The Bush administration's stupid short-sightedness continues with the Treasury Department plan to buy up to $700 billion in distressed mortgage-related assets from private firms.
Let's get this in some sort of perspective. The banks have gotten themselves in so much trouble because they they loaded up their balance sheets with toxic assets. So toxic in fact that the banks don't trust each other anymore and as a result won't lend each other money. Now along comes Treasury and says: "Hey guys, chill. We'll take those assets." But at the end of the day, those assets are still toxic. And in exchange, those bankers are going to get paid for those tox assets. Talk about moral hazard!!
As the New York Times points out, this bailout amounts to $2000 for every man, woman and child in the United States. And let's make no mistake about it. It will send the US into more debt, raising it to $11.3 trillion. It will boost the US trade deficit and that's bad for the market. And it creates problems for the next President of the United States. Regardless of whether it's McCain or Obama, they will not be able to implement any new domestic programs without a massive tax increase. They can thank George Bush for that!
London-based investment consultancy Independent Strategy is scathing in its report The Paulson Initiative
"The grave danger here is that this is yet another free banquet for the Wall Street nomenklatura provided by their brethren in the administration, styled up to be for the greater good of the people. And it will be a very big banquet indeed, one much to be celebrated by the City and the Street. At $700bn the package is about $200bn bigger than the (net) losses (after foreclosure and recovery) that we have anticipate for residential and commercial mortgages in the US financial sector.
"If this turns out to be a 'soft option' bailout, the US economy will suffer from impaired financial sector balance sheets and misallocation of capital for a very long time to come to the detriment of the performance of financial assets and the dollar. So enjoy the banquet while it lasts, which may not be very long.
"Perhaps the greatest failure of the package is its vision. It seeks to prolong a credit-addicted, thriftless society whose time is over. It seeks to minimise pain where pain is inevitable if things are to change for the better in a durable manner. Wasn't it a European central bank that spoke of a 'necessary recession' to correct global imbalances? At the heart of global imbalances is the US consumer, who has become addicted to credit as a material bridge between what he or she buys and earns. This package seeks to prolong that ultimately fatal addiction."
A national Mortgage Bailout plan is especially needed when the mortgage crisis is so bad that it actually threatens a country’s. economy and stock market. This usually happens when foreclosure records have been set with millions of households affected. This can occur when the government does not properly regulate how banks are distributing loans to borrowers.
Apparently, $700 Billion in relief is just not enough. Secretary of the Treasury Henry Paulson, and his Troubled Asset Relief Program, or TARP, hasn’t turned into the credit repair that many consumers need at this point. However, now that the chairperson of the FDIC, Sheila Blair, is able to weigh in on the situation, things are going our way a little bit more. She has pushed a $24.5 billion program to assist more than 1.5 million homeowners in danger of foreclosure, and it is very simple. Lenders will be given $1,000 for every loan that they renegotiate with homeowners that are facing foreclosure, and if default can’t be avoided, the FDIC will take on up to 50% of the loss. Paulson says it is a huge mistake that will bankrupt the FDIC. Others hail it as a route to re-establishing the liquidity for the mortgage market. It may not solve all the problems, but it’s an attempt to help repair credit.
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