Tuesday, March 31, 2009


Imagine that your teenager wrecks the family car. Then imagine saying to your teenager, "That's alright ... if you pay the first month I'll pay the rest of the new car & insurance costs because ... well, because you need to be out on the street impressing your friends." This, in essence, is how our bailout of Wall Street works.

This NY Times article by economist Joseph Stiglitz helps explain it, and is probably the best review of Treasury Secretary Tim Geithner's bail out plan that I have seen. Stiglitz offers a very accessible explanation of a complex program that tells us something that most of us already suspect: the American taxpayers foots the bill for Wall Street's stupidity, and their future profits.
The mechanics are rather simple.
1. Market players put up only what they can afford, or a fraction of the total cost of a (toxic) market instrument.

2. The government provides taxpayer money to help pay for this same instrument.

3. The government ALSO provides insurance in the form of loans that don't have to be paid back by the private sector.

So, if a market instrument costs $150.00 and the market player pitches in $12.00, the government matches it with $12.00 (our "equity" stake). But the government then has to provide a taxpayer guaranteed loan of $126.00!

And the market trash that's out there? It stays out there (albeit at a new price) and - unless we have some new and stiff regulations - the game begins anew.

- Mark

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