The cap-and-trade bad bank

Salon ^ | March 4, 2009 | Andrew Leonard

[Lorianne]

What the Treasury is trying to do is set up a kind of cap-and-trade system for bad debt. In this case, the "allowances," or the right to pollute, are the government loans helping private players buy up the existing pollution -- the toxic mortgage-backed securities. Obama's budget calls for a cap-and-trade system in which "allowances" are auctioned off, instead of just handed out, as was done semi-disastrously at the outset of Europe's Emissions Trading System several years ago. Here, the right to participate in the program is what is being auctioned off, and the more who participate, the less the government pays.

In this scenario the bank nationalizers are similar to cap-and-trade critics who push for a carbon tax, or direct emissions limits set by the EPA. They want the government to just go ahead and order a top-down solution, and not try to tweak markets to get the desired outcome. In both cases, politics limit options. A carbon tax is considered anathema by most politicians, and despite some murmurs of support for bank nationalization by some American legislators, I suspect that Congress would find it unpalatable if the White House announced plans to seize Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase.

Another troubling parallel: The bad bank attempts to solve a complex problem with more complexity, just as cap-and-trade is a complex attempt to cope with an incredibly thorny challenge. But greater complexity inevitably ensures greater opportunities to scam the system.

[Kansas58]

This “cap and trade” thing will be next decade’s “Credit Default Swap” type melt down.

[KoRn]

“Cap and Trade” will be an anvil chained around the neck of our economy as it tries to stay afloat.