Thoughts on the Bailout
I think most people have heard about the $700 billion bailout proposed by Treasury Secretary Henry Paulson and Fed Chariman Ben Bernanke. It has caused a lot of controversy, and I have to admit I’m a little torn about the whole thing. Up until this event, I’ve been mostly in favor of the Paulson/Bernanke handling of the Wall Street meltdown. Now, I’m not so sure.
Let me simplify this whole problem into a simple analogy (one that’s very cliché, I might add). The economy is like a car engine. Wall Street is the fuel pump. Money is the fuel. At the moment, the fuel pump has failed, meaning that pumping money into the engine has pretty much slowed to a trickle.
So here’s our choice. We do nothing and enter a period of low liquidity, low economic growth, and possible deflation. Or we choose a $700 billion bailout of the financial markets and get the fuel pump moving again.
Personally, I hate the bailout. I hate it not because it’s socialism, or because it will cost every taxpayer a lot of money, or because it gives huge unchecked powers to the Treasury. I hate it because I don’t think it will work. Don’t get me wrong, if the bailout passes we can expect the stock market will go crazy, Wall Street will be much better off, and the economy will keep moving. Letting banks write off $700 billion in bad debt will do that for you.
Yet in the end, I can’t help but think that nothing will change. We’ll restart the bubble cycle all over again, and in 5-10 years we’ll be back in this terrible spot looking for another $700 billion, or $1.5 trillion, or however much it will be – just like the $125 billion S&L bailout in the 1980s. Something needs to change, and I think it’s time to start thinking about what that change should be.
I don’t like the idea of 1990s style Japanese deflation, but I also don’t like the idea of 1990s style American bubbles. Both are unhealthy.
One of my profs believes emphatically that the gov’t has to make $ on the deal long term and that the “bailout” terminology is misguided.
Interesting perspective from a Bloomberg columnist on this……lose/lose, underpay and FASB decides it is a fair market then everyone has to M-t-M down and end up insolvent or overpay and FASB decides its not a fair market and I as a taxpayer get $700B of “swill”.
I know FASB has their own view on this, but I just can’t see how you can mark-to-market assets that rarely trade. There’s no market! The idea that I can mark-to-market based on rigged government prices ought to give someone a FASB a headache.
[...] or a terrible thing. To be honest, nobody is sure. As I mentioned previously in my post about Thoughts on the Bailout, I hated this plan. It contained no new regulation, and there was nothing to prevent the Return [...]