Compounding Unfair Advantages for Bad Banks

Today we read...

WASHINGTON (AP) -- The Treasury Department indicated Friday it expects taxpayers will lose billions less from the financial bailouts than earlier estimated. The problem is, its revised forecast assumes Treasury's shares of bailed-out companies are gaining value despite this week's plunge in stock prices.

Below the surface of this story is another. It's a story of conflicts of interest that could lead to further unfair preferential treatment of bad-actor banks at the cost of banks that played by the rules.

The US Treasury Department has a clear interest in promoting the stock price of the banks it bailed out. This creates pressures for Treasury to set policies and make decisions for the benefit of these bad-actor banks, improving their balance sheets, regardless of merit. A bank could be a crappy business, and Treasury would still want it's stock price to increase.

Given that these bad-actor banks compete in some ways with other banks that didn't have to be bailed out, being propped up in this way by Treasury has the effect of creating an unfair advantage. This unfair advantage merely adds to the more blatant unfair advantage of the original bailout; huge banks that could have been allowed to fail and naturally break up were, instead, propped up or forced into being bought by other banks resulting in fewer, larger banks.

This situation cries out for anti-trust action by the Government; these huge banks need to be broken up. This is justified for technical reasons of avoiding avoiding too-big-to-fail crises in the future and creating a more fair competitive market for good banks. It's also justified on basic principles of fairness.

Sources:

Associated Press, Lower bailout estimate assumes higher stock prices, May 22, 2010.

Korean Blogger Arrested?

Paul Krugman ponders why Team Obama's economic plan falls short of providing enough stimulus to reduce unemployment to "natural" levels. His calculations suggest, within three years the Obama plan will push unemployment down to about 7.3% (from an estimated peak of 8.7%.... "natural full employment" is pegged at 4.3%).

My Comment on the matter:

Maybe Team Obama is considering a two-objective problem in which the objectives conflict with each other:

1) Minimize Unemployment
2) Minimize Inflation

Perhaps they have a trade-off curve that shows a break-point when unemployment is at 7.5% with diminishing returns on driving down unemployment as inflation goes through the roof.

Elaboration: As US dollars are flooded into the world market they loose their value. The Fed has already pumped out way more than the Treasury Department's $700 billion for the financial bailout, with little fan fare. Word is that inflation is a certainty and will likely be taking off while the uninformed TV pundits are still lamenting the deflationary economic collapse.

BTW, has you heard about the popular Korean blogger who was arrested after he posted a piece on Korea moving away from US Treasuries? Here's a Digg article on it for you to help promote.

The word is that the mad rush from US Treasury bonds is going to take place fairly soon; there is already movement away, in part because there is legitimate concern the US cannot pay off the bonds, as mentioned recently in an opinion piece published by the Washington Post [1].

I'm thinking about 1) Taking a loan, the interest of which will be inflated away (that's effectively the US plan for getting out of debt), 2) Buying assets now (stocking up on the basics like toilet paper while it's still cheap), and 3) Gold.

Update: What happened to the blogger Park Dae-Sung?

The 31-year-old Park, better known as his pen name "Minerva,'' was arrested early this year on charges of circulating false rumors in cyberspace but was exonerated in April. The prosecutors appealed the court decision, though.

MORE from the Korea Times, September 28, 2009.

Sources:

1. Washington Post, DEFAULT OPTION: We're Borrowing Like Mad. Can the U.S. Pay It Back? January 11, 2009.