Comments on: The Story Not Told?

By: AllanF

AllanF — Tue, 17 Feb 2009 18:42:48 +0000

As a quick aside, because I’ve seen this thought being espoused so many times…

why we didn’t use the $700 bn to buy the excesses supply of houses

Housing was in a bubble. The bubble popped when houses became so expensive people could not afford to carry them even under the loosest of terms.

In the biggest bubble locales like S. California the price to income ratio was 6, 8, even 10 times above the historical average of 3-4. Nothing one undertakes regarding supply will make houses more affordable for the people that already overpaid and are now defaulting on their mortgages. This drop in price is a good thing. Unless you wish for us and all future generations to be nothing more than debt slaves in service of our mortgages.

By: SSAS

SSAS — Mon, 16 Feb 2009 18:46:07 +0000

I think businesses need to start looking at generating new opportunities themselves to survive the financial turmoil in the industry. In addition to relying on schemes and bail-out plans, smaller businesses can look towards alternative sources of funding during the credit crunch. Taking a business loan from the company pension scheme is one such way to do generate the much needed finance in harsher times. This is commonly referred to as SSAS loans.

By: matt

matt — Mon, 16 Feb 2009 18:06:07 +0000

Proposal for the Obama Administration:

While they are limiting the salaries of SOME of the bank executives on the government’s dime, I think that they should also limit the salaries of the state executives receiving government aid in the next stimulus. A lot of them make half a million dollars per year (including some deputy governors). I say knock it down to $150,000 per year.

By: Don the libertarian Democrat

Don the libertarian Democrat — Sun, 15 Feb 2009 16:43:54 +0000

I agree with Kurt, in the sense that the Money Market redemption threat was a way of finding out how far the government would go in financially intervening. From the prior Sunday, and the special trading session, many investors knew that, if Lehman went down, Merrill could follow quickly. In other words, a Calling Run ( Debt-Deflation ) was possible. When Lehman hit, the government aided AIG, the B of A bought Merrill, and the government essentially guaranteed Money Market Funds. All of these actions suggest to me that the government understood that we might be in a Calling Run. The mystery is why they have chosen such odd methods to stop it, other than generally admitting that the government is on the hook.

For me, a Calling Run is different than just redemptions in one area. Since no one knew who or how much anyone was committed to mortgages or mortgage related securities, and they could see a huge fall in prices and a tsunami of defaults coming, people started calling in cash in all sorts of investments, some only tangentially connected to mortgages. This also showed in the flight from agencies to treasuries, from implicit to explicit guarantees.

Once a Calling Run begins ( Fisher’s Debt-Deflation ) only the government can stop it, because only the government has the assets available to be believable in easing wipe-out concerns. The government has been trying to do this ever since, but poorly. The whole point of the total guarantee is to stop the run, and allow an orderly exchange of assets and losses, not keep it going, only in slow motion.

I like your plan, and would be inclined to support it, but not here. Again, for me, since many smart people saw this as a possibility, including Bernanke, I simply can’t explain their poor choices.

You know more than me, but that’s how I see it. By the way, paradoxically, even though I believe that we needed to honor these guarantees in this instance, I believe that these implicit guarantees are the main cause of this crisis. In this, I seem to be alone. For me, nothing else explains the risk taken by major banks and investment firms.

By: Stephen Purpura

Stephen Purpura — Sun, 15 Feb 2009 15:34:56 +0000

I agree with Kurt. There was more going on. TARP may not have been the right answer, but it was a flexible answer and the hits were coming at high velocity. I personally could argue that TARP was necessary purely because political buy-in from the Congress was a necessary evil, given the administration’s negotiating position and a pending Presidential election.

By: Kurt Osis

Kurt Osis — Sun, 15 Feb 2009 08:31:53 +0000

While I agree (And said at the time) the TARP is a terrible plan. You assume that the redemptions would have been halted by a Shutdown of withdrawals. Once word got out that the measure was necessary it seems to me demand for redemptions would have syk rocketed you know…. like a run on the bank.

They definitely needed a massive “Show of force” to demonstrate that the government would act decisively in order to head off a run on the bank.

That being said I still don’t see why we didn’t use the $700 bn to buy the excesses supply of houses paying off the mortgage and then tear them down removing the supply from the market.