Post Bailout I

I'm still trying to figure out what exactly the bailout means for the markets, but I have to echo Megan McArdle here:

I didn't think it was possible to be more disgusted with politicians than I usually am, but I find it impossible to express the seething contempt that I feel at this kind of opportunism. I don't mind when they screw with the normal operation of the economy for venal personal gain. But risking a recession in order to get a cut in the capital gains tax? Letting it tank because you can always blame it on the Republicans?

She's right. It seems, from these reports at least, that politicians were more concerned about politicking than about public policy and the common good. If some believed that keeping the government out of the markets now was for the common good, then that is respectable. If they voted no because they're worried about THEIR job security, well, perhaps they don't deserve the job that they currently have at the behest of their constituents. The same goes for anybody who thought that another compromise would have gotten the deal done but didn't try for the compromise so that they had a line of attack against Republicans for the next five weeks.

A Rundown on Paulson's Plan

I was going to post a rundown on the Paulson and Bernanke bailout plan. However, thus far, I've only been able to find paragraphs similar to the following:

The Bush administration has proposed granting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from private firms as part of a program that Treasury Secretary Henry M. Paulson Jr. said “has to work.”

I have yet to find any other details about this program, and my friends who work on Wall Street don't seem to have any more information to offer me.

This should be scary. It IS scary. After the movement towards socialism last week, the government now wants a blank check to spend $700 billion in tax payers money. Unfettered authority? I understand the need to remove toxic assets from the system, but giving the government unfettered authority over anything tends to end poorly for the citizens of that country. I have no doubt that this is a serious crisis and that something needs to be done. But, like I said last week, this is another flashback in dystopian movies.

Dodd's plan is better. For starters, it gives the US taxpayers equity in the bailout so that should the assets recover, the people will benefit from the sale of the assets. It also creates an oversight board to supervise the Treasury Department's purchases. The board would be consist of the chairmen of the Federal Reserve, Federal Deposit Insurance Corp. and the Securities and Exchange Commission, along with two members of the financial industry chosen by Congress. The board would create a credit review company to review all purchases made by the Treasury.. The Treasury Secretary would be required to give weekly reports about assets bought and sold. Dodd proposes penalizing executives who take "inappropriate risks" by reducing executive severance packages and force executives to give back earnings based on inaccurate accounting measures. Finally, this authority would expire on December 31st, 2009.

First off, again, giving this kind of authority to the Treasurer for any length of time is scary. The abiliity to nationalize companies is a huge expanse in executive power. However, while I'm not an expert on this subject, those who are see very little choice. So, if we must have a bailout, then we must have a bailout.

Dodd's bill hopefully mitigates the dangers the expanse in power creates. It also creates, as I indicated earlier, a disincentive for executives to allow their companies to get to the point where they need a government bailout. If executives face punishment for risky behavior, then they'll have less reason to engage in risky behavior. Under the Paulson plan, there is nothing to discourage executives from letting their company require a government bailout. Like I said earlier, the bailout conditions should be structured like that of the IMF's.

Finally, this post by Hilzoy should be read, as I'm sure it echoes the feelings of many people on the left. Key quote (Hilzoy is quoting Matt Stoller of Openleft.com)

"I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me."

Punitive Measures

Ben Bernanke believes that there should be no punitive measures for firms that participate in the bailout. But as Matt Yglesias points out, "if some measure of bailing out is truly necessary then the money will be provided, but it shouldn’t just become handouts for bankers. Punitive measures mean that only firms that genuinely have no alternative will enter into the program, and their corrupt or inept managers will be duly punished."

This is basically how the IMF works for entire countries. The IMF doesn't force itself on countries, but if the countries want to receive loans from the IMF, presumably because their credit is so bad nobody else will lend to them, then they have to meet several preconditions and change the way the economy works in order to get the loans.

While the shape the bailout will take hasn't been set yet, it seems to me that the IMF is probably the best model for it. As Matt says, if there are no punitive measures, then it's just free money, a handout it you will (we all know how much Americans hate handouts) If there are punitive measures then companies will be forced to behave in a more responsible manor, rather than taking risks that they shouldn't take and expect to get free money to fix their mistakes.