Tim Heilman ([info]v3risimilitud3) wrote,
@ 2008-10-04 23:47:00
Previous Entry  Add to memories!  Tell a Friend!  Next Entry
bailout is the cashing-out on suburbia
It occurred to me that this financial bailout is the cashing-out on the real value of suburbia during an era of cheap liquid transportation fuels. As the price rose and rose on suburban land, it was used to create huge fortunes for a relative few based on the debt they collateralized as the price rose. Then, when the price began to fall on suburbia, that private debt was transferred to the public whereas the fortunes made on the rise of the valuation of suburbia and the resulting debt were not. In effect, this was a massive transfer of wealth from the public into a relative few private hands. Am I wrong here?

(Post a new comment)

Interesting
(Anonymous)
2008-10-05 03:56 pm UTC (link)
I don't have a strong opinion on that, per se, but I think it's a fairly compelling claim.

Peripherally related: I kind of wonder if, had the treasury not been channeling resources at an astronomical rate into the war effort in and around Iraq, and had instead been piping that money into domestic concerns of just about any sort, we might not need a bailout in the first place.

A couple of posters to the Freakonomics blog (as in, primary posters, not idiot commenters) have made pretty compelling arguments that the core structure of the bailout doesn't even really address the actual problem, here. It will be interesting to see what the actual _impact_ is of this new package once it takes effect...

(Reply to this) (Thread)
Re: Interesting
[info]v3risimilitud3
2008-10-05 08:41 pm UTC (link)
seeing as how I'm lazy, what's the summary of those arguments on the freakonomics blog?

I'm certainly upset about the war spending, but I'm not sure how spending on domestic concerns of any sort would necessarily have prevented lax lending standards, an absence of oversight and regulation of derivative securities, and consumer debtor ignorance and overconfidence. You're saying that these things, while not eliminated by spending on domestic concerns of any sort, would that way not have resulted in the same crisis?

(Reply to this) (Parent)
gah
[info]hawk
2008-10-05 03:57 pm UTC (link)
that comment was from me.

(Reply to this) (Thread)
Re: gah
[info]v3risimilitud3
2008-10-05 08:45 pm UTC (link)
oops i should have posted my comment response here.

(Reply to this) (Parent)

[info]emtel
2008-10-06 03:34 am UTC (link)
There is a wealth transfer here... but an awful lot of shareholders have been wiped out in this whole process, so while yes, some fat cats have made out well, some have not; the situation seems more ambiguous to me than you paint it. Also consider that during the greenspan era of 4% home loans, we were in some sense transferring money from the public at large (via monetary inflation) into the hands of people who happened to be taking out loans at that time.

My bottom line is that there may have been many other less obvious (than the recent bailouts) wealth transfers taking place over the past, say, 10 years and it is unclear how they should or could be reconciled.

On the other hand, there were other bailout options that would have been less beneficial to the failing firms (e.g. debt for equity swaps), and it is strange that there was never any discussion (in congress) about these options.

(Reply to this) (Thread)

[info]v3risimilitud3
2008-10-06 07:00 pm UTC (link)
regarding shareholders ... I'm curious regarding this game of hot potato: how much were the total write-downs prior to the bailout, and how do they compare in magnitude to the bailout? It's true the write-downs let some cats take some of the fall, but how much as a percentage of the total? The fair thing would be for it all to have been write-downs, since it was *their own* money they were risking and lost. The public was never asked if it wanted to invest its taxes in risky mortgage-backed securities, yet now they shoulder the debt as if they had, but only after it turned sour. The cats saw all the upside and part (how much?) of the downside and yes, some lost a lot of money on that first part of the downside; joe public on the other hand sees none of the upside and the entire rest of the downside. On balance, since they never saw a cent of the upside, it seems to me that "rest of the downside" must thus be a wealth transfer.

It's a good point about loans at less than real inflation, though. That's the same direction of wealth transfer, though, isn't it? Public money into private hands, private debt into public hands.

It doesn't seem strange to me that debt for equity swaps were never discussed in congress. Here is my thinking: the crisis was (is) one of liquidity. Liquidating that scale of equity in the timeframe necessary would require prices so low it would further crash the housing market.

(Reply to this) (Parent)(Thread)

[info]emtel
2008-10-06 08:36 pm UTC (link)
Joe Public in many cases *did* benefit from this situation. Anybody who took out a loan _that they could actually afford to pay back_ around 03 might have gotten a fixed rate as low as 4.25% - if you think inflation is or is headed north of 4%, than those people are essentially getting *paid* for buying the house that they bought - unless of course you think that home values will never again reach 03 levels, but I strongly suspect that _even_ if you are right about the petrocollapse, homes in densely populated areas will by worth more in 2013 than they were in 2003. This is the mechanism by which I'm imagining wealth being transferred from "the public" to individual home owners - i.e. via nearly free money.

(Reply to this) (Parent)(Thread)

[info]v3risimilitud3
2008-10-07 06:53 am UTC (link)
I'm sorry, the term Joe Public may have been inspecific, I meant *the* public, as in members of the public without predicate. By Joe Public I don't mean members of the public, predicated upon them having taken out a loan with a private bank. Loans from private banks to individuals are voluntary and contractual (hence, private); inflation is involuntary for those participating in the monetary system in question and non-contractual (hence, public).

(Reply to this) (Parent)(Thread)

[info]emtel
2008-10-07 06:06 pm UTC (link)
Oh, I see... my brother wrote an excellent explanation of the whole mess (and he actually does this stuff for a living): http://worthlessandweak.blogspot.com/2008/09/you-may-be-asking-yourself-what-my.html

The point he makes at the end is that there is a decent chance that this will, in the long run, actually be a win for the taxpayer, aka "the public" [1].

Now, I don't know whether it will work out that way, and even if it does, "the public" didn't agree to play at this particular craps table, but it _does_ seem very hard to predict now who the winners and losers will be 5 years from now, and how much they will win or lose by. For instance, I think it is politically inevitable that we will see an uptick in bank regulation as part of the backlash, and banks do _not_ want more regulation. All that is why I reject interpretations of this mess as a calculated theft of public property by a conspiracy of plutocrats.

[1]: I think there are a lot of fundamental problems in analyzing this as a matter of "the public" versus "private enterprise" but that's a much longer debate...

(Reply to this) (Parent)

[info]emtel
2008-10-07 03:56 am UTC (link)
By the way, I ignored most of your first paragraph only because i have no idea how to answer the question. In fact, I suspect that really nobody does.

(Reply to this) (Parent)(Thread)

[info]v3risimilitud3
2008-10-07 06:46 am UTC (link)
isn't it a matter of research? the write-downs are public record for public companies. Just a curiosity, is all.

(Reply to this) (Parent)(Thread)

[info]emtel
2008-10-07 06:16 pm UTC (link)
I don't know whether only looking at write-downs gives you the whole picture. Maybe it does, but that seems too simple. Anyway, I'm out of my depth here....

(Reply to this) (Parent)

Create an Account
Forgot your login or password?
Login w/ OpenID
English • Español • Deutsch • Русский…