Buffett’s Bailout Blackmail

"

From the Wall Street Journal:

"If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will "get killed, and so will all our other investments.""

This article and others explain how Buffett stands to make a large profit if his deal to buy Goldman goes through. Fine for Buffett to make a profit; he does that well. Not fine for that profit to be created by an expenditure of government funds. It's too bad about his other investments, but we don't need to bail them out either.

Apparently the bailout deal is not yet done; the people's House of Representatives may stand firm against the mandarins of the Senate. Actually it's the way the system was supposed to work – good job, Founders. All those representatives are up for reelection this Fall; their mail is almost unanimous against the bailout and it's real mail and email and phone call from real angry people – not something generated by pressure group bots. For someone up for reelection the public outcry may be drowning the din of the big contributors calling to they may not be able to pay the next installment on their contributions if they don't get bailed out.

Letters and calls today will make a difference.

But what about the claim that we'll have a depression if this bailout doesn't pass? I'm sure some of the people making the claim believe it; even the fact that the claim has been made will intensify a short-term negative reaction in markets if the bailout bill fails. I can't disprove this. I also can't disprove the theory that, if all say "OM" at the same time, markets will miraculously recover.

It's up to those who make such scary statements and propose such expensive solutions and advance the proposition that we have to bail out the super rich to save ourselves to prove these statements and propositions. That hasn't happened. The excuse for not "proving" that there were weapons of mass destruction in Iraq was that we couldn't compromise intelligence sources – pretty good excuse. Now we're being asked to risk as much as we spent directly on the Iraq war but all we're getting to justify both the expenditure of cash and the enormous damage that a bailout'll do to the principles of free enterprise and fairness is inchoate fear and threats by banks to shoot themselves if we don't pay ransom.

What should the government do?

Build up the Main Street defenses. We've already re-nationalized Freddie Mac and Fannie Mae to keep mortgages flowing. The quick move taken to stop a panic in money market funds was a good one. Make sure there is a standby appropriation for Federal Deposit Insurance. Get some massive public investment underway in thing there ought to be public investment in: the electric grid, maybe broadband, government energy efficiency, bridges and roads. Banks are not public infrastructure; they're not where we ought to be investing public money.

Meanwhile, the real economy is working towards its own cure. People are breaking up their big deposits and CDs into $100,000 chunks covered by the FDIC. The big deposits tended to be in big banks; the chunks get distributed to local and regional banks (because there are more of them). Money is flowing but not the way Wall Street wants it to. The proposed bailout reverses the flow and pumps money back uphill to Wall Street.

Housing prices were down again last month; but lower prices are bringing buyers back into the market (surprise). The inventory of unsold homes was also down significantly for the month. Artificially keeping prices high doesn't end the pain from a burst bubble; it prolongs it.

Oil imports are down and gasoline prices still falling. Sure, we cut back out of pain but we cut back.

Now Mr. Buffett may need to cut back a bit, too. We shouldn't bail him or the rest of Wall Street out; we shouldn't let ourselves be panicked into a bailout. The stock market's going to try to scare us this morning with a swoon; we shouldn't buy the histrionics. The real buying opportunity is if the bailout fails; we can benefit from Wall Street's panic and buy into an economy and a country strong enough to withstand the anguish of its superrich.

It's time to just say NO.

Two other differing views from people I respect:

Fred Wilson is persuaded that we do need some form of a bailout but wants to see real upside for us, the investors in the bailout.

Andy Kessler who is a cynic and knows a lot about financial markets thinks that we the people will make a killing on all this bad debt, that "Paulson's Folly" will be a bonanza.

Comments

[ellen]

My friend bought a building at auction 4 months ago yet he hasn't acutally passed papers. In his small way he is trying to help the economy and also get a good deal for himself. Why is it taking 4 months for the bank to pass the property on to him and close? Are they deciding that a bailout and writeoff will get them more money than my friend's good earnest cash?
Things were crazy in 1987 but not like this. This has really become a "Liar's POker."

[J D]

END THE FED!

The End Begins November 22nd

Every Fed Bank. Every Fed Office.

38 Cities. One Purpose.

END THE FED!

http://www.endthefed.US
http://www.endthefed.blogspot.com

[Nancy]

I vote for $175,000 per adult and the rest of the money ininfrastructure investment. Heck, make it just a total of $500 B to start.

[CRose]

Or take it and pay for my next chemotherapy dose (OK, 1/100th of it). Sorry about that... chemobrain. I wonder if remedial math would cure cancer?

[Pete]

CRose - if that plan is enacted, I suggest you take your $425 and sign up for a remedial math class.

[CRose]

I received this as a joke, but in my simplistic mind, I wonder if something like this would work. It could start the recovery from the grass roots level on up. Why wouldn't it work?

I received this from a friend of mine. I was in tears laughing.


"Hi,

I'm against the $85,000,000,000.00 bailout of AIG.

Instead, I'm in favor of giving $85,000,000,000 to America in
a We Deserve It Dividend.

To make the math simple, let's assume there are 200,000,000
bonafide U.S. Citizens 18+.

Our population is about 301,000,000 +/- counting every man, woman
and child. So 200,000,000 might be a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a
We Deserve It Dividend.

Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage – housing crisis solved.
Repay college loans – what a great boost to new grads
Put away money for college – it'll be there
Save in a bank – create money to loan to entrepreneurs.
Buy a new car – create jobs
Invest in the market – capital drives growth
Pay for your parent's medical insurance – health care improves
Enable Deadbeat Dads to come clean – or else

Remember this is for every adult U S Citizen 18+ including the folks who
lost their jobs at Lehman Brothers and every other company that is cutting
back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it...instead of
trickling out a puny $1000.00 ( "vote buy" ) economic incentive that is
being proposed by one of our candidates for President.

If we're going to do an $85 billion bailout, let's bail out every adult U S
Citizen 18+!

As for AIG – liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't.

Sure it's a crazy idea that can "never work."

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than I do the geniuses at AIG or in Washington
DC.

And remember, The Birk plan only really costs $59.5 Billion because $25.5
Billion is returned
instantly in taxes to Uncle Sam.

Ahhh...I feel so much better getting that off my chest.."

[Damon]

There is too much talk going on about "turning a profit" (Fred Wilson, et. al). Profits belong to those who make wise decisions. We have not made good decisions, and won't receive any sort of profit. What we're talking about here is, at its heart, a costly measure to allow the nation to de-leverage itself in an orderly manner. That requires pain.

The debate should be centered around the methods we use to navigate the short-term chaos, not attempts to generate governmentally forced profits. It is wishful thinking to think that a handful of firms on Wall Street will alone suffer the consequences of widespread disregard for the risk of owning real estate. We will all suffer. The question is, will we break the bank in the process, or will it be a smooth downward glide? If we break the bank, I think more of us will suffer to a greater degree.

The fist step to recovery is admitting you have a problem.

[Ryan Graves]

Great post Tom.
The Gov. didn't make these types of investments in the past so I don't see why we think that it could turn out profitably now? I do like Fred's advice however, to treat this "splurge" like a venture deal...get in early with a "seed" stage $1B-$3B, see where it gets us, then decide on the rest. To bad it's not likely that congress approaches this mess with such logic.

http://ryanagraves.com