2008-09-18

And you thought G. W. Bush had badly hurt the United States?

Paulson's latests action on the US balance sheet (just for September 2008):
  • Fannie and Freddie: $200 billion + $5 trillion of bad dept on the balance sheet
  • AIG: $85 billion
And today, he is working on nationalizing all the losses of all the US banks and investment firms!
Treasury Secretary Henry Paulson is working on a plan that would set up a government facility to take on bad debts from financial institutions, preventing a worsening of the global credit crisis, Wall Street sources have told CNBC.

Such a move, according to its advocates, would allow banks to shovel bad debt off their balance sheets and allow the firms to go back to business as usual. It would also eliminate the need for individual company bailouts.

In turn, that could allow the housing market to recover because it would restore banks willingness to lend.

"This will bring real trust back into the market." Donald Marron, chairman of Lightyear Capital, said on CNBC. "It would free up real, spendable capital in these organizations. They can use that to make loans, to make transactions and to build confidence in the system. This is a confidence crisis."

The good news for libertarians is that this will fail to make the markets recover on anything but a short term speculative rally. Why is that? Because the problem is not that the banks hold bad dept on their balance sheet and hence cannot lend anymore. This is the consequence. The problem is that the debtors are unable to take on more dept and are unable to pay back their current ones! Paulson and Bernanke, probably the biggest fools in the world (even bigger than George W. Bush) still don't get it!

Not even China or Russia came up with this idea.
  • The United Kingdom, the supposed kingdom of capitalism and freedom, is also turning its back to all these principles, and prohibited short selling on their exchanges. Last time I heard such an irrational news was when Pakistan decided to forbid short selling and also forbid shares from declining more than 5%.
  • Russia announced today that it will keep its exchanges closed until Monday (to help it heal?).
  • China said it will start buying stocks in order to try to prevent markets from further declining.

This afternoon, I worried because free-markets were collapsing. This evening, I am worried because there are no free-markets anymore. Guess which one I preferred?

"They misunderestimated me." --George W. Bush

Bentonville, AR
11/06/2000

[Update: other comments from the blogosphere. They provide additional important information]
Stock Market Cheers Fiscal Insanity
SEC bans short selling on799 financial stocks
Peak Insanity (please read the email from "CS")

3 comments:

KJ said...
This comment has been removed by the author.
KJ said...

"that could allow the housing market to recover because it would restore banks willingness to lend."

But will they lend? And at what price? Will the banks, dumb as they are, lend at 6-9 times income for a bubble-priced house?

pej said...

If they pass the losses to the Treasury, why wouldn't they lend?