John Hussman weighs in on the latest emergency measures from the federal government (emphasis added in bold):
[F]rom early reports regarding the toxic assets plan, it appears that the
Treasury envisions allowing private investors to bid for toxic mortgage
securities, but only to put up about 7% of the purchase price, with the
TARP matching that amount -- the remainder being "non-recourse"
financing from the Fed and FDIC. This essentially implies that the
government would grant bidders a put option against 86% of whatever
price is bid. This is not only an invitation for rampant moral hazard,
as it would allow the financing of largely speculative and inefficiently
priced bids with the public bearing the cost of losses, but of much
greater concern, it is a likely recipe for the insolvency of the
Federal Deposit Insurance Corporation, and represents a major end-run
around Congress by unelected bureaucrats.
...
There is no doubt that the Fed also intends for the extra trillion in base money to end up as bank reserves. But think about what this move implies in equilibrium. The largest purchasers of U.S. Treasury bonds at present are foreign central banks. So what the Fed is really doing is printing enough money to crater the exchange value of the U.S. dollar, while leaving foreigners with a trillion dollars of savings that they would otherwise have invested in Treasury bonds, which they will now use, not to buy our lousy, toxic assets, but to acquire our productive assets, and at a steep discount thanks to the currency depreciation. So yes, the extra trillion in dollar bills will ultimately end up as bank reserves (and currency in circulation), but only by encouraging Beijing to go on a shopping spree to acquire a claim on our future production. Ultimately, funding the bailout of lousy assets comes at the cost of debasing our currency and selling our good assets to foreigners.
...
There is no doubt that the Fed also intends for the extra trillion in base money to end up as bank reserves. But think about what this move implies in equilibrium. The largest purchasers of U.S. Treasury bonds at present are foreign central banks. So what the Fed is really doing is printing enough money to crater the exchange value of the U.S. dollar, while leaving foreigners with a trillion dollars of savings that they would otherwise have invested in Treasury bonds, which they will now use, not to buy our lousy, toxic assets, but to acquire our productive assets, and at a steep discount thanks to the currency depreciation. So yes, the extra trillion in dollar bills will ultimately end up as bank reserves (and currency in circulation), but only by encouraging Beijing to go on a shopping spree to acquire a claim on our future production. Ultimately, funding the bailout of lousy assets comes at the cost of debasing our currency and selling our good assets to foreigners.
And for good measure, here's Tom Toles, who's all over this story...