Wall Street's mess: Tech bubble 2.0?

This crisis is completely different, it is a DEBT bubble, accumulated over 30 years.

I came rather late to this article, and have to just add that the comments to this article are very high in caliber - very different from so many blogs one sees on this (or any) subject. Congrats to all commenters! Especially to WCM who IMHO wrote an excellent summary of how to really confront this issue with bravery and insight. Lets hope it comes to pass.

down 100K..do i get out??

This entire bailout has very little to do with the sub prime borrowers and more to do with greedy Wall Street brokers and banks. When you get a mortgage loan from the bank, the bank turns around and sells it to a Fannie/Freddie type institution to get their original investment back to re-loan. Wall Street divided this loan to several smaller instruments called Mortgage Backed Securities (MBS), and sold them to investors in the US and around the world. One of the factors leading to the Wall Street crisis was the encouragement of loans to customers with poor credit. Why? Sub prime debt commanded more value on Wall Street since those debtors paid a much higher rate of interest on their loans, for having marginal or non-existent credit. As a result, the sub prime MBS pool had a higher value since [at least on paper] they seemed to guarantee a higher rate of return. To add insult to injury our bond rating agencies gave these sub prime MBS a triple A rating thus deceiving those who bought them as good investments. The program started to crumble when these sub prime loans started to go bad, especially when their already higher interest rate got readjusted upwards. Further more the deteriorating state of the economy and falling house values led to the decrease in the market for all MBS ? good and bad. The situation is further complicated by the fact that we do not know how many of these MBS are out there, as many are off the-book transactions, and what their true market value is. Now, during the waning days of the Bush administration the Treasury wants a $700 billion revolving line of credit to ?bail out? all these undeserving financial institutions and MBS they hold by creating a market for them. Time to reward your big donors. The goal being to infuse some liquidity by allowing this toxic waste to be dumped onto unsuspecting taxpayers at a value that Treasury determines to be fair. This is insane and should be stopped. So how does the world suffer as a result of this? There is no consumer like the US consumer - always spending beyond their means. When the US consumer stops buying and US banks can't fund their appetite to buy more the world suffers especially China and ofcourse the US too. Don't forget that paper similar to MBS exists for credit card debt, student loans,auto loans and more. In my humble opinion the rating agency's are the ones to blame the most. Will this bail out solve all our problems - No! The only way to stop this madness is for the US citizens to live within their means. Yes businesses will have to make do with less profits too. We know this will never happen. So the bail out will take place and the party will start all over again till a new day of reckoning. Till then - party on dude!

allowing people to circumvent resposibility for their actions, especially when there is easy money in the first half of the cycle, is never the appropriate response (we don't do that with our children ... that is if we want them to become responsible adults). Wallstreet (which really has no location) is not dumb, and almost always "plays the odds" - if they think they can get away with it, that reduces the risk, and promotes that behaviour. The instant parallel is that is exactly what leads to criminal behavior - crime on the streets is all about higher probablility of reward vs. punishment. no discipline prompts more criminal acts. Isn't that what we see here?

I agree with High VT. Why should my tax dollars go to bail out these irresponsible companies, arrogant, incompetent Wall Street analysts? I don't even own a house. Should I help others keep their million dollar houses???

When you have been around as long as I have, you see the patterns repeat over and over again. The tech bubble burst of 2001-2002 did not need to happen. It was the bypassing of the presidential selection process that caused the burst. When a political party cheats to achieve a win, they go around the natural event that would have happened. If Al Gore had been selected as president, the bubble would not have burst and we would have had another 8 years of an economic boom. Investors look ahead, and if they perceive a president that is not technically savvy, they pull out and run for the hills. That is what I saw in 2002. We are seeing it again but with a different twist. Investors have seen cheating succeed and have lost confidence in the voting and election process. They can?t tell who will win, so they are pulling out and waiting. McCain is seen as not technically savvy (he has even admitted it) and Obama has shown he is extremely technically savvy. I believe if Obama wins, investors will flock back in and if McCain wins they will hold out and play it safe. America has the opportunity to create a new industry, millions of local jobs and an economic boom as big as the one Clinton and Gore created with the internet, connecting all schools to the internet, the space station and Hubble. We can do this with a Green movement. Install subsidized solar panels, energy storage systems and electric/NG cars in homes all over America. New businesses would pop up to support the local installations. We could reduce or eliminate the cost of going to work for each and every home owner. Home prices would start to climb, more technology could be built into homes and the energy sector would get something they have only dreamed about, mass energy storage across America under their control. That is how you stop a bubble from bursting. If you were an investor, who would you bet the bank on to create something like this, Obama or McCain? It took a young technically savvy Governor from Arkansas to teach us that a president with a dream and the will to achieve that dream can within a few short years fix anything. I would bet the bank on Obama because he has the most to loose, the future chances of a minority person to ever become president of the USA. If McCain wins, I would dig in and prepare for 4 to 8 years of mass homelessness, scratching by, poverty and nothing really happening except war. I would also prepare for another round of corporate greed and bubble bursting because nothing will change in the government regulation of companies cheating the middle class and the poor. If there is any hint of cheating in this upcoming election, America will pass growth and prosperity on to China because that is the place where all the investors will head for. We will then have achieved second class status in the world and the dreaded downfall of our country. In a market place driven economy with no regulation or customer protection, the market place goes to who can afford to purchase the products and not to those who cannot make ends meet. This is true for an individual or a nation. Without jobs we have no consumers, just a nation of debtors. At least in China, investors know he who cheats faces the firing squad.

Anyone handy with a spreadsheet can figure out that if productivity improves at 3% per year over one?s lifetime, purchasing power increases by an order of magnitude. If an hour of labor bought $1 in goods in 1938, the same hour buys $10 in 2008. This has nothing to do with inflation, it?s simply a measure of what one hour gives a producer and a consumer. ~~~ Up until the 1970s, women?s role in the US workforce was constrained by a number of social conventions. Moving women into the workforce and granting them the opportunities to advance in any skill category they wanted pretty close to doubled the effective workforce. The flood of product, and money, that started gushing out of the American economy in the 1980s, and in particular the 1990s, led to large amounts of dollars with nothing to do. And as they say, the devil finds work for idle cash (or something like that). ~~~ The tech bubble money was spent on laying fiber, filling up the network infrastructure with routers, installing cell phone towers, and a large number of other things that were stimulated by the pointless projects like on-line pet supply stores. A few extra Ferraris and Aeron chairs were sucked into this vortex, but a lot of needed construction was powered by the foolishness at the surface. ~~~ The remnants of the bubble left Americans, and the rest of the world, more productive than ever. Problem is, what people need is still pretty basic: food, a roof over one?s head, enough electricity to stay cool in the summer and warm in the winter, and enough gas to make it to work and to Disneyworld. All the remaining productivity manifests itself in conspicuous consumption. Most people?s conspicuousness is limited to a few things: houses, cars, boats, travel, and clothes. It?s possible to spend a lot of money on electronics, but people don?t usually spend such money month after month (except for IPods). ~~~ So here we are, seven years after the 2001 tech bust, busted again. Unemployment (including women that would not have even been considered in the workforce in 1930) is at 5%, rather than 25% at the worst point of the Depression. Our excessive consumption from overseas led to a huge demand for energy, which truncated the supply chains back to where they were prior to the runup in oil prices. We have too many houses, too many cars, too many cell phones, and massive amounts of content that would have, at one time, been CDs, 33 RPM records, or video tapes. What we?re short of is the right-of-way and infrastructure for roads, power lines, airports, transit systems, and long distance water transmission. Such things tend to be built by governments, and governments have to do nasty things like condemn buildings, relocate people who don?t want to move, and pave over pristine natural viewsheds: things that tend to get citizens cranky. ~~~ So are we due for another bust down the road? Count on it. Renewable energy. We need to replace about 30 gigawatts of power plants per year (x 30 years is 900 GW). Current RE growth rates are about 50% per year. Around 2013 global production will probably be equal to 30GW. Given that the US consumes 25% of all world energy supplies, 50% growth after that will lead to excess in a hurry. ~~~ There are two companies making PV s at about $1 per watt, and making 1Gw each per year right now. Whether production costs can decline to 50 cents per watt is an intriguing question, but if market prices settle at $1.50 per watt (the point where PV s compete with coal and natural gas) the incentive to overinvest is pretty significant. Conventional wisdom will insist than an excess supply is good, because we?ll find something to do with it. However, the story of energy consumption in the US is one of vast amounts of surplus. We were warned in 1973, but actual supply constraints didn?t appear until the last few years. ~~~ And after it happens, we?ll have plenty of RE infrastructure. Foolish investors will take a bath, the rest of us will be basking in clean energy heaven.

It seems to me that the $700b should be used to restructure the mortgages that are presently in default/forclosure, thus making it possible for millions of Americans to make their mortgage payments and remain in their homes. This would have a significant effect on the housing market, either slowing or stopping the downward spiral. Those millions of monthly payments would also do quite a bit to improve the health of the banking/financial infrastructure and so forth. Obviously, serious reform in the banking system needs to be part of this . Most lenders would be able to remain afloat, albeit not with much profit. That is the price they will pay for their mistakes and greed. At this point, I don't see that blaming one party or the other is of much consequence. Clearing our government of encumbants, however, does sound like a rather good idea though.

All: Both political parties are responsible for this, for policies going back some 60 years to keep Americans from facing the costs of government programs. Neither party is willing to do what is required. The effort by one poster to blame it all on the Republicans was an emotional reaction not based in history or facts. As an example, the debate during the 1990s on a balanced-budget amendment was a howler, with Sen. R. Byrd (D) arguing that the Feds couldn't live with a BB amendment because they couldn't estimate well enough. I saw that one live on C-SPAN, and almost choked right then. There is a sure-fire way to start fixing all this, guaranteed to work and easy to implement. Just go to the polls faithfully and vote out the incumbents...every time. After 12 years or so of this, the power structure that controls Congress will figure out that they can't get a good ROI on their investment in Congress any longer, and will start looking elsewhere. At that point Congress can begin passing the long-term requirements necessary to secure the country's future. Until Congress is unwound, though, from those that have brought them to the dance for so many years, NOTHING is going to change for the better, and I mean NOTHING NOTHING NOTHING. Unless of course you want to discuss bloody revolution, but I don't think that's a good idea.

Dear American I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude. I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you. I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe. This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred. Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds. Yours Faithfully Minister of Treasury Paulson

Though I am mostly opposed to government propping up the offenders, I see some sense in not letting the sins of a few bring the whole financial system down. When a few of the tech companies went under in 2000-2001 time frame, the company that failed probably had only $200MM or so in debt, and that was enough to sink the ship, and not many people cared that those offenders didn''t get rescued. But when these big financial institutions fail, the offenders typically get big separation packages and leave the carcass of a company with maybe $500Bln in debt because buying and selling debt has been the "stock in trade" for these companies. Trouble is, that debt translates into a whole lot of angry creditors, and depositors that just lost their savings. These are usually not the offenders but these are the ones who pick up the tab. Then of course, there is a cascade of consequences as the losses spread to other companies. The potential collapse of a heavily leveraged society is really at stake - I think Greenspan initially called it "revaluation of debt". I call it an old fashioned run on the bank, often perpetrated by other banks. So there is some sense in picking up the pieces and minimizing the damage. It will be a challenge for us to perform the rescue and redistribute the leverage without laying the groundwork for the next cycle of boom and collapse. I am hoping that regulation will follow that can curtail some of this leverage (debt). But first we will have to give up our "stimulus philosophy", the thinking that all you need to cure the economies ills is another stimulus package, and a tax cut. Someone needs to stand up and tell the American people to pay your bills.

This is a tragedy brought on by greed, the deliberate deregulation that gave a few fat cats the cash and left the rest if us all out to dry. With no accountability and personal responsibility it will happen again. The Republican party is TOTALLY TO BLAME! They are the ones who forced Clintons hand on free trade, gutted the environmental and financial regulations, and all the while promising a pot of gold for all their supporters. The people who supported these fat cats have taken us all down the freaking tube and you know as well as I that they will not be held accountable. I think we should dump the whole lot of the Republicans and have an independent party take its place. A group of REAL public servants instead of bunch of crooks beholden to the corporate children running the show and acting like babies, whining all the way to the bank.

I think the whole rational of the $700 billions bail out is the logic that if you take the excess housing inventory out of the market then the downward spiraling of the real estate market will stop and an equilibrium will achieve thus allow the buyer sentimel to improve. Would you willing to bet $700+ billion dollars on this theory?

I'm afraid I agree with john...shame on us, but couldn't we pull ourselves back out if we become a leader in manufacturing again. Such as clean energy...is there enough being done in that area today...how many years will it be before we are a leader in clean energy ideas and manufacturing to the rest of the world.

most of us (from the US treasury to the not working yet college student) is leveraged much too much. Our economy has become a shell game that nobody can figure out. It's time for a real change and neither Obama nor McCain will be able to do it, but we don't deserve better so we will continue with a downward spiral until we disappear as a real power on the world stage...shame on us.

We shall remember 2008 as the year we paid $700B to get Communism. It robs the hard working financially responsible people to bail out those who are not. Remenber the trump card of the government is to print money. Nobody should be fooled by its "effectiveness".

I agree with AM. The financial sector is very tightly tied to the basic liquidity of our currency where the tech companies were not. A failure in the financial sector would bring our entire economy down much like the 1929 crash. The failure of a money market fund last week was a small example of what could happen very quickly unless this is managed. I'm not happy with the fact that the government has to do this but the point is that the government will take ownership of discounted but illiquid assets that have risk but also a certain intrinsic value which can be sold in the future close to cost if not a slight profit. The risk is the other side of this that needs to be accommodated. This, however, is only the tip of the problem we will be facing in the not so distant future. We have a massive government and consumer debt. The value of the dollar continues to slide as the rest of the world prices in that added risk. This needs to be corrected or we will see a very serious collapse of the economy if not the government itself. The inflation caused by the devaluation is evident at the grocery store and the gas pump. Unless this is corrected the financial crisis will get worse.

I believe this is a different scenario than what we saw in the tech bubble of the 90''s. The main difference is when a tech company goes bankrupt, it doesn''t disrupt the entire world economy. What we''re seeing today is major banking institutions going under, which if left untouched likely would have sent the entire world financial market into a tailspin. This is a similar scenario to the Wall Street crash prior to the depression, except that the government is stepping in to staunch the bleeding. If done right, the buyout could benefit the government coffers in the long run by taking over a majority share of these institutions, when they become profitable again, the government will benefit with the profits.