XM MLB Chat: Spengler Speaks

"To bankers and politicians who insist that the world will come to an end if the US Congress does not approve the proposed US$700 billion bailout package, I wish to say: "It is not the end of the world. It is just the end of you." Sadly, it won't be. America's financier caste will live to fleece another day.

There are no atheists in the trenches, and

no free-marketeers in Congress after a nearly 10% fall in stock prices.

A chorus of erstwhile conservative voices led by the likes of Newt Gingrich, the Republican firebrand of the 1990s, now argues that the proposed $700 billion bailout package is flawed,

but it is better to enact it than to do nothing.
This simply is not true....

The trouble is that the banking system is insolvent;

that is, it lacks sufficient capital to hold its existing portfolio of assets, let alone to make new loans....

What Treasury Secretary Henry Paulson has proposed is a backdoor way to put capital into banks, by purchasing securities from them at higher-than-market prices, as I observed last week (see E Pluribus Hokum, Asia Times Online, September 23, 2008). Federal Reserve chairman Ben Bernanke quaintly called the higher price the government is to pay a "hold to maturity price", as opposed to the "fire sale price" now available in the market place.

Which institutions would get the capital injection, and at what price? In effect

the Treasury (Hank Paulson) would be dispensing capital gains to institutions it liked,

but not to institutions it did not like (such as the unfortunate Washington Mutual).

Shareholders in favored institutions would receive an enormous benefit, which is why some amended versions of the bill propose to allow the government to claw back some of the capital gains through the right to buy company stock.

Why anyone believes that the Treasury plan will prevent widespread economic misery is unclear....

The banks need a good trillion dollars or so of new capital. The Paulson plan, unfair and indirect as it might be, cannot provide more than a small fraction of that amount. But there is wealth aplenty in the world eager to find a permanent home in the United States,... Nonetheless, the bailout package will pass in some form.