Posted on 09/18/2008 12:38:31 PM PDT by politicket
NEW YORK (AP) -- Wall Street surged higher Thursday, with the Dow Jones industrials up more than 400 points after a report that the federal government is considering creation of a repository for banks' bad debt. CNBC said Treasury Secretary Henry Paulson is considering creation of an entity like the Resolution Trust Corp. that was formed after the failure of savings and loan banks in the 1980s.
(Excerpt) Read more at biz.yahoo.com ...
BS.
In terms of publicly traded companies, you are correct.
However, the curent problem that we have is that companies used to borrow money for the purpose of building infrastructure needed to build their widgets. They then turned around and sold those widgets, made payments on the debt with interest, and expanded when the market made the opportunity available.
A great majority of "current" Wall Street companies are focused on a service-based economy. These companies borrow, go into debt, produce nothing but knowledge or effort, and depend on there being enough consumption of their service to support their debt. There is never anything of real intrinsic value created. Therefore, when they go belly-up, there is very little to salvage. Yet, most of these companies trade with enormous P/E ratios.
I'm not picking on service-based industry, but seeking to point out that one huge reason that our country is in dire straights is due to its loss of manufacturing to oversees entities.
I'm not saying the Federal Bank has always acted perfectly. It won't, because people make mistakes and people work for that bank, but the purpose of it is to smooth out the major bumps.
Just the major ones! Not every bump in the road, because they are a shock absorber, and not the spring.
Nobody will ever agree about the effectiveness of the Fed, because everyones perspective is different. Some are hurt worse than others by economic bumps and I can speak to that! I've been decimated three times, or was it four......I forget.
But without the Fed Bank, we would still be driving 56 Packards, and likely still fighting a world war due to a lack of communication.
The radio shows would be cool though. I used to like the detective shows.
Hope I made my point with the analogy.
We still have a large mfg base. We just don't make the same sort of stuff anymore, and most of the work, like aircrafts and the like, is skilled.
The reason is that other people in other countries are doing it cheaper. Much cheaper!
We would be required to subsidize those industries to keep them. Is that what you want the Fed to do?
I’m sure you will figure it out one day. Maybe when you retire.
I agree that the concerns would "disappear", but we disagree on where they would disappear to. In other words, I believe that the derivatives market is a house of cards, so the concerns would simply disappear under the covers for a short time and then reappear with more vengeance later.
I understand about credit swaps, etc., and I'm definitely not saying that they're all bad. I am saying that there are a huge number of them that are bad (in the order of $100-$200 trillion notional dollars). My contention is that investment houses began conceiving and partaking in a lot of seriously risky derivatives strategies beginning in the early 1990's until now. I have worked with major Investment Consultant's over the last 7 years that are from all of the major investment institutions in our country. I have seen first-hand how they create their various strategies - all thinking that they discovered the mother lode. These are the types of things that will explode and the Fed and Treasury know it. That is why they are in a completely fearful state right now.
I agree that the taxpayers didn’t cause the mess. Unfortunately you are going to pay for it one way or another.
It will either be a RTC type fund (which has the ability to actually make money once the panic is out of the market) or a melt down in the U.S. economy with huge increases in unemployment and inflation. The downturn in the economy will probably also cause social unrest.
Of course not. And I'm not saying that companies should be forced to produce products in this country.
I'm simply pointing out the fact that this country is now a service-based consumer economy. That is why we are the leading debtor nation, and why foreign countries own an exorbitant amount of our Treasury Bills (IOU's).
Your point about our manufacturing base is not correct. We have lost a tremendous amount of industrial base in this country and it would take quite a bit of time, labor, and money to re-establish it.
The details are found in your paycheck.
Seriously. Who the heck do you think is going to actually BUY the crap off of these balance sheets? The Treasury-funded Federal Reserve. Who funds the Treasury? YOU DO!
The big difference with the S&L RTC is that the banks were already in default and closed. These securities need to be BOUGHT from the financial institutions that are holding them, and even at that, probably with a sizable haircut.
The point is that manufacturing has changed, yet is not decimated or anything close.
If I recall correctly, it is still about 30% of GDP and that has not changed much for decades. Maybe 5 0r 6%, but I may be exaggerating the loss as in recent quarters, the exports have been booming.
And it might not have been needed, if in the beginning, the Government hadn't run up inflation thus breaking the business model of the S&Ls (long term loans from short term deposits), which business models they were bound to by regulation.
And it might not have been so bad if the S&L's hadn't been forced to get rid of their junk bonds at fire sale prices, by government fiat. The only folks who lost money on the junk bonds were the S&L who were forced to sell quickly.
This time, it will work again (with a generous definition of 'work'). But the cost will be either taxes or inflation (likely both). A couple of trillion dollars will be lost, and nobody really responsible will go to jail.
Eventually, some people are going to pat themselves on the back for a job well down in solving this problem. They are the same folks who tell me inflation is down, even as my July 4 steak was $8/lb this year, and that at Costco.
OK...maybe I need to be more specific.
Whan I speak of manufacturing of products, I'm talking about products that have inherent value - durable goods, etc.
Those are the backbone of an economy and we have sent most of it overseas.
You get the cigar!:-)
You are exactly correct. Bill Siedman explained it last night on CNBC and said it was not a good idea at all.....He ran the trust that they want to copy.
The holders would not be required to sell them and there is no law to make them sell. They could simply hold them and wait for the value to return as long as the Fed was raising the price....
So let’s say Uncle Sugar opens a new Resolution Trust whose mission is to buy up all of the bad mortgage paper that’s out there and supposedly driving this crisis.
Then what?
The bottom line is that someone is going to have to eventually buy all of those foreclosed and defaulted properties (at something approaching a real market value) in order for this whole mess to begin to end.
But who is supposed to buy those homes?? The people who just defaulted on their mortgage?? Correct me if I’m wrong, but if it takes 10 years or so for a default/foreclosure to drop off a credit report, and word is that the banks are tightening up lending practices, so will we have to wait for the next generation to get old enough to afford a house??
New Agency Proposed to Oversee Freddie Mac and Fannie Mae
By STEPHEN LABATON
Spetember 11, 2003
The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume More..supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken.
A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
*snip*
Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing. ((and donations to their campaign coffers)))
''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
~~~~
But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.
Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.
The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but “predatory.”
Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the ’90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.
And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.
It was the Bush administration that wanted to rein in the madness in the credit markets, and the Democrats who wanted to extend the Clinton policies that created the crisis we have now.
~~~
And last I checked, Congress makes the laws in this country.
The President proposes, the Congress disposes.
Later?
What’s wrong with you people?
We lost just about our entire fabric, carpet, and clothing businesses, but they constituted a very small percentage of GDP, and paid very low wages. I know, cuz I once worked the textile thing.
But, we gained electronics and high tech, medical devices, drugs, and the like, and these outfits employ fewer people yet produce high amounts of value. Caterpillar, John Deere, Aerospace and others have been exporting like crazy, and have taken the places or grown to the point that they have compensated for any dollar losses in GDP.
What we don't do anymore is the broom sticks, the labor intensive piecework like plastics, and metal foundries (another one of my previous careers) and this is what you see. But let's be honest here. These things can't come back unless we become a third world country. Then our labor will be cheap enough.
When the Japanese and Koreans could take a foundary casting order, sail the transport ship the next day with the entire foundry on board the sip and deliver it at half the cost that my company could in half the time, I figured it was time to get out of that business....LOL!
It's not any sort of mismanaged government that caused these changes, it is our increasing living standards and wages, coupled with regulatory and energy costs that force labor and power intensive corporations to other countries, or bankruptcy.
I wish more people understood the reality that manufacturers deal with, but most don't and they have to blame someone, when in reality it is our success and our innovation that is to blame, coupled with the rising growth in what once was a third world wasteland with tons of people, cheap energy, no regulatory structure yet and a desire to produce.
We, and Western Europe face the same things with maturity and higher taxes, wages, and costs. It can't be reversed, unless we devolve and they become the world leading economy.
Me and you in terms of real taxes. The entire country in terms of deflated currency.
“And it starts with setting a goal. And so by the year 2010, we must increase minority home owners by at least 5.5 million.”
Sounds like a quota.
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