The Margin Call From Hell!! 9-24-08

When I first heard Milton Friedman discuss the “four ways to spend money,” I quickly recognized this analysis as the best argument against government intervention. Now, I do believe that many policymakers have good intentions when they intervene in markets, however, intentions do not justify effective policy. Here are the four ways to spend money.

1. You spend your own money on yourself.
2. You spend your own money on someone else.
3. You spend someone else’s money on yourself.
4. You spend someone else’s money on someone else.

Only under condition 1 is your money put towards the most productive use, and under condition 4, money is most likely to be wasted. Think about how this relates to the Paulson-Bernanke bailout plan. These two men are essentially taking $700 billion in tax dollars and spending it on someone else, and for someone else’s benefit. Not only will they screw the taxpayer who should not be liable for these losses to begin with, but they will likely not even effectively alleviate the problem for the banks. Two men cannot solve the most complex economic crisis in history, gambling with our tax dollars by the way.

When watching the Senate Banking Committee hearing yesterday, I quickly realized that Paulson and Bernanke’s plan does not even have a chance of working. Paulson and Bernanke were essentially asking the taxpayers to cover MARGIN CALL FROM HELL on behalf of the banks. The problem here is that the underlying “assets,” the CDO’s that are causing all these problems are still loosing value as housing prices correct. By putting up the capital to cover the banks margin call we are not doing anything but prolonging the problem to a future day when the banks will ask for more capital due to another “margin call”. The margin calls will keep coming until the housing market bottoms out on its own.