Bail Out is 100% Essential

>> Wednesday, September 24, 2008

The Bail Out is a fascinating political phenomenon for a number of reasons and i believe it will be studied in poli sci classes around the country. Here we have an apparently catastrophic crisis at the height of an election that could cripple the potential presidency of the next President and the bill proposed as a solution is designed swindle the american people. There does appear to be a case for Bush playing political games with this but that does not mean that it is not essential.

What is being asserted is that Bush and Paulson either let the crisis get out of hand in order to allow them to come to the rescue later or that there really is no crisis that will take down the entire banking world and with it the global economy. The reason for this is apparently two fold. One is to give all the us treasury to wall street bankers and to create an issue so big and so important that it can bury the democrats in this election and handicap them should they win the election. There is some evidence being put together out in the tubes to prove this. First is the assertion that the Bush people have been putting the plan together for months

Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.

This of course means that they were fully cognizant of the problem and were choosing not to deal with it for some reason. When would they have decided to put something like this together? Probably right after Bear Stearns was dragged down by the toxic mortgages and their capital problem back in march.

US Government offers $29 billion of credit in the form of guarantees for the toxic mortgage-backed debt held on the books of Bear Stearns. The credit was made available as part of a deal where JPMorgan Chase acquired its smaller rival. US Federal Reserve also extends the availability of cheap financing to investment banks as well as commercial banks

There is an example of the US stepping in to deal with the issue of toxic mortgage debt that was crippling a piece of the financial industry. Bear was an investment bank just like merril and just like lehman. It is not difficult to assume that the underlying cause that brought bear down would also be afflicting the other investment banks. There was even speculation at the time about what happens if the other investment banks start to go.

People knew that there was an issue with the system. So it is not unreasonable to think that the government began prepping at that point for what would happen if the investment banks started to fail. So the bail out plan is created. In order to make it politically effective and to take full advantage of the shock doctrine the pump needs to be primed. That means getting the public ok with a big bail out and making a demonstration of what happens when their is a failure. This is where Fannie Mae and Freddie Mac along with lehman come into play.

There is an issue here about why exactly this particular time frame would be used for a political play of this magnitude. The fact that Fannie Mae and Freddie Mac were taken over the rationale went out that they were too big to fail and that the consequences would be dire if they were not bailed out. We had to. So then lehman, who had been on the rocks since june, finally gave out. They were allowed to fail. The reason for this seems to be something of a mystery,

This might not have been needed, at least not now, if the Fed and Treasury had stuck to their own game plan in Bear Stearns, to bail out creditors but not shareholders. We need to learn who pressed to force Lehman to fail completely. That decision led directly to the run on money market funds and to panicked trading conditions for credit default swaps at other brokerage firms.

This created panic and induced the BofA purchase of Merril on the theory that the gov might let them fail too. Bam! Crisis initiated. Now people are freaked and they dont know whats going on.

At this point AIG gets nationalized. Now there are actually only two investment banks left, Goldman Sachs and Morgan Stanley. Surely they must be next on the fail list? So on September 18 we finally get the action that seems needed to save the entire banking industry from collapse. The Great Bail Out of 2008. 700 Billion.

The issue here seems to be the speed from 0-1 trillion. what is the rationale? The one given was the potential for a global credit seizure where no one could get capital for anything because banks could not tell when other banks were solvent. So it seemed like the sky was falling. The plan appeared to be working as Dems were getting behind this idea of a $700 Billion dollar bail out. Something strange began to happen though. People read the plan.

I think their first mistake was making it only three pages. It is hard to hide the massive power grabs in such a short document. i mean people actually have time to read the thing. The patriot act, now there is a proper power grab. So when people started to read the thing they began to have questions like, why isnt there any oversight? Why do you need 700 Billion, that seems like a lot of money? The Administration has done its best to steam roll through these questions on the fear generated by the collapse of Lehman and the nationalization of AIG. But they are like the boy who cried wolf, they dont have the credibility they had on Iraq. This has lead from the original questions about lack of oversight to bigger questions about the premise,

Ask this question -- are the credit markets really about to seize up?

If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.

If the problem is toxic mortgages then how come they are still being offered all over the Internet? On the main page AOL generates for me there is an ad for a 1.9% loan (which means you pay that interest rate and the rest of the interest is added to your balance due.) Why oh why or why would taxpayers be bailing out banks that are continuing to sell these toxic loans?

How does the proposal help Joe and Mary Sixpack who can afford their current monthly payment, but not the increased interest rate that has been or soon will take effect? Every day bankers work out loans with customers -- so why are taxpayers being asked to act when banks are largely on strike, refusing to negotiate revised deals with many loan customers?

and Krugman

So the plan only helps the financial situation if Treasury pays prices well above market — that is, if it is in effect injecting capital into financial firms, at taxpayers’ expense.

What possible justification can there be for doing this without acquiring an equity stake?

No equity stake, no deal.

Then we get news that the deal applies to healthy banks too,

"With respect to executive pay, again, I'm not going to get into specific, point-by-point details on what our views are on that, other than the Secretary of Treasury said it would make more difficult to make this plan work and effective if you provide disincentives for companies and firms out there who are holding mortgage-backed securities and other securities from participating in the program. You have to remember, these are not all weak or troubled firms that own mortgage-backed securities. A lot of them are very successful banks and investment houses that have done very well, have been responsible, are holding performing assets that have value. They were not necessarily irresponsible players, and so you have to be careful about how you deal with them."

At this point the shit has really hit the fan for Paulson and crew. Their plan is being hammered and is very unpopular with the people. The worst of this though is that there is actually a need to do something. Thats right, there is a need. The entire way this has been handled has put the bail out in jeopardy. Here is an explanation of why this is such a problem.

Last week we were all sitting there watching the crisis progress from one institution to the next. Now that the blaze on the bottom floor is under control, people are like, “but we don’t know that it would have spread to the top floor!” And it’s not as if the threat has entirely diminished. Days after the bailout was announced, the spread between interbank lending rates and rates on loans from the government is some five times higher than it would be under normal circumstances. That’s huge. And it rose on Monday and Tuesday after falling over the weekend.

That’s one reason why time is of the essence. Confidence that a comprehensive solution is forthcoming has calmed markets for the moment, but if markets begin to doubt that a firewall against collapse is going to be there, then the downward spiral will begin again. Another reason is that jammed credit markets aren’t exactly healthy for the economy. Does this need to be done this week? No, but can it wait until January? Almost certainly not.

But what about the amount? How do we know that $700 billion is needed and not, say, $500 billion or $300 billion? Well, we don’t. But if that amount is off, then the correct amount is almost certainly higher. Read this to see the scope of the problem and the challenges involved. If Paulson didn’t request more, it’s probably because he thought this is the least he could get that would make a difference.

Get the oversight in there, please. Get a bipartisan team of experts involved. Get measures in there to ensure that taxpayers get a healthy share of whatever upside there is to the deal. Make the bill a good bill. But let’s not play around here. Healthy skepticism is healthy. Blind assessments of the situation as not dire, simply because you can still use your credit card are not.

and here is another explanation. Both Make it absolutely clear that something needs to be done. That Bush and Paulson put forth a proposal that was so bad when things are really on the line is just appalling. They have actually perpetuated the crisis by failing to put forth a bill that was even the least bit acceptable and failing to properly lay out the case for the american people.

The Democrats should not go along with the Paulson Plan but they need to get something together. What we appear to have is Bush playing politics and political games with something that is vital to the countries interest.

People have also been speculating on the political ramifications of passing the bill if rs all vote no. Well if the dems manage to construct a bill that helps from the bottom up as opposed to just the top then there is nothing to run against. Treat the underlying issue if you can and it will save election headaches. Can you imagine McCain and the other republicans voting against a bill that actually helps homeowners? Or middle class people? If the Dems cant win on something like that then they should just quit.

remember there is something does need to get done. We have lost time thanks to the Bush Admin's inability to let a chance to grab total power go by.

For a primer on the whole mess see here


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