I think Option 3 seems to offer the most long-term financial protection for the government and therefore think it should be favoured from a taxpayer perspective…is it really so complicated for a clever politician to explain?!

In response to James Kwak’s comment – I agree, the lack of transparency form the Fed about the composition of assets they are taking on is seriously concerning.

In response to Alamgir Kahn’s comment – I’ve heard a lot of people suggesting this idea of late but I’m not sold on it. We want people to spend yes, but don’t we want them to spend on discretionary items e.g. new car, tv ect?

With that in mind and the fact that handing out money to taxpayers is effectively a tax cut, don’t economists usually argue that tax cuts in recessions are ineffective because people simply save the money/use it to pay off debts NOT spend on discretionary items? (Hence why many economists favour increases in government spending rather than tax cuts).

By contrast, some of the (smaller) components are likely to see losses. I believe the Fed has already taken about $2 billion in losses on the $29 billion it took over from Bear Stearns, and I think it is highly likely that the guarantee in $306 billion in Citigroup assets will lead to losses (because those are probably the worst $306 billion in assets that Citi has).

Somewhere in the middle you have the Fed’s facilities to loan money to banks in exchange for collateral that may be shaky.

The most likely scenario is that the actual losses on this “$7 trillion” will be in the tens of billions, or worst case in the low hundreds of billions. However, I can’t say that with a ton of confidence, because the Fed has been stonewalling Bloomberg about the exact composition of the assets that they are taking on board. That lack of transparency I find indefensible and worrying.

But as a general point, I think it’s a mistake to conflate three types of things the government does that involve sending cash out the door: (a) buying (or taking as collateral) financial securities that are worth roughly the same as the cash being expended; (b) productive investments in our country’s economic capacity (research, infrastructure, education, etc.); and (c) pure short-term spending. You can think of (b) as capital investment and (c) as operating expenses for an ordinary company; (a) is what banks do. If you think of the government balance sheet the same way you would think of a company’s balance sheet, things make a lot more sense. There may be things to worry about – you can say that the quality of the assets the government is getting is poor – but it’s not as if the government is spending $7 trillion and getting nothing in return.

What is the evidence that supporting insolvent banks is less costly to society than allowing weak banks to fail, and stronger banks benefit? Further, are we all in? Is there any point at which taxpayers will no longer support prices?

The authors state, “In order to create long-term confidence in the banking sector, major banks should be required to raise a substantial amount of equity, either from the private market or from the government.”

It is hard for me to imagine that the banks could raise the amount of capital needed from the private sector in the current environment. Essentially we are talking about the government taking large common equity stakes in all the banks which participate.

Government purchase of large common equity in a bank will drive the price of stock down because of the extreme dilution. Pushing in the other direction would be the fact that the bank would be well capitalized. I would guess the net effect would be a drag on share price. For long term share holders this should not be a problem if banks are allowed to repurchase the stock in a few years.

Because the government would have majority ownership in the participating banks, I think it is unlikely that this plan could be implemented until it is absolutely clear that the financial situation has severely degraded. Only then will it become politically acceptable.

U.S. Pledges Top $7.7 Trillion to Ease Frozen Credit
http://bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home

Using that figure, we’re back at over $24K per US Resident.

Per your last comment Brad, I’m curious as to BaselineScenario’s fix fir stemming the tide of foreclosures. Furthermore, I’d like to get Baseline’s perspective on how the hand-outs we’re making now jive in any way with our (general) free-market philosphy.

The Paulson Plan: “Truly Idiotic”
http://blogs.wsj.com/deals/2008/11/25/the-paulson-plan-truly-idiotic/

“The problem is the completely opaque distribution of losses because no one knows how to value these mortgage losses. ***The way to solve the problem is from the bottom up***.”

The fundamental issue at stake is lack of public/consumer confidence in the current economic system and the failure of mortgage backed securites driven by the failure of indivuals to pay their mortages. Any solution must tackle these two issues and not the symptoms: reward banks for their risky behavior by giving them public monies–even with strings attached.

Banks took risks and must either face the consequnces (and be allowed to go under) or subject themselves to wholsale takeover by the government only to be broken up and re-sold. If they were “too big to fail”, they must be brought down to size both as mechanisms to punish and to keep them from endangering the US/world economy again.

I believe if the amount of money allocated for TARP had been instead distrubited to each US resident, we would all have an additional $24,000 in our pockets ($700T/300M). That would indeed kick-start the economy by both encouraging (massive) consumer spending and keeping from giving away our tax dollars to incompetents who are regularly supported by economists more interested in solving problems by treating symptoms than by tackling the root cause of the current crises.

Some SWFs were regarded as white knights earlier in the year, providing much needed capital. To wipe them out in every bailout would effectively be telling them to stop providing any capital to financial institutions here. To protect just the SWF’s share, on the other hand, would also be politically untenable from a domestic standpoint.