Bail them out? Or let them reap what they sow? Who wins and loses?

September 22, 2008 8:04 AM

Who will the current bailout plan benefit and how?

I've been trying for the last few days to untangle the implications of this crazy expensive plan.

As the rest of you have seen, it's daunting.

Any resources out there which can break it down for me? The pro's and con's of this bailout versus the pro's and con's for just telling Wall Street, "Sorry, you screwed up. You're on your own."

Trying to find a set of pro's and con's for each category of the players, like:

- Executives of the companies involved
- Investment bankers
- Investors in the companies involved
- Regular Main Street banks that hold deposits
- Taxpayers
- etc.

posted by jeanmari to law & government (14 comments total)

I'm not sure the choice is between plan/no plan.

I think it's between good plan/bad plan.

I would hasten to add that the plan itself is still bare bones.

So far those who are skeptical of the plan include:

Robert Reich (see What Wall Street Should Be Required to Do, to Get A Blank Check From Taxpayers)

Paul Krugman (see Cash for Trash)

Nouriel Roubini (see The Shadow Banking System is Unravelling)
posted by ornate insect at 8:19 AM on September 22, 2008

Don't focus on the executives, or the "personalities." Yes, many of those bastards absconded will millions of ill gained loot, but that's chump change.

In the short term, the bailout is lube for the financial systems. If the lenders freeze up, it will make it very hard, if not impossible for consumers to get loans. More importantly, it pinches businesses at all levels who rely on rotating credit for daily operations.

In the long term, increased regulation is supposed to prevent this type of thing from happening again - it remains to be seen if that will really happen or not, but that's the theory. The bailout gives real economic teeth to regulators (we saved your ass, now let us in) where before ideology was the only justification.
posted by wfrgms at 8:20 AM on September 22, 2008

The bailout gives real economic teeth to regulators

In theory perhaps, but some people are arguing that the plan's framework does little more than reward the very people who got us into this mess. What if any real new regulative measures come out of this plan remains to be seen. It's early days still.
posted by ornate insect at 8:25 AM on September 22, 2008

I agree with wfrgms, except that this bailout just includes the baby teeth, with the adult teeth to come in follow-on legislation over the next year. It is a bit early to clearly define what sort of regulation is best to prevent future situations without unduly hobbling the credit markets.
posted by caddis at 8:40 AM on September 22, 2008 [1 favorite has favorites]

Michael Hudson, President of the Institute for the Study of Long-Term Economic Trends, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and author of Super-Imperialism: The Economic Strategy of American Empire (and chief economic adviser to Dennis Kucinich), expressed it well on Democracy Now last Wednesday:

They’ve already spent $5 trillion in the last two weeks to double the size of the national debt by taking over Fannie Mae. How can they bail out the gamblers, how can they bail out Wall Street and not—and claim that the Social Security system doesn’t really exist? They’ve used the Social Security money basically for the bailout. There it goes. They’ve made a choice. The choice is to bail out Wall Street against the people.

The Treasury is supposed to represent the government and the economy, and the Fed is supposed to be the board of directors of commercial banks, but now Wall Street plays both sides of the game. It not only supplies the heads of the Fed; it supplies the Secretary of the Treasury. And that’s why I said the class war is back in business with a vengeance.
posted by jamjam at 8:42 AM on September 22, 2008 [6 favorites has favorites]

Injecting a trillion dollars of largely imaginary money (Treasury can print as much money as it wants) means that in the long run, the value of the dollar will decline. So, things may appear to remain normal, i.e., your salary stays the same, but other things will start to increase in price. Food, gas, and of course travel.

Question for the real experts: isn't there still just an unfathomable amount of debt in the world markets? Aren't we just pushing the Next Great Depression to the next generation? Maybe even pushing it only a couple of years?
posted by billysumday at 8:48 AM on September 22, 2008

What would be best in the long term is to let these institutions fail.

There is no incentive for lenders to behave responsibly when they know that the government will bail them out if they get in over their heads. Let them fail. Provide reasonable relief for the individual homeowners to help through this particular storm, then stop bailing out lenders.

When lenders understand that the government will no longer ride to their rescue, they will have a strong incentive to behave more responsibly. There will still be bad lenders out there, but they will tend to fail. Good, responsible lenders will tend to succeed.

Nationalizing corporate debt is a bad solution.
posted by DWRoelands at 9:08 AM on September 22, 2008 [1 favorite has favorites]

To learn more about the plan consider watching at 10am (EST) tomorrow as Paulson, Bernanke, Cox, and Lockhart present the argument for and the details about their plan to the Senate Banking Committee. It will be presumably be broadcast live on CSPAN.
posted by ornate insect at 9:24 AM on September 22, 2008 [1 favorite has favorites]

One good take on the issue (which was posted over in the blue, though I don't recall by whom) is from Naked Capitalism. Seeking Alpha has a strongly opinionated view, along with a series of links to other commentators.

Economists of all ideologies (from, say, Greg Mankiw to Paul Krugman) seem to agree that the plan as proposed is a bad idea. But, as pointed out above, the debate is more along the lines of good plan-versus-bad plan, and not whether we should do something at all.

My own take, for what little it's worth, is that the current plan would provide a huge handout to financial firms (of all stripes, under the current incarnation), buy buying any/all distressed assets (no longer just mortgage-related junk), while putting a lot of risk and little upside on the taxpayer. The taxpayers ultimately fund the government, which offers the $700bn line of credit, but don't get anything in return besides these very questionable assets. No equity, no explicit management authority, no new securities regulations, nada.

Banks and their shareholders do just fine by this; if it works, they get pulled out of the fire, they keep what's left of their equity. Taxpayers, if it works, get the privilege of not watching the financial sector implode (which would cascade down to everyone -- in the sense of hey, good luck getting money out of your checking account anytime soon, on your Main Street bank or otherwise.)

The "if it works" is a big question, in my mind.

New proposals are being discussed, though, which would tip the balance (giving taxpayers equity, as in the AIG deal, forcing more regulation, etc.) There are a million opinions on those different options, though there's general agreement that there are better alternatives than what we have.
posted by theoddball at 10:21 AM on September 22, 2008

Discussion from the bankruptcy law profs at Credit Slips.
posted by T.D. Strange at 11:27 AM on September 22, 2008

And, to back up my argument earlier where I said the dollar would tank - oil is up $25/barrel today.
posted by billysumday at 12:09 PM on September 22, 2008

They’ve already spent $5 trillion in the last two weeks to double the size of the national debt by taking over Fannie Mae.

This is BS. The $5T commitment includes liens on all these houses; losses might be a trillion but certainly not 100% of the $5T.

As for the question, this is basically a re-floating of the M-LEC idea that Paulson proposed earlier this year.

Many if not most companies need to roll expiring short-term bonds over to get/remain liquid and in business.

But the bond market is *TOTALLY FUCKED* right now. Anybody with money doesn't want to lend it.

Think of the current situation as a tetris board with a lot of holes and running out of space. Oh, and the pieces are really coming faster now.

The $700B+ proposal clears 4-5 rows on the bottom so that there's more room to make some transactions.

It rewards the risk-takers, and the costs will mostly be borne by all wealthy people, whether risk takers or not, since they pay the bulk of Federal Income taxes.
posted by troy at 3:14 PM on September 22, 2008

I really liked John Walker's simple illustrations of counterparty risk, for those who are wondering why the failure of an investment bank might affect real business.
posted by themel at 12:36 AM on September 23, 2008

the costs will mostly be borne by all wealthy people, whether risk takers or not, since they pay the bulk of Federal Income taxes.

I'm not sure that's true at all. Proportionately, wealthy people tend to pay far less in income tax than those on lower incomes. The wealthy, and particularly the risk taking wealthy, are very adept at avoiding taxes. There's no getting away from the fact that the cost of this bailout will be mainly borne by those who have little or nothing to gain from it.
posted by MrMustard at 11:08 PM on September 25, 2008