Real reason for the Paulson bailout proposal?

NPR had an interesting analysis of the possible motivation for the bailout proposal (sorry, can't find the link), which was based on what happened in the money market space when Lehman went under. I know I'll do a poor job summarizing, so if you want more info, google around a bit.

Basically, when Lehman went under, there was a minor run on money market accounts; something like $80 billion was pulled out in one day. Now, money markets buy short term commercial paper, like what companies issue to fund daily operations until they can liquidate their assets to cover it. When Lehman went under, some money market funds "broke the buck", and that caused a massive withdraw.

Now, if you're a financial institution running a money market fund, and you get massive redemptions, your money isn't liquid (it's in short term commercial paper, or bonds, or other lending), so you need to borrow in the same manner. However, on that day there was no money to borrow, so basically the system froze for about 12 hours until people could redeem enough debts to pay out the money. Scary situation for the financial industry and the government; if it happens for days, the country basically shuts down.

Now, this got me thinking... don't we have a mechanism to front short-term cash to banks to prevent this kind of liquidity crisis? Why yes, it turns out we do: it's called the Federal Reserve. They have about a trillion dollars of cash, and they are supposed to front it to banks to cover withdraws while the banks liquidate positions, thus ensuring that this kind of thing doesn't happen. It's pretty much the main reason that the Fed exists. So what happened?

Well, it turns out the Fed has been lending out their cash to the banks already for toilet paper securities as collateral, basically to keep them alive long after they would have perished in a free market. As a result, the Fed doesn't have much currency left to lend out, so they can't do their job. Basically, their market manipulation and funneling money to the banks has put them in a position where they cannot help the market when it's really needed, and are not going to be able to recover without unwinding all their junk loans (which, of course, would cause the insolvent banks to get their due, which the Fed is trying to prevent at all costs).

So basically, as far as I can tell, the Paulson plan exists solely to have the taxpayers buy the toilet paper from the banks which is currently being held by the Fed, so the Fed can get its cash back, and actually be able to prevent the entire credit system in the financial markets from grinding to a halt the next time there's a revelation about the real state of the system. They view it as essential because the Fed can't back out of the mess they have created for themselves without collapsing all the insolvent banks, and they can't save the market if the banks collapse because they have exchanged all their cash which they were entrusted with for that purpose with toilet paper securities from the insolvent banks. Way to go, solid plan that was.

The sad part is, when presented like that, you can see where the government comes to the conclusion that this must be done, even though it's insane to 99% of the people in the country. A much better solution would have been to stop the Fed months ago from creating this situation, if not abolish the organization as a whole; but that would have taken intelligence and political fortitude, attributes which are currently in short supply amongst our politicians. For reference, I still don't think it's a good idea to pass the payoff plan, but given the current situation at the Fed, I'd have a backup plan ready to go if it doesn't pass, and it sure as hell should incorporate some measures to prevent the Federal Reserve from creating another credit crisis with their ridiculously irresponsible policies.

Thoughts on the bailout

As everyone who reads any semblance of news (even really biased "news" like Newsweek, for example) knows, the government is currently hashing out the details of the inevitable bailout program. Although, in all fairness it should be phrased as 'another' bailout program, since there have been several already and will be more in the future, but this one is the largest and most public to date. As I'm rarely short of opinions, I have some on this...

First, the people pitching the bailout could use a good solid bitch-slap about calling things what they are and not hiding behind spin and double-talk. First, Paulson and Bernanke were careful not to use the term 'bailout', even though it was blatantly obvious their plan was one (judges would have also accepted 'crony payout' or 'taxpayer anal rape' as alternatives). Then, there was the BS about the government might not lose too much money, even though the explicit point of the bailout (in their words) was to "recapitalize" the banks. Hello, how dumb do they think people are? I mean, that may work for Bush (apparently so since he repeated it) or Congress, but average Americans know you can't give money to banks without somebody losing it; in this case, that's you or your children.

Side note: I've been normally pretty pro-Bush during the last few years (aside from his who right-wing wacko aspects), but he gets the big thumbs-down for backing this steam pile of horse manure. Don't forget to wipe after you're done flushing what's left of your credibility and legacy down the crapper, captain hand-puppet.

Second, I think that any "representative" who supports this bill should have to stand in front of a crowd of people who have lost their homes, and explain why the government is giving $700 billion to the organizations which created and fueled the housing meltdown, while they made billions for themselves in the process. The people should be armed. We'll give each rep a five minute grace period to make their case, then the people who got screwed by the mess created by the banks getting the payoff (which, BTW, comes to ~$2000 from every man woman and child in the entire country, for reference) can decide if the payoff plan is something they approve of, or if they should do the country a service and remove an obviously corrupt beyond redemption stain from this country.

Side note: I think the news media should stop calling the people in Congress "representatives", and start calling them "corrupt corporate stooges". The whole idea of one or more of these scum sucking morons representing the peoples' interests is obscenely laughable. Hey scum in Congress, we the people don't want this payoff at all.

Tangent: There's one point which I don't agree with for many of the people outraged about this payoff, and it's worth stating. Unlike many people, I don't think this will actually cost the taxpayers anything. What, you say, how could it possibly not? Well, I don't think the country will every pay down, much less pay off, the national debt; it's just not likely to happen ever. Given that, there's no reason for taxes to increase as a result of this, now or in the future. It's still a bad idea, but I don't think it'll actually be taxpayer money.

Tangent side note: I can hear you thinking, "But, but... that doesn't make sense! You have to pay the piper eventually, right?" Well, not really. See, it's much more likely the US will lose its credit rating rather than our elected officials actually growing enough balls to deal with the massive deficit spending, at which point we can't borrow any more to finance the debt upkeep. At that point the entire country collapses, you really hope you're not living here, and who knows what happens after that. However, there's one thing I'm reasonably certain of: whatever new country crawls out of the ruins of the once great United States after our government is done destroying it, probably won't honor the debts of the previous country, so these ridiculous payoff amounts will never actually be paid by taxpayers. It's a silver lining, I guess.

Anyway, we should have a bailout bill passed by next Monday, which will have no positive effects, but will put a crap-load of money in the pockets of those people most directly responsible for the housing market meltdown and national economic crisis. Large banks and investors are already betting on it, and they are rarely wrong (remember how Gross and Pimco made hundreds of billions the day after the GSE bailout, after Gross said it was necessary and inevitable). Ain't our country grand?

Housing blog post

This post about price vs rental price makes basically the same point I was making, but with an interesting observation/speculation as an addendum. Following the logic that the market will drop until there is parity between the numbers, it stands to reason that you can work out exactly how much "loss" (as opposed to equity) is in each property, based on the sales price and rental value.

If you buy that as a concept, if the owner cannot make the payments for at least the next 5ish years, then someone needs to eat that loss (ie: lose that much money) in the next few years. It can either be the original owner entirely, or it could be shared with a bank (in the case of foreclosure or short sale), and/or with a knife catcher. Nothing can decrease the loss amount, it's just the owner's decision on how the total loss is distributed, based on how they act now.

An interesting perspective, I thought.

Just in case you needed another reason...

In case your on the fence about McCain/Obama, here's another cheery bit to help influence your decision:

Obama might pursue criminal charges against Bush administration

I know when I woke up this morning, I thought, "Gee, what could the next administration do to best help the country? I know: they could start an enormous partisan political fight which will consume billions of taxpayer dollars in legal fees, divide the country, exasperate the citizens, and at the very best accomplish nothing, while having the outside chance of crippling the ability of our government to function effectively. Yeah, that's a great idea!"

Dear god, what a horrible disaster Obama would be. I'm sorry: if you are aware of this and you still vote for Obama, you're either an enemy of the country, a partisan fanatic, or a blithering idiot; there's really no other way I can see it. This is quite possibly the stupidest partisan political plan ever, and that's a pretty high bar.

Funny for the day...

Just a quick funny, from the Washington Post:

Sen. Barack Obama on Wednesday dismissed the ongoing Republican National Convention as a substance-free spectacle...

At least Obama's weaving some levity into his substance-free rhetoric. :)