Saturday, October 11, 2008

It's OK now

So now Paulson says it's OK for the Treasury to buy shares in the banks. The auctioned buy up of toxic waste, which was the strategery that was presented with the bailout bill, has now been superseded. But the underlying philosophy remains the same, the government provides the money but the power in the banks remains with their management.

As far as I can tell, only Britain's move will give them the power to actually force banks to loan to each other, which is the point all these interventions. Merkel and Sarkozy seem to have agreed to the US strategy of hoping that the sheer weight of the dollars being dumped into the banks coffers will make them start loaning.

All the measures used so far have been totally inadequate to the problem. The next measures seem to fit into the same pattern, unqualified optimism that 'doing something' (dumping liquidity) is going to make it all OK. But it didn't and it won't. The tens of trillions still out there in the CDS are going to have to be dealt with first (which can't be done except by cancelling them), or the governments are going to have to take control of the banks, which they'll have to do anyway if the CDS are declared null and void. Not much of a choice, the sooner it's faced up to, the better.


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