I Know That You Want The Candy
Kevin Drum seems to have found this Joe Nocera article about the need to pass the bailout plan quickly convincing. I find it, if anything, anti-convincing. It’s emblematic of the continuing efforts of Wall Street’s allies to bully opinion leaders into the belief that passing a $700 billion bailout is the only viable option rather than persuading us that it’s a good idea. Key to this, a tactical Nocera heavily engages in, is acting as if the only basis for disagreeing with this proposition is populist anger at the spectacle of a bailout. Then you acknowledge the populist anger and the validity of the underlying emotions, but say that nonetheless we need to be rational and do this.
So far so good, but surveying the scene I’m seeing hundreds — hundreds — of perfectly sober-minded economists who simply don’t think that this is a good idea. At the same time, I’m seeing tons of sober-minded experts who believe that Sweden, when faced with an analogous situation, came up with the solution of temporary nationalization of the relevant institutions and that we ought to go for a Sweden-modeled solution. I haven’t heard Hank Paulson, Ben Bernanke, or anyone else even begin to offer me a persuasive argument that their model is better than the Swedish model. At the same time, their model is more friendly to the financial interests of Wall Street players. So opposing the Paulson Plan on the grounds that we need a Swedish Plan isn’t an example of wanting to harm the overall economy for the sake of spiting Wall Street; rather, preferring the Paulson Plan is an example of wanting to harm the overall economy for the sake of being more generous to Wall Street.
I understand that Wall Street players want candy from the government, but since free candy isn’t the only solution to the crisis, I don’t see why it’s a solution we should opt for:
Indeed, Nocera has moved beyond even trying to argue that the plan he favors is a good plan. Rather, he says we need to pass it even though it’s bad because we need to act really quickly. His evidence for this consists of citing things like “Washington Mutual was seized by the government. The markets may not be as panicked as they were last week, but with every passing day, the situation is getting increasingly dangerous.” But Washington Mutual’s depositors are fine. We have a perfectly adequate procedure in place to liquidate insolvent depository institutions. Yes, WaMu’s shareholders got wiped out, but so what? Again, I can see perfectly well why bank owners might want us to spend $700 billion in an unfair and ineffective way in order to preserve the value of their investments. But I’d rather put their investments at risk than spend $700 billion in an unfair and ineffective way.
The idea that the scale of the crisis somehow makes responding to the crisis with a bad plan desirable is weird. The financial jam-up is a very big deal. Which is all the more reason to respond to it effectively rather than just spewing money around to give the markets a psychological shot in the arm.
54 Responses to “I Know That You Want The Candy”
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September 28th, 2008 at 3:27 pm
Look, I like nationalization as much as the next good lefty, but the current bailout package negotiated by Pelosi, Reid, Dodd, and Frank — with bank stock for taxpayers, mortgage renegotiation for homeowners, pay limits for CEOs, and oversight — is pretty good, right?
I’m happy for you to be moving the Overton window left, but we’ve got a pretty sweet proposal here.
September 28th, 2008 at 3:28 pm
But Washington Mutual’s depositors are fine. We have a perfectly adequate procedure in place to liquidate insolvent depository institutions. Yes, WaMu’s shareholders got wiped out, but so what?
If Chase hadn’t come through, WaMu’s failure would have come uncomfortably close to depleting the federal deposit insurance fund. A couple more major failures, and the government would have ended up spending billions upon billions replenishing the fund. Not to mention the fact that the public’s confidence in the financial system might’ve taken a major hit.
September 28th, 2008 at 3:30 pm
A number of recent science fiction movies have a plot device in which humanity only has time to send up one rocket on a mission to save the entire planet, either from an asteroid (Deep Impact) or to re-ignite the failing sun (Sunshine).
If they get it wrong, they don’t get to just do it again. Time is too short, the threat too looming, the resources too scarce.
Okay, this isn’t the same situation — we’ll all be here, and there will be an economy very much like what we have now, though decaying — but there are some simple plot guidelines which remain the same: acting quickly and blowing all your resources on an approach (”WE DON’T HAVE TIME TO THINK!!!”) which no one seems to be even trying to convince the knowledgeable sorts that it will work is the equivalent of blowing the mission on a whim, or on a monomanic’s dream, albeit not the shunned yet always right brilliant scientist, but the one who’s always wrong.
September 28th, 2008 at 3:30 pm
What we don’t have, but we need, is a liberal economist we can trust who says - we have this much time to do this. Is this a crisis that has to be acted on in a matter of weeks? I haven’t been convinced that it is, but if Krugman or Delong were to say either yes this can wait until mid November or no it cannot wait until mid November - yes it can or no it cannot wait until January - then we’d be able to gauge how much time we have and how much efficiency to sacrifice to emergency.
September 28th, 2008 at 3:31 pm
Okay, this is definitely an improvement on most of what I’m reading online today.
Matt, is there any chance we might get you to mention Barack Obama by name? Like, why is he so willing to take a step that eliminates the possibility that ANY of his domestic policy proposals might pass during his first two years in office? And why he has no trouble vesting all discretion and decision-making in a lame duck administration, when he will be politically accountable for all of the decisions that it ends up making?
And maybe a word on how the Democratic party can collectively look at itself in the mirror when it hasn’t done shit for the poor in 40 years but found $700 billion in borrowed money for Wall Street in a week’s time?
September 28th, 2008 at 3:32 pm
Just saw your post further down. We don’t know the details, okay, fair enough.
September 28th, 2008 at 3:33 pm
Nouriel Roubini, the New York University economics professor who actually described what was going to happen back in 2006, says about the bailout: “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.”
More here…
It’s sickening that Pelosi and Barney Frank, and even Obama, are getting sucked into this mess. What’s wrong with Democrats? Both politically, as well in terms of policy this is really fucked up.
___________________________________________
September 28th, 2008 at 3:36 pm
Marshall, the big hope here is that we actually get to play predatory lender to the financial corporations and take huge chunks of bank stock off of them. The government has made money off of bailouts before, and if this one is done properly, we could make money off of it too, while getting lots of the mortgages renegotiated. All while averting a paralyzed economy where nobody can get loans.
That’s why I’m pretty happy with Pelosi, Reid, Frank, and Dodd.
September 28th, 2008 at 3:48 pm
Nothing wrong with the Raveonettes, but this one will work as well:
http://www.youtube.com/watch?v=KNHcaIJETZo
September 28th, 2008 at 3:49 pm
Yes all the other ideas are better but there is no way the Republicans will allow them to pass. That is the sad fact.
Just remember that if the Dem take the WH back and get a 60 vote majority in the Senate this bailout package will be rewritten. This explains why the enactment side of this bail out package is so cumbersome, it buy the Dems time.
September 28th, 2008 at 3:49 pm
“…surveying the scene I’m seeing hundreds — hundreds — of perfectly sober-minded economists who simply don’t think that this is a good idea. At the same time, I’m seeing tons of sober-minded experts who believe that Sweden….”
Were any of these called to testify before Congress? Did any of them receive campaign $$$ from Wall Street?
“It’s sickening that Pelosi and Barney Frank, and even Obama, are getting sucked into this mess. What’s wrong with Democrats? Both politically, as well in terms of policy this is really fucked up.”
Nothing’s wrong with them. They just know who butters their bread.
September 28th, 2008 at 3:53 pm
We actually get to play predatory lender to the financial corporations and take huge chunks of bank stock off of them
If what you’re suggesting is that when we the taxpayers hold the purse strings of Wall Street, we can “give them a taste of their own medicine” by forcing corporations to take actions contrary to their financial interests, you’re completely wrong. First of all, that’s not how it works when the government owns a company: as a shareholder, the government becomes interested in that company’s profitability, not in its social conscience. Second, that’s precisely as it should be. As a shareholding taxpayer, I care only about recouping my investment. And thirdly, even if I, a taxpayer and voter, really wanted the government to act as a kind of policemen inside the boardroom instead of regulating from outside, I can assure you that the other corporate insiders, the ones in the board room with the Treasury, will find a lot of money for their lobbying budgets to buy a stake in Congress sufficient to hamstring any actions the Treasury takes toward regulation-from-within. That is precisely why the appropriate role for the government is as traditional regulator, not as owner with divided loyalties.
The government has made money off of bailouts before, and if this one is done properly, we could make money off of it too.
I think that is very, very unlikely. If it were so obvious that this deal was a money-maker, there would be no need to have the government involved. Funds that are still solvent (and there are plenty of those) would swoop in and buy those “distressed” securities. Which is exactly what they will do now that the government has volunteered itself as the buyer of last resort for utter crap. Frankly, the government should be a more cautious investor than the market, and if by that caution we taxpayers forego gains we could have made otherwise, so be it. There’s simply no way to have the government such a big player in the market without substantial distortion, and those distortions are much more likely to benefit the politically powerful (who can afford to buy Congress) than the powerless.
All while averting a paralyzed economy where nobody can get loans.
I’m pretty sure the economy is going to go into recession regardless of the bailout; the effect of the bailout will be whether a bubble will recur in the next cycle, when investors who saw what happened last time realize that there’s no downside to taking highly leveraged bets. After all, Uncle Sam is a very rich uncle. And if you’re worried that without a bailout, money will be too tight, that’s a question for monetary policy to remedy, not fiscal.
I might support this if it were accompanied, in the very same piece of legislation, by a large increase in the tax on capital gains. That might point to a bill that actually has the public’s interest at heart, not Wall Street’s. As it stands, this bill is the work of some very skilled investors who calculated that the cost of buying Congress is far, far less than the opportunity cost of not taking highly leveraged risky bets.
September 28th, 2008 at 4:05 pm
re: the need to act quickly, this recent panic was most probably caused by letting Lehmann go into an uncontrolled bankruptcy. The problem with an uncontrolled bankruptcy, is that from the management’s perspective there’s no difference between going a little bankrupt or a lot bankrupt, but it makes a big difference to creditors and other parties, who started panicking. If you want to do something quickly quickly quickly, then reversing, or partially reversing, or at least trying to mitigate the worst effects of, Lehmann’s bankruptcy seems a better option than rushing through an unconvincing bailout bill.
more from Profs. Delong & Eichengreen, who actually know what they’re talking about:
http://delong.typepad.com/sdj/2008/09/a-very-large-in.html
September 28th, 2008 at 4:08 pm
The Republicans are going to see if they feel generous and have 70 - 100 votes in the House.
Awesome.
September 28th, 2008 at 4:20 pm
First, I don’t think we’re going to be “forcing corporations to take actions contrary to their financial interests.” It’s in their financial interests to avoid collapse. For them, any option where they don’t collapse is preferable to one where they do. We’re the only entity with the cash, stability, and long time horizon to save several banks that would otherwise fail.
This brings me to the second point. There probably aren’t solvent entities out there to buy out all these failing banks. (Maybe you’re right, I’m wrong, and we could find a JP Morgan for every Washington Mutual. But given the scope of this mess, and the fact that we probably aren’t at the bottom of the real estate crash yet, I find it hard to believe.) This means that the treasury is the only place to go, and we can dictate terms. If you don’t believe me, look at the terms of the AIG deal. If I’m reading this rightwe get 80% of the company, 11.5% interest on any money they borrow up to $85B, and unbelievably, 8.5% interest on money they don’t borrow if they end up not using all $85B. This is the kind of sweet deal you get when you’re the only one who could save AIG from death.
On your third point, I’d like a big cap gains hike too and easier monetary policy. But I think moral hazard concerns are overblown. Nobody wants to be the AIG shareholder who got diluted to hell by Uncle Sam. Even after the bailout, AIG stock is under $4.
September 28th, 2008 at 4:20 pm
http://delong.typepad.com/sdj/2008/09/a-very-large-in.html
(3) Nevertheless, I said a year ago that if the unemployment rate stays below ten percent then it is a win for monetary policy. And I still think we have an 80% chance of achieving that…
Total meltdown, collapse, great depression 2.0 if a bill isn’t passed in the next two weeks? There has never been an argument for that. There is a problem that can be dealt with calmly, rationally and probably much more inexpensively than what is being presented.
This is a false crisis and to be honest, the Republicans are responsible for the pushback that this “crisis” deserves, to the shame of the Democrats.
September 28th, 2008 at 4:39 pm
Just like with “Regulatory Capture” where agencies start doing the bidding of the companies they regulate, we have an example here of “Media Capture”. It’s not calling Nocera morally weak to say he’s fallen victim: Everyone does. It’s human nature.
But clearly the NYT should rotate him to a different beat.
September 28th, 2008 at 4:41 pm
The latest Brad DeLong pronouncement:
The Swedish model is better, but doing nothing is like a poke in the eye from a Lawn Dart(TM).
I trust Brad, and Barry Eichengreen and Krugman [who, TBS, is on the fence] on this. Hell, I also trust Bernanke, who’s forgotten more about the Great Depression than most of us know [That doesn't mean he's right; but at least he's trying not to make the same mistakes]. By comparison, what I’m hearing here is a scary left-right alliance forming–the left saying “Let’s do nothing because it will benefit Wall Street people we don’t like.” and the right saying “Let’s do nothing because we hate government.” If I were non-American, I’d really be wondering right now why this dysfunctional country gets to dominate the world economy.
September 28th, 2008 at 4:46 pm
Matthew’s criticism of Joe Nocera is puzzling since Joe Nocera — UNLIKE Obama and the Democratic leadership — says there appears be a much better approach than the Bush-Democrat Bailout.
An approach Similar to what I recommended last week — have the government temporarily go into the banking business by buying GOOD assets –instead of toxic dreck — and loan to worthy businesses. Joe cites Andrew Feldstein, who runs Blue Mountain Capital Management, a hedge fund that specializes in credit instruments, as the source of the idea.
See “An ALternative Way to Save the Financial World” at
http://executivesuite.blogs.nytimes.com/2008/09/27/and-now-for-something-completely-different/
Joe notes “I got to know Mr. Feldstein and his partner Stephen Siderow a few years ago, and found them to be among the smartest — and most sensible — people on Wall Street. Mr. Feldstein has a way of proposing solutions to problems that are striking for their originality. His notion — that the government should establish a “good bank” to buy solid assets, instead of a $700 billion fund to buy bad assets — certainly qualifies. “
September 28th, 2008 at 4:47 pm
Wow… So it’s OK for credit markets to simply shut down for as long as it takes to arrange a socialist-style takeover of our banking system? I’m sorry, but the longer banks go without access to credit, the more the average American will begin to feel the effect of the financial crisis. This is a lose-lose political situation.
If Democrats support doing something now, we avoid a precipitous collapse of our economy, but they get blamed for bailing out Wall Street and there’s still a strong chance that we’ll be in a recession regardless. Democrats do nothing, and the economy tanks really REALLY quickly, and the Democrats get blamed, Hoover-style, for being oblivious to basic economic realities. Good, liberal economists (Krugman) have said that something needs to be done quickly. He just doesn’t (and I don’t) think that the plan needs to be SO generous to Wall Street.
You’re being far too hard on Joe Nocera, whose only crime is pointing out that most Americans don’t have half a clue what a credit market is, or how banks go about lending money, and so they naturally take their cues from politicians. Unfortunately, those politicians are equally clueless, and they take their cues from investment bankers and economists, who, as we all learned two weeks ago, are also effing clueless. Welcome to policy hell!
September 28th, 2008 at 4:48 pm
Krugman’s not horrified by the latest draft. I just hope the Democrats see that if they simply let the Republicans off the hook, it will not be pretty. Who knows. At this stage, there’s probably nothing left but Stockholm Syndrome.
September 28th, 2008 at 4:54 pm
I spent 4 hours today in the pouring rain today going door to door for the Obama campaign. Because I committed to doing the job last week and unlike Obama, I try to keep my promises.
In the past 8 years, I have spent an aggregate of months as a volunteer in three congressional races, Howard Dean’s campaign in 2004 and Obama’s campaign in the PA Primary and recently.
I even, God help me, worked a few weekends for John Kerry in 2004. Plus I’ve donated money –enough to get invited to see Bill Clinton at the Warwick Hotel in Philly.
But that’s it. Finito. I’m all out of favors as far as the Democratic Party is concerned.
There are children in Phillys ghettos who don’t have a hope in hell because of a shitty, unfunded education system. Millions without healthcare. Homeless living in tents and under bridges.
If I wanted to steal food out of the mouths of the poor and give $1.5 TRillion to the richest, most contemptible cocksuckers on the planet, I would have voted Republican.
I can hide guns. I can hide food. I can hide gold. I can let this country turn into a miserable shithold that makes Afghanistan look like a paradise — and I will survive.
But I will no longer let myself be fucked over by morons.
September 28th, 2008 at 5:02 pm
I heard part of an interesting insider take on this mess on “This American Life”.
The part I heard made this seem more chilling than what I have read anywhere else.
The panic started about 10 days ago, on Wednesday when a money market fund broke the buck. This didn’t sound important to me last week, but the announcement caused a total freeze of overnight lending for several hours.
The problem is that money market accounts are backed by commercial paper. This is the real crisis. Regular companies take out overnight loans, every night, or the lend money back to banks based upon the daily flow of cash into their company. But nobody trusts anyone. If you lend money tonight and the bank you lent it to goes bust before you get it back, you are screwed big time.
I guess what I don’t undestand is why the US government couldn’t step in and do this, but the risks could be even higher, and they would have to establish a business relationship with everyone needing to borrow/lend short term cash.
September 28th, 2008 at 5:04 pm
According to what I have heard, the bill must be passed before Oct 1, when the quarterly reports go out. If the bill passes, the auditors & accountants can say their toxic waste suddenly doesn’t look so bad.
A week from today will be too late.
September 28th, 2008 at 5:10 pm
Oh, and since the Senate will not be passing the bill before Oct 1, as B & H originally wanted, a lot of people are expecting a very interesting early week. Wachovia, probably.
Maybe the expectation of passage will be enough. I know I will be watching the futures in a few hours.
September 28th, 2008 at 5:11 pm
On the TV box, they’re all saying that it has to be concluded before 6 pm Eastern, which is when the Asian markets start opening up.
September 28th, 2008 at 5:14 pm
The Libor rate only bounced up to around 5 percent on Sept 16 from around 2-3 percent -and has fallen back. It was 5 percent for much of Sept 2007 and the world didn’t cave in. Plus the people who are lobbying COngress for this bailout can fake the Libor simply by filing false reports.
People know who the shitty banks are and which ones are solid. There are 12,000 plus banks. Who care if a hundred or so Class Ds and Es go out of business?
September 28th, 2008 at 6:21 pm
Swedish model is best kind of model so pretty har har har I hate myself.
September 28th, 2008 at 7:44 pm
There’s an old saying - “Something worth doing is worth doing poorly.” Sometimes you can’t get to good. If you opt to nationalize (think Cuba and Nicaragua) you lose too great a portion of the population that’s been force fed the notion that nationalization is a horrible thing. The cold war is too recent to allow the inclusion of sane alternatives like the Swedish model. Maybe in another generation or two.
September 28th, 2008 at 9:01 pm
The bailout plan makes me sick. Rewarding Wall Street’s bad behavior is disgusting. And yet…
The criticism that this may not be the best plan misses the mark and my well be like that employed by conservatives today to argue that the New Deal wasn’t really the best cure for the Great Depression. While that argument may be true, the fact is had FDR done nothing, it is very likely democracy would have died.
People may not like the deal, but the fact is virtually everyone, liberal and conservative, seems to believe we are in a truly monumental mess and that if nothing is done a severe financial debacle will occur. Maybe there is enough time to think through every possible alternative, but from what I’ve read there isn’t that much time. So the argument that a poor plan is better than no plan at all is, regrettably, a decent argument. We can blame Bush and Paulson for not having the foresight to address the problem sooner, but nonetheless it appears as though something should be done.
September 28th, 2008 at 9:06 pm
Look, I like nationalization as much as the next good lefty, but the current bailout package negotiated by Pelosi, Reid, Dodd, and Frank — with bank stock for taxpayers, mortgage renegotiation for homeowners, pay limits for CEOs, and oversight — is pretty good, right?
No, it’s not. The whole “we-need-a-bailout-NOW-or-else” is designed to get the bailout that Wall Street WANTS. This is a strategy designed to extract as much from the American taxpayer as possible, before taxpayers notice that the world keeps turning, and the country is, in fact, not a wasteland of foreclosures.
“Now” was originally last weekend, or else. “Now” is now this weekend. And if the bailout were not to pass for another month, “now” would be then. It’s all a charade, in the same way that if we didn’t invade Iraq at that precise moment in March 2003, we would have… discovered that Iraq was a manageable problem in August 2003, March 2004, etc etc.
September 28th, 2008 at 10:04 pm
Joe, the nightmare isn’t that the foreclosures will get worse; the Treasury plan didn’t address this at all, for instance. The issue is what happens to the credit markets. If you want to argue that fears are unfounded, fine, but at least talk about the correct fears.
September 28th, 2008 at 10:11 pm
I can’t prove to you that we can afford to wait until late January to solve this problem. I just don’t know the facts.
The people who say it’s a crisis that has to be solved now? They don’t know the facts either. They’re playing FUD.
So, this is the Bush administration we’re talking about giving away a lot of money to.
Remember when they said we had to invade iraq right away because otherwise maybe Saddam would have his nukes ready?
Remember when Bush said we had to give him the Social Security money right away because otherwise SS would fail?
That’s who’s supposed to do all the right things to solve this problem nobody understands.
I know I’m repeating myself but I feel like a whole lot of people just don’t get it.
If we can’t wait 4 months and solve this problem then, we can’t solve it at all.
September 28th, 2008 at 11:16 pm
Kevin really ought to stop channeling David Broder for his pro-bailout propaganda if he wants to have a decent reputation in the blogosphere after this.
September 28th, 2008 at 11:21 pm
I’d have more faith–I say ‘faith’ because we have been given no facts to go on–in the bailout plan if Washington ever met a mismanaged, deep-pocketed corporation that wasn’t “too big to fail.”
September 28th, 2008 at 11:28 pm
On a related note, this debacle combined with the FISA debacle earlier this year has led me to believe that Obama lacks independent judgment or leadership on the pressing issues of the day.
Ideally he would have been vocally opposed to both. If he believed they were truly as vital as their proponents suggested, he should have campaigned on their behalf. Instead he’s just dithered insignificantly in the background. At least McCain, whose campaign has been a hopeless and desperate affair, at least recognized the need to make a gesture at involvement in the process. Obama’s Dewey-like (or Gore-like or Kerry-like) platitudes may not squander the race in a year when the Democrats have the wind in their sails, but it gives me no reason to support him except as the generic Democratic candidate (which he is).
September 28th, 2008 at 11:50 pm
Meh, if Krugman’s given it his stamp of not disapproval, I’m good with it. The problem with pushing for a Sweden-style solution is that the Dems would have to do it alone (House Republicans would never go along), and it would become trivially easy to hang the “socialist” label on them, and the nationalization would be blamed for every economic ill for the next 25 years.
It may be better policy, but the politics of it are just terrible.
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