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Sunday, March 15, 2009

Overlapping Bailouts and Stimuli

Here's an easy way to know that the multiple bailouts include a lot of waste. Most of them try and accomplish the same thing from multiple perspectives. The economy really began to melt down when Lehman Brothers disintegrated. This had tremors throughout the credit system and credit dried up. Look at it another way. All the credit dried up because banks were holding on to far too much "toxic assets" which caused their balance sheets to to turn upside down and thus they had no money to lend. So, to solve this economic crisis somehow credit must flow again. To get that, something must be done about these so called toxic assets. As such, anything that accomplishes anything else does absolutely nothing to solve the crisis.

We've had three different bailouts/stimuli. We've had TARP, the stimulus, and the mortgage bailout. In the next week, we are supposed to have a plan to deal with the toxic assets. So, we are soon to have four parts to a plan to deal with one thing. Now, an effective plan to deal with the toxic assets would value them in such a way that the government isn't overpaying while at the same time removing them from the books of the banks. Once that happens, the banks balance sheets settle and they begin to lend again.

So, why would we need a mortgage bailout? What is the economic effect of a mortgage bailout? It is essentially a way to turn toxic assets into assets that are no longer toxic. Think about what a mortgage bailout would do economically. It would turn all of these loans, theoretically, into loans that the borrowers can pay back. By doing so, the mortgage default ratio would settle into much more reasonable and predictable level. If that actually happens, then the assets would no longer be "toxic". An effective plan for mortgage bailouts means there no longer needs to be a plan for removing toxic assets from the books of the bank. The assets would no longer be toxic after all.

Then there is the stimulus and the current TARP. That we still need a plan for removing "toxic assets" from the books of the bank implicitly means that TARP was a failure. After all, we all spent three quarters of a trillion Dollars to strengthen the balance sheets of the banks. Yet, we still need to create a plan to remove "toxic assets" to clean up the balance sheets of the banks. If the first were successful, we simply wouldn't need the second. The stimulus does absolutely nothing to address any of the problems. No matter how successful the stimulus is at "stimulating" as long as banks aren't lending there is no economic recovery. Nothing in the stimulus will help the banks lend any more than they are now.

So, why do we have so many different plans to accomplish one specific thing? In my opinion, it's because those creating these plans don't believe that any of them will work. As such, they are trying everything they can hoping something works. If they were confident in what they were doing, they would simply do one thing to fix the nexus of the problem. The problem is NOT too hard for me to understand. It is not too hard for the policy makers to understand. It does, however, appear too hard for policy makers to fix.

For my plan on fixing the crisis, go here.

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