Echoes Of Iraq War: White House Claims Bailout Will Pay For Itself

[seafan]

Thanks to Think Progress, for pulling these quotes together:


Echoes Of Iraq War: White House Claims Bailout Will Pay For Itself

September 25, 2008

To justify the exorbitant cost of the bailout for the financial industry, Bush administration officials have been repeating the dubious claim that American taxpayers should expect to recover much, if not all, of the proposed $700 billion:

PAULSON: This is not an expenditure. … Money will come back in.

BERNANKE: What’s clear is that the $700 billion is not an expenditure. There’s going to be a substantial amount of recovery.

BUSH: Money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back.

.....

As Paul Krugman writes, “The premise of the Paulson plan — though never stated bluntly — is that these assets are hugely underpriced, so that Uncle Sam can buy them at prices that help the financial industry a lot, without big losses for taxpayers. Are you prepared to bet $700 billion on that premise?”

The White House’s assurances that the bailout will pay for itself is eerily reminiscent of the assurances the Bush team made that the Iraq war would be similarly inexpensive — if not profitable — for America. Take a look at some of those promises:

RICHARD PERLE, Chair of Pentagon’s Defense Policy Board: “Iraq is a very wealthy country. Enormous oil reserves. They can finance, largely finance the reconstruction of their own country. And I have no doubt that they will.” <7/11/02>

PAUL WOLFOWITZ, Deputy Defense Secretary: “There is a lot of money to pay for this that doesn’t have to be US taxpayer money, and it starts with the assets of the Iraqi people. We are talking about a country that can really finance its own reconstruction and relatively soon.” <3/27/03>

ARI FLEISCHER, White House press secretary: “Iraq has tremendous resources that belong to the Iraqi people. And so there are a variety of means that Iraq has to be able to shoulder much of the burden for their own reconstruction.” <2/18/03>

LAWRENCE LINDSEY, White House economic adviser: “The likely economic effects would be relatively small…. Under every plausible scenario, the negative effect will be quite small relative to the economic benefits.”<9/16/02>

Krugman concludes, “The whole premise of the bailout push has been ‘We’re the grownups, we know what we’re doing, just trust us.’ Sorry, but that’s how Colin Powell sold the Iraq war. Fool me once, shame on you, fool me twice … you shouldn’t get fooled.”

[marmar]

1. What, they've got oil wells on Wall Street?

n/t

[msanthrope]

8. That's exactly the image that went through my mind---gushers, right there

in front of the market...

[Romulox]

2. There's a poster going about DU claiming we will PROFIT from the bailout.

No doubt it's shades of "Greeting us with flowers."

:silly: :puke: :eyes:

[Tierra_y_Libertad]

3. This whole thing reminds me of the letters from Nigeria promising to me rich for a small fee.

Which I would be inclined more to trust because, at least, their bullshit isn't hidden under a blanket of politics.

[gratuitous]

4. If the assets are underpriced, why aren't rich folks buying them?

That's the way it's always worked in the past; now these hot, hot, hot bargains are going to go to waste if we don't snap them up toot fucking sweet? This is sounding more like a late night infomercial all the time: "Call in the next 10 minutes to guarantee your savings! Quantities are limited! Call now, Now, NOW!"

[gravity]

5. They do have a good chance of making money on this

based off the economics of the mess. It isn't a far fetched fantasy like the Iraq war.

[Romulox]

7. Here we go. You understand that "making money" means "making more than they could by investing

in a more sound investment?" Right?

You also understand that if the free market saw a potential for profit in this situation, these MBS would not be, in effect, worthless on the open market?

[gravity]

10. It is riskier than a sound investment, but they still could make money

The problem with the private sector is that they experience very high borrowing costs at the moment, and no one is big enough to buy all the assets. It is a liquidity crisis.

The government has the advantage of being able to borrow at low costs, and can have the patience to hold for the long term until the markets stabilize.

[Romulox]

13. "The government has the advantage of being able to borrow at low costs"???

"The government has the advantage of being able to borrow at low costs, and can have the patience to hold for the long term until the markets stabilize."

You mean the government has the advantage of being able to pass on losses to taxpayers. "Patience" has nothing to do with it. It's that the market deems the risk of these MBS outweighs any potential rewards. In other words, the best prognosticators in the private sector deems these MBS worthless. Defaulting mortgagees don't magically start making payments because their note is in the hand of Hank Paulson.

[gravity]

15. They can borrow money buy issuing cheap treasury bills

The point of this bill is to stabilize the markets, not to act as an investment so you can't compare them. Tax payers burden the risk, but the government can still profit from the mess if they play their cards right. Much of the cost will be recouped if not all.

And the MBS are still paying interest, it is just that the market is frozen with fear. Even if half the mortgages default, then they are still worth 50 cents on the dollar.

[Romulox]

17. And just WHO is responsible for paying back those T-Bills, hmmm?

"The point of this bill is to stabilize the markets, not to act as an investment so you can't compare them"

That's funny, 'cause your first post to this thread was "they do have a good chance of making money on this". :hi:

[magellan]

6. Bullshit! Where's it going to come from?

Someone explain it to me in simple terms. How do they figure they're going to recoup this money??

[gravity]

9. They buy assets below their fair value

It is that simple.

[Romulox]

14. Logic problem: an "asset" that nobody will buy has no "fair value".

Or, more precisely, has a "fair value" of zero.

[magellan]

16. So it's as I suppose, they'll recoup pennies on the dollar for these "assets"?

n/t

[Romulox]

18. "Recoup" is the wrong word, since they're not even our worthless assets to begin with--

this is just a direct subsidy. Taxpayer monies given directly to the richest Americans. Not a loan. Certainly not an "investment". A gift/extorted payment.

[sinkingfeeling]

20. But we won't be buying assests below their fair value. They're called 'toxic' for a reason.

The only way this giveaway can work, is if we pay more than the assets value for them.

[anigbrowl]

21. Housing market recovers (over a deacade, say), MBS's regain value

In fairness, the treasury (and taxpayers) might well end up in the black. It depends what value they pay for those securities, vs. the likelihood that they will be resaleable as they approach maturity. Over the long term, it would probably balance. The question is whether the money they need to get the credit market moving again will be low enough for the resale to be profitable after subtracting the opportunity cost.

To simplify:

I am a bank. I issue 10 mortgages for $100k each, worth a total of a million bucks. I expect to make $1.5 million bucks once I am fully paid back for all these mortgages.

But in the meantime, I've given out a lot of cash. So I package these mortgages into a security and sell it to you for $1.25 million. I got my money back and then some, you're going to make $250k (- interest you could have got by leaving your cash in the bank) when it matures.

Except the market goes bad. shit.

Government steps in, offers you $500k for your security. You want to recover something out of this mess, so you accept a 50% loss on your investment rather than a total loss.

10 years later: 9 of the mortgages are getting paid off properly, 1 went bad. The security (owned by the govt) is now worth $1.35 million at maturity with (say) 10 more years to go. House prices are back up to about 2005 levels.

$500k + interest is worth, say, $750k. Government sells the security to you for $1 million. $250k profit, you get $350k profit (- interest you could have got by leaving your cash in the bank) when it matures.


I'm not saying it WILL work out profitably, I'm saying that it CAN, IF the government negotiates good terms for the securities it is offering to buy.

[El Pinko]

11. That's like the idea that it's okay to buy a house with payments eating up 75% or your paycheck...

...because "real estate always goes up and you can just turn around and sell it for twice as much a year later".


...and we all know how THAT went.

[sinkingfeeling]

12. The whole timing, wording, hysteria, threats, and rush is an echo of 2002!!

[xyouth]

19. It will not make any money

Probably most of you read the report from The CBO if you didn't it is still posted "Bailout Could Deepen Crisis" In it, Peter Orszag Basically says that we don't know what we are buying, and that it could open a worst can of worms. (This is my interpretation) He goes on to say,
Then, there is the paperwork cost of the bailout.

The budget office "expects that the administrative costs of operating the program could amount to a few billion dollars per year, as long as the government held all or most of the purchased assets, ....."

This does not even account for the carrying cost for this money.