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“It is well, I die hard, but I am not afraid to go.”     George Washington,    His Final Words

November 25, 2008

Seems Everyone Except Me Has Been Bailed Out Already

by Brad Warbiany

But maybe I can make use of this too:

The Federal Reserve and Treasury Department on Tuesday unveiled a plan to pump $800 billion into the struggling U.S. economy in an attempt to jumpstart lending by banks to consumers and small businesses.

The government hopes that these initiatives will enable more money to flow to consumers in the form of loans than has occurred so far in previous bailout plans.

One program will make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.

Hey, my wife has a small business. I wonder if she can qualify for $100M or so? I might not need that lottery bailout ticket I bought at 7-11 anymore!

So, it appears that the TreasFed are desperately trying to improve consumer confidence in the run-up to the holiday season. But it’s not going to work. You know why?

To that end, government officials said that they would not set up the $200 billion consumer lending program until February. So officials couldn’t say if the mere announcement of the program would cause lenders to make more credit available to consumers in time for the holiday shopping season.

Paulson described the $200 billion consumer lending program as a first step, one that could be expanded later to include different kinds of debt, including assets backed by commercial real estate mortgages and business debt.

As you know, the government announcing that it is going to do something often has the effect of doing something. I.e. the passage of a tax cut that won’t take place for 1-2 years (or the non-extension of a tax cut that is temporary) tells the market what to expect moving forward, and they act on the expectations of future reality.

Unfortunately, in this case they can only act on uncertainty, not expectation of reality. The TreasFed already burst that expectation:

The larger part of the new program is geared toward ending the mortgage crisis, which was the original intent of the bank bailout plan proposed in September and signed into law in October.

That plan, known as the Troubled Asset Relief Program, or TARP, was quickly dropped for one in which Treasury instead made direct capital investments in banks in return for the government receiving preferred shares in the institutions getting funds.

We know that they’re going to change their minds as they see fit. So we cannot plan our holiday purchases based upon interventions the government MIGHT make to debt markets in February. We simply have no level of trust that those interventions will be made*.

Is there any other way to spin this than that they simply don’t know what they’re doing?

* By the way, this is not an acceptance that these interventions SHOULD be made. But the only thing worse than government intervention is the expectation that government will intervene but without knowledge of their plans. When government — not the market — crowns winners and losers, you prefer to wait until you know the outcome before you place your bets.

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4 Comments

  1. The United States economy is in a mess. Thank you President Bush, the worst President in American history. The problems will not be solved upon the inauguration. The work on resolving these problems will only begin.

    Comment by Larry Linn — November 25, 2008 @ 3:35 pm
  2. Larry you’re leaving out a few names who deserve credit for this mess, I think they would be offended if you ignored their role in this crisis:

    * Greenspan, Bernanke and every central banker.
    * every treasury secretary, since the noble exception of Andrew Mellon.
    * Every president since FDR
    * And the architect of every financial crisis – Keynes

    Comment by Jono — November 25, 2008 @ 7:08 pm
  3. Speaking of FDR, didn’t this same sort of fiat meddling by the feds pretty-much extend the crashes of the 30′s?

    The federal government’s new plan for financial stability: Remove any potential reliability in markets by adding massive whim-based distortions by a few players using unbacked new money. Yeah, this’ll go well.

    Comment by Akston — November 25, 2008 @ 8:34 pm
  4. The best is still to come. Car companies will get their money Tuesday and it won’t be enough. They will submit a “secret plan” to Washington presenting old and unrealistic proposals to get out of the mess and will get just enough money to get through til February and the advent of the age of Obama.

    Comment by Persnickety Curmudgeon — November 30, 2008 @ 9:00 am

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