The Treasury Secretary Paulson and Fed Chairman Bernanke bailout plan calls for $700 billion in taxpayer funds to be used to purchase assets that will in all likelihood be worth considerably less in the future. As for the contention that the assets to be purchased could be worth more in the future than prices paid today, if there was any validity to this speculation the bailout plan in question would not be required as the assets in question would have already found a buyer.
Before continuing the above point needs to be stressed. To be sure, there are willing and able distressed assets investors roaming the markets (i.e. Buffett took a position in Goldman yesterday). However, what these investors have concluded is that a lot of mortgage based securities are toxic in that they can not be accurately priced by any conceivable buy-and-hold model and/or that they are still being too richly valued by their owners. To even suggest that the Treasury is going to be able to employ someone able to successfully accomplish what many well healed foreign and domestic distressed interests have not is shameful. In other words, the bailout plan, at best, is an attempt to make a market based upon the grand speculation that such an action will unfreeze markets and not prove overly detrimental to the taxpayer.
With that out of the way, the sad truth is that Paulson and Bernanke have come to the crossroads of common sense. They both know that the free market alternative, while preferable, would see more massive blow-ups in the future and that this, utilizing their policies, would compel the need for more bailouts. Rather than further disgrace the sanctity of free market idealism and watch investor confidence crumble with the day-by-day bailout proceedings, they instead opted for the mother of all bailouts. In this regard they are trying to act a la Greenspan, or in a 'preemptive' manner.
"I have never been a proponent of intervention...There is no way to stabilize the markets and deal with the situation other than through government intervention." Paulson
But while the preemptive action plan is understandable and perhaps even necessary to temporarily restore functionality in the financial mess that is the U.S. markets, that Bernanke and Paulson took turns trying to spin the bailout in an optimistic light yesterday is ridiculous. The $700 billion bailout is a desperate plan that could fail miserably, permanently damage the U.S.'s financial standing, and leave the U.S. taxpayer holding the bag. The way Paulson and Bernanke talk you would think that taxpayers should be lining up to donate more than $700 billion...
When Life Hands You Lemons Try To Make Lemonade
When asked by Sen. Jon Tester yesterday if the $700 billion bailout 'could potentially affect the credit rating of the U.S. Treasury', Paulson avoided the question, adding that the $700 billion wasn't necessarily an expenditure. Astonishingly, Mr. Paulson also said "This is all about the American taxpayer. That is all we care about..." Buying junk with taxpayer dollars shows that you care about taxpayers? Setting an artificial price for toxic assets is not expenditure?
"This is not expenditure." Paulson
"This is not expenditure." Bernanke
The initial Paulson/Bernanke bailout plan was all of three pages long and was franticly cooked-up as the markets were collapsing. It reads like it was put together by a bunch of tyrannical toddlers playing with crayons. Are we really to believe given the circumstances that this plan represents an opportunity and not an expenditure for U.S. taxpayers?
"This is not an expenditure of $700 billion. This is a purchase of assets, and if auctions are done properly, evaluations are done properly, the American taxpayer will get a good value for his or her money." Bernanke
Good value? Well Mr. Bernanke, if buying the garbage stinking up the American financial system is such an opportunity why don't you partake in this adventure with some of your own capital? (I am quite sure the public would not mind if a few Chinese walls were broken down to allow Hank and Ben to invest some of their own funds in this scheme). Why not call the new plan 'Opportunity USA', get the best minds in the industry to run the entity, and entice Greenspan, Bush, Gross, and other proponents of the plan to invest funds. After all, under such a scenario it is not inconceivable that taxpayers dollars would start voluntarily rolling in to also invest.
But alas, the chain of events to create 'Opportunity USA' is exactly how the free market works, and the free market has already spoken and told us that the crap to be so graciously purchased by the U.S. taxpayer is indeed crap.
Unable To Make Lemonade Try To Hike Up The Price of Lemons
By Bernanke and Paulson's own admission the plan in question would not be successful if assets were purchased at 'fire-sale' prices. I am sure that taxpayers (the investor's fronting this endeavor) would think much differently. Which brings us to the crux of the situation: you can not protect the financial system and the taxpayer at the same time. You focus on one - in this case the 'system' - at the expense of the other.
"Just as when you sell a painting at Sotheby's, nobody knows what its worth until the auction is over. Then people know what its worth. I think the same thing here..." Bernanke
Some of the securities auctions this year have been canceled, others have been devoid of buyers, and still others generated bids for pennies on the dollar. But pay no attention to these auctions, because apparently it takes Bernanke, Paulson, and $700 billion to tell us what many securities are really worth.
U.S. Credit Markets and Federal Rescue Plan C-SPAN Video