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URL:  https://boards.fool.com/its-been-primarily-a-liquidity-crisis-that-was-27047287.aspx

Subject:  Re: Question: For those who support the bailout. Date:  10/1/2008  9:33 AM
Author:  Thomfranklin Number:  256789 of 632502

It's been primarily a liquidity crisis that was created when the asset values were hard/impossible to measure. This resulted in capital impairment as loan loss reserves became impossible to determine. That created a need to de lever.

That produced a credit crunch, because the easiest way to de lever is not to put new money out. A viscous cycle developed where institutions didn't trust the safety and liquidity of other Banks. So, cash flows among banks and businesses stopped. That in turn cascaded and created more capital and liquidity problems.

It got very serious as you know. Before Trust and Confidence comes back, capital and liquidity have to be restored.

Why do we have to act? Because we are the country - we are the government. We are the final go to part of this equation. There is no - one else. And - the financial system is our field of play. A football team needs a field. We do also. The financial system is also like our veins and arteries - without them, we bleed out.

LANORTH!!



I respectfully take another view, Lanorth.

We the People do not have to bail out Crony Capitalists.

I agree with part of your post where you explained part of the credit problem. I say part because you left out one important reason for the credit crunch: Moral Hazard brought to us by the Federal Government.

Think back to Fannie and Freddie. Their charter never stated the US Government would be the lender of last resort, it was implied.Both parties never mentioned this implication, but sure had fun touting in the press how many Americans bought their first home in the past 8 years.

Hedge funds and investment banks didn't load up on derivatives until Phil Gramm rammed through his huge addendum to a bill which had nothing to do with the CFTC. Gramm's measure told the sharks on Wall Street, "Hey, Boyz, take your dollars, and go out and geometrically multiply them and don't worry about any agency oversite."

The overturn of Glass Steagall (during the waning year of the Clinton Administration) before Gramm's majestic maneuver told investment banks they could enter the world of insurance, Real Estate, banking, etc., and signalled the government would not care if buy side analysts were pumping crap stocks which their investment side were bringing to market.

And now I find it hard to believe any taxpayer wants to put their faith in this government to straighten out this mess by applying $700 Billion to the banks pain. This too is Moral Hazard.

Think about it. With the first shotgun takeover of Bear Stearns by JP Morgan over a year ago, the Federal government signalled we would see a Paulson/Bernanke put anytime a "too big to fail" institution showed distress or insolvency.

Since Bear Stearns, we've seen Freddie, Fannie, AIG, Lehman, Wachovia, etc., all tank, but suitors and rescues have come fast and furious through behind the scenes persuasion, money or takeover from the Fed and the Treasury.

If I were a banker now, why would I try to balance my books on assets I feel in my gut are only worth .20 cents on the dollar? Why would I sell those .20 cents on the dollar assets for only .20 cents when I now feel the government is going to give me .50 or .75 cents for those same crappy assets?

The government bailout tells bankers, "Go ahead, continue making mistakes, Uncle Sugar is always here to hold you and give you babies a pat on your back."

Instead, the government should back up and let banks fail. Not every bank has made bad decisions. The CEO of BB&T came out and said the bailout would reward the guiltiest banks of bad behavior, while offering nothing to a bank which did not go overboard in lending to bad credit risks, or which did not sell their paper to a GSE just to have more capital to make more risky loans. I don't know if the CEO of BB&T is just talking his book, but it sounds to me there are banks out there across this great land which have the wherewithal to lend money to people who have 20% downpayments and who are good credit risks.

I see distressed properties selling all over the Nation, so somebody has capital, somebody is scoring credit - it's just not these companies which went all in with their chips, turned around to the House manager and said, "By the way, that pile of chips? Can we make some 35 to 1 side bets on this pot that the number will be 7?"

Again, capital is out there.

Look at Buffet. He stepped in and gave Goldman $5 Billion. There are other cash rich companies in America which don't need credit and which could extend their cash to the best credit risk big banks - at Buffet type terms. Only those best of breed banks deserve private investor's money. (Would you tell Warren Buffet to invest Berkshire cash in Washington Mutual over Goldman? See, many of you who study banks know one is better suited for investment than another. Why should the US Taxpayers invest in just the crappy banks?)

What we have now is most of the FIRE sector waiting rescue of themselves from themselves using other people's money. Screw 'em. All those young bucks who sold their souls to Mighty Mammon, who gave up on studying the sciences so as to enter the most lucrative field of all - banking, brokering, insurance, Real Estate - let them learn there is no such thing as a free lunch.

A bailout ensures we undermine our US dollar. A bailout will signal to the world just how corrupt Crony Capitalism can be: we reward failure and allow the rich to whistle while they work, no matter if their work undermined the whole National Economy.

This is not Armageddon. This is not the Great Depression Redux. Yeah, we might have a severe, prolonged Recession. But as many a poster has reminded, we have safety nets in place which were not around in the 1930s.

By not bailing out the FIRE sector, we cleanse our economy of the biggest sociopathic leeches who gamed the system, played outrageous bets which could only blow up in their faces down the line (Buffet warned us years and years ago about derivatives and defecit thinking), and who just didn't skim short term profits, but stole them by the bags full.

The white collar mountebanks who flamboyantly pumped their crap derivatives and hedge funds and who've run off with the loot should not be rewarded with cookies and milk. Let them eat scraps. Let them wander the streets looking for work. Let them sell their belongings on eBay. Let them see how hard it is to survive in an economy where wages never kept up with housing's vapor gains. Let them understand the value of a hard boiled egg vs. hard boiled books.

To change the construct of Crony Capitalism, we have to burn it down to the ground and start anew.

Lastly, by not bailing out these bankers, we are warning future charlatans the Government is not the lender of last resort, that true Capialism is not just rewards without risks.

I say, let's get this blood purging on. If my Roth IRA takes a beating, so be it. Lets see which companies have real earnings. Lets buy more of them at a better price if the market drops 25% or more. Again, it's not the end of the world. The world was supposed to have ended last week. Now this week. Hey, are you still there? I'm still here. Living below my means, saving, buying stock on 700 point down days.


Upbeat as ever,
Thom
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