The Big Bailout

I'm not happy. The Bushies now have released their plan for salvaging the financial sector, and I think it stinks. It's nothing but the same old routine, taken to new and potentially disastrous extremes -- privatizing profits while socializing losses. The moral hazard is unprecedented.

Moreover, it probably won't even work.

It would be just a little more palatable if our government actually had the $700 billion Paulson and crew propose to spend on bad paper -- now frequently referred to as "toxic" debt. But no, we'll have to borrow the money somewhere -- mostly overseas. Nobody seems especially concerned that we would be incurring that debt to buy "assets" that currently have no value on the open market. $700 billion of government debt that can't be used for productive investment ties up just as much finance capital as $700 billion of private debt that can't be used for productive investment. The jobs of a few investment bankers may be saved, but it won't do a damned bit of good in the Rust Belt.

Even excluding the "fix it with duct tape" bailouts of the past few weeks -- Fannie, Freddie, and AIG -- so much additional debt roughly triples the federal deficit. The result is likely to be both inflation and an even slower economy. What really yanks my chain, though, is that the only assets we're planning to take off the hands of big finance are the toxic ones. With Fannie and Freddie, at least, we took the whole enchilada -- the good along with the bad. Given enough time, there's a possibility government might even turn a profit on Fannie's and Freddie's holdings.

In the current plan, though, government is likely to get nothing but the crap -- the immobile, overvalued securities that made fortunes for their originators but left the American economy with a severe case of constipation. And how much will the taxpayers have to pay for that crap? The figure being kicked around in Administration circles is 50% of nominal value -- but since we know the financial institutions have been inflating the value of their bad paper in attempts to avoid further panicking stockholders with truly frightening write-downs, 50% of nominal value is far too much.

If either presidential candidate has a clue regarding what's going on, it hasn't been observable in his public statements. In Congress, Democrats are taking great care to disavow ownership of the administration's plan. To me, that suggests they think it can't prevent economic collapse but they still want to curry favor with the financial industry -- and anyway, doing something always looks better than doing nothing.

And so Paulson will get what he's asked for -- maybe with a few "Main Street as well as Wall Street" amendments -- but the deal is pretty much done. If it saves the world's financial structure, that would be very nice. If it doesn't, though, it is important that we keep a failure from becoming a disaster. The devil is in the details.

Before any frozen assets are purchased from any financial institution, those assets should be examined by forensic accountants and realistically valued. Under no circumstances should government use taxpayer money to buy mortgage backed securities for more they're likely to be worth when, eventually, they can be resold. Given that "eventually" may be three to five years from now, 50% of their real value -- not their inflated valuation -- seems generous to me.

Pay attention, politicians! You all want to cut taxes. You all want to provide better government services. You'd also like to balance the budget -- maybe even start paying off the debt.

Well, there's only one option -- government, the largest business in the United States, has to start turning a profit on at least some of its activities. The current mess provides our government with a rare opportunity to buy into the private sector at rock-bottom prices. Let's keep the profitable divisions of AIG. Let's hang on to Fannie and Freddie, and develop a safe, steady income from the interest on well-vetted mortgage loans.

Most of all, let's make sure we turn a profit on those "toxic" mortgage backed securities. Wouldn't it be wonderful if, sometime in Ben Bernanke's lifetime, our national debt started going down.