With respect to the Pauslon plan, Calculated Risk offers this analysis:
The primary goal of the Paulson Plan is to get the banks to lend again – or “unclog the system” as Secretary Paulson put it. Secondary goals are to “protect the taxpayer” and hopefully minimize moral hazard.
Will the plan achieve the primary goal? I think the answer is yes. By removing these troubled assets from the balance sheets of the financial institutions, the banks will able to lend again without lingering doubts about their solvency and viability. At first glance, the size of the plan seems sufficient.
He’s getting some flak in comments from some people suggesting that he’s acting like a shill for the finance industry. (Of course, they’re conviently overlooking the part where CR says “the plan does nothing to protect taxpayers or minimize moral hazard.”) But the thing is, he’s probably right. This plan probably will unclog the pipes of the financial system and get the banks back to lending like it’s 2004. But it doesn’t mean it’s fair.
Let me pose an analogy. Let’s say I buy and sell Beanie Babies. I sit in front gift shops early in the morning, waiting for them to open so I can be first to snatch up the little critters. I have a buddy who works at Halmark who gives me good deal on the most coveted bears. I turn around and sell them for 100% markup, and they sell like hotcakes. I’m making hand over fist.
I’m making so much money that I don’t know what to do with it. I start to lend some of my money out to my classmates so they can buy snacks during study hall. They pay me back the next day, but with a little fee tacked on. I’m making more money. Yea me.
But then people figure out that Beanie Babies are just pieces of cloth stuffed with plastic beads and cheap cotton. Prices plummet. I’ve placed all the ads in several different Beanie Baby magazines, and no one is calling. I sunk all my funds into a big lot of the fancy bears to celebrate the death of Princess Di, thinking I could just keep selling them for twice as much I paid. But no one’s willing to pay what I paid, let alone my asking price. No one’s buying them, period.
So what should happen at this point? I made a bad bet, thinking that in this new economy every household will want their own collection of precious little beanies. But it was all a fad, a bubble.
Typically one might expect that my new collection of Princess Di Beanie Babies, now worth nothing more than the material they are made from, would be turned into chew toys for my dog. But here’s the rub; how are my classmates going to buy snacks during study hall? I don’t have any money to lend; I blew it all on worthless beanie babies.
Here’s where the Fed steps in. We can’t have a frozen banking system! Who will buy snacks, even if they have to incur a little debt to get some? So they buy the Beanie Babies from me. Maybe not at my initial asking price, but certainly a lot more than what they’re worth. I offload the bean bags to them, and they fork over the cash. I’m back in business! Now I have money to lend to my buddies. Yea me again. What to do the excess cash now? Hmmm… I heard Pokemon cards were selling well…
CR’s right; if we give the banking industry $700 billion in exchange for their big stupid pile of Beanie Babies, they will have money to lend. And we will have Beanie Babies. Yea us.