Trust Is (Rightly) In Short Supply
You remember, don’t you, those ancient days in October when the credit markets imploded, and the Treasury Secretary and Chairman of the Federal Reserve convinced Congress that unless they acted NOW!!!! RIGHT NOW!!!!!, Americans would not be able to get credit and the economy would go into a tailspin?
You doubtless know the outcome – Congress passed an awful bill that gave the Treasury unlimited authority to do whatever the hell they wanted with $700 billion (well, $350 billion to start), and the Treasury proceeded to do exactly that (i.e., whatever the hell they wanted), and the economy went into a tailspin ANYWAY because nobody without a near-perfect credit score can get any credit, so we blew $700 billion and got exactly squat for it.
Less than squat, actually, because we find out today that the Treasury screwed us over, but good, and much worse than we thought:
The U.S. Treasury may have significantly overpaid for its investments in financial institutions, a government watchdog said Thursday, as criticism of the
$700 billion financial rescue continues to build.“Treasury paid substantially more for the assets it purchased under the [ Troubled Asset Relief Program] than their then-current market value,” Harvard Law School professor Elizabeth Warren told the Senate Banking Committee.
Warren, who chairs a five-person congressional oversight panel overseeing the Wall Street rescue plan, said a report being released Friday by the group includes an analysis of 10 TARP transactions. Extrapolating that analysis for all of the purchases made by the Treasury in 2008 suggests Treasury paid
$254 billion for preferred stock and warrants worth approximately$176 billion , a shortfall of$78 billion .
This is what is known, to financial sophisticates and inveterate gamblers, as “throwing good money after bad”.
The point being that the scare tactics worked, but the promised benefits didn’t come.
Now we have a new President, but it’s “meet the new boss, same as the old boss” time. President Obama, in an op-ed piece in the Washington Post, opined thusly:
[E]ach day we wait to begin the work of turning our economy around, more people lose their jobs, their savings and their homes. And if nothing is done, this recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.
That’s why I feel such a sense of urgency about the recovery plan before Congress. With it, we will create or save more than 3 million jobs over the next two years, provide immediate tax relief to 95 percent of American workers, ignite spending by businesses and consumers alike, and take steps to strengthen our country for years to come.
This plan is more than a prescription for short-term spending — it’s a strategy for America’s long-term growth and opportunity in areas such as renewable energy, health care and education. And it’s a strategy that will be implemented with unprecedented transparency and accountability, so Americans know where their tax dollars are going and how they are being spent.
No, no, no! How can a person as smart as Barack Obama be this off on what is needed here? He says, “This plan is more than a prescription for short-term spending — it’s a strategy for America’s long-term growth and opportunity in areas such as renewable energy, health care and education. ” But this is a stimulus bill! It’s not SUPPOSED to be a long-term strategy for every cause under the sun – it’s the jobs, stupid!
And he’s wrong even about the long-term growth – the stimulus plan will NOT deliver long-term growth. In a widely-linked reply to Senator Judd Gregg, the non-partisan Congressional Budget Office today predicted that the stimulus WOULD provide a short-term boost to GDP and create millions of new jobs – but at the cost of actually lowering GDP by a few tenths of a percent in the long-run, due to crowded-out private investments caused by massive deficits.
Does that mean that it makes no sense to pass a stimulus bill at all (because, that is, of the crowding-out effect)? No, not at all, a bird in the hand now may be worth two in the bush…but it does show that using the stimulus bill as a vehicle for long-term ‘growth’ is woefully misguided…what is needed now is SHORT-TERM growth, and quickly. The kind of growth that comes from jobs created through spending on infrastructure, and not on attempts to use the package to “go green” or “redefine health care” or any of the other dozens of Democratic wish-list items that can’t stand the scrutiny of honest debate and are thus inserted into this bill in an incredibly transparent attempt to ram through legislation that is more about serving Democratic special interest groups than it is about creating jobs.
As of right now, the stimulus has not passed the Senate. That’s a good thing, trust me – oops! Bad choice of words…
Oh, and ‘watered-down’ protectionism is still protectionism. This is a bad bill, and it deserves to die. Let’s start over with a bill that does one thing only: creates jobs by addressing the glaring infrastructure problems facing our nation’s cities, highways, railways, and airports. THAT’s the kind of package we need, and it would do a hell of a lot of long-term good, to boot…
UPDATE 8:56 p.m.: Great news for those of us who still care about free trade – the Senate adjourned for the night, with no deal and no vote…so am I just an obstructionist Republican? No, not at all, I WANT a stimulus – pork- and protectionism-free…but as long as the Buy American provisions stay in, no matter HOW “watered-down”, I’m against it…
I’m not sure I understand this swipe.
Take the case of green energy. The usual rap against investing in green energy is that it invariably involves huge up-front capital costs, which only very slowly pay off. But if you’re interested in short term fiscal stimulus, a project with big up-front capital costs and a slow return on investment (spread, e.g, in the case of a wind or solar plant, over four decades) sounds exactly like the sort of project you’d want to fund.
Ditto for something like Obama’s plan to computerize health records: big up-front costs, with the savings spread over several decades.
I’m a little weary of the gibberish coming out of the Republican Caucus these days, so I’ll point to Steven Perlstein’s column in the Post.
My point is these are good causes that should be considered on their own merits seperately, not as part of a stimulus package whose main aim should be creating jobs…
I don’t understand the over spending for assets argument about TARP.
The purpose was to remove troubled assets and help the bank. If you pay $1 for every $1 of asset, how does that help the bank? It replaces one asset with another.
I thought the whole idea was to overpay so as to inject new capital?
Mark wrote:
Rather than thinking up new ways to spend money, I see nothing wrong with stepping up the timetable for spending on projects you were going to fund anyway.
Could you explain why you think that’s a bad idea?
And I’m not sure I catch your distinction between spending, which “just” boosts aggregate demand, and spending which “creates jobs”.
Bob wrote:
The idea (that they settled on) was to inject capital by buying shares (not existing shares; newly-issued shares) in the banks. This dilutes the equity of existing shareholders (and drives down the price of existing shares). But it most certainly injects capital into the bank. If the Feds buy 100 million shares of preferred stock at $20 a share, that’s $2 billion that the bank has on its balance sheet that it didn’t have before.
The trouble is that they probably should have bought 200 million shares at $10 a share. They overpayed, and hence coddled existing shareholders (whose shares dropped in price less than they “should have”).
There’s also the issue of whether they should have been buying ordinary common shares (with voting rights) instead of “preferred” shares (without).
They decided that buying common shares would be too much like socialism.
To put some numbers on that, say the market cap (before the capital injection) of the bank was $4 billion (400 million shares at $10 a share). To inject $2 billion into the bank, the Feds could
1) Buy 200 million shares at $10 a share. They thereby acquire a 33% stake in the company, and the existing shareholders (who used to own 100% of the company) now own only 67%.
2) Buy 100 million shares at $20 a share. They thereby acquire a 20% stake in the company, and the existing shareholders hold onto 80%.
Either way, the taxpayer spent $2 billion on their “investment”. But, when it comes time to sell, in scenario 2, they get only 60% of what they would have gotten under scenario 1 (selling a 20% stake versus a 33% stake). If they would have broken even under scenario 1, they’re out $800 million under scenario 2.
And the existing shareholders are correspondingly richer.
The WSJ reports:
“President Barack Obama decried as “inexcusable and irresponsible” the delay of his economic recovery legislation in Congress after a new data revealed that an estimated 3.6 million Americans have lost their jobs since the recession began. His remarks were some of his most direct and pointed in support of the stimulus package, which the Senate could vote on as soon as Friday afternoon. Obama acknowledged the current bill “is not perfect, but a bill is absolutely necessary.”
The more urgently he demands it the less convinced I am it is a good thing. It’s hard work convincing people that something as large and complex as this bill is a good thing. I’m surprised by his unwillingness to do that work.
Ok but it still doesn’t bother me to much.
I suppose it depends on how you feel about the shareholders of the banks which got us into this mess.
The scenario I outlined was an $800 million transfer payment from the taxpayers to the shareholders of the bank in question. Scaling up those (admittedly made-up) numbers to the full $350 billion of the TARP, that’s a transfer payment of $140 billion.
If that doesn’t bother you, but the undeserving nature of the recipients of some of the Government’s largess under the Stimulus Bill does bother you, then you’ll have to explain why you think the owners of the banks, which created the financial crisis, are more deserving.
Or we could just babble incoherently, like Mitch McConnell.
Mark:
Presented without comment:
“Former Cuban leader Fidel Castro questioned U.S. President Barack Obama’s plans to seek energy independence and to impose “protectionist” trade policies, saying those measures would further weaken developing nations….
Obama’s decision to support the slogan “Buy U.S. Products,” is “extremely protectionist” and goes against the fundamentals of the World Trade Organization, the former Cuban leader wrote.”
Jacques:
TARP stinks but the purpose was to inject capital into banks. The shareholders did not get the money, the banks did. The “windfall” only exists if the market cap stays the same or goes up. But we know that the market caps of many banks have continued to slide. So, I still shrug about the windfall. I don’t care if that makes you upset.
I never supported TARP, nor did I oppose it. I was and remain agnostic.
I always consistently said it was going to pass after feel good but ineffective “oversight provisions” were passed. Which is exactly what happened.
BTW, as you know, shareholders in general do not run large public corporations. The lady in the office next to me owns some bank shares inherited from her dad. I don’t think she caused the credit crisis.
The PorkFest benefits the Democrat Party, government workers and unions, not the economy. There are some facets that are ok but much is useless.
As for Mitch, you are just mad because the Jesus line is a brilliant political jab. If you want ” babble incoherently”, read about or see the video of Biden at the Democrat luxury retreat. Pure comedy gold.
Either way, capital was injected into the banks. But, if the Fed overpayed for the shares they bought, then the shareholders did reap a windfall, as I explained.
No, they are the owners of the corporation, who hired the people who run them. You do understand how Capitalism works, right?
They bought the shares, expecting to profit from the business strategies of the aforementioned managers. Evidently, it didn’t work out as they expected …
I am mad because it’s designed to dumb-down the debate over a very important piece of legislation.
You may think it’s “brilliant.” But if we’re fixing to spend nearly a trillion dollars, we ought to have an adult discussion about it, not cast the debate in terms so juvenile that my 8-year old would find embarrassing.
Like O’s rant at the luxury resort? O good, Republicans bad.
McConnell wants to defeat or at least delay and maybe improve the bill. Using the Jesus line helps his goal.
It certainly was not incoherent. It summed up the magnitude of the porkfest very neatly.
(I still don’t care if shareholders got a paper windfall. The whole TARP thing is a camel and you want the focus on the gnats.)
Jacques, there is spending, and there is spending that creates jobs. They’re not equivalent, though they can overlap. If I give some ungodly amount of money to NOAA to buy a new supercomputer (to pick one example), sure, it helps keep that computer manufacturer in business, but if I used that some money on bridge repair or a new highway, I’m willing to bet a hell of a lot more people would benefit, both through jobs and through the use of new infrastructure.
If they had made this a good old-fashioned public works-type bill, it would have flown through…instead, it became an ‘agenda’ bill…
Let me clarify even further: I think computerizing health records is WAY overdue. But again, I have to say, is this really a short-term stimulus that will provide jobs IMMEDIATELY to the 7.6% of our working population that is ‘officially’ unemployed (and we all know that number doesn’t include those who have given up looking or who are vastly underemployed)?
Because if it doesn’t meet that criteria, no matter how meritorious the proposal may be, I say get it out of this bill…
I’m no expert, but it seems to me that computerizing health records would provide immediate jobs. One would think that you would need a lot of data entry people, not to mention the orders which hardware and software companies would receive.
Incidentally, my college roommate and best friend — a rock-ribbed Republican from Arizona who is a retinal surgeon — is very much against government mandates for computerizing health record. He complained to me that he had to spend $250K to comply with HIPAA, which has stingent privacy requirements. He doesn’t see why anybody would care if Mrs. Smith has a retinal detachment, and thought the requirements were burdensome and unwieldy.
Spending on goods and services boosts aggregate demand. In a slack economy, with plummeting demand, boosting aggregate demand creates (or, more correctly, saves) jobs.
You’re saying that some goods and services are more meritorious than others. Repairing a bridge is better than buying a supercomputer. I would vehemently disagree that jobs in the construction industry are somehow more valuable than jobs in the computer industry.
I will agree that more people will benefit from using the bridge than will from using the supercomputer (though I think you’ll agree that there’s significant, albeit less tangible, benefit to being able to more accurately predict hurricanes and other serious weather events).
But whatever.
We’re not in a position of choosing supercomputers versus bridges. There aren’t enough “shovel-ready” bridge and highway projects to make up a stimulus bill of the size that is needed. Even if there were, it would not be sensible to focus all $900 billion on the construction industry.
So you really have two choices.
1) You can argue that we don’t really need a $900 billion stimulus package. A much smaller package, focused on infrastructure construction, would suffice to turn the economy around.
2) You can come up some alternatives for the spending that you don’t like: “Instead of computers, we should buy ….”
I don’t believe that for a minute.
Not a single House Republican voted for the House version. And not more than a couple of their Senate colleagues will vote for the Senate version. The Congressional Republicans, like Bob, have decided that it is in their political interest for President Obama to fail. And those interests outweigh any petty considerations about the state of the economy.
Either that, or Mitch McConnell really is dumber than a post.
I think it’s pretty evident by now that Republicans take their marching orders from Rush Limbaugh, who is on the record hoping for Obama’s failure.
Perhaps this is why a recent Gallup poll showed that only five states are red states (defined as leaning Republican above the margin of error). There just aren’t enough angry white men to go around. Even Mitch McConnell was complaining the other day that he didn’t want to be the Senate leader of a regional party.
I think you are too harsh on the Republicans…if the bill continues to contain protectionism and pork, it NEEDS to fail…it’s not about being anti-Obama, it’s about putting together a good bill.
Are the Republicans partisan? Oh, hell, yes…but are the Democrats? Oh, hell, yes, again…
In any event, the bill will probably pass, based on the latest headlines…I just hope they strip out that “Buy American” crap in conference, but my hopes aren’t high…
And yes, if the bill hadn’t contained ‘agenda’ items, I truly DO believe it would have passed easily…
But for the record – no, I don’t think buying a supercomputer for NOAA employs as many people as a comparable amount of money spent on infrastructure. It’s not privileging computers over construction, it’s a numbers game…
Peter, if you truly think Republicans take their marching orders from Rush Limbaugh, I can only assume you don’t know many Republicans. I know dozens of Republicans, and I don’t know of ANY of them who listen to a damn thing Rush Limbaugh has to say. He’s a showman, he’s not a statesman. I may agree with Rush on some things, but it’s not because he believes them. Don’t confuse coincidence with cause and effect…
And the angry white men thing is a cheap shot…it’s a not-so-veiled insinuation that Republicans are racist. Well, I’m a Republican, and I’m most assuredly not a racist…so think before you make comments like that…
I don’t know why you believe that.
I agree with you that the “Buy American” provisions would almost certainly spark a trade war, which would have disastrous consequences.
But “pork”? Under any reasonable construal of the term, the bill contains only a neglible percentage thereof. And, even if the bill contained a much higher percentage than it does, the “harm” that would cause is dwarfed by harm that would be caused by not passing a stimulus bill.
Jacques, I certainly don’t want to give you the impression that I am not in favor of passing a stimulus bill. We agree here on more than we disagree on…but it’s not right for the Democrats to demonize the Republicans for trying to get a better bill instead of just rubber-stamping what the House sent over. And it’s not just Republicans who are objecting, it’s Blue Dog Democrats, as well…
However, even though one of our areas of disagreement is whether there is pork (or how much, at least) in this bill, I will, in the post-partisan spirit, meet you halfway – if the conference bill strips out “Buy American”, I can, in all likelihood, support it…
And one last point: I’ve got no problem with buying supercomputers for NOAA…but that belongs in an appropriations bill, not a stimulus bill. Any government spending program counts as stimulus under the guidelines you seem to be endorsing…but I STILL maintain that not all spending is the same when it’s immediate employment that we’re concerned with…
Example: The government spent $700 billion on TARP. That surely saved quite a few jobs…but was that a stimulus bill? I don’t think so.
I still like the Republican sound bite here: Targeted, timely, and temporary.
One thing I haven’t even got into because of time constraints is the fact that some items in the package involves PERMANENT spending changes (or create a shift from traditionally state or local funding to federal, as with school construction funds) without identifying permanent sources of revenue…
Here’s the Wall Street Journal (your favorite!):
Mr. Obama is now endorsing a sort of reductionist Keynesianism that argues that any government spending is an economic stimulus. This is so manifestly false that we doubt Mr. Obama really believes it. He has to know that it matters what the government spends the money on, as well as how it is financed. A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP.
But that same dollar can’t be conjured out of thin air. The government has to take that dollar away from someone else — either in higher taxes, or by issuing new debt in the form of a bond. The person who is taxed or buys the bond will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American or the lender would have, then the net impact on growth will be negative.
Now, I know you don’t like the source, but the content is true, isn’t it?…
“There just aren’t enough angry white men to go around.”
I guess someone hasn’t seen the results of last Friday’s election . . .
No. The content is nonsense, written by an ignoramus.
Rather than debunk this myself, let me point you to economist Brad DeLong’s blog, where he has spent the last month debunking this (and related arguments). In particular, check out this post, where he takes on this particular argument with the full savagery it deserves:
Sorry. I misspoke. It was not written by an ignoramus.
As I said to Ryan previously, the WSJ editorialists are not morons. They know exactly what they are doing when they write stuff like that.
In a sense, yes. The government could go out and buy massive quantities of frilly womens’ undergarments and that would be stimulative. (Though you’d be hard-pressed to find ones made in the US.)
But I think I agree with you that we’re better off if the government, rather than spending money on just anything, spends it on things we really want, things that advance our interests as a nation. On that score, bridges and supercomputers for NOAA win out over leopard-stripe thongs.
Perhaps the Republicans in the Senate could have played a role here, suggesting spending programs which would have better-served the national interest, or ones where the money could have been disbursed more quickly. Instead, their counterproposal was a much-smaller bill, consisting exclusively of tax cuts.
They didn’t even try…
Well, under the same scenario you outlined above (i.e., buying frilly undergarments is stimulative), so too then are tax cuts…the question is where do we get the biggest bang for the buck, and it’s there that we find our common ground, I think, that not all stimulative activity is equal…so I’ll end my comments for now by saying I fully concur with your assessment that if we’re going to spend the money, let’s spend it on things we really need…and few people would argue that our nation’s decaying infrastructure is not a greater need than new weather-predicting supercomputers and making government office buildings ‘greener’…
Correct.
Except that it is pretty well-established that the multiplier (the number of dollars of increase in aggregate demand for each dollar of tax cuts) is smaller for tax cuts than for direct government spending. So, to use your phrase, spending gives you more “bang for the buck” than tax cuts.
The bill has hundreds of billions of dollars in tax cuts. Many of them are good. Overall, I’d prefer to see a little less in tax cuts, and a little more in spending. You, perhaps, would like to see more in tax cuts. These are details we can argue about.
I think you’d also like to argue that the multiplier for some types of spending is bigger than for others. Perhaps you’re right. But there isn’t empirical research (at least, none that I’ve heard of) to verify that, or point us to which types of spending have the biggest multiplier.
So we both are falling back on other types of arguments to justify which type of spending we prefer.
I fully agree that fixing our decaying infrastructure is a top priority.
I’m just arguing that, given the size of the stimulus that is needed, we’re not in a position to choose between infrastructure and other priorities. We’re gonna spend money on both.
Well, the devil is in the details…let’s see what comes out of conference next week, and I’ll try to be open-minded (except about “Buy American” – that simply HAS to go, or I don’t support the bill, no matter what)…
Oh, alright, one more thing – I’m not necessarily arguing that certain types of spending have a bigger multiplier, but rather that there is too much spending in this bill that doesn’t pass the triple-T test (itself a triple T – kind of neat, in a self-referential way) of temporary, targeted, and timely…
If this bill was such a political and economic winner, why the need for GOP votes and the anger displayed here and elsewhere towards the GOP?
Post 19: take a look at Congressman Phil Gingrey — who made the rather obvious point that people like Rush Limbaugh and Sean Hannity can throw stones but are not responsible for acting on behalf of a constituency — and then had to genuflect on the radio before Limbaugh for taking such an audacious position. Can you name a single prominent Republican who would stand up to Rush Limbaugh?
Post 20: Mark, I would never accuse you of being a racist. I think that you are a fair-minded soul, and I’ve never seen anything in your blog which remotely smacks of racism. My only point is this: if you delete all of those who follow people like Limbaugh and Sean Hannity — who are, if nothing else, angry white men — from the Republican party, what do you have left?
How about John McCain? He’s a pretty prominent Republican…
I apprciate your kind words – it’s not that I thought you were accusing me of racism, but you’re still missing the point: the Republican party is not made up entirely of dittoheads…it has room for people like me in it, too.
The loudmouths are often mistaken for the voice of the party by dint of the sheer volume of their shouting…
‘apprciate’='appreciate’
Paul Krugman is not happy with the stimulus bill that has emerged from the Senate.
Cutting $40 billion for state budget stabilization seems particularly stupid.
This graph (whatever you may think of the source) quite effectively drives home the severity of the situation.
Hmm. That link didn’t work.
Try again.
Jacques, read the Krugman link…but it appears he is suggesting that over $2 trillion would be necessary…I don’t see how that is possible, considering the incredible deficit we will already be running…
Krugman is really, really worried about deflation. Just about anything (including adding an extra trillion to the national debt) is better than deflation.
(Just for perspective, the Bush Administration added $3.9 trillion to the national debt, during the course of their tenure.)
But how much debt is too much?
Let me respond with the conventional view (which I freely admit is open to criticism). When the amount of Federal debt is too large, creditors (the holders of treasury bonds) will start demanding higher interest rates. Right now, the interest rate on federal debt is essentially zero. So there’s a lot of room to borrow a lot of money, before our creditors start showing concern (in the form of higher rates) about our ability to pay.
Of course, there isn’t “one” interest rate on Treasuries. There are short term rates and long term rates. You don’t want to finance the national debt with short-term borrowing. That’s like taking out an ARM on a very expensive house (and we all know how well that worked out).
Short term rates are at zero. The number to watch is the spread between long term and short term treasuries. That, too, is at historical lows. Which basically says that we can go ahead and borrow a lot of money at very favourable rates, right now.
Now, I’m not saying that’s a desirable thing to do. But if you believe Krugman, the alternative is even less desirable.
I dunno. The economists in the Obama Administration seem to think that $800 billion (or so) is big enough.
I hope they’re right …