Why The Bailout Is Necessary And Why Jim Cramer Is Right
By Justin Gardner | Related entries in Economy, VideoOkay folks, stake in the ground time.
One of the biggest proponents I’ve seen so far of the bailout plan so far has been the host of CNBC’s Mad Money, Jim Cramer. The point that he has been making, and many other smart folks I’ve been following, is that the “free market” will not touch this mortgages, even though more than 80% of them are perfectly fine.
Take me for example. I own a house and I pay on time every single month. But right now, if a bank were trying to sell my mortgage, the market wouldn’t touch it because everybody thinks its value would drop. And do know that my mortgage would actually be bundled with 1,000 other mortgages, most of which are perfect fine too.
That’s where the bailout plan comes in. Because where the “free market” won’t act, the government must. Or else we literally risk not having enough money to give average, ordinary citizens at the bank. This is why I’ve been chiding people about mischaracterizing all of these mortgages as bad. THEY AREN’T!
In any event, watch Jim discuss the whole situation and maybe it’ll make you feel a little better about the whole mess…
So then…
We can all keep talking about this is as a “bailout for Wall Street,” but what I really think this represents is the need for more government intervention in free market economics. The market is obviously being irrational right now and simply won’t step in during crisis time. So, in at least that respect, the free market DOES NOT WORK.
The long term question: will we consider nationalizing some of the “fundamentals” of our economy so the cash spigot never has a chance to turn off again?
This entry was posted on Monday, September 29th, 2008 and is filed under Economy, Video. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
September 29th, 2008 at 9:40 am
This has nothing to do with individuals and their mortgages! It’s about giving benefits to companies who knowingly screwed over individuals! That is so not okay. I want those companies to fall flat on their faces like Enron. It is so not okay to “free” them from the consequences of their actions.
September 29th, 2008 at 9:51 am
I am reluctantly in support of the bailout because I think its the best chance to stabilize the emotional component of economic value. Panic leading to people converting assets to gold and cash and leading to wider collapses like money market funds would be very awful, and are currently quite possible.
However, I think you’re missing something. If these mortgages were for sale, the prices that they’d sooner or later garner on the open market would reflect the market opinion of what they SHOULD and WILL be worth, not what the stated value is. So, there’d be no need for an investor to fear in purchasing YOURr mortgage simply because the price could go down, so long as the purchaser could make a reasonable estimate ands then buy at a price that seemed likely to lead to future profit.
Traders know how much of market value is based on emotion and the emotional component of financial opinion. In panicky times, no one wants to guess about how much downside there is to a given investment. If there’s a run on money markets and credit dries up and no loans can be made, there’s no telling how much the underlying value of the real estate represented could plunge. Ultimately, the value of all that real estate is pegged to what potential purchasers can afford to pay. If and when the market stabilizes, that value can be better pegged, probably at some sort of historical growth rate forward from the time when the bubble really started to grow, or at some multiple of the salaries of folks who might be able to afford the properties.
So suppose you own a house recently estimated at worth 350 k, and you owe $150 K on it. The value for an investor depends on how much the 350 figure falls, because as long as you keep your income and the house keeps oh lets say at least 40% of its old estimated worth, you’ll almost certainly keep paying.
At a guess, I’d say the larger issue with the mortgage packages is the packaging. Probably they need to be consolidated and re-packaged. No one wants to buy one of the current packages, because who knows what portion of the loans is really bad. The reason no one is buying is that no one knows what they should be worth as currently packaged.
And as real estate values go down, more and more of the recently-granted loans are more likely subject to default. If you took out a mortgage for $450 even with lets say $50k down on a house whose value is headed below 300k, what’s your incentive to keep paying on that loan if you have 29 years to go and don’t expect that house to see values above $400 k for 10 or 15 or 20 years now?
September 29th, 2008 at 9:53 am
I concur! How could giving the companies that started this problem more money possibly help the millions of people that will lose their homes? I agree that there needs to be more government intervention but not in the way you’re thinking of. Have you ever heard of the Glass-Steagall Act? That was repealed in 1999, even as Clinton tried to stop it. It was created to help the country recover after the SAME THING happened, the thing that brought about the Depression. The handfull of Senators that opposed this warned that by deregulating the banking system (again) all hell would break loose and the economy would once again come crumbling down around our feet. Ten years later and they couldn’t be more right.
September 29th, 2008 at 10:15 am
[...] Justin has made a fairly strong and persuasive argument in favor of the bailout bill currently being debated by the … I offer in response a morning post from my personal blog setting forth the arguments [...]
October 1st, 2008 at 3:11 pm
This is morally disgusting. I have no stocks, and I have no mortgage. I didn’t loan anyone money. Why should I have to pay for someones losses that aren’t my own?
Stealing my money to back another person’s loss? Disgusting.
Example of the bailout plan:
John: Can I borrow some money Mary?
Mary: Sure. Here is a dollar. Pay me back tomorrow.
John: Time is up. Where is the money you owe me?
Mary: I can’t pay it back. Take it from somebody else!
John: What a great idea! I’ll rob someone else to pay your debt!