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$700 billion here, $700 billion there...

lambert's picture
Submitted by lambert on Sat, 09/20/2008 - 10:26am
Thread: 
Class Warfare

Pretty soon you're talking real money! Of course, and as usual, the devil is in the details:

The nation's top economic generals [!! Financial dictatorship, anyone?] pressed Congress to move with extraordinary speed -- by next week -- to authorize a plan to bail out the U.S. financial system, but are still working to iron out enormously complicated details likely to generate controversy.

Indeed. Like who gets how much and who pays. Stuff like that:

The nation's top economic generals pressed Congress to move with extraordinary speed -- by next week -- to authorize a plan to bail out the U.S. financial system, but are still working to iron out enormously complicated details likely to generate controversy.

Under broad outlines of the plan, the Treasury Department will request the authority to run auctions using what Treasury Secretary Henry Paulson said would be "hundreds of billions" of taxpayer money to buy illiquid assets from U.S. financial institutions. The goal: to stabilize markets and allow vulnerable firms to shore up their balance sheets.

Apparently, helping you keep your house or your job or your health doesn't figure largely in these goals; although all those good things might "trickle down," of course.

The most ambitious part of the government plan is to create a new entity to purchase impaired assets from financial firms. The process could work as a type of reverse auction, in which the government would buy from the institution that sells its assets for the lowest bid. ...

People familiar with the matter say Mr. Paulson would like the new entity, which would buy and hold the distressed assets, established within the Treasury Department. The government would hire asset managers to oversee the entity, which would buy residential mortgages, commercial mortgages and mortgage-backed securities and other securities.

Gosh, I hate to be cynical, but "hire asset managers" sounds an awful lot like jobs -- and fees -- for the boiz.* I do understand somebody has to do the job, but at this point, when it comes to asset valuation, wouldn't throwing darts at a board be just as effective, and a lot cheaper, then hiring the kind of suits who engineered us into this mess?

And meanwhile, the local banks are pissed, and it sounds rightly:

Commercial banks expressed skepticism about the Treasury department plan. They fear it may prompt investors to pull their money out of banks and place it in money-market mutual funds, which often have higher rates of return than commercial bank savings accounts.

The Independent Community Bankers of America in a statement said it was extremely concerned about the Treasury's announced mutual-fund guaranty program. "ICBA cautions Treasury not to propose any solution to Wall Street's turmoil that will drain funding from community banks, constraining their ability to fund local economic activity and growth and serve local communities across the nation."

Moral hazards everywhere, it seems. Where the "full faith and credit" is, there shall the money go.

Exciting! As Atrios would say.

UPDATE * Naked Capitalist, who actually seems to understand this finance stuff, says the same thing with better words:

The authorities propose to save the economy by buying mortgage paper at market prices.

Why do we need the government to create a massive and costly effort to buy paper at market prices? Institutions can sell paper at market prices now. This is clearly ether a massive game of smoke and mirrors (if we are lucky) or a plan to buy bad assets at above market prices but somehow pretend that they are indeed correct.

The latter takes us straight down the Japan path. The government is left holding lousy paper it will have to dispose of at a loss, the banking system gets subsidized not based on triage, on who might it make most sense to rescue, but who gets enough of the crappy assets sold at a high enough price. It's a terrible, inefficient way to recapitalize the banking system. Why should taxpayers underwrite banks without getting some upside and a measure of control?

And as we have said before, Japan had high enough savings that it could manage its crisis internally. We don't. Foreign central banks are already coming under pressure from domestic constituencies over their dollar holdings. It isn't at all clear that they will support these initiatives by buying even larger amounts of Treasuries.

Oh, PS, and who gets to decide if the mortgage prices are fair? Consultants hired by the Treasury. [Financial dictatorship] Given how costly and ineffective this Administration's outsourcing has been, I have little faith that this would be implemented well separate and apart from the confused (or more likely misrepresented) objectives.

They want to hang onto the punchbowl until it's completely drained. And who can blame them?

UPDATE Yeppers, keeping the fees flowing from the punchbowl really is uppermost in everyone's mind, as shown in the lead from David Cho and Binyamin Appelbaum in today's WaPo:

The Bush administration yesterday proposed a historic $500 [now $700] billion bailout of financial firms that would let the government rather than the cold judgment of the marketplace decide the winners and losers from the crisis that has shaken the U.S. economy for the past year.

Nuh-uh. See above. It's the same "consultants" collecting fees regardless. It's just that Paulson will hire them at the Treasury, instead of some infestment bank doing it. The judgment will be 100% as "cold" either way. And the fees may be smaller, but eyes on the prize! Fees there still will be.

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