The NYT reports that the Treasury Department is coordinating the creation of a bailout fund that will be financed by several major banks, which will act to support the market in some of the exotic investment vehicles that they developed over the last decade. This should be reported as what it is, a bailout by the nanny state for the big boys who lack the ability to get by on their own in a free market. The billionaire welfare boys will insist that this is not a government bailout because it does not use government money. They know better and so should the reporters who cover these issues. Suppose that I decide to take a bet by investing in cattle futures. i know that one of the risks I face is that there will be a market run on cattle, depressing their price for a long period of time, or at least past the date where I will be forced to unload my futures. Now suppose that the government steps in with major financial actors to ensure that there are no temporary plunges in cattle prices, in effect stabilizing the market. This hugely increases the value of my bet on cattle futures. This is exactly what the Treasury Department has done with the banks and their complicated investment instruments. The bailout may prove insufficient (these boys have shown a remarkable ability to be surprised by the weakness in the housing market recently), but it is nonetheless a government bailout that is of considerable potential value to the beneficiaries. Arguably this bailout is still in the general public interest, since stable financial markets (assuming that the assets are actually stabilized near their long-term price) are desirable, but it is a subsidy to the banks for which the public may want to be compensated. After all, if people can get so bent out of shape about a $500 a month TANF check to mothers getting welfare, how would they feel about subsidies worth tens of billions of dollars to the richest people in the country? But, the media has to first inform the public about this act of charity to the wealthy.
--Dean Baker
