OK, so if all goes according to plan (somewhat less likely as of this post), Henry Paulson will soon start writing checks, lots of checks, lots of BIG checks. 700 billion is a number that's getting everyone's attention, as well it must if the psychological component of the Catastrophe is to be healed and reversed.
There's a punch line from a Churchillian story about Winston and a woman he's trying to seduce at a dinner party-- 'Madam, we’ve already established what kind of woman you are,” said Churchill, “now we’re just negotiating the price"----which reminds me of where we now are on all of this. So….how much??---700, 800, a trillion or more....when the national debt already tops 11 trillion, how do we define 'talking about real money' anymore?
I have no better solution to the Catastrophe than any of the expert opinion I have been reading lately, nor, I'm sure, do I fully grasp the full scope of this. Yet, basic economic rules still apply, and if you're going to write a big check, it's okay to expect goods, services, or promises-to-pay of comparable value to be delivered.
What does the US Treasury get after the check clears? We don’t yet know ! The securities in question have no firm value---by traditional methods of accounting (see my blog of Sep 16) or even the newer ‘fair value’ accounting methods. In a sense, their value is what the banks say they are worth, or at least what their mathematical models tell them they are worth. Talk about a pig in a poke!
If the Treasury is going to help the banks get the bad assets off the books, the transaction has to increase equity, otherwise why bother? You & I will have to buy these goods at a premium to their balance sheet value in order for this scheme to work, and then find a way to hold and sell off the assets, hopefully at a profit, later on. There is no one-size-fits-all solution here because banks differed on the way they marked down the value of the derivatives in recent months. Oy.
The
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