The Revised Bailout
Amazingly enough, despite all the hoop-la of how the bailout will pass, on Monday, it failed. It was quite entertaining to me to see a bill that everyone seemed so sure would pass, to just go and fail.
In the meantime I’ve found more than a few interesting links that only go to re-inforce my prior thoughts on the bailout.
The vagueness I noted in some sections of the bailout was quite intentional.
Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.
Ouch, well that sure is reassuring.
How’d they do? Pretty dang good. They made sure no pesky regulations would affect their golden parachutes, or reduce their paychecks, and they expanded the definition of what assets could be bought to extend beyond just mortgage related securities, to any troubled asset. If some bank has a laundry list of dumb investments that aren’t paying off well, they’re as eligible as anything else if the Treasury considers them at risk of failing (though even what kind of 'risk of failing’ is required before the Treasury buys such assets seems vague).
Isn’t the point of the free market to let companies that do stupid stuff fail from it?
The NY Times also mentions that many of the financial institutions want to manage the assets that are bought as well, and get paid for it of course, which would generate them a very hefty profit as well.
I haven’t seen a lot in the mainstream media about the huge list of economists (over 165 and counting) who oppose the bailout, which is curious.
So far, this countries track record of hastily passing massive and far reaching pieces of legislation based on hysteria hasn’t worked out too well. It has resulted in a war and all sorts of legislation that is still having ill effects on basic liberties and freedoms. The revised bill which includes more bits to appeal to Republicans doesn’t seem any better, and is still co-written by the financial industry eager to get some more free money.
Ron Paul has some good thoughts on why the bailout is a bad idea, and Michael Moore has an amusing write-up of how to save the banks with plenty of good facts and of a few questionable ones (but overall a good read). I particularly like his #2 point for paying for the bailout.
I disagree with Michael Moore though, mainly because I think Ron Paul and the economists have the right point. Investors should not be subsidized. Investors making risky bets, should take their losses. They clearly want to keep the profit, let them keep the loss as well.
Regardless, I hope the new version doesn’t get passed as well, though given how disappointing the politicians have been for me and the fact that the general public got creeped out watching the investors having a fire-sale means that the financial industry will likely be able to get the new bill passed. Nothing like some hysteria in the stock market to help some legislation creep through.
Ugh.
Update: A rather interesting look at the distribution of wealth in America, figure 5 showing the difference increasing.
Update 2: I should note that the new bailout bill that has had tastier pork tossed in, increased in size by $110 billion, and in size from the 101 page version I read, to a new 451 page bill.
That pretty much negates the odds of most people having enough time to read it, and who knows what other tidbits got buried in it.
I always find it interesting that those countries that work the hardest at “equitable” redistribution of wealth tend to be those with the lowest standard of living. In order for all to prosper, some must be allowed to prosper more and others less. Getting a high school diploma, no kids out of wedlock and getting married after the age of twenty nearly guarantees you will stay above the poverty line.
I got here via Planet Python, and while this is unrelated to Python, I’m here now. You make some good points and some weak ones.
I’m with you on the distribution of wealth being troubling, and I understand your annoyance that Wall St will try to profit on the bailout, but that’s what they do. In fact, every entrepreneur the world over will try to profit on this… and everything else. That’s how capitalism works. Just because you don’t think it’s fair doesn’t make that the wrong response.
“any troubled asset”: The problem with a credit crunch is that it’s pervasive – it doesn’t just affect one type of asset, and everything is so interlinked via derivatives that it’s hard to say what else might need to be scooped up. This is ok, though, because these are distressed assets – their market prices are much lower than their actuarial, or hold-to-maturity prices. The Treasury can buy them, sit on them, and make money on the deal, while the banks get them off their books and get cash in exchange that they can use to get liquid again.
free market: Yes, we could let the whole thing fail, but this contradicts your point about inequality. The people who feel the most pain won’t be the Wall St types; even if they lose 90% of their wealth, they’ll still be fine. The people who will hurt are the poor and lower-middle class, who will lose jobs and be unable to get credit cards, student loans, and home loans. For years to come. Go read some of the Depression memoirs, and tell me you want to see that again.
huge list of economists: There’s another long list of economists who are just as respected who are in favor. http://www.economist.com/blogs/freeexchange/2008/10/crisis_roundtable_the_other_ec.cfm
Ron Paul and Michael Moore: are both crackpots.
I think this bailout sucks, but I’d rather see the vicious deleveraging cycle arrested now rather than cascading all the way to the bottom.
@I: You’re making the assumption that the plan will actually work. What economists were consulted on it? The Treasury says it didn’t use any data at all to come up with how much money it’ll take to fix it, they have no idea if it will really help these companies start lending again or not. Nor do they have any idea if it will make a dent in stemming the flow of foreclosures which caused it to begin with.
@pspierce: Did you look at some of the countries with better splits on distribution of wealth? Such as Finland, Germany, Norway, etc.? Everyone there has health care at least, while the US has a lower standard of living. They also seem to have a significantly higher savings rate, with less debt.
I cited crackpots on both sides, because there’s still some truth in what they’re saying.
I have no problem with the government helping with a solution, I just don’t think this hastily crafted bill is the right one.