Matthew Yglesias » Above The Line

Sep 28th, 2008 at 4:54 pm

Above The Line

Paul Krugman says the plan isn’t very good but nonetheless pronounces it “good enough.” But apparently the text he’s read isn’t final, so we’ll see. My plan in ultimately making up my mind is to rely more heavily on the judgment of folks like Krugman than on my personal Raveonettes-based speculations.

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34

34 Responses to “Above The Line”

Jake Says:
September 28th, 2008 at 5:04 pm
I suspect there’s no way a “very good” plan by Krugman’s standards would ever get through Congress, and Krugman probably knows that. Thus the “good enough” qualifier.
gordon gekko Says:
September 28th, 2008 at 5:12 pm
Remember Krugman may be a progressive but he is also an economist. And while he might support Swedish style nationalization he is strongly against any of this populist rhetoric on reinflating the bubble (i.e. preventing an “antibubble”).
Don Williams Says:
September 28th, 2008 at 5:26 pm
Paul Krugman is a yapping lapdog — and people think that because he yaps, he’s a liberal.

Bullshit.

It was clear back in Feb 2001 that Bush was going to pay for his $2 Trillion tax cut for the rich by stealing the money from Social Security/Medicare’s Trust Fund. The data was buried in the back of Bush’s own budget. I sent three emails pointing this out to both the New York Times Editor and Paul Krugman.

Did they tell the public? Hell, no. They know where their bread is buttered. The New York Times makes a living by pretending to be liberal newspaper but palming the cards for the Superrich at critical moments. Like now. Like the Runup to the seizure of Iraq’s oil deposits. Like the coverup of what provoked Sept 11. The New York Times exists to prevent a real liberal newspaper from ever arising. Kinda like Microsoft killing off Netscape by giving its browser away for free.

Paul Krugman makes a living pretending to be a liberal economist. But like most economists, he knows where the consulting contracts and University grants come from.
Don Williams Says:
September 28th, 2008 at 5:40 pm
1) Of course, no one can quite lie to the American People like the Washington Post. In describing the deal, the Washinton Post said:

“The administration also agreed to Democratic demands that the financial services industry should help pay for the program. Under the agreement, the president would be required to propose a fee on the industry if the government has not recovered its money through sales of the assets within five years. ”
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/28/AR2008092800064_2.html?hpid=topnews&sub=AR&sid=ST2008092800943&s_pos=

2) The New York Times was marginally more honest:
“Among the last sticking points was an unexpected and bitter fight over how to pay for any losses that taxpayers may experience after distressed debt has been purchased and resold.

Democrats had pushed for a fee on securities transactions, essentially a tax on financial firms, saying it was fitting that they contribute to the cost.

In the end, lawmakers and the administration opted to leave the decision to the next president, who must present a proposal to Congress to pay for any losses.”
Ref: http://www.nytimes.com/2008/09/29/business/29bailout.html?pagewanted=2&_r=1&hp

3) Both reports are deceitful bullshit. There is no way in Hell that whoring Republican Senators like Mitch McConnell will allow a “tax increase” on Wall Street to pay for this mess AFTER Wall Street receives the Bailout. They will filibuster to hell and back.

Democrats KNOW this — and for them to allow a Bailout WITHOUT the tax shows they are whoring for Wall Street donations just as badly as the Republicans.

The difference is that Republicans whore openly –whereas the Democrats feign reluctance and feel compelled to lie about what they are doing.
roger Says:
September 28th, 2008 at 5:45 pm
Wow, you’ve still not learned, Matt. You have said you supported the invasion of Iraq because you “trusted” the Clintons. Don’t do this.

You should simply support things that sound reasonable to you, that you can argue for. Whether they come from Krugman or Boehner is not significant. Krugman has been an excellent critic of this bill, but he has also supported Bernanke’s interventions going back a year, all of which collectively made the problem much larger. If our only choice is a bad bill, Krugman might be right – but is our only choice a bad bill?
max Says:
September 28th, 2008 at 5:57 pm
Read the bill, Matthew. And THEN pay attention to everyone else.

You graduated from Harvard, so you can read (if Harvard graduates people that can’t read, we are all in way worse trouble than I thought).

The time-honored practice going back five thousand years is to make the laws public so that everyone from the mightiest to the lowliest of the low know the laws that apply to them. (Remember Hammurabi.)

You are meant to read the laws that apply to you. That’s why they’re published and made public, and you are surely smarter than, or at least as smart as, most Congress-critters.

Economists are not lawyers, and lawyers aren’t economists, so the playing field is practically level for you in many respects, even though you aren’t a lawyer or an economist. Last week, everyone economically-minded was hot for the Dodd bill until they had some time to work out the implications whereupon the thumbs down started arriving. That, of course, is why they’re rushing this through, so no one has time to process the implications.

And finally, there is the old standby legal advice: never sign anything you don’t understand, so if you don’t understand it, that’s the time to get someone to explain it to you. That is not the time to say fuck it and sign it anyways.

So read the damn bill! I’m fixin’ too.

max
['Assuming I can get something like a final draft!']
BruceMcF Says:
September 28th, 2008 at 5:59 pm
I much prefer a plan with immediate issue of non-voting Preferred Shares with heavy limits on firms that are not meeting the dividend … it shares, I reckon, much of the benefit of a temporary nationalization of banks, without sharing the political drawbacks.

However, on the question of taking advice from Krugman on whether the pending bail-out is “good enough” … is that economic advice or political advice? If its economic advice on how and why the plan is good enough, then it should carry some weight … certainly Krugman is a mainstream economist, but among the better of the mainstream economists.

If its political advice that this is bad but could be worse … there’s no special reason to favor Krugman’s expertise.
Soullite Says:
September 28th, 2008 at 6:24 pm
This plan is going to be electoral Armageddon in 2010. We’re going to lose the house. We’re going to lose the Senate. We’re going to spend this money, and Americans are still going to lose their houses. They are still going to lose their jobs. CEO’s are still going to get rich while running their companies into the ground. The economic crisis is going to continue. All this plan does is make sure those responsible for ruining this country never have to feel the pain they’ve caused everyone else. People are annoyed right now, but they will be full of fury and rage when all of this money is spent and it doesn’t do a bit of good.
lampwick Says:
September 28th, 2008 at 6:33 pm
A lot of big talkers and hysterics here.

The bill will pass, we will go into a severe recession but not an apocalyptic depression, this bill will be remembered as Bush’s work, Republicans will suffer more than Democrats at the polls, and Obama will slowly but surely fulfill all his promises.

Go take a chill pill if you think otherwise.
RKU Says:
September 28th, 2008 at 6:54 pm
Well, I’m no economist, but offhand this Bailout proposal sounds a lot like halting a financial panic by dropping hundred-dollar bills out of airplanes…

Except in this case, the money-drops are only taking place in the wealthiest zip codes…
Don Williams Says:
September 28th, 2008 at 7:02 pm
I agree with Soulite. So does Kos:

“So who will vote for this piece of crap bailout? Only those who don’t need to face the voters this year, apparently.

[News Extract re Republican and Democratic leaders trying to round up votes]

November? Do these jokers actually think this won’t be a lasting political issue? Heck, I’m praying that the Bush Dogs (really bad Democrats) vote for this thing, just so that 1) it helps generate strong primary challengers in their districts, and 2) so that we can wield the vote against them in those primaries.

I’m sure the Club for Growth is thinking the same thing on their side.

The question for anyone who wants to vote for this isn’t, “Am I safe this year?” It’s, “Do I want this damn thing hanging around my neck for the next X number of political cycles?” It’ll be an issue this year. It’ll be an issue in 2010.”
Ref: http://www.dailykos.com/storyonly/2008/9/28/175827/541/666/613612
————–

I remember when Matthew used to blog like that.
Don Williams Says:
September 28th, 2008 at 7:07 pm
Before Matthew had to ..er ..sing for his supper.

I don’t think Socrates did it that way.
jeff Says:
September 28th, 2008 at 8:01 pm
As to the political question raised by soullite and lampwick.

The political ramifications are greater than a bad vote–which this is.

Rather, the money spent on the bailout coupled with spending in Iraq (sorry Obama fans, that spigot is not ending soon)will leave so little money for vital programs (e.g. medicare, SS, healthcare) that republicans will use the deficit and spending excesses of the Bush administration as a pretext to cut programs and roadblock any progressive legislation (read healthcare).

This vote will come back to haunt democrats because they will be hamstrung to do anything with their short term electoral majority.

IF the democrats are unable to do anything to change the economy when they are in charge–which this bill will usher in–they will be removed from office.
jwb2005 Says:
September 28th, 2008 at 10:30 pm
ok, all you brave souls, are you really willing to risk a major depression over “we’ll lose the House in 2010″? Because if nothing is passed, the Dems win the election, and bad stuff happens, we’ll still lose the House. In fact, a good chunk of the country could well lose their personal houses. Losing the House will be the last thing we’re worried about when unemployment is in double digits and the foreclosure rate is through the roof.

By this logic, we should all just pray for a GOP landslide in November so we can win the House in 2010. Because odds on, whichever party wins in 2008 will get its clock cleaned in 2010. That’s just the nature of having a nasty recession in 2009-2010, and unless we get incredibly fortunate, we’re headed for a very nasty recession even if we make the right call on the bailout.

If you want to play politics with this, I think your best bet is to consider what option is most likely to deliver the best economic conditions in summer 2010. I have no idea what that is, but I’m pretty sure that waiting until after this election to act is not it.
mercurino Says:
September 28th, 2008 at 11:18 pm
psst, this just showed up in my inbox. pass it around.

THE 2008 FINANCIAL MELTDOWN IS PROUDLY PRESENTED TO YOU BY:
THE REPUBLICAN PARTY

1999: The REPUBLICAN SENATE votes to repeal Glass-Steagall, a law that had separated the commercial-banking industry from Wall Street. As a result of the repeal, banks become bigger, clumsier, and harder to regulate.
• FACT: The chief sponsor of the repeal was REPUBLICAN SENATOR PHIL GRAMM, chief economic adviser to REPUBLICAN presidential candidate, JOHN MCCAIN.
• BONUS FACT: GRAMM has stated that Americans are “WHINERS” because they’re worried about the economy.

2000: Mortgage lenders Fannie Mae and Freddie Mac set up the HOMEOWNERSHIP ALLIANCE to lobby Congress to loosen regulations on the two companies. As a result of lax regulation, Fannie and Freddie begin buying risky mortgages. In August, 2008, the government takes over the two mortgage giants amid fears that they are insolvent.
• FACT: The head of the HOMEOWNERSHIP ALLIANCE is REPUBLICAN RICK DAVIS, the CAMPAIGN MANAGER of REPUBLICAN presidential candidate JOHN MCCAIN. DAVIS makes nearly $2,000,000 lobbying for Fannie and Freddie.
• BONUS FACT: Between 2006 and August, 2008, Fannie and Freddie pay DAVIS’ lobbying firm, DAVIS MANAFORT, $15,000 per month for access to JOHN MCCAIN. During that time, DAVIS is also managing MCCAIN’S campaign.

2003-’07: THE FEDERAL RESERVE ignores calls from experts to exercise its regulatory authority over mortgage lenders. Those lenders proceed to give huge loans to risky borrowers while abandoning traditional lending standards like employment history, income, down payments, credit rating, assets, loan-to-value ratio and debt-servicing ability. A few years later, many of those borrowers default on their loans.
• FACT: Yippeee! Free money courtesy of REPUBLICAN ALAN GREENSPAN!

2004: The SEC waives its leverage rules, allowing investment banks to make huge bets with borrowed money on financial instruments backed by shaky mortgages. Some firms borrow up to 50 times more than their available cash.
• FACT: Head of SEC in 2004? REPUBLICAN WILLIAM HENRY DONALDSON!

2005-’07: Unscrupulous home appraisers find that they can attract more business by inflating appraisals. Honest appraisers petition CONGRESS to intervene in the widespread fraud. CONGRESS ignores them.
• FACT: Who controlled CONGRESS from 2005-’07? REPUBLICANS!

FACT: For the past eight years, REPUBLICANS controlled the EXECUTIVE BRANCH, the LEGISLATIVE BRANCH, and the FEDERAL BUREAUCRACY. During that time, they ignored warnings about the suspect lending practices of mortgage companies and the risky bets made by Wall Street banks. They consistently refused to exercise their oversight responsibilities and scoffed at experts’ calls for increased regulation.

REPUBLICANS like to lecture people about “taking responsibility” for their actions. Yet they still refuse to take responsibility for their central role in the current financial crisis. If they won’t hold themselves accountable, it’s up to the voters to do it for them.

sources: Bloomberg News, Newsweek, Barron’s
J Thomas Says:
September 29th, 2008 at 12:47 am
If you want to play politics with this, I think your best bet is to consider what option is most likely to deliver the best economic conditions in summer 2010. I have no idea what that is, but I’m pretty sure that waiting until after this election to act is not it.

JWB, you don’t know what to do but you’re sure it has to be done right now.

This problem is inside Congress’s OODA loop. There’s no possible way they can make a good decision quick enough to suit you. So you insist they have to make a quick decision (that will almost inevitably be bad) and hope it turns out well.

I say, if four months from now is too late to do the right thing, then our chance of doing the right thing is very very low. Congress doesn’t know how to get good results fast. Don’t tempt them to try. It’s like telling a software team that can probably get a good product out in a year that their deadline is two weeks. It isn’t going to be pretty.

We need Congress to ask Paulson etc some pointed questions.

1. Did you know this problem was coming, two months ago?

1A Yes: Then why didn’t you tell us about it then so we could get ready? We don’t trust you. Resign and we’ll pay attention to your successor.

1B No: Then why should we trust your ideas about what problems we’ll have two months from now? We don’t trust your competence. Resign and we’ll pay attention to your successor.
AlanC9 Says:
September 29th, 2008 at 2:36 am
Whatever happens, I’m really looking forward to sifting through the archives here in a few months. Some people are gonna be eating a lot of crow, methinks.
Soullite Says:
September 29th, 2008 at 5:18 am
JWB, this bill won’t do anything at all. It won’t help stem any crisis. All it will do is make the impending crises more comfortable for rich people so that none of them become vulnerable to the problems they caused.

This is the same BS logic that said ‘are you really willing to risk Saddam Hussein KILLING YOUR CHILDREN IN THEIR SLEEP!!!1!!!1!!!!one-hundred-eleven1!!!!!!!.’. Go sell your crazy to people who were born after 2003 and actually believe that the people on the teevee know what they are talking about.

The only people really defending this bill are the same people that always love anything that involves giving rich people more money and screwing the poor.
Soullite Says:
September 29th, 2008 at 5:19 am
If there was really a problem, the Republicans would have rolled over on bankruptcy and Wall Street would have taken it in the ass on executive compensation. That they were unwilling to do either proves to me that there was never any real problem, just a bunch of spoiled rich brats stomping their feet and hoping they can loot even more of the treasury before Bush’s term is over.
rapier Says:
September 29th, 2008 at 5:39 am
This will be remembered in months and years to come as something that didn’t work. Didn’t work to help citizens and voters. The rewards for them are surely impossible to measure because they are trickle down ones and you know how well those are measured.

It remains to be seen if it’s loaded down enough with oversight and rules and sunlight so that it won’t be what Paulson wanted it to be. A slush fund to help his buddies raid under priced assets and help gain control of the commercial banking system in an even deeper way than before by ownership of the regional banks.

Krugman has to support this do something bill because he too never warned of the serious systematic problems that were building for the last 30, 20, and 7 years. His hearty criticisms were about tactical issues, not the deeply strategic ones that involved what is best described by the term Credit Bubble.

This do something approach in the end should be seen as a last gasp embrace of fundamental soundness of the establishment understanding of how the financial system operates. Which is to say that it isn’t run by a bunch of crooks. It is.

Bankers are scum. Always have been always will be. That includes central bankers. Some are far better than others. The leaders of the really big banks are always scum however.
El Cid Says:
September 29th, 2008 at 6:43 am
Well, this is reassuring: via Naked Capitalism, you may download your own audio recording — they call it “Mussolini-style Corporate Capitalism” — of the behind-closed-doors conference call on the bailout, which they feel establishes that:

The gov’t rep’s feel the ‘tranching’ of the money (the famed first $250 billion and then the next divisions) is not legally a barrier and thus $700 billion will be available IMMEDIATELY, whatever Congress wants (from their notes on the call), and not just because it was already an appropriation. Once Paulson asks for the last $350 billion, it’s automatically presumed that it will flow, and Congress can only stop it by action:

To block the last $350B, Congress has to say no. Then the President can veto that. To override that veto, Congress needs 2/3 majority. ['We feel like that's a very high bar for Congress to block Secretary Paulson's initiatives.']

ALL of that must happen within 15 days, otherwise the money goes out.

Can’t the President wait and veto it with one minute left in the 15 days?

RTC had to go back to Congress. Kudos for making this program much EASIER!

I have to admit that having listened to the 17 minute call myself, such insight requires both real familiarity with the issues and repeated listenings, because it really is for those in the industry, and the audio isn’t so great — I mean, the words are audible, but it’s annoying since it’s recorded from a phone or cellphone.

Their own cautionary notes:

Update: Here are the notes promised. Calculated Risk had put up the conference call number. so some of this is the listener’s notes, some are hoisted from CR. They are admittedly skeletal at points, but track and enhance the live blogging report at DealBreaker. You can download a torrent for the call here, which I intend to do post haste and will amend the post accordingly. I’ve included the long form notes below, but some items jump out:

1. The tranching is a mere formality, and the Treasury boys as much as said so. They could take the $700 billion max as soon as the bill has passed,

2. However, they do not plan any action immediately, will wait a couple of weeks. They want to focus their efforts on stronger companies but also made noise about protecting the financial system. This, by the way, is the Japanese convoy system all over.

3. There seemed to be a lot of tap dancing about what price they will pay for assets and no straight answer about their policy on warrants. They did say that if the amount sold was greater than $100 million, they would take warrants. FYI, the current draft allows them to pay up to the price at which the assets were initially booked (yikes) . I wonder if this is obfuscation, if they have an idea of what the plan to do but will not admit it in any public forum.

4. As the person who listened to the call stressed, DealBreaker wasn’t clear on the bifurcated process. If you come to the Treasury and you are in trouble, you get reamed. Bear/AIG style treatment, execs probably fired. But if you participate on a voluntary basis, the intent is to make it very user friendly. That is consistent with Paulson’s position during the negotiations.

5. The exec comp provisions sound like a joke, They DO NOT affect existing contracts, they affect only contracts entered into during the two years of the authority of this program and then affect only golden parachutes. More detail on that point, but I don’t need more detail to get the drift of the gist.

Separately, “Nouriel Roubini Really, Really Hates The ‘Bailout’”:

Did we say really? Even by the normal standards of Roubini’s tendency to hyperventilate state his case forcefully, the good professor rises to levels of choler heretofore unseen.

Roubini focuses on many of the issues we have discussed in our earlier posts (most notably this one) but he teases out some of the issues in more detail. And he really hates it, whoops, I think we covered that already:

Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system…..

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead – in most cases in which it was used – made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification.

This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.

So this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession.

Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money…

….via public injections of preferred shares into these firms; via required matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; via suspension of dividends payments; via a conversion of some of the unsecured debt into equity (a debt for equity swap).

All these actions would have implied a much lower fiscal costs for the government as they would have forced the shareholders and creditors of the banks to contribute to the recapitalization of the banks…..For example if the private sector had done its fair matching share only $350 billion of public money could have been used; and of this $350 billion half could have taken the form of purchase of bad assets and the other half should have taken the form of injection of public capital in these financial institutions.

So instead of purchasing – most likely at an excessive price – $700 billion of toxic assets the government could have achieved the same result – or a better result of recapitalizing the banks – by spending only $175 billion in the direct purchase of toxic assets.

And even after the government will waste $700 billion buying toxic assets many banks that have not yet provisioned for such losses/writedowns will be even more undercapitalized than before. So this plan does not even achieve the basic objective of recapitalizing undercapitalized banks….

Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer.

And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented – many on the RGE Monitor Finance blog forum – alternative plans that were more fair and efficient and less costly ways to resolve this crisis.

This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street.

And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners.

But why worry? Political, and not economic, experts are assuring us that this trillion-dollar transfer is exactly what we need right now.
AlanC9 Says:
September 29th, 2008 at 7:12 am
Well, Jim Cramer’s for it too….

I was going to insert a joke, but I don’t think I really need one.
Don Williams Says:
September 29th, 2008 at 8:54 am
Re AlanC9’s comment “Whatever happens, I’m really looking forward to sifting through the archives here in a few months. Some people are gonna be eating a lot of crow, methinks.”
————–
A few months? US Citizens are going to be eating this $1.5 Trillion turd for a decade. Plus another $500 Billion in interest before the next Presidential election.

Along with that $2 Trillion Tax Cut for the Rich and $1 Trillion for an unnecessary war. Both of which some Democrats voted to approve.

Something to remember everytime Obama and the Congressional Democrats cave to the Republicans on giving a $Billion or two to the poor, the sick, the homeless, or the young.
Arnold Evans Says:
September 29th, 2008 at 9:09 am

2. However, they do not plan any action immediately, will wait a couple of weeks. They want to focus their efforts on stronger companies but also made noise about protecting the financial system. This, by the way, is the Japanese convoy system all over.

Absolutely disgusting. There never had been an emergency. This could have been considered in a reasoned environment and if it needed to be done, which I’m becoming more skeptical of, it could have been done more cheaply and efficiently.

The “crisis” was that Bush would be out of office soon and the Executive Branch would not have been able to frighten stupid congress people into making a huge transfer to Wall St.
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