[Vision2020] [spam] Debate about the bailout

[Jeff Harkins]

While most of us are still trying to fully 
comprehend the fiscal impacts of the proposed 
"bailout", many also realize that time may be of 
the essence here.  If the credit markets are 
constipated, then money capital can't flow to 
those that need it - hence payrolls may be 
skipped, payables left open, loans defaulted, 
etc.  This appears to be what Wall Street is focusing on.

A growing number of experts are now suggesting 
that rather than a direct intervention into the 
"pricing of assets" (purchasing mortgages), the 
Fed should provide loans and loan guarantees to 
troubled institutions.  This strategy has proven 
successful in past economic crises (Chrysler and 
S& L's) and lowers the initial investment of tax payer dollars.

It also provides an immediate return on the money 
put into play (interest).  It provides a means 
for the pricing of assets to continue to be 
driven by supply and demand, risk and 
return.  For those with less savvy, it would be 
much akin to Dad co-signing his son's loan for a car (or Mom and daughter).

It properly tasks the companies that are in 
trouble with choosing their strategies for 
survival.  Some won't make it (and shouldn't), 
but others will - and that will provide the means 
for long-term stability.  Markets will clear - 
investors will seek to purchase good assets at fair prices.

All that said - limits on executive compensation 
must be part of the provisions of the loans granted to troubled entities.

As I understand the situation, this is what the 
House Republicans have been advocating.  I just 
heard that some House Dems are also considering this.

Loans and loan guarantees mitigate the immediate 
investment of $ 700 B and buy time to fully consider the fiscal needs.

By the way, efforts to throw the blame on the 
accounting rules are bunk - Mark to market was 
the means by which this whole house of cards was 
revealed.  Had we not had mark to market rules in 
place, this whole mess might have been undetected 
for some time and the consequences even more severe.


At 07:47 AM 9/26/2008, you wrote:

>The nation has tried to rush to a bailout 
>solution based on the seeming consensus that the 
>financial markets, credit in particular, will 
>collapse or freeeze to our great and lasting 
>detriment if a "deal" is not obtained this week.
>
>Senator McCain "suspended" his campaign and 
>refuses to participate in tonight's scheduled 
>debate unless the deal, or at least an agreed 
>structure of the deal, is reached before it is 
>time to fly to Mississippi for the debate.  He, 
>too, seems to accept the concept, touted by 
>bureaucrats and Wall Street economists alike and 
>reiterated by politicians of all stripes, that 
>an immediate agreement upon a deal is absolutely crucial.
>
>Â
>
>We are trying in one week to structure and agree 
>upon the largest financial deal in our 
>history.  George Will aptly termed this 
>phenomenon as acting like "lemmings in reverse," 
>as everyone rushes pell mell away from the 
>proverbial cliff, from which lemmings suppose! 
>dly leap  as they blindly follow the lemming 
>in front of them.  It seems to me that getting 
>a deal of this magnitude done well in a 
>considered fashion is more important than 
>getting it done this week.  That idea of 
>"getting it right" seems to be taking 
>root.  Note the article reprinted below, which 
>talks at length about the split in "expert" 
>opinion on how to structure the bailout.Â
>
>All that being said, it appears that a deal 
>may not be reached this week due to the 
>complexity of the situation and well meaning 
>politicians, conservatives and liberals alike, 
>now struggling to "get it right."Â  In my 
>opinion, debate on this issue and "getting it right" is paramount.Â
>
>For me, the importance of "debate" on the issue 
>also means getting the two presidential 
>candidates discussing it openly in public for the nation to hear, tonight.Â
>
>If a deal in Congress is reached today in time 
>for the deb! ate tonight, wonderful.  If a deal 
>is not reached, I think Senator McCain ought to 
>hop on that plan and attend the scheduled 
>debate, notwithstanding his offer to "put the 
>nation first" by sitting in 
>Washington.  Certainly, getting the deal done 
>right in Congress is important.  But skipping 
>an hour and a half presidential debate -- when 
>the financial markets will be closed for the 
>next two days -- makes no sense to 
>me.  Skipping the debate does not materially 
>advance getting the deal done right in a time 
>frame that matters.  We need to hear what 
>Senator McCain has to say, and why his ideas 
>are better or worse than Senator Obama's.  As 
>debate grows about the wisdom of the structured 
>bailout deal being proposed, the need for debate 
>by our presidential candidates likewise grows.
>
>Bruce Livingston
>
>Away from Wall Street, Economists Question Basis of Paulson's Plan
>
>By Neil Irwi! n and Cecilia Kang
>Washington Post Staff Writers
>Friday, September 26, 2008; A01
>
>The Bush administration's pitch for a sweeping 
>bailout of the financial system has centered on 
>two simple premises: that the economy could 
>suffer a crippling downturn if action is not 
>taken very quickly and that this action should 
>consist of the government buying troubled 
>mortgage securities from banks and other institutions.
>
>But many of the nation's top economists disagree 
>with one or both of those ideas, even as many 
>top political leaders have swung behind them.
>
><http://www.washingtonpost.com/ac2/related/topic/Wall+Street?tid=informline>Wall 
>Street economists have mostly endorsed Treasury 
>Secretary 
><http://www.washingtonpost.com/ac2/related/topic/Henry+M.+Paulson?tid=informline>Henry 
>M. Paulson Jr.'s plan, or a variation thereof.
>
>But almost 200 academic economists -- who aren't 
>paid by the institutions that could directly ! 
>benefit from the plan but who also may not have 
>recent practical experience in the markets -- 
>have signed a petition organized by a 
><http://www.washingtonpost.com/ac2/related/topic/University+of+Chicago?tid=informline>University 
>of Chicago professor objecting to the plan on 
>the grounds that it could create perverse 
>incentives, that it is too vague and that its 
>long-run effects are unclear. 
><http://projects.washingtonpost.com/congress/members/s000320/>Sen. 
>Richard C. Shelby (Ala.), ranking Republican on 
>the Budget Committee, brandished that letter 
>yesterday afternoon as he explained his 
>opposition to the bailout outside a bipartisan 
>summit at the 
><http://www.washingtonpost.com/ac2/related/topic/The+White+House?tid=informline>White 
>House. The petition did not advocate any 
>specific plan, including that offered yesterday by House Republicans.
>
>Economists tend to agree that the nation's 
>economy is at serious risk as the flow of credit 
>threatens! to freeze. Just yesterday, the 
>interest rate at which banks lend to each other 
>rose steeply, as it has every day this week, 
>suggesting that lenders are hoarding cash. 
>History shows that when this happens, a broad 
>economic crisis can follow, for instance, the 
>Great Depression and Japan's decade-long recession in the 1990s.
>
>"If nothing is done, the potential for these 
>markets to seize up in a big way is definitely 
>there," said Frederic S. Mishkin, an economist 
>at 
><http://www.washingtonpost.com/ac2/related/topic/Columbia+University?tid=informline>Columbia 
>University who was a 
><http://www.washingtonpost.com/ac2/related/topic/U.S.+Federal+Reserve?tid=informline>Federal 
>Reserve governor until last month. "When you 
>look at the history of these crises, when things 
>spin out of control, the cost to fix it later goes up exponentially."
>
>But many others with a deep theoretical 
>knowledge of finance and experience in 
>government are ske! ptical of the structure of 
>Paulson's plan -- and the speed with which it has been crafted.
>
>The critics can be roughly divided into two 
>camps. One group thinks money should be directly 
>infused into banks, which should allow it to 
>trickle down through the financial system to 
>borrowers. A second group thinks the government 
>should buy individual mortgages, thus helping 
>ordinary Americans more directly, with the benefits trickling up to the banks.
>
>The plan promoted by Paulson and 
><http://www.washingtonpost.com/ac2/related/topic/Ben+Bernanke?tid=informline>Fed 
>Chairman Ben S. Bernanke is somewhere in 
>between: buying up packages of mortgages and 
>hoping that the benefits spread both up to banks and down to households.
>
>"The plan is a trickle-down approach from banks 
>to Main Street," said Alan S. Blinder, a 
>professor at 
><http://www.washingtonpost.com/ac2/related/topic/Princeton+University?tid=informline>Princeton 
>University. "But if you! reduce the flood of 
>foreclosures and defaults" -- which he would 
>have the government do by buying loans directly 
>and then renegotiating the terms -- "it will 
>make mortgage-backed securities worth more."
>
>That might help ordinary Americans but would be 
>extremely difficult to administer. The 
>government would have to make decisions on the 
>foreclosure and resale of individual houses all 
>over the country. Still, many economists with 
>left-of-center political views favor some 
>variation of this approach to the plan endorsed by Bush.
>
>"There is a kind of suggestion in the Paulson 
>proposal that if only we provide enough money to 
>financial markets, this problem will disappear," 
>said Joseph Stiglitz, a Nobel Prize-winning 
>economist. "But that does nothing to address the 
>fundamental problem of bleeding foreclosures and 
>the holes in the balance sheets of banks."
>
>Coming from the other direction, more 
>conservative economists worry that by having t! 
>he government buy mortgage securities, the 
>Paulson plan would manipulate prices in that 
>market without getting at the nub of the 
>problem: that banks do not have enough capital 
>and are having difficulty raising any on private markets.
>
>In a sign of how the debate over the economy has 
>shifted in recent weeks, some conservatives, 
>even as they argue for a relatively limited 
>government role, are calling on the government 
>to invest public money in private banks.
>
>"The root of the issue is recapitalizing banks," 
>said Glenn Hubbard, dean of 
><http://www.washingtonpost.com/ac2/related/topic/Columbia+Business+School?tid=informline>Columbia 
>Business School and a former chairman of 
><http://www.washingtonpost.com/ac2/related/topic/White+House+Council+of+Economic+Advisers?tid=informline>President 
>Bush's Council of Economic Advisers. "That could 
>be done more efficiently through the government 
>injection of preferred equity. Then the market 
>coul! d figure out the prices of the assets."
>
>Many of these critics don't care for the 
>assumption behind the administration's plan that 
>the market is now pricing these mortgage 
>securities incorrectly, a problem that the government intervention aims to fix.
>
>"The premise appears to be that the market is 
>irrationally pessimistic," wrote Greg Mankiw, a 
><http://www.washingtonpost.com/ac2/related/topic/Harvard+University?tid=informline>Harvard 
>University economist and another former Bush 
>economic adviser, on his blog this week. "That 
>might be so. Nonetheless, one has to be at least 
>a bit skeptical about the idea that government 
>policymakers gambling with other people's money 
>are better at judging the value of complex 
>financial instruments than are private investors gambling with their own."
>
>Some conservatives are now arguing, notably, 
>that the government should be investing in banks.
>
>Many economists fault the Bush administration 
>and C! ongress for moving so quickly on the 
>bailout package without allowing more time for 
>debate. That sentiment was reflected in the 
>petition organized by John Cochrane of the 
>University of Chicago. (None of the economists quoted here were signatories.)
>
>"I totally disagree that this needs to be done 
>this week. It's more important to get it right," Blinder said.
>
>Moreover, some economists said the proposed $700 
>billion may not be enough to address all the 
>problems stretching across the financial 
>landscape. "You only show up if you can win, and 
>this is not that package," said Simon Johnson, a 
>professor at 
><http://www.washingtonpost.com/ac2/related/topic/Massachusetts+Institute+of+Technology?tid=informline>Massachusetts 
>Institute of Technology and former chief 
>economist at the 
><http://www.washingtonpost.com/ac2/related/topic/International+Monetary+Fund?tid=informline>International 
>Monetary Fund. "This cannot be the ultimate, 
>deci! sive solution if you are not addressing the underlying cause."
>
>The plan is short on details, instead giving the 
>Treasury secretary wide latitude to determine 
>how to execute the purchases of mortgage securities.
>
>"I'd like to see how they see the evolution of 
>an end game. There are still many questions," 
>said Myron Scholes, a retired professor at 
><http://www.washingtonpost.com/ac2/related/topic/Stanford+University?tid=informline>Stanford 
>University and Nobel Prize winner. He said how 
>long the government holds the assets and how 
>they are later resold would be the keys to determining whether the plan works.
>
>Â
>
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