In theory, America is nation that believes in a free market. In reality, we just have our own version of socialism. If you make money, Americans believe you be be able to keep it. If you lose money, Americans believe your losses should be shared by everyone.

So we bail out banks. From the Naked Capitalist…..

We had warned a couple of months ago that a colleague with serious connections into the Treasury and Fed told us they were working on plans for a quasi-nationalization of the banking system. Their view was that while banks would technically be solvent, they’d have enough bad credits that they would be unable to extend new loans.

Steve Waldman, in a terrific post at Interfluidity, concludes that nationalization is underway, via the expansion of the Term Auction Facility and Fed’s new 28 day repo program.

Readers may know that there has been a lot of disquiet regarding the negative non-borrowed banking reserves that resulted form the TAF. Bond market mavens, such as commentator Caroline Baum at Bloomberg, dismissed those worries as reflecting a lack of understanding of Fed operations.

I remained troubled, not by the negative non-borrowed reserves figures per se, but by the fact that the Fed was downplaying an operation which was extraordinary. The TAF is a discount window of sorts, but with somewhat longer-term loans and no stigma. Note the TAF accepts the same types of collateral at the same haircuts as the discount windows.

But the discount window is a “break glass in case of emergency” facility. It’s when liquidity is so scarce that banks can’t borrow on normal terms, so they go to the Fed, post collateral, and get dough. The fact that a supposedly temporary operation has become semi-permanent and was increased (it was initially $40 billion, then it was quietly increased to $60 billion) was a troubling sign, yet the Fed acted as if this was business as normal.

We are looking for ways to bail out those who borrowed more money than they could afford to buy a house
From Market Movers…..

Martin Feldstein has a bright idea: allow homeowners to refinance 20% of their mortgage balances with the government, where the new loans amortize over 15 years and reset every two years at the interest rate on 2-year Treasury bonds (currently 1.6%).

Mark Thoma worries that participation won’t be high; I worry rather that participation will be too high

And how do we pay for everyones losses while enabling everyone to keep their gains? We depend on our favorite communist nation to lend us money at cheap rates. From Brad Setser…..

Reuters reports that China’s reserves increased by $61.6b in January alone.

That is a stunning sum. $60b is roughly the size of the US monthly trade deficit. Annualized, the implied increase in China’s reserves tops $700b.

And the real increase in China’s foreign exchange holdings could be even bigger. We don’t know what happened with the banks’ (large) fx position. It could have fallen, increasing the reserves of the central bank. Or it could have increased. My friend Logan Wright told Michael Pettis that China hiked its reserve requirement in January and the banks were required (oops, encouraged) to meet that requirement by holding even more dollars. If Logan is right, the total accumulation of foreign exchange by China’s state then could have topped $80b.

To be precise, the $61.6 increase includes some valuation gains. Strip out the effect of the euro’s January rise, and the “real” increase in China’s reserves was “only” $55b — or about $20b more than can be explained by FDI inflows and China’s January trade surplus. Some of the difference — maybe $6 to $7b — is explained by interest income on China’s existing reserves. Some likely reflects ongoing “hot money” inflow.

A $55b monthly increase works out to an annual increase of around $660b. That is big — but not implausible. In my January paper on China’s foreign asset accumulation I estimated that China’s state added at least $500b and perhaps as much as $600b to its foreign assets in 2007, with much of the increase “hidden” in the state banks. $660b is only a modest acceleration.

The sums involved are so staggering that I suspect that they have lost their ability to shock.

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