Monday, September 22, 2008

The Bail out Simplified

Here's my guess of what is being told Congressmen

Worst case Scenario:

If we do nothing and let the market take its course, people with debt would pretty much have 90 percent of it forgiven and those with savings would lose a big portion of it. The debtor would get title to their home for almost nothing and their debts written off. The unemployed would still be giving their house back to the state for unpaid taxes. The banks drop dead and the economy attempts to rise from the ashes. With 11 trillion in debt the government collapses.

Bail Out Scenario:

Debtors would still have to pay their bills on the books and our savings would only be diluted 50% for now and probably the full 90% when the whole thing unravels. A person with a retirement plan or bank savings, would recover half for the present. Government stays intact. Benefits paid out drop to zip. Social Security and health care reduced drastically.

In my opinion, this bail out is an attempt to preserve the current debt structure (what’s left of it). Government figures that it is better to buy the crap that is already spoiled and try to harvest what can be saved. This is what is being fed to Congress and it might not be the whole picture. Most of the interest only loans haven’t even started to reset. So the bail out could balloon drastically.

My view: We could come out OK by doing nothing. I’m just guessing that maybe 75% of our problem debt is foreign held. So everyone gets their house paid off and debts forgiven; that’s a good thing. The banks don’t collapse but the dollar goes to hell. That’s really not a problem; the rest of the world takes the proverbial “hand basket to hell” group charter. Look for inflation at 15%. Even with severe inflation, our government could afford to cover limited Social Security and some retirement benefits. Joe 6 pack makes out like a bandit and the "Real Rich" join the "Not so Rich" (call it tough love). The real loser here could be the stock market; it still stands to lose 60 to 90% either way.

The one thing I like about doing nothing is that it gets rid of the 75 trillion dollar derivatives market. That turkey is a bill that will never be paid. Let’s try to keep it that way.

As a footnote, I could be off by a country mile. This is what blogs are all about, we try to anticipate the future not report about the past.

Copyright 2008 All rights reserved


Anonymous said...

I laughed out loud at your " 'hand basket to hell' group charter" statement. Keep up the good work.

Free-market economics does work in competitive markets (some industries like utilities are natural monopolies where having no regulation is dangerous). I think the no-bailout option is the best solution for taxpayers.

I've called my two senators and House rep to give them my two cents (soon to be one cent if the bailout goes through).

Fort Worth, Texas

Jim in San Marcos said...

Hi John

I did the same, I hope they listen.

Thank you for your cmments

Sackerson said...

"$75 tn derivatives market"... I've seen a quote that the BIS estimates $1,000 tn+. How do we understand this market? How big a threat is it?

As to the "we sold 75% of the problem to foreigners", er, I'm not a US citizen. What's it going to do to us Brits? Do tell.

But if it stuffs the banks properly, savages the political elite, maybe gives the suffering over-mortgaged householder his house, and redirects what's left of the money system towards more productive sectors, uh, bring it on?

Except I fear that governments would rather start a major war than be made to account for their misdemeanours.

Anonymous said...

Jim. I think you're almost rooting for a depression at this point. You've been calling for it for 3 years now.

I don't like the amount of liquidity that has gone into keeping this ship afloat, but I am aware that the pumping of liquidity has kept the country from falling into complete disarray in other times too. I don't think there's going to be any chance at a fantastic result. But I think with the response so far, the market will probably sag to about 7000 in the next 7-8 months, and then slowly recover. House prices will sag until next fall, and then slowly recover. Inflation will be high (10%) for the next 2-3 years.

But then we'll come out of it. I think you're fear mongering a little bit here Jim.

Anonymous said...

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Anonymous said...

Anonymous writes:
"I think you're fear mongering a little bit here Jim"

What is the name of this blog? Oh yeah, the name is "The Great Depression of 2006". Did you expect to hear all about sunshine and happiness?

No matter how this thing turns out, you have to give the author of this blog credit for sticking to his guns!

What seemed crazy in 2006 does not seem so far fetched now. A lot of times I do not agree with Jim's analysis, but he called the calamity way before it was fashionable.

Keep up the good work Jim. You crazy SOB :)

Sackerson said...

@Anon 11:12 - your prediction of 7,000 points is fearsome enough!

Jim in San Marcos said...

Hi Sack

I'm not sure about the derivatives market. Hopefully a lot of it could fall by the wayside. I tend to envision them as side bets on a horse race. The amounts that people are talking about are mind boggling in size.

As for the debt owed to foreigners, everyone gets a slice to eat. France's Panama Canal Bonds are an example of a global hit. There is no bail out for investors, risk is the name of the game. If the rest of the world is forced to eat this stuff with us, we might get out of this eventually.

It's kind of hard to guess what's going to happen next. There isn't any good news coming out of this, and that's bothersome.

Thank you for your comments

Jim in San Marcos said...

Hi Anon 11:12

No argument from me. I expect the worse and if it doesn't get that bad, I'm pleasantly surprised.

Normally down markets are about 6 to 8 years in length. I don't really see this winding down in a two year cycle.

The future is pretty much an educated guess.

Thank you for your comments

Jim in San Marcos said...

Hi Komrade KS

Thank you for the Kudos. Your complements are my pay check.

Anonymous said...

Your blog is certainly one of the most thoughtful and levelheaded. If they want "fearmongering" I can show them some sites that are crazy. Look, does anyone KNOW where this is all going... no... that is why we are nervous and anxious. There is such uncertainty in the air. These hearings on TV honestly, it is making us look like we have lost a grip in this country... depression is depressing... but if we had any certainty at all we could all deal with this better... it is being in the dark we hate- and frankly I have felt in the dark since 911- our country hasn't been the same. All the secrets, is nuts- they should have a fireside chat and tell all- then the ship could be righted... they should all say they have seen this coming for a long time ( at least since 2006;) I hate it that they all act like they were in the dark- hey- but maybe they were- they are it seems so out of touch-
Catholic girl

Anonymous said...

Thank you for this great commentary. It is always outstanding and thoughtful. As far as I know, you are the only blogger to point out the obvious. Many derivative bets, CDS's and the rest of the alphabet soup are worthless, but no one lost any money except Investment Banks? When do you think the bad news will hit the mailboxes? After the election?

I'm Not POTUS said...

Hi Jim,

You forgot the part where Paulson reminds the politicos that they all can kiss their jobs goodbye, if we still have elections.

And I am also sure that Paulson did not mention to them that they could add on as many conditions, oversights and penalties they wanted. When the bill passes and gets sent to his boss, former King George II, will add a signing statement reverting the bill to it's original total authoritarian intent. And good luck getting it overturned before Jan 21st.

Anonymous said...

This is probably going to draw ire but what do all think - gut think - about Cramer ?? he is so hard to figure or follow... I think I am following him and the next day/night he says something that is totally opposite? He seems like Disneyworld to me- fake facades... but I want to know if he ever says anything I can trust?

Anonymous said...

Jim, I'm with Catholic girl, I always come to this site to get your level-headed perspective in a somewhat "over the top" blogosphere.

Jim in San Marcos said...

Hi Catholic Girl

Thank you for the complement. I don't think we can really blame anyone for this mess but ourselves.

Common sense says this should have stopped with the dot Com bubble and it didn't. People get mad when you try to take away the punch bowl. Somebody pointed out the other night that a Congressman wouldn't dare suggest that Joe6pack wasn't entitled to own a house because he couldn't afford the payments. The American dream was a home ownership for everyone. Nobody knew it was going to turn into a nightmare.

My opinions in 2006 were poked fun of, at the time. Rightly so, by people making lots of money in real estate.

Sadly there is no magic fix for this mess. The money is gone and like you suggested things are pretty uncertain.

Thank you for your comments

Jim in San Marcos said...

Hi Anon 10:53

The news should arrive by mail after September 30, the end of the quarter. I don't see how this can carry through past the election. I'm not a betting man with the rules being changed all the time now.

Jim in San Marcos said...

Hi Im not Potus

You know Paulson is out of a job too Jan 20th. Could be very interesting!

Jim in San Marcos said...

Hi Anon 3:21

Kramer is an entertainer. If he really knew how to pick stocks, he could quit his day job.

The thing to remember is that most people will not remember what you got wrong, only the stuff you got right. His calls on Fannie and Bear Stearns still get a chuckle.

Jim in San Marcos said...

Hi Watchtower

Thank you for the complement, The nice thing here is that we are having some fun musing about what might happen next.

Anonymous said...

Since we're musing.. I was musing about 911 and the 40 billion NYC asked Congress for initially after the horrific event. We all thought WOW what a lot of $- but we ( the average American ) would have given all we had- the good will in this country was amazing... whatever those people or that city needed... that is how we all felt, in fact most of us probably donated more to the Red Cross or some other charity for them, as well. Who would have thought just 7 years later the same city would initially ask for 700 billion.
There is no "good will" in this country for this-
in fact, did anyone notice the "southern" senator's reactions as compared to Dodd and Schumer? I happen to have days off and am being able to watch and blog and muse:)
Catholic girl

Anonymous said...

Yes, bloody brilliant. Let's do the whole "great depression and a world war" thing again. After all, what's a couple hundrerd million dead when you avoided rewarding some guy on Wall Street, right? Great price!

Anonymous said...

Maybe a stupid ? question but the MSM is saying McDonalds can not get a loan- do you believe this? Is it that bad? They are an international company- wouldn't someone in the world fund them? I am taking funds out of the bank tomorrow and avoiding the rush that's coming- a few dollars around the house just in case they close the doors a while. There will be a run if they keep scaring people.
Catholic girl

Anonymous said...

I am easily scared
Catholic girl

Anonymous said...

THIS BLOG WAS FIRST CALLED THE GREAT DEPRESSION OF 2005, so lets be honest about your call jim.

Secondly, there were many bloggers who called this credit mess;
calculated risk, Mish's economic analysis, Russ Winters, and many more who were at it long before Jim/ Not trying take credit away but the comments here brown nosing are getting a little carried away.

So you were right with the direction of the economy but way off on the time scale. It's like me saying we will have a bull market again, isn't that obvious, sure, but when! calling the time scale on events is very important.

Anonymous said...

excuse me anon- I have no reason to brown nose-
who are you??
I learned here first that there may be a depression and I learned it this year-
typed in depression and scrolled until I found a blog about it...
wasn't paying much attention until the gas prices soared but then my husband and I started thinking something may go sour with oil so high- till then was not even paying attention
- oh and by the way- anyone can call a bear or bull market but it takes guts to say there is going to be a depression when EVERYONE thinks you are nuts...
this may not be the only blog and it is not the only one I read but i have learned a lot here- not crazy conspiracy stuff just good financial stuff-
stuff a nurse wouldn't necessarily have ever been taught-
got issues?? don't take it so personal-
catholic girl :)
got your back jim :)

Anonymous said...

Hey Anon 3:25

Grow up.

Jim in San Marcos said...

Hi Everyone

Thank you for coming to my defense.

Anon 3:25 cracks me up accusing me of starting this blog in 2005. You can click on my profile and you'll see that it took me 4 months to figure blogs out before my first article in May of 2006. So no, I had no blog in 2005.

Many people have irritated me, suggesting that I move the date up each year because I have been "wrong" so far. My contention has been, that you won't know your in a depression for several years.

In 1929 no one at the time thought there was depression. 1932 it was a reality. From a historical point of view, the first depression probably started in 1927, but we have it as 1929. The thing not realized is that history books say it started in 1929 and people today take it as fact. The problem is, it took 3 to 4 years for the population of that time to realize that they were in a depression. It's not like passing a mile marker on the freeway.

Secondly I agree there were others that have been blogging on this mess. The reason I started blogging was because I was tired of having my comments buried in the comments section of some other bloggers post. So I recommend trying your shot at it, there is no pay but it can be fun.

Most of the people that write comments here like the idea of saying something and knowing that they will be read. There aren't 200 to 300 comments to sift through.

My suggestion to Anon 3:25 --> go see a proctologist for a second opinion

Sackerson said...

Jim, when they're shooting the messenger, you know they've got the message!

Anonymous said...

Although I have studied the markets and derivitives, and am aware of the issues and problems, I have been completely amazed at the events of this past week. It is absolutly surreal.

Anonymous said...

Contintinuation of surreal post:

By the way, called my bank this morning and they are still loaning money for cars etc.

Anonymous said...

I watched Bush's speech last night; did anybody else get the same eerie feeling of deja vu? I realized this week has been just like the runup to Iraq, with Paulson stepping in for Colin Powell.

I was half-expecting Powell to whip out some fuzzy satellite images to show us precisely where these "toxic mortgages" were beinig mixed and some audio intercepts of Wall Street bankers laughing their deep horror-film laugh (Haw, haw, haw, haw.... now give me my $700billion beotches....".

John D.,
Saginaw, TX

Anonymous said...

oops, meant Paulson.

Anonymous said...

this is anon 3:15.

Let me start a blog and make a prediction like Jim,

"the great bull market of 2010", and if I'm wrong by a few years and you buy too early and lose money, don't worry, we'll eventually get a bull market.

and sure Jim, I'll let you check my prostate for any swelling, didn't know you had an interest...

you guys on this board that just don't get the importance of time scale in predictions are probably not in the stock market.

those of you who are, when your puts expire, you'll understand the importance of time scale, as I'm sure Jim has found out by buying puts that have expired worthless for the past three years.

so, 2006, 2007, 2008, ok Jim, you got your three years, i.e. 1929-1932.

If anything, things(info, money flow,etc) move faster now days than the 1930's, so it shouldn't't have taken 3 years to feel the depression. in my opinion, the fact that we haven't gotten a depression yet tells me that it will probably not happen.

TIME WILL TELL ALL! we shall see...

Anonymous said...

Our corrupt govtmt officials care more about Wall St. than American households. What Paulson wants to do for his cronies on Wall St. is buy their close to worthless assets at a high price, thus allowing all other banks to mark to the "new market" (the Paulson market) and... Voila! their balance sheets look good again. The 700b will turn into 1.5t and the assets will never be able to be sold = Americans get burned for buying bad assets they can never sell for profit or break even. Paulson and his cronies will be long gone by then (living in their beautiful country manors or in exclusive long term care centers courtesy of their government pensions, social security and medical insurance).
A depression is being held off. As long as Fed and Govt can create credit and inflate, and hyper-inflate, they will hold of the great reckoning. The govt interference is what prevents us from predicting accurately. Consequences keep being pushed forward. All paper fiat currency empires eventually evaporate. We are the proverbial frogs sitting in the water, and the temperature is slowing moving towards the boiling point. I was criticized in this blog last year for being doom and gloom. But I say again... liquidating my assets, putting all my cash into Swiss near term treasuries and gold, moving to New Zealand and buying a nice little farm is a scenario that is approaching faster than anticipated.

Anonymous said...

Oh, and one last thought. No one in our government mentions the most important thing... GROWTH AND/OR PRODUCTION. This is the ONLY thing that gets one out of financial troubles.It is the only solution. Unless America starts producing services and products at competitive prices on a domestic and international basis (thus balancing out the trade deficit) we are doomed.
America has this diseased, degraded mind set that printed money and credit will solve everything. No one has to work or create valuable products or services anymore to exchange in the market place. Everything is supposed to just come to us. The something for nothing, information age, fiat money, credit, socialist viewpoint will be our demise. Where are the true leaders?

Anonymous said...


Against the $85,000,000,000.00 bailout of AIG?

Me too!

Instead, give $85,000,000,000 to Americans in a We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000
Bona fide U.S. Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up…
So divide 200 million adults 18+ into $85 billon that equals $425,000.00.
The plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.
Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage – housing crisis solved.
Repay college loans – what a great boost to new grads
Put away money for college – it'll be there
Save in a bank – create money to loan to entrepreneurs.
Buy a new car – creates jobs!!
Invest in the market – capital drives growth
Pay for your parent's medical insurance – health care improves
Enables Deadbeat Dads to come clean – or else
Remember this is for every adult U S Citizen 18+ including the folks
who lost their jobs at Lehman Brothers and every other company
that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of trickling out
a puny $1000.00 ( "vote buy" ) economic incentive that is being proposed by one of our candidates for President.
If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!
As for AIG – liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.

Here's the rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can "never work."
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than do the geniuses at AIG or in Washington DC.
And remember, This plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Unknown said...

Anon 10:34, I believe that is what is called "hyperinflation".

Anonymous said...

Lots of info both good, bad, odd, scary, etc...
Can you please write up a post on what we should be doing to best prepare for what is upcoming? With hyperinflation...should we be purchasing new
Should be stockpile/have extra food set aside?

What are your thoughts?

The Social Reformer said...

this bailout is guna be the death of us..

Anonymous said...

Did you know many of the fat cats who circulate from board to board and from job to job throughout the financial industry, are also members of the Bilderberg Group and or the Trilateral Commission? When someone takes your money and steals your car, it makes an impression. When they belong to such a secret political clique, it leaves an indelible impression. Many elected officials even belong to these cabals, hence the secrecy. When Bill Clinton eased banking restrictions, he dished out $8-billion dollars for community reinvestment loans. When the financing schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left banks in the lurch. Hillary Clinton counted on the loan giveaways to buy votes. Interestingly enough, had Hillary secured the nomination; she, instead of Barack Obama would preside over the bailout. So, where’s that $8-bilion plus dollars? Where’s Hillary? Why the caveat in Section 8 of the bailout: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” The Global Initiative people (code speak for car thieves) took my money; they stole my car. If you or I did half the things these people have done, we’d be serving consecutive life sentences. Wise up, get angry, and let the bubble burst. Remember, Ben Stein says we’re going to be just fine. You have my word on it. Gentlemen, I want my money back:

Anonymous said...

To Anonymous and the "New Proposal"... that math on that just doesnt add up.. 85 Billion divided out to 200 Million is only $425 to a person.. NOT $425,000. And I doubt that $425 will save our economy.. but its a good concept.

zgirl said...

Jim, As always, a thought-provoking post. I agree with you that the Derivatives gamblers should hang from their own rope, but I don't know if it's practical.

Sackerson: Different sources I've found put the value of the Derivatives market in the range of $40-85 Trillion. $600+ Trillion represents the trade in the market (i.e., if I sell $100 of IBM stock to Joe and he sells it to Jorge and he sells it to Aida, it gets counted as $300 in trades/settlements, even though it's still only $100 in stock value). See BIS data.

Global GDP is only $65 Trillion. Since derivatives have no value - their value is derived from something else - I think it is terrifying that they are valued at nearly the entire world's annual income.

Jim - sending the rest of the world to hell in a handbasket might not be the best approach. There is no way to quickly unwind the government's addiction to debt (let alone the individual's addiction) while keeping a fairly stable economy. As long as the government needs to keep borrowing Trillions, we need foreign investors to keep lending it to us.

Sackerson said...

@Zgirl - thanks for the clarification.

Jim in San Marcos said...

Hi Zgirl

The hand basket to hell was really a metaphor for what is liable to happen.

This house of cards is falling down, there is no stopping it.

Printing money rather than taxing to raise funds is an effort in futility.

There is really no money left for anyone to lend--at these interest rates

Thank you for your comments