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How bad are the current proposed bailout plans?
Posted by: McQ on Friday, September 26, 2008

Reason asked a number of economists that precise question. Before I get to their answer, Arnold Kling restates the key issue concerning the proposed bailout that seem to be getting only peripheral attention:
"The core task of this bailout is going to be valuing these mortgage securities and that is an impossible task. The bailout is bound to fail for that reason."
So, responding to the question - "How bad are the current proposed bailout plans?" - various economists contacted by Reason were for the most part not at all reticent about expressing their learned opinion about the present plan(s).

Robert E. Wright - "The current bailout plans are so bad it's impossible to tell just how bad they are with any precision."

Jeffrey A. Miron - "The bailout is a terrible idea."

Chris Dillow - "They're sub-optimal rather than terrible."

Frederic Sautet - "This is socialization of the banking industry, plain and simple."

Mark Thornton - "The actions taken over the last year and the pending bailout of Wall Street have not and will not help."

Yves Smith - "Frankly, they are dreadful."

Robert Higgs - "The proposals already accepted or likely to be accepted add up, not to a house of horrors, but to a Five Star Hotel of Horrors."

Mike Munger - "Very bad. And I am confident they will soon be much worse on the way to getting passed."

Munger's reasoning as to why the bailout is so bad, at least to me, resonates:
There are two main problems. The first is that we don't know what we are doing. The effects of the bailout are as likely to be catastrophic as beneficial.

The second is that current deficits are future taxes. We aren't saving any money; we are just pushing our problems into the future. If we aren't careful, we might precipitate a run on the dollar, with people dumping dollar-denominated assets in favor of Euros. That kind of run, given the amount of debt held in foreign hands, would make the current crisis look like a cake walk.
You need to read their complete statements as to why they find the proposal(s) so terrible. Suffice it to say, none of them are fans.

So what is a better way of approaching the problem?

Again some capsules, be sure to read them all:

Bryan Caplan - "Waiting a couple of years."

Robert E. Wright - "There are many things that policymakers are not doing that they should be. One is thinking long and hard about how to improve regulation."

Jeffrey A. Miron - "The only things we should be doing are eliminating the underlying policy causes of the current situation..."

Chris Dillow - "Apart from keeping our heads? Remember the distinction between capitalism and free markets."

Frederic Sautet - "Ultimately, this situation calls for radical policy solutions: The return to the gold standard and the abolition of central banks."

Mark Thornton - "The most important reform is to recognize the legal monetary status of gold and silver as intended in the Constitution so they can serve as an alternative money that is untaxed and unhindered by government interference."

Yves Smith - "There are no plans, zero, zip, nada, for better regulation and oversight of banks. Given that the credibility of the U.S. financial system is in tatters, and we continue to depend on foreign capital to fund our government deficit, which will only grow as a result of interventions already underway and whatever new program is passed, we need to take a cold hard look at how to improve financial industry regulation, particularly regarding murky over-the-counter markets."

Robert Higgs - "The government would do almost all of us ordinary people a favor if it merely refrained from what it's been doing for the past few weeks, and simply let badly managed firms go bankrupt. Capitalism is supposed to be a profit-and-loss system. Too bad the so-called capitalists and their lackeys in the government don't believe in capitalism."

Again, obviously, there's no consensus on where the priority should be. The only consensus among these economists is what is being proposed isn't the right way.

Seems to me that means this entire problem requires much more scrutiny than some plan who many see as probably exacerbating the problem (since there's no established value on what they're proposing to buy).

I continue to wonder why some measures such as those Arnold Kling recommends in the video at the link can't be instituted to keep the system functioning while a much closer look is taken at the problem to arrive at a solution that won't make the problem worse. Doing what Kling recommends would probably help calm the fears and the market while the approprate time is spent considering the problem and the best way to address it. Other than Congress wanting to go into recess to run for office, what's is the rush?
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Previous Comments to this Post 

Well, there’s a rush because they said there was a rush, if something doesn’t happen now it will be a financial apocalypse.

They can’t be proven wrong by reality. Even if the cure is worse then the disease, and really isn’t a cure at all.
Written By: Keith_Indy
"The core task of this bailout is going to be valuing these mortgage securities and that is an impossible task."

Frankly, I think that is BS. It may be difficult, and you may only get an approximation, but I think it can be done for a significant amount of the securities with a reasonable degree of reliability.
How are these mortgages bundled? By type? Amount? Originator? Maturity? These securities pay dividends, I believe. How much are they paying compared to last year? That may give a rough estimation of their value and how bad the problem actually is.

This seems to be a useful article, though I have only skimmed it.
Written By: timactual
URL: http://
In trying sell this, they’ve described it as the apocalyse. The problem is that they set this up.

I can’t watch the video, but the problem with a stop-gap or life-support approach, this would encourage even more congressional intervention and meddling on an ongoing basis. A 6 month execution drags into a 5 years or permanent affair.
Written By: jpm100
URL: http://
I can’t imagine any Republican in the House voting for any plan with funds going to ACORN, especially on such a high exposure bill as this.

It is pretty obvious by now that whatever negotiations that are happening on the House side appear not to include the Republicans (i.e. SOP). I think the House needs a new definition of bi-partisan, one that includes the two major parties and not just Democrats and Independents (i.e. Bennie Sanders).

So, I don’t expect John McCain to show tonight for the debate.

The head of the commission of debates said that, by law, there will be no debate if McCain doesn’t show up.

This doesn’t preclude Obama from making an appearance or such, but the commission will not be sponsoring anything that may otherwise be happening. It’s unclear if the college, Ole Miss (I believe), would have to offer McCain an appearance at another time, if Obama were to make an appearance. I believe they would.
Written By: Neo
URL: http://
You know it’s bad when opponents are proving your points...
"Instead of a purchase scenario where you have the government injecting $700 billion right up front into the markets, what you have here is an insurance plan," Cantor told reporters. "In order to get this insurance, the banks with these failed assets would have to pay for the government backing, pay for the insurance."

The plan emerged after it became clear that House Republicans in large numbers weren’t coming around to the approach favored by Treasury Secretary Henry Paulson, which is to have the government buy up the troubled securities, hold them, and eventually sell them off.

Under the House conservatives’ plan, institutions holding stronger assets would pay lower premiums for the government backing; higher-risk securities would require higher premiums.

Robert Litan, an expert on banking and finance at the Brookings Institution, called the framework unworkable, saying it would not achieve the basic goal of creating a market — and establishing prices — for mortgage securities no one’s willing to buy.

"Everything depends on how you value the security," Litan said. "If you do the deposit insurance scheme, there’s nobody out there to know what the right price is."
So, if we don’t know the "right price" at which to insure them at, who the heck knows what the right price is to purchase them???
Written By: Keith_Indy
Yves Smith - "There are no plans, zero, zip, nada, for better regulation and oversight of banks. Given that the credibility of the U.S. financial system is in tatters, and we continue to depend on foreign capital to fund our government deficit, which will only grow as a result of interventions already underway and whatever new program is passed, we need to take a cold hard look at how to improve financial industry regulation, particularly regarding murky over-the-counter markets."
This is a big part of the problem I’ve got with the bill. I fear that, once the plan goes in and the checks go out and some (possibly temporary) stability is brought back to the economy, it’ll be business as usual. Barney and Chris and Chuckie will continue to use government pressure to (ahem) persuade banks to keep making risky loans in the name of "fairness", and we’ll get to do this all over again in a few years.

Ed Morrissey at Hot Air raises an excellent point: the filthy dems apparently have the votes to get this bill right now. They don’t need Shelby and Boehner and McCain to sign on. All the screeching about the "revolt" of the GOP gives the game away: the dems don’t want to be responsible for what happens. They want to be able to blame the GOP if (when?) things get even worse in the future.
Written By: docjim505
URL: http://
There are many ways to understand this bailout, which isn’t really a bailout as much as it is a response to a financial panic and liquidity crisis.

But as to the mortgage-backed securities, once scavenger firms (existing and yet to form) get a hold on how to make a profit on them, the markets will clean up the mess.

I don’t fear, or substantially oppose, the idea of bridging those nonperforming portfolios out of financial institutions through a bit of time before dumping them at break-even or profit back into the market via scavengers. What I fear is what Congress attempts to get away with in the process. Especially Democrats.

Before funding and assumption of the Revolutionary War debt by Hamilton, soldiers sold off the paper they held, at pennies on the dollar, that promised payment for their service. After funding and assumption the speculators who bought the worthless paper were paid at full valuem or close to it, as I recall. So, the securities have considerable inherent value, it’s just not liquid at the moment.

If the government sets a buyer-of-last-resort price, then holders of the bad assets might be inclined to look first to scavengers to get a few more cents on the dollar, and the financial institutions and the scavengers can cut out the government middle man.

What I fear is Barney Frank, Chris Dodd, Charles Schumer, Harry Reid, Nancy Pelosi, etc. Complete scumbags all.

If the deal comes with some terms of workout with mortgagees that will be within bounds of good practice, that’s about as far as the thing should go with fairness with respect to said mortgagees.

Written By: Martin McPhillips
Wonder if the Dem’s will put a secret hold on the bill to require a super majority to vote on it...

Then they’ll run adds, "the Republicans were for it, before they were against it."
Written By: Keith_Indy
I don’t understand why these mortgage derivatives can’t be scrubbed by having the government replace the subprime tranches with good paper from their newfound supply of mortgages they just acquired with Fannie and Freddie. This way we wouldn’t have to discover the price of anything yet still be able to end the crisis of confidence which is preventing them from loaning to each other.
Written By: peter jackson
In other words, in stead of trying to prop up the price of these securities, prop up their rating.
Written By: peter jackson

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