A Defense of the Bailout, and a New Divide
posted by Frank Pasquale
My colleague Stephen Lubben has written a brief defense of the bailout, available here. He asks: “Foregoing the bailout likely means freezing up the financial system for a good, long time — are we really ready to say no home or car loans until 2010?” But it’s unclear whether, in the game of chicken now going on at Capitol Hill, there will be enough transparency in the final bill to make it plausible. We can hope for some Doddian tweaks, but perhaps most interesting here is the new political divide the bailout is uncovering.
The people who are most dismissive about this plan are on opposite sides of the political spectrum. Todd Zywicki calls it a “blunderbuss bailout” that recalls the worst aspects of the New Deal; Nation blogger Christopher Hayes analogizes it to a Nigerian spam scam. Greenwald articulates a realist/populist case against trusting the experts here:
Economic policy in this country has been dictated by Wall Street for the past two decades because . . . [it] funds both political parties. The face of Clinton’s economic policy of the 1990s, Robert Rubin, had exactly the same background as Hank Paulson, the Treasury Secretary who presided over the current crisis — former Chairmen of Goldman Sachs. These aren’t Sober Traditionalists who shunned the complex derivatives [often blamed] for this crisis. . . . They’re people who became wildly rich as Goldman Sachs led the way in staking the nation’s economic health on those reckless instruments.
One can look at these economic disputes in terms of “Republican v. Democrat” but, when it comes to economic policy, that is often unhelpful because the core leadership factions of both parties are funded and controlled by the same corporate interests. . . . [W]hile cultural wedge issues have divided ordinary American on the Left and Right, there is a growing, angry populism among both factions against the dominant Washington establishment elite that is so transparently running the Federal Government on behalf of the tiny group of corporate elite which funds and owns them. The backlash against the Paulson plan on both the Left and Right is a function of that same anger and resentment.
Populism has become something of a dirty word in contemporary American political discourse. But when John McCain proposes that “bank executives who take the mortgage bailout should have an annual salary limit of $400,000,” a serious re-think of current priorities may be in the air. Here’s the background:
McCain . . . blasted a plan by Lehman Brothers, which filed for bankruptcy last week, to set aside $2.5 billion in bonuses for its executives. The bonus pool was first reported by The (London) Sunday Times, and was on the front page of Sunday’s New York Post as “GALL STREET.” “I notice at Lehman … some $2.5 billion in compensation,” McCain said. “If they’re bankrupt, where did they get that? But the major point is that no CEO of any corporation or business that is bailed out by us, that is rescued by American tax dollars, should receive any more than the highest paid person in the federal government.”
I’d propose some similar rules for, say, Blackwater or other wartime contractors–to the extent they receive government funding, there ought to be some caps on compensation keyed to some reasonable multiple of what regulators make. (I’m eyeing the “single digit ratio” on punitives presently.) How else can we assure that regulators are competent enough to catch the crooks? Capping compensation is also an important part of the way Medicare and the VA hold down costs. If the government is to get as involved in the finance sector as it has been in the health care sector, we should consult the massive literature on health care finance in order to get the balance right.
What Robert Kuttner has written about the health care sector may apply a fortiori to efforts to preserve “private initiative” in a now massively subsidized financial sector:
Ironically, by maintaining a largely private health insurance system aimed at limiting the reach of government regulation, we reap ever more complex regulation to compensate for the inadequacies of that very system. . . . In a universal system . . . there is no regulatory need to resolve issues of continuity and eligibility, let alone interminable certifications, appeals, and adjudications. . . .There are no questions of rate-banding, cross-subsidies, guranteed issues, or permissible exclusions for various categories of applicants and conditions. . . .
My sense is that all those types of issues will come up for the “quasi-nationalized” companies slated to benefit from Treasury’s plan. We need to assure that the bailout does not become a shell game of hidden subsidies to inefficient and venal private actors.
Perhaps it’s impossible for the government to step in and become a direct lender instead of banks. But it would be so dispiriting to see this crisis’s authors walking away with massive handouts because of the very problems they created. We cannot underestimate the size of the spend we are being asked to authorize:
$700 billion . . . is roughly what the U.S. has spent to prosecute the war in Iraq to date, and nearly $2,300 for every man, woman, and child in the country. Added to the $200 billion that could go toward shoring up Fannie Mae (FNM) and Freddie Mac (FRE), and the $85 billion the government has pledged to acquire most of insurance giant American International Group (AIG), the potential price tag for taxpayers soars to near $1 trillion. That’s just under half what the country spends annually on health care.
Though some of that health care spending is wasteful, most goes to hardworking doctors, nurses, researchers, and other vital service providers who actually improve people’s health. Have the bailout beneficiaries produced goods or services even a fraction as valuable?
September 23, 2008 at 1:42 pm
Posted in: Corporate Law, Securities
Print This Post
Responses (4)
LaPopessa - September 23, 2008 at 2:56 pm
There will be a bailout. The issue remaining at this point is – will we hold those who are borrowing our money to be accountable? Or will we give them the US credit card to use as they like?
mike zimmer - September 23, 2008 at 4:59 pm
It seems as if the underlying cause of the freeze is the radical uncertain of the real value of many assets held by many different players in the market. How does the bailout solve that problem? Offering to buy, when no one can know what the value is, doesn’t work very well. How will the government know what to offer and how will the holders of the assets, who have no idea of their worth, know how to respond to an offer?
The only way real information can be developed as to the worth of these assets it seems is to unravel all these complicated packages back to their constituent parts. Perhaps the best way to start to do that is at the other end: Mount some sort of organized way of reaching the mortgagors who are in trouble, work out their problems and thereby undo these packages.
Meanwhile, perhaps the government needs to borrow money directly to keep the economy moving forward.
What a strange, new world?
mike zimmer - September 23, 2008 at 5:00 pm
It seems as if the underlying cause of the freeze is the radical uncertain of the real value of many assets held by many different players in the market. How does the bailout solve that problem? Offering to buy, when no one can know what the value is, doesn’t work very well. How will the government know what to offer and how will the holders of the assets, who have no idea of their worth, know how to respond to an offer?
The only way real information can be developed as to the worth of these assets it seems is to unravel all these complicated packages back to their constituent parts. Perhaps the best way to start to do that is at the other end: Mount some sort of organized way of reaching the mortgagors who are in trouble, work out their problems and thereby undo these packages.
Meanwhile, perhaps the government needs to borrow money directly to keep the economy moving forward.
What a strange, new world?
mike zimmer - September 23, 2008 at 5:00 pm
It seems as if the underlying cause of the freeze is the radical uncertain of the real value of many assets held by many different players in the market. How does the bailout solve that problem? Offering to buy, when no one can know what the value is, doesn’t work very well. How will the government know what to offer and how will the holders of the assets, who have no idea of their worth, know how to respond to an offer?
The only way real information can be developed as to the worth of these assets it seems is to unravel all these complicated packages back to their constituent parts. Perhaps the best way to start to do that is at the other end: Mount some sort of organized way of reaching the mortgagors who are in trouble, work out their problems and thereby undo these packages.
Meanwhile, perhaps the government needs to borrow money directly to keep the economy moving forward.
What a strange, new world?
Leave a Reply