In case we needed further proof that the government will do whatever is necessary to bailout Wall Street, they just gave it to us with the measures imposed early this morning, along with the additional ones they likely will impose. The first measure taken was the temporary banning of short selling on financial stocks. This was aimed at calming the markets and preventing the runs on stock that we saw with Lehman and AIG. The next move they made was to insure money market holdings. Several major money market funds had already broken the dollar threshold, and others were getting dangerously close. Naturally, this created fear among investors and the government wanted to ease those fears. The biggest measure, though, is one that has not been finalized, but they are working diligently on that. This measure would involve the purchasing of the toxic debt held by financial institutions.
For a country that says we believe in free markets, we sure aren’t showing it with all the recent moves being made by the government. While the short sale banning doesn’t really cost taxpayers anything, it does represent manipulation of the markets, because they are not being allowed to run their natural course. I love this line by SEC Chairman Christopher Cox, which was reported by the Associated Press (AP): “The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets." This statement was in response to the short sale ban. Don’t you like how he says they are committed to using every weapon to combat against market manipulation that threatens investors and capital markets? How are they going to do that? By manipulating the markets, of course. I’m not sure how they classify short selling as market manipulation, but apparently being smart and trying to make money off this financial disaster we call an economy isn’t allowed anymore.
The money market guarantee is going to be capitalized with up to $50 billion according to the AP, and will act similarly to the FDIC. Many of these money market funds held debt from Lehman, AIG and other financial firms, from which the problems are originating. We’ll have to wait and see how this plays out, but at this point it can only cost us $50 billion.
The big one we have to watch out for is this new idea that we should buy up the toxic debt held by financial institutions. Call me crazy, but why should taxpayers take on this liability when it is exactly what is destroying all these institutions in the first place? "This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them,” said Anthony Sabino, professor of law and business at St. John's University in an AP article. Why do we want to cleanse these banks at the expense of taxpayers? Paulson (the brainchild behind this idea) even goes so far as to say that it is in the best interest of taxpayers. I don’t know about you, but I’m getting awfully tired of hearing that as our nation goes deeper and deeper into debt and our future financial picture looks grimmer every day. Paulson was quoted by AP as saying, in regards to the cost of his plan, "We're talking hundreds of billions."
Now that we have nationalized Freddie and Fannie, taken stakes in the largest financial insurer, bailed out some other financial institutions and will possibly be buying up hundreds of billions in toxic mortgage debt, I think it is safe to assume that we are taking on too much risk. If this mortgage paper continues its death march against those holding it, if the real estate market continues to decline, where does that leave us? In complete and utter financial ruin, that’s where.