He who sets the price, controls the world
I've now had a chance to read the Bush administration's proposed legislation, and I don't like it one bit. It's simple as can be. Basically Congress would be giving the Treasury Secretary the unfettered, unreviewable authority to spend $700 billion in taxpayer money as he sees fit. There's not even an attempt to grapple with the most important element of the bailout, i.e., how the price of these assets would be determined. The price makes all the difference in the world. If the government pays more than these assets are worth, then all we're doing here is transferring wealth from taxpayers to investors who made bad decisions.
And it's going to be awfully tempting for the Bush administration to pay much more for these assets than they are actually worth. After all, it'll likely be years before we really know how much of a bill the taxpayers are stuck with. The assets are illiquid now, so the government will presumably hold on to them until the housing market rebounds and they can be sold. At that point they'll be sold for either a profit or a loss (the latter being much more likely). So here's the reality. No one will know if the Bush administration has paid too much for these assets until years from now. But the more the administration pays for these assets now, the better the overall state of the economy will appear to be in the near term. There will be less bankruptcies, less bank failures, and the entities currently holding these assets will have better balance sheets to report. Meanwhile, the administration will still be able to claim that it drove a hard bargain and that the taxpayers stand to reap a profit when the assets are eventually sold. And no one will be able to disprove those rosy assessments until the moment of truth comes several years down the road.
To put it another way, this legislation allows the Bush administration to transfer lots of money to Wall Street (and thereby artificially inflate the economy) while hiding the true cost of that transfer for years (and even pretending that there won't be any cost).
I'm not going to pretend I have all the answers to this mess, but if the government is going to be doling out this much money directly to Wall Street, the price that we're paying needs to be determined on some basis other than the whim of Hank Paulson. That's not an acceptable way for this process to work. Until then, I'm with Krugman. No deal.
UPDATE: If the Democrats in Congress aren't inclined to got back to the drawing board here, they ought to at least focus their efforts on amending the bill to provide for some sort of rational process for determining the price the government will pay for these distressed assets. If there is no neutral, market-based mechanism that anyone can come up with, then at the very least, some sort of independent panel (separate from the Bush administration) should be established and tasked with the job of setting prices. This enormous power should not be left in the hands of a single man, especially a political appointee.
UPDATE II: On Meet the Press just now, Tom Brokaw said that "people are talking" about amending the bill to put this new authority in the hands of an independent "czar", someone nonpartisan. He suggested Mike Bloomberg.
While I'm glad that "people" are noticing that it makes no sense to give this kind of discretion to a political appointee, Mike Bloomberg would be an even more insane choice. He's the Mayor of New York City, a city that relies on Wall Street to provide much of its tax revenue. He has a major conflict of interest here. It should be obvious to everyone that what's in New York City's interest in this situation is not necessarily in the United States' interest. Bloomberg, even more than Paulson, would have every incentive to overpay for these bad assets. It's a truly terrible idea.
And it's going to be awfully tempting for the Bush administration to pay much more for these assets than they are actually worth. After all, it'll likely be years before we really know how much of a bill the taxpayers are stuck with. The assets are illiquid now, so the government will presumably hold on to them until the housing market rebounds and they can be sold. At that point they'll be sold for either a profit or a loss (the latter being much more likely). So here's the reality. No one will know if the Bush administration has paid too much for these assets until years from now. But the more the administration pays for these assets now, the better the overall state of the economy will appear to be in the near term. There will be less bankruptcies, less bank failures, and the entities currently holding these assets will have better balance sheets to report. Meanwhile, the administration will still be able to claim that it drove a hard bargain and that the taxpayers stand to reap a profit when the assets are eventually sold. And no one will be able to disprove those rosy assessments until the moment of truth comes several years down the road.
To put it another way, this legislation allows the Bush administration to transfer lots of money to Wall Street (and thereby artificially inflate the economy) while hiding the true cost of that transfer for years (and even pretending that there won't be any cost).
I'm not going to pretend I have all the answers to this mess, but if the government is going to be doling out this much money directly to Wall Street, the price that we're paying needs to be determined on some basis other than the whim of Hank Paulson. That's not an acceptable way for this process to work. Until then, I'm with Krugman. No deal.
UPDATE: If the Democrats in Congress aren't inclined to got back to the drawing board here, they ought to at least focus their efforts on amending the bill to provide for some sort of rational process for determining the price the government will pay for these distressed assets. If there is no neutral, market-based mechanism that anyone can come up with, then at the very least, some sort of independent panel (separate from the Bush administration) should be established and tasked with the job of setting prices. This enormous power should not be left in the hands of a single man, especially a political appointee.
UPDATE II: On Meet the Press just now, Tom Brokaw said that "people are talking" about amending the bill to put this new authority in the hands of an independent "czar", someone nonpartisan. He suggested Mike Bloomberg.
While I'm glad that "people" are noticing that it makes no sense to give this kind of discretion to a political appointee, Mike Bloomberg would be an even more insane choice. He's the Mayor of New York City, a city that relies on Wall Street to provide much of its tax revenue. He has a major conflict of interest here. It should be obvious to everyone that what's in New York City's interest in this situation is not necessarily in the United States' interest. Bloomberg, even more than Paulson, would have every incentive to overpay for these bad assets. It's a truly terrible idea.
posted by A.L. at 9:50 PM
8 Comments:
Luigi Zingales, of University of Chicago, has some excellent ideas on handling the current crisis.
Quite a few commentators object violently to the political features of the proposed legislation, one noting that "The Treasury Secretary can buy broadly defined assets, on any terms he wants, he can hire anyone he wants to do it and can appoint private sector companies as financial deputies of the US government. And he can write whatever regulation he thinks are needed......Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
We saw this with the Military Commissions Act in regard to terrorists; now we are seeing it in regard to homeowners and retiree investors. The law is not for you. As State Security Sec.Chertoff recently pointed out, it is a little known part of the PATRIOT Act that it is an act of sedition for depositors to withdraw their money from a financial institution if the US Treasury or Federal Reserve deems that such an action would cause it to fail. When the FDIC (Federal Deposit Insurance Corporation) recently put out an unsettling statement about the company Washington Mutual the public queued up to get their money out and Chertoff used this provision to station forces outside the company's branch offices.
Keep in mind, also, that corporations have been declared off limits for criminal prosecutions by the Bush administration. The Justice Department has put off prosecuting more than fifty companies suspected of wrongdoing over the last three years, entering into what are termed "deferred prosecution agreements" with larger companies breaking corporate and environmental law.
We are in fascist territory here.
What is wrong with us? Biden says it's patriotic for the rich to pay their fair share and we hem and haw about it? HELL, YES! We should have one statement, "Warren Buffet is willing, what's wrong with the rest of his class?" You know, class warfare is a two-way street and we never point out the other side of the street. Redistribute wealth? That's what's happening NOW from ME and YOU to THEM.
We have to attack based on the same old greed. One Republican Bush-appointed person, with NO oversight, determines what to buy, how much it should cost, how much it's worth and who should benefit?? The only pre-determined aspect of this is who should pay.
ME - I'm calling for a tax revolution!
"distressed assets"...That's a cool one. I think in English that means : Bad Debt. Typically no sane person buys Bad Debt..so we will be buying distressed assets.
PS: I think the term might just be an oxymoron..but that's just be talkin'
The hyperbolic reaction to this bailout by some has been quite remarkable. The fact that the wealthy or otherwise well connected have more or less everywhere and always been able influence government in ways that benifit themselves seems to have been overlooked. That observers are now shocked and outraged that the solution to this crisis will probably be handled in a way favorable to the well off is truly astounding.
Take the usually convincing Glenn Greenwald, for example.
"... whatever else is true, the events of the last week are the most momentous events of the Bush era in terms of defining what kind of country we are and how we function -- and before this week, the last eight years have been quite momentous, so that is saying a lot. Again, regardless of whether this nationalization/bailout scheme is "necessary" or makes utilitarian sense, it is a crime of the highest order -- not a "crime" in the legal sense but in a more meaningful sense.
What is more intrinsically corrupt than allowing people to engage in high-reward/no-risk capitalism -- where they reap tens of millions of dollars and more every year while their reckless gambles are paying off only to then have the Government shift their losses to the citizenry at large once their schemes collapse? We've retroactively created a win-only system where the wealthiest corporations and their shareholders are free to gamble for as long as they win and then force others who have no upside to pay for their losses. Watching Wall St. erupt with an orgy of celebration on Friday after it became clear the Government (i.e., you) would pay for their disaster was literally nauseating, as the very people who wreaked this havoc are now being rewarded."
and
"If there is any "pitchfork moment" -- an episode that understandably would send people into the streets in mass outrage -- it would be this. Nobody really even seems to know how much of these losses "the Government" -- meaning working people who had no part in the profits from these transactions -- is undertaking virtually overnight but it's at least a trillion dollars, an amount so vast it's hard to comprehend, let alone analyze in terms of consequences. The transactions are way too complex even for the most sophisticated financial analysts to understand, let alone value. Whatever else is true, generations of Americans are almost certainly going to be severely burdened in untold ways by the events of the last week -- ones that have been carried out largely without any debate and mostly in secret. "
Really? The most momentous event of the Bush administration? A pitchfork moment?
For the sake of this argument we will ignore the Iraq war, torture, rendition, etc and focus only on financial issues. Under Bush the national debt has increased something like $4 trillion to date but now the fact that they will have to add a few hundred billion more as a result of this crisis is a ptichfork moment?
Let's examine one major element of the acquisition of this debt, the Bush tax cuts. If Bush had simply announced that the govenment was going to borrow money and remit the proceeds of the loans to the citizens, with each receiving 10% or so of their investment income on a yearly basis, in most cases the results would not have differed significantly from what actully occured. It would have been slightly more transparent but that is all and no doubt it would have led to far greater howls of outrage than the actual "tax cuts" engendered. But the point is that these "tax cuts" likely represented a far greater transfer of wealth from future tax payers essentially to the current investor class than the current bailout.
Greenwald and others write as though it is only the executives, who actually made the risky investments in derivitives who will reap all of the rewards from the bailout. But in actuallity it is everyone who is invested in the financial system in one way or another (and probably many who aren't)who will receive some benefit. Of course, like the "tax cuts" it will accrue far more generously to the financially well-off but any reasonalby well-informed individual could not only have predicted that outcome but have been virtually certain of it.
A.L.--
Surely you're not proposing that Congress formulate a procedure for valuing the assets? Please remember that so far, nobody has been able to come up with a way of doing this--that's the whole problem.
I completely sympathize with your concerns over the lack of oversight here but the nature of the beast is that we're going to have to trust somebody who's smarter than the average bear to look at the alarmingly small amount of information and take their best shot. I don't know if Hank Paulson is the absolute best person to do that but he'd sure as hell be on the short list.
Furthermore, please note that the whole idea here (albeit unstated) is to inject enough liquidity into the banking system that everybody's willing to lend to everybody else. That pretty much requires that the CDOs get valued fairly optimistically. The whole point of the the feds buying up the paper is that they've got a balance sheet big enough to absorb paying the premium. With a little luck, that premium will be dwarfed by the future value of the paper. If not, then we're gonna get screwed, but not as badly screwed is we would if everybody just stops lending for two or three years.
There are alternatives to buying up the debt. (See Mallaby's column in the WaPo, for example.) But none of them seem to have any higher probability of success than Paulson's plan, which has the advantage of being pretty simple in concept. Given that time is of the essence (hopefully everybody agrees on that), I'd say that we ought to go with it.
However. Speaking as a (usually) big believer in laissez faire economics and one who is utterly disgusted by even the simplest appeals to class warfare, I have to say that I have never had my faith in the correctness of free market capitalism so sorely tested. I'm pretty sure that, mod all the political posturing, when they write the history books on this whole sordid affair we'll find that this was 25% lack of regulation and 75% groupthink/failure of imagination. Still, this whole thing really pisses me off. There are about 500 people out there that I'd really like to see in jail, despite the fact that they did nothing illegal.
If I feel like this, I can only imagine how those of you more liberal than I must feel. Make no mistake: as of late Friday night, McCain's campaign is deader than a stone. When the rest of the country processes this, torches and pitchforks are not out of the question. I hope President Obama is smart enough to steer a middle course between responding to that anger and realizing that punishing the financial industry does nothing to make life better for ordinary Americans.
Let's not forget that the Democrats are highly unlikely to balk at the creation of a constitutional dictator for economic salvation, since they have to be calculating that it will be their guy who will have all the power.
I would imagine that the jockeying for the position of treasury secretary in an Obama administration is getting pretty intense just now. The power entailed by the creation of this mechanism to reward friends (if not destroy enemies) is just barely imaginable.
What we're seeing is a perversely reversed golden rule: those who make the rules get the gold.
AL,
I don't even need to read the proposal to loathe it. The urgency of Bush's demand for Congressional action has always been directly proportional to the heinousness of the deed he's trying to commit. It's as if he doesn't want anyone to think his BS through. Imagine that.
Translation for us working saps of the bail-out: "catastrophe" = any crisis created by greed and fraud that needs tax money to maintain the greed and fraud. “once in a century crisis” = forget Enron and Worldcom which were only a few years ago. “free markets” = ensuring that the Big Money Boys can swallow a fire hose of money for as long as possible. “protecting the American people” =protecting Bush/Paulsen’s Wall Street buddies who might have to give up a few mansions. “a clean bill” = nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving. “transparency” = We’ll report to the elected class after it’s a done deal. "partisans" = any Congresspeople who insist that any bail out should include oversight and some feature that will benefit average Americans. “This will work” = Sure, cuz the plan includes taking another chunk of our money after the first chunk doesn’t work. “poison pill” = anything like making CEOs foot some of the bill for their own terrible decisions. "trust us." give another blank check to those who've proven themselves to be wrong and/or incompetent at every turn for the past eight years. “American people” = those who caused this crisis and who exploited this crisis. They will slurp up the trillion dollars of our hard-earned money that's gonna be served up on a silver platter faster than you can say "Americans are suckers if they vote Republican."
Post a Comment
Links to this post:
Create a Link
<< Home