Market crash: are we there yet ?

[chucklesR]

I don't see a single thing in the 'plan' to keep the exact same thing from happening again, and that my friends is what is wrong with the plan.

We'll restore liquidity - and the lenders will go right back at it again making bad paper and getting more in debt - they have to, it's how they make their money and in particular the higher returns in the shorter terms that the stock holders are demanding.

First, pass senate bill 1100, which is the same as the bill that McCain cosponsored in 2005; it limits the worthless MBS paper, establishes oversight and regulations on the fanny and freddie fiasco and generally debunks the whole 'I'm a deregulator' myth.

Then, if necessary, bail out companies that fail so spectactorily they take a chunk out of the economy, smaller guys can fend for themselves in what is known as the market

[wind_magic]

Originally Posted by KeelHaulin

You know I think these speculations are not in line with what is happening. The banks have no liquidity right now. Liquidity is needed to get the ball rolling again for the banks to buy/sell/trade their "commodoties" (not just real estate bonds) and there is nothing for them to buy with (no liquidity).

This is the core of my argument above. I disagree with your premise, as well as the premise of the government. There IS capital out there. The LIBOR hasn't spiked up because there isn't money in the bank vaults to lend between banks, it has spiked up because even though the banks have money to lend, they simply refuse to lend it. They don't want to take the risk. And my argument is that handing them more money doesn't mean they are going to be any more willing to risk it, they may simply add to their reserves and continue to let troubled businesses starve.

While it's true that if you deposit 10k$us in a bank they CAN use that to generate many times that in loans, they don't HAVE to use it to make many times that in loans if they don't want to. Instead they can just keep it, lower their leverage, and be in a better position if things get even worse than they are now. Banks have to be convinced that there is a floor under the bad paper that everyone is holding, but they also have to be convinced that this isn't a bear market going forward, which isn't the same thing. If they believe that the end of the bear is here they will rush to get undervalued assets to position themselves for another leg up, but on the other hand if they think that the bear is going to last a while, they're going to use any money they get to position themselves for winter, so that they can outlast their competitors and be in a good position after hard times, they'll use the cash to clean up their own balance sheets, and they won't lend it to anyone regardless of the fact that the government is buying distressed assets.

This is why cash gets so valuable during a deflationary period, because deflation is by definition the destruction of debt and money, and it makes the money that is left worth more and everyone hoards it, which makes it worth even more. There is no provision in this bailout that says that if banks sell assets to the government in exchange for cash that the banks have to use that cash to generate new loans. They can take that cash and say thank you very much and put it in the vault for a stormy day. This is exactly what happened in Japan during the long recession of the 90's, the ¥jp soared in value because no matter how much ¥jp the Japanese government printed, all their people did was take the money and put it in their mattress, they simply refused to spend it.

So if the gov steps in and buys some of the real estate bonds -some- of the liquidity (and confidence to invest) will return to this sector of the market which has many other sectors being held hostage. The 700B is not a total buyout; I think it's just enough to get some chips back on the table for the investment firms/banks.

That is what the government is saying, that if they buy distressed assets that it is going to put a floor under them and that the economy will re-inflate after they've done it, that flowers are going to start blooming, birds singing, and that the banks are going to go "wow, thank goodness it's over", and open up the vaults and start lending out their money again - and that private equity is going to do the same, come out of hiding and jump on the chance to buy all of these undervalued assets.

I hope that happens.

Again, my point, is that the banking system doesn't have a cash problem. Individual banks have a cash problem. But the banking system as a whole has enough cash in it's vaults already to buy assets if the individual banks that had the money wanted to. If they already have enough cash to buy, what makes us so sure they'll buy if we give them even more cash ? Nobody is claiming that this 700B$us is enough to buy all of the distressed assets, they are simply saying it might be enough to bring out other buyers and put a floor under the market.

The problem is not strictly with banks needing cash to hold in their vaults; it has more to do with the big investment banking firms having no cash to carry out daily trading activities because their liquidity is locked up in the "toxic home loans". At least that's how I understand it.

See above.

The other way to get liquidity is for them to either close up shop or have massive sell offs of the loans while the investment portfolios of everyone in the market tank. What's worse for the economy, our GDP, and Tax Revenue? In light of what could happen I think that the 700B is a wise investment in our future to prevent a much much larger loss of value and tax income as a result of heavy losses Investment losses can carry over for many years on reported taxable income; not just the current year and the rebuilding time of losses on market value of stock is like a double edged sword because you must recoup your original investment before you see real growth.

I think it's better to stop the crash now before it wipes out our economy (but I HATE to say it and I can't believe that the current system did not have any failsafe for this situation). I also can't believe that the loan industry got away with the lending practices that caused this mess; and it makes me feel like the home flippers and investment bankers have won at their strategy to rip off everyone who was trying to save and invest wisely (by not buying over-inflated homes; and not putting zero down with cash coming back).

JMHO...

I have a feeling that this money we are "investing" is going to end up being good money after bad, that a further sell in the equity and bond markets may be unavoidable, and that it's going to be a long winter. My premise has been that bubbles beget busts and that there isn't much you can do about it. Sure, let's throw 700B$us and try to stop it, but I have my doubts.

I think the government knows it might not work, but they think that they have to try.

[PBzeer]

It would be nice, if while they are worrying about oversight, transparency, and review for Wall St., they'd afford us poor taxpayers some into what they are doing.

[camaraderie]

While I appreciate Rick's insight into the financial side of this mess, I've been critical of the "Blame Bush" rants. This article from the NYTimes might prove instructive on that score.

New Agency Proposed to Oversee Freddie Mac and Fannie Mae - New York Times

Oh yeah...the date was 2003!
It starts out....
"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 supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry."


Then the Dems weigh in...


"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.
''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.''
Representative Melvin L. Watt, Democrat of North Carolina, agreed.
''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

Case closed!

[PBzeer]

As snippets of info start leaking out, it's becoming obvious that this will be a political solution rather than an economic one. But, when you have politicians making the decisions, especially this close to an election, there's little reason to expect anything else.

[chucklesR]

Cam,
For what it's worth the 2005 and again 2007 bills co-sponsored by McCain is the legislation I've been speaking of that would have enacted those 2003 proposal's from Bush. In 2005 the bill was held for ammendments by the then Republican majority, in 2007 was held by Dem's. It's current incarnation is Senate bill 1100 - which I spoke to three or four posts ago. It's being kept off the floor by the Dem's.
Meanwhile the Dem's wail about McCain's deregulation - I admit to not understanding why the hell they (the sponsors of this bill) are not out in front of the camera's holding up copies of this legislation and waving them.

It truly boggles my mind. I just don't get it.

[Cruisingdad]

Originally Posted by wind_magic

This is the core of my argument above...

I think the government knows it might not work, but they think that they have to try.

Good post again, Wind. I agree with John. I apprecite your posts and insight.

Incidentally, I agree. I think it 'Could' change things. But I strongly feel that it will not. It might give the market a small boost, then reality sets back in. Homes are still over-valued or unable to sell. Should I mention also that there are a LOT of them??? You have an entire industry (or two or twenty) that has been sitting on their hands (real estate, construction, and now investment bankers). Mortgages are still hard to come by. If people cannot sell their homes for at least what the note on them is, they will give them back to the bank. Losses continue to mount. Credit tightens as credit losses (especially credit cards, the next big bust) mount. The more credit tightening causes more losses until it is a vicious cycle.

In essense, I do not feel the $700B will change the underlying true reality of the situation - nor what got us here. It will simply be a lot of money throw after it. Could it in fact be argued that it may also make the unavoidable crash even harder? Tell me if you agree.

Lets say it does not work (which is a very good possibility). Now the US is $700B more in debt. We still have too many homes, not enough buyers (and could they even get a loan if there were enough??), banks are scared to death to lend on anything, credit card/loan losses mount and make the real estate market look pretty in comparison, Americans have NO savings (never have in my memory), the US loses its financial credibility with the world, the EU dollar takes over as the main currency due to the vast devaluation of the US dollar, businesses cannot stay in business because they cannot get loans to keep the doors open (whether they are profitable or not) plus their profit on their products becomes non-existent, they lay off employees, this in turn causes more home losses and credit losses - and the cycle continues.

Read: Greater Depression.

What are the odds? And why will $700 Billion fix it? I simply do not understand how $700B will fix that. And if you artifically inflate the price of homes again, or other credit-backed investments, while devaluating your own currency, won't that make the next bust even worse??

I am not trying to sound doom and gloom. I am trying to stand back and look at this logically. Logically, we are in a mess. The fundamentals of it are what the issue is - not a mere $700 Billion shortfall.

Read here:

Commentary: Financial meltdown is an absolute disaster - CNN.com

Incidentally, I strongly believe that if we fall, the world comes along. What country does not have heavy trading with the US - directly or indirectly. What country's banks are not entertwined with the rest of the world? There are no more islands. Would you agree?

- CD

[chucklesR]

Perhaps here is why: there is no impending crisis:

''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.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.

[sailhog]

It's now "Bold Prediction Time." That's right. Let's all paint a picture of 2009.

Here's mine:

The $700 billion plan passes. The banks take all the crap off their balance sheet. They start loaning money -- but in small amounts to qualified borrowers -- because that's how they make money. In short, the plan doese what it's supposed to do, but the economy remains in first gear. Housing bottoms out in most markets. It doesn't go up, it doesn't go down. Unemployment hits 7.5% - 8%. By the second quarter of '09 the gloom and doom headlines stop, and no one notices for a while. By the fourth quarter there's a slight uptick in ecomomic numbers -- but nothing to get too excited about.

We'll all look back on our present situation as a bad dream. We'll be saying things like, "Remember back in September when everyone was forecasting another great depression..."

[Cruisingdad]

Originally Posted by sailhog

It's now "Bold Prediction Time." That's right. Let's all paint a picture of 2009.

Here's mine:

The $700 billion plan passes. The banks take all the crap off their balance sheet. They start loaning money -- but in small amounts to qualified borrowers -- because that's how they make money. In short, the plan doese what it's supposed to do, but the economy remains in first gear. Housing bottoms out in most markets. It doesn't go up, it doesn't go down. Unemployment hits 7.5% - 8%. By the second quarter of '09 the gloom and doom headlines stop, and no one notices for a while. By the fourth quarter there's a slight uptick in ecomomic numbers -- but nothing to get too excited about.

We'll all look back on our present situation as a bad dream. We'll be saying things like, "Remember back in September when everyone was forecasting another great depression..."

You are most likely right, D. Most of the guys here understand this stuff better than me. It is not my srength. I just have, as John said, little faith that a politically thrown together solution (in the matter of one week) right before a HUGE election will make any difference.

And should I also mentio nthe reality: We are effectively giving one man, who is NOT elected, $700 Billion Dollars to do with at his discretion. I cannot even fathom $700,000,000,000.00.

I like the anaolgy the Glen Beck used with the 747. We are going to crash. What they are trying to do is make it as soft as possible.

- CD