Does this sound familiar?
An unforeseen crisis strikes the nation suddenly. Multiple shocking events occur within a short period of time. Millions of lives are disrupted. The country is on edge. Panic ensues unabated for days. Unprecedented actions are taken. Bipartisanship is the watchword, unity is demanded, and dissenters are warned that deviating from a quickly drawn up agenda is irresponsible, and un-American. Invisible problems loom large. Principles are discarded. Rules are thrown out the window. Press conferences are held with little time for questions. Our very survival is staked upon the outcome of the crisis. Questioning the need to take a different course is viewed as either treasonous or deranged. A few members of the cabinet, and a few agency heads, commiserate largely in private, and announce without equivocation the course we must take, presenting few if any alternatives . . .
. . . and warning of disaster if we do not do what they say. Unimaginably huge amounts of money are committed to the task, with little or no thought given to the prospect of success, the availability of alternatives, or what the money will be unavailable for if it is spent as demanded. Predictions of imminent doom shine from every TV set, and the public, overwhelmed by the size and severity of the problem, is frozen in its tracks.
The current fiscal crisis may not be exactly like the run-up to the war in Iraq, but the similarities are positively chilling, right down to the $700 billion-$1 trillion that it is likely to cost.
By not standing up to the pressure being imposed on them the Democratic leadership is going to find the agenda Obama and Biden would have had adopted comprised before the election even occurs--for a rescue plan that not only isn't a guarantee to work, but as Joe Nocera wrote in the New York Times yesterday, is at best a crap shoot:
But how is the government going to assess these securities — and what price will it pay for them? In many cases, these securities aren’t being sold because they are still overvalued on a firms’ books. That is, their mark-to-market price is unrealistically high. Will the government buy it at the too-high price? If it does, the firms won’t have to take additional write-downs — but it will constitute a huge, unjustified bailout of Wall Street. (More moral hazard.)
But what if the government drives a hard bargain, and gets the securities for what they are really worth — 20 cents on the dollar, say, instead of 50 cents? In that case, the firms would have to take yet more enormous write-offs, which would further damage their balance sheets, and they would have to raise billions more in capital. Maybe the removal of these bad assets would allow the firms to raise the capital. But maybe not — meaning one or more could conceivably have to file for bankruptcy, creating yet another spasm of financial turmoil. It’s a huge roll of the dice by the government.
Finally, there is the question of how much it will ultimately cost. “Institutions so far have written down $550 billion globally of bad debt,” said Daniel Alpert, managing director of Westwood Capital. “We think that when you add up all the problems in the residential housing market still to come — further erosion of housing prices, mortgage foreclosures and so on — we are going to need another $1 trillion of write-downs.”
In other words, for all the toxic securities that Wall Street has acknowledged holding, there will be yet more mortgage-backed paper that will go bad as the housing market continues to fall. As much as we all hope the worst is over, it’s probably not.
This problem didn't arise last Sunday. See executive summary of a May 2008 Brookings Institution Report entitled The Great Credit Squeeze
There will be plenty of time to blame the culprits responsible for all this. But a lot of further damage can be done in the 4th quarter of the year if over the next three days Congress completely cedes control over the deleveraging of America. Before we give Henry Paulsen a $700 billion checkbook to use as he pleases, we may want a little more information about, and a few more strings on, how he spends the money.
Fool us 237 times, shame on them; fool us the 238th time, shame on us.