September 23rd, 2008

into battle


So, can anybody explain to me why the Treasury is in such a rush to ask for $700 billion to bail out the financial system ?

I've read a lot about this, and I understand the issues (I think) about the bailout itself. I don't know exactly how CDOs and credit default swaps work, but in some ways neither did a lot of people who were supposed to know that stuff for a living, and that's a big part of the problem.

But what I haven't really read anywhere is exactly what happens if there's no bailout. Most sources just say There Will Be Blood, and that is that. Or, perhaps, in more detail, that banks would stop lending, but in no more detail than that. But right now you can still get a mortgage and I haven't heard of any problems with short-term credit lines for businesses being taken away. In fact, companies with a lot of cash (like Microsoft) still have access to cheap credit and are using it to buy back their stock.

It's not that I don't think the situation is serious, it's that I am very suspicious of the motives of the financial sector. While Treasury Secretary Paulson thinks he is acting with the best interests of the country at heart, you also have to remember that as head of Goldman Sachs, he helped fuel the popularity of the use of CDOs (and made a pretty penny himself while doing it). I would rather have this thing worked out and the alternatives looked at so that we understand exactly what's at stake, and have it done in a way that befits a republic instead of a special subcommittee that serves at the pleasure of Wall Street.
into battle

Doom Part 2, or, Why the Rush ?

Journalists, please do your jobs:

In covering the proposed $700 billion bailout of Wall Street don't repeat the failed lapdog practices that so damaged our reputations in the rush to war in Iraq and the adoption of the Patriot Act. Don't assume that Congress must act instantly, as so many news stories state as if it was an immutable fact. Don't assume there is a case just because officials say there is.

The coverage of the Paulson plan focuses on the edges, on the details. The focus should be on the premise. And be skeptical of what gullible Congressional leaders, most of them up before the voters in a few weeks, say after being given a closed-door meeting on supposed horrors.

The Administration has scared the markets and some key legislative leaders, but it has not laid out a coherent, specific and compelling need for this enormous proposal, which is the equivalent of a one-time 55 percent income tax surcharge. (Instead the money will be borrowed, so ask from whom and how this much can be raised so quickly if the credit markets are nearly seized up with fear.)

Ask this question -- are the credit markets really about to seize up?

If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.