Quote from jordanf:
Neodude, thanks for your posts in this thread.
I just wanted to ask your thoughts on something.
My wife really hasn't followed much of this at all. She heard someone give a rundown of the problem. Her synopsis was this:
Banks made a bunch of crappy loans, didn't get paid back and now we are in this mess where they don't have the capital to make any more crappy loans. We need this bailout so they can start making crappy loans again.
Does this sound right? Of course, not all loans are crappy. But I would suggest that given the fact we are headed into a recession regardless, there is a good chance that a greater number of newly made loans will turn to crap.
As an example, CNBC was showing some "effect on Main street" thing today. They had a segment about a lady who started a store selling high priced homemade organic olive oil, or something like that. She wanted a 250,000 dollar loan to expand and open a new store and the bank turned her down. This was of course portrayed as a tragedy. My thinking was she should never get a loan right now for an expansion. We are headed for (or in) a recession. The first thing that people cut back on will be stuff like overpriced homemade organic olive oil. No way she should be expanding - she should be figuring out how her business will survive the recession. I honestly hoped they would name the bank that turned her down, because I wanted to move my money there.
Anyway, we have more or less been told that giving cheap and easy credit to people that probably shouldn't be getting it is the lifeblood of the economy. How can that be the backbone of a healthy economy?
All this bailout seems to do to give us time (months? years?) until we get right back to where we are now, except next time it will be 1.5 trillion or whatever.
jordanf, your wife is partially right. There is a possibility that some banks will make the same mistakes again. However, there should be a respite from bad behavior for at least a few years. Banking has always been a cyclical business and today's events will repeat themselves in the future, it is the nature of capitalism. Today's Tsunami will result in the following, which should keep bad behavior in check for a while.
1. Increased regulation.
2. Increased interest rates, even if we get a rate cut, there will be a long term increase in interest rates.
3. The failure of banks will result in less lending competition which will result in more prudent lending practices.
I don't want to give anyone the idea that the Fed's market manipulation is a good thing, but it is probably the lesser of two evils. Paulson and Bernanke know very well that this cash injection will not start a new bull market, instead they are hoping that it will prevent a sudden crash, which can cause social unrest. Of course many will argue that we need a crash, unfortunately when such an event happens prices tend to overshoot their equilibrium point punishing everyone, not just the bankers.
As a side note, I think we are not spreading the blame evenly. Everyone likes to point the finger at bankers, but we should remember that there weren't any bankers going around forcing people to take out mortgages they couldn't afford. Everyone thinks that the American dream is their right, yet not too many people are willing to work for it. Ultimately it is us, the consumer who is responsible, the bankers just sold us the rope that is tightening around our necks.
In conclusion, yes, this will happen again in the future, but it is something you have to get used to if you want capitalism. Everything comes with a price, if you are prepared and smart enough you can find opportunities in these events.
-Neo
