Supply Side Economics Meets a Bailout

I finally figured out what the underlying philosophy for the banking bailout is (other than TEH STOOPID): it's supply-side/trickle down economics. First, the latest insult by way of Chris in Paris (italics mine):

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/29/AR20081…

U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years.

The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don't serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.

Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends -- or conversely, why banks that need government money are still spending so much on dividends.

"The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program," said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.

The Treasury plans to invest up to $250 billion in a wide swath of U.S. banks in return for ownership stakes, which the government will relinquish when it is repaid.

Among other restrictions, participating institutions cannot increase dividend payments without government permission. They also are barred from repurchasing stock, which increases the value of outstanding shares.

The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury's investment over the initial three-year term.

Chris asks:

Why is there so much fear about having a come to Jesus with the banks?...Wow. 52% of the bailout for dividends. What was Paulson thinking?

I wondered that myself. A good null hypothesis with the Bush Administration is always incompetence and greed, but I think there's more going on here.

If you've followed this closely, time and time again, you keep reading about the Bush Administration's intense dislike and fear of telling banks--even those it partially owns--what to do. This administration is so ideologically terrified of the government telling bankers what to do (such as not paying bonuses to those who wiped out the last four years of profits) that they have fallen back on a 'supply-side'/ trickle down ideology: if we throw enough money at banks, they'll have to lend some of that money. If this sounds anything like cutting wealthy people's taxes in order to stimulate the economy (even though much of that money go into their bank accounts and isn't spent), well.... I'm sure if we throw enough money at the idiots who crashed the economy, they'll figure out something productive to do with it. Aren't you?

This is socialism for the wealthy. All the while, Republicans are running around screaming about how giving lower-middle class and working poor people a tax cut is socialism, and meanwhile they've turned an emergency nationalization into a giveaway.

What makes this all the more galling is that, while the Bush Administration won't exercise the responsibilities of ownership due to a terror of government interference in the economy, they will infringe upon our civil liberties at the drop of a hat.

Tuesday can't come soon enough.

More like this

From href="http://londonbanker.blogspot.com/2008/09/quotable-on-bank-balance-sheets.html">London Banker: "The problem with financial institution balance sheets is that on the left hand side nothing is right and on the right hand side nothing is left." It's pretty obvious that financial…
A friend cc:ed me on a letter to his Congressman, and I think he's basically right about the Wall Street bailout. He writes Congress: Please say NO. The Bush Administration's proposed bailout plan is overly broad, vastly too expensive, and lacks oversight and control that is absolutely necessary…
...I'm sure this will work out just fine: The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government…
It's economics time again. I hate economics. I find it hopelessly dull. But apparently my style of explaining it is really helpful to people, so they keep sending me questions; and as usual, I do my best to try to answer them. Even if I don't particularly enjoy it. So people have been asking me…

That's not entirely as bad as it seems (it is bad enough). By taking an equity position in the banks, the Treasury Department becomes a recipient of those dividends.

Say, if the TD re-capitlize a bank by taking 20% of its shares, it will receive 20% of the dividends. That how the bailout is supposed to repay itself, some day. It is also hoped that the banks would buy off the government stake, at some point.

But I agree with you, the dividend money would be MUCH better used as bank loans right now.