Capitol Hill beats physicists to create black hole

[sniglet]

The more I hear about the US government plans to accumulate bad loans and "toxic" assets from financial institutions the more it sounds like an astronomical phenomena: a black hole.

Not only is this new bail-out entity supposed to suck any tainted assets within its gravitational pull, but these assets will somehow be sucked into an alternate universe, permanently removed from human contact. It is not enough to just buy these assets as above market prices to prop up the financial system, but it is also critical that the underlying assets (e.g. foreclosed homes, etc) never come on the market to be sold at cut-rate prices. Doing so would drive down other asset values which would in turn make even more assets insolvent (continuing to undermine the health of the financial system).

This is NOT a Resolution Trust Corporation 2.0. The intent of RTC 1.0 was to quickly dispose of seized assets in an orderly fashion. The purpose of this bail-out is to magically transmorgify vacant real-estate into nothingness.

This sounds very much like a black hole to me. Perhaps the $700 billion going towards the bail-out will result in the creation of the biggest under ground super-collider ever seen, running from Maryland and Pennsylvania to DC and Virginia. Who would have thought our politicians would beat all the world's physisicts in creating a black hole?

[davidlosh]

Good Morning!
This may be a better place for this discussion.
You're correct about banks, or lenders, holding asset value. What the government is doing is different than buying loans. They are creating confidence. They are showing they will do something.
The mortgages or loans secured by Real Estate are an end result of larger credit issues. Unsecured credit card debt has been converted or consolidated into home refinances, and second mortgages. It seemed like a safe bet, securing debt with the family home.
The builders provided jobs, bought construction supplies, durable goods, and sold the end product to consumers who in turn decorated, and bought furniture. Then they bought cars to put into the garages.
Let's take a step back and look at the larger picture. Lehman Brothers, Merril Lynch, and AIG are income generators. They sell financial services, stocks, bonds, and gold. The mortgage loans were the end game, it's the credit market that's in trouble.
Those home loans are based on high prices, true, but the credit cards are also maxed out. Consumer confidence is waning. Wages have stayed about the same, so all of those consumer goods must have been bought on credit. Without credit cards how will consumers pay for heating oil this year? How about the Christmas shopping season?
If you take it a step further small businesses have also expanded on credit. That all important service sector economy has to pay down debt in a climate of declining consumer confidence. How will small business stock shelves with Chinese goods without credit? With tight money who will buy frivolous goods?

[jillayne]

Paul Krugman says "No Deal."

"I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.
As I posted earlier today, it seems all too likely that a "fair price" for mortgage-related assets will still leave much of the financial sector in trouble. And there's nothing at all in the draft that says what happens next; although I do notice that there's nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?"

More here:
http://krugman.blogs.nytimes.com/2008/09/20/no-deal/