US to Bail Out Financial System

Henry Paulson, America's Treasury Commissar, has led an effort to convince President Bush to rescue the financial system to the tune of $700 billion. As this is posted, Congress is working out the legislative details. It is the least bad option, but it is far from a good one.

The idea will be to create a Federally owned corporation that will buy the bad assets of financial institutions to clean up their balance sheets. This corporation will then manage the assets, and as the housing market recovers, it should be able to sell them off in a healthier market. In theory, the US taxpayer could even make a profit in the long run.

As usual, though, the devil is in the details. Buying the assets at the original purchase price would be folly, Discounting them to actual market levels might not be effective in restoring the institutions in question to financial health. The Goldilocks, just-right price has to be found.

The problem, here, is not that these assets are necessarily worthless. They all rest on the housing market one way or another, and houses are not an asset class without value. The problem lies in the unwillingness of lenders to lend. There are plenty of borrowers who are good risks who can't get their funding at present. It is like an engine without oil; the credit market has seized up.

The irony, of course, is the president's ideological outlook – he's allegedly a conservative. His party stands against regulation and the government and for the market and business. Now, he's taking enough money to fight another war in Iraq-Nam all over again, and giving it to the financial community, while putting the government in charge of Wall Street's mess. It is hard to imagine how loudly the GOP would be screaming if a Democratic president opted for this solution.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

Kensington Review Home