Dear Genghis,
Is the Emergency Economic Stabilization Act of 2008 a good thing?
Having conquered the largest empire in all of history may not make me an expert on running an investment bank, but I know enough to fire (OK, in my day it was more like set on fire, officials who are either so incompetent or so corrupt, that they would ask to send $700 Billion to companies owned by their old friends.
Do you know what your government will be getting for the tidy sum of $700 Billion? It must be several million mortgages backed by houses, right? Hardly. The current text of the as-yet unfinalized bill refers to buying "residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages." Then there is further language authorizing Secretary Paulson to buy anything he wants from his old buddies. The point is that the stuff Goldman Sachs et. al. want to unload on the government are mortgage backedderivatives, not mortgages. These are instruments that very realistically may expire with absolutely zero value. You don't get to wait for the housing market to stabilize (as though $450k starter homes represent a stable value!).
Nobody -- nobody -- thinks these investments are worth what the government will pay if Secretary Paulson is allowed to buy them from his friends. How do I know? Quite simple -- the investment banks will see to the highest bidder, and Paulson is asking to be that bidder.
Secretary Paulson insists that the world economy will collapse tomorrow if his plan isn't enacted today. (Yes, just like he said over a week ago). The President has checked out, and Paulson can find dozens of investment bankers to back him up in saying that it's really, really important that they get that $700 billion check as soon as possible.
Pathetic.
Here's how an economy works. Somebody grows some tomatoes for you. You fix their plumbing. As long as you are willing to do something for someone else, and let someone else do something for you, the economy will continue. The final ingredient, of course, is money. And that is what the investment bankers want you to think we will somehow run out of.
First of all, a flood of restless capital is what got us into this mess, as I wrote 10 months ago. And I'm willing to bet that you're still getting letters in the mail asking you to borrow more money at a low interest rate for six months. Trust me, the money is still there.
There's one thing the Fed can do that nobody else can, and it isn't buy bad debt. They can control the money supply. They've gotten in this mess by printing cash in an effort to forever forestall a recession. Now Paulson wants out, but not before the most massive graft the world has every seen. Hey, everyone does it, why not do it big?
If the problem were really just at-risk loans "clogging" the balance sheets, the banks would call their customers and say, "That $400k house you bought that's really worth $220, yes, of course you can't afford $400k, but that didn't bother us. Tell you what, you only owe us $210 -- how does that sound?" Presto. A "bad" mortgage just went "good," you swallow the $190k loss, and the balance sheet is no longer clogged.
Yeah, they're in a bad spot. You can't do the above with a mortgage derivative. In some cases their loses are simply too high. That's why you have laws for bankruptcies and bank runs.
No, you wouldn't want to go belly up either. Not if you had a good friend with $700 billion in his pocket.
