Wednesday, September 24, 2008

Not good enough...

The Paulson plan is fatally flawed, I believe, and I now stand with many economists who warn against enacting this too-much-too-fast panic reaction.

 Comments I agree with (My emphasis):
The sums involved are staggering. As a comment that Greg Mankiw, the former White House economic adviser, posted on his blog asked, "Has more money ever been given with fewer restrictions on how it is used? Ever?"

In 1932, at the height of the Great Depression, the government created the Reconstruction Finance Corp. to make loans to banks, railroads and others. President Hoover asked for $2 billion--equivalent in today's money to $30 billion--and spent just under that amount in the RFC's first year. The country then was in the midst of an economic catastrophe. Economic output had dropped 45 percent. Production of steel and autos were each down by three-quarters. Unemployment was 24 percent, and so on.

The allocation sought by Paulson is 23 times bigger. And it is in addition to the tens of billions pledged to back loans to Bear Stearns, Fannie, Freddie and A.I.G.

America's economy does not face an emergency--only its financial system does. This is a distinction lost on the bankers in Washington, but it is one worth remembering. On Main Street, unemployment is 6.1 percent. Home prices are down close to 20 percent and presumably headed lower. These numbers are not pretty, but they do not add up to an economic Pearl Harbor or even close.

Of course, potentially several million Americans face home foreclosure. That is a crisis, but it is a slow-developing one, for which the normal legislative process--as distinct from a shotgun corralling of Congress--will suffice. And the Paulson plan does not help homeowners.  [More]

Another from a whole bunch of brains:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses.  Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If  taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects.  If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity.  Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.  [More]
 and the final word for me:
Just when I was starting to feel disillusioned in my profession, the Stiglitz/DeLong/Edlin edited Economists' Voice lashes out against the Paulson bail-out. Just let me add: If we've learned anything from the Iraq War, it's that it's a good idea to calmly review the facts before taking drastic action. [More]

This administration has squandered its last benefit of the doubt. The biggest suckers have been fiscal conservatives like me. No more.

In fact, this evening some dots sort of connected.  Even if there are merits to the Paulson Plan, they are about to fall victim to the issue I have considered to be an underlying fault in our economic surge: inequality.

The issue of executive compensation alone may doom the bailout, and it will be driven by a tide of resentment from people whose incomes have stagnated while CEO compensation soars.  In this one chance, the populace is reasserting the right of democracy.  Even if it shoots their own feet, folks are tired of seeing economic benefits accrue to only a tiny number - deserved or not.  Of all the criticisms of the bailout, this one has ignited the fury of voters most.  Sec. Paulson's political tone-deafness astonished many in Congress, and is now the subject of some furious back-pedaling.

Free marketers - and I count myself one - can rail against the illogic of such actions but this only proves their ignorance of our brains, where fairness is apparently hard-wired.  Attention must be paid to avoiding extremes between "haves" and "have-nots", not because it optimizes economic returns, but because it diminishes the possibility of what is about to happen, I fear.

Many are ready to let the ship sink in order to drown the first-class passengers. In the long run, perhaps economists will start factoring this outcome now.


buffalobill said...

I originally thought that congress had to do something...but then I realized that this was congress we were talking about, not some above average and all knowing intelligence. As the President gets more and more strident in his demands for the bailout, I find myself more convinced that somehow this whole scenario is just wrong. It is good to find thinkers that are upholding my feelings with logic. I think also that there has to be accountability...the ones who made the questionable decisions should not be rewarded for them, they should lose their jobs... Bill

Ol James said...

Mr. John and Bill, I have to agree. I also have to wonder where these same deep pockets are when the subject of Social Security, Medicare, the National Debt and other public things are concerned??
But the way I see it...we just ain't one of the boys.

Ol James said...

Here's a solution I got in the mail, Whadda ya think??
I'm against the $85,000,000,000.00 bailout of AIG.

Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.

To make the math simple, let's assume there are
200,000,000 bonafide U.S. Citizens 18+.

Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18
and up...

So divide 200 million adults 18+ into $85 billion that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.

Of course, it would NOT be tax free.

So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife has $595,000..00.

What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage - housing crisis solved.

Repay college loans - what a great boost to new grads

Put away money for college - it'll be there

Save in a bank - create money to loan to entrepreneurs.

Buy a new car - create jobs

Invest in the market - capital drives growth
Pay for your parent's medical insurance - health care improves

Enable Deadbeat Dads to come clean - or else

Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( "vote buy" ) economic
incentive that is being proposed by one of our candidates for President.

If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!

As for AIG - liquidate it..

Sell off its parts.

Let American General go back to being American General.

Sell off the real estate.

Let the private sector bargain hunters cut it up and clean it up.

Here's my rationale. We deserve it and AIG doesn't.

Sure it's a crazy idea that can "never work."

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC .

And remember, The Family plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh...I feel so much better getting that off my chest.