Thursday, September 25, 2008

More thoughts on the bailout (2)

The public is currently terrified of owning anything with subprime exposure, and terrified of lending to banks that might be wiped out by such exposure. At the same time the public is desperate for the safety of T-bills and T-bonds, to the extent that T-bill yields fell almost to zero the other day and are still less than 1%.

If Treasury actually goes ahead with the $700 bailout plan, this is the essence of what will happen:

Treasury will give the public exactly what it is desperate for (by selling a slug of new T-bills and T-bonds), and in return take from the public exactly what it doesn't want (subprime mortgage securities). It shouldn't have any trouble accomplishing this if and when the authority is granted.

In the financial market the role that Treasury will be playing is traditionally the role of the speculator; the one who buys what no one wants in exchange for the cash that everyone wants. The problem many people have with this (myself included) is that the Constitution does not give the federal government the authority to be a speculator. That's what the private sector is for.

1 comment:

CDLIC said...


As I am sure you recall, in 1992 Sweden had a similar problem in kind as the U.S. financial systems is experiencing today. Sweden resolved the crisis quite differently that the U.S. is going about it. Too bad our 'leaders' will not learn from Sweden’s experience and how it resolved the problem . . . or am I missing something here?

From an article how Sweden resolved the situation at

"Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated."

The article ends with the following quote from a senior member of the Swedish opposition at the time. What a difference between the Swedish politicians and ours:

“The only thing that held back an avalanche was the hope that the system was holding. In public we stuck together 100 percent, but we fought behind the scenes.”