Paulson: On second thought, there’s no magic bullet to this crisis
posted at 4:05 pm on November 25, 2008 by Allahpundit
A magic bullet to prevent catastrophe is, of course, precisely what the bailout was supposed to be. Not that it was going to instantly restore a sick economy to good health, but the tacit understanding was that it would pull us back from a precipice and ensure that we were in for nothing worse than a bad recession. And yet here we are, at the precipice again:
In the short term, the latest effort to steady Citigroup has removed the risk that a sudden failure of the giant bank would send losses cascading through the financial industry.
But longer term, the new bailout could haunt regulators and taxpayers. The move ultimately may encourage banks to take more risks in the belief that the government will step in if they run into trouble…
Before long, anxious investors may start wondering which banks will be vulnerable next. If confidence fades, other big lenders will probably seek deals like Citigroup’s, in which the government has pledged to pick up potentially $290 billion in additional losses. Regulators drafted the plan with an eye to using it as a template for future bailouts…
“It looks like TARP 3.0,” Ms. Whitney said, referring to the Treasury Department’s $350 billion bailout fund known as the Troubled Asset Relief Program. “TARP 1.0 was buying illiquid assets from banks. Now, they are backstopping assets and really putting taxpayers on the line for much of this.”