The Real Reason Lawmakers Are Rushing Out a Bailout Plan

One of the questions that has come up in connection with this week's scramble to pass a $700 billion bailout package for the beleaguered financial sector is: Why the rush? Why not take some time to fully explore the risks, discuss the financial, economic and political ramifications, and figure out ways to minimize the cost to taxpayers?

Although those in charge have attributed their sense of urgency to fears of an imminent seize-up in financial markets, it is conceivable that policymakers could have applied a few more of the band-aids they have been using prior to now so that the issues and prospective outcomes could be examined more fully in the harsh light of day.

Unless, of course, there is more to it than what our leaders are admitting to. In "Brad Setser: Extraordinary Times," the London Banker blog suggests the pressure for a rapid-fire solution stems from the precarious financial position of the rescuer-in-chief: the Federal Reserve.

Brad Setser has a fascinating insight to offer in his newest post, Extraordinary Times.

My response:

Excellent and timely, Brad. I’ve been speculating all week that the pressure being used on the Congress to pass the Paulson Plan is the threat of Fed illiquidity. As of two weeks ago, the Fed had lent out more than $600 billion of its $800 billion balance sheet Treasuries against crap MBS collateral.

The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan. As a bonus, the Paulson mark-to-maturity price becomes the implicit Level 3 price for capitalisation of all the firms and banks in the system, giving them some breathing room to stay in business. Everyone wins except the poor American taxpayer.

The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.

Comments

[investor88:]

Michael has done good detective work and analysis not readily seen by the casual observer. Gives another perspective in looking at the mega bailout urgency.

2008 Sep 28 03:19 AM

[Hal:]

London Banker blog??? Setser is a young US economist, not a London Banker. His blog is on the Council of Foreign Affairs website

2008 Sep 28 04:26 AM

[silver-bullet:]

The Fed is never illiquid.

Remember what Ben B said: "We have a secret weapon, and it is called the printing press"

The Fed will print us out of oblivion. The quick bailouts is indicative of this.

Buy gold, silver, oil and commodity-based assets. Protect yourselves.

2008 Sep 28 05:40 AM

[john s. gordon:]

rush in congress due to politicians trying to get themselves re-elected.
> jack

2008 Sep 28 08:45 AM

[IP Daily:]

How in the name of common sense can you just " make-up " monetizing mark to maturity debt ? I want see what happens when some one tries to collect on that one.

2008 Sep 28 09:19 AM

[fran:]

HAL-- it's in the sentence structure.


I P DAILY-- stay tuned to any ensuing gov't auctions of assets purchased by said gov't against $700 billion[or whatever] legislation.

2008 Sep 28 02:06 PM

[diagnodave:]

This government is so short sighted... we're doing it to protect your retirement accounts? ...By delaying and making worst the future! If you are young (less than 55) watch out because when you want to retire you're 401k will be crushed. oil, gold, even real estate will be the only thing of value in this country. Thanks a lot Bush and congress.

2008 Sep 28 06:47 PM

[cyberman:]

Looking ahead of this particular financial fiasco, and since one cannot trust anybody at the fed., treasury, congress, wall street or the WH, what is the next hammer to be dropped on the taxpayers? Will this country be so 'fortunate' as to see this 700B solve the biggest of the frauds so far perpetuated on the American taxpayer - or, how much more of the fruits of greed and mismanagement is there to come and what is the next bail out they will be "...rushing out."

2008 Sep 29 01:12 AM