Recovery or double-dip?

The bail-out of Wall Street will merely compound the problems that got us here, because the program leaves the banks free of the cost of their junk assets while depriving the buyers of those assets—that’s us, the taxpayers—with any of the benefits of ownership. As planned, the bail-out will simply transfer paper around. That, my friends, is the recipe for a moral hazard. But not the moral hazard of government intruding in markets, rather it is the temptation on bankers’ parts to do it all again, because they are insured against the loss. Or, more to the point, they will not have paid the price for their misdeeds this time around.

Democratic calls for concessions by the banks, such as restrictions on CEO salaries and assistance to homeowners, while these are needed, will not temper the market’s desire for huge returns. They are band-aids on Godzilla, which makes the monster a little less ugly, but doesn’t change its appetite for destruction. The $700 billion+ the already expended $300 billion (on AIG, liquidity lending by the Treasury to the Fed, etc.) we’re spending is merely going into the accounts of the people who, feeling no limit to their tolerance for risk, ran the economy aground last week. The Bush Administration was part of that wretched crew, not its saviors. In fact, they are merely greeting their beleagured friends at the dock with buckets of money to hand out to the “survivors.”

In reality, the survivors of the economic meltdown haven’t been exposed yet. Fired bankers will go home and relax, because they have a lot of money. The rest of the country is simply waiting for the glacial pace of erosion to accelerate into their lives like a continental flood when the ice sheet disintegrated. Since those folks are now going to spend $1 trillion to “save” some banks from bad paper, which carry virtually no upside and a lot of risk that the paper will become valueless, the severity of that eventual economic cataract will only get worse.

On the other hand, if that $1 trillion represented real value, which the government could then sell at some future date, taxpayers would, at minimum, have some influence over the disposition of all the property that banks acquired during this spending spree. We’ve heard so much about “the ownership society” over the past seven years. Why, now that we’re dishing out another trillion dollars, are we not getting some ownership, as the government did when it bailed out AIG last week?

Everyone is expecting a recovery now. The market was disappointed today, to the tune of 300 points, that people are debating the terms of the bail-out before simply handing over all that cash. How can we be so presumptuous? Granted, the bail-out is necessary, but not necessarily in the form it takes under Henry Paulson and George W. Bush, a banker and a, well, “executive president,” who are bailing out their base.

If the bail-out goes ahead as planned, I’d hold on tight for a double-dip, when Wall Street comes begging for more help.