The Dartmouth investment banker and the Princeton professor.
It would be interesting to trace the origin of the term "bailout" as applied to the Bush administration's plan since the phrase has locked in a specific framing of the issue that inflames populist anger and caters to House Republicans' efforts to exploit the situation for political gain.
Of course, a "bailout" is not how an economist is likely to view or describe the proposal. An alternative description unlocks a very different perception and understanding. The bailout triggers thoughts rescuing individual wealthy bankers who got greedy. The term "economic surge" on the other hand, would activate thoughts of jump starting an economy that is collectively a stuttering engine.
From an article at this morning's Politico.com:
The cost debate illustrates just how nuanced the massive intervention will be. Paulson has often stumbled this week when trying to describe its intent, and the clearest voice has been Bernanke, a former college professor who casts the whole effort as an unprecedented experiment in "price discovery" that will add not just capital but also precious knowledge to jump-start the credit markets.
With the bursting of the U.S. housing bubble, mortgage-related securities are caught in a vicious downward cycle, commanding only "fire sale" prices, Bernanke says. The government purchases, through a series of novel auction mechanisms, will help the market value these assets, he says. And this could be the spark needed to get markets working and the economy's engine turning over again.
This explanation is very different from the "bailout" imagery that surrounds the debate. And the great challenge for both sides has been to find some path in between these two poles -- able to satisfy the anger voters feel toward Wall Street but also leaving enough room for Bernanke's experiment to function.
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But will it work?
The problem is that those who have been noting the scope of the problem have been much more accurate about forecasting the state of the economy than Paulson or Bernake. This increasingly doesn't look like a hiccup caused by natural business cycles of an otherwise strong economy, but rather a flimsy tower of heavily leveraged investments based on the collateral of terrible loans valued at market bubble prices. Couples with the corruption and incompetence of the past 8 years, I don't think anyone is giving this administration or anyone appointed by it the benefit of the doubt anymore.
Marketing this as an "engine restart" instead of a "bail out" only assumes that the engine has merely seized, as opposed to tearing itself apart from shoddy construction and maintenance, shedding the propeller and the last of the fuel.
I find the massive opposition to the plan is a blunder of group moral reasoning about fairness and culpability. For want of a nail, the kingdom was lost...
The seize is a good assumption, for if its wrong there is nothing to do and we are all dead men walking. That's an argument for taking action now though, time is the one thing we don't have. This isn't a nebulous threat from Iraq however, all the financial data is there on the net and on CNBC quoting the various financial spreads in the credit markets.
Doing nothing will almost certainly lead to a systemic failure sooner rather than later. Credit to the financial system, like blood to the brain, can only be blocked for a short time before really bad things start to happen like unconsciousness, irreparable damage and finally death.
I agree this "rescue the broken system itself in order to buy time to fix it" plan has been poorly framed from the start. I think that was a huge blunder on Paulson's part and is a major cause for the uninformed to mistaken about what this plan is trying to address.
At the very least, in either deal/no deal scenario, the taxpayer is a risk and in doing nothing, will almost certainly suffer far greater than adopting the plan. It really takes very little mental bandwidth to see this, unless one denies the systemic risk like one might deny global climate change.
I'm frightened we can let moral indignation allow us to be economic suicide bombers (by opposing the rescue effort and supporting the self righteous lynching of the greedy ) just to get some scapegoats out of the game.
NO Bank in a fractional banking system no matter how large can handle a run on its deposits. The FDIC only insures $100k per account, there are a lot of deposits that are being pulled which are above that threshold. This is a silent run that could kill many more banks. No long lines are needed. Look at t-bills, that reflects the panic run deposits. When the FDIC goes broke restoring failed bank deposits that a JPM et al won't buy, the taxpayer will have to come to the rescue anyway.