People tend to get fixated on things like major bank sales and the level of the various stock indices. These are important, but they are symptoms, not the main show, which is in the credit markets. Those remain frozen up.
Was I wrong to support the bailout? Hard to say. For one thing, it matters whether the alternative was doing nothing, or doing something better; for sure, it was not a very good design, and the bill that actually passed was worse than the one the House voted down. For another, I was not positive that the bailout would solve things; it's just that it seemed like the best shot. Since I can't compare the current world with some alternative in which it failed again, I need to think about what my metrics for assessing the decision should be.
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In the current world, we are people of low lives without principles. I could imagine one or two alternative worlds where that's not the case.
Layman's question: Why are new credit card offers still going out (cf. Instapundit) if solid companies like AT&T and Caterpillar are having trouble getting short-term financing?
I understand that no bank wants to lend to another bank--the bank might not be there in a week, whereas your hapless credit card customer will be, paying interest and late fees with any luck (for the bank). But where are Caterpillar or AT&T going?
"Since I can't compare the current world with some alternative in which it failed again, I need to think about what my metrics for assessing the decision should be."
If I rephrased this to make it sound like someone arguing that Socialism would work if only it were implemented correctly, would that be over the top?
Since I can't compare the current world with some alternative in which it failed again, I need to think about what my metrics for assessing the decision should be.
Summation: "But the intent was good, and we really can't know how much worse things would be if not for..."
Something tells me that if another writer were to make this statement concerning some massive government program or expenditure which failed to produce the promised or desired result, you would not be kind to that writer.
Megan,
With respect, I submit that you were wrong. However, the fact that you even question your decision reflects great intellectual honesty.
For evaluation criteria, I suggest "Were the stated goals achieved?" Simple and easy.
I always have a suspicion Megan likes a feeling of exclusivity. I think her support of the bill was one of those times. All the cool kids were supporting the bill.
I really like this blog. I like Megan's wit. But how many times do you get to be spectacularly wrong and still have your opinion matter?
I've been questioning a lot of things Jay, which is why I registered as a Democrat last Friday.
I didn't post specifically on that, for not wanting that to derail the economic part, but I'm sure it will become an obsession for some.
Considering that none of the measures authorized in the bailout have been implemented yet, isn't it a little wonder about its effects on the credit markets?
Whatever happened to your omnibus post about the proposed bailout plans? After reviewing the alternatives, what would have been your choice? It does seem that the current plan has incorporated a few of the more common suggestions.
Considering that none of the measures authorized in the bailout have been implemented yet, isn't it a little wonder about its effects on the credit markets?
We've had a lot of bailouts thus far, but none of them worked. The $700B bailout is just the latest and greatest action that will make everything better. I do find it a little suspicious that none of the money will be spent until after the election. I also find it strange that we needed this massive bailout now, with no time for reasonable discussion when it couldn't be implemented for a month anyways. Couldn't Paulson gotten everything ready, and figured out the details while we spent at least some effort debating the merits?
I have a feeling that the American people were conned again by their fears being played against them again.
MEGAN: The bailout obviously stunk, as pretty much every economist pointed out, and it's passage has precluded anything better being passed until the next presidency. And a lot can happen in a few weeks.
If this does not constitute an error what would?
-winterspeak
Really great book that helps frame really complex issues like this: Why Most Things Fail by Ormerod.
Bottom line is that most things are too complex to allow for complete a priori certainty, and that most systems fail sooner or later, for lack of being fault tolerant for every possible perterbation.
Maybe that says the ideologues are too smug, and maybe the empiricists are too meek. However, the good news is that one need only understand the issues a little bit better than average to be wildly successful, and so in that case I'd still vote with principles, even if they are over extended a bit. People that are principled can still advocate those and be intellectually honest about the variety of issues in a complex situation, and still learn from them.
I know enough about human behavior to not think the markets perfect, but I'm still a staunch free marketer even knowing that there was a lot of bad acting the free market, because I know that the free market rewards those who are just a little bit smarter than average. When sound money buys out bad money, that's what happens. When govt. bails out companies, that's not what happens. We are not culling the weak here. We are propping them up. We are not letting the smartest decide where to put their own money, but letting bureaucrats decide where to spend ours. Recipes for poor execution. I think one metric to watch is what are the key characteristics of those actions of a free market by competent actors, vs those of our govt.
The market won't step up and buy the MBS's at the prices that govt will. The question is why, and what does it mean? Wachovia wants the Wells deal and not the Citi deal. Why? AIG shareholders are not so sure that they would have accepted govt cash, and now govt has to put PR out to say it was a good thing. Why? WWFMD? What would a free market do? Yes, it isn't this world, but you can use reason to project incremental moves from the data you see around you. The inductive arguments don't come from you trying to project a hypothetical [erfect free market because you can't. It's too complex. But you can learn a lot by paying attention to even little reactions, and differences. If you can glean even one extra connection or generality, that might be all you'll be able to do, but it stands to make you wildly more successful in the long run.
All the best.
First, I suspect anyone with an ounce of humility has deep uncertainty about which path is best. Personally, I wish it was a straight liquidity injection (with warrants), rather than the bastardized mess that we ended up with. But that's politics and maybe it was the best result that could have realistically been attained. Who knows?
All that being said, IT'S ONLY BEEN 1 BUSINESS DAY. Remember, the money isn't even flowing yet and the balance sheets in question are still a mess.
Personally, I'm glad it's going to take a few weeks before the gravy starts flowing. Maybe Mr. market can use this time to purge itself of more weaklings.
the failure of the plan is as obvious as:
the utter absence of cute videos here since its enactment.
Was I wrong to support the bailout?
Were you wrong to support the Iraq Invasion?
Were you wrong to support George Bush, Jr.?
Were you wrong to support 2x4s?
Were you wrong to support Alan Greenspan?
Were you wrong to support wildly regressive tax cuts?
Were you wrong to (implicitly) support the FISA law extending immunity to telecoms?
Hard to say. For some people. For others, a call as easy a breathing.
It doesn't matter that it's only been one business day. The effect should have been instantaneous. The mechanism of action for the bailout was supposed to be psychological.
That's why Treasury settled on $700 billion -- because it was a really big number. Actually driving the prices higher through increased demand is almost certainly not possible. The credit markets are just too big. The domestic mortgage market is $14 trillion. The domestic credit market is $54 trillion. And that doesn't count swaps or equities or the rest of the world. $700 billion is a lot of money in almost any context except global capital markets. If the plan works, it works on a psychological level (the cavalry are on the way). If you wait for an effect driven through market mechanisms, you'll be waiting for forever.
Good for you on the Democratic registration, Megan. I think you'll find, as others formerly of the right have, that it's much more fun to be a liberal.
If nothing else, you get invited to a much better class of cocktail party!
I think the bailout will work but one improvement would be to mandate the funds received by banks get lent out again in 6 to 9 months. That will help to unfreeze it. I put that idea on my blog irishlightning.com earlier tonight if you want to see the full post. Essentially, by mandating a percent gets lent, the money will flow to main street usa and the freeze will start thawing out.
"The effect should have been instantaneous. The mechanism of action for the bailout was supposed to be psychological."
Psychology doesn't take bad assets off of banks' books. The Treasury department will, now that it's authorized to do so. I wouldn't expect this to have an effect on the stock market until the first quarter, as the results of this show up in the first round of mark-ups on the balance sheets of surviving financial companies.
"Personally, I wish it was a straight liquidity injection (with warrants)"
That was authorized under the legislation, and will be part of the response.
I don't get it. What do you get for registering as a Democrat? The primaries are over, right? as are the conventions? Is there some other exclusive venue at which you have to show your party card in order to get in?
Well, I certainly hope Ms. McArdle has fun spending my tax dollars on her vision of the collective good. But though you are stealing my money, confiscating my guns and running my life for my own good, do not expect me to thank any of you.
Tod: "I don't get it. What do you get for registering as a Democrat? The primaries are over, right? as are the conventions? Is there some other exclusive venue at which you have to show your party card in order to get in?"
And what do you get from voting, in primaries or otherwise? It's not like your vote matters one way or another.
It's all about self-expression.
I don't get it. What do you get for registering as a Democrat?
One presumes that Megan has just enough self-awareness to realize that the red stuff all over her hands is the blood of innocent Iraqis and members of the U.S. armed forces. She somehow believes that registering as a Democrat will make all her awful endorsements of the last 8 years magically go away. Good luck with that, Megan!
I've been questioning a lot of things Jay, which is why I registered as a Democrat last Friday.
I blame veganism.
Why does this have anything to do with politics? Either party's endorsees have approved the bailout plan, so we'll be stuck with that kind of politic for another 4 years at least.
The bailout was the wrong thing to pass. It's time to do something right.
Please support this proposal and get your Congressional representative to sponsor this solution to our current monetary crisis.
A complete list from the Detailed Executive Summaries of the National Economic Stabilization and Recovery Act:
http://nesara.org/bill/index.htm
Immediate Relief and Results
# Eliminates more than $1 trillion of the nation’s public debt
# Reduces future private debt by more than $1 trillion
# Immediately eliminates some private debt, especially for many homeowners
# Workers maintain better control of their earnings
# Production is no longer taxed, just consumption
# Most of the necessities of life are not taxed
# Encourages production thus revitalizing industry in America
# Encourages rebuilding of inner cities
# Discourages wasteful uses of natural resources
# Exposes the true cost of government
# Greatly eliminates the struggle between tax “protesters” and bureaucracy
# Allows the “underground” to resurface and become a viable contribution to production of goods and services
# Greatly restricts the influence of special interests and lobbyists
The Federal Reserve System
# The Federal Reserve Act of 1913 is amended
# The Federal Reserve System is abolished and replaced by a new Treasury Reserve System
# Control of the currency is moved from private control of the Fed to public control of Congress and the new Treasury Reserve System
# Congress sets the standards for the new monetary system but the people create as much or as little currency as they need
# Functions of the Federal Open Market Committee are transferred to the Board of Governors of the new Treasury Reserve System
# A new mechanism, the Treasury Reserve Account, is created to provide the Treasury Reserve System Board of Governors a better method to fine-tune the money supply, effectively eliminating inflation
# The Treasury Reserve System Board of Governors will continue using the previous three mechanisms for controlling the money supply: 1. Setting reserve requirements. 2. Setting the national discount rate. 3. Purchasing U.S. Treasury securities on the open market.
# All U.S. Treasury securities purchased by the Treasury Reserve System Board of Governors will be immediately turned over to the U.S. Treasury and cancelled out of existence.
Monetary Policy
# People are provided with several alternatives for currency
# Constitutional currency is restored
# Currency becomes debt free as the people stop paying interest payments for their use of a public utility
# Unlike previous policy, the new Treasury Reserve Board is provided one very specific mandate: maintain a stable currency
# Expansion of the economy is returned to the free market
# Private coinage is encouraged
# Exchange ratios for the various currencies are published at least weekly
# Printing of redeemable gold and silver certificates is allowed
# Postal money orders are made available in denominations of gold and silver coin
Banking
# Returns the banking industry to serving public interests
# For secured loans, compound interest is outlawed and replaced with a monetization fee
# Provides stricter banking controls by imposing excise taxes to discourage high or runaway monetization fees
# On secured loans obtained from a fractional reserve bank, principal must be paid in full before the bank begins collecting its monetization fee
# Eliminates the facade for banking insurance (FDIC)
# Except for fraud and criminal activities, virtually eliminates bank failures
# Banks are prohibited from using as reserves any commercial paper
# Only Treasury credit-notes can be used as bank reserves
# Banks are prohibited from purchasing government issued debt, effectively removing banks from influencing monetary policy
# Checking accounts against gold and silver deposits are prohibited
# Commingling of funds among the various money accounts without owner’s permission is prohibited
# All currency deposits with banks are general warrant deposits and custody accounts.
The Income Tax
# The Income Tax Act of 1939 is amended
# People need no longer fear the IRS
# Billions of hours of nonproductive labor are eliminated
# Mounds of paper work are eliminated
# The cost of the income tax is no longer hidden and embedded in the cost of doing business and passed down the chain with the consumer paying the final tab
# Most likely eliminates state income tax plans because state income taxation piggybacks on federal income taxation
# The IRS is reformed into the National Tax Service
# Volumes of complicated tax code are history
# Eliminates personal income taxes
# Eliminates corporate income taxes
# Eliminates gift taxes and estate taxes
# Eliminates capital gains taxes
Sales and Use Tax
# Tax rate of 14%
# Government entities are exempt
# Government mandated expenses such as licenses, permits, passports, are exempt
# Sales of bullion, coin and currency are exempt
# Sales made by or to nonprofit schools are exempt
# Sales of prescription drugs, medical supplies and services are exempt
# Real estate rents and leases are exempt
# Sales of groceries are exempt
# Sales of plants, livestock and fish used in the production of food for human consumption are exempt
# Insurance sales are exempt
# Segregated portions of labor in retail service contracts are exempt
# Incidental or occasional sales such as garage or rummage sales are exempt
# Sales for the purposes of recycling are exempt
# Meals provided by companies at company expense are exempt
# Sales that are nonprofit in nature are exempt
Would someone help me understand something about these securities?
Megan posted on 9/25 and others said that auctions will not work because of "asymmetrical information" i.e. the owners know how the securities are performing and the buyer/govt does not. I was under the impression that because these securities were made up of slices of multiple (thousands?) of mortgages NO ONE can determine the performance thus the actual value.
If performance info is available and relatively accurate, why do we need the bailout? Would not this same info be available to potential private buyers via a "due diligence" process? Or couldn't the owner establish the PV? Thanks