Is Congress crazy?

[cos]

Problem: A lot of banks, insurance companies, and other financial institutions are in trouble, and if a bunch of them fail the economy will suffer severely. They're in trouble through a chain of stuff that starts with a lot more mortgages failing than were expected, and a bad housing market. When someone can't make their mortgage payments they may be forced to sell the house, but in a bad housing market, their house may not be worth enough anymore to pay off the mortgage by selling it, so they can't do that. Glossing over a lot of the stuff in between, and ignoring for a moment the legal changes that let this happen, that's basically where the problem begins at the moment, yes?

Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????

We could take the same money and spend it on bailing out homeowners who can't make their mortgage payments.

We could get more bang for the buck at first pass because we wouldn't have to buy all of the "bad" debt, only enough to make it possible for each homeowner to keep on paying, perhaps with lower payments over a longer period of time. Banks would be stronger simply because all this debt would no longer be poised to fail, and confidence in the banks would recover as soon as the plan was passed, even before actual homeownwers were bailed out, because people would know that a lot of these loans would no longer fail completely, because they'd qualify for the bailout plan. Not only would we save banks, but we'd save jobs, neighborhoods, and families. By preventing mass dislocation of people we'd be saving lots of other pieces of the economy at no extra cost.

I've heard some arguments against the "moral hazard" of bailing out people who took risks that didn't work out... every single one of those arguments applies to a much greater extent to bailing out financial institutions who took vast amounts of irresponsible risk, who risked not just themselves but everyone around them, who were paid to understand finance and to know better than to do this, who lobbied for laws to make it easier for them to do this...

In what bizarre reality does it make any sense to even consider bailing out the financial institutions instead of the homeowners in trouble?

I'm going to call my members of the House and Senate and I hope you call yours.

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Comments

[johnromkey.livejournal.com]

If the financial system is on the brink of collapse then you may prefer to blow $700 billion rather than allow the collapse. If the investment banking system entirely collapses it doesn't just take itself down the drain. It takes your 401K's with it. It takes pension plans with it. It takes investments by towns with it. It takes the ability of many non-financial businesses to simply do business with it.

Doing a bail-out may allow pieces of the system to fail slowly rather than dramatically. If they fail in a slow, controlled manner then they won't have to depress the assets of the rest of the system. Morgan-Stanley and Goldman-Sachs were both profitable and solid companies. They beat earnings estimates in the most recent quarter. Their stock, however, is down over 30% as a result of the failure of other large investment houses (Lehman Brothers). As you take apart Lehman Brothers, if you flood the market with their assets you depress the value of other investment firms and you can put firms which are still able to operate out of business in the process. If that happens you may be looking at the collapse of the entire sector.

I think that's something you want to avoid.

I am not saying that I believe the government's plan is a good plan. I don't know enough about it to have an opinion. I don't know enough in general to really formulate a useful opinion even given the details. And I don't think enough details of the plan are even solidified yet to say.

Try to rescue the system, punish the people who are responsible for its failure, not just limited to the people running the organizations but the people in government who let it happen as well, like the people at the SEC who decided it was acceptable to waive regulations that would have not allowed the major investment firms to take on too much risk. If not rescue, at least attempt to put it to rest in a controlled manner.

The consequences of the system failing are a lot more dire than the individual businesses involved collapsing.

[cos]

Sure, I accept as axioms in this post that:
1 - we need to prevent the collapse
2 - it is worth spending $700 billion from the government's general fund to do so.

These points can be debated, but I'm not debating them here, I'm accepting them as starting points.