After the Bailout

Dan Drezner has a post about the success of the bailout. The New York Times reports,

The Treasury Department expects to recover all but $42 billion of the $370 billion it has lent to ailing companies since the financial crisis began last year, with the portion lent to banks actually showing a slight profit, according to a new Treasury report.

Drezner adds, "If you dig through the numbers, the bulk of the losses come from two sources -- the bailouts of GM and Chrysler, and the bailout of AIG."

Has Fox News reported any of this? Have the tea parties ceased?

Wall Street has changed enormously in the past two years. It's a much more conservative Wall Street than before. I'm not hearing stories anymore about brokers surfing the Internet for fancy cars. The after-work drinking binges are over.  Some firms might be paying out big bonuses this year, but the workers are dubious. It's a sober place right now with people digging in their heels into the solid firms. Fear and risk avoidance has replaced greed during the past couple of years. That's probably a good thing.

Comments

[Ragtime]

But without any substantive changes to the legal/ regulatory framework, there's no reason to imagine that the sobriety will last any longer than the current recession.

[MH]

The taxpayers lent money to companies that would have gone under without the loan and got, what, 2% interest from those who were able to pay it back. It's just like an investment. Cheer! And they managed to do it without extracting a single, definite reform from the bailed-out. Wee! Sure the shareholders of the bailed firms still took huge losses, but at least the heads of the companies kept their jobs. Yeah! And we now have risk avoidance, unless somebody notices that you can make a hundred billion bet with an insurance company that cannot cover the action and the U.S. government will cover the marker. Hurray!

If I got money under the terms of the bailout, I’d be able to pay it back and retire with independent means.

If there is fear on Wall Street, I'm thinking it was the tea parties (and general bitching) that created the fear, largely because everybody realized that Bailout II wouldn't happen without a 50% turn-over in Congress.

[jen]

If there's fear on Wall Street, it comes from watching the Bear Stearns and Lehman guys lose everything, not from tea parties.

But I heartily agree -- we need better regulation in the financial markets, and an end to "to big to fail" institutions.

[MH]

Anyway, unemployment is over 10%. I'm in one of the cities where unemployment is below the national average and there are three people on my street, all middle-aged and the primary earner in their household, who have been laid-off this year. The two biggest employers in town gave zero raises this year. I think the economic pain outside of Wall Street is barely getting started.

The bailout was sold an being necessary for the overall health of the economy. Maybe things would have been worse without it, but I don't think anybody is going to have very good luck calling an economic policy 'successful' in this situation.

[y81]

Losing only $42 billion on $370 billion doesn't seem like cause for celebration. Furthermore, to the extent that the losses result from the auto bailout, that is pretty clearly an Obama administration baby, so the tea partiers still have plenty to protest.

I agree that we need better regulation. My own proposal is for a prohibition on home mortgages of more than 80% loan to value (just as there is a prohibition on margin loans of over 50% loan to value). However, my idea fits no one's political agenda, and will not be adopted.

[MH]

And now, pretty much 100% of loans with above 80% laon to value ratios are guaranteed by the taxpayers. Reform!

[bj]

I'm on the left, and I think capping the home loan ratio makes sense. But, remember, at least part of the problem in the mortgage shenanigans was questionable appraisals. Capping the loan amount at 80% might just change the appraisals, rather than the amount loaned. But, it might be a start.

I think that in addition (or rather) than a rule like this one, we need to change the incentives. Right now high borrowing ratios are encouraged (by tax breaks, by low interest rates, by, now, the potential that you will be rescued if you get into trouble); offer high borrowing ratios are encouraged (by mortgage brokers who get paid by the number of people who the convince to take the loan, rather than the risks of those people); by securitization that hid the risks of those loans, and made taking them on a reasonable option for investors looking for falsely high rates of return.

Those are things I see of the top of my head, and I don't see how things will really change unless those incentives are removed (people will figure out ways to circumvent caps if the other incentives are there).

[bj]

Oh, and I do believe that the financial machinations of the last year have saved us from a Great Depression. I think they've created other perverse incentives, but I think that was worth it, if, as I believe, the alternative was the tragedy of the 30's.

[Amy P]

"But, remember, at least part of the problem in the mortgage shenanigans was questionable appraisals."

Quite right.

There's still a lot of iffy lending going on in the US and unfortunately some of the worst of it is FHA. When you combine the 3.5% down FHA with the $8,000 tax credit, that is in effect a zero down loan (at least for lower cost houses).

[Wendy]

I suspect they're trying to keep home values from absolutely plummeting. I know that technically they should plummet, but I think there would be a huge amount of pain if they did. As it is, we're all feeling the pinch. I can't refi because I'm way too far underwater. My house would have to appraise at $25K more than I paid for it for me to refi right now.

[bj]

"I suspect they're trying to keep home values from absolutely plummeting."

Yeah, but I really don't think that's in the public interest. I think having short sales is preferable to propping up the prices.

As someone said on the radio, the FHA should not be in the business of propping up house prices. Basically they're giving people money to buy houses for more than they're worth. I can't see what good can come of that. Fortunately, I think the program has ended.

[Amy P]

"As someone said on the radio, the FHA should not be in the business of propping up house prices. Basically they're giving people money to buy houses for more than they're worth. I can't see what good can come of that. Fortunately, I think the program has ended."

Nope, it's like the bad guy in an action movie, it just looks dead:

http://www.irs.gov/newsroom/article/0,,id=215791,00.html?portlet=7

They've expanded the program and extended the deadline, although not increased the credit (the usual suspects wanted it to be increased to $15k).

[MH]

I tend to think most of the plans to help the homeowners are really intended to help the banks without stirring-up the pitchfork crowd. The mortgage modification plans look like they are set-up to extract as much money as possible from a borrower who stands little chance at having disposable income in the next decade without a foreclosure or short sale. And all of the steps to keep the housing market open (tax credit, mortgage guarantees) allow banks to reduce their exposure to the housing market by placing the risk directly on the taxpayer.