The outrage of all outrages in the last 18 months is the complete protection of bank and corporate bondholders at taxpayer expense. These bondholders lent money to reckless banks and corporations who bet the farm on the premise that house prices would always go up. And they lost.
Now, thanks to bailout nation, taxpayers are on the hook for trillions. Bondholders, meanwhile–the folks who loaned the banks the trillions they have since vaporized–have lost next to nothing.
Today’s Treasury plan is just more of the same: A byzantine public-private partnership that will put $1 trillion of taxpayer money on the line so bondholders won’t lose a dime.
Fund manager (and PhD) John Hussman explains the end game of this current policy:
[T]he U.S. currently has a private debt to GDP ratio of about 3.5, which is nearly double the historical norm, at a time when the underlying collateral is being marked down easily by 20-30%. That implies total collateral losses of 70-100% of GDP; a figure that includes not only mortgage debt in the banking system, but consumer credit, corporate debt and so on.
The holders [of this debt] are not just banks, but insurance companies, pension funds, foreign lenders, and others. Even so, there is no way to prevent huge, ongoing losses, because the cash flows off of these assets are not sufficient to service the debt. The only question is whether the bondholders appropriately bear those losses, or whether the public bears them inappropriately. A continued policy of protecting all of these bondholders would eventually require U.S. citizens to be put on the hook for something on the order of $10-14 trillion. We are nowhere near the end of this process.
We simply cannot make these bad investments whole unless we are willing to hand the next 10-20 years of U.S. private savings over to the bondholders who financed reckless lending. Those bondholders should, and ultimately must, take a portion of these losses, and debt obligations will have to be restructured. Wall Street has become a bunch of Tooter Turtles crying “Help, Mr. Wizard!” because it got so used to Greenspan bailing everybody out. But that constant attempt to avoid inevitable private market losses is what allowed this problem to become so noxious. It will continue to do so until we collectively scream loud enough for Congress to say on our behalf, “Enough.”
The sideshow about bonuses at AIG simply underscores how little these bailouts have altered the fundamental behaviour of people throwing around other people’s money with nothing at risk themselves. The bondholders of poorly run financial companies should lose because they deserve to lose. The American public does not.
Well said. Will someone please tell Obama and the Treasury Department?
Business Insider Emails & Alerts
Site highlights each day to your inbox.