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September 26, 2008 – Comments (11)

One of the things that's troubled me about this whole bailout discussion (aside from the fact that so many so-called supporters of free markets flip-flopped on that the minute their paychecks seemed threatened by the gloom and doom predictions) is the story that the government is buying "assets" that are purely temporarily impaired, that are bound to be worth more in the future.

Well, actually, what troubles me most is the speead and ease with which some people, many of whom should know better, accepted the premise. I saw it happen among folks whose brains I expect. And, I saw it everywhere. I saw news stories in which people who knew nothing, zero, zilch (seriously, random shoppers in malls) were being asked for their opinion, and were saying it was a good idea because we'd be getting all this debt so cheap, and we'd all make money in the end.

Even "expert" money managers are promoting this line. Former Hedgie Andy Kessler actually says here, in the WSJ, that he thinks Paulson is going to earn $2 trillion on this deal.

There are many good reasons not to believe this argument, the first of which is that, without any details whatsoever on how the "buying" process will proceed, it's impossible to say what price we'll be paying, and for what, and without knowing that, it's impossible to predict the return -- even if you knew the eventual value. Of course, we don't know that, either... And with housing continuing to crash and more and more workers out of jobs... But I digress...

The main reason I don't believe this argument is that it so blatantly begs the question: The bailout is a good idea because the debts are worth more than we'll pay. How do we know the debts will be worth more? Because we say they will be or, because the bailout itself will make them worth more.

When everybody begins believing in and repeating a conclusion which hasn't been successfully argued -- indeed hasn't been argued at all -- I'm pretty sure it's because they're too scared and too confused to think. That's no way to run a government, or an economy.

Sj

 

11 Comments – Post Your Own

#1) On September 26, 2008 at 10:14 AM, givmeabreak (29.52) wrote:

Exactly bro. Nice call.

Emailed the same sentiments to my Congrsmn and Sntrs this morning. Don't feed me the line that we'll somehow mitigate risk by making big profits down the road.

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#2) On September 26, 2008 at 11:15 AM, HKendrick (< 20) wrote:

Indeed, SJ.  We're supposed to believe that sophisticated market participants can't price these things to make a profit, but our federal government can?! 

Or, put another way, if we as taxpayers can expect to make a profit, this problem wouldn't be a problem in the first place.  The market would have already taken care of it.

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#3) On September 26, 2008 at 11:16 AM, HKendrick (< 20) wrote:

Indeed, SJ.  We're supposed to believe that sophisticated market participants can't price these things to make a profit, but our federal government can?! 

Or, put another way, if we as taxpayers can expect to make a profit, this problem wouldn't be a problem in the first place.  The market would have already taken care of it.

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#4) On September 26, 2008 at 11:32 AM, HKendrick (< 20) wrote:

Indeed, SJ.  We're supposed to believe that sophisticated market participants can't price these things to make a profit, but our federal government can?! 

Or, put another way, if we as taxpayers can expect to make a profit, this problem wouldn't be a problem in the first place.  The market would have already taken care of it.

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#5) On September 26, 2008 at 11:54 AM, dinodelaurentis (75.59) wrote:

I'll have " If I Don't Admit It, It Doesn't Exist" for a $1000, Mr. Trebeck!

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#6) On September 26, 2008 at 12:42 PM, columbia1 wrote:

"The bailout is a good idea because the debts are worth more than we'll pay. "-  If the debts were worth so much, Why hasn't somebody else bought them?- what there are no suckers out there, come on, you can buy debts for 10 cents on the dollar and double your money in ten years!! better hurry up before the government pays 30 cents on the dollar!!

nice post!

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#7) On September 26, 2008 at 7:03 PM, jester112358 (28.86) wrote:

Just sent an email to Pelosi on just this point.  Apparently, emails and phone calls are running 100:1 against the proposal.  Thank God the election is coming up.  If the republicans won't support it the democrats don't dare, since they know it will be used against them.  And they are right.  This is just the kind of stalemate I like to see in any big government program.  I say lets do nothing and let the market sort out fair prices through the normal price discovery mechanism.

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#8) On September 26, 2008 at 9:07 PM, TheGarcipian (38.39) wrote:

Excellent points, Seth. Thanks for posting your thoughts. Here's a Rec for you!

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#9) On September 28, 2008 at 6:47 PM, sumbawa (29.61) wrote:

Good piece, Seth. Indeed, how can it be said the govt will make money if firstly, the value of these mortgage-backed securities is unknown and secondly, the price to be paid for them is as yet unknown?. Another unknown is how and at what price the govt would eventually sell these MBSs at.

Something I do wonder about is: if an MBS is worth 30 cents on the dollar or is sold for that price, does that mean that 70% of the mortgages are likely to default, or that 70% are in negative equity, or something else? Or would they be worth this amount simply because there are so few prospective buyers, like right now?

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#10) On September 30, 2008 at 3:34 PM, pjani06 (29.22) wrote:

Check this out, the solution to the mess, posted today by Karl Denninger from fedupusa.org / market ticker;

Denninger's "How To Fix Our Banking System" sent to all in Congress today Report this comment
#11) On October 21, 2008 at 10:20 AM, kenodaddy (68.48) wrote:

they should take the amtrak for the holidays

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