I’m not one to link and run, but sometimes there is really nothing to add. I think that everyone should read what Obi wan has to say about the bailout situation.
There has been no shortage of opposition to the hastily proposed $700 Billion Gift Card (Chris Suellentrop provides a nice rundown) – unfortunately little of the real opposition comes from members of Congress. Our own Senator Bennett has flipped from being wary to being supportive because, as every elected official knows, foolish action is better than rational inaction where re-election is concerned.
We are lucky right now to have a divided government – at least there is an initial reaction of shock from the Democrats at the lack of thought that has gone into the initial proposal. Democrats want to add in a few more dubious provisions, but at least they also want to provide some oversight in the process as well. The Republican leadership does not want any delay:
"When there’s a fire in your kitchen threatening to burn down your home, you don’t want someone stopping the firefighters on the way and demanding they hand out smoke detectors first or lecturing you about the hazards of keeping paint in the basement," Senator Mitch McConnell of Kentucky, the Republican leader, said in a speech on the Senate floor. "You want them to put out the fire before it burns down your home and everything you’ve saved for your whole life."
That analogy fits the goals of the administrations and their MO but it misses the actual situation. The truth is that a few houses have already burned down and others are smoldering in the neighborhood. In response, this fire department is proposing to break the dam above the town to quickly douse the neighborhood without considering the extra flood damage that may result and the fact that their action could weaken or destroy properties that are not currently in danger. They are so busy trying to look heroic by taking drastic action that they have failed to consider any minimal rational restraint in their proposal.
For those who are not afflicted by D.C. Myopia, the holes in the plan are gaping (Jay Evensen and Jason Linkins) and there are many better options being presented in short order. Paul Krugman astutely asks:
The premise of the Paulson plan– though never stated bluntly — is that these assets are hugely underpriced, so that Uncle Sam can buy them at prices that help the financial industry a lot, without big losses for taxpayers. Are you prepared to bet $700 billion on that premise?
I’m not – I wouldn’t bet $10 on that.
Sebastian Mallaby is generous enough to illustrate two alternative proposals by academics that carry lower risks and higher potential returns for taxpayers.
Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans. Given a fatter capital cushion, banks would have time to dispose of the bad loans in an orderly fashion. Taxpayers would be spared the experience of wandering into a bad-loan bazaar and being ripped off by every merchant.
Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments. . . Second, the government should tell all healthy banks to issue new equity. Again, banks resist doing this because they don’t want to signal weakness. . . A government order could cut through these obstacles.
Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks’ bad loans but by buying equity stakes in the banks themselves. Whereas it’s horribly complicated to value bad loans, banks have share prices you can look up in seconds . . . The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.
Mallaby also points out the difference between the Paulson Proposal and the Resolution Trust Corporation that it might be compared to:
The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.
The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC’s job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice.
Despite the widespread opposition to this knee-jerk reaction in Washington (I’ve only linked to 5 examples) I fear that the bill that gets passed all too quickly will look almost exactly like the one Secetary Paulson proposed. I think government is the only institution that can consistently be efficient where they should be deliberative and inefficient in all other things.
Please take the time to contact your Congressional representatives to encourage them to slow down on this and avoid a few of the gaping potholes before them.
I try not to focus on political or economic issues on Sunday, but I had a hard time when I noticed the figure "$700 Billion" yesterday. I was particularly worried by this statement:
. . . it would allow Treasury to act unilaterally: Its decisions could not be reviewed by any court or administrative body and, once the emergency legislation was approved, the administration could raise the $700 billion through government borrowing and would not be subject to Congress’ traditional power of the purse. . .
”It essentially creates an economic czar with no administrative oversight, no legal review, no legislative review. And it gives one man $700 billion to disperse as he needs fit,” said Sen. Dianne Feinstein, D-Calif., referring to Treasury Secretary Henry M. Paulson Jr.
”He will have complete, unbridled authority subject to no law,” she said.
In an administration that is already known for stretching its authority I have long had some fear of the consequences of the War on Terror. After this I am equally worried about the consequences of the War on Economic Uncertainty if this measure passes as submitted.
Thankfully the Democratic congress is pushing back on some aspects of the plan such as the lack of oversight.
Democrats want the measure to include independent oversight, homeowner protections and limits on executive compensation, House Speaker Nancy Pelosi, D-Calif., said in a statement early Sunday evening.
"We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome," she said.
While I historically agree with the Republican party more often than the Democratic party on economic issues, I very much side with the Democrats on this one (if I’m forced to choose one of those two positions). We must have a healthy system of checks and balances between branches of the government. Regardless of the checks that may be imposed by Congress, anyone who still argues that we have a free market is either lying or ignorant.
I saw much more encouraging news this morning:
Goldman Sachs and Morgan Stanley, the last two independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation, the Federal Reserve said Sunday night.
The firms requested the change themselves . . .
(emphasis added)
This is how a free market is supposed to work. The individual companies recognize their precarious position and make changes themselves. Only the threat of failure will cause them to do this. Having the safety-net of a bailout available only encourages more risky practices. What is really interesting to me about this move is that it essentially reverses a "protective measure" that was passed in the Great Depression. Apparently that intervention in the market helped to facilitate our latest economic shock.
By the way, the plan includes a provision to raise the debt limit from $10.6 Trillion to $11.3 Trillion. What good is it to have a limit if those who are "limited" are allowed to move the goalposts at will?