The bailing out of the bailout

The story of the bailout of Wall Street is becoming curiouser and curiouser. The President is a lame, or perhaps even a dead, duck. Democrats or Republications, all of them, want to come out looking like Superman after rescuing a dying patient - but they are terminally afraid that the other guy will steal there thunder. Main Street is worried about their future - and all, repeat all, common men and women on the streets hate the bankers and financiers who created this godawful mess, and want to walk away with their bonuses and leave the crap with the government - read, the tax payer.

Not just common men, either. Joseph Stiglitz (awarded the Nobel Prize in Economics in 2001), has this to say here (http://www.guardian.co.uk/commentisfree/2008/sep/30/marketturmoil.wallstreet). Excepts from his interview:

"To be sure, the rescue plan that was just defeated was far better than what the Bush administration originally proposed. But its basic approach remained critically flawed. First, it relied – once again – on trickle-down economics: somehow, throwing enough money at Wall Street would trickle down to Main Street, helping ordinary workers and homeowners. Trickle-down economics almost never works, and it is no more likely to work this time.

Moreover, the plan assumed that the fundamental problem was one of confidence. That is no doubt part of the problem; but the underlying problem is that financial markets made some very bad loans. There was a housing bubble, and loans were made on the basis of inflated prices.

That bubble has burst. House prices probably will fall further, so there will be more foreclosures, and no amount of talking up the market is going to change that. The bad loans, in turn, have created massive holes in banks' balance sheets, which have to be repaired. Any government bail-out that pays fair value for these assets will do nothing to repair that hole. On the contrary, it would be like providing massive blood transfusions to a patient suffering from vast internal hemorrhaging.

Even if a bail-out plan were implemented quickly – which appears increasingly unlikely – there would be some credit contraction. The US economy has been sustained by a consumption boom fueled by excessive borrowing, and that will be curtailed. States and localities are cutting back expenditures. Household balance sheets are weaker. An economic slowdown will exacerbate all our financial problems.

We could do more with less money. The holes in financial institutions' balance sheets should be filled in a transparent way. The Scandinavian countries showed the way two decades ago. Warren Buffet showed another way, in providing equity to Goldman Sachs. By issuing preferred shares with warrants (options), one reduces the public's downside risk and ensures that they participate in some of the upside potential.

This approach is not only proven, but it also provides both the incentives and wherewithal needed for lending to resume. It avoids the hopeless task of trying to value millions of complex mortgages and the even more complex financial products in which they are embedded, and it deals with the "lemons" problem – the government gets stuck with the worst or most overpriced assets. Finally, it can be done far more quickly."

For more about what the Scandinavians did, go here (http://www.reuters.com/article/reutersEdge/idUSTRE48M9ON20080923?sp=true).

What was it that someone had said - those who refuse to learn from history are condemned to repeat it? Probably I got that somewhat wrong, but anyways, you get the point.