Apologies for posting twice in short order, but I really think this needs getting around. I regret that I’ve already used my Daily Kos slot for the day. Thank heavens for Docudharma’s somewhat mellower approach.
Since Congress is scheduled to debate and probably vote on the Henry Paulson “rescue plan” for the financial markets today, I want to highlight a bit of news hot off the presses (or the servers, anyhow).
To introduce it, let me say that in my view this plan will do almost nothing to stop the ongoing economic meltdown, and a lot to save various Wall Street firms and advance the concentration of capital. I expect the worthy Ilargi at the indispensable economics blog, The Automated Earth, is right that the storm of desperation and outrage currently directed at Congress will not stop this legislation from going through, since it is all about politics and not economics.
On the one hand, $700 billion seems like a lot of money. It’s supposed to. A Treasury Department spokeswoman told the online Forbes.com last week, “It’s not based on any particular data point. We just wanted to choose a really large number.”
On the other hand, this morning brings the news that the Glitnir Bank has just been taken over by the Icelandic government to prevent its collapse. Iceland now owns 75% of Glitnir.
The price tag was $868 billion. Eight hundred and sixty eight billion dollars.
Think about it. That’s to rescue the third largest bank in freaking Iceland. (Admittedly Reykevik-based banks have become European and even global players by heavy risk-taking in derivative markets, but still…Iceland?)
If you feel like hollering at your Senators and Congresscritters this morning, you might want to ask them how much stability they think Paulson’s measly $700 billion is really going to buy?
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I try and follow this stuff and I even knew about Iceland’s banking troubles, but this stunned me…
… restore solvency to firms required to hold investment grade assets who have been burned from the absurdly inflated ratings of so much of this speculative junk.
For institutions who have been big players with their balance sheets stuffed full of this speculative junk, its chicken feed.
However, you missed one part of the bail-out … the junk that the Fed has accepted as instruments to execute repo loans.
Repo loans are short term loans that are performed by the lender buying an asset at a set price, and the borrower agreeing to buy the asset back a fixed period of time in the future at a set, higher, price. The original price paid is the amount lent, and the difference in prices yields the interest.
The point of doing it that way is that arranging collateral is an overhead that weighs down on the cost of borrowing for short term loans. Repo lending is “instant collateral”, since if the borrower goes belly up, the lender ends up owning the repo asset.
Of course, if the Fed were to, say, accept speculative junk as repo instruments (even AAA rated speculative junk, which used to be a contradiction in terms), then if the borrower goes belly up, the Fed’s balance sheet takes a hit, which requires bailing out.
Ouch.
So if you can buy junk off the balance sheets of the borrowers, enough to keep them in business with enough liquidity to refund the loan, the junk moves into long term government ownership OFF the books of the Fed, and the mess can be cleaned up.
Obviously it won’t cure a solvency crisis, but it sweep the absurdity of one of Bernanke’s pet projects, which Paulson collaborated on, and avoid those two sharing their fair share of the scape goating for the crisis.