Tuesday, January 20, 2009

The Worlds best economic minds went to Colludge too ya know.

"In the quest to clean up troubled banks and get them lending again, Mr. Obama's economic team has settled on a strategy that was ditched early on by the Bush administration: something ominously dubbed Bad Bank.

The idea for what's left of the $700-billion (U.S.) in bailout cash is to create one or more government-run “aggregators” that buy up bad loans and investments that are choking the banking system. It's worth trying, because nothing else has worked, some economy watchers say. And it will not be any more costly to the taxpayer than the so far unsuccessful strategy of injecting capital directly into major banks.

“When you order dirt to put in a hole and you empty the dump truck and the hole still isn't full, you've got to order another truck,” said Robert Brusca, head of FAO Economics in New York. “That's basically the problem.”

The drastic retooling of the rescue plan comes amid fresh evidence that officials around the world seriously underestimated how paralyzed even relatively healthy banks would become from the toxic waste spread throughout the financial system.

In Britain, officials have similarly launched another round of emergency relief after earlier capital infusions failed to spur lending, and public confidence in the banking system reached new lows. The government yesterday increased its stake in Royal Bank of Scotland to 70 per cent after the bank revealed that its losses for last year may total a staggering £28-billion ($41.3-billion), which would be a record for a British company."

Facing credit crisis, Obama team revives Bad Bank strategy

I especially liked the dump truck analogy. I wonder if those are Tonka trucks?


  1. Tonka trucks, no wonder the hole isn`t filling up.

    I thought resurrecting the old Clinton administration looked odd for change we can believe in but with the trillion or so in new stimulus still yet to come Obama has resurrected the Bush economic strategy times 2 or Bush 2.0.

  2. Finally America will find the bottom of its housing market! I have been shaking my head the last year at the stupidity of repeating the same mistake over and over again. How much sense does it make to set up the next downward spiral every time you forclose a house. Lets say two houses on a street are for sale and another house forcloses. The bank puts it on the market for whatever price they can get and drives the price down for the other two houses causing one of them to forclose as well as two others. so now the bank has three forclosed houses they can't find buyers for so they have assets that are returning no money and are actually costing money to hold not to mention the other origional seller forclosing along with a couple more neighbors. The U.S. banks now hold hundreds of billions in properties that bring in no revenue and will have to be sold pennies on the dollar to get rid of. on top of that many of these houses are being vandalized because they are sitting empty.

    What if two years ago they had set up this bank of last resort? When mortgages or credit cards went sour the banks had the option of getting say 60 cents on the dollar to sell the debt and thus having cash to lend out again to hopefully start recovering losses from lending in the past. And since this bank is not concerned with making money it can arrange for the homeowners losing their house to become renters for what they can afford until the housing market settles down and starts going up again. At that point they can remortgage the value of their house and start over again. These mortgages could then be sold back to the banks and at the end the taxpayer only gets hit with a small portion of the whole thing. Instead of the total collapse in the real estate market they have today it would have just gone through the normal correction period that occurs every time it gets too high and prices would be much higher than today and more than half the forclosures occuring now would not happen. Since the housing market is one of the biggest drivers of any economy we would have seen a normal recession rather than face a depression. The banking system would only see the worst ones go bankrupt while those that didn't make every loan a silly one would survive albeit not profitable for a few years which would have meant no bail out for the banking sector.

    Unfortunatly this is probably too little, too late but at least someone down there is finally thinking about something other than preserving bank profits.

  3. "Mr. Obama's economic team has settled on a strategy that was ditched early on by the Bush administration"

    More change we can believe in.

    Jill Biden said Joe was offered either the VP or Sec. State. Obama denied offering any choice and he was telling the truth. Biden himself said it was Clinton that put him in the VP slot so the decision was already made before it came to Obama.

    Congratulations to historic change we can believe in, Bill`s third term.

    Reminds me of an old joke from communist USSR days.
    Comrades, I have good news, today we will all have a change of shorts. Igor, you change with Ivan.

  4. And Igor said to Ivan, just in time. There's something living in mine.

    To which Ivan replied, I warned you about sleeping with White Russians.

  5. wayupnorth,

    As if it isn't foreboding enough already, the warnings about the 2nd wave of worthless debt are likely to make even the venturesome, extra cautious. If also feeds the sentiments of wait, it will go lower, for those who are presently sitting on their money. For some, this will offer an opportunity to recover some losses they may have sustained, but for many, they won't risk it. Once burnt, twice shy. Their dough is just plain gone into the hands of those who drove the cycle of speculation and knew enough to sell before everything tanked.

    I still can't get my head around the timing in relation to Obama's rise in popularity. Coincidence or design? Fodder for another theory.

  6. "the warnings about the 2nd wave of worthless debt are likely to make even the venturesome, extra cautious"
    I tend to agree comrade and so apparently does the stock exchanges.

    Quantum level discussions on stimulus between and by all Parties is proving to be a great distraction. As long as people are in enough fear they won`t question the very high possibility of failure, or the consequences.


    Projections cast doubt on government pledges to keep deficits short-term
    Mon Jan 19, 6:09 PM

    The federal government faces at least four years of multibillion-dollar deficits even before it starts spending billions more to stimulate Canada's stalled economy
    A senior government official has put the 2009-10 budget deficit in the $40-billion range, with Ottawa intending to inject $30 billion of economic stimulus in the form of infrastructure spending and tax cuts
    TD Bank chief economist Don Drummond, our economy will only recover when the international economy recovers.
    Prime Minister Stephen Harper told a meeting of business leaders in Halifax on Monday that there's a general consensus - a strong consensus - that all governments need to spend
    ***Exactly who is giving the strong consensus if Harper is telling business leaders the consensus news? The only consensus I have seen is among the politicians, CPC, LPC, NDP, BQ. Most experts agree deficit spending even on stimulus has a bad track record. They also speak of serious consequences of stimulus failure such as hyper inflation.
    Here`s a scary question, has anyone heard from a single politician on what the consequences of stimulus failure is? Perhaps even what the chances, if any, of success are? All I hear is we can`t do nothing as that will be worse. Really,,, worse,,, how do they know that if they don`t know what the consequences of stimulus failure is.
    There is a strong general consensus all right, politicians pulling their nuts out of the fire. If our politicians have yet to disclose the high possibility of stimulus failure it`s because the`re already too busy looking for excuses why it wasn`t their fault it failed. Probly some rogue government employee will take the blame for a few hundred billion added to the national debt.***

  7. Anon @1:50 p.m.

    "Most experts agree deficit spending even on stimulus has a bad track record."

    Could that be because once they have passed the Holy Chalice around the great circle, the cup runneth on empty?

    "Here`s a scary question, has anyone heard from a single politician on what the consequences of stimulus failure is?"

    Ah yes, that. Not that I can recall. I suspect their vision to be that the correction will take place naturally over the next 18 to 24 months, and the stimulus money will keep the reaper from the door until then. Additionally, bonuses will be available to all who Sup from the Great Cup.

  8. Store A is leveraged 80 equity/20 debt, store B 20 equity/80 debt.

    Let's say the equity in this case is food on the shelves and nothing else. Credit has tightened therefore interest rates have increased. What are the possible outcomes?

    A country has a ceiling as to how much equity foreigners can own in their chartered banks. The country's citizens don't have much faith, trust or liquid assets in present economy. Chartered banks can't raise the needed equity. Government decides to step in and buy equity. Government also needs to raise equity. Government issues bonds which these same banks also buy. Possible outcomes??

    A property with home sells for $10K. Taxes on land with home is $2000, taxes on property without home is $100. Possible outcomes?

    The bank idea has been tossed around for a while. What concerns me is that there is no underlying value in some of the assets, no paper trail. How would the debt be valued? Rounding up all the mortgage debt is one thing, consumer debt is a different kettle.

  9. "I suspect their vision to be that the correction will take place naturally over the next 18 to 24 months, and the stimulus money will keep the reaper from the door until then"

    Using our children to keep the reaper at bay, how very clever using such sacrifice.
    Ask not what government can do for you, but what you can do for government.

  10. Anon,

    Clever is what they do in question period. Those incapable read from cue cards.

    Bribing voters with their own money apparently isn't as good as adding their Children's future earnings as well.

    Like schlick on the commercial says, "get cash now!"