Where are we now?

So what's going on right now? Paulson will be doing his best to fight back the swarms of angry Congressmen, and broker deals with banks left and right... for the moment, the dust is starting to settle, and now we're seeing politicians squabble over power.

Maybe people have a right to be mad. Apparantly, these fallen titans doled out $39 billion in bonuses to their employees in 2007. Talk about a job well done!

If there is any type of article you should be reading, it is this one. Without a doubt, this entire problem occured because people didn't understand risk and statistics, and because of that:

"The banking system (betting AGAINST rare events) just lost > 1 Trillion dollars (so far) on a single error, more than was ever earned in the history of banking. Yet bankers kept their previous bonuses and it looks like citizens have to foot the bills."

You read that correctly. While banks certainly handled more than $1trillion over their collective history, the money they made by handling that money has just been eclipsed by the staggering loss they are now responsible for.

Or are they responsible for it? Could this have been the government's fault? This article insinuates that mark-to-market, or the act of valuing a difficult-to-value asset by matching it to the price it would fetch on the market. An accounting rule called FAS157 was responsible for implementing it, and beyond financial instruments, it is actually a very useful, fair value approach to accounting. I disagree largely with this arguement, because the implementation of FAS157 is a step forward to more accurate accounting.

Whether or not you think this was all the government's fault, it's clear that the government still has a golden opportunity to make a mess of things at this point. I agree with Mean Street, who thinks congress should back off and let Paulson do his thing. However, this is largely becuase I think a speedy solution at this point is more important than a more thought-out one. Waiting too long might do even worse damage around the world to an already broken system. This article does a good job at describing the motivations of the actors in this Greek tragedy. I think their arguement is persuasive as to why Hank needs as much bargaining power as he can get, and why the liberal solution to this problem is nonsensical.

But what can go wrong? Freakenomics, backed with a letter to congress from, literally, hundreds of prestigious economists has this to say: it looks really unfair, we have no idea how this bailout (the government buying up a staggering amount of toxic debt) will be structured (implying that it probably will be structured really poorly), and the effects of this bailout will be felt for ages, as the government's balance sheet tries to accomodate the incredible loss it will most likely incur.

So it is a race against time, and everyone knows it.

Will this solution probably be unfair? Yes. Are we basically forcing the innocent tax-payer to bail out these greedy bankers, who are largely responsible for this whole mess to begin with? Yes. But if we wait too long, then we may be dealing with far too many defaults for society, let alone the capital markets, to sustain.