Phil Anthropy

Sell Signal of the Day, Greenspan Edition

First, let's be clear that Fannie and Freddie were never guaranteed by the government. The bailout of these two was completely optional. We were likely blackmailed into it by the Chinese, Saudis, Japanese and British, who hold CDOs issued by those esteemed government sponsored enterprises, which are essentially private companies. If we don't bail our foreign partners out, they don't buy our treasury bills, of which we need to sell a couple of billion dollars daily in order to finance a couple of wars here and there -- and the billion dollars we gave to Georgia for "good will."

Second, this bailout is a Ponzi scheme, make no mistake. We bail out the banks. This raises bank stock prices. That allows the banks to borrow more money against the higher priced stocks. We also buy up their toxic assets (at above market value, a market value which has been criticized as "fire sale prices," but is actually just the real, fair market value, similar to any other illiquid asset from farmers fields to antiques to collectible coins). They take the cash and (we hope) loan it out. Actually, they take the cash and invest it overseas just as fast as they can, and let the U.S. economy go down the tubes, but who's counting?

The banks have higher stock prices, so they borrow money from the greater fool (indirectly, the taxpayer) against the higher asset values. Then they loan out money by issuing new credit cards (haven't you received a boatload of offers in the past few months of our "crisis?") They hope the credit card holders will stretch themselves out into 20% interest, which is far more profitable than the few percent they would get on mortgages. So they don't write mortgages or make commercial loans (yet I thought those were the point of the bailout exercise).

Then the feds will figure this out, after a few months and a few more percent unemployment and mortgage defaults. They will demand that the banks make mortgage loans. The banks will do this, but only if each and every new mortgage under any terms will be bought by Fannie or Freddie (which is to say, by the taxpayers). So now they will make bad loans again, and sell the toxic paper to us while making a profit doing that. For a short time this will stabilize home prices, until the new mortgage holders start to go bankrupt due to the economic recession that is upon us and will get worse. However, the banks are off the hook. They will get rich. Only the taxpayers will suffer.

Some might say, "but wait, we can get an equity stake in the banks." First of all, that is not required by the law. Do you think Paulson is going to strong-arm his Wall Street colleagues, when chances are good he's going back there in January? Also, some of the banks are on the brink anyway. They'll milk the deal and pay their executives as much as they can. The law, contrary to the "summary" reports by talking heads, does not stop golden parachutes or large bonuses. It only stops their deduction as expenses above $500,000. There is a lot of wiggle room for the banks to pay big money, one way or another, then go under and have their executives walk away rich. But maybe that's why we call it a bailout, rather than an economic recovery package: because we know what it really is.

I don't think the new law will work. It doesn't provide incentives for loaning money. All it does is recapitalize the banks somewhat at taxpayer expense. It would have been far better, in my view, to just require the Fed to make loans to all banks through the discount window for mortgage refinancing and local commercial loans only and to capitalize the Fed with the $700 billion, except that we loan it to them at interest, not just give it for free. The Fed (a private, for-profit bank) might find that strange, because currently when the government wants to issue money, it borrows it from the Fed at interest. But turnabout is fair play, after all.

As far as Greenspan is concerned, I have nothing against him. Smart people can be wrong. But I think he should have stuck to music and left economics to those who were better at it.