Bailout won't work

I watched part of the bailout hearings on TV while at the gym.  Evan Bayh (Democratic Senator from Indiana) was asking why the taxpayer couldn't get some equity in return for the risk. Paulson and Bernanke (Bush administration fellas) said that it would cut down participation. But ... excuse me ... isn't that the point?  Set the price for a bailout high enough and only folks who really need a bailout will apply.   Without such a disincentive, every finance industry lobbyist in Washington will jockey for part of the $700 billion bonanza.

Even the Democrats' competing bill has precious little oversight.  The Treasury Secretary (possibly Phil Gramm if John McCain wins the election) will get to dole out favors to his cronies.

How much of the $700 billion are you paying?  I did a back of the envelope calculation.  US  tax revenue is about $3.5 trillion.  The $700 billion bailout is about 20% of taxes.  So, if you paid $20,000 last year in Federal taxes, then your portion of the bailout is about a fifth of that -- about $4,000.   Question: will the bailout save you $4000?  If it prevents a depression, then yes.   So, on the face of it, the bailout may make some financial sense.

But only if it works.  The size of the credit swap market was $45 trillion before everything turned in (yes, more than the world's GDP!).  The stuff is not worth that much of course.  But the banks will claim it is, and try to get the full price on the loans they turn over to the government.  So, how on earth is $700 billion going to be enough?  It's just good money after bad.

When things look so dire, gallows humor is all there's left.  The letter starts:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude. I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. 
Read the whole thing.

No comments:

Post a Comment