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Dur­ing one of my many high-minded (ha!) dis­cus­sions with Tommy

V for Ven­detta rip

, an inter­est­ing view of the U.S. fin­an­cial bail­out emerged.

One of the fol­lies lead­ing to the credit crunch was the habit of tak­ing oth­er­wise bad debts, and repack­aging them into sup­posedly AAA secur­it­ies. The vast num­ber of these secur­it­ies float­ing around the fin­an­cial mar­kets, and the inab­il­ity of investors to a pri­ori

The Cel­lar Door full

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know the true value and qual­ity of them (other than trust­ing the rat­ings agen­cies), has con­trib­uted to the freez­ing up of lend­ing markets.

U.S. Treas­ury Sec­ret­ary Hank Paulson’s bail­out pack­age plans to buy up these bad secur­it­ies to main­line some liquid­ity back into the mar­kets. The gov­ern­ment has to fin­ance this meas­ure out of gen­eral rev­enue. The fed­eral budget is already deeply in defi­cit, and both pres­id­en­tial can­did­ates are offer­ing large tax cut pro­pos­als. The bail­out pack­age is thus really being fin­anced through more bor­row­ing, i.e., issu­ing U.S. Treas­ury bonds — basic­ally the safest kind of fin­an­cial secur­ity there is.

So, the gov­ern­ment is buy­ing up bad secur­it­ies and pla­cing them under the façade of safe secur­it­ies. Isn’t this pre­cisely the kind of beha­viour that they have been admonishing?