What’s Wrong with the World

"Related to this is is the notion that debt per se is bad; that more particularly the government taking on debt is bad."

Debt is of course a legitimate economic lever and financial instrument. The problem is the level we are operating at, especially as it pertains to national soveriegnty and independence of action. We've been the de facto armed services for Western Europe and Japan at no small cost to our own Treasury. In exchange they hold our debt. We open our markets to cheap Chinese goods and hollow out our manufacturing base in the process, all so they will keep holding those I.O.U.'s.

Do you think the insertion of the clause making foreign financial firms eligible for bail-out dollars voluntary on Paulson's part? I suspect its just another example of the various geopolitical pressures our nation is vulnerable to as a result of so much debt.

Each of us can draw our own conclusions as to whether this regime of indebtedness is healthy, or possible without experiencing some very painful consequences. One of which is now upon us.

Kevin:

Part of the problem is that to the best of my knowledge the government doesn't even have a balance sheet, so it is impossible to really tell what kind of shape it is in, or what kinds of debt on the nonexistent balance sheet are good debt and what kinds are bad. Like you I suspect that most of it is bad, but it is impossible to tell by anything other than 'gut instinct'. There are no numbers, there is no way to tell how leveraged the federal government is or is not, etc. You alluded earlier to the "banana republic" character of the original "invest in America" plan. I think it is less a feature of the remedy than it is of the fact that even the people in charge cannot possibly really know - I mean that literally: it is impossible to know - what is going on in Federal financial operations, because there isn't any accrual based accounting at all. And there never will be, because financial transparency is not in the interest of politicians or partisans of either major party at all. The "banana republic" nature of government financial operations just becomes more obvious in a crisis.

I think you are at least partly right about authorization to buy US-mortgage-backed securities from any seller: part of it has to do with the fact that the credit system is definitely global in character. The other part is the fact that the underlying on these securities is real estate in the US owned for the most part by US residents, of course. Imagine renegotiating mortgages with Bob and being unable to do so with his neighbor Fred, even though they both got mortgages through the same bank, because in Fred's case the liens are tied to untouchable securities at the Bank of Tokyo. It is definitely a mess.

To pick on just one example, it is definitely true that pressure from the Clinton administration on Fannie Mae and Freddie Mac to buy sub prime loans to mostly poor mostly minorities was a contributing cause.

Heaven forbid that people actually go to the trouble of making sure their argument is strong and sound before aligning themselves with the people with pointy hats.

Thanks for this, Zippy.

Zippy,
I agree that obscurantism is a staple of the managerial state and it is this noxious feature that no doubt fueled a good part of the reaction to the bailout. And let us add the term “off balance sheet liabilities” to our sardonic vernacular. The cost of federal operations are imperfectly estimated, but when it comes to who holds how much of our Treasury notes, not much guess work is required. And it is here that patriots should tremble. I think we’re out of economic silver bullets in trying to stave off some very unpleasant times. A full meltdown will be averted short-term, but what won’t return anytime soon is trust. I know of no private, public, or ecclesiastical institution that is not troubled by an often inchoate sense of betrayal held by its members. Our great task is to make sure the American people have the necessary spiritual reserves to draw from, and be ready to give an account of the hope within us.

Thanks for your thoughtful responses during these exchanges.

It's really bad, and people ought to accept that it is really bad, and that it isn't just about those guys over there but is going to be bad for you and your neighbors.

Unfortunately, just saying "trust me" isn't an argument. If you can't explain what will happen, then why should anyone believe "It's really bad"? Especially because 1) Paulson has lost all credibility on this matter because of his mistakes, and 2) there are many folks who believe what's happening is actually a credit bubble which has popped, but which the government is trying desperately and futilely to re-inflate, which is to say, it won't solve the underlying problems with the economy.

The populist nonsense about 'each house being robbed of thousands of dollars to bail out Wall Street' is just poppycock: this is about saving your own bacon as much as anyone else's, and it isn't going to cost you thousands to do it.

Exactly how much will it cost each of us? Do you really have any idea? The answer is no, because you don't know how effective any of these measures will be, or even the ceiling of how much Paulson and Co. are going to borrow from the Chinese, Saudis, etc. to make this problem go away.

Third, in the short and medium term, a credit injection by the feds has a very good chance - though it is by no means an absolute certainty - of averting the disaster.

By "averting" you mean sweeping under the rug until it pops up as a bigger problem down the line?

Folks have asked why corporations flush with "cash" - that is, non-volatile liquid assets, since that is what the "cash and equivalents" line on corporate balance sheets means - do not do this themselves, especially if it actually has the potential for profit. Built into the question is a misunderstanding of the nature of the problem. The key problem with these securities is that they have been treated as non-volatile liquid assets, and have been held by many institutions as that kind of asset serving that kind of purpose; but now, with all the defaults/etc, they have been simultaneously de-valued and have become illiquid. They have become (or really always were) something entirely different from the function they have been performing in the financial system. Someone who buys them up can get a good deal on them right now as a long term investment, but he can't use them as a "cash equivalent".

I do not think you understand the point of the "Folks." Folks are not saying that corporations flush with cash should buy these junk securities and treat them like cash-equivalents. Folks are rightly saying, if these securities are such Great Deals! then why aren't corporations flush with cash buying them not as cash-equivalents (where do you get that idea??) but as long-term investments that are sure to make them money? The answer is: it's because they are junk assets that probably won't make them money, because the mortgages that are backing them (giving them value) are generally subprime mortgages and value of housing is still declining (and rightly so).

Investors like Warren Buffett who have the cash to spare, who can easily spend their cash on long-term investments, are not buying these junk securities for good reason.

No one (that I know of) is arguing the straw man of saying these securities are exactly like liquid cash that somehow also grows over time. We know they aren't liquid.

There are times when it is absolutely imperative to spend more than you earn in order to stay out of trouble: to take out a loan to pay for your appendectomy or to have your car fixed or whatever.

Yes, that is obviously true. What isn't obvious is that we are in this situation right now. What if a more relevant analogy is you or your father borrowing $700,000 to buy an unlabeled bottle that some guy, let's call him Henry Paulson, tells you is really really good medicine that somehow people don't want to use, but it's good for you!

Sixth, many conservatives don't like the idea of government intervention in this because it smacks of socialism. But a big crash would and perhaps will give us lots more socialism, good and hard, and probably much worse besides.

This doesn't "smack" of socialism. It IS socialism, bit by bit the government is taking over private companies. Yes, if people like you continue to defend socialism, we will continue down the Road to Serfdom, which is paved with Government Heroism.

Think about it: the plan is to sell 'insurance' protecting the downside of these securities, without participating in any of the upside.

First, the government isn't supposed to be a player in the markets at all receiving any upsides. That's what started this mess in the first place. Second, if we're going to be socialist, then taking money from financial firms and giving them insurance IS the upside. Selling insurance is generally profitable for the seller (in this case the US govt can mandate that they purchase insurance and at which price) which is why State Farm Insurance, GEICO, etc are still in business. Third, if we're going to be socialist, it makes those financial firms directly accountable for each other, because they're all paying into the same insurance fund.

So in summary, I see three main problems with your analysis. 1) You believe in short-term Keynesian solutions to long-term problems, whose institutions tend to stick around forever (Fannie/Freddie) (Did you see a date of dissolution for the socialist institutions in the bailout bill? I didn't.). 2) You actually trust the very people who screwed things up to fix the problem. 3) You assume that a problem created by mistakes accumulated over 30 years of bad housing and economic policy can be solved without the market correction of a recession or depression. What if, like in the rest of life, mistakes made in the past have consequences we can't run away from and that Heroic Government cannot save us from?

But, I could be wrong. Fire Paulson, get Dodd, Frank and and Bernanke out of the decision-making process as a just and prudent consequence of their actions, and we'll talk.

To pick on just one example, it is definitely true that pressure from the Clinton administration on Fannie Mae and Freddie Mac to buy sub prime loans to mostly poor mostly minorities was a contributing cause. But it hardly stops there, and indeed even if we took that out of the picture entirely it is not clear that the crisis would not have arisen nonetheless.

Fifth, there are a ton of perfectly legitimate regulatory/etc things we need to worry about, to make this not happen again. They are far less immediate in priority than preventing a freeze up of the credit system, though that does not mean that they are not very, very important.

From what I could tell, the major people crafting the bill (Frank, Dodd, et al) were among the ones most responsible for the mess, and they show absolutely no sign that they acknowledge their mistakes, even after the abundant evidence of the Fannie and Freddie collapse, or that they plan to do anything about it. In fact, all the rhetoric from the Democrats indicates that they somehow blame free markets for the mess, and intend to do engage in even *more* of the insanity that caused it (the attempted ACORN giveaway is perhaps the most in-your-face demonstration of their attitude). I simply can't bring myself to support the bill under these circumstances. If they want to pass a piece of crap like that, let them do it themselves.

Investors like Warren Buffett who have the cash to spare, who can easily spend their cash on long-term investments, are not buying these junk securities for good reason.

Buffett actually bought a big chunk of Goldman Sachs recently:

http://www.bloomberg.com/apps/news?pid=20601109&sid=aJT7IsmvAQXs&refer=home

And of course it is above all the big investment banks like Goldman that are up to their ears in "junk securities."

...if these securities are such Great Deals! then why aren't corporations flush with cash buying them...

Buffett actually bought a big chunk of Goldman Sachs recently

Yes, which is why I used him as my example. As I wrote in response to First Things contributor Robert Miller last Friday:

What about Warren Buffett, the savvy, coolly rational investor? Warren Buffett is NOT buying these mortgage-backed securities. Instead, he is buying Goldman Sachs, which, in addition to having a record of making better financial decisions than its rivals, also happens to be would-be King Henry Paulson's former company and will be a recipient of the $700 billion in funds from the government, if the bill passes. Buffett is not betting on mortgage-backed securities, he's betting on the excellence of Goldman Sachs and the likelihood of government shell-outs to Wall St. He is a savvy investor.

You see, Goldman Sachs is not insolvent. All investment banks/finance firms took on the junk securities, but only Bear Stearn and Lehman died because the others had more capital to back up the risk. That's called good business practice.

The bottom line is: if the securities are so good, then why isn't Buffett buying them directly? If he's doing something different, you can be sure there's an important reason why. And in this case, it's because Goldman is a relatively solid firm that has the best chance of profiting off of taxpayer money.

All the finance firms on Wall St are in a frenzy right now trying to position themselves to get a piece of the pork. Do you really think it would be otherwise? Do you really think moral hazard is not going to totally defeat the "good intentions" of this bill?

Thanks, Zippy. My question is, putting aside pensions/IRAs/401ks and other investments for a moment, what's the upshot for the average person here? Is it that many companies depend upon credit to just make it through the year, so they will have to trim back jobs if their credit seizes up? What kind of disaster are we courting, from the ground level perspective? I guess you made your train wreck analogy to say you don't know what form it will take, but I'm asking what constitutes a train wreck as opposed to a nuclear meltdown, metaphorically speaking.

This is the URL for Robert Miller's attempt to make a case for the bailout: http://www.firstthings.com/onthesquare/?p=1182

It basically says, "The securities really are worth a lot, they totally don't deserve to be called junk assets. Evidence? Nah, just trust me." He says this even though we all ought to know that the subprime mortgages backing the securities are going down the toilet because housing prices are in a severe and continuing market correction. Hmm. Let's ignore that fact and take solace in the pipe dream that these assets, all evidence to the contrary, are actually valuable. It's revealing how supporters of the bill call the assets "mortgage-backed securities" instead of the more accurate "subprime mortgage backed securities."

The problem is that the securitization of mortgages chopped up different mortgages into little bits and put them back into new packaged derivatives and so you can't actually tell which derivatives are bad risks and which are worse risks. HOWEVER, what we DO know is that because subprime mortgages will continue to default nationally due to (correctly) declining housing values, the whole well is poisoned. What needs to happen is for these derivatives to be unpackaged so that we will be able to see which mortgages are okay and which are not okay, and Let The Bad Ones Fail.

This is the real problem. Credit will and should be tight right now because we're in an economic downturn and creditors (lenders, banks, etc.) made bad decisions and will be taking losses, meaning they won't want to lend.

BUT, nothing is stopping those who made good decisions to step in and provide the credit that others can't and reap the rewards of their prudence. This should happen, but IT WON'T HAPPEN if the government steps in and gives Bad creditors more credit (by putting taxpayers in debt with interest), destroying the opportunity of firms who would otherwise take advantage of their rival's mistakes.

Stop Socializing the Economy. Please. Right now, the markets are in a panic people of crap information. The markets are confused because "conservatives" are saying Socialism is the best way out of this. I can't believe I need to convince so many people of this on conservative websites. It's like this Financial Panic is providing people with crazy pills. Which, I guess, panic does do.

We are in an economic downturn. Credit will be really really tight. That happens and we need to help our neighbors through. The government can't save us.

Thanks Zippy for sharing these comments.

In the face of our cynicism, it seems to me that our leaders have failed to articulate what the credit freeze is and what it will mean. They have a hard job of convincing us that they are taking correct and thoughtful measures. I hope that they can accomplish this soon as the longer it takes and the longer the uncertainty lingers, the worse off we will find our economy.

Zippy,

Did you, like, get a high pressure fire hose and wash down MZ Forrest's wedding party? Did you say something bad about his mother in high school? Was there an offense in the deep past that can't be forgotten? Anything?

Chris:

What kind of disaster are we courting, from the ground level perspective?

I spoke with an investment banker yesterday in an attempt to get third party confirmation of the concerns about payroll systems. He had not heard of any impending problems at the Fortune 100 level, but he had talked to a major regional employer with plenty of "cash" in the bank who was concerned about making payroll. This was a situation where there was plenty of cash on the books, but the payroll system used by the company depends on the functioning of the credit system. He would theoretically be able to scramble and find a way to pay his employees, though possibly late: the issue was logistical dependence on the payroll system, and the failure of the payroll system itself because of sluggish credit. If the payroll system fails its employees will be unemployed and unable to make their house payments, his own employees will be paid late and will be late on theirs, which will lead to further sluggishness in the credit system, etc.

Did you, like, get a high pressure fire hose and wash down MZ Forrest's wedding party?

1) You believe in short-term Keynesian solutions to long-term problems, whose institutions tend to stick around forever (Fannie/Freddie) (Did you see a date of dissolution for the socialist institutions in the bailout bill? I didn't.).

2) You actually trust the very people who screwed things up to fix the problem.

3) You assume that a problem created by mistakes accumulated over 30 years of bad housing and economic policy can be solved without the market correction of a recession or depression.

Heaven forbid that people actually go to the trouble of making sure their argument is strong and sound before aligning themselves with the people with pointy hats.

Yeah, reality is racist for not making all-interest loans to low-income minorities immune to risk. And for making Asians short! And white men unable to jump!

Zippy:

Oh, I don't think this 'solves' it, any more than ambulances 'solve' a train wreck.

But at least ambulances take people to a doctor. I don't see anything in this plan to even point us in the general direction.

I'm not a Keynsian. In fact, I have no economic religion. True, to true believers everyone else is a heretic.

I'm not postmodern enough to care whether you personally identify yourself as a Keynesian. I only said, this bailout is a Keynesian plan, and you support it, ergo... But I do agree with you that you don't consider yourself a Keynesian.

Where did I suggest anywhere that I trust anyone?

Hmm. Isn't it implicit that you trust the managers of the bill's mandates to wisely carry out what the bill intends to do? I suppose you could distrust Paulson's ability and resolve to carry out the authorizations in the bill wisely, but support the bill for some other reason than you think it'll be carried out well. I guess I could support the bill then.

So, to be clear, you support the bill, but DON'T trust the executors of the bill's authorizations?

Oh, I don't think this 'solves' it, any more than ambulances 'solve' a train wreck.

Ah, perhaps you don't. I apologize. You do, though, believe the passing the bailout bill will be better for this nation's economy over the long run?

I don't see anything in this plan to even point us in the general direction.

So, to be clear, you support the bill, but DON'T trust the executors of the bill's authorizations?

You do, though, believe the passing the bailout bill will be better for this nation's economy [than not passing it, or something very much like it] over the long run?

"I completely understand Main Street cynicism on the point. A perfectly justified cynicism combined with a genuine clear and present danger is a toxic combination."

The fable of the boy who cried "wolf" comes to mind. The glut of fearmongering about great and minor matters has blinded people to any real threat.

The glut of fearmongering about great and minor matters has blinded people to any real threat.

If you are blinded, feel free to speak for yourself. As always, there are stupid people on either side. I for one understand that the credit crunch will lower growth. That's FINE because that's how the laws of economics respond to foolish government intervention combined with foolish decisions by those who wanted easy money.

I'm tired of folks "nobly" fear-mongering and then not being able to actually articulate evidence for their assertions. What exactly do you think is going to happen, and why do you think so? What scale? Who, and where? Why wouldn't new creditors enter the market and mop up? Which companies will Paulson bail out? How will he determine which assets to buy? Where will that money come from? Which foreign lenders? What's the interest spread on those loans versus payback?

These are all basic questions that need to be answered. But all I get is a sanctimonious "Trust me."

Exactly right. I don't trust the managers of any of the things I invest in, if "trust" means "turn it over and forget about it". Due diligence doesn't stop just because I write a check.

I guess I just don't think you have any influence whatsoever on what Paulson does or how any of these politicians/appointees execute their duties. The American people can only elect, and not elect, these people, not control their actions. Especially not ones at this level.

Yes.

You are strong in faith, sir.

Unfortunately, it is Congress which has the actual power, both now and later. Folks seem desperate to throw complete trust Congress to negotiate reasonable terms right now, on the one hand, and completely unwilling to think that Congress just might, maybe, possibly have something to say later in how things are actually run, on the other. IOW folks are arguing in the abstract as if Congress did not exist. I may be strong in faith, but I don't suffer from this weird dichotomy of "trust Congress to do everything right at this moment, in the heat of the final months of a campaign" and "act as if Congress disappears later".

I mean, we can argue till the cows come home about what I would do, in the abstract, if I were dictator. It is just that doing so is a waste of time.

Zippy:

Has anyone collated actual statistical evidence showing the tightening of the credit markets? I'd be curious to look at numbers and not the drum beat of i-Bankers.

similarly, what about something like this: http://www.nakedcapitalism.com/2008/09/why-bailout-bill-will-not-solve-credit.html

but I don't suffer from this weird dichotomy of "trust Congress to do everything right at this moment, in the heat of the final months of a campaign" and "act as if Congress disappears later".

Good. I quite reasonably don't trust Congress to do things right now with respect to this bailout bill they're trying to create, or later in the implementation of the bill.

Which is why they should do, precisely, nothing. And that would be the best course of action for our economy, the free market choice and not the socialist choice, which has always been true (except for the rich and powerful who love socialist schemes they can exploit in inevitable demonstrations of the law of unintended consequences).

I must say that I had a suspician, Albert, that your position was against any government action no matter what case could be made for it. And unfortunately, many of the criticisms of this plan are valid. But you go to war with the Congress you have, not the Congress you wish you had. Though yes, some would rather see Main Street burn.

""Hundreds of billions of dollars are going to bail out FOREIGN INVESTORS. They know it, they demanded it, and the bill has been carefully written to make sure that can happen." - Brad Sherman , D-California"

He said this on Kudlow last night.

Zippy:

I don't agree. It takes us to the ER to see the ER doctor.

No, it isn't. That's the problem. The bailout plan loads the credit market into the ambulance, and gives it a shot of adrenaline to keep it awake a while longer, but I see no evidence that this ambulance is actually going in the direction of a hospital, or that there are even any plans to do so later. The Democrats, in fact, who are mainly the ones behind this garbage bill, and who will remain in charge to oversee this thing for at least a couple years more, don't seem to think the banks even need a doctor. As far as I can tell, they're planning to take the dying body to the witch doctor, to place leeches on it and make it bleed even more.

Oh, and by the way, even assuming that the wide-eyed optimists are right, and these lousy mortgage securities the government wants to buy are actually a decent long-term investment rather than toxic garbage that the banks are trying to pretty up, the only way we will see a profit on them is if we get rid of Fannie and Freddie, and the other conditions that caused this mess, so that the housing market can actually recover for real (as opposed to simply blowing the bubble up again temporarily).

If we do *not* solve the problem,the $700 billion will just be used to create more bad debt and make the problem even deeper, the credit market will collapse and the value of these securities will not recover, and we will *never* see a profit on it.

Sorry, but before we sign off on $700 billion at taxpayer expense, we are owed some sort of guarantee that our money won't be used to make matters worse. Even if the problem isn't solved now, we need tangible proof that it has been acknowledged, and that steps are in motion to fix it soon. Instead, literally every single bit of evidence we have suggests the opposite: that the Democrats (did I mention they're in charge for the next few years?) intend to use this opportunity to socialize the financial system and push even more bad mortgages, wrecking the economy beyond repair.

Until I see a reasonable plan that comes with some common-sense guarantees that steps will be taken to fix the glaring causes of the credit crunch, Congress can keep its grubby hands out of my wallet as far as I'm concerned, and you are not going to convince me otherwise.

I must say that I had a suspician, Albert, that your position was against any government action no matter what case could be made for it. And unfortunately, many of the criticisms of this plan are valid. But you go to war with the Congress you have, not the Congress you wish you had. Though yes, some would rather see Main Street burn.

I would be for government action that would actually help the situation. Unfortunately for bailout proponents, because government policies contributed greatly to this disaster, the government action required is the cessation of those policies. Not an ill-conceived bailout plan that ignores the causes of the current crisis (indeed enhances them) and the mortgage market realities so that we can feel better because we tried to be heroic. That's not virtue, that's arrogance.

Those valid criticisms eviscerate the bailout plan, and while it's true that you go to war with the Congress you have, if the Congress is exacerbating the problem, you fight against it, hard.

Main Street is burning already, in case you didn't notice. What we don't want is to try to put out the fire with gasoline.

*sigh* I just don't understand. No wonder casinos make so much money. People already in the red will do ANYTHING to try to get out, and end up losing so much more.

The Deuce: Oh, and by the way, even assuming that the wide-eyed optimists are right, and these lousy mortgage securities the government wants to buy are actually a decent long-term investment rather than toxic garbage that the banks are trying to pretty up

The securities are actually toxic garbage. Now we have third-party evidence for it. The key is the continuing decline of the housing market, which is projected to continue to fall, increasing mortgage delinquency and defaults (already at 9.2% of all mortgages, from 1% in 2007), till at least 2010.

FWIW:
Dave Ramsay's proposed solution to the present crisis:

The Common Sense Fix
Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following threestep Common Sense Plan.

I. INSURANCE
a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.
b. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the
balance. This brings homeowners current and allows them a
chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or
the sale of the property to pay off the bad loan. In the event of
foreclosure or short sale, the borrower will not be held liable
for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and
executive team members as long as the company holds these
government-insured bonds/mortgages. This keeps underperforming
executives from being paid when they don’t do their jobs.
c. This backstop will cost less than $50 billion—a small fraction of the current proposal.

II. MARK TO MARKET
a. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.
b. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX
a. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.
b. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down.

Michael:

Think of it this way: if Dave Ramsay is right and our downside as an insurance carrier absorbing all the bad mortgages and only the bad mortgages is $50 billion, then everything left over in the pool is upside. Why should we just cover the losses, instead of buying the securities outright and getting the revenues to offset the losses? It seems to me that however you slice it an insurance approach is just a transfer of wealth from the taxpayers to the institutions holding the paper. Buying the derivative paper outright does saddle us with the bad mortgages in the mix, but not only the bad ones: we get the good ones too, to offset the bad ones. Providing insurance saddles us with just the bad ones; so whatever your assumptions about default rates, recovery from foreclosure, etc., it will cost the taxpayer more.

Sure, we'd charge a premium, but we can't charge a fair-market premium or there is no point to the insurance program in the first place. We get some nominal fixed fee, and we get to eat all the losses without limit. Not a good deal.

Insurance works as a business when there is well established actuarial data, you can charge more than what the claims cost in aggregate, and you can ruthlessly control cost. None of that applies here: it is just a taxpayer-to-bank giveaway. Ironically it might be an easier sell, because people will claim the numbers are smaller. But if all the actual underlying losses add up to $50 billion, then all the underlying losses add up to $50 billion no matter which plan we adopt. It is just a question of what revenue sources we will bake in to offset those losses.

Two additional problems with insurance plans: First, they tend to become permanent institutions, whereas a one time fund to buy up this particular kind of security does not have to become permanent. Second, they don't actually take these derivatives off of institutional balance sheets: they are still left rattling around in the crankcase where the institutions need liquidity. Yeah, the insurance helps them become more liquid; but remember, these suckers already have institutional (not government) insurance layered on top. That is how the i-bankers transmogrified sub prime loans into triple-A income instruments to begin with.

Mark to market is a little trickier. It is true that the current rule makes no sense for illiquid assets, but on the other hand getting rid of the rule entirely just reduces transparency even more, and lack of transparency is a big part of the problem. A modified rule using moving averages or something might be better.

Cap gains cuts are probably a good idea.

Not to mention that if I currently have a mortgage which has worse terms, I can force the bank to those terms just by not paying for three months. There's a 'moral hazard' for you, not to mention a massive write-down of what are right now good mortgages. Heck, I missed that one the first read through and did a double-take when I realized its implications. Yikes. Hopefully he only meant it as a requirement at the initiation of the program, not an ongoing stipulation, but still - yikes.

The New Bailout deal is simply, in a word, "awesome". Why, now I don't have to worry so much about inter alia WOODEN ARROWS FOR CHILDREN & RACE TRACKS which, in actuality, were the very things that keep the average American Joe awake at nite!

Here are five of the more outlandish things your taxpayer money is tagged to be spent on in this 451-page bill:

1. $19 million to cover excise taxes for rum brought into the U.S. from Puerto Rico and the Virgin Islands; $33 milion for corporations operating in American Samoa.

2. $6 million to pay for a repeal of a 39-cent excise tax for wooden arrows designed for use by children. The tax "shall not apply to any shaft consisting of all-natural wood with no laminations or artificial means of enhancing the spine of such shaft …" Seriously. That one was aimed to save arrow manufacturers, like those in Oregon, about $200,000 a year.

3. $128 million for auto race tracks.

4. $223 million in tax benefits for fishermen and others whose livelihoods suffered as a result of the 1989 Exxon Valdez oil spill.

5. The "Tax Extenders and Alternative Minimum Tax Relief" section includes: deductions for teacher expenses; additional standard deduction for real property taxes for non-itemizers; Indian employment credit; accelerated depreciation for business property on Indian reservations; railroad track maintenance; seven-year cost recovery period for motorsports racing track facility; enhanced deduction for qualified computer contributions; tax incentives for investment in the District of Columbia; extension and modification of duty suspension on wool products, wool research fund, wool duty refunds.

OINK! OINK! OINK!

For those keeping score at home:

http://www.techcrunch.com/wp-content/uploads/2008/09/septembermadnessb.jpg

More time with the politicians does not equal a better plan.

To allow our managerial class to mock constitutional order would prove far more disastrous and consequential than the wealth lost due to Congressional deliberations and back-room machinations. Liberalism, having eviscerated every religious, cultural and civil form that predates it, will stagger to its logical end with the complete loss of its own moral authority. No need to hasten the arrival of that day without having a humane alternative to the heir apparent; a more brutish and unbridled State.

Getting to the heart of the issue;

"Any political community would be not merely unwise but insane to allow its internal practices—its political practices, its market practices—to continue in a manner so complex that they blind the body politic to how they work or what they mean...

... We not only have allowed such practices to continue, but have done so for so long and in so many aspects of our lives, that we are almost incapable of subjecting them to serious scrutiny. And we continue to allow them despite their violation of our nature and their actual consequences for our happiness...

...We are not in a position to question its regime, because we cannot understand it. Moreover, we dare not question it, because we believe it provides its fruits as God provided the Israelites with manna: the moment we quibble or try to gain control over it, we lose it."
http://www.firstprinciplesjournal.com/articles.aspx?article=1103&theme=home&page=4&loc=b&type=ctbf

Remember, "Obscurantist Populism": That's The SOLUTION!

Im looking to take out a title loan, is a good interest percent between 14 - 18% ?