begrudge it?  they weren't welfare queens before and won't be after either.   

What was their mistake?  Their mistake was thinking people on main street would make good on their loans.  Put another way, they trusted main street who promptly robbed them and is now slandering them.

As I said, the financial capital sector is a special case.  Normally it reliably and efficiently deploys money where it can do the most good at any given time.  The loan an American farmer paid off at harvest time can become the loan an Australian farmer uses to plant his crops.  When he pays it could go to a factory owner who wants to do a production run of some new product.  The financial sector is very, very efficient at this.  Take it away and we all would be worse off.

We can either give a sector 1/20th or so of the taxes it has paid in over a number of years or we head into the abyss.

Don't even get me started on over taxation...   

I think the financial institutions have made bigger, or I should say more, mistakes than thinking people on main street would make good on their loans.  I think one of their biggest mistakes is extending too much credit to too many people that are high credit risks.  In my opinion they got greedy and it has bitten them in the ass.

But perhaps you are correct and I'm looking at this from too shallow a perspective.  I guess we are just going to have to agree to disagree.

I still say that the only thing these bailouts are going to do is delay the inevitable.

By the way, my comment last night of "You Vagabond, are starting to sound a bit like a proponent of wealth redistribution IMO." was unwarranted and I apologize.  You were merely explaining things from your point of view.

Again my apologies.

[Vagabond]

Don't even get me started on over taxation...   

I think the financial institutions have made bigger, or I should say more, mistakes than thinking people on main street would make good on their loans.  I think one of their biggest mistakes is extending too much credit to too many people that are high credit risks.  In my opinion they got greedy and it has bitten them in the ass.

But perhaps you are correct and I'm looking at this from too shallow a perspective.  I guess we are just going to have to agree to disagree.

I still say that the only thing these bailouts are going to do is delay the inevitable.

By the way, my comment last night of "You Vagabond, are starting to sound a bit like a proponent of wealth redistribution IMO." was unwarranted and I apologize.  You were merely explaining things from your point of view.

Again my apologies.

Don't forget who insisted government use it's  force to insist that those loans be made.  That was folks like Jesse Jackson, Al, Sharpton, and Barrack Obama.  A banker, just like any other businessman, isn't going to take on unnecessary risk.