Five Bailout Questions (Not Including, What The F@&!ing F@&!?)
Friday, while I was over here asking (and trying to answer) five questions about the short-sell ban, CFA Nicole Gelinas over at the City Journal was doing the same about the bailout, in what functions as a decent short primer on the many problems with what's been a-going on down Washington way. A sample, addressing one of the biggies: Why do we think this plan will do what's promised, that is, jumpstart credit markets?
Three. How will this plan restart the now-moribund credit markets? Secretary Paulson figures that by taking bad assets off financial institutions' books and giving them cash equivalents instead, the government can entice them to start lending again while encouraging private investors to put new money into those institutions. But the bailout can't change the fact that the primary infrastructure through which America has exported its private debt to the world—securitization—is now severely weakened. Nor can the bailout change the fact that many potential investors in financial institutions may now believe that these firms' business model is broken. It will take more to fix that perception than erasing bad debt—the defining symptom of that broken business model. Lending institutions likely need time—months, maybe years—to figure out what went wrong, before private capital can replenish the banks' coffers. Plus, lenders must reassess the credit risk behind all manner of potential borrowers, and they need to re-price that risk as well, charging some borrowers much higher rates than in the past and refusing credit to some applicants altogether. These tasks, too, will take time, and unavoidably reduce access to credit.
In not-unrelated news, one of the great warning voices about the coordination problems with wild credit creation, Austrian economist and libertarian luminary Ludwig Von Mises, would be 127 years young today, were he still alive at this hour.