Opening the Day: Bailout Confusion as the Senate Picks Up the Ball

by: Matt Stoller

Wed Oct 01, 2008 at 11:26


I'll have an analysis of the DeFazio-Edwards plan out in a bit.  Basically, it's not so much a legislative package as it is a series of recommendations for the executive branch that can be put into a piece of legislation (with a significant change to the FDIC).  It's designed so that both Republican and Democratic members can say to constituents that they voted for a solution to the crisis when they vote no on the compromise put forward in the Senate.  As it stands now, what matters is the final shape of what emerges.  I know there's a lot of skepticism at the removal of mark-to-market accounting, and I share it, but that can be done at both the executive or legislative level - the SEC just issued new rules 'clarifying' that firms have more latitude in valuing assets with no liquid market (ie. toxic paper).

Anyway, I guess what I'm saying is that this is primary a shield against the compromise bailout coming to the House on Friday, and much of it depends on the Senate today and whether House members will find the Senate version acceptable.  Dean Baker thinks the bailout as it is composed still nonsense, George Soros thinks the bailout will simply signal to creditors that America is going to inflate away its debt, while Krugman wants to see it go through.  If this bailout goes through (which I now think it will), Krugman's credibility is why.

  • ABC's new poll is out.

    If elected, McCain would take office at age self, is that something with which you're entirely comfortable, somewhat comfortable, somewhat uncomfortable or entirely uncomfortable?  

    52-48

    And the numbers have been moving the wrong way for McCain.  Sam Stein has more on McCain's health issues.  This has been covered up in a major way.

  • The Senate is moving forward on the bailout.

  • The text of the Senate bill is here.

  • Palin Bingo is being set up for the debate.  And yes, she thinks dinosaurs and humans lived at the same time.  

    When he asked her about prehistoric fossils and tracks dating back millions of years, Palin said "she had seen pictures of human footprints inside the tracks."

    Girls Against Sarah Palin launched.

  • Crisitunity has a great analysis of where the votes came from in the bailout.

    One other interesting way to break this problem down is by region. Basically, the greater physical proximity you have to Wall Street (or to a lesser extent, another major metropolitan area), the likelier you were to vote for the bailout.

  • The South is having severe gasoline shortages that will last into mid-October.  That's probably why Jim Martin is now in contention against Saxby Chambliss.

  • Conservatives are beginning to threaten Democratic big dollar donors with 'exposure' to their communities should they give to certain groups.  Good.  I'm thinking this can now be a badge of honor, if you haven't been 'exposed' by these guys you're not giving enough and you're not giving to the right groups.

Ok, the Senate is going to vote on a package, and Marc Ambinder thinks the House now has the votes.  I do too.  Paul Krugman is saying that "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. "

Let's hope that he's right and George Soros is wrong that this measure will "cost zero dollars".  This is already a high leverage moment to push through a real bailout for the economy, which we've lost except for some tax breaks for renewable energy and an AMT fix (per the Senate version).

Matt Stoller :: Opening the Day: Bailout Confusion as the Senate Picks Up the Ball

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Opening the Day: Bailout Confusion as the Senate Picks Up the Ball | 19 comments
McCain's health (4.00 / 1)
Remember that a few months ago, when Obama was solidly in front in the polls and it looked like there wasn't much McCain could do about it, there was some chatter about a possible "game-changer" for McCain: a one-term pledge.  I imagine it was discussed at least in top GOP circles as a potential ace-in-the-hole to counteract a scenario where McCain's age and health had suddenly become a prominent issue.

And then...he picked Palin.  Bye bye, one-term pledge.  No one has breathed a word of THAT ever since she joined the ticket.  

George Soros is absolutely right (4.00 / 1)
Krugman is not an Oracle. Let's stop worshiping this man the way warmongers worship Petraeus.

Soros knows (as should we all) that when a People never ever EVER bite the bullet, but always look to a bailout or to unprecedented borrowing, that such a People will never ever EVER pay off their debts.

To wit, the 700 billion will drive the annual deficit from 600+ billion to 1.3 trillion. The interest on the debt is a staggering 400+ billion. In other words, we are getting a new credit card merely to pay the interest on the old one!

We are ACCELERATING into default!

Do you hear anyone telling the People that an economy which is 70% consumption cannot last? (consumption needs to be south of 50%, think about it for a little bit and you will understand why...)

Do you hear anyone talking about how we will meet the payout obligations for Medicare and Social Security in an age of retrenchment? Even if we had NO DEBT WHATSOEVER we are incapable of meeting this obligation without taxing the living shit out of current and future workers! But we have debt. We have debt that we must expand MERELY TO MEET THE INTEREST ON THE OLD!

We exported the productive capital that could have possibly (but not surely) paid the future obligations of the government: the manufacturing base.

Now we have nothing left to pay the bills with. Are Latte' machines going to service the debt? Are paper shuffling middlemen like banks going to service the debt?

We are in dire straits and drowning in a sea of dishonesty.

Several Commentators on Bloomberg Radio (4.00 / 1)
keep slamming the Paulson plan saying it makes no sense. this is from one of the voices of the market. they also have people on it touting it, but you would expect that to dominate their broadcasts, and its not.

Krugman is hoping at best. Nobody knows the price of this junk or what Paulson will decide to pay for it. and it jams the US dollar.

Krugman has yet to even weigh in on Isaac's plan. He's really being coy for someone who likes to be an authority. Authorities make sure they comment on all options.

Very disappointing that Krugman just couldn't advocate for what he actually thought was better. He spent yesterday touting equity bailouts in europe and that's not what we get with Paulson. and Krugman has this delusion that congress and Obama will change things after the election. Hope is the new hope.  

Michael Bloomberg, prince of corporate welfare

Look .. (0.00 / 0)
I think Krugman knows what this bill can .. or can not do .. Do I think he is thrilled? .. No .. He probably isn't .. but I also think he looks at the political realities .. He can see like we can .. that Pelosi is a paper tiger .. that they'll likely sweeten up the bill to attract more Republicans/Blue Dogs .. and that something has to happen soon because the credit markets are a mess
[ Parent ]
he did advocate (0.00 / 0)
for better things extensively but now he's just laying down and he shouldn't.

The reason he's laying down is because many conclude it's better to do the wrong thing than nothing.

That said,  many economists really question if this will do jack for the credit crunch in the first place and he should come out and say that.  

But Krugman has been blogging/writing and speaking on this bad plan from day 1.

NoSlaves.com  


The Economic Populist

[ Parent ]
National debt will pass TEN TRILLION dollars today (4.00 / 1)
Ironic that the bailout is being sold with more free goodies on such a day.

And our Chinese creditors are signaling loud and clear that they are about out of patience.

I'm no expert but it looks like (4.00 / 2)
Krugman and Soros are on the same page. Krugman says we should seek

to expand bank capital, taking an ownership share in compensation, rather than trying to push up the value of toxic paper.

Soros says

Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system.

Tarp would invest in preference shares with warrants attached.

The same thing more or less, maybe differences in details, same basic thing. Am I missing something?

No, not really (0.00 / 0)
Most of the really negative stuff was written about the original Paulson plan. The new Paulson/Dodd bill allows for, but does not mandate, a variety of tools.

The Paulson plan was predicated on the idea that the main problem was that banks didn't trust each other because no one knew how much any of the other banks assets were worth (i.e. how likely they were to default). So no bank would loan to any other bank, or only do so at usurious rates (watch as the LIBOR rate has gone through the roof). The idea is that if you take away the assets that no one knows how much they are worth off the balance sheets, banks would have a clear idea of how much other banks were worth, and would be able to price loans to them accordingly, solving the credit crisis.

The recapitalization schemes are based on the idea that banks are dangerously short on capital, meaning that they can't afford to lend money to other banks without leaving themselves overleveraged. They are short on capital, the theory goes, because things that they thought were assets (mortgage backed securities) turned out to be worth basically nothing (or had to be marked so in the mark-to-market accounting). So the ratio of loans to assets shot way up and banks, in theory, find themselves in a highly risky position. This would explain why banks began hoarding  capital like it's going out of style, to firm up those balance sheets.

I suspect (not being an expert in market economics, only with general economic principles), that it is some combination of the two problems. Lots of prominent economists disagree as to which is the real problem, and this is the debate between Soros and Krugman. To say that the authors of OpenLeft or otherwise have some special insight as to what the real problem is, however, is crazy.

I think the Dodd/Paulson plan leaves too much in the hands of Paulson to determine which strategies to use, but the basic approach of allowing both options as the situation warrants is inherently wise, I think.


[ Parent ]
RTC (0.00 / 0)
is NOT a simple executive decision and that's what they have in the DeFazio Bill.  It's a RTC and what you're not realizing is the press release they clearly state the legislation itself is not written.  That's the framework and a RTC (Resolution Trust Corporation) is part of that.  This is a structure that many economists are recommending and what was used in the S&L crisis.  

Many, many are recommending that or a RFC (Restructure Finance Corporation or a HOLC or a hybrid.  

That's what Defazio has.  He also points out a very minor transaction fee on stock trades could raise $150B needed to pay for a plan and lobbyists immediately struck him down.

It's like you're laying down and swaying "oh well" when the fact is it's not a matter of don't like or like....it's the possibility that the Paulson plan might make the financial crisis worse.

The debt just hit $10 trillion and this is adding over 1.5 trillion dollars to the deficit.  Bernanke just doubled the money supply on top of it....

there will be no money for any alternative energy anything!

 

NoSlaves.com  


The Economic Populist

No it is empathetically not (0.00 / 0)
an RTC.

What Paulson originally suggested was a form of an RTC - unwind the bad debts on the taxpayer's dime. The original RTC also liquidated the banks involved, which is obviously impractical in this case (you can't just liquidate Citi and JPMorgan).

What the DeFazio bill is suggesting is that the government recapitalize the banks by giving them a paper loan in exchange for an IOU. No "real" money exchanges hands (although in the case of the Paulson plan, no "real" money exchanges hands either). This is similar to what happened in 1982, in a plan cooked up by the Reagan FDIC head (who is advocating the plan now). It may have worked then, but it seems to be a more cumbersome way to do what is already allowed in the Paulson plan - give cash for equity.

The DeFazio plan also has an obfuscatory element that, in the plan's theory, would allow banks to paper over their losses, hoping that the appearance of strength of the banks would be enough to end the crisis. Problem is, if housing prices continue to fall, this papering over strategy would make it really difficult to tell who is actually solvent and would make things much much worse.

[ Parent ]
that is just plain wrong (0.00 / 0)
Paulson DOES NOT create a RTC.  Real money DOES change hands on Paulson's plan.  HE is BUYING assets...that's real money, real exchange, real outlays.

uh huh, and you think negative equity is a good thing?  

I'm sorry now you're just blowing smoke.

You clearly don't understand the mechanisms, which is fine.

It's ok to not understand but not ok to think you do and try to tell others misinformation.

NoSlaves.com  


The Economic Populist

[ Parent ]
Right like you're some oracle (0.00 / 1)
Of course he's buying assets (by giving them T-bills), but the DeFazio plan is "buying" something too. You can't strengthen the balance sheets of banks unless you give them real money. Exchanging a paper loan for an IOU will be laughed at by the street unless the Fed actually plans to make good on the cash loan if the firm gets liquidated. In that case, we're on the hook for just as much either way.

At the end of the day, the government has to give the banks something of value to help shore them up. Either they can do it via recapitalization (of which you can either do it as a loan or by taking an equity stake) or by taking assets off their hands (by having the government unwind the credit-default swaps and other mortgage-backed securities, as was done by the RTC). Either solution addresses a different problem (capitalization versus trust); which problem we have is not clear. Do you know? I'm sure the hundreds of fighting economists would love to hear your brilliant insight.

And who said anything about getting upside down? Are you just throwing out random economic terms? Buying something overvalued has nothing to do with negative equity. Nor does paying a premium for an equity stake.

While I'm not wild about the government overpaying for equity or securities, if the total cost is $100 billion to avoid a global credit meltdown, it's probably money well spent.

[ Parent ]
you're getting really tiresome (0.00 / 0)
from the bill:

(e) PREVENTING UNJUST ENRICHMENT. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in Conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.

See DOES NOT APPLY TO TROUBLED ASSETS.

No, you are just posting and posting not having any understanding of the RTC or Issac's mechanisms and how they are different and I have pointed to ad nauseum at this point.

NoSlaves.com  


The Economic Populist

[ Parent ]
Of course it doesn't apply (0.00 / 1)
apparently you don't understand the difference between recapitalization and simply buying assets.

For the umpteenth time,

Paulson plan:
- allows recapitalization by buying equity stakes in the bank directly
- allows restored trust in the banking system via a RTC-style disposal of mortgage-backed securities (the RTC disposed of all of the S&L's bad loans this way, look it up on wikipedia)

It is completely at the Sec. Treasury as to how much of each approach he uses.

DeFazio plan:
- allows recapitalization by: 1) changing accounting rules (which I regard to be a scam) 2) issuing loans from the government in exchange for an IOU
- no provision for disposal of bad or un-valuable debt, as you noted.

This is completely consistent with what I have been saying. The DeFazio plan supposedly has no outlays because it counts its loan as a Certificate of Net Worth. However, the only way banks can use it as capital is if it can be used as security to borrow against.

The only way people are going to allow it as collateral is if the government would actually make good against it if the bank defaulted. So it is only capital to the extent that the government would be willing to be on the line to actually pay for it if the banks go tits up. You can't get capital for free. Sorry. The DeFazio plan is just an interest-free loan to the banks, run by the FDIC, and subject to no congressional oversight.

I think 1) You have no idea what the RTC did or how it operated 2) Have no understanding of what is real capital and what is paper capital 3) Have no understanding of how similar these plans actually are.


[ Parent ]
re: hundreds of fighting economists would love to hear (0.00 / 0)
I have not really heard any qualified economists saying the Paulson plan is better than recapitalization. What we have is political realists who say the Paulson plan is not as good as recapitalization but its the best we can pass. They are fighting with the ones who say the Paulson plan is worse than if we do nothing, and recapitalization is best. I have not really heard any qualified economist saying the Paulson plan is the best plan.
[ Parent ]
I think the criticism comes from two directions (0.00 / 0)
1) The original Paulson plan had no oversight (and still doesn't, imo).

2) It only dealt with the trust issue, not the capitalization issue. I don't think there is any economist that thinks it is soley a trust issue. I do think there are a range of opinions as to what extent it is a trust issue versus a capitalization issue, plus how to make the incentives of the plan such that it discourages bad behavior in the future.

I don't think that it is a unanimous opinion that what we have is only a capitalization issue.

[ Parent ]
Palin Bingo cards aren't very good (4.00 / 1)
Needs boxes like:

"missing definite article"
"I blame the media"
"insult Obama"
"insult Biden"
"nook-ewe-ler"
"moose"
"blank stare"
"oh, yeah"
"said no to bridge to nowhere"
"foreign policy by osmosis"
"I'm just a simple hockey mom, your world frightens and confuses me"

The gold standard for live snark bingo is here (0.00 / 0)
http://arstechnica.com/staff/f...

Even if you're not a Mac geek, it gives the proper style.

[ Parent ]
SO this bailout will pay for itself? (0.00 / 0)
Sounds fishy...the Iraq War was supposed to pay for itself too.  
Opening the Day: Bailout Confusion as the Senate Picks Up the Ball | 19 comments
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