Response to Democrats.com Rebuke of Paulson’s Bailout

September 22, 2008

The following is a response to this:

http://www.democrats.com/stop-paulsons-plunder

That proposal is aggressively misguided in the same way that right-wing rhetoric is aggressively misguided. 2 wrong bull-headed perspectives don’t cancel each other out… they only make things worse
 
The figures included seem ridiculous to me. $1.1 trillion cost of bailouts so far? As far as I know, that number is way too high. Also, the $700 billion allocated to Paulson is not a sunk cost. The economic reality of it is that in order to prevent the entire financial system from collapsing, the Fed has to intervene and support prices in the mortgage security market. Once this occurs, the illiquid assets purchased by the government will become liquid and be slowly sold into the open market for at or around their intrinsic value (they are the rights to the mortgage payments of millions of homeowners). Without, the stimilus, that $700 billion dollars of securitized mortgages cannot be exchanged, causing its price to approach zero in the short term – even though it has a lot of value over the long term. Even if 25% percent of the mortgages are defunct within a specific bundle, the $100 billion security can still be worth up to $75 billion. I highly doubt that the goverment is even going to pay more than the intrinsic value of the securities now.
 
While there are other very serious issues will arise relating to the devaluation of the US dollar and net outflows of foreign money out of the US, to not support this market could literally cause the US stock market to fall apart – a sceneario that cripples everyone in the US, not to mention the entire world. Bad for rich people, worse for middle class and poor people.

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One Response to “Response to Democrats.com Rebuke of Paulson’s Bailout”

  1. RallyGrrrl Says:

    They are ridiculous, but if no one calls them on it then we’ll be stuck with this for the next thirty years.

    Preaching to the choir, man. Tell it to your senator:

    http://www.senate.gov/general/contact_information/senator_cfm.cfm


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