A bailout by any other name
The financial media's been a-twitter the last 24 hours over a "rescue plan" for the credit markets concocted by the Treasury Department and the megabanks:
The high-stakes plan to rescue banks from losses on mortgage securities amounts to a big bet that a consortium of financial giants — at the prodding of the U.S. government — can persuade investors to pour more money into the troubled credit market.
Over the weekend, the Treasury hosted talks to help a group of banks set up a $100 billion fund to buy troubled assets in exchange for new short-term debt. The banks hope to have the fund up and running within 90 days.
The Treasury hopes the plan, announced this morning, will jump-start demand for commercial paper, which froze up this summer amid the credit crunch that roiled global financial markets.
The Treasury Department says it is "pleased with the response by the private sector to enhance liquidity in the short-term credit markers."
Can we please call this by its proper name? It's a bailout. No, it's not a bailout in the same sense as the "liquidity injections" of August, or the interest rate cuts of September — trashing the dollar's value to rescue the big boys on Wall Street. But Dean Baker demonstrates how it's a bailout nonetheless:
Suppose that I decide to take a bet by investing in cattle futures. i know that one of the risks I face is that there will be a market run on cattle, depressing their price for a long period of time, or at least past the date where I will be forced to unload my futures.
Now suppose that the government steps in with major financial actors to ensure that there are no temporary plunges in cattle prices, in effect stabilizing the market. This hugely increases the value of my bet on cattle futures.
This is exactly what the Treasury Department has done with the banks and their complicated investment instruments. The bailout may prove insufficient (these boys have shown a remarkable ability to be surprised by the weakness in the housing market recently), but it is nonetheless a government bailout that is of considerable potential value to the beneficiaries.
Bottom line: It's more intervention aimed at short-circuiting the cleansing process that's needed to restore some semblance of economic health. It's an attempt to reflate a bubble. It's not a surprise in any way… but it's still disheartening.