Monday, September 29, 2008

Gimme Some Money - the Federal Bailout

A Ponzi scheme is one in which the thing on sale is valueless. Instead, the first tranche of people to go in the scheme are paid by the next tranche to go in. The third tranche pay for the second wave. The last set of people to buy into the scheme pay their money and eagerly await the next round of suckers. If there isn't a next round of suckers, then they lose their shirts.

They ought to teach people about Ponzi schemes and pyramid schemes at school, because people fall for them.

Bankers, for instance. They've been selling each other rounds of increasingly worthless paper based on one concept – that house prices can only increase. It turns out that this eternal verite is not true – who knew?

Under the circumstances, it is vitally important that they convince the next round of suckers – Congress – that taxpayers should put money into the scheme. Financiers are depending on this money, or they will lose everything. They are fighting for their very Lamborghinis, and are very, very persuasive on the subject of why we need to put money in. Just a little more, and everything will work again.

George Bush says we need to bail them out, which seems like an excellent reason to look twice at the deal. He's panicked America into paying no-questions-asked money to his friends so many times that simply hearing it from him is enough to make you think. His cronies hollowed out the entire treasury in eight years and now we have to give more?

They have a great sales spiel. Buy this paper off us or we're all gonna die! But with their Jacuzzis and private jets at stake, they would say that, wouldn't they? Americans are strong, have a good work ethic, want to pay their bills. They'll make more money. China isn't going to completely pull the plug as the Chinese internal market is not well developed. It has to sell to someone to make money, and America is where it sells stuff. The collateral – housing stock - is still standing, even at reduced prices, and eventually it will free up. Lots of bankers will go tits up, but man, they didn't give me any money when they had it and I don't see why I should give them any now.

We don't need to bail the financiers out. They sold worthless paper to each other hoping against they wouldn't be the ones left holding when the bills needed to be paid. They are professional risk takers. They took a risk. It blew up in their faces. Let them learn their lesson.

The real argument for the bail out is that the money for these loans is gone, evaporated into thin air (that's why they call it a bubble) and isn't going to be replaced, but – and it's a big but – the banks are now frozen into place, unwilling to lend anything to anyone, including each other, and without cash to lubricate the system, it will never move again.

I guess if we have to do it, we have to do it. Generally speaking, I don't have much enthusiasm for giving money to people who got themselves into debt over mortgages and mortgage backed loans. However, I have about a million times more sympathy for giving them money than I do giving Paulson and his friends the right to spend $700B at a time without any congressional oversight by giving it to bankers who once earned hundreds of thousands to hundreds of millions each - all while losing billions on behalf of their customers.

Especially after reading this article, Let's put this bailout into perspective, ok? . A little sympathy, there.

Charlie Stross says,
Never mind bailing out the banks: what needs bailing out is the human beings behind the collateralized debt obligations. The money would be better spent keeping roofs over their heads (and servicing those currently-non-viable mortgages, which action would, incidentally, keep the banks liquid).

In my more cynical moments I look at the demands for money emanating from the White House and what I see is the Mafia hoods running up the lines of credit on a business they've taken over before they complete the bustout. Eight years of asset-stripping and looting, and finally the coup de grace: $700Bn in no-questions-asked, no-oversight slush money.

I don't want the people who ran the financial institutions into the ground playing with any more of my money. Ponzi schemes don't work; there's always someone left holding the paper, and I don't see why it has to be me.

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