1. dave hoffman - September 23, 2008 at 10:40 pm

   Frank,

   I don’t see how this is an outstanding commentary, at all. There is no evidence – that I’ve seen – that would suggest that this is a problem, as the Representative suggests, of intentional wrongdoing. That kind of frame is just the kind of thinking that leads us to pass bad, backward-looking, regulation, when what we need is a flexible regulatory scheme. And the idea that paying to prevent mortgage foreclosures will restore liquidity to the financial system doesn’t make sense to me. Basically, all I got from the speech was outrage. But outrage won’t do it here. The problem is highly complex, there are lots of moving parts, and her claim that this is just politics as usual is (I think) misleading.

2. Frank - September 23, 2008 at 11:56 pm

   Well, it appears that Republican FDIC Chairman Sheila Bair, widely respected by both Wall Street and financial experts generally, likes the idea of doing something to “prevent mortgage foreclosures” with this bailout:

   “Bair [is] operating Indy Mac, the failed bank seized by the FDIC, in a manner opposite from that of the Paulson plan. Instead of buying bad paper from the bank and letting incumbent management, she seized the bank, tossed out the culprits, and ran the institution in the public interest, offering refinancing to tens of thousands of holders of extortionate mortgages.”

   http://www.prospect.org/cs/articles?article=meet_the_next_treasure_secretary

   As for the uselessness of “backward-looking” outrage–how exactly do you propose to pay for the bailout? I think the really irresponsible people are those who advocate for massive government fiscal commitments when they won’t explain how we’ll pay for them:

   http://slate.msn.com/id/2200604/

   The “backward-looking” outrage may lead us to ask the people who most benefited from these schemes to pay for them. As Daniel Gross asks in that article, if we you don’t go for disgorgement, “Which Cabinet-level agency should be zeroed out? Which benefits programs cut? Which component of the defense budget gutted?”

   Finally, as for intentional wrongdoing: apparently the FBI doesn’t think this implication as ridiculous as you do:

   http://www.nytimes.com/2008/09/24/business/24inquiry.html

   “Mr. Mueller told members of the Senate Judiciary Committee that the major corporate investigations are aimed at companies that “may have engaged in misstatements in the course of what transpired during this financial crisis.””

   “He added that “the F.B.I. will pursue these cases as far up the corporate chain as is necessary to ensure that those responsible receive the justice they deserve.””

   “In addition to the major corporate cases, the bureau said it had about 1,400 open investigations into smaller companies and individuals suspected of mortgage fraud.”

3. dave hoffman - September 24, 2008 at 12:05 am

   Frank,

   Starting with the last point, of course the FBI has opened an investigation. They’ve got to be seen to do something, after all! But I really would resist the idea that disclosure was the problem here. I think that – in the “worst” case – failing to disclose simply moved the crisis forward in time. The problem is the collapse in the housing market, coupled with securitization of assets and a level of complexity that led holders to misprice and make bad deals.

   I am not against disgorgement, of course, but it needs to be done thoughtfully, as a part (perhaps) of a re-org plan, as Lipson discusses in the post I put up. Calling MBS “schemes” is rhetorically too hot, in my view, unless you think that all securities are schemes to defraud! I simply don’t think that this is like Enron, where self-dealing and disloyalty drove the engine. Or, to put it another way, if the financial innovators here are morally culpable, so is every citizen who speculates in the markets (securities or real estate). Also, it might be useful to think about how much money the financial industry contributed in tax revenue, both direct and indirect, over the last few years. To the extent that tax revenue was inflated by profits that ought not have been made, does that count against the debt now owed? In terms of payment, I think that a functioning credit system is a public good, like a subway or an army. We all get the benefit, and should share the cost.

   I’m going to think a bit about the mortgage buyout proposal. My concern is that to the extent that the problem in our financial industry is liquidity, I don’t see how it helps.

4. Patrick S. O'Donnell - September 24, 2008 at 1:04 am

   I think “intentional wrongdoing” is only a small part of what is a larger, structural problem that was well captured by Kelly Candaele in yesterday’s Los Angeles Times (http://www.latimes.com/news/opinion/la-oe-candaele22-2008sep22,0,1549912.story):

   ‘As a trustee of the Los Angeles City Employees’ Retirement System, every week I receive materials in the mail from money mangers imploring me to consider investing in their strategy for generating high returns for our $10-billion pension fund. One of the most fascinating — and revealing — set of marketing materials comes from a company that lists the following options for investing our fund’s money: credit default swaps, merger arbitrage strategies, collateralized debt obligations, interest rate contracts. You get the picture. Or perhaps, like most Americans not involved in the arcane “science” of finance, you don’t get the picture.

   It’s unfortunate that it takes a financial crisis for Americans to divert their attention from what kinds of glasses Alaska Gov. Sarah Palin wears to issues that really matter, but a reevaluation of priorities may be the only upside to a meltdown that the news media is now desperately trying to explain.

   In the so-called old economy, investors looked at the health of a company, the skills of management, potential market opportunities and the quality of the products produced. If, for instance, Harley-Davidson motorcycles looked as if it were producing high-quality bikes, investing in new engineering and training skilled workers, then that company could be a solid investment. Your investment was a wager, of course — like all stock investments — but nonetheless based on some modicum of analysis and solid research. If Harley-Davidson sold more motorbikes, then profits were made, investment was plowed back into the company and more jobs were created. Americans understand that basic logic of capitalism.

   But try explaining a credit default swap — the financial instruments now collapsing — to your neighbor. Here is how one popular website defines the strategy: “A credit default swap is a credit derivative contract between two counterparties, whereby the ‘buyer’ or ‘fixed rate payer’ pays periodic payments to the ’seller’ or ‘floating rate payer’ in exchange for the right to a payoff if there is a default or ‘credit event’ in respect of a third party or ‘reference entity.’ ” At what point in this elaborate series of maneuvers is the economy enhanced and American workers’ standard of living increased?

   It is easy to parody the language quoted above. And Karl Marx did so in his mid-19th century writings by referring to various paper transactions as “fictitious capital.” In our “postmodern” economic system, money makes money through speculation without the arduous process of actually producing anything.

   It is firmly established that hedge-fund strategies, arbitrage arrangements and other complex investments have made a great deal of money for money managers and institutional investors who have embraced them. And some of these approaches can help hedge against risk, an important component in any large portfolio.

   But more economists, writers and thankfully the American people are beginning to ask what these largely unregulated and opaque financial operations mean for the economy as a whole. In his recently published book, “Bad Money,” historian and political commentator Kevin Phillips points out that if you include mortgage lending and real estate operations, financial services has grown from 11% of our gross domestic product in 1950 to more than 20% today, dwarfing manufacturing. As more and more of our economy is given over to financial machinations, inequality grows and working people’s faith in the direction of the economy declines.

   And Nouriel Roubini, an economics professor at New York University who predicted the current crisis, points out that the financial meltdown is much more than simply the product of a few overzealous and incautious executives. “We have a subprime financial system,” he told the New York Times Magazine, “not a subprime mortgage market.” Capitalism has come off its leash.

   [...]

   Sophisticated and reasonable regulations will help our economy as a whole and provide more transparency for investors — like pension funds — that are looking for good investments that also strengthen our economy. We would all be better off if the most common economic questions were the fundamental ones: What does this company produce? What is its market? And how well is the company run?’

5. andy - September 24, 2008 at 1:41 am

   my interest was piqued by the title of this post, and I was looking forward to some incisive analysis of the bailout. but all i saw was a rambling woman. oh well.

6. Frank - September 24, 2008 at 9:26 am

   Yeah, andy, I just hate when some congressperson goes on and on about carefully considering a problem rather than just ramming through legislation. Glad there weren’t more ramblers before the war in Iraq.

   really–an substance to your critique of her?

7. Frank - September 24, 2008 at 9:28 am

   correction–”any substance” above

8. andy - September 24, 2008 at 1:57 pm

   Frank,

   I guess I just don’t find biting sarcasm and conspiracy theories very helpful in determining whether the bailout is a good idea. “Controlling media,” “timing the plan,” “hiding the plan from the public,” “manage the news cycle,” etc. etc. Seems like she just attributes bad faith to the people working day and night on this crisis and then expresses her outrage and indignation. The second half of her “speech” is much better than the first half, admittedly.

   For an instance of making constructive criticisms of the bailout program, see, e.g., http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm.

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