$800B ASSET PURCHASE

There is no doubt this is a real crisis, see CFR blog.

But, it's widely believed that the $800B is only the first wave (2T more?), uses faulty methodology, and together with suspended mark-to-market, might prolong banking judgment day, keep insolvent banks afloat (like Japan) and thus, prolonging the recession. Remember, we don't need to save all banks, just some banks. Alternate (mostly equity plans) here and here.

Buffett knows the real question is... will Paulson pay market for the assets or more-than-market thereby giving free capital to the banks without taxpayer equity in return. See here.

Most economists are confounded: WHY Paulson and the Bailout Gang never even floated the ONE idea with a successful track record in dozens of cases around the world...Capitalization of banks in return for short term taxpayer equity (like AIG deal). Worked in Sweden, will work with AIG, England, Iceland just last week, and many European countries are doing exactly that right now. Yet, in the US, banks enjoy a particular power. Paulson changed the plan when it came to the banks. My opinion, this change of course was to allow above-market asset purchases with no equity in return (Boon for banks). It was designed for the banks, not the banks-and-taxpayers (Sweden/Euro design). The major media outlets are not reporting on the fact that most American economists are in abject disagreement with our banker Secretary of the Treasury. Instead, the news outlets are still obsessed with asking political players to comment on expert economic issues. (Who do you want to hear, a Nobel wining economist or Paul Begala?) Therefore, American economists have banded together through blogs (outside media) to discuss why Paulson disagrees with most of our best economists. The burden must shift to Paulson to explain...

Special credit goes to NYU economist Roubini, who predicted the details of this crisis two years ago and has been used as a source and man in demand at NYT, BBC, FT, and most media. His name is popping up everywhere, including television interviews on the BBC and Bloomberg this week. His opinion here.

Is the FEDERAL RESERVE broke? Who is keeping tabs on the Fed's balanace sheet? This question is perking up lately, as some commentators suggest that the 800B bailout is really a reverse bailout of the FED balance sheet (because the FED has already extended nearly 800B in T-bills for toxic paper sitting dead on its balance sheet). If the 800B in toxic notes sit on the balance sheet, the Fed is hamstrung. Therefore, someone has to buy it....enter the taxpayer. Here is a bomb thrower going after the fed. He also writes this article for the conspiracy minded, suggesting the bailout is really for the plunge protection team (government buys equities directly to prop stock market). While evidence exists (Executive order 12631) suggesting the creation of a reactionary executive stock-buyers, there remains little evidence to suggest the PPT buys consistently in the market. Also, I do not see how the Treasury could conceal diverting purchases from assets to equity. That being said, how you define economic "emergency" is in the power of the executive, therefore, there is reason to believe the PPT has been abused in the past. If the federal government is on the buy-side of equity without transparency, that would be an assault on free market principles.

Bloomberg suggests here that AIG bailout was really a counterparty (investment bank) bailout. Paulson bailing Goldman, not that there's anything wrong with that.

Galbraith says no.



Lastly, here's a little light reading..... Ernest Hemmingway, 1923, on inflation.