Your Lying Eyes

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12 March 2008

So Is It a Bailout or Not?

I really don't understand exactly what it is the Fed did yesterday that got the Stock Markets all giddy (though I'm happy for anything that gives me even temporary relief that my life savings are not doomed). According to the Times
the central bank offered to let the biggest investment banks on Wall Street borrow up to $200 billion in Treasury securities in exchange for hard-to-sell mortgage-backed securities as collateral. And the Fed made clear that it was prepared to do more as needed.
If these CDO's are being accepted as collateral, doesn't that imply they are being effectively guaranteed? Isn't that a bail-out? If nothing bad happens to the loans, then nothing will come of it, so perhaps it's just balance-sheet relief. But if it should come to the point that the Fed effectively assumes these securities, then won't there be enormous pressure to bail out the actual borrowers themselves?

Paul Craig Roberts has proposed simply suspending the mark-to-market requirement for these assets, allowing firms to value them at, say, 85% of book value for a year or two until the market can sort out the actual valuations. This would seem to provide the balance-sheet relief the Fed's action seems intended to provide, without the harmful side-effects that a bailout entails. But then again Roberts is a far-right, conspiracy-theory-promoting kook, so he can't possibly be right.


Anonymous Anonymous said...

It is now:

March 14, 2008 3:52 PM  
Anonymous Anonymous said...

Ralph Nader is fond of pointing out that capitalism will never fail in America - because the Federal government will use socialism to rescue it. Truer words have never been spoken.

March 14, 2008 10:41 PM  
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March 16, 2008 2:43 PM  
Anonymous Dano said...

The bail out of Bear Stearns makes the Ralph nader quote more poignant.

They were the biggest proponent of subprimes and fraud

March 17, 2008 7:38 PM  
Blogger Zimri said...

Roberts's article says "Reagan’s goal was to END the cold war, not to WIN it".

Roberts may or may not be a kook, but he is definitely a liar.

March 18, 2008 10:21 PM  
Blogger ziel said...

I think what he means is that Reagan didn't want to defeat the Soviet Union per se, he wanted to stop them from being the way they were - like looking to spread socialism via proxy wars, enslaving Eastern Europe, being totalitarian at home. I think a good argument could be made that when he became convinced Gorbachev was sincere about changing, RR became much less hostile. If Gorbachev had freed Eastern Europe, foresworn its allegiance to international socialism, and continued glasnost, Reagan would have been very willing to make up and be friends.

March 19, 2008 12:00 AM  

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