:LPE:

I’ve just had the chance to glance through the proposed bailout bill (TARP) and reporting on same. Never was there such an opportunity in the crisis. It appears that there is almost no oversight on the spending by the Treasury. It might drive hard bargains, it might not. It’s leader is a former Goldman Sachs investment banker and it’s unclear what he’s going to do with his new power. If it does buy some assets at very distressed prices, there are hints that the accounting oversight bodies are not going to require sellers to recognize the losses they take for the purpose of their financial statements (and compensation based on same). Finally, the TARP will need to hire a large number of — wait for it — Wall St bankers to help value and structure the deals, and they will not come cheaply (except maybe Bill Gross, who counts as a West Coast investor).

Bottom line *could* be that the same people who created this mess get paid again for unwinding it at taxpayer expense, and the firms who are being bailed out are not required to acknowledge it.
Of course, a condition of participation is complete release from all liability: absolutely no application of the rule of law.

Or, it could be an orderly workout with a maximum of preventative measures taken. It is not easy to see, because it was pushed through in 72 hours without any real public debate in the middle of an election.

My understanding is that the U.S. government is running a healthy deficit paying for tax cuts and an illegal war in Iraq and Afghanistan. Add to that, now, it’s subsidization of the business of large group of banks, and we get a fairly significant public debt. I don’t know the estimates or the size of it relative to U.S. GDP — I read in the NY Times recently it might be 40% of GDP, but that sounds too large — and you wonder whether this affects the ability to raise money to pay for it all, and whether (here I am well out of my depth) there is a corresponding effect on Treasury issues or even the dollar.

Update: Yes, 40% is far too large a figure. 500B is about 8% of projected US spending and 1.7% of GDP. Even four times that is less than 10% of the size of the economy.

I take a month’s holidays and the financial sector collapses. Where to start?

I suppose first with the trinitarians: The Federal Reserve, the SEC and the Treasury whose leaders have collectively decided to swallow their pride and their fervent espousal of de-regulated financial markets and socialize America’s debts, and perhaps a few others as well. To do so, they’ve requested - demanded - that Congress turn over 700BN (context: the Iraq war has cost about 1000BN over eight years) to buy stuff no-one else will. I’m running out of superlatives: is this the biggest socialization of private business losses ever? Is this the biggest economic power grab and appropriation of public money ever? I think it must be. Is it being conducted by unelected officials? Yes. Is it being forced under threat of a total economic collapse? Yes. Is it being requested on terms that largely fail to address the cause of the problems? Yes. Is it the only way to stave off a wide-spread economic collapse?

No. There are other ways to get the same result. For example, buy the “toxic” mortgages for close to nothing, re-negotiate them with mortgagees for what, 60 cents on the dollar, say, or whatever makes sense, and make a small profit which goes to paying for the cleanup of the financial system and paying back some of the billions already spent. Or variations on this theme.

And conditions, well, as an only buyer and buyer of last resort, the Fed/Treasury/SEC is in a position to impose terms, and they should. One, equity in any operation whose debt it sells in proportion to the amount it buys. Two, the re-introductuion of the repealed Glass-Steagal Act. Three, regulation of credit derivative market. Four, regulate executive compensation (this one is making headway). Five, impose a financial transaction tax at a very low level. There could be many other conditions for an orderly workout and an improvement in the U.S. financial system, but that’s a start.