Money For Nothing - Part 2

Counting the $700 billion the congress and the president just authorized the Treasury department to use, almost $2 trillion has now been committed by the federal government to get the financial system functioning again. Several of our friends are also pitching in. The combined commitments announced by the US, Europe and Japan exceed $4 trillion.

The government politicos say "trillion" like it's an everyday number that just slips right off your lips. I can't really get my mind around such a staggering number. $4,000,000,000,000. I don't know about you, but all those digits look really scary to me.

Where does all this money come from?

I admitted in a previous post that I really don't understand money very well, but here goes. I assume that the Chinese and friendly OPEC nations will continue to lend a bunch of it to us by buying treasury bills and bonds. The rest will be created magically by just printing more of the paper variety we're used to seeing and by making some entries in an exotic "grand ledger in the sky".

This will increase our national debt to over $10 trillion. Some people think that this is really bad because our kids and grandkids will have to pay this back. But that never seems to happen. They may just pass the debt on to their kids and grandkids. In economic theory, I think this strategy is called "kicking it down the road".

Another possibility is that we'll experience a case of serious inflation (kind of like serious indigestion, but on a national scale). Thus, while we pay back the stated amount, it will not be worth very much in real money (whatever that is).

Just where does this leave us? In dire straits, where the money is for nothing (and the chicks for free). Hmm... I seem to remember something similar to that a while ago on MTV .

Perils of Paulson

I bet that most Americans know that Henry Paulson is the Secretary of the Treasury. I also bet that they had no clue who he was two weeks ago. I also guess that most Americans have no idea what the Treasury's role is in our system of government, but I'm pretty sure that they know that Paulson is the man behind the $700 billion government bailout. This is one heck of an expensive cram course in civics for Mr. Average Taxpayer. Even Stanford wouldn't have the cajones to charge this much.

Something like 90% of the population consider Paulson's plan to be a bailout of Wall Street. But, as discussed in the previous post, the cause of the crisis that is gripping the financial system is not just Wall Street's doing. There's plenty of blame to go around. It's now Paulson's job (along with all the political leaders) to sell the plan that has emerged this weekend as a bailout of the nation's economy, not just a bailout for the fat cats on Wall Street. This will not be easy. It's far simpler to scapegoat the unpopular rich guys. Both Obama and McCain did just that in their first debate two days ago.

Paulson's plan was two and one half pages long when he presented it to the President and Congress. After a week of work, the Washington politicos have renamed it the ‘‘Emergency Economic Stabilization Act of 2008’’. It has grown just a bit (by Washington standards) to over 100 pages of legalese gibberish. And it doesn't even cover the details of how the government will determine the price of the toxic assets it will be buying from the private sector.

Congress is set to vote on this bill this week. It appears that both political parties have come to understand the risk of inaction and are likely to pass the proposed legislation on to the White House. I wonder if they'll have the usual signing ceremony. Will Bush sign it using a bunch of pens which he will then hand to the smiling politicians who will be in the signing photo, or will it be done in the dead of night, with no one wanting any part of the whole mess? It should be fun to see which one happens.

As a free market guy, I'm pretty dismayed that the government is doing this. Sure, I like French food, but I don't sure don't like French economics. However, when I see Bush and both political parties agreeing on something smack in the middle of an election campaign, it must be darn necessary. So you can reluctantly count me in. Although it's not like anyone asked you or me.

Bailouts, Bankruptcies and Bloated Blather

Well, it's been quite a week in the money world. Bailouts, bankruptcies and bloated blather dominated the news. The talking heads on cable went wild on the subject, while each of the presidential candidates were especially inane in their varying pronouncements during the week.

Even though the seeds of today's crisis may have been sown well before they took over the reigns of government, who would have thought that a Republican administration would turn our financial system into one that emulates France? The details are still being worked out, but the rough estimate is that the overall government commitment to staunch the bleeding for awhile is approximately $1 Trillion (yup, that's Trillion with a capital T). And I say for "awhile" because no one really knows the full extent of the cost that will ultimately be incurred. History suggests that the amount the government will commit will probably rise substantially.

The basic cause of the financial meltdown that almost occurred this week was a lack of trust. Namely, trust that if I did a transaction with you, you would be around to honor your part of the bargain. In this environment, sane people (and organizations) simply stop doing business with the untrusted party. If nobody trusts anyone, all transactions cease. In the financial world, that's called Armageddon.

The lack of trust all fundamentally stems from the home mortgage debacle, in which scads of money was loaned to people who, put simply and crudely, just couldn't pay it back. Whether it's the creative capitalists on Wall Street who packaged the mortgages into ever more arcane securities sold around the world to organizations stretching for higher yields; or the unscrupulous mortgage banks and brokers who pushed money on hapless people who suddenly and unquestioning were able to live in homes valued at more than their wildest dreams; or the crazy accountants who demanded that the banks holding the mortgage-backed securities value them at unreasonably low prices; or the credit rating agencies who suddenly woke up to discover that their AAA ratings were just a tad overblown; or the government regulators who had no clue what to regulate; or lobbyists who somehow forced the government to bend over in an unseemly manner; or any other organization I've neglected to mention who had the slightest participation in creating the real estate bubble, the problem is real and darn serious.

So, at this point, it seems to me that Treasury Secretary Paulson and Fed Chairman Bernake, flying blind and having properly scared the pants off of the President and the leaders of Congress, are proposing some sensible actions selected from a steaming pile of rather unsavory options. Where and how it will end, no one knows. In this environment, the conventional wisdom still applies: just stay diversified. It's likely, given the strength of the US economy, that this will work out the best through the various ups and downs that are sure to follow.

By the way, it's really interesting that, even in today's highly sophisticated society, most financial transactions still take place based on just trusting the other person's voice (or mouse click) in the transaction. That's the way business has been done since money was invented (except for the mouse click part).