"Bad Bank" for Toxic Debt?

An ‘Aggregator Bank’ for Toxic Debt?

Excerpt:

The heads of the U.S. Treasury and Federal Deposit Insurance Corp. gave further momentum to the idea of a new government-backed bank to remove toxic assets from lenders’ balance sheets.

“A lot of work has been done on an aggregator bank” and other ways of using the $700 billion financial-rescue fund “to let it go further when it comes to dealing with illiquid assets,” Treasury Secretary Henry Paulson told reporters today in Washington. FDIC Chairman Sheila Bair praised the idea in an interview on CNBC, saying it might have “some merit.”

Today’s remarks come days before President-elect Barack Obama takes office, and signal a readiness among regulators to undertake what’s likely to be the most radical effort yet to unfreeze lending. Fed Chairman Ben S. Bernanke earlier this week urged a “comprehensive plan” to address illiquid assets, floating the idea of a “bad bank.”

Comment: Can you get an ATM card there? Does "Bad Santa" bank there? :)

My suggestion: "The Great Reset"

No Question We’re in a Financial Pickle. What Do We Call It?

Excerpt:

The economy is formally in a recession, as the National Bureau of Economic Research and President Bush said last week. But the current crisis lacks a capital-letter name.

Then again, the Great Depression did not become “great” immediately, and World War I wasn’t known as No. 1 at the time. While the “economic crisis” — a term often used by journalists — has also been called the “credit crunch” and the “Wall Street crisis,” it remains the rare major news event without a defining logo, one that crystallizes attention and acts as shorthand for reporters.

Comment: I consider it "the great reset" after "the great excess".

A call to personal responsibility and market forces

Getting Out of the Credit Mess - The last thing we need is policy that encourages or incurs more debt

Excerpt:

The intellectual start of this mess was in a flawed Boston Federal Reserve study published in 1992 that purported to show that minorities were treated less well than whites. That study led to increased political pressure on banks to modify their standards with increased emphasis through the Community Reinvestment Act, and aided by U.S. Department of Housing and Urban Development regulations in the Clinton administration that required parity of outcomes in the lending process.

The effect of all of this meddling was compounded by the lax or incompetent supervision of Fannie Mae and Freddie Mac. All in all, the government got into the business of encouraging and then forcing lending institutions to make mortgage loans to people who could not pay them back. What we ended up with is a failure of government, which we have erroneously termed a failure of capitalism.

...

All of this led to a huge overleveraging in the consumer market. The increase in debt burden fueled much of the nation's economic growth over recent decades, aided somewhat by increases in productivity and underpinned by easy money from the Federal Reserve. Since consumers represent about 70% of the nation's GNP, and since leverage cannot increase forever, we were bound to see the bubble burst and eventually enter a substantial recession.

So, are the current credit easing actions likely to be helpful or not? In my judgment, measures to create liquidity are likely to be helpful. Financial institutions that lend money to credit-worthy people for reasonable purposes have experienced a substantial reduction in available funding from which they can make loans. Hence the programs to support the securitization markets are sensible because money used for this purpose will be lent and used for purchases. Programs that deliver a short-term reduction in mortgage rates will, at the margin, help absorb some of the available housing stock, reducing the time it will take for housing to reach market-clearing levels.

...

In the longer term, our nation must delever -- either by reducing the amounts of borrowing or by increasing consumer earning power through economic growth. Relying on growth alone implies a growth rate higher than we have ever experienced in our nation's history. Nonetheless, our public policy must encourage economic growth by lowering tax rates for corporations and individuals while at the same time avoiding what would be growth killers, including "card check" legislation and trade restrictions. Public policy should support higher savings rates, and avoid encouraging increased consumer spending funded by further debt, which may be helpful in the short term but catastrophic in the longer term.

It is not only consumers that must delever. Governments must as well. State and local governments across the nation have incurred direct and indirect debt or obligations in the tens of trillions of dollars -- obligations that cannot be met under any set of reasonable circumstances without an explosion in growth and tax revenues. In fact, we continue to incur debt for politically palatable ideas, like rebate checks, which have very little stimulative power but increase the depth of the hole we're in.

To solve this problem for ourselves and future generations, we must get back to our historic reliance on personal responsibility and market forces, and get government out of economic management. It doesn't do a good job, as the current economic mess amply proves.

Comment: The last paragraph is key - "personal responsibility and market forces, and get government out of economic management"

Potential borrowers are not credit worthy

Bailout Monitor Sees Lack of a Coherent Plan

Excerpts:

“You can’t just say, ‘Credit isn’t moving through the system,’ ” she said in her first public comments since being named to the panel. “You have to ask why.”

If the answer is that banks do not have money to lend, it would make sense to push capital into their hands, as the Treasury has been doing over the last two months, she continued. But if the answer is that their potential borrowers are getting less creditworthy with each passing day, “pouring money into banks isn’t going to fix that problem,” she said.

...

In her view, the government should be trying to create more reliable customers for those banks by shoring up the fragile finances of the millions of American families that could not save, borrow or spend even if their banks were flush with capital.

“Any effective policy has to start with the households,” she said. “Years of flat wages, low savings and high debt have left America’s households extremely vulnerable.”

Comment: Heard: GMAC will not make a car loan to anyone with less than a 700 FICO score. GMAC limits loans to buyers with 700+ FICO rating. We need a long term national program to encourage savings and investing. See: In 2005, the U.S. savings rate hit negative levels for the first time since the Great Depression. (article has graph)

The Death of Credit Cards?

The Death of Credit Cards

Excerpt:

Meredith Whitney -- bank analyst extraordinaire -- predicts that the credit card industry may slash more than $2 trillion of existing credit lines -- 45% of the total -- over the next year and a half. Yikes! The obvious outcome here would be a huge risk reduction for companies that issue consumer credit, such as JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Citigroup (NYSE: C), while kicking an already-bloodied consumer -- and to a lesser extent, card processors Visa (NYSE: V) and MasterCard (NYSE: MA) -- while they're down.

The big question is whether those consumers deserve to be kicked, with all due respect. Among the more disturbing tidbits Whitney mentions in her report is that credit cards serve as consumers' second most important source of "consumer liquidity," behind actual jobs. Why is it disturbing? In any healthy economy, you'd expect savings to be the closest backstop to job income, not credit cards.

One of the key reasons we're in such a bind right now is that consumers scoffed at saving for a rainy day, and instead spent like there'd be eternal sunshine. Sure, a 45% contraction in credit-card lines will be miserable for some, but the harsh reality going forward is that people will be restricted to purchasing things they can actually afford. I know -- it's a tough concept to grasp.

All of this highlights what I think is one of the biggest fallacies we're facing today: the notion that the key to an economic recovery is getting consumers back to previous spending levels, without realizing that those same levels of spending are partially what ushered in this mess. There's no way around it -- the key to a stabilized economy is to get people to spend less and save more. Unfortunately, that'll mean a reduction in the standard of living for those reliant on plastic to begin with, not to mention the economy as a whole, which is composed of roughly 70% consumer spending.

That said, R.I.P., credit cards. You won't be missed.

Comment: I don't see CC's going away. The point highlighted above is key!

Encouraging consumers to be deeper into debt

The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle

Excerpts:

Over my career, I have seen thousands of consumers that have credit card lines in excess of their annual salaries. Some are sinking under their burden. Some have been fiscally responsible and have minimal amounts outstanding. My 21-year-old daughter, who’s in college, gets pre-approved offers all the time. She has no ability to repay debt, yet the offers flow in just the same. We all know how these lines are accumulated. The banks, in their infinite stupidity, keep upping credit lines because the customer pays the minimum payments on time. My daughter’s credit line started at $1,000 and has been increased over the last two years to $4,400. She has no increased earnings to support this. But the banks do it without asking. And without being asked. The banks reel in the consumer, charge interest rates higher than those charged by the mob, increase lines without the consumer asking and without their consent, and lure them into overextending. And we can count on the banks to act surprised when they aren’t paid back. Shame on them.

...

As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ‘C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages.

...

I’ve been reviewing many of the banks annual reports over the last month and there is no question that the default rates are on the rise. If Congress doesn’t act today, the bankers will have their hats in their hand before we know it, and doing another a tap dance before the Senate Banking Committee, and asking to be bailed out once again with our tax dollars. Sad, but true.

Comment: That "C" is important ... "Capacity to repay". People are being enslaved by debt. Our government (tax policies) punishes (disincents) savers and investors.

Iceland: "Voices of caution ... were drowned out"

Iceland: What It's Like to Live in a World Without Money

Excerpts:

There is no daytime TV in Iceland. Parents are at work and children at school, so the test card, that feature of a bygone age, is the only thing aired. For the transmitters to be switched on in mid-afternoon and a sombre-looking Geir Haarde, the prime minister, to appear behind a desk, a national flag at his side, it had to be serious – and it was. The country was on the verge of bankruptcy; the government was taking control of the banks and was going to assume far-reaching powers to secure the safety of the nation and its savers.

As I watched, I felt a detached sympathy for those poor people living on a blighted island – until it dawned on me that I was one of them. Recent events had savaged my net worth by 60 per cent and pushed up my cost of living by more than 20 per cent. Iceland’s plight was mine, too. What I failed to appreciate at the time was the emotion of this unprecedented television address, particularly in the way it finished:

“Fellow countrymen ... If there was ever a time when the Icelandic nation needed to stand together and show fortitude in the face of adversity, then this is the moment. I urge you all to guard that which is most important in the life of every one of us, to protect those values which will survive the storm now beginning. I urge families to talk together and not to allow anxiety to get the upper hand, even though the outlook is grim for many. We need to explain to our children that the world is not on the edge of a precipice, and we all need to find an inner courage to look to the future ... Thus with Icelandic optimism, fortitude and solidarity as weapons, we will ride out the storm.

...

Picture a pig trying to balance on a mouse’s back and you’ll get some idea of the scale of the problem. In a mere seven years since bank deregulation and privatisation, Iceland’s financial institutions had managed to rack up $75bn of foreign debt. In his address to the nation, Haarde put the problem in perspective by referring to the $700bn financial rescue package in America: “The huge measures introduced by the US authorities to rescue their banking system represent just under 5 per cent of the US GDP. The total economic debt of the Icelandic banks, however, is many times the GDP of Iceland.”

And here is the nub. Iceland’s banks borrowed more than $250,000 for every man, woman and child in Iceland, and placed an impossible burden on the modest reserves of the central bank in the event of default. And default they have.

Voices of caution – there were many in Iceland – were drowned out by a media that became fixated on the nation’s emergence from drab pupa to gaudy butterfly

Comment: Iceland today could be the US in a decade!

Hard times for debt collectors!

Even Debt Collectors Have Hit Hard Times

Excerpt:

This should be the best of times for America's debt collectors, since never has a society been so in hock. But ironically, much of the debt-collection industry is struggling because there's little cash left to squeeze from strapped consumers.

"People joke with me that my business must be great," said Mark Neeb, president of Affiliated Group, an Omaha, Neb., collection agency. "I would say the opposite is true. Our business flourishes when the consumer has money."

Comment: Wouldn't think so would you! Can't "Squeeze blood out of a turnip"

Greenspan: "once-in-a-century credit tsunami"

Greenspan Concedes to `Flaw' in His Market Ideology

Excerpt:

Former Federal Reserve Chairman Alan Greenspan said a ``once-in-a-century credit tsunami'' has engulfed financial markets and conceded his free-market ideology shunning regulation was flawed.

``Yes, I found a flaw,'' Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. ``I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.'' Greenspan added he was ``partially'' wrong for opposing the regulation of derivatives.

Greenspan's contrition came after lawmakers and Fed watchers increasingly blamed the former Fed chairman for helping cause the crisis with lax oversight of the housing boom and derivatives markets. Normally afforded deference by Congress, he endured almost four hours of questions from lawmakers less than two weeks before a national election.

``Greenspan is finally taking some responsibility for his actions,'' said Paul Kasriel, director of economic research at Northern Trust Co. in Chicago and a former Fed official. ``The damage has been done. His reputation has definitely been tarnished.''

Greenspan, responding to questions, said only ``onerous'' regulation would have prevented the financial crisis. Stifling rules would have suppressed growth and hurt Americans' standards of living, he said.

Comment: Goes on to say he is not infallible or omniscient. That's good to know!

Credit crisis: the pain is unlikely to end soon!

Banks Are Likely to Hold Tight to Bailout Money

Excerpt:

Since mid-2007, when the credit crisis erupted, the country’s nine largest banks have written down the value of their troubled assets by a combined $323 billion. With a recession looming, the pain is unlikely to end there. The problems that began with home mortgages, analysts say, are migrating to auto, credit card and commercial real estate loans.

...
Every corner of the economy goes through cyclical ups and downs. But the banking downturn has acted with ferocious speed to erase past profits.

In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount.

More:

Millions owe more on their homes than homes are worth

Excerpt:

... an estimated 12 million American mortgage holders now owe the bank more than their homes are worth. And with housing prices still sliding and the credit crunch worsening, the number of so-called upside-down mortgages is expected to rise to record levels.

Within a year, Moody’s Analytics predicts, a whopping 30 percent of all U.S. mortgage holders will owe more on their homes than they are worth. In some California communities, according to real estate service firm Zillow.com, negative equity already is the norm.

The effects of this are many.

The risk of default rises — and it’s good to recall that it was people defaulting on their home loans last year that set much of the current economic crisis in motion. Home equity lines of credit — even for people who pay their mortgages faithfully — will be harder to come by. And woe to those who lose a job or get sick.

“If you have some kind of disruption to your income and you can’t make your mortgage payment, it’s going to be very hard for you to refinance or anything like that,” said Mark Zandi, chief economist for Moody’s. “This was the bedrock of most people’s savings, their home.”

Comment: I saw something on an investment TV show yesterday ... the commentator said something to this effect: "credit to the economy is like alcohol at a party". In essence, if you want to have a fun party you need booze (I dispute this but let's go with this analogy for a minute) ... in the same way the US economy has been pumped up (high if you will) on credit. The after effect of a drunken binge is a terrible hangover ... well the after effect of this credit binge is a recession. Our economy is "hung over". I just hope someone does not vomit on me!

Silver lining: "a fundamental shift from living on borrowed money"

American debt nightmare ends easy credit era

Excerpt:

xperts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today's crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.

"I think we're undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue," said Greg McBride, senior analyst at Bankrate.com. "This entire credit crunch is a wakeup call to anybody who was attempting to borrow their way to prosperity."

Comment: Article tells of a man who couldn't buy a new car because he could not come up with a $ 1,000 down payment! Simple plan ... save up for it!

Forensics on our financial crisis

Comment: OK we're here. We are in this financial mess. Some say we should not play the "blame game" but just move forward. Move forward we must but unless we understand the mistakes that were made, we will be in this mess again in 20 or 25 years. With a little help from blog friends (acknowledged below), these articles highlight how we got into this financial hot water.

The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities

Excerpt:

The Clinton administration has turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities—and, as Senate Banking Committee chairman Phil Gramm memorably put it, a vast extortion scheme against the nation's banks. Under its provisions, U.S. banks have committed nearly $1 trillion for inner-city and low-income mortgages and real estate development projects, most of it funneled through a nationwide network of left-wing community groups, intent, in some cases, on teaching their low-income clients that the financial system is their enemy and, implicitly, that government, rather than their own striving, is the key to their well-being.

The CRA's premise sounds unassailable: helping the poor buy and keep homes will stabilize and rebuild city neighborhoods. As enforced today, though, the law portends just the opposite, threatening to undermine the efforts of the upwardly mobile poor by saddling them with neighbors more than usually likely to depress property values by not maintaining their homes adequately or by losing them to foreclosure. The CRA's logic also helps to ensure that inner-city neighborhoods stay poor by discouraging the kinds of investment that might make them better off.

The Act, which Jimmy Carter signed in 1977, grew out of the complaint that urban banks were "redlining" inner-city neighborhoods, refusing to lend to their residents while using their deposits to finance suburban expansion. CRA decreed that banks have "an affirmative obligation" to meet the credit needs of the communities in which they are chartered, and that federal banking regulators should assess how well they do that when considering their requests to merge or to open branches. Implicit in the bill's rationale was a belief that CRA was needed to counter racial discrimination in lending, an assumption that later seemed to gain support from a widely publicized 1990 Federal Reserve Bank of Boston finding that blacks and Hispanics suffered higher mortgage-denial rates than whites, even at similar income levels.

In addition, the Act's backers claimed, CRA would be profitable for banks. They just needed a push from the law to learn how to identify profitable inner-city lending opportunities. Going one step further, the Treasury Department recently asserted that banks that do figure out ways to reach inner-city borrowers might not be able to stop competitors from using similar methods—and therefore would not undertake such marketing in the first place without a push from Washington.

Fannie Mae Eases Credit To Aid Mortgage Lending (Note the date of publication: September 30, 1999!)

Excerpt:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk

Excerpt:

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

HTs: Bike Bubba and Denny Burk

Final comment: If we will not learn from our mistakes, our money will be worthless in a generation! I hope I am wrong. Frankly "in a generation" I will be in heaven. But I pray we learn fiscal conservatism now for the next generation!

A financial “flight to safety” and “the financial accelerator,

Comment: An excellent read!

As Credit Crisis Spiraled, Alarm Led to Action

Excerpt:

It was this 36-hour period two weeks ago — from the morning of Wednesday, Sept. 17, to the afternoon of Thursday, Sept. 18 — that spooked policy makers by opening fissures in the worldwide financial system.

Government bears a huge responsibility for the mess

Comment: Good editorial with perspective on how we got in this mess!

Commentary: Bankruptcy, not bailout, is the right answer

How we got here:

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

Solution:

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

...
So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

Silver Lining in Banking Mess?

Christian Financial World Sees Silver Lining in Banking Mess

Excerpt:

Dick Towner, director of Willow Creek Community Church's Good Sense financial ministry, hasn't sensed panic among investors. However, he detects concern among ministries — particularly those in the shadow of Wall Street — that year-end donations may sharply decline.

Yet he also sees a silver lining in the financial clouds.

"This is a time that can bring us back to the sensibility of what's important," Towner said. "We have for some time needed something that would grab our attention and say, 'Hey, this can't go on forever. We can't spend more than we're making.'"

Comment: Individuals, businesses, and ministries need to make the necessary adjustments during these times.

Bailout: a temporary euphoric reception?

Bailout won't put the brakes on downward slide

Excerpt:

But, at best, all a government program can do is keep things from getting dramatically worse, economists say. In the worst case, a government bailout program won't keep financial conditions for households and businesses from deteriorating much further.

The public detests the idea of bailing out lenders and investors complicit in the stupid decisions to offer mortgages to home buyers who couldn't afford them. But almost all financial market pros and the great majority of economists stress that failure to help financial institutions with bad loans would be a recipe for a deep recession or worse.

"Something does need to be done in short order," said Aaron Edlin, a professor of economics and law at UC Berkeley and one of 122 economists who signed a letter to Congress critical of the Treasury Department's original bailout plan.

...

In the short term, the financial markets emergency is a classic crisis of confidence. The catastrophe that nearly befell markets last week was driven by overwhelming and, in many cases, unjustified fear. After Wall Street's Lehman Bros. went bankrupt two weeks ago and insurance giant AIG needed government intervention to keep from going under, every company became suspect, even highly creditworthy borrowers far-removed from the housing market.

Quick, forceful action from Washington is essential to restore confidence and loosen loan markets, financial professionals and political leaders say.

"The markets need a message from us," House Speaker Nancy Pelosi, D-San Francisco, said at a news conference Friday.

Indeed, it's possible a bailout package could get a euphoric reception from both the stock and credit markets. But any psychological effect would be temporary, experts caution. In the medium and long term, it's by no means certain a bailout will succeed.

"I'd give the government a 50 percent chance of stabilizing the markets," Edlin said. "The reason for optimism is that there will be an enormous amount of money. The reason for pessimism is that nobody knows how the money will be spent."

The idea behind the bailout is to buy bad loans from financial institutions, freeing them to turn on the credit spigot again. But if those institutions have to take big losses on the assets they sell to the government, they could still be too strapped to lend freely again. In addition, they are likely to remain wary of extending credit in the midst of a recession. On top of that, a movement is under way throughout the economy to cut back on debt, a phenomenon known as deleveraging.

Dave Ramsey on the current conomic crisis

Q & A: Dave Ramsey

For individuals:

Have money in savings, get out of debt, live on a budget, live on less than you make, don't co-sign, and diversify your investments. These are things the Bible tells us to do with money. If you do these things, you're going to survive in bad times and prosper in good times.

Impact on churches:

We may have the lowest giving in the fourth quarter than we have had in a decade. Churches that are out of debt and have money set aside for emergency, biblically speaking, are going to survive. Churches that have no cash and are in debt are going to reflect some of these Wall Street companies. They have to adjust spending to be able to live on what's coming in and anticipate a drop right now.

Comment: Good advice

The danger of a downward spiral of credit lockdown

Credit Enters a Lockdown

Excerpt:

In many corporate offices, in company cafeterias and around dining room tables, however, the reality of tight credit already is limiting daily economic activity.

“Loans are basically frozen due to the credit crisis,” said Vicki Sanger, who is now leaning on personal credit cards bearing double-digit interest rates to finance the building of roads and sidewalks for her residential real estate development in Fruita, Colo. “The banks just are not lending.”

With the economy already suffering the strains of plunging housing prices, growing joblessness and the new-found austerity of debt-saturated consumers, many experts fear the fraying of the financial system could pin the nation in distress for years.

Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral.

Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers. Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.

“Without trust and confidence, business can’t go on, and we can easily fall into a deeper recession and eventually a depression,” said Andrew Lo, a finance professor at M.I.T.’s Sloan School of Management. “It would be disastrous to have no plan.”

Comment: One may think that they are immune .... but you probably are not. If you have a 401K plan, are an investor, have a credit card, have a student loan, work for a company, etc. ... it impacts us all!

Update: The credit crunch: Loans out of reach

At larger institutions, such as the San Francisco-based Bank of the West, which has approximately 700 branches mostly west of the Mississippi River, consumers need a better credit score than they did before the credit crunch hit.

"We have seen a change in the landscape and responded to it," said Bruce Heysse, an executive vice president for Bank of the West's consumer lending business.

Consumers whose credit rating teeters between 'good' and 'not so great' are the ones getting squeezed the most, added Carole Merchant, a fellow Bank of the West executive vice president in the company's indirect lending business.

"Will loans be available for people who have some sort of credit blemish? That will probably remain more difficult," said Merchant.

Given the current state of the economy, banks such as the San Antonio, Texas-based Cullen/Frost (CFR), have been forced to withdraw lines of credit from some customers.

Still, the lending spigot hasn't been completely shut off. Instead, Dick Evans, chairman and CEO of Cullen/Frost, said that his bank is charging customers higher rates for loans than they did before.

"We have tightened from the standpoint that we get paid for the risk," said Evans, whose bank focuses primarily on business lending and had more than $13 billion in assets as of the end of last year.

Comment: The above seems like a good thing!

Another view of the Bailout

Issue Is Payback, Not Bailout

Excerpts:

Yet in just a few days’ time, members of Congress have to figure out how to improve the bare-bones $700 billion plan submitted by Henry Paulson, the Treasury secretary, and ultimately whether to vote for it.

Their best shot at success depends on keeping the debate tightly focused on the questions that matter most. There are really only two: What steps are most likely to solve the immediate crisis? And how can the long-term cost to taxpayers be minimized?

...
The first thing to understand is that a bailout plan doesn’t have to cost anywhere close to $700 billion, so long as it’s designed well. The $700 billion number that you see everywhere is an estimate of how much the government would spend to buy deteriorating assets now held by banks. Eventually, the government will turn around and sell these assets, for a price almost certain to be greater than zero. So this $700 billion is very different from $700 billion spent on a war or on Medicare.

“Much of the discussion of the cost of the bailouts is getting it wrong,” David Colander, an economist at Middlebury College, says. “What matters is what price they buy the assets for and the price they sell them for. That’s where the real action is.”

Figuring out how much to pay for the assets is the first problem. The drop in house prices and rise in foreclosures have made it clear that these securities are worth considerably less than banks expected. But there is enormous uncertainty about how much less.

Comment: Much I do not understand!

Harry Reid: "no one knows what to do"

Democratic Congress May Adjourn, Leave Crisis to Fed, Treasury

Excerpt:

The Democratic-controlled Congress, acknowledging that it isn't equipped to lead the way to a solution for the financial crisis and can't agree on a path to follow, is likely to just get out of the way.

Lawmakers say they are unlikely to take action before, or to delay, their planned adjournments -- Sept. 26 for the House of Representatives, a week later for the Senate. While they haven't ruled out returning after the Nov. 4 elections, they would rather wait until next year unless Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke, who are leading efforts to contain the crisis, call for help.

One reason, Senate Majority Leader Harry Reid said yesterday, is that ``no one knows what to do'' at the moment.

``When you rush to judgment, you usually make mistakes,'' said Sherwood Boehlert, a former Republican congressman from New York. ``This is something you can't go on forever without addressing, but Congress in a short span of time is best served by going home.''

Comment: To quote Jon Lovitz, "Yeahhh! That's the ticket!"