The Bush-Pelosi Bailout

From an interview with the ex-CFO of Lehman Brothers, a major investment bank that is now out of business:

Erin Callan: Lucky to get out – Sep. 26, 2008
Did Lehman think the Fed would help it?

Yes. No one knew what it looked like for a broker-dealer this big and connected to the world economy to go bankrupt. And no one wanted to know.

Wall Street’s view of big risks has been this: if they win, they should keep the profits; if they lose: the government should pay the losses.

George Bush agrees. Nancy Pelosi agrees. The anchors at CNBC agrees, this morning warning us that buying these subprimes from investors at more than firesell prices would hurt the investment industry.

Well, relatively, yes. Everyone would like a free check for about $200 billion, give or take. Especially if you’ve run your life assuming that the government would save you.

The New York Times has an article on the Swedish bailout, which protected taxpayers and not speculators.

McCain can show his leadership be helping the Congressional Republicans hold out against socialism, and support a bail-out that does not teach bad behaviors. Obama has an opportunity to do the same thing, if he can convince the Congressional Democrats of the same thing.

This redistribution of loss from investors to citizens, if it happens, will be known by the most influential people who made it happen. To now, it has been the Bush-Pelosi plan. If McCain caves, and wins the election, it will become the Bush-McCain bailout. If the Democrats and Bush pass this over Republican objections, it will be the Bush-Obama bailout.

13 thoughts on “The Bush-Pelosi Bailout”

  1. Dan

    as a general thing I think you are overdoing the moral hazard theory and ideological purity on this subject. Yes, of course, it would be “just” and in line with free market thinking in a large sense to let everybody crash and burn. Can you predict the consquences for a highly interdependent global economy ?

    If you can, what will they be and how did you get to the eventual result ?

    Of course, my ability to put food on the on our table and into the cat`s bowl depends upon the gobal economy and more specifically the finance sector so I may be biased from obvious self interest.

    Many bloggers and economists I respect are on the crash and burn theory (Dave Schuler is the major exception), yet there is strangely little input from them on the likely consequences.

    Second, more specific point, the interview quoted above is just scary, to use the Yank expression. Is the lady holding back what she knows or is she really that naive ? I wd really feel safer knowing that there are lots of tough, evil, smart Gordon Gekko types out there.

  2. F.M.C.,

    as a general thing I think you are overdoing the moral hazard theory and ideological purity on this subject. Yes, of course, it would be “just” and in line with free market thinking in a large sense to let everybody crash and burn. Can you predict the consquences for a highly interdependent global economy ?

    Certainly we are hearing that the smoking gun may come in the form of a mushroom cloud.

    The financial industry has failed to disarm its toxic (radioactive, one might say) illiquid mortgage-backed vehicles. Only a trillion dollar financial war can save us now. Of course, my ability to put food on the on our table and into the cat`s bowl depends upon the gobal economy and more specifically the finance sector so I may be biased from obvious self interest.

    No, but I bet that you have relatives who will die of cancer, as wiell as care about some people under 18 whose generations will be asked to deal with oil wars because our current industrial-technological stance makes oil criticla for national security.

    A $700 billion outlay can buy a lot of things. Maybe giving the cash to Wall Street — quickly — is the best way to spend it. No one has argued why this might be the case outside of repeating the least believable rhetoric of the Iraq War buildup.

    Many bloggers and economists I respect are on the crash and burn theory (Dave Schuler is the major exception), yet there is strangely little input from them on the likely consequences.

    Likewise, Henry Paulson has been completely silent on the threat of Great Cthulhu waking from his deep slumber in the South Pacific and devouring passing merchant ships. Why will he not push $700 billion on a network of drone nuclear submarines, to deploy within the next year? Could Secretary Paulson describe in detail the consequences of not doing this?

    Now, I’m sure Paulson has seen evidence that convinces him this is a wise decision.

    I’m also sure he tried his best to make sure Goldman Sachs was in a good position, when he was running that firm. He clearly failed to do his job well the last time.

    Am I supposed to trust that Henry Paulson has suffered an attack of competence?

    Or would it be more prudent to ask him to share his evidence and reasoning?

    Second, more specific point, the interview quoted above is just scary, to use the Yank expression. Is the lady holding back what she knows or is she really that naive ? I wd really feel safer knowing that there are lots of tough, evil, smart Gordon Gekko types out there.

    It is terrifying that the CFO of a major investment bank would expect that hte company suffered no chance of going out of business, because it was depending on a government bailout.

    Or were you thinking of something else?

    ElamBend,

    The current bailout plan completely destroys the foundation of the previous system, by informing us that all the downside of investment failure will be suffered by the government, if the failing institutions is large enough.

    [1] http://www.marginalrevolution.com/marginalrevolution/2008/09/wont-get-fooled.html
    [2] http://en.wikipedia.org/wiki/Mark-to-market

  3. Has anyone mentioned that the Fed is not the government, and that a Fed backed bailout is actually a private purchasing of the failed economy? That, in essence, you’re all about to witness a major financial coupe of the American system, and that they’ve sold it to you as if it’s the government itself bailing out an accidental crash? This is the same shit that happened twice last century. The c-s at the top tell the media to tell the public that the market is about to crash, so all the puppets pull their money out, thereby causing the crash to happen (a self-fulfilling prophecy). Now the guys at the top who instigated the whole false crash can turn around and buy up all of your (virtual) debt for pennies on the dollar, effectively coming to own your asses. This is no longer a democracy, and the financial coupe is about to bare its ugly head.

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