More Thoughts On The Great Bailout of 2008
First of all, let’s try to go into this with our eyes open. We are on the hook for hundreds of billions of dollars – maybe even a trillion:
Congressional leaders emerged from an emergency meeting Thursday night vowing bipartisan cooperation on a massive financial bailout plan, but it may not be that easy: Conservative Republicans are alarmed by the plan’s potential $1 trillion price tag, and one GOP Senate aide suggested Friday that Treasury Secretary Henry Paulson may be trying to bail out his old friends on Wall Street.
“Senators on both sides have been willing to defer to Paulson’s ‘expertise’ so far, but this is going to cause many of them to wonder if he’s going too far,” the aide said. “He wants to shoot from the hip using close to double the defense budget, and we still don’t have any clear understanding of why he’s making these decisions.”
At some point, the aide warned, senators will “start to wonder” whether Paulson — the former CEO of Goldman Sachs — is “too willing to bail out his friends while making a mess of the federal balance sheet. People want this slide to stop, but so far the only thing these bailouts have bought are more bailouts.”
Well, I’m grateful that some are at least questioning the $1 trillion price tag – my God, to think the talk is to ram this through in a single weekend! Even Paulson puts the tab at a mere $500 billion (the NY Times, in the link preceding, calls it ” a plan involving more money than any single program in history”):
Henry M. Paulson Jr., the Treasury secretary, made it clear that the upfront cost of the rescue proposal could easily be $500 billion, and outside experts predicted that it could reach $1 trillion.
This is a staggeringly large financial commitment, and the attitude from the Fed and Paulson has been quite paternalistic: trust us, this is needed…but the details are skimpy, other than we face ‘catastrophe’ if it doesn’t pass. Consider this quote from another Times article:
Although Mr. Schumer and others have declined to repeat precisely what they were told by Mr. Paulson and Mr. Bernanke, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.
“There was a long pause in the room,” Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, said.
Well, no, that’s not good enough. Mr. Schumer and Mr. Dodd OWE IT TO THE AMERICAN PUBLIC to tell us precisely what was said it that room. So does the Bush Administration and Bernanke and Mr. Paulson. If you are asking the American public to pony up $1 trillion, a sum that is frankly beyond comprehension, you damn well better be up front with me.
This bailout feels more and more like a rushed, panicked reaction from officials who are too close to the big companies that formerly employed them. The Senate GOP aide quoted above may just be right.
Look, perhaps Bernanke and Paulson (and Bush and most of Congress) are right. Perhaps we stand on the precipice of a global meltdown, and this absolutely unprecedented $1 trillion bailout IS necessary. But don’t we need more than a weekend to think this over? Not just the policitians, but the public. We are being asked to essentially commit to a sum that equals the total spent in the five years of war in Iraq…with no public debate, just a quick vote that is supposedly justified because Congress is about to adjourn.
Well, to hell with that – does anyone outside of Congressional families care when Congress is scheduled to adjourn? This is $1 trillion we’re talking about here! Surely that’s worth a special session!
This is not what is meant by representative government. I do not ask the government to submit itself to micromanagement from its constituents. We elect our officials to represent us, and we trust in their judgment. But this is no ordinary matter – it’s perhaps the single biggest government interference in the markets of all time, and it deserves more than a weekend and a rushed vote.
I said in the comments in another thread that, like most American conservatives, I am resigned to and at peace with some government interference with the free market, as long as it as light-handed and not overly anti-competitive. This is about as heavy-handed as government intervention can get (the SEC has even banned short-selling on certain stocks – what the blazes is that? You can’t even make a negative bet now? Talk about government interference!).
Slow down…take a deep breath…and think things over – that’s all I’m asking. Let’s have a special session and debate this thing through, with time for public reaction. The markets will not collapse this weekend. I have more faith in them than that. Let’s not rush into the biggest commitment of all time blind…
The easiest way to understand an incomprehensible number like that is to divide it by another, appropriate, large number. In this case, the number of people in the U.S. seems like an appropriate choice.
We are talking about a bailout that will cost about $4,000 for every man, woman, and child in the U.S. Shift the burden to just working adults and it’s about twice that.
Is the Congress really going to pass this and adjourn? That’s just astounding.
On a semi-related note, no matter who wins in November, I think you can kiss your “middle-class tax cuts” goodbye.
So, based on that math the only justification for what the Fed, Congress, and the President are doing is that not doing it would have been worse, i.e.; cost more than $4,000 per capita. I haven’t seen or heard anything that is fact based making this argument. I have seen and heard lots of chicken little arguments though. Btw, do the quotes from Schumer and Dodd sound way too much like a teenager texting OMG! to you too? Maybe a little WTF!!! as well?
Well, I’m sure glad that it is your team which a) got us into this mess and b) has come up with a plan to get us out. I would hate to think what you guys would write if it was a Democratic administration which deregulated the markets or came up with massive government intervention to try to solve the problem.
We now know the “government isn’t the solution, government is the problem” meme and the pervasive dismantling of regulation is as damaging to our economy as the absurdity that decreasing taxes increases government revenue over the long term. Hopefully the voodoo economists of the past will be replaced by people who really understand the economy and the markets.
I disagree with the idea that Paulson is trying to “bail out his friends on Wall Street.” If you want to be cynical about it, it’s much more likely that he wanted to bail out the Republican party in November. Third quarter ends at the end of the month, and 401(k) statements will be mailed out in mid-October. If the stock market continued to crash, I’m not sure how many people would vote Republican after opening the envelopes.
Peter, the Republicans no more caused this than did the Democrats. Your continued reliance on the New York Times for your worldview has you stumbling in the dark. This was started by the subprime mortgage mess, not the Bush administration.
Get off your partisan high-horse – this is the American economy and the American taxpayer we are talking about, not the Democrats or Republicans…
And the Republicans are the ONLY ones who are starting to get antsy about this, so I doubt Paulson is doing them a favor. Spare me…
I think it’s also noteworthy that during the events of the past week, John McCain has shown himself to be utterly clueless about what the problem is or how to fix it.
On Monday, he told us once again that the fundamentals of the economy are strong. When an advisor must have pointed out that perhaps things aren’t so hunky dory, he pulled something out of one of his body parts and decided that the fundamentals aren’t things like labor statistics and GDP, but are the American workers. (And “some might disagree” about that. Really? Who is arguing against the American worker?) On Wednesday, he told us he was against the AIG rescue. On Thursday, he was for it. He said the as President he would fire the head of the SEC, despite the fact that the President doesn’t have the authority to do that. He blamed government agencies for the mess, although he seemed a little unclear as to which agencies he was blaming (he blamed the FEC — the Federal Election Commission — when he probably meant the SEC, and blamed the SPIC — whatever that is — when he probably meant the SIPC.) Despite a Senate career where he fought continuously for deregulation — and had Phil Gramm, its architect, as his economic advisor — he suddenly argued for more and better regulation. By the end of the week, he was a raging populist, decrying the “greed and corruption” on Wall Street. (People on Wall Street are greedy? Who knew? And while they may have made bad bets, nobody except John McCain has suggested corruption or criminality).
This is the guy you want to be President?
But let me try to raise you from your partisan stupor with a blunt question: do you think a trillion dollar commitment is worth a little public debate? Or do you think we should just ram this through and trust in the good judgment of two men who are, after all, only men, no matter their qualifications, and just as subject to mistakes as the rest of us?
I’m saying back off and give everyone a little breathing room…you can’t agree with that? On what basis do you disagree?…
We’re typing over each other, but this is not about John McCain or Barack Obama. This has the potential to be one of the biggest, costliest blunders in world history. We need to slow down and think things through…
All of a sudden the regulatory structure of the American economy is the sole responsibility of the Republicans, and the ridiculous decision to give $300,000 houses to people making $30,000 a year has nothing to do with anything. Success has a million fathers, but failure is an orphan…let’s get past the finger-pointing, and talk about $1 trillion of taxpayer money…
1) “Partisan stupor” has nothing to do with it. If I were being partisan, I would also be attacking what the Republican administration is now doing. I’m not. I’m for it.
2) Broadly speaking, there are two philosophies on what role the government should play in regulating the economy: the Clinton/Rubin axis and the Laffer/Gramm/Reagan/Bush axis. The latter group believes that taxes should always be lowered, antitrust supervision should be reduced, regulatory bodies should be dismantled or reduced in scope, and the free market should be left alone because it self-corrects and self-regulates. (Do you disagree?) You can draw a straight line from these beliefs and the mess we are now in. Moreover, you have a Presidential candidate who shares these beliefs (at least until this week) and who is more than likely to appoint Phil Gramm – of Gramm Leach Bliley fame — as Secretary of the Treasury if he is elected. Why would you vote to continue a path which has shown itself to be a failure?
3) Of course I have concerns – I’m not entirely comfortable with the Fed being the world’s largest hedge fund – but I recognize that the markets move instantaneously and we may not have the luxury of time for deliberation. When your house is burning down, you don’t stop to debate whether or not you’re using the right fire hose. I give Paulson and Bernanke credit for acting decisively and aggressively. I’ve been very impressed with what they have done thus far and I am willing to place my faith in them.
4) “All of a sudden the regulatory structure of the American economy is the sole responsibility of the Republicans” – yes, because they changed it – “and the ridiculous decision to give $300,000 houses to people making $30,000 a year has nothing to do with anything” – if your regulatory agencies don’t require minimum standards for mortgages, then ridiculous decisions get made and executed. I think the government should revisit whether there ought to be minimum requirements for mortgage loans, but that is tangential to the problem at hand. The guy with the $300K house has already been foreclosed and evicted. Let’s figure out how to get the economy moving again so we can once again prosper.
John McCain said the fundamentals were strong. He was referring to the American worker. He believes in the American worker. I take it that since you and Obama are criticizing him on this issue that Obama does not believe in the American worker?
Peter, reading your comments I sometimes forget…remind me again, who has control of Congress?…
The markets weren’t and aren’t deregulated, as in, absent regulation, there was, is, and soon be plenty (more) of regulation. If Republicans (exclusively, according to you) did anything it was to reduce regulation. Arguing that the markets were purely capitalist and that this caused the current crisis is fatuous.
Hey, by the way, what is Obama’s plan for extricating us from this crisis? Still in the planning stages, apparently:
http://latimesblogs.latimes.com/washington/2008/09/mccain-obama-2.html
I’ll point out again that, in 2004, the Treasury Department decided to nullify state laws (in Georgia, New York, New Jersey and New Mexico, but other states were looking at similar legislation) which made those kind of loans illegal.
Lots of people, at the state level, realized there was a problem, and were trying to take steps to fix it. But that did not sit well with the deregulatory proclivities of … (ooops. no partisan finger pointing.)
Since the underlying problem is the underwater mortgages that make any derivative securities (the ones Bernanke and Paulson are going to buy up), based on those mortgages, unsaleable.
I think the American Housing Rescue and Foreclosure Prevention Act (the Frank bill) was along the right track. You were opposed (as was the President). What are your thoughts now?
If, as you allege, John McCain’s response to questions about the serious state of the American economy was simply to praise the American worker, that’s a statement so anodyne and so beside the point, as to disqualify him from serious consideration for the office of dog catcher, let alone President.
That’s not what he was saying. You know it, we know it.
It was just another example of John McCain being McCain. Like his bizarre suggestion that the SEC chairman be fired. Or his bizarre response, in an interview this week, that, as President, he would shun enemies of the US, like Prime Minister Zapatero.
Jacques, I realize I’m the skunk at the garden party, but my thoughts are essentially these: We wait…we call a special session of Congress, to last one week, the first week in October. Congress recesses until then. They go home to their constituents, they listen, they read e-mails, they have briefings. The talk shows cover it, the morning shows cover it, the evening newscasts cover it, the blogs, the newspapers…we have a public conversation.
Slow down…that’s all…slow down.
If the case can be made that this is necessary, then let the case be made. But I don’t like the idea of committing to this gargantuan bailout in a rush…not one bit…
Regarding your pointing out again that predatory lending is a problem…I agree. But I’ll also repeat that Mr. Delaware Joe Biden can help explain to us why predatory lending is okay for credit cards and not for mortgages. No one should have to pay 24.99% on any loan when the Fed Funds rate is 2%. That’s criminal – or it damn sure should be…
Finally, to respond to the American Housing Rescue and Foreclosure Prevention Act – did I ever specifically weigh in on that? Perhaps I did and forgot…
So you actually want to regulate the credit card market?
That’s interesting. One of the things I like about this blog is your continued ability to surprise me.
I am very much not a fan of the Bankruptcy Abuse Prevention and Consumer Protection Act. But even I hadn’t really thought about capping credit card interest rates.
I do…I really do. As I’ve said elsewhere, I’m not against some regulation, as long as it is not anti-competitive. And I really do think that the credit card market is EXTREMELY predatory. And of course, credit cards ARE subject to regulation already.
But I wouldn’t want a hard cap – I would want one tied to some market rate of interest. I think 10-12% above the LIBOR, for example, is more than sufficient to allow banks to make a hefty profit and still make prudent bad loan provisions…
What I don’t like is that we (the Congress, the Administration, the Fed and the SEC) have spent weeks, if not months playing catchup. Good decisions are not made when you’re staring down the barrel of a gun. The serious, sober discussion you’d like to postpone till October (mere weeks before the election? Yeah, right …) should have happened months ago.
But it didn’t. Back in July, the President was threatening to veto the Frank bill. And, certainly, anything remotely resembling the current bailout was off the table.
I’m still trying to digest all the current proposals. I’m pretty much convinced that the Money Market Fund bailout (ahem … Insurance plan) is a badly-structured boondogle.
But, lest we forget where McCain stands (and has always stood) on financial regulation, there’s this from the current issue of the magazine of the American Academy of Actuaries:
Yessiree, let’s do to health care what we’ve done to the financial markets!
The American Academy of Actuaries? Boy, that sounds like a fun group. Can’t wait to attend one of their conventions.
Since LIBOR is around 3%, if you cap credit card interest at 15% you will preclude high risk borrowers from getting credit. That may be a good thing, but my inclination would be to allow banks to lend to people with lousy credit at rates which enable them to make money. I’m not against usury laws, but I think they should be set high enough so that credit is available to all but the most feckless.
Fine, make it 15% above LIBOR…I just threw that out as a basis for discussion…but (and there are credit cards out there with 24% interest) 21% above LIBOR strikes me as absurdly excessive…
But let’s go back a step – at current lending rates, you can’t make a profit on 15% interest and still make provisions for bad loans (i.e., higher risk creditors)? I’m not sure I buy that…but another idea – put in a floor…say, no interest rates above 19.99% OR 15% above LIBOR, whichever is the higher…
Of course, in the current market conditions, I realize that our ideas about what are sufficient provisions for bad loans are undergoing, shall we say, drastic revisions…
Jacques,
Here’s what McCain said:
You want to retract your bulls**t statements now?
Jacques is correct about one thing.
Our government shouldn’t have been surprised by this. And the fact that it was is a giant black eye on it. And you have to direct most of the anger to the Bush administration. Some to Congress (both sides), but most to Bush’s Treasure Department.
But we should’ve looked at this months ago, Jacques is absolutely right. Then we could’ve been deliberate and not rushing to spend $1T on what is definitely a knee-jerk reaction (right or wrong? don’t know…but definitely knee-jerk).
Or perhaps in May of 2006, when John McCain spoke about it.
Or perhaps in September 2003, when Bush proposed a new agency to oversee Freddie and Fannie.
Oh, but that’s right. I’m being partisan again. I should point out when Biden and Obama brought up this impending issue and proposed something.
[silence]
Oh. I see. How embarrassing for me. They didn’t.
McCain is right, the fundamentals of the economy are strong. It has bumped along despite credit and oil shocks. But it is a bad political statement. Everyone ignored the rest which talked about the financial crisis. So, he walked it back. He drifted to Gore populism because it plays better and he really is a populist on a lot of issues.
Obama says he has a secret plan to end the
warcrisis. Real profile in courage.McCain was right about Cox too. The President does have the power to remove Cox as chair. He also can remove him from the commission for cause. I think the current mess is “cause” enough. It would make a powerful statement to fire him. Por encourage aurtes (sic).
Wasn’t McCain calling for Rumsfeld’s head in 2005?
Mark, Congress won’t stop it, not now and not in October. They are afraid and don’t want the responsibility. All they will do is load it up with bailouts for the co-conspirators–those who took out the mortgages.
As if I have not covered enough issues, I agree with the ban on short sales. Why were they ever allowed? Selling something you don’t own is considered fraud on Main Street. It should be on Wall Street too.
Capital markets exist to raise capital. How does a “negative bet” raise capital? Want to make a bet, go to a casino.
But I never bet “don’t pass”…it’s anti-social!…
And people sell things all the time that they don’t own…very few futures contracts are ever seen through to actual physical delivery of the commodities…
In case the point I’m making above isn’t clear: buying and selling rights is an important part of the market, and borrowing shares to sell later at what you hope will be a lower price isn’t inherently slimy – if you guess wrong, you lose big. These are all parts of the mechanism of the markets, and through all these interactions, you get a clear idea of what the real value of assets are – usually, under normal conditions, at least.
And this is another reason why I don’t like what’s going on with Bernanke and Paulson – why are they having all these closed door meetings? It’s the people’s money, and the people’s business, and they are hoarding information from market participants, to boot…
You want to retract your bulls**t statements now?
You want to quote his original statement, instead of his lame-ass attempt to backtrack, after the fact?
The Federal Housing Enterprise Regulatory Reform Act of 2005 never made it to a vote (either in the Senate or in the House), at a time when Republicans controlled both Houses of Congress. It was, evidently, not much of a priority among your party’s leadership.
I’d be more than happy to discuss whether this bill — had it actually been brought to a vote — would have made things any better.
Its main provision was to abolish the Office of Federal Housing Enterprise Oversight (established in 1992, in the wake of the Savings and Loan debacle) and replace it was a new agency, the Federal Housing Enterprise Regulatory Agency. That, and other similar shuffling around of responsibilities would not have made much of a difference, especially since the bill actually weakened (among other things) the securities reporting requirements on the Federal Home Loan Banks.
But, hey, if that’s the straw you want to grasp at …
Future contracts are bad too. More mere gambling.
Evidently, WordPress didn’t like the nested blockquotes. The “bulls**t” line is Chris’s.
Anyway, to help Chris out, here’s McCain’s original statement (http://www.youtube.com/v/igAmVs0cvY8 ), on Sept 15. By later in the afternoon, even he was singing another tune. But it’s hard to expect much better, given that his key economic advisor is (still) Phil “nation of whiners” Gramm.
I’m sympathetic, but not convinced.
The problem is that, for better or worse, we, as a society, have effectively made possession of a credit card nearly a requirement. Try to rent a car without a credit card. Try to buy something online. Try …
If we cap interest rates, there are many people who currently are able to obtain a credit card, who will no longer be able to. I don’t think there’s any dispute about that.
Now, if you offered me a choice between no credit card at all, or a card at 24% APR, I would gladly choose the 24% APR. That’s easy for me to say, because I never carry a balance. And, the rational thing for anyone, faced with such a choice, to do is to put only what’s absolutely necessary on the card, and be sure to pay off their balance at the end of the month.
You could, at this point, say: “Well, what if you lost your job, or had unexpected medical expenses, and suddenly found yourself unable to pay off your credit card balance?” That’s indeed a worry. But, if my only source of credit is a card with 24% APR; if there’s no other place I can borrow the money, at a lower rate, then I’m screwed. And taking away my ability to get that card (even with its usurious interest rate) won’t help me.
Yes, Jacques, but now we have MasterCard-labeled bank charge cards that allow people to do things that formerly required a credit card, like rent cars, plus anyone – anyone at all, no matter the credit history – can get a credit card that is backed up by deposits at check-cashing places, for example.
I understand the universal addiction to credit, being that I am, myself, one of the worst addicts. I speak, alas, from experience…
But I understand your arguments, as well – and I’ve made that very choice you posit as a hypothetical on more than one occasion, so I guess I’m also the ultimate hypocrite on this issue…
I completely agree with Mark about short selling. Markets go up and down. It is ridiculous to only let people bet on rising markets.
I short stocks with some frequency. It is not for the faint of heart. However, it came in quite handy this year. Despite what you may hear, short sales ultimately support the market, because when you cover a short you have to buy the stock back.
When oil was at $145 a barrel, we heard a lot of people blame speculators. Now that oil touched $90 earlier this week, you don’t hear them praise speculators because oil went down by over 40%. I am sure that if markets rally, you won’t hear much about shorting either. This is the one part of the plan which I completely disagree with — I think it’s an effort to do something, even if it’s the wrong thing.
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