[IWE] Galbraith's OpEd on what should be done about the Bailout.

[Ben Tilly]

On 9/25/08, williamoxley@aim.com <williamoxley@aim.com> wrote:
>
>  Ben,
>  thanks for your input. I realize the problem is liquidity caused by the
> uncertainty of the real value of the portfolio's that are being marked down.
> I dont think giving Paulson a check will fix it without establishing a floor
> in advance.  Whether that floor is 50-70% of todays booked value it would
> allow the fed to be the buyer of last resort. Once owned a RTC type of

I don't see how a floor matters.  Also talking about today's booked
value is difficult, since the market for these bonds has dried up, the
value to book is highly debatable.

> institution could unwind and sell the underlying assets hopefully with
> enough to recover a lot of the funds expended. Handing Paulson a check is
> printing money, I hate to see the inflationary spiiral that is going to come
> in the next few years as the war costs and the bailouts hit. How much and

I agree that handing Paulson a check is printing money.  However right
now money is being destroyed at a prodigious rate.  If you just took
the current economy and simply added $700 billion, we wouldn't have to
worry about inflationary effects because more money has been destroyed
than added.

The only way we'd have an inflationary prospect is if we did this and
then the money creation process restarted and ran away.  Given how
much money has disappeared already, that isn't something I'd worry
about at the moment.

> some rules need to be spelled out quickly by the congress to allow the
> interbank lending to go forward. I know tech is busy right now but if
> companies gannot factor invoices its going to be hard to meet payroll. Not a
> good time at all.

And right there you have the critical issue that most people don't
see.  Given a soft Christmas, a lot of companies that *depend* on
Christmas to get by will come up short on cash.  Given a bad lending
environment, they won't be able to make payroll next year.  The
general public won't see this coming until they get laid off.

Moving to the other side of the equation, we're going to have a soft
Christmas.  That's a guarantee at this point.  The question is how
soft.  People who are concerned about the sudden disappearance of
their retirement portfolios spend less than people with that nest egg
mostly intact,  So a drop on Wall St that this disaster is coming will
make Christmas even worse, which will cause much more pain.

I wish us all good luck...

Ben