Relief on failure of bailout package

I know that people claim the failure of the bailout package resulted in sharp losses in stocks, made it difficult to get loans for busineeses and indiviuals, reduced 401(K) portfolio of so many people ....might lead to some more institutions failing, recession, depression,...... the sky feel off, moved human race closer to extension and so on.......

There will be another package which the US Congress will pass in few days similar to the one failed, maybe even worse in some respects but even then it feels good for now that it failed atleast once. Why?

First and foremost even in the US, even now there is influence of the voters, constituents, of the person on the main street. The bill failed because many in congress got emails, letters, calls from constituents that they were angry at the package at bailing out wall street. And more than 2/3rd of representatives who are up for relection in close races voted against the bill. They were listening because they wanted votes. The media has potrayed this as negative but I find this a GREAT positive. Representatives who voted against were liberals, conservatives but that doesnt matter what matters is voter sentiments had a role to play in this. 

Secondly, strong wall streest lobbyists lost out against the voice of voters atleast for now. In media there are articles filled with how banking association lobbyists lobbied hard to get the provisions they wanted. For example: all provisions of exceutive compensation, equity stakes in banks, taxing the financial industry for any losses after five years are highly diluted in the bill to the point that they are as good as not there. So its good that bill didnt pass in its form. 

The urgency, the excessive executive authority to treasury, the non-transparency of the bill (what prices will govt pay) made it a bad bill. The urgency shown by treasury, media, president was huge. I understand that there are severe repurcussions for not acting but there were no serious alternatives considered. Why not follow the Swiss model in which Swiss govt. bought stakes in banks and shared in the upside, or the good bank model - instead of buying bad assests buy the good ones. The man leading all this is a former Goldman Sachs CEO who would be given unprecedented powers. AIG was saved by a loan to $85 billion and current CEO of Goldman Sachs was present in the meetings because it would have caused Goldman huge losses had AIG collapsed. This raises questions like did Paulson bailout AIG because of Goldman connection and not Lehman which didnt have that much impact on Goldman. Who would he hire to manage the $700 billion, people he knows in the industry which created the problem. 

Lastly the claims that $1 trillion in market valuation was lost in the stock markets yesterday such a big number. Does that really matter?. See today more than $750 billion of that $1 trillion has being regained. Market valuation changes are not losses to be taken seriously, these are market fluctuations which come and go. Retirment or 401(K) accounts are not lost, markets regain value. 

Lastly business media claimed yesterday that by falling the market was giving an indication to politicans that they matter and should be taken seriously. I would advise against these fluctuations being of significant import. $700 billion is a huge amount and if govt is spending it on bailing out then it should be thought through carefully. Who is bailed out? What are the costs? How it is done? What are the alternatives? Does everybody deserve a bailout?

An alternative view to save the financial market

NY times article: This describes the plan very nicely and provides a "good bank" alternative

http://executivesuite.blogs.nytimes.com/2008/09/27/and-now-for-something-completely-different/

Some Tidbits on the crisis

Some observations.... read the previous post about crisis and frustration in general to get better understanding of where I am coming from. 

Man in Charge is Part of creating the crisis: 

Treasury Secretary Hank Paulson who will manage the $700 billion, atleast for next few months, was just about 2 years back CEO of Goldman Sachs and was involved on the corporation side in creating thecrisis. It sounds odd to me that a person with strong connections with people who created this crisis (and was part of them) be given full authority to buy stuff from them and fix it. Rarely has this being mentioned in any media reporting.

Unprecedented executive authority:

In the current bill Paulson's decision are not subject to question by any court of law and he gets overpowering authority to spend $700 billion. He decides how to price the securities he is buying (there is no market which decides on prices for these securities so nobody knows whats the price), who he buys the securities from (there are far more than $700 billion of securities ready to be sold) and other details. He only provides semi-annual reports to Congress and nothing else. Thats tooo much power. How can you trust a guy who was part of creating the crisis be able to make judgements which value things fairly?.

$700 billion number can go far higher:

The wording of the bill is tricky. Its says at any one time government can hold $700 billion of securities. So they can keep buying and selling and in aggregate buy fr more than $700 billion. This doesnt put a lid on the losses. 

Short Sellers: 

Short selling is a term used to describe a transaction when you sell something which you dont own on the hope that you can buy it later at cheaper price. So I dont own any microsoft stock and think that it will go down. I then just sell the stock today and if it goes down in some time buy it at lower price. Many have said that many financial companies like Bear Sterns, Lehman were brought down because many people at the same time short sold the stock and since there was selling by many stock started falling and then this fall became a cycle and eventually the companies collapsed. But traders, hedge funds, economists have always praised short sellers because its a way for markets to tell you in advance that something is wrong with a asset. Its claimed that its part of the "price discovery" process in the markets. Now though suddenly many of the same people have turned against it because it was their own companies which were being short sold - Merill Lynch, Goldman Sachs, Morgan Stanley and lobbied the government to impose a ban on short selling. Why is short selling at fault now when it was not earlier?

Greed: Capitalism is based on self-interest and greed is one of the self interest. According to Adam Smith the magic of capitalism is that everyone acts in their self interest and the system works for everyone. But now suddenly in the crisis "greed" is a bad word. From Mccain to   business channels everybody seems to be greed was reason for the crisis. Why has self-interest turned bad suddenly?. By that definition everyone should be against the markets and capitalism. 

Speed: Its a testament to Governments ability that it responded so quickly to the crisis. Clearly shows if government wants it can act faster than corporations and swiftly. But now Bush government, in same way as it did with Iraq war, is pushing Congress to approve the $700 billion fast. There are no details and Bush wants Congress to act fast - otherwise it says it would be BAD. I dont think that much urgency is needed. A week or so in deliberating the details is fair enough. 

The other motive of Bush is to avoid any other bailouts to homeowners which Democracts are pushing through. Clearly depicting that wall street deserves bailout but homeowners dont. Bush said "to move quickly and to resist the temptation to add provisions that, he said, "would undermine the effectiveness of the plan." Media is blaming politicians (Congress) on acting slowly.... really?. Its as if market asked govt to write a $700 billion check and government should respond otherwise suffer the guilt of killing the market. 

Regulation: 

Goldman Sachs and Morgan Stanley, two of "renowned" investment banks, who until now lobbied hard and succeded to avoid government regulation. Today they both begged to come under government regulation as that would give them better legitimacy and also access to government funds. This is what they have to say "We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources". So they want regulation when it is clearly helpful. 

Job Losses:

Two unrelated events happened on the same day. Lehman Brothers went bankrupt and 25,000 jobs were put in question (though most wont lose jobs). Heweltt Packard (HP) merged with EDS and declared that it would cut 10,000 jobs. The reaction to these news events was quite different. Media was sympathetic to the workers at Lehman with press outside interviewing and feeling sad for these guys, but as far as HP goes it was praised for cost cutting and its share price rose. There was no repeated mention of HP job losses or sympthay shown for them. Why the difference?. 

Crisis, Bailout and the Frustration

I am feeling very frustrated and angry over the last two days as the events have unfolded in the financial world and the government response to it. No the frustration is not due to any sort of financial losses or sadness over the failing financial institutions (though many would lose jobs and thats sad. Hope everyone ends up getting new ones soon). A lot has happened in this last two weeks and overall in the last few months in the financial world. The sub-prime started unfolding at a rapid rate since Summer last year. Financial institutions, banks and others, made bad loans to home owners at depressed interest rates, maintained by the "Oracle" of economics Alan Greenspan. Then they sold those loans off to Fannie & Freddie Mac and other institutions around the world. This was a miracle of modern day finance - you spread the risk of the loan among everyone, so that no one would suffer. Financial world came up with new "innovative" products like securiatization, auction-rate securities, credit-default swaps (dont even try to understand what these things mean, because nobody on wall street really does). These new markets were touted as safe instruments which would help in spreading the risk and were completely unregulated. Federal Reserve chariman Alan Greenspan and the government ignored calls to regulate any of these markets and de-regulation was the mantra. Investment banks, insurance companies, hedge funds which are all very big players in the market were not federally regulated and even the regulation which were present were not enforced. This is not the fault of Bush administration alone, the Clinton administration had started the whole process. There was also a extraordinarily large amount of leverage in the system - banks and other institutions investing with borrowed money - one of the results of absent regulation. These bad loans started to fail in large numbers last year. Millions of homes are in foreclosure and millions of families will be thrown out of their homes. This has being clear since last year and happening every month. There was a stimuls package by the government to help the economy and only minor help to homeowners. The Bush Administration refused on grounds of moral hazard to bailout the homeowners who were behind in paying their loans. These last two weeks as the crisis deepend it became clearer that many financial institutions would fail. Fannie Mae and Freddie Mac, two institutions which were designed so that government bore the burden of losses while private sector enjoyed all the profits, were completely nationalized by the government. Then Lehman Brothers, one of the stalwarts of Wall Street, went bankrupt - government this time allowed it to fail. Then AIG, the worldest largest insurance company, which is not regulated by the Federal government was nationalized and saved by the government by giving a bridge loan of $85 billion. The Federal Reserve has pumped hunderds of billions into the market to stablize it. 

Until all this happened it was ok but now there is a plan to create a big fund by government which would buy all bad loans from everyone and virtually bail everyone on wall street out at estimated cost of $800-$1 trillion with other countries Russia, China, UK and others coming out with their own mini-bailouts. There were reports in the Indian Press that Indian governement a few weeks back was planning a bailout for the airlines industry in India which has being hurt by the high petrol prices. This is really frustrating and angers me. Why?. Because I am a pure free market guy and dont like the intervention by the government. NO (Milton Friedman might fall in this category). Because government is spending tax payers dollars wastefully putting the money at risk. NO (I am not that concerned about this). Then Why?. I applaud and appreciate the work done by people within the government over this. Look at the efficiency, within a week government officials have chalked out a detailed plan on how to save the economy and the world in a infinitely complex financial universe. Who says government cant be efficient. The frustration lies in the injustice. Why does Wall Street deserve a bailout, created as a result of their risk taking and mistakes, but people in New Orleans dont. Government today announced that it will retroactively insure all money-market funds. This means that all money invested in these funds is safe, no matter how bad the managers of the fund have screwed up. Why didnt the government retroactively provide flood insurance to all houses in New Orleans after Katrina. That would surely have saved a lot of pain. 

Why do millions suffering from the food crisis world wide dont deserve a bailout while Wall Street does?. Since 2003 cereal prices have increased more than 250% resulting in widespread hunger across the world. Millions are on the verge of famine in Eastern Africa according to a recent UN report. The reason of the crisis are multiple - increasing meat consumption in China and the developed world, ethanol policy in US and Europe, drought in places, weak dollar, increasing oil prices, neglect of agriculture, unfair trade policies, decreasing purchasing power of the poor and the increasing inequality around the world. None of the reasons are due to mistakes/risk taking on part of the poor - who are the worst sufferers - as is the case in Wall Street crisis. But what has the response of the world to this being. There were calls for increased aid, big conferences were organized by World Bank and the UN and a paltry sum of $700 million raised in emergency food aid by the World Food Programme. Today UN issued an emergency appeal for $700 million more to avert famine in East Africa. But who is listening with the media screaming wall street ...

How is bailing out wall street institutions ok, while bailout of farmers in India lead to calls that India was being populist (as if that is bad) and moving away from the path of reform (Economist). How is bailing out Wall Street ok, when during the Asian crisis IMF (which follows US policies) gave loans to Korea only after it got assurances from the government that it wont bailout Korean banks. How is bailing out Wall Street and spending hundreds of billions ok, when US, World Bank and IMF have criticized developing country governments for giving food subsidies. 

How is this free market capitalism, which is dead against government intervention when times are good and everybody is making money and all for government bailout when times turn bad due to risks and mistakes which capitalist made. Explain to me how? ........

I am not against government bailouts in all cases, there are cases and this crisis might be one where they are completely justified but there have being others equally or more deserving crisis - Katrina, World Food Crisis, Indiviual homeowners in the US ......Why not them?. 

Criticism/comments/clarification welcome!