I will admit that this is much better than what was initially proposed. This leads me to think that the first plan was floated to take your eyes off the ball.
The first plan was such an abuse of the Constitution that you had to get upset, but admit it... You kind of feel okay about the current plan.
The first plan was such an abuse of the Constitution that you had to get upset, but admit it... You kind of feel okay about the current plan.
- You've got upside potential in the form of warrants (meaning that if the banks that are bailed out do well, taxpayers share in the good fortune).
- There's oversight now.
- Executive compensation is supposedly limited, the devil is in the details (in general, but more so on this point).
- The initial outlay is $250 billion instead of just authorizing $700 billion (say the word billion and try to imagine how much money that really is).
Problem is, the plan still won't solve the underlying problem. This whole thing was a smokescreen. Pay no attention to that bailout over there, we're here to help.
I've mentioned already that I think this type of plan will give off the appearance of "working", but it's just a matter of time before everyone realizes that this was just one more transfer of wealth from the middle class to the wealthy. There's still plenty of money to be made on Wall Street, and even if this plan is constructed in such an iron-clad way that there's no obvious transfer of wealth, there will be too much reliance on the finance industry. America's brightest minds (our biggest resource) are wasting their time trying to configure the latest financial innovation, rather than advancing science or technology. Balance needs to be restored and this can only prolong the return to balance, costing our country plenty in the long run.
Ultimately the de-leveraging will take place. Home prices will continue to fall and the value of mortgage-backed securities will fall right along with them (not to mention the CDO-squared and CDS's). Only two things can happen, wages increase to catch up with home prices (in other words, lot's of inflation), or home prices fall back to historic norms. I'm leaning towards the latter.
On top of the likely continuation of de-leveraging (deflation), we'll see Wall St. put all of their new-found liquidity (cash and borrowing ability from the Fed), plus all that they've put aside as this crisis has unfolded, into the next bubble. That could be gold and other precious metals, but may include materials, energy and other commodities, amongst other things.
So that means that most people will likely see a reasonable increase in the value of their 401k and/or IRA, but more and more people will struggle to find solid employment and we'll see some "inflation" in the form of increases in gas and food prices that we've kind of gotten used to over the past few years. This is not stagflation. It is not a depression either. I'm sure someone will coin a better term for it, but let's call it Debtflation. People will be up to their ears in debt from the credit-induced spending binge that America has been on for the past 25 years, and they won't be able to afford a lot of things that they had grown accustomed to over that same time period.
[This is as good a time as any to say that people who overextended themselves with credit were just acting in their best interest, at least to some extent. Interest rates (real and nominal - that is, adjusted for inflation) had steadily come down to approximately zero (negative real, very low nominal) over this time period, providing very little incentive to save and loads of incentive to borrow.]
The amount of de-leveraging that needs to occur is staggering. De-leveraging just means debt/credit write-offs. Think of bankruptcy. The courts will write-off your bad debts - what happens to them from the perspective of the banks that you owe? They disappear. Your debts used to be an asset to them, but since you are bankrupt the value of their assets falls by the amount they write off.
I'm going to start another post right now to try to explain what kind of assets we have been talking about throughout this crisis.
Btw, I changed the settings so that you can now leave anonymous comments. I don't really even have time for the blog, let alone policing comments, but I'll give this a go since I haven't had comments since my first post. Please use comments to ask me questions - that is the original intent of the blog. Without questions I've just stood at the podium and streamed consciousness for the past week.
I've mentioned already that I think this type of plan will give off the appearance of "working", but it's just a matter of time before everyone realizes that this was just one more transfer of wealth from the middle class to the wealthy. There's still plenty of money to be made on Wall Street, and even if this plan is constructed in such an iron-clad way that there's no obvious transfer of wealth, there will be too much reliance on the finance industry. America's brightest minds (our biggest resource) are wasting their time trying to configure the latest financial innovation, rather than advancing science or technology. Balance needs to be restored and this can only prolong the return to balance, costing our country plenty in the long run.
Ultimately the de-leveraging will take place. Home prices will continue to fall and the value of mortgage-backed securities will fall right along with them (not to mention the CDO-squared and CDS's). Only two things can happen, wages increase to catch up with home prices (in other words, lot's of inflation), or home prices fall back to historic norms. I'm leaning towards the latter.
On top of the likely continuation of de-leveraging (deflation), we'll see Wall St. put all of their new-found liquidity (cash and borrowing ability from the Fed), plus all that they've put aside as this crisis has unfolded, into the next bubble. That could be gold and other precious metals, but may include materials, energy and other commodities, amongst other things.
So that means that most people will likely see a reasonable increase in the value of their 401k and/or IRA, but more and more people will struggle to find solid employment and we'll see some "inflation" in the form of increases in gas and food prices that we've kind of gotten used to over the past few years. This is not stagflation. It is not a depression either. I'm sure someone will coin a better term for it, but let's call it Debtflation. People will be up to their ears in debt from the credit-induced spending binge that America has been on for the past 25 years, and they won't be able to afford a lot of things that they had grown accustomed to over that same time period.
[This is as good a time as any to say that people who overextended themselves with credit were just acting in their best interest, at least to some extent. Interest rates (real and nominal - that is, adjusted for inflation) had steadily come down to approximately zero (negative real, very low nominal) over this time period, providing very little incentive to save and loads of incentive to borrow.]
The amount of de-leveraging that needs to occur is staggering. De-leveraging just means debt/credit write-offs. Think of bankruptcy. The courts will write-off your bad debts - what happens to them from the perspective of the banks that you owe? They disappear. Your debts used to be an asset to them, but since you are bankrupt the value of their assets falls by the amount they write off.
I'm going to start another post right now to try to explain what kind of assets we have been talking about throughout this crisis.
Btw, I changed the settings so that you can now leave anonymous comments. I don't really even have time for the blog, let alone policing comments, but I'll give this a go since I haven't had comments since my first post. Please use comments to ask me questions - that is the original intent of the blog. Without questions I've just stood at the podium and streamed consciousness for the past week.
1 comment:
As for "$1 billion" - to conceptualize this one might consider thinking about what Alex Rodriguez earns for a 10-year contract ($250 million or so) and how impossible it would be to spend that much money by yourself without doing really ludicrous things. Then multiply that by 4 and you have "1 billion". Then multiply that by 700 and you have "700 billion".
Another way is to think of it this way - 700 billion is more than the GDP of all but 16 countries. Even 250 billion is more than the GDP of 32 countries, sandwiched right between Ireland and Thailand.
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