Losing “Faith in the American People”

[panAmerican]

Are Bush, Bernanke and Paulson losing "faith in the American People"? When a crisis hits the country, politicians are quick to claim they "have faith in the American people". If we fail to act, or act substantively, Paulson warns of financial Armageddon and Bernanke warns of a definite recession. First off, there’s a wide chasm between those 2 views. Even if Paulson is wrong, but Bernanke is right, so what? Have we not survived recessions before? Didn’t we go on after September 11th? Have they suddenly lost "faith in the American people"?

If there is indeed a possibility, though not a guarantee, that the taxpayer could make money off these assets eventually, then why can’t the holders of these instruments just wait it out? An argument is made that if the taxpayers pay "fair value" the banks won’t be willing to offload the debts. That doesn’t sound like desperation; it sounds like extortion. And if they have enough ammo to extort us, they have enough get themselves out of this jam without help.

Ordinary investors (retail investors, 401(k) investors, aka "the little guy") do not own the credit default swaps that are insured by the banks. Here are the people we are bailing out:
http://www.cnbc.com/id/26885945 Guess What? The Man Who Shorted Subprime Is RICHER (Pt 1)
http://www.cnbc.com/id/26886123: Guess What? The Man Who Shorted Subprime Is RICHER (Pt 2)

Why not make a rule to either exempt the bank from honoring these contracts, or allow them to honor a limited amount? This would preserve the liquidity that the banks need to have in order to extend credit to "the little guy" and to honest-to-goodness businesses for their operational needs. The only ones who get hurt by this are the fat cats who will remain wealthy regardless of what action Congress takes or doesn’t take.

The original proposal of the bill says that $700B is how much the Treasury can have on the balance sheet at any one time. This is akin to a revolving line of credit: at any time you cannot borrow more than your credit limit on your credit card, but as long as you pay off what you owe, you can borrow again and again. So the fix is in...They can technically claim that the bailout is contained while practically letting everybody with troubled assets take their turn in the public trough.

The argument that taxpayers should get equity or warrants is equally flawed, unless there are built-in measures to prevent these companies from restructuring themselves in such a way that they dilute our shares. Just like when the Fed prints up too much money we end up with inflation, companies can sometimes reduce the proportional value that their investors own. So the type of ownership or right to ownership that we get in this bailout is important.
The credit markets don’t know who owns how much of these toxic instruments. Why not make it conditional to disclose this information as a precursor to any discussion of bailing out any given institution? Better yet, why not issue an executive order to force everyone to disclose all of it?

Financial institutions, according to the original language of the proposal, will be agents of the government when the government tries to resell these bad debts later. If the market can’t figure out the value of these assets now, how will they be able to figure it out after they saddle the government with it? In other words, literally the whole world is running away from assets now that they have been proven to be virtually worthless. What kind of sales pitch will it take to convince buyers that they’ll be worth buying in a few years? What will have changed to merit the confidence of future buyers?

If the executives leading the institutions needing the bailouts, will they show good faith by investing their previously ill-gotten bonuses into this plan? Further, we are in an economy where the job market is suffering. Where is the justification for paying executives outrageous salaries "or else"? Or else what?! They will quit their job? Fine, then, hire somebody else. Life goes on.