That Humongous Wall Street Bailout You Just Bought

After a few weeks of trying to stand tough in the face of demands for a wholesale rescue, Hank Paulson couldn't take it anymore. So now we'll have the biggest bailout in history. And it will only cost $1 trillion!

Not surprisingly, the market's up huge on this news: When stocks that were headed to zero get a reprieve and shortselling is banned, the expected response is euphoria. And, it's true, the Fed's moves should head off a run on money-market funds, restore liquidity to the financial system, and create a general "time out" for the panic to recede.

So what are the costs? Almost certainly:

* Higher taxes
* Higher interest rates on government debt
* Bigger government deficits

When the alternative is the entire financial system going bankrupt, these costs are acceptable. (I'm not convinced that that was really the alternative, but early yesterday, before the bailout news leaked, the country certainly seemed to be heading that way).

The devil will be in the details, and Congress will certainly have something to say about that. One big question, for example: Now that the government is rushing to the aid of Wall Street, is it going to do the same for homeowners?

The bailout could prove the final bottom in the stock market, although I doubt it is. Unless the government makes a similar move on housing (which certainly seems more plausible, given this news), the housing problem won't disappear. And until the housing problem disappears, American consumers will still be under pressure. But the future certainly looks brighter than it did yesterday.

See Also:
* Economist McCain Blasts Bailout: "Feds Making It Up As They Go"
* Great News! Bailout Will Only Cost $1 Trillion

Comments

[Henry]

It has always seemed to me the apt metaphor is the cattle rancher who permits (from non regulation) the herd to become bloated because they have made their way into the feed bins(free money). A good rancher has cowboys that regulate the herd in conformance with the Rancher management choice. If the herd bloats, you cannot blame the cows, they eat and eat and eat until their wind pipes are contricted and they bloat to die a death of asphyxiation.
Now... take a look at the boys on wall street and fit them into this metaphor. With free money in the market what would you expect, boys will be boys. The management style of the herd has proved to be rather bad. But what would you expect from George, he's all hat and no cattle.

[Henry]

It was Walter Wriston who stated that countries could not go "bankrupt". He was soon to learn, however, that they could default! There would be no "bankruptcy". Just imagine, however, if the USA defaulted on a UST interest payment. Two to three $trillion in paper would come floating home. This would cause a crash crash crash of the dollar and the ensueing inflation would put us into the realm of times like the great depression. The farmers could sell wheat to Asia at $100 dollars a bushel, and guess what wheat would cost at home? Look at the fine mess you've gotten me into now, Ollie!

[bascombe]

why fix the problem, eh? all threats and no solutions are presented here. there will be layoffs and deficits and plenty of suffering, regardless of this bailout. the question is whether the government will have anything left to help it's citizens.

and of course, the media will have us all at each other's throats, blaming the poor and middle class for the suffering and poverty that result from the decisions made by those to whom we hand over the reigns of power and vast sums of money.

[robeson]

"When the alternative is the entire financial system going bankrupt..."

This is a false choice scenario.

[Cannongrape]

If we put the shaky institutions on hold, just shut them down for a while, long enough for mom and pop to refinance, and if we do it in such a way that neither the borrower nor the lender is under duress, there will be no need for a bail out. We can allow each bank to reopen as soon as they get their ducks in a row.

If you like this idea, contact your Representative at www.congress.org

[cylindar]

The crisis is so severe that it absolutely will not contain the fallout and damage to the economy. People in the US are going to suffer mightily for this and they will be very sorry if they bail out these firms without guarantees to the publics good welfare. How stupid we have all become. How so very very stupid.

[ToonMoene]

Cost !?!?

You're approaching it from the wrong angle.

Just imagine how much you could "regulate" this stuff, now that it's ours !

[julianne]

Today, Wall Street and Washington have a plan for nothing except greed and mayhem. Following the selling off of the craft foundation for our national security, the outsourcing, offshoring, and massive illegal-cheap-labor immigration, the U.S. turned its financial economy into an international whorehouse of redundant, attentuated debt and financial transactions that are indemically inflationary and destructive. Every transaction it makes creates nothing but further debt, inflation, and risk. The Americans operating this system over the years are not misguided,. They are arrogant scum, particularly those coming out of Yale, Harvard, and Duke. Just like the illegal invasion and mass murders in Iraq without an infrastructure or energy plan in sight, millions of ordinary citizens see what has been going on in the economy for years. Yet, we only hear from this corrupt corporate overclass who, in turn, own our filthy media. What we have is an elite in the U.S. that is morally and intellectually corrupt - so corrupt so that they no longer even know they are corrupt.. That goes double for our self-serving, malevolent judicial system and its private penal colony. No doubt, Jefferson, Franklin, Washington - if they were alive today -ould treat our present economic and political elite just like they did the British and, perhaps, so should we.

[dadw5boys]

You mean the Muli-Million Dollar Bonuses given the all the Excutives in the companys who went bankrupt so far this year were wrong ????

How about all the stock they dumped the weeks before they filed bankruptize or needed the bailout ??????

It was no different than Bush selling off his Harkin Oil Stock after a aduit so I guess it is alright according to Republicans they can do no worng.

[fnygy]

I'm not so sure congress will have any say in the details. It looks like the Treasury Secretary is getting a "trust me" pass. Well, I don't trust him. And not because he's not acting in good faith, but because Paulson thinks the way the guys think who thought us into this mess. He believes in market solutions, so whatever he constructs is going to be heavily biased to "restore" the market he thinks works so well in the first place. Clearly, it doesn't work - because here we are.

And why are we buying bad debt BEFORE it goes bad? Why not just guarantee being a safety net? Why not get an equity stake in the banks themselves? If nobody knows what this crap is worth - how is Mr. Paulson supposed to figure it out? Why aren't taxpayers guaranteed a fire sale price, like JP Morgan did for Bear Stearns?

Sorry, but - much like Iraq - I don't trust the guy who drove us into the ditch to drive us out of the ditch - and that means the entire Bush Administration. I cannot know why they are doing this because they've lied to us so shamelessly in the past.

[2kids4me]

What is the total bailout today from the US Federal Reserve & Treasury in comparison to the total number of people below the poverty line or persons without health insurance. What will it be after we do what Paulson and Bernanke are proposing? It appears that while the CEOs of major investment banks, mortgage houses and brokerage firms have made huge salaries over the past 5 years, we are now watching as our tax dollars go (freely or without clear conditions) to bailout what was a free market capitalist economy.

Are we really opening up the Treasury because we realize our economic fundamentals were flawed and rampant with greed where now risk is reaping taxpayer rewards? It appears that $20m and $30m pay packages and stock options awarded was the same as the inner city drug lord (mortgage companies) or gun dealer (rating agencies) who got their minions (analysts and bankers) to do their dirty work and walk away. They get their large compensation packages, pensions, retirement and estates with no questions by the judicial branch of our government. Are the scales of a democracy in action only for the rich?

[katok]

Let the chips fall. Save the people, not the criminals.

[mamacat]

Did we, the American people, just buy Wall Street? Or does China now own Wall Street? What would happen if China refused to buy the bonds to raise the money that our government wants?

It is very interesting to see what is happening today described in terms of the end of American dominance of the capital markets. What will be the next internationally recognised currency? Will it be something not yet invented, perhaps the gold-standard "Mao"? Maybe future currencies will be valued in petroeum, aka "Barrels of Oil"?

Why do I have the feeling that Bush and McCain are already looking for ways to spin this as the fault of Liberals and Obama? How refreshing it would be, to hear the GOP accept the blame for their many failures, instead of blaming everyone but themselves.

[barbarianatthegate]

"The devil will be in the details, and Congress will certainly have something to say about that.

I wonder when "we the people" will be consulted?" Oh, I forgot. We're only brought to the table when it's time to foot the bill.

[dadw5boys]

this is just the tip of the Commerical Realestate Property collaspe.

there is about $ 14 trillion in Commerical Property Loans to go bad over the next year.