"Just an Idea"

UPDATE: I keep meaning to come back and clean this post up, but there's so much other fun stuff to write about that I keep getting distracted. At any rate, as my Uncle Mark points out in the comments, the math here ain't quite right. But the idea's still an interesting one. Irrelevant, perhaps, but interesting.
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From a friend of a friend:

Rather than debating how to spend Americans' tax dollars ($700,000,000,000 to be exact) to "bail out" a flawed and failing Wall Street, its group of insiders, and greedy opportunists, I suggest that our government give each and every taxpaying American $700,000 instead. Americans can then take that $700,000 and use it to pay off their mortgages and any (if not all) of their own personal debt. Americans will more than likely still have money left over after paying off all their debt to "stimulate" the economy, put it into to their personal savings accounts, or choice of investments. I do think, at this juncture, we are less prone to foolishly spend our hard earned tax dollars except for the right reasons, and not for someone else's bad business practices and personal greed. Let Wall Street sink or swim on its own. Just an idea.

It took me a minute to really appreciate the numbers. 100 million tax-paying Americans. $700K apiece. That's some serious grassroots purchasing power.

Any economists out there? What would happen if we all paid off our houses, cars, credit cards, medical bills, and college loans next week? Would the banks recapitalize and be able to lend money again, as is the stated goal of the federal plan? Or would the very sudden shock to the system present short- and long-term effects that are actually negative?

The 8:30 AM Phone Call

Everybody understands that Obama called McCain at 8:30 this morning to suggest that the two men work together on a joint statement about the economy. Right? Right?

Buffett: The Power of One

Goldman's stock rose 6.5% in a matter of hours after Warren Buffet said "I'm in" to the tune of $5 billion. Wise investment? Corporate philanthropy? Both? Either way, there might be a lesson for the federal government.

From the WSJ:

While Mr. Buffett's investment is unquestionably a vote of confidence in Goldman, it is structured to protect him from losses. The dividends from the preferred shares will remain steady even if Goldman's stock falls. And if it does, Mr. Buffett won't spend the $5 billion to exercise the warrants to buy common. Including Goldman's after-hours stock jump, Berkshire has a nearly $700 million paper profit on the deal already.

Is it too much to ask Hank Paulson to guarantee similar protections for taxpayer investments as Buffet worked out for his Berkshire Hathaway company?

Politicos, alas, are already jumping on the opportunity to, well, politicize. The Journal goes on to report:

Democratic Sen. Charles Schumer of New York, a member of the Banking Committee and his party's leadership, called the Berkshire investment "a vote of confidence not only in Goldman but in Washington's commitment to come up with a plan."

And:

[T]he Berkshire news may rev up Republicans who already are arguing that such private investment is superior to a costly taxpayer-funded rescue plan. "People are holding back, and it sounds like Mr. Buffett is trying to lead by example for the financial community," said Rep. Thaddeus McCotter of Michigan, a member of the Financial Services Committee and Republican leadership.

Indeed. I was just waiting for somebody else to go first, and now I'm ready to ante up my first $100 million to help right the country. Anybody with me?

We'll learn more, and hear more opportunistic sound bites, as the day progresses.

Terry Gross, Gretchen Morgenson, and the Government Bailout

Terry Gross interviewed Gretchen Morgenson tonight on the issue of Wall Street and the federal bailout. Verdict? Take 38 minutes to listen. Morgenson is refreshingly down to earth, and she makes the outsized problems comprehensible. Solutions? Not likely any time soon.

The takeaway revolves around a couple key ideas. First and foremost, the government probably saw this coming back in 2006. Morgenson strongly argues that only a fool or a catatonic could have missed the clear signs. Her feeling is that government lied when they told us that the risks and the damages would be contained to the subprime mortgage lending industry. In her words, we're simply all too "interconnected," and the markets are too interconnected, for any major financial failure to be effectively contained.

Now comes the tricky part. Gross asked her guest to comment on whether the current crisis is a repudiation of the Bush administration philosophy that free markets, unregulated, correct themselves. Morgenson, to her credit, avoided cheap shots or lectures and simply said that yes, the current situation is a pretty clear repudiation of that philosophy. She went on to argue that, had the government intervened back in '03,'04,'05, and '06, when people didn't "have to be ambulatory" or "have a pulse" to get a mortgage, when her "cat could have gotten a mortgage," we probably wouldn't be in quite this bind now.

Had the government regulated the Wild West of subprime lending, at least curtailing the most carnivorous practices of the worst predators, that would have helped. But the administration favored a laissez-faire approach, essentially allowing the very practices that eventually corrupted the more stable investment environments (think Morgan Stanley, Bear Sterns, Lehman, AIG) to fester and swell unchecked.

Extending bad loans to people who never had a chance to make the repayments was an effective--if deplorable--way to make money in the short term. But so much credit was extended over such a wide and unreliable base that, when the breaking point was finally reached, the repercussions were disastrous, as evidenced today. Simply put, too many homeowners couldn't pay back their loans, and no amount of repossessions could set that to rights because there wasn't enough credit left to fund new buyers of repo'd houses. Lenders took back the houses but couldn't turn them around, and the reverberations went right up the food chain. Turns out credit is a finite resource after all. Once it's used up on bad loans, lenders pull back and refuse to lend to even the most credit-worthy in an effort to simply hunker down, keep the capital close at hand, and weather the storm.

So now what? The same government that happily promoted its self-regulating, laissez-faire lending environment is now screaming for debt relief in the form of a $700 billion taxpayer rescue fund to buy up "toxic" investments in the hopes that banks will be able to recapitalize and start lending consumers money again. Each day brings a new promise from the Bush administration of imminent doom if we don't act now, no hesitation, no questions asked, no oversight, and no accountability no matter what we find out later. I've already mentioned how I feel about that. And taxpayers are offered nothing in return. Morgenson says there's a word for that, and it starts with an S. "The government is privatizing gains and socializing losses. . . There's something really wrong with that."

Morgenson doesn't know what happens next, but it's pretty clear to her that, bailout or no bailout, Wall Street and the U.S. economy are in deep trouble. Least of the problems is that more banks will fail. The bailout itself can't stop that, and appears designed in fact to simply avoid a total collapse of U.S. markets in the short term (and there's no telling what the next administration will actually face once January 20 rolls around). Much larger than individual bank failures, however, looms the possibility that this financial disturbance could be large enough and far reaching enough to turn foreign investors off of American debt. If China chooses to sell off its current investments in U.S. bonds in favor of an alternative that's "safer than the United States government," we could be in for catastrophic financial consequences. U.S. borrowing power would plummet, dollar values would certainly drop, and inflation would skyrocket.

On an upside, Morgenson believes that the American people have what it takes to rally and to pull through this "morass." She worries, unfortunately, that the government won't really live up to the best of American problem solving and ingenuity. If she's right about the first, and I of course believe she is, then we can all be hopeful. If she's also right about the second, though, we may have some unimaginably difficult times ahead.

Set aside some time, pull out a sudoku, and listen to the interview. I can't effectively critique Morgenson's economics, but her sensibilities sound right. Furthermore, she answers the key questions a lot of us are asking right now, and puts the whole scenario in terms we can understand, even if we may not like them.

Saying No to the Bailout

Via TPM, Krugman doesn't like the bailout plan. Reading his brief post makes me wonder: where have all the fiscal conservatives of the Republican Party fled to in this time of trouble? Why can't the Treasury and Wall St. work out a plan that guarantees the funders, aka the taxpayers--who are under more financial duress now than at any time in recent memory--some security if the high-risk plan doesn't work?

If the trillion dollar bailout is designed to restore markets by encouraging consumer confidence, then why can't the Treasury come out with details of the plan? Why are Republican lawmakers taking meetings with lobbyists to ensure that the legislature doesn't tack any taxpayer protections to the bill? Not exactly confidence inspiring.

From the WSJ:

The plan offered to Congress also gives the Treasury legal immunity from any lawsuits. "Decisions by the secretary pursuant to the authority are non-reviewable … and may not be reviewed by any court of law or any administrative agency," the proposal says.

The proposal doesn't detail how Treasury would manage the assets, but does give Mr. Paulson the authority to hire private financial institutions to conduct the program, as well as to create other entities to purchase mortgage assets and issue debt.

"Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets," the Treasury fact sheet said.

Emphasis mine. Let me see if I get this right. We're supposed to trust the same government that has time and again funneled high-priced privatization projects to favored contractors without oversight, the same government that, as a result of incompetence and croneyism, failed to effectively root out the Taliban and Al Qaeda in Afhganistan, the same government that led the U.S. into a quagmire in Iraq, and the same government that failed to effectively respond when Katrina swallowed New Orleans, we're supposed to trust that government with $1 trillion, no questions asked? And the Treasury Secretary gets to appoint private firms to handle public funds without oversight?

On top of that, Krugman raises the excellent question of price. At what price will the government purchase (on behalf of the taxpayer) these troubled investments? At fair market value, which would obviously be low right now, or at premium or above premium prices in order, as I understand it, to send an infusion through national and world markets, a shot in the arm to restore confidence? The problem there is that falsely inflated premiums, paid to troubled institutions and made with theoretical money for which the taxpayer is on the hook, offer nothing more than another bubble, another illusion, another trick with numbers bound to fail and give way to the harsh realities of fiscal fact. And the fact is that fiscal irresponsibility cannot save us from the consequences of fiscal irresponsibility. We don't call that a rescue, we just call it "throwing good money after bad."

Obviously, to protect American (and global) financial interests, government must intervene. The U.S. government, despite hits it's taken in the past several years, is still the only entity big enough to assert effective might to leverage the markets, unless we'd like to ask China to help. And the taxpayer may have to foot the bill. But all this secrecy can't be the answer. No details, no guarantees, and no provisions to protect the taxpayer. Treasury is willing to gamble only if nobody will ever know what happens to the money, what decisions are made, and nobody, regardless of the outcome of all this, will ever be held accountable.

At this decisive moment we need Congress to step up. We need oversight written into any bill that passes. Yes, we need emergency funding and we need it quickly. But this plan reeks of a short-term fix that will make the next upheaval inevitable and all but impossible to address.

At every turn, at every crisis in the past 7 and 3/4 years, this government has failed the American people. At a glance I'd say it's setting up to do so again. Somebody please tell me why this is the best bailout plan we get.