Good Money After Bad
I was watching one of the senators discuss the bailout package this morning on TV (which one is irrelevant since all those in favor sound the same). This august figure sat there explaining how the public is going to make money on the purchase of distressed assets from struggling financial institutions. For example, Asset A is offered for 40 cents on the dollar. The government buys it, holds it for a few years and sells it for 60 cents on the dollar. Voila. Big Fat profits. The only thing I did not hear this modern day Webster acknowledge (and based on the events of the last few years, I can't believe he was unaware) is that asset prices, in fact, can go down. Hey, just ask millions of Americans who can only sell homes they bought for far less than the purchase price. Or how about people who bought equity in many of our financial institutions in the last year. Important safety tip, stock prices can drop.
However, our Congressional delegation, in the breadth of its' wisdom and rush to bailout, has not actually counted all the beans. First of all, if you issue $700 Billion in bonds, there is interest that must be paid. In order to profit, the sale price actually has to exceed the total cost of carry. (In my experience, most elected delegates don't consider the cost of carry to be their problem, so they ignore it).
In this case, however, there is one more cost our national financiers are not considering. In issuing this boatload of new debt, it in all likelihood will raise the cost of all the other debt we are now carrying (either demand for new funds, or cost of refinancing outstanding debt). With over $10 trillion or so of outstanding, an increase in average cost of one percent (over the what would otherwise be the ambient level of rates) would, over ten years, increase the net cost of borrowing by over $1 trillion. This does not include the slew of net borrowing yet to come.
So next time a Senator or Representative offers you a piece of financial advice, respectfully tell him you are not shopping for bridges today.
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I'm not particularly famous for my child-like naivete, but doesn't it seem glaringly obvious that, as usual, the one inevitable winner in all of this is the Federal Reserve Bank?
A couple of hours in the basement printing up another $700 Billion of coloured paper and, wham! The U.S. is in hock for another 20 years.
Doesn't it seem equally obvious that, if we're looking for associated causes for this mess, the Fed, with all its manipulations, is a likely candidate?
Woodrow Wilson was suckered into creating it, JFK was 'removed from office' for trying to stop it. Isn't it about time someone lifted the rock and had a long, hard look at what lives there?
See Neil Grossman's Profile
If you read some of my other postings, you will see that I believe Mr. Greenspan's monetary policy structure was a major cause for this mess; and his encouragement of financial risk taking actually interfered with normal risk assessment, which also has made matters worse. However, the Federal Reserve has an important role in the financial system; i think to some extent, it lost its way. In terms of printing money, I believe that is actually Treasury's responsibility.
You miss the point completely. If the foreign governments who have been buying virtually all of our treasury debt lose confidence in our markets, they will stop supporting our existing debt refinancing, much less buy new debt. We need a rescue package to get the international credit markets functioning again, with or without new debt. And we should all be holding our breath they will not lose confidence or we are truly, truly screwed.
of course we are screwed, but we screwed a bunch of people with the dollar going from 90 cents to the Euro to 1.50 to the Euro..... Of course a lot of that money is going to our good friends the Saudis (you know the ones who sent 15 of the 19 9/11 bombers).. and Bush talks to them regularly,,, boy they must be really pissed and that might explain the gross increase in the price of a barrel of gasoline...
What a mess, we need to get off the damn oil (Who in the hell killed the electric car? and gave those enormous tax credits for HUMMERs), get some real production back here and clean up the healthcare mess...
We could start with fully funding Planned Parenthood for maternal care, give VA benefits to soldiers for their entire lives and free immunizations across the board for infectious diseases (I still do not feel good about the Gardisil vaccine, refer to Paul Stern on that)
You're right. This has the potential to make us the Weimar Republic. This was the mega inflation Germany that had its currency decimated by war reparations "changed" into domestics leaving the tonnage of marks to be repatriated, sinking the currency, and ending up in the mega inflation. It's unlikely but it could happen the way we have conducted our foreign business and foreign affairs. Vlad Putin could do us more damage sending dollars back to america than sending missles to america.
Everyone needs to read this:
http://market-ticker.denninger.net/
"In issuing this boatload of new debt, it in all likelihood will raise the cost of all the other debt we are now carrying"
Good. There is no better way to learn about money than by going bankrupt.
:-)
See Neil Grossman's Profile
This is something that has totally been ignored by Congress in assessing the cost to the American Taxpayer. Outstanding debt is already in excess of $10 Trillion. Each 1% rise in the relative cost of borrowing costs $100 Billion per year; and that does not include the fact that, with or without the bailout, our liabilities are exploding. By the way, you might also ask your elected representatives whether the cost of the bailout includes the debt service costs.. I tend to doubt it, but I am notsure.
What i cannot figure out is how the Republicans could vote this down. They had to know what was going to happen to the market, eh? You do not think this was a sordid scheme to drop the market and then buy low, agree to the bill, and then pocket the "hard earned" gain after the market corrects with the positive news of the bill? Nah..... not even these slime balls would calculate such dishonorable, devious types of fraternity tricks. Would they? These guys are as honest as the day is long, and they've got principles.
It wasn't the Republicans. The vote was almost orthogonal to the party structure. For a definition of "orthogonal", see the learning unit about vectors.
boy, I really would not be surprised at anything that Bush and his buddies do... We need to get the auditors back in there with populist leadership so that we can determine how much we are missing in taxes that the rich are avoiding...off shore, expense accounts, etc.
See Neil Grossman's Profile
To be honest, I would have voted it down too. Not that a major initiative might not be warranted. I have traded for a very long time; and I can't believe that the way this was structured would not have provided a windfall to financial institutions and other select fund managers. If Bank's need more capital inject it directly and have the American taxpayer take direct ownership. The real benefit inures to the group who is providing funding. Sorry if current shareholders get diluted. By the way, they should also prevent financial institutions who receive aid from shedding jobs for a period, since unemployment is a growing concern. On the other hand, if homeowners are struggling, give them a hand too, on the same type of basis. Help them pay in the short run; and make beneficiaries shoulder the repsonsibility to repay the government later out of the proceeds of the sale of the house. I would also consider offering relief to people with excess credit card debt (if they did not own a home); again asking for repayment at some future date if able. this way people and institutions who need help get it, people and institutions who made their own decisions bear as much responsibility for solving it as possible; and the American public has the chance to actually benefit.
At the end of the day, Paulson and Bernanke treated us like fools. They should have sought broader input and analysis before moving.
Bailout bill failed. If the sky, in fact, does not fall, Bush & Co. got some splainin to do.
See Neil Grossman's Profile
An explanation is warranted whether the sky falls or not. The problem is you can't believe anything anyone in office, or seeking office says.
Actually, if you can't believe anything anybody says, it's time to get a check for a paranoid personality disorder.
I am not saying that one should believe everything or at least some things. Instead one should check EVERYTHING. And then, it turns out, often enough, at least the representatives of one major party, are telling the truth. The representatives of the other party are not so lucky. They have been drinking their own cool aide for a long time now and it shows.
If Bush says it, the opposite is what's good for the US. Proven time and again.
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