Good article on wall street bailout.
09-23-2008, 06:52 AM
#1
Registered User
Thread Starter
Join Date: Sep 2002
Location: Kirkwood, MO
Posts: 6,416
Likes: 0
Received 0 Likes
on
0 Posts
Good article on wall street bailout.
Many Americans today are asking themselves how the economy got to be in such a bad spot.
For years they thought the economy was booming, growth was up, job numbers and productivity were increasing. Yet now we find ourselves in what is shaping up to be one of the most severe economic downturns since the Great Depression.
Unfortunately, the government's preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention.
Ever since the 1930s, the federal government has involved itself deeply in housing policy and developed numerous programs to encourage homebuilding and homeownership.
Government-sponsored enterprises Fannie Mae and Freddie Mac were able to obtain a monopoly position in the mortgage market, especially the mortgage-backed securities market, because of the advantages bestowed upon them by the federal government.
Laws passed by Congress such as the Community Reinvestment Act required banks to make loans to previously underserved segments of their communities, thus forcing banks to lend to people who normally would be rejected as bad credit risks.
These governmental measures, combined with the Federal Reserve's loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.
Don't Miss
Obama blames lobbyists, politicians for crisis
Commentary: McCain, Obama botching response to crisis
Commentary: How to prevent the next Wall St. crisis
In Depth: Commentaries
When interest rates are lowered to below what the market rate would normally be, as the Federal Reserve has done numerous times throughout this decade, it becomes much cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.
Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.
In this case, this manifested itself in overbuilding in real estate. When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically.
This lowering of prices brings the economy back into balance, equalizing supply and demand. This economic adjustment means, however that there are some winners -- in this case, those who can again find affordable housing without the need for creative mortgage products, and some losers -- builders and other sectors connected to real estate that suffer setbacks.
The government doesn't like this, however, and undertakes measures to keep prices artificially inflated. This was why the Great Depression was as long and drawn out in this country as it was.
I am afraid that policymakers today have not learned the lesson that prices must adjust to economic reality. The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay.
Additionally, the government's actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.
Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.
The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.
It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.
The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.
Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride.
For years they thought the economy was booming, growth was up, job numbers and productivity were increasing. Yet now we find ourselves in what is shaping up to be one of the most severe economic downturns since the Great Depression.
Unfortunately, the government's preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention.
Ever since the 1930s, the federal government has involved itself deeply in housing policy and developed numerous programs to encourage homebuilding and homeownership.
Government-sponsored enterprises Fannie Mae and Freddie Mac were able to obtain a monopoly position in the mortgage market, especially the mortgage-backed securities market, because of the advantages bestowed upon them by the federal government.
Laws passed by Congress such as the Community Reinvestment Act required banks to make loans to previously underserved segments of their communities, thus forcing banks to lend to people who normally would be rejected as bad credit risks.
These governmental measures, combined with the Federal Reserve's loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.
Don't Miss
Obama blames lobbyists, politicians for crisis
Commentary: McCain, Obama botching response to crisis
Commentary: How to prevent the next Wall St. crisis
In Depth: Commentaries
When interest rates are lowered to below what the market rate would normally be, as the Federal Reserve has done numerous times throughout this decade, it becomes much cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.
Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.
In this case, this manifested itself in overbuilding in real estate. When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically.
This lowering of prices brings the economy back into balance, equalizing supply and demand. This economic adjustment means, however that there are some winners -- in this case, those who can again find affordable housing without the need for creative mortgage products, and some losers -- builders and other sectors connected to real estate that suffer setbacks.
The government doesn't like this, however, and undertakes measures to keep prices artificially inflated. This was why the Great Depression was as long and drawn out in this country as it was.
I am afraid that policymakers today have not learned the lesson that prices must adjust to economic reality. The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay.
Additionally, the government's actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.
Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.
The solution to the problem is to end government meddling in the market. Government intervention leads to distortions in the market, and government reacts to each distortion by enacting new laws and regulations, which create their own distortions, and so on ad infinitum.
It is time this process is put to an end. But the government cannot just sit back idly and let the bust occur. It must actively roll back stifling laws and regulations that allowed the boom to form in the first place.
The government must divorce itself of the albatross of Fannie and Freddie, balance and drastically decrease the size of the federal budget, and reduce onerous regulations on banks and credit unions that lead to structural rigidity in the financial sector.
Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride.
09-23-2008, 02:37 PM
#2
Registered User
Join Date: Feb 2005
Posts: 3,409
Likes: 0
Received 0 Likes
on
0 Posts
Not sure if I agree with all of it, but he has a more then decent grasp of the overall picture. If you take the rapid and unexpected devaluation of home prices as the root of this crisis, which I know it is but respect others' opinions, it is fairly clear that the diversion far from the mean was due directly to much of what RP mentions not too many years ago.
As far as the solution goes, I will not attempt to understand the systematic effects of what RP proposes. I have a pretty good guess that it would get extremely ugly and make our current environment of "all hell breaking loose" look fairly pleasant. Like cthree mentioned earlier, what Paulson and ol' Benny have done could end up being quite ingenious. There is a real possibility they are just buying at a firesale and it could all work out as they plan. However, a decade of dealing with what may come to be poor decisions of the present is certainly not out of the question.
I don't even think what these guys are doing is really proposed as a solution, it's plan a-z. There is no other option at this point. If they do manage to not utterly, completely, absolutely make a catastrophic disaster out of this ordeal I will be a little surprised.
I like RP btw.
As far as the solution goes, I will not attempt to understand the systematic effects of what RP proposes. I have a pretty good guess that it would get extremely ugly and make our current environment of "all hell breaking loose" look fairly pleasant. Like cthree mentioned earlier, what Paulson and ol' Benny have done could end up being quite ingenious. There is a real possibility they are just buying at a firesale and it could all work out as they plan. However, a decade of dealing with what may come to be poor decisions of the present is certainly not out of the question.
I don't even think what these guys are doing is really proposed as a solution, it's plan a-z. There is no other option at this point. If they do manage to not utterly, completely, absolutely make a catastrophic disaster out of this ordeal I will be a little surprised.
I like RP btw.
09-23-2008, 03:54 PM
#3
Administrator
This belongs in the Politics forum as it contains little or nothing of interest to investors. However, since you put it here, I assume you are looking for feedback from those who are investors. In future this sort of material should go elsewhere.
That said, the position is populist and therefore absent of reality. There are a number hard facts this statement sidesteps:
1. Nobody complained when they were handing out the money in the first place. Where was the talk of moral hazard then? It wasn't a secret. Look at the value of the US dollar against the Euro for the past 8 years. As the banks printed more money and middle-class America was driving 3 cars, an RV, got a 4000 sqft house and a second one to rent at the same time as RENTS WERE FALLING, the world markets were discounting the US dollar.
2. The assets are not illusionary, they are people's mortgages, backed by their very real homes, corporate debt funding projects real people make a living from to pay their very real mortgages. While the value of those assets is in question the existence of those assets are very much real.
3. What we are seeing is not the result of government involvement in the markets but the result of an absence of it. When a capitalist system is allowed to run amuck the damage it causes is swift and severe. Capitalism without control is anarchy, pure Lord of the Flies". This is not theory, it's fact. The fact is that those financial markets which are the most regulated are the ones which have the fewest problems. I know Americans suffer from NIH blindness but look around. The Canadian, German, French, Scandinavian, Swiss and other highly regulated banking systems ARE NOT in crisis. Indeed, those systems in the most trouble are those which model most closely the largely unregulated and unchartered US banking system.
4. Lives are short and finite. It's fine to say that letting the US financial system collapse under the weight of its own excesses and rebuilding it from the ashes is the optimal long-term strategy. The reality however is that YOU are going to need to spend the next 10 to 15 years scraping by at best and abandoning any hope of ever retiring, EVER.
This is a REALLY BIG DEAL. Being glib about it doesn't offer any constructive input. Your life is going to change and I assure you it's not going to work out as you planned up to now. Long term my ass. This is an immediate problem requiring an immediate solution. Bernanke is a expert on the Depression. He's uniquely qualified to do his job.
Government involvement in the US financial markets is 2920 days late and $1 trillion short but better late than never.
That said, the position is populist and therefore absent of reality. There are a number hard facts this statement sidesteps:
1. Nobody complained when they were handing out the money in the first place. Where was the talk of moral hazard then? It wasn't a secret. Look at the value of the US dollar against the Euro for the past 8 years. As the banks printed more money and middle-class America was driving 3 cars, an RV, got a 4000 sqft house and a second one to rent at the same time as RENTS WERE FALLING, the world markets were discounting the US dollar.
2. The assets are not illusionary, they are people's mortgages, backed by their very real homes, corporate debt funding projects real people make a living from to pay their very real mortgages. While the value of those assets is in question the existence of those assets are very much real.
3. What we are seeing is not the result of government involvement in the markets but the result of an absence of it. When a capitalist system is allowed to run amuck the damage it causes is swift and severe. Capitalism without control is anarchy, pure Lord of the Flies". This is not theory, it's fact. The fact is that those financial markets which are the most regulated are the ones which have the fewest problems. I know Americans suffer from NIH blindness but look around. The Canadian, German, French, Scandinavian, Swiss and other highly regulated banking systems ARE NOT in crisis. Indeed, those systems in the most trouble are those which model most closely the largely unregulated and unchartered US banking system.
4. Lives are short and finite. It's fine to say that letting the US financial system collapse under the weight of its own excesses and rebuilding it from the ashes is the optimal long-term strategy. The reality however is that YOU are going to need to spend the next 10 to 15 years scraping by at best and abandoning any hope of ever retiring, EVER.
This is a REALLY BIG DEAL. Being glib about it doesn't offer any constructive input. Your life is going to change and I assure you it's not going to work out as you planned up to now. Long term my ass. This is an immediate problem requiring an immediate solution. Bernanke is a expert on the Depression. He's uniquely qualified to do his job.
Government involvement in the US financial markets is 2920 days late and $1 trillion short but better late than never.
09-23-2008, 05:35 PM
#4
Registered User
Join Date: Feb 2005
Posts: 3,409
Likes: 0
Received 0 Likes
on
0 Posts
Originally Posted by cthree,Sep 23 2008, 03:54 PM
Bernanke is a expert on the Depression. He's uniquely qualified to do his job.
Government involvement in the US financial markets is 2920 days late and $1 trillion short but better late than never.
Government involvement in the US financial markets is 2920 days late and $1 trillion short but better late than never.
09-23-2008, 05:40 PM
#5
Administrator
Yeah, who would have thunk spending an entire academic career studying the Great Depression in excruciating detail would turn out to be the exact thing the guy was going to need later in life. Go figure.
09-23-2008, 07:05 PM
#6
Registered User
Join Date: Nov 2002
Location: slo
Posts: 473
Likes: 0
Received 0 Likes
on
0 Posts
Originally Posted by cthree,Sep 23 2008, 03:54 PM
This belongs in the Politics forum as it contains little or nothing of interest to investors. However, since you put it here, I assume you are looking for feedback from those who are investors. In future this sort of material should go elsewhere.
That said, the position is populist and therefore absent of reality. There are a number hard facts this statement sidesteps:
1. Nobody complained when they were handing out the money in the first place. Where was the talk of moral hazard then? It wasn't a secret. Look at the value of the US dollar against the Euro for the past 8 years. As the banks printed more money and middle-class America was driving 3 cars, an RV, got a 4000 sqft house and a second one to rent at the same time as RENTS WERE FALLING, the world markets were discounting the US dollar.
2. The assets are not illusionary, they are people's mortgages, backed by their very real homes, corporate debt funding projects real people make a living from to pay their very real mortgages. While the value of those assets is in question the existence of those assets are very much real.
3. What we are seeing is not the result of government involvement in the markets but the result of an absence of it. When a capitalist system is allowed to run amuck the damage it causes is swift and severe. Capitalism without control is anarchy, pure Lord of the Flies". This is not theory, it's fact. The fact is that those financial markets which are the most regulated are the ones which have the fewest problems. I know Americans suffer from NIH blindness but look around. The Canadian, German, French, Scandinavian, Swiss and other highly regulated banking systems ARE NOT in crisis. Indeed, those systems in the most trouble are those which model most closely the largely unregulated and unchartered US banking system.
4. Lives are short and finite. It's fine to say that letting the US financial system collapse under the weight of its own excesses and rebuilding it from the ashes is the optimal long-term strategy. The reality however is that YOU are going to need to spend the next 10 to 15 years scraping by at best and abandoning any hope of ever retiring, EVER.
This is a REALLY BIG DEAL. Being glib about it doesn't offer any constructive input. Your life is going to change and I assure you it's not going to work out as you planned up to now. Long term my ass. This is an immediate problem requiring an immediate solution. Bernanke is a expert on the Depression. He's uniquely qualified to do his job.
Government involvement in the US financial markets is 2920 days late and $1 trillion short but better late than never.
That said, the position is populist and therefore absent of reality. There are a number hard facts this statement sidesteps:
1. Nobody complained when they were handing out the money in the first place. Where was the talk of moral hazard then? It wasn't a secret. Look at the value of the US dollar against the Euro for the past 8 years. As the banks printed more money and middle-class America was driving 3 cars, an RV, got a 4000 sqft house and a second one to rent at the same time as RENTS WERE FALLING, the world markets were discounting the US dollar.
2. The assets are not illusionary, they are people's mortgages, backed by their very real homes, corporate debt funding projects real people make a living from to pay their very real mortgages. While the value of those assets is in question the existence of those assets are very much real.
3. What we are seeing is not the result of government involvement in the markets but the result of an absence of it. When a capitalist system is allowed to run amuck the damage it causes is swift and severe. Capitalism without control is anarchy, pure Lord of the Flies". This is not theory, it's fact. The fact is that those financial markets which are the most regulated are the ones which have the fewest problems. I know Americans suffer from NIH blindness but look around. The Canadian, German, French, Scandinavian, Swiss and other highly regulated banking systems ARE NOT in crisis. Indeed, those systems in the most trouble are those which model most closely the largely unregulated and unchartered US banking system.
4. Lives are short and finite. It's fine to say that letting the US financial system collapse under the weight of its own excesses and rebuilding it from the ashes is the optimal long-term strategy. The reality however is that YOU are going to need to spend the next 10 to 15 years scraping by at best and abandoning any hope of ever retiring, EVER.
This is a REALLY BIG DEAL. Being glib about it doesn't offer any constructive input. Your life is going to change and I assure you it's not going to work out as you planned up to now. Long term my ass. This is an immediate problem requiring an immediate solution. Bernanke is a expert on the Depression. He's uniquely qualified to do his job.
Government involvement in the US financial markets is 2920 days late and $1 trillion short but better late than never.
The root cause of the housing problem is pretty complex and has multiple causes. Government policies and interest rates did play a role....
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis
09-23-2008, 07:43 PM
#7
Registered User
Join Date: Feb 2005
Posts: 3,409
Likes: 0
Received 0 Likes
on
0 Posts
Like cthree said, this isn't the politics forum and we have enough emotion in here as is. Neither side is clear cut, cthree makes good points and as a politician RP seems to have a better grasp then the rest of them. I can't think of anyone else who even attempts to explain it, especially in their own words which RP probably does.
Trending Topics
09-24-2008, 08:07 PM
#8
Registered User
RP and Austrian economists did complain starting back in '03.. A bubble was inevitable, and they predicted it.
I don't see this as a failure of capitalism. You can't take some parts of the theory, disregard others, and expect to have a fully functioning system. You can't manipulate interest rates to inflate the economy out of a down turn and simultaneously claim the government allows the market to function freely. You can't give unnatural incentives that alter the ordinary allocation of resources and claim the government allows the market to function freely.
The bottom line: The FED gave out free money and the government made it artificially beneficial to buy a home and encouraged unfit people to do so. The bust isn't the problem. The boom was the problem. Real capitalism is ruled by the relationship between greed and fear.. risk vs reward. Regulation strives to control, reign in, and put a cap on greed, but greed isn't a problem when it's properly balanced by fear. Starting in 2001 (most recently), the government took it upon themselves to remove that fear.. what happened since was to be expected.
With that said, our system as it stands today, with a few people controlling policy and thinking they can control the economy, certainly needs more regulation.. that much is abundantly clear.
I don't see this as a failure of capitalism. You can't take some parts of the theory, disregard others, and expect to have a fully functioning system. You can't manipulate interest rates to inflate the economy out of a down turn and simultaneously claim the government allows the market to function freely. You can't give unnatural incentives that alter the ordinary allocation of resources and claim the government allows the market to function freely.
The bottom line: The FED gave out free money and the government made it artificially beneficial to buy a home and encouraged unfit people to do so. The bust isn't the problem. The boom was the problem. Real capitalism is ruled by the relationship between greed and fear.. risk vs reward. Regulation strives to control, reign in, and put a cap on greed, but greed isn't a problem when it's properly balanced by fear. Starting in 2001 (most recently), the government took it upon themselves to remove that fear.. what happened since was to be expected.
With that said, our system as it stands today, with a few people controlling policy and thinking they can control the economy, certainly needs more regulation.. that much is abundantly clear.
09-25-2008, 10:57 AM
#10
Administrator
Seriously, pure capitalism doesn't work and never has but that's for another discussion.
Nothing exists in isolation and this problem is not separate from past problems but a continuation of them. The real architect of this crisis is everyone you've elected to office for the past 20 years and a desire to create wealth without earning it.
You can't have a multi-billion dollar trade deficit year after year AND increase the real wealth of the country. It can't be done. The US is a net importer and consumer of resources, raw and manufactured. Americans pay for those imported goods by issuing debt. That debt is used to keep taxes unrealistically low, subsidize unprofitable businesses and pay for domestic and military activities which result in no net production.
While the US has remained largely employed it has done so in two ways:
1) issuance of national debt
2) creation of a supply of money in the form of personal debt
In the mean time, domestic industrial output has declined. Factories are all but closed and the bulk of industrial production shipped overseas. Taking its place are millions of service industry jobs.
The REAL problem is that #2 above is in default. All that money created by dirt cheap interest rates and a loosening of lending standards, while great at the time people were out spending it, has suddenly vanished. First is the problem of servicing that debt but secondarily the money supply has shrunk dramatically. The immediate effect is that the money people have to spend has dried up. There is no more cheap money to buy houses, planes, trains or automobiles with. Supply and demand dictates that when demand falls and supply remains constant the value of that "thing" declines. House prices go down due to oversupply. Dropping house prices have people up-side-down on their loans (due to those lax standards, see #2) and the money supply almost completely disappears.
#2 is now completely gone and you get a severe recession. Not only is it gone but it's become a vacuum, a financial black hole which is going to fill itself with? Exactly, #1. All that personal debt is going to become national debt, shared equally among everyone regardless of who got the lion's share of the free money in the first place.
If you didn't finance a park avenue penthouse and a Ferrari with borrowed money at some point over the past 5 years, sorry you FAIL. Here's your bill.
Now, there is no real risk of the US defaulting on its debt, not in the short term anyway, but those holding it aren't all that happy about it being diluted to the tune of a trillion (a 1 followed by 12 zeros, a number so big it can't be entered into a standard pocket calculator). Worse for them (we're talking China here) they also hold the other side of that trade deficit.
This is the global impact of this crisis. China and other large US debt holders have been taking IOU's for a good part of their GNP. The US issues debt, China buys it. The US takes that money and gives it to the taxpayers through various direct and indirect means. Those taxpayers spend that money on goods imported from China, where it all began. China's economic situation is a different matter but you see how it's connected.
Going forward the US has big problems that need to be addressed. The bank aid package will be approved plus or minus a little language but it's a done deal. The real problem in the future is how to turn the sinking ship around. The US cannot continue to compound debt and cannot continue to be a net consumer. As you go to the polls and chart a course you have to understand that things can't be business as usual. This problem will continue to recur over and over until the US becomes trade neutral. Your standard of living will not improve in aggregate (some will always do better than others) and your wealth will continue to decline relative to your peers.
If you need proof that we have spent the past 8-10 years going absolutely nowhere you need not look any further than the stock market. The S&P 500, the Russell 2000, the NASDAQ composite, the NYSE composite and even the DOW30 have a net value equal to what they had in Sept 1999.
Nothing exists in isolation and this problem is not separate from past problems but a continuation of them. The real architect of this crisis is everyone you've elected to office for the past 20 years and a desire to create wealth without earning it.
You can't have a multi-billion dollar trade deficit year after year AND increase the real wealth of the country. It can't be done. The US is a net importer and consumer of resources, raw and manufactured. Americans pay for those imported goods by issuing debt. That debt is used to keep taxes unrealistically low, subsidize unprofitable businesses and pay for domestic and military activities which result in no net production.
While the US has remained largely employed it has done so in two ways:
1) issuance of national debt
2) creation of a supply of money in the form of personal debt
In the mean time, domestic industrial output has declined. Factories are all but closed and the bulk of industrial production shipped overseas. Taking its place are millions of service industry jobs.
The REAL problem is that #2 above is in default. All that money created by dirt cheap interest rates and a loosening of lending standards, while great at the time people were out spending it, has suddenly vanished. First is the problem of servicing that debt but secondarily the money supply has shrunk dramatically. The immediate effect is that the money people have to spend has dried up. There is no more cheap money to buy houses, planes, trains or automobiles with. Supply and demand dictates that when demand falls and supply remains constant the value of that "thing" declines. House prices go down due to oversupply. Dropping house prices have people up-side-down on their loans (due to those lax standards, see #2) and the money supply almost completely disappears.
#2 is now completely gone and you get a severe recession. Not only is it gone but it's become a vacuum, a financial black hole which is going to fill itself with? Exactly, #1. All that personal debt is going to become national debt, shared equally among everyone regardless of who got the lion's share of the free money in the first place.
If you didn't finance a park avenue penthouse and a Ferrari with borrowed money at some point over the past 5 years, sorry you FAIL. Here's your bill.
Now, there is no real risk of the US defaulting on its debt, not in the short term anyway, but those holding it aren't all that happy about it being diluted to the tune of a trillion (a 1 followed by 12 zeros, a number so big it can't be entered into a standard pocket calculator). Worse for them (we're talking China here) they also hold the other side of that trade deficit.
This is the global impact of this crisis. China and other large US debt holders have been taking IOU's for a good part of their GNP. The US issues debt, China buys it. The US takes that money and gives it to the taxpayers through various direct and indirect means. Those taxpayers spend that money on goods imported from China, where it all began. China's economic situation is a different matter but you see how it's connected.
Going forward the US has big problems that need to be addressed. The bank aid package will be approved plus or minus a little language but it's a done deal. The real problem in the future is how to turn the sinking ship around. The US cannot continue to compound debt and cannot continue to be a net consumer. As you go to the polls and chart a course you have to understand that things can't be business as usual. This problem will continue to recur over and over until the US becomes trade neutral. Your standard of living will not improve in aggregate (some will always do better than others) and your wealth will continue to decline relative to your peers.
If you need proof that we have spent the past 8-10 years going absolutely nowhere you need not look any further than the stock market. The S&P 500, the Russell 2000, the NASDAQ composite, the NYSE composite and even the DOW30 have a net value equal to what they had in Sept 1999.
