A Visual Guide to the Financial Crisis:The Bailout

You rich elite worshipers forget one thing: You seem to believe your own lies when you say “The Rich” will just take their act elsewhere.

First: They have nowhere to go. Notice the “British Invasion” of music talent. We are the last country the rich elite can get away with their cr-p. Well, except for really failed countries where they live like kings, Louis XIV, rather as the dictatorships change monthly and the populace is not so much into revolution as cannibalism.

Second: They don’t earn their money. They either have it already or they are “Pigs that devour usury”. They don’t work for money, they buy and sell the labors of others. They don’t invent or innovate, they buy patents third hand and then have a lawyer use them to lawsuit blackmail actual producers for money. They move jobs overseas, and often that ends up costing more, but they bray to the government for our tax money to bail them out so they make a profit even when they wreck themselves with stupidity and indulgence.

End their “Free Ride” there will be plenty of inventors, entrepreneurs, innovators who’ve been held down by them eager to take their places and somehow I think they’ll be grateful, not hateful about paying “Their fair share” or more. Really, give me a million a year income, tax 60% of that I’m earning 400k a year, I think I’ll survive somehow. And if I’m concerned I’ll use “tax deductible” issues, not to get out of it, but to make sure most of my tax money goes to good ideas, like social programs.

http://www.pierretristam.com/Bobst/07/wf010507.htm
don’t be so afraid of socialism:D

1.) Why do the big three need a bailout if they produce tangible goods? obviously they are financially failed not economically failed. Therefore, need to file chapter 11 not recieve a bailout. Why do they also think it’s the taxpayers duty to bailout private companies monoplized by unions with democrat ties and affected by big government regulations? What about the employees from other companies who are failing but aren’t being saved by big government bailouts? (eg. Detroit free press, Tribune Co, NYT, Circuit City. etc…)

2.) I see no good reason to trust the same rationale that was behind bailing out the big banks. That $700 Billion TRAP was designed only to assist banks, however now insurance companies and even credit card giants like American Express are trying to get in on that action. Thus, This auto bailout is nothing more than, informal fallacy argumentation, ethier we complie or we caused everyone to be affected. How did that first bailout work again? Oh that’s right it was pork filled and paulson changed his mind on how that 700 billion should be spent. Not to mention, the economy has gotten worse. The stock market has tanked, and the deficit has soared to historic proportions. We’re now on the hook for over $7 trillion and some people are still begging for more? Who created this situation? Was it the fault of the tax-payers? Or was it the fault of bad management, the UAW with democrat ties, and the big Government regulations? All Evidence points to the latter. Furthermore, this isn’t the first time in history one of these car companies has asked the government for a bailout. In the late 1970’s Chrysler asked the government for a bailout telling the government their sob story and in the end they got their bailout. Flash forward to 2008 here they are again with another sob story asking the government for another bailout. ie. The government trough has reopened and the bad management, the lobbying special interest, and the UAW all feel they’re entitled to feed from it once again. The point of my example is this, they’ll just keep coming back asking for more and more tax-payer money. Those who learn nothing from history are doomed to repeat it. The big three are like bank robbers with alot of hostages so they aren’t afraid to black-mail tax-payers with the canard of 3.3 million jobs will be lost. The only way to cure the big three once and for all is to let them file chapter 11 and restructer from the bottom up. Moreover, Those auto part manufactureers can also do bussiness with the international auto-mobile makers that produce right here in america. Obviously they’ll pick up the slack for the big three if they end up failing. Honestly, do chief executives who fly on private jets really need a bailout? Seems to me, if one can create enough urgency then one can implament their agenda. And their agenda is obviously; Lemon Socialism!

Other industries have survived bankruptcy just fine:

eg. Most of the major airlines have spent time in bankruptcy, including United, Continental, Delta, Northwest, and US Airways. Their predicament looked particularly dire after 9/11. But the major carriers made it through. And to the extent that they suffered, low-fare competitors such as Southwest and JetBlue picked up the slack, often offering superior service in addition to cheaper prices.

Others have not:

eg. TWA/Delorean too big/historic to fail? (obviously not america is still here)

While another auto-mobile industry (leyland) which was in a very similar position to the big three’s situation now was indeed saved by a government bailout only to still fail in/by 2005: eg.http://edition.cnn.com/2008/BUSINESS/11/20/auto.industry.uk/index.html

(Note: For now I’m not even asking the big three to fail i’m only asking they file chapter 11.)
http://online.wsj.com/article/SB122939117718809261.html?mod=rss_opinion_main
http://www.cato.org/pub_display.php?pub_id=9787
http://www.frontpagemag.com/Articles/Read.aspx?GUID=F0FB4204-8E58-4E63-A348-AD9151BB6834 (Chapter 11 allows operations to continue while helping shed fatally unsupportable obligations. It does not mean liquidation.)

3.) They don’t all pay similar real wages: “The average private sector worker earns $25.36 an hour in 2006 $17.91 an hour in cash wages and $7.45 an hour in benefits such as pensions, paid time off, and health insurance. Autoworkers at Japanese plants located in the United States earn substantially more than this: between $42 and $48 an hour in wages and benefits, which amounts to over $80,000 a year in total compensation hardly cheap labor. However, The typical UAW worker at the Big Three earns between $71 and $76 an hour in 2006. This amount is triple the earnings of the typical worker in the private sector and $25 to $30 an hour more than American workers at Japanese auto plants. The average unionized worker at the Big Three earns over $130,000 a year in wages and benefits.” Where the other problem lies: “Health care costs the Big Three so much because the UAW negotiated gold-plated health benefits that include medical, hospital, surgical, and prescription drug coverage. These benefits also cover durable medical equipment (e.g., hearing aids), dental benefits, and even lasik eye surgery. For all this, GM workers and retirees must pay monthly premiums of $10 for an individual and $21 for families.These gold-plated health care benefits put the Big Three, and especially GM, at a competitive disadvantage.” http://www.heritage.org/Research/Economy/wm2135.cfm

Are they in the auto-mobile business or in the health insurance business? Last time I checked the auto-mobile industries made cars for X amount of profit. Hence the running joke that the big three are really health-providers who just happen to make cars.

From the NYT; Mitt came up with this plan:

“IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course – the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.”

4.) The logical fallacy here is assuming europe only wants american cars produced by the big three, but the reality of the situation is the free market doesn’t care “by whom in america” as long as an american company makes; small fuel efficient cars. Thus, it does not follow that they have to come specifically from the big three. Therefore, the international auto-mobile companies in America would then gain their exporting business replacing the big three. However, If the big three file chapter 11 the former won’t happen and as they restructer they can remain doing business in the european market. As for our trade deficit the only way of recovering our footing there is by declaring that the U. S. policy is to gradually reduce our trade deficit down to near zero. The goal of all countries should be equal trade. By gradually increasing the tariff on all goods imported into the United States from the following five countries Japan, Germany, China, Canada, and Mexico; Whom are responsible for 60% of our tade deficit. This will be the correct path to equal trade. Now that is a tariff with a responsible goal, a goal which is to create an international trading system based on equal trade between all nations.

ps. your site is aligned too far to the left center it out so I can read what you have to say. It’s such a pain in the arse.

wow..what a great diagram! hopefully everything will work out great and not just crumble.

See other people’s comments about the credit crisis at:
http://www.benovarghese.com/category/finance/

So we’re expected to trust a pack of Bolsheviks with our online banking credentials?

I don’t understand the people who don’t want to take more money from the wealthy. Here’s what I think.

First of all, the rich do not have to be SIGNIFICANTLY more taxed. It can be a small percentage higher than the poor and middle class. How will that stunt innovation? YES, they will obviously have less money, but not enough to stifle growth. The money does not have to be redistributed in the form of welfare either. However, it CAN be redistributed through federal government projects, subsidies, and a TRUE bailout of “Main Street.” Some of the money may also be distributed to state governments to spur state run projects and help THEM get out of THEIR debt. It seems that whenever someone calls for REDISTRIBUTING MONEY, every hardcore capitalist seems to think “Well that MUST mean more welfare!” Hardly. Think about the bigger possibilities instead of bashing people with rational ideas.

When do we begin to mimic Germany circa WWII, the frank was printed in such large quanities that families would burn them to stay warm, the wealthy left the country once the standard of living declined so there was no one with heavy pockets to bail the country out. Minus the literal burning of currency we are facing a similar dillema, the well-off have already begun to look to the door with there bags packed.additionally we are inflating faster than an irritant puffer fish. Is there a possibility we are scratching the ceiling of a room filling with water? Is is possible that a bail out just wont work. Are we witnessing the match that will burn Rome, ignite? Our own consumerism has lead to this situation mostly, our “bling-bling,” attitude combined with a middle class pocket book has created defecit that cannot be filled. No matter wich way you look at it or what chart you sketch our standard of living is falling and it will be much time before they rise again… dont believe me? Look at the consumer reports for the month of November and December 2008 and contrast them with last years and the year before… scary.

One of the interesting parts of this is that it shows how short-sighted some members of Congress have been while trying to find band-air bailouts. I think they need to work harder to fix the problems in the long-term, instead of focusing solely on the short-term.

Mitch McConnell, the Republican Minority Leader in the Senate, has been one of the few Congressional representatives who is talking about fixing the economy every chance he gets. He is making two key points. The first is that we don’t waste any additional tax dollars. The second point is that any economic stimulus/recovery plan needs to be well thought out. I strongly agree with both of those points. We need to make sure that any short-term fix doesn’t have major negative long-term consequences.

One of the areas I am most concerned about is the power that President-elect Obama and the large Democratic majority in Congress will have to repay political favors. Repaying those favors may come at the expense of truly fixing the economy. For instance, labor unions spent well over $300 million to help elect Obama and strengthen the Democratic majority in Congress. Now it seems the unions expect to get repaid for their support by having Congress quickly pass the Employee Free Choice Act, also known as the “Card Check” bill.

This bill would take away secret ballot elections in businesses where unions want to organize. I have no problems with unions when the workers decide on their own to form one. Especially in business sectors involving dangerous materials or processes, unions can serve a great purpose to protect worker safety. But it doesn’t seem to make any sense to take away the workers’ right to decide whether to unionize in a secret ballot election. Just as people were intimidated and coerced to vote certain ways in political elections in the early days of this country, the same thing would happen to workers who weren’t able to keep their votes secret. It would effectively stifle a lot of the debate because people with dissenting viewpoints would be opening themselves up to retaliation.

Plus, the fear of harassment could lead to “push-button” unions in a lot of businesses that really don’t require them – like very small businesses. Small businesses have always been the driving force of job growth and this bill could stifle them under excessive regulations. And that would really hurt the long-term prospects for the economy. I saw that the Friends of the U.S. Chamber of Commerce is working to make sure everyone knows about the potential negative effects of this bill. I encourage the other readers to sign their petition or directly contact their Congressional representative and ask them to protect worker privacy, fix the economy first, and fix the economy in the right way to ensure long-term growth. Here’s a link to the petition and some more information about the bill – http://friendsoftheuschamber.com/email/email4.cfm?id=178

Robin Brown, you said it all right there. I thought this would be some sort of real educated visual guide, not some sort of leftist theories. That solution did not compute realistically. It was like shooting us in the foot or brain for that matter.

It’s a quite difficult decision for any politician choosing between more bailout packages or letting the free market economic principles take care of the failed businesses, whether it is the financial institutions or automakers. The main focus should be defending the interests of middle-class Americans and creating a stable economic system that will guarantee long-term stability and sustainability. But here we also can face more challenges, since right now the Washington politicians are talking about the second large bailout package. If we bailout financial institutions and other industries again, when are they going to ask for the third bailout package? Or fourth? Maybe this is a time to let free market economy work rather than keep bailing out large, failed corporations? After all, it is the small and medium size businesses that create vast majority of middle-class jobs in America, not the large corporations. Maybe the government is better off to replace banks in lending practices and directly give loan packages with low interest rates to small and medium size businesses? That might work better and have a direct, immediate impact on economy and the middle-class America…

@ Clint

“Maybe I’m naive, but maybe someone can tell me – WHERE IS THE MONEY. Money is like matter or energy- its never truly gained or lost it just circulates. ”

Yes you are naive, but don’t worry- you are not alone. Until the average American understands the rules of the monetary game or better yet, the workings of the Federal Reserve, most will remain so. Matter may not be able to be created or destroyed, but the Fed creates money out of thin air.

THIN AIR, homie. Fractional-reserve banking depends on it. See also Derek’s post on Dec. 12th.

First of all: pardon my english, its not my first lanuage;

Love your blog man!

Just stumbled into this site and its really funny! Actually the comments are just as funny as the diagram! Living in one of those nasty socialist countries of Europe, I`m laughing pretty hard of some of those guys that write “This looks like the plan of Lenin” -> Yeah….I totally see the arrow where you overthrow the goverment and kill the royalty… and then take all private property and divide amongst the poor… Seriously.. are you high?! Lenin? BTW.. That wasnt the plan of Lenin as sutch cause he died relatively shortly after the 1918 uprising of russia, but youd have to actually know some history to know that

And “All the rich would flee the country…” Yeah.. thats why no rich people live in Europe and Canada… they live.. ehhh… in a big magical place where everyone is happy and pays nothing for anything

I`m not going to go into the whole capitalism/sosialism thing but I`m thankfuk that in the current crisis I live in a country where the unemployment rate is under 3% at the moment,we have a healtcaresystem that provides to everyone thus getting them BACK to the workforce, and a good unemplyment system so that people who loose theire jobs dont loose theire homes etc. My taxrate is 25-30% directly off the salary, and I pay it with happyness for the security it gives me. BTW..My wage as a nurse is about 45 000$ (US) pr year..so yeah…all sorts of sosialsm is a evil and bad!

Okay..so I kinda got into the sosialsm/capitalism thing.. My point is this; The best solution is propably somewhere in the middle.. not on either side! Both true capitalism and sosialism (communism) is bad for the people and the economy.
Thannk you and goodnight

That’s not true Jonny. Don’t use lame republican talking points. Think for yourself. BTW, the “socialist” countries of Europe… most of them have a higher standard of living than America. Also I don’t know if any of you trade, but when you’re a good trader the concept of working for an hourly wage seems like slavery and an absolute waste of time.

BTW “P” I don’t know how many European countries you’ve been too, or which ones.

But I wouldn’t live in Germany, Italy, Poland, or England. They do not have higher standard of living. Most don’t own cars, and houses are small. Many areas still have stay at home moms…..

STOP THE BAILOUTS and FIX THE BANKS
- Solve the loan problem.
- Solve the derivative problem.
- Reassemble whole loan mortgages.

The U.S. economy is shrinking fast, because businesses cannot get loans that they need to operate normally. Banks and lenders already made $ billions in bad loans, and they are afraid to make new loans. The government gave $ billions in bailout money to banks, and the banks hoard the money to save themselves.

Our financial system became untrustworthy, because it mixed $ billions in bad loans in with most of the good loans. Now, banks do not trust any of the loans, and the entire credit market stopped working.

The U.S. economy will continue to shrink until we untangle the loans. Once the bad loans are isolated, they can be fixed one at a time. Then trust will be restored. Credit will flow, and the economy will grow.

So far, our government is spending $ trillions on bailouts and pork projects, out of ignorance and political ideology. The real solution is much less expensive than that.

The USA has fixed this problem before, and it is not hard to do again.

A) Start with the Resolution Trust Corporation (RTC), which our government setup to solve a Savings and Loan problem in the 1980s.

B) RTC buys up components and derivatives to reassemble whole mortgages.
1. Total securitized mortgage market is estimated at $1.3 Trillion by a Professor of Economics at Ohio State University. (Also see the graph from Deutsche Bank at “The Death of Securitized Mortgages” http://www.nakedcapitalism.com/2008/06/death-of-securitized-mortgages.html )
2. Government buys components and derivatives at the lowest market price set via a reverse auction. (Google on “reverse auction”.)
3. Squatters, who sit on their derivatives in order to extort big $ from the rest of the system, can be forced to sell. (Law is analogous to eminent domain, or sales forced on cybersquatters that registered the domain names of well-established companies.)
4. Government pays derivative squatters at market price set by previous reverse auctions, perhaps with a penalty to the squatters.
5. Sellers give up all rights. No new law there.
6. Banks, investors, and insurers now have cash instead of questionable loans and derivatives, so the banking system is healthy with cash to lend.
7. Credit will flow, and the economy will grow.

C) Government reassembles whole loans from securitized mortgage components and derivatives.

D) Government sorts the newly reassemble whole loans (mortgages) into groups according to risk/quality.
1. Government uses traditional mortgage experts and guidelines to sort the home loans into quality groups, for example, a high quality group would include homeowners with 20% (or more) equity in their house at today’s market price; and house payments that are 25% (or less) of homeowners monthly income.

E) Government (RTC) sells groups of reassemble mortgages to traditional mortgage banks.
1. This solves the problem of renegotiating home loans with homeowners. Read on.
2. Law must be changed so that reassembled whole loan mortgages cannot be securitized into derivatives, again.
3. An important purpose is to reconnect each homeowner with his lender, and vice versa.
4. It eliminates incentive for mortgage lenders to make predatory and junk loans. If the loan fails, the lender is stuck with a bad loan.
5. Government recovers much of the $1.3 Trillion purchase cost, because government sells off the reassembled mortgages.
6. Groups of lower quality mortgage would fetch a lower price at auction.
7. Mortgage companies that buy the risky groups of mortgages did so at a lower price, and they have room to negotiate with the homeowners.
8. Some homeowner negotiations will not succeed. Those homeowners will move into affordable rentals. (The government does not owe everyone a free house.)
9. Other renters would like to buy those empty homes at reduced market prices.
10. If the government gets stuck with some homes, the government could profit by selling those homes when the housing market recovers.

F) Insurers like AIG may be reorganized through bankruptcy.
1. Securitized mortgage pools never made business sense, unless they were protected by various insurance schemes.
2. Those insurance schemes always were a scam.
3. Insurance only works when most of the insured assets are never hit with a disaster. That is why flood insurance does not work in the private market. A major flood ruins all the buildings in a large area, all at the same time. That is the fallacy of securitized mortgage insurance. In an economic downturn, the “disaster” hits all the houses, all at the same time.
4. Companies that ran the huge insurance scam will go through bankruptcy.
5. Never ending government bailouts for insurers like AIG are just throwing good money after bad.

This plan is inexpensive, tried and true. It leaves the banks healthy, with cash to lend. It restores trust in the credit markets, so loans will be made. It reassembles mortgage derivatives into whole loans, and restarts traditional mortgage lending. People can get loans to buy homes. Credit will flow, and the economy will grow. *

guy, gmmillennium_at_Yahoo.com
—————————————————-
*(footnote) The economy will grow if President Obama’s massive tax, borrow, and spending plans can be stopped, before he creates another Great Depression. Presidents Hoover and Roosevelt already tried to tax, borrow and spend their way out of a recession in the 1930s. Instead, they created the Great Depression, which lasted 12 years. Straight as he goes, President Obama is doing it, again. Nevertheless, cleaning up the securitized mortgage mess is a necessary first step.

this is terrible robin hood philosophy. i expected to see a chart about how people should save more money. while, none of the proposed taxes would apply to me, i still think you are insane.

i have no idea why you such a site would publish something so communist. i loved this website until now.

Wow… Why doesn’t Mint just manage our nations money?

Great idea – a wealth surcharge to get more money. Let’s punish the people who own the companies that provide jobs for people and give it to the people who don’t work, or to those who haven’t earned it.

This problem won’t be solved as long as there is no respect for the potential for the individual to be great. Welfare destroys the initiative for good honest people to work and earn their living rather than stealing it off the backs of those who are productive. No, we can’t all be millionaires, but we can work hard and be happy with what we have rightfully earned.

How about reducing taxes on those who already pay too much so they get to keep more of what they have actually earned and allow them to make the choices on how to invest their money. Then adopt a version of the flat tax so we all have a stake in the game and we all care about where the money is actually getting spent.

get rid of the federal reserve they are the biggest con since ghengis kaun, if you do a little research on fractional reserve banking you will probaly agree, i’m not even sure if america even exist anymore as a constitutional republic, from what ive gathered usa has been bankrupt for a long time and resorted to fiat tyranny long ago the sad thing is they got away with it for decades and still even afyter the bailouts people refuse to see the truth, many of us were sold out before we were even born

I didn’t know Mint.com was run by a bunch of psudeo-socialists. shame on you for telling people that creating value and wealth are bad while you’re trying to do the same!

The profit $1.8 billion in interest payments on the first set of bank loans that were repaid, from Obama Bailout is a good indication that the plan is working. That figure is according to news last June 10, 2009.

The current news that the Obama administration raises deficit forecast to $9 trillion also means that the White House has been way off with its economic projections. The effects of obama bailout on different sectors can be felt but not on a large scale. I think that’s the best option the current administration have to pull thru with the economic crisis.

I don’t know that much about finance, but I really liked you article!

I totally agree, I think we need to learn how to break a habit with the ‘past behavior’. I think we only need to look to the past to see we are just re-treading old ground in a new way.