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3 Responses to "Wall Street Bailout"

1. | Reply Brian Christensen
   Posted 25 Sep 2008 at 1:30pm #
   

   The latest edition of The Economist argues for the plan and I am essentially in agreement with them:

   And, second, the potential costs of producing nothing, or too little too slowly, include a financial collapse and a deep recession spilling across the world: those far outweigh any plausible estimate of the bail-out’s cost.

   Although $700 billion is a lot—about 6% of GDP—some of it will be earned back and it is small compared with the 16% of GDP that banking crises typically swallow and trivial compared with the Depression, when unemployment surged above 20% (compared with 6% now).

   If our options are a 6% cost with a plan versus a 16% cost without one, pragmatism tells me to go for the 6% plan. I still don't like it but I'm not sure I see any attractive alternative.

2. | Reply Scott Ellsworth
   Posted 25 Sep 2008 at 5:44pm #
   

   The argument goes something like this.

   Take it as written that investment banks screwed up big time. They misassessed their risk and exposure to subprime mortgages, and the impact of those mortgages on leveraged derivative securities. For example, many banks owned securites derived from perhaps a thousand mortgages, where the payments from the first hundred payers went to one party, the next hundred payers to another, and so on. Most classified the second to last tenth as pretty good, when actually, they were quite unsafe.

   Then, when caught by the need to write down some number of billions, they valued the write down conservatively, rather than liberally, understating their exposure again.

   One bank failing in this way is not a big deal. There will be other banks. Having all the major lenders die is a much bigger problem, as that kills the cash accounts and cash flow for companies that are otherwise solvent. Having AIG go down would mean that all of the companies insured through them just became much bigger risks, not because the companies are unstable, but because their insurer just went belly up.

   Put another way, had AIG tanked, companies with good cash flow would not have had the credit to buy things, would have been unable to get at their securities to pay mid-term expenses, like payroll, and would have had their stock tank due to a related failure.

   Points to question:

   Will this actually solve the problem by propping up the banks until a realistic assessment of their values comes through.

   Will the banks react with greater forclosures to satisfy short term cash needs, causing a bigger mortgage death spiral?

   Assuming we want to spend nigh on a trillion dollars to make the problem go away, is it best spent buying up dead assets, or is it best spent buying equity stakes in the companies, and letting them use the resulting cash to write down the assets?

   Should the people who ran the companies during this period escape unpunished? (Or, what is the statute of limitations on stupid investment practice at the executive level?)

   How should the program be administered, what oversight is needed, and how do we get a decent set of checks and balances on something over $2,500 per American worker?

   Scott

3. | Reply Brandon Menc
   Posted 28 Sep 2008 at 5:35am #
   

   This is a bad idea. 100 economists officially think so. They also agree that letting the market sort this out will not leave us in a depression. Maybe a recession, but we deserve it.

   A bailout creates moral hazard - failure is not punished, and investors will continue taking risky action because of it. At some point, we won't have the money for one more bailout, and then we'll be in serious trouble. Some think that the Savings and Loan bailout created the moral hazard fueling our current mess. It'll just get worse.

   No one is calling the situation what it is: the government will own AIG. This is socialism, and it might as well be communism. The government buying a business with our money? Not only that, but buying a failing business? Ridiculous.

   If this deal goes through, it will be a sign to the rest of the world that free-market capitalism failed.

   The French are already congratulating us for the bailout. What does that tell you?