September 24, 2008
A Solid Critique of the Paulson Plan
ThreeSources friend The Everyday Economist pens a thoughtful post that compares the current situation to the S&L Crisis and the Paulson Plan to the Resolution Trust Corporation (RTC). It's a good read, allowing you to relive the 80s without big hair and skinny ties.
He comes out foursquare against the plan at the end, by economic and not ideological reasons. I'm not prepared to join him there at this time, but many cite the success of the RTC as a model for the Paulson Plan and the EE develops enough differences to force consideration.
And johngalt is foursquare behind the ranking Republican on the Senate Banking Committee, Alabama's Richard Shelby, who told an incredulous host on NPR this morning that he is "willing to let the market sort this out" if the committee can't come up with a plan that makes sense. Yes, "doing nothing" is an option he will consider.
I feel better already. (For mostly ideological and not economic reasons.)
Posted by: johngalt at September 24, 2008 2:55 PMAlthough The Refugee sympathizes ideologically with jg, he fears that the consequence of not providing this loan/bailout/whatchamacallit would have consequences for the next 100 years. Not so much for current income, but politically. In 1929, Hoover allowed the market to sort itself out. And, it arguably would have without the New Deal. However, the political environment made the New Deal possible - the largest socialization in our history that curses us 80 years later. Providing liquidity at the time might have avoided it. We cannot afford the New Deal Part II.
Posted by: Boulder Refugee at September 24, 2008 9:48 PMOn this subject the Heretic agrees with the Refugee that the consequences of not providing a bailout far outweigh the moral an economic hazard of providing one. The Heretic does not have as much data as the Fed or the Treasury, but the simple yield curve where in short term credit is way more expensive than long term credit is a very scary situation for any prolonged length of time.
The Heretic disagrees with The Refugees views on "the curse of the New Deal" but that is beyond the scope of this discussion.
Posted by: The Heretic at September 25, 2008 1:23 AMI truly think that Secretary Paulson "stared into the Abyss." I was comforted to hear him tell a TV interviewer that he "hates" the bailout idea.
Perhaps my pragmatism is costing <mikemeyersvoice>$700 Billion Dollars</mikemeyersvoice> but I am tossing in my lot with James Pethokoukis and Larry Kudlow: there are times when government has to step in (to fix the things they broke -- I'm not ceding laissez-fairism). And that the costs of a full blown market freeze are worse.
The Heretic brings up the yield curve (a left-of-center commenter who brings up the yield curve, please stick around!) and when Caterpillar has to pay 325 bps to attract capital, the problem is not down the road but here already.
Contra The EE, I believe that the government could use its temporal advantage to hold some of this bad paper and turn a profit after the world's appetite for risk improves.
On the moral hazard side, I find it hard to see how many of the "helped" companies are really to come out of this "sunshine and roses."
Posted by: jk at September 25, 2008 10:51 AMjk, when the government breaks something, I don't want it to fix it. Don't you think the federal government's track record shows we shouldn't trust it, particularly when bailouts just get worse and worse?
To reword an old saying, "Where free-marketers fear to tread." There's a very, VERY good reason that the private sector doesn't want to take the risk on these bad securities, at least not at these prices. If it were so possible for government to make a great profit in this bailout, then Buffett would have jumped all over them first. The man by himself could have bought out the remains of Lehman Brothers, but he didn't.
Oh, and I point I made elsewhere: if you think Paulson with these proposed powers would be bad, how much worse would it be with the powers wielded by an Obama choice for Treasury Secretary?
Posted by: Perry Eidelbus at September 25, 2008 12:59 PMActually, Refugee, Hoover did NOT let the market sort itself out. Hoover's response was "make work" public works programs and...tax hikes. Sound familiar? "Tax hikes" included the Smoot-Hawley Tariff, which destroyed global trade.
As it turned out, FDR merely continued and amplified what Hoover started. And after FDR's platform said that taxes are too high, power should be given back to the states from the federal government, and that money should be made sound by being backed by gold.
Posted by: Perry Eidelbus at September 25, 2008 1:07 PMFair points all around, Perry. But -- yet again this year -- laissez faire is not on the menu. I would prefer a $700B stimulative tax cut, maybe waiving cap gains for those that buy this paper today. Speaker Pelosi? Leader Reid? I thought so.
Why will I, then, agree to incur the liability against future taxation? Because I have bought into the seriousness of the situation. Caterpillar's paying a 325 basis point premium over an offering from a few months ago is unsettling. Secondly, I have bought in to the idea you dismiss of the government's ability to hold these until conditions improve. Andy Kessler suggests that government can actively reflate to improve conditions (warning: not safe for metalists!) Buffett could play here but he chooses to play conservatively. It's hard to name too many others who could buy enough - a'la Soros -- to drive the market, and none are quite as well capitalized as Sec Paulson.
I could be proven wrong on both counts, of course. We're predicting uncertain futures. I really don't want to live through a full blown liquidity/credit crunch, and I'll go all in with Paulson today to avoid it.
Posted by: jk at September 25, 2008 2:24 PM"laissez faire is not on the menu."
And that's the problem. If we don't like the menu, we should be able to pick up and choose a different restaurant. It's far beyond "getting old" that we have to pick between Beelzebub and Mephistopheles.
You need to ask yourself: do you really trust the guys who created this mess in the first place to get us out of it? As the saying goes, "Ye shall know them by their fruits." Look at what they've given us so far, and rely on *that* to predict their future track record, not their promises today of peace, land and bread. I don't trust Paulson for a second, particularly when the initial plan is to give him incredible powers without any oversight.
A $700 billion tax cut would be AMAZING for the American economy. You'd see domestic and foreign investment return with such confidence, because maybe there won't be as much profit, but the feds won't be stealing a chunk. Problem is, $700 billion of tax *cuts*, not what could be taxed, would require eliminating cap gains on $4.6 trillion worth of profit.
Coyote Blog had a great observation: the same Democrats who are afraid to privatize Social Security have no problem blowing $700 billion on this. It's "too risky" to let people invest for their own retirement, but it's ok for them to spearhead the federal government buying up the worst securities on the market today. Great deal!
Oh, and speaking of Soros: his hedge fund lost at least $120 mil on Lehman, depending on when it bought the shares. I cackled for five minutes at that. Shows how great his investment instincts are when he doesn't have someone on the inside, huh? Or maybe he did and believed Lehman's executives.
Posted by: Perry Eidelbus at September 26, 2008 9:21 AMPE, as with most political gambits we are talking about degrees of intervention here. Arguably, Hoover pretty much did everything wrong, e.g., constrict capital, raise taxes, tariffs and public works.
The bigger issue is the environment that the Wall Street crash created: immense domestic pain (25% unemployment) etc. etc. that created the conditions under which the New Deal could be passed. My non-interventionist ideals are in conflict with my practical realities. I would prefer some bailout to conditions that would foster a second New Deal.
That said, I'm pleased that the House Republicans are pushing back. They may be onto something. That is, much of the problem may be caused by accounting rules such as mark-to-market that artificially devalue some finanicial assets and thereby hurt liquidity. Can we get out of this without a massive bailout and without a public uproar for big government? The Refugee has all of his digits crossed.
Posted by: Boulder Refugee at September 26, 2008 12:59 PMActually, BR, the Great Depression would have been only a few mild recessions, had the federal government not intervened. History could very well repeat itself today, if the federal government succeeds in "preventing a collapse" when what we actually need is the complete collapse of a few companies, which will then be absorbed, rather than everyone fall "equally."
Remember, and this is some of the best wisdom you can pass on to your children, that collectivism is about bringing the successful down to the level of the unsuccessful, whether it's taxing income or ensuring "equality of outcome" -- including "bailouts."
For further reading on the Depression: http://eidelblog.blogspot.com/search?q=%22great+depression%22
Oh by the way, some "conservative" in comments at alarmingnews.com is accusing me of "championing economic liberalism" because I oppose the bailout. WTF?
Posted by: Perry Eidelbus at September 27, 2008 11:42 AM | What do you think? [10]