Bailout Fails to pass

Wow.... Stunning. While I'm not an econ major, nor would I say that I'm an expert, I'm stunned at the amount of drama happening in the financial markets. I'm still pondering about the implications of the bailout, but prior to voting, I was somewhat against the bailout. The devils in the details and the devil was quite a big one.

Wall Street and Main Street are tied together, when one dies so does the other. Therefore, I agree that something NEEDS to be done, and relatively swift, I didn't like the bailout in its current form. The biggest gripe that many economists see, and that I agree with, is that the bailout shafts the taxpayer. The US government bailout buys bad assets, but the government and therefore the taxpayer doesn't get any equity. Even when the taxpayer is getting some kind of equity, it either gets very little preferred stock or is last in line to receive benefits. This is somewhat exemplified in the recent Wachovia deal:

"The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk."


So the taxpayer gets only $12 billion in stock, while has to risk $270 billion dollars. Not sure how exactly that works. I think this in general represents the scheme of the current bailout plan. Little reward for the taxpayer with huge risks.

Second, the bailout tries to address the lack of capital in these banks, but it goes about it the wrong way. Most economists are pointing to the Swedish Plan as the correct way to bail these companies out: Let companies die, wipe out shareholders, then recapitalize the banks.

"In response, the Swedish government set up an agency to recapitalize the financial sector. Bank shareholders were not compensated. But the Swedish government did not bail out all banks, only a subset. They used a microeconomic model to determine which of the banks had a chance to survive, and which did not. Those that did not were liquidated or merged. And those that were bailed out had to write off their bad debts first. All depositors were covered by an explicit government promise of compensation. The goal was to minimize the cost to the taxpayer, and it succeeded. It turned out as one of history’s most successful financial system bail-outs."
Instead, we're going the Japanese Route, which led to a decade long recession. The Japanese route tried to prop up firms that should be left to die. Of course this is overly simplified, nor do I fully grasp all the issues. The more you read, the more you get confused. The only conclusion I've reached is that either way, we're in for a long ride.