A Bailout for Actual People?

What an idea! But bank analysts are noticing that unem- ployment tends to create liquidity problems for individuals. That in turn can further clog the financial system. Thus spaketh Richard Bernstein of Merrill Lynch: "The government can come up with any number of refinancing and liquidity plans, but households are likely to increasingly default on mortgages and other debts if cash flow is not stabilized via employment." The economy lost 265,000 jobs in October and 285,000 in Septermber, and nearly 1.2 million so far this year. Analysts are promising worse to come. So hey - should we spend some bailout money on creating jobs for people?

Time entertained itself with a new series called "Top Ten Scared Traders of the Week" (see above).

There are lots of good ideas for the milllon things that need building or rebuilding, starting with green housing and green transportion.

Bush's lame-duck Treasury department isn't likely to help with this. Everyone should read Treasury Secretary Paulson's statement from yesterday - a masterpiece of omnious vagueness about the dismal future. All the allocated hundreds of billions are going to scarily bad banks who made such major mistakes that their failure could create a giant sucking sound pulling who knows how many businesses, pension plans, bond funding programs with it. We don't know who owns what, so we don't know exactly why the top folks like Paulson are so freaked out.

Paulson announced expanding the capital injection program to include private partnerships. They, that is we, are going to have to offer massive sweeteners to get private capital into this mess - if they thought it was safe they would have gotten back in already. That's going to cost. Apparently something like recent declines in consumer spending has increased Treasury concern about non-business credit markets. Paulson writes,

The important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is providedthrough securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt.

This process of "securitization" refers to creating securities that are nominally backed by an asset like 10,000 houses whose mortgages were pooled into the security.

But Paulson's language is important. He could have said "Approximiately 40 percent of U.S. consumer credit has been provided through securitization of credit card receivables . . ." This change in English verb structure would identify securitization as a historically local and specific, and perhaps reversible practice. His text could then entertain the possiblity that securitizing everything from home mortgages to credit card balances was a mistake - the mistake that underlies the whole current mess. The reason that is was a mistake is that instead of spreading and "hedging" risk, securitization depended on a collective belief that the value of these instruments would be sustained (and usually grow very quickly) even though their contents, and thus their risk, was not possible to caculate. Once the collective belief faded (the market became "illiquid"), the risk of most of these investments became, practically speaking, infinite.

Yesterday's Greenspan-like tedium of utterance marked an important expansion of the bailout that denies the error of securitization.

we are examining strategies to support consumer access to credit outside the banking system. To date, Fed, FDIC and Treasury programs have been targeted at our banking system, and the non-bank consumer finance sector continues to face difficult funding issues. Specifically, the asset-backed securitization market has played a critical role for many years in lowering the cost and increasing the availability of consumer finance. This market is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards. This is creating a heavy burden on the American people and reducing the number of jobs in our economy.

With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment.

Paulson's plan is to revive the securitization market and not to end it, and to do this by luring private investors back with unspecified but - logically speaking - inevitably expensive incentives.

Why not do something a few people were talking about two months ago? Instead save the money for infrastructural rebuilding, China style - say $750 billion over 2 years? The jobs, the new consumer spending, the return to the housing market, would all do more for finance than simply propping a rotten market with bribes. And it would buy the country a new infrastructure rather than a bunch of toxic bonds.