http://www.motherjones.com/commentary/columns/2008/11/how-is-the-bailout-going-henry-paulson.html<snip>
Perhaps this is stating the obvious, but the big US bailout plan hasn't worked so far. I don't just mean the $700 billion granted by Congress through the Economic Emergency Stabilization Act on October 3. I mean none of the related measures have worked, either.
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And yet, the bloodbath continues. This week jobless claims clocked in at a 16-year high—and these figures don't even include the 53,000 job cuts announced by Citigroup, 3,000 by JPMorgan Chase, or up to 6,000 by Sun Microsystems. Nor do they count the cuts that will come from the auto industry, which will be in the tens of thousands if the Big Three survive, and in the millions if they don't. Last week, the Department of Labor announced that in October the US Consumer Price Index had staged its biggest drop in 61 years.
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In mid November, members of Congress on both sides of the aisle were incensed that Paulson flip-flopped on the original intent of his Troubled Asset Relief Program, which was purchase toxic assets from imperiled financial firms, deciding that injecting capital into troubled banks was the best way to dethaw the frozen credit markets. The rest of us can let that concern go. Buying junky assets would have been just as ineffective as buying stock in the companies that processed the junk. On October 28, the Treasury Department spent $125 billion to purchase preferred shares in Goldman Sachs, Merrill Lynch, Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, State Street, and Bank of New York Mellon. Since then, shares in those firms have plummeted an average of 55 percent. That makes the $125 billion investment worth about $69 billion right now.
The big lie was that this capital would go toward easing credit, but it hasn't. Nor will it, for three reasons. First, with banks like Citigroup trading at roughly 10 percent the price of McDonald's shares and struggling for survival, they need to conserve all the capital they can. Second, as long as there is uncertainty among banks as to what kinds of losses lurk within their books, there will be no true credit flow in the industry. And third, consumers will always come dead last on their list of priorities.
But as the nation turns to the next bailout question, whether to come to the rescue of the auto industry, we've got to ask if capital injections or loans are the best way to go. Perhaps the leaders of the Big Three need what the finance industry needs: a Sheila Bair-style solution.
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