Not really. If you can compare the banking system of... say... a week ago... and one that becomes, by definition, an agent of the federal government, you would notice that one is a private banking system and one that is nationalized.
What has been done here is the federal govt is providing liquidty in the market for toxic derivatives and bad mortgages. In doing so, they are stabilizing as system that had ‘seized up’ due to the lack of liquidity and buyers for this stuff. the price of this ‘good deed’ is to add billions to our national debt.
The federal gov't stopped the stock market from crashing by creating the illusion that the insurmountable debt -- which is hidden as Level 3 assets - will simply be taken off the shoulders of these financial institutions. The problem is not liquidity. The problem is a lack of confidence and trust among the banks. Check the TED spread and LIBOR. They injected $300 BILLION of cash into they system on Wednesday and Thursday, and LIBOR went up! This isn't liquidity. It's a lack of solvency and the extreme distrust not built up among banks. Money is being hoarded in the system, not circulated.
Yes, this is not a good option, but good options ran out when banks started going under. The choice would be to see more banks go under due to lack of liquidity, see the stock market and economy tank, and consequently we’d see a global slump. After about 3 years we’d get through the ‘pain’.
A trillion dollars of Level 3 assets and CDS billed to the public will get the job done. Note, this only assumes what banks classified as "Level 3". Watch the rush to re-classify "Level 2" assets as "Level 3" so those can be sold off as well. The cost of this bailout will soar well beyond a trillion dollars. That's will kill the economy any way you cut it, and three years of pain is extreme optimism.
Adding ‘trust’ to markets via govt intervention is not fakery, but the real stabilizing factor that can end panic phases of credit cycles.
It's fakery when the government implies it can resolve the problem. It can't. The gov't injected enough trust into the system to stem the avalanche landing on Goldman and Morgan Stanley and relieve the intense pressure that was exerted on the bond market.
I would also add that $700 billion is the holding limit in the bill. People assume that would be the cost incurred, but it would likely be less if/when the Govt buy at market-stabilized prices and takes their time to resell at reasonable price. I won’t give an estimate on real cost, but leave that to some economists/analysts to estimate. I don’t know.
The bill only prescribes a maximum account value of $700 billion at any given time. i.e., if the fund is $700 billion and they sell $50 billion, they will buy another $50 billion of dead securities off of some bank's Level 3 sheet and add it back to the fund, bringing it back to $700 billion. This is not an estimate of total cost, only a limit on how much will be on the gov't balance sheet at any given point.
I dont see it that way. The structure is not much different from RTC in the last 1980s for S&L bailout.
Those banks were already failed, were they not?
hyperbole.
This is a repudiation of the free market system in broad daylight. Gov't manipulation of the stock market, gov't equity positions in private companies, socialization of private sector losses... unlimited powers.
Amazing that people cannot figure that out. If it were just a temporary bank run, or a glitch in a market, Helicopter Ben could fix that in an instant, or wonderful arbitrage opportunities would exist. We already spent a year trying all of the temporary loans and swaps and special credit windows and things. Broke is broke.
“and one that becomes, by definition, an agent of the federal government,”
That characterization is false. The rest of your analysis proceeds from this false premise.
This entity will be buying up distressed assets, it will not be taking over any banks.
“The federal gov’t stopped the stock market from crashing by creating the illusion that the insurmountable debt — which is hidden as Level 3 assets - will simply be taken off the shoulders of these financial institutions.”
No ‘illusion’ that is what the program will be.
” The problem is not liquidity. The problem is a lack of confidence and trust among the banks.”
Liquidity is a *function* of trust in the markets. Create more trust and you get more liquidity from private market participants.
Also, btw, liquidity and interest rates are separate entities. A rise in LIBOR indicates that the flight to safety was reversed. When interest rates and the market go up in tandem, its an indicator that something stimulative happened.
A few points:
- Nobody wants to do this, but Secty Paulson and Bush are correctly saying this is needed and inaction is a greater risk and threat to economy
- I think the final cost of this bill to taxpayers will be much *LESS* than $700 billion. They will buy toxic assets at deep discount to face value, at a long-term current value. Buying it for $700 billion and working it off over 3 years for resale of $400-800 billion (just a SWAG, nobody is giving an estimate of real cost) “cost wont be anything like the cost to buy these assets” so Paulson is giving indications the final cost is much less, this could cost a few hundred billion or net positive if a miracle occurs
- I think the lack of oversight in the bill is an issue and will get fixed (transparency, a board, report to Congress, etc)
- The Democrats are going to want to add regulations and mortgage bailouts and use this to control bank more; it should be resisted; I hate these ‘fast reaction’ type of bills, so the less they do now the better
The hyperbole is the false claim that this is the end of the Aumerican banking system. This is not it.
Next year, when the Obama administration and Democrats reinvent regulations on financial sector *THEN* we might see what you are talking about come to pass. Everything will get regulated and the Obama/Dems will be regulating pay, markets, hike taxes.
“It’s fakery when the government implies it can resolve the problem. It can’t.”