Paulson's shifting plan

It sounds like Paulson is saying that he wants to put the money into lending companies that could loan money to people in trouble. In other words, we would use the money to put people further into debt to try to get them through these troubled times. On one hand, I get why this is valuable. People can’t borrow to get new things and thus can’t buy things. This is freezing the economy. OTOH, putting people further into debt seems like a bad idea in the long run, if something prevents them from getting a job, etc. and being able to pay it off.

So, the theory is that the economy will be stimulated by all this buying (using borrowed money), and this will allow people to become solvent again and pay back the debts?

Something about that plan doesn’t sit right. I’m not an economist, but putting people further into debt on the hopes that they will later be able to come out of it seems like a VERY risky plan.

Am I missing something?

They’re just making shit up as they go along.

I think you meant to say “Shifty plan”.

The reaction to the shift has been interesting. I’ve heard several commentators say this new approach makes more sense than the original plan and that Paulsen can do this because Dems made sure the wording of the original bill allowed it because they thought this was a better approach.

The lack of a real outrage reaction to the shift should tell you something.

Why not just set up a division of the treasury to provide relief rather than funneling through an existing lending company? They’ll just take 10% off the top.

Or better yet, why not just give the people in trouble money directly? You could give 12 million people $50k for about $600b. That’s enough to help most unemployed and people in bad mortgages.

You know, because they have only spent 300 billion already without the “better plan”. Oh, and AIG executives appreciate their taxpayer funded bonuses. Socialists!

You mean lend, right?

Because giving someone $50,000 seems crazy to me. Giving 12 million people $50,000 each seems… well, 12 million times crazier.

Well, I’m not really advocating cutting checks directly. I’m just pointing out that you could expand and extend unemployment benefits plus provide substantial aid to people in mortgage trouble through a direct program. That would help people in trouble directly as opposed to the indirect approach that a “bailout” of certain industries and companies does not.

Bailing people out of their own idiotic mortgages (especially house flippers, people who treat houses as ATM machines, and dumbasses too stupid to realize that in addition to the $3k monthly mortgage payment they’ll need to make when the introductory interest rate ends, they also need to feed their families), seems like a pretty bad idea.

Houses aren’t investments. If you have one fucking house, it’s your home. Because if you buy it for $150k and sell it for $450k three years later during a bubble, odds are every other fucking house you’re going to buy is going to appreciate about as much and your financial growth is nothing but funny money.

They are going to bail people out of their idiotic mortgages because going into a depression is an even worse idea.

I think the reason they’re entertaining so many bad options is that there aren’t really a lot of good options. The financial system and the economic system are inextricably intertwined. The financial system is seriously, epically fucked. Un-fucking it while minimising the damage to the economic system is not going to be easy.

Here’s an interesting article about the whole thing by Michael Lewis, author of “Liar’s Poker”:

I agree the financial system and the economy both are fucked, but I’m not so sure they are epically fucked, perhaps it’s a mere prose edda of a fuckup… I think a lot of the otherwise inexplicable events of the last few weeks have to do with complex political and corporate attempts to simultaneously cover asses and collect maximum profit from the situation.

This is why congress votes no one day, and votes yes the next in confusion due to their typical hillclimbing approach to decision-making, and why Paulson throws money one way one day, another way the next, and why the stock market swings 1000 points in either direction from week to week. If everything was fucked to the “epical” level, there wouldn’t be enough cash around to push the market back up the 1000 points on the alternating weeks… True, the general trend has been significantly down, but that’s what you’d expect under the circumstances.

I admit there is some conspiracy theory paranoia to this point of view, but it certainly would be interesting to see a (mythical) unbiased audit of the money trail over the last couple of months, from the start of Lehman Brothers’ gyrations to date.

OK, the edda comment was pretty clever. Props for that. Let’s hope this move isn’t just a kenning and represents a smart shift to a better idea.

Paulson hasn’t been right about anything so far, I see no reason to give him the benefit of the doubt now. Hopefully Obama will pick someone competent to replace him, or at least someone with enough common sense to realize that the solution to a debt crisis is not more debt.

In our economic system, I think the only realistic solution to the crisis is more debt. This may be a sad state of affairs, but I think it’s the case.

Reversion to an emphasis on savings for consumers or to business models not based heavily on credit for corporations would cause a great deal of trauma, as money is drawn out of circulation on the one hand, and growth is hammered on the other.

There may well be some sensible long term approach for which debt reduction is considered good, but I think in the current state of the economy, considering just the crisis itself, what we actually want is more debt, albeit debt that is sustainable, will be repaid, and encourages growth.

I think you’re wrong. I think that the debt economy is dead even if the Treasury tries to prop it up, because it was unsustainable to begin with. It’s not the debt itself that’s the problem, it’s that the past 10+ years of economic “growth” was fueled by increasing amounts of debt. The government is terrified of reporting a falling GDP, and only slightly less scared of a lack of growth. But if your “growth” is all bought with borrowed money, it has to end sometime. Eventually nobody will lend to you anymore, because you already owe so much that the chances of you ever paying it back reduce to zero. I think we’ve reached that point.

It’s not that the Treasury can’t bail out financial companies and buy worthless paper at inflated prices, because obviously they can, and the US itself is still able to borrow as much as it wants. I just don’t think it will do any good. No matter how much money the government gives to the banks and pseudo-banks, they can’t force anyone to lend to consumers and busninesses, which is what they really need to have happen. The bailouts may keep AIG and Goldman Sachs in business, but it won’t trickle down to the rest of the economy because those firms have no reason to lend, even if they have the money to lend, to people who already owe more than their house is worth or to businesses that likely won’t survive the recession.

I think that beyond the housing bubble and commodities bubble there is a credit bubble, which is now deflating, and there isn’t a damn thing Paulson or Bernanke can do about it. All they’re going to get for the trillions of dollars they’re giving out is to keep a few Wall Street companies in business. But Wall Street never contributed anything to the economy anyway, it was a confidence game from the start. To actually fix the economy, you need to get people working. You need companies who produce something other than numbers and export something other than debt.

The credit bubble is like a wound. Unless you treat the wound, you won’t heal. But as the paramedics say, one way or another bleeding always stops.

This seems like as good a place as any to post this: Peter Schiff took a lot of shit for being right over the past couple years. It’s especially funny seeing the people arguing about whether Bear Sterns or Merryll Lynch are a better buy, and predicting the Dow to 16,000.

Well… almost. ;)