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Old 09-28-2008, 01:22 PM   #1 (permalink)
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Arguments for and Against the Government Bailout


As is evidenced by the large pickup in traffic that we are seeing to my videos series on the subprime financial crisis, there is a lot of interest in what is happening right now with the economy, how we got to where we are, and what is happening with the government bailout plan. With this in mind, I thought it would be good to try and get an updated discussion going on the topic that we can all learn and benefit from. Below you will find a brief overview of what I feel are the core arguments for the bailout plan and against.

The basic argument behind the proposed government bailout, is that the financial crisis which financial firms around the world have been embroiled in for over a year now, is now rapidly spreading to main street, and affecting companies and consumers who had nothing to due with the investments which are at the heart of the problem. This side of the argument goes that if things are allowed to continue as they currently are, without some sort of intervention, then the problems which have until recently been confined to the financial institutions which have made these bad investments, will rapidly spread throughout the entire economy. The Bush administration's basic argument is therefore that because this is going to have a large affect on the average person who had nothing to do with the problem, that the government needs to intervene and lesson the blow to the individual taxpayer.

Their argument basically comes down to them feeling that if nothing is done, the cost to the US economy and therefore the average taxpayer will be much larger than the cost of the $700 Billion plan they have put forth. A second point that they seem to want to make sure that the taxpayer understands, is that the $700 Billion will be used to purchase assets which the government plans to hold for a period of time and then sell in the open market as confidence hopefully returns as a result of them doing so. With this in mind, the ultimate cost of the plan is not $700 Billion, but whatever the government is able to recoup from the sale of those assets, which some are saying could actually return a profit.

For a good concise overview of the Bush administrations stance on the issue, here is an interview with Secretary of Treasury Henry Paulson:


The basic argument against the bailout, is that the problems we are currently experiencing are a result of bad investments and too much reliance on borrowed money. The fact that the price of the assets at the center of the problem are going down, is the markets way of trying to purge these assets from the system. So the argument here goes that by having the government intervene, you are not letting the market do its job. By not letting the market do its job they argue that we are simply propping up a failed system and turning what would be a painful year or two, into potentially a decade or more of economic stagnation.

The second point that people on this side of the argument give, is that ultimately the government will not increase taxes or reduce government spending in other areas to pay for this bailout. The argument here goes that instead what will happen is the federal reserve will increase the money supply to continue funding the large government deficit that this is helping to create, which will ultimately result in inflation and a devaluation of the US Dollar.

Below is an interview with a vocal opponent of the bailout plan Peter Schiff, where he lays out this side of the argument:


This post is obviously a very surface level overview of the debate, which is meant to simply start a conversation of the different views on this. If you have a view point here, or if there is something you don't understand and would like more information on, please post your comments below as I would love to hear people's thoughts on this.

Best Regards,
Dave

Other Links on the Bailout Debate

Automakers: Bailout Arguments, Pro and Con - Seeking Alpha
Big Three Bankruptcy: For and Against - Economix Blog - NYTimes.com
Question That: Bush/Paulson Bailout: For & Against

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Old 09-28-2008, 02:20 PM   #2 (permalink)
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I am a big fan of Peter Schiff and agree with pretty much everything he is saying. A few points I would add:

Schiff didn't mention this explicitly, but the US budget deficit (govt spending more than it is taking in) and the trade deficit (imports greater than exports) are a recipe for currency devaluation, and are a big part of the reason the US dollar has been steadily losing its value over the past eight years. Bailouts just make government bigger and give it more debt, which it cannot handle. This increases the risk of inflation. The inflationary scenario the United States faces is very similar to what caused hyperinflation in Argentina (pdf).

Also, the Bush administration claims the cost will be less than 700 billion. Frankly, I'm a bit skeptical of Bush's economic analysis capabilities, given less than two weeks ago he said the economy was "strong enough to handle turmoil", and that no more bailouts would be needed. Now the Bush administration is saying that if we don't pass this plan ASAP everything will fall apart. Schiff, on the other hand, correctly predicted the decline of the US dollar, the rise of gold, and the collapse of the housing bubble. While past performance is not necessarily indicative of future results, I feel more comfortable with Schiff's analytical skills in comparison to those offered by the Bush administration.

For a more academic explanation of the unsustainability of the twin deficits, and how this will ultimately lead to significant dollar devaluation if it is not addressed soon, I recommend this paper by New York University professor Nouriel Roubini (pdf). The paper is both long (15 pages!) and boring, but Roubini's analysis is thorough, and deserves serious consideration, in my opinion.
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Old 09-28-2008, 03:06 PM   #3 (permalink)
 
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bailout opinion


Hey guys... just thought I would throw in my 2 cents..(or is it more now?)... Fundamentally, I agree with you that this will devalue the USD.....I dont see anyway possible for USD to hold its value.... Frankly Im shocked that the USD didnt take more of a hit last week in eur/usd....but the market is the market.....perhaps one thing in favor of the USD, is that so many countries hold USD as a reserve currency... Even though I generally dont like the idea of taxpayers footing the bill ....this is nothing new....since the invention of taxes in the USA...the taxpayers have been paying the bills, that are created when the government, spends and then prints money...the government is NOT a profit center...the government has NO money...the government only gets money from the tax payers....how hard do you think people would work if the tax rate was 100%.....???....the US government has turned its taxpayers into servants...and now the government is going to handle more of our money...when has the government ever done anything better than the citizens??..Next they will be going after our healthcare and retirement dollars by promising they can do a better job than our current system....Screwed up social security is proof of that....Makes me laugh...IM sure the founding fathers are rolling over in their graves.... even though this bailout is part of this bad situation...I am afraid the the alternative near term....is much worse...Jerry
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Old 09-28-2008, 05:52 PM   #4 (permalink)
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Hi Guys,

Thanks for sharing your points of view as I hope others will as well.

One of the things that I have found very interesting about this whole thing, is bloggers on the internet seem to be against this plan by an enormous amount. In fact, while my search was definitely not exhaustive, I was only able to find one popular market blogger who was in favor of the bailout.

As far as what the cost of the plan will end up being, from a pure investment standpoint, I believe that the government is in a great position to actually profit from this. Will they actually take advantage of that posistion and manage things in a manner that does make money, and what will happen to that money when and if it is made is where my worry is. For more on how the government could end up making money on this see below:


Here is the Washington Post article they reference in the video.

Best Regards,
Dave
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Old 09-29-2008, 06:13 AM   #5 (permalink)
 
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I'm for, I'm against, I'm for, I'm.....


Such very good points for both arguments.
If the US government can profit from this that will be great so long as the dollar does doesn't devalue. Does the government really intend to print the money they need to do this? What happens when the dollar devalues and all those countries holding US dollars in their treasuries toss out US dollars like old bath water. Seems like a no brainer

If the goverment uses taxes to buy the debt they should be as mean as possible and get it as cheap as they can (speaking off the cuff here) and make an effort to profit as much as possible and pay a dividend to the tax payer.
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Old 09-29-2008, 10:57 AM   #6 (permalink)
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Hey Treeclimber,

Glad to hear from you.

I don't know if the government actually has set out here to increase the money supply but basically if the government creates debt then the money to pay off that debt has to come from somewhere. People who argue that the money will come from printing more money take this side because history has shown that governments are bad at reducing spending to pay off debt, and the public never wants tax increases, so the one way to keep both happy (at least in the short term) is to simply print more money.

Best Regards,
Dave
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Old 09-29-2008, 11:06 AM   #7 (permalink)
 
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bailout...


Exactly Dave.... even though this is not the best situation....my personal opinion is, what else could we do that will make the problem better, without throwing the enitre world into financial havoc..?... Nobody has presented a better plan... and now our congress gets to claim credit (no pun intended), for saving the economy....I guess were all winners....Jerry
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Old 09-29-2008, 11:30 AM   #8 (permalink)
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Hey Jerry,

Glad to hear from you.

There are actually a fair amount of other plans out there being circulated which range from doing nothing and letting the market work this out to better ways to recapitalize the banking system.

The basic points behind the do nothing argument is that the market needs to go through this pain in order to come out on the other side of this thing healthy. The main point here is that by intervening, the government is interfering with the markets natural ability to cleanse itself of the problem, which essentially just delays the inevitable and makes things worse in the long term.

Then there are arguments that there needs to be some sort of intervention but the track that the government is currently on is the wrong one. Below is a post which explains this better than I can as well as giving links to some of the alternatives being suggested:

RGE - Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System? No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks

Best Regards,
Dave
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Old 09-29-2008, 11:44 AM   #9 (permalink)
 
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bailout


Agreed that a markets "natural" tendacy to correct itself is a good thing.... but a correction that is needed of this magnitude seems SO LARGE... that I think it would cause uncertainty domestically and around the world regarding the USD...and therefore other currencies as well.... seems we've flown directly into the "windshear"and when that happens you have to add power to get thru to the other side...(aviation talk)....but the price of Miller Lite has stayed relatively the same....Jerry
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Old 09-30-2008, 12:42 AM   #10 (permalink)
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Hey David,

Great site you have here.

I watched the video with Mr. Gross of Pimco, and read his article. I think I understand the gist of his plan, except for one detail.

He says the government will earn 10%-15% on the mortgages it buys with the bailout (which didn't pass... yet). Can you shed any light on how Mr. Gross came up with this rate of return for the mortgages?

Thanks,

Clifford
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