Okay, this is probably the last of the foreseeable posts on the Wallstreet bailout – and probably the most serious.
I spend the last week extremely pissed off about the bailout. Here were a bunch of idiots absurdly inflating the price of housing, with other idiots actually loaning them money to do so, more idiots treating the bad loans as assets and still more idiots insuring them against loss under ridiculous assumptions. It’s not really a surprise that the whole thing blew up. The only surprise is that it took as long as it did. Hell – 5 years ago in late 2003 when K and I bought our current place, we were worried that there was a housing bubble inflating prices beyond what the properties were really worth. And this was in North Carolina which didn’t have the hottest housing market.
But here we are, we’ve got banks going defunct left and right and we’ve got republicans arguing that they really, really have always supported more federal regulation. The latter is one of the signs of the apocalypse for those keeping score at home. So along comes Paulson saying that he needs $700 billion to keep this from truly going in the crapper. The reason I’m so pissed off is that I agree.
Let’s put it this way – the U.S. economy (GDP) is on the order of $14 trillion. In other words, the bailout proposal was 5% of GDP. Now in real terms $700 billion or 5% of GDP are insanely huge amounts of money. Something like $7,000 per household. But if the economy collapses or if we go into a deeper recession than we otherwise would have, 5% of GDP is chump change. The economy could easily slow 5% in a year (or 2.5% each over two years, etc.). In other words, the proposed cure is cost effective compared to letting the disease run its course without intervention.
Given that we need some form of intervention to prevent a complete meltdown, there are a few questions that have to be addressed:
- What is the proper size of the intervention? How much do we need to spend?
- How will the plan work? How will assets be valued? Who has oversight? etc.
- Who pays for it?
In all of these, the original (3 page) Paulson plan was completely inadequate. Paulson picked the $700 billion number out of thin air. Hell, for all I know he thought it should be 5% GDP and backed out the $700b from there. The original plan said nothing about how the assets would be valued – essentially, the govt would likely pay the original value of the assets regardless of their actual worth. Paulson was to have no oversight and all decisions were to be final with no appeal to judicial recourse. Finally, for the plan to have worked, taxpayers would have to lose money which means that the benefits would primarily go to those of us with money in the stock market (401k retirement funds, etc.) or to the financial institutions themselves and the burden would fall on our standard tax system which places only a slightly higher burden on the rich than it does the rest of us.
So that plan won’t/shouldn’t fly.
What about the new plan? On Sunday, the congress and the whitehouse finalized a new proposal. Caveat lector – I haven’t read it yet, I’ve only looked at excerpts. But from what I’ve seen, it is better in almost every way to the original Paulson plan.
The new bill grants the Treasury $350b up front and the rest isn’t guaranteed. Congress will have significant oversight. There are two ways that Paulson can buy assets: 1) conducting a reverse auction to find the true worth of the assets; or 2) essentially buy equity in the company equal to the amount of money received for taking the assets. The former is likely to generate smaller amounts of money for the companies, but does allow them to get the bad assets off of their books. The latter may be useful for companies in worse financial shape. In either case, the govt is essentially getting something of value for the money it’s spending. Oh – and companies that participate in the bailout have to agree to reductions in executive compensation which is a good thing. I still wish they were required to participate in credit counseling – along the lines of that required for consumers under the 2005 bankruptcy law, but I might just be thinking punitively.
So, what’s not to like? Probably quite a bit – like I said, I haven’t had a chance to read the 110 page draft. One thing that’s probably not to like is that the bill allows the SEC to temporarily suspend Mark-to-Market accounting. This is just dumb. It would allow the SEC to look the other way while companies pretend that they are worth more than they really are. It’s a way to allow the companies to claim that their assets are worth more than the market would pay for them, allowing the companies to appear healthier than they really are. That’s not really helpful.
So, I’ll probably read through the full bill tonight, but for the most part I think I support it. It’s not perfect, but it seems to be both necessary and significantly better than the original Paulson bill (oh, and much better than the silly House Republican proposal, but we won’t get into that).
