First off, to clarify things, I'm not hoping for the destruction of our economy and a new great deppression. My opposition to this bill is based on somewhat shaky ground, basically a combination of the following:
1. A white paper from Weiss Research Inc. my sister's employer passed around titled "Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis; Too Much, Too Soon for the U.S. Bond Market" that did not go into the
immediate credit shortfall, but instead took a look at the long term ramifications of the original bush plan.
2. Mistrust of bush and any crony/expert in his employ. No need to elaborate on that here, right? :)
3. Most of the economist that have articles online do not like the bush/paulson plan at all.
I think we're talking apples and oranges, reletively speaking. You are apparently correct about the credit crisis, but I'm worried about the long term consequences, included the theory that the bailout will soak up monetary resources limiting an Obama administrations choices and resources.
There doesn't seem to be any economists who feel this is a good bill
beyond the short term fix to the credit crisis. A small sampling
from the James K. Galbraith article you cited titled How Much Will It Cost and Will It Come Soon Enough?
The question now is could the purposes of this bill be met with a smaller appropriation. In my view, the best way to answer that question is to ask:
What problem does $700 billion solve? The answer to that is, we do not really know. On the face of it, the exposure to bad mortgage-backed securities is considerably larger; the purchase plan in the bill would inevitably bail out some inessential as well as essential investors and institutions, thus wasting a fraction of the resources; and we do not know the full extent to which banks need new capitalization in order to remain solvent. The reasonable presumption, therefore, is that TARP would buy time; one hears estimates that the authority would be used at a rate of $50 billion a month, though the basis for that estimate is not clear. A smaller appropriation would buy less time.
How much time is needed? There is in my view very little prospect that economic recovery will restore housing prices and personal incomes within a reasonable time -- that is, before the $700 billion runs out. Therefore, it seems to me unlikely that this issue will finish here; more will be needed at a later date.
However, on the assumption that one can trust and monitor the actions of the Treasury to assure that it carries out its mandate in good faith, there is an argument for appropriating the full sum now: It will help ensure that the system will hold into next year. A smaller appropriation increases the risk of a major crisis in the relatively near term. By how much and when? No one can say.
If one does not trust the Treasury to act in good faith and in compliance with the spirit and letter of the monitoring and enforcement provisions, then of course there is no case for this bill.Many are concerned with the fiscal implications of this bill, so let me turn to that question. Despite the common use of language, the capital cost of this bill does not involve "taxpayer dollars." It authorizes a financial transaction, exchanging good debt (U.S. Treasury bills and bonds) for bad debt (the "troubled assets"). Many of those troubled assets will continue to earn income for some time, perhaps a long time. The U.S. Treasury commits itself to paying the interest on the debts it issues. The net fiscal cost -- which is also the net fiscal stimulus -- of this bill is the difference between those two revenue streams. Given the very low rate of interest presently prevailing on Treasury bills, this is likely to be somewhere between $20 billion per year and zero from the beginning, even if the Treasury were to issue all $700 billion in new debt at once. It is a mistake, in short, to count the capital cost as a "cost to the taxpayer." This is not the war in Iraq.
here's an excerpt from the executive summary from the white paper that "had my hair on fire"(it does refer to the original bush/paulson plan) :
http://solari.com/blog/docs/Final-Bailout-White-Paper.pdfExecutive SummaryNew data and analysis demonstrate that the proposal before Congress for a $700 billion financial industry bailout is too little, too late to end the massive U.S. debt crisis; and, at the same time, too much, too soon for the U.S. Government bond market where most of the funds would have to be raised.
I. Too Little, Too Late to End the Debt Crisis. Congress should
1. Disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117 institutions with $78 billion in assets. However, based on a broader analysis of recent FDIC call report data, we find that institutions at risk of failure include 1,479 FDIC member banks and 158 thrifts with total assets of $3.6 trillion, or 36 times the assets of banks on the FDIC’s list...
II. Too Much, Too Soon for the U.S. Bond Market. There should also be no illusion that the market for U.S. government securities can absorb the additional burden of a $700 billion bailout without putting dramatic upward pressure on U.S. interest rates.
The Office of Management and Budget (OMB) projects the 2009 federal deficit will rise to $482 billion. But adding the cost of announced and proposed bailouts, now approximately $1 trillion, it is undeniable that the federal deficit could double or triple in a short period of time, driving interest rates sharply higher and aggravating the very debt crisis that the bailout plan seeks to alleviate.and from Paul Krugmann's blog
http://krugman.blogs.nytimes.com/Stockholm Syndrome
On Olbermann a few minutes ago (that basement classroom with the heavy paper over the windows and camera sure has come in handy lately!) a phrase popped out of my mouth: “Stockholm Syndrome”, with regard to the bailout rescue.
Here’s the thing: it’s very hard for Congress to originate complex financial rescues, so it’s normally up to the executive to put things together. Unfortunately, Paulson came up with an awful plan. Ideally, the Dems would have ripped the thing up and started over, but that was never realistic. So instead they made it significantly better, but still building on the original, misconceived structure; it became better than nothing, but not good.And then it failed in the House, so the Senate has larded it up, with stuff like SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.
I think that Congressional leaders know that it’s a bad bill, but feel compelled to defend it, because they’re (rightly) scared of the financial consequences of a second rejection. And to some extent economists like myself are in the same position; I think I called it the “hold your nose caucus.”
So am I for the bill? Yuk, phooey, I guess so. And I’m very angry at Paulson for putting us in this position.
October 1, 2008, 10:08 am
Bailout narratives
...There’s a reason Paulson et al had such a hard time communicating the case for their plan - they didn’t have a very good case. To this day they’ve never been able to explain clearly why buying up bad mortgage assets at market prices will solve the credit crunch. The Wise Men, as far as I can tell, have never had a clear idea of what they’re doing.
My view, which I think is now shared by many economists, is that Paulson grabbed hold of the wrong end of the stick - he should have been seeking to expand bank capital, taking an ownership share in compensation, rather than trying to push up the value of toxic paper. In the end, that’s what we’ll probably do.On the other hand, the way that Paulson et al have been blundering around puts the lie, I think, to the idea that this is a cynical ploy. Ideology certainly played a role - it’s probably a lingering distaste for Evil Socialism that made Treasury go for buying toxic waste rather than injecting capital. And if the Bush years have taught us anything, it is that sometimes conspiracy theories are right. But in this case the performance has been more Keystone Kops than Star Chamber.
So now what? Like Jamie Galbraith, I’d rather see Dodd-Frank-Paulson, which is much better than the original plan, pass than not. The true cost to taxpayers will probably be close to zero, and it would buy some time. But I’m not passionate about this. The real financial rescue still lies in the future, probably under the Obama administration.
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