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Matt Yglesias, drunk
The plan is bad. But bad policies get enacted all the time. But we’re at a point now where congress is, allegedly, in the hands of progressive leadership. Simply put, if congressional Democrats manage to acquiesce in a plan that spends $700 billion on a bailout while doing nothing for average working people and giving the taxpayer virtually no upside in a way that guarantees that even electoral victory would give an Obama administration no resources with which to implement a progressive domestic agenda in 2009 then everyone’s going to have to give serious consideration to becoming a pretty hard-core libertarian.
It’d be one thing for a bunch of conservative politicians to ram a terrible policy through. Then we could say “well, if some progressives win the next election things will be different.” But if this comes through an allegedly progressive congress then the whole enterprise starts looking pretty hollow.
Here is the link. Personally, I don't get drunk, but there are a number of enterprises -- not just Matt's -- which are looking pretty hollow these days. And I don't just mean banks. You can blame lots of the crisis on government -- more than most people think -- but at the end of the day it is hard to escape the conclusion that markets simply have performed horribly in a number of important regards.
As one of Matt's commentators indicates, it is time for both candidates to show up in Washington and start...um...acting like Senators.
Addendum: Via Greg Mankiw, here is a chilling analysis of the bail-out. Get this line:
Decisions by the 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.
Second addendum: Also via Matt, here is a round-up of critical commentary on the Paulson plan. Count me in too, among those screaming "no!" Yet it seems it's going to happen.
Posted by Tyler Cowen on September 21, 2008 at 11:21 AM in Food and Drink | Permalink
Comments
What's your view on the Treasury buying stock or convertible debt in financial institutions? Seems a much better policy than the current plan.
Posted by: fusion at Sep 21, 2008 11:44:39 AM
What plan is Yglesias talking about? Paulson, Pelosi, Reid, Bernake & Bush have delivered the bricks to build a wall of money, but there is nary a sgn of the architects' plans (or the cement). If Yglesias sees anything more, he sure is under the influence.
Posted by: Diversity at Sep 21, 2008 11:50:10 AM
"As one of Matt's commentators indicates, it is time for both candidates to show up in Washington and start...um...acting like Senators."
Blast! Expecting our candidates to show up to their jobs!
What kind of America is that!
Posted by: Robert Olson at Sep 21, 2008 11:56:12 AM
The current crisis hasn't done much to discourage me about free markets. Maybe I'm too much of a zealot, but it seems to me that many of the deep problems that aren't direct consequences of interventions (e.g., interventions like artificially low interest rates, government guarantees on loans, and tax incentives creating a housing supply overhang) seem to involve principal/agent problems or time horizon problems. And it seems to me that the last century or so of progress away from freedom of contract and security of property have made it artificially hard for private actors to solve such problems.
In various key industries involved --- banking, insurance, securities trading --- and in corporate law generally, laws and regulations and legal precedents have done a lot to freeze things in place so that people can't try out new organizational forms to cope with principal/agent problems. The p/a problems tend to be ferociously hard problems, so maybe private experimentation with freedom of contract wouldn't lead to better solutions. But I'd like to see it have a chance to try.
And legal, tax, and fiat currency policies have done a lot to poison private incentives involving long time horizons.
Many people believe that various interventions like the SEC and fiat currency and high marginal tax rates are desperately needed in order to prevent even worse market dysfunction. Given the correctness of that belief, then the failures of this crisis start to look more like failures markets: I think I'd agree that given New-Deal-ish government policy, markets seem inevitably to be stuck with some bad principal-agent and time horizon problems. But I'm not yet convinced of the correctness of the given belief.
Similarly, the popular criticism of markets for how DARPA took the lead on the Internet would be more telling if legal restrictions on competing with Ma Bell hadn't existed. When you have dropped a legal restriction on the market right across the avenue that naive market optimists would expect the market to take, a market failure is a strong criticism of markets only if one grants that the legal restriction is inevitable.
Posted by: William Newman at Sep 21, 2008 12:28:02 PM
Wouldn't Obama's promised middle-class tax cut have put paid to any idea of a "progressive domestic agenda" even if the bailout had never come up?
Posted by: Paul Zrimsek at Sep 21, 2008 12:58:46 PM
from http://market-ticker.denninger.net/archives/587-The-Mother-Of-All-Frauds.html:
"The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"
This is clever and nobody in the mainstream media has figured it out.
If you think the cost of this bill is $700 billion, you're wrong. The cost is actually infinite and the entire bill constitutes a giant money-laundering scheme.
Paulson can (and presumably will) buy up to $700 billion of these "assets", then sell them. Let's say he decides to buy them at 60 cents on the dollar and sell them for 10. You, the taxpayer, will eat the fifty cents, for an immediate cost of $350 billion dollars.
Having done so, he is then authorized to do so again, since the $700 billion is no longer on the government's balance sheet.
In fact, he can do this without limit, other than possibly due to the federal debt ceiling, which of course Congress will raise any time we get close to it. Oh yeah, this bill does that right up front too. No need to bother with it the first time around.
Folks, $700 billion isn't even close to the total cost of this monster.
Posted by: David S at Sep 21, 2008 1:18:04 PM
Just remember everyone that Alex is paid to defend Conservatives and attack all things New Deal. If Alex does not, Alex will lose his bandwidth and his Magic Neoconservative Decoder Ring.
Reading Alex is like reading DailyKos or Little Green Football: the blind spewing bias to the bias, just opposite ends of the extreme and financially rewarded for that purpose.
Posted by: Mark at Sep 21, 2008 1:58:17 PM
Mark, the post is by Tyler not Alex. You may also wish to revise your theory given the following:
http://www.marginalrevolution.com/marginalrevolution/2008/09/why-libertarian.html
Posted by: Alex Tabarrok at Sep 21, 2008 2:25:57 PM
In contrast to Newman above, this crisis has completely shaken my faith in the markets. Every time a crisis happens, libertarians say that if it weren't for the Fed, none of this would have happened. Considering that crises were happening before the Fed and now after the Fed, maybe it is instead the nature of markets to experience highly leveraged booms which then crash rendering the financial players insolvent. *This* is the fundamental problem of markets. Furthermore the financial markets on their own don't produce adequate disclosure. Even *with* the SEC, we have incredible concentrations of liability within certain firms such as AIG. Consequently, when a crisis occurs, no one knows who the strong financial players are so lending stops. Thus the government becomes the financier of last resort. Libertarianism is dead.
Posted by: travis at Sep 21, 2008 3:09:22 PM
Also, I do not know why folks can whine about the few restrictions on the Treasury under this plan, yet a few can support "Federal Reserve Independence."
The concept is the same: Congress can't be trusted with a potato gun. Maybe allow some legal recourse if Paulson et. all REALLY screw up (and I do believe if they REALLY screw up, they can simply be impeached along with the President anyways), but this a much better move.
Unless you think Congress is a shining example of "responsible governance." ;)
Posted by: Robert Olson at Sep 21, 2008 3:14:26 PM
Becker and Posner offer their perspectives, and seem to echo some of Tyler's sentiment, notably Posner who calls this mainly a failure of markets, not government. Becker uses the D-word several times in his (depression).
Posted by: jason voorhees at Sep 21, 2008 3:28:35 PM
"Yet it seems it's going to happen."
Don't be a whiner. What does the best evidence suggest is the best thing to do? I sense some people (Mankiw?) see this as a dialectic promoting opportunity to increase their representational privilege, rather than as a problem to be solved as best possible. I'm searching for people who are coming up with good faith better countersolutions to that which elements of the govt. are promoting. Your posts sometimes read to me more like that guy who always wants to be for "lower taxes" in a debate with someone else who is for "higher taxes" -rather than to actually come up with the best solution, such as that "the best evidence is that tax rate should be X, not lower or higher."
Posted by: Hopefully Anonymous at Sep 21, 2008 3:30:50 PM
If markets didn't believe that govt would bail them out, we would still see crises, but more often and smaller. Instead we got a giant game of chicken, which the market wins (some bailout will happen) because the economy is held hostage. If you didn't have FDIC insurance, then there would be more bank runs; but since individual bank runs would be common, they would also be less threatening to the economy as a whole. The problem with institutions like FDIC is that they make the government the real underwriter, since I as small-time lender don't have to consider the solvency of a bank. And that means we pack our crises into less frequent and less manageable chunks.
Posted by: shortgamma at Sep 21, 2008 3:31:57 PM
If markets didn't believe that govt would bail them out, we would still see crises, but more often and smaller. Instead we got a giant game of chicken, which the market wins (some bailout will happen) because the economy is held hostage. If you didn't have FDIC insurance, then there would be more bank runs; but since individual bank runs would be common, they would also be less threatening to the economy as a whole. The problem with institutions like FDIC is that they make the government the real underwriter, since I as small-time lender don't have to consider the solvency of a bank. And that means we pack our crises into less frequent and less manageable chunks.
Posted by: shortgamma at Sep 21, 2008 3:32:19 PM
The "progressive domestic agenda" would have been DOA anyway. Obama may be a radical in his heart of hearts, but he is also pragmatic.
Recall that Clinton once had his own progressive agenda, which came to nothing: universal health care and (as the very first initiative, in his first few days) gays in the military. And that was with the post-Cold-War peace dividend, Internet bubble prosperity, no war on terror, and sharply lower budget deficits or even surpluses; far more favorable conditions than Obama could ever have hoped to face.
Posted by: at Sep 21, 2008 3:48:34 PM
I am somewhat puzzled by Posner's analysis (see above link). Essentially, he says it is the private sector's fault because Paulson and Bernanke are part of the private sector. But, they are also government. How is it a failure of the private sector when private sector actors are given governmental powers and then proceed to screw up?
I mean, the whole problem with government is largely one of rent-seeking, right? Isn't putting private citizens in charge of government functions exactly what we do not want government to do? How can we be surprised by rent-seeking regulations like banning short-selling coming from the financial industry? That is exactly why government needs less power, in my view.
Posted by: Cliff at Sep 21, 2008 4:06:13 PM
You know, I hate this plan, but there's a simple addendum that'd make me an enthusiastic supporter of it.
Execute any CEO of the failing institutions who let this happen on his or her watch. Solves the moral hazard problem.
Oh yeah, wouldn't want to forget Greenspan, too.
Posted by: Zephyrus at Sep 21, 2008 4:26:15 PM
From the naked capitalism link:
Yet as we discussed, the plan makes no sense unless the Orwellian "fair market prices" means "above market prices."
But does it? Are the 'market prices' of the securities really a good prediction of their value if held long-term? That is, isn't it possible that many of these mortgage securities are worth more to the federal government (which doesn't have to worry about short time horizons, 'mark to market' accounting or credit ratings downgrades), than they are to any private entity? Even if, as seems likely, house prices haven't hit bottom, it's still going to be a relatively small percentage of homeowners who will default ultimately. Unless...unless we have something like a genuine depression and massive unemployment.
So, yes, get rid of the 'non-reviewable' clause, but otherwise -- before we scream, "NO!" -- what's the second-best plan? Because if this plan is torpedoed and we go into political gridlock mode, the fallout could be so fast and terrible that no plan put in place a month from now or after the new administration was sworn in would have any hope of preventing disaster.
Posted by: Slocum at Sep 21, 2008 4:56:16 PM
Obama may be a radical in his heart of hearts
There are only two extremist poles in this game. Extreme hostility against markets and extreme hostility against governments. The first brand of extremism collapsed in 1991, the second one collapsed this week.
Posted by: ogmb at Sep 21, 2008 5:21:07 PM
It seems to me that in all this everyone is blaming the government and the finance companies, when the root cause was massive fraud on the part of borrowers and mortgage brokers speculating on the real estate market. Yes, maybe the lenders and mortgage buyers didn't keep their eye on the ball as much as they should have, but they are still the victims of fraud. You can't lie to someone and then blame them for believing you.
The real perpetrators were the people who lied about their stated income to buy homes at prices no one could afford (i.e. the people who are now being touted as victims when they lose the house they should never have bought), along with the real estate agents and mortgage brokers who encouraged them. If they had not done that, the bubble simply could not have gotten as big as it did.
If any government intervention is necessary, it is to prosecute the defaulting home buyers and their mortgage brokers for criminal fraud. Anyone who lied on their mortgage application is guilty of a felony, yet they won't even get the punishment I get for parking in front of my house on street sweeping day.
The real moral hazard we should be worried about isn't bailing out AIG or Fannie Mae, its allowing people to commit mortgage fraud and get away with it, simply because it is too expensive for the mortgage owners to bring fraud actions against insolvent fraudsters.
Posted by: Doug at Sep 21, 2008 5:22:31 PM
Look, we had banking institutions and monetary institutions that interacted with each other for several decades. Then the monetary institutions changed (when the dollar was made fiat),but the banking ones were not adjusted. All this inflated credit simply exaggerated banking flaws. Why is the lesson here that markets fail in this case? Government imposed these institutions, as well as its monopoly control over money, and markets performed deplorably, they did nonetheless act within the constraints set by the State. (Isn't this the point of TC's earlier post on derivatives?) Remove these constraints, allow competitive money again, allow bad businesses to fail (including banks), let shareholders control boards (repeal the 1993 legislation weakening their role).
Posted by: chris at Sep 21, 2008 5:37:47 PM
". . .it is hard to escape the conclusion that markets simply have performed horribly in a number of important regards."
One is tempted to ask: What did you want markets to *do*? But, really, markets aren't agents (actors, performers); the buyers and sellers (and brokers or other intermediaries) are the ones who are doing (or not doing) things. So the question should be: What have these people done wrong, according to you, and why have they acted so?
Posted by: Philo at Sep 21, 2008 6:08:38 PM
". . .it is hard to escape the conclusion that markets simply have performed horribly in a number of important regards."
One is tempted to ask: What did you want markets to *do*? But, really, markets aren't agents (actors, performers); the buyers and sellers (and brokers or other intermediaries) are the ones who are doing (or not doing) things. So the question should be: What have these people done wrong, according to you, and why have they acted so?
Posted by: Philo at Sep 21, 2008 6:09:21 PM
"it is hard to escape the conclusion that markets simply have performed horribly in a number of important regards."
Might be hard, but escaping that conclusion is still the right thing to do. How can a federal reserve, fractional reserve banking, a shadow banking system, socialist engineering projects posing as free-market institutions (freddie and fannie), and ad-hoc regulation of all the above resulting in meltdown have anything to do with market failure? A market is what emerges out of the absence of coercion. What emerges and collapses out of a mess of semi-coercion can not be called a market failure.
Posted by: paleohawk at Sep 21, 2008 6:47:35 PM
Tyler,
Congratulations! I call you the first of the libertarian economist that I have seen to have the intellectual honesty to take a look at their own market bias.
Philo,
What do I want markets to do? I guess you didn't get the memo. Markets are self regulating and able to generate mechanisms to insure against bad stuff happening without any government help.
Posted by: RobbL at Sep 21, 2008 6:47:54 PM
