Friday, October 03, 2008

flawed idea for the bailout plan

No Right Turn has a rather flawed idea for the bailout plan

The bailout was supposedly necessary because the banks had stopped lending to the real economy. The "solution" was to buy their bogus assets at vastly inflated prices in a dirty backroom deal cooked up between the US Treasury Secretary and his former workmates at Goldman-Sachs. A better solution would have been to cut the banks out entirely, and instead get the government into the lending business by setting up or buying their own bank and providing credit directly - bail out the real economy, and let Wall St burn. But that, apparently, would be "communism".

Now what could be the issue with his plan and why would it be communism?
Well the current banks have the current loan books. If we instituted communism we could take those loan books off the banks and desolve all the private banks. Amongst the many downsides to that one is that the rest of the world would be extremely angry because the USA doesn't wholly own it's banks anymore.

But of course NRT says his plan isn't communism - so he must mean the government starting it's own bank and out competing the private banks. But over the years that it would take to set that up banks would already be sucking money out of hte economy and would not be sellingthier business to the government because there is no incentive for them to do anyhting other than try every trick in the book to stay afloat.

So lets imagine it - banks starts charging high interest expecting high deposits offering low interest rates and caling in all it's morgages while companies cant get credit and start going insolvent. the government steps in and starts to offer cash to people - but who exactly is it going to offer that cash to? on what terms? does it jsut guarantee to extend every morgage at a fractionally lower rate than any bank that refuses to extend a morgage? If it had years up its sleve it could easily build a bank and hire the right people and run a bank at a huge loss in order to drive all the other banks out of the market (much to the anger of the WTO and the rest of the world) but it doesn't have that time - the economy would be in meldown.

Frankly it is lucky NRT isn't in charge. His policies sem based on anger and revenge rather than finding the best solution.

As to what one should do? the smart thing to do is very simply - not to pay vastly inflated prices. Maybe as David Brin says we could give money to Warren Buffet to manage.


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