The Paulson Plan

Today I have no shortage of subjects that I could talk about today, but as the Paulson plan is to important to ignore.

Now I can understand why this plan was put forward, as if there is not the cash in the banking system to oil the economy then the ordinary people will suffer. And it is better to pay higher taxes than have no job at all. However, the plan as being presented is all about a business as usual approach rather than really dealing with the causes of the problem.

It may be useful to think of the economy as being like a fan. The money is flowing through by people and businesses buying and selling and by borrowing and lending. The only problem is that while this fan is still turning, and I guess your ahead of me here, the fan is slow and sluggish because its covered in manure.

While it is a simplification, the problem is that of people defaulting on their mortgages. Then the simple thing to do would be to restructure the loans. This would help stabilise the housing market and that in turn would reduce the risk that further foreclosures would happen. Are but this is where the problem lays, the original lender no longer owns that mortgage. It has been split up into thousands of fragments, mixed with other loans, and sold as bundled securities to all the other banks.

These are the toxic assets that the under the Paulson plan the US Treasury would be buying. Well under that plan the lunatics really have taken over the asylum. As all that is really happening is the US government plans to give the banks billions for junk securities. It will do nothing to stop foreclosures, and even when the a property is sold to clear the debt, the US treasury may not get a cent from this as remember each of these mortgages have been fragmented.

The real way that this seven hundred billion dollars could be used is to buy up the homes of some of the people who are facing loosing their homes. I know that the plan that the senate have agreed is less than that, but it could be more than seven hundred billion dollars as the real cost.

By following my suggestion, or something akin to it, is the American government, and hence the people, would get the tangible asset of the property, and as I have said before, there would be an income from rent too. Who knows in time those properties could even make the government a profit. Also, it means the banks will get the cash the system needs and with the reduction in foreclosures this will induce, the pressure on the banks will reduce too. By helping the people, the banks are helped indirectly. If the Paulson plan were followed all that happens is the banks get a short term boost.

One of the reasons why the Paulson plan is such a bad one is that Paulson is a Banking insider. All that the PP will do is let the banks start lending the treasuries money and not their own. The banks are not lending to each other at the moment. They obviously know something we don't. In fact I leant someone twenty pounds and I became the fourth largest bank in the UK.

I realise that my musings here will have as much influence as the beat of a butterflies wing to creating a hurricane. However, there was one aspect of the debate in the House of representatives that I feel is worthy of comment. One of the republicans said that the PP was the rocky road to Socialism. While I don't think that governments are ever that good at running businesses, there are times when a government has to intervene in markets. And while I personally think that republican representative was talking nonsense about socialism, it should be clear to anyone with half a brain that the Free Market has not worked. my suggestion of acquiring the homes of people will please him even less. But only by helping the poor now will America avoid the future costs of having millions becoming homeless.

Additionally, while the US government talks a lot about the free market, recently they (The Bush Government) increased the subsidies to farmers growing corn and other agricultural support payments.

The reason why this matters is that if the US economy goes into a depression, along with the rest of the world, is that this depression will imped progress towards greening the economy. While any recession will slow down the dangerous emissions that are changing our climate, only with investment in changing the way we do things, can we work towards a better, more sustainable future.

One last bit of interesting news that I discovered while researching another topic relates to this. I was looking into the reasons why oil prices went up the way they did. When there was no rational reason for this. Also in a BBC report it emerged that one hedge fund lost one and half billion dollars when the price started to fall. The type of event that crocodile tears were invented for. But this got me thinking about who else was speculating on oil. It may not surprise you that it was the American investment banks. Lehman Brothers, Goldman Sachs et al who were playing the market at the time. Is that where all the money went? If they lost money, billions of it playing the commodity markets, then giving them more money, tax payers money, is like giving a gambler money and asking them not to go to the bookmakers.