Some random thoughts on the state of the econopocalypse.
First, Kevin Drum responded to those who panned Tim Geithner’s decision to basically pay banks whatever they want for crappy mortgage assets.
This is all true, but it’s a little too glib. After all, if markets can overvalue assets on the way up — and obviously they can — then they can also undervalue them on the way down. There’s a pretty good chance that the toxic waste in question really is worth more than the market is currently willing to pay for it.
Speaking of glib, as much as I normally love Drum his point here essentially boils down to postmodernism. How can we know that mortgage-based derivative securities don’t have some hidden value? How can we know that derivative securities are not themselves a linguistic construct with no more transferable meaning than a flying, numenous being of spaghetti and sauce? I suppose at gunpoint I would admit that any number of scenarios are theoretically possible.
That said, every real indicator suggests that the best mortgage securities will pay off at pennies on the dollar and much of the rest are a rounding mistake away from worthless. One of the magical characteristics of these securities is the extent to which their value evaporates in a market where home values fail to grow. Taxpayers will almost certainly take a bath on any plan that guarantees private buyers against losses or employs some other clever but functionally equivalent bailout scheme.
If we get past the moral hazard aspect of insulating major firms from their own bad decisions (note: not ready to do that), I still do not understand why anyone regards a plan based on gauzy wishful thinking as more “serious” than the Swedish nationalize-sell-return to work approach. Snark at sites like Atrios about Tim Geithner’s martini pals sounds more credible when this is the best plan he can offer.
On a related note, Ben Bernanke.
Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.
To rephrase shorter and less charitably, the current and future Fed Chair takes “too big to fail” non-bank institutions as a given and wonders how government might change itself to better serve them. Does that strike anybody else as precisely the wrong perspective? There is no reason why the government should make a habit of saving investment firms like Goldman Sachs and Merrill Lynch. If we’re going to nationalize risk then we might as well nationalize the gain and call ourselves Soviets.
Contra Bernanke, the normal person perspective would ask how we can structure the financial industry so that an awfully run firm can fail (that is the “free market”, kids) without opening the seventh f*cking seal. The idea that government needs to figure out how to accommodate too-big-to-fail cowboy firms is, to put it mildly, batshit crazy. Government needs to ‘wind down’ over-leveraged firms until they’re not too big to fail any more. If there’s any free time after they manage that, government next needs to find a safe place to stash any moron who still thinks otherwise before said moron goes Galt with the department budget or staples his dick to the wall.
***Update***
Maybe my reaction to Ben Bernanke misinterpreted his point. It’s possible, I’m pretty sleep deprived and only mostly sober. If his point is that the government needs a strategy to wind down too-big-to-fail (TBTF) cowboy firms until such an entity does not exist any more, then selah.
However, even giving Bernanke the most positive spin I still think that he sees the issue wrong. The problem is not that the government doesn’t have a plan to wind down failed TBTF’s; the problem is that such firms exist at all. As soon as we acknowledge that a firm can’t fail without dragging the country with it we give the firm blackmail power over the national economy. We need a new round of antitrust-type laws that trigger as soon as a firm gets big enough. Ideally we can split up [Update: or de-leverage or whatever] a group like AIG before its failure turns entire zip codes into weedy forbidden zones.
Ninerdave
ouch!
Llelldorin
Actually, Bernanke’s comment just sounds like the 87-word version of exactly what you said. He’s saying that there isn’t a legal framework in place to pull the nationalize-restructure-sell trick for nonbanks.
If a bank gets close to failure, the FDIC can seize it, create a nationalized "bridge bank" like the "IndyMac Federal Bank (FSB)" that’s currently handling the remnants of IndyMac’s business. There isn’t any legal structure in place to do that with a nonbank like AIG—they can only go bankrupt (financially equivalent to "seas of blood and rain of frogs"), or the government can spray money at them. That’s what he means by "safely winding down"–a bank wouldn’t be too big to fail if the government to manage a controlled breakup.
Brandon T
But Bernanke talks about this fund specifically as a way to wind down firms that ARE too big to fail. I mean, that’s what the FDIC does.
I might be reading more into it than ought to be, but here’s how I see it: occasionally we will end up with firms like AIG, which come to occupy a critical place in the economy that we didn’t expect. Sure, you can structure financial regulations in such a way to prevent this from happening, but at some point you can’t be totally sure your regulations will forsee every eventuality.
Now, personally, I think the proper way to deal with this is beefed-up antitrust laws (e.g. corporation x cannot consume more than x% market share w/out being broken up), but I’m not surprised that people like Bernanke would see this as micromanaging the economy.
Llelldorin
The site isn’t letting me edit that last comment. If the government could manage a controlled breakup, of course. He’s using a ton of verbiage to bury the word "nationalization," which is really the heart of what he’s saying.
Dave S
Seems to me that the answer is to stop approving every merger proposal that comes along. Growth is nice, but a lot of these guys got big by buying up or merging with other big firms, and the government has approved every single one of them. This applies to "depository institutions", non-bank financial firms, insurance companies, auto manufacturers, etc., etc. More is better.
We also need to repeal Grahm-Leach-Bsomething so we can keep the firewall up between depository banks, investment "banks" and insurance companies. That would make them easier to regulate, at a minimum. It strikes me that in allowing hybrid institutions, GLB should have also provided a mechanism for managing their reslolution. Seems a big hole in the legislation from today’s perspective.
Doctor Science
Beefed-up antitrust laws are my gut reaction, too: "too big to fail" means "too big". But I don’t know if they’re really the best idea.
As Brandon said, occasionally we will end up with firms like AIG, which come to occupy a critical place in the economy that we didn’t expect.
I think this happens a *lot*, actually. Google, for instance, is already too big to fail, occupying a critical but unexpected place in the economy. When Google had a glitch for about half an hour a few weeks ago, a lot of the Internet went on standby. The Google search engine and GoogleAnalytics are so closely linked that bolixing up the search engine froze an incredible number of commercial webpages that use Analytics.
If Gmail went down at the same time, that would take out effective email service for entire *countries*.
Does this mean Google already needs to be split up? My experience living through the Great Phone Company Breakup says, "not so fast". But I have no other idea how to keep a failure at that one company from taking out dominos around the world.
jon
The swedish answer would defeat the purpose of doing it. If you factor in how much equity would be lost doing that(including the hundreds of billions that the FDIC has bought up banking stocks with), how much cash the FDIC would lose in selling them off to the few remaining healthy banks and how much cash the FDIC/Treasury would have to shell out to cover the toxic assets in some sort of bad bank(that the very people complaining about the Geithner plan were also complaining about doing)..what’s the point of doing it? You’ll end up spending more than the 1 trillion(which isn’t an accurate figure at the end of the day), only the Geithner plan will see the fed getting their cash back in 3 years. Nevermind that the FDIC probably couldn’t nationalize banks that have such multi-national reach/assets(like Citi and BoA).
The Swedes had the advantage of only having a few banks not nearly as big as the US has currently. Nationalization wouldn’t lead to any solutions imo, just more(and deeper problems).
MikeJ
You can be POSITIVE you won’t foresee everything. Regulators do not live in a static universe. People will actively be looking at every corner case for a way to get beyond what the regulators intended.
It is perfectly analogous to computer virus writers and operating system designers. OS designers ideally want everything to be open because it is more useful to end users that way. They can’t do that though because virus writers (or insurance companies) will exploit every bit of freedom you give them. When they do something you don’t like you need to decide if it’s severe enough to issue a patch or if you just live with the risk.
And much like with OS, patches are never issued until after somebody has already found an exploit.
And for people that can’t edit comments: use noscript and don’t allow anything except balloon-juice.com to execute scripts on this page. The internet sucks without noscript.
JL
Benanke’s entire speech is worth a read. The speech is here
The speech had to do with protecting community banks. Hopefully there will be new anti-trust laws.
Brandon T
I suspect this is actually the main reason O’s admin is shying away from nationalization. In fact, I think one of the aspects of this crisis that will come out from future historical study is the high-level international pressure between countries over financial policy. Remember how there was the international outcry over giving the loans to the auto companies? Imagine what would happen if we, say, nationalized Citi–you can’t tell me every country they have a business presence/assets in wouldn’t try to pressure the U.S. govt for the outcome most favorable to them…
Comrade Stuck
This is a blurb from Allen over at Politico on Obama’s new re-regulation plan. Of course the devil will be in the details as to how far they plan to to. But putting back firewalls between the different sectors of finance and commercial banking should be paramount and crystal clear. If it is not, then we will have a problem Houston. I still don’t trust Geithner, or FTM Bernanke, to make the giant frog leap backward from free wheeling free enterprise, that might save the economy and country, though reduce production of overnight kazillionaires. That virus don’t die easy for these people, who initially spread it. And I expect fully wingnuts to blather with forked tongue their newfound "economy for the people populism", with the other fork whispering, me must block this war on prosperity and rich people.
gwangung
You know, I hate to say it AGAIN, but this just shows how complex the picture is. I never even thought about this aspect. I’m sure there may be a solution, but there are so many factors that I’m not even thinking about, that I’m not going to go full bore against or for any particular plan–too easy for me to forget something and look foolish (and I look foolish enough as it is…).
Josh Hueco
Bullets are a hell of a lot cheaper than bailouts. Just sayin’.
jon
@Brandon T: Well, not just that, but if you nationalized Citigroup(for instance) the FDIC would have to sell Citi’s international subsidiaries immediately for basically whatever they could get for it. There’s just too many reasons not the nationalize the banks. If Geithner’s plan fails, nationalization wouldn’t have fixed it since the toxic paper overwhelmed the system as a whole.
Brandon T
Semi-offtopic, but Brad DeLong has a pretty good FAQ on the "Geithner Plan", which actually explains it as I imagine the administration is thinking about it.
My first reaction is that it’s a very cynical plan–it’s essentially counting on the greed of hedge-fund investors to maximize their profit and, in doing so, save the economy.
Comrade Stuck
Through my limited understanding, these pervasive toxic CDS’s are like a vast spider web made of filaments of financial PrimaCord saturating so many financial institutions, that if more than a few were detonated, the entire system would blow. And the kicker is, that since they were completely un regulated, so no one really knows how much of it actually exists.
You can’t make this shit up.
gwangung
Your limited understanding has higher limits than mine.
jon
@Comrade Stuck: That is exactly what complicates everything. They didn’t even really know what a Credit Default Swap was until Geithner’s investigators at the NY Fed Reserve were going through Bear Sterns’ books to try and facilitate a sale. If it wasn’t for this financial instrument, the FDIC/Treasury could let Citi, BOA and whomever else fail and let everyone pick up the pieces. China, India and other soverign funds quietly admitted that they were carrying CDSs based on AIG’s financial health to the tune of about 1.6 trillion dollars.
@Brandon T: Yeah, that was a good post. It is cynical, but using greed to fix the damage caused by greed might be the way to go. As long as they slam the door shut on sub prime mortgages and credit default swaps also.
Comrade Stuck
@gwangung:
Or, I doubt know what the fuck I’m talking about. I always cringe when writing something on this subject, waiting for a smackdown with extreme prejudice. Hope to survive this one.
Elie
Thanks for the excellent conversation here — one of the last places to obtain a decend set of points of view about this issue and also some of the politics — also a place that can levy criticism of the current administration’s plans without name calling and crazy peasants with pitchforks – why-havent-they-fixed-it-yet-those- crooks — after two months..
Comrade Stuck, I hear your reservations about Geithner/Summers (and ultimately Obama since I do think he is the ultimate decider). I worry about it myself but am trying to allow him/them the power of having a reasonable period of time to get it together — to allow a certain amount of blundering around. Its scary that so many on progressive blogs and elsewhere have signed off completely — think its a bit premature and not sure what undercutting the administration with so much "no confidence" does — does it indeed lead to talking it down into failure — after all, so much of this is confidence if not in actual solution, in the people who will be in charge of it.
If we deny the Obama administration that confidence or trust, where do we go? Do we then just empower those we know will take things apart, making it even harder for them to do the things they can do?
Not at all saying that we can’t — in fact I know we must voice our concerns and make suggestions, but where is our responsibility to support who we voted for? How much of a chance do we give them? I thought when we elected him that he would get about 6 months. Hell, he barely had 40 days and people were screaming. Now at 2 months, its doesnt look like he’ll even get 6 months to get in a fix or something like it that brings our confidence back. Somehow that just doesnt seem right at all and the impatience of this could be very destructive to the very ends we seek… a careful resolution of this mess played out over a long enough time period to avoid a catastrophic effect on the people with the least ability to weather it — though I don’t know exactly how that would happen —
Anyway — just my thoughts and I appreciate this site…
passerby
Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.–Bernake
Tim:
Yes. My jaw dropped when I read his solution. I thought the whole idea was to prevent these "non-bank" entities from growing to behemoth size to begin with.
Weren’t they, the "non-bank" entities, the ones who were gambling with other peoples money? They didn’t have any skin in the game and while everyone else’s bottom line went south, they were raking in money hand over fist.
Weren’t they the ones who took their Ponzi scheme overseas and gambled with foreign currency too?
Unregulated back room deal making is exactly made these guys too big to fail—and they failed anyway.
Nice try Ben but I’m not buying it.
Comrade Stuck
@Elie:
I’ve quit calling for Geithner to go, being convinced by people like yourself, that doing so would cause more problems than now. Plus he seems to be communicating a little better, likely with some adult supervision. But I still do not trust him and think he was a mistake, and dearly hope to be proven wrong.
Elie
Comrade@22 —
Its very tough, I agree. I just don’t think that we have had enough time for what may be an extraordinary set of converging (what? – decisions, events, ) to occurr.
I am gambling and hoping mightily as you that Obama (again he is the decider, not Geithner) is going to pull this off and has the integrity to do the right thing (as though that is going to be clean and agreed upon by everyone – probably not) But at least I hope for something that will allow us to survive AND set up the transition (through regulation and legislation) to the new and better system. I know that its going to take some time, (how much?) Am scared that there just isnt the will to be careful and patient and to think it through — the cost/benefits — the open eyed trade offs — everyone will want something perfect from their own point of view. How do I know that? Look at where we are now….
Worse than making a set of bad decisions after working it through is being coerced into bad decisions by the need to calm your critics.
The reason that I hold the Krugmans, Rubini and others in such contempt right now is that I don’t hear their acknowledgement that the options are difficult and not always that clear in their upsides and down. Krugman is by his own admission "temperamentally unsuited" to being Treasury Secy — and yet we have to take his advice or else — the guy with no risk, no admission of having limitations on knowledge.
Krugman is like a guy who read how to fly a plane who is sitting in first class (with his nobel prize), telling the pilot who is strapped in up in the cockpit, how to fly the plane. Krugman can’t see the dials or control the engine power, etc., he can’t see out of the front of the plane. From his seat, looking out the side window he is critiquing the route, the altitude and the direction. He projects no humility about where he is sitting, but expects the pilot to do as he tells him or the plane is going to crash.
Not to pick on Krugman too much…we are all nervous and scared and I suspect some of the criticism is just that.
We’ll see.
Brandon T
@Elie:
I think this is the wrong question to ask. Elected presidents have no need of public "support"–they’re already in office. We’re supposed to criticize them when we deem necessary.
At the same time, we do have a responsibility not to make it knee-jerk criticism, and to make it intellectually honest. This is my biggest problem with people like Krugman. I think the fact that he engages in criticism is valid, but he tends to do so sometimes in intellectually dishonest ways. The bank rescue plan is the best example: he has a legitimate criticism (he feels the administration is overly optimistic about the values of the "toxic assets"), but instead of giving the administration’s view and why he thinks it’s wrong, he uses a strawman that negates most of the critical details of the plan and argues against that instead. Now, he’s made the judgement that the other details are superfluous and window-dressing–but is that really his place to decide? What’s more, he has no more valid argument that the assets are worthless than the administration has that they’re undervalued–all he has is some macroeconomic observations–but he’s lacking the actual data regarding the details of the CDOs.
The fact that he doesn’t acknowledge how he could be wrong, I think, is fundamentally dishonest.
joe from Lowell
Drum’s argument isn’t post-modern uncertainty. There’s a very good reason to believe that now-worthless MBSs will someday regain value; most of the underlying mortgages, more than 90% of them, are being paid.
merelycurious
MikeJ said:
You’re right, we’ll never be able to plug every loophole and the analogy to computer OS’s is exactly right. What’s our backstop for a compromised computer? Backups and Archives. What makes backups and archives useful? They’re outside the system.
What’s our backstop for the financial system? Regulation and Insurance. What can we add that’s outside the system? As we are all aware, people are clever little monkeys that will work around regulations and law enforcement always lags behind the crooks. So that leaves some kind of insurance, but we can’t trust the financial entities to purchase it on their own (note the FDIC did not collect premiums from banks for most of the current decade because they believed they were well capitalized)
My proposal for a better kind of insurance?: A Securities Transaction Tax. Small enough that it won’t interfere with commerce but if we apply it to all transactions it will add up. First I want it high to pay the taxpayers back for the bailout (I can live with it taking a decade or so). When we have recovered the cost of the bailout, lower but don’t eliminate it and use it as (government mandated and managed) insurance for the entire financial industry. I like it because it’s proportional to your use of the securities and investment part of our financial system.
Brandon T
I’ll just add that, Krugman’s semi-dishonesty is how you get videos like this (http://www.huffingtonpost.com/2009/03/22/paul-krugman-song-lights_n_177746.html).
He presents it as "I HAVE THE ANSWER", where the administration is more circumspect and cautious about what they can and cannot know. Krugman is thinking that, because he isn’t in a position of power, hedging and being uncertain would give him no influence at all–and that the maximalist position is the only way he’ll be heard. Yet, this is the same sort of behavior that he criticized among the Republicans in the previous administration and now. He laments the un-nuanced state of American discourse, but he himself is contributing to the problem.
Leelee for Obama
@Brandon T:
Cynical….I like that in this situation. Like the guy in California who spread the news about the gold in them thar hills. He could’ve just gone prospecting, but he knew the real "gold" was in the picks shovels and jeans he’d sell TO the prospectors.
I haven’t got a financially savvy bone in my body, but this counting on greed sounds just about right
.
Someone said in another thread that if Obama can fix this, he should get the job in perpetuity. I concur.
kay
This is interesting. Charile Rose interview with Geithner.
Geithner’s basic plan was first proposed by Warren Buffet.
[CR]
I have to ask you this. When you were at the New York Fed and you and Hank Paulson, then secretary of the treasury and Ben Bernanke, still chairman of the Fed, were looking at all the policy options at the time that you had the passage of the TARP legislation, and the kinds of things you ought to do. Did you, at the same time, consider this public private partnership that you are announcing in the next week or two and reject it? Did that happen?
[TG]
Charlie, this idea, this idea to use government financing alongside private capital is an idea that a few people had back in the fall.
[CR]
Warren Buffet, for one, sent a letter to Paulson suggesting this is a way to go.
[TG]
Among others. And some of us put a lot of merit in that proposal at that time.
[CR]
But it was rejected at that time?
[TG]
Well, I’m not sure it was rejected. I wasn’t secretary of the treasury, then.
Elie
Brandon T @24 and 27 —
Agree with you on Krugman. I also take your point that we don’t owe Obama support once we elect him — sort of.
If we mock and belittle and play fast and loose with facts to set up strawmen, we then ARE mobilizing opinion against the administration. So if we can’t praise, cause all we can do is elect them and that is the end of support, but we can criticize only, we are not going to give the administration the power it needs to do what we want it to do. In that sense, we would be asking the administration to "go it alone" politically once in office — to hear from us only with criticism.
Also, what about policy that takes a long time to develop or that requires a number of issues to take place before the approach can be refined? Or what if not all the facts can be shared publicly at a given time?
What is obvious to me is that we have absolutely no tolerance for that. If we don’t get it or see it right away, its bad. We also assume that we have all the knowledge necessary to make a given decision. Yeah, added to impatience, the 24 hour news cycle and lightning blog reaction, you have a situation of really poor ability to govern through tough times.
Nellcote
Yay! A positive, specific suggestion.
Another one I like is to tax capital gains less the longer one holds the stock. Less if you hold it for 5 years, even less if you hold it for 10 etc.
But what I can’t figure out is what can be changed via rules/fiat and what needs to go through Congress. And Congress seems to be a major sticking point in doing anything progressive/constructive. Which is another thing the critics don’t seem inclined to acknowledge.
Nellcote
Well of course they do. It drives the narrative in the MSM. They Bonus Hysteria this past week should be a fairly clear example.
TheHatOnMyCat
elie:
I can’t tell whether I love that more as a pilot, or as a blogaddict. Okay, both. And as a guy who is really learning weekly to more and more despise Krugman.
I will steal your metaphor, but don’t worry, I will take credit for it too.
:)
And BTW, if I had such a guy in the back seat, a few minutes of upside-down would fix his attitude. You want your stomach back? Then STFU, compadre. You do the crossword puzzle and let me drive, okay?
Heh.
TheHatOnMyCat
Oh lord, I just learned of an awful plane crash in Montana.
I am refraining from making any more pilot smart-aleck remarks at this time. Sorry.
El Cid
I’m trying to figure out what I’m supposed to draw from this analogy. Is this why there are so many deadly small plane crashes — two in Georgia here alone in the past couple of weeks — because the pilot is making an ass of him/herself to a complaining passenger?
[Note: This was typed before the ‘preceding’ corrective comment by THOMC.]
J. Michael Neal
I’ll restate my opinion that this, essentially reinstatement of Glass-Steagal, isn’t a difference maker. The shadow banking sector has become so integral to the whole system that regulating the depository banks really isn’t sufficient. Once you are regulating everything, combining functions isn’t such a big problem.
"Too big to fail" is also a bit of a canard. One thing all of this shows is that the interconnectedness of institutions can produce the effect of too big to fail even if it’s not one particular bank in trouble. I’m in favor of Glass-Steagal, and regulating size, but neither of them is the key.
However, the NY Times article that went over some of the initial ideas for regulation has some real winners. Forcing more derivatives onto exchanges; this is even better if there is a mechanism for listing things as they are invented. Transparency for hedge funds and other shadow institutions. Expanded rules on leverage, applying to everyone.
If the administration really pushes those, and can get them through Congress, that’s more important than specifics of the bailout.
J. Michael Neal
The plan isn’t based on any gauzy wishful thinking. The campaign to sell it is, but not the plan. I suspect that the people putting it together aren’t under any illusions as to the assets’ real value. They don’t care what the real value is. What matters is getting enough money into the banks to recapitalize them. This is a way of doing that. It’s complicated, but that’s for two reasons. One, that helps sell the plan, since it can be presented in a better light than it really is. Two, and this strikes me as crucial, the administration doesn’t actually have the authority to nationalize the banks.
These are not the same kind of institutions as the ones the FDIC takes over. It’s not just a matter of size. The FDIC regulates depository banks. AIG is an insurance company, which is regulated at the state level. Others are big holding companies that may or may not have a depository bank, but also own investment banks, hedge funds, brokerages, and all sorts of other things. There isn’t legislation for federal take overs of any of them. That’s before considering the international aspects involved in nationalizing them.
So, what do you think the chances of decent legislation getting through a Republican filibuster? Do you believe that Evan Bayh is going to be at all useful in this process?
You don’t bailout with the regulatory authority you want. You bailout with the regulatory authority you have.
gwangung
@J. Michael Neal:
Hm. Another person with limits far higher than mine.
Brandon T
@Elie:
I didn’t really mean that we can’t praise. I’m saying that people ought not to support a candidate after they’ve been elected SOLELY BECAUSE they voted for the candidate. I’m afraid of the idiotic "We’re patriots that support our Commander-in-Chief" of the Bush admin which really was toxic and which a number of Democrats seem willing to resurrect.
It goes hand in hand with being intellectually honest–you point out, in your criticism, the place where the guy gets things right and wrong.
iluvsummr
Anyone catch Elliot Spitzer on Fareed Zakaria’s GPS? Just watching it on my DVR and I’m upset that one of the few people who had actually done something about fraud on Wall Street and still has amazing insights into the problems with Wall Street basically sidelined himself. He pointed out that though Hank Greenberg of AIG wasn’t one of the AIG executives that was convicted for "cooking the books" a few years ago, he was referred to as an unindicted co-conspirator for his role in trying to make AIG look like it had more assets than it did and the AIG board asked him to step down. Today, Greenberg who helped create/oversaw most of the problems with AIG is appearing on shows unashamed and the anger is focused on Liddy. Spitzer mentioned the ratings agencies briefly, which no one else seems to want to do. So far, his take seems to be that we have a systemic problem that blaming a few individuals won’t solve, but blaming a few individuals is cathartic so there’s danger that this may be the path taken with no larger lesson learned. Yet I’m sure his points will be dismissed because of the prostitution scandal. So frustrating. Back to watch the rest of it…
J. Michael Neal
Yeah, but as has been said, the fact that I have more knowledge, and actual experience in finance, means that I’m looking out for my pals, and you can’t trust me.
Comrade Stuck
@J. Michael Neal:
Maybe in a perfect world, but the one we live in has changing leaders and ideologies that make simple regulation unreliable for the long term. I say make gambling with other peoples money absolutely taboo. Whatever it takes to do that. You can bet futures on derivatives from assets you own, but that’s it. I’m not expecting this to happen all at once, but it should.
I’m for reinstating G-S and repealing pronto Phil Grahams abomination of a bill along with the amendment from hell that exempted regulation of the insane derivatives trading, and if that’s not enough pass more draconian laws, and if they insist on gambling with our money, then string the motherfuckers up by their thumbs to send a message.
Nellcote
Elliot Spitzer needs to get hired at DOJ heading up Wall St. Investigations.
gwangung
Hm. They wouldn’t say it up front, would they?
mey
Drum is getting rightfully schooled in the comments. He has no idea what he’s talking about.
SBW
J. Michael Neal,
I think unemployment will continue to rise through the year (I live out west, Nevada, and it’s turning extremely ugly out here and in California).
If the Obama administration continues to preach that banks must be made whole before everyone else — hence the required enormous taxpayer subsidies in the floated but soon to be released Geithner plan — I am quite sure the President will be crushed by negative public opinion. We’ll see.
You don’t work with a public you wish you had, you work with the public you have. I guarantee patience will be gone by the end of summer. President Obama will still be there, and find it increasingly hard to do anything.
Do you actually think making these firms whole by ripping off taxpayers is going to drop unemployment?
Yes, I know that’s not the purpose of the plan — and that’s precisely the point. The government and financial community have backed themselves into an untenable position of believing that the financial community — must, of course — be bailed out with public money before any economic turnaround. That’s why I asked if you were in finance — you seem to believe the solution is through the finance industry, like many posters here. I do not.
Why do you think this plan will work? What if Americans don’t want to spend as much anymore, on anything: stop going out to eat as much, stop going on vacation as much, stop buying large homes, stop buying large cars, big TVs, you name it. What if Americans don’t want to take on more debt — I’m seeing all this now (though Nevada is at 11.2% for the U3). What if a large number of Americans stop investing in stocks? Will this plan increase lending if a large number of people remained unemployed? What then? What, yes what, will we get out of this plan sold to us by the financial industry?
The ‘we got to try something’ crap was pulled by Paulson. I’m not interested in a redux.
And most importantly — if these enormous wealth transfers do nothing but help the rich, what will the public’s reaction be?
liberal
@Brandon T:
You’re full of it, up to your eyeballs.
liberal
@jon:
You don’t necessarily have to cover the bad assets. You force a haircut on the bondholders, as much as you can without destabilizing the system.
The greater point of nationalization is to seize control and unwind insolvent banks rationally, instead of just throwing money at the problem like you propose doing.
gwangung
Not sure that’s possible with banks with international holdings–aren’t those international holdings supposed to be sold immediately?
J. Michael Neal
Great. What do you want him to do? Please live within the reality of the powers he actually has. Nationalization is not an option without getting something through Congress.
Your concerns about unemployment are real, but what, exactly, do you want to do about it? More stimulus also has to get through Congress.
J. Michael Neal
Who knows? That’s one of the problems with nationalization: no one knows exactly what it entails. Some of the unknowns are not in any way under the control of the administration.
SBW
Let me get this straight:
1) Obama can’t get more stimulus to lower unemployment, due to Congress.
2) Well, don’t need Congress (now) to subsidize the finance industry.
3) Use more taxpayer money, in order to buy trash assets, which won’t help unemployment anyway.
Just because President Obama can’t get more stimulus money at the present time doesn’t lead to financial subsidies. One doesn’t follow the other.
How will Geithner’s plan help the economy? I am talking about the economy, not the financial industry.
Do you think it will lower unemployment? I mean that — I haven’t got an answer out of any supporter.
My specific concern is not only high unemployment, but as I mentioned in my last post, it is precisely high unemployment combined with explicit favoritism towards the wealthy. Morally distasteful, yes, but also as a practical matter, politically explosive. As it should be.
What is the exact benefit for the entire public? If the public does not want to undertake more debt — and I don’t think that is a big if — what does this plan do for the public as a whole? This goes off on another tangent, but up until at least 2007, probably 2008, the financial industry’s share of GDP was enormous compared to say, the 1950s or 1960s — at least by a factor of 3. Without political bailouts, that share would most likely shrink by a large amount. How does this plan help that?
I’ll be curious to see Geithner’s announcement tomorrow morning, and how he tries to sell this.
gex
Bernake’s is a fucking brilliant idea, I can see it now. We’ll charge some sort of transaction fee, let’s call it a premium. Then when the fund gets almost big enough to cover a failure or two, then the non-bank financial firms can beg congress to allow them to just stop paying in, just like the FDIC. Then when a crash happens, we can say "Oh shit! We should have been collecting those premiums!" Oh well, there’s always the taxpayers.
Seriously, anti-trust is the only way. They must be allowed to fail. We can already see what happens when the government is the backup plan. They whine about the premiums, they refuse to let the rules keep up with their "innovations" and they hold the taxpayer at gun point no matter what rules are in place.
nota bene
YES
These firms should never have been allowed to get Jurassic-sized to begin with. When they’re that size they have near-governmental levels of power, which means when they go tits-up it’s hugely destabilizing.
And re: anti-trust–maybe I don’t understand, but I kind of always thought that anti-trust laws were supposed to prevent monopolies, which Too Big To Fail status kind of resembles….
Janet Strange
@SBW: Well, fwiw, according to Brad DeLong reducing unemployment is exactly the point (thanks for the link, Brandon T – excellent read, highly recommended to anyone who hasn’t been over there yet):
Now I have no idea if DeLong is correct, but it’s my understanding that his track record has been pretty good, so I’m willing to try to look at all this from his point of view.
Janet Strange
@Janet Strange: Oh drat, I got the dreaded "You do not have permission to edit this comment." (what’s up with that anyway?)
I would have fixed the lack of link to DeLong’s FAQ – now here and at least attempted to fix the blockquote problem. Everything except the first and last paragraph in my comment above is his.
guest
@Janet Strange:
oh goodie, it’s not just me. i was wondering what i did to merit such a sanction. lol
Elie
TheHatonMYCat:
You are free to use whatever analogies or stories that I tell – :-)
SBW – So what do you want to DO and why do you think its better than the plan that Geithner has not announced yet but you interpret as a bail out for the financial sector only. What are the up sides to your I am sure guaranteed successful plan and what are the down sides, (and don’t tell there aren’t any).
No more critiques of the O team until you pony up with your details, ok?
mclaren
I think the more elegant heuristic tangential to solving the "too big to fail" problem involves identifying everyone with a net worth over 100 million dollars, slamming ’em up against a wall, and shooting ’em.
I really think that would work.
A corporation is worth more than 100 million? Kill it. Break it up. Strip it out and sell off the assets. A person is worth more than 100 million? Blow his brains out and write WEALTH IS THEFT in the guy’s blood on the bullet-pocked wall.
Such are the elegant subtleties of the postmodern precession of simulacra, in Frederic Jameson’s phraseology.
Bruce Baugh
I’ve been thinking. Now, it’s true, I’m not an economist, nor do I wish to play one on TV. I am not qualified to assess technical merits, nor to do a lot of the math required to evaluate outcomes, or any of that.
But. I think that some folks doing basically constructive pushing back, like J. Michael Neal, are making an error in their own judgment. There are aspects of proposed plans that don’t require economic expertise, because they deal with observable human behavior outside of the situation at hand. Some examples:
1. Any plan that does not lead to a reduction in size and influence for the major players in the financial sector is, by definition, not any part of a long-term solution. We know this, reliably and confidently, because we see essentially universal agreement that "too big to fail" is an essential property of the most involved and damaged players. We have a multi-decade legacy now of "too big to fail" leading to one social atrocity after another. We know, therefore, that we must be looking at ways to shatter existing structures and keep them from reforming, or we will be looking at this kind of crisis again, quite possibly worse the next time it comes up. There is no lasting cure except to force a reduction of possible size and scope on a sector’s participants. It is okay not to do that all in one step, but no plan that fails to point in that direction at all can be trusted.
2. We know that people seldom reform their ways, once they’ve gotten accustomed to exercising power and accumulating wealth through transgressing social boundaries. The career of one Dick Cheney is a handy example here. He and others like him from the Nixon gang never faced serious penalty or shame from any source they took seriously, and so they never had to make any changes, however much others might hate them. Same deal here. We are fools if we don’t treat everyone involved in the whole multi-trillion house of cards as suspect and look for evidence that clears them. This is exactly the same principle one applies to troubled offices, to churches in scandal, to any human grouping where a lot of people have gotten entrenched in ways that do harm to others. Again, we can’t do this all at once, but no plan that fails to make it an ultimate priority and point in that direction can be expected to work.
3. We have lived with a deranged economy for a long time. How deranged? So deranged, in fact, that it actually fits Marxist categories. Last week I re-read Barbara Tuchman’s The Proud Tower and was struck by this passage describing Eduard Bernstein’s 1889 book The Evolution of Socialism:
But as a picture of the last thirty years, and in particular the last ten, that’s right on. It turns out that our world is now in the hands of plutocrats stupid enough to do exactly what Marx warned they would. A return to the norms of recent years won’t be enough, because those were also deranged times. A return to economic and social health means going back decades, and making some really serious structural changes. No plan that aims simply to rollback a few quarters’ accounting and practices can be trusted to do the job.
What we’re doing here is triage. On one level, it’s a technical judgment. But I learned about triage when I worked as a lifeguard, and I’ve never forgotten the principles. If I tell you, "I’m doing this non-standard carry because I happen to know the victim has a weak spine and would risk some extra damage if I slung him for fireman’s carry", you might or might not know if it’s a good idea. But if I tell you, "I’m doing this non-standard carry because he’s actually otherkin and has a dragon soul, and this leaves room for the psychic aura of his wings to sprout to their greatest height", you don’t have to have any first aid training to know that it’s worth not letting me get away with it. In this current crisis, those of us without relevant expertise cannot assess methods well. But as citizens and human beings, we can assess aims.
And the language of the Geithner plan is simply not the language of aiming at an actually healthy, honest, sustainable society.
J. Michael Neal
You seem to be assuming that there is no connection between the health of the financial industry, and the health of the rest of the economy. You are wrong.
Many, many companies fund their payroll of short term commercial paper. Given the mismatch between their revenues and their expenses, it’s difficult to operate any other way. Thus, if no one is lending, and they can’t write this paper, it impairs their operations.
Frequently, if businesses want to expand, they can’t do it out of retained earnings. In this case, they have to raise capital. You can do this either in the debt market, or in the equity market. Either choice requires that someone purchase what you are selling.
It is very rare that someone can buy or sell a house without a mortgage being involved. Getting the companies back in a position where they can make substantial loans would be a good thing. Right now, rates are low, but the restrictions on who can get a loan are extremely severe.
Functioning banks are an essential part of a functional economy. One of the prerequisites of getting the economy going again is to get a healthy financial sector. Going forward, there are a lot of things that we need to do in order to ensure that the financial sector is rewarded for doing things that help the economy rather than just trading things around without creating value. None of that matters unless we produce companies that can make money doing that.
It may be politically explosive, but it also has to get done. Since, currently, Congress does not appear interested in being helpful, the administration has to move forward with the tools it has.
Elie
JMichael Neal @ 50 —
I see that you had a hard time getting SBW to actually provide a solution or alternative. I also asked him down thread a little.
Has a right to his opinion of course…and maybe he has clearly spelled it out previously or on another thread. Just like to see, a) I disagree with this because…bla,bla,bla and I think he/we/they ought to do b) — because bla,bla, bla . I acknowledge these down sides to my recommendation but overall think that its the best approach because bla, bla, bla.
Don’t see that much though, do you?
SBW
Okay,
One question:
Are we — as a country — living beyond our means? What is our private debt level to GDP? It that high versus historical levels?
We just came out of the largest credit bubbles in human history (obviously that doesn’t bother DeLong — he appears to want to reinflate it).
I know quite a few companies — I just recently got laid off from one — who expanded based on credit, and whose business plans were never tenable. And of course Nevada was truly one of the bubble states — home prices (even in high desert Reno) jumped from 160,000 to 345,000 in around 4 years. In an area with an average household income of around 50,000.
This didn’t help the economy. At all. It distorted it, and the city is going through some pains. I think if Geithner was a local real estate agent he would swear the solution to everything would be to inflate prices again. It’s not.
I stated the financial industry had to shrink — by a lot, not that we didn’t need one. I don’t think the solution to this issue is to have taxpayer buy up trash assets from poorly managed firms, so banks can make good on their own losses, then try to reinflate a bubble. That is not recovery — though I can see someone in finance may think that way.
It seems simply idiotic — and I have a feeling the administration is going to get pummeled over this one — especially if it is used and there is no corresponding relief for the average citizen.
SBW
Elie,
One excellent solution is not to gauge taxpayers for a solution that will not work. You seem to have a desire to follow the President over a cliff. I’ve seen that happen before, was directly impacted by it, and didn’t like it.
I being a lowly citizen, am concerned about government backing of an industry that has distorted a) our politics and b) our industries, but if we throw enough money at Wall Street they will save us all. I do not subscribe to that.
And I believe you have yet to counter the fact the President Obama has not differed from Bush on his handling of the economic crisis. He hasn’t. Geithner’s plan is really no different than Paulson’s original plan. That is not good enough.
We need leaders who think outside the box, not who choose the easiest path.
By the way–Elie–coming from someone who has spent time in the Middle East, saying I don’t have an exact plan for financial resurrection is about as asinine, well, exactly as asinine as an Iraq war supporter claiming those of us who advocate for withdrawl should ‘shut up’ unless we have exact operational plans to get out of the Iraq. That is stupid, point blank.
I personally wouldn’t say that–even if I disagreed, which I don’t (occupation is unjust and expensive )– because, strangely, I think non-specialists do have input on problems regarding the potential effectiveness, morality, and justice of certain courses of action.
And non-specialists have been right over specialists.
Yes, and non-specialists have been right over specialists.
I’ve seen generals evicerated for incorrect actions, and Geithner damn well will be too.
Obviously you don’t see that. Fine. Until John Cole stops me posting, I will continue to point out the obvious judgment failures of this administration.
TenguPhule
Yes. And we have to keep it up or face an economic meltdown.
Can’t win, can’t break even and can’t even get out of the game.
georgia pig
@TenguPhule:
Right, but no need to be so melodramatic. We’ve always lived "beyond our means," it’s more a matter of degree. Getting into this "are we living beyond are means?" narrative, while certainly a legitimate question, in this debate risks veering into silly libertarian Austrian economics that have no understanding of politics. There’s always a bet on future income in a growth-model economy, and success and stability depends on social cohesion (e.g., how much can you trust Obama, Geithner, Congress and the market participants to act in good faith) and risk tolerance. You could adopt any of a number of plans, and success or failure would to a great degree rely on whether you can trust the execution. Note that every scenario involves a guess as to what people will do. Nationalization has similar issues (e.g., statutory authority, political opposition, international repercussions, bureaucratic stasis), they’re just different. My problem with Krugman is that he gives these short shrift, e.g., he doesn’t even acknowledge that we might not politicallly operate like Sweden. Obama and Geithner appear to have chosen the devil they know and can do with existing political power over the one they don’t know and may not have the political power to pull off. They could be wrong. Start with the preposition that all options suck.
J. Michael Neal
As with some of your other comments, it would help if you didn’t misrepresent what other people say. This is not what DeLong wants to do. I would suggest reading more of what he has said before spouting off.
Again, start over. Either that, or find me some reference to Geithner indicating this.
The financial industry is shrinking – by a lot. That’s happening now, and will continue to happen, no matter what ideas get put forth as a bailout package. Preventing shrinkage isn’t what this is about.
Did we have an asset bubble and a lot of bad lending? Yes. Does that mean that any attempt to get lending restarted is synonymous with trying to reinflate the bubble? No. Right now, there is a lot of necessary lending that is being done, because the banks can’t meet their capital requirements. Right now, you have a lot of money fleeing to the safest assets possible, and away from anything but Treasuries. When the Reserve Primary Fund broke the buck in the wake of the Lehman collapse, that was a disaster sign. People aren’t sure that money market funds are safe.
I don’t really pretend to understand populist anger, so I have no idea if you are right. If you are, though, then we are completely and totally fucked. If it is true that the administration can’t take any action to save us without triggering unstoppable public anger, then we have no way out.
Inaction is not an option. We can stall, but things aren’t going to get better while we do. Unless you think that some other plan can get pushed through Congress that’s better, then we need to go with this one. The consequences of it not working are not worse than the consequences of doing nothing. I’d rather have a President that risks public wrath trying to come up with a solution than one paralyzed by fear of that wrath and unwilling to do anything.
Ash Can
@J. Michael Neal:
Boy howdy. Furthermore, I see an awful lot of upside to bringing that wrath on now, a whopping sixty days into his term. Take action, let the pearl clutchers run around with their hair on fire, put up with the wailing and flailing and drama, endure the plunging poll numbers (presumably, at least; that still isn’t happening). Then, as things settle over the coming months and years and the world doesn’t end and the economy gradually gets back on track, the notoriously short memory of the now-placated American electorate will kick in, just in time for midterms and the glimmerings of the next general election. And the Republicans will still have jackshit to show for themselves.
Cerberus
Well, I’m not an economist at all so take this with a grain of salt, but it seems we’re focusing still on top-down trickle-down solutions to the crisis. How can we save the richest firms and the money markets to make it beneficial for CEOs to reinvest and trade money around and thus somehow spurn growth.
It seems the real crisis for awhile has been the stagnation of wages and the way all the mergers have caused chronic unemployment figures (the real number of which is far higher than we’re hearing as we’re ignoring how Bush changed the way we calculate unemployment in order to make his ridiculous X months of unprecedented job growth claim). We have funneled most of the wealth to the upper class and thus we no longer have a middle class or lower class able to buy the goods and provide even the minimal demand they did. Considering we have a demand-based economy. This leads to shrinking economy, etc…
The AIG mess and all the derivatives seem like the small cons that were being run when the bubble was being inflated on debt, important to get rid of, but hardly the root of the economic crisis.
I mean, the mortgage securities will be easier to disentangle if we pay for the mortgages themselves getting people back in their homes at least, the job situation regulated with anti-trust laws and new industries to help get people to work with the EFCA helping them form new unions.
I suspect the AIG mess is expensive triage as we get the public sold on the idea that the private firms really have no place in insurance in general and really health insurance, financial insurance, etc… really should be government own and run. Then we can let AIG go down without risking everyone’s insurances and be able to rebuild from the ground up a healthier bank and financial industry.
Padraig
Wow, I love this post.
Cole is exactly right – the logic of concentration of financial capital leads to either socialism, or a national guarantee for the banksters against loss by taxpayers (socialism with no potential public upside). The real question is, are firms this large more efficient and/or inevitable (which revives the case for socialism in the financial sector at least), or can we anti-trust our way back towards perfect(ish) competition?