Sometimes When You Give, You Get Back

August 31, 2009 7:57 AM

TARP investments yield 15% returns.Almost trom the start, critics characterized the TARP program that first began under the Bush administration and that continued through early this year under President Obama as a taxpayer funded giveaway, while government officials insisted it was a long-term investment program whose initial costs would eventually turn a profit as economic recovery began. Now the NY Times reports that the program has already yielded $4 billion in profits, and a separate report reveals that related Federal Reserve loan programs aimed at economic stabilization have returned $14 billion in profits.
posted by saulgoodman (119 comments total)

These profits are phantom in exactly the same way the old profits were.
posted by Malor at 8:05 AM on August 31 [3 favorites]

[Lights cigar from burning penny.]
posted by Your Disapproving Father at 8:05 AM on August 31 [11 favorites]

Oh so NOW it was begun under the Bush administration.
posted by DU at 8:06 AM on August 31 [36 favorites]

LMAO*.

*If that is you only look at the parts of my ass that actually came off when I laughed. I may still have some attached if you look at all of my ass. But still that is more ass coming off than was predicted and there is reason to think that more ass may yet come off. However, critics warn that even more ass could have come off and that there may still be some hidden ass.
posted by srboisvert at 8:16 AM on August 31 [18 favorites]

Now the NY Times reports that the program has already yielded $4 billion in profits

Really? So we've had $704 billion dollars returned? Because if we spent $700B and got $4B back, we haven't made a profit, and we're a long way from doing so.
posted by eriko at 8:17 AM on August 31 [7 favorites]

What this is more appropriately described as is a return of capital; to call this a profit is to ignore trillions of dollars in taxpayer monies that have been spent, lent, guaranteed, drawn against and otherwise consumed in what will likely be the greatest transfer of wealth in the planet’s history. Link.
posted by preparat at 8:17 AM on August 31 [1 favorite]

These profits are phantom in exactly the same way the old profits were.

How so? It seems that the banks actually paid the money back plus interest. That's a profit, right?
posted by kathrineg at 8:19 AM on August 31 [1 favorite]

I wouldn't declare this profitable just yet.

First, if the government get's back a penny of the over $100 billion it gave AIG, I'll be amazed. Throw in the money wasted on GM and Chrysler, and you can see that extrapolating from data points like Goldman Sachs paying back a loan it never needed in the first place is probably less than instructive.

Also, the worst possible outcome of this is that it does become profitable overall, and politicians get the bright idea to pay down the debt by lending to or investing in random companies.
posted by Pastabagel at 8:24 AM on August 31 [1 favorite]

I must be missing something. I thought the funds handed out were in the near-Trillion dollar range. If I handed out $1000 in loans, I wouldn't call getting repaid $14 a good return.

“The taxpayers want their money back and they want the government out of our banking system,” Representative Jeb Hensarling, a Texas Republican

Christ what an asshole. Calling for more deregulation after what previous deregulation did. I want as much more government in the banks as it takes to prevent this from happening again.
posted by anti social order at 8:24 AM on August 31 [1 favorite]

One day I'll preview... One day...
posted by anti social order at 8:25 AM on August 31

Some commentary about how the numbers as reported are misleading here. And here. And here. And here. In short, yes, some parts of the financial aid to banks have returned a profit. But it would have returned more if it had been priced at market value; much, much, much more was done for free; and they are not reporting the losses.
posted by procrastination at 8:25 AM on August 31 [4 favorites]

> Oh so NOW it was begun under the Bush administration.

Assuming this wasn't just a troll...

The economic meltdown is a problem of such scope that I'm quite willing to put partisan considerations and pet hates aside to actually, y'know, try to understand it. Which I haven't yet, anyway.

If the sky actually isn't falling, or if it is falling more slowly now and may even start rising again, well... good. (paging Mutant... is this good?) If TARP is actually going to do what we were told it would, then I have no problem crediting both the Bush team for unrolling the TARP, and the Obama administration for continuing with it.

On the other hand, if it doesn't work I'll be too busy shooting looters and gathering firewood to care.
posted by Artful Codger at 8:27 AM on August 31 [1 favorite]

Good heavens, not according to financial blogs that I read every day and that have stood me in good stead (i.e., saved me thousands of dollars) since the economy began tanking in earnest a year ago.

Read here: http://www.nakedcapitalism.com/2009/08/the-financial-times-joins-fed-flattery-parade-fed-makes-14bn-profit-on-crisis-loans.html

and here: http://www.froogalizer.com/news/more-bogus-bailout-reporting-%E2%80%9Cas-big-banks-repay-bailout-money-u-s-sees-a-profit%E2%80%9D.html

for more analysis of this story from people who are not also demanding to see Obama's penis (No, not for some kind of strange "teabagging party," you dirty-minded mefites. So they can prove he was not born here.)

I am not a financial expert, but I am not a ninny, either. I don't for a second believe this about TARP. The story about profits is being laughed at right now by people who seem to know what they are talking about.
posted by staggering termagant at 8:28 AM on August 31 [3 favorites]

From the third link:

The story, which cited Fed officials, said the internal estimate is based on the difference between fees and interest on the lending facilities, and the return that the U.S. central bank would have earned if it had put the money in three-month Treasury bills

Is that what the central bank would be doing with money if were not lending it at the direction of TARP? Putting it in 3-month T-bills? Wouldn't have guessed that.
posted by dios at 8:29 AM on August 31 [1 favorite]

Dammit, procrastination. Why couldn't you have put your post off til later?
posted by staggering termagant at 8:30 AM on August 31 [1 favorite]

The 15% represents the return on the funds issued to those few institutions in question, not return on the entire TARP spend. NY Times should have made that a little clearer.

Anyway, here's to cautious optimism! I don't think the treasury is going to get rich as it were on profits from this program, but I am cautiously optimistic that it will not bankrupt the US. Any more than we are already bankrupt, I mean.
posted by Mister_A at 8:31 AM on August 31

Really? So we've had $704 billion dollars returned? Because if we spent $700B and got $4B back, we haven't made a profit, and we're a long way from doing so.

Shut up with your math, you math person.
posted by odinsdream at 8:32 AM on August 31 [11 favorites]

Sounds like yet more smoke and mirrors being blown at the American public in order to prop up the house of cards we can an "economy." There seems to be a continual game that has been played since about mid-2007, one of flat-out lying to the American people about how well the economy is doing, because it's like Tinker Bell. If we all BELIEVE hard enough, then it will all be okay. This is why they forced ALL the banks to take TARP funding (because only having some of them take it would show to the public which were failing), this is why they refuse to give real details about the "stress test" results (because if they told us the truth, we would know which banks are actually insolvent), and this is why they tell us every month or so "the economy is in recovery, we've reached or passed the bottom, everything will be sunny and roses from now on."

It's a lie, supported by lies, in the hope we will all believe it and clap hard enough, and bring Tinker Bell back to life!!!
posted by hippybear at 8:36 AM on August 31 [6 favorites]

Really? So we've had $704 billion dollars returned? Because if we spent $700B and got $4B back, we haven't made a profit, and we're a long way from doing so.

No, looks like the money we've been repaid was about $704 billion, however, there is still more to be repaid. It looks (?) like that might be repaid, also with a profit.
posted by kathrineg at 8:38 AM on August 31

Man, the original article is misleading.

The actual truth is that less than 1% of the money lent has been returned; on that 1%, the taxpayer has earned about 15% annualized ROR. There hasn't been a penny of profit yet.

Well, guess what? This same behaviour would happen in almost any scenario - even one where the taxpayer eventually sees huge losses.

By the nature of such loans, the healthiest companies will pay off their loans fastest and provide the greatest rate of return to the taxpayer. The real excitement will come as the last third of the loans get paid off - if they ever do.


kathrineg: Suppose you lent me $10,000, and I paid you back $115 to write $100 off the loan. By your reasoning you have $15 in profit - but in fact, you still are owed $9900 and have put in $9885.

Even if you claim that $15 is book profits rather than real profits, to accomplish that you have to value that $9900 of remaining debt at face value - and that's dodgy because you need to factor in the chance that I'll default on it.


Afroblanco: flagged.
posted by lupus_yonderboy at 8:39 AM on August 31 [4 favorites]

Why do you hate Tinkerbell so much, hippybear?
posted by Mister_A at 8:39 AM on August 31 [1 favorite]

Sounds like yet more smoke and mirrors being blown at the American public in order to prop up the house of cards we can an "economy."

Why are you getting so angry about people trying to save the economy--if that's what you think they're trying to do?

This doom and gloom, more-cynical-than-thou bullshit is getting a bit old.
posted by kathrineg at 8:40 AM on August 31

Dammit, procrastination. Why couldn't you have put your post off til later?

Because I have some very important work I am avoiding. It was urgent to post right away.
posted by procrastination at 8:40 AM on August 31 [2 favorites]

Urg, my numbers are quite wrong (from misreading the article). Please ignore that part of my post. :-( More coffee.
posted by lupus_yonderboy at 8:40 AM on August 31

kathrineg: Suppose you lent me $10,000, and I paid you back $115 to write $100 off the loan. By your reasoning you have $15 in profit - but in fact, you still are owed $9900 and have put in $9885.


Yes, but suppose you lent me $100 and I paid you back $115. It makes sense to call that a profit, even if all my loans are not yet profitable, correct?
posted by kathrineg at 8:41 AM on August 31 [1 favorite]

And by my loans, I mean your loans.
posted by kathrineg at 8:42 AM on August 31

Why are you getting so angry about people trying to save the economy--if that's what you think they're trying to do?

Because they profited from destroying the economy and now are profiting from (perhaps) saving it... and the rest of us have had to foot the bill on the way down and now on the way "up"?
posted by lupus_yonderboy at 8:42 AM on August 31

Why are you getting so angry about people trying to save the economy--if that's what you think they're trying to do?

Because they profited from destroying the economy and now are profiting from (perhaps) saving it... and the rest of us have had to foot the bill on the way down and now on the way "up"?

It seems like we don't know whether we're getting the money back and, certainly they are paying the government less than they would have had to pay private investors, I don't know if I'd go and get mad at them for that.
posted by kathrineg at 8:43 AM on August 31

There is a huge "they" that really doesn't distinguish between various institutions that are a part of this complex plan, it gets a little old to see the entire attempt to deal with the economy smeared with so much paranoid angst.
posted by kathrineg at 8:44 AM on August 31

Institutions have been eager to repay TARP funds because they don't want to operate under TARP restrictions. This has been going on for some time now.

Also, it is inaccurate to state that all banks were forced to take TARP funds.
posted by Mister_A at 8:46 AM on August 31

hippybear: assuming arguendo that the economy is a "house of cards" that needs to be propped up for the sake of the country, would you not agree that it is an extremely important, life-altering 'house of cards' that could have devastating and even fatal effects on people if it collapses such that all efforts should be made to prop it up?

I guess I wonder what your suggestion is: let the economy collapse? What then? I can understand the argument that the cure is worse than the disease made by many economists. But I take your position to be that you don't want a cure and you want the patient to die. I don't understand that point of view.
posted by dios at 8:46 AM on August 31 [2 favorites]

This doom and gloom, more-cynical-than-thou bullshit is getting a bit old.

Not half as old as business news editors who trumpet misleading headlines. It seems pretty obvious that using "TARP" and "profit" in the same paragraph is hilariously, unforgivably stupid.
posted by mediareport at 8:52 AM on August 31 [1 favorite]

A small bit of welcome but unsurprising news; small because as other have pointed out the total investment is very large, but not a surprise, for many reasons.

First of all, the entire market back then was dominated by fear, and its always a good time to invest when a large percentage of other participants are afraid.

Second, we know the greater majority of financial institutions receiving TARP funds not only had difficulty raising capital (remember LIBOR soared by several hundred basis points in about four weeks when this entire episode kicked off August 2007) augmented by relatively weak capital structures, but possessed loan portfolios that were relatively solid (i.e., not totally subprime crap).

We also know the valuations of institutions receiving funds increased, and we almost saw a strong postive correlation between the size and timing of capital injected (I've got data but not sure if I can share; if I can I'll post the googledocs url). In other words, those institutions getting bigger loans earlier saw much larger increases in market cap than their similarly sized peers who either went looking for funds later, or requested smaller amounts.

I read some dead tree internal research recently that predicted (and it named names but I won't) the biggest problem some of these institutions may face over the remainder of the credit / business cycle will be debt overhang; the value of loans outstanding may exceed the firms ability to pay.

Since some traders looking for a play you could probably look at short interest and figure out who is most likely to have problems over the next twelve to eighteen months or so.

This has been a very curious episode, but in spite of this news its still not totally clear to me how all this will end. This is a very, very remarkable market in many ways, and I'm not talking about a 50% bounce in the S&P 500 since March.

No, even as we're starting to see some (minor, but welcome) evidence of inflation in the system (July PMI pricing numbers are ticking up), most of the G8 is still coasting along damn close to zero nominal, while Australia is talking of raising rates.

Even as it looks like the EuroZone as a whole looks set to exit the recession in Q3 France & Germany (hopefully not prematurely) are calling the recession over.

I'm not convinced, see lots of divergent indicators, but this is one interesting couple of years we've had in the markets.

Myself, I'm betting on a nice run up in inflation to make this 70's / 80's market replay complete.
posted by Mutant at 8:53 AM on August 31 [8 favorites]

> ... in the hope we will all believe it and clap hard enough, and bring Tinker Bell back to life!!!

Well, in the sense that capitalism requires consensual belief... c'mon Tink!
posted by Artful Codger at 8:54 AM on August 31 [1 favorite]

Yes, but suppose you lent me $100 and I paid you back $115. It makes sense to call that a profit, even if all my loans are not yet profitable, correct?

Oh definitely, but if you lent out $100 to one-hundred friends, and Tom paid back his loan for $115, it'd be much more accurate to say, "my loan to Tom was profitable" than "my loans to my friends were profitable." Until you account for all 100 loans, you can't make that sort of blanket statement.
posted by explosion at 8:55 AM on August 31

Seems very misleading to me. My suspicion is somebody's doing some serious spin control, trying to create the impression that the program was "profitable" and a "success" based on the early paybacks, in the hope that the public loses interest and just never notices when the bulk of the principle doesn't get returned.

Which will probably work, come to think of it.

There are quite a few banks who realized very quickly that the TARP program wasn't something they wanted to be involved in (BB&T and several others dropped it like it was hot, amidst claims that healthy banks were forced to take loans in order to not make it obvious to the public which ones were 'unhealthy') and so it's not surprising that there's money flowing back in.

Assuming nothing happens to block repayment by the 'healthy' recipients, we should expect to see some of the loans paid back promptly and in full, but then for the repayments to slow down and stop once it's just the crap loans that are left outstanding. My guess is that once we start to see that, we'll be able to get a better idea of how much we as taxpayers will be expected to write off in the long run.
posted by Kadin2048 at 8:57 AM on August 31

My point was that the article is deliberately misleading in concept, although not in close reading, because the line that "we're making at 15% profit on our TARP investments" is myth-making which benefits the economy a lot more than the truth of the situation. Drawing the conclusion that I find it despicable to be lied to equals I hope the economy fails is a false set of assumptions leading to the ugliest possible thing to say about me, and you should just stop right now.
posted by hippybear at 9:00 AM on August 31 [2 favorites]

s/principle/principal/g

With apologies to my 4th grade teacher, who tried so hard to beat that one into my head, clearly to no effect whatsoever.
posted by Kadin2048 at 9:01 AM on August 31

Because they profited from destroying the economy and now are profiting from (perhaps) saving it... and the rest of us have had to foot the bill on the way down and now on the way "up"?

Yup, THEY are way better at this shit than we. I remember hearing it said at the moment of collapse (slightly less than a year ago) that what we were in the middle of was the most brilliant rip-off in all human history. Not only had we been robbed blind by these bastards but now, and entirely by design (ie: Part 2 of THEIR diabolical plan), we had to throw unprecedented gazillions of dollars at them to stave off some kind of fiscal (and ultimately social) zombie apocalypse. Kind of like Cheney and his Haliburton cronies in Iraq. Gazillions to fight the war, Gazillions more to clean up the mess they made. It all makes beautiful sense from their side of the balance sheet.

So, short of hunting all of THEM down, penetrating their billion dollar security systems, busting into their safes and slitting their throats while they sleep, What To Do? Probably something to do with letting karma and/or the good Lord take care of them and focusing our energies on re-imagining the whole notion of Economy ... but what do I know? I'm Canadian.
posted by philip-random at 9:07 AM on August 31

Drawing the conclusion that I find it despicable to be lied to equals I hope the economy fails is a false set of assumptions leading to the ugliest possible thing to say about me, and you should just stop right now.
posted by hippybear at 11:00 AM on August 31

My apologies. That is why I asked you for clarification because I was uncertain what you meant. I was thrown off by your tone in the phrase: "

Sounds like yet more smoke and mirrors being blown at the American public in order to prop up the house of cards we call an "economy.""

Referring to the economy as a house of cards and putting scare quotes around the word economy seems to suggest some hostility to the economy qua economy. But if I misread your point, my apologies.

I understand the dislike of being lied to; I understand thinking the cure is worse than the disease or no cure at all; I understand feeling uncertainty as to the real economic outlook. What I don't understand is the belief that the economy is a house of cards or somehow fictional, which is why I was asking if you were making that point.

Thanks for the clarification.
posted by dios at 9:08 AM on August 31 [1 favorite]

What I don't understand is the belief that the economy is a house of cards or somehow fictional

Insofar as the economy is based on dollars and its day to day functioning involves the transfer of these dollars (the paper kind worth different amounts based entirely on the different numbers and pictures printed on them), then yes, the economy is fictional, because a hundred dollar bill is NOT worth a hundred dollars. I'm guessing it's worth a few cents and as such, short of a certain shared fiction which many millions of people (billions?) agree on, it's only real use is for wallpaper, starting fires, wiping one's ass etc ...
posted by philip-random at 9:18 AM on August 31

It's always a good time to invest when a large percentage of other participants are afraid.

True. I made a killing on anthrax futures.
posted by joe lisboa at 9:20 AM on August 31 [1 favorite]

It's not a fiction if it works. If I can buy stuff with that $100, it's worth more than a few pennies.

I guess technically I can't eat it, live in it, or drive it around, but to call it fictional is a bit overly philosophical.
posted by kathrineg at 9:22 AM on August 31 [1 favorite]

Good heavens, not according to financial blogs

Well, there's your mistake then: reading financial blogs. Finance guys, in general, are the most partisan, right-wing, anti-market intervention fanatics you're likely to find on the planet. A random survey of any half-dozen or so blogs by brokers, professional investment advisers, and amateur stock market followers (especially all the mouth-breathing cavemen among the day traders), etc., will indoctrinate you in an entirely alternative history of America, one authored not by actual historians, but by coke-fueled former high-school jocks whose out-sized competitive instincts never fail to trump common sense: one in which the mere existence of progressive taxation, labor laws, occupational safety standards, welfare programs, every rule passed in response to the stock market crashes of the Great Depression era, etc., have only hindered America's economic prosperity, despite indisputable economic data to the contrary, and mounting evidence that with every one of these progressive reforms we undo, the economy weakens.

Here's the crowning irony of it all, to me: ultimately, the only way the TARP and Federal Reserve investments really end up screwing the taxpayers out of their money on a massive scale is if the underlying companies in which the investments were made fail without repaying their debts. And yet most of these small-time finance guys constantly screaming about how our tax money is being squandered are at the same time actively campaigning with every bit of their meager influence to convince the markets and the public that these failures are inevitable, even as they cynically clamor to book their bets to cash in on the downside.

They accuse the government of squandering taxpayer money while at the same time actively promoting the very outcomes that would result in the losses of taxpayer money.

Oh definitely, but if you lent out $100 to one-hundred friends, and Tom paid back his loan for $115, it'd be much more accurate to say, "my loan to Tom was profitable" than "my loans to my friends were profitable." Until you account for all 100 loans, you can't make that sort of blanket statement.

Why not? Banks that issue loans and other financial institutions do exactly that when they release their quarterly financials. What, the government needs to stay so far out of the markets that it shouldn't even be allowed to reckon profits and losses using basically the same methods lenders do?
posted by saulgoodman at 9:22 AM on August 31 [12 favorites]

You didn't clap hard enough. Tinkerbell's dead.
posted by Skot at 9:24 AM on August 31 [5 favorites]

I'm guessing it's worth a few cents and as such, short of a certain shared fiction

By definition, something is worth whatever people agree it's worth and are willing to pay for it. Where's the fiction?
posted by floam at 9:25 AM on August 31

It's not a fiction if it works. If I can buy stuff with that $100, it's worth more than a few pennies.

It's a fiction that many millions/billions of us have bought into (myself included), and as such, it works ... kind of how art works, and magic. It's the degree to which we start thinking of it as hard science (as real as a rock that you stub your toe on) that it becomes a dangerous house of cards.
posted by philip-random at 9:25 AM on August 31

Really? So we've had $704 billion dollars returned? Because if we spent $700B and got $4B back, we haven't made a profit, and we're a long way from doing so.

I think you're conflating TARP (the bank bail-outs) with ARRA (the stimulus package). TARP funding is around $250 billion, while ARRA funding was about $700 billion.

TARP was intended to be repaid, at some point, and maybe make a profit. ARRA is not intended to be repaid; it's money being pumped into states and state-federal programs (like Medicaid and unemployment insurance) to try to fill the gap left when private demand collapsed. The argument was that by arresting a potential depression, we'd end up less-worse-off than we would if we did nothing--but no-one ever suggested that the states are going to actually scape together money to pay back to the government.

The fact that these two programs are so inextricably linked in people's minds probably has something to do with why there's so much confusion about which program is a continuation of Bush policies (I think it's fair to characterize TARP this way) and which ones were 100% the Obama administration (ARRA).
posted by iminurmefi at 9:27 AM on August 31 [2 favorites]

The only alternative, philip-random, is the barter system, under which an iPod touch is worth 4 goats, and who's going to carry that around?
posted by Mister_A at 9:28 AM on August 31

demanding to see Obama's penis... so they can prove he was not born here.

I question this strategy. My penis may have been born here, but it didn't really come of age until a couple of times Around the World.
posted by rokusan at 9:31 AM on August 31

Katherineg, will you please lend me $1000?

I promise to pay back a small percentage of it next week, with a HUGE profit for you included.

What could possibly go wrong?
posted by rokusan at 9:32 AM on August 31

Durr, never mind, it looks like the nytimes is saying that TARP was also $700 billion. That's strange.

Carry on.
posted by iminurmefi at 9:33 AM on August 31

Philip-Random: I would argue the economy isn't a fiction so much as an elaborate system of social conventions and habits of behavior.
posted by saulgoodman at 9:34 AM on August 31

I can't believe the sheeple killed Tinkerbell!!!!1
posted by drjimmy11 at 9:38 AM on August 31

What I don't understand is the belief that the economy is a house of cards or somehow fictional,

Okay, but much of the US "economy" of the past ten to fifteen years or so -- the FIRE economy -- was basically fictional. The links given in that Wikipedia article cover some of the main criticisms, but it's not hard to find others. The short version is that we didn't really make anything, we just pushed around papers and sliced up risk and made fees every time there was turnover, until we reached the saturation point and could not wring any more nickels out. And then the whole thing finally went boom as everything started precipitating out of the solution at once. /tortured Chemistry metaphor

But worse than merely "fictional", that kind of paper-pushing was (is, will be shown to be) outright destructive, too -- to local governments who expanded (both physically and financially) beyond sustainable levels and who are now suffering huge year-over-year "surprise" shortfalls in their tax receipts, to consumers who are maxed-out on their credit cards and now putting this month's school supplies on layaway, to banks that made stupid bets on leverage and are now subsisting on taxpayer money, when not outright closing. It was all based on wringing money out of debt, whether that debt was a mortgage or a credit card or whatever.

So that's where the whole "house of cards" meme comes into play; so much of this "growth" was mostly unreal and certainly unsustainable. Now add in some seriously shady actions by the government over the past two years, and by highly secretive quasi-government entities (hello, Federal Reserve!), and I think you can understand why people feel the way they do.
posted by Asparagirl at 9:38 AM on August 31 [4 favorites]

It's a fiction that many millions/billions of us have bought into (myself included), and as such, it works ... kind of how art works, and magic.

And money. Money works this way. Don't tell anyone else, but those bills in your wallet...not worth the face value!
posted by Mental Wimp at 9:40 AM on August 31 [1 favorite]

it just seems that the so called liberal media is dedicated to nothing but spreading misinformation and lies these days - and they want it this way - it's a lot easier to control people who can't tell what's going on because they're not given the information
posted by pyramid termite at 9:40 AM on August 31

Who wants to bet that the banking sector's debt will be written off before the debt of the 'developing' world?
posted by knapah at 9:41 AM on August 31

According to the Wikipedia page about TARP, the $700 Billion amount is the total of the loans and investments which were being guaranteed under the program, while just under $400 Billion has actually been allocated.
posted by hippybear at 9:42 AM on August 31

This thread is filled to the brim with misinformation. TARP hasn't spent even close to its allotted $700 billion. According to Wikipedia, "$388 billion had been allotted, and $296 billion spent", most of which went to the Capitol Purchase Program (investing in the troubled banks and lending institutions) but not all. Those investments are turning out to be potentially profitable, although serious risk remains from investments in AIG, B of A, and Citigroup.

It's not clear if the American taxpayer will recoup the investment, but I think reasonable people think that's unlikely. A significant portion of TARP early on was used to clear the "toxic assets" off of bank balance sheets, assets which are probably unredeemable. However, the topic article merely indicates that we may not face as large of a loss as otherwise thought. Not really something to provoke outrage, as far as I can find... Though TARP is complicated and complex, a lot of it is simple to understand and widely available, so the misinformation is unexcusable.
posted by napkin at 9:44 AM on August 31 [2 favorites]

I guess I was channeling phillip-random in my last comment. But he said it better.

I guess I wonder what your suggestion is: let the economy collapse? What then? I can understand the argument that the cure is worse than the disease made by many economists. But I take your position to be that you don't want a cure and you want the patient to die. I don't understand that point of view.

Perhaps a bit of regulation so these boys can't put the rest of us over a barrel as they rake in their millions and billions, eh, what? That may run counter to some people's warped view of the "free market", but, what the hell, it's worked in the past.
posted by Mental Wimp at 9:49 AM on August 31 [1 favorite]

Finance guys, in general, are the most partisan, right-wing, anti-market intervention fanatics you're likely to find on the planet...They accuse the government of squandering taxpayer money while at the same time actively promoting the very outcomes that would result in the losses of taxpayer money.

I get where you're coming from, but this is not entirely true among the newer crop of bloggers, as opposed to long-time finance guys like Larry Kudlow who may also happen to have a blog. One of the biggest finance/market bloggers, Karl Denninger at the Market Ticker (who also blogs at Seeking Alpha), is a middle-aged life-long Republican and former GOP donor, who voted for Obama last year and has written several scathing articles lately about the party, primarily because he feels they are complicit in the fraud that has helped create this financial mess: "To the RNC: WAKE UP" (August, 2009), "Sarah Palin and the Republicans" (July, 2009), "Republican Irrelevance" (June, 2009), etc.
posted by Asparagirl at 9:49 AM on August 31 [1 favorite]

In all fairness, that was dios in response to me.
posted by hippybear at 9:52 AM on August 31

So...it's a house of cards...made of rocks...which are on fire?
posted by electroboy at 9:54 AM on August 31

It seems pretty obvious that using "TARP" and "profit" in the same paragraph is hilariously, unforgivably stupid.

Depends on your point of view. If you're Goldman Sachs ...
posted by Kirth Gerson at 10:01 AM on August 31

I'm not screaming socialism, doubly so because I'm actually a fan of it in lots of circumstances, however...

I think the thing that some people fail to recognize about the validity of the arguments presented by the loonies is that we've currently got a governmental structure touting its ability to make money on its own. Ergo, we have a government loaning money to the private sector and turning a profit on it. Sounds good on the face of it, especially because the volumes of product are so great that the rest of the private sector can't touch 'em.

However, that said, there's always a first step. I'm a little...er... less than a fan of governmental competition for private-sector markets. Seems like a dangerous stepping off point.
posted by TomMelee at 10:07 AM on August 31

Every economic discussion like this makes me feel like I am sitting across from Ricky Jay, a year after he's had his brain dropped into the body of a squid. I know that I am getting a fast one pulled on me every time he does the cup-and-balls routine, tentacles going everywhere, and I know just as well that I will never, ever be able to point to anything and say, "Yeah, right there, that's where you did the switcheroo."
posted by adipocere at 10:14 AM on August 31 [4 favorites]

SOCIALISM! SOCIALISM! SOCIALISM!

Oh wait. We're not doing that today? Sorry. My bad.
posted by bitter-girl.com at 10:23 AM on August 31

But let's be clear when we talk about the "shady" Federal Reserve, Asparagirl: we're talking about a system of institutions that dates back to 1913 and earlier. If we're going to have a debate about the role, positive or negative, of the Fed, then it's not a debate about the recent economic picture except insofar as the Fed took actions outside the scope of its normal functions during the recent crisis.

I think one major reason so much of our economy is "moving paper around" these days is this: In the West at least, we don't really need enough damn stuff to sustain our economy, forcing us to have to create pockets for money to sit in or ways to burn it off. This idea is purely speculative, I'll admit, but my intuition is that we spent decades developing economically and technologically toward bringing about an enlightened age of leisure time and cultural expansion, only to find our industrial leaders instead demanding never-ending increases in personal productivity and simultaneously rejecting any social or political pushes toward the kind of leisure-time filled future we'd spent much of the industrial era laying the groundwork for in order to protect and increase their own disproportionate share of wealth.

Even if we didn't outsource so much of our manufacturing these days (which we don't do because enough able-bodied workers couldn't be found here, but only because our own workforce is unwilling to deliver the low cost margins demanded of them), gains in production efficiency across every sector of the kinds of "real" industries you seem to have in mind have greatly scaled back the demand for an industrial workforce.

If our economy didn't contain large asset bubbles, and redundant or what you might otherwise consider meaningless jobs, there wouldn't be enough jobs to go around at all. And since we're unwilling to talk about growing the public sector and enlarging social programs to make up the gap--or for that matter, hell, to even seriously discuss shifting to a shorter work week like in Europe--our technological successes have left us in a bind: that's part of the reason for out-of-control consumer culture as well. We constantly have to repackage, re-brand, hype and peddle variations on the same ultimately unnecessary consumer goods, because there aren't enough things to sell that people actually need to keep the economy humming along. We're victims of our own success.
posted by saulgoodman at 10:30 AM on August 31 [6 favorites]

Regarding reading finance blogs, I definitely agree that the political leanings of some of the bloggers out there dismay me. And I would be very worried if I were getting my financial info from the commenters at Google Finance.

But I would hardly call Yves Smith of Naked Capitalism a right-wing mouthbreather. She's actually been criticized for being a left-wing ideologue. But I guess one man's left-winger is another man's right-winger, particularly if the second man is from France.

Anyway, I've found Naked Capitalism, Brad Setser with the Council on Foreign Relations, and iTulip to be valuable, largely non-partisan collections of information about the economy. I especially have learned from reading the discussions in the comments sections.

I do have the ability to parse when someone is showing me cited data vs. when someone is talking out their ass. And honestly, I am about as likely to accept what the NYT says at face value as I am other sources I turn to for info. And finally, even right-wing mouthbreathers may have interesting information or points to consider about their specific disciplines. Why discount them utterly just because they are conservative? Who knows more about the economy? A left-wing tree surgeon or a right-wing economist?

I can read a variety of sources and come to the conclusion that because many of them agree that the fundamentals of our economy are not sound, this recovery is not as solid as some (who also have a vested interest in their position) might claim.
posted by staggering termagant at 10:41 AM on August 31

Sure, staggering termagent, there are doubtless any number of good sources for analysis out there. Just don't ever trust traders or anyone who looks at the markets through that lens.

Traders are in no better position to understand or offer informed opinions about the economy than gamers are when it comes to software architecture. Plus, most of them have personal financial stakes that color their judgments.
posted by saulgoodman at 10:51 AM on August 31

The US Govt gave $85 billon to various AIG counterparties, most notably Goldman Sachs. That money probably will never find it's way back into the US coffers.
posted by PenDevil at 10:59 AM on August 31 [1 favorite]

Even if we didn't outsource so much of our manufacturing these days (which we don't do because enough able-bodied workers couldn't be found here, but only because our own workforce is unwilling to deliver the low cost margins demanded of them ...

... and we have labor standards and unions and higher costs of living, etc, etc.
posted by me & my monkey at 11:05 AM on August 31

It will as long as AIG survives to pay back its debt. The US government took shares of ownership in AIG in return for its outlays, it didn't just give AIG the money to pay its counterparties with no strings attached. As long as AIG doesn't fail, we don't lose the money. As WSJ reported in Sept. 2008:

The U.S. negotiators drove a hard bargain. Under terms hammered out Tuesday night, the Fed will lend up to $85 billion to AIG, and the U.S. government will effectively get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points. (Libor, the London interbank offered rate, is a common short-term lending benchmark.)

The loan is secured by AIG's assets, including its profitable insurance businesses, giving the Fed some protection even if markets continue to sink. And if AIG rebounds, taxpayers could reap a big profit through the government's equity stake.

posted by saulgoodman at 11:09 AM on August 31

Seriously, one of the most depressing experiences I had was last year, when the market was crashing, watching the DOW on Google. You could also see comments on the page, and those people...

"Frat-boys" is a good way to describe these traders and what they were talking about (tits, n****rs, beer, etc.). In fact, I'm sorry, frat boys for insulting you with the comparison.

Getting your financial info from daytraders is like getting the teenager who works at the Piggly Wiggly pharmacy to remove your appendix.
posted by staggering termagant at 11:11 AM on August 31 [1 favorite]

The US Govt gave $85 billon to various AIG counterparties, most notably Goldman Sachs. That money probably will never find it's way back into the US coffers.

But we just made $4 billion! So what if we lose $81 billion, when we made $4 billion!
posted by Blazecock Pileon at 11:17 AM on August 31

So that's where the whole "house of cards" meme comes into play; so much of this "growth" was mostly unreal and certainly unsustainable. Now add in some seriously shady actions by the government over the past two years, and by highly secretive quasi-government entities (hello, Federal Reserve!), and I think you can understand why people feel the way they do.
posted by Asparagirl at 12:38 PM on August 31

Let's slow down a second here. The growth was real. That's why the crash is real. If the growth was unreal, then so is the contraction.

I agree that is was unsustainable, but that's not inherently bad. Technologies come online that increase productivity will caused rapid growth that is unsustainable, but it plateaus, it doesn't fall off.

What I think people want to say is that the FIRE economy was not productive or useful. It did not advance human civilization one iota.

The question has to be asked: what is the goal? What is the purpose of an economy? To facilitate the exchange of goods and services among members of society and the world? To efficiently diffuse social and technological innovations from the innovators to the masses? To facilitate our exploitation of resources and each other? And once you answer the question, you much address the real "first derivative": what is the role of economic growth beyond population increase? Why is it important? Are there disadvantages, and how do you manage them?

The reason we have political leadership, in my opinion, is not to control the economy. I don't like the idea of a presidential administration struggling to keep GM afloat. If GM's former customers didn't care enough about GM to prevent them from buying a Honda, I don't see why the president should care.

What the president should be doing is reminding American society what its vision of its own future is, and setting the rules at a high level such that once the productive activities of 300 million people are unleashed to act on their own within the confines of those rules, the outcome will inevitably be to realize that vision.

So, who do we think we want to become as a country or a world? What are we working toward? A vision is inherently simple but requires imagination to create and a boldness to articulate.

It would be nice if the President listed the 20 most exhilarating challenges (not threats) for human civilization, and then picked one to be a specific objective. Then he could incentivize investment in that area. Much more useful to have a boom in biotech or solar energy than in finance - if nothing else at least you get some hard science out of it.
posted by Pastabagel at 11:18 AM on August 31 [1 favorite]

Sure, that would be great if Obama picked something like sustainable energy/energy independence and made it the new Apollo project. I'm all for it. People forget what a boon the Apollo program was for American industry.
posted by Mister_A at 11:22 AM on August 31

staggering termagant: "Who knows more about the economy? A left-wing tree surgeon or a right-wing economist?"

Ah, but who knows less?
posted by Rat Spatula at 11:29 AM on August 31 [1 favorite]

If the growth were real, everything it created would still exist. Only imaginary things go away when you stop believing in them.
posted by hippybear at 11:34 AM on August 31 [1 favorite]

The reason we have political leadership, in my opinion, is not to control the economy. I don't like the idea of a presidential administration struggling to keep GM afloat. If GM's former customers didn't care enough about GM to prevent them from buying a Honda, I don't see why the president should care.

Do you support TARP and the stimulus package? Or is your dislike of government propping-up of business limited only to manufacturing sectors and does not include AIG, banks, and other financial institutions?
posted by hippybear at 11:38 AM on August 31

(and yes, I agree. I wish Obama had adopted the "100 in 10" idea about energy policy -- that within 10 years, we will get 100% of our energy from renewable resources. If we can put a man on the moon in less than a decade, surely we could achieve that goal. But without a real figurehead leading and inspiring, whether that's Obama or more generalized the US Government, it only is a bunch of nice talk and voluntary participation and as such won't amount to much.

Sorry about 3 posts in 10 minutes. I'll step away for a while.
posted by hippybear at 11:45 AM on August 31 [1 favorite]

Um, the one who doesn't know more?
posted by staggering termagant at 11:59 AM on August 31

Or wait, is this a grammar question? Was I supposed to say "Who knows 'fewer'"? What?
posted by staggering termagant at 12:00 PM on August 31

If the growth were real, everything it created would still exist.

This seems like a nice clean line to draw, but it's really not so straightforward. What about any meals you might have eaten out at a restaurant over the last month? Do those meals still exist? Would it be real economic growth if all the economy created were more meals? What about theater performances? Did you happen to go see a play last year? Does that performance still exist now? Would you still consider it economically valuable though?

If you thought about it, I bet you could come up with a long list of things you'd consider economically valuable that don't exist as physical artifacts that can necessarily be pointed to as concrete economic products. Most products of the service sector--hair cuts, massages, a professionally prepared tax form, etc.--don't meet this literal-minded take on economic output, yet they still have an economic value, don't they?
posted by saulgoodman at 12:16 PM on August 31

Do those meals still exist?

It's called poo. Look into it.
posted by Mister_A at 12:26 PM on August 31

Well, would you pay as much for a plate of poo as for a meal?
posted by saulgoodman at 12:31 PM on August 31

Hmmm...
posted by Mister_A at 12:35 PM on August 31

Do you have some poo or is this hypothetical?
posted by Mister_A at 12:36 PM on August 31 [1 favorite]

Oh there's plenty of supply. Just make an offer.
posted by saulgoodman at 12:46 PM on August 31 [1 favorite]

What about any meals you might have eaten out at a restaurant over the last month? Do those meals still exist?

That's a false analogy at best. Food cannot be stored indefinitely, but the supposed storage of wealth in markets and derivative instruments and such is not equivalent to food. How is there any parallel between your example of consumable and resources requiring continual renewal and money markets and AIG insurance deals? It's an apples to CDO comparison, and doesn't really hold water.

Frankly, I wish the money all the executives had been paid all those years while they were raping the middle class to line their pockets would evaporate like the supposed "value" they created in our economy. That would at least provide some amount of parity between the harm they wreaked upon the globe and the end result of their greed. But it doesn't, because money isn't like food or haircuts. It doesn't require to be constantly renewed or you die, or that you have to continually spend it or it gets all shaggy and out of control.

As far as the plays and concerts and such that I spend my good money on... I learned long ago (and there are studies to back this up) that spending money on experience has greater psychological lasting value than spending money on objects. Existence of value does not have to be tangible. I fail to see where the deceptively-marketed toxic loans or any of the derivative supposed wealth they created (and has since vanished) meets any of this criteria.
posted by hippybear at 12:57 PM on August 31

Hrm. a word disappeared. "It's an apples to CDO comparison..."
posted by hippybear at 12:59 PM on August 31

If you would all just broaden your definition of the word profit, you'd see that we have turned a profit.

See, once you give somebody something, its no longer yours.

So, if I "lend" my friend John $10, I no longer have that $10.

If John gives me a penny back, that's a penny that I didn't have.

Thus, I profited by one penny.

Also, you need to redefine "lend" to mean "give" for this definition of profit to work.
posted by Joey Michaels at 1:13 PM on August 31

There have been huge betrayals of the public trust on Wall Street, and many activities in the swaps and other derivatives markets were indefensible and IMO criminal. But without some mechanism for freeing up banks to write more loans (which is all that bundling loans into basic CDOs does), loans simply wouldn't be available when people needed them to expand their businesses, buy homes, etc. And investors both need and want investment vehicles to grow their money. Those are services with real economic value.

And Joey Michaels, since when did any bank, lender or other investor apply the definition of "lending" you're suggesting we use, in which they get to keep the money they lend and collect payments with interest from the borrowers of that money at the same time? How would that work? There were contracts negotiated for all the various "bailout" funds, you know. And they did explicitly define those bailouts as loans, with interest. How is that like "giving" ten dollars to someone?
posted by saulgoodman at 1:21 PM on August 31

I'm glad some folks raised the economy upthread; having seen lots of market cycles since I was a kid, the most fascinating thing about the past couple of years isn't that we've seen the lowest nominal rates since WWII or one of the most jaw dropping equity market collapses since the 30's - globally synchronised as well, which has never happened in the past (well, it has but there always were lags of between one and twenty odd months), but rather the fundamental restructuring we're seeing in the US Economy now.

This is all happening in the background, rather quietly as far as I can tell. But it is most certainly happening and it is historic.

I was an a conference run by one of the investment banks a few weeks ago and a panel discussion by some relatively minor players unexpectedly turned out to be the hit of the week, lots of interest.

I'll post it just in case folks are interested in what some of the banks are talking to some of the hedge fund crowd about. I'm not 100% sure I believe this, but on the other hand if someone would have told me July 2007 that the Dollar LIBOR / TBill spread was gonna widen out by four hundred basis points or that TBill yields would go negative I wouldn't have hardly believed them. So these are unusual times.

We generally only see what these guys are predicting - what a surprise - in times of significant economic change characterised by excessive market volatility. Think post WWII Britain when Pound Sterling lost its place as the world's reserve currency.

Now this is off the top of my head, left my conference notes at University, but here are the general themes. I'll try to augment with web links when I can.

As recently as 2006 the main driver of US GDP was personal consumption, roughly 73% or so of the total actually. And some 40% this personal consumption was housing related; either outright purchase or repair, etc.

As the recession bit, personal consumption (as in all previous recession by the way) cratered and (once again, like we've seen in all previous recessions), personal savings by Americans took off, hitting a 14-year high of 6.2% in May.

So that's interesting on its own - in the markets we do see the same general themes over and over again, you've just got to look back far enough - but here's the rub, the thing that sets this wrenching series of market events apart.

The global economy has largely been driven the US consumer. But they ain't spending so much now, getting the shit scared out of them by all the doom and gloom and, of course, neighbours getting made redundant, losing homes, etc. If you've got a job you do anything you can to keep it, and while you've got the job you save save save.

Now here is something very curious - the Chinese supposedly make their livings off American profligacy and sure enough, when the recession got started in earnest their GDP cratered but last July we saw a sharp rise in GDP up to 7.9%, and it looks like they'll finish 2009 with YOY GDP growth in excess of 8%.

Not too shabby. But where is this growth coming from.

A traditional analysis (like I'd run) would indicate three sources

Chinese distorting the numbers -- yeh, it happens. When I was running a team covering Asia the only way we'd get accurate data was to put one of our guys or gals on the ground there. Chinese run radically different accounting standards, so you're NOT going to get GAPP or IFRS data out of them.

US demand increasing (recession over in the United States) -- interesting one, as we generally don't know a recession is over until it is well and truly over. So this is a possibility.

Decoupling – domestic demand in China

Now I'd hedge my bets, maybe predict a little of the first two and not so much of the third, but guess what? The third possibility was the surprise hit of the show, and the reason why this seminar topic was so damn popular.

Some folks are betting the farm on Chinese domestic demand taking off. Here's the arguement.

In 2001 the Chinese middle class was 20% of the total population, or about 200M people.

Of course population data is tough to get in China, but some folks feel certain (enough to place money on the trade) that the Chinese middle class broke through 300M people in 2009.

That's right, the Chinese middle class is the size of the entire US population (which is hardly 100% middle class, I might add).

Of course in dollar terms middle class American is different than middle class Chinese, but I've lived and worked all around the world and I can tell you the middle in Lagos or the middle class in Cairo or the middle class in London or - well, you see where I'm going with this. Middle class folks generally want the same things, to consume roughly similar items.

So some folks are arguing that China doesn't have to depend so much on US export demand any longer as they're own middle class is now picking up demand.

In other words, decoupling is late to the party. But she is HERE.

And that's
1) inevitable (just look at other nations that have developed e.g., Japan)
2) pretty darn interesting.

Now I'm very active in the fixed income markets and I like to look at the US yield curve, and check this out - the Chinese are (quietly) moving their holdings to the short end.

Why? I'm willing to bet they're getting ready to disinvest, and one year from now they won't be holding as much US debt as they are now. Probably won't dump all their holdings (diversification is good for the portfolio), and certainly not all at once, but a good chunk is coming back on the market.

Now here is the really interesting prediction these guys had.

US savings rate will continue to increase, while Chinese domestic demand picks up.

And what we're gonna see in about one decade (and please keep in mind the history of finance tells us these switchs are always very tumultuous) is role reversal; US once again running current account surplus, trade surplus, gradually declining deficits. China running account deficits. Might take decades to fully realise.

They did detail historical projections quantitatively, but I don't recall in enough detail to feel comfortable posting.

Other tidbits of interesting - sure, inflations coming back (but we already knew that, it's called mean reversion and we see it any long run time series of econometric data) interest rates will trend higher (have, to demand is gonna start to decline and we'll have to pay more to attract funds) unemployment will trend higher than we've seen over the past decade (we all knew rates less than 3% weren't sustainable) and that poor US dollar is gonna get weaker.

I realise all this will be a shock to anyone less than 30, but if you're fortunate enough to live through enough credit / business / interest rate / equity market cycles you'll see it all.

If you can't wait that long historical books on finance and the markets are a great substitute.

And by the way, these are NOT my predictions. I'm not a 100% believer, but north of 50% and have been slowly becoming more convinced as I see more data.

Won't tell you folks how I'm trading it except to say what I've been saying for the past few years (read my comments) - rerun of the 70's, not the 30's, buy gold & silver, physical if you can get it, ETFs are good as well.

If you're more adventurous oil might be a good play as well - last few weeks has seen it solidly above 70$ and it just may stay there.

Fascinating market we've got right now. Really interesting. To say its historic would be stating the obvious as I feel every day in the markets are different and thus, by definition, historic.

But these times? Truly historic. In a major kind of way.
posted by Mutant at 1:29 PM on August 31 [20 favorites]

"the swaps and other derivatives markets" --> "credit default swap and other [more exotic] credit derivatives markets"
posted by saulgoodman at 1:42 PM on August 31

@saulgoodman: Clearly you haven't been paying attention. The terms of that loan to AIG have been renegotiated three times since the original, onerous terms were made public -- each time making the bailout larger and more generous in terms to AIG.

AIG went from an $85bil loan at LIBOR+8.5% to a combination $60bil loan from the Fed and a $40bil share purchase under TARP in November (also giving them an additional $52.5bil in further asset-backed loan facilities via the Fed at LIBOR+3.5%) Pretty good deal for a bankrupt company to somehow get better terms when the other option was bankruptcy. So now they're up to $112.5b in loans and $40b in purchases.

December 08 - the Fed creates Maiden Lane I and II to purchase CDS and Mortgage obligations from AIG. AIG puts up $6bil, the Federal Reserve $52.5bil.

March 09: The AIG deal is renegotiated a third time. This time, AIG drops all of its loan payments to simple 3 month LIBOR (no more penalty rate -- so much for the 8.5% 3.5%) and additionally converts some of the government's debt stake to equity.

Much of the bailout funds for AIG went directly into the coffers of banks like Goldman Sachs and Deutsche Bank to pay off Credit Default Swaps held against AIG. The US Federal Government made the bets of these banks whole even when there was no way that they could be paid.

If this bailout of AIG doesn't disgust you (and if you think we're ever going to see that money back) you're not paying attention.
posted by fet at 1:53 PM on August 31 [2 favorites]

I never said it didn't disgust me, fet. My position has always been that it probably was necessary, if completely wrong, to prevent much deeper economic damage. Also, as I said, bad as it might have been, it wasn't a simple giveaway. We own AIG now, like it or not. Cheerleading the downfall of AIG now is stupid, because if we get that wish, we lose more of our money than under virtually any other long-term scenario.
posted by saulgoodman at 2:07 PM on August 31

Less than a year after TARP was established, we still haven't gotten all the money back: EPIC FAIL!!!! I want my apocalypse back!!!
posted by Jimmy Havok at 3:01 PM on August 31

Between the poo meals and the large asset bubbles, I have completely lost my appetite. Thanks a lot, economic wanks.
posted by Kirth Gerson at 3:41 PM on August 31

What about any meals you might have eaten out at a restaurant over the last month? Do those meals still exist? Would it be real economic growth if all the economy created were more meals? What about theater performances? Did you happen to go see a play last year? Does that performance still exist now? Would you still consider it economically valuable though?

What about all that money I was up at the blackjack table, but ultimately lost? Does it still exist? What about those health insurance premiums I paid? After the insurance company denied all of my claims, were those still economically valuable? What about the money my grandmother lost in that Ponzi scheme? Would it be real economic growth if we all just swindled each other?
posted by vibrotronica at 3:52 PM on August 31 [1 favorite]

Am I the only one who comes into these threads and goes find 'mutant' and just reads that?
posted by sien at 4:00 PM on August 31 [6 favorites]

So some folks are arguing that China doesn't have to depend so much on US export demand any longer as they're own middle class is now picking up demand.

I live in China and I have been rather shocked at the strength of the Chinese economy through the recession, bit I still don't understand where this demand is coming from. The Chinese economy is still largely export oriented to a huge amount and people in other countires stopped buying Chinese made goods, so where is the money for this new middle class demand coming from? Is it from the goverment stimulus package? Are the Chinese starting to spend their famously high savings? Are the Chinese in the middle of their own real estate bubble (this one seems likely to me, because in my experience the Chinese rent to buy ratio for real estate is highly distorted)?

Any more insight into this would be greatly appreciated.
posted by afu at 10:39 PM on August 31

Mutant, I would love it if you did a post about this.
posted by Houstonian at 11:54 PM on August 31

Much of the bailout funds for AIG went directly into the coffers of banks like Goldman Sachs and Deutsche Bank to pay off Credit Default Swaps held against AIG. The US Federal Government made the bets of these banks whole even when there was no way that they could be paid.

WTF? Surely the whole point of the bailiout was to pay off AIG's debts so it trade solvently again. And the CDS weren't taken out as bets on AIG's solvency, so they're legitimate creditors. But you don't think they should get the money owed because... why? This is conspiracy-theory-level wrongheaded bollocks.
posted by cillit bang at 5:30 AM on September 1

Bailout Propaganda Begins
posted by HP LaserJet P10006 at 9:00 AM on September 1

Bailout Propaganda Begins

Ah, Matt, I love your raw way of stating the obvious truth. Take no prisoners!
posted by Mental Wimp at 10:26 AM on September 1

Less than a year after TARP was established, we still haven't gotten all the money back: EPIC FAIL!!!! I want my apocalypse back!!!

You've got it backwards: they're saying "We've got a few little signs of progress and completely no idea about the rest: EPIC SUCCESS!!!! We are so smart!!!"
posted by Mental Wimp at 10:29 AM on September 1

In my mind, the bailout propaganda began a long time ago. And it's not just coming from any one set of players.
posted by saulgoodman at 10:36 AM on September 1

The average guy has few options in this crisis:
1) find some way into the upper-crust (such as higher-paying job, become an investment whiz, embezzle, rob a bank, politics)
2) buy ammo and survival supplies, join a militia and wait for the End of Days (or Rapture if you're so inclined)
3) hang onto your job, save where possible, hope the Powers That Be know what they're doing

There's no appetite for revolution. Otherwise we should be storming the Hamptons NOW, while it's still nice out.

Lame as it sounds, #3 is what most of us are going to do.

If all consumers believed the recession was over and it was prudent to spend again... and the market believed that the consumers believed... the recession would actually end, right?

If this is the case, then propaganda is exactly what we need. Shut up and start believing, already.
posted by Artful Codger at 11:11 AM on September 1 [1 favorite]

"The only thing we have to fear is fear itself."

It was propaganda when FDR said it, too. But it was true all the same.
posted by saulgoodman at 11:37 AM on September 1

cilit bang: Some of you really haven't been paying attention have you :)

AIG had written Credit Default Swaps (CDS) on all sorts of products with a total leverage of something like 80 to 1, possibly more. In other words, a drop in value of less than 2% of the total products in question would bankrupt AIG: When US house prices began to fall nationwide in 2007, AIG was toast (many of the CDS were written on US mortgage backed bonds & AIG had assumed that such correlated falls could never happen). What remains of AIG is a shell through which the US Fed has been funnelling money into the worldwide banking system by paying up for the CDS that AIG had written.

In any ordinary bankrupty, do you expect the company to pay all it's debts if the assets are not there? No, of course not.
posted by pharm at 2:46 PM on September 1

In any ordinary bankrupty, do you expect the company to pay all it's debts if the assets are not there? No, of course not.

AIG didn't go bankrupt. It wasn't allowed to because if it had, the municipal bond market would have collapsed, among other serious follow-on effects, and a banking collapse would have soon been triggered, bankrupting the FDIC (which finds itself cash-strapped even now). Thanks to the Bush bankruptcy law reforms, AIG would have been forced if it went into receivership to pay out on its credit derivatives obligations before making even its traditional policy holders whole. Bankruptcy law was specifically rewritten under Bush to prevent these derivative contract obligations from being dismissed in the bankruptcy courts. The sum AIG would have had to pay out on its credit default swap obligations alone would have left nothing to pay out on its other lines of insurance (which is significant, among other reasons, because AIG is also the nation's largest bond insurer).

Bailing out AIG was a small price to pay, morally unsatisfying as it might have been, to avoid imploding the banking industry and draining the public coffers through the FDIC (yes, I know the FDIC doesn't rely on public funds, but the money would have to come from somewhere in the event of a cascade failure in the banking system).

The US financial regulatory system completely failed, that much is true. AIG should never have been allowed to put itself on the hook for so many contract obligations it couldn't meet. Thank the de-regulatory brigade and their anti-government cheerleaders for that. But the past is the past, and the fact is, there aren't any better options for now. President Obama can't order the bankruptcy courts to ignore the law. And by the time Congress managed to get anything done, we'd all be wearing cardboard shoes.
posted by saulgoodman at 7:34 PM on September 1 [1 favorite]

One of my favorite things is how the FDIC was prevented by Congress from collecting dues from participating banks for about a decade because the banking lobby convinced the lawmakers that there was no need to have the institutions keep paying into it. Because, you know, a collapse will never happen as long as the good times are going on.
posted by hippybear at 10:44 PM on September 1

saulgoodman: AIG is/was bankrupt in all but name, that's the point. The *only* reason it still exists at all is because the Fed has been using it as a conduit to funnel billions of USD into the US banking system. Whether the CDS would have been first in the queue or not (and I completely agree with what you say on that point) is irrelevant to the fact that there simply was not enough equity in the company to cover the losses.

To argue that the US government "invested" in AIG is specious: they did no such thing, and the money that they have poured into AIG is money that will never be returned. In order to do that, they had to buy out the existing shareholders, and you can call that an "investment" if you want, but set against the torrent of money that they have lost, it's irrelevant. No doubt when this is all over they will sell AIG back into the market as a going concern and trumpet that they've made a "profit" on their "investment" in AIG. That will be just as irrelevant as the $14 billion currently being shouted from the rooftops.
posted by pharm at 11:44 PM on September 1

pharm: So you would prefer that AIG had just put all the bailout money in a huge Scrooge McDuck bank vault, rather than used it to pay off their debts? What else are they going to do with it?
posted by cillit bang at 2:55 AM on September 2

saulgoodman: AIG is/was bankrupt in all but name, that's the point.

No, this is the point: a formal AIG bankruptcy would have triggered another round of credit default swap contract payouts and caused the ratings of a great many municipal bonds and other insured securities to drop precipitously. banks everywhere would have posted massive losses. if AIG had been allowed to "go bankrupt in name," regardless of its underlying financial condition, the financial collapse would have been much worse and much farther reaching.
posted by saulgoodman at 6:32 AM on September 2

cilit bang: Now that would have been just silly :)

SaulG: I'm not arguing about whether funnelling all this money into AIG was a good idea or not. I'm pointing out that it's completely ridiculous to claim that the money put into the companies is an 'investment' which 'the government will make a profit out of'. The financial industry had the government by the throat and issued a 'pay us, or the dog gets it' ultimatum. Any (small) amounts that they happen to pay back are small beer next to the huge amounts of money the banks have been paid which will never be paid back. Hence claiming that the government has 'made a profit' on it's 'investment' is simply wrong: The government is going to make a huge loss on its 'investment'. That that maybe the best of all possible outcomes (although that's a difficult counterfactual to prove of course!) doesn't change the facts one iota.
posted by pharm at 6:55 AM on September 2

afu, fixed investment growth has taken the place of exports.
posted by Kwantsar at 8:07 AM on September 4