Think About the Massive Ripple Effects

“Every time you tinker with this delicate system even small changes can create big ripples. This is the impossible situation they are in. The risks are that the government's $700 billion purchase of assets disturbs markets even more.” -Dino Kos, former head of the New York Fed's open-market operations

Paulson-Bernanke Steps Created `Big Ripples,' Leading to Rescue: “The $700 billion rescue that the U.S. House considers today reflects the unintended consequences of decisions made by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke since March.

Beginning with the orchestrated purchase of Bear Stearns Cos. by JPMorgan Chase & Co., each step was a bold effort to forestall a collapse of the financial system. The economy grew in the first two quarters of this year, and financial distress eased for a while after the Bear Stearns rescue. Still, each decision to bail out or not created more instability, leading to further runs on securities firms, banks and insurers.

Paulson and Bernanke insist that the program to buy troubled mortgages and other securities is needed to revive lending and restore stability to markets. What they haven't discussed is the risk that they inadvertently make matters worse. By creating a government pool of distressed real-estate and bad debt, they could depress the housing market further. Risk may become even more concentrated through a wave of bank mergers that, if unsuccessful, would stick taxpayers with an even higher bill.”

WOULD? Don’t even worry about that. It WILL stick taxpayers with an even higher bill.

Fannie Mae and Freddie Mac are the ultimate example of the concentration of risk. Mind you, everybody KNEW exactly what the consequences would be back in 1999: Clinton, Fannie Mae: They Knew, Did it Anyways.

Best case scenario: This bailout bill passes and inspires a bounce that can be shorted.