I hope this isn't a dufus question: how much of the bail out can be undone if Obama is President?

[wcepler]

Look, I don't mean to sound like a dufus, but how much of the bail out can be undone if Obama is President?

My PhD is math and I encourage my students (when I teach) to feel free to ask questions, since they typically block themselves by thinking they're the only one in the room for whom this material is a black hole.

The reality, of course, is that generally everyone breathes a sigh of relief when the question is asked, because they too wanted to ask a similar question and blocked themselves for just the same reasons.

Well, economics is not my forte, and I swear to God I am at least as confused as my students about what the h___ is really happening.

So please forgive the very short piece, but may I cut to the chase and ask you professionals can Obama basically "undo" the bailout, which one submission I recently scanned said was EVEN WORSE than 9/11?

Also, any really solid general outline of this convoluted financial world (at least to me) would be very, very gratefully received.

I thank my teachers in advance.
**********************************************************************

W. Christopher Epler (Bill)

<http://theliberationofrealism.blogspot.com/>

[yewberry]

1. I don't think there's much that can be done.

Hi Bill,

There's an article at MSNBC relative to what might be in store for the next president.

For a great breakdown of the bill, check out this week's "This American Life" from NPR here. You can listen for free online or download it as a podcast from iTunes (it's available starting Monday.)

[On the Road]

2. The Good News is That the Federal Government

will take possession of large blocks of mortgages that can be resold to the private sector. In a sense, that would mean undoing it.

It is probably true that for a period of years, the mortgages could not be sold for the value the government will pay for them. The value will probably be much greater is if they are held to maturity, or the government waits until conditions improve.

Since the precise conditions of the purchase and future economic conditions (including the rate of foreclosures) are not know, it impossible to be more specific until the purchases are made.

A lot of the purchases will probably be made before the next president takes office. I actually hope that the government does not undo them by reselling them immediately, because it will likely result in a much greater loss. However, Obama supported the bailout, and it is unlikely that he would support that in any case.

[amandabeech]

3. In the meantime, the Treasury will have to auction off $700 billion in Treasury Securities

to borrow money for the purchases. I'm not sure how the Treasury market will react to such a large sale on top of everything else. I'm concerned that we will end up paying a fairly high rate of interest unless there is a global perception that Treasuries are still safe investments.

This is really a high wire act.

I myself hope that the SEC and the FASB will relax the mark to market rule before the Treasury gears up for these purchases. If the CDOs could be marked to something other than the daily market, then there would be less need for the Treasury to purchase all of them in order to get the banks lending. I wish that some of the $700 billion could be held back by other than a Congressional veto to see if the SEC and FASB will cooperate. I'd like to see if the credit market can be helped with less layout of taxpayer dollars.

[On the Road]

19. Yes, It is a High Wire Act

and it does absorb risk, but the federal government is better able to absorb it than the private sector.

We will see how the bonds go. The current flight to safety may actually make it easier to find buyers for those bonds.

I don't know what to think about the mark-to-market rule. It would be a short-term help, but it has its own pitfalls. The danger of valuing holdings at book value rather than market is institutions can great overstate the value of their holdings.

Once the fed buys a bundles of mortgages, of course, the rule is moot -- at least for those assets.

[amandabeech]

21. I guess that I question whether the federal government really is in better shape than the public

sector right now. The feds have huge amounts of outstanding debt, and I'm not sure if the Treasury market will be able to absorb all the bills and notes needed to fund this monster and everything else that will happen before this thing settles out. The feds and consequently the taxpayer may have to swallow some enormous interest charges to keep this thing financed.

I realize that softening mark to market has its downside, but it helps push some of the risk off the feds at least for the short-term. I would advocate a loosening only, not a full abandonment of the rule so that the new mark would end up somewhere between current market price (if there is one) and the lower of purchase price or issue price. What I find interesting in the comments supporting the relaxation, is that in very uncertain times, it helps stop a vicious downward spiral in capital that will crater extremely low and take out lots of economic activity before the market returns to some realistic equilibrium at a later date.

[On the Road]

22. The Total Federal Debt

compares surprisingly well with other developed countries, considering how long the country has been in deficit. It's going in the wrong direction for the wrong reasons, but the magnitude of the debt is far from crippling.

The country had extremely low debt in 1980 and Reagan and later GWB decided to just borrow, borrow, borrow. Reagan was a concerned enough about the deficits that he raised taxes at one point after lowering them a couple of times. Bush Sr. probably ruined his chances for reelection with his tax hike that broke the "read my lips" pledge. Bush Jr. simply didn't care and borrowed out the wazoo.

[amandabeech]

23. I'm pretty old, and I remember much of what went on from the mid to

late sixties onward. Your paragraph is a painful reminder.

I have seen some statistics comparing outstanding debt to GDP for some western countries, and in comparison, ours isn't bad as you say.

However, many Americans see paying taxes as a mortal sin even though those same Americans love the goodies, like cuts in the capital gains taxes that Republicans promise no matter what the economic problem is, as evidenced by the Reagan and Bush II regimes.

I think that means that this country is less able to handle larger debt to GNP ratios than some other industrialized countries that might actually tax and save enough to shoulder the debt and eventually pay it down. That same ethic of thrift seems to be dead and buried here.

[verges]

11. But the properties still need to be maintained.

Thousands of deteriorating residential properties on the Government's hands is not a good thing. Nor are empty houses in a neighborhood.

[On the Road]

20. As I Understand It,

most of what the government is planning to buy will be performing loans. Those that are foreclosed will be handled the way any other foreclosure is handled. Unless the loan is older and a substantial amount of the property has been paid off, there is generally a loss to the mortgage holder. The average amount is factored in to the business model so that the lender can make a profit in total even if some of the houses are foreclosed on.

In the current environment, more properties will probably go to foreclosure and the loss per property will probably be greater. There is still a substantial value, however -- a lot of posters here seem to be under the impression that the government will get nothing of any value in exchange for the $700 billion.

[penguin7]

13. The government is going to lose all kinds of money on this

What is going to happen is Goldman Sachs is going to buy all the crap bonds held by the Bank of China. Three days later Goldman Sachs is going to sell the crap to Hank Paulson.

I hope Obama did not think that this bailout was a good idea and only voted for it for political reasons.

[cloudythescribbler]

4. CommonDreams' Thom Hartmann advocates a TAX on Securities Transactions to PAY for the bailout:

STET -- Securities Turnover Excise Tax, which discourages speculative short term investment & market manipulation and encourages longer-term investment based on fundamentals

http://www.huffingtonpost.com/thom-hartmann/how-wall-street-can-bail_b_129657.html

A VERY HIGHLY RECOMMENDED READ, GOOD HISTORY!!!!!

[wcepler]

5. Thank you all.

Thank you all. I'm coming to realize that without a significant understanding of these complex and desperately serious financial dynamics, it's impossible to have any real sense of not only the election, but world events in general. Oh God, time to be a student again -- but hopefully with teachers such as these. Many, many thanks for helping to get me at least somewhat up to speed with all this.

Bill


ps Looking forward to more of the same. And I particularly thank you for the educating sites, some of which I've already checked out.

[Demeter]

6. We Won't Know Until We Try, And That's a VERY Good Question!

And if there's a god, she will put Pelosi and Reid out of our misery so that efforts can be made.

It's not an easy job, but it must be done, done well, and done quickly, so the guilty are made to pay for their crimes. That includes both the shyster financiers and the BushCo cronies who gave them free passes.

On DU there are the Stock Market Watch in LBN Monday through Friday, and the Weekend Economists threads in Editorials, where we compile, analyze and try to predict outcomes and evasive maneuvers from economic chaos. Drop in! It's one-stop education. You may want to trace back a few weeks, too, just to get some background.

[Two Americas]

7. some input Bill

For what it is worth, here is a different view.

Thinking that we need to understand economics to understand what is happening with the financial crisis is like thinking we would need to be an expert in ballistics to know that gangsters are shooting up the town, or to have a degree in criminal justice before we can understand that someone has broken into our home, or to have a PHD in psychology to know when someone was rude to us or had punched us in the nose.

[VPStoltz]

8. Don't bet on it....

I head a piece on NPR today - wish I could remember who was being interviewed - about the mess. The interviewee was saying that the entire bill will be rewritten within the next few months. I guess it's up to the electorate to keep those cards and letters flowing.

[Tutonic]

9. It can be undone. If Obama wins you can expect that the banks will

not have a free ride. He needs to get past November 4th but afterwards he knows that he has to balance the field for the public. The problem is that thirty years of Republican rule have poisoned the economy and it is still heading for a big crash in four or five months. Bush just wants to get past December and bail. He started out as a coward and will end as a coward. What a useless being. Hopefully Laura is planning on bailing on him.

[yurbud]

10. he could undo nearly all of it. How much he does will partly show how good a president he will be

I personally think Paulson should be added to the list of Bushies who belong in prison.

[depakid]

12. The changes to the tax code can and probably will be modified or reversed

Most of the securities swaps on the other hand will likely be completed, by then- so that's a done deal.

[bemildred]

14. Laws can be repealed or modified. New laws can be made and enforced.

People can be investigated and prosecuted (according to the merits of the case) whenever the spirit rises for it.

Taxes can be raised, and on those with the money to pay them. Since 10% of the people have 90% of the assets, or something like that, it's clear where you have to go for that.

But of course, you cannot go back in time, or change the past.

[yellowcanine]

15. Actually the next President and Sec. of the Treasury has a lot of discretion on how to administer

the bail out. A little noticed provision was slipped into the Senate version of the bill (which is the one that passed) that allows the Sec. of the Treasury to take preferred stock in companies who are getting bailout money, for example. Preferred stockholders get paid off first if a company goes under, so this is an important protection for taxpayers.

[lumberjack_jeff]

16. None. The money will be spent within one week of Bush signing it into law. n/t

[endthewar]

17. Paulson said that he could only spend about $50 billion per month

with the bailout. That's 14 months minimum for this program to fully take place. People need to realize that the bailout is supposed to soften the blow to the economy over a long period of time, not provide a quick and sudden fix to the economy.

[lumberjack_jeff]

25. Like the war in Iraq, I don't think it's supposed to do what we've been told it's supposed to do.

[endthewar]

18. I think that added a section to the bill that allows for a revenue-generating idea.

Specifically, I think it was for a future president (I think 5 years from now) to propose a revenue-generating proposal to Congress. This was criticized by some Dems because it wasn't a binding resolution, essentially only a suggestion. However, if it's a Dem President and a Dem Congress, you can bet that they'll stick it to the rich and the corporations. Bernie Sanders' proposal was a wealth surcharge on millionaires. :rofl: Hannity will crap his pants if that happens. :evilgrin: It sounded to me like a more likely scenario is charging a fee on some type of stock transaction thingy (I didn't recognize what they were talking about).

[AZ Criminal JD]

24. Obama supported and pushed the bailout

Why would you think anything would be undone?