Monday, September 29, 2008

The Paulson Plan - Comments by Roubini, FT, & Naked Capitalism

Analysis of Roubini post by Naked Capitalism:

1. The plan is inefficient (ie, it doesn't discriminate between who ought to be saved or not, and in fact rewards those who created dud assets)

2. It runs counter to the best models of how to deal with this sort of problem [according to a study by the IMF only 7 out of 42 countries in financial crisis actually purchased bad assets/loans and only 1 did it as the sole remedy]

3. It does not punish current shareholders [or bondholders] or management

But he uses words we haven't dared to, like "rip-off", "pathetic" and "disgrace". Go Roubini! Source
Without a contraction in the financial sector, the US administration risks a debt explosion, and a sudden withdrawal of foreign financial investors. This is the other big catastrophe looming large in the background. We are facing two big tail risks from different ends. Failing to rescue the banking system could lead to a depression. But so could a rescue if it produced macroeconomic instability. Source