Boy, I wish I had thought of this, and why no one else save some smart readers have focused on the mechanics of the Paulson plan operations is beyond me. This bill is moving ahead like the Titanic…..with high odds of similar outcomes.
Hoisted from comments, we turn the mike over to reader Don:
The bailout, I mean rescue plan, can be seen as nothing less than a new Ponzi scheme. It works like this:
Fed as only lender, in an attempt to keep the financial system from imploding;
TARP needed to keep Fed balance sheet intact so that it can continue as only lender;
Treasury will need to significantly increase the amount of Ts (public money) auctioned to fund TARP;
Panic serves to encourage T. buyers, especially for bills;
This represents a liquidity trap: TARP recipients of Ts will hoard cash to buy Ts: rinse and repeat.
This results in drying up of lending to corporations/crowding out private capital – no new credit lines;
The Fed becomes a holder of private capital, the later of which is now frozen to protect that capital from deteriorating, The rollover scheme will restrict even more lending in the private sphere for purposes of keeping the financial sphere on life support, but with the consequence of furthering the deterioration of the ‘real’ economy.
The counterargument is that the TARP will end the fear, breaking the Treasury-hoarding. But with banks (presumably) able to use the new phony prices paid by the TARP as marks for asset valuation purposes (whether they sold to the TARP or not), you get less transparency and hence less faith in bank balance sheets.
Further remarks from reader FairEconomist:
My thoughts exactly, Don. Plus the durations target the drawdown precisely on the capital we need most. We’re desperately short of 3 month working capital, and here comes Paulson to take $700 BB of what we’ve got left away and dump it in the mortgage industry. I don’t think you could devise a worse plan. We might be better of if he *did* steal it.
Informed reader comment very much appreciated.