Time to Grow Up and Pass the Bailout
UPDATE: Here is the summary analysis by the Congressional Budget Office of the bailout bill.
UPDATE 2: Because the vote is still being held open in a last-ditch attempt to gain passage of the bill, it is not yet an absolute certainty. But it appears that tn a 207-226 vote that split both party caucuses internally, the House of Representatives has voted to indulge in the risky emotionalism of extremists on both left and right. If we can take opponents at their word (questionable), they hope to be able to find time to negotiate something else from among the array of a dozen or more alternative proposals of varying quality on both sides sometime before the financial system collapses completely. They are rolling the dice. If the financial system melts down before Election Day (likely at this point), please make sure to note whether your Congressional representative voted to dither and delay and take that into account when you vote.
Until this moment, I have never rooted for Nancy Pelosi on anything. But now I will. Keep holding that vote open, Nancy. Keep twisting those arms. This is too important to be left to ignorance and emotion to win.
UPDATE 3: Emotion and ignorance have prevailed. We must now hope that they recede in time for something else to be enacted before the economy tumbles irreparably over a cliff. Those who indulged in ideological purism now own the consequences. No excuses. Snapshot of the future: the Dow is down over 500 points and dropping fast. Congratulations, House Republicans (and too many House Democrats) — you just voted for repeating 1929.
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Perhaps the Rolling Stones said it best: “You can’t always get what you want.”
The bailout bill in front of Congress now may be a “crap sandwich”, as Rep. Boehner called it, but the fact is that everyone is going to have to take a big bite nonetheless. The risks of inaction are too high. No one knows exactly when the financial system will pass the point of no return and tumble off the cliff into deep recession or possibly even depression, but all seem to agree that that point is coming soon. Dithering and bickering about a proliferating array of alternative plans where each seems more implausible than the last while we continue to march towards the edge is deeply irresponsible. Rolling the dice with the economic health of the country just to appease ideological purity tests is quite simply a betrayal of the public trust.
The most doctrinaire conservatives and liberals have found common cause opposing the bailout. Extreme conservatives cite the unprecedented expansion of government power into the economic realm as a violation of their limited-government principles and the potentially staggering price tag as a violation of their newly-rediscovered principles of fiscal parsimony. Extreme liberals simply hate rich people and the Bush administration and seem more than willing to risk the collapse of the economy as long as it means those two groups will suffer. Some from the most extreme elements of the left even hope for the outright collapse of the capitalist economy in the hope that a socialist utopia will rise from the ashes of millions of people’s lives. In an illustrating moment, Rep. Ron Paul and Rep. Barbara Lee just spoke back-to-back in bizarrely contrasting speeches that meandered into their characteristic pet ideological issues while ignoring the actual situation we face.
Neither group is dealing with reality. Both are indulging in ideology as religion rather than as guide to practical action. But in the hyper-partisan air of a presidential election year, even the most irrational manifestations of ideological purity can have massive power. As I write, a parade of Congressional representatives from both parties are speaking on the floor of the House, promising to oppose the bailout due to its violations of their principles. They instead demand that Congress pull back and consider a diverse range of more ideologically pure alternatives, none of which appears to have any likelihood of gaining majority support or, if passed, addressing anything more than the tiniest part of the overall problem. Such proposals are nothing more than recipes for infinite delay. Meanwhile, banks continue to fail, driving other banks towards insolvency. And no one lends money to anyone, hoarding cash in the desperate hope of surviving just one more round. The net effect is simple — the financial heart of the economy is shut down.
That heart is shut down now. Banks have been refusing to lend to each other for weeks now, and the problem is not, as some claim, simply limited to Wall Street. Regular people buying homes, cars, or attending college rely on the availability of credit to live their everyday lives. These loans are already becoming hard to come by and as the contagion continues to rapidly spread, they may disappear entirely for all but those who don’t need loans in the first place. One major “run” on deposits has already destroyed a major bank — Washington Mutual — and that Depression-era throw-back may be poised to make a return if public confidence is further undermined by Congressional paralysis.
Those who continue to indulge in ideological purity tests while the financial heart of the country burns are little better than tantrum-throwing children. They prioritize their own selfish emotional satisfactions over the material needs of real people. When they claim to be conservatives, they betray their own core principle of risk-aversion, choosing to prefer the limited-government doctrine even to the point of embracing a financial collapse suicide pact. When they claim to be liberals, they betray their own claims to support the interests of the poor, condemning millions more to poverty in the hopes that a few of the rich will also suffer.
Yes, there are flaws and risks in the bailout bill. Responsibility means continuing to address these problems going forward. No one believes this bailout bill is a panecea. But it is a start. And those who refuse to make that start just to appease some ideological purity test or political vendetta need to grow up.
You don’t quite understand the problem. Where exactly are they supposed to get 700 BILLION from anyway?
They have to create that money from thin air (look up what FIAT means). When they do that, it devalues the dollar. Inflation skyrockets and when the folks overseas stop accepting dollars, the whole thing crashes…
These assets are not ‘illiquid’, they are, in fact worth something, just prices are still too high. The banks want to sell their homes for 500k when they are only worth 200k.
We need to force these banks to liquidate their bad debt. Prices will come down. Look at Warren Buffet! He just snapped up a company for half price!
You do realize that there are companies right now buying up bad debt at pennies on the dollar that will then be able to sell that to the government at FULL price!
How does that make any sense? Let companies buy something at pennies on the dollar then let them sell it to the tax payer at full price? Instantly making a huge % profit?
You’re completely wrong.
The bad assets would be purchased with T-bills — government debt — not by printing new money. That prevents inflationary effects but at the cost of increasing the government debt. Debt is bad, of course, but it is not the IMMEDIATE threat that a shutdown in the credit market is. The bailout plan is akin to chemotherapy — we embrace a toxic treatment because it is less dangerous than the disease.
The debt increase is certainly not a good thing, but it serves to buy the one thing not available in the status quo — time. The government can carry that debt for a longer period of time than the private sector can. The government also stands to eventually recoup much of that money by selling the assets after the market recovers. That this process works is empirically proven by the RTC in the 1990s and the Hong Kong stock market bailout in 1998.
The assets are illiquid because there is no market at all for their sale right now. No one is buying mortgage-backed securities at any price right now because they cannot determine their future value with any level of confidence. Allowing the government to purchase them allows three complimentary effects — (1) removing the debt to reduce the incentive to hoard cash as a hedge against bad debt contagion, (2) recapitalizing the banks to provide available capital to restart the credit markets, (3) improving consumer and investor confidence to reduce the emerging “run” on deposits. It will also buy TIME To determine the value of assets — time that we don’t currently have.
The buying of companies sounds really good if you assume that there is a bottomless pit of available capital to buy them with. Buffet’s investment in Goldman Sachs was, according to Buffet himself, under the assumption that it would be supported by additional government action in the financial sector. Neither he nor anyone else has $700 billion in any form that could replace the prospect of government investment. You say we should “force banks to liquidate their bad debt” — that sounds nice and populist on an emotional level (a typical indulgence of those who don’t deal with reality), but it is completely impractical. It can’t be done when there are no buyers available at ANY price. Only the government can wait years for the market to recover to recoup its investment. No private actor can.
Most importantly, any investment on that scale would require access to lines of credit. Banks aren’t giving credit even to each other anymore. So acquisitions aren’t much of a solution, especially when you consider that even those institutions that had available pools of capital have already spent them AND those pools of capital that remain are now being hoarded as hedges against further failures (which will make more debt into bad debt, thus spreading the effects of collapse to include even healthy companies).
The assets are illiquid because there is no market at all for their sale right now.
Yep. Which is also why they’re going to be fairly cheap for the market-maker. The word "bailout" keeps being used, but it’s not. It’s a forced fire-sale auction to clear the market glut and establish a market floor for resumed trading, with the government acting as the market-maker.
The increased debt required is somewhat offset by the fact that it’s being used to acquire real assets. Whether or not this eventually results in a net profit to the government (taxpayer) is debateable, but it’s not remotely a straight-spending formula. The government (taxpayer) WILL get back some large portion of that money in the long run from re-sale of the acquired assets. The question is how much.
No doubt there are some few people buying up some of those debt traunches in hopes of making a profit, but remember that the initial trouble is the inability to assess the real asset value underlying those trunches, and the real (both systemic AND specific) default risk involved. It’s a crap-shoot. Some will get profit, some will hosed. And some will be forced to hold their positions for quite a while to get a profit. In the meantime they’re doing EXACTLY what it is the government proposes to do–injecting liquidity and establishing a market floor.
But there’s not enough of them. It’s a cash game, and there’s not enough cash for the market to do it all alone. Only longer-term cash players are buying right now, and there’s not all that many of them compared to the amount of illiquid assets out there. Remember, no one will lend them any money to play. They have to use their own coins.
Letting the market work it out for itself in a credit crunch is what we did in 1929-1932. Remember how well that worked out? The big worry IMHO is keeping the Congresscritters from alrding up the bill, as was attempted with the union and ACORN provisions, and in keeping any oversight board from being under the control of Congress, which is just begging for a repeat run.
"Some from the most extreme elements of the left even hope for the outright collapse of the capitalist economy in the hope that a socialist utopia will rise from the ashes of millions of people’s lives."
UM…. communisim? There can’t ever be Communisim, because we are human. Someone will want to be in in charge, and that ruins that. More than likely we will end up with desoptism.
See what else they have instore for us… http://www.aim.org/aim-column/920-billion-more-to-bail-out-the-world/
The assets are illiquid because there is no market at all for their sale right now. There isn’t a market because the Wall St. firms don’t want to be realistic with their pricing. If they priced these where they should be, $0.10 on the dollar, there will be a market. Of course there will be tons of writedowns and banks will fail but that’s ok. Just liquidate this garbage, let the banks fail who deserve it. We’ll have a shorter recession than what this bill will do. This will prolong the pain and make the problem worse by debasing the dollar for every American. Wall St. is as unrealistic as the homeowner in Las Vegas who thinks his home is worth $500,000. If both these people would open their eyes and price their "assets" where they should be, the market will recover faster. But unfortunately they complain and the idiots in DC listen and want to give them a fat welfare check. What a joke! And to the guy who says, "we’re not printing money, we’re selling T-bills". There’s no difference! They’re creating T-bills out of thin air! Just what backs up the creation of T-bills? Gold? Silver? No! Just the hope the government will repay. This is a joke.
"The bad assets would be purchased with T-bills — government debt — not by printing new money."
You are kidding me right? The Federal Reserve will be buying these T-bills! Where do they get the money! Yep, they print it and give it back to the government.
"That prevents inflationary effects but at the cost of increasing the government debt."
Huh? Inflation comes from too much money supply! Printing money increases the money supply and thus causes inflation.
I’m willing to grow up and swallow the crap sandwich, but like Tully I ask to be spared the lard chaser.
And I may be able to keep from retching if I can also be spared the pressers with the faux outrage of Barney Frank, Chris Dodd, and Nancy Pelosi.
And the claims by Obama that he was the one beating the drum about the impending crisis, as he claims that McCain did nothing while he introduced a bill to reform the mortgage market (the bill was a retread of the bill that McCain had introduced in the previous Congress!)
I most emphatically don’t blame only one party or the other (for instance, when McCain and others did raise the concerns, there were obviously many Republicans who didn’t support the reform efforts. But check out the video here to see which party was apparently paying attention a couple of years ago, and which party was trying to obfuscate.) The degree to which the Democrats’ narrative is going unchallenged is what I’m completely unable to swallow. I’m not suggesting that our main focus should be on accountability right now- but I’m deeply concerned that when there’s at least a suggestion that several of the principle architects of the mortgage fiasco are the ones who are now pretending to the be the saviors riding in to clean up the mess, someone ought to at least be telling them that they’re credibility is on the line.
It is a crap sandwitch but we have to take a bite anyhow?
Uh, no, we don’t.
And absolutely should not transfer PRIMARY pain from wallstreet to mainstreet to avoid possible SECONDARY ripple effect from the pain of wallstreet.
Yes it will be bad if not passed. It will be worse, and for much longer, if passed.
spinnikerca, this isn’t a potential ripple effect, it’s an actual collapse of the entire system which has already begun. The financial sector of Wall Street is the circulatory system, and it’s in shock. The rest of the organs of the body can’t survive without a blood supply.
"you just voted for repeating 1929"
You don’t even know what you are talking about. Price fixing after the crash IS WHAT LED TO THE EXTENDED DEPRESSION.
Even Ben Bernanke has admitted to this!
What are we doing by allowing the government to buy bad debt? We are fixing prices! We are artificially keeping housing prices high instead of letting them fall like the market wants!
I’m not quite sure you understand how the dollar system works. That is not a slam (I don’t understand it all either), but your arguments about debt vs. printing money shows that you don’t understand how the central bank works and where ‘Federal Reserve Notes’ come from.
The failure of this bill will help the dollar because there will be not be 700 BILLION more added to the money supply (thus diluting the others).
Based on the research I’ve done over the last several weeks, I would say that your factual assertions are simply not true. Because you only offer empty assertions rather than explanations, it is difficult to respond except by a stupid "is not, is too" exchange which I will decline. Based on the best research I know of in political economy, for example, the most proximate factor that led to the Great Depression was a credit crunch deriving from a DEflationary monetary policy — in short, the path we are on now due to the credit crisis and Congressional inaction and the path that your ideology of a “strong dollar” would actually endorse in spite of its devastating real-world consequences. You offer nothing to persuade me towards another view except an unsupported assertion.
We will see if your prediction that the economy will be helped somehow comes true or not. I will make a further prediction, however, that when the economic decline intensifies, you will suddenly forget your prediction. I will point out that the only evidence of an immediate reaction on the strength of the dollar involves not a strengthened dollar, but a weakened Euro due to the GLOBAL effects of an economic downturn. This isn’t clear evidence for my position yet, but it looks very bad for your prediction.
I think it is revealing that proponents of the rescue, like me, have tried to explain HOW the financial system is broken and HOW to fix it in a practical sense, while opponents like you and the other one above just make sweeping and unsupported assertions with the air of religious fervor around them.
Research done over the last several week? Wow! You know there were actually people predicting this for a couple of years like Rep Ron Paul who you insulted. If they were right about their predictions, what makes them wrong now? Also, all the people cheerleading this bailout also cheerleaded the housing bubble.
If I predict that the sun is going to come up tomorrow and it turns out I am not only right about that but there is also a heat wave, that wouldn’t make me automatically credible with regards to the question of how to treat sun poisoning.
Similarly, the fact that Paul (along with many others) may have spokes about the potential problems that could derive from a bubble in mortgage securities (did he ever address it specifically, or are you ascribing perfect prediction to him merely based on his highly general predictions of economic doom?) does not mean that we should give them credence on their bizarre theories about how to radically restructure the modern U.S. economy around rules used for an 1870s economy (which even then resulted in periodic depressions — not recessions, depressions).
You’re going to have to do better than sweeping and blanket declarations of divine authority for either Ron Paul OR Milton Friedman. Maybe you all could start by putting down the Paul/Friedman scriptures, picking up some reports about how the REAL WORLD operates, and starting THINKING FOR YOURSELVES FOR A CHANGE.
"Regular people buying homes, cars, or attending college rely on the availability of credit to live their everyday lives. These loans are already becoming hard to come by and as the contagion continues to rapidly spread, they may disappear entirely for all but those who don’t need loans in the first place"
whatever happened to living within one’s means? why do people think they are entitled to a loan?
I don’t really see how you can say that Ron Paul’s "pet ideological issues" have nothing to do with our current crisis.
His pet issues with regard to this subject are his animosity towards the Federal Reserve, and his disgust with runaway deficit spending. Since the housing bubble was the product of excessive monetary easing by the Federal Reserve combined with the Bush administration’s massive deficits, it would seem that his pet ideological issues are very important right about now.
You seem to think that people who foresaw the current crisis and were laughed at should just shut up and pursue a course of action prescribed by the people who did the laughing, and that’s just not reasonable. Why should Ron Paul listen to Ben Bernanke about anything? Literally anything?
Similarly, the fact that Paul (along with many others) may have spokes about the potential problems that could derive from a bubble in mortgage securities (did he ever address it specifically, or are you ascribing perfect prediction to him merely based on his highly general predictions of economic doom?) does not mean that we should give them credence on their bizarre theories about how to radically restructure the modern U.S. economy around rules used for an 1870s economy (which even then resulted in periodic depressions — not recessions, depressions).
Hey, that’s fine. But then don’t ask for their votes in the Congress.
If your theories are so sound, why are we in the current situation?
If Paul says, "A fiat currency system where a central bank can control the money supply is vulnerable to systemic collapse," and everyone laughs and says it’s not true, Paul is not the one with some explaining to do when a systemic collapse comes along one day. It might be, as you say, a bizarre 1870’s theory, but the same people who say that are the people who said that our "modern, managed" economy was no longer subject to events of this kind, and who declared themselves to be on the threshold of eliminating the business cycle. Why should we continue to regard such claims as credible?
Brian,
Do you have specific idea for ways to respond to the current financial crisis that you are prepared to discuss and defend in detail? Or are you just doing (yet another) Paulbot hijack of any thread that happens to mention His name, let alone DARES to disagree with Him?
Yes, Paul predicted "systemic collapse", but so did the guy who I once heard predict the Second Coming of Christ would occur in 1986. A vague, generic prediction of eventual failure does not make one an expert on how to address a failure that actually is imminent. I argue that Paul’s vague, radical and impractical ideas (i.e. competing currencies that magically avoid transaction costs, abolishing the Fed with no alternative idea who would govern monetary policy at the expert level, transition to a gold standard that would repeat the economic depressions of the 1800s), are fundamentally non-responsive to most elements of the real world. For example, Paul and his devoted
cultistsfollowers love to talk about how a floating currency can led to "systemic collapse" but whenever people point out how the 1870s gold-standard policy that they advocate led to even more frequent "systemic collapse", they suddenly change the subject or just ignore it and escalate the spamming. I have found the exact same non-responsiveness and reliance on vague and sweeping assertions, subject changing, and name-calling (I have already had to delete nearly a dozen vulgar Paulbot comments on this thread alone) whenever I talk about the need for “democratic technocracy” in managing monetary policy or the transaction costs problem that attaches to Paul’s “competing currencies” proposal.So the bottom line here is this: Unless you are prepared to stop with the standardized defensive and vague talking points that pop up to hijack any thread that mentions Ron Paul and actually address SUBSTANTIVE discussion of ACTUAL ideas, you are hereby invited to GO AWAY.
Maybe RedState was right on how to handle you people.
The 19th century economy was obviously subject to the business cycle. That’s perfectly true and a fair criticism.
But if, after a century of monetary system "expert level management", we still have recessions [or maybe worse] what have we gained? We have had greater and greater interventions by the state and its proxy institutions, culminating now in the potential quasi-nationalization of a large part of our financial services industry – and the system still isn’t stable, and by your own pleading admission, if we don’t pass this bailout package right now the whole system might fall down and go boom. So exactly what did we trade a real currency for a fiat currency for? To accomplish what? Why did we empower the Federal Reserve again?
The Fed’s demonstrated inability to manage the financial system [this is the third financial services industry meltdown on its watch] doesn’t seem like good evidence that we need more interventions.
What should we do? What’s my specific recommendation? In all humility, I have no idea how to avoid a steep recession and possible deflation at this point. But the fact that I cannot tell you how to repair the problems we face due to "expert level management" is not an argument in the bailout plan’s favor.
I agree that Paul’s competing currencies plan seems impractical. And I also would say that we’ve invested so heavily in our current fiat system, and have become so dependent on it institutionally and structurally, that we may be trapped in it and may have no choice but to tough it out the best we can. But that’s a flaw of our system, and not an argument against critiques of that system.
We haven’t gained the elimination of all recessions, but we have gained in making them less frequent and less severe than they were in the 1800s and early 1900s. In short, the experts have learned. That doesn’t mean that they are gods nor that they are immune from making mistakes. But throwing away the whole institution simply because it has not obtained perfection is pretty foolish, in my view. Demanding absolute perfection as the price for maintaining basic institutions is a recipe for perpetual chaos, not sound economic growth. As an M.D., Paul of all people should understand the basic conservative principle of “first, do no harm”. Alas, he prefers radical transformation in the quixotic pursuit of a theoretical ideal and damn the consequences — an obsession that I find offensive in someone who offers himself as a transcendent leader to the masses of “sheeple”.
Anyway, there is a substantial body of research in political economy that shows that countries that have independent central banks and floating currencies are significantly less likely to suffer recessions and that the recessions they do suffer tend to be less severe.
Based on that research and the empirical record as I understand it, I support continuing to use the Fed and continuing to learn from experience (yes, the experts need oversight and monitoring and accountability — I’m not fetishing them). And I oppose rejecting what we have built simply because it has failed to obtain some idealized, purely theoretical vision of perfection. In short, my approach is conservative/reformist instead of radical/revolutionary.
Anyway, there is a substantial body of research in political economy that shows that countries that have independent central banks and floating currencies are significantly less likely to suffer recessions and that the recessions they do suffer tend to be less severe.
Until now, at least. We’ll see if that record continues to hold.
I would tend to think that there might be data sample issues involved there – after all, the most advanced economies adopted central banks and floating currencies for reasons that were political as much as economic, and it may very well be that those advanced nations experienced better growth and shallower recessions despite, and not because of, their central bank policies. And, of course, many of the truly spectacular failures of state currency manipulation are of such antiquity now that they probably would not be included in any such comparative analyses.
Yes, that’s true, especially if we take into account the role of what have been called "epistemic communities" in producing institutional isomorphism in the area of monetary policies across developed as well as developing economies. My claim is not of absolute truth, but a preponderance of evidence. I don’t agree that “state manipulation” from “antiquity” should be coded as the same as a modern central bank, but I concede the possibility of significant selection effects. Nonetheless, given the preponderance of evidence that does exist as of now, we should reject extremist proposals that are backed by nothing more than theoretical musings until we have very good reason to embrace them.
So far, Paul and his supporters haven’t even acknowledged that burden of proof, let alone begun work to meet it. As far as I know, they fund no research, undertake no research of their own (other than that for conspiracy theories about the Bilderbergs and Da Jooz), and, from what I have observed, maintain a ruthlessly anti-intellectual attitude towards counter-evidence or dissent whenever they encounter it.
"we should reject extremist proposals that are backed by nothing more than theoretical musings until we have very good reason to embrace them"
Couldn’t have said it better myself.
A $700 BILLION bailout package based upon the proposals of ‘experts’ who have been managing the economy up until now?
If they were so damn good, why are we having to cough up $700 BILLION to ‘fix’ it?
And, in case you missed it, the Federal Reserve just put another $630 BILLION into the markets…
http://www.bloomberg.com/apps/news?pid=20601101&sid=an2oieaCK11Y&refer=japan
"Fed Pumps Further $630 Billion Into Financial System The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression."Just accept the fact that these guys don’t know WTF they are doing. The only thing the federal reserve can do is to inflate the currency! The very thing that has gotten us into this mess!
Sorry for this additional post, but don’t you think the creation of $630 BILLION (almost the bailout’s $700 billion) is newsworthy and could you comment on the actions of the federal reserve?
Perhaps talk about the effects of it?