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Originally Posted by mheisig
Right on.
The banks were stupid enough to make sub-prime loans to people that they knew couldn't afford them in the long run, and the people taking the loans were stupid enough to do it in the first place. It's rampant greed on the part of everyone involved. As much as people want to bitch about the high-paid CEOs, there should be equal bitching about the idiotic people who took these loans in the first place. It takes two to tango - the banks share half the guilt.
Now the federal government is forced to step in and start fucking with the market. It terrifies me when the government suddenly owns 80% of one of the largest banks in the country.
There really is not "good" solution to all of this - it's robbing Peter to pay Paul, we're just trying to figure out which one to rob and which one to pay.
I CPA that I'm good friends with says that he thinks the best solution is for the government to repeal a substantial number of the corporate taxes that are in place for about two years. The lessened tax burden allows the banks to recover and start backing their own loans. It's more of an easing of the pressure than a bailout. Of course then you have to deal with decreased tax revenue for two years which is it's whole own problem.
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I listen to Dave Ramsey. Look him up if you haven't heard of him. He is looking more and more like a genius nowadays.
One factor he was discussing stems from the fallout of Enron. This is a cautionary tale about trying to control business and the way they conduct their business.
Anyways, after the Enron debacle a huge new law was pass called Sarbanes-Oxley. Most have probably heard of it. It has a lot of provisions trying to legislate ethics.
One regulation it implements is that publically traded companies have to restate their assets value on a daily basis. Good idea. But it forces them to use market value. This is sometimes a good idea and sometimes not. In the case of the mortage industry it is a very poor stipulation.
Say a company like Merrill-Lynch owns 30B in bonds secured with sub-prime loans. This means the values of the loans is 30B and the value of the houses those laons are for at one point added up to 30B. Nowadays with a downturn in the market those houses are worth say 25B.
But the market value of those bonds may only be 10B since they involve poor loans. So ML has to take a 20B loss in states assets because the market value is so much lower. This hss caused the market for these types of securities to tank and essentially seized up the market. If the gov't would lift that provision for a the time being then ML could have increased their stated assets by billions and freed up the market to work a little more naturally.
A case of the gov't implementing something that seems good but has terrible unintended consequences.
We need to be careful about how we legislate fiscal responsibility. It doesn't work sometimes and can lead to an even worse problem.