Preview of the Toxic Assets Bailout Coming Soon

[Pangloss]

Thomas Friedman of the New York Times gives us a little preview of what's likely to happen when the toxic assets bailout plan is unveiled (possibly next week).

 

http://www.iht.com/articles/2009/03/18/opinion/edfriedman.php

 

When you hear a sitting U.S. senator call for bankers to commit suicide, you know that the anger level in the country is reaching a "Bonfire of the Vanities," get-out-the-pitchforks danger level.

 

Best I can piece together, the administration's recovery plan — due out shortly — will look something like this: The U.S. government will create a facility to buy the toxic mortgages off the balance sheets of the major banks. They will be bought by a public-private fund or funds in which taxpayers will, in effect, be partners with hedge funds and private equity groups. The hedge funds will be there to provide expertise in pricing and trading the assets. The taxpayers will be there to guarantee — gulp — that the hedge funds won't lose money if they take the early risks and to also lend them money to make some of the purchases. Taxpayers will benefit from any profits these partnerships make.

 

Once the banks sell their toxic assets, many will need capital, because, while they may be carrying these assets on their books at 85 cents on the dollar, they initially may have to sell them for less. So, the government will probably have to inject capital into more banks to maintain their solvency, but once the banks begin to clear their balance sheets of those toxic assets, they will likely attract the private capital they need and relieve the government of having to put in more.

 

Will it work? We can only hope. But I know this for sure: Unless the banks are healed, the economy can't lift off, and that bank healing is not going to happen without another big, broad taxpayer safety net.

 

 

I don't like it, but my gut feeling is that we can't let the banks fail. Letting businesses fail is something we should be doing in general, but if we let the banks fail, with THAT much leverage and impact, we lose the whole shooting match -- we ALL get to stand in the line at the soup kitchen, sooner or later.

 

But I'm trying to keep an open mind about it. The real problem of course is that nobody knows the exact answer to ANY of this shit. Economics is not an exact science, and for every Nobel Prize winner arguing one way there's at least one Nobel Prize winner arguing the opposite. It's ridiculous, but that's the situation we're in.

 

All I can say is it's a damn good thing I don't own a pitchfork.

[CaptainPanic]

You can't let banks fail, I agree. We need some money transfer institutes where you can store and borrow money.

I'm not so sure that it should be the central part of our economy though. Banks should just facilitate the economy, not form the main part of it.

 

But what would happen if you can prevent them from making profit from now on? (Nationalize the whole system, make it a public system)?

It is quite radical, and I'm not sure that it would work, but it would stop the short-term thinking that was partially the cause of this crisis.

 

I'm an engineer, not an economist. But wasn't money once meant to represent physical things? How can stocks and currencies fluctuate so much as they do?

Why did the USA become 20-30% cheaper in a matter of months (for people with euros )? The Americans surely did not lose 30% of their goods.

I fail to understand it, and I'm arrogant enough to say that this could be a sign that the system doesn't make sense rather than me not understanding enough of economics.

[The Bear's Key]

I'm an engineer, not an economist. But wasn't money once meant to represent physical things? How can stocks and currencies fluctuate so much as they do?

Why did the USA become 20-30% cheaper in a matter of months (for people with euros )? The Americans surely did not lose 30% of their goods.

It seems an unwise percentage of economics is about betting odds, and not focused enough on real, tangible goods.

[ecoli]

Your point is well taken pangloss, and I think its a strong argument for strong post-recession deregulation.

 

Right now, scaling back the safety nets will create more volatility - that's just obviously market psychology. But, if this recession has taught us anything, its the moral hazard problem is really dangerous.

 

One of the reasons why everything started to unravel is that people knew that government was going to be here to bail them out. People are totally unused to a market where they have to assume 100% of the risk they take (more or less). This lead to taking more risk than the system could afford.

 

That being said, if people don't know how to behave without the omnipresence of government, then gov't doing nothing could potentially make things worse (but thats still government's faults.

 

So fine, save things that are 'too big to fail' but then get the hell out markets so that capitalism can do its thing.

 

Actually one reason why I'm not strictly against the bonus taxing (in AIGs case) is because I think people need to see how much government interference in markets suck in a visible way. Already some banks are giving up their bail out money because of the strings govt attached. What people don't see are those invisible strings that led to the crises. Adding those visible strings is, hopefully, convincing markets and the american public to reject future government 'regulation'