The "Bailout" in Layman´s Terms
Aubrey Clark
October 03, 2008
Okay, the sky isn´t falling and America is not going to fall into a depression. President Bush painted a pretty grim picture to Americans when he made his plea for Congress to act quickly. During the President´s speech he warned, "The value of your home could plummet.... More businesses would close their doors, and millions of Americans could lose their jobs.... Ultimately, our country could experience a long and painful recession." The scenario he painted is possible, but not probable.
The first thing we need to do with the "bailout" is to stop calling it a bailout. In layman´s terms, it´s a stupid purchase by the government, and by proxy, the tax payers. Basically, the government is going to inject money into the businesses that were run by greedy stupid people, by buying up all of their bad paper. So technically it´s not a "bailout", it´s a buyout. The plan is, at the end of the day Uncle Sam will sensibly manage these portfolios with all of the bad loans in them and eventually get most or all of the money back. Kind of like the way they managed Fannie Mae and Freddie Mac.
The contention in congress is how they should pay for the bad loans they are about to buy. Some want to buy the bad paper outright, have our efficient government manage the portfolios, and eventually try to sell them to break even. Others want to loan the money to the stupid people who run the companies that caused this mess and let them pay Uncle Sam back with interest. So the argument basically boils down to: Who gets to handle the bad paper - Tweedle Dee or Tweedle Dum?
The reason for the delay is that those who have proposed the "buyout" want to have guarantees for the "poor people" who got hammered by the "shady" lenders built into the buyout. This means, at the end of the day, Uncle Sam is guaranteed to take a loss on the purchase because of the built-in entitlement. It is further argued, by the opponents of the buyout, that entitlements like these are all (or at least part) of the problem that caused this mess. For this reason, the proponents of the "lending approach" do not want the bill.
Those who have proposed the "lending approach" have equally screwed the pooch with their plan, according to the other side. The lending advocates want to lend the money at a low interest rate to the stupid people and essentially let them go back to business as usual. There are a few restrictions about how much money the CEOs can make and so forth, but that's all. On top of that, they want to lower taxes for the stupid people to help them make a profit sooner so that they can pay back the loans sooner. The "buyout" side of the fence would rather lick the business end of a taser gun than let this happen. Are you seeing a pattern yet?
So what does this mean to you right now? Not much more than what you´re feeling today. One way or the other, the stupid people will get the cash, along with a slap on the wrist, and go back to business as usual (with a tighter leash, of course). As far as the stock market goes, the ups and downs are just saber rattling from hungry investors in other countries who own most of America. If they pull out of the market it would wreck our economy and also theirs because they wouldn´t get all of their money by reinvesting in other markets.
However, credit and how it is issued has been changed forever, or at least for the forseeable future. Loans on boats, cars, houses, credit cards, and even commercial lending will be much tighter and will require good credit. According to Michael Haltman, CEO of Commercial Capital Alliance, "The commercial mortgage market, not unlike the residential market, is feeling the same stress in terms of the availability of mortgage money for anyone except the AAA borrower… until the banks free up liquidity for commercial mortgage loans to buyers a little further down the food chain we will have the same inventory stagnation being felt in the residential housing market."
To put it bluntly, the "buyout/bailout" is basically methadone for America´s credit habit. We are getting ready to be weaned off our dependence on credit and get back to saving money. In the near future, the dollar will rise in value, property values will come up, and America will reclaim her place as the economic capital of the world once again. Then in about another 50 years, we will screw it up again.
The first thing we need to do with the "bailout" is to stop calling it a bailout. In layman´s terms, it´s a stupid purchase by the government, and by proxy, the tax payers. Basically, the government is going to inject money into the businesses that were run by greedy stupid people, by buying up all of their bad paper. So technically it´s not a "bailout", it´s a buyout. The plan is, at the end of the day Uncle Sam will sensibly manage these portfolios with all of the bad loans in them and eventually get most or all of the money back. Kind of like the way they managed Fannie Mae and Freddie Mac.
The contention in congress is how they should pay for the bad loans they are about to buy. Some want to buy the bad paper outright, have our efficient government manage the portfolios, and eventually try to sell them to break even. Others want to loan the money to the stupid people who run the companies that caused this mess and let them pay Uncle Sam back with interest. So the argument basically boils down to: Who gets to handle the bad paper - Tweedle Dee or Tweedle Dum?
The reason for the delay is that those who have proposed the "buyout" want to have guarantees for the "poor people" who got hammered by the "shady" lenders built into the buyout. This means, at the end of the day, Uncle Sam is guaranteed to take a loss on the purchase because of the built-in entitlement. It is further argued, by the opponents of the buyout, that entitlements like these are all (or at least part) of the problem that caused this mess. For this reason, the proponents of the "lending approach" do not want the bill.
Those who have proposed the "lending approach" have equally screwed the pooch with their plan, according to the other side. The lending advocates want to lend the money at a low interest rate to the stupid people and essentially let them go back to business as usual. There are a few restrictions about how much money the CEOs can make and so forth, but that's all. On top of that, they want to lower taxes for the stupid people to help them make a profit sooner so that they can pay back the loans sooner. The "buyout" side of the fence would rather lick the business end of a taser gun than let this happen. Are you seeing a pattern yet?
So what does this mean to you right now? Not much more than what you´re feeling today. One way or the other, the stupid people will get the cash, along with a slap on the wrist, and go back to business as usual (with a tighter leash, of course). As far as the stock market goes, the ups and downs are just saber rattling from hungry investors in other countries who own most of America. If they pull out of the market it would wreck our economy and also theirs because they wouldn´t get all of their money by reinvesting in other markets.
However, credit and how it is issued has been changed forever, or at least for the forseeable future. Loans on boats, cars, houses, credit cards, and even commercial lending will be much tighter and will require good credit. According to Michael Haltman, CEO of Commercial Capital Alliance, "The commercial mortgage market, not unlike the residential market, is feeling the same stress in terms of the availability of mortgage money for anyone except the AAA borrower… until the banks free up liquidity for commercial mortgage loans to buyers a little further down the food chain we will have the same inventory stagnation being felt in the residential housing market."
To put it bluntly, the "buyout/bailout" is basically methadone for America´s credit habit. We are getting ready to be weaned off our dependence on credit and get back to saving money. In the near future, the dollar will rise in value, property values will come up, and America will reclaim her place as the economic capital of the world once again. Then in about another 50 years, we will screw it up again.