Bailout going astray!

The $700 bn "mother of all bailouts", engineered by Henry Paulson and his Government Sachs team, is increasingly resembling a case of good money being thrown after the bad! About $250 bn has already been committed with no perceptible improvement whatsoever. As Barry Ritholtz scathingly lists out, this appears to be the latest addition to an already susbtantial list of Paulson Blunders.

Naomi Klein even thinks that elements of the bailout are borderline criminal. About a third of this money has gone into dividends the banks are paying their shareholders, and the rest into severance pay, executive salaries and bonuses. Another portion has been spent in acquisitions designed to raise share values. All of these are of dubious legality. Another chunk has been poured into bailing out giant insurer, AIG.

Robert Reich and Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair are among an increasing number of influential voices, who are now calling for using the remaining money to guarantee payment of mortgages whose terms are eased by lenders.

Ms. Bair is proposing that the Treasury use $24.4 billion from the bailout program to help refinance and reduce the mortgage obligations of people who are delinquent on their payments and in danger of losing their homes, so as to pre-empt a tidal wave of imminent foreclosures. Under her plan, lenders who modify troubled loans according to specific criteria would be insured against some of the losses they would incur if the modified loan were to default. That would give lenders an incentive to rework bad loans and in so doing, slow the pace of foreclosures and house-price declines.

Besides, it is also being suggested to use the money to restructure automobile companies whose creditors, executives, shareholders, and workers agree to put up money as well, to guarantee loans made to credit-worthy small businesses, college students, car buyers, and others who at this moment cannot get credit.

Even as the debate intensifies, the dismal news continues to mount (here, here and here) threatening to drag the economy into a long Japan style stag-deflation.