The Entire Premise of the Bailout Plan is False

Today, Congressman Defazio said that the Paulson bailout plan won’t create liquidity. He also referred to reports that banks are reducing their loans to consumers and to each other in anticipation of the bailout bill passing.

What’s he talking about?

A professor of economics and an expert in liquidity explained:

“I suspect that part of what we’re seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,” said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory.

As a prominent economist says:

“No one is lending to counter-parties as no one trusts any counter-party (even the safest ones), and everyone is hoarding the liquidity that is injected by central banks.”

And some savvy financial writers are saying that Wall Street is borrowing billions of dollars through the Feds Open Market program and the parking it in commercial money market funds and CDs.

This is a repeat of the 1990’s Japanese financial crisis. Specifically, when the Japanese government threw cash at their big banks in the 90’s, the banks just horded the money instead of using it to restore “liquidity”.

The entire premise of the bailout plan – that it will unfreeze frozen credit markets – is false.

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