A "Bailout" is Cheaper than the Status Quo
Last week, I gave some of the reasons why I thought that the bailout was a lesser evil solution, but I want to emphasize that the "bailout" bill, especially if it can be tightened in the next few days to get more Dem votes, is a far cheaper alternative to the status quo.
Just look at the headline on the front of TPM itself: Fed Pumps Further $630 Billion Into Financial System, which details the massive emergency loans that the Fed has authorized for the financial system. This comes on top of the deal Citigroup got for buying Wachovia, where the federal government agreed to absorb ALL losses on bad loans above $42 billion in Wachovia's portfolio, similar to the deal JPMorgan Chase got for buying Bear Sterns. The risk and obligations assumed are unknown and could balloon astronomically for taxpyers.
Compared to these bailouts that already happening on a massive scale, here's the advantage of the explicit "bailout" legislation:
- The federal government actually buys assets at a fixed price and absorbs losses but also gets the profit from any good loans in the whole tangled mess, rather than just offering unlimited insurance with no upside potential for taxpayers at all;
- If the government takes equity in the companies selling the bad assets, the government also gets to participate in the upside profits of companies benefitting from a stabilized marketplace;
- By removing bad assets from the marketplace, it will make the whole banking industry more confident in lending, making all financial assets worth more, including the ones purchased by the federal government;
- By buying up lots of mortgage assets, the federal government is likely to consolidate ownership of the various "pieces" of each individual home mortgage currently spread over multiple institutions (see post below). This will make it far easier to avoid foreclosures and negotiate workout plans that benefit the lender (ie. the taxpayers) and the homeowner.
And this is of course a start. We need a real commitment to job creation to boost the real economy beyond stabilizing the damage done by financial speculation.
Do We Want to End up With Just Three Megabanks? But the point is that while I respect those who are complaining about the aid to undeserving financial firms, that is already happening. No legislation does nothing to end the bailouts that have been happening on a rolling basis; it just means they will happen more haphazardly, will cost more for taxpayers, and all of the upside profits when recovery happens will stay in the hands of the firms like Citigroup, Bank of America, and JP Morganchase that survive and have bought these assets at firesale prices with helpful guarantees by the Federal Reserve.
If there are going to be government-engineered firesales, it makes far more sense for taxpayers to be the buyers, than to hand over de facto insured assets to private firms -- Citigroup, Bank of America, JP Morganchase -- that have a guaranteed limit to their downside but get to keep almost all of the upside profits from recovery.
But we need some bill to create an alternative to these crazy Fed bailouts that are just helping Citibank, JP Morganchase and Bank of America become financial megabanks that will just dominate the economic landscape soon. I'd rather move assets into taxpayer hands that further strengthen a handful of these megabanks.
Jeebus!
Even Nathan's turning into a panicky Wall Street enabler!
Wachovia buy-out. The FDIC, which is funded by the banks, assumed Wachovia's "losses" over $42 billion.
Firstly, we have no idea 1) what the size of these "losses" will be or 2) what The Times reporter even means by the word "losses" (accounting is aan arcane profession).
Secondly, the FDIC received "$12 billion in preferred stock and warrants" from Citigroup.
To claim that throwing $700 billion at the banks to buy their toxic garbage is the right thing to do because the FDIC may someday lose some money is irresponsible blather.
September 30, 2008 12:52 PM | Reply | Permalink
It seems to me that one thing that has made this debate difficult is that there is not enough in the bailout bill to address the precise nature of the assets that the government is going to be getting, and the mechanisms by which those assets will be priced and purchased.
My understanding is that the crux of the credit problem is that financial institutions have a bunch of mortgage backed securities and derivatives on their books that are not necessarily trash, but which the market doesn't know how to price. Thus, there is too much "opacity" in corporate balance sheets, and potential lenders to those firms don't know how to assess the risks of their loans, and thus whether they should provide those loans at all, and at what rates. The bailout is supposed to replace these mysterious assets with something the markets do know how to price, namely money, and that is supposed to eliminate much of the opacity problem and get things flowing again.
Since these assets are not all junk, just mysterious, then if the government pays an appropriate price for them, and prudently manages them after they take them over, they might even be able to make some money off the purchases. But there is a lot of risk involved here for the taxpayer, since if one knew what would be a good price, there wouldn't be an opacity problem in the first place.
On the other hand, I assume the financial firms also have assets on their books that are not mysterious at all. The market does know how to price them, and effectively values them at levels well below what the firms paid for them. It's not an opacity problem, but just a problem of perfectly clear, non-opaque losses. These assets are "trash". No doubt the banks would love to have these assets taken off their hands at prices much higher than what the assets are worth.
If this is really the situation, then the taxpayer has a legitimate concern in making sure that the bailout funds that are aimed at purchasing the first kind of asset are not just used to give banks free money in exchange for pure trash. Isn't there some way of organizing this bailout (or buyout or buy-in), and overseeing the auctions or other mechanisms that are used to purchase the assets, so that the government gets stuck with only minimal amounts of actual garbage, but which succeeds in getting those hard-to-price mortgage-backed assets off the balance sheets?
September 30, 2008 1:20 PM | Reply | Permalink
Isn't there some way . . . so that . . . .
Permit me give an answer similar to the one you gave (correctly) to a rhetorical question of mine, yesterday.
No!
September 30, 2008 4:09 PM | Reply | Permalink
Why not? Can't we write in some auction rules and provide stronger oversight so that Paulson doesn't have so much unilateral leeway to decide what we pay for those securities?
September 30, 2008 4:17 PM | Reply | Permalink
If you haven't yet downloaded the audio (partial) of Treasury's private conference call with SIFMA* analysts last Sunday evening, you might want to.
It contains quite a bit of explanation of what the bailout bill, as finally negotiated over the weekend, provides with respect to the extent and breadth of Paulson's discretion.
Not wholly off topic, I'd like your view of whether we can trust anyone who shortly before the market opens, privately gives valuable trading information to certain preferred market participants.
* Securities Industry and Financial Markets Association
October 1, 2008 3:31 AM | Reply | Permalink
Ellen-- the point is that the Fed is already a Wall Street enabler, so my point is let's compare the bailout legislation to the real status quo of Fed handouts to the big banks, not to some imaginary reality where lack of new legislation means some big financial institutions aren't getting big financial supports from the feds.
The status quo is a bunch of very expensive, haphazard bailouts amounts to tens of billions, maybe already hundreds of billions in potential losses to taxpayers. That's NOW. So the question is whether buying actual assets, as opposed to explicit or implicit insurance, is a better and less costly approach.
Yes, I actually agree with Paulson, Chris Dodd, Barney Frank, Paulson and, god help me, George Bush, that it's better than the status quo approach.
September 30, 2008 1:28 PM | Reply | Permalink
Sorry, Nathan. You're a week late to the party.
The Democratic "leadership" blew it when they panicked and accepted the financial tactic -- removing garbage from banks' financial sheets -- that Paulson and Bernanke were plumping.
No matter how much lipstick Democrats try to apply to P&B's bill they won't be able to protect us taxpayers. It's a pig and will always be a pig.
September 30, 2008 1:46 PM | Reply | Permalink
Reviving the bailout bill Senate adds tax benefits for business. AP September 30, 8:33 pm ET
And get a load of this jewel!
But by also adding legislation to prevent more than 20 million middle-class taxpayers from feeling the bite of the alternative minimum tax, the step could build momentum for the Wall Street bailout from House Republicans.
As if the Congress is about to not provide this relief!
So if you vote against the bailout bill, your opponent will run an add in the campaign: "He voted to increase your taxes. He voted to keep the AMT."
September 30, 2008 9:03 PM | Reply | Permalink
BTW Ellen-- you are right that the Citigroup deal is slightly better than I thought, since the government gets a $12 billion equity stake, so they will participate in the upside. But I still think making big banks bigger, even with the federal government getting a taste, is worse policy than more evenhandedly buying troubled assets and spreading the government equity stakes around more institutions to decrease financial centralization.
September 30, 2008 1:36 PM | Reply | Permalink
. . . making big banks bigger . . . .
Offered for your enjoyment, Nathan.
I especially like The Queen of England's involvement.
September 30, 2008 2:14 PM | Reply | Permalink
Now, that's funny :) and
September 30, 2008 2:32 PM | Reply | Permalink
That is funny! As to the McCain/Obama matchup, I'm going to stick my neck out and suggest that the first guy to go populist on the mortgage crisis which is the root of the bailout crisis will win the election. If it's McCain, it will not matter in January what the bailout bill says today, next week or next month.
Ellen, I responded to your question in the previous thread--would be curious to hear what you have to say.
September 30, 2008 4:07 PM | Reply | Permalink
I'm also shocked to see Nathan on the bailout side of this argument.
The Wachovia deal is really the way things are supposed to work.
That you agree with Paulson and Bush on this surprises me but what shocks me more is that you trust them. How many more billions do we let this lame duck swindle from us?
September 30, 2008 2:32 PM | Reply | Permalink
As I said, I'm not for "a bailout"; I think purchasing assets makes more sense than offering open-ended insurance. It's good we got $12 billion in equity in Citigroup, but if the losses on Wachovias assets are very large, that equity will be dwarfed by the straight cash paid to Citigroup to make up its losses.
September 30, 2008 2:56 PM | Reply | Permalink
Right but then we need what any potential investor would want or demand -- complete balance sheet transparency. The potential losses shouldn't be quite the mystery you make them out to be.
September 30, 2008 7:00 PM | Reply | Permalink
Congress is Playing with Fire
Rejecting the bailout package by a vote of 228 to 205 the U.S. House of Representatives did more damage than good the bailout package was supposed to bring. The investors in U.S. Stock Markets saw $1.2 trillion wiped off their value, half a trillion more than the relief package is worth.
Republican and Democratic members of Congress played cat and mouse with each other waiting to cast their vote depending on which way the outcome goes. With the entire house up for re-election on November 4 and many Republicans in danger of losing their seats were just too scared to vote for the bill. Watching this development, as many as 95 Democrats joined 133 Republicans in rejecting the bill.
Millions of people around the world (bankers, brokers and common investors) waited with baited breath for the passage of the bill and the hoped for bounce in the markets, saw the worse market slide in decades instead. It seems as if nothing matters to Congress except for re-election. The country be damned, the markets be damned, the investors and tax payers be damned. Meanwhile bank failures continue, Wachovia followed the example of Washington Mutual and ended up in the embrace of Citigroup. What remains to be seen is, what impact will the forced mergers of WM and Wachovia with J P Morgan Citigroup will have on their respective balance sheets. Will JPM & Citi also need a lifeline to stay in business or will Congress' political game play ultimately damage these larger institutions as well?
It is imperative that the House of Representatives quit this dangerous game play and pass a financial bailout package that provides instant liquidity to financial institutions and prevent the domino effect of bank collapses. Another 100 U.S. banks are ready to fold if this measure fails or is delayed inordinately. Apparently Senators (Democratic and a majority of Republicans) have been ready for a few days to pass the bill but are waiting for the House to pass it first.
The silly game play started by Republicans is not doing them any favors. According to French news agency AFP article (link below) it seems the longer economy looms large, the more Barack Obama is increasing his lead. Will the Republicans inadvertently deliver Presidency to Obama?
http://afp.google.com/article/ALeqM5hQ2ezkvZe32sF3l_LsPbarnQUyqQ
September 30, 2008 2:52 PM | Reply | Permalink
OK...warning I am putting on my far left socialist cap on.
I have had it up to here with the bailout nonsense. We keep on hearing it has to be passed or we'll all end up living under bridges, pushing around a shopping cart all day and cooking squirrel for dinner. This bailout bill is a one-way street..and it is called Wall Street. I've heard if we don't pass this bailout 3.5 million Americans will lose their jobs. It is blackmail. Bail us out or you'll all be ruined. How is Main Street gonna be helped by this massive bailout? We'll get to keep our shitty paying jobs, with no health care and lousy benefits while the next president is fiscally hamstrung in terms of being able to help out Main Street. But at least we'll still have our low paying jobs and access to easy credit, right? Is that the deal?
I don't want to hear that we have to do this and save Wall Street before we can help out Main Street. Meanwhile what few remaining good paying American jobs there are continue to be outsourced to workers of other nations. We need to be protecting the interests of the average working American man and woman and not protecting the trust funds the top 1% want to pass down what they have looted to their heirs. The fundamentals of our 'ownership society' economy are FUBAR and just giving $700B to thieving, scheming, greedy bastards who caused the problems to begin with, with laughably tepid oversight provisions and reform, does nothing to fix it. Wall Street has been described as having a gun to its own head threatening to pull the trigger unless we help...nawwwwwww I don't see it like that...they have the gun to our heads saying 'give us what we want out we'll waste you'.
I ask again what are we getting out of the deal other keeping shitty jobs and having access to easy credit which only enriches the people that caused this 'mess' in the first place?
September 30, 2008 3:00 PM | Reply | Permalink
There is a "company store" aspect to this situation, isn't there? We're really not satisfied with our elected officials, our business infrastructure or our standard of living, and yet we're expected to keep all three exactly where they are based on the idea that it could only get worse.
September 30, 2008 3:32 PM | Reply | Permalink
The R's version...the D's version...a compromise version...It is all about keeping the larger status quo in place.
September 30, 2008 4:10 PM | Reply | Permalink
Libertine, you should run for President! You have my vote.
September 30, 2008 3:59 PM | Reply | Permalink
Thanks Hoppy...I appreciate the kind words.
I tell you what I'll run if you agree to be my running mate on the ticket. I think the 2 us could make some very positive changes.
September 30, 2008 5:33 PM | Reply | Permalink
I can't be your running mate. I don't live next door to Russia. I have met and had a conversation with a foreign leader, a king*, in fact, and I have been in some foreign countries, Greece, France, Denmark, Japan, China, Mexico, Canada, but I don't read all of the news media. So, I am just not qualified.
*While in American Samoa, my wife and I bummed a ride with the King of Western Samoa, with whom we had a very nice conversation.
September 30, 2008 8:24 PM | Reply | Permalink
LOL...Hoppy!!!
I view you more in the model of a Biden VP than a Palin one. Based on what you said you are waaaaaaay too qualified to be McSame's running mate...and thusly someone I would be looking for in that regard. Besides you don't sound like someone who enjoys eating mooseburgers. You don't eat them, do you? That could very well be a disqualifier. :-P
September 30, 2008 9:44 PM | Reply | Permalink
Like Ste Sarah, my family seems to be afflicted with the "out of wedlock syndrome". Surely that will disqualify me. Besides, I feel certain that I am worth more than a bucket of warm...spit.
September 30, 2008 11:49 PM | Reply | Permalink
Libertine, this doesn't sound like someone wearing a far left socialist cap to me. It sounds more like you are wearing an angry right/left populist cap to me, the sort of thing that the right has been pushing for years on talk radio. You sound more like Lou Dobbs than Eugene Debs.
My own job is not shitty, so please speak for yourself. Although like almost everyone else I would like a better safety net and better benefits, and look forward to a Democratic administration to accomplish some of those things, I would like to keep my job, thank you.
My wife and I are very sparing in our use of credit. We didn't overpay for our house, and we didn't buy a house that was priced at the upper limit of our means. We live within our means. Our credit card balances are modest.
I'm not interested in getting any loans right now, cheap or otherwise. I'm more interested in the integrity of my retirement accounts, and in my company's ability to keep getting loans to meet its operating expenses, of which paying my salary is one such expense. I'm also interested in minimizing the depth of the recession we are no doubt already in, so that our quality of life doesn't decline any more than it has to.
I also worry about the jobs and well-being of my relatives and friends. How could I look them in the face if one of them were to lose his or her job, while I was here on the blogs preaching a wild-eyed "let it crash" doctrine of resentment and spite.
My son is going to college next year, and thanks to my wife's position as a tenured faculty member with seniority at a college that is part of a tuition consortium, we should be OK there. But other people aren't so lucky as us, and so their ability to take loans to pay for college is a very, very big deal. They may also need to take a loan to make necessary repairs or upgrades to their homes, whose market values are falling.
I'm getting a little tired of people who are more than willing to jerk around with my own financial well-being for the sake of their emotional gratification. That isn't to say that there might not be rational arguments against a bailout. If you think we don't need the bailout, argue for that conclusion based on evidence and data, and I will listen. If you think we could get a better bailout, argue for that conclusion based on evidence and data, and I will listen to that too. But all this blind ranting and raving about avaricious Wall Street poobahs isn't helping anything.
I have never worked on Wall Street myself. But I know that most of Wall Street is not made up of fat cats and greedy, evil bastards. It's just a bunch of middle class guys and women schlepping to work every day to do their jobs, which involves in part investing and managing the money of millions of Americans, for individuals and businesses, and trying to take care of it so we all prosper. Some of them have actually done their jobs well over the years to our benefit; some not so well. But they have the same concerns that you and I have about their middle class lives, their families and their savings, and most of them are not paid fortunes.
Some of us might not like the structure of the capitalist system in which we live, and might wish to change it in several ways, whether modest ways or fundamental ways. I personally would like to see some serious debate in the next administration about a maximum wage law, which would yoke the prosperity of top executives and low-paid workers much more closely together, and provide stronger incentives for executives to raise their employees salaries. But for better or worse the system we've got is the system we've got, and we are all tied together in it. A concern for justice requires that we minimize the extent to which corrupt individuals unjustly profit from the system. But crude, outdated and stereotype-based class warfare images that depict a vast gulf between Wall Street and Main Street, or between Wall Street and Everything Else, don't contribute to a rational and morally responsible approach to the current problems.
September 30, 2008 4:15 PM | Reply | Permalink
Lou Dobbs Dan? Nawwww...I don't blame things on immigrants and in fact think they are victims also being used to drive our wages down while we are given us someone to blame (familiar with Tim Wise?). And I doubt Lou Dobbs also favors taxing the wealthy so we all have universal health care free of charge.
Am I angry? Yeah you are right there though. And I am not saying let it crash either Dan. I want it held together long enough for the wealth to be redistributed downward. Changes? I am for changes too...I guess we differ in the degree of change.
And I am happy to hear your job isn't a shitty one...mine isn't either. But is all of this we discuss just about me and you? If it is that would sound more Dobbsian to me than my position...
Yeah, yeah, yeah, I've heard the no class warfare plea before. Yeah it doesn't accomplish anything...just like us complaining about, for example, Bush employing torture in his 'War on Terror' didn't stop the practice. But in both cases I won't stop railing about what I feel is wrong. And if that means using "crude, outdated and stereotype-based class warfare images" sobeit!!
September 30, 2008 5:26 PM | Reply | Permalink
And I am not saying let it crash either Dan. I want it held together long enough for the wealth to be redistributed downward.
Good. What is your plan for for holding it together?
September 30, 2008 7:49 PM | Reply | Permalink
For now...bail it out. It serves no good purpose if it is allowed to crash and burn. But the way the politicians have allowed our economy to operate is slowing down any progressive reforms that could be made. Marx was correct about where society would end up under pure capitalistic model even if he didn't have the answer in terms of his alternative. In fact I think that the world collectively is facing more global problems (wars, poverty, overpopulation and starvation, extremist groups, depletion of resources, pollution, etc.) now than we ever have and the cause of the problems is in not limiting the expoitive nature of capitalism. And in fact that exploitation has been encouraged for 'the common good'. The right way can be found somewhere in between the Marxist and Milton Friedman ideologies...
September 30, 2008 9:30 PM | Reply | Permalink
All of us who opposed this bailout were quite aware that Wall Street would try to punish us if we defied their demands. Well they did as we expected. Sad to see so many otherwise sensible people let a small drop in the Dow panic them into support. Bailout or no bailout, the economy is heading into a fairly steep recession that will likely last about 18 months according guru Roubini. If so the market is still overpriced. It will likely go close to 9000 before this is over.
Do we feel better to watch it drip drip drip or is it better to watch it go in an avalanche? Makes no difference to me, but why panic and let the banksters extort us.
September 30, 2008 3:10 PM | Reply | Permalink
Hear, hear!
But what's with your optimistic Dow? How 'bout Dow 7300?
September 30, 2008 4:00 PM | Reply | Permalink
Because Democrats believe in modulating economic dislocations, and in trying to provide for soft landings. The approach of allowing it all to crash and letting the free market sort out the carnage is the radical Republican alternative. Nor have Democrats traditionally swallowed the argument that government shouldn't intervene directly in markets, but should only provide safety nets to catch some of the falling bodies when the capitalist towers are shaken and toppled by free market winds.
If you can provide some evidence for believing that not only will there be a recession bailout or no, but that the recession will be equally bad bailout or no, I'd like to hear it. But it is strange to hear Democrats advancing arguments about like this about the futility of government intervention.
September 30, 2008 4:26 PM | Reply | Permalink
One thing that struck me about this post and I wonder if the posters would comment--I'm not sure that Democrats are railing against the futility of government intervention as much as against the futility of government intervention by this particular group of Republicans.
September 30, 2008 4:47 PM | Reply | Permalink
There are Democrats and there are Democrats, Erica. And some Democrats have indeed been speaking out strongly against vigorous government, i.e. taxpayer, intervention in this situation, either because they believe the crisis is all made up, or because they believe it is only a crisis affecting a few Wall Street fat cats, one that has nothing to do with their own lives.
Syvanen says it makes no difference whether the economy declines by drips or collapses in an avalanche. Others are all over the internet advocating left-wing versions of "shock treatment" that seek not to mitigate or lessen an economic downturn, but to let it happen so it can be exploited. That's not the kind of classic, Rooseveltian Democratic approach to the economy that I remember. It's extremism.
Well, as anyone who has read the things I have written here over the past few years knows, I have zero patience with Jacobins and fanatics, whether they are promoting violent wars in Iraq and elsewhere abroad to promote global democratic revolution, or are promoting catastrophic economic damage at home so that they can usher in their imagined People's Paradise.
Of course other Democrats want a variety of non-crazy activist government interventions, including Scandinavian nationalization schemes and such that, whatever their merits, share the minor flaw of having zero chance of getting through our divided government. They also seem to be under the impression that they can ram a decade's worth of progressive legislation from the lefty wish list through this same divided government in a few weeks' time, as add-ons to the bailout.
Because we have a profoundly week government in Washington, we are seeing the dangerous triumph of mob rule and ignorant populism. It's all over the radio waves, on the blogs and on the cable networks. Democrats who have fallen under this spell have been giving aid and comfort to Republicans all week, lining up with a classic anti-government, anti-spending "taxpayer revolt" that Republican demagogues love so well. And these misguided Democrats have submarined their own party's top leaders and presidential candidate. If they were fighting against the current bailout proposals with serious and politically realistic alternative proposals to address the credit collapse, I wouldn't be so mad about it. But they are not, and may end up electing John McCain and Sarah Palin as a result.
I have, certainly, seen many economically informed, challenging critiques of the bailout, some on this site, by people like Ellen and others. Dean Baker even managed to advance such a critique after he calmed down and stopped acting like a wild man. I'm no economist, so I try to listen to those who know more than me and do my best to figure out what is going on. But I