The world probably doesn't need another blog post about the current crisis and the possible "mother of all bailouts". There is, however, no more pressing issue in policy today, and so I would be remiss not to say something. Briefly, Sec. Paulson has said that instead of just putting band aids everywhere, we need a comprehensive solution. However, his $700billion request, on top of the ~$200billion that Treasury has paid out and I think ~$600billion that the Fed has loaned have done nothing except prolong the day of reckoning. The $62trillion dollar, completely unregulated market for credit derivatives grew when nearly everyone either repaid their loans or sold collateral at a profit. This new federal money, like all that before it, will be swallowed up without a burp, much like the "economic stimulus" checks from earlier this year.
Meanwhile, it does nothing to address the cause of the crisis, which is the unsustainable mode of credit-fueled living in this country. If the problem is that people cannot pay their mortgages, how does buying securities so that banks out can issue new ones solve the problem? Housing, by any historical standard, still has about 10% to fall in most cities before it's affordable to the median wage earner. Many of the credit derivatives that are just now getting attention are based on loans to retailers, and will turn sour if spending this Christmas does not increase substantially over last year. We are, in short, screwed no matter how much debt King Hank leaves us. I leave you with a brief haiku:
Since collapse it must
Let us get on with it
Fix bridges not banks
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