Paulson’s Plan

Most of what is being said about the Paulson Plan (a.k.a The Big Bailout) is superficial at best and utter nonsense at worst. Nevertheless, there are some pockets of clear thinking. I suggest reading this to get a better understanding of what’s going on. Because of the uncertainty of valuations, financial risk is much higher than usual. When financial risk is high, the risk premium increases and we see higher interest rates. Higher interest rates mean that more speculative endeavors are scaled back or eliminated. This is just the Invisible Hand’s way of telling us that we were investing too much in speculative things (like flipping condos) and not enough in bread and butter. As much as some folks like the go-go frenzy provided by low interest rates, there is no plan (Paulson’s otherwise) that will bring back easy money until capital is allocated more efficiently. Intervention might speed it up, but it might slow it down too. Remember – the geniuses trying to fix the mess are the same geniuses who got us here in the first place!

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