THE UNITED STATES OF BAGHOLDERS
Politicians love guarantees because they don’t require current expenditures. In fact, they often pretend a guarantee or a loan is free money—as if a guarantee something that probably won’t ever have to be paid off and all loans from the government will get paid back. As we’ve learned throughout this crisis, that’s a dangerous fiction. If you say you have a bazooka in your pocket, eventually the market will demand you produce it and start blowing things up.But he also explains why that's nonsense, with what he calls the Dislocation Ideology:
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[The administration] decrees the TARP money to be "equity", and then goes off to the FDIC to provide "debt". Both of these sources of funds are US government risk capital which will be used to buy up toxic legacy assets. There's no economic reason to make the debt/equity distinction. But there is a political reason: Congress would have to approve any more equity spending, but FDIC guarantees can be issued to an unlimited degree without Congressional approval.
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Insurance provides a much more politically palatable way of bailing out the banks. Politicians won’t have to spend a dime on day one. They’ll claim that much of the insurance will prove unnecessary because the asset values will recover. We're sure someone will say that taxpayers could even make money on the insurance, if the premiums charged to banks wound up being higher than the pay outs on the insurance. The budget makers will come up with a rose-tinted estimate of eventually payouts, and that estimate will be based on the idea that the troubled assets will recover their value.
We’d guess that the program to purchase assets turned out to be horrifyingly expensive. Banks are unwilling to shed the assets at steep discounts. Many bankers still believe that a lot of their troubled portfolios will be worth more once the “market dislocation” clears up. That assumption that these debt linked securities will be worth far more than current market pricing indicates we’re calling the Dislocation Ideology.Add to this the point that Applesaucer explained in the comments yesterday -- that "banks who sell into this program will find a way to buy the same assets coming out" -- and you begin to see the depths of the latest boondoggle.
But even if they were willing to give up on this Dislocation Ideology, they wouldn’t sell their bad assets to the government at market prices because this would render them insolvent. When the government got around to figuring out what it would cost to overpay enough for the troubled assets that banks would come clean, the number was almost certainly beyond anything they had contemplated.
Meet the New Paulson Plan, same as the Old Paulson Plan. We're paying. A lot. And the banks -- the same banks who got us into this mess -- survive, receive new injections of capital, and then get to keep whatever is of value at the end. Or they can just buy up what's worth buying, with the proceeds of the money we so generally "lent" to them.
And what do we get? The bag.
And it's empty. Except for the bill at the bottom.