Carol asks…
Why the govn’t does not invest 700B$ in education, heath care, alternate energy but bailout the banks instead?
I mean the role of the banking system and the capital market is supposed to funnel capital sectors that are good investment. The recent banking crisis can be attributed to the failure of this system to allocate money to where is needed, but rather over allocated to an excess sector like housing. Bailout will violate the principle of free market but saving a system that made serious mistake. Why not the government take control with direct investment in education, health care, alternative energy to create jobs and economic activities instead of saving a failed banking system? Many countries after the WWII such as Japan has government controlled strategic investment and produce good economic results. Is bailout of the banks really a solution that make sense or just because the politics? can someone explain to me?
The Expert answers:
The roll of the banking system to really to provide credit, not provide capital to fund sectors in the economy.
“An important part of the Federal Reserve’s statutory mandate is promoting the availability of credit throughout the banking system.”
http://www.federalreserve.gov/newsevents/testimony/Kroszner20070613a.htm
Banks loan money based on risk models. Clearly their models failed miserably. They over lent in the real estate market and assumed two things.
1. Real estate prices can never go down.
2. Interest rates can never go up.
The FED Funds rate went from 1.00% on 06-25-2003 to 5.25% 06-29-2006 – a 425% rate increase. This killed the real estate market.
Http://www.federalreserve.gov/fomc/fundsrate.htm
Anyone with adjustable rates were severely impacted. And millions got signature loans, leveraged phantom equity in their house and bought more real estate.
Thus I have to respectfully disagree with the statement that, “The recent banking crisis can be attributed to the failure of this system to allocate money to where is needed.” That would not be the role of banks.
Banks PRIMARY business is lending in the area of home and commercial real estate. The stock market provides capital to new and expanding business that banks do not want to take such risk.
Yes, a bailout would violate the principles of a free market.
However, the risk to the US banking system and hence the US economy are a far greater risk. We, as consumers cannot afford to allow massive banks failures. The result could be huge unemployment 30%+, soaring inflation/ interest rates (25-30%+), and a plunge in the US Dollar, further escalating inflation (everything will get expensive fast). This would make The Depression look like an e-Ticket at Disneyland.
Taking government control over the entire economy would be called Socialism. We would be looking at income taxes like most socialist countries who pay ~50% on income taxes with no deductions no matter how much you make. Socialists’ counties also pay 40-50% in sales tax. That is why people don’t drive luxury cars in mass in Europe, have big screen TV’s, as they do in the USA. Europe also pays double what we pay for gas. It’s the high EU socialistic taxes that everyone has to pay to live in socialists countries.
They also live what we would call apartments or very small housing in comparison. There are exceptions, but they are not common place like they are in the US.
Sure you get health care and education free, but it really isn’t free, because Europeans pay for those social programs via higher taxes. That is why we left Great Britain 232 years ago. Why would we go back to that program?
The USA spends more on education than any country in the world. We have more government sponsored universities, state schools, junior colleges, and K-12 than any anyone.
The USA spends about $ 1.25 Trillion (2007) on entitlement programs (welfare, social security, Medicare, and other related social programs). This amount will increase rapidly every year as more baby boomer retire and collect social security and need medicine.
Http://www.cbo.gov/ftpdocs/78xx/doc7851/03-08-Long-Term%20Spending.pdf
The government should allow tax breaks and other incentives to get PRIVATE money into alternative energy.
The US should use and develop our own energy which we have and could develop, but no one wants a nuclear power plant in their home town.
As a result of that “Toxic Substances Control Act” (Clean Air Act), [15 U.S.C. §2601 et seq]. We have not had a single new oil refinery built in the USA (for our own domestic oil benefit) since 1976.
Toxic Substances Control Act
http://www.epa.gov/lawsregs/laws/tsca.html
“There hasn’t been a new refinery built in the U.S. Since 1976, the result of extremely tight environmental restrictions, not-in-my-back-yard community opposition, and the high cost of new construction.”
http://www.msnbc.msn.com/id/6019739/
The government’s role is not to create jobs. That thinking would be shared by socialists. The gov can lay the foundation and set up the rules for the private sector to create jobs.
Japan obviously went through a bit of restricting since WWI, but so did the rest of the world. Japan is the #2 economy after the USA.
Http://en.wikipedia.org/wiki/Economy_of_Japan
Japan has not recovered in 19 years from the housing bust of 1989. The Nikkei-225 Index (Japan’s major market index) is still down about 50% from their 1989 high.
“The (Nikkei-225) average peaked at 38,915.87 points on December 29, 1989.”
http://www.nni.nikkei.co.jp/FR/SERV/nikkei_indexes/nifaqs.html
Chart
http://en.wikipedia.org/wiki/Nikkei_225
“Bailout”
So is a bailout of US banks a solution? Yes, it is a solution. Is it the only solution, no.
Keep in mind that despite incorrect belief, the US tax payer is not just handing out a $700 billion check to banks.
We would be buying up real estate ASSETS with that money, but not all at once. Homeowners would pay the gov for their mortgage. After 25-30 years, hopefully real estate price would be higher then, verses now. Then the US gov could and would sell those properties at current market prices. Any gain would go to the Treasury (the tax payers).
If structured correctly, the amount of money the tax payer could make could pay for a lot in the future.
If housing grows at just 3% a year for the next 30 years (assume 30 year mortgage) on average, that $700 Billion would grow to $1.699 Trillion.
Http://www.moneychimp.com/calculator/compound_interest_calculator.htm
This does not include the interest earned by tax payers on the mortgages.
In addition, I think it would be wise if the government REQUIRES all banks who participate in this “bailout” to GIVE the Treasury (the tax payers) rights or warrants and or Senior Preferred Stock (legal term is “Senior Liquidation Preference”) to own part of the bank’s stock. So if the bank makes money in the future, the Treasury (the tax payers) make a profit off their stock.
Senior Liquidation Preference
“A series of preferred stock has a “senior” liquidation preference when it is entitled to receive its liquidation preference before another series of preferred stock. ”
http://www.fenwick.com/vctrends/VC_Terms.htm
Preferred Stock
http://www.investopedia.com/terms/p/preferredstock.asp
I think this is a fair risk exchange for the Treasury (the tax payers) to take on all the bad banking decisions. So now we have several ways for tax payers to make money on their investment.
1. Rights, warrants, and or Senior Preferred Stock of ownership in such banks we bail out. Preferred stocks often pay quarterly dividends. We make money while we wait for a return on our $700 Billion investment. We profit on the banks growth in their stock price, when banks earn money in the future. We lose nothing if they don’t.
Banks can pay the Treasury a PREMIUM now, for the right to buy back the stock, warrants, etc, issued to the US Gov at a profit say 50%. I figure as long as the bank doesn’t fail in the future, the stock should easily have grown by 50% over 30 years.
Wachovia is up 87% (interday trading, 09-30-08 ) one day after they were taken over by the FDIC and handed to Citigroup.
2. We make interest on existing mortgages we bought with that $700 Billion. Some will default, yes, but tax payers get the house to hold or sell it for cash.
3. Mortgages that are held to maturity, (25-30 years from now) tax payers get fair market value of home prices in the future. That alone should pay off the investment. But I still think we should penalize the banks for making bad decisions, and say if you want tax payers to take on this investment, we want part ownership with the opportunity to share in the profits of your good assets too.
This is exactly how the Citibank – Wachovia deal was structured with the FDIC.
Video
http://www.cnbc.com/id/15840232?video=871751416
Summary:
“Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.”
http://www.bizjournals.com/stlouis/stories/2008/09/29/daily11.html?ana=from_rss
So, how the proposed bailout is structured will answer this question. And how the markets react to it, will be the “final answer.”
It would be nice if we could get all the billions of unnecessary pork barrel spending OUT of any bailout bill. This is Congress taking advantage of taxpayers in order to save the banking system. This is not a time to fund billions in “pet projects” during an election year.
Congress and the media need to sell this idea to taxpayers in these more realistic financial terms and not just (incorrectly) paint it as a “tax payer bailout of Wall Street.”
Donald asks…
Why is there such a heavy support for frac jobs (“fracking”) (see details below before answering)?
So I know what fracking is and that it gets natural gas out of the ground. But after doing some research, it’s clear that hundreds of chemicals are used during frac jobs in the extraction process. After looking into these chemicals, you’ll find that many are carcinogenic (that means they can cause cancer). So carcinogenic and toxic materials are being pumped into the soil and running off into waterways, some of which is leads to drinking water. I’ve firsthand seen this destroy whole ecosystems along streams and be so heavily concentrated in peoples’ drinking water that they can literally light it on fire. To say that this is clean energy is obviously propaganda. It hurts the environment and water supplies a lot, so why do so many people support it more so than other options such as alternative energy (wind, solar, etc.)? Oh and don’t say because of jobs. It’s been shown that switching to alternative energy entirely would actually triple energy related jobs.
Hey people I’m not saying our water isn’t imperfect in other ways too. This is not something for the market to decide though. When there’s 2 options and both help the economy, the logical option is to go with the one that doesn’t pollute the environment as opposed to the ones that puts carcinogens into the water.
@Olli if even half the money we spend on war went to developing alternative energy instead, there wouldn’t be an issue with money. Problems existed before but fracking has made things drastically worse. You gotta put the environment first. I mean do you fail to see that YOU live in the environment?
The Expert answers:
Because half of our country is obsessed with oil. No matter how many jobs alternative energy will create, no matter how much less we’d spend at the pump, no matter how much less we’d spend on oil subsidies, it all comes down to the money they THINK that they would have to spend to see alternative energy come to fruition on a national scale. They falsely believe that big oil is just an example of the free market at work, and that if alternative energy were viable it, too, would just go national privately, and not through subsidies.
Charles asks…
What do sustainable energy technicians do?
I ask because I can’t get a clear answer from the college near me thats offering the sustainable energy technician program which leads to an A.A.S.
I know what the course if for and what I will learn, but when I actually search for a sustainable energy technician JOB I can’t find anything whatsoever! I see other “green jobs” but all require a bachelors degree. So, is there anyone out there who can help me get a clearer picture of what exactly I can do with this degree? I see there are a few things listed that I can do, I’m not interested in installing and repairing in just one field though, I’d rather be more involved then that, in a job that pays more money then what some of these listed pay. If I have the knowledge in ALL of it then I want to use all of it, know what I mean?
Thanks in advance.
PS here is a part of the description.
In the SET courses’ labs, students will gain practical hands-on
experience in a variety of sustainable energy technologies. Students
will be qualified for entry-level positions in sustainable energy fields
such as wind, photovoltaic solar, biofuels and gasification.
These jobs include, but are not limited to:
• wind turbine installation and repair;
• solar panel installation and repair;
• energy efficient building, construction and remodeling;
• repair of energy-efficient vehicles;
• biofuels production;
• energy-efficiency assessment;
• alternative energy research; and
• geothermal installation and repair
The Expert answers:
Entry level positions and the schooling that it takes to get these just opens the door to a job. Most of these kinds of jobs either require experience, which you will get in an entry level job, or higher education AND experience.
Unfortunately, no one ever uses all the things they learned in school. It would be shortsighted to think that if you learn all that, that you would use it. You would have to work for several different companies because none of them is going to do everything listed.
Joseph asks…
Will the world be able to survive the last 8 year’s with the Bush Administration?
Al Gore would have created jobs by creating alternative energy. Too bad George Bush stole the presidency.
The Expert answers:
Simple. No.
William asks…
You know why I am for Natural Gas as an alternative energy?
There are so many reasons that I can write a book on it. Well let me summarize it like this. It will create so many jobs that we so desperately need. In every corner of our society since we are using technology that is so different to what we currently have.
Remember that everything we have now is outsourced. So we need something that no one else is using to pull ahead. We can also export Natural Gas to so many countries that we can pay off our debt so much faster.
Just think about it. We can end all of the wars since oil is not that important anymore. We can keep working on solar and wind technology at our own pace rather than rushing through it.
It just makes so much sense but Government bureaucracy is fracking it all up.
For those who believe in the lies of the New York Times take a look at this.
http://2.bp.blogspot.com/-yh7wTbJMBq0/Tagz9BAu7iI/AAAAAAAABaU/SQu5XRN-Lkw/s1600/Shale+gas+map+US.jpg
The Expert answers:
Except lots of other countries have this resource. So many, in fact, that we actually import natgas, because it is cheaper than producing in domestically.
Oil isn’t important anymore? You may be prescient in that remark, but I think oil is, and will unfortunately continue to be economically dominant for at least 20 more years. Likely much longer.
Government bureaucracy is fracking it up (pun fully appreciated!)? Because the land that private companies want to f*** up is government owned (remember, the government bought the Louisiana Purchase, annexed through was the Mexican Cession, and bought Alaska). If the companies want to exploit natgas, then they need to invest in the cleanup of the land at the closure of contracts, something the oil and gas folks have made sure the “bureaucracy” will forever more watch closely. It is the industry that f***ed up for itself, having no respect, like a bad renter at a rental agency turning in a house uncleaned, and wondering why they have a hard time renting the next time.
I didn’t bother reading the article. I generally agree with the sentiment of what you are saying, just not the specifics.
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