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Sunday, September 28, 2008

A Bailout by Any Other Name of course still a bailout. There is all sorts of spin on the right to make it seem as though Republicans got major concessions. No doubt, they changed the bill dramatically, however, what they didn't change was the basic premise of the bill. If you listened to Republican heavy weights like Mike Pence and Richard Shelby the problem wasn't merely the details of the bailout but the bailout itself. Yet, that is exactly what we have.

Those pragmatists on the right proclaimed that we have no choice because only a bailout would make sure that there is confidence on our markets. Well, first, I disagree that a bailout was the only option. Second, the reason that there is no confidence in our financial system is that they all bought into all sorts of bad investments. Taking those bad investments off their hands doesn't change what they did.

So, what do we have? First, Wall Street's obscene irresponsibility will be forgiven because most of those bad investments will be removed from their books with the wave of the magic Treasury wand. Second, financial services have effectively been socialized. The government now effectively runs financial services. There won't merely be oversight in this bill but interference from the government on financial services. Rather than allowing these poorly run financial services companies fail, the government will effectively take over their day to day management. If ever the founding fathers were rolling over in their graves, this is it. Many of them are likely also telling Alexander Hamilton that this is exactly what they feared when he suggested a centralized Treasury.

Then, we have also expanded debt. Barack Obama continues to claim that he will help the middle class with tax cuts. Great, yet, he supports this bailout which will greatly increase our deficit, and he couldn't in the debate name one program that he would cut. Controlling spending will be the number one priority of the next President. That's because this bailout has just exponentially increased the probability of major inflation in the next couple years. It matters not if a middle class family receives a thousand dollar tax cut if their grocery bill increases by a thousand dollars.

Finally, some have made the assertion that over time the Treasury will likely re coup their investment and even likely make plenty on it. That may happen, but not only is that not guaranteed, but it is frankly way up in the air. Here is what we know. First, the Treasury has agreed to buy really bad debt. Second, that debt is backed by something solid, real property. Third, the Treasury will buy this debt for pennies on the dollar. Here is what we don't much is that property worth. The four years from 2003-2007 saw an explosion in real estate prices. While real estate has a tangible value, what that value is remains to be determined. If real estate drops another forty percent from here, there is no guarantee that the Treasury will recoup anywhere near what they outlayed. Furthermore, it could be years before this paper finally shows a profit. While in the end, they may in fact, two things need to be considered. First, they are borrowing to make the investment. As such, any profits have to be above and beyond what they paid to make the investment. Second, there is also the time value of money. Even if they make money in the end, if it takes five to ten years to turn a profit, that isn't money well spent.

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