Ed Brayton is a journalist, commentator and speaker. He is the co-founder and president of 
As I said in a comment, I don't feel I know enough the situation to know whether this government intervention is necessary or not or whether it is on balance a good idea or not. But I know that the proposed bill to establish a $700 billion fund for the government to purchase mortgage-related assets is, as written, a very bad idea. For this reason:
Sec. 8. Review.Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
There are absolutely no safeguards in this bill at all. The only thing that comes close to offering even the slightest accountability is this:
Sec. 4. Reports to Congress.Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
And that isn't much, since there is no procedure in place by which Congress could actually challenge any decision made. I hope Congress doesn't vote for the bill in this form, but I have zero faith in Congress at this point to do what's right. They've rolled over for Bush on every issue to this point, failing to do their job of reigning in the abuses of executive authority at every turn.
And by the way, here's the best line I've seen so far about the bailout, from the consistently great John Scalzi:
Are we socialists yet? No, no. Relax. We couldn't possibly be socialists. Socialists only nationalize successful businesses.
Politics
Comments
I confess that while I can imagine reasons for such a clause, I can't think of any justification for including it. Have any been offered?
Posted by: Morgan | September 22, 2008 9:39 AM
Banks by law require a percentage of reserves held against outstanding loans (aka capital in a narrow sense on this topic, reserves are usually something liquid like money market funds, currency, and I think but am not sure treasury notes and other short-term gov't instruments).
It is my understanding after listening to Sec. Paulson carefully yesterday on two of the morning news shows, that to meet the primary objective of re-injecting liquidity into the credit market, speed is imperative, otherwise credit drys up and your average new borrower can't easily borrow money from their lenders - no one has the reserves neccessary to write loans at any interest rate.
Therefore Paulson is looking to quickly buy these mortagage-backed assets which supposedly have no market in order that the sellers of such assets can continue to purchase more new loans from lenders against their current reserves, which they are increasingly unable to do as payment default rates rise, and the assets themselves are devalued on their books, pushing primary lenders' reserve/debt rates above the legal ceiling which prohibits them from writing new loans (in Investment Banks' case, it is really buying these loans from upstream lenders who need to offload these loans so their reserves allow them to write new loans against their reserves/capital).
Posted by: Michael Heath | September 22, 2008 10:21 AM
So far I can't find any economists who think the Paulson plan is fair to those of us taxpayers who did not cause this problem, is the best way to address the crisis, or does anything to prevent reoccurances of this mess. (Maybe I am reading the wrong blogs.) In other words, if someone were designing a plan to reward corruption and malfeasance in the financial industry, this is the plan they would come up with. Paulson's insistence of a "clean" bill that addresses no long-term problems, does not prevent golden parachutes for those who created the problem, and puts no restrictions or oversight on the Bush administration's implementation trips my cynicism alarm. Fool me once (on Iraq WMD), yada, yada, yada.
My solution? Too detailed for the the margins of this blog, unfortunately, but I would start with the principles recommended by Brad DeLong and Paul Krugman, and with a lower initial funding level.
Posted by: JimV | September 22, 2008 11:21 AM
If we're going the socialist route, then dammit we gotta go all in. No more of this "privatize profit, socialize loss" crap, because I'm tired of paying for it. I want some quid for my pro quo or no dice. Anti-trust laws that eliminate the "too big to fail" scenarios. Laws that give bankruptcy judges the power to reset loan terms of mortgages in default (with guidelines, of course). And give the bailout in the form of equity guarantees to the mortgage holders, don't just buy the crappy paper.
Also, there has to be a provision that if any person who benefited from this bailout ever complains about a capital gains tax again, I get to punch him/her in the nose...hard.
Posted by: Shygetz | September 22, 2008 11:30 AM
Why are you hogging the fun?
I think a line of folks would do just fine.....
Posted by: gwangung | September 22, 2008 11:43 AM
Glenn Greenwald has a scathing review of the bailout proposal over at Salon.
http://www.salon.com/opinion/greenwald/2008/09/20/bailout/index.html
He has a further article on the main page.
Posted by: Reality Czech | September 22, 2008 11:45 AM
I don't have a strong position on the wisdom of this move. I would argue that the optimal way to promote a theory is to openly consider and rebut the strongest falsification efforts against the theory to see if it can withstand such scrutiny.
Here is my attempt:
Paulson claims we teetering on the edge of a credit liquidity meltdown, where Main St. consumers and businessman would be unable to secure loans necessary to go about the normal course of business. If his claim is the primary factor, than why not buy good debt from primary lenders rather than investment banks who are holding bad debt as an asset? Purchasing good loans from traditional lending institutions would be a profitable investment for taxpayers while also allowing these frontline lenders the neccesary liquidity to write the types of Main St. loans Paulson is claiming to be defending?
My solution would then force the Investment Banks to sell their bad debt at market value, which even if it were so low they'd go out of business, it wouldn't hurt market lending liquidity since market lending happens more at traditional banks given that Investment Banks' bad loans are not loans they underwrote, but instead purchased from traditional lending institutions. In effect, the Treasury becomes an investment bank using hindsight to not make the same mistakes the Investment Banks did, this would also reduce the risk of future moral hazard since you are rewarding good performance, not poor performance.
I have not heard anyone address my alternative. My solution may not be optimal, my point is that no solution has had any falsification attempts aired out by Paulson/Bernacke that I've heard, so we just can not judge the worthiness of all our options.
Posted by: Michael Heath | September 22, 2008 11:46 AM
Aaack! Hit post rather than preview, here is a proofed version of the above.
I don't have a strong position on the wisdom of this move. I would argue that the optimal way to promote a theory is to openly consider and rebut the strongest falsification efforts against the theory to see if it can withstand such scrutiny.
Here is my attempt:
Paulson claims we are teetering on the edge of a credit liquidity meltdown, where Main St. consumers and businessman would be unable to secure loans necessary to go about the normal course of business. If his claim is the primary factor, than why not have the Treasury buy good debt from primary lenders rather than investment banks who are holding bad debt as an asset? Purchasing good loans from traditional lending institutions would be a profitable investment for taxpayers while also allowing these front-line lenders the neccessary liquidity to write the types of Main St. loans Paulson is claiming to be defending.
My solution would then force the investment banks to sell their bad debt at market value, which even if it were so low they'd go out of business, it wouldn't devastate market lending liquidity since market lending for Main St.-type loans happens more at traditional banks given that investment banks' bad loans are not loans they underwrote, but instead purchased from traditional lending institutions. In effect, the Treasury becomes an investment bank using hindsight to not make the same mistakes the investment banks did; this would also reduce the risk of future moral hazard since you are rewarding good performance, not poor performance.
I have not heard anyone address my alternative. My solution may not be optimal; my point is that no solution has had any falsification attempts aired out by Paulson/Bernacke that I've heard, so we just can not judge the worthiness of all our options that should be considered.
Posted by: Michael Heath | September 22, 2008 11:52 AM
Michael,
My guess would be that the argument against buying the good loans from the institutions that have good performance would be that you take away from them a source of revenue (from the interest). I'm not saying that I agree with that argument, I just think that it might be what they would claim.
My major problem with this is that not only is the American taxpayer taking the bad loans/debt from these companies, their execs still get 7-8 figure salaries, they still gain when they make good loans, and, on top of it, McCain is still talking about cutting capital gains taxes and corporate profit taxes. If all of these things were implemented, we would literally create an untaxed elite who no longer need to worry about risky investments because we will bail them out. Utterly ridiculous.
Posted by: dogmeatib | September 22, 2008 12:19 PM
It's scary enough that this language has been included in ANY kind of legislation. But it's really freakin' scary to see that anyone would think not only that this sort of thing is appropriate to include in legislation, but even expects it to be passed, and apparently with good reason for expecting to be able to pass it. That's alarming in the extreme.
If this measure gets passed, it needs to be challenged with all possible haste, no matter what other good it may accomplish, for nothing more than the inclusion of this anti-accountability clause. It basically sets someone up to do, literally, whatever he darned well pleases, and do it at public expense, with nobody empowered to stop him -- in fact, every agency is explicitly barred from being able to stop him. Surely that cannot be even remotely sound constitutionally.
~David D.G.
Posted by: David D.G. | September 22, 2008 12:30 PM
Is that clause even Constitutional at all? Hoiw can Congress -- or any other branch or agency -- create an organization outside of the Constitutional system?
This looks like it was designed to: a) give the Executive branch more power and less accountability; b) force the Democratic Congress to cave with not enough time to discuss or articulate a coherent response; and therefore c) make the Democrats look weak and behind-the-curve just in time for the election.
This is almost entirely a Republican failure: their "deregulation for all occasions" ideology led us to this emergency, and now they're scrapping their ideology for a draconian quick fix. And once again, the Republican spin machine is portraying Obama as part of the "old boy network," McCain as the "crusading outsider," white as black, and freedom as slavery. It's despicable and depressing, and it will probably work. And the Republicans will have four more years to reduce America to a third-world theocratic backwater.
Posted by: Raging Bee | September 22, 2008 12:31 PM
This is, to put it succinctly, the biggest swindle in history.
Posted by: TomTallis | September 22, 2008 1:03 PM
"This is almost entirely a Republican failure: their "deregulation for all occasions" ideology led us to this emergency, and now they're scrapping their ideology for a draconian quick fix.
I've already heard Republicans blaming this crisis on the Community Reinvestment Act and the "liberal guilt" that prompted it. In other words, pathological liberals and irresponsible black people are behind the mess.
Reminds me of McCain blaming political correctness for the poor health of American children.
Posted by: Dr X | September 22, 2008 1:42 PM
I've heard a great deal about whether the democrats or republicans are to blame for this mess but why is there no discussion about which company officers are to blame? Why aren't we seeing their pics and hearing the details about their golden parachutes? No doubt, they will be re-hired to destroy another company; but not before they make rich a select few.
Posted by: jls | September 22, 2008 2:10 PM
if all these banks didn't want to be in financial trouble, they'd get off their lazy asses and go make some money like the rest of us. quit sitting around and waiting for the government to take care of them.
whining that the government ~owes~ them and holding their hands out for welfare, it's disgusting. how about some personal responsibility here? instead, they keep spawning their little branches, when they should be keeping their pens in their pants.
don't get me wrong, tho. some of my bestfriends are banks.
:|
Posted by: arin | September 22, 2008 2:24 PM
Jim V,
Speaking of DeLong, this was also interesting:
If there is anything that characterized the predominant attitude among deregulation enthusiasts, and I confess and to having been one of them, it was a lack of skepticism. The market may be right in the long-run, but some pretty catastrophic things can happen on the road to correction.
Posted by: Dr X | September 22, 2008 2:24 PM
Paulsen is apparently unfamiliar with this:
"The term Section 8 refers to a former discharge from the United States military for reason of being mentally unfit for service."
It's from Wiki but I think it's prolly close enough.
Michael Heath:
One of the things I heard the other day on NPR was that the plan proposed by Paulson is essentially a repeat of the mistake made by the Hoover admnisistration. They kept propping up bad banks (and watching them fail, anyway) instead of injecting money directly into the economy via public infrastructure projects. A japanese economist said that Japan followed the New Deal idea (to some extent) after their economy crashed (due to insanely inflated land values and borrowing--sound familiar?) in the 1980's.
Am I missing it, or is no one talking about that?
Posted by: democommie | September 22, 2008 2:36 PM
Someone wiser than me wrote the following. It sure sums up what they are doing.
"Put all the money on the counter...
... don't make a scene, don't press the alarm button, don't call the cops... just let us walk out of here with all your money, and everything will be ok."
Surrrrrrrrrre, Mr. Bank Robber. Whatever you say.
Posted by: ThirtyFiveUp | September 22, 2008 2:39 PM
democommie - I am a fan of public infrastructure investment in times when private capital investment is down. While government is not as efficient at investment projects as private industry in terms of multiplying money through the system as it ripples through labor, goods, and services affected by the project, it does still work and is especially helpful to the economy as a whole when private investments are not being made. If memory serves me, $1 of gov't investment (not expenditure, but an investment like a road) will generate about $3 of money of total GDP. The ratio for private investment is around $5 - $7. There are times however when private investment stalls out. I don't have an economics text book here at work so my numbers might be a bit off, but not too much and the general concept is correct.
The concept of how money moves through an economy, once learned, shows how absurd Bush's stimulus package was this past spring along with Obama's proposal since it adds money at the back-end of that cycle, putting it into the hands of consumers rather than at the start of the investment cycle. I got a hearty chuckle that only Internet porn sites reported a noticeable bump by the Bush plan.
The concept is simple, if a private firm adds a machine tool for example, or the govt starts a road project, they start spending money on goods and services that ripples through the economy, they hire people, those people buy food, bowl, go the dentist, the project requires services, supplies, and generate income like manufactured parts, etc. The bigger the return on capital for the initial investment, the more money is injected into the economy.
The issue Paulson is attempting to get us out of is a different issue, it's about lenders not being able to write new loans where there is demand from both consumers and private business investment, and not YET about our economic growth stalling out, though that is a Paulson concern if the credit market can't support private investment capital demand.
Posted by: Michael Heath | September 22, 2008 3:51 PM
arin - yours is an argument from ignorance.
This isn't about banks being lazy. It's about developing enough liquidity in the market so people who want to borrow money have lending institutions whose reserve requirements are sufficient enough they can underwrite new loans to support the demand for loans that currently exists.
Lending institutions by law can only write new loans if they have sufficient capital to cover a percentage of the loan after funds are dispensed. Lenders can't sell their current loan/assets in the market place in order to have sufficient funds and a reserve ratio sufficient to write new loans.
I have a problem with Paulson's plan, but it doesn't presuppose banks are "lazy". See my 11:52 a.m. post on this thread for my proposal.
Posted by: Michael Heath | September 22, 2008 4:08 PM
Whoosh!
Posted by: Tulse | September 22, 2008 4:30 PM
"arin - yours is an argument from ignorance."
To elaborate somewhat on tulse's terse but eloquent comment, I now have collected enough data (measured in units of "insults") to be quite confident in asserting that sarcasm in blog comments, lacking facial or tonal clues as they do, fail in proportion to how subtle they are.
Although I have to say that in this instance, arin gave enough clues that anyone with a sense of humor should have picked up at least one. Sorry, Mr. Heath - in general I appreciate your comments, but in this instance you blew it. (Unless, of course, tulse and I missed your - in which case ... apologies!)
- Charles
Posted by: ctw | September 22, 2008 5:19 PM
"your" = "your sarcasm"
- c
Posted by: ctw | September 22, 2008 5:22 PM
Michael H,
Forgive arin. Not everyone knows that satire is dead.
Posted by: Dr X | September 22, 2008 6:26 PM
We still haven't paid off the S&L bailout of the 80s. They said it would something like a mere $5 billion. It turned out to be more like $500 billion. Now they say it will be $700 billion (because that sounds better than $1 trillion). But no one knows how much it will really cost. Something tells me it will be 100+ times $700 billion.
Posted by: wheyghey | September 22, 2008 6:56 PM
Do you know what I want to hear from the presidential candidates about this plan?
Fuck.
I want them to say "fuck" on national television. Though I appreciate Obama's ability and willingness to address issues head on with respect for nuance and context, in this case I think the most appropriate response falls along the lines of "Holy fuck! We've got to stop them!"
Consider that there are roughly 100 million taxpayers in the United States, $700 billion works out to $7000 from each of them. That's roughly the equivalent of the federal government sweeping through the streets tomorrow and just confiscating a car from every household.
How can any response to such a plan avoid profanity and remain sincere?
Posted by: DaveL | September 22, 2008 8:23 PM
Dr. X wins. Thread over.
Posted by: Troublesome Frog | September 22, 2008 8:37 PM
arin:
It is a simple word substitution code, "black" for "bank". yes?
Michael Heath:
I don't disagree with your premise, but Paulson's plan seems to simply shift a burden from WS to Main Street. If we're going to buy all the debt, we should get what the debt is attached too. WS should not be able to simply walk away from their obligations. One of the most odious pieces of legislation passed in recent memory was that which, essentially, immunized the usurers at companies like Capital One from having their customers loans forgiven in a bankruptcy. WS should certainly be as liable as the poor schlub who has NO idea what he's doing when he borrows against his own interests.
I agree that the "economic stimulus package" is a joke. It's the current political equivalent of Rome's "bread and circus" program--not that I'll be returning the money.
Posted by: democommie | September 22, 2008 9:33 PM
arin - my apologies. The "whoosh" was appropriate. Great job, ashamed I still didn't get it even after two others noted it was satire to me. I thought it was kind of weirdly worded. . .
democommie - see my 11:52 a.m. post, I proposed we NOT buy the Wall Street bad assets, but instead consider purchasing traditional lender's good debt in order to create enough capital to provide liquidity in the credit markets to typical Main St. borrowers. We bring liquidity to the market, and the employees and investors of the poor performing investment banks do not benefit from taxpayer relief.
I think this capital infusion should injected as a form of equity in the lenders given the Treasury is not qualified to actually administrate Real Estate debt.
wheygey - I believe the S&L bailout cost $160 billion, of which the taxpayer covered $124 billion. I'm not sure if that number covers the interest expense or not given those taxpayer expenditures were borrowed and contributed to a significant portion of the budget deficits in the very early 1990s.
Posted by: Michael Heath | September 22, 2008 10:41 PM
Quoth Dr X:
It's hard to avoid this conclusion when1. Stated Income ("Liar") loans were supported by the left to allow e.g. illegal aliens to buy homes.
2. Conservatives have been warning about the loosening of lending standards required by CRA for at least ten years.
3. These loose standards could not have done much damage without government policy creating a market for the shaky mortgages through FNMA, etc. Government policy was a key element of the failure.
4. Left-wing legislators like Barney Frank were among the most vocal defenders of Fannie Mae and Freddie Mac right up until they collapsed.
To add insult to injury, Barney Frank has been quoted saying that the GSE's would not end up costing the taxpayer anything. We know how much that promise was worth, don't we?
Plenty of other people benefitted from this scam (builders, the Mexican government through remittances from illegals working in construction), but CRA and its requirements to lend to people with a high likelihood of default is responsible for a lot of the mess.
Posted by: Engineer-Poet | September 23, 2008 8:46 AM
Engineer-Poet: CRA-mandated loans account for about a quarter of these failing mortgages.
Why, exactly, should we believe the CRA had anything to do with this? Especially when you are grossly misrepresenting what CRA requires?
Posted by: Michael Ralston | September 23, 2008 9:32 AM
"1. Stated Income ("Liar") loans were supported by the left to allow e.g. illegal aliens to buy homes."
And Hitler supported vegetarianism. Stated income loans were created for millions of small American business owners. But thanks for pointing out that illegal immigrants are also being blamed for the meltdown along with black people.
2. Conservatives have been warning about the loosening of lending standards required by CRA for at least ten years.
All conservatives, only conservatives, who? If conservatives were warning of this for ten years, why did the Republican congress do nothing between 1998 and 2006? And if I find two liberals who warned about these loans, I supposed I can say that "liberals have been warning about loosening of lending standards for ten years."
3. These loose standards could not have done much damage without government policy creating a market for the shaky mortgages through FNMA, etc. Government policy was a key element of the failure.
Fannie Mae has been around since the 1930s and has been a private government supported corporation since the 1960s. Fannie Mae isn't about blacks and liberal guilt and Fannie Mae was not the problem per se. And I would point out, again, that from 2000-2006 we had a Republican President with a Republican Congress.
I'm not arguing government policy had no hand in this, but it's ludicrous to lay this meltdown off to liberal guilt about black people. The Republicans had ample opportunity to do something about the situation just as Democrats did. Lots of people had their hands in the pot.
Posted by: Dr X | September 23, 2008 9:48 AM
So when average individuals act badly (like mug people) it is their personal responsibility, but when giant financial institutions act badly, it is due to lack of oversight? I am flummoxed at how rapidly conservatives have embraced government regulation and outright welfare for Wall Street, when they are so opposed to such in other domains.
Posted by: Tulse | September 23, 2008 10:05 AM
Michael Heath:
I left a comment earlier, it's gone.
I did read what you said earlier, but it disappeared into my fevered brain. If we (you and I and the rest of the taxpayers) are going to help, then, yes, let's help the folks who deserve it.
I've been listening to "The Diane Rheem Show" and just heard a "financial expert" say that tying the bailout to limiting of executive compensation was bad idea and would result in the program not working. My reaction is, "Horsehit". Every time big business gets it tit in the wringer they blame market forces, regulation, nefarious furrin' cabals, or someone, anyone, but themselves. I am sick to death of hearing about how these people deserve anything other than derision and contempt. Fuck them. A fair number or them should be going to jail, but we will not be seeing that happen--besides our prisons already have enough people who've written bad checks, albeit for a lot less money.
Posted by: democommie | September 23, 2008 10:34 AM
I really don't understand the logic of this -- is the claim that companies would rather go bankrupt than rein in their CEOs' compensation? And that the company stockholders would go along with this, and lose a substantial portion of their investment? This is fear-mongering of the first water.
Posted by: Tulse | September 23, 2008 11:04 AM
A) You mis-state what CRA requires.
B) CRA banks have LOWER rates of defaults than other lenders.
C) The highest rates of subprime defaults are in middle to upper middle class suburbs, areas where CRA doesn't lend.
In other words, the facts do not support your prejudices.
Posted by: gwangung | September 23, 2008 11:26 AM
From what I understand, Paulsen's proposal is to buy undervalued mortgage-backed assets and hold them until the price comes back up. These assets aren't completely without value -- they're just worth less than they were originally selling for. But now no one wants to buy them at all.
Ultimately, the federal government is most likely going to make money on the deal. Some mortgage holders will default, but a great many won't. But now that there's an irrational aversion to buying the securities backed by those mortgages, Paulsen is proposing that the government buys them dirt cheap and holds them until confidence is restored and the price comes up again. Then the government sells and can probably make a few hundred billion and save the economy from further damage in the process.
A little more accountability (for Paulsen in particular) in the bill would be nice though.
Posted by: Dan L. | September 24, 2008 1:49 PM
Let's assume for the moment that Paulsen and company know better than the market does what the actual price of those assets should be. Given the current climate, that's not unreasonable. Your post seems to be assuming:
1) That the value of "dirt cheap" is still enough over the current market price to sufficiently recapitalize undercapitalized banks.
2) The actual value of the paper is high enough that, if the banks were able to hold onto it without going under in the mean time, the actual loss the holders would take is small enough that they wouldn't go bust.
I don't see a lot of support for either of those contentions. Part of the problem is that these companies are operating on razor thin margins and even a relatively small decline in the value of those securities is enough to wipe them out. In order to truly rescue them, Treasury will probably have to pay a much higher rate than the actual value of the securities. If it's selling for $0.20 on the dollar and it is actually worth $0.40 on the dollar, the Treasury buying it for $0.35 on the dollar only helps you if you were still able to absorb a 65% haircut on your "safe" investments.
It seems much more likely to me that Paulsen will have to buy those securities at a price pretty darned close to their original market value and take a sizeable loss for the tax payer in the process. I'm not buying into their new "we're going to cause price discovery" argument.
I'd trade some accountability for the potential for equity in the companies in question if the deal goes south. Dodd's plan seems much more sensible in that regard. You can sell your crap to the government, but if they overpay you, you make it up in equity. That adds some protection to the tax payers and keeps the bailout from being a straight-up offer of free money for idiots. It's a bailout. It shouldn't be fun or free.
Posted by: Troublesome Frog | September 24, 2008 9:12 PM