It's economics time again.
I hate economics. I find it hopelessly dull. But apparently my style of explaining
it is really helpful to people, so they keep sending me questions; and as usual, I do my best to try to answer them. Even if I don't particularly enjoy it.
So people have been asking me to explain what the proposed bank bailout plan is,
how it's supposed to work, and why so many people are upset about it.
Background
The basic problem underlying the current financial mess is, quite simply, that banks made
a lot of bad loans. They took those bad loans, and bundled them up into packages, and
then sold those bundles, which they called investment vehicles or collateralized
debt obligations. Somehow in the process of tying bad loans up into bundles, they
transformed them into something that they claimed (on the basis of very silly
arguments) was an extremely safe investment. (I wrote about this before
href="http://scienceblogs.com/goodmath/2008/09/economic_disasters_and_stupid.php#more">here.)
Then they took those CDOs, and used them as collateral for borrowing money to make other
investments - often in the very same kind of bad-loan based bundle. Of course, they knew that
this was all a pile of bullshit, so in order to supposedly cover the mess, they created what
they claimed was a kind of insurance called a credit default swap. But credit default swaps
aren't insurance: they're bets, plain and simple. And once they had a gambling system in
place, they went wild: they used things like credit default swaps and the CDOs to create a
gigantic, international gambling ring that makes the folks who own casinos in Las Vegas look
like a bunch of pathetic pikers.
Naturally, a scam like that can't go on forever. At some point, someone needs to collect
the money that's at the bottom of the pile. But the bottom of the pile is a heap of bad loans!
So, naturally, a huge portion of the base loans aren't every going to get paid back. And that
means that many of those CDO investments aren't actually worth anything. And since they're not
worth anything, the things built on top of them really aren't worth anything either. So the whole thing comes tumbling down. All of these piles of worthless loans stacked on top of worthless loans, collateralized by worthless loans - that's what people are calling toxic assets.
So now we've got banks and other big financial firms that are, effectively, bankrupt: they've god huge debts which they can't pay back, because both the collateral for the loan,
and the stuff that the loan was used to buy are both now close to worthless.
That's the basic background.
The Proposed Bailout
What's the current proposed bailout? The idea is to prevent the banks from
going bankrupt by helping them sell those so-called toxic assets. If they can get enough
money by selling those, then they'll be able to pay off their debts.
Of course, if they could just make enough money by selling them to pay off their debts,
they would have done that already. No one wants to buy that crap for full price. People will
buy it for a fraction of its face value, but buying full price? That's ridiculous: we
know that they're based on bad loans, most of which will never be repaid.
So what the bailout tries to do is make the toxic assets into slightly more attractive
investments. And the way that they're proposing to do that is by providing low-interest loans
to help people buy them, and by saying that if the things they bought using the loans lose
value, the loans will be forgiven.
With that incentive, it becomes a much better risk. After all, for the guys buying it
using the loans, most of the money that's going to be risked buying the garbage isn't theirs.
And the stuff is bad - but it's not all worthless. Some portion of those
loans will get paid back. Some of those CDOs will eventually make some money. Most probably
won't. But some will. And they're not going to be selling for full price - they'll
sell for a lot more than they'd get without government help, but still less than
face value. So at the discounted price, a lot of them will make some money.
What the government is proposing to do is to hand out loans to investors, which
they can then use to buy up some of those bad assets. If the asset makes a profit, the
investor pays off the loan. If it doesn't, the loan is forgiven. Something like
85% of the purchase price of the toxic assets can be covered by one of these
no-recourse loans. So the investor is only on the hook for 15% if it doesn't work out.
That leads us to part one of why people are upset: what this loan program basically does
is what Paul Krugman calls "privatizing the gains, socializing the losses." Just think about
what happens to the money backing those loans. If the assets purchased using the loans make
money, then the private folks pay back the loan, and keep all of the profits. If the assets
purchased by those loans don't make money, the loan is forgiven - and the loss falls onto the
taxpayers. So the taxpayers whose money is backing this plan will get stuck covering the
failures, but they get no share of the successes. In other words, one way of looking at it is
that it's a huge transfer of money from the federal treasury to wealthy investors. That's all
too typical of how things have been working in our economy over the last couple of
decades.
But to make matters worse, there's another reason to be upset: because there's cause
to believe that the whole thing won't work. Even though it will effectively transfer something like a trillion dollars from the government to private investors, it still won't fix the basic problems with the banks or the economy!
That argument is based on the fact that there are really two different ways that a
bank can fail. A bank can fail because of something called a run, and it can fail because
it's really bankrupt. The proposed bailout will work if the basic problem is a run; but
it won't work if it's a bankruptcy.
Banks operate by borrowing money from depositors. When you put money into your bank
account, you're actually loaning it to the bank. As a payment for the loan, they pay you interest, or they provide you with some set of services. Then they take your money, and
they invest it - either by giving loans, or by buying various kinds of assets. The difference
between what they make on their investments of the money that they borrowed from you, and
what they owe you in interest and services is their profit.
The catch to this is that the money that's invested is not available for immediate return
to all of the depositors. Banks invest in a lot of long-term things that they can't pull money
out of on a moments notice. So if everyone who deposited money in the bank suddenly wants
to pull their money out at the same time, despite the fact that the bank hasn't lost anyone's
money, they can't pay back all of the depositors. That's what a bank run is: when everyone
wants to pull money out at once, and the bank can't do it because the money is tied up. The
thing about a run is that the bank does basically have the money - it's just that they can't
get it immediately. In a run, the government can help a bank in two ways: it can either loan
them money to cover them until they can sell their investments, or it can buy the investments from them. In either case, what the government is doing is providing a short-term bridge. It works because the bank does have the necessary assets; it just needs time to cash
them in.
The other way that a bank can fail is bankruptcy. That is, it's got a bunch of
people that it borrowed money from to invest in some collection of assets. But the assets
lost value, and they're worth less that what the bank owes. It's not a short term
problem, where they just need help covering things until they can sell assets - they're
genuinely short of assets: they owe more money than they have in assets. In this case,
the stopgaps don't help - because all that they do is give the bank time to sell its
assets. If they're really not worth as much as the bank owes, then time doesn't help.
The current proposed bailout is designed assuming that the problem right now is just a
bank run. That is, the banks and financial firms really do have enough assets to cover
everything; it's just that due to people's paranoia, they can't sell them right now. But given
time, people will realize how much they're actually worth - and when that happens, the banks
will have plenty of money to pay off their debts. So all that the government needs to do to
solve the problem is to provide a way for the banks to cash in those toxic assets for their
real value, and everything will be OK.
But what many critics believe is that the assets in question are genuinely worthless,
which means that the banks and financial firms are really bankrupt. The assets that they're
trying to get rid of aren't worth anything. The problem is that they really don't have
enough assets - they've got piles of paper, but that paper isn't worth anything close
to what they owe, and it's never going to be. They're never going to be able to
pay off those debts. Never.
So helping the banks to sell worthless paper as if it was worth something isn't really
doing anything about the fundamental problem. All it's really doing is handing the banks
money to cover part of their bad debts - but pretending to be doing something
else.
Worse, that way of handling the bad debt isn't going to work. Because the total
size of the bad debt dwarfs the amount of money that's going to be used for buying those
toxic assets. The total amount of money that these big firms have tied up in garbage isn't
know for certain, but I've seen estimates ranging from 3 trillion to 45 trillion
dollars! So at best, this plan covers 1/3 of the bank debts. That's not enough to save them from bankruptcy. So this supposed rescue amounts to handing the banks a trillion
dollars, without actually solving the problem.
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There's too many people in positions of power that are averse to changing the status quo. It's quite depressing. This bailout ammounts to little more than just paying off somebody's gambling debts.
So money changed hands, and the banks ended up losing trillions. But the money had to end up somewhere. So who got all the money? The same investors who are now going to profit once again from the "bailout"? The traders and the CEOs who got filthy rich running the economy into the ground? Trillions of dollars ended up in somebody's pockets. Whose?
Re #2:
The one bit of this whole mess that I find the most upsetting is that my understanding of it is that the trillions of dollars never existed.
People were creating wealth on paper, which never existed in the real world. Trillions of dollars have disappeared - but it's not at all clear that those trillions of dollars actually ever existed.
There's a huge amount of money sitting at the bottom of the pile - the money people made by selling something real. But on top of that, there's money that people made by buying the real stuff, reshuffling it, and reselling it. And then other people did the same thing. Layer upon layer, taking the same crap, rearranging it, and selling it again. If you look into the details, you find that there are numerous cases where people were ultimately buying things from themselves without knowing it - they'd sold something, which got repackaged into something else, which got repacked into something else, which they bought. They were just pushing paper back and forth, pretending that they were somehow making money by doing this.
The whole thing was a fraud - a giant pyramid scheme. So the people at the bottom, who created the original investments (i.e., the banks) made money. The next few generations of investors (i.e., the banks again) made money. Beyond that, none of it was real. Banks spend hundreds of billions of dollars investing in something that was just a big shadow. Now they claim to have lost trillions of dollars. They didn't - they never had trillions of dollars. But they believe that they did.
Mark @#3, thanks for your reply. I get what you're trying to say, but I can't see how that can be true. Even in pyramid and Ponzi schemes, there is real money made by the schemsters. Even if there is no (or little) real worth at the bottom of it all, the money lost by one is gained by another.
If I lend you $100 which I don't really have, whatever the final outcome of the deal it cannot be that we both lose $100. Unless some lawyer makes $200, of course. The net sum of money stays the same, though.
If the banks believed that had money which they didn't have (worthless assets booked as real assets), they should still break even from illusion. If they lost money on it, someone else must have gained, as far as I can comprehend.
I agree with your premise. However, some of the banks which are defined as being insolvent, may be able to restore their balance sheets by generating cash from normal operations over time. At least that is the speculation.
Also, apparently, these so called CDOs or toxic assets may make up only a minority of a banks bad loans:
http://money.cnn.com/2009/02/27/news/economy/tully_banks.fortune/index…
@ #3: I don't think you understand how banking works.
In almost every modern economy, banks lend money. They are not safe deposit boxes that magically have a few cents appear on your investment. You put in money and they will lend it to people, getting interest back on those lends, some of which you then get back. This is incredibly important because, effectively, it creates money.
Consider the following: You have $100 and deposit it in a bank. You then go out to a restaurant and, when the bill comes, write a check for $75. The bank, however, only has a 10% reserve requirement, so it lent out $90 out of your $100 to some guy who wants to start a business. But that's no problem! The bank simply moves $90 worth of credit to the restaurant owner's account, and if he tries to cash that check, it gives it to him from someone else's account. Meanwhile, it gave out $90 to the guy who opened up a store, so, in effect, it created $90. Even though only $100 were put into the system, the system will operate, and will keep operating, as if there were $190. Indeed, the only danger happens is if a bank run happens -- if everyone tries to take out their money at once. This was already discussed in the blog post, so I won't bother talking about it.
You keep saying that "most" loans are worthless, but the absolute worst estimates I've seen are that something on the order of 15% of the loans will eventually default. That's still a whole lot of money, but the majority of loans are expected to be paid back. (A huge part of the problem, of course, is that nobody knows which 15% will default, and if you're heavily leveraged then 15% of your base material disappearing is catastrophic.)
As far as made up money, it's the difference between hard currency and the stuff that's written down on balance sheets. An analogy I heard recently (in reference to Iceland) was if I have a dog and you have a cat, we can both agree that they're worth $1 billion and trade them with each other. Now, instead of having a pet, we have a billion dollar asset that we can put down on our books. Nobody has ever actually paid a billion dollars in currency for it, but trading around assets can inflate their values if everyone agrees to play along.
It's sort of like www.oneredpaperclip.com, where the guy started with a single paperclip and, via a series of one-for-one trades, ended up with a house. If you play the accounting game right, you could say that the single red paperclip he started with was worth the same as the house, since via some chain of events the paperclip got traded for the house. Sure, nobody would pay a house worth of currency for the paperclip, but you can make it look on paper like someone should. (This is a lot easier when you're dealing with a complex financial instrument without an obvious price rather than something you can't buy at your local Office Depot.)
If most of that "money" is owed by banks and investment funds to each other, then you'd think they would be able to just "cancel" it somehow. If I need income from investment A to pay interest on loan B, and you need income from investment B to pay interest on loan C, and someone else needs income from investment C to pay interest on loan A ... then it would seem sensible for the three of us to get together and forgive and forget.
Or is it all too complicated and obfuscated for that?
Is there any outcome to the crisis that doesn't involve getting rid of most of that 45 trillion dollars?
Re #7:
With respect to the issue of how many loans are bad:
The so-called "toxic" assets are close to worthless.
There's two things you've got to remember:
(1) Loans aren't uniformly distributed. While the overall default rate might be 15%,
the default rate in specific groups of loans is quite a lot higher. The toxic ones are
the ones with high default rates.
(2) When loans are bundled into securities, it's done by something called tranching.
The toxic assets belong to the lower tranches. The way that tranching works is
is that as money comes in to pay off the loans, the top tranches are paid off
first; only when a higher tranch is completely paid off do the lower
tranches get anything. If for a given bundle of loans, there's a 30% default rate (which
is not unusual in many sub-prime packages), and there were two 50% tranches, then
the upper tranch would get fully paid off; but the lower tranch would see a 60% default
rate. In fact, the tranching was quite aggressive, and there are usually multiple
levels - so the bottom 30% is frequently one or tranches itself. Anything based on those
tranches is absolutely worthless.
Re #6:
In the example you gave, the bank didn't "create" money; what it did was push money around. That's the basic idea of banks: you put money into a pool, and the bank invests the pool. There's no money being created - in order to pay both the restaurant owner and
the business owner, they need to have the money to give to both. But since not everyone is taking their money out, if they used your money to give the loan to the business owner,
they borrow money from some other depositor to cover your withdrawal.
What happened in this mess is exactly what another commenter said. Basically, they printed out a piece of paper, and said "This piece of paper is worth $100". Then they traded it with someone else for another piece of paper that the other guy said was worth $100. Then they each wrote down in their accounting books that they'd made a profit of $100 - after all, the piece of paper that they printed cost them nothing; and they got something worth $100. So between the two of them, they created $200 out of nothing.
That's the difference between the common banking scenario and the massive fraud behind the current disaster. In the case of the bank, nothing was created; it was just moved around. If you look at it from the viewpoint of the borrower, the depositor, and
the restaurant owner, you say that the depositor put in $100, the bank loaned out $90 of it, and then the depositor paid $75 of it to the restaurant owner: so the depositors money somehow inflated from the original $100 to $165. But in reality there's a pool of money in the bank, and the bank borrowed from that pool.
Of course, you can create money. Money is just a marker that represents wealth. Whenever anyone creates something new - whether it's a tangible good, or
an intangible service - they're creating new wealth. There's nothing wrong with that; that's the way that economies grow. But the key thing is wealth is created when people create something that has value. In this giant clusterfuck between the banks, they didn't create anything that had real value. They just pretended to.
I'll disagree a bit about the 'creating wealth on paper' comment. Wealth is always based on what someone will pay you for something. So it's silly to say that the wealth was just on paper, when people really were willing to pay you for it. Even things with utility, like a car or house have values (both monetarily and functionally) which can change based on the market; if the economy tanks where the house is and there are no jobs, the house would be worth less, and a car could reduce in value if cheaper, better, cars become available, or other alternatives like public transport improve.
So, even unchanged physical items can have their values change based on outside influences, so how is all 'wealth' not 'on paper'?
Re #11:
As I said in some comments above: what I mean by wealth on paper is "wealth" created by what amounts to fraud.
If I sell you a PDF draft of my book for $10, and you pay me via paypal, I've made $10, even though nothing tangible changed hands. All of the transfers would be on paper (or more accurately bit twiddles on a disk somewhere.) And yet, it would be a legitimate transaction: I produced something that was valuable enough to you for you to pay for it.
On the other hand, suppose I took a sheet of paper, and with a crayon, scrawled the words "This is worth $100". If I tried to sell it to you for $100, you'd say I'm crazy. It's a sheet of paper that I wrote on. It's got no value. If you decide you don't want it, I won't give you your $100 back. In fact, I wouldn't give you a nickel for it.
Now, suppose that you also took a sheet of paper, scrawled "This is worth $100", and then traded with me: my $100 sheet for your $100 sheet. We agree that they're worth
$100, even though no one in their right mind would pay a nickel for those sheets.
Now, I've got a sheet of paper that you said is worth $100. But it cost me a fraction of a penny to produce my $100 sheet. Since you've told me that your sheet is worth a hundred dollars, that means that I've made a profit of $100. LIkewise, it cost you a fraction of a penny to produce your sheet, and you've gotten something that I've promised you is worth $100. So we've each made $100, right?
That's what I mean by paper wealth. They've traded "securities" that are by any objective measure worthless. But by promising each other that they were valuable, each side
booked a great big profit. But the profit didn't really exist - both sides were lying, and both sides knew that the other one was lying, but by pretending to believe them, they were able to book a profit and bring home a huge bonus.
The current disaster is mostly caused by variations on that - where banks used these scams to buy other stuff. So now the bills are coming due - but because the money that they used to buy it never really existed, they can't pay.
In regards to "where did the money go" - the cash was paid to the home sellers who got lucky by selling on top of the bubble. The problem is - that cash was created by the scheme described by MCC, but then spent like it was real value generated.
If the price for a loaf of bread doubles, it's called inflation and bad. When the prices for houses double, that is "generated wealth", and good for some reason.
The quantity of money is not conserved. So, yes, money can be created and destroyed without anyone winning or losing it. And without fraud. The earlier poster who mentioned the reserve requirements has the gist of it correct.
Let's have three people, Adam, Bob and Charles. And a bank, First National.
A starts off with $100 dollars. He deposits it at FN. He still is worth $100 dollars.
The bank takes his $100, invests 10% of it in some asset and loans $90 to B. B now has $90 to spend. He buys something from Charles. Charles now has $90, and he deposits in the bank. Charles is now worth $90.
There's now $190 of money in the system. Adam has $100 and Charles has $90. Bob has a $90 debt that he has to pay back to FN eventually. But his debt doesn't cause the money to not exist.
Adam and Charles could get together and buy something from David for $190. David would have $190 then. Of course, there was only $100 of currency, so if he tried to withdraw it all from FN, FN would have a problem. David just caused a run on FN.
One of the aspects of the credit crisis is tied up in that 10%. A bank is required to keep assets worth 10% of what they've got loaned out. If they have less than that, they can't loan anymore money. So if the value of what they've invested in drops, they can get stuck.
Some of the assets are now toxic because, even though everyone agrees they're worth something, no one wants to buy them. So the market value is dropping to zero. And, because of the principle that something is worth what someone will pay for it, some of the assets that banks were counting towards that 10% are now worth nothing. Even though they are still generating income. This is what people are referring to when they say that we should change the mark-to-market accounting rules. Of course, these rules were put into effect after the last big banking crisis, when Thrifts went under and it became apparent that they had wildly over valued the assets they had on their books.
Mark @#12: "So we've each made $100, right?"
And when it becomes clear that you didn't, you lose those imaginary $100. You lose what you apparantly gained, which may or may not have been imaginary wealth the whole time. Which means you are back to zero, you break even on the affair.
But say you managed to come out $100 short. It could happen like this: With your newly aquired $100 asset, you feel safe taking $100 out of your mattress and lending it to your aunt. It eventually becomes clear that your $100 asset is worthless, and you ask your aunt for your money back, realizing that you might need it after all. Now imagine that she can't pay you back, the money she borrowed is lost forever. This leaves you $100 in red. However, the money didn't just disappear. What you lost was gained by your aunt.
So this still leaves me wondering who ended up with the trillions lost by the banks. #13 thinks it's the home sellers selling at the peak (and not buying something at the same or higher price). And I guess also developers building and selling homes people couldn't really afford. But is this really the whole explanation? Surely a lot of people on Wall Street made a lot of real money while the bubble was growing in size. Money which they still have.
It's not really true that "the money had to end up somewhere". There is no Law of Conservation of Money - it's not stuff. Only a tiny, tiny proportion of it is present as physical dollar bills. The rest of it mainly exists as credit, and it is possible for credit to disappear as lenders become less willing to lend.
Re #15:
You're still looking at this as if it's a one-sided thing - that is, there was one guy cheating, and the counterparties were honest.
Banks used scams to create fake wealth, a la the "This paper is worth $100" trick. Then they used that money to buy stuff from each other.
A huge portion of the money just doesn't exist, and never did - it was artificially created and shuffled around between the banks.
Of course, plenty of people made out incredibly well on this. Whenever they sold one of those $100 pieces of paper,
they took a commission, which was paid out in real money. Between commissions and bonuses, an astonishing amount of money way paid out by the banks to their traders and executives.
That's what drives so much of the anger over things like the AIG bailout. Just read the self-righteous op-ed in the NYT today by an AIG employee. This guy made enough money working for the company that he can afford to give away a million dollar bonus, quit his job, and live off of his savings with no concern for his family. But he thinks he's been mistreated.
Where did the money to pay his bonuses come from?
Where did the money that he's living off of come from?
The fact is, AIG and companies like it paid out absolutely obscene amounts of money, because their trading operations were doing so well. And now, they're bankrupt, but the people who work there sincerely believe that they still deserve their bonuses, even though the money to pay those bonuses was basically generated by massive fraud.
It infuriates me, even though I've got a steady, well-paying
job.
You see, in my jobs, I've made a very nice salary. And part of my pay is a yearly bonus. In years when the economy was bad, regardless of how well I did that year, I got a lousy bonus. Because my bonus was computed based both on my performance, and on the performance of the company as a whole. I didn't complain: I knew when I signed on that that was how it worked.
In my current job, I get a very nice bonus. But if the company doesn't do well, I could easily end up getting no bonus. And while I'd be unhappy if that happened, I wouldn't be crying about how unfair the company was.
But this AIG trader is furious at the notion that
his company's bankruptcy should affect his bonus. The fact that his company had absolutely destroyed itself, lost hundreds of billions of dollars in just one year,
and that they had to be taken over by the government in order to avoid a forced liquidation - he thinks that that shouldn't affect his bonus, and that he's being treated unfairly when people say that the company shouldn't have been handing him a million dollars of government bailout money.
people who think that the fact that his company had to take billions of dollars from the government, because they were completely bankrupt and on the verge on forced liquidation
1) Banks can create money. That's what reserve banking, which is what is being described here, is all about. For example, on the gold standard, before we abandoned it, $25,000 worth of gold could create $550,000 worth of circulating currency. The trick is managing the reserve ratio and the rate of transaction, otherwise the money supply can spin out of control.
2) One thing that wasn't mentioned was leverage. Suppose I buy a can of tuna fish for $5 and sell it to you for $5,000,000. (You've got a buyer at $20,000,000 all lined up, so you are making out even better than I am.) Unfortunately, you don't have $5M, so you put up $50 and borrow the rest for a leverage of 100,000 to 1. After repaying the loan, you wind up making $15M on a $50 investment. What happens if your buyer drops out? You lose $5M on a $50 investment. As Archimedes once said, give me a pipeline to Federal Reserve, and I'll buy the world.
As long as people were willing to lend based on inflated asset prices, the leverage merry go round could keep on turning. There would always be someone else to buy you out, but the slightest stutter could result in incredible losses. The current recovery plan is to pretend that the merry go round is still turning, but as anyone caught on the wrong end of a lever knows, it never ends smoothly.
Pretty decent basic introduction video to the fractional banking system: http://video.google.com/videoplay?docid=-9050474362583451279
Which is indeed very bad.
In addition to MarkCC's answers, the money went into:
1. The pockets of contractors and workers who built new houses, or remodeled them.
2. The pockets of hometown mortgage brokers, home inspectors, real estate agents, and associated employees.
3. "Invested" in boats, RVs, and other recreational equipment, vacations, big screen televisions, etc., paid for after perhaps yours, and certainly my, neighbors refinanced and "took equity" out of their homes whose values were rising 10+% per year.
4. Similar to 2, in the pockets of MDs, hospitals, nurses, etc., who had their medical bills paid for by working class people, such as my mother, who paid for non-elective but uncovered surgery after refinancing her home (for way more than it was worth). She later walked away from the home, which sold in foreclosure for about one half the outstanding mortgage.
No one. That is Fake Money. Ok, lets use a smaller example. When you hear someone talk about Bernie Madoff's 64 Billion dollar ponzi scheme, they came to that amount by adding up the statements that Madoff was sending to his "investors". OF course, those statements were lies, and so there wasn't REALLY 64 billion dollars lost. When the regulators went in and added up the amount of money Actually put into the system, It was only about 17 billion dollars. Now, if all that money is lost, were you out 17 billion dollars? Well, probably a little bit more, say 20 billion dollars, because those people thought they were investing the money, so the loss of potential investment is considered part of the loss. However, Nobody is walking around with the 40 billion bernie just poofed out of thin air.
But yeah, if you are talking about the 17 bn of actual money (in bernies example), William Wallace #20 pretty much took care of it. The real problem is because nobody knows how much fake crap is out there, nobody knows what the losses are or will be, hence the credit freeze.
Mark, you and most of the media are significantly misrepresenting the Geithner plan. The government DOES get to share in the upside, and the private investors DO share the risk. (See Brad DeLong for details.)
The problem with Geithner is that while the government shares in the upside, and the private investors share in the risk, the government takes a larger share of the risk than the private investors, so the private parties have an incentive to overpay for the assets (Krugman explains how).
At any rate, what you are explaining is what the overwrought headline writers have described, not the actual plan...