Well, clearly I'm late to the party. This mess has been in full effect for weeks now, and things still look bleak. One thing is for sure: this is a historic moment.
What to do? In reality, I'm not exactly sure. Some degree of stabilization seems necessary, but Paulson's current plan is utter nonsense. $700 B with no strings attached? Give me a break. This is corporate welfare in its worst form: handouts for those artists formerly known as iBankers. Unfortunately, it seems all too likely that it will pass.
Just how much money is $700 Billion? Here are a couple explanations. If you accept Joe Stiglitz's estimate for the cost of the war in Iraq, the bailout costs about 20% as much as the war. Thankfully, there's at least some chance that we'll make money on the bailout. I'm still skeptical.
The trouble here is the time-frame - we do need relatively quick action.
Believe it or not, Paul Krugman's analysis is right on.
"1. They’re still offering something for nothing. In major financial
crises, the beginning of the end comes when the government accepts that it will
have to pay some cost to recapitalize the banks. But in this case they’re still
insisting that it’s basically a confidence problem, and it we can wave our magic
wand — a $700 billion magic wand, but that’s just to impress people — the whole
thing will go away.
2. They’re asserting that Treasury and the Fed know true values better
than the market. Just to be fair, it’s possible, maybe even probable, that
mortgage-related paper is being sold too cheaply. But how sure are we of that?
There are plenty of cash-rich private investors out there; how many of them are
buying MBS? And isn’t it bizarre to have officials who miscalled so much — “All
the signs I look at,”
declared Paulson in April 2007, show “the housing market is at or near a
bottom” — confidently declaring that they know better than the market what a
broad class of securities is worth?
3. Even if it works, the system will remain badly undercapitalized.
Realistic estimates say that there will be $800 billion or more of real,
medium-term — not fire-sale — losses on home mortgages. Only around $480 billion
have been acknowledged by financial institutions so far. So even if the
fire-sale discount is removed, we’ll still have a crippled system. And Paulson
is offering nothing to fix that — unless he ends up paying much more than the
paper is worth, by any standard.
Meanwhile, Paulson and Bernanke seem to be digging in their heels against
equity warrants or anything else that would make this a more standard financial
rescue. I say no deal on those terms — and if the lack of a deal puts the
financial world under strain, blame Paulson and Bernanke, who have wasted most
of a week demanding authority without explanation."
Ultimately, If a bailout must happen, we need an equity stake. This should be non-negotiable. We cannot continue to have socialized risk and privatized benefits.
Here's a helpful analogy from the guys at Division of Labor.
