Why play anything safe ever?
By Thoreau
The logic of the bailout appears to be that if you recklessly loan too much money to people who probably can’t pay it back, you’ll be taken care of. Of course, if you happen to profit, you’ll get to keep those profits, but if you lose out, you’ll be taken care of.
If you recklessly borrow money that you can’t pay back, the Congressional Democrats will work to make sure that the bailout package includes some relief for you. Because, really, why should saving instead of borrowing be regarded as a virtue?
And if you wisely save money instead of either lending too much or borrowing too much, then you get to bail out the lowlifes who borrowed too much and loaned too much.
Seriously, why should I ever pay a goddamn bill ever again? I’ve been making extra big payments on my remaining loan because I am so eager to reach a point where I am completely, finally, debt-free. I even deferred investing for retirement because my top priorities were to get rid of debt and establish an emergency account, so I’d be in a secure position before I started investing. (On the plus side, it looks like investing as the market was going down would have been a bad idea anyway.) For me, it was a matter of ethics: My most urgent priority is to make sure I’m completely self-sufficient, in debt to nobody and able to take care of rainy days on my own. I prioritized these things over the quick return or the temporarily-cheap ARM loan.
Screw it. The real divide in this mess is not rich-poor, it’s responsible-irresponsible. Whether you’re a moron who borrowed too much or a moron who loaned too much, you get taken care of. Screw all of them. The Congressional Republicans will take care of the irresponsible rich people, the Congressional Democrats will take care of the irresponsible poor and middle-class people [edit:Â let's be honest, this is for the middle class, not the poor], and not a goddamn one of them will even acknowledge that some of us actually, you know, saved money instead of being stupid and reckless.
Comment by matthew hogan —
September 28, 2008 @ 5:09 pm
Just another shill for Big Integrity.
Comment by Mike Kozlowski —
September 28, 2008 @ 5:48 pm
It’s too bad someone (perhaps those liberals) haven’t been pushing for the government to take equity shares of the companies it bails out, so as to avoid rewarding the irresponsible.
Comment by joe from Lowell —
September 28, 2008 @ 5:57 pm
Mike,
They have been. That was one of the ideas Barney Frank put on the table.
Thoreau, you keep letting out the same plaintive wail about how “taken care of” the financial firms are. In case you haven’t noticed, they lost a ton of money, and will continue to have lost a ton of money under even the most generous bailout proposals. If they emerge solvent, they will do so at a dramatically reduced value.
In addition, the individuals who were actually running these companies are, again under the most generous bailout proposals, going to have their salaries capped at somewhere in the range of 1-10% of what they usually make.
And this saver/payer would just as soon not see the economy go into a depression, thank you very much, even if some bad guys don’t get 100% of what’s coming to them.
Comment by Thoreau —
September 28, 2008 @ 6:08 pm
joe, if the economy needs continued credit to avoid recession, why not just let the people who need credit borrow from whoever is going to loan us the money for the bailout? Isn’t that better than the taxpayers taking out the loan and passing it on?
Comment by joe from Lowell —
September 28, 2008 @ 6:14 pm
Thoreau,
It would be better, but it is highly unlikely that the people lending money to the US government would be willing to become mortgage lenders and what not. It’s only because it’s the US government, which has never defaulted on a debt and is very simple to lend money to and collect it (in the form of buying and selling T-bills) that the capital is being made available.
Comment by Thoreau —
September 28, 2008 @ 6:27 pm
joe, you really believe that this is for the good of the economy? A month before the election that will almost certainly replace this junta, an urgent cry goes out “Quick! Give $700 billion to the investment banker fox guarding the treasury’s henhouse so he can give it to financial institutions that will otherwise collapse! Don’t ask questions, just give him the money quick before the term ends!”
If you believe that, there’s a guy in Nigeria I’d like to introduce you to….
Comment by joe from Lowell —
September 28, 2008 @ 7:10 pm
Yup.
Sometimes you have to consider factors other than dark imaginings about the government, thoreau.
There is a great deal of disagreement among economists about the right way to respond to this crisis. There is no disagreement worth mentioning about whether there is a crisis, and whether it requires outside solutions to avoid a depression.
Because you have this idea about how the government works, the people saying there’s a crisis must be wrong – is that it?. When did you become a global warming denialist, thoreau?
Skepticism is supposed to spur you to learn more about the underlying facts, not fall further into reflexive ideological narratives.
Comment by joe from Lowell —
September 28, 2008 @ 7:20 pm
The great thing about the “You’re so naive” pout is that it remains emotionally satisfying regardless of how unmoored it is from reality.
You really think you can trust the government to tell us who was really behind the 9/11 attacks? You’re so naive. Ask yourself this: who benefits from the public believing it was Islamic radicals? You can’t just take everything the government says at face value, you know. If you were smart and worldly like me, you’d know that.
If you ever need anything please don’t
Hesitate to ask to ask someone else first
I’m too busy acting like I’m not naive
I’ve seen it all, I was here first.
Comment by Thoreau —
September 28, 2008 @ 7:25 pm
Fair points, joe.
Recommend a good, honest pro-bailout economist and I’ll take a look at what he says.
You’ve gotta admit this, though: If this is just a coincidence and not a heist to steal $700 billion, then the Bush administration is the luckiest bunch of bastards ever. Their first year in office saw a terrorist attack that provided the pretext for everything else, and their final months in office see a financial crisis that will enable their Treasury Secretary to get a $700 billion slush fund.
Comment by joe from Lowell —
September 28, 2008 @ 7:37 pm
Paul Krugman. Check out his “Conscience of a Liberal” blog at the NYT’s site.
Lawrence Summers is another.
And the goal should be to make sure the bailout isn’t a slush fund. Of course, that requires one to recognize that there is a difference between carrying out the operations of government and giving gifts to your buddies. If there was a way to let them all crash AND keep the economy from hibernating for a few years, I’d eat that free lunch in a second.
I’d like to see them nationalize, hold, then sell off the investment houses like the Swedes did with their banks when they faced a similar situation. Ideally, the House Republicans will throw enough tantrums for their “the Tax Cut Fairies Will Save Us!” plan that the Democrats will toss them overboard and do this from the left. I’m not holding my breath, though.
Comment by joe from Lowell —
September 28, 2008 @ 7:44 pm
Brad DeLong.
Comment by Thoreau —
September 28, 2008 @ 7:56 pm
That’s a point I’ve made before, of course. I do agree that there’s a difference. However, I need some confidence that the people doing it also recognize that difference. The plan on the table is not to have some Ideal Platonic Official conduct the bailout, but rather to have Real Actual Bush Administration Officials conduct the bailout. We both know how that tends to work out.
I’ll take a look at what Krugman and DeLong have to say. I will never acknowledge anything written by Summers, for obvious reasons. (I’m an untenured professor with survival instincts.)
Comment by joe from Lowell —
September 28, 2008 @ 8:00 pm
Thoreau,
The lack of oversight and accountability in the three (3) page Paulson Plan – which did manage to squeeze in language regarding “not reviewable by any court or administrative agency” – was a giant red flag for me, too.
Last I heard, an independent IG was one of the items that was added in the negotiations.
Comment by joe from Lowell —
September 28, 2008 @ 8:03 pm
I will never acknowledge anything written by Summers, for obvious reasons. (I’m an untenured professor with survival instincts.)
You know, people like you are why the rape culture persists.
Comment by joe from Lowell —
September 28, 2008 @ 8:05 pm
I’m sorry, totally OT: you know what Martin Peretz blames for Larry Summers’ removal as President of Harvard?
“anti-Jewish animus among the faculty.”
No, really. He wrote that in the New Republic.
Comment by Thoreau —
September 28, 2008 @ 8:05 pm
If this were done over time by a different administration, I’d be more confident in oversight measures. But the Bush administration seems to be awfully good at circumventing oversight. Moreover, they only need to circumvent oversight for a few months, and on the last day in office a pardon can be issued.
A few months is also more than enough time for money to be wired to the Caymans.
This isn’t oversight applied to the Ideal Platonic Administration, joe. This is oversight applied to the Real Actual Bush Administration.
Comment by Thoreau —
September 28, 2008 @ 8:07 pm
Don’t even joke about that, joe.
I was just reading the archives of a scientific blog that will not be named, and a very nice science professor (well, nice based on his blog posts and comments, I don’t know him perfectly) was told that the nice guys in the science departments are the reason for rape culture.
Comment by Jennifer —
September 28, 2008 @ 8:08 pm
If the economy can’t function without the likes of me bailing out the likes of Warren Buffett, then the economy isn’t worth saving.
Let the stupid banks go under so the smarter banks will have room to grow and get more business. Don’t tax the responsible to bail out the irresponsible.
Comment by joe from Lowell —
September 28, 2008 @ 8:25 pm
I wish we had a different mayor in Lowell, thoreau. Do you think we should ground the Fire Department?
Comment by joe from Lowell —
September 28, 2008 @ 8:28 pm
then the economy isn’t worth saving.
This is not an option. How many people do want out of work, Jennifer? Another couple million? How about twenty?
Easy for you to say.
Let the stupid banks go under so the smarter banks will have room to grow and get more business. Yeah, that’s exactly how it would work. Exactly. Just some businesses losing a share of a steady market.
Comment by joe from Lowell —
September 28, 2008 @ 8:28 pm
then the economy isn’t worth saving.
This is not an option. How many people do want out of work, Jennifer? Another couple million? How about twenty?
Easy for you to say.
Let the stupid banks go under so the smarter banks will have room to grow and get more business. Yeah, that’s exactly how it would work. Exactly. Just some businesses losing a share of a steady market.
Comment by Jennifer —
September 28, 2008 @ 8:39 pm
Joe, we have an economy where the super-rich can take any risks they want; if the risks pay off they get to keep the profits, and if the risks fail they get to demand the taxpayers bail them out. We have a “consumer-driven” economy that can only function if people keep going into debt buying shit they don’t even need. Bush even tried using this as a justification in his pro-bailout speech: the bailout will make it possible for people and businesses to get credit to meet their daily needs.
Getting credit is just a euphemism for “going into debt.” And if the economy requires people to go into debt just to meet their daily needs, then the economy’s already fucked.
And more to the point: we have an economy that’s going to hurt like hell whether we do this bailout or not. The question is not “do we suffer for a few years, or take steps to avoid that”; the question is “do we suffer for a few years and wind up with something better, or suffer for a few years to maintain the bullshit status quo?”
Comment by Jennifer —
September 28, 2008 @ 8:47 pm
Short version: we can’t have an effective capitalist system unless the failures are allowed to fail. Having the failures bailed out by those who managed to avoid failure will only make things worse.
Don’t make oversized loans to puff out an unsustainable asset bubble. Don’t borrow more than you can afford to pay back. You don’t have to be a damned financial genius to figure this out.
Comment by Michael Martin —
September 28, 2008 @ 9:16 pm
Late to the party, but Hilzoy has a post with a bunch of links to non-administration economists who are, indeed, very scared.
Comment by Kieffer —
September 28, 2008 @ 11:15 pm
Never attribute to malice that which can adequately be explained by stupidity.
This is simply what we ants get for leaving the grasshoppers in charge.
Comment by Brett Peters —
September 29, 2008 @ 7:20 am
Warren Buffett isn’t getting bailed out. He looked at the crash as a market opportunity and invested $5 billion into Goldman Sachs to get their assets in a fire sale. It was an awesomely shrewd investment.
The devil of this deal is in the details.
Comment by mds —
September 29, 2008 @ 9:25 am
OTOH, we can’t have an effective capitalist system without a functioning commercial credit system, which is not nearly as simple as “Don’t borrow more than you can afford to pay back.”
However, I agree that failures should be allowed to fail, and then the government can swoop in to unwind them. Despite the unpleasantness of the Keating-enhanced S&L meltdown, the RTC approach wasn’t a completely stupid mechanism. The plunderers at the top were not rewarded by having the feds seize their companies, yet depositors had some protection. We don’t yet know whether the AIG intervention will be successful or profitable, but it’s also better than simply cutting big checks to the people who engineered this CDO / CDS mess to begin with. Or, given that credit is the lubricant for capitalism, why can’t the government more directly make up the shortfall in “smart banks” and turn the “too big to fail” guys into “unnecessary enough to fail”?
But seconding others above, I’ve gradually been brought around to the notion that doing nothing isn’t a great option, attractive-sounding though it may be. Yet for the ordering “Good Plan > No Plan > Bad Plan,” the problem remains: when does a plan become good enough to surpass No Plan? Eliminating capital gains, scrapping existing transparent accounting rules, and putting taxpayers on a long-term hook via adding to the glut of “insurance” is a Bad Plan. But where does the latest deal fall? Looking at the players, the result is going to be much closer to Chuck Schumer’s dream than Bernie Sanders’.
Comment by mds —
September 29, 2008 @ 9:31 am
Meanwhile, add Wachovia to the list:
One can criticize the partitioning of losses in this arrangement, but it’s a damn sight better than simply giving billions to Wachovia to keep it afloat, especially with the (admittedly probably inadequate) risk-compensation provision. Yet somehow this isn’t the way to approach the “bailout” plan.
Comment by Picador —
September 29, 2008 @ 9:55 am
Wow, intense deja vu.
The rhetoric I’m hearing here really takes me back to 2001-2002. There was an immense, imminent danger, and even though the Democrats didn’t trust Bush, they were willing to give him permission to do something drastic to save them. Nay-sayers were dismissed as conspiracy theorists and crackpots. The NY Times and other “liberal” media outlets led the charge, proudly exhibiting their grown-up bona fides by being willing to put petty partisanship aside and support Our Great Leader. And then, when it was finally all revealed as a scam, it was understood that everybody had been fooled by it, and that it was our collective fault, and not the fault of anybody specific.
Why are the people who fucked up our country by stealing everything that wasn’t nailed down now being put in charge of fixing it, and being written a blank check to do it with?
And just to clarify: I’m not talking about the Republicans, I’m talking about the politicians, economists, and bankers in both parties who have been on the financial irresponsibility bandwagon since day one.
Comment by radish —
September 29, 2008 @ 10:33 am
joe, have you noticed that about every third comment you post, and in some threads every single comment you post, involves an excluded middle?
Interestingly, the supposedly crazy option doesn’t seem so crazy in this case. When the mayor and fire department have an established and well documented history of going around and setting fires in order to expand their powers and wealth, then yes, goddammit, maybe it’s time to ground the fucking fire department.
Krugman’s not exactly enthusiastic, and he hasn’t explained why it’s an emergency for anyone other than bankers either. Of course it’s an emergency if you’re a banker or bank shareholder — but everybody else is paying for… what exactly? Lower interest rates? Interest rates are gonna go up anyway. The question is how fast.
Krugman and DeLong (and various others) have endorsed Bruce Bartlett’s view that (false dilemmas again) the only choices are bailout and catastrophe. Apparently the only way to add to Main Street’s liquidity is to pump liquidity into Wall Street.
Eh? Why is it exactly that the “real” economy will cease to function if the banks have to balance their books the hard way? Is Bartlett suggesting that they’ll simply refuse to balance their books at all, ever? That there will be no more banks? What is it exactly that y’all think is going to happen if all that money gets pumped into Main Street next year instead of Wall Street this year?
However, if we’re arguing from authority, I’ll see your Bruce Bartlett and rase you a Dean Baker, who says this morning: “There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.”
People keep keep saying that phrase. I do not think it means what they think it means.
Comment by dhex —
September 29, 2008 @ 10:35 am
this post needs more pictures of the great depression. i’m not feeling enough frisson.
Comment by Barry —
September 29, 2008 @ 10:36 am
Thoreau: “Seriously, why should I ever pay a goddamn bill ever again?”
Because you don’t have power.
thoreau: “I will never acknowledge anything written by Summers, for obvious reasons. (I’m an untenured professor with survival instincts.) ”
Please, stop with the crap. Summers was unpopular among Harvard biggies, *and* had a Harvard friend involved with major federal fraud in Russia (IIRC, he had Harvard pay $25 million to take care of), *and* was responsible for a decline in female tenure rates, *and then* made a bullsh*t speech in which he blamed it on the women (with, of course, the usual lying disclaimers).
Step on your d*ck enough, and bad things happen. Well, unless you’re a lot higher than Harvard president.
And (guessing here) Summers got at least a silver parachute. You try the same thing as a junior/middle manager in a company, and see what happens.
Comment by dhex —
September 29, 2008 @ 10:43 am
how did summers drive down female tenure rates?
his speech was silly, but that’s the first i’ve heard of this.
Comment by fish —
September 29, 2008 @ 10:50 am
Lawrence Summers of the “Let’s send all our toxic waste to poor countries”?
Comment by fish —
September 29, 2008 @ 10:59 am
One thing to remember Thoreau (and it is hard when you are surrounded by highly educated people all the time), is that (approximately) half of the people in the United States are of below average intelligence.
It is a little mean spirited to punish people just for losing the DNA lottery. I would recommend a sliding scale of punishment based on socio-economic status…
Comment by radish —
September 29, 2008 @ 11:01 am
By the way (since I’m seeing this a lot too) what is the point of asserting that “Good Plan > No Plan > Bad Plan” if we don’t have a device that can measure the relative “Goodness” of a plan?
Very nice. Somehow I missed that one, but yes, that’s an excellent example of a “not a totally fucking stupid and counterproductive giveaway” type plan. There are others out there. What they have in common (which the Pelosi-Boehner plan does not) is that a) they attempt to address an actual problem instead of simply authorizing the delivery of money and b) they do not pretend that the risk associated with the overleveraged toxics is going to magically disappear just because it’s owned by the government.
Comment by mds —
September 29, 2008 @ 11:14 am
See? Apparently, we do have a device that can measure the relative “Goodness” of a plan!
Now, I’ll admit that I give great credence to Dean Baker, who was sounding alarums about the housing bubble and CDOs quite some time ago, making his skepticism compelling. However, for completeness, a (over?)simplified explanation of why we might worry, albeit appearing in the New York Post of all places, has been penned by Bruce Bartlett. I do think he goes too far into panic with his “pass now, fix later” approach, which has been much of the problem with developing a sensible plan.
Comment by Thoreau —
September 29, 2008 @ 11:36 am
Barry,
What crap should I cut regarding Summers? For all of the reasons that you just outlined, he’s a toxic figure not worth going near. It may very well be that he has some sort of intelligent thing to say about something or other, but that signal is surrounded by a lot of noise and offering any sort of regard for him is a bad idea precisely because he is a toxic figure for all the reasons you just outlined.
Comment by KWK —
September 29, 2008 @ 11:56 am
Screw the bailout of the economic sector; what we really need is a
Poetry Bailout.
Comment by radish —
September 29, 2008 @ 12:18 pm
Hey, that’s right, we could just let me decide. And I can fix your toaster too
Of course, sometimes I don’t read the comment I’m responding to very carefully either, so on second thought maybe neither of us should be in charge of the economy. Anyway my response to Bartlett’s article is on record and I stand by it.
Comment by joe from Lowell —
September 29, 2008 @ 12:18 pm
radish,
I’m not the one exluding the middle, thoreau is. The alternative HE presented was “do nothing.” As a matter of fact, it was exactly the “excluded middle” problem that my comment about the stupidity of closing the fire department (the point of which seems to have eluded you) was addressing.
However, if we’re arguing from authority We’re not. I was asked for references, and I replied. Once again, take it up with thoreau, not me, who introduced the concept I replied to.
No, sir, you do not ground the fire department. You do not let house fires destroy several blocks so that the deputy chief who had his hand in the till will get his.
What you do is FIX the Fire Department. Duh.
Comment by radish —
September 29, 2008 @ 12:21 pm
Hm. Please scratch the “either” in that last. It occurs to me that my other comment had nothing to do with your previous comment. Which just goes to show the danger of paying any attention to anything I say…
Comment by radish —
September 29, 2008 @ 12:27 pm
joe, are we talking only about which options are available today, or which options are available in general?
Because AFAICT you’re defending the proposition that something needs to be done approximately today and therefore our choice are limited to those options which are available today, whereas Thoreau is defending the proposition that nothing needs to be done today but that something might need to be done at a later date.
And in re the fire department, the point I was trying to make is that this particular fire department has a verifiable history of burning down more house when they do get involved than when they don’t. At this point if I were a neighbor of a burning house I’d just as soon deal with the problem myself thanks.
Comment by mds —
September 29, 2008 @ 12:34 pm
Hey, radish, since Bartlett’s “Faster, Pussycat! Bail! Bail!” hadn’t been actually linked to, I figured it would be fair and balanced to provide an easy way to read the whole thing. That’s my story, and I’m sticking to it.
I’ll admit, though: my feeling that this is a Kobayashi Maru economic scenario is growing.
Comment by radish —
September 29, 2008 @ 12:49 pm
Works for me. Mind you, I didn’t used to think that was such a great strategy until I saw what the GOP managed to do with it.
Also, joe, to clarify the boundaries of the fire department metaphor and how it relates to whether “do something later” is one of the options, do the options available to us approximately today include fixing the fire department? Because if so then sign me up.
Comment by mds —
September 29, 2008 @ 1:02 pm
Yeah, unfortunately, the details trickling out confirm that this is the Paulson plan + the completely insane “insurance” provision from Dumbshit Pence’s plan + figleaves that have no real content whatsoever. “Only” $350 billion will be available initially… with the President free to release the remainder at anytime, unless a 2/3 vote of Congress stops him. There will be a taxpayer equity stake… except when there isn’t. I haven’t seen so much weasel language since I wrote an action plan for the ferret shelter. Gone is the notion of allowing judges to adjust mortgage terms to mitigate some of the damage at the low end. But at least Paulson went on his knees for Pelosi. Nancy, they do have manuals for putting the spice back in your marriage, you know.
Goddammit, these people keep managing to stay ahead of my ever-lowering expectations. This is looking objectively like “a totally fucking stupid and counterproductive giveaway.”
Comment by alkali —
September 29, 2008 @ 6:03 pm
Two and a half points:
1) Note that tomorrow (9/30) is a quarter-end, which is a date that hedge fund investors can seek redemptions (i.e., to withdraw their investments from the funds), which means that hedge funds are scrambling for cash right now and are looking to sell off mortgage-backed securities right now. That lends some urgency to all this, because the market is going to be a mess tomorrow absent this plan.
2a) If someone had a magic valuation wand that declared the true value of the mortgage-backed securities everyone is respectively holding, there wouldn’t be any need for a bailout. The securities are worth some amount less than their face value but a whole lot more than nothing. If the banks knew what that number was, some banks would fail, most would not, and life would go on. It is the uncertainty as to what these securities are worth that is creating the problem, not the losses.
2b) The point of the bailout is not to dump $700b into the banks and other financial institutions. Rather, the idea is that the feds can remove all the uncertainty by buying up all these securities at a substantial discount to face value. If the feds make a profit, good for us taxpayers. If the feds take a loss, there’s a provision in the bill by which the feds can take a bunch of stock from the offending institution, assuming it hasn’t died in the interim. That doesn’t mean this is going to be costless, but this is not, not, NOT the same as spending $700b on electric dog polishers or dumping the money in the Marianas Trench.
Comment by radish —
September 29, 2008 @ 9:23 pm
Eh? If you don’t know what the securities will wind up being worth then you don’t know what your losses will be, and if you don’t know what your losses will be then how could you possibly know that they won’t turn into a problem as soon as you find out what they are? Unless of course the feds are willing to buy everything that everybody wants to sell. But let’s pretend for now that solvency isn’t an issue…
Oh, ya, sure. Or the feds could simply guarantee that no mortgage will be allowed to default for the next 12 months, and let CDO holders continue to distribute the securities and swaps and revenue streams however they see fit. I like that a lot better, don’t you?
If you’re right and this is strictly a liquidity problem then all those securities will continue to be worth at least whatever they’re worth now (presumably a good deal more) for at least a year, and the people who need cash will be able to sell them in an orderly and controlled fashion to people who think their value will increase. Problem solved.
But if you’re wrong, and this is a solvency problem after all, then buying $700b worth of derivatives might not actually do the trick*, and guaranteeing the underlying mortgages is a lot safer. That would essentially guarantee a price floor for all MBS at the current (albeit unknown) value, while the entities which are already insolvent go through collapse, bankruptcy, takeover etc. Those bankruptcies would reveal the new (presumably lower) value of those securities and allow them to change hands without (or with less) encumbrance. Even if holders of CDOs totally lose their shirts, at least the underlying loans will retain their value (and continue to provide revenue) while shedding the excess leverage which has congealed around them so it can be destroyed.
Kind of poetical too, now that I look at it.
So why would the fed want to buy the derivatives instead of guaranteeing the mortgages? Unless of course setting a price floor wasn’t their primary purpose.
I don’t know what it would cost to guarantee residential mortgages for one year, but I have a very very hard time imagining that it would cost $700b. If I were a congresscritter with a staff and access to the CRS an estimate would be on the top of my tongue. Unfortunately I have to work for a living.
* (unless of course the feds keep buying and buying until the problem is solved, but that could be many trillions of dollars)
Comment by Ponder Stibbons —
September 29, 2008 @ 9:39 pm
joe wrote:
Casey Mulligan is one economist who disagrees. And the WaPo article that reported that small banks are doing well seems to back up his argument.
Comment by alkali —
September 30, 2008 @ 9:06 am
48: Or the feds could simply guarantee that no mortgage will be allowed to default for the next 12 months, and let CDO holders continue to distribute the securities and swaps and revenue streams however they see fit. I like that a lot better, don’t you?
These banks hold CDOs that may pay off at (I’m just making numbers up) 55 to 85 cents on the dollar. One choice is for the government to buy these from the banks at 70 cents on the dollar so that the banks are no longer uncertain about whether their books balance. That is the Paulson plan in a nutshell.
The other choice — the one you’re suggesting — is for the government to make sure that they pay off at 100 cents on the dollar by making up all the missed payments on the underlying mortgages. That would be a truly sweet deal, both for the banks and for the people defaulting on their mortgages. The banks incur no losses at all, and as for the defaulters, hey, free house. It’s not such a sweet deal for the taxpayers footing the bill, however.
Comment by joe from Lowell —
September 30, 2008 @ 9:56 am
radish,
I’m talking in the general sense, not any specific bill.
Should we act? needs to come before How should we act?
Comment by Barry —
September 30, 2008 @ 10:31 am
Comment by Thoreau —
“Barry,
What crap should I cut regarding Summers? ”
Sorry – I was interpreting your comment as sympathy for the guy, like you thought that he actually got fired for being ‘politically incorrect’.
Comment by radish —
September 30, 2008 @ 2:09 pm
joe, in addition to not actually answering my question, that’s a remarkably content-free and unhelpful position. Let’s just agree that we’re leaking and listing, in the middle of a big storm, with absolutely no idea how far we are from shore.
When you talk about Not Acting are you talking about standing around aimlessly waiting to get swept overboard by the next swell? Because the kind of Not Acting I’m talking about is finding the fucking hole in the boat instead of jumping out and swimming for shore or grabbing gobs of pitch and flinging them randomly at the inside of the hull.
Comment by radish —
September 30, 2008 @ 8:19 pm
Overlooked your response last visit, alkali, sorry.
You said it, not me.
Sure. And more to the point those banks (probably) won’t be uncertain any longer about whether they’re solvent. But the only reason these banks will (probably) be solvent is financial reverse engineering. The feds have to buy at a price which has squat to do with market value and everything to do with making sure that the bank is in the black after it’s all over. Note that when vulture funds do that they own the bank afterwards, but whatever…
As long as confidence in interbank loans recovers before the feds run out of cash, the Paulson plan works just fine. What happens if the feds run out of cash before confidence recovers? What’s the old saying? Oh yeah, “the market can stay irrational longer than you can stay solvent.”
It’s not like that couldn’t possibly happen. All those overleveraged obfuscated derivatives (including but not limited to the ones purchased by the feds) are still overleveraged obfuscated derivatives. We still have no idea exactly how much leverage they represent, and we won’t know what (if anything) they’re actually “worth” until the government “balances” its own books (which it won’t do, because if it turns out that the stuff it bought is totally worthless then confidence is destroyed and we’re back where we started only $700b poorer).
The only thing that’s changed is that the gummint now owns (hopefully) the ugliest chunk of a very ugly derivatives market (but maybe not, because we still don’t know how ugly things really are) and some of the banks now have more cash (which is hopefully enough to make credit affordable for everybody).
Taxpayers are screwed no matter what. The Paulson plan borrows $700b, places a bet that buying shitty CDOs selected by Henry Paulson and the banks will stabilize the credit market, and leaves the taxpayer holding CDOs that may or may not eventually pay 55-85 cents on the dollar. The radish plan borrows $700b, places a bet that pumping that money directly into the bottom of the economy will stabilize the credit market (and maybe the real estate market as well), and leaves the taxpayer holding real estate that may or may not be worth 55-85 cents on the dollar.