I have some thoughts about the bailout, but I'm also an idiot. Can someone check me on this?

[WilliamPitt]

Big fat hairy caveat: If I were an SAT question, I would look like this: "Will Pitt is to _________________ as a small vial of cat urine is to _______________."

(Answer: "Will Pitt is to economics as a small vial of cat urine is to perfume.")

Not my forte, the numbers and stuff. I've spent the last several days giving myself a crash course in What-The-Fuck-Is-Happening 101...I'm making headway, but not much, so bear in mind that I'm putting this issue/question forward from a state of near-total ignorance.

===

I read this FAQ article on McClatchy's site (probably the 321st "FAQ" thing I've read in the last two weeks): http://www.mcclatchydc.com/227/story/53291.html

Quote: "Although the investors who buy these short-term debt instruments may be on Wall Street, the companies issuing this debt are corporations that employ millions of people in the U.S. and around the world. When their costs of borrowing go up substantially, they have to cut costs elsewhere, and that often translates into layoffs."

There's a whole lot more on that link, but the word LAYOFFS jumped out at me...and this thought came barrelling into my mind: The economic center of the U.S., for well over 10 years now, is and has been the service industry. Ours is a "service economy" now, for the most part, and this category of employment involves a wide spectrum of jobs, companies and workers.

It is waiting tables at a restaurant, rocking a register at a retail store, walking a sales-floor beat as a retail associate, answering phones as a 1-800 help-line operator for a tech firm, cable TV company or other massive utility, or answering the help-line for a day-trader website, an online gambling site like PokerNet, or a ticket/travel shop like Orbitz.

Employees of a law firm are part of the service industry, as are accounting firm employees, workers in a real estate brokerage shop, etc. etc. etc. These and many others are all part of the "service economy," and are collectively the core of our financial well-being (wakka wakka). We don't make stuff anymore, not really, since our manufacturing infrastructure got mailed overseas to places where payrolls are measured in pennies and unions are a dangerous myth.

I did a little Wikipedia research, which I know is pretty weak, kinda like getting a kiss from your sister...if your sister is really un-smart and easily manipulated by outside influences. :) I did my best to validate the Wiki data with other sources, and it appeared to be reliable enough.

Below are five definite sub-sectors of the service industry with total number of people employed:

Sectors of the U.S. Economy in 2002

Wholesale trade: 5,878,405 employees
Retail trade: 14,647,675 employees
Finance & insurance: 6,578,817 employees
Real estate & rental & leasing: 1,948,657
Accommodation & food services: 10,120,951

Link: http://en.wikipedia.org/wiki/Economy_of_the_United_States#Sectors

That comes out to somewhere on the order of 40 million Americans who hold down service-industry jobs and depend on service-industry paychecks. Personally, I can think of ten friends who are part of that total, including my girlfriend, According to these Wiki numbers, that amounts to more than a third of the total number of employed Americans (just shy of 109 million)....and I left a few other sectors off the list because I didn't want to unintentionally fudge the "service industry" parameters I'm talking about. A separate page said 79% of the workforce was in the service sector, so my numbers may very well be low.

McClatchy quote again: "Although the investors who buy these short-term debt instruments may be on Wall Street, the companies issuing this debt are corporations that employ millions of people in the U.S. and around the world. When their costs of borrowing go up substantially, they have to cut costs elsewhere, and that often translates into layoffs."

1. The fuckwads who have been robbing the till lo these many years can all burn in hell. I have nothing but contempt for them.

2. But...

3. To paraphrase the Buddha, "It is what it is, yo." They did it, and now banks are failing, the dollar is crashing, and while Bush & Co. certainly went overboard with their panic-panic-panic presentation of all this (what a shock, right?), that doesn't mean everything is OK and it's all a bunch of bullshit. This is a very weird, scary, uncertain and perilous situation, and that's true despite the automatic distrust/disgust/deny instincts we're all wrestling with because Bush is involved. I have a busted watch in a desk drawer, and it's right twice a day, so maybe that little bastard has managed to be half as smart as my shitty old busted-ass watch, for once.

He's not the only one saying it. Most of the harshest critics of Paulson's bailout travesty have conceded the need for some kind of action to shore up the economy, provided it makes sound fiscal sense and does not involve tyranny and fascism and stuff. Therefore, by my reckoning, there are millions and millions of Americans who are in danger of losing their jobs because of this situation. And because I am for the worker, like any good liberal should be, I think this is a shitburger we're going to have to choke down.

P.S. Clinton put together a $2.4 trillion surplus before he was done, and did it facing a Republican congress that eventually impeached his ass. If Obama wins, he'll have a Democratically-controlled congress for at least two years. I have every confidence in his ability to create that kind of revenue stream again and put paid to this thing but good.

Thoughts? Am I just totally, totally off-base here?

[pwb]

1. I say prove it....not you,.. the media

Give me an example of companies not being able to pay workers. They say shit happens, but then they have no proof, which makes it only a rumor.

[elleng]

4. Go around your town,

and ask who ordinarily borrows, short-term, to make payroll.

[AntiFascist]

44. They did this the other day on CNN...

they showed a small company that makes caramel popcorn and ships it out, where the owner hasn't been able to pay his own salary and, unless he can get a loan, won't be able to pay his employees this month. OK, so a loan will help him in the short term, but it is odd that CNN made no mention of the effects of the economy and the fact that people will stop buying mailorder caramel popcorn in order to pay for gas and necessary groceries, particularly when they are losing their jobs!

[WilliamPitt]

55. You can have my mailorder caramel popcorn when you pry it from my cold, dead molars.

Ew. Sorry.

:P

[AntiFascist]

56. Bwaaaah! n/t

[Warren Stupidity]

2. I don't see what the size of the service sector

has to do with short term debt liquidity. The manufacturing sector and agriculture and transportation etc all use short term debt financing for their operations as well.

What I haven't seen is any evidence of an actual short term debt liquidity crisis. We were told this bailout had to be 'as is' and had to be now or BADNESS. Now has passed, and other than spectacular gyrations on the stock markets - where exactly is this crisis actually manifested?

[elleng]

5. Watch

and listen.

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3520531

[ProfessorGAC]

34. Sorry, But It Just Tain't So

There are hundreds of banks in this country with strong liquidity positions, particularly community charters and credit unions. They are, as we dwell on DU, developing plans to fill the void left by the banks who have liquidity but are too timid to make the move or are hoping for the bail-out to mitigate the risks they've already taken, even though those risks don't jeopardize their future.

The liquidity issue is greatly overblown by those who clearly don't know how to read a bank's filling statements. After 20+ years a board member of a community bank, i do.
GAC

[WilliamPitt]

36. Question

Is a bank's "strong liquidity position" based on nothing more than paper, and on promised payments of oustanding debt? Could a cascade failure like what we saw with Lehman/Merril/AIG wipe out the companies that represent a bank's "strong liquidity position," thereby leaving said bank high and dry and unpaid in full?

Say ten DUers owe me money. They all have good jobs, they are good people, so I have every confidence in being paid back in full later on down the line. These are good debts, so I have a "strong liquidity position." But then one day, three of the DUers who owe me are killed by a freak meteor shower; a week later, a volcano nobody knew about suddenly erupts and swallows the homes of three other DUers who owe me, leaving them penniless and unable to pay; a day later, one of the other DUers who owes me dines on unimaginably spicy Indian food and is poisoned in his bed that evening by his own tremendous farts; and when the remaining four DUers hear about my suddenly precarious financial standing, they all decide to stop answering the phone for six months.

Eight days ago, I was in good shape. But now that six of my outstanding debt-holders will never pay those debts, I'm abruptly fuckerd over and fucked up...and probably a goner myself pretty soon.

Like I said above, I'm not at all conversant on these matters, but my understanding is that the entire system of "liquidity" itself is a) Based on nothing but the credibility and survival of those who owe you; and, (B Leaves pretty much any and every institution in a tremendously vulnerable position if/when their debtors abruptly collapse because their debtors collapsed, etc.

I'd be really interested in your thoughts on this, especially given your position with that community bank. You are confident the situation is more stable than we are being led to believe? If so, that makes me breathe easier.

Thanks in advance for any wisdom you can provide. I feel like I'm back in Algebra fucking II again. :(

;)

[ProfessorGAC]

39. Your Example Is Fine & Good, But. . .

. . .that is the opposite of a strong liquidity position. Liquidity means the available cash you have above and beyond the liabilities.

There is a certain (and quite high percentage) and loans that are pefectly good and the cash flow from those is relatively constant. The liabilities a bank has are the amount of deposits that can be removed on demand (passbook, MMA, checking, etc.) and the assessed risk on the ousttanding loans.

A condition of liquidity is loan to asset ratio. If you overextend on the loan to asset (more loans outstanding than cash, near cash, and capital assets) that difference is considered a liability. This is because loans are considered assets by the bank and to make a balance sheet "balance" you offset this differential on the other side of the sheet. So, you don't have liquidity because it hasn't materialized yet.

If your loan portfolio is too small then liability of demand withdrawals exceeds the income stream. This is lower risk, of course, but not as profitable.

All of that was a long way of saying that the measures a bank uses includes all the possible scenarios as you described and under your example you would NOT have a strong liquidity position. The banking defintion of liquidity and capital are VERY well established and well accepted.

Did i answer your question or muddy the water?
GAC

[WilliamPitt]

47. "Did i answer your question or muddy the water?"

Yes.

;)

Kidding.

No, you're clear as crystal. As you can see, I am not yet familiar with some (by "some," I really mean "most") of the basic terminology involved here. A strong liquidity position = amount of cash in the vault outweighs amount of outstanding debts owed. Cash on hand = "liquidity," outstanding debts = "liabilities," more liquidy than liability = "balance."

If I may bend your ear a bit more, can you tell me how much of this whole thing relies on the honor, integrity and truthful bookeeping of those who run these banks? Or is this all controlled by black-letter law and regulatory requirements, leaving no room for a dishonest bank manager to lie about how strong his position is so he can squeak out a deal and recover his position on the sneak?

I'm looking at this with Enron and Arthur Andersen in mind, specifically thinking of that piece of GOP legislation from 1995 called the Private Securities Litigation Reform Act. It allowed companies to basically be able to wildly overstate their earnings when making their quarterly reports (and avoid getting sued because of it). Clinton vetoed the thing, but a few shitass Dems climbed on board with Gramm & Co. and were able to override the veto.

Link: http://en.wikipedia.org/wiki/Private_Securities_Litigation_Reform_Act

I haven't read that 1999 Gram disaster bill in detail yet. Is there anything in there that allowed bankers to bullshit the strength of their position? If so, isn't that the kind of thing that could cause similar mayhem to envelop smaller institutions as well?

Thanks for your patience...and speaking of which, it just occurred to me how ridiculous a lot of the conversation here must sound to you, given what you do. Have you smashed anyone yet, or are you breathing very, very deeply instead.

;)

[Gorobei]

61. Weren't the Oil companies trying to figure out to do with all their cash?

Will we see the first National bank of Exxon?

There is a whole lot of money floating around out there.

[moodforaday]

62. Interesting. And this is as it should be.

Small, prudent banks see the opening and will fill the void. So could it be said that the bailout is anti-competitive?

And do the small banks, credit unions etc have enough capital to replace the few humongous ones who dried up?

[elleng]

3. You've done a GREAT JOB,

WmPitt! You're in a similar position to MOST of us, and have taken time to study!

Bravo!

Some are proposing different 'burgers,' with maybe some better ingredients; one way or another, we'll have to accept something.

Glad you're among us!

[tavalon]

8. What the heck does that welcome mean?

I know we are royally fucked and that something has to be done. That's where my knowing ends. Does that make me part of the "in" group? Sorry to be snippy, but I don't want to take sides, I want answers!

[elleng]

9. Wha?

?

[tavalon]

10. I'm sorry.

Grumpy because I've been listening to too many people talk about just letting it burn but that isn't necessarily the answer here. This isn't a game of football and I'm mortified that too many people are seeing it that way around these parts.

[elleng]

12. OK. I'm with you,

and hope that people will take some time to consider.

[aquart]

6. Will, what happens if companies fail to provide necessary service?

That's the question you have to ask. If there is no waitress in the restaurant, what happens?

They are holding layoffs over our heads like hostages....but we have been enduring ceaseless layoffs for nearly 8 years AND NOT A PEEP OUT OF THE BASTARDS.

Is the situation dire? You bet. Will it hurt? Have we ever helped BEFORE it hurt? Will many of us suffer and even die because of this? Absolutely...hope it's not me or mine or you and yours, but I can't be sure of that.

What will this bailout do? Stave off collapse till January maybe?

We have a vast re-ordering and re-thinking to do. So far, we aren't doing it. This is going to hurt. If they pass it or don't pass it, the layoffs will come.

We are wounded and bleeding internally. They want to apply a bandage after removing our saleable organs. Maybe we'll live.

[elleng]

11. We'll learn what

'necessary' means?

[tavalon]

7. I've also been taking a crash course in this stuff

I've been amazed at the number of folks here who absolutely know that this means this and that means that! So, thank you for parroting my POV, which is that this is huge, confusing and not easily digested and knowing absolutely what must be done isn't something we have at this point. I've had a number of coworkers tell me this week that since they don't have money in the stock market, it's no skin off their nose and we should just let it burn. Pretty astonishing. I don't have a clue what specifically needs to be done but to believe that nothing needs to be done is naive at best and willfully ignorant at worst.

I trust this administration as far as I can throw them and in the last two years I've come to learn that I can trust the Democratically held Congress just about as much. But thinking that because this administration is bad, the economy is, therefore, good is the worst kind of black and white thinking, IMO.

I'm glad you have so much confidence in Obama. I think he is a good man and a really, really savvy politician but I don't know whether this is bigger than any one person or President. As a matter of fact, I'm quite concerned that it might be much bigger than any one person can fix. But, again, I don't know shit about this issue and that's after spending a huge amount of time trying to get up to speed.

Yeah, we will have to choke down some sort of shitburger for the sake of our fellow Americans, that's obvious to me and I think it should be obvious to everyone ("should" being the operative word here). I wish I had a better handle on what is the best form of shitburger we should be making, or rather, allowing our Congress to make in our stead. I would feel a hell of a lot better if I was convinced that our Congresscritters had more expertise than I do.

Funny thing, I'm not going to lose my job in the first round because healthcare workers won't be hit..........at first. You would think I could afford a little of that mentality of Let It Burn!!!! Nope, I just don't see this going well for any of us.

[some guy]

13. near as I can tell

the crux of the problem is massive amounts of toxic paper. No one knows what any of it is worth, but everyone is pretty sure it isn't worth as much as the holders are saying it is, and are expecting to be paid for it.

We've weathered the initial round of panic panic panic. So we should be able to put some thought in how best to address the problem. We may have to eat the shitburger, but as the ones paying for it, we should be able to order fires and a soda to go with it.

Tough regulations to prevent the sort of paper generation that created the problem should be part of the solution. Making the holders of the toxic paper pony up some of their other assets would make the shitburger a bit more palatable (equity shares in the companies dumping the toxic paper.) Loss of licenses for those who generated the toxic paper would be good. There's lots of things we should be able to do to make those who got rich off the toxic paper take big bites of the shitburger too - the bigger bite they take, the less we have to eat. :)

[depakid]

14. Those are more or less my thoughts here

I'd only add that, for those who are worried that the fraudulent operators and the "fat cats" aren't going to have their day of reckoning, they're not listening to Obama and Biden.

But that has to wait until 2009, whereas this cannot.

[geckosfeet]

15. Agreed in principle. But since the feds can print and hand out money whenever they want,

and have in fact been doing just that to keep "a select group" of lenders liquid, why do they need the blessing of congress and the public to sign on? Something stinks here.

In any case - any assistance should include SUBSTANTIAL efforts aimed at improving the soundness of the financial industry and protecting consumers. We make it go. It is our money - not just what is going into the bailout - but it is our investment money, our mortgages, our debt and our buying power that fuels the financial industry.

There are all kinds of payment structures and regulation on how the consumer must pay back their loans or invest but the financial industry itself is largely unregulated. Given the fundamental importance of the US financial markets to the world economy I find the lack of transparency unacceptable. We elect our government, but the people who run corporate financial entities are hired without any input from the millions and millions of people whose lives they will have direct impact on.

[girl gone mad]

24. You asked a good question.

I know the banks really want to get rid of the bad mortgage backed securities, but that market is so huge that it's possible the 700B would do nothing to restore confidence, though it could give us a peek into the abyss (though, as the guy from the CBO said, that might actually make things worse).

I wonder if the provision to lower the debt ratio to zero is what they are really wanted and the 700B was just icing?

[Waiting For Everyman]

16. The banks have money to lend but they're not doing it.

If they don't do it eventually, they will make no profits. Then, they will go bankrupt - as they should.

They are holding this country and our economy hostage, throwing a giant temper tantrum. And if we all give in because it's "too serious" to let go... I think we're sending our seriously dangerous enemies a message we will live to regret. Namely, that we're soft and will do anything (including give away our government and our future) if threatened financially.

We are a month or so from an election. I say, hold out.

[PVnRT]

27. If they see more potential losing money on default loans

than the money they'd lose by sitting on their money, they won't make the loans. It's actually fairly simple economics here. There is no way the entire banking industry could conspire to "hold us hostage" - do you know how many people that would be?

[sendero]

17. I agree that some sort of action..

.. will eventually be needed. But I'm adamantly opposed to any bailout bill in which the CEOs of the bailed out companies balk at even giving up SOME of their compensation.

It just doesn't pass the smell test.

If you want to learn more about someone I pretty much agree with, go to FedUpUsa.com.

[Tandalayo_Scheisskopf]

18. Pay close attention to the news today.

That is, the financial news(Bloomberg and the generally overheated Marketwatch are your friends here). Why today? Well, today is the day that people can pull their money out of hedge funds. What are hedge funds? That is where you buy in for about $250K, for starters, or a LOT more, they take your money, borrow on that money(leveraging) and invest, invest, invest. A lot of those hedge funds invest by driving up energy prices and shorting banks. Also CDS's, tranches, derivatives and all sorts of other toxic paper. And oh, they are unregulated, for the most part, and hedge fund managers pay 15% taxes on the incredible fortunes they make. Hedge Funds are where the white boy cocaine dealers of the 80's and 90's went, if they didn't get busted or didn't go into repuke politics.

So why today?

The hedge funds are expecting a LOT of people to be bailing on them and the expectation amongst the financial illuminati(Oh, I just HAD to use that word! Hehehehe...snork) is that several are gonna do the big Coriolis Two-Step down the cosmic financial water closet.

Today could be most interesting, in the most Chinese curse of ways.

Remember what Andrew Mellon said: "Depressions are when money returns to its rightful owners".

[girl gone mad]

26. I love that quote. n/t

[AntiFascist]

64. You won't be able to short bank stocks until Black Friday n/t

[mmonk]

19. The fault of this mess is the cumalative

effect of financial market deregulation, derivatives, hedge funds, and the dumping of worthless devalued paper due to devalued assets they represent. Totally "free" markets don't work well with no rules. The best an Obama can do is to come up with a prudent regulatory system that can survive whatever ideology takes office in the future. I have confidence he will.

[elleng]

66. "Free markets,

in order to be free, must be properly regulated."

Wesley K. Clark

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

[girl gone mad]

20. So what you're really saying is that..

if the people don't prop up the lenders, then the lenders will take their bad business and go away?

That actually might be a good plan.

The people will to get by. Work farms, start new businesses with reasonable cost structures that can be maintained.

That 700 Billion could go a long way towards creating the green jobs of the future and improving infrastructure.

Whoever decided it made sense to run everything on revolving credit anyhow? It doesn't work for individuals, and it doesn't work for businesses.

[Raven]

21. Morning Will. Everybody operates on credit. You are the only

human being I know who doesn't use a credit card. Even if we pay off our balances every month, most of us use the plastic. More importantly, business operates on credit. You will recall that when I began my law firm, the first thing we did was to get a line of credit from State Street Bank. We seldom used it but there were times when cash flow was low and we had to tap it TO MAKE PAYROLL> There it is: TO MAKE PAYROLL.

This crisis is a credit crisis...it is a workers' crisis. As I said on another post here, anyone who doesn't take this very seriously or is gleeful about it is either insane or insolvent.

[scarletwoman]

22. Well, let me introduce myself to you, then. I don't use a credit card, either.

Will has more company than you might suspect. :)

sw

[ismnotwasm]

46. Me either

I learned not too the hard way, a long time ago.

Case in point, I've moved, needed a stove, bought a very good used one for $230.00, I could have charged a new, cheaper model for $100 or so more dollars, I suppose, but as it is, no interest, nothing owed. I put money into a family owned business, and I have a good stove with a guarantee.

[WilliamPitt]

25. "anyone who doesn't take this very seriously or is gleeful about it is either insane or insolvent"

Line of the week, ma. Brilliant.

My credit card is my bank account and Visa check-card from the bank. Works like voodoo. ;)

[dudewheresmycountry]

63. well glad to see I am not alone

I do not have a credit card, I do own a business, I do give credit to some clients but only short term. I feel if a person in business can't to it without borrowing money from the banks maybe big for his britches. Of course this comment has nothing to do with the current situation we as a country are facing.
This is what I read today, the government will purchase these bad loans at top dollar, this will get the money flowing again. Then the government will have to sell these bad loans for pennies on the dollar and the banks who owned these bad loans will buy them back making a huge profit. True of False, I think true..

[Waiting For Everyman]

23. As Nancy Reagan said, "just say no". See ya November 5th.

If we all get laid off, it's a month. We'd get hired back middle of November without an extra trillion going to empower the monsters.

And if McCain wins somehow, a Secretary Gramm won't be in charge of that money. Do you really, really, really think your job will last long if he has his way?

Don't give away the store, especially until you know who will be running it.

[PVnRT]

28. Yes, everyone is saved up to survive a month

This post is indicative of the selfish attitude on this site lately.

And don't tell my unemployment will help. The last time I got it, it took them a month to get the paperwork done.

[Marrah_G]

31. Are you insane? "only" a month???????

[yy4me]

60. Was laid off on 9/18, went to the unemp office on 9/22 and was

told that although the process doesn't take long to initiate, they are behind. I should expect to see my meager check in 5 to 6 weeks. What if I had children to feed? I think that is far too long, but then again, Massachusetts has no money anyway.

[Imperialism Inc.]

29. You aren't alone in being a little confused Will. Even the "experts" are.

Of course there are some on DU that "know for sure" what the right thing is and "know for sure" the Paulson plan will make the treasury money in the long run but the idea that they somehow know that is pure fantasy.

Progressive economist Dean Baker doesn't seem to think it is a crisis. He thinks something needs to be done just not rushed in to.

When Wall Street Needs Money, Rules of Journalism No Longer Apply

http://prospect.org/csnc/blogs/beat_the_press_archive?month=09&year=2008&base_name=when_wall_street_needs_money_r

Washington DC’s Fox affiliate appears to have been taken over by Wall Street lobbyists. It has been reporting all sorts of unsubstantiated assertions that a credit squeeze is destroying the economy. You'd never know that typical 30-year mortgage is going for around 6.0 percent these days. Back when I last bought a home I had to pay 7.15 percent. But in Fox's sell the bailout campaign, there is no place for arithmetic.

Of course few people expect much journalistic integrity from Fox. On the other hand, the NYT enjoys a somewhat better reputation. However, with some of its reporting on the bailout, it's not clear this better reputation is deserved Today it told readers that “early on Tuesday, banks were charging one another the highest overnight borrowing costs ever recorded, as measured by an important rate known as Libor.”

That sounds really bad -- the highest overnight borrowing cost in history. Maybe it would have been helpful to tell readers that this data has only been compiled since 2001, a period of unusually low interest rates.

If we want a longer time frame, we can look at the history for the three month interbank rate. Bloomberg reports that the three month London Interbank rate (LIBOR) closed at 4.05 percent on Tuesday. In the same chart, we can find that it was 5.23 percent a year ago.

Those interested in a little more history can find that the LIBOR rate was over 8.0 percent for most of 1990 and actually topped 9.0 percent on some days in September of 1989.

So how scared should we be that yesterday's interest rate was almost half as large as the three month LIBOR back in 1989? It would be hard for a serious person to explain how a 4.05 percent LIBOR can shut down the economy, when the interest rate has been more than twice as high in the not too distant past. But, that won't fit the NYT credit crisis story, so you won't see the historical data mentioned.

--Dean Baker

Some comments at that blog entry point out it is not just LIBOR but its ratio to the Fed rate that is so scary. I'm not sure if that is accurate or not but it seems that the overnight rates are not especially high. However, I have also heard that the volume of overnight lending is very very low. International lending was even zero one day according to a couple of The Nation reporters I heard on a podcast. I know this conflicting info doesn't really help with the confusion I'm just pointing out there are other perspectives out there.

If something needs to be done then there are better ways than the toothless plan that just failed the house. Nobel prize winning progressive economist Joseph Stiglitz gives some outlines to what to do.

Here's a Better Bailout Plan
http://www.alternet.org/workplace/101034/here%27s_a_better_bailout_plan/
Here's a Better Bailout Plan

(snip)
And for what? In the S&L bailout, taxpayers were already on the hook, with their deposit guarantee. Part of the question then was how to minimize taxpayers' exposure. But not so this time. The objective of the bailout should not be to protect the banks' shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn't that what the Fannie Mae/Freddie Mac bailout was supposed to assure us?

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products -- which they created -- and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer -- and for no return. The second problem is that there is a big and increasing hole in bank balance sheets -- banks lent money to people beyond their ability to repay -- and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market -- and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February -- one that would have included increased unemployment benefits and aid to states and localities -- and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, to aid the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle-down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.

The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again. There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem -- the government getting stuck with the worst or most overpriced assets.

Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.

If we design the right bailout, it won't lead to an increase in our long-term debt -- we might even make a profit. But if we implement the wrong strategy, there is a serious risk that our national debt -- already overburdened from a failed war and eight years of fiscal profligacy -- will soar, and future living standards will be compromised.

(snip)

Finally here is a link to one morea article with other ideas (and some of the same ones as Stiglitz)

The Fiscally Insane Bailout Bill Might Not Pass -- Here Are 5 Reasons It Shouldn't
http://www.alternet.org/workplace/100700/the_fiscally_insane_bailout_bill_might_not_pass_--_here%27s_5_reasons_it_shouldn%27t/?page=1

[mojowork_n]

72. Nbl-prz-economist J. Stiglitz was on Amy Goodman this morning.

You'll maybe recall he's the one who wrote that "3 Trillion Dollar" book on the Iraq War.

I wasn't awake, yet, but I think I heard him basically say something along the lines of 'the War Machine has hijacked our economy... it's been an orgy or borrowing ever since the price of oil went up by a factor of 5 or 6... oil was $23/brl when that war started. The price increase has sent cascading waves of disastrous ripples throughout every part of the economy, including the financial services/banking/investment sectors. Our children and grand-children will still be paying off these debts Bush and Cheney have incurred, even as they're making do with a lower standard of living.'

I googled him and found this article at The Guardian:

http://www.guardian.co.uk/commentisfree/2008/sep/30/marketturmoil.wallstreet

and another at The Nation's website.

http://www.counterpunch.org has had some good articles on the 'bail-out,' too, including one by Kucinich's economic guy, Michael Hudson, on Sept. 23rd.

[Marrah_G]

30. If something isn't done to stabalize the markets and banks things will get bad.

I work for a very liberal, progressive, VFP small business owner (life insurance brokerage). I asked him about this yesterday. He said if nothing is done then he will be out of business in 6 months and lose his house in a year. Along with his losses goes the loss of mine and my assistants jobs. He is a fantastic boss. Honorable, honest, fair with a huge amount of integrity.

He is nervous as hell.

People are angry at wall street and want to see them punished, the problem is that the ones most hurt will be small businesses and their employees.

[crispini]

32. "Measure twice, cut once"

A couple of points:

The "safeguards" in the original bill were ridiculous -- no teeth in them, from what I understand.

Also, is there REALLY a liquidity crisis? Read ProfessorGAC's post here http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4132114&mesg_id=4133119 and others by him in the thread.

I will concede that we need to pass SOMETHING. However, it needs to be the RIGHT something. I want it to (1) work and (2) contain some real safeguards with teeth in it.

[BrklynLiberal]

57. Thanks for that link. His info is excelllent. Also has a post upthread here.

[SnowCritter]

33. I posted this on another thread, but

it seems to apply here, too.

In his book "American Theocracy" Kevin Phillips examines, among other things, the histories of several world powers and how they fell into decline. IIRC, in each case the county affected went into decline after their economies shifted from a manufacturing base to a "financial" base (pushing paper to make money).

We need to return, somehow, to a manufacturing-based economy. It also has to be the anti-thesis of "supply-side" or "trickle-down" economics.

[marions ghost]

35. "A manufacturing based economy"

I understand the theory but since manufacturing has gone to other countries how do you develop that from scratch again? Can't we be a service & information -based economy and still stay afloat?

I barely squeaked Econ 101 but like Will, I won't pretend otherwise. Many of us are getting a crash course here.

[elleng]

67. Manufacture components

of various environmentally sound commodoties, etc? I suspect there's a LOT to be done.

[marions ghost]

71. I'd love to see it

but wouldn't we just be competing with Chinese cheap labor on the manufacturing end? I can see that we could develop such commodities, but manufacturing them would be limited by what is deemed cost-effective, rather than what would strengthen the US economy. There never seems to be a big picture viewpoint in American business. It's all about the bottom line.

[bigtree]

37. Of course Obama will have to clean this up when he gets in

But, with our track record in this presidential arena, it should be obvious why folks are desperate to manage whatever we're giving away to prop the market up. Also there's nothing in your assessment about whether the actions taken by Congress will actually accomplish the things you're concerned about. There's just this generic acknowledgment that we have to do 'something'. I wish we knew enough to measure what Congress proposes to see if it will work or not.

Also, there are things which may pass in this bill that we'll spend decades trying to bring to a vote to clean up. There's really no guarantee that Obama will get the Congress he needs to effectively pull the fat out of the fire; the fat that we're so prepared to let go right now in the interest of doing 'something'.

[chicagoexpat]

38. U sell urself short, if ur really an idiot ur in the right place (internet forum)... but if ur

really an idiot u wouldn't have done any research, you wouldn't have come to a conclusion, u'd just spout off ur uninformed opinion

so...

GET WITH THE PROGRAM!

[tavalon]

45. That was Wills way of being humble

He is one of the better political bloggers on the toobz.

[mzmolly]

40. This from one man who enlightend us on the Bush/Nukes/WMD claim.

He's not the only one saying it. Most of the harshest critics of Paulson's bailout travesty have conceded the need for some kind of action to shore up the economy, provided it makes sound fiscal sense and does not involve tyranny and fascism and stuff. Therefore, by my reckoning, there are millions and millions of Americans who are in danger of losing their jobs because of this situation. And because I am for the worker, like any good liberal should be, I think this is a shitburger we're going to have to choke down.

Agreed! It's not just Bush, Paulson ... it's Krugman, Reich and others. Not everyone agrees with the solution as you've said. But most agree something needs to be done.

[earth mom]

41. Even the so called "experts" don't know if the bailout will work.

That should give everyone pause. Instead everyone looks at them like saviors when they should be suspicious and wary.

I mean when is the last goddamn time the government or big business did anything that was right by the people? Think about it.

It's naive to believe that anything is different now.

[LiberalHeart]

42. Explain this: The whole time Obama talks about the bailout, the Dow improves.

Really -- watching it now. Is it just a coincidence?

[WilliamPitt]

48. No clue.

However, a similar lightening of the economic load took place when Clinton took office. He didn't do anything besides show up for work on his first day, but the markets went up anyway.

Hm. Funny, that.

;)

[EFerrari]

43. If you haven't, check Amy's show yesterday: "The Bridge Loan to Nowhere"

http://www.democracynow.org/2008/9/30/bridge_loan_to_nowhere_house_rejects

[Hydra]

50. That was very good- thank you for posting

I don't have time lately to watch Amy, most unfortunately.

[EFerrari]

51. My pleasure. I don't understand economics and that segment helped. n/t

[Hydra]

49. Here's my POV on this mess

1. Anytime someone screams "Too complicated to explain" they are bullshitting you. I have not heard one solid thing this $700 Billion giveaway to Paulson and Bush would do that's positive, but I have heard of a potential raft of problems it could cause(Like inflation beyond the 12% that's already occurring)

2. You can't borrow your way out of debt. We keep talking about how businesses need to borrow to make payroll- what's going to happen next month when business is down even more? Money needs to be made available to the workers- our economy is 70% consumer based. If they don't have money, they won't be supporting those small businesses. This bailout is just the government saying that they want to support large(Read: Potential Monopolies) businesses using our taxes because we can't afford to pay them for their services.

Either we are practicing capitalism, or we are practicing socialism. We aren't picking what works best for the people in charge at the time.

[LonelyLRLiberal]

53. One thing that stands out to me is the total lack of facts and figures given by bailout proponents.

That goes with the "too complicated to explain" excuse.

Another excuse that has been given is that it is impossible to value the "assets" the money is supposed to be used to buy (because they are so "complicated").

Paulson has said (I think) that the $700B figure is merely a guess.

They knew about this situation for months (I won't call it a problem 'cause I don't have a clue.

I dislike Ben Stein, but from a link here on DU I read his statement that the CDS's are a big part of the situation. No one mentions those when the pols appear on Teevee, unless they are included within another category. CDS's are totally unregulated, I have read, and are private contracts. I don't know who the parties are, but assume they include holders of some of the mortgage products, whoever that might be now that mortages are sliced, diced and sold.

We know that when anyone from the Bush administration speaks, and when most Republicans speak, lies are being told for the most part on most issues.

It doesn't give me much confidence that we are being told the truth or that they know what they are doing. My only hope is that one of Obama's financial advisers is Warren Buffett and that Warren Buffett is giving honest advice and not recommending stuff that just helps him with his own investments.

[ContinentalOp]

54. #1 is a good point. When people actually take the time to explain how it all works,

it's not that hard to understand. Yes it's complicated but an explanation is possible. The fact that there are no convincing explanations as to how this bailout would help is telling.

[live love laugh]

52. I'm not totally against it--It's the oversight that I have a problem with

I want tight oversight. I saw something like a review being proposed for every $50 billion spent. That is too loose for me.

There should be accounting for every dollar spent, to the American people since our money is being used.

I saw that 911-iani is even lobbying to "consult" as part of the financial wheeler dealers that will handle our tax dollars. I want to know who is getting our money and I want some rules to stop the blatant cronyism.

[mgc1961]

58. Will, I'd check your work...

...but my head starts to swim at a pretty elementary level of economic competency.

:toast:

[MilesColtrane]

59. You've basically come to the same conclusions that I have.

The entirety of my knowledge about how the economy works comes from random readings and one corporate finance class taken as an elective during my college days. (I passed, despite being WAY over my head.)

I tried to use the analogy of the economy as a shooting victim to a friend the other day.

The immediate thing that will kill him is loss of blood. As the LIBOR increases and money market funds threaten to break the buck, blood flow begins to stop.

Yesterday my own sainted, seventy year old mother recommended that I remove most of what little cash I have in the bank because she had heard rumors of "something bad happening".

An I.V. bag of Treasury money, carefully monitored by Congress, won't fix the problem, but it will keep the basic functions continuing until a solution can be proffered.

[Alcibiades]

65. There are better ways

Nothing Paulson has done indicates we should trust him with $700 billion to use at his discretion.

The rush to get this done before the election bothers me. If it were this bad, the financial geniuses who have designed this bailout would have let us know before the very last minute, wouldn't they? Either they are incompetent or deceitful, either way there's no reason to trust them this close to the election.

Remember, this industry you are so keen on bailing out gives all their money to Republicans. Give them $700 billion, that's $700 billion they can use to bankroll McCain, and the next Republican, and the next. If this bailout needs doing, they can do it out of their own pockets, like Wall Street moguls used to do.

$700 billion is a lot of money, especially if there are no guarantees it will work. Give the investment banks $70 billion and see what they do with it. If they really want the government in charge, nationalize Wall Street. If they just want my money, my kids' money, and my grandkids' money, and they want their 15% capital gains tax rate and deregulation and the former CEO of Goldman Sachs in charge of it and to get it done before the election before they kill the kitty--well, no.

Remember, they had experts who were dead certain that Saddam had WMDs. Apparently, you can fool some of the people all the time, and, amazingly, some of those folks are my fellow Democrats.

[Forkboy]

68. The whole thing reminds me of a scene from The Three Stooges.

The three of them are in a rowboat that's taking on water, and Larry reaches under his seat and finds a big corkscrew drill. He holds it up and says, "Look, a water letter outer!"

I still agree with your 3 points (hard to argue with Buddha because he doesn't care)....but I'm not happy about it. x(

[eridani]

69. We'll have to move fast on it. A quick way to raise $900 billion--

A Responsible Plan to Pay For Recovery: $900 billion in New Revenue

Below is our ten-point program to pay for this broader bailout. This plan would generate $900 billion a year until the costs of the bailout and stimulus program are paid for.

1. A Securities Transaction Tax: $100 Billion.

A fair plan to pay for the bailout should include a modest financial transactions tax on the buying and selling of stock and other financial products. A penny on every $4 invested would generate $100 billion a year. Other European countries already tax stock transactions, and these transaction taxes effectively discourage speculation.

2. A Wealth Tax Surcharge on Households with $10 million: $300 billion
Congress should institute a modest wealth tax surcharge on households with net worth over $10 million. These households currently own and control over 20 percent of the nation’s private wealth. They have realized huge gains from the manipulation of capital markets and the asset bubbles that created the current crisis. A modest surcharge — no more than 3 percent — could generate over $300 billion.

3. A Corporate Minimum Income Tax: $60 Billion
In August, the Government Accountability Office reported that two-thirds of U.S. corporations paid no income taxes between 1998 and 2005. These corporations paid nothing toward our shared expenses of defense, environmental protection, public health, and education. Ordinary taxpayers should not be left holding this bag. A minimum corporate income tax should contribute toward the bailout.

4. A ‘Disgorgement’ Recovery from Profligate CEOs: $40 Billion
Until several weeks ago, top CEOs and managers were collecting massive salaries and fees while they told the rest of us that “everything is fine.” These CEOs gorged themselves and have taken the money and run. The four biggest investment banks on Wall Street shelled out $30 billion in bonuses last year. One of them, Lehman Brothers, has just gone under. Another, Bear Stearns, was bailed out earlier this year. To help pay for recovery, the new Treasury authority should seek the payback of executive compensation inappropriately extracted in the years before the Wall Street meltdown.

5. An Income Tax Surcharge on Incomes over $5 Million: $105 Billion
A portion of the bailout cost should be financed with an emergency income tax surcharge on incomes over $5 million. Wealthy investors have been the big winners in the unregulated bubble economy. They have watched their incomes skyrocket over the last 25 years. Meanwhile, President George W. Bush has cut their taxes for seven years. Instituting a 50 percent tax rate on income over $5 million and a 70 percent rate on income over $10 million would generate $105 billion a year until the bailout is paid for.

6. An End to Overseas Corporate Tax Havens: $100 Billion
Congress should close down corporate tax havens that allow corporations to game the system and cut their taxes, sometimes to zero. This step would generate $100 billion from profitable companies that have paid no taxes over the last decade.

7. The Elimination of Subsidies for Excessive CEO Pay: $20 Billion
As taxpayers, we subsidize excessive CEO pay, through a host of tax loopholes, to the tune of $20 billion a year. Congress should close these loopholes, including the accounting gimmicks that permit companies to report one set of earnings to shareholders and another lower number to Uncle Sam.

8. The Elimination of the Tax Preference for Capital Gains: $95 Billion
The mega windfalls that Wall Street executives have pocketed over recent years will be generating additional income, in the form of dividends and capital games, for years to come. Under current tax law, dividend and capital gains income faces a mere 15 percent tax rate while income from actual work can be taxed at rates that go up to 35 percent. Taxing wealth and work at the same rates would generate $95 billion a year in revenue.

9. A Progressive Inheritance Tax: $60 Billion
In the near future, the moguls of the past quarter-century will be passing off the scene and leaving behind dynastic-size fortunes. A portion of this wealth should be taxed. A progressive estate tax on estates over $2 million — $4 million for a couple — could generate $60 billion a year in the short term and much more in outlying decades.

10. The Elimination of the Mansion Subsidy: $20 Billion
Wealthy taxpayers can currently deduct their mansion mortgage interest off their taxes. The richest 2 percent of U.S. households do not need to be subsidized by American taxpayers. Capping the home mortgage interest deduction for households with incomes over $200,000 per year would generate $20 billion a year.

[OakCliffDem]

70. Kick

[NashVegas]

73. Total Shitburger

My only hope is that a deal will be banged out that will be beneficial to long-term labor interests.

[RUMMYisFROSTED]

74. I'd like a round of hearings with my shitburger.

3 or 4 days ought to do it.

[L. Coyote]

75. I was thinking today, if people wanted secure returns on investments

they should have been more careful about where they invested how much.

Of course there was going to be a major correction!! There still is a balloon in valuations.

When home values rose, did people send the government bailout checks from their new found wealth? NO!

The government should aid homeowners whose residences are foreclosed on, but not investors who made mistakes.