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Saturday, October 11, 2008

The great heist

Taxpayers will pay for bailout failure | coloradoan.com | The Coloradoan,



Is Henry Paulson a crony communist or a businessman? The answer could be the difference between economic disaster and recovery. Understanding Paulson's role in stopping - or fueling - the credit crisis requires a review of two axioms from Economics 101: 1) A credit crisis occurs when banks stop lending, and 2) The amount banks can lend is a multiple of the capital in their vaults. Therefore, ending a credit crisis means prompting new lending - and that means maximally increasing bank capital. Enter Paulson, the former Goldman Sachs executive and Treasury secretary. The bailout he fearmongered through Congress aims to waste almost a trillion taxpayer dollars buying banks' bad mortgages - a scheme all but ensuring a disastrous outcome. If Paulson pays banks exactly what their mortgages are worth, he will not increase banks' capital (or their lending ability) - he merely will convert one asset (mortgages) into another (cash), making no impact on the credit crisis. If, to protect taxpayers, he buys mortgages at lower prices than banks list them, banks will have to write down their capital and consequently contract lending - and the credit crisis will worsen. If Paulson overpays for mortgages, he may marginally augment bank capital, but also incur massive taxpayer losses when he later resells the mortgages at their real price.

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