Busted Bailout

While America’s political leaders developed, virtually overnight, a $700 billion bailout plan to resuscitate the country’s rapidly deflating financial sector, rank-and-file members of the US Congress, just as stunningly, rejected it – at least for now. Perhaps they were right to be skeptical.

CAMBRIDGE – Spend in haste; repent at leisure. With minds concentrated by fears of another 1930’s-style Great Depression, America’s political leaders developed, virtually overnight, a $700 billion bailout plan to resuscitate the country’s rapidly deflating financial sector. But, just as stunningly, rank-and-file members of the US House of Representatives have rejected it – at least for now. Perhaps they were right to be skeptical.

The plan’s central conceit is that government ingenuity can disentangle the trillion-dollar “sub-prime” mortgage loan market, even though Wall Street’s own rocket scientists have utterly failed to do so. To boot, we have been told that government is so clever that it might even make money on the whole affair. Perhaps, but let’s not forget that a lot of very smart people in the financial industry thought the same thing until quite recently.

Just a year ago, the United States had five major freestanding investment banks that stood atop its mighty financial sector. Collectively, their employees shared more than $36 billion dollars in bonuses last year, thanks to the huge profits these institutions “earned” on their risky and aggressive business strategies. These strategies typically involve far more risk – and sophistication – than the activities of traditional commercial banks.

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