

America's bail-out plan

I want your money


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Bernie Dobson

When I was 18 years old I took my first job working in a U K High Street bank. The manager told me, after a couple of weeks working there, that the basic tenet of banking is 'Lending against security is bad lending, it should always be against the ability to repay.' Even at that early age, and this was back in the '70's, I could see that this basic rule was rarely followed. As time has moved on even less so. How can you lend someone 5 or 6 times his annual income to buy a property when labour markets, his ability to repay, are so unstable? The lending is evidently against the security, the supposed value of the property. Almost all mortgages in the USA and Western Europe are bad lending. I now work in Dubai where the property market is one of the few in the world that is still buoyant but, guess what, the banks are about to introduce the 100% mortgage - because the property prices are going up all the time, aren't they?


the cause of this crisis is NOT "a cycle of panic and pessimism";
but bad loans,
artificially low interest rates,
and little government oversight on lending and leverage.
buying "toxic" mortgages greases the system,
but guarantees inflation and taxes in the future,
does not fix these causes of the bubble,
and does not gear society to reality.
reality being:
the bubble has to burst,
prices have to reflect the asset's expected return,
and people have to move to productive areas of society.

SO Lagos

Looks like we are witnessing a gradual, subtle change in The Economist's editorial suite. You guys might think the $700 billion is an exception, but it defeats the entire purpose and lesson of free market capitalism. Fine, govts can try to inject liquidity in the macro and restore investor confidence, but please don't buy their toxic assets. Tell them to go raise capital or die. We'll take care of the burial!


Yes the bail out is not pretty...and it offends many people...but it is the only one that stands any chance of working and to enable the capitalist system..which has been a remarkably successful philosophy compared to any of the alternatives (think of communism for one)...to renew and recreate itself..hopefully with more humility and a good deal less greed and a whole lot more oversight and much less 'laisser faire' from the likes of Alan Greenspan, Gordon Brown and the many, many others who let such an enormous (world-wide) housing bubble grow without any attempt at stopping it.Blame those that let open the stable doors these last few years..and those bankers and traders that rode the wild horses of securitised debt and mortgages and all the other wild-fangled instruments that had no transparent market on which they could be valued...not those who are trying to get the horses back in...and domesticated!


Let it fall. All of the free market, pull yourself up by your bootstraps people are running to the government to save them. What happpened to the wonderful world of Darwinian winners and losers. If you work for the Economist you probably have a vested interest in seeing that things continue as usual. Why not split the 700 billion between every US citizen over 18? We would all have enough to pay our mortgages, solving the problem with housing. I could do away with my 22,000 in student loan debt giving Sallie Mae more incentive to continue loaning money and I will stimulate the economy by buying lots of goodies. Or is it only CEO money that stimulates the economy? Bull I say!!


As a prerequisite to any firm receiving "bailout" money, I vote that all of the offivers of that firm be required to:
1. Reject any severance and golden parachute compensation
2. Amend their last three years tax filings and pay a 50% Bailout AMT.

If ordinary taxpayers must feel pain...the firms officers should feel pain.

Yankee Doodle

CarmeninCali wrote: ... "The world is not going to end. And it's not up to the modest American to bail out the crooks either."

Fine. Congress guaranteed these loans. The US Government guaranteed these loans. Now that they have gone bad, can Americans NOW unsign them? Do you really think that we can ignore our signed committment?

When the Federal Housing Enterprise Regulatory Reform Act of 2005 failed, we agreed that no reforms were needed. When you and I failed to demand that it pass, it was then too late.

No, the world will not end. It did not end in 1929 either ...


YankeeDoodle, the terms of the FDIC was to protect assets, not loss from investments. This alone makes me question why the bailout is so expensive. The working class Americans, this 95% of us that own less than 5% of it's collective wealth, are needed as consumers in America to keep the Economy alive. And we are already strapped. The cost of housing has been way too expensive and with these mortgages, it leaves a lot of Americans with less disposable income. Then add on the plight of inflation and higher tax prices. Already a lot of Americans couldn't even keep up with their mortgages, so they rent. So either way, it's very expensive for us either way. Now if you add on this kind of tax burden, many Americans will not have any cash at all. It's just basic mathematics.

Yankee Doodle

What is most interesting is that like everyone, the Economist misses a key fact: The US Government long ago assured investors that the mortgage securities underwritten were in fact federally guaranteed. Read any textbook. There can be no debate about a bailout, only about how to do this. There was debate if these corporations should be regulated to prevent this collapse, and in 2006 Congress decided NO.

Another key fact: Senator McCain understood that the present crisis was developing and he acted in time to prevent it. Google: Federal Housing Enterprise Regulatory Reform Act of 2005.

Another fact: Senator Obama opposed necessary reform and took massive cash contributions from the very executives he now rails against, more cash than any other politician (and he of course also voted against the change that we needed BEFORE it was too late).

Senator Obama relies upon the very architect of the abuses, Jim Johnson, and asked him to select his VP, write Obama's housing plan, and apparently he is still his key advisor.



For all the excellent reasons (both right- and left-wing) already given in many comments below, I am astonished and disgusted that the Economist is backing this bailout - it seems an utter abandonment of all their long-held principles. In fact I am seriously considering not renewing my subscription when it comes around soon.


Cabo Wabo has one view of America, Inc. There are of course others too.

We're all a bit like the blind philosphers arguing over the nature of an elephant from fondling just one part. From the viewpoint of this lower-order person, it appears that the set of resources that once defined "America" is used up. We don't have the seemingly unlimited ores and coal and petroleum that fueled the first wave of Robber Baron capitalism and internal expansion. The Walmart consumption model (that also drives its own suppliers to bankruptcy on the dream of the "big sale" that's based on "lose a little on each unit, make it up on volume" idiocy) has trashed not only the hearts of innumerable small towns but even the notion of symbiosis and cultural and economic homeostasis that might have been implicit in their survival.

As goes California, so goes the country. The writer limns the divide -- lots of extreme "conservatives" who do things like push through a limit on property taxes that favors the "already haves" at newbies' expense. True believers now annoyed that the Austrian Great White Hope has morphed into what we call a "populist." Participation by a few guys in and around government who, like Paulson, were given carte blanche with a shipload of the public's money, and brought the Enron energy scam-and-collapse and the near-bankrutpcy of several cities, due to the same order of speculative investments that we will now have to eat the risk on while the few prosper, again, due to the influence and control of how law is made and how regulations are developed. Phony talk of "deregulation," which actually is simply re-writing the rules to benefit the few, by those who have captured the switchhouses of government agencies and now control the levers of power.

American education has dumbed down in large part because "conservatives" insist on hacking the teaching heart and tradition out of the schools, serial generations of one observation I would agree with (increasingly lax standards for promotion and academic rigor) coupled with the ascendance of generations of "educators" with "new, improved" ideas for curricula who play politics and bureaucracty to install their pets, in concert with "conservatives" who've learned to take power without a sense of governance and without personal consequences.

And of course The Economist's constituency, the do-ers and shakers who have mastered the universe by mastering the art of coming in with the golden handshake and bailing out under the platinum parachute. Folks who move up and puff their resumes by "managing change" like outsourcing and de-nationing whole industries, driving toward "efficiencies" by simply burning every fuel in sight including the health of the employee driven always to do more and more with and for less and less, and then moving on like a South American farmer to burn the next patch of rain forest to get a couple of years' worth of free soil enrichment to grow cattle to feed the Americans their burgers and fries. Our great profit-generating military-industrial complex, driving policy as well as procurement, working to maintain a constant level of "trouble" in the world to keep the procurement channels for ever-more-expensive war toys open (and developing the enhanced-lethality gadgets like bio-nanotech-cyber-satellite-autonomousbattlerobots that may obsolete or just destroy all us "soft targets.") You Brits are great at this kind of promotion: see "Jane's" and your M-I-C magazines that read like Consumer Reports for weapon systems.

And the current crop of Robber Barons, chatting up how "greed is good" (for them), and like the rich described by F. Scott Fitgerald, wafting off into their vast indifference when real people suffer.

Wabo decries the "idiots" that the system he feeds off has made. I hope that there's enough of what he believes America was once made of left in the pipeline to let us bail out the entire world's high-finance high-fliers. I hope that the Third Estate doesn't decide that it's time to set up the guillotines again, now that we have been told we should just shut up, shoulder down and eat our cake. And as one who went to Vietnam and became thoroughly sick of guns, I am glad that the NRA which is mostly "conservative" has helped ensure that the populace has and has access to lots of arms too.

It's gonna be a great time for cynics and snipers.

Andrea da Praga

When did The Economist became The Socialist?
As written before by many the reaoning in the article is very weak and it completaly ignores some critical issues. Economist should realize that by gaining some leftish readers it is going to loose a lot of freedom loving ones. If this trend continues it will soon have nothing in common with business and financial community and will rather appeal to the social democratic voter's taste. Why call it The Economist then?? I cannot wait to see the decadency of the editorial staff in this magazine sacrifising the last sacred principle (free trade) to the god of etatism. It wouldn't be surprised if this was approaching quickly

Jimmy Gatts

This is a first : an hostage taker (Wall Street) putting the gun to his OWN head , saying : "when I kill myself, my dead carcasus will fall on you and you will die too".This is nothing short of extorsion. The same old Bush & Co tactics of 2003 and the "imminent danger" of Iraq and the "hundreds of american lives to be lost from an imminent iraqi attack". Same old tactics to scare people off and get a blank check. Well, we have already seen that movie and it is awful.
Goldman did a deal in the market. Let's have others bank follow through and let's deal case by case. Every time the government scalps a company like AIG , it should give an extra incetntive for the remaining financial institutions to get their act together.If they don't, they should get AIG's fate : nationalized.At least, we know as taxpayers what we are getting for our money. Furthermore, the premise of the bailout is that banks will use the US$ 700 billion to jump start the credit markets that are frozen. This is an highly dubious premise to say the least. Banks that are selling their debt (mortgages) at a discount, will use the proceeds to lend the money at 6.50% in the form of...mortgages (!). It is more likely that they will hoard the cash and sit tight.






First they thought America could export jobs but then realized no jobs no consumers.They thought the American dream of owning a home was a cash cow all they had to do was increase the price incessantly, They thought our credit was the answer to their liquidity. when we had nothing left they built empires on what we did not have. Now they want us to pay for their mistakes. Enough is enough. Stop this insanity stop it now. They know they need a lot more than 700 billion that's just what they want now .

Rev. Flaesh

Section 8 of the Bail-out text:
Sec. 8. Review.
Why $700 billion?:
The Dukes of Moral Hazzard!

Country Doc

So it is the Fall of Rome, as discussed in many articles. Our financial system had more than a hiccup, it looks like a heart attack. We may not have the right doctor to fix it. On another blog someone wrote we are not asking what would Roosevelt do. THE NEW DEAL, is the quick answer, so is the bailout supposed to work like the NEW DEAL? I mean, is a convoluted batch of money that is supposed to be parcelled and delivered to help the financial industry regain its power to leverage and lend going to jump start our 1980 PINTO stationwagon of an economy? I dont remember the New Deal being this generous. The Roosevelt Era was as close to anticapitalism as you can get with a government run economy and restructuring. We sure have come a long way from that model. We need the Beta version or quick fix and hope it works is what i get from the FEDs current take. Will it work? Can we have more than one economist to guide us to the answer in our american government or do we just listen to the FED. Can there be another way. I mean how many times does G W Bush have to tell us we have to do it his way and quickly. We know the bailout will pass, but what will happen to the Dollar? I forsee a terrible free falling dollar, someone joked about the IMF but if things go south...?

Yankee Doodle

CarmeninCali wrote: "Yankee Doodle, let's say hypothetically the car sells for $100,000 USD. And let's say hypothetically I earn $20,000 USD per year. And more hypothetical criteria to my question; I have no assets and i have poor credit. Would you still just give me money for that Ferrari? Do you believe it's fair for the taxpayers to sponsor that decision?"

Sure, why not?

When lending the capability to repay a loan is really the only important question. When flying, taking off and then landing skills are the important questions. If I was a poor pilot, but good at cleaning up air crashes, would you fly with me?

Lenders only worried about what homes would resell for, which is focusing upon after-crash planning.

You are smart, ethical, educated, and energetic, and I can tell that you are a good person to lend money to and that you have good credit. You know why I know to loan you money? You really won't borrow money stupidly no matter what I offer. I cannot make you take more than you can afford. So I don't worry. Still want your Ferrari loan?


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