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Sept.23
“Some said we should just stick capital in the banks, take preferred stock in the banks. That’s what you do when you have failure,” Mr. Paulson told the Senate Banking Committee on Sept. 23. “This is about success.”
Here is the link.
Posted by Tyler Cowen on October 12, 2008 at 01:46 AM in Current Affairs | Permalink
Comments
If it is success, he wouldn't be begging in the first place.
Posted by: just say nyet at Oct 12, 2008 2:02:05 AM
I just updated my priors. Now I am 99.7% convinced he is a crook.
Posted by: Bob Murphy at Oct 12, 2008 2:02:07 AM
My prior that he's utterly incompetent is now at 105.3%.
Posted by: ogmb at Oct 12, 2008 8:42:34 AM
It's not working yet because he wasn't granted carte blanche no questions asked.
Posted by: meter at Oct 12, 2008 8:52:27 AM
In a sense he's right. The argument of Paul Krugman and other economist goes like this. Say a bank's balance sheet is the following:
Assets:
Alright mortgages/cash/car loans: 450
Toxic subprime mortgage exotica: X
Liabilities: 500
The Paulson plan assumes the true hold-to-maturity price of X is much greater than 50, but banks' balance sheets have started to appear insolvent to creditors due to mark-to-market. A good reverse auction gets the assets priced, the market moving and the government eventually comes out even. Then, everybody has a merry Christmas.
However, what if the Paulson plan's reverse auctions work, but correctly set the toxic stuff at X<50? Banks still cannot pay creditors nor take out more credit for themselves. To survive they'll need straight-up cash, not treasury bills nor cash for any of their existing assets. Cash will increase equity, which the government should be given ownership of.
It's a very drastic step for banks that are indeed in failure.
Posted by: anon at Oct 12, 2008 9:20:35 AM
Treasury bills in my last post wasn't correct. I meant loans issues to the Fed for the Fed to keep interest rates low.
Posted by: anon at Oct 12, 2008 9:22:55 AM
Is it cheaper to prop up banks that are failing than close them, sell the deposits, and liquidate the assets? Perhaps in the short-run, but what happens in the long-term? Just putting in cash to cover the toxic securities may not be enough. What if there is a run? When do you stop supporting the institution? How much money do you risk?
Posted by: jorod at Oct 12, 2008 5:23:46 PM
I think a run is the unforgivable sin, which is a bit ironic.
It reminds me of a passage I think in The Godfather about the bookie who accidentally left a 'middle' where savvy gamblers made money on both sides of the bet. Running a gambling house is okay, but letting the patrons figure out the game is a problem. It seems the mob and the government have something else in common.
Posted by: Andrew at Oct 13, 2008 4:25:16 AM
At the time, I reckoned that this was the stupidest thing said by anyone in authority in the three days up to and including the 23rd. And there was plenty of competition.
I give Mr Paulson every credit and honor for changing his mind.
Posted by: David Heigham at Oct 13, 2008 7:01:19 AM
The stupidest thing said by anyone in authority has to be, "this sucker could go down."
Posted by: David at Oct 13, 2008 8:41:02 AM
