No Deal

John McCain chose Sarah Palin to be his vice president.

There is a 40% chance John McCain will be president on January 21, 2009.

There is no way in hell that anybody should give any extra power to any Treasury Secretary chosen by John McCain.

I beg the Democrats in congress: write a bill that makes sense.

Comments

[howard]

the more i've thought about this tonight, the more i think it's a must for obama to oppose forcefully.

if he does, it will open up the space to think this through a little more carefully.

if he doesn't, it's far worse than the FISA sellout in my book: indeed, it pretty much assures us that our worst fears (that obama, politically, is another jimmy carter) are, in fact, true.

[stunney]

There is no question that if we don't give the Invisible Hand of Hank Paulson every unreviewable power imaginable, Muslim terrorists will feel emboldened to destroy our way of life in a way that will make 9/11 seem like a Sunday School picnic.

Indeed, if we don't give the Invisible Hand of Hank Paulson this power, America might see a Black Muslim raising taxes on our wealthiest citizens AS SOON AS EARLY 2009!

[rory]

I can only assume you are mocking Palin because of her lack of experience.

Pretty ironic since we are now in the midst of relying on the same experienced genius' that got us into this financial mess get us out of it. Perhaps we need less experience/genius and more common sense.

I figure Palin has at least a 50/50 chance of having common sense, while we have seen over the last few years, that the regulars in Washington definitely don't have it.

You have to admit, she did get the natural gas pipeline kick started after years of business as usual.

On another note, since a bailout in inevitable, I say it comes with strings. If companies want government money, they their employees (including CEO's) should have to accept government salaries.

[degustibus]

The likelihood of spineless Dems writing a sensible bill= Less than zero, or something like that.

[rory]

I should of added that my vote is officially up for grabs to the first candidate that takes a hard stand against the bailout as proposed.

[esb]

Recall that when William Jefferson Clinton was elected the 42nd President of the United States, his first significant move as P-Elect was to convene an economic conference of the best and brightest from academia and Wall Street to design an economic legislative package.

If this is an economic crisis orders of magnitude larger that what was being confronted in 1992, then we had better demand and have no less input than what he sought before legislating.

This "before Asian markets open Monday" ploy being repeated endlessly by Paulson reveals him to be little better than a street con man with a fnacy suit and perception management experience (or support).

Nancy Pelosi should stand up to Paulson and just say, "enough of the bogus scare tactics."

[lampwick]

I trust Chris Dodd in this crisis.

But I don't trust the Blue Dogs or the Democratic Leadership (Pelosi, Reid).

[low-tech cyclist]

Whether the bailout deal is a good one or a bad one, the question of how we're going to pay for it should be addressed head-on. If we're just going to go deeper in debt as a nation to do this, that leaves typical taxpayers still on the hook, only in subsequent years rather than now.

It seems to me that now is the time to address who pays, and to execute the tax hikes that will pay for the bailout over the next 5-10 years. That way, we can have this argument NOW.

To me, it seems obvious that the small sliver of the population that's done well in the Bush years, partly due to the bubble that set this up, should be the ones to pay for the cleanup.

I've got some ideas for specific taxes here: http://davidbroder.blogspot.com/2008/09/how-should-we-pay-for-big-bailout.html

Dunno how to get the Dems to wake up, though.

[do not let the pony finders inside the gates]

I nominate Volcker as chairman emiritus, Shiller, Stiglitz, Roubini, Michael Farrell (http://phx.corporate-ir.net/phoenix.zhtml?c=74036&p=irol-govManage), as candidates for the emergency committee of finance and tax responsibility.

Debate format will be every Tuesday till election day Pres Bush for the Paulson wing of the country and presidential candidate Obama as spokeson for the proposed emergency committee will debate and take questions from the public, decision will be a referendum on this November election day voted on a paper ballot only. The presidential candidate and vice presidential candidate can substitute for the acting president, but the acting president must appear at least twice a month.

If you have lost your investment bank through foreclosure, whether your vote counts or not can also be a proposal on the paper ballot. In the meantime no campaign contributions allowed through any vehicle.

[MobiusKlein]

My proposal is that the Bush administration should resign in shame first.
The notion that these folks have any business running this gig is crazy - don't give your car keys to the drunk after he crashes his own car.

Baring that, they can come begging, hat in hand to Congress pleading for a chance to make amends, do something right.

[Chris]

What should really scare the Congress is not the threat of a "meltdown" Paulson has used to do so, but rather the memory of being stampeded into the Iraq war by similar scare stories, mainly lies, being told them by this same administration five years ago. After the Iraq War mess, why in heaven's name would Congress trust and act on another scare story from this administration without taking its good time to look under the hood?

[pseudonymous in nc]

Phil Gramm plus $700bn line of credit to buy toxic paper = party on Wall Street.

Obama's campaign has talked about mutual responsibility -- that government should be there to help if you're in trouble and it's out of your control. This bailout rewards irresponsibility.

Where's the moral hazard here? What's there to stop another round of 40-1 leveraged idiocy to hit the quarterly number in line with the other idiots?

[mike]

It seems to me Bernanke is calling the intellectual shots on this.

I think all sides trust him, and should.

I see no reason not to trust Paulson.

[But it's not Paulson. It's a 40% chance of whoever the guy who thinks Sarah Palin is the most qualified person to be vice president picks.]

I am very afraid of this melting down further. Some European banks are as or more leveraged than ours. And they will probably have a harder time legally/politically of printing money than we will. Our government is seriously compromised by our huge deficit. When the market digests the essential facts here, we may all be too far along on our way to doom by the time McCain or Obama take over the Whitehouse.

So, it seems to me the downside of not letting these guys do whatever they feel they need to do now is much worse than the downside of letting them do whatever they feel they need to do.

We are seriously lucky we have Paulson and Benanke sitting where they are now. I think they are (probably) fine benevolent dictators. It could have been much, much worse given the general incompetence of nearly everyone else in this administration. Regardless, I think we have no other choice except to trust them.

-m

[Oaklander]

To those who argue that the choice is between total inaction and doing what Bush administration wants: why should it be so black and white? Isn't it more sensible to try and reach some kind of compromise, e.g. make sure that at least some of the (many) serious objections are addressed? I find it very ironic that the very people who got the US into this mess now have the nerve to call any objections to their demands unpatriotic.

[do not let the pony finders inside the gates]

equation

How do you value of the neighboring state of New Jersey's SWF investment in Lehman Bros Co.?

Investement x 100/20

or preferred investment, 100/100 = equity but no dividend ?

Help with the math here please, I don't know the value or even what class the NJ SWF investment was. I would label it under fiction next to Stephen King.

or $2.5 billion?

As [s]taff at Lehman’s New York office who helped to cause the world’s biggest corporate bankruptcy are to share in a $2.5 billion bonanza.

http://www.nakedcapitalism.com/2008/09/key-lehman-employees-to-get-25-billion.html

Barclays of London owes 200 former employees of Lehman Bros Co. $2.5 billion. In a Special Sec of the Treasury Paulson no do-overs, this is not the board game Risk back in college, move, "A Chapter 11 bankruptcy document filed by Lehman Brothers Holdings Inc says that Barclays has identified eight individuals out of the New York staff of 10,000 who are vital to make the deal succeed and a further 200 who are identified as “key”. It is thought that these eight directors will be locked into two-year contracts worth between $10m and $25m a year."

It is the English bank in London that has to pay the bonus; the brief just happens to be filed by the bankrupt firm. My hands are tied. Note the foreign relations angle from the state of our Special Relationship.

How did Lehman Bros Co. get the money? Special innovative finance move, move ahead 3 turns to the Cayman Isles, "Price Waterhouse Coopers (PWC), the administrator to Lehman’s European operation has demanded that the firm repay £4.4 billion that was transferred from the UK to Lehman’s US holding company just hours before the firm collapsed." Of course, Baber help us, the elephant in the room , this badly effects our closest ally, even in Finance. "This left London with no money to pay staff.," the staff being acquired from Lehman London by Barclays'.

All right. Bottom line, maybe there has to be a partial move subject to repeated "move backs", on Sunday, Monday. But tossing the first chip, impeachment, to the help is required {metaphor shark jump}.

[do not let the pony finders inside the gates]

Math. The unit is trillion.

The bail out proposal is $700 billion on Friday, 7/10 of a unit. It is $1 trillion on Monday. Time factor of money.

Refunding the FDIC is 1/2 $1 trillion in the near future.

Investment in retooling Detroit. wait, that's 1.2 units already?

Yes, it is.

Retooling Detroit costs one twentieth of a unit.

Now, hold on a minute, that's the lowest yet. I like the smooth sounds of Detroit. Let's make the love train. Come on board.

[book keeper of our president's magic treasure cellar]

the interest rate wand is a tube of lipstick

[jh]

Pony finder is totally incoherent.

[bks]

Who knew that Bush had one last catastrophe to visit upon America? Oh, wait, he's still got four months to screw up even worse.

--bks

[domino]

Rory,

The reason Sarah Palin is relevant here is only as evidence of John McCain's judgment in making appointments. This $700 billion will be the toy of the person appointed treasury secretary by either Obama or McCain.

Given how much thought McCain put into his VP selection, are you ready to trust his Treasury Sec? a priori? It could be anyone!! Maybe he'll decide its "mavriky to appoint an Islamic banker - they don't believe in interest rates! Who knows what he'd do?

Maybe you have a high opinion of McCain's judgment. In that case, are you willing to trust Obama's Tresury Sec? He might appoint a socialist!!! I'd bet you'd love to give a socialist $700 billion to play with.

The betting markets have close to even money on both candidates, so if you're happy to put $700 billion on even money (with weighted inflators/deflators for your opinion of each candidates judgement) then I would call you a risk lover.

[Cranky Observer]

> It seems to me Bernanke is calling the
> intellectual shots on this.
>
> I think all sides trust him, and should.
>
> I see no reason not to trust Paulson.

Sort of like we trusted the Bush Administration on the unPatriot Act, the anthrax investigation, and the Iraq War?

Cranky

[Nietz]

Ah, we're just a nation of whiners. We should give a trillion dollars to Phil Gramm and let him distribute it as he sees fit.

Things have been too good for too long so we need to get used to living with less. Sure, men in their 30s earn less than their fathers, despite twice the productivity. Sure, wages haven't budged for most people in 30 years and have declined for 90% in the last 8.

Those were the good times. Now's the time to pay for our "excesses". You may not have been invited to the party but it was a blast and now you need to help clean up.

[ken]

Imagine President Palin's first thought when contemplating the enormous, unchecked power the Treasury Secretary, who serves at her pleasure, will have. "Finally, finally I have a lever big enough to get someone to fire my brother-in-law!"

[Steve LaBonne]

So, it seems to me the downside of not letting these guys do whatever they feel they need to do now is much worse than the downside of letting them do whatever they feel they need to do.So you trusted them implicitly when they said "no more bailouts", and you still trusted them implicitly the very next day when they said "OMG we need a 700 mil blank check RIGHT NOW". I guess there's one born every minute...

[W.C. Varones]

A modest proposal:

1) Treasury gets extremely dilutive warrants from any bank that touches this facility. This is what happened at AIG: the taxpayers may lose a lot of money, but at least Wall Street's profit from the scheme is minimized and the taxpayers get something back in a best-case scenario.

2) Executive compensation is capped at any bank that touches this facility. Nobody makes more than 10x or 20x the median employee, and no more stock options. Maybe even a clawback for ill-gotten gains during the bubble. Executives don't go along? Push them out.

3) Substantial new funding for the Justice Department to prosecute mortgage fraud and securities fraud for everyone that caused this problem, from Angelo Mozilo and investment bankers all the way down to speculators who committed fraud on their loan applications. We saw "perp walks" for Enron and WorldCom. Why have we still seen none for this much larger fraud?

http://wcvarones.blogspot.com/2008/09/modest-proposal-for-tards.html

[El Cid]

This only proves my continued naivete.

I thought that the Republicans would have to privatize Social Security in order to hand Wall Street a $1 Trillion to play with.

Foolish me.

Turns out all they had to do was wait for a bad moment, and then it's "Hand us $1 Trillion in unmarked bills, America, OR THE ECONOMY GETS IT", and the frightened Congress thinks they're the hostages when they have all the actual weaponry.

[arbogast]

The proposal is deflationary. It was designed to be deflationary. And it is probably only mildly deflationary.

Anything else produces Fourth Reich inflation or a breakdown of American society.

The proposal is a good one and should be supported.

[capatalistpig]

Does "jh" not understand because he does not want to or is he incapable? Is it the impeachment to which he is opposed? Or is it the suggestion that wall street Republicans are to blame and should be required to pay?

[ob]

A thought on the opportunity cost of the Paulson plan:

I've been looking around at the commentary on the financial blogs about this bailout and it all seems rather narrowly focussed on questions about the eventual full cost, on the moral hazard issues, and on accountability. There is no discussion of opportunity cost associated with a USD 700 billion government expense. Two premises ought to be kept in mind. One, the ultimate point of the action is not to stabilise the credit market; this is just a means to the further aim of limiting the effect of the credit crisis on the real economy - consumption and investment - of the US. Banks going bust is a problem insofar as it causes the credit markets to dry up, thus limiting the opportunities for debt both for companies and consumers, causing a negative feed-back loop as consumption and investment dries up, leading to depression. Two, the way the plan is structured - buying up bad assets rather than capital infusions in the banks - makes it likely that the full sum of 700 billion will be eventually be written off as a loss (see the comments of Calculated Risk and Angry Bear).

So from this perspective, we can ask ourselves what the opportunity cost is of blowing USD 700 Billion on bailing out banks. Is this the most efficient way of limiting the effect of the credit crisis on the real economy?

Take a simple alternative - give the 700 Billion back to the tax-payer. This would involve USD 7000 per household, or if targeted somewhat more efficiently at those hardest hit, USD 14000 per household under the median wage. This would raise consumption and investment, help households pay off their credit card and mortgage debt, and cushion the blow for those hit by foreclosure and unemployment. Moreover, consumers' improved ability to pay off their debts would improve the performance of the various problematic credit instruments - CDO's, MBS's, etc - and thus improve the liquidity in the secondary credit markets.

So what is the objection to this alternative?
1. Is it grossly unfair? Yes, it is a grossly unfair redistribution from the affluent to the less affluent, but no less unfair than the reverse distribution proposed by the Paulson plan.
2. Is there a moral hazard risk? Yes, the consumer who has unwisely taken on too much debt will feel encouraged in this behavior. But, again, the Paulson plan encourages and vindicates the irresponsible behavior of other participants of the economy - banks. And arguably the moral hazard in the proposed consumer bailout is less of a problem. Because the hard-hit banking sector will have learned the lesson of the credit crisis and thus forbid consumers from overextending themselves in future.
3. Won't many banks go bankrupt? Yes, insolvent banks will go bankrupt. That is the point of a free-market economy - punishing bad investment.
4. Won't the implosion of the banking-sector cause a depression-inducing shrinking of the money-supply? Unlikely, the infusion of USD 700 bn will ensure an expansion of the money-supply.
5. Won't the implosion of the banking sector cause further government expense in the form of federal deposit insurance, etc? Certainly, but find me one economist who thinks that the Paulson plan is the end-game in credit-crunch related government lay-outs.
6. Won't this be massively inflationary? No. The kind of inflation that is problematic involves a self-reinforcing wage-price spiral, and a one-time infusion does not a spiral make.
7. Isn't this massive consumer bailout plan utterly insane? Yes, but it just puts into perspective how insane the massive Paulson plan is. And the whole justification for the Paulson plan is that these are insane times, calling for insane action.

There are other alternatives. This is just one example. But the question ought to be 'what would you do with 700 billion dollars to help the US economy?', not 'what color wrapping paper do we use for a 700 billion dollar gift to the banks?'

best,
OB

[Mithras]

Look, just saying "no deal" is not a response. This isn't social security (where we said "no deal" and it worked) or Iraq (where we said "no deal" and it failed, to the nation's cost). This is a situation where we have to say "here's the deal", because without an alternative plan, the legitimate, very real fear of a catastrophic financial collapse will cause Bush's plan to go through.

There are a lot of very smart people in the blogosphere who are qualified to come up with a proposal (*look at DeLong and Krugman*). They need to help us all come up with a set of principles, at least, to fight for in a financial system reform bill so we can call our representatives up first thing tomorrow morning and say, "No deal. Here's the deal."

[bakho]

In order to make a deal, you have to have all the inside information. Bush administration has more information and are not sharing it, so it is difficult for outsiders to propose something concrete. Dean Baker has laid out a set of principles.

http://tpmcafe.talkingpointsmemo.com/2008/09/20/progressive_conditions_for_a_b/

The Paulson plan is woefully short of the mark.

The problem with Bush/Paulson is that there is NO representation for the American taxpayer at the table. This is a proposal of BIG $$, by BIG $$ and for BIG $$. They do not have checks and balances in the room asking the right questions.

[Mithras]

bakho-
You say, "The problem with Bush/Paulson is that there is NO representation for the American taxpayer at the table."

There is this thing called Congress ....

I don't intend to be insulting. It's just that we can affect the shape of the deal if progressives act quickly enough. I like Dean Baker's proposal for comprehensive reform (to the extent that I can understand it), but we need a short sales pitch for Monday morning. And it's just not true that you need perfect information to make a deal, you just need a deal that will give you an acceptable outcome regardless of the contingencies.

[VennData]

There's no market for the debt securities in question. If there was and a bailout facility of this magnitude were proposed it would effect the price anyway. The huge new market buyer-only participant will fundamentally change the mortgage finance side

There is a crisis of confidence when people begin pulling out of money markets.

The banking system is illiquid, possibly technically bankrupt, and we are dependent upon it.

A fund of this magnitude puts the blame squarely on Bush so I just don't see why the "No Deal but I don't have a solution people" are not jumping for joy at this come down for GOP ideology.

Put an FCC-style board in charge and let's recapitalize the banks, then let the Democrats re-write the rules in 2009. They won't get it perfect, we can clean up any errors in 2010 and another cycle begins. But at least or ATM cards will have continued working. The system needs fixing now.

[brodix]

The full faith and credit of the United States of America has become a paper bubble. Wall street is a paper bubble. What this plan proposes is to make these two paper bubbles into one paper bubble. Think in terms of the WTC collapsing. This plan is like stacking all the office furniture in a pile to stop it. If you think there is anything that can be done to stop it, consider the assumption that Volcker cured inflation by raising interest rates. The wage/price spiral is a symptom of inflation, not the cause, which is a surplus of capital causing the laws of supply and demand to reduce its value. Volcker's higher rates may have reduced the supply of capital somewhat, but his recession reduced the demand by an equal or greater amount. It was Stockman's deficit spending which pulled surplus capital out of the private markets and injected them into pump priming the public sector, which had the additional effect of increasing private sector investment and spending. Our entire economic model is based on ever increasing debt to absorb savings. Where would the money the government borrows go otherwise? It is all one big bubble and it's been growing for decades. When it does burst fully and completely, here is an idea;

"Money is a medium of exchange and store of value. These work at cross purposes because as a medium of exchange, money functions as a public utility, while as a store of value, it is a form of private property. It is as private property that most people think of it, due to its historical origin as an accounting of assets, yet the reality is that modern monetary systems are fundamentally a medium of exchange and only as a function of that are they a store of value, as they have no real backing other than faith in the issuing institution and must be invested for the system to function and maintain value.

The monetary system, with its broad connectivity, is similar to a road system. You own your car, house, business, etc., but not the roads connecting them. That the money in your pocket is interchangeable with what is in others pockets is what makes it a function of exchange. Money is not private property, since you cannot print what you want, as the government retains copyrights, but effectively leases it out to the private banking system. Its value is based entirely on public faith in the institution issuing it, so the taxpayer is ultimately responsible for guaranteeing its value. The result being private gains and public responsibility.

The problem with capitalism is that it has created a large surplus of capital. This encouraged ever more lax lending standards as a way to absorb savings and sustain further growth of the money supply. The effort to privatize Social Security is a good example of the disconnect between rhetoric and reality, since there is no place to invest this amount of additional personal savings and would only be a boon to the brokers given the responsibility for handling it. We invest in our old age by investing in our parents old age, so that our children might continue the practice. It is a clear example of investing in the larger community as a viable form of savings. Wealth is a convective cycle of rising assets and precipitating benefits. Stopping this process only creates large storm clouds of marginally productive wealth hanging over a parched economy, much like we have now.

Currency did originate as a store of wealth, because it started as a accounting of specific assets, but political power also started as a projection of individual influence and evolved into monarchism before the inherent instability and corruption drove society to devise methods for making political power a public trust. It has come time to make economic power a public trust as well. Money lubricates the economy, rather than fuels it. Ideas, labor and resources are the real economic fuel.

If money were thought of as a public utility, it would have definite psychological effects. People might be less inclined to define their security in terms of the size of their bank account and start leaving natural wealth undisturbed and investing more effort in their communities and environment, rather than draining value out to put in a bank.

An effective financial system should have a currency loaned directly by the government, with the additional currency to pay these loans put into circulation by government payment for infrastructure. This would incorporate the banking system as a function of government at all levels. Small banking systems to serve at the county and town level, medium sized ones at the state and local level and larger national institutions. These would feed their profits directly back into the levels of the community which produced them and the various communities would be in competition to provide the best environment for people and business with these funds.

There are many aspects of the public sector which function quite well, from legislatures, courts, police, education, military, roads, etc. if they are managed effectively. It is not coincidence that private enterprise only insists on privatizing those aspects of community services which they can derive a direct and substantial profit from. Nobody thinks lots of regulatory detail will improve the situation, since the details are massaged best by those with an interest in them, so rather then trying to re-regulate the entire economy and society, just start with nationalizing a banking system that will have to be bailed out anyway. Government might be slower than the private sector, but that might be more healthy, since its perspective is longer term.

As it is now, government debt is the basis of our economy, which serves to transfer wealth from taxpayers to bondholders. Do we really want our government foreclosed on?"

In the natural order a conspiracy is simply the layer of the food chain, or the level of emergent phenomena above yours. Just as humans manipulate the natural world, there are levels of society which manipulate those less organized than they are. This emergent level used to be religious and political, now it is economic and financial.
The problem they face is that in a collapsing ecosystem, highly specialized top predators are vulnerable.

[ceolaf]

Rory,

The reason Palin is a relevant is not simply her inexperience. In fact, experience is ever the ultimate issue.

Rather, the issue is judgement. We often use experiene as a proxy for judgement, because experience often contributes to good judgement. But we all know people who have experience, and are still fools. Intelligence is an important contributor to judgement, especially when mixed with experience. And high quality education can be worth more than an equilent amount of experiecne. Put them all together (i.e. intelligence, education and experience) and you really increase the chances of developing good judgement.

And there are the occassional people who have incredible judgement, far out of scale with their limited education/experience.

The problem with Palin is not simply her lack of experience. Rather, there is also a lack of education on par with what principals generally have, and -- I would argue -- a lack of the kind of intelligence* we want in a president. She simply does not very forward looking in her thinking, rather is very focused on the short or even immediate term. She does not think deeply or logn about issues, rather going with her gut and sticking with it. That is, she relies on her own judgement without having done very much to hone her judgement.

Now, how to the finanical experts compare? They've certainly got experience. But their judgement has been flawed. Everyone knew there was a housing bubble. Everyone. And they ignored any amount of sense in thinking that a huge pool of very high risk loans is magicially going to be worthy of a AAA rating. Only, not all the "experts" thought. Certainly those at the financial firms acted that way; those who were more motivated by profit seemed to have been. But there are other experts who have been issuing warning. Perhaps most of those are in think tanks and academia, but they are out there.

So, don't confuse experience for judgement. People point to a lack of experience as indicator that someone probably lacks judgement, but experience is not really the issue.

* Clearly, Gov. Palin has many talent and is quite smart in other ways. She seems to be able to memorize quite well -- one of the most imporant things in our current educational system. She knows how to carry and present herself, and she connects with people. That is really imporant. She also seems to have a very good understanding of politics, in the small room/town sense. That takes real intelligence. Local politics is not easy, and she appears to have entirely mastered it. There are many areas in which we do not know whether or not she has aptitude, however. And, there are some that she clearly seems to lack.

[MaryLou]

Any chance saying 'no deal' causes an immediate stock market crash (eg, on Tuesday, after Monday's peeps of resistance sink in) which is then pinned squarely on the Democrats? Aside from the economics, it appears that the politics of this situation could be tricky. Right now, what wind of blame there is seems to be blowing in the direction of the Republicans. If the winds shift, look for another 8 years of Republican rule. Let's pray the Democrats do a good job of selling the imperative need for a better deal.

[Jonathan]

First, tell all of your friends to call their congress men and women and say NO to the Paulson plan.

Wow. I really like OB's idea. It has as much or more likelihood of working as Paulson's plan and does not reward those who made the bad business decisions at the expense of the tax payer.

Given that it is pretty bold and unlikely of gaining acceptance, I am pushing for an RTC like plan where we are taking over failing institutions, not simply buying the toxic assets from these institutions. In this manner institutions can fail, but the overall system will continue to operate. Ultimately this will cost us much less than a simple giveaway.

I agree with Mithras that we do need to respond, but we need to respond thoughtfully; not under the Buy Now or Else mantra.

[Mithras]

MaryLou-
You said, "Aside from the economics, it appears that the politics of this situation could be tricky."

Right.

You said, "Let's pray the Democrats do a good job of selling the imperative need for a better deal."

Let's do more than pray. Let's come up with a short and sweet description of what a "better deal" is and then call our congressional representatives tomorrow morning. Where's Brad?

[tegwar]

While this crisis push does follow the Bush Administration's M.O. (see Iraq, Patriot Act, Torture, Domestic Spying, multiple etcs) this case does seem to be a bit different. To wit, we have seen some of the actual carnage (collapses) rather than mere ominous suggestions (although those also make an appearance here). So 'something' needs to be done. And while always we prefer that that 'something' be considered and thought out - sometimes time does not allow that. Mostly, I see that point as a reason for consistently high-grade leadership - people whose judgment can be trusted, whose administrations will plan ahead (rather than just react). The double shame of this situation is we have leadership (Bush and co.) in whom we (rightly) lack confidence and may not have the time to wait for a full fleshing out of the risks and options (a complement / semi-substitute for quality leadership). Standing in the way may lead to disaster; but it may also be beneficial. At this point we just don't know.

To me, what's important is not to hijack the plan or to slow it down, per se. Rather, what is important is to limit it. Authorize a $50bn or $100bn (just picking numbers, admittedly) plan now, with a promise for additional authorizations in 3 months and again in another 3 months. I can't imagine the full $0.7 trillion would be disbursed over the next 3 months (the outlay of that much simultaneous debt by the gov't is boggling). So authorize enough to carry the fight through the immediate crisis, then take the time to make sure this is the right approach and that, in the end, solid plans are put in place. Am I missing something here?

[Jonathan]

Tegwar,

I think what you are missing is that the idea is they are going put the bulk of the 7$00 billion into play immediately if not all of it immediately. The proposal states: "The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time."

This means that we are going to step right in and start buying likely up to the full amount. They will then sell those assets (most likely at a major loss) and use the proceeds to buy more.

I agree with Paulson that we have to act and we have to act now, but this is not the way to do it. We have options. As you have stated, we could authorize $50 to $100 billion to buy some time and come up with a better plan.

[ob]

Jonathan,
Happy you like my alternative bailout. And I grant that its political viability is nil.

As for using the RTC model, it won't work, because the short-term aim of any action is to calm the panicked credit markets by increasing confidence in counter-parties. And to do that, you need some way to reassure them that their counter-parties aren't going to go bust tomorrow. The RTC model is one that is useful to clean up and sell off assets of banks that have already gone bust. So that won't do much good, as far as I understand it (maybe I'm wrong here...). What is required is some kind of obligatory capital infusion - public or private - to shore up equity and thereby allay fears of counter-party insolvency. And this is much less likely to ultimately cost the tax-payer anything. It's frankly amazing that Treasury hasn't included something along these lines in their plan. I can't think of - and haven't heard any suggestion of - a reason not to include obligatory capital infusions.

[seth edenbaum]

WaPo http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091902012_pf.html
"TOKYO, Sept. 19 -- Japan is a captive of its investment in the United States economy and its central bank has no real alternative other than to hold on to the massive amounts of U.S. Treasury bonds it owns and work hard to help clean up the mess on Wall Street, Hidehiko Sogano, an associate finance director at the Bank of Japan, said Friday.

"The reason why we stress the importance of stability is that the amount which we have in U.S. assets is so enormous," said Sogano, referring to the roughly $860 billion of the bank's $1 trillion in reserves that are in U.S. investments, mostly Treasury bonds.

Sogano spoke on a day in which East Asian stock markets sharply rebounded after days of declines. Japan's Nikkei average was up 3.8 percent, cutting in half losses for the week. The Shanghai Composite Index surged 9.5 percent, while Hong Kong's Hang Seng index was up 9.6 percent. The rises followed market-calming moves by the U.S. government that helped drive the Dow Jones industrial average up 410 points Thursday and another 368 points Friday.

[Jose Padilla]

> It seems to me Bernanke is calling the
> intellectual shots on this.
>
> I think all sides trust him, and should.
>
> I see no reason not to trust Paulson.

Ben Bernanke = Colin Powell (circa March 2003)

[Tazistan Jen]

Why can't we treat the symptoms for the moment to prevent a meltdown, and take some time to come up with a better plan? If we want to prevent a run on money market funds, we guarantee them for a year (already done). If we want banks to lend to each other, we guarantee that for a year. If we need to stop public trading of banks and IBs for a week or so, go for it. This stuff can be evaluated, adjusted, or reversed as needed.

But $700 billion instantly with no oversight? Every American family should hand over $7000 and ask no questions or expect an accountability? No way; no deal.

[Travis Fast]

Buy two trillion of toxic sub-prime at 40 cents on the dollar; disaggregate, repackage and re-sell back to existing home owner for 50 cents of the original face value. The taxpayer realizes a 25% ROI, and average Joe gets his house for half the price of its originally bloated asking price. That effectively puts a floor on valuations and ensures that those who took the risks suffer the losses.

Maybe the haircut could be a little less severe say 60 cents and resold at 70 cents for an ROI to the taxpayer of 16.66%. But the whatever the discount the plan covers all the bases: it both socializes the risks and the profits.

The plan can be defended against all criticism by simply repeating the following phrase:

It might be costly but it is less costly than doing nothing.

[michael roberts]

Look, time is short. So far, I just see one proposal on the table and everyone complaining about it. Krugman's 'stage 2 proposal' seems way too vague (to me, anyway).

If the current Bernanke-Paulson proposal is "no deal" then smart guys like Paul Krugman, Brad Delong, Larry Summers, & Robert Rubin should post, publicly, clear and concrete alternative proposals and explain why they make more sense.

It just doesn't help to say this deal is bad because no matter what it's going to be bad. It's a matter of choosing the alternative that does the least damage.

Buying $700 bil. of toxic mortgage debt in an auction would likely have little downside and could have a lot of upside. Will it solve the problem? Maybe, maybe not. But taxpayers would get a fair price for these assets and could do very well in the long run (risk premia must be big right now). So, the upside is good and the downside isn't bad.

So, maybe it would help to force these guys to be a little clearer about how they will go about buying these crazy assets.

[Jonathan]

For those of you who see one proposal on the table and not listening to other ideas being proposed, I suggest you read the actual proposal:

http://www.nytimes.com/2008/09/21/business/21draftcnd.html

It is hardly a proposal and it is a bad one. I could scratch that out on a piece of paper in under an hour.

My push, which I think I am not alone on is an RTC like entity. One person said they did not think this would work because it would not assure the credit markets. In reality it would. One part of the RTC like idea is that not only do we take over the companies and sell their assets, we fund their obligations. I do not like this, but it would assure the markets.

OB's idea, which I have not given up on, is to give the money to the taxpayers. This could actually work if instead of giving simple cash to the taxpayers that instead we gave them a cash like instrument that was limited in use to paying down debts (mortgage, credit card, etc.), given to the bankruptcy court if they were in bankruptcy or given to them directly if they have no debts. This would make sure that the program would strengthen the financial markets and would partially benefit those that will be paying for it.

[ob]

Michael Roberts,
you said: "smart guys like Paul Krugman, Brad Delong, Larry Summers, & Robert Rubin should post, publicly, clear and concrete alternative proposals and explain why they make more sense."
- the clear alternative proposal is for a mixed plan including capital infusions into overleveraged banks to allay worries about solvency.

"Buying $700 bil. of toxic mortgage debt in an auction would likely have little downside and could have a lot of upside."
- I keep hearing this claim, but never any argument for it. The way the Paulson plan is structured ensures that the downside is well in excess of USD 700 bn, it is in fact precisely the difference between the current federal debt and whatever congress decides the statutory limit on the federal debt is. The figure of USD 700 bn limits the amoung of toxic securities the treasury is allowed to hold at any one time. Moreover, the implied claim that these securities must be worth more than any rational self-interested individual is currently willing to pay on the open market boggles the mind. If they are such a good deal, pray tell - how many MBSs have you bought lately, and at what bargain-price?

[Mithras]

ob-
You said, "the clear alternative proposal is for a mixed plan including capital infusions into overleveraged banks to allay worries about solvency."

Does the Treasury get equity stakes in return?

[stunney]

The first worry seems to be this: the Paulson plan necessitates the issuance and sale of $700 billion of new Treasury bonds. Assuming these bonds are purchased by US and foreign buyers, then the interest and principal will have to be repaid by the US taxpayer, and no-one really knows whether the bad private sector debt to be bought up by the Treasury in the meantime will generate enough to cover the cost of the government debt.

But isn't there a simple solution? Once the new debt is sold, why can't the Federal Reserve simply purchase it by open (secondary) market operations? The US Treasury then 'owes' the interest and principal to the Fed, which of course turns over the interest and principal to... the US Treasury.

At first glance this looks like it would be inflationary, but given that the money raised by selling the new bonds is used solely to buy already deflated assets, it needn't affect prices in the rest of the economy much at all.

[Mike Alexander]

The way I think of it is like the panic scene in It's a Wonderful Life. Paulson is playing George with a $700 billion wad of cash trying to keep asset holders from panic. If those with the toxic assets are like most of the Building and Loan owners, willing to leave the bulk of their assets at risk, only accepting a minimum payment needed to keep operating, then it could work. But if they are like the guy who wanted all his money NOW, then Paulson is going to run out of money fast.

Somehow I think people who live in the ruthless world of high finance are going to like the first guy and want as much as they can get of Paulson's money. So he is going to run out and need more. And he will get it.

In the end he will succeed in reflating the credit markets, the national debt will be many trillions larger and there will be nothing to show for it.

This is simply what Republicans always do when given power: vastly increase the debt in exchange for nothing. And half the country just loves them for it.

[ob]

Mithras,
Just to be clear. This isn't my plan- it was a response to those whining that there is no alternative. THE consensus-among-reasonable-people alternative plan out there certainly involves equity stakes.

[Measure for Measure]

"I nominate Volcker as chairman emiritus, Shiller, Stiglitz, Roubini, Michael Farrell... as candidates for the emergency committee of finance and tax responsibility."

Seriously, if you are worried about 2009, then pass powers to purchase assets (MBSs or equity) over to a board headed by Paul Volcker or perhaps a former President of the New York Federal Reserve, effective near the end of this year. In the meantime, give them authority and funding for hiring staff and investigating financial institutions.

(Volcker is 81, so this would indeed be an emeritus position.)

[GT]

> It seems to me Bernanke is calling the
> intellectual shots on this.
>
> I think all sides trust him, and should.
>
> I see no reason not to trust Paulson.

What-the??

So you didn't read this from May...

"The Federal Reserve does not foresee a broader economic impact from the growing number of mortgage defaults and home foreclosures, its chairman said yesterday." (http://www.nytimes.com/2007/05/18/business/18fed.html)

or this from June

"Losses from America’s sub-prime mortgage crisis could hit $100 billion (£49 billion), according to figures given in evidence to Congress today by Ben Bernanke, the Federal Reserve Chairman."
(http://business.timesonline.co.uk/tol/business/economics/article2105558.ece)

In that second piece, it makes clear that Bernanke claimed that the actual cost would be BETWEEN $50b and $100b, based on 'estimates'.

Both of these pieces mark Bernanke as yet another politically-appointed hack who will say whateer he thinks people want to hear.

And yet some doofus like me, on the other side of the planet, without access to the hallowed halls of the Fed, could write in 2004 that CDOs and ARMS were going to result in the ruin of the US economy.

So Heliccopter Ben's got you on board with his 'intellectual leadership'? I hope your portfolio withstands the future better than Bernanke's testimony withstod EIGHT WEEKS of history.

Cheerio

GT
France (but I'm an Aussie)
http://marketrant.blogspot.com