Buy a house and get a visa

[Tim Eriksen]

To stay on topic.  I think it is a great idea and have been wondering why Congress wasn't pursuing it.   

[enoch01]

Would you have preferred Bernanke, Paulson and Geithner just minded their own business and let BAC, JPM, GS, GE, eventually WFC, BRK and most other leveraged financial institutions fail in 2008? 

YES!!!!

 

Honest question: And after that, what would have happened..?

 

If this isn't rhetorical, it is impossible to answer.  It also shouldn't be an impediment to doing the obviously right thing, which is to let consequences occur as close as possible to actions.

 

Instead we have socialized losses, added trillions to the debt of future (voiceless) generations, and contributed to the growth of cynicism and class warfare in our society.  Such are the insidious consequences of those decisions in 2008.

[Green King]

What where the chances of BRK failing if the government didn't bail out the banks ?

How attached was BRK to the rest of the system ?

 

Lower than most financial institutions, but significantly higher than say Coca-cola.  If credit seized, how would Berkshire companies like Netjets, Clayton Homes, BNSF, Mid-American finance their operations?  It would have gone down but slowly.  Possibly selling assets at fire-sale prices to pay debt and save the remaining businesses, while making sure the insurance businesses had plenty of capital, as much of their equity portfolio would have collapsed.  And as mentioned, the Chairman and CEO has already said that they would have gone down too.  Cheers!

 

Thank You for your response Parsad

I guess i always thought BRK with its prudent management would survive.

Well this make sense as it explained the double speak Charlie Munger has been using in his interviews after the crisis. Talking about the problems of the society than when ask completely support Tim Geithner and others for bailing them out.

 

On the other hand wouldn't this buy a house and get a visa idea allow the corrupt politicians clean their money and be protected by the US government ? 

[Liberty]

If this isn't rhetorical, it is impossible to answer.  It also shouldn't be an impediment to doing the obviously right thing, which is to let consequences occur as close as possible to actions.

 

Instead we have socialized losses, added trillions to the debt of future (voiceless) generations, and contributed to the growth of cynicism and class warfare in our society.  Such are the insidious consequences of those decisions in 2008.

 

The damage you describe is very real, but I'm not convinced that the alternative is less damage, both in the short and long term.

[Santayana]

Would you have preferred Bernanke, Paulson and Geithner just minded their own business and let BAC, JPM, GS, GE, eventually WFC, BRK and most other leveraged financial institutions fail in 2008? 

YES!!!!

 

Honest question: And after that, what would have happened..?

 

Exactly what, nobody knows.  Lots of economic pain for sure.  But it would have been temporary, and we could be back on track by now. 

[ERICOPOLY]

Would you have preferred Bernanke, Paulson and Geithner just minded their own business and let BAC, JPM, GS, GE, eventually WFC, BRK and most other leveraged financial institutions fail in 2008? 

YES!!!!

 

Honest question: And after that, what would have happened..?

 

Exactly what, nobody knows.  Lots of economic pain for sure.  But it would have been temporary, and we could be back on track by now.

 

We'd still have too many houses.  People wouldn't have the down payment for houses.  What would be different aside from who owns the banks?

 

 

[Santayana]

Would you have preferred Bernanke, Paulson and Geithner just minded their own business and let BAC, JPM, GS, GE, eventually WFC, BRK and most other leveraged financial institutions fail in 2008? 

YES!!!!

 

Honest question: And after that, what would have happened..?

 

Exactly what, nobody knows.  Lots of economic pain for sure.  But it would have been temporary, and we could be back on track by now.

 

We'd still have too many houses.  People wouldn't have the down payment for houses.  What would be different aside from who owns the banks?

 

I'm not sure about that.  I think one result would have been that the housing price collapse would have happened all at once instead of this slow decline that keeps going on (and that I don't think is nearly finished even though we're building a house right now).  If prices were lower 3 years ago, more people may have been able and willing to buy then.  Now you have a situation where I think many people are more afraid to buy now than they were in 2008. 

 

The banks that failed would have been replaced by new ones, or existing ones growing, essentially being rewarded for not over-leveraging themselves.  Those banks would help jump start economic activity.

 

Basically I think we've created a situation where there's not a lot of economic activity, and many people see no end in sight.  If we had let things collapse on their own accord, the worst may have been even worse, but it would be seen as behind us and things would be moving forward.

 

Does your new diet include beer, or have you given that up?  Would love to have this conversation over a cold one the next time you are up this way.

 

[leftcoast]

Does any one here think it will fly because if it does I want to sell my Vancouver home quick cuz it sure will kill our market which has been kept afloat because of immigration.

 

I thought the same thing. It would certainly level the playing field between Vancouver and Seattle.

[ERICOPOLY]

Would you have preferred Bernanke, Paulson and Geithner just minded their own business and let BAC, JPM, GS, GE, eventually WFC, BRK and most other leveraged financial institutions fail in 2008? 

YES!!!!

 

Honest question: And after that, what would have happened..?

 

Exactly what, nobody knows.  Lots of economic pain for sure.  But it would have been temporary, and we could be back on track by now.

 

We'd still have too many houses.  People wouldn't have the down payment for houses.  What would be different aside from who owns the banks?

 

I'm not sure about that.  I think one result would have been that the housing price collapse would have happened all at once instead of this slow decline that keeps going on (and that I don't think is nearly finished even though we're building a house right now).  If prices were lower 3 years ago, more people may have been able and willing to buy then.  Now you have a situation where I think many people are more afraid to buy now than they were in 2008. 

 

The banks that failed would have been replaced by new ones, or existing ones growing, essentially being rewarded for not over-leveraging themselves.  Those banks would help jump start economic activity.

 

Basically I think we've created a situation where there's not a lot of economic activity, and many people see no end in sight.  If we had let things collapse on their own accord, the worst may have been even worse, but it would be seen as behind us and things would be moving forward.

 

Does your new diet include beer, or have you given that up?  Would love to have this conversation over a cold one the next time you are up this way.

 

Getting a beer sounds good.  Will be nice to see your brother again too. 

 

The total collapse I think would have driven housing to the bottom very quickly like you say, in terms of transaction prices.  However the idea that the economy would come roaring back is something I wonder about.  I mean to say, when the stock market crashes what does that do to stimulate the economy?  It cleanses us of some margin borrowing daredevils, but does it boost the underlying business activity?  Why would housing prices be different?

 

Construction wouldn't boom if prices were lower -- those people would still be unemployed because we don't need more houses.  The existing housing stock would merely be even cheaper.  That might encourage even more people to walk away -- but that's still on the taxpayer's tab (Fannie and Freddie, FDIC).

[Santayana]

Oh, I don't think anything would be roaring back, just that we would be closer to a true recovery than we are right now.   

 

If TBTF were allowed to fail, that would include Fannie and Freddie, no need for taxpayers to be on the hook.  Ginnie Mae is the only one with an explicit government guarantee. 

[ERICOPOLY]

True about Fannie and Freddie.

 

Regarding collapse though.  They let the banks collapse during the Great Depression but so far I like our outcome better.

 

[Parsad]

Would you have preferred Bernanke, Paulson and Geithner just minded their own business and let BAC, JPM, GS, GE, eventually WFC, BRK and most other leveraged financial institutions fail in 2008? 

YES!!!!

 

Honest question: And after that, what would have happened..?

 

Exactly what, nobody knows.  Lots of economic pain for sure.  But it would have been temporary, and we could be back on track by now.

 

It would have by no means been temporary.  In fact, you would have seen a 10%+ drop in GDP and massive business failures within a year.  The consequences would have been beyond what was seen during the Great Depression, and chances are you would have seen unemployment creep well past what was seen 70+ years ago.  GE was a week away from not being able to finance its business!  It would have taken 2-3 decades for us to work our way out of that hole...one domino falling after another.  Cheers!

[Aberhound]

 

 

You really think declining morality is caused by income inequality?  Are you positing that the rich got richer and eventually that led them to a loss of morality?  Or are you seeing the elites as a third group whose morality declines when the rich get richer and the masses don't? ...

 

You attribute immorality to some but not all, and interestingly not the masses.  Why is that?  Were just lenders greedy and not borrowers???? 

 

People are much the same, rich or poor. Income inequality creates unequal bargaining power so the invisible hand doesn't work so well. It also creates resentment and envy so the poor act in harmful ways as well.

 

David Hume whose writings influenced Adam Smith writes that people act as a result of their feelings and desires, and while it is true that these may be influenced by what they believe to be the facts, it is not the knowledge alone that moves the will or restrains it from acting. Hume also says morality has nothing to do with reason, it is based on the effect of one's acts on the feelings of others. Finally Hume says we act based on our senses. He says many other things as well and EconTalk has a number of good podcasts discussing the theories in detail. I am sure that I don't remember well the details of Hume's excellent work because, as Hume points out, we all know less than we think we do.

 

Accordingly I argue that when there is great inequality of wealth, it appears that morality degrades. It is not that people suddenly become different as human nature never changes. At times when the rich and powerful, acting as any human would do, gain the opportunity to exercise unusually great power due to the greater inequality in bargaining power that they take advantage of their situation acting in their own self interest.  Normally Adam Smith's invisible hand protects us all because self interest usually benefits everyone. At times of great inequality of bargaining power the elites can game the system which is the first part of the problem: the opportunity. Second, they continue to do so even though millions may suffer because we all act based primarily on what we experience with our senses and because of our desires, not on facts. The poor in turn feel envy and resentment and they act based on feelings and desires. Some borrowers may send jingle mail, others may riot. I do not criticize rich or poor or human nature. Human nature is what it is and will never change.

 

[ubuy2wron]

To stay on topic.  I think it is a great idea and have been wondering why Congress wasn't pursuing it. 

Wow Tim we agree on some thing perhaps I am wrong.... just jidding.

[Santayana]

I think it is really difficult to compare our outcome so far to the GD.  The social safety net that that has grown up since those times makes it unlikely we would ever SEE things like the GD again.  Bread lines are replaced by SNAP cards.  The chronically unemployed aren't counted.  The size of the state and federal workforces dwarfs those from the 1930s. 

 

In the depression, there were plenty of people with jobs, and those people were able to do well.  Today, the official unemployment rate may be lower, but those who have jobs often are struggling just as much.  I know we disagree on this, but you're making the assumption that we aren't decades away from getting out of the current situation. 

 

GE failing just means they wouldn't be sending jobs to China right now, and Immelt wouldn't have his white house gig.

 

The gist of what I'm hearing you say is what really scares me.  You think that massive federal intervention was necessary and the entire system was the verge of collapse if they didn't act a large way.    Doesn't that point to an unstable system?  What prevents the same thing from happening over and over?

[ERICOPOLY]

The gist of what I'm hearing you say is what really scares me.  You think that massive federal intervention was necessary and the entire system was the verge of collapse if they didn't act a large way.    Doesn't that point to an unstable system?  What prevents the same thing from happening over and over?

 

The system was certainly unstable at the time.  Personally I believe it's way less unstable now.

 

Really I think only regulation can prevent those kinds of risks.  AIG was allowed to write loads of CDS without reserving for potential losses.  That's something that can be regulated, just like the rest of the insurance that they write.  Down payments for houses can be regulated -- a law stating that 20% must be saved for down payment would eliminate any future housing bubble.  The housing bubble is really what caused this whole mess -- too much dicey collateral.

 

I don't think letting the whole thing collapse would eliminate future systemic risk.  The way corporations reward executives, they get their pay and they're out.  The corporation holds the liabilities, the executives remain wealthy even after the collapse.  The shareholders of Citigroup learned a lesson, the stock is down like 95% from it's prior peak.  But what did that do for future risks?  Did they demand changes of the sort that you'd expect from total wipe out, or is 95% wipe out nothing at all like 100% wipe out?  Presently, huge changes have occurred at Citigroup -- they're getting back to basic banking, and with less leverage.  They did this as a result of government pressure and perhaps common sense to some degree -- or maybe just regulation.  But whatever, they're doing it and it happened without total wipe out to shareholders.  Some would say the bondholders didn't lose anything, and they'd be right, but the shareholders and government (or just governement perhaps) have changed things at Citigroup anyhow.  Or maybe things haven't changed enough -- I don't know.  They still probably do some things that people object to, but it's not like nothing at all has changed.

 

[beerbaron]

Really I think only regulation can prevent those kinds of risks.  AIG was allowed to write loads of CDS without reserving for potential losses.  That's something that can be regulated, just like the rest of the insurance that they write.  Down payments for houses can be regulated -- a law stating that 20% must be saved for down payment would eliminate any future housing bubble.  The housing bubble is really what caused this whole mess -- too much dicey collateral.

 

20% collateral would help avoid huge credit bubbles but I think it's dangerous to overlook the cash flow as well. A loan has to be evaluated on both aspects or else you get the effect of leverage over leverage over leverage, etc... That's exactly what happened in Japan, banks were relying on collateral with not enough focus on cash flow. We all know the end of the story...

 

BeerBaron

[ubuy2wron]

I think it is really difficult to compare our outcome so far to the GD.  The social safety net that that has grown up since those times makes it unlikely we would ever SEE things like the GD again.  Bread lines are replaced by SNAP cards.  The chronically unemployed aren't counted.  The size of the state and federal workforces dwarfs those from the 1930s. 

 

In the depression, there were plenty of people with jobs, and those people were able to do well.  Today, the official unemployment rate may be lower, but those who have jobs often are struggling just as much.  I know we disagree on this, but you're making the assumption that we aren't decades away from getting out of the current situation. 

 

GE failing just means they wouldn't be sending jobs to China right now, and Immelt wouldn't have his white house gig.

 

The gist of what I'm hearing you say is what really scares me.  You think that massive federal intervention was necessary and the entire system was the verge of collapse if they didn't act a large way.    Doesn't that point to an unstable system?  What prevents the same thing from happening over and over?

Nothing prevents it from happening over and over the system without regulation and goverment intervention is inherently unstable. The history of capitalist economies until the post WW2 period was marked with frequent panics and depressions. The period since the end of WW2 has been the longest period of no depression in the history of the Western World yet many here think that

we need the catharsis of economic extremes to unleash the forces of creative destruction.

[seshnath]

there always has to be a gimmick. we just can't ever let things restore to their natural balance. gov Always interfering with the markets.

 

Would you have preferred Bernanke, Paulson and Geithner just minded their own business and let BAC, JPM, GS, GE, eventually WFC, BRK and most other leveraged financial institutions fail in 2008? 

 

Government can work, as long as they don't cater to special interests and actually have the country's best interest at heart.  Cheers!

 

The problems are income inequality and declining morality of the elites. The former seems to cause the latter. Think of the robber baron age around 1910. It brought out the worst problems: income tax, the federal reserve, two world wars, the change of the US from a republic to an empire, and the great depression.

 

 

Hold on....  are you saying that world war was caused by the robber baron age?  post hoc ergo procter hoc, eh?  If I remember my history lessons correctly, US jumped in at the last moment into the first war after the sinking of merchant ships. 

 

[Parsad]

The gist of what I'm hearing you say is what really scares me.  You think that massive federal intervention was necessary and the entire system was the verge of collapse if they didn't act a large way.    Doesn't that point to an unstable system?  What prevents the same thing from happening over and over?

 

As Eric said, the system was incredibly unstable.  And instability continues in certain areas...we don't have good central derivative clearing houses or limits on the amount of leverage that can be utilized by very large institutions.  We are still missing some accountability on dark pools of assets and how they are allocating capital and the leverage used. 

 

But the system is significantly more stable now, at least in the U.S., and I expect Europe in the next few months.  While the U.S. debt load is a concern, that is something that can be defused over the next decade.  Whereas massive amounts of derivative counterparty liabilities from a large investment bank failing, has to be handled within weeks, if not days.

 

Also, while many won't agree, even some of my mentors, I think mark-to-market accounting has been instrumental in forcing some accountability.  It's not as easy to hide huge swings in derivative position values or other Level 2 and 3 assets.  If the average investor has to account for portfolio risk due to the viscissitudes of Mr. Market, why should our financial institutions not be held to the same!  Cheers!     

[merkhet]

I love this idea -- I think the knock-on effects of soaking up inventory will be very helpful in supporting our slow recovery.

 

Folks who think that things would be better by now if we let the banks and other TBTF institutions fail...

 

... even if all the real estate came to the market at once, and we bottomed very quickly... even assuming that we had better employment than we did today... exactly how would housing recover if we had massive bank failures across the board?  Who would be lending them money for the other 80%?