I have no professional background in economics or high finance. I’m a little guy, who felt the crash coming and pulled my money out of investments some time back. I knew a bad deal when I saw it. Now I see another bad deal, a potentially catastrophic deal between Wall Street and Washington, this Corporate New Deal of the 21st Century, and there’s not a thing I can do about it.
The Administration proposes to place the Secretary of the Treasury in an extraordinary and extralegal position of authority without any responsibility whatsoever to Congress, the body constitutionally established to set laws and to authorize funds. Once again, fear and panic are used to rush through under cover of darkness a complete abdication of their responsibilities and eliminating any thread of accountability to the taxpayers. (This is the same body of government that voted several years back to make it virtually impossible for folks like me to seek debt relief by declaring bankruptcy.) We are all once again subjugated and rendered irrelevant except for our pocketbooks.
The latest Wall Street bailout concept proposes to buy up a humongous amount of bad debt using valuation methods yet to be determined and without oversight or review of any kind. Take a look at a couple of sections from the draft text:
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
…
Sec. 8. Review.
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.
Concerns like mine are readily dismissed by those who are more “sophisticated” and “knowledgeable” of the universe of capital markets. “It’s too complicated for you to understand. Trust us.” I don’t need to be a PhD economist or a Democrat to grasp the idea that the bound knot of capital flow we have today arose from wild-eyed speculation and creative bookkeeping. This is Enron-nomics on a massive scale.
Treasury’s move is supposed to calm the markets and to restore confidence in the US financial system, yet there isn’t even the most tenuous suggestion of how the government will recoup a reasonable portion of the handout. For that matter, the proposed legislation doesn’t even mandate recovery of any kind.
As an investor and taxpayer, what exactly am I supposed to feel good about?
Recommended reading:
Why Paulson is Wrong
Luigi Zingales
Robert C. Mc Cormack Professor of Entrepreneurship and Finance
University of Chicago - GSB
Why You Should Hate the Treasury Bailout Proposal at nakedcapitalism.com
Monday, 22 September 2008 at 04:34
It looks like the Paulson plan won’t fly in its current form. This needs to be done in a transparent way.
Monday, 22 September 2008 at 14:19
My immediate reactions to last week’s turmoil: (a) Gee, I remember The Crash of 1987. Don’t they? Maybe I’m an out-of-touch nearly-Ivy, but I don’t remember the bread lines and the 35% unemployment…. (b) I remember the S&L crisis. [Not to be confused with the SNL crisis… it took them years to recover from the departure of Mike Meyers and Dana Carvey….] Remember the bread lines and the… oh, never mind. (c) I wish I had some loose change, because now is the time to buy some stocks, (d) Why are the folks who got massive campaign contributions from Freddie Mac and Fannie Mae still in charge of sorting this out?, (e) Our Treasury Secretary’s name is Paulson? Who knew? (f) Gee, immediate action by Washington? Something really must be wrong. (g) Never mind, the Dems are stonewalling. Back to business as usual.
Monday, 22 September 2008 at 16:28
Wikipedia says “Paulson received his Bachelor of Arts in Advanced Kleptomania from Dartmouth College in 1968.” These Ivy elitists really are ruining this country.
Monday, 22 September 2008 at 23:06
The Wikipedia entry as quoted makes sense. The warning signs are clear from his Dept of Treasury bio: Dartmouth English major/football player. Codewords for just “player” in Hanover. He was a Pentagon and White House staffer in the Nixon administration after he got this MBA at Harvard. Oh, boy. He didn’t exactly agree to a pay cut when he came back to government.
Monday, 29 September 2008 at 02:18
Well, FWIW — which isn’t much — I’ll go on record as officially opposing the bailout, at least in the form it is being reported on Sunday night, 28 Sept 08. I reminds of the adage that no man’s property is safe when the legislature is in session.
Monday, 29 September 2008 at 17:17
It’s all the fault of those dastardly MIT physics grads.
Monday, 29 September 2008 at 18:56
Well, I’ve become a hard-liner on statistical questions. Which is to say, as I’ve matured, I’ve gained the footing to dispute the ‘frequentist’ interpretations of probability and stick to the rigorous analysis. Which is why I probably
wouldn’t have fit in on Wall Street (though I considered it back when I was taking graduate courses in economics ~ca. Y2K). I would have spent my days warning people that applying statistical techniques and the Ito calculus to stock movements is unrigorous. MBAs don’t want to hear that from their highly-paid technical consultants.
Monday, 29 September 2008 at 23:41
Paul Krugman: “So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we’ve become a banana republic with nukes.”
http://krugman.blogs.nytimes.com/2008/09/29/ok-we-are-a-banana-republic/
At this point, I oppose it, too. Jeffrey Miron makes a good point about bankruptcy preferred over bailout for a number of reasons. Government mismanagement is among the chief reasons things are getting a bit ugly.
“[T]he current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.
“The costs of the bailout, moreover, are almost certainly being understated. The administration’s claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.
“If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.”
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/
Tuesday, 30 September 2008 at 23:46
ROFL at Krugman calling anyone else a crazy. But his point is well taken — there are crazies on both sides of the aisle. But look on the bright side — gridlock is good. I don’t know about the comparison to a Banana Republic — last time I bought pants there, they seemed pretty well-run.
Krugman, a notorious leftie, has never accepted that gridlock is the natural state of a well-balanced government. Like most lefties, present company excluded, he seems to believe (a) he knows what is right, and (II) therefore everyone else should do what he says. I’ve found that’s a logical stance for professors, but not for politicians.