(2008-09-22) Massive Finance Bailout

A massive Bail-Out of the finance industry is being proposed. (Credit Crisis 2008)

There's some debate, though I'm not sure what the Governance process is.

Non-US banks and Hedge Fund-s are getting included! Yet somehow the price tag hasn't changed.

• In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy. "It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."

And this apparently supports an existing Bail-Out proposal for AutoMobile makers.

John Robb is Framing this as a Wisdom Of Crowds/Concentration Of Power issue. We moved more economic power from hundreds of millions of wage-earners (Middle Class) to a much small number of money shufflers, and they screwed it up. He sees this as leading to a Hollow State. Philip Bobbitt got it wrong in his book, "The Shield of Achilles." The prosperous Market State he envisioned through constitutional reform isn't possible.

Decisions by the Treasury 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. Hmm, that's some interesting Rule Of Law there...

Shouldn't the DotCom industry have gotten a Bail-Out? Imagine if Jeff Bezos had been a gummit "Secretary" in 1999....

Darn, too late to TradeMark Dude Wheres My Bailout - still a good T-Shirt idea...

• and you could give a "TooRichToFail" T-Shirt to your favorite Investment Bank CEO.

Oh boy, Congress is supposed to adjourn the end of next week. That leaves lots of time for careful consideration.

• Press Secretary Tony Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.

In case you forgot, a Bail-Out, like all government financial transactions, is a transfer of wealth from some people to others. If you look around the (poker) table, and can't tell who the Suck Er is, then it's probably you. img

• note it's not just individuals who will pay this price. It's also businesses (who pay taxes), including banks that stuck to their core business.

  • John Allison, CEO of BB&T, said This is a housing-value crisis. It does not make economic sense to purchase credit-card and automobile loans as part of the bailout.

Steve Landsburg notes

• the Great Depression was caused more by bad Money Supply handling than from bank failures

• borrowers and lenders won't disappear, they'll just have more trouble finding each other. But we have some new technology to help them.

Kenichi Ohmae thinks the plan doesn't go far enough. He called for a $5 trillion "international facility'' to be made available to financial institutions. The system could be modeled on one used by Sweden during its banking crisis in the early 1990s, he said... Ohmae compared the current financial crisis with Japan's 15- year economic decline that began in 1989. Both started with a property bubble, which wiped out companies' equity when it burst, and like in Japan, the current one could lead to escalating bankruptcies as banks worried about their own survival rein in lending, he said.

Credo Action has an anti-Bail-Out petition you can sign.

A number of economists have signed their own anti-bailout petition.

Glenn Hubbard also objects.

There's a protest this Thursday at 4pm.

Sept24: John McCain aims to delay the coming debate and "suspend" his campaign until this is resolved.

Both candidates basically support the plan: they say they want various improvements to it, but I'll bet little of that goes in, or really gets followed, and they'll go along. Hmm, sounds like the Patriot Act.

David Brooks says And lo and behold, a new center and a new establishment is emerging. The Paulson rescue plan is one chapter. But there will be others. Over the next few years, the U.S. will have to climb out from under mountainous piles of debt. Many predict a long, gray recession... If you wanted to devise a name for this approach, you might pick the phrase economist Arnold Kling has used: Progressive Corporatism. Brooks seems to think that's a good thing. Kling does not - I guess it goes down easier than "liberal Fascism."

Arnold Kling wonders whether the credit markets are un-naturally bad in anticipation of the Bail-Out. If you sell this week and take a big loss, you will look pretty stupid if there is a bailout next week where comparable securities fetch much higher prices. He doesn't like the plan. Partially because - We got here because financial executives took on mortgage credit risk without understanding what they were doing. Some of them were new to the business, like the high-flying Wall Street firms who entered the industry during the boom. Some of them thought they were insulated from risk, because of new derivative hedging instruments. Some of the executives never belonged in the business in the first place, including Dick Syron at FreddieMac, who in 2003 took over a firm where there was lots of knowledge of mortgage credit risk and proceeded to flout the warnings of experienced middle managers and the Chief Risk Officer about the firm's plunge into subprime lending. Congressional and Administration meddling in support of "affordable housing" played a role, and those folks are still around working on the latest legislation.

Alex Tabarrok questions whether there's really a Commercial Lending crunch. And suggests a different approach if there is one: stimulate savings by permanently eliminating taxation on IRA contributions made in the next 12mo.

Karl Denninger assembles more anti-Bail-Out sentiments, including the CBO (though their logic is freaky itself).

Local banks appear healthier than the big banks, and are getting fresh deposits as savers seek safety (Flight To Quality).

Sept27: no deal yet, but supposedly new progress.

Mark Thornton gives an Austrian School alternative.

Sept28: a deal supposedly has been made. But (a) no details have been released, and (b) Already staffers for lawmakers are backing away from the notion that this is a final agreement, describing it as a "framework" for an agreement.

• Nouriel Roubini says this structure of rescue is unusual and has poor odds of success.

• Henry Blodget digs into the details.

• the deal fell through on Monday.

• Bush has already managed to convince the American people to trust him to do something radical, without him really spelling out the reasons why - in Iraq. Now, no-one trusts him, which means that no-one really trusts his bailout package, which means there is no party unity, which means that the bailout plan can't weave its magical confidence spell.

Is Henry Paulson protecting his Wall St NewClass brethren? People who study Income Inequality have postulated that the New Class members atop the FinancialServices sector are a bigger reason for the rise in income inequality than their much-abused New Class brothers, corporate CEO-s... From 1998-2006 (the only years in which I have data, although I'm confident the pattern has held good for far longer than that), the finance industry, including commercial and investment banks, savings & loans, private equity firms and insurers (other than health insurers) has held the the Numero Uno spot in the political influence game. (Lobbyist)

Henry Blodget makes his own recommendation, coming from John Hussman. Here is a broader overview.

Oct2: Arnold Kling summarizes what he sees as the cause of the Crisis.

Oct3 update: the House passed the revised Bail-Out passed Wednesday night by the US Senate - basically the same as the original plan, but with lots of Pork Barrel crap added. Very impressive, gentlemen. (Though I'll probably benefit from the adjustment to AMT.)