It's Time for the Govt. to Spell Out the Risks of Not Rescuing Financial Markets

Federal Reserve Board Chairman Ben Bernanke has failed to quantify the potential risks and rewards that Secretary of Treasury Henry Paulson's $700 billion rescue plan for the financial markets entail. To put the problem in terms voters and members of Congress understand, these questions need to be asked and answered:

1. If there is no rescue, would employment rise from the current 6.1% to 10%, 12%, 15%, or what?

2. What would a failure to reassure the markets do to stock prices, 401ks, pension funds? Would stocks drop 30%, 50%, or what?

3. What would happen to home mortgage rates? Would we be looking at 12%, 15% 30-year fixed with 30% down payments?

4. The dollar? Would it soar or sink, and how would that affect inflation?

5. What are the potential risks and profits for the government's $700 billion speculation on illiquid mortgage-backed securities? Could their value drop 10%, 15% or 30% after the Treasury bought them? Could they appreciate 10%, 15% or 30%? What are the probabilities?

6. If there is no rescue, how much would that failure cost municipal, state and Federal governments in terms of reduced income tax revenues and increased expenditures on welfare and make work programs?

No one can confidently predict the answers to any of these questions, but the government's traders and financial institutions holding the distressed securities will have to guess when they try to discover their real prices if the rescue plan is enacted. There is no doubt that the Treasury Dept. and Fed are game playing the planned auction markets, as are the owners of those securities and investors in the owners of those securities.

What the markets are saying at this point is that speculators are reasonably confident that Congress will enact some kind of rescue plan, but whether it will be workable or not is totally unknown. Both Democrats and Republicans are convinced something should be done, but they're considering a wide variety of checks and balances, some of which could make the rescue ineffective. Up to this point, Paulson and Bernanke have refused to quantify the potential risk and rewards. But the markets have had time to adjust to the risks.

Professionals know the risks, and many small speculators have their ideas, too. The markets can handle it if the public is let in on the scary scenarios that we all have in mind. For, until the public gets it, Congress won't. Whatever Congress enacts, there will be unintended and unexpected consequences, which will keep speculators on edge for a long time.

Disclosure: None

Comments

[blackbody:]

Has Paulson/Bernanke disclosed to the public why there will be a financial melt-down if $700B bailout does not occur "within days".

2008 Sep 24 04:28 PM

[old short Bob:]

It's not a matter of whether this plan fails or not, it's a matter of finding a better way of doing the same thing without the risk. Leave all the instruments with the banks. let them have 5 years to dispose of them without having to write them down each quarter and looking for capital.
If they need support, give them a bridge loan. All less than $700 B

2008 Sep 24 04:42 PM

[Alan Young:]

Blackbody: I heard Barney Frank in an NPR interview asked the same question. He answered that now that Paulson has issued such a dire prediction, it would be true because enough people believe him to start a panic.
It sounds like a bluff worth calling to me.

2008 Sep 24 04:46 PM

[User 265729:]

Scandal! Malfeasance! Oh Mr. Potter!

Whatever the risk of Congress not passing this bailout plan, we can all be sure of what is going to happen if they do... Bye-bye democracy. Bye-bye free market system.

2008 Sep 24 04:47 PM

[blackbody:]

Aalan, obviously Paulson/Bernanke laid out the consequences to select members of the congress. Thing that I think is important is not the bail-out itself but the urgency of it. I remember that about $1T of debt has to roll-over by the end of the September and my guess is that the credit market has absolutely seized up, meaning papers will not get rolled over and number of companies, with GM a likely candidate, about to roll-over and declare BK. This bail-out will have to go through one way or the other. Thing is $700B bailout will not fix anything and the same problem will come up, only it will come up when someone else is in the white house.

2008 Sep 24 04:54 PM

[Jason Rines...:]

'Give Me Liberty or Give Me Death'. About 1/2 of my colleagues all feel this way even if we must take in all of our neighbors and feed them during an economic collapse. The other half are less successful and in general irresponsible. They want a bailout now for themselves no matter what the costs long-term. That's our country for you right now. And to Paulson and Bernanke, I agree with the article explain the risks and rewards short and long-term to Congress in numbers. Since when do we as investors invest in a 3 page plan with a price tag only? That was the dotcom era LOL. There will be no full disclosure to the public of course, because in doing so it implicates those in iBanking and Washington politicians. Trouble for them is, the American public is already figuring this out on there own, that dotcom era did tend to have some longer term benefits of instant information.

2008 Sep 24 04:57 PM

[Doomsday:]

Thank you Donald.

Thats the first time I have heard a Seeking Alpha writer spell out what the potential consequences would be.

If the writers on this board damn the Tresury plan then please pose an alternative.

2008 Sep 24 04:59 PM

[debtacid:]

Bail out only the individual and married/joint U.S. tax payer. Only tax payer bank accounts, 401k, and pensions. Freeze U.S. tax payer losses immediately.
The IRS will be abolished and over 20 years, every dime of income tax they have collected since 1920 will be refunded.
Abolish the Federal Reserve.
Abolish fractional reserve banking.
Re-establish the gold standard.
There is no reason why banks should be any more profitable than your local car wash. Bank depositors will voluntarily make their deposits available for lending from 5% to 7%. The depositor will collect the monthly interest and pay the bank a fee. Max mortgage life will be 10 years, No interest greater than 7% on anything.
The major goal of this plan is to stop the plundering of Main street by Wall street, Washington and international bankers.

2008 Sep 24 05:19 PM

[alwaysalady:]

Exactly what I've been thinking! Paulson & Co. may as well be saying the "big bad wolf" as vague as the need for this proposal has been currently expressed. They act like a recession is the end of the world.
Their world maybe, but I have lived though a recession, lost my job, found another one and survived. I've paid 12% on an adjustable rate mortgage which went down every adjustment period.

It's insulting that the risk/ reward isn't being quantified. I've written to both my senators and told them that I expect them to understand all aspects of this proposal and that includes understanding how the total amount was arrived at, who will be hurt and how if it is not passed and who will be hurt and how if it is.

If everyone did the same, Congress would realize that this is where the rubber meets the road in the accountability game. To stay on the sidelines is not acceptable and is not something we will forget come election time.

2008 Sep 24 05:56 PM

[YuriinSeattle:]

Instead of paying cash for bad loans, why not provide cash infusions into banks in exchange for equity position. (like Sweden did in 1980s)

This with eliminate many issues in the current proposal.

2008 Sep 24 06:22 PM

[Yogidad:]

Well everyday people all over America go to work and receive a check because the financial system works. Thousands of small businesses depend on credit in constant cycles to stay afloat. The financial system, which includes Wall Street, does have to keep functioning to keep Main Street alive. As capital retreats to safe havens it is less likely to help people stay or become employed. So, even though the plan is not much of a plan at all - the sooner the better.

2008 Sep 24 07:44 PM

[paddywhack:]

Bernanke and Paulson are mjor players in why we are in this stew pot and they cannot be considered to be either honest or unbiased. Look at Paulson's background - does anyone really think he favors the tax payer over his previous financial empire ????

2008 Sep 24 08:07 PM

[farmer448:]

Bush last night doubled down and stuck Congress as the dealer in a tough position.

Credibility is the center of the problem and the whole administration Crew seems to have a distinct lack of credibility. This administration has already added 5 trillion to our debt. It is running a war, and buying votes with the taxpayer the credit card. None of the 5 trillion has been invested in adding or upgrading infastructure to grow our economy. The 700 billion will do nothing to making the role of wall street more effective.

I hope Congress listens to the voter rather then the donors and wait till after the election before taking up the supposed crisis.

2008 Sep 25 10:06 AM

[henarl:]

Let Paulson pony up the $500,000,000 he took out of Goldman if he wants to save their ass.

2008 Sep 25 02:51 PM