The bailout, part II

Did I say bailout? I meant rescue. Here is an excerpt from one of the smartest financial writers I know of, Mish Shedlock:

To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

All this talk about Strategy, Implementation, Recruitment, Procurement, operations, compliance, and other details masks the essence of the plan. And even though “A program as large and complex as this would normally take months — or even years — to establish“, the Secretary for Financial Stability is going to ramrod something through as quickly as possible.

Unfortunately, no matter what seat of the pants strategies they come up with, I can guarantee in advance that the unforeseen consequences of whatever decisions they make, simply will not be any good. Besides, it is axiomatic that plans to rob Peter to pay Paul, can never really work in the first place, regardless of how much time is spent crafting them.

This is not to say that it won’t work overall, as this plan at least finally addresses the fact that what banks need is capital, not access to credit. In fact, this is the first article of Mish’ that wasn’t outright beligerent in calling Paulson and the Fed complete fools, so I guess that is as close to an endorsement as you’ll get. But it’s just sad that the masters of the universe screw up royally, and poor people will disproportionately pay the price. It’s also sad that this further concentrates Chinese power over the American economy as they will be undoubtedly financing a lot of this.


3 responses to “The bailout, part II”

  1. Using the tax payer’s money to buy shares in banks and then firing the people who deliberately created this mess is not such a bad thing. Then you only stand to lose, for example, the £5bn that London’s bank heads gave themselves in bonuses last year by lending money to people who cannot afford to pay it back, declaring that as profit and then taking their profit-related pay.

    The problem is that the US government seemed to be giving Paulson $1tn without getting anything in return (e.g. shares). Even ignoring Paulsons blatant conflict of interests, that is obviously a bad idea…

  2. Hi Jon. Good to hear from you again. My worry is that many of the banks we’re buying aren’t worth anything. This just prolongs the time when we figure out who is really worth what, and start clearing out all of the bad debt and worthless assets based on them. It’s like papering over a rotting wall. Nobody will trust the house. And I think the fact that no banks trust any other banks is why credit is still stuck, despite all of this.

    And that’s not to mention my original objection to the fact that this cost will be borne disproportionately by the lower classes when the dollar eventually sinks in the long term.

  3. Most banks are technically bankrupt anyway so I do not imagine they are worth anything beyond their brand and the fact that they have privatized profit and nationalized loss. That cannot change though: the finance sector could not exist without being underwritten by the state and it has shown many times, including now, that it cannot police itself and requires a state nanny.

    The only real losers are the countries with governments too small to buy out their banks, like Iceland, who are really suffering as countries like the UK buy their banks and theirs debts. Now they owe us billions instead and they will really suffer as a consequence.

    I’m not sure that this will afflict the lower classes more. It will certainly afflict stupid people more: people who spent beyond their means or put their money in bad investments. I’m expecting to make hundreds of thousands of dollars out of this, having liquidated my real estate, made sound investments and stand to profit from exports as our currencies weaken.

    In the grand scheme of things, I really don’t see think this is a big deal because it amounts to a few people in the finance sector taking a few billion dollars out of the national economy for themselves (which should have been illegal, as it was 20 years ago). Everything else has been ploughed back into the country of origin. To put this into perspective, Bush borrowed an order of magnitude more from other countries to feed his overspending on things like invading other countries while he was in power. That is a much more serious problem with longer term ramifications that will bring the US to its knees before long.

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