So what does Paulson's plan do?
The banks will have sold their bad assets at above market prices. This gives them capital, boosts their credit rating, and boosts their share price, all without helping anyone but themselves.
Now, do you really think they are going to take all this new cash and lend it to a contracting main street at low rates?
I think it is going to put additional pressure on short term loans that businesses use to fund normal resupply operations.
The only reason there is any working capital right now is because the t-bill rate is so pathetically low that there is still some inflow to the money market. The money market buys commercial paper which the banks issue to make short-term loans to companies with solid credit lines.
The credit lines are not actually tapped; the companies essentially dip into the money market pool for 30 days or so, up to 270 days. This saves the bank from having to use its own capital to loan to a company that it has extended credit to.
If the money market pool is dried up, then there is a problem and the bank has to use its own money for the loan. This would make the bank nervous, and regardless, tapping into a line of credit can make others nervous too, such as credit ratings companies. At no fault of the company, their credit rating could be lowered, and that will cause their cost to borrow to go up and their stock price to go down, and they haven't done a damn thing.
What could cause the money market to contract?
The treasury is not going to just turn on the printing presses yet. They will buy up these troubled assets from banks by auctioning more treasuries.
In order to attract buyers for these treasuries, they will have to look more attractive than they do now.
The more attractive they look, the less attractive the money market looks.
You will have the treasury raising money to buy bad assets from banks, who will turn around and buy treasuries with their new cash.
The banks will be circulating money in the back of the building, but at the window in the front, things have actually become tighter.
The companies who used to get their short term loans for about the cost of insuring their line of credit, will now find themselves possibly having to tap the line of credit and that will freak everybody out.
The bank's own desire for better returns and better safety might end up limiting the ability for businesses to borrow, which will hurt their ratings, which make their costs to borrow that much more.
This will have done nothing to free up credit. It will only trickle up.
The banks will have sold their bad assets at above market prices. This gives them capital, boosts their credit rating, and boosts their share price, all without helping anyone but themselves. They have not contributed to the economy, but hurt it. That will make them want to lend even less.
Paulson has rationalized that he cannot save the entire economy, so he will save the banks at the expense of making the recession or depression longer for everybody else.
He is gone in 4 months, and he is going to let the next treasurer make the decision to turn on the printing presses.
We're fucked.
Where am I wrong? Am I missing something fundamental?