Article 43


Biggest Con Job Of 2009


My people are destroyed for lack of knowledge: because thou hast rejected knowledge, I will also reject thee, that thou shalt be no priest to me: seeing thou hast forgotten the law of thy God, I will also forget thy children.
- Hosea 4:6

...the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was NEVER REALLY INTENDED to get them to resume lending to businesses and consumers--the ostensible purpose of the bailout. It’s essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.
- The Dirty Little Secret Of The US Bank Bailout October 29, 2008

What luck for the rulers that men do not think.
- Adolf Hitler



Zombie Financial Ideas

By Paul Krugman
NY TImes
March 3, 2009

CALCULATED RISK looks at the latest plan floated by the Treasury to make low-interest, non-recourse loans to private investors who buy bad assets - and immediately gets it: this is a plan to drive up the prices of toxic assets by creating a lot of moral hazard.

By offering low interest non-recourse loans, these public-private entities can pay a higher than market price for the toxic assets (since there is no downside risk). This amounts to a direct subsidy from the taxpayers to the banks. It is amazing how many different ways theyve tried to recycle the same bad idea.

Indeed. Every plan we’ve heard from Treasury amounts to the same thing an attempt to socialize the losses while privatizing the gains. We’re going to buy up all the bad assets at premium prices; no, were going to offer the banks guarantees against losses; no, we’re going to let PRIVATE investors BUY THE STUFF, but offer them de facto guarantees against losses in the form of non-recourse loans.

Underlying all this, apparently, is the theory TUM DUY sums up so aptly:

Policymakers are assuming that restoring proper functioning in credit markets - and confidence in general - is equivalent to a housing price rebound. They seem incapable of envisioning a world in which this is not the case. This tunnel vision prevents policymakers of trying to devise policy which assumes that the many of the assets in the banking system are simply bad. For Bernanke and Geithner, there are no bad assets. Only misunderstood assets.

And the insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us wont notice? That is, are they stupid, or do they think we’re stupid?

I dont know which possibility is worse.



Despair Over Financial Policy

By Paul Krugman
NY Times
March 21, 2009

The GEITHNER PLAN has now been LEAKED IN DETAIL. Its exactly the plan that was widely analyzed, and found wanting a couple of weeks ago. The ZOMBIE IDEAS have won.

The Obama administration is now completely wedded to the idea that thereגs nothing fundamentally wrong with the financial system that what weגre facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad I mean misunderstood - assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But its immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating - deliberately!  the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isnגt, thats someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

This plan will produce big gains for banks that didnt actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.


Posted by Elvis on 03/22/09 •
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