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International public goods? Public bads?
Among the potential sources of tension is the Treasury’s ultimate decision on whether it will buy troubled mortgage-backed securities from non-American banks. European banks, like UBS, invested heavily in such securities.
“If Paribas has bought a mortgage-backed security, why can’t they present it to Treasury?” Mr. Truman said. “If the government is going to do it for the American banks, they should do it for everyone.”
But that could provoke a strongly negative reaction from lawmakers on Capitol Hill, who already protested that other countries should chip in for the $85 billion rescue of the insurance giant American International Group, because it has operations in those countries or has insured their banks.
“Are the taxpayers in the United States going to bail out all the banks in the world?” said Allan H. Meltzer, a historian of the Federal Reserve. “I just don’t know how this works out.”
Here is the story.
Posted by Tyler Cowen on September 20, 2008 at 04:29 PM in Current Affairs | Permalink
Comments
If the Treasury won't buy these securities from foreign banks, what's stopping someone like Goldman Sachs from buying from UBS and then dumping them on the Treasury ?
Posted by: MichaelB at Sep 20, 2008 4:51:14 PM
See also this interesting article at Voxeu, http://www.voxeu.org/index.php?q=node/1669 about the implications of the bailout for European banks. Basically, the problem is that many European are to large to fail, but are also to large to be saved by their respective host countries.
Posted by: Norman Chester at Sep 20, 2008 4:52:05 PM
I've always wondered what it's like to live in a Banana republic.
Once local governments run out of money, we'll be able to retain local sheriffs for personal use, just like in Central America! Boy, it's going to be fun.
Posted by: Mercutio.Mont at Sep 20, 2008 5:19:27 PM
MichaelB: Hey, that was going to be my comment!
Seriously, what difference does it make from whom you buy this garbage? Whoever it is will just act as a conduit and skim some fees off the top.
Efficient market and all that.
Posted by: Nemo at Sep 20, 2008 5:59:52 PM
Like, I guess, many of the MR readers, I'm on a pretty good but not stellar salary and don't have a huge mortgage.
Why do I have the nasty feeling that I'll end up paying large amounts of money to people who borrowed more than they could pay (helpfully squeezing up property prices for the rest of us considering buying) and to the wealthy retirees whose money was lent to the borrowers.
Posted by: jonm at Sep 20, 2008 6:32:42 PM
The Australian subsidiary of AIG is regulated under Australian law according to the last statement is solvent. The new owners (the US taxpayer) has an asset that can be used or sold to provide a return to the new equity holders. Why should Australian taxpayers help bail out the parent company?
Perhaps this can be looked on as an empirical test of competition between regulators.
Posted by: tjr at Sep 20, 2008 6:41:48 PM
According to Section 2 (a) of the legislative proposal for Treasury authority to purchase mortgage-related assets, "The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States".
Although it is clear that only institutions with headquarters in the US will be able to sell assets to the Treasury, by far the most important point of the proposal is the delegation of authority to the Secretary to establish the terms and conditions of the purchases. To discuss the proposal we should know about these terms and conditions. To start this discussion, I suggest that the law establishes some minimum terms and conditions, delegating to the Secretary a limited power to establish other terms and conditions. The minimum terms and conditions should include at least a reference price for the purchase as well as the seller's obligation to repurchase the asset with the prohibition of distributing profits until the asset is repurchased.
Posted by: E. Barandiaran at Sep 20, 2008 6:51:32 PM
According to Section 2 (a) of the legislative proposal for Treasury authority to purchase mortgage-related assets, "The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States".
Although it is clear that only institutions with headquarters in the US will be able to sell assets to the Treasury, by far the most important point of the proposal is the delegation of authority to the Secretary to establish the terms and conditions of the purchases. To discuss the proposal we should know about these terms and conditions. To start this discussion, I suggest that the law establishes some minimum terms and conditions, delegating to the Secretary a limited power to establish other terms and conditions. The minimum terms and conditions should include at least a reference price for the purchase as well as the seller's obligation to repurchase the asset with the prohibition of distributing profits until the asset is repurchased.
Posted by: E. Barandiaran at Sep 20, 2008 6:52:35 PM
So what do you call the apathy, bitterness, hatred, and general ill-will felt by those who followed the rules, were careful with debt, were forced by circumstance to overpay for inflated assets, and are about to get screwed again? Moral hazard doesn't cover it.
Posted by: David at Sep 20, 2008 7:59:39 PM
"So what do you call the apathy, bitterness, hatred, and general ill-will felt by those who followed the rules, were careful with debt, were forced by circumstance to overpay"
The Federal Reserve System? Am I right? What do I win?
It's a good thing we have the Fed. Without it, the free market would create ever bigger swings in the business cycle.
Ben Bernanke and The Fed - Bringing bald and sexy back.
Posted by: Andrew at Sep 21, 2008 4:44:10 AM
I was thinking maybe "Cynical Hazard."
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Nobody knows when the politician man is talking truth, when is talking nonsence
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we can learn from him
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