Jesse W.
http://www.subprimeblogger.com

http://www.shadowstats.com/alternate_data

society is different now than in the 30’s. sure, unemployment is lower. but how many of the jobs held now either didn’t exist then and/or are expendable now? once you take away your service industry, your spa workers, your hair stylists — all those professions that have been created in the times of luxury — you’ll see unemployment surge. the fact is — people don’t need those types of businesses. when consumers cut back, waiters will lose their jobs. people who work in stores will have their hours cut back. people will dye their own hair. things that are not necessary for survival will go and the people who provided those services will be out of jobs.

warren buffet can buy because he has already has money. i think people living check to check have a right to be scared. if they’re not self employed, or contracted, or farmers, they can be out on the street in less than a month. they don’t have to pull money out of the bank — they can spend it all just living in the day to day.

“The only thing we have to fear is fear itself. Fear and negative equity … The two things we have to fear are fear itself and negative equity, and the depleted capital of financial institutions … Amongst the things we have to fear are fear itself, negative equity, and the depleted capital of financial institutions.”

The reason we need these bailout is that BUSINESSES can get loans they need to pay your salaries, among other things. That banks can get short-term loans from other banks so when people withdraw more money that banks have available (rather than invested), the banks can pay their depositors. There have been runs on banks as people with over 100K were withdrawing at roughly the same time, as people with under 100K who don’t quite trust FDIC were withdrawing “just in case”. Normally when this happens bank take low interest loans from other banks, than repay from their revenue. Now the banks are afraid to loan to one another. Then there are transportation companies that need to pay employees before something is delivered, but get paid after the delivery is done. Or a construction company that has to pay employees first, then gets most of the money after the building is paid.

I think the reason you call this bailout ridiculous is that you don’t understand to what extend credit is used in day-to-day operation of all companies. Even, maybe even especially, the large corporations. No business can afford to keep piles of cash doing nothing just lying in a vault or in multiple under-100K checking accounts. The money is normally invested. Since expenses often don’t coincide with the time a business gets money from its customers, the short-term loans is used.

How do we know there is a lending crisis? There are number of indicators. The interbank loan rates which is normally at 2% is now at 4%. The Libor rate is almost at 5% (normally it’s a little over 2%). There are other indicators that show that even at these rates, loans are hard to get. If your employer isn’t able to get loans too, you may just lose your job.

As to “this is not as bad as Great Depression”. NOT YET. This is the purpose of the bailout – to avoid the depression. We may still get recession, but maybe the bailout will make it short and less painful for all of us.

And, there’s still time to influence the government to make the best possible use of that $700 billion. It’ll take awhile for the plan to be implemented, and we need to push our representatives to bring in as many outside experts as possible to modify that plan.

Why should we do this? Because the bailout, as is, could make the recession worse.

This is from the Breakingview.com site:

Misallocation of capital:

“Treasury secretary Hank Paulson’s plan uses money borrowed by the US government to buy value-impaired debt left over from the credit bubble. In a period of freely available credit, that might not matter. Good investments would get funded and, since additional money is available, some bad investments would, too. Diverting some money into unproductive uses should affect mainly those bad investments, with only modestly negative economic effects.

When money is tight, however, as it is likely to be for some time, withdrawing $700bn from the funding pool to support failed, past investments has a more serious effect on the economy, because capital flows are restricted by market illiquidity and investor trepidation. If that reduces asset prices, it exposes more loans to losses. If it prevents good investments by crowding them out of any chance of getting funding, it reduces economic activity. Either way, it makes the economy less efficient.

Herbert Hoover’s Reconstruction Finance Corporation of 1931-32, which made loans to politically connected companies, didn’t do much to alleviate the Great Depression. An equivalent amount of welfare handed out through the “Veterans’ Bonus”, which Hoover opposed, might have boosted consumption and stabilised the economy more quickly.

Japan’s 1990s infrastructure spending spree also diverted capital from more productive uses, helping to cause consumption to stagnate and the downturn to extend for 13 years. Paulson’s plan differs from both these examples in some ways, but is similar in that it may divert capital from its most productive uses. The danger is that the rescue plan could have similar consequences.”

To read more about consquence of the Paulson plan, see The Paulson Plan: Triumph of Cynicism & Why it’ll make things Worse.

~ Best,
The Charters Of Dreams

In some Christian faiths, as well as the Muslim faith, it is forbidden to profit from a loan. A loan is only allowed to be a generous act, help from one person to another. Making money from another’s less fortunate situation is considered vulgar, and unacceptable. Ungodly, and also bad for the recipient.

If loans were only given by the government, interest free, based on work experience, and only for education or health matters (the assumption being is better for all to have an educated and healthy populace), then the entire society would be forced to live within their means. So radical! Everybody would not have everything, and hardwork would produce the most reward, not saavy paper-pushing and marketing.

Families would live together longer, and people wold not feel as isolated, either. Natural support networks would arise.

You know who is completly unaffected by this whole crisis? The Amish. They must be scratching their heads at our self-created crisis.

Thanks again. :)

I interpret bob’s comment differently — the first 2 sentences are true, the third’s pure cynicism, and bob’s made no statement on whether he’s for or against the bailout. You can read bob’s-against-the-bailout into it but I prefer not to for it could have been written by one who’s neutral or don’t care on the bailout. Would have been simpler had bob stated clearly whether he’s for or against it but perhaps he can chime in now?

Re. “how many mortgage are actually being “walked away from”? I’ve heard 5% to 7% are non-performing, so the number isn’t even that high. That’s not worth $700 billion dollars.”, I don’t know how many mortgages are being walked away from but is the exact number relevant? Lurker Carl did an back-of-the-envelop estimate and his number of mortgages resulted in a bailout $ amount with the right order of magnitude. I’ve no idea if all foreclosed or will-be-foreclosed properties are worth G$700 but the current number has been sufficient to cause severe financial difficulties for banks here and around the world (failures, bailouts, mergers). As I understand it, the G$700 is an authorized ceiling much like the credit limit on a credit card so if it won’t cost G$700 then the Secretary won’t be spending the whole G$700. If it turns out to be more, additional authorization will be needed from Congress, if the Secretary chooses to do so.

Re. “And you’re wrong about business’ line of credit not being variable rates.”, I fully understand LOC rates fluctuate — they go up *and* down with fluctuations in interest rates, perhaps tied to some metric like LIBOR — but they don’t reset in the same sense as teasers rates on subprime mortgages do. “Reset” in my statement was intended to mean a sudden jump from teaser to market rate peculiar to subprime mortgages, while LOC rates fluctuate from one market rate to the next market rate all the time, but you’d interpreted it to mean that I didn’t know that LOC rates fluctuate.

Re. “Continued use of the LOC being a sign of poor business practice.”, I’d use a LOC if I were trying to juggle several contracts simultaneously simply to make my life a whole lot easier. True, one can get into financial difficulty if the LOC’s used irresponsibly but the mere existence of a LOC should not indict a business owner as exhibiting poor business judgement. If customers refuse to do business with me because I’ve a LOC, then so be it. Irrational, but so be it. In my personal life, I use a CC for almost everything and pay if off in full every month just for the convenience (and it’s interest-free of course).

Not a legit problem? Check out this article: http://news.yahoo.com/s/nm/20081003/us_nm/us_california_loan_5

It is important to remember the last 25 years have seen only VERY mild and VERY short recessions.

Don’t expect this one to be as cheap and easy.

Re: bob’s comment @ 12:33 on 10/2 –
“The reason we need this bailout is because it is difficult for people with poor credit to get loans now.

The reason that led up to this bailout is because it was too easy for people with poor credit to obtain credit.

And the wheels go round and round.”

The way I read that – he is against the bailout because as he indicated with his comment “wheels go round and round” – the bailout would cause loose credit again which would call for another bailout, completing the cycle a 2nd time. Maybe I’m missing something?

Re: your comment at 11:39am today –
Your first point – how many mortgage are actually being “walked away from”? I’ve heard 5% to 7% are non-performing, so the number isn’t even that high. That’s not worth $700 billion dollars. And you’re wrong about business’ line of credit not being variable rates. Most of my clients’ rates are variable – based on prime and adjust monthly.

Your second point – I understand using a LOC to smooth things out is somewhat common. Continued use of the LOC being a sign of poor business practice. I haven’t heard any of my clients complaining about their lines being frozen, so I wonder if this really is a legit problem.

I’ve seen this theory floated around before. The so called ’shadow governemnt statistics’ claim this kind of thing.

Buy the theory is wrong. The idea that there are somehow a large # of unemployed people not being counted isn’t backed by any data.

If this idea held true then the % of people who do not participate in the work force would have seen an abrupt jump at some point and it would be gradually increasing over time. Right? Its not.

The civilian labor force participation rate increased from 64% in 1980 to 66% in 1990. If some accounting was changed in Reagans era to drop people out of the system of employed / unemployed then the % of people working would have decreased not increased. Since Reagaon the % participation rate has bounced around the 66-67% range.

Jim