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msl
09-30-2008, 04:17 PM
So, I know everyone on here is against the bail-out, and I've seen this (http://mises.org/story/3128), but I'm still not entirely sure exactly /what/ the bailout is.. What are the facts (i.e., what /exactly/ is going to go down if it gets passes)? (And if this is posted somewhere else, sorry, just please post the link to that thread.)

THX!!!

Theocrat
09-30-2008, 04:39 PM
So, I know everyone on here is against the bail-out, and I've seen this (http://mises.org/story/3128), but I'm still not entirely sure exactly /what/ the bailout is.. What are the facts (i.e., what /exactly/ is going to go down if it gets passes)? (And if this is posted somewhere else, sorry, just please post the link to that thread.)

THX!!!

A bailout is kind of like that one scene in the movie Forrest Gump where young Forrest is trying to get into a regular public school, but he doesn't meet the minimum requirements because of his low IQ. Forrest's mom then pleads with the school's principal to try to get him into the school (even if Forrest missed the cut-off by "five measely points"), and the principal, sympathetic to Forrest's mom's pleas for her child's education, agrees on the condition that she sleeps with him (since her husband is "on vacation). Forrest's mom sleeps with the principal (the "bailout"), and subsequently, Forrest gets to attend a school in which he never achieved the proper credentials to go to in the first place. As fate would have it, young Forrest is able to excel anyway, and he even meets his future wife on his first day of school.

I don't know if the investors on Wall Street will have that sort of measure of success should this bailout go through Congress, but it will entail Uncle Sam giving them something which they didn't earn at expense of "chaste" taxpayers.

I'm not sure if you've ever seen Forrest Gump before, but I hope the scene I've described helps you understand the principle behind what a bailout is. :)

heavenlyboy34
09-30-2008, 04:51 PM
A bailout is kind of like that one scene in the movie Forrest Gump where young Forrest is trying to get into a regular public school, but he doesn't meet the minimum requirements because of his low IQ. Forrest's mom then pleads with the school's principal to try to get him into the school (even if Forrest missed the cut-off by "five measely points"), and the principal, sympathetic to Forrest's mom's pleas for her child's education, agrees on the condition that she sleeps with him (since her husband is "on vacation). Forrest's mom sleeps with the principal (the "bailout"), and subsequently, Forrest gets to attend a school in which he never achieved the proper credentials to go to in the first place. As fate would have it, young Forrest is able to excel anyway, and he even meets his future wife on his first day of school.

I don't know if the investors on Wall Street will have that sort of measure of success should this bailout go through Congress, but it will entail Uncle Sam giving them something which they didn't earn at expense of "chaste" taxpayers.

I'm not sure if you've ever seen Forrest Gump before, but I hope the scene I've described helps you understand the principle behind what a bailout is. :)

I've never seen Forrest Gump, but that's a pretty good analogy! :D

JasonC
09-30-2008, 04:53 PM
He is asking for specific facts of what the bailout does. I know it uses some form of an auction to prop up the prices. It uses the tax payer money to cover all of the loan defaults, as well as giving the executive branch unconstitutional power over the economy. It goes against everythign a free market is supposed to be. I can;t get too much more specific then that. I'm not even sure if they have the most recent version of the bill posted online.

I am looking for the link that explains it, but I know someone here can explain it well. I haven't had much time to look at the specifics in the bill. Let's get some help on this here.

JasonC
09-30-2008, 05:33 PM
I found this link to a pdf download of the bill. http://thesunnews.typepad.com/opinionblog/2008/09/anyone-wanna-re.html

heavenlyboy34
09-30-2008, 05:55 PM
R.i.p., u.s.a. :(

Zippyjuan
10-01-2008, 01:48 PM
Paulson says that the problem in financial markets are the securities and dirivatives based on mortgages which have been sold to various investors- including banks, investment firms and even foreign governments. The problem with them is that good mortgages were packaged with riskier ones (a standard practice which spreads risk and helps reduce the risk on the iffiest ones). They are so mixed and repackaged and again resold that it has become impossible to value the securities and nobody wants to buy any of them without some sort of reliable value. The firms which hold them had booked their value at what they hoped they would be worth when the loans in them were paid off but now they do not know what portion is likely to be paid off.

Since the value of these have fallen, the companies have to report this fallen value in their books meaning they have smaller reserves to either invest in other things or to loan to others. So no lending is taking place - even to qualified borrowers. Students cannot get loans for schools. Businesses cannot get loans to either keep their business going in the first place or to expand it. Would be homeowners cannot get loans. Credit has basically frozen.

What Pauslon has proposed to deal with this is to get a wad of government (taxpayer or borrowed via say Treasury Notes) to purchase these securities, sort through them and properly value them and then resell them back to investors. If it works, it takes the questionable securities off business books and allows them to start functioning more like the normally do and start money moving again. If it works well, the governement could make money off the deal- replacing the borrowed money plus a return on it.

The purchase would be conducted via a "reverse auction". In a normal auction, the item up for sale goes to the highest bidder. In this case, the Treasury will announce that they intend to buy a certain number of securities. The firms who would like to sell them to the Treasury will make an offer of how much they want to sell them for. The lower they go, the more money they lose but the more securities they can get rid of. The Treasury will pay the price which allows them to purchase their target and will take them starting with the ones at the lowest price up to the desired quantity. Higher priced ones will be less likely to be sold.

Say they decide to buy 1000 securities. Three firms have 500 securities each. Firm A offers to sell theirs at fifty cents on the dollar to their face value (what they will be worth when the mortgages in them are paid off- like the face value of a bond). Firm B offers to sell theirs at 30 cents on a dollar and firm C offers theirs at 55 cents on the dollar. The treasury would buy the securities from firms A and B but none from C. The treasury would then try to revalue the securities and later resell them in the market. At that time, the value of the security will be known so buyers will be more willing to take them than they are at the uncertain values they have today.

Glenn
10-01-2008, 02:17 PM
In specific terms, a Charlotte caller to a local talk show host made the following case:

The recent deal from CITI to "buy" Wachovia was included as a last minute provision to the "bail-out" IE CITI buys Wachovia for 2 billion$ +/- and inherits a 178 Billion $+/- bad mortgage debt left over from Wachovia's deals. Along comes the fed's and they PAY/BUY the 178 Billion dollars worth of bad debt. CITI nets ALL of Wahhovia's assets, IE land, offices etc plus a 176 billion dollar profit! And we are stuck holding the bag.

Ozwest
10-01-2008, 02:21 PM
Supposedly, the "bailout" will free up lending institutions, thereby freeing credit.

heavenlyboy34
10-01-2008, 02:36 PM
Supposedly, the "bailout" will free up lending institutions, thereby freeing credit.

heavy emphasis on "supposedly". ;)