Interest rate cuts — tick. Quantitative easing — tick. Fiscal stimulus — tick. Next: bank bailout.

US Treasury secretary Timothy Geithner’s Bank Bailout Mark III to be unveiled tonight our time is now the entire focus of the financial markets desperately seeking salvation. Nothing else has worked, so this one has to. Or at least it has to not not work, as it were.

Mark III should at least be better than Mark II. Elizabeth Warren, the Harvard law professor heading up the panel overseeing former Treasury secretary Henry Paulson’s Bank Bailout Marks I and II, has just revealed that Paulson overpaid by $US78 billion for the troubled assets bought under that scheme. And it didn’t work anyway.

Now it seems Geithner’s package will focus on guaranteeing the so-called “toxic” assets rather than buying either the assets or the banks that own them.

And if there are any actual purchases, they’ll be done by a new “aggregator bank” in partnership with the private sector (assuming they can find some parts of the private sector that are solvent).

The plan is also said to involve a big expansion of Federal Reserve financing for securitised financial markets so that cash flows from new loans can be bundled up and sold to investors.

In other words, and to sum up, the focus of official policy in the US now is to keep the great Ponzi scheme of the US financial system going.

That it was, and is, a colossal Ponzi scheme there is no doubt: new money continually fed the returns on old money. Securities like collateralised debt obligations (CDOs) and synthetic CDOs, and CDOs of CDOs, were created out of thin air and sold to simply keep the machine running.

And as with all Ponzi schemes, when the money stops flowing in there is nothing but thin air.

The various versions of the Government bank bailouts, including the one to be announced later today, all suffer from the fundamental problem that the assets being valued and bought by the Government don’t actually exist.

Of course Hank Paulson overpaid by $US78 billion for the first lot of TARP assets — that was the whole idea. If the Government doesn’t overpay, the plan doesn’t work.

The real problem with the Paulson/Bush plan is that they lied about it, trying to pretend that it was just a relief program for troubled assets, not the propagation of a fraud.

Elizabeth Warren explained this in an interview on Sunday with Fox News. The interview said: “As a taxpayer, I’m scandalised … You would have to peel me off the ceiling. Why in the world would we ever overpay for something … to the tune of $78 billion?”:

WARREN: Well, this is the part that I’m a little upset about, about this undertaking. And here’s the deal – it’s that there may have been a good reason to pump an extra $78 billion into these banks.

INTERVIEWER: But nobody told us.

WARREN: But that’s the deal. You’ve got to come clean about this. If what we’re going to do here is we’re going to subsidise these banks, especially with that kind of money, you’re going to have to belly up and tell the American people about it.

In other words — there was good reason to overpay by $US78 billion, it’s just that they didn’t come clean about it.

Can Timothy Geithner “comes clean” tonight? If he does, how does he avoid either destroying the US banking and finance system, or buying it (on the grounds that “you break it, you own it”)?

In the UK and elsewhere in Europe, governments have readily nationalised insolvent banks, but the assumption has been that the Bush Administration was so ideologically opposed to that idea that it would do anything to avoid it — including lying about the nature of the TARP.

Maybe we’ll find out tonight that it’s not really about ideology, but the amount. The US Government simply cannot afford to nationalise the US banks; the best it can do is participate in an aggregator bank — that is a “bad bank” holding “toxic assets”, mostly paid for by someone else — and otherwise provide guarantees in an attempt encourage confidence from private investors.

One of the problems, it seems me, is the term “toxic assets” itself. It was invented by the banks to give the impression that they had been poisoned — that they’re victims of some dastardly act by someone else.

They are not the victims, of course, but the perpetrators, and the so-called toxic assets are the lingering evidence of a vast fraud, in which securities were created against nothing and sold to investors stamped “AAA” by credit rating agencies. It’s like selling a bridge to a sucker.

The assets are only toxic if someone else pays anything resembling real money for them, including the Government.

Tonight’s bank bailout scheme by Timothy Geithner should actually involve locking up the bankers beside Bernard Madoff, the only one of the current crop of Wall Street crooks who has admitted to running a Ponzi scheme.

But Geithner won’t do that. Instead he will give them all more money because the Ponzi scheme can’t be allowed to stop — otherwise president Obama might as well as hang on to his $US820 billion stimulus money, or rather, not borrow it from China.

Peter Fray

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