It’s official: Henry Paulson is now authorized to begin shelling out the first tranche in his $700B plan to refloat financial markets. Don’t pull your money out from under your mattress just yet, however.
1. This is just a beginning. The writedowns in the mortgage market are estimated at $2 trillion and the bubble is still unwinding. The losses in derivative assets will be greater still. The bailout buys time but it does not constitute a solution.
2. The problem of pricing assets will be enormous. There is a technical problem, of course, in determining the price of something that no one currently bids for, but a deeper issue lurks. The plan was sold on the basis of highly ambiguous wording. It was stated for public consumption that the only problem is liquidity, and that the Fed/Treasury can solve it by offering to buy assets at their hold-to-maturity value. Everyone knows, however, that the real problem is solvency, and that the unspoken intention is to overpay in order to slip cash to players who might otherwise go under. No doubt it is possible to do this quietly, a few billion at a time, like the US military does in Iraq, but this is not big enough or fast enough to rescue the markets. There will need to be big, big overpayments, and in their search for congressional votes the plan’s backers couldn’t hope to ask for such a mandate. This means that everyone connected with the operation will be looking over their shoulders, worrying that, if they follow the unstated intent of the law, they will be held personally accountable.
But look on the bright side: mental illness will now be covered under more private health insurance plans (for those dwindling few that have them), and small timber-dependent communities out here in the Pacific northwest will be able to keep their schools open. So the bill will have some successes to crow about.
Good post.
ReplyDeleteI'm thrilled at the possibility that someone will be able to shoot Oregon-made wooden arrows at specific targets for $0.39 less per arrow than before, and that they'll be able to discuss such plans with their therapist first while starving.
ReplyDeleteAt least we already know the punchline: "You call this a line?"
"It’s official: Henry Paulson is now authorized to begin shelling out the first tranche in his $700B plan to refloat financial markets. Don’t pull your money out from under your mattress just yet, however."
ReplyDeleteAt the risk of being redundent I would like to point out again that I find it incredible that our esteemed congressional representatives have assigned to one of the chief architects of the crisis, Mr. Paulson in his role as a primary decision maker at Goldman Sachs for nearly twenty years, the opportunity to distribute the contents of the Treasury to his former allies in the banking industry. Are we all nuts?
Is this some new approach to crisis resolution? The guys who create the crisis know best how to resolve it. Will Henry be seeking the sage advice of Phil Gramm, now Vice Chairman of UBS and another architect of the deregulation of (should we say destruction of?) the banking system.