Although the trends have been there since 1980, the election of George W. Bush in 2000 marked the ascendancy of crony capitalism and establishment of "New South" social class of bourbons who view themselves as America's "productive class." The profits are for this class, the losses for commoners.

Dr. Ha-Joon Chang, author of Bad Samaritans (a book which questions the neoliberal consensus on such matters) might be a good one for the media to seek out... but so far, there has been an echoing silence in response to his fine book.

If we're going to be Keynsians, lets be Keynsians... rather than propping up failed institutions, we could nationalize them. We could fund public works and repair the roads, we could pay for children's health care...

But no. Instead, we'll just bail out some obscenely wealthy banks... and as if that wasn't quite bad enough, even were one of these wealthy bankers to be fired, it would be with a multi-million dollar severance package.

There are people out there buying that stuff? Please, please, tell me that's not true. Is there anyone out there who doesn't know that the mortgage paper is worth pennies on the dollar? We don't need more economists. We need to stop putting stupid pills in the water.

As one of those short the market, today I lost a third of my (unrealized) profits. I also lost on my intermediate-term bond holdings.

I am left dumbfounded by the Fed's actions.

A number of the institutions being bailed out by this continue to pay large bonuses to the incompetent managers who did the counterfeiting.

But I guess they weren't really incompetent -- if the Fed is ready to buy counterfeits with real money (but does any of it deserve to ebcalled "real" now?), counterfeiting is smart.

And saving is really dumb.

I don't see anyone buying that crap, so I don't get the Feds logic.

Isn't that $300 billion so far to loan their member institutions at below market rates, or exchange for worthless paper, to guarantee billions of profits to prevent major financial failures for the idiotic and well-heeled lenders?

And only at a cost of a very rapidly dropping dollar and inflation about to heat up like no one can believe.

How long can they keep this Rube Goldberg financial contraption spinning before it all falls apart?

I can't recall who at the Columbia School of Journalism did the study I'm thinking about but one very striking fact stuck to my memory: a majority of journalists (especially those with 10 years or less of working experience) considered that fact checking was not part of their job description!

Given this frame of mind, is it any wonder that the media keep on mindlessly typing the pablum that the PR agencies and the spokepersons for the powerful and well-connected?

Colbert's parody of the Washington press corp at the media meeting in DC was spot on.

Here's a novel question: When the financial instituions pledge these worthless assets as collateral, who will determine the value of the "pledged assets"?
Does anyone really know the "value" of these securites?

Bailouts for industries are common, and the probability of a bailout when things go bad is factored into the present value calculations of their investments (at least implicitly).

The bailouts are made by the politicos who figure that the bailouts increase their own future income stream (from grateful business leaders), and are factoring in these increases into their own present value calculations.

Dean and others:

First, the Fed isn't actually buying the bad loans, right? It still has recourse against the banks. Collateral is just collateral. In a normal transaction it would come into play only if the debtor doesn't pay.

Second, the Fed doesn't need to (and is it?) accept the bad paper at face value. The fed can say "we will let you use subprime paper as collateral but only at a percentage of the face value."

Third, isn't the most likely scenario one not mentioned by Dean: the banks and fed simply keep rolling over the 28-day loans until the loans are paid back. There's still a subsidy to the bank, in the form of the low interest rate, but not as big a subsidy as Dean's post implies. (I think.)

"It is possible that they won’t be able to find enough suckers, in which case these banks will end up defaulting on their loans and the Fed (i.e. the government ) has lost tens or hundreds of billions dollars paying good money for counterfeit currency."

Dean, two questions: is this collateral literally worthless - the fed seems to be imposing a haircut of some kind, no? and can they just walk away from these loans ("jingle mail to the fed")? I would think they'd only default if they go into bankruptcy...

Mark wrote, Third, isn't the most likely scenario one not mentioned by Dean: the banks and fed simply keep rolling over the 28-day loans until the loans are paid back.

But what if they'll never be paid back in full?

I guess the Fed could demand and perhaps is demanding that the bank take a haircut, e.g. Fed offers 90 cents on the dollar.

But I doubt the Fed will demand a haircut that reflects best estimates of the true value of the securities.

Maybe it shouldn't be news to ANYONE, since it's a loan only for 28 FRIGGING DAYS!

It doesn't make the problem go away. It only provides a little more morphine to the terminal patient.

I am not an economist, but as I see it the problem here is that the "Feds" are only federal by name. The Federal Reserve is owned by private banks. So all they do is using tax-payer money to bail them self out.
As simple as that.

The issue is that we cannot decouple the banks from the system as a whole. Thus there are two options:

1. Save everyone, including undeserving Wall St. fat cats.

2. Punish everyone, including John Q. Public.

I think most economists are completely aware of the moral hazard of bailing out people who don't deserve it, but they'd rather do that than jeapordize the whole system and put each and every American at risk to lose all their savings and investments should the market crash.

Lesser of two evils. And true, when it was East Asia, we took the "lets punish everyone path" and it was a pretty dick thing to do and we got a lot of crap for it, but if you hate that we did that to them, why would you want to do it to us? Two wrongs don't make a right.

PS. If you can figure out how to punish the bad guys without punishing the rest of us, I'm totally game. But seriously, it is NOT in the public interest whatsoever for a major institution like Citibank to go under. The damage from that would far exceed the cost of a bailout.

Unfortunately, Nylund is on to something. I really want to punish, not reward the bad actors. He also uses the term moral hazard with respect to the banks, which is appropriate. But aside from making a point about the utter faithlessness of financial institutions to the commonwealth, I'm not sure what else can be done. Letting any of these institutions fail probably means the failure of all. And that means throwing the whole family out with the bath water.

Dean,

Let's have some accurate facts: Feds currently only accepts the Fannie Mae and gov't agency type MBS as loan collaterals. They are not accepting privately-issued MBS. Second, Feds will use a collateral margin (cushion) on the MBS--not a dollar for a dollar.

The subsidy comes in the form that institutions have liquid funds on low rate.

If MBS value declines further, institutions will need to pony up more MBS to maintain that collateral margin. The MBS value is priced regularly (of course with high volatility now).

Not exactly all counterfeit.

Oh, I am more than a little stunned that none of your readers knew about this important fact and point this out.

Yes, institutions might not be able to use the same MBS to get good percentage of cash (loan to value ratio) and at such good rate.

Is this bad enough to say counterfeit money? If the MBS declines in value, write-down will be made to the collateral and more will be needed to keep a safe margin.

Nyland wrote, The issue is that we cannot decouple the banks from the system as a whole. Thus there are two options:

But it's possible yours is a false dichotomy.

If you read Dean's other posts, you'll see there's possibly a third option: if a bank is going to fail, the government seizes it and puts it in receivership, and continues operating the bank. Recapitalization occurs only after shareholder equity is wiped out, and all higher level executives are terminated without golden parachutes.

There is only one way to reflate the currency without rewarding those who drove it to ruin and punishing those who are blameless, the tax payer. The direct payment of money to the public at large, on a per capita basis, for as long as it takes. It could be done on the same authority as Lincoln's green backs. The treasury department could simply print the notes.

Liberal quoted Nyland who went on to write:

Nyland wrote, The issue is that we cannot decouple the banks from the system as a whole. Thus there are two options:

But it's possible yours is a false dichotomy.

If you read Dean's other posts, you'll see there's possibly a third option: if a bank is going to fail, the government seizes it and puts it in receivership, and continues operating the bank. Recapitalization occurs only after shareholder equity is wiped out, and all higher level executives are terminated without golden parachutes.

I would go one better Liberal.
ANY executive found to have actively pursued this fraud on the American people will be prosecuted.

Who the hell am I kidding.

One word to American's, Roubini...get to know him.

And pray

The Chrysler bailout suggests a solution less radical than nationalization. As a kicker for its loans, the government gets warrants for a substantial percent ownership. If the banks recover, their stock goes up, the government exercises and sells at a profit. Shareholders suffer dilution. Tough.

The mortgage market mess does seem to play into the hands of big banks/big buissness. I am not opposed to helping a family stay in their home, for example: If a loan was issued with a very low teaser rate and then jumps to 12%, this loan ought to be refinanced by the Fed at a reasonable rate, say 6%. This is good for everone. But if the bailout is intended to compensate banks for the unrealized profit, (the difference between 6% and 12% over 30 years) then I am definately opposed. If this is what them mean by bailout then we need to look at charging our political leaders criminally.

I would go one better Liberal.
ANY executive found to have actively pursued this fraud on the American people will be prosecuted.