Tuesday, November 25, 2008

Paulson's Bailout, Take Two

Some time ago, I explained why I think the credit markets are hosed up; one of my readers was even kind enough to say he thought it was well written and well thought out. In short, I think the banks aren't lending to each other because none of them knows what overblown totals in credit default swaps the others may be sitting on, so they're afraid to lend to anyone. If this sounds as though I think the banking system is insolvent, I'm afraid that's what I think these days.

So now Mr. Paulson has conjured another huge sum of money out of his top hat, only a quarter of which will come from the money Congress actually authorized. He's going to throw this money at the consumer lending industry, so people will be able to borrow again; he's doing this by promising to buy up securitized packages of car loans, consumer debt, credit card debt, etc.

I'm still not sure where he thinks he got the authority to print all this money. Congress didn't authorize it. Does the Federal Reserve really have the authority
to print up $800 billion just because the Treasury Secretary says so? I know they can increase the money supply to fight inflation but this seems out of line.

In my previous post, I didn't go into why people aren't spending money because, frankly, I thought it was obvious: the economy is in the tank, job losses are hitting levels not seen in nearly 30 years, mortgages are still resetting higher, everybody's 401K investments have lost 40% of their value, and there's no obvious end in sight. Nobody's spending, even if they still have jobs and can still afford their mortgages, because they're scared shirtless. So to speak. Not to mention the fact that all the credit card issuers (which, to be honest, is the main source of consumer credit in this country) have raised their rates and lowered their credit ceilings.

Is it really necessary for me to explain why offering to buy up bundled securities of credit card and auto loans isn't going to make the American consumer go back out and buy that flat-screen TV?? Apparently it wasn't obvious to Mr. Paulson.

Does Mr. Paulson honestly not understand that nobody is buying houses because house prices are still losing 17.4% a year (per today's Bloomberg article)? Who would go into debt for hundreds of thousands of dollars for an asset that may be worth less next year than what you owe on it? After all, he's supposed to be a brilliant investor.

I'm afraid my paranoia is getting out of control again. I actually just had the thought that Paulson is doing this (assuming he actually has a reason and isn't just flailing) in order to pump the government deficit to even more ridiculous heights, in a deliberate attempt to hamstring the incoming Obama administration's efforts to fix the economy. If I can't fix it, says Hank, it's not going to be fixed.

On the other hand, maybe he's just flailing. That would explain why he never explains what he thinks he's doing.

I flagged this post "we can do this better" - but I have to admit I don't know what we could be doing better. I'm just sure that everything I've seen the administration do to date has not worked, and has not worked for fairly obvious reasons, like being poorly thought out and badly designed. I still think we should force an audit of all the outstanding credit default swaps, publish the results, and let the chips fall where they may. It would destroy a number of insolvent banks; but they're probably going to die eventually anyway, and at least it would make clear where everyone stands.


  1. Anonymous3:30 PM

    Everyone is negative about the economy, but I say now is the best time ever to start a business, buy a home, etc. The bailout is causing lenders to practically give away money. You would be surprised at how much cheap and in some cases "free" money is going around out there.

    Bailouts for Everyone

  2. Hedera, this is really a cool post. But wouldn't it be so much more fun if we didn't have to find out about how the banking business works? What dull stuff it is! Now I remember why I chose not to get an MBA. Even law school would've been better.

    Paranoid? Naw. There's a lot of speculation around. How's this? Paulson and Bernanke are performing the same thankless task that Colin Powell did during the run-up to the Iraq invasion. Present a lot of phony "evidence" of doom and gloom, and demand huge amounts of money to fix it. Remember, these are Bush people. It wasn't the Congress, or the fiduciary committees of Congress that initiated this bail-out thing, it was the Bush people. Paulson lied when he said he was going to use 700 billion to "buy up the toxic debt." He had no intention of doing anything of the kind. Remember, Paulson and Bernanke come directly from Wall Street. In just 60 days--give or take a week--both men will return to executive positions in the industry they've just bailed out, and their reward will be hundreds of millions of dollars in salary and perks. You could even say, with justice, that they're engineering their own parachutes, since the companies they go to work for will be among those which received all that filthy lucre!

    The Republican agenda since Reagan has been to balloon the federal debt, then strangle all the programs that taxes support. The other part of that equation is to see to it that the federal money goes to your friends and contributors, instead of the people.

    I'd say Paulson is doing his job description as written by Bush & Co.

  3. But I'm interested in how the banking business works. Actually, I'm interested in how almost anything works, banking included.