Dean Baker on the Swedish Model

The Fabulous Baker Boy writes, somewhere on Josh Marshall's TPM. My one complaint is that if Obama had won then the TARP would not have been "a $700 billion giveaway to Wall Street." Only if McCain had won--and only if McCain's Treasury Secretary was Phil "Nothing's Wrong with Deregulation, You Nation fo Whiners!" Gramm or Carly "But I Like My $41M Golden Parachute!" Fiorina--would it have turned into a large-scale giveaway. My belief is that if Paulson were to stay on he would treat undercapitalized banks like a Goldman-Sachs honcho treats counterparties in trouble: strip them of everything and send them naked into the blizzard to live or die on their own--that's what he and Bernanke have done to the preferred and common shareholders of Freddie, Fannie, AIG, WaMu, Wachovia, Bear-Stearns, Lehman, and to the bondholders and counterparties of Lehman...

Here's Dean. I think he wants us to name Warren Buffett to be chairman of an National Industrial Recovery Administration and give him $1T to invest in banks and expanding tradeables-producing industries:

In spite of its best efforts, the Bush administration failed to push through a $700 billion giveaway to Wall Street. President Bush conjured up scary images... even partially backed away from his initial demand for a complete blank check.... But the public refused to send their tax dollars to Wall Street banks run by incompetent bankers.... While the editorialists are busy denouncing members of Congress for surrendering to the vulgar masses, it's a good time to quickly check the score card. The United States is in a recession and facing the worst financial crisis in almost 80 years because the folks currently in charge were out to lunch.

They allowed an $8 trillion housing bubble ($110,000 for every homeowner) to grow unchecked.... The main cause of the economy's weakness is not insolvent banks and lack of credit; it's the loss of $4 trillion to $5 trillion in housing equity as a result of the bubble's partial deflation. Families used their equity to support their consumption in the years from 2002 to 2007, as the savings rate fell to almost zero... families can no longer sustain their levels of consumption... banks won't lend to these families is that they no longer have home equity to serve as collateral.... And house prices are not going to come back....

The main problem in recovering from the recession will be finding ways to boost demand other than household consumption. In the longer run... reducing imports and increasing exports. In the short-run...government stimulus.... Democratic demands for stimulus were not extraneous to the legitimate goal of a bank bailout bill. Fiscal stimulus must be central.... It would be good to get our banks in order, but it also would be good to send $100 billion to state and local governments to support infrastructure projects and other spending.

How do we go about getting the banks in order? Almost every economist I know rejects the Paulson approach and argues instead for directly injecting capital into the banks. The taxpayers give them the money and then we own some, or all, of the bank. (That's what Warren Buffet did with Goldman Sachs.) This isn't about... constructing a bank rescue the way that business people would do it. We have an interest in a well-operating financial system. There is zero public interest in... Wall Street banks and their executives.

If Secretary Paulson constructed a package that was centered around buying direct equity stakes in the banks, he could quickly garner large majority support in both houses. Better yet, Congress could just construct its own package centered on buying equity stakes and send it to President Bush. If he balks, we can just threaten him with stories about the Great Depression.

Comments

[Spence]

I couldn't agree with Dean more. We need an equity stake in these banks. Other economists have also suggested a combination of equity and insurance. The argument is that insurance would stop the slide in the value of the assets since the price of the insurance would be factored into prices. Any thoughts on that?

[Cosma Shalizi]

"somewhere on Josh Marshall's TPM" - here, I believe:

http://tpmcafe.talkingpointsmemo.com/2008/09/29/the_bailout_round_ii_adult_ver/

[Cosma Shalizi]

Also, you should really be using reCAPTCHA as your spam blocker; trolls and weak-excuses-for-journalists can thus contribute something of value to society.

http://recaptcha.net/

[JC]

scared me when you said "if Obama had won", I was like - Whaa??? what do you know that I don't?? Did someone decide the election without me??

Going forward, I understood the context, but man - don't DO that!

[Kaleberg]

I think you read a different article from the one you posted. Baker is arguing for an infrastructure stimulus and receiving taxpayer equity in exchange for capital. The Paulson plan and its more recent versions has no economic stimulus. In fact, it takes $700B out of the economy off the top. The Paulson plan and its more recent versions is amazingly vague on taxpayer equity. It leaves an awful lot of wiggle room for simply giving away the money in the least effective manner possible.

Paulson, given his instincts, experience and training, will simply give the money to wealthy people who will simply bank it, most likey putting it in Treasury notes. Remember, the $700B will be borrowed. From whom? Most likely the very handful of wealthy people who are going to be given the money as a gift. We are going to spend all that money and not get one bit of extra lending unless the proposal is changed dramatically.

(I propose giving each citizen a few thousand dollars that can only be deposited in approved banks. Then the banks can jockey for accounts and at least everyone will get a free toaster. That would be better than the current plan.)

[Robert Waldmann]

I think Paulson and Bernanke and whoever is running the FDIC stripped WaMu bond holders too. I don't see how that was legal, but it seems to have happened.

http://economistsview.typepad.com/economistsview/2008/09/the-opposite-of.html

[pgl]

Nice big picture piece but on the bill before the Senate - isn't the Dodd amendment to the Paulson plan the same debt for government equity that Dean is endorsing? Of course, scrapping the Paulson auction and just having a bill with Dodd's alternative would be even better.

[leo]

Bring back McFadden and Douglas.

[David in NY]

Will recapitalization (or the promise of it) alone fix the immediate liquidity problem?

[Ken Houghton]

They didn't strip the bondholders (or, technically again, the equity holders).

The bondholders and equity holders still have commitments from the Holding Company--which is what they bought an interest in in the first place.

The Holding Company remains: it was "only" its deposit base and loan portfolio that was transferred to JPMC.

(Yes, I'm unduly proud of the FDIC and Sheila Bair for that move; after all the times of seeing firms set up shell companies so that their obligations can pose no risk to the shareholders--including but certainly not limited to AAA-rated subs of BBB- banks for derivatives operations--pulling that stunt in reverse was bloody brilliant.)

[mpowell]

Yes, the bondholders got screwed, but as Ken noted, it's their fault for lending money to the Holding Company instead of the bank itself. I suppose this might kill the legal fiction of creating these kinds of holding companies if they can't attract bondholders for this reason, but would that be so terrible?

[ogmb]

Fire Hank Paulson. Do it now.

[Clint]

Why not have Paulson submit actual plans of who much for who for what and have congress vote on that?

[CalDem]

Someone should ask Paulson to put a few hundred million of his own into the bailout. If it is such a fantastic carry trade, then it shouldn't be too much to ask to show his sincerity.

And the taxpayer will get a great deal out of it with his own $ at risk.

[Barry]

I second CalDem, with the addition that the house of any economics Ph.D. endorsing this plan should also be added to the pot. Watch them backtrack.

And under the category of "only a Ph.D. in economics can be this, uh, 'trusting'":

Brad DeLong: " My one complaint is that if Obama had won then the TARP would not have been "a $700 billion giveaway to Wall Street." Only if McCain had won--and only if McCain's Treasury Secretary was Phil "Nothing's Wrong with Deregulation, You Nation fo Whiners!" Gramm or Carly "But I Like My $41M Golden Parachute!" Fiorina--would it have turned into a large-scale giveaway. "

I gotta do it, so please don't take this personally, Brad - its an intervention:

J*s*s F*cking H Chr*st! After 7 years of Bush administration trillion-dollar corruption, do you seriously think that Bush, Cheney, Paulson, Wall Street and Co. can't suck $700 billion down in four months? That's only ~$10 billion per business day; I'd bet that Wall Street could suck that up easily, even during boom times. Now, it'd be like running a sprinkler on desert soil.

Further DeLong: "My belief is that if Paulson were to stay on he would treat undercapitalized banks like a Goldman-Sachs honcho treats counterparties in trouble: strip them of everything and send them naked into the blizzard to live or die on their own--that's what he and Bernanke have done to the preferred and common shareholders of Freddie, Fannie, AIG, WaMu, Wachovia, Bear-Stearns, Lehman, and to the bondholders and counterparties of Lehman..."

Where in the 9 billion names of G-d do you get *any*, any support for the idea that Paulson any honesty at all? Not competant criminality, the ability to refrain from stealing $100 if there's $100,000 to be gained, but the sort of honesty that merits giving him the Secretary of the Treasury position, let alone handing him $700 billion to spend at will?

He's a Wall St CEO, which suggests a considerable level of ruthlessness and dishonesty, and a Bush appointee, which suggests more dishonesty, and a deep, deep hatred of country.

And then you also suggest that he be kept on?!?!?!?!?

This I do believe: "he would treat undercapitalized banks like a Goldman-Sachs honcho treats counterparties in trouble".

You hand Paulson that much money, and G-S will be the #1 firm on Wall Street; #2 will be a long, long way behind. Having $700 billiion to spend, almost at will, with impunity, is the sort of dream that not even large bowls of cocaine can give to Wall Streeters.

[Gene Koo]

Please consider a public service announcement explaining, in simple language and with graphics/cartoons, the concepts laid out here by yourself and Prof. Baker. There is a lot of anger in the general electorate, and a lot could be alleviated by simple understanding. (I know you are not an official adviser to the campaign, but something like this coming from Sen. Obama would be met with much gratitude).

[Neal]

Simple proposition--capitalize 20 new banks with the proposed $700 billion. Relieves the credit crunch, doesn't save the stupid or criminal.

[Kato Bernanke]

I can't not support either of my two democratic senators, Kennedy and Kerry, if they vote for this mess. If they have to be working on a bill, it should be a good bill.

[Maynard Handley]

"My one complaint is that if Obama had won then the TARP would not have been "a $700 billion giveaway to Wall Street." Only if McCain had won--and only if McCain's Treasury Secretary was Phil "Nothing's Wrong with Deregulation, You Nation fo Whiners!" Gramm or Carly "But I Like My $41M Golden Parachute!" Fiorina--would it have turned into a large-scale giveaway."

In other words bet the expectation value and ignore the possibility of the worst case scenario occurring.
Didn't thinking like that get us into this mess in the first place, and here is Brad telling us we should stick with it!

Once an economist, always an economist I guess.

[Matt]

If the Feds invested in the cities and municipalities, what projects would make the most sense?

We do not know for sure, but the new projects would be related to export industries. But what municipalities? What projects? Our city leaders are not ready to say, they have not figured it out themselves.

If our cities knew what they wanted, then they could go to auction and get money, just like NYC did recently for a school bond.

What about my city, and the central valley California communities? What are there export industries? Agriculture, but unfortunately we still have leaders who know nothing but housing, we will have to wait for an election or two.

[Kato Bernanke]

yeah, Matt, what industries? the supported by your tax dollars agricultural industry? I thought that was staffed out with Central Americans, no American wants to work for $5 an hour and a mouthful of gunstock, but that's where we going. and the Paulson/Bernanke bail-out gets us there faster, so don't think, don't negotiate, pass it. we gotta do something even if that something is bad. fast. before Bush has to work getting on tee vee again.

[baileyman]

Those are my numbers! Go, Dean, go! Woohoo!

[Chairman of Yucca Mountain Bernanke]

With all this gloom and doom, nobody has mentioned this, but I think I have to, as it's part of the reason being an American is great.

Isn't it fun, fun, FUN, dealing with the effects of the burst overly-leveraged bubble? Twelve to thirty times leverage, then pop, the party's just starting.

Now we're going to launch Paulson's super SIV. I love being lied to while we are led into serial debacles.

[Jacob Davies]

"Simple proposition--capitalize 20 new banks with the proposed $700 billion. Relieves the credit crunch, doesn't save the stupid or criminal."

I don't think brand-new banks would be such a great idea, but I'm no economist but I don't understand myself why, if the threat is that commercial lending to non-financial institutions and consumer lending will be shut down, we can't just lend capital at very low cost to those banks and credit unions that maintained sensible lending standards through the last five years and aren't contaminated by the toxic subprime stuff.

My credit union is in fine shape and does excellent work in community lending, and my impression is that there are larger-scale banks that are doing fine too. By letting them borrow from the government at very low or zero rates they could lend more out to everyone else and then provide that, uh, liquidity we were looking for.

Or seize the next national-scale bank and use its branches and systems to run a government-backed lending scheme for non-financial businesses. Lending does not seem to be rocket science.

In other words, can the problems with the toxic subprime junk be confined to those in the financial industry who bought or packaged them? While preserving the lending function to the rest of the economy by having the government do it?

I know, I'm sure there are things wrong with this, but there would seem to be things wrong with the idea that the government will borrow $700 billion to buy the worst crap from the shitpile so that the very same institutions that caused the problem can continue to operate.

[christofay]

So it starts, the bail-out at the wrong end,

"Hurricane Ike evacuees complain of violence at Wal-Mart shelter" at yahoo but later "Ike evacuees complain of violence at shelter" at http://news.yahoo.com/s/ap/20081001/ap_on_re_us/ike_troubled_shelter.

It has it all; start filming in Texas with tax cuts, there is no reason to go to Vancouver. Spike Lee please film at home now.

Who knows ergonomics please? There are 1,600 or 3,000 evacuees and one Wal-Mart store which I will say is 45,000 square feet. That's either 28 or 15 square feet per 9 foot tall adult American. The Kunstler extra is it seems it is cheaper to let the two year empty building detoriate rather than maintain it.

Did you see the photo with the guy in a tie, martini in glass in hand with the fool-ya arrow with the feathers on the left side and the arrowhead on the right around his head? As for the situation in the Wal-Mart shelter, it is a prime opportunity for security provided by Blackwater.

[christofay]

Ten times the house of your dreams is 4 people and 4,500 sqft so 16 people and 45,000 square feet for comparison. Bonus question, how many people in this modeled sample, 16, are allowed to vote?

[John Emerson]

The real John McCain:
http://www.rollingstone.com/news/story/23316912/makebelieve_maverick/print