Bailout is Infuriating, But is it Necessary?

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Bailout is Infuriating, But is it Necessary?

By JLP | September 22, 2008

The title of this CNNMoney article Be Ticked Off - But Get Over It sums up the author’s opinion quite nicely: that the bailout of the financial services industry is infuriating but necessary.

I’m a “small government” kind of gal myself, one who is generally for lower regulation, lower taxes, and higher citizen responsibility - which would include allowing companies and individuals to experience the consequences and the rewards of their investing decisions. I simply can’t get behind the idea of bailing out those who fail and putting higher taxes those who succeed. That Americans are incented to take risks and are free to succeed (or fail) is one of the greatest things about this country.

But I also know it’s not that simple. Obviously some regulation is good and necessary, as are some taxes. And so are some bailouts, as much as I might wish otherwise.

Without this bailout, many experts are asserting that millions of people could lose their jobs (there are over 8 million employed in the financial services industry alone) and the credit crunch would likely become a credit freeze - which would collapse many unrelated businesses and even industries which rely on a constant flow of credit in addition to making it near impossible for even responsible citizens to get a mortgage or a loan.

In short, letting financial services companies fail would probably cause a sharp and potentially long recession which would arguably cost taxpayers a whole lot more than the proposed bailouts.

“This was done not to prop up shareholders and executives but to ensure the solvency of the financial system,” said John Norris, an economist and managing director with Oakworth Capital, a private bank based in Birmingham, Ala. I remember enough from my “Money and Capital Markets” class in college to know that people (citizens and foreign investors alike) losing confidence in our financial system is pretty much the worst thing that can happen. That’s why we have such complex and amazing systems in place to make sure that, for instance, ATMs and banks never run out of money.

All this scary information doesn’t make what’s happening right now in congress OK - but it makes it seem more favorable than the alternative.

The main thing that is making me uncomfortable is that I (and probably you) can’t critically evaluate what might happen if we don’t do a bailout. I personally have no idea how bad it might get and, therefore, whether a bailout is really necessary. I feel I am totally at the mercy of all the alleged “experts” who are fighting (read: lobbying) for this action - but don’t many of them work in or benefit directly from the strength of the financial sector? How unbiased or reliable are their opinions? Are we all just running scared and overreacting?

Feel free to share your own views or insights on this matter.

More from Meg at The World of Wealth

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Comments to “Bailout is Infuriating, But is it Necessary?”

Mr. ToughMoneyLove Says:
September 22nd, 2008 at 4:35 pm

The bailout is necessary if we insist on trying to maintain the standard of living bubble that has been inflated in the last 15 years. If we don’t bailout the credit flow system, that bubble will burst, causing recessionary effects. Although that is probably what is needed long term, no one will accept it, least of all politicians who want to get re-elected.

Spokane Al Says:
September 22nd, 2008 at 5:40 pm

I am one who does not agree with most bailouts. I believe that risk is an important part of the investment, business and entrepreneurial process and as a result must be an important part of the equation.

That said, I obviously do not have the full picture as does the Treasury Secretary, Fed Chairman and the other decision makers, so I will defer to them that without this bailout, the financial institutions are at the brink.

I do wish that it would be said that this bailout represents more than saving the Wall Street barons, and does, in fact, provide help for the rest of us as well. We all have a stake in the financial well being of our markets.

I also wish that, rather than pandering for votes, one or both sides of the political picture would remind each of us that we are, in a very large part, responsible for our own decision making. This means that because someone took out a mortgage that he/she could not afford, it is not the rest of the taxpayers’ automatic responsibility to pay or guarantee that debt. Sometimes failure is not the worst that can happen.

I am also concerned about the idea of insurance for money market mutual funds (MMMFs). Again, I think that when we remove the risk, we now have the potential of additional damage. In the MMMF arena my concern is that, with insurance, the fund managers will be inclined to take on additional risk, in order to increase the yield, and in turn increase their profits. The insurance will remove the investor risk, which could be trouble. If MMMF insurance is be, then I sincerely hope that it is for a very, very, very short term.

In conclusion, if the bailout of the financial services industry, while extremely troubling and irritating, is necessary, then we should and must proceed.

Adam Says:
September 22nd, 2008 at 5:44 pm

It’s not the supposedly inflated standard of living that is at stake here, but rather any reasonable standard of living here and abroad. The goal of the bailout is to try and keep the real bubble that started this, the mortgage mess, from dragging down everything else in it’s wake. Sure it would be great if society could go back to simpler times, but I think there are better ways to go about it than a global financial crisis. Not to say it wouldn’t work, but I’d rather avoid that if at all possible.

Kin Says:
September 22nd, 2008 at 6:59 pm

Being in Australia it’s clear by the way our market jumped 4% on the news of this bailout how imperitive it is, not just for the US but for the world.

Businesses here are failing because banks are unable to get credit due to poor judgment by execs in other countries. Even our governments have been stung.

Where does it end? Every month for the last 12 I’ve heard people say “The worst is over”. Clearly it’s not and there’s no way of telling how bad it could get. On that basis alone any action is preferable to no action.

Lord Says:
September 22nd, 2008 at 7:44 pm

I think the real problem is the allowance of the creation of too big to fail entities. These essentially become government permitted monopolies and part of our kleptocracy. One idea is prior designation of too big to fail entities together with expedited bankruptcy. Firms could choose to remain smaller than that by spinning off independent entities or accepting increased regulation with these strict bankruptcy procedures.

Preston Says:
September 22nd, 2008 at 10:25 pm

Personally, I am aching for this to end in failure without a bailout. At a relatively young age, I feel I’m ready if the crap really hits the fan. So to those who say it will be terrible, oh so terrible, if things fail I say this:

Yes, yes it will be. And you (the collective you), your friends, family, parents, siblings, and depending on age, children created this situation. To those twenty-somethings and younger - we’ll get through it. It will be rough for awhile, but eventually the dying chaff will be scrubbed away, and the inflated lifestyle that you and your generation(s) created will reset to a manageable level.

Yes, it will be painful. And you, your friends, family, parents, siblings, and depending on age, children will have to find new ways to live. Instead of indulgences, it will be necessity. It is time to get back to life, away from this fake society that has been created.

Let it fail.

john Says:
September 22nd, 2008 at 11:36 pm

so why does the bailout have to look like junk?

http://www.creditslips.org/creditslips/2008/09/the-right-and-t.html

i usually agree with krugman. is paulson taking america for a ride? is one bailout the same as the next? i strongly doubt it.

Wilson Says:
September 23rd, 2008 at 12:06 am

Everything is fine. The world economy has never been so strong. Our banking system is “sound and safe”. inflation is well controlled under 2 percent. The American dream of home ownership is at historical high level, a sign of eternal happiness:)
Monday has passed without the bill being passed “clean and quick”, the earth still turns around as usual. so why is the urgency? let the congress sit and scrutinize a few weeks further.

I suspect Paulson and his wall street buddies have hijacked the congress. Someone may take this opportunity, if the bill is passed “clean and quick”, to abscond with billions of $$$s.

Miranda Says:
September 23rd, 2008 at 7:41 am

While I think that Congress should take the time to scrutinize the bill, something may need to be done. That’s what the scrutiny is for. I liked what one of the panelist at a financial blogs session said at Blogworld: That these companies are too mestastatized to fail. Meaning that they are too involved in industries other than finance.

Some oversight, though, is necessary. While I don’t like too much regulation, it is clear that transparency is needed, and that things like credit derivatives should enjoy more disclosure going forward…

Kitty Says:
September 23rd, 2008 at 8:20 am

I believe it was necessary based on everything I heard. I am no expert, so I have pretty much the same information everyone else - cnnfn.com, cnbc, wall street journal, etc. Here is how I understand it:

For the moment, everything looks great to us: some losses in our investments, but the economy “appears” OK. So was the situation in 1929. Sure, some speculators on Wall Street lost lots of money, but those who kept money outside the stock market were fine. There was an interesting example given today on cnbc by a commentator: ‘when there was a crash in 1929, my father - a small business owner - said “it serves them right”. A year later my father had to close his shop and was broke’. This is the fear today - that this crisis on Wall Street would spread and ultimately affects all of us.

But what we don’t see is the total credit freeze between companies, and businesses depend on credit - not only for expansion but day-to-day operations as well. All businesses. As a friend from Wall Street explained to me, businesses don’t just keep piles of cash lying around, they keep money invested into business. They borrow to pay expenses, then take part of the money from cash flow and repay. Everyone is afraid to lend money today. What started happening last week was a complete credit freeze. Total credit freeze hurts every business, not just banks.

There are also “runs on banks” which we don’t see well - after all our deposits are insured so we aren’t withdrawing our insured deposits (BTW - where exactly does FDIC money come from,it’s still our money, right? so who will end up paying for bank failures even without the bailout?). But those with larger deposits world-wide do. The money market mutual funds aren’t insured. There have been a lot of withdrawals from the money market mutual funds. This affects our 401Ks but it also robs the companies of liquidity.

Most commentators talk about this as the biggest crisis since 1929. Most banks are affected in one way or another. A failure in one bank affects other banks and companies who deal with this bank. Additionally, banks employ a lot of people - from tellers to accountants to IT - most of whom have nothing to do with “bad decisions” made by banks’ management. When bank fails, all these people are unemployed. Then there are companies that aren’t in financial business, but that sell, for example, computers to financial companies. Eventually they suffer too. They lay off people. This leads to massive unemployment. Sure we aren’t there yet, but we may be closer than most of us think.

Bernacke, by the way, is an expert on the Great Depression.

One other interesting thing about these assets that the government will purchase. Yes these assets appear to be worthless now - they don’t cost much and nobody rashes to buy them. But they are worthless in the same sense a penny stock is worthless: people don’t want to buy it or just have no cash to risk to buy it, but if the company rebounds, it may still go up. These assets represent, in one way or another, subprime loans. Because everyone fears subprime loans, the assets are valued very low. They are valued as if more than 50% or 60% of these homes will foreclose, and if when homes foreclose no money is recovered. But in reality, only about 25% of subprime homes foreclose, and when the house is sold some money is recovered. So it is quite possible that when there is less fear, these assets will indeed be worth more, and the government can indeed make money on the deal. As it ended up make money on Chrysler bailout in 1980. Now, there is risk, but the alternative is something that would affect every single one of us, our money in banks and our jobs.

No Debt Plan Says:
September 23rd, 2008 at 9:01 am

I, too, think it is necessary… unfortunately. I do support the Congressmen (and women) that are trying to put in protections for taxpayers in the bills (primarily democrats, if I remember correctly).

They’ve turned it into a pretty bad deal for the institutions by doing the reverse auction, you’ve go to be in bad shape to participate. They are trying to stick provisions in that if you participate your executive compensation will be put under review, etc. Obviously boards, CEOs, etc. will be big fans of that but I’d love to see CEO pay get curtailed.

No Debt Plan Says:
September 23rd, 2008 at 9:04 am

I also heard something on NPR this morning that when Merrill Lynch had to liquidate some of their assets, they were selling 22 cents on the dollar. The commentator was certain that they would be worth at least double that — simply because not all of the loans in the asset are going to be bad, subprime loans. They were bundled with good loans, say 50/50 split. On top of that even if the loans go bad, you have collateral — the house. Yes, it may be worth 50% less than it once was, but there is still money there if you can sell the house.

Makes me wish I could buy some of those distressed assets at rock bottom prices.

Brad P. Severance Says:
September 23rd, 2008 at 10:20 am

The notion that a bailout is necessary, is, at the very least, suspect.

Some members of Congress question whether or not the bailout will even work.

If the efficacy of the bailout is in question, then the bailout itself is in question.

Additionally, when the Bush administration comes out and publicly states that we need to do something urgently, then I would question it. Their past record hasn’t exactly been exemplary in this respect.

Think about it.

Wilson Says:
September 23rd, 2008 at 10:59 am

when you are told by the media something is good, the chance is that it’s bad.

It is true one has to keep invested all the time? The media says so, the financial industry says so. But the reality is, the securities are just casino instruments. Does one have to be in the casino all his life? The answer is no.

Is the bail out of chrysler a good thing? The truth is, GM and FOMOCO have continued their dumb management and marketing strategy, only to be overwhelmed by their Japanese and European rival. Now they are crying for a bail out again.

The American spirit is completely lost. Demise of a super power.

Joe Says:
September 23rd, 2008 at 12:07 pm

I am no fan of bailouts, and what worries me the most is not that the government is effectively rewarding risky financial behavior but rather the fact that the U. S. Government seems to be nationalizing the financial industry!

I personally don’t want the government owning my bank. History has shown that government take overs of industry don’t work in the long run. Free markets don’t fail. They do get painful from time to time, but that’s the price (risk) you pay for the reward when times are good.

Scott F Says:
September 23rd, 2008 at 12:27 pm

I am going to post a quote I just read in an article on yahoo and leave it at that!

“This massive bailout is not a solution. It is financial socialism and it’s un-American,” said Sen. Jim Bunning, R-Ky.

Mark Says:
September 23rd, 2008 at 12:35 pm

This bailout will cost approximately 25000 PER PERSON.

The entire country would have to be unemployed for a year to “lose” this much money.

Al Says:
September 23rd, 2008 at 2:12 pm

I think the part that galls most people is that these very people who want us to pony up the money are the same ones that two months ago told us it would take only $1 billion to clean up the sub-prime mess (Bernanke, July 08). And now they say it’s $700 billion. Kind of makes you wonder about their abilities, from where I sit. So now they want us to hand them $700 billion and they appear to be less than competent at this point, frankly. And then to say that they want to have total control with absolutely NO oversight? That pretty well raises a red flag, when you’re talking about MY money.

kitty Says:
September 23rd, 2008 at 5:54 pm

“s the bail out of chrysler a good thing? The truth is, GM and FOMOCO have continued their dumb management and marketing strategy, only to be overwhelmed by their Japanese and European rival. Now they are crying for a bail out again.”

Maybe, but the government (and taxpayers) ended up with profits. As the result of Chrysler bailout, the government got their tax options. At the time they were worthless. After the company rebounded, the government made a nice chunk of money.

Also, it amazes me how everyone talks about big companies as about abstract entities. Maybe management at Chrysler continued to be stupid, but the employees at Chrysler kept their jobs.

We work for companies. We do our best, but most of us don’t participate in the type of decisions that caused this crisis. Yet when companies fail, it is the employees that suffer.

Oh, and how will FDIC get its money after its reserves run out? By asking banks to pay more - but it would take time to replenish the reserves. So, it’ll still be our money either way.

Also, fewer companies, fewer employed people = less money collected in taxes.

Wilson Says:
September 23rd, 2008 at 8:28 pm

“but the government (and taxpayers) ended up with profits.”

The anticipated profits will be given to the banksters receiving the bailout.

In today’s hearing Bernanke said:
“I believe that under the Treasury program, auctions and other mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold to maturity price, there will be substantial benefits.”

There will be no reverse auction. Paulson will buy the toxic papers at “hold to maturity price”. That’s why the three stooges don’t want any oversight, such that the banksters could dump their waste to the treasury at a “hold to maturity” profit.

There are too kinds of Americans: the free Americans, and the sheeple Americans. The sheeple enjoy the Ponzi scheme as long as they can make a sheep’s living at the bottom level(s) of the scheme. Upon hearing the scheme would collapse, they are more than willing to sponsor a bailout at the expense of their offsprings …

Just weeks ago, Paulson was touting our “sound and safe” bank system. I bet the sheeple must be happy upon hearing that statement:) Since it’s a safe and sound system, why worry about being unable to pull money out of the ATMs?

Just because Paulson says there are no alternatives, the banksters must be bailed out at tax payers’ expense? While the sheeple would readily believe whatever Paulson spouts, the free Americans are not as easily duped …

Carol Says:
September 24th, 2008 at 1:15 am

Quote from above: “The main thing that is making me uncomfortable is that I (and probably you) can’t critically evaluate what might happen if we don’t do a bailout. I personally have no idea how bad it might get and, therefore, whether a bailout is really necessary. I feel I am totally at the mercy of all the alleged “experts” who are fighting (read: lobbying) for this action - but don’t many of them work in or benefit directly from the strength of the financial sector? How unbiased or reliable are their opinions? Are we all just running scared and overreacting?”

This IS the $700 billion question. Everyone on here is guessing.

I want proof.

kitty Says:
September 24th, 2008 at 9:55 am

“Is the bail out of chrysler a good thing? The truth is, GM and FOMOCO have continued their dumb management and marketing strategy, only to be overwhelmed by their Japanese and European rival. Now they are crying for a bail out again.”

Do you realize that the government actually MADE MONEY on Chrysler bailout? Whatever you think of GM management and their cars, from the taxpayers’ perspective Chrysler bailout was a good deal: as part of this deal government got then-worthless options in Chrysler stock that they sold at a nice premium when Chrysler rebounded.

You are also forgetting that there are real people like you and me working for Chrysler and, now, for these banks. These people had nothing to do with this crisis yet they stand to lose their jobs when companies fail.

Incidentally, this is Warren Buffett perspective:
http://www.cnbc.com/id/26866865

“The entire country would have to be unemployed for a year to “lose” this much money.”
If nothing is done, a lot of people will be unemployed for a lot longer than a year.

I think most people really don’t understand how serious this is. This is not like S&L crisis when only a subset of banks was affected. Most banks are affected. Last week there was an actual credit freeze between banks - no bank will loan any other bank money. Since banks (and other companies) don’t have piles of cash lying around, they depend on credit to pay people salaries, to pay the depositors who want to withdraw their money, etc. Then they repay it from cash flow. If there is no credit, and a company cannot meet its obligation “today”, it declares bankruptcy. Even if it has assets it could sell. Whatever you think of this bailout, the risks of doing nothing are far greater. I do suggest reading a bit about the Great Depression and especially about the bank crisis later on.

yanni raz Says:
September 24th, 2008 at 8:15 pm

News! You Can Refinance and Consolidate Your Debt Again

If you want to refinance your home and consolidate debt, now it’s the time. A group of private investors in los angeles California loan money to homeowners and real estate investors. These private investors also called hard money lenders are the bank.

Many of you tried to refinance with your local bank or a mortgage company in your area, but with no success. Now it’s possible again, but you have to know the conditions to qualify. You don’t need excellent credit score or great income documentation, but you do need a lot of equity in your property.

Hard money lenders have been around for a long time, but no body ever heard about them. Real estate investors and brokers were working with them for years, but homeowners didn’t know they exist. Today for many of us hard money lenders are the only hope to get a real estate mortgage.

Where can you find a hard money lender?

Many mortgage brokers and real estate agents are already in contact with one or two investors because of the fact that they just need them. If you will go online and look for a hard money lender, you will probably find a 100 private investors or more. You don’t need to get fanatic about it, you just need to know what they’re talking about.

How do you know who is the right investor for you?

Normally of course you need to go with gut feeling, but in this case you need to be a little more careful then that. There are many hard money lenders that you don’t want to work with. So what do you do? You ask questions. Here are some questions you will need to ask private investors when you call them:

1. The name of the company.
2. How long they’ve been in business.
3. Get some name of people they’ve worked with.
4. What are the interest rates they’re offering?
5. How many points they charge you.
6. Do they charge any due diligence fees, or any money upfront?
7. Are there any other fees included?
8. You want everything in writing from them, it’s very important.

You have to understand that you don’t deal with big corporations. Hard money lenders are individual like you and me, but they have few millions dollars in their bank account. They would love to help you as long as you offer your real estate as collateral.

karen Says:
September 26th, 2008 at 6:09 pm

Is this crisis directly related to Clinton signing some kind of bill that loosened and/or strongly encouraged banks to give mortgages to people who could not afford them? If so I feel bad that Bush is taking the hit for this. My response to the guy who thinks we are all spoiled is that I haven’t a clue what he means. I am of the baby boom generation and my husband and I each have 2 jobs. We contribute to our 401 plans and have worked hard to put 3 children through college. We want our children to be able to have a good life but obviously we worked hard and expect them to also. Preston,what you don’t realize is that it is not going to hurt the aristocrats or the spoiled. It is going to hurt the hard working people, it always does. I don’t know about you but we work hard for what we have. We have had to work harder and harder just to pay our bills. We don’t have newer cars and our raises are canceled out by our increases in health care premiums. We were told to invest heavily in our 401K because people don’t need retirement from their employers and so we did. My guess is that the 401K is going down the toilet. I am also guessing that when I am 75 years old and perhaps showing signs of dementia that my employer is not going to want to keep me around. The responsible citizens of the baby boom generation who work hard,pay their bills and try to raise responsible children are not responsible for this melt down but our generation and yours are responsible for being too politically and financially passive and ignorant perhaps. We have and are allowing ourselves to be lead around by our leaders like sheep as long as we can keep up with our movie stars and American Idol. We need to remember that our entertainers are not middle class and if they were at one time the fact remains they are not going through these times as middle class citizens. We need to turn a deaf ear to them. We
need to research and make our own educated decisions. I believe people who make millions of dollars by just singing, talking, acting or entertaining should have to sign a contract stating that unless they can prove they have the education to talk politics, they are required to keep their mouth shut. Sorry I am being sarcastic,not totally serious.

Kitty Says:
September 26th, 2008 at 10:14 pm

@Yanni Raz
And what exactly does your post have to do with the price of tea in China?

@Wilson
There are real people like you and me work for these banks. When the bank fails real people like you and me the majority of whom had absolutely nothing to do with this crisis lose their jobs.

It amazes me how everyone talks about “bank” or “company” that has to be penalized for their actions. A company is not a person who is guilty or innocent. A company may have some executives who made bad decisions, but guess what. They are the ones that suffer the least when the company goes out of business. They had plenty of chances to collect millions. The rest of the employees, both old and young, are those who suffer. And then we all suffer because our savings decrease in value and because unemployed people cannot afford to buy much, so other businesses suffer as well.

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Bailout is Infuriating, But is it Necessary?