Financial Ghouls
One big problem with the bail-out that nobody talks about is, as Paul Craig Roberts puts it in my latest interview with him (which will be the EP podcast for October 10th), the money must be borrowed. And since the U.S. savings rate is zero or negative it must be borrowed from foreigners. The risk, then, is that by borrowing to bail out Wall Street we could damage our ability to continue such borrowing if the bail-out fails. That's worth taking a moment to think about because if the bail-out fails and if we can't continue borrowing from abroad (we need about a trillion dollars a year to finance our current account deficit), then we will have a general economic collapse à la Great Depression as U.S. consumption gets frozen in its tracks.
My own, further concern is that the bail-out targets toxic paper when what it should be doing is in effect nationalizing banks. Propping up the paper — and I'm not an expert here so take my guess with a grain of salt — probably gives financial grifters too much of an opportunity to siphon off the bail-out money.
If what you want to do is stabilize markets in the short-run while thinking about how to solve the big picture macro-economic problems and hopefully devise comprehensive legislation, there may just be a fix that would work through November: again, from Paul Craig Roberts, suspend the mark to market rule, which shouldn't apply to distressed and crisis sales of impossible to value paper, and continue the current suspension of short selling, imminently set to expire.
The latter point is key because short selling in this environment makes it fairly easy to precipitate a run on an otherwise solid bank and — I think — in a larger sense on the U.S. economy as a whole. I would hate to see as much as several trillion dollars poured into the system just for the benefit of a few crooked speculators.
My other notion, mentioned in previous posts, and purely hypothetical as it has no chance whatsoever of being tried, is to pass a law that makes all derivatives instruments illegal in the U.S. from that point forward, until such time as the government begins to regulate them. The current stock of derivatives could be left to legal limbo. My sense of it is, and again I may be mistaken, if you completely wiped out the derivatives casino most bets would cancel out and it would be a simpler, more easily managed problem to re-capitalize banks where necessary. Then we would get back to a real economy based on real assets.
In any case, with Wednesday evening's Senate vote now only the U.S. House of Representatives stands between the people and a deeply flawed, risky bail-out proposal. I've been taking time to make calls to congressional offices urging a "no" vote, and you should do the same.
Posted by George Kenney on October 1, 2008 10:13 PM 
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Comments
I agree with you about the derivatives, and I think that the uncertainty about who is exposed to what is a big part of the lack of confidence in the credit markets. If there is no market for these instruments, why don't we make one. Like you said suspend creation of new derivative contracts. Would it be possible to give institutions 30 days (or any set amount of time) to make public all derivative positions. Any derivative positions that aren't registered during this period aren't valid. Then we can sort through them, and like you suggest see where they cancel each other out. There needs to be rules governing these instruments, but the first step must be trying to figure out what's out there. God knows that this is a massive endeavor, but I think one worth doing.
Posted by: Pete | October 2, 2008 10:55 AM
The Senate Bill looks like an Appropriations Bill, not a bail-out.
Time to flood the Hill will calls and emails again, crashing the system like the last time.
We can do better......
Posted by: Throw Them Out | October 2, 2008 11:12 AM