November 24, 2008

$7.7 trillion...

$7.7 trillion...

That's "half the value of everything produced in the nation last year."
The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan.... It could pay off more than half the country’s mortgages....

In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.

A haircut refers to the practice of lending less money than the collateral’s current market value.
Okay, then.... They haircut it.

69 comments:

XWL said...

But, but, but between Paulson and Bernanke, I'm not seeing a whole lot of hair there to cut, we're doooooooooomed!!!!

Simon said...

Haha. Who are the RINOs now?

Chris Wren said...

God, you guys are such commies now, it's not even funny. And this is still Bush's watch.

Ron said...

Haircut or buzzcut?

Lawgiver said...

That's rich, a guy posting from Canada calling someone in America a commie.

peter hoh said...

I had to laugh listening to Sean Hannity complaining about the expansion of big government. He was blaming Obama, of course.

Hah!

Chris Wren said...

Lawgiver, the Canadian government regulates the banks - it doesn't own them outright. Nor does the government own the finance sector. Do you actually know anything about Canada, or have you just read a couple of Steyn columns?

Lawgiver said...

Well Chris I did read a Milepost as I traveled the Alcan and I once met Alex Trebek so I do know a little about Canada.

How's that social medicine thing working out for you?

Skyler said...

Yeah, like Bernanke is someone we can trust on a prediction like that.

I don't know why anyone would trust any of these bozos to print so much money.

When GW Bush was elected I told my brother and sister in law, die hard democrats, that he was an extreme socialist. I had to pick them up off the floor, they laughed so hard.

Not even Clinton's administration had the temerity to destroy so much of western civilization as Bush has.

Ron said...

This is like pulling the Titanic alongside the iceberg to chip off ice for drinks....what could go wrong?

Donna B. said...

Ron, you are so correct.

Too big to fail? Too big to have existed without "help" in the first place.

Seven Machos said...

The federal government is going to own a chunk of everybody's house, then, right?

The problem here is that the real estate market is so screwy right now that no one actually knows what property is worth right now. Is it $50,000 on a house that sold for $400,000? Okay. Is it $200,000 on a house that sold for $300,000. That's a riskier proposition.

pro said...

"A haircut refers to the practice of lending less money than the collateral’s current market value."

Well. . . then it's settled then. These values only go up, amiright? Guys?

blake said...

Yes, I'm sure Canada will be just fine in the upcoming depression.

So well regulated!

Chip Ahoy said...

I'm certain he meant haircut as "shorn." We're being fleeced.

Revenant said...

I'm not sure which part of communism involves the government loaning money to banks. Maybe our Canadian friend can explain it.

TitusTheReflex said...

We have become a bunch of socialists in the last days of a republican administration.

Wow, times have changed.

I have been reading a bunch lately from the WSJ and the Economist and NYTimes (there's your answer Katie) and it sounds like we are going down the tubes.

Are we going down the tubes? How much worse will it get? Unemployment is steadily rising, the US governement seems to bailing out another company everyday, real estate prices are in the tank, no one is shopping, no one can get credit.

Is this really truly scarey or just a little bump in the road?

Also, what is really scarey is I haven't been horny. I wonder if it is the economy.

rhhardin said...

Money isn't wealth. It's a ticket in line to say what the economy does next, presumably something for you.

It looks like money to one person, but it isn't wealth to a nation.

The Fed creates and destroys tickets all the time. That's what its monthly interest rate target is really about: do we increase or decrease the number of tickets and how fast.

These zillions are just filling gaps in the financial system, not demanding that the economy do anything. It's a bunch of tickets used for propping up table and chair legs until people trust the furniture again. In particular they don't compete with your tickets for services. They just sit there.

It's in the same units as normal government spending but is not normal government spending. It has to do with correcting an actual collapse of the money supply.

TitusTheReflex said...

The good news or bad news is prices are falling. It took me 30.00 to fill up my car this weekend. I generally only fill up my car once a month and the last time I filled it up it was like 50.00.

That is called deflation.

I learned that today.

chuck b. said...

Now I'm a priest teenager
On a tower of dust
I'm a dead generator
In a cloud of exhaust
I eat alone in the desert
With skulls for my pets
I rate the days, one to ten
With lead cigarettes

It's nausea, oh nausea
And we're gone
It's nausea, oh nausea
And we're gone

Lisa said...

Let me get this straight...

We can bailout Wall Street and Citibank because 'they're too big to fail' even though they caused a lot of this mess but we won't bailout the Big 3, the only one of the bunch that makes anything, because they should have seen this coming?

Hell, part of the Big 3's problem is that banks aren't loaning out money right now... to them or their customers.

Bissage said...

$7.7 trillion?!?!?!?

Now, that is cause for concern.

A trillion here and a trillion there and pretty soon you’re talking real money.

Darcy said...

Great question, Lisa.

Scary stuff.

Crimso said...

"We have become a bunch of socialists in the last days of a republican administration."

Should be a smooth transition.

"We can bailout Wall Street and Citibank because 'they're too big to fail' even though they caused a lot of this mess but we won't bailout the Big 3"

Except we're not talking about bailing out the Big 3, we're talking about bailing out the UAW. And yes, they should have foreseen the consequences of what they were doing to the Big 3.

Hoosier Daddy said...

When GW Bush was elected I told my brother and sister in law, die hard democrats, that he was an extreme socialist.

I'm still convinced Bush is the Manchurian Candidate. This just pretty much proves my theory.

Hoosier Daddy said...

God, you guys are such commies now,

Does that mean you Canucks will like us now?

Quayle said...

The scandal isn't the $7.7 trillion.

The scandal is $7.7 trillion and not one officer or board member of a receiving company sacked.

This fact makes the bailout the worst thing this country has done in a long, long time.

Every director and every officer of every company that got bailed out should be noisily fired.

We should all know and remember their names for decades. They gambled with all our money, taking huge bonuses on the upside, and leaving the losses to us on the down side.

The ultimate of greed and evil.

Sorry, but I am damn mad about it, and so should you be.

vet66 said...

Just for the sake of argument, let us consider that:

A. The timing of the housing bubble burst, failure of Fannie Mae/Freddie Mac, etc. was incredibly well-timed;

B. All the money being tossed around can be blamed on Bush;

C. BHO and the democrats get to spend massive amounts of our money as they usher in really big government under the guise of the cavalry riding in to save the beleagured wagon train settlers;

D. Fait Accompli.

Rahm Emanuel is the reincarnation of Carl Rove.

"Never allow a crisis to go to waste!" Rahm Emanuel

MadisonMan said...

I will echo Quayle. Where is the accountability at the foundering Banks that are being thrown this solid gold lifeline?

(I hope that bad metaphor isn't prescient).

Hoosier Daddy said...

BHO and the democrats get to spend massive amounts of our money as they usher in really big government under the guise of the cavalry riding in to save the beleagured wagon train settlers;

In fairness to Obama, I'm honestly not sure how much bigger government can get at this point. They pretty much own the financual sector in this country at this now.

Although I found it interesting Obama said he may postpone repealing the Bush tax cuts and wait the couple of years for them to expire. I'll be delighted to hear his rationale for that.

AJ Lynch said...

I can't wait for the independent commissions to determine what and who caused these disasters!

The commissions are being formed as we speak right? If not, why not?

Ron said...

So this is the GDP of Japan...and Germany...combined!

AJ Lynch said...

The $7.7 trillion is equal to about 50% of all home mortgage balances in the USA.

Therefore, the $7.7 Trillion does not pass the reasonablesness test for me.

Quayle said...
This comment has been removed by the author.
LarsPorsena said...

Yep!!! All this and more$$$$$.
Robert Rubin will probably keep his job. Enron warranted Congressional hearings and jail for 'Kenny Boy' Lay et al ,but these guys will get a hug from Barney Frank and Chris Dodd.

Quayle said...

We know what caused these disasters.

It used to be very common that proprietary desk traders (i.e. those traders that sat at a desk and traded for profit using the banks funds) – it used to be that the morally challenged desk traders would figure out that they could take very risky positions with the banks money.

If those risky positions paid off, the bank would make good money, and they, the trader, would get a huge bonus at the end of the year.

And if those positions failed, it was totally the banks loss, not the traders.

The worst that would happen to the trader is they would get fired, and they’d go across the street and do it again.

It was all upside potential to the trader, and all downside loss to the bank.

And because this temptation always existed for traders, the Banks used to implement various compensation plans that would try to prevent the traders from doing it. They used claw-backs, and profit averaging, etc.

But in our “progressive” times now, instead of just a few morally challenged traders doing this, the bank presidents are doing it, placing their entire bank on the line for a potential huge upside homerun.

Upside profit: the bank president gets a huge bonus. Downside loss: it’s the shareholder’s (and now the tax payer’s) problem.

An Edjamikated Redneck said...

The hard question, for some of us, is do we apply for the personal bailout?

Do we continue to fulfill our obligations on our own while allof our neighbors basically sell their homes to the Feds?

Who comes out better in the long run? Us or Them?

What happens when in a couple of years the feds nationalize all of the real estate anyway, and our neighbors have 2 years of equity in the bank (or mattress), and our two extra years of equity just got nationalized?

AJ Lynch said...

Quayle:

You may be correct when you explain what caused these problems but I don't understand your answer.

If total home mortgages amount to $15 trillion, and we are now guaranteeing about $7.7 trillion in debt, does that mean 50% of all home mortgages defaulted to a zero market value?

If not, we are I assume being asked to guarantee other types of losses/ debts. What are these and what caused them? And should we even consider it?

mcg said...

Looks like they're demanding a bit more accountability in Iceland.

Henry said...

Michael Lewis, of Liar's Poker fame has a great article on the crash at Portfolio.com.

He would agree with Quayle. The reason the investment bank presidents are doing it is because their companies are public. They are risking other people's money. When the banks were partnerships, investment bank presidents risked their own money.

Best line from Lewis's article, though is about the rating agencies that were supposed to evaluate risk:

“We always asked the same question,” says [short-seller Steve] Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.”

rhhardin said...

The banks aren't being bailed out. The shareholders are mostly wiped out.

What's being supported is the obligations of the banks.

These are being supported because the Fed can wait out fire sale prices and the companies cannot.

The fire sale prices are more or less the fault of the system, for having developed an instability; what caused that is to be analyzed.

It's usually some regulation added on to prevent something that causes the disaster by causing something else.

rhhardin said...

con't

The legal process can't deal with the obligations of the failing banks because the procedures would tie up the obligations in court for well past the time that other banks would fail as a result, then winding up in some other court.

So you have to keep these legal dominoes standing up and deal with the problem in a way that keeps the banks so-called operating normally.

Darcy said...
This comment has been removed by the author.
rhhardin said...

A haircut is what depositors used to get on accounts over $100K at a failing bank. They get to keep only the $100K and the rest is gone.

Collateral works the other way: they keep the extra money after using the collateral to pay themselves the loan amount.

rhhardin said...

So the problem with Congress is that it will never opt out of populist lines on the crisis.

1. If we bail out the banks we must bail out the auto companies (there's no need to; bankruptcy deals with their problem very neatly)

2. It's too much money (but it's not being spent and does not compete with existing money for economic services) or we should spend more on schools or any other pet project.

So some really bad policies are almost certain to come out of Congress very shortly.

If they prolong the crisis, the better for Congress.

Congress is not your friend unless you pay them for it.

downtownlad said...

I have no problems with this. The markets seem to agree. Three strong days in a row. Three strong increases in a row with large volumes usually triggers the start of a bull market.

Original George said...

I like Obama's plan to create 2.5 million jobs.

Of course, they'll all be in China.

The Drill SGT said...

What Quayle said and MM seconded.

Off with their heads. Seriously, I would like to put these guys under a life sentence: Any Director of any company bailed out, would be forbidden from serving on the Board of any other publicly traded company.

These guys failed at their jobs

Original Mike said...

Every director and every officer of every company that got bailed out should be noisily fired.

AMEN. But I would add to that our elected representatives who participated in this fiasco. Chris Dodd was not up for reelection, but how stupid are the people in Massachusetts who voted for Barney Frank 3 weeks ago?

Dust Bunny Queen said...

Every director and every officer of every company that got bailed out should be noisily fired.

We should all know and remember their names for decades. They gambled with all our money, taking huge bonuses on the upside, and leaving the losses to us on the down side.

The ultimate of greed and evil.

Sorry, but I am damn mad about it, and so should you be.


Agreed. However, as a board director of a small utility district, I have to tell you that it is very very hard to get some of the board members to live up to or even recognize their responsibility. I think that we might want to look at these boards and keep the people who were doing their duty and who were trying to get the others to perform. Surely it can't be that every single one of them was negligent? If so, we are in really deep doo doo, more so than even I think.

In the financial world that I live in.... a haircut is the difference between the commissions actually paid and the amount that I get after the broker/dealer keeps their cut.

Bob said...

If we are to banish those on the corporate boards from future service then also do so for those in Congress who sat on the banking and investment oversight committees. They were just as willfully blind and bear responsibility.

Hoosier, currently Feds take about 23 percent of economy. The first to fall will be medical segment, that's about 16 percent. Nationalize the automakers and we're over the 40 percent mark. So it can get much larger.

garage mahal said...

I love how congress is shocked! at how CEOs travel in corporate jets and write it all off along with 400 million dollar stadium naming rights, when they are solely responsible for writing those tax codes. And then be surprised that after giving banks no strings attached billions to lend to people that they haven't lended any of it, to people.

LarsPorsena said...

Henry:
Thanks for the link.
A must read. I can only hope it gets wider circulation.
I don't think anyone in Congress has a clue as to how the ratings agencies
were corrupted and how everything else precipitated from there.

Quayle said...

If total home mortgages amount to $15 trillion, and we are now guaranteeing about $7.7 trillion in debt, does that mean 50% of all home mortgages defaulted to a zero market value?

Now the problem is more than the underlying mortgage problem. That number was known.

The problem now is that the equities market has lost so much value.

All that value has gone to money heaven - it has totally disappeared. It is like cash suddenly gone.

So now there is need for infusions of capital to keep our industries investing in plant replacements and new materials, and for liquidity (in the form of lines of credit) to keep the money flowing around, and get people by short term cash crunches.

Henry said...

Where is money heaven?

Great phrase.

Bob said...

Money heaven, I thought it was "Money Honey". Money heaven sounds a lot like when my father told me my dog went to Doggie heaven. I'm thinking the market losses are like my old dog and won't be able to find its way back.

AJ Lynch said...

Henry:

Thanks for the link. I printed the story and plan to read in my leisure which will be sooner rather than later if financial crisis continues.

Quayle:
Thanks for elaborating. And I agree also your phrase "money heaven" is a good one.

The solution may be to levy a huge confiscatory tax on all the non-profit endowments including the University of Wisconsin's. Althouse needs to squirm a bit.

Quayle said...

Best line from Lewis's article, though is about the rating agencies that were supposed to evaluate risk:

The ratings agencies were part of the alchemy of the sub-prime mortgage securities.

By crude example, Goldman would package 85 good mortgages with 15 sub-prime mortgages, pay a rating agency to give it a investment grade rating, and slap on mono-line insurance for good measure.

The entire package would sell like it was 98 good mortgages.

Without the rating, lots of investment portfolios would not be allowed to buy and hold them. So the rating was a key factor to the game.

But the ratings agencies were always a supplier to the investment banks - a clear conflict of interest. What rating agency is going to insult one of its major customers, and cut off a huge line of revenue by giving a bad rating to an intractable security?>

The other joke in the alchemy was the insurance on the mortgage backed security.

Mono-line insurers got going by insuring municipal bonds. The mono-lines could offset the risk of one city defaulting (or one geographical area having a downturn) by spreading the risk across many cities and geographical regions.

If Florida was tanking (a payout) Seattle and other cities would be booming (the premium intake) so the mono-line insurance pool worked OK for munis.

But when mono-line insurers got into mortgage backed securities, the model broke. There was no risk diversification. With mortgage securities, the insurance would only be needed when it would be needed by everyone. So in effect, nobody was insured, because when mortgage securities went bust, the insurer went bust.

But, boy that insurance sure looked good on the MBS when the sales guy was touting it!

Hoosier Daddy said...

I love how congress is shocked! at how CEOs travel in corporate jets and write it all off along with 400 million dollar stadium naming rights,

Actually I don't know what is more ironic, a bunch of congressmen lecturing corporate america for greed and mismanagement while they have spent like teenagers with dad's credit card to the tune of an $11 trillion debt on top of a $14 trillion economy.

If Obama can bring some fiscal sanity to that fucking swamp of a government, I'll be more than happy to support him for re-election. Of course that means spending restraint which means most of his constiuency won't like that but I can dream.

Dust Bunny Queen said...

The ratings agencies were part of the alchemy of the sub-prime mortgage securities.

By crude example, Goldman would package 85 good mortgages with 15 sub-prime mortgages, pay a rating agency to give it a investment grade rating, and slap on mono-line insurance for good measure.

The entire package would sell like it was 98 good mortgages.


Good description, Quayle. This is exactly right and this is how people got tricked into owning sub prime paper. Pension funds and municipalities in particular.

Original Mike said...

"Money heaven"? More like "money hell". Though, if Bernanke is to be believed, it's only in "money purgatory".

AlphaLiberal said...

Where is all this money going?
How do we know people aren't ripping us off?

What a mess!

Original George said...

The state and local pension problem is barely on the radar....For example, NJ has $85 billion in pension obligations and no money to pay for them. That's why Corzine tried to sell the NJ Turnpike.

City and state employees, like, say bus drivers, are not so very different from GM employees. They've been promised incredibly good retirement and health care benefits.

Good book on the subject....While America Aged. Video of its author here.

Quayle said...

The state and local pension problem is barely on the radar....

Original George is right. This is looming out there.

Hugh Hewitt has questioned whether, under the Contracts Clause, the state government's can constitutionally change those pension promises.

Hugh believes the answer is 'no', but I think I heard Erwin Chemerinsky say he's not sure.

I'd be interested in what Ann has to say on the issue.

Does the Contracts Clause (Article I, Section 10) prevent the state governments from unilaterally reducing their state employee pension commitments?

Original George said...

Just saw this article on NJ pensions...

"If the market is flat over the next 5 years, New Jersey will have a minimum of $118 billion in obligations and will be sitting on $31.8 billion."

The Governor wants to let local towns/counties, etc. have "pension payment holiday" until 2012, reducing the amount they put into the state's fund, so as to not increase property taxes.

The worst case scenario is that NJ runs out of money to pay pensions in 6 or 7 years. This would happen if the S&P falls from the present 850ish to around 600.

TitusTheReflex said...

It is all Barney Frank's fault.

He is the perfect boogey man.

Gay, jewish, from Massachusetts.

He is a goldmine.

Anthony said...

This is a large part of the reason I decided I could be a Republican, or a conservatvie, but not both.

Hence, I am now registered under the Libertarian Party (though I still voted for McCain, go figure)

Alex said...

For those saying that no one is shopping, the last time I went to Wal Mart on Sunday night it was full! So there.

Alex said...

America - too big to fail. Please World, bail us out. Really, we won't screw up again! We promise. Noooooooooooooooooo!!!