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$700 Billion to Bail Out the Financial Industry: Good Idea or Bad Idea?

This article was written by in Economy. 28 comments.


Over the weekend, President Bush asked Congress to grant the United States Treasury Department the authority to purchase $700 billion in assets from troubled financial companies. The government would create a corporation, like 1933′s Home Owners’ Loan Corporation, to buy mortgage-backed securities at a discount and sell them later for a profit.

This is by any measure the biggest government intervention in an economy ever. So much for “free market.”

Do these financial companies deserve to be bailed out? They created, marketed, and sold risky mortgages. The market has determined that the bundles that the financial companies created to market these mortgages to investors are worth nothing. That is, the supply of these mortgage securities is high while the demand does not exist. If you can’t sell a product, it is “worth” $0.

Through the bailout, the government is saying that they’ll pay a certain amount for the securities the market has determined are worthless. In addition, the government believes that they will make money throughout this process. That is, in the future, either someone else will buy the securities or the rate of default on the mortgages will improve.

The default rates won’t improve unless conditions improve for homeowners. This plan does not address the homeowners, only the financial industry.

It’s unfortunate that greedy companies and greedy people, as well as homeowners who were led to believe they could afford their mortgages, won’t be forced to suffer the full consequences of the creation and purchase of risky mortgages. This sends the message that corporations and homeowners are encouraged to lie, cheat, and steal: Once the situation gets bad enough, all past sins will be forgiven.

Nevertheless, a bailout of this size is most likely necessary to help stabilize the economy, and without it, the world’s economies might experience a devastating collapse in a manner never experienced before.

Is a $700 billion bailout the right course of action? Should failing companies and defaulting homeowners be saved? What is needed for the global economy to move in the right direction?

Photo: epicharmus

Updated January 16, 2010 and originally published September 22, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 14 comments… read them below or add one }

avatar Brad

I think that the bailout is unfortunately necessary to help bring balance. I also think that all leadership for these companies should be held accountable in some way for what they did. If the government doesn’t, then I think the shareholders should file class action lawsuits against the leadership for their loss.

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avatar KC

A better question might be what are the consequences of not having a bailout? Most of us agree that we don’t want a bailout for the sake of rescuing some greedy people and companies at tax payer expense. However I believe that if these brokerages and eventually banks were allowed to fail we’d have much greater consequences to our economy and taxpayers would suffer more. Government regulation isn’t necessarily bad if it sets up regulations that stop these activities from happening again. The tax payer would suffer a lot more if we allowed these companies to fail and our economy sank even further.

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avatar Greg

Alas, the bailout seems to be a necessity. While I tend to NOT favor government regulation, any entity that “can not fail” must be regulated. As for those responsible being held accountable, mostly doubtful, but the execs at Freddie Mac and Fannie Mae did get the stings to their golden parachutes clipped (http://consumerist.com/5049913/feds-snip-fannie-freddie-golden-parachutes) .

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avatar Matt

Have I got this scam correct?

1. Bush/Republicans do massive deregulation due to total control
2. Banks offer BS loans to people who can’t afford them, making money with closing costs and other fees
3. This causes overproduction and overpricing of housing
4. People naturally start defaulting on the loans
5. The taxpayers buy these defaulted loans

Is it a coincidence that the last scandal of this size happened under Republicans (S&L – the last greatest financial nightmare)? I try not to be so partisan but I truly feel sorry for actual fiscal conservatives who have to put up with their presidential choice candidates always being frauds. Bush ballooned the govt 40% larger in only 8 years. Pity. I’ll take a tax and spend Liberal and a budget surplus over a recession (or possible depression) and zero job creating “conservative” any day.

The Right is just better at politics. The Democrats just need to resurrect Johnny Cash and be done with it. The Republicans have no qualm with running celebs (though they project that onto the Left – so called Hollywood Libs). Do you think that the Republicans would’ve chanced losing an almost sure thing by NOT choosing Hillary as the Veep? Does McCain pick of Palin answer your question? With Hillary we’d be yawning about Romney right now. The Right is just better at politics b/c they know that winning is the only thing. You can’t squabble over policy when you don’t have a seat at the table. Ideals and hope and change mean nothing if you lose.

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avatar James

Matt, I don’t believe so. Banks were giving the BS loans because they knew the government would bail them out if things went south. Government meddling caused this.

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avatar msoori

Matt, you are right on it. Dont forget about the oil issues as well. The oil shoots up in the final year of Bush administration, and what is the solution thats being put forth? Offshore drilling! Isnt this like letting the fox take care of the hen house? Hasnt any one connected the dots yet?

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avatar Jim

Unfortunately the bailout seems necessary to keep the economy from taking a giant tumble. I think if they let the banks fail on their own then the resulting impact to the economy as a whole would cost everyone more in the long run.

I certainly don’t think failed companies should be rewarded and I hope thats not what ultimately comes out of this all. Hopefully those in charge of the companies in question will get some consequences. I’d really also like to see some definite regulation changes go through that would help stop this kind of thing from happening again in the future.

Jim

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avatar anthony Scollati

who is coming up front with the $700 billion check,can some one kindly explain to me? I am puzzled,and befuddled. I Know the bank of China has the cash at hand andTreasury secretary knows them very well ;could that be the answer,that China banks have promised an interest free loan?I I know it is not that simple,but can you kindly explain to me

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avatar Marshall

How could NOT spending $700 billion dollars NOW, of money that we don’t have, possibly cost us MORE in the long run? That $700 billion dollars will be going into the pockets of the big private investment bankers. We don’t NEED them.

Sure, lots of little people are going to lose lots of money if we don’t bail out the investors who the little people gave their money to. But the thing that caused the great depression was that there was no money circulating, no money being loaned, no money to work with, no money to borrow, following a period of short sales in the market, which is what we just had here. In 1930 the big private investment bankers kept all their cash and sat on it. As soon as their man, FDR, was safely installed as president, out came the loans and cash. The country prospered. Short sales were banned.

In 2007 the ban on short sales was lifted. Short sales means selling something that’s not your’s, then using the money to buy it, then selling it again for a profit. Short sellers are parasites. They cause the price of things (stocks, securities, houses) to be falsely inflated. Now they have short sold almost the entire U.S. economy. We should NOT bail them out.

The U.S. Treasury is empowered by the Constitution to print and regulate money. There need be no shortage of cash and even interest-free government loans to any and all Americans. We should abolish the privately-owned Federal Reserve Bank, which masquerades as a government-operated entity, and has been and IS the biggest parasite this country has ever been cursed with for almost a hundred years now.

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avatar Matt

Breaking – FBI to investigate Lehman, AIG, etc. This bailout is a corporate scam – socialism for the rich!

Deja vu with the S&L scandal – but this time, no Wall Street bailout:

WASHINGTON (AP) _ The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration.

Two law enforcement officials said the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc., and insurer American International Group Inc.

A senior law enforcement official says the inquiries, still in preliminary stages, will focus on the financial institutions and the individuals that ran them.

http://www.ktla.com/landing_national/?Sources-FBI-investigating-possible-fraud=1&blockID=66016&feedID=23

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avatar ray of light

the government should give the money to the people. not the companies. if we got the money, we could pay our mortgages and stimulate the economy. in a capitalist market bad businesses fail. that’s why we’re capitalist. let them fail. but the people who have diligently saved and provided the money to the banks to lend out and thus lost. should be compensated. and no golden parachutes for these greedy bas*****, they should be broke like the rest of america.

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avatar Extreem

This Bailout really is just a cover up. It covers all of Wallstreet, your town and
my town. Who in their right mind would think of even helping these criminals.
The mortage co.”s banks, and any lending insitutation that has these bad notes
or loans which they are holding, all of the real estate deals could be all taken
care of for way under 100 billion dollars. More like or close to 65-70 billion dollars. What is the other 600 billion needed for ?????? They got alot to cover up.
extreem

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avatar davida

700 billion / by 200 million tax payers comes to 3500 $ each well … sam has not found a way to tax zero in come so i shall not be giveing 1 thin dime to this debackle till i get a job.

and i better not be hearing about ceo’s from these places earning more then 1 millon a yr

i dont care how good they are,,

damed good chance they belong in jal and should have to pay for there full keep at $100,000.00 a yr .

just stay out of my way. … just not in the mood..

where do i find this exact document to read my self .

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avatar local joe

We the people have lost billions 45 to 60 on every bank take over of failing banks,because they do not have to pay taxes on that buy out. Yet you and I the people of these United States have to pay taxes to bail these bad business ceo board of directors and whom ever they wish to keep on there payroll so they can do it again and again and again. I would like to find one individual who has been helped by any of these mortage companies and banks ,countrywide was bailed out by bank of america,as an example. I on the other hand still have a 7.5% mortage in helping me they added money on the end of my contract and added another 139 dollors to my 2000 dollars a month mortage.My mortage goes up and my payement is due to go up in 2 years on a 5 year interest only loan, plus i will still be paying interest. This not just my situation will spiral for the next 5 to 8 years and happen all over again and again and again. I am glad we the people of the people are going to let bad business get billion and billions bail out and individuls get 0 zero after all they deserve it we want to give it to them they did nothing wrong i on the other hand deserve what i get for try to work for 33 years and keep my house. They on the other hand move from board of directors to board of directors and ceo to ceo and bank to bank making golden parachute deals so they never lose. Wish I could do that. Is there any individual out there that has been helped by any mortage company of bank???

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