JPF Home Page Forums Stop The Bailout

Man, I'm having a tough time with this issue - mostly because I don't know enough about it.

I heard Suze Orman say on CNN yesterday that a trillion dollars just disappeared in one day. Poof! Gone!

I don't think I believe this. Now my thinking here is probably too simplistic but tell me the flaw in the reasoning. Let's suppose I have $100, Joe has $10 and Bill has a share of stock. I buy the stock from Bill for $100. I hold it for awhile and then decide to sell it but no one wants to buy it. So I sell it to Joe for his $10.

At the end of the game, there is still $110 and one share of stock - it's just in different hands. If the underlying value of the stock was really $50 then Bill came out $50 ahead, Joe came out $40 ahead and I came out $90 behind. But no wealth was lost.

The crisis appears to be caused by lenders making bad loans. What does this really mean? Forget that they talked people who couldn't afford it into paying on inflated properties. I think the crux is really this: As lenders, they bought the properties for more than they were worth and now they can't sell them.

Who made out on the deal? The people who originally owned the property. There are a ton of people out there who made beaucoup bucks on this - but they are not the banks and lenders. They are the builders or original property owners (who I guess might have been other banks in some cases).

I suppose these people who made out could turn around and buy these properties at bargain prices. A classic case of sell high and buy low. And they might just do it - but it will take a very long time. In the meantime, the banks stuck with these properties don't have cash to loan.

So what's my take on the bailout? The answer is that the devil is in the details. If the government buys up these properties for more than they are worth, then we lose. If they are tough and buy them at low cost, then we will win in the long run.

So I could support a bailout if we get a good deal on these properties. The question then becomes whether the banks (which would have to take losses if we buy at bargain prices) would get enough out of the deal to start making loans again.

If we do nothing, things will sort themselves out eventually - but it will take a very long time and many innocents will be hurt in the process.....

Anyway, what do I know - I'm no economist.....

Scott