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The rush to do something has been what's bothered me all along. I couldn't understand why we had to do something without talking about it.

I've never understood this mentality either - it's not like most of the crises that get this treatment are things that suddenly pop up and demand immediate (today! now!) attention. Most crises of this magnitude are years in the making, slowly building up one small bad decision at a time. Trying to fix something like that by slapping a quick bandaid on it - and that's what this is, a huge, expensive bandaid - doesn't in fact fix the problem, it just buys time.

What I am worried about is that, having bought the time but not having fixed the problem, the majority of people are going to act as if it WAS fixed, and continue on in the same reckless (if less flamboyant) fashion, leading up to another similar crisis down the line.

I have these fears about global climate change, too, and dwindling petroleum supplies, and an economy predicated on endless growth for its success. They're all huge, complex things, developed slowly over years and engrained into the very mesh of our society - and we're getting used to the idea of quick "fixes" that allow us to continue on doing exactly as we have been, heading towards another predictable crash.

One of these days a bandaid isn't going to be enough.

Ken Muldrew

When Mark Thoma writes, "Money doesn't breed, simply taking out a loan from a bank won't make you wealthy, you have to do something productive with that money, that is where you get the profits to cover the loan and interest." and the proposal is to breed $700b and spend it on what everyone agrees is not productive, that's where ordinary people lose track of the rationale. Providing investors with false confidence does nothing to address the underlying bubble. If you want "the market" to fix the bubble, then you need to accept the fact of another great depression, if you want government to fix the bubble, then let us know what the plan is.

Both Krugman and DeLong favor a plan of nationalization along of the lines of what Sweden did in '92, but fear that Americans are too deluded with free-market ideology (picture Nixon smiling as he asks, "How does it feel to be free?") to go for that.

The need for investor confidence has been well explained, and a reasonable case has been made as to how that can be accomplished by devaluing the assets of every American citizen by about $3k, but the failure of current methods of securitization remains. There is a network of dependencies between the loans at the end of the chain (especially mortgages, but not just) and the investment that ultimately underwrites the loans. The mechanism by which trust flows through that network is broken (and it was broken intentionally to parasitize the system).

The current problem is analogous to the credit networks that existed in the early modern economy. In 18th century England, about 95% of all economic transactions were based on credit. This was mainly due to the lack of currency, which itself was due to the necessity of using precious metals for currency to ensure trust in the value of the currency. One's ability to get credit in the community was a function of one's reputation, but with almost the entire economy based on credit, chains of debt inevitably grew and separated the trust and security of the ultimate lenders from the end-chain borrowers. The complexity provided a means to game the system from within and that happened frequently (on average, every household in England was involved in one litigation per year at the middle of the 1700s). The problem was mainly solved by making the currency more of a token of exchange, rather than a security of exchange. Through the recoinage and a move to paper bills, the government was able to prevent counterfeiting to an extent whereby they could guarantee the value of the currency while increasing the amount in circulation to such an extent that the credit networks diminished (to make a long and complicated story very short and overly simplified).

The Swedish nationalization plan is similar in that the government takes over the problem of insuring security at the end of the chain and thereby short-circuits the growth of credit networks. Without complex networks, the opportunity to game the financial system itself diminishes, although the opportunities for bubbles still remains (the difference being these bubbles are investments in some external thing, not the actual financial system itself (the current bubble is like counterfeit currency)).

If the proponents of the current plan could explain how the problem of securitization was actually going to be solved, rather than just postponed, that might go a long way toward getting support for the bill.


Rana: What I am worried about is that, having bought the time but not having fixed the problem, the majority of people are going to act as if it WAS fixed, and continue on in the same reckless (if less flamboyant) fashion, leading up to another similar crisis down the line.

R, I worry about the same thing. Human beings being what they are, I think it's a legitimate worry. I also worry that the bailout will fix things well enough that nobody will remember to come back and fix the things that the bailout bill isn't designed to fix. Obama just promised to remember. I hope he does.

Ken Muldrew: If the proponents of the current plan could explain how the problem of securitization was actually going to be solved, rather than just postponed, that might go a long way toward getting support for the bill.

This is that other thing that bothers me. Nobody in charge seems to feel a real need to explain anything to us. They take it for granted that will figure out on our own that they've done the right things. They also seem to take it for granted that we all have degrees in economics.

Ken Houghton

Speaking as one who supported Monday's bill and generally opposes today's, here's my high-level list of reasons:

  1. It wasn't going to authorize the whole $700B, but about$250B, with renewal (or scrapping) to follow. (That Henry Paulson was an idiot in his pitch, and that that pitch has been perpetuated to the detriment of sanity, was documented by Stan Collender.)
  2. Even a broken clock is right once or twice a day. Yes, the administration cried "Wolf," but the tense of your post is incorrect—banks are already not loaning to creditworthy entities.
  3. What made it worse is that about two weeks ago, they decided not to loan to each other. Or to do so only at (relatively) ridiculously high rates.
  4. Subnote of the above: My HELOC is currently somewhere between 3.75 and 4.75%. Which means that I could borrow $25K or $50K or $100K on it, invest that money at LIBOR, and make a profit. That's the type of thing I mean when I say the markets are too out of kilter. The market seems to believe that I am a better credit than, say, Citigroup.
  5. They may be right.

On the bill itself:

  1. Krugman is right. It's not good—the current "pitch" is economically inaccurate; George W. Bush was more correct than Henry Paulson on what would work—but it was probably the best we were going to get as a bipartisan effort.
  2. There were conditions in it that should have ensured, on balance, that the taxpayer ended up with a significant equity participation in the firms that were saved. (Dodd's addition: 1.25(Y-X) in company stock for every dollar lost between the purchase and the final sale, was inspired.)
  3. There were restrictions—not so strong as I'd like, but restrictions at least—on the bailout monies going to the high-level execs who have mismanaged those firms for the past several years.
  4. If it's not a bipartisan effort, then the Republicans are going to hang it on the Democratic Party for the next 34 days, even though their people are the ones who said it was necessary.
  5. Given (1) and (4), the alternative when the bill failed was one of two things: (a) take the Brad DeLong approach or (b) introduce a ill that looks like a bill that Democrats would support: fund infrastructure, extend unemployment benefits, put more money in the hands of people who are (to borrow a phrase) "liquidity constrained"—that is, the people who will spend it. It will end up in the same place—on some bank's balance sheet—and have at least done some good. And then dare Republicans to veto—or run against—the bill. (Fairness note: Domenici's addition in the Senate fits well in that group.)
  6. They didn't do either of those. They made it a bill that appeals more to the Republican money-base's interest, and does even less for the credit crisis than the previous one did.
  7. I realise the essence of the argument is "Wasting $400B or so of a $700B bill is all right, but wasting $500-550B of an $850B bill isn't." But the original bill was, as Krugman noted, marginally acceptable. The current one is well over the margin and into "unfunded giveaways that won't support the economy or increase the velocity of money."
  8. That last point is essentially, to bring us back(?) to baseball, the argument of J. C. Bradbury in discussing Kyle Lohse's new contract: you could have a mediocre deal today, or a better one later. Since it's only going to get worse over the next few weeks, the chances of getting a better deal by waiting only go up. But apparently Hillary Clinton and Harry Reid decided not to go that way.


The Gramm-Leach-Bliley Act of 1999 was signed into law by Bill Clinton in the face of a veto override threat by Newt Gingrich's Republikan Revolutionaries. My most powerful take-away from that fact is that mortgage-backed securities have been accumulating like plaque on the arteries of the national and global financial system for nearly 10 years. Ten years. Think about that. There's literally not enough money on the planet, printed on any presses, to buy back that much bad paper.

The political aspect of this is that few congress creatures really understand what's going on, except in the typical amoeba/politician sense of stimulus-response sense. Most of all, they fear doing nothing and being blamed for that inaction. No matter what the US congreffs does, there will be blood...

Gramm-Leach-Bliley will be studied in business programs until the end of time (provided there are still business schools -- or any need for them -- after the looming global economic crash) as a lesson in amazing, stupendous, literally world-smashing, unintended consequences.

Todd Bates

Good piece--you succeed in making the case for a bailout concrete: car loans, student loans, payrolls, etc.

We probably agree that any bailout bill that passes should be--but very likely will not be--accompanied by an efficacious resolve to reform finance, reform that can be carried out AFTER the bailout bill passes. It is not as if everything that should be done needs to be done all at once.

Buuuuuut Thoma seems to be oversimplifying when he says "you have to do something productive with that money, that is where you get the profits...." For instance--does house-building in a housing bubble count as productive? Even if much of that housing goes unsold for part of the downside? "Productivity" might not be simply univocal and occurent; maybe whether an activity X is productive depends on its context, such that X's being productive is time-sensitive. If so, then for some times t and t', X could be unproductive at t and productive at t'.

What passed--at one time--as profitable lending practice is now "evaporating" wealth, turning out to be unproductive.

Ken Houghton

Schrodinger - The major consequences of GLB were not "unintended." Phil Gramm, Jim Leach, and Tom Bliley were and are many things, but they are not—well, Gramm and Leach are not; can't swear about Bliley—stupid. (I may the long argument here; short version is that if you look at it as a two-body problem, it's fairly easy to see the result.)

Yes, house building in a bubble is productive: it employs builders, architects, designers, plumbers, electricians, etc. Whether it makes a profit may be another story, but you only borrow money in the first place in cases where E(return) > 0.

Lance - If you're going to highlight my initial support, I feel obligated to note that I'm recanting that position at AB around 3:50pm today. This—which I should have seen earlier—is a major reason why.

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