Explain to me: Federal Bank Bailout

[asterroc]

Oh wise LJ-friends, explain to me this Feds bailing out / buying out the banks thing. Preferably in 3 sentences or less (so as to boil it down to what's most important).

I really do appreciate y'all's ability to boil down these topics I find remarkably complex and filled with too many details for me to grasp, into simple "here's what's important about the thing, and here's what you can ignore" sort of summaries. And I've a tag for them too.

So. Fannie May, Freddie Mac (what's with the names anyway?), and AIG. Three sentences. Go!

Comments

[galbinus-caeli.livejournal.com]

My explanation was a bit longer than that. But still pretty succinct I think.

[zandperl.livejournal.com]

Direct link for my reference. http://galbinus-caeli.livejournal.com/207709.html

So what does all this mean for the future of our economy?

[galbinus-caeli.livejournal.com]

Sorry, I meant to make that a direct link.

What will this do for the future? That is the $64 question.

In and of itself, not too much. Some poor and middle class people will lose their homes, but they were losing those anyway. Some rich people will lose some value out of their portfolios. All of us will have a government that is a little bit more in debt, but no more than the cost of a month of the Iraqi occupation.

On a larger scale the loss of these firms will result in what they call a "tightening of the money supply". Basically that means that credit should be a bit harder to get, mostly for the big banks and financial organizations loaning money to each other. This theoretically means fewer big capital purchases (new factories, companies buying each other). But predicting how this will actually play out is really a job for big economic brains.

The most interesting aspect of this is that the government now has direct control of the two agencies that guarantee home loans in the US. Fannie Mae and Freddie Mac were highly regulated private corporations, they are now government agencies. But again, exactly what this means is a question for experts.

The short form of all this is that regulation policies for these industries have failed. These huge essential organizations are supposed to be regulated like utilities so they don't fail. They have, which means the regulatory policies failed.

[zandperl.livejournal.com]

I guess what I'm wondering now is I hear lots of people (such as marquiswildbill, above) saying this is a sign of the horrible recession we're in, and that it's going to snowball into massive bank crashes. Is that likely? How do we get there from here?

[galbinus-caeli.livejournal.com]

In my slightly informed opinion, no, this is not going to lead to massive bank crashes. The ones that are crashing are ones that were out on the edge of what they have been allowed to do. They are being bought up by the ones that have been more conservative (in a good way). Notice how Bank of America, Suntrust, and First National Bank of Omaha are buying up all these failed banks. Account Holders are going through brief periods of loss of services (including access to their funds) but no one with less than $100,000 in a single account is going to lose any actual money. They will end up with a new bank, and will probably have new atm cards issued to them, but they won't even have to have their checks reprinted.

Credit is already tighter for consumers than it was a few years ago, and I expect that trend to continue. Cheap home loans are gone and they aren't coming back. Quick flip "investment" properties are going to be a thing of the past. But these are all corrections, they were poor ideas in the first place.

Of course without more corrections from the top, this is not going to happen quickly or cleanly. And unless the real core problems of our economy not corrected the slow decline of the last twenty years will continue.

Unless we fix the problems with foreign trade and guest workers we are going to have a very hard time recovering.

Every dollar we send overseas is gone. A dollar spent locally is recycled.

Let me give an example. If I buy a tomato imported from Mexico, that dollar goes to Mexico and does me no more good. If I buy a tomato from a local farmer, he is going to use that dollar to to pay for fertilizer from a local hardware store, who pays a clerk who works in my neighborhood, who buys CDs produced by a local band, who keep people coming into my local bar, where I can buy beer. That local tomato helps keep my local economy going.

The same is true for a guest worker. If I pay a guy from Mexico (I am not picking on Mexico, it is just an example) to mow my lawn or fix my roof, he is spending the minimum he can on an apartment he shares with nine other guys and sending most of the money I just paid him back to Mexico where he can support his wife and three kids in a much better lifestyle than if he worked and lived at home. If he instead immigrates to my neighborhood, all the money I pay him is used to buy a house here and shop and pay taxes here, and send his kids to school here where they can be the person to cure cancer.

Basically we need to choke down on foreign trade. Charge tariffs for imported articles, and find ways to reduce guest workers. If people want to work in the US, they should typically live here.

Anyway, sorry for the sermon.