Bailout 9: Paulson's Plan

[Arlemagne]

They can't liquidate D's assets? Maybe they can try liquidating doze assets?

Thank you. I'll be here all week. Be sure to tip your waitress.

[derirfan]

I am about to write an essay on the whole bailout issue and luckily found ur Channel which gives a very intuitive introduction to the topic!

Thumbs up!

[bry3921]

This gangster is bald, tall, white, and gravitas in his voice. Pulls up the truck to haul away half a billion, then comes to the people as the shameless rats finish up the ruination of two nations, 3 page document in hand demanding 700 billion for greedy devils. Hand it over! He should have yanked a child from a mother and hacked her arm off, threatening to do the next. "epistemological"? please, think papa and baby doc in Haiti.

[joehlbm]

Sorry, but I'm very new to this but something about this scenario seems wrong to me. The CDO's are representing mortgages. The government is the only party that has the ability to buy these, incur the loss for a longer time, but hold them untill their value reaches the hold to maturity date. If the CDO's represent a mortage on a home, that has some value, although not in this market, couldnt the government hold them (DCO's) untill their value rises to the bought value?

[frother]

@joehlbm

He said in previous videos that the smelly CDOs are specifically packaged to contain the highest-risk mortgages that are likely to default

[ananiasacts]

It seems like we could have simply doubled the mortgage interest tax credit to artificially reflate the housing market for a lot less money because it would have given the banks time, and lots of fresh capital in the form of new loans to 1/3 of Americans who own their homes outright would take out a small loan merely to bank the money. We could then phase that out over 50 years or so until their the credit no longer exists. That would help pay for it.

[JLZesbaugh]

The current perception of the assets is toxic, but to a long standing institution(fed), they may not be so. The challenge is simply making adjustments so people can repay these mortgages.

Grouped like they were no bank could make those adjustments, however, the gov has to authority to make favorable adjustments, decreasing the toxicity.

On to the next.

[checoavalos]

Sal, you are brilliant! you should appear on TV . You make those people know nothing. The only thing they say is TOXIC ASSETS and blame the MARK TO MARKET. Now is the accountant's fault for using the mark to market.

[carthfhuil]

Yeah, these are great. Having all the balance sheets out on a single screen really makes it easy to understadn.

[nissanka]

Good stuff. It's a shame that this has only 7000 views. Ignorance is bliss I guess.

[seppukuhierarchy]

GOOOOOOOOD VIDEOOOOOOOOOOOOOO

[MCsunday1508]

Thank you very much for making these videos, I believe Im begining to have a better understanding of some of the terms that are used in the debate about the economy and what the key issues are. I will certainly watch the other vids aswell.

[milatyme36]

However, it's is even more important to realize that the Federal Reserve has total control over what the interest rate (the cost to borrow money) is at. Therefore, the Fed with its low interest rate levels and money creation abilities, designed to increase borrowing > increase cash flow throughout economy > increase GDP (real or not) > increase standard of living, created the bubble in the first place. Once the bubble bursts, all who have capital, including the Fed itself, can take what's left.

[milatyme36]

It's important to remember that the underlying problem was that financial institutions all across the board undervalued their risk based on the assumption that the "bubbling" of the housing market was a normal phenomenon and would lead to assured profit gains.

[bryandunn0214]

Hey Sal. Where can I short sell the FED, or can I just short the USD instead?

[ThatIsNotDeadWhich]

AFAIK, you can't short the Fed - I don't think it's publically traded. And anyway, Fed share price wouldn't drop, because they can literally print new money for themselves...

You can't very well short the US$ either - at least not on a large scale - because that would require you to borrow dollars... and (part of) the problem is that nobody lends dollars these days.

But if you have savings in US$, you might convert parts of it to - say - €, to hedge against the Fed printing money.

[mongobobo]

UDN or really if you think the dollar is going to become worth less buy DGP as gold goes in the inverse to the dollar.

Recently I made 30% gains with DGP as the dollar plunged from its 88 high down to 78. Glad I sold yesterday as it looks as though we aren't done with this deflationary picture.

[andreamirelez]

If the government was really concerned about the economy slowing then they would have given farmers/business owners etc.[main street] the capital they would need to produce through direct loans from the government. Then at a later date hand those loans off to the private sector to service the loans and would still be paid back. I think it's only about Paulson bailing out his own friends. We have been done wrong by our government.

[juhapakkala]

Excellent. Superb work!

[elM4gor]

you shoudnt make such a videos, you cant understand economy at all, because economy is social science. Markets are about beliefs and hopes. This is just useless mathematical exercise. If markets are on descending spiral all assets comes to be priceless, so without bail out the amount of problematic CDOes would be enourmous. So bail out is great to start markets again. But there should be also some systematic changes to prevent such a situation in future.

[khanacademy]

Paulson's bailout is almost identical to the what the Japanese did 20 years ago.  Look into how that turned out. We need to get capital flowing back to the real economy. Pumping money into zombie banks with shrinking assets won't help (and will only suck money from real projects)

[arlenschmidt]

@elM4gor

Have a cry

[andrewedwardjudd]

hang on here! If i am a little old lady saver with the bank i am recorded in the books as a lender to the bank or a risk taker with the bank along with the other liabilities! How come i get to be some worthless thing who deserves to be wiped out??? Otherwise you are doing great work! ;-)

[khanacademy]

You won't be wiped out because your deposits are FDIC insured.

[Kerpal2253]

I'm totally with that. They should raise it to about 4 million or so. Freeze the corporate banking structures, don't let a bunch of banking take overs occur, but let their accounts fail. Accounts with more than 4 million in the bank will pay for the bailout. In my head the crux of the issue isn't borrowing, its borrowing money, while shipping it to china, because everything we buy comes from china.

[phoenixshade3]

Kerpal - the problem with raising the FDIC limit is that it doesn't really solve anything. It merely means that when the banks DO fail, the federal government must BORROW MORE from the federal reserve in order to meet its obligation. The result is the devaluation of currency. Just look at what has happened to the value of the dollar recently, especially when compared to Asian currencies.

Although I must admit that this is better than handing over $700B to cover bad risk by foreign investors.

[0PsycoDad0]

Great work! I´m absolutely agreeing with you! The financial institutions have forgotten their purpose and the fed bailout prolongs systemic corrections on average taxpayers expense.

[pongman]

I say the government should loan directly to the small business and AAA corporations; and keep the banks out of it.

[daejinko100]

Who will bail out if the Fed collapses?

[0PsycoDad0]

the american taxpayer?

[Shadyhunter04]

Why would the fed collapse? Only way that will happen is by revolution or congressional action.

[Yourdeadmeat69]

If bailout doesn't happen, banks are frozen for big store and corner store, small as well as big business is being tossed in the crapper--they can't get quarterly cash flow from the bank to pay operating costs.

Little guys ARE screwed TWICE, but we if don't free up the system, Chinese & Europe SAID they're not going investing in our paper anymore.

Hang bastids, & stop rewarding execs for failing the country, but 1st its defibrilate the dead economy, or it IS the little guy fookayed.

[ThatIsNotDeadWhich]

There is no reason you can't reboot the economy by nationalising the banking sector and running it as a part of the public infrastructure.

If it turns out at the end of the panic that the banking sector was actually solvent, the equity can be split between the present shareholders. Not that I think there'll be much equity to split.

Of course, the US economy would still be screwed from thirty years of neoliberalism. But that would be the case whether you bail out the banks or not.

[Yourdeadmeat69]

Concur

[ivar197]

there would still be the problem of increased inflation, people losing value of their money by government printing and taxing more, decreased efficiency in banking sector due to government interference,

[ThatIsNotDeadWhich]

Neoliberal nonsense.

First, inflation is not a problem as long as it is kept within reason (which basically means below two digits), wages and public transfers are inflation-indexed and ForEx rates are periodically adjusted.

Second, printing money is only inflationary if a similar amount of money is not destroyed through taxation.

[ivar197]

How does taxation destroy money? It seems to me like it would still remain in circulation as money still remains the common denominator used for services and production, even by government, unless it is completely abolished and coercive central planning is used instead.

The fact that banks and govt institutions can use currency before other people, means that they can use it before the rest of the economy adjusts to higher inflation, which in turn causes wealth transfer from average people to

[ivar197]

the institutions, its in effect a hidden tax.

[ThatIsNotDeadWhich]

A fiat currency is backed only by the government's power to tax the economy. So in effect, a fiat currency chit (e.g. the € coin you hold in your hand) is an I.O.U. from the government. It means that the government owes you 1 € in taxes.

When you pay the 1 € to the government, the government owes you 1 € less in future taxes. And since owed future taxes *are* (M0) money under a fiat currency scheme, the 1 € has ceased to exist.

[ivar197]

what cant be ignored is the terrible inefficiency of any type of government enterprises and the lack of choice that comes with them, the limitation of freedom through taxing which in turn leads to decreased demand for the freedom available in such a system and increases the demand for additional security through government jobs & security and causes unrest due to different people having different ends while being forced to work for the same ends in a socialist system.

[ThatIsNotDeadWhich]

There is no evidence that governments are, across the board, bad at running banks. In Germany, the banks that are run by the Länder are far healthier than the banks that are run privately. If *the American* government is incapable of running banks, it is a problem with Americans, not a problem with government.

[ivar197]

empiric evidence is useless if variables cant be isolated and their effect tested separately. And in the field of economics, that is often the case, so the motherload of work will have to concentrate on theoretical research

[ThatIsNotDeadWhich]

Garbage in, garbage out. If your "theory" starts from the assumption of rational expectations, perfect information and externality-free contracts, your "theory" is bullshit.

Bluntly put, Friedman and every other neo-classical "economist" like him are hacks, because their assumptions are worthless garbage.

For that matter, their market fundamentalism has failed so thoroughly, so systematically and so completely that it is actually possible to do empirical studies of its failure.

[ivar197]

I cant comment on neo-classic economy in general, but the Austrian school assumes that people act in their interests(even if they sometimes misunderstand what their interests are) and builds its economic claims on that. Id like to hear your favorite rebuttal on that school's views. With sources if possible, hard to post convicing arguments in the youtube commentary environment without that.

[ThatIsNotDeadWhich]

The principal epistemological problem with Austrian economics is that it refuses to submit its models to falsification. That makes it a branch of political philosophy, not political economics (and, as noted below, means that it cannot make reliable predictions).

The principal pragmatic objection is that it does make predictions (in the form of policy recommendations), and those predictions fail across the board, whenever they are implemented.

[ivar197]

i dont understand this. How are their models not open to falsification and if they are where is some solid rebuttal available, id be interested in hearing

[ThatIsNotDeadWhich]

Falsification involves empirical evidence. If you do not accept the validity of empirical evidence, then you cannot falsify your models.

[ThatIsNotDeadWhich]

And as for the claim that governments are incapable of running things *in general*...

AHAHAHAHA

ROFLMAO

Very funny.

But back here in the real world, the German government runs the world's best train service, the French government runs the world's safest nuclear reactors, and the Danish government runs the power grid with the world's highest wind power penetration.

[ivar197]

public sector can do a good job, no doubt. But they wont do a cost-effective job and in the process of doing so they eliminate competition and freedom, force their will on people and take away people's money with coercive force.

[ThatIsNotDeadWhich]

"Cost-effective"?

Dude. Infrastructure isn't supposed to be "cost-effective." Infrastructure is supposed to *work.* All the time. That means that it's supposed to have redundancies built in, and redundancies are not "cost-effective."

And privately run infrastructure just plain doesn't work. Rail privatisations have uniformly been a disaster, electricity privatisations have uniformly resulted in redlined grids and gas-fired power plants. And so on and so forth.

[ivar197]

i see no reason why infrastructure that doesnt work reliably would be competitive in a free market.

As for the second paragraph, refer to my earlier post on empirical evidence

[ThatIsNotDeadWhich]

There is no "market" for infrastructure, for a variety of obvious logistical reasons (marginal cost vs. sunk cost and winner-takes-all advantages, for two examples).

And while you are of course free to reject empirical evidence out of hand, this means that you cannot make predictions. Making predictions inherently involves exposing your model to falsification. That's page one of every epistemology textbook since Popper.