Thursday, October 02, 2008

Money, money, money

A few days ago, I attempted a short-term education on the whole bank/mortgage/bailout situation. I listened to a special on the topic, chock full of experts (economist, financial adviser, financial writer, senator). Read my news magazines carefully, as well as my totally trashed--redesigned--Chicago Trib. And I've spent time reading various and assorted online sources.

My learned conclusion? The situation sucks, isn't likely to get better soon, and the bailout is no magic wand. Yet it appears that some sort of bailout needs to occur. Not to save Wall Street but to save us.

The very thought leaves a nasty taste in most of our mouths. Why should we taxpayers spend any money buying bad assets from banks and financial institutions who used poor judgment picking up the assets in the first place?
The answer appears to be that helping them helps us.

If banks go under and the average Josephine can't invest, get mortgages or borrow money, then Josephine takes the hit.
The theory goes that, inn the absence of a bailout, the markets continue to slide down, leading retirement assets and housing values on their own slide. Thus, Josephine taking the hit as a taxpayer is the lesser of two evils to keep the financial situation afloat.

But why $700 billion? It's literally a random number the treasury threw out. Why not start smaller? Why not an intermediate plan, to tide us over until the election is passed and a new regime can take over?

The answer I've heard is that the financial markets need "shock and awe", a big number thrown at the problem to bring back confidence. In other words, it's all one big confidence game. It's not that the bailout will solve the problem; it's that They (who is "they", exactly?) will feel more confidence in the entire financial system if the bailout occurs.

Um. Yeah. Sure. Solid and reasoned comeback. Being a financial naif, I need a bit more tangible evidence to back spending a whopping $700 billion, more evidence that it "might" solve a problem of "confidence".

Or maybe I'd feel more inclined to spend $700 billion if I was getting something in return. I, being the Josephine. If you are going to spend my money buying up bad assets, then I want some regulation of this industry. Big regulation. This big smash-up wasn't exactly unexpected. Economists have been making dire predictions regarding the results of adjustable rate mortgages for some time. But business was busy raking in money and didn't want to listen.

I think it's time to make them listen: listening and obeying common sense regulations on spending and lending as a condition of receiving the bailout. Both Obama and McCain oppose much of this, stating we need to solve the economic crisis now and worry about "punishment" later. The current Senate plan has continued tax breaks for average Josephine, as well as increased FDIC coverage. Do you know a lot of average Josephines for whom the increased FDIC coverage is going to make a big difference? Are many of those folks suffering foreclosures sitting on bank accounts with $250,000? Didn't think so.

Which brings us to another important add-on to the bailout: the ability to bankruptcy courts to insist banks renegotiate interest rates rather than foreclose. Currently, that avenue is not available. Banks have a strong interest in not sharing that power. But this is a provision that could save a lot of average Josephines

(are we getting tired of that yet? at least I didn't call her Josephine six pack)

their homes. But neither House nor Senate has seen fit to include this provision yet, though the House bill contains interesting provisions like one exempting children's wooden arrows from excise taxes, in an attempt to buy votes. Wish they'd include this one to buy some of ours.

So, The Liz Thompson Grapentine Economic Bailout aka Cleaning Up The Finance Industry's Crap Bill would be a short-term, much smaller funded bill with far-reaching industry regulation and some immediate foreclosure assistance. Will it solve the problem? Well, I can give you as much of a guarantee as our leaders have given us. I don't know. But we've got to do something.

Until we have a magic fix, I am paying attention to the following advice:
  • Don't panic: leave your money in the bank where it's covered by FDIC
  • Don't panic: if you have a decently diversified retirement portfolio and aren't retiring next month, leave your 401 K alone, for heaven's sake.
  • Don't panic: but if you're not cash-rich, be more careful with your spending, as you won't be able to rely on the free flow of credit to you as you may have been able to in the past.
Off to ready myself for the VP Debates. Need to download those Bingo cards!


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