Friday, September 26, 2008

Hocus Pocus Among Us (Emmett Harris)

Emmett Harris summarizes the financial situation quite well:

The magical money machine in Washington has produced yet another wonder of fiduciary slight of hand. This time it was Treasury Secretary Henry Paulson taking his turn in front of the crowd, inspiring awe as he pulled close to a trillion dollars out of his hat.

Like alchemists and sorcerers of old, Paulson wishes to conjure value from nothing. The aim is to transform tottering mortgage holdings into secure assets by merely changing what name appears at the top of the balance sheet unfortunate enough to have them as a constituent part. If the risk of mortgage defaults was there before, it doesn’t disappear because the pea has turned up under another cup. The risks now reside with the U.S. taxpayers, and the true magnitude will only become apparent over the next several years.

But the show doesn’t end there. The massive amount of new debt required to pay for the bailout has effects of its own.

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