Wednesday, April 01, 2009

No Wonder People Are Against Bailouts

When the government involved privatizes profit and socializes risk, the taxpayers are always the loser. So it should come as no surprise that popular opinion is against bailouts of any kind. The problem isn't in the bailout, but in the government's attitude toward the private sector. Joseph Stiglitz explains how the bank bailout in the U.S. is set up:
In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.
In effect the Obama administration is forcing the American taxpayer to take on the majority of the risk, on behalf of the crooks who put the world's economy into the dumper. To me, it is completely rational for the American people to be sickened by this "remedy". This is change we can believe in? Don't make me laugh. It is the same old crony capitalism peddled by a much better sideshow barker.
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