Summerwind

so instead of giving away $700B to banks, why not just set temporary rules the banks HAVE TO do reasonable loans and set what reasonable means. Have this legislation with a six month time limit or review or whatever. Wouldn't this be the solution that costs no one?

donsutherland1

If you're assuming that no money would be used to purchase some of the banks' toxic paper, the answer is no. The costs could be much higher.

Right now, the banks need liquidity, not new lending regulations, in order to make loans. The rescue package would take a share of the bad assets off the banks' balance sheets and liquefy them in the process. Without ample liquidity and continuing fears over the adverse impact of their toxic assets, banks have become increasingly risk averse. They have curtailed their lending and some financial institutions have begun using their excess liquidity to purchase Treasuries rather than make loans.

Should the liquidity drought worsen, the risk of a systemic financial crisis would increase. Should systemic failure unfold, as it happened in Japan, Sweden, Finland, Norway, and Taiwan during the 1990s, the economic and social costs would be of a magnitude of order greater than $700 billion. Furthermore, a good chunk of the $700 billion would likely be recovered over time as some of the toxic securities increase in value or are paid-off.

chriskaplan

I have an issue with Elliot Blair Smith who wrote the article to which MC. spin used to write his allegation, "The Man who wrecked Wall Street". First of all, Mr. Smith is not a reliable journalist, so please use better judgment when reading his articles. Mr. Smith is on the list of journalists who are avoided by the rating agencies, for example.
Also, mc. spin cited a few names but he mainly talked about Gary Witt. I used to work at S & P so I know some facts. Mr. Witt was not THE managing director, he was just a team managing director, along with more than 50 other MDs. He reported to a group MD, who consequently reported to a senior MD, and then to a more senior staff, who ultimately reported to the President, then to the CEO. So, who has the power to wreck Wall Street? Not a team managing director.
Also, Mr. Witt left that group in the autumn of 2005, and two other MDs have been in that position since then, so please do your research before you scapegoat someone. And by the way, Mr. Elliot Blair Smith, write responsibly next time.

Summerwind

Except that the fed has done things to encourage liquidity a number of times recently, and they didn't loan it out. So shouldn't a requirement be tagged to this bailout that the money must be used thusly?

Gladiator

There are several ways to define the current problem.

One problem is the expense of maintaining a large number of unsold homes, that have been foreclosed. By the Fed removing some unsold homes from the housing market, then the the market should be able to sell homes at a more reasonable market rate.

The whole housing market is depressed by an excess of unsold houses on the market.

Excess unsold houses on the market have been created by a confluence of several factors. There was an increased housing demand 2002 to 2005. This housing demand created additonal houses built, and more purchased by investors, intending to rent out the houses.

The factors increasing demand for houses were Mortgage incentives for first time lower income home purchases. An influx of illegal immigrants for the construction trade, and other work, created by the perception and reality of lax INS enforcement, 2000 to 2005.

http://www.debatepolitics.com/econom...post1057748277 (Why Freddie Failed)

The demand for housing fell sharply after 2005. This reduction in demand for housing was coupled with the default and foreclosure of some poverty and other incentivized home financing packages. There was a reduction in demand for rental housing also, so some investors became over-stretched, and defaulted.

The housing market could make corrections, in the past, because the demand for housing was fairly constant. The housing market ordinarily corrects by owners being able to sell, or rent, before default, thus usually avoiding default.

The current housing demand reduction is due in part also to illegal immigrants returning home as a result of the perception of more stringent INS enforcement.

By the Fed taking houses off the market, maybe for a few years, untill demand for housing catches up to the supply, then the market can function in a more normal manner.

This is what Hoover did in 1929. Hoover bought up a number of house mortgages in 1929, when there was an unsold house problem, and resold later, as housing demand caught up.

How can the building of more houses be prevented now, to avoid further exacerbating the problem of unsold houses? Where should the building ofnew houses be permitted? Is the depressed housing market a sufficient mechanism to prevent the building of houses that add to pressures increasing the number of unsold houses?

"July's inventory of unsold homes on the market rose 3.9% to a record 4.67 million units, representing a supply of 11.2 months based on the current sales pace. The inventory figures are not seasonally adjusted.
A sharp increase in condo inventory accounted for the gain in July. Inventories of condos rose to a record 769,000 units. Projects started before the housing market recession began are coming on line, creating gluts in some markets."

U.S. existing-home sales rise but unsold inventory hits record - MarketWatch





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How did Our Oil get under Their Sand?

Gladiator

Here is a Link to the Bailout Language:


http://www.latimes.com/media/acrobat...9/42631254.pdf

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oldreliable67

Actually, the Fed and other central banks around the world are lending it out. The Fed and the other central banks have become in essence a clearing house for loans...banks are borrowing from the central banks rather than each other. The Fed's total this week and last is, I think, about $630B.

Banks around the world are essentially hoarding cash, trying to get their capital ratios in order. Today, September 30 is a quarter end for the vast majority of banks around the world. Consequently, their balance sheets and their capital ratios as of today, when reported in about 30 - 45 days (although the grapevine will have those numbers well ahead of their official release), will be highly scrutinized in order to determine who is strong and who is weak. This will make a critical distinction determining which banks the others are subsequently willing to lend to, and in turn, who will survive and who won't.