Matthew Yglesias » Nationalize Everything

Sep 26th, 2008 at 3:32 pm

Nationalize Everything

Kevin Drum wonders if he’s “too queasy about taking over banks” and says it’s a serious question. I think he is being too queasy. At this point, I would say that the government should probably be taking over just about everything that’s available for taking over.

For a long time, there’s been a well-known “equity premium puzzle” in which, basically, the economy as a whole seems to systematically undervalue equities relative to treasury bonds. And at the moment, investors are in full-scale freakout mode. Even though the government has taken on unprecedented fiscal liabilities, the interest rate we need to pay to borrow money is now lower than ever. Basically a huge swathe of the world’s money is right now unwilling to save itself in any vehicle other than in bonds that are earning practically no interest.

People have a tendency, meanwhile, to look at deficit spending through a moralistic lens wherein it’s somehow just bad and irresponsible as such. In the early days of Bush’s big deficits, you would hear jokes about “credit card conservatism.” But the problem with credit card debt is that the interests rates are enormous. At the moment, the people of the world are, amidst their panic, prepared to hand the U.S. government what amounts to free money. Under the circumstances, I think it makes a ton of sense to take them up on their offer. That means, on the one hand, massive temporary outlays on infrastructure projects — SUPERTRAINS and windmills and transmission lines — and on the other hand it means it’s a good idea to snatch up depressed equity. Any one bet might go terribly awry, but given the incredibly low interest rates that are available to us right now the key is to bet widely — the odds are overwhelming that the US financial sector is not, in fact, collectively worthless. Issuing bonds and buying equity and then doing it again and again and again until people become unwilling to keep lending us free money — at which point we can start selling some stuff back to investors, once investors have once again gotten interested in investing in things other than treasuries — seems like a smart play to me.

I dunno, maybe that’s wrong. But it seems right to me. And after watching what the private sector’s done with the financial system, I’m not exactly trembling in fear at the idea that it might somehow wind up mismanaged.

Comments
38

38 Responses to “Nationalize Everything”

The Other Steve Says:
September 26th, 2008 at 3:42 pm
When do you pay this debt back?
Neil the Ethical Werewolf Says:
September 26th, 2008 at 3:46 pm
I’m with you, Big Matt. Let’s own us some banks!
Gherald Says:
September 26th, 2008 at 3:48 pm
Apparently you don’t. You just pay the crazy-low interest…
kafka Says:
September 26th, 2008 at 3:51 pm
Not to worry, Matt, Wall Street is safe. Latest Bailout news:

FROMM: http://biz.yahoo.com/ap/080926/financial_meltdown.html

Democrats, too, signaled they were considering jettisoning some of their own priorities.

Frank indicated they might ultimately drop a requirement that a portion of any profits from the rescue be funneled to a fund to build housing for low-income people. That mandate, deeply unpopular with Republicans, “is not an essential,” Frank said.

Additionally, Obama said earlier in the week he hoped Democrats would not press a proposal giving bankruptcy judges the power to ease mortgage terms for homeowners.

Yup, selling out your voters is a tough dirty job, but the Democratic party is more than up to the task.
chrismealy Says:
September 26th, 2008 at 3:55 pm
That equity premium puzzle is only a puzzle if you assume returns follow a normal distribution. Guess what? They don’t! Well, they kinda sort do, except when they don’t, which in my book means they don’t. Black Monday 87 should have proved that once and for all.

Also, the equity premium stuff assumes that standard deviations are the same thing as risk. That’s not really true either. Sane people don’t have such smooth preferences about risk. When regular people disagree with economic models, it’s not always true that the economists are right and everybody else is wrong.

For more info, check out “The (Mis)behavior of Markets” by Benoit Mandelbrot.
lutton Says:
September 26th, 2008 at 3:57 pm
>>When do you pay this debt back?

Did you miss the Issuing bonds part?

They pay interest and are paid in full at a predetermined point in the future.

jeez, no wonder our economy is in shambles–people can’t even grasp the simplest stuff…
max Says:
September 26th, 2008 at 4:04 pm
At the moment, the people of the world are, amidst their panic, prepared to hand the U.S. government what amounts to free money. Under the circumstances, I think it makes a ton of sense to take them up on their offer.

They will not be willing to do this forever, however. That’s why you buy the banks now, at a cheaper price than the price we will pay doing serial bailouts.

max
['Then we can sell 'em later.']
bemused Says:
September 26th, 2008 at 4:10 pm
Here’s where the Republicans can demonstrate their belief in privatizing Social Security… place these new government “investments” in the Social Security Trust Fund. Many observers seem to believe there is a long term upside in fed holding of stock in the bailed out institutions…
bob Says:
September 26th, 2008 at 4:23 pm
I say we put up the House Republican “plan” for a vote immediately.

Let them vote for their stupid garbage, and then get on with the responsible adult behavior.

Where did that Obama quote come from, Kafka? I never saw it earlier in the week, and that offhand AP reference is pretty weird. I thought that was part of what he was insisting on yesterday at the WH mtg.
Matt Conn Lee Says:
September 26th, 2008 at 4:27 pm
Edward Forst – picked to help Paulson with the bailout made 49 million a couple of years ago working at Goldman Sachs – http://people.forbes.com/profile/edward-c-forst/37710 – I wonder what his compensation will be?
kafka Says:
September 26th, 2008 at 4:30 pm
Where did that Obama quote come from, Kafka? I never saw it earlier in the week, and that offhand AP reference is pretty weird……

I included the link to the article in my post. If the article itself doesn’t have an original source, try a Google search. I’ve found if I try different key word combinations, I can find just about anything that way.
bob Says:
September 26th, 2008 at 4:39 pm
I read the linked article, kafka, I just suspect the AP could be wrong, and I’m not finding any other reporting or quotes to back it up. Here’s what his part of the “joint statement” said:

Speaking for himself, Senator Obama outlined the following principles that he calls on Senator McCain to support:

I believe that several core principles should guide this legislation.

First, there must be oversight. We should not hand over a blank check to the discretion of one man. We support an independent, bipartisan board to ensure accountability and complete transparency.

Second, we need to protect taxpayers. There should be a path for taxpayers to recover their money, and to turn a profit if Wall Street prospers.

Third, no Wall Street executive should profit from taxpayer dollars. This plan cannot be a welfare program for CEOs whose greed and irresponsibility has contributed to this crisis.

Fourth, we must help families who are struggling to stay in their homes. We cannot bail out Wall Street without helping millions of families facing foreclosure on Main Street.

Fifth, we both agree that this financial rescue package should move on its own without any earmarks or other measures. We have different views about the need for other action, but this must be a clean bill.

This is a time to rise above politics for the good of the country. We cannot risk an economic catastrophe. This is not a Democratic problem or a Republican problem – this is an American problem. Now, we must find an American solution.
bob Says:
September 26th, 2008 at 4:41 pm
Joint Statement was Weds. 9/24. On Sun. 9/21, Obama laid out similar principles, including for homeowners:

# No blank check. If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight. Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check.

# Rescue requires mutual responsibility. As taxpayers are asked to take extraordinary steps to protect our financial system, it is only appropriate to expect those institutions that benefit to help protect American homeowners and the American economy. We cannot underwrite continued irresponsibility, where CEOs cash in and our regulators look the other way. We cannot abet and reward the unconscionable practices that triggered this crisis. We have to end them.

# Taxpayers should be protected. This should not be a handout to Wall Street. It should be structured in a way that maximizes the ability of taxpayers to recoup their investment. Going forward, we need to make sure that the institutions that benefit from financial insurance also bear the cost of that insurance.

# Help homeowners stay in their homes. This crisis started with homeowners and they bear the brunt of the nearly unprecedented collapse in housing prices. We cannot have a plan for Wall Street banks that does not help homeowners stay in their homes and help distressed communities.
#

# A global response. As I said on Friday, this is a global financial crisis and it requires a global solution. The United States must lead, but we must also insist that other nations, who have a huge stake in the outcome, join us in helping to secure the financial markets.

# Main Street, not just Wall Street. The American people need to know that we feel as great a sense of urgency about the emergency on Main Street as we do the emergency on Wall Street. That is why I call on Senator McCain, President Bush, Republicans and Democrats to join me in supporting an emergency economic plan for working families – a plan that would help folks cope with rising gas and food prices, save one million jobs through rebuilding our schools and roads, help states and cities avoid painful budget cuts and tax increases, help homeowners stay in their homes, and provide retooling assistance to help ensure that the fuel-efficient cars of the future are built in America.

# Build a regulatory structure for the 21st Century. While there is not time in a week to remake our regulatory structure to prevent abuses in the future, we should commit ourselves to the kind of reforms I have been advocating for several years. We need new rules of the road for the 21st Century economy, together with the means and willingness to enforce them.
Thorfinn Says:
September 26th, 2008 at 4:50 pm
The basic idea is right. The plan would be a giant interest rate carry trade making use of the fact that America can borrow at low rates. As long as the assets will yield more than the interest, the government will make money. Of course, the government can always ask for a bigger return on their investment (ie equity). There’s nothing inherently wrong with deficit spending, especially if it goes towards investment.
El Cid Says:
September 26th, 2008 at 4:55 pm
In the transitional phase of Republican Communism, all power must temporarily be controlled by the Secretary of the Treasury, until such time as a sufficiently enlightened populace may be created.
flory Says:
September 26th, 2008 at 4:59 pm
When do you pay this debt back?

Did you miss the Issuing bonds part?

They pay interest and are paid in full at a predetermined point in the future.

jeez, no wonder our economy is in shambles–people can’t even grasp the simplest stuff

No. Its a very good question. The risk with Matt’s approach is the timing mismatch. People are willing to lend to the US, effectively interest free, for very short durations — 3 – 6 months; maybe a year. That debt has to be rolled over, frequently. If the rest of the world decides to stop lending, but we’ve still got deficits that need to be financed, then we pay punitive rates. And if this were to happen before the markets recover, we don’t have any appreciated assets to sell, either.
par4 Says:
September 26th, 2008 at 5:05 pm
LOL El Cid. Who controls the means of production?
El Cid Says:
September 26th, 2008 at 5:11 pm
par4: This isn’t a big question any more, because there is no more production; rather, it’s all about the production of means.
Colin Says:
September 26th, 2008 at 5:18 pm
Get back to work like a good prole, par4. Remember who issues your ration cards.
NBarnes Says:
September 26th, 2008 at 5:29 pm
At the moment, the people of the world are, amidst their panic, prepared to hand the U.S. government what amounts to free money. Under the circumstances, I think it makes a ton of sense to take them up on their offer. That means, on the one hand, massive temporary outlays on infrastructure projects — SUPERTRAINS and windmills and transmission lines

Matt, you’re a goddamn tease. Any sanely run company or country would recognize the chance to make massive investments in future payoffs offered by such cheap money. *unhappy sigh*
Martin Bento Says:
September 26th, 2008 at 6:10 pm
Barack Obama did cite bankruptcy changes as a Democratic priority that should probably not be in the bailout bill. He said it at his press conference yesterday. I don’t have a cite handy, but I saw him say this either on MSNBC or CNN.
M Says:
September 26th, 2008 at 6:27 pm
It’s time to think about the America we want to have, and tax the rich until we can buy it.
Petey Says:
September 26th, 2008 at 6:34 pm
“At the moment, the people of the world are, amidst their panic, prepared to hand the U.S. government what amounts to free money. Under the circumstances, I think it makes a ton of sense to take them up on their offer. That means, on the one hand, massive temporary outlays on infrastructure projects — SUPERTRAINS and windmills and transmission lines — and on the other hand it means it’s a good idea to snatch up depressed equity. Any one bet might go terribly awry, but given the incredibly low interest rates that are available to us right now the key is to bet widely”

This actually makes a fair amount of sense.

Go tell it to Barney Frank.
DWN Says:
September 26th, 2008 at 6:55 pm
Matt, exactly correct.
Richard Steven Hack Says:
September 26th, 2008 at 7:37 pm
Matt: “At this point, I would say that the government should probably be taking over just about everything that’s available for taking over.”

That would probably include your busted wheel bike, you moron.

Christ, spare us from Harvard kids with philosophy degrees…
PaulC Says:
September 26th, 2008 at 7:49 pm
“That means, on the one hand, massive temporary outlays on infrastructure projects — SUPERTRAINS and windmills and transmission lines — and on the other hand it means it’s a good idea to snatch up depressed equity.”

Chairman Matt’s Great Leap Forward?

Not being critical. For all I know, it might actually work. Seems unlikely to happen though.
Ragout Says:
September 26th, 2008 at 8:15 pm
I support countercyclical fiscal policy, like the infrastructure investments that Yglesias is advocating. But I think he’s exaggerating how low interest rates are now. Short term T-bill rates are incredibly low (around 0.5% for a 3-month Treasury) but longer-term rates aren’t (around 3.8 for a 10-year Treasury, which is low, but not that much below historical averages).
rapier Says:
September 26th, 2008 at 10:37 pm
The Treasury borrowed $198 billion this week. To pay the bills for the current bailouts. AIG, FNM, FRE, money markets. This mind boggling amount is starving the rest of the credit market. Huge portions of the real market are now closed. This crowding out by the Treasury is thus making the problem worse. Because the Treasury is sopping up every dollar out there you won’t be able to buy a car, to use the silly parlance of Hank’s planned bailout supporters.

Since Ben and Hank said the sky is falling everyone is rushing in to buy their paper. Coindicence or plan? It’s great we are borrowing money for nothing but the borrowing is mostly very short term. None more than a year.

When that paper comes due we will have to borrow it again. Remember, even without all the bailouts the deficit is running at a record level, and sure to get worse as tax receipts crater. While the sort end is still low the long end is rising. Its a distinct possibility that long rates will continue to rise. So when we refinance todays loans it will cost a lot more.

Which is all to say there are real limits to MY’s ideas. I’m an ultra liberal but I still believe in markets. Sadly Greenspan and the Wall Street pigmen have gamed and almost destroyed the mother of all markets, the credit market. The stupendous borrowing by the Treasury now is destroying the market and is wrecking Uncle Sams credit.

Yes during WWII total Fed debt got to 130% of GDP and is now, I’ll guess, 70%. So in absolute terms we can borrow a lot more. At the end of WWII we had 50% percent of the worlds productive capacity. The strongest everything measurable. Now however we don’t make much of anything, are hardly the strongest in anything except the ability to bomb anyone anywhere anytime. How are we to earn enough to pay off the debt? Sell more movies?
Jasper Says:
September 27th, 2008 at 1:26 pm
At the end of WWII we had 50% percent of the worlds productive capacity. The strongest everything measurable. Now however we don’t make much of anything, are hardly the strongest in anything except the ability to bomb anyone anywhere anytime. How are we to earn enough to pay off the debt?

Rapier: I want to size of the bailout to be as small as possible. That’s why I think charging banks a price (equity) for any money they receive is the key for me, and an insufficiently good bargain for the taxpayers on this score would make it a deal-breaker were I a member of Congress.

That said, it’s just silly to talk about the US of 2008 being weaker or poorer or less capable of paying debt than the US of 1946. We make plenty of everything. Far more, in fact, than at the end of WWII. The total value of US manufacturing is at or near an all time high, and in fact is either number one in the world, or a very close second to a country with more than four times our population. And the US most definitely is the “strongest” major economy on lots of scores, and in lots of areas.

This, too, shall pass. Especially if we get it right.
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Nationalize Everything

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