DOW up over 300 points after news of Obama's plan to buy $1 trillion in bad assets

myp

Site Founder
Jan 14, 2009
5,841
50
#1
The market is seeing a good gain thus far today after news spread of the Obama administration's plan to spend $1 trillion on buying bad bank assets. The market is reacting well because obviously it will put a lot of the banks off the hook for the toxic asset problem, at least temporarily. The alarming, yet overlooked, problem though is the question of where is this money going to come from? We are getting to the point where trillions seem ordinary in spending, when in reality we have no money to actually spend. 1 trillion= 1,000 billion= 1,000,000 million, does anyone remember that? This plan is only bound to add more to inflation and when consumer demand goes up we will really suffer because of all of this spending.
 
Mar 21, 2009
11
0
#2
I wonder if he is really spending that much. I mean, stock market is purely based on speculation, they probabily want to place money on the market to calm down people and generate positive views?. Eventually, the market will be stable before the government gets to spend all that money? just trying to get a clue here, it's a lot of money, and it all will come from the people's pockets, so now the regular and hard working guy has to pay for the richest man being irresponsible and shaking the world? not fair. But if it's just a message to say "if we need to, we'll spend it" just to make the market more stable, it's a good choice. After all, invesment is required to stabilize the market.
 
Mar 15, 2009
422
3
Florida, USA
#3
I'm beginning to believe the fact of taking action is more important than the action itself. At least as long as it isn't more of the same policies as we had under Bush.
 
Mar 24, 2009
2,751
6
Undisclosed
#4
The market is seeing a good gain thus far today after news spread of the Obama administration's plan to spend $1 trillion on buying bad bank assets. The market is reacting well because obviously it will put a lot of the banks off the hook for the toxic asset problem, at least temporarily. The alarming, yet overlooked, problem though is the question of where is this money going to come from? We are getting to the point where trillions seem ordinary in spending, when in reality we have no money to actually spend. 1 trillion= 1,000 billion= 1,000,000 million, does anyone remember that? This plan is only bound to add more to inflation and when consumer demand goes up we will really suffer because of all of this spending.
I agree 100%.
All this "feel good" stuff is great until you need to pay for it. I had 8 credit cards for several years. Then they all jacked up the interest and wanted to take my house! I still have the house, but no credit cards.
 

myp

Site Founder
Jan 14, 2009
5,841
50
#5
I agree 100%.
All this "feel good" stuff is great until you need to pay for it. I had 8 credit cards for several years. Then they all jacked up the interest and wanted to take my house! I still have the house, but no credit cards.
Smart move, I wonder when the United States government will think of it :)
 
Jan 24, 2009
140
1
#6
Nice moves the last few days. If the market stabalizes then the economy will recover in theory in 6 to 9 months. IF the stock market goes back down then its longer again. Remember throughout our economic bubble cycles that the stock market recovers 6 to 9 months before the economy.
 

deanhills

Secretary of State
Mar 15, 2009
2,187
2
#9
The market is seeing a good gain thus far today after news spread of the Obama administration's plan to spend $1 trillion on buying bad bank assets. The market is reacting well because obviously it will put a lot of the banks off the hook for the toxic asset problem, at least temporarily. The alarming, yet overlooked, problem though is the question of where is this money going to come from? We are getting to the point where trillions seem ordinary in spending, when in reality we have no money to actually spend. 1 trillion= 1,000 billion= 1,000,000 million, does anyone remember that? This plan is only bound to add more to inflation and when consumer demand goes up we will really suffer because of all of this spending.
Excellent point. Where is it going to come from, and won't we then have a real depression, out of a fear for a depression? In the meanwhile who gets to define what assets are toxic? Surely only a percentage of Bank debts would be due to the real estate loan instruments, so who gets to decide which is which? I just hear a drum going for all the possibilities in corruption. I still think it is an incredibly bad idea to be baling the Banks out.
 
Mar 15, 2009
422
3
Florida, USA
#10
Governments don't really have to pony up with the money the way we poor credit card suckers do. As long as they can pay the interest and pay out when debt becomes due, they are OK. And that depends on surpluses and the ability to replace debt with new debt. For that you need an economy that is viable.

In this case, it's the interest burden down the line that will be trouble. At least with interest rates low, it won't be disproportionately high.
 

myp

Site Founder
Jan 14, 2009
5,841
50
#11
Excellent point. Where is it going to come from, and won't we then have a real depression, out of a fear for a depression? In the meanwhile who gets to define what assets are toxic? Surely only a percentage of Bank debts would be due to the real estate loan instruments, so who gets to decide which is which? I just hear a drum going for all the possibilities in corruption. I still think it is an incredibly bad idea to be baling the Banks out.
Well this move will reduce fears of depression, atleast temporarily because the markets will like it since it doesn't interfere in their actions, yet it takes a huge load off of many firms. As for toxic assets, they are any asset that is worth less than its mortgage. You can see a detailed explanation in my reply to this thread: http://www.politicalfray.com/showthread.php?t=627

The problem with this whole thing is really the long term consequences and what it means for the people in terms of the debt that we will end up paying through inflation and taxes, as well as other side effects of this massive spending.

Governments don't really have to pony up with the money the way we poor credit card suckers do. As long as they can pay the interest and pay out when debt becomes due, they are OK. And that depends on surpluses and the ability to replace debt with new debt. For that you need an economy that is viable.
You don't see a problem with governments paying off old debt with new debt? That is exactly what people try to stay away because it is not sustainable and just like people, the day will come when our government can get no more loans- then what will we do?
 
Mar 15, 2009
422
3
Florida, USA
#12
It is sustainable as long as you keep it in control so that there is confidence that you can continue to roll it over. Corporations work this way, too. They issue bonds to get the money to pay off bonds that are maturing. It works fine as long as the company is doing well and can carry the debt. In other words, if the debt is reasonable.
 

myp

Site Founder
Jan 14, 2009
5,841
50
#13
It is sustainable as long as you keep it in control so that there is confidence that you can continue to roll it over. Corporations work this way, too. They issue bonds to get the money to pay off bonds that are maturing. It works fine as long as the company is doing well and can carry the debt. In other words, if the debt is reasonable.
It is totally different for corporations because they can cover the costs of the new bonds with profit, since they are profit-seeking entities. The government is not a profit-seeking entity, so this comparison is not valid. Where is that money going to come from?
 

The Parakeet

Retired Moderator
Jan 19, 2009
639
2
#14
Taxes in the next year. The logic works in the same way as a corporation. They are borrowing to help the economy grow. This could be seen as increasing tax revenue. If the cost of creating/borrowing the money today is lower than the benefit derived from helping the economy, then you do it. Then even get to count things like social benefits, so it's pretty easy to justify it.

Borrowing money is a thing that healthy governments do. You borrow to ride out the down periods and pay it off in the good times. We are unfortunately near our limit, which is why Obama's looking at some tax increases next year.
 
Mar 15, 2009
422
3
Florida, USA
#15
It is totally different for corporations because they can cover the costs of the new bonds with profit, since they are profit-seeking entities. The government is not a profit-seeking entity, so this comparison is not valid. Where is that money going to come from?
It comes from growth in the economy. If the economy grows, tax revenues should grow. Of course, under the previous administration, any growth in tax revenues that came from a growing economy was immediately given back to the rich in the form of tax cuts. But that is where it comes from. If it didn't, we'd still be operating under George Washington's budget.
 

deanhills

Secretary of State
Mar 15, 2009
2,187
2
#16
It comes from growth in the economy. If the economy grows, tax revenues should grow. Of course, under the previous administration, any growth in tax revenues that came from a growing economy was immediately given back to the rich in the form of tax cuts. But that is where it comes from. If it didn't, we'd still be operating under George Washington's budget.
So are you saying that you prefer the present Government upping taxes and investing it all in socialism and more Government? Rather than motivating the rich to earn more money and indirectly contribute more taxes? I thought the real problem was in spending, and has been throughout regardless of Republican or Democrat Governments, and not income. Government has consistently been spending more money than it has in its coffers (its coffers are really empty), and is in effect broke, and the only thing that is keeping things still chugging along is people's confidence in the future of the United States.
 
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The Parakeet

Retired Moderator
Jan 19, 2009
639
2
#17
A deficit by itself isn't that bad. Standard inflation of 2% erases a nice little bit of the deficit. Small and occasional deficits are actually better on the whole than having a arbitrary budget that has to be balanced.

As far as taxes go, the simple truth is that we don't need anymore. Bush's did very little to actually stimulate the economy and the increase to the budget deficit will probably hurt us more in the long run. Reagan pretty much marks the spot where tax cuts stopped being a fix all. His didn't have the full effect and the return has only diminished since then. We just didn't really need anymore. We were past the little point where cutting taxes magically made business grow. That didn't stop the Republicans from using as a favorite rhetorical point though.

Spending is also a bit of a quagmire. We just can't cut much. There is only about $700 billion going to discretionary stuff. $500 billion or so goes to defense (which is already pretty tightly budgeted). Another $800 billion or so goes to entitlements (social security, welfare, unemployment, medicare, etc.). Another $400 billion is interest on the deficit.

There just isn't a lot of room to cut spending without gouging a "good" program. We're kinda stuck for now.
 

deanhills

Secretary of State
Mar 15, 2009
2,187
2
#18
A deficit by itself isn't that bad. Standard inflation of 2% erases a nice little bit of the deficit. Small and occasional deficits are actually better on the whole than having a arbitrary budget that has to be balanced.

As far as taxes go, the simple truth is that we don't need anymore. Bush's did very little to actually stimulate the economy and the increase to the budget deficit will probably hurt us more in the long run. Reagan pretty much marks the spot where tax cuts stopped being a fix all. His didn't have the full effect and the return has only diminished since then. We just didn't really need anymore. We were past the little point where cutting taxes magically made business grow. That didn't stop the Republicans from using as a favorite rhetorical point though.

Spending is also a bit of a quagmire. We just can't cut much. There is only about $700 billion going to discretionary stuff. $500 billion or so goes to defense (which is already pretty tightly budgeted). Another $800 billion or so goes to entitlements (social security, welfare, unemployment, medicare, etc.). Another $400 billion is interest on the deficit.

There just isn't a lot of room to cut spending without gouging a "good" program. We're kinda stuck for now.
I have this feeling that what is really needed is a complete change in how the US are managing themselves. If you really need change, you need to do things differently than before, and it would appear that the Government wishes to continue how it has always done things before, as well as make progress, and that is no longer possible. Does the country really need such a big Government? Do the programs all have to be Federally administered? Are the big banks what the country really needs, I would have imagined that smaller credit union type of local banks would be much more effective and of greater service. Big banks also have those thick layers of banking officials that seem to come at such a high price. Does the economy really have to be that complicated? Think that there should be a complete rethink and redesign of everything, going right down to basics.
 

myp

Site Founder
Jan 14, 2009
5,841
50
#19
Taxes in the next year. The logic works in the same way as a corporation. They are borrowing to help the economy grow. This could be seen as increasing tax revenue. If the cost of creating/borrowing the money today is lower than the benefit derived from helping the economy, then you do it. Then even get to count things like social benefits, so it's pretty easy to justify it.
So you are going cover the interest by distorting the markets and taking money from successful parts of the market by taxing them? That only stunts growth. Why not just leave the market alone and maintain more modest budgets?

As for the statement about borrowing being a thing that healthy governments do- that is a statement of opinion, not fact and it depends on what economic theory you believe in. Looking at the current crisis and what is to come, I really beg to differ. The only time I would justify debts is in moments of national security emergency or something else that is of physical harm to the people.

It comes from growth in the economy. If the economy grows, tax revenues should grow.
And what if the economy contracts as it is doing now? Where are you going to get the money from then? This sort of thinking calls for unlimited exponential growth, which is not sustainable.

A deficit by itself isn't that bad. Standard inflation of 2% erases a nice little bit of the deficit. Small and occasional deficits are actually better on the whole than having a arbitrary budget that has to be balanced.
You don't see a problem with inflation? You realize that when the 2% inflation rate "erases" the debt, all it is really doing is taxing the people by reducing the buying power of the currency?

As far as taxes go, the simple truth is that we don't need anymore. Bush's did very little to actually stimulate the economy and the increase to the budget deficit will probably hurt us more in the long run. Reagan pretty much marks the spot where tax cuts stopped being a fix all. His didn't have the full effect and the return has only diminished since then. We just didn't really need anymore. We were past the little point where cutting taxes magically made business grow. That didn't stop the Republicans from using as a favorite rhetorical point though.
It is basic economic fact that cutting taxes means more money in the markets and in people's pockets, which means a healthier economy. I don't know where you are getting this tipping point idea for tax cuts from...

Spending is also a bit of a quagmire. We just can't cut much. There is only about $700 billion going to discretionary stuff. $500 billion or so goes to defense (which is already pretty tightly budgeted). Another $800 billion or so goes to entitlements (social security, welfare, unemployment, medicare, etc.). Another $400 billion is interest on the deficit.

There just isn't a lot of room to cut spending without gouging a "good" program. We're kinda stuck for now.
Actually there are plenty of places to cut spending- namely in pork, welfare programs, the Federal Reserve, the Iraq war, military bases in places where we don't need the army, and hundreds of inefficient government programs.

I have this feeling that what is really needed is a complete change in how the US are managing themselves. If you really need change, you need to do things differently than before, and it would appear that the Government wishes to continue how it has always done things before, as well as make progress, and that is no longer possible. Does the country really need such a big Government? Do the programs all have to be Federally administered? Are the big banks what the country really needs, I would have imagined that smaller credit union type of local banks would be much more effective and of greater service. Big banks also have those thick layers of banking officials that seem to come at such a high price. Does the economy really have to be that complicated? Think that there should be a complete rethink and redesign of everything, going right down to basics.
I agree that government should be a lot smaller. As for the big banks, they are fine because you need to remember that they are big only because of the investors and people who trust in them and use them. As long as their services are in demand, they grow and you can't blame them for being big. The problem comes in when the government steps in and props them up when they fail or props people's bad loans up. Make people accountable for themselves and let capitalism do the rest. It will lead to a prosperous and strong economy and freer people.
 

The Parakeet

Retired Moderator
Jan 19, 2009
639
2
#20
Sorry for the long post guys.

So you are going cover the interest by distorting the markets and taking money from successful parts of the market by taxing them? That only stunts growth. Why not just leave the market alone and maintain more modest budgets?

As for the statement about borrowing being a thing that healthy governments do- that is a statement of opinion, not fact and it depends on what economic theory you believe in. Looking at the current crisis and what is to come, I really beg to differ. The only time I would justify debts is in moments of national security emergency or something else that is of physical harm to the people.
I'm not sure where you are coming from with market distortion. Not cutting spending or raising taxes would ensure that the market stayed the exact same. This would mean higher tax revenue in the next year than if you cut something or raised taxes.

Borrowing doesn't really hurt anyone too much (as it stands now). The only real danger would be a growing interest rate or if crowding out occurred. Neither has really happened. We have plenty of foreign banks that just love to lend us money (risk-free investment for them). We shouldn't count on that forever, but as long as our deficit stays lower than the GDP, we'll be fine in the long run.

As far as healthy governments doing it, I have never heard of a philosophy that was actually against them borrowing from time to time. It's just logic. If they are going to have a deficit one year, they have two choices. They can cut the fat on the budget or raise taxes. The problem is that there isn't a whole lot of fat on the budget in most real examples, so they usually have to cut into the muscle and bones of a number of programs. This would hurt the economy and lower revenues further. Tax increases obviously hurt the economy and can even cancel themselves out.

The smart choice would then be to run a deficit for the year to maintain the economy. It would obviously be foolish to partake in hardcore deficit financing, like we did, but that's another argument entirely. We're playing with fire, but we are far from burning ourselves.

It also has very little to do with our current predicament. Really...if crowding out had occurred, then we'd be in better shape. More money would have gone to government debt instead of mortgage backed securities :). Bad for other reasons obviously, but kinda cool.

And what if the economy contracts as it is doing now? Where are you going to get the money from then? This sort of thinking calls for unlimited exponential growth, which is not sustainable.
Again, the money comes from the idea that the economy will be hurt by not borrowing (which follows pretty logically). You are getting more taxes than you would have otherwise.

If there is a contraction, then you'll get it sometime in the future :). That's the beauty of being a government. You can carry debt for a very long time. We've been carrying debt for periods of 30 years or so since the Revolutionary War.

If it's an awful contraction, then you'll will eventually be forced to suck it up and make the unpopular decision to cut a whole bunch of programs and gut the government to drastically cut federal spending.

This would actually require 30 or 40 years of a stagnant or receding economy. It just takes a short boom to pay back substantial amounts. I know that we were looking at a $1 trillion dollar surplus during the Bush presidency before the Iraq War and the pointless tax cuts (and if I remember the CBO reports correctly, we would have had it). If we really have that bad of a contraction, then we have bigger things to worry about than some government debt.

You don't see a problem with inflation? You realize that when the 2% inflation rate "erases" the debt, all it is really doing is taxing the people by reducing the buying power of the currency?
???? Inflation occurs. It is a fact of life. It often occurs on the micro level. The only thing to stop it would be wage caps and a freeze on raises. Deflation is much worse.

Inflation isn't bad either. Unexpected inflation is. Inflation is always accounted for in investments, so all it really does is convince people to keep putting their money to work. Money under the mattress hurts us all though.

Obviously the government shouldn't induce inflation to pay off the deficit. We see how that worked for the Weimar Republic back in the 1920s and 30s. If they are going to do that, then we'd actually be better of having Obama come and say that we just aren't paying. It would hurt our credit rating and have terrible political fallout, but it is always an option.

It is basic economic fact that cutting taxes means more money in the markets and in people's pockets, which means a healthier economy. I don't know where you are getting this tipping point idea for tax cuts from...
I'm getting it by looking at the actual reports from the CBO (I did a full report on this a year ago, so I still remember a lot of random deficit figures).

I'm referring to the Keynesian idea that cutting taxes solves all our problems and causes a greater benefit to the country as a whole (Reagan's principle). I don't believe you hold it, so it's sorta pointless to say much more. Just the simple fact that income growth did not match tax revenue lost for any tax cut after the Reagan period. This would mean some level of inefficiency, since the market growth should ideally offset most of the tax losses.

You are also forgetting that taxes don't magically disappear in the government. They are paid to government workers. Paid out as social security. Paid to defense contractors. Paid to a whole bunch of Americans. At the point we are at now, a tax cut would probably find its way out of the country through the purchase of export goods or foreign workers (if it's a corporate tax cut). There's an argument to be made at least (don't have the figures or the desire to find them though).

Actually there are plenty of places to cut spending- namely in pork, welfare programs, the Federal Reserve, the Iraq war, military bases in places where we don't need the army, and hundreds of inefficient government programs.
Pork - Pork is sadly not that much of a boon for cuts. It should be cut by principle alone...but good luck with that. It doesn't actually amount to much.

Welfare programs - That's your opinion (one I generally support, but still). Cutting welfare would give a terrible hit to the lower class which would be a social nightmare. It would also remove a lot of lower level spending to grocery stores and fast food places. That does have economic fallout, possibly greater than the relatively small return.

Fed Reserve - What exactly would we cut? We need a way to manage the banks to prevent the wildcat fiasco we had 150 years ago. We tried letting them not have a central bank...it cause a terrible 2 year crash and ruined Van Buren's presidency (if I'm remembering my historical timeline correctly).

The Fed isn't exactly expensive to maintain either. I believe that it often returns a small profit thanks to its loans to member banks. I know that there is an existing protocol for handling the profit (it goes to the treasury department and is filtered in as extra profit...its mixed in with the money we effectively make from printing money and releasing collector stamp packages)

Iraq War - The war itself is only $100 billion a year and we are already winding down...so it's actually a drop in the bucket in the long run. There probably some argument to be made that its an investment for future oil revenue...but regardless.

Military Bases - I'd have to dig up figures for this, but I don't know how much the bases themselves cost. I actually think that the general maintanence for the real army isn't too bad. Most of the cost comes from R&D, manufacturing, etc.. We also have some NATO commitments, I'm sure. They are also a good way to protect American interests in foreign places. Overall, we get pretty good bang for our buck. Remember, military pay goes to soldiers, who often send it home to be spent on food and furniture, so it's not a total waste either way.

Inefficent Programs - Yeah. Good luck finding them. A total audit wouldn't necessarily turn up much at any individual agency or program. It would probably even be counter-productive and might cost more than the temporary savings. A general restriction would also just nail the efficient programs while barely cutting the fat.
 

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