Fun and interesting economic news the last few weeks.
I, personally, have had a very interesting edumacation in this area over the last week or so, as I’ve been spending quite a bit more time reading Robert Reich’s blog, while Krugman has been blogging up a late-season tropical storm of econowonking. If you’re looking for deep insight into the details of the bailout proposal, from a somewhat skeptical left-of-center perspective, you could do much worse than to read up on what those two have to say.
However, I’ve also been trying very hard to listen to what Hank Paulson and Ben Bernanke have had to say about the proposal, especially on the Sunday morning shows, and I also spent a very enlightening 2 hours hiking yesterday morning with friend A.A., who is an economically conservative investment banker. The bags under her eyes after the last few weeks were a little distracting, but she had a very interesting position on the situation.
I have neither the economic nor the writing chops to put together a terse, coherent set of views on the proper set of actions that we really should be looking into. But, a few random points below the fold.
1) To call this an $800 billion expenditure is a bit overblown. It is true that the plan is to purchase $800 billion worth of assets of a very questionable quality from various Wall Street entities. It’s my understanding that what we will be purchasing are CDO’s made up of distressed mortgages, basically collections of subprime mortgages gone extremely awry. This has a downside, which is mostly summed up in the question “who the hell is going to be in charge of collecting on and administrating all these bad loans?” I definitely don’t want the government in charge of deciding when to foreclose on a home loan. However, it also has an upside, which is that there is an actual asset, a house, at the base of all of these things. And while the house may well not be worth as much as is owed on it right now, it’s also not going anywhere. The legitimate hope is that if the economy recovers, it might appreciate its way back to the point where we can escape without taking too large of a financial hit.
2) That said, I am still nervous about the government taking over these assets, and I think there’s a lot to like about the plan Sebastian Mallaby, among others, were pushing this weekend. Read Paul Glastris for more, but, in short, the idea is that, rather than trying to find a ‘fair market value’ for those distressed assets, then trying to manage them back to profitability, the government should leave the assets in the hands of the banks who are currently holding them, but make a large equity investment in the banks. The benefit here is that the government is not in the business of valuing large, confusing, debt obligations, and is almost certain to make a hash of it, whereas giving the banks capital with which to jump-start the trading process could get the economy moving again, while leaving the government in a position to reap the rewards of future profits via ownership stake in the banks in question.
There are two downsides I see to this plan. The first is that it’s hard to see how the government, once it’s in the banking business, gets out. The nice thing about the current proposal is that the government is buying specific assets – once their value goes up enough, you sell them and move on. The second, which I get courtesy A.A., is that you still have no good way to value the distressed assets. The biggest upside of the Paulson proposal is that the government will, in effect, be setting a floor value for the assets that it purchases, which should give investors some confidence that the values won’t drop below that point, allowing trading to resume and capital to begin flowing again.
3) There are certain aspects to the Paulson proposal which are non-starters, beginning with the Warrantless Wiretapping of the economy, courtesy Noah Millman at The American Scene:
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.
Say what? Look, I get the need for lean oversight to keep down the amount of red tape you have to navigate, to maintain the ability to move swiftly when necessary. But we’ve seen how badly the Bush administration is capable of messing up a comparatively small-ish war (by war-historical standards) when they lack any oversight. Now we want to give them unfettered access to the public teat to muck around with the economy, with any oversight being specifically made illegal? No thanks.
In general, I think the basic idea of the plan seems sound, although there are definitely questions I’d like to see answered. I hope that Congress, if when it chooses to lard up the bill with side-projects, chooses ones which are, at the least, actually net positives for the economy, rather than further giveaways for the sake of being able to say that you’re at least doing something. One thing that I would really like to see is some further restrictions put on the banks which are being rescued. Make participation in the bailout optional, but if you choose to participate, then you’re going to have to play by our rules: maximum limits of leveraging, reduced executive compensation packages, elimination of dividend payments on shares, things like this. We The People are going to be paying for this plan for quite a while – it’s only right to make sure that the Titans Of Industry feel a little bit of the pain as well, in their pocketbooks as well as in their pride.