Don't give Bush control over $350 billion in bailout money

At the core of the problem, in the trillions of dollars, are credit default swaps. This is one of those rare instances when those not familiar with these filthy things can get a nice background read from Wikipedia. Particularly note History, subhead Concept.

These things were born dead. I can buy a contract and pay it off over time that says you pay me if a security doesn't pay off. I don't have to own the security, you don't have to have the money to pay me if the security defaults. And I can declare this fece as an asset, upon which I can loan money. Total financial insanity.

And institutions who clung to some pathetic belief that SOMEBODY was minding the store, like the life insurance company, got blasted when they turned out to be worthless AND unrecoverable.

It's worse than I describe, incidentally. You want to get physically ill, delve.

I am familiar with a life insurance company who held some mortgage-backed securities. In all of the sub-prime turmoil, they were required to revalue those securities on their balance sheet. Normally, that is appropriate, however during the turmoil, any security that was mortgage backed, that did not come with a govt guarantee, was devalued by the market based on a panic. Nevermind that the insurance company planned to use the securities for cash-flow and keep until maturity. No, they had to immediately revalue them on their balance sheet and take a book loss. That is one of the asinine things that happens when governments overreach into private industry. Take a big wide brush and paint over the problems, while also including things that were not a problem.

1. In fractional-reserve banking, a safely nonpolitical, universally-accepted practice, banks may loan several times the value of their assets, on the theory that at no time will more than a known percentage of its depositors come for their deposits. The percentage they must keep on hand, which inverted is the multiplier against their assets for which they may make loans, is set by law.

2. The Chicago School, with Milt Friedman as a highly visible proponent of their theories, ON GOOD EVIDENCE, proposed that the market was the best possible information-gathering device, and that ANY government interference in the market distorted that information. Thus regulation was to be avoided at all costs.

3. When the banks and bank analogs started swapping the more exotic sort of derivatives, all mandate to regulate or monitor these instruments was removed by law.

4. THIS IS THE CRITICAL POINT--economists of this school believed that the banks, acting rationally, would either consciously or be forced by the market to ACCURATELY valuate the worth of these derivatives in their asset portfolio. THIS IS WHAT ALAN GREENSPAN CONFESSED TO BEING WRONG ABOUT.

5. Instead they went berserk, and the rating agencies happily supplied whatever valuation the banks wanted, or they'd get another rating agency.

6. The value of the derivatives collapsed, and now not only were the banks' asset portfolios much smaller, but they could no longer make loans against them to the value of several times the value of the assets, and the amount of credit available in the economy collapsed. THAT'S WHY THE AUTO INDUSTRY BAILOUT: when Chrysler got its first bailout twenty years ago, there was plenty of credit, they just needed a guarantee. Now the money for credit isn't there at any price.

7. Because the derivatives involved were totally unregulated, WE STILL HAVE NO IDEA HOW BAD IT'S GOING TO GET! I.e., we can only guess how rotten the banks' asset portfolios are.

Some smaller local banks, and credit unions in particular, escaped most of the collapse because they don't hold derivatives as assets in large quantity.

There'll be a test on this Thursday.

Which in some ways may not be a bad thing. The "well" is in the money-center banks who package up loans from downstream banks and finance companies, and securitize them to be sold. The reason that may not be a bad thing is because that is one of the things that got us in this mess. The problem is, when home values come back, is will the money be available. Sure, right now the money is in the banks because people are buying CD's instead of treasuries. It seems to me that well run banks have excess cash to loan. Not sure what the situation is with not-so well run banks. TZA may be right for now, but I suspect that for this economy to get back on its feet, a lot more loan money is going to be needed. I kind of agree with Yael. Don't let Paulsen control the remainder of the TARP. He won't be accountable for very much longer, and we need someone involved with it that, if needed, can have their feet held to the fire.

The single dumbest comment made in the past six months on this blog: "the credit crunch is a myth." What a relief that will be to the American auto industry, the now-defunct investment banking industry, and the hundreds of thousands of people now out of work because their employers couldn't get rollover credit at any price.

IT'S ALL A SOCIALIST PLOT TO TAKE OVER THE ECONOMY.

Thank you for letting us laugh at love again, tza.

Banks still aren't lending to creditworthy people, for instance.

Hmm. My score is generally around 730, depending on who you ask, - not bad but not great either - and I just got a new AMEX card for Costco (significant savings on gasoline and such), Capital One extended my credit line, my credit union extended my credit line as well as making an offer for a signature loan - "holiday loan" or some such thing - and after driving the Odyssey to MI thru snow and ice for xmas with the family, I was in the market for something with AWD and had no trouble getting top-tier financing thru several lenders - credit union, local bank, capital one, manufacturer's finance arm.

Point being that the credit crunch is a myth and if the author had bothered to look up any of the data points he would know this. One cannot criticize the power-grab tactics used by the administration from one side of the mouth while facilitating the same strategy from the other side. This is at best ignorant and at worst disingenuous.

Feel free to state your opinion at any time, but please communicate responsibly and make it clear that your statement is not *fact* or based on any facts.

And, yeah, what a horrible idea. Another step in misappropriating taxpayer money - that would be your money, my money, OUR money, friends and neighbors.

/rant>

Is Congress so inept as to let something like that happen? Well, stranger things have happened--just look at the Arizona Cardinals.