The bail-out scam

What's wrong with the Bail-out legislation? It doesn't actually fix anything, that's what. So why is everyone so panicked when the Congress didn't pass the bail-out?

What does it mean: "the bail-out bill doesn't fix anything?"

From Paul Krugman we get this explanation.

Via Yves Smith, a very nice piece by John Hussman laying out the balance sheet issue:

Let’s return to the basic balance sheet of a typical financial company before the writedowns:

Good Assets: $95
Questionable Assets: $5
TOTAL ASSETS: $100

Liabilities to Customers: $80
Debt to Bondholders: $17
Shareholder Equity: $3
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $100

Now let’s write down the questionable assets - not all the way to zero, but to $2:

Good Assets: $95
Questionable Assets: $2
TOTAL ASSETS: $97

Liabilities to Customers: $80
Debt to Bondholders: $17
Shareholder Equity: $0
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $97

This shortfall of protection on the liability side of the balance sheet is what causes a run on the institution, because once shareholder equity is gone, the only way to get at the debt to bondholders is for the company to declare bankruptcy.

Hussman then explains why the Paulson plan as originally sold didn’t provide any real answer to the problem:

The Treasury plan seeks to buy up those questionable assets and thereby protect the institution against failure. Problem is, suppose the Treasury buys those questionable assets at their going value of $2. Here’s the result:

Good Assets: $95
Cash Proceeds from Sale of Questionable Assets to Treasury: $2
TOTAL ASSETS: $97

Liabilities to Customers: $80
Debt to Bondholders: $17
Shareholder Equity: $0
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $97

Does this transaction protect the institution against failure? No! If you buy the bad assets off the balance sheet at their market value, nothing changes on the liability side!

Some of the Democratic add-ons may actually change things economically, but the basic bail-out bill will not.

But everyone says failure to pass the bail-out bill will cause the Great Depression to reoccur!

Really? Here's Dean Baker on the subject:

That's easy. You ask the bleating D.C. Intellectuals how failure to pass the bailout will give us a Great Depression.

The odds are that your favorite DC intellectual type has uttered some dire warning like that. After all, they all heard some authority like President Bush or a highly respected news reporter make such a claim. All right-thinking people know that we just have to give $700 billion to the Wall Street crew or the economy will collapse.

While all right-thinking people might know we need the bailout, just about all right-thinking people don't have a clue as to what they are talking about.

The Great Depression story is of course the most extreme case. No one has yet sketched out the sequence of events that will give us ten years of double-digit unemployment. But hey, if the scare story helps get the bailout passed -- and gets those uneducated skeptics in the hinterlands to buy it -- why not talk about the Great Depression?

So why would the Bush administration try to panic the sheep D.C. Intellectuals about the economy?

Read the Shock Doctrine by Naomi Klein. Bush is coming to the end of his eight year term, and his ability to convert America into a plutocracy will end with his Presidency on January 20, 2009. If he can tie up $700 billion dollars of taxpayer money, then the incoming President will not be able to pass universal health care, improve American education, or even make an effort to rebuild the middle class which the conservative movement is dedicated to destroying.

Think that the 700 plus point drop in the stock market Monday means anything? Yeah. It did. It means that the Bush administration flacks could frighten a lot of stockholders into selling stock. But the next day, most of it was bought back at decent prices. The Stock market is not the economy. It is the froth that rides on the economy. It is emotional and highly volatile. One day is almost nothing. Wait and see if the credit markets remain frozen up, and if they do, then that matters. Unfortunately, nothing in the bail-out bill directly addresses the credit markets. It's just going to make a lot of very wealthy men even more wealthy because money the federal government is going to tax from the middle class is going to be handed to them to continue gambling with.

One thing that has happened in 2008 with remarkably little mention. The U.S. now has three mega banks with no real competition. Citibank, Bank of America, and J.P. Morgan Chase. Talk about too big to fail! The U.S. has never seen anything like them.

The whole thing is quite disgusting, but any nation willing to turn control of itself over to its wealthiest members - its plutocrats - probably deserves what they are getting. A plutocracy. That's why the bail-out bill will pass in much the same form it was when Henry Paulson handed it to Congress.