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Paul Kiesel
Paul Kiesel
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The Next Bailout: How Much Will It Cost?

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A few excellent points on the $700 billion "Rescue Package" have been made since President Bush signed it into law last Friday.

1. The plan does not recapitalize banks, it just buys their troubled assets.

2. It won’t clean up the banks’ balance sheets anytime soon (the $700 billion will be slowly allocated to banks, as determined by the Treasury Department and Congress).

3. Because of the two aforementioned points, there here will be an inevitable FIFTH bailout, and it’s likely to occur before the end of the year (The four bailouts: Bear Stearns, Fannie Mae/Freddie Mac, AIG, and the "Hank Paulson" bailout plan).

The Los Angeles Times’ Peter Viles reported on this looming problem yesterday in his L.A. Land Blog. Below are Edmund Phelps’ (2006 Nobel Prize winner for economics) thoughts on the matter and Paul Krugman’s assessment, who’s a New York Times columnist. Both are two of the more erudite individuals on U.S. economic policy.

U.S. Treasury Secretary Henry Paulson’s $700-billion plan to buy troubled assets from financial firms may not work because it doesn’t recapitalize banks, said Edmund Phelps, winner of the 2006 Nobel Prize for economics.

“There are lots of reasons to think the Paulson plan won’t succeed in cleaning up banks’ balance sheets any time soon,” Phelps, an economics professor at Columbia University, said at a conference today in Washington. “It may aggravate the second problem banks have, which is that they’re quasi-insolvent.” (L.A. Land Blog, 10/6/08)

Speaking at the same conference, New York Times columnist Paul Krugman agreed, saying the Paulson plan fails to recapitalize banks, and that another government intervention, to inject capital into the banking system, is probably inevitable.

Last Friday, Krugman questioned the just signed "Rescue Package" in a New York Times Opinion column, "Has the Bailout Already Failed," and then went on to write:

OK, I know that’s premature. And I place no weight at all on the fact that the Dow plunged after the vote.

But it is interesting that short-term Treasury yields are down — only 0.13% on one-month — suggesting that the flight to safety continues unabated. Against this, John Jansen reports some signs that money markets are unfreezing, slightly.

We’ll learn more next week. But I have a prediction: well before January 20, Congress will be asked to vote on bailout 2.0.

Only time will tell, but it looks like the portending by both Krugman and Phelps is likely to occur, as President Bush tried reassuring Americans today, telling them to give this current rescue package time to work. (The President’s reassurances over the past seven and a half years always signal more troubling times ahead, whether it’s in regards to Hurricane Katrina, Iraq, Afghanistan, the Mortgage Crisis, etc., etc.) This is also coming from a president who has not answered reporters’ questions since August 6.