International Law

Bailout Bad Medicine?

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I have no special knowledge about financial theory, special purpose vehicles, or counterparty obligations.

So, the technical details of our current credit crunch eludes me.

However, I do have a pretty good ear for fraud talk - especially when it is wrapped up in self-deceit, shrouded by technical nonsense, and hidden agendas.

The current $700 billion bailout and the language surrounding it reminds me of Charles Ponzi's scheme of rescuing his insolvent Securities Exchange Company.

The SEC was the classic rob the future to pay the present scheme. At the height, the SEC had $15 million in liabilities and $8 million in assets.

Ponzi's solution to the insolvency? Expand the SEC! He intended to buy the US Shipping Board war fleet for $200 million. He calculated that with the authority confirmed by this purchase, he could open the SEC in all of the fifty states and "raise" $200 million in 30 days. Sound like a something for nothing scheme?

Well, James Grant, the noted bear and pessimist, argues that this what the bailout consists of:

"Long after the crisis burst into the open, the Fed and Treasury downplayed it. It was, they insisted, "contained."

Last week they asserted that, unless the House voted "yea," the wheels would come off this $14 trillion economy.

President Bush himself has broadly hinted that the nation is on the cusp of disaster.

How can they be so sure?

And how can they know that the unintended consequences of the radical policies they are pushing through won't be worse than the panic that they themselves are helping to foment?

When the Fed insists it has no choice but to print up hundreds of billions of new dollars and when the keepers of accounting standards bend in the face of criticism that market prices hurt, what they are really saying is the that financial truth is too awful to bear.

Heaven help us all if they're right."

Full post as published by Misleading Advertising Law on October 06, 2008 (boomark / email).