BS: Cash for Trash

Subject: BS: Cash for Trash
From: Stringsinger
Date: 22 Sep 08 - 11:20 AM

September 22, 2008
Op-Ed Columnist
Cash for Trash

By PAUL KRUGMAN
Some skeptics are calling Henry Paulson's $700 billion rescue plan for the U.S. financial system "cash for trash." Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There's justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers' money on behalf of a plan that, as far as I can see, doesn't make sense.

Some are saying that we should simply trust Mr. Paulson, because he's a smart guy who knows what he's doing. But that's only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis "contained," and then offered a series of unsuccessful fixes — justifies the belief that he knows what he's doing? He's making it up as he goes along, just like the rest of us.

So let's try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven't been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the "paradox of deleveraging."

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn't clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I'm not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don't go to the people who made the mess in the first place.

That's what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It's also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a "clean" plan. "Clean," in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review "by any court of law or any administrative agency," and this adds up to an unacceptable proposal.

I'm aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I'd urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don't let yourself be railroaded — if this plan goes through in anything like its current form, we'll all be very sorry in the not-too-distant future.

NYTimes

Subject: RE: BS: Cash for Trash
From: Donuel
Date: 22 Sep 08 - 11:32 AM

This is my take/illustration on trash for cash

http://usera.imagecave.com/donuel/garbage2.jpg

Subject: RE: BS: Cash for Trash
From: Donuel
Date: 22 Sep 08 - 11:39 AM

Clean as a trash heap

Subject: RE: BS: Cash for Trash
From: Donuel
Date: 22 Sep 08 - 11:53 AM

Congress is seeking a more equitable arrangement. There is no guarantee a bail out will work in the first place. I think it will lead to doubling inflation at bare minimum.

The PASS THE BAIL OUT NOW before it is too late pressure is being parlayed but I bet Congress will take a bit more time on this one compared to the Iraq War "debate".

Subject: RE: BS: Cash for Trash
From: Peace
Date: 22 Sep 08 - 12:56 PM

Money and jobs leaving the US has helped create the problem. Too many big lobbies influencing government financial decisions. They ain't in it for the tax payers good, but the money is sure nice..

Subject: RE: BS: Cash for Trash
From: Donuel
Date: 22 Sep 08 - 01:01 PM

"If McCain is elected, and the final stages of this conquest (they'll refer to it as "reform") are successful, you will not recognize this country in six-seven years (maybe a lot sooner). This neocon crew has every intention of dismantling what's left of the middle class, simultaneously shredding whatever safety net there is, leaving the vast majority of us to fight like dogs over the scraps (under the watchful eye of a privatized "police state"), while they sneer contemptuously from behind their gated and guarded walls."



"General Petraous, BUILD UP THAT WALL!"

Subject: RE: BS: Cash for Trash
From: Peace
Date: 22 Sep 08 - 01:08 PM

Read your link to the satire. It's so much like the truth, isn't it? Good one again, Don.

Subject: RE: BS: Cash for Trash
From: Stringsinger
Date: 22 Sep 08 - 05:51 PM

Ach Der Leiber!




Can't Be Allowed to Happen'
Hundreds of millions of euros from a German government-owned bank went down the drain with Lehman Brothers on Monday after a strange deal that has left many people scratching their heads. Why would a German bank transfer €300 million to an American Wall Street firm after it filed for bankruptcy?

German Finance Minister Peer Steinbrück says he's as baffled as anyone.

The German Finance Ministry declared itself shocked -- shocked! -- on Wednesday at the news that a state lending bank, KfW, had transferred €300 million ($426 million) to Lehman Brothers in New York on Monday, just after the investment bank collapsed.
"What we have had to read today is astonishing and exasperating," Finance Ministry spokesman Torsten Albig told reporters. "We expect a swift explanation of such a technical failure, which is inexplicable to us."

The trouble is, KfW is overseen by the Finance Ministry, among other elements of the German government, and the country's finance minister, Peer Steinbrück, holds ultimate responsibility for the bank's health. Ratings agency S&P said KfW's sudden exposure to such a loss would not hurt the bank's credit; but KfW was already burdened by the collapse of another German bank, IKB, in the wake of the subprime crisis last winter. KfW was IKB's largest shareholder, and it oversaw a deal -- on behalf of the public -- to sell the bank to American investors at the firesale price of €100 million. The bargain basement sale, however, came only after taxpayers were required to pay billions to bail IKB out.

The money transfer between KfW and Lehman was called an erroneous swap -- a swap being a derivative agreement between two parties to exchange one stream of cash flow for another. German papers on Thursday morning are no less shocked by the deal than the Finance Ministry, and they want an explanation for what seems like terrific mismanagement of publicly insured money.