The Bailout Stupidity, It Burns
Ok, enough. I’m hearing too much stupidity, like "the government will be massively incentivized to protect the value of the crap they buy, so the government will make a profit!" Or, "the government will help borrowers because it’ll own the mortgage (no, it’ll own the mortgage backed security) and it’ll want to."
Good God, the stupidity, it burns. Who cares if the government is massively incentivized to protect the value, even assuming the government cares which is far from clear to me since for this plan to do anything it has to buy at far above market value? They’re going to be sold the shittiest parts of the shitpile by far because what would you sell to them if you were the banks? Think about it. This stuff isn’t called toxic waste for nothing. MBS’s may have something behind them, but much of what’s going to be sold are massively internally leveraged instruments like first loss bonds, credit default swaps, and other noxious stuff that hardly even has a name. Much of it won’t even be mortgage based, and that which is won’t necessarily give clear title to the mortgage proper (you can sell different parts of the mortgage to multiple different MBSs). The 700 billion will probably be gone before Obama even gets in power, so you’re not betting on what Obama will do, you’re betting on what Paulson and Bush will do. Furthermore Wall Street is already saying 700 billion won’t be enough. (So, ok, you might be betting what Obama will do with the next 700 billion or so.)
More than that, a huge pile of this is going to go overseas, you don’t think those provisions were in there for show, do you? Foreign banks will sell the worst parts of their shitpile to their American subsidiaries and from there to the Treasury. Furthermore, there is nothing in the bill to stop banks from minting more shitpile and selling it to the Treasury. You can make something today and sell it.
The Treasury will buy these things at above market price, and has not set a floor under prices so no one else will buy the toxic waste at overinflated prices unless they think they can sell it to the sucker of last resort: aka, the Treasury Department, aka: you, the taxpayer. So private actors are going to lobby hard for the government to buy even more shit, because this isn’t just a bailout, this is a potential profit center since, hey, the government will buy shit at above market manure prices.
Exactly as written this is a huge giveaway of government money to private interests. That is its purpose. It is meant to bribe banks into lending to each other again. "Sure, it’s not profitable to loan at below inflation, but we’re making it up to you by buying your shit."
Once a big chunk of the shitpile has been bought, something will have to be done with it. I imagine you can figure out who it’s going to land on.