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September 29, 2008

Comments

Hopefully, this is not a cultural disaster in which all of current social contracts come up for renegotiation. Of course, one might wonder whether such a set of circumstances could ever have come into being if what we expected in the way of social contracts even, in fact, existed at all.

Thanks for being sane on this, Hilzoy. So much of the liberal blogosphere seems to have gone completely bonkers about this, and largely in a really knee-jerk, "we hate big corporations" kind of way.

Thanks for being sane on this, Hilzoy. So much of the liberal blogosphere seems to have gone completely bonkers about this, and largely in a really knee-jerk, "we hate big corporations" kind of way.

I think it's quite possible to support this bill reluctantly and still hate big finance people with a white hot intensity....

I'd like to echo gwangung and just add that my hatred for big corporations--particularly those deemed "too big to fail"--is not knee jerk. It is considered, thought-out, and frankly, reasonable given the circumstances. In my opinion, the people who are bonkers are the ones who are refusing to question the basic premises of the system that brought us to this point in time.

FWIW, I'm against it, simply because:

1. It's a big, expensive project that involves Congress inventing a lot of money that the US doesn't actually have.

2. It's being run by the Bush administration.

I don't know economics: I just know that, given the past 8 years, left up to the Bush administration, I would expect this project to go horridly wrong.

More than that: I would expect this project to go horridly wrong in a way that would benefit the Bush administration/major Republican donors/the McCain-Palin campaign.

2. It's being run by the Bush administration.

I don't know economics: I just know that, given the past 8 years, left up to the Bush administration, I would expect this project to go horridly wrong.

If they go through the $250 billion in the next four months, that's a pretty valid concern....

Dear Hilzoy, it is perfectly true that the financial system of the United States is in a very bad way and it is probable that the country is headed for a depression in consequence.

Giving an enormous amount of money to very rich people who have a track record of using it for unproductive purposes which happen to benefit them, and to harm others -- that does not look like a method of heading off a depression.

The U.S. Congress has utterly failed to regulate the other malfeasances of the Bush Administration. Can you think of a single reason why they are going to succeed with this one?

Oh, and by the way. Those people who are unhappy because some people on the left hate big corporations? Those big corporations are the forces responsible for the entire problem, dear friends. It is not only proper to blame them, it is essential. The refusal to blame them is the clearest possible indication that the current plan is intended to undermine the people of the United States in order to rescue a tiny plutocracy.

One simple change that would do much to minimize future disasters caused by overly clever rich people trying to get super-rich would be to revive really steep tax rates for really high incomes. If you're a CEO and your marginal tax rate is 90%, more of your status, satisfaction, etc. will come from your position (head of Acme Products! All hail!) and less from your bank account (only $100,000 of your second million in income gets to that Swiss bank account, poor thing).

This is not an argument that we should reluctantly tax rich folks because of the useful things we can do with the money; this is an argument that we should eagerly tax rich folks because it will cut down on the damnfool things they'll do to become obscenely rich.

I think we should spend that money on useful and necessary things; but we'd still be better off extracting the cash from the rich even if we loaded it onto leaky ships and sank it into the Mariana Trench.

gwangung: If they go through the $250 billion in the next four months, that's a pretty valid concern....

Getaway money if the impossible happens and Obama wins with such a majority that there's no way McCain can be handed the White House in January.

Not that Obama plans to seriously investigate or prosecute the crimes of the Bush administration, but there's just a chance that it might happen anyway if you remove the active obstruction at the top.

I'm not sure I seriously believe that, but I certainly, seriously believe that there's no way the Bush administration ought to be handed another crapload of money and told "here, fix what you broke".

I'm generally for it. The arguments against it are arguments of principle (generally), not arguments against its efficacy. It is the arguments against its efficacy (and there are a few out there) that scare the begeezers out of me.

Krugman is rallying the troops. I was wondering if I could bring myself to vote for Barack HuSame Obama... but the thought of Phil Gramm as Treasury Secretary is truly horrifying.

Granted in advance: the decision to launch an aggressive war against another country is far worse than the decision to "fix" an economic crisis by funneling large amounts of money to the people responsible for it.

But all the sensible, prudent people saying that after all something did need to be done about Iraq, and yes, this might not be absolutely the right thing to do but we should listen to the experts and the experts were saying this needed to happen...

They were wrong.

All the hotheaded, idealistic, cynical, leftist, visionary, principled people who opposed the war on Iraq from the start?

We were right.

I was intrigued about the "popularity" of the leading people involved in the proposed bailout bill so I did a face-off at my Word Face-Off blog: Paulson, Bernanle, Pelosi, Reid, Frank, Boehner, McConnell, Baucus... even Bush, Obama and McCain. The resulting trend graphs are very interesting.

As an economist - and a Bayesian at that, the very line "is/is not" a crisis is more than a bit problematic. A better way to frame the question would be "What is the probability of a financial meltdown without the passage of the bill?" Alternately, how does that probability change with the passage? Or one more, how have Paulson's actions changed that probability over, say, the last six months? That is, should you trust him to come up with a solution?

Different economists would answer the first question very differently but I doubt that few would place that probability at greater than 50%. I suspect that even Paulson may not place the probability that high. Personally, I'm down in the 5 to 10% range. Still a big number but a number that suggests - given the costs of being wrong either way - that it's important to take the time to get things right. Perhaps as importantly, we have the time to get things done right.

The administration used fear to push a panicked vote for authorization to attack Iraq. I would hope that everyone in Congress would recognize the current setup looks distressingly similar.

Thanks for the voice of sanity. The Liberal blogosphere is so sure this is wrong. I am no economist, but common sense tells me these banks are connected in ways they even don't know. if they tank they are taking with them hundreds of thousands of jobs, middle class investments in stock market, and their tangled web in every industry. Hence I support the bailout.

Did you just compare Economics with Theoretical Physics? Okay, let's be honest, Economics has a lot less in the way of successful predictive results than Physics. A lot, lot less.

I think this is part of the problem here, we're being asked to make this decision on the basis of what experts tell us, but this isn't a field where experts have been shown to be much more reliable than people with average common sense.

Is there a disaster coming? Probably. But it's amazing we needed Paulson to say so, and to cite vague and incredibly convoluted reasons. You'd think just looking at the level of federal debt, the size of the deficit, the amount of consumer debt, and the fact that we are fighting two land wars in Asia while waiting for the Baby Boomers to retire would be enough. Common sense says that couldn't go on forever.

But apparently none of that is a problem. The real problem is too vague and convoluted to be understood by anyone but experts.

Will the bailout plan work? Honestly, I think the experts are guessing just as much as we are. About all we've got to go on is other countries in the past with banking problems, and what they did, and what happened next.

Thank you! It drives me nuts to hear commenters and bloggers blithely give their opinion. The arrogance and recklessness from both ends of the political spectrum has served to muddy the situation even more. I think you have it exactly right. A banker I spoke with said Bear Sterns was supposed to be the firewall. When that went down there was no room left for failure. I don't know if that is true but I can understand what that means. We need to be calm and rational instead of falling back into our respective ideologies.

Well, the guys who were right all along (Roubini and Baker) do not want this bailout, and the guys who a year ago didn't think this could happen (Krugman and DeLong), think it should pass. I'm going to use a highly esoteric evaluation method that consists of not listening to guys who were wrong and say this bailout shouldn't pass, and the Dems are committing hari-kari by passing it.

But all the sensible, prudent people saying that after all something did need to be done about Iraq, and yes, this might not be absolutely the right thing to do but we should listen to the experts and the experts were saying this needed to happen...

They were wrong.

All the hotheaded, idealistic, cynical, leftist, visionary, principled people who opposed the war on Iraq from the start?

We were right.

Jes, the two situations aren't even remotely comparable. In the case of the war, the hotheaded idealistic cynical leftist people of principle were backed up by the experts who actually knew the facts on the ground: your Jean Coles, your Scott Ritters, et cetera. The "sober practical individuals" backing the war were either self-interested in seeing a war or were ignorant of the facts on the ground. (Or were Thomas Friedman, who occupies a special seat of his own.)

This time around, the sober practical individuals backing the bailout aren't particularly self-interested for the most part (at least not the ones worth listening to - I'm talking your Paul Krugmans and your Brad DeLongs, not your Henry Paulsens) and definitely aren't ignorant of the facts on the ground.

Dean Baker and Nouriel Rabini have both made compelling cases against the bailout; Krugman and DeLong have made strong cases for it. Base support for bailout or no bailout on the cases they make, not on a gut feeling that you're right - the gut feeling is how the war in Iraq got started in the first place.

So much of the liberal blogosphere seems to have gone completely bonkers about this, and largely in a really knee-jerk, "we hate big corporations" kind of way.

I'm not against federal action to insure that the credit markets continue to function.

I am against tax money being used to insure that financial speculators don't lose money.

Are those two things impossible to tease apart?

I'm not anti-corporation. I work for a corporation, and hold equity in corporations. I think corporations are an excellent vehicle for taking on commercial enterprises that are bigger than a breadbasket.

I am against *people* who use their position in corporations to engage in reckless and anti-social behavior. I'd like to see them in jail.

What I am really, really, really against are the folks in government who have failed to safeguard the public interest.

Look, the problem here is not corporations. The problem is greedy, reckless *people* who want to make themselves obscenely wealthy by playing stupid games with other people's money.

If there is a way to stabilize the capital markets without giving them a dime of my money, I'm all for it.

If not, then we'll all do what we have to do, and we will, once again, suck it up and move on.

But there is nothing "bonkers" or "knee-jerk" about the anger that folks feel. We're being screwed, and that right well.

It really ought to piss you off.

Thanks -

Well said, mightygodking. "Don't listen to prudent-seeming people!" isn't a good takeaway message from Iraq, though I'm sure it leads to a much more exciting life.

I'm excited that I'll probably get to buy a bank on the cheap through my government. The details of the AIG bailout are really encouraging, as far as how things will turn out for the taxpayer. Paulson was given a free hand there, and he gave us a really good deal -- 11.5% interest on anything they borrow, 8.5% interest on anything they don't up to 85B, and 80% of the company.

"I think it's quite possible to support this bill reluctantly and still hate big finance people with a white hot intensity...."

Yep. As I said somewhere, I am trying -- and it does take effort -- to keep my eyes on the ball. And the ball, as far as I'm concerned, is what happens to ordinary people.

Jes: If it were just like Iraq, I would be against it, as I was against Iraq.

As to Krugman: he certainly called the housing bubble. (E.g. here and here.)

I'm not very good at economics, but I'm not stupid either and economics isn't hard science. So before anybody speaks in favour of just giving 700 billion away (btw, why not 300 billion, or a trillion, who's to know?) I would at least expect them to make a strong case against Roubini's case that:

the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification.

But hey, it's not my money.

I'm talking your Paul Krugmans and your Brad DeLongs

Yes: and neither of them support the bailout. Brad Delong supports "temporary Swedish-style nationalization", and Paul Krugman calls the current plan an "ugly compromise".

My basic point is: you can't trust the Bush administration. By this time we are - or ought to be - all experts in the facts on the ground.

Anyone who is basing any part of their belief that the bailout ought to happen on the Bush administration acting for the good of the country, has probably been living in a little Republican bubble in Alaska for the past 8 years, or else is running a fever that causes a level of delusion.

We can assume that the Bush administration will do whatever they think is best for their own, and secondarily whatever will ensure that McCain is in the White House in January and/or the Democrats do not control Congress.

We cannot afford to assume that the bailout will be administered competently or that the intent behind it is to alleviate the damage that a financial crisis will do to the majority of people in the US or around the world.

Base support for bailout or no bailout on the cases they make, not on a gut feeling that you're right - the gut feeling is how the war in Iraq got started in the first place.

Oh, come off it. Now you're just being silly. I don't have a "gut feeling I'm right" - I have a considered and knowledgable view of the Bush administration and the kind of people they appoint and the kind of policies they approve. In 2002 and 2003, the Bush administration didn't justify their leading the US into war based on a "gut feeling" - they just lied, and lied, and lied again, and lied some more, and are still lying.

Lesley: "It drives me nuts to hear commenters and bloggers blithely give their opinion. The arrogance and recklessness from both ends of the political spectrum has served to muddy the situation even more."

So you'd prefer we just come up with a blank check every time Paulson asks for one?

Thank God for the netroots outrage, for the Main Street disgust, for the closest thing to a middle-class revolt we've had in a long time.

If there had been this kind of angry introspection before most Dems put up very little fight before Bush took us into Iraq, maybe that situation would have turned out differently. I doubt it; but maybe.

P.S. Pelosi wants us to call the bailout a "buy-in."

My problem with this bill is that I've been following all this as well as can be expected by a non-banker and I still can't understand what exactly this is supposed to do.

Essentially, the solution is that the treasury will buy up assets above market value (otherwise, this whole thing is useless), and sit on them for an unspecified period of time until they become more marketable and will then sell them. I'm fairly sure that a lot of these assets have a current fair market value of $0 and an expected future value of $0 and everybody knows this. Most of the last couple of years has been extended efforts by holders of these securities and obligations to make sure that price discovery didn't happen.

As far as I understand it, the problem is that there is a large risk that short term credit will seize up due to counterparty concerns: all the banks have no trust in each other to pony up. If that's the case, why don't we solve this problem directly? We The People have these spanking new Fannie Mae and Freddie Mac things we bought a couple of weeks ago that buy and guarantee conforming mortgages: can't we add conforming commercial debt to their charter and put the money there, and strengthen FDIC and SIPC to take care of bankruptcies?

I'm guessing that solving the actual problem means a lot of banks, with their equity and debt, will get wiped out. However, if we stop the credit seize-up, life will go on with the surviving banks. The actual proposal on the table seems to save the banks and hope that that saves the credit market.

Experts aren't stupid, but they are often conflicted. They will be talking their books, since that's what they're paid to do. A lot of these people should have been screaming their heads off years ago about the same securities that are now imploding, but didn't say a word. Also, the death of the current Wall Street ecosystem may be like the end of the universe from where they sit, but the rest of us may weather this a lot better than they personally do.

If it were just like Iraq, I would be against it, as I was against Iraq.

Well, it's not an aggressive war on a nation that can't do the US any harm.

It's only like Iraq in that it's a colossally expensive mistake that a lot of people are arguing the prudent thing to do is to support it because it has to happen now, even though there doesn't appear to be a single independent expert found to give this "plan" wholehearted approval... and it's also like the Iraq war in that none of the supporters have discussed how the Bush administration are going to be prevented from wrecking it in their usual style, or how the Bush/McSame administrations will benefit from it electorally.

I actually don't blame the financiers too heavily. You have to consider their institutional incentives: many knew that things were getting out of control, but if any of them were to forgo the massive profits that others were seeing then they would quickly be out of a job. You were constantly faced with the choice of gambling that the crash wouldn't come this quarter or this year, or else giving up the gig.

I blame the overseers of the markets a lot more: they didn't apply rules that would keep the game within reasonably sane constraints, the individual players where each playing as competitively as the rules allowed in order not to get benched.

Obviously it's not as simple as that. But what is one banker to do in, say, 2005? Stand up and say for the good of the country he wasn't accepting these assets any more, and then watch as those assets are gobbled up anyway by the other players who probably made a hat of money for the next year or two?

You know, it's also worth considering that if the bailout is reasonably effective and the depth of the expecting recession is relatively moderate, then perhaps the wealth lost during the hangover might be substantially less than the wealth created during the binge. In other words, it's not at all inconceivable that when we do the arithmetic 10 years from now, it will all have been worth it. I'm not saying that's what will happen, I'm just saying that a LOT of wealth has been created in recent years, and the people in charge seem pretty savvy to avoid the mistakes made in the early 1930s.

Everybody seems to want to jump on Bernanke and Paulson, but I can't see a great deal to fault them. The bailout is a bold attempt to act big and act early, thereby escaping much of pain caused by dithering after 1929 and in Japan during the 1990s. It's not like they personally caused the crisis, and you could not have expected them to ask congress for a 700 gigabuck outlay BEFORE banks started imploding, they would have been laughed out of the room.

Besides, as financial meltdowns go, while it's probably the biggest in absolute terms, the predicted bailout is a relatively small chunk of GDP compared to the average in these situations.

Just saw this, very funny - and scary.

I actually don't blame the financiers too heavily. You have to consider their institutional incentives: many knew that things were getting out of control, but if any of them were to forgo the massive profits that others were seeing then they would quickly be out of a job.

This is a key point, and what the deregulate-everything crowd just does not get. It's exactly the same reason we ban steroids in sports: if we didn't, an honest athlete would have the choice of not taking steroids and being completely uncompetitive and out of the sport, or taking steroids, being competitive, but ruining his health.

However, the CEOs certainly didn't come out against these securities, at least not in public. Since most of these guys are massively overconfident in their own abilities, my guess is that they saw the problems just fine but thought they were smart and fast enough to dump all the crap on someone else by the time the music stopped. Oops.

My problem with this bill is that I've been following all this as well as can be expected by a non-banker and I still can't understand what exactly this is supposed to do.

Essentially, the solution is that the treasury will buy up assets above market value (otherwise, this whole thing is useless), and sit on them for an unspecified period of time until they become more marketable and will then sell them. I'm fairly sure that a lot of these assets have a current fair market value of $0 and an expected future value of $0 and everybody knows this

My understanding is as follows:

The crisis at the moment is a lack of liquidity. Banks and other financial institutions lend money to each other all the time, all day long, sometimes borrowing huge sums of cash and giving it back before the close of business the same day. Now, however, everybody is afraid that they are going to lend a big wad of dough to the Super Permanent New York Bank of Invincibility, and the bank will implode before paying them back. Thus everybody is asking for enormous interest on their loans, thus nobody is borrowing or lending. But because nobody is borrowing or lending, the prophecies of doom are almost self-fulfilling because banks go bust when they otherwise would not have if they could just have borrowed money like they normally do.

The root problem is a lot of lousy assets out there, but while much of this stuff might well end up being practically worthless, their current worthless evaluation is the result of a total lack of demand, because no one is borrowing money to buy them. You could have a diamond as big as a grape, but if no customers exist for it, then it's practical value is zero.

The bailout thus proposes to recapitalise the banks by giving them hard cash for these assets, in theory instantly boosting reciprocal confidence and get the money moving through the pipes again. These assets are NOT worth zero - in the future they may well end up being quite valuable once the system is back on its feet and the natural buyers of such assets are able to start buying assets again. Some will be duff, some will be very profitable for the government, no one seems to think this is $700B down the drain. Talk of eventual profit is optimistic, but not inconceivable and the historical precedents are supposedly quite good. Moreover, the sooner the bailout occurs, the better for the economy and the higher the value of these assets will prove to be.

The government has to buy them now not because no one else is gullible enough, but because no one else has the money and the financial security to do so. The Federal government dwarfs any bank in sheer financial muscle, and is thus the lender and buyer of last resort in the event of an emergency.

While certain banks will go bust regardless, the hope is that banks that are in danger purely because of a temporary by very grave period of illiquidity can be saved.

In keeping with ericblair's comments, what really gets me is -- not so much bailing out all of these financial institutes if it is going to prevent another Great Depression -- but the idea that in order to get them whole again we, the taxpayers, have to buy their assets at well below market value. Or we're buying assets that we are simply guessing at their value.

The whole thing seems unscientific and a crapshoot.

But because it's being done by people much smarter and richer than me and ericblair, we are told even though it's medicine that tastes bad we need it.

ericblair: yeah. I am fascinated to see McCain blame this on greed. Last time I checked, the general idea behind capitalism, was that greed, properly channeled, drives innovation and efficiency.

Our present administration, along with Alan Greenspan et al, decided to forget the 'properly channeled' part. I suppose it's to be expected that given a choice between remembering it -- aka giving up on the idea of deregulation as a e-all and end- all --and blaming "greed", they would blame greed. But that's like blaming competitiveness for problems in sports.

Not (to be clear) that I don't think they are, in fact, greedy, and not that I am not well and truly pissed at the lot of them. Also, not as though I don't find a lot of their priorities not just wrong, but inexplicable. (There's a reason I'm not on Wall Street...)

I just think it's funny when conservatives decide that the problem with the markets is greed. That's all.

ericblair: The thing about mortgage backed securities is that no matter how spurious the loans were, they are backed with houses, and although houses are falling in value, for them to be entirely worthless is a hard situation to imagine.

But even so, a rather important provision that Dodd-Frank added is that if the securities turn out to REALLY be worth less than the government pays for it then we get shares of stock instead and it just becomes a good old fashioned buyout of the respective companies.

The whole thing seems unscientific and a crapshoot.

I don't think it's unscientific at all. In fact a bailout is SOP for a financial meltdown, because as much as people like to warn against 'moral hazard', the reality is that no conscionable government can watch its capital markets evaporate. Bankers may grate, but without them none of us would have jobs, and though we wish it wasn't the case and say that it's not the cash, the harsh reality is that a banker is simply more important - economically speaking - than a factory worker.

There's certainly a lot of known unknowns etc., but I think that NOT bailing out the financial sector as a point of principle would be to gamble the entire country to prove a very questionable theory. You would be risking calamitous depression now so that future generations of bankers *might* be more careful. Which is obviously silly, and based on the whole anti-regulatory ideology that doesn't want to stop bankers from getting too silly simply by not letting them, instead of allowing the economy to implode a few times until they learn their lessons.

That's basically what the whole anti-regulatory, anti-bailout ideology of the House Republicans comes down to - pure fantasy. They think the absence of government is utopia, when actually the absence of government is just Russia in the 1990s.

"I don't think our Congress has faced a more important decision than whether or not to pass the bailout bill in decades, perhaps longer."

Should be: "I don't think our Congress has faced a more important decision in decades, perhaps longer, than whether or not to pass the bailout bill."

We're not discussing whether or not to pass the bailout bill decades from now.

The root problem is a lot of lousy assets out there, but while much of this stuff might well end up being practically worthless, their current worthless evaluation is the result of a total lack of demand, because no one is borrowing money to buy them. You could have a diamond as big as a grape, but if no customers exist for it, then it's practical value is zero.

Interesting discussion. However, if it really is a liquidity crisis only as you say, why shouldn't the current efforts by the central banks to "flood the system" be the correct way to solve the problem? Why do we need to buy the securities, since there's hundreds of billions of dollars more money/credit in the system today to buy this stuff on the market?

I'm far less sure of the worth of these securities, since they're based on mortgages whose risks were seriously misrepresented by the homeowners and mortgage brokers, plus their performance was based on some seriously flawed mathematical models that assumes that a lot of default events were independent instead of systematic. Even if they are worth something, there's enough uncertainty due to the flaws and misrepresentations that make these look like pigs in a poke and have a market value reflecting that.

If H. can basically repeat a thread, I can repeat a comment:

hilzoy: It is also, in my judgment, not a time for those of us who are not professional economists to imagine that we can sort things out without expert advice.

Tell it to Congress. They chose not to take testimony from any professional economists about these proposals.

Those principles Obama laid out last weekend? There are only gestures toward them. The negotiations won almost nothing substantive. This bill is the naked class war of the Paulson proposal with a few fig leaves.

No.

And I'm not opposed on principle, pace byrningman, but opposed because this bill may not resolve the credit freeze, certainly will not do anything to solve the underlying problems (either in terms of regulation to prevent more bubbling-up or in relief to reduce the toxicity of mortgages at the bottom of the betting pile), and is being paid for by the wrong people.

If there had been this kind of angry introspection before most Dems put up very little fight before Bush took us into Iraq

Um, there was. It made no difference at all.

I've got the big fear that the Bush Administration doesn't really care what's on that written piece of paper and will do as it will.

And be incompetent at it, as usual.

My wish is to get something that will hold things together until a real plan is formed by the incoming administration.

Nell: I don't want to re-argue Iraq. But I don't recall the public being nearly as angry and confused and desperate about Bush taking us to war than they are now about the Fed taking our money.

Nell: "This bill is the naked class war of the Paulson proposal with a few fig leaves."

Two dubious legacies of the Bush Administration:

Iraq.

Class warfare, featuring the brutal beatdown of working America.

Considering that they had only one rather than eight years of Bush-Cheney looting-as-governance to go on, a remarkably high percentage of the public -- a good third -- were angry and desperate.

Another sixth were confused and uneasy.

But the corrupt political class, then as now, had already made the decision to go along.

Ithink that the public in general is far less jhappy aboutthis bill than they were about invading Iraq. In fact I think that the publicn in general supported, in deed wallowed in jingoism, befoe, during and immediatlely after the invasion.

Rank and file Deomcrats are different, a sub fropup of the public and a subgroup that often has a different reaction to major events than the wider public. Before, during and after the invasion many many rank and file Deomcrats were very disgusted--with Bush and with Democrats in Congress. In fact I think that's why Hillary didn't get the nomination.

On this issue, well as a rank and file Democrat my feelings are very mixed. I'd be a lot happier if there was a big well publicized effort underway to restore the regulations that are need to prevent this form happening again. I'd also be happier if the problem was being clearly labelled as one caused by Republican deregulation. Put the regulations back, blame the deregulators: that's ending the party. But just a bailout, even with strings? That's just giving the drunk some hot coffee while we wait for the next party. So I'm pissed.

Something to remember: the alternatives for Iraq were much simpler: invade or not invade.

That's not the case here; the alternatives are more in number and the issues way more complex (at least from what I can tell). And, hard to admit as it is, we ARE going to have to call upon the same yo-yos who got us into this mess to do some of the work to help alleviate it.

On this issue, well as a rank and file Democrat my feelings are very mixed. I'd be a lot happier if there was a big well publicized effort underway to restore the regulations that are need to prevent this form happening again. I'd also be happier if the problem was being clearly labelled as one caused by Republican deregulation. Put the regulations back, blame the deregulators: that's ending the party. But just a bailout, even with strings? That's just giving the drunk some hot coffee while we wait for the next party. So I'm pissed.

Ah, that crystallizes my thought exactly.

[W]hat is one banker to do in, say, 2005? Stand up and say for the good of the country he wasn't accepting these assets any more, and then watch as those assets are gobbled up anyway by the other players who probably made a hat of money for the next year or two?

Perhaps, rather than putting every ounce of their effort into creating the crisis we now face, they could have used the untold millions they spent lobbying Congress to press for sensible regulations.

gwangung: we ARE going to have to call upon the same yo-yos who got us into this mess to do some of the work to help alleviate it.

Granted. But what we're actually doing is giving virtually all the decision-making power to one of the people who, as chairman of Goldman Sachs, got us into this mess (and then got Goldman out of a lot of it by taking over AIG), who failed to put any of the brakes on and continually insisted things were fine while the situation careened out of control.

My reaction to this post was immediate, and I was going to compose a post, but then I read what TJ said, and all I can say is ditto.

Well, the guys who were right all along (Roubini and Baker) do not want this bailout, and the guys who a year ago didn't think this could happen (Krugman and DeLong), think it should pass. I'm going to use a highly esoteric evaluation method that consists of not listening to guys who were wrong and say this bailout shouldn't pass, and the Dems are committing hari-kari by passing it.

hilzoy, I'm sorry, but not even the most panicked of the economists from whose authority you are choosing to argue is predicting anything remotely resembling another "Great Depression."

I have yet to see a robust explanation of how a not-awful bailout actually fixes something rather than merely covering some (enough?) exposed assets. I have yet to see any explanation of why the only way to mitigate side effects of a "seizure" in the credit markets is to fork over umpty billion dollars right this minute. Krugman et al aren't saying even that much in so many words -- they just think the immediate liquidity is preferable to the alternatives and aren't saying anything about post facto options.

Let's face it. We don't have any (non-military) industrial sector worth talking about now, whereas in the twenties capital-intensive manufacturing was practically the whole economy. We also tend to forget that the depression-era wreckage of the ag sector was not just a problem with capital. There was the small matter of a long and severe drought as well.

In the absence of any (non-military) industries that require large amounts of capital and rotating credit to function it's not clear why fewer but larger concentrations of liquidity are preferable to smaller but more numerous concentrations of liquidity. Is the average citizen really going to benefit more from the protection of a hundred existing banks rather than from the creation of a thousand new credit unions?

There are other ways to prevent credit from drying up besides redistributing wealth from future taxpayers to professional moneylenders. There are other ways to create jobs besides pumping more cash into the money supply.

So thanks, but no thanks. We're gonna be in a world of hurt pretty soon regardless, and spending umpty billion dollars to prop up an overleveraged financial sector isn't going to change that.

Bankers may grate, but without them none of us would have jobs

This is actually not true. Many forms of employment don't require any capitalization at all.

Swap "bankers" and "us", however, and you're onto something.

the harsh reality is that a banker is simply more important - economically speaking - than a factory worker.

Well, sez you.

First of all, in terms of, for instance, the manufacturing sector, where "factory workers" actually work, the analogue to the "banker" would not be the line worker, but something like a director of production. Someone who makes executive decisions about how resources should be deployed, to maximize their value.

I'd say the overall economic value created by a manufacturing director would compare quite well to that created by an investment banker in enterprises of comparable size and capitalization. My two cents.

So, nothing personal, but IMO your point here is bogus.

Thanks -

As with the Iraq decision, while recognizing that the impetus for the deregulated debacle came from the right, I'm seethingly furious with the Democrats who allowed this bubble to continue, made no real effort to re-regulate, and who when the crunch came in the form of this outrageous proposal failed to negotiate any real protections for taxpayers, much less the people at the sharp end of the foreclosure-recession-bankruptcy stick.

I'm looking at you, Barney Frank. And Chris Dodd. And all the other members of the banking and finance committees who've been bought.


ericblair: The thing about mortgage backed securities is that no matter how spurious the loans were, they are backed with houses, and although houses are falling in value, for them to be entirely worthless is a hard situation to imagine.

No time to comment in detail on the bill (I'm still getting caught up reading about it), but this comment quoted above is simply wrong, and it is very important to understand why.

The mortgage pools which were bundled into MBS were seperated into tiers of anticipated likely failure rates, called tranches, and this process was in many cases repeated at multiple levels. What that means in practice is that for an MBS which is not based on senior tranches, the value of that security is very much like being a creditor who is last in line during a bankruptcy process.

All of the money which can be extracted from the underlying set of mortgages will be used to pay off the senior tranches first and to do so completely, while the junior tranches will be left to see if there is anything left for them before the cash runs out. If the monetary stream runs dry before the junior tranches are paid, they can sustain up to 100% losses even if the default rate of the underlying mortgages is much closer to 0 than it is to 100%.

It is precisely the MBS which are based on junior tranches which the investment banks will be selling to the Treasury first, and then progressively more senior ones as they get deeper into their dodgy paper, as the unloading process continues.

This means that the first batch of paper sold to the Treasury by each investment bank will be completely and utterly worthless, and subsequent batches will only be worth something if they dig deep enough into their MBS pile to start selling us paper based on senior tranches - which they have little incentive to do because those securities are known by everybody on the Street to have value and will be liquid as a result.

So just because the actual houses continue to hold their value does not mean that the securities based on them will have any value at all.

As a wild off the cuff guess, I'd estimate that if we purchase $700 billion in MBS over the next 6 months, the Treasury will be lucky indeed to recoup $100 billion from that mess of paper.

Well, the guys who were right all along (Roubini and Baker) do not want this bailout, and the guys who a year ago didn't think this could happen (Krugman and DeLong), think it should pass.

They want it to pass, alright, but let's please not forget this minor detail:

Both think it's a bad plan and that it will probably not help resolve the crisis.

ThatLeftTurnInABQ: That's what makes the equity warrant provision Dodd inserted so critical (in fact, my support for the bill hinged entirely on that sole provision).

If they sell us stuff that's all junior tranches and charge us like it's senior, the difference comes out of their company. It's heavy incentive not to try that.

Also, it appears Treasury is going to purchase the assets by reverse-auction -- yet another incentive not to jack up the price.

Some companies -- those most desperate for cash -- will undoubtably gouge. And we'll end up with equity or senior debt in their company, and they will be among the last to be bailed out.

Equity warrants and reverse auctions push the incentives away from "Dump the worst crap on the government for the highest price I can think of" to "Sell as little as possible to survive, as close to what I predict it's actual worth will be in a year or two".

Without them -- IE, Paulson's original plan (unless part of the "I can do what I want, how I want" was him planning equity warrants and the like, which I doubt) -- you have a massive wealth transfer. With them, you have something that's not much different than any ordinary bailout, and a lot fairer to taxpayers.

As I said -- without Dodd's provision for equity warrants, I would be against this bill. If it turns out the compromise (and I THINk it requires warrants, but am not 100%) does not require warrants in virtually all cases, I will be against the bill.

Warrants are insurance for taxpayers against getting sold brass for the price of gold.

"In the case of the war, the hotheaded idealistic cynical leftist people of principle were backed up by the experts who actually knew the facts on the ground: your Jean Coles, your Scott Ritters, et cetera."

Who is Jean Cole?

I assumed that was a typo for Juan Cole.

Gary, he's the French counterpart of the English John Cole and the Spanish Juan Cole. There's an international fraternity of them, including Giovanni Cole and Ivan Cole and Hans Cole and Sean Cole and João Cole.

Johann Cole and Yiannis Kole as well.

Morat20,

That was my position on the bill as well - "no equity, no deal".

What scares me is that the articles I'm reading now are very confusing on whether the warrants as specified in the final version of the bill actually have any teeth in them or not, and there are already some indications that the practical effects of the bill may differ significantly from what the formal language of the bill would seem to indicatea - that some of the language in the bill may a fig leaf for concealing some very ugly and disturbing things which are not fit for public consumption.

It seems like this is one of those "the devil is in the details" areas where we may think we are getting equity warrants which are actually worth something but in the end not so much.

In the face of this much confusion, I really don't know what is the best course of action, but if Roubini is calling this bill a monstrosity, that for me is a dealbreaker since Roubini has been closer to correct in predicting the course of events than anyone else thus far.

It really comes down to trust here - and at this point I don't trust anybody except the harshest critics of the administration and Wall St. who are either dead set against this bill (Roubini) or are telling us it is a crappy deal but the best we can get out a politically toxic environment right now (Krugman).

And to repeat a point I made in a prior thread - I think this is our one and only shot to recapitalizing the banks with borrowed money. If we blow this chance (with a bad bill which fails to solve the problem) then I don't think we will have another chance to borrow money from abroad - the Treasury will have to scrape up the cash via massive tax increases, not by selling more T-bills.

Though it may be a few years before Giovanni Cole really gets his blog going.

It's a judgment call, and one that requires a fair amount of sophisticated knowledge. I am of course trying to understand it as best I can. But I am not under the illusion that I could arrive at a view I feel real confidence in on my own.

That's all true, and I'm torn between acknowledging my lack of expertise and my gut sense that I'm being taken for a ride on this.

One rule of thumb I can apply, though, is that when there's a major, major deal like this happening, I ought to hear screams of pain from both sides of the question. So far, I'm only hearing them from the "Main Street" side. That makes me lean to wanting to extract more from the lowlifes who created and enabled the untransparent mess we're in -- e.g., nationalization, voting shares in bailed out companies, tax surcharges on the very wealthy, etc.

Morat20: [If it] does not require warrants in virtually all cases, I will be against the bill.

Thomas Nephew: when there's a major, major deal like this happening, I ought to hear screams of pain from both sides of the question. So far, I'm only hearing them from the "Main Street" side.

The speed with which the House is determine to pass this makes it unlikely that we will get straight answers to questions about the toothlessness of many of the provisions. Therefore it's worth reading the analyses that have already been done:

Reports from the conference call Treasury held with about 600 people in the the industry (no media, no public invited; if it weren't for financial bloggers, we wouldn't know what was said).

'Analysis of the Bailout: What's In it, Anyway?' from Clusterstock

Didn't see TLTIAbq's comment; the links in my comment are from the 'Naked Capitalism' post he links. And I'd echo his excellent point, with the reminder that the best that can happen here (and it's very unlikely) is that this bailout eases the solvency fears that have created the credit seize-up enough to buy time for real regulation.

If it doesn't, then the progressive taxation that should happen to fund universal health care and clean energy investment will go to further propping-up of the financial sector.

Heaven forfend anyone touch that sacred military budget...

"It is also, in my judgment, not a time for those of us who are not professional economists to imagine that we can sort things out without expert advice."

Your faith in economists and the study of economics is misplaced. For example, Long Term Capital Mgt was comprised of the very best and brightest economists (including nobel prize winners) and they went bust and almost brought down the entire financial system.

I am fairly certain that someday this "bailout" will be seen in the same light leeches as cure by medical doctors.

We're gonna be in a world of hurt pretty soon regardless, and spending umpty billion dollars to prop up an overleveraged financial sector isn't going to change that.

But that's the point of the bailout, helping the banks deleverage in a safe way.

Krugman: "Mr. Gramm hasn’t had an official role in the McCain campaign since he pronounced America a “nation of whiners,” but he’s still considered a likely choice as Treasury secretary."

Any blogger with an audience has a moral imperative to mention this as often as possible.

ThatLeftTurninABQ: Ah, I was aware of the magic of tranches but for some reason I didn't put two and two together that the diveeing up of payouts applied both when mortgages were paid off properly and when they were foreclosed on.

Russel,

me: Bankers may grate, but without them none of us would have jobs

This is actually not true. Many forms of employment don't require any capitalization at all.

First of all, in terms of, for instance, the manufacturing sector, where "factory workers" actually work, the analogue to the "banker" would not be the line worker, but something like a director of production. Someone who makes executive decisions about how resources should be deployed, to maximize their value.

I'd say the overall economic value created by a manufacturing director would compare quite well to that created by an investment banker in enterprises of comparable size and capitalization. My two cents.

So, nothing personal, but IMO your point here is bogus.

I just think that's an emotional response rather than a cold look at realities. No modern business exists without capitalization, you have to go to the developing world to find segments of the economy that subsist with credit markets - and subsist is the right word.

The line worker-manager metaphor is the wrong metaphor, because my point is that without bankers not only would the line worker not have a job, the manager wouldn't either, and the factory wouldn't exist.

Also, I'm sure not who was arguing that no American industries these days need credit, but that's just mad. You'd be hard pushed to find an industry that doesn't depend on credit. From the old car firms that are so in hole that they issue huge new bonds every year, to the shiny new dotcoms and biotech firms launched on a Powerpoint presentation and a huge wad of capital, the entire US economy is a big debt sandwich, and right now there's not enough to go around.

I haven't read the final bill yet, and I haven't read the arguments for or against it (except right here in this thread). But I hope when I do read them, they explain how the bailout plan protects itself from the demonstrated incompetence / malfeasance of the Bush administration in its last days.

And:

We're obviously going to have to pass some serious regulation to prevent this from happening again. I'm happy to postpone that: I think the next Congress is likely to do a better job in any case.
The political problem is that people less thoughtful than you are really angry and are looking for someone to blame, and right now it looks all too easy for them to blame the Democrats who are taking credit for a $700 billion bailout. That's going to make it harder to get a better Congress.

... Evidence that I hadn't read it: I didn't know the $700 billion had been cut in half. That might help with the politics.


But that's the point of the bailout, helping the banks deleverage in a safe way.

But it is quite clear that there are other ways to do this (see Sweden for examples, the IMF paper referenced by Yves for even more examples).

My best estimate is that there is a real crisis but we are being railroaded into a bad solution which likely to be ineffective at doing much other than providing large benefits to the people who are telling us we have to act now.

In other words: OMG the boat has just hit an iceberg. Quick! Launch the lifeboats - and make sure the bankers and brokers get in first.

If Roubini and Krugman are both correct, Roubini about the more purely financial aspects and Krugman about the political aspects (this is the best we can do in dealing with a potential emergency right before and election), which to me seems about right, then I think the best mitigation we can get would be to scale down the size of the funds being committed immediately and give Congress stronger control over commitment of additional funding.

One part of the private conference call which Yves posted (and which Nell also linked to) that is especially telling is this:

[note: the boldface is my emphasis]

Tranching of $700B (I didn't know that was a limit)

Entire 700B is appropriated entirely by the act, no further appropriation necessary.

Tranching: first $250B

Then Secretary determines that more is needed and tells Congress, another $100B
Then Secretary determines that more is needed and Congress has 15 days to refuse, the remaining $350B

No time limits. Can request all the tranches at once, no need for delays.

More about tranching:

To block the last $350B, Congress has to say no. Then the President can veto that. To override that veto, Congress needs 2/3 majority.

ALL of that must happen within 15 days, otherwise the money goes out.

Do you get that? This whole business of "well Congress can stop the flow of money if it doesn't approve" will require a Presidential veto override within 15 days or less.

How many veto overrides have we had recently?
How many do you think we can get in the face of finanical panic?

0 is what I'd estimate. In other words the tranching of this outlay is nothing but a cynical figleaf.


... Evidence that I hadn't read it: I didn't know the $700 billion had been cut in half. That might help with the politics.

Erik,

see my post at 1:14pm. There is a bait-and-switch manuever going on here.

Also, the point which Yves raised at the very beginning of her post is huge to me. The mere fact that that conference call was for analysts only stinks to high heaven. If it weren't for the econobloggers nobody in the wider public would even know about this.

We are entering RICO territory here with the way the details of this bill and what they really mean are being dealt with.

without bankers not only would the line worker not have a job, the manager wouldn't either, and the factory wouldn't exist.

And vice versa - this whole line of argument is absurd.

Bailout going down in the house? Amazing.

The House of Representatives (where the people go to fuck themselves) is voting DOWN the rescue plan.

The market is now down 600 points.

Banks and mortgage companies in Europe are going belly-up by the hour.

Good luck to all of you.

The jackasses over at Redstate are bragging about their effing guns.

They are going to need them.

Looks dead.

"I assumed that was a typo for Juan Cole."

Ah, thanks. For some reason he didn't come to (my) mind.

I tried to keep track of who said what, but life's too short....

So, to the general point of "Hate the Bankers":

I too work for a major, very well-known financial company (mutual funds and brokerage). It is also about the most cautious company in the business, and so has NO primary exposure, and almost no secondary exposure, to this crapola. And the point is, it is possible to be very, very succesful and very, very profitable in these businesses and DO IT THE RIGHT F-ING WAY!! Notice that Citi, for instance, is a huge buyer in all of this (absorbing Wachovia today); you haven't heard a breath of a whisper about problems at Fidelity, Schwab, Citi, Goldman, or many other firms. They could have chosen to dive in with both feet. They didn't. And yes, I know that except for Goldman they aren't "Investment Banks" per se. But there are lots of ways to invest in crap without underwriting it. You could insure it, for instance (Hello AIG!!).

So, yes, hate the bankers. By all means. They took unconscionable risks, and believed in the permanence of bubbles, both the worst mortal sins in their businesses, at their level, all for super big bonuses. As someone (probably more than one someone) said up above: its time to let the grownups run things.

As for executive comp: no-one likes that the limits are only going forward, but it would have been a hell of a series of court cases to try to abrogate exisitng employement contracts.

We are very close to the President of the United States declaring financial martial law.

If they sell us stuff that's all junior tranches and charge us like it's senior, the difference comes out of their company.

I'm getting a bit shell-shocked from spending so much time in the tranches. Can I transfer out of the infantry?

Thus endeth the campaign of Senator John McCain.

It appears to have failed in the house. I guess we'll see if the whole economy grinds to halt, or if the Dow just goes back to 2005 levels and we do something else about credit on Main Street.

Bailout goes down on initial vote in House:
Democratic 141-94
Republican 66-132 (now 65-133; probably more vote-switching ahead as GOP gears up to run on fake-populist "we killed the Wall Street giveaway").

The politics of it have a very Lucy and the football feel.

This bill stank on the merits, and to go in the

The merits of this bill are few enough, and moving in the Republicans' direction is

moving in the Republicans' direction is extremely unpleasant to contemplate.

JT: "The market is now down 600 points."

I have a co-worker -- he's only 10 years from retirement and is heavily invested; I am 20 years away and probably have no more than $1,000 in my 401K -- who is doing DOW play-by-play.

"Down 700."

"Now 425."

It seems ironic that the House Republicans -- the party of Wall Street, or so I thought -- seems intent on bringing this bill, and the economy, down.

P.S. Has John McCain re-suspended his campaign yet?

Can't the President appoint Warren Buffet as a "special advisor" to Congress?

I don't think there is an American alive who would object to that.

Just had a crazy thought: The McCain camp may wind up using the DOW's fall and the continued Bailout bruising as an excuse yet to call off the VP debate.

Something that caught my untrained eye about the plan (pp. 45,46,48):

The Secretary may not purchase, or make any commitment to purchase, any troubled asset under the authority of this Act, unless the Secretary receives from the financial institution from which such assets are to be purchased a warrant giving the right to the Secretary to receive nonvoting common stock or preferred stock in such financial institution, as the Secretary determines appropriate; or [...]

SUFFICIENCY.—The financial institution shall guarantee to the Secretary that it has authorized shares of nonvoting stock available to fulfill its obligations under this subsection.

On the face of it, I think I'd prefer voting "oh no you don't" stock to nonvoting "nothing I can do about it" stock, but maybe there's some up-is-down meaning to this I don't understand. Anyone else bothered by this?

"Just had a crazy thought: The McCain camp may wind up using the DOW's fall and the continued Bailout bruising as an excuse yet to call off the VP debate."

Does Palin know about the economy? She is from a state where they pay people to be residents.

And the point is, it is possible to be very, very succesful and very, very profitable in these businesses and DO IT THE RIGHT F-ING WAY!!

Good point, I always cringe when avoidable economic crises are treated like natural disasters and the concept of corporate ethics is hastily thrown out of the window.

Does Palin know about the economy? "She is from a state where they pay people to be residents (and keep an eye on Russia for the safety and protection of all of us, by God)."

I have two observations.

(1) Is this it for the Republican party and Wall St?
(2) The House Repubs are on some steps somewhere trying to blame this all on Pelosi's speech. They are holding up a copy of her speech and how it poisoned the well with partisanship yada yada. And I'm thinking to myself: what wimps, what absolute wimps. Last week, McCain suspended his campaign because this was some kind of national emergency, and this week the Republicans are telling me they couldn't do the right thing to save the country because of some speech???

I have two observations.

(1) Is this it for the Republican party and Wall St?
(2) The House Repubs are on some steps somewhere trying to blame this all on Pelosi's speech. They are holding up a copy of her speech and how it poisoned the well with partisanship yada yada. And I'm thinking to myself: what wimps, what absolute wimps. Last week, McCain suspended his campaign because this was some kind of national emergency, and this week the Republicans are telling me they couldn't do the right thing to save the country because of some speech???

If Pelosi can not get something as vitally important as this bill passed then what the 'ef good is she as Speaker? With a Democratic majority in the House this should have been a slam dunk.

Politicians are just too stupid to be allowed the responsibility of anything beyond smiling for the occasional photo op.

efgoldman: you haven't heard a breath of a whisper about problems at Fidelity, Schwab, Citi, Goldman, or many other firms.

There's more than a breath of a whisper of problems at Citi, which may be absorbing Wachovia in order to make itself "too big to fail", i.e. to avoid Lehmanization. They may be, along with UBS, one of the institutions most anxious for the bailout to proceed in order to unload their trashiest paper. A commenter at Calculated Risk describes the merger as "two drunks leaning on each other for support".

Given the scale of credit default swap business, and the lack of required reporting -- much less regulation -- no one willing to say actually knows how much exposure some institutions have. The NYT story Saturday made it clear that Goldman was AIG's largest trading partner and had some $20 bil exposure -- and that no one knew or was admitting that until their exec talked to Paulson to urge the AIG takeover.

The chance to get some clarity on the value of the assets is a potential plus of some bailout action. But the record of the current Secretary of the Treasury does not inspire confidence that he'd be aiming for clarity versus papering-over.

If Pelosi can not get something as vitally important as this bill passed then what the 'ef good is she as Speaker? With a Democratic majority in the House this should have been a slam dunk.

Slam dunk? Why? This was a watered down, compromise piece of legislation meant to appeal to the GOP. But more Republicans voted against it than Democrats!

If the Republicans are not going to support it, then the Democrats should not offer a compromise bill designed to appeal to GOP lawmakers. The Dems should craft an actual Democratic bill and then pass it with just Democrats.

That would be a slam dunk.

With a Democratic majority in the House this should have been a slam dunk.

Ken, for it to have been a slam dunk among Democrats the bill needed to have a lot more in the way of teeth wrt equity warrants, oversight by non-Treasury Secretary persons, relief for mortgage-payers, and smaller amounts of money disbursed before elected officials have a chance to evaluate and put on the brakes.

And if it had had those things, the bill might have passed on straight partisan lines; at a minimum it would be easier to defend. How would you have responded? Against the bill, is my bet.

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