“Buy this because it is extraordinarily cheap. The owner must sell right now because…”
This is the opening line of a thousand confidence games. Stories told by well-dressed, smooth-talking grifters. Like many of those sent out to sell the Paulson Plan (which is not dead, as Congress will certainly reconsider some form of it later this week).
The government can buy financial assets from the world’s leading financial firms at prices so low that substantial profits are likely.
Read those words. Confidence tricks require marks, people who believe preposterous statements about promised gains if stated authoritatively and backed with a slick story.
- “The Paulson Plan Will Make Money For Taxpayers“, Andy Kessler, Op-ed in the Wall Street Journal, 25 September 2008
- “Bailout May Be Granddaddy of All Carry Trades“, John M. Berry, Bloomberg, 26 September 2008
- “Taxpayers can still benefit from a bail-out“, Lawrence Summers, op-ed in the Financial Times, 28 September 2008
Not all advocates of the Paulson Plan are attempting to con us. Many are enablers, often economists with unjustified confidence in their ability to use the government’s power to manipulate markets. At this time they are, to borrow Lenin’s apt phrase, “useful idiots” for those who will profit from this plan.
There are a few voices stating the obvious, such as “Hold-to-Maturity is the new Mark-to-Myth“, James Saft, op-ed in Reuters, 25 September 2008 — Excerpt:
“Now what the hell is a ‘held-to-maturity’ price, and how in the world can an auction or ‘other mechanism’ be devised that gives the market a good idea of ‘hold-to-maturity’ prices — since there is no such thing?” economist Thomas Lawler, a former Fannie Mae portfolio manager and founder of Virginia-based Lawler Economic & Housing Consulting, wrote in a note to clients. “Of course, everyone knew what he meant: ‘held-to-maturity’ means ‘above market.'”
The hope, presumably, is that the subsidy given by buying up debt for more than it will fetch on the open market will be enough to prop banks and attract new investors.
Why will we probably lose money on this plan?
The historical analogies used to support this plan fall into two general types.
First, narrow problems (aka special situations). Such as our loans to Mexico and Chrysler. Chrysler was saved with the aid of some large government contracts and new management. Mexico was in trouble in 1994, but hardly a bankruptcy candidate. Neither are at all similar to the current conditions or the measures in the Paulson Plan.
Second, the loans to homes and businesses during the Great Depression (e.g., the Home Owners Loan Corporation). These measures were broadly similar to the Paulson Plan, but with one essential difference. These measures were put into effect in 1934 and thereafter. The recovery, sparked by WWII, was years away. But there were two major differences. Most of the damage had already been done, and loans were made to going concerns or on the basis of tangible assets (e.g., homes). The Paulson Plan purchases will be made on assets of uncertain value — in the early phases of the recession.
Neither of those things make it a bad plan (there are many other reasons it is a bad plan, discussed in earlier posts listed below). Just that these factors make it unlikely that the Paulson Plan will turn a profit — or even break even. The results depend on the exact terms of the final bill (yet unknown) and its implementation by Secretary Paulson and his successor.
If not the Paulson Plan, then what should we do?
That is a complex question. For a simple answer see A solution to our financial crisis.
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Some FM posts about the current crisis
Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
Another voice warning about the nationalization of AIG, 18 September 2008
A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
Another step away from our Constitutional system, with applause, 19 September 2008
What do we know about the financial crisis? What are the key questions?, 20 September 2008
Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
Legal experts discuss if the Paulson Plan is legal, 21 September 2008
Essential steps to surviving the current crisis, 23 September 2008
How should we respond to the crisis?, 24 September 2008
A solution to our financial crisis, 25 September 2008
Is the US economy in good shape, or in terrible shape?, 27 September 2008
For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.