And the Taxpayers Get Stuck with the Pile
It's official: the Treasury and the Fed are now working with Congress to craft some sort of massive bailout to prevent our financial system from crumbling.
This is very complex stuff, and it may well be that intervention of this sort is the least bad option available to us at this point. But this much I do know: we're now all but committed to follow this path. The possibility of a bailout has now been raised and the capital markets around the world are now counting on it. We would we see an unprecedented sell off if the plan fell through. So now it must happen. Failure is not an option.
If we're going to do this, though, Congress needs to make sure it is not just postponing the day of reckoning. If we're going to buy up the Big Sh*t Pile, we better make sure that we buy it at the deepest discount possible and make companies show their cards and take their losses now. Transparency is key. The full extent of the damage needs to be apparent and not masked until some later date. The goal should not be to prop up the stock market or restore investment losses but rather to prevent catastrophic failure and no more.
This is one of those times where we should all be thankful that the Democrats retook Congress in 2006. If the Republicans still controlled both Congress and the White House, I can virtually guarantee you that the primary goal of any legislation would be to delay the true day of reckoning until after November 4, to mask the true extent of the problem until after voters have gone to the polls.
But the Democrats are unlikely to allow that to happen. We should do whatever needs to be done, but if there are bitter pills to be swallowed, they need to be swallowed now, in the open. That's how democracy is supposed to work, in the open, with full knowledge of the situation.
The head of the Treasury and the Federal Reserve began discussions on Thursday with Congressional leaders on what could become the biggest bailout in United States history.When rumor of the proposed bailout spread this afternoon, the Dow shot up an astounding 661 points from its low of the day. Similar rallies are apparently taking place right now in the international markets.
While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.
This is very complex stuff, and it may well be that intervention of this sort is the least bad option available to us at this point. But this much I do know: we're now all but committed to follow this path. The possibility of a bailout has now been raised and the capital markets around the world are now counting on it. We would we see an unprecedented sell off if the plan fell through. So now it must happen. Failure is not an option.
If we're going to do this, though, Congress needs to make sure it is not just postponing the day of reckoning. If we're going to buy up the Big Sh*t Pile, we better make sure that we buy it at the deepest discount possible and make companies show their cards and take their losses now. Transparency is key. The full extent of the damage needs to be apparent and not masked until some later date. The goal should not be to prop up the stock market or restore investment losses but rather to prevent catastrophic failure and no more.
This is one of those times where we should all be thankful that the Democrats retook Congress in 2006. If the Republicans still controlled both Congress and the White House, I can virtually guarantee you that the primary goal of any legislation would be to delay the true day of reckoning until after November 4, to mask the true extent of the problem until after voters have gone to the polls.
But the Democrats are unlikely to allow that to happen. We should do whatever needs to be done, but if there are bitter pills to be swallowed, they need to be swallowed now, in the open. That's how democracy is supposed to work, in the open, with full knowledge of the situation.
posted by A.L. at 11:33 PM
13 Comments:
Here's a scoop... Hillary makes a speech on the floor of the Senate laying out "the plan". McCain says something vague about a plan. Paulsen (who gave McCain a heads up),tells (not confers about) the plan to Congress and convinces them to stand up with him "for the good of the country". Now McCain will claim "the plan" was his idea. You just watch... the vote will swing to McCain. How sad... Voters are so easily deceived...Meanwhile, Obama is a voice in the wilderness,
telling the American people what they need to wake up to. The trickle-down economic philosophy or corporate capitalism is what caused this and "democratic capitalism" is the change we need.
But the Democrats are unlikely to allow that to happen.
You certainly have a great deal more faith in this Democratic Congress than I do. Given the largess with which it has treated Bush to date, and given Reid's outburst about "We don't know what to do. Nobody knows what happened." whith respect to the financial crisis, I suspect they will do precisely whatever Paulson and company dictate.
jayhawk,
At the very least, I expect that the Democrats in Congress will be more upfront about the cost. If the markets rebound and disaster is averted, it's important that voters know what it took to accomplish that and how much they are now on the hook for.
I wouldn't mind if they put off any legislation til after November. This issue is WAY too complicated and politically loaded to be talked about in the late stages of a presidential campaign. For the reasons you point out, the impulse of Congress will be not to buck what the Fed, in cahoots with the WH, will suggest. Obama certainly doesn't want to take on the responsibility, right now, of being the guy denouncing the "fix," but a fix it will be, the cynic in me says, as we all stand by watching what could well be the end the progressive agenda - the crowning moment of American conservatism, that is, wrested from the jaws of defeat, as the middle class is called upon to bail out "entrenched" wealth.
In other words, A.L., you express hope that the Dems will make clear the price of this ticket. I don't think price, or numbers, mean anything to anyone anymore. Narratives, as they say, matter, and who at this point is going to enunciate the counter narrative (to the idea that the Fed is fixing the problem, the stock market says so) that this is Robin Hood stood on his head?
Obama? I wouldn't ask it of him right now, or expect it. He's on the verge of a win. He doesn't need to be seen as "defying" the market.
So who?
No one.
Please let us find a way to discuss this in a couple months. later time.
Anonymous,
I'd prefer to put things off till after the election too, but I don't think it's possible.
It was getting downright apocalyptic out there yesterday until rumors of the bailout started swirling. The credit markets were absolutely frozen. It was a total lockdown. Treasury yields were going negative (meaning people were willing to pay the government to hold their money). That didn't even happen during the Great Depression. Literally nothing was moving and without intervention, we may have seen a situation where companies couldn't make their payrolls and worried investors started making massive runs on money market funds. It could have cascaded completely out of control. We were on the brink of an epic collapse of our entire financial system yesterday (and we're not out of the woods yet).
The house is on fire, and we've gotta try to put it out before it spreads.
granted,
but then I guess the questions comes, how specifically does Congress right now have to describe the terms of the bailout. The signal has been sent, the Fed's got you covered. But will either party, or candidate, ackowledge the respect in which this bail-out potentially scraps their whole economic policy, and will force them to make (if they are responsible) some fairly radical new choices?
Probably not. So I suppose the revision to my response would be to hope that the bitterness of the pill you speak of is explained to the American people not just in terms of dollars and cents - we are innured to the amount of debt we'll be passing down - but in terms of choices.
As in, for instance, how much do we, as a newly minted corporate welfare state, still get to have the most awesome and expensive military machine in the history of the world?
Talk about your third rails...
If we're going to buy up the Big Sh*t Pile, we better make sure that we buy it at the deepest discount possible and make companies show their cards and take their losses now. Transparency is key.
I'm with you on the transparency part but I beg to differ on your characterization of the Large Fecal Mound.
It's potentially a gold mine. When you pull off the CDOs and the CDSes from AIG's balance sheet, the feds are sitting on 75% of the equity of the largest insurance company in the world. They picked that up for an $85B bridge loan and it's worth, what, maybe $1T? That's a protection scam that would make any mafioso blush.
And even the mortgages are worth a ton of money once they've been de-leveraged--which of course they will be when they're purchased by the feds, for pennies on the dollar.
Indeed, my secret fear in all of this is that the government is going to discover just how lucrative it is to have their very own sovereign wealth fund. Tired of managing the budget using those pesky tax revenues? No problem! Just cover any shortfalls using Uncle Hank's Monster! It'll make privatizing 5% of social security look trivial.
Mind you, I agree completely that this needed to be done. No doubt we'll find out that the solution is far from optimal, even given the dire conditions prevailing at the time. That's what happens when you have to act fast. Still, I think Paulson did remarkably well--at least this time around. The probability of the world ending was significantly reduced, which is certainly a good thing. But the world will never be the same; some extremely bad precedents have been set.
All this money to the rich and to homeowners. Nothing for the poor and unfortunate. It stinks.
RM,
I agree that there are plausible scenarios here where the government ends up turning a decent profit. It all depends on how far the housing market falls and what price they pay for these securities now. If they drive a hard bargain and the housing barket turns around, they could actually make a decent amount of money. Lots of ifs in there, though. We'll see.
I'm going to point out that the whole purpose and focus of government is to collect, or print, then spend, money. Not only is it utterly wrong (in a figurative sense) for the government to make money, I suggest that it is outside their ken -- and that, despite all opportunities and circumstances, they'll find a way to spend money rather than making it, in the end.
The most likely method for losing money (I predict) will be to contract out the operation of the business to their corporate buddies, in effect paying some corporations to garner any profits to be had at government (i.e., taxpayer) expense.
Remember, a cynic is just an optimist with experience.
I'm going to point out that the whole purpose and focus of government is to collect, or print, then spend, money.
Says who? We're just being transitioned to a different form of government - State Capitalism is a reasonable categorization.
Bill,
I don't know your experience, so I can't give you a truly accurate response to your "Says who?" -- but, if you happen to have corporate experience, imagine the result if you suddenly take all the people in the corporate disbursement office and put them in accounts payable.
I suspect your corporation would not be happy for a good long while.
Oops, make that "move everybody in accounts payable to accounts receivable."
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