Wed Sep 24th, 2008 at 12:37:58 AM EST
This bailout demand from Paulson makes no sense as stated. It has been suggested that the true purpose is to provide a stealth recapitalization of the Fed, as Bernanke has traded most of its cash and treasuries for toxic paper and it is in danger of default. They might not even have enough to guarantee Paulson's stock in Goldman's! That would be a true emergency.
The Fed should not be in the business of making good every insane deal Wall Street ever devised. To even start to do so would require either printing massive amounts of dollars or imposing very significant taxes on the wealthiest 0.5% of US citizens. They and the various trusts are the only sources of immediate cash on that scale in the USA. Foreigners probably won't lend it to us at any affordable rate. They have more sense than that. I think this US government would default on its obligations before it would go after the assets of its wealthiest citizens. Money is supposed to flow to these worthies, not be extracted from them.
Rather than continuing down this road to disaster, we should prepare a recovery plan. If even a part of the $700 Billion being proposed for a Wall Street bail out were used to provide equity capital for new banks, we could "thaw the financial system." These banks should be required to operate under 1970 banking regulations. At a ratio of $15 of loans for every $1 of equity, $530 Billion would back over $8Trillion of new loans. That should get the economy functioning again. Businesses could get operating capital, consumers could finance purchases, people could get home loans. There should be plenty of sadder but wiser bankers available to staff these new banks. Let Schumpeter's "creative destruction" go to work on Wall Street. Wall Street has become a giant leach on the body politic. This would be like taking a giant car cigarette lighter to that leach, like I used to do after swimming in the creek in Oklahoma in the 1950s. The leach lets go. Why $538 Billion? One bank for each senator and representative. All would be heroes. Christmas could be saved.
There is going to be damage from the bursting of this bubble. As it has been leveraged at up to 30 to one it probably cannot be avoided. The only thing to do is to recognize the damage, which we have so far refused to do, and put in place new, functioning institutions that can allow recovery to begin. That is only made worse if we spend $1 Trillion trying and failing to guarantee bad bets leveraged at 30 to 1. These bets may total as much as $50 Trillion. Other countries should do the same. That is all anyone can do. But it is easier to do if we have not first flushed $1 Trillion or more in a failed attempt to deny reality.