Monday, September 22, 2008

Pull yourselves together!

William Greider's "Paulson Bailout a Historic Swindle" is a pretty good case study in liberals going absolutely bananas about the proposed remedy to the financial crisis. It worked poor Bradrocket into such foaming rage that he threatened to withhold his vote for Obama if he acquiesced to the $700 Billion Blank Check.

A few points:

1) A lot of people, Greider included, are overstating the extent to which the people who actually work "on Wall Street" were the primary beneficiaries of the housing/credit bubble. Yes, they made a lot of money, but the total amount of wealth creation from the rise in housing prices and the overextension of credit was huge and widespread. The dot-com bubble was actually not as major as the housing bubble, and a lot of people sold houses from 2002-2006. If profiting from asset price inflation per se is a sin, there was plenty of sinning going on off Wall Street as well.

2) Related to this tendency to be blinded by the hubris of super-rich people is overstating the extent to which large capital infusions for major financial institutions benefit the executives of the banks personally. Yes, they make huge amounts of money, but it's not as though the $700b is going right into Jamie Dimon's expense account. It's overcompensation, not rampant embezzlement. That money is going on the balance sheets of the banks, in place of their Monopoly money Level 3 assets, so they can slow down their deleveraging and relieve the market of some forced selling. This isn't being proposed solely to make super-rich people feel super-rich again. I'm not sure how many cents on the dollar the Treasury will eventually recover, but if Barney Frank suggests (as he did this morning on TV) that it could be approach breakeven then I'm convinced it's at least plausible.

3) The spite factor seems to loom large as Greider dwells on the fact that the government could, if it wanted to, crush all these banks like so many grapes:

Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own--cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed.

Yeah, no kidding. The government could doom the banks, but that's not the object of the game now, is it? That would be counterproductive in the extreme. Everybody likes a solvent banking system, not just bank CEOs. It's pretty much Paulson's talking point from his tour of the Sunday shows, but the American taxpayer is already in dire financial trouble. I'm all for Congressional hearings when this is over, but people need to realize that massive bank failures would also suck in their own way.

Most Americans come out behind in their dealings with both Wall Street and Washington, but neither can just be given up on. You can't call John McCain the second coming of Herbert Hoover while also insisting that the banking industry be left to its own devices. Yes it's a blank check. Yes it's a taxpayer giveaway to investors. What taxpayers get in return is a new, substantially-less-doomed financial system, which can survive to be thoroughly overhauled afterward.

I'd like to see some strings attached to the money, but the Democrats' decision to focus on executive pay limits almost makes me wish they had just laid down completely. What a feckless, superficial demand. The big question is how should the deal be structured to minimize moral hazard and economic damage to those who didn't own this crap. That the funds are to be administered at Hank Paulson's discretion doesn't strike me as prima facie evidence that those goals won't be met.

Given how many much smarter people whom I usually agree with oppose this plan, it's likely I'm wrong about it. But from where I'm sitting (i.e. in the financial industry), the outrage is completely out of proportion and largely misdirected.

The Politico has a roundup of economist skepticism about the plan, but there's some pretty notable concessions made by two of the quoted skeptics:

Prof. Zingales of U. Chigago, in the linked piece entitled "Why Paulson is Wrong": "The Paulson RTC will buy toxic assets at inflated prices thereby creating a charitable institution that provides welfare to the rich—at the taxpayers’ expense. If this subsidy is large enough, it will succeed in stopping the crisis."

Nouriel Roubini: “He's saying, ‘Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.” (Roubini told the New York Times that despite these concerns, he also thought the plan could help stave off a recession.)

And the Financial Times likes it outright. But other than that, it is quite unpopular.

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