That makes him a traitor to libertarians, doesn't it, Spot?
Nah, grasshopper, remember: it's privatize the gains and socialize the losses. And the Perfesser put up a post today defending the bailout and minimizing its consequences:
First off, let's dispense with the idea that the Paulson plan is a "$700 billion bailout." It isn't. We are borrowing $700 billion from world markets at the rates the U.S. government gets, to buy mortgage-backed securities from banks that want to sell them.
Well, that's different Spotty! How can you argue with that? We'll just borrow the money.
Which will probably drive up the cost of everyone's borrowing, even for the federal government itself. And when the Perfesser says "world markets," he means the Chinese, and maybe a Saudi royal or two.
But Spotty, Professor Banaian says we'll be able to sell the assets we buy later, and we'll get some money back.
Right grasshopper, but under Treas. Sec'y Paulson's plan, the federal government buys assets at a price that reflects a "hold to maturity" price. In other words, there is assumed to be no defaults and no credit risk. That's a pretty creamy price. Those are the kind of assumptions only an economist could love, and apparently the Perfesser does:
The federal government, by dint of its preferred position in borrowing on international markets, can finance the gap between the two prices [described in the data-free graph provided with the text] without fear of having to liquidate its position. The banks, because of the precautionary demand for excess reserves, are induced to liquidate earlier and, in part thanks to Sarbanes-Oxley, have to mark their assets to market not only if they liquidate but if their neighboring banks do so.
Sometimes, the market price isn't the right or real price, according to the Perfesser. Instead of the price established by a willing buyer and a willing seller, the Perfesser thinks the price should just be what a willing seller can get from a bunch of feckless politicians.
It's just socializing the losses.
But Spotty, doesn't the Invisible Hand know what the price should be?
Ask the Perfesser, grasshopper. Apparently, the answer is "yes," except when it is inconvenient to People Who Matter.
Another assumption that the Perfesser makes is that the cost of the bailout is the difference between what is paid for the assets and what is received for them, plus the carrying cost. This is an unknowable number, but it neglects the pressure on the cost of borrowing, as alluded to earlier, the inflationary impact and the downward pressure it will place on the dollar - which is already in the tank - in effect raising the price of oil and everything else, and the reduction of discretionary non-defense spending even further.
It is also pretty rich to argue that the financial community should be essentially held harmless (except for handing out a few warrants to the government) while saying to defaulting homeowners, "Too bad, you made a bad decision. Let's have some personal responsibility." What defaulting homeowner doesn't say, "Just give me a little time to get back on my feet and for the real estate market to recover." (It's unlikely to do that for the foreseeable future, but nevertheless.)
Do you know what happens when you lose you house in foreclosure, grasshopper?
No, Spot, I don't.
In virtually every case, the homeowner loses whatever equity or investment in the property s/he had. That's what the big boyz are trying to avoid now. If they get away with it, both major political parties should go the way of the Whigs. As Prentice Cox, a law professor at the U. of Minn. says, the Paulson plan is like giving restitution to the crooks and putting the victims in jail.