Bail-out passes and its aftermath

By Fester

I am and have been opposed to the basic structure of the Paulson proposed bail-out because I don't think it will work as it does not look at the basic root causes of the current credit freeze.  Instead it addresses a symptom, horrendously crappy balance sheets instead of the insolvency issues that permeate the global economy.  The last of the cheap land and cheap oil booms created too many promises based on unreasonable premises and backed by wild policies and supported by skewed, perverse short term incentives.  Those promises are failing because there is not enough money or reasonable accessible future income streams to maintain those promises.

This crisis is at its base an insolvency crisis, then a counter-party risk crisis, then a credit crisis and finally a balanec sheet problem.  We are addressing the top layer with crappy incentives. And that plan was put together in panic and haste without viable alternatives such as the Swedish model being advanced.  So I don't think it will work.

Ian Welsh at Firedoglake outlines my basic objections to the structure of the law well:

They're going to be sold the shittiest parts of the shitpile by far because what would you sell to them if you were the banks? Think about it. This stuff isn't called toxic waste for nothing. MBS's may have something behind them, but much of what's going to be sold are massively internally leveraged instruments like first loss bonds, credit default swaps, and other noxious stuff that hardly even has a name. Much of it won't even be mortgage based, and that which is won't necessarily give clear title to the mortgage proper (you can sell different parts of the mortgage to multiple different MBSs). The 700 billion will probably be gone before Obama even gets in power, so you're not betting on what Obama will do, you're betting on what Paulson and Bush will do. Furthermore Wall Street is already saying 700 billion won't be enough. (So, ok, you might be betting what Obama will do with the next 700 billion or so.)  

More than that, a huge pile of this is going to go overseas, you don't think those provisions were in there for show, do you? Foreign banks will sell the worst parts of their shitpile to their American subsidiaries and from there to the Treasury. Furthermore, there is nothing in the bill to stop banks from minting more shitpile and selling it to the Treasury. You can make something today and sell it.

The Treasury will buy these things at above market price, and has not set a floor under prices so no one else will buy the toxic waste at overinflated prices unless they think they can sell it to the sucker of last resort: aka, the Treasury Department, aka: you, the taxpayer.

And for those who want to make policy by the Dow --- evidently no one was impressed as the TED Spread increased even after the bail-out passed the house and the stock market fell another 1.5% today. 

We're panicking and destroying our option space and credibility without achieving our stated goals:

Comments

[Ron Beasley]

This is very simialr to what Hoover did in 1931 - it didn't work then. We can only hope that Obama will get some good people around him and address the real issues. We can only hope that Paulson will not be able to burn through the entire 700 billion before he gets booted out.

[distributorcap]

of course it wont work
bush has touched it
nothing he does works
except for his own pockets and his friends