Bailout: FAQ Revisited

I thought I was done ranting about Bushite Misrule, but there's at least one more bone I have to pick and bonk them with.

Before (Sept. 23, the day after Secy. Paulson announced the outlines of the original bailout plan), we addressed these questions:

1) Who is to blame for this mess?--Answer: Originators, RATING AGENCIES (thoroughly confirmed through the hearings), Investment houses, Consumers of the securitized mortgage products, and all us folks chasing those extra 20 basis points of return.

2) What should be done to keep from blowing the taxpayers' huge investment? I argued that Treasury should spearhead a revolutionary change in the risk management of the practice of mortgage securitization, and that "what we can and should expect from this exercise is that there will be a functioning market for this stuff, that it will be priced properly for its risk and that the risk will be better understood. We can expect that the most egregious actions will be punished, and that our initiatives will make a recurrence impossible and that the Bile Bubble will not simply be pushed onto the next weak spot in the financial industry." More on this later.

3) What legislation should be passed right now? OK, I advocated for the bailout, and in the terms requested, though the amount of money to be spent by the Bushites needed to be severely limited.

Now, Hank comes back to us to say that actually buying the mortgage-backed security assets, the "toxic sludge", in order to build a market for them and allow the banks to eventually pass them through their constipated systems, was "too slow". Or too hard (as in, constipated hard and it would take too long to figure out the appropriate laxative).

Instead, Paulson listened to those who said the banks simply needed an infusion of capital. It's true that there were many leading economists (including our new Nobel Prize winner, Paul Krugman) who said this would do the job. I didn't get it, but I'm not expert on banks' capital structures (as I am on toxic sludge). The way I saw it, giving the banks more capital just meant they weren't so badly under-capitalized for the assets they had. Whatever; clearly--as we are seeing--it didn't clear out the hardened sludge blockage and get the banks' bowels moving again.

So, here we are. Paulson & Co. have picked their winners and losers--the winners get assistance, the losers are swallowed up. $300 billion later, and it's time to come back and note that their mission has changed. At least--I think--they won't be given license to spend the rest of it.

It will be left to Paulson's successors to apply the power of the federal government to force out the information and bring to bear the discipline necessary to crack this problem. It's still needed.

The Bile bubble hasn't moved on, but it has expanded--to the auto industry, to credit cards, and now it's moving to high-tech investment.

Note for the proposed auto bailout: I'm in favor of allocating $15 billion or so. It should have one--very thick--string attached: the money should be used, exclusively, for development and rollout of workable plug-in hybrid vehicles. If the auto companies don't want it, they don't have to (though they do have to make their fuel efficiency targets). We saw earlier this decade the huge bump Toyota and Honda got from coming out with improved fuel-efficient cars; this next bump could belong to one or more of the Big Three, if they've got the brains and guts. If they make satisfactory progress, the cash flow will take care of itself.