Paulson’s folly


I’ll be writing a lot more about this in the upcoming issue, but at the risk of getting ahead of myself, I have to express my sadness at the goings on south of the border right now. The U.S. government is in the process of negotiating a bailout plan which will likely come in at close to double the cost of the Iraq war so far. We are told that this is regrettable but necessary in order to prevent worldwide financial Armageddon.

I’m not buying it. I think we have all been traumatized by ghost stories about financial calamities, and we are so frightened by them, that we will accept just about any lunatic policy proposal that promises to keep the boogey man at bay. Congress is debating a US$700 billion proposal to buy virtually worthless assets from hundreds of financial institutions that made out like bandits while the market was rising. The package will almost surely exceed a trillion dollars before it’s all settled. Nobody is even bothering to try to argue that this is right. Only that it is unavoidable. But is it?

We’ve had market crashes before. We’ve had bad recessions before. They’re not nice, but we survive them. Part of what has helped us survive is the distinction between private enterprise and public finance. Public finance should be used to address the damage from market crashes. If you had a trillion dollars to spend, you could do an enormous amount to help people hurt by a market crash. With a trillion dollars, you could create a public program to halt home forecloures, for example. You could go on a massive public infrastructure spending program to employ all the tradespeople hurt by the housing collapse (and address a huge and simmering long–term threat to the economy at the same time). That’s just two examples.

They have managed to terrify people, in order to convince them that this is the only way they could prevent a return to the Great Depression. I think they’re saddling our generation, and our kids generation with a greatly diminished future, for the sake of temporarily bolstering the status quo, and bailing out a handful of incredibly irresponsible institutions that ought to be allowed to fail.

Instead they’re blowing up another bubble…the tech bubble burst and flowed into the housing bubble. now the housing bubble has burst and is inflating a U.S. national debt bubble financed overwhelmingly by foreign capital. When it goes, there’ll be nowhere to turn for help.

FOR MORE: Paulson’s power grab


Paulson’s folly

  1. I think a big part of this is due to the fact there is an election going on and no one is willing to come out and say, ‘tough luck home owners, you are on your own, you shouldn’t have signed up for mortgages that you couldn’t afford’.

    I have been wondering if this is even legal. A few guys getting together and deciding the fate of the nation is something we are used to in Canada but, in America, the heads of Fed and Treasury signing up the public to a trillion dollars of debt without approval of Congress is rather odd.

    I also get suspicious when there is a rush by legislators to do something because I think they are trying to bamboozle us. Why does this all have to happen this week? Why can’t they take some time and look at all the options?

    Who knew we would be talking about the People’s Republic of Wall St a few, short months ago. We are living in strange times indeed.

  2. Not just a national debt bubble, but also priming the inflationary machine to run on automatic.

    Throwing 700 billion dollars into the marketplace with 0 productivy gains is nothing but sparking inflation.

    The counter to inflation typically used is higher interest rates.. but it’s was the interest rates that already killed the sub-primes. Real increases on the interest rates will start to eat into the normal mortgages, causing more bad debts which the government has just established precedent that it will buy.

    I have a very bad feeling about where there is heading.

  3. It looks like reaction is already starting to happen. The US dollar is starting to drop, thus requiring oil price rises (because oil is still primarily traded in American dollars) and making imported products more expensive for Americans.

  4. “With a trillion dollars, you could create a public program to halt home forecloures, for example. You could go on a massive public infrastructure spending program to employ all the tradespeople hurt by the housing collapse”
    I would like to add
    Make the wall street Fat Cats work at the construction sites as labourers.

  5. Heh. I was surfing Youtube and found this little beauty.

    It’s good for a laugh.

  6. It is truly astonishing that no one in Congress will stand up and say “WE CANNOT DO THIS TO AMERICANS” and simply walk out of the room with a pledge to kill the proposal.

    As for the “crisis,” I’m in the “let them rot” camp. We’ll manage. We don’t even have good health care, and we’re going to throw away $1 trillion or so because Wall Street led people to believe that when they bet on the house, they’d get rich overnight, sometimes without a stake? This country is in deep trouble.

  7. I am afraid we don’t have much choice now. I haven’t seen a better plan. Paulson made a mountain out of a molehill with his inept handling of Fannie, Freddie, Lehman and AIG, which undermined investor and creditor confidence. Both are in panic mode now. Credit for large consumer purchases is reportedly getting harder and harder to get. If this doesn’t go through (or doesn’t work), there could be a total meltdown. I am willing to take a chance on it to avoid another Great Depression.

    This isn’t really a bailout. It is simply another secondary market for mortgages, like Ginnie, Fannie and Freddie. They were also designed to expand banks’ ability to make more money available for housing. The only difference is that the mortgages have to be repriced. The Treasury will undoubtedly make a lot of money on it, because of their low cost of funds.

    It should also be remembered that the government is a partner with all firms, since it takes a big chunk of profits through taxation. Big financial firms are too intertwined to let fail.
    I bet Paulson now wishes that he had put up $35 billion or so to bail out Lehman. Now, it’s going to take 20 times as much (or more) to restore confidence.

    The scariest part is listening to the blowhard pols at the Senate hearings. Most don’t have the slightest clue–on both sides of the aisle. Bernanke keeps going over the same things time and time again. It just doesn’t seem to get through.

  8. Stafford: Here’s a plan. Instead of directing perhaps a trillion dollars to the big banks who did this in the first place, direct that trillion dollars to creating a significant welfare system to help out those who’ve found themselves homeless for buying into a system that offered them no protections and lied about how it would work.

    How you think the treasury is going to make money on repossessing homes that nobody will be able to afford to buy is beyond me — because this bailout money will simply have to be printed up with no backing, ergo, inflation, ergo higher interest rates, ergo less ability for people to purchase these houses.

  9. AS an American who is fed-up with GW Bush and the CONSTANT stupidity of his administration I no longer care what happens to the USA and in fact I hope it sinks into oblivion and in fact I’ll do everthing in my power to help it sink into oblivion

  10. I take it you’re voting McCain, John? :)

  11. T. Thwim,

    What you are talking about has already been done with the $200 billion housing bill. When Bank of America took over Countrywide, they marked the mortgages down to fair value, possibly 50% of face value on the bad 2005-2007 loans. This goes directly onto the balance sheet and are not written down in earnings. The difference ($4 billion) went into goodwill.

    BofA basically wrote the bill. When BofA refinances the mortgages thru FHA, it takes a tax deduction over several years (worth 38.55% in NC and higher in other states.). Thus, there is a large incentive to mark down the mortgages and put them into the program.

    Similarly, when a bigger bank takes over WaMu, the same will apply. These two have a huge percentage of mortgages, especially in the West. Thus, the program should prop up housing prices. This seemsn fair, since WaMu and Countrywide overpaid taxes for previous years, based on the risk of the mortgages. Unfortunately, it appears from my reading (I am not an accountant) that loan losses are prospective, i.e, they can’t be carried back. Hopefully, Congress will change this.

  12. $5B from Buffet may end up going further than $700B from Paulson – now I’m kicking myself for not buying Goldman stock.

    Yesterday I watched a hearing with senators on both sides railing against the proposal – there are definitely elected people who have stood up said they are against this.

    Unfortunately, the press coverage has been focused on two particular senators.

  13. I say no to the bailout. Housing prices have grown at outrageous rates. People who could not afford them chose to buy into mortgages they could not afford. Those of us who are responsible and did not buy into this should be rewarded by the collapse in house values that is anticipated.

    Yes, housing values should go up over time.Look at an eichler house in Palo Alto CA. They cost about $6,500 originally, then about $11,000 in 1949. There is no way a house like this should cost 1.5 Million dollars now.

    I am sorry if you paid 1.7 million dollars two years ago and can no afford your mortgage now on a house that is valued at 1..4 million…… No, I am not!!!!

    I say let the housing market collapse and then responsible people who work hard can afford these houses. We all make bad decisions in our life….. This is one we should let people pay for on an individual basis.

    700 Billion dollars!!!!! That is about $2400 for every man woman and child in the U.S.A. Not to count intrest it could come to about ten thousand dollars per person to bail out people who made bad decisions.

    I say let the free market be the free market and ride out the lows that will come.

    If enough people are foreclosed on….the housing AND rental prices will drop and our American lifestyle will be more affordable. The fact that people spend 60-70% of their income on housing is (in my opinion) one of the reasons why they can not buy other products and let our other industries survive (if not grow).

    Final thought. How about a flat tax.

    BTW. I am not a fat cat who has a six figure income….

    Just a few thoughts………

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