October 2, 2008 3:45 PM
It will actually divert money to the Treasury from commercial lending. Naked Capitalism has more, concluding:
When Paulson dumps out his 700 billion in treasuries it's going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson's billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson's billions divert credit from working capital to long-term mortgages - from where it's most needed to where it's most wasted.
Even if the giveaway adequately props up the banks, which I doubt, they still can't make working capital loans, because the raw material they used (commercial MM deposits) will be desperately short.
I think it's very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson's plan will increase the supply of, say, inventory loans. It's not that every economist in the world is an idiot, it's just not going to help. I think people have fallen into the fallacy that if it costs a lot it must be valuable. Paulson's plan falls into the category of very expensive way to hurt ourselves.
October 2, 2008 3:18 PM
At least in its original form, the $700 billion bailout bill was unconstitutional because it gave the Treasury Secretary boundless discretion to buy, or not buy, bad loans at whatever suited his whims, without providing for judicial review. More recent versions of the financial-system bailout bill may have added a little bit of judicial oversight (rendered almost meaningless by virtue of the minimal, vague, and conflicting statutory criteria they provide), but they have not changed the fact that the bill remains politically dangerous.
If the bailout bill passes (as seems likely), businesses seeking to sell their bad loans will have a powerful incentive to ingratiate themselves with whoever is president, and whoever is the Treasury Secretary, by making political donations and engaging in influence-peddling. Expect vast political donations to the President and his party from banks and lenders if the bailout bill passes, effectively drowning out the voices of the American people.
The incoming administration may be able to use it as a form of political patronage, effectively operating as a political slush fund for favored lenders. During the New Deal, the government used welfare programs to essentially buy votes in swing states. As a result, even though the U.S. economy recovered more slowly from the Great Depression than from prior sharp recessions, and even though it recovered more slowly than the economies of other Western countries which rejected big-government responses to the Depression (like Great Britain, where public employee salaries were cut), the incumbent administration was reelected an unprecedented four times.
October 1, 2008 11:24 AM
Banking expert Peter Wallison explains why deregulation didn't cause the financial crisis, while Steven Malanga explains how government regulators foolishly pressured banks to drop prudent lending criteria as "discriminatory," resulting in risky lending that caused the crisis.
October 1, 2008 10:07 AM
As a $62 trillion dollar over the counter market, CDSs need an exchange or central clearinghouse to provide transparency and collateral requirements. CME (formed from the Chicago Board of Trade and the Chicago Mercantile Exchange) and the Clearing Corp (formed from 17 financial players including UBS and Goldman Sachs) have stepped up to the plate. Clearing Corp could have had a clearinghouse up and running within a week or so; however, the Fed has pushed Clearinghouse to obtain a banking license which will probably delay its opening until next year. But with each bank that is removed from this house of cards the threat of meltdown is increased. The banks are falling one after another internationally, and with the CDSs so intertwined, its only a matter of time until when you take away one more card and they all fall.
According to Bloomberg, "Barclays analysts estimated in February that if a financial institution that had $2 trillion in credit-default swap trades outstanding were to fail, it might trigger between $36 billion and $47 billion in losses for those that traded with the firm. That doesn't include the market-value losses investors face as the cost to protect companies against a default widens."
Perhaps it would be a good idea for the Feds to speed their approval process?
October 1, 2008 3:59 AM
As the Wall Street crisis has expanded, politicians are falling all over themselves arguing on behalf of the "little guy" against "fat cats." But in reality, the main elements of "rescue" plans receiving a bipartisan push would represent a massive transfer of wealth from little guys and gals to fat cats' pockets.
First, there was Treasury Secretary Hank Paulson's $700 billion bailout the House defeated on Monday, but to be revived in the Senate as early as Wednesday night. Then there is the upper-income wealth transfer that will now be added as the cherry on top of this bailout: raising deposit insurance to bank accounts of $250,000 or more.
According to the Associated Press, both Barack Obama and John McCain on Tuesday backed lifting the deposit insurance cap to $250,000 from the current $100,000 maximum. And Federal Deposit Insurance Corporation Chairwoman Sheila Bair wants Congress to give the FDIC "emergency" authority to raise the cap to any level she deems necessary to "restore confidence" in the banking system.
But wasn't too much confidence in the banking system in large part what got us into this mess? Deposit insurance, even at current levels, encourages "moral hazard" as consumers assume their banks are totally safe and don't look for quality as they do with investments and so many other products.
And I'm sorry, but if you were fortunate enough to inherit or sophisticated enough to accumulate more than $100,000, you don't need the extra protection from other taxpayers. How hard is it, under the current system, for folks with $250,000 burning holes in their pockets to find three different banks to put it in?!
September 30, 2008 7:34 PM
Rigid mark-to-market accounting rules may have triggered the current financial crisis by artificially undervaluing mortgages and securities (making financial institutions appear insolvent). Even the very government officials who have advocated those rules now hint that they will disregard them in valuing the government's own mortgages, in administering any bailout! (This inconsistency undermines arguments for the bailout).
The SEC today made federal accounting rules a bit less rigid by allowing methods other than mark-to-market accounting in appropriate conditions. Thus, when mortgages have not defaulted, financial institutions need no longer treat them as worthless, even when no active market exists for the security based on those mortgages.
September 30, 2008 11:58 AM
The People have spoken. They have picked the Market over the Government to be the chooser of winners and losers.
Here are the Market's choices for winners:
1. Those that live in their homes, versus those that purchased houses to be flipped (third letter).
2. Homeowners that purchased a house that they could afford with a 30-year fixed, versus the over-extended with an adjustable rate.
3. Small local banks that didn't make ARM loans with no money down, versus big ones with mortgage-backed securities.
4. Those that saved their money, versus those betting on the stock market.
5. Those who pay for their cars with cash, versus those who finance them.
6. Those who pay for their expenses with cash, versus those who run up credit card debt.
7. Those who save money for their kids' college funds, versus those who rely on loans.
8. Those who chose preferred stock, versus owners of common stock.
9. Those industries that are needed by and contribute to today's economy, versus those that rely on subsidies voted for them by politicians.
10. In the global market—the Market will choose economies that have less debt and low inflation, versus big spending governments with easy monetary policy.
In general, the Market will choose the prudent. Who would have the Government picked as winners? The Market's choices for losers. The Bailout would have picked all of the losers above.
Risk is not immoral: everyone should be able to invest as they choose, but they do so at their own risk.
September 29, 2008 6:19 PM
There are all sorts of people today who normally talk about free markets but who have got themselves into a tizzy over the failed bailout. We need to get one thing straight - the bailout was the wrong answer to the wrong question. To begin with, the plan was merely postponing the inevitable, as a letter in the Wall Street Journal pointed out this morning:
The lesson of past financial inflection points is that we must let the markets reallocate capital from less efficient to more efficient uses. The sad fact is that we need to go through a brutal process of resizing down our financial and real-estate industries. Actions to try to recapitalize doomed financial companies only postpone the day of reckoning, which will make matters worse as the Japanese learned in the 1990s.
Secondly, we have to ask how to protect future viable assets and investments, not just what we should do about past failed assets and investments. The bailout plan is exactly the wrong approach. It puts in them in jeopardy because not only does it tread down the policy road that led to the Great Depression, as Martin Hutchinson powerfully argues, but because real capitalism provides strict disciplines that actually provide better protection than government regulation. We will not succeed in protecting our children from a future financial meltdown if we merely put in place the exact parameters for it to happen again.
September 29, 2008 6:04 PM
The stunning defeat of the Hank Paulson's socialism-for-Wall Street bailout on Monday has just made planks of a pro-free market alternative much more viable. As Open Market has noted before, The Republican Study Comittee, a caucus of pro-market members of the GOP Congress, has presented such a plan that would be much more effective at stopping the contagion than the Paulson bailout, and many of its provisions would not cost taxpayers a dime.
The RSC plan is chock-full of measures to remove barriers to economic growth and market-distorting subsidies. It would suspend capital gains taxes to put trillions of dollars of capital in the economy, and set Fannie Mae and Freddie Mac, which as CEI has documented were at the root of this crisis, on the road to full privatization.
Most importantly for the crisis at hand, the RSC plan would make regulatory agencies suspend the mark-to-market accounting rules that a range of experts agree are spreading the contagion by forcing solvent banks' to "write down" their assets, based on the last fire sale of a highly leveraged bank. As Gary Gorton, finance professor at Yale and member of the National Bureau of Economic Research has written, "With no liquidity and no market prices, the accounting practice of 'marking-to-market' became highly problematic and resulted in massive write-downs based on fire-sale prices and estimates."
September 29, 2008 3:23 PM
Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don't stick the rest of us with their losses.
It's not hyperbole to say the Republican and Democratic backbenchers who defied both parties' leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming.
Several great speeches on the Right and Left were given. Democrats Brad Sherman of California and Earl Blumenauer of Oregon gave powerful speeches against corporate giveaways. And conservative leaders of the Republican Study Committee -- such as Jeb Hensarling, Jeff Flake, Mike Pence, and of course Ron Paul -- spoke about how government intervention was largely the cause of this predicament, but the bailout would doom arguments for the free market form here on out. The idea of the government making this kind of outlay to high-flying risk takers just didn't jibe with members, and certainly not with the American people.