Akkam’s Razor

Make no mistake, it is coming. They are clearly in panic mode [nakedcapitalism via Economist's View]:

“We have lost control,” said Hale, quoting [Federal Reserve Chairman] Bernanke. “We cannot stabilize the dollar. We cannot control commodity prices.”

(Please note that they really could never control it anyway, regardless).

The NYT says:

The head of the Treasury and the Federal Reserve began discussions on Thursday with Congressional leaders on what could become the biggest bailout in United States history. While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.

And WaPo:

Paulson and Bernanke presented a “chilling” picture of the state of the financial system, according to a participant in the meeting who spoke on condition of anonymity. Lawmakers were told that the consequences would be grave if they failed to pass legislation by the end of next week. Sen. Harry Reid (D-Nev.) and Rep. Nancy Pelosi (D-Calif.) committed to meeting that deadline.

The plan involves using hundreds of billions of dollars in government funding to buy bad loans, leaving banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.

After the meeting, Paulson told reporters the proposal was “an expeditious solution that is aimed right at the heart of this problem.”

Also last night, the Fed was considering offering backing for money-market mutual funds, which have had massive withdrawals in recent days, said a source familiar with the discussions.

From the WSJ:

At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said

Another proposal would be the creation of federal insurance for investors in money-market mutual funds, coverage akin to the insurance that currently safeguards bank deposits. The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a sign of how the crisis is spreading to Main Street. There is $3.4 trillion in money-market funds outstanding.

In addition, the Securities and Exchange Commission proposed a temporary ban on short-selling on 799 financial stocks. The ban, which is effective immediately, is set to last for 10 days, but could be extended for up to 30 days.

What is the cost to you and I, the taxpayer? From Kenneth Rogoff in the FT:

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

There are still plenty of questions, however, summarized at Economist’s View. If you think that this won’t effect you, I have a Bridge to Nowhere to sell you (via taxgirl):

In light of the recent government bailouts of several high profile companies, some pundits are rushing to attempt to correct the idea that taxpayers are paying the tab. Some analysts are trying to push the idea that the billion dollars’ worth of bailouts are merely structured as loans or investments by “the government” and thus don’t cost taxpayers anything… which is fair enough except that “the government” isn’t some enigmatic entity, nor is its funding. Government dollars are largely tax dollars. They belong to you and I. Our tax dollars are footing the bill for the bailout whether or not you believe that those dollars are actually at risk (and I believe that they are).

And yes, I realize that the cash that is generated to fund these bailouts is not funded by an immediate tax increase. No one will come knocking on our doors tomorrow looking for more cash. I know that most of this type of funding comes from money in the government’s portfolio (um, guess where most of that comes from?). And I realize that doesn’t immediately add to the deficit.

But just as when you or I raid our reserves, less money in the bank means less more for both existing and unexpected expenditures. What happens when you can’t pay your bills? You either search for ways to generate more revenue (raise taxes), borrow more (adding to the deficit) or you make cuts. All of those options affect taxpayers.

Comrades, the free market is dead. Long live the USSRA!