A Tepid Case for a Bailout

Allow me to sound like the old guy on the blog for a minute and make the case as to why a bailout may well be as urgent as the Administration says.  (And yes it galls me to find myself conditionally on this side of the argument, given how these Republican fuckers have mismanaged the economy for the last eight years.)

I spend a fair amount of my legal practice doing work for union sponsored pension funds, mainly for various construction crafts.  My firm represents clients with about $25 billion in assets so we have a fair amount of interaction with investment firms and consultants, including quite a few of the larger investment management firms on Wall Street (as opposed to investment banks). This morning I talked to a consultant who described the current crisis as one involving the "systematic deleveraging of assets that has led to people running from risk like a crowd fleeing a burning theater."  As a result, even sound assets in the bond market are currently difficult to unload -- another of my clients had a hard time selling $1 million worth of investment grade corporate bonds last week.  In normal times these would be considered close to cash assets -- here the manager advised the client to sell in two increments of $500,000 so as to avoid unnecessary losses. 

A lack of capital seems to be creating a freeze in the credit markets, making people wary of corporate bonds, money markets, and commercial paper -- the stuff that used to be the plain vanilla asset classes that fueled a substantial portion of the economy.    My concern is that this is going to spread to the point where the staples of our credit based economy -- the four year car loan, the thirty year mortgage, and loans for commercial construction and capital improvements by business become much harder to come by.  This, in turn, will exacerbate already rising unemployment rates, cut tax revenues, and depress corporate profits and stock prices.

(Okay it's galling as a lefty to have to care about the latter items, but they do matter.  These pension plans that I represent need to have investment return over time of roughly 7 to 7.5% annually in order to fund their promised benefits.  This tailspin in the stock market today, (which wiped out more value in one day than the $700 billion bailout price tag) and in 2008 generally, on top of that which occurred from 2000 to 2002 has left many of these plans in a fragile state.  The stock market will bounce back -- but in the interim how many people are going to lose their jobs, their homes, their insurance coverage, etc.  With no credit, this economy is going to contract in a way that hasn't been seen since 1981-82.  And as someone who works for working people, I am awfully concerned about this happening.

[I wanted to add one more thing -- in bold.  Many of you may have heard some of the House Republicans saying the phrase "mark to market" over and over again tonight -- and saying it like it's a bad thing.  What they are objecting to is the accounting requirements that the assets in the Big Shitpile be held on bank balance sheets at their actual market value.  In other words, the "conservative" Republican solution to the problem of these bad assets is to let the banks carry them at inflated values, so that the banks no longer have capitalization issues.  Think about this, if you dare.  It is akin to me solving my financial problems by xeroxing a couple of hundred thousand dollars.  The mind boggles really.]  

(Let me add on a slightly contradictory note, that the Democrats should not bear the burden of passing this bill on their own.  It's a flawed piece of legislation, that needs a bipartisan imprimatur.  Absent a buy-in by the Republicans, i.e. the folks who brought you the "Big Shitpile," the Dems should let the chips fall where they may.  President Obama and the new Congress will just have to pick up the pieces in 2009.)   

Comments

[Stephen]

Well, I'm still not very happy with the idea of a bailout at all, and if we're to have one, what was proposed was terrible. So I find myself on the side of the reactionary, ultra-conservative Republicans in the House.

This whole thing stinks.

[Scott K]

I have two main concerns about the current state of affairs... one is regarding how all these goings-on affect people today, such as the people that you talk about, Sir Charles, as well as those who may have slowly built towards retirement, and now may not be in a position to retire anymore through no fault of their own.

The other concern is about what comes down the road. It is obvious to me that people will lose money as the market unwinds all of these exotic derivatives and various securities are finally given their proper value. That doesn't bother me as much-- many of the people who jumped on board with these vehicles can afford to lose money. Some aren't in such a position, but what worries me more is the impact on the greater economy if the unwinding doesn't happen in a somewhat orderly manner. That has the potential to have an impact on Main Street, it just won't happen for some time. During the Great Depression, the stock market crashed in 1929, but it took some time for unemployment to fully manifest-- the peak came in 1933.

Quite frankly, when evaluating the current state of affairs, I do feel that there are better ways to do this than the bailout bill that failed today, but we are dealing with a Republican party that still has a certain amount of negotiating ability, considering that the president is still Bush (unfortunately) and the Democrats don't have a veto-proof majority. So there is a choice between doing nothing, passing something better than nothing but far from optimal, or trying to push something optimal but failing (which is equivalent to doing nothing except where the political calculus is concerned). Doing nothing essentially means taking a gamble that the gutted federal institutions can keep things contained until the next Congress and presidency; doing something suboptimal carries the risk of creating more problems.

I know that I am hardly an expert in such matters, but when I look for guidance from the experts that I respect, there is hardly any agreement on this issue.

[Sir Charles]

Scott K,

The hardest part of this whole thing is trying to figure out two mysteries -- 1) how bad is the credit crunch and how much time do we have in which to deal with it; and 2) how much is the Big Shitpile worth? No one seems to really know the answers to these questions.

As concerned as I am, I would not compromise further with the Republicans. I'd let them roll the dice and then see what we can do with the presidency and 57-58 Senate seats.

[Brock]

So I find myself on the side of the reactionary, ultra-conservative Republicans in the House.

Which should be a good indication that you need to rethink your position, Stephen.

[Scott K]

I think the answer to (1) has more to do with the subjective idea of "confidence" where the markets are concerned... which is pretty much the only thing that suboptimal bills are useful for. The trick is to somehow manage to come up with a bill that enough Republicans (including the president) are willing to eat, without leading to a situation where taxpayers have to foot the bill for the eventual appraisal of the Big Shitpile.

I do agree with you on not compromising further with the Republicans, I think that the bill that failed today was the absolute minimum that I'd accept, and even then I would need a fifth of liquor every day until the election (upon which point, hopefully, I would have two fifths to celebrate).

[Scott K]

Which should be a good indication that you need to rethink your position, Stephen

Not quite... a lot of very progressive Democrats voted against the bill as well.

[Sir Charles]

Stephen,

I totally understand your visceral reaction. It's outrageous that we should be charged with cleaning up this mess. Yet I fear that when Wall Street gets a cold of this nature, Main Street may well catch pneumonia.

It's also worth pointing out that in the end, this will not cost $700 billion most likely. A lot of these assets have value -- the problem is figuring out exactly how much.

[Stephen]

Which should be a good indication that you need to rethink your position, Stephen.

No, since I came to my position from an entirely different set of priorities. The enemy of my enemy can be both my friend and, in other settings, my enemy.

It's clearly time for a solidly Democratic bill, but the Democrats' wish for bipartisan cover is going to be way stronger than any sense that they need to take the lead on this and strike a blow for the 290 million of us who didn't make this happen.

I simply cannot see a situation in which Pelosi & Reid don't start giving up what small concessions we had in today's failed proposal in order to win more GOP support.

[litbrit]

I heard a House Republican speak on teevee today, and instead of saying what I usually say (unprintable), I cheered and clapped.

That pretty much says everything.

My sense is that bailout by the taxpayers may indeed be needed, for some of these banks, but passage of the plan--which MUST contain the appropriate controls as well as relief for Main Street--can wait. Something that's cobbled together this quickly, and has so many gaping holes in the bedrock information that it looks like a collection of knitting mistakes, can only lead to further problems in the future, perhaps the very near future.

The whole bloody thing can wait until there is a grownup in the White House.

[Corvus9]

But what if it can't?

[Corvus9]

And I am with Sir Charles on this. It's great that everyone is now rebelling against corporate welfare and all, but I would rather have people come to agree with me if it means that we are going to have another Great Depression, which means a third of the country out of work, I don't want to be right. Especially considering that, since I work a shit job, I expect my chances of losing it in such an eventuality are actually greater than 33.33%, I really want a solution to this. And I want a solution sooner rather than later. So I really don't give a shit about the politics or the ideals right now. I'm scared, and I don't really give a shit about any political victories that can be built on other people's suffering. If that's what the progressive blogopshere is up for, then the progressive blogosphere can go fuck themselves.

[karl]

Part of the problem with easy credit is that it tends to inflate prices. Especially real estate that is purchased with long term debt the interest rate is more important than the price of the home.
In effect cheap money has enabled people to buy large houses with the idea that even cheaper money will enable them to sell the house for more than they paid for it. The party had to end at some point why not let the artificial prices collapse completely rather than propping the up for a while so they can crash again in a few years.

[Corvus9]

Just to clarify, I am not saying I know what's going on or anything, or that I don't think it would be better to get some sweet sweet nationalization like Neil's advocating. In fact, my hope right now, in my uninformed way, is that the Democrats follow his advice. But that's probably not a political possibility, since it either wouldn't get signed, would push away blue dogs (actually, I think they voted against it anyways, but you would need some of them to make up the absence of Republicans), and would be politically risky as all get out. So basically, I was kind of hoping it would pass, shitty as it was, just because a shitty bill seems right now like it would be better than nothing, and I am really really afraid of nothing. Sure, Stephen thinks nothing will happen, but on this one, I will trust Krugman (and Sir Charles).

Also it was basically this post and it's comments that has me on edge about the blogosphere. Booman seems pissed, and I like Booman, and people in the comments seem to be proving his point that this situation isn't being given the seriousness it deserves.

[jncam]

Sir Charles,

You had me convinced until the (fine print). Too bad. I am very interested in the opinions of folks like yourself. That is, folks who "manage" or "look after" the retirement/pension accounts of the little guys. Specifically, does a bailout help a boomer that is about to retire in the coming year?

[John]

Well, I'm with you, Sir Charles. While I've seen some smart lefty critiques of the bail out, most of what I see seems to be of the visceral "I hate bailing out Wall Street fatcats" sort. Any time Matt Stoller, Kos, Andrew Sullivan, and the House Republican caucus agree on something, it's a good idea to be on the other side. From what I can gather the stupidest, most knee jerk part of the left joins up with the even stupider, completely delusional right to oppose this thing.

This isn't to say the proposal is perfect - it seems to be deeply flawed in a lot of ways. But most of the people I see opposing it don't seem to think there's any need to do anything at all. And the main reason I can see for that belief is that they have no understanding or knowledge of economics whatsoever.

Also, in terms of creating a Democratic bill, that would be a total political disaster. It's also hard to see how such a thing gets through the Senate, and possible that Bush would veto it.

The whole thing is a mess, and the House Republicans are a gang of buffoons.

[MR Bill]

I have only had Econ 101 (and that years ago, with a Ayn Rand devotee as the teacher, a strange young woman who would wear a maroon suede pantsuit to class, and toss off wry jokes that no one caught while looking out the window..), and am a former artist, bookstore manager, and now lowly construction/repair guy. So what I have to say about the economy is moot. At this point in my life, I owe nothing, and if it's a week to week struggle, the debts (medical and otherwise) my late ex wife ran up in her illnesses, mental and physical are paid. My kids are(or will be, both boys are HS seniors) getting through college on scholarship, and if I stay healthy (as I have no insurance), I'll survive. I grew up on a farm, where we canned and froze food (and my folks, in their 80's still do) and can kill and dress hogs, deer.
Country folk will get by. City folks, I worry for some of you.
I understand that there is a major short term crisis as the assets of financial institutions seem to melt away like cotton candy in the rain, assets in odd financial instruments like the mysterious 'derivatives', and that the failure of these financial dinosaurs will cause a failure of the credit structures in this country.
And that will hurt Main Street.
I don't see why we can't find a way to make the bailout make sense, and not be totally on the taxpayer, and that the taxpayer gets some real benefit from it.
And in the longer term, I have seen that the financialization of the economy (manufacturing replace with service, and a belief that the balance sheet was the only measure of a nation's economic health) has allowed the over development of areas like my North Georgia. We have a vast oversupply of commercial real estate on the books, silly development, strip malls that are unopened and unoccupied, restaurants built with inadequate sewerage, huge log 'cabins' (actually lodges) with no buyers, small businesses opening with no possible chance of survival but still getting bank funding.
This collapse of the Wall Street Souffle might lead to a definancialization of the economy: where we don't see the land and it's rapid and unplanned and irrational development as the quick road to riches. The Atlanta area is vast over developed for it's infrastructure and water supply, and it happened because lax planning and get rich quick development allowed the sprawl. It was a government decision, ratified by the financiers.
If we can turn this collapse to use it to make the economy work sensibly, where making quarterly dividends are less important than long term growth, where is is not longer desirable to loot a company and send it's jobs offshore, where the workers get a far share, and the executive class gets a more modest portion of the pie, the pain will be worth it.
Hell, comrades, we may use this to get the market socialism many on the left have hoped for. The days of a 'free market' that is anything but, more a casino rigged to cheat the ones who actually make things, are over. What Comes Next, after the bailout, and How Do We Get There? are the questions we should ask.
There will be some sort of bailout. There should be some sort of political reckoning. If we can avoid a Christian fascism born of a depression, we might just do ok.

[Lisa Simeone]

But Sweden took a different course from the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing.

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em=&adxnnl=1&adxnnlx=1222444829-enm+sRfIgOYOCRzgP30Adw

[Brock]

The liberal populists who were cheering for the defeat of this bill will be eating their words if unemployment hits 10% in the next two years.

You may want to blame the Republicans for the mess, but shortsighted American voters will blame the party in power, and that's going to be the Democrats. Look for the House to flip to the Republicans in 2010.

Obama's first term will be crippled by the economy, and the only good thing we might get out of it will be a withdrawal from Iraq.

Maybe I'm wrong. I hope I am. But if I'm not, this country is screwed, and in no small part thanks to liberal populists.

[Lisa Simeone]

But we've long known that if the Democrats won the White House this year, they'd be blamed for all the shit that the Republicans over the past 8 years have created. Whether this financial debacle were happening now or not, we've known all along that people would forget who caused the shitpile in the first place. I don't see any way around this except to wish that McCain wins and he and the Republicans have to clean up their generations-long mess -- and I don't wish that.

[low-tech cyclist]

I'm all for a bailout, but not THIS bailout.

First of all, I'm not convinced it would have worked, in the sense of keeping credit flowing, without throwing another, similarly large, chunk of money at Wall Street down the road.

So I want the Swedish plan, because I think it would work, and economists who seem to have had some foresight think it would work.

Second, the American people are right: this turkey helps Wall Street, but doesn't help THEM that they can see. That's fixable, so let's fix it! Sheesh, we're Democrats - you'd think we'd see this as a feature, not a bug!

Third, nobody's explained why we had to pass a bill yesterday in order to keep the world from falling apart. So I'm glad yesterday's bill went down in flames, so we'll at least have the opportunity to convince the spineless Dems to pass their own bill.

If it turns out that yesterday's bill is going to be as good as it gets, then I'll hold my nose and urge my Congresscritters to vote for it in a week or two. But not until we at least have the chance to TRY for something better.

[low-tech cyclist]

Here's the email I sent to Steny Hoyer (my Congresscritter) this morning. I sent a variant to my Senators, too.

Dear Rep. Hoyer,
The EESA has failed. Time to forget bipartisanship, and pass a strictly Democratic alternative.

If you try to compromise with the GOP, all you get is a bad bill (like the EESA in its present form) that will spend hundreds of billions, but may not actually fix the problem. (How WAS it supposed to work, anyway?) And they may not vote for it anyway, as you found out Monday.

Not to mention, the American people will see it as a bailout for Wall Street, but not a bailout for THEM.

So get the Dem caucus together, and see if everyone can agree on a bill that (a) will work, in the sense of keeping credit from freezing up, and (b) helps the American people directly as well.

Bush can't veto a bill like that, because he says we need a bailout NOW. A veto would make a liar of him. And I bet this is one time when the Senate Republicans don't dare filibuster. So a strictly Dem bailout bill can be enacted. You've got the leverage - USE it!

a) A bill that would work: the 'Swedish plan.' They faced a similar situation in 1992, and it worked. Ask Brad DeLong or Paul Krugman or a host of other economists for details.

b) Helping the American people: extended unemployment benefits, expanded food stamps, spending on infrastructure, maybe even include the SCHIP expansion.

Then pay for it all with a tax on the super-rich - e.g. a 45% bracket on incomes above $10 million.

Think you and your fellow Congresscritters can sell that to the American people? It should be a much easier sell than the current EESA. And I can't see why any actual Dems would be against it. This should be doable. So do it!

Cheers,
[low-tech cyclist]

[Sir Charles]

Brock,

I hate to say it, but Reagan proves this isn't true. He let unemployment his nearly 11 percent and brought the economy to a grinding halt early in his term. But by 1984, the recovery had occurred and he ran for reelection on the bullshit "morning in America" meme and won in a landslide.

If the Dems want to engage in pure electoral calculus, they would probably just walk away froma deal at this point and let Obama ride to the rescue in January.

Lisa,

I personally prefer the Swedish model (that's kind of fun to write) too.

jncam,

A bailout will probably help retirement funds. I will at some point post my advocacy of traditional defined benefit retirement plans and stress once again the need to socialize risk so that individuals are not subject to abrupt market downfalls.

MR Bill,

I hope we never go to a barter or hunter/gatherer economy. I'll be in deep trouble.

[Stephen]

MR Bill,

Yeah, if everything collapses and my family can't run back to Korea, then we might have to hunt you down. You can teach us how to survive, and my children are only 6 and 2, but they already have strong backs.

Although we do have some friends around here who could probably survive in a post-apocalyptic dystopia.

[Lisa Simeone]

Sir C, you sell yourself short in the hypothetical hunter/gatherer economy. You could trade your bons mots for all kinds of things! You would be a kind of Cyrano of the 21st century.

[Sir Charles]

I'd sell my body, but I think that ship has sailed.

[BruceMcF]

The path ahead is clear. Make a good faith effort to pass the current bail out in a bipartisan way, because it will poison efforts to fix the fall out from this approach if its "blamed on" the Democrats. Either the Republicans deliver the additional votes needed to pass, or no dice.

Otherwise, put together a bill to get a real recapitalization started, together with genuine executive compensation limits, as opposed to the phone ones in the bill, and a own-to-rent mortgage rescue package to put a floor on the correction of mortgage values and prevent a rolling collapse of big bloody chunks of the part of Main Street servicing side of the Finance Sector.

And vote it in on a party line vote, recess to Mid-November, while the ranking members in both chambers, who are all in safe seats or on the Senate side not facing election this year stay in town to work on the post-election package.

I've floated $150b before ... add $50b for the own-to-rent part of the package.

[BruceMcF]

As a note on "agreeing with" the Republican caucus ... their position is against this bill with no clear preferred alternative. If there is a clear progressive alternative ... or several, since this current bill leaves so much headroom that there are multiple alternatives that are improvements ... and you both oppose the current bill and prefer the progressive alternative, then you are not agreeing with the full position of the Republican caucus, you are agreeing with many of the 40% of Democrats who voted against this bill.

[MR Bill]

I hope you guys read past the first paragraph, 'cause I'm not suggesting that we have a barter/agrarian economy. I can probably get by. I'd prefer shopping for the vast portion of my food.

[Sir Charles]

MR Bill,

Are you accusing us of having McCain like attention spans?

I did in fact read the whole comment. I was just impressed at your self sufficency. I define soft city dweller at this point in my life.

[MR Bill]

Yeah well. My daughter is a vegan, and I for one look forward into one day affording to eat at the new Japanese restaurant in town. The crux of what I was trying to say was about the definancialization of this economy....
And as usual I went on to long about local color.

[Sir Charles]

I'd have to be a vegan if I had to provide my own food.