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.


Taxing the poor to bail out Wall Street

It has been assumed that the cost of the putative bailout will be born by taxpayers. However, since that the Fed and Treasury will pay for it with debt and by printing money, the people who will pay for it are anyone who holds dollars. Given that the final cost could end up in the trillions, the result will be quite a bit of that hidden tax called “inflation,” as all the debt and new money dilutes the currency. Inflating the currency is actually a very regressive tax, however. Poor people generally have to live month-to-month, and thus aren’t able to save and invest money, holding most of their wealth in cash. They also don’t have access to as high yielding investments as the rich. Most importantly, they occupy jobs which are usually the last to see inflationary wage increases filter down to them (which is as it “should be” or otherwise inflation wouldn’t work so effectively as a hidden tax).

So, this bailout of Wall Street is going to be disproportionately paid for by the working poor. Good job congress.