[kevin]

Originally Posted by horatio

To make it short, unlike normal companies one cannot let banks go bankrupt unless one wants to repeat the Great Depression. That's why the government has to interfere now. Do we like it? No. What are the alternatives? Socialise banks or better regulate them to prevent them from doing too high risk business.
What simpel extra rule do we need? If a bank sells a credit and rebuys it afterwards, it still has to underlie it with equity.

Well the U.S Government has just announced a $700 billion dollar bailout plan to buy mortgage assets and hold them for later sale.

Will it have the desired effect on the financial system though? That's the question I guess.

[horatio]

Originally Posted by kevin

Well the U.S Government has just announced a $700 billion dollar bailout plan to buy mortgage assets and hold them for later sale.

Will it have the desired effect on the financial system though? That's the question I guess.

I appreciate Paulson's quick action, liquidity alone cannot amend this structural problem. Many folsk oppose this governemnt interference, even my favourite economist Joseph Stiglitz, but I don't see any alternatives.
The lesson for the future should be better regulation which is preferable to the Fed as lender of last resort or the government as buyer of last resort, preferable to capitalism in booms, socialism in busts.

[Botany Bay]

Originally Posted by horatio

I have to disagree with you, BB.
If you buy a house on pump and finance it via itself, i.e. because you believe house prices continue to rise, you can hardly blame the bank if house prices don't continue to rise.
It's like you buy stocks and the nice gentleman at the bank told you that stock market indices rose about .12-. .15 per year for the last 20 years (the actual annual yield of the past 100 years is about .07 or .08) and you believe him that this is a natural law and then stock markets crash and then you complain about it.

Horatio, your answer surprises me a little. If I advertise a loan, talk you into taking it, knowing exactly you will never ever be able to pay it back - isnt that fraud?
Isnt it fraud to sell the loan away, knowing all to well the one who buys it will lose?

If I sell you a car, knowing its bottom is all rusty and it had three accidents, but I tell you everything is fine with the car and its as good as new, isnt that fraud?

Thats what was going on since the past two years. No law and no regulation stopped it because politicians agreed to deregulate the financial market thanks to the neo-conservative tenet of free market capitalism and despite the obvious consequences. Politicians, elected to protect the people, looked the other way.

PS: And can we please stop calling it bail-out? The apropriate term is nationalization. Thats what Hugo Chavez did with the oil industry in Venezuela. The only difference: Venezuelans now own companies that make profits while Americans own bankrupt wrecks.

[Zardoz]

"It's the end of the world as we know it."

[Chris Fawkes]

For $10 you can get my book on how to survive the world recession.

[Zardoz]

Originally Posted by Chris Fawkes

For $10 you can get my book on how to survive the world recession.

Oh yes...wasn't that "Yes, Now I Screwed You Out of 10$ Too!" By Chris Fawkes?

[Chris Fawkes]

Originally Posted by Zardoz

Oh yes...wasn't that "Yes, Now I Screwed You Out of 10$ Too!" By Chris Fawkes?

I know you are under pressure but that deserves a book cover.

When you get back perhaps.

[Zardoz]

Originally Posted by Chris Fawkes

I know you are under pressure but that deserves a book cover.

When you get back perhaps.

Perhaps....lol...

[Botany Bay]

In the meantime we can enjoy the #1 hit of the season:

Celine Peeon
"The Economy Will Go On"

http://de.youtube.com/watch?v=jYKuLbQWdrQ

[horatio]

Originally Posted by Botany Bay

Horatio, your answer surprises me a little. If I advertise a loan, talk you into taking it, knowing exactly you will never ever be able to pay it back - isnt that fraud?
Isnt it fraud to sell the loan away, knowing all to well the one who buys it will lose?

If I sell you a car, knowing its bottom is all rusty and it had three accidents, but I tell you everything is fine with the car and its as good as new, isnt that fraud?

Thats what was going on since the past two years. No law and no regulation stopped it because politicians agreed to deregulate the financial market thanks to the neo-conservative tenet of free market capitalism and despite the obvious consequences. Politicians, elected to protect the people, looked the other way.

PS: And can we please stop calling it bail-out? The apropriate term is nationalization. Thats what Hugo Chavez did with the oil industry in Venezuela. The only difference: Venezuelans now own companies that make profits while Americans own bankrupt wrecks.

Morale is about how people should behave, economics is about how people actually do behave. To stay with your used car example, if you buy a used car from a private person and there is no law or contract arrangement which ensures good quality, you got cheater but it is your own fault. Go to a professional car dealer who has a reputation to lose if he sells lemons if you want a fine car.
If someone buy a house, probably the single most expansive thing in his entire life, and does not carefully think about how to finance it, I don't pity him if something like right now happens.

Sure, a bank's genuine job is to monitor whether borrowers are credit-worthy and they did this job pretty bad; that's why we have to change their incentives via better regulation. This and socialising some banks (which are privatized again when the crisis is over, so only bail-out-socialism, not permanent Chavez-style) to prevent a serious depression is the only thing we can do.
But regulation has its limits as well, here in Germany mostly public banks bought subprime asset-backed securities to get some high yield assets in times of low interest rates. This should teach us that we should either sell the public banks or design better rules for them as well, it is about who watches the watchers and not whom to blame (which would include central banks, regulation institutions as far as they are not included in the central bank, private banks, public banks, borrowers, or shortly everyone ).