Bailout or No Bailout?

[scottwww]

Bailout Could Deepen Crisis, CBO Chief Says
Asset Sales May Lead to Write-Downs, Insolvencies, Orszag Tells Congress

By Frank Ahrens
Washington Post Staff Writer
Thursday, September 25, 2008; D04

The director of the Congressional Budget Office said yesterday that the proposed Wall Street bailout could actually worsen the current financial crisis.

During testimony before the House Budget Committee, Peter R. Orszag -- Congress's top bookkeeper -- said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.

"Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values," Orszag said in his testimony. "Establishing clearer prices might reveal those institutions to be insolvent."

In an interview later yesterday, Orszag explained using the following example: Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X's real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.

Such companies "look solvent today only because it's kind of hidden," Orszag said. "They actually are insolvent" already, he said.

In hearings on Capitol Hill so far this week, criticism of the bailout plan put forward by Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke has largely been restricted to the shape of the $700 billion proposal, how the money will be spent and what sort of oversight Treasury should have.

But Orszag yesterday questioned the wisdom of the plan itself, testifying that "it therefore remains uncertain whether the program will be sufficient to restore trust."

In yesterday's interview, Orszag said, "The key question is: What are we buying and what are we paying for it?"

Orszag offered alternatives, such as equity injections into particularly troubled companies, but allowed that those could lead to further problems, as well. In the end, he said, Congress must pass some sort of relief, if only because Wall Street is expecting it.

"If we did nothing, there is a significant risk of another collapse of confidence in the financial markets," he said.

[Voltigeur]

Originally Posted by scottwww

Bailout Could Deepen Crisis, CBO Chief Says
Orszag offered alternatives, such as equity injections into particularly troubled companies, but allowed that those could lead to further problems, as well. In the end, he said, Congress must pass some sort of relief, if only because Wall Street is expecting it.

"If we did nothing, there is a significant risk of another collapse of confidence in the financial markets," he said.

ie something needs to be done - it's the form that needs work. Just quietly, the last time we had a major collapse of the financial markets economy, 1929-31, it did not bode well for Main St. Simply because the financial economy provides the life's blood to the broader economy, capital and liquidity.

And this needs to be about the economy - not about pushing one's own political party / ideaology: there's another forum here specifically for politics ...

The politics across the spectrum gets in the way of pragmatic solutions.

[scottwww]

Originally Posted by Voltigeur

ie something needs to be done - it's the form that needs work. Just quietly, the last time we had a major collapse of the financial markets economy, 1929-31, it did not bode well for Main St. Simply because the financial economy provides the life's blood to the broader economy, capital and liquidity.

And this needs to be about the economy - not about pushing one's own political party / ideaology: there's another forum here specifically for politics ...

The politics across the spectrum gets in the way of pragmatic solutions.

Like he said, it could make it worse. Might as well do nothing even though something is expected.

Really, I would like to see certain regulations put in place, but most importantly, stop the cycle. This is caused by a systemic problem. To fix it will require systemic changes. Some of the other threads in the politics forum deal with a few of those.

A couple external sources for information are Representative Ron Paul's website (www.ronpaul.com), the Consitution Party website (www.constitutionparty.com), Chuck Baldwin's website (www.baldwin08.com) and many others.

[Los Angeles]

Burn that bailout bill.

Its bullshit!!

All it does is cover up the dirt that's really happening behind the scenes.

And who the hell came up w/ $700B??

Is is like some magical number??

"Hmmm.. $600B ?.... $400B ? .... no wait, $650B.... nah....

I got it $700B!!! ... wait.. or .. $675B?

... nah, let's stick w/ $700B, I've got bills to pay."

[cgnahc]

The bill was padded with bunch of special interest "bailout $$$" to get the polititian/sponsor brownie points with their constituents.

Market heading south again...after a weekend to digest the plan. No winners globally. Other markets halted...pretty bad beating.

[PBmadness]

Bailout $$$ being put to good use!

http://www.msnbc.msn.com/id/27075884/

[cgnahc]

Global coordinated rate cut not helping, yet.

[cgnahc]

What the heck? another -600 pt? now Dow at 8579.

[achien]

ur... Jim Cramer predicted 7,700 for the Dow. Watch out below!!!

Originally Posted by cgnahc

What the heck? another -600 pt? now Dow at 8579.

[cgnahc]

short selling for 800 financial stocks lifted today.

[cgnahc]

The carnage continues...

[achien]

now what? bail out for all the G7 countries...

please, stop screwing around with the markets and let the system run its course.

everything will be back to normal in 18 months (if the stupid governments don't tamper with the markets)...

[Voltigeur]

-

Um no. The freakin' banks won't even lend to each other. The liquidity system is totally effed. If we don't get the short-term financing market pumping we are going to have a really deep recession. This is a systemic market failure that even market purists like Arthur Laffer - and I have been debating this directly w/ him - recognize the necessity for direct assistance to get the wheels moving & restore confidence.

The issue then is: which tools in the policy bag do you use? That's the real debate.

The TARP has not even kicked in yet, and in the terms of the TARP there's a bunch of flexibility re what the Treasury / Fed can do.

The market still has downside risk until the credit markets unfreeze.

[Voltigeur]

Originally Posted by Voltigeur

-
The issue then is: which tools in the policy bag do you use? That's the real debate.
The TARP has not even kicked in yet, and in the terms of the TARP there's a bunch of flexibility re what the Treasury / Fed can do.

Bingo:
"[Treasury is rolling out] a wide-ranging effort to restore confidence to the battered banking system, following similar moves by European governments that sent global stock markets soaring. The initiatives will likely supersede many of the government's previous efforts. One central plank of these new efforts is a plan for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the $700 billion bailout bill."

What I have been looking for to get a more direct impact than buying distressed assets (which takes months to work); and the taxpayers get stock in return for their funds at risk.

More on this from ISI

Originally Posted by ISI

Why Haven't the Paulson/Bernanke Plans Worked Yet?
* Relative to the severity of the crisis, the plans were late.
* Until last week, there was little global coordination.
* Many believe the TARP is misdirected.
* Many believe the TARP will be difficult to implement.
* ECB and BoE rates are still too high.
* Many believe insuring all deposits is key.
* Not enough has been done to insure inter-bank lending.
* The plans have been piecemeal, not overarching.
* Many believe the plans have been inconsistent.
* Many believe Lehman should have been rescued.
And it takes time for their plans to be finalized, implemented and to work, and the problems are severe. They may start to work when the TARP actually starts to buy assets, when the Fed actually starts to buy CP, and when new mark-to-market accounting is implemented.

What More Can Be Done?
Before going on, it should probably be noted that an enormous number of policy steps have already been taken over 15 months, both here and abroad. And there are lags. In any event, there's more that can be done.
* More guarantees for deposits.
* More coordinated central bank rate cuts, particularly ECB.
* More coordinated guarantees for inter-bank lending.
* Inject public capital into banks.
* After buying CP, the Fed prints more money and buys RMBS, corporate bonds, CMBS, and maybe even stocks and houses.
* Fiscal stimulus is passed, which could include permanent tax cuts, a tax holiday, rebates, extended jobless benefits, and infrastructure spending.
* McCain/Obama both announce now they will ask for Congress to reconvene after the election to enact a rescue plan.
* McCain/Obama both announce now they will ask a major public figure, eg, Paul Volcker, to serve as Treasury Secretary, and that person accepts.