Vic Socotra

24 March 2009

Confidence Game

(FDIC Chair Sheila C. Bair)

It is all about how we feel when we get up in the morning. The Mexicans have brought a gigantic machine to the grounds at Big Pink. It looks vaguely like a Tyrannosaurus Rex, and eats old asphalt.

We are going to re-pave the parking lot, and when the three-day project is done, we are going to have black-top as smooth as silk, and I am going to be able to go back to roller-blading around the building now that it getting warm without a care in the world.

It is a little out of phase- I don’t know why we just re-painted the lines on the parking spaces if we are going to chew it all up, but maybe it kept some people working. Wasteful or not, we are feeling pretty good today.

Positively vigorous, in fact. It is a just a matter of confidence, as Bernie Madoff could tell you. All you have to do is convince everyone that things are going to be fine and things will go swimmingly- for a while, anyway. The plan doesn't address health care or education or energy, which are the other elephants in the room, but hey, you have to shoot the elephant closest to the sled first, you know?

I'm confident this morning like Wall Street, since there is a new three-part Public-Private Investment Program that is going to offer private investors vast amounts of cheap, taxpayer-supported financing for every dollar we put up of our own money.

Wait a minute- my confidence faltered here a bit- the other part is- or was- our money, too. Oh well. Have to pay the piper, I suppose.

Can’t think that way. It will shake my confidence. The thing that struck me about the plan is the central role of Sheila Colleen Bair. She is currently the most powerful woman in government as the chair of the Federal Deposit Insurance Corporation.

Forget about Tim Geithner. This plan may save his job, since the usual suspects have been crying for his head lately. I have made no secret of my admiration for Ms. Bair, who I considered way more powerful than the Secretary of State, and definitely hot.

Sheila is going to oversee a program that will offer up bundles of toxic mortgage debt for sale to the highest bidders. I don’t know how that is supposed to work- the closest I can get is what the old Resolution Trust Corporation did to deal with the wreckage of the Savings and Loan collapse. That was the real-life drama where George Bailey got run over my his depositors, and did not save his financial institution.

The difference is one of scale. This is, like, huge.

The trick to this one is to get people to offer up their hoarded dollars. In order to do so, Sheila is going to lend up to 85% of the final winning bid as a loan, and then cover half the remaining amount, dollar for dollar, to give some confidence to the private investors.

The Treasury is also going to finance a program to purchase mortgage-backed securities, which are those toxic bonds that have been pulling down the balance sheets at the banks, and naturally the market felt invigorated.

Those two legs of the stool are worth somewhere between a half and a full trillion dollars, depending on how you account the left-over loose change from the Troubled Asset Relief Program. No one is really sure, any more than the Congress was when it passed the legislation.

The kicker was the third leg of the stool- and I like this one already since it made the Chinese nervous. Anything that does that has got to be good, right?

As conditions warrant, the Treasury could pump another trillion more into the effort through something called the Term Asset-Backed Securities Loan Facility, or TALF. I like things with the word "term" in them, since it implies it will end some day. Like Term Limits. But I digress.

Tim and Ben Bernanke over at the Federal Reserve cooked this one up, which seems like a great idea. Originally the program was supposed to help originate new consumer loans, but the announcement yesterday that they were putting the program on steroids by expanding it to include commercial real estate portfolios.

Spending our own money on this is what makes the Chinese anxious, since they will not have strings on this debt. They must be itching to buy all those strip malls, and could even buy more T-Bills to keep their leverage on us. I'm confident that this is a great strategy

I’m equally confident this is going to help turn things around. I read over the weekend that we could spend as much as five trillion and only incur an annual debt payment of around $400 billion dollars- the equivalent of the old Defense Department, just until we pay off the principal we are printing up in Ben’s back office.

I can’t keep track of the trillions, and don’t know whether to count the first trillion against the bad Bush Debt or the new good one. The numbers are too squishy really to keep track of. But it seems like we are committed to at least five trillion already, and more power to them. With luck, we will get the wheels turning again, and be back to spending privately as happily as we are spending publicly.

I’m ready to go on that. I am so confident that I am not going to pack a lunch today.

I just wish Sheila Bair was going to be running all of this. But what the hell. When lunchtime comes around today, I am just going to go out and buy somethinghot.

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