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Flaw With World Leader's Agreement on Bailout
Reuters reports the leadership has coordinated on vague plans.
One key problem with the goverment-led bailout is the failure to issue bonds, and for the governments to propose 100% bailouts.
We're asked to believe this approach would work.
However, the error is for the governments to offer only a small portion of the bailout -- say 20% -- and then offer the 80% through bonds.
Wall Street should be forced to provide the 80%. A failure of the governments to get other backers suggests the 100% bailout plan focuses on speed, not in generating support.
One key problem with the goverment-led bailout is the failure to issue bonds, and for the governments to propose 100% bailouts.
We're asked to believe this approach would work.
However, the error is for the governments to offer only a small portion of the bailout -- say 20% -- and then offer the 80% through bonds.
Wall Street should be forced to provide the 80%. A failure of the governments to get other backers suggests the 100% bailout plan focuses on speed, not in generating support.
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Currently, the approach is for the governments to bailout 100% of the troubled institutions. This is an error.
A better approach, and one that would increase the moral obligation of the world financial markets, would be to offer bonds.
Supposedly, these troubled assets will, one day, return to a higher value. Then it stands to reason that other market players, other than government, would want to invest in assets that would supposely increase in value.
The falure to offer bonds on this supposed future increase in asset value does not fare well for this plan.
October 12, 2008 4:54 PM | Reply | Permalink
The plan is long on throwing money at a supposed problem with has not been specifically defined.
It's unclear, as Krugman notes, what the $700B and other funds will accomplish.
They're just throwing jello at the wall, and failing to credibly demonstrate financial institution support for the notion that these asset values will -- one day -- return to the "fair" market value or a higher value.
They're waving their hands, not providing specific plans or credible actions.
October 12, 2008 4:57 PM | Reply | Permalink
Let's pretend this vaguely defined world-bailout plan is going to work.
If that were true, and there was high certainty of success, Wall Street bankers and world financiers should, in theory, be lining up to buy the very bonds of these firms.
There should be no requirement for the governments to directly invest; but the markets should be able to provide a substatial portion of the funds needed to bail out the problem institutions and solve this problem.
These proposed plans are contradictory: Asking that we believe there will be success; but failing to include in the plan a mechanism to distribute the anticipated "resulst of that success" to finaciers.
This isn't adding up. they do not appear to have a clue what the problem is, how to solve it, or to generate financial institution support.
October 12, 2008 5:00 PM | Reply | Permalink
Another problem is the plan of the governments, outside the financial system, to directly fund 100% of the bailout plans. This is silly.
It meas the government is quickly exhausting funds, as opposed to keeping some in reserve, as would be possible under the 20%-government-backed-approach, discussed above.
Why should anyone believe this plan will work when the governments are not willing to "allow" financial instutions to enjoy an stake in the advertised "benefits" that should accrue with the turnaround?
The reasonable conclusion: This is a bigger mess than they've let on; and they're quickly moving, exhausting resources because they fear inaction could bring a bigger problem. Fear, not planning, is driving this approach.
October 12, 2008 5:03 PM | Reply | Permalink
The world community has see in Iraq and Katrina how the world's "finest" minds will go about planning.
Even with many months of planning, the US government got it wrong on Geneva and security for Iraq.
A fast plan, especially where the problem has yet to be well-defined, suggests they're going to bungle this as was done in New Orleans with Katrina.
Not impressive.
October 12, 2008 5:06 PM | Reply | Permalink