Economy Can Bailouts Have Do-Overs? This One Might.
posted by October 30 at 16:10 PMon
A few weeks ago, I had intended to track key metrics in the credit markets as a sadistic means of removing all joy from the world. Then I came to my senses. Calculated Risk beat me to it anyways, with a daily tracker. According to those numbers, while many things have improved in the credit markets since the bailout went into effect—from all-time historical highs to merely untenable highs—we’re nowhere close to normal.
The bailout plan, first proposed by Treasury Secretary and former Goldman Sachs banker Henry Paulson, was intended to loosen up these markets, returning them closer to normal. Thus far, the bailout measures have added about a trillion dollars to the national debt and left the credit markets improved, but still non-functional. And, it appears as if most of those credit improvements were due to direct governmental intervention, rather than a true improvement in investor confidence.
The two models of the bailout can be exemplified by the bailouts of Bear Stearns and AIG.
For Bear Stearns, the government bought up their impossible-to-value toxic debt. No returns on that investment yet:
The Federal Reserve reduced the estimated value of the Bear Stearns Cos. assets it took on in June by $2.7 billion, or 9.2 percent, as the worsening credit crisis forced more markdowns on mortgage-backed debt.
And with AIG, the taxpayers took control of the company in return for desperately needed cash to keep the enterprise running. Initially, we provided $85 billion for a controlling share of AIG, followed by an additional $35 billion. How did that work out? The heads of AIG apparently lied about just how ugly the situation was and is. The $120 billion or so of taxpayer dollars we lent to them is already gone, with the company still teetering on failure. Take it away, NYT:
The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.
“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.
The revelations that things were worse at AIG than expected led to the collapse of several insurance company stocks today, with many losing a quarter to a half of their total value.
How bad are the credit markets? Well, investors in the world’s largest—and first—Money Market fund still cannot get their money back, over a month after it was frozen. The fund lost a tremendous amount of assets after Lehman Brothers collapsed. It gets worse. A second fund managed by the same company, that was supposed to only invest in government debt, also has been frozen—perhaps evidence the Reserve Fund company, in an attempt to hide their losses in their primary fund, took and lost money from investors in the government fund.
At least 400,000 people, and perhaps as many as a million, can’t get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments….
Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.
The news occasionally posted on the fund’s Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.
Why would anyone entrust their money to a system where the lies and deceit are still being uncovered?
In the meantime, enter Fed Chairman Ben Bernanke—former economics professor and expert on the Great Depression.
His prescription: The government should spend money, even if it means running up even more debt. Spend on everything, including another round of checks. Enough with trying to save the financial system. If the credit markets are beyond short-term salvation, it’s time to try to save the citizens of the country. You know, the Democratic plan, costing a (now paltry-seeming) $300 billion.
And the man he endorsed to spend the money, as his choice for the next president? Obama.
To summarize, in the Golob-scale-of-economist-panic, after a brief bit of optimism in the shadow of the trillion dollar Hail Mary pass to save the financial markets, and its subsequent failure to help enough, we’re at six beakers by now:
You don’t have to take my word for it. Let the San Francisco Fed president Janet Yellen’s gloom be your confirmation.
And now some Muppets to make things feel better: