The logic is that the bailouts to date have set up short sellers to know where to look for the next victim, sort of a domino theory of busted equity corporations. This probably has some merit.
However, if the formula shifts so that the US goverment simply buys out stressed assets, rather than backing a company whose liquid equity (and stockholder equity) has evaporated, that implies the equity holders of these giants are the ones being bailed out in the new formula twist, with a one for one shift of risk to taxpapers from those who exercised bad judgment. The other bailouts have left equity nearly worthless; the new one likely would not.
In other words, the people who took leveraged risk with other people’s money (loans) may transfer the downside risk to taxpayers, while keeping the upside for themselves.
The bill is estimated potentially in the many hundreds of billions; not really so bad, considering George Bush has the general fund borrowing $600 billion a year already. But it seems clear the government is guaranteeing that our “ious” are going to be good, meaning we’re not going to default on all those treasury (and Mortgage) bonds held by foreigners (no mention yet whether we’ll default on the IOUs held on behalf of our elders in the Social Security trust, but shouldn’t they get the same treatment, both legal and professional, as oil shieks and foreign central banks?).
Perhaps where there is risk, there is reward, and the stressed obligations themselves could prove to be more valuable with the backing of a patient and deep-pocketed US treasury. But on the other hand, it puts the treasury and Federal Reserve into a potential conflict of interest scenario in propping up over-valued assets or perhaps selling off undervalued assets due to political pressure (and opportunity).
I agree with Obama today, this isn’t a time for fear, it’s important to build confidence in the economy and the nation.
But it’s also a time to ask how the US treasury and the federal reserve got themselves into this situation, and exactly how much taxpayer money should be put at risk for what.