As near as I can tell, we have a choice:
- Treasury bails out banks before they fail, letting the shareholders escape with some of their money. There is massive inflation from the bailout.
- FDIC takes over banks after they fail. Shareholders eat it. There is massive inflation to maintain reserve ratios in the face of bank runs and writedowns of assets.
We're in the final phase of a pyramid scheme way way bigger than Albania's. In any pyramid scheme, the participants are on a broad spectrum from crooks to suckers; they deserve basic human compassion and not all of them deserve jail terms longer than a few years, but nobody involved in the scheme has any business coming out ahead.
Housing prices blew up, loans got written for absurd prices that don't reflect actual value, so the loans have to get written down. The three ways to do this are:
- renegotiate the loans
- cry like a baby as the loans go into default
- inflate the currency until the loans are reasonable again (and so are house prices, and any profits anybody's booked in dollars lately are worthless...).
It would have been nice if we could do the first one, but shareholders and investment banks declined to do so, because they wanted to pocket their profits from the pyramid scheme.1 So we're going to do the other two, and the shareholders and investment banks can eat it.
There's going to be inflation no matter what, but more pain for the people who chose to participate in this means less for those of us who didn't. People who were rich enough to retire and live off their 401(k)s for 30 more years won't be anymore, so they'll have to get real jobs.
And meanwhile, house prices in Cambridge might even drop below $2008600,000, so those of us who have real jobs will actually be able to own something for once.
So yeah, that's a win. So, Wall Street, what am I missing?
1The usual claim is that securitized debt made renegotiating impossible. Renegotiating loans was not "too hard"; it just required investment banks to buy back the CDOs from shareholders. The shareholders declined to sell at a price that would permit investment banks to renegotiate at a profit. The correct response is not "awwww, poor shareholders and investment banks, they wanted to renegotiate but they just couldn't"; it's "bulls make money, bears make money, pigs get slaughtered".